This blog was contributed by Ben Moore, Policy Manager at the Russell Group. Here he responds to the new HEPI report, What’s next for national security and research?, out today, and reflects on the National Security and Investment Act (2021).
The strength of the UK’s R&D sector was underlined in the world leading contribution universities, research institutes and private sector partners made in helping tackle the coronavirus pandemic. In developing vaccines, running clinical trials and identifying effective therapeutic treatments, our researchers laid the foundation for the safe reopening of the economy and saved lives around the world.
When you see the impact UK science can have it’s easy to understand why our scientists, universities and others working within the R&D ecosystem are in high demand when it comes to building international partnerships. As a sector in which the UK is a genuine world leader, R&D has the capacity to make an enormous contribution to building a Global Britain outside of the EU as we work to secure new trade deals.
Government has long recognised the potential of higher education to drive investment and successive administrations have worked with our universities to enhance our soft power and boost international research collaborations.
Taking advantage of the opportunities our R&D strength represents is not without risk. In recent years there has been increasing concern over how hostile state actors may seek to take advantage of new UK advances to undermine our national security. With this in mind, it’s right that we look closely at how to best protect our interests and ensure new international partnerships and investments are a genuine win-win for all.
One area in which the UK previously lagged behind our international competitors was in the powers available to government to screen, and intervene in, investments in research that could pose threats to the UK’s national security.
The US, Australia and Germany already have well-established legislation which enable them to screen and block investments that pose risks to their national security. Earlier this year, the UK Government passed the National Security and Investment (NSI) Act to close this gap and modernise the UK’s national security laws. This is a positive step that will enhance our ability to protect ourselves from states and individuals hostile to the UK.
The Act, which came into force on January 4th, introduced two new reporting regimes.
A mandatory reporting requirement now applies to investments in UK companies meaning BEIS approval will be required for acquisitions involving the purchase of 25% or more of shares or voting rights in companies operating in 17 sensitive areas of the economy. This covers firms working on things like AI and energy technologies (the full list can be found via this link). The same rules will apply again if investors seek to increase their holdings in a company, with new referrals triggered as 50% and 75% ownership thresholds are passed. Once investors have referred proposed investments to the government, a unit within BEIS will either approve or ‘call-in’ the investment for further scrutiny if they believe it poses a threat to UK national security.
A second, voluntary regime encourages organisations and individuals to seek approval from BEIS before sharing ‘ideas, information, or techniques’ that may give rise to national security concerns. These referrals go through the same triage process as those in the mandatory regime, but there are no penalties for failing to comply.
Science is increasingly an international pursuit, and these new rules will have implications for universities and the way that we develop R&D partnerships overseas. Some of the impact will be unambiguously positive. Other elements of the new regime could be more challenging and come with a risk of unintended consequences.
On the positive side, the National Security and Investment regime will enhance the vetting of foreign investors and collaborators, boosting university efforts to ensure sensitive technology is not inadvertently shared with actors who could then use this to harm the UK.
On the less positive side, the new UK regime will not include some of the safeguards countries like the US and Australia have introduced to ensure proportionality and minimise bureaucracy without compromising security.
Comparable screening regimes internationally are targeted towards foreign investors, with exemptions for domestic entrepreneurs as well as those from allied countries. UK investors, for example, are largely exempt from the US and Australian rules. In contrast, the National Security and Investment Act applies to all nationalities equally, so a British investor or a partner from a trusted allied state will have to go through the same process as an individual from a country that has been openly hostile to the UK.
The basic question here is whether we think a partnership between a UK university and a German or US company poses the same security risk as an equivalent deal with, for example, a firm under state control in a country subject to economic or military sanctions. If the answer to this question is no, then it is right that we think about what changes can be made to ensure the new system is proportionate.
A related challenge will be capacity, with the CBI among those expressing concerns that BEIS may be overloaded with referrals which could cause delays in decision-making that jeopardise time sensitive research deals and investments. This could have a chilling effect on investment in collaboration in cutting-edge UK technology.
The best regulatory regimes are targeted, risk-based, and impose the minimum burden required to deliver critical policy goals. By contrast, a less targeted approach could result in the system being overwhelmed with referrals, which could ultimately result in more risky transactions being missed.
It is obviously still very early days for the new rules but we can expect a high volume of referrals from the higher education sector alone, given the broad scope of the voluntary regime, the number of university spin-outs that will be captured by the mandatory regime, and the lack of exemptions for partners from the UK or allied states. All of this comes at a time when universities, with encouragement from government, are accelerating work to raise capital for promising university spin-outs to help drive growth, create jobs and boost research intensity in every nation and region of the UK.
Security assessments are resource intensive and while government is clearly well-intentioned, in the past we have seen long delays in processes which involve similar audits such as export control licensing and the ATAS scheme.
There are steps that can be taken now to ensure that the new regime delivers the security benefits we all want to see without impacting adversely on the ability of universities to build new strategic partnerships. The recommendations set out in this new report from HEPI provide a good framework for action that would help ensure the new legislation is fit for purpose.
We agree with HEPI that streamlining the new NSI Act reporting regime will be important, and it’s critical we work to foster even greater collaboration between government departments, the university sector and other key players in the trusted research space.
Specific actions that should be pursued as a matter of urgency include ensuring that the National Security and Investment screening unit is properly resourced, with staff given the capacity to manage a large volume of referrals quickly and efficiently.
BEIS should also consider introducing new, tighter timetables for the management of national security referrals to help international partners invest in the UK with confidence.
Finally, government should look closely at the sophistication of the US and Australian regimes and introduce targeted referral exemptions for domestic investors and those from allied states to remove bureaucracy without risking our national security.
The government was absolutely correct to act on this issue and bring forward legislation that will help keep us safe. Now the Act has come into force we need to get implementation right to ensure the new regime fully protects our national interest while ensuring universities and others within the R&D system can continue delivering for the UK.