Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

In approving Li Ka-shing's takeover bid for Australia's electricity and gas utility Duet Group, the country's Treasurer Scott Morrison is admitting that the horse on foreign infrastructure investment has already bolted.

That's a good thing. Australia has been importing foreign capital since the first British penal colony was established on Sydney Harbour, and large slices of its domestic energy sector are already owned by various configurations of Li's CK Hutchison Holdings Ltd., China's State Grid Corp. and Singapore Power Ltd.

Bringing It All Back Home
Australia has run current account deficits for almost all of its modern history
Source: Bloomberg

Li's fellow Hong Kong billionaire Michael Kadoorie controls one of the country's largest electricity retailers, EnergyAustralia, through CLP Holdings Ltd., while the territory's third-richest man, Henry Cheng, has a takeover offer outstanding for Alinta Energy Holdings Ltd. via his family's Chow Tai Fook Enterprises Ltd.

To paraphrase an old Irish joke: If Australia wanted to get to a place where its power system was entirely locally owned, it wouldn't want to start from here.

Suspicion of foreign involvement in electricity and gas networks isn't without some justification. Since the Stuxnet computer worm infected and crippled Iran's atomic weapons program in 2010, the vulnerability of critical infrastructure to malign infiltration has been a live issue.

Hackers took down about a quarter of Ukraine's power grid in December 2015 and disabled part of Kiev's almost exactly a year later, with local officials pointing to Russia as the source of the attacks. Code linked to Russian hacking operations was even found on a non-grid-connected laptop owned by Vermont utility Burlington Electric last year, leading to fears that the U.S. could become vulnerable to similar assaults.

Nonetheless, Morrison's inconsistent approach to recent takeovers has risked throwing out the baby of foreign-investment openness with the bathwater of national security.

Last year, he blocked Li and State Grid from buying Sydney-based electricity distributor Ausgrid on the grounds that a deal would be "contrary to the national interest." The move treated Li's Hong Kong-based, Cayman Islands-registered business as equivalent to a company owned by Beijing's governing State Council.

Convergence
Shareholders have finally stopped discounting the odds of CKI's Duet bid going ahead
Source: Bloomberg

That assessment had its supporters. There was "increasing alarm in national security circles about the extent of Chinese investment in critical infrastructure," former senior defense bureaucrat Peter Jennings argued in an article in the Weekend Australian newspaper earlier this month. "CKI is, in some ways an unwilling casualty of this situation, but it’s clear that Beijing is asserting ever closer control over its former British colony."

That's drawing a pretty long bow. For one thing, buying utility assets so that you can later take them down through malware attacks seems a ham-fisted and easily traced way of conducting cyber warfare -- especially given the relative ease with which code can be smuggled onto any network through an errant thumb drive.

More importantly, letting through the Duet Group bid -- as well as Chow Tai Fook's as-yet-unapproved offer for Alinta -- acknowledges something that many of Li and Cheng's compatriots are keen to assert: that, in spite of the pending 2047 expiry of its separate administrative status, Hong Kong isn't China, and its businesses aren't Chinese either.

It's not inconceivable that at some point CK Hutchison may fall much more closely under the influence of Beijing. But that, rather than the current benign situation, would seem to be the appropriate occasion for an aggressive foreign investment review.

At present, infiltration of Australian grid networks via overseas owners is a much more remote scenario than the possibility that a local utility worker compromises systems by charging a smartphone from a company computer's USB port.

Dry Spell
Foreign direct investment inflows into Australia have fallen to their lowest levels in at least a decade
Source: UNCTAD
Note: The negative figure in 2005 was largely due to the reincorporation of News Corp. in the U.S.

Australia has suffered a serious drop in inbound investment in recent years. Hostility to foreign takeovers, along with policies such as this week's decision to scrap the country's main visa program for skilled migrants, risks accelerating that dynamic.

The country is too small, and too isolated, to turn its back on international capital. Duet Group shareholders aren't the only people who should applaud Morrison's decision to allow the takeover to go ahead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net