UK Gas Market

Simon Baynes Excerpts

Monday 20th September 2021 Commons Chamber

[Kwasi Kwarteng]

The hon. Gentleman makes a good point. I am not sure whether we have scheduled this in, but one action point is that I want to do a call with the devolved Administrations this afternoon. After this statement, I will be very much looking forward to seeing some of his colleagues and people in the Welsh Government, as well as those from some of the other DAs.

[Simon Baynes (Clwyd South) (Con)]

I welcome the steps this Government have already taken to protect energy supply in the UK, specifically the warm home discount scheme and the winter fuel payment scheme. Will my right hon. Friend expand on the ways in which he is working with colleagues across Government to protect the most vulnerable, in Clwyd South and the rest of the UK, during this winter?

[Kwasi Kwarteng]

We have consistently, in our discussions on net zero and in our attempt to decarbonise the economy, sought to protect the most vulnerable of our constituents. He will know that I am seeking to protect the schemes he mentioned and, if possible, to enhance them.

Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (First sitting)

Simon Baynes Excerpts

Tuesday 6th July 2021 Public Bill Committees

[Seema Malhotra]

[Simon Baynes (Clwyd South) (Con)]

[The Chair]

Enabling Community Energy

Simon Baynes Excerpts

Thursday 1st July 2021 Westminster Hall

[Simon Baynes (Clwyd South) (Con)]

It is a pleasure to serve under your chairmanship, Sir David. It is also a pleasure to follow the hon. Member for Ceredigion (Ben Lake), my near neighbour in Wales and a doughty champion of community energy.

My own interest in community energy originates from growing up at Lake Vyrnwy, where my father ran a hotel, a few miles south of my constituency of Clwyd South, where the mighty Vyrnwy masonry dam, the largest in Europe when it was completed in 1890, contains a hydroelectric unit that used to supply the surrounding valley with electricity until it moved on to the mains in 1960. I strongly believe that we need to return to that model of community energy. Therefore, in Clwyd South, I have been championing the hydroelectric potential of the River Dee in Llangollen with town councillor Stuart Davies. I warmly welcome the recent decision by members of the town council to set up a task and finish group to investigate the feasibility of using the site of decommissioned hydro-units in the town.

Further up the River Dee in my constituency, in Corwen, is the perfect example of a community energy project—the Corwen community hydro scheme. People came together as a community to build a 55 kW high head hydro scheme in the town. It is 100% owned and run by the community, which raised more than £300,000 for the construction with a share offer five years ago, of which 50% was bought by people in and around Corwen. The success of that first project has led to a second larger project in Bonwm, near Corwen, where work is expected to start this autumn on building a 100 kW hydro scheme, which will be completed ahead of the end of the feed-in tariffs in July 2022.

The Corwen projects have benefited significantly from the support of the local landowner, Lord Newborough, whose Rhug Estate has put sustainability firmly at the heart of its business mission, particularly through its own renewable heat and power generation. That has led to the welcome announcement this week that Rhug has won a net zero award from the North Wales Mersey Dee Business Council.

The Local Electricity Bill lies at the heart of this debate, and I, like many other Members, have put its key points to the UK Government. I know that the Minister and the other BEIS Ministers are keen to take as constructive an approach as possible on what I appreciate is a highly complex issue. While we debate these matters, the Corwen community hydro scheme is actually putting into practice the aims set by the Local Electricity Bill—namely by creating a market between the local generators and the local householders directly. It is doing that by using its electricity to benefit homes in Corwen via the model developed and run by Energy Local, the community interest company that is transforming the electricity market for communities with small-scale renewable generators, which was referenced in the Government’s energy White Paper. The Energy Local model enables consumers to benefit from cheaper electricity if they use power when Corwen’s hyro is generating. The participants pay only 7.5p per kWh, compared with the average market price of 11p to 15p. Of course, that is facilitated by the arrival of smart meters and Energy Local clubs.

I strongly support community energy schemes, as proposed by the hon. Member for Bath (Wera Hobhouse), my hon. Friend the Member for Waveney (Peter Aldous) and the hon. Member for Ceredigion. I am proud that Corwen is the second Energy Local scheme in the UK. The first was also in Wales—in Bethesda, in north Wales. I wish every success to similar schemes that are in the pipeline in England and elsewhere in the UK.

Budget Resolutions and Economic Situation

Simon Baynes Excerpts

Tuesday 9th March 2021 Commons Chamber

[Simon Baynes (Clwyd South) (Con) [V]]

This is a very strong Budget for the Union. We are stronger as one United Kingdom. As a Welsh MP, I am particularly pleased to see the extra £740 million for Wales in the Budget, and I only hope that the Welsh Government will spend that money in a timely fashion, rather than continuing their habit over the last year of holding back hundreds of millions of pounds of the UK Government’s support from those who need it most in Wales. This means that overall, the Welsh Government are receiving an additional £2.1 billion in the next financial year through the Barnett formula, on top of the baseline of £15 billion. There is also £300 million of funding outside the Barnett formula, in particular for farm support and fisheries.

Businesses in Clwyd South are very appreciative of the continued financial support outlined in the Budget, such as the extension of furlough and support for the self-employed, the recovery loan scheme and the extension of the reduced VAT rate of 5%. I am delighted that the Government are accelerating the three city and growth deals in Wales—in Swansea bay, mid-Wales and north Wales—by bringing £58.7 million forward in the investment programme. This means that the north Wales growth deal will get an extra £4.4 million per year from April for the remaining nine years of the deal, which will create up to 3,800 new jobs and support an uplift of £2.2 billion for the economy, as well as local regeneration projects—in the Wrexham area, for instance—amounting to £9.1 million.

That boost to the economy will be further strengthened by the newly announced levelling-up fund, which will be UK-wide and will bring at least £800 million for infrastructure projects in Wales, Scotland and Northern Ireland, and by the newly announced community renewal fund, which will provide £220 million of extra funding over and above the old EU structural funds to pilot programmes and new approaches in Wales and across the rest of the UK.

This Budget helps to cement the UK as a world leader in offshore wind, which is of great importance to north Wales. Following the measures included in the 10-point plan and the energy White Paper, the Government have shown that they are determined to deliver a green and cleaner economy. Many constituents in Clwyd South contacted me before the Budget about universal credit, so I was particularly pleased by the extension of the £20 per week uplift for a further six months. In conclusion, I strongly support this Budget, which shows that the UK Government have north Wales at the heart of their agenda and are leading the way in Wales on delivering for local communities.

