Does the government's rejection of GrainCorp set a new foreign investment precedent?

At any other time, Friday’s decision by treasurer Joe Hockey to reject Archer Daniels Midland’s (ADM) A$3.4 billion takeover bid for GrainCorp might have been just another controversial foreign investment decision.

Indeed, were it not for a widely reported split in the Coalition over the proposal, the decision may not have made it out of the business section of the national press.

However, inserted within the ADM-GrainCorp decision was a never-before-seen rationale for rejecting a foreign investment: the tenor of community attitudes and level of popular support. This seemingly minor caveat may radically change the way in which foreign investment reviews are conducted by the Coalition government in coming years.

Australia’s foreign investment framework

Debate about Australia’s foreign investment policy was catalysed in 2008, with the highly contentious “dawn raid” by Chinalco on Rio Tinto.

Since then, an ongoing series of high-profile foreign investment deals has attracted both intense public and regulatory scrutiny: these include the takeover of OzMinerals by China’s Minmetals; the acquisition of Felix Resources by Chinese state-owned Yanzhou Coal; the failed Singapore Stock Exchange bid for the Australian Stock Exchange, SAB Miller’s acquisition of Fosters, and the current takeover bid of Warrnambool Cheese & Butter by Canadian dairy group Saputo.

Australian foreign investment policy presumes in favour of foreign investment, and generally does not enforce local ownership requirements. However, investments in a small minority of cases are screened by the Treasurer to ensure they are consistent with the national interest.

This screening process is conducted by the Foreign Investment Review Board (FIRB), and must be undertaken if an investment: a) is from a foreign government investor; b) is a business investment over 15% of the targeted firm and valued at over $248 million; c) is in real estate; or d) is in a defined set of “sensitive” sectors (such as banking, airlines, airports, shipping, media and telecommunications). All other foreign investment applications receive automatic approval.

Reviewed applications are subject to a six-point “national interest test”, administered by the FIRB. This considers:

• Impacts on national security

• Impacts on competition

• Impacts on Australian government policies

• Impacts on the Australian economy and community

• The character of the investor

• [For state-owned enterprises] The commercial orientation of the investor

Following its enquiries, the FIRB makes a (confidential) report to the treasurer, who may either approve, reject or conditionally approve the investment.

The overwhelming number of screened foreign investments are approved. Over the five years to 2011-12, 38,590 applications were approved (valued at A$860 billion), while only 63 were rejected. The bulk of these were in the real estate sector, and prior to the GrainCorp decision only two major business proposals had been recently rejected: the 2001 Shell takeover over Woodside Petroleum, and the Singapore Stock Exchange’s 2011 bid for the ASX.

GrainCorp: a new populist precedent?

Friday’s decision is significant because it may set a new precedent for how foreign investment is screened. It would appear the ADM-Graincorp decision is implicitly adding a new, seventh criteria to the FIRB’s national interest test: community attitudes and popular support.

In explaining his decision, Treasurer Joe Hockey outlined two reasons for rejecting the proposal: that there is limited competition in the grains handling industry (presently dominated by GrainCorp), and that there was a “high level of concern from stakeholders and the broader community”. He also argued that “allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally”.

Several analysts have argued the competition policy rationale is relatively weak. The Australian Competition and Consumer Commission (ACCC) had already approved the deal in June on the grounds it would be unlikely to substantially lessen competition, and ADM had made significant commitments to improve bottlenecks in the grain handling chain.

Thus, it would seem political concerns have loomed large. One consideration appears to be opposition from the Nationals, who had campaigned hard against the application being approved. But another was widespread community opposition to the deal, with Hockey instructing the FIRB to consider the “wider ramifications” of the deal – including public attitudes – mid-way through the assessment process.

Until now, community attitudes have not been part of the FIRB’s national interest test. While “community concerns” are considered, these are defined in economic terms – a fair return to the community, opportunities for Australian participation, the interests of employees.

The FIRB has not assessed whether an investment is considered “popular”, or how it will influence community attitudes to foreign investment more broadly. Moreover, no recent decision by the treasurer – whether approval, rejection, or conditional approval – has made reference to public sentiments. Until now.

The implications of community attitudes

The ADM-GrainCorp case is of course a single decision, and it is not clear whether this will be a one-off, or will be followed by the Coalition government in future cases. But it raises questions over how community attitudes should be assessed, and whether the FIRB even has the capability to assess them.

Community attitudes are a nebulous and difficult to measure concept. For example: if the majority of the country supports an agricultural investment, but a majority of rural residents oppose it, whose views should dominate? Moreover, the economic policy-focussed FIRB has no experience in assessing community mood, nor the resources or capabilities to do so at present.

Whether this would be a robust test, or simply a “get out of jail free” card that allows the Treasurer to reject controversial cases, remains to be seen.

Secondly, it would significantly reduce legal certainty for foreign investors in Australia. At present, there is a clear set of national interest guidelines, which have been applied in a transparent and consistent manner. A foreign investor will have a good idea as to whether their proposal ticks the boxes before committing, and can be confident the goalposts will not be moved part-way through the process.

Introducing volatile and contested community attitudes into the process may deter investors out of fear their proposals will be decided at the whim of populist politics.

Third, it will “politicise” the foreign investment assessment process. Rather than approving investments based on their economic merits, popular attitudes will also become a key criterion. A number of worrying outcomes may result.

Investment proposals could become an issue for party politics, determined more by the electoral fortunes of the government of the day rather than sound policy criteria. A business’s competitors may try and sabotage a deal by stirring up community opposition, transforming the FIRB process into a politically-contested commercial battleground. Vested interests with something to lose may also use popularity arguments to sink deals, even when they bring net national benefits.

If the example set in the ADM-GrainCorp decision becomes common practice, Australia’s supposedly “open for business” approach to foreign investment may change radically.