Infra graduates to the national security mainstream

Germany has tightened foreign investment rules with a heavy focus on the asset class – following a trend that is sweeping other developed countries, including the UK and Australia.

Germany amended its foreign investment rules last week and, in line with what’s happening in other developed economies, the changes focus heavily on infrastructure.

From now on, BMWi’s definition of acquisitions that could “endanger public security or order” includes amendments focusing on the ownership and operation of critical infrastructure, international law firm Pöllath + Partners outlined in a note to its clients. Among the German watchdog’s concerns are: the development of industry-specific software for the operation of critical infrastructure; telecoms surveillance measures or manufacturing related to it; cloud computing services related to critical infrastructure; and control over the approval of components or services in the telematics infrastructure arena.

As you will have noticed, there are a lot of infrastructure-related worries on the German government’s mind. But the country is far from alone in this regard: on 21 June, UK Prime Minister Theresa May’s plans to give her government the power to intervene in foreign takeovers of critical infrastructure were one of the highlights of the non-Brexit agenda featured in the Queen’s Speech.

But if you want a stronger sense of where this wind is blowing, you need only look at how the powers of Australia’s Foreign Investment Review Board have evolved over the past few years – not to mention the establishment this January of the country’s Critical Infrastructure Centre.

Some of the changes that governments are now implementing are, one could argue, a long overdue recognition of the need to protect infrastructure against data leaks and cyber intrusions. Others appear to acknowledge the global impact of seemingly sovereign local decisions, much to the chagrin of anti-globalisation proponents.

Take the much-discussed 2015 sale of Port of Darwin by Australia’s Northern Territory government to Chinese group Landbridge. At the time, FIRB oversight of the sale was not required due to an exemption under the Foreign Acquisitions and Takeovers Act 1975 for interests acquired directly from an Australian government by foreign private investors. That subsequently changed after a very public ticking off by the US, Australia’s long-time ally, which has military interests connected to the port.

The Australian Treasurer’s veto of the first round of Chinese bids for the privatisation of New South Wales electricity network Ausgrid offers another example. As FIRB board member Patrick Secker told us on the sidelines of our recent Melbourne Summit (watch out for the full interview soon): “The ownership was not a problem with the original Chinese bidders – it was always about who was going to operate the asset.”

As Secker explained to attendees at the conference, a national security tip from an Australian ally eventually derailed the original Chinese bids. But what he is also hinting at is more stringent oversight that could lead to certain conditions – such as demanding an independent chairman and half the board of an acquired company be independent Australian citizens with national security clearances, for example.

In that sense, the old adage of partnering with local capital might be upgraded from common sense to a key requirement for certain types of investment.

Speaking of common sense, it’s important to keep in mind that, despite all these high-profile rejections, Australia actually recorded a A$55 billion increase in approved foreign investment in 2015-16 to a total of A$248 billion, compared with 2014-15 – with China the number one source of foreign capital at A$47.3 billion, according to the FIRB.

One thing is certain, though – foreign investment in infrastructure will never be quite so care-free again.

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