Revelations that foreign and domestic intelligence agencies penetrated the communication networks of leading Australian mining firms, including Rio Tinto, provides an important lesson in how Australia should secure its vital interests in regulating foreign direct investment (FDI). The 2008 attempt by China’s Chincalco to raise its stake in Rio Tinto exposed weaknesses in both the policies and processes Canberra then applied to screening foreign investment applications. The transaction was remarkable for being referred by the Rudd government to the National Security Committee of Cabinet.
The Australian government was deeply ambivalent about large scale Chinese investment in the mining sector at the time and struggled to respond coherently to the growing number of proposed transactions, often making policy on the run. The Foreign Investment Review Board (FIRB) opposed the increased stake in Rio for reasons that would change every time Chinalco sought to address them. Ironically, China’s National Development and Reform Commission, which approves China’s outward FDI, was also unenthusiastic about the acquisition.
The Australian government announced it would screen all transactions by entities owned by foreign governments and suggested preferences for the ownership stakes that would be viewed more favourably, although the criteria remained frustratingly opaque to foreign investors. One of the concerns raised was that Chinese enterprises were potentially conflicted as potential owners of businesses producing commodities that they also consumed. From China’s perspective, it was only natural to hedge exposure to commodity prices through such acquisitions.
Concerns were also raised that Chinese firms would gain knowledge of production costs and other information that might help them in negotiations over long-term bulk commodity price contracts.
We now know that domestic and foreign intelligence agencies, including China’s, likely had access to such sensitive corporate information anyway. The change in the composition of Rio’s share register was not the real security issue. These revelations come at the same time the United States has revealed that Russian hackers have compromised critical US infrastructure and Chinese hackers gained unprecedented access to US federal employee data through a government contractor. These episodes demonstrate that foreign ownership is only one of many avenues through which national security can be compromised. A domestically-owned and operated business may be just as vulnerable as a foreign-owned one.
National security needs to be secured behind the border over time and not at the border at a particular point in time when a foreign acquisition is first proposed. This is a task for domestic law enforcement and intelligence agencies. These agencies should assume a larger and more systematic role in the foreign investment review process, but screening foreign investment cannot by itself mitigate threats to national security.
A report written by myself and Jared Mondschein that was released last week examines the risks to national security that can potentially arise from foreign acquisitions. It calls on the Australian government to focus the FDI screening process on national security, leaving economic and other policy issues to existing domestic regulatory frameworks that already operate behind the border to regulate business investment. The FIRB already largely defers to domestic regulators in its consideration of these issues.
The United States provides a good model for how the Australian FDI screening processes could be improved. Rather than an open-ended ‘national interest’ test, the US process focuses squarely on transactions that could threaten national security. The Committee for Foreign Investment in the United States plays a similar role to FIRB in advising the president on the use of his discretion to reject foreign investment, but without being over-burdened by the confusing array of policy considerations that have been introduced by successive Australian governments into our FDI screening process.
Australia’s foreign investment policy trivialises the concept of the national interest by associating it with foreign investment decisions that are often more about domestic politics and protectionism than national security. The United States also has clear statutory principles that are applied as part of its screening process. Australia should look to develop a similar set of principles while clearly flagging to foreign investors those assets that are likely to raise national security concerns.
Given the joint nature of Australian and US security and intelligence interests, defence industry and technology, a coordinated approach to screening foreign acquisitions is also required. A memorandum of understanding between the Australian and US governments for sharing information and coordinating on foreign investment decisions should also be put in place. These changes would increase certainty for foreign investors, benefiting the inflow of foreign capital, while protecting Australia’s legitimate security interests.