Foreign Investment Rules and Sovereign Wealth Funds

24 June 2008

Kali Sanyal
Economics Section

Contents

Introduction
Federal government responsibilities and powers regarding foreign investment approvals

Policy in general
Prior approval
Who needs to apply?
Examination by sector
Australian urban land
Banking
Civil aviation

Domestic services
International services

Airports
Shipping
Media
Telecommunications
Approval period

Sovereign wealth fund (SWF)

Top SWFs in size
What are the biggest sovereign wealth funds?
SWFs in Westminster style of government countries
Governance arrangement of SWFs
Governance arrangement of SWFs in Westminster style of government countries
OECD guidelines on SWFs
Current Australian policy issues on sovereign wealth funds
Impacts on investments of the new principles in Australia
The FIRB approved major SWFs in Australia
SWFs of Singapore
Chinese SWFs

Attachment A: prescribed sensitive sectors under the Australia-United States Free Trade Agreement (AUSFTA)
Attachment B:Guidelines for foreign government investment proposals

List of acronyms

APRA

Australian Prudential Regulation Authority

AUSFTA

Australia US Free Trade Agreement

CIC

China Investment Corporation

CITIC

China International Trust and Investment Company

FATA

Foreign Acquisitions and Takeovers Act 1975

FFA Future Fund Australia
FIRB Foreign Investment Review Board

FSSA

Financial Sector (Shareholdings) Act 1998

GIC

Government Investment Corporation (Singapore)

HEEF

Higher Education Endowment Fund

IMF

International Monetary Fund

ITR

Integrated Tourism Resort

OECD

Organisation for Economic Cooperation and Development

SAA

Strategic Asset Allocation

SWF

Sovereign Wealth Fund

Introduction

This note has been prepared for Members and Senators in the Australian Parliament to describe the responsibilities and powers of the Australian Foreign Investment Review Board regarding the assessment of takeovers of Australian companies by overseas companies. The note also covers the emerging issues associated with sovereign wealth funds (SWFs).

Federal government responsibilities and powers regarding foreign investment approvals[1]

Policy in general

Foreign investment is regulated in Australia under the Foreign Acquisitions and Takeovers Act 1975 (the FATA). The Foreign Acquisitions and Takeovers Regulations 1989 provide monetary thresholds below which the relevant FATA provisions do not apply, and separate thresholds for acquisitions by US investors.[2] The FATA also provides a legislative mechanism for ensuring compliance with the policy regulations.

Certain types of proposals by foreign interests to invest in Australia require prior approval and need to be notified to the government. In the majority of industry sectors, smaller proposals are exempt from notification and larger proposals are approved unless judged contrary to the national interest. The Australian Treasurer is responsible for making approvals and the Foreign Investment Review Board (FIRB) acts in an advisory capacity.[3]

In Australia, by far the largest number of foreign investment proposals involves the purchase of real estate. The government seeks to ensure that foreign investment in residential real estate increases the supply of dwellings and is not speculative in nature. The policy seeks to channel foreign investment in the housing sector into activity that directly increases the supply of new housing (that is, new developments such as house and land, home units and townhouses) and brings benefits to the local building industry and its suppliers.

Therefore, the more restrictive policy of not allowing foreigners to invest in the existing developed residential real estate brings twofold benefits. Firstly, it helps reduce the possibility of excess demand building up in the existing housing market. Secondly, it aims to encourage the supply of new dwellings, most of which would become available to Australian residents, either for purchase or rent. The cumulative effect should be to maintain greater stability of house prices and the affordability of housing for the benefit of Australian residents.

