Amendment 2

Nuclear Energy (Financing) Bill - Report – in the House of Lords at 4:15 pm on 24 March 2022.

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Lord McNicol of West Kilbride:

Moved by Lord McNicol of West Kilbride

2: Clause 2, page 2, line 14, at end insert—“(c) the nuclear company is not owned, wholly or in part, by a foreign power or entity listed in regulations made under section (Barring of certain foreign powers or entities from involvement in UK civil nuclear projects).”Member’s explanatory statementThis amendment makes clear that a company may not be designated by the Secretary of State if it is owned, wholly or in part, by a foreign power or entity specified in regulations laid by the Secretary of State.

Photo of Lord McNicol of West Kilbride Lord McNicol of West Kilbride Deputy Chairman of Committees

My Lords, I shall speak also to Amendment 6 in this group.

Amendment 2

“makes clear that a company may not be designated by the Secretary of State if it is owned, wholly or in part, by a foreign power or entity specified in regulations laid by the Secretary of State.”

In Grand Committee, my noble friend Lady Wilcox of Newport very ably, in my Covid absence, introduced two Labour amendments that would have severely restricted foreign involvement in the UK’s civil nuclear industry. During the course of that debate, she suggested that if the Government were sympathetic to the arguments but uneasy with the mechanism, they could come forward with an alternative. In responding, the Minister confirmed this. These adapted amendments following Committee take on board the considerations that we debated and, although weakening the original amendments, retain their essence.

It is with that in mind that I hope the Minister will consider Amendments 2 and 6 favourably. They now provide alternatives—rather than banning foreign involvement completely, they would require the Secretary of State to establish and maintain a list of foreign powers and entities that are barred from involvement in UK nuclear projects. This feels both proportionate and reasonable. As we see it, the list would operate in a similar manner to the financial action task force’s list of high-risk countries for money laundering, which is part of our domestic law via regularly updated SIs.

The amendments do not specify criteria for including states or entities on the list; it could be national security, but the Secretary of State could also choose to bar a company that has a questionable track record in other respects—be it a poor delivery record or safety concerns. It may be that the department wishes to bar the involvement of some individuals or entities currently subject to sanctions but who may not necessarily still be on the sanctions list at the time of a future designation.

The Minister told us in Committee that this was an interesting idea and that the department would study it closely. We are grateful that he made BEIS officials available to us for discussion on this and other topics last week, but that meeting took place just hours before the deadline for tabling government amendments, and final agreement could not be reached. The Minister knows we are supportive of the Bill, but our general support should not diminish the importance of our concerns. The feeling of colleagues in Grand Committee and in private discussions since has been that the protections under the National Security and Investment Act 2021 are not sufficient in this area. We feel that Amendments 2 and 6 offer a sensible way forward, building on a system already used by other departments—Her Majesty’s Treasury, for example—and familiar to financial and other institutions across the country.

Should the amendments be accepted, I am sure the department will be free to address any drafting deficiencies, but we on these Benches believe that this is an important point of principle and will test the opinion of the House if the Minister does not accept Amendment 2. With that, I beg to move.

Photo of Lord Vaux of Harrowden Lord Vaux of Harrowden Chair, Finance Committee (Lords), Chair, Finance Committee (Lords)

My Lords, I speak to Amendments 4, 7 and 8 in this group in my name, but, before I do that, I will quickly say that I also support Amendments 2 and 6, in the name of the noble Lord, Lord McNicol of West Kilbride. In Committee, I said I was unable to support his amendments because I felt that a blanket ban on foreign state involvement in our nuclear programme went much too far, so I am delighted that he has now found a more flexible formulation, which would enable the Secretary of State to decide who should be barred from the nuclear programme.

The amendments in my name are intended to cover a similar point, but perhaps more widely and slightly more flexibly. Last week, we spent a lot of time discussing the importance of being able to identify the ultimate beneficial owners of property in the UK. It seems to me considerably more important that we should always be certain of the identity of any party that may be able to exercise significant control over a nuclear company, either directly or indirectly, and that we should be able to take action to prevent undesirable parties, should they attempt to obtain significant control of a nuclear company. My amendments simply seek to achieve that.

As I mentioned in Committee, it was ruled out of scope when I tried to introduce an amendment that would have allowed the Secretary of State to revoke the licence of a nuclear company if an undesirable party obtained significant control. My amendments here are restricted to the designation under the Bill, but the comments I am about to make apply every bit as much to the licensing regime, and I ask the Minister to keep that in mind.

