Australia is “under new management”. The Liberal National Party (“the Coalition”) was elected as our new Government on 7 September 2013. In the lead up to the election the Coalition pledged to stimulate the agribusiness sector, with the aim of making Australia the “food bowl” of Asia.
Presently only 11% of Australia’s agricultural land is whole or part foreign-owned. The potentiality of the other 89%, and the significant amounts of capital that are required to drive agribusiness investments, make Australia a tempting target for foreign investors. This is especially the case for those from the ranks of our very close and heavily populated Asian neighbours.
When in Opposition, and in the lead-up to the election, the Coalition expressed concerns about what it perceived to be a lax approach towards foreign investment under the relevant regulations, particularly as they apply to the agribusiness sector. Externally, these concerns were said to relate to food safety and the reputation of Australian produce. Presumably, the theory behind these concerns is that foreign owners will be less likely to observe Australian laws and won’t “do the right thing” when it comes to domestic or export food quality. Presumably, it is contended that Australia’s high reputation for quality food products would then suffer, in line with increasing foreign ownership of Australia’s agribusiness assets.
From our perspective, this theory is illogical. It is only unsupportable from a starting position of prejudice (that foreign investors are not inclined to comply with Australian laws) or of economic ignorance (that foreign investors would not care about the very asset that they paid a lot of money to acquire in the first place).
Food security has also been raised as a concern. However the prospect that a major food producing country with a low population like that of Australia would run out of food for its people is not particularly credible.
However, the political concerns are more readily apparent, and are very real from the perspective of a party seeking to win power. A large part of the electorate does not want to see Australia’s agricultural heritage fall into the hands of foreign investors – and there are votes to be won in positively responding to those fears.
In this China Messenger, we comment upon possible changes to Australia’s foreign investment scheme, with a particular focus on the way these changes might affect investment in Australian agribusiness.
FIRB – The investment watchdog
Australia’s foreign investment policy is administered by the Foreign Investment Review Board (“FIRB”). FIRB reviews applications by foreign owned companies looking to invest in Australia and recommends approval, amendment or rejection to the Treasurer, who then makes a final decision. This review takes place within the framework of the Foreign Acquisitions and Takeovers Act 1975 and Australia’s published foreign investment policies.
Whether a proposed investment must be notified to FIRB is determined by strict dollar amounts, definitions of “control”, and the nature of the target investment itself. Once notified, FIRB must test the proposal against national interest criteria set out in the government’s announced policies. These criteria are literally ambiguous and their application is ultimately subjective. They include the effect of the investment on national security, and implications for the economy, for competition, and for the community at large. Other government policies are taken into account as well.
Importantly, FIRB examines the connections that an investor has to a foreign government. Where there are such connections, FIRB’s scrutiny of the proposal intensifies. FIRB will consider the commerciality of the investment, and ask itself whether the investor may be pursuing political or strategic objectives which would be contrary to Australia’s national interest.
There is no law that prohibits foreign governments and their enterprises from investing in Australia. Nonetheless the significant amount of investigation of such proposals, the advance warning of publication of the proposal that FIRB must give where it is not going to meet its assessment deadline, and examples of onerous conditions imposed on previous approvals, can discourage investors. FIRB will claim that it does not refuse any applications – however that does not account for the withdrawals of applications, nor for the non-applications by investors that do not want to “run the gauntlet” of FIRB consideration.
Criticism of investment approval thresholds - Too low or too high?
The main concern expressed by the Coalition when in Opposition was the threshold which must be crossed by an investor before FIRB approval is required for a foreign acquisition of Australian agricultural land. Currently, the threshold for approval of foreign investment in rural land is AUD248 million. If the land includes urban land it comes down to AUD54 million. But the Coalition’s stated intention is to lower the threshold for review for the acquisition of all agricultural land to as low as AUD15 million.
A new threshold for foreign investment in agribusiness entities is also under consideration, namely that any proposed foreign investment must be notified to FIRB if the proposed investment exceeds over 15% of an agribusiness valued at AUD248 million, or exceeds AUD54 million.
FIRB under attack for its alleged inaction and inexperience
To date, FIRB has never publicly rejected a foreign agricultural land or agribusiness acquisition. The Coalition flagged this as being an indication that FIRB’s capacity to protect the national interest was deficient. Opponents of foreign investment criticise the approval system as not being able to identify the true beneficial owners of a foreign acquisition, or as being powerless to prevent transfers of ownership to foreign state owned enterprise. It is also claimed that competition considerations are not properly evaluated in the review process, and that FIRB should insist on market pricing of exports to protect public revenue derived from Australian agricultural output.
The composition of FIRB has also come under attack. Critics say that FIRB lacks understanding of the agribusiness sector, because the majority of board members are experienced in financial matters but not in the wider considerations of the national interest. The proposed changes to FIRB include increasing its members from four to seven, and to include at least one member with agricultural industry expertise.
Redefining urban and rural land, and letting you know who owns it
Australian investment law defines urban land as any land in Australia that is not rural land. Rural land is defined as land used exclusively for carrying on a business of primary production. On this basis, land which might commonly be considered to be agricultural land is treated as urban land under the regulations. Under the new government’s proposed changes, the definition of urban and rural land would be changed to reflect their more common meaning. This will attract tighter supervision of agricultural land acquisitions.
Queensland maintains a national register for the declaration of foreign ownership of agricultural land and agribusinesses, but no other state or territory does the same. The lack of publicly available data is of concern to the new government, and there are moves afoot to now establish a similar register at the national level.
Implications - An Asian food bowl without the bowl to support it?
The new government’s proposals may be moderated before they are introduced, on the assumption that populism in order to get elected is often reassessed in the harsh light of economic practicality once power is won. There are already signs that this is occurring, with the new government announcing that economic growth would be reignited by a new investment and free trade push. Prime Minister Tony Abbott is reported as saying that other countries would “build walls against us” if Australia cracked down on foreign capital.
These contradictions can be expected to play out in continued approvals of foreign investment despite the stricter notification requirements – something we might describe metaphorically as “bigger gates in a higher wall”. The message the new government will want to send out to the world is that Australia is not only under new management, but is also back in business.
While some may see the changes to FIRB as a barrier to foreign investment, particularly in agribusiness, it is more realistic to say that the government is tightening regulation in anticipation of a large influx of investment that the new government will itself be encouraging. The new government is likely to have a strong commitment to its stated objective of becoming Asia’s “food bowl”, with the Northern Territory and Queensland to be major beneficiaries of this commitment.
Ultimately FIRB is just one part of the regulatory matrix which applies to agribusiness investment in Australia. The right advice is needed to understand and to handle the issues that impinge upon business establishment and acquisition in Australia. At Moulis Legal we look forward to continuing our association with agribusiness and with foreign investors in this dynamic and rapidly changing commercial environment.
For more information, please contact Daniel Moulis on +61 2 6163 1000 or email daniel.moulis@moulsilegal.com or Christopher Hewitt on +61 7 3010 9265 or email christopher.hewitt@moulislegal.com
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.
© Moulis Legal 2013
