2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Note on Exchange Rate:Throughout the 2012 Investment Climate Statement for Australia, we have used the exchange rate of A$1 = US$1.00, reflecting the most current rate as of January 2012. It should be noted, however, that the exchange rate fluctuated over the year.

Openness to and Restrictions on Foreign Investment

Australia welcomes foreign investment. The United States is the largest direct investor in Australia, while Australia is the ninth largest source of foreign direct investment (FDI) for the United States. In 2010, U.S. FDI in Australia was A$120billion while Australian investment in the United States was A$93billion. U.S. FDI in Australia accounts for 25% of total foreign direct investment in the country and is concentrated largely in resources and energy, manufacturing, and the nonbank financial services sector.

Inward foreign direct investment is regulated by the Foreign Acquisitions and Takeovers Act 1975 and associated regulations. The Act sets out a number of minimum thresholds under which smaller scale investment proposals do not need approval. Under the Australia-U.S. Free Trade Agreement (AUSFTA), higher (i.e., more favorable) screening thresholds apply to U.S. citizens and corporations than to other foreign entities.

The Foreign Investment Review Board (FIRB), a subdivision of the Australian Treasury Department, reviews investment proposals. Based on advice from the FIRB, the Treasurer can block or impose conditions on proposals that are contrary to the national interest. The national interest test seeks to ensure that ‘investment and sales decisions are driven by market forces rather than external strategic or non-commercial considerations.’ All foreign governments and their related entities (e.g., state-owned enterprises and sovereign wealth funds) are required to notify the Australian government and get prior approval before making a direct investment in Australia, regardless of the value of the investment.

Conversion and Transfer Policies

The Australian dollar is a fully convertible currency. The government does not maintain currency controls or limit remittance, loan or lease payments. Such payments are processed through standard commercial channels, without governmental interference or delay.

Expropriation and Compensation

The Australian legal system is firmly grounded on the principles of equal treatment before the law, procedural fairness, judicial precedent, and the independence of the judiciary. Strong safeguards exist to ensure that people are not treated arbitrarily or unfairly by governments or officials. Private property can be expropriated for public purposes in accordance with established principles of international law. Due process rights are well-established and respected, and prompt, adequate and effective compensation is the norm.

Dispute Settlement

Australia has an established legal and court system for the conduct or supervision of litigation and arbitration, as well as alternate dispute processes. The traditional approach to commercial dispute resolution involves litigation, arbitration, and more modern methods of alternative dispute resolution. Australia is a world leader in the development and provision of non-court dispute resolution mechanisms. It is a signatory to all the major international dispute resolution conventions and has organizations that provide international dispute resolution processes.

Property and contractual rights are enforced through the Australian court system, which is based on English Common Law. There are few investment disputes involving foreign companies. Australia is a member of the International Center for the Settlement of Investment Disputes.

AUSFTA establishes a dispute settlement mechanism for disputes arising under the Agreement. In the first instance, disputes are to be settled through consultation between the parties. Where these consultations are not effective in resolving the dispute, the Agreement provides for an arbitral panel to consider the matter.

The dispute settlement mechanism provides for compensation for breaches of agreement, which may include requiring the breach to be corrected, trade compensation to be provided, or monetary compensation in lieu of trade compensation. The FTA does not allow private investors to directly challenge government decisions, but individual investors are able to raise concerns about their treatment by the Australian Government with the U.S. Government (or vice versa).

Performance Requirements and Incentives

As a general rule, foreign firms establishing themselves in Australia are not subject to performance requirements and incentives.

Right to Private Ownership and Establishment

The common law system which forms the basis of Australian jurisprudence guarantees the right to private ownership and the establishment of private business enterprises.

Protection of Property Rights

A strong rule of law protects property rights in Australia and operates against corruption. Both foreign and domestically-owned businesses enjoy considerable flexibility in their licensing, regulation, and employment practices.

Transparency of the Regulatory System

Australia subscribes to the 1976 declaration of the Organization for Economic Cooperation and Development (OECD) concerning International Investment and Multinational Enterprises. These instruments cover national treatment and investment incentives and disincentives, and spellout voluntary guidelines for the conduct of multinational enterprises in member countries. Australia also subscribes to two OECD codes of liberalization, one covering capital movements and the other invisible transactions.

