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Economics Legislation Committee

CRANE, Mr Jim, Director, Industry and Government Affairs, Australian Sugar Milling Council

RYNNE, Mr David, Director, Policy, Economics and Trade, Australian Sugar Milling Council

SETTER, Mr Troy, Chief Executive Officer, Consolidated Pastoral Company

Evidence was taken via teleconference—

CHAIR: I welcome representatives of the Australian Sugar Milling Council, and hopefully we'll be joined shortly by the Consolidated Pastoral Company. Thank you for appearing before the committee today. Information on procedural rules governing hearings has been provided to witnesses and is available from the secretariat. Answers to questions on notice are required back by midday on 20 November. Perhaps we'll start with the Australian Sugar Milling Council. Do you have any opening remarks?

Mr Rynne : Yes, we've got a prepared opening comment that we can talk through to start.

CHAIR: Please, go ahead.

Mr Rynne : Thanks for the invitation to appear today. The ASMC, or the Australian Sugar Milling Council, is the peak rep body for Australia's sugar millers. We've got five company member organisations. They collectively produce about 90 per cent of the nation's sugar. The Australian sugar industry has been a major beneficiary of foreign capital over the past 14 years or so. We estimate about $7 billion has been injected into Australia's sugar, ethanol and co-generation of power by foreign agribusinesses. These include Finasucre, who is Belgian; Wilmar, who is Singaporean; Mitr Phol, who is Thai; COFCO, which is Chinese; and Nordzucker, which is German. Their investment, their $7 billion over the last 14 years or so, has created and sustained around 23,000 jobs, mainly in regional Queensland today. The sugar industry is likely to remain highly dependent on foreign capital going forward to sustain ongoing operations but probably more importantly in this context for equity acquisitions as mills seek to purchase cane, land and maybe other sugar related infrastructure.

Australia's FIRB framework has changed pretty dramatically since 2015, when we saw the last raft of significant legislative amendments. The proposed 2020 changes that we will be talking about today will add another layer of complexity and cost, and this may distort decision-making in a sector that we would consider as low risk, certainly from a national security perspective.

I'd just like to step through a couple of examples of how this legislation, if enacted, would impact us for a transaction or acquisition of cane land, which we suspect might be a typical transaction over the next 10 years, especially as we are seeing an ageing of the grower workforce and we are expecting a churn of cane land on the market over the next 10 years. For the acquisition of a medium sized 2,000 hectare cane farm worth about $14 million, under this legislation—and I will add the 2015 legislation as well to show the total aggregate impact. This type of transaction under this legislation and the current requirements would impose the following costs and requirements: a statutory FIRB approval fee of $79,200 under the currently proposed Treasury fee framework. Our advice from a law firm in Brisbane who assists acquirers with the FIRB laws has advised that the fee for a typical transaction would be around $30,000 of this nature and this value of consideration.

Senator O'NEILL: Before you jump off that, for clarity can you separate out the 2015 and 2020 legislation? We really are looking at the impact of the current legislation.

Mr Rynne : Yes. The fee that I have discussed is the new fee as proposed by Treasury; $79,200 for a bit of land of a consideration value of $14 million. The legal fees are set by the value of the consideration by the law firm, so they estimate around $30,000.

Senator O'NEILL: That is a standard business transaction though, isn't it? That is not particularly impacted by this legislation?

Mr Rynne : The advice from this particular law firm is that that might increase given the added complexity of this legislation.

Senator O'NEILL: That is helpful, please continue.

Mr Rynne : Because those fees are expensive, over $100,000 in expenses for the FIRB approval, the advice we are getting is that that would probably trigger a review of the commerciality of the transaction, so then they would consider whether the land was actually economic to purchase in the first place, so again going through that commercial reconsideration.

There would be potential delays in getting the approval given the anticipated increase in workload that would be given to the FIRB team. This is where I hark back to the 2015 impacts, but it is part of the aggregate impost now. It would be an obligation of the mill to register and update information on the ATO's agricultural land register, so more paperwork involved with that. Again harking back to the 2015 legislation, that land has to be marketed for 30 days under the transparent sale process requirements. Because of that requirement, the mills cannot purchase land. It is very hard to purchase land through auction, which is a common type of land transaction. I'm trying to paint a picture here that the 2015 plus the 2020 legislation is imposing a very, very large burden, especially on mills, for very simple nonsensitive transactions such as cane land.

