Foreign investment rules overhaul for Australian energy infrastructure

6 February

Mark Coughlin - PwC Energy Utilities and Mining Leader. This article first appeared in The Australian (Business Review), 6 February 2018

Foreign investment in Australian energy infrastructure is not new – it has been happening since the 1990s in one form or another. Back then the energy assets of Victoria and South Australia were privatised and there have been subsequent deals done in the decades until now. The big roadbump happened during the recent NSW privatisation program when there was the sudden apparent changing of the rules for foreign investment in Ausgrid. While many of the details are still secret it became clear that international investment in Ausgrid was not going to occur due to national security concerns raised at the 11th hour. This created turmoil in international investment circles as the poster child of international energy infrastructure investment, Australia, now appeared out of reach and there were still deals in the pipeline. One can imagine some consternation in the corridors of NSW Treasury at that time as well.

The energy investment infrastructure game was forever changed in Australia. The rule changes created opportunities for some local investors who put together a very astute deal for Ausgrid. They also created a great deal of confusion for the subsequent sale of Endeavour Energy – raising questions around which entities could invest, were there different restrictions for different nations etc. As we reflect back the price achieved for Endeavour was robust and international investment was an important part of the successful consortium. In subsequent months we have seen deals involving consolidation of energy network companies with Asian ownership and also the purchase of large coal fired power stations by Asian interests. We can be sure that national security concerns were front and foremost in these deals. So in many respects the question then becomes: why do we need tighter rules on foreign investment in energy infrastructure?

This week the Treasurer announced that new conditions will be placed on foreign investment in energy infrastructure. A quote from the press release “These conditions codify those already applied, on a case-by-case basis, to previous transactions” suggests that no new rules will be put in place. Getting the rules clear and codified will be a good thing for investment into energy infrastructure in Australia. It is plausible that the type of clarity promised by The Treasurer and the Minister for Home Affairs will be net positive for investment – clarity encourages more players into the market. It is also likely that if the rules are set and in place for some time that deal values may also improve.

Let's turn to the national security risk that is to be avoided through these codified rules. This is far from simple. The federal government’s announcement to impose tighter foreign investment restrictions on electricity assets in the name of national security follows recent reports from ASIO that the threat of espionage is now worse than during the Cold War. Whilst the reasoning appears sound, the truth is espionage is no longer carried out in the same way it was in the 1970’s and 80’s. The rise of digitisation and our increasing reliance on technology has proportionally reduced the effort required to obtain information, either legitimately or illicitly, beyond physical and geographic boundaries. While Scott Morrison’s decision may appear to be made in the interest of national security, from a cyber security perspective, it makes little to no difference.

Espionage or spying between nation-states is hardly a new phenomenon, but the age of cyber espionage has introduced an entirely new realm of tactics that can be employed with greater stealth and less cost. Cyber attacks against the Ukraine power grid in 2015 and 2016 left tens of thousands of citizens without power and highlighted the mass disruption that hackers can cause when they are organised and well-resourced. The Ukraine has since attributed these attacks to the Russian government. Reports surfaced in 2016 that energy infrastructure in the UK and Ireland were being increasingly targeted by sophisticated nation-state groups. And in the last few months the risk of cyber attacks against US-based nuclear assets has been assessed as ‘relatively high’.

No government or organisation is immune to the risks of cyber espionage and cyber attacks more broadly, regardless of geographic location. Each of these threats has a common thread – they can be realised by motivated cyber adversaries ten thousand miles away from the target. For critical infrastructure, cyber security has too often taken a backseat to maintaining production - ‘keeping on the lights’ - but rapid advances in technology and increasing interconnectivity of these critical systems has heightened the risk of disruption and we need to catch up. Mitigating this evolving threat requires a renewed focus and closer partnership from governments and private enterprise on protecting critical infrastructure in this age of physical and digital convergence. Building bigger fences and more checkpoints may have worked during the Cold War, but in 2018 it is a false sense of security.

Where does this leave us? It is clear that energy infrastructure needs to be protected from all manner of risks. National security interests are a very important risk to manage. The ongoing vigilance of our energy asset owners and operators in protecting energy infrastructure from all manner of risks is expected. Investment rules on energy infrastructure must act as a first line of defence whether owners are foreign or Australian. However, we must remember that the real heroes here are those within the energy businesses who not only keep the lights on and the gas flowing but also keep us safe and secure.

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