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Economics References Committee
Inquiry into foreign investment proposals

FERNANDES, Professor Clinton, Private capacity

RICHARDSON, Mr David, Senior Research Fellow, The Australia Institute

Evidence from Professor Fernandes was taken via teleconference—

ACTING CHAIR: Welcome, and thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I'd also like to advise witnesses that answers to questions on notice are to be sent to the secretariat by Wednesday 19 August 2020. I invite The Australia Institute and then Professor Fernandes to make a brief opening statement, should you wish to do so. If you could keep it brief that would help us, because we are limited with time.

Mr Richardson : Sure. I'd just like to mention in opening that we used to have a strong foreign investment policy, beginning in the late sixties—strong in theory but often watered down in practice. I heard your comment earlier that Treasury had a long list of faults in their follow up. That persists. I might mention that in a former life, working with the Parliamentary Library years ago, I used to assist Don Chipp, who was very active in the foreign investment area. That will do for an opener.

ACTING CHAIR: Thank you, Mr Richardson. We'll come back to you with questions shortly. Professor Fernandes, do you have an opening statement?

Prof. Fernandes : Yes, thank you. Very briefly, my core proposition is that the phrase 'national interest' is never defined in the Foreign Acquisitions and Takeovers Act—it appears 16 times in the act, but it's never defined—and the committee should not be bound by a very narrow, unambitious version of the national interest. It should take into account the need to develop Australia's economic complexity, not merely protect us from, say, a foreign takeover. That's all, thank you.

ACTING CHAIR: Thank you very much.

Senator PATRICK: My question is to Professor Fernandes. I note you're from the University of New South Wales, so I presume you're not speaking on behalf of the university, noting the controversy over the last couple of days.

Prof. Fernandes : I don't know what controversy you're talking about. I'm in Melbourne. I'm appearing via remote.

Senator PATRICK: You might be aware that the University of New South Wales pulled some tweets that were offensive to Chinese students.

Prof. Fernandes : I see.

Senator PATRICK: And there has been a new policy, explained by the University of New South Wales, but it appears Minister Tehan is going to conduct an inquiry as a result of it.

Prof. Fernandes : I haven't kept in touch with this, because I've been—it's quite difficult teaching online, you see, so I'm not really aware of this.

Senator PATRICK: That's alright—no problems. You put forward a proposition in your submission that—and, in some sense, it's not necessarily saying how you'd adjust your foreign investment review rules but rather saying that a different strategy ought to be adopted. You talk about precious metals and the idea behind the national company. Can you explain that a little bit more?

Prof. Fernandes : Sure. There is a study done by Geoscience Australia called Critical commodities for a high-tech world. It turns out that the high-tech world—this is the world of 5G, advanced materials manufacturing techniques—relies on certain critical minerals, and Australia happens to be rich in them. So one thing that could happen is: we could start a national company that is owned by the Commonwealth which can enter into partnerships with foreign investors or domestic investors as required, but this would give us a dominant proportion—all of us, the Commonwealth—of equity. That is not against the national interest test in the Foreign Acquisitions and Takeovers Act. The part I draw to your attention in my submission—the main submission, that is, submission No. 7—is the contrast between what, for example, Norway has managed to do with a petroleum fund, where its own citizens own its oil and gas resources. They're able to use that to provide pensions, a highly advanced society and even good foreign aid projects to the global south. There's no reason why we shouldn't have our own national company. That doesn't mean expropriating the property of existing oil and gas companies, but I'm talking about new investments that we have. There's nothing wrong with simply establishing a national company which can get the royalties, make investments and then try to get us to a higher level of economic complexity. That really is the core of what I'm trying to say.

Senator PATRICK: So you say that that is, in some sense, an alternative to foreign investment, or complementary to it—

Prof. Fernandes : Complementary.

Senator PATRICK: and should be viewed in the context of foreign investment. You say that government should be looking at, when a proposition is put forward and an investment opportunity arises, whether or not one of the options is to form a national company.

