Canberra and Beijing In A Knot As Australia’s 2018 Security Act Conflicts With Earlier China Port Acquisitions

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Op/Ed by Chris Devonshire-Ellis  

The row over Australia’s intended new Foreign Policy Act, scheduled to come into law next week has turned into twists and knots following the imposition of the National Security of Critical Infrastructure Act of 2018, which was introduced after Chinese investors had spent billions of dollars in acquiring stakes in two of Australia’s strategic ports.

Australia’s Security of Critical Infrastructure Act was devised to “manage the complex and evolving national security risks….posed by foreign involvement in Australia’s critical infrastructure”. The Act applies to approximately 200 assets in the electricity, gas, water and ports sectors, and was mandated from 11th July 2018. It is this act that the Australian Government have intended to support by introducing additional legislation under which Australia’s foreign minister would have the power to axe any agreement signed between a foreign country and state government, local council or publicly-funded university that is deemed to undercut the federal government’s handling of foreign relations.

Australia’s Prime Minister, Scott Morrison, has stated that “Where any foreign government seeks to undermine the sovereignty of Australia’s foreign policy by seeking to do deals with subnational governments, Australia needs to protect itself.”

The immediate problems with this in China’s eyes are the two significant deals agreed with two Chinese owned businesses over their successful bids to purchase the Ports of Darwin and Newcastle. China’s Landbridge Group  purchased the Darwin Port for AUD506 million on a 99 year lease in 2015, while the Newcastle Port was co-invested in 2014 by China Merchants Group on a 50-50 co-ownership deal with an Australian investor for 98 years. That stake was included as an asset worth AUD607 million listed by China Merchants in Hong Kong. Neither company is a State-Owned Enterprise, although in common with all large Chinese MNC’s they retain close connections with the Central Government. While this allows Beijing to properly direct Chinese assets into areas where they can be the most effective, and reduce waste among competing Chinese businesses, it can also have the effect of making them appear non-transparent, or facing accusations of being SOE’s. It is the latter point that has irritated Beijing and instigated a row that from China’s perspective appears grossly unfair having spent over a billion dollars on investing in the Ports prior to restrictive legislation being introduced.

The Act lists numerous Ports (among other assets) as being “Critical Infrastructure Assets” and subject to the regulatory environment, including Darwin and Newcastle along with Ports at Adelaide, Brisbane, Broome, Cairns, Christmas Island, Dampier, Eden, Fremantle, Geelong, Gladstone, Hay Point, Hobart, Melbourne, Port Botany, Port Hedland, Rockhampton, Sydney Harbour & Townsville.

Referencing the Security of Critical Infrastructure Act again reveals that it can be invoked by any Direct Interest Holder in relation to an asset, and defined as being any of the following:

  1. an individual, whether or not resident in Australia or an Australian citizen;
  2. a body corporate, whether or not formed, or carrying on business, in Australia;
  3. a body politic, whether or not an Australian body politic;
  4. a partnership, whether or not formed in Australia;
  5. a trust, whether or not created in Australia;
  6. a superannuation fund, whether or not created in Australia;
  7. an unincorporated foreign company.

with a further defining clause as follows:
An entity is a Direct Interest Holder in relation to an asset if:

  1. together with any associates of the entity, holds an interest of at least 10% in the asset (including if any of the interests are held jointly with one or more other entities)
  2. holds an interest in the asset that puts the entity in a position to directly or indirectly influence or control the asset.

A further clause defines control of an asset in Australia:
Meaning of Influence or Control

  1. An entity is in a position to directly or indirectly influence or control an asset if:
    1. the entity is in a position to exercise voting or veto rights in relation to the body that governs the asset
    2. the entity is in a position to make decisions that materially impact on the running of, or strategic direction in relation to, the asset; or
    3. the entity has the ability to appoint
      1. persons to the body that governs the asset; or
      2. key personnel involved in running the asset, or
    4. the entity is in a position to influence or determine decisions related to the asset;
      1. the business plan, or any other management plan, for the asset; or
      2. major expenditure relating to the asset; or
      3. major contracts or transactions involving the asset; or
      4. major loans involving the asset.
  2. An entity (the controlling entity) is in a position to directly or indirectly influence or control another entity (the controlled entity) if the controlling entity:
    1. is in a position to exercise voting or veto rights in relation to the controlled entity;
    2. is in a position to make decisions that materially impact on the running of, or strategic direction of, the controlled entity; or
    3. has the ability to appoint persons to the board of the controlled entity; or
    4. is in a position to influence or determine decisions relating to:
      1. the business plan, or any other management plan, for the controlled entity; or:
      2. major expenditure relating to the controlled entity; or
      3. major contracts or transactions involving the controlled entity; or
      4. major loans involving the controlled entity; or
    5. together with any associates of the controlling entity, holds an interest of at least 10% in the controlled entity (including if any of the interests are held jointly with one or more other entity)

That extensively covers both the Chinese management and the corporate holdings of both Landbridge and China Merchants. Not surprisingly the Chinse are somewhat miffed, share prices and investors have been impacted and their business plans – built on 90 plus year leases – thrown into doubt.

There are some lessons here to be learned by Chinese investors overseas however -regulations and terms and conditions issued by other national Governments are subject to change and can be imposed to have retroactive impacts. With the relationship in China between Government and Big Business much more intertwined and often planned out in advance in terms of five and ten year plans, decisions such as those made by the Australian Government can come as an unwelcome shock. Some maturity concerning this needs to be injected into Chinese body corporates as it does the Chinese Foreign Ministry.

However, the rhetoric issued from Australian politicians has also served to fan the flames of the issue, which has now developed into a full scale political battle with no current end in sight. It is not unreasonable for the Chinese to feel aggrieved, yet little appears to have been done beforehand and in diplomatic actions to reassure investors in Australia affected by the legislation that questions such as those posed by previous acquisitions – made in good faith – would be accommodated. Clearly that hasn’t happened and this surprised Beijing, while any interaction between Australia’s Security Council and its Ministry of Foreign Affairs and Investment appears to have been minimal or even non-existent when considering the commercial impact.

Both Canberra and Beijing need to withdraw their war of words and get back to the legal terminology and work out how investors in Australia can continue to do so – without the need to be so disastrously impacted by new legislations based on Ports which have already been permitted as being operational under foreign investment and control.

Beijing needs to stand down and have it’s MNC’s exercise rather more due diligence and a greater maturity of understanding the international political risks of conducting business in other countries, while Australia needs to conduct better research on the impact of introducing legislation that will impact on its investors. The current situation and how it has descended into farcical jibes and accusations could, and should have been avoided.

Chinese MNC’s overseas need to be better educated about political risks and retroactive legislation (and use this as negotiating tools) as part of their investment due diligence process,  while National Governments should better understand what the implications of introducing such measures impacting upon earlier investments are likely to be.

 

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com

 

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