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Our foreign investment gatekeepers face a new challenge in agriculture, writes Peter Cai.
By · 26 Oct 2013
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26 Oct 2013
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Our foreign investment gatekeepers face a new challenge in agriculture, writes Peter Cai.

Once a month, the members of the secretive Foreign Investment Review Board gather at the Reserve Bank’s oak-panelled boardroom in Sydney’s Martin Place. On the agenda are sensitive proposals for foreign investment in Australian companies, farms and real estate – some of them highly contentious.

The board includes two seasoned merchant bankers, a professional company director, a former head of the Tax Office, and a senior Treasury official. It spends hours debating big takeover and merger applications.

On these matters, it is the Treasurer’s privy council; it is this board that advises the Treasurer on whether to approve or block foreign acquisitions.

At hand are two proposals that already have the new Coalition government sweating – the American agribusiness giant Archer Daniels Midland’s play for GrainCorp, the biggest listed agribusiness in Australia, and Canadian company Saputo’s bid for listed Victorian dairy producer Warrnambool Cheese & Butter.

The GrainCorp deal is shaping as the review board’s first big test under the new government.

The board’s task is challenging, and the volume of the deals it must consider is breathtaking. The secretariat of the board, which is housed inside the Treasury and staffed by Treasury officers, receives, on average, 155 applications a week.

Between 2008 and 2012, the board examined 1495 applications, each worth more than $50 million, 126 of which were worth $1 billion or more.

It approved $869 billion worth of investment projects between 2006 and 2012, or more than 50 per cent of Australia’s annual gross domestic production – a figure that included an ever larger volume of money flowing into the real estate sector.

With its role of presiding over deals worth billions of dollars and its close access to the senior figures in government, the board is one of Canberra’s most influential institutions. Its status has grown in recent years because of its involvement in high-profile transactions such as Chinalco’s bid for Rio Tinto and the Singapore Stock Exchange’s tilt at the ASX.

The emergence of China as one of the biggest investors in Australia has transformed the FIRB secretariat at the Treasury from a backwater of mundane transaction processing into a hotbed of activity. But despite the high stakes, the Treasurer and the board members only examine closely the most controversial and complex transactions.

The vast bulk of foreign investment deals – billions of dollars worth – are handled by a handful of junior or middle-level Treasury bureaucrats at the FIRB secretariat.

And while it may be influential, the board also ranks as one of the most opaque bodies in government, with its operations and decision-making processes shrouded in secrecy. It is a target both for whingeing foreign investors, who struggle with its delays and lack of transparency, and angry locals unhappy with any decision that involves selling off the ‘‘family silver’’.

‘‘The FIRB is a strange animal. It has no statutory responsibility and its only purpose in life is to advise the Treasurer,’’ a former member of the board said.

On GrainCorp, Treasurer Joe Hockey is in a bind. His Nationals colleagues, including Barnaby Joyce and Fiona Nash, are putting pressure on him to reject the deal on the grounds of national interest. But his own liberal instincts and lobbying from the big end of town are urging him to stand up to interest groups and approve the deal.

This month, Hockey extended his decision-making period for the GrainCorp deal by 60 days. It was an unusual move because in such cases, the board usually asks the applicant to quietly withdraw and resubmit its application to keep it out of the media.

Given that Archer Daniels Midland (ADM) flagged the takeover bid for GrainCorp last October, its long-suffering lawyers at Corrs Chambers Westgarth may have already had to withdraw and resubmit their applications a dozen times.

Hockey’s move to make the delay official means either that ADM has called the government’s bluff and forced Hockey to set a deadline for a decision, or the Treasurer is determined to take the case out of the too-hard basket and make a tough call.

Yet it is believed that the review board has already made its recommendation to the new Treasurer.

‘‘It is puzzling that the current government is dragging its feet on this question, they should have the comprehensive advice before them,’’ former treasurer Wayne Swan told Fairfax Media this week.

Swan, who made some tough foreign investment decisions under his watch, said Hockey should not be swayed by his xenophobic colleagues and should make ‘‘an adult’’ decision on the GrainCorp deal, which is the last remaining significant Australian-owned agricultural asset.

Australia is a capital-hungry country that is in desperate need of foreign investment, especially in the agricultural sector, Swan said.

