Australia: Foreign Investment Review Regime and Indonesian Comparison

In a heavily globalised economy, foreign companies, especially multinational companies, are increasing their international flow of funds and deployment of capital into other nations.¹ As such, governments have created safeguard mechanisms to protect overriding doctrines of ‘national interests’ and ‘public order’.² This article will summarise the Australian foreign investment regime for the benefit of Indonesian corporates, and will show a brief comparison with the Indonesian system to highlight any similarities or differences.

Australian Foreign Investment Review System – The Framework

In Australia, foreign investment is regulated by the ‘Foreign Investment Review Board’ (“FIRB”).³ Their primary purpose is to ‘examine proposals by foreign persons to invest in Australia and make recommendations to the Treasurer (the selected individual responsible in government for running elements of the economy including cash and liquidity management, risk management and corporate finance) on those subject to the Foreign Acquisitions and Takeovers Act 1975 and Australia’s subsequent foreign investment policy’.⁴ The primary instruments that comprise the foreign investment framework are:⁵

1. Foreign Acquisitions and Takeovers Act 1975 (Cth);
2. Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth);
3. Fees Regime; and⁶
4. Australia’s Foreign Investment Policy (“The Policy”).⁷

A foreign investment in Australia will usually require the foreign entity to apply to FIRB for a notification that the transaction is conditional on Treasurer approval.⁸ These applications can be voluntary or mandatory, subject to the transaction and sectors involved.⁹ Generally, companies will submit a voluntary application pre acquisition as any application will be pending a Treasurer review before the transaction is completed. Mandatory applications are needed in certain types of investments, such as controlling real-estate investments in Australia. These will be listed below.¹⁰ Further, when a voluntary filing is made, the Treasurer is subsequently precluded from making post-acquisition orders on ‘the basis of national security concerns’ – this acts as an incentive to make voluntary applications.¹¹

As stated above, there are transactions that require mandatory approval from the Treasurer pre-acquisition. The types of deals that are generally required for ‘review’ by the FIRB, are as follows:¹²

1. There is a ‘substantial’ interest in an Australian entity with 20% interest in an Australian company that is valued over A$281m;
2. A ‘direct interest’ in a national security business has 10% interest with no value threshold;
3. An interest in national security land and there is no threshold for the interest in this type of deal;
4. Australian land and land-rich entities has 50% interest in the land; and¹³
5. Agricultural land and agribusinesses – especially any real estate or land associated with this.¹⁴

Therefore, the process of foreign investment in Australia is fairly rigorous, and “the Treasurer has wide divestiture powers, and criminal prosecution and civil penalties can apply for serious breaches” in post-acquisition reviews, making a pre-acquisition application almost essential.¹⁵ Importantly, it is noted that the Treasurer has been interested in protecting Australian agriculture, food/drink production under ‘Australia’s national interests’, or point iv) and v) in the list above. The Treasurer, under the scope of his/her power, will consider in his/her review of a proposed or pending transaction: national security, competition, effect on other Australian laws, impact of investment on the economy and community, and character of the investor.¹⁶

Australian Foreign Investment Review – Sale of Lion & Dairy Drinks Case

On the 25^th of August 2020, the Treasurer of Australia announced that the proposed sale of Lion Dairy and Drinks (Australian company) to China Mengniu Dairy Company (Chinese company) would not be within ‘Australia’s national interest’ and blocked the transaction. The transaction would have been worth a reported A$430m, before it was terminated.¹⁷

This is because the application of the ‘national security test’ was the largest factor in this case.¹⁸ The decision to block the foreign investment appears to lie centrally on the identity of the foreign investor; that being, a Chinese company. It certainty can be a view to protect Australian-owned staple-resource businesses from an emerging global superpower, as a company such as China continues to attempt to expand globally and taking controlling stakes in critical business sectors, and subsequently distort supply control in their target investment country. Since the acquisition was occurring within the ‘sensitive sector of agriculture’, there was a strong chance a blockage would occur, given the government has recently made an emphasis on protecting national food/drink sources from foreign investors (especially Chinese investors) in ‘Australia’s national interests’.¹⁹ There has been a string of other blocked Chinese investments which points to an unwillingness to surrender financial assets to Chinese investors.²⁰ There has been subsequent criticism that Australia has been highly protectionist against Chinese investment, which is against Australia’s long-standing preference for an ‘open-door’ policy of investment.²¹

