2.1
Of the billions in foreign investment made in Australia each year, only a proportion is assessed under the Foreign Acquisitions and Takeovers Act 1975 (the Act). As discussed in chapter 1, if proposed investments exceed relevant thresholds they are assessed against either the national interest test, or the national security test. Investments that do not trigger the thresholds or other criteria are not assessed. As an indication, in three months of the zero-dollar threshold, $2.7 billion in investments were assessed that would not ordinarily be assessed.
2.2
This chapter begins by discussing the presumption of benefit from foreign investment, and the impact on the assessment of foreign investment proposals of the negative framing of the national interest test. It then examines some of the benefits and potential negative effects that can flow from different types of foreign investment.
2.3
While there is support for the existing approach to foreign investment assessment, some question the presumption of benefit, suggest the test is not sufficiently ambitious, and argue it should be reframed positively. It is in this context that New Zealand’s approach to assessing foreign investment proposals is discussed.
2.4
The chapter closes with a case study of Moon Lake’s 2016 acquisition of the Van Diemen’s Land Company and the impetus this has created for entities to be made more accountable for the benefits they claim will flow from their investments—so-called ‘voluntary undertakings’.
Presumption of benefit
2.5
Longstanding Australian government policy is to presume foreign investment to be beneficial, and this is reflected in the negatively framed national interest test. Foreign investment proposals subject to screening will proceed unless found contrary to the national interest. In the words of the Treasury:
…the framework operates not by approving proposed foreign investments based on their expected benefits, and instead by prohibiting investments if they are considered to be contrary to Australia’s national interest [emphasis in original].
2.6
As a negative test it is not necessary to prove an investment is in the national interest or that any finite benefits might be derived by the investment, only that it is not against the national interest. For the Treasury, the national interest factors—national security, competition, taxation and other government policies, impact on the economy and the community, and character of the investor—’are not limiting factors’.
2.7
Although applications are assessed against ‘the national interest test’, there is no ‘test’ per se. When making an assessment, the Treasury’s foreign investment policy states a range of factors is considered (see chapter 1). The weight given to each factor varies depending on the nature of the enterprise and investor. The substance of the test can also vary depending on the type of investor (for instance, foreign governments) and the nature of the investment (such as agricultural land or sensitive infrastructure).
Conditions
2.8
Consistent with the presumption of benefit, the Act allows the Treasurer to approve an investment with conditions, referred to as providing a ‘no objection notification imposing conditions’. Section 74 of the Act provides the Treasurer with the authority to impose conditions on an investment approval if the Treasurer is of the view such conditions are ‘necessary to ensure that the action is not contrary to the national interest’.
2.9
Under section 74 of the Act, after approving an investment, the Treasurer can revoke a condition, impose a new condition, or vary an existing condition only if:
the person consents to the new condition or the variation; or
the Treasurer is satisfied the new condition or variation does not disadvantage the person.
2.10
The Act provides no guidance on the substance of conditions, only that they are applied to ensure an action is not contrary to the national interest. That is, without the conditions imposed, an investment could harm the national interest.
2.11
There is qualified support for the imposition of conditions on foreign investment approvals. The Law Council of Australia identifies conditions as an important mechanism to protect the national interest while also allowing an investment to proceed. However, the Council also raises a number of concerns in terms of consistency, transparency, and uncertainty.
Rationale for a negative test
2.12
That the national interest test is not legislated, that it lacks detail, that its substance might change over time, and that it might be applied differently according to the particular investment or investor, could be considered controversial in many areas of public policy. However, there is support for this approach, particularly from those who agree with the presumption of benefit.
2.13
The Treasury argues the ‘flexibility’ allows the Treasurer to consider any factors that may be relevant to a particular case. This lack of transparency could have the potential to undermine public trust; the Treasury regards it as fundamental to ensuring community confidence in the framework, particularly as the national interest is difficult to define and can change over time.
2.14
Further, the Treasury argues the lack of specificity in the test allows a broader range of concerns to be considered: ‘Australia’s broader approach to the national interest test allows us to protect against any concern, including national security concerns that may be present in a particular case’.
2.15
The negative framing and nebulous substance is defended by the Productivity Commission on the grounds the approach:
places the onus of proof on the Government to allow all foreign investment unless it can determine that a proposed investment is against the national interest, which is a fairly high bar resulting in few investment applications being blocked outright;
gives treasurers discretion to define the national interest as they see fit, in a manner that changes over time, allowing governments to respond quickly to new concerns that are likely to affect the national interest, as well as to avoid blocking investments on grounds that were once relevant, but no longer are; and
allows the Treasurer to weigh up the potential benefits of an investment proposal, not just the potential costs.
