New laws change the way the workplace works

Forward with Fairness has finally arrived.  At 613 pages it will take some time to digest the implications.  First impressions reveal something new and unexpected.

The legislation introduces a concept into workplace relations that will probably change the nature of work regulation in fundamental ways.

Until now, industrial relations law governed relationships between employers and employees.  This is retained.  The new bit is that the law will also cover relationships between employers and unions.  This is very different and unanticipated.

Until now, unions derived their legislative authority through their representation of employees.  The essence of employment law is the relationship between employers and employees.  The union role, when authorised, was to act for, and on behalf of, employees.  Employers dealt with unions because they represented employees.

But with 85 per cent of private sector employees not being union members, union authority in most workplaces has been marginal and even questionable.  This has long been a union complaint and they have sought a renewed role and authority.

Forward with Fairness seems to creatively deliver this new role.  Under the legislation unions have statute authority independent from that of any union membership they may have in a workplace.  The legislation, in effect, assumes that employers and unions have a "relationship" that is separate to that of the employer's relationship with employees.

This is surely a new legal concept.  It's hard to know what it means.

Employers have always accepted that they have a relationship with employees.  After all they have contracts with employees that create the relationship.  Unions may sometimes be involved in employee contracts but only by authority of employees.  There is no "stand-alone" contract needed with unions.

Suddenly this new legislation seems to be imposing an employer-union relationship when no contract exists between them.  In this respect the legislation is highly interventionist.

When combined with the additional new requirement to "bargain in good faith", employers may be staring at a legal squeeze that has not before been experienced.

There are perhaps parallels to the earliest days of the Howard government.  With all the best of intentions, industrial relations legislation had clauses prohibiting discrimination.  Over time these provisions took on completely different meanings to that in common use.  "Anti-discrimination" became a technical, legal tool in industrial relations disputes.

The same thing is likely to happen again.  Through legislative assertion that employers have legal relationships with unions with whom they have no contract, employers will find themselves in technical "disputes".

It's likely that failure to engage with a union will constitute a dispute.  This is a new legal game with strange, unpredictable and unknown managerial implications.

Commercially this heralds uncertainty not before seen.  Presumably attempts to create productivity benefits for businesses, employers and the economy through enterprise bargaining will involve an enforced engagement with unions.

This may be a good thing and, when the detail of the legislation is applied, it may reveal simplicity not clear in the broad concept.  Whatever is revealed this is highly creative legislative design.

It seems that workplace relations is about to undergo a degree and direction of change not anticipated 12 months ago.

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Japan and Global Warming Policies

Occasional Papers

Japan has not sought prominence in the global climate policy debate.  Its major corporations and their representative bodies are largely absent from the media debate except as offering general support.  Its car firms have been in the forefront of promoting radical emission reductions but not from their own in-factory domestic energy usage viewpoint.

In terms of emission levels, Japan has seen increases since 1990.  Per capita levels grew from 8.7 tonnes to 9.9 tonnes of CO₂-e (compared to 16 tonnes for Australia).  There has been a swing away from oil and gas to coal (which supplies 21 per cent of primary energy) and nuclear (having increased its primary energy share from 12 per cent to 15 per cent, some 30 per cent of electricity).  Nuclear is a favoured approach by the government but is stalled partly due to a reactor having been damaged by an earthquake in July of this year and though this did not pose a threat it nonetheless caused concern.  More important is the lack of sites -- local opposition to nuclear is strong.

Following the 1970s oil crisis, Japan expended considerable sums in "insurance" policies that looked to commercialise coal-to-oil.  Victorian brown coal was a major target and over the course of 15 years hundreds of millions of dollars were spent on seeking to find a low cost conversion regime.  Parallel activities are now being undertaken with low carbon emitting coal including a major pilot program in Queensland.

According to Kyoto University Professor of Economics, Seiji Ikkatai (who is also the environmental economics adviser to the Japan Bank for International Cooperation) Japan's measures implement its own targets have rested on the exhortatory (for households) and voluntary targets (for business sectors).  Japan has announced that its Kyoto outcome will be an increase of 8.6 per cent over 1990 compared with the -7 per cent reduction agreed to.

The two ministries involved in policy are METI and the Environment Ministry.  The former has advocated voluntary and moveable targets that vary with growth and this approach has until recently prevailed.  The Environment Ministry favours an EU style cap and trade approach and the former Prime Minister (Mr Fakuda) agreed to this in May of this year.  However the caps are in effect voluntary as is the base on which their level is measured.  The sectoral approach is to be measured with reference to the relative performance of Japanese industry sectors set against those in other countries.  This seems to bear some similarities to a scheme proposed by the Australian Garnaut Report for the trade exposed sectors.  Industry broadly calls for voluntary measures though some firms, notably Sony, favour stiffer targets to foster greater energy saving innovation.

In his research, Professor Ikkatai estimates that the effects of the measures introduced have not appreciably differed from those that would have prevailed without them.

Other sources confirmed that Japan is taking a de facto approach that involves no action of a substantive nature.  Japanese industry is very concerned to combat measures that would add to its costs and retard growth.  It also takes the view that it is highly efficient already and points out that the Japanese use less energy than others domestically due to the smallness of their houses, a matter which called forth deprecating comment from the western media not long ago.  Even so, the policy approach followed is not consistent with the 3-4 tonnes per capita average global emission levels that would be required if CO₂ levels are to be stabilised at the 550 ppm level.

Japan will participate in all international matters and contribute to carbon savings but is not considered at all likely to introduce a tax or ETS that involves any disciplines on industry.

Japan sees no role for wind as a significant source of power into the future.  It does have wind investments and together with photovoltaics wind comprises about 0.3 per cent of sales.  There is no equivalent to an MRET scheme fostering these renewables and firms appear willing to undertake modest investments in them in response to jawboning and to promote their images.

Japan has not sought prominence in the global climate policy debate.  Its major corporations and their representative bodies are largely absent from the media debate except as offering general support.  Its car firms have been in the forefront of promoting radical emission reductions but not from their own in-factory domestic energy usage viewpoint.

In terms of emission levels, Japan has seen increases since 1990.  Per capita levels grew from 8.7 tonnes to 9.9 tonnes of CO2-e (compared to 16 tonnes for Australia).  There has been a swing away from oil and gas to coal (which supplies 21 per cent of primary energy) and nuclear (having increased its primary energy share from 12 per cent to 15 per cent, some 30 per cent of electricity).  Nuclear is a favoured approach by the government but is stalled partly due to a reactor having been damaged by an earthquake in July of this year and though this did not pose a threat it nonetheless caused concern.  More important is the lack of sites -- local opposition to nuclear is strong.

Following the 1970s oil crisis, Japan expended considerable sums in "insurance" policies that looked to commercialise coal-to-oil.  Victorian brown coal was a major target and over the course of 15 years hundreds of millions of dollars were spent on seeking to find a low cost conversion regime.  Parallel activities are now being undertaken with low carbon emitting coal including a major pilot program in Queensland.

According to Kyoto University Professor of Economics, Seiji Ikkatai (who is also the environmental economics adviser to the Japan Bank for International Cooperation) Japan's measures implement its own targets have rested on the exhortatory (for households) and voluntary targets (for business sectors).  Japan has announced that its Kyoto outcome will be an increase of 8.6 per cent over 1990 compared with the -7 per cent reduction agreed to.

The two ministries involved in policy are METI and the Environment Ministry.  The former has advocated voluntary and moveable targets that vary with growth and this approach has until recently prevailed.  The Environment Ministry favours an EU style cap and trade approach and the former Prime Minister (Mr Fakuda) agreed to this in May of this year.  However the caps are in effect voluntary as is the base on which their level is measured.  The sectoral approach is to be measured with reference to the relative performance of Japanese industry sectors set against those in other countries.  This seems to bear some similarities to a scheme proposed by the Australian Garnaut Report for the trade exposed sectors.  Industry broadly calls for voluntary measures though some firms, notably Sony, favour stiffer targets to foster greater energy saving innovation.

In his research, Professor Ikkatai estimates that the effects of the measures introduced have not appreciably differed from those that would have prevailed without them.

Other sources confirmed that Japan is taking a de facto approach that involves no action of a substantive nature.  Japanese industry is very concerned to combat measures that would add to its costs and retard growth.  It also takes the view that it is highly efficient already and points out that the Japanese use less energy than others domestically due to the smallness of their houses, a matter which called forth deprecating comment from the western media not long ago.  Even so, the policy approach followed is not consistent with the 3-4 tonnes per capita average global emission levels that would be required if CO2 levels are to be stabilised at the 550 ppm level.

Japan will participate in all international matters and contribute to carbon savings but is not considered at all likely to introduce a tax or ETS that involves any disciplines on industry.

Japan sees no role for wind as a significant source of power into the future.  It does have wind investments and together with photovoltaics wind comprises about 0.3 per cent of sales.  There is no equivalent to an MRET scheme fostering these renewables and firms appear willing to undertake modest investments in them in response to jawboning and to promote their images.

Machine culture rotten to core

Is the NSW Government totally dysfunctional or is it just suffering from a series of disconnected unfortunate events?  The list of events is long and often reads like a series of episodes from a television soap drama.

A minister is jailed for being a pedophile.  He abused boys in his ministerial office yet his closest staff members deny any inkling of his behaviour.  Another minister is stood down over allegations of abusing restaurant workers and another for abusing his staff.

These are just some stories emerging from the NSW Government at its highest level.

Below this level, other stories constantly appear.

A transport union safety fund receives about $700,000 from the Government.  The transport union gives a similar amount to the Australian Labor Party.

A senior union official demands and receives from the Education Department lists of apprentices and employers in breach of privacy laws.  The union then approaches employers demanding apprentices become union members.

Senior judges caught for traffic offences pervert the course of justice to hide their offences.

At the local government level bribery and sexual favours determine who receives town planning approval for development projects.  The developers see this as normal business requirements in NSW.  Systemic bribery is revealed in a state transport department.  People caught paying the bribes plead that if they didn't bribe, they wouldn't win jobs.

Maybe there's just a lot of bad people doing bad things in NSW.  Surely we can assume the system of government remains solid and honest?  Unfortunately, this is not the case.  The overload of scandal is in fact endemic and reflects the functioning of government itself.

The problem is bigger than just bad individuals.  It's a problem created by the culture of the labour grouping that runs NSW.

It's embedded in the institutions and processes that administer NSW.  It's enforced by the laws of NSW.  It affects everyone living in NSW.  It's the factor causing NSWto descend into deepening economic recession when the rest of Australia is managing reasonably well.

Before the problem can be fixed, it needs to be understood.

