a) Cleared (b) Not cleared from scrutiny; further information requested; drawn to the attention of the International Trade Committee
(a) Communication welcoming foreign direct investment while protecting essential interests; (b) Proposal for a Regulation establishing a framework for screening of foreign direct investments into the European Union.
Article 207(2)TFEU; Ordinary legislative procedure; QMV
(a) (39024), 12217/17, COM (17) 494; (b) (39017), 12137/17 + ADDs 1–3, COM(17) 487, SWD (17) 297
11.1Foreign direct investment (FDI) and control over EU companies in strategic sectors such as technology, energy, communications and financial infrastructure have, in recent years, aroused concerns among EU Member States, the Commission and the European Parliament. These concerns have been precipitated in particular by the steadily increasing investment activities of state controlled companies from large emerging economies (primarily China). The Commission is also concerned that while the EU has one of the world’s most open investment regimes, many of its major economic partners impose significant regulatory barriers to foreign investors.
11.2The Commission’s proposal seeks to respond to these concerns by proposing an EU-level legal framework to ensure better information sharing and coordination among Member States and between Member States and the Commission, on investment screening activities.
11.3While not restricting the ability of Member States to operate foreign direct investment screening mechanisms, the proposal establishes a requirement for compulsory information sharing on potentially sensitive commercial or security information, sets timelines for comments from Member States and the Commission on FDI in other Member States, and gives the Commission power to initiate a screening process on FDI that relates to specified projects of “Union interest”.
11.4The Government has expressed strong reservations about this proposal in its current form—concerns that we share to a large extent. These focus on the lack of specified safeguards on the protection of sensitive commercial or security-related information; the possible 10 week delay to existing streamlined UK screening processes that would be necessitated by the sequential deadlines for Member State and Commission comments; the risk that the Commission’s activities in this area encroach on Member State exclusive competence on national security; and the risk that the information sharing requirements would be used by some Member States for “protectionist purposes such as reciprocity of market access”.
11.5The Government tells us that it already shares information on security risks with other Member States on a case by case basis, and is supportive of the sharing of best practice. The Minister for Trade Policy (Greg Hands MP) expresses concern that the proposal as it stands would constrain
“the ability of the UK to act swiftly in cases of genuine national security concern, and place additional burden [..] on prospective investors, which is at odds with the UK’s stance as an open and liberal investment destination”.
11.6In addition, the Government has recently launched a consultation on tightening UK rules on mergers that raise national security concerns, as well as introducing a mandatory notification regime on FDI in sensitive sectors.
11.7We share the Government’s concerns that the Commission’s proposal in its current form could be detrimental to UK interests both at present and in the future. We are particularly concerned at the apparent lack of specified safeguards on the protection of sensitive information required to be shared with Member States and the Commission. In addition, there is a clear danger that the timelines for receiving Member State and Commission comments on live cases run the risk of preventing decisions being taken in an expeditious manner, and of prospective investors being discouraged from doing business in the UK.
11.8This proposal is at an early stage, and we note the Government’s comment that “a significant number” of other Member States share its concerns. We retain the proposed Regulation under scrutiny and request that the Government update us on the progress of negotiations.
(a) Communication welcoming foreign direct investment while protecting essential interests: (39024), 12217/17, COM (17) 494; (b) Proposal for a Regulation establishing a framework for screening of foreign direct investments into the European Union: (39017), 12137/17 + ADDs 1–3, COM(17) 487, SWD(17) 297.
11.9The Commission seeks with this proposed Regulation to respond to concerns in a number of Member States and in the European Parliament about increasing investment by third countries into EU-based strategic industries, infrastructure and future technologies. The accompanying Communication and Staff Working Document set out the context for the proposed policy response. The proposal was anticipated in the Commission’s Reflection Paper on Harnessing Globalisation.
11.10The Communication stresses that the EU has one of the most open investment regimes in the world, and that it is the world’s leading source and destination of foreign direct investment. It cites 2015 figures that show that inward foreign direct investment (FDI) stock was over 5.7 trillion, while over 6.9 trillion was held by EU investors in third countries.
