Submission to the Senate inquiry into investment by State-owned entities

EXECUTIVE SUMMARY

Australia has always been dependent on foreign investment to build infrastructure, grow industries and jobs.  If Australia wants to attract investment in a capital constrained world, it must be an attractive destination.  Yet Australia currently has one of the most restrictive foreign investment regimes in the world, and that applies especially for investments from State-owned entities (SOEs).

The rise of investment applications to the Foreign Investment Review Board from SOEs has prompted concerns about the motivations of such investments and whether the government should block these applications.

To provide clarity, in February 2008, the Federal Treasurer, Wayne Swan, outlined six additional principles to apply to investments by State-owned entities.  But there is an inconsistency between the perception of risk and the reality of risk posed by SOE investment.

SOE investments do not pose a threat to Australia's national interest.  The risks posed by SOEs flow from the special treatment they enjoy from close proximity to domestic government.  But the special treatment enjoyed in their domestic economy does not extend extraterritorially.  For example, a Chinese SOE may enjoy beneficial arrangements in China, but the powers of the Chinese government do not extend to Australia, and nor do the benefits the SOE enjoys.

In Australia an SOE only enjoys the same commercial environment as any other investor.  And the Australian government maintains the right to appropriately regulate where there may be a perceived risk from an external SOE investor.  For example, the government can do so by ensuring that the standards of corporate governance for firms listed on the Australian Stock Exchange are rigorous and prevent large controlling shareholders from looting the firm's assets or expropriating firm value from minority shareholders.  Given appropriate corporate governance standards, large controlling shareholders need not pose any investment threat or any other type of threat to Australia.  With appropriate shareholder protection all investment would be in the national interest.

Australia also needs to come to grips with the realities of new sources of investment, especially SOEs.  As investors they are not unique and are subject to market scrutiny, as are other forms of investment.

Rather than fearing investment from SOEs, the Australian government should be:

• ensuring the appropriate legislative and regulatory frameworks are in place to ensure investors act appropriately;  and
• liberalising the Australian investment regulatory regime to ensure Australia is an attractive destination for investment capital.

Developing Australian infrastructure, Australian industry and Australian jobs is in the Australian "national interest".  To fulfil these objectives Australia needs investment capital.  With the correct regulatory and legislative regime in place the origins of the investment is irrelevant.

ABBREVIATIONS

EU = European Union
FDI = Foreign direct investment
FIRB = Foreign investment review Board
OECD = Organisation for Economic Cooperation and Development
SOEs = State-owned entities
SWFs = Sovereign wealth funds
UNCTAD = United Nations Committee on Trade and Development
US = United States

1 INTRODUCTION

Recent bids by state-owned entities (SOEs), or companies owned by SOEs, for equity or ownership of Australian companies and assets has prompted political outcry about the intentions of the acquisitions.  As a result, alarmist rhetoric and political hyperbole has entered the national debate about the risks of allowing SOEs to invest in Australia without extensive scrutiny.

The Foreign Investment Review Board (FIRB) is charged with scrutinising foreign investment in Australia over a certain dollar value.  FIRB applications are assessed based on an opaque "national interest test", before a final decision by the Treasurer on each application.  Because of the perceived risk of acquisitions by SOEs the Commonwealth Treasurer, Wayne Swan, introduced an additional test in early 2008 to further scrutinise investment stakes by SOEs.  But the addition of the test was motivated more by political expediency, than evidence-based concerns.

This submission will assess the current position of the international investment environment, Australia's position in it and how regulation affects Australia's investment environment in the global context.  The submission will then assess the legitimacy of concerns about SOEs as investors in Australia.  In particular this submission will look at the political and economic risks, the concerns that underlie them and assess whether they have a legitimate basis.  Finally the submission will propose options for reform to promote Australia's investment interest based on the perceived threat from SOEs.

2 THE CONTEMPORARY INVESTMENT ENVIRONMENT

The global economy is in a precarious position.  The United States (US) economy is mired in financial problems that first emerged in subprime mortgage lending, but has 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 recessions amongst many of the traditional suppliers of investment capital.  Australia is facing contradictory economic pressures.  The government has now declared a recession "inevitable" against continuing growth (though reduced in comparison to comparatively recent high rates of growth) in many of Australia's major Asian trading partners.

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

2.1 THE INTERNATIONAL INVESTMENT ENVIRONMENT

A more unstable macroeconomic environment is 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 cancelation 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. ⁽¹⁾

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. ⁽²⁾  In a further signal of a recent slowdown in foreign investment activity, UNCTAD reported a reduction in the number of greenfield investments globally of about two per cent during the first quarter of 2008 compared to the same period in 2007. ⁽³⁾  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. ⁽⁴⁾  Other surveys report similar concerns about "capital account protectionism", driven by, for example, rising hostility against direct investment by foreign interests (including SOEs) in local companies.

2.2 AUSTRALIA'S PLACE IN THE INTERNATIONAL INVESTMENT ENVIRONMENT

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). ⁽⁵⁾  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). ⁽⁶⁾  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:  Most attractive countries for the location of foreign investment

1. 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. ⁽⁷⁾

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.

3 AUSTRALIA'S ALREADY RESTRICTIVE INVESTMENT REGIME

The success of countries to attract FDI 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. ⁽⁸⁾

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". ⁽⁹⁾

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'. ⁽¹⁰⁾

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.

Foreign investment screening restrictions seems to drive Australia's high score against an Organisation for Economic Cooperation and Development (OECD) benchmark measure of regulatory restrictions on FDI, based on an earlier study by the Productivity Commission. ⁽¹¹⁾

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. ⁽¹²⁾

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). ⁽¹³⁾  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. ⁽¹⁴⁾

Figure 2:  OECD FDI Regulatory Restrictiveness Index scores

1. Aggregated 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.

There are a number of caveats that 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. ⁽¹⁵⁾  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.

3.1 MORE REGULATION, MORE POLITICISATION, LESS INVESTMENT

Australia has a formal foreign investment policy under the Foreign Acquisitions and Takeovers Act 1975 (the Act), and accompanying regulations.  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. ⁽¹⁶⁾

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 Australia's 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". ⁽¹⁷⁾  Consequently, the Commonwealth can deny entry to any significant foreign investor "in the national interest" without legal constraints or transparent explanation. ⁽¹⁸⁾

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". ⁽¹⁹⁾

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". ⁽²⁰⁾

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. ⁽²¹⁾

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.

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. ⁽²²⁾

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". ⁽²³⁾

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". ⁽²⁴⁾  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".

