UK Steel Sector: Supply Chains

Stephen Kinnock Excerpts

Wednesday 9th June 2021 Westminster Hall

[Stephen Kinnock (Aberavon) (Lab)]

I beg to move,

That this House has considered the UK steel sector and its supply chains.

It is a pleasure to serve under your chairship, Sir Graham. Hon. Members taking part in the debate today will recognise that this is not the first time that we have sought assurances from the UK Government that they are sincerely committed to supporting the British steel industry. Indeed, by my calculations, since 2015 Labour MPs have secured 19 debates and urgent questions on steel, made 51 speeches on steel, asked 54 oral questions on steel, and intervened on or responded to Ministers 103 times on the future of our steel industry. A pessimist may ask, “What’s the point?”. After all that pressure, the British steel industry still faces a range of serious challenges, and the UK Government are continually failing to provide the necessary level of support to allow the UK steel sector to compete.

In spite of those powerful headwinds, I am optimistic about the future of our steel industry, because I believe that covid-19 has completely reset the way in which the British people think about the sort of country they want to live in. The public want a Britain that can stand on its own two feet and that is more resilient to external shocks. The pandemic has exposed the weaknesses and vulnerabilities that lie at the heart of our economy and our society. The pandemic has demonstrated beyond a shadow of a doubt that if we wish to address those weaknesses and vulnerabilities, we must commit to and invest in a renaissance of modern manufacturing in our country.

British manufacturing has been in decline, dropping from 30% of GDP in the 1970s to just 9% today. The UK’s shift towards a city-centric, service-based economy means that it is now the most geographically unequal country in northern Europe. We have the richest area in the whole of northern Europe—London—but also the five least prosperous areas, with west Wales and the valleys the poorest of all.

Today, our country stands at a fork in the road, and the choice is clear. Are we going to continue to allow our manufacturing sector to wither away, constantly eroded by the sort of policies that have come to define the last decade and which are advocated in the book of the Secretary of State for Business, Energy and Industrial Strategy, “Britannia Unchained”: “Let the market rip. Let the City of London call the shots. Let globalisation and deindustrialisation ride roughshod over our communities.”? Or are we going to truly understand the pandemic as a clear and unambiguous warning that we cannot go back to business as usual and that we must strive for real enduring change; that we must stand on our own two feet by reducing our dangerous over-reliance on imports from China; that it is time to recognise that the collapse of British manufacturing is the primary cause of the grotesque inequality that exists between the wealthiest and the poorest regions of our country; and that a modern manufacturing renaissance is our only route towards a fair and just transition to a cleaner, greener future?

Our manufacturing base can be rebuilt only if it is based on a strong and healthy steel industry, because steel is a vital foundational industry that is critical for our security, prosperity and green resilience. Our economic and national security are underpinned by steel. Every military vehicle, major infrastructure project and power station requires steel. In a world where strategic competition between democracies and dictatorships is intensifying on an almost daily basis, it is crucial that as much of that steel as possible is produced here in the UK.

Our prosperity as a nation is also dependent on steel as a vital foundational industry that feeds into our entire manufacturing sector. Steel jobs are good jobs that pay an average annual salary of £36,000, which is 36% higher than the Welsh average, and the Port Talbot steelworks in my Aberavon constituency provides 4,000 such jobs, alongside thousands more through the supply chains.

Home-grown steel is also the only route to tackling climate change. Steel will play a critical role in greening our economy by building the electric cars of the future and providing vital components for solar, wind and tidal power. Moreover, British production processes have half the carbon footprint of China’s far less decarbonised steel industry, and shipping steel from the other side of the world is obviously more carbon intensive.

Whether we look at the British steel industry through the prism of our national security, regional prosperity or planetary sustainability, we draw the same conclusion: there can be no sustainable post-pandemic economic recovery without a strong and healthy steel industry. The arguments are compelling, irrefutable and over-whelming, so it is difficult to understand why the UK Government have been so slow to act, but the pandemic has put rocket boosters on the need for a modern manufacturing renaissance underpinned by the rebirth of our steel industry.

The Government must now take the following steps. First, they must reject the recommendation of the Trade Remedies Investigations Directorate regarding steel safeguards, and must ensure that all 19 of the safeguards remain in place. Those trade defence measures were put in place to guard against import surges caused by President Trump’s section 232 tariffs, and it is essential that they are retained until such time as the section 232 tariffs are dropped by the Biden Administration. The TRID’s recommendations are tantamount to dismantling the flood defences just as the tidal wave is about to hit. Will the Minister assure us that she has made the position of the steel industry, steel unions and steel MPs clear to her colleagues in the Department for International Trade?

Secondly, the Government must as a matter of urgency address the issue of our industrial energy crisis. British steelmakers pay 86% more than their German competitors and 62% more than the French. Over the past five years, that disparity has cost the UK steel industry an additional £254 million. Those additional costs represent funds that should and would have been directed towards critical capital investment, including decarbonisation projects. Will the Minister please assure us today that her Department is truly committed to tackling the root causes of the UK’s astronomical industrial energy prices, and can she set out her urgent action plan for doing so?

