report on apec regional symposium - Australian APEC Study Centre

REPORT ONAPEC REGIONAL SYMPOSIUM:POLICIES AND ENVIRONMENTCONDUCIVE TO INVESTMENT5-8 APRIL 2011MELBOURNE

KEN WALLER -­‐ DIRECTOR, AUSTRALIAN APEC CENTRE AT RMIT UNIVERSITY ROY NIXON -­‐ SYMPOSIUM CONVENOR INTRODUCTION The global financial crisis caused a marked decline in investment flows. Recent <strong>report</strong>s from OECD and UNCTAD noted that global FDI inflows grew only modestly in 2010 at an estimated $1,122 billion compared to $1,114 billion in the previous year. There were considerable quarterly variations through 2010, suggesting the global economic recovery remains patchy. There was an uneven pattern among regions, components and modes of FDI. Developed country FDI inflows continued to contract in 2010, while those to developing and transition economies recovered. Mergers and acquisitions rebounded while new greenfields investment remained low. "A new FDI boom remains a distant prospect”. In many economies domestic investment remains weak. Recovery in most economies will be a lengthy process and is by no means assured. The ADBI’s recent study on Infrastructure for a Seamless Asia estimates that between 2010 and 2020, Asia needs to invest approximately US$8 trillion in overall national infrastructure, and a further US$290 billion on specific regional infrastructure projects, an average overall infrastructure investment of US$750 billion per year. The objective of the symposium was to assess risks to business investment in the region in the context of contemporary global and regional economic circumstances and to consider ways to enhance capacities in regional economies to minimise investor risk and to encourage and facilitate investment flows. The Symposium brought together senior officials of investment policy advising agencies, including investment facilitation and promotion agencies, senior business people and representatives of major regional and global agencies, to consider major challenges now impacting on investment flows. Around 100 people attended and the symposium was informed by high quality presentations and exchanges between presenters, moderators and participants. This <strong>report</strong> to APEC fora, and in particular to the Investment Experts Group, is presented as a contribution to ongoing work on measures to promote investment liberalisation and facilitation, for the consideration of Ministers, policy makers, regulators and the business community. The symposium was the first part of an activity, funded by AusAID and supported by the State Government of Victoria through its support of the Melbourne APEC Finance Centre, the OECD and the Asian Development Bank Institute, to contribute to enhancing investment flows in the region by defining key investor risk concerns, and measures to ameliorate them. The <strong>report</strong> contributes to work in APEC in formulating the Investment Facilitation Action Plan (IFAP) 2. It draws on key lessons emanating from APEC’s investment framework, including the OECD’s Policy Framework for Investment (PFI) and also work of the World Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 1

Bank, UNCTAD, UNESCAP, ADB and the ADBI the views and experiences of major private investors in the region’s economies. Drawing on the lessons learned from the symposium, a second part of the activity funded by AusAID, will be the convening of a capacity building training program for investment policy specialists and investment promotion and facilitation officials from the region, covering policy issues relevant to enhancing domestic and foreign investment flows. The program will be developed by the Centre in cooperation with the ADBI and the OECD. A copy of the symposium program is attached, together with a list of participants. SUMMARY OF KEY POINTS • Global FDI flows grew only modestly during 2010. There was a strong rebound in flows to developing Asia and Latin America offsetting a further decline in inflows to developed countries. The Asian region received US$ 226 billion in FDI in 2009, second to OECD economies with US$ 547 billion. The main components of FDI flows in 2010 were reinvested earnings driven by higher corporate profits and mergers and acquisitions. Greenfield investment activity remained subdued. • Prospects for an immediate pick-­‐up in FDI flows are uncertain. The main risk factors to higher FDI flows in 2011 are: -­‐ uneven growth outcomes between developed and emerging economies which are likely to worsen existing global imbalances and could add to continuing protectionist pressures. -­‐ currency risk and associated unilateral action in response to currency volatility, including capital controls, and the prospect of businesses restructuring their investments, perhaps sub-­‐optimally, to mitigate against currency movements. -­‐ the sovereign debt overhang in the Euro area. -­‐ potential for renewed drops in real estate prices, most notably in the US and the UK. -­‐ a danger of asset price bubbles such as those being seen in Asian economies with too much capital and too few firm project opportunities, leading to complacency in investment best practice. • Asian economies have an important role to play in global rebalancing of capital flows. Policies, to facilitate a structural change from savings to domestic consumption in the region, to switch from capital intensive investment to SMEs and to deepen capital markets are relevant to global rebalancing. • Increased investment in infrastructure is a major priority but will require supportive policy changes in regional economies, including the development of corporate bond markets and legal frameworks to provide investor confidence. However, infrastructure investment is complex, will likely require in developing economies many supporting policy reforms and even with these in place, national capacities to organise and implement projects will inevitably by limited. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 2

• Expectations that infrastructure will resolve the region’s development issues need to be tempered by the capacity constraints on implementing projects. Even so, if economies are to attract investment into infrastructure they need to develop credible pipelines of projects so as to attract private investors over the long-­‐term. • Following the recent major natural damages in Japan, new laws and policies have been announced which have the effect of changes to property rights and this may well encourage the involvement of the private sector in tracking some components of the nation’s reconstruction program. However, details of how the policies will be implemented are yet to be fully enunciated. • Excess global liquidity and the relatively low cost of capital means that this in an opportune time for economies to seek to channel funds into infrastructure assets. This will require reforms and policy changes in Asia’s developing economies such that the investment environment is conducive to attracting long-­‐term savings, both domestic and foreign, into infrastructure assets. • Currency risks which have heightened as a consequence of the global financial crisis present as a significant impediment to investment flows and to the financing of cross-­border trade and services. While currency risk is recognised by G20 and by relevant international forums, ways to deal with it are illusive. One suggestion is for the creation of an APEC reserve currency. While not eliminating all currency instability, the diverse composition of the currency unit would help dampen volatility and could provide a more stable investment environment. • Current sharp fluctuations in currency relationships are causing policy makers in the Asia Pacific region to consider capital controls aimed at limiting inflows of finance so as to contain upward pressure on regional currencies. The prospect of competitive currency depreciations to protect national export markets adds a further complex dimension to investment decision making. • New major global investors, such as Brazil, Russian, China, India and South Africa – both as recipient and sources of FDI – need to be encouraged to work on framing good international investment principles. They are increasingly important in the global pattern of investment flow and have strong self-­‐interest in ensuring that the investments they make are respected under agreed international investment codes and principles. Similarly, there is mutual interest in those economies providing fair and equitable treatment to foreigners investing in them. • Concerns on the investment activities of SOEs and sovereign wealth funds have led to enhanced screening of their proposals in some economies and in some cases to onerous requirements placed on them. Experience points to the value of SOEs and sovereign wealth funds deepening their understanding of the national interest policies of the economies they seek to invest in. This would go a long way to easing potential frictions and the risks associated with them. There is evidence that SOEs and sovereign wealth funds are giving increasing attention to joint partnerships and ventures in their foreign Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 3

investment policies in place of total or major majority asset ownership and that these developments are contributing to maturing and less risky relationships. EXECUTIVE SUMMARY A. Investment and risk Economic, business and political risks are factors relevant to investment decision making, particularly in regard to investment in another economy. Measures to minimize political risk include policies to ensure macroeconomic stability, transparency in decision-­‐making and in legal processes and having institutions which have well defined powers and responsibilities to ensure effective business conduct and the fair and equal treatment of both domestic and foreign investors. A failure in the development of public private partnerships (PPPs) has been the attempts by governments in such partnerships to place risks on private sector investors that they were unwilling or unable to bear. More innovative approaches to the allocation of risk between governments and private partners are needed if PPPs are to become acceptable investments to private investors. Economies are also encouraged to establish centres of excellence’ to encourage best practice PPPs. Greater care is needed in planning and implementing PPP projects to avoid the prospect of cancelling a project and the costs involved for both the government and the private investor, including the important one of seriously impairing private sector interest in future projects. B. Promoting investment flows and reducing uncertainty A sound investment policy would exhibit a number of characteristics important to the needs of both foreign and domestic investors, including: • transparent investment laws and regulations • ownership of land and other forms of property would be clearly titled and registered • intellectual property rights laws and regulations properly implemented and enforced • easy access mechanisms to enforce contracts and resolve investment disputes • the expropriation powers of the State clearly defined and adequate compensation provided in cases where this power is used • Equivalent treatment for foreign investors to domestic investors with regard to de facto investment opportunities. • Accession by the state to a network of treaties to include investment dispute, resolution procedures and review processes for compliance Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 4

