FIRB changes to dampen foreign tech investment

Denham Sadler
Senior Reporter

New rules surrounding Australia’s foreign investment regime which passed Parliament last week may “dampen the enthusiasm” for investment in local tech companies, according to Australian Investment Council chief Yasser El-Ansary.

The reforms to the Foreign Investment Review Board (FIRB) framework sailed through Parliament with bipartisan support during the last sitting fortnight of the year, despite widespread concerns the changes would disincentivise investment in Australian companies, and create uncertainty about these investments.

In submissions to the government, Q-CTRL founder Professor Michael Biercuk said the reforms would “imperil” the Australian quantum sector, while the Victorian and Queensland state governments were also highly critical of the reforms, saying they would damage the tech and research sectors.

But the legislation was passed with support of the Opposition on one of the final sitting days of the year, with the changes to come into effect from the start of 2021. These include the scrapping of the monetary threshold, with companies deemed to be “national security businesses” to be subject to screening, and new “call-in powers” handed to the Treasurer to block or divest an existing investment.

Sunrise of sunset? FIRB changes create uncertainty for inward tech investments

The bill defined national security businesses as “endeavours that if disrupted or carried out in a particular way may create national security risks”, with this likely to include telecommunications companies, critical infrastructure operators, companies manufacturing defence technology for another country and those storing sensitive data.

Labor raised concerns about the changes, including the rushed process behind their implementation and a lack of detail on how they will be enforced, with this to be set out in legislative instruments.

But after successfully moving an amendment requiring a review of the effectiveness of the scheme to be tabled by the end of next year, the Opposition waved through the legislation.

Mr El-Ansary said the reforms would require careful implementation and further consultations on how they operate and would likely impact the level of investment in local tech companies, particularly in the short term.

“These reforms may well lead to some initial dampening of enthusiasm for investment into Australian tech businesses from offshore as everyone looks to understand how FIRB will apply the law under this new and expanded regime,” Mr El-Ansary told InnovationAus.

“We need to encourage inbound investment capital into our tech businesses to help create new economic activity and to create new jobs across all industry sectors. Australia has just endured our first economic downturn in 28 years, the challenge for us now is to rebound out of this as quickly and aggressively as we can.”

It won’t be an easy process to create some certainty around the new rules and their implementation, Mr El-Ansary said.

“It’s going to take some time for FIRB to establish a guidance which will provide the certainty needed to make long-term private capital investment decisions. There is more work to be done in the period ahead to ensure investors are comfortable with the reach of the expanded regime, and to ensure Australia can continue to attract inbound investment to help support our economic recovery over the years ahead,” he said.

“The government clearly wants to have a greater line of sight over investment transactions that could have the effect of presenting a national security threat – but the challenge for all of us will be how to navigate the expanded regime to filter those transactions that really do pose a security risk from those transactions that do not.

“There is more work to be done in the period ahead to ensure investors are comfortable with the reach of the expanded regime, and to ensure Australia can continue to attract inbound investment to help support our economic recovery over the years ahead.”

The government was warned of several concerns surrounding the changes throughout a number of consultation periods.

In a submission to government, Professor Biercuk said the reforms will “imperil” the quantum sector and severely disadvantage local tech firms. Due to overly broad definitions, all emerging quantum tech firms will be subject to the new tests and restrictions, he said.

“The entire potential of quantum technology to support these ambitions is now imperilled by the unintended consequences of this draft legislation. Quantum technology is likely to prove as transformational in the 21st century as harnessing electricity was in the 19th,” Professor Biercuk said in the submission.

The changes “place our sector at a tremendous disadvantage relative to competitors formed in regions with larger and more mature investor bases including the US and EU”, Professor Biercuk said.

He had called for an exemption from the new test for certain early-stage companies and thresholds based on business maturity, capital raised or annual defence-derived revenue, but these were not included in the final legislation.

A number of state government also raised concerns with the now-passed foreign investment laws.

The Victorian government said the changes would see more companies subject to review, and could jeopardise the ability to attract foreign investment, damaging sectors such as artificial intelligence and medical technology, among others.

The reforms have the “potential to disadvantage Australia’s ability to secure international investment and consequently risks economic growth and recovery, development of human capital, knowledge transfer and innovation for the nation”, the Victorian government said in a submission.

“The likely impact of these changes would see Australia risk in the rankings as one of the most restrictive OECD members with regards to foreign investment regulations. This could not occur at a worse time for the nation’s economic prosperity, when foreign investment is more critical than ever in supporting the nation’s economic recovery,” the state government said.

In a separate submission, the Queensland government said it was concerned with the 10-year timeframe in which the government can exercise its “call-in powers”, saying this should be as short as possible.

“Longer timeframes and retrospective reviews could act as a disincentive for proposals with investment profiles stretching over many years, such as some collaborative commercialisation activities in the universities’ sector,” the Queensland government submission said.

“While recognising the importance of appropriate oversight to maintain a high level of national security, the Queensland government considers that the call-in timeframe should be as short as possible, and that the use of call-ins should be kept to a minimum to avoid unnecessary delays and uncertainty.”

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