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Thursday, 10 March 1966

Mr BOWEN (Parramatta) .- We owe a lot to the members of the Vernon Committee. They have gathered together a great mass of statistics and factual material and placed it in order. That is what appears in the second volume of their report. They have devoted a great deal of time and thought to the major economic issues that face Australia and have recorded their views in a very convenient form. That is in the first volume of their report. Whether or not we agree with all of their conclusions, 1 think every one of us would agree that the report is of very great value. For a long time, I think, it will be a solid starting point for discussion on these major issues.

This afternoon I want to speak about their chapter on overseas investment in Australia. This is chapter 11. In it they start by setting out the arguments for and against overseas investment from our point of view. These arguments are fairly well known, but I think they will stand brief repetition.

As they see the position in sections 3 and 4 of this chapter, they place the arguments for investment from overseas in Australia as being three in number: First, that it brings new technologies and knowhow; secondly, that it supplements our domestic savings and so enables us to achieve a higher rate of capital investment and, in consequence, a higher rate of increase in productivity; and thirdly, that it relieves pressures on our balance of payments.

As against that, they put two main arguments. First, they say it builds up an increasing liability for remittance of interest and dividends overseas, and this might become an embarrassment. Secondly, it increases the proportion of overseas ownership and, consequently, overseas control over important sectors of our economy.

Having stated those arguments for and against, they pose the question: Are we relying loo heavily on overseas investment? They argue various issues and there are throughout this chapter a number of suggestions. They suggest the establishment of a register of foreign investment. 1 think most people would agree with this. It would be very useful to have it. It probably could be organised by using the foreign exchange control procedures. They are inclined to favour government regulation of takeovers. They suggest that Commonwealth and State promotion of overseas investment should be stopped. Finally, they say that possible risks in the future with our balance of payments should lead us to keep the level of new capital inflow at a level not exceeding about £150 million a year.

These may be regarded as suggestions. They make no very firm recommendations in this chapter. In fact, in the last section, section 99 of the chapter, they say, in effect, that they will not answer the question that they pose. They say -

We appreciate that in practice it would be desirable to avoid imposing inflexible limits on overseas investment, either in general or of particular kinds; nor would it be advisable for changes of policy to be too severe, lt seems to us essential, however, both for public understanding and in order to obtain the desired reaction from overseas investors, for the question to be kept in the open.

They go on with some general statements. They do not finally express a very clear or categorical answer to the question that they pose although, as I have said, they make these various suggestions in the course of their remarks.

What 1 should like to do this afternoon is to look at one or two of the issues which they raise, and to make some comments upon them. In stating the arguments in favour of a fairly free capital inflow, I think they probably do less than justice when they refer to new technologies and knowhow. One may take a particular industry, for example, the automotive industry. It is clear that the benefits which flow from this for Australia are considerable. In the first place, it provides direct employment. Also, in the contracts into which it enters with suppliers, it provides further employment. Secondly, it gives us technical skills, which otherwise we would not have had. Thirdly, it gives us an increased defence capacity beyond that which we would have had if we had not had this industry. Fourthly, of course, Australia takes a share in the profits of the industry. It takes its tax at the rate current at the time, say 8s. 6d. in the £1 or 421 per cent, of the profits. The Australian people are silent partners. If dividends are paid abroad to a double tax convention country, such as the United States or the United Kingdom, we take a further 15 per cent, in dividend withholding tax. If they are paid to a country which does not have a double tax convention with us, we take 30 per cent. Fifthly, if we did not have this industry and we wanted the cars that it produces, presumably we would have to import a very large proportion of them, and this would have a very serious effect itself on our balance of payments. Sixthly, we have an export business growing from this industry. It is exporting cars to New Zealand, South Africa and elsewhere. In fact, it is suggested that if the Japanese restrictions did not prevent us, we might be exporting cars to Japan at this time.

It is true, of course, that, against this, dividends are paid abroad from this industry and this has affected our balance of payments. Surely however, this is relatively insignificant beside the benefits which we have had. It is true that this industry is foreign owned to a large degree. The automotive industry is one of those in which the proportion of foreign ownership is very large. However, this is a matter which we can control, if it becomes dangerous to us or if we consider that it is. Indeed, we could stop the outflow of dividends immediately if we wanted to. There are risks but on the other hand great advantages. I suggest that these are worth stating because in the Committee's report these advantages are dismissed somewhat briefly. I think we get more than this, from overseas investment. If we have controls - it has been mentioned that Japan, New Zealand, India and some other countries have controls - we run the risk that these industries will not come to us. Indeed, the automotive industry has refused to go to at least one country because of the local requirement of a 40 per cent, equity. Are we prepared to pay that sort of price for insisting upon a rigid form of control? At this stage of our development, I suggest that we are not.

Dealing with some of the arguments which were put against the inflow of capital as detriments by the Vernon Committee, perhaps the one that caused members of the Committee most worry was the increasing liability for remittances abroad. In appendix N they produced projections. One of these is reproduced as a table in the course of the chapter as one bearing importantly on this matter. In this they calculate what will be our liability for payment of dividends and interest abroad in 10 years time, if we go on importing capital at the rate of £50 million a year, £100 million a year, £150 million a year, £200 million a year, or £250 million a year. They have a look at the figures on their projection and they find that if we import £250 million a year, then in 10 years our dividend bill will be £616 million. They say, of course, after having a look at the balance of payments this figure is too large. It is largely for this reason that they come to the conclusion we should keep our inflow of capital at the rate of about £150 million a year, so as not to produce that result.

There are various criticisms of this. I would not want to develop them in detail this afternoon. They are dealt with very effectively in the supplement to the " Treasury Information Bulletin " entitled " Australian Balance of Payments ", which was issued last month.

