By John W.H. Denton
Chairman, BCA Global Engagement Task Force
Partner and Chief Executive Officer, Corrs Chambers Westgarth
Foreign investment has played a vital role in the economic performance of Australia. Our performance, even in the face of the impact from the recent global financial crisis, has been very strong when compared to other developed economies. But having come through the global downturn so well, one of the dangers we face is complacency.
Given this recent performance, we could, as a community, be lulled into forgetting why our economy has been so strong and resilient, and why we enjoy higher living standards as a result.
One key reason behind our success has been the willingness of successive federal governments to proactively pursue important economic reforms. These reforms have made Australia an attractive place for foreign investment. In turn, widespread gains have flowed from making good use of this capital. These include the building of modern, globally competitive industries, the securing of valuable trading relationships and the creation of many highly skilled and well-paid jobs.
If we do avoid the trap of complacency, further gains can be made and shared with the wider community. Economic modelling undertaken for the Business Council of Australia by Access Economics showed that if Australia could increase foreign investment by 10 per cent over the next 10 years this would add more than 1 per cent to economic growth. This would represent an additional $16.5 billion to our economy by 2020, which in turn would directly and indirectly boost employment.
These potential gains are by no means assured. The international economic landscape has been changed by the global financial crisis. Added to this, government or state-owned enterprises and sovereign wealth funds continue to emerge as sources of foreign investment. While investments by state-owned entities may very well be in Australia's interests, this needs to be considered on a case by case basis, as happens under current policy.
The rapid economic rise of Asia and the increasing global influence of both Asia and the Asia Pacific is one of the most important economic and strategic issues for Australia in the 21st century. Australia must continue to lift its level of engagement with the nations of Asia. Growing investment secures our trading relationships, which in turn will help provide the basis for strong and effective relationships with those nations over the medium to longer term.
It is critical that we work to maintain the support of the Australian public for foreign investment, and for the policies that attract capital to our shores. With this in mind, it is always important that a balance is struck between attracting investment while safeguarding our legitimate national interests.
It will be crucial that governments and business take active steps to facilitate investment. We need to make sure that policies continue to support investment coming to Australia, as well as encouraging investment from domestic sources. Both are essential if we are to continue to create and maintain modern and competitive industries throughout the 21st century.
Governments of both persuasions have long advocated an open and measured investment regime for Australia. To its credit, the Rudd government has already introduced important reforms to Australia's foreign investment policies to reflect changing global dynamics. These have included some liberalisation of the screening requirements for private sector investors, and making more information available about the principles that underpin the screening process.
The government's efforts to communicate its proposed resource rents tax have raised questions about the appropriate returns to foreign investors, potentially damaging confidence in Australia as a stable investment destination. This is unfortunate because the federal budget strategy and Australia's future prosperity depend on continued strong investment. This will mean a continued reliance on foreign capital, including investment in the mining sector.
In considering the impact and detail of the new mining tax, we must pay close attention to how any arrangements might affect foreign investment, and avoid sending the wrong signals to foreign investors.
In the light of changes impacting on the global economy, ongoing reforms to foreign investment policies will be essential. In the BCA's recent report, Foreign Attraction: Building on Our Advantages through Foreign Investment, we recommend further improvements to our foreign investment policy settings, including:
- Private corporate investors from all nations should be exempt from the pre-investment screening process for proposed investments in businesses valued at up to $1 billion. This is a threshold that already applies to investors from the United States.
- Foreign investment screenings should require that state-owned enterprises, and where applicable, sovereign wealth funds, demonstrate as part of any investment proposal that the administration of the investment will be independent of a foreign government.
- The federal government should avoid encouraging or formally attaching conditions to foreign investment proposals that do not directly relate to the proposed investment.
- The federal government and its key agencies should improve the communications and marketing of Australia's foreign investment policies.
The BCA is also reinforcing the importance of giving a high priority to reforming tax and regulatory policies in ways that support the continuing flow of foreign investment.
We also need to make sure that we send clear signals that Australia continues to be open to investment. Our foreign investment policies must reflect this basic message. The government, the opposition and business all have an important role in clearly explaining why foreign investment continues to be essential for Australia's future.
At what is a challenging time in the global economy, we must be on our guard against complacency.