By Megan Bowman, UNSW

SYDNEY: 4 September 2013 - It was only last month that federal Trade Minister, Mr. Richard Marles, endeavoured to step up negotiations in Beijing on an Australia-China Free Trade Agreement (FTA). A government press release at the time stated that: "Providing goods and services to the growing Chinese middle class represents an incredible opportunity to diversify the Australian economy and to move beyond the resources-dominated commercial relationship with our largest trading partner."

Indeed, Australia took a significant step during that round of FTA negotiations by offering to soften regulatory scrutiny of Chinese investment into Australia. Currently Foreign Investment Review Board approval is required for: all investments by state-owned enterprises (SOEs); and investments over AU$248 million by privately-owned Chinese companies. As reported on the CLMR Portal recently, it is believed that China wants removal of the automatic-approval requirement for its SOEs and an increase of the threshold for private investors to the same level as that for New Zealand and U.S. investors, namely AU$1,078 million. Although the details of Australia’s FTA offer are yet to be disclosed, there have been indications that it may embrace the more liberal attitude to threshold issues expected by China.

However, closure on the FTA may again be delayed if political posturing during a Q&A session on foreign ownership last week manifests as real policy after the election.

During the final leadership debate, Opposition leader Mr. Tony Abbott told the audience that if foreign investment is “not in our national interest, then it shouldn't happen.” While stating that he was in favour of lucrative foreign investment in land, he also proposed a stricter FIRB threshold to examine private bids for land above AU$15 million (a significant change from the current $248 million threshold) in addition to the establishment of a national foreign investment register in land and agribusiness. In addition, Mr Abbott explicitly stated that there should be no “colour ban” on investors, which was an implicit reference to concerns over Chinese foreign direct investment (FDI) in Australia.

Prime Minister Mr. Kevin Rudd said he was ''not quite as free market” as Abbott, yet he gave no commitment to tighten FIRB thresholds. Instead he stated a preference for co-investment/joint ventures between Australian and foreign enterprises, and similarly committed Labor to introducing a register of all foreign investments in land. Nonetheless, he added: “But I am a bit nervous, a bit anxious frankly about simply an open slather on this…I think when it is about rural land and land more generally, we need to adopt a more cautious approach”.

The responses by both leaders have been viewed by commentators variously as a “crackdown on foreign investment in agriculture”, a “vote-driven shift” and a change in policy that “appeared to come without prior party consultation”. Specifically, Mark Kenny of the Sydney Morning Herald described it as “rank populism that threatens to overturn a longstanding consensus in Australian mainstream politics between free market-oriented figures in both the Liberal Party and the ALP.”

Whether the comments represent a seismic policy shift for the parties is arguable; however the comments certainly prompt analysis of four key questions on foreign investment: (1) How does the foreign investment review process currently operate? (2) Why is there public concern? (3) What do the empirical data indicate, particularly about Chinese investment patterns? and (4) What is the best way forward?

1. How does the foreign investment review process currently operate?

As detailed in previous CLMR Portal reports, the regime under which foreign companies can invest in Australian businesses and purchase Australian property comprises the Foreign Acquisitions and Takeovers Act 1975 (FATA), the Foreign Acquisitions and Takeovers Regulations 1989, and Australia’s Foreign Investment Policy (AFIP). Under the current AFIP any 'direct investment' in land or business by a 'foreign government investor' (such as an SOE) is subject to review by the Foreign Investment Review Board (FIRB). Direct investment is defined as 'investment of an interest of 10 per cent or more' although it may be less than 10 per cent where the 'acquiring foreign government investor is building a strategic stake in the target, or can use that investment to influence or control the target' (AFIP, p.14). Clearly then, the current process does not permit ‘open slather’; Mr. Rudd can relinquish his anxieties on this point.

