Chapter 6
Foreign investment and agricultural development: the Ord irrigation area
case study
6.1
As part of the committee's inquiry, it considered the issue of foreign
investment in major agricultural developments. As a specific and topical
example, the committee focussed on the Ord irrigation area development as a
case study. In April 2013, the committee held public hearings in Perth and
Kununurra and undertook site visits of agricultural properties in northern
Western Australia.
6.2
This chapter considers the issues arising from foreign investment in the
region and the implications it has for foreign investment in future
agricultural developments. Following an outline of the Ord irrigation area, the
chapter discusses the key issues of capital investment, water entitlements (in
order to assist capital investment), land tenure and the community views
towards foreign investment in this region.
Figure 6.1—Rural and Regional
Affairs and Transport Committee members visiting agricultural producers in
northern Western Australia
The Ord irrigation area
6.3
The Ord irrigation area was established in 1971 when the Ord River Dam
was completed and created Lake Argyle near Kununurra, Western Australia. This
resulted in the Ord Stage 1 development of 14 000 hectares of irrigated
agricultural land. The current produce in this area includes a variety of
horticultural produce, chia[1],
and sandalwood. A map of the Ord irrigation expansion is included in Appendix 6.
6.4
In November 2012, the Western Australian Government announced that
Kimberley Agricultural Investments (KAI), the Australian wholly owned
subsidiary of the privately owned Chinese based company Shanghai ZhongFu
(Group) Co, was the successful bidder for the development of the Ord Stage 2
under the Ord-East Kimberley Expansion Project.[2]
6.5
Under the proposed arrangements, KAI would lease land from the Western
Australian Government and develop 13 400 ha of farmland, primarily for growing
sugar cane. At the time of the committee's visit to the Ord irrigation area,
the KAI and the Western Australian government had not reached a formal
agreement on the development of the Ord and the negotiations are expected to be
completed by mid‑2013.[3]
Therefore, details about this aspect of the Ord development were not fully available
to the committee for examination.
Figure 6.2—Committee members'
aerial viewing of the Ord River Dam
Key issues
Capital investment
6.6
The committee heard evidence that the challenges in attracting domestic capital
investment for major agricultural developments was a significant reason that foreign
investment was sought after by agricultural businesses.[4]
The committee heard that for major agricultural developments to occur, the
industry should move to more concentrated capital investment. Foreign
investment was said to provide sources for such capital more readily than from
domestic investors. The committee also heard that agriculture was an industry
that required 'patient' capital, that is, capital investment that took a
long-term view to returns on the investment. Finally, the committee was told of
the barriers imposed by the Australian banking sector towards domestic
investment in agriculture which led companies to source capital off‑shore.
These three issues will be discussed below, in turn.
Structure of capital – concentrated
and patient capital in agriculture
6.7
The committee heard evidence that for major agricultural developments to
occur in Australia, the agriculture industry needed to move from its
traditional diversified capital structure to more concentrated capital
investments. As Mr Andrew Murray, Chair, Western Australian Regional
Development Trust, told the committee:
If you look at the use of capital in Australia historically,
it mirrors the use of capital elsewhere. Most people, when confronted by the
modern way in which capital is applied and used in mineral resources, forget
that once the resourcing of mines and the exploitation of resources were
similar to what has applied to farming. In other words, they were small-scale,
and the great mining houses resulted from a collection and an aggregation of
small mining operations, because they needed economies of scale, basically, on
both the finance and the technical basis. A similar thing is happening now in
agriculture, where you find that the formerly dispersed financial model, where
money was fed into small family or corporate organisations, is now shifting
into larger corporate concentrations of capital.[5]
6.8
Furthermore, Mr Murray noted foreign investors were providing more
concentrated levels of capital in Australia:
Interestingly, [corporate concentrations of capital]...is
much more a feature of the foreign investor than the Australian investor, and
one of the issues you need to address—which I do not know the answer to—is why
Australian capital is much more negative about that sort of investment and
application of financial know-how and investment than is foreign capital,
especially bearing in mind that it is expensive for foreigners to invest in
Australia—it is not cheap; it is very expensive. So they see an application of
capital in ways which Australians, so far, have not.[6]
6.9
In a similar respect, the committee heard about high level of 'patient' capital
required for sugar development in the Ord irrigation region. A local producer
from the Ord stage 1 area was sceptical of the possibilities for the
development of land from Ord stage 2 to occur without significant foreign
investment, which he implied was a key source of patient capital:
Senator EDWARDS: But the actual development of the
land [at Ord stage 2] is secondary investment. Somebody has to clear it
all, somebody has to level it all, somebody has to put the channels in and
somebody has to redevelop the land. All of those things still have to happen,
don't they?
