Preface
Economic freedom measures rank countries based on the rule of law, government size, regulatory efficiency, and (most relevant to this discussion) market openness. This includes freedom of trade, investment freedom and financial freedom.
In terms of overall economic freedom, Australia ranked fifth after Hong Kong, Singapore, New Zealand and Switzerland in the 2016 ranking. In the “open market” section of the index, Australia scored 80 out of 100 points for investment freedom, placing us among the 200 countries with the highest degree of freedom.
Australia’s foreign investment framework
In 2008, Chinalco (Chinalco) triggered a fiercely controversial “dawn raid” against Rio Tinto, sparking a debate about Australia’s foreign investment policy. Since then, a series of high-profile foreign investment transactions underway have attracted scrutiny by the public and regulatory agencies: these include China Minmetals’ acquisition of OzMinerals; Chinese state-owned Yanzhou Coal Industry’s acquisition of Felix Resources; Singapore The stock exchange’s bid for the Australian Stock Exchange failed, SAB Miller’s acquisition of Fosters, and the Canadian dairy group Saputo’s current bid for Warrnambool cheese and butter.
Australia’s foreign investment policy is assumed to be favorable for foreign investment and generally does not enforce local ownership requirements. However, the treasurer screens investments in a few cases to ensure that they are in the national interest. This screening process is carried out by the Foreign Investment Review Board (FIRB).
If the investment is: a) from a foreign government investor; this screening process must be carried out. b) is more than 15% of the target company’s business investment, valued at more than US$248 million; c) in real estate; or d) in a defined set of “sensitive” sectors (such as banks, airlines, airports, shipping, media and telecommunications) )in. All other foreign investment applications will be automatically approved. The reviewed application must accept the six-point “National Interest Test” managed by FIRB. considering: Impact on national security Impact on competition Impact on Australian government policy Impact on the Australian economy and community Investor character [State-owned enterprise] Investor’s business direction
After the inquiry, FIRB will make a (confidential) report to the treasurer, who can approve, reject or approve the investment conditionally. The vast majority of foreign screening investments are approved. In the five years to 2011-12, 38,590 applications (worth A$860 billion) were approved, and only 63 were rejected. Most of them are in the real estate sector. Before GrainCorp made a decision, it recently rejected two major business proposals: Shell’s acquisition of Woodside Petroleum in 2001, and the Singapore Stock Exchange’s 2011 bid for ASX.
GrainCorp: A new nationalist precedent?
Friday’s decision is important because it may set a new precedent for screening foreign investment. It seems that ADM-Graincorp’s decision implicitly adds a new seventh criterion to FIRB’s national interest test: community attitudes and popular support. In explaining his decision, Chief Financial Officer Joe Hawke outlined two reasons for rejecting the proposal: limited competition in the grain processing industry (currently dominated by GrainCorp), and “high attention from stakeholders and the wider community.” He also argued that “allowing it to continue may undermine public support for the foreign investment system and broader continued foreign investment”. Some analysts believe that the justification for competition policy is relatively weak.
The Australian Competition and Consumer Commission (ACCC) approved the transaction in June on the grounds that the transaction is unlikely to significantly reduce competition and ADM has made major commitments to improve bottlenecks in the grain processing chain. Therefore, it seems that political worries are imminent. One consideration seems to be the opposition of the nationals, who fought hard to oppose the approval of the application. But the other is widespread community opposition to the transaction. Hockey instructed FIRB to consider the “broader impact” of the transaction in the evaluation process, including public attitudes. So far, community attitudes have not been included in FIRB’s national interest test. Although “community issues” are considered, these issues are defined from an economic perspective-fair return to the community, opportunities for Australian participation, and employee benefits. FIRB has not yet assessed whether an investment is considered “welcome” or how it will affect community attitudes towards foreign investment more broadly. In addition, the treasurer has not recently made a decision-approval, rejection or conditional approval-involving public sentiment. Until now.
The meaning of community attitude
The ADM-GrainCorp case is of course a separate decision. It is not clear whether this will be a one-off or whether the coalition government will follow in future cases. However, this raises questions about how to evaluate community attitudes and whether FIRB is even capable of evaluating attitudes. Community attitude is a vague and difficult to measure concept. For example: If most countries support agricultural investment, but most rural residents oppose agricultural investment, whose opinion should be dominant?
In addition, FIRB, which focuses on economic policy, currently has no experience in assessing community sentiment, nor does it have the resources or capabilities. It remains to be seen whether this will be a strong test or just a “get out of jail” card that allows the treasurer to reject controversial cases. Second, this will greatly reduce the legal certainty of foreign investors in Australia. At present, there is a clear set of national interest guidelines that have been applied in a transparent and consistent manner. Foreign investors have a good idea about whether their proposal will be ticked before submission and can be confident that the target bar will not be transferred midway through the process. Introducing unstable and controversial community attitudes in the process may prevent investors from worrying that their proposals will be determined by the rise of populist politics.
Third, it will “politicize” the foreign investment evaluation process. Rather than approve investment based on its economic merits, public attitudes will also become a key criterion. May lead to many worrying results. Investment advice may become a matter of party politics. It depends more on the electoral fate of today’s government than on sound policy standards.
Competitors of companies may disrupt the agreement by inciting community opposition, thereby turning the FIRB process into a politically controversial commercial battlefield. Vested interests whose vested interests have been lost may also use popularity arguments to conclude deals, even if they bring net national benefits. If the example set in the ADM-GrainCorp decision becomes the norm, Australia’s so-called “opening up” approach to foreign investment may undergo fundamental changes.
