COMMONWEALTH OF AUSTRALIA
SPEECH BY
The Rt Hon. W. McMAHON, M. P.
Prime Minister
ON
Overseas Investment in Australia
Ministerial Statement
[ From the ' Parliamentary Debates', 26 September 19721
Mr McMAHON ( Lowe-Prime Minister)-
by leave-Last May, the Treasurer
( Mr Snedden) tabled in this House a Treasury
economic paper entitled ' Overseas
Investment in Australia'. In doing so, he
identified 3 problems associated with overseas
investment. They were the high level
of capital inflow and the potential problem
that creates for managing the domestic
economy; the suggestions of exchange rate
speculation to which such inflows give rise,
and the -possible consequences of that; and,
the sheer growth of foreign ownership and
control of important elements of our economy.
Since May this year, the Government
has been conducting a review in depth of
our policy towards overseas investment.
We were aided in this by the public debate
which the Treasury economic paper generated.
Today I want to announce the Government's
decisions to date arising out of that
review. Before doing so, however, I wish
to make clear the Government's view of
the past and future role of overseas capital.
Overseas capital has played a vital role
in Australia's development. It has added
considerably to the resources available for our growth. It has brought with it valuable
technological know-how and access to
overseas markets; it has created new industries.
As a result, Australia is a larger
nation, and a more prosperous one. The
inflow of capital has been associated with
increasing overseas ownership and control
of industry in Australia. This has -been one
cost of the increased growth which has
come from welcoming overseas capital. In
the past, this has been a cost which, in our
judgment, has been outweighed by the
benefits. Nonetheless, our policy has been
to encourage overseas capital to come insofar
as practicable on a joint basis-and in
close co-operation with Australian-owned
enterprises. But circumstances change and
so must -policies.
In the past 2 years, capital inflow has
increased dramatically. In 1969-70, net
apparent capital inflow was $ 797m. In
1970.71, it was $ 1,418m. Last year, it was
$ 1,841m. A very high* level of capital
infloyw seems in prospect again this year.
Until 2 years ago, capital inflow, by and
large, was -broadly matching our defcit on
the current account of the balance of payments.
That is, the overseas capital was
being used to add to the resources available
in the economy. Without it we could
not have sustained a large net inflow of
goods and services from the rest of the
world. That situation has now changed. In
1970-71 net apparent capital inflow
exceeded the current account deficit by
S598m. In 1971-72, the excess rose to
S1,443m. Between end-June 1970 and end-
June 1972, official reserve assets rose from
$ 1,538m to $ 3,764m. They now exceed
$ 4,100m. In brief, in the past 2 years, capital
inflow has resulted chiefly in a build-up of
international reserves rather than an addition
to resources actually being used in the
economy. The greater part of this recently
increased inflow has been in respect of
company borrowings. Exchange control
approvals of gross borrowings abroad rose
from $ 568m in 1969-70 to $ 1,222m in
1970-71 and to $ 1,681m. in 1971-72. With
the existing unimpeded access to overseas
lenders, our ability to use monetary policy
effeotively has been called into question.
The House may recall that the Treasury
economic paper said that ' private capital
flows have now acquired a practical potential
to nullify the effects of monetary policy
on internal economic conditions.' To
date, this has not happened. But the buildup
in liquidity which is proceeding will, if
allowed to go unchecked, produce some
headaches for the future.
As a separate but related matter, the
Government has also -been considering the
growth of overseas ownership and control
of Australian industry. We need to be sensible
about this. We all want to see a bigger
Australia. We all want the tangible
benefits that access to overseas capital and
skills ' brings us. Yet there is legitimate
cause for concern. The right balance
between our desire for an Australian Australia
and for greater growth and prosperity
must be struck. After 20 years of
vigorous growth, we are today a relatively
wealthy nation. We have less need to
depend on overseas capital for our growth
today than we did some years a-go. We can
afford now to trade off, at the margin,
some of the benefits of overseas capital for
a greater Australian share in our industry
and resources. We can do it, too, without
frightening off overseas capital. Overseas
investors -are expecting us -to move. In brief, the policies which have serveL US
well in the past now need modifying.
