Working Papers

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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Blame it on Rio

John Durie sees straight through Treasurer Wayne Swan:

FEDERAL Treasurer Wayne Swan went to extraordinary lengths not to make a ruling on Chinese investment in Australia’s resources industry by partially knocking back the OZ Minerals deal.

His excuse was as lame as they get: the Chinese rescue could not include the Prominent Hill copper and gold mine because it was too close to the defence facility at Woomera in South Australia.

The mine is 162km from the facility and to define it as being of strategic importance is a stretch of extraordinary proportions.

If China or anyone wanted to spy on Woomera, and few would, all you would need to do would be to log on to Google Earth rather than pay more than $4 billion to buy a gold and copper mine…

For a Government that boasts about its good work in helping the country through the recession, this decision says the exact opposite…

Swan’s non-decision has made an already murky part of Government even murkier.

Apparently, Chinese miners are more of a security risk than the Russians.

posted on 29 March 2009 by skirchner in Economics, Foreign Investment

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Self-Inflicted Chinese Influence Peddling

The ACCC clears an increased Chinalco stake in Rio in terms of section 50 of the Trade Practices Act:

Chinalco and Rio Tinto would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels. Given this conclusion, it was not necessary for the ACCC to reach a determinative view on the extent to which Chinalco could control and influence Rio Tinto.

It is noteworthy that the ACCC’s decision was based on the worst-case assumption that:

Chinalco and various steel makers are subsidiaries of the same parent entity and therefore may have common commercial interests.

As I noted in an earlier op-ed, given its determination in relation to the formerly proposed merger between Rio and BHP, the ACCC could hardly have concluded otherwise. 

Having cleared the competition policy hurdle, the deal must now be cleared in terms of the Foreign Acquisitions and Takeovers Act.  But with the economic issues now settled from a regulatory standpoint, what does the FATA have to add to this process?  The FATA’s only purpose is to serve as a vehicle for ministerial (in this case, Prime Ministerial) discretion over foreign investment. 

Is it any wonder then that the Prime Minister is being lobbied by some of the highest echelons of the Chinese government?  While some see this as sinister, this sort of influence peddling is entirely of our own making, being effectively institutionalised by Australia’s FDI controls.  As I noted in Capital Xenophobia II, these controls are much closer to those used by the Chinese than to those used by comparable countries.  The lesson is, if you don’t want foreign investment policy in Australia being manipulated by the Chinese, then keep Australian politicians out of the process.


posted on 26 March 2009 by skirchner in Economics, Foreign Investment

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‘They will just dig them up and cart them away’

The FT’s David Pilling on the proposed increase in Chinalco’s stake in Rio:

But to say there is state involvement is not the same as imagining a monolithic apparatus planning world domination. In any case, the west, whose banks, carmakers and god-knows-what else are underwritten by the state, is not in an ideal position to lecture others. If China wants to use its trade surplus to secure mineral resources, one response might be: so what? But Chinese companies, even state-owned ones, are as likely to be engaged in cut-throat competition as in cosy cartels or state-sponsored carve-ups.

That undermines the idea that Chinalco, an aluminium maker with no need of iron ore, would seek to persuade Rio to sell cheaply to China Inc. Even if Chinalco were in a position to influence price negotiations – and with just two board members that seems doubtful – it is more likely to try to maximise prices for its own sake than to minimise them for China’s good.

Evidence that China’s forays abroad have been led by companies, and not orchestrated by an all-knowing state, is plentiful. Chinese companies often compete for the same asset. Both Shanghai Automotive and Nanjing Auto bid for Rover when the UK carmaker went chassis-up. Fears that Beijing is making a huge asset grab while the world reels from financial crisis also ignore the fact that foreign adventures are out of vogue in China. State institutions that invested in sinking foreign banks have faced public outrage for squandering national resources.

Pilling quotes NLP Senator Barnaby Joyce as saying:

“If they own the resources, they will just dig them up and cart them away.”

Yes, Barnaby - that’s how mining works. 


posted on 26 February 2009 by skirchner in Economics, Financial Markets, Foreign Investment

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Market Power is Bad, Except When it’s Our Market Power:  Harry Clarke versus the ACCC

Harry Clarke offers a ‘market power’-based defense of restrictions on Chinese ownership of equity capital in the Australian mining industry.  Harry prefers a Rio-BHP merger over selling assets to Chinalco, saying that ‘BHP-Billiton would have enjoyed unparalleled and enhanced monopoly power were it to consumate [sic] a marriage with Rio.’  However, this was not the conclusion the ACCC reached when it approved the proposed merger between BHP and Rio:

“The merged firm would be a significant global supplier of a range of commodities, including iron ore, coal, bauxite, alumina, copper and uranium. In particular, the proposed acquisition would combine two of the three major global suppliers of iron ore,” Mr Samuel said. “While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market.”…

“The proposed acquisition would combine two of the three major global seaborne suppliers of iron ore lump and iron ore fines. While barriers to market entry are high, involving significant sunk costs, market inquiries indicated there has recently been significant new entry and expansion in response to high demand for iron ore,” Mr Samuel said. “This increase in supply, which has included new large scale Australian operations with associated infrastructure, has frequently been supported by commitments or investments by steel makers.

“The ACCC considered whether the availability of alternative suppliers and the ability of steel makers to facilitate capacity expansions would be likely to undermine any incentive the merged firm may have to seek to influence the global supply and demand balance of iron ore in the future.

“The ACCC’s inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers.

“In relation to the supply of iron ore in Australia, market inquiries indicated that steel makers in Australia are unlikely to face higher iron ore lump and iron ore fines prices, based on a move from export parity pricing to import parity pricing. The ACCC found that alternative suppliers are likely to be available to Australian steel makers, including alternative suppliers with established rail and port infrastructure in Australia.”

Based on the ACCC’s analysis, Chinese interest in Australian commodity assets can be viewed as pro- rather than anti-competitive, not just in terms of the market for ownership and control of equity capital, which is important in itself, but also in terms of the relevant commodity markets.

But Harry argues this is a bad thing, because it undermines whatever market power Australian producers might have.  The logic of Harry’s argument is that Australia should use foreign investment controls to further the cartelisation of commodity markets to extract higher rents from Australian commodity output.  OPEC tried to do the same in the oil market, but only succeeded in demonstrating how difficult it is to effectively corner commodity markets.

Harry’s concern is with who captures whatever rents are associated with Australian mining output.  Chinese interests might sell Australian mining output to related entities at below market prices, but this would simply be a transfer of profits between these entities.  Australia might capture these rents more fully by nationalising domestic commodity production, a strategy followed by oil producing socialist states like Venezuela.  I’m pretty sure this is not what Harry wants, but that is where the logic of his position leads.  The globalisation of investment necessarily entails the globalisation of profits.  Using foreign investment controls for the purposes of cartelisation and rent extraction is beggar-thy-neighbour protectionism.

Harry is not alone in thinking that the sale of assets to Chinalco is a bad deal for Rio shareholders.  But it is not the role of government to protect businesses from making bad decisions.

posted on 19 February 2009 by skirchner in Economics, Foreign Investment

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