Deputy Prime Minister and Treasurer
3 December 2007 - 27 June 2013
Address to the Global Foundation
10 December 2009
Good morning. Thanks for having me here today.
I thank the Global Foundation for the invitation to speak. The Foundation has for many years played an important role in bringing together ideas from the private and public sectors, and in taking on the big issues facing Australia, including Australia's relationship with the rest of the world.
I wanted to use this opportunity of one of my last speeches of this busy year, and to an engaged audience such as the Global Foundation, to talk to you - and beyond you to the global investment community - about foreign investment in Australia.
In doing so, I also want to take the time to locate the current debate in its proper history and context. One of the notable things about the foreign investment debate in recent years has been the way public attention has tended to focus heavily on the latest decision.
The Chinalco-Rio proposal was a case in point. Everyone had an opinion on this transaction, and I'm glad to live in a country where this is the case. But while the transaction was under consideration, every road led straight to it.
I would open my newspaper of a morning and read I was definitely going to approve Chinalco's bid, because I had approved some other bid the day before. The next day I would read I was going to reject the bid, because another proposal was being subjected to further analysis.
I got lots of free advice.
I would get advice from other foreign investment applicants or targets. It won't surprise you to hear it tended to reflect their own commercial interests.
I'd get commentary from corporate advisors to applicants. Invariably, they would say the regime is complex and fraught with difficulty. Subtext: proponents need to pay for the finest commercial advice they can afford!
And I'd get advice from the National Party. You'd all remember Barnaby Joyce during the Senate Inquiry on foreign investment thumping the tub about foreign control, and not thinking or caring about the damage he might do to investment that supports hundreds of thousands of Australian jobs. I'd like to pay tribute to Liberal Senator Alan Eggleston, Labor Senator Annette Hurley and their majority colleagues for producing a sensible and balanced report which contributed to keeping some calm and rationality in what we know can become ugly debates.
My task as the decision maker was and is to stay out of the cut and thrust of debate on individual applications, and to focus on the national interest. Much of the confusion and heat in the debate arises simply when people try to dress their sectional interest up as the national interest.
Today I want to step through recent developments in foreign investment, and put them in proper historical and policy context.
I want to do that in four parts:
- Firstly, why foreign investment is in the national interest;
- Secondly, how the debate has evolved throughout Australian history;
- Thirdly, how the Rudd Government has continued and adapted policy in response to a changing environment;
- And fourthly, some future directions for foreign investment policy.
Let me start with the national interest. I'm not going to attempt a simple definition, but I do want to talk about the key elements - firstly about job and wealth creation, and later on about the vital issues of our economic sovereignty.
As I have said on many occasions before, Australia has great opportunities in the coming century. For the first time in our history, our location will be a competitive advantage for our nation, where in the past it has been a disadvantage. The epicentre of global growth is moving into our time zone.
At the same time, our nation will need capital investment to capture this growth, and with it the jobs and wealth that can flow to our people.
And our economic history for generations has been that those investment needs have exceeded our pool of domestic savings.
Of course, a government (not this one) could decide to limit the inflow of foreign direct investment and rely instead on the pool of domestic savings. I asked my Department to do some calculations on the economic consequences.
Clearly there would be a range of adjustments as businesses tried to find alternative sources of funds, often at higher costs, or put projects on hold. But putting these adjustments aside, based on the last few years of foreign investment levels, we could expect business investment to be initially about 25 per cent lower and output to be about 3 per cent lower, resulting in around 200,000 fewer jobs. There would also be very substantial costs to Australia's productive capacity, given the role of foreign direct investment in building our capital stock.
Because we understand these economic impacts, this Government's basic position is to welcome foreign investment. In practice, this means that the vast majority of foreign investments proceed without government intervention.
Successive Australian governments have administered the Foreign Acquisitions and Takeovers Act 1975 in as non‑intrusive a manner as possible.
To use an analogy, the Act is not a roadblock. It keeps the Government out of the traffic, but allows the Foreign Investment Review Board to pull over more sensitive proposals to see if they meet national interest criteria and should proceed.
That's why I announced reforms in August this year to lift and index the monetary thresholds - to keep the national interest test well-targeted, and to get the Government out of the road of everyday business transactions.
