6.1
During the course of this inquiry, the Senate Economics References Committee (the committee) has received evidence from a range of witnesses and examined a number of matters of concern. In the evidence presented to the committee, a number of common themes emerged that have implications for public sentiment regarding the administration and regulation of foreign investment in Australia. Broadly, these go to the confidence the community can have that foreign investment approvals are made in the national interest and foreign investors are held to account for the undertakings they make; the capacity of the Treasury to assess foreign investment applications and monitor and enforce conditions; the institutional design most appropriate for a regulator; and the excessive secrecy that surrounds the foreign investment regime.
6.2
Foreign investment has been crucial to the growth of many sectors of the Australian economy and more broadly, to the transfer of new technologies, skills and innovations. There can be little doubt that foreign investment has made possible Australia’s prosperity. However, key to a successful foreign investment regime is public confidence that foreign investment decisions are in fact made in the national interest and foreign investors are held to the terms of foreign investment approvals. The lack of transparency in the foreign investment regime, to which the committee will return shortly, is a factor that has the potential to undermine this trust.
6.3
While it is the case that foreign investment can be beneficial, it is certainly not true that all foreign investment is beneficial. The legislation that governs foreign investment in Australia, the Foreign Acquisitions and Takeovers Act 1975, recognises this when it provides for the screening of foreign investment proposals. Investments that reach certain thresholds are examined to ensure they are not contrary to the national interest—in practice, however, this is something of a generous assessment.
6.4
Whilst acknowledging the benefits that might come from foreign investment, the committee is of the view these should not be overblown. The rhetoric of benefit has the potential to overshadow the possibility foreign investment is not in the national interest. If the potential for foreign investment to harm Australia’s national interest is not appropriately acknowledged, there is a danger investments may proceed when they ought not.
Holding foreign investors accountable
6.5
The negative national interest test, which allows foreign investments to proceed unless they can be shown to be contrary to the national interest, means foreign investors do not need to show an investment will benefit in any form the Australian economy—this is assumed. The test merely provides some level of implied confidence the investment will not harm the national interest. That investors are not held to any of the intentions they claim about future activities when they make an application is a concerning matter to which the committee will turn shortly.
6.6
For now, it is sufficient to note some foreign investment does not bring the benefits hoped—investments into existing businesses may be less beneficial than the establishment of new businesses; supply chain opportunities or the transfer of technology may not eventuate; foreign investors may engage in aggressive tax minimisation activities; others may be structurally incapable of operating in Australia’s national interest. Foreign investment may reduce the need for foreign-owned firms to innovate; technological transfers from foreign investment may reduce domestic innovation; increased concentration may reduce competition; the capital-intensive nature of foreign investment may have a negative effect on employment growth and real wage growth.
6.7
What is clear, is Australia’s foreign investment regime does not provide the government of the day with the ability to consider these eventualities, or act on them when they occur. Assessment of foreign investment proposals, for the most part, occurs at a single point in time—what happens after that assessment, absent a significant national security concern, is largely irrelevant to the assessment of a foreign investment application.
6.8
The case of the then Treasurer Peter Costello’s rejection of Shell’s proposal to acquire Woodside is a good illustration of the fact governments have only one point in time policy lever to determine whether an investment may be contrary to the national interest. By rejecting the proposal and publishing the rationale, the Treasurer acknowledged that what might be in the best interests of a foreign investor, may not be in Australia’s national interest, and further the government would not be able to do anything about this in the future, other than prohibit the investment at the outset.
6.9
In light of the variability of benefit that might accrue from foreign investment, the committee acknowledges the views of submitters and witnesses that Australia might consider a more ambitious national interest test—one that attempts to better define what is in the national interest. Such an approach would require greater scrutiny of foreign investment proposals at the lodgement phase and over the duration of the investment related to any claims that investors might advance in support of their investment proposals.
6.10
The present ambiguity in the national interest test means there is a great deal of leeway for governments when they approve foreign investment decisions. However, without some tangible definition of the national interest, whether acknowledged or otherwise, the means becomes the ends of the policy—promoting foreign investment becomes the sole goal, not other factors such as developing the complexity of the Australian economy. When an assessment starts with an assumption of a positive and only requires that there be no evidence of harm, the balance may be somewhat different than an assessment that begins from a neutral position and requires evidence of benefit.
6.11
In contrast, the positive approach taken by New Zealand—that foreign investment must be proven to be in the national interest, rather than not contrary to it—is of interest to the committee. The committee understands that New Zealand’s Ministerial Directive Letter provides guidance to the regulating agency without altering the criteria for consent established in New Zealand legislation. It demonstrates that the enforcement of undertakings and conditions is an important factor in maintaining public confidence and transparency in New Zealand’s foreign investment framework.
