US investor frustration boils over

Article by Tony Boyd courtesy of the Australian Financial Review

When it comes to bouquets and brickbats, it is rare to see a brickbat as formidable as the one that just hit the Foreign Investment Review Board chairman David Irvine.

It was lobbed by the American Chamber of Commerce in Australia (AmCham), PwC Australia, and representatives of United States companies with a combined market value of about $US3.5 trillion.

After more than six months’ work, the coalition has published a report that tears strips off the FIRB and reminds readers Australia has the fifth-most restrictive foreign investment rules in the OECD.

It criticises FIRB for its risk-averse culture, opaque processes, the lack of timeliness of decision making and its apparent lack of awareness of the damage it is doing to Australia’s image.

One sentence jumps out at Chanticleer: “There is a growing perception among US dealmakers that Australia does not welcome investment or is not an easy place to do business.”

The report includes a less than subtle reminder of the growing importance of the geopolitical strategic partnership between the US and Australia and the fact that Australia’s foreign investment is forecast to go backwards this year.

The US companies and their offshoots happy to be associated with the AmCham report include Blackstone, Boeing, Brookfield Asset Management, Chevron Australia, Citi Australia, Google Australia and New Zealand, Pfizer Australia and New Zealand, Tesla, and Twitter Australia.

Others on the committee that contributed to its contents include Joe Hockey’s Bondi Partners, Gina Rinehart’s Hancock Prospecting and institutional investor QIC.

It is noteworthy that very few of these organisations have ever been publicly critical of the FIRB, possibly because of fear of the impact it would have on their reputation with government.

The report, Attracting US Investors to Australia: The opportunity is now, is pitched by PwC chief executive Tom Seymour and AmCham CEO April Palmerlee as a blueprint for “making Australia the preeminent destination for investment from the United States”.

The press release issued with the document includes praise for the country’s regulators. It says that over the past few decades they have led the world in creating a “stable and trusted environment”. It goes on to say: “Our regulators do a great job, but is it time to empower them with a bias for action to encourage investment.”

There are five pages in the report covering a reform agenda for FIRB. This exposes the simmering frustration among American multinationals about the way Irvine and his colleagues are managing their role.

Although, to be fair to Irvine and his colleagues, some of the blame for the approval pipeline being clogged up must rest with the Treasurer, Josh Frydenberg.

That AmCham and some of its most influential members felt the need to go public says the strategy of lobbying behind closed doors has failed.

There is no doubt PwC and AmCham have done a comprehensive job of analysing both the strengths and weaknesses of the FIRB and its guiding legislation, the Foreign Acquisitions and Takeovers Act 1975.

The report calls out 10 burning issues that need to be addressed by the FIRB as part of a micro-economic reform agenda that also includes proposed changes to tax policy, skilled migration and regulatory cultures.

The report criticises FIRB’s habit of consulting with other regulatory agencies such as the Tax Office, the Australian Competition and Consumer Commission and others before making decisions.

“In circumstances where the foreign investment decision is based in policy, not in law, this allows agencies to reach beyond their usual powers to make decisions for policy reasons, rather than based on the application of the relevant laws governed by that agency,” the report says.

“If FIRB moves from its intended gatekeeper role to that of a regulator, it removes the usual rights of appeal against decisions which domestic investors avail of, requiring US investors to obtain ex-ante approval from consulted agencies without the ability to legally challenge rulings.”

It says when FIRB’s approval decisions are policy based and not based on specific legislative criteria it creates uncertainty that criteria might move unexpectedly.

It says that global transactions where Australia plays a minimal role generally still require FIRB approval, “meaning global deal activity can be hampered by the need for foreign investment approval in Australia. This also has negative impacts on Australia’s perceived openness to investment from the United States if it is too regularly seen as an impediment,” the report says.

The report criticises the detailed and unlimited tracing provisions in the foreign investment law for interests in a company where investors do not have a controlling stake in the company.

The report has a go at the rule that any entity inserted between an Australian company and the ultimate parent company of the acquirer does not qualify for the higher foreign investment screening threshold, available for countries with whom Australia has entered into a free trade agreement.

It criticises the expansive definition of foreign government investor, which means that many private US investors such as private equity funds can be considered to be foreign government investors where the US government invests in their fund.

AmCham is not happy with the high fees involved in FIRB applications, which rose 367 per cent to a maximum of $500,000 on January 1. “The high level of fees is exacerbated when there is a competitive auction process and the seller requires all bidders to seek FIRB clearance as part of the auction process, leading to FIRB receiving multiple fees for a single transaction,” the report says.

It criticises the new “call in” powers that permit the government to review foreign investments that did not require approval at the time of investment, for up to 10 years from when the investment in question was undertaken. “The length of time exacerbates uncertainty and risk for investors, particularly for long term and capital intensive investment propositions.”

Finally the report says the introduction of “last resort” powers that permit reviews of a decision approving an investment for national security reasons where there has been a material change in circumstances mean “significant uncertainty and sovereign risk to foreign investors”.

The report has an eight-point plan for unclogging FIRB’s approval pipeline, which is said to have stretched out to six months.

The recommendations for reform include the publication of guidance about the application of foreign investment policy, expanding existing bilateral country agreements with the US, introducing a passport system for regular US investors, limit the need for approvals of restructures with no effective change of control, ensure the treatment of US quasi-government funds does not unnecessarily restrict capital flows and introduce a review process, or combine foreign investment decisions with existing review processes within the ATO and other relevant government agencies.

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