The Committee's table involves a number of assumptions. In the first place, the figures are produced by assuming that whenever capital comes in and produces its profits, 50 per cent, of those profits will be ploughed back. It is also assumed that they will always be producing 8 per cent, profit. It is from these assumptions that the Committee arrives at its figure of £616 million. In addition, when we look at these figures we find that the Committee has assumed certain rates of imports over the period of 10 years and certain rates of exports. Already the Committee's assumption about the probable increase in the rate of exports has proved to be an underestimate. The members of the Committee underestimated, for instance, the amount that we would receive during this period from exports of iron ore. Contracts already in existence when considered in conjunction with projected contracts, show, I suggest, that they have seriously underestimated this source of export income. It would seem that we can use in this direction a far greater capital inflow than the Committee was prepared to recommend when it used this arithmetical approach. I suggest that in rejecting that recommendation of the Committee the Government was quite right. Hindsight in this instance shows the risk of being tied too closely to equations and arithmetical calculations of economists, when deciding Government policy.

The second worry that the Committee bad about overseas capital concerned the extent to which ownership of Australian industry was falling into foreign hands. The Committee calculated that about 25 per cent, of Australian industry was owned by overseas interests. It pointed out that in the case of some industries, such as the automotive industry, the pharmaceutical industry and the petrol refining industry, the proportion was very much higher, perhaps more than 90 per cent. Some reference was made to Canada and to the fact that United States interests have a very big share in Canadian industry, but one or two matters are worth noting in this regard. In the case of Australia, in contrast with Canada, the foreign ownership of our industries is by corporations in different countries. They are not all in one country. The largest proportion of foreign ownership of Australian industry is to be found in the United Kingdom, and the second largest proportion is held by companies in the United States of America. But there are also proportions of foreign ownership of Australian industry in Canada, New Zealand and other countries. It is almost ridiculous to suggest that all these companies in various countries, or even the ones scattered within single countries, could ever combine in any hostile sense in united action against us. This seems to be the fear that has received expression. Foreign ownership has been spoken of as though it were all in one hand, and, of course, it is not.

There is a second matter that is worthy of attention. When we talk about and criticise foreign ownership we tend to speak as though there is a certain Australian industry and foreign interests are coming to take it over. This may be so in the case of takeovers, but in the great majority of industries the fact is that we would not have those industries here at all, if they were not foreign owned. Foreign capital has virtually created them in the first place. Often when we talk about the difficulties of foreign ownership, we should talk about choosing between having certain industries partially or wholly foreign owned or not having those industries at all.

Finally, let me remind the House that we are not without power to control the situation. We can watch it and, if it looks like getting out of hand we can stop repatriation of dividends or capital. Indeed, we can exercise very considerable powers of control over foreign ownership. But the situation has not yet been reached in Australia in which it has been deemed necessary to exercise these powers. We must always remember the power that flows from the Foreign Exchange Control Regulations under the Banking Act. The power is exercised at the present time so as to encourage investment and not to restrict it, but, I repeat, the power is there.

Let me now deal with the suggestion that there should be at least 40 per cent, of Australian equity in enterprises carried out in this country. Some people say that we should insist on 40 per cent. Australian equity. The Vernon Committee considered this suggestion and recommended against it. It said that we should not insist on 40 per cent. Australian equity as a means of reducing the financial control exercised over Australian industries by overseas interests because, if we did so, we would be merely placing more Australian capital under foreign control. That capital could be under Australian control, could be employed elsewhere in the Australian economy, and should not be put under foreign control as a minority interest.

In addition, of course, this overseas capital comes in very largely in connection with risk ventures, such as oil exploration and mineral ventures. We do not find Australian capital willing to come in on the required scale. Investors in those ventures might have to resign themselves to losses for five years or so and then spend a number of years recouping those losses. They might not be able to look forward to a profit for a very long time. We cannot insist on 40 per cent. Australian equity on those terms. It is not practical politics. In addition, as I have said, the imposition of this requirement would often result in our failing to establish the industries contemplated. This has happened in India and in other countries which have insisted upon such a requirement. We have not so far been prepared to pay a similar price for the privilege of 40 per cent. Australian ownership.

Nevertheless the Foreign Exchange Control Regulations have had an influence on the position. When interests outside the sterling area contemplate a takeover they tend to ask for an assurance from those administering the Regulations that they will be able to get their dividends out. While they do not obtain a contract guaranteeing that they will get their dividends out, they are given a statement of policy, provided their propositions are suitable, that they will be able to get them out. In one recent case the proposition was that the overseas interests would take over only 60 per cent. of a very large Australian industry and would leave 40 per cent, under Australian control. They made this proposition because they knew it was in accordance with the general policy of the Australian Government. In this way the Foreign Exchange Control Regulations are exercising their influence, and at the same time we avoid any undesirably rigid legislation setting out that 40 per cent. Australian industry is an absolute requirement and so producing undesirable results. We have the power to control and we are at present exercising it to provide for a free flow. We can keep an eye on the situation and we can altar our policy, if necessary, to deal with any risks arising from foreign ownership. There are risks, as the Vernon Committee pointed out, of building up too great a liability iti dividends and interest, but there are also risks on the other side.

One of the results of having this capital inflow has been to enable us to support a very large immigration programme and increase the rate of our development. We may not have unlimited time to develop this country. If we start to restrict, by control, the free inflow of capital we will reduce the pace of our development. That is the risk on the other side of the ledger. Are we prepared to take it? I suggest that at present there is only one answer to this question. We should have a free flow of capital; we should provide for registration and records so that we can exercise control if the need arises, but we should not at present impose serious restrictions.

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