6.12
It is apparent that Australia’s foreign investment regime places no such importance on foreign investors being held to the promises they make when they apply for approval—even though these intentions are relevant to an assessment of whether an investment is contrary to the national interest.
6.13
The case of Moon Lake’s acquisition of the Van Diemen’s Land Company demonstrates the influence the intentions of an investor can have on the decision to approve a foreign investment proposal. The Treasurer’s statement announcing approval for Moon Lake’s acquisition of Van Diemen’s Land Company made it clear voluntary undertakings are considered in the national interest analysis. Yet the investor has failed to meet many of these conditions and there is no avenue within the legislation currently to hold this investor to account.
6.14
The committee agrees that if the intentions of an investor are considered in the approval of a foreign investment proposal, it is important that there be some requirement of an investor to genuinely follow through on the proposed activities. It is also necessary that this is publicly articulated in some form so that the Australian public can have confidence that it is being met.
6.15
It is clear from the evidence provided by Treasury officials and from guidance material issued by the Foreign Investment Review Board (FIRB) that the intentions of an investor do influence the consideration of whether an investment is contrary to the national interest. Treasury officials stated very clearly to the committee that factors such as the contribution a foreign investor intends to make to domestic innovation, supporting higher-value add sectors, research and development, advanced manufacturing, and energy efficiency are considered in the assessment of a foreign investment proposal.
6.16
Without a mechanism that reinforces the seriousness of these so-called intentions or voluntary undertakings, there is a danger foreign investment proposals are or will come to resemble works of fiction—crafted so as to pass the test, but discarded at the convenience of the investor.
6.17
The committee is of the view it is not credible for Treasury officials to suggest voluntary undertakings have no influence on the assessment of a proposal against the national interest when they are expected as part of the application process. Foreign investment applications cannot be accurately assessed against the national interest if investors are able to make certain undertakings that they are then under no obligation to carry out.
6.18
If foreign investors are not held to account for the undertakings they make, and upon which their applications are assessed against the national interest, the integrity of the entire foreign investment framework is jeopardised.
6.19
The committee is aware the trade agreements to which Australia is a party limit changes that can be made to Australia’s foreign investment regime. The committee is disappointed the Department of Foreign Affairs and Trade and the Attorney General’s Department did not respond in good faith to committee’s requests for information. However, from the unhelpful responses provided, the committee concludes the trade agreements to which Australia is party will not allow substantive alterations to the national interest test.
6.20
Nevertheless, recognising that public support is crucial to a successful foreign investment regime, the government must investigate how regulations might be made that reflect the need for foreign investment to contribute to activities that are in the national interest, and for investors to be rightly held to account for the promises they make when they propose an investment. Such a requirement is not a high hurdle and should not be conceived as being restrictive.
6.21
The committee recommends that the Australian Government amends regulations to the effect that undertakings made as part of a foreign investment application can be enforced as conditions on an investment approval and that they consider publishing details relating to these decisions.
Assessing applications, applying conditions and monitoring compliance
6.22
The committee will turn shortly to the imposition of conditions on foreign investment approvals. First, however, it is relevant to discuss risk in the foreign investment regime because if the Treasury does not have the expertise to examine foreign investment proposals, the ability to apply conditions to an approval carries little weight. The assumption foreign investment is beneficial, in combination with the necessity that regulation must not stifle the investment required for economic growth, means risk must be finely balanced in the Treasury’s assessment of foreign investment proposals.
6.23
While the Treasury states it takes a risk-based approach to its regulatory role, risk exists at several levels, including in the accuracy of the Treasury assessment against the national interest. The balancing of risk, in the context of a nebulous national interest test, can result in assessments on risk sitting on a presumption of benefit—itself something of a risk.
6.24
Many aspects of a sound regulatory framework are evident in the Treasury’s practices and procedures. The objectives of the regulatory regime are clearly outlined and communicated to key stakeholders, as are the eligibility and assessment criteria. The Treasury states it calls upon expertise as required to assist in the evaluation of proposals. On the basis of the Regulatory Performance Framework, the Treasury is able to demonstrate it performs well.
6.25
However, none of this guarantees the outcome. The Treasury’s self-assessment against the regulator performance framework does not investigate whether its examination of foreign investment proposals has ensured investments have not been contrary to the national interest, neither does it assess whether the conditions applied sufficiently ameliorate risk to the national interest, or whether entities are complying with conditions. It is left to trust that Treasury’s screening, assessment, monitoring and enforcement processes are robust and provide assurance risks are appropriately managed.
