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Economics References Committee
Foreign investment review framework

JENNINGS, Mr Peter, Executive Director, Australian Strategic Policy Institute

Committee met at 09:11

CHAIR ( Senator Ketter ): I declare open this public hearing of the Senate Economics References Committee. The committee is hearing evidence on the committee's inquiry into the foreign investment review framework. The Senate referred this inquiry to the committee on 25 November 2015 for report by 4 February 2016. I welcome you all here today.

This is a public hearing and a Hansard transcript of the proceedings is being made. Before the committee starts taking evidence, I remind all witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public, but, under the Senate's resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, also be made at any other time.

On behalf of the committee, I would like to thank all those who have sent representatives here today for their cooperation in this inquiry. I welcome our first witness, Mr Jennings. I invite you to make a brief opening statement, should you wish to do so, and then we will ask questions.

Mr Jennings : My thanks to the committee for the opportunity to appear. I should say that I am presenting my personal views. ASPI does not take corporate positions on any matters. I will address the port of Darwin issue first because I understand this is to be the main focus of the hearings today, but I will also finish with some brief comments about the foreign investment review framework more generally.

With regard to Darwin, I would like to make the following points. First, I would argue that the lease appears to show some concerning loopholes in foreign investment review processes. Because the facility was owned by the Northern Territory, it appears that there was no basis for the lease to be considered by the FIRB, the Foreign Investment Review Board. It is really beside the point, I think, that the Northern Territory government may have contacted the FIRB if the board itself had no authority to make an assessment of the case. Second, I think there is some lack of clarity around the role played by Defence and other national security agencies. I understand the defence department's position was that it limited its consideration of the issues to the extent that it impinged on Defence's interests and responsibilities. I think that points to the need for a stronger national security test to be applied to foreign investment decisions. Therefore, this committee might like to consider who should be given carriage of this national security assessment role. Third, the secretary of Defence, whose presence I acknowledge in the room, has made it clear that there was no prior consultation with the United States, and he has said in retrospect that it would have been more sensible to give them prior advice. Given the expanding cooperation with the US Marine Corps out of the Port of Darwin, to my mind this remains a serious oversight. The matter was serious enough for President Obama to raise it with the Prime Minister in Manila last month. That is something that does not happen lightly.

Fourth, for the record let me make the point that Chinese and indeed other sources of foreign investment are to be welcomed, but Australia also needs to have confidence that appropriate investigation is made into the impact of such investment on critical infrastructure such as port facilities or electrical and telecommunications infrastructure. Foreign investors would certainly not be given access to such critical infrastructure in China. Most countries have investment measures that seek to protect their strategic assets. For some, these investment policies are very limited in their coverage, while for others, such as China, the restricted coverage is very broad indeed.

Fifth, what has become clear since the Port of Darwin decision is that all large-scale Chinese business enterprises, not just those that are owned directly by the Chinese state, will have links to the Communist Party of China and, in some cases, the military. That should not necessarily bar investment by such entities, but this aspect of Chinese investment needs to be part of any credible foreign investment review process.

Finally on the Port of Darwin, I would argue that the port has both commercial and strategic value for all of Australia. A 99-year lease takes us as far into the future as we stand in relation to the Anzac landings at Gallipoli. On that time frame, I think it is impossible to make confident judgements about what our strategic situation will look like in a decade, let alone in a century.

On the broader foreign investment review framework, I welcome reports of Mr David Irvine's appointment to the Foreign Investment Review Board. This is an important first step to ensuring an approach that involves high-quality national security assessments.

I and some other colleagues at ASPI will be making a written submission to the Senate Economics References Committee which calls for some further steps to be taken, including strengthening the FIRB's capacity for making independent assessments of the foreign investment impact on national security matters. FIRB's authority should certainly be extended to cover state and territory owned assets. We will also suggest that the National Security Committee of Cabinet, rather than the Treasurer, should sign off on the more complex investment proposals and that a more systematic and transparent process should be used to assess applications. That concludes my opening statement, and I am very happy to take questions.

CHAIR: Thank you very much, Mr Jennings. Senator Conroy.

Senator CONROY: Thank you very much for appearing, Mr Jennings. You have spoken on this publicly and written a number of articles, and I think some of your colleagues from ASPI may also have contributed. You have made some comments in your opening statement, and I note particularly that you welcome the new appointment to the FIRB of Mr Irvine. Do you think that does enough to address your concerns? Firstly, do you think that acknowledges that there was a mistake, a loophole, something that was not as tidy as it perhaps could have been?

