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Economics References Committee
Inquiry into foreign investment proposals

BRENNAN, Mr Michael, Chair, Productivity Commission

COPPEL, Mr Jonathan, Commissioner, Productivity Commission

Evidence was taken via teleconference—


ACTING CHAIR: I understand the Productivity Commission representatives are on the line. Firstly, thank you for appearing before the committee today. Information on the procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I would also like to advise witnesses that answers to any questions on notice are to be sent to the secretariat by Wednesday 19 August 2020. I'd now like to invite you to make a brief opening statement, should you wish to do so.

Mr Coppel : I do have a brief opening statement. The statement will draw on a recent Productivity Commission research report on foreign investment in Australia. My remarks will mostly relate to your terms of reference points on conditions, the role of the FIRB and a few other matters.

First, let me say that it is well accepted that foreign investment plays an important part in the Australian economy. Over the past two centuries, foreign funding has supported Australia's economic development by permitting more investment than domestic savings would have otherwise allowed. It can bring with it a range of other benefits, such as access to new technologies, better management practices, increased competition and jobs.

Unlike its close cousin, foreign trade, foreign investment receives relatively little attention. It's often taken for granted that foreign investment into Australia will keep on rising. The policy interest in foreign investment is changing, however, both here in Australia and overseas. There's a recognition that some investments may risk less competition, bring social and environmental costs or compromise national security. Foreign investment also stirs strong community reservations. Those community concerns were palpable when the PC had an inquiry into Australian regulation of agriculture in 2016. In part, this community concern reflected a lack of information and ill-informed debate on foreign investment.

To facilitate a more informed public debate, the commission recommended periodic reporting on the trends, drivers and effects of foreign investment, and that recommendation was supported by the Australian government. That's how the Productivity Commission's research report into foreign investment, which was released just a couple of months ago, came into being. The question we asked ourselves in that report was whether Australia's foreign investment screening policy enables the Treasurer to make and enforce decisions that balance the economic benefits of foreign investment against the risks and maintains community confidence that foreign investment is in the national interest. It's a threshold question and it's closely related to your terms of reference.

The first point to observe is that Australia is generally open to foreign investment. The OECD publishes an index of FDI restrictiveness, with a value of zero for the most open policy regime and a value of 1 for the most restrictive. On this measure, which is widely used but does have limitations, Australia scored about 0.15 in 2018. So it was quite close to that zero threshold. However, Australia is less open than other OECD countries, with the most restrictive FDI policy regime of the 36 OECD countries. This is significant because research on the OECD has shown that a higher restrictiveness index score can mean lower FDI. They estimate that a 10 per cent increase in restrictiveness is associated with decreases in inward investment of about 2.1 per cent.

What we did for the Productivity Commission's research report was to use these estimates to try to quantify the economic costs of a more restrictive screening regime. We looked at a scenario that moves Australia to be the most restrictive among the OECD countries [inaudible]. The scenarios suggest that the economic costs would be material, though not large. The additional restrictions would reduce gross national income by between $0.8 billion and $7.1 billion per annum, which is equivalent to between $80 and $730 per household per year. As with any modelling exercise there is uncertainty around these estimates and our work is no exception, as is reflected in the wide range between the lower and upper cost estimates. The key point to take from the exercise is that an overly restrictive screening regime has economic costs.

This brings us back to getting the balance right. It's far from an easy task and ultimately requires fine judgement based on an acceptable risk appetite. That risk appetite is a societal choice which is exercised by governments. It's not for an agency like the Productivity Commission to pass comment on what represents an acceptable risk appetite, but what we have done is assess the FDI screening regime through the lens of leading regulatory practice. This permits us a more positive analysis and a basis for identifying where improvements in policy settings can be made.

The major feature of Australia's foreign investment screening regime is the national interest test. Some aspects of the policy regime here work well and others could be improved. Let me run through those. On the positive side, the design and vesting of responsibility with the Treasurer for administering the national interest test is, in our view, appropriate. The test gives flexibility to quickly adapt to new concerns. It weighs up not just the costs but also the benefits from foreign investment. The negative nature of the test—that is, deciding whether proposals are contrary to the national interest—limits the risk of rejecting projects that are in the national interest. These features, we think, should be maintained.

