National Security and Investment Bill (Third sitting)

Stephen Kinnock Excerpts

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

[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.

[Stephen Kinnock]

Thanks very much. Does Ms Wright want to add anything?

Lisa Wright: No.

[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.

--- Later in debate ---

[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.

[Stephen Kinnock]

Q Given what you just said about the nature of the threat, how should that inform the composition of the investment security unit, which is going to be placed in BEIS and will be the primary locus for the screening of acquisitions? Would you say that it needs to have absolutely leading expertise in technology in the issues that you mentioned—quantum and so on? Should it also have China experts and people who speak Mandarin?

Professor Martin: One of the reasons that this is so difficult, as I said in my first answer to Ms Onwurah, is that I can think of at least three areas of expertise that the unit is going to need to draw on. Technological, yes, because of what technologies will matter. Geopolitical, yes, and I do not have a strong view on whether it needs Mandarin speakers because the UK has a strong and intelligent foreign service mission in country in China and all over the place that can provide input. But the third thing is actually quite a lot of commercial nous—patent laws and so forth.

This is where there is a distinction. This is not all about China. It is layered, and there will be things that we would not want to see going even to quite friendly countries. Arm is a case in point, with the concentration of power in a couple of US companies—particularly when one of them is derived from UK technology. That is not comparable as a strategic threat to Chinese dominance—I hope the Committee does not think I am saying that—but there are times when it would be a damaging foreclosure, if you like, of UK freedom of action and freedom of choice. We know that the US has a strong and sometimes aggressively used extraterritorial legal system in which it can use the power of US companies and block trading with US companies and so on, so we need people who understand those areas where we think, “We are not sure we would want that to leave the country at all” as well as people who understand Chinese. That involves a lot of expertise in things like patents, international law, US commercial law, sanctions and so on.

[Andrew Bowie (West Aberdeenshire and Kincardine) (Con)]

Q Professor Martin, I have been listening with interest—it has been fascinating—especially when you were talking about the need to balance national security, the national interest and economic security. I have been reading the very good briefing by the Law Society of England and Wales, which suggests that the Bill could be improved by the insertion of a definition of national security. Do you agree?

Professor Martin: I do not vehemently disagree with that suggestion, but I am not persuaded by it. It is not a new issue. I remember cases—they have nothing to do with this—going back to the aftermath of the so-called global war on terror, with demands during inquiries for definitions of national security. I am not sure what that would achieve other than it would be heavily litigated. In terms of both definitions of national security and the categories of technology, a better answer is a drumbeat of reviewable activity, which is by definition transparent, about how the Government interpret the scope of the Bill, if it becomes an Act, and the sort of cases it applies to so that, over time, you build up a broadly accepted framework—of course, not everyone will accept it—that is seen to be fair and rational.