In infrastructure investment policies should include clear and published selection criteria based on commercial and bankable risk allocation with a publicly announced outcome. An important question is that of whether developing country governments need pursue investment policy options specifically to attract more new FDI or alternatively would there be more gain from finding ways to maximise the benefits from their existing foreign investments by for example policies that enhance the competitiveness of existing investors' supply chains including with SMEs, facilitate the transfer of up-­‐to-­‐date technology or ensuring that exchange rate policies properly reflect sensible resource allocation. Identifying and reducing barriers to investment Barriers come in many forms, both at the border and behind the border and they may impact on foreign investors (at the border) or both foreign and domestic investors (behind the border). They may include excessive regulation, unclear property rights and poor legal systems to a lack of appropriate laws that foster competition. FDI makes up only between 5 and 17 per cent of gross domestic fixed capital formation in APEC economies so the importance of analysing the behind the border barriers impacting on domestic investment can be a critically important public policy issue as barriers raise business costs, add to risk and uncertainty and restrict business competition. They chill investment. The impetus in undertaking any review should be internally driven by economies – it could be part of a specific investment driven strategy or part of wider efforts to reform the economy more broadly. APEC's Investment Expert's Group (IEG) undertook major projects to demonstrate to APEC member economies that both border and behind the border barriers to investment were significantly impeding investment flows in the region. Most APEC member economies are now pursuing investment reform initiatives, which includes a mix of investment liberalisation and facilitation measures. Assistance is available to APEC member economies to help undertake policy reviews and in assessing reform priorities in the form of expertly constructed survey indicators (e.g. World Bank Doing Business and Investing Across Borders indicators) and policy frameworks (e.g. OECD PFI assessments). World Bank indicators point to the fact that East Asia and the Pacific (EAP) region has been relatively slow compared with other regions in undertaking investment reforms. For example EAP members have more restrictions on foreign equity ownership than any other region. EAP performance measures on the ease of establishing a foreign subsidiary and the Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 5

time needed to register property rights is weak compared with other regions, and with considerable variation across the region (PNG 108 days, Cambodia 36 days to Singapore 9 days). This is considered a major impediment to foreign investment where administrative lag times inhibit competitiveness. Mexico provides a good case study of how to use the World Bank's Doing Business Indicators to drive a coordinated reform program at all levels of government. Supported by a strong institutional framework and a need to improve competitiveness, Mexico undertook analysis of the direct and indirect impacts of various reforms and determined priorities after widespread consultation with all key stakeholders in the reform process. Private investment in infrastructure The Asia Pacific region will need to spend about $US 8 trillion over the next decade (or two and a half times the amount spent in the last decade) to meet critical energy, transport, communications and other physical and social infrastructure needs. Emerging economies have struggled to attract an adequate supply of private investment in infrastructure projects and policies are now under scrutiny. The main challenge facing the Asia Pacific Region is how to turn excess savings into bankable infrastructure projects. Though many of the regions' domestic private capital markets do not have sufficient financial depth to meet infrastructure financing needs there remain many policy, regulatory and institutional obstacles that will need to be tackled to encourage greater private sector participation in infrastructure projects. They include improved governance structures, enhanced public sector capacities, stronger upfront planning and implementation procedures, and the development of deep relationships with major stakeholders and building credible pipe-­‐lines of projects. Setting up specialised PPP support units or Centres of Excellence such as the one established by the State Government of Victoria, Partnerships Victoria, can greatly improve the capability of the public sector to interact with the private sector effectively and importantly to develop mutual trust. There is value in governments seeking more innovative approaches to demonstrate to the community the benefits that can accrue from involving private sector financing and management in PPP infrastructure projects. Building political and community trust is a complex and time-­‐consuming process. Financial market development is a major challenge to effective PPP outcomes in the longer term and this will involve ways of better aligning long-­‐term PPP assets with long-­‐term funds available from institutional investors like pension, insurance, and sovereign wealth funds. This may require changes to institutional investor mandates if they are to be attracted to Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 6

investments in PPPs. Changes to host government engagement policies may well be needed including to their risk-­‐return expectations and preferred capital structures. The global focus is changing from growth to quality of life. Community behavioural characteristics and expectations need to be better understood in considering societies’ infrastructure needs. Ways need to be found to ensure that community expectations arising from infrastructure investments are properly communicated to and understood by governments. The G20 have tasked the major multilateral development finance institutions, including the World Bank and ADB, to take a central role in implementing the Action Plan. Similarly, the <strong>report</strong> prepared for the 17th APEC Finance Ministers’ Meeting in Kyoto in November 2010 provided a road map for promoting PPPs in the APEC region including the possible creation of an Asia Pacific Infrastructure Partnership. C. Investment in key sectors – the resources and financial sectors Barriers to investment are constraining investment flows into these two sectors. Improving the opportunities for project financing in resources is challenging, as are ways to deepen capital markets in the region’s economies. Resources China became a net importer of gas and coal in 2009 as energy demand grew rapidly and is facing considerable energy supply pressures. A central plank in its approach to meet its growing energy needs is its "go global" strategy. Chinese enterprises are encouraged to go global to seek out new suppliers of natural resources in foreign markets often in developing countries as in Africa and Asia but also in developed countries like Australia. Chinese SOEs have typically faced obstacles through increased national security or national interest screening which are impeding outward investment by Chinese entities. The issue of screening is not solely an issue for China’s SOEs, nor is it the only issue confronted by Chinese enterprises and faced by foreign investors generally. Investors in resources face a number of barriers, including uncertainty and inconsistency of application of host country laws and regulations, lack of clarity in the responsibilities, powers and regulation at different levels of government, uncertainty in the tax regime applying to resource investments and the application of competition law on regulated and monopoly assets. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 7

Possible solutions in dealing with some of the tensions arising from FDI investment in resources include the use of project specific investment agreements with Government, a greater focus on strategic joint ventures/partnerships with host Governments or major local companies, or other successful FDI investors, or possible bilateral of regional investment treaty protection agreements. Most large mining projects now require extensive mining infrastructure to extract and supply the commodity to market. Therefore there is the need for significant commitment to and investment in infrastructure, in addition to the mine development. Project financing techniques are key to unlocking and funding the massive infrastructure requirements of the resources sector. As in infrastructure projects in other sectors, the success of project financing is dependent on the appropriate allocation of risk and reward between different stakeholders. Finance Pre-­‐GFC an issue of concern to the APEC business community was a view that to fully benefit from broad structural reform policies generally being pursued by member economies, the opening up to foreign investment in banking and in financial markets was an attendant and beneficial policy option. The APEC Business Advisory Council (ABAC) produced a checklist of the major impediments to FDI, which, if removed, would substantially benefit the host economy and corporate investors. Yet, FDI restrictions remain to investment in the financial sector of some economies and where the sector is already regulated for prudential reasons -­‐ to limit contagion and protect depositors and consumers. Since some governments are seeking to consolidate there banking sectors, continuing restrictions on foreign investment through limits on equity shareholding and in other forms is questionable. A minority investor is unlikely to make the same commitment via the amount of technology transfer and management efficiencies as a controlling investor would. The result of FDI restrictions is slower efficiency gains for local financial systems. A more beneficial approach could be to consider protecting the top four or five institutions only in an economy, while encouraging 100% control of smaller institutions. Here the result is skills transfer, technology transfer and consolidation, while protecting the integrity of the local financial system. In 2010 ABAC recommended APEC economies should collaborate to develop wholesale securities markets open only to professional investors (with less strict disclosure rules than those designed to protect retail investors). This could lead to the development of regional Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 8

arrangements for securities settlement, the removal of barriers to entry and to the development of a regional professional securities market. Regional collaboration between government and regulatory officials and market players to reduce barriers to cross-­‐border settlement and to promote the use of foreign securities as eligible collateral throughout the region would enable major domestic and foreign financial institutions and investors to participate in cross-­‐border collateral markets. The cross listing of listed funds from outside and within the APEC region, such as Exchange Traded Funds (ETFs), has offered investors greater investment choice along with potentially lower costs and better returns. But there remains a gap with respect to the cross-­‐border recognition of unlisted funds. It is difficult to market unlisted funds in APEC economies. To address this constraint on regional finances, the proposal for an Asia Region Funds Passport (ARFP) is now under consideration. Such a passport would allow unlisted funds to be marketed across jurisdiction and capitalise on the rapidly growing mutual funds market. If APEC members can adopt the ARFP regulations will have to agreed and implemented to allow for the manufacture, distribution, management and administration of unlisted funds within the region. This would open up a range of important new investment options and employment opportunities for APEC member economies. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 9