Australia ranked third in 2011(behind Hong Kong and Singapore) on the Heritage Foundation’s rankings for economic freedom. According to this measure, the survey found that, “Australia has a strong tradition of openness to global trade and investment, and transparent and efficient regulations are applied evenly in most cases. An independent judiciary protects property rights, and the level of corruption is quite low.”

In June 2011, Australia was ranked as the second easiest place in the world to start a businessby the World Bank. It ranked fifteenthin terms of “ease of doing business” and was the eighth easiest place to obtain business credit. The Australian economy recorded 20years of uninterrupted growth to 2011, despite two global downturns. The 2011Institute for Management Development (IMD) World Competitiveness Yearbook rated the Australian economy the second most resilient in the world. For countries with populations greater than 20 million, Australia ranked first.

Australia’s rankings in various international governance surveys are given below:

Transparency International corruption rank: 6th in 2011

Heritage Economic Freedom rank: 3rd in 2011

World Bank Doing Business rank: 15thin 2011

World Bank Business Start Up rank: 2ndin 2011

Efficient Capital Markets and Portfolio Investment

Australia has anAAA international credit rating with a well-developed, deep and sophisticated financial market, regulated in accordance with international norms. In terms of global turnover, Australia's foreign exchange market is the seventh largest in the world, and the Australian dollar/U.S. dollar is the fourth most traded currency pair globally (BIS, Triennial Central Bank Survey, December 2010). Australia’s four leading banks are highlyranked in terms of financial security with AA minus rankings. Total assets of Australia’s largest banks were US$2.7trillion in September 2011 or about twice GDP, according to the Reserve Bank of Australia. Australian banks have one of the lowest non-performing loan ratios of economies surveyed by the IMF in December 2010, which found only 0.7% of Australian bank loans were‘nonperforming.’

Australia has an open and transparent approach to mergers and acquisitions. There are no “cross-shareholding” and “stable shareholder” arrangements used by private firms to restrict foreign investment through mergers and acquisitions. Measures used by private firms to defend against hostile takeovers are not focused on foreign investors. Overall, Australia’s M&A deals ranked third largest worldwide in the September quarter 2011, according to Bloomberg.

In 2010, the Australian Stock Exchange (ASX) was the 7th largest in the world and the market capitalization of shares of domestic companies on the ASX was about US$1.4trillion.Current projections indicate that Australian funds under management will grow to around A$2 trillion by 2015.ASX operates in a market that has the fourth largest investment fund asset pool in the world. In 2011, Chi-X became Australia’s second stock exchange operator in a move aimed at increasing competition.

Competition from State-Owned Enterprises

Private enterprises are generally allowed to compete with public enterprises under the same terms and conditions with respect to markets, credit, and other business operations, such as licenses and supplies. Public enterprises are not generally accorded material advantages in Australia. Almost all state-owned enterprises (SOEs) have been privatized. Remaining SOEs do not exercise power in a manner which discriminates against or unfairly burdens foreign investors or foreign-owned enterprises.

Australian Commonwealth and state governments have followed policies of privatizing their remaining state-owned assets in areas such as electricity generation, transmission, distribution, and retailingto both domestic and foreign investors. In September 2010, the Queensland state government privatized railway assets used to transport natural resource exports (particularly coal) to its ports. In December 2010, the Parliament passed legislation to separate Telstra's retail and wholesale arms, with the latter coming under the National Broadband Network Company (NBN Co), which remain a government-owned enterprise until it is later privatized.

Sovereign Wealth Fund: Australia has one sovereign wealth fund, the Future Fund, which was established by the Future Fund Act 2006 to help future governments meet the cost of public sector superannuation (i.e., retirement pension) liabilities by delivering investment returns on contributions to the Fund. Investment of the Future Fund is the responsibility of the Future Fund Board of Guardians with the support of the Future Fund Management Agency.

The Board and Agency also invest the assets of the Building Australia Fund, the Education Investment Fund and the Health and Hospitals Fund, which were established by the Nation-building Funds Act 2008. At end-September 2011, the Future Fund had assets of A$73.2 billion. There is no regulation prescribing the proportion of the Future Fund’s assets which must be invested in Australia or offshore. The Future Fund intends to gradually increase its foreign exposure, but most funds are currently invested in Australia.