Mr Jennings : I do read it as a signal that the government thinks it needs to have a stronger national security approach to FIRB review. As I said in my opening statement, I see it as an important first step but not the only necessary step. I think there are some appropriate moves that should be made to look at structure and processes associated with the FIRB, partly because of the very significant volume of foreign investment processes or foreign investment applications which are likely to come in over the next few months or so. It seems to me that a FIRB which is strengthened in terms of those processes is one which will lend greater public confidence to the decisions which governments ultimately take to agree to foreign investment.

Senator CONROY: If we just take a step back from the specifics of the Darwin port for a moment, could you in broad terms outline your views on what China's strategic objectives and intentions are in the region and then sort of merge that into your concerns about how Darwin port might fit into China's strategic plans? What is your overarching concern?

Mr Jennings : On the broad issue of China's strategic intentions in the region, I think we are seeing a country which, thanks to its growing wealth over the last couple of decades, is now in a position to play a much stronger military and security role throughout the Asia-Pacific region. In fact, we have recently been seeing signs that that is China's intention. It wants to be seen to be a great regional power. It wants to be seen to have significant military and strategic sway in the Asia-Pacific. It is taking all of the steps that would be necessary to implement those objectives.

I think an important waypoint was reached when President Xi became president in 2012. At that point we saw something of a change in Chinese strategy, particularly as it relates to the East China Sea and the South China Sea, where there has been a much more overt expression of Chinese power and military capacity in the region. Back in 2012 or early 2013, it declared an air defence investigation zone across the East China Sea, engaging in much more overt use of its naval and paramilitary forces—the coastguard and other maritime forces it has—to assert its sovereignty claims.

Then more recently again in the South China Sea we have seen the very rapid construction of artificial islands across a number of areas which are in dispute in terms of the sovereign control of those areas. I think China is really, by dint of physical presence, demonstrating its capacity to control the region rather than being concerned about the legal niceties of who actually owns or has sovereign authority over those areas.

At the same time as we have seen that, we have also seen a significant up-tick in the concern of the United States and a number of other countries about the intrusive nature of the Chinese cyberstrategy, which is really designed to look for intellectual property which China can use for its own purposes across a significant number of countries, including Australia.

The other thing I would mention is the articulation by President Xi of what he refers to as his 'one belt, one road' strategy, which is about building Chinese infrastructure across the north of the country—road, telecommunications and pipe links for natural gas and oil. China is also seeking access to port facilities in a range of countries in South-East Asia through to Darwin, which I think can be seen as part of this broader strategy, to Sri Lanka and Pakistan.

All of this is about giving China a greater sense of its capacity to assure its own strategic lines of supply for vital raw materials and goods and to strengthen the weight of China's strategic and diplomatic presence through that very wide region indeed. I see the Darwin port as being a part of that broader Chinese push to secure infrastructure for itself and, behind the infrastructure, to secure long-term access to vital raw materials for the Chinese economy.

Senator CONROY: You mentioned the cyberattacks that China have been engaged in. You would be aware there was recently a fairly major attack on the Bureau of Meteorology which China has been identified as the source of. Do you have any information or knowledge around that you could share with us?

Mr Jennings : Not on the specifics of the Bureau of Meteorology. I cannot help you on that, but I can say in more general terms that China is very often identified as being one of the most aggressive actors in using cybertechnology for intelligence-gathering purposes. It is one of a small number of countries, which would also include Russia and Iran, which have invested deeply in their ability to use cyberpower for those purposes. So the Bureau of Meteorology attack, if it was sourced from China, does not particularly surprise me. It reflects a very broad Chinese interest in gathering as much information as it can across a wide front of areas.

Senator CONROY: Surely, it is not interested in the weather over Australia.

Mr Jennings : I think it is interested in a number of things, which might be relevant to a hack into the Bureau of Meteorology. One is to look for a potential weak point across a broader network of Australian government agencies, from which it could penetrate into, perhaps, more sensitive areas of government activity. Of the value it would get from data the Bureau of Meteorology might have, you would probably be surprised at how valuable it might be, from a Chinese perspective. It could help improve the quality of their own meteorology, which is something—

Senator CONROY: You are not seriously putting to us that they hacked in so they could get better weather forecasts!

Mr Jennings : There are big dollars behind things like being able to predict droughts and make decisions relating to crop—

Senator Xenophon interjecting

Mr Jennings : Because it is probably cheaper, simply, to take the data. Broadly, the issue is, they are interested in big data, they are interested in whether or not it can provide further access to other, potentially, more sensitive areas of government activity and they are interested in exploring networks, connections of individuals, to see who they are connected to. We know the Bureau of Met has a connection into the Defence department, for example, which does have very precise interests in meteorological information.

