Foreign investment and food security

The question of whether or not the purchase of Australian farmland by foreign governments or foreign government agencies or enterprises, or indeed by any foreigners at all, will have an impact on Australian food security continues to bubble along in the nation’s political discourse.  Associated with these concerns are claims that the purchase of Australian assets by foreign government owned agencies or companies involves a loss of Australian sovereignty.

The two hot items currently giving momentum to this debate are the purchase of farmland in Western Victoria by a Qatar Government-backed entity, and the purchase of 43 farms outside Gunnedah by the Chinese Government-controlled Shenhua Watermark Coal Corporation, whose interest in these farms is clearly the coal that lies under them.

One of the latest contributions to the debate is an opinion piece by CIS Research Fellow and Senior Lecturer in Economics at UTS Business School Stephen Kirchner, in The Weekend Financial Review, 2-3 July 2011.

Kirchner sees no problem in foreign investment in our farm sector – he says it will enhance our food security – and he sees only base motives in those who wish to “meddle” in commercial transactions and thereby prevent Australian farmers from getting the highest sale price they can for their farms:

What unites politicians on this issue is not so much xenophobia but their conviction they have the right to meddle in commercial transactions they don’t like.

….

Xenophon’s proposed national interest test is more prescriptive than the existing national interest test under the Foreign Acquisitions and Takeovers Act, which is deliberately open-ended.

Ironically, this would open the door to administrative and judicial review of the Treasurer’s unbounded discretion to reject foreign acquisitions that fall within the terms of the act.

This may not bother Xenophon, but it certainly bothers other politicians and Treasury, who want to preserve their ability to meddle without scrutiny by the courts.

…

The FIRB is just a fig-leaf of bureaucratic respectability for political decisions to interfere in commercial transactions and deny the resident owners of Australian equity the right to realise its full value by selling to the highest bidder.

There is some silly ideological stuff here: Kirchner appears to believe that nothing should be permitted to get in the way of a “commercial transaction” – being “commercial” puts it off limits, apparently – and his imputation of base motives to anyone who believes otherwise almost obscures the key policy point he makes in his article:

In the unlikely event of a serious international conflict or crisis, foreign-owned assets in Australia can be nationalised or exports of food restricted.

There are some important issues to be considered in relation to large scale foreign investment in Australia, but as Kirchner’s comment immediately above indicates, they have little do with either food security or sovereignty.

To deal with the latter point first, investment in Australia by sovereign entities or sovereign-owned or –controlled entities involves no compromise to Australian sovereignty. This is because, while the entity might exercise the powers of the sovereign in its own country, it can only be present in Australia as an Australian natural or corporate person, its actions within the Australian jurisdiction entirely subject to Australian law.  Foreign entities farming in Australia, for example, are subject to the same rules about land clearing, control of noxious weeds, plant and animal health, use of agricultural chemicals etc. as everyone else, and to tax laws including those relating to transfer pricing.

Similarly, any entity, sovereign or not, wishing to convert farmland for purposes of mining will be subject to the approval of the responsible State and Commonwealth authorities. There is a debate to be had about whether or not 43 farms outside Gunnedah should be made over for coal mining, but that debate has nothing to do with the fact of the 43 farms now being owned by a Chinese Government-owned company.

Unlike Mr Kirchner I do not believe that nothing should be permitted to get in the way of a commercial transaction and I think that from time to time particular transactions raise important matters of national interest for consideration by the Government of the day.

Nor do I share his view that Treasury officials are motivated in this matter by a desire to meddle. In the days when I was directly involved in advising on foreign investment in mining (1970s-80s, as a senior officer of the Department of Trade and Resources) I was far more often concerned by the desire of Treasury officials not to meddle in transactions that I saw as raising serious national interest questions.  This was particularly the case when John Howard was Treasurer; to my recollection John Howard never saw a foreign investment proposal he didn’t like, and most of the relevant Treasury officials were of a similar view.