Prior approval

The types of foreign investment proposals which are subject to the FATA or the regulations or both, and hence should be submitted to the government for approval, include:

  • acquisitions of substantial interests in an Australian business where the value of its gross assets, or the proposal values it above, $100 million[4]
    • For US investors different exemption thresholds apply: $105 million for investments in prescribed sensitive sectors or where the acquiring entity controlled by a US government, or $913 million in any other case[5]
  • proposals to establish new businesses involving a total investment of $10 million or more require prior approval
    • Proposals by US investors, except an entity controlled by a US government, do not require notification but remain subject to other relevant policy requirements
  • portfolio investments in the media of 5 per cent or more and all non-portfolio investments irrespective of size
    • For US investors, the thresholds for sensitive sectors and government entity apply
  • takeovers of offshore companies whose Australian subsidiaries or gross assets exceed $200 million and represent less than 50 per cent of global assets[6]
    • For US investors the $913 million threshold applies, except for offshore takeovers involving prescribed sensitive sectors or an entity controlled by a US government, where a $210 million threshold applies
  • direct investments by foreign governments and their agencies irrespective of size[7]
  • acquisitions of interests in Australian urban land[8] (including interests that arise via leases, financing and profit sharing arrangements) that involve:
    • developed non-residential commercial real estate, where the property is subject to heritage listing, valued at $5 million or more and the acquirer is not a US investor
    • developed non-residential commercial real estate, where the property is not subject to heritage listing, valued at $50 million or more, or $913 million for US investors
    • accommodation facilities irrespective of value
    • vacant real estate irrespective of value
    • residential real estate irrespective of value or
    • shares or units in Australian urban land corporations or trust estates, irrespective of value
  • proposals where any doubt exists as to whether they are notifiable. (Funding arrangements that include debt instruments having quasi-equity characteristics will be treated as direct foreign investment).

Who needs to apply?

The policy applies to such acquisitions by foreign persons. A foreign person is defined as:

  • a natural person not ordinarily resident in Australia
  • a corporation in which a natural person not ordinarily resident in Australia or a foreign corporation holds a controlling interest
  • a corporation in which two or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate controlling interest
  • the trustee of a trust estate in which a natural person not ordinarily resident in Australia or a foreign corporation holds a substantial interest or
  • the trustee of a trust estate in which two or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest.

Examination by sector

Below is an outline of the policy and the examination guidelines it provides in relation to particular industry sectors which are regarded as sensitive. The majority of foreign investment proposals will fall within these guidelines. Those that do not are examined on a case-by-case basis.

The FATA applies to most examinable proposals and provides penalties for non-compliance.[9]

Unless there are breaches of conditions imposed under the FATA, individual investment proposals face no objections. Such conditions ordinarily relate to acquisitions of real estate, primarily the time period for the development of vacant land and to second hand residential real estate being used as the acquirer s principal place of residence.

All contracts by foreign persons to acquire interests in Australian urban land are subject to foreign investment approval, unless approval was obtained prior to entering into the contract. Contracts should allow a minimum of 40 days from date of lodgement for such a decision.[10] Foreign investors are in breach of the FATA if they enter an unconditional contract to acquire property before approval is granted and may be subject to significant penalties.

Australian urban land[11]

Proposed acquisitions of residential real estate are exempt from examination in the case of:

  • Australian citizens living abroad purchasing either in their own name or through an Australian corporation or a trust
  • foreign nationals who are the holders of permanent resident visas or are holders of, or are entitled to hold, a special category visa purchasing either in their own name or through an Australian corporation or a trust and
  • foreign nationals purchasing, as joint tenants, with their Australian citizen spouse.

Proposed acquisitions of real estate for development (generally vacant land) are normally approved subject to specific conditions requiring continuous substantial construction to commence within 12 months, or 5 years in the case of commercial developments not to be used for residential purposes. Once construction is complete, the parties are required to provide advice of the completion date and actual development expenditure.

Foreign persons are normally given approval to buy:

  • vacant land for development, including house and land packages where construction has not commenced, subject to a condition imposed under the FATA that continuous construction commences within 12 months for residential developments, or 5 years for commercial developments not to be used for residential purposes and
  • new dwellings such as house and land packages, home units and townhouses purchased off-the-plan , that is, under construction or newly constructed, but never occupied or previously sold. Off-the-plan sales to foreigners are only permitted for new development projects or extensively refurbished commercial structures, which have been converted to residential, on condition that no more than half the dwellings in a development are sold to foreign persons.