Once a review is triggered, chief consideration is given by FIRB to whether the proposed investment will be contrary to the national interest. Despite the obvious importance of knowing what the ‘national interest’ is in order to protect it, the phrase is not legislatively defined. Indeed, cases are decided on an individual basis in the context of the following issues: national security; competition; impact on the economy and community; Australian government policies such as tax; and the character of the investor (AFIP, pp. 7-8).

Yet are these issues adequate to assist consideration of foreign investment applications in a changing global world? This is especially relevant in the context of agribusiness where the traditional roles of developed nations as importers and emerging economies as exporters are becoming blurred. It is telling that the Chair of FIRB, Mr Brian Wilson, when asked at a Committee hearing on 9 May 2013 whether FATA can deal with current foreign investment scenarios responded that: “I will simply say that the Foreign Acquisitions and Takeovers Act was put in place in 1975 and, as I recall, was last modified in 1989 and it is now 2013 so you could draw your own conclusions about how up to date it might be.”

To this end, the Australian Rural and Regional Affairs and Transport References Committee released its final report on the ‘national interest’ test on 26 June 2013. Specifically, the Committee recommended that the government: establish a national agricultural land register (Recommendations 6-9, 11-15); and “increase the transparency and public awareness of the national interest test” to provide “precise and unambiguous instructions to prospective foreign investors about their obligations to FIRB and the Treasurer, and how the national interest test is conducted” (Recommendation 18). In this way, the Committee also sought to increase public confidence in the fair and consistent application of the national interest test in foreign investment decision-making.

2. Why is there public concern?

‘Public confidence’ appears to be at the heart of foreign investment debate and concern in Australia.

The Coalition outlined its policy approach to foreign agribusiness investment back in August 2012 in a discussion paper titled Foreign Investment in Australian Agricultural Land and Agribusiness. In this paper the Liberal-National Coalition proposed that, if it takes government, it will establish a national land ownership register and a stricter trigger of FIRB scrutiny for proposed foreign investment above AU$15 million. Accordingly, Abbott’s statement at the final election debate confirmed his party’s position since 2012.

Of relevance, the discussion paper asserted that “there is growing community and industry concern that some types of acquisitions may be contrary to the national interest and that a strengthening of the regime may be advantageous to the long-term prosperity and food security of Australia.” (p.3)

Indeed, according to a 2008 Lowy Institute survey of public opinion over time, more Australians are opposed to foreign ownership of major Australian companies than are opposed to the death penalty, the Iraq war, or even “illegal immigration”. Importantly, 85% of respondents felt that companies controlled by foreign governments should be more strictly regulated than foreign private investors, with the most opposition directed at companies controlled by China (78% opposed).

The intrinsic nature of an SOE seems to capture public concern and fuel media sensationalism. For example, headlines from The Australian in the past six months include: ‘China’s state-owned enterprises obtain FIRB approval by stealth’; and ‘Don’t mix politics and deals: FIRB in warning to state-owned investors’.

And political decisions are not immune from the influence of populism, with a recent example being the Australian government’s 2012 exclusion of Huawei from the National Broadband Network bidding on the basis of security concerns.

But why is there such concern about SOE-led investment over and above other modalities of investment? In the case of SOEs, the traditional view is that they are national corporate champions purpose-built to fulfil government investment mandate abroad. Accordingly, SOEs traditionally tend to invest in areas of nation-wide priority, being natural resources, utilities, telecommunication services, and defence. This has created some concern by recipient countries about the political (rather than commercial) motives of state-directed FDI. Specifically, there is concern that, through the investments of state capital actors such as SOEs, foreign governments may obtain access to sensitive information or technology that may jeopardize the recipient country’s national interests or security.

Accordingly, the reasons for public and political concern centre upon perceptions of risk to national security, energy security, economic security (control over wealth-creating assets) and/or fear of the other. Certainly, concerns about one state owning another state’s key resources or assets through strategic SOE corporate activity is not new; examples exist from as long ago as the 1600s with the Dutch East India Company and in the 1970s-80s with Japanese acquisition. Arguably however, recent concerns are due to the vulnerability of some Western economies post-global financial crisis and the subsequent legitimacy crisis of liberal capitalist ideals.

