Author: Peter Jennings

Treasurer Scott Morrison has an imminent decision to make on whether to approve the sale of gas and electricity giant, DUET Group to Cheung Kong Infrastructure (CKI) the company owned by Hong Kong Billionaire, Li Ka-Shing.

Soon after that Morrison must surely redesign and strengthen the failing bureaucracy responsible for advising him on incoming foreign investment.

DUET owns the Dampier Bunbury Natural Gas Pipeline, supplying gas to Perth and coastal WA as well as United Energy distributing electricity in east and south-east Melbourne and Multinet Gas distributing gas to Melbourne’s eastern suburbs.

In advising Morrison on the sale, the Treasury’s Foreign Investment Review Board (FIRB) has to consider if foreign ownership presents a national security risk. And it must focus on what Scott Morrison calls the ‘aggregation effect’ of an ever larger part of Australia’s energy infrastructure being owned by a small number of mainly Chinese and Hong Kong businesses.

Last November Morrison claimed it would be ‘contrary to the national interest’ to let CKI and Beijing’s State Grid bid for half of Ausgrid, supplying electricity to 1.6 million households and businesses in NSW.

These are uncomfortable issues. Australia needs foreign investment but there is increasing alarm in national security circles about the extent of Chinese investment in critical infrastructure. This alarm is shared by defence and intelligence agencies in Washington DC, Ottawa, London and elsewhere in the west.

Morrison is fully aware of these worries. In January this year he, along with Attorney General George Brandis, made the remarkable admission that ‘Australia’s national critical infrastructure is more exposed than ever to sabotage, espionage and coercion.’

The key risk is the vulnerability of ports, power grids and gas pipelines to damage through cyber-attack on their internet-run industrial control systems.  These attacks can potentially be done remotely or supported by ‘trusted insiders’ with hands-on access to key systems.

When it comes to cyber security not all foreign investors raise the same concern. Canadian superannuation trusts aren’t likely to attack the Australian grid, but an increasingly nationalist and assertive China might be interested in having such an option depending on strategic circumstances.

Hong Kong’s CKI is, in some ways an unwilling casualty of this situation, but it’s clear that Beijing is exerting ever closer control over its former British colony.

DUET’s gas and electricity infrastructure is, by any measure, strategic. In WA the Navy’s main submarine base at HMAS Stirling, the Special Forces Regiment and the super-secret Defence Satellite Communications Station at Geraldton all rely on local critical infrastructure to operate.

Victoria, South Australia and the ACT now are dependent on gas and electricity in large part supplied by Chinese or Hong Kong-owned infrastructure. Selling any more of these assets to foreign entities must surely trigger Scott Morrison’s aggregation principle that ‘you can own one, perhaps, arguably … but that doesn’t mean you can own two three or four.’

The risk of ‘sabotage, espionage and coercion’ to Australia’s critical infrastructure is a confronting reality to a bureaucracy more used to facilitating foreign investment than seriously reviewing it.

Let’s be clear, most foreign investment is welcome and needed, but while popular concerns about farm land and residential property attract negative attention these don’t raise national security challenges in the way that foreign investment into critical national infrastructure does.

The warning sign to Government came in 2015 with the mishandling surrounding a 99 year lease of the Port of Darwin to a Chinese company. To their alarm, Ministers found that a loophole in regulations meant that the FIRB had no authority even to consider the Northern Territory’s government’s lease.

No part of the Canberra bureaucracy feel it incumbent on them to advise government about the negative strategic implications of leasing Australia’s only significant northern port or the impact on defence cooperation with the US Marines Corps.

Since then steps have been taken to strengthen FIRB, including by appointing David Irvine, the former head of ASIO, to a part time position on the FIRB board.  A new unit in the Attorney General’s department has also been tasked to build ‘a critical assets register that will enable a consolidated view of critical infrastructure ownership in high risk sectors across the country.’

Translating from the bureaucratese what this means is that Canberra is furiously scrambling to adapt its decision making processes to handle a much more difficult foreign investment environment.

A key problem is to overcome a deeply held bias that facilitating foreign investment is the overriding national priority and denying any investment is somehow irrational and bordering on xenophobic.

In my experience as a Defence Deputy Secretary the national security and intelligence parts of the federal bureaucracy used to be reluctant to challenge Treasury on this turf.

Defence tried to limit its input to FIRB advice to commenting only on the impacts investment decisions might have on military bases, rather than on broader national security considerations.

The result was that, on some critical foreign investment approval decisions, advice on the national security implications came to government late, diluted or not at all.

While the Government has taken steps to strengthen national security considerations as part of foreign investment approvals more needs to be done.

The FIRB should be removed from the Treasury and given its own statutory basis to advise government on foreign investment and in particular the national security implications of individual and aggregate investments.

FIRB should now be given the critical mass to make its own assessments on the national security implications of foreign investments by absorbing the small parts of other federal agencies that watch this area.

Far too much time has been wasted on past decisions going through the inelegant herding of reluctant bureaucratic cats. Bringing the right expertise into one agency will speed decision making.

Finally the newly strengthened and independent FIRB should report to the National Security Committee of cabinet not just Treasurer Morrison. The Treasurer’s role is hardly the right one to solely make these key decisions relating to the national security of Australia’s critical infrastructure.

Peter Jennings is the executive director of the Australian Strategic Policy Institute and a former deputy secretary for strategy in the Department of Defence.

Originally published:  The Weekend Australian. 08 April 2017