By Megan Bowman, UNSW

SYDNEY: 28 June 2013 - The Rural and Regional Affairs and Transport References Committee began its investigation into the Foreign Investment Review Board (FIRB) ‘national interest’ test on 6 July 2011. After considering 35 submissions, holding public hearings in four Australian cities, conducting several site visits in northern Western Australia, and delivering an interim report in November 2012 (which focussed on the taxation arrangements of foreign investment in Australian agriculture), the Committee delivered its final report this week on 26 June 2013. That report speaks squarely to the conundrum of how best to encourage foreign investment in Australian agriculture in a way that serves the national interest. 

The Committee made 29 recommendations in all, ranging from topics of tax revenue leakage (Recommendations 1-2), establishing an Independent Commission of Audit into Agribusiness (Recommendation 3) and a national agricultural land register (Recommendations 6-9, 11-15), and improving access to domestic finance for Australian agricultural businesses from Australian banks (Recommendation 27). Yet the recommendation of most relevance to inward investment generally in Australia, is that the federal government instigate “an independent and wide-ranging review of Australia's foreign investment regulatory framework” (Recommendation 4), which includes strengthening the national interest test.  

From the specific perspective of agribusiness investment, the Committee specified that such review must ensure that foreign investments in Australian agriculture are genuinely commercial, do not distort the capital market or trade in agricultural products, and compete fairly with Australian farmers and agribusinesses. In particular, the Committee noted evidence of rising concerns about foreign investment in Australian agribusiness, stemming from: increasing global food security issues (‘the growing global food task’); a lack of transparency about the FIRB national interest test; and empirical information gaps regarding levels and types of foreign investment in Australia (par 1.3). It was to these issues that the Committee appeared to tailor its key recommendations. 

There is no doubt that ‘feeding the world’ is a significant issue for this decade and beyond. The United Nations has estimated that food production needs to increase by 70% by 2050 to feed a projected world population of 9.3 billion. Moreover, the recent Agricultural Outlook 2013-2022 ‘highlights’ report bears a clear message about the increasing symbiosis between global markets and China’s increasing appetite and reduced output: “With one-fifth of the world’s population, high income growth and a rapidly expanding agri-food sector… [d]evelopments in Chinese agriculture may have a major influence on world markets.” (p.9) 

But is this issue best couched in terms of food insecurity or global agribusiness investment opportunity?  The Committee appeared to prefer the former conception. It acknowledged that food insecurity represents a significant opportunity for Australia's agricultural industry but only if foreign investment in Australia remains commercially motivated and not by another government’s concerns about food security. “Australia will not have the capability to effectively contribute to the future global food task if its agricultural capital and trading markets are distorted by foreign government-owned companies who invest in Australian agriculture but do not participate in the market on a genuinely commercial basis.” (par 2.13). 

Yet one may ask why a foreign proposal cannot be both commercial and strategic in nature, yet still in the national interest. This scenario is well illustrated by the recent US Smithfield/Shuanghui takeover proposal, which is currently under CFIUS review as documented on the CLMR portal. The media release for that proposal makes explicit the commercial ‘supply-demand’ purpose of the deal and simultaneous food security concerns of China by stating that “together we will be able to meet the growing demand in China for pork by importing high-quality meat products from the United States”. Importantly, it also makes clear that the deal will benefit the US: “Shuanghui is committed to…continuing to work with American farmers, producers and suppliers who have been critical to Smithfield’s success.” 

If a similar proposal were to arise in Australia, would it satisfy the national interest test under our regime? This is the problem: it is unclear at present exactly what the national interest is for foreign investment purposes; and it is apparent that the Foreign Acquisitions and Takeovers Act 1975 (FATA) is inadequate to deal with contemporary investment practices. 

The regime under which foreign companies can invest in Australian businesses and purchase Australian property comprises the FATA, the Foreign Acquisitions and Takeovers Regulations 1989, and Australia’s Foreign Investment Policy (AFIP). Under the current AFIP any 'direct investment' in land or business by a 'foreign government investor' (such as a state-owned enterprise (SOE) or sovereign wealth fund (SWF)) is subject to review by FIRB. Direct investment is defined as 'investment of an interest of 10 per cent or more' although it may be less than 10 per cent where the 'acquiring foreign government investor is building a strategic stake in the target, or can use that investment to influence or control the target'. (AFIP, p.14) 

Once a review is triggered, chief consideration is given by 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). 

Yet are these matters adequate to assist consideration of foreign investment applications in a changing global world? This is especially relevant in the context of agribusiness where the traditional roles of developed nations as ‘importers’ and emerging economies as ‘exporters’ are becoming blurred. To this end, the Chair of FIRB, Mr Brian Wilson, was asked at a Committee hearing on 9 May 2013 whether FATA can deal with current foreign investment scenarios. His response is telling. “I will simply say that the Foreign Acquisitions and Takeovers Act was put in place in 1975 and, as I recall, was last modified in 1989 and it is now 2013 so you could draw your own conclusions about how up to date it might be.” 

Thus, the Committee has made a positive reform contribution via Recommendation 18 that the government “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”.  In this way, the Committee also hopes to increase public confidence in the fair and consistent application of the national interest test in investment decision-making. 

One other way to increase public awareness and confidence about foreign investment in Australia is by collating and disseminating empirical data on investment trends and levels, as noted by Gilligan and Bowman in a recent CLMR-CIFR working paper. Accordingly, the Committee’s recommendations to establish a national agricultural land register are most welcome indeed. Specifically, such a register ought to document: (a) foreign ownership of agricultural land, agribusiness and water entitlements in terms of volume and value; (b) the type of investor (state-controlled or private); and (c) divestment activity, which is just as crucial as investment activity when tracking real supply and demand patterns. 

Overall the Committee’s final report is a timely call for change to a regime that has fallen behind the needs of the society it seeks to serve.