FIRB is just one link in the foreign investment chain

The debate about how best to handle foreign investment by Chinese state-owned enterprises has revolved around the investment threshold, but there are other options to ensure proper oversight.

A high-level Australian delegation has left for Beijing for the 21st round (and hopefully the last round) of free trade negotiations with China. The Abbott government hopes to seal the final part of its trifecta of East Asian trade deals.

The government is reportedly ready to offer the $1 billion investment screening threshold for private investors it gave to Japan, Korea, New Zealand and the US. This means private Chinese enterprises are exempted from submitting their proposals below $1bn to the Foreign Investment Review Board.

It is still unclear what Canberra is prepared to offer the Chinese in terms of an investment threshold for state-owned enterprises, which is by far one of the most contentious issues in the protracted negotiations that started more than a decade ago under the prime ministership of John Howard.

The current policy dictates that foreign state-owned enterprises and sovereign wealth funds need to submit their investment proposals to FIRB for vetting regardless of the values of their proposals. If China Investment Corporation wants to buy a corner store in Sydney, it has to run the gauntlet of the screening process.

The fear is if Canberra lifts the investment threshold for state-owned enterprises, many of them could invest in Australia without the necessary oversight, which could present a threat to the country’s national interest.

Is this fear justified? 

We have to understand that the Foreign Investment Review Board is part of a broader regulatory network that oversees foreign company investments. It is arguably one of the weaker bodies among regulators such as the Australian Taxation Office, the Australian Competition and Consumer Commission or even the much-criticised Australian Securities and Investment Commission.   

Under Australia’s overarching national interest policy, which considers issues such as competition, national security, taxation, corporate governance structure and the impact on the economy and the community, other regulators are heavily involved in the decision-making process.

For example, the ACCC will consider whether a particular investment deal would be against Australian competition law. The Australian Taxation Office will also examine the tax structure of deals to make sure that foreign companies pay an appropriate amount of tax to the government’s coffers.  

Let’s assume Canberra offers Beijing the $248 million investment threshold that applies to foreign private enterprises. That means investments below the threshold could go ahead without FIRB approval, but it does not mean these investors are exempted from other regulatory hurdles.

The competition watchdog, taxation office and other regulators can still scrutinise foreign investors regardless of the foreign investment screening process.  The taxation office regularly takes foreign companies to court over transfer pricing issues as well as other tax avoidance problems. It seems that multinationals like Google, Apple and Amazon present far bigger challenges than state-owned investors in natural resources.

The debate around the threshold is based on a flawed understanding of how the system works. A better approach to strengthen Australia’s overall regulatory system would be to provide the tax office, securities regulator and competition watchdog with more resources to exercise proper oversight over foreign investors.

Australian would do China a favour by subjecting Chinese companies, whether state-owned or private, to the rigour of the Australian regulatory system as well as market discipline. The securities regulator, Australian stock exchanges as well as local business press can also impose an additional layer of scrutiny on foreign companies.

For example, state-owned enterprises should be asked to adopt ASX’s world-class corporate governance principles and appoint Australian independent directors to sit on their local boards to ensure companies operate as commercial enterprises rather than state agents.  

FIRB’s enforcement power should be enhanced to allow it go after foreign companies that breach the Foreign Acquisitions and Takeovers Act. At the moment, the board rarely gets involved in litigation due to lack of resources and enforcement expertise. If the government were to lift the investment threshold for Chinese state-owned enterprises, it could consider a US-style retrospective power for FIRB to unwind transactions if they were found to act against Australia’s national interest.

The investment threshold is not a terribly difficult barrier to cross but it has political and psychological significance for the Australian population. In reality, it is much more important to rely on Australia’s broader corporate regulatory system to deal with foreign investors and subject them to market discipline.

Canberra can afford to lift the investment threshold without compromising the overall integrity of the foreign investment regulatory system. The government and the population should have more faith in the robustness of the Australian regulatory system. If that is not the case, we will have a bigger problem in hands than the investment threshold.