Foreign investment changes are part of a global shift and not aimed at China

This is what Scott Morrison means by greater national sovereignty. Australia’s transformed foreign investment policy affirms the world has changed. The days of Davos-inspired deregulation and free-flowing capital are gone.

The new policy, driven by Josh Frydenberg, recognises foreign investment is now about strategic advantage, not just economic returns­. The revolution in policy is the legacy of China Inc and its tactics that have driven a gradual tightening in policy for several years, leading to the Frydenberg security firewall.

This sharply increases the power and discretion of the Treas­urer in foreign investment. This will be its enduring impact. It seeks a new balance between sovereign protection and investment flows. It repudiates the demands of national security hawks for the government to cancel previous approvals for Chinese investment in infrastructure.

Frydenberg looked at this option­ and said “no” — it would have devastated investment ­confidence in Australia. The key to the policy is a new security test with a $0 threshold, which means all foreign investment proposals, public or private, relating to sensitive security businesses must be screened by the Foreign Investment Review Board and, in effect, be approved by the Treasurer.

The government makes no ­secret about the long list of such “sensitive areas” — it will cover telecommunications, critical infrastructure, the defence supply chain, cyber-related technology, businesses that collect, store and own data, aspects of energy, electrici­ty, ports and water.

To fully comprehend the transformation under way, you need to focus on Frydenberg’s remarkable statistic on Friday — in the past year, 80 per cent of foreign­ investment approvals by value had conditions attached.

A total of 4149 applications were approved subject to conditions amounting to 47.6 per cent of total approvals. In short, most foreign investment into Australia is now subject to conditions, a drama­tic change over a generation. The FIRB now has a total of 1000 conditional investment approva­ls on its books resulting from decisions over the years that it must monitor to ensure the parties honour the terms on which their investment was authorised.

The government will now ­assume greater powers and penalties to ensure compliance and enforcemen­t, the job of Treasury and the tax office, and will provide an extra $54m for this.

The policy constitutes a new era of scrutiny and regulation justified by a global transformation in what are deemed to be national security risks. The Morrison government’s decision is not a solo Australian venture but reflects decisions taken by many nations, including the US, Britain, Canada and Japan, among others, intensifying a national security focus.

Morrison was upfront, saying foreign investment would be “on our terms, on our rules and in our national interest”. The new policy is targeted at no nation. But it is driven, above all, by the tactics spearheaded by China Inc.

Frydenberg left nobody in doubt that these were the most im­portant changes to foreign investment rules since 1975, reflecting that investment was now con­flated with “strategic object­ives”.

The new policy gives the Treasurer a “call-in” power if an investment is subsequently deemed to create a national security risk. This power will not be retrospective. It will apply to investment approvals from January 1 next year. The Treasurer, under a “last resort” power, will be able to vary the conditions attached to the investm­ent or order divestment.

The foreign investment message is that Morrison/Frydenberg pragmatism means heavy limit­ation on market forces as opposed to national security in decision-making. A slowing in China’s investmen­t into Australia can be assumed. Investment approvals with conditions will be foundational to the new policy.

A guaranteed consequence is that parties and governments submitting proposals will incorporate national security assur­ances as part of their bids.

This policy was not triggered by the Darwin Port sale to Chin­ese interests. That sale did not require FIRB ­approval or federal government approval. That omission was later corrected by Morrison in a change to process.

There remain different views on this issue. The view of Defence was that no security grounds existed­ to veto the sale. But at the political level Frydenberg has made clear that any comparable proposal would not be accepted.

Frydenberg said the new framework would give Australia a greater sense of “control over the investment that comes into this country”. Morrison said he saw “no reason” why the policy should create more tension with China.

The policy, however, involves a streamlining of passive investment proposals by foreign governments when they partner with private capital. “We are competing internationally for capital,” Frydenberg said of the post-COVID world. It is a necessary move to try to counter the regul­atory roadblock in the system.

Frydenberg said one in 10 Australians jobs was driven by foreign investment. The total stock was now $4 trillion and the aim was “to ensure Australia can continue to benefit from foreign investment while safeguarding our national interest”. Morrison said Australia would still have “the most liberal rules” for foreign investment in our part of the world.

The new policy has been developed in the past 18 months. It is a major extension by Frydenberg of the direction Morrison was taking as treasurer when he began tightening the system. It was Morrison who appointed former diplomat and security chief David Irvine as chair of the Foreign Invest­ment Review Board. Irvine advised on these reforms and said the board “fully supports” them.

In the past, 99 per cent of foreign investment approvals had no national security implications. The main source countries for foreign investment are more than 20 per cent from the US, more than 10 per cent each from Britain and Japan, and a little more than 5 per cent from China.