Prof. Fernandes : Yes—for identified strategic projects of national significance. Just because somebody from abroad or a company from abroad wants to buy something in Australia—that's just foreign investment. But I'm talking about strategic investments in areas that are vital to the next 20 to 30 years of the development of capitalism. If we are to go to, for example, green technology, with solar panels or with electric cars, you need batteries, and the key things in those batteries are in those critical commodities. Why simply ship the minerals off overseas to a global supply chain, so that they can manufacture the cars somewhere else, and then we buy the cars back again? Why can't we just have a technology transfer process, whereby the nationally owned company can invite a foreign manufacturer, if needed—and I think it is needed—and that way we can capture more of the value here?

Senator PATRICK: Does the Norwegian model allow for foreign investments in their petroleum company?

Prof. Fernandes : Well, the company itself is no longer totally state owned. Norway is a capitalist country. It's a member of NATO, it's not—yes, they do allow foreign investments. But where it was strategically important in those core decades, where the North Sea oil and the other oil and gas assets of the Norwegian government were important, they simply got the oil and gas and they managed to get more than a trillion dollars in their fund. For a small population of maybe six million people, that's a lot of money. And we could have that, because the future really will rely on some of the critical minerals that we possess. Those minerals are absolutely critical to a high-tech world. There is no reason to say that the national interest involves shipping those minerals somewhere else or allowing the foreign company to come in, buy the rights to exploit the minerals, take the minerals somewhere else, manufacture the smart electric cars somewhere else, and then we buy the cars. That, to me, is like a Third World country; it's like an economic dependency.

Senator PATRICK: I was really just going to ask whether or not that oil company, formerly Statoil, have a regime in place that allows, for example, a foreign investor to invest in some Norwegian project. I presume that's allowed?

Prof. Fernandes : Yes. They have a much more dirigiste model. We have to adapt the best practices around the world to our own circumstances. In Norway, for example, the government owns bottle shops, so if you want to buy alcohol that's where you go. I'm not talking about that. But, in certain things, where it's necessary for us as we try to go into a low-carbon future, those critical minerals are absolutely vital.

Senator PATRICK: The other thing you talked about in your submission was 'economic empires' as a replacement term for 'the market'. In some sense, the submission almost talks about predatory conduct as a norm. Is that something that we should recalibrate here in Australia as we think about foreign investment?

Prof. Fernandes : Basically, we live in a world of global value chains. That's what I was trying to say. Let's take a bookshop—I happen to be partial to one. I know you're a South Australian senator—you've got a Dymocks bookshop in Rundle Mall. There's a Dymocks bookshop probably in Queen Street, Brisbane, or in Melbourne. If they move products from one shop to another just to manage their store levels, that's not South Australia trading with Victoria; that's an internal move within a corporation. Eighty per cent of world trade is nothing more than internal moves within a global-value-chain world. That's what I mean by private economic empire. It's not actually free trade when these small traders, or even independent corporations, are just trading with each other. The majority of Australia's trade with South Korea, or a large part of it, is Hyundai moving its parts inside Hyundai's global value chains. When we do aircraft spare parts manufacturing trade with the United States, that's Boeing—Boeing's second-largest workforce outside the United States is in Australia. So it's an internal move within Boeing. That's what I'm talking about as a private economic empire.

Senator RENNICK: I noticed you made a good comment here:

Nothing changes with respect to its output, employment and so on and so GDP is exactly what it would have otherwise been in the absence of the foreign investment.

That is if a foreign company takes over an Australian company. You're right about the key indicator, the GDP. Gross domestic product measures the output of all goods and services in a country regardless of ownership, whereas GNP, gross national product, measures the output of a country and across the world by Australian companies. Do you think it would be better if the ABS, the Australian Bureau of Statistics, started reporting GNP to give a better benchmark of Australian profitability rather than offshore profitability in Australia?

ACTING CHAIR: Who is that question directed to, Senator Rennick?

Senator RENNICK: To the Australia Institute, because they've talked about it in their submission: that the GDP doesn't change when a foreign company takes over an Australian company—which is correct; I agree with that. My question is: wouldn't it, therefore, make more sense for the Australian Bureau of Statistics to report GNP, which actually reports the profitability of Australian owned entities, rather than all entities that operate within Australia regardless of whether or not they're foreign owned?

Mr Richardson : Yes, that would make a lot of sense. In fact, if you go back into some of the very early ABS publications—

Senator RENNICK: It used to be GNP, yes.

Mr Richardson : Yes.

