Article in the FT: Britain must rethink its ‘national security’ law

Posted January 24, 2021
by John Fingleton

New powers to intervene in deals will staunch the economic lifeblood of foreign direct investment

In November, a significant piece of legislation crept onto the UK’s parliamentary agenda almost unnoticed. The intense spotlight on Brexit and the Covid pandemic distracted from something that, in more normal times, would have aroused far wider debate and concern.

That legislation is the National Security and Investment Bill (NSIB), a bill that threatens radically to change the investment environment in this country – though few companies are yet aware of the full extent of its impact. Lord Mandelson, a former business secretary, has described the bill as “a powerful deterrent to foreign direct investment”.

The bill introduces a new regime for monitoring new inward investments on national-security grounds. It requires any prospective investment in a company in one of 17 named industrial sectors that amounts to more than 15 per cent of the company’s value to be notified to a brand-new government body: the Investment and Security Unit (ISU) set up specifically for the purpose. For the rest of the economy,  notification is voluntary.

Such legislation captures the zeitgeist of the times. Other advanced economies have also recently introduced or extended laws to protect sensitive industries from foreign takeover. But this is far more than the UK playing catch-up in a worldwide outbreak of protectionism; it leapfrogs way beyond what has been introduced elsewhere in two ways.

First, the scope is incredibly wide. It covers all sectors of the economy. The investment threshold for mandatory filing is incredibly low. The UK government will be able to intervene in cases involving organisations that have no UK assets, because the law will cover foreign companies that are active, or sell goods and services, in Britain.

Second, the sanctions are draconian and can be applied retrospectively. The government can “call in” deals for review up to five years after they have been completed, and it then has the power to declare them to be null and void. This will apply to any investments made after the bill was introduced. It automatically voids any agreement that should have been mandatorily notified but was not.

The threat of such drastic action means investors will want to play safe, especially since there is no definition in the legislation of what actually constitutes “national security”. Before going ahead with any deal, they will be keen to seek full clearance from the ISU – an organisation that does not yet exist and that, when it does, the body will be expected to handle hundreds of times more deals than are currently investigated for national security. That may lead to long waiting times and, perhaps for some investors, other more welcoming homes for their money.

Ironically, two days before the bill was introduced to parliament, the prime minister launched a new “Office for Investment”, set up specifically to improve the UK’s ability to attract foreign investors. Sensible, as the evidence shows foreign direct investment increases productivity. But the security bill ensures that the Office will start with at least one hand tied behind its back. 

The most worrying aspect of the bill, however, is that any vested interest that does not like the look of a deal will lobby politicians to call it in on the grounds of national security. That could range from competitors complaining about a foreign investor buying into wind-farm projects to workers objecting to the implications of a takeover for job relocation. At present, a minister can say that they lack the ability to intervene, but the bill will change all that. It will be a charter for economically wasteful lobbying amid Kafkaesque bureaucracy.

At a broader level, the legislation is simply misdirected. It buys into conspiracy theories about malevolent foreigners itching to buy up corporations in order to steal other nations’ hard-won secrets. In introducing the NSIB, the former business secretary Alok Sharma said that “hostile actors should be in no doubt that there is no back door to the UK”. Direct investment can hardly be described as a secret back door.

In most of the 17 mandatory sectors identified by the bill, national security risks lie more with people and know-how than with capital. Why would malevolent foreigners buy expensively into companies when they can simply tempt a few key employees to walk onto their payroll who carry invaluable intellectual property in their heads? Or when they can recruit key academics from university research departments?

In the US, the FBI is well aware of this latter possibility and has recently sharpened its focus on America’s key universities, asking a number of them to monitor the information that their (specifically) Chinese research students have access to. The interests of national security are better served by taking steps such as these than by threatening to staunch the economic lifeblood that is foreign direct investment.

With a new Secretary of State for Business, Kwasi Kwarteng, now in post, is it time for a radical re-think.

Read the article published in the FT on Saturday 23rd January 2021 here