FULL REPORT INTRODUCTION This <strong>report</strong> is set out under the session headings shown in the symposium program. It covers the major issues raised by moderators and presenters and the contributions made by participants during the question and answer periods that followed each session. It does not attribute views to specific individuals but rather <strong>report</strong>s on the issues that were raised and discussed in two-­‐days of intensive dialogue between speakers and participants, drawn from international agencies, regional policy and regulatory agencies, investment promotion agencies, business representatives and academics. OPENING ADDRESS Starting from the view that investment flows will be increased if uncertainties facing investors are reduced, it was noted that APEC had encouraged its members to implement reforms aimed at encouraging investment policies and practices based on non-­‐binding investment principles, first designed by APEC in 1994. Those principles promote transparency in legislation and its implementation, non-­‐discrimination in the treatment of investors whether they are domestic or foreign, discourage investment incentives and performance requirements that may distort or limit the expansion of trade and investment and the expropriation of foreign investments, or if expropriation occurs, that investors are fairly compensated. APEC member economies are also encouraged to ensure the free and prompt transfer of funds related to foreign investment and that investment disputes will be settled promptly by recognised dispute resolution mechanisms. The principles also promote entry of key personnel for activities connected with foreign investment and the avoidance of double taxation of foreign investment. Complying with the APEC Investment Principles would tend to generate investment flows and flows would be facilitated by deep and liquid capital markets, market driven exchange rates and the free flow of capital across borders. Investment flows are impeded where access to capital is restricted and where capital markets are underdeveloped, making it difficult for investors to lay off risk. A key risk is currency risk particularly in periods, as now, of currency volatility. Prolonged volatility induces economies to resort to capital controls in efforts to minimise the effect of capital inflows impacting on monetary growth and inflation and to prevent currency appreciation impacting on an economy’s exports. Currency volatility also impacts on decision making by businesses which may seek to restructure investments, perhaps sub-­‐optimally from a Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 10

usiness perspective, to mitigate against the prospect of investment returns being adversely affected by currency movements. Recent OEC D and UNCTAD <strong>report</strong>s express concern over the prospect of competitive devaluations arising from volatile capital flows and which would add further to risk and deter investment flows. Longer term movements in currency rates are more likely to reflect increasing or decreasing competitiveness of economies and by monetary policy measures undertaken to deal with domestic conditions. If monetary conditions are loose there will be a tendency for structural depreciation arising from the increase in the supply of that currency. Some global commentators are of the opinion that currency volatility and currency instability are part of a wider problem and that is that the multilateral trade and payments system is unable to adequately cope with the major imbalances now apparent in global economic relationships. One suggestion was for the establishment of a parallel currency for the Asia-­‐Pacific or an APEC reserve currency -­‐ not currency union in the sense of the Euro zone -­‐ but one where domestic currencies would adjust against the reserve currency according to a set of arrangements that would need to be negotiated. While such a system would not eliminate currency instability, the diversification of currencies in the reserve, could dampen currency movements and thereby reduce risk to investment flows. It was recognised that such a proposal would involve complex negotiations within the APEC but the persistence of continuing major imbalances suggest that the proposal, or other ways to reduce currency volatility, ought to be given serious consideration. SESSION 1: FACTORS IMPACTING ON GLOBAL AND REGIONAL INVESTMENT FLOWS The session focussed on global and regional investment factors including major economies’ imbalances and sovereign debt overhang and their importance to investment flows; perspectives on outflows of capital from the Asian region and intra-­‐regional flows; regional mergers and acquisitions; tensions and emerging protectionism; and regional trends in investment risk. There is a fine balance for economies at this phase of the global economic recovery from the global financial crisis and that is sustain the economic recovery as governments’ stimulus packages are wound down. Private business investment including FDI has not resumed its position as an engine of growth and many risks remain in the short to medium term. The potential for uneven growth between developed and emerging economies is likely to worsen existing global imbalances and lead to persistent protectionist pressures for some time to come. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 11

Fundamental weaknesses in macroeconomic management in the Euro area has lead to large surpluses in some countries while others run large current account deficits leading to sovereign debt accumulation. This requires new and cross-­‐cutting approaches to economic and financial management in the euro area to avoid the growth of more sovereign debt. The emergence of G20 and its strong leadership had been an important factor in containing investment protectionism to date and G20 will need to continue to be vigilant. The Japanese tsunami and nuclear disaster has added to the risk of stalling in the global economic recovery, especially as Japan is one of the leading sources of FDI into developed and emerging economies. Asia accounts for about one-­‐third of the global current account surplus and investment in the Asian region can play an important role in supporting the global rebalancing process, sustaining growth in the Asian region and contributing to recovery in the advanced economies affected by the recession. The Asian region received US$ 226 billion in FDI in 2009, second to OECD economies with US$ 547 billion. More interesting however are the underlying trends. FDI inflows into Asia have been increasing for the last two decades and the sharp downturn in FDI flows that accompanied the global financial crisis in 2008 in OECD economies and Eastern Europe did not occur in Asia where inflows remained relatively stable. Asia is the second largest source of FDI next to the OECD, with the increase in Asian outward FDI clearly discernable in the last two decades. Again, these outflows remained relatively stable during the recent crisis compared to outward flows from OECD sources. Aside from the traditional motivations of FDI, Asian economies, most particularly China, are promoting, outward FDI as a rational way of easing current and capital account surpluses and the concomitant exchange rate revaluation pressures. Notwithstanding the strong FDI performance, inward FDI only forms a small component of gross fixed capital formation in most Asian economies, with the four-­‐year average share of FDI inflow ranging from 2% (Korea) to 17% (Vietnam). Moreover, strong FDI flows belie weak investment conditions in some domestic Asian economies. The firm level median investment rate (investment to capital ratio) from 2000 to 2007 in some ASEAN is 10%, lower than other developing economies in other regions. Latin America is at 12%, Middle East and North Africa is at 15%, and emerging Europe at is 16%. Investments in Asia that would support global rebalancing, would be those that promote the growth of domestic Asian markets or make use of the existing regional production networks to produce goods and services that cater to the Asian region or other emerging economies and which increase consumption. Investment also needs to shift away from capital-­‐intensive firms which crowd out SMEs. Investments that help ease financial constraints in Asian economies would also support global rebalancing. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 12

FDI can augment the quantity and the variety of capital instruments in an economy to bring down the costs of capital and make resources more accessible to smaller enterprises. The development of corporate bond markets especially for infrastructure investments would be particularly beneficial. FDI brings with it valuable production, organizational and management technologies important for PPP schemes of infrastructure investments. FDI for infrastructure projects in India, Indonesia, Thailand, Vietnam and the Philippines would be particularly welcome to support domestic private capital formation. Now is a good time for economies to enhance their investment policies and to improve the climate for investment. The cost of capital is relatively low but given Asian demand for capital the cost will inevitably increase. The current excess of global liquidity is facilitating demand for and increasing the prices of existing assets. Liquidity should be channelled into developing assets and infrastructure in developing economies. Improving infrastructure, institutions and regulatory incentives would be important components of strong investment policy directives. However, there are currently insufficient incentives to the owners of capital to invest in some developing economies. Stability in asset prices and improvements in the economic conditions and regulatory, governance and institutional strengthening would be particularly important in attracting long-­‐term investors into infrastructure. In the present environment where there is too much capital and too few firm project opportunities, there is a danger of asset price bubbles and complacency in investment policies and practices. The importance of the political economy to investment decision-­‐making clearly impacts on and can shape the relationship between recipients and sources of FDI. Relationships between economies involved in trading and investing can be enhanced by engagement by both parties in understanding the objectives and policies of the other. This was evidenced in the case of Australian and Chinese officials involving in detailed discussions on their respective trading and investment policy objectives. This had led to improved bilateral relationships on trade and investment policy matters between them and an understanding of political economy aspects that are relevant to good policy outcomes. SESSION 2: BASIC DETERMINANTS OF INVESTMENT AND SOVEREIGN RISK A combination of firm-­‐specific preferences or decisions, overlaid with ‘locational’ factors determine international investment flows. FDI results from several conditions being met: • a multinational corporation sees advantage in owning a foreign asset; • the host country enjoys locational advantages through market size, good infrastructure, lower labour or other factor costs; and • internalizing these advantages creates more benefits to the firm. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 13

Governments influence the question of whether there is a locational advantage for FDI through three avenues: • policy determinants: such as those set out in the OECD Policy Framework for Investment, including investment policy, trade policy, competition policy, tax policy, corporate and public sector governance. • business facilitation measures: including those specifically targeting investment promotion and incentives, but also those aimed at reducing the amount of red tape; and • economic determinants: market-­‐seeking investment; resource availability; efficiency-­seeking investment. Econometric studies have pointed towards economic determinants as being the most important determinants of FDI inflows, especially market-­‐related factors. The size, expected growth of a market and income per capita affect investors’ decision-­‐making more than trade liberalization. Business confidence, sound macroeconomic policies and certainty in the regulatory and political environment also impact on domestic investment flows. Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or defaulting on loans it guarantees. Risk derives from uncertainty and at the basic level from an investment not being profitable or being appropriated by a state, with or without compensation. Thus risk encompasses economic elements (poor growth prospects, productivity etc), political elements (change of government or adverse government policy change) or social factors (business culture or environment such as the level of corruption), which foreign and domestic investors assess in the investment decision making process. Specialist advice is available to investors in assessing political and economic risk factors from various agencies such as the Economist Intelligence Unit, World Bank, Transparency International. Global players like Brazil, Russia, India, China, South Africa and others are becoming increasingly important, not only as recipients of FDI, but as overseas investors in their own right. As a result these countries have a greater stake in, and responsibility for, the global system of rules and practices that govern investment. It is important that they participate in and support the development of harmonised investment standards to reduce investor risk and uncertainty, including reducing barriers to access to foreign investors in their own markets, ensuring fair, equitable, and non-­‐discriminatory treatment to FDI, creating predictable regulatory and legal environments; and supporting dispute resolution procedures. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 14

