State-owned is not the main problem

The Treasurer should decline to approve the application by Chinalco to raise its stake in Rio Tinto from 9% to 18% through a $US19 billion purchase of Rio Tinto shares. For the application to be approved would be contrary to the national interest.

The principal reason for this 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.

Viewed in today’s economic and financial context the Foreign Investment Guidelines are rather quaint in the distinction they seem to perceive between SOEs, sovereign wealth funds (SWF) and private companies. The reason for particular scrutiny of proposed investments by foreign governments or their agencies is stated in the Guidelines to be “the fact that investors with links to foreign governments may not operate solely in accordance with normal commercial considerations and may instead pursue broader political or strategic objectives that could be contrary to Australia’s national interest”.

The least problematic foreign investment of all would probably be portfolio investment by sovereign wealth funds like the Kuwait Investment Fund or its Norwegian counterpart – investors who do not seek to influence the management of the companies in which they invest, but who are simply interested in the dividends which will flow from their stake. To be fair, investments of that type, while required to be submitted for scrutiny, would quickly be approved.

Regarding the SOE issue, it is remarkable that, at a time when we are attempting to manage our way through a global financial crisis brought on by the “commercial” behaviour of private financial institutions in the United States and Europe, which behaviour has brought the world financial system to the brink of collapse, we are solemnly deliberating about the possibility of Chinalco behaving “not solely in accordance with normal commercial considerations”.

A distinct possibility, but state owned enterprises are not alone in this. And while some mineral commodities are sold on a very competitive basis – those like aluminium, zinc, copper and nickel which are sold through the “open cry” system on the London Metal Exchange, there are others, notably iron ore and coal, for which the trading processes do not begin to approach the perfect competition model of Economics 101.

Further, a company does not have to be state-owned to be respondent to the dictates of a government other than the Australian Government. All foreign-owned companies will be influenced to a greater or lesser degree by legislation and/or policy direction in their country of domicile.

As examples of private companies being governed by factors other than “normal commercial considerations”:

(1) To my first hand knowledge an American owned company declined to sell coal to Vietnam after Australian sanctions were lifted following the Vietnam War, because otherwise it would find itself in violation of the US Trading with the Enemy Act. Its national interest template was fashioned in Washington, not Canberra.

(2) The United States maintains extraterritorial application of its antitrust legislation. It asserts a right to pursue any anti-competitive activity that is deemed to have an effect on US commerce, irrespective of where the action took place. The 1970s Westinghouse case related to alleged price fixing of uranium by Australian, Canadian and French companies at a time when uranium could not be imported into the United States. Some very senior Australian mining executives had to avoid setting foot on US soil while that one was sorted out.

(3) In the late 1970s and early 1980s when the Fraser Government still had export controls on major mineral exports, the executives of several US-owned companies asserted that they could not comply with Australian Government policy or they would be in trouble in relation to the extraterritorial application of US antitrust law. The Australian Government was obliged to strengthen the regime to put its mandatory aspect beyond doubt. This imposed additional costs on other companies and on the Government itself.

(4) I wonder, in light of the US Patriot Act, whether any United States company managing or supporting communications equipment within Australia could guarantee at all times to comply with Australian privacy laws, as is often stipulated as a requirement in Government tender documents.

Another concern expressed in the Foreign Investment Guidelines is that an investment may impact on Australian Government revenue or other policies.

Transfer pricing by vertically integrated multinationals raises that issue and has undoubtedly impacted on Australian Government revenue. It is very difficult to police.

Also, it is not necessary to make an investment in order to impact on Australian Government revenue. In the 1970s and 1980s all iron ore for the Japanese steel industry was purchased on behalf of the nine Japanese steel companies by one company, Nippon Steel. Nippon steel purchased not only the Australian iron ore, but that obtained from Brazil and South Africa. The smaller importers of the day, Korea, China, India and Pakistan all awaited the Nippon Steel settlement and then settled for that price minus a discount of a few percent. This system meant that there was effectively only one game in town – three major producers, BHP, CRA (Rio Tinto) and CVRD (Vale), competing for the favours of that one buyer. There can be little doubt that there was a substantial effect on the revenue.

This situation was only rectified when the growth of the steel industries of China, Korea and India created a genuine competition for product and shifted market power in favour of the producers, thereby generating the rivers of tax revenue that were experienced before the global financial meltdown caused the minerals boom to run out of steam.

