Monthly Archives: October 2023

Artificial Intelligence: ‘The Future of Defence Capability’

GK Senior Adviser Robert Blackmore assesses how world leaders will increasingly need to consider the implications of incorporating AI as part of their defensive capabilities, and looks ahead to this week’s summit on the governance of artificial intelligence.

This week Bletchley Park will host a global summit on safety and Artificial Intelligence. For the first time, world leaders, AI companies and researchers will come together to discuss the opportunities and risks surrounding the development of the most revolutionary technology since the discovery of nuclear fusion. The summit aims to initiate the development of a global consensus on AI governance.

Whereas much of the initial focus on the purpose of nuclear technology had military connotations, experts today highlight the impact AI may have on every aspect of our lives. Bletchley Park will therefore host discussions on a wide range of potential over-arching implications of AI. However, with an historic rise in global deaths by conflict reported by the Institute for Economics and Peace, not least following Russia’s second invasion of Ukraine in 2022, and the latest outbreak of violence in the Middle East, it is important to consider the role of AI and defence in isolation.

Earlier this year, Lord Sedwill, the former National Security Adviser, suggested to the House of Lords Select Committee on AI in Weapons Systems that AI was “the future of defence capability”. While he assured Peers that such a development would not equate to “Terminator” or “Matrix” style killer robots – a view that is not universal – the implication was clear: developments in AI have the potential to have dramatic ramifications for the defence sector, and in turn, the future of warfare.

This has not been lost on the world leaders. In 2018, rather ominously, the United States warned: ‘Our adversaries and competitors are aggressively working to define the future of these powerful technologies according to their interests, values, and societal models. Their investments threaten to erode U.S. military advantage, destabilize the free and open international order, and challenge our values and traditions with respect to human rights and individual liberties.’

In response, the Pentagon published an AI Strategy that sought to transform the ‘speed and agility’ of US military operations and identified several potential benefits of AI, including improving situational awareness and reduce collateral damage. Meanwhile, in 2022, the UK Ministry of Defence outlined its ‘Defence Artificial Intelligence Strategy’, highlighting its ambition for the UK Armed Forces to be the world’s most ‘effective, efficient, trusted and influential Defence organisation’ for its size.

Nor has the potential of AI been lost on the defence industry. This year defence contractor Leidos formed a strategic partnership with tech giant Microsoft, while Lockhead Martin has invested multi millions in AI technology and established and ‘AI factory’, as reported by Forbes, to ‘streamline access of its software writers to the resources they need for generating AI applications’.

AI already plays a crucial role in military operations. For example, it is being used by the Ukrainian military to rapidly review satellite images and video feeds from drones. Crucially, in this scenario AI acts a vital supporting tool for military operators to make decisions. Ultimately, final output remains the preserve of human, as opposed to artificial, intelligence.

This is the crux of the matter. As AI’s capabilities increase, how much agency should it be given to act according to the set of instructions established by its human handler? Can we trust a weapon acting autonomously not to make catastrophic errors in the context of life and death scenarios? Once you remove human oversight from weaponry, you are left with Automated Weapons Systems (AWS), loosely defined as systems that can select and attack a target without human intervention.

The closest such weapon in existence is believed to be STM’s Kargu-2 drone. It has been deployed by the Turkish, and reportedly Azerbaijan, armed forces. Unsurprisingly, there are significant ethical concerns about the further development of such weapons. The International Committee of the Red Cross (ICRC) has argued AWS risk escalating conflicts in an unpredictable manner and thus potentially aggravating humanitarian needs, while Amnesty International claim such machines would automate killing, treat it as a technical undertaking, and refrain from making life and death decisions with any empathy or compassion.

As it stands, there are no formal international rules governing the use of AI in a military context. United Nations Secretary-General António Guterres has called for a legally binding instrument to prohibit lethal autonomous weapon systems without human oversight by 2026. While in February, 33 Latin American and Caribbean States called for the urgent negotiation of a legally binding international treaty on autonomy in weapons systems that will guarantee human oversight. As recently as October, Pakistan’s representative to the United Nations’ First Committee on Disarmament and International Security stated that “We are at the verge of a monumental step in human technological history, heralded by the advent of artificial intelligence”, warning that there were insufficient guardrails governing the ‘design, development and deployment’ of AWS.

