Better Regulation
(8 years, 10 months ago)
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The Chair
Before we begin, let me briefly outline the procedure. A member of the European Scrutiny Committee may make a five-minute statement about the decision to refer the documents. One of the Ministers will then make a statement lasting no more than 10 minutes; questions to the Ministers will follow. Once questions have ended, one of the Ministers will move the main motion and debate will take place. We must conclude our proceedings by 7 pm. Does a member of the European Scrutiny Committee wish to make a brief explanatory statement?
Alec Shelbrooke (Elmet and Rothwell) (Con)
It is a pleasure to serve under your chairmanship, Ms Vaz. I will set out why these documents have been put forward by the European Scrutiny Committee for debate in this Committee.
The documents, which form part of the better regulation package published on 19 May 2015, comprise an overarching communication by the Commission indicating how it intends to improve the quality of its proposals for legislation, as well as a proposal for an interinstitutional agreement on better regulation, to replace and expand on a number of previous interinstitutional agreements. The package also includes some additional documents internal to the Commission and therefore not formally subject to scrutiny by the House: better regulation guidelines, a better regulation toolbox, and a regulatory fitness and performance—REFIT—state of play and outlook.
The package focuses on better preparation for legislation, increased scrutiny and increased consultation. Headline elements of it are the production of a road map and inception impact assessments at an early stage of formulating legislation, to permit citizens and stakeholders to provide views before drafting of legislation starts; further consultation on drafts of legislation that are subsequently produced; a “Lighten the Load” web portal, inviting views on existing EU legislation and initiatives; a strengthened regulatory scrutiny board, including independent members, to examine the fitness of proposed legislation; more stringent examination of proposed amendments to a legislative proposal; and greater transparency in the preparation of EU subordinate legislation.
The Commission has put into effect the matters that are in its own hands. The interinstitutional agreement has now evolved into a final provisional text, which received political endorsement at a Council meeting of 15 December 2015 but remains under consideration by the European Parliament.
Better EU regulation is not a new aspiration. The latest initiative can be viewed against the background of the Commission’s intention that the EU should interfere less in matters where member states are better equipped to give the right response at national and regional level, and be more open and accountable about what it does and how it does it. Better regulation also now features in the competitive basket of the UK renegotiation. The European Scrutiny Committee has emphasised the importance of putting good intentions into practice and noted how the principle of early consultation could facilitate early, and therefore more effective, scrutiny by Parliament. It has noted that the proposals for greater consideration of amendments to legislation suggested by the Council or the European Parliament has been characterised as a power grab.
While the interinstitutional agreement has evolved in a way that is likely to be welcome, some elements cause the Committee concern and much of the agreement remains expressed in generalities. We therefore stress the importance of the commitment contained in the agreement being put into practice rigorously. There is no improvement on the earlier text in relation to the role of national Parliaments, but in correspondence with the Commission we have received an undertaking from the vice-president that the Commission’s inception impact assessments will be transmitted directly to national Parliaments, which will facilitate early and therefore more effective scrutiny. The possibility that impact assessments will be made public only at the end of the legislative process is of concern.
The interinstitutional agreement makes little significant improvement to the transparency of the EU legislative process, which is also a matter of concern. This issue is likely to remain in the public eye, due to the inquiry currently being undertaken by the EU ombudsman into the transparency of trilogues. The objective shared by the UK and other member states of having concrete targets for the reduction of the burden of regulation only finds expression in equivocal terms. That is why we felt it important to refer these documents to the Committee.
The Chair
I call the Minister to make an opening statement. I remind the Committee that interventions are not allowed during the statement.
The Minister for Small Business, Industry and Enterprise (Anna Soubry)
Thank you, Ms Vaz; it is a pleasure to serve with you in the Chair.
I am pleased to have the opportunity to discuss the European communication “Better regulation for better results”. My right hon. Friend the Minister for Europe and I will be happy to answer any questions the Committee may have about the better regulation agenda in the EU. As the Committee will be aware, the Government have introduced ambitious measures to minimise unnecessary red tape at national level, but action is also needed at EU level to limit the burdens on our businesses that stem from EU legislation, which the OECD has estimated to be about 50%.
Since taking office in 2014, the Juncker Commission has made welcome progress on better regulation, and the Government have lobbied consistently in Brussels to keep better regulation at the top of the Commission’s agenda. For example, the number of new initiatives proposed in the Commission’s 2015 and 2016 work programmes was 80% lower than the average in the previous five years, and more laws have been laid down for repeal in the past two years than during the whole of the previous Commission. In the “Better regulation for better results” communication, which was published in May last year, the Commission set out what more it plans to do. The communication addresses long-standing UK priorities and the Prime Minister welcomed it as a significant step in the right direction.
The communication has three main themes: transparency, tools for policy makers and reviewing the stock of legislation. Specifically, the Commission announces longer consultation periods on legislative proposals and greater independence for its regulatory scrutiny board. The board examines the quality of impact assessments and its favourable opinion is needed before the Commission may adopt a proposal. The Commission also renews its commitment to applying a small and medium-sized enterprise test in respect of new legislation, systematically considering lighter regimes for SMEs and exemptions for micro-enterprises wherever possible. That is one area in which I particularly welcome action that will reduce burdens: SMEs are the backbone of all our economies and the Commission estimates that they create 85% of new jobs in Europe. Finally, the communication describes how the Commission’s regulatory fitness, or REFIT, programme to evaluate existing EU legislation will become more targeted, quantitative and inclusive.
We welcome those better regulation reforms, which demonstrate the Commission’s positive attitude and intention to make rapid advances. The communication is evidence that our efforts to embed the EU’s focus on competitiveness, jobs and growth are bearing fruit. We continue to work with like-minded member states to achieve further progress on EU better regulation from all three EU institutions. That is genuinely a shared responsibility for minimising the burden of EU legislation.
The interinstitutional agreement—IIA—governs working practices between the Council, the European Parliament and the Commission, and it is one of the key institutional priorities of the Juncker Commission. It replaces the IIA on better law making, dating from 2003, and focuses on improving the operation of the legislative process in the EU. A draft text was published in May last year and tripartite discussions concluded in December, culminating in a political agreement at the General Affairs Council. A formal vote in the Council of Ministers is expected at the General Affairs Council next week.
The Government’s negotiating mandate adopted a two-pronged strategy for meeting ambitions for the IIA: to maintain interinstitutional balance at least where it was set by the Lisbon treaty and the previous IIA and to prevent encroachment on the Council’s powers and prerogatives; and to pursue a broad better regulation agenda, including through proposals for measures on better regulation and better impact assessment processes. The Government were also clear that where proposals on better regulation could not be achieved through the IIA negotiations, the door was to be left open to pursue them through other means.
The Government’s better regulation objectives were a priority during negotiations and they have been successfully achieved in a number of key areas, which is a real boost for small businesses, which are the motor of our economy. First, the Commission makes a firm commitment that impact assessments will include
“potential short and long-term costs”,
the impact on the competitiveness of a proposal, and subsidiarity and proportionality tests. It makes a specific commitment that its impact assessments will, in future, have
“particular regard for Small and Medium Enterprises”
through “think small first” principles. Secondly, the European Parliament and the Council confirmed that they will carry out impact assessments in relation to their substantial amendments to the Commission’s proposal, which is something that the United Kingdom has consistently called for.
Thirdly, and most important, the Commission commits for the first time to assessing the feasibility of establishing an EU burden reduction target—a significant achievement that was added to the text of the proposal as a result of the UK’s lobbying. However, we want to go further. As set out by the Prime Minister, the Government made better regulation one of the elements of our reform agenda ahead of the referendum, and as the Committee will know, the President of the European Council has proposed measures to address the agenda. That is a significant result for British businesses. We are pleased with the way in which the IIA preserves the level of interinstitutional balance, which was another of the Government’s key objectives during the negotiations. The IIA text reflects the UK’s call for a more systematic and timely consultation of co-legislators in agreeing the Commission’s annual work programme. It now provides clear provisions to hold the Commission to account to deliver its annual work programmes in line with the promised improvements to the process.
During negotiations, we explored the option of addressing the role of national Parliaments in EU decision making through the IIA. The IIA text acknowledges the need for national Parliaments to be able to exercise fully their prerogatives under the treaties, and commits the EU institutions in their legislative work to be fully compliant with subsidiarity and proportionality principles. However, the Commission and a clear majority of member states felt that that was a matter for debate between the Commission and national Parliaments directly, rather than as part of IIA negotiations. As a result, strengthening the role of national Parliaments remains a key element of the UK’s renegotiation agenda. We are seeking a new arrangement whereby groups of national Parliaments acting together can stop unwanted legislative proposals.
I hope my introduction assures members of the Committee that the Government have secured ambitious outcomes across a number of aspects of the legislative process in the EU. Crucially, the agreement strengthens the better regulation provisions in several key areas of UK interest. Hon. Members will have seen the letter from the Prime Minister to President Tusk, so they will know that better regulation is very much at the heart of our EU reform agenda. Huge progress has been made across the whole EU; awareness is growing that we must regulate less and ensure that existing regulation is doing the job it is meant to do, rather than holding back small and medium-sized businesses across the whole EU. We are leading the charge. I thank the European Scrutiny Committee for calling for this debate.
The Chair
We now have until 5.30 pm for questions to the Minister. I remind hon. Members that questions should be brief and that they may, subject to my discretion, ask related supplementary questions.
Pat Glass (North West Durham) (Lab)
It is a pleasure to serve under your chairmanship, Ms Vaz. I have two brief, pragmatic questions.
The document sets out ways in which consultation can be improved and cites the 12-week rule as the appropriate framework. That mirrors the Cabinet Office guidance on consultation, to which the Government—certainly, in my experience—rarely conform in practice despite requiring others, such as local government, to adhere to it. Is it possible for the document to be more closely aligned to our Cabinet Office guidance? The Cabinet Office guidance is really good. It specifies not only that there is a 12-week timescale, but that it should not span times when it is more difficult to engage with the public such as the six to eight weeks of the summer holidays or, at least, the month of August when the Government go into standby mode.
My second question is about feedback. The one thing that really irritates people about consultation is when they go to the trouble of giving their views, but receive little or no feedback. Are there any plans to ask the EU to look at that in the document—I did not see any—to ensure that feedback is built into the consultation process?
The Minister for Europe (Mr David Lidington)
I am glad that the hon. Lady drew attention to the 12-week rule. Of course, that also ties in with what is in the draft reform texts from President Tusk apropos the suggested red card for national Parliaments. President Tusk is talking about having a 12-week period during which reasoned opinions can be tabled, rather than the eight-week deadline that is set out at the moment. That is a real benefit to national Parliaments. I have a lot of sympathy with what the hon. Lady says on both counts. One has to have a caveat in terms of the ability of EU institutions to act urgently when there is urgent need, perhaps most obviously on issues to do with plant or animal health and the need to act swiftly to prevent the spread of disease.
I sympathise with the hon. Lady’s wish that we try to align European arrangements more closely to Cabinet Office guidance, but the reality is, of course, that at EU level we are dealing with 28 different Governments and 28 different Parliaments, each of which has its own arrangements for domestic legislative processes and, indeed, for parliamentary recesses and holidays. For example, in parts of Europe, including Scotland, the summer holiday starts towards the end of June, and there are other places where people break a lot later. It is similar at Christmas and new year, when the duration of the holiday depends on whether western or Orthodox Christianity is the mainstream in a particular country. Although we have probably got a decent distance, I accept that there is further to go, but we must bear in mind such complicating factors.
Mr Lidington
On feedback, the text of the interinstitutional agreement contains a certain amount that goes in the direction that the hon. Lady suggests, particularly annex 1 to the agreement and the new arrangements for consultations in the preparation and drawing-up of delegated Acts—in other words, EU secondary legislation, the equivalent of statutory instruments here.
