Working Papers

Chinese Perspectives on Investing in Australia

With Sinosteel pulling the plug on a $2bn iron ore mine, the Lowy Institute has come out with a timely survey of Chinese Perspectives on Investing in Australia. The Lowy analysis highlights the role of government policy in causing confusion among Chinese investors. It singles out what it calls ‘public (but undocumented) comments in 2009 by a FIRB official.’ I assume the author means these comments, which are now on the public record following an FOI request.

The Lowy analysis is disappointing in arguing that if the FIRB did not exist, we would have to invent it. It even suggests setting up a FIRB presence in China. Given that the Treasurer has sought to regulate Australian FDI in China through some of the conditionality imposed on Chinese acquisitions in Australia, that would be perversely appropriate.  It seems that geography is no boundary to the Treasurer’s discretion. Australia’s dysfunctional regulatory regime for FDI is a problem not only for Chinese investors, but for anyone engaged in cross-border acquisitions of Australian equity capital.

posted on 24 June 2011 by skirchner in Economics, Foreign Investment

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We’re Too Busy to be Transparent: FIRB

FIRB chairman John Phillips on the rejection of the SGX-ASX merger:

“I couldn’t understand why anyone would support it—unless they had a vested interest.”

John ignores the possibility that some people might support the merger by taking the view that it was none of their business what ownership structure ASX management chose to pursue. Unfortunately, many in government and the media see their role as being back-seat drivers of other people’s business decisions.

John also complains about the FIRB’s time being taken up responding to FOI requests:

Mr Phillips said the FIRB was currently subject to many Freedom of Information requests which were taking up the time of its staff.

“We are getting so many requests from (journalists) and others under the FOI Act which is unfortunate in a way because it is taking up the time of people who ought to be dealing with applications,” he said.

Mr Phillips said he was “not sure how much more transparency there can be”.

I can think of one less FOI application the FIRB would have had to deal with if they had taken the time to put their public speeches on their web site. It is the FIRB that wastes everyone else’s time by denying access to information that should be on the public record as a matter of course.

posted on 09 June 2011 by skirchner in Economics, Foreign Investment, Rule of Law

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How New Zealand Turned Away IKEA

In contrast to the Australian Treasury, the Acting Secretary of the New Zealand Treasury injects some sense into the debate over foreign direct investment:

Acting Secretary to the Treasury Gabriel Makhlouf has hit out at critics of foreign investment in New Zealand, saying Treasury has consistently recommended removing all screening.

The British civil servant who arrived in this country 15 months ago told the New Zealand Institute of International Affairs that lowering foreign investment would be counter-productive to growth ambitions.

Small, high productivity economies relied heavily on international connections of people, capital, trade and ideas, he said.

He advocated the reduction of costs and distortions associated with capital inflows, particularly tax.

“If we are to continue to screen foreign investment, and Treasury has consistently recommended removing all screening, it needs to be kept to a minimum and under constant review,” he said.

“Some of you might have followed the story of the big Swedish furniture outlet called IKEA, and its attempts to find a site for a store in the North Island,” Mr Makhlouf said.

The company ran into so many obstacles that it eventually abandoned its plans to establish a New Zealand branch. Domestic policy settings relating to roading infrastructure, the Environment Court process and the approach of the local council managed to sink IKEA’s plans.

The UK has one of the world’s most liberal FDI regimes, so the New Zealand regime must have come as a surprise to Makhlouf.

posted on 02 June 2011 by skirchner in Economics, Foreign Investment

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Italian-French Food Fight: How to Regulate FDI

A couple of US lawyers note the global trend towards invoking bogus strategic and national interest considerations to support political intervention in cross-border acquisitions. They suggest the following principles for regulating politically-sensitive transactions:

First, the review process should encourage investment and be tailored to apply to transactions implicating true national security interests. Screening for other reasons, such as a “national interest” standard should require an exceptionally high standard for intervention. To support this principle, reviews should be led by a responsible agency able to assign appropriate weight to the interests of open investment while also fully protecting against national security risks. The review process should be protected from political interference…

Also, the review mechanism should provide as much certainty as possible to investors…

Third, the government agencies conducting the review should be accountable.

Australia’s regime for regulating FDI fails on all three counts.

posted on 21 April 2011 by skirchner in Economics, Foreign Investment

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A Failure of Political Leadership

I have an op-ed in the Straits Times that discusses Australia’s regulation of foreign direct investment in light of the Treasurer’s rejection of the SGX-ASX merger:

the Treasurer’s sweeping powers and the open-ended nature of Australia’s ‘national interest’ test are a standing invitation for politicians to pre-empt and second-guess commercial outcomes. The Foreign Acquisitions and Takeovers Act is a lightning rod for political intervention in the market for ownership and control of Australian equity capital.