Oral Answers to Questions

Simon Baynes Excerpts

Tuesday 9th February 2021 Commons Chamber

[Mark Logan (Bolton North East) (Con)]

What steps his Department is taking to support the renewable energy sector.

[Simon Baynes (Clwyd South) (Con)]

What steps his Department is taking to support the renewable energy sector.

[The Minister for Business, Energy and Clean Growth (Anne-Marie Trevelyan)]

The UK is a major global market for renewables, and we have world-leading ambitions for deployment. We aim to deliver up to double the renewable capacity at the next contracts for difference round at the end of this year, compared with the last round. We are spending £160 million to support new port and manufacturing infrastructure needed to achieve our 40 GW offshore wind ambition, which will secure local jobs and benefits.

--- Later in debate ---

[Anne-Marie Trevelyan]

I am delighted to see my hon. Friend championing the north-west and the opportunities that our green industrial revolution will bring to his area. The north-west is incredibly well placed to benefit from our £1 billion commitment to become a world-leading sector in technology to capture and store harmful emissions away from the atmosphere. We have also launched the green jobs taskforce, which will help us to develop plans for green jobs, including in the new green automotive sector across all regions, and we advise on what support will be needed for people who are in those transitioning industries.

[Simon Baynes [V]]

Can the Minister comment on the opportunities for companies in Clwyd South and elsewhere in Wales offered by the latest £11 million round of the UK Government’s energy entrepreneurs fund, which is dedicated to driving forward new clean technologies?

[Anne-Marie Trevelyan]

Wales’s promising clean tech entrepreneurs are urged to bid for the latest £11 million of Government funding, which is going to support between 15 and 20 projects, with successful bidders receiving up to £1 million each. The funding available through the energy entrepreneurs fund is open to all eligible companies across England, Wales, Scotland and Northern Ireland, and I look forward to seeing their submissions.

National Security and Investment Bill (Twelfth sitting)

Simon Baynes Excerpts

Committee Debate: 12th sitting: House of Commons
Thursday 10th December 2020 Public Bill Committees

[Chi Onwurah]

[Simon Baynes (Clwyd South) (Con)]

[Chi Onwurah]

--- Later in debate ---

[Sam Tarry]

[Simon Baynes]

[Sam Tarry]

National Security and Investment Bill (Third sitting)

Simon Baynes Excerpts

Committee stage & Committee Debate: 3rd sitting: House of Commons
Thursday 26th November 2020 Public Bill Committees

[Stephen Kinnock]

Q I want to explore a bit further the issue of critical national infrastructure, which is defined by the Intelligence and Security Committee as the Government’s 13 sectors ranging from energy to transport infrastructure and anything that relates to public health. With covid, we have seen the massive importance of how we have been overexposed in certain supply chains, and that might have an effect on our thinking about critical national infrastructure. To what extent does that influence your work on mergers and acquisitions and your thinking about whether such mergers and acquisitions in areas of our critical national infrastructure are in the national interest?

Christian Boney: If I am following the question correctly, I think it is the correct balance to strike to say that people pursuing significant M and A activity involving the UK’s critical national infrastructure should expect to go through a notification process and should expect their transaction to be at potential risk of examination and call-in. From my experience, corporates undertaking transactions in the spheres of national infrastructure and so on expect that. It is what they see in other countries and jurisdictions, so it is something they come to accept as part of doing deals in top-tier democratic nations.

Lisa Wright: I agree with all that. I guess I would also add that people are well aware that these considerations change over time. This year has shown that more than ever. People have an eye on what might not have been an issue yesterday; today, it might be different. We saw the amendments coming through to the Enterprise Act earlier in the autumn to bring in the power to allow the Government to intervene on public health grounds. People are very conscious of the fact that this changes, and they keep an eye on it from that perspective.

[Simon Baynes (Clwyd South) (Con)]

Q Thank you both for your submissions this morning. I want to go further into the issue of how you, the Government or the agency it sets up to do this makes a judgment about whether a small or start-up company really falls within being a threat to national security. I imagine that that might be quite a difficult judgment to make. I am putting to one side the issue of mandatory notification, which Mr Kinnock has looked at in more detail. I am saying that once it has been notified, how do you make the judgment about whether it is a threat to national security?

I would have thought that there are two aspects to that. One is the nature of the acquirer, which is partly what you have already alluded to. The second part is that I would have thought that it is quite difficult to ascertain whether something at the cutting edge of technology is or is not a threat. I would have thought that that is a really difficult judgment to make in practice. Do you have any thoughts on that, and what experience do you have of other regimes trying to make that kind of judgment?

Lisa Wright: I think there are probably a number of ways to tackle that question. I guess that an answer is that it is ultimately a question for the Government. They are the ones who understand the threats and the intelligence. As advisers, we can look at the guidance and cases that have happened in the past, and we can speak to the unit, which, as we understand it, will be open for engagement and will welcome that. We can guide clients through the process, using the touch points and information that is available to us, but ultimately it is the Government that are in possession of the full set of facts and considerations that go into the decisions about whether that particular transaction is a problem or not. I guess what that speaks to is having the right people in the unit and getting them plugged into the right people elsewhere in Government to arm them with the ability to make these assessments.

Christian Boney: To pick up on that, I agree entirely with what Lisa said. It is not necessarily an easy thing for the advisory community or clients themselves to make a judgment about whether they are presenting risk to national security. That is why this concept of real-time, interactive engagement with the unit that is set up to police this regime is going to be so important.

In the world I operate in, one of the regulators we deal with is the Takeover Panel, which is fantastic at being responsive, with real-time engagement. It results in a dialogue and an interaction that helps advisers navigate their clients through a regime that is not straightforward at times. That is the kind of practice that could usefully be learned from in the context of the investment security unit, because that kind of real-time feedback and informal advice will be very helpful in helping companies make the judgment about which side of the line they fall.

[Peter Grant (Glenrothes) (SNP)]

Q Good morning, Ms Wright and Mr Boney. I want to look in more detail at the kind of information that might be included in the Secretary of State’s clause 3 statement, which will set out the kind of factors that they will take into account in deciding whether they needed to intervene.

