Tony's got it wrong on foreign investment

FIRB is under-resourced and ill-equipped to deal with foreign investment in real estate.

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When times get tough, one easy political fix is to turn to nationalism. Our embattled Prime Minister Tony Abbott appealed to nationalism, or rather xenophobia, at his make-or-break National Press Club address yesterday.  When he talked about his plan for the future, he started with Islamic fundamentalism and foreign investment.

Yes, you heard me right, radical Islamic fundamentalism and foreign investment. After he talked about bringing tough legislation against home-grown jihadists, he moved on to talking about foreign investment after barely a moment of pause.

“I am a friend of foreign investment but it has to come on our terms and for our benefit,” he said, “the government will shortly put in place better scrutiny and reporting of foreign purchases of agricultural land and better enforcement of the rules against foreign purchases of existing homes so that young people are not priced out of the market.”

Let’s start with the alleged failure of the Foreign Investment Review Board to enforce rules against foreigner buying existing homes. Firstly, the rule was only introduced in 2010 under the Rudd Government. The policy was brought in as a knee jerk reaction to media reports and based on little evidence.

At the time of the policy U-turn, the Board was chronically under-staffed and under-resourced to deal with a far bigger and significant issue -- the massive Chinese investment into Australia’s mining sector. Back then, the Board was getting something like one big investment proposal a week from Chinese investors, according to the then executive director Patrick Colmer.

How under-resourced was it? Let facts speak for themselves. The budget for the board and its secretariat, essentially a division of the Treasury Department for year 2012-13, was a bit over $4 million and it employed 34 staff. But they had to handle 13,222 applications for foreign investment that included many complex and big deals that involved billions of dollars.

Nearly a third of the division’s staff had to work on free trade agreement-related investment policy issues, which left the real estate unit with fewer than a handful of people to deal with more than 10,000 applications a year. That works out to be about one person for every 1,000 cases.

If you ever wonder why there is not much enforcement or prosecutions going on, that is reason number one. Another important reason, which no one seems to pay much attention to, is the fact that people at the Treasury are ill-suited to carry out the type of enforcement and detective work that the government wants them to do.

The Treasury Department is a policy agency and nearly all of its analysts are trained economists and lawyers whose jobs are mostly concerned with policy-making -- not detective work. That should be the job of a regulator like the Australian Securities and Investment Commission, the ATO or the Australian Prudential Regulatory Authority.

At present, the Board is nothing more than an advisory body comprised of part-time members whose work is supported by a policy division of the Treasury Department. The government is fighting a “grave threat” with ill-trained and under-equipped troops.

So, if the government wants the board to do its job properly, it must give it adequate resources, namely forensic accountants and experienced enforcement lawyers, not policy wonks. Even then, it is up to the Director of Public Prosecutions to weigh the merits of bringing cases against foreign investors for buying old houses.

The government should stop blaming the board and give it a bigger budget and the right people to do the job. Kelly O’Dwyer’s ideas for higher stamp duty and application fees are good starting points.

Apart from the alleged failure of the Board, another big issue is the politics of foreign investment. Despite all the hype about foreigners pricing young people out of the housing market, we simply don’t have enough evidence to support or debunk the allegation one way or another.

Good policy making starts with good data collection, and at present, only Queensland requires foreign purchasers to disclose their nationalities. Until all states and territorial governments amend their laws and regulations, we simply don’t know how big the problem is. It is simply irresponsible to make policy on the run.

Housing affordability is a huge problem in this country, especially for young people.  There are a host of factors behind it, negative gearing, restrictive planning laws, and poor infrastructure to outer suburbs -- not to mention youth unemployment. It is easy to make foreign investors the scapegoat for the housing problem.

Despite the Coalition’s rhetoric that this country is open for business, the government has adopted an ambivalent attitude towards foreign investment. Joe Hockey’s first major act as the Treasurer was to reject ADM’ s takeover bid for Grain Corp. Now, the Prime Minister is talking about foreign investment in the same breath as Islamic fundamentalism. That is a concern.

It is time to remind us again the wise counsel of Colin Powell, a much-respected former US Secretary of State. “Capital is fickle; it will go nowhere where it is put in fear. Money will fly and go away from corruption and bad policies. It does not want to be around conflicts. It does not want to be around political unpredictability or instability. It goes where it is welcome and where investors can be confident of a return on the resources they have put at risk.” 

Peter Cai is the Editor of China Spectator and a former Treasury Officer. Follow him on Twitter: @peteryuancai