We need a new approach on foreign investment and national security
17 Nov 2015|

Aggregate foreign ownership of Telstra is limited to 35% of the privatised equity.

In 2013-14 for the first time China ($27.7 billion) was the largest source country for approved proposed foreign investment in Australia, overtaking the US ($17.5 billion).

Also for the first time, Chinese private sector investment exceeded state-owned enterprise investment, both in terms of volume and value, (although sometimes the distinction between the private and state owned sector can be murky in China).

A useful report by KPMG and the University of Sydney on Chinese FDI in Australia can be found here. This global tracker on Chinese FDI is also helpful.

With this background, I read with interest my colleagues Paul Barnes and Peter Jennings’ article in Friday’s Australia Financial Review. They argued that the 99-year lease on strategic sections of the Port of Darwin to a company wholly owned by the Chinese firm Landbridge Group should prompt an urgent review of the Foreign Investment Review Board to assess whether it’s got the ‘right skills, resources and powers to assess the national security implications of foreign sales or long term leases.’

They suggest that in a worst case scenario operational control of the Port of Darwin could ‘facilitate intelligence collection of the tactics, techniques and procedures used by Australian Defence Force and US Marine elements during their North Australian deployments’.

They’re rightly concerned about China and FDI: a history of commercial and military espionage, including cyber-attacks on western targets. It’s worth noting that WA Premier Colin Barnett announced in May that the Fremantle Port is to be sold through a 49-year lease.

There’s obligations that can be put into leasing arrangements with foreign companies or controls on how an asset is managed. We can insist on local board representation. The Northern Territory government, for example, will retain an initial 20% stake in the Port in the case of the recent lease to a Chinese company. But Landbridge must find an Australian company to take the 20% share within five years.

We can put limits on foreign ownership, as we do with airports. Aggregate foreign ownership of Telstra is limited to 35% of the privatised equity.

The strength of our economy is a national security asset, so liberating debt from state governments is important. Governments owning assets can be an economic drag.

State and territory governments will want to ensure that when it comes to asset sales or long-term leases that they’re as commercially attractive as possible.

But as part of balancing economic strength and national security governments can, as I’ve said, put in controls that relate to the terms of a lease, impose conditions that relate to business continuity, or place requirements that certain types of customers will be dealt with in certain ways. The Port of Darwin, for example, is under a strict security regime as mandated by the ISPS Code. And in the event of a major defence emergency the Defence Act allows the Commonwealth to ultimately step in and exercise control.

The first set of issues raised in Paul and Peter’s op-ed revolves around identifying factors that should lead to the FIRB exercising heightened scrutiny.

The Commonwealth could help here by classifying the nature and type of critical infrastructure assets, noting that what was once of national security importance may not be in the future.

It’s hard to believe, for example, that the ABC’s radio transmission towers were once regarded as major strategic assets because they were viewed as critical to a national communications network. Now governments don’t feel that they need to own the telecom infrastructure.

A second set of issues revolves around setting out the relevant elements FIRB should consider when it comes to national security.

The national security implications of asset leasing/sales needs a mechanism for the Commonwealth to talk with the jurisdictions about what conditions should be in relevant contracts for critical infrastructure leasing or sale.

Relevant national security factors would need to be identified by the FIRB, such as the risk of access to sensitive information or limiting government access to information, possible means of disabling the asset or compromising its ability to supply during a conflict, or compromising security of public or private networks, with high risks to public safety.

My colleagues’ article points to a case in the next few months when the government may have to decide whether a Chinese state-owned enterprise can buy or lease (or possibly part of a consortium) TransGrid, a NSW government-owned electricity transmission firm. TransGrid supplies power and telecommunications to Defence bases in NSW and Canberra.

There’ll be stricter security requirements for foreign bidders, including a majority of local directors and security checks for nominated directors. But this wouldn’t prevent other internal actors inserting disruptive code into control systems. ASPI executive director, Peter Jennings, will discuss those insider threat issues and the general effectiveness of mitigation measures when it comes to FDI and national security in a future post on The Strategist.

This case echoes the Abbott Government’s December 2013 approval of the $6 billion purchase of electricity group, SP Ausnet, and its related Jemena business which has electricity, gas and water assets, by Chinese government-owned State Grid Corporation. A condition was imposed that at least half the directors must be Australian citizens.

If owning the asset meant a corporate that was the agent of a potentially hostile power could implement software that would allow it to disable the grid’s operation in the event of a conflict, that would be a concern.

But if our NSW/Canberra military bases could switch to alternative suppliers rapidly in a crisis, if they feared power being cut off, then the rationale for blocking the foreign acquisition would be weaker. (It should be noted that changes in technology may impact on what’s ‘critical’ when it comes to ‘poles and wires’.)

FIRB would need to have access to the skill sets to make such assessments. So I like Paul and Peter’s suggestion that the FIRB should publicly release a detailed evaluation framework that spells out the specific criteria that must be assessed in reviewing any sale or long-term lease of critical national infrastructure. (I argued for greater FIRB openness here some years ago.)

The FIRB’s evaluation process, they rightly suggest, ‘must involve the Defence and intelligence agencies best able to assess espionage and sabotage risks. It needs to be clear that these agencies are there to assess national security vulnerability not simply to validate the security status of their own facilities’.

The second option my colleagues suggest is possibly redesigning the FIRB as an independent statutory authority separate from the Treasury with a ‘clear charter to examine and decide on foreign investment applications and a strong national security assessment function’.

Late on Friday federal Treasurer, Scott Morrison, said that the government was ‘acutely aware of the sensitivities regarding foreign investment in strategic national assets and critical infrastructure’ and that the government is assessing options to ‘strengthen the federal government’s ability to protect the national interest in these cases’.
It’d be worth looking at the performance of the US Committee on Foreign Investment housed within the US federal government.

The CFIUS reviews select inbound investments on national security grounds and seeks to balance free market principles against national security considerations, ‘specifically averting or mitigating foreign control of US companies that are operating in potentially sensitive sectors’.

We need more analysis on the role of foreign investment policies in protecting our strategic assets.