Thirdly, we need a patriotic procurement policy. It is absurd and inexcusable that the Ministry of Defence is buying Type 26 frigates for the Royal Navy that are built with Swedish steel. We need procurement that gives the right weighting to local value. Let us look at big opportunities such as High Speed 2, with 2 million tonnes of steel. How much of that steel is going to be British? Can the Minister assure us today that every Government Department and HS2 will be signed up to the steel charter by the end of this calendar year?

Fourthly, we need a Government who are truly committed to rebuilding our manufacturing base, and who believe in partnering with industry to do so. Some say that steel is a sunset industry, but nothing could be further from the truth—it is at the cutting edge of innovation. Indeed, the vast majority of the alloys that are used in steel these days did not even exist 10 years ago. It is absurd to have a Government who have utterly failed to support the Orb plant in Newport—I look to my hon. Friend the Member for Newport East (Jessica Morden)—which could play a major role in electric vehicles.

It seems that the left hand does not know what the right hand is doing, which is precisely why co-ordinating forums such as the Industrial Strategy Council are so important. Can the Minister please explain why the Industrial Strategy Council has been closed down by the Business Secretary, and can she please tell us whether she thinks that decision will be a help or hindrance to the future of the British steel industry?

British steelworkers are a strong, proud community of men and women who make the best steel that money can buy. They are certainly not looking for anybody’s charity, special treatment or favours. They are simply seeking the opportunity to compete without having one hand tied behind their back. They are simply asking for a level playing field. Since 2010, successive Conservative Governments have let them down by leaving the flood gates open to heavily subsidised imports from China; by failing to close the energy price gap; by declining to develop a patriotic procurement policy; and by failing to grasp the vital role that a home-grown steel industry must play in driving the green industrial revolution forward.

Receiving a fair day’s pay for a fair day’s work is as important to steelworkers as it is to every other working person across the length and breadth of our country. However, working people are motivated by far more than money. Above all, they are driven by the sense of pride and dignity that their work gives them, and steelworkers are certainly not an exception to that rule.

Steelworkers do long shifts in challenging conditions because they want to make a contribution. They are fiercely proud of the fact that steel is the basis of the houses we live in, the offices we work in and the cars we drive. They are steelworkers because they want to do their bit for their country, for their communities, and for their families. They are steelworkers because they want to be part of something bigger, but they cannot do this alone.

They need a Government who will back them to the hilt; a Government who will put policies in place that attract investment, rather than drive it away; a Government who truly believe that a country should be able to stand on its own two feet. Our steelworkers need a Government who are genuinely committed to reversing the decline of manufacturing in this country. They need a Government who are truly invested in swinging the pendulum from cities to towns, and from London and the south-east to the rest of the country. Britain needs its steel, and our steelworkers need a Government who are on their side.

[Sir Graham Brady (in the Chair)]

I should inform all participants that due to a technical problem, all those participating virtually did not catch the first three minutes of the debate. That has now been resolved, but I pass on the apologies of the staff who have been working to resolve the problem.

There are a lot of Back-Bench participants on the call list. If it is possible for them to keep to about five minutes, we should be able to get everybody in.

--- Later in debate ---

[Stephen Kinnock]

I thank all hon. Members present for a really constructive and useful debate.

I thank the Minister for her response, but there is a chasm between the rhetoric that the Government are deploying and the tangible actions that we need to see. Safeguards are now of the utmost urgency, but we are in an absurd situation whereby the Secretary of State for International Trade is not being given the option of modifying the recommendations that we have discussed; it is simply, “Take it or leave it”. If the decision is to reject the recommendations in their entirety, all the safeguards will fall. That would lead to a massive import surge, which could be crippling for our industry. I urge the Minister to go back to the Department for International Trade with the greatest urgency. The recommendations appear to be based on a fundamental misunderstanding about how the steel industry actually works, as the hon. Member for Scunthorpe (Holly Mumby-Croft) so eloquently set out.

On procurement, we need concrete actions. We need targets for how much of the steel in public infrastructure projects should be British steel, and we need clear supply chain plans so that procurers are obliged to set out precisely how they will maximise the input of British steel. We have been calling for this for years, and we need to see specific actions.

On price disparity, we should be looking at the French-German model for network cost reductions, increasing the renewable levy exemptions and providing exemptions from capacity market costs. Again, those are all things that we have been calling for over several years.

Finally, on the green transition, a recent report by a think-tank, the Energy and Climate Intelligence Unit, showed that there are 23 hydrogen steel projects happening across the European Union, but absolutely none in this country. It feels as though we could be behind the curve in that regard. Politics is about choices, and I urge the Government to make choices that actually favour our British steel industry.

Motion lapsed (Standing Order No. 10(6)).

Oral Answers to Questions

Stephen Kinnock Excerpts

Tuesday 25th May 2021 Commons Chamber

[Mohammad Yasin (Bedford) (Lab)]

When his Department plans to publish the ACAS report on fire and rehire and the Government’s response to that report.

