Minister for Financial Services & Superannuation
14 September 2010 - 1 July 2013
Address to Open the Baker Tilly Asia Pacific Conference
15 April 2011
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Good morning ladies and gentlemen.
It is a pleasure to be able to join you here today to open this conference at the Langham – one of my favourite Melbourne hotels.
To those from interstate and overseas, welcome to Melbourne and I trust that you will have the opportunity to properly explore this beautiful city while you are here.
It's a special place Melbourne, not just because it's my home, but because it's home to so many magnificent worldly charms.
A few years ago the urban development academic and author Joel Kotkin observed - interestingly in my view - that while city magnificence should not be a zero-sum game, history offers up so many cases in which cities flourish and then get caught up in a variety of self-destructive pursuits or a malaise that sends new development to better opportunities elsewhere.
Melbourne is of course quite a young city by ancient comparisons. But I firmly think you are visiting a metropolis today that has enough history to be splendid and adequate shrewdness, vision and optimistic promise for the future to outwit the self-destructive malaise of which Kotkin warns.
This is a great place to visit, invest and do business.
I should also add that Mr Kotkin's overall thesis and advice is that cities succeed when they can balance needs for sacredness, security, and commerce.
So let me say this: to Melbourne sport and gardens are sacred; this town is one of the most safe and secure places to raise a family; and to do business here is to enjoy making the deal while making a quid.
This conference brings together a large number of practitioners from across the Asia-Pacific region. I'm sure that over the next few days, you'll be treated to a wide range of discussions on issues such as audit and assurance, taxation and specialist advisory services.
Today I am going to discuss a topic that has received a lot of media coverage recently, and one that I'm sure many of you are interested in – Australia's foreign investment framework.
Before I speak about foreign investment though, let me spend a few moments putting it into context by discussing the economic outlook for the region.
The Global Economic Environment
On the global economic front, the recovery is showing signs of gaining traction.
While strong growth in emerging economies continues to drive the global recovery, there are signs that increasing momentum is building in the US and German economies.
The US, in particular, has seen its unemployment rate fall one percentage point in the four months to March 2011, the most rapid four‑month fall in 27 years.
Moreover, financial market sentiment appears to be holding up well.
Despite the unrest in the Middle East and North Africa and the natural disasters in Japan – though these have had a large human cost – global equity markets as a whole fell only 7 per cent. And since mid‑March, global equity markets have regained most of that loss.
The IMF is forecasting global GDP growth of around 4½ percent in both 2011 and 2012, which is in line with trend global growth, and on the back of 5 per cent growth in 2010.
Australia is expected to continue to benefit from its links with developing Asia, a region the IMF forecasts will see GDP growth of around 8½ percent in both 2011 and 2012.
While there is good reason to be increasingly optimistic about the global recovery, there are nonetheless uncertainties surrounding the outlook.
Sovereign debt risks have not gone away, with those in the euro area particularly acute. Indeed, the current political turmoil in Portugal, and the country's subsequent announcement that it is seeking an EU-IMF bailout, has brought this risk sharply back into focus.
Inflationary pressures in fast‑growing emerging economies have been building for some time, with an attendant increase in pressure to tighten policy settings.
Global oil prices had already risen substantially prior to January of this year, as a result of increased oil demand as the global recovery gathers pace. However, the unrest in the Middle East and North Africa, and fears of a major disruption to global oil supplies if this unrest escalates, have pushed global oil prices up even further to 2½ year highs.
Japan's nuclear situation also continues to weigh on global markets and may prolong the impact of this crisis on the global economy.
So overall, the global recovery continues to get onto a firmer footing, but there are clearly a number of challenges to be navigated to ensure the recovery remains on track.
An economy in transition
There are a herculean handful of big trends Australia ought to be acutely conscious of as we set about securing our next wave of prosperity.
For some months now I've been describing the situation we are in as the circumstances of an economy in transition.
1. Our presence in the Asia Pacific region
The re-emergence of Asia is the third greatest transformation in the last four centuries.
First was the rise of the British Empire. Second was the rise of the United States. The third is the re-emergence of Asia.