One of the benefits of the interinstitutional agreement that we now have is that there is a commitment to involve member states’ experts much more closely in the preparation of draft delegated Acts and in a timely manner. There is a specific requirement for the Commission to say openly, at the end of any meeting of member state experts, what conclusions it has drawn, how it will take those experts’ views into consideration and how it intends to proceed. Those conclusions will be recorded in the minutes of the meeting. There is a permissive provision in the rules for broader groups of stakeholders to be involved in the preparation and drawing-up of delegated Acts, so there are some measures in the text that take us very much in the direction that the hon. Lady suggests.
More generally, in terms of its better regulation proposals, the Commission has chosen to make more information available at an earlier stage. Stakeholders’ comments will therefore be more relevant and helpful because they will have access to the documents—the road maps and the inception impact assessments—that will give more detail about the policy initiative in question. Clearly, the proof of the pudding will be in the eating, but the proposals amount to a very useful step forward from the previous position.
The Chair
As no more Members wish to ask questions, we will proceed to the debate on the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Documents No. 9079/15 and Addenda 1 and 2, Commission Communication: Better regulation for better results-An EU agenda and No. 9121/15 and addendum 1, Commission Communication: Proposal for an Interinstitutional Agreement on Better Regulation (IIA); welcomes the Commission’s intention to use these documents to refresh and take forward its work on better regulation; supports the negotiations on the Interinstitutional Agreement that started in June this year, aimed at setting out the commitments of the European Parliament, the Council and Commission concerning better regulation, interinstitutional relations and the legislative process; and welcomes the Commission’s report on the working of the comitology committees in 2014, which enables the Government to assess critically the effectiveness of these committees.—(Anna Soubry.)
Pat Glass
Better, more transparent regulation is difficult to argue against. We certainly do not want worse, more opaque or more cumbersome regulation. The documents attempt to set out a strategy to improve efficiency and therefore to deal with some of the more common criticisms made of the EU: that it is inefficient, bureaucratic and disengaged, and that it too often strays beyond the principles of subsidiarity and proportionality and hangs on too long to legislation that is no longer appropriate or required. Engaging with these proposals will hopefully provide a pathway towards addressing some of those criticisms, with agreed goals of efficiency, ongoing legislative renewal and review, and increased public consultation and awareness of the functions of the EU and its purposes and how citizens can participate in the formation of new legislation and the review of existing legislation.
The documents recognise the influence that member states have, in that, without their engagement, those good intentions cannot be delivered. We should welcome the fact that the EU, and in particular the Commission, has recognised that there are issues that need to be addressed and has set out a strategy for doing so. Good intentions are one thing, but the EU needs to will not only the ends, but the means to achieve its goals. It is important to recognise the difficulties it will face in bringing about these efficiencies. However, it is clear that there is an understanding that the future of the Union depends not only on its being relevant to ordinary people’s lives, but on ordinary people being able to engage and have some influence. In that sense, I think this is a major step in the right direction.
Mr Lidington
I am grateful to the hon. Lady for her contribution.
We have before us a welcome step forward. One has to look at the various things that are happening in the EU in smarter regulation to see that we are shifting the course of the super-tanker, albeit not as fast as I would perhaps wish. Whether Governments are from centre-right or centre-left political families, Europe is waking up to the existential nature of the crisis of economic competitiveness that faces it. We all know that unemployment in many parts of Europe, particularly youth unemployment, is far too high. We know, too, that Europe is struggling with sluggish growth rates. That is all happening at the same time as European economies are contending with the challenge of global competition and digital technology, which is starting to shake up our professional and white collar occupations in the way that automation did factory-floor working a generation ago.
In the light of those multiple economic challenges, the blunt truth is that unless Europe can raise its game, and dramatically, in terms of economic competitiveness, the next generation of Europeans will be able to afford neither the standard of living, nor the social protection, nor the public services that our children and our grandchildren will expect and that Europeans today, from whichever country they come, take for granted. If that were to come to pass, it would breed social and political tensions that would make the rise of extremist movements such as Jobbik and the Front National seem relatively mild.
That is a massive challenge, and what we are debating today is important because it is one element—I put it no more strongly than that—in addressing that profound economic challenge. It sits alongside other efforts to promote smarter, less burdensome regulation on business, alongside the drive to negotiate free trade deals between Europe and other countries and regions of the world, and alongside efforts to deepen the single market to make it as good a single market in services and digital as it already is in goods. Since the Juncker Commission came to office, we have so far seen an 80% reduction in new legislative and regulatory initiatives coming out of the Commission, compared with the last year of the Barroso Commission. We have also seen a large number of the measures that the Prime Minister’s business taskforce called for a couple of years ago translated into action at European level.
In the documents we are debating this afternoon, we see an effort to turn that mentality into something that is embodied within both the corporate culture and the systemic working of the European institutions. We have, in one set of documents, the Commission’s better regulation agenda, which is a declaration by the Commission that in future it will act in this particular deregulatory way. We have an interinstitutional agreement that takes us further than where we are at present towards greater transparency and greater involvement of national Parliaments, and a commitment to improve the general quality and comprehensibility of regulations made at European Union level.
At the same time, we have the renegotiation that my right hon. Friend the Prime Minister is leading and the draft texts from President Tusk that were published last week. Those texts provide, among other things, four specific targets for the reduction of regulation—something that has never been accepted previously. They provide too for a mechanism for the retrospective review of EU law and regulation and for the Commission, in doing that work, to seek the views of both the Council representing national Governments and of individual national Parliaments. If that approach is, indeed, reflected in a final negotiated settlement, I hope national Parliaments will seize the opportunity in practice to create a kind of green card mechanism whereby national Parliaments work together to promote particular objectives in terms of smarter, less burdensome and less complex European regulation.
While the measures are not a panacea—I would never claim that they are—they are significant moves that take Europe in the right direction, towards being more competitive, less burdensome on business and better at creating the jobs that our young people desperately want and need. We should therefore welcome those initiatives.
Question put and agreed to.
Assessment of Exhaust Emissions
(8 years, 10 months ago)
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The Committee divided: - Ayes: 7 / Noes: 1 - Question accordingly agreed to.
The Chair
It may be of assistance to hon. Members if I go through the procedure that we will follow. First, a member of the European Scrutiny Committee may take up to five minutes to explain that Committee’s decision to refer the documents to this Committee for debate. Secondly, the Minister may take up to 10 minutes to explain the Government’s position, leading into up to one hour of questions and answers. Finally, the documents may be debated on the basis of the motion on the Order Paper, which is to be moved by the Minister. We may progress more speedily, of course, but I must put the question on the motion no later than two and a half hours after we began; that is to say, at 7 pm. To start the proceedings, does a member of the European Scrutiny Committee wish to speak?
Kelly Tolhurst (Rochester and Strood) (Con)
It might be helpful to the Committee if I take a few minutes to explain the background to the document and the reasons why the European Scrutiny Committee recommended it for debate. Before a vehicle can be placed on the EU market, it must pass certain safety and environmental tests. Exhaust emissions are determined by a laboratory-based test. However, as it has become apparent that emissions of cars driven on the road, particularly of nitrogen oxide from diesel engines, substantially exceed those measured in a laboratory, a European Commission regulation sought to address that issue towards the end of 2014.
However, Members will undoubtedly be aware that certain vehicle manufacturers have recently been found to have used so-called defeat devices to produce misleading results. The European Scrutiny Committee received an explanatory memorandum from the Government last November indicating that the Commission would be addressing the issue by introducing a further regulation establishing a new procedure for assessing tailpipe emissions under real driving conditions. The Government also said that they supported the proposal, and that the targets being set were achievable and would provide manufacturers with the certainty needed to develop cleaner vehicles.
Despite the absence of any official text for the proposed regulation, the European Scrutiny Committee took the view that as some manufacturers had sought to conceal true levels of vehicle emissions, it was clearly right that the Commission should address the issue. The Committee also considered that the circumstances prompting the need for such action raised a number of important issues about the enforcement of EU legislation in this area. It therefore recommended that this document be debated.
Members may be aware of the latest developments on 3 February, when the European Parliament voted by a narrow majority of 323 to 317 to support the Commission’s proposal. There were 61 abstentions.
The Parliamentary Under-Secretary of State for Transport (Andrew Jones)
It is a pleasure to serve under your chairmanship for the first time in this capacity, Mr Nuttall. I welcome the European Scrutiny Committee’s interest in the Commission’s proposals to introduce real driving emissions testing into the regulatory approval regime for vehicles.
As the European Scrutiny Committee said when recommending this debate, it is right that the Commission should take steps to address the issue. Although Volkswagen’s regrettable actions have undoubtedly concentrated minds on the issues surrounding type approval for vehicles, proposals for RDE testing were in development long before we became aware of that issue in the autumn. The proposal recognises the importance of improving real-world emissions controls of oxides of nitrogen, known as NOx, for diesel vehicles and of minimising the risk of manufacturers using defeat devices.
The Government are committed to taking action on vehicle emissions testing that restores consumer confidence and delivers our wider air quality and climate objectives. RDE is a vital step in tackling air pollution. It will make type approval emissions requirements significantly more stringent and ensure that new diesel vehicles achieve real-world reductions in emission levels of NOx, which is a harmful pollutant.
I should mention that, although the focus is on emissions of NOx from diesel vehicles, the proposal applies to vehicles that run on a range of fuels, from diesel and petrol through to biofuels and liquefied petroleum gas. It will ensure that vehicle manufacturers must achieve reductions in emissions across the board.
We strongly support the existing RDE agreement, which is expected to reduce significantly average, real-world NOx emissions from new cars and vans starting next year. The Government have been a strong advocate of implementing effective RDE testing since discussions began with European partners. We pushed for the introduction of RDE from 2017 at a meeting between the Commission and member states in October 2014. In May 2015 we abstained from supporting a Commission proposal on RDE, because it did not contain implementation dates. We worked to reintroduce dates in subsequent negotiations.
The objectives of the proposal are uncontroversial, but some reports have suggested that it will weaken Euro 6 requirements. I believe that such suggestions are unfounded, as RDE is a new conditional requirement that manufacturers will have to comply with over and above the existing laboratory emissions test. The RDE test is aimed at assessing average emissions over a typical driving cycle. The test procedures were finalised last year and are significantly more challenging than the lab test, since the new test can involve a vehicle being heavily laden, or travelling up a hill or at speeds of up to 100 mph. I doubt that the test will include all those extremes at the same time, but it is a possibility, which means that manufacturers must ensure that their systems are robust and capable enough to tackle such conditions and to stay within the limits.
Ben Howlett (Bath) (Con)
Will the Minister join me in welcoming the plans to build a real-world vehicle emissions testing centre at the Bristol and Bath science park, funded by the University of Bath?
The Chair
Order. Before the Minister responds, may I remind hon. Members that it is customary for the Minister to make his opening statement without interventions, because there will be plenty of time—at least an hour—for questions to be asked? Notwithstanding that, the Minister may respond.
Andrew Jones
Thank you, Mr Nuttall. I welcome my hon. Friend’s intervention. I know that his area has a strong record in developing engineering and new technology. It is therefore appropriate that we see some such developments taking place in his area. I welcome them most strongly.
I stress that the Euro 6 limits for the laboratory emissions test remain unchanged. RDE introduces a compliance criterion defined as a conformity factor. The conformity factor is the ratio of emissions recorded during the real-world test to the limit on the laboratory test. That must not be exceeded during the real-world, on-road testing.
Under the proposal the requirements for RDE are to be phased in with a two-step process to allow manufacturers time to bring compliant products to the market. Step 1 mandates a conformity factor of 2.1 for all new models in 2017. Step 2 achieves full compliance with Euro 6 standards for all new model types in January 2020, with an additional conformity factor margin of 0.5 to take into account measurement uncertainties. Set against the existing situation in which European air quality planners estimate that vehicles emit three times as much NOx and published research has shown some vehicles to be emitting even higher levels than that, the steps represent significant and achievable reductions in pollution levels.
