UKCTA Response to BEIS National Security and Infrastructure Investment Review

ukcta_public Policy papers

9th January 2018
UKCTA RESPONSE

BEIS National Security and
Infrastructure Investment Review

Introduction

1. UKCTA is a trade association promoting the interests of fixed-line telecommunications companies competing against BT, as well as each other, in the residential and business markets. Its role is to develop and promote the interests of its members to Ofcom and the Government. Details of membership of UKCTA can be found at www.ukcta.org.uk.

2. UKCTA is pleased to be able to respond to this consultation. UKCTA is very supportive of the Government’s aim that rules should serve as a model of fairness and efficiency, and that the UK must truly be open for business with the rest of the world. UKCTA members are engaged in the provision of Critical National Infrastructure and count both major and important government agencies as their customers so intrinsically recognise the need to have transparent and proportionate controls on foreign direct investment and mergers where they can run contrary to the security of the UK. So far the proposals are very vague, and we are very concerned to ensure that they do not go further than is necessary and proportionate.

Rationale for change

3. As the Green Paper notes, mergers and all forms of investments are important to help companies grow, innovate and become more efficient. The foreign investment (“FDI”) that the UK currently enjoys is highly beneficial to the economy, and any actual or perceived barriers to the flow of this inward investment will have a potentially detrimental impact. The proposals set out in the consultation allow for government to have far greater scope to intervene and scrutinise mergers than is currently the case. We consider that this intervention may go far further than is necessary and proportionate. As a result, it is critically important that any changes are proportionate, targeted and transparent to avoid the possibility of undermining the UK’s reputation as a good place to invest.

Political considerations

4. Particularly in the light of Brexit, there is a huge degree of political sensitivity attached to initiatives that are, or could be perceived to be, protectionist in nature. While we appreciate the concern government expresses about the need to protect national security, we urge the government to think carefully about the way it positions and presents this. Foreign investors looking at different regimes in which to invest will consider all aspects, including political stability and regulatory certainty – and regardless of how the government might favour continued investment, there is a risk that this sends out mixed signals.

Sector-specific regulation

6. It is important that any review of a merger from a competition law perspective, (in the UK by the Competition and Markets Authority (“CMA”)) is kept as a strictly separate process from the national security review. Competition merger reviews are very different economic analyses which should not be confused or muddied by a national security review, which presumably considers very different factors. This separation should extend to metrics and factors used to determine whether and how a merger is considered to raise concerns, and the process should be fully transparent and evidence-based so parties can understand how decisions are reached.

Relationship with existing merger provisions

5. The Green paper makes clear that there is already a substantial amount of sector-specific regulation in existence which addresses national security issues. While it makes sense to work towards a harmonised horizontal regulatory structure which is sector-agnostic, it does not make sense to retain sector-specific obligations which would overlap. Therefore, to prevent a build-up of unnecessary red tape, we urge government to ensure that there is no duplication of current powers or regulation.

National security review process

7. It is very important that the national security review is as open and transparent as possible. As stated above it should be entirely separate from any competition-related review, and should be carried out by suitably vetted and experienced teams competent in handling sensitive information. The government should publish a detailed guidance on how it can best help businesses understand how this review works, and what would be expected of them if they fall within scope of the requirements. Any form of third party scrutiny of a proposed or actual deal can be, and often is, onerous on the parties concerned. This is especially the case where the process is new, not widely understood or only experienced regularly by a small proportion of industry stakeholders. Indeed, it might be a material factor in whether the deal goes ahead and the investment is forthcoming. Such a scenario would entirely counter to the government’s desire to maintain healthy levels of FDI into the UK.

8. We would also urge the government to consider what information it is able to share about what it is looking for in conducting a national security review. This necessitates proper understanding of what is meant by “national security”. This term is widely used in many contexts, and it seems unlikely that all stakeholders have a clear consistent understanding of what it does or does not cover. We would like to see much greater transparency in this regard, not least to aid better informed responses to further consultations on this subject, which are clearly needed.

9. For example, in a scenario where a foreign investor is intending to make an investment into a UK business, it would be highly beneficial to understand what factors or information will be analysed to determine whether concerns are raised from a national security perspective. Knowledge of what is being looked for would help business better prepare for the assessment and give parties who may be considering a deal greater clarity on whether or not such a review may be needed.

10. Where a business is or may be subject to a notification, we would like to see the process lend as much support and guidance as possible. Thought should be given to a “pre-notification” process whereby parties can seek and receive a quick feedback on whether or not they are captured. Such a pre-notification process should be very quick simple and easy to follow as this will ultimately benefit all parties. Further, thought should be given to the possibility to provide a comfort letter in circumstances where parties will not need where consideration of a pre-notification concludes no need for any further action. This would help to build up a bank of best practice and greater certainty for industry over time.

Timeframes for review

11. Any national security review must be carried out in a timely and efficient manner. Ideally it should follow the same timelines as a Phase one merger review that may be carried out by the CMA, as this is a well-established and recognised timeframe and ensures consistency and certainty1. In any event, the review must move swiftly and ensure the parties are kept fully informed of progress. The government would need to resource teams appropriately to ensure this can happen, particularly if the number of notifications increases materially.

Information requests

12. It should be ensured that the nature and scope of information requests linked to the national security review are carefully thought through; especially where a competition review is happening in tandem. Information-gathering exercises can be extremely burdensome and can demand resource from multiple teams within a business. Such administrative issues can sometimes be regarded as of lesser importance – however we would suggest that they can have a very material impact on the burden felt by stakeholders.

Voluntary regime observations

13. We consider that a voluntary regime as proposed would hugely increase the scope of transactions that may come within the scope of the powers, especially where it includes new assets or projects. This could result a disproportionate level of uncertainty as the government has the power to call-in transactions across any industry sector, even when they are at an embryonic stage. This is even more problematic as the Green Paper includes almost no explanation of what this could cover. We would like to see far more clarity about how the government envisages this working in practice, and how it would ensure a targeted and consistent approach.

14. We understand that with the voluntary regime as proposed, the government may have the ability to call-in any transaction in any sector which has not been notified voluntarily. It is very hard to determine how many times or in what circumstances the government might pro-actively call-in transactions that are not notified voluntarily – and we see this as potentially a very intrusive extension of the current powers, depending on how they are used in practice. In the US, as pointed out in paragraph 116 of the green paper, there is a great deal of experience in a voluntary regime, meaning that there is a good level of certainty. That is not the case in the UK. Therefore, it could be the case that such a regime would likely result in large numbers of notifications (where businesses take a safety-first approach) which are of no interest from a national security perspective, generating a huge administrative resource for industry with no benefit.

Mandatory regime observations

15. Here again, so far we do not see sufficient clarity on certain of the terms it uses, such as “advanced technology”, “provision of a submarine cable” and “essential functions”. It seems to suggest that not just companies providing essential functions, but also those who are “crucial to the undertaking” of such functions would be covered. This could be very broadly construed, and again gives no certainty over the exact scope. We urge the government to publish a further consultation on these definitions.

Criminal sanctions

16. We consider that the possibility of criminal sanctions for non-compliance with the obligations, as suggested in the paper, is unnecessary and highly disproportionate.