On Tuesday 16 March the government published the long awaited and much anticipated Integrated Review, Global Britain in a Competitive Age. The year-long review of security, defence, development and foreign policy was led by No10 foreign policy adviser John Bew with support from officials across Whitehall. At its core, it provides a synthesised view of the UK’s national security posture and foreign policy for the next decade and beyond.

The review sets out fundamental pillars of sovereignty, security and prosperity. Much has changed since the last Strategic Defence and Security Review in 2015, particularly from a geostrategic perspective. Importantly, this latest review seeks not only to respond to this change and account for it but, crucially, also to shape the landscape that will follow.

In his statement to the Commons, the prime minister said the UK would need to ‘relearn the art’ of competing against countries with opposing values. The ambition is clearly to position the UK as a big state actor committed to global issues. The role of technology in underpinning this ambition will be crucial. The prime minister rightly committed to incorporating it ‘as an integral element of national security and international policy’ and to firmly establish the UK as a global leader in science and technology and as a ‘responsible cyber power’.

The review outlines how the UK’s reach should be global, with particular focus on the Indo-Pacific region as a bulwark to an increasingly aggressive China. It also stresses the importance of deepening our relationships with allies and partners around the world, a recommitment to NATO and others, as well as moving more swiftly and with greater agility.

Many of the headline findings of the review have been well trailed in the media over recent days, including a refurbished COBRA complex and increasing the stockpile of nuclear warheads. What is increasingly clear is the extent to which the UK views both Russia and China as big state threats. The review describes Russia as an ‘active threat’ and China as a ‘system challenge’, although the UK still hopes to deepen its trade and investment relationship with the latter.

It is interesting to note that the UK assessment is closely aligned to that of the US, which recently published its own interim look at national security. Much like the UK review, the US interim review had a heavy focus on great power competition with nation-states and a slight shift away from counterterror initiatives. The similar approach being pursued by both the UK and the US should provide confidence to those who have been concerned at the vacuum created across the traditional diplomatic and defence alliances and institutions over recent years.

The team of advisers and officials who have produced this review have set a clear direction of travel for government. They have identified the critical need to tackle big state issues, while opening trade and investing in cyber and technology. However, with department’s still experiencing shortfalls in budgets, decisions in the forthcoming Spending Review will demonstrate the government’s seriousness to put this plan into action.

Contact Scott Dodsworth, Director, for more information and how to engage with government across defence, trade and international relations. Email scott@gkstrategy.com

Sir Peter Hendy’s interim Union Connectivity review was published today (10^th March). The Review was launched in October 2020 to consider transport connectivity across the United Kingdom and to identify a series of recommendations that will support the Government’s strategic ambitions. Hendy’s final recommendations are expected in the Summer.

Despite being an independent review, the highly political mandate from Government is evident even in this initial iteration. From ‘levelling up’ to the environmental agenda and the future of the Union, the Review is shaping up to be the latest in a long line of reports which elucidate the Johnson administration’s post-COVID, post-Brexit vision for the UK. Hendy appears highly conscious of his work’s position in the greater scheme of things – citing the recent Integrated Rail Plan, the Regional Air Connectivity Review and the upcoming Transport Decarbonisation Plan as parallel and interdependent pieces of work.

As the name suggests, where the Union Connectivity Review is most additive is on the question of how transport links could better operate between nations of the UK. The headline proposal is for a new ‘pan-UK’ strategic transport network to work alongside the existing strategic networks of each nation. This would not alter the operational responsibilities of Highways England, Transport Scotland and others, but would complement them with cross border strategies and assessments.

The final Review will provide an assessment of the ongoing costs of such a network, including preliminary costing and timescales for the proposed fixed link between the British mainland and Northern Ireland.

