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Tuesday, 16 October 1973
Page: 2161

Mr LYNCH (Flinders) - Mr Speaker,the present Prime Minister (Mr Whitlam), during his Address-in-Reply speech to the Parliament in 1970, referred to the Australian Industry Development Corporation in these terms:

In short, under a Labor government the Industry Development Corporation will be used for the democratic socialist purposes I outlined in my policy speech and the Act which establishes this Corporation will be amended by us to secure those purposes.

The Australian Industry Development Corporation Bill and the National Investment Fund Bill propose immense new powers designed to achieve the socialist purposes clearly outlined by the Prime Minister. The purposes are to be achieved by a form of state-controlled 'corporate socialism'. The Opposition Parties reject both Bills.

The former Government legislated to establish the Australian Industry Development Corporation in 1970. The functions of the Corporation were designed to preserve Australian control over the mining and manufacturing industries, to provide development finance in situations where existing financial institutions had not been able to meet the financial and investment needs of Australian companies, and to provide a stimulus for exports and import replacements. Under its present charter the Corporation has certain important restrictions. It is bound to avoid becoming or remaining in a position in which it is to control or manage the affairs of a company to which it provides assistance, lt must divest itself of its equity holdings in a company as soon as practicable, lt is not subject to Government direction. It cannot initiate action regarding an investment proposal. It is not subject to preferential treatment in respect of State and Federal taxation. It can only provide assistance when requested to do so by a company or with the consent of a company. It is restricted to assisting the manufacturing and minerals industries. It must borrow principally overseas and any supplemental borrowings inside Australia are subject to limitation by the Reserve Bank. The Bill, by a wide variety of provisions, removes all these constraints. Not only does the Government propose to remove all these barriers; it proposes to allow the Corporation access to vastly increased funds. No longer will the AIDC be principally an overseas borrower. It will now be free to make a massive assault on Australia's private sector funds.

The AIDC would be able to obtain domestic equity finance. In addition, it is proposed that the Corporation, through the National Investment Fund, will raise funds through the establishment of savings schemes, superannuation or retirement schemes, including schemes that include provision for the payment of moneys in the event of death. There is little doubt that the Government sees the proposed AIDC as a mechanism to achieve its socialist objectives. In an official statement on 3 March, the Minister for Overseas Trade (Dr J. F. Cairns) said:

In cases where the Government believes it is desirable for Australian capital to be provided, the Government will be able to direct the AIDC to provide appropriate assistance to small producers whose successful future is in the national interest, to the largest economic operations, such as the provision of a national gas pipeline system.

It is clear that the Corporation will be the vehicle for the establishment of the national pipeline grid. Not only that, the Minister for Minerals and Energy (Mr Connor), in a statement on 10 August, admitted that all foreign investment in Australia's natural resources will be required to be directed through the AIDC. That is, no foreign company will be allowed a direct equity in an Australian project. Major foreign companies in West Germany and Japan have already made it clear that this proposal is unacceptable and are now seeking alternative investments in other countries. The Opposition believes that the proposed extension of the powers and functions of the AIDC is unwarranted and, in its impact on the Australian community, positively harmful. It is unwarranted because of the capabilities of the AIDC as presently constituted and because there are alternative means by which problems in the Australian capital market can be solved. It is positively harmful because the new powers to be granted to the AIDC will cause a massive diversion of funds away from existing private institutions, increase the control of industry by a statutory corporation, and provide a vehicle for the socialisation of Australian industry.

Government policies should be designed to ensure that Australia's economic development is undertaken in such a way that our resources provide maximum benefits. Balanced economic growth and development require now and will continue to require substantial overseas investment. Government policy must ensure the continuation of that level of foreign investment which is needed to enable Australia to achieve its social and economic goals, by adding to our capital resources and supplementing our technical knowledge and management skills. We are, however, conscious that overseas control and ownership of Australian resources can have adverse effects. Overseas ownership entails an entitlement to share in the profit of an Australian enterprise and overseas control carries with it the additional ability to determine the policies of that enterprise - its marketing, its investment, its purchasing and income distribution policies, its labour relations policies and so on. I make it quite clear that the Opposition recognises the inherent problems associated with overseas investment as well as its direct benefits. But Australia is too mature and self-confident a society to treat foreign influence as simply a sinister threat.