4 THE RISK OF SOVEREIGN WEALTH FUNDS?

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.  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". ⁽²⁵⁾

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". ⁽²⁶⁾

According to a recent survey conducted by the Lowy Institute, these concerns appear to be keenly felt amongst the general Australian community. ⁽²⁷⁾  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 majority Australian control.

In response to concerns, in early 2008 the Federal Treasurer introduced an additional six policy guiding principles on investment by SOEs or controlled entities:

• 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. ⁽²⁸⁾

These guidelines state that "proposed investments by foreign governments and their agencies (e.g. SOEs 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". ⁽²⁹⁾

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". ⁽³⁰⁾  Another argument is that, to some extent, the six principles outlined in February 2008 may duplicate controls that already exist. ⁽³¹⁾

4.1 IS THE RISK REAL?

The motivations supporting the extra hurdles for SOEs are questionable.  Bryan Caplan argues that there are four systematically biased beliefs that inform economic opinion amongst laymen. ⁽³²⁾  These biases are an anti-market bias, an anti-foreign bias, a make-work bias and a pessimistic bias.  Economic concerns about SOEs combine two, if not three, of these biases.  Many people express concern about the market for corporate control even before suspicion of foreigners comes into play.

The anti-foreign bias within Australia can be broken up further.  In the first instance, Australia has had a long history of xenophobia.  The White Australia Policy, for example, operated for several decades to restrict immigration from non-European sources.  While that policy has now been abandoned, Australia nonetheless still suffers from capital xenophobia.  It is not clear, however, that a xenophobic dislike of foreigners explains a distrust of SOEs.  For example, at present there is substantial public concern about a Chinese SOE acquiring an Australian firm, whereas previously a Singaporean SOE acquired an Australian firm with little fuss.  Clearly, there are additional factors at work beyond mere xenophobia.

Many Australians view selling Australian assets to foreigners as "selling the farm".  This view seems to suggest that Australian entrepreneurship is a non-renewable resource and that it has already been used up.  The notion that Australian entrepreneurs will continue to develop new business ideas that are valuable in the global market does not enter into this type of argument.  This is consistent with Caplan's pessimism bias.  Of course, this argument overlooks the fact that foreigners pay for the Australian assets that they purchase.  A related idea could be that foreign buyers systematically underpay for the assets that they purchase.  This could be related to a cultural cringe argument that suggests that Australians are overawed by foreign investors and will not charge full price for their assets.

This is an argument well worth examining in closer detail.  It may well be the case that Australians do sell their assets to foreigners at reduced prices.  To investigate this issue Harvey Kho invested takeovers on the Australian Stock Exchange between 1997 and 2002. ⁽³³⁾  Over that period he investigated 298 transactions consisting of 199 purely domestic bids and 92 cross-border bids.  He then examined the stock market reaction to announcements of takeovers using a technique known as event study analysis.  He is able to show the stock market reaction to domestic takeover announcements and compare those to foreign takeover announcements.

Figure 3:  Stock market reaction to take over bids

Source:  Hock Khoon (Harvey) Kho, (2004), pg. 136

If foreigners underpay for their acquisitions we would expect the stock market reaction to be somewhat muted compared to Australian acquisitions.  Yet we see, in figure three, that the stock market reaction to foreign acquisitions is greater than that for domestic acquisitions.  This is not consistent with the view that foreigners acquire Australian assets on the cheap.

Arguments relating to economic concerns do not stand up to close scrutiny;  however, there are a range of political concerns that cannot easily be countered by empirical analysis.

In the first instance some individuals may be concerned that foreign governments are investing in Australia.  The argument here is that government is a particular institution that should be viewed with some trepidation.  While this argument is more or less true, there are some aspects that are worth further investigation.

The first argument that should be debunked can be described as the Tom Clancy Debt of Honor argument.  The 1994 novel, Debt of Honor, tells the story of a clandestine war between Japan and the US.  In the story a Japanese consortium (secretly representing the Japanese government) acquires an American bank and uses that bank to crash the stock market thereby destroying US wealth.  While it makes for great entertainment value, it is not at all clear that SOEs exist to establish beachheads in foreign economies and are a prelude to military conflict.  In the first instance, the identity of SOEs, or their ultimate controlling shareholders, is not secret.  Even if those countries that did operate SOEs were national security risks, most countries already have procedures and institutions in place to manage those risks.

Part of the problem may be that SOEs often purchase well-known iconic firms.  This, however, is a well-known phenomenon in international investment.  All foreign investors face an asymmetric information problem and when making investments in an economy and as such are more likely to invest is well-known firms.  It s not surprising that SOEs follow the same pattern.  The political risk here is not for the domestic economy, but rather for the foreign government.  Ownership of a well known iconic firm provides a target for domestic protest against foreign governments.  Whereas before protesters might target embassies, they now also have corporate targets when protesting against foreign governments.

A more serious political concern is the argument that SOEs represent a reversal of privatisation.  Andrei Shleifer and Robert Vishny have argued that political interference in firm operations is likely to result in inefficiencies, misallocation of resources, and corruption. ⁽³⁴⁾  SOEs have the potential to return ownership out of private hands back into inefficient public ownership;  and worse, foreign government ownership.  While this concern cannot be readily dismissed, nonetheless it is not immediately apparent that government portfolio investment represents the return to government managing firms in the hope of controlling the commanding heights of the economy.

The problematic issue associated with government ownership is that government can use its regulatory and police powers in addition to any market power it may enjoy.  The ability to coerce individual consumers exists because the domestic government owns firms;  it does not exist when foreign governments own firms.  In other words, the economic and political abuses associated with government ownership are likely to occur when the domestic government owns firms and not when a foreign government owns firms.  Foreign governments have no additional economic power in a domestic economy than does any other foreign investor.

It is for this reason that a clear distinction needs to be drawn between the activities of domestic state-owned enterprise and sovereign wealth funds (SWFs).  State-owned enterprises normally exist to meet non-economic objectives of a government.  Historically they have been associated with substantial levels of inefficiency and corruption.  When making portfolio investments, however, government has tended to behave as does any other large investor.  Their objective is to invest money and earn the highest possible return (for a given level of risk).

The final objection is that foreign governments are unaccountable to the domestic electorate.  This is always true.  This isn't just true of foreign government;  it is also true of almost all foreign investors.  The point remains, however, that SOEs have potential corporate governance problems.  The important point here is to remember that the corporate governance standards that SOEs are accountable to are the domestic standards, not the foreign government standards.  All firms that operate within the domestic economy are bound by local laws and so long as firms obey the law of the land, they are no different from any other firm.  The problem with government is the exercise of sovereign power;  foreign governments, however, do not exercise sovereign power in the domestic economy.  Consequently SOEs should be considered the same as any other category of foreign investor.

