National security a new test for foreign investment
Gavin Clancy, Senior Consultant, Lunik
Like any developing economy, Australia relies heavily on direct foreign investment.
Indeed, successive federal governments have welcomed foreign investment for the employment and economic opportunities that it funds.
In 2020, however, the ground shifted a little for foreign investors in Australia as the Covid-19 pandemic took hold.
Amid its rapid economic response in late March, the Federal Government announced that all proposed investments into Australia would require approval, regardless of value or nature of the foreign investor.
It reduced to $0 the monetary screening threshold for all foreign investments under the Foreign Acquisitions and Takeovers Act 1975.
Up to that change, foreign investments under a certain monetary threshold did not require government approval under the Act.
At the time, Treasurer Josh Frydenberg said the “temporary measures” were designed to “safeguard the national interest.”
A more cynical view was that the measures would prevent overseas investors snapping up distressed assets in Australia during an economic crisis.
The Government kept its word that the changes were temporary – of sorts. In December, Federal Parliament passed amending legislation containing significant reforms to the foreign investment regime.
From 1 January, the $0 mandatory threshold was removed and previous thresholds restored – except for those investments in sensitive national security land or businesses; they would require government approval, regardless of value.
In addition, foreign investors would be subject to enhanced monitoring and investigation powers, supported by a stronger regime of enforcement options and penalties.
The new provisions came under the spotlight in early January, when the South African parent company of Australian-based construction company Probuild advised that an international bid (by China State Construction Corporation) for the builder would be “rejected by the Federal Government on the grounds of national security.”
Still, the Government continues to welcome foreign investment. As outlined in its 2020 legislation, however, it wants to ensure that any investments are “not contrary to the national interest.”
In that context, the new foreign investment laws provide a last resort power, which, in exceptional circumstances, permits the Treasurer to “impose conditions or vary existing conditions, or as a last resort, require the divestment of any approved investment where national security risks emerge.”
Commenting briefly after the Probuild announcement, Josh Frydenberg said the ‘national interest test’ could apply to national security, tax or competition issues. He also noted that in the last six months, around 20 per cent (more than 250) of approved foreign investment applications had at least one Chinese partner.
Significantly, the two largest inbound foreign investor economies into Australia are the United States and the United Kingdom, which are both partners in the ‘Five Eyes’ alliance.
Figures to the end of 2019 released by the Department of Foreign Affairs and Trade showed that the US invested A$983 billion in Australia, or a 25.6 per cent of total foreign investment in Australia, followed by the UK, on $686 billion or 17.8 per cent. The $3884 billion total foreign investment included direct, portfolio and other investment.
Belgium, Japan and Hong Kong made up the top five of foreign investor countries in Australia in 2019. China sat at ninth position, at $78 billion, or a two per cent share, ahead of New Zealand ($64.4 billion, or 1.7 per cent).
Among industries, mining and quarrying accounted for almost 36 per cent of the direct foreign investment of $1019 billion into Australia in 2019, followed by manufacturing (12.9 per cent), finance and investment and real estate, both around 11 per cent.