Corporate Social Responsibility

In Australia, there is a general awareness of corporate social responsibility among both producers and consumers. Both foreign and local enterprises tend to follow generally accepted corporate social responsibility (CSR) principles such as the OECD Guidelines for Multinational Enterprises. Firms that pursue CSR are often rated highly in surveys of corporate behavior.

Political Violence

Instances of political violence are a rarity in Australia. As in all liberal democracies, political protests (e.g., rallies, demonstrations, marches, public conflicts between competing interests) form an integral, though generally minor, part of Australian cultural life. Such protests seldomdegenerate into violence.

Corruption

Australia maintains a thorough system of laws and regulations designed to counter corruption. In addition, the government procurement system generally is transparent and well regulated, thereby minimizing opportunities for corrupt dealings. Accordingly, corruption has not been a factor cited by U.S. businesses as a disincentive to investing in Australia, or to exporting goods and services here. Non-governmental organizations that monitor anti-corruption measures, including Transparency International, operate freely in Australia. Australia is perceived internationally as having low corruption levels. Transparency International’s Corruption Perception Index from December 2011ranked Australia eighthamong nations perceived as having low levels of corruption, ahead of South Korea, Japan and the United States.

Australia is an active participant in international efforts to end the bribery of foreign officials. Legislation to give effect to the anti-bribery convention stemming from the OECD 1996 Ministerial Commitment to Criminalize Transnational Bribery was passed in 1999. Legislation explicitly disallowing tax deductions for bribes of foreign officials was enacted in May 2000. At the Commonwealth level, enforcement of anti-corruption laws and regulations is the responsibility of the Attorney General’s Department.

Bilateral Investment Agreements

The Australian Government supports the negotiation of comprehensive Free Trade Agreements (FTAs) that are consistent with the World Trade Organization rules and guidelines and which complement and reinforce the multilateral trading system. Australia has FTAs with the United States, Thailand, Singapore, Chile, and a multilateral FTA with New Zealand and the countries of the Association of Southeast Asian States (ASEAN), all of which contain chapters on investment.

Australia-United States FTA (AUSFTA):The Australia-United States FTA (AUSFTA) entered into force on January 1, 2005 and is a comprehensive agreement that covers goods, services, investment, financial services, government procurement, standards and technical regulations, telecommunications, competition-related matters, electronic commerce, intellectual property rights, labor, and the environment. The agreement has guaranteed U.S. access to the Australian market and the gradual expansion of this access. Under the FTA, trade in goods and services, as well as in foreign direct investment, has continued to expand. More than 99% of U.S. exports of manufactured goods are now duty-free. The FTA will also eliminate tariffs within 10 years of entry into force on textiles.

Other Bilateral Free Trade Agreements: Australia signed a free trade agreement with the Association of Southeast Asian Nations and New Zealand, which became effective in January 2010. ASEAN and New Zealand together account for A$104 billion, or 18%, of Australia's total trade in goods and services, in 2010-11. The Singapore-Australia Free Trade Agreement (SAFTA), which became operational on July 28, 2003, eliminated most tariffs and increased market access for services. It also harmonized competition policy, government procurement, intellectual property, e-commerce, customs procedures, and business travel. The Thailand-Australia FTA cut tariffs to zero on virtually all goods from January 2010. The Australia-Chile FTA reduced tariffs on 97% of goods currently traded. Tariffs on all existing merchandise trade between Australia and Chile will be eliminated by 2015.

Australia is currently negotiating agreements with South Korea, the Gulf Cooperation Council (GCC), Malaysia, China, and Japan, all of which are expected to include investment liberalization. Australia is also participating in negotiations for a Trans-Pacific Partnership Agreement (TPP). The United States, Australia, Vietnam, Malaysia, Peru,Brunei Darussalam, Chile, New Zealand and Singapore have joined the TPP negotiations, whileJapan, Canada, and Mexico have expressed interest in entering the TPP process.

In addition, Australia is negotiating Comprehensive Economic Cooperation Agreements with both Indonesia and India. Australia is continuing negotiations with the other members of the Pacific Forum towards a Pacific Agreement on Closer Economic Relations (PACER) Plus.

