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Australian investment decisions need demystifying

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In Brief

Foreign investment is periodically controversial in Australia. The decision by Treasurer Scott Morrison to reject foreign bids for Australian electricity provider, AusGrid, on national security grounds is the latest matter to generate adverse comment.


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A leading bidder was a consortium comprised of StateGrid, a Chinese state-owned enterprise, and a private Hong Kong investor.

The reasons for the rejection are vague as to the precise security concerns involved. The decision has upset critics who claim it sends an ambivalent message about Australia’s openness to Chinese investment. There are concerns Australia may be perceived as an unpredictable investment environment with a consequent reduction in investor confidence and interest.

A recurring criticism is that the foreign investment regime allows for political decisions by the treasurer because its central concept — the Australian ‘national interest’ — is only loosely specified. It is alleged that the concept is left deliberately vague to allow for the interpolation of political considerations as needed. The treasurer has a broad statutory discretion to reject a proposed foreign investment if it is judged contrary to the national interest.

The government’s foreign investment policy lists ‘national interest factors’ that may be relevant to the treasurer’s decision. But the list is not exhaustive and hence the treasurer is not precluded from considering other, potentially unrelated factors. National security is treated as a subset of the national interest: it is but one of the national interest factors for the treasurer to consider. It is also the least transparent component of the foreign investment policy, as there is no guidance on the kinds of proposals that may infringe on Australian security interests.

The treasurer’s broad discretion to determine the national interest is rarely an issue in practice. There have been very few instances where the treasurer has intervened to block proposals, reflecting a bipartisan recognition of the importance of foreign investment to the Australian economy and a commitment to a fundamentally open market. The historically infrequent exercise of the treasurer’s power to block foreign investment arguably helps explain the resilience of an opaque and rather anachronistic executive discretion. It has been hard to get seriously bothered about a power so rarely exercised, since the net effect of invocation is marginal. But there are signs that this might be changing.

Since 2013, three proposed foreign direct investments have been blocked. This exceeds the number of proposals (two) blocked in the preceding 40 years. Two of the three proposals rejected since 2013 were said to raise national security concerns. Australia is contending with an increasingly complex global security environment. It has been argued that foreign investment does not pose any special threat to national security and should instead be viewed through the economic lens of national prosperity. But the government does not necessarily share that same unmitigated optimism.

Given the current environment, it would be unsurprising if we were to see the discretion to block foreign investment on national security grounds exercised more frequently. A growth of this kind would risk a much larger, and ultimately undesirable, deterrent effect on foreign investment.

How can Australia pursue the legitimate goal of protecting national security without undermining the confidence of foreign investors in the existing review process? The US approach to regulating foreign investment is instructive. There, the sole test of whether foreign investment ought to be prohibited is whether the president believes it threatens to impair US national security.

National security is a notoriously vexed standard for government decision making. It is often seen as a ‘black box’ in which any number of considerations unrelated to security can masquerade. But the United States has considerably demystified the black box in the foreign investment space. Hence the commercial lawyers who advise foreign investors on the US review process tend to have a good idea of the characteristics that make a case likely to attract government attention.

Several features of the US regime have aided this demystification. There is a statutory list of national security factors that may be considered in determining whether foreign investment threatens to impair US national security. The US Treasury, which coordinates the review of foreign investment, produced a policy document that provides guidance on the national security assessment process and discusses categories of cases that have historically raised national security considerations.

The government agencies routinely involved in the national security review are specified in legislation and executive order. The president’s power to prohibit a transaction is also subject to an important legal constraint: it can only be exercised if the president finds there is ‘credible evidence’ of a potential threat to national security and existing laws are inadequate to guard against the threat.

The US regime does not supply a fixed meaning of national security, but the legislation, executive instrument, and policy serve a number of important roles. They set the general parameters of the national security review process and in doing so create an institutional culture among the administrators of the foreign investment regime. Purely political considerations are indisputably ‘out of bounds’. They also send a message to foreign investors that the review is about national security alone and help educate them as to the kinds of transactions likely to be of concern.

A government review process that focuses on national security can never be perfectly transparent to the transacting parties. But the impact a lack of transparency has can be lessened, as the United States has sought to do, through policy and processes that are public and robust. Instead of expecting people to trust in the integrity of the national security review process, the Australian government needs to give them reason to do so. A good start would be to look to the example of the United States.

While the security concerns that exercise the two nations may be different, the United States offers a model of policy and process that could be adapted to the Australian context. The Australian government should supplement its strictly opaque national security review process with readily accessible legislative and policy guidance on what may constitute a concern, how the review will be conducted and by whom.

Rebecca Mendelsohn is a PhD candidate at Crawford School of Public Policy, The Australian National University.

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