The Act adds nothing useful to the regulation of business investment in Australia. It allows government to infringe the property rights of the owners of Australian equity capital, who are denied the opportunity to sell to the highest bidder and thereby realise the full value of their equity. That in turns reduces the amount of capital available for re-investment in Australia by the sellers of these assets. The Treasurer’s opposition to this and other deals devalues Australia’s stock of equity capital.

posted on 12 April 2011 by skirchner in Economics, Foreign Investment, Politics

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ASX-SGX RIP: Wayne Swan’s ‘No-Brainer’

Treasurer Wayne Swan’s rejection of the SGX-ASX merger is given an explicitly protectionist rationale:

“Becoming a junior partner to smaller regional exchange through this deal would risk us losing many of our financial sector jobs,” he told media.

Former Treasurer Peter Costello resorted to similar protectionist arguments in boasting about his role in frustrating the globalisation of Australian business:

The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.

The regulation of foreign direct investment in Australia is now effectively an arm of domestic industry and employment policy. Swan has received advice on the matter from the RBA and ASIC, but it remains to be seen how much of this advice is publicly released and how much stays a state secret. No doubt The Australian will try and FoI all of it. The journalists at The Australian are the only ones who understand that this is principally a rule of law issue. The commercial merits and implications of the proposed transaction are a secondary consideration.

posted on 08 April 2011 by skirchner in Economics, Foreign Investment, Rule of Law

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Offshore Perceptions of Australia: A Failure of Leadership

The WSJ on the failure of the federal government and opposition to provide leadership on the SGX-ASX takeover:

Ms. Gillard professes to understand the general principle involved, having said that “An open economy has been in Australia’s interest.” So the failure by her and Mr. Swan to more aggressively support lifting the ownership cap to open the economy further is puzzling.

She may feel politically constrained as the head of a minority government beholden to a small band of Greens and independents. But that’s all the more reason to mount an aggressive persuasion campaign. Equally disappointing is the reaction—ranging from silence to outright hostility—from members of the ostensibly more free market opposition.

On this issue, the federal opposition is not even ostensibly free market.

Jennifer Hewett argues the government won’t risk defeat on something it doesn’t care about anyway:

It would be hard enough to muster political energy and risk defeat for something the government strongly supported, but Labor doesn’t really like this deal one bit. That is even though it knows blocking it on national interest grounds would be awkward for a government already regarded with suspicion by the international investment community. It’s why the Treasurer is sounding so cautious.

posted on 22 March 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law

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‘If the FIRB Doesn’t Kill It, We Will’

The FIRB is nothing more than a fig-leaf for political decisions that have already been made:

A senior source told the Herald that the government’s disposition was to reject the [SGX-ASX] merger, despite what the board recommended. ‘‘If [the board] doesn’t kill it, we will.’‘

posted on 19 March 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law

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WikiLeaks Blows the Whistle on Australian FDI Policy

WikiLeaks confirms what many have long suspected. The Australian government runs a secretly discriminatory policy on foreign direct investment by China:

The Foreign Investment Review Board told US diplomats that new investment guidelines signalled “a stricter policy aimed squarely at China’s growing influence in Australia’s resources sector”.

The anti-China rationale was set out in confidential discussions with US embassy officers in late September 2009 by the head of the Treasury Foreign Investment Division, Patrick Colmer, who is also an executive member of the Foreign Investment Review Board.

The embassy report on MrColmer’s remarks, titled “New Foreign Investment guidelines target China” and classified “sensitive”, is among US embassy cables leaked to WikiLeaks and provided to the Herald.

Based on Mr Colmer’s briefing, US diplomats reported that the Australian government privately wished to “pose new disincentives for larger-scale Chinese investments”.

The documents also confirm that the recent liberalisation of FIRB review thresholds was designed to alleviate the administrative burden on an over-worked FIRB that has increasingly sought to micro-manage high-profile FDI transactions.