OPIC and Other Investment Insurance Programs

The Australian Government provides assistance to business for the development or expansion of export markets, and business advice on exporting and financial grants through the Export MarketDevelopment Grants scheme and the activities of Austrade, Australia’s export promotion agency. The Export-Import (EXIM) Bank provides export financing assistance to Australian businesses and, in some cases, overseas buyers. The U.S. Overseas Private Investment Corporation (OPIC) does not extend coverage to Australia, which is not a high-risk or developing country. The U.S. Export-Import (EXIM) Bank provides export financing, in certain circumstances, to firms exporting to Australia.

Labor

Australia’s unemployment rate was 5.3% in December 2011, seasonally adjusted, down from 5.6% in early 2010. In the year to August 2011, annual average weekly earnings in Australia grew 5.3%, seasonally adjusted. The core inflation rate was 2.3% for the year to September 2011. Real wages have grown strongly over the last decade, and the mining boom has led to skills shortages in that sector, particularly in Western Australia.

The Fair Work Act provides a safety net of enforceable minimum employment terms and conditions through the National Employment Standards (NES). The NES sets out 10 minimum workplace entitlements which apply to all employers and employees in the National Workplace Relations system, though only certain entitlements apply to casual employees. In 2010, a new body, Fair Work Australia, took over the functions of the former Industrial Relations Commission as an arbitrator of industrial disputes.Fair Work Australia sets minimum wages for lower paid workers.

The number of industrial disputes islow by historical standards, but has been increasing. In the year ended September 2011, 214,000working days were lost due to strikes; compared to 144,000during the previous year. During the year ended September 2011, 197industrial disputes were recorded, compared to 221during the previous year.Other Commonwealth laws set specific employment conditions.

The Superannuation Guarantee (Administration) Act 1992 requires employers to contribute a minimum of 9% of each employee's base salary into that employee's superannuation (i.e., retirement pension) account. Employees may make additional contributions and are entitled to choose their superannuation fund. In the 2010-11 Federal Budget, the government announced that the superannuation guarantee (SG) rate will gradually increase from 9% to 12% between July 1, 2013 and July 1, 2019.

In 2001, the Government established the General Employees Entitlements Redundancy Scheme (GEERS), a taxpayer-funded insurance scheme, in response to growing community concerns about the loss of employee entitlements after several companies collapsed. GEER is a basic payment scheme established to assist employees who have lost their employment due to the liquidation or bankruptcy of their employer and who are owed certain employee entitlements. The scheme covers capped unpaid wages, annual and long-service leave, capped payment in lieu of notice, and capped redundancy pay. Employees currently stand ahead of unsecured creditors, but behind lenders with fixed security, in the creditors' queue following a company collapse. The Australian Government is a party to all International Labor Organization (ILO) conventions.

General Skilled Migration Program: Immigration has always been an important source of skilled labor in Australia.The Immigration Department has a ‘skilled occupations list’ (SOL) which can be used by potential applicants seeking to nominate skilled occupations which are acceptable for permanent and temporary skilled migration to Australia under (1) the General Skilled Migration (GSM) program; and (2) the Employer Nominated Scheme. Applicants must have a nominated occupation which is on the SOL and applicable to their circumstances.

In 2010–11, 168,685 people migrated to Australia, with a skilled worker component of 113,725. There was an increase in the employer-sponsored program to 39% of the skill stream, part of the government's policy to directly target skills shortages through a more demand-driven approach. For the first time, China was Australia's largest source of migrants with a total 29,547 places, or 17.5% of the total, followed by the United Kingdom (23,931) and India (21,768), respectively. In 2010–11, the government continued to provide for family reunions with 54,543 family places (32% of the total migration program).

The 457 Long Stay Business visa: If an overseas company decides to establish a presence in Australia and relocate for its business operations, it may apply for the status of a Business Sponsor and sponsor personnel for a 457 visa through the Department of Immigration. Companies can usethe 457 visa program to gain access to priority processing and approval to sponsor skilled workers for six years.The program applies to businesses that both; used 457 visas for three years and have a commitment to ensure at least 75% of their domestic workforce is Australian.The 457 visa program aims to alleviate skill shortages in growth sectors such as the mining industry.More rapid processing of the 457 visa was announced in November 2011.

