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Security shouldn't trump economics on the Ausgrid sale

Security shouldn't trump economics on the Ausgrid sale
Published 18 Aug 2016 

Security trumps economics, or so the Ausgrid saga seems to have taught us.

But maybe this framing is all wrong. Security and economics might be better thought of as being directly connected. If this is so, Australia is in real danger of building a poorer, less secure future through a flawed premise.

The rejection of the two Chinese bids for Ausgrid was justified by Treasurer Scott Morrison on national security grounds. No one can say what exactly those grounds were, but many have assumed there are worries over cyber security and continuity of electrical supply. 

At first glance this all seems a bit reminiscent of Monty Python (or at least Fawlty Towers). After a state government asset was tendered internationally, the federal government suddenly realised there were critical vulnerabilities that hostile countries could exploit. Moreover, there is no plan to fix them. These national security shortcomings (whatever they are precisely) will continue to exist indefinitely.

Ausgrid is only an electrical distribution system. There must be straightforward engineering solutions to these vulnerabilities, otherwise all such electrical distribution systems would have the same vulnerabilities, which seems highly unlikely. The rapidly developing technology of off-the-grid power generation could potentially address continuity issues, while any cyber security shortcomings seem able to be fixed (and urgently should be).  [fold]

These Ausgrid problems presumably reflect limited state government funding to fix what are national security concerns. Ausgrid’s sale was slated to bring in some $10 billion to $13 billion; even 10% of this would be a sizable amount to allocate to addressing the identified national security concerns. It’s hard to see these vulnerabilities being addressed any other way; Australia’s defence budget seems heavily committed to new fighter jets, warships and armoured vehicles, not to funding electrical infrastructure protection improvements.

Crucially, Chinese companies could then bid on Ausgrid, ensuring a much better sale price than seems likely now. The effective banning of Chinese investors suggests a fire sale and not an attempt to get the maximum financial return on the asset. Investment specialists consider that Chinese bidders were offering 1.7 times the regulated asset base but that this may decline to only 1.3 times with their exclusion. A 25%-30% reduction in sale price is significant. Including Chinese bidders and allocating, say, 10% for national security purposes would still bring the state government comparatively more cash for infrastructure spending. 

Even so, there would still be issues.Firstly, some may be uneasy about seemingly reducing security – the first business of governments – to a simple matter of dollars and cents, but of course that is just what budgets do. The government is steadily increasing the Australian defence budget to 2% of GDP. More money will mean a better defence force, enhancing national security. Recycling funding from asset sales can bring economic growth that then feeds into a stronger defence force (the larger Australia’s GDP, the more money defence gains from a 2% allocation).

Secondly, security and economics might be two sides of the same coin but some incentives exist for Australia’s security agencies to always oppose asset sales to China, the likely highest bidder. China today is more assertive (particularly in the South China Sea), government-run newspapers can be jingoistic, some Chinese netizens are hyper-nationalists and the authoritarian Chinese Communist Party has opaque decision-making. All of this is worrying. 

Australia’s national security agencies are in the insurance business, to be called upon when disaster threatens.  They accordingly focus on risk management and here China looms large; no one knows what might happen in the 99-year Ausgrid lease. Accordingly, it’s always less risky to stop an asset sale then allow it, especially when there are no evident national security gains. 

However, redirecting some funds to  fixing national security problems identified by agencies suddenly changes this equation. Now the agencies can see benefits (sometimes even for themselves) in approving privatisations. There might be some delicious ironies in this: money from a Chinese state-owned enterprise could be crucial to fixing Australian cyber security gaps, and so to preventing future Chinese cyber intrusions. 

John Howard famously said that Australia did not have to choose between China and America – between our prosperity and our security.  We should embrace his sage advice. It’s important for our future to make economics and security work together, not be split apart. The Ausgrid sale process badly needs some innovation.

Photo: Flickr/Bill Collison

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