Alerts. Real-time analysis of events occurring at the intersection of economics, finance and global security concerns.

UPDATE:  On August 11, Australian Federal Treasurer, Scott Morrison, announced a preliminary decision to block the sale of Ausgrid to both Chinese bidders, SGCC and Cheung Kong, citing ‘national security concerns’.  Ausgrid provides critical power infrastructure and communication services to business and government, which raised serious questions about the viability of equity stakes by Chinese state-owned enterprises with close ties to the country‘s military-industrial complex and intelligence services.  The deal has been stalled despite potential setbacks for the government‘s infrastructure development plan that was to be funded through this lease agreement.  The decision made by the Australian government mirrors action taken in London, a week prior, to postpone the signing of the $24 billion Hinkley Point nuclear reactor project.  Prime Minister Theresa May‘s government cited similar national security-related concerns, particularly with regard to China General Nuclear Corporation with ties to Beijing’s illegal island-building in the South China Sea.  SGCC and Cheung Kong are being given a week to respond to the Federal Government‘s decision before it is made final. 

On July 25, the State Grid Corporation of China (SGCC) and Cheung Kong (CKI) Infrastructure entered a bid of over $10 billion for a controlling stake (50.4%) of Australia‘s largest electrical distribution company, AusGrid.  This acquisition represents a bold move by SGCC to more fully embed itself into the Australian energy transmission network.  This acquisition carries significant potential risks with regard to Australia‘s energy security and the influence it would provide Beijing over critical Australian infrastructure.  SGCC has an impressive number of substantive ties to the Chinese military, intelligence services and Huawei, a company that is banned from participating in infrastructure projects in both the U.S. and Australia due to security concerns. 

SGCC already possesses a 60% stake in Jemena, a utility company that manages $5 billion in pipelines and energy transmission networks across Australia‘s eastern seaboard that includes services to Sydney and Melbourne.  In addition, Jemena was awarded a contract in December 2015 by the Australian government to construct the $800 million Northern Gas Pipeline Project (i.e., the North East Gas Interconnector Pipeline).   SGCC is also the major shareholder in ElectraNet, the operator of the Southern Australian electricity transmission network and is currently looking to expand this stake. 

Cheung Kong Infrastructure also has stakes in a number of Australian energy companies, often in concert with the Hong Kong-based firm, Power Assets.   When these stakes are combined, the two Chinese firms become controlling shareholders. 

Cheung Kong‘s existing assets (before this bid) include:

‘‘      51% of SA Power Networks (23.07% CKI and 27.93% Power Assets)

‘‘      51% of Powercor Australia Limited (23.07% CKI and 27.93% Power Assets)

‘‘      51% of CitiPower Limited (23.07% CKI and 27.93% Power Assets)

‘‘      72.5% of Australian Gas Networks Limited (45% CKI and 27.5% Power Assets)

‘‘      100% of Transmission Operations Australia Limited (50% CKI and 50% Power Assets).

Accordingly, all together, assets already controlled by SGCC and Cheung Kong Infrastructure provide service to some 5.864 million Australians, accounting for over 25% of the total population.

In 2015, SGCC partnered with the Macquarie Group to bid on the $10 billion, 99-year lease of TransGrid, the manager and operator of the high voltage electricity transmission network in New South Wales.  The bid was approved by Australia‘s Foreign Investment Review Board, but was later defeated by a competing consortium made up of Canadian and Middle Eastern companies.  Approval by regulators of this past attempted acquisition does not bode well for the potential blocking of SGCC‘s AusGrid acquisition, despite the recent tightening of foreign investment rules.  To date, no strong competitor has surfaced for the AusGrid purchase, all but assuring that China will win this strategically sensitive infrastructure deal.

As mentioned above, despite an outward appearance of simply being an energy infrastructure company, SGCC has significant ties to the Chinese military and intelligence services.  SGCC subsidiary, the Nanjing Nanrui Group, is also active in Australia and has been awarded construction contracts by TransGrid.  This subsidiary is involved in the development of China‘s Beidou project (its attempt to put in place its own space-based GPS system). 

Overseeing this project and working closely with the Nanrui group is the PLA‘s primary weapons and technology producer NORINCO.  SGCC‘s reliance on Huawei technology and equipment should also raise a red flag for Australian regulatory authorities and its security community.  Both Australia and the U.S. have banned Huawei from bidding on domestic infrastructure projects, stemming from Huawei‘s links to the PLA and China‘s intelligence services.  Upon a more detailed review of SGCC operations and associations within China, this strategic transaction appears worthy of significant security-minded scrutiny.