If the land is purchased by a mill that is not deemed to be a national security business, the mill would not incur the statutory fee or the associated legal fees because it is under the $15 million agricultural land threshold, but it would be subject to the new call-in and last resort powers of this legislation, which adds another layer of uncertainty of national security concerns, however they are defined, are identified.

If agricultural land is purchased by a mill that is not a national security business, as we are interpreting the legislation as currently drafted, [inaudible] 10 per cent or more of equity or have shares in a critical infrastructure asset—that would be ports—and we do have major shareholdings in ports in Queensland. I've got a number of members, a number of mills, that are deemed to be a national security business and so are very much in this net, even though they are operating sugar mills.

Senator O'NEILL: Can I just clarify that? Because of the nature of the range of investments that sugar mills own, including having part ownership of a port as part of the portfolio, that would trigger engagement with the Foreign Investment Review Board, even if you weren't triggering it any other way?

Mr Rynne : Exactly. That's exactly right.

Senator O'NEILL: Thank you very much.

Mr Rynne : We could have a situation where, because the thresholds that have currently been amended years ago with $16 million the threshold for ag land, we could be under that but, because we are a national security business, we are triggered and have to get FIRB approval, for example. Most transactions will be under the ag threshold, so we are going to be caught in this system of getting FIRB approvals and being subject to all the call-in and last resort powers and whatnot.

The ambiguity and complexity in the drafting of key terms coupled with the higher penalties could actually result in us having little choice but to lodge FIRB applications for most if not all transactions. We think this may be an unintended consequence of this legislation.

Of grave concern, however, is any delay in the processing of applications coupled with the significant fee increases. Just to make that clear, on the fee increases for ag land, I've demonstrated with a $14 million acquisition of cane land. Under the current fees framework, that's a couple of thousand dollars in fees. As I say, that transaction, under the proposal, will be $79,200, plus the $30,000 in private legal fees to get transaction finalised—or to get the approval through the system, I should say. So we're worried that we are going to get a situation where farmers, millers and acquirers of cane land and important assets simply won't go through with the transaction. They'll think it's too difficult.

So, to address these concerns, we call for the following changes to the proposed legislation and the bills. We think benign acquisitions in non-sensitive sectors such as sugar should be exempted from all the proposed national security provisions. This would allow small transactions on small parcels of cane land under $14 million, for example—below the threshold—to be able to proceed without delay. We would like to see some clear drafting in the legislation. There is some ambiguity around fee constants that even our lawyers cannot interpret. We know that it is iterative and Treasury will come out with some guidance material, but there's still a lot of ambiguity in the legislation around what defines a national security business, for example. We'd like to see, obviously, a change to the fees that are being proposed. We are getting very high fees on ag land because the fee constant is very low, at $2 million. We don't understand why there's such high risk associated with benign transactions such as cane land purchases. We'd like to see the $2 million fee constant increased to $50 million, in line with domestic transactions. This would bring a typical transaction to around $6,600, which is much more affordable and probably more aligned to cost recovery principles. The penalties, we believe, should be commensurate to the risk to the national interest and the offence associated. On that, unless Jim has anything else to add, we're happy to take questions.

CHAIR: Thank you very much for that. We appreciate it. We do want to get to questions, but I'll just give Mr Setter a chance to put his views on the bill. Then we'll go to questions.

Mr Setter : Thank you for the opportunity to appear today before the committee for the inquiry. The Consolidated Pastoral Company, or CPC, is a foreign owned, Australian and Indonesian based agribusiness. We operate seven cattle stations across northern Australia, comprising about 3½ million hectares, with capacity of about 300,000 cattle, and we operate two feedlots and some farming operations in Indonesia. CPC was sold by the Packer family to a British private equity fund called Terra Firma in 2009 and then was recently sold, in the last couple of weeks, to a consortium that involved Terra Firma's major shareholder, Guy Hands, and his family, aligned to the CPC management team. We've completed several sales and purchases through the FIRB process in the last five years and then have had the two major book-end processes in the 2009 and in the last couple of weeks. So the company is well placed to provide the committee with insight into how the current process works in practice and the potential impact of proposed amendments.

