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ECONOMICS REFERENCES COMMITTEE
22/06/2009
Foreign investment by state owned entities

CHAIR —I welcome officers from the Department of the Treasury and the Foreign Investment Review Board. Do you wish to make an opening statement?

Mr Colmer —No, I do not wish to make an opening statement. I am more than happy to deal with questions that you may have.

CHAIR —Thank you. I will ask you an opening question. Can you tell us something about the scale of foreign investment in Australia—where it comes from, who the largest investors are, who the smallest investors are and what the spectrum is?

Mr Colmer —I can tell you something about that, but before I do I would like to just sound a couple of notes of caution. The information that we have from the foreign investment system is data on proposed investment, and in that sense it is very different from the formal data on actual investment which comes from the ABS. I cannot emphasise that too strongly, because it looks very different. The reason for that is, as I said, first of all, that it is proposed investment and often it does not proceed after we have approved it. It may be that the deals fail at a commercial level. It may be that we have approved—I should not use that word because we do not approve; we ‘do not object’ rather than ‘approve’—or rather it may be that we have dealt with competing cases for the same target. That is quite a common occurrence.

The other thing I would say is that when we compile our data we do not actually disaggregate what might be a proportion of investment coming into Australia when the target is a multinational enterprise. I guess the classic case of that would be the Chinalco investment into Rio Tinto at the start of the year—which we counted as $19 billion although in reality most of that actually went to the UK arm of Rio rather than the Australian part. So there are some issues around what we count and how we count it.

Having said that, we pulled out some figures for you which are for the current financial year—so they are incomplete figures. Again, they have not been validated because we will not do that process until the end of the year so they are I guess illustrative figures rather than definitive figures. For the current financial year as at today, we have had a total so far of $259 billion worth of proposed investments. Of that, $23 billion or so is in the real estate sector. So that comes out to something in the order of $230 billion of proposed investment in industry.

The No. 1 investor, as I think pretty much always it has been in recent times, is the United States—followed by the United Kingdom. This year, for the first time, China comes in at No. 3. Last financial year China was at No. 6 in the overall total. We should just be careful with using those figures because they are only illustrative at this stage.

CHAIR —That is interesting. So China’s level of investment is, say, greater than that of Japan, the Netherlands, Germany, France and Singapore?

Mr Rosser —There are a couple of caveats on that. In relation to China that includes the Rio Tinto acquisition—

CHAIR —Which has not happened?

Mr Rosser —No, this was the original one in August. So obviously that is a one-off large investment lump. A number of other ones in the figures that Mr Colmer cited have a particular relevance probably only to this year, because the global financial crisis has resulted in a number of financial institutions having injections of capital by their home government and each of those, as it comes to us, is treated as a foreign investment application. Therefore the relevant amount of investment, as in the Australian acquisition, if you like, is captured in our figures. So we probably have a large one-off figure which will be unwound over future years as the governments exit those investments.

CHAIR —Over the years we have had a lot of foreign investment in Australia, particularly, as we have heard, in the minerals industry. I suppose the biggest investors in the early part of the last century were certainly the British and the Americans. In the sixties, seventies and eighties there was a lot of Japanese and Korean investment in Australia. Now there is an increased incidence of Chinese investment. Would you make any comparisons between the Japanese investment of the sixties, seventies and eighties and the Chinese investment which is occurring today? Are there any differences or any similarities?

Mr Colmer —I guess the similarity is that both the Chinese and the Japanese and Koreans were looking for resource security. I think that is an undeniable similarity. I think probably the major difference is the structure of the Chinese economy and the Chinese state. That is certainly a very big difference, but at different times some of those other national economies have had less formal means of organising their industry that may have produced not dissimilar results—so, for example, the Japanese system through the seventies and eighties was not the formal state control that we see in China but some of the results may not have been that different.

The other point I would make is that the policy has changed since the early nineties, which was after most of the major Japanese investment came into the country. Up until 1993 there was a rule that required 50 per cent Australian equity in resource projects unless it could be demonstrated that that was not available. That rule no longer holds. So we are seeing more Chinese proposals to take stakes which are larger than 50 per cent—and at times 100 per cent stakes.

