Costello 1, Paul Keating 0?

I think Peter Costello gives a good account of himself here (reproduced below the fold). This will fill some with horror of course. It’s difficult to understand what one is doing when one is deciding whether or not to allow a foreign takeover and if so on what terms. Costello argues that he negotiated better terms for the BHP Billiton arrangement than his predecessor Paul Keating negotiated for a similar exercise with CRA-Rio Tinto. His case is that these ‘better terms’ involved BHP Billiton remaining an Australian oriented company with its central functions in Australia. Of course a sufficiently ‘pure’ free market line would ask why it’s better to have headquarters here than whatever other jobs might have materialised if the headquarters had left. A more reasonable question is ‘what did we pay for keeping BHP Billiton here – in terms of a lower price for buying BHP shares. (By the way, the ‘we’ is shareholders of BHP shares – although if one is seeking to assess ‘national interest’ presumably we don’t care about foreign shareholders – unless our actions might somehow lead other foreign shareholders to shun Australia as an investment destination.)

Who knows? I certainly don’t. But . . . my guess is ‘not much’ if anything at all. And the gains seem substantial. Though it’s invisible to ‘economic theory’ as currently practised it seems plausible that the benefits of having a firm as large as BHP Billiton headquartered in Oz are reasonably substantial in terms of the demand it generates for very high value added services – a demand which is likely to support a supply which is of use elsewhere. Now one problem is that it seems to me that one doesn’t want to prevent all takeovers that would end up seeing a headquarters relocate out of here. Indeed one might want to prevent very few. But if one were going to prevent it, it’s hard to think of a stronger case than one where we’ll have the largest or one of the largest firms in the relevant industry and that it’s an industry in which we have a long established, resource rent backed, comparative and competitive advantage. Ditto for two of the largest companies in the same industry – but as Costello would be at pains to insist – his predecessor kissed CRA goodbye.

I also quite like Costello’s intuitive argument that a country that thinks of itself as a serious destination for foreign investment, benefits from substantial indigenous firms. But of course it would be virtually impossible to prove. The issue of ‘strategy’ (and if not strategy then the location of the planning of strategy) is essentially invisible to economic theory in the form it takes today, so people are welcome to disagree, and their guess might be better than mine. But there’s not much point in pretending that it’s anything more than a guess.

Rio feathers should stay in our nest

  • Peter Costello
  • February 18, 2009

The reef of lead and zinc that crosses Broken Hill gave birth to two great Australian mining companies: the Broken Hill Proprietary (BHP) and the Consolidated Zinc Corporation that came to be known as Conzinc Riotinto of Australia Ltd (CRA).

In the 1960s they developed iron ore mines in the Pilbara in Western Australia. As they expanded they entered dual listed structures: BHP with Billiton, and CRA with Rio Tinto of Britain.

Rio Tinto is saddled with high debt. BHP Billiton last year offered to merge with it and was rejected. Now Rio has sought finance from the Chinese state-owned company Chinalco. Part of the proposal involves Rio divesting an interest in Australian mines to Chinalco, the most significant of which are the iron ore mines in the Pilbara, a bauxite mine at Weipa and the aluminium smelter at Gladstone.

The ultimate decision on whether this proposal will be allowed under Australia’s foreign ownership laws must be made by the Treasurer. Our Chinese-speaking Prime Minister will undoubtedly favour the proposal.

The Commonwealth Treasury will also be in favour of it. In my time administering our foreign investment laws, I cannot remember Treasury ever recommending that I block or disallow the acquisition of an Australian company by foreign interests. There were specific rules for media, real estate and the like, but in the general economy Treasury always supported foreign investment. In 2001 I rejected the Treasury view that Shell’s application for the oil and gas producer Woodside should be allowed. It caused a great deal of agitation in the department. I asked Treasury to give me previous decisions where foreign bids had been disallowed so I could use them as a precedent. The department told me it had no precedent.

In 2001 I had to rule on BHP’s application for dual listing with Billiton. I knew there was a precedent: the CRA Rio decision approved by the Keating government in 1995. I wanted to use that as a precedent of what not to do.

The Labor government originally laid down such conditions for approval as stipulating that a third of the board of the dual-listed company be Australian. Later it withdrew the conditions, saying Rio had agreed that Australians would have a bigger stake in CRA. The approval was made unconditional.

At present, by my count, three of Rio’s 15 directors are Australian. Originally the chief executives of the dual-listed company were Australian, but now there are no Australians among the executive directors. Before the dual listing, CRA had its headquarters in Australia. Now they are in London. Despite the mineral wealth from Australia, insurance, legal, corporate and financial services come from Britain, including merger and acquisition strategies, like the Chinalco deal.

