National Security and Investment Bill (Fourth sitting)

Stephen Kinnock Excerpts

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

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

Q I was going to ask you about whether the Bill is proportionate between being very focused on national security—albeit, as you quite rightly point out, there is a spectrum of that—versus public interest, but I think that you have answered that issue in saying that you would very much guard against expanding it.

James Palmer: I will just explain why. I remember working when the public interest regime still applied. The move away from the public interest regime started in the 1980s. Pre the 1980s, this country was not an international investment destination; it really was not. We have earned that position. Whatever one’s politics—I am not party political—this is something that the UK has earned. We have done that by moving to being pretty open-minded in foreign investment. We have actually not worried that much about national security considerations being controlled through ownership, because again this debate has been—sorry, let me first come back to the Minister’s point.

I am very nervous that if you open it up to public interest, you vest that authority in a politician; forgive me, but that is what leads to lobbying, to short-termism, and to completely inconsistent decision taking. I am afraid that whatever Ministers at the time may say about these decisions, there is no external credibility on the predictability of those. It does not matter whether Ministers think they are doing it in good faith or on security grounds. It does not come over that way.

On broadening it to public interest, I completely agree. I am very grateful—because I know that there was a debate about this—that it has been rightly focused just on national security, albeit with a broad ability to intervene to protect the national interest.

[Stephen Kinnock (Aberavon) (Lab)]

Q Thank you very much indeed for your useful and interesting evidence. I want to ask about some tangible examples, just to get a sense of where you stand on this spectrum—in this debate between economic openness and national security. You have made your position on it quite clear, which is that we should not sacrifice one to the other. Do you think that the Arm-SoftBank transaction would have gone through under this regime?

James Palmer: My own view is that I actually hope so, because I think that there is a debate here. We all identify a business that has been established in the UK, and we regard it with pride as a national asset. I completely understand that. I am not just interested in global M and A; I am interested in investment in the UK. My goal is not just M and A. It is the investment, which we will not get without M and A at the end, because investors want to know that they have the ability to realise.

My own judgment—I am not an economist, but most of the economic evidence that I have seen supports this—is that you do better by allowing people to come in, allowing them to sell, not necessarily completely untrammelled, but on a broadly liberal perspective, giving them the certainty and confidence to do that.

I think what we are debating here is about those things that are generated solely in the UK—for example, research, work and ideas that are funded by the UK Government. I can see why the UK Government might want to keep control over those things and link their funding to a level of control. If someone takes funding on that basis, I can see that. I do not know enough about the history of Arm, but it was acquired by a Japanese parent, not by a so-called hostile actor. If we are not going to allow Japanese businesses to buy into our technology businesses, I think we look like a less interesting technology investment and growth destination. We might hold on to a business for another five years, but what businesses are we losing for our children and grandchildren in 10, 20 and 30 years’ time? That is how I look at the question.

[Stephen Kinnock]

Q What about AstraZeneca and Pfizer, which, of course, did not go through, mainly because of the political debate that raged around it?

James Palmer: Partly. I was involved in that as well—not entirely, actually. By the way, I think there is a misunderstanding about hostile versus agreed deals. Agreed deals, politically, are regarded as generally okay, and hostile deals as not. But it is about price normally. In occasional cases, there may be other factors, but I think that should not be the determinant of whether a deal is favoured or not.

On AstraZeneca-Pfizer, the challenge there is that AstraZeneca is not just a UK company; it is a global company. Most of its business is not in the UK; it is all around the world. It was built up by making acquisitions all around the world. If we say that it cannot be acquired by an American pharmaceuticals company, what message does that give to businesses that want to come and headquarter in the UK to then go and buy elsewhere? The UK has been a net acquirer globally, and I think that our openness is what has allowed us to do that.

I completely understand the concerns about jobs, and I completely understand the concerns about science and the preservation of skills, and I do not dismiss those, but I worry that by trying to hold on to what we have today, we lose the appeal in the long term, a bit at a time, to people coming in the future. It seems to me that if we are going to have research in the UK, which I think we will, it should flow from our research skills, not from holding on to things that want to leave.

[Stephen Kinnock]

Thanks very much. Do I have time for one more?

