Labor’s destructive secrecy

The Age today published new Wikileak revelations about the Foreign Investment Review Board (FIRB) and it’s policy vis-a-vis China:

Canberra’s foreign investment regulator has privately admitted that it is seeking to limit investment from China in response to political concern about the control of Australia’s strategic resources.

Contrary to the federal government’s claims that it supports a non-discriminatory foreign investment policy, the secretive Foreign Investment Review Board has told US diplomats that new guidelines approved by Treasurer Wayne Swan signalled ”a stricter policy aimed squarely at China’s growing influence in Australia’s resources sector”.

The anti-China rationale was set out by Patrick Colmer, Treasury’s foreign investment division head and an executive member of FIRB, in confidential discussions with US embassy officers in late September 2009.

The embassy report of Mr Colmer’s remarks, titled ”New Foreign Investment guidelines target China”, is among embassy cables leaked to WikiLeaks and provided to The Age.

Based on Mr Colmer’s briefing, US diplomats reported that the Australian government privately wished to ”pose new disincentives for larger-scale Chinese investments”.

On August 4, 2009, Mr Swan announced changes to Australia’s foreign investment laws to increase the threshold for mandatory review of proposals – so that private overseas businesses buying a stake greater than 15 per cent in companies valued below $219 million could proceed without review. (With annual indexation, the threshold was raised to $231 million on January 1 this year.)

The new threshold was more than double the old $100 million mark that would trigger FIRB scrutiny and Mr Swan said these measures would ensure the government would not become unnecessarily involved in uncontroversial business transactions.

At the time the Treasurer denied that exclusion of foreign state-owned companies from the new threshold discriminated against future Chinese investment. ”There’s never been a threshold for foreign government or state-owned enterprise investments, so nothing changes there for anybody,” he said.

”It’s not related to any particular country – the rules are the same for everybody – this is a change in the rules for lower-value applications for private business investment.”

Trade Minister Simon Crean also rejected any suggestion that the government was inclined to discriminate against Chinese investment in Australia’s resource sector. ”We run a non-discriminatory policy,” Mr Crean said in a radio interview in October 2009. ”Large investments from whichever source have to meet a national interest test and there has been huge approval of Chinese investment into Australia.”

In private talks with US embassy economic officers, however, the FIRB confirmed the government’s preference for minority foreign shares in new resources projects, with the foreign share of greenfield developments limited to below 50 per cent, and around 15 per cent for major mining companies.

”FIRB general manager Patrick Colmer confirmed … the new guidelines are mainly due to growing concerns about Chinese investments in the strategic resources sector,” the US embassy subsequently reported to Washington.

This blogger has written before that it agrees with regulation that prevents market failure. For instance, it believes that the Federal government was perfectly within its rights to have actively canned the 2009 Chinalco takeover of Rio because it unbalanced the dynamic between supplier and customer in bulk commodity negotiations. On the same rationale, it should also have canned the proposed BHP takeover of Rio the year before. Policy crafted in this manner would have prevented:

The whole freakin’ debacle, the lobbying, the secret deals, the blurring of national and corporate interests, the damage to BHP’s and Rio’s reputations, could have been avoided if the Australian government had knocked the original merger back on the basis that it was anti-competitive, as it should have done.

Today, we would be in exactly the same position, with an effective two-pillar policy for the iron ore market-makers, but without all of the waste and damage.

And that’s the point this blogger wishes to expand upon today. This Labor government seems obsessed with doing things behind closed doors to the detriment of business and democracy.

Witness, during the 2008 GFC, the entire banking bailout was negotiated with business interests behind closed doors. We still don’t knows many details, a phenomenon this blogger describes as “Invisopower!” which, it argues, leaves the banks operating in an uninformed market.

Then throughout 2009, the Rudd Government negotiated its original Carbon Pollution Reduction Scheme (CPRS) behind closed doors. The policy was announced up front, and an endless procession of special exemptions were struck with business interests as they traipsed to Canberra. The carbon tax looks set to be implemented in the same way.

The same approach was adopted with the Resource Super Profits Tax (RSPT). Only the negotiations didn’t proceed fast enough and the business interests publicly attacked the government. The special exemptions were then negotiated with a gun shy new Prime Minister.

Now we have these revelations about FIRB and Labor’s secret need to keep Chinese interests at bay.

All of these episodes have the consequence of encouraging rent-seeking in business. In an economy dominated by concentrated monopolies, duopolies and oligopolies this is a red rag to a bull. Why compete when you can simply lobby or pressure the government to prevent competition. Even as both you and the government trumpet your “free market credentials”.

