CHAPTER 2

Foreign Investment Proposals

This chapter provides statistical information on the proposals submitted in 2000-01 for examination under Australia's foreign investment policy and comments on some of the more significant cases. There is also a section covering the Board's monitoring and compliance activities in respect of residential real estate.

Limitations of the Board's data

The Board urges particular caution in the use of FIRB statistics, including making comparisons with earlier years.

The Board's statistics on foreign investment proposals relate to the administration of foreign investment policy and are substantially different from the Australian Bureau of Statistics' (ABS) statistics of foreign investment in Australia. ABS statistics, which are set out in Chapter 3 of this Report, seek to measure actual investment transactions between residents of Australia and non-residents.

The term `proposed investment' is used widely throughout this Report. Total proposed investment is the aggregation of:

• the proposed cost of acquisition (including shares, real estate or other assets);
• the value of the Australian assets of merging companies;
• the proposed cost of development following acquisition; and
• in the case of a new business, the proposed cost of both establishment and development.

The FIRB statistics are not a reliable indicator of trends in foreign investment inflows because:

• they are inherently `lumpy' (that is, the tendency for a few large investments to skew any one year's figures);
• they include proposals approved, which may not be implemented or could be implemented over a number of years; and
• major liberalisations of foreign investment policy that have occurred since the mid-1980s limit comparability over time.

• For example, the increase in the notification exemption thresholds from $5 million to $50 million on 10 September 1999 has acted to reduce the number of proposals and proposed investment values for existing business assets as well as commercial real estate in 2000-01 compared to 1999-2000.

In addition, the statistics are not a comprehensive measure of all foreign investment inflow in any year, nor do they purport to measure changes in levels of foreign ownership of particular industries.

• The data are restricted to investments within the scope of the FATA and the Government's foreign investment policy. They do not cover foreign portfolio investments, direct foreign investments below the notification thresholds, new businesses below the notification thresholds, expansions of existing foreign-owned businesses in Australia (both in existing areas and into related areas) and sales by foreign investors to Australian residents. The current notification/examination thresholds for the various sectors are specified in the policy summary at Appendix A.
• The figures provide no indication of the source of the funds for the investment. Some of the proposed funds to be invested would be contributed by Australians where they are in partnership with foreign interests. The extent to which approved investment proposals will directly result in foreign capital inflows depends not only upon whether the proposals are implemented, but also upon the proportion financed from foreign sources. In many cases, this proportion will be quite low. For example, the acquisition by a foreign interest of a business operating in Australia may involve no inflow of capital to Australia where the purchase is financed from existing Australian operations.
• The database that records all foreign investment proposals requires proposals to be categorised into sub-codes and does not allow for diversified companies. For example, the merger of BHP Limited and Billiton plc has been classified under oil and gas rather than coal or some other sub-code, resulting in an apparent substantial increase in investment in the oil and gas industry;
• The figures do not necessarily reflect changes in foreign ownership levels as, in some cases, both the vendor and purchaser are defined as a `foreign interest'.

Applications decided in 2000-01¹

Chart 2.1 depicts the number of applications decided. Chart 2.2 shows the value of proposed investment associated with applications decided for real estate and other sectors over the past seven years.

Chart 2.1: Applications decided - number

Chart 2.2: Applications decided - proposed investment

The number of applications decided during 2000-01 was around 16 per cent lower than in 1999-2000. In contrast, the value of proposed foreign investment associated with those applications decided in 2000-01 was about 49 per cent higher than the level in 1999-2000. A breakdown on the outcome for applications submitted over the last four years is provided in Table 2.1.

Table 2.1: Applications considered (number and proposed investment)
1997-98 to 2000-01

Forty six proposals were rejected in 2000-01, or 1.4 per cent of all decided proposals. Of these, 44 were in the real estate sector.

A significant case that was rejected by the Treasurer was the proposed acquisition of further shares in Woodside Petroleum Limited by Shell Australia Investments Limited. The proposed $9.7 billion consideration for this proposal makes up the majority of the difference between the value of total cases approved ($106.3 billion) and total cases decided ($116 billion) for the period.

