October 15, 2009
Dr Stephen Joske: "(Peter) Costello hated lobbyists but Swan seems to have let some of them get a foot in the door." Photo: Sanghee Liu
In February 2008 the Chinese Government-owned aluminium giant Chinalco derailed BHP Billiton's plans for a full takeover of Rio Tinto by snatching 12 per cent of its London shares.
BHP, the world's biggest miner, immediately began a mammoth but discrete media and government relations campaign against the Chinese investment, including private talks between chairman Don Argus and Prime Minister Kevin Rudd at the Lodge in Canberra.
Mr Rudd, Treasurer Wayne Swan, Resources Minister Martin Ferguson and their advisers were particularly targeted.
''Emails from BHP were circulating at the highest levels, copied into ministers' offices, about all the 'China Inc' stuff,'' says Stephen Joske, a former Treasury official who left Canberra last year.
The BHP campaign was ratcheted up after Chinalco again stunned the market in February 2009 by signing an additional $US19 billion investment deal with Rio.
That second deal died a natural if acrimonious death when Rio walked away from for an iron ore tie-up with arch-rival BHP Billiton.
''It was Rio's decision to walk away, not the Government's,'' emphasises a source close to BHP. ''FIRB (Foreign Investment Review Board) or the Government never even ruled.''
In the dying days, Canberra had told the Chinese ambassador, Zhang Juncai, that the Chinalco bid would be approved. But that was based on
a radically pared down version of the deal as briefed by Rio, which Chinalco had never agreed to.
If Chinalco executives were stunned and wounded by the way their deal fell apart, they were also a little awestruck at the quiet backroom efficacy of BHP.
''I admire BHP's strategic discipline and the way it plays the game,''' says Chinalco's key acquisitions strategist, Wang Wenfu, who spearheaded the Rio Tinto bids. ''But I did think it was unusual to not make a single submission to the Senate inquiry on foreign investments when it was busy supplying ministers with dossiers on that very topic behind the scenes.''
Clinton Dines, who headed BHP's China business until July, said Australia was entitled to screen investment applications but few had been rejected.
''The Chinese themselves have mastered the art of declining to approve investments where they wish to protect their own interests - there is nothing wrong with that - and the Australian Government should preserve the same policy prerogative,'' he said.
Since then a long list of Chinese investments in Australia has been delayed, discouraged or rejected by the Australian Government. In recent weeks, it has rejected two Chinese bids and instructed others to resubmit their applications.
In May China Nonferrous Metals Mining Group launched a $500 million FIRB application bid for control of rare earths miner Lynas. The application had been back and forth at FIRB until the regulator was satisfied that a marketing mechanism had been devised that would not exacerbate China's stranglehold on the rare earths market.
But on the morning of September 23, China Nonferrous received a message from the investment regulator saying that ''we are inclined to approve this transaction and we can approve it tomorrow, with just two minor amendments'', according to a source privy to the conversation.
The amendments were to reduce the Chinese shareholding from 51 per cent and reduce Chinese board nominees to a minority.
The Chinese company was told that FIRB wanted to send a message to China's economic planning agency, the National Development and Reform Commission, that it had to comply with Treasurer Swan's investment guidelines.
The problem was that China Nonferrous thought it had already complied. It immediately walked away from the deal.
''They grossly misjudged the sovereign insult and failed to see that China Nonferrous would make a decision not to use up their political capital trying to get a lesser deal and save it for another transaction,'' said a source close to the deal. ''It is very, very difficult to do transactions when the policy sands keep shifting beneath us.''
FIRB had intended to announce the Lynas deal's approval the following day, September 24. That would have coincided with FIRB chairman Patrick Colmer laying down tough new guidelines that appear to restrict foreign government-owned investors to 50 per cent of greenfield resource projects and to less than 15 per cent of major ones.
These guidelines were intended to add certainty to the process. Instead, they have created a new round of confusion and bewilderment in Beijing. Observers and participants in the deal wondered whether the $US3 billion ($A5.2 billion) bid by Yanzhou Coal for Felix Resources - also stalled at FIRB - would now be ruled off limits.
''The 15 per cent test has caused absolute confusion here,'' said a source close to that deal in Beijing, adding that he thought the deal would still go through.
Those who frequently dealt with FIRB told BusinessDay that the system has been enveloped in additional rolls of red tape since Colmer's comments.
''A response from FIRB is now beginning to look like an ACCC market inquiry analysis Q&A,'' says the lawyer.
Indeed, a whole industry of lawyers, lobbyists and retired politicians is springing up to earn fees by promising China that they can divine the mysteries of Australian's foreign investment laws. Many contacted by The Age are critical of FIRB and others are critical of the Australian media. But they are all fearful of speaking publicly, lest they offend the agency they are paid to deal with.
Mining magnate Clive Palmer, who has close business dealings with China, caused fireworks recently by calling FIRB a "racist body". Privately, some Chinese executives are equally scathing. One leading Chinese investor recently privately complaining about Canberra's "xenophobia" while promising to send his capital elsewhere.
Chinese officials have tended to be more restrained, perhaps given that it is notoriously difficult for foreign companies to enter the Chinese mining industry.
But Australia's investment restrictions appear to be popular at home, with 50 per cent of respondents to this week's Lowy Institute survey saying the Rudd Government was still letting in too much Chinese investment.
But Stephen Joske says the Rudd Government's public opinion problem is of its own making.
''There wasn't strong public resistance to Chinese investment in Australia a few years ago,'' he said.
''But indecision from the Government and negative signals created a vacuum in which concerns grew. As soon as FIRB started to define what the national interest is they bound their hands without really resolving the issue; now FIRB is being used to fan public opinion and concerns about state-owned enterprises.''
Some reports hinted that BHP Billiton succeeded in framing senior government advisers thinking, including in the office of Resources Minister Martin Ferguson who is planning a trip to China this month.
But Mr Joske's comments are the first insider's confirmation of problems with the investment policy process, the extent of BHP's influence and the strategic economic questions at stake.
Mr Joske, who had been a macro economy adviser to former Treasurer Peter Costello, a Treasury representative in Beijing and also the top China economy analyst at the Office of National Assessments, was privy to the Government's investment decision-making processes following Chinalco's initial tilt at Rio Tinto.
He said he was ''shocked'' at Treasury's failure to brief its boss, Mr Swan, on the usual pros and cons of foreign investment
''I suspect Treasury did what they thought the minister wanted,'' he said. ''[Former Treasurer Peter] Costello hated lobbyists but Swan seems to have let some of them get a foot in the door.''
Mr Swan repeatedly said Australia welcomes investment from all sources, including China, subject to the national interest. He declined to comment for this story.
Mr Joske says the investment policy setting is getting worse because of a lack of leadership.
''There is no strategic framework with China 'I don't know what caused it but it's a fact. Because of this vacuum you get crap policy. FIRB's been allowed to depart from the spirit of the open economy and to effectively dominate the entire economic relationship,'' he said.
as posted here
14 October 2009
