Sovereign risk – in this context, the notion that government action could put a private enterprise or investment at unforeseeable risk – is not something historically associated with a democratic country with a free market economy, like Australia.
Queensland already suffers the ignominy of the highest political risk rating of any State in Australia because of recent policy chaos, creating implications for directors.
This reduces the confidence of the Queensland business community and damages Queensland’s reputation amongst international investors; it is also placing new risks in the laps of company directors.
For a public company director, the prospect that up to $150 million of shareholder capital could be placed in jeopardy by a haphazard policy decision, without any consultation and in contradiction to the policy environment set in place by that Government sounds too far-fetched to believe.
However that is precisely what happened on April 18 as yet another Government decision undermined its talk of being ‘open for business’ when it announced a surprise ban on underground coal gasification, or UCG.
The decision was made with no consultation and came despite an Independent Scientific Panel, established by the Government, finding that there were no environmental grounds for not approving further use of the technology.
Put aside for a moment any personal views on the merits or otherwise of UCG. If seemingly with impunity the Queensland Government can ban an entire industry on a whim then which industry will have the door slammed on it next?
How can directors be expected to meet their obligation to recognise and manage risk? In the present case, how are directors to assess the risks of committing significant shareholder funds over a period of more than eight years to develop a new and innovative industry when, despite openly and actively following Government-articulated policy to the letter, this investment could disappear in a puff of smoke.
What extra due diligence should a board consider when contemplating further investment in Queensland to better assess the risks that the Government might simply change its mind on a whim?
The lack of transparency around the decision making process for some of these major decisions defies credulity. It also places directors in a difficult – if not impossible – position in trying to meet their obligation to make timely and balanced disclosure.
While the Government issues florid press releases that “Queensland opens door to private infrastructure investors” there appears next to no consideration that the very investors they are seeking to attract make investment decision over 20 to 30 years over several different election cycles; they need stability above all else. Carbon Energy has spent close to a decade proving that its world leading CSIRO developed technology is a way for Australian industry to affordable cheap syngas. All the talk about the need for affordable gas for industry and ‘reserving natural gas’ for local industry may be solved by using UCG-produced syngas.
One of Australia's important competitive advantages as a destination for foreign investment, when compared with its neighbours, is the predictability of its legal framework and reputation for sound, democratic Government.
Much has been made about the importance of attracting increased Chinese investment in Australia particularly in the wake of ChAFTA.
The Premier herself has highlighted her focus on driving overseas investment, only last month participating in Australia Week in China as a sign of that commitment. She talks of the need “to partner with our trading nations” and yet undermines exactly the sort of stability that is required if we are to do so successfully.
The international business community wants to see that all foreign money is welcome and safe in this country. Until such steps are taken, sovereign risk will remain a reason for foreign businesses to hesitate to invest in Queensland.
The challenges for directors navigating this complex environment have only increased, particularly in the age of shareholder activism in which we live.
By Louis Rozman, executive director at Pacific Road Capital - Mining Investment Funds
(Opinion) -- Boards are well used to considering the implications of political and sovereign risk and analysing complex geopolitical trends when investing in countries like West Africa or parts of South America – but what about Queensland?