Senator RENNICK: That's one of the many misleading indicators, in my view, that the ABS uses to mask economic performance. The other one, of course, is the fact that they don't count the cost of existing housing in the inflation figure. If they did, inflation would be a lot higher than what they report, given that house prices have risen 200 to 300 per cent in places like Sydney and Melbourne over the last 30 years. But I'll take that as a comment.

With all that supply chain issue, one of the reasons that happens—and it's one of the things I want to try to highlight in my time in Canberra, if I can—is the fact that withholding taxes on profits shifted offshore are taxed at a much lower rate than profits retained in Australia. The onshore tax rate in Australia is 30 cents, whereas the offshore tax rate, as a result of treaties, is often between zero and 10. It will depend on treaties. But, obviously, when you have an exit tax lower than your onshore, our tax system actually encourages profits to be sent offshore rather than be retained here in Australia. I will just leave that as a statement, as well.

ACTING CHAIR: Did you want to comment on that Professor Fernandes?

Prof. Fernandes : Yes, I could add to his comment. Part IVA of the Income Tax Assessment Act contains anti-avoidance provisions that include a purpose test. If it can be objectively concluded that the sole or dominant purpose is to obtain a tax benefit, then these arrangements are illegal. You can requisition—summon—the internal documents to make sure that the purpose test is met.

Senator RENNICK: I have a masters of tax law, so I am very familiar with the tax act. You can still satisfy the arms-length transaction and conditions, or transfer pricing conditions, but the problem is that it's actually legal to shift profits offshore and you pay less tax to do that, so part IVA won't apply. If you talk about tax treaties, we have actually given up our taxation sovereignty. It is not just in the tax treaty, there is also section 128F, the public offer test, section 855, which doesn't put capital gains tax on non-portfolio holdings—

ACTING CHAIR: Senator Rennick, is there a question?

Senator RENNICK: Sorry, it's just a statement.

Prof. Fernandes : I have a comment on that. He is right. I think this is the issue with the free trade agreement. The Singapore-Australia Free Trade Agreement of 2003 has been updated three times. It has provisions now to recognise both countries' professional qualifications in engineering, accounting and law. That allows companies to set up marketing hubs that are tax dodges in places like Singapore, to allow our tax code to be subverted. Mr Richardson, were you going to say something?

Mr Richardson : When we're looking at multinational tax avoidance, we see big juicy items in the balance of payments that are associated with licence fees for business services and all sorts of intellectual property rights, with transfer from tech company Australia to tech company Ireland or tech company New York—whatever the case is. There are all sorts of internal transactions within the multinationals, which is the sort of thing that Professor Fernandes mentioned earlier—the supply chains. But this ensures, too, that the intellectual property charges, which are all bogus really—it's just monopoly profit by another name—all end up in low-tax havens. I have given evidence to the Senate in earlier inquiries on this matter. It's something that needs to be addressed. I know the government's doing a fair bit on that issue, but, for the present purposes, it's just one of those other unfortunate things that we have to deal with when it comes to accepting foreign investment in Australia. When we've seen examples of European countries trying to address that very issue—how do you tax Google, Amazon and so forth?—the American government has been very heavy. So, in a big way we still have big countries around the world offering us free trade, with a big stick, and threatening retaliation in the event that countries take legitimate action in trying to work out a decent tax arrangement to address tax avoidance.

ACTING CHAIR: Thank you for that. I appreciate it. I'm glad you brought it back to the risk that's embedded in foreign investment, because that is the purpose of our inquiry. Senator Whish-Wilson?

Senator WHISH-WILSON: Can I thank both of the witnesses for their excellent submissions. I particularly enjoyed reading the history, in both submission, around the issue that we're discussing today. I might just start with Professor Fernandes, if I could. I really like your idea about government investing in strategic industries like precious metals. What led you to this idea and have you done any particular or specific work in the lithium market in Australia? You mentioned batteries a few times. It is an industry for which I have had correspondence with people who have concerns about foreign interference and market manipulation.

