An opaque and vaguely defined standard may hold the key to national economic recovery in the post COVID-19 era. The problem is that no one knows the exact contours of a ‘gatekeeper’ test that will enable foreign investors to inject much-needed capital into the Australian economy. Traditionally, the Treasurer sought advice from the Foreign Investment Review Board (FIRB), a curious non-statutory advisory body responsible for generating a recommendation for the Treasurer based on the operative factors under the national interest. The final word rests with the Treasurer.
When the Foreign Acquisitions and Takeovers Act 1975 (Cth) was being debated in the Parliament, it was suggested that the ‘national interest’ criterion should be assessed by reference to a variety of operative factors such as net economic benefits to Australia to justify the change in foreign control, whether the foreign investor was expected to follow practices consistent with Australian expectations and whether the proposal would be consistent with the Government’s policy objectives. In assessing these matters, it was suggested during parliamentary debates that the Government would look at factors such as Australian participation in ownership, control, and management as well as the interests of employees, shareholders, and creditors.
In the mid-1980s, a more liberal interpretation of the national interest criterion was adopted, abandoning the application of the net economic benefit test on the basis that foreign investment was then acknowledged to have clear economic benefits to Australia.
Fast forward to 2020, in the new Australian Foreign Investment Policy, the list of operative factors expanded to include imperatives such as national security, competition, taxation policy, impact on the community, and the character of the investor are considered when assessing foreign investment applications (pp 8-9). In addition to these factors, when examining foreign investment proposals in the agricultural sector, the Government typically considers the effect of the proposal on a series of factors, including employment and prosperity in Australia’s local and regional communities (pp 9-10).
From its original iteration in 1975, the national interest test reflected a bias towards foreign investment, but it had been severely criticized. The ‘national interest’ test has always been an opaque standard that has not become clearer despite piecemeal reforms.
Lessons from History in the post COVID-19 Recovery?
The Australian economic recovery from the impact of the COVID-19 pandemic will be reliant on a steady inflow of capital. The Australian economy will face a plethora of challenges ranging from public health crisis to an economic downturn. Meanwhile, state-owned enterprises (SOEs) from authoritarian states may be circling overhead, observing closely for any predatory investment opportunity. The changing landscape is best described by Duncan MacInnes as accelerating the trends of inequality, populism, deglobalization, and perhaps environmentalism and government involvement in the daily lives of the people.
More than the COVID-19 pandemic, the challenge for Australian policymakers is to dispassionately look at the foreign investment landscape and re-examine the operative factors considered in the national interest test. The underlying motive behind such a revisit of the current operative factors is not only to ensure a clearer and thorough reinterpretation of the scope and boundaries of the existing factors but also the inclusion of certain new factors to meet the challenges posed by the present crisis. The current crisis should be looked upon as an opportunity to fix the cavities in the system, and a holistic approach is the need of the hour. Even more so than the operative factors will be the hard question: what investment do we allow and which ones we reject? In an economic slowdown and recession, there are not many choices left.
Do lessons from the past hold the key to recovery and fostering healthy foreign investment inflows while assuaging concerns over loss of control? There is no one answer to this query.
Firstly, the policymakers may wish to consider adopting the 1975 criterion of ‘Australian participation in ownership, control, and management‘ of businesses into the national interest operative factors. The second reading speech delivered at the Parliament provides for much greater participation and control over businesses taken over by foreign investment:
‘In making judgments as to whether particular foreign takeovers would be against the national interest on any of the foregoing grounds, due weight will be given to The extent of the Australian participation in ownership, control and management that would remain after the takeover; and the interests of employees, shareholders, and creditors of the business subject to the takeover proposal.’
By way of comparison, the equivalent criterion considered in the ‘net benefit’ test from Canada vide the Investment Canada Act 1985 is worth noting. The ‘net benefit’ test unequivocally prescribes the local participation criterion for foreign investment by considering:
‘the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada of which the Canadian business or new Canadian business forms or would form a part.’
The inclusion of this criterion will surely pepper the palate of populists and community groups that advocate for greater autonomy and Australian control in managing foreign takeovers.
Secondly, the operative factor of ‘malicious intention behind the takeovers’ must be carefully considered. This factor is particularly relevant in the backdrop of the attempted opportunistic investments by SOEs sponsored by authoritarian states around defence technologies and sensitive infrastructure. In March 2020, Ellen Lord, the US Undersecretary of Defence in charge of monitoring foreign investments, warned that it was ‘critically important that we understand that during this crisis, the [defence-industrial base] is vulnerable to adversarial capital.’
Thirdly, ‘the impact of the investment on public health’ will need to find its place in the list of operative factors. The post COVID-19 demand for pharmaceutical inputs, medical equipment, and the COVID19 vaccine worldwide will be unprecedented, presenting a lucrative opportunity for Australian businesses. The optimized national interest test will ensure that the benefits of the post-COVID19 recovery phase’s opportunities remain within Australia. The EU is already moving in this direction: for example, on March 25, the European Commission issued new foreign-investment guidelines for its member nations to safeguard assets, notably in health, medical research, biotechnology, and infrastructures.
Fourth, the operative factor ‘employment and prosperity in Australia’s local and regional communities’ considered when examining foreign investment proposals in the agricultural sector does not seem to be a significant consideration for all other foreign investments. Employment for Australians should be made an overarching criterion irrespective of the investment is in the agriculture sector or not.
Australia’s journey from the restrictive business investment model of the 1960s to the current liberal model of attracting foreign investment has been challenging. It has run into rough weather many times. Fortifying the national interest with new operative factors will help remove the vacuum created by the vague interpretation of operative factors.
Bovas Johannan is a Legal Services Officer with Domestic+General and an LLM (Research) Candidate at the Faculty of Law, Bond University. Umair Ghori is an Associate Professor in the Faculty of Law, Bond University.