There is a fair amount of information in the Bill and the documents published alongside it about the kinds of businesses being acquired or taken over that might give rise to concern. There are quite clear definitions of what constitutes a trigger event, whether it is a purchase of shares or whatever, but there is very little detail about how the Secretary of State will decide which potential acquirers pose a threat. There are clearly good reasons why that information cannot be made public in too much detail, but is the fact that there is so little on the face of the Bill about how that decision is arrived at a problem? Does it make it less certain and therefore more likely to result in legal challenge?

Christian Boney: Acquirer risk is one of the points picked up in the statement of policy intent that is going to be looked at when determining the level of risk that a transaction presents. When looking at and explaining acquirer risk, I think that helpful additional guidance could be added to it to, for example, make clearer how the Government will consider acquirer risk in the context of things such as private equity funds and other funds that may be looking to invest in the UK. By that, I mean in particular whether the Government will be willing to disregard the identity of limited partners and other investors in funds that sit above the particular acquisition vehicle that is doing the relevant transaction. That is the kind of thing that I think there would be real benefit in trying to make clearer in the statement of policy intent.

--- Later in debate ---

[Peter Grant]

I will leave it there, Sir Graham. I may want to come back later, but I will let someone else in now.

[Simon Baynes]

Q Thank you for your excellent evidence, Professor Martin. You said, if I understood you correctly, that the process needs to be relatively open about why it is making decisions, but I foresee problems, particularly where there are issues of confidentiality and national security. Would you explore that a little? I note that within the terms of the Bill, decisions will be subject to judicial review or appeal, and the Government will be able to apply for a closed material procedure to protect sensitive matters in such proceedings. It seems to me that there is a potential problem there in relation to commercial and national security information sensitivity, so the “openness” of the system might be fairly limited and it might not be as respected as it could be.

Professor Martin: I get that completely. I do not think 100% transparency will be possible in this case. Obviously, it will be judicially reviewable, but I am entirely unsurprised that there is an explicit provision for closed material procedures. It will be a minority, but there will be cases in which the reason why a particular aspect of a particular piece of technology is really sensitive—it will probably be highly specialised, and there might be a dozen people, of whom four serve in government, who actually understand why—cannot be published. Then, of course, there will be commercial sensitivities.

Having said all that, if you take, for example—these are real examples—the current debate around the potential use of offensive cyber, or the sort of allegations Edward Snowden made against Five Eyes countries in 2013, or some of the defences that the Government had to use in the 2000s about their role in the aftermath of 9/11 and Iraq and co-operating with US forces, in my view there is a clear distinction between being able to describe the operating environment and the sorts of thematic issues that you are dealing with, versus individual cases, which often contain extremely sensitive detail. National security organisations can say much more about the former than historically they have been willing to do.

In something like this, where we are talking about business confidence and how the country looks to potentially very friendly and helpful outside investors who like the UK, want to come here, want to put money here and like the high-quality research and the brilliant innovators and individuals, it should be possible to give them something that says, “In the course of the last year, we have looked at quantum resistant cryptography and here are the types of aspects of this that we are reserving and here are the bits that are more open” or that sort of thing, without disclosing anything sensitive. That is all you need to be able to say—these are the judgments. Let us say that the Bill becomes law in the middle of 2021, for sake of argument. By 2025 and the beginning of the next Parliament, the tech landscape will look very different. You will not want investors to be looking back at the debates you are having in the House now as a guide to the latest way in which the Government are applying this, or looking at drip feeds of information. You will want something official. It should be possible to do that.

[Mark Garnier]

Q I want to refer back to some earlier questions about the skills within the investigatory unit that would be within BEIS. With your knowledge of Government, do you see any sort of experiences that can be carried over from the export control joint unit within the Department for International Trade? They do not have all the skills there, but they draw on skills from other Departments, particularly when it comes to arms export control and the eight consolidated criteria. Do you think there is potentially an opportunity in the day-to-day structure of the investigations unit for some lessons to be learned and carried across from the ECJU? Or do you think that is irrelevant?

Professor Martin: I do not know the ECJU that well, but it is relevant. I remember, although it was some time ago, being asked for specific inputs into that sort of point. The important thing is that the unit achieves a prominence and reach across the Government, because bits of Government will have to be involved occasionally and there will be bits that will be embedded. It needs a home—in our system of government, every organisation needs a home with a responsible Minister and an accounting officer and all that. However, I do think this needs to be broadly based and multidisciplinary. Export controls are one of the few areas where we have had to do that consistently for a number of years, so I agree that it is well worth a look.

National Security and Investment Bill (Fourth sitting)

Simon Baynes Excerpts

Committee stage & Committee Debate: 4th sitting: House of Commons
Thursday 26th November 2020 Public Bill Committees

[Sam Tarry]

Q Clearly there would be some serious resourcing implications around that. Thinking about what you said earlier, about a number of different examples that have been in the press about major UK-owned companies that were the subject of various takeovers, would you like to say a little about how industrial strategy could also relate to national security?

David Offenbach: I listened to and read the Second Reading debate in the House of Commons last week. I know that a lot of Members were concerned to try not to let issues of industrial strategy stray into areas of national security. It is a subject that I do not really want to go into.

Some people have expressed anxiety about the activities of sovereign funds in other countries posing dangers to assets in this country. Is there more of a risk from investments in China? Somehow, people feel that those investments are connected with the Government and that they are not really independent. I think the necessary protections are in this new statute that will prevent that from being an issue.

So far as industrial strategy is concerned, people are worried about sovereign funds. I think Britain should have its own sovereign wealth fund, like Norway does and like we used to have with the Industrial and Commercial Finance Corporation, and then with 3i. There are amazing investments that could be made and wonderful technological discoveries that Britain should be able to get the profits from, and that should not be going overseas. When I went on a trade visit to China a few years ago, I saw the China Investment Corporation. They said, “We are really pleased with our investment in Thames Water. We do nothing every year. The dividends come and it doesn’t cost us any money.” I thought, “Why shouldn’t Britain have the advantage of the dividends, rather than the China Investment Corporation?” Norway’s sovereign wealth fund is worth more than £26,000 for every citizen in Norway and is one of the most successful. That is something that really we ought to look at.

