In brief
The Australian Government's Critical Infrastructure Centre, launched earlier this year, is part of the government's plans to manage national security concerns arising from foreign investment in Australian critical infrastructure. The Centre has released a discussion paper calling for input into how it can best work with governments, industry and investors to manage these risks. This paper provides greater insight into the Centre's role but there remain areas to be clarified. Partners Wendy Rae and Jeremy Low, Mergers & Acquisitions Counsel Andrew Wong and Associate Nicholas Kefalianos examine this issue from the perspective of Australia's foreign investment framework.
Background
The Australian Government launched the Critical Infrastructure Centre on 23 January 2017. Its establishment was part of the government's efforts to manage national security risks relating to Australian critical infrastructure and followed earlier reforms to the foreign investment legislation, which narrowed the general exception to the FIRB (Foreign Investment Review Board) approval requirements for acquisitions from government so that the exception no longer applied to acquisitions of critical infrastructure assets.
On 21 February 2017, the Centre released a discussion paper seeking views on how it could work with state and territory governments, industry and investors to manage the national security risks relating to Australian critical infrastructure.
What is the Critical Infrastructure Centre and how will it impact foreign investment?
The Centre is based within the Federal Attorney-General’s Department and comprises staff with expertise from across Australian Government agencies. The Centre will work cooperatively with Australian agencies, states and territories, regulators, and private owners and operators of critical infrastructure to proactively identify and manage national security risks relating to critical infrastructure, including from foreign investment in those assets. Among other things, it is proposed that the Centre develop a register of critical infrastructure assets and undertake a risk assessment of these assets to determine the relevant national security risks specific to the asset and the strategies necessary to manage these risks.
In the context of foreign investment, FIRB will continue to be responsible for assessing foreign investment applications, and will consult with the Centre in assessing applications relating to critical infrastructure. It is hoped that the establishment of the Centre will address the concerns raised about the bids by State Grid and CKI to acquire a 99-year lease of 50.4 per cent of Ausgrid and provide greater certainty to foreign investors making investments in critical infrastructure. Given that FIRB will be able to rely upon work conducted by the Centre in assessing any national security concerns relating to a given piece of critical infrastructure, it is hoped that this will result in more meaningful and timely discussions between FIRB, foreign investors and sellers, and allow FIRB to consider such applications in a more timely and efficient manner.
What is the Critical Infrastructure Asset Register?
It is proposed that a Critical Infrastructure Asset Register be established to capture information regarding persons who own and operate critical assets in sensitive sectors (currently telecommunications, water, ports and electricity have been suggested as the sectors with the highest risks). Unlike the registers of agricultural land and water entitlements and rights which apply only to foreign persons, the proposed Register will apply to both domestic and foreign owners of critical assets in sensitive sectors.
A number of aspects of the proposed Register require clarification.
1. Purpose of the Register
If the Register's sole purpose is to assist FIRB in its consultation process and facilitate more timely consideration of sensitive FIRB applications, we consider its introduction to be a welcome development. However, if the Register has a broader purpose, greater scrutiny is required. It will also be important to ensure the reporting obligations do not create unnecessary regulatory burdens for foreign investors and domestic and foreign owners of critical infrastructure.
2. Scope of 'critical infrastructure'
The scope of what is (and will be) considered 'critical infrastructure' is unclear. The discussion paper defines 'critical infrastructure' as:
those physical facilities, supply chains, information technologies and communication networks which, if destroyed, degraded or rendered unavailable for an extended period, would significantly impact the social or economic wellbeing of the nation or affect Australia’s ability to conduct national defence and ensure national security.
This appears to be broader than the infrastructure listed in the foreign investment legislation as relevant to national security, being public infrastructure (an airport or airport site, a port, infrastructure for public transport, electricity, gas, water and sewerage systems), existing and proposed roads, railways, inter-modal transfer facilities that are part of the National Land Transport Network or are designated by a state or territory government as significant or controlled by the government; telecommunications infrastructure and nuclear facilities.
3. What ownership interests need to be notified?
'Owners' of critical assets will be obliged to provide necessary information for inclusion on the Register. This could include details of the owner, the name and location of the asset, the organisational management structure and details of operational access and control of the asset. It is unclear whether the concept of 'owner' will align with the existing ownership framework in Australia's foreign investment regime, including the types of ownership interests that are intended to be caught.
4. Will the Register be public?
We understand that it is not currently intended that the Register be made public, which raises questions as to whether the existing owners of critical infrastructure will be made aware that the asset they own is considered critical infrastructure, and whether they will have an opportunity to dispute this classification. Such a classification would be important to asset owners, given the potentially elevated regulatory burden imposed to manage risks identified by the Centre, together with the potential impact of such a classification on the pool of potential purchasers of such assets.
Submissions to the discussion paper
Submissions in response to the discussion paper are due on 21 March 2017.
If you would like to talk to an expert about these changes, please contact one of the partners listed below.