Treasurer Scott Morrison has rejected the proposed sale of the Kidman cattle properties to foreign interests:
Given the size and significance of the total portfolio of Kidman properties along with the national security issues around access to the WPA (Woomera Protected Area), I have determined, after taking advice from FIRB (Foreign Investment Review Board), that it would be contrary to Australia's national interest for a foreign person to acquire S. Kidman and Co. in its current form.
There are some special, perhaps unique, factors in this case. The cattle properties involved are certainly exceptional, not only in sheer geographic mass (100,000 square kilometres, or 1.3% of Australia’s total land area and 2.5% of agricultural land), but in terms of their iconic historical status. In addition, one of the properties overlaps the WPA where sensitive weapons-testing takes place.
There are also some not-so-unique factors involved. Selling agricultural land to foreigners has become an emotional issue, especially for the government’s coalition partner, which represents rural interests. The prospect of selling to a Chinese firm (even privately owned) adds another layer of resistance.
Nevertheless, in principle Australia actively encourages foreign investment. The public generally accepts net benefits have been positive. Foreign investment funds a good part of our substantial current account deficit, which for more than 200 years has allowed us to invest more than we saved, and to grow faster than otherwise.
It's not as if much foreign investment has been blocked. Outside of agriculture, much of the family silver has already been sold: 80% of our mining resources are foreign owned. In agriculture, it's just 12%, and even there we don’t have an 'in principle' objection to Chinese investment and we have accepted a rapid growth of Chinese ownership in this sector.
If we are concerned about foreigners using transfer pricing to avoiding paying a fair share of taxes, then our concerns should focus on the large-scale chronic tax avoidance practised by many multinationals operating here. The national security argument might be relevant in the Kidman property case because of the special location, but it can’t have widespread application, unless we accept the spurious argument that all Chinese investment is a 'projection of power' and that if Chinese own the electricity grid, they might turn off the lights.
Past rejections don’t provide much in the way of precedents to establish clear principles. We knocked back Shell’s attempt to buy Woodside, Singapore’s bid to take over the stock exchange (ASX) and the attempted purchase of grain-handler GrainCorp. The approval process also scuppered Chinalco’s attempt to increase its stake in Rio Tinto.
It’s not as if Australia is the only country that vets foreign investors, nor are we the only country wary of Chinese investment. The US rejected Chinese investment and the US president ticked off our prime minister for not consulting America before leasing Darwin harbour to a Chinese company. Farmland stirs patriotic fervour everywhere. New Zealand recently rejected Chinese investment in a dairy property. China itself is also very restrictive of foreign investment.
Thus just about all countries show a mix of paranoia and parochialism, perhaps with a touch of racial prejudice, in their attitude to foreign investment. But in the end Australia lets almost all of it happen. When purchases have been blocked, the public intuitively understands and largely agrees (this was the case with Woodside, Chinalco and ASX).
This ambiguity isn’t surprising; politics represents community values, which are ambivalent, even inconsistent. Governments have to dissemble, ducking and weaving to maintain sensible balanced policies, and in this case that means considering current account funding and providing a global element to investment.
It is, however, important for Australia, as a substantial capital importer, to either articulate a clear policy on foreign investment or learn to live with a smaller external deficit. It is also possible to squeeze more benefit out of the foreign investment that is coming in.
The starting point is to look ahead a few decades at what our world will look like. Asia (and particularly China) will be a substantially bigger economy. If we are to succeed, our economy will have to be much more integrated with the region. Resources (iron ore, LNG and coal) will still dominate our exports. China (and other Asian markets) will have established the stable supply relationships needed for food and resource security. Australia could provide a significant component of both.
The central policy issue is this: what is the commercial and regulatory framework that will maximise the benefit to us as a nation?
It will require specific skills, knowledge and guanxi to tap the Chinese market successfully. For agriculture, it will require scale well beyond the traditional Australian family farm (just as it does in resources). A high level of Chinese involvement in the Australian supply-source seems inevitable, even desirable. But how to ensure that the disparity of scale (they are huge and we are relatively tiny) doesn’t mean that the value add (the very considerable difference between the farm-gate price and the retail price) doesn’t all go overseas, and the choice jobs along with it?
This needs more concerted policy thinking than just tweaking the FIRB rules in isolation. For a start, our competition authorities need to recognise that scale is often needed to compete globally. Some of the elements of a more comprehensive process are underway. The Productivity Commission is looking at the agriculture sector. DFAT has examined the trade aspects, and the China-Australia Free Trade Agreement (ChAFTA) has helped to define some of the relevant issues.
But if we don't want to run the risk of becoming 'hewers of wood and drawers of water', we will need to do more.
This might include the development of an Investors’ Code of Conduct to provide a template for a broader FIRB application process, putting specific content into the nebulous 'national interest' criterion. This could cover tax and transfer pricing. There might be a presumption there would be a substantive Australian partner. Where it makes economic sense to carry out value-add processing in Australia, this might be mandatory. There would be opportunity, too, for the foreigners to refute the more fanciful of the security concerns.
We should be able to put out the welcome mat for foreign investors while at the same time demonstrating to domestic sceptics they are not on the way to becoming mere share-croppers in their own country.
Photo courtesy of Flickr user Alex Prolmos