Get ready for a new era of post covid-19 protectionism

Countries are once again assessing FDI restrictions in the wake of the global pandemic, partly to avoid critical infrastructure assets being picked up on the cheap.

With the coronavirus forcing all of us to turn inwards, it’s perhaps unsurprising to find that governments are also starting to tighten restrictions on foreign investment in critical infrastructure.

The measures taken in Australia are the most severe to date – perhaps unsurprisingly – with Treasurer Josh Frydenberg removing investment-value and investor-type thresholds that previously formed part of the government’s foreign investment directive in the wake of the covid-19 crisis. “Protecting the national interest” is at the heart of the policy amendment, he said.

The European Union, which usually adopts a subtler, more diplomatic tone, was forthright on how it views this potential consequence of the pandemic. “You should use all options to protect critical European companies from foreign takeovers or influence that could undermine our security and public order,” said Ursula von der Leyen, president of the European Commission, to EU members last month.

Taking its cue, Germany’s Ministry of Economics this month sought to amend the country’s Foreign Trade and Payments Act to strengthen its screening process for foreign investments.

“With the reform of the investment review law, we are creating the legal prerequisites to be able to examine foreign investments, for example in companies with critical infrastructure, even more comprehensively and with foresight,” said the minister of economy, Peter Altmaier. “The current situation shows that we need our own skills and technologies in certain areas in Germany and Europe. In this way, we can better protect German and European security interests.”

Lest we forget, this was the country which, in 2018, realised its foreign investment controls were too weak to formally prevent China State Grid from buying a 20 percent stake in regional electricity transmission operator 50Hertz from IFM Investors. What followed was a protracted and convoluted process that ended with state development bank KfW buying the stake instead. As a result, the government later reduced the screening threshold for foreign takeovers from 25 percent to 10 percent.

Without being more specific, “foreign powers” were also highlighted by Denmark’s defence minister, Trine Bramsen, who warned of domestic infrastructure companies being acquired on the cheap as liquidity needs begin to take their toll.

This distrust of foreign investors – often thinly veiled code for Chinese state-backed investors – in critical infrastructure has been a common theme in recent years, and the current crisis will surely exacerbate such tensions.

Even Dominic Raab, foreign secretary of the UK, which before the outbreak resisted US pressure to allow Huawei to build parts of its 5G network, said last week that it cannot go back to “business as usual” with China once the virus recedes.

However, the unique trappings of covid-19 should make others wary of the latest round of protectionist statements and policies, which are unlikely to be aimed simply to keep Chinese influence at bay.

Many industry sources we’ve spoken to in recent weeks – while concerned about the virus both personally and professionally – have expressed interest in making future acquisitions at what could turn out to be significant cost reductions. Once the dust settles, we will almost certainly find ourselves in a buyers’ market.

That is exactly what’s worrying governments around the world.

Italy, for example, even took the extra step of extending its screening laws to entities within the EU as well as outside it, thus highlighting its energy, communications and transport sectors as those at risk of exploitation.

It is no coincidence that the EU’s first screening laws on foreign investment came soon after the 2008 financial crash, as valuations became depressed. Since then, populism and protectionism have only increased.

So while governments’ focus today is on defeating the virus and lifting lockdown measures, many are sending signals that their infrastructure assets will not be allowed to go cheaply.

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