Mr Boshammer: That is right, and that is a
significant investment. It will be done gradually by people in private
capacities. If it is given to them, however, I doubt very much whether we will
have a sugar industry if it is left in a private capacity without significant
foreign investment. That is a huge investment, and there is just no patient
capital available in Australia for an investment like that. And we probably
don't know the market well enough to know that we can market the product
long-term.[7]
Figure
6.3—Aerial view of the Ord Stage 1 area showing the scale of current
agricultural production
Domestic banking constraints
6.10
The TFS Corporation noted that it was required to look for sources of
capital off-shore due to difficulties in obtaining finance from Australian
banks. TFS representatives told the committee that it received 'unfair'
treatment from its bank when seeking finance for its business. As a result TFS
stated that it was forced to seek capital investment off-shore.[8]
As the Hon Mr Chris Ellison, Advisory Director, TFS Corporation further
explained:
...We believe that we abided by our banking covenants. We
believe that we were charged banking fees which were exorbitant, somewhere in
the region of three-quarters of a million dollars. That is what we are saying.
We are saying that the bank had made a decision to get out of agriculture and
used that decision, that policy, and followed it and pursued whatever means it
could to get out of the agricultural sector.
We do not believe that we are alone on this issue. We think
that other businesses in Australia have experienced the same thing. When you
talk about foreign investment, TFS would like nothing more than to have an
Australian banking system providing finance to have Australian investors.[9]
6.11
In a similar context, the committee heard evidence about the limited
access of finance for agricultural businesses due to the level of interest
rates and the difficulty this creates for financial returns.[10]
However, another witness noted that the risk‑averse bank lending by
Australian banks provided a greater level of security and protection from the
global financial crisis.[11]
Figure 6.4—Aerial view
showing the scale of the current Ord development
Committee view
6.12
The committee notes that the typically diverse and small-scale structure
of domestic capital in the agricultural industry is a major driver of companies
accepting large-scale capital investments from off-shore. This, in turn, has
fuelled the current concerns regarding foreign investment in Australia. Foreign
investment has been, and will continue to be, a legitimate and important source
of capital in Australian agriculture. However, this does not mean that greater
efforts should not be made to improve access to capital from Australian
sources.
6.13
The committee understands that agriculture is an industry which is
subject to many short-term and medium-term uncertainties. However, the
committee also considers that increased long-term investment in agriculture is
not only beneficial for the industry and the nation, but can also provide
suitable financial returns to investors. Such returns are likely to improve
with future growth in capital investment and the resulting development of the
industry. So that the Australian economy can maximise the benefits from growth
in agriculture, the committee considers it necessary that the government
develop policies and establish structures that will encourage long-term (or
patient) capital investment from Australian investors, including Australian
superannuation funds and other domestic investors with long-term horizons.
Recommendation 26
6.14
The committee recommends that the Australian government commission an
extensive and independent review of possible incentives and barriers for long‑term
capital investment in major Australian agricultural developments by Australian
investors, including superannuation funds and other domestic investors with
long-term horizons. The review should make a comparative analysis with the
incentives for foreign investors to invest in major Australian agricultural
developments.
6.15
Based on the findings of the review, the Australian government should develop,
publish and implement policies to encourage long-term domestic capital
investment in Australian agriculture. The policies should specifically identify
opportunities for Australian superannuation funds and other domestic investors
with long-term horizons and where appropriate, the policies should be
coordinated with relevant state governments and agencies.
6.16
The committee acknowledges the evidence provided by TFS Corporation that
outlined the financial disincentives that the business faced in obtaining
capital through Australian banks. The committee is also mindful that other
industry participants found that current domestic banking arrangements made
borrowing difficult. One of the consequences is that local business may be
pushed towards foreign investment when they would prefer domestic sources of
capital.