CHAIR —Wasn’t foreign investment in Japan covered by the ministry which was concerned with foreign investment? Was it MIMI?

Mr Colmer —That is before my time in the field.

CHAIR —It is before my time too, but I have read about it.

Mr Rosser —I think it was MITI.

Mr Colmer —Yes, I think it was MITI.

CHAIR —In other words, what I am trying to suggest is that Japanese investment to some degree was influenced by the Japanese government—even though this was from private enterprise companies. Is that a possible comparison to draw?

Mr Colmer —I think that is true up to a point. I guess they are two very interesting sides of the one coin. The Japanese system was less formal than the Chinese system but the outcomes may not be dissimilar. While there is a much greater formal link between a Chinese company and the Chinese government, what we see, by and large, is a fair degree of overt commercial behaviour on the part of the Chinese companies seeking to invest in Australia. They certainly believe that they are very competitive with each other. We certainly see that they are trying to understand western business processes and they do have a strong commercial orientation.

CHAIR —Back in the sixties, seventies and eighties though, because of the rule about the percentage of foreign ownership, the Japanese companies could not have had a controlling interest in a resource company in Australia—was that the case?

Mr Colmer —Most of the Japanese investments were less than 50 per cent holdings. But that rule tended to crumble away as Australian equity became harder to come by with the greater expansion, I think, of the sector as much as anything else. The situation that we find ourselves in now is that there are very high levels of foreign ownership across the board in the resources industry. Indeed BHP under our laws is a foreign corporation—as is Rio Tinto. Both of those companies have fairly high levels of foreign ownership. I think in the case of Rio Tinto it is probably around the 80 per cent mark, and in BHP it is somewhere between 50 and 60 per cent I believe.

CHAIR —I have an article here from the Financial Review of 15 May this year which suggests that it should be noted that BHP’s share register is more than three-quarters foreign owned. That is a big percentage. Do you think foreign investment has been driven by the fact that there was not a great deal of Australian capital available for this sort of investment—domestic capital?

Mr Colmer —I think foreign investment generally is driven by a lack of domestic capital. I think though that the resources sector is a bit different from that. Australia has some first-class international resources that certainly are attractive as resource projects. On top of that, Australia is generally considered to be a good destination for foreign investment because we have such a strong legal system, investors’ rights are protected and we have good political stability and good infrastructure. So the risk for a foreign investment into Australia is much less than it is in many other parts of the world.

Senator PRATT —One of the issues that strikes me from what the chair has asked is the kinds of investments that national governments might have an interest which both China and Japan might have in common—that is, strategic resources and energy assets versus I suppose the other kinds of foreign investments that have a much greater diversity but that might not have the same national strategic importance. Is that too much of a generalist statement or are there some elements of truth to it?

Mr Colmer —We have seen a lot of government related investment in Australia. As Mr Rosser said just before we have seen an awful lot more in the last 12 months as a result of foreign governments taking control of their financial institutions.

Senator PRATT —It is a very common practice these days.

Mr Colmer —As someone said to me recently—and I do not know whether this is true but it very well could be—the biggest state owned enterprise in the world now is General Motors. I suspect it is true. I have not actually tested that. Major banks are now owned by their home governments. We have seen a variety of other investments in Australia and while resources are probably the major ones for the Chinese, they are not the only ones. The Chinese have made some other investments into the financial sector and some of the chemical industries. We have seen, for example, Canadian investments into the media sector where there is a sovereign wealth fund interest there. We have seen a number, recently, of French related interests in the public transport area. We have seen French interests in defence industries. So there are a variety of foreign governments with a variety of interests in different Australian industries.

Senator PRATT —I actually have a list of questions I would like to ask, but I am required in the chamber to go and give a speech. I might reflect on the Hansard and ask you specifically what the trends are around foreign investment by sovereign wealth funds and state owned enterprises internationally generally.

Senator JOYCE —Chair, on an ETS I can run down and give the speech for her, if you like?

Senator PRATT —I do not think so, Barnaby. Not tonight.

CHAIR —I think that is a very kind offer, Senator Pratt.

Senator PRATT —It is a very kind offer, but I think we have rather different positions on this.