I have revised my amendments from Committee so that my three amendments now introduce a regime for designated nuclear companies that is similar to that which applies to persons with significant control of UK companies. They further give the Secretary of State the ability—not the obligation—to revoke the designation of a nuclear company either where the Secretary of State is not satisfied that the identity of a party with significant control has been verified, or if a party later obtains significant control and the Secretary of State is not satisfied that they are a fit and proper party to own or control a company.

I am very grateful to the Minister and his team for their helpful engagement on this point—again, unfortunately, just before the deadline for submitting the amendments. They have pointed me towards the National Security and Investment Act 2021—the NSI Act—as providing the protections that I am seeking and, to an extent, they are right. But there remain important gaps, and I want to raise them and hear what the Minister thinks.

First, the NSI Act comes into play only if there is a notifiable transaction, so it does not apply at the point when a nuclear company is applying to be designated. It seems to me important that we designate companies only where we are satisfied that we know the identity of all parties that might have significant control, so Amendment 4 adds a new condition that the Secretary of State is satisfied that the identity of any party with significant control has been verified.

I am sure the Minister will tell us that the Government will of course carry out this verification as part of their due diligence—he is nodding—before a designation is granted. If the Government intend to carry out this step anyway, why not accept the amendment? Secondly, it is, sadly, not uncommon for due diligence not to be completed as thoroughly as we might like—1 am sure we can all think of examples of that. The amendment would not add any burden to the Government, but it would ensure that this critical verification step must be included in the due diligence, so why not accept it?

There is another reason. If the due diligence failed to identify such a party for some reason, without Amendments 4 and 7 taken together there would be no mechanism in the Bill to remedy the situation after the designation had been granted. The NSI Act would not apply, because no qualifying transaction would have taken place. So we would be stuck with a party that we had not verified, which cannot be right.

The next problem with relying on the NSI Act is that the first remedy under the Act is that, if a notifiable transaction takes place without authorisation, it is void. But that can apply only to UK companies. If, for example, a nuclear company has a 51% shareholder that is a Japanese company, and a Chinese company later takes a stake in that Japanese company, there is no way we can void that transaction, regardless of what the NSI Act says.

In such a case, the Secretary of State can call in the transaction and, following an investigation, make an order. That order can require a

“person, to do, or not to do, particular things”.

In such a situation, I do not think the Secretary of State can actually revoke either a licence or a designation. While the Secretary of State can impose restrictions on the use of the licence or designation, the nuclear company would retain that licence or designation. I am not totally sure about that—the NSI Act, frankly, is not as clear as it could be in that respect—so perhaps the Minister could confirm whether I am right. If I am, does the Minister agree that having the ability to revoke a licence or designation would be a simple and powerful remedy that ought to be in the Secretary of State’s armoury? That is what Amendment 8 tries to do: to strengthen the hand of the Secretary of State, if they are not satisfied that a person with significant control is a fit and proper person to own or control a UK nuclear company.

The clue to the final problem about relying on the National Security and Investment Act is in its name: it can be used to intervene only in situations where a risk to national security arises. That is obviously critical, but it is easy to think of many other situations that do not amount to a national security risk, but where we might not consider such a person to be a fit and proper person to obtain significant control. I can give a few examples: a company with a poor safety record, a poor environmental record, a poor record of employment practices, with a previous criminal record or with commercial conflicts of interest with the nuclear company. Would we want any of these companies to obtain significant control of a nuclear company? Clearly not, but there is nothing in the NSI Act or this Bill that would stop it happening. Does the Minister agree and how do the Government intend to deal with such situations if they arise?

I am not going to divide the House on these amendments, primarily because, as I said before, their scope has had to be limited just to the designation process, so they would have a limited impact anyway. But transparency around the ownership and control of key assets has rightly become a real area of concern recently, for obvious reasons. I hope I have demonstrated that there are real gaps in our current ability to know who might hold or obtain significant control over a licensed nuclear company. Relying primarily on the NSI Act for our protection against undesirable parties becoming involved in our nuclear industry also leaves substantial gaps, especially in what action we are able to take where it is not clear cut whether this is a national security risk.

I hope the Minister can confirm that the Government will take a close look at this and carefully consider whether there is anything we should do to close these gaps, particularly by looking at the circumstances in which we might wish to have the ability to revoke a nuclear generation licence.

Photo of Viscount Trenchard Viscount Trenchard Conservative 4:30, 24 March 2022

My Lords, the noble Lord, Lord McNicol, tabled an amendment similar to Amendment 2 in Committee. The Minister could not accept it because it appeared to rule out EDF as an investor in Hinkley Point C or Sizewell. It also attempted to restrict sourcing of nuclear fuel to domestic producers, which the noble Lord has dropped from his revised amendment. My noble friend explained that the Government do not support investment in our critical infrastructure at the expense of national security, which was good to hear. I ask the Minister to tell your Lordships what progress the Government have made on replacing proposed Chinese investment in Hinkley Point C and Sizewell C.