By all means let us examine the foreign investment proposals of sovereign wealth funds and state owned enterprises, but let us also give the Foreign Investment Guidelines an overhaul to line them up with the realities of the global minerals market. In particular, let us have a cold hard look at any proposal which would have a major player sitting on both sides of the negotiating table.

And how do we now treat those financial institutions, motor manufacturers and others that have been bailed out by and are utterly beholden to their governments? Do we treat them as State Owned Enterprises (they certainly meet the "links to foreign governments" test) or are they still treated as "private"?

Withdrawing from Iraq - don't forget Iran

President Obama’s announcement on the weekend that American troops will cease combat operations in Iraq in August 2010 and that most American troops will be withdrawn by 2011 is to be welcomed. At the same time, it needs to be recognised that managing a withdrawal to this or any timetable is tricky to manage. Much can go wrong.

The setting of a deadline makes it all the more urgent for the United States to normalise its relations with Iran. Iran has the capability to derail the process, in a deniable way if need be, in a more open way if it chooses.

My reading of the Iranians is that they would prefer not to be driven in this direction. Iran has a clear national interest in having a peaceful, prosperous and stable Iraqi neighbour, and there are many in Iran who would welcome a more constructive relationship with the United States. But Iran has other national interests, one of the more important ones being the deterrence of attacks on its territory, from any quarter.

This means that the United States needs to switch off all talk of military action against Iran, and ensure that Israel does likewise. As matters stand at present, Iranian defence planners must take seriously the steady drumbeat of talk about military strikes, or the Bush Administration’s “all options are on the table” stance, and prepare themselves accordingly.

There is not much of a price to be paid for setting the military strike option aside, because the scenarios for a successful attack, even for the limited aim of setting back Iran’s nuclear development, are hard to conjure up and much of the rhetoric has to be dismissed as frivolous and ill-informed. We are talking about attacking a country that is almost the size of Queensland, with a population of 66 million, and widely dispersed nuclear and military sites. We know where some of them are, but not necessarily all. The known nuclear sites are widely dispersed and it would be hard for the United States to take them all out, let alone for Israel to do so. And Iran has various defensive and retaliatory options at its disposal.

There is an equally urgent need in this context to make progress on the Palestinian front. It is hard to see the Iranian regime walking away from its long-standing public positions on the plight of the Palestinians. For the normalisation of US-Iranian relations there will need to be meaningful progress not only on some kind of vague promise of a two-state solution in the dim distant future, but on the prompt and enduring normalisation of the daily life of ordinary Palestinians.

This means that the US-Iran relations issue is a triangular one, not simply a matter between the United States and Iran. President Obama is going to have to have a pretty straight conversation with Mr Netanyahu before long. If, as seems likely, Mr Netanyahu has to search for a solution that will satisfy the requirements of Mr Avigdor Lieberman as well as President Obama, then his life is about to become very interesting.

They said it would never happen ...

A 3.5 km rail link across the Mekong River, between Nong Khai in NE Thailand and Thanaleng, 20+ kilometres SE of the Lao capital Vientiane, will be open for public use on Thursday 5 March, following an inauguration ceremony to be presided over by Her Royal Highness Princess Maha Chakri Sirindhorn.

The Friendship Bridge which carries the railway line was constructed as an Australian aid project in the early 1990s. It is just twenty years since then Prime Minister Bob Hawke, on a February 1989 visit to Bangkok, made an offer for Australia to undertake construction of this first bridge across the Mekong, at an estimated cost of $US 35 million. The idea of the bridge had been under consideration by the Mekong Committee since 1954, but the political and military situation in the region had always militated against it. With a joint Thai-Lao announcement in 1988 that they wanted to convert the region from a zone of war to a zone of peace, its time had come, and in offering to proceed with the bridge as an Australian aid project Bob Hawke saw this as an important political gesture, underpinning and expressing faith in the outbreak of peace, not just a modestly useful piece of economic infrastructure.

When the Thai and Lao Governments accepted the offer there was widespread scepticism within the Australian bureaucracy. The sceptics knew the project would become a “boondoggle” - the costs would blow out and the bridge would never be completed. And when the Lao Government expressed the wish that the bridge be constructed to a standard that would enable it to carry a standard Thai railway locomotive, they were sure that that would never happen.

It was an interesting project. As the river is an international boundary, the two ends of the bridge are in different countries, which raised interesting issues in relation to everyday matters such as workers and engineers moving around the site. In Thailand they drive on the left hand side of the road, in Laos on the right. Relations between Thailand and Laos were historically very difficult, but within the environment of this project they rapidly became remarkably cooperative.

