29/10/2009 - 00:00

Foreign investment clarity needed

29/10/2009 - 00:00

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The guidelines governing Chinese investment in Australian resources seem to be getting more opaque.

UNDERSTANDING the logic behind foreign investment rulings has always been a challenging exercise, never more so than now.

That is a problem because one of the biggest issues facing Australia over the past year has been the trend towards increased Chinese investment in resources projects. Or more precisely, there have been increased proposals to invest in Australian resources.

It is no coincidence that this trend has lifted community anxiety over the issue and, in direct proportion, made it harder to understand Canberra’s thinking, which has resulted in some foreign investment proposals being rejected outright, some being watered down, some gaining conditional approval and others flying through with no conditions.

The latest development was last week’s announcement by Assistant Treasurer Nick Sherry that China’s Yanzhou Coal Mining Co can take over coal producer Felix Resources for $3.5 billion.

That made it the single largest Chinese investment in Australia, eclipsing previous deals like Sinosteel’s takeover of Midwest Corporation.

The Felix approval came with a twist. The new owner must float at least 30 per cent of Felix on the ASX by the end of 2012.

In addition, Yanzhou’s economic interest in the underlying mining assets, held through joint ventures, must be reduced to less than 50 per cent.

This came just one day after BHP Billiton chairman Don Argus floated a similar idea in a wide-ranging address to the Melbourne Mining Club.

Mr Argus stated that “foreign direct investment has been a critical and valued enabler for Australia, and the natural resources sector in particular” but then proceeded to advocate restrictions.

“What we have got to understand and debate is: are we going to be comfortable with a foreign government owning our endowment assets?” he asked.

“We can’t get complacent from a competitive point of view because we have had a good run with China. China is now going out and branching out to try and lock in resources themselves.”

Mr Argus pointed to Canada’s reduced ownership of its assets as a pointer to what Australia should avoid.

He said state-owned enterprises and sovereign wealth funds should be able to buy undeveloped resources in Australia, but on the proviso they agree to float half of the subsequent project on the ASX 15 years after development.

Senator Sherry’s office has rejected the notion that the Felix deal sets a new benchmark, insisting deals are evaluated on a case-by-case basis.

Yet only a month ago, Foreign Investment Review Board executive chairman Patrick Colmer said the government would prefer state-owned entities to keep their stakes in undeveloped projects below 50 per cent and in major producers below 15 per cent.

That was the clearest guidance offered to the market, yet it appears to have been contradicted by the Felix ruling.

The federal government’s policy might have become clearer if it had to make a public ruling on Chinese group Chinalco’s planned investment in Rio Tinto.

If this deal had proceeded, it would have stopped BHP pursuing its plan to merge its Pilbara iron ore operations with Rio, and would also have made it more difficult for BHP to revive its Rio takeover aspirations at some future time.

The federal government was saved by Rio’s change of heart, when it decided to pursue alternative funding arrangements and link its Pilbara operations with BHP.

Treasurer Wayne Swan has previously stated that investments by foreign entities would be subject to several special criteria, such as: whether the bidder was at arm’s length from the government; whether it adhered to commonly held standards of business behaviour; whether it might lead to undue concentration or control; and whether it would affect Australia’s “strategic or security interests”.

These criteria give the Australian government plenty of excuses to reject foreign investment proposals but do not provide much clarity.

Business investment thrives when there is certainty and the onus is on the Australian government to provide that.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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