Key emerging investment risks are those related to the growth of State Owned Enterprises (SOEs) in investing in other countries and investment overseas by sovereign wealth funds. Both sources are increasingly important global investors. Concern was expressed that some SOEs might be motivated by strategic as well as economic considerations, which could impact on the national security implications for host countries. The prospect of intervention by the home government of a state enterprise may impact on host economy markets to the detriment of domestic often privately owned competitors. A number of policy measures based on the principle of “competitive neutrality” can preserve competition in these circumstances including: • maintaining/creating a level playing field through the effective implementation of competition law; • evaluating the taxation, financing and regulatory provisions that apply to SOEs; and • implementing corporate governance reforms within SOEs and reshaping management incentives. These kinds of approaches to managing tensions that SOEs might cause is preferable to using protectionist investment review mechanisms to screen SOE activity and which may draw on national security grounds as the main reason for an increased level of scrutiny. The OECD’s Guidelines for Recipient Country Investment Policies Relating to National Security are useful guides to handling these kinds of issues. A major emerging issue confronting the region concerns the problems relating to the development of public private partnerships (PPPs) in infrastructure financing, planning, implementation and management. The low take up of PPPs is due in part to a failure of governments seeking to transfer too much risk to the private sector in areas beyond the competence of the private sector to manage. Risk allocation between the public and private sectors ought to reflect the capacity of the relevant sector to manage the risk. Australia is an excellent case study of learning from past mistakes and developing innovative approaches to the risk allocation problem for infrastructure projects. Australia has become an attractive place for FDI in infrastructure. It has a credible macroeconomic policy framework, a solid framework for infrastructure development, public sector specialists experienced in designing and implementing PPPs, a welcoming foreign investment policy and a high sovereign credit rating. Learning from mistakes like the Southern Cross project in Victoria, specialist groups to manage PPP projects and ‘centres of excellence’ to encourage best practice have been established. Partnership Victoria, an area of the Victorian Treasury established a framework for PPPs in the State and which has now been transferred into a national PPP policy under the auspices of Infrastructure Australia. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 15

The global financial crisis has increased the level of political risk generally, as evidenced by the prospect major sovereign debt defaults in the euro zone. Political risk is difficult to overcome but important first steps are macroeconomic stability, greater transparency in public accounting, the enforcement of laws and regulations and solid and credible institutions. Other measures which may ameliorate investor risk are reflected in the G20 recommendations for <strong>report</strong>ing on investor protectionism and through bilateral and regional investment treaties and FTAs. SESSION 3: CHARACTERISTICS OF A SOUND FOREIGN INVESTMENT POLICY Investment policy is one of the key government policy determinants affecting the decision where to locate FDI. The OECD's Policy Framework on iinvestment policy provides a useful framework for judging the effectiveness of a country’s investment policies and practices. It does this through focusing on eight important issues, important to the needs of both foreign and domestic investors. It is not a one size fits all approach and takes into account an economy’s stage of development and its political and economic structures. The issues concern: • transparency of laws and regulations; • effective ownership of land and other forms of property; • implementation and enforcement of intellectual property rights laws and regulations; • widely accessible mechanisms for contract enforcement and dispute resolution; • well-­‐defined limits on expropriation power with proper compensation provided; • equivalent treatment for domestic and foreign investors with regard to de facto investment opportunities; • ensuring international cooperation through a network of treaties on investment promotion and protection including review processes for compliance; and • ratification and implementation of binding international arbitration. Perhaps the most relevant aspect of an attractive foreign investment policy for a prospective foreign investor is that of transparency in the laws and policies of the economy of the country of interest. Transparency has many forms, including the need for properly documented principles-­‐based corporate law (including commercial and property law), fair and equitable taxation principles, efficient and credible administration and clear and properly documented investment approval processes which treat investors on a non-­discriminatory basis. Investment screening procedures should aim to prevent negative public and private outcomes further down the project life cycle. Issues often arise in infrastructure financing as a consequence of the governance model applying to PPP processes, for example in relation to government procurement. The preferred process should be clear and published, include the selection criteria and based on commercial and bankable risk allocation that leads to a transparent published outcome and Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 16

integrated into the legal framework. Moreover, good governance, quality and transparent information and political commitment are crucial. Because the preparation of bids for infrastructure projects can be timing consuming and expensive to private sector bidders, governments should make explicit and clear to all bidders project details and provide information sufficient to enable effective bidding. Where governments lack the resources to undertake feasibility studies and research they should consider outsourcing these activities to service professionals. APEC member economies could consider the value of establishing an ombudsman for PPP projects with the objective of providing term support for investors over the life cycle of a project. A question of particular relevance in shaping investment policy is whether governments should pursue investment policy options specifically to attract more new FDI or, alternatively, consider policies which make the most out of the current stock of investment. Some economies with young populations, high levels of capital expenditure and strong current account surpluses may have less real need for policies to attract foreign investment. In those economies the relevance of investment policies that may involve the granting of special licences (monopoly rights), tax breaks, and protection from imports or export subsidies is questionable. Moreover, investment screening processes should avoid the facilitation of the installation of second hand technology such as has been seen over the years in car industries, as has occurred in India and Australia. Policies that favour particular sectors such as the traded goods and services sectors can have unintended consequences. For example, holding down exchange rates to provide benefits to export and import replacement sectors also provide an opportunity for foreign direct investors to acquire undervalued domestic assets. Among the types of policies that would make the most value of existing FDI include supply-­side capacity building of domestic enterprises. For example, greater numbers of domestic small and medium enterprises (SMEs), confronted with the perennial challenges of accessing finance, technology, human resources and the acquisition of market information, could benefit from new opportunities that come from FDI inflows. And such flows, which help the development of regional and global value chains, may offer nation-­‐wide benefits. Technology transfer through new or existing FDI is not always assured. Another policy option is to buy best-­‐technology from abroad rather than waiting for technology to arrive as part of a foreign private direct investment. Markets are already facilitating such technology transfer. China’s investments in Africa involve technology transfer but there are attendant problems in the form of the lack of domestic skills to meet and support the investment. Large-­‐scale skills transfers to support technology transfer are a constraint on FDI in some developing Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 17

egions and may require policy actions which facilitate migration into the investor recipient regions. SESSION 4: BARRIERS TO INVESTMENT Barriers to investment may occur at the border in the form of specific barriers to foreign direct investors or behind the border where they impact on both foreign and domestic investors. Investment barriers are basically policies that prevent investment from flowing freely. The World Bank and other agencies undertake various indicators undertaking measurement of the impact of barriers on investment flows and they also show progress being made in easing barriers to investment in the Asia Pacific region. Some emergency response measures following the global financial crisis and which have the effect of supporting domestic industries are barriers to increased FDI flows. The use of screening prospective foreign investment arising from increasing concerns, purportedly on national security grounds, especially over the operations of SOEs, is another barrier to investment flow. These developments have provoked international cooperation through G20 in attempts to combat rising investment protectionism. The impetus for developing economies to undertake analysis of their investment policies to determine how they might be impeding investment flows is necessarily a matter for decision for individual economies to make. Reforms taken unilaterally by an economy may well yield major benefits, which are unlikely to be achieved as a consequence of reviews undertaken in response to external pressures. The experience of the ill-­‐fated OECD Multilateral Agreement on Investment (MAI) illustrates the fact that international cooperation to promote model investment rules requires that all parties to a negotiation must be effectively involved and consulted. MAI negotiators engaged in negotiating perfect model investment treatment rules at the expense of agreeing measures that could lead to a liberalisation investment regime that would apply on the entry into force of the agreement. The scale of policy reservations submitted by participating countries undermined the intent of the agreement and support for the treaty, including from business, dissipated. APEC's Investment Expert's Group (IEG) has identified border and behind the border barriers (BTB) to investment. It concluded that many border barriers still exist while some progress had been made in reducing or eliminating them in some economies. Further work has been commissioned to consider the impact of these border barriers on economic growth and regional integration. As FDI generally represents a relatively small proportion of gross domestic capital formation in APEC economies, differences in investment barriers at the border are unlikely to explain why investment rates as a proportion of GDP are low in some economies. Analysis is also needed on the impact and extent of BTB barriers to investment. Such barriers are not just formal restrictions on investing in certain business activities — although these do exist. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 18