Amendment 2 is an improvement on the version debated in Committee, but the link to Amendment 6 requires the Secretary of State to establish a list of foreign powers or entities that are barred from involvement in the UK’s civil nuclear sector. Amendment 2 covers nuclear companies owned wholly or in part by a power or entity included on this list, but ownership in part could mean just one share. Surely this amendment should restrict only significant shareholdings; perhaps 5% would be an appropriate trigger.

Furthermore, the requirement on the Secretary of State imposed by Amendment 6 would clearly be massively burdensome, if not impossible. It is quite adequate that the Secretary of State should deal with each application separately and assess the shareholders at the time of application.

I said in Committee that I was inclined to support the amendments in the name of the noble Lord, Lord Vaux of Harrowden, who has experience in these matters and always takes a well-considered view. He has persisted in seeking more safeguards in the Bill by bringing back his amendments, but now aligned with the generally accepted definition of “persons of significant control” of UK companies. Those are usually persons holding more than 25% of the shares in a company or having the right to appoint a majority of the board of directors.

The noble Lord, Lord Vaux, is also surely right in his purpose in tabling Amendments 7 and 8 that designated nuclear companies should promptly notify the Secretary of State of any change in persons of significant control. However, I am not sure that it is necessary to state this explicitly in the Bill, and there could well be cases where the Government welcome changes in the shareholding structure of nuclear companies. As my noble friend explained to your Lordships in Committee, the Secretary of State may attach any conditions he deems appropriate to the designation of a nuclear company, and I believe that this will give him the flexibility to make whatever stipulations he needs to with regard to the balance of shareholdings in such a company.

The noble Lord, Lord Vaux, made some further good points today, although I must say that I consider his suggestion that a Chinese company might take a 51% stake in a Japanese company to be very unlikely, based on my experience of working in the Japanese stock exchange. Nevertheless, I look forward to the Minister’s reply to those points.

Photo of Lord Oates Lord Oates Liberal Democrat Lords Spokesperson (Energy and Climate Change)

My Lords, this group addresses the foreign ownership and transparency issues which we have just heard about, and it includes the amendment in my name and that my noble friend Lord Stunell, on transparency issues.

I very much support the compelling arguments made by the noble Lord, Lord Vaux, and I hope that the Minister will be able to address them. I was also pleased in Committee to support the amendment in the name of the noble Lord, Lord McNicol. He has brought back one that addresses the concerns that were raised in Committee, and he will certainly have the support of the Liberal Democrats. I think it fair to say that Peers on all sides of the House are concerned about the foreign ownership issue, so I hope the Minister can give us some comfort on this. However, if he cannot accept the amendment and if the noble Lord, Lord McNicol, chooses to divide the House, he will have our support.

Amendment 9, in my name and that of my noble friend Lord Stunell, deals with transparency. As drafted, Clause 13(2)(a) allows the Secretary of State to withhold any material which they believe would

“prejudice the commercial interests of any person”.

As I said in Committee, this is an enormously wide loophole which does not take any account of the degree of prejudice to the public interest of withholding that disclosure. Surely it is only proper in order to ensure effective public scrutiny that Ministers are not able to hide information behind claims of prejudice to commercial interests through wide loopholes such as this. These projects are being funded by the public and they have the right to know all relevant material, except in exceptional circumstances.

We already know how reluctant the Government and their agencies are to provide information on costs which is overwhelmingly in the public interest, but it goes wider than that. I note that in a reply to a Written Question from the noble Lord, Lord Alton, about meetings between Ministers and the China General Nuclear Power Group, the response was that no minutes were kept of that meeting. I am not clear whether that is within the Ministerial Code, but it goes to show that there is a reluctance to share information here.

The record of transparency in nuclear affairs is poor. This amendment would require the Secretary of State, if he withholds information, to make it clear that it was seriously prejudicial to commercial interest and to set out to Parliament his reasons for withholding it. I hope that the Minister can address those issues in his response.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

My Lords, I thank all noble Lords for their contributions to the debates. As all the amendments in this group, tabled by the noble Lords, Lord McNicol, Lord Vaux, Lord Oates and Lord Stunell, are linked, I will address them together.

