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The Age, April 25, 2001.

Investment data expose scaremongering about selling off the farm as populist nonsense By DES MOORE

For almost all of Australia’s existence as a modern nation, foreign investment has made a major contribution to growth, living standards and employment. However, the exercise of foreign control may not always be in the national interest and this is the rationale for the Government’s decision to reject the takeover of Woodside by Shell.

An important question from this decision is whether it indicates a change in policy because Australia is judged to have become excessively dependent on foreign capital. Treasurer Costello has given no such indication and has clearly tried to portray the decision as a one-off related to the particular circumstances of the case.

But the recent concerns expressed by business leaders about the risks that globalisation will force Australian firms largely to become branch offices of overseas multi-nationals may have been an influence. And rumours that a Costello proposal to approve the project (subject to conditions) was defeated in Cabinet adds weight to the belief that politics played a determining role, with the main pressure coming from the traditionally isolationist Western Australians. A Coalition member from that State suggested that approval would lose a number of seats.

This reminds me of the old pre-election saying "I feel a dam coming on". It is, unfortunately, consistent with Canberra reports that Government decisions have recently been more concerned with putting out bushfires than developing fundamental reforms and policies.

Is there any reason for Western Australians or others to be concerned that Australia has become excessively dependent on foreign investment? The best overall measure of such dependence is the contribution it makes to total capital formation. In 1999-00 total gross fixed capital formation was nearly 24 per cent of GDP while the current account deficit (which reflects the net inflow of foreign capital) was only just over 5 per cent, that is, foreign capital funds about one fifth of Australian investment.

With the recent fall in the current account deficit to around 4 per cent of GDP, and the falling (relatively) costs of servicing our net liabilities, there is certainly no reason for concerns about the general role of foreign investment. Rather the contrary: in fact the recent exchange rate depreciation appears to be due more to a weakening in net capital inflow than to traditional concerns about mounting servicing costs of foreign debt and equity.

Moreover, the net foreign capital that finances the current account deficit includes capital of all kinds. Foreign direct investment in Australia, the principal form of investment subject to control by overseas companies, amounted in 1999-00 to only about 2 per cent of GDP or less than one twelfth of total fixed capital formation.

Australian investment overseas is also relevant. At end December 2000 outstanding direct investment in overseas countries by Australian enterprises was valued at no less than $184 billion, up almost $100 billion since June 1998. Although this surge mainly reflected increases in values of overseas assets (as distinct from new outward flows), such investment is now worth only $18 billion less than the comparable foreign investment here.

This is hardly an indication of growing foreign control in net terms. It suggests, moreover, that Australian companies themselves not infrequently face decisions as to whether to give priority to domestic or overseas assets.

If there is no reason for any general concern about the extent of foreign investment, are there more particular concerns in this case?

Australian foreign investment policy rightly provides for proposals to be rejected when they are judged against the national interest. In the Shell/Woodside situation the bottom line question is - will the very large and important gas assets be developed (and the proceeds sold) to the maximum extent by the NW Shelf partners or will Shell’s influence allow it to give priority to its large gas assets outside Australia? The answer is all the more important given that gas is usually sold on contracts extending over a number of years.

If Shell would have obtained a monopoly or quasi–monopoly position, there would be justification for rejecting its bid or at least requiring it to observe appropriate development conditions. But the project’s development would have also depended on decisions by four other partners.

Perhaps Shell would have some special influence. But the Treasurer’s comments leave me without a satisfactory explanation as to why, with Shell and the other partners, an agreed program could not have been developed. The rejection adds a worrying trend to recent policy decisions, including the excessive government intervention in the private sector.