11.11While the United States is by far the largest foreign investor into the EU—with 41% of FDI stock in 2015—its share has fallen from a figure of 51% in 1995. This downward trend has also been visible with other ‘traditional’ investors such as Japan and Switzerland.
11.12Emerging economies such as China and Brazil are now increasingly prominent as providers of FDI in the EU. Significantly, while only 0.4% of EU companies are controlled by non-EU investors, these companies are, notes the Commission, on average much larger than companies controlled by EU investors. Consequently, they represent around 13% of total turnover, 11% of value added, and 6% of total employment in the EU.
11.13At present the US controls around 26,000 EU companies, while China controls around 4000. The UK tops the list of US-controlled companies, followed by Germany, the Netherlands, France and Italy. The Commission estimates that in any given year, there will be between 2000 and 4000 inward FDI transactions. In 2016, there were 1869 announced FDI transactions that involved a foreign acquisition of a stake above 10% in an EU enterprise.
11.14The Commission notes that foreign investors “are increasingly focused on seeking new markets and strategic assets and State-Owned Enterprises play a growing role in the global economy”. This is a clear reference to China’s state owned enterprises, whose role both in overseas investments and in fuelling over-capacity in strategic industries such as steel have been criticised by EU Trade Commissioner Malmström over the past year.
11.15The Commission also highlights situations where, apart from direct state ownership of enterprises, the state exercises direct or indirect influence over companies, or “where the state facilitates foreign take-overs by national companies, notably through facilitating access to financing below market rates”. Again, this refers mainly to China, although companies with FDI ambitions from other large emerging economies would also be included.
11.16The specific risk that the Commission identifies is that foreign investors—particularly those that are state-owned or subject to state control—may seek to acquire control of EU undertakings whose activities are connected to critical technologies, infrastructure, inputs or sensitive information. Foreign states would thereby potentially gain the ability to use these strategic assets “to the detriment not only of the EU’s technological edge but also its security and public order”.
11.17The staff working document notes that the sector most targeted by foreign investors is computers and electronics, followed by real estate, telecommunications, finance, healthcare, utility and energy. In comparison, non-EU FDI in traditional manufacturing sectors has slowed down in recent years.
11.18The Commission’s case for a mechanism to screen FDI is linked with the EU’s wider ambitions to encourage third countries to open up their markets to a much greater extent. In this context, it highlights that the OECD FDI Regulatory Restrictiveness Index lists China as having one of the highest number of restrictions against foreign investment.
11.19The establishment of a level investment playing field with third countries is set out as one of the objectives of the EU’s trade and investment policy. Its bilateral and regional agreements therefore seek to include binding rules and commitments on foreign direct investment. These include clearer legal frameworks and better access for EU investors, provisions to safeguard intellectual property, increase transparency, limit trade-distorting subsidies, and constraints on the behaviour of state-owned enterprises.
11.20Twelve EU Member States presently have mechanisms in place to screen FDI. This includes the UK. Differing approaches in terms of scope and design are followed in these countries. For instance, some countries screen both intra-EU and extra EU investments, with in some cases slightly different rules for third country investments. Some screening mechanisms cover specific sectors considered to be strategic, while others are not limited in this manner.
11.21The mechanisms set out either qualitative criteria or quantitative thresholds, or a combination of both. For instance, acquisition of direct or indirect control over a company or assets, or gaining a percentage of shares or voting rights.
11.22There are differences also in the grounds for screening. Some are limited to the protection of essential interests of national security—focusing on weapons production, military equipment and the like. Most screening mechanisms extend beyond the defence sector and encompass the protection of other public interests such as public security and public policy.
11.23The Commission states that Member State screening procedures take two main forms: prior authorisation mechanisms or ex-post control of investments already completed. Deadlines for completing national screening procedures generally fall in the range of two to four months. Mechanisms providing for prior screening often operate on a system of tacit approval, where an investment is deemed to be approved if a decision is not taken within the prescribed time limit. Investors usually have a right to legal redress against decisions.