The challenge for the Australian government is not the identity of large foreign investors, be they government or private, but ensuring that the standards of corporate governance for firms listed on the Australian Stock Exchange are rigorous and prevent large controlling shareholders from looting the firm's assets or expropriating firm value from minority shareholders.  Given appropriate corporate governance standards, large controlling shareholders need not pose any investment threat or any other type of threat to Australia.  With appropriate shareholder protection all investment would be in the national interest.

5 LIBERALISATION IS THE BEST REFORM

In an investment constrained global economy, it seems counter to Australia's national interest to restrict inward investment.  There are clearly concerns about the role of SOEs as potential investors into the Australian economy, but the basis for these concerns appears largely unfounded.  As outlined earlier the primary threat posed by SOEs comes from the beneficial arrangements they enjoy domestically from a close proximity to the State.  But those benefits are not enjoyed extraterritorially.  Australia still maintains the right to appropriately regulate where there may be a perceived risk from an external investor.

The current uncertainty about foreign investment by SOEs is affecting the potential gains for Australia.  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". ⁽³⁵⁾  Others have perceived the guidelines to be part of a broader push by the Commonwealth to discourage investments by Chinese SOEs.  For example, the Wall Street Journal Asia 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". ⁽³⁶⁾

Instead of being afraid of SOEs, the Australian government should embrace the opportunity that SOEs provide in an investment-constrained environment.  To do so the Commonwealth government 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.

The Treasurer's FDI principles seem to be founded on a concern that 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 SOE investors in other countries have not been motivated to pursue commercially prudent FDI decisions.  Regarding the case of a SOE, 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". ⁽³⁷⁾  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 SOE or SOE capital, will be the subject of continuous market testing in domestic and global economies.

Accepting the case that most FDI projects by 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. ⁽³⁸⁾

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 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 SOE investment applications.

6 CONCLUSIONS

The economic uncertainties currently afflicting the world do not necessarily cast "gloom and doom" for Australia.  A window of opportunity for Australia to become a "safe haven" for FDI in the Asia Pacific region is now open.  And the growing enthusiasm by Chinese-backed SOEs partly demonstrates that potential.

However, many observers have been particularly concerned about the rise of government-backed entities interest in Australian assets.  But their concerns appear to be rooted in false premises.  The principle concern about SOEs is that they will use their investment for political, rather than economic interest.  But the capacity for SOEs to do so is based on their capacity to leverage beneficial arrangements through laws and regulations as a result of their proximity to the State.  But the benefits of proximity doesn't extend extraterritorially because domestic governments maintain the right to regulate business conduct and behaviour within their sovereign territory.

Rather than prohibiting SOEs, the Commonwealth government should liberalise Australia's investment regime and remove additional hurdles to SOEs investments in Australia.  But in doing so, it should also ensure that the domestic legal and regulatory framework operates to inhibit coercion and market manipulation.  In such an environment it is unlikely that SOEs will have any adverse consequences that may arise from the identity of their owners.

REFERENCE LIST

1. Callick, R., 22/09/2008, "Open for business:  PM tells Chinese", The Australian
2. Caplan, B., 2007, "The myth of the rational voter:  Why democracies choose bad policies", Princeton University Press
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4. Drysdale, P. & Findlay, C. 09/2008, "Chinese Foreign Direct Investment in Australia:  Policy Issues for the Resource Sector", Presentation to Australian National University Crawford School Public Seminar
5. FIRB, 2008, "Annual Report 2006-07", Commonwealth of Australia, Canberra, Australia
6. Garnaut, J., 2008, "Master of the universe", The Diplomat, July-August
7. Hanson, F., 2008, "Australia and the World:  Public Opinion and Foreign Policy", Lowy Institute for International Policy, Sydney, Australia
8. Hardin, A. & Holmes, L., 1997, "Services Trade and Foreign Direct Investment", Industry Commission, Canberra, Australia
9. Herman, S., 24/09/2008, "US Financial Crisis Expected to Affect Foreign Investment" VOA News
10. ITS Global, 09/2008, "Foreign Direct Investment in Australia -- the increasing cost of regulation", September
11. Kasper, W., 1984, "Capital Xenophobia:  Australia's Controls of Foreign Investment", Centre for Independent Studies, St Leonards, Australia
12. Kho, H. K., 2004, "The impact of takeovers on shareholder wealth and factors affecting shareholder wealth:  Evidence from Australia", Unpublished PhD thesis, RMIT University
13. Novak, J., 2008, "Australia as a destination for foreign capital", AOIF Paper 1
14. OECD, 2007, "International Investment Perspectives:  Freedom of Investment in a Changing World", Paris, France
15. Pannett, R., 07/07/2008, "Canberra takes hard look at foreign investments", The Wall Street Journal Asia
16. Reserve Bank of Australia, "Australian Economic Statistics 1949-50 to 1996-97", and Australian Bureau of Statistics, "Balance of Payments and International Investment Position, Australia", cat. no. 5302.0
17. Shleifer, A. and Vishny, R., 1994, "Politicians and firms", Quarterly Journal of Economics, v109, i4, pp 995-1025
18. Shleifer, A. and Vishny, R., 1998, "The grabbing hand:  Government pathologies and their cures", Harvard University Press
19. Stoeckel, A., 07/2008, "Sovereign Wealth Funds:  Friend or Foe?", Speech presented to Australia-China Business Council Forum
20. Swan, W., 2008a, "Australia, China and This Asian Century", Speech to the Australia-China Business Council Forum
21. Swan, 2008b, "Government Improves Transparency of Foreign Investment Screening Process", Press Release
22. Taylor, P., 30/09/2008, "Barnett warns on investment", The Australian
23. UNCTAD, 2008a, "World Investment Prospects Survey 2008-2010", United Nations, Geneva
24. UNCTAD, 2008b, "World Investment Report:  Transnational Corporations and the Infrastructure Challenge", United Nations, Geneva

---

ENDNOTES

1.  UNCTAD, 2008a, "World Investment Prospects Survey 2008-2010", United Nations, Geneva

2.  Herman, S., 24/09/2008, "US Financial Crisis Expected to Affect Foreign Investment" VOA News;  and UNCTAD, 2008b, "World Investment Report:  Transnational Corporations and the Infrastructure Challenge", United Nations, Geneva, pxvii