6.26
As to screening and assessment, the committee received evidence suggesting the Treasury requires greater expertise and resources to appropriately examine foreign investments against the national interest. In particular, the committee notes evidence to the inquiry that the Treasury requires greater knowledge of foreign jurisdictions; and that its use of the expertise of partner agencies may not be optimised or efficient.
6.27
Some of these concerns are illustrated by the Musselroe Bay case, and by the data of the number of consultations Treasury has with partner agencies. For instance, in 2019-20, Treasury referred only 13 matters to the Australian Federal Police (AFP) for advice, and generally requests information from the Australian Transaction Reports and Analysis Centre only 10 times each year. Evidence given by witnesses suggests that the information provided by some partner agencies may be limited. The committee notes the AFP primarily checks if any applicants have been convicted of a Commonwealth criminal offence and deals with Treasury requests in a ‘pretty quick fashion’.
6.28
The committee is left with the impression it may be wrong to assume foreign investment applications are always thoroughly examined to ensure they are not contrary to the national interest. It is important to again note at this point that the success of the foreign investment regime relies to a significant extent on the confidence the public has in the government to approve foreign investments in the national interest. The committee is of the view there can be improvements in the Treasury’s assessment procedures and without the requisite skills and knowledge, there is a risk investments contrary to the national interest will be approved.
6.29
The committee received evidence of gaps in regulator capability. Accordingly, the committee recommends the Australian Government conducts an audit of the expertise required by foreign investment regulators to thoroughly assess applications against the national interest and establishes a plan to staff these organisations accordingly.
6.30
Turning now to monitoring and enforcement, the committee agrees a key responsibility of regulators is to maintain the confidence of not only the Parliament, but importantly also of the community. Assessments against the national interest must be robust, and equally robust must be monitoring of compliance and enforcement of conditions attached to investment approvals.
6.31
Of significant concern to the committee is the fact Treasury did not appear to take seriously its compliance and enforcement functions prior to 2019—before which the sum total of its compliance and enforcement capacity was two people. When the Treasury states it is strengthening its compliance function, it is starting from a woefully low level.
6.32
While the Treasury rightly takes a risk-based approach to compliance and enforcement, it can be difficult to reconcile an ‘encouraging’ approach that provides generous timeframes for compliance with conditions, with the requirement to ensure an investment is not contrary to the national interest.
6.33
That conditions can legally only be applied in the first place to prevent an investment being contrary to the national interest means the risk from non-compliance would appear high, and the requirement to be in compliance would seem immediate. If conditions are legally placed on an investment approval, it is only if conditions are met that an investment is not contrary to the national interest.
6.34
As has become clear during the course of this inquiry, despite the Treasury’s regulator self-assessments suggesting it is meeting its regulatory obligations, there are grounds to believe that this amounts to little in substance. The self-assessment does not examine how effectively compliance and enforcement is undertaken, only that the Treasury does not unnecessarily inconvenience foreign investors when seeking information, and when monitoring a foreign investor that it considers the operational needs of the investor.
6.35
The lack of transparency in the foreign investment regime means any weaknesses in the Treasury’s assessment and compliance processes can easily go unnoticed. The committee’s work has been hampered by this lack of transparency. It is not possible to verify whether companies are complying with conditions on foreign investment approvals because neither the approvals nor the conditions are publicly released. One must guess.
6.36
In explaining new legislative measures, the Treasury indicated some breaches of conditions resulting in the serving of infringement notices were likely to occur frequently. This suggests areas of the Foreign Acquisitions and Takeovers Act 1975 (the Act) were unenforced prior to the legislative changes.
6.37
Confidence in the Treasury’s compliance processes are undermined by the fact that even with the expansion of the compliance section to around 15 staff, Treasury remains unable to identify the number of annual compliance reports it receives, or the number of these reports it examines for accuracy. This is despite introducing an ‘enhanced compliance framework’ in 2017.
6.38
The case study of conditions placed on the Alinta acquisition by Chow Tai Fook Enterprises shows the Treasury’s approach to compliance. The Treasury appears to have taken a relaxed approach to ensuring Alinta Energy was compliant with the conditions placed on the acquisition by Pioneer Sail Holdings. One must bear in mind conditions can only be applied to an approval if they are necessary to ensure the acquisition is not contrary to the national interest.
6.39
Astoundingly, the company was given more than a year to identify whether it was in compliance with conditions, and then another year to submit a remedial action plan. This action plan was not approved by the Treasury until two and a half years after the sale, and the company was not required to come into compliance with all conditions until December 2020. Whether Alinta did come into compliance with conditions by this date remains a secret.
