National Security and the Labour Government

In the run up to UK's General Election in July 2024, there was a notable emphasis on national security in the Labour party manifesto, with the party looking to burnish their national security credentials, which has traditionally been seen as a weak point for the party. Indeed, national security was the first chapter of its manifesto, which began with the statement that "no policy commitment matters unless we uphold the first duty of any government: to keep the country safe". More specifically, Labour promoted the concept of "securonomics" – a term coined by the Chancellor – which centres on the goal of ensuring robust and sustainable economic growth underpinned by strong national security foundations.   

This renewed emphasis on national security has raised the prospect of the Labour Government adopting a similar (or even tougher) approach to reviews under the NSIA regime than the previous Conservative administration. Such an approach does however raise some tension with the Government's overriding goal of promoting growth, in particular from international investors. As seen from the three watch areas considered below, this leaves the Government with a delicate balance to strike between encouraging in-bound investment into the UK on the one hand, whilst ensuring that this does not compromise the UK's national security on the other hand

In line with Labour's securonomics agenda, the Government may seek to prioritise the resilience of key supply chains - resulting in increased scrutiny of transactions in sectors of the UK economy which have, as of yet, received only relatively limited attention from an NSIA perspective.

• Food supply: Labour's election manifesto recognised the national security implications of shocks to global food supply chains, stating that "food security is national security".
  
  Given this, we may see the Government be more willing to exercise its call-in powers in relation to transactions involving key agricultural assets, agribusinesses, and vital food supply chains. This would align with the broader national strategy of ensuring greater self-sufficiency and mitigating risks of foreign control over essential commodities.
  
  
• Pharmaceuticals: the government may also push for more rigorous evaluations of foreign investments in pharmaceutical companies, biotechnology firms, and medical research institutions, noting that the most relevant NSIA mandatory sector in this case, synthetic biology, attracted one of the fewest number of notifications in the last reported year, according to the NSIA 2023/2024 Annual Report.
  
  A heightened interest in the pharmaceutical sector would not only aim to safeguard the UK's capability to respond to health crises, as underscored by the Covid-19 pandemic, but also preserve the UK's status as a leading hub for life sciences.

We could be seeing the beginning of a trend towards greater use of economic commitments, with the Government potentially being more willing to extract concessions from foreign investors as a price for investing in UK businesses.

By requiring foreign investors to make substantial economic commitments, potentially involving job guarantees, continued investment in local infrastructure, or participation in national economic projects, this could serve to balance national security needs with economic growth imperatives, fostering an environment where foreign investment bolsters rather than compromises the national interest.

Indeed, we got a first glimpse of this in EP Group's takeover of International Distribution Services (IDS), the parent company of Royal Mail, where EP Group gave a comprehensive set of institutional, financial, and regulatory undertakings to the Government. Whilst these undertakings were technically separate to the NSIA Order that was also imposed by the Government (and which require EP Group to ensure Royal Mail remains able to fulfil its services in support of national security), it is notable that many of these undertakings are not purely regulatory in nature and are clearly aimed, at least in part, at protecting wider UK economic interests.

The requirement that each of IDS and Royal Mail maintain their headquarters in the UK and remain UK resident for tax purposes will help to guarantee UK jobs and the continued flow of tax receipts to HMRC. Even more blatant is the undertaking to re-list on the London Stock Exchange (if Royal Mail were to decide to re-list), which appears little more than a rather naked attempt to boost UK stock market activity.

To the extent the Government were to continue in this vein in the context of NSIA reviews, this would dovetail neatly with Labour's securonomics agenda and help to ensure that acquisitions of domestic businesses maximise inbound investment into the UK. The Government will however be conscious of ensuring that this approach does not go too far and risk cooling foreign investment more generally. 

Finally, a nuanced shift is foreseeable in the Labour government’s approach towards Chinese investments in certain sectors of the UK economy. Over the last few years, Chinese investment into the UK has chilled considerably, off the back of increasing geo-political tensions and in-depth scrutiny under the NSIA regime (noting that all but one of the prohibitions so far under the NSIA regime so far have involved a Chinese or Chinese affiliated acquirer). 

However, with both the Prime Minister and the Chancellor openly courting inbound Chinese investment, it appears the Labour administration might be willing to adopt a more nuanced stance, selectively easing restrictions on Chinese investments, particularly in sectors where the perceived security risks are manageable or where robust safeguards can be implemented.

By permitting Chinese investment into less sensitive sectors of the economy, the Government could foster economic ties and leverage Chinese capital for domestic development goals. That being said, there is little doubt that higher risk areas, including critical infrastructure and defence, will continue to be subject to rigorous evaluations to mitigate potential security threats.

Even when taken in the aggregate, the trends covered in this article clearly don't constitute a dramatic shift in how the Government is approaching reviews under the NSIA regime. Indeed, no one is expecting such a shift to take place, particularly with no end in sight to long-running geo-political tensions involving Russia and China. However, what we are possibly seeing taking shape are the beginnings of discernible trends and, potentially, a distinctive Labour Government approach to reviews under the NSIA regime.