Prof. Fernandes : When you say work, yes, I am examining the geopolitics of new military technologies. I am at the UNSW at ADFA, which I believe you're a graduate of. I'm examining the geopolitics of new military technologies. One of them involves hypersonic weapons and things like that, but these rely on these rare earths and these critical commodities. I look at where it is, in the Katanga province of the Congo, and I examine where countries like China, for example, are trying to buttress their own stock of these critical commodities by building strategic alliances with certain countries in the African continent. Is that what you mean? Because I look at that—

Senator WHISH-WILSON: Yes, correct. That's one example—

Prof. Fernandes : To that end, I would add that it would give us real strategic clout in the world if we ourselves could have a company, controlled and owned by the Commonwealth, that had access to that and had control over it. It is a force multiplier for Australia's weight in the world.

Senator WHISH-WILSON: You used the African example there. Our first witness today was very clear that the Chinese government—it is this issue about getting as much control as they can on these supply chains. In Australia, we have listed lithium mining companies at various stages. Is it also feasible that a foreign government could be using the market based system to also entrench its interests? For example, if they're large buyers of raw materials, they can potentially manipulate the price of those raw materials and [inaudible] in Australia's interest.

Prof. Fernandes : Portfolio investment through shell companies—yes, that could happen. It's more than just defence. It's about whether we would like to see an Australia that does more than simply act as a quarry for other people to make smart things. Yes, China is trying to buttress its supplies in Africa. I look at that and at the United States' own policies. Foreign aid is used to achieve those goals. So are coups, intelligence operations and normal diplomatic treaties. But it's more than that. This is a rare opportunity, as we have had a geopolitically historic, significant crisis of neoliberalism for the last 40 years. This is an opportunity to see if we can increase our economic complexity by doing more than just being a quarry.

Senator WHISH-WILSON: Mr Richardson earlier mentioned this barrage—we talk about the free trade deals that we have signed, many of them in the last few years, that provide overlays of investor-state dispute clauses and state-to-state dispute clauses, that really do limit our federal government from investing in many industries directly, or from subsidising industries, like we used to, perhaps with carve-outs for defence and areas of national security. Do you believe that the government taking an active position in these kinds of industries and companies would trigger some of those restrictions that are in place under free trade deals, including the versions of the Trans-Pacific Partnership Agreement and RCEP and some other large multi-faceted deals that we're signing?

Mr Richardson : I'm having trouble hearing your question.

Senator WHISH-WILSON: I was just interested, Mr Fernandes, whether he believed government taking a strategic investment approach, where it was a part equity owner, in key strategic industries would trigger some of these restrictions that are put in place on free trade deals, such as state-to-state disputes?

Prof. Fernandes : Investor-state dispute settlements. Yes?

Senator WHISH-WILSON: And state-to-state dispute settlements.

Prof. Fernandes : If we don't move now, foreign interests will in fact gain access and then we will in fact be vulnerable to action under state-to-state dispute settlements or investor-state dispute settlements. So, this is the right time. As the investments begin in a future post-pandemic era, there will be a need to reorient and build greater resilience in supply chains to shorten them—they have been too long—to reduce the number of steps and to bring the critical elements home. If we don't do that, then, yes, other private industries will simply pre-empt us, and then we will be vulnerable to it.

Senator WHISH-WILSON: Mr Richardson, if I could put this question more directly to you, on the same subject.

Mr Richardson : I would first like to add a little bit. If we look at our history, we have had lots of policies that go towards what Professor Fernandes has been advocating. For example, under the Gorton government, the Australian Industry Development Corporation was established. That had precisely the sort of function that has just been envisaged—that of investing in sensitive and cutting-edge industries, and also, to some extent, buying back the farm. On top of that, we used to have pretty strong controls over mining investment and in sensitive minerals. Such would be the case with rare earths and lithium and so on. There used to be a policy of 50 per cent Australian participation. It would be nice to see a bit of discussion around those sorts of ideas again.

Senator WHISH-WILSON: I have some specific questions. In your submission, Mr Richardson, you talk about the fact that you know of no example where a decision has been revoked because conditions were violated under FIRB approvals—

Mr Richardson : Yes.

Senator WHISH-WILSON: Why do you believe that is the case? Is that because of things like trade deals that we interface with on this subject, or are there other reasons that the government's never bothered to even audit many of these conditions?