Certain categories of foreign nationals, who hold a visa that permits them to reside in Australia continuously for at least the next 12 months, may be given approval to purchase developed residential real estate (that is, second hand dwellings) for use as their principal place of residence (that is, not for rental purposes) while in Australia. A condition of such purchases is that the dwelling must be sold when the foreign nationals temporary resident visas expire, they leave Australia, or the property is no longer used as their principal place of residence.

Foreign companies, with an established substantial business in Australia, buying for named senior executives resident in Australia for periods longer than 12 months, may be eligible for approval provided the accommodation is sold when no longer required for this purpose. Whether a company is eligible, and the number of properties that may be acquired, will depend upon the extent of the foreign company s operations and assets in Australia. Unless there are special circumstances, foreign companies normally will not be permitted to buy more than two houses under this category. Foreign companies would not be eligible under this category where the property would represent a significant proportion of its assets in Australia.

Proposals by foreign persons to acquire developed residential real estate that do not fall within the above categories are subject to the FATA but are not normally approved.

Proposed acquisitions of developed non-residential commercial real estate are normally approved unless they are determined to be contrary to the national interest.

Proposed acquisitions of residential property (both vacant land and existing dwellings) which are within the bounds of a resort that the Treasurer had designated as an Integrated Tourism Resort (ITR) prior to September 1999 are exempt from examination. For resorts designated as ITRs from September 1999, the exemption only applies to developed residential property, which is subject to a long term (10 years or more) lease to the resort/hotel operator, making it available for tourist accommodation when not occupied by the owner. All other property, including vacant land for development, within the ITR would be subject to the normal foreign investment restrictions. Strict conditions must be fully met to qualify for ITR status.[12]

Proposed acquisitions of hotels and motels operating under one title are normally approved under the tourism sector policy (unless considered contrary to the national interest). Proposed acquisitions of strata titled hotel accommodation may be approved in certain designated hotels.

Banking

Foreign investment in the banking sector needs to be consistent with the Banking Act 1959, the Financial Sector (Shareholdings) Act 1998 (FSSA) and banking policy, including prudential requirements. Any proposed foreign takeover or acquisition of an Australian bank will be considered on a case-by-case basis and judged on its merits. Acquisitions of interests by US investors in financial sector companies, as defined by the FSSA, are exempt from the FATA. The FSSA continues to apply.

The government will permit the issue of new banking authorities to foreign owned banks where the Australian Prudential Regulation Authority (APRA) is satisfied the bank and its home supervisor are of sufficient standing, and where the bank agrees to comply with APRA s prudential supervision arrangements.

Civil aviation

Domestic Services

Foreign persons (including foreign airlines) can generally expect approval to acquire up to 100 per cent of the equity in an Australian domestic airline (other than Qantas), unless this is contrary to the national interest.

International Services

Foreign persons (including foreign airlines) can generally expect approval to acquire up to 49 per cent of the equity in an Australian international carrier (other than Qantas) individually or in aggregate provided the proposal is not contrary to the national interest.

In the case of Qantas, total foreign ownership is restricted to a maximum of 49 per cent in aggregate, with individual holdings limited to 25 per cent and aggregate ownership by foreign airlines limited to 35 per cent. In addition, a number of national interest criteria must be satisfied, relating to the nationality of Board members and operational location of the enterprise.

Airports

Foreign investment proposals for acquisitions of interests in Australian airports are subject to case-by-case examination in accordance with the standard notification requirements. In relation to the airports offered for sale by the Commonwealth, the Airports Act 1996 stipulates a 49 per cent foreign ownership limit, a 5 per cent airline ownership limit and cross ownership limits between Sydney airport (together with Sydney West) and Melbourne, Brisbane and Perth airports (for further clarifications, go to www.firb.gov.au).

Shipping

The Shipping Registration Act 1981 requires that, for a ship to be registered in Australia, it must be majority Australian-owned (that is, owned by an Australian citizen, a body corporate established by or under law of the Commonwealth or of a State or Territory of Australia), unless the ship is designated as chartered by an Australian operator.

Media[13]

All direct (that is, non-portfolio) proposals by foreign persons to invest in the media sector irrespective of size are subject to prior approval under the policy. Proposals involving portfolio shareholdings of 5 per cent or more must also be submitted for examination (for a list of sensitive sectors in the AUSFTA, see ATTACHMENT A).