BTB barriers cover a raft of domestic policies, rules, procedures and laws (or lack thereof) that unnecessarily impede investment in domestic businesses. The barriers come in many forms from excessive regulation, unclear property rights and poor legal systems to a lack of appropriate laws that foster competition. They act to increase costs, risk and impede competition within an economy. Work undertaken by IEG in APEC sought to highlight measurable benefits to an economy by reducing or eliminating barriers to investment. Specific APEC success stories were drawn on and this has been useful in encouraging economies to pursue reforms aimed at enhancing the liberalisation of investment regimes and facilitation measures. Some economies have benefitted from using World Bank indicators, for example, Mexico, while others, Vietnam and Indonesia, have undertaken OECD PFI assessments programs. The World Bank produces various indicators measuring investment barriers and the success of measures to improve performance. The comparative performance indicator of the East Asia and the Pacific (EAP) tracks success in reform activity and the indicator Investing Across Borders measures the impact of barriers at the border. This shows that EAP countries have more restrictions on foreign equity ownership than any other region, and for the ease of establishing a foreign subsidiary and time to register property rights they are also comparatively weak compared with other regions. On the other hand, EAP countries are comparatively good on access to international arbitration. The ease of establishing a foreign subsidiary shows considerable variation across EAP, for example: PNG 108 days, Cambodia 36 days to Singapore 9 days. The World Bank had done additional analysis in East Asia and Sub Saharan Africa where investment proposals require ministerial approval. This was considered by the WB as a significant impediment to foreign investment where administrative lag times prevent competitiveness. Mexico provides a useful case study in the use of the World Bank's Doing Business Indicators. The indicators contributed to a coordinated investment reform program at all levels of government in Mexico. At its core is a strong institutional and legal framework where reforms to barriers to investment are assessed as to their impact on business costs, the level of risk and uncertainty and the impact on competition. Other important factors taken into account is the impact on the environment and sustainable economic growth, and the relevance of investment to globalisation and competitiveness. Prioritizing reforms for action is directly related to the level of impact and the ease with which actions can be implemented. Direct impacts are also given higher priority over indirect impacts. Progress in easing barriers in Mexico was slow initially but based on widespread consultation and involvement. The government collaborated with key universities, other Latin-­‐American economies and undertook community surveys to gather Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 19

new ideas and issues to be considered during reform. Sub-­‐national levels of government were involved in the process including a strategy of promoting competition among the various regions to reform more quickly. NAFTA made a positive contribution to Mexico’s investment reform program. New financial instruments were introduced to channel foreign investment to infrastructure projects including facilitating investment by pension funds. SESSION 5: INVESTMENT IN INFRASTRUCTURE The Asian Development Bank (ADB) estimates that the Asia Pacific region must spend $US 8 trillion over the next decade to meet critical energy, transport, communications and other physical and social infrastructure needs. This involves an estimated 250% increase from the previous decade. Inadequate regional infrastructure capacity has hindered economic development and led to the questioning of current strategies to involve private investment including FDI in infrastructure projects. Some emerging economies are unable to attract an adequate supply of private investment into infrastructure projects. There are many reasons, including weak tariff and price regulations applying to the supply of services by utilities; unreliability in honouring concession commitments; the inconsistent enforcement of laws; corruption and poor governance practices; lack of availability of long-­‐term local currency financing at fixed interest rates; weak accounting and disclosure norms and under-­‐developed securities markets and supporting legislation. Challenges in promoting infrastructure investment include mobilising domestic and international finance, managing and reducing risk over the life of infrastructure projects, enhancing the role of multilateral agencies and the private sector, and the role that APEC might play in supporting regional infrastructure development. There is insufficient depth in some of the capital markets of emerging economies in the region to facilitate the issuance of bonds to finance long-­‐term debt that is needed for infrastructure projects. Private sector investment in infrastructure which recovered to between 10% and 13% of total infrastructure financing in Asia in 2008 (still well down on the 25% level achieved in the mid 1990s) has declined since the global financial crisis. New ways of incentivising investors are necessary. While the paucity of financing through local bond markets is a constraint, another critical major constraining factor is the limited capacities of some emerging economies in the planning, preparation and implementation skills to operate successful and effective PPP programs. A starting point in building capacities is improving policy, regulatory and institutional frameworks. Where private sector participation is required good governance is crucial. Having strong public sector capacity to plan is a basic foundation to good governance. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 20

There is an important need for the development of capacities to plan and test and develop proposals that will facilitate supportive private sector responses, including the skills to procure and manage suppliers. Government champions are necessary and the formation of centralised specialised PPP support units or centres of excellence are needed, as are the skills to interact with the private sector and to understand the factors that are likely to attract serious private sector business groups. From the viewpoint of the investor a key issue is having the trust that a government will ensure that commitments entered into at the commencement of a project are delivered and respected over the life of a project. Governments also need to demonstrate to the community the benefits that can accrue by involving private sector financing and management, particularly where this will lead to a payment for services, say water or sanitation services, previously delivered free as a public service good. Building political and community trust is a complex and time-­‐consuming process, as is determining how risks may be shared by the public and private sectors. Managing expectations about what is achievable through PPPs is also important. PPPs are not a universal solution to all infrastructure development needs and there is no one standard model. An expectation that more than say 15/20 % of the region's total infrastructure project could be financed through PPP’s is probably unrealistic. For most emerging economies, their capacity to handle more than two PPPs per annum would probably place too many strains on the administrative and technical capacities of agencies at their current levels of capacity, and strain the skills and personnel of private finance markets. That said, the building of a coordinated pipeline of PPP infrastructure projects is vital if serious private sector contractors, financiers and managers are to be attracted into long-­‐term PPP partners in an economy. A good case study in developing public sector capacity to manage infrastructure projects is provided by Partnerships Victoria, an arm of the Victorian Treasury. Formed in June 2000, its aim is to achieve value for money in the public interest, focusing on whole of life costing, output specification and the optimal allocation of risk between public and private parties. Since 2000, 21 PPPs have accounted for approximately $A10.5 billion of capital investment in Victoria. Partnership Victoria demonstrates the importance of setting up an effective PPP institutional framework that has firm political support and one based on transparent guidelines and processes for competitive bidding. On the funding side, while any budgetary cycle is a challenge to any government, a PPP project does place an obligation on a government to commit, once having commenced a Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 21

project, to it being completed. It is most desirable that all parties, including private sector financiers, be involved throughout the tender process and that they are consulted in all phases of projects. Financial market developments are critical to effective PPP outcomes in the longer term. PPP financing necessarily involves exploring opportunities to better align long-­‐term PPP assets with long-­‐term funds available from pension and insurance funds, as well as from capital markets and funding from banks, and the support available from multilateral development and export credit guarantee agencies. Sovereign wealth fund investors are likely to become a more important component of PPP financing. The way society develops and the form of social systems, which evolve, ought to be important determinants of infrastructure requirements. The Australian SMART institute considers the system of infrastructure systems in responding to future challenges in PPPs. It assesses the behavioural characteristics behind infrastructure. Communities should be encouraged to identify long-­‐term societal needs and these need to be channelled in advice to government on what the performance requirements ought to be and the “liveability” requirements that infrastructure should deliver. Governments and communities often fail to accept that specific infrastructure assets are connected to a system of assets and that the broader economic and social system supports these assets. The global focus is changing from growth to quality of life, including importantly in China, and this will impact on infrastructure development and outcomes. . The role of multilateral development banks in financing infrastructure requirements is changing as a consequence of the G20 Development Agenda and the associated Infrastructure Action Plan to be developed. Until recently the role of MDBs in promoting PPPs was modest but it is now recognised that they have an important role in promoting infrastructure to support growth and the reduction of global poverty, and that they should seek the involvement of the private sector in development. The G20 has tasked the major multilateral development finance institutions, including ADB, to take a central role in implementing the Action Plan. Similarly, the <strong>report</strong> prepared for the 17th APEC Finance Ministers’ Meeting in Kyoto in November 2010 provides an excellent roadmap for advancing PPPs in the APEC region. The APEC Business Advisory Council (ABAC) is developing a concept to help build trust between public and private sector stakeholders and with a focus on the provision of advice by highly experienced private sector experts to political leaders in APEC’s developing economies. This proposal envisages the creation of an Asia Pacific Infrastructure Partnership or APIP. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 22