Mr Richardson : A big part of it is, firstly, that they don't have the appropriate weapons. How would you go about reversing a takeover, which is really the only sanction they have? There's no intermediate penalties that can be imposed. Secondly, though, and much more important, and this complaint goes way back, there is no ability in Australia to actually monitor what goes on. I mentioned that I have been working in the Parliamentary Library on that subject matter for decades. I was once asked by a stockbroker who was acting for foreign interests, 'If we go ahead with this proposal and they apply these conditions, do we really have to abide by them?'

And I had to give the honest answer: well, nobody's going to check whether you do or not. I've given examples in the submission.

Senator WHISH-WILSON: You have, which are excellent. I did know that Don Chipp made that comment all those years ago, and this issue's been ongoing for many, many decades. One thing the committee homed in on in our two earlier hearings is that when some companies have been given approval or some investors have been given approval there have been voluntary undertakings. And we've got some case studies. One is Van Diemen's Land, which is interesting, because you talk about the dairy industry in your submission. Do you think we should just remove voluntary undertakings and look at the FIRB architecture so that these undertakings are audited and enforceable—if they're made, they need to be enforceable?

Mr Richardson : Yes, absolutely. We also have to recognise, though—I think for cosmetic reasons a lot of things are probably given approval subject to conditions that everybody knows they're never going to enforce. Again, I've given examples. But, to give credit where credit's due, the Costello decision in Shell's attempted takeover of Woodside is an example. If you read the press release, he outlines that they would have liked to get some agreement with Shell that it would act in Australia's national interest. But there was no way of setting up an enforceable regime. So, because they couldn't do that, the permission for the takeover was denied. That's the first time, as far as I'm aware, of a government expressing that sort of humility—that in fact we can't control this stuff.

Senator WHISH-WILSON: We have seen a situation recently where Bellamy's, and other foreign government interests, had put some enforceable undertakings on keeping their headquarters here and keeping staff employed in Australia. Do you have any views—perhaps you could take it on notice, and also Professor Fernandes—on whether it should be a recommendation of the committee that we should be making undertakings enforceable and having the resources to audit those things? And my second question, which perhaps you could answer now, is to me an important question. I noticed in your submission you talked about protection of Australia's market based system from manipulation that would benefit proposed foreign investment or investors. Do either of you have a view on perhaps a blanket ban or very strict conditions being applied to the takeover of Australian companies if they're being bought by foreign government interests and that foreign government also is a key competitor of the Australian company and is in a position to influence their sales in their market?

An example there that I raised publicly was Bellamy's. Bellamy's was selling infant milk powder into China. Their key competitors were Chinese state-owned companies. The Chinese government didn't give them their licence for many years. Their share price languished. They didn't have much of a future. And they were then bought by their competitor. We know of other examples that have been given to me. Do you think we should just have a blanket ban on those conflicts of interest within our market system?

Prof. Fernandes : It's long overdue. I'm grateful to you for bringing this up.

ACTING CHAIR: Do you want to expand on that?

Senator WHISH-WILSON: Yes, would you like to expand on that? It was a very strong answer. I wasn't expecting that. But if you could expand on that, that would be great.

Prof. Fernandes : There is public concern all the time, and a perception that Australian produce, companies and resources are in fact being used principally to help foreign markets rather than the Australian public. It would not be inconsistent with a generally open scheme of foreign investment, because you could argue in these cases that there is a market-distorting effect of a state owned company moving things outside the scope of market forces but into mercantilism, and so you want to combat that.

Senator WHISH-WILSON: It ' s an unusual time in history , when some of our key markets and key buyers are also our key competitors and they can influence these things. Do you have any views on that, Mr Richardson?

Mr Richardson : I 'd be concerned i f we're picking on state owned enterprises . What do we do with Vodafone or Singapore Airlines? But , also , you use the word 'mercantalism', and m e rcantalism i s almost US policy at the moment. How do we handle that? We escaped a few bullets. We didn't still have the prohibitions imposed on Australia that the Europeans have , and we haven't been subject to the same sort s of threats yet. But I think it's misunderstanding a lot of world trade and foreign investment if we see it as a purely free market with just a funny couple of examples in China. Mercantalist policies are much more widespread than that . A nd we're equally guilty. We've used the power of the state against East Timor . S oon after the Hawke- Keating government came to an end, we saw both Hawke and Keating lobbying on behalf of National Mutual and the AMP , respectively, for entry into China . I may have got that wrong; it might be the other way around. But we observe trade missions and all sorts of things all round the world all the time , like allegations about the National Security Agency acting on behalf of Boeing and Raytheon .