6.40
Nevertheless, it is not clear on what grounds it is appropriate for a period of more than three years to pass before an entity complies with a particular condition—the rationale for which is to ensure an investment is not contrary to the national interest. According to Alinta, this timeframe was agreed with Treasury when the acquisition was approved.
6.41
In May 2020, Alinta confirmed systems were still not in place to prevent the transfer of mass consumer information as per the conditions on the investment approval. The timeframe agreed with the Treasury implies that the transfer of information internationally would only pose a risk to the national interest if it occurred after December 2020, and not before. A preposterous assessment, particularly given the fact the FIRB itself has highlighted the importance of personal data security.
6.42
Despite recognising the strategic importance of personal data, the Treasury appears to have taken a lax approach to its security at Alinta. The concerns do not end at this point. That the Treasury would approve Alinta’s own internal auditor to conduct baseline and assurance audits, in spite of its own guidance notes that state there should be an absence of any existing or potential conflicts of interest, leaves the committee to ponder what constitutes an existing or potential conflict of interest. As was noted in the case study, assurance that EY was independent and not conflicted was undertaken by EY staff themselves and reviewed no further.
6.43
It is possible the Alinta situation—where Alinta’s internal auditor, EY, was approved to complete an audit of Alinta’s compliance with foreign investment conditions—has occurred elsewhere and will again occur.
6.44
The committee notes the additional regulatory powers that were provided to the Treasury through recent amendments to the Act, including the ability to issue infringement notices and enforceable undertakings, and enhanced monitoring, investigation and search powers. The effective use of these powers, however, is dependent on the regulatory culture in the agency. That the Treasury cannot identify any instance where it has taken legal action under the previous provisions in the Act for non-compliance suggests there may be weaknesses in the Treasury’s recently established compliance and enforcement capacity.
6.45
It is the case the new powers are being provided to the agency without any change to its institutional design or demonstrable efforts to reform an organisational culture that appears historically and very recently to have put limited emphasis on compliance and enforcement. The extraordinarily lax attitude to compliance highlighted with Alinta firmly cements questions on the Treasury’s ability to navigate and manage a regulatory compliance regime in the national interest.
6.46
In addition, the division is hamstrung in the protection of Australia’s national interest by an inadequate and antiquated information management system. It is difficult to see that the Treasury’s information management system is capable of capturing data that may provide insight into regulatory risk, or that it could support any form of analysis of data to assist in identifying trends and patterns that may be indicative of systemic risks.
6.47
Significant shortcomings were identified in the Treasury’s system such that it could not be confident it had comprehensive and comprehensible oversight of all investments, the conditions applied to investments, and whether investors were complying with conditions. The committee is of the view the current information management system does not have the attributes necessary to allow for the complex analysis required of regulatory agencies that oversee compliance with obligations believed necessary to protect the national interest.
6.48
At this point in time, the committee cannot be confident Treasury information management systems are sufficient to support its key regulatory functions. The committee cannot be confident the Treasury has reliable and full documentation of all regulatory decisions taken when addressing non-compliance.
Who should be the regulator?
6.49
Much came to light during the inquiry about the regulation of Australia’s foreign investment regime. It was noted earlier that some, including the Productivity Commission, have questioned whether regulation of foreign investment should be within the purview of a policy agency.
6.50
Evidence received by the committee suggests the Treasury, in some instances, may be conflicted by its policy role to promote foreign investment, its regulatory role to ensure compliance with conditions, and a regulatory approach that specifies foreign investors should not be excessively inconvenienced by compliance obligations. While it describes itself as having a gatekeeper role, the conditions imposed on investments can be enduring, as must be the monitoring of compliance of conditions.
6.51
The committee leaves the government to consider the Productivity Commission’s view that while conditions may be necessary to mitigate particular risks, their necessity suggests national laws and regulations need to be strengthened.
6.52
The committee is also of a mind to point out that while Treasury officials state they work under the authority provided through legislation, this legislation can be changed if required.
6.53
The committee notes suggestions foreign investment regulation should be undertaken by an independent final decision-making power acting in an accountable and transparent manner. However, ensuring community confidence in the foreign investment regime requires the authority to balance technocratic regulations with genuinely held community sentiment. As such, the committee does not recommend ultimate decision making on foreign investment approvals be removed from the Treasurer—though it does recommend a thorough review of regulatory responsibility for foreign investment.
6.54
The committee recommends the Australian Government takes note of the Productivity Commission recommendation that consideration be given to the most suitable institutional design to support decision-making on foreign investment and monitoring and enforcement of compliance, and conducts a review to determine the structure necessary for an effective and efficient foreign investment regulator.
