LONGREAD: infrastructure no longer just roads and bridges

Australia is - and is always likely to be - a capital importing nation. The desire to further develop national capacity and capability, and improve the standard of living, exceeds the nation’s ability to save.

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Foreign investment is needed to bridge that shortfall. And while sources of foreign investment change over time, the weight of capital flowing from China cannot be ignored. Nor can the fact that capital flows freely and, in the global competition for capital, Australia needs to maintain and possibly improve our allure to foreign investors

"Australia, like a number of other countries, has recently taken some appropriate steps to clarify the scope of critical infrastructure."

Dr Bates Gill (not a typo - ed), in an essay for the latest Asia Society series suggests Australia is entering a period of “bounded engagement” with China. While there is no viable alternative to continued engagement, and it remains in Australia’s best interests to do so, the “parameters of the possible … [will] steadily narrow.” The areas of narrowing will not be uniform - and that will require us to be flexible and imaginative.

These statements resonate strongly in the context of infrastructure investment where Chinese capital has played a prominent role in recent years both in expanding Australia’s infrastructure stock and in the debate about new limits on foreign investment in critical infrastructure.

What Australia needs is a shift in the way we look at infrastructure and foreign investment - a more transparent, clear-eyed approach that looks to the future and recognises that common interests and shared outcomes do not necessarily require fully shared values and which enables foreign investment to support Australia to adapt to its future.

Let’s consider four broad forms of infrastructure:

Infrastructure of the future

The first is critical infrastructure. It is commonly defined as various types of infrastructure that, if destroyed, degraded or rendered unworkable for an extended period, would significantly impact a nation’s societal or economic wellbeing, its ability to conduct national defence or its ability to ensure its national security. 

Australia, like a number of other countries, has recently taken some appropriate steps to clarify the scope of critical infrastructure and has implemented a new process, through the Critical Infrastructure Centre, to monitor and assess foreign investment and to identify and mitigate any national security risks that may arise through these investments and supply chain arrangements.

While Australia has limited this initial scope to telecommunications, electricity, gas, water and ports, the US and the UK have cast a broader net, reflective of the nature of their economies and their domestic circumstances.

Several countries, including the US, UK, Germany, France, Japan and Australia have recently increased the level of scrutiny of foreign investment, including in these areas. Additional steps are also being taken in some countries in the areas of technology, data and information, reflecting the fact that these areas are the critical infrastructure of the future.

Nothing should stop a government from prescribing rules that relate to any form of public or private investment in its critical infrastructure, nor should they be prevented from the appropriate and non-discriminatory level of discretion over approvals for foreign investment, whether private, public or government-controlled or influenced, in these sectors.

However, further clarity on what is and is not allowed, and in what form, regardless of its source of origin, and a speedy “yes” or “no”, are required. The parameters of the possible have already narrowed in these areas but should not narrow further without good reasons.

Deeper regional engagement

The second is regional infrastructure. The depth and size of Australia’s economic, trade and other relationships with China creates, in the eyes of some, the risk of over-exposure to China and the reliance or concentration risks that follow.

At the same time, a growing amount of commentary (including the most recent Foreign Policy White Paper) calls for a higher level of engagement between Australia and other countries in the region, including the ASEAN countries and, more recently, the South Pacific island nations.

The discussion in Australia needs to move on regional infrastructure beyond China’s Belt & Road Initiative (BRI) and also beyond the competing infrastructure initiatives being pursued by the United States, Japan and even Australia itself. The reality is that the size of required investment across the region requires each of these initiatives.

What is missing is a framework for the assessment of a project and the recognition of the mutual dependencies that exist for this type and amount of infrastructure to be delivered across the region.

There will always be projects in a jurisdiction in which the Australian government, or Australian business, will choose not to participate for any number of reasons. There is also the competition between domestic projects (especially during the current “infrastructure boom” in much of Australia) and regional projects, and the different types of risks, returns and factors that need to be considered in assessing them.

However, if Australia is serious about deeper regional engagement and, importantly, about growing the export of its skills to the region, then we should be clear-eyed about areas of competitive advantage and even more so about the need to collaborate with other countries on a long-term basis. And we need to encourage our competitive businesses to focus on new markets, not just the home market.

Australian companies often cannot compete with the scale of construction and engineering companies from China, Japan and the US. But Australia can compete with its skills: project design, engineering and delivery; risk management; legal services; and the mobilisation and efficiency in the use of capital, to name a few.

While Australia does not have a monopoly on these skills, it has a track record of their success and the benefit of being a relatively “neutral” source country.

However, both industry and government need to coordinate a framework and an approach for an initiative of this type. The framework needs to contemplate the type of projects, and their terms, that would fall within the initiative; or, in other words, a project that meets international standards and norms in which participation by Australian business should be encouraged.

The approach needs to contemplate a “national” approach, through which the Australian brand and expertise in the relevant skills would be projected, and with which the government could provide some support to incentivise Australian business to participate and simplify some of the issues associated with the export of skills.

Dig-produce-refine-transform and export

Australia should be aspirational: corporate tax benefits in connection to such projects; a simple way for a worker to manage the personal tax associated with moving between jurisdictions; a way of easing the recognition of the relevant skills and the visa and local employment requirements required to provide them.