CHAIR —Senator Pratt, this is a question of some debate. Do you want to put those questions on notice? This session will not last for too much longer.

Senator PRATT —No, I am comfortable if that is the case.

Senator JOYCE —I want to go through a few things. First of all, in the Foreign Investment Review Board, what do you see as your goal for Australia? In the deliberations and the representations you give to the Treasurer what is the paradigm for what you see is good for Australia? How do you define that?

Mr Colmer —I think we start off by saying that foreign investment is good for Australia. Foreign investment has been a major component of the Australian economy for many years, probably since first settlement. The way that the legislation is set up is that the default position is that the investment is allowed to proceed. The legislation is set up so that it is clearly the exception rather than the rule to intervene in an investment case. What the legislation does is provide an opportunity for the Treasurer, as the responsible minister, to raise objections if a proposal is considered to be against the national interest.

Senator JOYCE —When is a foreign investment bad for Australia?

Mr Colmer —That is a question which I think varies over time. If you look back at the cases that we have rejected, you can see that we have not rejected outright very many at all. In fact our best information is that 16 cases have been rejected since 1990. That is out of something in the order of, on average, about 500 business cases a year. We have had a different pattern in real estate but I have not actually been talking about that. The predominant reason for rejecting those cases has been to do with various forms of criminality on the part of the proposer. There is also the Shell-Woodside case where the decision was taken back in 2001 that Shell was not going to develop that resource; and the decision was taken at the time that the national interest was best served by developing that resource much more quickly than Shell was expected to do it.

Senator JOYCE —Just briefly, was that Woodside decision a decision of rejection by the Treasurer?

Mr Colmer —That is right.

Senator JOYCE —What do you see as the national interest?

Mr Colmer —As I said, the national interest is first and foremost to get an orderly foreign investment system. But if you look at what elements might make up a national interest concern, then I think you cannot do better than to go back to the Treasurer’s statement of February last year where he announced the principles for foreign government investments. As I am sure you are aware, there were six principles that were laid out there—only one of which is specifically relevant to state owned enterprises. The other five are considerations that we take into account on any proposal. They are things like competition impacts, the taxation implications, national security considerations, the impact on other Australian businesses and how well a company can be expected to operate within the Australian system.

Senator JOYCE —Referring back to my previous life, in tax we have the related entity test. If something is substantially controlled or owned by another entity then it is deemed to be the one entity for assessment under the tax act, to stop people sneaking around. Do you take into account the related entity test?

Mr Colmer —We have an associate provision in the legislation which allows us to take into account those sorts of issues, yes.

Senator JOYCE —So you would have to see such things as sovereign wealth funds and state owned entities of China as all one, as far as the tax act and the test you apply to them are concerned, because the Chinese government is strongly interrelated with them. Interrelationship, ownership—they all seem to tick off, suggesting they are related entities.

Mr Colmer —I cannot comment about the tax act definitions, but they are not considered as all one related entity in the terms of the Foreign Acquisitions and Takeovers Act.

Senator JOYCE —What is your definition of real estate? With foreign entities and the purchase of real estate, there is a certain limit and they have to go to you for assessment.

Mr Colmer —We have not spoken about real estate at all so far tonight. The basic legislation sets out a requirement for all foreign acquisitions of residential real estate to be notified. However, over the 20 or so years that that system has been in place, there have been a number of exemptions provided from that. The latest lot were done earlier this year, and new regulations were brought in in about April, I think. In terms of residential real estate, though, we expect all nonresidents acquiring residential real estate to notify. Under the foreign investment policy, nonresidents are generally prohibited from buying established real estate and can only buy new real estate.

Senator JOYCE —Why is rural land outside this?

Mr Colmer —The actual act specifically exempts primary production land from being classified as real estate under the act. It is exempted and has been, I assume, since the late eighties, when the real estate provisions were brought in.

Mr Rosser —The act applies to land that is not being currently used for a primary production purpose. So what is called ‘urban land’ in the legislation is in fact all land in Australia that is not actively being farmed, apart from exemptions for specific types.

Senator JOYCE —One of the things that is cast towards us over and over again—and I think you have already touched on it—is that the conditions under which the Japanese could invest back in the seventies are the same as the conditions now and that we had no complaints then, so we should not have any complaints now. But that is not actually the case, is it? There is a difference between the conditions that the Japanese were assessed under and the conditions now.