On the negative side, we identified two main elements of Australia's policy that we thought did not exhibit the characteristics of leading regulatory practice. The first, the national interest test, lacks clarity around how it is interpreted from case to case. Obviously, while some discretion is understandable, potential investors would benefit from more certainty from the process. The Australian government's treatment of investment applications is unusually secretive, especially compared with a number of other OECD countries. We consider that there is scope to lower compliance costs and lift investor certainty and transparency by, for example, routinely publishing reasons for decisions to block proposals—while recognising that national security and commercial confidentiality may limit the detail or timing of publication—and also by publishing more detailed information on the timeliness of decisions taken each year and giving early advice to investors where standard time lines are not likely be met. That's the first area of concern.

The second area of concern relates to conditions. Attaching conditions to foreign investment approvals may be necessary to mitigate risks, but their effectiveness is likely to be limited. Conditions set at the point of the transaction become less effective over time because risks evolve through changes in the nature of the business, because of technological changes and because of shifts in geopolitical considerations. Further, conditions that duplicate existing legal requirements on businesses operating in Australia can add to the regulatory burden without delivering additional benefits. For example, standard tax conditions appear to be of limited value as they mostly require companies to comply with the Australian tax laws. Cases where conditions are needed are more likely to be the exception than the rule. Where they are needed, their necessity suggests that national laws and regulations may need to be strengthened.

We also commented on how the increasing use of conditions has seen the role of the FIRB evolve from being a gatekeeper to being something more akin to a regulator. While some of the regulatory roles have been moved to the ATO, FIRB's and Treasury's powers and institutional arrangements have changed little. Attaching conditions to foreign investment approvals with limited enforcement capability provides only limited means to mitigate risks and foster community confidence. We think national laws and regulations, together with purpose-built and adequately resourced regulators such as the ACCC, provide a more flexible risk management capability and, where available, they should be preferred. If conditional approvals remain prevalent, we think consideration needs to be given to whether FIRB's monitoring resources and enforcement toolkit are adequate to ensure compliance.

Lastly, I'd like to stress that some of these points are based on our analysis which predates recently announced significant changes to Australia's foreign investment policy, including new enforcement powers. The commission have not analysed the impacts of these changes in detail, but we do anticipate revisiting the topic in the future. Certainly greater attention has been given to national security and other national interest concerns, as, for the first time, one of our largest sources of investment is not a democracy or a military ally. Yet we must not lose sight of the economic benefits that foreign investment can bring nor the fact that Australia has a robust set of laws and institutions which are generally well equipped to deal with all manner of potential risks.

ACTING CHAIR: Thank you very much. Could we get a copy of that opening statement?

Mr Coppel : Yes.

ACTING CHAIR: Thank you. Could I ask, in relation to your submission, about who might be an appropriate regulator? ASIC are a model. They're an independent regulator. Is that where the Productivity Commission would think might be the best way for foreign investment proposals to be dealt with, through an independent regulator?

Mr Coppel : The framework we used in the report was to identify what are leading regulatory practices and then evaluate the policy regime against those benchmarks. One of those principles was for regulatory practices—the separation of regulation from policy. So on that basis there is scope for potential conflicts of interest between the application of the regulation and the policy role. It's not a clear cut principle in terms of how practices play out in Australia and another country. The EPBC Act is an example where the regulator and the policy are within the one department, so it's not clear cut. There are different models. But what is considered a leading practice is to have the separation, and at the same time, it's also very important that we have a tool kit to enable the enforcement of regulations. This is something that until recently had been fairly limited in the case of FIRB and Treasury.

Mr Michael Brennan : Senator, one of the implications I took from your question went to whether or not the decision-making itself should also be handled by an independent entity at arm's length from government. If that was part of the question, I think it's fair to say from the report that we did and the discussion that we included that the answer to that is no. We actually came out with the view that the decision-making in the first instance is well handled by the Treasurer in part because determining the national interest necessarily involves a judgement and it involves the weighing up of competing criteria, and it's very difficult to codify those explicitly such that an independent statutory decision-maker could make those decisions. So I think the initial decision-making naturally rests with the Treasurer. The question is whether the ongoing enforcement of conditions that are imposed on an acquisition belongs with the Treasury/FIRB or with an institution that's more set up with the traditional tools and outlook and focus of a regulator.

ACTING CHAIR: Thank you very much for that answer.