While these issues are raised frequently by industry, and often the subject of positive change in various free trade agreements, perhaps a project specific approach will provide the right framework to achieve meaningful change. And this does not need the continuing debate as to whether Australia joins the Belt & Road Initiative. The value that Australia and China can bring to each other, and to countries in the region, does not require a piece of paper to validate it.

Productive infrastructure

The third is productive infrastructure. This is infrastructure that adds to the productive capacity of Australia and which moves us to a higher level of activity. But we need to think hard about changing our mind-set and move from a dig-or-produce and export model to a dig-produce-refine-transform and export model; from a buyer-seller relationship to a business-partnership model; where the types of investment should be more accurately delineated; and where different types of investment can be differentiated.

While there are many sectors of relevance for this, let’s just focus on agriculture and agribusiness. This is not about “selling the farm” but rather how do we best develop the farm and Australia’s reputation for quality; how do we secure ownership and employment for future generations; and how do we further transform the products we sell and the markets we sell into?

Some Australian farms are relatively small, owned by individuals, and grow products to sell, rather than to process. Some lack the necessary scale or level of investment required to adapt them to the future of climate change, technology-led provenance and changing consumer preferences. Some of them face intergenerational succession issues. Many of them lack financial and physical capital, not intellectual capital.

Ownership of land by foreign investors always raises issues which often outweigh the actual amount of or relative percentage of foreign investment. Perception is reality and it’s the mood.

But consider mining or energy industries as an example. There is no suggestion that Australian capital or ownership alone is necessary, or even desirable, to develop the underlying resource to its maximum potential.

Don’t sell-the-farm

There is flexibility in the thresholds that apply to foreign investment in the sector. There is an established history of foreign co-investment, often starting at the minority level, to provide the required level of scale and capital to develop the resource, often supported by significant production facilities (that are developed with foreign investment) and with significant offtake contracts for what is produced (with foreign purchasers).

This process has allowed confidence in foreign investment to be established, in a way that protects Australia’s national, economic and security interests, and which maximises the economic value to Australia and Australians, all in the context of a nation that needs foreign investment to achieve its potential.

The same concepts, with some adaptation, could apply to the agricultural and agribusiness sectors, with the benefit and support of Chinese or other foreign investment – both through public sources but, more likely, through Chinese-backed private equity or venture capital.

Why not have a structure where farms are aggregated into a shared ownership structure, local and foreign? Why not allow a foreign investor to provide the capital required for the farm to not only produce but also process into a form required by offshore markets, and then sell a higher quality and higher priced output? Why not allow investment in return for an offtake contract for a certain good? Why not take the benefit of developments in technology to allow the provenance of output to be certified and the process of the output to be managed, if that bolsters Australia’s current reputation for quality?

There would be some requirements. Full transparency and the right level of Australian ownership, management, control and sharing of profit, would be critical. The sell-the-farm argument is too well entrenched, so it needs to be reimagined to become save-the-farm, process-and-sell-the-produce and share-the-returns.  

Cultural intelligence

The fourth is social infrastructure or people. Despite economics, business, technology and the transformation in communications, relationships matter. Whether it is a produce-and-sell or business-partnership relationship, people need to know each other, trust each other and understand each other. Relationships build understanding; understanding leads to respect; and respect is the foundation for trust.

And in a world of increasing change with new and emerging pressures that have little precedent in living memory, the investment in relationships or the social infrastructure between Australia and other countries, is a foundation that needs further development and investment. Building a deep level of cultural intelligence is a sound investment in the infrastructure of the future.

To succeed, there needs to be more people-to-people connections that have a purpose. The New Colombo Plan is a leading way of developing relationships for the next generation. If you look at the relationship between Australia and Singapore, where there is a high level of connectivity, exchange and understanding, in both countries, you can see a precedent.

If you start with the assumption that Singapore did not just allow this to happen but managed it to an outcome, it is easier to see how Australia and China could do this from students to business to government. This would involve a higher level of investment by both countries in exchanges and; collaboration in mutually advantageous areas so that business partnerships and people, business and government fora would start to build better relationships, better understanding and better trust.

Having a simpler immigration, visa and taxation system in both countries that allowed people to be exchanged for periods of time, within an integrated or collaborating business venture, would be a big step forward in improving integration and understanding.

The investment required here is not just financial but also time, energy, focus and attention. These relationships are harder to foster; need constant encouragement and tending; and need a long term and intergenerational view.

Infrastructure is not easy, either in terms of cost or concept. Old concepts of infrastructure, or investment, are being strained by technology and change. Not all types of infrastructure should be open to foreign investment, from China or elsewhere. A balance between common interests, shared outcomes and values will require a deftness and nuance that cannot be framed into a soundbite for a domestic audience.

But shifting focus to areas which are possible, where there is a common interest and a mutually beneficial common outcome, is crucial for the future success of the Australia-China relationship and the benefits each of them can continue to bring to the other.

Stuart Fuller is Head of KPMG Law and an Asia Society Australia board member.

This article is adapted from a paper on Australia-China economic engagement published as part of Asia Society Australia’s Disruptive Asia series. 

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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