Working Papers

The Great Pat Colmer Speech Hunt

Glenda Korporaal weighs in on the Pat Colmer speech:

A week later the FIRB says there is no transcript of the speech, and the Australia China Business Council, which is to be commended for organising a conference with a wide range of Australia-Chinese experts, has been deluged with requests for a copy from every lawyer advising on foreign investment.

As of yesterday afternoon none was available…

The fact that the speech is not yet available—and may not be made available—to people who would genuinely like guidance on foreign investment applications can only add to the potential for criticism that Australia’s foreign investment policy is less than clear…

That said, there is still a real hunger for more information and more clarity about both the official policy and the administration of that policy.

This is an issue that should be acknowledged and addressed at higher levels than the FIRB director, but making the speech generally available would be a start.

The Executive Director of the FIRB is the designated Australian National Contact Point (ANCP) under the OECD Guidelines for Multilateral Enterprises.  According to the government, ‘the ANCP is committed to carrying out these responsibilities in accordance with the Guidelines requirement for NCPs to be visible, accessible, transparent, and accountable.’

All rhetoric, no substance.

posted on 02 October 2009 by skirchner in Economics, Foreign Investment

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Yes, We Have No Patrick Colmer Speeches

I really shouldn’t complain about FIRB secrecy.  Variations on ‘Patrick Colmer speech’ are now the number one search term delivering traffic to this site.  Alan Jury’s Chanticleer column in the AFR yesterday (gated, so no link) deserves considerable credit for highlighting the issue of making pseudo-policy announcements via speeches that are not in the public domain.  As Jury noted, it makes a complete mockery of the government’s posturing on transparency and accountability in international fora like the G20, not to mention the ‘Government 2.0 Taskforce’ (I would settle for some Government 1.0).

posted on 01 October 2009 by skirchner in Economics, Foreign Investment

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Xenophobic, Not Racist

I have an op-ed in today’s Wall Street Journal on the confusion being created by the government’s discretionary approach to the regulation of foreign direct investment.

This morning I read in one of the US equity analyst reports I receive that ‘we hear out of Australia that its foreign investment regulator wants to impose 15% caps for global purchases of the country’s large companies.’  This is over-stating the situation, but is indicative of the perceptions now being created among offshore investors.

Australian mining magnate Clive Palmer is not taking Patrick Colmer’s advice to leave the lawyers and media out of it and quietly cut deals in Canberra.  He is threatening to take an FDI case to the High Court.  Palmer is also calling Australia’s regulatory regime for FDI racist.  I think ‘xenophobic’ is a better characterisation (hence the title of my monograph on the subject).  Colmer effectively conceded as much when he said that part of FIRB’s role was to maintain public support for foreign direct investment by managing an ‘orderly’ flow of FDI transactions.

posted on 30 September 2009 by skirchner in Economics, Foreign Investment

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The FIRB and the Rule of Law

If you need further evidence that the rule of law is largely non-existent with respect to foreign direct investment in Australia, you need look no further than a speech FIRB director Patrick Colmer gave to the Australia-China Business Council last week, as reported in The Australian:

Mr Colmer said many of the foreign investment decisions were matters of “policy” rather than black-letter law.

He said the government had to balance the need for an orderly flow of foreign investment into Australia with the need to ensure continued public support for foreign investment proposals.

“One of the problems we have also seen is where lawyers get involved and try to turn a policy argument into a legal debate,” Mr Colmer said. “It is not effective. The lawyers don’t like us telling them that, but we do try to steer people through the policy issues rather than the legal issues ... Don’t turn it into a legal stoush, and deal with us the way we like to deal with you - in confidence.”

The last thing FIRB wants is a review of decisions on common law grounds (other forms of administrative and judicial review being effectively precluded).  As the ACCC would no doubt tell their FIRB colleagues, legal process and case law are the enemies of bureaucratic discretion. 