Foreign Trade Zones/Free Trade Zones

Australia does not have free trade zones.

Foreign Direct Investment Statistics

Levels of Foreign Investment:The level of foreign investment in Australia increased by A$61billion (US$61billion) in 2010to reach A$1.968trillion (US$1.968trillion). Portfolio investment accounted for A$1.146trillion (US$1.146trillion) or 58% of the total, direct investment for A$474billion (US$474billion, or 24% of the total), other investment liabilities for A$244billion (US$244billion, or 12% of the total), and financial derivatives for A$104billion (US$104billion, or 5% of the total). Of the portfolio investment liabilities, debt securities accounted for A$766billion (US$766billion, or 67% of all portfolio investment) and equity securities for A$380billion (US$380billion, or 33%of all portfolio investment).

The leading investor countries in 2010 by level of investment were the United States, with A$550 billion (US$550 billion or 28% of all foreign investment), the United Kingdom with A$473billion (US$473billion or 24%), Japan with A$118billion (US$118billion or 6%), the Netherlands with A$42billion (US$42billion or 2%), Germany with A$41 billion (US$41billion or 2%) and the Hong Kong Special Administrative Region with A$41 billion (US$41billion or 2%).Note: Australian foreign investment statistics are based on current market values. Foreign direct investment (FDI) into Australia in 2010was valued at A$94billion on a flow basis; and the level of FDI in 2009 was A$1.968trillion. Australian GDP in 2010was A$1.344trillion, so that the ratio of FDI inflows to GDP in 2010was 7.0%. The ratio of the stock of FDI to GDP in 2010was 146.4%.

There is no official listing of major foreign investments by U.S. companies or other nations’ companies. The Australian Bureau of Statistics collects this information, but does not release it on a disaggregated basis due to confidentiality provisions in the legislation governing its activities. A list of major new resources and energy projects, which often involve significant foreign investment, is compiled by the Australian Bureau of Resources and Energy Economics (BREE).In October 2011 the BREE reported that investment in Australia’s resources sector continued to set new records with 102 minerals and energy projects at an advanced stage of development, representing committed capital expenditure of A$232 billion.

Australian Investment Abroad:The level of Australian investment abroad reached A$1.186trillion (US$1.186trillion) in 2010, an increase of A$54 billion (US$54 billion) in the previous year. Direct investment abroad accounted for A$362billion (US$362billion or 31%), portfolio investment for A$461billion (US$461billion or 39%), other investment for A$221billion (US$221billion or 19%), reserve assets for A$42billion (US$42billion or 4%), and financial derivatives for A$101billion (US$101billion or 9%). Equity has been the leadingform of Australian investment abroad during the past decade. At A$615billion (US$615billion), equity represented 52% of the total level of investment in 2010.

The leading destination country in 2010was the United States, which accounted for A$410billion (US$410billion) or 35% of the stock of Australian investment abroad. Other major countries of investment were the United Kingdom with A$192billion (US$192billion, 16%), New Zealand with A$74billion (US$74billion, 6%), Canada with A$39billion (US$39billion, or 3%), Japan with A$29billion (US$29billion, or 2%), France with A$29billion each (US$29billion, 2%), the Netherlands with A$25billion (US$25billion or 2%).

Investment Inflows:Foreign investment in Australia recorded a net inflow of A$94 billion (US$94 billion) for 2010, adecrease of A$68billion (US$68billion) over the previous year. The leading investor countries were the United States with A$24 billion (US$24 billion) or 26%, the United Kingdom with A$22 billion (US$22 billion) or 23%, Japan with A$4.3 billion (US$4.3 billion) or 5% and Luxembourgwith A$3 billion (US$3 billion) or 4%.

Investment Outflows: Australian investment abroad recorded a net outflow of A$59 billion (US$59 billion) for 2010, a decrease of A$45 billion (US$45 billion). The leading destination countries were the United States with A$24 billion (US$24 billion) or 41%, the United Kingdom with A$22 billion (US$22 billion), Japanwith A$4.3 billion (US$4.3 billion) or 7.3% andCanadawith A$4 billion (US$4 billion) or 6.8%.

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