Foreign investment can work

Foreign investment can work


Business
Australia should emulate some of China's prescriptive investment guidelines, especially for prime farmland, according to Doug Anderson. Information sourced from KPMG and University of Sydney.

Australia should emulate some of China's prescriptive investment guidelines, especially for prime farmland, according to Doug Anderson. Information sourced from KPMG and University of Sydney.

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New controls can boost confidence and capital

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In my various roles I have witnessed a wide range of reactions to the fallout from Treasurer Scott Morrison’s decision to block both Chinese bidders for the lease and management of Ausgrid power distribution in NSW.

After the initial shock and confusion regarding the effective elimination of both bidding companies for national security reasons, attention has turned to the transparency in bidding, decision making and communication with participants.

It’s fair to say that emotions and opinions range widely, but nearly all parties agree the process could have been managed and communicated much better.

These processes span 12 months, are hellishly expensive and distracting for bidders and vendor, in this case the NSW Government, which base its budget and infrastructure funding plans on the reasonable assumption of certainty of sales revenue and timely completion.

Concern over foreign ownership has been common In our post war history, firstly with the US, then Japan, and to a lesser extent Korea. It fades over time. But now China Inc. is the main focus and some key sectors stand out – electricity, telecommunications and agricultural land.

This is not pure xenophobia, nor is it pure populism and politically motivated. The contributing factors are many, the issues are complex and we don’t have access to all the information.

Emotions have run high in both countries. Fortunately at government and diplomatic levels and in senior business circles, cool pragmatic heads will prevail because business is business and we have 44 years of solid foundations underpinning. Australia has developed a deep bilateral relationship with China since 1972.

It’s our largest export trade market (AUD$82 billion in goods and another $10b in services in 2015) and Australia has received the second highest amount of Chinese direct investment (USD$80b accumulated) of any country recipient (behind USA) and Chinese tourist numbers (1.5 million) continue to increase more than 20 per cent per annum.

Australia is ranked among OECD countries as most dependent on China by country mile, with 33 per cent of our exports going there. It’s logical for investment to follow trade. Chinese companies have been seriously investing here since 2006.

Last year, KPMG and University of Sydney’s research reported record annual increases in Chinese investment to Australia of AUD$15b for the calendar year across 65 completed transactions. What stood out was the major shift in sector focus from mining, gas and power in the past decade towards real estate (45pc), renewable energy (20pc), healthcare (17pc) and to a much less extent agribusiness (3pc).

So the focus is not power, telecommunications or agribusiness.

Another major trend related to this is a very large shift from state owned enterprises to private Chinese companies investing. In 2015, 80pc of completed deals were from private investors - by number. 

Chinese companies recognise the demand and potential profit opportunities to feed China and Asia’s ever growing consumer populations with high-protein, safe, fresh food. 

We await the national register of foreign ownership data to confirm the actual value and proportion of Chinese ownership. However at present we assume Chinese investment in Australian agribusiness is modest.

In 2015, KPMG data recorded only 12 large scale commercial agribusiness deals worth a total of AUD$375m. Much of this was in major dairy processors, but also several cattle and cotton stations in Queensland and NT.

These numbers don’t include private individual sales under $5m and this total certainly doesn’t reflect the amount of tyre-kicking and aborted deals that’s been going on in the background.

The arduous sale process of iconic Kidman and Co continues but it has brought the issue of Chinese ownership of agricultural land and precious water to the public arena and it’s clear the people have spoken against it - and the politicians are listening.

Many farmers and operators don’t share this protectionist view as they want to grow or sell and they recognise the need for foreign investment. Many have negative perceptions of Chinese companies after frustrating dealings in the past. 

Greenfield asset investment and ownership are two different and important matters for debate. We appear comfortable with green field agri investment in Northern Australian, new dairy, meat, grains and sugar processing infrastructure and regional infrastructure investment from Asia and China.

Australians recognise the importance of this investment but have reservations about outright ownership and control of large areas of freehold land, especially prime rural land with access to water. That’s fair enough, it’s consistent with other western countries and indeed in China, and perhaps it’s time for foreign investment policies to adapt.

As we have seen on Ausgrid and Kidman - clarity of policy and certainty in process is paramount for attracting foreign investment. Also, we must be prepared to treat American, Kiwi, Japanese, Chinese, British investors equally in future dealings.

Assuming mandatory Foreign Investment Review Board limits for agricultural land remains at $15m for aggregated portfolios and $55m for agribusiness investments, there is an opportunity to debate further changes for agricultural land.

Consider this proposition. In prime agricultural food production zones perhaps our laws specify minority investment or leasehold zoning for all foreign companies for assets in excess of a certain land size holding (20,000 hectares perhaps). 

Majority ownership and management could remain Australian, which may suit foreign companies in need strong local partners.

It provides greater clarity and consistency for all concerned going forward.

This will be practically challenging, and FIRB will always want to preserve its “national interest test” criteria, but China has developed prescriptive sector investment guidelines and we can too.

Doug Ferguson is national leader of Asia and International Markets, KPMG Australia, Asia Society Australia chairman and Australia China Business Council agribusiness committee leader.

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