Foreign investment framework tweaks could hinder Australia's quantum future

Australia is updating its foreign investment review framework with the overarching goal of addressing national security risks, strengthening compliance, and streamlining investment in non-sensitive businesses.

While the Foreign Investment Reform (Protecting Australia's National Security) Bill 2020 aims to protect Australia, the country's quantum technology sector is worried about the problems the Bill could create for the nascent industry.

"At its present stage of development, I would expect the Australian quantum technology industry to primarily develop through some combination of startup businesses forming to exploit the fruits of our research and by foreign companies partnering with locals to bring our research outputs into their organisation," Dr Michael Harvey said in a submission [PDF] to Treasury.

"Both these scenarios will potentially be affected by the proposed changes to Australia's Foreign Investment Review Framework."

Early-stage investing in novel technologies, particularly in deep tech segments such as quantum, are inherently a high-risk endeavour, Harvey said, adding that he was concerned the proposed changes would add administrative barriers, regulatory risk, and uncertainty to the process, which would discourage investors and limit the availability of capital for the industry.

Must read: Australia's ambitious plan to win the quantum race

Harvey is the program manager for the Translational Research Laboratory in the ARC Centre of Excellence for Engineered Quantum Systems (EQUS). EQUS was established in 2017 as an initiative between the University of Queensland, the University of Sydney, the University of Western Australia, Macquarie University, and the Australian National University.

He said it should be possible to simultaneously meet national security goals and provide certainty of treatment for startups or businesses.

"Most quantum technologies, if developed to products, are usually benign and of no national security import. A handful of quantum technologies have the potential to be of national security significance. Several potentially dual-use technologies sit in-between these two extremes."

Harvey said a quantum technology startup may find it difficult or even impossible to determine whether they are a "national security business" because of the subjectivity in the test as currently enunciated.

"I do not see any practical way to eliminate this subjective element," he said. "This situation could be remedied if there were a mechanism for a binding assessment to be made based on the business' existing circumstances, without having to tie this to any particular investment or investor."

According to Harvey, certainty could be added to the fundraising process for many quantum businesses and startups by simply allowing them to verify that they are not a national security business.

"Further, in the event that a business is deemed a national security business, or the determination could not be made without reference to a specific investment action, then this information will help the business triage prospective investors and streamline compliance by making the counterparties aware of their now certain notification obligations," he added.

Read more: Quantum computing: A cheat sheet (TechRepublic)  

Also raising similar concerns was Q-CTRL, Australia's first venture capital-backed quantum technology company.

"The broad definitions of 'national security businesses' in this draft legislation encompass effectively all emerging quantum technology companies and place our sector at a tremendous disadvantage relative to competitors formed in regions with larger and more mature investor bases including the US and EU," Q-CTRL CEO, founder, and professor Michael Biercuk said in his submission [PDF].

"Simply put, Australian venture capital is insufficiently mature to support growth in our industry at this stage, meaning that fully realising the potential of quantum technology in Australia necessitates the involvement of foreign investors."

Biercuk said Australia would risk cutting off the quantum technology industry at its knees by implementing an "expensive and time-consuming review process" on low-risk early-stage companies.

"Proceeding without amendment will ensure that Australia fails to capitalise on its long-term investments," he said. "Moreover it will increase the likelihood that technology development in a critical area -- where other nations are investing billions of dollars -- occurs offshore, missing Australia's opportunity to develop sovereign capability."

Offering suggested amendments, Q-CTRL said incorporating risk-based tests would avoid ensnaring early-stage Australian technology small businesses. It also recommended for the exemption or exclusion of certain early-stage businesses from the definition of national security businesses and the exemption of reviews for investors from Five Eyes nations.

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