Senator WHISH-WILSON: Your submission seems to point in particular to competition [inaudible]— let's say , purchases potentially by state owned enterprises. You raise dairy in your submission, and fact that the product seems to be going from a domestic market to one market in particular, rather than to other export markets. Why did you raise that particular issue around me r cantalism ? Y ou didn't use that word , but that's the way I interpreted it. Do you think it's more of a competition issue that needs to be addressed for any foreign investor?

Mr Richardson : I might take that on notice, if that's possible.

Senator WHISH-WILSON: Sure.

ACTING CHAIR: I have a number of questions, if I may continue the line of questioning from my colleagues. The issue of national interest has been discussed briefly this morning. Certainly, it is at the heart of the foreign investment regime. What are your views on the current definitions of national interest? Are they sufficiently robust and sophisticated? What is your view, seeing as we have legislation about to hit the parliament? Can we start with you, Professor.

Prof. Fernandes : Sure. There is no definition of national interest at all in the Foreign Acquisitions and Takeovers Act 1975. The phrase appears 16 times, but it's never defined. And so, what the committee is using as a test of national interest is the terms of reference of this inquiry—money laundering, protecting our system from manipulation and so on, and that's fine. But the national interest is what you make of it. A previous Senate inquiry into the national interest—the foreign policy white paper of 2003, I think—referred to its Promethean character. The national interest has to be consistent with common sense. It can't be used simply as a justification, or a tool for whatever you would like to push. But, I think, with the imprecision and generality that is traditionally associated with the social sciences, you can still say that the national interest involves providing us with a decent standard of living, a good quality of life and a clean environment—and the resources of our country principally benefiting the people of our country.

ACTING CHAIR: Thank you for putting it so succinctly. Can I go to you, Mr Richardson.

Mr Richardson : I'd like to make the point that national interest is the sort of thing that is hard to define, but we know it when we see it. I wouldn't like to see it defined precisely. On the question of whether we have had a decent definition—when we first started legislating on foreign investment in the 60s and 70s, how could that tackle the issue of Huawei and 5G? That would be impossible to anticipate. It would be impossible perhaps now to anticipate some of the outcomes of artificial intelligence. So, for those sorts of reasons, I would prefer to leave the question open. But, perhaps in a similar way to the way the tax office gives you guidance if you think you might be sailing against the wind a bit—maybe that's a role for the Foreign Investment Review Board.

ACTING CHAIR: So the spirit of the term lives on, but it needs to be sufficiently open to adapt to the current and prevailing times. The West Australian government proposed that one of the ways to improve the quality of foreign investment and the outcomes for Australians—which you've spoken about—might be to ask applicants to identify whether the investment would do one of four things: contribute to more research and development, facilitate technology transfer, provide for joint venture and partnership proposals, or potentially provide for local companies to participate in international supply chains. Do you support that and do you have anything to add to it? Or would you like to speak to any of those points in further detail?

Prof. Fernandes : For reasons of time, I will just draw your attention to my supplementary submission. There is a short paragraph on technology transfer, which I am a big proponent of. There are five ways in which technology transfer can be achieved. I've outlined them there.

ACTING CHAIR: Thank you. Mr Richardson?

Mr Richardson : Yes, I'd agree with that, and especially in the case of takeovers, for example, where often the outcome is that the industry is pretty well unchanged. The default seems to be, in Australia, that if you put up a proposal, it's going to get approval. If we turn the onus around though: if you want to take over, turning that onus around to show why you would benefit Australia, including from among those four categories—yes, I'd fully support that.

ACTING CHAIR: Professor Fernandes, Australians are very, very concerned in this COVID time about job insecurity and the profound impact of loss of jobs. You make some very important points that I think the Australian public needs to come to understand about the complexity, or the lack of complexity, in our economy as it currently exists. Also, you've cited research that found foreign direct investment can have positive economic growth but can have a significant negative affect on employment growth and a significant negative affect on real wage growth. We are presiding over a time of employment in decline. We have seen the rise in insecure work and we've had no real wage growth. How do these two matters that you've raised need to be addressed in the current climate?

