For the first time in decades, security concerns are king in industrial and economic policy. Few sectors are more impacted by this trend than emerging tech. US offensive action targeting semiconductor exports to China, together with the defensive CHIPS and Science Act, is the most significant peacetime national security market intervention by a Western power in many years. The EU and other Western governments have introduced a range of similar – albeit more modest – reforms. The global trajectory towards greater market intervention, including government support for strategic sectors, seems relatively baked in.
In the UK, the Government is planning to release several strategies that will cover many of the most important emerging tech sectors, such as semiconductors, quantum, and the future of high-end computing capability. The Government’s aim is to develop domestic technological strengths, as well as address the increasingly close relationship between economic and national security. We can expect these plans to resolve some questions about the Government’s approach to key technologies, but they are also likely to introduce new uncertainties. Businesses and investors in the sector should engage in conversations with government to ensure these new strategies respond to real-world considerations, both now and into the future.
The global context
Over the past decade, great power competition between the US and China has meant that Western governments have been slowly becoming more alive to the risks of leaning on unreliable partners for trade and investment. This process was dramatically accelerated by the dual shocks of the pandemic and Russia’s invasion of Ukraine. Resilience concerns are now much closer to the top of policy-makers’ agendas, which is leading to a more integrated approach to national security, economic policy and industrial strategy. This is a significant shift in the way that Western governments have recently approached policy-making in these fields – so while some elements of this integration are reasonably well-advanced, others are struggling to catch up.
The trend towards great intervention in the market will affect emerging technology more than any other sector. Growth in strategically important technologies with step-change capabilities like quantum and AI will require a policy framework which includes support for R&D, clear routes to market, protection of IP and data, and reliable access to high-end computer chips and other inputs which are part of global supply chains. Similarly, the Net Zero transition will require access to know-how, as well as an increased and secure supply of materials for new infrastructure such as wind farms and electric vehicles. These are all issues that require the right policy settings across a spectrum of policy agendas, from innovation, to trade, to national security, to consumer protections.
Industrial policy by stealth?
In the absence of settled, formal industrial policy for emerging tech– a consequence of political turmoil, lack of ministerial bandwidth and the Conservative Party’s traditional reticence to intervene in markets – the UK Government is currently leaning on national security levers to shape key sectors, namely via the National Security and Investment Act (NSIA).
The NSIA singles out specific sectors for which M&A requires government pre-approval. These include ‘traditional’ national security assets, such as energy and telecoms, but also includes strategic industries with less immediate national security implications, such as quantum computing, synthetic biology and critical minerals. The Government’s annual report on NSIA call-ins showed that, in the early months of the regime, a transaction was ‘called in’ for a security assessment every five days. Of those, more than 10% related to AI technologies, and more than 15% related to advanced materials.
The Government’s reference for a Phase 2 investigation by competition authorities into the short-lived Arm-Nvidia acquisition provides the clearest articulation to date of this tendency to use national security as a means to shape the market. There, it stated its view that ‘market effects… through lower [incentives] to innovate or a reduction in diversity’ in certain sectors were themselves a national security risk. This was reinforced in the Government’s order to Chinese-owned Nexperia to divest from Welsh semiconductor manufacturer Newport Wafer Fab: in that decision, the Government said that the location of a facility near the South Wales semiconductor cluster posed a risk to the activity that the cluster overall could undertake, potentially hampering the sector’s development.
The UK landscape for emerging technologies
While the UK has thus far leant on national security levers to make headway in emerging technology sectors, it has also made a number of commitments to publish formal strategies in relevant areas, including:
The Sunak Government also recently resurrected the National Science and Technology Council, which includes Secretaries of State from key departments including Defence, Digital, Business and Trade. The Council will be the most influential decision-making body in government when it comes to a whole range of big-picture policy issues with an impact on business, including investment, export controls, tax incentives and regulatory strategy.