[Stephen Kinnock (Aberavon) (Lab)]

What plans he has to bring forward legislative proposals to outlaw fire and rehire practices.

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

The Department engaged with ACAS to hold discussions in order to generate evidence about the use of fire and rehire. ACAS officials have shared their findings with BEIS officials. It is right and proper that we give this evidence full consideration, and we will communicate our next steps in due course.

--- Later in debate ---

[Paul Scully]

There is a huge difference between our employment law and that of Germany and Spain, in so much as theirs is very much more rigid—it lacks flexibility and that is reflected in the job figures and the job growth we have had in this country. The Government remain committed to bringing forward the employment Bill, where parliamentary time allows. We want to protect and enhance workers’ rights as we build back better from the pandemic.

[Stephen Kinnock [V]]

Fire and rehire has been used against supermarket staff who worked through lockdown to keep our country running, and the practice has now spread into schools, with teachers being threatened with the sack unless they agree to worse terms and conditions. Does the Minister agree that it is completely unacceptable that our key workers, who have sacrificed the most in our national effort against covid, are the very people now being threatened by these bully-boy fire and rehire tactics?

[Paul Scully]

I have said repeatedly that bully-boy tactics are absolutely unacceptable, but if it is a matter of a choice over protecting jobs in the first place, that is the flexibility that we need to check, based on the evidence, and ACAS has gone a long way to providing that evidence.

UK Steel Production: Greensill Capital

Stephen Kinnock Excerpts

Thursday 25th March 2021 Commons Chamber

[Kwasi Kwarteng]

I assure my hon. Friend that we are committed to the steel industry in the UK. That is why, last week, we published the industrial decarbonisation strategy, which I was very pleased to commission as energy Minister. I look forward to speaking to him about the next steps forward for this industry.

[Stephen Kinnock (Aberavon) (Lab) [V]]

British steelworkers make the best steel that money can buy, but they are having to compete with one hand tied behind their back because electricity costs our steel companies 86% more than in Germany and 62% more than in France, an issue I raised with the Secretary of State when he met steel MPs on 3 February. On 22 February, the Prime Minister told me from the Dispatch Box that

“we must indeed address the discriminatory costs of energy.”—[Official Report, 22 February 2021; Vol. 689, c. 647.]

What progress has the Secretary of State made in addressing this critical issue since our 3 February discussion, and does he think that the Chancellor understands that there can be no post-pandemic recovery without a strong and healthy steel industry?

[Kwasi Kwarteng]

My right hon. Friend the Chancellor is fully aware of the importance of the sector. The hon. Gentleman will know—I think he attended the Steel Council where this issue was raised—that we have commissioned work to see what can be done to redress the balance he alludes to.

Disused Mineworks in Skewen: Flooding

Stephen Kinnock Excerpts

Monday 8th March 2021 Commons Chamber

[Stephen Kinnock (Aberavon) (Lab)]

On 21 January, residents living in Skewen in my Aberavon constituency had their lives turned upside down. Unbeknown to them, a blockage in a disused mineworks was preventing water from draining away. Thousands of gallons of water therefore accumulated underground, creating the liquid equivalent of a ticking time bomb, which finally exploded on the 21st, causing a blow-out from the mine shaft.

The force of the water was so great that not only did it punch through the cap that had sealed the mine for over 100 years, but it erupted through the road above. The torrent of water and sludge then cascaded through Goshen Park, down Drummau Road and The Highlands, through Sunnyland Crescent before settling in Sunnyland, Jubilee Crescent, Dynevor Road and the bottom of Cwrt-Y-Clafdy. Residents, including at a nearby care home, were evacuated as the mine waters continued to rise. The sheer terrifying force of the water was breaking down walls, displacing cookers, fridges and furniture, shattering glass and destroying belongings. It left a trail of destruction in its wake. Miraculously, nobody was physically injured, but make no mistake: the traumatic emotional aftershocks of this will be felt forever in this tight-knit community.

Before I make any further comment about the impact of this horrific incident and how the UK Government and the Coal Authority must respond, I would like to place on record my thanks to the emergency services and all the agencies that responded to the incident and helped residents. The local councillor, Mike Harvey, has also been a rock for his residents, standing by them from the outset. Neath Port Talbot Council’s response has also been rapid and effective. It has continued to support residents, helping them to find temporary accommodation, administering the Welsh Government’s financial assistance, facilitating council tax exemptions, providing support for pursuing insurance claims and organising generators and dehumidifiers for residents without insurance to dry out their homes.

I would also like to thank those at Skewen Salvation Army for the wonderful work that they have done to support and help the victims. They were on site with their emergency vehicle within hours. They opened their hall for donations, and they have set up a fundraising page and raised thousands of pounds to help residents. Residents are particularly grateful to Briony Powell, the volunteer co-ordinator, Emma Jones, the local area co-ordinator, and Captain Jo Walters, who so quickly mobilised the relief effort. We are fiercely proud of our legendary community spirit in Aberavon. We have certainly seen it in Skewen, and it has certainly been needed.