I start with those tabled by the noble Lord, Lord McNicol. As the noble Lord has described, the amendments seek to create an obligation for the Secretary of State to bring forward a list of foreign powers and entities that should not be allowed to invest in nuclear projects, and to use this as the basis for a new designation criteria under the Bill. I appreciate the sentiment behind the amendment but, as the noble Lord will understand, I cannot agree to it for a number of reasons. The amendment is too broad; it does not specify the range of companies that it could cover or the reasons that a foreign power or entity could be included on a list, and the excluded activities are extremely wide—all participation in all projects. This is an extremely broad-brush approach which could severely affect our ability to bring in finance and to deliver new nuclear projects. We would expect the amendment to have a chilling effect on investment, ultimately leading to a higher cost for consumers.

In addition, I am concerned about the further impacts of the amendment. In the noble Lord’s explanation of the amendment, he mentions that the list should act

“in a similar way to the Financial Action Task Force’s list of high-risk countries.”

However, the main focus of that list is to encourage enhanced due diligence in respect of these countries, rather than to provide an outright ban as this amendment seeks to do.

There is also an inconsistency between the amendment to Clause 2 and the proposed new insertion after Clause 3. While Clause 2 is targeted at preventing listed entities from having full or partial ownership of a nuclear company under the RAB model, the proposed new clause discusses barring entities’ involvement in the whole civil nuclear sector. If this wider approach were taken, it could limit our options for international co-operation on this sensitive issue, including obtaining technical advice.

By highlighting these problems, I do not suggest that I disagree with the sentiments behind the amendments. Indeed, as the noble Lord will know from the numerous discussions that I have had with him, the Government know that the protection of our national security must be the top priority. The Government already have strong oversight of foreign ownership in nuclear projects as a result of the NSI Act 2021, as the noble Lord, Lord Vaux, reminded us, which includes the ability to call in for assessment any qualifying acquisition if the Secretary of State reasonably suspects that it may give rise to national security concerns.

Importantly, certain acquisitions of entities operating in the civil nuclear sector require mandatory notification and clearance before the acquisition can be completed. This is set out in Schedule 4 to the notifiable acquisition regulations made under the Act, which specifically include entities which hold, or are in the process of applying for, a nuclear site licence or development consent under the Planning Act 2008 in relation to a nuclear reactor.

To provide an illustrative example, this means that if a new entity wanted to acquire over 25% of the shares in a nuclear project company, this would have to be notified to the Secretary of State and could not be completed until, or if, the Secretary of State agreed it. Indeed, the Secretary of State could require that the transaction was not progressed, assuming the relevant tests in the Act were satisfied. If the acquisition was completed without first being approved by the Secretary of State, or in breach of an order from the Secretary of State, it would be void and not legally effective.

Beyond the NSI Act, the Secretary of State can also apply conditions as deemed appropriate to the designation of a nuclear company—conditions which if not met may lead to the company having its designation revoked. We are committing today that, as a condition of a nuclear company being designated under the legislation, the Government will have a right to take a special share in the company being designated and any of its group companies that the Government consider appropriate. We would expect a Secretary of State to make this a condition of designation wherever this is felt to be relevant and necessary.

While the exact rights to be included in such an arrangement would be developed in parallel to negotiations with a prospective RAB company, a special share could provide a variety of rights that would allow the Government to safeguard the UK’s national security and related objectives. For example, this could include—complementary to the NSI Act but tailored to the unique nature of nuclear—the ability for the Secretary of State to scrutinise investment above a specified threshold and to take any appropriate action in the light of this.

I turn now to Amendments 4, 7 and 8 laid by the noble Lord, Lord Vaux. These amendments also seek to add an additional designation criteria with the effect that the Secretary of State must be satisfied that the identity of any person with a specified degree of control over the nuclear company is verified. They also seek to ensure that any changes in ownership are notified to the Secretary of State.

I welcome the noble Lord’s attention on this subject. We met earlier in the week to discuss this and I believe that, since then, officials have provided the noble Lord with further information. The points he makes both in his amendment and his speech are good ones. However, we believe that the most appropriate place for many of these issues to be resolved is through the commercial processes and negotiations around a proposed nuclear project. For example, if considered appropriate, there would be opportunities to include conditions to a designation as the Secretary of State feels appropriate, at both the designation and licence modification stages of the process. The right to take a special share, which I earlier stated would be a condition of designation, could also potentially be used to address all the issues that the noble Lord has raised.

I repeat the assurances I gave the noble Lord during our meeting. At the point of designation, which is only one step in a process towards a project benefitting from the RAB model, we would expect to have very good visibility of those who have control over the nuclear company. As part of the due diligence around a project the Government will seek to identify those with control of the relevant project company.