Senator CONROY: Yes. Most of our Defence facilities would require accurate weather information—any airfield or naval base. Anybody who needs to plan any of our deployments, in any way, shape or form, would need access to the materials supplied by the Bureau of Met.

Mr Jennings : That is right. And it is relevant to the conduct of operations, humanitarian and disaster assistance into the region. There are many Defence uses for that type of information.

Senator CONROY: In the ASPI article 'NT deal shows FIRB must be given new national security credentials', you state:

In a worst case scenario, operational control of the Port of Darwin Port could facilitate intelligence collection of the tactics, techniques and procedures used by Australian Defence Force and US Marine elements during their North Australian deployments.

Can you elaborate on that?

Mr Jennings : The point I was wanting to make in that article was that there is a deep Chinese interest—driving interest—in understanding how Western military forces operate, right down to the fine details associated with how a ship operates, how it is loaded and unloaded, the types of signals a ship will emit through a variety of sensors and systems, and the noise it makes as it moves through the water with its propellers. These are all points of information that are of deep interest to China and something they very actively seek to gather, in a range of means, overt and covert.

It is worth noting that even today the Chinese military is remarkably isolated in its connections with other military forces, so it uses every opportunity it can get to look for information that helps it better understand how competent military organisations operate and run. I do see this as an interest China would have—understanding how the Australian Navy operates and how the Marine Corps or any other navy coming to the port of Darwin on visits or for exercises operates.

There have been indications in previous annual reports of the Darwin Port Authority that up to 100 or more naval ship visits take place, into the port, every year. I would see that as 100 intelligence-gathering opportunities, in terms of the interest China would have, in finding out big things and little things about how naval forces operate. One should not underestimate the fact that there would be significant intelligence interest in the movements into and out of the port and anything that could be gleaned from that in tactics, techniques and procedures of those naval ships.

CHAIR: Senator Conroy, I would just interrupt for a moment to note the presence of the media at the inquiry and find out whether any member of the committee has an objection to the media being present. Mr Jennings, do you have any concerns.

Mr Jennings : I have no objection.

CHAIR: We ask the media to observe the normal protocols in relation to filming during these proceedings.

Senator CONROY: You would have read that Defence officials have been dismissive of the concerns that you have outlined, with the Chief of the Defence Force and the Secretary of the Department of Defence suggesting that, if foreign officials wanted to observe the movements in and out of the port, they could sit at a fish and chips shop on the wharf and watch ships come and go. How do you respond to that?

Mr Jennings : It is certainly possible for them to do that, but I would say is that the Chinese and indeed other foreign intelligence services have far more systematic and technically sophisticated means at their disposal to observe the activities of ships. It is not simply a matter of knowing what is coming into port and when it is there and when it moves out; I think the compelling interest would be around the electronic emissions of a ship in terms of its systems and sensors and, as I say, the more fine-grained tactics, techniques and procedures that a ship uses to load and unload and to move the military forces around. The marine vessels, for example, are essentially large cargo vessels to move significant amounts of marine military equipment. So all of those things would be of interest to the Chinese. They can access that material in a variety of ways. There is satellite over head—

Senator CONROY: I was just going to raise the issue of satellites. You have heard that satellites have been invented, haven't you?

Mr Jennings : Indeed. I have read that satellites have been invented, but I also know that they are strong in terms of some types of intelligence gathering and less so for others. Proximity is still a valuable asset for any intelligence gathering organisation.

Senator CONROY: So if I were to take Mr Richardson's advice and go and have some fish and chips and do a bit of fishing off the side of the port, I would not be able to gather quite as much information as is being suggested and there are other things that are at stake?

Mr Jennings : Yes, indeed.

Senator CONROY: In the ASPI article 'Security crucial in leasing assets', you note that Landbridge proclaims to be 'contributing its best to realising the great rejuvenation of the Chinese dream'. What do you think Landbridge means by this? Is it just rhetoric?

Mr Jennings : No, I do not think it is rhetoric in the context of the Chinese system. I think the key point to make is simply to say that capitalism with Chinese characteristics is a rather different thing than is the case for private sector firms in Australia or many other parts of the world. For a large firm to succeed in the context of China's political system it needs to have close and effective links with the Chinese Communist Party. A large firm will tend to have a Chinese Communist Party committee inside the firm, which can play a role in making organisational decisions about the purpose of the firm. In a firm that is concerned with critical infrastructure, port facilities and logistics, there will also be connections into the Chinese military. This is just an inherent part of how the Chinese system operates.

