CHAIR-Senator Ludlam.

Senator LUDLAM-I have a couple of questions for the Foreign Investment Review Board and I gather
they are not here this morning, but is somebody able to take some questions on their behalf?

Mr Colmer-I can probably handle those, Senator.

Senator LUDLAM-I am really after, I suppose, just some principles and then I would like to go to one
specific case about proposed investments by entities that are wholly owned by foreign governments in ustralian resources.

Mr Colmer-Yes.

Senator LUDLAM-I gather there are six guidelines, including an investor's operations being independent from the relevant foreign government. Can you just tell us how the FIRB assesses independence in the case of an entity that is wholly owned by a foreign government?

Mr Colmer-Senator, before answering that specific question, it needs to be borne in mind that those
principles that were announced by the Treasurer last February are guidelines, they are not a check list whereby every item needs to be ticked off. The reality is that any government-owned entity will not be totally independent from the government. The questions that we look at are: what is the governance of the entity, how does it operate, and can we see that it is operating independently and without direct and continuing government control, because any government entity will have a relationship with its government.

Senator LUDLAM-Did you actually send people to these countries? The ones that I am interested in that I am going to ask you about in a second are Chinese. Does FIRB actually send investigators? How do you ascertain the degree of independence in these sorts of structures?

Mr Colmer-The degree of independence is a difficult question. In significant cases we do meet with
companies, we do meet with other parties. We do not go to China to investigate every Chinese investment. We would never be in the country if we had to go all around the world. We have 700 applications from a variety of countries. At the end of the day, the principles are essentially a balancing act and we need to look at the materiality of any problems that emerge. I guess the easiest way to answer your question is that bearing in mind that government entities are related to governments, we have not to date taken the view that any particular company has such overriding government control that it has been a problem.

Senator LUDLAM-An application has never been knocked back on the grounds that it was too close to
the parent government. Is that what you mean?

Mr Colmer-Yes.

Senator Sherry-Can I just mention, Senator, in this context of sovereign wealth funds, arguably
Australia's Future Fund is a sovereign wealth fund. It is there for the purpose of providing investments. When the Future Fund and its Board of Guardians choose to invest overseas, as I am sure they do, the degree to which Australia's Future Fund is examined by foreign governments for investments they may choose to make, acquisitions they may choose to make, is a not dissimilar issue.

Senator LUDLAM-Would the Future Fund be permitted to buy 51 per cent or a greater than half share of a mining company in China?

Senator Sherry-That is an issue you would have to put to the Future Fund.

Senator LUDLAM-I guess so. It is a little bit tangential to where I was going, but thank you.

Senator Sherry-I accept it is tangential, but it is relevant.

Senator LUDLAM-Sure.

Senator Sherry-Because we are invariably dealing around the world with a range of government created instrumentalities for various purposes but that are effectively owned by the government. There are many such entities. China is not alone in having such an entity. For example, the Norwegian government has one of the world's largest sovereign wealth funds based on their oil investments. There would certainly be at least 10 to 15 major classified wealth funds for a range of purposes that I can think of around the world that are very
substantial in size.

Senator LUDLAM-I am just trying to get a sense of the way in which these things are assessed by the
Foreign Investment Review Board. Your second guideline, as you put it, is that the investor should be subject to and adhere to the law and observe common standards of business behaviour. In terms of adhering to the law, is that domestic law or the law everywhere in which that entity operates?

Mr Colmer-It is both, Senator. Clearly we seek to discover whether there is any evidence of illegal
activity but actually that criterion is much more about how does the foreign investor operate in Australia, what are the arrangements for governance and do they actually understand and operate within the Australian system? That is, of course, the key issue that we are looking at.

Senator LUDLAM-We have come to the specific one that I am interested in and I realise you probably
will not be able to disclose too much of the actual thinking of the board at this time. Can you confirm for us whether the board is assessing the case of Lynas Corporation Limited, which has proposed mining operations at Mt Weld in WA, and China Nonferrous Metal Mining Group-CNMC-which has proposed to take a 51 per cent stake in Lynas? Are you familiar with that, for example?

Mr Colmer-I am a little familiar with it. At this stage, I am not sure that it is even a formal case. I could be wrong there, but we are aware of the proposal.

Senator LUDLAM-Could you take on notice for us, if that is something that you are aware of at the
moment, whether the board is assessing that proposed investment?

Mr Colmer-The board itself has not had a look at that case as yet.

Senator LUDLAM-Can you just step me through your process? When a proposed investment like this is on the table, at what point does the board get involved and how is its advice rendered to government?

