[LINK] Foreign Investment and the FTA

[Bernard Robertson-Dunn]

<brd>
Some of us might remember the discussions on Link some years ago about the
Multilateral Agreement on Investments. This piece has echos of that issue.
</brd>

Topic: Foreign Investment and the FTA 
John Edwards
Chief economist with HSBC and former economic advisor to the Keating
government
Monday 23 February  2004  
Presented by Sandy McCutcheon 
http://www.abc.net.au/rn/talks/perspective/stories/s1051432.htm

Program Transcript
The free trade agreement between Australia and the US will not have much
more than a marginal impact on Australian trade with the US. Australian and
US manufacturing tariffs are already very low and US concessions to
Australian agriculture are very limited. It is a useful agreement but both
its opponents and supporters have wildly exaggerated its significance. It
should, over time, be somewhat easier for Australian firms to compete in
the US services markets and new access to the US government procurement
market will be helpful, but nothing in the agreement on goods and services
will validate Prime Minister John Howard’s claim that it will set Australia
up for the next half century. There is, however, one area where the
agreement will make a difference, and that is in the liberalisation of
Australia’s foreign investment regime.

It is true that Australia has continued to reserve urban land, air
transport, telecommunications, defence and media from the new rules, and
that it will maintain existing foreign ownership restrictions for Telstra,
Qantas, CSL and airports. It is also true that even under the agreement the
Australian Treasurer retains the right to reject on national interest
grounds proposed takeovers of Australian firms by US firms, although the
threshold at which a bid needs to be notified to the Foreign Investment
Review Board (FIRB) has been increased from $50m to $800m. And finally it
is true that of 4747 foreign investment applications made to FIRB last
financial year, only 79 or 2 per cent were rejected. All that said, the
changes are much more sweeping than has been generally understood.

Once the agreement comes into force, there will be no requirement to notify
FIRB of any US investment in Australia which does not involve the takeover
of any existing company. Currently any such investment of over $10 million
needs to be notified, which means it is potentially subject to the
Treasurer’s power to determine if it is in the national interest. It does
not mean the usual environmental or other policies would not apply, but it
does mean the proposed US investment would be treated exactly like a
proposed Australian investment.

While the Treasurer retains the right to reject takeover proposals from US
interests for Australian companies, the increase in the notification
threshold from $50 million to $800 million makes a big difference. Most
major Australian companies have a market capitalisation considerably
greater than $800 million. But there are 1400 listed companies on the ASX,
and once the top 100 are excluded the average market of the remainder is
$70 million. This is above the existing threshold, but nowhere near the new
threshold. US companies will now be able to make offers for the great
majority of Australian listed companies without needing to notify the FIRB.

The FIRB does approve nearly every application made to it. But of those
approved last year, three-quarters were approved only with conditions. For
takeovers of industrial companies these conditions may include requirements
for a local board, a local CEO, or for commitments to R&D or manufacturing
facilities. Under the new rules there will be no conditions for bids under
$800m, and no notification will be required. And while a takeover above
that threshold requires approval, the acquisition of a blocking stake
against other predators may not.

When the new rules are operating they will be extremely discriminatory,
since they apply only to US firms. When an Australian target is defending
against a foreign predator it is quite common to make the case to FIRB that
the offer is against the national interest. Under the new rules the US firm
will not face this impediment. But if the Australian firm seeks a white
knight which happens to be British or New Zealand or German or Japanese,
the white knight will be compelled to go through the FIRB processes. It
seems to me this is not a sustainable position. It is all the more delicate
because Australia already has understandings with New Zealand and with
Japan that those countries will enjoy the most favourable investment rules
into Australia which apply to any other country. It is highly likely
therefore that within a few years the newly liberal rules will apply to all
intending investors, and the role of FIRB will be whittled down to very
large transactions, and those sectors which continue to be reserved.

-- 
There is nothing more likely to start disagreement among people or
countries than an agreement
-- E. B. White

Regards
brd

Bernard Robertson-Dunn
Canberra Australia
brd at austarmetro.com.au