Only at subsequent budgetary events – most notably the anticipated 2021 Spending Review – will we see how the Government’s priorities fall between cross-border connectivity and other transport projects, including the flagship HS2 project. From a political perspective a Conservative government might assess that apart from diluting the pro-independence feeling in Scotland, there is more to be gained from shoring up their voter-base in the Midlands and the North, than from creating better cross-border links.

On top of the political considerations, there is growing talk of unease from the Treasury about the level of investment chalked up for transport projects versus digital infrastructure – the so-called ‘steel versus fibre’ debate. This rift is one reason given for the continued delay to DfT’s publication of the Rail Network Enhancements Pipeline, which is hotly anticipated by the sector.

If these strands of thought prevail, a new pan-UK strategic transport network could end up far more strategy than substance.

The second week of February was National Apprenticeship Week, and providers, employers and assessors of apprentices waited with bated breath for the plethora of announcements that would come thick and fast to support the sector and encourage greater uptake of apprenticeships by employers. They were disappointed.

Last month’s celebration of the Government’s flagship training and employment policy was a muted affair, with the DfE concentrating on awareness-raising and success stories rather than solid policies. This happened despite the broad consensus currently shared between policymakers and businesses that apprenticeships can provide a solution to a number of issues created or exacerbated by the pandemic. For instance, they can assist in reducing youth unemployment, and allow businesses to meet the new needs of the economy post-pandemic, by retraining existing staff.

Of course, over the past 12 months, the Government has been tinkering with its apprenticeships policy. Most notably with the introduction of the “opportunity guarantee” in June of last year, in which the Prime Minister promised that every young person who wanted an apprenticeship should get one. This featured a cash handout to employers for every apprentice under 25 that they hire. However, this was widely seen at the time as being not nearly enough to offset the risk employers would be taking on by hiring new staff in such an uncertain time. More broadly, this policy has been accompanied by several other announcements in related areas – kickstart, traineeships, t-levels, vocational training – a veritable scattergun of ideas.

This was crystalised with the Spending Review at the end of last year, and the Skills for Jobs White Paper, announced in January, which proposed a number of structural changes to apprenticeships and other similar policies to make them more flexible for employer needs.

While it is good to see the Government prioritising this area, the lack of focus on any one scheme (of which apprenticeships is the most promising) risks confusing and diluting the impact of their initiatives. Apprenticeships work best when they are part of a pathway from education to employment, bridging the gap from school leavers to full-time employees, with a ramp on and off to ensure individuals are not left out from the next stage of their development.

Apprenticeships are fortunate to have some effective advocates both within Parliament and the sector – and it is time for the Government to work more closely with those who want to utilise apprenticeships, and to remove the stumbling blocks that COVID has put in their way. Training providers and employers of apprentices now have an opportunity to engage constructively in this conversation, and stand to reap the rewards of well-trained, motivated staff while Britain builds back better.

The Comprehensive Spending Review has been dialled back in ambition but will still set the future direction of departmental spending and will impact on policy development, writes Rt Hon David Laws, former Cabinet Minister

It is commonplace these days for large parts of Budgets and Spending Reviews to be leaked in advance, so it is no surprise that we have already learned that in next week’s Spending Review the Defence budget will get a boost, while Overseas Aid faces cuts – as yet, of an uncertain size.

This Spending Review is arguably less important than when it was first announced, many months ago, because at that stage it was designed to be a long term review, setting out spending plans for the next three years. The Treasury has now understandably got cold feet about long term spending plans, when there is so much uncertainty about the size of our economy next month, let alone in three years’ time. So, because of COVID, most budgets will only be set for the financial year ahead (incidentally one-year settlements are the norm across many western nations).

But to conclude that the Review no longer matters would be a big mistake, for three reasons. Firstly, it will allocate hundreds of billions of pounds over the next year, and it could involve some big changes in priorities. Budgets such as health, business support and welfare could be increased dramatically due to COVID related pressures. Other budgets could also face a big squeeze, as the Treasury fights to prevent a further upward spiral in public borrowing.