Evolution of the Debate
The second point I want to elaborate is how the role of foreign investment has evolved over Australian history. A young economics student today could be forgiven for thinking that foreign investment is the story of Chinese investment alone, and in the resources sector alone at that.
Yes, Chinese investment is growing and yes, Chinese companies have been involved in several high profile acquisitions.
But at the end of 2008, the stockof Chinese investments in Australia was ranked only 15th, with the USA and UK having over 50 times the level of investment in Australia that China has.
No doubt this rank will change, as recent Chinese investment proposals are realised. But even so, over the past 24 months, Chinese investments represented only one-tenth of FIRB's largest applications (defined as more than half a billion dollars).
But putting this issue in perspective is not just a numerical exercise, it is a historical one.
Australia has seen several booms in foreign investment. And like previous ones, this growth in Chinese investment tells us something important about Australia's place in the world today.
A book I've found insightful on this issue is Australia in the Global Economy by David Meredith and Barrie Dyster.
And it charts for us a very Australian journey.
In the late 19th and early 20th centuries, much of our foreign investment was British - mostly loans to finance infrastructure projects, boosting Australian urban standards of living, without impacting our export sector.
After the second world war, foreign investment surged from the United States, as multinationals invested in our growing industries, including manufacturing and mining. And this was welcomed for its obvious benefits - boosting post-war jobs and technology transfer.
Then in the 1970s and '80s, this picture evolved again, with Japanese and other investors deploying their surplus capital across Australian industries - resources, manufacturing and services like tourism.
Each successive wave of foreign investment reinforced a pattern that we see today with China - where successes in trade led to successes in investment.
Controversy characterised each wave too - concern about foreign influence or control. These trends crossed party lines - reflecting community concerns more than party doctrine.
My point is that we have had these debates in the past. They were and are very important. But we have generally managed to conduct them sensibly and responsibly, and managed to keep investment and growth flowing with enduring benefits for our national income and wealth.
This will be more important than ever to remember in the year to come. Just two days ago we saw Tony Abbott's elevation of Barnaby Joyce straight from the reactionary fringe of our economic debate to the second most senior economic policymaking job in the alternative government.
This is the same Barnaby Joyce whose inflammatory rhetoric about foreign investment includes phrases like: "leaving the back door wide open for foreign interests to buy Australia paddock by paddock, business by business".
The same day Mr Abbott gave Senator Joyce the job, he pointedly agreed with his past comments on foreign investment. This should be of concern not just to Mr Hockey; not just to the Liberal Senators who helped craft a calm and considered majority report on foreign investment; but to the country as a whole.
This is a serious national debate; the Leader of the Opposition needs to come up with serious, responsible and considered policies rather than sign up to the more extreme views of his new finance spokesman.
This brings me to the Government's policy responses to a changing global investment environment and to recent debate on foreign investment.
When I became Treasurer, it was already apparent that SOEs and sovereign wealth funds had become an important source of international capital.
Our assessment was that Australia's existing foreign investment screening regime was already well-placed to deal with such national interest concerns. But given the emergence of SOEs and sovereign wealth funds, we sought to clarify how our regime would apply where links to a foreign government existed.
In February 2008, I published a set of guidelines that we consider when evaluating the national interest implications of foreign government related investments.
These emphasise independence and commerciality, and their release promoted transparency in how the national interest test is applied.
We look specifically, for example, for evidence of a commercial basis for the investment.
We also look at the commercial and legal conduct of that company - do they adhere to the law, do they abide by common standards of business behaviour?
We look at competition, the impact on our revenue base, national security concerns and, of course, the impact of that investment on the Australian company, our economy and the broader community.
The guidelines are non-discriminatory - we apply them equally to investments by all foreign government entities. They do not target or restrict any particular country.
During the global slowdown in world capital flows, we made a number of other reforms to demonstrate to the world that Australia remains a welcoming and competitive destination for foreign capital.
We introduced legislation to ensure that FIRB can screen complex investment instruments, such as convertible notes and warrants. These arrangements have a solid commercial basis, but were not envisaged when the Act was originally drafted.
And on 22 September 2009, the Government lifted the monetary screening threshold for privately-owned foreign investors to $219 million, more than twice the previous threshold of $100 million. We simplified the thresholds, and indexed them to keep pace with inflation. And we abolished the screening requirement on privately-owned new businesses over $10 million.