As I wrote back in March 2009 about the proposal for Chinalco to increase its stake in Rio Tinto (see State-owned is not the main problem):

The principal reason [why the application should be declined] is not, as often asserted in the media, the fact that Chinalco is a state owned enterprise (SOE), and might not therefore behave in accordance with normal commercial considerations. The most important reason is that Chinalco is a major player in its own right in the international minerals market, which is why it wishes to increase its stake in Rio Tinto, and likely to become more so. Either now or in the future, its commercial interests as a buyer and investor elsewhere might well diverge from the Australian national interest as a seller. We should examine carefully for its potential impact on the national interest every proposal for a major foreign purchaser of minerals to take a stake in the Australian minerals industry.

Issues raised by proposed investments which establish foreigners in a position on both sides of the commercial negotiating table are:

-  Transfer pricing issues

-  Access through taking a minority stake to commercially sensitive price information – very important in relation to monopsony buying practices of the Japanese steel industry before market conditions put market power in the hands of the producers rather than the consumers.

-  Issues to do with foreign government coordination of purchasing by enterprises within their jurisdiction, public or private.  Two examples will suffice:

(1)    In the late 1970s when the contracts were being negotiated, the sum of the amounts that the nine Japanese power utilities wished to take from the Northwest Shelf LNG project was vastly in excess of the amounts that the project would produce. Having secured from the NW Shelf consortium a rather unwise undertaking that they would not sell any of the gas to other than Japanese customers, the Ministry of International Trade and Industry then proceeded to allocate amounts determined by it to the individual power companies, so that suddenly Japanese demand was equal to Australian supply, and there was no price auction. I will leave it to the reader to judge what impact this may have had on the project’s revenue stream.

(2)    In 1986, when China ceased buying all its wool through a single government agency (Chinatex, represented at the Australian wool auctions by the formidable Mme Zhu Youlan) and four separate agencies began to compete with each other in the market, there was a major spike in the Australian wool price – a fact which Mme Zhu in conversation with me attributed to the inter-agency competition.  Clearly the reduced coordination in China was good for Australian woolgrowers.

-  The willingness of foreign executives to abide by Australian Government policy (very difficult in my experience with US companies which for entirely understandable reasons put US laws such as the Trading with the Enemy Act and the extraterritorial reach  of US antitrust law ahead of Australian law).

The above examples should be sufficient to indicate that large-scale foreign investment does indeed raise national interest questions which it is proper for governments to consider.  To those who find it troublesome that the national interest is nowhere defined in legislation, and believe that it ought to be, my response would be that determination of the national interest is properly a matter for the elected government of the day, in the circumstances at the time, and the capacity of a present or future government to determine the national interest should not be constrained by an attempt to define it in advance in legislation at a particular moment in time.  There was a time when State Governments felt that it was in the public interest to legislate that no Asian person can own an interest in a mining lease or a boat, and sooner or later such legislation can become, well, downright embarrassing. As a 1963 article in Time magazine noted (see here):

Whim Creek. The White Australia policy is often carried to absurd, esoteric extremes. Recently, five Japanese technicians employed by a Japanese-controlled mining concern—at, of all places, Whim Creek in Western Australia—were convicted of violating an obscure 1904 law specifying that "no Asiatic or African alien shall be employed in any capacity whatever in or about any mine claim." As a result, Western Australia's state legislature last week repealed the law, but virtually negated its action by adopting an amendment specifying that Asians must still get government permits to work in the mines.

As for those governments who believe that they are increasing their resource or food security by investing in production in Australia, my advice would be that the investment achieves very little by way of security over and above that which can be obtained simply by signing a commercial contract with an Australian-based supplier.

On the one hand, contracts are enforceable at law, and there is every reason for the buyer to expect them to be performed if at all feasible. On the other hand, the Australian Government has clear power under the Constitution to prevent or control exports, and nothing written into a commercial contract will prevent an Australian Government from exercising that power if it saw it as being in the national interest to do so.  In the unlikely event that Australia ever faced food shortages, it is hard to imagine an Australian standing idly by and permitting food supplies needed in the home market to be exported.

There can be all sorts of valid reasons for foreign governments and their controlled entities to invest in Australia, but security of supply is not really one of them.