It must be recognised that foreign investment involves mutual trust. Foreign companies give a hostage to the borrowing nation in the shape of their plant and equipment and the technical and management skills they embody. And this kind of direct investment is not something that will continue to flow in the face of governmental hostility; nor is it a tap that can readily be turned on again once the flow has been interrupted. We believe that overseas investment should represent a significant contribution to Australia's long-term economic capabilities at minimum cost. Equally, we recognise that the independence of our national economy should be maintained. It is the constructive role of government to create a legislative and 'fiscal framework within which foreign investment may operate to the mutual advantage of borrower and lender. In government we would use economic policy instruments including tariffs and excise duties and government purchases to ensure that foreign owned subsidiaries followed practices which were not inconsistent with our general social and political aims.

This debate does not provide an opportunity to give a detailed outline of the Opposition's policy on overseas investment, except to indicate a number of broad principles in conformity with the aims to which I have already adverted. These are: -Firstly, the right of all Australian enterprises to obtain funds in the most efficient manner having regard to associated technological, marketing, financial and other benefits; secondly, the right of individual investors of any nationality to buy or sell shares freely, thus ensuring the widest possible scope and flexibility for the Australian capital market; thirdly, the right of Australians to invest funds abroad in order to avoid insulation of our equity markets from world trends; and fourthly the establishment of guidelines for all multi-national companies domiciled in Australia, embodying Australians to comprise a majority of the senior management and the board of directors; the encouragement of all such companies of a major size to list publicly on the Australian stock exchanges, restrictive export franchises to be discouraged, and the policies of such companies not to be detrimental to Australia's national goals.

The Minister for Overseas Trade in his second reading speech stated that the Government's primary policy objective for the AIDC was to obtain majority ownership and control over existing and future enterprises. In other words, the AIDC is to be the Government's vehicle in a campaign to extend Government enterprise and to 'buy-back' Australia from overseas ownership. The Opposition believes that Australian ownership and control of our resources is important. Insofar as our capital resources permit, Australian ownership should be maximised. However, we are opposed to the modus operandi outlined by the Labor Government. The use of the AIDC in the manner proposed is economically misguided. It will, in fact, place a net economic burden on the Australian community. The 'Australian', in an editorial on 29 August, said:

It must immediately be said that the Government's proposal has a distinctive ring of Benito Mussolini economics about it.

The 'Australian' commented further:

But in essence it is precisely the same attempt to build a kind of half-way house to socialism, in which private resources are directed to national purposes within the context of the private capital market.

The Corporation, since its inception, has played a useful role in enabling Australians to obtain greater control over Australian assets.

The Corporation has obtained most of its finance from overseas borrowings and these funds have been used, in many cases, to strengthen Australian control over domestic assets.

Under the new provisions the Government proposes to exploit the greater fund raising powers of the AIDC. The AIDC could raise increased funds within Australia on its own account, through the National Investment Fund, and from the Australian Government. There would be a shift in emphasis from external to internal fund raising. These additional sources of investable funds will eventuate in a minimal net addition to the community's savings since Australia has already achieved a very high savings rate by international standards. The main effect will be a diversion of savings away from other financial institutions and towards the AIDC. Under these circumstances the overall proportion of assets owned by Australians will only increase if the buyback operation causes displaced overseas capital to move out of Australia. Any increase in Australian ownership in the buy-back areas will be directly offset by reduced Australian investment in other areas. Moreover, any increased Australian control that does occur will be in the hands of the AIDC.

