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Economics Legislation Committee
18/11/2020

BRENNAN, Mr Michael, Chair, Productivity Commission

DAVIDSON, Ms Nina, Head of Office, Productivity Commission

Evidence from Ms Davidson was taken via teleconference—

CHAIR: I welcome representatives from the Productivity Commission: thank you for appearing before the committee today. Information on the procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I'd like to advise witnesses that answers to questions on notice are required by midday on 20 November. Do you have any opening remarks before we go to questions?

Senator O'NEILL: Mr Brennan and Ms Davidson, have you been following the inquiry at all in the course of the day, or have you been too busy with your day jobs?

Mr Brennan : I confess I haven't, Senator. I have a passing knowledge of the bills themselves, but I haven't been focusing on the proceedings of the committee today.

Senator O'NEILL: Could I go to the research paper entitled Foreign investment in Australia, which you delivered in June 2020. I would invite you to give me some overarching comments about how the headline findings of your research intersect with the current legislation.

Mr Brennan : Sure. Senator, you may recall that the research paper was put out at a time that predates, obviously, the presentation of these bills, but it post-dated some of the announcements that go to the substance of the bills before the committee. Announcements had been made concerning the introduction of a national security test and the introduction of some more-graduated enforcement powers and tools for the Treasurer and the Commissioner of Taxation. So, in many ways, the work was not fully informed. Those announcements came along fairly late in the piece as we were putting together this research, but we were able to reflect it to some extent.

Senator O'NEILL: Those announcements were in March and on 5 June, I think.

Mr Brennan : Yes.

Senator O'NEILL: What date in June did your report come out?

Mr Brennan : I think it was released in late June, from memory. But—

Senator O'NEILL: But the Treasurer probably would have had the benefit of having had a look at the report some time prior to that?

Mr Brennan : It would be standard for us to give the Treasurer's office a copy with seven days notice before publication. The Treasurer would have been aware that we were undertaking the work, in general, but wouldn't have seen the document until just before its publication. There are a couple of things about the research project: one was to just restate the general case in favour of the benefits of foreign investment, and hence the acknowledgment that foreign investment regulatory policy involves a balancing of what we see as the benefits, the economic gains from foreign investment, measured up against the potential risks that can flow from a range of sources, including national security.

We talked a little bit about trying to put some modelled quantitative estimates around the benefits of more or less restrictive foreign investment regimes. That's an inherently difficult exercise. We used as a proxy the OECD measure of foreign investment restrictiveness, which has its own limitations. But it allowed us to put some metrics around what we thought would be the costs of moving to a materially more restrictive regulatory regime. We were able to make a few remarks, generally, about the gradual evolution of foreign investment regulation in Australia, noting the extent to which conditions were becoming a more prevalent feature of foreign investment approvals, and the role that the Treasury and the ATO play now as regulators, which is an enhanced regulatory role relative to what foreign investment policy may have looked like 10 or 20 years ago.

Senator O'NEILL: Are you aware of evidence given to this committee, I believe it was, with regard to the need to stand up as a statutory body to undertake this work outside of Treasury?

Mr Brennan : I'm not aware of particular submissions that made that case, but I'm aware of views to that effect, yes.

Senator O'NEILL: That was evidence given to this committee by Allan Fels. Do you have a view about the resourcing and capacity of both Treasury and the ATO—because this is a particular model—to undertake this role?

Mr Brennan : We've never expressed a view, specifically, on that question of whether or not the role sits ideally with the Treasury. We did make reference to the fact, in this document, that it was going to be an ongoing question and it was becoming a more salient and relevant question—what has ostensibly been a policy department looks and feels more like a significant regulatory role—of whether Treasury is the right place. We didn't express a definitive view on that, but I think it's something that's got to be an area for consideration, going forward.

What I think is important, as we noted in the paper and as has been given effect to in the bills before the committee, is that sense of having a greater graduation of enforcement tools and penalties, like the tier 3 infringement notices and the changes to the tier 1 infringement notices, those sorts of things that allow regulatory tools, that would be available to most regulators, that hitherto haven't been available to the Treasury.

Senator O'NEILL: If this legislation is passed by the parliament in coming weeks and implemented by 1 January 2021, has it effectively turned the FIRB into something quite different from an advisory body to the Treasurer into a pseudo-regulatory agency?

