The folly of fearing SOEs

Lowy Interpreter

Mike Callaghan is spot-on in arguing that Australia's foreign investment policy needs a wider reassessment than simply looking at limits on state-owned enterprises (SOEs). Let's try to take this a bit further.

This fixation with SOEs is a peculiarly American priority seen also in the Trans-Pacific Partnership conditionality and the debate on sovereign wealth funds, and reflects a touching faith in the magic of the free market. Private sector players, pursuing their own interests, are assumed to also pursue the national interest, while SOEs may not.

Of course the market is a powerful operational framework for a successful economy, but successful economies have often found an important place for government-owned enterprises as well. At the same time, there is ample evidence that private companies without appropriate regulation will not always pursue the national interest. This is not an issue to be determined on doctrinal grounds: we need to examine the behaviour of both private companies and SOEs.

Here's an example. As a major commodity producer with an 80 per cent foreign-owned mining sector, Australia's national interest is to ensure that our minerals exporters get the best price in global markets and that we squeeze as much out of the miners as is sensible in the form of royalties and taxes. Our concerns should be to prevent transfer pricing, tax shifting, monopolistic price-setting or collusion between the demand and supply sides of the market. With these issues satisfied, there is no good economic reason to discriminate between domestic and foreign companies, or between private companies and SOEs. Our concern should be that the market is working well. For this, the national authorities need to have enough information about the operational market structure to ensure that our national interests are met.

We've just seen an example which illustrates how far we are from where we should be. Last year Glencore (a commodity producer and trader with sales of $250 billion) took over Xstrata, our largest coal miner (and itself already foreign owned). The transaction was so large (the fifth-largest in the global history of gigantic resource take-overs) and important for world commodity trade that it needed to pass the scrutiny of competition authorities inSouth Africa and China. The Europeans required Glencore to unwind its relationship with a zinc company and the Chinese required divestiture of its Peruvian copper assets (giving China the opportunity to acquire these assets).

Australia didn't require anything.

It's hard to find any record that the Foreign Investment Review Board gave this matter substantive scrutiny, while the Australian Competition and Consumer Commission saw no problems within its remit. This is despite Glencore's reputation as an aggressive tax minimiser, its reputation for underhand dealings, its lack of transparency reflecting its Swiss domicile and its dominant position in segments of global commodity trade. Glencore itself says the transaction will allow it to 'capture value at every stage of the supply chain from sourcing raw materials deep underground to delivering products to an international customer base'. 

What to do? For a start, why not require foreign investors (whether Swiss-based Glencore or Chinese SOEs) to provide the same degree of detailed public transparency required of Australian-domicile companies? This would give Australian authorities a starting point in assessing whether we are getting the best deal out of foreign investment.

Of course there are bigger issues as well. Why do the BCA and the OECD start with a strong presumption that the flow of FDI should be maximised, when there are alternative sources of funding for the current account deficit (debt or portfolio flows) which might be cheaper or more suitable?

In any case, foreign investment policy goes beyond economics. There are, for instance, no good economic reasons for limiting investment in real estate or agriculture, but many countries (including Australia) do so. When it comes to political issues, the overwhelmingly important one for Australia is that we are small and many of the investing countries are big. If Chinese companies (private or SOE) chose to make Australia an important part of their commodity security priorities, they will want to own a large proportion of our resources and agriculture. Politically, we will find this uncomfortable, perhaps even unacceptable.

Originally published by The Lowy Institute publication The Interpreter. Republished with permission.