The proposal means that after 2019 all new models brought to market must meet Euro 6 limits in the real world, with a margin for measurement error of at least above the test equipment. The European Parliament’s environment committee and other commentators have identified the margin for measurement error as a permanent increase in Euro 6 emission limits. That is simply not the case. The proposal will place an obligation on the Commission to review that annually, with a clear aim of reducing the measurement margin in the light of technological progress. We supported that obligation, and the Government look forward to seeing the evidence for setting the correct measurement tolerance, as experience is gained in RDE testing over the coming period.
The UK automotive industry has been supportive of the introduction of RDE, and although the first-step conformity factor is more stringent than it had expected, it is generally content with the agreement, believing it to be tough but achievable.
I wish to draw the Committee’s attention to the significant role that real-world testing has had in reducing emissions from trucks, buses and coaches. On-road portable emissions measurement testing has been used to verify emissions for heavy-duty vehicles registered since January 2014. A study by the Dutch research organisation TNO shows that real-world emissions of NOx from heavy-duty vehicles have fallen by 90% for motorway driving and by at least 30% under urban conditions. The proposal is set to make significant improvements for passenger cars too.
It is also relevant to note that the European Commission recently published a separate proposal for the approval and market surveillance of vehicles. We are assessing that proposal, and I will provide an explanatory memorandum on the matter to the European Scrutiny Committee shortly. I expect the proposal to contribute to how vehicles are approved for sale and how they perform in the real world.
Reducing vehicle emissions is a high priority for the Government, and Ministers and officials have been active in speaking with MEPs and European counterparts to promote the importance of RDE. I am glad, therefore, that the European Parliament chose to support the Commission’s RDE proposals in its vote on 3 February, and I expect that the Council of Ministers will also support them when it votes in the next couple of weeks. I welcome the opportunity to have this debate today.
The Chair
We have until 5.35 pm for questions to the Minister. I remind hon. Members that questions should be brief. There will be an opportunity for debate after the questions, and I may, at my discretion, allow supplementary questions.
Richard Burden (Birmingham, Northfield) (Lab)
I apologise to the Committee in advance, Mr Nuttall, as I am suffering from a cold. I hope that I do not tax Hansard too much, and that it does not mess up the Official Report too much if I start coughing, spluttering or sneezing.
I have two sets of questions. I welcome the fact that the regulation has been scheduled for debate; I thank the European Scrutiny Committee for recommending it. My first set of questions is on the regulation itself, and the second set is on the subject of Volkswagen, which both the European Scrutiny Committee and the Minister have mentioned as being directly related to it.
A number of organisations opposed to the revision of the emissions testing rules, including, I understand, the European Parliament’s own legal affairs committee, have argued that the introduction of conformity factors runs counter to the aims and content of the 2007 EU regulation on the type approval of vehicles. Will the Minister confirm what legal advice the UK Government have received on that matter, and can he assure the Committee that the UK would not end up being prosecuted in the event of a legal challenge?
Will the Minister also confirm how he expects the review mechanism to work in practice? He is absolutely right that the regulation itself will not weaken Euro 6 regulations, but let us be clear that the criticism has been that by allowing a conformity factor of 0.5, there could be an open-ended permission after 2020 for manufacturers to breach the standards by up to 50%. If the reason for the conformity factor is technical deficiencies, or potential technical deficiencies, in testing machinery, what will be done to stimulate the technological improvements that will avoid the need for a conformity factor so great after 2020, and hopefully altogether?
My third question relates to recent discussions in the Select Committee on Transport. In correspondence with the Committee and the Commission, the DFT emphasised its willingness to focus on a new test approach based, I understand, entirely on real-life driving. Will the Minister tell us what feedback the Department has received from the Commission about supporting research by the Joint Research Centre, and what steps the Government are taking to implement that approach?
To simplify administration and the cost of testing, manufacturers will need to test only a minimum number of vehicles representing extremes of performances of wider families of vehicles. How will the Minister ensure that that is done appropriately, and what assessment has he made of smaller manufacturers, for which testing costs could be most acute?
I turn to the VW scandal. The Minister will be aware that legal proceedings are under way in several countries, including Germany, the United States of America and South Korea. What discussions has he had with the Serious Fraud Office and the Competition and Markets Authority, and why is the UK not suing VW? In a written answer before Christmas, he assured me that he would make a statement in the new year on the emissions inquiry, so can we have one now on how many vehicles have been re-tested, what has been found, at what cost, and when he expects the programme to be completed? Will he confirm that the Government will still seek reimbursement for the Vehicle Certification Agency’s re-testing? Does he agree with VW’s decision not to compensate VW owners in the European Union?
Finally, in addition to the 1.2 million customers affected by the NOx defeat devices, I understand that Volkswagen has since admitted to irregularities in tests for carbon dioxide affecting up to 36,000 vehicles. What tests have the Government done to verify that, and can the Minister assure us that VW will be liable for the costs relating to the tests and any shortfall in vehicle excise duty that arises from those irregularities?
Andrew Jones
The hon. Gentleman asked quite a number of questions. I will take the questions on VW first.
The Government first became aware of the installation of software fitted to Volkswagen vehicles to distort emissions testing following the announcement of the US Environmental Protection Agency’s investigation on 18 September last year. We have widely condemned VW’s behaviour and demanded that it take early action to rectify the situation. Our priority is to protect the consumer, to restore confidence in the real-world performance of diesel vehicles and to ensure that VW supports its UK customers.
The VCA has secured an assurance from all automotive manufacturers outside the VW group for which it has issued emissions type approvals that defeat devices have not been used. The Government have called on the EU to conduct a Europe-wide investigation into whether there is evidence that cars have been fitted with illegal defeat devices. We have obviously gone on to test vehicles, and on 10 November, the Secretary of State announced an emissions testing programme to look for defeat devices and to improve our understanding of the real-world emissions performance of vehicles used in the UK. That investigation is vital to restore public confidence.
The VCA, our type approval authority, first reran lab tests for those VW group vehicles for which it had provided approval. Those initial tests provided valuable information for improving our ability to detect a defeat device and strengthened our understanding of the impact on vehicle emissions. To ensure the independence of the testing, the Department is funding the programme and neither the cars nor the testing facilities will be provided by the vehicle industry. We are completely distant from anything in the sector. We are testing 40 vehicles that are representative of a significant proportion of the overall vehicle fleet. The testing is proceeding well and we are using all the facilities we have in our country to make the process happen as quickly as possible, but we are only halfway through it. That is why we have said that the findings will be published in the spring. It would be premature to make further announcements today because we would be doing so only halfway through the programme, which would not be appropriate. We have been clear that we will not provide an ongoing commentary because we will need to conduct in-depth analysis when we have completed the process and ensure that the results are viewed in context, which can be done only at the completion of the testing. I cannot say more than that on the VW issue today.
I emphasise to the Committee, however, that although the VW crisis has brought things more into the public eye, the work on real driving emissions started long before the VW issue was on anybody’s radar, and that will continue. The proposal before us is about testing for all marques, not just one, and for all vehicle fuels, not just those diesel fuels used in the particular type of engine that caused the problem at VW. While VW is a part of this, that is only in the sense that it has brought the issue further into the public domain. On how we can improve performance, we are building on the success and progress that we have had on air quality over some years—we have gone from Euro 3, Euro 4 and Euro 5 up to Euro 6—and these proposals are a step change. I just want to put things in context for Members, because while that issue is related, it is not the key one.
I will now deal with some of the other questions. Provisions for small manufacturers will be discussed and agreed in the package 3 negotiations, which will take place later this year. The UK has already highlighted the importance of the matter to the Commission and is in discussions with manufacturers here, such as Aston Martin.
I can certainly confirm that discussions are continuing with the Serious Fraud Office and the Competition and Markets Authority. They are independent bodies, so it is for them to decide whether to investigate. We are fortunate to live in a country in which politicians do not direct the legal process.
We need to reflect a little on the issue of changes to measurement tolerance, which is a significant factor. The intention, with the first transition step in 2017, is that the conformity factor can be reached through software and calibration changes alone, and a conformity factor of 2.1 has been agreed. That includes any measurement uncertainty.
The second and final step, in 2020, will brings the conformity factor down to 1, which represents parity with the lab test plus, again, measurement uncertainty. Research conducted by the European Commission’s Joint Research Centre examined the various sources of error in on-road emissions measurements. Its conclusion was that there was a worst-case error margin of 0.375, which was why the UK supported 0.4 as a conformity factor. However, some member states argue that other factors that increase NOx emissions in real-world conditions should be taken into account, so an overall figure of 0.5 was agreed.
The Commission has committed to the European Parliament to review the tolerance quickly. We are dealing with new equipment and relatively new technology. The reason why such testing has been used for heavy goods vehicles before cars was simply that the equipment was so big—it could be put in the back of a truck, but not in the back of a car. We are not in that position now as technology is miniaturising. The Commission has committed to a quick review of the tolerance and possibly to moving to much tighter tolerance. We therefore know exactly the direction of travel and there is clear technological progress.
A further question was asked about reviewing our own position on real-world testing, but we have to be clear about what we are asking for before we speak to the European Commission. The Department and chief scientists are considering the matter. Once we know what must be done, we will engage with the Commission and the Joint Research Centre.
On the question of legal challenge, I think that we can be very secure and we have no concerns about that. Our legal opinion is that real driving emissions measures are consistent with Euro 5 and Euro 6 measures. We are not aware of legal challenges on that, and the Commission and the European Parliament are also content. The proposal will complement Euro 5 and Euro 6 testing in a laboratory.
Stewart Malcolm McDonald (Glasgow South) (SNP)
I promise to be brief. I have two quick questions, following on from what the Minister said about the Serious Fraud Office and the Competition and Markets Authority. Of course he is correct that those bodies are independent and must be able to make their own decisions, but the Secretary of State has the power, when he believes that an illegal defeat device has been used, to impose fines or to take legal action against a company. He has not done so, because he has come to the same conclusion as Volkswagen: what VW installed in cars in Europe does not actually constitute a defeat device. Does the Minister therefore share my disappointment that these new proposals from the Commission do nothing to alter the definition of a defeat device in Europe? Why has the Commission not gone for the American definition, which is much tougher to get around? To implement such a measure wholesale in Europe would show consumers that we take the issue seriously. Will the Minister consider the definition of a defeat device here in Europe? I urge him and the Secretary of State to get it changed quickly.
Andrew Jones
Our priority is to protect the consumer and to restore confidence in the real-world performance of diesel engines, ensuring that VW supports its UK customers. We have launched an investigation, and re-tested diesel cars to gather much-needed evidence to restore public confidence and to improve our understanding of vehicles’ real-world emissions performance. We are only halfway through that testing process. We have said that we will not bring the matter to a conclusion or take any further steps until we are absolutely clear about the extent of the problem, but we have not ruled anything in or out. We are still working and are only halfway through the process. On the definition of a defeat device, the real driving emissions proposal includes an amendment to bring requirements on defeat devices in line with those for the USA.
The Chair
If there are no further questions, we will proceed to debate the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union document No. 14506/15 and Addendum, a Commission Regulation (EU)…of…amending Regulation (EC) No. 92/2008 as regards emissions from light passenger and commercial vehicles (Euro 6); and urges the Government to continue to press for action so that EU emissions testing accurately reflects real-world performance of vehicles on the road.—(Andrew Jones.)
Richard Burden
A lot of things to talk about arise from those questions and answers. The relationship between emissions and air quality is fundamental. We know that road transport is a key cause of the pollution that is damaging public health in towns and cities in this country, in the EU and around the world, so it is absolutely right that we are having this debate. Various Committees of this House have had and continue to have hearings on this matter, but it is important that other Members have the opportunity to scrutinise Ministers, and this is one such important opportunity.
However many issues are at play, we risk them being lost or conflated if we are not clear about two things. The accuracy of emissions testing has been an issue for a long time; it has not simply come up as a result of the VW scandal. Despite the leniency of the existing EU testing regime, it appears that in the European Union, as well as in the United States, VW has been involved in actively distorting test results.