It should not be forgotten that in 1570 Asia was the biggest region in the world – far bigger than the Roman Empire.
But for being closed off to the Industrial Revolution Asia would have stayed enormous. Our considerable good fortune as Australians today is to be closely integrated with Asia – 70 percent of our traded goods and services is with Asia.
I think it's time we matched our economic integration with Asia with a deeper and more sophisticated social and cultural integration.
2. Huge moves in the services sector
Australia is a modern economy. Examination of our financial, accounting, insurance, legal, online, data industries reveal they are amongst the highest paid sectors in the world.
Except for the mining sector, wages in financial services are very high compared to the rest of our employers. Slowly, yet surely, our other sectors are declining.
That does not mean our farmers and manufacturers don't have a viable future – but the trends of greatest dynamism and competitive advantage are clear.
3. Communications and the Role of Education
Modern information technology and the flow of information are crucial. The boost it gives to productivity is huge.
It starts with schools and universities and then continues with the communications between people.
Education is all about what goes down the information technology pipe.
Our tertiary sector has massive assets. But it's only fully open for 24 weeks a year, so it's a privileged sector.
Quality IT means cheaper and better education.
Online technology will enable cheaper education with better teachers. "Televisioning" will enable greater education, as well as education access.
From the end of the 1960s we have been moving from manufacturing to services via technology.
But we are now in the second stage of this – it's now not just about computers and software development. It's about the information flowing through ICT.
For 200 years monasteries then universities stored all our information and knowledge. Google captured and stored all this in 10 years. This is mind blowing.
These are some of the big trends we will be dealing with in the future.
Obviously there some very tangible ones we are already dealing with now – like our strong terms of trade.
Australia's economic outlook & our productivity agenda
Let me turn now to the outlook for the Australian economy.
We have strong fundamentals, with low unemployment, strong job creation and a massive pipeline of business investment.
Notwithstanding this outlook, recent natural disasters in Australia and Japan are expected to weigh on Australia's economic growth in the first half of 2011. But while these factors will suppress growth in the short term, the medium term outlook remains strong.
This outlook is largely underpinned by the resources sector – and this is where what is really a fourth 'economy in transition' theme becomes powerfully evident.
Global prices for Australia's bulk commodity exports have continued to rise, pushing the terms of trade to record highs.
High prices for coal and iron ore are prompting a dramatic global supply response, including in Australia. Mining investment has risen in Australia from around $10 billion in 2003 (when the current mining boom began) to $40 billion in 2010.
And the pipeline of resources investment has increased with the recent CAPEX survey indicating strong growth in investment through the remainder of 2010-11 and into 2011-12.
While the resources sector is a key source of strength and the outlook for the aggregate economy is strong, it is also clear that the higher dollar and other factors are dragging on other sectors of the economy such as tourism, education exports and manufacturing. In addition, we are seeing the re‑emergence of labour shortages and bottlenecks in some industries which may create inflationary pressures.
In acknowledging these concerns we should be sceptical of doomsday predictions for certain sectors and industries.
While Australia is often characterised as a commodity economy, Australia's prosperity is based on how it has transformed its natural endowments to build an economy that in fact relies on the skills, knowledge and innovation of its people.
At the same time though, we face a challenge of making the most of our opportunities while spreading the gains across different sectors and regions of the economy, and ensuring that living standards across the board improve.
We are meeting that challenge through a broad ranging agenda to improve productivity.
Key elements of that agenda are delivering a stable macroeconomic environment, as evidenced by our swift response to the GFC and commitment to a responsible fiscal strategy; implementing reforms to get incentives right and make sure we make the best use of our workforce and capital, including the Seamless National Economy regulation and competition reforms being undertaken through COAG; and making well targeted investments in skills, public and private infrastructure and innovation.
However, as the Treasurer has stated, the impact of mining boom Mark II on Australia's economy will be as profound as the structural change associated with the floating of the dollar, and the tearing down of Australia's tariff walls in the '80s.
While Government can help manage and ease change, it cannot prevent it.