Of the 144 properties affected, 59 were flooded internally and 17 were flooded externally. Over 50 households have needed to find temporary accommodation. For each one of these properties, their owners are facing every homeowner’s worst nightmare, and they are facing it in the midst of a global pandemic. Having visited the site a number of times, I have seen for myself the sheer scale of the destruction that has been caused, and I can tell the House that the residents’ stories have not got any less heartbreaking.

Mr Godden and his son work in the ambulance service, and Mrs Godden is a nurse. The last 12 months on the frontline in the battle against this pandemic have been hugely challenging for them, and now this has happened. Their home is devastated. There is not much left. Their caravan and the vehicle they were unable to move have both been written off, but they still have to pay off the lease on the car. To add insult to injury, they have been told by their insurance company that because they cannot make a claim against the Coal Authority, they are considered to be at fault for the damage the water has caused to their caravan. This is nothing short of a scandal.

Emma Jones was at work when it happened. Her 15-year-old twins were at home studying when the water engulfed their home. They were rescued though waist-deep water by firefighters. The ordeal of what unfolded that day has left her daughter suffering from nightmares, seeing images in her mind’s eye of her family and friends face down in water.

Ria Evans grew up in her home on Dynevor Road. Her mother lived there and so did her grandmother. The home holds great sentimental value to her. It was full of loving memories and treasured belongings, but they have all been destroyed. Ria has yet to find long-term accommodation. She is desperate to find somewhere to settle so she can get a bit of stability and stop living out of a suitcase. Every day is a constant battle for her. She is struggling to sleep, she is struggling emotionally, and she is struggling to focus, which is affecting her work.

Every time I speak with residents, I am profoundly impressed by the dignity with which they are conducting themselves. However, I have to tell the Minister that there is a growing feeling of anger and betrayal about the way in which they are being treated by the Coal Authority and the UK Government.

The Coal Industry Act 1994 transferred responsibility for mines, including the one in Skewen, to the UK Government. At that time, the Coal Authority was established and given the responsibility for managing the effects of past coalmining and dealing with the myriad environmental and safety related issues that are the legacy of the coalmining industry. The Skewen mine was inspected in 2011 and deemed a low risk, but it has since transpired that the map was incorrect and the wrong location had been inspected. Lessons must be learned from this sorry tale, but the bottom line is that the responsibility for the botched 2011 inspection lies squarely at the door of the Coal Authority and the UK Government.

Why on earth should residents be expected to pay a single penny for damage that has been caused through no fault of their own? Residents simply cannot fathom why the Coal Authority is not accepting liability for the damage that the mine water, ochre, debris and sludge from the mine has cause to their homes. I have to say that I am equally baffled.

Residents are continually being told that the UK Government and the Coal Authority do not have liability for flooding and that water is water—it is not owned by anyone. These arguments are both insensitive and nonsensical. The blow-out was not an act of God, like a river bursting its banks or a storm surge; the mine workings are man-made. They are the responsibility of the Coal Authority and, by extension, of the UK Government.

The simple fact of the matter is that there is a moral responsibility that each property should be returned to the condition it was in on 20 January, and that no resident should be burdened with the cost. What has been offered so far by the Coal Authority is, frankly, an insult: £500 does not begin to scratch the surface when the cost of the damage caused by the mine water is running to tens of thousands of pounds for each property. One resident has been quoted £50,000.

The Coal Authority and the UK Government are sticking dogmatically to their mantra that residents need to go through their insurance companies, but what about those who do not have insurance? There are about 20 properties with no insurance, and the intransigence of the Coal Authority and the UK Government means that people are expected to find substantial amounts of money to make their homes fit to live in again. This is an appalling way to treat people who have had their homes destroyed through no fault of their own. Even those with insurance are finding that it does not cover everything. Gardens, garden furniture, driveways, fences and outbuildings that have been damaged are not included. In some cases, residents have buildings insurance but not contents insurance.

Rhian David, her husband and two young children were evacuated from their family home and have been told that they will not be able to return for another year. Despite taking out a large sum of insurance, it is not enough to cover the extensive damage. The initial damage came to £18,000, but the secondary damage such as damp has added a further £5,000 to the costs.

By the Coal Authority’s own admission, this was a unique incident and the work to remediate the mineshaft and install a water management system should prevent any future recurrence. A compensation fund must therefore be set up to cover all uninsured losses and other unforeseen costs. The unique circumstances and the work of the Coal Authority would mean that that was a one-off payment in exceptional circumstances. It would not be setting a precedent; it would simply be doing the decent thing in response to an exceptional and unprecedented incident. This is a question of doing what is morally right, and the UK Government must respond accordingly.