Mr Colmer —The major change was the 50 per cent equity rule for resource projects, which was removed in 1993.

Senator JOYCE —You were saying you look to criminality in the assessment of foreign corporate interests. Does that get complicated if there is a sense of what we would deem to be criminality in the actions of a government?

Mr Colmer —We do make a distinction between the entity and the government, as a general rule. There may be the very occasional case where a government itself is making a direct investment, but that would be very rare. I do not think I can recall any. What typically happens is that government related investments are made through a separate entity.

Senator JOYCE —If, for instance, Zimbabwe wanted to buy—and they could not—a mine in Queensland, would the actions of the Zimbabwean government have anything to do with the assessment of the process?

Mr Colmer —Off the top of my head, I am not entirely clear on our sanctions regime against Zimbabwe, but I do not think that is what you are asking about. We do have a regime of sanctions against Zimbabwe and members of the Zimbabwean government. I take it that is not what you were going to; you were trying to ask a hypothetical question of how we would differentiate between an entity and a government.

Senator JOYCE —Yes. Let us make up a name for a place: Zimrwandantarctica. Zimrwandantarctica has done something that is quite obviously criminal or is an action that fair-minded people across the world say is beyond the pale. Does that become one of the instruments of assessment for the Foreign Investment Review Board or do they have to put that aside and say, ‘That is irrelevant for the purposes of assessment’?

Mr Colmer —It would only be relevant for the purposes of the assessment, I think, if that government—I will just say the ‘antarctican’ government; I cannot remember what the rest of it was—

Senator JOYCE —Zimrwandantarctica.

Mr Colmer —You must use that other in other circumstances! If the ‘antarctican’ government was a separate entity from the ‘antarctica mining company’, we would have to look at that and then try and make a judgment based on what was the actual relationship between the government and the company. I guess, though, that when you talk about the actions of government and criminality you are getting into—

Senator JOYCE —Diplomatic area.

Mr Colmer —You are getting into a diplomatic area but you are also potentially getting into a highly political area. For example, there are people who have taken very different positions about some of the major conflicts in the world. Some of them would say that some governments have acted criminally in Vietnam, Iraq or whatever; other people would say no. So it is not a clear-cut case, I do not think, if you are trying to go to the issue of criminality in governments.

Senator JOYCE —It is very sensitive. You would have to say it would make life very difficult for Australia because all of a sudden how you deal with it becomes extremely sensitive. Would that be correct? As opposed to a corporate entity, where you just say—

Mr Colmer —As opposed to a corporate entity, there are going to be a whole lot of different considerations.

Senator JOYCE —Sensitivities.

Mr Colmer —But I think it is probably largely something that we are not going to see because, as I said, we see very few—in fact, outside of real estate I cannot think of any cases where I have ever seen a direct investment by a government without some separate entity interposed.

Senator JOYCE —Do you take into account the reality of court structures, the transparency of government and how the judicial principle operates in the country that is the source of the investment to be invested here, or do we just say that also something that is not for consideration under FIRB guidelines?

Mr Colmer —I think it is fair to say that our major concern is any information that sheds light on how we can expect an investor to operate in this country. It is important to recognise that an investor in this country will be subject to the industrial law, to the environmental law, to the health and safety law. All the Australian laws apply equally to a foreign investor once they are established in the country as they do to any other company operating in this country. As I said, our major concern would be anything that sheds light onto whether or not we can reasonably expect problems with the way they would behave inside Australia, so we would be looking very closely at any evidence that they had acted outside of the law elsewhere.

Senator JOYCE —So, if they acted badly elsewhere, that would be an element of consideration in how they might possibly work inside Australia?

Mr Colmer —It may be, yes. That is the sort of thing that we would be looking to try and understand.

Senator JOYCE —What about the issue of reciprocity? Do you say, ‘Okay, we’re going to give this country an avenue to generate wealth in our country, therefore we should be allowed the same or approximate avenue of generating wealth in their country; and, therefore, if they don’t let us buy that, we shouldn’t let them buy this, because otherwise it becomes a one-way street’?

