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Monday, 23 November 2009
Page: 12364

Mrs MOYLAN (12:30 PM) —I am pleased to have an opportunity to contribute to the debate on the Foreign Acquisitions and Takeovers Amendment Bill 2009 today. There is little doubt as to the importance of foreign investment to Australia. It brings new jobs, innovation and competition, all improving Australian industries. While we need to make a continued effort to encourage investment in Australia, we also need to be aware that sometimes a foreign investment may actually come at a significant cost to the overall Australian economy and that it might not always be in the national interest to allow such an investment to go ahead. One of the cases that I was most closely involved with was the proposed takeover of Woodside by Shell. My colleague who is at the table, the member for Brand, was also at that time closely involved in that matter. There is no doubt that it was not in Australia’s best interests for that transaction to proceed. It certainly would have meant the loss of billions of dollars worth of investment in Australia, in Western Australia in particular. There would have been little benefit to the nation from that particular proposal proceeding.

In 1976 the Foreign Investment Review Board, a non-statutory body, was established. That occurred so that the Treasurer might be advised on the government’s foreign investment policy and its administration. Since that time the Foreign Investment Review Board has played a critical role in the foreign investment process because it ensures that foreign investment decisions are thoroughly examined and that they proceed on the basis that they are in the national interest. I think the reason for this is pretty clear, because the level of foreign investment has been exceedingly high in recent times. We see that from 1999 to 2008 an average of 76.4 per cent of proposals were changed to meet certain conditions and that over the period from 1999 to 2007 there were 45,000 proposals valued at $1 trillion. It is a very substantial amount of investment, and there can be ramifications if it is not closely scrutinised. So we are very pleased that the Foreign Investment Review Board has been doing its job under the act, and these proposed amendments should give greater clarity to its carrying out of that work. As I said, a number of proposals had been received. I think that the 7,841 proposals received in the year 2007-08 represented a 27 per cent increase, so I do not think we are going to see a slowing down of interest in investing in Australia anytime soon. That particularly applies to the mining sector.

One of the interesting arguments that was run during the Shell-Woodside debate was that if the government, and indeed the Foreign Investment Review Board, did not approve that deal we would see a flood of capital away from this country as people would not want to invest. I never believed that was a sound argument at all. I think that the investor is looking for a safe haven, for stability and for good projects, and that this country can offer that, so I never believed that, on the basis of one project being knocked back by the Foreign Investment Review Board, we would see foreign investment fleeing this nation. I think that the decision was made on the best possible grounds and that it was an important decision. In the legislation before us there are no changes to the national interest test, so that will remain, or indeed to the monetary threshold for consideration by government. But this bill certainly seeks to strengthen the current safeguards and, hopefully, it gives the Foreign Investment Review Board greater guidance in terms of what can and cannot be done.

The balancing act between the benefits and the costs to our economy has been at the centre of the foreign investment review policy for the 35 years that it has been in operation. With the introduction of the Foreign Acquisitions and Takeovers Act 1975, certain transactions must be reported and the Foreign Investment Review Board must advise the Treasurer whether to approve an investment. Clearly, there have been significant changes to the mode of foreign investment since 1975, and it is important that the legislation is updated to reflect these changes. There was an article in the Australian Financial Review written by Jo Clarke which was quite illuminating to read. In that article there was this quote from a lawyer who had apparently had quite a bit to do with foreign investment:

“This is likely to lead to more creative financing structures to get around FIRB, particularly now that FIRB has introduced further delays and complicated the approvals process,” …

Well hopefully, through the passage of this legislation, we might be able to avoid some of the worst abuses of creative schemes designed to get around the proper processes that foreign investment should rightly have to adhere to when making investment in this country. As I said, we understand that it is a balancing act between benefits and costs to our economy, but that should not deter us from making sure that there is a robust process for approval.

Section 18 of the Foreign Acquisitions and Takeovers Act gives the Treasurer the power to prohibit proposed acquisitions that would result in a foreign investor having a controlling interest in an Australian company where it is decided that such a transaction would be ‘contrary to the national interest’. Section 26 stipulates that the Treasurer must be notified of any agreement to acquire a substantial shareholding in an Australian company. As of 22 September 2009, a notification must be made where the target company is worth $219 million or more and the acquisition will result in the foreign entity holding a substantial interest in the company. ‘A substantial interest’ is understood to mean a holding of 15 per cent or more of the voting power or the issued shares in a corporation. This definition of substantial interest will be expanded by the bill before us today to ensure that it applies to all the different models and structures that characterise modern foreign investment. It is no longer sensible to assume that foreign investment will be structured to relate only to voting power and issued shares.