The Minister has stated from the Dispatch Box that she will visit Skewen to see for herself the damage and destruction that the water has caused and to hear directly from residents, but we still do not know when she is coming. Only by visiting the site can she appreciate what has happened and truly comprehend the devastation. It is vital that she comes to Skewen before too much remediation work is carried out. Only by speaking directly with the residents can she fully understand the enormous emotional toll that this is taking. She needs to grasp the traumatic impact that the intransigence of the Coal Authority and the UK Government is having.

The saying goes that actions speak louder than words. The Coal Authority and the UK Government have offered the victims plenty of warm words, but statements of sympathy rapidly curdle into empty platitudes if they are not backed up by tangible deeds. The longer the Minister stays away, the clearer it becomes to my residents how little the UK Government care about what has happened to them.

Residents are equally worried about the impact of the incident on house prices. The Coal Authority and the UK Government must engage with estate agents and mortgage providers to ensure that their valuations and advice are based on a clear and comprehensive understanding of the uniqueness of what has happened.

Residents’ treatment by insurance companies has been a lottery. Some have acted reasonably well, but others have not. Residents have had real problems with insurance companies increasing premiums, with quotes that have seen premiums double after the incident; in one case, the annual payment jumped from £341 to £1,389 and a £10,000 excess. Others have been told that they cannot claim off the Coal Authority so they cannot make a no-fault claim.

This is a scandalous way to treat people. Residents should not be punished financially as a direct result of a blow-out happening through no fault of their own. The Coal Authority has promised to provide an information pack, which will provide estate agents with reassuring details about the unusual nature of what has happened and the new water management system, but that is taking far too long. Residents need that information pack urgently. The longer it takes for them to receive it, the more stress is caused and the more cost incurred.

The UK Government and the Coal Authority must also step up their efforts with insurers. They cannot be allowed to get away with this behaviour. It is imperative that the UK Government make it clear to all relevant insurance companies that they must not add a single penny to the premiums of those who have been impacted by this incident, and that all claims should be treated as no-fault.

The people of Skewen are strong and resilient. They will not take this lying down and, to quote Dylan Thomas, they will not go gentle into that good night. I am therefore giving the Minister fair warning this evening that the Coal Authority and the UK Government have awoken a sleeping dragon. She needs to know that she is in for a fight if she continues to stick rigidly to her stance.

I have great respect for the Minister. I know her to be a reasonable person and a credit to the important position that she holds. I therefore call on her to recognise that this is about doing what is morally right. It is time for the UK Government to step up and create a compensation fund to cover uninsured losses and to help those who have lost so much through absolutely no fault of their own.

Oral Answers to Questions

Stephen Kinnock Excerpts

Tuesday 9th February 2021 Commons Chamber

[Anne-Marie Trevelyan]

The Government are backing the airline sector to achieve net zero, committing £3.9 billion, with industry, to fund aerospace research and development from 2013 to 2026. This includes the FlyZero project, to study in depth the potential for zero emission aircraft. We are also investing £125 million in the future flight challenge, to enable the use of new forms of green and autonomous aircraft.

[Stephen Kinnock (Aberavon) (Lab)]

With reference to recent flooding in Skewen, what recent discussions he has had with representatives of the Coal Authority on the safety of old mine workings.

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

First, I wish to offer my sympathies to all the families affected in the Skewen floods. My officials have been updated by the Coal Authority on the flooding in Skewen on a regular basis and on the work that it and local partners are doing to support the community, remediate the site and allow people to return safely to their homes. I will be meeting people from the Coal Authority shortly to discuss its work and the investments it is making to reduce the risk of this ever happening again.

[Stephen Kinnock [V]]

My constituents in Skewen have been devastated and traumatised by the flooding that ripped through their homes on 21 January. The disused mine workings that caused this incident are the responsibility of the Coal Authority and, ultimately, of the UK Government. Will the right hon. Lady therefore ensure that the Government fill the gaps not covered by insurance and provide financial support to those who are not insured? Does she agree that not a single Skewen resident should be left out of pocket by this terrible flooding?

[Anne-Marie Trevelyan]

The hon. Gentleman is a wonderful advocate for his constituents, and I hope very much to be able to visit Skewen with him and talk personally to those affected. The Coal Authority does not have liability for flooding; flooding, whether from a river, stream or groundwater, is mainly dealt with through insurance, and I know that the Welsh Government emergency grant equivalent of the Bellwin scheme for those affected by flooding in England provides a higher sum. So I look forward to working with him and to hearing directly from his constituents as soon as we can arrange this.

Oral Answers to Questions

Stephen Kinnock Excerpts

Tuesday 15th December 2020 Commons Chamber

[Paul Scully]

I thank my hon. Friend, who has raised the issue about weddings and events with me on a number of occasions. We continue to work with the Treasury to see what more we can do to support the hospitality sector as a whole. I am really looking forward to working with the weddings taskforce, which has been set up by the sector itself, to see what a covid-19 secure wedding looks like and how we can introduce that when the health science allows.

[Stephen Kinnock (Aberavon) (Lab) [V]]

  The GMB, Unite and Unison trade unions are fighting hard for workers who are being fired and then rehired on worse terms and conditions. What is the Secretary of State doing to ensure that companies such as British Gas are negotiating in good faith with the workforce, not imposing these completely unacceptable practices on them?