Mr Colmer —No, we do not.

Senator JOYCE —If it is good for Australia to allow unencumbered investment, why would other countries think differently?

Mr Colmer —Most other countries do not think that way. Most other countries do not base their investment policies on reciprocity. Most countries base their investment policies on what they see as a good result for their country. In investment, certainly, in the OECD, reciprocity is not considered to be a useful way to go. I think, though, that if you look more generally, for example, if you look at Australia’s history with tariff reform over the last 20 or so years, that was all done on a unilateral basis. There is a lot of evidence to suggest that reciprocity does not really do much apart from make the system much more complicated and probably does not actually provide good results.

Senator JOYCE —If you have got a vertically integrated entity, how do you discern when they are not acting in Australia’s interests, through mechanisms such as transfer pricing—if they just say, ‘Well, if you’ve got a problem with us, deal with it via our ambassador’?

Mr Colmer —If you are talking about transfer pricing—that was the example—that is fundamentally a matter for the tax office, and I do not think anybody would dream of expecting a tax officer to deal with an ambassador. They would deal with the company direct. The reality of having an entity making an investment in Australia means that that entity is subject to Australian law, and Australian law does not say, ‘Go see the ambassador.’

Senator JOYCE —But we referred earlier on to the sensitivities that were obviously in place in the assessment process and how we deal with them and the actions of countries overseas. Surely, this just becomes another extension of those sensitivities? People do not become less sensitive on another issue. Ultimately, people work to their commercial advantage, and if they can push the envelope they will, and one of the items they would consider would be ‘I’m stronger than you are, so don’t push me too hard’.

Mr Colmer —Well, possibly. We have no evidence to suggest that that is happening. If you have any evidence to suggest that that is actually happening, we would be more than interested in seeing it.

Senator JOYCE —Are there boards equivalent to the Foreign Investment Review Board in other countries, such as India, China or the United States?

Mr Colmer —Yes and no. The United States has a system called the Committee on Foreign Investment in the United States, generally referred to as CFIUS, and that is similar to the foreign investment process that we run. I would say, though, that our system is much more interventionist than the United States system, and in the OECD in this area we are ranked 35 out of 41, as being the 35th least restrictive—get your head around that! It is difficult; I don’t know which way to count on that—

Senator JOYCE —Who is the most restrictive?

Mr Colmer —The most restrictive is either China, India or Russia, but I am not sure which one.

Senator JOYCE —China, India or Russia—they are all up the top there somewhere?

Mr Colmer —They are down at 41. We are at the bottom.

Senator JOYCE —I know, but the most restrictive on investment are China, India and Russia?

Mr Colmer —Yes, I think that is right, from memory. And the least restrictive are typically the European countries. I think maybe Iceland might be No. 1, but I have not looked at the ranking for a while. The UK is up in the top five.

Senator JOYCE —The problem at the moment, of course, is that Iceland is broke, Ireland is broke and Britain is making its very best attempt at going broke. Would these be good indicators of how you should operate?

Mr Colmer —I am not sure whether or not you can relate their economic situation totally to their investment regime. I think there are probably a wide range of other factors that are in play.

Senator HURLEY —You are just relying on the last 18 months out of many decades of prosperity.

Senator JOYCE —What are the great sensitivities of Russia? In what section of its economy has it got immense sensitivity about where people invest?

Mr Colmer —I am not terribly familiar with the Russian investment system, except that I do know that it is one of the more restrictive ones. We are probably better compared to places like Canada, New Zealand and the US, who all have—in a very general sense—a similar system to ours. There are quite different arrangements at the detailed level, but they are generally similar types of systems.

Senator JOYCE —With the OZ Minerals-Minmetals approval, they now have the capacity of 100 per cent ownership of what was formerly Century Zinc and every other mine except Prominent Hill. That is correct, isn’t it?

Mr Colmer —There were a few other little bits that were kept out of the deals.

Senator JOYCE —There was one in Indonesia, which is really nothing to us.

Mr Colmer —OZ Minerals have a few exploring-type assets as well as Prominent Hill, I think. I am not sure of that.