The Treasury paper published in May 1972 made the following comment:

Although the question of local equity participation in foreign owned subsidiaries, like that of foreign takeovers, raises important non-economic considerations, it needs to be recognised, nevertheless, that such participation cannot, in general, add to Australia's total capital resources and extend Australian ownership of domestic assets unless it occurs via an increase in the rate of domestic savings or is financed by overseas borrowing. It can, in fact, reduce these resources - though not Australian ownership - if Australian equity participation (financed by a given level of domestic savings) in new enterprises displaces overseas capital that would otherwise have come in for those enterprises or if overseas capital released by Australian equity investment in existing foreign subsidiaries moves out of the country. In other words, Australian equity participation may (in the absence of an increase in Australian savings) involve an opportunity cost represented by the forgoing of investment which would have otherwise been financed from overseas.

In short, there seem 2 possible outcomes of the Government's legislative proposals. Firstly, if foreign investment remains at its previous level there will be: A minimal impact on the proportion of Australian assets owned by foreign interests; a significant increase in Australian assets owned by a statutory corporation; and a significant reduction in Australian assets owned by Australian shareholders or private institutions.

Secondly, and far more likely if foreign investment is reduced, there will be: Some increase in the proportion of Australian assets owned by Australians; but a tightening in the availability of finance in such areas as housing because Australian funds are diverted to AIDC; a decline in the rate of growth of living standards because of the decline in the growth of capital resources and technical know-how; and, an increase in the control of Australian assets by a statutory corporation rather than by private risk takers.

Quite clearly, an analysis of this type must comprehend the effect of other government policies on investment. While public investment will extend strongly in the near future, the removal of the investment allowance for primary and manufacturing industries can be expected, in the long run, to reduce private investment by at least $200m per annum. In addition, private investment will be further depressed by the Government's announced intention to implement a prices policy, without taking complementary action to restrain costs. The net impact of government initiatives will cause a massive diversion of investment funds away from the private sector and towards the public sector.

A buy-back scheme financed by diverting Australian savings from other uses will impose a net economic burden on the Australian community. Increased equity in foreign owned subsidiaries will be obtained )at the expense of decreased investment in Australian owned enterprises. It must be recognised that we already gain substantial advantages from the operation of foreign owned subsidiaries in this country since such enterprises pay income tax to the Government. These gains arise in the main from the higher output per head which comes from the use of more capital, better technology and additional management skills. They flow in 3 ways to the Australian community: Firstly, through the considerable taxes that are paid on. the profits of overseas corporations; secondly, through higher real wages to Australian workers, and the higher taxes paid from those, and of course the important recognition of the employment opportunities which such corporations provide; and, thirdly, by providing goods and services to the community as a whole at prices that are lower than would otherwise be the case. Even if we limit ourselves to the first and probably the smallest of these gains the advantages are considerable.

The present taxation rate on gross profits, allowing for company income tax and the dividend withholding tax is 55.37 per cent where the investment comes from Britain or the United States, and 63.25 per cent for other overseas investment, the difference deriving from the operation of double tax agreements. Insofar as the displaced overseas capital moves out of Australia after the buyback operation, we gain control of this investment and lose opportunities, to expand owned enterprises.

The buy-back theme has developed a somewhat emotive ring about it. The real problem is to achieve a greater and more efficient use of our resources under the overall direction of the Australian Government. The Government's true role in the national development is to act as the leader, guiding free enterprise into areas in which it has not been sufficiently active in terms of our present and future needs, to develop the necessary infrastructure and to supplement efforts of private capital when and as required. If, instead of this, the Government takes over through AIDC those functions which free enterprise can more effectively perform, and has performed satisfactorily, it will lead to duplication of effort, discouragement of private investment, and a direct increase in overall costs to the nation.

Buying back is not the real problem facing Australia today. The real problem is ensuring that there is sufficient investment capital available at a reasonable cost for the Australian economy to maintain an adequate growth rate and to develop in the right direction. Reallocating available investment capital resources from free enterprise to the public sector will not increase the amount of investment capital available. In fact, more likely than not, it would merely make existing capital resources available for investment more expensive by bringing AIDC into the domestic capital market as an additional competitor. This would raise the cost of borrowings both to the private and public sector.