11.24Foreign direct investment falls within the common commercial policy, but there is no comprehensive EU-level legal framework for the screening of foreign direct investment. However, there are a number of EU legislative frameworks in place that relate to the security of critical infrastructures and essential services. In some cases, they address the issue of foreign ownership.
11.25The most significant of these is the EU Merger Regulation, which allows Member States to take appropriate measures to protect legitimate interests provided they are compatible with EU law. ‘Legitimate interests’ are defined as the protection of public security, media plurality and prudential rules.
11.26The Commission acknowledges the need to maintain flexibility for Member States to screen FDI. However, it stresses that the absence of a comprehensive EU level legal framework makes it difficult to monitor in detail FDI flows into the EU or to monitor the screening decisions taken by those Member States that deploy FDI screening mechanisms; and prevents EU-level cooperation on FDI issues that may affect the interests of several Member States or of the EU as a whole. It believes that foreign investors may also be subject to increased uncertainty due to the different screening regimes in place.
11.27The Commission believes that closer cooperation and better coordination between Member States is therefore an essential response to the changing investment landscape. It proposes the following objectives:
11.28The Minister of State for Trade Policy and Minister for London (Greg Hands MP) provides a briefing on the main policy implications of the proposed Regulation.
11.29Firstly, he believes that the proposed Regulation could encumber the UK’s streamlined investment screening activity in the crucial period before EU exit,
“constraining the ability of the UK to act swiftly in cases of genuine national security concern, and place additional burden and uncertainty on prospective investors, which is at odds with the UK’s stance as an open and liberal investment destination.”
11.30On the issue of the requirement to share information with other Member States and the Commission, the Minister expresses strong reservations:
“While the UK already shares information on security risks with other Member States through appropriate channels on a voluntary basis, the compulsory sharing of information that is likely to be highly sensitive both for security and commercial reasons, would not be acceptable to the UK.”
11.31The Minister also highlights the possible implications of the Regulation’s provisions on the exercise of respective competences:
“..Allowing the Commission to encroach upon Member States’ ability to act on a national basis to protect their security interests sets an unhelpful precedent both in relation to security matters and in respect of other areas of Member State competence. Should even a small overstep be accepted in this case, it is possible that this could be taken as a precedent to expand even further in future.”
11.32In terms of the proposed Regulation’s impact on UK law, the Minister states that it is possible that procedural requirements would need to be added to the Enterprise Act 2002, as well as potential amendments to that Act and other legislation on information sharing on live FDI screening cases. The Government’s view is that the extent of the proposed Regulation is not sufficiently clear so far as this latter aspect is concerned.
11.33The Minister adds that the Commission’s announcement has coincided with the Government’s plans to bring forward its own proposals for an enhanced investment screening regime. He states that:
“This will be security focused, and we will be consulting on how to ensure any reforms are targeted and proportionate and do not damage inward investment.”
11.34The Minister highlights that following the UK’s exit from the EU, it will be subject to the provisions of the Regulation.
11.35On 7 November the Minister responded to a series of questions from the European Union Committee of the House of Lords. These related to the concerns expressed by the Government that the information sharing requirements could constrain the ability of the UK to act swiftly in urgent cases, the nature of the Government’s concerns over the compulsory sharing of sensitive information, the danger of a precedent being set in relation to respective competences, information on the UK’s new investment screening regime, the Government’s views on the overall proposal, including future implications for the UK as a third country, and how the Government is balancing its current interests against future considerations.
11.36The Government believes the timelines for comments from Member States and the Commission to live investment cases could “add a delay of ten weeks or more to an investment authorisation being made by the UK”. The Minister adds that this:
“may be unacceptable on security grounds as well as on presentational and process grounds.”
As comparison, the Minister notes that:
“a recent Ministerial intervention on national security grounds was conducted on an urgent basis in under five weeks, so the added procedural delay proposed by the EU could be significant.”
11.37He believes that additional uncertainty, complexity or delay in screening processes is likely to act as a deterrent to foreign investors, at least in the short term.
