【SMH】Chinese puzzle over Canberra's reasoning

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Chinese puzzle over Canberra's reasoning
http://business.smh.com.au/business/chinese-puzzle-over-canberras-reasoning-20090614-c7cf.html

JOHN GARNAUT June 15, 2009

According to the cardboard talking points trotted out by the Prime Minister, Kevin Rudd, and the Treasurer, Wayne Swan, Australia has a non-discriminatory investment policy that welcomes investment from everywhere, including China.

Chinese commentators, business leaders and many Chinese officials plainly think that's rubbish.

One reason the Government is having so much difficulty selling its message of non-discrimination is that the foreign investment review process in Canberra is about as transparent as it is in Beijing, without the bribery.

Normally the opacity doesn't much matter because every deal goes through either unscathed or with token constraints.

Until last year there was only one exception that we know of: Shell's bid for Woodside Petroleum eight years ago.

But since Chinalco's initial raid on Rio Tinto last year there have been at least three Chinese investment applications that have been blocked or subjected to significant limiting conditions: Sinosteel for Murchison, Chinalco to raise its investment in Rio Tinto last year, and Minmetals for OZ Minerals in February.

There may be others that have never and will never be disclosed.

The highlight, of course, was Swan's rushed decision to block Minmetals' $2.6 billion bid for OZ Minerals because the large Prominent Hill mine was discovered to threaten a neighbouring missile range (the security-threatening mine was cut out and a new lesser deal accepted by Canberra and by OZ Minerals shareholders on Friday).

Swan said at the time - when the Government was reeling under China-related political scandals - that he was acting on "national security" grounds after receiving advice from the Defence Department.

But he has never revealed whether Defence or the Foreign Investment Review Board had actually expressed any serious national security concerns.
In fact the review board's recommendations to the Treasurer are rarely made public. Its annual report only reveals the aggregate amount of investment it approves but does not mention what it knocks back.

When Chinese commentators look for hard facts the best they can do is turn to Bureau of Statistics figures that show that in 2008 China's direct investment into Australia represented less than 1 per cent of the total stock of foreign investment in Australia ($392.9 billion) and that Chinese companies have received three of the four known rejections.

And they see that the two main elaborations that Swan made last year to the "national interest test" - a special wariness to investors who are state-owned or who are consumers of the resources we produce - together apply in practice almost exclusively to Chinese investments.

Andrew Thompson, head of Minter Ellison's energy and resources practice in Perth, says foreign investment decisions can be purely political decisions made by the Treasurer after considering but not necessarily following a recommendation from the Foreign Investment Review Board.

"It's a quasi-legal and political process, with FIRB advising the Treasurer who then makes a political decision," says Thompson, who has advised dozens of mainly Western companies on FIRB applications.

Further, he says the political process begins at FIRB, even before it gets to the politicians.

"One thing that is not commonly understood is that FIRB listens to, reads and is very much guided by its assessment of the community mood before applying that amorphous test of what is in the national interest," he says.

It's in the shadows of this opacity and Canberra's recent wariness towards Chinese investments that Chinese observers are dismissing Rudd's assurance that Rio Tinto's decision to dump Chinalco and join iron ore forces with BHP Billiton was entirely a commercial matter and had nothing to do with Canberra.

The Economist reported that Rudd wanted the deal to go through. That may well be a message Rudd's office would like the outside world to have but it is not consistent with any dealings I have had with any of Rudd's ministers, staffers, friends or advisers, and certainly not from the companies involved.
In the normal course of events we would never find out what went on inside FIRB.

On this occasion - as Rio's chairman, Jan du Plessis, hinted after he walked away from the Chinalco deal just over a week ago and Chinalco's President, Xiong Weiping, more clearly indicated at his press conference on Thursday - the original deal would have been killed in Canberra without substantial amendments.

"During our engagement and communication with FIRB we received advice in principle in terms of how the transaction should be modified," said Xiong.
He linked Canberra regulatory concerns to what he revealed was his modified offer to Rio: a lower overall equity stake and halving his planned stake in Rio's Pilbara iron ore mines.

And, unusually, Rudd ministers publicly leant against the deal from the start. Last week the Resources Minister, Martin Ferguson, said the Rio-BHP tie-up represents a better return to our natural resources for the Australian community.

My own understanding, from both Australian and Chinese sources, is that FIRB expressed its intense displeasure at almost every substantial aspect of the Chinalco deal but never spelt out what it would take for the deal to pass. FIRB's displeasure and the range of its concerns increased as time progressed - in correlation with the improving commodities, stock and debt markets - reaching critical levels in early May.

Xiong hoped his very large concessions would be enough for Canberra. In fact he had no idea. Would Canberra have allowed him to accept a seat on the Rio Tinto board? He and we will never know.

Rudd may have been right in assuring China and the world that the Chinalco-Rio deal failed for "entirely commercial reasons". But Australia's China-like investment review process means we will never know the counterfactual.

Without the delay and uncertainty injected by the political process, which strengthened BHP's negotiating arm vis-a-vis Chinalco, how would those two parallel commercial negotiations have panned out?

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