I will return to the VW aftermath later, but let us consider specifically the regulation of testing. For a long time, emissions testing has been known to be inaccurate. Given the challenges of technology and the importance of getting variables to be as similar as possible for all tests, there is a gap between lab tests and emissions tests that reflects real-life driving. Policy makers and the industry have been aware of that for a while and have worked to improve the situation. In fact, an EU working group was set up as long ago as 2011, but the response has been woefully slow.
The well-known air quality crisis facing many of our urban areas, plus the opportunity for the UK automotive sector to become a leader in developing the necessary technology, should have prompted the UK Government to push for more action much earlier than they did. Despite what the Minister says, there is little evidence to suggest that the Government as a whole have not dragged their heels. As recently as July, there have been reports that the Department for Environment, Food and Rural Affairs was briefing MEPs to oppose measures on real-life emissions testing, and it is still not clear what was happening there or, indeed, whether DEFRA was consulting DFT. It seems that it was only when the VW scandal made emissions testing a concern for the wider public that the Government felt compelled to act.
We are where we are, and the regulations before the Committee have left the European Parliament, and all of us, in an impossible position, stuck between a rock and a hard place. Plain and simple, the choice is between consenting to regulation that sets a series of standards but that, after 2020, has built into it an open-ended permission to breach those standards by up to 50%, or getting something in place now to avoid more delays and get the testing improvements that we need in the long run.
Most people accept that limitations in the technology used for testing cannot yet provide 100% accuracy in all conformity tests. That is why we will not oppose the motion, because we must be realistic and get the regulations in place for their planned introduction in 2017, which is important for policy certainty and for ensuring that air quality improvements happen as soon as possible. Lessons have to be learned, however, and the Government must realise their responsibilities.
Labour welcomes the efforts by the European Parliament and, from what the Minister says, the Government to ensure that a review mechanism is built in to the regulations. Saying that there will be a review mechanism is one thing, but ensuring that that happens and means something is something else. It is crucial that the Government do not think, “Job done,” and that pressure on that review mechanism remains. For the sake of public health, we cannot afford to have open-ended emissions breaches in real-life driving tests.
As well as advocating research into the measuring capabilities, there must be a consistent and constant review of the regime to ensure that manufacturers do not avoid limits through other means. The Minister says that all manufacturers in the UK, other than VW, have made it very clear that they have not been involved in the kinds of practice with which VW has been involved. I accept and welcome that, but it is important that the tests provide a failsafe, because public confidence is at stake. The industry is as aware of that as anyone else.
Group testing is a reasonable measure to keep costs down, but the Government must support the VCA to ensure that we get an accurate snapshot of all necessary vehicles. In the longer term, the Government have to be a leader in the European Union and press for a whole new approach that focuses on real-life driving scenarios in a way that is seen to be representative and reliable. Domestically, I will welcome a statement from the Government on what assessment Ministers have made of the Environmental Audit Committee’s recommendations for an older diesel scrappage scheme and a review of vehicle excise duty.
Beyond the regulations, we must encourage the media, publications and consumers to maintain pressure for standards to be met. Manufacturers need to be encouraged to go below the emissions standards that are set out. It is easy to think that motorists do not care about emissions, but Which? magazine’s “Come Clean on Fuel Claims” petition suggests otherwise.
Turning to Volkswagen, the public outrage at what it has done has been real and marked. Not only has Volkswagen undermined trust in that company, but public trust in the whole automotive industry has taken a knock. That industry is vital to the UK and Europe, and is doing many good things, but the impact of the scandal has been very detrimental. Its aftermath and outcome are still not clear, however, and I appreciate the opportunity to put concerns to the Minister.
When did the Government actually know? I think that the Minister touched on this earlier, but before the scandal broke in the United States—back in 2013—the European Commission’s Joint Research Centre expressed concerns about the possible use of defeat devices. Why was that allegation not followed up? There is a need for a pan-European inquiry. The Socialists and Democrats in the European Parliament are pushing for that and have written to all member states. Are the Government responding to that request and, if so, what will they be saying?
The second issue is to do with what is going on now. The crux of the matter is that still no one fully understands what has happened. Lawsuits are taking place in Germany, South Korea and the United States. There is talk of fines and compensation in some countries, but not in others. The fact that 40,000 drivers have contacted Volkswagen directly underlines the uncertainty facing retailers, workers and drivers. In October, in front of the Transport Committee, Volkswagen apologised profusely and said that it had let everyone down. Now Volkswagen suggests that in Europe the defeat devices were not actually defeat devices at all, and that it will not pay compensation to European Union owners, even though compensation might be paid to owners in the United States of America.
Part of the problem is that our Government have not done enough to press Volkswagen because otherwise why is there still so much confusion among motorists about what is going on? It took a month before Volkswagen first wrote to its customers. No cars have been fixed and no one has an idea of what impact any repairs will have on fuel economy. We need to know what needs to happen and who will pay for it. There is a real risk that the Government’s failure to handle Volkswagen properly will be seen in the same light as their handling of Google, for example. We cannot allow VW to be treated as a Google and to be let off the hook. I appreciate that Volkswagen wants to make sure that the solution does not impact on vehicle performance, fuel consumption or driveability—that is reasonable—but at the same time, the delay is causing extra problems for air quality. At what cost are we letting Volkswagen sort out the problems in its own time?
There are other concerns that the Government have to address. The latest figures suggest that the impact of the scandal on sales figures has not been as bad as was originally feared, but what if there are traceable costs for the retail industry as a whole? Years of false emissions data means, in practice, lost vehicle excise duty. Ministers have promised that drivers will not face higher tax bills as a consequence of Volkswagen’s actions, and we will hold them to that pledge. To do that, however, the Government have to be able to calculate the shortfall for the 36,000 vehicles that apparently have irregularities in not NOx but CO2.
The Government also need to look at what the cost of VCA re-testing has been and how to recover those costs. Will any fines be levied? As the hon. Member for Glasgow South said, while no one wants to get in the way of the investigations of the Serious Fraud Office or other bodies, there is still a question about whether fines could be levied and hypothecated to promote sustainable transport in the UK.
The development of an accurate emissions testing regime is fundamental to improving air quality and public health and has to be a priority for the Department for Transport. It should not have taken this long, but while the regulation is not to everyone’s liking or ideal, it is a step in the right direction. The important thing now is that the Government have to back their words with actions and not think, “Job done.” That means pressing for the Joint Research Centre to develop better measuring equipment and ensuring the VCA has the resources and finances it needs to do its job effectively.
Let us continue the re-testing, but in respect of VW, surely the time has come for the Government to give their backing to the call for a full Europe-wide inquiry. Nothing short of that will dispel the suspicion that VW could become another Google. If that impression is out there, it is bad for consumers and for the Government, but it is also bad for the automotive industry as a whole, which across the piece seriously wants to tackle the air quality challenge. Part of doing that is restoring public trust, which has to be done by drawing a line under the VW scandal, and that can only be done by maximum transparency, a proper Europe-wide inquiry and appropriate accountability being ensured.
Stewart Malcolm McDonald
We have been brought to this point by the soap opera of the Volkswagen scandal and by the fact that one in two cars sold in Europe is a diesel car. This is an enormous public health and consumer issue. I fear that the Government are at risk of sitting on their hands, as we hear that country after country in a list as long as my arm are taking action of some kind against Volkswagen. It is interesting that the hon. Member for Birmingham, Northfield mentioned the Google issue. I worry that the Department for Transport risks being seen to be as feckless as Her Majesty’s Revenue and Customs when it comes to standing up for the public interest against big corporations.
Volkswagen, quite simply, has managed to pull the wool over so many consumers’ eyes, but because of the inadequate rules here in Europe, it will probably get away with it. In the United States, Volkswagen drivers are being compensated with $500 in cash and $500-worth of credit vouchers. Here in the United Kingdom, Volkswagen drivers will not receive a single penny. What of the fact that it was a United States authority that caught out a major European car manufacturer? Not a single one of the EU’s 28 member states caught Volkswagen out; instead, it was a Californian authority.
There is undoubtedly some good stuff in the documents produced by the European Commission, but I feel an opportunity has been missed. We have an opportunity to strengthen the proposals. There are some technical elements that need to be strengthened, but really we need to see more from the European Commission to tackle the culture in the car industry and its relationship with testers and regulators across the EU. We must see proposals that put an end to manufacturers being able to shop around in Europe to get the most favourable tester to give them the results that they want. In the Transport Committee we heard evidence from Transport & Environment, a Europe-based think-tank that does a lot of work on emissions regulations. It seems strange that an awful lot of manufacturers go to Luxembourg—a country not exactly known for its car industry. What is going on in Luxembourg? What are manufacturers getting there that they cannot get elsewhere? The proposals do nothing to crack down on that, and that is where the Minister needs to focus his attention in future.
At the moment, 45 lobbyists are working in the European Parliament on behalf of Volkswagen, which over the years spent millions of pounds to get the results it wanted. My goodness, that was money well spent. Look at the result in the Parliament only last week: the right number of abstentions to ensure that these watered-down proposals, which still allow manufacturers to exceed the legal limit on NOx, went through. We must turn the corner and get to grips with an industry that for too long has perverted environmental regulations and treated consumers with disdain—an industry that does not give a damn about regulators because it has creative engineers who help it get around regulations. My fear and that of so many people who are much more qualified than me, whether those who work in the transport sector or those such as the British Lung Foundation, is that that will continue.
This is a major public health issue. We know that pollution from NOx is killing about 500,000 people across Europe every year, so I want to see some enthusiasm from the Government to get to grips with the opportunity before them. The proposals are a good starting point, but the Minister must assure us that he will put British consumers and British public health first by arguing for strengthened proposals. He could give us some confidence by taking a tougher line on Volkswagen than simply stating that it has been naughty, naughty. All of those statements, correct though they are, are a wee bit wet. People expect a bit more from Her Majesty’s Government on this, probably the biggest corporate scandal to engulf the motoring industry for quite some time. For that reason I will oppose the motion.
Andrew Jones
We have talked about critical issues in the debate, and it is absolutely right that improving our national air quality is a top priority. We must remember that the wider impacts of poor air quality are equivalent to about 29,000 early deaths in the UK. It is a huge and significant public health issue and that is an important factor.
We must also recognise the progress that has been made in tackling air quality issues by the automotive sector. Responding to challenges from Government and its own desire to improve its performance, the sector has shown creativity and determination in improving its engineering to deliver benefits for drivers and, through them, the rest of our community. We only have to look at the difference between Euro 5 and Euro 6 to see the progress made. We are looking here at how we can build on that progress.
I do not think that any Government have been complacent—far from it. However, it is fair to say that there is significant public concern on air quality issues and I share them entirely. The idea that the Government have been complacent is just wrong. In May, we abstained in protest after pressing for the introduction dates to be included in the EU motion. They were not included and we wanted them to be. I remember that particularly well because it was the first decision I had to make as a Minister and it happened about three days after the general election. It is critical to recognise that the Government have been pressing for action, and that started long before I took this job.
Have the reputations of the automotive sector and of Volkswagen been damaged by these events? Yes, it would be ridiculous to suggest that they have not been. We only have to look at the impact on share prices and sales figures to see that there is huge concern.
Stewart Malcolm McDonald
The Minister is right to say that the reputation of the auto industry has been damaged. Does he accept that the reputation of regulators in the UK has also been damaged, given that it took an American authority to find out what was going on?
Andrew Jones
I gently remind the hon. Gentleman that it was the portable emissions measurement equipment, which has been developed largely in response to the UK and others in Europe pushing for RDE, that actually enabled the investigators to unearth the VW issue in the first place. Europe is the first place in the world to introduce on-road emissions testing. The idea that we have been off the pace, complacent or asleep at the wheel is simply not true.
