National Security and Investment Bill

Stewart Hosie Excerpts

2nd reading & 2nd reading: House of Commons
Tuesday 17th November 2020 Commons Chamber

[Alok Sharma]

My hon. Friend raises an important point. As he will know, and I am sure appreciate, I am not going to be able to set out every single test that we will apply when it comes to a national security assessment. The application of the tests will, of course, be based on information that we garner from across Government. He can be certain that in using the powers, the Government will act in a quasi-judicial fashion, we will have regard to the statement of policy that has been published, and we will act, again, in accordance with public law principles of necessity and proportionality. I also made the point earlier that any decision can, of course, be challenged by an affected entity.

[Stewart Hosie (Dundee East) (SNP)]

Before the Secretary of State moves on, will he give way?

[Alok Sharma]

I will move on, if that is all right with the hon. Gentleman.

These powers are narrowly defined and will be exclusively used on national security grounds. The Government will not be able to use these powers to intervene in business transactions for broader economic or public interest reasons, and we will not seek to interfere in deals on political grounds. They will not and cannot be used for wider economic tests. The Government already have proportionate powers in statute for intervention on the grounds of competition, financial stability, media plurality and combating a public health emergency. Going further than that would risk chilling and destabilising investment in the United Kingdom and reducing growth opportunities and jobs.

The UK has the lowest corporation tax rate in the G20. We are rated one of the most innovative countries in the world, ranking fourth in the 2020 global innovation index. We are one of the top 10 countries in the world for ease of doing business. We have a world-leading research and development environment, and the stability of our institutions, tax system and legal framework are respected globally. It is because of our pro-market approach that the United Kingdom has become one of the premier places to invest in the world, and I certainly would not want to do anything to change that. The powers we seek in the Bill support and enhance our pro-business environment, supporting economic growth, prosperity and jobs across the United Kingdom, while enhancing security for our country. I commend the Bill to the House.

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[Stewart Hosie (Dundee East) (SNP)]

I start with my ISC hat on because it was the ISC that first investigated UK Government powers and processes for scrutinising foreign investment in sensitive areas of UK industry, found them lacking and called for more powers. In its 2013 report, “Foreign involvement in the critical national infrastructure”, the Committee looked into the issue of

“foreign investment in the Critical National Infrastructure (CNI)”

and concluded:

“The difficulty of balancing economic competitiveness and national security seems to have resulted in stalemate.”

That is not a criticism and it is not meant to be contentious. This issue has arisen over the past few years and most, if not all, advanced economies are now grappling with it. I therefore welcome the Bill, in principle, or certainly a measure like it.

While on the subject of the ISC, I offer the apologies of its Chair, the right hon. Member for New Forest East (Dr Lewis), who is self-isolating having been contacted by the English version of Trace and Protect, and is sadly missing this debate.

The Bill is designed to bring additional scrutiny of foreign investment that may have an impact on national security. I say from the outset that not only is there nothing wrong with having a national security eye on investments in critical areas—it is in fact absolutely vital.

Currently, as we have heard, the ability of the Government to scrutinise investments on national security grounds contained within part 3 of the Enterprise Act—that is, the mergers provisions—is rather limited. In practice, it means that the UK Government are unable to scrutinise on the grounds of national security without the investment first meeting competition concerns or, in very limited circumstances, a public interest test. We know this concern and similar concerns are shared globally. A number of other countries have been tightening up their investment security regimes in response to changing national security-related threats, enabling technology, the loss of intellectual property and the increasing crossover between sectors, which I may touch on later. The Committee on Foreign Investment in the United States is largely seen as setting the standard. We have also seen tightening in Japan, Canada, Sweden, Germany and France at least, with the Japanese regime extraordinarily strict, in some cases limiting ownership to barely 1% of active management or, more accurately, to barely 1% of a company in certain circumstances.

In the UK Government’s proposals, if both the trigger and the threshold are met, the individual investment can be called in by the Secretary of State for approval. The powers can be retrospective; it can be called in after it has occurred. However, the time to conduct the national security assessment—30 days, with potentially an extra 45—might be deemed to be a little short, given how shrewd, or clever, certain institutions, organisations and individuals are at hiding genuine beneficial ownership. One thinks how long it took to find where beneficial ownership existed for some entities in the UK. Were it not for the Panama papers, we would probably still never know. I therefore question whether that maximum of 75 days is actually sufficient.