Telecommunications

Around 83 per cent of Telstra Corporation Limited (Telstra) is owned by institutional and individual investors, with the remaining approximately 17 per cent to be transferred by the government to the Future Fund, a fund established by the government to fund its public service superannuation liabilities. Shares transferred to the Future Fund will be held in escrow for a two year period.

Aggregate foreign ownership of Telstra is restricted to 35 per cent of the privatised equity (including instalment receipts) and individual foreign investors are only allowed to acquire a holding of no more than 5 per cent of the privatised equity.

Approval period

Approval under the regulations is normally only given for a specific transaction which is expected to be completed in a timely manner. If an approved transaction does not proceed at that time and/or the parties enter into new agreements at a later date, or if a transaction is not completed within 12 months, further approval must be sought for the transaction.

The time period for an approval may be varied where it can be shown that an extended period is fundamental to the success of a proposal and that extending the timing of the proposal does not involve an activity (for example, real estate speculation) that would be contrary to the national interest. In this situation the extended period will be stated in the approval.

Sovereign wealth fund (SWF)[14]

According to the International Monetary Fund (IMF), a sovereign wealth fund (SWF) is a particular type of asset held by a government in another country s currency. Most of the countries owning SWFs, by running a current account surplus, accumulated more reserves than they perceived they needed for immediate purposes.

Top SWFs in size

Currently, more than 20 countries have SWFs; the holdings remain quite concentrated, with the top five funds accounting for about 70 percent of total SWF assets. Over half of these assets are in the hands of countries that export significant amounts of oil and gas. Norway has a large sovereign fund, as do places as disparate as Alaska, Alberta, Russia, and Trinidad and Tobago. About one-third of total assets are held by Asian and Pacific countries, including Australia, China, and Singapore.

SWFs have been around for a long time, at least since the 1950s. But their total size worldwide has grown dramatically over the past 10-15 years, with the IMF now estimating that they will rise from $2-3 trillion today to about $6-10 trillion within five years.

The main impetus for the growth of SWFs comes from high oil prices, financial globalisation, and continued imbalances in the global financial system that have resulted in the rapid accumulation of foreign assets by some countries.

What are the biggest sovereign wealth funds?

At present, the United Arab Emirates (US$875bn), Norway (US$380bn), Singapore (US$438bn), Saudi Arabia (US$289bn), China (US$200bn), Kuwait (US$213bn), Russia (US$157bn), Australia (US$54bn), Libya (US$50bn) and Qatar (US$50bn) are among the countries that hold the world s largest SWFs (see Table 1). [15]

Table 1: market estimates of assets under management for SWFs

SWFs in Westminster style of government countries

There are only two funds from the Westminster style of government that feature among the top SWFs in the list. Australia s Future Fund (US$54 billion) and Canada s Alberta Heritage Savings Trust Fund (US$16 billion) are among the top investors in global markets.

Governance arrangement of SWFs

Are these funds subject to political manipulations?

Yes and No.

In certain cases, the SWF investments may be motivated by political objectives since they are driven primarily by the expanded role of governments involved (see IMF description of SWF investment strategies in Box 1).[16] From the perspective of SWF countries, however, avoidance of the resource curse (huge short to medium term wealth off the back of depletable resource earnings), in particular the effect on exchange rates, is a key rationale to drive offshore.

Box 1. SWFs and investment strategies

SWFs are a heterogeneous group of investors that apply a wide range of investment strategies reflecting their different objectives. When executing their strategic asset allocation (SAA), some SWFs invest solely in publicly-listed financial assets (e.g., bonds and equities), while others invest across all major asset classes, including alternative investments. Some SWFs invest relative to market indices and sometimes put additional caps on the maximum holding of each company s shares with a view to ensuring diversification. Other SWFs that aim at maximizing absolute returns over longer time horizons may shift between different asset classes and acquire larger stakes in specific companies that they see as profitable investments. It is unclear how active a role they have in these companies. However, the evidence suggests that SWF are generally passive and long-term investors with no desire to impact company decisions by actively using their voting rights.1 Some apply social responsibility or ethical guidelines to rule out specific industries (e.g., tobacco, military) that may not conform with the social and ethical objectives of their governments.