3.  UNCTAD, 2008a, p8

4.  UNCTAD, 2008a, p19

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

6.  UNCTAD, 2008b

7.  UNCTAD, 2008b, p33

8.  Kasper, W., 1984, "Capital Xenophobia:  Australia's Controls of Foreign Investment", Centre for Independent Studies, St Leonards, Australia; Drysdale, P. & Findlay, C. 09/2008, "Chinese Foreign Direct Investment in Australia: Policy Issues for the Resource Sector", Presentation to Australian National University Crawford School Public Seminar;  ITS Global, 09/2008, "Foreign Direct Investment in Australia -- the increasing cost of regulation", September; and Stoeckel, A., 07/2008, "Sovereign Wealth Funds: Friend or Foe?", Speech presented to Australia-China Business Council Forum

9.  Swan, W., 2008a, "Australia, China and This Asian Century", Speech to the Australia-China Business Council Forum

10.  Callick, R., 22/09/2008, "Open for business:  PM tells Chinese", The Australian

11.  Hardin, A. & Holmes, L., 1997, "Services Trade and Foreign Direct Investment", Industry Commission, Canberra, Australia

12.  OECD, 2007, "International Investment Perspectives:  Freedom of Investment in a Changing World", Paris, France

13.  OECD, 2007, p139 and Stoeckel, 2008, p11

14.  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.  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) is an issue subject to further research.

15.  Novak, J., 2008, "Australia as a destination for foreign capital", AOIF Paper 1, p9

16.  FIRB, 2008, "Annual Report 2006-07", Commonwealth of Australia, Canberra, Australia

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

18.  ITS Global, 2008, p29

19.  ITS Global, 2008, p3

20.  FIRB, 2008, p7

21.  ITS Global, 2008, p21

22.  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 inclusion in a publicly-released gazette of their proposal after the cut-off period

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

24.  Swan, 2008a

25.  Swan, 2008a

26.  Taylor, P., 30/09/2008, "Barnett warns on investment", The Australian

27.  Hanson, F., 2008, "Australia and the World:  Public Opinion and Foreign Policy", Lowy Institute for International Policy, Sydney, Australia

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

29.  Swan, 2008b

30.  Drysdale and Findlay, 2008, p27

31.  ITS Global, 2008, p2

32.  Caplan, B., 2007, "The myth of the rational voter:  Why democracies choose bad policies", Princeton University Press

33.  Kho, H.K., 2004, "The impact of takeovers on shareholder wealth and factors affecting shareholder wealth:  Evidence from Australia", Unpublished PhD thesis, RMIT University

34.  Shleifer, A. and Vishny, R., 1994, "Politicians and firms", Quarterly Journal of Economics, v109, i4, pp 995-1025.  See generally, Shleifer, A. and Vishny, R., 1998, "The grabbing hand:  Government pathologies and their cures", Harvard University Press

35.  Garnaut, J., 2008, "Master of the universe", The Diplomat, July-August

36.  Pannett, 2008

37.  Stoeckel, 2008, p13

38.  ITS Global, 2008, p26

Depopulate and die of boredom

It must take a rather active imagination to look at a map of Australia and think that it is too full.

Last week Sandra Kanck, the national president of the environmental group Sustainable Population Australia, urged the country to cut down its population from 21 million souls to just 7 million.  To do so, she recommended we adopt a one-child policy, completely eliminating middle-child syndrome and saving the planet in the process.  China's one-child policy appears to have gone from a massive human rights violation that is universally condemned to "Hey, now that's an idea".

One article on the Sustainable Population Australia website berates Nadya Suleman for being a "criminal" and a "murderer".  Best known as "Octomum", the Californian Suleman famously gave birth to eight children earlier this year.  And she is -- at least according to Sustainable Population's site -- "killing all of us".

Fair enough:  someone needs to stand up to those murderous breeders.  No opportunity to inform them about their criminal behaviour can be wasted;  the environment demands it.  For example, transport regulations may require you give up your seat to a pregnant woman, but once the mother-to-be has sat down, you have a good opportunity to berate her for destroying the planet.

Certainly, Sustainable Population Australia is just a fringe environment group, and criticising them for their warped moral compass is like criticising the Citizens Electoral Council for their bad economics.  But the idea that we desperately need to shut down breeding for a while in order to save the planet is surprisingly widespread.

In Britain, one of Gordon Brown's environmental advisers has been urging the Prime Minister to support the halving of Britain's population to just 30 million.  And the president of the Sea Shepherd Society -- an organisation regularly praised for stalking Japanese whalers -- wants to reduce the global population to less than a billion.  Yet, the population of the world continues to grow, not least in the developing world.

But if you believe that population growth will eventually lead to the collapse of our civilisation and planet, then the last millennium of human history must be very confusing.  Over and over, we have demonstrated an extraordinary capacity to innovate our way out of any theoretical "limit to growth".

So it takes a strange sort of intellectual hubris to imagine that the exact moment you are alive just happens to be the exact moment in human history that we cross the "too many people" line.  In the 1970s, zero population growth advocates were pretty sure the end was nigh, but humanity has managed to barrel on for a few more decades.  Anyway, few species have found flirting with extinction a particularly effective survival strategy.

But we could spend all day debating the impact of population on the environment.  I'm more concerned about another thing:  can you imagine how excruciatingly boring Australia would be with only 7 million people?

Last week's Sunday Age reported that a large proportion of "tree-changers" regretted their decision to move from the suburbs to the quieter countryside.  Shockingly, in remote and regional Victoria there are fewer and less varied jobs available, fewer services and less commercial activity than in the cities.

An Australia with just 7 million people would be like a mandatory tree-change for everybody, with those who survived the great population decline skulking about the ruins of this once-busy nation.

Australia already suffers because of its small population.  We have a small audience for culture.  We have a small market for goods and services, and a small base to produce them from.  If it weren't for the fact that we can trade stuff with other countries, it would hardly be worth having an Australia at all.

Pretty much everything interesting and exciting about the world is the direct result of human action.  Fewer people would mean fewer people doing cool stuff.  How would life be without basil pesto, the British version of The Office, single malt whisky, SuperTed or Facebook?  Nasty and brutish, sure, but agonisingly long.

And let's face it -- whatever meaning has been imposed on the environment has been imposed by people.  So when deep greens exalt nature as morally superior to humanity, it comes across as just a little bit stupid.  When the chips are down, surely our loyalty lies with the human race.

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Open convection

The Prime Minister's hint that the First Home Owners Grant might be axed has further intensified interest in a housing market which was already at fever pitch.