Senator WHISH-WILSON: Could I perhaps ask a broader philosophical question to start with. I'm interested in the Productivity Commission's views. I think that, on FIRB restrictions, there's long been a greater restriction placed on foreign investment in Australia by state owned enterprises, reflecting concerns around strategic investment—their ability to pay higher than market prices for strategic reasons—and concerns around possible changes to supply if state owned enterprises are taking products straight back to their home markets. Does the Productivity Commission have any concerns or do you share the thought that there may be competition aspects and other economic disadvantages to some kinds of foreign investment?

Mr Coppel : Yes, I think these are examples of areas where the screening regime can pick up some potential practices that may not be in the national interest. I am referring to those examples where an acquisition is coming from a foreign state owned enterprise, and that's because, being a state owned enterprise, there may not be the same commercial imperatives driving the decisions. There may be broader issues that lie behind it. So those sorts of considerations would need to be taken into account and are taken into account in the FIRB arrangements, which have always—for the last number of years, at least—had a screening threshold for investments from prospective foreign state owned enterprises.

Senator WHISH-WILSON: Even more broadly, one of the case studies that the committee is looking at is the purchase, six or seven years ago, of Australia's largest dairy business, Van Diemen's Land. I understand that wasn't directly connected to a state owned enterprise; however, the acquisition price was significantly above what a local consortium was willing to pay. The company made a number of voluntary undertakings to invest additional money in the business to expand it and to vertically integrate it, as well as to employ locals and spend money on environmental remediation. My understanding is that none of that information—in terms of whether the company met those voluntary undertakings—has been made available, so the committee is looking at that. Does the Productivity Commission support voluntary undertakings per se? Or would you agree with making such undertakings mandatory and giving FIRB or the Treasurer the ability to audit those and force companies to comply if they make those kinds of commitments at the time of purchase?

Mr Coppel : I think one of the themes that we emphasise in our work is that conditions attached to the acquisition of an Australian asset can sometimes play a role but it is preferable to be able to rely on Australia's national laws and regulations to ensure the conduct and the achievement of the objectives behind those regulations and laws. Certainly, one of the principles that lie behind sound foreign investment policies relates to the principle of nondiscrimination—so, treating in a like way investors who are similarly situated. I think the considerations that you were talking about there would be the sorts of things that, if they were interpreted as being matters of concern, should then be addressed through means other than conditions.

Senator WHISH-WILSON: From my perspective, looking at the public interest, there seems to be—certainly, in my state of Tasmania—a lack of confidence in our foreign investment laws and in the FIRB processes, and I think it's really important that Australians do have confidence in those laws and processes. Is the Productivity Commission aware of any other ways that any foreign investors, in a non-discriminatory manner, could be bound by undertakings that they made at the time of purchase or investment in Australia?

Mr Coppel : One of the rationales put forward for conditions is to provide that added level of surety which can help in terms of community confidence in Australia's foreign investment regime. For specific cases, the point that I would be making is to get a better understanding of how the impacts would play out. So there's certainly a role to better understand how foreign investment bears on the local economy. In the majority of cases, that investment—and that investment overall—coming from foreign acquisitions has been and is in Australia's broader economic interest. It can also bring some spillover benefits. Those spillover benefits are not guaranteed. They're very hard to measure and they're very hard for people to feel in a tangible way. So there's certainly a role to better understand those and make those aspects of the impacts of foreign investment more transparent, more visible.

Senator WHISH-WILSON: I certainly remember the famous quote that the Productivity Commission said many years ago that transparency should be in our genes in Australia. Are you comfortable that the kind of assessments that are done on purchases of Australian assets, like for example by the ACCC or other agencies that feed into the FIRB processes, are transparent and that information is made available for scrutiny?

Mr Coppel : I'm probably not so well placed to be able to make an assessment on how individual cases are assessed through the FIRB or the ATO with respect to residential real estate, so I'm not really able to give you an answer on that one, sorry.

Senator WHISH-WILSON: That's okay. It's our third day here and we have talked about the process in Australia, whereby the Treasurer or FIRB have to prove that the acquisition is not in Australia's interest, versus, for example, a New Zealand model where it's around the other way, the investor has got to prove that it is in the national interest if they're going to get approved. But you believe that we actually have the resources and, I suppose, the want to actually scrutinise these things properly? You mentioned, I suppose, the FIRB's transition to becoming a regulator in its current form, but is there any evidence that these things are actually thoroughly reviewed before they're approved?