Crucially, the Government also protected the increase in state R&D funding for the forthcoming three years, which will see it reach record levels, and it also remains committed to growing the pool of growth capital, for example by injecting government money into venture funds and making it easier for pension funds to allocate capital to venture equities. Ministers are focussed on ensuring this is used to build domestic strengths, not least through supporting home-grown technology firms that will scale and list in the UK.
To capitalise on existing UK R&D strength, as well as draw international investors, the UK also wants to be seen as a global regulatory leader in emerging technology. The UK has expanded Whitehall teams dedicated to maximising its ability to influence international standards, and a number of agreements signed with other countries have included commitments to cooperate on the development of regulatory approaches.
The recent Autumn Statement also committed to reviews of retained EU law in areas such as digital technology, life sciences and advanced manufacturing. Internationally, ‘standards setting’ is seen as one of the UK’s strengths, so the UK is likely to be an influential player. For instance, this month, the Australian, US and Canadian Governments endorsed the UK’s Open RAN principles, intended to ensure interoperability and implementation neutrality in the future development of the telecoms market. Businesses should think of the UK Government as one vector through which they can provide input and feedback in relation to global standards for emerging tech.
The update to the Integrated Review, which sets out the Government’s strategic view of defence, foreign and security policy, will be another opportunity for the Sunak Government to provide clarity. We understand that the Review will be published alongside the Spring Budget, for which HMT is said to be preparing a growth plan which will impact these industries.
How Flint can help
Flint has leading specialists in technology regulation, as well as expertise from within Whitehall departments on how the Government will approach these questions, and how best to engage with Government and deliver policy objectives.
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What challenges are facing health and care?
The challenges facing the new Health Secretary heading into winter are not new: the Covid backlog; strain on emergency, primary and social care; and workforce pressures. However, the wider backdrop has worsened, with strike action by nurses and paramedics planned, and inflationary pressures squeezing existing spending settlements.
Alongside this, the link between the health service and the UK’s economic performance is increasingly under scrutiny. 20% of the working-age population is now inactive, an increase driven in part by long-term sickness. Tackling health challenges is increasingly seen as a lever for economic productivity by the centre of government.
What is government’s approach?
While an extra £8bn in funding was allocated to health and care in the Autumn Budget, difficult decisions on spending priorities are unavoidable. Both Rishi Sunak and Steve Barclay have deep-held scepticism about the efficiency of NHS spending and have had strained relations with NHS leadership. In contrast (and unusually for a Chancellor), Jeremy Hunt has more sympathy for the NHS leadership’s arguments following his six-year stint as Health Secretary.
The government’s immediate priority is getting a grip on the Covid backlog. ‘Winter crises’ are not unusual in health, but there is a fear that visible signs of stress on the system could be much worse than usual this year, and offer an electoral gift to the Labour Party.
Reform, for now, is taking a back seat – but it is still seen as essential for the long-term sustainability of services, with a workforce plan covering NHS recruitment, retention, and productivity promised for next year. The sector is also being targeted for economic growth, with life sciences singled out in the Autumn Statement, and Chief Scientific Adviser Patrick Vallance looking at opportunities for regulatory reform to boost the UK sector.
Opportunities for business and investors
Five core areas of opportunity for health businesses and investors include:
This blog was written by James Hedgeland, Director and Verity Ryan, Director who co-leads Flint's work advising businesses and investors on health policy; and Anna Trevers a manager at Flint who advises corporate and investor clients in health and life sciences.
On 22 November, after months of discussions, and much pressure exerted by EU countries, the European Commission released its proposal for a gas price cap, entitled “Regulation establishing a market correction mechanism to protect citizens and the economy against excessively high prices”. But was it worth the wait?
The proposal’s price cap per megawatt-hour is set at €275, well above the current price of gas. It also contains numerous get-out clauses, most notably that the price remains above the set level for at least two weeks (even longer than the price peak experienced this August). Indeed, one may wonder whether the Commission really wants the cap to ever come into play. There can be little doubt the Commission proposed the cap solely to placate certain Member States, while itself being firmly opposed to the idea.
