Malcolm Turnbull on Chinalco’s bid for Rio

Australia’s nation­al inter­est is to ensure wher­ev­er pos­si­ble that the con­trol of its major nat­ur­al resource assets remains in the hands of com­pa­nies that will pur­sue the devel­op­ment of those assets in a way that will max­imise the eco­nom­ic returns for Aus­tralia.

In no way is it the role of an Aus­tralian gov­ern­ment to nom­i­nate the com­pa­nies that devel­op our nat­ur­al resources. That’s pre­cise­ly the worst aspect of the com­mand-econ­o­my that Turn­bull crit­i­cizes in the Chi­nese state-own­er­ship of pro­duc­tion.

The sys­tem of enter­prise-led cap­i­tal­ism with trans­par­ent and account­able reg­u­la­to­ry insti­tu­tions serves Aus­tralia very well (it’s what gives us the capac­i­ty to host even for­eign state-owned enter­pris­es estab­lished here). So it’s dis­ap­point­ing that Turnbull—like the FIRB—wants to start pick­ing-and-choos­ing. That is, mak­ing bets—on the basis of very lit­tle infor­ma­tion and, to judge from his speech, his own expe­ri­ences of China—about whose own­er­ship rights would be ‘best’ placed to return most to the Aus­tralian econ­o­my in the future.

That’s not cap­i­tal­ism, its dirigism. Eco­nom­i­cal­ly inef­fi­cient and bound to fall into the hands of dog­ma, prej­u­dice and polit­i­cal barter.

I don’t think any politi­cian or bureau­crat has a claim to know the pri­vate inten­tions of any company—state-owned or private—that seeks to invest in Aus­tralia. That’s why I say that the FIRB review of for­eign invest­ment at the bor­der is an illu­sion.

Chinese government control?

It’s also why I don’t buy Turnbull’s major slan­der on this deal: that it is effec­tive­ly putting these resources in the hands of the Chi­nese gov­ern­ment. Although that may be the legal effect, we don’t have any evi­dence of what that means in prac­tice. The rela­tion­ship between the state and the state-owned entre­pris­es (SOEs) in Chi­na is com­plex (no sur­prise; think about the behav­ior of our own SOEs like Qan­tas and Tel­stra). The com­mer­cial rival­ries between them, as report­ed by John Gar­naut, are such that the risks of trans­fer pric­ing do not seem high. But even if they were high, our own tax reg­u­la­tions are the best defense against gross abus­es.

Defend­ing his argu­ment for ‘mutu­al­i­ty’ (equal oppor­tu­ni­ty for Aus­tralian firms to invest in Chi­nese state-owned resources) he lat­er told the press that he expects Chi­na to move in the direc­tion of the pri­va­ti­za­tion of state entre­pris­es. But if that is so, it puts an extra­or­di­nar­i­ly high price on his insis­tence that they do so imme­di­ate­ly in order to have access, today, to the own­er­ship of Aus­tralian resources. We would loose an enthu­si­as­tic investor and devel­op­ment part­ner over a mat­ter of sched­ul­ing? Real­ly?

Conflict of interest?

Mr Turnbull’s sub­sidiary argu­ment is that there is a ‘con­flict of inter­est’:

“It is obvi­ous that there are con­cerns with a major pur­chas­er of our com­modi­ties acquir­ing a posi­tion of con­sid­er­able influ­ence and access to infor­ma­tion in the oper­a­tions of a lead­ing pro­duc­er of those same com­modi­ties.”

I can­not see any con­flict here at all. It’s a sur­pris­ing­ly unso­phis­ti­cat­ed view of com­mer­cial real­i­ty for some­one as expe­ri­enced as Mr Turn­bull to take.

No one makes mon­ey from major resource projects by con­ceal­ing the costs of pro­duc­tion from their cus­tomers, cer­tain­ly not over the life of the long-term con­tracts that dom­i­nate com­mer­cial arrange­ments in the Aus­tralian min­er­als indus­try. Cus­tomers for mil­lions of tonnes of ore have a pret­ty good idea what the pro­duc­tion costs are, any­way.

Min­er­als pro­duc­ers make mon­ey from the fact that their cus­tomers’ val­u­a­tion of the ore exceeds the costs of pro­duc­tion, whether the cus­tomers know what that cost is or not. In fact, the more dif­fi­cult infor­ma­tion to derive is the cus­tomers’ val­u­a­tion because it depends on the val­ue of trans­formed prod­ucts (steel, build­ing mate­ri­als) and the cus­tomers’ effi­cien­cy of trans­for­ma­tion. Those sums are a bit more com­plex, and involve more pri­vate data, than the costs of ore pro­duc­tion.

The con­flict of inter­est, if it exist­ed, would be in trans­fer pric­ing, which the Aus­tralian reg­u­la­to­ry author­i­ties have to guard against in the case of any relat­ed par­ty trans­ac­tions whether or not they involve state-owned com­pa­nies. There is also the the­o­ret­i­cal pos­si­bil­i­ty that Chi­nal­co will do the bid­ding of the Chi­nese state and loose mon­ey on its Aus­tralian invest­ments in order to sup­ply cheap iron-ore to Chi­na. But there is no evi­dence that Chi­nal­co want’s to be a com­mer­cial sac­ri­fice on the altar of Chi­nese eco­nom­ic growth; quite the con­trary.

Nor does it do Mr Turn­bull any good to invoke Peter Costello’s revo­ca­tion of the Shell bid for Wood­side on spurious—unprovable, nev­er justified—grounds that Shell might have left the resource unde­vel­oped. That deci­sion just about takes the prize for arro­gance and unwar­rant­ed inter­fer­ence.

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