CAPITAL FROM OVERSEAS HOW TO KEEP AUSTRALIANS IN AUSTRALIAN BUSINESS

Press, Volume CIX, Issue 32119, 15 October 1969, Page 14

CAPITAL FROM OVERSEAS HOW TO KEEP AUSTRALIANS IN AUSTRALIAN BUSINESS

<By

CHARLES SMITH

In the "Financial Timer")

(Reprinted by arrangement)

Foreign investment in Australia has never been as controversial as it in in Canada or as carefully controlled as it is in New Zealand. But it has, in the course of the last year, become a major political issue. Mr John Gorton, the Australian Prime Minister and a man who has done much recently to change the climate of Australian politics, has made it so with the continual thinking aloud on the problem in which he has indulged since his first utterances on overseas take-over bids last December.

A few weeks before a General Election, he has tried to lay the controversy to rest with a set of guidelines which challenge in complexity and sophistication anything of the kind which has existed in Australia up to now. It is far from certain whether he has been successful: indeed the problem which Mr Gorton has been trying to tackle might well be more than a match for any conceivable set of regulations. The dilemma of what to do about the foreign investor is, of course, not a new one for the Commonwealth Government. During almost the whole of its industrial history Australia has been dependent on overseas capital for anything up to a quarter of its investment needs (and far more than a quarter in certain key sectors of the economy).

In the very recent past the picture has changed dramatically. Capital inflow in the Australian financial year 1967-68 more than doubled to reach a figure of just over SAI2OO million, while in the 12 months ended last June the inflow again exceeded $AllOOm. Minerals Boom The cause of this virtual revolution in the investment pattern was simple enough: the Australian minerals boom had begun and its driving force was foreign money. Projects like the s2oom Mount Newman scheme in Western Australia or the sl6om Queensland Alumina refinery at Gladstone (the first 40 per cent foreignowned, the second more than 90 per cent) were on a scale undreamed of before the midsixties in Australia, or for that matter anywhere else in the world. A mere handful of such schemes would have been enough to change the pattern of Australia’s predominantly agricultural economy even if they had been isolated phenomena: in fact they were far from isolated. The major developments were followed by a flood of exploration activity involving most of the world’s leading mining companies and by an equally impressive inflow of foreign portfolio investment in mining and other sectors of the Australian economy. The British public, uncertain about the outlook at home, bought $262m worth of Australian stocks in 1967-68. compared with only s27m the year before.

Saved Deficit For the men who manage the Australian economy the capital inflow has had its uses, even apart from its impact on the country’s rate of growth. The balance of payments would have been in heavy deficit both last year and the year before but for the greatly increased capital surplus (it could well be in the red this year if the current lull in portfolio investment continues). Yet with these and other advantages the Australians have shown themselves less than grateful for the attentions of foreign investors. At the popular level, the Commonwealth Government has been accused of squandering the country’s irreplaceable assets for the benefit of foreign industrialists when it Should be using them to build up Australia. The counterargument invoked by the politicians and civil servants who have presided over the great mineral developments in Queensland and Western Australia is that the new investments are doing far more than simply producing “holes in the ground.”

Aid To States In Queensland, investors in the coal and bauxite industries have been required to finance the construction of state-operatea railways which will serve agriculture as well as mining. In Western Australia, where private enterprise dominates the scene to an extent probably unequalled since the opening-up of the American West, the mining companies have built ports, railways, schools and power stations, and will eventually erect steel works if their agreements with the state government are honoured to the letter.

Even so there are doubts, in high places as well as low, about possible conflicts of interest in industries whose major companies are subject to control from London or New York. The late Mr Harold Holt, in most respects a total believer in the open door policy towards foreign investors, admitted this by implication when he introduced guidelines in 1965 relating to borrowing rights of a foreign company in the Australian money market to the volume of equity offered by the same company to Australian shareholders.

The Holt guidelines were a response to the Johnson Administration’s attempts to defend the United States balance of payments and were chiefly designed to discourage investors from drawing too liberally on Australia’s domestic financial resources while retaining undiluted domination of its industries. Since they were introduced, the gap between Australian and international interest rates has widened and the incentive for overseas companies to borrow as much as they can in Australia has correspondingly increased. But the advent of Mr Gorton as Prime Minister has almost certainly done more than interest rates to heighten the investment controversy. Two Objects A non-traditional Liberal leader, whose policies on several domestic issues are closer to those of the Australian Labour Party than to those of his predecessors, Mr Gorton has often sounded nationalistic when talking about foreign investment. He has also sounded vague and inconsistent —at least he did up to the moment when the new investment guidelines were formally introduced in Canberra. Given the fact that the guidelines are obscure in

certain key sections and pending further explanations which are still due to come from the Australian Treasury it is now possible to trace two basic objects in Mr Gorton’s policy. One is to make it more difficult than before for domestic Australian companies to be taken over by overseas interests. The other is to urge on by every possible means the issue of equity within Australia by established foreign companies. Of the two objects the first is, in the context of Australia's Federal system, by far the more difficult to realise. Mr Gorton’s new takeover code, which aims to prevent outsiders from buying up significant portions of an Australian company’s shares without revealing their hand, is applicable only in the Australian Capital Territory and the Northern Territory, the two parts of Australia which come directly under the control of the Federal Government. Voting Rights His announcement of the new provisions for altering the voting rights in companies listed in Australian stock exchanges so as to restrict the votes of foreign shareholders is also less significant than might appear at first sight. The amendments concerned can only be made with the support of 51 per cent of the affected shareholders, which means that they could hardly ever be made in practice. Compared with the nebulous provisions on voting rights, Mr Gorton’s inducements to the issue of local equity by overseas companies look convincing enough. The establishment of a fixed ratio between the percentage of its borrowing which an overseas company can make in Australian money markets and the percentage of its equity which has been issued (or offered) to Australian investors. The ratio is four to three which means, for example, that a company which is 30 per cent owned by Australian shareholders can raise 40 per cent of the money required for any increase in its fixed capital within Australia. But the guidelines do not close the door completely to companies without Australian shareholders.

A company with a long history of Australian operations which is wholly-owned abroad can raise 10 per cent of its borrowing requirements from Australian banks or other sources of fixed interest finance. A new company can raise 2] per cent, with the prospect of more liberal treatment after the first few years. Finally, all companies may borrow freely to provide themselves with working capital, though exactly what Mr Gorton means by this expression in the context of the guidelines remains in doubt. If the optimists are right he could mean all the money required by a leading finance house such as General Motors Acceptance Corporation to finance sales of G.M.-Holden cars in Australia. If they are wrong, companies like G.M.A.C., which is among the biggest foreign borrowers in Australia, could find themselves in difficulties. However, the chances are that they will, at the very least, be allowed to survive. Observance Likely In contrast with his takeover code, Mr Gorton’s borrowing guidelines are “voluntary.” They are, however, backed by unofficial sanctions, the chief one being that the Reserve Bank could use its exchange control powers against any recalcitrant company, and it is assumed that they will be< faithfully observed, Whether they will also be effective in the sense of actually increasing Australian participation in the economy is another matter. Mr Gorton knows very well that Australian investors might not always be keen to take up shares in mining companies whose profits and dividends are likely to be minimal in their first years of operation, however impressive their long-term prospects. He has even made concessions to his countrymen’s caution by offering tax concessions on convertible notes which can be transferred at the discretion of the lender from fixed interest loans into equity. But he is obviously determined, come what may, to involve Australian money and Australian management to the full in the Australian economic miracle. It will not be surprising if some of the great schemes of the future turn out to be more Australian than their predecessors.