Review of selected reports

2.1        As noted in Chapter 1, the committee was referred the annual reports of only two bodies: the Foreign Investment Review Board (FIRB) and the Corporations and Markets Advisory Committee (CAMAC). This chapter will examine the FIRB and CAMAC reports in more detail.

Foreign Investment Review Board

2.2        FIRB is a non-statutory body established by the Minister, and does not have a legislative requirement to table an annual report. FIRB is an advisory board whose role is to make recommendations on foreign investment matters to the Treasurer and other Treasury portfolio Ministers, particularly in relation to the national interest implications of investment proposals made under the Foreign Acquisitions and Takeovers Act 1975.

2.3        On 16 April 2017, FIRB welcomed a new Chairman, Mr David Irvine AO.
Mr Irvine had been a FIRB member since December 2015, and has significant expertise is national security. He was previously the Director-General of both the Australian Security and Intelligence Organisation (ASIO) and the Australian Secret Intelligence Service (ASIS).[1]

2.4        In the report's transmittal letter, Mr Irvine provided an overview of FIRB's main activities and achievements for 2016–17. These included a number of
high-profile investment applications, such as the fifty year lease for the Port of Melbourne.[2]

2.5        Mr Irvine also commented that 2016–17 saw a significant drop in the number and value of residential real estate applications processed, and elaborated that:

The most significant factor explaining this drop is the introduction of application fees in December 2015, which has resulted in investors only applying for properties they intend to purchase. This implies a reduction in the number of applications rather than necessarily a reduction in actual investment. Other factors that may also have contributed to a reduction in applications include tighter Chinese capital controls, weaker market conditions and additional taxes in some jurisdictions. Business related investment proposals totalled $168 billion in 2016–17, only slightly lower than 2015–16.[3]

2.6        Mr Irvine also noted FIRB's focus on national security, and its role in assessing risk to Australia's critical infrastructure:

The FIRB devotes considerable effort to understanding the national interest risks from potential acquisitions and assessing potential mitigations. In this regard, an important development has been the establishment of the Critical Infrastructure Centre (the Centre) in 2017. The Centre has provided the FIRB with consolidated whole-of-government input on the national security implications of major critical infrastructure transactions. Over time, the Centre will undertake more proactive assessments of critical infrastructure assets in advance of transactions occurring.[4]

2.7        The Centre is discussed in more detail later in this chapter.

Executive Summary

2.8        The annual report provided a clear summary of the key features of the
2016–17 financial year, including:

• Major business related investment was focused on ports and electricity network assets, continuing the trend of acquisitions in these sectors in recent years. Data centres are also an emerging area of interest for investors.
• A continuing challenge is the complexity and sensitivity of potential acquisitions. This has led to an increasing proportion of applications being approved subject to conditions.
• Following the significant reforms introduced in 2015–16, further minor refinements were made to the foreign investment framework to ease the compliance burden on business. In the 2017–18 Budget the government announced stronger rules for foreign investors owning Australian housing, including the use of residential dwellings and capping the level of foreign investment in new residential developments.
• Compliance with the foreign investment regulatory framework continues to be a priority, with an emphasis on encouraging voluntary compliance. The ATO has been active in identifying residential real estate related breaches and data matching is an increasingly important source of investigations. The number of residential real estate related breaches identified by the ATO more than doubled in 2016–17 to 549 (from 260 in 2015–16). The Treasury has expanded its work to ensure compliance in relation to foreign investment in business assets, and subsequent to 2016–17 has initiated its first round of compliance audits.[5]

Critical Infrastructure Centre

2.9        The Critical Infrastructure Centre (the Centre) was established in
January 2017. The role of the Centre is 'to more proactively manage the national security risks that may arise from foreign involvement in sensitive critical infrastructure assets'.[6]  The Centre is part of the Home Affairs portfolio, however, was jointly announced by the Treasurer and the Attorney-General, as it is crucial in supporting the effective operation of the FIRB:

Treasury works closely with the Centre and other security agencies to consider foreign investment proposals that may raise national security concerns. The changes in the geo-political environment for Australia have led to increasing complexity and usage of conditions to ensure that an investment can proceed, in line with Australia's position of welcoming of foreign investment, while ensuring risks to the national interest are mitigated. For example, data conditions may be applied to manage risks associated with potential access to large holdings of personal, operational and network data for malicious purposes.[7]

2.10      The Centre aims to develop coordinated, whole-of-government national security risk assessments on critical infrastructure assets to support government decision-making.[8]