2.16
Nevertheless, the Commission argues the current national interest test lacks clarity on how it is interpreted from case to case and calls for tighter policy guidance, and excluding risks from the test that can be mitigated through domestic regulation. A similar position is held by Ms Yun Jiang, specifically that the variable nature of the test leads to uncertainty for investors.
Potential positive and negative effects of foreign investment
2.17
Australia is a net recipient of foreign investment, and it has been an important factor in the growth of the Australian economy. The Department of Foreign Affairs and Trade estimates the gap between national investment and national savings has been on average around four per cent of gross domestic product (GDP) over the past few decades.
2.18
The Treasury agrees Australia does not have the capital base to develop the Australian economy:
Australia has historically run current account deficits, and essentially what that means is that our level of investment has been higher than our level of saving. Economists would say that level of investment builds the capital stock which is very important for economic growth, very important for real wages, very important for productivity. In the absence of that foreign investment, you would either need to have a higher level of domestic savings to support a level of investment or you need to have a lower level of investment.
Historically, Australia has had a wealth of investment opportunities, greater than our level of national savings can facilitate, and foreign investment has been able to supplement our level of domestic savings to enable us to exploit more of those investment opportunities that Australia has.
2.19
Regardless of the need for foreign investment, the inquiry heard it cannot be assumed that all investment is necessarily beneficial. Foreign investment can have both benefits and disadvantages, depending on the type of investment and the manner in which it is regulated.
Some benefits and disadvantages from foreign investment
2.20
While the Productivity Commission supports foreign investment on the basis it has allowed the Australian economy to make more investments in capital than would be possible if financed through domestic savings, it acknowledges that in addition to the positive direct and spill-over effects there are potentially some negative effects. Other submitters also presented research detailing the potential of foreign investment to deliver positive and negative effects.
Table 2.1: Potential positive and negative effects from foreign investment
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– additional funds for investment with positive effect on economic growth
– unleashing of increased competitive forces encourages ‘reciprocal’ innovation in competing Australian-owned companies
– expanding capital per worker results in labour productivity growth that generally leads to increased wages
– direct transfer of advanced technology and spread of knowledge from world-leading firms
– access to new management practices
– greater participation in international supply chains
– greater ‘human capital’ development
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– potential of negative social and environmental spill-overs when foreign investors do not adhere to domestic regulations
– competition from efficient foreign businesses may result in some Australian firms going out of business
– foreign direct investment (FDI) reduces the need for foreign-owned firms to innovate
– technological transfers through inward FDI reduce the need for domestic innovation
– provides opportunities for tax minimisation
– increases industry concentration and reduces competition
– the capital-intensive nature of FDI has a negative effect on employment growth and real wage growth
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Source: Productivity Commission; Professor Clinton Fernandes; Mr David Richardson
2.21
The 2020 Productivity Commission report into foreign investment in Australia identifies some negative trends observed internationally:
wholly-owned foreign projects are less likely to source and supply goods locally; however, this is partly offset by foreign investors transferring more resources, know-how and advanced technology to wholly-owned projects, as the investors can maintain more control and avoid leakages to competitors; and
foreign owned firms are significantly less likely to partake in product and process innovations, and those with a foreign owner located in Asia appear to undertake significantly less research and development (R&D) expenditure; international studies point to foreign ownership reducing domestic R&D activity in Northern Ireland and the UK as research generally occurs at the headquarter location, not within the subsidiary. In Germany, service sector firms with headquarters abroad were also significantly less likely to engage in product or process innovations than domestic German firms.
2.22
The Productivity Commission also states while there is evidence of technology transfers and diffusion through vertical linkages (with suppliers or purchasers in host countries), it is more difficult to observe evidence of horizontal linkages that occur through the demonstration of new technologies and management techniques.
2.23
The Productivity Commission acknowledges quantifying the benefits of foreign investment can be difficult because it can be hard to identify the direction of causality—is foreign capital attracted to opportunities of an expanding economy, or is it providing impetus to growth. Although the results of studies identified by the Productivity Commission vary, the Productivity Commission is of the view foreign investment is nevertheless a positive for the Australian economy.
Greenfields versus cash cows
2.24
The diversity of foreign investment makes generalisations about the actual benefit difficult. By their nature, the benefits that might accrue from greenfields and brownfields investments differ—one creates something new, the other purchases an asset that exists. The Australia Institute questions the effect on innovation and competition in Australia from brownfields investments:
If a foreign investor wishes to set up in Australia they can do so and attempt to compete against incumbents from a greenfield operation. If they compete and succeed then they add to competition and choice in Australia. However, in general Australia is a very uncompetitive environment and so a takeover necessarily involves replacing domestic owners in an industry that lacks innovation and dynamism.
2.25
The presumption of benefit might also be questioned where a foreign interest acquires a profitable Australian company, does not change its business model, and merely collects the profits formerly enjoyed by the previous owners:
Nothing changes with respect to its output, employment and so on and so GDP is exactly what it would have otherwise been in the absence of the foreign investment. However, Australia’s net national income has fallen because the profits generated no longer accrue to Australian owners but to foreign investors. There will also be an outflow of income over the balance of payments.