Mr Colmer-The way that the system works is that applications for foreign investment approval are, in the first instance, assessed by Treasury in my division. My division provides secretariat services to the board as well as advice to the minister. Under the legislation, the Foreign Acquisitions and Takeovers Act, the Treasurer is the minister who is required to make a decision on each case. The Treasurer does that with a combination of advice from the Foreign Investment Review Board and the Treasury as his department. It varies depending on the nature of the case and the size and similar sorts of things, but typically we consult confidentially with other relevant government departments, we do our own analysis of the particular issues that might arise in a particular case, and then depending on the significance of the case and what sort of issues might appear, the Foreign Investment Review Board will have a varying degree of involvement. The Foreign Investment Review Board itself does not look at the routine cases; it only looks at the more significant cases and that provides
advice to the minister via the department.

Senator LUDLAM-Is the board able to call in particular cases? Who is choosing the significant ones that they will assess or do you refer them along to them?

Mr Colmer-The board is informed of all cases and is perfectly able to ask to look at any of the cases if it wishes to.

Senator LUDLAM-Or you can refer them?

Mr Colmer-Generally we refer them and the board will certainly tell us if there are particular cases in
which they have an interest.

Senator LUDLAM-What happens then? What sort of process of consultation or examination do they go through?

Mr Colmer-The board generally meets monthly but the individual members have a weekly phone
conversation with officers of the division, usually myself. In those meetings and phone discussions we will talk through the details of particular cases, we will provide draft advice that the board will consider and make comment on, and, if there are particularly significant cases, we have teleconferences. It is really a consultation process I guess between the department and the board to some extent and then the board can provide its advice to the minister.

Senator LUDLAM-When you said draft advice before, you meant draft advice to the Treasurer.

Mr Colmer-That is right. The department provides the advice at a formal level.

Senator LUDLAM-What happens then? When there is advice and it has been through that process for the more significant cases, the board has had a role and the advice is drafted and sent to the Treasurer?

Mr Colmer-That is right.

Senator LUDLAM-Is the Treasurer then free to entirely disregard that advice or is he bound by the
advice coming from the department?

Mr Colmer-It is advice, Senator; the Treasurer can take his own view based on that advice if he chooses.

Senator LUDLAM-In past practice, how reliably does the Treasurer follow the guidance of your
department or the board in the cases when it is involved?

Mr Colmer-I cannot really say, Senator. Firstly, that is a question which goes very much to the
relationship between the department, the board and the minister, but, secondly, we do not actually keep data on that.

Senator LUDLAM-Is that not something you would be interested to know, whether your advice is being routinely disregarded? It would be a bit of a waste of time-

Mr Colmer-I think that is a fairly large leap to suggest that the advice is routinely disregarded.

Senator LUDLAM-But you do not know if you are not keeping the data.

Mr Colmer-I think we would know if it was routinely disregarded, Senator.

Senator LUDLAM-It is kind of curious to me that you would not be tracking how often your advice is
being accepted. Maybe routinely is strong language but do you have any idea at all how often your advice is disregarded?

Mr Colmer-Yes, I do.

Senator LUDLAM-Is the advice that you produce disclosed to the public, or is it confidential?

Mr Colmer-No, it is kept in confidence. You need to understand, Senator, that we deal with a lot of things which are very market sensitive, so, we need to deal with them in the strictest confidence.

Senator LUDLAM-Sure. In terms of the six guidelines, do they just apply to the FIRB's deliberations or are they right through the department in all of your thinking around foreign investment?

Mr Colmer-Those six guidelines are specifically designed for the assessment of proposals under the
Foreign Acquisitions and Takeovers Act.

Senator LUDLAM-So, everybody would have regard to those. I have referred this one myself in a letter a week or two ago, the case of Lynas and the CNMC, to the Foreign Investment Review Board. Is that case under active consideration by your department? You said before you do not think it has been referred to the board yet.

Mr Colmer-I am not entirely sure where its status is in the system but we are aware of it. It has been in the press and we are aware of your letter.

Senator LUDLAM-One of the reasons that I have referred that and that I am interested in it and that it has picked up some press is that CNMC, the Chinese group, operates the largest nickel in Burma in active partnership with the Burmese military government and is seeking more acquisitions in Burma. I am just wondering whether that would set a red flashing light, at least on the second of your criteria of observing common standards of business behaviour. Would investments under one of the world's worst military regimes qualify as breaching that second criteria?

Mr Colmer-The relationship between Burma and Australia is primarily one for the Department of Foreign Affairs and Trade and we are discussing that issue with the department. We have sought advice from them. My understanding is that Australia has no sanctions on investment to and from Burma.

Senator LUDLAM-That is correct.

Mr Colmer-The position, as I understand it from the basis of the information that we have, is that the Chinese company is operating in Burma. That in itself does not tell us anything except that it is operating in Burma. The fact that a company may be operating in Burma-I believe we have an embassy in Burma.

Senator LUDLAM-Yes we do.

Mr Colmer-It does not seem, of itself, to be a relevant consideration. If there is information about its operations in Burma or anywhere else that are relevant to the way that it operates in Australia, then that would be something that we may be interested in.

Senator LUDLAM-I have no further questions. Thanks.