NSW Labor is not just a political organisation.  It's a bigger machine than the ALP and elected parliamentarians.  It is a complex web of interconnecting, personal relationships built around families, friends and associates.  Its obvious core membership comes from unions.  But it extends to selected lawyers, academics, business representative bodies, investors and business people.  It's a large but tight group.

Ordinarily, extended networks are the lifeblood of political groups in healthy democracies.  But there's something special about how NSW Labor has institutionalised its network, which makes it uniquely powerful and corrupt.

First is the culture.  NSW Labor networkers live in a time warp, obsessed with the idea of class warfare.  They imagine that employers are evil by nature.  They fantasise that they are the guardians of good against evil.  This bonds them, giving them their justification for power.

They allow business to function but only those businesses that comply with the Labor machine.  They relentlessly try to crush businesses that are defiant.

What makes this culture so powerful is that it's given legal sanction through the NSW industrial relations system, which is unique in Australia.  Orders of the NSW Industrial Relations Commission cannot be appealed.  It overrides the authority of the High Court and NSW civil and criminal courts.  Unions are its authorised enforcers, with search, seizure and prosecution powers exceeding that of the police, tax and business regulation authorities.  This is the law in NSW.

The legal powers are all reaching beyond normal industrial relations matters to controlling commercial prices in the transport sector, overriding commercial leases and dictating who can tender for government work.  It controls construction work through agreement setting and links into town planning processes.

What is alleged to be an industrial relations system is in reality a legal mask for the delivery of power to NSW Labor.  It's awesome in its reach.

It's so powerful that it part-neuters Australia's competition watchdog, causing the competitive business environment in NSW to be corrupted.

Normal business regulation is overridden by the necessity to conform to the Labor machine.

It has taken total control of the administration of government in NSW, such that the parliamentary ALP is a government in name only.  This was demonstrated by the effective sackings of premier Morris Iemma and treasurer Michael Costa.  More significantly, the public service is controlled through a vast number of oversight committees on which only NSW Labor machine members sit.

The Labor committee and network process effectively controls the NSW government budget.  Reforms to the transport, education and health systems are frozen because any reform threatens vested labour interests within the organisations.

Great wealth has been delivered to some inside players.  Important NSW-based businesses depend on the system for their market power.  Individual fortunes have been built on it.

It's a power frequently reflected in the arrogant behaviour and even swagger of those at the top of the system.

This was demonstrated by the recent union raid on the desalination plant construction site under the cover of ministerial inspection.  Here the Labor machine is furious that a government-funded construction site is not NSW union controlled.  The site is subject to federal, not NSW, industrial relations laws.

This entrenched and unelected power structure in NSW assaults the very fundamentals of good society.  The failure to prosecute a union-owned labour hire company following the work-site deaths of three of its employees demonstrates how destructive of justice is this labour network.

What's happening in NSW is that many individual acts of corruption are being exposed.  The state's Independent Commission Against Corruption is swamped with work.  But the ICAC's powers do not extend to the systemic cause of the problem.

Corruption, dysfunctional government and the declining economy of NSW are all products of a Labor culture disconnected from normal moral reasoning.

Its extreme power is made possible because it has a mask of legal authority.

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Former PM with manners of steel

With John Howard back in the public spotlight this week, the question arises:  what kind of former prime minister will he be?  Will he follow in the footsteps of his hero Winston Churchill, write a book or two, receive several international awards, then fade quietly into the sunset?  Or will he miss the limelight, emulate Malcolm Fraser and Paul Keating and pontificate on nearly everything under the sun?

In the years since they departed from the political scene, our former leaders have lined up like a wailing Greek chorus to not only condemn their successors but to tell all and sundry their criticisms of their parties and nation.

In the process, they have sometimes embarrassed themselves and tarnished their legacies.  What Conrad Black once said of Margaret Thatcher's behaviour after her retirement from the British parliament -- that her almost deranged intemperance exceeded the bounds of political decorum -- could easily be said of Keating, Fraser, Bob Hawke and Gough Whitlam.

Howard, however, will be different.  True, he's given 20 hours of interviews to ABC1's The Howard Years, in which the 33-year parliamentary veteran breaks his year-long silence on his time in power from 1996 to 2007.  He will also write his memoirs, deliver a few addresses to the Liberal party faithful and give the rare interview to the news media, such as the Fox News Channel, which he did last weekend.

But far from ranting and raving a la Keating and Fraser, he is more likely to follow the example set by Churchill and John Major after they left British politics.  Less vitriol and fewer vendettas.  More class dignity.  Those other political has-beens, after all, have left a lot to be desired.  Consider:

Whitlam:  He frequently criticised his party's most successful leader (Hawke) towards the late 1980s and early '90s for being more interested in winning elections than securing a substantial policy legacy.  (To which Hawke replied a year after losing office:  "To use a direct Australian expression, that's bullshit.")

Fraser:  He spent much of the past decade attacking his former treasurer (Howard), promoting a bewildering variety of progressive causes and elevating the worship of African dictators to a high artform.  (John Gorton, in retirement, frequently derided this fellow Liberal PM as "ultra-conservative".)

Hawke:  His bitterness toward his successor (Keating) surfaced in his memoirs and his opinion of him was so low that he even reportedly predicted then Liberal leader Alexander Downer would win the next federal election.

Keating:  He described his successor (Howard) as, among other things, "a desiccated coconut" and "a pre-Copernican obscurantist".  That's not to mention his recent attacks on the incumbent Labor PM.  Or his claiming all the credit for the prosperity of the first decade of the 21st century.

One suspects we won't hear such nasty language and self-indulgent hubris from Howard's lips.  Whenever he will recall the good old days over which he and Peter Costello presided, it will be a case of how his government (and, to be fair, the Hawke-Keating Labor governments) implemented free-market reforms that led to a miracle economy.  If an old nemesis such as Phillip Adams dies anytime soon -- God forbid -- we won't hear Howard echo Keating's diatribe following the death of Paddy McGuinness and call the columnist a "liar and a fraud" who had the "morals of an alley cat".

If Howard privately observes the future political scene with disgust, frustration and the latent yearning of a former campaigner, it's a fair bet he won't air his views publicly.  Nor will he venture to interfere in the affairs of his party.  He knows he is no longer a player, but a privileged spectator of the divine comedy of politics.  In other words, Relevance Deprivation Syndrome, the term coined by Gareth Evans shortly after his retirement in 1999, is not likely to afflict our second longest-serving prime minister.

Now, some people believe Howard's post-political life will more likely resemble that of Menzies than other ex-PMs.  After all, they were both roughly the same age at retirement:  Howard was 68;  Menzies 71.  And within the first year out of office, both did their fair share of globe-trotting, book writing and cricket watching.

But that's where the similarities end.  For Menzies, in a little noted interview with veteran journalist David McNicoll in 1974, slammed his party ("They break my heart") and its senior spokesmen, describing then-Liberal leader (Billy Snedden) as "hopeless" and calling his other successors "a mischief maker" (John Gorton) and "a contemptible squirt" (Billy McMahon).  In contrast to Ming and the other ex-PMs, Howard won't be reaching from the political grave to blight the affairs of his former colleagues and beloved party.

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A dignified silence

John Howard won't tarnish his legacy like other former prime ministers.

Have you heard about the former Liberal prime minister's remarks to a journalist about the state of his party?  Here's some of the dialogue:

Question:  The Liberal Opposition in Canberra?

Answer:  They break my heart.

Question:  Your Liberal party successors?

Answer:  The incumbent is a hopeless leader whose predecessor is just a mischief-maker.

Question:  And the former Liberal treasurer?

Answer:  A contemptible squirt.  Pathetic.  Dreadful.

John Winston Howard?  Ranting and raving about his beloved party and his former colleagues Malcolm Turnbull, Brendan Nelson and Peter Costello?  Hardly.  It was Sir Robert Menzies.  And he was blasting the party he founded, especially his former ministers Billy Snedden, John Gorton and Bill McMahon.

The date was 3 April 1974 -- eight years after he retired from politics -- and Ming was speaking on the record with the veteran journalist David McNicoll.  The conversation, however, was not published until a year after Australia's longest serving prime minister died in 1978.  Whether the normally cautious Menzies, who had spent much of his retirement in relative obscurity, intended the conversation to be released is not clear.  In any case, the episode serves to highlight that even elder statesmen and former prime ministers can let their guard down -- and do so in a most undignified and regrettable manner.

That won't be said of the other Liberal party elder statesman and former prime minister.  True, John Howard has returned to the limelight this week with the broadcast of the four-part ABC1 television documentary series The Howard Years, in which he breaks his year-long silence on his time in power from March 1996 to December 2007.  But don't expect Howard to do now what his predecessors have consistently done since they left office:  self-indulgently speak out about virtually all matters under the sun and, in the process, sometimes make a goose of themselves and tarnish what is left of their legacies.

Neil Brown -- Howard's deputy during the dark days of opposition in the 1980s -- once remarked that the trouble with former PMs is that they "seem to think we all rush to the breakfast table every morning and rip open the newspaper to see what their views are on every subject of public importance.  And they give it all such a pompous moral tone that you feel inadequate for not just agreeing with them".

Indeed, in the years since they departed the political scene, our living former leaders, Gough Whitlam, Bob Hawke and especially Malcolm Fraser and Paul Keating, have not only condemned their successors but spelled out to all and sundry their problems with their party, the nation and the world.  What Conrad Black once said of Margaret Thatcher's obsessive interference in Tory party and national politics after her retirement from the Commons in 1990 could easily be said of Australia's ex-prime ministers:  that her almost deranged intemperance exceeds the bounds of political decorum.

Keating, in particular, has set the perfect benchmark in how a former prime minister ought not behave:  describing his successor (Howard) as, among other things, a "desiccated coconut" and "a pre-Copernican obscurantist" who fanned the flames of racism;  deriding within days of his passing a former legendary editor and columnist (Paddy McGuinness) for his "prejudiced, capricious and intellectually corrupt mind that was all over the shop depending on what suited his miserable purposes at the time";  and having the gall to take all the credit for creating the economic prosperity of the Howard years?

Howard, however, is different, preferring to follow the example set by John Major in Britain after his election loss in 1997 and Winston Churchill after he retired as PM in 1955.  That does not mean Howard will fade into the sunset anytime soon.  After all, he is writing his political memoirs, delivering the occasional speech to the party faithful, speaking on the international circuit, giving the rare media interview to foreign news outlets and mentoring young conservative true believers.  It just means he will be more measured, prudent and, shall we say, dignified than those other has-beens.  His autobiography, for example, won't be about settling old scores, but a chronicle of an important period in Australian history in which he has, among other things, played a major role in transforming the nation from a heavily protected and subsidised closed shop into a high-growth and market-oriented powerhouse that remains the envy of the industrialised world.