2.26
The Productivity Commission agrees in many instances greenfields investment is preferable because it is new, additional investment and this is a key mechanism through which investment provides a broader benefit to the economy as a whole.
2.27
Nevertheless, although the Productivity Commission has done no research to quantify the difference between greenfields and brownfields investments, it suggests a brownfields investment does provide resources to the seller, who can choose to undertake a new investment in Australia. Further, although spill-over effects are difficult to measure and are not guaranteed, the Productivity Commission suggests there is evidence spill-over effects such as technology transfer occur more in brownfields acquisitions as a new investor integrates itself into existing supply chains.
Supply chain implications
2.28
Supply chain benefits, though possible, are not guaranteed. The Government of Western Australia is concerned about the recent emergence of investments being tied to project supply chain opportunities linked to the operations of the investor in their home market.
2.29
Under such an arrangement, equity or capital contributions can be tied back into procurement decisions—a capital injection or investment will go into a project and some of the supply contracts to that project are tied to the capital injection.
2.30
The WA Government cites anecdotal evidence where agreements negotiated as part of the foreign investment exclude local companies from bidding for certain supply chain opportunities—opportunities that tend to be lucrative and high-value adding. It suggests the Federal government has no visibility on this. The WA Government is of the view any tie-back supply chain opportunities negotiated should be visible to regulators and their consultation partners. Further, applicants should identify how they will engage with the Australian supply chain and offer full, fair and reasonable access to project supply opportunities.
Tax minimisation
2.31
The Productivity Commission notes multinational tax minimisation is a growing problem—companies are using an increasingly aggressive range of tools to relocate where profits are reported for tax purposes, including about where they hold their debt (thin capitalisation) and the pricing of goods, services and intellectual property between group companies (transfer pricing).
2.32
The Productivity Commission makes the following observations from the Organisation for Economic Co-operation and Corporate Development Group of Twenty (OECD-G20) base erosion and profit shifting (BEPS) work:
the profit rates of multinational affiliates in lower-tax countries are higher than their group’s average worldwide profit rate;
FDI is increasingly concentrated in a few (mostly low-tax) jurisdictions;
there is some evidence of an increased transfer of intellectual property (IP) to favourable holding locations, as the ratio of royalty receipts to R&D spending has increased sharply in some countries; and
effective tax rates paid by large multinationals are estimated to be 4 to 8½ percentage points lower than similar domestic-only enterprises.
2.33
The Commission states in some cases foreign investment may result in new tax minimisation risks—previously domestic-only businesses gain opportunities for BEPS through an acquiring multinational enterprise.
Operating in the national interest
2.34
The Australia Institute argues the presumption of benefit cannot be made in areas of the Australian economy controlled by large corporations—in particular, banking, retail and resources. When a multinational with significant world share of a commodity acquires an Australian resources company for instance, the benefits can be uncertain. It becomes a more serious concern where monopoly, duopoly or oligopoly environments exist.
2.35
By way of example, in 2001, then Treasurer Peter Costello prohibited Shell’s proposed acquisition of Woodside and in so doing acknowledged the government could not require Shell to act in Australia’s national interest, neither could it craft enduring conditions to ensure this occurred—the best that could be obtained through conditions would be ‘best endeavours’.
2.36
Specifically, the Treasurer stated Australia’s national interest was that resources from the North West Shelf project were developed to their full and sales of the resources promoted in preference to competing sales from projects in other parts of the world. Shell was not in a position to guarantee these outcomes for a number of reasons.
A more ambitious national interest test
2.37
Given the variability in benefit that might be derived from foreign investment, the current national interest test with its presumption of benefit is, for some, insufficiently ambitious. Several submitters and witnesses argued there should be higher expectations for foreign investment, beyond an expectation the effect not be negative.
2.38
Professor Clinton Fernandes states the national interest is what you make of it and argues against being bound by a ‘very narrow, unambitious version of the national interest’. The national interest should recognise the need to develop Australia’s economic complexity. For Professor Fernandes, policies that would give effect to a more ambitious understanding of the national interest would increase Australia’s economic complexity by diversifying exports into higher value-added sectors:
An economically complex country can ‘combine new capabilities with a wide set of existing capabilities, resulting in new products of higher complexity than those of countries with few capabilities’. A country’s level of economic development is associated with the complexity of its economy.
2.39
That Australia has low economic complexity was suggested in 2018 by the then Chief Economist of the Department of Industry, Innovation and Science. According to the Chief Economist:
Australia’s economic complexity is an anomaly among advanced economies, with the economic complexity closer to that of a developing country … Countries with highly complex exports include Japan, Germany, Switzerland, Sweden and South Korea. Australia ranks 53rd—comparable to the economies of Kazakhstan, Cambodia, Kenya and Saudi Arabia—and is the least complex of all the OECD countries.