The pastoral industry is a very large contributor to the Australian economy and a custodian of a significant amount of Australians' land. It's relied on and benefited from foreign investment significantly over the last 200 years. A lot of the development we see in northern Australia has come from foreign and domestic capital, but certainly foreign capital has been a game changer, with investments in blue sky and opportunities and infrastructure. With about 70 per cent of Australia's beef exported, particularly from northern Australia, channel producers such as ourselves are very reliant on those international markets. We must compete internationally, and a lot of those international markets have different labour regimes and different operating rules. That's why productivity and efficiency are so important for companies like ours. Lifting productivity and efficiency requires investment in capital infrastructure technology. Basically we see that the pastoral industry just doesn't have sufficient domestic savings to meet industry needs, leaving foreign investment as one of the opportunities to fill the gap.

As stated in the explanatory memorandum to the bills before the committee:

Foreign investment … creates jobs, improves productivity, enables the transfer of new technologies and connects Australian businesses to global supply chains.

The EM also notes:

Australia remains one of the world's most attractive investment destinations, with an overabundance of high-quality investment opportunities that cannot be realised from domestic savings alone.

The Register of Foreign Ownership of Agricultural Land's 30 June 2019 report shows that livestock production is the dominant activity in agricultural land where there is a foreign interest and that livestock production uses large areas of land that are predominantly unsuitable for higher-intensity agricultural production systems. Particularly in northern Australia, in Queensland about 10 or 11 per cent, in WA 18 per cent and in the Northern Territory about 27 per cent of agricultural land in pastoral production is foreign owned.

As a case study, CPC, which was acquired from the Packer family in 2009 and then transacted recently, I think, and had multiple transactions, is a good case study. We've certainly engaged well with FIRB. We've always had a good relationship with FIRB. We've operated properties next to defence bases. We've operated properties with defence engagements, and we've always found that to be a transparent and productive process. We find the FIRB team to be helpful to our business. We're certainly not here today with any issues with the operations of the FIRB team, noting that they are a bit stretched at the moment with the zero threshold and the significant runway of pipeline work coming to them.

CPC would like to draw the committee's attention to the table contained in 9.11 of the explanatory material and run through the fees. While we note that the fees cap out at $500,000 for proposed members in the Foreign Acquisitions and Takeovers Act, a few weeks ago that was increased to $1 million and it's likely that the fees for $1 million land acquisitions will be more than $152 million. When you look at larger aggregations of land in northern Australia with current market pricing, it doesn't take a huge amount of land or number of properties in northern Australia to start pushing well into those higher levels. This amounts to, effectively, a federal stamp duty of 0.65 per cent, which is a tax on investment. Any tax on investment that limits money being spent on the purchase of an operation reduces the profitability through the life of that investment. We'd rather see a tax on exit or a tax on profitability rather than a tax on investment. A federal stamp duty combined with a state based stamp duty makes investing in Australia difficult. My experience in working for both domestic and foreign agribusinesses over the last 25 years is that capital certainly has a choice, and it goes to where it can get a good return and can get consistent returns. I think some of the changes proposed with the fee charges highlight some inconsistencies with Australia.

CPC's FIRB application for the Hands Family Office, dated 28 August 2020, has been approved. It is quite a significant investment in an Australian entity and a direct investment in an Australian agribusiness, at this interim acquiring an interest in agricultural land. So we were classed as an agribusiness due to our structure and our position. That gave fees payable of $26,700. Today, if that application was to be put in under the proposed changes, it would be a fivefold increase to $120,000. So the actual application process hasn't changed and the work around the preparation for the submission process isn't changing, but there's a fivefold increase in fees if you look at us as a case study. So that certainly concerns us.

The definition around 'national security land' remains limited, but we won't really know how this is going to look until we see the updated regulations. However, we certainly support there being security engagement in agricultural land purchase, but we think it needs to be practical and actually have a risk rating to it. Not everywhere has a risk of national security. The call-in power being out to 10 years we consider to be a very long period of time and that would be concern for us and others similar to us on investment. I'm happy to pause there and jump into questions and add further detail.