Foreign ownership registers

2.11      Since 2015, FIRB has maintained an Agricultural Land Register, which monitors the level of foreign ownership of agricultural land in Australia. FIRB's report noted fluctuations in the level of foreign agricultural land ownership during the reporting period:

As at 30 June 2017, based on the registered properties, foreign investors held 13.6 per cent of Australian agricultural land. This is a slight reduction from 14.1 per cent at 30 June 2016. The United Kingdom remains the largest foreign agricultural land holder (2.6 per cent of agricultural land), followed by China (2.5 per cent of agricultural land) and the United States of America (0.7 per cent of agricultural land).[9]

2.12      On 1 July 2017, FIRB also established a Water Entitlement Register to increase transparency around foreign ownership of water entitlements:

The Water Entitlement Register will operate in much the same way as the existing Agricultural Land Register and will be administered by the ATO. Foreign persons are required to register their interests in registrable water entitlements and contractual water rights, and certain changes in those interests, regardless of value, with the ATO.[10]

2.13      The Water Entitlement Register will first report in the second half of 2018.[11]

2.14      FIRB also noted the expected establishment of a Residential Land Register:

The Australian Government provided $16 million to the states and territories under a National Partnership Payment to enable them to undertake systems changes to transfer the data on sales and transfers of real property involving foreign persons to the ATO. Many states have had to implement legislative change to support this reporting which has delayed the establishment of the Register.

Aggregated data collected through the Residential Land Register of foreign owned properties is expected to be publically released towards the end of 2018.[12]

Foreign investment trends

2.15      FIRB's report included a chapter on foreign investment trends in Australia. This section noted that Australia has 'traditionally relied on inward foreign investment to meet the shortfall between domestic saving and domestic investment'.[13] Further, the report comments that foreign investment plays a significant role in driving economic growth, creating skilled jobs, and opening Australia to overseas markets.

2.16      FIRB explained that global growth in Foreign Direct Investment (FDI), defined as foreign ownership of 10 per cent or more of a business, has been strong over the last decade:

Over the last 10 years, the global stock of FDI has increased from US $14 trillion in 2006 to US $26.7 trillion in 2016––an increase of nearly 90 per cent over the period.[14]

2.17      FIRB noted that investors have directed more FDI to the economies of China and India as they have emerged; which, FIRB explains, has resulted in a declining share of global FDI stock held in Developed Economies. FIRB also noted that 'Australia has continued to hold a stable share of the stock of global FDI since the mid-1990s––around 2 to 2.5 per cent'.[15] FIRB justifies that 'this reflects the strength in Australia's underlying economic fundamentals and the attractiveness of Australia as a destination for foreign investment'.[16]

2.18      In relation to the levels of FDI in Australia FIRB noted that there had been a year-on-year increase since 2009, rising to $796 billion in 2016. This is an increase of 8.5 per cent (or $62.5 billion) compared with 2015. FIRB also noted that 'FDI, which usually takes the form of equity or reinvested earnings, has averaged around
25 per cent of total foreign investment over recent years'.[17]

At the end of 2016, the total stock of FDI from Japan and the United Kingdom was $90.9 billion and $67.9 billion, respectively. At the end of 2015, Japan overtook the United Kingdom for the first time to be Australia's second largest investor country. China was the fifth largest source country of the FDI stock in Australia at the end of 2016, accounting for 5.3 per cent of all FDI in Australia.[18]

2.19      The layout of FIRB's annual report is clear and provides the reader with a succinct yet comprehensive summary of its activities in 2016–17.

2.20      The committee again commends FIRB for reporting to the Parliament each year and encourages it to continue doing so.

Corporations and Markets Advisory Committee

2.21      CAMAC was established under the Australian Securities and Investments Commission Act 2001 to provide advice and recommendations to the Minister about matters relating to corporations and financial services law, administration and practice.[19] CAMAC fulfilled this outcome by providing 'timely advice to the Minister in the form of CAMAC reports and other papers'.[20]

2.22      The government announced its decision to cease the operation of CAMAC in the 2014–15 Budget. CAMAC was eventually abolished by Schedule 7 of the Statute Update (Smaller Government) Act 2018, which commenced on 21 February 2018.[21]

2.23      CAMAC's main activity during the 2016–17 reporting period was to '[cease] its operations in an orderly manner and [terminate] the engagement of its three staff'.[22]

2.24      The committee notes that CAMAC's outstanding work has been transferred to The Treasury.

Senator Jane Hume
Chair

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