Mr Michael Brennan : You raised the question of the negative versus the positive test and at the moment the test is couched in the negative, in that effectively you have to determine that a proposal is contrary to the national interest in order for it to be rejected. I take the import of your question to be basically is the FIRB adequately resourced to make those judgements and is the Treasury adequately resourced to advise on them—

Senator WHISH-WILSON: And motivated to do that, yes.

Mr Michael Brennan : I guess the thing would be, even if you did shift the burden of proof and, say, you couch the test in the positive, you would still have a problem if you felt there was inadequate resourcing. Then the risk would be that you would miss out on potentially beneficial foreign investment because of the inability to establish the positive national interest test. In our work we came down on the side of saying that the current negative test works because it's the appropriate burden of proof that, on balance, in general, foreign investment is beneficial for the Australian economy. Then you want to work your way back and identify those instances where it might be contrary to the national interests. We certainly endorsed the negative test. Whatever concerns there are about the resourcing and the ability to make these judgements, I think in one sense they would also be true if you had a positive test, and I think the nation would be poorer for it.

Senator WHISH-WILSON: Another example of a dairy company being bought by a foreign interest was Bellamy's. The company that bought Bellamy's then went on to buy other vertically integrated businesses in Australia, which was the supply of raw milk. I wrote to FIRB asking what kind of assessments were going to be made. I think the companies they bought were about seven per cent of the raw market for milk in Australia. I'm not saying that the company is going to send all that offshore, but if they did what possible impacts would that have on, for example, competition and the prices of dairy in Australia? Are these things assessed? Is it possible to see any analysis? But I didn't get any response. I don't know if these kinds of things are done at any point?

Mr Coppel : I am familiar with the Bellamy's case because I know at the time it was a controversial acquisition, but I'm not familiar with the details of how that acquisition has played out since. It does reinforce the point that when conditions are set they're set at the point of the acquisition, and circumstances can change after that and conditions are not really able to then respond to those changed situations. Whereas if it's embedded as a regulation to meet some broader objective then that has the flexibility to respond as circumstances change, which is a further point that I'd like to add in terms of the negative national interest test. Yes, it does give discretion to change how that test is interpreted as circumstances change over time. That is also, in our view, a considerable advantage, because that flexibility may be needed, particularly when it comes to emerging national security threats and the ability to respond quickly rather than possibly face some of the hurdles associated with the lag associated with changing laws.

Senator PATRICK: Going to your opening statement where you talked about the value of foreign investment here in Australia, do you see the same advantages in foreign investment for a greenfields site versus an established cash cow?

Mr Coppel : The preference expressed is usually for greenfields investment. It's very difficult to know the split between the greenfield and the brownfield. The reason greenfields are preferable is that it's new and additional investment and that is one of the mechanisms through which investment provides a broader benefit to the economy as a whole. The distinction, if you look at it beyond the immediate acquisition, becomes a little less clear cut. Even a brownfield investment would release or provide resources to the seller. They can then use those resources to undertake a new investment, and that wouldn't get measured in the foreign investment analysis.

Senator PATRICK: I think most people would have a gut feeling that a greenfield site is better, but have you done any work that perhaps quantifies the difference between the greenfields and the brownfields?

Mr Coppel : No, we haven't. One of the constraints on that is there is very limited information on that distinction between greenfields and brownfields.

Senator PATRICK: I just wonder whether or not some empirical data on that would somehow change the equation when being considered by the FIRB? Obviously, it interlaces with other things. We heard about the APA Group and the concerns about monopoly ownership. That can sometimes not be the case, if it's greenfields, because it's simply adding a new dimension to the market.

Mr Coppel : I think they are the sorts of things that would be considered in making the assessment or the acquisition with the national interest test. That competition, in fact, would look at that sort of consideration, in my view.

Senator PATRICK: Sure. But, in the absence of empirical data, it's hard to do that objectively, isn't it?

Mr Coppel : It makes it harder, yes. I would agree with that.

Senator PATRICK: Secondly, you talked about conditions. I appreciate what you're saying. If a condition already exists, as you used the example of a tax requirement, to that extent, in some sense, the condition is redundant, but what about other conditions? Let me give you a couple of examples. We know that in the case of some water assets being purchased, by Cubbie Station for example, there were requirements for the company to divest themselves in the particular percentage of shares over time. That surely is a condition that's not unreasonable and that allows a purchase to occur, but with time to find other investors. Another one I can think of is one that relates to critical infrastructure and that may require safeguards from a national security perspective.