However, the obstacles that the creation of an international agreement would face are stern. Professor Sir Lawrence Freedman, during a hearing of the House of Lords AI in Weapons Systems Select Committee in May, told Peers that the speed at which AWS technology is developing would inevitably outpace any negotiation of such treaty. Furthermore, for it to have purpose, it would require agreement in good faith between adversaries. Negotiations over nuclear disarmament between the Cold War between the United States and the Soviet Union, culminating in the much-heralded 1987 Intermediate-Range Nuclear Forces Treaty (INF Treaty), has shown that this is possible. However, the necessary geopolitical conditions must be in place, as they where in the late 1980’s between the two global superpowers. It is for this reason, this week’s AI Safety Summit could be so crucial, even if it is not directly dealing with the use of artificial intelligence in a combat setting. For China, despite its soaring tensions with several countries present, not least the United States, will reportedly play a key role at the summit. A delegation from the Chinese Ministry of Science and Technology will be in attendance. While, the Telegraph suggests that Professor Yi Zeng, a leading academic at the CCP-controlled Chinese Academy of Sciences, will chair a behind-closed-doors session focusing on the risk that AI mechanisms may “unexpectedly develop dangerous capabilities”. It would be a great surprise if AI in the context of warfare was left unmentioned.

Therefore, at a time when the geopolitical stakes are so high, the AI Safety Summit has the potential to establish a common cause in relation to the governance of AI. This could perhaps lay the foundations for a pathway, however embryonic, towards an international guardrail in relation to Automated Weapons Systems.

Will Labour follow through on its commitment to reform carried interest?

GK consultant Hugo Tuckett looks into the Labour Party’s proposed reforms to carried interest and its impact on the private equity industry in the UK.

It is no secret that Labour remains in a hugely advantageous position in the build-up to the next General Election, expected in Autumn 2024. YouGov’s latest polling has the voting intention figure at 47% compared to the Conservative’s 24%, and the Party looks likely to form the next government.

While Labour Leader Keir Starmer has broadly aligned himself with the Conservative Government’s economic agenda to date, one area where Labour has sought to create some distinction is with its proposals for private equity tax reform. While this is unlikely to gain a significant amount of national media attention, it will have huge implications for private equity firms operating in the UK and the UK’s attractiveness as a destination for this type of investment.

The proposals centre on the tax arrangements utilised by private equity firms, in particular carried interest. Carried interest refers to a share of profits earned by general partners of private equity firms. General partners typically receive 20% of a fund’s returns (usually above a pre-defined minimum return known as the hurdle rate) as a performance fee for managing the fund.

While this appears relatively uncontroversial, what has attracted particular attention is the tax treatment carried interest receives. Rather than being taxed as income, which would incur a tax rate of up to a 45%, carried interest qualifies for capital gains tax and is taxed at a rate up to 28%.

The private equity industry argues its payments are not bonuses but investment returns, as investors are required to invest their own money in deals to be entitled to them. Opponents of the current approach believe that the everyday reality of most private equity firms means they should be considered trading, not investment, businesses.

Shadow Chancellor Rachel Reeves has placed private equity tax arrangements firmly in her sights ahead of the upcoming General Election. Reeves has described the existing arrangements as “absurd” and said a Labour government would close the “carried interest loophole”. The Party estimates the change would raise £440 million a year for the Exchequer.

Reeves’ argument is also gaining some traction in the legal profession. In March 2023, a leading tax lawyer argued that most private equity funds should be treated as “trading” for tax purposes. Changing the classification would mean payouts would be levied as income with a top rate of 45%, rather than at a capital gains tax rate of 28%. The same author suggests that to facilitate the change, the Government would need to introduce legislation to avoid an uncomfortable judicial review of HMRC.

This stems from a statement agreed in 1987 between the British Venture Capital Association (BVCA) and Inland Revenue, which recent analysis suggests could be unlawful, saying that typical private equity funds were not “trading” for tax purposes, with the consequences being that carried interest was taxed as capital. Since then, the Inland Revenue and HMRC has followed the BVCA statement, and private equity funds rely on it as a matter of course.