The owner occupied home comprises over half of the average Australian family's wealth.  Unsurprisingly, house prices command far more attention than those of shares, which account for 6 per cent of wealth or even super (comprising 15 per cent of wealth).  Moreover, a vast industry of builders, suppliers, land developers, and real estate agents is also dependent on housing.

At the present time, there is an almost unprecedented polarisation of views about the future of housing prices in Australia.

NSW academic Steven Keen has been labelled a doom merchant for forecasting a 40 per cent decline in house prices.  Unfortunately the persuasiveness of his contemporary forecasts is somewhat compromised since he has been crying wolf on housing for longer than anyone can remember.

In the other corner, Rismark's Christopher Joye adopts the Pollyanna approach, arguing that prices won't fall, though latterly hedging his bets by adding, "As long as households have access to credit on reasonable terms".  He draws comfort from observing rising house prices in the 1991 recession.  This though is disingenuous, because prices had already fallen in the previous three years (by 40 per cent in Sydney and 30 per cent in Melbourne).

House prices were down 6 per cent in the December 2008 quarter with Australian Property Managers data inferring a further fall in the March 2009 quarter.  This is in spite of support by the First Home Owner Grant.

The debate on where house prices are going -- and for the record I see them declining by at least 20 per cent -- is only one dimension.  The real issue for house prices and affordability is land supply.  Based on the costs of developing land in readiness for house construction, no suburban block anywhere on the urban fringe in Australia should sell for greater than $70,000.

That $70,000 is the cost of developing the land -- levelling, building roads, water and sewers, telecom lines, installing drainage and so on -- combined with the initial value of the land itself.

The underlying value of undeveloped land is reflected in the prices of farmland, which comprises the overwhelming preponderance of land use.  Based on a maximum of $10,000 per hectare that agricultural land sells for, the underlying value of a housing block is only around $1000.

But the restrictions placed on development by State Governments creates a scarcity value that raises this value at least 50 fold.  There is no physical scarcity causing this price rise.  The area on the periphery of all our cities is massively adequate to accommodate any conceivable housing needs.  Even Sydney has the Plain of Cumberland where a million extra houses could be built on land that is presently used for sub-marginal agricultural activities.

It follows that the price for developed land for a standard 500 square metre block should be about $70,000.  Actual land prices range from $130,000 (Melbourne) to $230,000 (Sydney), which means a regulatory induced price premium of $60,000 to $160,000 for an average new house.  This is far greater than the selective subsidy through the first home owner grant and in terms of mortgage repayments adds almost $300 per month to the costs of a new buyer in Melbourne and a staggering $900 per month in Sydney.  Added to this are the effects of discriminatory taxes levied to a greater or lesser extent on new developments in all states.

The price premium from regulatory induced land use restraints and higher taxes on new houses has a knock-on effect throughout the housing stock.

Some state governments, notably Victoria are seeing the possibilities of injecting greater activity into housing by loosening up the regulatory stranglehold.  In this respect, Victoria also sees the attraction of allowing more land to be used for urban development as a means of supplementing state revenues.

Unfortunately, Minister Plibersek's hand picked National Housing Supply Council is complacent about land supply.  Failing to understand the pressures that are operate on price, it blandly states that supply is adequate for the next two years house building requirements.

Such a statement is what the Commonwealth has wanted to hear, and thereby avoid criticising its kindred state governments.

In fact, the noose around the housing land market has artificially boosted prices and reduced demand.  Recession will bring more price reductions, and UK and the US West Coast, where land use regulations also constrain supply have already seen 20-40 per cent falls.

Now, as recession intensifies, is the ideal time to release the regulatory shackles on land supply to allow new home costs to fall.  Canberra should insist on the state governments taking such action at the same time as it removes the selective subsidy to first home owners, thereby setting the stage for a house building revival based on genuine supply and demand.

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We are a magnet for illegal immigrants

Harsh, insensitive, morally callous, dog-whistling, fear-mongering, whipping up xenophobia -- all of these charges have been hurled at Sharman Stone in the past week or so.  And her sin?  To lament the loss of life.  That's right:  the opposition immigration spokeswoman merely complained that the federal government's lax border protection policies have culminated in the recent deaths of at least five boat people and injuries of up to 50 others trying to reach Australia on an unauthorised vessel which, thanks presumably to the antics onboard, caught fire and sank.

It speaks ill of our political discourse that a senior frontbencher should be condemned for publicly acknowledging what the Australian Federal Police had privately told the Rudd government:  that Canberra's softened border protection policy, enunciated in August last year, would encourage more people-smugglers, which in turn would heighten the risk of deaths on our seas.

It's a wonder Ms Stone has not also been accused of resuscitating the White Australia Policy.  During the Tampa asylum seeker stand-off in 2001, many journalists and academics frequently used that old chestnut against John Howard and Philip Ruddock.  That such crude populists who pandered to racism almost doubled the nation's annual non-discriminatory legal migrant intake from about 70,000 in 1996 to nearly 140,000 in 2007 did not matter.  For the moral absolutists, what counts is the symbolism of compassion.  And yet it is interesting how readily some of those who espouse the causes of human rights and civil society will resort to ad hominem attacks when faced with views they find uncongenial.

Never mind that any democratically elected government has good reasons to take seriously the issue of deciding who comes in to the country and the circumstances in which they come.  It's not simply that the post-Tampa hardline policies stemmed the tide of boats:  between 1999 and 2001, some 8,000 people are known to have paid for the people-smuggling passage;  from 2002 to 2008, only 134 reached Australia by boat.  Nor is it simply that the Howard government's position -- backed, remember, by Kim Beazley's Labor opposition -- won overwhelming public support.  Nor is it simply that Australia, far from being denounced as the new international pariah, was a model to many Western countries which have considered or adopted tougher measures of their own in recent years.  Nor is it simply that the Rudd government's decision to end temporary protection visas, abolish mandatory detention and close detention camps on Nauru and Christmas Island has shown a green light to the people-smugglers.

All of these arguments are true, and they vindicate the Howard government as well as shame its Labor successor.  But there is another, more obvious, point to this debate that both supporters and opponents of a tough border protection policy overlook:  if the people's elected representatives do not defend the sovereignty of their nation's borders and the integrity of our immigration system, then public support for our high levels of non-discriminatory legal migration will falter.  During the second half of the Howard years -- which is to say, the period following the Tampa stand-off -- a political consensus for high annual migrant intakes prevailed.  This flowed directly from a sense that, in Howard's words, we were deciding who comes here.