In considering whether the transaction will result in a substantial interest being held by the foreign entity, regard will now be had to not just voting power but also potential voting power and the right to an interest in the issued shares. This change will encompass the more sophisticated and complicated structures that are now common in foreign investments, ensuring that the obligation to inform the foreign investment review tribunal applies evenly to simple and more complicated transactions. Substantial investment proposals need to be fully examined for national interest concerns regardless of the way that they are structured.

Essentially, where an investor has the future right to acquire votes or shares, they are deemed to have them at the time of the transaction. This potential exists even where the right may only be exercisable on the fulfilment of a future condition. This change for potential voting power is extremely relevant where instruments such as convertible notes are used, where an investor may gain control of a corporation through means other than the present acquisition of shares or voting power, or a convertible note is a debt instrument that allows for the conversion into equity in the future. Law firm Allens Arthur Robinson has described the impact of this bill as:

… it is the grant, rather than the exercise, of the equity options inherent in convertible notes that will need to be the subject of the traditional ‘subject to FIRB approval’ clause …

So if an investor is to acquire convertible notes or other options over unissued shares, they will need to report the transaction under the Foreign Acquisitions and Takeovers Act, where the notional conversion would result in 15 per cent of the votes in the corporation being held by the foreign investor. I can only assume that where an instrument does not specify the exact amount of shares that an investor would have a future right to but, as is often the case, specifies the dollar value of the share entitlement, the calculation of whether this would amount to a substantial interest would need to be based on the value of the shares at the time of the transaction.

Given that share prices are vulnerable to fluctuation, especially when foreign investment is in the pipeline, it is entirely foreseeable that some transactions will not be reported where it may be appropriate, and vice versa. For example, if the price of shares increases dramatically between the date of the transaction and the time that the investor converts the equity into shares, then they may acquire considerably less than the significant interest and yet the transaction would still be subject to considerable delay while it is being reviewed by the Foreign Investment Review Board.

The issue of delays within the approval process has become serious since the influx of applications following the collapse of the Chinalco deal. On 16 September the Australian Financial Review noted that there is a ‘growing backlog’ causing delays to many transactions. The same article also said that the amendments proposed in this bill are:

… likely to lead to more creative financing structures to get around FIRB, particularly now that FIRB has introduced further delays—

which was the quote I read out earlier.

Foreign investment is integral to Australia’s economic growth, and the need to find the balance in the review process is more important than ever. Clearly the review process should not become so arduous and time-consuming that investors are turned away, but at the same time it does need to be thorough enough to ensure that transactions that are not in the national interest do not get approved. I think there is considerable public disquiet, particularly when it comes to iconic Australian companies and when it comes to those corporations that are involved in either our mining or our energy sector. I can understand those concerns, often expressed by electors in the electorate of Pearce, that we should ensure, in so far as possible, that we remain in control over our resources and, in particular, those resources that have security interests such as energy. I understand always the tensions that we in this place are faced with in trying to balance the national interest with continuing robust foreign investment in Australia and the jobs that can offer and the growth and development that can offer, which might otherwise not take place.

Australia does have a lot to offer foreign investors in this mutually beneficial relationship. The nature of foreign investments has changed dramatically since the introduction of our review process back in 1975 and no doubt many new structures and models will come about in the future. For now, though, it is important that all major foreign investments are reviewed, regardless of whether the investor acquires shares, voting power or some other interest or right exercisable in the future. If we get that balance right, then the Australian economy has everything to gain.

In conclusion, I listened carefully to the contribution of the member for North Sydney, the shadow minister, in this debate. I support his call for an amendment which ensures that the government publishes the registered beneficial owners of Australian government bonds. Many would say it is perhaps, after all, another way of attracting foreign investment into this country. Given the sensitivities out there within communities, I think it is just part of open and accountable governance. It is a sensible suggestion. I hope that my colleague the member for Brand might particularly want to support that suggestion, knowing of his great interest in open and accountable governance and his experiences in the attempt by the great Dutch company Shell to take over Woodside some years ago.

Currently, the Chinese government, as the member for North Sydney, the shadow minister, said, is the biggest investor in the world. If the Chinese government invests in Australia, the Australian people should know about it. Most people would be pleased to know that the biggest single foreign investor in Australia in 2007-08 was the United States, with a total investment of $49.5 billion, which is about 26 per cent of the total investment. After that, the United Kingdom, Germany, Singapore and Switzerland are also major investors. Of course, we welcome the investment of our near neighbours, the Chinese government and the people of China. They are clearly playing an important part in the development of some of our resources and will continue to do so in the future.

In the interests of, as I said, openness and accountability in government and the fact that the Australian government is raising a substantial amount of money through government bonds it would be appropriate for the Australian community to be kept appraised of those transactions, just as they want to be kept appraised of the transactions which are of interest to the Foreign Investment Review Board. In essence, I am very pleased to be able to support this legislation. If it means greater clarity and streamlining of the foreign investment process, then it has to be said that it will add immeasurably to the legislation that we have passed in this House in the past.