FOREIGN INVESTMENT: by Patrick J. ByrneNews Weekly
New foreign investment rules still fall short
, October 17, 2009
According to Nationals spokesman Senator Barnaby Joyce, new rules to limit investment by foreign government-owned companies are not wide enough to stop such companies from taking a major stake in Australian resource industries.
Under the new rules, investment in new green-fields developments would be limited to 50 per cent, while investment in major producers (presumably meaning resource companies) would be limited to 15 per cent.
The new rules were outlined by the general manager of the Foreign Investment Review Board (FIRB), Patrick Colmer.
He also confirmed that federal Treasurer Wayne Swan had approved $34 billion of Chinese investment in 90 projects in the past 18 months, and flagged that China would soon emerge as the third-largest source of approved foreign investment in the current year (Australian Financial Review
, September 25, 2009).
However, at the same time, the Rudd Government has also lifted the threshold at which a foreign investment requires FIRB scrutiny. Formerly, the threshold was for an investment of 15 per cent or more in a company worth $100 million or more.
Now, scrutiny is required only if the company is worth $219 million or more. Further, that threshold will be indexed to rise annually with inflation.
Also, the requirement to notify the Commonwealth Government when establishing a new business in Australia valued above $10 million has now been removed.
These two changes mean that there will be significantly fewer investments by foreign-owned companies being scrutinised by the FIRB.
According to Senator Joyce, if foreign government-owned companies or foreign sovereign wealth funds (SWFs) are allowed to take even a 15 per cent share in an Australia company, "they can be the biggest block shareholder". He said: "If China's Chinalco had taken its planned 18 per cent stake in Rio Tinto, it would have been the biggest single shareholder."
As financial commentator Robert Gottliebsen has pointed out, that stake along with a planned 600-page contract - which included Chinalco dictating future funding sources and controlling the promotions committee of Rio - would have given Chinalco eventual effective control of the mining giant.
Senator Joyce said that foreign government-controlled companies "operate in the long-term strategic objectives of their governments and can operate not for profit".
Frank Zumbo, associate professor of business law at the University of NSW, is an expert on competition law. He recently gave evidence to a Senate Economics Committee inquiry into the issue.Lack of transparency
He told the inquiry (August 10, 2009) that there was a chronic lack of transparency with foreign government-owned companies.
He said: "I have looked at this area very carefully, [and] I could not find comprehensive information of the size, scale [of activities], source or management of these vehicles.
"It is very hard to find the names of management. … One is left to look at tables compiled by magazines like The Economist
"There is a lot of secrecy surrounding the size, source and management of these sovereign wealth funds."
Because of this lack of transparency, current Australian foreign investment rules leave strategic companies and industries open to creeping acquisitions.
This is where a foreign company - or group of companies under the one umbrella - takes incremental stakes in either a local company or industry until it achieves a controlling interest.
To that end, Senators Barnaby Joyce, Scott Ludlam and Nick Xenophon produced a significant minority report for the Senate Economics Committee inquiry.
They argued that "an entity test" be applied to any investment by foreign government-owned companies. This would mean that "different corporate entities with the same ultimate majority controlling influence" would be "deemed as one entity" for the purposes of assessing if their investment represented "more than 10 per cent of control of any strategic asset market in Australia".
This recommendation is crucial to preventing creeping acquisitions.
Associate Professor Zumbo also warned the Senate inquiry that investment from companies that were foreign-government controlled could involve serious national security issues. These companies can be subject to "potential political interference or influence, perceived or actual.
He said: "As there is a lot of secrecy surrounding these foreign-owned enterprises, we do not know how much influence the government or security agencies in that foreign country may exert."
He also said there were competition dangers from state-owned companies giving preferential pricing. Because they are not subject to shareholders and not required to make profits in the same way as a commercial company, they can price-discriminate between, say, Australian customers and customers in their home country.
Finally, there is no level playing-field with foreign investment. Australian companies don't enjoy the same rights to invest in, say, China as Chinese companies have in Australia.
Hence, the Senate minority report recommends that the FIRB, in considering an investment application, should be required to consider reciprocal investment rights in the proposer's country.Patrick J. Byrne is national vice-president of the National Civic Council.