Monday, April 11, 2011


Apr 11, 2011

A failure of political leadership
By Stephen Kirchner , FOR THE STRAITS TIMES

AUSTRALIAN Treasurer Wayne Swan's rejection of Singapore Exchange's (SGX) bid for the Australian Securities Exchange (ASX) represents a failure of political leadership.

By all accounts, the government's opposition to the deal has little to do with 'national interest' considerations and more to do with fears about how the deal might play politically. Yet there is little evidence of a groundswell of popular opposition to the deal among the general public.

The Treasurer has received advice to reject the deal from Australia's Foreign Investment Review Board (FIRB), but this is just a fig leaf of bureaucratic respectability for a political decision. In fact, the Treasurer enjoys wide latitude to exercise his discretion under the Foreign Acquisitions and Takeovers Act to reject any transaction deemed to be against the 'national interest'. The Act does not define the national interest, so the Treasurer's discretion is unbounded.

The Australian government has yet to disclose fully the advice it has received on the matter from regulators. This lack of transparency makes it difficult to evaluate the government's 'national interest' concerns, but these concerns should not have been a deal-breaker.

The government has also resorted to explicitly protectionist arguments, with Treasurer Swan saying 'this deal would risk us losing many of our financial sector jobs'. The regulation of foreign direct investment in Australia has apparently become an arm of domestic industry and employment policy.

The Australian government's regularly updated foreign investment guidelines are little more than a laundry list of considerations that expand rather than limit the scope of the Treasurer's discretion to veto commercial transactions the government does not like for political reasons.

The creation of a single holding company to operate the two exchanges would better position both SGX and ASX in relation to the global consolidation of securities trading that has been under way for some time. If the New York Stock Exchange can be acquired by Deutsche Boerse, it is very hard to make a case for why ASX should be an exception to this global trend.

The deal would not in itself create a single securities market. Nor would it change the regulatory framework for securities trading in the two jurisdictions. The Australian government would retain full sovereignty in relation to the regulation of securities trading within its borders. Whether the deal is successful in achieving its objectives is a commercial judgment best left to the management of ASX and SGX. It is not the role of Australian politicians to make these judgments.

Unfortunately, the Treasurer's sweeping powers and the open-ended nature of Australia's 'national interest' test are a standing invitation for politicians to pre-empt and second-guess commercial outcomes. The Foreign Acquisitions and Takeovers Act is a lightning rod for political intervention in the market for ownership and control of Australian equity capital.

The Act adds nothing useful to the regulation of business investment in Australia. It allows the government to infringe the property rights of the owners of Australian equity capital, who are denied the opportunity to sell to the highest bidder and thereby realise the full value of their equity. That in turn reduces the amount of capital available for re-investment in Australia by the sellers of these assets. The Treasurer's opposition to this and other deals devalues Australia's stock of equity capital.

It would be a mistake for either Australia or Singapore to take a mercantilist 'national champions' view of their securities exchanges. More integrated regional securities trading would raise the status of both Australia and Singapore as financial centres. Blocking the deal risks consigning Australian securities markets to the status of a regional backwater, with adverse implications for the ability of ASX-listed companies to raise the capital needed to drive investment and economic growth.

Establishing a regional financial centre and exporting financial services to the world is a longstanding aspiration of Australia's politicians, but one that sits uneasily with their suspicion of foreign direct investment and protectionist attitudes to Australian-owned and listed firms.

Australia is increasingly an exporter of direct investment capital, making Australian-owned and listed firms potentially vulnerable to protectionist sentiment abroad. The recent rejection of BHP Billiton's bid for the Canadian Potash Corporation highlights the danger protectionist sentiment poses to Australian-listed firms seeking to expand in overseas markets. Yet foreign governments can readily point to Australia's own politically driven regulation of foreign direct investment to justify their actions.

Foreign investors and the Australian owners of equity capital have good reason to fear a political class that has become increasingly insular, provincial and xenophobic in its attitude to foreign direct invetment.

The writer is a research fellow at the Centre for Independent Studies, Sydney and a senior lecturer in economics at the University of Technology Business School, also in Sydney.

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