Has the reputation of the sector been damaged? Yes, it has. Has VW’s reputation been damaged? Yes. For what it is worth, my car has been recalled as part of the process. VW is not quite the company I thought it was when I bought the vehicle, and indeed paid extra for the environmental package as I sought to be a low-emitter driver. I am sure that the sector recognises that its reputation has been damaged. I have had that conversation with automotive industry players and with the Society of Motor Manufacturers and Traders. Real driving emissions testing is part of the answer and the key to recovering trust.
Richard Burden
I think the Minister is running two things together now; they are related, but they are separate. One is the need for real-life driving emissions testing, which is the purpose of this regulation, but the second point relates to VW and I do not think the Minister has addressed it. Before the scandal broke in the United States, in 2013 the EU Commission’s Joint Research Centre raised concerns about the use of defeat devices. I am not aware that that was followed up on. Was it and, if so, where was the follow-up? If it was not, why not?
Andrew Jones
Well, no hard evidence was shared by the Commission or the Joint Research Centre, and we cannot take action without hard evidence. It goes back to the point about real driving emissions testing being the answer. It is not a question of conflating different issues. VW and real driving emissions are separate but related issues. The VW crisis has brought to a head the work on real driving emissions, but that work started long before the VW crisis and will continue after the situation is resolved.
The Department was first aware of the situation on 18 September, as my right hon. Friend the Secretary of State said in his written ministerial statement. He has been following up on the matter and pressing VW to take care of its UK consumers. For example, he took the issue up with its UK chief executive on 10 December. There was a further question about whether VW has breached EU regulations. I have to say that it is not clear that VW has breached EU regulations, which is why the RDE package 2 agreement has included an amendment of the text relating to defeat devices to require vehicle manufacturers to declare any alternative emissions strategies.
The situation regarding compensation is also different in the USA and in Europe. In the USA, Volkswagen does not have a technical solution; in Europe, it does. However, the point remains that we are in the middle of the testing process. We have ruled nothing in or out and we will not comment further until we get to the end of the process and put all of it into context, but we will certainly speak up for UK consumers, and that is what we have done consistently.
We are committed to improving air quality, and the RDE agreement is crucial to delivering improvements in UK air quality and decreasing real-world NOx emissions. The current arrangement is the best option we have for environmental and health benefits and to ensure that vehicle manufacturers improve real-world emissions now. The implementation dates and conformity factors are challenging, as everybody in the industry recognises, but they are achievable. It is right to set demanding targets, because the goal of clean air will benefit our communities and is clearly important. It will require vehicle manufacturers to produce cleaner cars, starting next year.
I recognise that more work needs to be done at technical level. The UK is committed to playing a full and active role in finalising the remaining technical issues. We will certainly press the Commission to start a review of how RDE functions, with the clear aim of reducing the margin for measurement uncertainty that is in the final agreement.
The motion urges the UK Government to continue to press for action on real driving emissions. I am happy to make that commitment, but I hope that it has become clear in the course of this debate and in the answers that I have given that we are not just pressing for action; we are taking action, and we are leading the way on taking action. We started a long time ago, and we will continue to do so. The UK has a strong record on public health and automotive, and we have brought the two together to provide significant benefits for the people of this country.
Question put.
Protection of the EU’s Financial Interests
(8 years, 10 months ago)
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The Chair
Before we begin, I will outline the procedure. First, a member of the European Security Committee may make a five-minute statement about that Committee’s decision to refer the documents for debate. The Minister—or, in this case, the Ministers—will then make a statement of no more than 10 minutes, and questions will follow. The total time for the statement and subsequent questions and answers is up to an hour. Once the questions have ended, the Minister will move the motion and it will be debated. We must conclude our proceedings by 7 o’clock. Does a member of the European Scrutiny Committee wish to make an opening statement?
Damian Green (Ashford) (Con)
It is a pleasure to serve under your benign tutelage, Sir Edward. I will take a few minutes to explain the background to these documents and the reasons why the European Scrutiny Committee recommended this debate.
The first document is the Commission’s annual report for 2014 on protecting the EU’s financial interests, in which the Commission summarises and evaluates measures taken by it and member states to counter fraud and irregularities against EU expenditure and revenue in 2014. It is supplemented by six detailed annexes, including a statistical evaluation of irregularities reported in 2014, a follow-up to recommendations to member states in the 2013 report, and the methodology regarding the statistical evaluation of reported irregularities for 2014.
The European Court of Auditors must report each year on implementation of the EU’s annual general budget and the European development funds for development aid. The second document is the ECA’s 2014 reports on the general budget and the EDFs budget. The documents also contain the statements of assurance—commonly referred to as the DAS, from the French—concerning the reliability of the accounts and the legality and regularity of the underlying transactions that the ECA is required to produce.
Because the ECA’s annual audit reports have for many years revealed serious inadequacies in the implementation of the EU general budget, it has become customary each year for the latest report to be debated with the Commission’s annual anti-fraud report. Although the current ECA report affirms the reliability of the accounts for the 21st successive year, there is not a positive statement of assurance, so the European Scrutiny Committee had no hesitation in recommending that this document be debated. We suggested that Members might wish to focus on the Government’s efforts to improve EU financial management. They might also examine the ECA’s comments about the ineffectiveness of some of the UK’s management of EU funds, the Government’s response, and the reasons for the welcome that the Government gave to the qualified statement of assurance in the report of the European development fund audit.
The Financial Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to serve under your chairmanship, Sir Edward. It is also a pleasure to be joined by the Minister of State, Department for International Development, my right hon. Friend the Member for New Forest West to discuss the three reports outlined by my right hon. Friend the Member for Ashford. The Government welcome the three reports—the European Court of Auditors’ annual audit report for the 2014 budget, the ECA report on the European development funds in 2014 and the European Commission’s “Fight against fraud 2014 Annual Report”—which continue to play a key role in informing the UK’s approach to EU fraud and financial management. The Council vote on the discharge of the EU budget in 2014 will take place at ECOFIN on 12 February and will be discussed in COREPER the day after tomorrow. The Government’s priority is to hear the Committee’s contributions on EU fraud and financial management before those meetings.
As the Committee is aware, the Government take a tough stance on EU financial management. The Prime Minister’s 2013 deal, which represented the first ever real-terms cut to the EU budget framework, set the context and imposed financial constraints that are forcing the Commission to prioritise spending and focus on value. Against that backdrop, we welcome the European Court of Auditors’ report on the 2014 EU budget, which, in particular, increased the focus on performance and results.
Compliance is important, but without considering performance we will never achieve the maximum value for money. It is necessary, but not sufficient. As Vice-President for budget Kristalina Georgieva said, a 100% compliant road to nowhere
“is a 100% waste of our taxpayers’ money”.
We are therefore pushing hard for a more effective EU performance framework that delivers results.
Proper financial management is essential and it is clear that the ECA’s verdict on the EU accounts does not yet give taxpayers sufficient confidence in the system. While EU revenues and commitments were given a clean audit, the Government regret that there has been no significant improvement in the estimated level of error for EU payments. Consequently, the ECA has been unable to grant EU budget expenditure a positive statement of assurance for the 21st consecutive year. This estimated level of error in the EU budget—reflecting expenditure that is not compliant with EU regulations—stands at 4.4%, which is well above the acceptable 2% threshold, and shows only marginal improvement on last year’s 4.5% error rate. We are not achieving the rigorous standards of budgetary management that we expect to see at EU level. We are therefore pushing all those involved to make further improvements.
Until the 2009 audit, previous Governments had consistently voted to approve the discharge of EU annual budgets. However, in 2010, under the current Chancellor, the UK took the unprecedented step of abstaining on the Council decision to approve the Commission’s management of the EU budget. Subsequently, for the past four years, the UK has voted against the discharge of annual EU budgets. We intend to continue to do so this year, issuing our own counter-statement calling for an increased focus on performance and setting out our own recommendations.
On EU spending in the UK, I am pleased to confirm that where the ECA has identified specific cases of potential weakness in the UK, the relevant authorities have engaged with the Commission and the ECA to resolve those issues. In the majority of cases, the necessary recovery action or sanction has either been completed or is under way.
Finally, I turn to the Commission’s report on the fight against fraud in 2014. Based on Commission estimates, established fraud is likely to affect only about 0.02% of EU payments. None the less, any fraudulent misuse of EU funds is unacceptable. That is why the Government take a zero tolerance approach to such criminal activity by fully supporting anti-fraud in the EU, including co-operating with the European anti-fraud office, OLAF.
I want to conclude by assuring the Committee of the Government’s strong commitment to improving EU budget management, borne out by our focus on three key areas: driving simplification to reduce compliance errors; encouraging a sharper focus on performance and results; and continuous improvement of domestic control systems to ensure the effective management of EU funds in the UK.
I will now hand over to the Minister of State, Department for International Development, to say a few words about the report on European development funds. I look forward to the subsequent debate.
The Minister of State, Department for International Development (Mr Desmond Swayne)
Mr Leigh, I had not realised that the statement was voluntary. Had I done so, I might have chosen not to make a statement. However, on the basis that I have prepared one, it is probably best if I deliver it.
Mr Swayne
I will endeavour to do so.
The issue is of enormous importance to DFID, given that 11% of our official development aid is spent through the EU institutions. It is vital that we ensure it is spent well and according to our own priorities and objectives, to which end we employ 19 officials between Abercrombie House in East Kilbride and No. 22 Whitehall to ensure that that is the case, and we deploy 26 officials as secondees to the European institutions directly. Their main effort is to ensure that the EU’s priorities align with ours and that their procedures and standards reflect ours.
I come to these debates with a certain prejudice. When people complain to me about the unsatisfactory nature of European institutions, I am inclined to say, “Not me, guv. I voted no in 1975.” Nevertheless, notwithstanding such prejudices, I have been impressed by the quality of European aid delivered by the European institutions. What is more, when overseas in some of the countries in which we operate, I find that humanitarian staff are equally complimentary of the quality of European aid. Having read the documents, which are not a particularly good read, it seems that the EU is delivering high-quality aid in spite of lapses in some of its management systems. It is vital that we get on top of that, so that those management systems do not begin to undermine the quality of European aid.
We are concentrating on various aspects of the EU’s procedures. Members of the Committee may remember that we focused last year on the results framework and how results are calculated. We are currently working on a review of procurement and counter-fraud policies. There is an element of frustration in dealing with the reports, because the Committee will appreciate that we made all sorts of observations and criticisms last year that we would expect to be taken into account, but the period covered by the report precedes the criticisms that we made last year, so there is an element of catch-up. It will take time for our observations and demands to be reflected in the reports that we see before us.
As for the development funds, I expect that the auditors will be quietly confident that the appropriate level of seriousness is being attached to the criticisms that were made, but there is an elephant in the room, namely, the European Parliament’s report of some two weeks ago, which made headlines in The Times in London. It reported that half of EU aid is wasted, more specifically that 53% of €20 billion will not be deployed and will not deliver the intended effects.
However, as Field Marshal William Slim used to observe, nothing is ever as bad as first reported. It turns out that it was a report not of the European Parliament but of a Member of the European Parliament who had access to an external assistance management report that was published on the European Parliament website in what I would call a rather unnecessary and unwise fashion. We would not publish live management documents of that sort. Some Members may recall the arguments in the previous Parliament over just such a management document: the risk register. This document is a risk register, on which officials would be expected to record everything that could possibly go wrong unless steps are taken to prevent it from going wrong. The document’s purpose is to ensure that action is taken to prevent that.
Nevertheless, the document has been used to draw up the criticisms that were made, in particular that it will take some 27.5 years to disburse the commitments that have already been made to development projects. That shows the limitations of using a management document that is a snapshot. There will be always be points in a development cycle when more will have been pledged than has actually been deployed and disbursed, particularly in a humanitarian environment such as we have at the moment, with huge crises in Syria, Yemen and South Sudan. Large amounts may have been pledged, but not actually disbursed. I would be more concerned about criticism that we were shovelling money out of the door rather too fast in order to meet commitments, rather than dealing with them proportionately. Typically, a European project lasts some four years, which is to be expected in the circumstances.