[Simon Baynes (Clwyd South) (Con)]

Q Thank you very much, Mr Offenbach, for your interesting comments which, as my colleague has said, are in sharp contrast to Mr Palmer’s point of view—so that is helpful to us. I have two questions. Apart from the lack of inclusion of public interest, are you broadly happy with the Bill as it stands, in terms of what it is seeking to achieve? I suspect you are.

David Offenbach: Yes, I am.

[Simon Baynes]

Q You refer to other regulatory regimes being tougher, but I think Mr Palmer’s point was that there would be other regimes that are weaker and more liberal. I think the point that he was trying to make is that if controls are tightened here, the capital, knowledge and companies will go elsewhere. Do you not see that as a risk?

David Offenbach: No, I do not—not in the slightest. I am thinking of clients of mine—French—who moved from Paris to London because it is easier to set up and promote business here. Why did they not stay in France? Because they know that the regime is more restrictive. Why did they not go to Australia? Because they are a similar regime. They are more restrictive. We are a very open environment to do business, in this country. You can come here and set up a company in 24 hours, and start trading. You cannot do that in France: it is much more difficult. In Germany, it is much more difficult, and in Australia. Those comparable regimes, if you like, are less favourable. That is why people come from the Baltic countries to set up business here. It is much easier to do business.

[Simon Baynes]

Q I think that Mr Palmer’s point, if I understood him correctly, was that if we bring the Bill in, we create a tougher regime than there is at the moment. I think he used the example of Ireland, and I hope I am not misrepresenting what he said, but he said it was potentially an environment that would have a less structured regime, and therefore could take business away from us, to put it crudely.

David Offenbach: We have the issue that we do not know what difference being out of the European Union is going to make to future investment; but Ireland has been very attractive for many years, partially because of the tax regime—and for lots of other reasons—so will people choose Dublin rather than London if they want to do business? They might very well, but the fact that Britain is open to trade is an important part of the British economy. People will still come here and work here, open businesses and enjoy the infrastructure of the technology and the various businesses that are already here, and that they can feed off, so I am not worried about that in the medium term.

[Peter Grant (Glenrothes) (SNP)]

Q I see from the profile that we have been given that you have considerable experience in land transaction—the legalities of land transactions—as well as company law and so on. Given that part of the Bill that we have not looked at much so far is about controls on the purchase and acquisition of land and other physical assets, as well as companies, are you comfortable with the fact that the processes for controlling potentially hostile purchases of land assets are similar to those being proposed for company takeovers or company acquisitions? Is there any reason why there needs to be different processes for them both?

David Offenbach: It does not need to be any different at all. I was pleased that land was included. Certainly one knows from seeing property transactions and looking at title deeds, sometimes where the owners of these companies are or purport to be is very curious. The Bill covers that very adequately.

National Security and Investment Bill (Second sitting)

Simon Baynes Excerpts

Committee stage & Committee Debate: 2nd sitting: House of Commons
Tuesday 24th November 2020 Public Bill Committees

[Matt Western (Warwick and Leamington) (Lab)]

Q It is a pleasure to serve under your chairmanship, Sir Graham. Dr Lenihan, I am keen to know more about whether, other than in the US, you have seen good exemplar approaches to screening investments into these sectors; we spoke about Japan and Germany a moment ago. Can you give examples which we might learn from?

Dr Lenihan: I do think the US system is the most institutionalised that we have, and the best at the moment. That being said, Germany’s system is very good; it has caught quite a bit. The German system has also been very good about regularly updating, changing and adapting its regulations as it sees new emerging threats to itself. They seem to have good feed-in across Government and they are exceptionally good at co-ordinating with other states in terms of information of concern.

In terms of national security review, Canadian and Australian systems are quite good. The problem with those systems is that they tend to do national interest reviews at the same time or in tandem with their national security reviews. Over the long term, including national interest in the regime has had an impact on how they are perceived in terms of their openness to foreign direct investment abroad. In the OECD’s FDI restrictedness index, Canada and Australia rank far lower than the US, the UK, Germany and France, and I think this is because of their inclusion of national interest concerns. Similarly, on the World Economic Forum’s global competitiveness index, they rank far lower. That does not provide investors with the type of clarity that they need. In general, we see that investors tend not to be dissuaded from investing just because there is a new foreign direct investment regime, as long as that regime is seen to have clear regulatory guidance, is transparent, and is applied consistently over time.

France sometimes gets quite a bad reputation for economic nationalism, but its review mechanism is also quite good at catching potential threats to national security. Japan is an interesting case. It has been so restrictive for so long that it is a little harder to compare with the other western countries. Its system has been tied in again to an overarching inward investment regime that has been restrictive towards foreign investment for other means beyond national security, so I find that country to be less of a comparator for these purposes. I hope that answers the question.

[Simon Baynes (Clwyd South) (Con)]

Q It is a pleasure to serve under your chairmanship, Sir Graham.

I have found your comments particularly interesting, Dr Lenihan. My own background is in the financial world, where I was involved in cross-border M and A and quoted equity transactions. I fully accept the premise of the Bill, which I think is important and has to be put into effect, and I draw encouragement from what you are saying about other regimes, but I am still left wondering a little bit whether, in practice, it will be really quite difficult for us to put into effect. Your point about the necessity of expertise among staff is crucial. Having sat at the centre of the process, I recognise that the point you make about a huge amount of information flowing across, especially in respect of unquoted companies, is very important; often, there is not much established information in the public domain. That first point is very important. The second point is that there is a very complex mechanism of market sensitivity as well. I do not quite know how this system intervenes with that. Also, within the UK itself there is a culture of openness, which has been touched on before, and in some respects we are a very different country from the others, particularly given the strength of the City of London. We therefore have the ability to transact in a way that some other countries do not, and a different culture.

The other point I wanted to raise and to hear your comments on is that there is a danger of political interference. I know that that is not the intention, but it must be a hazard in this process. What happens if the Government get it wrong about a company? Could not that be interpreted as political interference rather than seeking to establish a security risk?

Dr Lenihan: I started my career in mergers and acquisitions in aerospace and defence M and A, in London. I think you make an important point: the UK has historically been the most open country to foreign direct investment on most indices and indicators. That perception is strong, and I do not think that that culture of open investment will or should change with the introduction of the regime. To the contrary, it actually gives you one of the best starting points that any country has to do this.