Low complexity in Australia suggests there is significant export and growth potential to diversify its export base. Low complexity also points to risks in Australia’s lack of diversity, with a narrow range of exports meaning the economy is more subject to income volatility through demand shocks for specific goods. While Australia has benefited significantly from China’s demand for commodities, low complexity suggests a negative shock to export demand would be more detrimental for Australia than for a more complex economy. Yet low complexity also indicates that Australia is a highly specialised economy, suggesting it has adapted to competitive trade pressures.
2.40
A narrowly considered national interest can result in investments that focus on supplying raw materials for other countries to turn into elaborately transformed finished products. A strategic national interest test would include the goals of increasing the complexity of domestic innovation and supporting higher value-added sectors including:
advanced manufacturing; and
2.41
For Professor Fernandes, the national interest should encourage strategic investments in areas that will be vital to world technological development over the next twenty to thirty years. The high-tech world of 5G and advanced materials manufacturing techniques, for instance, rely on certain critical minerals in which Australia happens to be rich. Professor Fernandes stated:
If we are to go to, for example, green technology, with solar panels or with electric cars, you need batteries, and the key things in those batteries are in those critical commodities. Why simply ship the minerals off overseas to a global supply chain, so that they can manufacture the cars somewhere else, and then we buy the cars back again?...
There is no reason to say that the national interest involves shipping those minerals somewhere else or allowing the foreign company to come in, buy the rights to exploit the minerals, take the minerals somewhere else, manufacture the smart electric cars somewhere else, and then we buy the cars. That, to me, is like a Third World country; it’s like an economic dependency.
2.42
Professor Fernandes suggests a national company owned by the Commonwealth could enter into partnerships with foreign investors or domestic investors to exploit and strategically develop these resources, ‘there’s nothing wrong with simply establishing a national company which can get the royalties, make investments and then try to get us to a higher level of economic complexity’. Rather than assuming foreign investment is automatically in the national interest, the national interest is better served by policies designed to promote technology transfer, local equity participation, and training:
It’s about whether we would like to see an Australia that does more than simply act as a quarry for other people to make smart things.
2.43
The Western Australia Government similarly suggests applicants should be able to demonstrate how an investment will improve the overall productivity of the economy and provide opportunities for local businesses and workers. Applicants might be required to identify whether the investment would:
facilitate technology transfer;
provide for joint venture or partnership proposals; and
potentially provide for local companies to participate in international supply chains.
A positive national interest test
2.44
Few argue foreign investment brings only benefits to the Australian economy; it is widely acknowledged there can be upsides and downsides to foreign investment. There is a general view the current approach to foreign investment encompasses something of a balance—that is, it allows positives and the negatives to be assessed and comes to a position of approving investments that are not on the negative side of the ledger. The Treasury states the national interest test balances the need for foreign investment against potential threats to the national interest.
2.45
The Productivity Commission similarly argues a significant advantage of the national interest test is it weighs up not only the costs but also the benefits of a foreign investment proposal. As such, a low level of national security risk need not stop an investment that potentially brings economic and other benefits.
2.46
Some submitters suggest there may be benefits to legislating a positive test, though this is opposed by others. Professor Allan Fels is of the view ‘the public interest test is so broad it could mean almost anything’, though he did not support a positive list on the grounds it would be restrictive.
2.47
The Productivity Commission agrees: a positive test would likely require a definition of the national interest in the Act and while this would increase transparency of Australia’s foreign investment policy (something the Commission supports), it would come with the risk of false positives and might stop significant valuable investments.
2.48
A key issue may be the difficulty in defining the national interest, and accounting for change over time. The Australia Institute argues:
… national interest is the sort of thing that is hard to define, but we know it when we see it. I wouldn’t like to see it defined precisely. On the question of whether we have had a decent definition—when we first started legislating on foreign investment in the 60s and 70s, how could that tackle the issue of Huawei and 5G? That would be impossible to anticipate. It would be impossible perhaps now to anticipate some of the outcomes of artificial intelligence.
So, for those sorts of reasons, I would prefer to leave the question open. But, perhaps in a similar way to the way the tax office gives you guidance if you think you might be sailing against the wind a bit—maybe that’s a role for the Foreign Investment Review Board.
2.49
Noting the difficulty of settling on a definition of the national interest, Professor Fernandes argues it is not necessary to make the definition particularly prescriptive. The national interest has to be consistent with common sense:
It can’t be used simply as a justification, or a tool for whatever you would like to push … the national interest involves providing us with a decent standard of living, a good quality of life and a clean environment—and the resources of our country principally benefiting the people of our country.