I turn now to the 4 specific decisions we
have taken as a result of our review to
date. Three relate to the problem of net
capital inflow and the fourth to the problem
of overseas control of our industry. I
begin with the first of the 4 dec'isions, that
is: Exchange Control on Short-Term
Borrowings Overseas
The largest part of net capital in-flow is
accounted for by borrowings overseas * by
Australian residents, including foreign
companies resident in Australia. We have
decided to act to reduce the level of short
term borrowings. The ' Reserve Bank will,
from tomorrow, refuse exchange control
approval for all overseas borrowings which
would be repayable, or carry options to
repay, in 2 years or less. Loan agreements
which have already received exchange control
approval will not -be affected.
With a view to rendering the proposed
measure effective, the present sterling area
exemption, under which, inter alia, borrowings
in Australian dollars from sterling area
residents are not subject to exchange control
approval, will be terminated forthwith. For
the sake of administrative simplicity, at any
rate in the early stages of the scheme, borrowings
totalling less than $ 100,000 in any
one year will be exempt. The appropriateness
of this exemption limit will be reviewed
from time to time. I come now to the second
decision which concerns:
The Borrowing Guidelines
Since May 1965, the Government has
laid down certain guidelines which have
limited the freedom of overseas-owned companies
to borrow in Australia. One effect of
the guidelines has been to require overseasowned
companies to bring in funds from
overseas in place of the funds which they
have not been permitted to borrow locally.
This effect was appropriate to the circumstances
formerly prevailing, but the circumstances
have changed. The need now is to
limit overseas borrowings, not to encourage
them. Accordingly, the Government proposes
to abolish the guidelines forthwith.
Portfolio Investmuent Overseas by
Australian Residents
At present, portfolio investment abroad
by Australian residents is not permitted.
Our decision is to relax this policy while
retaining the need for exchange control
approval of such transactions. Details will
be announced shortly by the Governor of
the Reserve Bank. The effect of these decisions
Will be to moderate the level of net
capital inflow from overseas. They may, as
a result, have some effect on the Australian
capital market and will, incidentally,
restore to Australian financial
institutions some of the business which, in
recent times, has been going abroad. I
want to emphasise that developments in
our own market will be watched very
carefully to ensure that there are no untoward
consequences. With liquidity presently
at a high level, no transitional
difficulties are foreseen.
Mr Speaker, at this point 1 turn to the
question of overseas ownership and control.
In this area of policy, the Government
has long made it plain that the most
welcome overseas capital is that employed
in partnership with Australian-owned capital.
However, the trend towards increasing
overseas ownership has gone on. The time
has come to consider more direct action to
influence that trend. Our balance of payments
on current account has improved
greatly and, with that, our need for overseas
capital has lessened. Our own Australian
industry is more advanced and
technologically capable than 10 or 20
years ago and can, if given the chance,
effectively partner overseas companies.
Action in the field of foreign ownership
and control generally raises complcx problems.
We have undertaken an initial study
of these problems, but their resolution will
require more detailed study and further
time for careful consideration. That work
is now in hand. Its results will be
announced as soon as practicable. However,
in respect of one particular form of
overseas ownership and control, we have
decided that action can be taken without
awaiting the final outcome of that full
review. I refer to the subject of our fournh decision: Foreign Takeovers
No aspect of overseas investment has
excited more attention than this question.
Foreign takeovers result in control as well
as ownership passing from Australian to
foreign hands. This aspect causes particular
disquiet. Sometimes foreign takeovers also
have the objective, or at any rate the
effect, of limiting competition. In such
cases, disquiet is justifiably intensified. On
the other hand, foreign takeovers can
revive an ailing company or may be made
at a price permitting the Australian recipients
to reinvest the proceeds at a considerably
increased return. Australian as well
as overseas investors have rights at stake
and our policy must be such that their
interest is not prejudiced-except when the
interest of the nation requires it. The Government's
longstanding policy has been
that it reserves the right to do all in its
power to prevent a particular takeover
when, in the circumstances of the case, it
is considered by the Government to be
against the national interest. Moreover,
under the policy announced on 24th May
last by the Attorney-General on restrictive
trade practices and monopolisation, takeovers
which are likely to limit competition
will be subject to examination and report
by the monopolies commission which is to
be established. This applies whether the
bidding company be foreign or Australian.
We think, however, that the time has
now come to introduce a new approach
for the control of foreign takeovers. The
Government intends to legislate for the
prevention of foreign takeovers it considers
would be against the national interest ion
the basis of criteria which I shall indicate.
