Last Thursday Patrick Colmer — the rarely heard from CEO of the Foreign Investment Review Board (FIRB) — dropped something of a bombshell on the sharemarket when his organisation decided to knock back the proposed recapitalisation of rare earths producer Lynas Corp by a company called China Non-Ferrous. Rather than limit his judgement to the specific circumstances surrounding Lynas Corp, Colmer released some regulatory obiter dicta that has now highlighted a lack of clarity about overseas investment in this country. As a result, it is now incumbent on Treasurer Wayne Swan to clarify what has become and extremely murky issue.
In his remarks about Lynas Corp, Colmer made the following points about foreign investment in Australian companies:
- the federal government/FIRB isn’t keen to see control of companies pass to consumers of its products (China Non-Ferrous’ investment, if successful, would’ve resulted in it owning 51.6% of Lynas);
- with respect to smaller companies, the federal government/FIRB would prefer in any case to keep foreign ownership in general below the 50% level. Given that many offshore businesses have successfully taken over local companies in the past, some have interpreted this second remark by Colmer to be aimed at state-owned buyers — which would apply to most Chinese proposals; and
- with respect to larger companies, a foreign ownership limit of just 15% (at which point prospective buyers used to just apply to FIRB for permission to go further) would be preferred.
Taken together, these three points throw into the air the previously accepted policy of permitting foreign investment into Australia except where is clearly contravened the “public interest” (as defined by the Treasurer of the day, e.g. Costello’s decision against Shell’s approach to Woodside several years ago). Current bids for companies such as Felix Resources (by 50% state-owned Yanzhou Coal) and Nufarm (which on Monday received a proposal from China’s Sinochem) now have to operate in an environment where sovereign risk, as represented by the newly revealed vagaries of FIRB’s thinking, prevails.
Nationalistic populists might argue that FIRB’s job is to ward off the avaricious buyers from the rorth, yet in reality nothing could be further from the truth. Australia has always relied on foreign capital to fund its expansion, and over the past 150 years such funds have come from the UK, the US, Japan and now China. To be sure, one wrinkle in the Chinese chapter of Australia’s economic development is that many of its companies are at least partly state-owned; but it would be folly in the extreme to assume that a country with which we enjoy a substantial and valuable trade surplus wouldn’t at some stage wish to own a portion of the local assets that help generate export income.
Soon after being elected in 2007, Prime Minister Kevin Rudd made much of his connections and familiarity with the People’s Republic of China. If he and Wayne Swan wish Australia to remain a place in which Chinese companies feel comfortable investing, then a clarification of FIRB’s rules in this regard is long overdue.
The author controls shares in Felix Resources