2.50
While there is strong support for a negatively framed national interest test, which is not legislated, it is not clear the existing framework operates negatively in all circumstances. Although it claims to operate the test negatively, the Treasury’s Foreign Investment Policy identifies positive factors against which the national interest is assessed. For instance, the policy states:
An investment that enhances economic activity such as by developing additional productive capacity or new technology is less likely to be contrary to the national interest.
New Zealand’s positive test
2.51
During the course of the inquiry, the Senate Economics References Committee (the committee) considered arrangements in other jurisdictions. Of interest was the positive test in New Zealand and the general requirement that investors deliver on the promises made in their applications.
2.52
New Zealand welcomes foreign investment and acknowledges it supports job creation, the creation and adoption of new technologies, increases human capital and grants New Zealand more diverse international connections. Without foreign investment, New Zealand’s living standards would be lower. Nevertheless, rather than assuming foreign investment will be beneficial, foreign investors in New Zealand must demonstrate how their investment will positively benefit New Zealand. This reflects different starting assumptions—New Zealand tells foreign investors the ability to invest in New Zealand is a privilege, and acknowledges not all foreign investment is beneficial.
2.53
The New Zealand Overseas Investment Office (OIO), a unit within Land Information New Zealand, regulates foreign investment in New Zealand under the Overseas Investment Act 2005 (NZ) (OIA). Pursuant to section 34 of the OIA, the Minister of Finance provides a Ministerial Directive Letter to the OIO (which, under section 35 of the OIA, must be published) directing the regulator on:
general policy approach of the government to overseas investment;
relative importance of different criteria or factors in relation to particular assets (see, for instance, section 17 of the OIA);
level of monitoring by the regulator; and
other matters relating to the regulator’s functions, powers and duties.
Ministerial directive
2.54
While a Ministerial Directive Letter cannot alter the criteria for consent established in the OIA, it can direct the OIO on the relative importance of different benefit factors, allowing the Minister to influence the focus of the benefit assessment.
2.55
The current Ministerial Directive Letter (issued on 28 November 2017) provides significant detail on the government’s approach to assessing the benefit to New Zealand of foreign investment.
The Government welcomes high quality overseas investment that:
generates high levels of benefits to New Zealand;
creates new productive assets (e.g. ‘greenfield’ investments);
is environmentally sustainable, minimising adverse impacts on the natural environment, and is likely to create positive and long lasting environmental benefits;
provides economic, environmental, social and cultural benefits to regional communities;
significantly increases value added activities in New Zealand; and
provides for significant participation and oversight by New Zealanders.
However, the Government recognises that not all overseas investments provide high levels of benefits to New Zealand and overseas investment can result in the loss of New Zealand ownership and control of important productive assets such as farm land and strategic infrastructure.
The Government also recognises that while economic goals are important, so too are environmental, social and cultural goals. Overseas investment must deliver for all of New Zealand. It is a privilege, not a right, for overseas persons to own or control sensitive New Zealand assets and that privilege must be earned and maintained.
The Government’s overall policy approach is to achieve a balance between the need for highly beneficial overseas investment and the need for New Zealand to maintain ownership and control of sensitive New Zealand assets.
Consent requirements
2.56
Foreign investors in New Zealand require consent to acquire sensitive land (including non-urban land over five hectares, residential land and lifestyle land, and land adjoining sensitive areas such as the foreshore), significant business assets, and fishing quota. Under New Zealand’s positive approach, potential investors have to demonstrate the benefit to New Zealand of their proposed investment.
2.57
There are a range of tests that apply either individually or in combination to various investments:
benefit to New Zealand test (sensitive land);
investor test, that focuses on the characteristics of the overseas person (significant business assets, sensitive land, fishing quota); and
national interest test (fishing quota, land or assets used for strategically important business, investments associated with foreign governments).
2.58
The benefit to New Zealand test is legislated under Section 16A of the OIA, and Section 17 of the OIA and Regulation 28 specify overarching factors for assessing the benefit of overseas investments in sensitive land. The factors come under three categories—economic, environmental, and offer of special land to the crown—and include:
new job opportunities or retention of existing jobs, introduction of new technology or business skills, increases in export receipts, added market competition, greater efficiency or productivity, enhanced domestic services, introduction of additional investment for development purposes, increase processing of primary products;
protecting or enhancing existing areas of significant indigenous vegetation and significant habitats of indigenous fauna;
protecting or enhancing historic heritage;
protecting or improving walking access;
consequential benefits; and
impact of refusing the application.
2.59
Section 18A of the OIA establishes the investor test, which must be satisfied for investments in significant business assets.
