15/04/2009 - 22:00

Foreign investment a grey area

15/04/2009 - 22:00


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Some hard questions still need to be answered on Chinese investment in Australia.

Foreign investment a grey area

IN the past month, the federal government has made two major decisions regarding Chinese investment in Australian companies.

It has yet to make its critical decision on the biggest proposal yet - Chinalco's planned $US19.5 billion (A$28 billion) investment in Rio Tinto.

Nor has the government, or the Australian community, evaluated just what we expect of companies that we like to call Australian.

The underlying premise of foreign investment policy is that Australian control of Australian companies is inherently a good thing, or at least better than foreign control.

But does that premise stand close scrutiny in an increasingly globalised world?

Rio Tinto is headquartered in London, BHP Billiton is headquartered in Melbourne and Wesfarmers is headquartered in Perth, but does that affect their business decisions in WA?

All of these companies are driven fundamentally by a desire to maximise shareholder returns.

And, importantly, their shareholders are institutions and individuals spread across the globe.

The companies invest in industries and geographic regions that suit their corporate goals. Activities they undertake as 'good corporate citizens' are tied to the regions in which they operate, not the places they happen to be headquartered.

This discussion forms an important yet little discussed backdrop to the debate over foreign investment in general, and Chinese investment in particular.

Treasurer Wayne Swan's recent announcement approving Hunan Valin Iron and Steel Group's application for a 17.55 per cent shareholding in Fortescue Metals Group included some guidance on his priorities.

The approval included several undertakings by Hunan's board representative.

"They ensure the appropriate separation of Fortescue's commercial operations and customer interests, and support the market-based development of Australia's resources," Mr Swan said in a statement.

That came a few days after his surprise rejection of China's Minmetals proposal to acquire 100 per cent of OZ Minerals.

The biggest surprise was not the decision but the reason; the fact the OZ Minerals' Prominent Hill mine is within the Woomera weapons testing range.

I have yet to find anybody in the business world who attaches any credibility to this argument.

As many people have pointed out since the decision was announced, a major highway also runs through the so-called prohibited area, which apparently "makes a unique and sensitive contribution to Australia's national defence".

OZ Minerals has since negotiated an alternative $1.75 billion deal that would involve the Australian company retaining ownership of Prominent Hill and a handful of other assets, while Minmetals would buy the rest of its assets.

That would allow OZ to rebuild its balance sheet and continue as a going concern.

It would join other Australian mining companies such as Perilya and Mt Gibson, which have also benefited from major Chinese investments to help them reduce debt and ensure a long-term future for their operations.

FMG is set to join this group once it completes the formalities for the Hunan Valin deal.

And let's not forget Gindalbie Resources, which is set to proceed with its Karara iron ore project in the Mid West only because it has backing from China's Ansteel.

Which leads on to Rio Tinto's defence of the proposed Chinalco deal, under which the Chinese group would buy a minority stake in some of Rio's main assets, including its Hamersley Iron operations in the Pilbara.

Rio's Perth-based iron ore chief executive Sam Walsh has likened Chinese investment to Japan's influence in the 1980s, which was criticised at the time.

Mr Walsh correctly points out that Japanese money was critical to the development of the iron ore industry in the Pilbara.

"Without that support, without that underwriting, it is impossible to imagine that Australia would have an iron ore industry, and our greatest export business would simply not have occurred," Mr Walsh said.

Rio's deal with Chinalco is about more than a monetary investment. Its details include joint ventures overseen by governance guidelines that are designed to address the federal government's concerns.


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