Foreign investors are encouraged to discuss potential or actual proposals with the Board to ensure the proposals are consistent with policy. As a result, proposals clearly inconsistent with policy may not proceed to a decision, that is, they are not lodged or, if lodged, are withdrawn. Alternatively the proponent may modify a proposal to ensure it conforms to policy. The data for withdrawn cases reflect proposals that do not proceed for commercial or personal reasons, as well as those cases that are withdrawn by the parties instead of proceeding to a formal rejection. The low rejection rate reflects the consultative approach taken in the administration of foreign investment policy, particularly in respect to real estate proposals.

The great bulk of conditional approvals were in the real estate sector. Only 54 proposals outside the real estate sector were approved subject to conditions. The main kind of condition that was applied in the non-real estate sectors was to ensure headquarters and/or other key functions remain in Australia. For real estate, 2,244 proposals were approved with conditions relating to the period during which development should commence, the need for temporary residents to sell established properties when they cease to reside in Australia, or the imposition of reporting requirements on `off the plan' sales.

Approvals by sector

General summary

Table 2.2 provides details for 2000-01 of approved proposals for each sector and the associated proposed investment on acquisitions and new businesses. The bulk of the total proposed investment is attributable to the proposed cost of acquisitions. The skewing of the foreign investment data towards acquisition costs is a consequence of the notification requirements, as the expansion of existing businesses generally does not require foreign investment approval. Additionally, the increase in the notification exemption threshold from $5 million to $50 million on 10 September 1999 would have acted to reduce the subsequent number of proposals for existing business assets as well as commercial and rural real estate. Bearing in mind the limitations of the Board's data noted at the beginning of this chapter, the following general points can be made:

• The services (excluding tourism) sector attracted the largest amount of proposed investment, with approvals totalling $31.1 billion; and
• Other major sectors were minerals exploration and development ($23.7 billion), manufacturing ($21.9 billion), finance and insurance ($14.8 billion) and real estate ($12.7 billion).

Table 2.2: Approvals by Industry Sector 2000-01 ($billion)

Note: Totals may not add due to rounding.
`..' indicates an investment figure of less than $50 million.

(a) Data have been compiled by reference to the Australian and New Zealand Standard Industrial Classification published by the ABS, except proposals involving newspaper printing and publishing which have been allocated to service industries (the ABS classifies these under manufacturing). Acquisitions of diversified company groups are classified according to the industry of the major activity of the group. Acquisitions of real estate to be used for purposes incidental to the main business activity of the purchaser are classified according to that activity.
(b) Excludes 67 proposals involving financing arrangements and corporate restructures.
(c) Total proposed investment in the real estate sector may be overstated as it includes expenditure for annual programs and `off the plan' approvals granted to real estate developers. Based on past experience, a significant proportion (possibly up to half) of these advance approvals are not utilised. In addition, no account is taken of real estate that is developed under an annual program by a foreign developer that is subsequently sold to Australian interests.

Chart 2.3: Approvals by Industry Sector 2000-01
(per cent of the value of proposed investment)

Agriculture, forestry and fishing

The number of proposals to invest in the agriculture, forestry and fishing sector decreased from 18 in 1999-2000 to 10 in 2000-01. Total proposed investment was $378 million compared to $800 million in 1999-2000 to $378 million in 2000-01. The acquisition by the US and Australian owned company, Hancock Victorian Plantations Pty Limited, of Australian Paper Plantations Pty Limited for a consideration of $150 million was the largest proposal by value in this sector.

Finance and insurance

Total proposed investment in the finance and insurance sector increased from $3 billion in 1999-2000 to $14.8 billion in 2000-01. There were 39 proposals approved, of which 9  involved expected investment in excess of $100 million.

The most significant proposal by value was the off-shore merger between Chase Manhattan Corporation and JP Morgan and Co Inc. In terms of Australian assets, the merger was valued at $11.8 billion.

Manufacturing

Total proposed investment associated with the manufacturing sector increased from $21.7 billion in 1999-2000 to $21.9 billion in 2000-01.