CHAIR: Thanks very much. I'm sure there are plenty of questions for you. I'll just go to the Sugar Milling Council first. Mr Setter talked about this as well. When we're talking about the potential cost increases—you talked about a scale around the $20,000 to $76,000 mark, I think—what's the scale of investment which is going to attract that kind of fee, just to give us the comparator?

Mr Rynne : The example I gave was of a transaction for, say, a 2,000-hectare block of cane land, which is about average, with a market consideration of value of $14 million. That's currently under the threshold as it sits at the moment for FIRB approval. When I looked up the fees as proposed by Treasury, how I've interpreted it is that, with the $2 million fee constant, if you times that out it goes from a fee of a couple of thousands of dollars now to, under this proposal in the legislation, $79,200. So, if I've read the schedule right, that fee constant works in tandem with the value of the consideration and there's a cascading increase and you times out the fee constant with the consideration, basically.

CHAIR: We'll certainly explore that with Treasury a little bit later on.

Senator O'NEILL: I appreciate your submissions. Thank you for your fulsome opening statements which really did address the material in the submissions that we have before us. Could I just go briefly to the Australian Sugar Milling Council. You indicated low risk because, basically, you make sugar. But you also mentioned ethanol, which goes to fuel. I know that the issue of fuel security is one that is given national consideration and does relate to security matters. Do you think that's relevant in your industry?

Mr Rynne : We certainly have aspirations to grow our ethanol production. We are actively seeking to diversify away from raw sugar. We are a price-taker in global markets—90-odd per cent of our raw sugar is sold in very competitive global markets and prices are very volatile. So there is an active agenda within the Australian sugar industry to diversify its revenue base. We would like to expand into ethanol. There is a whole lot of policy and commercial settings around why we can't do that currently. Especially with crude oil prices sitting as low as they are, it is tough to put ethanol into the system. Yes, we would like to grow our ethanol base. That would do a fantastic job at mitigating our huge global reliance on crude and refined petroleum coming into Australia. We would certainly like to see ethanol mandates increased and properly enforced by the state government, if not the federal government—it's a national mandate.

Senator O'NEILL: In response to your opening statement, Mr Setter, the issue of definitions generally has been well aerated in the course of the inquiry today. There is a preponderance in this legislation, as in much of the other legislation from the government, to do a lot by regulation rather than putting it into the legislation. I know that's causing concern. Could you flesh out exactly what you think 'national security land' is. I particularly note that you indicated that you hold land adjacent to a defence facility, so you might have a very interesting perspective for us.

Mr Setter : We have owned and operated, and still operate, land next to substantial defence facilities in northern Australia, and some of those are public-type facilities, such as Tindal airport at Katherine. There are many participants around them. We also operated the station next door to the Bradshaw military base in the Northern Territory, which doesn't have the sort of public access that the facility in Katherine has. Based on the knowledge that we have—I certainly don't propose to have all of the knowledge that Australian security forces would have—but for us it was being transparent about movements that we might have next to those facilities, annual updating of infrastructure build, and a two-way communication of aircraft moving back and forth. We operate several aircraft on most properties for mustering and moving livestock. They fly at low heights. The military operators in those areas do the same with testing and training, and we're able to interact well. We have reasonably good rules around that. We sold a property last year to a Vietnamese company and rules were inserted for them in terms of infrastructure building and communication-tower-type building. A direct engagement with defence seemed to work quite well.

Another piece that sat over that was caring for the environment and working together with defence. Defence owns significant amounts of land in northern Australia, and feral animals and weeds cross between properties. There was actually quite good engagement with defence. That type of thing is hard to put into regulation around caring for land, but defence do have a responsibility for that land in northern Australia, and we work with them. In terms of any other operational issues, we didn't really have any, because we had a very transparent relationship with the military operators about what we were up to, and they had the same with us around what they were physically up to. It was probably more around safety and being transparent around infrastructure build.

Senator O'NEILL: It's a good example, though, of the sorts of practical realities that often people don't think about, and why land might be considered a notifiable national security piece of property that we need to be aware of. What do you understand the term 'national security land' to mean? Is it the kind of land you were just talking about, or is it something else? Or is it unclear?

Mr Setter : It's probably a bit of everything, to be perfectly honest. At a simple point, national security land, in my view, is land owned by defence in Australia and land around that, at a simplistic form. But then if we start to think about national security land in terms of access to infrastructure or gateways or bottlenecks, it starts to become ports and things. But I would look at that and say: what is a strategic port for Australia for defence or for transport and movement of goods versus what is, simplistically, a non-bottleneck type of infrastructure?