6.17
The evidence received regarding this issue came late in the inquiry and
it was impractical for the committee to fully examine the issue with input from
relevant stakeholders. However, as the committee considers that appropriate
access to domestic finance from banks is related to the broad themes of the
inquiry, the committee intends to write to a number of banking industry
stakeholders seeking explanations of these matters and, where appropriate,
publish the responses received on the committee's website. Furthermore, the
committee encourages the government to use any of the responses that the
committee may publish and the evidence already available as part of this
inquiry, to address the broader issue of improving access for Australian
agricultural businesses to domestic finance.
Recommendation 27
6.18
The committee recommends that, as part of the review and policies
established under recommendation 26, and with appropriate consultation with the
banking industry, the agricultural sector and other interest parties, the
government should consider appropriate avenues for improving access for
Australian agricultural businesses to domestic finance from Australian banks.
Water entitlements and access to domestic capital
6.19
The committee was informed that water infrastructure and subsequently a
water market were essential to the development of agricultural regions in
northern Australia. As Mr Andrew Murray explained to the committee, water was
one of a number of key factors in this regard:
Regional development cannot occur sustainably unless the
basic development underpinnings are available; water, power, transportation,
communications, housing and social resources. Of these, in WA water is often
the biggest challenge to regional development.[12]
6.20
Mr Murray went on to add:
Water use must be sustainable. Sustainability is predicated
on good data, experience and science. WA has an estimated 12½ thousand
gigalitres of unallocated surface and ground water. Since only 15 per cent of
WA has been water mapped, inadequate water mapping and a lack of data—which is
not surprising in a state the size of Western Europe—means that any estimate of
water for development must presently be viewed as conservative... Water
priorities and projects must feed in to such Commonwealth and state planning.[13]
6.21
The committee heard evidence that the creation of a water market would
help manage diverse cropping in the Ord irrigation area and potentially assist
the development of the sugar industry that is being considered by foreign
investors. As a local Kununurra producer told the committee in the following
exchange:
CHAIR: ...if there were a market and a price on the
water, wouldn't what happens with the water be driven by the commercial return
on the water, rather than you getting the land and 17 megalitres a hectare...[14]
Mr Boshammer: Absolutely. There would be some
advantages and there probably would be a good combination between the
sandalwood, which now is not using very much water as it gets older and it has
got its roots fairly deep down, and actually doing some good for the watertable
and maintaining that. There would be some real benefits for the sandalwood
companies in being able to sell their allocation to the Chinese sugar
companies.[15]
6.22
Another witness at the Kununurra public hearing noted the role that market-driven
water entitlements could play in the future development of the Ord irrigation
area. Mr Tony Chafer commented based on his previous experience with the issue
in the following exchange:
CHAIR: ...there is about 80,000 hectares [in the Ord
region] if you take the rising sand country. With good technology, there [are]
many thousands of hectares there. If you had freehold title on Ord stage 1 and
a water licence entitlement, were in the sandalwood business, only needed two
megalitres a hectare a year and could trade your other water, and there might
be someone out on that sand country, like down at Carnarvon, doing fertigation
who wanted to fund his fertigation through the sale of some of his water, all
of that would make it more of an incentive for young blokes to get into the
market, wouldn't it?
Mr Chafer: It definitely would, and it would make an
incentive for people to use their water a little more smartly. I would love to
see trading. In fact, in a previous life I was the Chief Executive Officer of
the Ord Irrigation Cooperative here...and we had the biggest water allocation
licence in Western Australia. Unfortunately, we could trade between ourselves,
but we could not trade externally. In fact, we effected the only trade in the
Ord when another farmer in the sand country wanted to come along. We spent a
million dollars on improvements in the irrigation infrastructure and sold a bit
of the water entitlement that we had saved to that person. But it had to remain
within our licence...
CHAIR: If we built it to 100,000 or 80,000 hectares,
that would be enough, I reckon, to create a market.
Mr Chafer: Yes.
CHAIR: If the sugar job got a pain in the guts and it
was a rotation a couple of years out of sugar, you might be able to grow
something, sell some water and fund it. It just gives more flexibility.[16]
Mr Chafer: Absolutely.
Committee view
6.23
The committee is of the view that irrigation areas such as the Ord
irrigation area, should establish a system of water entitlements that are
environmental sustainable, tradable, commercially viable, and that attribute
appropriate value to the water used. The committee is mindful of the difficult lessons
that can be learnt from the over‑allocation of water resources in the Murray-Darling
Basin and over-confidence about the long-term availability of water. It urges
relevant government agencies and stakeholders to move to a water market early
and to give adequate consideration to these factors if and when such a system
is created.
