Hilarious. I think the Australian government is quite right in advocating against using US hosting where government or personal data privacy is a key requirement. If the cloud providers want the business so much, build some local infrastructure.
This hesitance to use US infrastructure due to US legislation such as the Patriot Act is only going to grow. This is an opportunity for cloud providers in regions with a good mix of infrastructure and data protection policies.
The question of infrastructure investment is a good one - of all the major providers I believe Azure has half to a full rack of gear for their CDN in Australia. The others have zero of anything apparently.
The current 'cloud' providers in Australia sell little more than a VPS at this stage.
"Agencies should note it may also be possible for foreign governments to access information held in their jurisdiction or to access information held in Australia by any company with a presence in their jurisdiction.
For instance, the USA PATRIOT Act 2001 contains provisions allowing the US Government to access information in specified circumstances, (i.e. cases involving suspected terrorism or threats to national security) irrespective of the geographical location and, without necessarily advising the agency."
Note also the second part of the first sentence - I have been told explicitly that we will never be allowed to use Amazon AWS for private information (public websites like data.gov.au already use AWS but have no private areas) even if there were physical datacenters in Australia because their US staff could be coerced under the Patriot Act to access that information and in that case would be ordered to circumvent any logging/audit trails to do so.
The USA PATRIOT Act only altered the search and seizure requirements for foreign nationals under FISA. It's not a big deal - these requirements were already in place, they just lessened the legal justification for getting a court order. Personally, the USA PATRIOT Act wouldn't concern me - SOPA style legislation would though.
This hesitance to use US infrastructure due to US legislation such as the Patriot Act is only going to grow. This is an opportunity for cloud providers in regions with a good mix of infrastructure and data protection policies.