Mr Brennan : I would have to think about whether that's a fair characterisation of this legislation, specifically. My instinct is it's an evolution that's been underway for some time. There's been a greater use of conditions on approval. It's placed the Treasury—and the ATO, in respect of residential approvals—more and more in the position of being the ongoing regulator, in order to test compliance with conditions that have been placed on approvals.

Senator O'NEILL: You did note that there was an increase in conditions being placed. Have you confidence in the current structures within government to enforce those conditions, and does this legislation do anything to improve enforcement, in your view?

Mr Brennan : I can only repeat what we've said in the research paper, which doesn't really go to confidence in particular institutions. It just goes to noting the transition that's been underway, the increased regulatory role that the Treasury has and the long-term question about whether or not it should continue to sit there, which is a matter for ongoing attention. As to whether this improves the regulatory architecture, I think it certainly provides a range of tools which have been missing in the regulatory toolkit. Optimally, a regulator has a range of enforcement tools, in this case ranging from divestment powers through to much more measured, small-scale infringement notices or the ability to accept enforceable undertakings—these sort of things. You want to be able to have those graduated compliance tools and penalties, rather than being caught in a position where you have all or nothing, or where you have big, nuclear options or slaps on the wrist. I think that's what we pointed to in the research paper, and I think that's partly what the bills go to.

Senator O'NEILL: In the tier 1, tier 2 and tier 3 fine regime?

Mr Brennan : Yes, and the infringement notice regime and, I think, the ability to accept enforceable undertakings and a range of other things.

Senator O'NEILL: One of the key points is that, to the extent that foreign investment proposals are blocked or discouraged, this results in lower Australian household incomes. You say that commission modelling estimates that these economic costs would be material though not large. That contrasts with evidence we've received today from business, who are indicating that the financial impost of the fee structure that's proposed by the government is so significant as to call it a tax on business. They argue that it is not a cost-recovery model of fee application on submission for consideration but something much more than that—in fact, a revenue-raising tax. Can you give me your view of what you think about those fees and how that may intersect with your comments about the cost to the Australian people of dissuading people from engaging in investing in Australia from overseas?

Mr Brennan : We would agree that the fees constitute a tax, because the fees do exceed the level of cost recovery associated with the system. I think the explanatory memorandum is quite explicit on that fact, so I don't think that is in dispute. The extent to which the level of fees is deterring applications is always a question. I think that, in some cases, for very large acquisitions or deals, that may be a harder case to make if the fee is not significant relative to the potential value of the acquisition. But, in general, some combination of the fee and the restrictiveness of the regulatory regime can deter foreign investment, and that was the basis of our findings on what you described as the material but not large impact. Effectively, that was the cost of moving to a more restrictive regime, if we had something more akin to New Zealand, for example. Material but not large—I think, from memory, the figure that we were talk about was an overall cost to GDP in the order of about $5 billion per year. I'd have to check that precise figure. It's a very, very difficult thing to really get a handle on, because this OECD measure of restrictiveness is quite subjective and it actually doesn't take into account at all the national security element, which is the main subject matter of this bill. It's largely about the screening requirements, more so than what actually gets through and what actually doesn't. So, on one measure, Australia has a very strong and open approach to foreign investment, because foreign investment as a share of GDP in Australia is higher than it is for many OECD peers, but it can appear that our screening regime is more restrictive, because more deals are coming under the purview of the FIRB and the Treasurer.

Senator O'NEILL: So our current level of restrictive assessment of foreign investment, on the evidence that you just gave, is not a significant dissuader of people investing in the country?

Mr Brennan : I don't want to be too definitive about it, because, obviously, many inbound investors may have a different view. I think it's inherently difficult to know. A very difficult question to answer is: how many applications haven't been made by virtue of either the fee or the screening regime?