If legislation to change the existing system were to be introduced, it is currently unclear the extent to which it would be prioritised by an incoming Labour administration. Other long-touted reforms, namely amending VAT arrangements on private school fees, for example, will form part of the Party’s first year in government Shadow Ministers have confirmed. With Labour positioning economic growth as a central plank of its election pitch, the wisdom of alienating potential investors will also likely be called into question. At the recent Party Conference in Liverpool, Labour confirmed it would seek to unlock private sector investment across a variety of industries including infrastructure for digital connectivity, laboratories and energy.

While Labour has previously made bold commitments in relation to the private equity industry, wider pledges and the prioritisation of other reforms could push changes to carried interest tax arrangements down the pecking order. However, given that Labour has clearly presented its views on ending what it refers to as a “loophole”, the viability of dropping the proposals altogether is unlikely.

A possible route forward would be to reform the current capital gains tax treatment utilised by the private equity industry so that returns on investments in sectors outside Labour’s industrial strategy are taxed as income, while investments in those sectors continue to benefit from the reduced rate. While Labour has confirmed it has no plans to introduce a wealth tax, increase capital gains tax or put up the top rate of income tax, this does leave the door open to a two-tiered approach. This would allow Labour to present itself as going after private equity bosses, an argument popular with its traditional voter base, while also encouraging investment in areas tied to its economic agenda.

GK Strategy is an expert advisory firm that supports investors with political and regulatory due diligence, and political advice and insight, across a range of different sectors including energy efficiency, adult social care and education. Please do get in touch with our insights team at insights@gkstrategy.com if you would like to discuss Labour’s approach to private equity tax reform or any other potential investment areas.

Party conference 2023

As the annual conference season draws to a close, possibly the last before a general election next year, the main political parties will be reflecting on the success or otherwise of the Manchester and Liverpool gatherings. Both conferences were attended by our political advisers, who reflect on Conservative and Labour conference below.

As with past conferences, the measure of success differs, this was Rishi Sunak’s first as Tory leader, a more stable but still divided party. Just a year ago Liz Truss led a chaotic prelude to her short time in No10 and this year’s collection of Nigel Farage (as journalist) and long awaited HS2 announcement wasn’t the best backdrop as the Prime Minister attempted to cast his leadership as a force for change. Contrast Liverpool and the balance of a Labour party consistently ahead in the polls, with a more united and coherent party than for the past decade – a gathering of Labour activists who were at pains not to be carried too high on the prospect of government.

In a change to the usual order, the Conservative’s met first. The ongoing saga of will they, won’t they with HS2 didn’t help Rishi Sunak’s first conference as party leader. While the Prime Minister’s team struggled to get a hold of the narrative over the three days in Manchester, the former leader and likely leadership hopeful, Liz Truss and Suella Braverman, were quick to try and seize the agenda. Where the party truly seemed united was on the importance of support for climate action, and this was reflected in the sheer number of well-attended fringe events giving serious attention to how the UK can credibly retain its status as a climate leader. The Conservatives, despite recent announcements seemingly backing away from climate policy, understand that this remains a key vote-winner. Cobbling together a sell-able vision for the climate to the electorate could be make-or-break for the party in any upcoming election.

Sunak’s conference speech, his most important as leader saw the Prime Minister attempt to create some separation between his premiership and what he referred to as the previous “30 years of a political system which incentivises the easy decision, not the right one”. This will be a tough balancing act in the months ahead of the upcoming election. The 30-years Sunak references encompasses not only former Labour leaders Tony Blair and Gordon Brown, but no fewer than five Conservative Prime Ministers. The key question going into an election year will be whether Sunak can create that separation and be given the opportunity to push forward with his ambitious reforms to education, or whether he will be rejected by the electorate as more of the same.

Keir Starmer’s speech embodied Labour conference in Liverpool this week. A leader and a party more at home with its values and a confident, clear, coherent, even hopeful message about Britain’s future – a decade of national renewal. The party wanted a clean conference, a solid platform speaking to business leaders and the wider public, the opportunity now to project Keir Starmer’s message for the country which faced down the shame of the Corbyn-era and proudly bound past Labour success with a party of service, building a new country over the next decade and beyond. The test now is for the party to successfully project the same confidence beyond Liverpool, and Westminster, to the country at large.