"For its supporters, the Prime Minister's action was a highly reassuring event," argued the eminent historian John Hirst of the year or so after Tampa.  "Its broad appeal was not to race or xenophobia;  it was a declaration that Australia still existed and could still take charge of its destiny."  Meanwhile, the unauthorised boats virtually stopped while the rate of legal non-discriminatory immigration almost doubled.

The risk now is that if our political leaders are seen to be turning a blind eye to a people-smuggling racket that treats our borders and migration programme with contempt, and if a perception holds that an unregulated inflow of boat people could accelerate rapidly out of control and put an intense burden on the public purse and the nation's resources, then it follows that public faith in Canberra's capacity to take charge of our destiny diminishes.  This is especially the case when one bears in mind the boat people's alleged tactics of pouring petrol onto their sea vessel in order to intimidate naval authorities into accepting their entry.  When critics such as David Marr accept this, it is excused because of the alleged "desperation" of the boat people.  Yet why they should feel desperate at being returned to Indonesia, a tolerant Islamic state and safe port of refuge for Muslims, is not clear.  We're being taken for fools.

In these circumstances, is it any wonder that public support for our immigration levels might collapse?  Such a scenario is self-evidently not in our national interest.

The one public policy issue that consistently unites both sides of the political divide is that of a large-scale non-discriminatory immigration policy.  It has been a great Australian success story since the war, especially since Harold Holt and Hubert Opperman dissolved the White Australia Policy in the mid-1960s.  With rare exceptions, migrants have provided powerful economic benefits to the nation, such as increased domestic demand, a more flexible workforce, new ideas and new cultural links, international entrepreneurial and management skills and the development of new trade skills.  There is little reason to restrict skilled immigration, though there may be a case for limited unskilled cheap labour and family reunion programmes.

During the Howard years, the numbers almost doubled.  Even immigration minister Chris Evans has praised the former PM's record.  In March, he told a Senate Estimates testimony:  "He ran a strong humanitarian migration programme and, in fact, a very strong skilled migration programme, which he increased each year for 11 successive years.  I give him due credit at every public opportunity.  We have had bipartisan support for that policy for many years, and long may it continue."

The problem, though, is that community support for such a policy is less likely to continue if the government gives the impression that it is not in control of who comes into the country.  Polls consistently show that a broad cross-section of the Australian people want their government to subject new unlawful arrivals to tough scrutiny.  Again, as Hirst pointed out, a tough stand on border control increases support for the official migration programme.

People-smuggling is a business, albeit an illegal and immoral one, and like all businesses it is alert to maximising economic opportunities wherever and whenever they may arise.  As the ABC's Chris Uhlmann reported exclusively this week, the people-smuggling sources in Jakarta have caught the significance of the Rudd government's decision to soften Australian border controls.  Sure, global trends indicate rising asylum seeker traffic, but people-smugglers are also back in business because the law has changed.

As it turns out, public support for high levels of immigration is falling.  According to leading demographer Katherine Betts, 46 per cent of voters support cuts to immigration.  It is not clear whether this is due to urban congestion or rising house prices.  But it is a fair bet that public consensus for high immigration rates will further deteriorate if the government makes it easier for unauthorised arrivals to jump the queue.

A tough stand is not tantamount to racism or xenophobia.  It is sound public policy.

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Recession: Rudd's year of denial

The media, including The Australian Financial Review, were keen to ventilate material yesterday from the Prime Minister's office that Kevin Rudd had finally managed to acknowledge that Australia is in recession.

Actually, as early as March 21 Rudd told Channel 9:  "It's clear that the impact of a worsening economic global recession will make it virtually impossible for Australia to sustain positive economic growth for the period ahead."

This followed a year of denial by the Prime Minister and his dissipation of $80 billion of Australia's savings in various giveaways and guarantees to stave off recession.

Indeed, as recently as early February on the ABC's 7.30 Report, Rudd proclaimed, "What I refuse to do is to haul up the white flag and say, as the Liberal Party have done, that recession is inevitable."  And he pointed to apparent pre-Christmas sales buoyancy, saying this is, "real data as opposed to the theoretical projections" of his detractors.

This record of mis-analysis and wasteful expenditures confirms the incompetence of the country's leadership.

Mounting deficits and endless guarantees of failing businesses, in attempting to divert savings into consumption, are cannibalising savings and denying funding to the investment opportunities necessary to bring recovery.  Present policies will exacerbate the economic distress that the global downturn makes unavoidable.

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ACCC in dangerous game of monopoly

The deregulation of wheat marketing last year should have meant the end of inefficient and anti-competitive practices.  Yet one single desk has been simply replaced by another.

Last year CBH, the monopoly bulk handler in Western Australia, successfully applied to the Australian Competition and Consumer Commission to gain control over all grain in WA between local silos and the ports.

The program, known as Grain Express, directs all grain in WA onto the ageing and largely uncompetitive rail network.  At the time, in a submission to the ACCC against CBH's proposal, I argued CBH's proposal was anti-competitive and likely to result in the sub-optimal development of the grain industry in WA.

Unfortunately, the experience this season has exceeded even the most pessimistic expectations.  Recent reports in The Australian Financial Review indicate major international wheat buyers, such as Indonesia, South Korea and Japan, cannot get wheat out of WA in a timely manner.  Ships are lined up empty at WA ports waiting for grain to be moved from up-country silos.

This should be ringing alarm bells for the federal and WA governments.  Make no mistake;  these problems are a direct result of the monopoly the ACCC granted CBH, whose history is as a bulk handler supplying to a single buyer, AWB, under the old single desk.  Consequently, the firm's primary consideration is utilising its fixed assets, not finding the least cost and most efficient pathways to port.

CBH claimed the adoption of the Grain Express system would lead to enhanced port efficiency and increased rail usage.  However, as this season has proved, these two goals are mutually incompatible.

As in other states, the WA grain rail network is long overdue for rationalisation.  Of the four port zones in WA, three lose money.  As a recent state government report says, "Albany and Geraldton do not return positive results under any practical rationalisation scenario, primarily due to low grain-volume density and competitive road networks."

Yet CBH, with the support of the then WA Labor government, convinced the ACCC to force grain growers and buyers to use this outmoded rail network.  Industry participants report that not enough trains were booked at the start of the season, so inherent inefficiencies in rail were compounded by the network running below capacity.

Had there been normal competition, instead of a single operator trying to second guess future volumes, more grain would have gone by road straight to port, and rail limitations would have been far less critical.