SESSION 6: INVESTMENT IN RESOURCES SECTORS Despite the adverse effects of the global financial crisis on world growth and activity, global resources sectors and especially mining continue to enjoy boom conditions with cash earnings projected to hit record levels in 2010 to 2012. China is the primary driver of demand growth for many commodities being the world’s largest consumer of iron ore and steel, coal, aluminium, copper and nickel. India and Brazil and emerging markets are expected to take up any slack in demand should growth in China moderate. Because of growing world demand, resources companies are undertaking investment in regions once regarded as risky, including in West Africa, South America and in the Asia Pacific region -­‐ Papua New Guinea and Mongolia. Expansion into these markets has created a greater focus on sovereign risk and how this should be priced in project evaluation. Capital is generally available to finance mining projects including associated infrastructure requirements. Most large mining projects are now contingent upon the mining infrastructure solution to extracting and supplying the commodity to market. This requires a significant commitment to and investment in infrastructure, in addition to the mine development. The extra uncertainty and risk in the period before a project generates cash flows, provides additional challenges to both miners and to the providers of capital. Resource companies are under pressure to increase ROE by moving from primarily equity based to debt skewed financing structures as soon as it is possible, particularly in funding mining infrastructure. Project financing techniques will be key to unlocking and funding the massive infrastructure requirements of the sector. Project financing techniques are challenging when significant mining infrastructure, that may be shared with other users, is dependent on the mining operation. There are also additional challenges when applied in a developing country jurisdiction. The success of project financing is dependent on the appropriate allocation of risk and reward to the different stakeholders. China's SOEs are adopting a "go global" strategy in an effort to secure China’s growing energy needs. China became a net importer of gas and coal in 2009 as energy demand grew rapidly. National projects in the field of new energy (and the associated project financing sector), are unlikely to satisfy growth in demand, even though national policies also include growing the services sectors and reducing emphasis on manufacturing and resource intensive activities. China also promotes energy conservation and emissions reduction as well as the development of clean energy. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 23

China’ s overseas investments in energy and natural resources overseas often face problems -­‐ referred to earlier in this <strong>report</strong>. They include screening of investment proposals on national security grounds. China would benefit if potential recipient governments improved their support and service system with a view to simplifying examination and approval procedures. But rising constraints on FDI in mining and resources are not solely an issue for Chinese SOEs. In a sector that will increasingly require significant infrastructure development and funding, existing constraints on FDI in mining and energy applied by recipient countries to investments by resource exploiting companies, need to be examined carefully with a view to: • ensuring independence, certainty and consistency of application of host country laws and regulations including a welcoming stance for FDI; • clarifying responsibilities, powers and regulation between local, regional and federal jurisdictions; • consideration to facilitating strategic agreements between the investor and the government or facilitating joint ventures/partnerships between the investor and major local companies, or other successful FDI investors • agreeing to provide Treaty protection to foreign investors, ensuring national treatment and taking measures which aim to reduce risk and uncertainty for foreign investors • maintenance of a stable tax regime • encouraging investment in mining infrastructure (rail, port), potentially through some form of tax or royalty incentive, particularly in large prospective mining areas that are underdeveloped • consider the need for competition law in respect of regulated or monopoly assets. It makes for improved relationships if foreign investors respond to host country sensitivities about their investment by considering support for local enterprises by purchasing, where competitive and the quality is appropriate, goods and services, such as equipment manufacturing, project management and energy services. They should also consider integrating the complete industrial chain link as distinct from activities which lead to value adding in the investor’s home economy. In Chile, expectations of FDI are fairly typical with the objective of seeking to exploit the economic benefits domestically from the countries natural resources through: • a goal of getting as much value add as possible in country; • associated knowledge and skills transfers; • a requirement for a social licence to operate; • policies increasingly sensitive to environmental management; and • a desire for local content, participation. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 24

Mining royalties in Chile are channelled to health, education and social infrastructure in communities affected by the mining industry. With 40 per cent of exports being mining exports, $US45 billion in reserves, this policy is expected to provide finance for social development programs for at least another 10 years. To eradicate poverty, Chile pursues an open economy model, based on good governance, accountability and transparency. Economy-­‐wide development is determined by the success of a strong agenda based on integrating Chile with the global economy and partnerships and the development of strategic long-­‐term relationships. SESSION 7: INVESTMENT IN FINANCIAL SECTORS Understandably the focus of much recent attention by global financial system policymakers has been on the impact of the global financial crisis on financial markets and the reforms necessary to ensure that countries are better prepared to mitigate future financial crises. Pre-­‐GFC an issue of concern to the APEC business community was the strongly held view that governments embrace policies that provided for greater financial sector openness, in conjunction with broader structural reform policies in order for both the investor and the host economy, to fully realize the benefits of FDI. Significant evidence was provided by international institutions like the World Bank and others, including an ABAC commissioned <strong>report</strong> from 2004 (the Dietrich Report), that FDI in financial services sectors helps improve competitiveness of the host economy, has positive benefits for consumers and provides capital, technology, new product lines, managerial knowledge, enhanced skills and the restructuring of inefficient enterprises. ABAC produced a checklist of the major impediments to FDI, which, if removed, would substantially benefit the host economy and corporate investors. An efficient financial sector implies openness to best practice, which may well require the benefits that arise with foreign investment. However, this view is under challenge by some economies as a consequence of the global financial crisis. Emerging markets in Asia were significantly less affected by the crisis than other regions, in part, it is argued, because exposure to toxic assets at the centre of the crisis was limited by a constraints and limitation of local capital markets and banks. A question arises as to how protected local financial regulations need to be, particularly in relation to foreign equity in banks. The financial sector is regulated to maintain prudential stability, to limit contagion and to protect consumers so why there is a need to also control foreign equity interests in banking, particularly when in some markets governments seek to consolidate their banking sectors – often as a prudential safeguard? The approach in some developing economies is to have dominant state-­‐owned full service banks or to limit the amount of a local bank that foreign investors can buy, usually to a Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 25

minority stake -­‐ meaning any investment in such banks by a foreign entity is more akin to a portfolio investment and with limited control and with the prospect of reputation risk. From a commercial viewpoint, a foreign minority investor is unlikely to make the same commitment via the amount of technology transfer as a controlling investor would. The result may be sub-­‐optimal efficiency gains for local financial systems. A better approach may be to consider protecting the top four or five institutions only, whilst encouraging 100% control of smaller institutions. Here the result is skills transfer, technology transfer and consolidation, while protecting the integrity of the local financial system. APEC is developing a number of initiatives to strengthen the region’s financial systems, including enhancing the region’s bond markets. While there has been some deepening of markets, domestic markets generally remain inadequate to meet private sector financing needs. Obstacles remain in the form of market infrastructure and the legal, policy and regulatory frameworks. Work is on-­‐going through the ADB and the ADBI and through the Chaing Mai initiative to enhance sovereign bond and corporate bond issuance in the region. This work is important to facilitate the integration of the region’s financial systems. In another initiative ABAC recommended to APEC Leaders in 2010 that APEC economies collaborate to develop wholesale securities markets open only to professional investors (with less strict disclosure rules than those designed to protect retail investors). It is intended that this could eventually lead to the development of regional arrangements for securities settlement, the removal of barriers to entry and to further steps to create a regional professional securities market. ABAC has also recommended regional collaboration between government and regulatory officials and market players to reduce barriers to cross-­‐border settlement and to promote the use of foreign securities as eligible collateral throughout the region to enable major domestic and foreign financial institutions and investors to participate in cross-­‐border collateral markets. The cross-­‐listing of listed funds from outside and within the APEC region, such as Exchange Traded Funds (ETFs), has offered investors greater investment choice along with potentially lower costs and better returns. But there remains a gap with respect to the cross-­‐border recognition of unlisted funds. It is difficult to market unlisted funds in APEC economies and as a consequence a proposal is under consideration for an Asia Region Funds Passport (ARFP). This would allow unlisted funds to be marketed across jurisdictions and to capitalise on the rapidly growing mutual funds market ($US30 trillion globally). At the moment while there is no regional agreement on the cross-­‐border recognition of unlisted funds, some APEC economies are relying on European regulated structures (UCITS). Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 26

If APEC members can adopt the ARFP it will require coordinated regulations that allow for the manufacture, distribution, management and administration of unlisted funds within the region. This will open up a range of important new investment options and employment opportunities for APEC member economies. SESSION 8: CLOSING SESSION Discerning the capacity building needs in investment policy, facilitation and promotion agencies in the region and in particular the capacity of agencies to help manage and ameliorate risks to private investment flows was the underlying objective of the symposium. As noted in the introduction, this <strong>report</strong> will contribute to the preparation of a training program for policy makers involved in the development of investment policies, promoting and facilitating investment in APEC economies, and which will be delivered by the Centre in Melbourne later in 2011. Major factors impacting on investment flows were highlighted. Asia is now the second largest source and host of FDI and sovereign wealth funds and major investments by State Owned Enterprises from China and from other economies are influencing both flows and the way in which economies receiving those flows are shaping their policy responses. As well as impacting on investment decision making, some of these political economy challenges involve policies relating to the long-­‐term management of natural resources, sustainable development and the way in which the revenues generated from resource endowments are handled. In essence the political economy aspects of investment flows has become more sharply into focus than previously and this is impacting on investment relationships between economies and businesses. APEC is engaged in helping shape policies which will have cross-­‐border investment implications in the form of the promotion of public private partnerships (PPPs) required to meet the challenges of designing, implementing, managing and financing the massive infrastructure needs of the region. To be successful these will need to bring together the skills of the private sector specialists with those of government agencies. Similarly, in unlocking the savings in Asian societies – to fund regional infrastructure and investment more broadly – policies to deepen financial systems and capital markets to promote bond issuance and the movement of cross-­‐border mutual funds are also matters being pursued by APEC. There are major challenges to development in progressing these matters efficiently and expeditiously in the region. There are major risks if these challenges are not met. Other matters involving the political economy involve risks arising from political and economic transformation are highly relevant. Mexico and Indonesia are undergoing major political and economic transformation and the pace and quality of managing the transformation is impacting favourably on business assessments of risk in those economies. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 27