‘‘There has been a lack of domestic capital for the agricultural sector [and] that is why the foreign capital is coming. Australian investors have been reluctant to invest in their own industry,’’ he said.

In the recent past, the board advised Swan to sign off on a range of controversial agricultural assets sales. These included Cubbie Station – the largest cotton farm in Australia – to a Chinese-led consortium; the acquisition of AWB – the former government-backed wheat export monopoly – by US agribusiness Cargill; and the sale of Sucrogen – a subsidiary of CSR – to Singaporean company Wilmar.

Despite long delays, intense lobbying by farmers and wide media coverage, the review board – which was then led by the former deputy governor of the Reserve Bank, John Phillips, and veteran investment banker Brian Wilson – recommended Swan approve these transactions.

Defending his decision to approve the sale of Cubbie, Swan said: ‘‘If I had not approved that, the place would shut down because there was no domestic capital available to invest in [it].’’

In GrainCorp’s case, it’s likely that the board has recommended the Treasurer approve the transaction, but with conditions attached.

A source close to the board said Wilson, the current chairman, and Hamish Douglass, another investment banker on the board, take a hard-nosed, commercial approach when assessing deals. ‘‘They are a much-needed counterbalance in a much-politicised environment,’’ the source said.

But it’s still the Treasurer’s call, and Swan said the board’s recommendation was just one of many considerations. ‘‘Ultimately, it is a decision for the Treasurer, but what you have is this analysis before you, but you just don’t rely on the FIRB for that. The FIRB is very important in all that, but it is not the only consideration.’’

The Treasurer also receives advice from the Australian Competition and Consumer Commission, the Australian Securities and Investments Commission, other regulators, and even, in some matters, classified briefings from intelligence agencies.

During the life of the Labor government, the review board division filed the largest number of executive minutes to the Treasurer and Assistant Treasurer’s offices of any division within the Treasury, according to a former political staff member.

Early in the Rudd government, Treasury – including the FIRB secretariat – was caught off guard by the sudden surge in China’s appetite for Australian assets. For a time, it was not adequately resourced to handle the large volume of proposals after an extended period of inactivity.

Former Treasury official Stephen Joske noted in 2009 that, at the time, there was a lack of understanding about the Chinese economy, and the government’s foreign investment policy was heavily influenced by mining giant BHP Billiton.

Most importantly, the board was forced to deal with one of the most contentious issues about Chinese investment – the dominance of state-owned actors in the shopping spree for Australian resources.

There is deep-seated anxiety about state-owned enterprises, which are assumed to be operating with a mixture of commercial and strategic objectives and are ultimately answerable to the Communist Party of China.

In 2008, the department hastily developed a set of loosely defined guidelines to scrutinise the influx of Chinese state-owned investors. The guidelines, which were announced by Swan and looked at such things as whether the company operated at arm’s length from the government and whether it was a good corporate citizen, were administered under the overarching ‘‘national interest’’ test.

Concealed behind this oft-mentioned test is an extensive list of criteria that includes anything from preventing vertical integration in the resources industry to preserving fragile natural environments.

The 2008 attempted takeover by state-owned China Nonferrous Metal Mining Group of local rare earths producer Lynas is an exquisite case study in how the ‘‘national interest’’ test can be wielded.

The Lynas case is the only one in which Treasury elected to release information on the FIRB’s decision-making under a freedom of information request.

With Lynas in financial trouble at the height of the global financial crisis, the Chinese threw it a lifesaving equity injection of $252 million in exchange for majority control in the company.

The deal didn’t raise many issues at first. But things took a dramatic turn when a Chinese fishing boat collided with a Japanese coastguard vessel tens of thousands of kilometres away.

China reportedly suspended the supply of rare earths – crucial raw materials for Japan’s electronics industry – to secure the release of the detained Chinese fishing captain. It sent shockwaves around the world because China supplies more than 90 per cent of rare earths worldwide.

Japanese, Americans and Europeans all lobbied Swan to reject the Chinese bid for Lynas. After extensive debate within the board and consultation with other government agencies, a creative solution was found.

Swan announced that it was in Australia’s national interest to be a reliable supplier to all of its trading partners – implying that a Chinese takeover of Lynas could jeopardise Australia’s ability to supply rare earths to Japan. Swan required that the Chinese miner reduce its proposed shareholding in Lynas below 50 per cent. In the end, the Chinese walked away from the deal.

