A Chilly BREEze For Inward Investment

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By George Gilligan, UNSW

MELBOURNE: 4 June 2013 - In the nineteenth and early twentieth centuries the Australian economy was widely perceived as riding on the sheep’s back, as agriculture and in particular sheep farming was central to Australia’s export performance.  As the twentieth century progressed so did the Australian economy diversify, agriculture was still prominent, but manufacturing exports increased, as did mining and resources activity in particular, along with numerous other industries such as education and tourism.  In the last decade or so there has been a massive surge in the Australian mining and resources sector feeding coal, iron ore, liquefied natural gas (LNG) and other resources into China’s booming economy in particular.  For example, the Department of Foreign Affairs and Trade (DFAT) reports that China is now Australia’s most important trading partner with 19.9% of Australia’s total two-way trade. 

The Sino-Australian trade relationship is not merely a matter of filling large merchant vessels with raw materials and shipping them from Australia to China and importing substantial numbers of Chinese manufactured goods into Australia.  China has become increasingly significant in terms of foreign direct investment to Australia and it is important to remember that historically Australia is a nation that depends for its economic well-being on attracting foreign capital investment.  Foreign Investment Review Board (FIRB) data indicates that China provided almost half of the total approved inward foreign investment contracts in Australia in 2011-201 totalling AUS16.9 billion and 64.9% of the value of those approved contracts was in the mineral exploration and development sector. The pace in the increase of Chinese foreign direct investment into Australia’s energy and resources in recent years has been startling, moving from 8.5% of total investments in 2005-2006 to 43% in 2011-2012, according to data released by Clayton Utz (p.7). In the period 2006-2012, 73% of Chinese direct investment was in mining, 18% in gas, 4% in renewable energy and 5% in other sectors combined.  2012 saw a shift towards increased investment in gas of 42%, 48% in mining, 2% in renewable energy and 8% in other sectors combined suggests KPMG (p.7).

So, is it a case of no worries, Australia is now riding in the back of a giant dump truck rather on the back of a sheep?  That is of course a caricature of complex sets of economic arrangements but any complacency about a sustained smooth-ish ride for the nation in the ubiquitous dump truck was rocked last month with the release of the report Energy in Australia by the Commonwealth Government’s Bureau of Resources and Energy Economics (BREE).  BREE is the key forecaster on commodities for the federal government and it delivered a number of chilly messages on the near-term projections for Australia’s resources and energy sector, despite the current relatively rosy picture.  For example, on the plus side, Australia’s energy sector accounts for 6% of Australia’s total industry value, provided $77 billion of energy exports in 2011-2012 and currently has committed and potential projects totalling $350 billion (approximately 18% of GDP).  However, on the negative side the value of committed and potential projects is expected to fall to $25 billion in 2018.  This dramatic downturn has already been signalled during the last year by the setting aside of $150 billion in energy and mining projects including Aquila’s West Pilbara iron ore mine in Western Australia, BHP’s Olympic Dam expansion in South Australia and Woodside Petroleum’s Browse LNG project in Western Australia.  The bad news concerning shelved projects such as these is amplified by revelations of cost blowouts of more than $29 billion regarding existing projects.

A 96% fall in large-scale investment in energy and resources in only five years is a massive slide and prompted a flurry of headlines (see here and here) proclaiming that Australia’s resources boom has ended. The slide may turn out to be not quite so precipitous, but nevertheless it seems inevitable that there will be structural adjustments in the Australian economy as the reality of reduced investment bites.  Not all commentators are as gloomy about the BREE report, perceiving some positives from a slowing of the resources wave.  For example, Clyde argues that a swifter tapering off in investment reduces the risk of a massive boom-bust outcome that has plagued earlier commodity trade cycles and that other sectors of the Australian economy such as manufacturing may in the future receive a greater proportion of investment capital than they have received during the resources boom.

Time will tell whether investment into Australia’s energy and resources sector does spiral downwards as dramatically as the BREE report suggests and if some of the more apocalyptic media headlines that have greeted the report’s findings have overshot the mark.  An interesting regulatory question in the midst of this likely shift in Australia’s direct investment fortunes, given Australia’s undeniable need for continuing inward foreign investment, is how it might affect the regulation of foreign direct investment in general and investment in Australia by Chinese State Owned Enterprises (SOEs) in particular. 

In 2012, regarding completed investments valued at US$5 million or above SOEs accounted for 87% of the deal value and 74% of all deals by number of total Chinese inward investment into Australia says KPMG (p.1). So, it seems likely that SOEs will continue to be the main mechanisms through which China funnels its outward investment, not only to Australia, but also to the more than one hundred jurisdictions for which China is also the number one trade partner. Competition for that Chinese investment dollar is likely to intensify and not just on a direct country: country basis.  For example it is worth noting that when looking at what the target locations within Australia were for Chinese inward energy and resources investment from 2005-2012, Western Australia and Queensland unsurprisingly topped the list with 84% of value, but they were followed by Africa via listed Australian companies at 9%, New South Wales at 5%, Northern Territory, Tasmania and Victoria a combined 2% and South Australia 1%.

Competition for inward foreign investment against Australia from African jurisdictions and indeed many other countries around the world is likely to increase.  How much the twin pressures of increased investment capital competition and Australia’s seemingly reduced attractiveness as a target for that inward investment capital will impact upon the realpolitik of Australia’s foreign investment regulatory regime over the coming years is unknown.  It is the Government of the day which decides and expresses Australia’s Foreign Investment Policy and which provides guidance on the national interest in relation to foreign acquisitions through that Policy.  

Australia’s Trade Minister Craig Emerson admitted in April 2013 that: ‘…talks on a free-trade deal with China have stalled because of a dispute over restrictions on investment in Australia by Chinese state-owned enterprises.’ There have been few overt statements in recent times by the current Commonwealth Government that would be deemed hostile to inward investment from China.  However, the March 2012 blocking by the Australian Government on national security grounds, (on the advice of the Australian Security and Intelligence Organisation- ASIO), of Chinese telecommunications firm Huawei Technologies from taking a significant role in the building of Australia’s National Broadband Network (NBN) undoubtedly irritated the Chinese Government. 

Huawei was bemused by this move given that it has played a key role in building equivalent networks in eight jurisdictions around the world including the UK. A federal election is due in Australia on 14 September 2013 and if opinion polls over recent months are to be believed it will be a crushing victory for the Opposition Coalition led by Tony Abbott.  However, the likely future federal government does not seem enthusiastic about increasing inward investment to Australia from Chinese SOEs if it maintains the position expressed in a speech in Beijing in July 2012, by Mr Abbott who said: ‘It would rarely be in Australia’s national interest to allow a foreign government or its agencies to control an Australian business. That is because we don’t support the nationalization of business by the Australian government, let alone by a foreign one.'

Whether the Coalition would change its stance if it assumed government one does not know.  There may well be little noticeable policy change regarding Chinese SOEs or the foreign direct investment regime in general.  Or, it may be that the likely chillier economic trading conditions that Australia seems sure to face as flagged by the BREE report may mellow the position of the Australian Government on SOEs, whatever that government’s political hue may be.

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