Probuild becomes the latest victim to FIRB’s new national interest test

Treasurer Josh Frydenberg has informally rejected China State Construction Engineering Corporation’s (CSCEC) $300M acquisition of building contractor Probuild. After being privately advised by the government of their intention to veto the deal, the parties withdrew the transaction from the Foreign Investment Review Board (FIRB) to avoid formal rejection.

A risk to national security

The decision was made on the basis that the acquisition posed a risk to national security and contrary to the national interest. This is in accordance with the new national security test introduced by the government as part of its reform to Australia’s foreign investment regime that commenced 1 January 2021.  The Treasurer found, on advice from the Critical Infrastructure Centre and other consultation bodies, that Probuild operates on assets categorised  as a ‘sensitive national security business’. 

FIRB’s guidance notes indicate that “[c]onstruction firms often hold contracts with government agencies and critical infrastructure service providers. Commercial construction firms which develop assets for these clients may have significant access to sensitive information, such as building blueprints and supply chains.”

Probuild, which is Australian-based and South African-owned, is currently constructing numerous buildings classified as sensitive assets, including the Victorian Police headquarters and the Melbourne headquarters for biotech company CSL (which is currently producing Australia’s Oxford-AstraZeneca COVID-19 vaccine).

Whilst this appears to be the kind of ‘sensitive national security business’ to which the new laws were directed, Probuild executive chairman Simon Gray and the Chinese embassy in Canberra believe otherwise. The Chinese embassy has accused the government of “weaponising the concept of national security to block Chinese investment” in Australia.

Indeed, the move may be seen by some as Australia’s own retaliatory effort against China’s move to target Australia’s barley, beef, wine, coal, lobster and copper exports following Prime Minister Scott Morrisons call for an international inquiry into the origins of the coronavirus.

China inconsistent with national interest?

There are several factors that could support this view. 

Firstly, whilst the new national security test does not officially target Chinese companies, it was proposed shortly after the Chinese Communist Party introduced new laws that now enable the government to compel Chinese companies to turn over their data to authorities.

Further, Mr Gray, speaking to the Australian Financial Review, suggested that the rejection was “more politics than it is anything else”. Mr Gray pointed to China Communications Construction Company’s 2015 acquisition of John Holland, a rival construction contractor arguably more exposed to sensitive infrastructure work than Probuild.

Whilst John Holland previously provided construction services to the Australian Defence Department and worked on defence bases, it has since been required to withdraw from such projects as a condition to the 2015 acquisition. Mr Gray argued that the Treasurer should have granted approval for the buyout of Probuild with an attached condition that the company be precluded from being involved in sensitive works that may pose a risk to national security.

There’s reason to be concerned with CSCEC

But just as quickly as Probuild can point to a politically motivated move, there are also good reasons to justify the Treasurer’s decision.

Contrary to Mr Gray’s argument, it appears that FIRB and Mr Frydenberg did indeed consider whether it was possible to grant conditional approval before ultimately rejecting the deal. This decision was made on the basis that it would have been too difficult for authorities to enforce any of the restrictions necessary for the buyout to proceed and, even then, the security risk may not have been fully mitigated.

The government would also quickly point to state-owned CSCEC’s close ties to the Chinese defence industry as another reason for rejecting the deal. Last year CSCEC was listed by the US Department of Defence as a Chinese military company, due to its connection with the People’s Liberation Army. This listing now prohibits any American company or individual from owning a stake in CSCEC.

And finally, the World Bank blacklisted CSCEC for six years in 2009 after finding the company had “engag[ed] in collusive practices” whilst bidding on a major Bank-financed roads project in the Philippines.

Whilst it is arguable that political tensions may have guided the Treasurer’s decision, there remains a range of plausible grounds that Mr Frydenberg can point to to justify his decision to block the Probuild buyout. 

For more on FIRB and the new national security test, click here.

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