CBH has proved itself incapable of running the monopoly it convinced the ACCC to grant it.

If the consequences for Australian trade and farmers' returns were not so serious, CBH chief executive Imre Mencshelyi's blaming the state government for the rail network could be laughed off as yet another company chief trying to transfer blame.  If anything, the previous WA government's biggest failing was to pander to its dominant bulk handler by keeping these unprofitable rail branch lines open to avoid stranded CBH assets up-country.

A direct result of the removal of competition in the WA supply chain was significant delays at ports, to the extent that the shipping stem was suspended for a month to clear the backlog.  This led to the real risk of crippling demurrage charges that could severely test the financial viability of some exporters.

Reports also suggest the WA shipping stem has been altered to advantage some buyers.  If this is proven, there is a risk of long-term damage to our export reputation, loss of custom to Canada and other exporters, and adverse renegotiation of current contracts.

Unfortunately, because CBH's monopoly was directly granted by the ACCC -- supposedly pro-competition -- there is nowhere for the industry to turn to fix this mess.

If the ACCC cannot recognise it made an error in allowing this new monopoly, it should at least impose conditions on CBH to improve transparency and accountability.

The federal and WA governments must ensure the deregulated wheat market can operate freely and efficiently.  Farmers cannot afford to lose important export markets because the competition regulator granted an ill-advised monopoly to a company that has proved incapable of delivering.

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In praise of our leading lady

Writing in Quadrant magazine many years ago, John Howard argued:  "In fighting the battle of history with the Labor party, Liberals must remember George Orwell's proposition:  'Who controls the past, controls the future.  Who controls the present, controls the past.' "  Not only does Labor "wish to reinterpret Australian history to promote their contemporary political objectives," he argued, "but they also wish to do so to marginalise the contribution of the liberal-conservative side of Australian politics and entrench the Labor party as the only true product of Australia's political soil."

Howard wrote his essay nearly two years before he became prime minister, but his remarks are as valid today as they were in 1994.  Indeed, his political disciples should bear his comments in mind when they hear Kevin Rudd and his comrades use history -- or their particular interpretation of history -- as a political weapon.  On some issues, such as the Howard-Costello economic legacy, many Liberal backbenchers have recently defended their past.  However, on other issues, such as education, immigration, environment or Aboriginal affairs, they have all too often allowed Labor to steal the nation's historical narrative and showcase its credentials as the party of reform and innovation.

By any proper reading of the past 60 years, however, it's the Liberals who have been the trendsetters.  On education, it was Robert Menzies, not Kim Beazley Sr, who introduced state aid and ended a century of discrimination against Australian Catholics with his policy of direct Commonwealth funding of science blocks in all government and nongovernment schools.  On Aboriginal rights, it was Harold Holt who presided over the 1967 referendum which allowed indigenous Australians to be counted in the census and regarded as full citizens.  On the environment, it was none other than the dreaded conservative Garfield Barwick who was the first president of the Australian Conservation Foundation.  It was Liberal immigration minister Hubert Opperman, much to the chagrin of Arthur Calwell and the union movement, who played the decisive role in abolishing White Australia;  and it was Malcolm Fraser, much to the chagrin of Gough Whitlam and Bob Hawke, who embraced a more liberal immigration policy when he stood up for the Vietnamese boat people.  In fairness to Labor, the party helped kick-start the economic-reform agenda of deregulation and privatisation, but given the Prime Minister's recent repudiation of "neo-liberalism", this is a legacy the ALP is suddenly, and opportunistically, jettisoning.

Recently, advocates of Labor's we-own-history mantra have been having a field day over Australian women in politics.  For good reason, the nation celebrated Anna Bligh, who became the first female elected premier last month.  And it is true Labor has had other many accomplished women -- past and present -- who've served in the higher echelons of power.  Think of deputy prime minister Julia Gillard and other federal ministers Penny Wong, Nicola Roxon, Tanya Plibersek and Kate Ellis, not to mention former (nonelected) premiers Joan Kirner and Carmen Lawrence as well as Northern Territory chief minister Clare Martin.  But read the recent commentary about Bligh's historic success and you'd be forgiven for thinking that Tory women pale in comparison historically.  They obviously have not read Anne Henderson's brilliant Enid Lyons:  Leading Lady to a Nation.

Henderson, the deputy director of the Sydney Institute and a prolific author, has written an all-engrossing biography of the nation's first woman cabinet minister.  These days, writes Henderson, young women are told they can't have it all:  that parenting and a public life are too difficult to manage at one time.  But Enid did just that, marrying future prime minister Joe at age 17;  and eventually having 12 children.  No mere housewife, Enid was a political animal and an integral part of her husband's campaigns, initially in Labor circles before moving to the conservative side.  As Henderson says, they were a power couple long before the term became fashionable.

Add to this that she reared her football team of children as a single parent after Joe's sudden passing in 1939, that she was the first woman to a win a house seat (which was marginal during the Labor landslide of 1943) and then the first woman appointed as a cabinet minister in 1949, that she served on the ABC board for a decade, that she became a prominent radio broadcaster and prolific writer, including her two volumes of memoirs, and it is clear that this was one impressive lady.

As Henderson puts it, Enid defies many conventional leftist stereotypes for a feminist.  Indeed, her success had everything to do with the voters' perception of her ability and nothing to do with her sex.  Nor did her success have anything to do with feminist sloganeering.  Her political rise came decades before the American sisters exported Emily's List to our shores;  or before a director of the Equal Opportunity for Women in the Workplace Agency or a minister for the Status of Women arrived on the political scene.

Enid succeeded in politics while she raised a large family at a time when prejudice against women was supposedly universal.  Yet she did not expect other women to vote for her in sisterly solidarity.  Nor did she assume Menzies would appoint her to his cabinet to atone for man's patriarchal past.  Bear this in mind when you hear Labor champion more gender quotas in parliament.

Which brings us back to the reluctance of Liberals to defend their party's achievements as well as the failure of the media to put current political events in their proper historical context.  In fact, many Canberra journalists have no real feel for or interest in Australian political history before Whitlam -- which is to say, before many of them were even born.  They should heed Cicero's wise maxim:  "To be ignorant of what happened before you were born is to remain always a child."  A veteran Canberra journalist once told me how two colleagues in their mid-twenties did not even know who John Gorton was.  No wonder, then, that the many journalists who greeted Anna's election as a political watershed in Australian history did not recount the story of Enid Lyons.  They've probably never heard of her.