The outcome for particular industry sectors within manufacturing was mixed. Total proposed investment associated with transport equipment companies was higher at $9.4 billion, up from $172 million in 1999-2000. Proposed investment in the food, beverage and tobacco sector was $4.3 billion in 2000-01 up from $1.6 billion in 1999-2000. However, proposed investment was lower in the electricity and gas sector, $5.2 billion compared with $7.7 billion in 1999-2000. Foreign investment proposals associated with the manufacturing of textiles, clothing and footwear; wood and paper products remained at low levels.

As has been the case for a number of years, proposed investment included a number of large acquisitions in the electricity and gas generation sector. A significant proposal was by the Hong Kong companies, Cheung Kong Infrastructure Holdings Limited and Hong Kong Electric International Limited to acquire Powercor Australia Limited for a consideration of $2.3 billion.

Mineral exploration and development

The number of approved investment proposals in the minerals sector remained steady in 2000-01 (that is, 75 for 1999-2000 and 2000-01). However, total proposed investment increased from $10.1 billion to $23.7 billion. This increase was due mainly to the merger of Australia's largest resource company, BHP Limited with Billiton plc, and an increase in foreign investment expenditure in Australia's oil and gas and coal industries.

Some of the most significant acquisitions of Australian assets in the minerals sector during 2000-01 involved one of the world's largest resource groups, the Rio Tinto Group, comprising Rio Tinto Limited and Rio Tinto plc in a dual listed company structure. Approval was granted for Rio Tinto to acquire the minority interests in Comalco Limited ($1.5 billion), Ashton Mining Limited ($700 million) and North Limited ($3.5 billion).

The level of total proposed investment in the oil and gas sector increased substantially from $0.6 billion in 1999-2000 to around $11.9 billion in 2000-01. This increase in proposed investment can be attributed to the merger of BHP Limited and Billiton plc, which was categorised as an oil and gas investment, and to an increase in the number of approvals granted in this sector in 2000-01.

There was a substantial increase in proposed foreign investment in Australia's coal industry from $1.9 billion in 1999-2000 to over $5.2 billion in 2000-01. One of the significant coal cases was the acquisition of QCT Resources Limited by a joint venture company owned by Mitsubishi Development Pty Ltd of Japan and BHP Limited. The total proposed consideration was $830 million.

Table 2.3: Minerals Sector approvals by number and total proposed investment: 1999-2000 and 2000-01

	Acquisitions						New Businesses
Industry	No of approvals			$million			No of approvals			$million
	1999-00	2000-01		1999-00	2000-01		1999-00	2000-01		1999-00	2000-01
Gold	18	8		1,408	653		-	-		-	-
Oil and gas	9	11		564	11,881		2	1		363	205
Coal	16	27		1,888	4,108		2	1		998	75
Base metals	6	9		432	341		1	2		1,466	145
Other	19	14		1,926	4,672		2	2		1,083	10
Total	68	69		6,219	21,655		7	6		3,910	435

 

Resource processing

There were 7 approvals in the resource-processing sector during 2000-01, with a total proposed investment of $0.9 billion. In 1999-2000 there were 14 approvals with a value of $5.5 billion. The largest of the approved proposals for 2000-01 was the acquisition by the French owned Pechiney SA of the AMP Group's 15.5 per cent interest in the Tomago Aluminium Smelter in NSW, for a consideration of approximately $400 million.

Service industries (excluding tourism)

During 2000-01, there were 167 proposals approved for investment in the service industries sector (excluding tourism), comprising 18 proposals to establish new businesses and 149 proposed acquisitions of interests in existing businesses. The total proposed investment for the establishment of new businesses and existing businesses was $31.1 billion.

There were 41 proposals involving investment of over $100 million, of these, 6 were for more than $1 billion.

The largest proposal by value in the communications industry was the share acquisition, for a consideration of $6 billion, by Liberty Media Corporation in The News Corporation Limited, as part of The News Corporation's acquisition of Liberty Media Corporation's shares in the US Company Gemstar-TV Guide International Inc.