Yet is there a documented cause for the type of concerns that have manifested in media and policy circles?

At the time of its release, the Opposition discussion paper was labeled “deeply unsatisfying” by some commentators due to its lack of explanation or evidence as to why foreign ownership may be contrary to the national interest and/or Australia’s food security. The paper certainly mirrored populist concerns, but lacked data to support those concerns and subsequent proposals.

This lack of evidence for assertions and assumptions continues to undermine the quality and accuracy  of the foreign investment debate in Australia.

3. What do the data indicate, particularly about Chinese investment?

It is clear that empirical data about Chinese investment flows and patterns are required to inform Australian policy on foreign investment.

Data on Chinese investment in Australia generally

According to FIRB Annual Reports, there were 10,703 FIRB-approved proposed foreign investment contracts for the fiscal year 2011/12. Proposed Chinese investment contracts comprised nearly half of this number, making China the largest proposed investor by contract volume followed by the UK, Japan, the U.S. and Canada. However, in dollar value, the U.S. is Australia’s largest proposed investor (AU$36.6 billion), followed by the UK (AU$20.3 billion) and then China ($AU16.2 billion), Japan (AU$13.9) and Canada (AU$8.9 billion).

In terms of actual or completed investment, Australian Bureau of Statistics (ABS) data for the calendar year period 2006-2012 show that accumulated FDI from the U.S. equated to AU$747 billion, being a 24% share of Australia’s total FDI stock. This compares strikingly to China’s FDI for the same period which equated to only AU$57.3 billion or less than 2% share of the total.

Indeed, by the end of last year, China was only the ninth largest direct investor in Australia.

Data on investment by Chinese SOEs specifically

Certainly one point of populist rhetoric is true: Chinese investments in Australia are predominately made by SOEs.

FIRB Annual Reports do not differentiate between SOE and non-SOE investments in Australia (whether from China or elsewhere). Thus, SOE-specific information must be extracted from multiple other sources, including government agency sources (e.g. Australian Bureau of Statistics (ABS), Department of Foreign Affairs and Trade (DFAT), Ministry of Commerce of the Republic of China (MOFCOM), China State Asset Supervision and Administration (SASAC), and the National Bureau of Statistics of China (NBS)) as well as industry sources such as Clayton Utz, KPMG, and The Heritage Foundation.

In recent research on this topic, CLMR Fellows Gilligan and Bowman have found that while datasets are available they are not easily compared. This is due to a number of differences between the sources regarding deal value, deal type, investor location, and compilation methodology. However, this is not an insurmountable hurdle to data collection; and being mindful of disparities between data collection methods enables more accurate investigation of Chinese SOE investment patterns.

In 2012 KMPG reported that investments valued US$5million and above for the period September 2006 to June 2012 comprised 116 deals by volume of which nearly 80% were made by 45 SOEs; and over 95% of deal value involved SOEs during this same timeframe. Those percentages are notably higher than average Chinese SOE-led investment deal value figures for the U.S. (65%) and Europe (72%), as demonstrated by the Rhodium Group. Indeed, the ten largest Chinese corporate investors in Australia all happen to be SOEs. According to the Heritage Foundation Chinese Investment Tracker, these ten SOEs accounted for US$39,000 million out of total Chinese FDI of US$51,020 million for 1 January 2005 to December 2012, which equates to 76% of accumulated Chinese FDI into Australia over the past seven years.

Nonetheless, 2013 data from KPMG clearly indicate that natural resources and mining sector investments dominate Chinese investment in Australia with some diversification towards energy (gas and renewables). Specifically: mining comprised 73% of total Chinese FDI for the period 2006-2012 and 48% for 2012 alone; and gas investments comprised 18% of total Chinese FDI for the period 2006-2012 and 42% for 2012 alone. Importantly, agriculture has been the area of least interest for Chinese investment in the past seven years, commanding only around 2% of Chinese FDI volume since 2006.

