The $371m bid for the Kidman cattle properties by Dakang Australia (80% Chinese owned) was knocked back in late April by the Federal Treasurer, according to the current policy to review foreign purchases of agricultural land.
Australia is a host of foreign director investment (FDI) in many sectors of the economy. Annual FDI (net) inflows recently were about $60b a year. The inflow adds to capacity for production by adding to the stock of capital in Australia, adds to the productivity and income of Australian labour as a result and often brings with it new technology.
Foreign direct investors come with a longer horizon that those who invest in financial assets. They are less likely to rush in and out. Earlier research shows they also tend to pay higher wages, maybe related to the impact of the technology they bring with them.
There are many motivations for investments. The motivation in this case is likely to be to secure access to resources, here land which supports the supply of food, beef in particular, which is in rising demand in China. That is, we expect these investors will take the beef from the cattle stations back to China.
There is a complication in this strategy. China generally imposes tariffs of 12-25% on beef imports. These will be removed under the recent trade agreement with Australia but only slowly (over 9 years). A 12% tariff on offal will also be removed (in 4-7 years). Australia would like to speed up this reduction and in future negotiations could ask to do so. In addition, China has retained the right to apply a restriction on beef imports if they get too big (but not offal). The trigger level sits at 170,000 tonnes a year (and grows over time). The trigger is reported to be ‘10% above the peak of Australia’s historic calendar year peak levels to China’. Exports in 2013-2014 were 161,000 tonnes and 93,000 tonnes the year before.
In this context, it helps to have friends within the relevant sector in China, both for the implementation of this agreement and for further liberalisation when the agreement is revisited at a later date. Foreign investors who want to export back to their home country can play that role. That is, signing an FTA is all well and good but local allies who will help drive forward its application also matter. The Australian beef sector, not just the Kidman owners, lose friends from this decision to block the sale.
So FDI in beef from China looks like good news. Why did the Treasurer reject the proposal?
The public reason was that it was not in the national interest. This was because of the size of the sale: the Treasurer estimated that it involved over 2% of Australian agricultural land. The Treasurer was concerned that the offering of the properties in one big transaction limited opportunities for Australian investors.
However, a bid of $371m does not seem an insurmountable sum for an Australian investment. Indeed QIC, an Australian fund management company, also this week announced it would buy 80% of NAPCo, a local cattle company with more animals but less land than in the Kidman portfolio. That deal is said to be worth $312m.
Apparently the proposal from the Treasurer is to break up the Kidman holdings and sell them separately. But the Kidman properties are more valuable in a group since they were purchased deliberately to complement each other. They were connected in a way that allowed the cattle to move from breeding through fattening to market. The current shareholders would bear the cost of the Treasurer’s position in terms of a lower sale price if the company is broken up.
Another option may be to split ownership from operations. If ownership is the issue, then perhaps an Australian consortium could be put together to actually own the land while an operating company could be set up to manage the cattle and their sale, including exports. Whether this would meet all the objections remains to be seen.
Are there other reasons to hold back foreign ownership?
- One may be that foreign investors are thought to behave in a different way to local investors, because they have a different motivation or orientation. But Dakang presents as a commercially oriented organisation.
- Another issue may be a concern the commercial actions of the foreign investors will have a social impact. But all investors are subject to the same laws and regulatory systems to handle those social consequences, environmental impacts for instance.
- Perhaps the concern is really about the perception of a risk related to future food security, the scenario being that Australians would be denied access to cattle grown on foreign owned land. Trade supported by FDI is actually good for food security. It looks at the issue from a global perspective and helps promote two way trade in food. Good investments in research on food production and technology also help.
In summary, it is difficult to find a good reason for controls on foreign direct investment. If there is an issue to be resolved, there is generally a better and more direct instrument – be it food security, environmental effects, and so on. More than that, controls on foreign investment lead to lost opportunities for all of us.