Comparison of Australia and Indonesia

To put it in perspective, the Indonesian system of foreign investment review operates differently to that of Australia. Research dictates that it is less formal and more ad-hoc than the Australian review system. Whilst there is no set ‘national policy’ for the review of foreign transactions (on national security or public order grounds), the Indonesian Government does have discretion to reject foreign investment applications in some particular fields that are closed to investment (and are entirely regulated by the state)²² – these include narcotics, gambling, national security and public order. Ideas of ‘national security’ and ‘public order’ strike certain similarities with concerns in Australia and is one way in which the two regimes are invariably linked.²³

Further, as of 2020, Indonesia have introduced a new foreign investment regime as a biproduct of the implementation of Law No. 11 of 2020 on Job Creation or widely known as ‘the Omnibus’ Law. ²⁴This regime includes a list of sectors that are either closed, or ‘conditionally open’ to foreign investment/transactions (under Presidential Regulations No. 10 of 2021 on Investment Business Fields, lastly amended by Presidential Regulation No. 49 of 2021, or ‘New Investment List’).²⁵

Based on the ‘New Investment List’, like Australia, essentially all lines of business are in fact open to foreign investment, apart from: narcotics, gambling, manufacturing of chemical weapons, government-run museums, manufacturing of alcoholic beverages, air navigation sectors, or any sectors reserved by the central government.²⁶ Further to this, it must also be noted that certain sectors have separate, independent review schemes where foreign investors must seek approval from non-centralised, sector-specific government entities.²⁷ These sectors include banking & finance, oil & gas, and mining. Outside of these sectors, there are only minimum capital and control requirements (similar to Australia) that must be complied with.²⁸

Therefore, the Australian system of foreign investment is predicated on a formulaic review system that especially focuses on the protection of national interests across sectors (but in practice, especially in security or agricultural sectors). The Indonesian regime differs as a more targeted approach at certain industries but a fairly scattered and non-uniform approach to generalised industry. However, recent legislation has pointed to Indonesia moving towards a more uniform approach to foreign investment review, similar to Australia.

1. OECD, ‘FDI and Globalisation’, OECD Benchmark Definition of Foreign Investment, Fourth Edition p.124. ↩︎
2. Mendelsohn, Rebecca, ‘Australia’s Foreign Investment Review Board and the Regulation of Chinese Investment’ China Economic Journal, Volume 7, 2014. ↩︎
3. https://firb.gov.au/. ↩︎
4. https://www.whitecase.com/publications/insight/foreign-direct-investment-reviews-2021-australia. ↩︎
5. Ibid. ↩︎
6. https://www.whitecase.com/publications/insight/foreign-direct-investment-reviews-2021-australia. ↩︎
7. Ibid. ↩︎
8. Ibid. ↩︎
9. Ibid. ↩︎
10. https://www.ato.gov.au/General/Foreign-investment-in-Australia/Residential-real-estate-application—instructions/. ↩︎
11. https://www.whitecase.com/publications/insight/foreign-direct-investment-reviews-2021-australia. ↩︎
12. https://www.gtlaw.com.au/insights/foreign-investment-review-australia-2021. ↩︎
13. Ibid. ↩︎
14. Ibid. ↩︎
15. https://www.whitecase.com/publications/insight/foreign-direct-investment-reviews-2021-australia. ↩︎
16. Ibid. ↩︎
17. https://www.dlapiper.com/en/canada/insights/publications/2020/08/sale-of-lion-dairy-and-drinks-not-in-australias-national-interest/. ↩︎
18. Ibid. ↩︎
19. Ibid. ↩︎
20. Mendelsohn, Rebecca, ‘Australia’s Foreign Investment Review Board and the Regulation of Chinese Investment’ China Economic Journal, Volume 7, 2014. ↩︎
21. Ibid. ↩︎
22. Oliver J Bordges, ‘Foreign Investment Review – Indonesia’, Lexology GTDT. ↩︎
23. Ibid. ↩︎
24. Ibid. ↩︎
25. Ibid. ↩︎
26. Ibid. ↩︎
27. Ibid. ↩︎
28. Ibid. ↩︎