Risks arising as a consequence of sovereign debt overhang in Europe and of the continuance of major global imbalances, of surges in protectionism and the failure to conclude the Doha Development Round are relevant to investment decision making. Risks to business occur as a consequence of natural disasters – the recent massive destruction in Japan is impacting on global supply chains, stocks and on outward investment to many APEC economies – and there are risks caused by crises of a man-­‐made variety, including for example, the global financial crisis and its repercussions on capital controls and on the availability of trade and investment finance. In assessing best practice approaches that APEC economies might consider in shaping their investment strategies in responding to these various risks it is perhaps most relevant to emphasise the importance of fundamental policy settings to induce and encourage investment. The impact of the global financial crisis and the weaknesses exposed by an era of loose monetary policy, excessive liquidity and de-­‐regulation has led to a strengthened resolve in the G20 and in other forums, and importantly in APEC, to focus on solid policy foundations and policy coherence and these certainly relate to sound investment policies in financial services but more broadly. As regards the policy framework for investment, the goal of open investment in the region framed in the Bogor declaration and reflected in APEC’s Non Binding Investment Principles remain as fundamental guiding principles. The guidelines and recommendations on investment policy and practices in the work of the OECD and in particular the Policy Framework for Investment (PFI), UNCTAD, WTO and in relevant Free Trade Agreements and Bilateral Investment Treaties all contribute to a strong investment policy framework. Importantly, APEC economies can gain considerable value in self-­‐assessing their investment policy frameworks by drawing on for example the OECD’s PFI and there are many helpful benchmarks and indicators, for example those prepared by the World Bank, that economies may draw on in reviewing and enhancing their investment environments. A practically oriented capacity building program for investment policy makers from the region, based on the issues raised in the symposium ought to embrace some or all of the following themes: • the measures and institutional approaches required in shaping an economy’s responses to investment policy in the context of heightened interest in political economy issues Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 28

• drawing on the OECD’s Policy Framework for Investment, the best practices to involve ministries with different responsibilities in forming sound and comprehensive investment policies; and the promotion and facilitation of investment • the value and use of the OECD’s Guidelines on multinational enterprises in the promotion of investment flows • ways to involve civil society, academics, trade union, and the business community in framing best practice investment policies • case study/ies on a self-­‐assessment by an economy on aspects of its investment policy under aspects of the OECD’s PFI framework • the value and use of the World Bank’s indicators in reviewing and enhancing investment policies and promoting investment flows • linkages between APEC’s work on investment and its work on infrastructure and financial system deepening and strengthening and the role of G20 in international policies impacting on investment. Report on the APEC Regional Symposium: Policies and environment conducive to investment Page | 29

PROGRAM: TUESDAY, 5 TH APRIL 2011VenueEmily McPherson Building, Lecture Theatre (Room 9, Level 3), RMIT University8:30 - 9:00 Registration9:00 - 9:10 Welcome Address Prof Ian Palmer, Pro Vice Chancellor,College of Business, RMIT University9:10 - 9:30 Opening Address : Reducing uncertainty;increasing private investment flows9:30 - 11:00 Session 1 : Factors Impacting on Globaland Regional Investment FlowsGlobal investment factors/major economies’imbalances/sovereign debt overhang• Asian regional perspectives – outflows fromthe region / intra-regional flows / mergers andacquisitions• Detailing with tensions and emerging protectionism• Regional trends in investment riskGary Judd QC, Chairman, ASB Bank Limited,CBA Group; ABAC member New Zealandand Co-Chair of the Advisory Group on APECFinancial System Capacity BuildingModeratorAndrea Goldstein, Head, Global Relations,Investment Division, OECDSpeakersFrank Di Giorgio, Principal Advisor,Australian Foreign Investment Review BoardDoug Brooks, Assistant Chief Economist,Asian Development Bank11:00 - 11:15 Morning Tea11:15 - 12:45 Session 2 : Basic Determinants of Investmentand Sovereign Risk• Key measures to promote investmentflows – evidence of success• Measures to reduce sovereign risk to supportforeign investment flows• Is business responsive in current environment?ModeratorTom Westcott, Senior Consultant, ITS GlobalSpeakersJonathan Fritz, Economic Counselor,United States’ Embassy in AustraliaMichael Daly, Executive Director, Ernst and Young12:45 - 1:45 Lunch1:45 - 3:15 Session 3 : Characteristics of a Sound ForeignInvestment Policy• Specifics of a sound foreign investment policyto attract foreign capital• Assessment of ways to improve the foreigninvestment policy framework in regional economiesModeratorMasato Abe, Economic Affairs Officer, UNESCAPSpeakersTony Cole AO, Senior Partner, MercerJohn Walter, Partner, Corrs, Chambers, Westgarth3:15 - 3:30 Afternoon Tea3:30 - 5:00 Session 4 : Behind the Border Barriersto Investment• Indicators of barriers impacting on investmentflows• Progress in easing barriers to investmentin the Asia Pacific region• Regional measures to promote reformsto investment policiesModeratorRoy Nixon, former convenor of APEC IEGSpeakersPeter Kusek, Senior Investment Policy Officer,World BankEnrique Prieto, Director of International Affairs,Ministry of Economy, Mexico6:30 - 9:00 Dinner Cumulus Inc. 45 Flinders Lane, Melbournecumulusinc.com.auPOLICIES AND ENVIRONMENT CONDUCIVE TO INVESTMENT 5

WEDNESDAY, 6 TH APRIL 2011VenueEmily McPherson Building, Lecture Theatre (Room 9, Level 3), RMIT University8:45 - 9:00 Registration9:00 - 10:30 Session 5 : Investment in Infrastructure• Challenges in promoting infrastructureinvestment• Mobilising domestic and international finance• Reducing risk in infrastructure• Role of multilateral agencies and private sector• Role for APECModeratorKate O’Sullivan, Assistant Director, PartnershipsVictoria, Department of Treasury and Finance,State Government of VictoriaSpeakersKamran Khan, Director, Singapore Urban Hub,World BankJon Lindborg, Advisor, Director General’s Office(Public-Private Partnership) ADBGarry Bowditch, Director, SMART InfrastructureFacility, University of Wollongong10:30 - 11:00 Morning tea11:00 - 12:30 Session 6 : Investment in Resources Sectors• Resource needs in Asia Pacific region• Developing strategic partnerships in resources• Public and private sector rolesModeratorJohn West, Senior Consultant,Asian Development Bank InstituteSpeakersZhao Youli and He Chongyang, FinanceResearch Institute of Industrial and CommercialBank of ChinaMario Artaza, Consul General of Chilein Hong Kong SAR and Macao SARPaul Murphy, Partner, Mining and Metals,Ernst & Young12:30 - 1:30 Lunch1:30 - 3:00 Session 7 : Investment in Financial Sectors• Policy options to manage barriers in investmentin financial sectors in the region• Improving financial regulatory coordinationin the regionModeratorRod Maddock, Executive General Manager, GroupStrategy, Commonwealth Bankof AustraliaSpeakersYoshihiro Watanabe, APEC Business AdvisoryCouncil Member of JapanJeremy Duffield, Chairman, Australian Centrefor Financial Studies3:00 - 3:30 Afternoon tea3:30 - 5:00 Session 8 : Key Messages and Conclusions• Identification of key measures to reduce riskin investment in the Asia Pacific region• Policy options for governments• Role of private sector• Advantages of enhanced regional coordination• Identification of capacity building needs forregional investment policy, facilitation andpromotion agencies.ModeratorKen Waller, Forum Chairman,Director, Australian APEC Study CentreSpeakersJon Lindborg, ADBJohn West, ADBIAndrea Goldstein, OECD6APEC REGIONAL SYMPOSIUM

