In a recent press interview the Federal Treasurer, the Honourable Wayne Swan MP, announced a significant departure from the existing policy in respect to the investment by SOEs in Australian mining exploration companies.1 In particular, it seems SOEs now need to obtain FIRB approval at 2 different stages. Firstly, on acquisition of an exploration business and, secondly, following a "viable" discovery to further develop the resource to the mining stage. There is also the prospect of a third FIRB approval stage in respect of financing of a project, in particular where project finance is to be obtained from a foreign government controlled bank with security over assets in Australia.

In justifying these amendments, Treasurer Swan commented that it "doesn't make any sense logically" to allow an exploration licence holder to proceed to development without obtaining a second approval. He is reported to have said "[h]ow do you apply the [FIRB] criteria to an unknown mineral of an unknown size in an unknown location in an unknown market?" 

This policy shift would appear to stem from two concerns. Firstly, a desire of the federal authorities to keep closely informed of, and retain control over, significant investments into Australia's mining sector. Secondly, the seeming emergence of a view that Australia's foreign direct investment regime should not only apply at the initial, exploration based investment stage but should require a further approval before a miner controlled by an SOE (but not other foreign investors) can progress from holding an exploration licence to obtaining a mining lease and commencing mining operations.

The purpose of Australia's current foreign direct investment regime (which is regulated by both the Foreign Acquisition and Takeovers Act 1975 (Cth) (FATA) and (although of no legislative force) the federal government's Foreign Investment Policy (Policy)) is to authorise the Treasurer, following the receipt of advice from the Foreign Investment Review Board (FIRB), to make orders in respect of proposals that are considered to be contrary to Australia's "national interest".

In considering whether a foreign direct investment proposal is contrary to the "national interest", government will have regard to whether:

  • an entity's operations are independent from the relevant foreign government;
  • an entity is subject to and adheres to adequate and transparent regulation and supervision, and observes common standards of corporate practice;
  • an investment may hinder competition;
  • an investment may impact on Australian government revenue or other policies (including environmental policies);
  • an investment may impact on Australia's national security; and
  • an investment may impact on the operations and directions of an Australian business, as well as its contribution to the Australian economy and broader community.

While introduced in an effort to "enhance the transparency of Australia's foreign investment screening regime"2, those guidelines arguably have the opposite effect, as no guidance is provided as to how much weight Treasury's consideration of the "national interest" is impacted by each of these factors. This lack of transparency is not helped by the fact that the concept of "national interest" is not prescribed in the regulatory regime (rather it is attributed to a point in time determination of the "widely held community concerns of Australians") and the lack of any requirement on Treasury to publish the reasons for its decisions to either accept or reject an application.

Current Application Process

In order to obtain prior approval under the FATA or the Policy, foreign investors (including SOEs) are required to provide FIRB with specific information about the acquirer, the target and the transaction. Applications are then generally assessed within 30 days, although interim orders may be made by the Treasurer which extends this timeframe by a further 90 days.

In the context of investments in resources exploration and development projects, neither the FATA nor the Policy currently imposes any obligation to obtain federal governmental approval for anything more than the initial investment. This one stop approval process, while not itself being transparent, at least provides investors with the certainty that they need before committing significant time and resources to exploration and development mining and energy projects.

In recent times however there has been a noticeable shift in thinking among government circles as to this approach.

The Proposed New Regime

The Treasurer's announcement, while significant in its potential effect, was minimal in terms of content (legislative or otherwise). It is unclear what the legislative basis is for a 2 stage approval process, though on a highly technical view the "acquisition" of a mining lease could be viewed as the acquisition of a new asset which is separate to and independent of the initial acquisition of the exploration company. This is despite the fact that the "separate transactions" will generally involve the exact same entity and resources over which approval was initially sought and the intention at such initial stage would have been clear, that all things going well, the acquirer intends to develop the resource to the mining stage.

The announcement also lacked specificity as to what policies and procedures will be imposed on SOEs. For instance, will the same application process (including relevant timetables and assessment criteria) be used at both stages of the process? Presumably yes. If an SOE identifies a significant resource, but is denied FIRB approval at the second approval stage, will it be compensated for its expended development costs or alternately will it simply be forced to divest the project in a fire sale? Or is the reality that approval at the second stage will generally be granted, but subject to conditions around the pricing of the off-take or independence of the off-take sales process?

The lack of transparency and certainty as to the process is likely to cause concern amongst foreign investors, particularly SOEs. Already there is commentary that foreign investors are viewing Australia as a difficult and uncertain place to invest, particularly when compared to the other resource rich countries like Canada, South Africa and Brazil.

Is the new regime really necessary?

The federal government should obviously have the right to protect the nations' strategic and long term economic interests. However the implementation of additional foreign investment restrictions may act as an unnecessary deterrent for future investment in the mining sector. This would seem to be an unfortunate development at a time when many consider we should be encouraging further investment and development. It is also seemingly at odds with recent progressive initiatives such as the early September 2011 announcement of a memorandum of understanding between the Western Australian government and China's National Development and Reform Commission covering bilateral trade and investment co-operation.

Potential investors are already required to engage in extensive consultation with government in order to progress a mining project from inception to the development stage. For instance, FIRB requires that potential investors provide highly detailed applications setting out, among other items, the investors corporate history, ownership structure and corporate governance practices, details as to the proposed investment (including its nature, methods of acquisition, value of investment and timetables), as well as a statement of the investor's intentions for the acquisition (both immediately and on-going).   In addition, when a potentially "significant" investment is to be made, investors are further encouraged to meet with FIRB in person to discuss their application in depth so as to allow timely consideration of the proposal. 

Further, all participants in the mining industry are already required to comply with comprehensive federal, state and local government legislation throughout the life of a project. This includes the standard mining and environmental legislation, as well as more recent state based agricultural protection measures (for instance the strategic cropping legislation in Queensland – proposed legislation which purports to quarantine or highly restrict the state's most fertile and productive agricultural land from mining development). 

In addition, mining companies are required to make a series of applications and obtain a range of state and local government consents and approvals to move from an exploration permit to the grant of a mining lease. This includes the submission of mining, environmental and native title approval applications with relevant state government departments – a costly process that typically involves the submission of a proposed operational plan setting out the nature of the proposed development, the method of mining, its environmental impact and proposed management procedures, rehabilitation proposals and all building plans. Once granted, the company is required to comply with strict conditions and endorsements on the mining tenement to ensure that the interests of the state are protected.

In terms of maintaining control, again the existing legislative and policy framework (although lacking in transparency) appears sufficient.  If the federal government has concerns about the commercial or strategic impetus behind a SOEs investment, it already has the framework in place to place conditions on that investment at the time of the initial application without creating uncertainty by imposing a second or third stage in the approval process.


Instead of adding additional approval requirements perhaps some focus could be brought to making application of the existing legislation more transparent and consistent. In this way, Australia's national interests could be protected, while at the same time maintaining and enhancing certainty for investors.