There can be all sorts of reasons for Australian Governments to decline to approve proposed investments by foreign government entities, but loss of sovereignty is not one of them.

China: why Channar was different

Some of the commentary in favour of approving proposed Chinese investments in Australian iron ore producers has hearkened back to the Hawke-era Chinese investment in the development of CRA’s iron ore deposit at Mount Channar in the Pilbara.

This was project was a great step forward in the Australia-China relationship, but the reasons for that need to be seen in the light of the circumstances of the day and they have only limited bearing on the current proposals.

The question of direct Chinese investment in an Australian iron ore mine first arose during the March 1983 visit to Australian by then Premier Zhao Ziyang. A Chinese evaluation team from the Ministry of Metallurgical Industry (MMI) was in Australia at the same time, seeking an investment opportunity in an Australian iron ore project. It visited all of the proposed new projects, spoke to the companies involved, and in due course settled on CRA’s Mount Channar project as the preferred target.

Zhao Ziyang’s visit was followed in 1984 by a visit by the Minister of Metallurgical Industry, Li Tongye, who visited the sites and the companies.

The strategic significance of these developments is that they came very early in the process of what the Chinese Government called “opening to the outside world”, a process that began in 1979 with important agricultural reforms sponsored by Zhao Ziyang and then General Secretary Hu Yoabang, who himself visited Australia in April 1985 and stood with Bob Hawke atop the Channar deposit.

Those of us who were involved in the Government to Government discussions of the project (which were very intense and drawn out) realised that this first major offshore direct investment represented a fundamental departure from the traditional “economic autarchy” thinking of centrally planned economies, under which the country should be self-sufficient in all important products. Under this model, importation of foodstuffs and steel-making raw materials was seen by the more doctrinaire as a stop-gap measure pending the country reaching the level of economic maturity that would make it self-sufficient in all important respects. This model was underpinned by national security doctrine as well as economic doctrine.

Thus while China was already a regular and important purchaser of Australian iron ore, there was no assurance of how long that would continue. As a result of self-sufficiency thinking, internally China undertook energy intensive magnetic separation processes that beneficiated “ore” containing 27% iron up to 52% - less than the 54% cut-off grade below which Pilbara producers did not even stockpile ore for potential future use, as they did with ore in the range 54-63% iron.

The proposal to invest in offshore facilities was a first step away from the economic autarchy doctrine, one which was marketable to the traditionalists within the Chinese central bureaucracy because it involved a level of State ownership of the resource, even if the resource itself were offshore. A couple of times during the two-year process that brought the investment into being I observed to the MMI officials that security of supply could be assured simply by signing a long-term contract with an Australian mining company, but this was not the real issue - the strategic issue was “opening to the outside world”, integrating China into the world economy, truly revolutionary thinking at the time, and this investment was a key part of it. A lot was at stake; China has never been very forgiving of those who made “mistakes”, which is why there was a lot of discussion at Government to Government level, a lot of high level visits in both directions, a lot of confidence building over a couple of years before the end result was achieved.

These considerations are absent from the current proposals – China has many resource investments in many countries, it is fully a part of the global economy, and the current round of investment proposals does not represent the breaking of new doctrinal or policy ground.

It should be noted also in relation to Mount Channar that China was seeking only to establish a joint venture in a mine, not to purchase equity in a major mining company as the Chinalco-Rio Tinto proposal does.

None of this is means automatically that the current proposals ought not to be approved (the Fortescue Metals one already has been) – simply that there were different issues at stake in the early 1980s.

In State-owned is not the main problem I have argued that the Treasurer should decline to approve the Chinalco investment, on grounds centred on the undesirability of having major customers sitting on both the buyer and the seller side of the table, and in Time to calm down about China I have argued that the Treasurer was right to have national security concerns about granting a Chinese enterprise access to the Woomera Prohibited Area. In the latter piece I also acknowledged that respectable arguments could be constructed against both of these viewpoints, and that it should not be beyond the wit of man to find a mutually acceptable solution to the problem of the Prominent Hill mine within the prohibited area (as seems to have happened).

Whatever the outcome on Chinalco, Channar is not much of a precedent and I doubt that it will play much of a role in the Treasurer’s thinking.

