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Foreign investors: forced to swap political patronage for social licence
April 11 2018
Opinion by Katherine Teh-White
Foreign Chinese investment in Australian property and agribusiness has soared in recent years and is increasingly becoming an emotive issue politicians are responding to with tighter rules and regulation.
State and federal governments have introduced tax hikes and tighter regulation for overseas investors as they grapple with housing affordability and public concern about being locked out of the market.
The Federal Government’s latest plan to give local buyers a head start is a new 30-day period for prospective local farmland buyers to buy-up property before foreign investors can bid.
Whether these laws will be effective remains unclear. Proponents on both sides of the debate claim the laws will not stop vendors seeking out the best possible price. More often than not it will be a price local buyers simply can’t compete with.
What is clearer is that community concern remains high and political patronage is waning for overseas buyers. This is in the context of foreign investment in agricultural land dropping from 14.1 per cent to 13.6 per cent last financial year.
The core issue emerging time and time again is that companies are taking the regulatory approach, focussing on securing government approvals rather than using an effective social licence strategy to engage with stakeholders when expanding to foreign markets. This is especially evident if we consider the Australia-China context.
There is no denying the importance of Australia’s relationship with China. Never before have there been more people of Chinese origin in Australia. Mandarin surpassed Italian in 2011 as the most spoken language in Australia after English. Our nations’ economics are highly complementary with the service sector set to be a key driver of growth in the near future for both countries.
Our differing histories, political systems and strategic interests, however, mean there is potential for tension that each country will need to work at if we are to manage our relationship.
One key source of tension is the lack of emphasis companies put on achieving a social licence to operate. If we are to continue to further our reciprocity and align our comparative advantages we must enhance our understanding of social licencing.
If we consider from a social licence perspective, over the years here in Australia there has been a range of poorly conceived and executed approaches by Chinese business groups to foreign investment. Although these cases may be few in number, their examples echo loudly around the country and are dredged up by opponents when a new investment proposition is put forward.
If we take a look at the experiences of the Ningbo Dairy group for example, it is clear how ignoring community and societal concerns can have enormous implications on a project’s lifespan. In its acquisition of five farms in South Gippsland the Group planned to station 1000 milk producing cattle inside barns and construct a bottling plant on a plot of land the size of the MCG.
The Group’s executives bragged to the media how they would reduce costs and improve labour efficiency by bringing in 2000 Chinese farm workers, achieve higher milk production per cow with Chinese methods, and that they thought Australian milk prices were so low they were “a joke”. No community or stakeholder engagement took place and as a result over 400 submissions were made to the local council by the community.
The Ningbo Dairy Group may have won its federal and state approvals but it hadn’t won the hearts and minds of the people. Community outrage was rife and the plans were unanimously rejected by the Bass Coast Shire Council.
The naivety of the group was its idea that federal and state government approvals were all it required to progress with its aggressive plans. However, its lack of understanding of societal expectations and community sensitivities is what caused the unravelling of its plans and the ultimate loss of its regulatory licence to operate. The Foreign Investment Review Board approval of the Ningbo deal meant nothing when it came down to dealing with the local council.
So the question is from a business point of view, what are the values that foreign companies must embed in their businesses to ensure they are futureproof? Futureye’s robust social licence methodology outlines three crucial elements of a company’s strategy which must all be in alignment if a project is to survive:
- The project must consider the long-term perspective.
- The company must display a genuine commitment to meeting and exceeding societal expectations.
- The company must be open to expert advice from external consultancies and strategic advisors.
If we examine the Ningbo case according to these three conditions there is a distinct misalignment. While the firm outlined a strategic plan that considered the long-term horizon it failed to engage with the community and hear their concerns and chose to forego working with consultants or experts on their entry into Australia.
Crucial to this case is the company’s decision to implement Chinese farming practices in favour of Australian ones.
The community already had a preconceived ethic and expectation when it came to farming cattle so Ningbo Dairy was directly challenging that ethic. By refusing to consult with the community the Group generated widespread outrage. Communities need to feel they have been heard and respected by those that are involved in the planning, implementation and operation of a project; and that their concerns have been addressed.
Like many of the clients that I have worked with, the Ningbo Group believed that its government approvals meant it didn’t require expert advice in developing its entrance strategy.
One of the Group’s executives even expressed to The Australian that he couldn’t understand how the local council could overrule the company’s plans given that it had received approval from both the federal and Victorian state governments.
There is a reputation for Chinese business groups to avoid seeking advice from management consultancies as this advice could be alternatively sought free of charge by consulting within their personal network.
It is common for groups to try to execute deals with advice obtained from their network of personal contacts, few of which might have relevant experience in a sector like agriculture or doing significant business transactions in Australia.
With rising societal expectations and activist sophistication it is vital for business groups to see the value in working alongside management consultancies to address the myriad of issues that could impact its social licence from the outset and to ensure they adapt in an effective manner.
The rate of societal change in expectations now presents the greatest organisational risk if you don’t measure and manage effectively. In current and new operations a social licence becomes your company’s safety net against rising expectations. It helps you to anticipate and measure community concerns around your operations – leading to more predictable and sensible policy outcomes that will not jeopardise your commercial returns.
In essence, a social licence provides a lens on risk that helps industries and companies act before regulatory and political risk escalates.
A social licence is not built through selling benefits, but through meaningful engagement with stakeholders who are highly involved in each issue. This engagement involves using risk communication and outrage mitigation to understand expectations, ultimately addressing their underlying causes to resolve disputes.
With an abundance of Chinese investors eyeing Australian industries the goodwill of local communities is vital if they want their new ventures to succeed. Whatever sector Chinese investors are focused on, they must understand the expectations of the affected communities and perform in a way that both meets and exceeds those expectations at each stage of their project’s lifespan.
Involving communities that are affected early in the decision-making framework, and ensuring trade-offs are mutually identified and agreed, will significantly reduce the risk that decisions are contested.
However, to implement engagement strategies successfully, the required change in approach must be first understood and then supported broadly, across the organisation.
At Futureye we understand the emotional barriers to change. We acknowledge these barriers and work to overcome them conceptually, organisationally and throughout implementation.
Our methodology catalyses change, incentivises change, builds a social licence to operate and solutions that drive improved social, environmental and economic outcomes.
We know how to identify emerging issues so proactive management is possible and we have a process to shift people from ineffective methods to more effective methods that create impact through a shared vision and value.
To do this assessment we have a robust methodology that assesses risk that we can then translate into a process to create a strategy to gain the tacit approval of the community.
Futureye provides a transparent and systematic methodology for crisis management which is at counterpoint to the ad-hoc responses typified by so many of our competitors.
When this approach is combined with our unrivalled track record of managing major crises, the full benefits are clear. When customers, consumers, employees, investors, stakeholders, regulators and governmental bodies are all demanding immediate answers and action, we are working beside you. We can help you adapt and innovate to meet and even exceed expectations.
The prospects for future growth in the breadth and depth of the commercial relationship between China and Australia are excellent.
The ability for future growth in the reciprocity of our services is dependent on harvesting an understanding of the nuances surrounding social licence to operate.
As Chinese investment into Australia and conversely, Australian investment into China is likely to continue into the foreseeable future, it is imperative that companies adopt sophisticated approaches to the market to ensure societal concerns and community expectations are adequately met.
It would provide a stronger bilateral framework for the future – building our relationship in ways which allow both countries to take a long-term view of our interests in each other.