As I said, on the whole, in the Bill as written, and in the statement of policy intent behind it, it is very clear that the powers for review and intervention should be used only for an identified risk of national security, and not on the grounds of national interest. Regimes that are based only on national security, like that in the US but also Germany and France—even with a very different culture in many ways—have not seen a lowering of levels of foreign direct investment over time, because they have introduced, modified or kept these regimes up to date. It is because, on the one hand, the stable environment that they provide and that the UK will definitely provide for foreign investors, is far more attractive than any uptick in cost from having to get up to speed on a new regime; also, they are able to retain these global perceptions of openness to foreign investment and ease of doing business because of the way in which the rules are applied. As long as the rules are applied consistently, and with clear reasons behind their use, and applied consistently and transparently over time, it should be okay.

The Bill provides for a lot of regulatory guidance, which needs to come forward in a clear and very easily comprehensible and understandable manner. As long as that happens, it should be okay. Global Britain should still be the proponent of liberal economic values that it always will be, while also being able to demonstrate to itself and to its allies that it is able to protect itself from this type of investment.

Going forward, Britain’s relationship with many of its Five Eyes allies is going to depend on having a comprehensive regime of this nature that is used well. Under FIRRMA, under US law, for example, the UK is an exempt foreign investor in certain categories—one of three with Canada and Australia. It has been stated that for that to continue––it is going to be reviewed––it needs to have a regime to protect itself. We can talk about this later, but part of that is about the potential concern about not just the ability to share intelligence on these issues, but about acquisition laundering, export controls and all these issues that tumble on behind that can affect investment, trade and intelligence-sharing relationships over time. That is important.

The research evidence shows that foreign investment is not deterred unless there is a problem in how this is applied. There has been politicisation of cases; demonstrated proportionality of response is also extremely important. There are many cases in which a threat to national security can be mitigated by agreements and undertakings without needing to block a deal. When you look at the modern history of foreign direct investment intervention across Europe and the US––even if you look at Russia and China and how they behave––the preference is, where possible, to mitigate national security concerns through comprehensive agreements, and that can be done in a host of ways. It can be that you have a board of directors that is only UK nationals, or that you require divestment of a certain black box technology company to another UK company or a friendly allied country. Whatever it may be, historically, there has been a preference for that type of action to be taken. Vetoes of cases are actually quite rare since world war one, when we first really saw this type of issue pop up.

The concern is if we see the UK blocking deals where it could mitigate because a deal has become a political hockey puck. In today’s world, where this is something that is constantly discussed in the Financial Times and The New York Times, whereas it was not 15 years ago, any case has the potential to be discussed widely in the political debate. The question is how it is treated by Government and how other countries perceive that treatment. I know that I have used US examples quite a bit, but if you look at US-China investment, China still invests a lot in the US, even though it complains every time a deal is blocked or mitigated. The reason behind that is because this is a sovereign right under customary international law, and China does the same thing when it has the same concerns. It is only if a case becomes truly politicised that there is an issue.

To give you an example, in 2005 in the US, the case of Dubai Ports World and P&O, which was a takeover of a UK company, became overly politicised in the US system. It is one of the only real examples where it has happened, and that was because there were a few US lawmakers who had a completely different view of the risk and relationship of the US vis-à-vis the United Arab Emirates than the Department of State or the Department of Defence. That is quite rare but what ended up happening was US lawmakers seeking to block a deal when most reasoned professionals in the industry and in various Government Departments thought that any risk could be mitigated simply in a host of other ways.

In the case of overuse, overbalancing, misuse, politicisation, whatever you want to call this tool of economic statecraft, there was a momentary blip in relations between the US and the UAE. There was a momentary stalling of trade talks, change in the currency basket and some uncomfortable months, but the relationship was strong enough to survive and it usually is. This is not really an aspect of going to war. I think the key is proportionality in response, how it is applied, and it is about consistency and transparency. The Bill is well written in many ways, but how it is used can go any number of ways, so it is about how the UK uses it going forward.

[The Chair]

Thank you, Dr Lenihan. There are lots of Members wanting to speak and we have limited time, so I will try to get through some quickly. I will call Stephen Flynn, Mark Garnier, then Stephen Kinnock.

--- Later in debate ---

[The Chair]

We have to end this session at half-past 3, so I think that this will be the last question and it will come from Simon Baynes.

[Simon Baynes]

Actually, Mr Kinnock has asked my question, Sir Graham.

--- Later in debate ---

[Mark Garnier]

Q May I follow on from that question about the resources? There is talk about 1,800 companies coming forward and voluntarily disclosing that this transaction is going on, but I am just as interested in what happens with those companies that do not disclose this? I am not for a moment suggesting that there are a huge number of dishonest actors involved in the corporate finance market, but given the fact that the threshold was reduced to £1 million a year under the recent review, there are an awful lot of small businesses with turnover of about £1 million a year that are not very well resourced for their corporate governance functions and that could easily miss the requirement to disclose, should a transaction come through that is enticing for the shareholders, who are presumably offered the same as the directors. Are you confident that the Government have in place sufficient resources to be able to police the whole sector, to make sure that we are not missing out on a number of transactions that are going through? Even if we do, are we getting in there quick enough to make sure that the intellectual damage is not done by the time we have found out what is going on?

David Petrie: That is a very difficult question. We will find out—that is the answer to that. I think businesses working in sectors where there is a real threat to national security know that. They know that they are involved in weapons design or designing software that could have a dual use. In advising companies over the years, I have found that no one knows better than the company directors about the value of their assets and their business, both from a market perspective and to competitors or others seeking to gain access to their technology.

The Bill has been in discussion for some years now, and the advisory community is well aware of its existence and of the Government’s desire to put this legislation on the statute book, so I do not think there will be many corporate finance advisers for whom the Bill emerging last week was a surprise. I am very sympathetic to the points made about small companies falling under the provisions of the Bill, but I hope that it will be possible for them to complete what, in the first instance, is a five-page questionnaire—when completed, it could run to 20 pages or more—at a relatively low cost.

To my earlier point, I hope they are able to engage in formal and meaningful dialogue with the unit at the earliest possible opportunity by saying, “This is what we do, and this is what we are worried about.” They have to say, “We’re concerned about this. These are the people from whom we are hoping to attract investment to take the business to the next stage. How do you feel about our business, and how do you feel about the people we are talking to? How does the Government feel about xyz corporation?” I think that kind of steer would help remove a great deal of uncertainty from the circumstances that you have set out.