There have been a number of responses to comments that I and others have made about this point, to say that Landbridge is hardly unique; this is very typically a part of how capitalism operates in China with the private sector; and that, if that was a criteria for saying that a Chinese firm ought not to be allowed to invest in Australia, there would be very little investment indeed. The point I would make about that is simply to say that this ought not to preclude Chinese firms from being able to bid for investment opportunities in Australia but nor should we be blind to the reality that this is how Chinese firms operate, with the closest possible links into the Chinese system. They would not be successful if they were not able to operate in that way within the Chinese political system. And so that quote you referred to I believe is on the English language website of the Chinese firm Landbridge, and I believe it reflects what would seem to be a very serious statement of corporate intent about the operation of the company in China.

Senator CONROY: Do you believe China would allow Australia to buy a port in China?

Mr Jennings : No, Senator, there is a series of rules established in the Chinese system with very significant exclusions written into the rules for foreign investment into their own country. Critical infrastructure of that sort would not be available for sale to any foreign company.

Senator CONROY: Why would China define a port as critical infrastructure but Australian does not?

Mr Jennings : I cannot really answer that question. For countries that are deeply involved in international trade, or the movements of commerce, ports are clearly critical infrastructure. There is no doubt in terms of how the port of Darwin has been written about over the years. the Darwin Port Corporation in its most recent annual report referred to the port has being 'a strategic asset'. That word 'strategic' has often been used by Defence in its own characterisation of the port.

Senator CONROY: Another ASPI article, entitled 'The Port of Darwin as "a grey zone" situation' by Patrick Cronin and Phoebe Benich, published on 27 November, stated:

While Defence Department Secretary, Dennis Richardson says officials in his department were consulted in assessing the deal, it’s surprising that Defence appears to have acquiesced in the lease so effortlessly and free from debate. According to Australian Treasurer Scott Morrison, the deal also evaded formal review by the Australian Treasury’s Foreign Investment Review Board.

Are you able to elaborate on this? I appreciate that you did not author the article, but do you share the authors' concerns that 'Defence acquiesced in the lease so effortlessly and free from debate'?

Mr Jennings : Of course, the secretary will be able to put the department's position after my time here—

Senator CONROY: We are always at liberty to call you back to respond, Mr Jennings.

Mr Jennings : I remain puzzled by the overall assessment that this was an acceptable lease arrangement from a Defence point of view. I believe that what the department was doing was assessing the suitability of the lease from a fairly narrow perspective—which is to say the impact that it had on Defence facilities in the port of Darwin and not part of the lease arrangement. As you know, there is HMAS Coonawarra, which is a small patrol boat base that is outside of the lease arrangement. There is also currently under construction a barge-ramp facility, which is a roll-on roll-off facility that will be of use to amphibious vessels, outside the lease arrangement, although adjoining the lease.

I do believe that it was really on the basis of making an assessment about the impact of Defence's current use of those facilities that the department concluded that the lease was acceptable. My own view is that there needs to be a broader national-interest test applied to whether something of this nature is sensible from an Australian perspective. It may well be the case that that is not something that the Defence department feels equipped to undertake, but I do think it is where the Foreign Investment Review Board needs to apply a broader set of judgements about national security interests, other than the security of Defence bases. In the submission that we will make to the committee early in the new year, one of the things we will suggest is that the Foreign Investment Review Board should be equipped with capacity to make those national security assessments itself, but that does mean an expansion of staff to some extent to be able to make those sorts of judgements. Obviously, drawing on wider advice from other parts of the public service and the intelligence establishment, it was the national security test rather than the defence test that I felt was left wanting as a result of this lease arrangement.

Senator CANAVAN: Mr Jennings, what do you see are the core concerns here on this lease? You have mentioned intelligence and information I suppose the lessor would have access to. Is that all the concerns are or do they extend to the level of service that would be provided by the new lessor or denial of access at particular times, et cetera? Are the concerns that broad or are they just on those information and intelligence issues?

Mr Jennings : No, they are broader than that. In addition to the matters I have already raised I think there is a concern that needs to be addressed about the impact on alliance cooperation with the United States. So we have a situation where we are engaging in an expansion of our cooperation with the US Marine Corps that ultimately in a few years time will see a marine unit of around 2,500 troops regularly deployed into the north of Australia along with their ships and equipment operating out of the port of Darwin. So I think an issue here is: to what extent will this potentially impinge on that cooperation? Two ways: one is just in practical ways about where those ships will tie up, operate and load from and how they will work together. Given that the Americans have I think in some respects deeper concerns than we on not wanting to allow those things to happen in a Chinese owned facility then—

Senator CANAVAN: Just to be clear: are you saying there is a risk that Landbridge would not provide them access to tie up boats in certain areas and those sorts of things? I understand the relationship with the US, but what exactly practically on the ground would it mean for operations?