Senator JOYCE —Does it create problems for us that we have created a situation where 100 per cent ownership by a foreign state-owned entity is okay? Does that create a precedent which is a problem if we ever want to reject anybody who wants less than 100 per cent ownership?

Mr Colmer —I do not believe it does. I think we have taken great pains to explain to foreign investors that we do look at cases on an individual case-by-case basis. We have also taken considerable efforts to explain our preference for small stakes in large producers and various partnership and joint venture-type arrangements—in the order of 50 per cent in smaller players. But we do look at things on a case-by-case basis.

Senator JOYCE —In the assessment of the Rio-Chinalco deal, they talked about 18 per cent, but in some instances that was 50 per cent of some strategic assets. Was that the case?

Mr Colmer —That is right.

Senator JOYCE —Say there is a manipulation of the process and they had—hypothetically, because it is not going forward there, so we can talk about it—cut their ownership down to 15 per cent but still had 50 per cent ownership of certain strategic assets. Would they have been exempt from the Foreign Investment Review Board guidelines?

Mr Colmer —That is a very difficult question to answer without actually seeing the detail of a transaction that is proposed. At the end of the day, whether the act applies is a question of law and it does depend on a whole range of issues. I think that, if you look back at the Qantas arrangement, you can see that that was a situation where there were problems in the application of the act and it seemed to be explicitly structured to avoid the operations of the act. Just as with tax law, it is possible to structure arrangements so that the act does not apply.

Senator JOYCE —The Qantas one is interesting because Allco was in play there and Allco went broke. We would not have an airline now if the deal had gone forward. Do people will take into account the proportion of ownership? Even though you might have only a 15 per cent interest, you may be, through structuring, by far and away the most influential shareholder in an organisation. You might have the capacity to influence, not explicitly but implicitly, the other directors on the board and the directions of the board because of your strategic share ownership.

Mr Colmer —The way that the legislation is written says that a 15 per cent interest in either the issued shares or the voting power of the company is the trigger. That is the way that the law is written. That is the way it has been since 1975. Yes, it is possible to construct a proposal that may not trigger that. It is one of the reasons why the government announced that we would be looking at a legislative fix on that.

Mr Rosser —The act also applies to arrangements that go to the governance of the company. So if there are arrangements or agreements in place that would give somebody control, notwithstanding that they might not have 15 per cent of the voting rights or the shares, then the act potentially has the capacity to deal with that as well.

Senator JOYCE —So you can look into it and say, ‘This person has the capacity to influence people in a way that might be not explicit but implicit. They have the capacity to influence where everything is going.’ As we all know, there are a lot of people who control companies who never own 50 per cent of them.

Mr Rosser —It also has the ability to look at separate entities that have a degree of association or are acting in a concerted way, so two people owning 14.9 per cent could be considered to be able to exercise control. The act also applies to entities where the ownership of the company is at 40 per cent. So, where a new foreign person becomes one of the 40 per cent holders, the act can apply to that as well.

Senator JOYCE —Is there any belief in a limit to foreign ownership in Australia before it actually works to the detriment of Australia? Take, for instance, mineral wealth. If it were 90 per cent owned by foreign entities, would that be to the detriment of Australia or is there no concern about that? Could it be 100 per cent owned by foreign interests without the consent of the Foreign Investment Review Board? Is there any tipping point of ownership which rings bells?

Mr Colmer —I do not think that is in any way a simple question. Before you could possibly contemplate an answer to it, you would have to ask a whole series of questions about the rest of our legal framework, such as the taxation system, the royalty system, environmental management and similar sorts of things, before you could even come to any conclusion as to whether or not there was a point and what it might be.

Mr Rosser —There is another element too. The resources in question might not be developed or at least not developed as quickly without foreign investment. So you could have a situation where a particular resource is being developed and that is contributing to the nation but at that particular time it is owned by foreigners.

Senator JOYCE —So the benefit to us is purely royalties.

Mr Rosser —Royalties, taxation, employment, jobs—all of those things.

Mr Colmer —Regional development.

Mr Rosser —It is hard to analyse it without thinking about what would happen if the investment were not present.

Senator JOYCE —Thank you.

CHAIR —We thank you for appearing, and thank you for your briefing.

Mr Colmer —Thank you.

[9.14 pm]