Written by Adam Geha and Michael Easson and submitted to the Minister for Immigration’s Business Advisory Panel Working Party, for Macquarie Bank Limited in collaboration with Michael Easson Management Pty. Ltd., March 1998.
Executive Summary
The Investment-Linked Sub-Class 131 visa requires successful applicants to make a “Designated Investment” of between $750,000 and $2,000,000 for three years with an approved issuing authority. This investment is intended to serve as a tangible sign of the migrants’ commitment to Australia in the short term and they are expected to engage in business in the longer term.
In the past twelve months, fresh applications from a number of traditional source countries – such as Taiwan and Hong Kong – have declined.
Macquarie Bank (“Macquarie”) believes that – with a few minor but important amendments – the performance of the program could be significantly improved, to the mutual benefit of migrants and Australia’s national interest. Macquarie proposes two key amendments.
At present:
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- Only State and Territory Treasury corporations are approved issuing authorities.
- Funds used to finance the Designated Investment must be personally owned and unencumbered and must be legally accumulated by the migrant’s qualifying business or eligible investment.
In this submission, Macquarie proposes that the definition of “Designated Investment” be expanded to include infrastructure securities listed exclusively on the ASX Infrastructure and Utilities Index. A private trust could then apply to the Department of Immigration and Multicultural Affairs (DIMA) for registration as an “Approved Issuing Authority” provided its trust deed limited its investments to Designated Investments – namely, government securities and listed infrastructure securities.
Under our proposal, business migrants will be given the choice to nominate the proportion of their Designated Investment that they wish to have invested in government securities and listed infrastructure security respectively.
Anecdotal evidence also suggests that the requirement for migrants to demonstrate personal exertion in the accumulation of their Designated Investment is a difficult evidentiary burden to discharge and often works to discourage many bona fides applications. We propose that this requirement be relaxed, ensuring that Australia is competitive with alternative international business migration programs.
It is undoubtedly in Australia’s national interest for the country to be an attractive destination for quality, wealthy business migrants and their families. Macquarie’s proposal is designed to ensure that the program not only remains “user friendly” but continues to place Australia ahead of competing locations.
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- Introduction
1.1 History of Business Migration in Australia
The current investment-linked migration program was introduced in April 1995, although business migration programs have required migrants to invest funds in Australia since 1981. However, in 1992 – following the release of a highly critical report by the Joint Parliamentary Public Accounts Committee on the previous business migration scheme – the Federal government temporarily froze the acceptance of fresh applications pending the introduction of the new guidelines.
Criticisms centred on whether appropriate tests were made regarding the probity of migrant funds amidst allegations of “loan-laundering” – i.e., claims that some business migrants were borrowing the funds required to establish the minimum net worth, effectively circumventing the spirit of the program.
The 1995 reforms attempted to address the above criticisms – valid or extreme as they may have been – by introducing an explicit investment-linked class of business migration while at the same time re-emphasising the need for business skills as an essential requirement of that class. The investor-linked class complemented the business investment and business executives categories of business skilled migrants. The reforms also introduced various tests, by way of declaration and production of evidence, to require investment-linked migrants to “prove” their economic bona fides.
Not surprisingly, the 1992 freeze dramatically impacted on the credibility of Australia’s business migration program leading to a noticeable decline in the number of applications in the 12 months following resumption. Although the number of applications has since recovered somewhat, it is questionable whether Australia is attracting as many quality high-net-wealth business migrants as it should.
1.2 Key Requirements of Current System
To qualify under the current system, investment-linked migrants must establish:
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- A record of successful business/investment activity, and a minimum of three years’ experience in actively managing a business/investment.
- In one of the past 5 financial years, the migrant must have maintained direct and continuous involvement in the management of a qualifying business or eligible investment.
- A minimum 10% shareholding in a qualifying business or a minimum of A$1m in eligible investments. Eligible investments exclude personal residence.
- A minimum score of 105 on the business skills points test, involving an investment of between A$750,000 and A$2,000,000 – for a minimum of 3 years – in a Designated Investment.
- Funds used to finance the Designated Investment must be personally owned and unencumbered and must be legally accumulated by the migrant’s qualifying business or eligible investment.
- For the two financial years prior to the application, the migrant’s net assets must be worth at least 50% more than the capital the migrant plans to invest in a Designated Investment.
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The intention and effect of conditions 2-4 is apparently to ensure that the applicant is not merely an affluent person but also a person with considerable business experience and acumen.
