Don’t let national security fears risk closing Britain for business
The UK government’s National Security and Investment consultation, which closed last week, has an aim that is not just laudable, but essential.
The government is seeking to protect vital national assets, whether emerging technology or critical infrastructure, from falling into the wrong hands – from organised crime groups to rogue states to certain major powers.
The government’s white paper, published in July, includes recommendations that its powers to review investment and M&A deals on national security grounds be dramatically extended.
At first glance, this could be seen as a sensible response to geopolitics in flux. Britain still leads the world in many cutting-edge technologies. We would not want hostile groups – overseas or domestic – to acquire, say, quantum computers that could enable them to break into cryptographic communications.
Equally, it’s easy to see why strategic national infrastructure should not be controlled by investment funds that have originated in North Korea.
But in seeking to resolve a very real problem, the white paper has cast an exceptionally wide net – with the potential to damage individual British companies, and even the government’s own industrial strategy, by deterring legitimate, appropriate investment.
The following technologies fall within the proposed “core areas” of the new legislation: advanced materials and manufacturing science, artificial intelligence (AI) and machine learning, autonomous robotic systems, computing hardware, cryptographic technology, nanotechnologies, networking and data communication, quantum technology, and synthetic biology.
In infrastructure, the list includes: civil nuclear, communications, defence, energy, and transport.
There are also another two catch-all categories, comprising “critical direct suppliers to the government and emergency services sectors” and “military or dual-use technologies”.
The government’s research suggests the proposed changes could mean as many as 200 deals, of all sizes, being reviewed every year, with about half going to second-stage review.
ICAEW’s own research suggests the number could be closer to 300 – one or more per working day.
By contrast, the Competition and Markets Authority counts itself busy if it has 20 live cases in a year.
The proposals could also mean that acquisitions and investment by organisations based in certain countries will more likely trigger a block. Calling a halt to commercial transactions will force the government into defining a “hostile nation”.
With the government’s own figures predicting 50 or so transactions a year blocked or modified by these rules, this is potentially provoking a diplomatic row every week.
It also places an additional bureaucratic burden on businesses trying to grow. Predicting whether investment should be permitted by organisations with roots in China or parts of the Middle East would drag companies, advisers, and investors into a complex, multi-faceted, and lengthy process.
Broad legislation, a protracted formal approval process, potentially serious sanctions for a breach, linked with uncertainty in the investment and advisory community – these are all ingredients for stagnation, or worse.
What seems missing here is a sense of proportionality. Legislation that may be appropriate for the multi-billion development of a nuclear power station is not necessarily appropriate for a high-tech, science-based company working in AI that may urgently require a few tens of thousands of pounds.
The proposals suggest that it could take 45 days to get a decision on any deal “called in”. For early-stage tech ventures, as well as more traditional SMEs, 45 days to access funding can be a matter of survival.
Fortunately a plethora of government powers already exist to restrict others from nabbing strategically sensitive intellectual property and technological hardware.
The UK has strict export controls on military technology under the Export Control Act 2002 with recent amendments. Section 58 of the Enterprise Act 2002 permits the business secretary to intervene on grounds of national security and financial stability.
On infrastructure, in the event of national crisis, it seems likely that the government would assume emergency powers to control assets such as ports and fuel distribution.
The final spectre raised is that the new review regime could allow for unwarranted government intervention in the market. Measures to safeguard the nation are one thing – but there is also a risk that these new review powers could become the vehicle for politically motivated economic protectionism.
These are not questions with easy answers, but the worry is whether they are even being asked, or asked in the right way.
Britain can be proud of its open economy, which makes it one of the top destinations in the world for foreign direct investment – and for creating and growing high-tech companies. The government has already recognised this in its industrial strategy. It must be very careful now not to throw a spanner in the works.