Examination of Witness

National Security and Investment Bill – in a Public Bill Committee at 3:15 pm on 26th November 2020.

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Creon Butler gave evidence.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

We will now hear oral evidence from our fifth panel. We welcome Mr Creon Butler from Chatham House. We have until 4 o’clock for this session. Mr Butler, may I welcome you to the Committee? Please will you introduce yourself for the record?

Creon Butler:

I am Creon Butler, the director of the global economy and finance programme at Chatham House. I am very pleased to have the opportunity to give evidence.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport)

Q Welcome, Mr Butler, and thank you for sharing your expertise with the Committee. Your expertise is considerable, given that you have advised on policy issues such as climate change, national resource security, global health security and economic security. There are clearly many aspects of security. Are both the distinction and the links between national security and economic security appropriately reflected in the Bill, or could they be better reflected?

Creon Butler:

You get right to the heart of the matter and, indeed, to one of the points I wanted to make. Yesterday I looked at how national security is defined, and the “Collins English Dictionary” defines it as preventing a country from being attacked by hostile powers. One very important thing in relation to this Bill is that, first, while there is a good justification for having a broad range of powers to intervene, given the breadth of those powers to intervene and collect information, it is important that the Government define more clearly than they have hitherto exactly what those powers will be used for and, in those terms, use them in relation to national security. Specifically, I mean investments that could lead a hostile power to have technology that would enable it to make better weapons to attack us or would enable it to intervene in our critical national infrastructure.

There are other aspects of economic security, such as having a major industry in AI, renewable energy or something of that kind, that could be relevant to broader security in the future. You may well want to have a strategic intervention to ensure that the UK has that kind of industry, but I do not think this is the Bill for doing that. I think there are other tools you would want to use, including competition policy, strategic investments, contracting, R&D and so forth. That is one of the points I wanted to make.

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Energy and Industrial Strategy), Shadow Minister (Digital, Culture, Media and Sport)

Q Are the other tools or powers needed to make interventions with regard to strategic capability in place under the Enterprise Act 2002, such as for the Arm takeover? I am not sure that they are. Given your experience, will you say a bit about the level of resourcing and expertise the unit would need to make such assessments?

Creon Butler:

On your first question, I do not think we have that yet as a country. Actually, with the previous Prime Minister we had a clear definition of a number of sectors that were felt to be very important, but it is a continuing story in terms of exactly how we are going to intervene to ensure that those sectors are strong. We have some powers, but there are a range of tools. I previously mentioned public contracting, where we do our research and development, and competition policy specifically to make it impossible for British companies to develop in those sectors, and so on. There is a broad range of policies for ensuring we have those sectors, and I think they are continuing to evolve.

Your second question is a really crucial one. I guess a key point is that this is not an absolute thing: you cannot protect the country from all possible national security risks through this route. The only way you could do that, potentially, is by having every single investment notified and examined. That would create an enormous bureaucratic monster, which would really not be what we want.

The further point is that when you are looking at the right cases, you want to be sure that the judgments that are made trade off with the national security risk, as I have defined it, but also with the potential economic benefit of having an investment in that area. To do that, you need expertise among the people who are making such judgments, which spans security expertise but also economic, investment and commercial expertise. It is very important, first, that there enough people to do the judgments properly, and secondly, that you have a breadth of expertise. Certainly in the past, we may have swung from one side to the other. Sometimes you have had what people would describe as a securocrat approach: “There is a possible risk here. Let’s go for it—let’s eliminate it, whatever the economic cost.” Sometimes, on the other hand, you have had the alternative situation: “Let’s encourage investment, whatever the risk might be.” I think it is important that we get a balance between those two.

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

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.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

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 thatQ

“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.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Foreign and Commonwealth Affairs)

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.Q

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.

Photo of James Wild James Wild Conservative, North West Norfolk

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?Q

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.

Photo of James Wild James Wild Conservative, North West Norfolk

Q That is helpful. On the operational point, do you have a view on the timescales for turning round the reviews and assessments within the Bill as it stands?

Creon Butler:

There is obviously a trade-off again. My sense was that the provisions that are there now are realistic and sensible, but we need to see how the thing evolves and fine tune it according to the experience that we have had. People have pointed out that this will lead to a lot more cases being looked at than before. I do not think that that is a criticism of what is happening; it is a reflection of the world that we are in. However, in the light of the experience of looking at a much broader range of cases, we should be ready to adjust the timeframes and so on, taking account of that experience.

Photo of Matt Western Matt Western Opposition Whip (Commons)

Q I wonder, Mr Butler, if you would elaborate on, and give more examples of, the sorts of international threats that you see us facing, in terms of not just national security but economic security, and the links between the two.

