Hockey kills GrainCorp takeover by ADM: experts react

Treasurer Joe Hockey has blocked the A$3.4 billion bid by US giant Archer Daniel Midlands for GrainCorp. AAP

Federal Treasurer Joe Hockey has rejected the proposed takeover of GrainCorp by US grain handling giant Archer Daniels Midland, arguing the takeover would not be in the public interest.

Mr Hockey said the deal was one of the most complex to come before the Foreign Investment Review Board, and while Australia needed to attract strong inflows of foreign investment, the level of public concern about the deal meant allowing it to proceed could risk undermining public support for foreign investment.

Mr Hockey also flagged the need for a “transition towards more robust competition”, and that a more competitive network was still emerging.

We asked the experts to respond to today’s announcement.

Linda Botterill, University of Canberra, Professor in Australian Public Policy at University of Canberra

I have to say I’m a little bit surprised. I would have expected Joe Hockey to have supported the takeover, particularly in light of prime minister Tony Abbott’s comments on election night about Australia being “open for business”.

But the really interesting thing about this is that the grains industry – and rural Australia more generally – has got upset about the prospects of a foreign takeover of GrainCorp, but it’s not that long ago that GrainCorp itself was being demonised by the industry in the context of other wheat industry debates. So, it’s quite an interesting development to see that sector coming out quite so defensive of GrainCorp. What I’m referring to here is when the government was winding up the final regulatory structure around wheat marketing in Australia – at the end of the fallout of the oil-for-food scandal – one of the great concerns about the removal of all government controls was that GrainCorp would be in a monopoly position on the east coast.

Those issues would remain whether or not it was a foreign-owned company, and (Chairman) Rod Sims from the ACCC pointed out a few weeks ago that really the issue with GrainCorp is not so much its ownership, but that of market domination, and that there’s a need to ensure access to terminals and so forth. So, it’s interesting that the industry that was criticising GrainCorp for its power only a few years ago has now come out so strongly in favour of it.

It certainly looks like a National Party win. I know that the prime minister was a bit uncomfortable in some comments he made a week or so ago about the prospect of the ADM takeover of GrainCorp. Of course, nobody knows what goes on within the Cabinet and what trade-offs have been made in terms of future issues that might be of importance to the National Party.

But this early in a Coalition government after such a substantial win over Labor, it is interesting to see the National Party having such a large policy win.

Jeffrey Wilson, Fellow of the Asia Research Centre at Murdoch University

The rationale given is fascinating: that the deal must be rejected to ensure community attitudes to foreign investment don’t deteriorate. To the best of my knowledge, at no point in postwar history has this ever been raised as a reason to oppose a foreign investment.

Of course, one could debate whether: (a) this makes any logical sense at all; and (b) whether it was the real reason for the rejection, or instead an nice way of avoiding saying that the government relented under enormous community and political pressure.

But either way, this sets a new precedent for the application of the “national interest test” by the FIRB.

At present, this test contains six criteria that defines what will be considered when assessing national interest (to do with commercial behaviour, competition policy, security and defence, impacts on Australian government policy, etc). But none of the six criteria presently refers to “the impact of an investment on community attitudes to foreign investment”.

While “community concerns” are considered by the FIRB, these are largely defined in economic rather than political terms (a fair return to the community, opportunities for Australian participation, the interests of employees, etc). It does not presently assess whether an investment is considered “popular”, or how it will influence community attitudes to foreign investment more broadly. It would appear the Treasurer is implicitly elucidating a new, seventh national interest criterion - community support.

Will this new criterion be maintained in the future, or is it just a one off for GrainCorp? Time will tell, but for the sake of argument let’s imagine it does get maintained. If so, the implication is that the FIRB will now have to assess community attitudes to investment applications, in addition to the economic assessment they already do. This has not previously been a requirement, and raises interesting questions for how foreign investment will be assessed.

It raises questions whether the FIRB has the institutional capacity to assess community attitudes and popularity (at present, it arguably does not). It may also make foreign investment applications more challenging, by creating a channel for community campaigns against certain deals to interface with the decision-making process. Finally, it would also significantly politicise foreign investment, and make the assessment process focus not simply on the economic benefits and costs of an investment, but their political ramifications as well.