An enterprise will not become more efficient simply because all, or most of it, will be owned by Australian capital rather than foreign capital. In fact, there could be many cases in which such an enterprise could well become less efficient, not only because its access to new investment capital previously provided by the foreign parent could dry up, but also because the foreign parent may be expected to be less willing to provide technical knowledge and therefore access to research facilities to its former subsidiary which has been bought back. In more general terms, an over-zealous buy-back scheme may be expected to scare off foreign investment capital and thus have a detrimental effect on the national economy as a whole.

One of the major arguments for an extended buy-back plan is that such a scheme is supposed to reduce the costs associated with foreign control of Australian assets. However, most of the costs associated with such control are hypothetical, while burdens imposed on the community by diverting Australian savings towards a buy-back program are certain to constitute a large proportion of the average rate of return on investment.

The Government cannot legitimately claim that the proposed powers are necessary for the AIDC to expedite its role as a development financier. The AIDC as it is now constituted performs a useful function in helping to fill gaps in the Australian capital market. It is generally recognised that development financiers can assist in the mobilisation of large blocks of finance for highly capitalised ventures, and in the provision of venture capital for higher risk areas. However, the additional powers provided in these Bills are not only simply unnecessary and unwarranted, they would be positively harmful in their impact on the Australian capital market.

Sir AlanWesterman, the Executive Chairman of the Australian Industry Development Corporation, adverted to the AIDC's presently constituted capabilities in his evidence to the

Senate Select Committee on Foreign Ownership and Control on 13 July 1972 when he said:

From AIDC's relatively short experience to date an interesting point which has emerged is that, in a number of instances, the Corporation has been able to make a contribution to development and Australian ownership considerably greater than the scale of its own financial participation would signify . . . Already in a few instances, AIDC's contribution, by putting up the last of the equity and/or loan capital requirements for a venture and so closing a gap in the financing, has made all the difference between whether the project would go ahead or founder - or at best go ahead under foreign domination after foreign companies in the wings had picked up the pieces. Even more significantly, the fact of AIDC's willingness to support or participate in certain ventures has been instrumental in interesting other Australian companies to participate - bringing equity and sometimes also loan capital with them, as well as operational skills and experience which have contributed to forming a strong management group and so enhancing the prospects of the venture.

The crucial role of the development financier is that of bringing the right investors together rather than providing the finance itself. The AIDC is at present well equipped to perform this task. Furthermore, it should be recognised that there are other development financiers operating in the Australian capital market. The Commonwealth Development Bank and the trading banks' term loan fund provide longterm finance for small businesses. The Australian Resources Development Bank and the private merchant banks arrange long-term finance for larger ventures. All these bodies have acquired considerable expertise in their fields of operation. It is clear that their activities would be severely impeded by the creation of a giant new AIDC with preferential status in the Australian capital market.

It is also erroneous to assume that the problems of the capital market can best be met by the investment of a statutory corporation. If there is a social need to encourage additional investment in certain areas and, conversely, to discourage investment in other areas, the flexible use of special subsidies and taxes will generally be a more appropriate policy. Such an approach leaves the private sector free to choose the actual projects that should be initiated, whilst providing a general indication of the overall needs of the Australian community. The additional powers to be given to this corporation with newly enlarged powers will, in fact, be positively harmful in their economic impact. The new Bills provide the Corporation with power to take control of Australian companies and to form new companies. These powers would enable the AIDC to operate, manage and control Australian companies. Control would revert from the private sector to the hands of a statutory corporation. The Government, in effect, proposes that the Corporation will be both financier and entrepreneur. The likely result is that it will perform poorly in both roles.

The additional powers will increase the likelihood that the AIDC might pursue an unwise investment policy. At present, the AIDC cannot take a controlling position in an Australian company. It can provide a considerable amount of finance for a venture, but it needs to attract other investors if the project is a large one. In other words, the outcome of an AIDC backed project is dependent upon the judgment of a number of investors. Under the new provisions the AIDC alone can initiate a project and it will have access to a much greater supply of funds. The possibility of imprudent investment is thereby greatly increased.