Secrecy
6.55
As to whether the Treasury is an effective regulator: ultimately it is difficult to know whether investments approved are not contrary to the national interest, whether conditions are sufficient to ensure an investment is not contrary to the national interest, whether conditions are complied with, or understand the Treasury’s performance as regulator due to the extreme secrecy that surrounds the foreign investment regime—something that is not a feature of the frameworks in other countries. And it is to the issue of transparency that the committee now turns.
6.56
Transparency in Australia’s foreign investment regime is complicated by the long-standing convention across all governments, reflected in legislation since 1975, that foreign investment decisions are the purview of the Executive.
6.57
The secrecy provisions in the Act, known as the protected information provisions, allow governments a large amount of leeway in their decisions on whether to approve an investment. They allow for inconsistency in decision making, for decision makers to be unaccountable for the decisions made, and for the community to remain uninformed about foreign investment approvals and the conditions attached to the approvals that are ostensibly to ensure investment is not contrary to the national interest. The fact, other than in very limited circumstances, foreign investment decisions cannot be challenged adds further to the secrecy and absence of accountability.
6.58
During the course of the inquiry, the committee was repeatedly stonewalled by Treasury officials who argued information sought by committee members was protected information and could not be disclosed without the permission of the investor concerned.
6.59
The committee informed the Treasury the protected information provisions do not bind the Parliament. For clarity, the committee advises the Treasury and other departments:
committees have the power to seek information that may be covered by a statutory secrecy provision;
a statutory secrecy provision does not prevent the disclosure of information covered by the secrecy provision to the committee; and
parliamentary privilege protects any such disclosures with absolute immunity for those involved in disclosing the information.
6.60
The committee is of the view, it is past time departmental officers recognised they are accountable to the Parliament, the ultimate lawmaking body under the Constitution.
6.61
The Treasury’s routine reference to the protected information provisions creates an environment of opacity around the foreign investment regime. This is an environment where no questions are asked about the appropriateness of the secrecy and lack of transparency—action by officials merely proceeds from this point. As such, there is no routine analysis of whether harm might result from making public information about foreign investment applications.
6.62
It can be difficult to understand what harm might be caused by publishing conditions that require a foreign investor to ensure the majority of the board are Australian resident citizens or that board meetings occur in Australia, that headquarters be located in Australia, that data is located in Australia, that maintenance of equipment is undertaken in Australia, or that certain investments are made legally in Australia.
6.63
Information relating to mergers and acquisitions, prior to any action occurring, is routinely made public by the Australian Competition and Consumer Commission (ACCC). It is an argument that cannot be sustained that a foreign investor might be harmed by the release of certain information, but a domestic investor would not be harmed by the release of the same information.
6.64
That foreign investors might be reticent to invest in Australia if they cannot proceed with secrecy would not seem a valid justification in an open and democratic country that respects the rule of law. The making public of conditions imposed on foreign investments would do two things: it would assure the community foreign investment approvals, for example foreign investment in over-inflated real estate, are being made in the national interest; and it would assure the business community there is consistency and fairness in investment approvals.
6.65
The committee notes at the same time the Treasury was defending the protected information provisions and refusing to provide information to the Parliament, it was gaining powers to share protected information with ministerial staffers and foreign overseas governments through amendments to the Act made by the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020.
6.66
The committee accepts there is an argument for maintaining Executive flexibility to make decisions in the national interest, an interest that may manifest in different ways; this is not an argument for secrecy.
6.67
Cases where the Treasurer has announced conditions attached to an investment approval provide evidence there is little likelihood of significant adverse consequences in all but the most exceptional cases. The practices in other jurisdictions, and indeed in Australia through the operation of other regulatory agencies like the ACCC, demonstrate the lack of substance to arguments that secrecy must be maintained.
6.68
The committee is of the view a positive transparency regime, where information is made available until such time as harm can be demonstrated should be considered. It should rightly be the responsibility of the investor to demonstrate the prejudice that would likely result, and for the veracity of such claims to be thoroughly examined, not merely accepted. Transparency, as a principle, should apply not only to foreign investment applications, but also to any conditions attached to approvals, and any enforcement actions. Transparency in the foreign investment regimes in the United States, Canada, and New Zealand cannot be shown to have hampered foreign investment.
6.69
Without a reasonable level of transparency it is not possible to know if Australia’s foreign investment framework is fit for purpose. This report began by emphasising the importance of public confidence that foreign investment decisions are ensuring the national interest is protected. Without transparency, there can be no way to provide this confidence.
Senator Anthony Chisholm
Chair
Labor Senator for Queensland