Tourism

There was a decrease, from $2.4 billion in 1999-2000 to $800 million in 2000-01, in proposed investment in the tourism sector. Of the 42 proposals approved in this sector, two involved proposed investment in excess of $100 million.

Urban real estate

Urban land is broadly defined under the Foreign Acquisitions and Takeovers Act 1975 to be all land that is not used wholly and exclusively for carrying on a business of primary production. Reflecting concerns over foreign ownership of urban land, the policy in relation to this sector is restrictive. As a result, all proposals relating to urban real estate need to be submitted for examination, unless explicitly exempted by regulation (see Appendix A).

A number of changes to foreign investment policy announced in September 1999 have acted to reduce the number of foreign investment applications associated with urban land. These changes involved an increase in the notification threshold applying to the acquisition of developed commercial real estate from $5 million to $50 million, a removal of the requirement for Australian citizens and foreign spouses to obtain foreign investment approval when purchasing residential real estate as joint tenants and a similar exemption for holders of special category visas and permanent resident visas when purchasing residential real estate through an Australian company or trust. Additionally, an exemption was provided (in certain instances) for the acquisition of interests in Australian urban land by foreign owned responsible entities of managed investment funds.

Table 2.4 gives a breakdown of approved investments in urban real estate. The number of approvals was less than those approved in 1999-2000, falling from 3,344 in 1999-2000 to 2,810 in 2000-01. Total proposed investment associated with these proposals rose from $9.5 billion in 1999-2000 to $12.7 billion in 2000-01, reflecting higher housing costs and investment in higher cost developments.

Table 2.4: Investment in urban real estate by type and number of proposals approved in 2000-01 ($ billion)

Note: Totals may not add due to rounding.
`..' indicates an investment figure of less than $50 million.
`-' indicates an investment figure of zero.

Real estate for development

During 2000-01, there were 1,477 proposals approved for the acquisition of residential real estate for development (including eligible redevelopment), a decrease from the 1,731 proposals approved in 1999-2000. Proposed development expenditure was $4.4 billion compared to $1.6 billion in 1999-2000. As a consequence of changes in the Government's foreign investment policy applying from September 1999, the acquisition of house and land packages, where construction has not commenced, are treated as vacant land for development rather than under the `off the plan' category.

Ordinary approvals comprise the purchase of broadacres for residential subdivision and vacant building blocks for single dwelling construction and for integrated residential developments (such as townhouse and high rise units). Some 676 proposals (879 in 1999-2000) by foreign interests to acquire residential real estate for development were approved in 2000-01, with a total proposed investment of $1.2 billion ($1.3 billion 1999-2000). Such approvals have a condition that continuous development must commence on the land/site within 12 months of approval. In addition, the parties are required to report on the completion of development to demonstrate compliance with the development condition. The Government views seriously any breaches of these development conditions (see section on Residential Real Estate Compliance).

In 2000-01, 509 proposals from individuals were approved under the `off the plan arrangements', involving proposed investment of around $200 million. In addition, there were 229 applications approved from real estate developers seeking `advance approval' to sell property `off the plan' to foreign persons (compared with 280 in the previous year). The value of such developments fell from $3.5 billion to $3.1 billion.

Certain points should be noted in relation to the Board's statistics dealing with `off the plan' applications. First, the Board's figures overstate the likely extent of foreign purchases as few developers with `off the plan' approvals will sell 50 per cent of their developments to foreign purchasers. (There is necessarily a significant lag between the granting of approvals and receipt of reports due to construction time and completion of sales).

Secondly, the `off the plan' category has zero proposed development expenditure recorded against them. In the case of `individual off the plan' the consideration relates to the proposed amount payable by foreign interests for newly completed dwellings.

The annual program arrangements are designed to avoid the need for established developers to notify individual acquisitions of property. Such developers may be granted annual approvals to buy land up to specified limits on condition that they report to the Board at the end of the year on their acquisitions and the developments undertaken. The granting of an annual program for acquisitions of land for development does not relieve the developer of responsibility for complying with the general requirements of foreign investment policy. For example, additional investment in relation to acquisitions of existing businesses, or for the establishment of new businesses with total investment of $10 million or more, or acquisitions of heritage listed properties would require an additional application, separately submitted to the Board for examination. In 2000-01, 7 annual programs were approved. These arrangements involved residential and commercial real estate for development totalling broadly $300 million in proposed acquisition costs.