1.3 Current Guidelines for Designated Investments
Regulation 5.19A stipulates that ‘Designated Investments’ are to be limited to State and Territory government securities or securities which satisfy the following criteria:
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- The security matures in not less than 3 years from its date of issue;
- Repayment of principal is guaranteed by the issuing authority;
- The security cannot be transferred or redeemed before maturity except by operation of law or under other conditions acceptable to the Minister; and
- Investment in the security is open to the general public at commercially competitive rates of return; and
- The Minister is satisfied that the Commonwealth will not be exposed to any liability as a result of an investment in the security by a person.
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1.4 Guidelines for Review of Designated Investments
The Business Advisory Panel (BAP) Working Party has been asked to review the range of Designated Investments with a view to examining the scope for an expansion of choices available to investment-linked migrants under Sub-Class 131.
Proposals for new Designated Investments will be evaluated in accordance with whether or not they have the capacity to:
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- Meet all requirements specified in Migration Regulation 5.19A.
- Focus or target investment capital into areas of quantifiable economic benefit to all Australians.
- Minimise administrative complexity and risk.
- Focus on areas of perceived need such as regional infrastructure funding.
- Maximise choice for the business migrant (as per DIMA press release).
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2. Administrative Reforms
At present, investment-linked migrants must – among other things – establish the following:
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- A record of successful business/investment activity, and a minimum of three years’ experience in actively managing a business/investment.
- In one of the past 5 financial years, the migrant must have maintained direct and continuous involvement in the management of a qualifying business or eligible investment.
- A minimum 10% shareholding in a qualifying business or a minimum of A$ 1m in eligible investments. Eligible investments exclude personal residence.
- Funds used to finance the Designated Investment must be personally owned and unencumbered and must be legally accumulated by the migrant’s qualifying business or eligible investment.
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These criteria are designed not only to establish the bona fides of the applicant but also to ensure that the business migrants possesses business skills over and above any personal wealth that they may bring to Australia.
Macquarie agrees that probity is critical to the success and public acceptance of any business migration program but believes that the conditions’ insistence that each business migrant prove that he or she was personally responsible for the accumulation of the Designated Investment is an unnecessary and unduly cumbersome requirement.
In our opinion, if the business migrant is able to establish that he or she has the requisite net worth and has a bona fides involvement with a qualifying business or eligible investment, this ought to be sufficient for the purposes of Sub-Class 131.
Australia is the only country in the world that insists on a “source of wealth” test for business migrants. Business migrants – particularly Asian migrants – find this test complicated, patronising and insulting. Asian culture views such enquiries as implying impropriety and distrust. This test also adds greatly to the administration costs of the scheme, unduly delaying applications and further taxing the already-over-worked staff and resources of DIMA.
In making these observations, Macquarie wishes to emphasise that its views are not in any way critical of the highly-motivated personnel of DIMA, particularly its “business skills” staff. It is the rules that are in need of reform.
3. Investment Product
3.1 The Case for Investment Choice
Currently, investment-linked migrants are only permitted to invest in 3-year government securities.
It is difficult to argue with the previous review’s conclusion that “of all the investment types on offer, government securities provided the highest level of security of investment capital, the least potential for claims of government liability as a result of the migration process and a relatively simple and inexpensive administrative mechanism”.
However, Macquarie believes that restricting Designated Investments to government securities is an unduly extremist approach to achieving the government’s objectives. Indeed, the 1995 reforms were widely regarded as a first step in the pioneering of this investment-linked category.
The problems with the present approach are:
The economic benefit to Australia of migrant investment in government securities is not readily quantifiable in terms of its contribution to Australia’s economic growth and the community’s living standards. Migrants investing in government securities are not “making a punt on Australia” – it is a risk-free investment.
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- Although migrants tend to be relatively risk-averse, the current system compels all business migrants into the most risk-averse option possible. There is no mechanism for catering for varying preferences among migrants. Government securities should be one option, but not the only option.
- Even though, according to DIMA, the feedback from migrants suggests satisfaction with the current system, this outcome should be understood in the context of: (a) Self-selection bias – i.e., feedback obtained from successful applicants does not necessarily reflect the opinions of potential applicants; and (b) Since the inception of the program in April 1995, migrants have entered into the fixed interest market at a time a falling interest rates. This will not always be the case in the future.
3.2 The Proposal
Macquarie recommends that the regulations be amended to allow for the following:
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- The definition of “Designated Investment” to be altered to include “all infrastructure securities, debt or equity, listed or listing exclusively in Australia on the Australian Stock Exchange’s Infrastructure and Utilities Index”.
- The definition of “Approved Issuing Authority” to be amended to include “any private trust bound by its deed to invest only in Designated Investments, and registered by the Department of Immigration and Multicultural Affairs.” This should thereby prove to be a simple system for DIMA to administer.
An Approved Issuing Authority so registered would then be responsible for making itself known to the various registered migration agents and will be required by law to:
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- Notify DIMA on entry or exit of a migrant into the trust.