Most SWFs actively use external managers, either to match index returns or to create active risk-adjusted return.2 Although, public sector investment managers such as reserve managers have significant experience in fixed-income markets, they often have limited capacity for investment in other asset classes, such as equities.

Thus, the SWFs rely on external fund managers to implement their strategic asset allocation in areas where their capacity is limited. Some SWFs have, however, established in-house capacity and operate as highly professional investment managers (e.g., Norway, Abu Dhabi, and Singapore), and rely less on external managers than in their past. Some commentators have highlighted that by using external managers and passive index-based investment strategies, SWFs may be able to obtain the desired asset class returns, while avoiding potential scrutiny of their investments and how they execute their voting rights.

_______________

1. This means that they vote by proxy and often ask external managers to vote on their behalf.

2. Some SWFs taking larger stakes in companies have explicitly relinquished their voting rights as a condition for entering into private transactions; this was for instance the case when China Investment Corporation acquired a stake in Blackstone Group of close to 10 percent in May 2007.

Governance arrangement of SWFs in Westminster style of government countries

The Future Fund Act 2006 (Australia) states that the mandate must have regard to maximising returns on the Fund over the long term, consistent with international best practice for institutional investment and other matters considered relevant by ministers. The current mandate sets a target return of between 4.5% and 5.5% above the Consumer Price Index (CPI) measure of inflation over the long term. The Board has interpreted this as an objective to provide a return of at least 5% above CPI over rolling 10 year periods. It is recognised that as the Fund transitions to a long-term strategic asset allocation, a return lower than this benchmark is expected.

The Board of Guardians is responsible for deciding how to invest assets. The Board is governed both by the Future Fund and the Higher Education Endowment Fund (HEEF) legislation and the Investment Mandates established by the responsible ministers, being the Treasurer and the Minister for Finance and Administration.

The Board, with the support of the Future Fund Management Agency, builds the investment strategy and is accountable for the performance of the Fund.

Actual investments are made through professional investment managers selected by the Board.

OECD guidelines on SWFs

As shown by the guidelines released by the OECD on 9 April 2008, OECD countries are committed to keeping their investment frontiers open to sovereign wealth funds as long as these funds invest for commercial, not political ends.[17] That is the message in a letter from OECD Secretary-General Angel Gurr a to G7 Finance Ministers detailing a common OECD position on policies towards SWFs.

OECD members have agreed to base their investment policies towards SWFs on existing investment instruments which call for fair treatment of investors. Two key instruments are the OECD Code of Liberalisation of Capital Movements, adopted in 1961, and the OECD Declaration on International Investment and Multinational Enterprises, issued in 1976 and revised in 2000.

They embody five basic principles, including commitments to non-discrimination, transparency, progressive liberalisation and undertakings not to introduce new restrictions and not to insist on reciprocity as a condition for liberalisation. They also involve a process of regular peer review to monitor countries observance of the principles.

OECD investment instruments recognise the right of member countries to take actions to protect national security, and investments by SWFs can raise concerns as to whether their objectives are commercial or driven by political, defence or foreign policy considerations. However, OECD countries have accepted that the national security clause should be applied with restraint and not be used as a general escape clause from their commitments to open investment policies.

Current Australian policy Issues on sovereign wealth funds

The Spring 2007 edition of the Treasury Economic Roundup contained an article on current policy issues.[18] Whilst the article s focus is the economic aspects of the funds, it touches on non-commercial motives. The article found that the funds present few direct threats to the financial system stability (note: a former US deputy Treasury secretary concurs with this view)[19] but concerns over a lack of transparency and non-commercial investment motives may give rise to financial protectionism which might be a bad policy and would be welfare-destroying.

In view of the emerging issues of SWFs, on 17 February 2008, the Australian Government announced a new set of principles (see Attachment B) guiding the review of foreign investment proposals.[20]

The existing set of principles already confers the review power on the FIRB with regard to any foreign investments by foreign governments and their agencies irrespective of size.