Lest I sound like a Howard hagiographer, I should stress that I've had deep disagreements with the former prime minister, from his big spending government that should have made any honest Whitlamite proud to his astonishingly unqualified support for Uncle Sam.  Leading conservative intellectual Owen Harries has rightly pointed out that Australia, under Howard, "found itself engaged in an ideological war against a country that, however vile its regime, did not in any way threaten us or the international status quo -- and was, as we now know, our best wheat market".

Nevertheless, it's worth pointing out that Howard will avoid the fate of other has-beens.  However tempting it may be, he won't be reaching from the political grave to blight the affairs of his party or nation.  That is a rare -- and admirable -- trait in Australian public discourse.

It's also a shame.  For if there is an ex-prime minister worth listening to it is surely Howard.  There is, after all, much to be said for a man whose age, experience and temperament constitute not only a formidable intellectual and political arsenal but provide a touch of scepticism about grand visions and weird social experiments.  (Think of a Bill of Rights, which remains a hot topic in Labor party circles.)  It is, moreover, doubtful whether any politician of national stature -- former or current -- could write or speak as well as Howard.

In any case, he has much to be proud of.  Like him or loathe him, Howard has presided over several impressive achievements over more than three decades in public life.  Whatever the political issue -- immigration and border protection, industrial relations, Asian engagement, gun control, Aboriginal reconciliation, the republic, the culture wars, East Timor, anti-terror laws, the US alliance -- Howard has had a significant influence on national life for better or for worse.  And he can always take solace in knowing that the only way Kevin Rudd could beat him in last year's election was by being more like him.

True, he clearly misjudged his exit from the political stage;  and this theme will cloud the rest of ABC1's documentary series.  Still, it should not determine his otherwise impressive record and legacy.  Which is perhaps another reason why Howard, unlike other former PMs, feels no need to get back into the arena.

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Labor always unravels prosperity

Parlous developments in the NSW government's finances are a timely reminder of the familiar Australian cycle of change.  In its mini-budget delivered last week, NSW became the first Australian jurisdiction to be forced to recognise the crisis in state government taxing and spending.  This is not unexpected since NSW has seen fast growth in taxation revenue through increased house prices, has been more willing than other states to accept regulatory costs and has seen less expenditure restraint.

NSW is projecting a temporary deficit this year despite raising taxes and charges.  For 2009-10, aside from sales of surplus land and shifts of expenditures, NSW seeks to save about $1 billion in spending and to increase taxes and charges by some $900 million.  The big-ticket expenditure savings are capital investment deferrals in road, rail and electricity (some $700 million).

Though some attempts at scaling back bloated government are made in the mini-budget, these are minor -- even tackling the rail overmanning demonstrated by the Independent Pricing and Regulatory Tribunal is not expected to produce many results and none for the next two years.

The fact is that the increased revenues serendipitously showered on state governments from the buoyant economy yielding high goods and services tax returns, booming minerals industry (and mineral royalties) and rampant house prices have been dissipated.  No state has used the boom to reduce the size of government, though Victoria has done better than most.  Queensland has lifted the government share of GDP faster than other states, though the rise was capital expenditure, which rose only modestly in NSW and Victoria.

Other Labor states are discreetly scathing in their criticisms of NSW's history of mismanagement.  But none of them has used the booming economy of the past five years to slim down their share of the GDP.  As a result, they are all vulnerable to having to make expenditure cuts or increase taxes.

And this returns us to the cycle of change.  Every decade, Labor governments demonstrate failings that an electorate, which prefers to vote for their more compassionate message, cannot ignore.  A Labor government, which had been originally voted into office as a caring version of the conservative government it replaced, gradually starts to unravel the economy's prosperity.  This stems from several sources.  Among them is increasing government expenditure.  Also important is the increased influence of unions, which are the party's major funders and foot soldiers, but the increased influence they obtain adversely affects productivity.  As the administration becomes more established, it also starts increasing the regulatory controls over markets.

Gradually these activities undermine the prosperity that was the legacy the government inherited.  So Greiner replaced Wran and Unsworth;  Kennett replaced Cain and Kirner;  and at a federal level, Howard replaced Keating.

Labor's problems are exemplified by the final years of the Keating government and the current Rees administration in NSW.  In both cases the governments demonstrated they were temperamentally and ideologically unsuited to taking the tough expenditure reduction decisions that a gradual ramping up of wasteful government expenditure and regulations begin to require.

Often external events exacerbate the shortcomings created by governments' own activities.  And this is likely to be the unraveling situation around Australia.  The electorate reaches for the doctor of conservatism.  Some measure of fiscal conservatism is restored.  After some time, Labor in opposition convinces the electorate that it has learned from its failures and is ready to govern again.

But standing out like a sore thumb from this scenario is the Rudd government.  Having been elected as a fiscal and social conservative, Rudd is showing himself to be a spendthrift on a Whitlamesque scale.  Rudd's predisposition to intervene in the decisions of private enterprise, coupled with advice from Treasury and the Reserve Bank of Australia to stimulate the economy, is a heady brew.

At a time when savings have to be repaired, the government is dissipating them in hand-outs to pensioners and to the car industry.  With these policy approaches, pretty soon the talk will no longer be of avoiding a recession but of how deep the depression will be.

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Free choice the key to get more women on board

Federal Government studies released recently have claimed that the glass ceiling is bearing down on Australian working women, crushing their career aspirations.

According to the Equal Opportunity for Women in the Workplace Agency, the number of female executive managers has fallen to 10.7 per cent, a drop of 2 per cent compared with 2006.  The number of surveyed companies with no women executives has risen to 45.5 per cent, up from 39.5 per cent in the previous survey.

The results have been met with an outcry by feminists, social commentators and by figures in the corporate world.  EOWA chief Anna McPhee said "everyone should be concerned about this chronic waste of female talent".  Meanwhile, Nicole Hollows, an executive for Brisbane-based mining company Macarthur Coal Ltd, labelled the EOWA survey result as "appalling".

When thinking about how women fare economically, it is appropriate to consider the long-term trends.  It then becomes obvious that market capitalism has delivered the goods by improving the economic prospects for women.

Market-friendly measures, such as the removal of discriminatory formal barriers to workplace entry (as in the public service marriage bar), and access to tertiary education has seen significant numbers of women benefit from a growing economy.

Where a female business executive would have been unheard of a generation or two ago, we now have a public debate about the workplace proportions of women executives.

It needs to be borne in mind, however, that these changes are generational by nature, and cannot happen overnight.  A parent today has every reason to hold out high hope that his or her young daughter will have even more opportunities in the capitalist economy of tomorrow.

For some people the current rate of positive market-based change is not enough.  For example, some have called for a debate about workplace quotas enforcing a certain proportion of listed company executives to be female.  Norway is often seen as a role model in this regard, with a law that 40 per cent of board positions in publicly listed companies be held by women.

While proponents of the quota system suggest that it would effect change more rapidly than under market capitalism, the question is whether Australians would be prepared to accept the economic consequences of such radical regulation.

The problem with a prescriptive quota system is that it is highly likely to set women up to fail.  This is because firms would be obligated to fill high-level positions with women who are either unqualified or not yet ready to take the necessary step up the corporate ladder.  Productivity improvements could be compromised because of the quota mandate.

Such regulation could also create resentment among colleagues, who might feel that a newly promoted woman only gained her position via government regulation.  For men and women, a quota system would make it much harder to determine if people gained high-level positions on their own accord or not.

It is easy for an external observer to recoil in horror at what one might interpret as an "obvious" waste of female human capital, and so a blunt regulation like a quota sounds enticing.

However, the reality is that suitability of people for executive positions is not only influenced by their skills and capabilities, but by lifestyle decisions and changes in workforce participation.  These include real-life decisions such as starting a family, or choosing to transition from full-time to part-time work.  It will be difficult to balance an arbitrary, set-in-stone quota against the choices that many women routinely make.

Australian firms are fortunate to have excellent women already in high-level positions, with the prospect of even more to come as generations of young aspirant women enter the labour market.  It is best that we allow businesses to make free choices to employ more women, instead of going down the road of gender conscription in the workplace.

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Climate Change: China's approach

China's rapid industrialisation had by 2006 led it to becoming the world's largest emitter of CO₂-e, surpassing the US with 18 per cent of the world's total emissions.  In per capita terms, China remains a low emitter with 4 tonnes per capita (cf. US 20 tonnes, Australia 16 tonnes, OECD average 11.5 tonnes).

China was and remains ostensibly fully committed to the issues of carbon reduction.  Like all other developing countries, however, the actions in creating reductions have been focussed on requiring leadership from major emitters.

China has however embarked on a strong development of wind subsidised by an amount that approaches the market price of coal based electricity.  Wind installed capacity has doubled in each of the past five year and there is an open ended requirement on the electricity suppliers to buy and pay for wind derived electricity's connection to the grid and buy the supplies offered which also benefit from a favourable tax rate.  All wind generating asset must have over 50 per cent Chinese content to qualify.  Wind is now expected to provide one per cent of electricity next year (the highest in the developing world) but the pace of expansion is expected to slacken.

In this respect, wind has been pursued more aggressively than nuclear which provides only about three per cent of electricity.  Coal based electricity is cheaper than nuclear for most of the country and though a strong nuclear expansion is planned coal will continue to dominate.

China has sought to demonstrate its credentials by stressing its intent to increase energy efficiency (by 20 per cent by 2020 -- not a very ambitious goal).  This policy of "co-benefits" is central to overall policy and also embraces pollution reductions.

In terms of the trade-off of industrialisation and domestic carbon reduction, the former takes absolute precedence.  The essence of policy scenarios includes one that foresees China's per capita emissions doubling by 2030 and not beginning to tail off until new technology and industrial transformation away from heavy industry cuts in.  There is no serious pressure to accelerate carbon reduction from the environment ministry, other than in the co-benefit of reduced local pollution.  Research is progressing into a tax based system and taxes are to be introduced on petrol but nobody is discussing a carbon tax before 2020.

On 29 October 2008 China issued a White Paper on Climate Change which markedly changed the country's policy approach.  The White Paper expresses fears about climate change and stresses the losses it says China faces from such developments.  Some Chinese analysts attribute these strongly expressed sentiments to a need to placate those forces contemplating countervailing duties on goods from sources that do not accede to Kyoto-Copenhagen agreements.  Chinese officials also see the process as one of offering opportunities to obtain better technology to reduce emissions with the co-benefits of lower local pollution and cheaper energy.