The legislation will apply to acquisitions of
shares or other assets by overseas interests
which might reasonably be expected to
result in control of an Australian business
passing to overseas interests. In the case of
company takeovers, there will be a presumption
that acquisition by any one overseas
interest or associated group of 15 per
cent or more, or by overseas interests in
the aggregate of 40 per cent or -more, of
the voting power of an Australian company
could constitute a takeover. For this
purpose, overseas interest will include an
Australian-incorporated company ink wvhich
any one overseas interest or group holds
per cent or more of the voting power
or in which overseas interests have in the
aggregate 40 per cent or more of the voting
power. Cases where control of a business
would pass into overseas hands
through acquisition of all, or a substantial
part, of the assets of the business will also
be subject to the measures.
The measures may also apply to the
transfer of a significant part of the ownership
or rights over a valuable or potentially
valuable mineral area, such as can
occur through transactions known in the
mining industry as ' far-m-ins'. If overseas
interests demonstrate that an acquisition
would not give a significant degree of
foreign control, the measures -will not
apply. They will also not apply if the takeover
would simply transfer control from
one overseas interest or group to another.
The measures will, in general, apply to
cases where the company concerned,
whether listed or unlisted, has assets of
more than $ Im. Australian governments
have already taken action to restrict
foreign investment in certain industries of
national sign ificance-notably banking, airlines
and radio and television broadcasting.
Cases may arise where an Australian company
involved in a takeover proposal is
considered by the Government to be an
economically strategic industry leader or to
be so large that the takeovers would
significantly affect the relative balance of
Australian-overseas ownership and control
of the industry concerned. The proposed
legislation will include -a power, in those
circumstances, for the Government to take
direct action to prevent the takeover if it
judges such action appropriate.
~ Foreign takeover proposals judged by
the Government to warrant detailed investigation
as to whether they would be
against the national interest will * be
referred t o an independent authority-including
official Government representation-
which will analyse each such proposal
and report on it to the Government.
Decisions on individual cases will be
taken-I stress this--by the Government,
after consideration of the independent
authority's report. There will be a time
limit of one month, measured from the
date of notification of a takeover to the
Government, or the date of the making of a public announcement concerning the
takeover, for reference of takeover proposals
-by the Government to the independent
authority. Proposals not referred in that
time will be free to proceed. There will be
a further time limit of 3 months maximum
from the date of reference for report by
the authority, unless extended by the Government
in special circumstances.
For the purpose of references to and
reports by the independent authority, the
first criterion to be applied in judging
whether a proposed foreign takeover would
be against the national inerest will be:
Whether, against the background of existing
circumstances in the industry concerned,
the takeover would lead, either
directly or indirectly, to inet economic
benefits in relation to such matters as production,
prices, quality and range of products
and services, and efficiency and technological
change which would be suicient
to justify the increased degree of foreign
control of the particular industry that
would result from the takeover.
If the proposed takeover is judged to be
not against the national interest on this
basis, the following additional criteria will
also be taken into account: Whether, after
the takeover, the firm concerned could be
expected to follow practices consistent with
Australia's interest in matters such as
exports, imports, local processing of materials
produced, research and development
and industrial relations, including employee
protection; and whether the takeover
would have adverse consequences in terms
of the Government's objectives for
defence, environmental protection or
regional development.
In making judgments as to whether particular
foreign takeovers would be against
the national interest on any of the foregoing
grounds, due weight will be given to:
The extent of Australian participation in
ownership and management that would
remain after the takeover; and the interests
of shareholders of the company subject to
the takeover and the attitudes of its board
of directors. Pending the enactment of legislation
and establishment of the independent
authority to be provided for in it, the
measures I have outlined for the control of
foreign takeovers will be brought into
immediate effect on an interim basis.
Uti. er the interim arrangements departmental
machinery will be used in place of
the independent authority and on the basis
of application of the criteria I have
indicated. These measures will apply from
tomorrow and will embrace foreign takeover
proposals already current.
The decisions I have announced are firm
and positive: They have not been taken
lightly. Australia has benefited greatly
from overseas capital in the past and we
continue to welcome it on fair and reasonable
terms. The steps we are taking are designed to deal with some of our main
concerns. We believe they do so fairly and
judiciously. As I have said, we aim to see
greater Australian participation in overseas-
owned companies. In addition to the
steps I have announced this evening, the
Government is examining further means of
giving effect to that aim. In the meantime,
however, we make it clear that our concern
is to see that overseas capital is
employed in Australia in real partnership
with Australian owned capital. I comiend
the proposals to the House.
19840/ 72-2W 0. Mua. AY, Government Printer, Canberra