Mr Jennings : It sort of leads me to the next point which is simply to say that it is impossible to know how the broader strategic world is going to look over the timeframe of the lease. So we have a situation now where there is in fact increased tension in the Asia-Pacific region, which does have a US and Chinese dimension to it, as China and the US sort of test their capacities and their interests in the South China Sea. In some respects we hope that the elements of cooperation in the China-US relationship will be more important longer term and overcome the elements of competition, but I do not think it is possible to rule out that that competition could become more intense and difficult in coming years, including in relatively short order. It is unknown how that will then play out in terms of the perhaps incompatible interests of the two countries when it comes to the use of the port of Darwin.

Senator CANAVAN: I understand that and, without putting words in other witnesses' mouths, I have read that Defence seem to be happy that there is a regulatory arrangement in place to provide access and obviously we can impose obligations on Landbridge or a lessor. If they breach those obligations by doing some of the things you are suggesting if tensions are higher, presumably we would have the ability to step in and change the arrangements because effectively it is a breach of contract. That is not enough of a protection in your view against those—

Mr Jennings : The secretary has made the point that the Defence Act does create a legislative base to make it possible for the Commonwealth to step in if it feels the strategic situation is serious enough to warrant that step. To the best of my knowledge I think the last time the act was used for that purpose was in the Second World War—for example, requisitioning factories for military production during that time. So in a sense what that shows you is the degree of crisis that we would need to find ourselves in before something of that nature would—

Senator CANAVAN: Are you saying that that step alone could be an escalation or fuel to the fire, if you like, in any tense environment?

Mr Jennings : We would be in a different strategic environment if the government felt it was necessary to undertake a step of that nature.

Senator CANAVAN: Given it has only been used in wartime it would almost be bordering on an act of war.

Mr Jennings : It would clearly be a very serious step to take, yes.

Senator CANAVAN: I recognise you may not be an expert on the foreign investment review act, but, with regard to the particular deficiencies you have expressed, is your concern only around this particular issue—the leasing or purchase of state government assets—or do you see that this has revealed broader problems?

Mr Jennings : I think there is a need to strengthen the capacity of the Foreign Investment Review Board to deal with national security issues, in part because of the flood of investment proposals which is in front of the board now and likely to be in front of the board in coming years. The Foreign Investment Review Board, I think, has been a mechanism designed largely to facilitate the channelling of foreign investment into Australia, and it has operated primarily with that sort of financial-economic mindset—and appropriately enough; I have no concern about, and indeed support, the value of foreign investment as a necessary thing for the Australian economy. But where I feel there is now a need to strengthen its capacity is in that national security area.

Senator CANAVAN: Do you think this can be solved simply by identifying those assets which are of a strategic nature and incorporating them into the foreign investment review framework, or should we expand it to cover state government assets generally because it is too hard to identify what may or may not be strategic?

Mr Jennings : I would probably suggest both of those steps need to be taken. We could follow an option which both the Americans and, in fact, the Chinese do, which is to identify areas of critical infrastructure and say, 'These things either will not be leased or sold, or need to be subjected to very close scrutiny before they are leased or sold.' That is very much a part of the American process and indeed the Chinese process.

I think also, though, it is important to say that there should be a mechanism for the Commonwealth to be able to intercede when we are talking about areas of critical infrastructure owned by state or territory governments. It seems to me that, if a piece of infrastructure is critical to a state, it is also critical to the Commonwealth, and therefore there needs to be the ability for the Commonwealth to address that so that there is some sort of uniform approach to how we deal with these matters.

Senator CANAVAN: Finally, I am interested to know to what extent this was a matter of interest to the strategic commentariat, I suppose—which you, Mr Jennings, are a prominent part of—given that there was a Northern Territory parliamentary inquiry and there was some publicity that they were at least considering leasing it, although not necessarily to this particular company, of course. Was there any sort of concern expressed, or emails or texts between people saying, 'This is a bit of an issue,' prior to the announcement, or did it hit you as a bit of a shock that it had gone to this company?

Mr Jennings : My personal attention was not drawn to this until the announcement by the Northern Territory Chief Minister—

Senator CANAVAN: Just to be clear, this was the announcement of Landbridge as the successful candidate.