In a notable turn, the White Paper shifted the policy priority to adaptation.  This is a recognition that China (and therefore others in the developing world that embark on a rapid growth path) will not initiate serious abatement measures at least until Western levels of emissions are reached.  And in this respect the White Paper discusses cumulative levels of emissions which would justify China out-emitting Western countries on the basis of the past levels of emissions.  A corollary is that the sort of CO₂-e levels of emissions said to be required to stabilise the warming effect will not be reached.

The White Paper addresses changes in the structure of industry that will enable lower energy levels per unit of output and has aspirations to reduce conservation measures, which it claims to have reduced usage by the equivalent of 240 tonnes of coal equivalent saved being the goal.  As well as pushing strongly with wind, it has policies distributing energy efficient light bulbs, energy saving renovation and air conditioning standards.

The White Paper's principles reject caps on emissions and are based on emission levels being reduced as a result of strong economic development and not as a result of retarding that development.  It called for

1. A world committee on climate change adaptation
2. Adaptation "capacity building" for developing countries including funding support
3. Technology transfer to facilitate adaptation
4. An "adaptation fund" with resources contributed be developed countries.

The White Paper also envisages a much greater role for private enterprise in energy production.  This would however require a radical change since electricity generation is virtually all state owned and it, as well as the grid, is subsidised.  Private power could only be attractive if prices were allowed to reflect costs.  This sparks fears of price protests and social unrest and underlines a major issue China confronts in moving further along the path to a market based economy.  Its heavy industries, electricity, steel and smelting, are largely state owned and have not achieved the efficiency levels of other sectors but unwinding the ownership means confronting a great many vested interests.

It would certainly seem to be the case that China is not going to make any significant efforts to cut its emissions aside from those that bring per se "co-benefits" in cost reductions and lower levels of pollution.  The country has spent considerable sums on wind and will do so on other green measures but in the greater picture these are token expenditures.

Though the government proclaims that climate change will be a costly issue for China and though it recognises that if carbon emissions are to be lowered this must also incorporate China, it has no intention of taking cap or tax based actions on C0₂ that would mean reducing energy growth into the medium future.  Rather, it is vigorously displaying its credentials as a concerned nation, partly to defray any countervailing import sentiments that might arise in the developed world and partly to encourage the developed world to transfer assistance and resources to other countries.

Tough times call for tough measures

This time last year, the Reserve Bank was forecasting growth a tad lower than the previous year's 4 per cent.  It now sees growth in June 2009 at only 1 per cent.

Even this looks optimistic.  Worldwide, reductions of 20 per cent are now being built into many companies' production schedules.

For Australia, the world financial collapse has shown we were over-reliant on foreign capital that was indirectly financing consumer spending.  We now need to save more.

But the Government's knee-jerk reaction to the economic downturn has been to give consumers money to increase their spending.

This won't work.  In fact, it is exactly the wrong response, since it dissipates savings that comprise the government budget surpluses.

Other measures being undertaken are similarly doomed to failure.

A host of infrastructure projects are queueing up for federal support.

Some of these may be useful.  But you can bet your government-guaranteed bank savings that those getting the tick will include lots of wasteful investment into public transport, desalination plants and other uneconomical projects.

Last week, the Government gave $22 million to ABC Learning, which had gone bankrupt.  But ABC Learning's failure was not due to lack of demand.  ABC Learning was actually underpricing its services, and had been accused of pricing low to force out competitors.

The overwhelming number of ABC Learning's 1040 centres clearly generate sufficient cash to stay open.  But Deputy Prime Minister Julia Gillard preferred $22 million of taxpayers' insurance rather than watching any centre close down amid heart-wrenching appeals by parents.

ABC Learning getting $22 million of taxpayers' funds was chicken feed compared to Canberra gifting $6.4 billion to the car industry, which the Government sees as strategic for all industry.

But granting companies blood transfusions of taxpayer money will only defer their collapse or, at best, their downsizing.

The coming recession will mean a string of businesses looking for similar government support and marshalling a case that they are "strategic".

Part of the car industry subsidy was to pursue the mirage of the Australian green car.  Linking the environment and job support is becoming increasingly fashionable.

Incoming US President Barack Obama has said he will create five million green jobs in alternative power resources based on wind, and solar.

Maybe instead we could replace conventional power stations with people generating electricity by pushbike!  This would create jobs but, like those created producing alternative energy, the accompanying subsidies and high costs would destroy far more jobs.

When emerging from communism, Eastern Europe faced far worse dilemmas than those currently confronting the Australian Government.

In 1992, Hanna Gronkiewicz-Waltz found herself chairman of the dominant Polish bank.  Her frequent response was to reject claims for bail-outs and financial infusions, telling the applicants:  "You say these are valued assets but all I see is debts and losses."

In post-communist Poland, as in present-day Australia, those businesses that can show an ability to profitably supply goods and services that people want will always find backers.

If we are to avoid a lengthy and costly recession, Australian governments need to absorb these lessons.

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NZ gets its ACT together

New Zealand's electoral system might be completely incomprehensible, but it does have some benefits.  At the election last weekend, the ACT party, with around 4 per cent of the vote, won five of the 122 seats in the parliament in the previous parliament it had one seat.  John Key's National Party won 59 seats, and the Nationals will need the support of ACT to maintain a parliamentary majority.

ACT (so named because it's the successor to the Association of Consumers and Taxpayers) is probably the only political party of its type in a parliament in the English-speaking world.  It is unashamedly small government and libertarian.  Its main policy is a flat-rate personal tax of 15 percent.

Even better than ACT increasing its representation is the return to politics of Roger Douglas.  Now 70, the former Labour finance minister (what New Zealanders called their treasurer) will be in parliament as an ACT MP.

In the 1980s it was Douglas who led a series of reforms that once made New Zealand the envy of the world.  "Rogemomics" involved floating the currency, deregulating the banking sector and privatising public assets.  For everything that Bob Hawke, Paul Keating, John Howard and Peter Costello did, none of them ever had a special word coined in their honour.

Douglas slashed agricultural subsidies, infamously saying: "It's possible to grow bananas on Mt Cook, but is it worth spending the money it takes to do so?"  Much ofNew Zealand's reform program was reproduced in Australia, except for the fact that Douglas introduced a consumption tax a decade before Howard and halved the highest rate ofpersonal tax to 33 per cent.  Douglas has recently written Just do it -- Beat Australia by 2020.  The way things are going in Australia at the moment his ambition is not unrealistic.

ACT's climate change policy is something that no major party would dare contemplate.  ACT would repeal New Zealand's emissions trading scheme and withdraw from the Kyoto Protocol.  According to ACT, decisions should be "based on sound science not on blind belief or ideology which is increasingly divorced from reason".  Its platform says that green business opportunities "which address nonexistent problems and needs are not business opportunities but a massive risk and likely to destroy wealth on a massive scale".

It seems the smaller a country's contribution to the carbon emission of the world, the bigger the issue of climate change is in that country's politics.  Although New Zealand's share of global greenhouse gas emission is minuscule, it didn't stop the previous Labour government from pledging it would be a leader, not a follower, in the debate.  New Zealand has no less than eight different schemes, programs, strategies and plans of action to combat climate change.  All of this for a nation of 4 million people, of whom 10 per cent live overseas.  It's unfortunate that the National Party has committed itself to implement an emissions trading scheme that is "as closely aligned as possible" with Australia's.  As ACT points out, "nothing New Zealand could do, including disappearing off the face of the planet, would have any impact on global climate".

The idea that in an economic downturn people will automatically turn to the comfortable bosom of overnment was disproved by Key's victory.  New Zealand is officially in a recession, and every prediction is that the economic condition of the country will get worse.  During the election campaign both the Nationals and Labour offered special "emergency" packages for the unemployed.  In somewhat of an understatement, Key described the situation as "not a pretty picture".

Since the election much has been made of the differences between Kevin Rudd's Labor Party and Key's National Party.  In Australia, Rudd is embracing economic and social paternalism, yet this is precisely the path that was rejected at the weekend by the New Zealand electorate.

However, there's a more significant difference that hasn't been commented on.  In Australia, Rudd needs the Greens to get his legislation through the parliament.  In New Zealand, Key will need ACT.  Businesses deciding in which country to invest will quickly make up their mind as to which of those two minor parties is more friendly to business, and in a worldwide recession would business prefer to operate in New Zealand under Key or Australia under Rudd?

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Contrary to reports, our rail system is alright

For years, Paul Mees has been arguing that there is some overseas city whose public transport system Melbourne should be emulating, but in his article "Travelling second-class", published on this page on Wednesday, Dr Mees has added a temporal comparison to his usual geographic ones.

While he eulogises the performance of the Melbourne rail network in the 1920s, he is apparently unaware of the experience of F.W. Eggleston as minister for railways in that decade.  Eggleston's attempt to improve the railway was so disillusioning that it converted him from being a firm believer in state control of all common services to an advocate of private enterprise wherever possible.

Many of the problems that were to bedevil public transport for the rest of the 20th century were already observed by Eggleston as he made the obvious point that a service that habitually loses money is bound over time to adopt lax financial methods and to lose its focus on the customer.

While the latest cities with which Mees likes to compare modern Melbourne are Zurich and Perth, it is interesting that the one comparison that he never makes is the obvious one, with the city most like Melbourne -- Sydney.

Helpfully, the NSW Government's Independent Pricing and Regulatory Tribunal recently commissioned a consultant to undertake that very task.  Their benchmarking of the two cities' rail systems showed that on just about every criterion, Melbourne's rail system is providing much better value for money to its citizens than Sydney's.  The study concluded that the NSW Government would have to reduce the cost of its CityRail operation by almost a quarter if it wanted to match the financial efficiency of the franchised Melbourne model.

Franchising has locked in public transport costs at a level that is a major embarrassment to Sydney and provides Melbourne with far greater opportunity to put more money into the network, as it is not being wasted on unnecessary costs.

That same franchising model that Dr Mees describes as Byzantine, a shambles and a farce, has, in recent years, produced faster growth in public transport use in Melbourne than any other Australian city.  Of course, there has been a significant rise in patronage in other Australian cities, driven by a range of factors such as the increase in the price of petrol, but the fact that Melbourne has led the way indicates that it comes up well in any interstate comparison.

Since franchising began in 1999 both trains and trams have seen significant increases in services, the introduction of new rolling stock and a more customer-focused attitude.  Also, commuters no longer experience the sort of industrial action that produced the 55-day rail strike in 1950, or the six-week tram blockade in 1990.

Most of the problems that do arise in the Melbourne system are the result of either decades of under-investment in the maintenance of infrastructure during the time when it was fully government operated, or from the problems of overcrowding resulting from the success of the operators in attracting more customers.

