The UK government has launched a review and public consultation of the implications of foreign ownership or control of critical infrastructure and how it can best ensure that investments and takeovers do not raise national security concerns.

The consultation is seeking comments on a green paper ‘National Security and Investment and Infrastructure Review : The Government’s review of the national security implications of foreign ownership or control.

The consultation is split into 2 parts - the first is focussed on the government’s short-term proposals to amend the turnover threshold and share of supply tests within the Enterprise Act 2002. This is to allow the government to examine and potentially intervene in mergers that currently fall outside the thresholds in 2 areas:

• the dual use and military use sector
• parts of the advanced technology sector

For these areas only, the government is proposing  to lower the turnover threshold from £70 million to £1 million and remove the current requirement for the merger to increase the share of supply to or over 25%.

 Govt plans to make more substantive changes In longer term to how it scrutinises security implications of foreign investment

The second part of the consultation seeks views about potential long-term reforms that government should take to its approach to ensuring that investments and takeovers cannot raise national security concerns. In the longer term, the Government intends to follow the example of other developed, open, countries and make more substantive changes to how it scrutinises the national security implications of foreign investment.  The precise shape and scope of these reforms will be informed by this consultation which will be followed by detailed proposals put forward in a White Paper.

Infrastructure pipeline between 2016/17 & 2020/21 - Funding split of each sector

Introducing the consultation, the Department for Energy  Business & Industrial Strategy (BEIS) said that  the UK is one of the top destinations for foreign direct investment (FDI), however:

“Britain’s rightly-praised openness to foreign investment also needs to be accompanied by appropriate scrutiny of the potential national security impacts of deals, as demonstrated by the Hinkley Point C decision last year.

“The vast majority of investment into the UK’s economy raises no national security concerns. However, we need to be alert to the risk that having ownership or control of critical businesses or infrastructure could provide opportunities to undertake espionage, sabotage or exert inappropriate leverage.”

The UK is one of the world’s top destinations for FDI with the third highest FDI stock in the world behind the US and China.

The reforms have a particular focus on ensuring adequate scrutiny of whether significant foreign investment in the most critical businesses raises any national security concerns and providing the ability to act in circumstances where this might be the case.

 The expectation is that the need to act would be relatively rare and scrutiny does not mean making any part of the UK’s economy off-limits to foreign investment, the consultation paper says.

Potential reforms include:

• an expanded version of the ‘call-in’ power, modelled on the existing power within the Enterprise Act 2002, to allow Government to scrutinise a broader range of transactions for national security concerns within a voluntary notification regime and/or;
• a mandatory notification regime for foreign investment into the provision of a focused set of ‘essential functions’ in key parts of the economy. Mandatory notification could also be required for new projects that could reasonably be expected in future to provide essential functions and/or foreign investment in specific businesses or assets.

The government is proposing that of the 13 national infrastructure sectors in the UK, which includes water, only civil nuclear, communications, defence and energy should be subject to the mandatory notification regime.

For the water sector, there is no proposal to introduce mandatory notification regarding a change in ownership or control of undertakers or licensees.  “The Government acknowledges the strong regulatory protections already in place to mitigate national security risks,“ the paper says.

Of the nine English regional water and sewerage companies, only Severn Trent, South West Water and United Utilities are still listed on the London Stock Market. The others are owned privately – owners include overseas investors and sovereign wealth funds.

Large proportion of infrastructure pipeline investment "will need to be provided by foreign investors”

Commenting on upcoming infrastructure investment, the paper says that the UK requires significant capital sums to upgrade, renew and expand its infrastructure. The National Infrastructure Pipeline details long-term plans to invest over £410 billion in 525 projects in water, energy and transport infrastructure up to and beyond 2020-21.

The paper says:

“A large proportion of this will need to be provided by foreign investors.”

“The UK relies on investment from the private sector to deliver infrastructure projects as effectively and efficiently as possible. Over 50% of the infrastructure investment pipeline up to 2020-21 is expected to be financed and delivered by the private sector, with the largest proportion of private investment in utilities, energy and communication.”

Deadline to submit comments on the first phase of the consultation is 14 November 2017.  The consultation on potential long-term reforms will close on 9 January 2018.

Click here to download the consultation paper ‘National Security and Investment and Infrastructure Review : The Government’s review of the national security implications of foreign ownership or control.