Friday, December 05, 2008

Merger could hit red-tape turbulence

In a fast-moving global economy, government regulatory frameworks are rightly put under the microscope.  The revelation in The Australian Financial Review ("Qantas and BA plot $8bn merger", December 3) that Qantas Airways and British Airways are in advanced merger talks will surely test Australia's foreign investment framework.

Since 1975, Australia has retained a formal foreign investment policy allowing the federal government to scrutinise major investment applications.  The policy obliges governments to assess projects against a national interest test, even though this is left undefined under the relevant legislation.  Apart from the general conditions applying to prior approval of projects, the government has in place additional restrictions on a range of sensitive industries.

Civil aviation just so happens to be one of the industries subject to additional conditions for investment approval.  According to the Foreign Investment Review Board, foreign airlines may acquire up to 49 per cent of the equity in an Australian international carrier other than Qantas.

More restrictive conditions apply for the flying kangaroo.  Total foreign ownership in Qantas is restricted to 49 per cent in aggregate, with individual holdings capped to 25 per cent and aggregate ownership by foreign airlines limited to 35 per cent

The proposal to merge the two airlines is based on a commercial decision to buffer the carriers against a fall in global demand for travel.  Other benefits typically associated with foreign investment, such as the achievement of greater economies of scale and the transfer of world-class operational and management skills, are also in the offing.  Unlike most commercial decisions taking place elsewhere in the economy, politicians and their advisers will have a major hand in determining the fortunes of the Qantas-BA merger proposal.  With the national interest test left to the government of the day to define and interpret, the merger proponents will be forced to bear considerable regulatory uncertainty.

A major aspect of this uncertainty is the possibility that the government will impose conditions for the proposal to be approved.  In an attempt to head off this possibility, Qantas and BA have proposed that each carrier will retain its brand and national identity.  They also propose to retain sharemarket listings in both Sydney and London.

It is not beyond the realms of possibility that the assessment of this proposal by FIRB will be subject to considerable delay, which could create considerable costs for the merger proponents.

Given the antipathy of the average citizen towards foreign investment and the perceived loss of national identity in a globalised world, the commonwealth might well feel some political heat if it is put in a position to screen the merger.

While the government has recently flagged relaxing the intermediate caps on foreign ownership of Qantas, it has not proposed an increase in the 49 per cent overall foreign ownership limit.  Instead of predictable results, Australia's statutory investment regime opens the door for significant political discretion over project approvals, leads to possible delays in investments, and fuels uncertainty among foreign investors about government attitudes towards foreign direct investment (FDI).

To ensure that this, and other, foreign investment proposals are realised in the current uncertain economic reform, Australia must liberalise its policy regime.  As will be raised at today's symposium on foreign investment, this should include the removal of prescribed sensitive sectors, including civil aviation, from the FDI legislation.  Other reforms could include raising thresholds for all proposals to those that apply to US investors under the free-trade agreement, and removing additional requirements for government controlled investments.

Foreign investment remains a powerful form of international economic integration that has allowed Australia to achieve rising living standards and economic prosperity.  The current proposal on the table to merge two great international airlines reflects a mutually beneficial exchange perceived by both parties.  Most economists would tend to agree that where consenting investment adults are interacting with each other, there is no gatekeeping role for government.  The current foreign investment restrictions are a remnant of a bygone age.


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