10 Aug 2016
We should 'trust but verify' on China's investment plans
By Paul Barnes
Foreign direct investment is valuable to modern economies. Australia values investments from many sources, and will continue to do so. These points have been made very clearly by Treasurer Scott Morrison over a considerable period.
Recent changes to Foreign Investment Review Board appraisal processes and personnel will enhance the transparency, rigour and commercial standing of its appraisals.
With a decision about the sale of the NSW electricity distributor Ausgrid to a Chinese company expected soon, the importance of foreign investments in Australia will be central to the Treasurer's deliberations – as is what is best for the national interest.
Due diligence is an important business practice, with systems of corporate governance being central to decision making across the public and private sectors. Similar expectations exist at a national level for decisions that may impact the viability of an economy.
An important goal for any national government is to make sure that it has mechanisms and evaluation processes at its disposal that allow consideration of all the many attributes of sound business decisions.
It is no surprise that Australia should be seen as a preferred location for investment because it is a jurisdiction that protects investments, both foreign and local, and minimises business risk by maintaining strong and effective operational business systems and legal structures.
The maturity of regulatory environments that attract international investment is supported by regular cycles of scrutiny and improvement. Changes to the foreign investment review processes as announced by the Treasurer in late 2015 are an example of a national system that was updated to meet new and changing national needs.
It is worth remembering that the Foreign Investment Review Board earlier reviewed its appraisal guidelines in 2009 over concerns about Chinese investments in the strategic resources sector.
The guidelines provided the basis for government advice to prevent sensitive transactions that 'may affect Australia's ability to protect its strategic interests.'
However at that time the term "national security" was not effectively defined, nor was detail available about how evaluations were undertaken to assure emergent Australian interests. How assessments were done remained up to the FIRB to apply on a case by case basis.
The recent legislative, administrative and personnel changes announced by the Treasurer are likely to have enhanced FIRB evaluations. It would also be surprising if a re-appraisal of practices used in getting advice from the Department of Defence, ASIO and the Australian Defence Force have not taken place at the same time.
Commentary about the poor track record of "defence hawks" in assessing the national security implications of foreign investments, such as the leasing of sections of the port of Darwin or other elements of our critical infrastructure networks, might suggest that such concern is unwarranted. The reality is that there are always differences in knowledge about national security matters and specific types of threats across society.
Nor is it safe to rely on China's lack of response against the major electricity grids that it owns in the Philippines following the International Court of Arbitration's ruling in Manila's favour on South China Sea claims, or on the assumption that it makes no commercial sense to turn off the power supplies of paying customers.
It is useful to note in contrast China's criteria for assessing acceptability of Foreign Investment in China.
The Chinese National Development and Reform Commission (circa 2008)1 include consideration of: economic security and safety; public interest; optimisation of major planning; national economic security; national security, national energy resource security; prevention of monopoly and national cultural security.
An example1 of Chinese assessment is the 2005 proposal by the Carlyle Group, a US firm, to purchase an 85 per cent stake in the Xugong Group Construction Machinery, a large machinery manufacturer which was reportedly the result of an open auction process supported by the local Jiangsu Government.
The transaction resulted in a storm of criticism from one of Xugong's competitors with claims that the local government was selling a "strategic asset". The sale did not proceed despite amendments to the original proposal which would have seen the Carlyle Group reduce its stake to 45 per cent.
According to reports from the China Daily, the Ministry of Commerce rejected the transaction ''amid concern that foreign control of key Chinese firms could threaten the country's economic security".
But we can't be naive and should remember that state governments have a right to ensure that when they sell or lease infrastructure they want to make it as attractive a commercial proposition as they can. Strong economies are a national security asset, and freeing state governments from debt is important.
It is crucial to underline the importance of the last point. It is illogical to discourage foreign investment which serves to lift our growth rate, and enables state governments to make effective planning decisions.
A maxim of former US president Ronald Reagan was "trust but verify". By extension a sound national regime for the assessment of the acceptability and implications of significant investment bids on critical infrastructure systems is good due diligence.
It could be presumed that Australians from all walks of life expect senior government advisers and ministerial decision-makers to apply this level of rigour to their decisions.
 Vivienne Bath (2012) “Foreign Investment, the National Interest and National Security-Foreign Direct Investment in Australia and China,” Sydney Law Review, 34(1), PP. 5-34.
Dr Paul Barnes is head of risk and resilience at the Australian Strategic Policy Institute.
Originally published: Australian Financial Review. 10 Aug 2016