We believe these changes have been essential in ensuring Australia remains an attractive place to invest amongst a more competitive playing field for foreign investment following the global financial crisis.
Let me now turn to the issue of policy continuity. I spoke earlier of the way foreign investment policy came to be viewed through the lens of just one transaction. As a result, some observers complained about the lack of predictability.
Of course, if you were concerned solely about predictability, it could be very simple to fix. You would set hard and fast rules, with capped shareholdings, and no discretion. You could publish them on a website, and simply tell non-compliant proposals not to bother.
But no-one with a real interest in Australia's economy would seriously suggest this, and as all careful followers of the debate would know, the Assistant Treasurer Nick Sherry (who has carriage of several aspects of the foreign investment regime under delegation from myself as Treasurer) and I have approved applications above and below the various 'caps' the Government has been said to have.
Successive Australian governments have rightly decided we want to see all potential proposals, rather than have some potentially very valuable ones never leave the boardrooms of their international proponents.
This is why Australian governments have rightly insisted on a case-by-case approach and the operation of a national interest test. It maximises investment flows, while protecting our core interests. And of course, we make no apologies for the fact that if a proposal does not meet the national interest, we won't approve it.
Naturally, case-by-case will throw up different results in different situations. But two years into our term, I think some consistent themes emerge - ones which it is very helpful for investors and Australians alike to understand.
- One - that we carefully consider cases where a proposed investor is also a buyer of the resource - in particular, where the proposal involves potential control over pricing and production;
- Two - that foreign investment in a resources company must enable Australia to remain a reliable supplier in the future to all current and potential trading partners;
- And three - that business transparency and shareholder discipline is important in promoting and maintaining sound business practices. Essentially, that we prefer to see major companies maintain their listing on stock exchanges.
There has been another important element of continuity in our policy and that's the Board itself. I want to express my thanks to the Board Chairman, John Phillips, and the Board members, Lynn Wood and Chris Miles, for their hard work, astute advice, and for their long‑standing stewardship.
Today, I want to announce some changes to how FIRB will operate in 2010.
The Assistant Treasurer, Nick Sherry, and I have decided to increase the size of the Foreign Investment Review Board from three members to four. These additional members will broaden the expertise and experience of the Board.
I am pleased to announce today the appointment of Mr Brian Wilson and Mr Hamish Douglass to FIRB.
Mr Wilson has extensive financial services experience, including involvement with both the funds management and investment management sectors. He is a former Australian managing director of the global investment bank Lazard and a former vice‑chairman of Citigroup Australia. Mr Wilson is also Pro‑Chancellor of the University of Technology, Sydney.
Mr Douglass has been a member of the Takeovers Panel since March 2009, and has special expertise in the resources sector. He has more than 18 years experience in the financial services industry and is currently the managing director and CEO of Magellan Asset Management Ltd.
I congratulate both Mr Wilson and Mr Douglass on their appointment and look forward to working closely with them in the new year. And I sincerely thank the outgoing FIRB member, Mr Chris Miles, for his outstanding contribution to the Board over the course of more than 10 years.
I am also announcing the first task I have set for the expanded Board - to review and improve our communication of Australia's foreign investment policy.
Early in 2010, the Board will release an easy-to-read version of the foreign investment review framework for prospective investors, which will be made available in other languages, including Chinese, Japanese and Bahasa.
And I have asked FIRB to engage directly with embassies in Australia in the new year - as it has done from time to time - on how the policy is applied. I note that the Assistant Treasurer has already held a significant roundtable session with senior representatives of 19 European States and the European Commission, with more planned in the coming months.
This responds in part to the Senate Economics Committee majority report which I mentioned earlier. The Committee found that communication of our foreign investment policies can always be improved, and I agree 100 per cent.
If I can wrap up by saying that Australia has always been a country with big ideas and big ambitions.
And a robust and open foreign investment framework reflects that adventurous, entrepreneurial Australian spirit.
I believe the Government's stewardship of foreign investment policy is in accord with that spirit, and the need to keep our economy vibrant, open and competitive in the decades to come.
And I thank you for the opportunity to speak with you about these very important objectives today.