The Government has also been slow to respond to the demands on the system of more commuters.  If, as Mees asserts, there are more efficient ways to deliver extra capacity on the rail system than the $9 billion Eddington rail tunnel from Footscray to Caulfield, then competitive tendering provides the opportunity for one of Connex's bidding rivals to provide a better alternative.

The Victorian Government would no doubt welcome any operator that said it could deliver more services without huge capital expenditure.  By contrast the NSW Government has no capacity to replace, and no will to reform, its poorly performing government operator.

What is also striking in Dr Mees' article is that every criticism he makes is directed at the rail operator, not at the tram operator.  One can only assume that even he must acknowledge the obvious improvements in the tram service.

It is easy to feel nostalgic about the good old days, or assume that other cities do it better, but for all its faults Melbourne has an improved public transport system that compares well with those of other cities.

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Dont ditch cattle yet, science isnt settled

How many times have you heard it said, the science is settled, we will have catastrophic global warming unless we change our ways and reduce our greenhouse gas emissions?

While the "science might be settled" it does not seem to be well understood.

At least there has been a dramatic rise in key greenhouse gases in the past last two years, in particular methane, but temperatures have not gone up.

In fact, global temperatures are falling.  That's right -- falling.

While Australian farmers have been told they should make a transition from cows to kangaroos to reduce their greenhouse gas emission, in particular emissions of methane, it is increasingly unclear that such a dramatic action, even if it was undertaken, would have any effect on global methane levels.

The amount of methane in Earth's atmosphere shot up in 2007, bringing to an end a period of about a decade in which atmospheric levels of the potent greenhouse gas were essentially stable.

At least that's according to a team of scientists led by Matthew Rigby and Ronald Prinn at the esteemed Massachusetts Institute of Technology (MIT) with their findings about to be published in the journal Geophysical Research Letters.

Methane in the atmosphere comes from a variety of sources including cattle, rice paddies, the coal industry.

It is destroyed by reaction with the hydroxyl free radical (OH), often referred to as the atmosphere's "cleanser."

A surprising feature of the recent surge in atmospheric methane levels is that it occurred almost simultaneously at all measurement locations across the world.

The scientists say a rise in northern hemispheric emissions may be due to the warm conditions observed in Siberia throughout 2007, potentially leading to increased bacterial emissions from wetland areas.  However, a potential cause for the increase in the southern hemisphere is less clear.

It was thought an explanation for the rise may lie, at least in part, with a drop in the concentrations of the methane-destroying OH.

Theoretical studies, however, indicated that if this had happened, the required global methane emissions rise would have been smaller and more strongly biased to the Northern Hemisphere, so this can't really explain the simultaneous rise in methane levels that have occurred all around the world either.

Indeed while the science of climate change is according to some "settled", there really is a lot we don't understand.

Not even our Federal Climate Change Minister, Penny Wong, can guarantee that a dramatic change in how Australian farmers go about their business would have any effect on global temperatures.

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Coughing up for others' inefficiencies

When Infrastructure Australia is sorting through funding requests from the states there is a strong argument that it should reject any for transport in NSW.

In particular, it should bin NSW Premier Nathan Rees's demand for federal funding of a $4 billion metro from the Sydney CBD to the inner west.  The latest NSW metro is a truncated version of one announced under Morris Iemma's premiership, when it was proposed to extend all the way to Sydney's outer northwestern suburbs at a cost of $12billion.  The Iemma proposal was, in turn, replacing a plan for a conventional rail link to the northwest at a fraction of the cost of a metro.  One of the oddest arguments Iemma made in support of the metro was that it would provide the catalyst for improved work practices across Sydney's CityRail system.  There is no doubt that CityRail needs a drastic overhaul, but spending $12 billion, or even the reduced amount of $4 billion, and waiting years to build a metro, seems both unnecessarily costly and slow.

A recent benchmarking study found that retaining train guards and staff at low patronage stations means that the NSW Government is paying $130 million more than it should to operate its metropolitan rail system.  It is also clear that savings of a similar amount could be made by adopting more efficient maintenance practices for both rail infrastructure and rolling stock.  Yet, despite the obvious need, Rees seems to have ruled out substantive rail reform, no doubt cowered by the power of Unions NSW.  By contrast, in the 1990s in Victoria, the Kennett government removed all train guards, reduced the number of station staff, and reformed maintenance practices under a package of reforms that rail unions ended up accepting without strike action.

Rail is not the only aspect of transport in NSW that needs reform.  In 2007, the Walker report recommended that the best way to stop Sydney Ferries haemorrhaging $50 million a year was to privatise it.  Remarkably, Rees has now announced that the ferries are to be returned to direct government control.  Report author Bret Walker has commented that Rees's decision "may even reduce the present statutory pressure for efficiency".

Sydney is also the only of the five main state capitals where a state government operates a bus fleet.  It is little surprise that the franchised operations in Adelaide and Perth and the private operators in Melbourne are more efficient than the Sydney operation, but so too are the council-operated Brisbane buses.

Unsurprisingly, the culture that tolerates operational inefficiencies also has an appalling record on delivering public transport infrastructure projects.  Sydney's new Epping-to-Chatswood rail line is years late, has seen a massive cost blowout, was designed with a tunnel that is too steep for the modern Tangara trains and, according to recent reports will impose deafening noise levels on commuters.

Given the demonstrable inefficiencies of Sydney's trains, ferries and buses, the demand for federal funding raises an important question.  Why should taxpayers from the rest of the nation have to subsidise the transport system in NSW, when it is clearly the country's least efficient?  Further, it is now being run by a state Government that has given up making any attempts to reform it.

It is clear that IA needs to ensure that it does not subsidise transport infrastructure that could be funded by a state or territory if that jurisdiction's own transport system were operationally efficient.  In doing this, IA could provide infrastructure funding under a model similar to the one that, in the '90s, saw the federal government provide incentive payments to the states for undertaking competition reforms.

With such obvious avenues for transport savings in NSW, it would be hard to justify giving federal funding.  Until now, it has been the long-suffering Sydney commuters and taxpayers of NSW who have paid the price for the power of Unions NSW to stop transport reform in the state.  Unless IA rejects Rees's demands, in future it could be the whole of Australia paying for NSW's refusal to reform.

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Australia as a destination for foreign capital

EXECUTIVE SUMMARY

The current international economic uncertainty provides Australia with challenges and opportunities.  As the latest UNCTAD World Investment Prospects Survey points out, investors are expressing greater caution about investing globally.  The survey reveals that global financial instability is negatively affecting foreign direct investment (FDI) plans, leading to a reduction in global investment of about 10 per cent for 2008.

Smaller numbers of multinational company executives are reporting large increases in their expected global investment spending.  The survey also shows that almost half of multinational company executives are worried about foreign investment deregulation by governments.

Amidst this uncertainty, Australia's inherent advantages should allow it to market itself as a "safe haven" investment destination capable of delivering the best economic return.  Yet, we are going in the opposite direction with Australia falling behind as a favoured investment location according to the UNCTAD prospects survey.

Despite common perceptions and liberalisation since the 1970s, Australia's FDI regulatory framework remains restrictive.  The Commonwealth government screens large FDI projects against a "national interest" test on a case by case basis, with no legislative definition.  Doing so generates uncertainty to potential investors.  Current regulatory restrictions are a significant barrier inhibiting Australia's potential to attain more foreign capital.

It has long been established in economic policy that rules must be open, transparent and predictable to give businesses certainty about their decisions.  The Australian FDI policy framework runs contrary to this.  Instead of predictable results, Australia's statutory investment regime opens the door for significant political discretion over project approvals, leads to possible delays in investments, and fuels uncertainty amongst foreign investors about government attitudes towards FDI.

Political and community concerns have been raised about Chinese investment in Australia, notably in the growing mining sector.  In February 2008, the Treasurer outlined six additional principles to apply to investments by sovereign wealth funds (SWFs) and state owned enterprises (SOEs).  These are providing more, not less, uncertainty to investors by introducing prejudgement into a non discriminatory FDI policy.

Australia's restrictions on foreign investment are directly impacting on its attractiveness as an investment destination.  The OECD has assessed that Australia has one of the most restrictive FDI regimes in the developed world.  Australia's regime is only less restrictive than those of Iceland and Mexico.

If Australia wants to attract more investment in a capital constrained world, it must reassess its performance as a FDI destination.  It also needs to come to grips with the realities of new sources of investment, including SOEs and SWFs.  As investors they are not unique and are subject to market scrutiny, as are other forms of investment.

Australia needs to free up its FDI policy to attain more global capital in an uncertain environment.  Some strategies proposed include:

• Raising investment thresholds for all FDI proposals to those currently applying to investments from the US;
• Removal of politically sensitive sectors from legislation, encouraging new sources of investment flows into Australia;  and
• Removal of FDI guidelines for SWFs and SOEs, removing uncertainty about government attitudes to capital inflow from these investment classes and ensuring that domestic laws do their job.

Foreign investment has allowed Australia to achieve world class living standards and economic prosperity.  But continuing investment flows should not be taken for granted.  By turning away from "capital protectionism", Australia can attract more FDI and become a "safe haven" for investors in more uncertain economic times.

INTRODUCTION

It has been consistently argued by economists that foreign investment has played a vital role in Australia's long term economic development.  As noted by the former Commonwealth Treasury Secretary, Ted Evans, "it is a fact that, for all of its modern history, Australia has borrowed from abroad -- our prosperity has been built on foreign investment". ⁽¹⁾

For all the positive economic effects of foreign investment for Australia -- such as an expansion in productive capacity, local employment opportunities, and the transfer of new technologies, work practices and skills -- there remains a reservoir of community concern about alleged adverse consequences of such phenomena.  Chief among these concerns are a perceived loss of national sovereignty as a consequence of foreign investment.  In apparent acknowledgement of the concerns, Australia has maintained formal regulations governing the flows of investment from foreign sources since the 1970s.

This paper seeks to critique the impact of current regulations on foreign direct investment (FDI).  FDI refers to the investment in assets by a foreign entity for the purpose of control.  If Australia is to forge ahead as a leading destination for such investment in the growing Asia‑Pacific region, it must improve its investment performance.  Improving the regulatory framework for FDI has now reached greater urgency as a consequence of the credit‑constrained international economic climate.

INTERNATIONAL ECONOMIC CONDITIONS AND FOREIGN INVESTMENT:  AUSTRALIA'S OPPORTUNITY

The global economy is in a precarious position.  The US economy is mired in financial problems that first emerged in subprime mortgage lending, but which have now spread much more broadly throughout its financial sector.

Other countries are feeling the effects of the US economic contagion -- including through tighter international credit markets, and weak business and consumer sentiment, translating into slower economic activity.  Australia is facing contradictory economic pressures of an economic slowdown against continuing strong growth in Australia's major Asian trading partners, driving increases in the terms of trade and contributing to inflationary pressures domestically.

