National Security and Investment Bill (Third sitting)

Nadhim Zahawi Excerpts

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

[Chi Onwurah]

Q You mentioned, and I think it is absolutely right, the issue about going from a standing start to such an increase in the number of callings but also in the number of notifications—the impact assessment estimates 1,830 notifications. That is on the acquirer and does not take into account the fact that almost every start-up seeks capital investment at some point and I imagine would, therefore, as a consequence have to think about this regime. What impact do you foresee on the UK’s investment climate and especially on capital sources for small and medium-sized enterprises? How could that impact be mitigated or encouraged to be as positive as possible?

Christian Boney: I think this question really divides into two. In terms of larger corporates, investment by, and in, larger corporates is very likely to be unimpacted in any meaningful way by this legislation, because large corporates and their advisers are very used to going through regulatory clearance processes. This will just be another thing that needs to be added to the list.

I think you make a very valid point in the context of start-up and early-stage companies. The concern I would have principally is with those companies that are in that phase of their corporate life and fall within the mandatory notification sectors. Given the kinds of companies that this country is trying to encourage to flourish—those that are active in areas like artificial intelligence, advanced robotics and quantum technologies—a reasonable number of start-ups, I would expect, would fall within those mandatory notification sectors. For them, this regime is going to make the process of getting investment more time-consuming and more complex.

Anything that can be done in the process of consulting on the mandatory sectors, and anything that can be done to pair back the regime to make it more workable for companies in that stage of life, the better. An example might be some form of de minimis threshold, which is included, such that really early-stage companies do not fall within the mandatory notification regime, but the Government can nevertheless rely on their call-in power down the track, should that early-stage company becomes successful and more strategically important within the UK. Those are my principal thoughts. Lisa, do you have anything to add?

Lisa Wright: Not on that point, no

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Nadhim Zahawi)]

Q May I return to the national security issue—as opposed to the wider public interest test, which is an important question—and get your view as to the Bill’s scope, which is very much focused on national security, versus the wider public interest, to which I think my colleague’s first question alluded?

[Chi Onwurah]

To clarify, my question was this: how would you distinguish between national and economic security?

[Nadhim Zahawi]

My question is more about your reflections on the Bill being narrow in its purpose to deal with national security versus the wider public interest.

Lisa Wright: It is already a very broad regime; it catches a lot of transactions, as we have just discussed. I therefore think it is important and right that it is limited, in terms of the substantive concerns that it is catching, to national security. That is already a necessarily, I think, uncertain or undefined concept. Corporates and investors can make it work as long as other aspects of the regime work efficiently. That may be subject to some of the points that Christian just made about the impact on start-ups.

I think that once you broaden the regime out from national security into other considerations, you do risk introducing quite a degree of unpredictability, which possibly would impact on people’s assessment of the investment climate in the UK. My understanding is that the existing intervention regime under the Enterprise Act is planned to remain in force, so the national security considerations will come out of that and will be dealt with under this new regime. But there will still be the ability for—[Inaudible.]

[The Chair]

Mr Boney, do you have any observations while we are waiting for the tech to work?

Christian Boney: I agree entirely with what Lisa has been saying. I think the scope of the Bill is already broad, so to my mind, broadening it further to take account of other areas is likely to introduce the uncertainty that Lisa was referring to and, as a consequence, have a potentially negative impact on the investment climate in the UK.

[The Chair]

Lisa, it looks like we have got you back now. Would you like to add anything?

Lisa Wright: I am not sure at what point you lost me, but I think I was saying—

[Nadhim Zahawi]

We lost you while you were talking about a “degree of unpredictability”, Lisa.

Lisa Wright: Okay. In my view, if you were to broaden the regime out from national security to take into account other considerations, that would introduce quite a degree of unpredictability and would, I think, potentially impact negatively on people’s assessment of the investment climate in the UK—I am sorry if I am repeating myself. However, my understanding is that the existing intervention regime will remain, so national security will come out of it, but the Government will still be able to intervene in transactions on other public interest grounds under the Enterprise Act. That regime has some limitations, but those powers will still be there.

[Stephen Kinnock (Aberavon) (Lab)]

Q Thank you very much for the really excellent evidence you have already given us. I want to go back to what Mr Boney said about de minimis thresholds and whether you might look at introducing de minimis thresholds for particular areas, sectors or industries that I guess you would say are considered to be low risk from a security point of view and highly beneficial to the UK economy, which should therefore affect our thinking about how you might filter this whole process. But are there not other considerations on filtering as well? In essence, this is a risk management process and you have to identify the highest risks. Surely issues of critical national infrastructure would place a type of acquisition into the high-risk quadrant. If the acquirer is close to a state or Government—particularly a hostile Government—that would place it in the high-risk quadrant. Therefore, on having a more filtered process, is the de minimis threshold the right way to go, or would it not be better to have a strategic approach based on a hierarchy of risks?