So 'national security land' could also be land that could potentially have a road built on it in the future that opens up access to further development of land in northern Australia or opens up a corridor for rail. It's not just about security with a military lens on. It's also security in terms of the growth and development of Australia ensuring that there is opportunity to continue to develop Australia and grow Australia and maintain and care for Australia for the benefit of Australians.

Senator O'NEILL: Critical infrastructure then becomes a part of that.

Mr Setter : Yes.

Senator O'NEILL: It is 18 November. I think it's fair to say that all of the evidence so far today indicates that there has been largely a one-way communication from the government to all of the sectors about what it's determined to deliver and not a lot of response. There's also been this uncertainty in terms of definitions. You actually say in your submission:

We would hope that the definition remains limited to this—

when you have described what you understand 'national security land' to be, but you go on to say—

but will not know until updated regulations are released. In any event, there remains the chance of further expansion of this definition at any time through changes to the regulations—with limited parliamentary scrutiny—and this could impact on agriculture land acquisitions.

It could impact on anything when things are not defined and are contained not in legislation but in the regulations that sit alongside it for the relevant minister, in this case the Treasurer, to make rules that could change at any point of time. Does it concern you that this very complex bill of incredible significance for Australia's national security and for investment in our country is being shepherded in at this stage with a one-day hearing and a start date of 1 January 2020? Is this good legislative practice, Mr Setter?

Mr Setter : I'm not an expert on legislative practice, but as you've explained and run through the process then, and from my understanding of it, it does worry and concern me that there is not a good, adequate time for engagement and for drafting of the rules and drafting of the definitions. Then there's not an adequate period of time to get feedback and actually test it. David touched on earlier that even the lawyers that specialise in this area are quite confused and concerned around some of the draft wording that they've seen.

Senator O'NEILL: And we're literally a week and a bit away from this looking like it's going to come into the parliament and, if it gets through, six weeks from implementation. It doesn't seem like very good management of the national economy and security to me. Could I just go to both groups of witnesses. There is a definition of 'foreign government investor'. The government is proposing to change that definition for the purposes of streamlining applications so as to avoid passive investors having to notify. Do you have any views on that particular change which would potentially be enacted by complementary regulation?

Mr Rynne : We haven't looked closely at it. It's not overly relevant to the Australian sugar industry.

Mr Setter : We haven't seen the detail. I suppose my thoughts are about the definition of 'passive' and how that fits in with land owning and rules of land owning, particularly in the Northern Territory and Western Australia, where there's a requirement to actually use that land for agricultural productive purposes, or however it's titled, or lose it. It's probably a bit conflicting and a little bit challenging, but you could also say there are Territory and Western Australian protections just off land banking and destocking and unusing of that land. I suppose there's been concern raised in the past about large tracts of North Queensland being bought by investors—again, I'm not in any environment—and land being destocked and the impact on rural communities. I think there does need to be some sort of protection there to understand what the purpose of that land is for. If it's for passive nonuse then that can have a detrimental impact on local communities. I think we do need to have the ability to question that. I know that in any of our FIRB applications which we've put through in our engagement with FIRB, community benefit has been a very strong part of the interrogation and questioning that we've had. I think that should remain.

Senator O'NEILL: We had evidence earlier today from some of the witnesses with regard to the register. I'm sure you're familiar with what's proposed there. It's clear that the register won't contain all foreign owned assets, that it's only going to contain some that reach certain thresholds, and that the information on the register won't be publicly available. Given what you've just said about community benefit, one of the things that I think we all know as Australians is that people want to know who owns what land where they live and what's going on with it. In New Zealand—from evidence we took in this committee, but in another hearing—it was people who lived in the community who were really watching what was going on. Do you have a view about the government's proposed model of a register here? And, also, do you have a view about whether it should become a public register?

Mr Setter : My personal opinion—and this may go against some of our peers and other investors—is that we don't have trouble with transparency. We operate a webpage that has contact details, what we own, what we don't own and how we do it. We're more than happy with transparency ourselves.