Nevertheless, the European Court of Auditors judged that the cost-effectiveness and efficiency of controls have not been demonstrated and it is therefore important that an action plan to deal with that is put in place. That action plan involves intensive management training to ensure that officials comply with the rules, and the deployment of new financial tools to ensure that they are complied with.
In 2011, the financial resource management estimate that we made for the European Union in our own multilateral aid review was that it was actually very good. We have to see this report in that context, but it is vital that this is got right, because one of the most corrosive things in relation to international development is the undermining of public confidence in our commitment through people being told that the money is wasted. Therefore, we have to deal with these issues to ensure that there is no question of that arising.
Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to appear before you, Sir Edward; I do not think that I have had the pleasure before. I have a brief question for the Financial Secretary to the Treasury. I understood him to say that 0.2% of EU spending was thought to be subject to fraud. Have the UK Government made an assessment of the level of fraud and irregularities, which can be different, relating to the UK’s share of that EU expenditure?
Mr Gauke
I thank the hon. Gentleman for his question. It is 0.02% that is identified as being fraud. I think that a slightly larger number is suspected of and looked at as being fraud, but when it comes down to it, only 0.02% is established as being fraud.
In terms of the UK comparison, it can be difficult to make exact comparisons. All managing authorities across the UK have in place robust anti-fraud measures. Those include fraud risk assessments, mandatory checks on payments, fraud awareness training and regular referrals to OLAF where suspected fraud arises. We also support OLAF through the work of the designated UK anti-fraud co-ordinator, AFCOS, which is based in the City of London Police alongside Action Fraud. AFCOS continues to engage actively with OLAF and other member states to investigate and bring criminal proceedings against perpetrators of EU fraud. It would also be fair to say, looking at the ECA’s assessment of member states, that it samples member states’ activities; it is not intended to be a thorough audit of each and every member state to produce those numbers, so there is not a specific UK error rate on fraud, just as there is not for financial management errors.
Kelvin Hopkins (Luton North) (Lab)
It is a pleasure to serve under your chairmanship, Sir Edward. Hon. Members may notice a sceptical note in my questions, but—[Interruption.] They are just very accurate. We are a very substantial net contributor to the European budget, and 4.4% of the budget going amiss is the equivalent of certainly £1 billion and possibly more. Should we not be more concerned than some of the large recipient countries, because it is our money that is going into the wrong pockets?
Mr Gauke
It is certainly right that we should be concerned about that money. That would be the case regardless of whether we were a net contributor, but the hon. Gentleman makes a fair point: we make a substantial contribution to the EU budget every year. The UK has traditionally played a leading role in ensuring budgetary discipline in the European Union, and I highlight the Prime Minister’s achievement in 2013 of a real-terms cut in the EU budget for the multi-annual financial framework. An important area for us is ensuring that money is spent wisely and that we do not spend too much money at an EU level. We are a strong advocate of sound financial management and are committed to ensuring that EU funds are safeguarded and managed well. The Commission has ultimate responsibility for the implementation and management of the EU budget, but all member states, including the UK, must take responsibility in terms of putting pressure on the Commission and ensuring that money spent by member states is spent well.
Kelvin Hopkins
No doubt there are particular budgets that are more vulnerable and particular countries where the budget is not as appropriately controlled as it might be. The Financial Secretary talked about simplification. Are the British Government targeting certain areas and do they have concerns about particular countries where the budget might not be appropriately spent?
Mr Gauke
In terms of the UK’s action in this area, we have in place comprehensive procedures to ensure that EU funds comply with UK and EU rules, including a role in programme audits and preventive anti-fraud measures. The hon. Gentleman raises concerns about particular areas. Structural funds, for example, which are a sizeable part of the EU budget, have to be focused upon. The Commission set up a high level group on European structural investment funds simplification last year, whose work is ongoing. Although the agenda is in its early stages, the UK continues to engage actively by advising on simplified costs and financial instruments.
In agreeing the terms of the 2014 to 2020 structural funds regulations, the UK actively pushed for and achieved greater use of simplified costs, reductions in document retention periods, and lighter and more automated annual reporting. In terms of good practices, DCLG’s work in improving public procurement procedures was highlighted in an ECA special report last year. The Department has set up an internal network to review public procurement issues, including the issue of guidance, case studies and reviews of public procurement checks and audits.
As I have said, the UK takes this matter very seriously. Although the Commission has ultimate responsibility for implementation and management of the EU budget, we have a role in taking responsibility to push for reforms.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
It is a pleasure to serve under your chairmanship, Sir Edward. May I say I admire how you have generated such a beautiful gender balance on the bench beside you?
I have two questions, if I may. My first is for the Minister of State. I am interested in this issue because I have spent much of my life in parts of the developing world and on aid projects. I have a very precise question, but, by way of a short preamble, I have a lot of sympathy with those who are at times critical of agencies that operate internationally. At one stage in my life I was in Yemen to look at a college built with World Bank money and with United Nations Food and Agriculture Organisation development. My terms of reference were simple: we have built this building, now tell us what to do with it. It was not necessarily the best project that had been set up. The Minister mentioned the recent report, published on the EU website, on the amount of money wasted. He said that in his and the Government’s view, the report was “very good”. Will he explain precisely what “very good” is?
Mr Swayne
I was referring to the multilateral aid review that we carry out periodically. The last update was in 2011. We assess the effectiveness of all the multilateral organisations through which we operate as a prelude to deciding on what terms we are prepared to continue using them as development partners. The EU institutions are part of that review. Specifically, we judged their financial controls and their effectiveness in deploying the finance that they are given to deliver projects on the ground to be very good. I said that to counter the criticism set out a couple of weeks ago that they are too slow and that it will be 27.5 years before they can deploy the finance that they have been given. That is a snapshot, or the use of a management tool to draw a wholly inappropriate conclusion.
Roger Mullin
My supplementary to the Financial Secretary is also about the international aspects of fraud. Many projects funded through the European Union require multinational partnerships. I am aware that some fraud has occurred in more than one member state. Does he have a general view of how the UK compares with other EU member states on multinational projects?
Mr Gauke
There is a general view that the UK is strongly determined to address fraud. We have a strong record of budgetary discipline in the EU and with multinational projects, and we have demonstrated that we take fraud very seriously.
From the documents before us, it is hard to draw comparisons between the UK and other member states. There is no directly comparable error rate for the UK’s management of EU funds against which the ECA’s error rate for the EU budget can be measured. To our knowledge, there are no national accounts of major economies, including the UK’s, that can be meaningfully compared with the ECA’s audit of EU accounts. Only a few countries—the UK is one—produce whole of Government accounts. It is hard to compare precisely our record with those of other member states or countries outside the EU. The UK remains determined to root out fraud, wherever it might be.
Stephen Hammond (Wimbledon) (Con)
Like so many others, I want to say that it is a pleasure to serve under your chairmanship, Sir Edward. I confess to my right hon. and hon. Friends on the Front Bench that I have not read these documents cover to cover.
Stephen Hammond
It is indeed shocking, although I thought it would be more useful to spend my weekend trying to ensure that my hon. Friend the Member for Richmond Park (Zac Goldsmith) is elected in May.
I agree with my right hon. Friend the Member for Ashford that it is shocking that this is the 21st year in which the accounts have not been properly audited and signed off. That would not be acceptable in the financial world. With my financial hat on, I read three of the chapters, and I would like to test something with the Financial Secretary. Chapter 3 is about getting results from the EU budget. The common themes include poor performance setting, poor planning and objectives that are not fit for management purposes. My hon. Friend will have noticed that it states that budgetary strategy is not aligned with political strategy, which is an explicit criticism of the inability to make proper financial judgments.
Hidden in the documents—the Commission did not even bother to reply—is paragraph 3.79, which gets to the heart of the lack of results in partnership arrangements. I would like to hear from my hon. Friend exactly how the Government will put pressure on the Commission to respond with more a bit more force than its bland statements.
Mr Gauke
My hon. Friend raises an important point. It is traditional in these debates that we focus on error and specifically on fraud, but as I touched upon in my opening remarks the focus on performance should not be forgotten. We welcome the ECA’s increased focus on performance while retaining its valuable role on compliance. That shows there is recognition that compliance without performance will achieve little. Strengthening the ECA’s work on performance could help to maximise the efficiency, economy and effectiveness of EU spending.
It is also in line with Vice-President Georgieva’s budget for results initiative, which aims to develop a more performance-orientated budget that delivers tangible results for EU citizens. We see this as an important opportunity to help to improve the transparency of EU spending to taxpayers, and its value and efficiency. My right hon. Friend the Chancellor made our position clear at ECOFIN last year.
We are working closely with the Commission on this issue, offering our expertise in areas such as transparency and value for money. The Commission is keen to drive this agenda forward. In particular, it is our priority to ensure that this work feeds into the mid-term review of the multi-annual financial framework this year. It is important that the work in this area is joined up with other related initiatives to improve budgetary management, such as proposals for simplification of the common agricultural policy and structural funds, which were launched earlier this year by the Commission, and the wider mid-term review this year.
My hon. Friend the Member for Wimbledon raises an important point. Having heard Vice-President Georgieva discuss these matters on a number of occasions, I know that she is clearly very personally committed to a move towards ensuring that performance is at the forefront of how EU money is spent, and that is an initiative that we support and welcome.
Stephen Hammond
I am grateful for that response and I am sure that many in this Committee will hope that Vice-President Georgieva’s performance will show the result of that next year.
The one other issue that I just wanted to raise with my hon. Friend is the contentious nature of state aid rules and infringements, because obviously that goes quite far towards the heart of trade. Paragraph 6.39 indicates that there were 14 projects that infringed state aid rules and the Commission’s response is, “We’ll deem whatever action’s necessary.” Given that these projects are obviously usually highly controversial and get to the source of quite a lot of disagreements, can he assure the Committee that we will be pushing the Commission to act where deemed necessary so that action is taken?
Mr Gauke
In terms of UK infringement of state aid rules, the mandate of the relevant audit authorities for structural funds in the UK includes checks on compliance with state aid rules. The UK project reference here is not identified by the ECA, so it is not possible to comment on the nature of the errors. However, if my hon. Friend’s concern is about ensuring that state aid rules are properly enforced, I say to him that we will continue to push the Commission to focus on the areas of greatest error, and we think that that would be beneficial in ensuring that the EU state aid regime works as effectively for Europe as it can.
Rob Marris
I have a question for the Minister of State. In her explanatory memorandum dated 10 December, Baroness Verma, the Under-Secretary of State, Department for International Development, pointed out that the European development fund is the European Union’s main development co-operation instrument and that the total budget for it in 2014 was £34.5 billion. She also said that about 15% of that came from the United Kingdom. I say “about 15%”, because in paragraph 2 she says it was 14.68% and in paragraph 21, on page 391 of the bundle, she says it was 14.82%—it is about 15%. The Minister of State referred to 11% of DFID’s budget being spent via the European Union. Could he say briefly what the process is for deciding the percentage of DFID’s budget that is spent via the European Union?
Mr Swayne
The fact that 11% of our overseas development aid goes via the European Union is not inconsistent with the fact that 15% of what the European Union spends is accounted for by us. I am not quite sure how that works out mathematically, but I am confident that it is true. The issue of how much is spent—how much comes from us—is an assessment of our share of the European budget. My understanding is that that works on the same basis—[Interruption.] The seventh cavalry has arrived. The ratio of UK funds to the EDF is determined by our gross national income at the beginning of the period. Well, there it is.
Kelvin Hopkins
I have one or two questions for the Minister of State. I have attended many such European Committee debates over the past 19 years. There have been concerns in the past about the allocation of aid by the European Union, including that it is less efficient and less well-directed than British Government aid, but the Minister seems to suggest that that is no longer the case. There were two specific accusations: that the aid was not directed to those most in need—the poorest countries, such as sub-Saharan Africa—and that there was a bias towards the better-off Francophone countries around the Mediterranean. Can the Minister tell us whether that matter has been addressed?
