Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020

The second order that we are considering today—the Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020—amends Section 23A of the Enterprise Act 2002. That section includes a list of “Relevant enterprises”, which are sectors where the threshold for government intervention in a merger is lower than that for other businesses. The relevant enterprises listed in the Act are all in particularly sensitive sectors where there is a public interest or a national security case for allowing the Government to intervene more readily. As it stands, Section 23A sets out three such sectors: military or dual-use technologies, quantum technology and computing hardware. The order adds a further three relevant enterprises to the list: “artificial intelligence”, “cryptographic authentication” technologies and “advanced materials”.

Businesses falling within those categories are often at the forefront of research and innovation. They are small businesses producing cutting-edge technology which may not yet be commercially viable, but which can have implications for our national security. Break- throughs in those fields underpin other areas of societal and economic development and are critical to areas such as defence and security. Ownership of businesses in those areas can therefore undermine our national security through espionage, sabotage or exerting inappropriate leverage, and puts us at risk of losing our advantages in security and defence.

I repeat that the vast majority of investors in this country have entirely noble intentions. The order seeks to deal with the tiny minority who invest maliciously with a view to exploit or do harm. The Covid crisis has brought this matter to the fore, magnifying the potential risk to national security. The depreciating effects on sterling and the financial pressures of a decrease in investor confidence all make us more exposed to opportunism. It goes without saying that the Government must be able to mitigate national security risks, and this requires our being able to intervene in mergers in the areas set out in this order, all of which are critical to our nation’s security.

In addition, we propose to make a second instrument before commencement of the share of supply order by the negative resolution procedure. That will allow the Government to intervene in mergers involving the new relevant enterprises where their UK turnover is more than £1 million. That is consistent with the other relevant enterprises listed in Section 23A. The order is a short-term measure that will apply until more fundamental reform can be taken forward in the national security and investment Bill. Such a measure is necessary given the immediate risk that we face as a result of the pandemic.

Having set out what these two orders will do, I will now say briefly what they will not do. They do not affect our commitment to an open economy. They do not alter our appetite or our enthusiasm for investment into the United Kingdom, and they do not change the fact that now, more than ever, foreign investment is the lifeblood of our economy. It created more than 57,000 jobs in 2018 alone. We have no wish to create barriers to business—quite the reverse—and permitting intervention does not mean that the Government will interfere unduly. There have been only 20 interventions under the Enterprise Act and none has resulted in blocked mergers. Rather, these are proportionate, reasonable and necessary measures to maintain capability in public health emergencies and to protect our national security, ensuring that the UK is open for business, but not open for exploitation. I beg to move.

However, experience shows that many new tools must be available if we are to combat action and reaction to pandemics. These reforms presumably reach out, as the Minister said, to pharmaceutical and medical equipment suppliers, but they also seem to extend further. As he mentioned, they look at the effects of the pandemic including on food supply and service providers such as the internet. That is a very wide reach. Will the Minister confirm that this new power could also be used to prevent hostile takeovers of otherwise profitable and stable companies suffering short-term reductions in profitability or depressed share prices as a result of the pandemic or similar emergency? Will he also confirm that notifications to the CMA will remain voluntary, even though the intention remains to mitigate risks in the short term, which suggests that a more direct route of action might be required? Will there be further guidance on what might trigger this power, which has been criticised as being potentially very broad, and, if so, when that will be published?

The Government last lowered the jurisdictional turnover thresholds of the UK merger control regime in June 2018, when we passed an SI concerned with the development and production of military and dual-use technology, computing hardware and quantum technology. At that time, the threshold in relation to UK target company turnovers was lowered from £70 million to £1 million, which is a big change, and the 25% share of supply, which the Minister mentioned, was amended. We supported the moves at that time, but we questioned whether other sectors should be included. But these were described at that time as temporary, short-term reforms, again pending primary legislation. Is that still the situation? Can we expect more changes when the Bill finally arrives? When does temporary and short-term actually morph into permanent?

We now have a proposal to extend these already amended jurisdictional thresholds to three further sectors under quite broad headings—artificial intelligence, cryptographic authentication and advanced materials. The Explanatory Memorandum makes it clear that the intention is to cover producers but also researchers, and it covers suppliers to these companies, so the scope is again potentially very wide. There is a promise of further guidance on this. Will the Minister give us some more information on when that will be available? Again, the notification system will be voluntary, and companies will have to take the risk of the CMA or the Secretary of State initiating an investigation. Is that really the most sensible way of proceeding?

The outstanding questions that my regret Motion raises and that I would like the Minister to respond to are as follows. As the SLSC says, it is very difficult to scrutinise these SIs. Indeed, it will not really be possible to do so until we see the national security and investment Bill itself. When will it be published? Will there be pre-legislative scrutiny? If not, why not? Can the Minister settle the question of whether the changes set out in these SIs are intended to be temporary, in the sense that they might be unwound in the NS and I Bill, once it arrives, or are they permanent? Can he confirm that it remains the Government’s intention to unwind the earlier June 2018 amendments once the new regime is in place, or are they now permanent? Can the Minister confirm whether the new Bill will follow the proposals in the 2018 White Paper? The world is a very different place now, and I wonder whether, for example, the voluntary notification system is really sufficient for national security concerns. Also, will there be turnover cut-offs or sectoral cut-offs? What about regional and place considerations?

Finally, why are consumer interests not given a central part in this process? The CMA, under its recent chair, the noble Lord, Lord Tyrie, was rightly refocusing work around the prevention of detriment to consumers. Its recent consultation on its 2020-21 plan stressed that competition, particularly in digital markets, was getting weaker in many sectors and that practices that damaged effective competition needed to be eliminated. In a sense, this is the other side of the same coin which is being addressed by these SIs.

Finally, can the Minister give a steer as to whether the legislation that the Government are planning for when we have left the EU will be in place by the end of the year, and whether they will respond to pre-legislative scrutiny, as the regret Motion of the noble Lord, Lord Stevenson, requests?