6.24
Furthermore, the committee considers that the creation of appropriate
water entitlements is a key mechanism for creating levels of certainty around
the monetary value of irrigated farming in areas such the Ord. A likely
corollary of the monetary value that water entitlements would attribute to
farms is that it will provide more scope for relevant businesses to borrow from
domestic banks in order to raise capital. This in turn could reduce the
pressures on companies to source capital from foreign financiers and reduce the
associated risks to Australia’s national interest.
Recommendation 28
6.25
The committee recommends that the Australian government encourage the
Western Australian and Northern Territory governments to consider possibilities
for establishing a water market (including tradable water entitlements) for
irrigation developments, including the Ord, in Australia's north. The
information about foreign ownership of any water entitlements established under
this regime should be included in the national foreign ownership register for
agricultural land.
6.26
In establishing water entitlements, the committee urges the relevant
bodies to consider lessons from the Murray-Darling Basin, including avoiding
problems such as over-allocation, the value of different water security types,
and water efficiency mechanisms. In addition, any new water entitlements should
be developed in a manner that can allow for transparent oversight of the use
water resources by foreign investors. As such, the committee recommended in
chapter three that foreign interests in Australian water entitlements should be
included as information collected under the government's national foreign
ownership register for agricultural land.
Land tenure
6.27
The committee heard evidence that agricultural development in Western
Australia is intimately related to the issue of land tenure. For example, Mr
Murray noted the commitment of relevant state and federal governments to
developing agriculture in Australia's northern regions, while noting the
relationship of land tenure arrangements in Western Australia:
It is worth noting the broad federal, state and territory
intergovernmental support for agricultural development in Northern Australia.
At the fifth meeting of the Northern Australia Ministerial Forum, on 22
November 2012:
Ministers agreed that the
development of agriculture in northern Australia is a rapidly emerging policy
priority across the north, supporting national and international food security
and regional development more broadly.
WA is a vast underdeveloped state of great variety and
resource. It is the size of Western Europe, or five times the size of France,
with just over two million people in it. Only seven per cent of WA is freehold.
Of all tenures, freehold is the most important in underpinning modern societies
and economies.[17]
6.28
However, the extensive leasehold arrangements could have longer-term benefits
in relation to foreign investment in Western Australia. As Mr Murray noted when
questioned about the leasehold arrangements for the Ord development:
...If you want to retain and store and increase value, the best
thing you can do as a government which has an investment is have a leasehold
because eventually you get it back. So without going into the pros and cons of
that specific deal about which I do not have deep understanding, I would
suggest to you that the model is a pretty good one because you have not sold it
off permanently. You have retained an asset that you have leased out.[18]
6.29
Despite the potential benefits of such leasehold arrangements, the
committee also heard that where foreign acquisitions in agricultural land are
made from state governments, such as crown land, the Foreign Investment Review
Board (FIRB) is not involved in the review process. As Mr Wilson noted in the
following exchange, FIRB is constrained in reviewing such acquisitions because
of the provisions in the Foreign Acquisitions and Takeovers Act 1975 (FATA):
Mr Wilson: It is not a matter for the board [FIRB],
it is a matter under the act (FATA). Ever since the Foreign Acquisitions and
Takeovers Act was put in place in 1975, there has been a blanket exemption for
sales by governments.
CHAIR: Government to government.
Mr Wilson: Or government to private. So any sale by a
state or territory or Commonwealth government is explicitly excluded from the
actual Foreign Acquisitions and Takeovers Act.
CHAIR: That is very interesting. So, in the national
interest, when we measure all this stuff—given the unexploited mosaic of
opportunities of a lot of Crown land in Northern Australia—there is the
possibility that could run off the rails if there isn't some sort of oversight.
Is that going out too far with the thought?
Mr Wilson: I suppose that is a matter for the
legislators.
Mr Rollings: I would hazard a guess there could be
some constitutional constraints behind that legislation. That is just a
thought.[19]
6.30
On the other hand, outside of crown land, the committee was told of the
limits of leasehold arrangements for managing foreign investment. In
particular, it was noted that such an arrangement was unlikely to be suitable
for private-owners of freehold titles. The Western Australian Farmers
Federation (WAFF) was asked whether leasing was a 'pathway' for foreign
investment in Australia. This resulted in the following exchange:
Mr Park: Well, let me know when you convince someone
that holds a freehold title to give it back and let the government have the
leasehold. The next one will be the first I suspect—willingly anyway.
