The foreign investment review legislation is general in application and was certainly not drafted with renewable investment in mind. FIRB can affect renewable investment in Australia in sometimes surprising ways.
Renewable Investment in Australia
Many renewable energy projects in Australia struggle to attract equity and/or debt capital from domestic sources. Return expectations of investors and interest rates for finance are usually higher, largely due to the perceived higher risk of these projects, than is financially viable for a project to get off the ground. We have recently worked on projects with incoming European investors that have lower return expectations which have gone a long way in making otherwise financially unviable projects viable.
Investors should be aware that even a minority foreign investment may be impacted by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the “FIRB Act”).
Significant actions and notifiable actions
Any incoming foreign investor should seek detailed legal advice as to whether its investment falls within the category of a “significant action” or a “notifiable action” under the FIRB Act — and be prepared for some surprises!
Under the FIRB Act, the Treasurer has the power to impose conditions on an action, prohibit an action or require an action to be undone, if the action is a “significant action”. There is a mechanism for the Treasurer to issue a decision of “no objection” to such an action, with or without conditions. Obtaining such a decision gives investors certainty that a transaction will not need to be unwound after the event.
A broader range of “notifiable actions” must be notified to the Treasurer before they are taken. The definition overlaps with that of significant actions and many activities fall into both categories.
While the rules are convoluted and complex, the monetary thresholds for an acquisition or investment into the shares of a renewable energy SPV to be caught by the FIRB Act are relatively high — ranging from AUD 252,000,000 to AUD 1,094,000,000. Most renewable energy investment remains well below these values.
But sometimes the question is not how the acquisition proceeds or what its value is, but what assets the acquired entity holds.
Beware of the humble sub-licence
An exciting area of renewable investment in Australia — and one where Pegasus Legal is quite active — is the deployment of renewable generation in off-grid mining contexts, where solar and wind can displace diesel consumption.
For a number of reasons, including the often very complex deal dynamic, the renewable energy SPV typically only takes a sub-licence to the Mining Lease to secure its site. It consequently foregoes many of the protections of proper security of tenure as would normally be expected for this type of transaction. This sub-licence is frequently tucked away in the power purchase agreement under which the mine takes the output of the solar or wind generator.
Yet it is this humble sub-licence that can trigger the FIRB process:
Through the various statutory tests, the grant of a sub-licence to a Mining Lease can become both a “significant action” and a “notifiable action”.
Even where this is the case, our experience is that the investment will typically still be given the green light — we have not yet seen an investment in renewables knocked back by the Treasurer/FIRB.
Do the right thing
Foreign investment is a politically sensitive topic in Australia and it is important to meet the regulatory and compliance criteria. Provided this is done, even the quirkiest application of the FIRB regime should not pose major problems.