The Bill adds a mandatory notification scheme whereby investment interests in certain sectors and asset types—which I do not demur with—must be pre-emptively or retrospectively declared, but it removes notification of call-ins from the competition authority to a direct serve from the involved parties. In the interests of transparency, I seek clarity from the Government on the reasons why notification via the CMA is being removed.

The Bill also introduces new powers to increase screening in respect of health and preventing hostile acquisition through strategic buying of health supplies, for example. I welcome that, but the scope of activities that might be caught is very wide. There may be a good reason for that, but it is worth exploring. The statement of policy intent describes the core areas as including things such as advanced technology, which is perfectly reasonable, but it also contains a much wider definition of national infrastructure. The impact assessment for the Bill estimates that the new regime would result in between 1,000 and 1,830 transactions being notified per year. That is very specific and it is also an eye-watering number, given that only 12 transactions were reviewed on national security grounds since the current regime was introduced 17 years ago. The necessary resources, as the right hon. Member for Doncaster North (Edward Miliband) said, and access to intelligence agency assessments, as the right hon. Member for North Durham (Mr Jones) said, must be available in the proper manner in order to carry out the work.

[Mr Kevan Jones]

Does the hon. Gentleman share my concern that the Bill sets out a voluntary reporting and a notification system, but it is not clear how the security services enact any concerns they may come across into this system? I shall be making the point that I do not think this should sit within the Department for Business, Energy and Industrial Strategy. Does he have concerns on that issue?

[Stewart Hosie]

I absolutely agree that these services should not sit within another Department. I am not sure whether it would be appropriate for them to be able to request call-ins directly, not least because where the information came from would then become abundantly clear, but there must be a mechanism whereby information that an agency comes across can be fed in to the proper people in order for this call-in to happen.

It is also self-evident that Members considering this legislation need to have far more information to understand the reasons for the Bill and the changing nature of the threat it is designed to counter. We also need carefully to assess the impact the Bill will have on sectors and infrastructure, not just in the UK as a whole, but in the devolved Administrations and in the English regions, in the light of the future economic opportunities they see and the plans they are already putting in place. It is far too soon to seek assurances, but I hope the Minister will wish to take a little time just to convince himself that there are no unintended consequences, either for the UK or for the Scottish Government’s inward investment plans, when Government agencies of all sorts are out actively seeking investment in some of the areas that may be deemed to be critical national infrastructure. As an example, let me cite the whole of Scotland’s tech sector, but that of Dundee in particular. It now has a digital ecosystem that spreads out across academia and through gaming, software design and development, and data centres. Many of the component parts of that have cross-sectoral application, some of which, depending on who owns them and who wishes to use them, could certainly raise a national security concern, depending on how bits of tech are deployed. How do we ensure collectively that the Bill does not impede growth or investment in such areas?

I also briefly wish to raise, at this early stage, some issues about implementation. The Bill is set to radically overhaul the UK’s approach to foreign investment, at a time of significant economic uncertainty. On leaving the EU, the UK Government cannot afford to get their global Britain approach wrong and suffer what has been described as the “chilling effect” on investment if this appears heavy-handed. So let me turn briefly to some of the possible implications and costs of these measures.

First, the impact assessment suggests a net cost to business of £43 million. Can the Government confirm whether that is the direct cost, or whether the figure includes the cost of lost investment? I suspect that it is the former because the latter is incalculable, but if the Government get this wrong, the true figure in lost investment, and the concomitant loss of output and productivity, could be substantial.

Secondly, the impact assessment suggests that microbusinesses are in scope. As the Secretary of State will know, some of those businesses develop high-tech, cutting-edge intellectual property, and their business models include selling tranches of shares to raise cash throughout the development and life of the business. What assessment has been made of how these measures might stifle that investment and growth?

The third point is specifically on universities and academia. Throughout the whole UK, universities all have incubators, start-ups, spin-outs and commercialisable research. What assessment has been made of their ability to continue to thrive if the measures in the Bill inhibit investment by proposed sales being called in—because word will get out—or even investment being put off because of the potential additional risk of those sales being called in? We do not yet quite know what the impact on academia would be. There are some wider concerns about the possible impact on essential investment in energy, particularly renewable energy, and the possibility of retaliatory action against UK investors overseas, but I think they can be explored later in the Bill’s progress.

