Opinion & Commentary
Canberra's Investment Confusion
Chinese companies are increasingly looking to invest overseas, and foreign capitals are calibrating their policy responses. Australia, which has been the destination for several high-profile attempted Chinese mining investments over the past year, is at the front lines of this process. Recent developments show that Canberra hasn’t yet gotten the formula right.
The executive director of Australia’s Foreign Investment Review Board, Patrick Colmer, gave a speech last week that was interpreted as signaling a tougher stance toward foreign investment in the resources sector. Mr. Colmer indicated a government ‘preference’ for foreign interest in new (or ‘greenfield’) projects to be limited to 50% and investments in major Australian producers to be kept below 15%. That the speech was given to the Australia-China Business Council left little doubt as to the intended recipient of the message: Chinese state-owned enterprises.
This policy preference had already been implied by the limits Australian Treasurer Wayne Swan placed on previous acquisitions, such as Sinosteel’s acquisition of a 49.9% stake in Murchison Metals last year. But Mr. Colmer’s remarks were the most explicit statement yet of the government’s approach. It comes at a time when Chinese state-owned enterprises are showing a growing interest in purchasing majority stakes or making outright acquisitions of Australian resources companies. The speech also coincided with the decision of China Nonferrous Metal Mining Group to walk away from an attempt to acquire a 51.6% stake in the Australian rare earths explorer Lynas Corporation, worth 505 million Australian dollars ($439 million). Conditions set by the Foreign Investment Review Board ultimately broke the deal.
The risk for the Australian government is that its tougher approach to these transactions denies resource companies access to cheap foreign capital at a time when capital constraints are the main obstacle to expansion for many domestic producers. Australia has always relied on substantial foreign participation to capitalize on its mineral wealth. Given their access to cheap capital and desire to hedge exposure to commodity prices, Chinese firms are a natural fit with Australian resource companies.
There are some signs Canberra still recognizes the benefits of foreign investment. In early August, the government announced the most significant liberalization of its approval process for foreign direct investment since the Australia-United States Free Trade Agreement came into operation in 2005. The changes rationalize the government’s approval process for smaller foreign acquisitions up to A$219 million. Most transactions below this threshold will no longer be formally screened. This fell short of the more liberal benchmark of A$953 million (adjusted for inflation) under the free trade agreement with the U.S., but was no less welcome for that. The changes will reduce the costs, delays and uncertainties facing some foreign investors.
Yet even after that improvement, Australia still has one of the world’s most restrictive regulatory regimes for foreign direct investment, according to one Organization for Economic Cooperation and Development survey. First foreign investors have to run the gauntlet of Foreign Investment Review Board approval, with all the political uncertainty that entails. Then they face a tax burden on capital that ranks as the fourth highest in the OECD at 11% of GDP. It is no coincidence that Australia’s share of global inward FDI flows is much less than its share of global GDP. On this measure, Australia ranks near the bottom of 141 countries in attracting its share of global FDI flows.
A key problem with Australia’s regulatory regime is its highly discretionary approach to FDI approvals, which Mr. Colmer’s speech does not significantly clarify. The Foreign Acquisitions and Takeovers Act gives the treasurer essentially unconstrained discretion to reject foreign investment based on an open-ended ‘national interest’ test. The treasurer’s powers are so sweeping, there is effectively no scope for administrative or judicial review. The Foreign Investment Review Board is notoriously secretive and unaccountable.
Even when approval is forthcoming, this has increasingly had conditions attached. In some cases, these conditions have been absurdly prescriptive, including the levels of output and employment to be maintained at specific mining operations. They have also been explicitly protectionist in intent, with Treasurer Swan unashamedly saying they are designed to ‘protect Australian jobs.’
Mr. Colmer’s speech last week compounded all these problems. He told his audience that the regulation of FDI was a matter of ‘policy,’ not ‘law,’ and that prospective foreign investors would be best served leaving lawyers out of the process. He also warned against using the media to front-run the approval process by announcing deals before talking to policy makers in Canberra. Prospective foreign investors have little basis on which to predict how the government will exercise its discretion over FDI. The government’s efforts to clarify its policy have only created confusion and uncertainty.
Australia’s regulatory framework for FDI still needs comprehensive reform. Not only would this provide foreign investors with greater certainty, but the political debate surrounding reform would help Australians resolve their long-running ambivalence about the role of foreign capital in their economic development – and teach the rest of the world a lesson in how to deal with Chinese capital inflows, too.
Dr Stephen Kirchner is a Research Fellow with The Centre for Independent Studies and the author of Capital Xenophobia II.