2.60
Amendments to the OIA in 2020 introduced the national interest test, and a national security and public order call in power. The national interest test is intended as a ‘backstop’ tool to manage significant risks, allowing the minister to consider potential risks of a transaction to New Zealand’s national interest when deciding whether to grant a consent. While the test will always apply to investments in strategically important business assets and investments with a significant foreign government interest, it may be applied to other transactions at the minister’s discretion. If a transaction is determined to be contrary to the national interest, consent may be declined or conditions imposed to mitigate risks. The test is not defined in the Act, giving the minister broad discretion on a case-by-case basis.
2.61
According to the New Zealand government, the advantages of this approach, over a legislated test, are that it:
allows New Zealand’s interests to be protected, without establishing a framework that would likely result in valuable investments being declined; and
ensures the OIA is an enduring piece of legislation that can easily respond to changes in the global risk environment, community concerns about foreign investment, and government priorities.
Conditions
2.62
The OIO can apply a range of conditions to foreign investment consents. Promises made or intentions specified in an application to demonstrate an investment is positively in New Zealand’s national interest, can be enforced as ‘special conditions’. This is unlike the Australian regime where promises or intentions are regarded as ‘voluntary undertakings’ and are not enforceable (see below). The OIO specifies it will consider taking enforcement action where an investor has ‘failed to deliver the promised benefits from their investment’.
2.63
The conditions placed on an investment (in particular the undertakings made by an investor in their application), are often identified in the decision summaries the OIO publicly releases each month. Since 2015, the OIO has been publishing the records of enforcement actions taken, including court orders, orders for the disposal of property or investments, administrative penalties for the late provision of reports, warnings, and other compliance actions and compliance letters sent to investors.
2.64
Investors are required to deliver on the promises they make in their applications because the intentions of investors are part of the foreign investment framework. The OIO publishes details of its enforcement actions. For instance, in August 2019, the OIO ordered KBSR to sell an historic Waikato hotel complex after KBSR failed to follow through with an agreed redevelopment. When purchasing the property, KBSR had promised to undertake work to improve the facility, including protecting heritage features and improving public access to the property. It also undertook to construct new guest rooms and other facilities. After engaging with KBSR, the OIO concluded KBSR was not adequately addressing the government’s concerns and was not providing confidence it would be able to complete the developments in future. The OIO ordered KBSR to dispose of the property.
2.65
The OIO also publishes warning notices. In September 2020, the OIO wrote to Matthew Wakelin of Wairarapa Estate Limited noting annual reports to the OIO indicated Wairarapa was in breach of several conditions it was required to complete by December 2019. These included a failure to upgrade a road; to implement required covenants; to complete a comprehensive archaeological analysis; and to provide public access. The letter warns Mr Wakelin the OIO may take enforcement action, including requiring the disposal of the property, if breaches are not remedied.
Assessing applications against the national interest: voluntary undertakings
2.66
Unlike the foreign investment regime in New Zealand, in Australia, investors are not necessarily held to any undertakings they may make at the time a foreign investment proposal is submitted.
2.67
Although very few foreign investment approvals are announced, in a small number of cases where there is broad interest, the Treasurer may make an official announcement—this announcement may mention ‘voluntary undertakings’ or guarantees. Voluntary undertakings are actions an entity says it intends to complete following the acquisition—for instance, they may relate to investment, employment, business development, or community benefit.
2.68
The Treasury is unable to identify the number of applications where applicants include voluntary commitments or undertakings in order to demonstrate the investment will not be contrary to the national interest. The Treasury states voluntary undertakings can be offered, but are not suggested or encouraged, or ‘relied upon’ in making the assessment.
2.69
Voluntary undertakings do not form part of the foreign investment framework and are not enforceable. Nevertheless, the Foreign Investment Review Board (FIRB) does highlight investor intentions in case studies in its annual report.
Information required in an application
2.70
When an entity submits an application for foreign investment approval, it must include details about the proposed transaction, including why the proposed transaction is not contrary to the national interest, the commercial rationale behind the proposed transaction, and describe the acquirer’s intentions for the business or land, amongst other things.
2.71
In practice, it is not clear how voluntary undertakings (or the intentions of an entity), which are required as part of a foreign investment proposal, would not be considered when an assessment as to whether an application might be contrary to the national interest is made. Advice provided by the FIRB, that an investment that enhances economic activity by developing productive capacity or new technology is less likely to be contrary to the national interest, would appear to invite applicants to state their intentions following acquisition.
Box 2.1: : The Moon Lake Case—the role of voluntary undertakings
The Treasurer’s announcement: The Treasurer’s announcements about foreign investment approvals can indicate voluntary undertakings are considered when determining investments are not contrary to the national interest.
For instance, on 23 February 2016, then Treasurer, the Hon Scott Morrison, approved the foreign investment application of Moon Lake Investments to acquire the land and assets of the Tasmanian Land Company (TLC)—the Van Diemen’s Land Company (VDL)—from the New Zealand-based New Plymouth District Council. The sale price was reported to be $280 million.