The FIRB has now been vested with a role to check the true character of SWFs. In other words, the FIRB now has to scrutinise application from SWFs on the question of how far the commercial agency of any foreign government operates independently and commercially and suggest if a proposal from SWFs is consistent with Australia s national interest.

The determination for approval is ultimately a matter for the Treasurer.

Impacts on investments of the new principles in Australia

It is too early to predict the impact of these new guidelines on the quality and the magnitude of foreign investment in Australia. As the competition for foreign investment is growing across the globe, and as Australia needs productive foreign investment in a broad range of sectors, the new measures need to be conveyed to international companies as not a part of more restriction, but rather as part of the government s honest intention of improving the transparency of the regulatory regime itself.

Recent opinions in the media have taken a critical view of SWFs. At the same time, there are growing cautions about the fall out in the growth of the economy if the investment proposals are discouraged without a transparent and internationally accepted mode of compliance.

The Australian Financial Review on 21 February 2008 in its editorial titled No gain in scaring off sovereign funds , suggested that SWF investments in Australia ought to be welcomed, as long as the transactions treat stakeholders fairly and are in accordance with Australian laws.

Worries that SWFs could wield unhealthy influence surely become relevant only if a proposed deal reaches some significance in scale, or the sensitivity of an industry sector. Australia must uphold the national interest and setting up specific rules for SWFs may serve some efficiency purpose in Canberra, but making too much of it would be counterproductive. [21]

The FIRB approved major SWFs in Australia[22]

A number of some of the world s biggest and most established SWFs have been operating in Australia with sizeable investments.

SWFs of Singapore

The Singapore government-owned Temasek and the Government Investment Corporation (GIC) collectively own more than $20 billion of holdings in Australia. Combined, the two Singapore investors represent the world s second-largest sovereign wealth fund, with assets totalling $US489 billion ($539 billion), according to Morgan Stanley.

Singapore Telecom (SingTel) paid $14 billion in 2001 for Optus, then owned by Cable & Wireless. CitySpring, bought underwater electricity cables company BassLink for $1.2 billion in July 2007. CapitaLand owns 55 per cent of the listed property company AustraLand and is further poised to invest in shopping centres.

Since 1996, the real estate arm of GIC, known as GIC RE, has spent almost $3 billion building a portfolio of prime Australian assets located mostly in Sydney and Melbourne. GIC RE joined a consortium that paid $600 million for the Melbourne Myer store, earmarked for redevelopment, costing $1.2 billion in 2007. GIC RE also acquired a half share in Westfield Parramatta for $717.5 million.

In 2007, Temasek took a 12 per cent stake of ABC Learning, a child care company, with its first direct investment in Australia paying $401 million.

Chinese SWFs

The Chinese government-owned CITIC (the former China International Trust and Investment Company) which took a 10 per cent stake in Portland Aluminium Smelter in Victoria in 1987, became the first Chinese SWF to invest in Australia. Since then, Chinese government-backed enterprises have invested in a diverse range of sectors, from cotton fields to infrastructure and iron ore and coal mines.

In 2007, the FIRB approved Chinese investments totalling almost $5 billion in Australian companies. Two existing Chinese investors, Anshan Iron & Steel and Shougang Steel, have pledged to co-invest in expanding infrastructure and mines, totalling almost $4 billion, in their respective investments.

There are big SWFs from mainland China - China Investment Corporation, China's sovereign wealth fund which formally launched in 2007, is about to make entry in Australia.

CIC currently has assets of $US200 billion, but will ultimately be responsible for managing China s $US1.5 trillion foreign reserves. Since the late 1990s, Australia is said to be one of several key countries targeted for Chinese investment - mainly to secure long-term supply of raw commodities.