Information on development expenditure in relation to annual programs is collected on an ex-post basis, with developers required to report annually on actual acquisitions, development expenditures and details of any properties sold following development.

Approval was given to 56 proposals to purchase land for commercial development involving total proposed investment of $3.8 billion. This was a decrease on the 87 proposals approved during 1999-2000.

There was a decrease from 31 rejections in 1999-2000 to 10 rejections in 2000-01 in relation to the proposed acquisition of residential real estate for development (including `off the plan' dwellings). Of these, 3 involved vacant land for development and 7 were rejected as they did not meet the `off the plan' criteria. Usually there were one or more of the following reasons for these rejections:

• the planned development expenditures were not considered significant in relation to the acquisition price for the property (there is an expectation that proposed development expenditure should be equivalent to at least 50 per cent of the acquisition price);
• the proposed timetables for development were unsatisfactory;
• the property proposed to be acquired for the purpose of demolition and redevelopment was not considered to be at the end of its economic life, for example it was rented out;
• the proposal did not add to the housing stock;
• the prospective foreign purchasers had not established, to the Government's satisfaction, that they had the technical and financial capacity, nor the necessary planning approvals, to undertake the proposed development within an acceptable timeframe; and/or
• the applicant had breached conditions associated with a previously approved application.

Acquisitions of developed real estate

Generally, foreign investment policy enables the purchase of developed commercial real estate by foreign persons. Conversely, it restricts the purchase by foreign persons of developed residential real estate. However, certain categories of foreigners are able to purchase developed residential real estate under particular conditions (see Appendix A). In 2000-01, 1,283 proposals were approved for developed residential real estate compared to 1,540 in 1999-2000.

Reflecting the comparatively restrictive nature of the policy, there were 31 rejections in 2000-01 (57 in 1999-2000) of proposed acquisitions of developed residential property. The total potential acquisition cost involved in these rejected proposals was $8.1 million. These proposals were rejected because the prospective buyers did not fall into an eligible category.

In 2000-01 there were 50 approvals to purchase interests in developed commercial real estate (for example, shopping centres, offices, warehouses, etc) involving total proposed investment of $3.4 billion. This represents a decrease on the 73 approvals in 1999-2000 but an increase in value from $2 billion in 1999-2000. The fall in the number of approvals can be attributed partly to the increase in the exemption threshold for commercial real estate from $5 million to $50 million that occurred in September 1999.

Real estate by state

Table 2.5 provides details of approved investment in all categories of urban real estate (that is residential and commercial) for each State and Territory. Victoria and New South Wales were the main locations for proposed foreign investment in urban real estate by value, with 38 per cent and 34 per cent respectively of the total in 2000-01. Queensland also had significant foreign investment approvals accounting for 15 per cent of the total value (down from 18 per cent in 1999-2000).

Table 2.5: Total proposed investment in urban real estate by category of real estate and location of investment, approved in 2000-01 ($ million)

Note: Totals may not add due to rounding.
(a) `Other' includes acquisitions of companies/trusts with real estate holdings in more than one State or Territory and proposals in the ACT, NT, Tasmania and South Australia.

Residential real estate compliance

Under policy, the purchase of developed residential real estate by foreign interests purely for the earning of rental income, for speculative purposes or where it may involve land banking is not permitted. Therefore, the Government seeks to ensure that where foreign interests acquire residential real estate for development, any stated development is carried out within a reasonable time (this usually involves a requirement to commence continuous construction within 12 months).

The policy is directed at maintaining greater stability of house prices and the affordability of housing for the benefit of Australian residents (see Appendix A). Any failure by foreign interests to pursue stated development plans is considered to be a breach of policy. A foreign interest found to be in breach of the residential real estate policy may be ordered to sell the subject property (which may result in a significant capital loss for the purchaser) and/or penalties by way of a prosecution for an offence under Section 25 of the FATA. Section 25 provides for financial penalties or imprisonment on conviction.