Mr Swayne
The hon. Gentleman refers to the fact that he has experienced these Committees over a number of years. I wonder if it has occurred to him that there is at least a possibility that this might be the last such feast he has to attend, depending, of course, on a democratic process somewhat down the road. Nevertheless, with respect to the substantive issue he raises, I am certainly alive to that concern. I came to this role with a whole series of prejudices that have largely been dispelled in respect of the quality of aid delivered by the EU institutions.
Mr Swayne
There are other priorities.
Given that we spend 11% of our official development aid through the EU institutions, it is important that they reflect our priorities, including that of concentrating on the poorest, rather than on those groups mentioned by the hon. Member for Luton North. I am confident that we have been moving the European Union much more significantly in that direction. I am also satisfied with the progress of the reform programme, certainly in respect of gender—I think we have scored highly on moving the goalposts towards where we want to be.
The Chair
If no more Members wish to ask questions we will proceed to the debate on the motion. I call the Minister to move the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 11470/15 and Addenda 1 to 6, a Commission Report: Protection of the European Union’s financial interests—Fight against fraud 2014 Annual Report, and unnumbered European Union Documents, the European Court of Auditors’ 2014 Annual Reports on the implementation of the budget and on the activities funded by the 8th, 9th, 10th and 11th European Development Funds; agrees that budgetary discipline and robust financial management at all levels remains crucial, and that EU taxpayers must have confidence that their funds are being effectively managed and implemented at an EU level; expresses disappointment that the error rate for EU budget payments shows only a slight improvement on last year; supports the Government’s efforts to continue to engage with the Commission and Member States to drive improvements to reduce the error rate, in particular, advancing the simplification agenda; stresses the importance of the EU budget achieving results as well as being compliant; and presses the Commission for a clear action plan to address the European Court of Auditors’ recommendations relating to the European Development Fund in order to improve its error rate.—(Mr Gauke).
Rob Marris
I have a few minutes of remarks, Sir Edward, but I know that you wish to make progress.
Rob Marris
Please do not tempt me. I congratulate the Financial Secretary to the Treasury. The European Commission report came out on 31 July and he signed off the explanatory memorandum for Parliament on 24 August—during the holiday period. Clearly his family never get their holiday though, and I urge him to change that. Similarly, the Minister in the House of Lords, Baroness Verma, promptly signed off her explanatory memorandum on the European foreign aid report from the Court of Auditors on 10 December, and here we are having a fairly prompt debate.
The explanatory notes, as ever, are helpful—the Financial Secretary knows my penchant for reading explanatory notes carefully. Paragraph 2 refers us to the report:
“The report summarises and evaluates measures taken by the Commission and Member States to counter fraud and irregularities against EU spending in 2014.”
That is a major area of concern, as my hon. Friend the Member for Luton North mentioned. Page 2 of the document from the European Parliament refers to the amount of fraud, saying
“the Commission estimates that tax fraud in all its forms amounts to EUR 1 000 billion in the EU, or EUR 2 000 per European citizen.”
That is a huge amount of tax fraud.
The reports deal with the monitoring and auditing to see that there is not fraud—not only tax fraud, but fraud and irregularities in other spending. The Commission report on page 21 of the bundle refers to measures already taken and to AFCOS, to which the Financial Secretary to the Treasury referred earlier. It also refers to
“a draft directive on the fight against fraud by means of criminal law, proposed in July 2012,”
and goes on to refer to
“a draft regulation on the establishment of a European Public Prosecutor’s Office (EPPO), proposed in July 2013.”
The EPPO would be established under article 86 of the treaty on the functioning of the European Union. I hope that one of the Ministers present—I imagine the Financial Secretary to the Treasury—will be able to indicate what progress is being made on that draft directive and that draft regulation. With the passage of time, I hope that there has been progress.
There is a huge problem with fraud and irregularities, not just in terms of tax. What is meant by irregularities? Just as my father used to say—I do not know why he used this example—all St Bernards are dogs, but not all dogs are St Bernards, so all fraud is an irregularity, but not all irregularity is fraud. An irregularity can occur when a beneficiary is not in compliance with the EU rules, which could be down to a genuine mistake.
Kelvin Hopkins
Should we accept that the term “irregularities” is merely a euphemism for fraud and that we should use the term “fraud” when we mean it?
Rob Marris
That is not my understanding of how the term “irregularities” is used in Euro-speak. It could be that there is non-compliance with the rules, but the reason for that non-compliance is not fraud but, for example, laziness, misunderstanding and so on. It does not necessarily have what us lawyers would call the mens rea for fraud.
Kelvin Hopkins
It is perhaps the same as the difference between tax avoidance and tax evasion.
Rob Marris
That is perhaps not the greatest of parallels, but I understand where my hon. Friend is coming from. Of course, tax avoidance is not illegal, but tax evasion is. Nevertheless, some tax avoidance—by, for example, Google—raises serious questions that my hon. Friend and I would agree on.
There is a great deal of difficulty with the error rates, some of which, again, will be driven by fraud and some by non-fraudulent irregularity. Take, for example, funds for jobs and growth on page 382 of the bundle. The hon. Member for Wimbledon talked about chapter 3, but, as lawyers often do, I went to the back to get to the juicy bits. The explanatory memorandum dated 9 December that was submitted by HM Treasury refers to chapter five of the European Court of Auditors annual report. That chapter is on funding for jobs and growth, for which research and innovation accounts for 60% of spending. At paragraph 16, the explanatory memorandum states:
“The estimated error rate for this area of expenditure is 5.6%, an increase on 4.6% for the 2013 budget.”
It refers to the European regional development fund and the cohesion fund. It states in paragraph 20, on page 383 of the bundle:
“The overall estimated error rate is 5.7%, an increase on 5.3% for 2013.”
The bête noire, of course, is the common agricultural policy and the common fisheries policy. Paragraph 26 states:
“The ECA estimates that the overall error rate for this area of expenditure stands at 3.6%, the same as in the 2013 budget.”
There are considerable concerns about error rates. A company trading in Britain, for example, with an error rate of 3.6% in its accounts would be open to serious questions about whether it knew what it was doing. The situation is more difficult with the number of member states in the European Union and the number of disbursements that they make to the hundreds of thousands of individuals and organisations in the European Union, but that is quite a large error rate.
In paragraph 4 of the Financial Secretary’s helpful explanatory notes, he refers to
“the various initiatives taken by the Commission in 2014 to counter fraud affecting the EU budget”.
If you will forgive me, Sir Edward, I will, because I have questions on these points, read out quite a long quote from paragraph 4. It concerns a series of 10 different areas and, with your indulgence, it will be simpler if I just read those out. They will then be on the record in Hansard. The areas are:
“negotiations between the European Parliament and the Council on the proposed Directive on the protection of the EU’s financial interests by means of criminal law; ongoing negotiations concerning the proposal to set up a European Public Prosecutors’ Office”—
I referred to that earlier—
“a Commission proposal to partially revise the Financial Regulation to align it with the revised public procurement Directive; the 2014 Communication on fighting corruption in the EU; negotiations relating to four delegated and four implementing Regulations on the reporting of irregularities; actions concerning anti-fraud policy in customs; measures taken to fight against VAT fraud; negotiations to include anti-fraud provisions in international agreements; the entry into force of new public procurement rules; a Directive on protection against currency counterfeiting; and progress on the implementation of the CAFS and Hercule and Pericles Programmes.”
For those hon. Members who have temporarily forgotten, Pericles is a European Union exchange, assistance and training programme for the protection of the euro against counterfeiting, so it is not directly of interest to the United Kingdom, but is indirectly; and Hercule is the European Union programme to promote activities related to the protection of EU financial interests, which is very much of interest to the United Kingdom. I therefore hope that the Financial Secretary, either today or perhaps later in writing, can give me and the rest of the Committee an indication of what is happening as regards those 10 items of anti-fraud policy at European Union level, helpfully delineated in the Minister’s explanatory notes, and of how the European Union, in co-operation with the United Kingdom, is getting on in those areas.
The explanatory notes, at paragraph 7, say:
“The Commission considers that Member States have, in general, adequately implemented the recommendations in its 2013 report, for example, the designation of an AFCOS”.
I hope that the Financial Secretary can say a little more about what is going on in that regard.
The explanatory notes also say, at paragraph 14:
“The use of false or falsified documentation or declarations remained the most common type of fraud.”
The Financial Secretary will remember the debate that we had in Westminster Hall on 14 January regarding VAT fraud on online purchases. Online retail purchases in the United Kingdom have gone up by two thirds since 2010. It is a growing area and will continue to grow as an area of retail sales. One hopes that there will not be a commensurate growth in fraud, but that is of great concern.
The note from the European Parliament—this is on page 2—states:
“Two directives were also adopted in 2013, one on the common system of VAT concerning an optional and temporary application of the reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud, the other concerning a quick reaction mechanism against VAT fraud”.
Will the Financial Secretary indicate, first, what a reverse charge mechanism is in relation to supplies of certain goods and services susceptible to fraud, because I do not know, and, secondly, what is being done about it? Clearly the European Parliament thinks it is a problem, and so do the member states, because a directive was adopted in 2013, more than two years ago—perhaps three years ago.
The second directive is a quick reaction mechanism against VAT fraud. Will the Financial Secretary enlighten us on what the European Union and, indeed, the United Kingdom are doing about a quick reaction to VAT fraud? As he will remember, considerable concern was expressed in the Westminster Hall debate of 14 January on both sides of the House about VAT fraud in online retail. VAT fraud does not only happen in online retail, but online retail is perhaps more susceptible to VAT fraud, as it is more difficult to address. As I have indicated, online retail is a growing area of commercial activity, and it is very big in this country.
Paragraph 22 of the Financial Secretary’s helpful explanatory notes refers to four specific recommendations contained in the report from the Commission on financial interests:
“urging Member States to use their AFCOS to its full potential; encouraging Member States to put in place effective measures to tackle conflicts of interest; asking specific Member States to strengthen their detection and/or reporting of fraud against the EU budget; and inviting Member States to inform the Commission of measures taken to fight customs fraud.”
Can he indicate, either today or later in writing to members of the Committee, what is happening in each of those four areas in terms of both the United Kingdom and the European Union? The report has indicated that something should be happening in each of those areas.
The European Parliament report—this is on page 4 —states:
“Particular attention should also be paid to the development of mechanisms for prevention, early detection and customs transit monitoring”.
Can the Financial Secretary enlighten the Committee on what customs transit monitoring is? I suspect, perhaps wrongly, that it could be related to VAT fraud, which is of considerable concern on both sides of the House.
Paragraph 36 of the Financial Secretary’s helpful explanatory notes—he has repeated this today—states:
“The Government believes that the best way to reduce the level of irregularities and fraud is through a more preventative approach, such as greater simplification of the systems and regulations.”
I agree that simplification is desirable—he and I have discussed it many times over the years—but I draw his attention to paragraph 14 of his own explanatory notes, which I read out earlier, regarding the use of false and falsified documentation or declarations. Some of that might be addressed through simplification, but if false documents, et cetera, are the most common type of fraud, as he indicates in paragraph 14, I suggest that simplification, as per paragraph 36, although welcome, is not necessarily the best way to address false documentation. I hope he can enlighten the Committee as to what Her Majesty’s Government propose to do about false documentation.
Kelvin Hopkins
It is interesting to sit on one of these Committees for possibly the 19th time. I have debated in almost all of them, if not in every one. I was a permanent member when there was fixed membership of such Standing Committees, and for several years I have taken part in debate on the issue we are considering, as a member of the European Scrutiny Committee.
It is amazing that no one has said how unacceptable and astonishing it is that for 21 consecutive years the European Court of Auditors has failed to sign off the European Union budget. If the National Audit Office could not sign off the budget of a Government Department for 21 years, and up to 4.4% of the Department’s funding had gone missing through fraud or irregularities, there would be a scandal.