[Simon Baynes]

Q Thank you, Mr Petrie, for a very interesting presentation. I want to look at two areas. One was touched on by the previous witness: the inclusion of not only businesses, but tangible and intangible assets. That is one issue. The second is the acquisition of material influence over qualifying entities’ policy being another trigger point. I would have thought that these are more subjective—perhaps I am wrong—in terms of how you define them, whereas the other trigger points are obviously very clear cut. There are different levels of voting shares in the qualifying entity. I think the previous witness was somewhat surprised to see the tangible and intangible assets element of it and said that this goes further than other similar regimes in other countries. Can you comment first on whether you are surprised or whether you think it makes perfect sense? Secondly, is it easy to define the material influence and the assets, either intangible or tangible?

David Petrie: On the question of tangible assets, it really depends on what we are talking about. Again, it was trailed in the White Paper and the Green Paper that assets would also be within scope, so it is not going to be a surprise. It depends very much on the nature of those assets. In a relatively small country, the ability to acquire land or other buildings—strategic assets—immediately next to a sensitive military installation is, presumably, now included within scope because people who know about these things think it ought to be. I think the investment community will have a degree of sympathy there.

With intangible assets, that is a much more difficult question. It depends on the extent to which ownership of those assets is necessary in order for a malign actor to have the control or the information that they might need. It is possible to gain access to intellectual property through means other than ownership, so the question here is, how might those intangible assets be applied in ways that might prejudice our national security in some way? Again, that is something that the unit is going to have to assess on a case-by-case basis.

It makes sense to include assets that could be sold separately, without the sale of shares in a business. Companies often do that. They may well sell a parcel of patents, or parcel up a division and sell it on because it is no longer core to their operating activities. That is understandable. The investment community will understand that. In short, it is not a surprise, and we are going to have to find our way through this on a case-by-case basis.

[Simon Baynes]

Q Could you expand on one or two examples of such intangible assets? You have stated patents. Could you illustrate what you understand to be such assets?

David Petrie: That would be the most obvious example. There are things like industrial designs, blueprints or chemical processes that may not be subject to patents. It is typically those aspects of production and design that it is necessary to ensure would be in the scope of this kind of legislation.

Much of the discussion that has led to the publication of the Bill has been around the ownership of shares or of the business—as to whether that is actually the bit that malign actors might want to get hold of. That may not be what really interests them with the business. It may well be intellectual property or these other assets, which it is necessary to separately define. If they are able to get hold of those without buying the company, then it seems to follow that it makes sense to include that within the scope of this Bill.

[Simon Baynes]

Q But they would be quite difficult to police, would they not? How would you know—

David Petrie: Yes. I don’t think anyone is suggesting that the job of this new investment security unit is going to be straightforward. In fact, we are absolutely not suggesting that. It is going to be absolutely essential for Government Departments to work together and, going back to my original point, for this unit to be extremely well resourced, to be able to respond quickly and appropriately to what is put before it.

[Peter Grant]

Q Good afternoon, Mr Petrie. There will be some entities that try to take over British businesses where the warning flags are flown immediately, because it is well known that either it is a foreign state, or a company controlled by a foreign state. Often, it is difficult or even impossible to know who the ultimate controlling party of a business is if they have arranged to have their ultimate ownership registered somewhere offshore, where that information is not made public. Does the Bill, as presently worded, provide enough protection against a hostile power trying to infiltrate the system by going through a secretive intermediary state? If it does not, what more should be done in the Bill to protect us against that scenario?

David Petrie: This is an issue that is well recognised by the investment and advisory community. I think that, as you say so rightly in your question, the warning flags, flares or whatever they might be will already be going off if this is a particularly sensitive military asset that is being considered for acquisition. I think that the unit will be able to look first at the nature of the asset, and it will be apparent very quickly as to whether this is a very sensitive issue. If the acquirer is not a British public limited company, a British private company or one invested in by private equity, if the ultimate ownership is structured in a way that is not conventional—many companies are held through offshore companies for entirely conventional, obvious and transparent reasons for the investment community—and if there is something strange about that ownership structure that makes it extremely difficult to trace the ultimate ownership, it feels to me as though that would be one of the 70 to 90 cases that the Secretary of State would want to review in a lot more detail. Then, due and diligent inquiries would be made to try and understand the ultimate ownership of those holding companies. There would be lots of complicated diagrams drawn, no doubt, showing who owns which bit of what and who are the key individuals and shareholders. The answer would be that, I am afraid, this unit is going to have to keep digging until they get to the bottom of who are the ultimate shareholders.

The Bill is drafted in such a way that you do not need to own much in the way of shares—or there are provisions included within it such that if an entity or individuals, or individuals reporting elsewhere, have control or influence over those holding companies, that in itself would be something we would be concerned about. The Bill includes provision for that because we know, and I believe the security services are well aware, that the equivalent of layering is used for acquisition of these sorts of businesses, or people have certainly tried to do that. So, it is going to be a matter of hard work and digging to get to the bottom of who really owns and controls those entities.

--- Later in debate ---

[Peter Grant]

Q Thank you. Decisions under this legislation will initially be taken by the Secretary of State. In the United Kingdom, the way that Ministers exercise the authority given to them by legislation, and indeed the way that Governments or Prime Ministers exercise the authority that comes down through the concept of the royal prerogative, is governed as much by tradition, convention and understanding as it is by hard legislation. Recently, we have seen an increasing number of occasions when Governments have chosen to do things that are allowed but are completely unprecedented and not according to the usual traditions and conventions. There are some notable examples here, and clearly a number of examples from the outgoing President of the United States. Does that give you a concern that legislation might be passed giving a Minister power under certain understandings, but that the understandings themselves might have no legal force, so a future Minister might exercise that power in a way that is very different from what had been expected or intended when the legislation was passed?

Chris Cummings: Forgive me, but it is obviously not my role to advise future Ministers on attitudes they may take. I can simply say, from an investor’s point of view, that we prize stability, predictability and accountability beyond all things. Making sure that the rule of law applies and that there is no handbrake turn in policy direction matters hugely. Investment is being sought by every economy around the world, and it would be a very rash Minister indeed who decided to unpick something that is a great strength of the UK and one of our global competitive advantages: a system based on the rule of law and an approach to policy making that is entirely transparent and accountable to Parliament, which gives the investment community great confidence that the UK retains its position as being one of the safest places in the world to invest in.

