• National Security and FDI



    I find it interesting that the United Kingdom, the world’s 5th largest economy, is courting Chinese investment in infrastructure: railways, power generation and urban development are all contained in a UKL 25-billion (P1.75 trillion) prospectus that the Chancellor of the Exchequer (Secretary of Finance) is using in trying to tempt them. Included within the prospectus is Chinese participation (backed by a UK government guarantee for UKL 2 billion) in nuclear power development. About 19 percent of the UK’s electricity needs are currently provided by nuclear power, a reduction from a peak of 25 percent during the 1990s. It is also worth noting that the UK was a world leader in nuclear power technology development.

    The rationale for inviting the Chinese into the development and operation of a highly controversial and critical sector of the UK economy is that the Chinese have a good track record of finishing nuclear plant development on time and within budget. This is, of course, hardly surprising when government power companies work with government contractors using government-produced equipment and materials in a centrally planned economy with almost infinite resources!

    Most nuclear plant construction in the non-control economy world is subject to a very high risk of massive cost and time overruns on what are, in the first place, very expensive facilities ($5 million to $8 million per MW, compared to $2-3 million/MW for coal fired and $1-2 million for oil-fired). It is also interestingly held by supporters of this initiative that the Chinese have good technical competence in nuclear technology, which they themselves inherited from the Russians (builders of Chernobyl) and have no doubt tweaked to give it some Chinese characteristics.

    The naiveté of the British government is astounding. To involve Chinese state-owned enterprises in UK nuclear power development can only bring major disruption to the power construction sector as well as potential safety risks, which will take a lot of time and effort to address—risking the Chinese “excellent track record of completion on time and within budget”. They will find it hard to work in the UK in the same way they do in underdeveloped African countries, which are so far the main recipients of Chinese overseas aid.

    The Philippines is busy trying to evict Chinese management of National Transmission Corp on the grounds that it is a national security risk to have foreigners in control of critical infrastructure—quite the opposite of the UK’s current nuclear initiative. The Philippines is effectively closed to foreigners whereas the UK is totally open—the main UK newspaper I read is owned by a Russian and I must confess that I don’t detect too much political spin in its reporting or opinion.

    It is obvious that there are security angles to be considered in the involvement of potentially hostile nations in the operation of critical national infrastructure.

    Look no further than the issue of Russian gas supplies to Ukraine in 2006-2009. In 2006 Gazprom—the Russian state gas company—stopped all supplies to and passing through Ukraine, initially over pricing issues that eventually expanded to a major political issue and led to reductions in gas supplies to European Union countries whose gas transited Ukraine. Subsequent disputes between Russia and Ukraine give this more than a little political color.

    The neo-liberal views currently fashionable in most of the advanced economies tend to encourage completely open markets and in some cases even discourage regulation: the British wooing of the Chinese government investment in nuclear power, Germany welcoming Syrian and assorted other refugees at a rate of up to 800,000 a year—“Let’s all be friends, we are all human beings after all, live and let live.”

    I’m old-fashioned enough to think this approach has serious security risks and that the Chinese—like the Russians over Ukraine gas transportation—may at some stage just be tempted to use their position in critical infrastructure for some sort of political agenda.

    The most often quoted reason for the Philippines to resist foreign involvement in business, not just critical infrastructure but in almost anything, is that the profits will be “stolen”. But if it is the foreigner who invests why should he not take the profits?

    By investing, he creates employment and possibly even long-term skill development, and in many cases industry that the Philippines direly needs, even to producing goods for export. That the foreign investment can make profits from the Philippines is not something to be xenophobic about, unless of course you happen to be amongst the small group of people who believe the market belongs only to you. Are there not some Filipinos who own shares in foreign companies by which they could profit from investment in the Philippines?

    There is a sound economic case for encouraging foreign direct investment in the Philippines, but firstly the investors must actually want to invest in the Philippines. Alas it is now just too difficult and risky a prospect for most.

    The regulatory environment is unstable and the rules seem to change every month or so. Critical infrastructure investment tends to be expensive and if it stretches the UK private sector (which the government would have you believe) then it will certainly stretch the Philippine private sector. Consequently, it needs to be sourced from places where there is no risk of any political agenda being pursued.

    Mike can be contacted at mawootton @gmail.com.


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