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Apr 6, 2011

Australia's black box of foreign investment regulation

The knockback of the SGX-ASX takeover is an example of the complete lack of transparency around our FIRB process. At least Joe Hockey and the Coalition are happy.


It’s hard to know whom to dislike more in the fallout from Wayne Swan’s non-decision to block the Singapore-ASX takeover: the economic nationalists keen to re-establish investment protectionism, or the screen jockeys muttering about Australia “withering on the vine” as a result.

The one bloke who’ll be happier even than investment xenophobe Barnaby Joyce is Joe Hockey. Swan’s supposedly interim knockback of the takeover lets the Coalition off the hook in a big way — conditional approval by the government of the deal would have required legislation to overturn the restriction on foreign ownership of the ASX, and that would’ve put the Coalition in a tricky position.

There’s undoubtedly support for a strongly pro-investment foreign investment regime within Liberal ranks, but the Nationals regard it as one step short of economic invasion (except, of course, when mates sell agricultural properties to foreign companies). For the economic nationalists, it’s die-in-a-ditch stuff; for those supporting free investment flows, it’s not. Who do you think would have carried the day? The options for the Coalition were either a very visible split, or opposing the legislation, yet again showing the party of free markets and liberalism sticking up for regulation and restriction.

All is not lost for the takeover proponents, however. They can now sell a “How Not To” guidebook on foreign investment, given the ASX managed to botch virtually every single aspect of its campaign for political approval. If Magnus Bocker really was “shocked” about Swan’s decision, as he claimed yesterday, he’s quite extraordinarily badly informed.

But while the xenophobes crack open a bottle of home-grown sparkling to celebrate, the same long-standing problems in our foreign investment regulatory framework remain. Australia’s regulation of foreign investment is a black box process: you lodge an application, the Foreign Investment Review Board assesses it, consults on it, develops recommendations on it, all in secret, and then hands it to the Treasurer, who has the final say anyway.

The process is mostly opaque to the applicant, and wholly opaque to everyone else.

But it’s not just the process. The rationale for assessment, which is the “national interest”, is also opaque. What’s the national interest? Well, that’s never defined, because defining it might circumscribe your capacity to rule out future applications.

That’s not to say there aren’t lots of definitions in the assessment process. The government has overhauled the FIRB guidelines twice since August 2009. “National interest” specifically includes “sovereignty and security interests”, competition issues, economic impacts, other government policies and the character of the investor. Ironically for a process that is entirely obscure, the guidelines include whether an investor “operates on a transparent basis”.

But these are guidelines for a vacuum — they don’t serve to indicate what is or isn’t in the national interest, because no politician wants to be circumscribed in that way. As we know from WikiLeaks, the guidelines can be a cover for other concerns: the 2009 overhaul was explicitly aimed at Chinese investment in the resources sector.

The government has acted to substantially lift the thresholds at which the FIRB process applies. The 2009 changes more than doubled the threshold at which FIRB notification was required. Those thresholds are indexed, and are now, for non-real estate acquisition, $231 million for non-US foreign investors and for sensitive sectors like the media, and just over $1 billion for US investors.

Even so, once the threshold is crossed, you’re into a limbo where politics, as much as any consideration of “the national interest”, determines bids, in a way that no one except Cabinet can ever be sure about.

At least under the types of protectionist measures that traditionally propped up our manufacturing industries, there was absolute certainty: tariffs provided a clear economic barrier to importers, and subsidies padded the revenues of local manufacturers. The protectionism of our foreign investment regulatory framework lacks even that small positive.

It provides no certainty, either for those seeking to invest in Australia, or for the rest of us, about the basis on which major foreign investment applications will be considered. Rather, it’s a device of convenience for politicians.


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19 thoughts on “Australia’s black box of foreign investment regulation

  1. ronin8317

    The SGX-ASX deal is not merely foreign ownership, but foreign government ownership. The deal is dead the second it was announced. Australia’s national interest is not served by having the Singaporean Government owning our biggest stock exchange. The 15% cap is put in place for a very good reason.

  2. Richard Wilson

    I really don’t abide time sharing with a totalitarian state, albeit in most instances a benign one and I am at a loss as to why Keane is shilling for the deal. You really never know when the winds of change blow through a dictatorship and, as Mr. Gaddafi is realizing, you cannot always believe your benefactors.