Under the Foreign Acquisitions and Takeovers Act, the Treasurer has unlimited power to impose conditions on transactions as he sees fit to address concerns of national interest.

‘‘The Treasurer can ask a foreign investor to don a top hat and dance in the boardroom as part of a condition attached to the approval if he so desires,’’ a former member of the FIRB said.

The 2008 guidelines also require all state-owned enterprises or sovereign wealth funds to submit all of their proposals to invest in Australia to the board for scrutiny, irrespective of value.

Chinese investors see this policy as overt discrimination against their country, an accusation that has a ring of truth, according to diplomatic cables from the American embassy in Canberra that were published in 2011 by WikiLeaks.

‘‘FIRB general manager Patrick Colmer confirmed ... the new guidelines are mainly due to growing concerns about Chinese investments in the strategic resources sector,’’ the US embassy reported to Washington.

But not everyone complains about the board. Some are pragmatic about its processes.

‘‘The FIRB is very reasonable, provided you get in early, keep them briefed, and you don’t try to have the conversations in the public arena, thereby applying public pressure on the process,’’ said Andrew Michelmore, the chief executive of Chinese nickel miner Minerals and Metals Group, the Australian assets of which include the Rosebery base-metals mine in Tasmania.

‘‘There is a lot of misinformation about the FIRB as it makes for a good story and it makes good headlines because there is always a bad guy out there.’’

Some argue that the misinformation surrounding the board is a direct result of its own opacity. BusinessDay spoke with several lawyers who regularly deal with the board. They say there is a clear need for more transparency around decisions, and better explanations of the common delays that beset FIRB applications.

The small size of the FIRB secretariat – believed to number just a few dozen – would also surprise many.

While the surge in Chinese mining investment provided a headache for the Labor government, foreign investment in agriculture – both farmland and agribusiness – has now replaced the resources sector as the most controversial investment category for foreigners.

It is building as a major issue, with the GrainCorp proposal already straining the unity of the Coalition. The perception that a large chunk of Australian farmland is being sold off is not borne out by FIRB statistics. It only approved $3.6 billion worth of transactions, or just 2 per cent of the total approved volume last year.

According to the board’s latest annual report, for 2011-12, the average level of foreign investment in agriculture has been slightly more than $2.5 billion. ‘‘Investment proposals in this sector are inherently irregular and can be skewed by large transactions with several competing bidders,’’ the FIRB said.

At present, about 11 per cent of Australian farmland is foreign owned, according to a survey by the Bureau of Statistics and the Department of Agriculture, Fisheries and Forestry last year.

Still, the recent spree of foreign agribusiness and farming acquisitions has stoked fears about Australia’s future food security, amplified by the previously inadequate collection of information by the review board.

Foreign investment in agriculture will continue to test Australia’s relatively liberal attitude towards foreign capital. It will also be a major test of the Abbott government’s skills in engaging with Asian trading partners.

The board will be expected to help take the sting out of the heated political debate and to provide Hockey with some cover for the tough calls he will need to make.

Indeed, an important part of the board’s role is about managing perceptions – reassuring the public that there is a gatekeeper protecting national interests. Swan sums up the FIRB’s function this way: ‘‘What it does is reassure our population that we have a supervisor in place.’’

Hockey’s office and the board did not respond to requests for interviews.

Contentious FIRB verdicts

Cubbie Station


Recommended in favour of the sale of an 80 per cent share of the enormous Queensland cotton station – which entered voluntary administration in 2009 - to a Chinese cosortium.

Australian Securities Exchange 2011

Lynas Corporation 2009

Required that China Nonferrous Metal Mining Co reduce its proposed stake in rare earths miner Lynas to less than 50 per cent, among other conditions. CNMC then walked away from the deal. Decided that the Singapore Exchange’s $8 billion proposed takeover of the ASX was not in the national interest.

Rio Tinto 2009

Dragged out its decision on the friendly $30 billion tie-up in which Chinalco would own 18 per cent of Rio Tinto. By the time FIRB’s verdict was imminent, global markets and Rio Tinto shares had rallied and investors went cool on the deal, forcing Rio Tinto to abandon it.

Felix Resources 2009

Yancoal was allowed to acquire 100 per cent of coal producer Felix Resources for $3.1 billion on the condition that Yancoal must be listed on the ASX and reduce its shareholding in Felix to 70 per cent.
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