Mr Jennings : Yes, that is correct. There are a number of other issues, including the 'polls and wires' lease in New South Wales, which was one I had been following more closely from a security perspective. Certainly, what I can say is that there has been a high level of attention paid to this issue since the announcement by the Northern Territory Chief Minister. I was in Washington, DC last week, speaking at a number of conferences, and I was struck by the number of American people working in the think-tank world, the strategic world, who had been following this issue quite closely.

Senator CANAVAN: But only since the announcement about Landbridge, in your view?

Mr Jennings : In the American context, yes, I think that would be right.

Senator CANAVAN: After it was on the front page of the NT News?

Mr Jennings : Indeed.

Senator CONROY: Clearly if you have a subscription!

Senator CANAVAN: Okay. That is enough from me.

Senator XENOPHON: Mr Jennings, essentially you are saying that the rules that should apply here should be no different to the rules that the United States and China apply to similar types of foreign investment applications.

Mr Jennings : I am probably more in favour of the design of the American system than the Chinese, which is really designed to keep foreign investment out. We need to attract foreign investment but, at the same time, make sure we are looking to appropriate national security concerns.

Senator XENOPHON: In other words, we need to attract foreign investment without being mugs about it, to put it bluntly.

Mr Jennings : Indeed.

Senator XENOPHON: As I understand it, Dubai ports did try to buy into a couple of US ports a number of years ago and were blocked. Is that your understanding?

Mr Jennings : Yes.

Senator XENOPHON: On what basis was that?

Mr Jennings : National security concerns, as the Americans articulated it.

Senator XENOPHON: Even though the Emirates are a close friend of the United States, that was still knocked back.

Mr Jennings : Yes, indeed.

Senator XENOPHON: Do you know anything more about that?

Mr Jennings : It does go to, I think, a different American approach to thinking about critical infrastructure. In the case of their own investment review process, which is known as CFIUS, the Committee on Foreign Investment in the United States, there is a much clearer linking of American critical infrastructure into their evaluation of foreign investment. Indeed, that is a step which should perhaps be considered for our FIRB processes. We have a critical infrastructure system that operates out of the Attorney-General's Department, which defines it and creates linkages between government and industry to talk about how to keep it secure. I think a closer connection between foreign investment assessment and that critical infrastructure would be a useful thing to do.

Senator XENOPHON: There seem to be three elements here. The first is that you are saying that the FIRB ought to have a clearer statutory role or be a separate statutory authority. Is that what you are suggesting?

Mr Jennings : Yes.

Senator XENOPHON: I think that would carry with it an implication of more resources to be able to look at some of these deals forensically. Secondly, it seems that the states and territories are exempt under the current provisions of the Foreign Acquisitions and Takeovers Act. Is that correct?

Mr Jennings : Yes.

Senator XENOPHON: In your view, is that an anomaly or something that needs to be remedied?

Mr Jennings : I think it does need to be remedied on the basis that, beyond the interests of the states and territories, the Commonwealth is the entity which has national security responsibilities, and that needs to be addressed.

Senator XENOPHON: You have alluded to the third matter I want to go to. What would the thresholds be for national security considerations to be dealt with? I am not quite clear—and I expect it is my fault—as to whether you are suggesting that the National Security Committee of cabinet have a more active role or whether the Foreign Investment Review Board ought to look at national security issues more proactively or a combination of both.

Mr Jennings : What I am suggesting by involving the National Security Committee of cabinet is to make the point that that is essentially the most senior entity within the Commonwealth system for making assessments about Australia's national security interests. When it comes to making decisions about foreign investment that go to critical infrastructure concerns—the port of Darwin, poles and wires in New South Wales and perhaps other issues that one could think of—ultimately there will be a stronger sense of public confidence in government decision making if the National Security Committee of cabinet is the entity that ticks off on those approvals, the reason being that it is not just the Treasurer, who is also a member of the NSC, but it brings together ministers who have a range of responsibilities in those national security areas.

Senator XENOPHON: Presumably, the Foreign Investment Review Board, if it were a statutory authority as such, would give input to the National Security Committee.

Mr Jennings : It could be structured to do it that way and I think that would be sensible.

Senator XENOPHON: Do we lack a sufficiently robust framework to deal with these sorts of issues?

Mr Jennings : I think the framework needs to be made more robust. It probably worked in an earlier time when there was perhaps less in the way of high-value investment proposals relating to critical infrastructure, but that is not the world we are in now, so I think the need is to strengthen it.

Senator XENOPHON: We will be hearing from representatives of the Northern Territory government—their chief executive officer and the Deputy Coordinator-General—later today. Do you have any comments to make about the robustness of the framework and the process that was adopted by the Northern Territory government?

