Letting them down gently

Last week’s decision by the Australian government to block CK Infrastructure’s takeover bid of gas pipeline giant APA Group was perhaps not a huge surprise, following several similar rulings in recent years.

And while the reaction of some market observers has been to express disappointment that foreign (read Chinese) money has again been turned away, it feels a bit different this time.

Treasurer Josh Frydenberg stated in his preliminary view that the takeover would be “contrary to the national interest” of Australia.

Much of the initial reaction has, of course, focused on the fact that CK Infrastructure is based in Hong Kong, so by extension is Chinese in the eyes of many, despite it being a long-established publicly listed company.

Frydenberg has been careful to try to use more conciliatory language than past Foreign Investment Review Board rejections, though, particularly as the decision comes at a delicate time in Sino-Australian relations, when it looked like a thawing of tensions was on the cards.

Specifically, he emphasised the decision was not an “adverse reflection” on CK Group or its related companies and said the government welcomed its existing investments in Australia’s energy sector, where it owns Duet Group.

While it is not a good thing for foreign investment to be discouraged, Frydenberg’s preliminary view has left room for CK to amend its bid, by either partnering with a domestic investor or offering to divest more assets beyond those in Western Australia it had already put on the table.

It’s easy to see why the Australian government would prefer this – and Australian investors, too.

The Australian Competition and Consumer Commission previously waved the bid through, even though a successful takeover would lead to all of Australia’s east coast gas infrastructure being concentrated in the hands of just two companies.

While investors obviously prefer monopoly or near-monopoly assets, it’s reasonable to say that this might not be in the best interests of consumers. And when both of those companies are Chinese – or at least closely linked to China – it’s obvious where the security concerns come from.

ACCC chairman Rod Sims has said that competition rules did not allow his organisation to refuse the bid, so it was left to the Foreign Investment Review Board and Frydenberg to effectively do his dirty work and block the bid.

Sims also failed to intervene over Transurban’s recent acquisition of WestConnex, suggesting that it might be worth looking again at how competition rules function in Australia and whether they are fit for purpose.

But we are where we are. CK and China more broadly will obviously feel disappointed, especially as this isn’t the first time this has happened to CK (it was part of the bid for Ausgrid that was blocked by then-treasurer Scott Morrison in 2016).

Even though CK is listed and separate from the Chinese mainland, and even though it offered to divest assets to reduce the amount of critical Australian infrastructure it would own, it’s hard to say that Frydenberg’s security concerns were not at least somewhat justified. And it’s even harder to argue that the decisions wouldn’t find widespread support among Australian politicians and the general public.

Most importantly, though, his tone is much more conciliatory than in the past, with the decision coinciding with foreign minister Marise Payne’s visit to China, who was tasked with fronting up to the Chinese over what her colleague in Canberra had decided.

In a region affected by a US-instigated trade war, China can’t afford to dump a potential Pacific partner – and, crucially, neither can Australia.

When viewed in the context of past events, the decision to block CK’s bid for APA looks at first glance like the continuation of a worrying trend. But it’s a more nuanced decision that is unlikely to have major long-term ramifications for Australia’s relationship with China – or Chinese investors’ willingness to look at the Australian market.

Write to the author at daniel.k@peimedia.com