My own whistle blowing efforts in relation to Australian FDI policy can be found here, although I obtained the document legally through the Freedom of Information Act.

posted on 03 March 2011 by skirchner in Economics, Foreign Investment

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Offshore Perceptions of Australia: Hostage to ‘Ultranationlist Mavericks’

The FT’s Kevin Brown on the proposed ASX-SGX merger:

a handful of ultranationalist mavericks holds the balance of power in Australia’s divided parliament…

The tricky element in this strategy is finding a way to get the government and the opposition to move together, so that neither is able to outflank the other by suddenly adopting the nationalist agenda.

posted on 16 February 2011 by skirchner in Economics, Foreign Investment

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Speaking Truth to Bill Shorten

An investment banker speaking to Bill Shorten gets a less than cogent response:

IT WAS mid January and Bill Shorten, the Assistant Treasurer, was in Hong Kong attending an Australian Chamber of Commerce function.

In an address to a relaxed gathering of ‘‘Australians in finance’‘, Shorten told the audience of the importance of financial services, and if anyone had fresh ideas they should approach him in the informal setting.

David Webb, a former director of the Hong Kong Stock Exchange, elected on a corporate governance ticket by institutional investors, took up the offer. A well-known activist and retired investment banker, he now devotes much of his time to dealing with corporate governance in Hong Kong.

When Webb’s turn came for a chat, the Englishman told the minister that Australia should consider scrapping the Foreign Investment Review Board as it was an impediment to attracting foreign capital. Other regulators could consider contentious investments, he said.

According to Webb, Shorten said the board was necessary, turning the topic to a looming decision on the takeover of the Australian Securities Exchange by its Singapore counterpart…

But what Shorten said next surprised Webb.

‘‘His attitude about this was … that foreign ownership or a perceived foreign takeover would result in Australian investors being screwed. He didn’t make very cogent arguments to me.’‘

posted on 12 February 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law

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What’s So Special About the ASX?

Deutsche Börse AG looks set to acquire the New York Stock Exchange, while the LSE Group is also set to merge with the Toronto exchange in the latest cross-border tie-ups between securities exchanges. The local market has correctly interpreted these deals as increasing the likelihood that Australia’s Treasurer will approve the proposed merger of SGX and ASX (it has already cleared ACCC scrutiny). If an icon of US capitalism such as the NYSE can be acquired by Deutsche Börse, it becomes very difficult for Australia’s FDI protectionists to argue that the ASX should be immune from foreign acquisition. Oddly enough, opposition to the Deutsche-NYSE deal is more likely to come from European than US regulators.

We should still not underestimate the potential for the ASX-SGX deal to fall over, either because Treasurer Swan deliberately spikes the approval with so much conditionality as to make it unacceptable to the parties or because of parliamentary disallowance of the necessary regulatory changes. The deal remains a key test of Australia’s international openness, one that some combination of the federal government, the cross-benches and the opposition might still fail.

posted on 10 February 2011 by skirchner in Economics, Foreign Investment, Rule of Law

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How the ACCC Doomed ASX

Maurice Newman on a fateful decision:

When, in 1998, the Australian Competition and Consumer Commission rejected ASX’s bid for the Sydney Futures Exchange, it consigned ASX to a non-independent future. In the seven years it took for the ACCC to finally approve the merger, most of the bigger stock exchanges in our region and some outside it had emulated Australia’s aborted lead. This robbed ASX of a significant first mover advantage, depriving it of scale and scope and an unrepeatable regional leadership position.

There can be no doubt that the 2006 merger of ASX and the Sydney Futures Exchange, when it came, was a huge benefit to both markets and to Australian financial services generally, but it came too late to fully leverage this success internationally.

posted on 27 January 2011 by skirchner in Economics, Financial Markets, Foreign Investment

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The ASX-SGX Merger and the National Interest

ASX commissioned Access Economics to produce a report on why the ASX-SGX merger is in the national interest. As the report notes, internationally ‘no previously proposed cross-border exchange sector transaction has failed to proceed on the basis of regulatory disallowance.’ But in Australia, as Jennifer Hewett has noted, ‘the politics are overwhelmingly stacked against it’.

posted on 09 December 2010 by skirchner in Economics, Financial Markets, Foreign Investment

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Tories for FDI Protectionism

Opposition to FDI in Australia often comes from the political right. Canada is no different, with Mark Milke noting the hypocrisy of Canada’s Tories:

The decision by the federal Conservative government to reject the Australian mining company BHP Billiton Ltd.’s takeover bid of Potash Corp in Saskatchewan was only the latest in a series of anti-investment moves by a plethora of Canadian governments…

Those who claim that resource ownership akin to oil and gas reserves was at stake are fibbing. As with oil and gas, the subject of the takeover attempt was a company that extracts the resource; it was not about ownership of the resource itself. Oil, gas and potash all belong to provincial governments.

posted on 02 December 2010 by skirchner in Economics, Foreign Investment

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