Let me return to one particular issue. I said earlier that the impact assessment suggested notifications of up to 1,800 transactions a year. In clause 7(4)(c), the Bill describes a qualifying asset as

“ideas, information or techniques which have industrial, commercial or other economic value.”

I know that this is not the Government’s intention, but wielding a hammer or welding a pipe are techniques that have economic value, and my concern is that companies erring on the side of caution will refer or notify themselves when they need not.

I have three brief questions that were sent to me by the Photonics Leadership Group. I intend to ask these questions now because they will be typical of what many industrial and new tech sectors are asking. First, there will be a huge number of research groups and businesses for which this Bill is relevant. Has the Department for Business, Energy and Industrial Strategy considered the number involved, and is it ready for the volume of submissions? Secondly, the information that has been sent out to relevant groups includes a flow chart, which suggests that businesses currently engaged in relevant business have from 12 November until this Bill is passed to register. This would suggest that the process is live already, but there appears not to be a template to allow businesses to contact BEIS and ask the question. Thirdly, since many in the sector cannot rely on foreign investment, how are the Government planning to replace this should there be the chill on investment that some fear?

I am pleased the Secretary of State said that the assessments would be based on information gathered from around and throughout Government, because I think we need to make our own geopolitical assessments. But the right hon. Member for Chingford and Woodford Green (Sir Iain Duncan Smith) quoted the Henry Jackson Society. It would be unfortunate if we found that our assessments of which investments may or may not be aligned were being driven, pushed or prodded by someone else’s geopolitical assessment. I say gently to the Secretary of State that we need to guard against that to ensure that national security is protected, but that we do not have the chill on investment that is possible if we get it wrong.

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[Sir John Hayes]

Yes, the Minister needs to explain how the Government’s arrangements for the new investment security remit interface and interact with the national security structures that already exist, such as the investment security group. There needs to be clarity about the process, as I described it a few moments ago.

[Stewart Hosie]

Of course, it is not just about the formal structures, because of the fast-changing nature of the threat and the way in which technology emerges and develops. Perhaps we should have an annual debate in here, where we can think out loud about emerging technologies that may become a threat and, on the other side, those technologies that have become so redundant they are no longer a threat, to avoid them being pre-emptively given to the Government and clogging up the system.

[Sir John Hayes]

That is an excellent suggestion from another member of the Intelligence and Security Committee. My goodness, we are here in force and working as a team, as you can see, Madam Deputy Speaker. It is important that the House considers these matters, as well as the Committees I mentioned which have a particular responsibility for dealing with these things and holding the Government to account.

The point was made earlier that the national interest and national security are not identical. But they are coincidental—they do overlap—as there is a point at which national resilience, or its absence, compromises national security. The Government acknowledge that in the scope of the Bill. They talk about critical national infrastructure, as well as technology sectors of various kinds. By the way, I first looked at this issue, Madam Deputy Speaker—this is not a widely known fact, but I am happy to share it in the privacy of this intimate gathering—as a Cabinet Office Minister, with the former Member for West Dorset, Sir Oliver Letwin. We looked particularly at the threats posed to core infrastructure, such as the energy sector. By the way, that threat is posed not only by hostile state actors, but other players who might choose to disrupt core activities, with extraordinarily damaging consequences for our citizens. The Government do look at those things, but historically I do not think they have done so systematically enough. I know my right hon. Friend the Member for Tunbridge Wells, who has a distinguished record in this area, will have had similar experiences to me when we, in turn, looked at energy as part of our ministerial responsibilities.

China has been mentioned. I do not want to speak about it at great length, but clearly the ISC is currently looking at China and will be considering these very subjects in relation to that inquiry. That will come as no surprise to the House or the Minister.

I said this Bill was necessary, but necessity requires a degree of precision and I have some specific questions that I hope the Minister will deal with, either in summing up or by writing to the ISC if he does not have time to address them today. In looking at a specific case, will the investment security unit be able to consider the cumulative effect of a particular business transaction? In other words, will it take into account whether past acquisitions in that sector, when combined with the case currently under consideration, will result in a cumulative threat to national security? Moreover, will the unit consider acquisitions that might result in an indirect threat, for example, through supply chains or managed service providers? This may well involve very small businesses; sometimes a single expert or a small group of experts will play a vital role, as component parts, in either a technology or an industry that is vital to our national security.