For a detail discussion on each SWF, please visit the Carlson Analytics brief on Overseas Sovereign Wealth Funds.[23]

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Attachment A[24]: prescribed sensitive sectors under the Australia-United States Free Trade Agreement (AUSFTA)

For US investors subject to the AUSFTA, the prescribed sensitive sectors are:

  • media
  • telecommunications
  • transport
    • including airports, port facilities, rail infrastructure, international and domestic aviation and shipping services provided within, or to and from, Australia
  • the supply of training or human resources, or the manufacture or supply of military goods or equipment or technology, to the Australian Defence Force or other defence forces
  • the manufacture or supply of goods, equipment or technology able to be used for a military purpose
  • the development, manufacture or supply of, or the provision of services relating to, encryption and security technologies and communications systems
  • the extraction of (or the holding of rights to extract) uranium or plutonium or the operation of nuclear facilities.

Acquisitions in these sectors are subject to different thresholds under the FATA.

Attachment B[25]:guidelines for foreign government investment proposals

Proposed investments by foreign governments and their agencies (e.g. state-owned enterprises and sovereign wealth funds (SWF)) are assessed on the same basis as private sector proposals. National interest implications are determined on a case-by-case basis.

However, the fact that these investors are owned or controlled by a foreign government raises additional factors that must also be examined.

This reflects the fact that investors with links to foreign governments may not operate solely in accordance with normal commercial considerations and may instead pursue broader political or strategic objectives that could be contrary to Australia s national interest.

The Government is obliged under the Foreign Acquisitions and Takeovers Act 1975 to determine whether proposed foreign acquisitions are consistent with Australia s national interest. In examining proposed investments by foreign governments and their agencies, the Australian Government will typically have regard to the following six issues.

1.             An investor s operations are independent from the relevant foreign government.

In considering issues relating to independence, the Government will focus on the extent to which the prospective foreign investor operates at arm s length from the relevant government.

It also considers whether the prospective investor s governance arrangements could facilitate actual or potential control by a foreign government (including through the investor s funding arrangements).

Where the investor has been partly privatised, the Government would consider the size and composition of any non-government interests, including any restrictions on governance rights.

2.             An investor is subject to and adheres to the law and observes common standards of business behaviour.

To this end, the Government considers the extent to which the investor has clear commercial objectives and has been subject to adequate and transparent regulation and supervision in other jurisdictions.

The Government will examine the corporate governance practices of foreign government investors. In the case of an SWF, the Government would also consider the fund s investment policy and how it proposes to exercise voting power in relation to Australian companies.

Proposals by foreign government owned or controlled investors that operate on a transparent and commercial basis are less likely to raise additional national interest concerns than proposals from those that do not.

3.             An investment may hinder competition or lead to undue concentration or control in the industry or sectors concerned.

These issues are also examined by the Australian Competition and Consumer Commission in accordance with Australia s competition policy regime.

4.             An investment may impact on Australian Government revenue or other policies.

For example, investments by foreign government entities must be taxed on the same basis as operations by other commercial entities. They must also be consistent with the Government s objectives in relation to matters such as the environment.

5.             An investment may impact on Australia s national security.

The Government would consider the extent to which investments might affect Australia s ability to protect its strategic and security interests.

6.             An investment may impact on the operations and directions of an Australian business, as well as its contribution to the Australian economy and broader community.

The Government would consider any plans by an acquiring entity to restructure an Australian business following its acquisition. Key interests would include impacts on imports, exports, local processing of materials, research and development and industrial relations.

The Government would also consider the extent of Australian participation in ownership, control and management of an enterprise that would remain after a foreign investment, including the interests of employees, creditors and other stakeholders.



[1] Foreign Investment Review Board, General Policy , http://www.firb.gov.au/content/policy.asp?NavID=1, accessed 23 June 2008.

[2] Under the Australia-United States Free Trade Agreement (AUSFTA) which came into effect on 1 January 2005, a US investor is a national or permanent resident of the United States of America; a US enterprise; or a branch of an entity located in the United States of America and carrying on business activities there.

[3] This Summary of Australia s Foreign Investment Policy should be considered in conjunction with the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Regulations 1989.

[4] A substantial interest occurs when a single foreigner (and any associates) has 15 per cent or more of the ownership or several foreigners (and any associates) have 40 per cent or more in aggregate of the ownership of a corporation, business or trust, and $50 million prior to December 2006.