These events may have an important effect on foreign investment flows going forward, presenting new challenges and opportunities for Australia in attracting FDI in the future.

INTERNATIONAL ECONOMIC UNCERTAINTIES COULD MODERATE FOREIGN INVESTOR ACTIVITIES

A more unstable macroeconomic environment seems to be having a negative effect on global investment plans.  This could lead either to investors restricting their plans only to projects with the highest returns, or the cancellation or deferral of investments.  Alternatively, a more uncertain macroeconomic environment could encourage investors to invest in "safe haven" locations with the best guarantee of an economic return. ⁽²⁾

Important insights into the FDI outlook can be gleaned from an annual survey of global investment conditions by the United Nations Conference on Trade and Investment (UNCTAD).  The latest World Investment Prospects Survey gauges expected foreign investment patterns for 2008‑10, and is based on a sample of 5,000 multinational companies.  The survey findings are subject to review and analysis by academics, consultants and investment attraction agencies prior to publication.

According to the survey, the global economic downturn and financial instability have made the latest multinational corporate investors more cautious about their medium‑term FDI ambitions.  About half of the respondents suggested that the possibility of a global economic downturn represents a significant additional threat to their ongoing investment plans.  Close to 40 per cent of respondents reported that the instability flowing from US economic conditions has had a significantly negative impact on their investment plans for the next three years.

Other elements of the latest World Investment Prospects Survey appear to confirm these sentiments.  FDI plans have been revised downwards compared to last year's survey -- only 21 per cent of companies anticipate a "large" increase in their investment expenditures globally over the next three years, compared with 32 per cent in the survey of the year before.  The proportion of those companies which only plan a "moderate increase" has risen to 48 per cent from 38 per cent in the previous survey.

While it is difficult to ascertain the full impact of global macroeconomic instability on international capital flows, one source recently estimated a reduction in annualised global FDI in the order of ten per cent for 2008 compared to the previous year. ⁽³⁾  In a further signal of a recent slowdown in foreign investment activity, UNCTAD reported a reduction in the number of greenfield investment globally of about two per cent during the first quarter of 2008 compared to the same period in 2007. ⁽⁴⁾  These preliminary results imply a more cautious attitude toward global investment by multinational corporations in recent months.

An important issue raised by a recent survey relates to concerns about more prescriptive FDI regulation.  The UNCTAD World Investment Prospects Survey for 2008‑10 shows that 48 per cent of responding multinational company executives are worried about the risk of negative changes in countries' investment regimes. ⁽⁵⁾  Other surveys report similar concerns about "capital account protectionism", driven by, for example, rising hostility against direct investment by foreign interests (including government‑owned entities) in local companies.

AUSTRALIA SHOULD POSITION ITSELF AS A SAFE HAVEN FOR INTERNATIONAL CAPITAL

Australia has managed to attract extra foreign capital stock over the past 25 years -- increasing from about $25 billion in 1980‑81 to about $347 billion in 2006‑07 (or from about 18 per cent of GDP to about 33 per cent). ⁽⁶⁾  However, the more uncertain global economic situation is likely to have a very real impact on Australia's economic growth through reduced foreign investment.  Challenges and opportunities abound in the current environment.

The UN studies indicate that some contradictory trends are pressing on Australia's international investment performance.  Survey data shows that representatives of multinational corporations appear less certain about investing in Australia (and other countries such as Japan, New Zealand and some original European Union countries). ⁽⁷⁾  In the latest UNCTAD survey of the foreign investment outlook, Australia has lost some ground compared to other countries such as Germany and Indonesia (Figure 1).

Figure 1:  Ten most attractive countries for the location of foreign investment1. Based on percentage of responses to UNCTAD World Investment Prospects Survey.  Source:  UNCTAD, World Investment Report:  Transnational Corporations and the Infrastructure Challenge. (Geneva:  United Nations, 2008)

Although the survey report does not provide reasons behind weakening sentiment for Australia as a FDI destination, respondents broadly identify a range of risk factors to global investment going forward.  These include a global economic downturn, financial instability, inflation risks, as well as unfavourable changes in FDI policy regimes.  Some of these factors could be pertinent to Australia's situation.

That said, Australia remains in the top ten of most attractive countries in which to invest through to 2010, while the East, South and South‑East Asian regions remain favourable FDI destinations.  In addition, a high demand for natural resources (such as minerals) is expected to attract capital from foreign sources. ⁽⁸⁾

How Australia reconciles these competing trends will be critical in attracting FDI.  A case can be put forward that Australia can position itself as a global "safe haven" for foreign investors seeking profitable destinations in which to invest.

Whereas domestic growth is expected to moderate somewhat, it appears that most of the problems directly associated with the financial system meltdown internationally have not substantially affected domestic financial institutions to date.  Together with general political stability and a highly‑skilled workforce, these positive factors could put Australia in a position to potentially secure even more capital.

However, continuing flows of foreign capital cannot be taken for granted.  As will be discussed below, the prospect for Australia transforming its FDI potential into reality will critically depend on its foreign investment policy regime.

DESTINATION AUSTRALIA?  CLARIFYING PERCEPTIONS AND REALITIES

The success of countries to attract FDI, both currently and in the future, partly depends on the barriers and restrictions imposed on investments.  However, the true extent to which Australia has realised a liberal foreign investment regime has long been the subject of policy debate. ⁽⁹⁾

Policymakers frequently claim that Australian FDI policy is relatively liberal by its nature.  In a July 2008 speech to the Australia‑China Business Council, the Commonwealth Treasurer Wayne Swan said that "Australia is an open, liberal nation that makes its living through trade with the rest of the world ... It follows that we have an open and welcoming approach to foreign investment". ⁽¹⁰⁾

Complementing these espoused principles is the notion that Australian FDI policy does not discriminate between investors.  Recently the Prime Minister, Kevin Rudd, said Australian foreign investment regulation is "non‑discriminatory.  We have had foreign investment from Japan and Korea and the US and Great Britain for decades on a large scale". ⁽¹¹⁾

It is important to critically assess these statements, given that the uncertain world macroeconomic situation means that Australia will have to compete more aggressively against other nations for available international capital.

AUSTRALIAN FDI POLICY OPENS THE DOOR FOR ARBITRARY POLITICAL INFLUENCE OVER INVESTMENT

Australia has a formal foreign investment policy under the Foreign Acquisitions and Takeovers Act 1975 (the Act), and accompanying regulations.  Concerns have been raised that this allows the Commonwealth government either to block much‑needed large foreign investments, or change proposals in ways originally unintended by investors.

The Act establishes pre‑screening processes for major investment applications, defined as any purchase by a foreign entity, and any associates, of more than 15 per cent of an Australian company, or by several foreign entities of more than 40 per cent in aggregate.  Investors are obligated to notify government of their proposal, prior to commencement, if it exceeds a set of monetary thresholds including:

• acquisitions of substantial interests in an Australian business where the value of its gross assets, or the proposal values it, in excess of $100 million;
• proposals to establish new businesses involving a total investment of $10 million or more;
• takeovers of offshore companies whose Australian subsidiaries or gross assets exceed $200 million and represent less than 50 per cent of global assets. ⁽¹²⁾

There are additional restrictions on sensitive industries such as airports, banking, media, residential real estate, telecommunications and transport (civil aviation and shipping).

Applications for major foreign investments in Australia are assessed by the Foreign Investment Review Board (FIRB).  FIRB is an arm of the Commonwealth Treasury and final decisions of FIRB rest with the Commonwealth Treasurer.  The legislation requires the FIRB to assess an application within 30 days (although this can be formally extended up to 90 days).

The government assesses large foreign investment projects in accordance with a "national interest" test.  Importantly, there is no definition of "national interest" under the Act.  In effect, "national interest" is determined by the government of the day and is interpreted on a case‑by‑case basis.

However, determining "national interest" is not without precedent.  A government report on the recent history of the Australian foreign investment regime states that "the Government determines what is "contrary to the national interest" by having regard to the widely held community concerns of Australians". ⁽¹³⁾  In effect, the Commonwealth can deny entry to any significant foreign investor "in the national interest" without legal constraints or transparent explanation. ⁽¹⁴⁾

In effect, it is claimed that under the Australian FDI regime "decisions on foreign investment become politicised and tend to reflect the views and prejudices of the median or "swinging" voter, regardless of how much or how little they know about foreign investment or the economic trade‑offs that are involved in restricting it". ⁽¹⁵⁾

As an alternative to blocking FDI entry, the Treasurer can reserve the right to impose conditions on a major foreign investment proposal in order for it to be approved.  According to a recent study, about 30 per cent of all proposals approved, by value, by the FIRB have terms and conditions imposed on them.  This seems to be an inordinately high percentage given the claims that Australia has an avowedly liberalised FDI regulatory regime, and belies the publicly stated "general presumption ... that [unamended] foreign investment proposals will generally serve the national interest". ⁽¹⁶⁾

In practice, some FDI applications are likely to be withdrawn before the screening process is completed.  The FIRB does not publish details of either the applications that are subsequently resubmitted in a modified form, after having being withdrawn, or the investment that is permanently foregone as a consequence of withdrawal.  However, a study by ITS Global estimates that the economic cost of withdrawn investment could be as high as $1.5 billion per annum. ⁽¹⁷⁾

There could also be some commercially viable, internationally footloose investments that bypass Australia altogether in favour of countries without screening processes.  It is very difficult, if not impossible, to estimate foregone investment as a consequence of the FDI screening policy regime.  Nonetheless, it is likely there will be some investors who overlook Australia precisely for this reason.

POTENTIAL DELAYS TO FOREIGN INVESTMENT APPROVAL COULD HAVE SEVERE CONSEQUENCES

Another consideration is the likelihood that screening processes by the regulator under the Australian FDI regime may be time‑consuming and subject to considerable delays.  As noted above, the FIRB is obligated under legislation to deliver a ruling within 30 days, with an option for a decision to be extended to 90 days. ⁽¹⁸⁾

Apart from the potential cost of any delays to the investor, the screening period may also fuel speculation about the attitudes of the government towards FDI.  For example, in recent months, there have been reports of the FIRB encouraging some investment bids in the Australian resources sector from Chinese SOEs to be temporarily shelved.  The Wall Street Journal Asia recently reported that "market watchers believe Labor has been acting to slow investment without publicly opposing Chinese investors, while it decides how to deal with the wave of Chinese government‑backed deals". ⁽¹⁹⁾

The magnitude of foregone investment opportunities cannot be known with certainty.  However, questions surrounding the political attitude towards certain types of investors, or the proposed sectoral destination of their investments, could deter a number of otherwise commercially viable foreign investments taking place in Australia altogether.