Perhaps the most tragic aspect of Colmer’s speech is that it was actually welcomed by some commentators as a clarification of the regulatory regime for FDI.  This interpretation would be somewhat less ludicrous if Colmer’s speech were actually a publicly available document, accessible by foreign investors.  FIRB is evidently too busy micro-managing FDI on behalf of the Treasurer to put the speech on its web site.  I have emailed FIRB requesting a copy, but have no expectation of receiving a reply.

posted on 28 September 2009 by skirchner in Economics, Foreign Investment

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Australia: Developed Country Institutions, Emerging Market Growth Rates

Treasury Secretary Ken Henry suggests that Australia remains an attractive proposition to foreign investors:

it seems quite likely — to me at least — that the Australian economy might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate.

This fifth observation might surprise you. My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities — of governance and flexibility — of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds.

It follows from what I have just said that I do not think it likely that, relative to earlier growth periods, the future expansion of the Australian economy will be constrained by a reduced capacity to attract foreign capital.

Henry failed to mention that the main constraints on Australia attracting foreign capital are imposed internally, not externally: relatively high rates of tax on capital and a Whitlam-era, Chinese-style regulatory regime for foreign direct investment.  We will find out at the end of the year what Henry proposes to do about the former.  The government’s modest tinkering with the latter suggests that Australia will continue to underperform its potential in attracting FDI.

posted on 18 August 2009 by skirchner in Economics, Foreign Investment

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FDI Liberalisation Falls Short

Following hot on the heels of the New Zealand government’s announcement of reforms to its regulation of foreign direct investment, the Australian Treasurer has also announced changes to the thresholds for screening FDI applications.  My take on the changes can be found in an op-ed in The Canberra Times today (text below the fold).  I’m also quoted on the subject in a story on page three of the AFR today.

continue reading

posted on 05 August 2009 by skirchner in Economics, Foreign Investment

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The Trans-Tasman Battle for FDI

I have an op-ed in today’s Age contrasting the New Zealand government’s liberalisation of its regulatory regime for foreign direct investment with the Australian government’s growing use of FDI regulation as an extension of domestic industry policy (note that there is a minor sub-editorial error: the third para should read ‘by 40%’ not ‘to 40%’).  I predict that this will add to Australia’s underpeformance in attracting its share of global FDI.

Bryan Frith wrote-up my proposals to reform Australia’s regulatory regime for FDI in The Australian, concluding that ‘While the Rudd government is in reformist mode, it should take a serious look at Kirchner’s suggestions.’  However, as my Age op-ed notes, the Rudd government is moving in the opposite direction to the one I set out in Capital Xenophobia II.

posted on 31 July 2009 by skirchner in Economics, Foreign Investment

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Kevin Rudd’s China Crisis

Greg Sheridan and John Garnaut both have good analyses of the issues arising from China’s detention of Australian Rio Tinto executives for alleged espionage.  Both emphasise that this is a critical test of Kevin Rudd’s leadership and China credentials, although Garnaut maintains that Rudd’s leadership has already failed:

With the exception of his famous “Zhengyou” speech at Peking University last year, he ducked the responsibility to lead on China. His Government’s policy ambivalence towards Chinese investment encouraged those in Australia who believed that Chinese money was something to be feared. His advisers played up the China military threat, or encouraged journalists to believe that his Defence White Paper had played up that threat.

The leadership vacuum on China was quickly filled by the shrill and ill-informed.

Australia’s business and political leaders needed to be assisting those in China who saw the world as an economic opportunity rather than a security threat. The risk of doing otherwise, of playing up the threat of “China Inc”, was that it would become self-fulfilling.

While there is an element of truth to this, China still bears primary responsibility for these developments.

Greg Sheridan was an opponent of the proposed Rio-Chinalco tie-up (a position he uncharacteristically shared with arch-enemy Peter Costello), which explains why he perhaps did not appreciate the irony of these comments:

The Chinese have made it clear they can regard any commercial matter as a matter of their national interest...

Under this system, they can intervene legally in any business deal they do not like…

the Chinese authorities have explicitly said that commercial matters are matters of national security

Exactly the same could be said in relation to Australia’s regulation of FDI.  The Australian government has routinely made use of bogus national security and national interest arguments to rationalise political interventions in the market for foreign ownership and control of Australian equity capital. This is not to say that we are as bad as the Chinese, but the differences are ones of degree rather than kind.

