Foreign investment policy is back in the news. The Business Council of Australia (BCA) is warning that Australia's foreign investment regime is discouraging Chinese investment, particularly from Chinese state owned enterprises (SOEs). The BCA has put forward a number reform options, arguing that change is necessary because we are competing for foreign capital.

Others have flagged the need to overhaul the foreign investment review system too. Former Australian Competition and Consumer Commission (ACCC) chairman Allan Fells has called for the Foreign Investment Review Board (FIRB), which screens foreign investment applications, to be reconstituted as an independent and transparent agency modeled on the ACCC. It is currently a non-statutory body. The Australian National University's Shiro Armstrong says the FIRB system is like Swiss cheese, particularly with random free trade agreements (FTAs) introducing new review thresholds. Add to this changes for agriculture investment and possibly new rules for foreign real estate investment.

At a conference on 29 August, Treasurer Joe Hockey suggested the Government is contemplating a more liberal approach to investment from China's SOEs. He did not signal specific changes but said a number of times that the Government hopes to conclude an FTA with China by the end of the year; it is likely that a more liberal approach to Chinese SOE investments will be part of the FTA.

Chinese negotiators are demanding the same treatment for their government-owned investors as in other Australian FTAs. But if there is a carve-out for Chinese SOEs similar to that in the Korean and Japanese FTAs, this would add more holes to Australia's Swiss-cheese foreign investment policy.

Australia needs a clear foreign investment strategy. Foreign investment thresholds should not be a bargaining chip in free trade negotiations.

Currently, all investment applications from SOEs have to be screened by FIRB. For foreign private investors, investments over $248 million need to be screened. But in Australia's FTA with New Zealand and the US, only investments above $1.078 billion are screened. The same threshold is included in the recent FTAs with Korea and Japan.

The reason SOEs are treated differently reflects a concern that, as state entities, SOEs will may not be motivated solely by commercial motives.

The BCA notes that if FIRB screening is removed, this will stimulate investment in Australia but could expose Australia to investments 'contrary to the national interest'. But removing screening of SOEs under an FTA also exposes Australia to investments that could be contrary to the national interest. Perhaps the benefit of increased market access for Australian exporters under the FTA will offset the risk of foreign investments contrary to the national interest. However it is unlikely such a cost-benefit assessment is undertaken as part of the negotiations.

Ministers have said one of the benefits from the FTAs with Japan and Korea is increased investment by these countries in Australia. But if our foreign investment policy is excessively deterring investment in Australia, we do not have to enter FTAs to increase screening thresholds. Australia can make that change unilaterally.

The BCA's reform options range from removing FIRB screening altogether to doing nothing at all. In between are five options based around different screening threshold levels (such as the US/NZ FTA level at $1 billion or the general threshold for private foreign investment at $248 billion), and options where such thresholds would only apply to SOEs with a good track record in Australia or to those meeting specific operational criteria.

The core criteria that needs to be established in order to assess the reform options is the degree to which SOE investments are likely to be contrary to Australia's national interest. It is clear that not all SOEs are the same and Chinese SOEs are changing. In particular it needs to be established if there is a real economic threat or whether it is more a case of appeasing community concern over SOE investment. If it is the latter, the focus should be on community education.

Australia does need to overhaul its foreign investment review system. It needs a coherent strategy, not one based on concessions in FTAs. Moreover, the whole system should be reviewed, not just the treatment of SOEs. And Alan Fells is right; changes need to be made to the FIRB. The OECD has recommended that Australia needs to 'further promote foreign direct investment by easing the stringency of screening procedures'. But Australia needs a clear foreign investment policy strategy, and not one that looks like Swiss cheese.

Photo by Flickr user bleu celt.