In underlining my point about the broad resilience of the Australian economy, despite our global interconnectedness, I simply highlight the number of what we might call 'international disasters' of the past quarter century. There has been:
- The bird flu epidemic of the late 1980s
- Chernobyl disaster of 1986
- Asian Financial Crisis of 1997
- Both the Y2K 'Bug' and Dot Com crash of 2000
- September 11 and the associated downturn
- Aceh and Thai tsunami of late 2004
- The GFC of 2008 and 2009
- Haitai's earthquake of Feb 2011; and
- Japanese earthquake and tsunami of last month
It is worth bearing in mind that none of these events caused a recession in Australia. The GFC caused a major global downturn, but because of active and shrewd policy action and stimulus from the Australian Labor Government, again our country experienced no recession. And strong future growth is today building upon this 'during the GFC' stability.
Regional Engagement in the Asia‑Pacific Region
As I mentioned earlier, the Australian economy is expected to continue to benefit enormously from its links with the Asia‑Pacific region.
I am pleased that Baker Tilly has this year chosen to have its conference in Australia because the Australian Government has a strong, ongoing commitment to the Asia‑Pacific region.
We are very active players in all of the key regional forums of which we are a member, including APEC and the East Asia Summit.
Our commitment to APEC is long standing. Indeed the idea of APEC was first publicly broached by former Australian Prime Minister, Bob Hawke, during a speech in Korea in January 1989. Later that year, the first APEC meeting ever, was held in Canberra.
Since that time, Australia has had an important hand in APEC's many successes including lowering barriers to trade across the region, and helping countries to make many significant improvements in their capacity to attract and to sustain new foreign investment.
With Australia's help, APEC also improved ease of doing business across the region, not least of all through the development of the APEC Travel Card.
One measure that you are likely to be interested in is the Asia Region Funds Management Passport. We are currently working with a number of Asian economies to develop a passport that would provide a multilaterally agreed framework allowing the cross border marketing of funds across participating countries.
Working in close consultation with stakeholders, the Australian Treasury is taking a lead role in facilitating the development of the regional funds management passport proposal within the APEC Finance Ministers' Process. This is an important avenue to strengthen financial market integration in the region.
In March this year a workshop on the Passport was hosted by Hong Kong, where the Australian Treasury, along with representatives from Hong Kong, Japan, Korea, Singapore, Malaysia, New Zealand, Thailand, Philippines and Vietnam discussed policy and technical aspects of the passport proposal.
We are progressing with developing the policy and technical aspects of the passport and hope to introduce a pilot for a small number of countries in 2012.
The East Asia Summit is a relatively new regional forum, but an important one. Australia has been very actively engaged within the Summit, and worked closely with regional partners to bring about the first East Asia Summit Finance Ministers Meeting in 2010.
Australia has also undertaken a number of important capacity building activities to assist emerging economy members with the development of their financial sector.
We see significant potential within the East Asia Summit and look forward to the prospect of increased financial and economic cooperation in the future.
A key part of Australia's approach to improve regional engagement and assist developing countries in the region is to lead by example where possible and to adopt best practice from other regional economies where appropriate.
Australia has a robust financial system, strong macroeconomic and regulatory frameworks, and decades of microeconomic reform have made our markets competitive. But another important contributor is that we are a competitive destination for foreign capital because we maintain an open and transparent investment climate.
Australia's Openness to Foreign Investment
Australia is a globally competitive location to do business and offers a wealth of opportunities for businesses to succeed. We have a number of attractions to foreign investors: for example, strong institutions, flexible markets, a highly skilled workforce, a culture of innovation and a sound economic policy environment.
We are also near to and have the natural resources sought by, the two major developing economies, China and India.
These provide a solid platform for business and political stability, and our sound regulatory climate supports business growth and provides a favourable investment environment. These factors, and decisive action by the Government, helped Australia ride out the storm of the global financial crisis.
Australia's reputation as an attractive business destination was confirmed in the 2011 Index of Economic Freedom. Australia was again ranked 3rd overall (behind only Hong Kong and Singapore).
The Index — produced by The Wall Street Journal and Washington's Heritage Foundation — ranks countries on 10 measures of economic openness, including business freedom, trade barriers, the tax burden, government spending, price stability, investment openness, banking efficiency, property rights, freedom from corruption and labour freedom.
