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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