George Gilligan & Megan Bowman Senior Research Fellow & Research Fellow

1. George Gilligan & Megan Bowman Senior Research Fellow & Research Fellow Centre for Law, Markets & Regulation What's the State of Play? The Effects of State Capital Investment in Australia and Regulatory Implications

2. Structure of Paper Introduction – State Capital and the Changing Global Economy International Regulatory Issues Inward Capital Investment to Australia Researching State Capital: A Snapshot from Ground Level

3. Introduction – State Capital and the Changing Global Economy 1 Globalisation - ↑ Interdependence between jurisdictions & ↓ economic sovereignty? Globalisation further elevates national deficits & surpluses → ↑macro-economic imbalances Absolute centrality of political economy issues regarding State Capital State Capital – Back To The Future? Gunboats & Redcoats & Linkages of Investment Capital: State East India Company (EIC) - 1600 Dutch East India United Company - Verenigde Oostindische Compagnie (VOC) -1602 Hudson Bay Company (HBC) - 1670

4. Introduction – State Capital and the Changing Global Economy 2 Contemporary state capital actors do NOT play EIC, VOC or HBC militaristic/governmental role but DO facilitate sovereign’s economic & political influence ↓ liquidity on capital markets & ↑ strategic importance of state capital as sources of liquidity with longer-term investment horizons GFC fall-out, e.g. nationalising/part-nationalising failing banks; Entwined regulatory/investment role of the state becomes more cloudy Potential conflicts as: an active investment actor; a detached and independent regulator; a recipient of inward investment from both state and non-state sources; and the promoter of the national interest West → East global imbalances & ↑ of China, e.g. foreign reserves $21 bn in 1992, 5% of GDP → $31 bn in 2012, 45% of GDP

5. Introduction – State Capital and the Changing Global Economy 3 - % share of global GDP

6. Introduction – State Capital and the Changing Global Economy 4 - Actual and projected top 20 economies based on GDP in PPP terms (PwC Economics, 2013) 2011 2030 2050

7. Introduction – State Capital and the Changing Global Economy 5 (DFAT, 2013) Australia's top 10 two-way trading partners 2011 ($ billion)

8. Introduction – State Capital and the Changing Global Economy 6 (Coleman, 2013 using SWFI data)

9. Introduction – State Capital and the Changing Global Economy 7 – Measurement Issues The figure for China's largest fund "is a best guess estimation” Discourse on state capital - some parallels with the discourses on white collar crime and financial crime, e.g. both heavily reliant on “best guess estimations” as well as: definitional & classification uncertainty; diffusion of effects; powerful actors not welcoming scrutiny; problematic re gathering hard data → measurement difficulties; so difficult to evaluate regulatory responses; empirical uncertainty symbiotic with ambiguity & ambivalence re state capital?

10. Introduction – State Capital and the Changing Global Economy 8 - Sovereign Wealth Funds (SWFs) Wide rage of definitions re SWFs, e.g.: Lowery (2007): ‘..a government investment vehicle which is funded by foreign exchange assets, and which manages these assets separately from official reserves.’; IWGSWF [now IFSWF] in their GAPP (2008): ‘SWFs are defined as special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.’ Jen (2007) SWFs have five basic ingredients: i) sovereign; ii) high foreign currency exposure; iii) no explicit liabilities; iv) high risk tolerance; and v) long investment horizon.

11. Introduction – State Capital and the Changing Global Economy 9 – SWF Operators Extremely diverse, e.g.: authoritarian one party states; sophisticated democracies; highly developed European oil/gas exporters (e.g. Norway, Russia) less developed oil/gas exporters in the Middle East (e.g. UAE, Kuwait); manufacturing/trading entrepots in Asia (e.g. China, Korea Singapore); broad-based commodity exporters (e.g. Australia, Chile); smaller emerging economies (e.g. Mauritania, Uzbekistan). SWFI (2013): 40% in Asia; 35% in the Middle East; 17% in Europe; 3% in Africa; 3% in the Americas; and 2% in other areas of the world.