Senator O'NEILL: I don't mean to verbal the witnesses who came, but it was kind of a 'we'll all be ruined if those goes through' type of attitude coming from the business sector. You would dispute that, given the estimates that you've come to from your modelling, based on those OECD—

Mr Brennan : At the risk of being really unhelpful to the committee, it's not even clear how the changes outlined in this bill would alter the modelling results that we undertook, in part because the OECD measure of restrictiveness on which we based our measure doesn't actually include screening that's specific to national security. It's not even clear we would be regarded as more restrictive under the OECD measure as a result of these changes. We'd need to think more seriously about that. It's partly a matter of perspective about what is a material change. Things that can be a material change to individual investors and individual sectors of the business community may, at the same time, not be quite so material in terms of overall economic impact.

Senator O'NEILL: Could I go to the government's register, as it's proposed. It won't be capturing a lot of the ownership that already exists. We just heard from Mr Grunhard that the reduction to the filtration device to zero dollars has thrown up a whole lot of data and insights that have piqued their interest in terms of national security. There is some argument that a register should be fulsome; perhaps go back 10 to 15 years—I think that was one of the suggestions today; and be available for civil society to access and interact with. People can probably go to ASIC and find out who owns things, as it is. What's your view about a public register and how that may clarify things? If it's useful, perhaps go to your point about the need for publication of reasons for decisions to block. It's that whole question of transparency. The register, communications and transparency—that's the area I'm seeking to get something on the record from you on.

Mr Brennan : I'll ask Ms Davidson to perhaps refresh my memory as to the views that we've expressed before on the register issue. I don't have a firm view on that so much. We thought the publication of reasons would be potentially beneficial, particularly from the perspective of an inbound investor—knowing what were some of the considerations in the past that have led to conditions being placed on an acquisition or the rejection of an acquisition, so that you could develop a kind of body of precedent. Precedent wouldn't be binding, obviously—

Senator O'NEILL: But it would be indicative.

Mr Brennan : It would be indicative; that's right. And it would probably help improve the transparency of the regime. That's probably what we had in mind, though I also would concede that would also improve the transparency of the regime to domestic stakeholders as well; they would have a sense of the basis on which the investment was being either rejected outright or having conditions placed on it. I might just ask Ms Davidson to comment on the register issue, because I know we've had some involvement on this—not so much in this work, but in work we've done in the past on the regulation of agriculture, for example.

Ms Davidson : By way of general comment and consideration of these issues, I think it's a question, with the maintenance of registers or information sets, of balancing up the value—as you've outlined, of open and transparent information and having data available to glean insights from—with the burden that may be involved in collecting and maintaining that information. I didn't hear the point raised in previous testimony, but I was just thinking about what might be involved in developing information sets that are backward looking. That can sometimes be very challenging in terms of what information sources exist and how diverse or diffuse existing sources might be.

Senator O'NEILL: Chair, I wonder if Senator McAllister might have the call now? I believe she has a question.

CHAIR: Certainly.

Senator McALLISTER: Thanks very much for accommodating me. I apologise; I have only been able to be intermittently involved today, because I had other appointments in the diary. I want to ask a quite high-level question. This legislation and, indeed, a number of other initiatives proceeding in parallel seek to manage risks that present to Australia through the vector of foreign investment. What is the PC's understanding of those risks? I guess my question is: what problem are we trying to solve?

Mr Brennan : As we noted in this research piece, at a very high level Australia and governments around the world are grappling increasingly, particularly with the national security dimension of foreign investment, but it's not the only new concern. There's been heightened focus on multinational tax avoidance, and that's partly because of the extent of intangible transactions that allow a bit of transfer pricing or profit shifting. So it's fair to say those things have become more salient considerations than they were 20 or 30 years ago, for example. Australia is not unique, but it is in the position of having a significant trading partner and source of inbound investment that is neither a democracy nor a military ally, and that is an issue that has brought the balancing task of foreign investment policy to the fore.

Whilst the Productivity Commission is not close to the national security considerations—and we don't claim to be—we did outline in the paper some of the sources of risk that can come about. Foreign investment may provide increased scope for foreign involvement, espionage activity and other things. We're quite upfront also about the fact that maybe there are other regulatory means that could be used and deployed to try and address some of those risks, which don't necessarily involve just foreign investment. But it's fair to say these risks exist, and it's just a matter of continuing to balance the benefits that we perceive from foreign investment against those risks.

Senator McALLISTER: Thank you. I appreciate it. That's all I have. I just wanted to ask that headline question.