Introducing a cap on gas prices has been one of the more contentious measures amid a severe energy crisis in the wake of Russia’s invasion of Ukraine. The Commission proposal serves to underline the divisions between EU countries, pitting the long-standing advocates of a cap against the sceptics. While countries like France believe a cap to be a distraction that targets the symptoms without seeking structural solutions for the underlying issues fueling the energy crisis. In other words, the French would like the priority to be on the re-design of the EU electricity market.
Since the beginning of the war in Ukraine, the European Commission has put forward temporary emergency measures, to be replaced by a proposal for a re-design of the EU electricity market. The Commission will reveal its proposal in February or March next year. It is expected to focus on reforming the market, ensuring lower-cost renewables and low-carbon technologies, and delivering cheaper bills to consumers while decoupling electricity and gas prices.
EU divisions, a recurring story
Member state divisions at the height of the present energy crisis are no new phenomenon. Energy policy has long been a much-guarded national competence and given different national energy mixes, in particular different degrees of reliance on Russian fossil fuels, reaching a consensus was always going to be elusive. One may recall that back in May, after weeks of negotiations mostly stalled by Hungary, EU leaders reached a political compromise to ban seaborne imports of Russian oil by 5 December. Last week, in coordination with the G7, EU countries finally agreed on an international price cap for shipments of Russian crude oil set at $60, timed to coincide with the EU ban on seaborne Russian oil imports. Since the beginning of the war, the European Commission has also been heavily criticized, and rightly so, for pumping out half-baked proposals, not consulting adequately with Member States, and instead opportunistically trying to arrogate power to itself.
Divisions between member states are expected to worsen as Europe’s economic outlook gets bleaker. Energy policy has always been contentious, particularly when it comes to gas, with some countries’ economies, most notably Germany’s, heavily reliant on cheap Russian gas. Indeed, back in April the chief executive of BASF, a leading German chemicals company, claimed that “renouncing Russian gas would destroy our entire economy”.
So, what’s next?
The European Commission has made it clear that the ball is now in the EU Member States’ court to reach a deal. While expectations of an agreement may be low, one can expect that a compromise deal will be agreed upon. By tying the fate of this proposal to the much less contentious “Regulation on joint purchasing of gas” and “Regulation on accelerated permitting of renewable energy projects”, Member States long supportive of a gas price cap are hoping to increase the chances of a deal being reached. Yet the impact of the joint purchasing proposal will likely be negligible, given the unambitious level of 15% of 2023 gas needs to be procured via a centralized platform. But perhaps most importantly, EU countries do not want to be seen to be kicking the can further down the road and will want to send a positive signal to the markets by formally adopting the three regulations. Disunity at a time of war on the European continent is a look all sides are keen to avoid.
With EU sanctions on Russia having been progressively strengthened since the invasion of Ukraine, the high price the EU has been paying for Russian gas is an issue that could no longer be overlooked. But one thing is clear: when it comes to energy policy, Europe would appear to be as short of unity as it is of gas. There is, however, now a window of time in which to negotiate a compromise deal. EU energy ministers are to descend once again on Brussels on 13 December for what is referred to as an “extraordinary meeting”. Whether discussions yield anything extraordinary remains to be seen.
This article was written by Zach Burnside, who advises clients on EU political, policy and regulatory developments with a focus on the energy sector.
Flint was delighted to write the Background Note for the OECD Competition Committee roundtable on “Competition in Energy Markets”. The note provides a discussion of the challenges and policy responses arising from the energy crisis and the transition to net zero, and the role of competition authorities in the sector. You can read the report here.
Flint has deep expertise in energy and other infrastructure sectors, providing support to clients on issues including government policy, regulation and competition in both the UK and EU. To find out how Flint can help your business navigate this environment, visit: https://flint-global.com/sectors/energy/