- Ensure that securities purchased by migrants are non-redeemable and non-transferable for the duration of the 3-year period.
- Provide DIMA with audited financial statements on a half-yearly basis.
The Infrastructure and Utilities Index is presently comprised of the following securities (listed exclusively on the ASX) – although at least 10 further securities are expected to list on the Index in the next 10 years:
-AGL
-Australian Infrastructure Group
-Envestra
-Hills Motorway (M2)
-Infrastructure Trust of Australia
-Infratil Australia
-Transurban (Melbourne City Link)
Note: This proposal does not involve infrastructure bonds. Infrastructure bonds are a concessionally-taxed finance instrument introduced by the Keating government to encourage greater private investment in infrastructure. These bonds have since been withdrawn by the Howard government – and although Macquarie has a number of previously approved issues pending – it was not considered appropriate to involve infrastructure bonds in the present proposal. |
3.3 Proposal Rationale
Macquarie believes that our proposal represents a sensible incremental development of the program introduced in April 1995.
The proposal concords with the majority of the criteria stipulated by the Guidelines:
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- It meets all the requirements specified in Regulation 5.19A, except for the provision of a capital guarantee. That is: (a) the security matures in not less than 3-years; (b) the security is non-redeemable and non-transferable prior to maturity; (c) the investment will be open to the domestic market at commercially competitive rates; and (d) the Commonwealth will not be exposed to any liability as a result of such a product.
- It directs migrant capital to an area of quantifiable economic benefit to all Australians;
- It minimises administrative complexity and adopts a conservative approach to risk (see discussion below);
- Regional infrastructure funding would be a natural extension of the product we have proposed, and assuming a favourable market reception to our current product, Macquarie would be happy to develop such a product for the purposes of the next review.
- Under our proposal, business migrants will be given the choice to nominate the proportion of their Designated Investment that they wish to have invested in government securities and listed infrastructure securities respectively. This will allow business migrants the flexibility – within reasonable limits – to specify the risk profile they feel most comfortable with.
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We believe the proposal has several key advantages for both Australia and its business migrants:
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- Total government expenditure on infrastructure has been declining as a percentage of GDP since 1965 (see graph below). Moreover, the recent Hilmer competition reforms have driven State governments to sell their management franchise over infrastructure assets and assume the public policy role of regulation. As a result, at least $100 billion of existing and new Australian infrastructure is expected to be financed by the private sector over the next 10 years.
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Public investment as % of GDP
The Industry Commission estimates that the Hilmer reforms will deliver a net economic gain to Australia in the order of 5% of GDP (or $25 billion). By contributing to the funds necessary to finance such a fundamental transition, migrants can be seen to be actively supporting Australia’s economic growth and prosperity.
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- International data suggests that listed infrastructure securities typically exhibit less volatility than the general stock market. Macquarie’s analysis of over 150 international infrastructure stocks indicates that the beta for such securities is between 0,7 to 0.8. In other words, infrastructure securities tend to be 20-30% less volatile than the general stock market index.
- Even without allowing for the lower volatility of infrastructure stocks, investments on the Australian Stock Exchange over a rolling 3-year period exhibit only moderate volatility. Since the All Ordinaries Accumulation Index was launched in 1980, none of the sixteen 3-year rolling periods over the period 1980-1997 have exhibited a negative average annual return (see Graph below). In other words, the 3-year lock-in period operates as a de facto capital guarantee.
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Annual Return On A Rolling 3-Year Period On The Australian Stock Exchange
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- The proposal is an appropriate acknowledgment of the fact that successful Sub-Class 131 applicants are experienced and sophisticated business personalities, capable of understanding a stock-market-based product of the kind proposed. Rather than compelling migrants to choose the most risk-averse investment (which incidentally is less beneficial to Australia) – our proposal allows migrants, within reasonable limits, to choose a risk level they feel most comfortable with.
- Our proposal will provide an incentive for the private sector – subject to DIMA’s regulatory supervision – to reinvigorate the marketing of Australia’s business migration program. This should greatly assist Australia’s attempt to attract its fair share of quality business migrants.
- An additional 500 business migrants per year, bringing with them an average net wealth of $4 million per family, would result in an “unrequited transfer” of $2 billion on Australia’s current account. This would represent a significant contribution to reducing Australia’s persistent current account deficit.
- The proposed product is not intended to be in lieu of but rather in addition to the existing option for business migrants to invest their entire Designated Investment in government securities.
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4. Conclusion
Australia stands to benefit greatly from attracting high quality investment-linked business migrants. Our proposal is designed to enhance this prospect.
Postscript (2017)
This was the first significant project that my future business partner, Adam Geha (then with Macquarie Bank) & I worked on.