6 March, 2018
On 1 February a joint media release from the Treasurer and the Minister for Home Affairs, stipulated that effective immediately, all applications related to the acquisition of electricity transmission and distribution assets, and some generation assets, will attract ownership restrictions or conditions for foreign buyers as they are considered "critical national assets".
What you need to know
All applications submitted to the Foreign Investment Review Board (FIRB) related to the acquisition of electricity transmission and distribution assets and some generation assets will attract ownership restrictions or conditions for foreign buyers.
Standard conditions are not currently contemplated and each application will be assessed on a case-by-case basis.
FIRB will also focus on assessing the impact of any acquisition against the cumulative level of ownership and diversity of ownership within the electricity sector.
Early proactive FIRB engagement by sellers is recommended so that any ownership restrictions are identified to the market as early as possible during a sale process.
No business exemption certificates will be granted in respect of investment in critical infrastructure.
What you need to do
If you are a current or prospective player in the electricity sector interested in selling or acquiring an interest in these infrastructure asset classes you will need to engage with FIRB early in the sale process.
If the asset is a generation asset, you should test whether ownership restrictions or conditions are likely to be applied.
The potential conditions may impact both buyer interest and the information that may need to be disclosed to potential buyers. Conditions may relate to operations and potential bidders will need to have access to sufficient information to determine the practicality of, and cost of compliance with, conditions that may be proposed by FIRB.
New ownership restrictions or conditions
Effective immediately all applications submitted to FIRB related to the acquisition of electricity transmission and distribution assets, and some generation assets, will attract ownership restrictions or conditions for foreign buyers as they are considered critical national assets. The detail of conditions that may be imposed have not been publicly released and the Treasurer has indicated that:
- each application will be assessed on a case-by-case basis;
- conditions and restrictions will be based on restrictions that are already in place; and
- there will be an emphasis on assessing a range of factors including the cumulative level of ownership within a sector and a need to diversify ownership within that particular asset sector.
What electricity assets will this apply to?
There is no guidance regarding the asset type which falls into the category of a "critical national asset".
We assume that electricity transmission and distribution assets and "some generation assets" fall within that category given the discussion of those assets in the context of these new conditions.
There is no guidance as to the parameters or thresholds to apply to decipher whether a generation asset would fall into the category of the "some generation assets" which will attract these new conditions. A sensible starting point may be to refer to the threshold parameters for what is considered a critical electricity asset under the Security of Critical Infrastructure Bill 2017 (Bill). Under the Bill an asset is a critical electricity asset if it is:
- a network, system, or interconnector, for the transmission or distribution of electricity; or
- an electricity generation station that is critical to ensuring the security and reliability of electricity networks or electricity systems in a State or Territory as prescribed in the rules.
Whilst still subject to legislation, the Critical Infrastructure Centre has indicated and the draft exposure of the Security of Critical Infrastructure Rules 2017 stipulates that the electricity generation stations likely to be captured by the Bill will include:
- those systems that are contracted to provide a system restart service which provide the ability to restart generators in the electricity network and ultimately commence restoration of load; and
- any synchronous generator which generates electricity above the following MW threshold, NSW – 1400MW; Victoria – 1200MW; QLD – 1300MW; WA – 600MW; SA – 600MW; Tasmania – 700MW; and NT – 300MW.
What conditions or restrictions will be imposed?
The detail of conditions that may be imposed have not been released. The Treasurer has indicated that standard conditions are not currently contemplated and instead conditions will be applied on a case-by-case basis.
The Treasurer confirmed that there will be an emphasis on assessing a range of factors including the cumulative level of ownership within a sector and a need to diversify ownership within that particular asset sector. Conditions have previously been imposed limiting the level of foreign ownership permitted in particular critical infrastructure assets. However, there is no guidance as to how FIRB will assess "the cumulative level of ownership within a sector" or a need to diversify ownership within that particular asset sector. The Government already takes into account competition factors when considering whether an investment is contrary to the national interest, including considering whether a proposed investment may result in an investor gaining control over market pricing and production of a good or service in Australia. It is not clear if there is an intention to look at competition issues over and above the current practice in referring to other Government agencies, including the Australian Competition and Consumer Commission (ACCC) prior to issuing a no objection notification. The ACCC also examines competition issues in accordance with the current competition regime independently of FIRB.
It is expected that the conditions that may be imposed will go beyond minimum levels of Australian board members or local presence on board committees and that conditions on access to operational information may be applied.
FIRB is engaging with the relatively new Critical Infrastructure Centre (which forms part of Department of Home Affairs) to develop a whole-of-government approach in assessing national security risk of what are considered critical infrastructure assets.
On the assumption that the Security of Critical Infrastructure Bill 2017 is passed, it remains to be seen if the Critical Infrastructure Centre will seek to apply conditions it recommends to FIRB uniformly across the industry and not only to generation assets that are considered critical national assets owned by foreign persons.
Early engagement with FIRB
It is advisable to proactively engage with FIRB from the outset, in particular as standard restrictions or conditions are not currently contemplated and instead will be applied on a case-by-case basis.
What does this mean for the electricity sector?
Whilst FIRB has not issued formal guidance, the tone and content of recent media releases from the Treasurer demonstrate that the Australian government will pay close attention to and monitor any change in ownership within the electricity sector and those assets which are considered critical infrastructure assets. No business exemption certificates will be granted in respect of investment in critical infrastructure or agribusiness.
This change in policy approach will impact how vendors conduct any divestment process. Current and prospective players in the Australian electricity sector will need to manage transaction timelines both on the buy side and sell side to take into account the clear preference from a policy perspective for parties to engage with FIRB early; additional due diligence regarding operational matters may also be required.
Early proactive engagement with FIRB will assist in ascertaining if there are any particular national interest concerns or if ownership restrictions will be applied. For some divestment processes, this will be critical to enable vendors to work closely and collaboratively with FIRB to minimise any negative impact on the sale process before going to market.
We are hopeful that additional guidance will be issued regarding the type of conditions and restrictions to be imposed and that there will be an opportunity for consultation with the industry on any further guidance before it is applied as policy.
For further information, please contact:
Kylie Lane, Partner, Ashurst
kylie.lane@ashurst.com