Editorial: Time to calm down about China

There is so much immature commentary about China – its intelligence activities and its proposed mineral investments – in the air at the moment that it is time for everyone to take a cold shower and think about what they are saying.

To take the intelligence issue first, let us all acknowledge that China, like all major powers and all authoritarian regimes, has an avid thirst for intelligence, and is highly skilled in obtaining it. It is skilled at mounting technical attacks, and very skilled and diligent at obtaining “humint” (human intelligence), i.e., intelligence which comes from individuals finding out things that they ought not to be able to find out and reporting back to home base. In any society with a sophisticated approach to intelligence analysis the picture obtainable from covert sources is filled out by the insights gained from open sources – publications, conversations, and the knowledge which the nation’s nationals have of countries of interest.

Second, we may assume that Australia is a serious intelligence target. Not only are we an important country in our own right, and a very capable military power with very high level technology, we have very close military technology and intelligence links with the United States, the United Kingdom and a range of other countries. Any country that is serious about its intelligence gathering will be constantly probing and testing to see whether we present an easier way in to someone else’s secrets.

We routinely employ two lines of defence against intelligence attack. The first and most important is ensuring that access to classified information is granted only to people who are assessed by quite rigorous processes (and in the case of very sensitive information, extremely rigorous and intrusive processes) to be reliable, not only in the sense of their primary loyalty being oriented to Australia, but also in the light of assessments of their financial circumstances, personal behaviour, discretion and any other factor which might make them liable to coercion (blackmail) or otherwise make them an unreliable custodian of the nation’s secrets.

The bottom line of this process is to ensure that there is no-one with access to classified information who is likely, deliberately or inadvertently, to disclose to any unauthorised person information which it is their duty not to disclose. This is reinforced by the “need to know” principle – not disclosing information to any person who does not have a need to know it in order to carry out their duties, no matter how high their security clearances might be.

The second line of defence is the whole category of defences that we might call technical defences – physical security of bases and other facilities, firewalls on defence IT systems, encryption of signals, encryption of data on laptops etc.

It needs to be understood also that Ministers, senior military officers and senior defence civilians constantly find themselves in formal and informal contact with representatives of foreign governments (friendly, hostile or somewhere in between) who would love to know all sorts of things that we could tell them. To take just one example, during my time as Secretary to the Department of Defence the Head of the Chinese People’s Liberation Army came to Canberra and met the then Defence Minister, Ian MacLachlan. A day or so later Mr McLachlan entertained the Chinese delegation to an evening buffet on a boat on Sydney Harbour – a very pleasant occasion in an informal setting. These types of contacts are not a security risk – we are not going to disclose any sensitive information, and the guests know better than to ask.

Against this background people like Sydney businesswoman Helen Liu fade into insignificance as an intelligence risk. Apart from the fact that ASIO says it has no information to suggest that she is a threat, our first line of defence is that we may safely rely on any Australian Defence Minister not to disclose to any unauthorised person information which it is his duty not to disclose.

Regarding the proposed Chinese investments in the Australian minerals industry, for reasons set out in State-owned is not the problem I think there are good grounds for the Foreign Investment Review Board to turn down the proposed Chinalco investment in Rio Tinto.

I believe also that the Treasurer was right to demur at a proposal that would grant a Chinese corporation access to the Woomera Prohibited Area; that is the plain-English meaning of prohibited area.

These positions have nothing to do with xenophobia or a Yellow Peril mentality. They are sober assessments of where the national interest lies, and while it is possible to construct equally sober analyses that would disagree with them, it is unworthy for people to be dismissing as xenophobic or racist the arguments of those who express concern in these terms. Also, I believe that the Prominent Hill-Woomera issue is one to which it is not beyond the wit of man to find a mutually acceptable solution.

So everyone needs to calm down. It is not ridiculous to be alert to Chinese (or other foreign) intelligence activities, but people like Ms Helen Liu represent a very minor threat. It is not xenophobic to raise issues about proposed Chinese investments, and the Australian Government has both a right and a duty to consider each on its merits and determine where our national interest lies.