It’s been an eventful few years for Australia’s Foreign Investment Review Board. In late 2015, it was damned when it did not have the powers to vet the controversial acquisition of Port of Darwin, but it spent most of 2016 being damned when it did advise against Chinese-backed bids for the acquisition of electricity network Ausgrid and the sale of S Kidman, one of Australia’s largest beef producers.
“We’ve been the canary in the coalmine on national security,” says Patrick Secker, one of the FIRB’s six board members. “Ten years ago, problems like cyber-security and terrorism had a different impact. So we were very pleased when the government established the Critical Infrastructure Centre earlier this year, which sits under the Attorney General, as we can now quickly clear up what are the security risks in a potential foreign acquisition and move on from there.”
The CIC was set up in late January to act as a one-stop-shop to assess any national security threats to Australian infrastructure. That means, from now on, the CIC will look at any national security issues related to foreign acquisitions of critical infrastructure before the FIRB gets involved. It also means (though Secker did not spell it out) that the CIC will likely take some of the heat away from the FIRB if certain proposed acquisitions get rejected.
In a way, it was inevitable the FIRB would come under increased scrutiny. On one hand, you have a once-in-a-generation privatisation programme, with state governments flogging billions of dollars’ worth of assets; on the other, the FIRB has just gone through the most comprehensive set of reforms in its 40-year history, gaining the power to scrutinise state government-led deals and charge fees from applicants so the Australian taxpayer no longer shoulders its costs.
Though the FIRB remains the same advisory body it has always been, with the actual decisions to reject deals made by the Treasurer, its expanded powers, granted in 2016, came on the back of the storied acquisition of Port of Darwin by China’s Landbridge group in late 2015. The details are well-known by now, but not only was the deal not examined by the FIRB, it also managed to displease the US, which has military interests connected to the port.
“We asked questions behind the scenes on Port of Darwin and we consulted with our partners in the Department of Defence, who said there was no problem, even though, constitutionally speaking, we had no power then,” Secker recalls. “The issue there was our allies, who were not told about the deal. But in the end, I don’t think it’s been a problem.”
The funny thing about the FIRB is that, despite all the attention it gets when it advises against a deal, most transactions that cross its desk are not problematic.
“About 50 percent of the transactions we oversee end up with no conditions attached; the other 40 percent very rarely get conditions attached, but if they do they are there to ensure Australian interests are represented; it’s only about 10 percent of deals that generate concerns. And when there are issues, they will get very quick action from our department and applicants will get a very quick idea of the nature of the problem,” Secker explains.
Some believe the process could be further streamlined. At our Melbourne Summit, Gary Sorely, a director at the UK’s Foresight Group, suggested “the introduction of a pre-screening process, where the FIRB could raise red flags would help” keep bidding costs down, now that it charges applicant fees to the tune of A$78 million ($62 million; €53 million), according to the FIRB’s latest annual report.
But, in general, Secker’s assertion is borne out in the numbers, with Australia recording 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.
Operation is key
Warren Mundy, managing director of Bluestone Consulting and a director of the Sydney Desalination Plant and Transgrid, argued at Melbourne that governments are using ownership regulation to deliver national security outcomes, pointing out that is not the most efficient way to manage national security risks. For Secker, though, it’s who operates these assets that really counts.
“Say a Canadian pension fund wants to buy an asset and all they want is something that offers a return on their investment, but they would be fine with having the operators here in Australia – that wouldn’t be a problem. We might have some conditions, but if the Canadians are not the operators, it would be OK,” he explains.
Things get trickier when the proposed asset operators are foreign, in which case the FIRB might move to attach some conditions. “For example, there could be a demand to have an independent chairman and half the board of an acquired company be independent Australian citizens with national security clearances,” Secker says. “Most people agree with the conditions we set – but we don’t budge on them.”
That is partly what happened with the high-profile rejection behind Ausgrid’s first Chinese bids from Cheung Kong Infrastructure and State Grid. “The ownership was not a problem with the original Chinese bidders – it was always about who was going to operate the asset,” Secker explains. While he could not go into any detail, he did tell our Melbourne attendees that a national security tip from an Australian ally eventually derailed the original Chinese bids.
That it took three months for the New South Wales government to learn of the rejection – a much criticised delay at the time – was, according to Secker, just bad timing.
“We received the tip one day before the election started. During elections, there is a protocol that governments running for election don’t make major decisions – or at least, not without consulting or getting agreement from the opposition. Because it was a long election period – nine weeks – plus the swearing in of the government, there ended up being a three-month delay. Now, the Critical Infrastructure Centre would’ve cleared that up quickly.”