Moreover, there is growing debate about the extent to which SOE investment decisions are being exercised independently of their sovereign sponsor for two main reasons. First, multiple external parties are involved in SOE investment decision-making abroad, including domestic consultants, corporate partners and financiers. Secondly, SOEs are evincing commercial motivations by making capital investments to secure stable and high-quality supplies of natural resources, mergers and acquisitions to acquire new brands and technology, accessing new markets, and exporting home brands.

Importantly, statistics show that Chinese investors rely heavily on local talent to manage Australian companies in which the investor gains a controlling interest. For example, Clayton Utz lawyers demonstrate that during the period 1 January 2005 to 31 December 2012, Chinese nationals were appointed as Chief Executive Officer only in 32% of acquisitions in the energy and resources sectors, and Chief Operating Officer in only 10% of same. Thus, it is least likely that a Chinese national will be appointed to the position of Chief Operating Officer in investments which resulted in a change of control at the corporate level. Accordingly, Mr. Rudd’s stipulation that joint ventures be the preferred modality for keeping Australian land in Australian hands appears unnecessary.

The evidence begs a serious questioning of media sensationalism and public concern about Chinese investment in Australian agriculture. In summary, data detailed and discussed above show that:

• China is a significant trading partner with Australia but only our ninth largest investor;
• Chinese investments are occurring predominantly in mining/natural resources with diversification indicated toward energy sectors;
• investments in agriculture have occurred only recently and are small when compared with the value and volume of total Chinese FDI; and
• corporate control of acquired companies tends to remain with local Australian actors.

4. What is the best way forward?

After  the final election debate last week, the Business Council of Australia (BCA) criticised both parties' position on foreign investment, saying Australia should have the "open for business" sign up: "If we're serious about being part of the Asian Century, then we have to get serious about foreign investment", said BCA spokesperson Scott Thompson.

Similarly, former BCA president Graham Bradley said there was little need to undermine the current foreign investment review process at a time when Australia is trying to integrate economically with Asia: "If Australia is to realise its potential to be a more significant food producer in our region, foreign capital will play a critical role in achieving its potential."

Certainly these remarks are consistent with the federal government’s Australia in the Asian Century White Paper, released in October 2012, and the OECD/FAO Agricultural Outlook 2013-2022 report, released in July 2013. The White Paper stipulates that “The Australian economy will be more open and integrated with Asia, through efforts to improve our domestic arrangements” (National Objective 18a), which includes consistent and transparent foreign investment decision-making (p.195), and “welcoming foreign investment” as a way of supporting Australian businesses (p.187). Moreover, the OECD/FAO report sets out key data and analysis in Chapter 2 titled ‘Feeding China: Prospects and challenges in the next decade’. A clear message is the increasing symbiosis between global markets and China’s appetite and output: “With one-fifth of the world’s population, high income growth and a rapidly expanding agri-food sector… [d]evelopments in Chinese agriculture may have a major influence on world markets.” (p.9)

Arguably the opening of ‘soft resources’ commodities markets in China represents timely new opportunities for Australian meat, dairy and grain producers at a time when mineral resources investment is declining. Accordingly, now is the time for both political parties to engage in rational and well-evidenced debate on foreign investment, not reactive ‘policy on the run’.

Thus far, the data tend to indicate that media and policy concerns have been overplayed in Australia. Given the growing importance of Chinese trade with and investment in Australia, and Australia’s need to retain competitive advantage in the region for the long-term, pursuing evidence-based conclusions ought to be a priority of national interest.

Australian policy needs to reflect that Australia is not only a player on a global stage but one who would seek to retain its comparative advantage and increase its influence in the Asian Century. It remains to be seen how this will manifest when the Australian public go to the polls on Saturday 7^th September to decide the nation’s leadership.