Secondly, while budgets for day-to-day spending may only be set for a year, the allocations for “capital spending” could be set for much longer periods – perhaps even up to a decade. These days the Treasury accepts the case for longer term capital budgets for infrastructure spending, in areas such as transport, housing, defence equipment, and school building. And with interest rates at historic lows, money for such projects can be accessed incredibly cheaply – meaning that productive investments can be made for a zero or even negative real cost. In some policy areas departments have been pressing for longer term capital budgets than have been usual in the past (for example school buildings), and it will be interesting to see if the Treasury is willing to allocate more capital spending for 5-10 years, rather than the usual three.

Finally, this is our first real opportunity to see the spending priorities of what is, after all, essentially a new government. While much will be distorted by the near term imperatives of responding to the COVID crisis, it should also be possible to discern new areas of priority, and to distinguish these from areas the government does not seem to want to give top billing to.

It is important to understand the Spending Review process, and what the final published “numbers” actually mean. In essence, the Treasury starts by deciding privately how much in total it wants to spend and save, and it then sends out a proposed “settlement” to departments. Departments then supply detailed papers, usually explaining why they want more money, and make the Treasury a counter-proposal about how much money should be allocated. The Treasury knows departments will never settle at the first number it proposes, so it always builds some “fat” into the negotiation, which it can generously concede. But it will have a “bottom line” with each department that it cannot go beyond, if the Spending Review as a whole is to add up.

During these negotiations, departments will look at their spending programmes in huge detail – and will have assumptions for every programme about how its budget should grow or shrink. This means that when the Review is concluded and announced, there is a departmental assumption somewhere about how each budget line will be affected. But this detailed information is usually not publicly released on the day of the Spending Review – leaving more time for departments to decide how to “share out the cake” So it’s crucial to understand that not all decisions on individual budgets will be baked in after the Spending Review is announced, and within departments there is huge scope to debate and discuss what the spending priorities should be.

That’s why for all those interested in helping shape the detail of government spending, next week’s announcement should not be seen as the end of a process, but as an opportunity to start more detailed and serious engagement with Ministers, advisers and civil servants.

By Ioan Phillips, Senior Political Analyst

Joe Biden has finally been confirmed as US President, following several fraught days of ballot-counting. But what does his victory mean for Private Equity?

Many in the industry will be glad to see the back of the volatility that characterised policy-making in the Trump administration.

While the platform Biden ran on suggests higher taxation and tighter regulation overall (trends that are typically negative for deal activity), the priority afforded to tackling COVID-19 and climate change could open up opportunities for assets in the healthcare and built environment sectors. We outline these themes in more depth below.

Tax rises: Low-hanging fruit?

Biden talked a lot about raising corporation tax during the campaign. If the Democrats control both houses of Congress come January, expect to see an increase prioritised as part of the new administration’s legislative agenda. This move would reduce the profitability of larger assets and Private Equity firms trading as corporations – but it is smart politics for a President who crafted his personal brand around standing up for “ordinary folk”.

The incoming President also sees an easy political win from raising Capital Gains Tax (CGT) on all income above $1 million, as well as a timely revenue raiser that helps offset losses from COVID-19.

Tighter regulation and scrutiny of M&As

Biden is no firebrand, but he and his party have stressed the need to better regulate M&As – especially those in sectors, such as technology, where issues of national security arise. The Democrats already proposed legislation during Trump’s presidency that sought to increase the oversight powers of the Federal Trade Commission (FTC) and broaden its regulatory remit.

In addition, it is likely that the Biden administration will use the appointment of progressive figures to drive tighter enforcement of antitrust regulations.

Fighting COVID-19

Biden’s acknowledgement that social distancing measures will have to continue into next year will likely sustain demand heightened for companies that can provider remote medical assistance and advice – or adapt their offering accordingly.

Against this, it is worth considering how any tightening of regulation around M&As may affect demand for healthcare assets. With Democrat proposals aimed at encouraging greater pluralism within markets, this could create favourable procurement environment for smaller healthcare firms seeking entry into state- or federal-level supply chains.