Sheridan says that:

The implications for Chinese conduct of investments in Australia is clear.

The Foreign Investment Review Board, perhaps at the direction of the Rudd government, needs to factor this information in to all future decisions about proposed Chinese strategic investments in Australia.

China’s actions will cost it dearly.  But it would not be in Australia’s interest to make the same mistake by becoming even more like China in its regulation of FDI.

posted on 13 July 2009 by skirchner in Economics, Foreign Investment

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The Slow and Secretive FIRB

Don’t hold your breath waiting for the Foreign Investment Review Board’s annual report:

THE Foreign Investment Review Board is reinforcing its reputation as one of Canberra’s most secretive bodies. More than a year after the 2007-08 year there is no sign of its annual report.

In contrast, the companies whose fate depends significantly on the board’s deliberations must deliver their annual reports within four months of the end of the financial year…

Although the board carries out confidential consultations with government departments and takes submissions from interested parties in cases that are already in the public domain, its decision-making remains secretive even to those with a close interest in outcomes. Its recommendations are passed directly to the Treasurer and are rarely made public…

Even when the Treasury-controlled board’s 2007-08 report is eventually made public, it is unlikely to reveal little about its deliberations.

The 2006-07 report reveals the number of applications for foreign investment and the decisions made, but does not identify the companies subject to applications.

I make recommendations for reform of the FIRB in my CIS Policy Monograph, Capital Xenophobia II.

posted on 06 July 2009 by skirchner in Economics, Foreign Investment

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The Rio-Chinalco Counter-Factual

John Garnaut challenges the widespread assumption that the Rio-Chinalco deal fell-over for commercial rather than political reasons:

The Economist reported that Rudd wanted the deal to go through. That may well be a message Rudd’s office would like the outside world to have but it is not consistent with dealings I have had with any of Rudd’s ministers, staffers or advisers, and certainly not from the companies involved.

In the normal course of events we would never find out what went on inside FIRB. On this occasion, Rio chairman Jan du Plessis hinted after he walked away from the Chinalco deal just over a week ago and Chinalco president Xiong Weiping more clearly indicated at his press conference on Thursday, that the original deal would have been killed in Canberra without substantial amendments.

“During our engagement and communication with FIRB we received advice in principle in terms of how the transaction should be modified,” said Xiong. And, unusually, Rudd ministers publicly lent against the deal from the start.

My own understanding, from Australian and Chinese sources, is that FIRB expressed its intense displeasure at almost every substantial aspect of the Chinalco deal but never spelt out what it would take for the deal to pass.

FIRB’s displeasure and the range of its concerns increased as time progressed — in correlation with the improving commodities, stock and debt markets — reaching critical levels early last month.

Xiong hoped his large concessions would be enough for Canberra. In fact he had no idea. Would Canberra have allowed him to accept a seat on the Rio Tinto board? He and we will never know.

Rudd may have been right in assuring China and the world that the Chinalco-Rio deal failed for “entirely commercial reasons”. But Australia’s China-like investment review process means we will never know the counter-factual.

Without the delay and uncertainty injected by the political process, which strengthened BHP’s negotiating arm vis-a-vis Chinalco, how would those two parallel commercial negotiations have panned out?

For all the ink spilled on the Rio-Chinalco deal, Garnaut is one of the few journalists to identify the real public policy issue in this debate: Australia’s Whitlam-era, Chinese-style regulatory regime for FDI.  Once again, that regime has been tested and found seriously wanting.  The collapse of the deal only adds to the uncertainty facing prospective foreign investors and the vendors of domestic equity capital.

posted on 16 June 2009 by skirchner in Economics, Financial Markets, Foreign Investment

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The Contradictions of FDI Protectionism

The ‘chairman’ of Hancock Prospecting, Gina Rinehart, argues against a Rio-Chinalco tie-up:

We cannot wish or assume that Rio-Chinalco (without investment conditions) will then invest in high-cost Australia.

