Delicate balancing act for the foreign investment board

The FIRB must weigh up the national interest against the country's need for capital investment, writes Peter Cai.
By · 26 Oct 2013
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26 Oct 2013
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The FIRB must weigh up the national interest against the country's need for capital investment, 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 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 on whether to approve or block foreign acquisitions.

At hand are two proposals that already have the new Coalition government sweating - the American agribusiness group Archer Daniels Midland's play for GrainCorp, the biggest listed agribusiness in Australia, and the bid by Canada's Saputo for listed Victorian dairy producer Warrnambool Cheese & Butter.

The GrainCorp deal is shaping as FIRB's first big test under the new government, which itself is riven on the merits of the takeover.

The board's task is challenging and the volume of deals it must consider 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 last year, 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 last year, or more than 50 per cent of Australia's annual gross domestic product - a figure that included ever larger volumes of money flowing into the real estate sector.

With its role presiding over deals worth billions of dollars, and its close access to senior figures in government, FIRB is one of Canberra's most influential institutions. Its status has grown in recent years because of its involvement in transactions such as Chinalco's bid for Rio Tinto and the Singapore stock exchange's tilt at 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 hot bed of activity.

But despite the high stakes, the Treasurer and FIRB members closely examine only 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 - its operations and decision-making processes are 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".

"FIRB is a strange animal, it has got no statutory responsibility and its only purpose in life is to advise the Treasurer," a former board member says.

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 national interest grounds. 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 signalled the takeover bid for GrainCorp last October, its long-suffering lawyers at Corrs Chamber Westgarth may have had to withdraw and resubmit their applications a dozen times already.

Hockey's move to make the delay official means either that Archer Daniels has called the government's bluff and forced him 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 the board has already made its recommendation to the 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 says.

Swan, who made some tough foreign investment decisions, says 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 says. "There has been a lack of domestic capital for the agricultural sector, that is why the foreign capital is coming. Australia investors have been reluctant to invest in their own industry."

The board has previously advised Swan to sign a range of controversial agricultural asset sales, such as 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 Singapore's Wilmar.

Despite long delays, intense lobbying by farmers and wide media coverage, FIRB recommended that Swan approve those transactions.

Swan defends his decision to approve the sale of Cubbie. "There was an outpouring of angst about that," he says. "The fact was if I had not approved that, the place would shut down because there was not domestic capital available to invest in that particular operation."

In the GrainCorp case, it is likely the board has asked the Treasurer to approve the transaction, but with conditions attached.

A source close to the board says Brian Wilson, the present chairman, and Hamish Douglas, another investment banker on the board, take a hard-nosed, commercial approach when assessing deals. "They are a much needed counter-balance in a much politicised environment," the source says.

But, at the end of day, it is still the Treasurer's call, and Swan says the FIRB recommendation is 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 FIRB for that.

"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. In the Rudd government's early days, the Treasury - including the FIRB secretariat - was caught off guard by the sudden surge in Chinese appetite for Australian assets. For a time, it was not adequately resourced to handle the large volume of proposals that came through 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 BHP Billiton.

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

To put things in perspective, China's total stock of investment in Australia is about 3 per cent of the total foreign investment in Australia. In comparison, the US and Britain control about half the total stock in the country.

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 Chinese Communist Party.

In 2008, the department hastily developed a set of loosely-defined guidelines to scrutinise the influx of Chinese state-owned investors.

The guidelines, announced by Swan in 2008, included elements such as the company operating at arm's length from the government, being a good corporate citizen and potentially listing on a sound Western stock exchange.

The guidelines were administered under the over-arching "national interest" test. It was defined loosely.

"Our system is one of the best in the world," Swan says, "because it does not get you down to black letter law. If you want to try to give it a definition, then you get into black letter law stuff, which does not give you the degree of flexibility that you need to make a commonsense decision."

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

The 2008 attempted takeover by state-owned enterprise China Nonferrous Metals 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 where the Treasury elected to release information on 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.

The deal did not 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 was reported to have 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 as China supplies more than 90 per cent of rare earths worldwide.

The Japanese, Americans and Europeans all lobbied Swan to reject the Chinese bid for Lynas.

After extensive debate within FIRB, 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 Acquisition and Takeovers Act, the Treasurer has unlimited power to impose conditions on transactions as he sees fit to address national interest concerns.

"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 FIRB member says.

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

This policy is one of the most complained about by Chinese investors, which they see as overt discrimination against their country. This accusation has a ring of truth to it, according to diplomatic cables from the US embassy in Canberra, 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.

Not everyone complains about the board - some are pragmatic about its processes.

"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," says Andrew Michelmore, chief executive of Chinese nickel miner Minerals and Metals Group, whose Australian assets include the Rosebery base metals mine in Tasmania.

"There is a lot of misinformation about 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 FIRB is a direct result of its own opacity. BusinessDay spoke with several lawyers who deal regularly 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 previous Labor government, investment in agriculture - both farmland and agribusiness - has now replaced the resources sector as the most controversial investment category for foreigners. The GrainCorp proposal is 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 approved only $3.6 billion worth of transactions, or just 2 per cent of the total approved volume last year. Its latest annual report, for 2011-12, shows 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," it says.

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

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 FIRB.

"The decisions we make now will affect our food security into the future, which is why we need to determine today Australia's long-term approach towards foreign investment and ownership," junior Coalition minister and Nationals senator Nash warns in Future Proofing Australia, a collection of essays.

Foreign investment in agriculture will continue to test Australia's relative liberal attitude towards foreign capital, as more countries eye prime agricultural assets. It will also be a big test of the Abbott government's skills in engaging with Asian trading partners.

FIRB 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 FIRB's role is about managing perceptions - reassuring the public that there is a gatekeeper protecting the national interest.

Hockey's office and FIRB 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 consortium.

Australian Securities Exchange


Decided that the Singapore Exchange’s $8 billion proposed takeover of the ASX was not in the national interest.

Lynas Corporation


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.

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


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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