[The Chair]

If it is very quick.

[Stephen Kinnock]

Q Could you just say a word about comparable jurisdictions, such as the United States, where their CFIUS law brings into play the extent to which the acquirer has a history of compliance with US law, and the same for us—not just the acquirer, but perhaps also the state that that acquirer comes from?

James Palmer: There is an interesting issue about compliance with law. You need to be careful, because clearly, the draft legislation envisages—as, by the way, I think, the current very broad discretion, which catches an awful lot of transactions, gives discretion to do—allowing quite a bit of leeway to exercise judgment as to what is a national security issue. If you have an investor that is clearly law-abiding and not about to try to put toxic software into your systems or whatever it might be, you are going to worry a lot less about them, so I do not want to limit the discretion.

Do I think that you need to draw out compliance with law in particular? I am nervous about doing so, because it could become a hobby horse for a company that has breached some law somewhere or other. If a big global company has 50,000 employees, people make mistakes; someone somewhere will do something that will transgress. So I worry about it missing the substance. I think there is a discretion to look more substantively, rather than being too much tied to whether they are law-abiding or not. Again, there is clearly a China focus here—I am neutral on that issue; that is for you—but you are not going to know whether a Chinese company is law-abiding outside China or in China, in particular if it has not invested outside China before.

The only other thing I would say on comparator regimes is that the whole debate on this has been framed, as it was in the 2017 paper, around the main rationale, which was, “Other countries are doing this, so we need to look at it.” A much better rationale, which has also been articulated by the Government, is, “We’re coming out of the EU. We’ve got EU-based legislation at the moment. It’s actually the right time to take stock, rather than necessarily that the old regime was hugely defective.” I do not think it was as defective as everybody is saying.

We keep talking about France, the US and Australia. My firm is the largest law firm, or one of the largest law firms, in Australia, and we are in all the markets—France, Germany, Italy and Spain—that keep being cited. Those countries are our very friendly trading partners, but none of them has the reputation for being as open and free trade-oriented as this country. I think we need to be careful about setting comparisons with the most controlling of our friends, not the least controlling, because there are a whole load of countries that have not been named in any of the discussions that are not doing any of this.

Take Ireland and technology. Maybe, under pressure from the EU, they will introduce something, but the Irish have been trying to grow technology; so have the Danes and the Swedes, and the Dutch as well. The Dutch will come out with some proposals in this area, but my expectation is that they will be much more limited. The Dutch are very internationally competitive. For new industries—for green tech, which we really want to be in—the Nordic countries are significant competitors, and I do not think they are going to have all this. I think that, for investors, that is a factor we just need to bear in mind as we try to find the right balance.

[The Chair]

We have less than five minutes left, so I suspect that this will be the last question. Mark Garnier.

--- Later in debate ---

[Matt Western]

Q Going back to my previous question, do you think that we should think about areas such as climate change and other things that are perhaps not necessarily of immediate urgency—some would say, of course, that climate change is urgent—as matters of national security?

David Offenbach: I do not think that there is anything other than the 17 already mentioned and the ones that I mentioned, most of which came up in the debate last Tuesday. I think that telecoms might be mentioned as well, but the list really covers all the areas where national security is a significant risk.

[Stephen Kinnock]

Q Thank you very much for this useful and important evidence. I have one relatively specific question based on your expertise in real estate. The statement of political intent states:

“Land is generally only expected to be an asset of national security interest where it is, or is proximate to, a sensitive site, examples of which include critical national infrastructure”.

Do you think that scope is too narrow? For example, we know that property in London is used to launder large amounts of money—nefarious organisations often own property in London and use it for nefarious purposes. London is sometimes referred to as a laundromat for dark money. Do you think that that is a national security risk and should be included in the scope of the Bill, and that the land definition in the statement of political intent should reflect the money laundering issue?

David Offenbach: I am not sure I quite agree with the statement of intent as part of the Bill papers. The drafting of that section of the Bill is wide enough to include the issues that you raise. It would be open to the Minister to intervene in the cases that you mention without any change to the drafting of the Bill being necessary.

[The Chair]

If there are no further questions at this point, I will say thank you very much, Mr Offenbach. The next witness is not due until 3.15 so we will have a 10-minute suspension.