Prof. Fernandes : The reason for the negative effect of foreign direct investment on employment growth and wage growth is due to them being more capital intensive. They're more interested in plants and manufacturing, because we have all the resources here. They are not interested in the people so much as the resources. It seems to be a quarry and dairy farm. The aim is then to use those resources to fit us into a global value chain that they control. How to address that? The Chifley government had a white paper on full employment in 1945. Coming out of the Second World War—a major trauma and a big geopolitical reset—it was a time for ambition.

I'm not a fan of the song 'Hotel California'. You can't find a passage back to the way things were before, but you can capture that ambition by saying: 'We will have employment policies that are consistent with a decent life, and we will try and get up the ladder of economic complexity. We will make sure that we are capturing more of the value here by having more of the manufacturing and more of the R&D done here.'

ACTING CHAIR: Australians are desperate to hear this from their government. They want jobs where we grow our wealth. Just how bad things are was sheeted home with your submission where you indicated that Australia ranks 53rd in terms of low economic complexity comparable to countries such as Kazakhstan, Cambodia, Kenya and Saudi Arabia.

Prof. Fernandes : Yes.

ACTING CHAIR: I don't think Australians actually believe that our economy is so unsophisticated and lacking in capacity to grow jobs, nor that it's actually integrated with foreign investment. Would you like to speak to that, Professor?

Prof. Fernandes : Yes. The public seems to think that insecure employment and a government that simply privatises is natural. That's the environment they've grown up in and that is the era, so it's taken for granted that governments aren't going to offer bold solutions, but there was a difference. Even in this last 40 years, if you look at the global financial crisis, after the then Treasurer's intervention, trust in government went up markedly and then it began to fall again after that. What you want to do is increase economic complexity by increasing the level of diversification in the number of products we export and also ensuring that, if a foreign company wants to come in—we're not holding a gun to their head—and use some of the critical commodities for a high-tech world, like tantalum, cobalt, coltan and so on, we would like equity in that. We would like to have some of the complexity and manufacturing captured here. This is the future.

Semi-autonomous cars, advance materials and manufacturing techniques is the future and it requires boldness. I think, in the last 30-odd years, there's been a bipartisan policy consensus, at least at the top levels, to weaken the power of the Australian government and increase the power of the corporation—that is, subordinate the state to the market. It's time that balance was reset.

In my supplementary submission, I named the three trends that are already underway now, which the coronavirus pandemic is making visible and is accelerating. One of them is a greater role for governments.

Senator O'NEILL: We are returning to some of the issues that were opened up earlier in this section. I will take you, Mr Richardson, to the matters of auditing compliance. You kind of said it was an open secret amongst those who play the game that they can invest in Australia, basically, with impunity. No-one is going to follow them up. If they don't comply they shouldn't expect any sort of sanction. These failures have been revealed to this committee by the questions that we've asked. We asked questions on notice of Treasury who cannot identify the proportion of approvals to which broad categories of conditions are attached. There is no record of the number of targets for compliance under remedial action plans not being met. In earlier evidence that we received in the course of this inquiry we found out that in 2019 there were two people in Canberra to monitor the compliance with conditions that were set for billions of dollars of investment. What needs to occur for Australians to actually have confidence that this Treasurer is making sure this government isn't selling out the country?

Mr Richardson : You hit the nail on the head. The two people involved are probably busy enough just writing answers to questions that come into the Treasurer now and again—those ministerial jobs—

Senator O'NEILL: To be fair, I think there are 12 now.

Mr Richardson : But even so, as far as we know they have no power to inspect books and things like that, so there is a whole raft of things. You need to set-up a system similar to what we have in the ACCC or ASIC, specifically for foreign investors and specifically to monitor not only conditions that they agreed to but also their compliance with the ordinary rule of law in Australia, including tax arrangements and all that sort of stuff. Are they being good corporate citizens? There is no point even doing all that unless we have a penalty system and we don't. At best, and this has never happened, you could unwind a takeover, for example, if that's possible. But there are no intermediate steps. I'm convinced that this is one of the reasons why governments have never been very active in compliance. Why would you do that when we effectively have no sanction?