We will hear from Mr Richardson—it is terrific he is here today—soon. I am trying to understand what information was given, imparted, from the Northern Territory government to Defence on this. What is your impression, given that you have looked at this, of the robustness of the process used by the Northern Territory government?

Mr Jennings : The Northern Territory government, in a sense, acted in good faith on what they took to be an assessment from the Commonwealth that there was no problem with the lease proposal. It is unclear to me how that interaction took place, between the Northern Territory government and the Commonwealth, at what level, what questions were asked and what questions were answered. At the end of the day, the Northern Territory government is within its rights to make the point that it is the Commonwealth rather than the Northern Territory government that has to make judgements about national security interests.

Senator XENOPHON: I go to this vexed issue of the link between Chinese enterprises, their links to the state, whether they are state owned enterprises or not. This is not a criticism. China is Australia's great trading partner and we have a very close relationship with them. But given the nature of the role of the state in commercial enterprises in China, do you think it reasonable in any deals, such as this—of critical infrastructure—to examine the backgrounds of the principles of such a company and their interaction with the state?

Mr Jennings : Yes. It is important to have a clear understanding of how capitalism works with Chinese characteristics. One individual put to me that in polite society one does not talk about these things, when it comes to how Chinese firms operate. But when we are talking about the operation of these firms into Australia, particularly where it relates to critical infrastructure, we need to have a realistic appreciation of how the Chinese system operates.

Senator XENOPHON: I am not singling out Landbridge—I want to make that clear—but it is not unreasonable that there ought to be due diligence done on a company, such as Landbridge, for a deal such as this.

Mr Jennings : Yes, that is exactly right.

Senator XENOPHON: Do you think due diligence was carried out, in this case?

Mr Jennings : I would note the degree of surprise, the reaction, to a number of things that my institute published, when we did no more than apply a Chinese linguist to look at Landbridge's Chinese language sites. That reflects a minimum level of due diligence that might be appropriate in considering the nature of the company concerned.

Senator XENOPHON: You are saying there was not due diligence done, in your view.

Mr Jennings : In my view, no.

Senator XENOPHON: Does that concern you, given the nature of the deal and the asset?

Mr Jennings : Yes. If we are going to support infrastructure, investment of this type, it is necessary to understand what we are dealing with. That means to say, some assessments have to be made about the nature of these companies.

Senator XENOPHON: The closing and settlement of the deal, on the surface, seems to have been dramatically accelerated. Is that your view?

Mr Jennings : It was the observation of the Northern Territory assembly and the review they did about lease arrangements that the process was very hurried. The assembly's report indicated that there was some concern—in private-sector circles in the Northern Territory—it had been done very fast. The report itself, which was on what the right leasing arrangement should be, was conducted within about four weeks of the operation of the assembly. So it does seem to have happened very quickly, indeed.

Senator XENOPHON: That concerns you, the due diligence.

Mr Jennings : Yes.

Senator WHISH-WILSON: It seems that one of the bigger issues, here, is about a lack of investment in the port. Both the Northern Territory government and you, Mr Jennings, in your article in The Australian, raised the issue of significant underinvestment in the port by previous and existing governments. Could you expand on why previous governments have not invested in more naval infrastructure and other infrastructure in this port, which has put us in a situation where, clearly, the government felt it had to go to the private sector to fund the growth of the port?

Mr Jennings : There are always multiple calls on the Defence facility dollar for investment, and the Port of Darwin competes against many other priorities that have been identified. I would make the point that in a review that Allan Hawke and Ric Smith conducted into the Australian Defence Force posture in 2012 they concluded that there was a need for broad additional investment of resources in the north of the country. And it is certainly the position of the Northern Territory government that there has been inadequate Australian investment.

Senator WHISH-WILSON: Sorry, Australian government investment?

Mr Jennings : Australian government investment in terms of military infrastructure within the port. The position to counter that might be to say that, in fact, Australia's defence interests of a maritime nature in Darwin have been fairly limited. There is the patrol boat base HMAS Coonawarra, which has been adequate for what one might describe as 'peacetime needs' for many years. More recently of course we have seen a very significant expansion of the use of Darwin for what is called 'enhanced cooperation' with the US Marines, and I think that does give rise to consideration going forward about what is the investment that will be required to support that as we get a larger and larger US Marine presence, and along with that US Marine vessels, which are part and parcel of how the Marines operate.

Senator WHISH-WILSON: I am interested: do you think any of this decision-making process has been influenced by the move to privatisation of these ports? That not taking a holistic view on it has been because there has been this move to seeking private capital?