[5] The FATA does not apply to investments by US investors in those financial sector entities which are subject to the operation of the Financial Sector (Shareholdings) Act 1998; the US thresholds are subject to annual indexation; $100 million during the calendar year 2007; the AUSFTA prescribed sensitive sectors are set out in Attachment A; $871 million during the calendar year 2007.

[6] $50 million prior to December 2006.

[7] The guidelines for foreign government investment proposals are provided at ATTACHMENT B, as announced in the Treasurer s media release of 17 February 2008.

[8] Urban land is defined as all land situated in Australia other than rural land. Rural land is land that is used wholly and exclusively for carrying on a substantial business of primary production. Further details of the urban land policy are provided in the document Foreign Investment Policy - Urban Land (real estate), available on the website at www.firb.gov.au.

[9] Examinable proposals include prescribed sensitive industry sectors, and proposals related to acquisitions of real estate.

[10] The 30-day statutory examination period commences upon receipt of a valid notice under section 26A; a further 10 days from the date of decision is available under the FATA to notify the parties of the decision.

[11] This is a brief summary of the urban land policy. Further details of the urban land policy are provided in the document Foreign Investment Policy - Urban Land (real estate), available on the website at www.firb.gov.au.

[12] For the name and locations of current ITRs, refer to the document entitled Foreign Investment Policy Integrated Tourism Resorts, available on the FIRB website.

[13] The requirements that previously applied to broadcasting and newspapers were removed following proclamation of the Broadcasting Services Amendment (Media Ownership) Act 2006 to come into effect on 4 April 2007.

[14] S. Johnson, The Rise of Sovereign Wealth Funds, we don't know much about these major state-owned players , Finance & Development, September 2007, Vol 44, Number 3, International Monetary Fund, Washington D.C. USA. http://www.imf.org/external/pubs/ft/fandd/2007/09/straight.htm, accessed on 23 June 2008.

[15] IMF Survey Online, IMF Intensifies Work on Sovereign Wealth Funds, IMF Survey Magazine, 4 March 2008, http://www.imf.org/external/pubs/ft/survey/so/2008/POL03408A.htm accessed on 23 June 2008; Note: The band of lower and upper level assets of the two SWFs (UAE and Singapore) is in essence an IMF approximation of the value of the funds; the exact information has not yet been disclosed by the respective governments.

[16] International Monetary Fund, Sovereign Wealth Funds A Work Agenda , Monetary and Capital Markets & Policy Development and Review Departments, IMF, 29 February 2008, p.9, http://www.imf.org/external/np/pp/eng/2008/022908.pdf, accessed on 23 June 2008.

[17] The report is available here: http://www.oecd.org/dataoecd/34/9/40408735.pdf

[18] W. Devlin & B. Brummitt, A few sovereigns more: the rise of sovereign funds, in Treasury Economic Roundup, Spring 2007, Commonwealth of Australia, pp. 119-136.

[19]E. Thornton & S. Reed, Who s afraid of the Mid-East money? Business Week, 21 January 2008, p. 44.

[20] W. Swan (Treasurer), Government Improved Transparency of Foreign Investment Screening Process, Press Release, Brisbane, 17 February 2008. http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/009.htm&pageID=003&min=wms&Year=&DocType=, accessed on 23 June 2008.

[21] Editorial, No gain in scaring off sovereign funds , Australian Financial Review, 21 February 2008, p.78.

[22] F. Chang, Foreign Superpowers eye Australia , The Australian, 18 February 2008, p.29.

[23]Carlson Analytics, Sovereign Funds, http://www.caslon.com.au/sovereignfundnote5.htm, accessed 01 May 2008.

[24] The Foreign Investment Review Board, Summary of Australia s Foreign Investment Policy - Attachment C, http://www.firb.gov.au/content/_downloads/General_Policy_Summary_April_2008.pdf, accessed on 23 June 2008.

[25] W. Swan (Treasurer), Government Improves Transparency of Foreign Investment Screening Process , Press Release, 17 February 2008, http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/009.htm&pageID=003&min=wms&Year=&DocType=0, accessed 23 June 2008.

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