    The idea of Australia’s stock exchange becoming a multi national exchange enriching its shareholders and disenfranchising the people and businesses of Australia is bad enough, but my hunch is that this is just an opening gambit in a far bigger game which will eventually involved merging (selling out) to the Shanghai Exchange providing China with a legally sanctioned doorway into Australia and SE Asia. ( I am talking about plays 2 and 3 which involve acquiring other exchanges in SE ASIA and then selling out at a massive profit to the Chinese).

    Now China is a totalitarian state and is still, to large degree a closed economy. Unlike Singapore it could hardly be described as a benign dictatorship having one of the worst human rights records in the world. Bockman’s main chance is to make his billions by fusing the SE Asian exchanges with the Chinese markets thereby enriching the few at the expense of every nation in Asia as the Chinese simply move in and buy up.

    I am not against the Chinese or the Americans for that matter buying things but under our sovereign watch – not someone else’s. This would not be a fair fight. The smaller nations will be tossed around in a sea of takeovers the likes of which we have never seen, leaving us with a carbon tax we can no longer afford to pay. But the guys who sold us all out will be doing just great thanks!

  3. Peteyboy

    It’s only allegedly opaque to the self-interested participants in the deal. The FIRB process is designed so that politicians (who we elect) can make decisions independently from the cabal of financiers, lawyers and courts who all stand to personally gain from the transaction.

    Yes, it’s anti-judicial, but unlike the bloated, self-sustaining and absurdly expensive legal system, it’s an example of (rightly or wrongly) people power. I’d rather be manipulated by a dishonest politician who’s answerable to me at a ballot box, than a judiciary who’s decisions are much harder to undo.

    It’s also called democracy and we need more of it – not endless transfer of power to the courts.

  4. John Spresser

    I am sure economic writers fail Econonics 101 and then decide to branch off into journalists as it is a rare exception that one actually strays past the first 3 months of the course.

    I am afraid that this article is not one of the exceptions.

    PS I wonder if economic writers were actually in competition with overseas writers and

  5. Gavin Moodie

    I agree with Keane on this one. If you are going to have capitalism it works best in most areas if there is a free movement of the means for production – capital, labour and resources. I suggest the arguments for a free market are strong particularly for the institutions for accumulating and moving capital – stock exchanges, futures markets, banks, insurance companies, etc.

    Big capital markets are better than small capital markets, in several ways. Selling the Australian stock exchange overseas would relinquish Australian ownership of a financial institution, but should give hundreds of Australian public companies access to a much deeper, more diverse and more sophisticated pool of investors.

  6. Bill Williams

    Gee, Bernard….it’s a wonder you aren’t in foreign affairs. How do you expect Swan and the FIRB to make their declaration of Australia’s national interest transparent?

    I guess you would be happier if Mr Swan announced to the world and our biggest resource customer something like:

    “We are just a little bit scared about Singapore’s special relationship with their cousins from the old country. It’s not China’s $91.5 billion annual military budget, or their 3, 445,000 soldiers that we are worried about . It’s not even that our own intelligence agencies believe that China: is hiding its military build up / may dangerously overestimate its capabilities/ demonstrates ‘historical predilection for strategic deception’.We are not even too worried about what might happen if China buys the merged ASX SGX entity and we find ourselves asking the US to apply Mr Rudd’s strategy of “using force” when necessary. It’s not the $US2.45 trillion in foreign exchange reserves under the control of the Bank of China. No, Bernard, these issues are merely background. What we are really worried about is the actual mission of the ASX. Heretical though this might sound to the neo liberal economic high priests that dominant such discussions, we are considering the possibility that the true mission of the ASX might be to provide secure governance for the orderly trading of Australian securities. We are also just a little bit worried that ordinary Australians aren’t intelligent enough to grasp the advantages of selling control of our stock exchange to China via Singapore (as many of them in regional Australia can’t see the advantages of selling the AWB to Cargill via Agrium).”

    Would that make you happier, Bernard?

  7. freecountry

    Not one meaningful reason given publicly for the FIRB’s advice against the deal. And why bother? The public doesn’t know what it’s missing, doesn’t care, waffles darkly about foreigners getting their hands on our money (as if the Singapore government were going to take over the regulatory role of ASIC) so what would be the point of going against the voices of protectionism?

    One of the central pillars of Paul Keating’s reforms was that Australia was located in the Asia region, and that economically this was a very good place to be. John Hewson, who was right about many things, was wrong about this in 1992, when he thought Asia was just paper tigers and the north Atlantic was still the main growth story for us.

    Thirty years later, Asia is still the place to be. And Australians are still scared of foreign investment, and jobs being swapped across the sea. Not caring that the whole might be greater than the sum of the parts.