Senator O'NEILL: Can I ask about national interest?

CHAIR: Yes, please. We have a couple of minutes.

Senator O'NEILL: Thank you. Your summary of key points says:

Other aspects of the foreign investment policy framework could be improved.

After announcements from the Treasurer, when you published this at the end of 2019-20, you said:

The national interest test lacks clarity around how it is interpreted from case to case.

The reality is that in this legislation there is no definition of the national interest, and that's been the subject of considerable disquiet in evidence from all participants today. How problematic is it that there is no clarity around national interest and other definitional gaps that exist with the current legislation as it's proposed?

Mr Brennan : Again, I think this is an issue of balance. I just note that, in the dot point above the one you quoted, we cited the positive, which is the flexibility inherent in the national interest test. We say:

… the design and vesting of responsibility with the Treasurer for administering the 'national interest' test works well. It gives flexibility to quickly adapt to new concerns, weighing up not just the costs, but also the benefits from foreign investment.

So to some extent the national interest test, the fact that it is a negative test and the fact that it vests with the Treasurer all combine to provide a degree of flexibility, which is a good thing. But we did note that there could be incrementally more done to provide a degree of clarity and not quite certainty but greater guidance about the way the national interest test has been applied and might be applied in the future. That goes to things like the publication of reasons for rejection or conditions being placed on acquisitions.

I apologise for reflecting the nuance or the lack of a clear, definitive answer on this, but the whole challenge here is often that we're dealing with judgements that are difficult to really precisely codify. That's part of the reason why having the decisions rest with the Treasurer is important. It's also part of the reason why, notwithstanding our view about looking at what regulatory apparatus is right over the long term—whether it is the Treasury or a standalone regulator—there is some merit in the decision-making, or the advice on the decision-making, being located quite close to the Treasurer. These are difficult, sort of subjective judgements because they involve the weighing up of competing interests and they are very difficult to put into a formula.

Senator O'NEILL: Do you have a view about the call-in power or the last-resort power? Do you have a view also about the Treasurer's capacity to order disposal of an asset whose acquisition the Treasurer has previously approved?

Mr Brennan : I confess I don't know as much about those as I should. I am aware of the fact that they are part of the bill, but they weren't things that we commented on particularly in the research paper. I can't even recall if they had been—maybe the call-in power had been announced. I am not sure if some of the other things had. It's not something I have a view on.

Senator O'NEILL: Ms Davidson, anything to say there?

Ms Davidson : No, nothing to add, as it's not something that we have looked at.

Senator O'NEILL: You would be aware that there is concern amongst people who have participated in this inquiry and have submitted that three years is, in their view, more than enough time for the Treasurer to get across whether an entity is complying, despite the fact that we know Alinta has had four and still isn't compliant. Perhaps it is, but we are not quite sure because it is not registered anywhere for us to see. Three years versus 10 is one of the arguments that's been put forward. Is 10 years too long to keep your eye on a foreign investor? Or is it not long enough? What's your view, having done this inquiry into foreign investment?

Mr Brennan : It's just not something I've looked at in a great deal of detail. I would have to think about it a bit further.

Senator O'NEILL: You might want to take that on notice.

Mr Brennan : I'll take that on notice, yes.

Senator O'NEILL: Thank you.

Senator O'NEILL: In terms of the urgency for this piece of legislation, it's six weeks from the date on which this needs to be implemented. Given the level of concern and uncertainty about so many elements of it, do you think it's important that there is a review date or a sunset clause put into this legislation to try and give a trigger to undo any of the unintended consequences that look like they will be a part of its implementation if it goes ahead?

Mr Brennan : I don't have a specific view about whether that ought to be built into the legislation. I think the Treasury has said there would be a post-implementation review of this by 2025. I might be operating from memory; perhaps Treasury the clarify that. In general, it's good to make an assessment about how a regulatory regime is working after the event and refine it as need be. I don't have a view, particularly, on the urgency. I note that perhaps part of the urgency is associated with the expiry of the temporary reduction in the threshold to zero. But these are more matters for government. Our research certainly didn't go down to that level of detail.

Senator O'NEILL: Thank you very much, Mr Brennan. Thank you, Ms Davidson.

CHAIR: I thank the witnesses for their time today.