While it is unlikely this will deter foreign investment overall, it will certainly send a message that the new Coalition government will be far less likely to approve complex or contentious applications.

In the last 12 years, only two business deals - Shell Oil for Woodside (2001) and the Singapore Stock Exchange for the ASX (2011) have been rejected by the Treasurer following FIRB assessment. Under the previous ALP governments, the typical model to manage controversial deals was ‘behavioural conditionality’ - approving the deal, but applying conditions that legally require the investor to behave in certain ways consistent with the national interest. Time will tell, but it appears from this case the Coalition may choose to reject some of these deals instead.

Does this rejection set a precedent for how the Coalition will handle Chinese investment? It depends on the underlying rationale for the decision. If the decision to reject ADM was largely driven by market power concerns (the fear that ADM would have too much control over the grain handling chain), then probably not. This has little to do with Chinese investment, where the key issue has been around state ownership. However, if the primary motive was political (perhaps community pressure or opposition from the Nationals), then it might reflect a change in government attitude towards foreign investment that will be relevant for Chinese cases.

Margaret McKenzie, Lecturer, School of Accounting, Economics and Finance at Deakin University

On the whole it is a good decision, though a surprise decision.

There is the issue of whether an international company like Archer Daniels Midland would comply with Australian regulatory frameworks as they are. For instance grain handling or bulk handling is regarded as an essential facility in the ACCC framework and it might be more of an issue in terms of supporting the public interest.

If ADM decided it was unprofitable, during an extended drought for example, they may just sell up and the stability issue would remain for farmers over time.

The other side of that is capital raising issues remain in the long term. The argument is the international company might be able to raise capital in a way that’s not available to the domestic players. But that’s not clear in my view.

On the issue of competition, it doesn’t matter how they regulate it, it’s a network industry and it’s one that benefits hugely from economies of scale throughout the network.

It’s really unlikely things are going to increase competition at that level. You could argue there might be international competition for the whole business, but that level of the grain handling business tends towards monopoly all the time.

Hockey thinks people will sit up when they hear the word “competition” but there’s been a good 25 years to develop that competition and it hasn’t happened and that’s because of the nature of the industry.

Stephen King, Professor in the Department of Economics at Monash University

By Joe Hockey saying there’s a competition problem he’s effectively saying it’s with the ports and the current access regime for ports can’t be working. If it was working, there wouldn’t be a competition problem.

Theoretically all grain traders can get access to the ports, so effectively Hockey is saying that the system is broken.

Is this really a reason why we shouldn’t have overseas ownership of the ports? No, that still doesn’t explain his decision. There’s no reason to believe a domestic monopoly is nice compared to a foreign one.

It doesn’t explain why you wouldn’t let ADM take over GrainCorp other than some sort of xenophobic reaction.

But the more important issue is the fact Hockey has said there is a competition problem in Australian grain ports. By blocking the acquisition, he has flagged there is a problem and it’s now incumbent on the government to tell us how they will fix the problem.

The options to do this include requiring GrainCorp to divest some ownership of the ports, or vertically separating GrainCorp - the Telstra solution.

If control of ports is a problem, then separate that from the upstream and downstream activities, the grain handling and grain trading.

Which option is it? Hockey can’t just leave it hanging there.

Peter Batt, Professor, School of Management, Curtin University

This is a complex decision that I fear will have significant long-term repercussions for the industry.

When a major international player seeks to diversify its portfolio by increasing its investment in Australia, its not in the national interest to reject that proposal. Particularly as so few of the Australian superannuation funds seem willing to invest in agribusiness, primarily because of the volatility in returns associated with seasonal variations in agricultural production, quality and price.

ADM is one of the world’s largest food companies and like the other major commodity traders (Bunge, Cargill, Dreyfus and Xstrata) it has the capacity to manage the risk and the volatility that is inherent in international grain markets. It’s the ability to manage that risk and, through a diversified portfolio, to be able to maintain a continuous supply of product to institutional buyers that brings the greatest benefits to Australian grain growers, issues that have so seldom been talked about in this debate.

Since the majority of the other players are already operating in Australia, it was no surprise to find that the ACCC did not oppose the bid.

My immediate concern is that the share price for GrainCorp will fall and when balance sheets start to head south, it will become even harder to attract the investment that is so desperately needed to improve efficiencies in transport and logistics.