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.

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—

National Security and Investment Bill (Second sitting)

Stephen Kinnock Excerpts

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

[Stephen Flynn]

Q Obviously, the consultation in relation to the 17 sectors, which was mentioned earlier by a colleague, is going to run beyond the end of the Bill—perhaps, I imagine, of its being implemented. The Government may well just get it through the House, but were that to happen the consultation would still be ongoing, so, again, I am sorry to try to pin you down on this, but do you think that would create a level of uncertainty that investors simply would not be comfortable with, and that they might well look elsewhere unless the Government were clear about having a system in place that makes things more flexible for business?

I am sorry to flip back again, but on smaller-scale early-stage ventures, we said this could be an issue, and again, I am sorry to pin you down: could it, or will it, be an issue? Where would you lean in that regard? Will we find that investors seek to go elsewhere with this a little bit more, where the timing is a little easier?

Michael Leiter: I think it will be an issue unless you are confident that small-scale, early-stage investors can have their transactions quickly reviewed within roughly 30 to 45 days. If it is longer than that, that will make the investment climate, I think, worse than other competing markets. I think that could have an impact.

On your first point, let’s face it, business always likes predictability, so you always want certainty, but deal makers have to understand risk and understand some uncertainty. That is inherent. I will say, it is not that the US has done this remotely perfectly. The US announced almost two years ago now that it was going to further define foundational and emerging technology that would then be subject to different levels of review under CFIUS. Here we are, almost two years later, and we still do not have that. The fact is that there has been uncertainty, and there will be uncertainty on your side as well. Having those definitions clarified as quickly as possible is good.

Do I think that a lack of clarity for three, four or five months about these sectors will suddenly stop investment in the UK? No. I don’t want to exaggerate it to that degree. You can try to pin me down, but the fact is this is all a matter of balancing, and there is no clear answer about when people will stop or start investing. More clarity is better. The faster there is clarity, the better, and to some extent, a lack of clarity will push people to look at other markets.

[Stephen Kinnock (Aberavon) (Lab)]

Q It is a pleasure to serve under your chairmanship, Sir Graham, and thank you very much, Mr Leiter, for your insightful evidence. I was wondering about the acquirer definitions, which are an important part of the equation, and the extent to which the legal structure and ownership base of the acquirer should play a role and, perhaps, be more clearly defined in the Bill, in terms, also, of what the triggers are for the screening process. If the acquirer is a state-owned enterprise or a state-backed investment vehicle, should that trigger a, for want of a better word, tougher or more robust screening process? If so, what might that look like in practice, and do other regimes contain that differentiation between a private sector acquirer and a state-backed acquirer?

Michael Leiter: Thank you for the question. The answer is that many regimes do draw such a distinction, which is generally a good thing, but there is an exception to that as well. This is important on two points, one of which I have already raised so I will not belabour. Understanding the ownership structure of private equity to understand how the Bill will or will not handle limited partners who are managed by a general partner at a fund is very important. That is a significant amount of investment, and clarity on that point is critical.

In the United States, for example, foreign limited partners in US private equity are fundamentally, overall, not considered for CFIUS. For foreign private equity investing in the United States, foreign limited partners are considered. Again, that is broad brush, but that is fundamentally how it works. With respect to sovereign wealth funds or state-controlled investments, there is a perfectly good argument that yes, the standard of review might be a bit more rigorous. In the United States, the way that works is that if a foreign Government-controlled entity invests in what is known as a TID business—one that that deals with critical technology, critical infrastructure or sensitive data—in the United States, and if they own more than 25% equity, that is a mandatory filing. So, it is increasing the likelihood of a mandatory filing if you are controlled by a partner.

Using such a standard makes sense. Right now, I do not believe the Bill provides many opportunities for that. You are already saying that, in the 17 sectors, all will be mandatory and there is no de minimis threshold. From that perspective, whether you are a sovereign wealth fund or not, it will be mandatory in a large scale of matters. You could of course say, with a dollar threshold such as you have now, that in the voluntary sector, if it was a state-sponsored entity, that would also be mandatory. I think there is some sense to that, but I would move slowly on that because, as I have noted several times, you are going to have a relatively high number of mandatory filings in the first place.

There is a second important piece to this, though, about whether you actually want to change it for Government-controlled entities. That is, especially in the case of China, but other countries as well, the distinction between state controlled and not state controlled is becoming less and less. Again, in some western democracies, it is quite clear whether it is a state-controlled entity, but to the extent a foreign Government can influence a private sector actor, that distinction starts to fade away, at least partially. Under your regime, it is not clear to me, other than expanding some voluntary into mandatory, how that will apply, and I think, to some extent, the distinction is losing some of its fineness.

[Stephen Kinnock]

Q I have a small follow-up question. The points that you have been making about private equity are very interesting. Large swathes of our social care system in this country, particularly residential care homes, are owned by private equity companies. Do you think it would have a material impact on the assessment of a private equity company if it was looking to invest in the social care sector, which one could argue is critical national infrastructure?