The bridge was constructed on time and within budget. Construction formally commenced in November 1991, and the formal opening took place on 8 April 1994, presided over by the King of Thailand, the President of Laos, longtime Pathet Lao revolutionary Mr Nouhak Phoumsavan, and the Prime Minister of Australia, The Hon. Paul Keating, an interesting group of people to be seated together on the one dais.

Now the last piece of the jigsaw puzzle is falling into place. The Chairman of the State Railway of Thailand Board expects that the train service will carry 400-500 passengers per day on its twice daily return trip.

Submarines past, present and future

The recent announcement by the Minister for Defence that Rear Admiral Rowan Moffitt has been appointed to the new position of Head Future Submarine Program in the Defence Materiel Organisation marks the opening of another chapter in Australia’s long and distinguished history of submarine operations, going back almost a century.

Under this major new project, designated SEA 1000, the future submarine is planned to replace the Collins Class submarine beginning in 2025.

The Collins Class submarine represents one of Australia’s greatest technological achievements. As the project neared completion it was the subject of much controversy, most of it undeserved. The history of the project is very well told in Peter Yule and Derek Woolner’s The Collins Class Submarine Story: Steel, Spies and Spin (Cambridge University Press 2008), which documents in a balanced way how a fleet of excellent submarines was brought into service, and the hard-won lessons that were learned along the way.

The Department of Defence is to be congratulated for its support and cooperation in the writing of this history. Apart from its inherent interest, it is to be hoped that it will be studied carefully for the lessons it offers for the future conduct of major military projects in this country. It would be useful to see similar histories of other indigenous projects such as the Anzac Frigate project and JORN (Jindalee Operational Radar Network), the over-the-horizon radar network which represents another great Australian technological achievement.

Australia’s first two submarines, the British (Vickers) built E-Class submarines AE1 and AE2, arrived in Sydney in May 1914. On 14 September 1914 AE1 failed to return from patrol during the attack on the German wireless station at Rabaul and was never seen again. It was the first vessel lost by the Royal Australian Navy.

AE2 sailed to the Mediterranean and on 25 April 1915 played a dramatic role in the attack on Gallipoli. In the early hours of the morning HMAS AE2 entered the Dardanelles on the surface to create a diversion by “running amok in the Narrows”, then enter the Sea of Marmara to cut the supply lines of the Ottoman Army. Her campaign ended five days later when she was fatally damaged in an engagement with a Turkish torpedo boat and was scuttled by her crew without loss of life.

She disappeared from view for more than 80 years until Turkish museum director and wreck explorer Mr Selcuk Kolay found AE2 sitting intact and upright on the bottom in 73m of water.

The Submarine Institute of Australia (www.submarineinstitute.com) sponsored early activity to appraise the wreck and ensure that AE2’s contribution at Gallipoli was duly recognised. Following the obtaining of Government support, the Project has been assigned to the AE2 Commemorative Foundation Limited, a not-for-profit company limited by guarantee.

A survey expedition was conducted in 2007 in collaboration with Turkish participants, and is the subject of an excellent documentary which was broadcast on ABC TV on Anzac Day 2008. It is available on DVD from the ABC.

The story of AE2 is also told in the Vecihi and Hatice Başarin’s Beneath the Dardanelles: The Australian Submarine at Gallipoli, Allen & Unwin, 2008.

The Submarine Institute’s website is a key site for those interested in the past, present and future of the Australian Submarine Service.

Australia 21 on Resilience

On Thursday 5 March Professor Glyn Davis, Vice-Chancellor of Melbourne University and Patron of Australia 21 (www.australia21.org.au) will launch Australia 21’s next publication, Brighter Prospects: Enhancing the Resilience of Australia. This collection of essays by leading Australian thinkers, edited by Dr Steve Cork, canvasses the application of resilience thinking in a number of key policy areas including ecosystem resilience, climate change, public health, preparation for pandemics, biosecurity, peak oil, the economy, education, governance and national security.

The document will be available on the Australia 21 website soon after the launch.

If you like what you read, please remember that Australia 21 is a non-profit organisation that is entirely dependent upon grants, donations, in-kind support and generous contributions of time from its directors and researchers to undertake its work in advancing the research agenda on key issues that face Australia, and promoting public debate directed towards the development of robust solutions. As Obama’s approach to funding his election campaign showed so clearly, every little bit helps. Secure online donations can be made by clicking the icon on the Australia 21 home page.

Our thanks to PricewaterhouseCoopers for their generous assistance in staging this launch event.