Senator HEFFERNAN: That would be the catch. Who is
going to pay for the title to let the cocky get out and retire while someone
else takes on the lease?
Mr Park: That is exactly right. So who is going to buy
that?
Senator HEFFERNAN: It would have to be very patient
capital.
Mr Park: Traditionally we are leaseholders with it
being government owned.[20]
Committee view
6.31
The committee understands and respects that land tenure is an issue for
State governments. However, given the feedback from stakeholders in Western
Australia that is outlined above, the committee encourages the Western
Australian government to address these concerns in a manner that promotes the
ability of Australian companies to develop agricultural land in the region.
6.32
At the same time, the committee is mindful of some of the benefits that
large state government held leases have for managing foreign investment in new
developments such as the Ord irrigation area. The committee considers that
there are significant limitations to suggestions that all foreign investment
should be based on leasing arrangements as this would make foreign investment
impractical for the large number of privately-owned freehold farms. However,
the use of long-term lease arrangements to encourage foreign investment in
crown land is generally supported by the committee. This is because in such
cases, the overall ownership of the agricultural asset remains within Australia
and ultimately under Australian control.
6.33
In addition, the committee urges the commonwealth, state and territory
governments to consider developing a common policy for FIRB to be consulted in
the case of significant foreign acquisitions from respective governments. The
committee considers that FIRB would only be consulted in those cases that FIRB
would review equivalent foreign acquisitions from private Australian
businesses. The committee also acknowledges that any final decision for foreign
acquisitions from federal, state or territory governments should remain the
prerogative of the respective government.
Recommendation 29
6.34
The committee recommends that the commonwealth, state and territory
governments work together to consider appropriate policy options for consulting
with FIRB in cases of proposals for significant foreign acquisitions from
respective governments bodies.
Community sentiment towards foreign investment
6.35
The lack of confidence of local communities about the benefit of foreign
investment has been a common theme throughout this inquiry. However, unlike
some of the concerns expressed elsewhere, the Kununurra council expressed
general support for foreign investment in the Ord irrigation case. The shire
President, described this perspective as part of the following exchange:
Councillor Moulden: ...This is a very practical town.
We do not have an ideological standpoint to start with. I have been asked the
question before: what would happen and what would be the reaction here if the
bid went to the Chinese? My response to that is: if that is the best outcome
for the community here, the state and the country, how could you oppose it?
CHAIR: I guess you would like the capacity, the
sovereignty of Australia, to provide the hospitals and the roads, so we must
make sure they are in the revenue base.
Councillor Moulden: Absolutely. I can tell you from
my observation that, by and large, there has not been any negative reaction to
the success of the Chinese bid. The principals of Shanghai Zhongfu fronted a
public meeting in Kununurra in December [2012] after it had been announced they
were the preferred tenderer. Maybe 200-plus people were in the room. There was
opposition voiced by maybe three people. Generally, the community is excited
that something is happening. They were curious to see the people who are going
to be living with them. From my point of view, the Chinese have handled their
relations with this community absolutely perfectly. They have been visible.
They have been upfront and they have explained themselves.[21]
6.36
Similar support was expressed by other stakeholders.[22]
Committee view
6.37
The committee was encouraged by the general support for the large-scale foreign
investment in the Ord irrigation area among local community representatives and
stakeholders. The committee considers that the Ord development with KAI appears
to be proceeding in a manner that will provide significant economic benefit for
the region while at the same time sensitively managing local relationships and
social interests.
6.38
In this respect, the committee notes correspondence received from the Premier
of Western Australia that the KAI proposal forms part of 'future potential for
irrigated agriculture in the region [that] based on best practice irrigation
practices has been estimated...to be as much as 100,000 ha.'[23]
The result of such a development could greatly assist Australia's contribution
to the future global food task.
6.39
Therefore, the committee is generally supportive of the project and the
approach taken to date by the Western Australian Government. However, the
committee urges the Western Australian Government to manage remaining arrangements
with KAI in a way that will maximise the potential for Australian producers to
participate in the market created by the Ord expansion. Furthermore, the
Western Australian Government should ensure that KAI participates fully in the
marketplace in a manner that is commercially motivated, fair to Australian
businesses, and that protects Australia's tax revenue.
Senator the Hon Bill Heffernan
Chair
Navigation: Previous Page | Contents | Next Page