Whatever their political affiliation, however, Australians should see the record of Enid as a source of pride and achievement.  Henderson's book should be required reading for any high school course on Australian history.  And if Liberals don't have good enough memories to honour the nation's Leading Lady, remember that next month marks the milestone of another great conservative lady:  the 30th anniversary of the Iron Lady's rise to power in Britain.  As it happens, Enid Lyons and Margaret Thatcher met in Canberra in 1979, two years before the former's passing and just after the latter's landslide election.  Now that is a legacy conservatives should also celebrate.

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Budget will put Brumby's efforts to the test

A quarter of a century ago governments throughout the Western world realised they were no good at running businesses.

Government businesses tended to be hostage to narrow employee interests, resulting in overmanning and high costs to taxpayers and consumers.  Placing these businesses under proper management made huge differences.

A key feature in eliminating that waste was privatisation as with Qantas, Telstra, banks, gambling, and energy supply.  An example of the benefits is seen with the private companies that replaced Victoria's Gas & Fuel and the State Electricity Commission.  Energy is now more reliably delivered with only a quarter of the labour force.

Having sold their commercial business arms, few governments now wish to turn back the clock.  This remains the case even when they are copping adverse publicity for a privatised activity's operations, as with Melbourne's trains.

Governments know they cannot improve on a private operator, which in place at least allows them to duck some brickbats that come their way.

But governments still want to pull the business strings.  And, unfortunately, some politicians see an absence of direct budgetary accountability as providing scope for greater freedom of action.

Nowhere is this more obvious than in telecommunications.  Having sold Telstra, the Commonwealth installed a tough regulatory regime to force down prices.  And the Rudd Government now wants to conscript Telstra on the cheap into its broadband paradise plan.

Similarly with energy, the Commonwealth is seeking to load the costs of its greenhouse policies on to businesses to deflect criticism of itself.

The Victorian Government has form in this direction, having its own renewable energy carbon emission program.  It maintains this actually creates jobs despite volumes of evidence proving the contrary.

Moreover, in a triumph of hope over experience, Spring St intends to implement policies based on Australian Conservation Foundation "research" that claims 500,000 green-collar jobs can be created by 2030.  The massive subsidies required would displace real jobs and, in the process, leave us all considerably poorer.

In similar attempts to mollify the green activists, the Victorian Government is persisting with its desalination proposal.  That will cost upwards of $3 billion to supply water at six times what it would cost from a new dam using the eastern ranges' abundantly available supplies.

However, the Brumby Government deserves some credit in tackling over-regulation.  It has been more successful than other state governments in allowing housing developments on rural land.  The result is lower house costs.

The Government also has introduced the regulation watchdog, the Victorian Competition and Efficiency Commission, which has slowed the growth of regulations.  However, Spring St has removed little of the excessive regulation that the VCEC identifies.

Premier John Brumby has recognised the necessity for belt-tightening.  It has rarely been timelier to implement measures to protect jobs by lowering costs.  Many such policy changes are available.

For example, the Victorian community would receive a handsome dividend from replacing the desalination White Elephant with a new dam.  Other benefits would follow from further relaxing land use restraints and from an intensified assault on regulations.

Leadership is urgently needed and the state Budget on May 5 will measure the Premier's credibility.

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Rule by nods and winks

The idea that anyone, let alone the government, has a clue about what the internet will look like in eight years' time is preposterous.  In 2001 we were still calling it the information superhighway.  Who knows what we'll be calling it in 2017?

Yet Prime Minister Kevin Rudd would have us believe that the Department of Broadband, Communications and the Digital Economy (yes, that's its actual title), which can't even get an internet filter to work, should be trusted with $40 billion to pick broadband winners.

The announcement is just the latest addition to the ever-expanding list of bad decisions.  From the bank deposit guarantee, to "RuddBank", to the stimulus packages, it seems the worse the decisions get, the more popular Rudd becomes.

And this is a trend that may continue -- until the public realises that taxes must rise to pay for Rudd's promises.

Another trend likely to continue is that the business community will keep quiet about what's happening.  As two decades of reform is being unwound and as federal expenditure grows at a rate not seen since the 1970s, the nation's corporate leadership has gone missing from the public debate.

Business appears to be remarkably relaxed about not only what is being decided but how the government is making its decisions and how those decisions are implemented.  The notion that governance should be according to legislation and subject to parliamentary scrutiny is being replaced by government according to nods, winks, and public threats from ministers.

Governments of all persuasions have always tried to influence the behaviour of individuals and companies by non-legislative means.  But as the Rudd government attempts to re-regulate the economy, the phenomenon has worsened and the exercise of arbitrary power has grown more obvious.

Take the government's treatment of the banks as an example.  Rudd and Treasurer Wayne Swan have basically said that in exchange for the government's deposit guarantee, the banks should lower interest rates.  Bank bosses are now faced with the situation of having to comply with both the law and with what they think are the policy preferences of the politicians.

The bosses are in an invidious position.  They are required by the Corporations Act to maximise shareholder returns, at the same time as ministers are beseeching them to pass on interest-rate cuts regardless of the commercial consequences.  The irony is exquisite because it was "uncommercial lending" by banks in the United States that gave us the sub-prime debacle.

There are other problems when opinion instead of legislation is used to regulate the economy.  Opinions change constantly and while laws do too, press releases aren't subject to the checks and balances of the parliamentary process.

Laws (at least in theory) should allow citizens to plan their actions with a degree of certainty as to what the consequences of those actions will be.

It is hardly surprising that no-one is investing in new power generation given that the design of the emissions trading scheme changes on an almost weekly basis.

Put simply, what is absent from policy-making in Canberra is an appreciation for the importance of the rule of law.  And the person who perhaps best demonstrated the significance of the rule of law in free societies is Friedrich Hayek, who also happens to be the person Rudd has spent the past year denigrating.

As we now know, because he keeps telling us, the Prime Minister is something of an expert on Friedrich Hayek.  According to Rudd, it was Hayek, the Austrian economist and Nobel prize-winner, who bequeathed to the world "neo-liberalism".

Hayek summed it up in The Road to Serfdom, his seminal work published in 1944.  For him, the rule of law was what distinguished liberal societies from those that suffered under arbitrary rule.

The rule required that government "in all its actions is bound by rules fixed and announced beforehand -- rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances".

"Since legislators, as well as those to whom the administration of the law is entrusted, are fallible men ... the discretion left to the executive organs wielding coercive power should be reduced as much as possible."

Maybe the Prime Minister does not like Hayek precisely because Hayek warned against anyone putting too much faith in governments run by fallible men (and women).

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