I have outlined the general basis on which the Opposition rejects both Bills. In doing so I have been careful to outline, in a constructive and positive manner, a number of alternative policies to deal effectively with the problems of overseas ownership and control. However, I believe a number of provisions require comment prior to the Committee stages of the Bills. I turn to clause 5 of the Bill which seeks powers within the ambit of similar powers formerly rejected in respect of the Australian Airlines Commission. More importantly, this provision indicates the real objectives of this legislation. If the Government proposes to utilise the AIDC to secure Australian ownership and control there can be little justification for the inclusion of transportation and distribution within the Corporation's functions.

Air transport is already 100 per cent Australian owned - half by the Government and half by Australian shareholders. Road passenger transportation is already 100 per cent owned by Australian companies. Road freighting organisations have their 5 to 6 largest national operators all Australian owned. Furthermore, the capital markets both in. Australia and overseas have provided and will continue to provide adequate finance for the future development of the transport industry in the private sector. Clearly this Government is intent on the extension of public control of the transport industry of Australia. The Opposition rejects that proposition as entirely un justified on economic or social grounds. This Bill is a device to achieve objectives formerly sought in previous legislative proposals. We reject it now as we did then.

Secondly, by means of clause 7 of the Australian Industry Development Corporation Bill, the Government proposes the establishment of a national interest division. This division would permit the Government to undertake major projects, which could not be judged as economically viable, through the AIDC. An assessment of various statements made by both the Minister for Overseas Trade and the Minister for Minerals and Energy indicates that the provisions of clause 7 will be used in the following principal areas - oil and natural gas development, uranium mining and enrichment, the national pipeline grid, and the manufacture of government cars by the Government Aircraft Factories. It is through the AIDC that the Government will pursue its nationalisation objectives in all of these basic areas.

The Minister for Overseas Trade will be able to direct the Corporation without restraint. The National Interest Committee is to consist entirely of the Minister's own nominees including one to be appointed by the Minister for Minerals and Energy. Such powers will enable this Government to engage in the forced acquisition of foreign owned assets in Australia and to invest in areas hitherto left to the private sector. The proposed powers are clearly open to abuse. In particular, there are insufficient safeguards to prevent rash and precipitate action by the Government. The AIDC would be a vehicle for the socialisation of large sections of the Australian economy and a mechanism for the avoidance of proper parliamentary control of public funds.

Not only are the provisions relating to the national interest division open to abuse; they are also unnecessary. The Government can foster the development of national interest industries by a flexible use of the fiscal system. If it wishes to restrain investment in certain areas, for example in central business district office buildings, additional taxes can be levied. If it wishes to boost investment in other areas, for example in decentralised development, subsidies can be applied. Direct government intervention in particular investments in these areas carries intervention a step further. Involvement in particular projects is bound to be a more expensive proposition both in terms of the absorption of government funds and in the demands on the time of senior public servants. Government investment in industry would therefore be unnecessary in normal circumstances. And even if a case could be made for government intervention in a particular situation, it should be done explicitly, through a specific Act of Parliament rather than by stealth, as is inherent in the proposals before this House.

In short, the proposed National Interest Division of the AIDC is both undesirable and unnecessary. It is undesirable because it may become the vehicle for the socialisation of large sections of the Australian economy. It is unnecessary because 'national interest' investments can be encouraged by tax remissions or subsidies.

The National Investment Fund Bill 1973 raises fundamental questions of very real concern to this Parliament and this country. The Minister's explanation of how the scheme will operate is wholly inadequate. There is extensive competition in Australia for local and overseas funds by a variety of institutions, including banks, life insurance companies, building societies, hire purchase companies, merchant banks and other financial institutions. The Government has not advanced detailed arguments to explain why it is necessary to establish the fund or to outline its likely impact on the Australian institutional framework. The Minister makes emotive reference to enabling 'ordinary people to share in the ownership - the profits and the capital growth - of great industrial enterprises', but no reference to risks or losses. The fact is that no evidence exists to show that the Fund will satisfy a need or demand by private and public lenders which at present remains unsatisfied. The Government seems to have conveniently overlooked the fact that the bulk of the money handled by banks, hire purchase companies, life companies and superannuation funds belong to individuals. The Government's proposals will not generate additional savings; all they will do is switch funds from private io Government ownership and control.