Then there is the small consequence of our fraying democracy.

One wonders where this political culture comes from. It is tempting to see it as the triumph of state political practice over federal. After all, state politics is basically the business of negotiating with interests and Labor has been doing it in the major jurisdictions without much interruption for a long time. Kevin Rudd came from state politics, as did the new wave of number crunchers. Any reader analysis in this regard would be welcome.

Give us all a break, Labor, start doing business in public.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Interesting contrast to their views on foreign, especially Chinese, investment in our housing bubble… I bet there is no cable signalling ”a stricter policy aimed squarely at China’s growing influence in Australia’s property markets”… much more likely that there is a cable along the lines of “we would like them to invest all they want, indeed all they can, in keeping our housing bubble afloat, it’s just that the electorate is so damned concerned about housing affordability that we need ‘to be seen’ to be looking after the ‘Aussie battler'”…

    And that’s where it links to the underlying theme of your story, which I consider to be right on the mark… up here in Queensland a few years back the journos were right on the politicians’ tails for their “cash for access”, $5,000 a head lunches which were heavily populated by the property industry… not too many Aussie battlers there, not to mention the homeless…

    What you say in this article was the reason why my family donated to the Red Cross, which responded so admirably to the disasters that have affected our country so deeply in recent months, rather than to “the premier’s appeal”… Anna Bligh has done a good job, in my view, of responding to the crisis… but you just know that, like always, the tentacles of the vested interests were right in there trying to influence Government response to their advantage… if she can shake those shackles and continue to lead for Queenslander’s benefit, then she will have really achieved something… but recent history does not make it look promising…

    • Hi guys,

      I thought I’d alert this to you as an interest piece warranting analysis. I am a reagular reader of Garth Turner’s “greater Fool” blog. I find the similarities between Canada and Australia are remarkable.

      I noted a week or so back this post (quoted below) and couldn’t help but wonder if there is anything similar in Australia?

      With allegations of foreign investor activity being a key driver of (housing) demand, if we take it to be true, it is also forseeable that there is a future point at which they will cash out. This could play out as a result of myriad issues (exchange rates, bubble popping, or domestic Chinese woes).

      Tracking down a foreign landlord may prove difficult for the ATO or FIRB (whichever responsible agency it is).

      A mass exodus of Chinese property investors could prove interesting. I couldn’t think that anyone is prepared for the scenario

      ********
      #41 Hoof Hearted on 02.24.11 at 1:07 am
      This was just posted on Vancouver Condo Info

      http://vancouvercondo.info/

      Buying a flip? Budget for taxes.
      February 23rd, 2011

      As you’re probably aware, flipping real estate is a business and the Canada Revenue Agency is going to want their cut whether you’re a Canadian citizen or not.

      But what if they can’t track down the foreign seller?

      Then they’ll get it from the buyer.

      That’s right, if you’re buying property from a foreign seller there’s a small but important detail you should be aware of:

      Under section 116 of the Income Tax Act, when a non-resident disposes of taxable Canadian property, the purchaser “is required to withhold 25 per cent of the purchase price…until such time as a certificate of compliance is obtained by the non-resident vendor.”

      The non-resident vendor is required to notify Canada Revenue of the disposition either prior to the sale or 10 days after the disposition date.

  2. All of these episodes have the consequence of encouraging rent-seeking in business. And,One wonders where this political culture comes from.

    The political classes, especially Labour are nothing more than “backdoor capitalists.” The era of brown paper bag money has been replaced by legalised larceny.
    Take the QLD “gang of four.” Wayne Goss, Kevin Rudd, Peter Beatty and Mike Kaiser.

    The fastest route to riches for these people has not been enterprise but politics. Backdoor crony capitalism.

    E.g. Kaiser’s appointment from QLD to the NBN. The job was not open to other potential applicants, or even advertised. A political appointment @$350k p.a.

    To get rich is glorious! Spoken by a Chinese communist, implemented by Australian Labour politicians.

    Born to rule or born to rob? The louts from the legalised larceny party.

  3. There’s some truth to that rant Sean. I’ve often wondered about the unintended consequences of two-party democracy and market “liberalism” (its certainly NOT a free market).

    I tend to believe we have a more “civilized” version of crony capitalism that exists in the USA. i.e its not in your face (Chicago style – although I hear NSW is similar…..)

    Whether we can civilize our rampant socialism is another thing.

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