There are a number of processes that assist in ensuring compliance with the residential real estate policy.

• Information on Australia's foreign investment policy is disseminated directly by the Board through publications, public presentations and in response to inquiries. In addition, information is provided by other government departments, such as by the Department of Immigration and Multicultural Affairs to applicants seeking temporary resident visas.
• In purchasing property, foreign persons may deal with a number of professionals and organisations, such as solicitors, financial institutions and real estate agents, who have an interest in ensuring that foreign purchasers have information on the need to comply with foreign investment policy.
• There is a reporting requirement placed on approvals to improve compliance with conditions imposed, for example, on real estate for development.
• Assessment of new proposals includes examination of compliance.
• All allegations of possible non-compliance are fully investigated.
• Sample checks on compliance are made by the Board's Executive.

The Treasurer has the power under Section 36 to serve a notice in writing requiring a person capable of giving information or producing documents relevant to the exercise of the FATA to supply the information within a specified time.

Approvals by country of investor

Data on proposed investment associated with approvals in 2000-01 are shown by country, disaggregated by State in Table 2.6 and by industry sector in Table 2.7.

The United States was the most important single source of proposed foreign investment in Australia during 2000-01. The other major sources of foreign investment were the United Kingdom, Germany and Canada.

• Approved proposed investment from the United States was $47.5 billion. This represented around 45 per cent of all total approved foreign investment compared to 38 per cent in 1999-2000. This proposed investment was concentrated in the services, finance and insurance and manufacturing sectors.
• Approved proposed investment from the UK increased from $11.5 billion in 1999-2000 to $22.7 billion in 2000-01.
• Germany and Canada continued as major foreign investors contributing $4.7 billion ($4.1 billion in 1999-2000) and $3.6 billion ($3.1 billion in 1999-2000), respectively in 2000-01.
• Hong Kong and Japan continued as major foreign investors in 2000-01 with approved investment of $3.1 billion ($2.7 billion in 1999-2000) and $2.7 billion ($1.5 billion in 1999-2000) respectively.

Table 2.6: Proposed investments by country by state 2000-01 ($billion)

	USA	UK	Germany	Canada	Hong Kong	Japan	Other/ Aust(a)	Total
NSW	1.7	1.4	0.8	0.1	0.3	0.1	4.7	9.1
Victoria	1.6	0.6	0.1	0.1	0.2	0.1	4.9	7.6
WA	1.6	0.7	-	0.7	-	0.2	1.5	4.7
Queensland	1.8	0.5	0.6	0.1	0.1	1.8	2.5	7.4
More than one (b)	19.9	18.7	3.0	0.3	2.5	0.3	5.3	50.0
Offshore takeovers	20.6	-	0.2	2.3	-	-	0.4	23.5
Other(c)	0.3	0.8	-	-	-	0.2	2.8	4.1
Total	47.5	22.7	4.7	3.6	3.1	2.7	22.1	106.4

Note: Totals may not add due to rounding.
(a) Includes proposed investment from Australian controlled companies.
(b) Includes proposals where the investment is proposed to be undertaken in more than one State or Territory.
(c) Includes investment in the ACT, NT, Tasmania and South Australia.

Table 2.7: Total proposed investment associated with approved proposals, by country of investors and industry sector 2000-01 ($million)

Note: Totals may not add due to rounding.

(a) `Off the plan' approvals to real estate developers have been recorded as not allocated to country because the country of investors is not known in advance.
(b) The investment identified as originating from Australia represents the contribution by Australian-controlled companies and Australian residents to the total investment associated with foreign investment proposals in which they are in partnership with foreign interests, but does not generally include the contribution attributable to minority Australian shareholders in companies with majority or controlling foreign shareholders.
(c) These figures indicate the total number of proposals in which investors from the particular country have an interest. Proposals involving investment from more than one country count as one proposal for each of the countries concerned.

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1 The ensuing discussion relates only to proposals upon which a decision was taken. Those applications that were found not to be cases or were withdrawn are not included, except for Table 2.1.