Mr Coppel : To reiterate the importance of conditions at the time of acquisition, circumstances may change in a way that makes those conditions less relevant or more relevant. That's one point to take into consideration. The other point is, to put this in a broader sense [inaudible] and the rising importance of [inaudible] I think conditions at the time of acquisition through the FIRB processes have changed the nature of FIRB from one of gatekeeper to one more closely aligned with a regulator and for that to be effective there needs to be a more granular tool in terms of the monitoring and the enforcement of the conditions. Up until recently FIRB traditionally had a sledgehammer as a tool to either block an investment or force divestment of an investment, and then you have these conditions which are somewhere in the middle but it's very difficult to [inaudible] without additional powers to monitor and enforce those conditions without overreach. So that [inaudible] Some of them have been addressed through shifting some of the responsibility onto the ATO for residential investments. But others—

Senator PATRICK: But you have terms and conditions even with a bank cap—a bank loan. Often they'll have that term that says, 'And the bank can change things as time marches on'. So, if your criticism is simply that it's a static set of conditions that match a point in time sale, does that mean we should look at imposing a requirement, or an ability, to adjust those as a function of time, and then the question is: how does that affect sovereign risk and indeed just general risk to the company that might be procuring the asset or the investment?

Mr Coppel : If conditions are imposed over time in a way where it's very difficult to establish a degree of investor certainty or investor predictability, and they go beyond or treat differently a national investment from a foreign investor, that may well have implications in terms of sovereign risk. How significant they are would probably depend on circumstance.

Senator PATRICK: Okay. I'm a bit frustrated with your answer because you're sort of saying—and I could be getting it wrong, so I'll just express my frustration. On one hand you're saying that the conditions perhaps shouldn't be imposed because over time they'll go out of date, but on the other hand you're saying that having the ability to change conditions as a function of time is bad too. It's almost like the position you're taking is 'have no conditions'. I can see the need to not replicate things, but conditions are imposed upon everyday people, everyday businesses, either through contract, through promise or through laws all of the time.

Mr Coppel : I'm not saying, 'No, we shouldn't have any conditions'. I am saying, 'Where possible, use existing national laws and regulations to achieve the policy objectives in mind'.

Senator PATRICK: That clarifies things for me. Thank you. My last question goes to confidentiality. I suspect I share your view with great affinity on this. Are the areas of confidentiality you're trying to strip away the ones in the process or after the process? Are you talking about the release of decisions, for example, so that people can understand the thinking of government in certain circumstances, and/or the disclosure of conditions? Can you tell us whether you think that confidentiality needs to be backed off on—what areas?

Mr Coppel : What we have in mind is providing greater feedback on the rationale for why decisions were taken and the sorts of considerations that entered into a decision. We obviously recognise that in areas of national security there are limits to how you explain why a decision was taken the way it was; you can't telegraph vulnerabilities when it comes to matters of national security. But there are other ways in which you can provide a basis for giving greater certainty as to the sorts of things that are taken into consideration in the national interest test for potential foreign investors. It is an approach that is taken in a number of other advanced economies. Canada, for example, publishes a list of completed decisions and notifications of foreign investments each month. That may not relate to an individual investment, but it provides some information about the sorts of things that are front and centre of mind in making that decision. There is a similar situation in New Zealand. It publishes reasons for granting or declining applications—with the exception of residential land applications; there are so many of those—and it does that every month. The United States has a similar process, although the confidentiality of the reasons is maintained. So we think there are ways in which you can provide better certainty and transparency around the basis for decisions without, obviously, compromising the vulnerabilities associated with national security, for instance.

Senator PATRICK: But you could have a decision that said, 'This decision had some national security implications centred around critical infrastructure,' so it would be quite high level. That would also, perhaps, give indications without revealing too much, I would have thought.

Mr Coppel : Yes.

Senator PATRICK: Okay. So I think we're aligned on the confidentiality stuff. Thank you very much for your evidence.

ACTING CHAIR: I'll go to Senator O'Neill. I just note we are running a little bit over, but only a couple of minutes. But we might go to Senator O'Neill and then just delay the break until after we hear from Senator O'Neill and the commission.