  8. devil.of.firewalls@gmail.com

    It’s very true that darlin’ Joe will be happy about this – but it’s the right decision. Both parties (Hockey and Swan) are both taking the correct approach. Hockey says nothing, while Swan denies everything. Sort of unfortunate that it appears our two political paradigms can’t work together over a huge national interest thing like this – rather than a “If they make the wrong decision, we’re all screwed” from the opposition. It’s not helpful nor conducive to a democracy. The average voter cannot make an informed decision about their political beliefs if it’s just a “not me” approach.

  9. jeebus

    Bernard, the “free market” does not look out for Australia’s interest so why should we worship at its altar?

    At the height of the financial crisis, our markets came under savage attack by foreign speculators using naked short selling to try and collapse our banks. They succeeded in many other countries who did not raise the barriers against that activity in time.

    We’re two years on from the greatest financial war the world has seen, and there is a mounting trail of mangled economies strewn about the world. And yet the spaghetti of the global financial system could not be unwound sufficiently to find and prosecute the wreckers, so the cost of cleaning up the mess has been dumped onto the struggling tax payers in those countries.

    The only exception is Iceland, a nation of 300,000, whose bankers had so deeply infiltrated and corrupted their government that there could be no obfusticating the exact people responsible.

    Now to add insult to injury, wrecked countries are being brow beaten by the same bankers into selling off strategic assets in order to repair their credit ratings, with Greece offloading their biggest port to the Chinese. Our own state governments are constantly harassed to offload the few remaining public assets in order to appease the same market forces.

    The “free market” is a utopian fantasy, as destructive an ideology as communism.

    The reality is a global financial system frequently rigged by market makers who can hide their activity in the shadows, away from taxation, oversight and regulation. This is where you should be spitting your bile, Bernard.

    The FIRB is but a small barbed wire enclosure in a global jungle. I think it’s commendable that both parties have at least committed to this measure in our nation’s interest.

  10. Hogarth

    @JEEBUS writes
    “The only exception is Iceland, a nation of 300,000, whose bankers had so deeply infiltrated and corrupted their government that there could be no obfusticating the exact people responsible.”

    Iceland was the only country to actual follow through on capitalism properly. They let the idiots eat their own losses. All the other zombie states like Ireland and the USA, let the tax payer eat the losses.

    @JEEBUS writes
    “Now to add insult to injury, wrecked countries are being brow beaten by the same bankers into selling off strategic assets in order to repair their credit ratings”

    It seems you are trying to excuse the government by blaming the bankers.
    It’s piss week governments that toe the line of bankers and screw the very people they are charged with defending.
    If the government followed its motive of “for the people”, they would default on all bad debts.
    Just like Iceland did.

    As Homer Simpson says: “The two sweetest words in the English language: de- fault!”

    @JEEBUS writes
    “The “free market” is a utopian fantasy, as destructive an ideology as communism.”

    I’d partially agree with that. A market is only free when all parties in the market place have identical information. And once that happens it stops being “free” and becomes “fair”.

    After the Sydney Futures Exchange was instrumental in the loss of at least 1000 jobs when they closed down open outcry trading, I have no problem with a foreign owned trading floor.

  11. ronin8317

    In response to Hogarth’s comment about Iceland letting the ‘idiots eat their own losses’ : it’s not true. The Iceland taxpayers remains on the hook for all the losses incurred by the Iceland commercial banks. The referendum held last year was the Iceland’s taxpayer calling for their government to default. If it really is ‘free market’ capitalism, Iceland taxpayers should not be on the hook in the first place.

    I find it weird that people who advocate ‘free market’ is rooting for ASX to be owned by the Singaporean government. How is this ‘free market’? Government ownership is bad, but foreign government ownership is good? The hypocrisy beggars believe.

  12. Hogarth

    RONIN writes..

    “The Iceland taxpayers remains on the hook for all the losses incurred by the Iceland commercial banks. ”

    It is my understanding, that the foreign debt was consolidated into a few banks and then those banks went broke, leaving the remaining banks intact.

  13. freecountry

    There seem to be more details emerging that the rejection is based on the details of the deal, rather than the sort of protectionist waffle Barnaby Joyce has been saying about loss of jobs and so on. If so, then ASX could have another try in a few years.

    I wonder if language would prevent ASX ever merging with the Tokyo Stock Exchange (which operates in four languages)? Japan remains Australia’s second biggest trading partner despite the lack of media attention to it, and politically it’s a stable liberal democracy which does not pose the (real or perceived) sovereignty issues some people see elsewhere in the region.