Green opportunities

Biden promised to increase taxes on carbon emissions and increase subsidies for clean energy sources. This is likely to augment demand for assets active in the sustainable energy sphere.

How GK can help investors and businesses

Biden’s agenda is arguably the most radical of any incoming president since Franklin Delano Roosevelt.

GK Strategy has helped many international firms operating similarly fluid fiscal, political, and regulatory frameworks. Whether advising investors and management teams on the sell-side and buy-side in a transaction process, working with investor-backed businesses and Private Equity firms on engagement with policy-makers, or providing ongoing support and advice on the political and regulatory environment, GK’s political, policy and regulatory DD offering leads the field in mitigating risk and value creation.

For more information, please contact our Head of Investor Services, Martin Summers, via Martin@gkstrategy.com.

By Ioan Phillips, Analyst at GK

If Boris Johnson’s name is linked to any political idea, then it is ‘cakeism’ – the belief that it is possible to govern without making trade-offs. On devolution, the PM’s cake is in danger of toppling over.

Coronavirus has stalled government plans to devolve more powers to English regions while highlighting the limitations of centralisation – especially in healthcare delivery. Health devolution is already under way in places such as Greater Manchester, London, and West Yorkshire. However, the Government is yet to develop a coherent vision as to how this should be applied across England. Expect then to see pressure from local government for greater decentralisation in this area – both in terms of policy-setting and procurement powers.

The pandemic also threw into sharp relief the impact of a decade of austerity on England’s councils. Funding cuts made by central governments meant many struggled to provide vital services, or deal with increased demand for them arising from coronavirus. Although the Government told councils to do “whatever it takes” to protect communities, whether this rhetoric is backed up with a substantial long-term funding uplift remains to be seen. Uncertainty over future funding (particularly regarding the form the UK Shared Prosperity Fund takes), coupled with reductions to income streams as a result of coronavirus, suggests councils will seek to consolidate or enhance existing revenue sources amidst the deepest recession in 300 years.

Over Hadrian’s Wall, the perceived missteps of the UK Government in dealing with the pandemic has brought Scottish independence back to the fore. Polls regularly put public support for it at 50% and above – a recent survey found 53% of Scots in favour. The governing SNP is also polling at record levels. The psephology points to a majority for pro-independence MSPs at next year’s Holyrood elections. This shift in constitutional sentiment has stirred the UK Government into action. A ‘Union Unit’ has been established in Downing Street; the PM frequently challenges the SNP on devolved matters, while Whitehall is said to be planning a spending programme intended to show Scots the advantages of staying in the union.

At the same time, the Government’s framing of post-pandemic economic recovery in strongly unionist terms in its new white paper on the UK internal market is fermenting new tensions with the devolved administrations. Although the UK’s four governments all accept the development of a series of ‘common frameworks’ to harmonise standards and regulation, the UK Government believes it should have sole responsibility for the terms of future trade deals. But the devolved administrations have responsibility for many of the areas – including controversial aspects, such as food standards – that will be covered by future deals. Once the deals are concluded, there is a risk that the devolved administrations could simply refuse to implement parts of them.

The internal market is just the latest example of how the Government is setting itself on a collision course with the devolved administrations. This trend is here to stay – and with it, greater political contestation of policy-making and regulatory powers. The Government’s reluctance to devolve further powers to national legislatures is in sharp contrast to its regionalist ‘levelling up’ mantra. The long-term sustainability of this devolution dualism is questionable, though.

GK Strategy works with many firms operating within what look set to be fluid fiscal, political and regulatory frameworks in the years ahead. Using our extensive knowledge of policy, political, and regulatory trends, we can help investors and businesses to address risks and identify business opportunities at a local, regional or national level.

For more information, please contact Martin Summers, Head of Investor Services, on Martin@gkstrategy.com.