Christian Boney: I think the de minimis concept is potentially relevant and helpful in the context of thinking about what needs to be subject to mandatory notification. If you are not within the mandatory notification regime, that does not mean that the Government cannot exercise the call-in power so long as the relevant tests in the legislation are satisfied; it just means that the relevant company does not have to make a notification. There are elements of the mandatory sectors where some form of de minimis has already been included. Energy is a good example of that, and that makes sense in the context of energy.

I think it is worth exploring whether, within any of the other sectors, where we are more likely to see start-up, early-stage companies operating, there is benefit in introducing some form of de minimis regime solely in respect of the mandatory notification requirement. As I say, if a small-scale company operating in critical artificial intelligence is receiving investment from somebody who we view as a hostile actor, that transaction might escape mandatory notification, but that does not mean it escapes voluntary call-in by the Government at the point they become aware of it. That is something that might be worth exploring.

--- Later in debate ---

[Chi Onwurah]

Q Thank you. I am very taken by your definition of sovereign and friendly capability. Indeed, that is exactly what we do not have in our 5G networks, hence the mess with Huawei.

Moving on slightly, a comment made numerous times on Second Reading was about the role of the intelligence services. Indeed, my right hon. Friend the Member for North Durham (Mr Jones) asked for more intelligence in the process. How can the Bill better ensure that the intelligence services, including the National Cyber Security Centre, have input and scrutiny and, indeed, provide their expertise as part of the process so that the appropriate decisions are taken?

Professor Martin: I think the essential, principal requirement is not the intelligence services’ involvement—although that is important and I will come to that in a minute—but the understanding of technology and technological developments within Government. These are fundamentally economic issues as well. Apart from anything else, if you look at some of the reasons why the Bill has come about, you will see that, in strategically important technologies, the Government have invested heavily in university-sponsored research and in private sector research, only to see the fruits of that research sold off. Even if that did not impact on national security, which in most cases it does, it is not a good return for the taxpayer in terms of long-term UK involvement if the intellectual property ends up being monetised elsewhere.

I have enormous respect for Mr Jones and I think he is on to something in terms of involving the national security and intelligence services, but I do not think this should be intelligence-led. In my experience—obviously, I cannot go into detail on this particular aspect of it—secret intelligence adds relatively little to your knowledge of intent. If we take Russia and China, the two big strategic threats to the UK, Russia does not have a strategy in this space. We have to worry about Russia and cyber-security because it attacks us, but it attacks us on the internet that the west has built.

China is very different. China has a technological, strategic dominance aim, but it is not a secret. It is published and has been translated into English in the Made in China 2025 strategy, as you know. Our knowledge about the precise, intricate details of how that is implemented gains relatively little from secret intelligence.

What secret intelligence does have, particularly in GCHQ and the NCSC within it, is a knowledge of how technology works in terms of the national security threat space. I think the UK has a head start on other countries, because the National Security Council innovations of the 2010s gave the intelligence services a much bigger voice at the table, and that is reflected in the structures that we have now. The UK should be well placed to be able to listen to the intelligence services, but I would encourage—not least to make sure that in this very delicate balance of trying to show that we still have an open economy and are not shutting the doors to investment—as much transparency as possible on the decision taking. It will not always be possible because GCHQ technologists will know about things—exploitations of particular bits of technology—that they cannot reveal. They will be able to tell that to secret forums within Government for consideration—I am quite confident about that: there will be a seat at the table for them.

My recommendation would be that, as far as can safely be done, the Government should be relatively open about why they make the judgements they make about strategic areas of technology and the interventions they will make once this Bill is passed—assuming that both Houses wish to pass it.

[Nadhim Zahawi]

Q Professor, that was excellent and I am very grateful for it. I will follow on from that thought and ask about the proposed powers within the regime for the Secretary of State to gather that information, which, as you quite rightly remind us, is not necessarily secret but about understanding the technology, or a particular piece of the technology, within the sector. What are your thoughts on the regime for the Secretary of State to be able to gather that information to inform a decision or to call in witnesses, so that they are able to really understand that particular issue and therefore make a decision on it?

Professor Martin: I suppose the mantra, if I had one, would be, “Broad powers, sparingly used, with accountability mechanisms”. It is incredibly hard to be specific about this, for two reasons: one is that new areas of technology crop up, as they invariably do, and the other is that sweeping categorisations are needed on the face of legislation.