12. Introduction – State Capital and the Changing Global Economy 10 – State Capital & Regulatory Environments State capital actors likely to become more prevalent & larger ↑ly influential recyclers of global finance but shaped by global macroeconomic imbalances themselves Post GFC = lower returns in investment returns in developed economies → state capital as ↑ conduits → emerging markets Post GFC = global appetite for risk ↓ Regulatory trends → ↓ emphasis on light touch regulation The state to be an ↑ly active investor in financial markets & ↑ly active overseer of their design and regulation (e.g. G20, FSB)

13. 1 International Regulatory Issues 1 State capital ↑ly varied & aggressive in their investment strategies →↑ fears of financial protectionism in recipient countries e.g. US Dubai Ports World (2006) – Bush administration approved deal, but rejected by House Panel 62: 2 (March 2006) Management of seaports already foreign owned by P & O (UK), media pressure: public hostility: protectionist sentiment 2008 →Confluence of GFC: liquidity shortages: state capital (especially SWFs) as liquidity sources: multi-lateral regulatory activism of SWFs themselves (facilitated by IMF & World Bank) May 2008 – Washington DC = 25 SWFs → IWG October 2008 – Santiago = Generally Accepted Principles and Practices (GAPP) – The Santiago Principles

14. International Regulatory Issues 2 Kuwait City – April 2009 IWG evolved → International Forum of Sovereign Wealth Funds (IFSWF) July 2011 – IWFSWF Members Survey (80% participation): ‘..it was not reasonable or possible to expect uniform compliance with the GAPP from all IFSWF Members.’ = Reflection of political reality? Can top-down regulatory infrastructure work? E.g. OECD Multilateral Agreement on Investment (MAI) in 1998 OECD Members bound by agreements such as Declaration on International Investment and Multinational Enterprises & Code of Liberalisation of Capital Movements, BUT Non-Members are not → gaming of protocols So intermediation NOT new regulatory institutions? Evolutionary approach congruent: market realities & ↑ process legitimacy?

15. International Regulatory Issues 3 –Beauty Parades 1 (Spa, Belgium 1888)

16. International Regulatory Issues 4 –Beauty Parades 2 (Wodaabe Tribe Niger)

17. International Regulatory Issues 5 –Beauty Parades 3 Competitive ‘regulatory beauty parade’ environment as recipient jurisdictions compete for capital, regulatory infrastructures are a crucial part of that competitive process Some regulatory uniformity, e.g. G20/FSB measures Recipient country approval regimes → monitoring & partial control of inward investment, legitimate protection of national interest State capital actors as downstream users of commodities, acquisition of foreign assets → implications for recipient countries re: corporate governance; competition & tax policies. Australia Senate Economics References Committee (2009): best way to regulate foreign investment is ‘robust domestic legislation.’ Continuing balancing act of robust legislation: beauty parade….

18. 2 Inward Capital Investment to Australia 1 Foreign Acquisitions and Takeover Act 1975 (Cth) (FATA) & Foreign Investment Policy administered by the Foreign Investment Review Board (FIRB) - a non-statutory body FIRB’s functions advisory only, decision-making with the Treasurer. Ongoing authorisation (effectively a delegation) = 94% + proposals decided under this delegated authority (FIRB 2011-2012) Little controversy, rejection statistically low, e.g. FIRB 2010-2011: 10,865 applications; 10,293 approved 43 rejected, 390 withdrawn; 139 deemed exempt Real estate dominant: 9,771 of the approvals & 42 of 43 rejections Until recently little controversy, really only rejection of Shell’s 100% acquisition of Woodside (2001)

19. Inward Capital Investment to Australia 2 Recent years = ↑ high profile coverage of Chinese investment in Australia especially regarding resources assets (scaremongering?). For example: 2008 - Chinalco : Rio Tinto 2009 - China Minmetals Non-Ferrous Metals Co Ltd acquisition of Oz Minerals (issues re Prominent Hill Mine in Woomera Prohibited Area) Treasurer Wayne Swan imposed restrictions in both Chinalco & Minmetals cases 2012 Huawei prevented from significant tendering in National Broadband Network (NBN). Jingoism always lurking in the DNA of Australia’s inward investment discourse? ‘The Foreign Acquisitions and Takeovers Act was put in place in 1975, when there was a huge backlash against Australia being sold off to the Japanese.’ (FIRB Chair Brian Wilson – 2012) ‘..talks on a free-trade deal with China have stalled because of a dispute over restrictions on investment in Australia by Chinese state-owned enterprises.’ (Trade Minister Craig Emerson – April 2013)

