Year in Review: Making the free market a little less free

While the West has long distrusted Chinese investment in infrastructure, in 2018 this has been extended beyond China, exposing worrying trends.

We shouldn’t be surprised by politics anymore. After all, polarisation and leaders from the fringes have risen to try to topple the world order. Yet in 2018 we still managed to be surprised.

After several months of claiming it was powerless to stop China State Grid investing in regional transmission system operator 50Hertz, the German government went the long way around. Persuading majority-owner Elia to once again exercise pre-emption rights to block the Chinese, Germany subsequently used state development bank KfW to buy a 20 percent share, being sold by IFM Investors, on “national security grounds”. For what it’s worth, KfW said it “does not assume any entrepreneurial or strategic responsibility for the transaction”.

Here was one of the world’s leading nations effectively circumventing free-market rules to ensure China State Grid did not gain a minority share in its electricity transmission system – and in the process, recognising its own laws were inadequate to do this in a more straightforward manner.

While the distrust around Chinese investment is certainly not new, steps taken to block it had rarely been seen outside Australia. The German government subsequently reduced the threshold for scrutinising investments to 10 percent, from the previous 25 percent level.

Germany was indeed ramping up action on rhetoric that had included voices from the EU. In late 2017, European Commission President Jean-Claude Juncker said: “We are not naive free-traders,” when introducing laws designed to restrict investments from government-linked non-EU investors.

But Germany’s actions have taken place against a backdrop that is no longer just about Chinese investment. Years of privatisation to the highest bidders are now being replaced by a desire to protect infrastructure assets from foreign investment, arguably in general.

In Denmark, energy titan Orsted is looking to sell power distribution subsidiary Radius. Reported Chinese interest has indeed raised eyebrows, but so has the interest of potential Canadian and European investors in the business.

Denmark’s own push to beef up foreign investment restrictions will arrive too late to intervene in the Radius sale, but it did not stop finance minister Kristian Jensen issuing a thinly veiled warning to Orsted, amid calls within the Danish parliament to keep Radius in Danish hands.

“Of course, we consider that a company in which the state is a major shareholder does not want to sell vital infrastructure to a buyer we are uncertain of,” he said. “I have great confidence in both the executive board and the board of directors in Orsted. I’m sure they have a very sensible sense of politics for what will be a problematic sale.”

The issue also reared its head in one of the industry’s largest ever deals. While 2017 saw a bidding war emerge between Italy’s Atlantia and Spain’s ACS for the latter’s compatriot, Abertis, the two eventually combined amid Spanish government fears that Abertis could end up in the hands of foreign owners.

Looking ahead, 2019 will likely see the privatisation of France’s Aéroports de Paris, with industry sources believing the French government is unlikely to contemplate offers that don’t involve domestic investment.

Also in Europe, Italy’s relatively nascent government is seemingly looking to give Britain’s Jeremy Corbyn a run for his money by floating proposals to nationalise the country’s fibre network, in part to exclude the involvement of foreign investors.

There is a trend here and it’s a potentially worrying one. While countries such as the US and Australia have long had varied forms of opposition to foreign investment, this was largely, as in the case of Germany and 50Hertz, explained on the grounds of “national security”.

The fallout, though, is different. Countries which are, ironically, part of one of the world’s largest free-trade blocks are trying to make clear they welcome neither Chinese investment nor, in some cases, investment from its union neighbours.

The free market in which infrastructure investment has thrived seems increasingly under threat.