Australia has a history of welcoming foreign investment and indeed it has proved to be a key driver of our development as a nation. We have historically relied on international finance to open new investment opportunities and to develop our rich and abundant natural resource endowments.
The Australian Bureau of Statistics estimated in 2004 that foreign owned businesses employed 12 per cent of all private sector employees and contributed 25 per cent of all capital formation. In the mining sector, around one in four people were employed by foreign owned businesses.
At the end of 2010, the total stock of foreign investment in Australia was $2 trillion. Of this, the total stock of direct investment (investments involving a controlling stake) was $506 billion.
At the end of 2008, the latest year that industry data is available, 25 per cent ($100 billion) of foreign direct investment was in mining and 19 per cent ($74 billion) in manufacturing.
Foreign investment not only provides additional capital for Australian growth, it creates new job opportunities and supports existing jobs, it encourages innovation and skills development, introduces new technologies and promotes healthy competition amongst our industries.
To highlight the importance of foreign investment to Australia, let me focus for a moment on innovation and some real success stories for Australia. The ABS notes that almost half a billion dollars of Australia's annual R&D expenditure is funded from overseas.
For instance, in December 2010, Mesoblast, one of the world's leading developers of innovative biological products for the broad field of regenerative medicine, entered into a strategic alliance with global biopharmaceutical company Cephalon Inc.
The alliance is aimed at developing and commercialising products based on Mesoblast's unique adult stem cell technology. Under the terms of the alliance – the world's biggest stem cell deal to date – Mesoblast will receive an upfront payment of US$41.7 million and up to US$1.7 billion in milestone payments and will retain its manufacturing rights.
In March 2010, Acrux signed an exclusive agreement with US pharmaceutical company Eli Lilly for the commercialisation of a platform drug delivery technology with applications to humans and lucrative animal markets. The deal is worth up to US$332 million plus royalties.
IBM has now established its first global research laboratory in Victoria. The national innovation centre will seek to solve problems of the future that haven't even affected us yet. Aligned with its drive to build a Smarter Planet, IBM was drawn to Australia by the availability of world-class talent, the innovation environment, continent-scale opportunities and Australia's robust economy. IBM will build high-skill, high-wage jobs for Australians in technologically cutting-edge industries. It will also provide real world experience for researchers and PhD students in a world-class facility.
Another Australian innovation project which has relied on foreign capital is the $80 million technology and learning complex to be opened in Perth, WA, by multinational company GE which will develop highly skilled staff for rapid-growth industries in Australia. The centre will house GE's headquarters in WA and workshops to service and commission products and technology.
Australian businesses more broadly also benefit from innovation and R&D undertaken internationally when they adopt new products and new ways of doing business that have been successful overseas.
I think it is clear that foreign investment has helped build the innovation dynamo and modern competitiveness of our economy and will continue to do so into the future.
Australia's foreign investment arrangements
Despite Australia's many advantages as an investment destination, our foreign investment screening framework has attracted some negative press recently so I would like to use this opportunity today to clear up a couple of misconceptions about investing in Australia.
I will start by describing what has been – amidst much speculation around specific transactions – a very consistent approach from Australia in relation to foreign investment.
We welcome and encourage foreign investment because of the benefits it provides our economy. However, like many other countries, to identify investments that might be contrary to our national interest, we consider it important to maintain the ability to review foreign investment proposals before they are completed.
Foreign investment proposals are examined by the Foreign Investment Review Board, and the Treasury which makes recommendations to the Treasurer on whether they are consistent with the national interest.
The numbers speak for themselves. Since 2007, the Government has approved over 1,600 foreign investment business proposals worth around $490 billion. Over 99 per cent of these were approved, and approved without any conditions.
It is important to stress that consideration of foreign investment applications is on a case-by‑case basis. We prefer this flexible approach to hard and fast rules. Rigid laws that prohibit a class of investments too often also stop valuable investments. The case‑by‑case approach maximises investment flows, while protecting Australia's interests. This has been a bipartisan view by successive Governments since the arrangements were established in 1975.