20. Inward Capital Investment to Australia 3 FIRB Approved Proposed Investment: 2011/12 (Deal Value in $Aus billion & Number of Contracts) Total Deal Value = 170.71 $Aus billion Total Number of Contracts = 10,703 Sources: FIRB Annual Report 2011/12

21. 3. Researching State Capital: A snapshot from ground level 3.1 Context: Foreign acquisition by SOEs - a contentious issue Strength of State capitalism - SOE capitalisation = significant element in 3 of the BRIC countries; - One third of FDI from emerging economies 2003-2010 = SOE Share of SOE capitalization on the MSCI national stockmarket index: % of total, June 2011 Source: The Economist, 21 January 2013.

22. Context, cont. Weakened state of Liberal Capitalism - Vulnerability of several advanced economies post-GFC Several high-profile acquisitions & investments - Qantas/Emirates 2013 - CNOOC/Nexen 2012 - Abu Dhabi/Chrysler Building 2008 Questioning of liberal capitalism; and Concerns re diminution in home-state ownership of national resources & entities.

23. Context, cont. Concerns focus specifically on foreign SOE acquisition. Exemplified in media headlines: China's state-owned enterprises obtain FIRB approval by stealth The Australian March 13, 2013 12:00AM Don't mix politics and deals: FIRB in warning to state-owned investors The Australian August 7, 2012 7:00AM

24. Context, cont. ...policy guidelines: Eg. Revised Canadian investment policy guidelines: Investors “expected to address…the inherent characteristics of SOEs, specifically that they are susceptible to state influence” projects are commercial & free from political influence. ...and political decisions: Aust govt: exclusion of Huawei from National Broadband Network bidding (2012) US govt: prohibition of Ralls Corporation from owning wind farms in Oregon (2013)

25. Context, cont. Intrinsic nature of an SOE: eg. Clarke and Howson (2012) on Chinese SOEs Feeds media sensationalism and influences political discourse But is there documented cause for concern? Assumption = inward investment by SOEs (particularly China) is statistically dominating the Australian landscape Reality = lack of readily accessible empirical data on exactly where SOEs vs. non-SOEs are investing: Which jurisdictions? Which sectors? Which entities?

26. 3.2 Our Research Goals (1) Source empirical data on Chinese SOE vs. Non-SOE investment  readily accessible one-stop database (2) Research individual Chinese SOE companies  where else investing? (3) Make well-founded mid-term predictions about likely materiality of Chinese SOE investment into Australia  cross-compare and evaluate the current Australian regulatory regime  provide evidence-based recommendations for optimal regulatory design.

27. 3.3 Initial stage – data gathering & challenges Aim: produce a longitudinal table - incidence of Aust approvals of Chinese investment by sector differentiating between SOE and non-SOE investors Process  has revealed surprising gaps, inconsistencies and methodological challenges for researchers of state capital.

28. 3.4 Initial stage & challenges, cont. Multiple sources: Chinese, Australian, international Starting point = FIRB but no breakdown of SOE: non-SOE Extracting that level of detail from other sources, incl: • ABS, NBS • DFAT • OECD, IMF • Heritage Tracker, • Media • KPMG, Deutsche Bank • MOFCOM, SASAC.  (1) Datasets are not easily compared

29. Examples of differences between sources

30. (2) SOE investment data for Australia: state/territory, sector, industry, entity? Traditional areas of SOE investment: natural resources, utilities, telcos, defence. KPMG 2013: Chinese SOE diversification towards other sectors & away from natural resources & mining Lee 2012: Chinese SOEs now operate in all major sectors Marchick & Bowles 2011: growth of small private coys. Heritage Foundation’s China Global Investment Tracker - Limitations  triggers methodological caveats outlined above. - BUT can further investigate data to reveal insights about SOE investment in Aust.

32. 4. Conclusion Post-GFC world: rising economic power of Asian countries  changing perceptions of appropriate levels of state-directed investment activity  changing trends in composition of the global economy. Highlighted significant trends & strategic importance of state capital  national/ international policy development must be underpinned by accurate data. Methodological challenges associated with evaluating the extent and impact of investment by state capital actors  important process to chart these developments.