The Treasurer has stated his awareness of the need to provide procedural fairness to all applicants, and this means "taking appropriate time to consider proposals". ⁽²⁰⁾  Nonetheless, there is a need to balance the screening process (as problematic as it is) against the potential cost delays, in a global capital market invariably governed by the practical concept of "time is money".

RECENT ADDITIONS TO FDI REGULATION COULD LEAD TO CONFUSION AMONG INVESTORS

Australian FDI policy has also come under greater scrutiny because of adverse political and community reactions to a growing number of investment applications from China.  This has recently culminated in an announcement of extra FDI regulation, adding complexity to a process already marked by political discretion over large investments.

Concerns have been raised by the political elite and general community alike regarding the rising Chinese FDI in Australian mining.  The Commonwealth Treasurer expressed the view in July 2008 that:

Australian governments -- now as in the past -- are particularly attentive when the proposed investor in an Australian resource is also the buyer of that resource or linked with the buyer of that resource. ... it follows that as the proposed participation by a consumer of the resource increases to the point of control over pricing and production, and especially when the resource in question is already developed and forms a major part of the total resource, or where the market disciplines applying to public companies are absent, I will look more carefully at whether the proposal is in Australia's national interest. ⁽²¹⁾

The Western Australian Premier, Colin Barnett, in late September 2008 stated that "Australia could be overwhelmed by the weight of Chinese investment. ... I believe Australia as a whole needs to agree on the rules of the game with this Chinese demand.  I think we do need to make sure we do keep it manageable, that we don't lose control of our own economic development, in other words". ⁽²²⁾

According to a recent survey conducted by the Lowy Institute, these concerns appear to be keenly felt amongst the general Australian community. ⁽²³⁾  About 78 per cent of respondents opposed major foreign investments by companies, banks or investment funds controlled by the Chinese government.  In general, 90 per cent of those surveyed believed that the Commonwealth government has a responsibility to ensure that major Australian companies are kept in Australian control.

The Commonwealth government and the Treasurer have responded to these concerns.  In February 2008, an additional six policy guiding principles on investment by government‑owned or controlled entities were outlined:

• An investor's operations are independent from the relevant foreign government.
• An investor is subject to and adheres to the law and observes common standards of business behaviour.
• An investment may hinder competition or lead to undue concentration or control in the industry or sectors concerned.
• An investment may impact on Australian Government revenue or other policies.
• An investment may impact on Australia's national security.
• An investment may impact on the operations and directions of an Australian business, as well as its contribution to the Australian economy and broader community. ⁽²⁴⁾

These guidelines state that "proposed investments by foreign governments and their agencies (e.g. SOEs and SWFs) are assessed on the same basis as private sector proposals.  National interest implications are determined on a case‑by‑case basis.  However, the fact that these investors are owned or controlled by a foreign government raises additional factors that must also be examined". ⁽²⁵⁾

This addition to the FDI policy regime raises further uncertainty about the conduct of foreign investment policy, in particular towards Chinese investment.  It contradicts the repeated assertions of the government that Australia's FDI regime is non‑discriminatory towards all‑comers, since China's investment proposals would invariably come under the class of investments subject to the additional six principles.

Furthermore, as nebulous as the current national interest test may be, it could be argued that "the a priori identification of a class of investment proposals as deserving of special scrutiny introduces an element of pre‑judgement into the foreign investment review process". ⁽²⁶⁾  Another argument is that, to some extent, the six principles outlined in February 2008 may duplicate controls that already exist. ⁽²⁷⁾

DOES THE OECD FDI INDEX SHED ANY LIGHT ON THESE QUESTIONS?

Foreign investment screening restrictions seems to drive Australia's high score against an OECD benchmark measure of regulatory restrictions on FDI, based on an earlier study by the Productivity Commission. ⁽²⁸⁾

The measure, referred to as the "regulatory restrictiveness index", aims to capture the extent of discrimination against foreign investors compared to domestic investors in a given country.  The restrictions covered by the restrictiveness index can be broadly classified into entry and post‑entry operational restrictions.

The indicators take into consideration the following potential restrictions:

• Equity restrictions:  Discriminatory barriers to entry in the form of limitations on foreign ownership, typically in the form of limiting the share of companies' equity capital in a sector that non‑residents are permitted to hold;
• Screening restrictions:  Special screening procedures which only apply to foreign investors, such as prior approval of FDI and stipulations that investors must demonstrate the economic benefits of their project;  and
• Operational restrictions:  Post‑entry management and other operational restrictions imposed on the foreign investor, for example stipulations that nationals or residents must form a majority of the board of directors of a firm subject to foreign investor interest.

These direct foreign investment restrictions can either be across‑the‑board, applying to all sectors, or sector‑specific.  Weights are applied to these three elements of FDI restrictions when determining the final index results for OECD countries.

The OECD index measures FDI restrictiveness on a zero‑to‑one scale, with zero representing full openness and a score of one reflecting a prohibition of foreign investment.  Restrictiveness is first calculated at the industry level (covering nine sectors), and then a weighted national average is obtained using FDI and trade weights. ⁽²⁹⁾

According to the latest FDI regulatory restrictiveness index results, Australia has the most restrictive foreign investment policy regime of all OECD countries except Iceland and Mexico (Figure 2). ⁽³⁰⁾  The FIRB screening processes are pivotal to Australia's final index score -- the abolition of the screening policy, with other country policies held constant, would reduce Australia's score, and place it toward the middle range of OECD countries. ⁽³¹⁾

Figure 2:  OECD FDI Regulatory Restrictiveness Index scoresAggregated index for nine sectors (business, telecommunications, construction, distribution, finance, tourism, transport, electricity and manufacturing).  A higher value implies a more restrictive FDI policy.  Source:  OECD 2007.

A number of caveats have been expressed regarding the OECD index methodology.  The index reports on statutory FDI restrictions only and does not incorporate the effect of actual investment approval outcomes, including upon investor sentiment.  In addition, it does not measure the stringency of actual enforcement of FDI regulations.  For example, as noted by the OECD, "the stringency implied by screening requirements could be particularly variable across countries.  Moreover, some countries may be more forthcoming than others in self‑reporting their restrictions". ⁽³²⁾

These issues pose a significant limitation on the results.  For example, the OECD observes that intra‑European Union (EU) FDI flows are completely unrestricted.  Presumably, this has some impact on the relatively low index scores registered for a number of EU countries.  However, there are important practical differences in restrictions imposed by various EU countries on non‑EU investors that may not be reflected in final index scores.

In addition, broader features of the institutional environment -- that equally affect domestic and foreign investors -- are not considered, with the exception of state monopoly enterprises. ⁽³³⁾  Therefore, issues such as regulations of financial, labour and product markets, and other policies, are not considered in the development of the OECD index results.

It is noted that the OECD measure only covers a limited range of industries in the services, manufacturing and utilities sectors.  Importantly for Australia it excludes activities such as mining:  "because opportunities for investment in energy, such as oil and gas, vary considerably across countries depending on their natural endowments, energy other than electricity is not covered by the index.  The exclusion of other primary sectors, such as mining, may distort countries' relative restrictiveness indicators". ⁽³⁴⁾

The final index results are also affected by the quality of information on FDI restrictions made available to the OECD.  The transformation of qualitative information into a single metric, or set of metric indicators, is invariably a difficult exercise that relies on judgement.

Finally, the construction of (ultimately subjective) weights attached to the different forms of regulation may also affect the results.  In particular, ownership restrictions are accorded a relatively greater weight on the basis that foreign ownership is a necessary condition for FDI.  However, in certain countries, other forms of statutory regulation could be more important than an equity requirement in influencing foreign investment levels.

These caveats imply that the OECD regulatory restrictiveness index results alone are insufficient to predict the attractiveness of specific countries to foreign investors, and should therefore be treated with caution.  However, in the absence of better alternatives, the OECD measure does lend at least some weight to the argument expressed in this paper that Australia's statutory FDI regulations are potentially quite restrictive in theory, if not in practice.

MORE CAPITAL WELCOME!:  A STRATEGY TO FREE UP CAPITAL FLOWS INTO AUSTRALIA

To attract additional FDI, and help avert the impact of weaker foreign investor sentiment in the next two years, Australia should continue to liberalise its foreign investment policy.  This will also ensure that political agents and their bureaucrats play a reduced role in determining what FDI projects should take place.

RAISE THRESHOLDS FOR ALL FDI PROPOSALS TO THOSE THAT APPLY FOR US INVESTORS

Thresholds are set at higher levels for US entities wishing to investment in Australia under the terms of the Australia‑United State Free Trade Agreement (AUSFTA).  For proposed FDI in prescribed sensitive sectors, or by an entity controlled by a US government, the threshold for FIRB notification is $105 million.  In all other cases, the threshold is $913 million -- a substantial increase compared to the general threshold requirement applying to FDI from other countries.

In 2006, the Commonwealth government amended the Act to provide for higher thresholds for US entities, and for these levels to be indexed annually.  The government also raised the general asset value threshold from $50 million to $100 million, and the offshore takeovers threshold increased from $50 million to $200 million. ⁽³⁵⁾

However, the government declined the opportunity to extend the relevant FIRB thresholds for US investments to FDI proposals from all countries.  It is now an opportune time to equalise the general foreign investment thresholds to those applicable to the AUSFTA.  Indexation of the thresholds is also desirable.  This will not only ensure a non‑discriminatory approach to FDI, but also restrict the government's screening process to very large investments only.

REMOVE INVESTMENT RESTRICTIONS ON POLITICALLY SENSITIVE SECTORS

As noted above, the government's FDI policy guidelines incorporate guidelines on "national interest" matters in relation to a range of sectors regarded as sensitive.  For example, the government applies additional restrictions on the foreign acquisition of residential real estate, commercial real estate, rural land, accommodation facilities, and urban land corporations and trusts.  Other sectors with extra restrictions include airports, banking, media, telecommunications and transport (civil aviation and shipping) (Box 1).