--- Later in debate ---

[Nadhim Zahawi]

Q Welcome, Mr Butler, and thank you very much for your attendance. Reflecting on the changing nature of the national security threats that we are now facing, which you alluded to in your answer to my colleague, the hon. Member for Newcastle upon Tyne Central, how do you think the Bill builds on the Enterprise Act 2002? It has been 18 years since that legislation was introduced, so it would be great to get your take on that. Given your CV, it is worth getting your reflection on that while we have you here.

Creon Butler: I think—I am sure many people have said this—it is very clear that the previous legislation needed updating and was not fit for purpose, given both the way in which the global economy as a whole has evolved and the way in which the threats have evolved. It is both necessary and urgent to update that, and the way the Bill has done that, in terms of this first phase of creating the powers both to collect information and to intervene, makes a lot of sense. We have to fine-tune it and make sure it works properly, but this is a good first step. As I said, though, it is really important, if you are going to have such broad powers, to define exactly how you will use them—and much more precisely than the Government has done hitherto.

The further point is that this piece of legislation does not do everything. Alongside it, we need to strengthen our ability to collect the information we need about those threats. There are a number of elements. One that I have some experience of and that is really important is the question of who actually owns and controls companies that are operating in the UK—the question of beneficial ownership transparency. If you do not know that a hostile power is influencing a company that might be registered in an overseas territory or something of that kind, you will not be able to take the steps that you need to take.

A further area—it is a step in the right direction, because it gives us the powers to engage with this issue —is through international co-operation. Looking forwards, we need to strengthen and enhance our international co-operation with like-minded partners by going beyond the Five Eyes and including other really key partners, such as Japan, the EU and so on. That will enable us to do two things. First, it will enable us to share information about the things that can happen, such as the techniques that hostile powers are using. You may see it come up first in one country, and if we can share that information, we know that we can be prepared for that. Even more importantly, you may have a hostile power that does a number of things in different parts of the world, and it is only when you see the entire picture that you can see what the threat is.

Having that kind of international co-operation to do that is really important. These powers are necessary to get us in the same place as some of our key allies, in terms of what we can do. I do not think we are ever going to be able to standardise the areas of intervention or the nature of powers, but we should push very hard to enhance the sharing of information in the way I described.

[Stephen Kinnock]

Q Thank you very much for the very interesting evidence that you are providing. I want to focus on the acquirer risk element of the Bill. The statement of political intent states that

“the National Security and Investment regime does not regard state-owned entities, sovereign wealth funds—or other entities affiliated with foreign states—as being inherently more likely to pose a national security risk.”

Do you agree with that assessment? Logic would seem to suggest that the closer an entity is to a foreign Government, the more likely it is to pose a risk to our national security.

Creon Butler: Clearly, some state-owned enterprises can be a significant risk, but some clearly are not. VW has a significant state element in it through North Rhine-Westphalia, but that does not make it a national security risk. At the same time—this goes back to the point I was making about who actually controls companies —you could well have a company that is registered in another country and, particularly if that country does not have very beneficial ownership transparency laws, as even some very close allies such as the US do not, the company emanating from it could have ill intent towards us.

For that reason, I think the Bill is right not to make a special regime for companies that are state owned, because that could go wrong in two ways: either you could be looking at only one set of companies when there are others that are potential threats, even though they come from close allies, or you may end up spending a lot of time looking at companies with state shareholdings that are really no threat at all. Clearly, when you come to do the analysis, whether there is a stake from a hostile state will be an important part of the analysis that you do in assessing that threat. I think the Bill gets it right in not creating a special regime, but that does not mean that this will not be an important part of the analysis that you do in assessing the threats.

[Stephen Kinnock]

Q The Bill does not suggest a special regime, but it also seems to say explicitly that the state-owned characteristic should not be considered, because the statement of policy intent says that it is not inherently more likely to pose a national security risk. It does not seem to do either of the two things you are suggesting.

Creon Butler: I did not read it quite that way. I read it more as meaning that that is not a reason for having a special regime, but when it comes to doing the assessment, you look at whether there is a state element of ownership and from which country that state element of ownership comes. That would be a factor when you are examining the likelihood that that particular investor could pose a threat to us. I am not a lawyer; I just read it that way. If the way you are reading it is the correct way to read it, I do not think that is quite right.

