By Dr Megan Bowman, CLMR Fellow, and Ms Swati Bhatnagar, CLMR intern. With special thanks to Dr Rob Nicholls, CLMR Associate.

SYDNEY: 18 December 2013 - Apparent inconsistencies in two recent Ministerial decisions on foreign direct investment (FDI) in Australia have raised concerns regarding prospects for encouraging future foreign investment. The decision to reject the U.S. Archer Daniel Midland (ADM) acquisition of GrainCorp contrasts starkly with the decision to facilitate Yanzhou’s investment in Yancoal. The outcome demonstrates the opacity and uncertainty of Australia’s foreign investment policy particularly on the issue of ‘national interest’.

ADM/GrainCorp decision

In June 2013, the ACCC approved ADM's $3 billion takeover of Australia's GrainCorp on the basis that the takeover was not anti-competitive because local competitors would still hold over 50% of the market share. GrainCorp’s Board and shareholders also supported the proposal. As ACCC Chairman, Mr Rod Sims, said at the time, "Our concern is competition, to make sure there's sufficient competition in the market, so it doesn't really matter who owns these assets or what nationality the owner is, it's all about competition from our point of view." Any concern about foreign ownership invokes the role of the FIRB.

However, earlier this month, Federal Treasurer Mr Joe Hockey rejected the proposal after the FIRB failed to reach a consensus recommendation. Mr Hockey claimed that the proposed takeover is not in the ‘national interest’ as it will negatively impact competition in the wheat production industry. In spite of the fact that the U.S. is the largest foreign direct investor in Australia, the ADM investment is one of the biggest rejections of a foreign investment by the Australian government. Not only was the acquisition rejected, but ADM has been left hanging, with the Treasurer allowing ADM to increase its stake to 24.9% which only perpetuates investment uncertainty.

Yanzhou/Yancoal decision

In contrast, Mr Hockey recently lifted investment conditions on Chinese mining company, Yanzhou. The conditions imposed in 2009 required Yanzhou to maintain a maximum of 70% interest in its subsidiary vehicle Yancoal Australia, whilst also reducing economic interest in Syntech Resources, Premier Coal and Felix Resources. Hockey’s decision to alter the conditions came from the “slowing demand, declining coal prices and a number of mine closures”. Yancoal Australia’s role as a major regional employer demonstrates the changing nature of the ‘national interest’ concept. New conditions imposed on the mining company require it to hold at least 51% of shares in Yancoal and extend existing loans to Yancoal if required. The changed conditions have led to an immediate increase in Yanzhou’s FDI into Australia of US$250 million.

Foreign Investment Regulatory framework

As detailed in previous CLMR Portal reports, the main regulatory documents governing foreign direct investment are Australia’s Foreign Investment Policy (AFIP), Foreign Acquisitions and Takeover Act 1975 (Cth) (FATA) and the Foreign Acquisitions and Takeovers Regulations 1989. As CLMR Fellow Dr Megan Bowman has previously described, once a review is triggered, chief consideration is given by the FIRB to whether the proposed investment will be contrary to the national interest. Despite the obvious importance of knowing what the ‘national interest’ is in order to protect it, the phrase is not legislatively defined. Indeed, cases are decided on an individual basis in the context of the following issues: national security; competition; impact on the economy and community; Australian government policies such as tax; and the character of the investor (AFIP, pp. 7-8).

Moreover, as CLMR Fellow Dr George Gilligan summarises, the regulatory framework surrounding FDI in Australia allows the Treasurer to maintain broad discretion to determine whether or not a proposed investment decision is in the national interest. The FIRB reviews investment proposals to advise the Treasurer if the investment will be contrary to the national interest, however, the Treasurer is not bound by the decision, nor obliged to publish the decision. Both the FIRB and the Treasurer can have different understandings of the ‘national interest’ concept, and without the requirement for the FIRB reasons to be published, the process is opaque and uncertain for foreign investors. Ultimately, the decision rests with the Treasurer and his/her delegates to determine the definition and breadth of national interest, and thereby, whether a proposal should be approved.

Need for Transparency in the FDI process

Statistically, the FIRB passes the vast majority of deals it reviews. Out of more than 11,000 applications in 2012, the FIRB rejected only 13 (all related to real estate) which is an extremely low 0.1% rejection rate.

Yet perception is almost as important as evidence. As  special counsel at law firm King & Wood Mallesons, Mr Malcolm Brennan, states: "We need to be careful about the message we are sending…There are so many myths out there and we are in competition with others [countries] for deals."

Indeed, the Shadow Minister for Agriculture, Mr Joel Fitzgibbon, has claimed that potential investors will not bother trying to navigate investment applications without rules in place that clarify the process. Conversely, Mr Jeffrey Wilson of the Asia Research Centre at Murdoch University has argued that the ADM decision will “send a message that the new Coalition government will be far less likely to approve complex or contentious applications.”

Yet it remains true that increased transparency and certainty around the process for foreign direct investment and publishing of FIRB’s decisions would allow investors to judge how the process will operate, and to know in advance the requirements to satisfy. Transparency could further be enhanced by providing more information about the criteria used to determine whether an investment is of ‘national interest’. Moreover, the use of reviewable decisions and involvement of specialist agencies would ensure accountability of the Treasurer and FIRB. As Mr Mark Crean of Herbert Smith Freehills argues, transparency in the foreign investment screening process is necessary to increase the confidence of potential foreign investors as well as the Australian community.

ACCC Merger Guidelines

There are transparent but confidential regulatory review processes in Australia which can provide lessons for the conduct of FIRB. These provide guidelines which outline the exact process used to approve investments, mergers, and takeovers. A relevant guideline relating to the Yanzhou and ADM decision is the Merger Review Process established by the ACCC. The document outlines the informal process that the ACCC undertakes when completing assessments of mergers and acquisitions. Not only is the process only publicised when there are issues to be resolved, but there is ample public consultation and community involvement. The process is strictly adhered to prior to making a decision, hence increasing transparency, certainty and accountability.

Despite transparency, the guideline also maintains confidentiality in that an investor can obtain the ACCC cab provide a confidential view as to whether the acquisition runs a risk of substantially lessening competition. When the ACCC’s decision is announced, despite the process being secret, the means of obtaining that decision are clear and reviewable, as set out in the guidelines. Similar mechanisms could be adopted by FIRB, requiring it to establish a set of guidelines which clearly outline the method by which foreign direct investment proposals will be assessed to fulfil the ‘national interest’ requirement.

Conclusion

The Treasurer claims that “the government has no objection to 100% foreign ownership of Australian companies”  provided it is in the national interest, and Prime Minister Mr Tony Abbott has said that he wants to "make it absolutely crystal clear that we are open for business, we are open for foreign investment".

The foreign investment decision-making process needs to become transparent and reviewable in order to ensure these words translate into reality. And, as often as not, that will rest with perception as much as statistical fact. To this end, the Australian Rural and Regional Affairs and Transport References Committee released its final report on the ‘national interest’ test in June 2013 recommending that the government, amongst other things, “increase the transparency and public awareness of the national interest test” to provide “precise and unambiguous instructions to prospective foreign investors about their obligations to FIRB and the Treasurer, and how the national interest test is conducted” (Recommendation 18). In light of the recent ADM and Yanzhou decisions, it is clear that such a review is still necessary in order to increase public confidence in the fair and consistent application of the national interest test in foreign investment decision-making.