What do India or Africa offer Rio and other mining companies? Massive and high-quality ore reserves and labour costs massively cheaper than in Australia.

What happens when Rio, perhaps enlivened with Chinese assistance, develops these massive projects in Africa and/or India?

Those projects offshore will compete against Australian mines and interests for many decades to come.

How will this help us to create more jobs? How will this help us to repay our growing debt? How will this help us maintain or grow standards of living?

Rinehart views FDI policy in protectionist terms, but her claim that Australian mining projects cannot compete with those in emerging markets is at odds with those who oppose the tie-up on the grounds that Chincalco would over-develop Australian resources with a view to lowering prices.  The opposition to Chinese FDI in the Australian mining industry is fundamentally incoherent.

In sharp contrast to Gina Rinehart, Peter Gallagher has an excellent post responding to Malcolm Turnbull’s concerns about the proposed Chinalco-Rio tie-up.

posted on 13 May 2009 by skirchner in Economics, Foreign Investment

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More FDI Protectionism from Treasurer Swan

Not content with micro-managing foreign direct investment in Australia, the Rudd government’s latest approval under the Foreign Acquisitions and Takeovers Act also seeks to micro-manage Australian FDI in China:

My approval under the Foreign Acquisitions and Takeovers Act 1975 is conditional upon Ansteel supporting the wider development of infrastructure in the Mid West, and maintaining agreed levels of Australian participation in a greenfields joint venture in China’s Liaoning Province.

Using the FATA to obtain leverage for Australian FDI in China sets a dangerous precedent and ignores the basic reality that Australia benefits from Chinese FDI even in the absence of Chinese reciprocity.  The answer to Chinese FDI restrictiveness is not to make our system more like China’s. 

As with other recent FDI approvals, the Treasurer has once again made explicit the protectionist intent behind the exercise of his discretionary powers under the Act:

These undertakings support Australian mining jobs, and protect Australia’s investment participation in the Chinese resources market.

The FIRB and Treasury are going to be kept very busy if the Rudd government is going to micro-manage every FDI proposal coming out of China in coming years.

posted on 09 May 2009 by skirchner in Economics, Foreign Investment

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A New Era in FDI Protectionism?

The conditional approval of Minmetals’ acquisition of OZ Minerals’ assets under the Foreign Acquisitions and Takeovers Act marks what may well be a new era in FDI protectionism.  Indeed, the Treasurer’s press release states explicitly that the conditions and undertakings required of Minmetals ‘are designed to protect around 2000 Australian jobs.’  Some of these conditions, such as the requirement to ‘comply with Australian industrial relations law and honour employee entitlements’ are legal obligations of any company operating in Australia, regardless of ownership, and are therefore completely redundant.  The reporting requirements imposed on the company are also already required under the Corporations Act.  This is a perfect illustration of how scrutiny of FDI under the FATA adds nothing to the regulation of business investment in Australia. The FATA’s only real purpose is to serve as a vehicle for political intervention in the market for foreign ownership and control of Australian equity capital.

In this case, political intervention has resulted in some extraordinarily prescriptive conditions in relation to both corporate governance and operational matters.  For example, Minmetals is required to: 

1. continue to operate the Century, Rosebery and Golden Grove mines at current or increased production and employment levels;
2. pursue the growth of the following projects:
1. the Century mine in Queensland, by the continuation of exploration activities for ore and/or the conversion or later sale of the plant so that it can produce a phosphate concentrate; and
2. the Rosebery mine in Tasmania, which with further exploration and development work, could continue to operate well beyond current mine life or at levels beyond current production rates; and
3. reopen Avebury (nickel) in Tasmania and develop Dugald River (zinc) in Queensland;

subject in each case to project feasibility and economic fundamentals permitting.

The weasel clause is, of course, ‘economic fundamentals permitting.’  Since there is no legal basis for determining ‘economic fundamentals’, these conditions are meaningless, except that the Treasurer has powers under the FATA to order divestment by foreign persons.  The conditions could conceivably be used to rationalise a future divestment order, but there is no need to demonstrate a breach of these undertakings for the Treasurer to exercise his powers under the Act.