Box 1:  Foreign investment guidelines for selected prescribed sensitive sectors Banking Foreign investment in the banking sector needs to comply with banking legislation and government policy.  For new foreign owned banks wishing to enter Australia, the Australian Prudential Regulation Authority (APRA) must be satisfied that the bank and its home supervisor are of sufficient standing, and are willing to comply with APRA prudential supervision regulations. Civil aviation Unless contrary to the "national interest", foreign persons (including airlines) could expect approval to acquire up to 100 per cent equity in an Australian airline, other than Qantas.  Similarly, approval could be expected to acquire up to 49 per cent of the equity in an Australian international carrier (except Qantas), individually or in aggregate. In the case of Qantas, total foreign ownership is restricted to a maximum of 49 per cent in aggregate, with individual holdings limited to 25 per cent and aggregate ownership by foreign airlines to 35 per cent.  Other criteria must be satisfied relating to the nationality of board members and the operational location of the enterprise. Airports For airports offered for sale by the Commonwealth, the Airports Act 1996 stipulates a 49 per cent foreign ownership limit. Shipping For a ship to be registered in Australia it must be majority Australian owned, unless the ship is designated as chartered by an Australian operator. Media Direct proposals by foreign persons to invest in the media sector, irrespective of size, must seek prior approval.  Proposals involving portfolio shareholdings of 5 per cent or more must also be submitted for examination. Telecommunications Aggregate foreign ownership of Telstra is restricted to 35 per cent of the privatised entity (including instalment receipts), and individual foreign investors are only allowed to acquire no more than 5 per cent of the entity. Source: FIRB, Annual Report 2006‑07. (Canberra:  Commonwealth of Australia, 2008)

In terms of US investments under the AUSFTA, the range of prescribed sensitive sectors and activities have been extended to include defence and security technologies, uranium or plutonium extraction, operation of nuclear facilities, and rail and port infrastructure.

According to the latest FIRB annual report, "reflecting community concerns, specific restrictions on foreign investments are in force in more sensitive sectors". ⁽³⁶⁾  In other words, the nomination of sensitive sectors explicitly reflect a political response to voter demands that FDI be restricted in certain parts of the economy, rather than any economic issues per se.

It is the case that some other OECD countries impose additional restrictions on foreign investments in certain industries.  However, given the likely intensification of competition for FDI over the next two years, Australia would benefit from the removal of prescribed sensitive sectors from the Act.  Australians would benefit from the additional economic benefits gained from additional foreign investment in the sectors subject to liberalisation.

In some instances, the proposal to remove FDI regulations applying to politically sensitive sectors will require offsetting policy adjustments by governments.  For example, the liberalisation of foreign investment arrangements for real estate should be matched by measures to improve housing supply.  In particular, State and local governments should streamline their development approval processes and zoning laws to ensure that additional supply meets the expected additional demand for housing from foreign interests.

REMOVE FDI POLICY PRINCIPLES APPLYING TO INVESTMENTS BY GOVERNMENT ENTITIES

There is also a case for removing the February 2008 guidelines on FDI by foreign government entities from Australia's foreign investment regime.

There are reports suggesting that these guidelines have created uncertainty in some segments of the foreign investment market.  An executive of Shenhua Group, a Chinese coal mining SOE, was reported to have said in June 2008 that "Chinese companies have got a kind of feeling that we are encountering unfair policies.  We don't want any preferential policies, we just want fair and open competition". ⁽³⁷⁾  Others have perceived the guidelines to be part of a broader push by the Commonwealth to discourage investments by Chinese SWFs and SOEs.  For example, the Wall Street Journal Asia recently reported that "market watchers believe Labor has been acting to slow investment without publicly opposing Chinese investors, while it decides how to deal with the wave of Chinese government‑backed deals". ⁽³⁸⁾

The Treasurer's FDI principles seem to be founded on a concern that SWFs and SOEs are funded, and can be underwritten by, taxpayers and are beholden to the decisions of political masters.  In comparison, private firms undertaking investment are accountable to their shareholders and are directly responsive to competitive market forces through the profit‑and‑loss mechanism.

However, there has been precious little evidence to suggest that SWF and SOE investors in other countries have not been motivated to pursue commercially prudent FDI decisions.  Regarding the case of a SWF, Stoeckel observed that even "if a fund pursues a non‑commercial agenda, which then proved detrimental to the interests of its host, it would be running the risk that all future foreign investments it proposed would be rejected". ⁽³⁹⁾  A similar principle can apply in the case of an SOE intending to invest capital in Australia.

In addition, the value that the foreign investor places on the firm's assets, and any subsequent operations of an Australian firm with the injection of foreign SWF or SOE capital, will be the subject of continuous market testing in domestic and global economies.

Accepting the case that most FDI projects by SWFs and SOEs are commercially motivated, there would seem to be little point in Australia setting up additional FDI policies to block any proposed foreign investment by these entities subject to the observance of domestic laws and business standards. ⁽⁴⁰⁾

All foreign investments, regardless of source, are subject to Commonwealth, State and local government laws.  This should be sufficient to ensure that a foreign SOE investor will not create monopolistic industry conditions, evade taxes or abrogate corporate or other legal standards in Australia.  The fact that these domestic policies exist effectively renders a number of the principles outlined by Treasurer Swan superfluous.

There are suggestions that the new guidelines are fuelling uncertainty amongst certain foreign investors, potentially harming Australia's capacity to attain more FDI inflow.

Ultimately, whether the board and shareholders of a privately owned Australian corporation wishes to entertain a proposal for acquisition of its assets by a foreign SWF or SOE should be a matter for the individual corporation, not of the Australian government.  It is therefore an unnecessary addition to government bureaucracy that the FIRB should be accorded extra functions to test foreign SWF and SOE investment applications.

CONCLUSION

Foreign direct investment is a powerful form of international economic integration that delivers gains to both parties according to the principle of comparative advantage.  Along with international trade and the opening of financial markets, FDI has allowed Australia to achieve world‑class living standards and economic prosperity.

The economic uncertainties currently afflicting the world do not necessarily cast "gloom and doom" for Australia in every respect.  A window of opportunity for Australia to become a "safe haven" for FDI in the Asia‑Pacific region is now open.  If Australia is so willing, it can position itself for investment excellence by seeking more foreign capital relative to the levels acquired in the past.

However, it cannot do so without removing cumbersome regulatory restrictions on foreign investment inflows.  Indeed, Australians should not accept lower levels of foreign capital, and through it lower economic growth, because of regulatory restrictions through ambiguous "national interest" tests or the institution of additional tests that could reduce investment from growing Asian economies.  Australia would do well to pare back the role of the FIRB and the Commonwealth Treasurer in investment determination.

It is only until such time that Australia embraces the concept of free capital, and eschews the "low road" of capital protectionism, that it can genuinely be an attractive destination for capital investment.

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ENDNOTES

1.  Evans, Ted, "Economic Nationalism and Performance:  Australia from the 1960s to the 1990s", Ninth Annual Colin Clark Memorial Lecture, 4 June 1999.

2.  United Nations Conference on Trade and Investment (UNCTAD), World Investment Prospects Survey 2008‑2010. (Geneva:  UNCTAD, 2008a)

3.  Herman, Steve, 2008, "US Financial Crisis Expected to Affect Foreign Investment", VOA News, 24 September;  UNCTAD, 2008b, xvii.

4.  UNCTAD, 2008a, 8.

5.  UNCTAD, 2008a, 19.

6.  Reserve Bank of Australia, Australian Economic Statistics 1949‑50 to 1996‑97;  Australian Bureau of Statistics, Balance of Payments and International Investment Position, Australia, cat. no. 5302.0.

7.  UNCTAD, World Investment Report:  Transnational Corporations and the Infrastructure Challenge. (Geneva:  United Nations, 2008b)

8.  UNCTAD, 2008b, 33.

9.  Kasper, Wolfgang, Capital Xenophobia:  Australia's Controls of Foreign Investment. (St. Leonards:  Centre for Independent Studies, 1984);  Drysdale, Peter and Findlay, Christopher, 2008, "Chinese Foreign Direct Investment in Australia:  Policy Issues for the Resource Sector", Presentation to Australian National University Crawford School Public Seminar, September;  ITS Global 2008, Foreign Direct Investment in Australia -- the increasing cost of regulation, September;  Stoeckel, Andrew, 2008, "Sovereign Wealth Funds:  Friend or Foe?", Speech presented to Australia‑China Business Council Forum, July.

10.  Swan, The Hon Wayne, 2008a, "Australia, China and This Asian Century", Speech to the Australia‑China Business Council Forum.

11.  Callick, Rowan, 2008, "Open for business:  PM tells Chinese", The Australian, 22 August.

12.  FIRB, Annual Report 2006‑07. (Canberra:  Commonwealth of Australia, 2008)

13.  Commonwealth Treasury, "Foreign Investment Policy in Australia -- A Brief History and Recent Developments", Economic Roundup, (Spring 1999).

14.  ITS Global, 2008, 29.

15.  ITS Global, 2008, 3.

16.  FIRB, 2008, 7.

17.  ITS Global, 2008, 21.

18.  In practice, applicants of complex FDI proposals are often encouraged by the FIRB to withdraw and resubmit their investment application if they wish to avoid public gazettal of their proposal after the cut‑off period.

19.  Pannett, Rachel, 2008, "Canberra takes hard look at foreign investments", The Wall Street Journal Asia, 7 July.

20.  Swan, 2008a.

21.  Swan, 2008a.

22.  Taylor, Paige, 2008, "Barnett warns on investment", The Australian, 30 September.

23.  Hanson, Fergus, Australia and the World:  Public Opinion and Foreign Policy. (Sydney:  Lowy Institute for International Policy, 2008)

24.  Swan, 2008b, "Government Improves Transparency of Foreign Investment Screening Process", Press Release.

25.  Swan, 2008b.

26.  Drysdale and Findlay, 2008, 27.

27.  ITS Global, 2008, 2.

28.  Hardin, Alexis and Holmes, Leanne, 1997, Services Trade and Foreign Direct Investment. (Canberra:  Industry Commission, 1997)

29.  Organisation for Economic Cooperation and Development (OECD), International Investment Perspectives:  Freedom of Investment in a Changing World. (Paris:  OECD, 2007)

30.  OECD, 2007, 139;  Stoeckel, 2008, 11.

31.  It is notable that the OECD index shows that the United States, with the largest relative share of FDI flows in the world, similarly does not impose any screening policies on foreign investors.  Whilst outside the scope of the current paper, an interesting exercise would be to determine the extent to which Australia's FDI screening procedure detracts from its ability to attain foreign capital relative to non‑screening countries (controlling for other factors such as economy size, resource endowments, institutional factors, and so on).

32.  OECD, 2007, 138.

33.  In the view of the OECD, a government monopoly is in effect a de facto ban on foreign direct investment (OECD, 2007, 146).

34.  OECD, 2007, 137.

35.  FIRB, 2008, 97.

36.  FIRB, 2008, 72.

37.  Garnaut, John, 2008, "Master of the universe", The Diplomat July‑August.

38.  Pannett, Rachel, 2008, "Canberra takes hard look at foreign investments", The Wall Street Journal Asia, 7 July.

39.  Stoeckel, 2008, 13.

40.  ITS Global, 2008, 26.