Striking right balance on vital foreign investment

Ten weeks ago, a day before launching the JobKeeper rescue, Josh Frydenberg set out temporary and precautionary changes to foreign investment laws. The Treasurer declared all proposed foreign investments subject to the Foreign Acquisitions and Takeovers Act would require approval, regardless of value or nature of the investor. He argued these were extraordinary times, with the value of companies and assets severely diminished here and around the world because of the coronavirus pandemic. “This is not an investment freeze,” Mr Frydenberg insisted. “Australia is open for business.”

At the time the Treasurer stressed this was not aimed at any country, but the public sighed in relief because an expansionist, cashed-up China is on the prowl. As we report, Mr Frydenberg is beefing up resources and compliance to give the Foreign Investment Review Board better “eyes and ears”, as well as introducing a robust national security test. The aim is to keep our pro-foreign investment stance, via streamlining measures, but improve capacity to identify proposals that contain security risks. It’s a difficult balance to get right, especially in a turbulent geopolitical setting and when capital spending is in a hole, even before COVID-19. If we raise the bar too high, we limit options for expansion and jobs in a shrinking economy. If the barrier is set too low, we expose the nation to danger.

Mr Frydenberg claims the reforms are the most significant since the act was introduced in 1975. All foreign investments in sensitive national security businesses will be subject to a zero “monetary screening threshold”; before the emergency, only foreign governments were subject to that level. There will be a new “last resort” power, allowing the Treasurer to apply or vary conditions or order disposal where security risks emerge post-approval. The FIRB and Australian Taxation Office will get a funding boost for the added scrutiny; there will be higher penalties for breaches. The government aims to introduce legislation in October so the measures can take effect at the start of next year. The crisis screening measures will stay in place until then.

There has been a push from so-called hawks within the foreign policy and security establishment, including key Coalition MPs, to give more weight to security risks due to the predatory nature of state-owned enterprises. In our pages, Australian Strategic Policy Institute executive director Peter Jennings has led calls for a new national security strategy that “includes health and biosecurity, climate, human security, critical infrastructure, security of supply of petrol, oils and lubricants, the ever-expanding range of cyber-security challenges, university and industry R&D, and more traditional defence, intelligence and foreign policy concerns”. He argues the FIRB be moved from Treasury, reporting to the Prime Minister via an all-powerful national security adviser.

For hawks, ultra-wary of China’s moves and motives, the logical step is to reverse past FIRB decisions, including the ill-considered leasing of the Port of Darwin and deals on electricity, gas, medical facilities and farmland. Such steps would raise red flags, so to speak, about the nation as an investment risk. The proposed “last resort” powers will not be retrospective. Australia was built by foreign capital, from Britain’s Vestey empire in the rural sector through to the US, Japanese and Dutch money behind our minerals and resources industries. The US is still the largest foreign investor here, with holdings four times the value of China’s stake, which is fifth. One in 10 businesses has benefited from foreign capital. Yet only 1 per cent of FIRB approvals have a national security implication.

But China’s rise, and its aggressive, debt-trap push with the Belt and Road Initiative, demands a better-equipped screening apparatus. The Morrison government is wisely seeking a middle path that promotes an open foreign investment regime while drawing on the economic expertise of Treasury. FIRB chairman David Irvine is a former ASIO chief and diplomat. After 2015 changes, the agency has been enhanced to identify and deal with security issues. It has often meant conditions have been placed on FIRB approvals; half of all approvals, or 80 per cent by value, now have provisos attached.

As the Treasurer argues, there are several lenses through which proposals need to be assessed, such as tax, competition and the character of the investor. The narrow prescription of the hawks would be counter-productive and place severe limits on growth, industrial development and living standards. In any case, Mr Frydenberg says the proposed reforms mean the government will be able to “call in” an investment before, during or after acquisition for review if it raises security concerns. That’s a big step. He points out the US, Britain, New Zealand, Canada, Japan and EU have updated foreign investment rules in response to new security challenges. That reflects a changing global order, in a financial, trade and military sense. Right now, in the midst of an economic calamity and tensions with China rising, the last thing we need is a predator scooping up companies in distress or assets vital for our national security and prosperity.