I am not a deep technical expert—although others are available from my former organisation—but if you take sweeping, umbrella titles like “quantum” or “artificial intelligence”, there are huge swathes of that where, actually, not a lot of these powers in the Bill will be used. There will be companies that will be doing very interesting things—10 interesting things—of which only one would be caught by this Bill.

If you take areas like specialist quantum computing and so forth, I think the community of interest and expertise is actually relatively small and has relatively good relations with Government—not least because, again, while it is not perfect, the whole system of research council funding and Government investment in funding technological research is pretty good, by international standards—so you end up knowing these people. One of the reasons that this sort of policy evolution came about, which has led to the publication of the Bill before you—I remember this from discussions within Government—is that people were volunteering to come to us. World-leading experts, people who had been funded by the Government—I will not go into individual cases because it is commercially sensitive and possibly security sensitive—would come to Government and say, “Look, we’ve had this inquiry from a Chinese behemoth,” or even, “We’ve had this inquiry from a US company,” and so forth: “What do you guys think about this?” and, invariably, we would have to have an informal influencing discussion.

I do not think that some of the businesses to which this will apply will be screaming that this is horrible Government regulation and intervention in areas where that should not be made. There was already a dialogue; there was just no legislative framework. Of course, that meant that companies that felt a loyalty to the UK and so forth but that also had to look after their commercial interests were sometimes in a real bind.

To try to answer your question, I think that the powers should be fairly broad. I think there should be accountability and transparency mechanisms, so that there is assurance that they are being fairly and sparingly applied.

[Stephen Kinnock]

Q This is very interesting evidence. I want to ask you a little bit more about China. As you rightly pointed out, much of this is in the public domain, and the Made in China 2025 strategy is very clear about the objective, which is to achieve global technological dominance. Given your experience at the National Cyber Security Centre, can you share with us a little bit more about how that would manifest itself in practice? What do you see as China’s next moves, in terms of rewriting the rules on technology and on creating that dominant position that you have talked about? How do you see that manifesting itself?

Professor Martin: I think there are broadly two or three areas in which China is very interested in doing that. I can make some comments on motivations, because I think they are very important, and then I will finish with how that manifests itself in UK casework.

Clearly, China has set out a stall, which it published in Made in China 2025, in which it said it wants to be the world’s pre-eminent leader in a number of key areas of technology. It mentioned artificial intelligence and quantum, and it is throwing vast sums of state money and long-term strategies at them, unencumbered by the need to seek re-election and popular consent, so it is a very powerful movement. That is the first thing: it is trying to build up its capability.

China is also trying to change, at least for itself—we will come to that in a minute—the way the internet works. It was reported earlier this year that Huawei and other major companies in these international standards bodies are looking at something called new IP protocols, among many other things. To give you a sense of what the motivations behind that are, at the minute when traffic flows around the internet, despite some popular impressions to the contrary, it is actually pretty hard to work out what is going through it. Therefore, it is relatively difficult to censor, although China has managed it in some ways. The new IP protocol will make it much easier to work out what sort of traffic is going through and being rerouted, so it makes it much easier to control. China is trying to dominate and essentially get a lead in the strategic technology, and also to change the character and culture of the technological age from one that started off fairly anarchic to one that is much easier to control. That is what it is trying to do.

Why is China trying to do that? A lot of this is about the assertion of its own power for itself—the regime, power, Chinese nationalism and so forth. I think it does intend to extend its sphere of influence, but I have never seen that as the primary motivation. One of the interesting things, post the pushback from the Trump Administration and the US sanctions on Huawei, is the extent to which China will now accelerate its desire for self-sufficiency, and the extent to which that leads to a separate pole of technological influence that may become less interested in countries such as the UK, European Union countries and North America.

To date, how has that manifested itself in cases in the UK? Ms Onwurah has already mentioned the Huawei controversy. If you take Huawei as a company, I think it shows the different ways in which this can manifest. The Huawei 5G controversy is going to be dealt with by a Bill that I believe is coming to the House next week, not this one. The 5G controversy was not about investment; it was about selling to British companies to build stuff. Obviously, that case has been very heavily analysed.

I think that the more interesting case in the last 10 years involving Huawei was its acquisition in 2012 of the Centre for Integrated Photonics—a world-leading British firm in a really key area of technology. That, in my view, was pretty strategically damaging. If we had our time over again, that is the sort of thing that the Bill might well notify. I know you have taken evidence from the likes of Charles Parton and people with huge China expertise. The fact that the acquisition of the Centre for Integrated Photonics did down Britain’s technological development was probably a by-product. The point is that Huawei could buy world-leading research, which China could then take and appropriate for itself very cheaply. That is what it will continue to do to build up its own capabilities.