Mr Jennings : I think that reflects that there is a limit on the capacity of Australian federal, state and territory governments to provide investment into port infrastructure, and it is perfectly reasonable to look to the private sector to provide that. Across the port system in Australia we are certainly seeing that now unfold more broadly. The port of Fremantle is being considered for lease, as is the Port of Melbourne, and a number of other ports I believe, including Townsville, have been leased to the private sector. In a sense, that is a perfectly reasonable strategy as long as there is appropriate due diligence taken in terms of assessing the impact of those investments on broader national security interests.

Senator WHISH-WILSON: I also have a couple of big picture questions. In your opening statement you raised the issue that the long-term strategic implications of a lease this long are hard to gauge. I see Neil James, in his commentary, has talked about similar issues for 99-year leases, to the point where he said that it is best just not to enter into these arrangements with these kinds of Chinese government firms or state-owned enterprises—whatever you want to call them. Contrary to that, Sam Bateman has talked about the need to work in cooperation and work more closely with these kinds of companies. He has actually highlighted that the kind of commentary we are seeing today helps drive a wedge between the US and China and actually fuels security dilemmas. Philosophically, do you agree with Commander Bateman that it is better to work more closely with the Chinese government on these issues, rather than shut them out of these kinds of acquisitions?

Mr Jennings : A close economic and defence relationship with China is important for Australia's interests, and in fact we have that. On the defence front, which is the bit that I am best qualified to talk about, we actually have quite an effective defence relationship with China. I recall a Chinese general saying to me when I was in the defence department that in fact the only country China thought it had a closer relationship with was Pakistan. We have now had 18 years worth of strategic dialogue with the Chinese, unbroken—which, in fact, is something that the United States has been unable to achieve. All of this is valuable both for China and for Australia. Where I think we need to be stronger in terms of our approach to dealing with China on these is just to have a very clear-eyed assessment of what our own national interests are. As the Chinese do, we need to be prepared to articulate what those interests are, and then stick with them. The point was made earlier that there is no way that Australian investment would ever be allowed into a Chinese port system. In some respects, I kind of respect the clarity and the sense of China's approach in that respect.

Senator WHISH-WILSON: On a similar subject, Commander Bateman has also talked about the important checks and balances that would be in place with the lease. Do you think that some of the potential long-term strategic risks can be mitigated by the actual structure of the lease? Is that an area that you have looked at or are prepared to make commentary on?

Mr Jennings : I think there is the potential to mitigate the national security impact of the lease by taking appropriate steps around the physical and electronic security of the vessels which will be using port facilities covered by the lease, most notably Fort Hill Wharf. I think longer term there is also a need to consider what the future Defence use of the broader Port of Darwin will be and whether or not that does lead to facilities investment outside of the current lease area. Whether or not those steps are adequate to mitigate the problem, it can really only be tested against what the strategic situation is going to look like in coming years. Again, a concern there is that a 99-year lease really takes us into unchartable territory in terms of knowing what the strategic circumstances are going to look like at the time.

CHAIR: Senator Whish-Wilson, we are just running over time here. We have a couple of further clarification questions. I think, Senator Canavan, you had a quick follow-up question.

Senator CANAVAN: I just have one final question. What do you think we should do now, Mr Jennings? You have said in some of you writings that you think it deserves further review, potentially by the Public Works Committee. What options do we have available to us? Would one of those options be to seek to unwind this arrangement?

Mr Jennings : The first option really goes to the redesign of the Foreign Investment Review Board to make sure that we have adequate approaches to future investment. I think the committee might wish to consider what would be the appropriate steps to recommend to the government in terms of mitigation strategies with regard to the precise Port of Darwin lease arrangements. I doubt that the Commonwealth really has an interest in wanting to resume the lease or take a step as dramatic as that. So, really, the question is: under what circumstances would it be appropriate for that step to happen in future as we deal with whatever the strategic environment brings out. That is unknowable. But I think we ought not just leave it to the unfolding of a real crisis before we consider what those options might look like.

CHAIR: Senator Conroy, do you have a quick question?

Senator CONROY: You indicated that you are going to put a submission to us. Will that outline your effective evaluation system that you have talked about in one of your articles?

Mr Jennings : What we are proposing to do is to come to you with sort of a road map for how to redesign the Foreign Investment Review Board. That is the core of it, rather than the Darwin issue. I think we have dealt with that one as best we can. Our interest now is to make some recommendations which I hope you will find useful to look at for the redesign of the processes and structures.

Senator CONROY: I look forward to receiving that.

CHAIR: Thank you very much, Mr Jennings.