The establishment of the Fund would involve a major change in Australia's structure of investment. This is a very sensitive area, requiring careful supervision and delicate handling. It is subject to fluctuation arising from a variety of causes originating at home

Dr overseasand it is the basis of the longterm growth and development of the Australian nation. Research work in the field of savings institutions suggests that the creation of this additional facility will make only a very small net addition to the community's savings. The possibilities of Australia obtaining any very significant net increase in personal savings as a result of proliferation of savings mechanisms is remote because Australia has already achieved one of the very highest capital-investment ratios in the world. It already has probably one of the most comprehensive networks for the collection of personal savings that can be found anywhere.

In part, at least, the accumulation of savings through the National Investment Fund would represent a diversion of savings from other savings channels. These other savings channels include, of course, not only life offices and pension funds, but, in addition, a number of savings channels in which the investment earnings are not tax deductible and which currently serve valuable social purposes. They also include deposits with savings banks, whose funds go to the public sector and housing; deposits with building societies, whose, funds go exclusively into housing; and personal holdings of government and semi-government bonds.

Any benefits to the financing of public sector requirements which may be expected to flow through the creating of the National Investment Fund and the encouragement of it by extending the eligibility of the $1,200 deduction will be offset by the diversion of funds from other channels already serving the public sector, such as savings banks and private holdings of government bonds, and including importantly the life offices and pension funds which are 'captive holders' of public sector securities; the lost taxation revenue which must occur where funds diverted to the National Investment Fund come out of savings channels which do not enjoy tax deductibility; any slowing down in the rate of growth of life offices and pension funds as a result of diversion of savings to new investment opportunities being offered by the AIDC. This would not only reduce the flow of funds from life offices and pension funds into the public sector but also would constrict the availability of their funds for private sector purposes. Such funds of the life offices represent the most flexible pool of long term savings available for the general needs of industry and commerce.

I have outlined the nature of the Opposition's objections to this legislation. In conclusion 1 would like to refer to the operations of a similar organisation - the Canada Development Corporation. This Corporation was established in similar circumstances to the AIDC. Section 6 of the Canadian legislation refers to the objects of the Corporation in these terms: To assist in the creating or development of businesses, resources, properties and industries of Canada; to expand, widen and develop opportunities for .Canadians to participate in the economic development of Canada through the application of their skills and capital; to invest in the shares or securities of any corporation owning property or carrying on business related to the economics interests of Canada; and to invest in ventures or enterprises, including the acquisition of property, likely to benefit Canada; and these activities 'shall be carried out in anticipation of profit and in the best interests of share' holders as a whole'.

Section 2 of the Act summarises these objectives by saying that the Corporation 'will help develop and maintain strong Canadiancontrolled and managed corporations in the private sector of the economy and will give Canadians greater opportunities to invest and participate in the economic development of Canada'. The Chairman of the Corporation outlined its operating philosophy with these words:

I believe that our distinctiveness lies in four features: Our independence from government interference, our mandate to conduct our operations in anticipation of profit, our potential size and the fact that a mechanism exists for Government participation in the Corporation to be scaled down by the Directors to not more than 10 per cent at any time.'

This is a significant contrast to the Australian Labor Government's proposal. It highlights the difference between one Government's genuine desire to promote private sector growth and the present Australian Government's clear intent to extend public sector control. The present proposals are typical of a socialist government's liking for grandiose state symbols, for inefficient steam hammers rather than efficient nut crackers. If adopted, this proposal would sacrifice the economic and social development of the entire Australian community to the misguided socialism and vanity of the Ministers concerned. The Opposition parties reject both Bills.

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