Tough foreign-investment rules put Australia on collision course with Chinese interests

27 March 2018 9:03am
Australian Flag

23 March 2018. By James Panichi .

When in 2015 a Chinese company won a bid for a 99-year lease to operate the port of Darwin, in Australia’s strategically important territory dubbed the Top End, the news was met with euphoria by local politicians.

The A$506 million ($390 million) deal with the Rizhao-based Landbridge Group was a “fantastic outcome for the territory,” according to Chief Minister Adam Giles, who went on to say that the Chinese port-logistics and petroleum-transport company had an “outstanding track-record of investment and innovation.”

But the celebration soon prompted soul-searching, amid concerns that by granting a Chinese company access to a key piece of infrastructure, Australia had put its national security at risk.

The port’s new Chinese owner, Ye Cheng, added fuel to the fire in a media statement, in which he described the deal as his contribution to China’s One Belt, One Road initiative — the Chinese government’s ambitious strategy to link the country through ports, roads and railways to Southeast Asia, South and Central Asia, parts of Africa and ultimately Europe.

Australia’s federal government had already expressed concerns about foreign ownership of strategically important assets — including key infrastructure and agricultural land. But the Darwin Port deal marked a turning point in government policy.

Since then, the government has ramped up its institutional response to foreign-ownership concerns, creating a new oversight office to list and monitor strategic assets, establishing a register for the foreign ownership of land and implementing rules allowing the government to stop telecommunications deals.

Since the Darwin Port acquisition, the government has also unleashed its discretionary powers to block large investment deals, rejecting the acquisition of a stake in the property portfolio of S. Kidman & Co. by Chinese-owned Dakang Australia, then putting the kibosh on a bid for electricity company Ausgrid by mainland Chinese and Hong Kong companies.

What had become clear was that Darwin Port would be the high-water mark for Chinese investments in Australia. In December, Canberra announced draft legislation that, if enacted, would formalize a number of regulatory restraints affecting Chinese investment in the country.

And while the government has been mindful not to mention China directly in the legislative overhaul, arguing that the proposed laws apply to all foreign investment, the debate about foreign investment has found itself entangled in a broader discussion about Beijing’s influence in Australia.

‘Critical assets’

In announcing the Security of Critical Infrastructure Bill 2017 last December, Australia’s then attorney general, George Brandis, said that while he recognized the “many benefits” of increased foreign investment, the country’s critical infrastructure remains exposed to “sabotage, espionage and coercion.”

The proposed legislation was Australia’s chance to “manage these challenges” in the high-risk areas of electricity, gas, ports and water.

The laws would include a “critical assets register” to provide understanding of “who owns, controls and has access to critical infrastructure assets.” It would also grant the attorney general the power to issue a “last resort” direction to force an operator to take specific action to safeguard national security.

Although the draft legislation is designed to “strike an appropriate balance between managing national security risks and minimizing the regulatory burden on owners of critical infrastructure,” the government pulled no punches in naming a long list of industries and key infrastructure that will be covered.

These new laws are just one part of a range of new regulatory measures imposed to manage foreign investment.

In February, the government announced that the sale of electricity transmission and distribution assets, as well as some electricity generation assets, would face new restrictions and conditions for foreign buyers.

Last year, the government established an office specifically for the purpose of managing security risks of foreign bids for critical infrastructure. The Critical Infrastructure Center will develop national security risk assessments and provide “security and certainty” to investors.

This regulatory revamp comes at a time when Australia is also strengthening its laws to restrict the operation of lobbyists acting on behalf of foreign countries. Rightly or wrongly, the issue of foreign influence has become conflated in a recent political scandal over former politicians working for Chinese interests in Australia.

Discretionary powers

The argument that the raft of new initiatives will create “certainty” for investors is one that the Australian government appears keen to promote — partly because its recent decision to use discretionary powers to block foreign acquisitions has left investors complaining that they don't know where they stand.

Under current arrangements, Australia’s treasurer may intervene to prevent a foreign acquisition if this is recommended by the Foreign Investment Review Board, or FIRB, which oversees all foreign investment — the threshold varies according to the industry involved.

But Treasurer Scott Morrison’s decision to stop the planned acquisition of Ausgrid has prompted an angry response from China, with media reports suggesting Beijing had called for “fair treatment” for its companies as they plan to invest in Australia.

Speaking after the announcement, Morrison said that he would have preferred that those companies putting forward a bid for Ausgrid had been advised “a lot sooner” in the process of the regulatory concerns. And, indeed, the Critical Infrastructure Center's stated purpose is to manage this process and inform the parties involved in the deals of regulatory concerns early on in negotiations.

What's more, by codifying the government’s power to intervene, the new foreign investment laws are designed to create certainty, in the wake of past controversial decisions.

Yet, there is no denying that the government's discretionary powers to intervene have created some bad blood.

The Ausgrid decision pitted the Australian government against the Chinese state-owned State Grid Corporation, which was warned off submitting over A$10 billion worth of bids for the electricity company.

While the Kidman decision — a company with family ties to Australian actress Nicole Kidman — saw Morrison conclude that the deal to acquire a controlling stake of a property company that covers over 1 percent of the Australian landmass would be “contrary to the national interest.”

“Australians must have confidence in how we regulate foreign investment, to ensure continued support for foreign investment that is critical to our economy in providing jobs and growth,” Morrison said at the time.

But storm clouds are gathering once again, with Chinese telecommunications company Huawei preparing to bid to participate in Australia’s nascent 5G telephone network — something which may raise the hackles of the Australian government.

Under the provisions of another recent security initiative, the telecommunications-sector security reforms, due to be implemented in September, Canberra could “direct a carrier…to do, or not do, a specific thing” that is necessary to “protect networks and facilities from national security risks.”

If not, the government could simply block Huawei’s involvement — just as it did in 2012, when the company was banned from tendering on the National Broadband Network.

Either way, Australia’s tough stance won’t win it many friends among Chinese companies whose investment the Australian economy still craves.

ABA 2019