From our perspective, that accounts for one of the reasons why our investment management industry here in the UK is globally pre-eminent. The UK is not only the largest investment centre in Europe; we are bigger than the next two or three added together. Only the US is a bigger market, and that is because of its substantial domestic scale. When it comes to international investment, the UK is streets ahead of its competitors. We would very strongly urge any parliamentarian, and certainly any Minister, to think twice before taking actions that would have a lasting consequence for our international reputation.

[Simon Baynes]

Q Thank you, Mr Cummings, for a very good presentation. I just want to go back to your point about the blanket exclusion for investment managers. First, you say that is the situation in Japan, but maybe you could say where else it exists. Secondly, why is it needed? I totally accept that, on the whole, the investments being made by your members will not fall within the trigger points, because they will not be taking over 25% of Shell or even some small companies, but they might do in certain circumstances.

Thirdly, to what extent do hedge funds represent members within your organisation? Obviously, they have greater capacity, or greater natural affinity, for investing in smaller companies—not always, but in certain cases. They might actually fall within the remit of the triggers, so I do not quite see how we could implement the blanket exclusion, if from time to time there are exceptions to the exclusion.

Chris Cummings: Thank you for asking me to clarify; I apologise that I was not as clear as I should have been. The hedge fund community has a representative organisation. It is a splendid one that can do a tremendous job in speaking for them, and I would not put myself in that position; I would not try to speak for them. We have members that invest substantially through private markets into smaller and unlisted companies. Again, it comes down to intention. The intention is not to invest in such a way as to take over the company and to seize the reins; the intention is to make an investment that is in the strategic direction of the company, to support its growth.

I am trying not the use the term “passive investment”, because we are anything other than passive when it comes to investing, but it is an approach that is designed to support the company, rather than to change dramatically the company’s ownership or direction, or to land one of our members on its board—in effect, they would then be part of the management and governance of that company. I hope it is more than a subtle definition; it is a distinction with a real difference. That is part of why we think it is an important distinction to make.

Other jurisdictions have been through similar experiences. The Japanese example is so relevant, because it is only a year or so ago that the Japanese Government were considering very similar legislation. As a result of consultation, they came up with the approach that we are suggesting: to exclude the activities of investors, insurance companies and so on, because it is around the intentionality—not wanting to take an active role in the management or to change the company’s direction, but to support through investment rather than to seek control.

The US has a similar modus operandi. It is not quite as framed in the legislation as it is in Japan—again, just through history. The approaches that we have seen in Germany and France also nudge in the direction that I am describing, so there are parallels. The Japanese experience is the closest match that I can offer the Committee, but we will continue to do further investigations and to feed in ideas through the Bill’s stages and through the consultation on individual sectors.

[Simon Baynes]

Q There is a fairly fine line in smaller companies in which an investment manager takes a major stake. There is a fairly fine line between having an active role in its management and having very close scrutiny of its management. From my own experience in the business, the investment manager keeps a very close eye on it in those cases. If they do not, quite a lot of risk is involved. That is quite a crucial grey area, and it therefore makes me think that a blanket exclusion would create problems. It might be viewed by private equity companies or whatever as being an unfair advantage to investment managers.

Chris Cummings: Certainly, we are keen to see those smaller and medium-sized companies get access to as much growth capital and investment as they need. Part of our enthusiasm for this piece of legislation, and indeed others, is that it is an opportunity to re-excite the UK public about the opportunities for equity—for shareholder participation in fast-growing companies. That is partly why we are so keen to work with your Committee and others to communicate the message.

Perhaps a clearer distinction could be found for the difference between listed and unlisted companies. That is perhaps where we could focus our attention more, on explaining—I am not sure that “blanket exception” is quite the right language for me to use because that seems to be a one-and-done exercise and perhaps there would be more to it than that—but focusing the attention on the listed sector, where it is much more obvious that we as investment managers are investing for the long term rather than seeking control over the company. I hope that would allay some of the concerns that you rightly mention.

[Matt Western]

Q Thank you, Mr Cummings, for being a witness today. I want to come back to the point about capacity in terms of the mandatory notifications. As described, do you think it is going to be able to cope with that, and just how opaque are some business organisations and ownership? With that opacity, will they realistically get to that within 30 days? That is my first question. Secondly, in terms of many transactions, the Government have no legal powers over retaining jobs or research and development in the UK—thinking about SoftBank, Arm and many others. Do you think there is a need to plug those sorts of gaps or deficiencies?

Chris Cummings: You rightly raise the question of scale and resources. It is one of the things we have been consulting our members on, and having discussions with others, to try and get a better view of what the notification process would be, who would notify, who would then respond, the scale of the team in the Department that would be exercising due diligence in the applications and whether the system could cope. Bluntly, what would concern us deeply is having a 30-day notice or turnaround period that the Department regularly missed, because that would then create a shadow over this particular piece of legislation. It would gum up the works and, frankly, none of us would wish to see that.

Looking at how the regime works at the moment, with very few notifications, there seems to be a scale difference between where we are today and what the legislation proposes. We would like to hear more from Ministers on how they are going to address that and what the processes would be. There have been discussions about a portal, a very brief form of five pages or so that would be easy to complete, but I think a degree more of reassurance on that point would not go amiss—as would the confidentiality. There is so much around any investment process and the acquisition process that has to remain entirely confidential, that investors would require and would be looking for reassurance that these conversations could be held in the strictest of confidence and that nothing would appear until the right time. In terms of scale and resources, it is a point that we share your interest in.

I was making a note of the point you raised on transactions, but could you repeat that part of the question? Apologies.

National Security and Investment Bill (First sitting)

Simon Baynes Excerpts

Committee stage & Committee Debate: 1st sitting: House of Commons
Tuesday 24th November 2020 Public Bill Committees

[Simon Baynes (Clwyd South) (Con)]

Q It is a pleasure to serve under your chairmanship, Mr Twigg.

I want to explore the extent to which the world—if I can describe it as one world—of academic consultants and private sector companies, to which you have referred, would agree with what you are saying. You refer to having a SAGE-like committee; is there a danger that, if you did have such a committee, it would actually have very divergent views?