Senator O'NEILL: Thank you very much, Chair. Mr Brennan and Mr Coppel, I have here a document that the government released in June of this year. It's entitled 'Foreign investment reforms', and it has a green cover page. I'm just asking witnesses today: to what extent were you involved in the development of this document, and, following from that, what can you tell me about the exposure draft of the relevant bill and your engagement with that?

Mr Michael Brennan : We weren't involved in the explicit policymaking around the changes to the foreign investment rules or, really, the exposure draft. We follow these developments, but our involvement here, as usual, is that we conduct our research and put that out in the public domain. The report that we've most recently undertaken, which predates these changes, really was across the broader suite of the issues associated with foreign investment. We've had no real involvement at all in the policy changes.

Senator O'NEILL: Okay. Have you read any of the submissions to this inquiry?

Mr Michael Brennan : I haven't. Mr Coppel may well have.

Mr Coppel : I've read only one, a submission by Professor Allan Fels.

Senator O'NEILL: Yes, that was fantastic evidence, and I thought he gave us some great insights. I point to submission No. 7, by Professor Clinton Fernandes. We've talked today about how responsive foreign investment needs to be to the changing circumstances. Here we are in the most changed of changed circumstances, nationally and globally. We have incredible unemployment growing day by day before our eyes. We're coming off the back of a period of a massive increase in insecure work, a period of wage stagnation. Given that context, I'm going to ask for your response to Professor Fernandes's comments about Australia's low economic complexity pointing to a lack of diversity that puts us 53rd against comparable economies—lining us up with Kazakhstan, Cambodia, Kenya and Saudi Arabia—and positions us as the least complex of all the OECD countries. I think that's an undisputed fact. But, on top of that, the summary of his position to us is that he found that, yes, there could be positive effects on economic growth from foreign direct investment but that it had a significant negative effect on employment growth and a significant negative effect on real wage growth. Now, to me as a Labor senator dedicated to jobs for Australians, and to small businesses and sole traders being able to get on and create wealth for themselves in Australia, that is a very concerning statement. Can you speak to the low economic complexity of the Australian economy and to the way in which foreign direct investment can drive down demand for skilled labour and wages, increase concentration in industry, and reduce competition?

Mr Michael Brennan : I'll make a start and then I'll hand to Mr Coppel. I have not read the relevant submission, so I won't go into the detail of the points raised there without having read it. On the general issue of these measures of economic complexity, I think one has to exercise some caution in interpreting them. Part of the challenge there is that, often, we're comparing Australia with economies—even advanced economies—which are quite different in their underlying economic structure. The economies that tend to score relatively highly on that measure of economic complexity are those that have still quite significant manufacturing sectors. Australia has a smaller manufacturing sector. We have a larger-than-average mining sector and then, beyond that, we are predominantly a services based economy. We tend to rank low on that measure of economic complexity, and yet when we look at GDP or incomes per capita—which is, arguably, the best approximation for living standards across the world—Australia rates very highly.

Senator O'NEILL: We heard evidence earlier on this, and Mr Rennick has raised the question of gross national product as opposed to domestic product. I'm just sitting here in the suburban Central Coast, where people may hear this word 'arguably' but what they're feeling in their life is that they can't get a secure job. They want to go somewhere and manufacture and create something. They want to be part of a supply chain that enhances sovereignty. This trade-off—saying that we're a mining nation not a manufacturing nation—I think the days for that, with respect, are over. Australians want to have our sovereignty and our security and to create really great jobs here. So I have some concern about the repetition of this conversation that we're the mining pit of the world—and maybe the dairy farmers as well.

Mr Michael Brennan : All I'm trying to establish, really, is more that, whilst those rankings of economic complexity tend to [inaudible] with, say, Kazakhstan, if people draw from that a conclusion that our economy looks more like Kazakhstan's than the economies of other developed economies, I think that's an incorrect conclusion.

Senator O'NEILL: Fair enough.

Mr Michael Brennan : Australia is a high-income economy, with, actually, a higher GDP per capita than many of the countries that outrank us on that scale of economic complexity.

ACTING CHAIR: There's also the Harvard index of economic complexity—I'm not sure that it's about the GDP, but I think it's on the complexity of the activity. I think that might be something that is akin to what Senator O'Neill is referring to. I'm sorry to interrupt, but I just thought that might help with answering Senator O'Neill's question.