[James Wild (North West Norfolk) (Con)]

Q Mr Butler, given your experience in the National Security Secretariat, I want to ask you a few structural questions. How you think the NSS should be linked into the new investment security unit in BEIS?

Creon Butler: It is a constantly evolving picture. The benefit that the NSS can bring is a strategic overview. When you want to put the element of national security protection in the context of broader economic security issues, it is really important that the NSS plays a key role. I do not know the precise detail of exactly what the linkages are between the new unit and the NSS. I would think, from the way I worked in the NSS, that they will be very close in term of people, exchanges, links and so on.

In terms of the respective roles, the strategic role is one that the NSS should play, looking at this element alongside all the other elements of national economic security. As I understand it, it is very important that this unit has a very strong operational focus and effectiveness, the skills that enable it to do this, and the space in which to do it. If I was in charge of designing the relationship, that is how I would design it.

--- Later in debate ---

[Andrew Bowie]

Q Earlier on today, and two days ago, we discussed the link between national security and national interest, and I am sure you would agree with me that attracting inward investment is very much in the national interest. We have just heard from the hon. Member for Aberdeen South about the effect that this might be having. We do very well as a country in terms of attracting inward investment; I think we are No. 1 in Europe. As the Bill stands right now, do you think it will have a detrimental effect on our ability to attract inward investment to the UK?

Will Jackson-Moore: Not as the Bill stands in its own right. As you say, we are the largest inbound country for venture capital, for private equity and for infrastructure, and we have been seen as the gold standard for the location in Europe to invest into. Many other European territories have equivalent legislation, but again it is about the application of the legislation, in particular the process, the ability to pre-clear and the timelines actually being met. To understand some of these technologies is not going to be straightforward. These are emerging, cutting-edge technologies in some cases, and the talent required to assess that will not necessarily be easy to attract. Some consideration needs to be given to partnering with research institutes or academia in specific areas, so that there is a panel available to assess certain technologies, not only to understand its position right now but also its trajectory—where that technology may go in the next two or three years.

[Stephen Kinnock]

Q Thanks very much for that helpful evidence. I want to focus on this issue of the target risk and the type of asset that is potentially being acquired. I am interested in the role of private equity in the residential care home sector. Large swathes of our residential care homes are owned by private equity companies. I just wonder whether you think residential care, and social and public services of that nature, should be defined as a critical national infrastructure?

Will Jackson-Moore: It is not something I have specifically considered. It certainly would not that be within what I considered to be a matter of national security under the auspices of the Bill. I do not think I am in a position to comment any further.

[Stephen Kinnock]

Q I am sorry; I saw that you have done a lot of work with private equity and thought that you may have been involved in that aspect of it. On sovereign wealth funds, do you see the China Investment Corporation—I do not know if you have ever done any work with it—as an arm of the Chinese Communist party?

Will Jackson-Moore: I am not in a position to talk about specific individual organisations. A number of sovereign funds in China are very well regarded in the international capital markets. However, in terms of their interaction with Chinese Government, that is not something that I have a perspective on.

[Mark Garnier]

Q My apologies for not being here at the beginning. I am interested in your work on sovereign wealth funds and private equity funds, in terms of working out the value of an investment asset. We heard evidence in the first session this afternoon—I do not know if you were here—than the fact that this Bill will restrict the number of potential buyers out there might then restrict the amount of interest coming in to start with; an investor with a target company to invest in may have limited numbers of people that they could sell it to when they want to exit, which will adjust the price. Have you had any thoughts about that at all?

Will Jackson-Moore: As I mentioned earlier, the UK is the gold standard for a location to invest in, particularly within Europe. Investors like investing in the UK because of the fairness and transparency, UK law and UK courts, and as a place to be based and to live, so there is an inherent benefit to doing UK-based transactions. However, and as we sit here right now, on a scorecard-type approach, the UK is not as attractive a location as it has been historically. We have the uncertainties of Brexit and we have a number of other territories looking to recover and rethink their economies given the situation we are all in, so there will be more—