Delegates Prof Aaron Smith Deputy Pro Vice-­‐Chancellor, Industry Engagement RMIT University Australia Mr. Alejandro Alcocer Production Officer Bilateral Business Committee Mexico-­‐Australia / New Zealand Mexican Business Council for Foreign Trade, Investment and Technology, COMCE Mexico Mr Andrea Goldstein Senior Economist OECD Mr Andrew Moon Consultant, ITS Global Australia Mr Arunish Chawla Personal Assistant to Deputy Chairman Planning Commission India Mr Ashley Chaleyer Senior Policy Adviser Department of Business and Innovation Victorian Government Australia Mr Aslan Kanukoev Head of State Programs of Regional Development Department of Inter-­‐Budgetary Relations Ministry of Finance of the Russian Federation Russia Ms Betty Komes A/Assistant Secretary Policy & Monitoring Branch Department of Commerce and Industry Papua New Guinea Mr Brendan Berne Assistant Secretary, APEC Branch Australian Department of Foreign Affairs and Trade Australia Mr Cameron Boardman Head -­‐ Australia & New Zealand Invest Hong Kong Mr Cesar Duran Vice-­‐Chairman Mexico-­‐Australia-­‐New Zealand Bilateral Business Committee Mexican Business Council for Foreign Trade, Investment & Technology (COMCE) Mexico Ms Claudia Lucía Paliza Vizcarra Analyst, Private Investment Ministry of Economics and Finance Peru Mr Daniel Callahan Political/Economic Officer United States Consulate in Melbourne Australia Mr Denis Forau Meone Policy Analyst Economic Reform Unit Ministry of Finance and Treasury Solomon Islands Dr Dennis Hew Director, Policy Support Unit APEC Secretariat Singapore Mr Diego Velasco Consul-­‐General of Chile in Melbourne Australia Mr Do Van Su Head of Foreign Investment Division Foreign Investment Agency, Vietnam

Mr Don Ajith Perera Abeysekera Director, Department of Public Enterprises Ministry of Finance and Planning Sri Lanka Ms Dong Yang Researcher, Research Division Asia-­‐Pacific Finance and Development Center, Ministry of Finance China Mr Dorjkhand Togmid Deputy Director General Development Financing and Cooperation Department Ministry of Finance Mongolia Dr Doug Brooks Assistant Chief Economist Development Indicators and Policy Research Division Asian Development Bank Mr Enrique Prieto Director of International Affairs Directorate of General Foreign Investment Ministry of Economy Mexico Dr Frances van Ruth Group Manager, Strategy and Research Department of Business and Innovation Invest Victoria Australia Mr Frank Di Giorgio Principal Advisor Foreign Investment Review Board Australia Mr Ganbold Bataa Deputy Director Department of Accounting Policy Ministry of Finance Mongolia Mr Garry Bowditch Director SMART Infrastructure Facility University of Wollongong Australia Mr Gary Judd QC Chairman ASB Bank Ltd New Zealand Mr Gavin MacLaren Partner, Allens Arthur Robinson Australia Ms Georgia Halliday Policy Adviser Department of Business and Innovation Victorian Government, Australia Mr Glenn Maguire Executive Consultant Evans & Peck Australia Dr Guann-­‐Jyh Lee Executive Director Economic Division Taipei Economic and Cultural Office in Australia Ms Hajah Normah Suria Hayati Jamil Deputy Permanent Secretary Development of Primary Resources Ministry of Industry and Primary Resources Brunei Darussalam Mr Hay Sovuthea Deputy Head Social Policy Division Supreme National Economic Council Cambodia Mr He Chongyang Senior Manager Planning and Strategy Research Division, Finance Research Institute Industrial and Commercial Bank of China China

Mr Heath McMichael Director A/g, APEC Branch Department of Foreign Affairs and Trade Australia Mr Ideris Haji Ali Senior Marketing Manager Marketing and Investment Promotion Brunei Economic Development Board Brunei DarussalamMr Igimu Momo First Assistant Secretary Structural and Investment Policy Division National Department of Treasury Papua New Guinea Mr Ivan Pomaleu, OBE Managing Director Investment Promotion Authority Papua New Guinea Mr Jeremy Duffield Chairman Australian Centre for Financial Studies Australia Mr John Kitchen Foreign Investment and Trade Policy Division Australian Treasury Australia Mr John Gall Consultant -­‐ Financial Services Franklin Templeton Investments Australia Ltd Australia Mr John Larum Former President of China Business Asset Management Group UBS Australia Mr John Walter Partner, Corrs Chambers Westgarth Australia Mr John West Senior Consultant Capacity Building and Training Asian Development Bank Institute Mr Jon Lindborg Advisor Public-­‐Private Partnership Asian Development Bank Mr Jonathan Fritz Counselor for Economic Affairs United States Embassy Australia Mr Jonathan Sinton China Program Manager International Energy Agency Mr Kamran Khan Head, East Asia Infrastructure Finance Practice Group World Bank -­‐ Singapore Urban Hub Ms Kate O'Sullivan Assistant Director Partnerships Victoria Department of Treasury and Finance Victorian Government Australia Mr Ken Waller Director, Australian APEC Study Centre RMIT University Australia Mr Kenichi Iwase Chief Representative Japan Bank for International Cooperation Australia Mr Khamlien Pholsena Director General Department of Planning Ministry of Planning and Investment Lao PDR

Mr Korshed A.B.M Alam Additional Secretary Ministry of Industries Bangladesh Mr Lachlan Pontifex Director, AusAID Multilateral Policy and International Partnerships Branch AusAID, Australian Government Australia Ms Lauren Streifer Project Officer Australian APEC Study Centre RMIT University Australia Mr Liang Qinjun Head, International Banking Department Industrial and Commercial Bank of China China Mr Luen-­‐Jeng Liou Deputy Director Economic Division Taipei Economic and Cultural Office in Australia Ms Luhua Tang Senior Industry Adviser Financial Services Australian Trade Commission (Austrade) Australia Mr Maciusela Naqesa Lumelume Director Asset Management Unit, Financial & Asset Management Ministry of Finance Fiji Mr Manothong Vongsay Deputy Director General Investment Promotion Department Ministry of Planning and Investment Lao PDR Ms Margot Kilgour Manager, Australian APEC Study Centre RMIT University Australia Ms Mariani Haji Sabtu Acting Deputy Director of Economy "Ease of Doing Business" Unit Ministry of Industry and Primary Resources Brunei Darussalam Mr Mario Artaza Consul General of Chile in Hong Kong SAR and Macao SAR Chile Mr Masato Abe Economic Affairs Trade and Investment Division UNESCAP Mr Md. Shamimul Haque Senior Assistant Chief Planning Commission Government of Bangladesh Bangladesh Mr Michael Daly Partner, Ernst & Young Australia Mr Mike Elliott Partner Global Mining & Metals Leader Ernst & Young Australia Mr Nikunj Soni Board Chairman Pacific Institute of Public Policy Fiji Mr Paul Murphy Partner, Mining and Metals Ernst & Young Australia Mr Peter Kusek Senior Investment Policy Officer Investment Climate Advisory Services World Bank Group

Ms Pia Simonsen Desk Officer Trade Liaison Section Department of Foreign Affairs and Trade Australia Mr Richard Foster Director, Foster Infrastructure Pty Ltd Australia Dr Rod Maddock Executive General Manager Group Strategy Commonwealth Bank of Australia Australia Mr Roy Nixon Symposium Academic Coordinator Australia Mr Sahil Vaid Research Analyst Strategic New Ventures Mitsui & Co. Australia Ms Senate Marama Mualaulau Chief Economic Planning Officer Budget Division Ministry of Finance Fiji Ms Serena Lillywhite Mining Advocacy Lead Oxfam Australia Australia Ms Shuai Yang Deputy Director Program Division Asia-­‐Pacific Finance and Development Center, Ministry of Finance China Mr Sirikumara Weligama Arachchige Don Gunasinghe Director, Department of National Planning Ministry of Finance and Planning Sri Lanka Mr Soknang Heng Personal Assistant to Secretary General of CDC Council for the Development of Cambodia Cambodia Ms Thida Myint Director Directorate of Investment and Company Administration Ministry of National Planning and Economic Development Myanmar Mr Ting Kok Onn Markets Group, Competition Unit Australian Treasury Australia Mr Tom Westcott Senior Consultant ITS Global Australia Mr Tony Cole AO Senior Partner Mercer Australia Mr Tyler Gillard Legal Expert OECD Mr Vijay Singh Chauhan Director Department of Economic Affairs Ministry of Finance India Mr Xiaoming Zhang Head, International Banking Department Industrial and Commercial Bank of China, Henan Branch China Ms Yan Xu Head, International Banking Department Industrial and Commercial Bank of China Ningbo Branch China

Mrs Yin Robards Deputy Head Australia & New Zealand Invest Hong Kong Mr Yoshihiro Watanabe Advisor Bank of Tokyo-­‐Mitsubishi UFJ Ltd Japan Mr Zaw Win Than Director, Department of Mines Ministry of Mines Myanmar Ms Zhao Jing Manager, International Banking Department Industrial and Commercial Bank of China China Ms Zhao Youli Deputy Division Chief Urban Finance Research Institute Industrial and Commercial Bank of China China