Evidence in support of change to the legislative or regulatory framework
This chapter considers evidence to the committee which raised concerns
regarding the current regime and supports a change to the framework on the
basis of economic, national security and national interest factors.
A number of submitters to the inquiry suggested that the lease of the
Port of Darwin raised questions about the long term consequences of allowing
critical infrastructure to be either owned or leased by private sector actors.
In its submission, Victoria University's Institute of Supply Chain and
Logistics maintained that the Port of Darwin lease highlighted the potential
economic consequences of allowing foreign-owned interests to acquire
controlling stakes in Australian land, infrastructure assets or companies:
Further research conducted by the Institute indicates that
the general public may not be fully aware of the extent and ramifications of
this shift in ownership in businesses that are critical to Australian trade.
The main driver for overseas owners is to maximise return on the considerable
investment that they have made to acquire assets, with perhaps little concern
or knowledge of what is best for Australia's interests...A number of ports...have
increased their service charges substantially since being privatised. As these
ports have a monopoly position in servicing their hinterland, port users have
no choice but to pay these increased charges in order to get their products to
and from the port.
Dr Gennadi Kazakevitch, Deputy Head of the Economics Department at
Monash University, also highlighted the potential consequences of allowing
foreign investors to acquire significant holdings in Australian companies or
infrastructure. Dr Kazakevitch argued that the current foreign investment
review process does not adequately consider the governance arrangements of
foreign-owned firms seeking to invest in Australia.
Dr Kazakevitch maintained that the framework does not sufficiently examine the
extent to which a foreign government might be in a position to influence (directly
or indirectly) the commercial decisions of a foreign company that owns or
operates a business in this country:
Particularly, the 1975 Act does not imply [sic] the FIRB to
look into the proportion of foreign government ownership in such a company;
involvement of a foreign government in a company's decision making
(particularly, through the government's representation on the FIRB of
directors); taking government's orders that limit a company's commercial
independence, or complying with legislations [sic] beyond the ones that
normally regulate commercial decision making.
These submitters suggested that the current foreign investment review
framework requires amendment to address some of the potentially significant
economic and political consequences of foreign direct investment in the
The Maritime Union of Australia (MUA), in a submission to the Northern
Territory's Legislative Assembly select committee inquiry, argued that any
investment in the Port of Darwin by a private operator will disadvantage some
port users. In particular, the MUA questioned the ability of the Australian
Competition and Consumer Commission (ACCC) to intervene effectively in any
dispute between port users and a private port operator.
According to the MUA, the arguments in favour of the lease of the Port
of Darwin neglected the real-world record of private port operators' investment
strategies. It cited the case of Flinders Ports, the private operator of Port
Adelaide. The MUA alleged that, while Flinders Ports has made a number of
significant investments in Port Adelaide's infrastructure, it has done so in an
unbalanced and potentially anti-competitive manner.
By using its substantial profits from the operation of the port to
expand into stevedoring services, the MUA suggests that Flinders Ports has
become, in effect, a landlord and a competitor to those companies, such as
Patrick and Qube, which also provide stevedoring services at Port Adelaide.
According to the MUA, this 'dual' position leaves the door open to
infrastructure investment that unfairly advantage the subsidiary companies that
are owned by the port operator:
Flinders Ports does have a better record of investing in port
infrastructure [compared with other private port operators]. However, the logic
of privatisation does mean that investment appears to have been made in an
unbalanced way that disadvantages other port users...One result of the expansion
of Flinders Ports into stevedoring is that it is effectively both a landlord
and a competitor to Patrick and Qube. The ACCC warns against such an outcome in
Although the NT Government suggested that the ACCC could act as a final
arbiter in any dispute between the port operator and the port user, the MUA
cast doubt on this contention. It cited a recent ACCC analysis of stevedoring
at Australian ports, Container Stevedoring Monitoring Report – October 2014.
In that report, the ACCC made clear that ports, largely by virtue of
their nature as major pieces of critical infrastructure, are usually monopoly
or near-monopoly assets. This provides their operators with considerable market
The ACCC recommended that any government planning to privatise a major piece of
critical infrastructure, whether on the base of a long-term lease or an
outright sale, must construct a regulatory framework that does not attempt to
make the asset more attractive to a potential buyer. In particular, the ACCC took
the view that a price monitoring mechanism does not provide an effective
restraint on the exercise of market power:
...regulatory arrangements should be determined before the
sale, to provide greater regulatory certainty to the purchaser. Governments
must carefully consider the form of regulation that is appropriate. A price
monitoring regime may be favoured by a government seeking to maximise the sale
price. However, in the ACCC's experience, price monitoring does not provide an
effective constraint on the exercise of market power, including monopoly power.
The MUA argued that a leased Port of Darwin has the potential to produce
an anti-competitive operating environment. It suggested that the NT
Government's decision to lease the Port of Darwin to Landbridge amounted to a
transfer of monopoly market power. The MUA maintained that the consequences of
this decision are unlikely to be curtailed by a regulatory framework that is
based on price monitoring.
National security and national interest considerations
In its submission to the committee, the Australian Strategic Policy
Institute (ASPI) observed that Australia's foreign investment review framework
is a multifaceted process that involves a number of discrete and complex steps.
Many decisions will touch upon a range of interconnected issues, from national
security to the implications of a proposed investment for Australia's
competition policy. According to ASPI, the NT's decision to lease the Port of
Darwin – and FIRB's response to that decision – highlighted a number of flaws
in the review process.