Michael Leiter: That raises two excellent points. First, yes, I think private equity is quite methodical about thinking of those restrictions. Whenever I deal with private equity in the Unites States, whether it is US private equity, foreign private equity or sovereign wealth funds, there is always a consideration of the way in which the business in which they are investing may be subject to a national security review and whether or not they will, even if approved, lose access to critical information, technology or other management control of the business in a way that would make it a less attractive option. From a US Government perspective, I think that is entirely appropriate; it is the entire purpose of the national security reviews.

It could affect the choices of private equity in the UK, but one still has to identify what the national security risk would be—and not just what the national security risk might be, but the extent to which, if the investment was allowed, the Government could still put in place restrictions that would eliminate or mitigate that national security risk. That leads me to make two very quick points.

First, there has been much commentary about defining what national security means. I would not welcome to go down that path; frankly, I think it is a bit of a fool’s errand. The Government will define national security as they may. Certainly, they should not overreach in extreme ways, but this is not one that I think legislative language is well tuned to trying to capture. That is not to say that it should not be limited in practice, but trying to capture it in legislative language is, I think, exceedingly hard. Again, it changes over time, depending on technology, access to data and other factors. One can imagine certain things that, before covid, we never would have considered to be issues of national security, but that are today. Capturing language for that is quite challenging.

The second piece is making sure that you have a good regime. We have been talking so much about screening, punishment and what falls into the bucket of review. There has been much less discussion here, and there is much less discussion in the law, about what mitigation and rules and enforcement there will be. If you permit a foreign investor to invest in one of these sectors and you put in place certain protections to protect British national security, how will you actually make sure that that occurs? It is wonderful to have these rules, but unless you actually have the regime and follow these things and ensure that there is enforcement and monitoring of them, you will have spent an enormous amount of time and money but actually not protected national security, so I think we should not give short shrift—[Inaudible]—deal is closed and approved but still being monitored by the Government for the very national security risk we are trying to protect against.

[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.

National Security and Investment Bill (First sitting)

Stephen Kinnock Excerpts

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

[Nadhim Zahawi]

I am grateful to you, Mr Parton. I do not want to hog the floor, as I am sure many colleagues want to ask questions. Thank you very much.

[Stephen Kinnock (Aberavon) (Lab)]

Q It is a pleasure to serve under your chairmanship, Mr Twigg. I do not know whether you can see me, Charlie, but I am here. I am sitting at the back due to social distancing, but it is good to see you.

Going back to your point about resourcing the investment security unit, can you give a bit more detail about what would be an ideal outcome from your point of view? Would it be that we need specificity in the Bill that key representatives and experts of the intelligence services, of the Ministry of Defence, of the diplomatic corps and of other agencies be formally named in the legislation, so we would have that reassurance that the body doing the screening had all the necessary breadth across the spectrum of both the economy and national security?

Charles Parton: That is a good question; it is not necessarily for me and I do not necessarily have the experience to lay down precisely how it works. For me, I think, first, that all those organisations you have mentioned—although others also on the economic side, such as the Treasury and BEIS—perhaps should be there to set the parameters of what needs to be referred. I think that, as a sort of preliminary filter, one would hope that there was an ability for most companies, and most universities as well, very quickly to put forward the deals or the pieces of work that they felt might be coming up against the parameters set by such a Government body.

For a quick decision, is the topic one that is suitable, or does it need a little more investigation? Should we be working with this organisation, or in some cases this particular Chinese academic or company, which may have links to the military or to the repressive regime? The experts, as it were, which means the SAGE-type committee, surely should be very quickly—companies and academics need to move quite quickly—making a preliminary estimation of whether this needs to be referred upwards to a Government Committee that wants to look at it in more detail.

I do agree with you that the range of interests needs to be representative if the decision is to be perceived by all sides as acceptable when it is eventually made.

[Stephen Kinnock]

Q Thanks very much; that is very helpful. On this point about making sure that we have the most effective and streamlined system in place, one of the areas where the Bill diverges from legislation in similar jurisdictions, such as Germany and Japan, is that it does not contain a definition of national security as such.

In the Japanese and German cases, they refer to national security including concepts of public order. I refer in particular to your comments about organisations out there in the marketplace, whether they are universities or businesses, needing to have clarity to know what needs to be referred and what does not. They need to know where the amber or red light is flashing, and where it is clearly a green light and not an issue. Would that be aided and facilitated if the Bill contained a definition of national security?

Charles Parton: It is a bit like defining terrorism. It is really quite difficult to be all encompassing. Sometimes, I am in sympathy with the Chinese legislation that adds at the bottom “and other offences” or “and other things”. I think it is quite difficult, even if people are convinced that they can effectively define that. It is not only national security; there is a question whether you are aiding crimes against humanity or the genocide that is going on in Xinjiang. I am using loaded terms there, but I think they are justified. There must be some mechanism for ensuring that those, too, are brought to bear, but I am not expert enough in legislation to be able to say, “Yes, we need a watertight definition of ‘national security’.”