Senator O'NEILL: Professor Fels gave evidence in the last hearing that I was in attendance at with regard to some reasons why treasurers might want to keep this within their portfolio, but he also raised the questions, that you are just raising there, about the regulatory toolbox—a full suite of capacities. Is it time for Australia to have a separate statutory authority that actually has the job of protecting Australia's interests when it comes to foreign investment, because it seems that the current structures, where the Treasurer and his department are responsible for this, with advice being given by a review board, is creating an impression in the public that there's an entity that's looking after all this and, frankly, there is no entity. Has the time come for a statutory authority to do the work, of the kind that we have been talking about, to make sure that the complexity of our economy is improved by investment, that investment delivers jobs for Australians, that investment is going to help us with research and development, not just rip money out of Australia and take it back home, and we get the technology transfer and that the jobs that are provided by having supply chains established here in Australia? Those things cannot currently be done and they're not being monitored. Do you have a view about that—both witnesses if possible?

Mr Richardson : Yes, absolutely; I agree with all of that. I'm not an expert on whether a statutory authority is the right model. But with the independence from Treasury: imagine the scenario where a boffin in Treasury reports to the minister, 'Hey, look, we've got a problem with so-and-so.' The natural inclination of the Treasurer of the day is going to be: 'Well, is that going to be public? Can we sit on it?' And who is to blame them? Whereas if it's an independent authority then they're not beholden to the Treasurer of the day and, hopefully, do act fearlessly. But that's right—

ACTING CHAIR: The acceptance of foreign investment is the Treasurer's responsibility and failures of foreign investment are also the Treasurer's responsibility, as it stands—is that correct?

Mr Richardson : That's right, as is anything that goes wrong with foreign investment under his or her watch.

ACTING CHAIR: Thank you. Professor Fernandes?

Prof. Fernandes : I agree. I would support that in industries and sectors which are pre-identified it would prevent any monitoring or statutory body from going on a massive hunting expedition but focus it on areas which have a strategic importance for us in getting us to a new level of economic complexity—things like rare earths, rechargeable batteries and things like that; anything that's vital for a high-tech world. Yes, in those areas you'd want to make sure that there was a monitoring agency, otherwise the statutory body would be in too many things and it wouldn't have any direction.

I would like to add here, though, that when Australia did try to go up the ladder of economic complexity by bringing the Holden car into Australia and setting up our car industry—I haven't put this in my submission, but I think I'll add it here—American economic planners objected to this. They wanted Australia to focus on agricultural and mineral exports, not industrialisation. They said, 'Australia is engaging in poorly conceived programs of industrial expansion, whose principal aim has been to create protected, high-cost industries.' They wanted a global system of production and a global division of labour, with the highest value manufacturing in the United States. It was the government at the time, which brought in the Holden car, that rejected those pressures and decided to build a car industry behind that protection.

The United States would not have a steel industry or a computer industry had it not protected its own industry. If it had followed the principles of comparative advantage, as outlined by David Ricardo, today it would be exporting furs and not iPads. The biggest ideological con game has been the theory of comparative advantage, whereby one country is rich in one factor and another country is rich in another factor and you should produce what you're good at. The reason that, say, the West Indies is rich in sugar and Africa is in coffee, or Malaysia is in rubber, is that colonial powers planted those things there. They're not natural at all. Secondly, if, say, Germany and Tanzania exchanged goods: Tanzania can produce coffee and Germany cannot produce coffee at any factor of production. It is simply not possible. So comparative advantage—like David Ricardo's famous example of Portugal and England producing cloth and wine; England could not produce a Portuguese wine at any factor of production—the whole thing is a con game and it has been the defining justification for Australia to remain economically simple: underdeveloped.

ACTING CHAIR: Things need to change. We've had the demise of the General Motors presence in Australia and that's been the subject of consideration in other committees just in recent times: they've left the country and left many people at risk of losing their jobs across the 185 Holden dealerships across the country.

I thank you very much, gentlemen, for your evidence. My last question is: have either of you consulted with the government about the proposed draft legislation slated to come to the parliament around foreign investment?

Mr Richardson : No.

Prof. Fernandes : No, I have never consulted with any government.

ACTING CHAIR: Thank you very much. You might want to make some contributions. I hope the public record will help get your views aired. Thank you very much for participating today. I will remind you that you may have some questions to answer on notice and, if you do, please return them by 19 August.