When making modifications to a designated nuclear company’s generation licence to implement the RAB model, we would also expect our commercial engagement and due diligence to include scrutiny of prospective shareholders in the nuclear company. For example, we may expect to include conditions in the nuclear company’s modified licence which would require the company to declare details of its shareholders. This would aim to provide the Government with sufficient transparency on who has ownership of a RAB project company.

As I have already set out, the right to a special share could also be used to provide the Government with rights to scrutinise ownership of the company, even after the point of designation, if any new information came to light.

Amendment 8 seeks to deal with changes in control. Again, I reassure the noble Lord that the NSI Act already provides the Secretary of State with powers largely equivalent to those that the amendment would provide. The amendment even uses a 25% threshold, which reflects one of the thresholds in Section 8 of the NSI Act. Let me make it clear to the noble Lord that, like all previous Governments, we deliberately have not defined what national security is within the Act. It is up to the Secretary of State or whichever other Minister he designates to determine the precise nature of national security.

The NSI Act has been designed to account for the full range of potential ownership structures and includes provisions covering interests which are held indirectly through a chain of other entities. The Act also allows the Secretary of State to call in acquisitions of control, even when mandatory notification requirements are not triggered, provided that the relevant conditions in the legislation have been satisfied.

I understand that the noble Lord wants to ensure that the Secretary of State has the power to revoke a nuclear company’s designation in this context. The Bill includes the power to revoke when the designation criteria are no longer met. A designation may also automatically lapse if conditions attached to it are not complied with. Given the powers we have to stop transactions under the NSI Act, we do not require an additional power for the Secretary of State to revoke a designation in relation to acquisitions of ownership in the nuclear company.

Finally, Amendment 9, laid by the noble Lords, Lord Oates and Lord Stunell, is an altered version of an amendment previously laid on Report. I see that the amendment now focuses more on the exclusion of commercially sensitive information. I again stress that this amendment is unnecessary. As currently drafted, Clause 13 is drawn narrowly so as to allow for the legitimate exclusion of commercially sensitive information. It is the same wording as deployed in similar provisions in the NSI Act, which has functioned well since its introduction. I therefore do not believe that the amendment addresses any genuine issues. Indeed, as I made clear in Committee, the addition of “seriously”, given that this term has no clear definition in this context, would potentially add significant uncertainty. This ambiguity about whether their legitimate commercial interests would be respected would seriously damage investors’ confidence and make it less likely that they would become involved in projects.

I also note that the Government have already obligated themselves through the legislation to publish the reasons for the designation of a nuclear company in the relevant designation notice, as well as any material that is required to be published under Part 1 of the Bill. A large part of the amendment is therefore duplicative of existing requirements under the Bill.

With the information I have been able to provide and the necessary reassurances I have given that the Government already have in place the necessary powers and mechanisms to deal with those concerns, I hope the noble Lords will feel able not to press their amendments.

Photo of Lord McNicol of West Kilbride Lord McNicol of West Kilbride Deputy Chairman of Committees 4:45, 24 March 2022

I am very grateful to the Minister for his detailed response to these amendments and to the noble Lord, Lord Vaux, who ably introduced his amendments and made many powerful arguments in their favour. I appreciate the sentiment and tone of the Minister’s response. It is unusual to hear a Minister not taking up the powers that we are looking to give the Secretary of State and being constrained. In the world that we live in today, and given the importance of the civil nuclear sector, we think that these amendments—the Secretary of State having this power—is so important.

The Minister is right—this is about due diligence—but I think he is wrong when he talks about an outright ban. That would come in on an entity or designated organisation only if the Secretary of State wished it. It would come to Parliament only if it was recommended by the Secretary of State. Amendments 2 and 6 as written give that power to the Secretary of State.

I am also very pleased to hear about the special share. It was in one of the amendments that we laid in Committee, and we fully support moving forward with Sizewell and the Government taking a special share. We would love it to be retrospective as well, for Hinkley, but we understand the difficulties with doing that.

We on these Benches fundamentally believe that Amendment 2 and, consequentially, Amendment 6 set important principles, so notwithstanding the Minister’s response I would like to test the opinion of the House with regard to Amendment 2 and, consequentially, Amendment 6.

Ayes 107, Noes 126.

Division number 6 Nuclear Energy (Financing) Bill - Report — Amendment 2

Aye: 107 Members of the House of Lords

No: 126 Members of the House of Lords

Aye: A-Z by last name

No: A-Z by last name

Amendment 2 disagreed.

Amendments 3 and 4 not moved.

Clause 3: Designation: procedure