Certainly, the Bill must convey to companies and academics the need to clear a range of topics. That will not be specific, but, at best, they must be encouraged to consult almost as a default, so that they are not caught out. The other question is, what happens if they don’t? What sort of sanctions are they under if they do not consult, when it is clearly something they should consult on, for reasons either of security or of repression and crimes against humanity?

[The Chair]

Thank you very much. I now call Andrew Griffith.

--- Later in debate ---

[The Chair]

This will probably be the last question, from Stephen Kinnock.

[Stephen Kinnock]

Q Thank you very much, Chair, for giving me another bite at the cherry. Mr Parton, as a final point, I thought it might be useful to remind the Committee of the symbiotic nature of the relationship between the Chinese Communist party and the Chinese business community. Based on your extensive experience in China, could you briefly outline how the Chinese Communist party in essence runs the business community; the role that it plays in ensuring executives are appointed who are sympathetic to the party; and the whole way in which the nomenklatura works? That will help us to understand the extent to which Chinese business interests in this country are, in essence, the same as the interests of the Chinese Communist party.

Charles Parton: That is a very good question.

[Chi Onwurah]

Could I just add to that? That is an excellent point, but could you also say a little bit on how China responds to proposed takeovers that might implicate its national security, if those takeovers are allowed? How does it respond to that investment into its companies?

Charles Parton: Those are both good points. First of all, divide it into the state-owned sector and the private sector. In terms of the state-owned sector, the top executives of the big state-owned companies are appointed by the central organisation department of the party. That is the organisation that is, as Mr Kinnock has said, in charge of the nomenklatura: the top 3,000 to 4,000 party officials. Of course, a lot of state-owned companies are also owned at the provincial and lower levels, and there, too, the top executives are party members and beholden to the party. Let us not forget that most foreign investment by the Chinese is state owned, so it is not just a fair bet but a fair certainty that any state-owned enterprise investing is fully politically controlled.

When it comes to the private sector, Huawei has spent a large amount of its time insisting that it is a private company—I really do not care. And I do not really care that the national security law says that any individual or organisation must help the party or security organs when called upon. The brute fact is that, in the way the system is run in China, if the party tells you to do something, the only response from private business to an order is to say, “Certainly, Sir. How high do you want me to jump?” so this debate is entirely irrelevant. The party is now pushing committees into all private enterprises—foreign and local—and it would be a very unwise head of a private company who said, “No, Mr Xi Jinping. I don’t think so.” If nothing else has been shown by what has happened with Jack Ma, China’s second-richest person, and the Ant Group finance company in the last few weeks—there are, of course, financial risk reasons they might want to control Jack Ma’s Ant Group—it is, “Sorry, you are beholden to the Communist party.” That was a very fierce reminder of it.

In terms of this debate, I do not think we should be under any illusion that if a party says to a company about its technology or whatever, “Well okay, it’s all very well that you’ve got that, but we want it fed into our People’s Liberation Army organisations and science and technology system,” no company is going to say, “Oh no, that’s not right. We won’t do that.” For instance, when Huawei says, “If we were asked to do something against our commitments, in terms of what we do abroad, that would threaten security, we would not do that,” it is rubbish. They know that.

--- Later in debate ---

[James Wild]

Q In the Bill, there are 17 sectors listed where mandatory notifications are required. They include transport and communications, as in some of the points that Mr Western was raising. Should others be added to that?

Also, do you think that although we need to look at the Bill as to what it does, we should also recognise that it does not solve all the problems and threats from hostile states—that the intelligence activity and other things we do to raise the cost of theft of IP need to be seen holistically across the piece, and that the Bill cannot solve all the problems?

Sir Richard Dearlove: The Bill is a step in the right direction. What is important about the Bill is that it raises parliamentary and public awareness of the issue. Everybody takes a big step forward in being sensitised to the problems in the future.

To be honest, I do not have any suggestions right now to add to the list, but I might look at that and see whether there are certain areas. For me, the Bill is almost a symbolic move—one that is long overdue and signals a change in attitude at Westminster and on the part of this and future Governments. It is a very healthy, pleasing and important development.

[Stephen Kinnock]

Q Thank you very much, Sir Richard, for the evidence that you have given us today. The Intelligence and Security Committee defines critical national infrastructure as

“certain ‘critical’ elements of infrastructure, the loss or compromise of which would have a major, detrimental impact on the availability or integrity of essential services, leading to severe economic or social consequences or to loss of life.”

Would the Bill benefit from having that definition of critical national infrastructure embedded in the middle? Linked to that definition, should special measures be taken to raise our guard even higher when it comes to any kind of investment in our critical national infrastructure?

Sir Richard Dearlove: I would certainly see that as advantageous, because it defines a clear area where you start and from which you can make judgments about the involvement of foreign firms being given space or activity in those areas. That is not a bad idea at all, actually.

[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?