The current government is sending increasingly strong signals to prospective foreign investors that they will have to conduct their business operations in Australia in accordance with politically-determined requirements and objectives rather than according to the rule of law.

Sadly, the government’s increasingly prescriptive regulation of FDI is no different from the protectionist views of Liberal backbencher and former Treasurer, Peter Costello.  With a seemingly bipartisan consensus in favour of FDI protectionism, foreign investors could be forgiven for looking elsewhere.  Indeed, China’s National Development and Reform Commission withheld approval for Hunan Valin Steel’s bid for 17% of Fortescue Metals on the grounds that Canberra’s conditions were too onerous and set a bad precedent.  Australia’s regulation of FDI offends even Chinese central planners.

posted on 24 April 2009 by skirchner in Economics, Foreign Investment

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Explaining Capital Xenophobia: Cranky Old Conservatives?

The latest Newspoll asks whether foreign companies should be allowed to acquire shareholdings in Australian mining companies.  A separate question asks whether Chinalco should be allowed to increase its stake in Rio.  52% of respondents are opposed to the former and 59% to the latter.  Opposition is stronger among Coalition voters than Labor voters, which may reflect National rather than Liberal Party voters.  Opposition also increases with age.  While it would be tempting to conclude that capital xenophobia is mainly attributable to cranky old conservatives, there is still more opposition than support even in the 18-34 age group.

Taken literally, the question on foreign shareholdings in mining companies implies that Australians are opposed not just to foreign direct investment, but to foreign portfolio investment as well (a 10% equity stake is enough to qualify as FDI according to the ABS; the threshold for FIRB scrutiny is generally 15%).  In any event, this and other opinion poll data (see Andrew Norton’s round-up) render Australia’s FDI controls readily explicable in political terms. 

Opposition Treasury spokesman Joe Hockey has even sought to raise concerns about foreign (ie, Chinese) portfolio investment in Australian debt markets, arguing that this might give the Chinese leverage over Canberra.  Like US debt markets, Australian markets are deep and liquid enough that the Chinese are unlikely ever to be effective price-makers.  Chinese threats to sell-off Australian dollar denominated debt would just provide a buying opportunity for other investors, to the detriment of their own portfolio.  But excluding all foreigners from participating in Australian debt markets would of course lead to a massive increase in domestic interest rates, something voters wouldn’t be too thankful for.

The irony is that at the same time the government is setting up Rudd bank to offset the implications of potential foreign capital flight for the commercial property sector, and politicians complain about the failure of banks to pass on reductions in official interest rates, neither the government or opposition are putting out the welcome mat to foreign capital.

posted on 08 April 2009 by skirchner in Economics, Financial Markets, Foreign Investment

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Canberra is the Problem, Not Beijing

I have a column in today’s Business Spectator arguing that it is Australia’s regulatory regime for FDI that is responsible for perceptions of inappropriate Chinese influence over the federal government:

China may well have the world’s most restrictive FDI regime, but Australia has the fifth most restrictive regime, based on one OECD measure. Australia’s highly politicised FDI controls more closely resemble those found in China and Russia than comparable countries like the United Kingdom and the United States. Is it any wonder that Chinese politicians finds themselves on familiar ground when lobbying Australian politicians over potential acquisitions?

If Australians are really concerned about the potential for Chinese influence over foreign investment policy, they should support making Australia’s regulatory regime for FDI less like China’s and more like the UK’s.

The priority for any reform should be removing ministerial discretion from the FDI approval process. This is the main source of the politicisation of foreign investment in Australia and the nexus for potential influence-peddling by sectional interests, including by foreign firms and governments…

The real scandal is not the potential for Chinese influence over Australian politicians. It is the Whitlam-era, Chinese-style foreign investment regulatory regime we have inflicted on ourselves.

posted on 01 April 2009 by skirchner in Economics, Foreign Investment

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