Creon Butler:

In my view of economic security broadly, the biggest existential threat is climate change, frankly. We are going through a ghastly pandemic. Fortunately, it looks like we can see the way out of it, but I do not think that at any point we felt that this particular virus was an existential threat to mankind more generally. My view of climate change is that it is, and it is very close. In any broad assessment of national and economic security, I would put climate change as one of the most important issues. That is why the accelerating efforts both within Governments and in the private sector to deal with it are crucial.

In terms of other kinds of threats, we have had this particular pandemic, which as far as we can see is not an existential one; there could be other pandemics that are. That is why infectious diseases have been so high on our risk register in the past. Steps to ensure that we do not face future pandemics that are even more serious than this one in terms of the threat to human life, or the economy, are a very important priority. Those are two examples of broader threats beyond hostile powers that we should incorporate in our approach to national and economic security.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Q Good afternoon, Mr Butler. You highlighted the problem of identifying the fact that an acquiring party may have hostile intent towards us if we do not know who is really in control and who the ultimate owners are. One way of addressing that is simply to have a built-in presumption against allowing any acquisition of a security-sensitive asset or business by a company whose ultimate owners are not identified. Do we need to go as far as that? If not, what else could we do to protect ourselves from hostile elements, which will undoubtedly use that back-door access, if it is left open?

Creon Butler:

It is a good question. It is something I worked on when I was in the Government. There is a pending proposal in relation to property, to ensure that no foreign company can invest in UK property without some means—whether their own register of beneficial ownership or a regime put in place in the UK—of ensuring that transparency. That is in relation to ownership of property. It did not go much broader than that, because it involves a major bureaucratic process and there is the issue of not interfering too much with the way the economy works. If we did do that, it would help in relation to one of the national security concerns we have, which was highlighted in the Bill, where a hostile power buys some property close to a very sensitive site.

I need to think about it a bit more, but I do not think it would make sense at this stage to require that we can identify the ownership of every single investment. For example, in the US they do not have consistently strong beneficial ownership rules. You might find a situation in which several US investments in the UK did not meet those transparency requirements. If they were in non-sensitive sectors and did not pose a threat to us at all, it would create a considerable burden.

Thinking it through on my feet, the logic would be to do something of that kind, where it related to sectors that we knew to be sensitive. Indeed, those are already covered by the mandatory notification case. Where you have the mandatory notification, it will presumably trigger information about who owns the company that is making that investment. If that is not clear now, that may be the route to make sure that this element is covered.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Q To be clear, you mentioned in your answer the need to regulate foreign-registered companies from certain types of acquisitions. Does that also apply to UK-registered companies, which are in turn owned by foreign companies? The bad guys will set up a UK company to do all the bad stuff through. Do you agree that we need to follow the chain of ownership and control right back to the ultimate controller?

Creon Butler:

Absolutely. We currently have a public register of beneficial ownership for all UK-registered companies. That was a major and important step. There are issues about whether we are doing enough to enforce those legal requirements. That area could be looked at helpfully in this context. When that regime was designed, the view was that market forces, external pressures and gathering information from NGOs and others would ensure that the information on the register was accurate. I am not sure that we can now be sure that is the case. We want to get that transparency for UK-registered companies, and we may need to do more in that direction, particularly through the enforcement process in Companies House.

Photo of Stephen Flynn Stephen Flynn Shadow SNP Deputy Spokesperson (Treasury - Financial Secretary)

Thank you, Mr Butler, for your evidence so far. It has been incredibly enlightening. It is probably fair to say that national security—what is tantamount to national security—is an ever-evolving feast, particularly given the technology that is now available. Do you feel that the scope of the Bill, particularly the consultation of the 17 sectors that have been included, satisfies your concerns around national security? I am particularly thinking of social media and the level of data that is pertinent within that. Do you think that is adequately covered by the Bill as it standsQ ?

Creon Butler:

I think this comes again to the point about how we will tightly define national security in relation to these broad powers. I think you are thinking of a hostile power investing in a social media platform that can then be used to attack the UK—I guess that is what you have in mind. It is, again, something that I have not thought through. Probably, I would not see the nature of the threat as being so great that we would necessarily make it a mandatory notification, but by using other sources to collect information about threats, we might use the other powers in the Bill—the calling in and those kind of powers, and the voluntary notification —to make sure that we had covered the threat. I do not think I would put it in the mandatory category, but I would want to use other information and powers to collect information, and to call in a particular investment if I felt it was a threat.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

There are no further questions, so thank you, Mr Butler, for your time and your assistance to the Committee. We have our witness for the sixth and final panel in the witness in the room, so we can move on seamlessly and a little early.