At the time of its purchase, VDL was the largest dairy farm in Australia, consisting of 25 dairy farms. In total, VDL milked around 18,000 cows over almost 20,000 acres and employed 140 people. The land was granted to VDL by King George IV in 1824, and VDL has always been foreign owned.
Factors considered by the Treasurer: In announcing the approval, the then Treasurer stated:
In forming my view I have carefully considered the national interest test and how it applies to this case, including the likely impact on local jobs and increased investment to support economic growth.
…
Moon Lake Investments have given guarantees that all current VDL employees will be offered ongoing employment with Moon Lake on terms no less favourable than their current employment arrangements.
Moon Lake has also committed to undertake a number of investment projects in the VDL farms, which will provide additional economic activity to the Tasmanian economy, and based upon Moon Lake’s estimates will result in a near doubling of employment at VDL. This will guarantee more than 140 local jobs, generate an intended additional investment of over $100 million and an expected additional 95 jobs.
Moon Lake has advised that it intends to continue to supply the milk produced at VDL under the same contractual terms that are currently in place. This provides assurance that there will not be an impact on the supply of milk and milk products in Australia. Indeed, the investment that Moon Lake proposes to undertake may result in an increased supply.
The land on which VDL operates has important cultural and natural heritage considerations. Moon Lake has committed to honour the terms of all environmental and cultural agreements entered into by VDL, including with the local Aboriginal community. This also includes the ‘in principle’ approval for construction of a ‘Devil Proof Fence’ at its Woolnorth property to help reduce the spread of Devil Facial Tumour Disease among the Tasmanian Devil population.
Given these considerations, I am satisfied that the Moon Lake proposal to purchase TLC is not contrary to the national interest. It will ensure increased employment and investment in an important industry sector in Tasmania, while the safeguards we have put in place will ensure they pay their tax.
In this statement, the Treasurer linked the various ‘guarantees’ with the assessment the investment would not be contrary to the national interest. It was clarified by Treasury officials during Senate Estimates that these ‘guarantees’ were ‘undertakings’ and not legally binding.
Concerns raised about progress on meeting voluntary undertakings: In April 2018, following the resignation of five non-executive directors from the board of Moon Lake, and a corporate restructure under Chinese Ningbo Xianfeng New Material Co Ltd (APlus), the Treasurer requested annual updates from Moon Lake (now Van Dairy) on its progress against the commitments made at the time of its proposal to purchase VDL. To May 2020, Van Dairy made three annual reports.
In these reports, Van Dairy had yet to meet some of the significant undertakings more than four years after they were made in early 2016. Van Dairy, through its lawyers, attested it:
continued to honour the terms of its statutory vegetation management agreement with the Tasmanian government;
completed installation of a devil proof fence across sections of Woolnorth Road, and continues to support the Devil proof fence project by providing access and accommodation to persons conducting conservation work tagging devils;
continued to honour the terms of the Memorandum of Understanding with the local Indigenous community that requires Van Dairy to improve access to, and protection of, Indigenous cultural heritage across Woolnorth; and
continued to supply milk to Fonterra on largely the same terms as VDL.
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However, Van Dairy had yet to meet other commitments:
there had been no local equity participation;
capital expenditure (suggested at over $100 million) had been approximately $20.5 million;
it had not yet created any new dairy farms and the long term plans to invest in new dairy farms was reduced from 9 to 6;
it continued to explore plans for a processing facility;
because there was no processing facility, it had not been able to provide site visit opportunities for food technology, processing and engineering or more extensive internships opportunities at AgriTas; and
it was providing employment for 145 full-time and 34 casual staff (39 on working visas and 16 working holiday makers). At the time of purchase the Treasurer stated the acquisition would guarantee 140 local jobs, and an additional 95 jobs were expected as a consequence of the investment.
Subsequent developments: Between December 2020 and March 2021, the Circular Head Council issued nine Environment Protection Notices to Van Dairy regarding effluent management systems on its farms that were causing, or likely to cause, material environmental harm. A formal audit by the Tasmanian Dairy Industry Authority, which manages licensing, inspection and auditing of dairy businesses, found 19 of the 23 farms owned by Van Dairy had significant non-compliance issues.
The Environment Protection Authority Tasmania announced in April 2021 it would investigate Van Dairy’s compliance with the Environment Protection Notices, on the grounds there are significant allegations of environmental harm. The Environment Protection Authority estimates the cost of rectifying the issues will be over $10 million. Van Dairy subsequently appointed a consultant to assist it manage compliance with regulatory requirements.
In April 2017, media reports announced the Fair Work Ombudsman had launched inquiries following claims of worker underpayment and work compliance breaches.
