Government

There’s been a lot of talk – and no small amount of bluster – about political risk in Australia over the past month – or more specifically since the announcement of the government’s proposed Resources Super Profits Tax.

According to Rio Tinto Chief Executive Tom Albanese, Australia’s proposed RSPT is currently “my number one sovereign risk issue on a global basis”. That’s a big call from the leader of a company that invests in countries with far less predictable political regimes than Australia’s, including Zimbabwe and Papua New Guinea.

Xstrata Chief Mick Davis suspends Australian investments in opposition to the proposed RSPT

Sovereign or political risk refers primarily to the risk posed by government policies to the interests of foreign investors and lenders; it covers the gamut from the ability of investors to repatriate their assets and/or profits and of lenders to recoup their loans, to outright seizure or nationalisation. Perhaps not surprisingly then it has traditionally been a concept reserved for nations that are far less market-oriented and democratic than ours, nations where political power is more likely to be wielded arbitrarily, sometimes directly against foreign interests for domestic political purposes. Think of the seizing of foreign oil assets by the Chavez government in Venezuela.

Of course since the GFC, the ‘political risk’ tag has been increasingly attached to developed economies, but this has more to do with the accumulation of worrying levels of foreign debt. And whilst Australia’s levels of foreign debt are higher now than before the GFC, and whilst we may well carry a private foreign debt refinancing risk of massive proportions, few investors seem that concerned about Australia’s debt position. No, the idea that Australia is now a hotbed of ‘political risk’ seems almost squarely limited to the proposed RSPT. So how fair is this charge? Are Australia’s future economic policies really likely to pose a major threat to the interests of foreign investors?

You’d have to think not. To begin, unlike countries in which the arbitrary wielding of power is commonplace, Australia is a democracy – and a lively one at that – in which major policy proposals are typically subject to rigorous debate, especially when the policy is aimed at companies with lobbying resources the size of Rio’s. Sure, policy proposals may sometimes be unexpected – not only to the public but to the party whose leader announces them (take Abbott’s maternity leave proposal for example). But once on the table, especially if the policy is likely to impact major business interests, we can expect extensive consultation and rigorous scrutiny both within and without the House (or both Houses as the case may be). And given the amount of scrutiny being applied to the RSPT, it’s highly unlikely to be put or passed without amendments making it more palatable to the resources sector that it targets. Put simply, the arbitrary wielding of power against major corporate interests in Australia is well nigh impossible.

Of course, that is not to say that the Australian government does not have the capacity to act arbitrarily. But the fact of the matter is, in times gone by, its arbitrary actions have almost always been in the interests of foreign companies. Take for example the 2004 proposal to relax import restrictions on pork products, contained in the Import Risk Analysis issued by Biosecurity Australia, despite scientific evidence that this would almost certainly lead to the introduction of Post Weaning Multi-Systemic Wasting Syndrome – a deadly pig disease that has devastated pork producers in other countries. Whose interests were being served by such a proposal? Certainly not those of Australian pigmeat producers.

Australia has an outstanding record of treating foreign economic interests well – and so it should. We are a nation that depends upon foreign investment as the lifeblood of the economy, the necessary ingredient of economic expansion. This does not mean, however, that foreign interests should be privileged over domestic ones – not that it is necessarily a zero-sum game.

Which brings us to probably the most important point about political risk in the RSPT debate: the intention behind the tax. Despite increasingly hysterical allegations from some corners, the argument that the government’s aim in all of this is to cripple the resources sector cannot be maintained. Rather, the purpose behind the proposed tax is to reduce the threat posed to other sectors of the economy by windfall profits accruing to one sector – in this case, mining and mineral exports. It’s about trying to ensure that the long-term interests of Australia are given equal priority as securing a fair return to investors in what is, and what will no doubt remain post-tax to be, a very profitable industry. Whether the proposed tax is the way to do it or not is debatable - but the idea that the tax indicates hostility towards the resources sector is overblown, as is the suggestion that a change in the rate of taxation in a democratic country constitutes an enormous political risk.

Fortescue Metals CEO Andrew Forrest suggests the RSPT reveals Communist leanings on the part
of the Rudd Government

Windfall profits taxes are well recognised instruments for putting a booming sector under some kind of constraint, and socializing the benefits being generated. Think of Norway’s sovereign wealth fund, financed by taxes on the North Sea oil industry, designed to ensure the future prosperity of the country. Or this statement from Obama, as candidate for the US presidency: "I'll make oil companies like Exxon pay a tax on their windfall profits, and we'll use the money to help families pay for their skyrocketing energy costs and other bills," This statement was made in June of 2008, when oil prices were high; now they’re lower, and Obama has not implemented such a tax. But if they rise again, the industry can expect to be debating such a windfall tax in the US.

It may well be that the design of the government’s proposed RSPT is ill-founded (although Professor Ross Garnaut has described the proposed tax as ‘elegant’ and justified). But the intention behind it is not, nor is the capacity of the government to consult and deliver an outcome that strikes the desired balance. And that is what measuring political risk should really be about. Intention and capacity. Given Australia’s record on the treatment of foreign investors, its level of openness, its incentives to attract and retain them, and indeed the frequent privileging of foreign interests over and above local companies, the idea that the Australian government’s future economic policies are likely to pose a political risk to foreign investors is pure hyperbole.