11.38The Government stresses its concern that the Commission’s proposal does not set out specific safeguards for the protection of commercially and security sensitive information. The Minister adds that the requirements for compulsory sharing of sensitive information :
“presuppose that the Member States have the power to obtain ‘information’ from a putative investor. It is not clear how extensive this requirement might be and whether the UK Government has the powers to obtain and/or share this information.”
11.39The Minister recalls that the EU Treaties preserve the right of Member States to screen FDI on public security or public policy grounds. He expresses concern that although the opinions issued by the Commission would be non-binding, Member States would be required to demonstrate that they had taken ‘utmost account’ of the Commission’s opinion and provide an explanation to the Commission if they do not follow its opinion.
“It is possible that the Commission issuing opinions on inward investment could be taken as precedent to expand their powers further in future.”
11.41The Minister states that under the Enterprise Act 2002, Ministers can only intervene formally in merger cases if they raise national security or other specified public interest concerns, and meet the jurisdictional and turnover thresholds set out in UK and EU law.
11.42In October, the Government published a green paper on ‘National Security and Infrastructure Investment Review’, which set out proposed reforms to the mergers regime. Two sets of proposals are set out in the paper. The first proposes enabling the Government to examine and potentially intervene in mergers that currently fall outside the thresholds. These would be limited to two sectors: dual use and military use, and parts of the advanced technology sector. For these areas, the Government proposes to lower the turnover threshold from £70 million to £1 million, and to remove the requirement that the merger increases the share of supply. The Government believes that turnover and share of supply “are no longer reliable indicators of security risk in all cases”.
11.43The second set of related proposals is stated to be longer term in nature. The Government has proposed making substantive changes to how it scrutinises investment for the purposes of protecting national security, and states that it is following “the example of other developed, investment-liberal countries” in this regard.
11.44The options are: a call-in power in respect of domestic and foreign investment; a regime to automatically scrutinise foreign investment into critical infrastructure; or a mixture of the two options.
11.45The Minister stresses that:
“The Government supports the continued ability of Member States to review, and to intervene proportionately in, investment situations that could pose a genuine risk to national security, public security or public order.”
11.46He adds that:
“The Government also encourages the sharing of best practice and continued voluntary information sharing on investment-related security risks on a voluntary basis.”
11.47After repeating the Government’s concerns over the possible risks of compulsory information sharing, the Minister states:
“The Government’s position is that such regimes should not be used, or be open to being used, for protectionist purposes such as reciprocity of market access.”
11.48On the implications for the UK as a third country, the Minister notes that after withdrawal from the EU, the UK’s investors would be subject to the “additional scrutiny and delay” of these proposals when investing in the EU. Additionally, he fears that if the proposals in their current form come into force before the UK leaves the EU,
“some reputational damage may already have been done to the UK from participating in a regime that third countries may see as unwelcoming to investors, and potentially open to use for protectionist reasons.”
11.49On the balancing of current and future interests, the Minister states that the UK’s “open and liberal approach towards trade and investment” spans its current and future relations with the EU. He notes that “a significant number” of other Member States share the UK’s concerns over the proposal as it stands, and that the Government has begun working closely with the Commission and other Member States to respond to the proposals.
128 Council number . Considered by the Committee on 22 November 2017.
129 OECD data on FDI Regulatory Restrictiveness can be found .
130 The others are Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal and Spain.
131 Text of Merger Regulation
132 Other relevant sectoral legislation and strategies which contain national security and public policy provisions are highlighted by the Commission by the Commission. These include the , , , and .
133 Critical infrastructure is stated as including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities.
134 Critical technologies are stated as including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology.
135 The Commission states: “such measures may include the screening, in compliance with EU law, of direct investments carried out by an undertaking formed in accordance with the law of a Member State and owned or controlled by a foreign investor, when the investment is made through artificial arrangements within the EU that do not reflect economic reality and circumvent the screening mechanisms”.
136 specifies that an acquired company must have an annual UK turnover of more than £70 million and/or the merging companies must collectively supply or acquire 25% or more of particular goods or services in the UK, provided that the merger results in an increment to that share. Limited public interest grounds are allowed for intervention in certain mergers involving defence and media companies which fall below those thresholds.
1 December 2017