ASPI maintained that the current framework privileges an expedited
review process, whose primary aim is to facilitate a high degree of foreign
direct investment. The unintended consequence of this 'structural' bias is to
limit the critical attention that is paid to the national security implications
of some foreign investment proposals.
As ASPI made clear in its submission:
Our view is that the current legislative and regulatory
framework to manage foreign investment is inadequate in a number of respects.
Current arrangements do not give sufficient consideration to the national
security implications of foreign direct investment, especially as it relates to
According to ASPI, Australia's foreign investment review framework
suffers from two interconnected problems. Firstly, the process for assessing
foreign investment proposals is largely ad-hoc and lacks sufficient rigour and
transparency. Secondly, this lack of procedural clarity brings with it the
unintended consequence that governmental oversight, especially at its highest
levels, including the National Security Committee of Cabinet, is at times
inadequate in critical cases. ASPI maintained that national security concerns
are the most likely to be overlooked as a result of a flawed assessment
process, and this places the integrity of the review framework in doubt:
The processes for assessing investment proposals are ad-hoc,
lack transparency and rigor and do not give government sufficient oversight in
critical cases. As is very apparent from recent experience the result is that
decisions to proceed – or not to proceed – with specific foreign investment
requests are poorly explained to the public and give rise to confusion about
how the government has exercised decision-making powers.
Further, ASPI argued that the flaws in the process are the result of a
number of gaps in FIRB's capacity to analyse the likely implications of foreign
investment proposals. Among the more significant issues highlighted by ASPI are
The lack of a statutory basis for FIRB, which means that it
cannot be separated from the Treasury, and is therefore, denied sufficient
independence in its decision-making processes.
The fact that FIRB only advises the Treasurer, and therefore does
not report, through the Treasurer, to the National Security Committee of
FIRB's secretariat appears to lack staff with the professional
expertise required to make policy recommendations on national security matters.
FIRB lacks a properly defined concept of critical infrastructure,
which reveals a wider failing on the part of the Government.
ASPI's criticisms of the current process for reviewing proposals for
foreign investment, along with its suggested recommendations to address these
shortcomings, focus on the need to ensure that FIRB does not neglect the
national security component of the national interest equation.
In particular, given the fact that the Government's policy document
explicitly defines an approach to assessment that avoids 'hard and fast rules'
in favour of a case-by-case assessment, ASPI argued that the current review framework
allows national security matters to be effectively sidelined. In part, this is because
FIRB's secretariat does not appear to possess sufficient expertise in national
security assessments to provide advice that considers more than the economic
implications of a proposed investment. ASPI continued:
The current FIRB relies on Defence and the intelligence
agencies to advise on the national security impacts of investment...The best way
to deal with this situation is to strengthen the FIRB's internal capabilities
to advise on national security matters. This will still require drawing on
other departments to provide intelligence and other assessments, but it will at
least make it possible for the FIRB to ask informed questions...To offer a sense
of scale, a statutorily independent FIRB could function with a workforce of
twenty to thirty APS staff, of which perhaps ten people might have professional
expertise in traditional Treasury domains and ten be seconded from other
agencies to work on defence, intelligence, critical infrastructure and national
According to ASPI, another primary fault of the current process is the
fact that the concept of critical infrastructure is not a primary consideration
in the assessment of proposals for investment.
ASPI argued that the concept of critical infrastructure must be central to FIRB's
advice to the Treasurer. According to Mr Peter Jennings, Executive Director of
ASPI, in leasing the Port of Darwin Australia ceded effective strategic control
over a major national security and critical infrastructure asset:
Australia’s strategic interests, including responding to
increasingly assertive Chinese maritime behaviour in the South and East China
seas, now have to be balanced against the reality of operating out of a harbour
run by a company whose website proclaims it is “contributing its best to ...
realising the great rejuvenation of the Chinese dream”. The Port of Darwin
lease raises hard questions about the specifics of the deal and how Australian
governments make sensible decisions on national security when considering
foreign investment proposals.
ASPI argued that, by ensuring that the concept of critical
infrastructure is at the forefront of the review process, it is less likely
that national security implications, as one component of the national interest
equation, will be either overlooked or downplayed.
The idea of critical infrastructure departs from the contention that
infrastructure is little more than a purely physical asset, to which a
straightforward monetary value can be assigned. As ASPI explained, the concept
of critical infrastructure implies that some infrastructure assets are vital
elements of Australia's national security framework:
From a strategic perspective the assessed dollar value of an
element of critical infrastructure may not be the most relevant factor in
considering the national security value of a potential foreign investment.
There is, after all, only one Port of Darwin regardless of its commercial
valuation. 'Infrastructure' shouldn’t be thought of as only physical assets,
but also production systems and networks. This includes such areas as maritime
ports and airports, communications systems, power generation, distribution and
transmission, hospitals and medical facilities, critical industrial
capabilities used to support the Australian Defence Force, and essential
ASPI further observed that, as the development and administration of the
Government's critical infrastructure policy is the responsibility of the
Attorney General's Department, it is important that strong ties between FIRB
and the department are fostered and maintained.
Therefore, in order for these changes to occur and to incorporate
national security concerns as an integral part of the evaluation of foreign
direct investment, ASPI argued that the Government's framework for the
assessment of foreign investment proposals must undergo further legislative,
regulatory and administrative reform.
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