  14. Gavin Moodie

    In this case the market should be allowed to work freely within the law: that is, regardless of whether the owner is Australian or another nationality and regardless of whether a buyer is a government, a publicly listed company, a private company, an individual or any other entity.

  15. ronin8317

    The Iceland commercial banks were nationalized and then ‘reborn’, however all the deposit liabilities stayed with the Iceland government. The total liability of the banks is about 3.9 billion Euro, so every Iceland citizen get slogged for 17,000 Euro.

  16. jeebus

    @Hogarth, the problem is not simply bankers or government. It stems from the self interest that underpins the philosophy of free market capitalism.

    Iceland’s banks were privatised in the early 90s and sold to businessmen who were friends of the governing party.

    The biggest shareholders of those newly private banks began lending each other vast sums of money in a complex network of mutually beneficial business relationships.

    They used that ponzi scheme as collateral to grow and expand into foreign markets. They lured foreign customers with super high interest rates on savings accounts.

    The severe over leveraging inevitably caused them to go bust during the GFC.

    The British and Netherlands governments reimbursed those irate voters customers and demanded Iceland’s taxpayers repay the money.

    They even offered Iceland’s government a loan of $5 billion (with heavy interest) to start them off.

    Though Iceland’s bankers made away with billions, the government bent their own people over the barrel by passing legislation forcing them to pay back the debt.

    This was when sh*t got real. The outraged Icelanders took to the streets and began rioting. They picketed the residence of the President and petitioned him not to sign the legislation into law.

    The president (like our GG, somewhat independent from the governing party) pledged only to sign the legislation if there was a national referendum on the issue.

    There referendum was held and the people voted hell no. The government collapsed, and now criminal investigations into the politicians and bankers involved are underway.

    The lesson we learn is that it required a great democratic upheaval to forcefully divorce the banks from the government.

    While Australia’s government applies a decent level of oversight to our banks, the problem we face is with the manager of the global banking system – the USA. American Banks have infiltrated their government up to the highest levels, declawing regulators and dismantling regulation.

    Under Bush, they successfully lobbied to repeal the Glass-Steagal act that had prevented savings banks from behaving like hedge funds. From that point on, Wall Street used the savings of every day people to make big risky investments and plump up the yearly bonuses.

    When one year’s worth of bonuses could set a guy up for life, what did the long term stability of the banking system matter?

    When it all inevitably collapsed, they didn’t back off. They upped the ante, threatening the end of the world as we knew it unless a trillion dollars was handed over. And they got their money, in a bailout program orchestrated by Henry Paulson, former CEO of Goldman Sachs.

    All this leads to the conclusion that the end result of free market capitalism is one in which the self-interested power of private capital will ultimately eclipse and co-opt the system of government, leading to a fascist state.

    Interestingly, this path is not only exclusive to democratic systems with market-based economies. China adopted a market-based economy that is now beginning to challenge, and may eventually co-op its authoritarian system of government.

    The Washington Consensus is broken, because a market and a democracy are mutually exclusive concepts. We need a new consensus that is built around the values of the modern west – free, fair, transparent, representative democracy above all else.

    The economic destiny of each country will then be in the hands of the people, where it belongs.

  17. jeebus

    * Correction, it was actually under Clinton that the Glass-Steagall act was repealed.

  18. freecountry

    As I recall, and I’m happy to be corrected if I’m wrong, all the western governments had come to the conclusion after Lehman Brothers that banks must take responsibility for their own debts and deposits.

    Then Ireland announced it was guaranteeing all deposits. The UK was furious, the EU were shocked, but a whole lot of money immediately started flowing out of the UK banks and into Ireland, so the UK had to quickly guarantee their deposits just to counterbalance the Irish guarantee. That threatened to drain much of Europe so in a matter of days the world’s banks were being guaranteed by taxpayers left right and centre.

    It was a prisoners’ dilemma. If every government had stuck to not guaranteeing banks, the whole financial world would have learned an expensive lesson in risk, caution, responsibility, and the difference between phantom wealth and real production, and would be a much more stable place now.

  19. Gavin Moodie


    I think that is right as far as it goes, but we should add that the UK and US governments invested huge amounts of money into some of their banks to stop them failing even with a government guarantee but did not nationalise those banks. This removed any discipline from banks – a classic moral hazard – and consequently they continue to act excessively.


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