Mr Michael Brennan : Yes, there are these measures based on various attempts at capturing economic complexity. I guess my observation is they tend to have Australia well down the list, in a way that is potentially misleading about where Australia sits in terms of overall living standards—to the extent that people are concerned about the lack of economic complexity, if that was a goal for public policy. Foreign investment of course not only increases the aggregate level of capital in the economy but also often brings significant dynamic benefits in terms of technological transfer, new skills, new business models and often cutting-edge frontier technology from overseas markets into Australia.

I'll go back to the question raised by Senator Patrick about the difference between greenfields and brownfields. Whilst it's intuitive to think that we benefit more from greenfields, we actually found some evidence that those dynamic spillover benefits occur more in a brownfields acquisition, because that's where a new investor is integrating themselves into an existing supply chain and often having that dynamic, technological transfer through the supply chain. So that is a significant benefit of foreign investment. As I said, I will try to read the submission to get to the link that was being made between those two concepts.

Senator O'NEILL: Please do. Australians want jobs and they want to be proudly using our own resources, building our assets and sharing that wealth in our economy. I want to restate the evidence from Professor Fernandes. He said that there was not an increase in the demand for skilled labour and wages as a result of foreign direct investment—and people want those jobs. The Premier of Western Australia also raised concerns in their submission about the emergence of investment being tied to project supply chain opportunities linked to operations of the investor in their home market. This goes to the conversation you were having a little earlier with Senator Patrick with regard to the negative test. If a positive test were to be applied to investment, the Western Australian submission said that it should be able to address the test of whether it contributes to more research and development—and based on what I've read so far, we are not seeing that. It should meet the test that, if it does facilitate technology transfer, it provides joint venture or partnership proposals and it potentially provides for local companies to participate in international supply chains rather than bringing their own supply chain structures in. What do you say to that Western Australian submission, which I think I've accurately conveyed to you?

Mr Coppel : I think it's a bit similar to the response that Mr Brennan gave to the earlier question. I suspect, listening to you, that the submission from Fernandes is trying to get at how to maximise some of those spillover benefits that are associated with foreign direct investment by using more proactive means. Getting back to the question of employment, it's often seen that FDI can be associated with local engagement of people in enterprises that are at the frontier, if you like, in terms of innovative practices. It's through that mechanism you also generate broader economic gains on top of those employment gains.

Our view on this—and it's something that's reflected in the broader literature, which we do summarise in the report—is that those sorts of spillovers are difficult to measure precisely, but they can occur spontaneously. That is an important channel. If you start to stipulate requirements, you may run the risk that that in itself acts as an obstacle to foreign investment that may be beneficial in the absence of those conditions, so the consequence of that—and this is where the biggest gain from foreign investment to the Australian economy occurs—is through adding to the level of capital in Australia. The higher level of capital in Australia is a significant driver of labour productivity, which in itself is a driver of higher wages. [Inaudible] the right way to think about the impacts of FDI overall in the sense of both the direct and some of the indirect consequences that stem from inward foreign investment.

Senator O'NEILL: I have grave concerns about the almost zealot like mantra 'foreign investment is good' when we cannot track the spillover benefits and when the Treasury department cannot assure this committee that they have sufficient technological capacity, let alone interest, to make sure that when terms and conditions are set that they're actually enforced. I think there are gaping holes in what's going on in the country. It's great that we have a degree of wealth on paper that makes us more worthy than our 53rd position on the economic complexity index, but that is absolutely no good to people who have no job in the Hunter or to people who are losing farmlands that generate income in their local economy in the Riverina. Sadly, on the watch of this government I think that their concerns about foreign investment being exploitative are very valid. I think we need more sophisticated understanding of what we're going to ask of those to whom we say, 'Come and invest here, but know that we're going to stand up for Australians to make sure that we get a good deal out of this.' I don't know that we're doing that. There are a lot of words, but I don't feel confident that Australians are really getting the best bang for our international buck and maybe not the best jobs either. Thanks for your evidence and for your opening statement.

ACTING CHAIR: If there are no further questions from committee members—and speak now or forever hold your peace—I thank very much the Productivity Commission for appearing today and for the evidence they've given. The committee will suspend for a 15-minute break.

Proceedings suspended from 14:47 to 15:02