I fully respect where you are coming from, but you made some quite hard-hitting comments earlier about crimes against humanity in the concentration camps, and questioning whether companies and academia should be involving themselves in aspects of China. You also referred to a top mathematician, who was formerly at Oxford University, helping China with cryptography.

I want to get a feel for the extent to which you think that your views are shared by academics, consultants and the private sector, and then feed that back into whether, if you did put together a SAGE-like committee—and I can see the sense in doing that—you might find it quite difficult to come to a consensus.

Finally, it must be quite difficult to judge exactly whether what is being developed—whether it be from an academic idea or from a corporate idea—will be helpful to the Chinese in a way that is detrimental to Britain, or is actually a perfectly sensible piece of research and development that could be of benefit to both countries.

Charles Parton: Can I take those three questions almost backwards, or certainly not in the order in which you have presented them? In terms of expertise within a SAGE-type community, those experts would not be making the political decision. They would be making the technical decision: “To what degree can these technologies be used in a military, as well as a civilian, context?” That is the advice that would be going up. It would then be for the Ministers on a committee to say, “Well, we judge that risk to be acceptable,” or “We do not.”

Of course, nothing is black and white in technology because, as the distinction between civil and military is increasingly eroded, it is quite difficult to know; there are many shades of grey here. A judgement has to be made on any particular technology—either “Sorry, we will have to rule that one out,” or “On this one, yes, there are some risks, and maybe we will come to regret it, but on balance, we will let that one through.”

On whether consultants, academics and others agree with my views on China and the nature of the regime, I think that depends, if you will excuse my saying so, on the degree to which they have studied China and looked at the issues.  It is noticeable that those who read what the Chinese communist party says about itself tend very much to agree with what I say, or with the sort of views that I put out.  Those who have other interests do not.  Of course, there are some who I would say are captured, quite frankly, by the degrees of interference and other aspects that the Chinese United Front Work Department pushes. 

There is a variety of opinion there, but I think that those who understand China and read what the party says—the party says an awful lot, actually, if you bother to read what it says; it is not a black box—are inclined very much to my views.  Those views are: be careful, because it is not coming from the same angle as us, and has some very distinct and not very nice aspects to it. At the same time, it is a major economic power, a major science and technology power, and a major influence on the goods in the world, whether for health, development, peacekeeping or whatever, and we must get on with the country to the best of our ability.  I don’t know if that answers your question fully; do come back.

[Simon Baynes]

That is good. Thank you very much.

[Peter Grant (Glenrothes) (SNP)]

Q I am pleased to take part in this Committee under your chairmanship, Mr Twigg.

Mr Parton, the Bill looks primarily at direct investment by potentially hostile operators. Does it give sufficient protection against indirect control? For example, a company may be reliant on its bankers, who may or may not be based in a hostile territory, and who may rely on technology through a company such as Huawei; or a company’s ultimate owners and controlling party could be registered in an offshore tax haven, and it could be that nobody has any idea who actually owns that company. Does the Bill give sufficient protection against those kinds of threats through indirect influence and control?

Charles Parton: I am not a legal expert, but the Committee stage of the Bill needs to look deeply at that question. If there is any doubt as to who the ultimate owners are, that should be taken into account by whatever organisation makes the recommendation on whether a particular investment is acceptable. If we cannot follow through relatively easily back to the ultimate beneficial owners and users, that is a factor that needs to be weighed very heavily in the decision on allowing a particular, possibly sensitive, investment to go ahead.

--- Later in debate ---

[Stephen Kinnock]

I know time is short, so thank you.

[Simon Baynes]

Q Thank you, Chair. Thank you, Sir Richard. When and why did we let down our guard to China and where would you restrict its access? You made that comment in your statement, and you have commented already on areas such as nuclear power. Can you add to that to give us a bit more of an idea of other strategic areas where you think we should restrict its access?

Sir Richard Dearlove: I think we were over-enthusiastic about becoming a favoured trading partner with China. I am not going to name names, although I think I have done in one or two instances where, let us say, certain Ministers were incredibly enthusiastic and uncritical about building a commercial relationship with China. Part of that was driven politically, in that if we are going to not be a member of the EU, we need alternative relationships. I am not sure I would see it quite like that.

There has been a big emphasis on building a privileged position with China, which has led to people such as myself shouting from the sidelines and being pretty unpopular. For example, the 48 Group Club that the Chinese set up in the UK is extraordinary. They recruited a whole group of leading British business and political figures into that group who were designated cheerleaders for a burgeoning relationship with China. Huawei was an important part of that. The composition—the British membership of the Huawei board—was a very impressive line-up of people who were there to persuade us to drop our guard.

Anyway, I am glad that that is now largely history. A lot of the people who were involved are very keen to jump ship and be disentangled from those involvements. I am sure that, in time, the economic rewards that they were offered to go on to those boards and things were pretty significant. So the Chinese knew how to play us and that is why we got ourselves into this very difficult position on 5G.

Sorry, what was the second part of your question?

[Simon Baynes]

Q The second part was: can you say a bit more about where you would restrict their access, because that was one of your key points? You have mentioned nuclear power.

Sir Richard Dearlove: On artificial intelligence, given that the UK is a leader in its own field, there are all sorts of aspects of AI and we would not want to allow the Chinese to buy those companies or take over the technology. There is no question but that the China dream that Xi Jinping has expressed is based on—let me put it like this—authoritarian technological supremacy and having a capability that dominates the global market in those areas. Huawei was definitely a step in that direction.

The critical areas are largely about the speed of technological advance and AI-related companies. We are very sophisticated in those areas, and the Chinese do not have a good record themselves of developing that sector without pinching it from the west—not to put too fine a point on it. The embargo placed on chip manufacturing by the Americans is a serious problem for China, because at the moment they cannot replicate that. I am sure that they will solve the problem themselves in due course. Of course, we have a certain dependence on them for certain things such as rare earth elements, so the quicker we can develop alternative sources, the better.

I am Cornish—I was born and brought up in Cornwall—and I see that one area where you might, using new technology, get rare earth out of the ground is Cornwall. I am devoted to the development of the Cornish economy, and I would love to see us making a real effort to develop Cornwall, for example, as a source of those elements, which is technically possible. It would be more expensive than buying them from China, but would be of huge benefit to our domestic economy. That is a good example of a sensitive area.

[The Chair]

I call Andrew Bowie. This will probably be the last question.