An issue which has received significant media coverage in recent times has been whether the Government should put in place tighter controls on foreign inbound investment in Australia's agri-sector, particularly investments made by foreign government investors (foreign governments and related entities such as state-owned enterprises).
In this article we discuss the thresholds that apply for investments in agricultural land and agribusiness for both foreign private and foreign government investors. We also compare the Australian regulatory framework to the New Zealand foreign investment regime. Finally we set out what lies ahead for foreign investment in Australia's agri-sector.
Foreign investment has in general received strong bipartisan support in Australia. The Government has confirmed its position in relation to investment in the agri-sector in both its Green Paper on Australia's National Food Plan and its White Paper on Australia in the Asian Century. The Opposition is also supportive of foreign investment but advocates stricter controls on acquisitions of both farm land and agribusiness and the continued automatic scrutiny of investments from foreign government investors.
Both the Government and the Opposition are also keen to develop Australia's Top End, as evidenced by the Government's Feeding the Future joint report with the People's Republic of China Government (see our previous alert on 'Strengthening China-Australia relations in agriculture to feed the future') and the Coalition's recently leaked draft proposal to use tax incentives to encourage businesses to relocate to northern Australia.
Regulatory regime for agri-sector transactions
In Australia, there is generally no requirement for private foreign investors to obtain approval from the Foreign Investment Review Board ('FIRB') to acquire 'rural land',- that is, land used wholly and exclusively for carrying on a business of primary production including the cultivation of land, animal husbandry, farming, horticulture, fishing and forestry.
However, any purchase of rural land by a foreign government investor does require approval.
By contrast, purchases of Australian urban land (land that is not 'rural land') must be approved by FIRB, unless one of the limited exemptions applies.
In the minds of some parts of the community, it is anomalous that a foreign investor can acquire large tracts of farm land without any need to obtain approval from FIRB but cannot buy a residential property without FIRB approval. The Opposition believes some limits are needed and have proposed a review threshold of $15M for purchases of rural land.
Where a private foreign investor seeks to acquire an interest in an Australian agribusiness (i.e. a business or corporation, as distinct from land), FIRB approval must be obtained where this interest is greater than 15% and where the imputed market value or the gross assets of the business or corporation exceeds $248M (other than for US or NZ investors, where a threshold of $1,078M applies). All 'direct investments' by foreign government investors however require approval regardless of value.
Some commentators have said that the $248M threshold is too high for agribusiness (given the nature and scale of agribusinesses in Australia). In response, the Opposition has proposed some reform in this area. It has suggested adding agribusiness to the list of prescribed sensitive sectors of the economy (currently banking, civil aviation, airports, shipping, media and telecommunications) which have additional statutory requirements for investment or other statutory limits on foreign ownership. As a result, additional statutory requirements would need to be introduced and it is not clear what is proposed in this respect. The Opposition has also suggested lowering the monetary threshold triggering FIRB review for agribusinesses to the lower of $53M and the current threshold (which could be as low as 15% of $248M).
Where approval is required, FIRB may block or impose conditions on the proposed acquisition if it is considered to be contrary to Australia's national interest (see our previous alert, 'Australian Government develops a National Food Plan', which outlines the principles underpinning this assessment).
Contrast with the New Zealand regulatory position
The New Zealand foreign investment review framework regulates foreign investments in:
- 'significant business assets' – acquisitions of more than 25% of a business or company whose assets exceed NZ$100M (and NZ$477M for Australian private investors); and
- 'sensitive land' – rural land in excess of five hectares, and other types of land in excess of 0.4 hectares that is (or adjoins) an area including waterways, parks, the foreshore, culturally or environmentally significant land and other areas of natural beauty.
There are some significant differences between the way in which Australia and New Zealand regulate investments in the agri-sector.
Firstly, acquisitions of sensitive land require consent from the Overseas Investment Office ('OIO') (the New Zealand regulator) regardless of the value of the proposed investment. This means that a greater number of rural land transactions, as a proportion of all foreign investment proposals, are being reviewed by the OIO compared to FIRB.
Secondly, in addition to the statutory criteria that must be satisfied for all foreign investments, there are extensive additional criteria for sensitive land acquisitions. These include a requirement that an acquisition of rural land be of substantial and identifiable benefit to New Zealand and that the land has been offered for sale in an open market to New Zealanders. Additionally, for large rural land transactions (172 hectares for a dairy farm, 443 hectares for a sheep farm), the OIO must also take into account whether New Zealand's economic interests will be improved by the proposed investment and the extent to which New Zealanders will oversee or participate in it.
Finally unlike Australia, there is no specific regulation of urban land or special thresholds for foreign government investors.
Future trends in the agri-sector
We think in the short to medium term changes will be made to the regulatory framework to require FIRB to review a higher number of rural land and agribusiness transactions, especially if the Opposition wins the general election later this year. This would be more consistent with the approach taken by our closest neighbour New Zealand.
However, there is unequivocally a major role for foreign capital to play in funding the development or expansion of projects in Australia's agri-sector. The recent initiative by Shanghai Zhongfu (a private Chinese company) to develop the Ord River Basin in Western Australia, is a case in point. Our politicians will need to ensure any increased regulation does not set the bar too high and consequently result in the failure of projects, which otherwise have significant commercial merit, to proceed. To date we consider that FIRB has struck a good balance between ensuring the protection of the Australian national interest (achieved through imposing conditions on the bidder including requiring the target business to maintain independent Australian directors, operate on an arm's length basis and improve water usage efficiency) and the development of the agri-sector, as most recently evidenced by FIRB's conditional approval of the Shandong RuYi-led consortium's acquisition of the Cubbie Station assets (see our previous alert on 'Australia's agricultural sector in the spotlight').
Although the Opposition has flagged an appetite for possible increased oversight by FIRB in respect of agribusiness M&A and rural land transactions, there is general bi-partisan support for fostering greater foreign investment in Australia's agri-sector. With major business organisations and representative industry bodies such as the National Farmers Federation also supportive of foreign investment (albeit on arm's length terms), positive momentum in favour of offshore capital flows into the agri-sector will continue to build into the foreseeable future.
This article is from our March 2013 edition of Mergers & Acquisitions newsletter.