Last year, we released an easy-to-read version of our foreign investment policy. That has now been made available in Chinese, Japanese and Bahasa. For the first time, to enhance clarity the Policy outlined the factors that the Government typically considers when assessing foreign investment proposals.
We consider national security concerns, competition issues, we look at what impact a foreign investment proposal will have on taxation revenue and other Government policies such as the environment, and we generally look at the impact that the investment may have on the Australian economy and the broader community. We also consider the character of the investor, including their corporate governance practices.
I should emphasise that these factors are not new, nor do they represent a tightening of Australia's foreign investment arrangements. They were released to ensure that investors are aware of the factors evaluated when the Government considers Australia's national interest.
These factors are non-discriminatory — we apply them equally to all investments, whether they are private investors or whether they are foreign government investors or related entities. However, where a proposal does involve a foreign government or related entity, we also consider if the investment is inherently commercial in nature or if the investor might be pursuing broader political or strategic objectives that may be contrary to Australia's national interest.
There has been a lot written in the past week about the Treasurer's decision to prohibit the acquisition of ASX by the Singapore Exchange. It is important to stress that this decision does not change Australia's policy towards foreign investment. We continue to welcome foreign investment because of the benefits it provides our economy. The SGX acquisition is the first business application rejected by Australia in 10 years.
The Treasurer's decision to prohibit the SGX acquisition of ASX was based on clear, unanimous and unambiguous advice from FIRB that the acquisition would be contrary to Australia's national interest. The Treasurer also drew on a broad range of stakeholder perspectives.
The reasons for the Treasurer's decision were clearly articulated in his public statement last Friday. The decision was based on both economic and regulatory considerations.
It is in Australia's national interest to maintain the ongoing strength and stability of our financial system, and ensure it is well placed to support the economy into the future. It is also important that we continue to build Australia's standing as a global financial services centre in Asia to take best advantage of the benefits of our superannuation savings system.
The Treasurer was concerned that many of the claimed benefits of the SGX acquisition were likely to be overstated. The proposed acquisition would not have provided the suggested increase in Australia's integration into Asian capital markets and did not support building Australia as a global financial services centre in Asia.
The ASX is unlike most other exchanges in that it is also the operator of critical financial sector clearance and settlement systems. The recommendation of FIRB, which incorporated advice from Australia's financial regulators, was that reforms were required to our regulatory framework, to avoid material risks and supervisory issues for the effective regulation of the ASX, particularly its clearing and settlement functions.
The Treasurer has initiated a review by the Council of Financial Regulators to advise on such reforms.
The Government is not opposed in principle to future deals that involve the ASX – provided they are consistent with the principles that the Treasurer outlined in his public statement. Any future proposal that involved the ASX would be considered on its merits against this criteria and the broader national interest principles I have outlined.
I stress again that the Gillard Government is not averse to foreign investment in Australia's financial sector generally.
In fact, this Government has been actively pursuing a framework that will allow for the introduction of competition in Australia's equity markets, which could include foreign operators setting up markets in Australia.
As you know, ASIC has released a timetable for the commencement of market competition in Australia with the entry of Chi-X in the market expected later this year. This is an important step to ensuring that Australia's financial markets remain efficient, innovative; and brings competitive pressure to enhance outcomes for investors.
I have only provided a broad outline of Australia's foreign investment rules but I trust that I have provided a positive picture about Australia's investment climate. It is a good story and one which we are proud to tell.
As I stressed earlier, it is important to remember that we look at each proposal on a case‑by‑case basis. If you are involved in a major investment in Australia, I would strongly recommend that you get in touch with FIRB early in the process so that it can provide more information and advice on the review system to assist you.
Australia has much to gain from our growing economic relationship with the Asia-Pacific region – a region in which Baker Tilly obviously has a substantial business footprint.
Historically, we have been an importer of capital and our future growth relies on continued openness to foreign investment, including increasingly from Asia.
I am at pains to stress that we welcome and encourage foreign investment and as a sophisticated modern economy, Australia offers diverse business opportunities across a broad range of industry sectors.
Thank you again for the opportunity to speak here today. I wish you a productive conference and enjoy the many delights of Melbourne while you're here.