I was determined to ensure that BHP’s corporate presence did not disappear from Australia in the same way as CRA, so I put conditions on its dual-listed company structure that required the global headquarters to remain in Australia, that this be specified in all public documents, that the majority of board meetings be in Australia, and most importantly, that the chief executive and chief financial officer have their principal residences in Australia. This last condition was opposed by the company.

Several times the company sought to have these conditions eased but they remain in place, and to its credit, the company has scrupulously complied with them. The world’s largest diversified mining company is still Australian.

If a country wants to be seen as open to investment it needs to show that there are high-profile global companies that operate inside its shores. If a country wants to see itself and be seen as significant in the global economy it needs to have companies that show the entrepreneurial character of its people and business leaders.

The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.

When the Rio Tinto application goes to the Treasurer, it will come with all sorts of assurances – just like those the government “accepted” in 1995. My advice would be to look carefully at how past assurances worked out. The only thing that counts in foreign investment decisions are conditions that are written, enforceable and policed.

Peter Costello is a former Liberal federal treasurer and the member for Higgins.

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LuckyPhil
LuckyPhil
12 years ago

“I think Peter Costello gives a good account of himself”
Can we be sure that he wrote it?

observa
observa
12 years ago

Well, well, well! OTOH we have a bunch of leftists who want to flog off emission rights to all and sundry beyond our jurisdictional grasp and OTO they’re getting nervous and xenophobic about the ownership of certain private property extraction rights here. Hard working Chinese who save their pennies should be rewarded for such values in a world full of profligate owners of troubled and overgeared assets up to a point. That point is one where no owner can abscond with the social responsibility to pay the duly assessed communal tithe for their right to enjoy private property, by transfer pricing or any other means. The answer is to sensibly redesign the constitution of our marketplace so we couldn’t care less who owns the extraction rights. Ditching income and company tax for carbon and resource taxing would do that perfectly and what’s more encourage corporate headquartering here at the same time when you think about it. This is just one more nail in the coffin of income taxation and those thousands of pages of Tax Act that have degenerated into- ‘Give us a call and we’ll tell you what we think of it!’

observa
observa
12 years ago

And notice I just got rid of that taxeating FIRB in one fell swoop, not to mention putting that xenophobic, leftist control freak Bob Brown and his ilk back in their box so the rest of the globalised world can get on with enjoying the freedoms we all aspire to.

observa
observa
12 years ago

There’s a third way staring you in the face Nicholas if you can just step back and see the bigger picture here and all the contradictions and failings of our current constitutional marketplace. That CM(largely set by the overall impact of taxation) is an outdated one we have inherited from the science of muddling through and incrementalism. It’s long past its use by date and this issue is just one more example of that. Personally I’m not that interested in which of Costello or Keating wins the ‘least pregnant’ guernsey.

observa
observa
12 years ago

Come off it Nicholas. Costello 1 Keating 0? More like Costello, Keating and Brown all zilch for failing to see the emerging wood for the trees while you go about covering the piano legs in polite company. They all have the same piano legs in the parlour from where I’m looking.

NPOV
NPOV
12 years ago

“If a country wants to be seen as open to investment it needs to show that there are high-profile global companies that operate inside its shores”

…but I wonder how much does it count for if it’s a company that’s basically forced to be here? FWIW, I certainly agree it wouldn’t be a good look for Australia if all our best companies ended up being acquired/merged and/or headquartered overseas. But it would seem more productive to investigate if there are things that can be done that make it more attractive for such companies to stay (e.g. lower corporate tax rates) rather than rely on the power of government to keep them here.

observa
observa
12 years ago

Much more politely said than the crash thru or crash observa NPOV. You can stay for tea.
On the related topic of capital imperialism, those left of centre, with a prediliction for printing money (and internationally traded emission permits) might be interested in the results of their infernal machinations sometimes-
http://blog.atimes.net/?p=601
Those Asia Times boys really know their stuff.

tim watson
tim watson
12 years ago

I think if you were to be unkind to Costello you could say his decision making was coloured by his closeness to the corporate services crowd in Melbourne- the accounting, tax and legal advisers.

The fact that these people form a large part of his constituency, donors and supporters was surely only a coincidence.

The bottom line is that his decision making in the BHP case amounted to a form of protectionism for white collar jobs in Melbourne.

Whether this is a good thing or not I am unsure.

Pappinbarra Fox
Pappinbarra Fox
12 years ago

Obs at 5 – what is CM?

observa
observa
12 years ago

CM – short for ‘constitutional marketplace’ which I’d previously mentioned but probably shouldn’t have here. However, you can see the enormous contradiction from the Bob Browns on this issue vis a vis their stance on emissions trading rights.

pedro
pedro
12 years ago

Yes NPOV, get them in with better corporate taxes, and a nice free labour market while we are at it. Tim is correct about protectionism.

Tel_
Tel_
12 years ago

The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.