I've certainly witnessed arguments where domestic owners of land should possibly have the same level of transparency and accountability put onto them as foreign owners do. I know that's not part of your remit, but I think that custodians of large amounts of Australian land should be transparent. We don't have an issue with that, but I know that won't align with some of the views of some of my peers.

Senator O'NEILL: Okay. Mr Crane or Mr Rynne, did you have anything to say about the register as designed?

Mr Rynne : Yes. There's obviously already an obligation there with the ATO with the land register. Just chatting with Jim, I don't think our members would have too much of an issue if there were another layer of transparency associated with that. Our mills are very obvious in the communities. I think that regional communities understand exactly who owns and operates these mills. The mills own around 10 per cent of the cane land themselves and those holdings would be well known to the regional communities as well.

On the issues around shareholdings or equity stakes in critical infrastructure, such as ports, they're also already on the public record through STL, which operates the sugar terminals in ports in Australia. You can just go to the annual report, so I think that what there is to be known is already known. We would just say to try to keep the red tape and the compliance burdens to a minimum.

Senator O'NEILL: You've indicated in your evidence today, Mr Rynne, that under this government there has been an escalation in cost, with that set to rise at an exponential level, and that there has been an explosion of red tape. How do you propose to meet what we have to assume is the government's correct report about a threat to national security that is so pressing that this legislation has to be advanced? What would you do differently, given that the government doesn't seem to be able to contain red tape or cost to business?

Mr Rynne : I think we have to go back to some fundamental principles about what we're trying to achieve here. We laid out four principles in our submission around what we think should be the public policy objective here. Obviously, the most critical thing, and Mr Setter and I have spoken about it today, is just the need for certainty: clear, unambiguous rules that will allow capital to continue to flow to Australia. I can't stress enough how mobile capital is globally. We have no natural right in Australia to continue to receive this capital; we have to compete for it. That means we must have extremely attractive policy settings. Getting the balance right on national security is obviously imperative. Making sure we've got good legislation and good policy design that addresses the risk in those sensitive sectors and transactions is imperative. At the moment the net of this proposed legislation is very, very wide and it's going to scoop up a lot of benign, non-sensitive sectors in the process.

Senator O'NEILL: As a businessperson representing a big chunk of activity in the wetter and hotter parts of the country—that beautiful part of northern Queensland is where you're really strong—do you believe the government's proposal in this legislation will hurt business in Queensland if it goes through as it is?

Mr Rynne : In the feedback I was getting—and sorry to complicate the 2015 with the 2020—we were already getting concerns from our members around the 2015 proposal. When we saw—

Senator O'NEILL: Which looks like a light touch by comparison to what's happening now.

Mr Rynne : That's exactly right. We're seeing an exponential increase in fees that is going to impact our positions regardless of whether they're national security businesses. It's going to impact everyone going forward. Then there is this national security test—'Are you a national security business?'—now sitting on top which adds another layer of complexity. All transactions must now receive FIRB approval. We're a non-sensitive cane and sugar sector with, I would have thought, a very low risk to national security, but we're caught in this net by virtue of the rule because some mills hold greater than 10 per cent in national or critical infrastructure assets—these are sugar ports. They are not anywhere near defence assets or anything like that; these are sugar ports.

Senator O'NEILL: I think Australians are rightly concerned about the sale in 2015 of the Port of Darwin, which led to that very rapid response legislation in 2015. This legislation is not retrospective. It can't go back and fix that oversight. There are concerns about national security right now and, in fact, Mr Frydenberg stated that this legislation we are discussing today is required to ensure the framework:

… keeps pace with emerging risks and global developments, including similar changes to foreign investment regimes in comparable countries.

One of the arguments that businesses have been putting today from many different sectors right across the country, including northern Queensland, is that this government hasn't made clear the case for this legislation. It hasn't provided certainty because it's left too much in the regulatory domain and, effectively, the amount of money in fees that it's set to impose is a tax on business. Is that a fair indication of your view? Is this the establishment of a tax on business about which you're unhappy?

Mr Rynne : If the fees are not reflective of cost recovery in terms of the administration and due diligence associated with processing an application, the consequence is that it's effectively a tax. Absolutely, if it's beyond the cost recovery.

CHAIR: We will need to move on. I thank both our witnesses very much for their time today.