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swan reins in foreign investors

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    David Uren, economics correspondent | February 18, 2008

    BILLION-DOLLAR investment funds controlled by foreign governments will have to show they cannot be manipulated by their political masters before being allowed to take stakes in Australian companies.

    New foreign investment guidelines unveiled by Wayne Swan yesterday are intended to stop any future veto of an investment in Australia by a sovereign wealth fund from turning into a diplomatic incident.

    The guidelines set out the reasons why the Treasurer might block the takeover of an Australian company by a foreign government-owned agency.

    "As a new Government, we thought it important to have complete transparency," Mr Swan said.

    Until now, the Treasurer has been able to block any investment he decides is against the national interest without giving any reasons for the decision.

    Mr Swan said the new principles were not intended to discourage foreign investment.

    "I want to make it very clear that Australia does welcome foreign investment," he said. "But as Treasurer, it's my job to ensure such investment is consistent with the national interest."

    The guidelines have been issued just days before the Foreign Investment Review Board considers the $16.5 billion investment in mining giant Rio Tinto by the Chinese government-owned company Chinalco and US aluminium giant Alcoa.

    Chinese companies have been rapidly building their investments in Australia's resources industry.

    Mr Swan recently approved an investment by the Chinese government-owned steel company Shaogang in Australian ironore mining company Mt Gibson Iron.

    Sovereign wealth funds invest the billions of dollars of reserves built up by sovereign governments, particularly big exporting countries with large capital surpluses such as China and Middle East oil producers. They control up to $3.2 trillion in assets worldwide, according to International Monetary Fund estimates.

    The Rudd Government wanted to put the principles governing its approach to foreign investment into the public domain before any big investments in the resource industry by the massive new Chinese sovereign wealth fund, the Chinese Investment Corporation, which has been given more than $200billion of China's international reserves to invest.

    The biggest sovereign fund with Australian stakes is Singapore's investment agency Temasek, which with its subsidiaries has bought into SingTel, owner of Optus, and SingPower, which owns Victorian electricity assets, as well as national childcare provider ABC Learning.

    The new guidelines say foreign state-owned investors will need to demonstrate they have clear commercial objectives, and that they operate at "arm's length" from their government.

    "In the case of a sovereign wealth fund, the Government would also consider the fund's investment policy and how it proposes to exercise voting power in relation to Australian companies," the guidelines say.

    The board and funding arrangements of the investor will be assessed for whether they would allow "actual or potential" control by a foreign government.

    The Government has acted now because of concern that Chinese sovereign wealth funds and state-owned companies could become much bigger investors in Australia in the future.

    Although decisions are made on a case-by-case basis, Mr Swan does not want foreign governments to think they are ad hoc.

    The most recent official figures show China's investment in Australia totalled only $3.5 billion in 2006, but it is growing rapidly.

    Opposition Treasury spokesman Malcolm Turnbull declined to comment on the new guidelines yesterday. However, he is expected to release a statement on sovereign wealth funds in coming days.

    Melbourne Business School's Paul Kerin said the new guidelines were valuable because they would only allow the Treasurer to veto investments if they were breached.

    "Until now, treasurers have been able to veto deals simply to please domestic political lobbies (including threatened boards and unions) and yet pass the decision off as in the national interest by offering fluffy nonsense statements," Professor Kerin said.

    He said transparency would be improved if the Treasurer were also required to provide a detailed explanation for any veto, including the release of the Foreign Investment Review Board's full advice.

    "Otherwise, it is too easy to use the new criteria to justify vetos that are really motivated by xenophobia or other things that are actually contrary to the national interest," he said.

    Mallesons partner Tony Bancroft said the new guidelines would be helpful, but were still so vague that they would allow the Government to stop anything it wanted.

    "They do improve the situation because at least they show you the areas the Australian Government is looking at," Mr Bancroft said.

    The rise of sovereign wealth funds, which are redirecting themassive surpluses accumulated by China and oil producers, including Russia, Saudi Arabia and the United Arab Emirates, is causing concern around the world.

    The group of industrialised nation governments, the G7, has asked the International Monetary Fund to develop a code of conduct for sovereign wealth funds, that would require them to operate commercially.

    Additional reporting: Kevin Meade
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