In May 2021, it was announced Van Dairy had sold 11 of the farms for $62.5 million. The buyer was reported to be Melbourne-based asset manager Prime Value. The sale was reported to include 5,000 cows and 2,200 hectares of land. Mr Lu, owner of Van Dairy, is reported to have stated the sale ‘delivers on our promise for Australian companies to own 10 per cent of the land’.
Treasury assessments
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Treasury officials have confirmed a variety of elements can be considered in the assessment of a foreign investment proposal, including the contribution of a foreign investment to: domestic innovation, supporting higher-valued add sectors, R&D, advanced manufacturing, and energy efficiency. For instance, research, further investment, greenfields work, introduction of new technology ‘are all, absolutely, taken into account’, according to a Treasury official.
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It is unclear how the Treasury can separate out the various elements of an application and ignore those that relate to the intentions of an investor when assessing whether an application is not contrary to the national interest.
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However, regardless of how they affect the decision-making process, unless these undertakings then become conditions imposed on an investment and subject to a reporting regime, the Treasury has no way to ensure such undertakings occur. As they exist outside the foreign investment framework, there are no penalties. The Treasury has stated if voluntary undertakings are not subsequently met by an investor, it may be considered as part of the character of the investor in future applications.
Can Australia’s foreign investment framework be changed
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The committee asked the Department of Foreign Affairs and Trade and the Office of International Law in the Attorney-General’s Department whether, given Australia’s international trade obligations, changes to the foreign investment framework could be legislated. In particular, the committee asked the departments whether under international trade obligations, it is permitted for Australia to:
introduce a positive national interest test into the act that would require prospective foreign investors to demonstrate how their investment would benefit Australia;
introduce a provision in the Act that would define the ‘national interest’; or
make enforceable any ‘voluntary undertakings’ detailed by an applicant when an application is lodged.
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The departments initially declined to provide a substantive answer to these questions. The committee reaffirmed its request. Rather than responding generally to the questions in principle, the departments responded in a manner that was not helpful. The departments stated they could not provide answers to these questions because they would need further detail to undertake a case-by-case analysis of all the relevant facts and circumstances. In particular, the departments stated that in order to provide a response, the following information would be required:
positive national interest test: whether this would be defined in legislation or guidance material, the content of any such definition, and how prospective foreign investors would be required to demonstrate that their proposed investments would benefit Australia;
defining national interest: the content of the proposed definition, whether it would be an inclusive or an exhaustive definition, and the level of discretion available to the decision maker; and
making voluntary undertakings enforceable: whether this would apply retrospectively, the types of undertakings that may be sought from prospective investors, and the available enforcement options.
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The departments stated:
Only with greater clarity about the nature and content of the proposals would it be possible to step through the legal analysis to determine whether each of the three hypothetical proposals was ‘permitted’ under Australia’s international trade and investment obligations.
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These steps include identifying the sources of relevant international trade and investment obligations; whether proposed measures are covered by a relevant agreement; where there is a prima facie breach of an obligation; and whether there is a reservation, exception or carve-out available.
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The departments were also asked for an explanation of the legal basis upon which Australia can impose and enforce conditions on a foreign entity that are not similarly applied to Australian-owned entities, specifically with regard to World Trade Organisation national treatment obligations, or similar provisions in free trade agreements.
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The departments explained the national treatment obligation is subject to a range of reservations, exceptions, and carve-outs:
For example, in Australia’s free trade agreements, the national treatment obligation does not apply to any measure as set out by Australia in its schedules of non-conforming measures. These schedules include entries relevant to Australia’s foreign investment screening regime. Our GATS [General Agreement on Trade in Services] commitments are subject to a similar reservation for Australia’s foreign investment screening regime.
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However, when asked about stand-still and ratchet mechanisms, the departments responded that while the national treatment obligation in Australia’s free trade agreements, where it applies, does not apply to any measure as set out by Australia in its Annex I schedules of existing nonconforming measures:
… this reservation is qualified by a ‘standstill and ratchet’ mechanism which essentially provides coverage for changes to existing non-conforming measures so long as they do not make the measure less consistent with the national treatment obligation, compared to the situation immediately before the amendment.
One of the entries in Australia’s Annex I schedules of existing non-conforming measures in free trade agreements is for Australia’s foreign investment screening regime which is subject to the standstill and ratchet mechanism described above. However, it is important to note that, apart from this non-conforming measure, a range of other reservations, exceptions and carve-outs are relevant to Australia’s foreign investment screening regime.
Determining whether a particular proposed change to Australia’s foreign investment screening regime would be consistent with Australia’s international trade and investment obligations would involve the provision of legal advice on a case-by-case basis in light of all of the relevant facts and circumstances.
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The Committee surmises the government is likely prevented by international trade obligations from making further amendments to legislation that would ensure foreign investment in Australia provides a positive benefit to all Australians and is positively in the national interest, and that foreign investors are required to carry through with the promises they make when they propose an investment.