Peter Gallagher

Our processes for approv­ing invest­ment from abroad are puz­zling and incon­sis­tent with the way we gov­ern the rest of our econ­omy. We have well-developed laws and effi­cient insti­tu­tions to review com­mer­cial prac­tice, direc­tors’ respon­si­bil­i­ties, and trans­fer pric­ing and to ensure thatall Aus­tralians share in the eco­nomic ben­e­fits of growth.

Why then do we have the Trea­surer stand­ing at the door to our invest­ment mar­ket mak­ing deci­sions on indi­vid­ual com­mer­cial rela­tion­ships and on who may, or may not, have a seat on an Aus­tralian company’s board?

Should China’s largest resources and invest­ment com­pa­nies have to line up for lunch with the Prime Min­is­ter to ask whether they will be allowed to invest in Aus­tralia (“PM gives busi­ness heads-up off-course”, AFR 11 August)?

Here’s an anal­ogy. Could you imag­ine our biggest cus­tomers ask­ing the Prime Min­is­ter whether he will allow them to import from Australia?

Never. But invest­ment and trade are faces of the one coin; com­ple­ments, coun­ter­parts. Direct invest­ment is the strongest tie to our cus­tomers and sup­pli­ers around the world. Even more than trade, invest­ment makes a mar­ket bond.

Would it not be bet­ter to base our invest­ment poli­cies, like our trade poli­cies, on long-term rela­tion­ships and evolv­ing com­mer­cial real­i­ties, rather than on arbi­trary, one-off hur­dles for firms at entry?

Wayne Swan recently gave us six ‘principles’—comprising five eco­nomic cri­te­ria and a nod to unex­plained ‘national secu­rity’ concerns—to sup­ple­ment the ‘national inter­est test’ that he wields under the For­eign Takeovers Act.

It’s dif­fi­cult to know whether to applaud his effort at trans­parency or to ques­tion the absence of prior con­sul­ta­tion on whether any of the items on his list deserves to be there.

The eco­nomic cri­te­ria, how­ever, are far too broad and uncer­tain in appli­ca­tion to be entrusted to a con­fi­den­tial tri­bunal like the FIRB. Those that are rel­e­vant to the con­duct of a busi­ness in Australia—including com­pet­i­tive behav­ior— can appro­pri­ately and effec­tively be applied by exist­ing author­i­ties whose deci­sions are reviewed by the Courts.

Oth­ers such as ‘inde­pen­dence from for­eign gov­ern­ment’ and ‘adher­ence to busi­ness stan­dards’ are lit­tle more than insin­u­a­tions. Busi­ness stan­dards and norms dif­fer by coun­try, and they are shaped con­stantly by society’s chang­ing expec­ta­tions; they do not lend them­selves to one off assess­ments before the fact.

Regret­tably, too, Mr Swan acknowl­edges there’s a sev­enth cri­te­rion that may trump them all, where China is con­cerned. He admits to a “pre­dis­po­si­tion to more care­fully con­sider pro­pos­als by con­sumers to con­trol exist­ing pro­duc­ing firms.”

Why this extra cau­tion on invest­ment for ver­ti­cal inte­gra­tion? Ver­ti­cal inte­gra­tion is the con­veyor belt. There seem to be no sim­i­lar con­cerns when Japan­ese con­glom­er­ates (pre­sump­tively ‘inde­pen­dent of a for­eign gov­ern­ment’) invest in min­er­als or energy prop­er­ties. You’ll find no evi­dence of any con­cern if you look at the own­er­ship of coal mines in Queens­land or NSW.

Why is Chinalco’s inter­est in Rio, or Sinosteel’s in Murchi­son, or Antam’s in Her­ald Resources or China Met­al­lur­gi­cal in Cape Lam­bert Iron Ore any different?

It makes lit­tle sense, either, to dis­tin­guish between ‘green­fields’ and exist­ing projects when con­sid­er­ing invest­ments by our export cus­tomers. The eco­nomic value of their direct invest­ment is the same. If the project risks dif­fer, the mar­ket will reflect that dif­fer­ence in the price.

This is not to say we should put no con­di­tions on invest­ment from abroad. But no one should have to appeal to a polit­i­cal leader to do busi­ness in Australia.

Instead, we should rely on exist­ing, review­able reg­u­la­tory author­i­ties to safe­guard com­pe­ti­tion and busi­ness stan­dards and on the mar­ket to set the price with­out guid­ance from obscure gov­ern­ment strategists.

Share­hold­ers and other asset own­ers are today’s losers from uncer­tainty in our rules for China’s invest­ments. Con­sumers, tax­pay­ers and the next gen­er­a­tions of Aus­tralians will be losers, too. Arbi­trary deci­sions on direct invest­ment will have major impli­ca­tions for Australia’s future trade pro­file. China has other options; we have fixed assets.