Highly paid? Yes. Highly skilled? Hmmm, maybe for suitable definitions of skill.

What really matters is that these people make decisions that affect a large number of other people. In economic theory, their decisions are rational, clinical and depend only on the money involved, not on the person making the decision. We all know that real people don’t work like that, they make decisions based on grudges, hunches, beliefs and guesswork. Real people also factor a great deal of non-financial information into their judgements, primarily because the financial system does not accurately track all the personal motivations that go into a big decision such as closing down the Newcastle steel mills. Note that I’m not suggesting these decisions are irrational, they are quite rational, from a particular perspective, and the perspective does matter.

BHP is one of the few Australian heavy industries doing manufacturing in Australia and turning a profit (admittedly with a bit of help from guaranteed government “buy Australian” policies). While I’m not a fan of using tax money to prop up a failing industry by any means, in cases where we do have a success, we don’t want to take it for granted. It is entirely likely that foreign decision-makers would far less aligned with the Australian national interest than would a local.

Hard working Chinese who save their pennies should be rewarded for such values in a world full of profligate owners of troubled and overgeared assets up to a point.

In an abstract sense, it makes sense that they would be rewarded, but from my own point of view I see absolutely no reason to offer them any particular assurance of reward.

That point is one where no owner can abscond with the social responsibility to pay the duly assessed communal tithe for their right to enjoy private property, by transfer pricing or any other means.

Oh very fine, “duly assessed” by you? by Australian voters? by Chinese party committee? The penny-saving Chinese get what they can grab with the power and influence available to them, and the collectors of the communal tithe get what they can grab with the power and influence available to them, so don’t bother with any deep spiritual principles of true justice. We have a system of private property because it works, it provides motivation, efficiency and stability. Even the Communists have come to this conclusion.

The answer is to sensibly redesign the constitution of our marketplace so we couldnt care less who owns the extraction rights.

I suspect that you will find that making the extraction rights worthless would result in the minerals staying in the ground (until some time later when we all change our mind once again).

By the way, I don’t think it’s entirely fair to score Keating against Costello. Keating turned around a big heavy ship after being handed an economic disaster by the Fraser government, while Costello got handed the wheel and only made a few minor adjustments to trim the sails. There may well be examples of Costello doing a better job of trimming those sails than Keating did, but nothing will change the fact that Keating was a visionary and Costello was a very ordinary treasurer (not a bad treasurer by any means, but nothing special).

Tel_
Tel_
12 years ago

BHP has a seriously large number of subsidiaries and they shuffle around all the time, it’s like a dance.

http://www.bluescopesteel.com.au/

I can’t find the exact number of shares that BHP owns in Bluescope but it’s reasonably well understood that although Bluescope have been spun off as a separate legal entity, BHP still have a lot of influence over the way Bluescope operates. Suffice to say that Bluescope and BHP are pretty darn close on the corporate web. I believe that the current situation is that BHP owns most of Whyalla while Bluescope owns most of Port Kembla but there’s a lot of details I don’t have (I could hunt them down if you really need to know). Products such as railway track will tend to carry the BHP brand, OTOH colourbond roofing is it’s own brand but owned by Bluescope.

There used to be a subsidiary called Tubemakers of Australia but I think they have been slurped back into the parent company (BHP bought them back). I have no idea who owns that pipe making infrastructure now.

Anyhow, the whole incestuous ecosystem of metalworking in Australia is another reason why putting a local boy into the big chair is a good idea. Having the head office in London would detach the brain of the operation from understanding of what the body is doing. It is completely disingenuous to believe that BHP operates as an isolated entity like a corner shop milkbar.

Tel_
Tel_
12 years ago

Hmmm, with a bit more study, OneSteel was demergered from BHP in 2000 and they ended up owning the mill at Whyalla (which was before Costello’s 2001 decision) and then Bluescope split off a bit later (after Costello made up his mind). So agreed that manufacturing and extraction have become somewhat isolated from each other in recent years. Recently OneSteel and Smorgon Steel merged so they now cover both manufacturing and sale/distribution of steel products and I think they ended up owning a lot of the tubemaking plant (e.g. http://www.austubemills.com/) so the shuffle of ex BHP subsidiaries continues.

So in conclusion, yes I was oversimplifying the situation, but I still believe that moving the BHP head office offshore would have a substantial negative effect on Australian heavy industry.

Tel_
Tel_
12 years ago

I’m not suggesting that moving the head office offshore would shut down their Australian operations completely. What I’m pointing out is that there are off-balancesheet factors that go into the way these businesses work together and handing the major decision-making over to foreigners creates a real detachment between the managerial level of the company and the day-to-day ecosystem that the company operates within.

I really don’t believe that someone who only looks at balance sheets can effectively manage a business that they don’t have an intimate connection with, and which operates a thousand miles distant.