Foreign investment in Australia has always been subject to a national interest and national security test. Recently, changes have been made to expand the concepts of critical infrastructure and technologies to protect essential sectors of the Australian economy from security threats. As a result, more transactions are subject to scrutiny through the Foreign Investment Review Board (FIRB) process.
This follows changes made due to COVID-19 related rules in 2020 and increased regulatory focus on national security from 1 January 2021.
Two recent developments
There are two recent developments in this space for the attention of foreign investors:
- the release of a new blueprint in relation to Australia's approach to critical technologies on 17 November 2021; and
- the expansion of the scope of critical infrastructure assets and sectors through changes to the Security of Critical Infrastructure Act 2018 (Cth) (SOCIA) by the Security Legislation Amendment (Critical Infrastructure) Bill 2021 (Cth) passed by Parliament on 22 November 2021 (effective date from 2 December 2021 and 14 December 2021).
What are the relevant critical technology categories and critical infrastructure sectors?
The broad categories are outlined below. The sectors outlined below include and are in addition to existing prescribed critical infrastructure (such as certain port, electricity and telecommunications assets) and areas identified as being relevant to Australia's national security in guidance from FIRB.
Critical technologies
- Advanced materials and manufacturing
- AI, computing and communications
- Biotechnology, gene technology and vaccines
- Energy and environment
- Quantum
- Sensing, timing and navigation
- Transportation, robotics and space
Critical infrastructure sectors
- Communications (including telecommunications, broadcasting, domain name systems)
- Higher education and research
- Data storage and processing
- Defence industry
- Energy (including electricity, gas, energy market operator, liquid fuels)
- Food and grocery
- Financial services and markets (including banking, superannuation, insurance, financial market infrastructure)
- Health care and medical (including hospitals)
- Space technology
- Transport (including ports, freight infrastructure, freight services, public transport, aviation)
- Water and sewerage
What is the impact for the FIRB process?
The impact of this is that activities relating to these technologies and within these above sectors will attract greater scrutiny from an investment and development perspective. More investments will now require mandatory review through the FIRB process than was previously the case.
This is because the concept of 'national security business' – for which there is a $0 screening threshold - is linked to (amongst other things) critical infrastructure under the SOCIA.
Situations where a mandatory FIRB approval will be required for investment include:
- starting a national security business; and
- acquiring an interest of 10% or more (or a lower amount where there are certain control or influence rights, or associated business agreements) in a national security business.
The specific assets within the identified critical infrastructure sectors that are linked to being a 'national security business' are outlined in further rules published in relation to the SOCIA and guidance published by FIRB.
As a result, a broad range of businesses will now be 'national security businesses' (despite the terminology) and more due diligence will need to be done to close out this issue.
Even where a 'national security business' does not arise, factors such as the nature of the business and its impact within the supply chain for the above critical technologies and sectors may mean that a voluntary application is still highly recommended. This would close out the risk of the Treasurer calling in a transaction for review up to 10 years post-transaction.
What do investors need to consider?
Additional due diligence
The critical infrastructure rules and FIRB's guidance outline some specific entities or types of assets as critical infrastructure assets. It will be relatively straightforward to identify a number of those assets. For example, certain ports, major utilities in generation, distribution and supply of energy, the big supermarkets, the big banks, the big insurers, the big superannuation funds, certain freight and logistics assets. Investments in these assets would very likely have exceeded the usual FIRB thresholds in any case.
However, the impact of the rules on parts of the supply chain affecting those businesses will be harder to identify. It will require a detailed understanding of the target, the target's business in Australia and how the target's business affects certain specified businesses in the market. For example, a supplier of software to a big bank in Australia may be considered to be a critical data storage and processing asset, such that the supplier could itself be a national security business for FIRB purposes.
Early engagement, including from a sell side perspective
Assets owned by critical infrastructure businesses can themselves be national security businesses for FIRB purposes. Any sales process will need to factor in FIRB risk associated with potential buyers – both as to substance and timing.
Existing agreements and transition
For agreements signed before 14 December 2021, transitional rules are in place so that the new amendments do not affect the 'national security business' status of those deals.
Other factors in FIRB's screening process
The FIRB review of the investment target is combined with the recent and increased focus on the character of an investor in FIRB's screening process. This includes historical compliance with other regulatory regimes. The sectors and technologies outlined above are, of course, exposed to other regulatory regimes in Australia and overseas including rules relating to export controls, modern slavery, foreign influence and interference, prudential requirements, to name a few.
It is important to note that the government considers investment in these sectors is vital to Australia’s economic prosperity, social cohesion and national security. In addition, Australia has always been a country in need of and welcoming of foreign investment.
The blueprint, new laws and guidance help investors to understand circumstances where investment will be exposed to additional scrutiny to protect Australia's national interest.
If you have any questions about these developments and would like to discuss, please let us know.