We should raise our concerns again. We cannot just roll over and say, “Oh, well, it’s the European Union. What do you expect?” We should say it is not right. People’s money is involved—that is particularly an issue for substantial net contributors, of which we are one. We should not accept fraud or corruption, especially when, as I suspect, it happens in particular countries, and is less likely to happen in the United Kingdom and some of the better regulated countries. Perhaps I am claiming too much, but I suspect that certain countries and budgets in particular are involved.
I remember, going back years, a report of a beef subsidy being paid to a resident of a tower block in Turin. I suspect that there were not too many beef cattle in his tower block flat. I hope that these more extreme cases have been dealt with; nevertheless, there are clearly still things taking place that should not be. I hope that the British Government will take issue with the European Union over the matter in the strongest terms, once again. As the International Development Minister said, this sitting may well be the last of its kind. Who knows? I would certainly vote for that—not, I may say, with all my Opposition colleagues. Some of us, however, do take that sensible view, as I would describe it.
The level of corruption is ridiculous. Because of my concern, I made a serious suggestion in previous Parliaments that I want to repeat now. Let us consider, setting aside aid that goes to countries outside the European Union, fiscal transfers between members of the European Union. They could be made to member states’ Governments, so that there would be a net contribution to the budget of Latvia, for example. I know that there is a substantial net contribution to Latvia, and that a high proportion of its gross domestic product comes from European Union transfers.
If the transfers were done on the basis of GDP per head, so that those with the lowest level of GDP per head received the most net transfers, and those with the highest made the biggest contributions, but it was done to and through Governments, I think we would overcome much of the problem. The Governments of those member states would have the job of sorting out how the money would be spent—whether they would subsidise agriculture or industry, or simply reduce taxes. Whatever they did, it would be their choice, and they would do it democratically through their own Governments.
That would be seen as fair because rich countries would be contributing assistance to poorer countries on a proportional basis.
Rob Marris
My hon. Friend raises the intriguing prospect of a European Union Barnett formula, such as we already have, of course, in the United Kingdom. Perhaps I may take him back a bit, to his reference to fraud of more than 4%, and contrast that with what I understood from the Minister. Perhaps this is a comparison between apples and oranges, but the Financial Secretary mentioned 0.02%. There is a big discrepancy between those two figures. From where did my hon. Friend get his figure—or are we talking about two different measurements?
Kelvin Hopkins
I took my figure of 4.4% from the Minister at the beginning, but I notice that the table on page 37—or 21; there are two figures—suggests that the actual amount involved is €500 million, as opposed to 4.4% of the budget, which would be much more. Nevertheless, substantial fraud is still going on, and substantial sums of money are still going missing inappropriately and sometimes corruptly, so we ought to take it seriously.
My suggestion for simplification is that even if we stay in the European Union, the budget should be allocated simply on a proportionate basis according to GDP per head, so that the fiscal transfers are from rich to poor and the countries themselves decide democratically how they allocate that budget. We would have the same privilege as well if we were in that position. If they want to subsidise their agriculture, they can; if they do not, they should not.
I was in Lithuania a couple of years ago with the European Scrutiny Committee. Lithuania used to be self-sufficient in food, but it is now being paid not to grow food, so thousands of acres in Lithuania are left fallow because the European Union does not want it producing too much food. That is nonsense. Lithuania ought to be able to decide for itself what it spends its income on. If it wants to stay self-sufficient in food, that is a sensible thing to do.
As I said, I put this particular suggestion in more than one previous Parliament, and the response—not to me personally, but in European documentation—suggested that people did not like it. The reason was clearly that it would weaken the glue holding the EU together, because there would be no European common agricultural policy—or fisheries policy; it would be very sensible to get rid of that. Instead, each country would get a fiscal transfer, or pay out a fiscal transfer, and expenditure would be decided democratically within member states.
That would make the European Union a very different place. If we must have a European Union with large fiscal transfers, it would be a much more sensible way to do it, and we would avoid all the problems with fraud. If there is fraud within countries, it would be their problem to sort it out. If they did not sort out their own fraud, it would in a sense be their problem, and it would be the problem of the democratic electors of those countries to ensure that their Governments did the right thing. Anyway, those are my thoughts. I think it is ridiculous that we have a vast amount of fraud every year, year after year.
I have one final question to the Minister. There is a table on page 129 showing the evolution of budgets and payments from 2010 to 2014. Interestingly, in the last four years, the payments made have been larger than the final voted budget in each case. The last time the payment was less was in 2010. Also, the amount spent on the budget increased substantially between 2010 and 2013, by 21% over those three years, which is way beyond inflation. Last year, because there was such pressure and such concern, it decreased, but payments made were still higher than the final voted budget.
Even over those four years, there is still a 17% increase in budget expenditure, at a time when we are supposed to be more concerned about reducing spending in the European Union. Can the Minister comment on that? He might be able to explain it simply to me as a problem that is not serious, but it looks serious in the table, given the calculations that I have suggested.
Roger Mullin
Of course it is a terrible problem—absurd, in many ways—that for 21 years a budget of this scale has not been signed off. A major concern on which people have concentrated in this debate so far has been fraud. One thing that we know about fraud is that often it can be underestimated, particularly in situations of great complexity involving many partners. That is the situation that we face, so we must take it seriously, but if I knew what the solution was, I would have mentioned it long before now, because this is a difficult matter.
One of the things I agreed very much with in the Financial Secretary’s opening remarks was when he hinted that we needed to move much more towards being concerned about outcomes. As we know, many types of European projects involve a fascination with measuring every input—in education projects, for example, every partner often has to record every single teacher and every single hour worked every day on a particular project. More and more, as that builds up in many projects, with many partners, over many years, that can create circumstances in which those who are less scrupulous than others might find an easy way to massage how they record inputs, showing much less concern for moving projects further towards achieving the necessary outcomes. I am not sure of the solution, but the Financial Secretary was wise to say in his opening comments that the Government want to see more pressure towards concern about the impact and outcomes of such projects.
I also share some of the scepticism expressed by my hon. Friend the Member for Luton North—I hope he does not mind me calling him an hon. Friend—about practices in different countries. I hinted at that in my question earlier. Certainly people involved in education projects in the past have come to me and said that whereas in the UK a pretty conscientious approach is taken, they sometimes find that their partners in other countries have perhaps felt slightly less burdened by the need to dot every i and cross every t. Parts of the communities that we represent feel that at times our scrupulousness is not necessarily matched by that of other beneficiaries of EU funding. We do not know the comparative data, but it might be worthwhile raising with the European Union how we satisfy Governments about so many countries and so many participants.
I thank the Minister and the shadow Minister for their helpful and frank responses to the questions. With those few remarks, I will leave it there.
Mr Gauke
I thank all right hon. and hon. Members for their participation in the debate. I thank the hon. Member for Kirkcaldy and Cowdenbeath for his warm words of appreciation. He brings an amiability to his role as the Member of Parliament for Kirkcaldy and Cowdenbeath that is perhaps unprecedented.
Mr Gauke
Indeed.
I thank the hon. Members for Luton North and for Wolverhampton South West for their questions, which I will attempt to address. I also thank other hon. Members who participated in the debate.
As the Committee is aware, the Government have taken an increasingly robust stance on financial management. Although the estimated European Court of Auditors 4.4% error rate from the 2014 EU budget shows a slight improvement in the estimated level of error, it is a marginal reduction from the 4.5% error rate in the previous year and remains well above the ECA’s acceptable threshold of 2%.
We want to see more ambition and progress in the area, so, as I confirmed earlier, the Government will vote against discharge of the 2014 EU budget at this month’s ECOFIN. That is the most public way for member states to take a tough stance on financial management and the Government continue to make that stand for UK taxpayers. None the less, we welcome the efforts of Vice-President Georgieva to manage the budget better and to focus on performance. The UK is taking a proactive role in driving that agenda forward.
The hon. Member for Luton North asked about the difference between fraud and error, which was touched on by his Front-Bench colleague. Fraud is the deliberate criminal misuse of EU funds. Financial errors are breaches of often complex EU regulations. Of course, the Government take a zero-tolerance approach to fraud. As I said earlier, only an estimated 0.02% of EU payments are established as fraudulent, according to Commission data. The “Fight against fraud 2014 Annual Report” shows that, across the EU, cases of suspected or potential fraud affected around 0.26% of EU payments and 0.8% of EU revenues. Of these, Commission estimates suggest that around 8% are likely to go on to be established as actual fraud. So I do not think we should consider that that 4.4% is all fraud.
Kelvin Hopkins
I thank the Minister for his explanation. However, the discrepancy between definitely defined fraud and the money that has been spent inappropriately suggests a relaxed attitude to expenditure—money splashing about and finding its way into the pockets of people who might be politically helpful and so on. It may not be fraud, but it leans that way.
Mr Gauke
First, where I would agree with the hon. Gentleman is that failures of financial management matter. Whether it is fraud or not, we should have stringent standards and take a robust approach. However, there is another context. We often talk about fraud and error, or error and fraud, in the context of welfare payments, and when politicians allow the percentages that refer to fraud and error to be described as simple fraud, those politicians tend to be criticised. Indeed, I have heard people make the case that we should refer to error and fraud, not fraud and error, because the larger part of the error and fraud budget relates to error and is not proven to be fraud. So I think that approach should also be borne in mind.
It is also the case that, as has been mentioned, much of the legislation governing the EU funds is complex, and the associated guidance does not always offer the necessary level of clarity. Some of the errors identified are systemic, recurrent, and affect various member states and EU institutions. It is therefore clear that the overarching rules governing these areas need to be addressed. I do not wish to downplay the importance of dealing with error or any kind of financial mismanagement, but it is not the same as fraud. It is not synonymous with fraud, and the element that can clearly be identified as fraud is a subset of the overall 4.4% number that we are talking about.
Kelvin Hopkins
Clearly, we must not confuse error and fraud. Nevertheless, if the vast proportion of the money that is inappropriately spent is described as error, it enables those who want to play it all down to be successful in reducing concern about the money that is misspent. There might be a penumbra somewhere between fraud and genuine, innocent error.
Mr Gauke
Yes. I do not in any way want to downplay that 4.4% number. It is too high and needs to be addressed. On the 0.02% that is identified as fraud, there may well be sums of money that in the end are not identified as fraud, but might be getting close to it. I recognise that point. However, I would not want us to consider that the two are synonymous.
The hon. Gentleman raised a point about expenditure levels. It is worth reiterating again that in 2013 the Prime Minister secured the first ever real-terms cut to the multiannual financial framework for the period 2014 to 2020, forcing necessary budget restraint. For example, both the 2014 and 2015 budgets represented cash and real-terms cuts compared with the 2013 budget, which was the last year of the previous MFF. From 2010 to 2013, we were still working on the MFF that had been agreed by the previous Government. Tempted as I am to debate the weaknesses of that agreement, I would rather focus on the successes of the 2013 agreement, negotiated by the current Prime Minister.
Turning to the detailed points made by the hon. Member for Wolverhampton South West, he first raised the directive on the fight against fraud to the Union’s financial interests by means of criminal law—the PIF directive. The UK supports the directive’s broad aims, but the draft text contained several unacceptable elements, such as the inclusion of VAT in the directive’s scope. While the Council’s general approach of 2013 removed many of the unacceptable elements, discussions are ongoing and the final text is yet to be agreed. As such, the UK has elected not to opt in to the PIF directive at this stage but continues actively to engage in EU negotiations and will consider the case for a post-adoption opt-in once the final text has been agreed. I will of course keep hon. Members informed of progress in that respect.
We of course continue to take VAT fraud seriously at both national and EU levels. In addition to working to tackle VAT fraud domestically, Her Majesty’s Revenue and Customs continues to work closely with other member states and international agencies to combat VAT and other cross-border fraud. Additionally, member states continue actively to work together to share knowledge and expertise through the Fiscalis programme and exchange information on potential missing trader intra-community fraud in the EUROFISC network. The UK has also successfully pushed for the increased use of multilateral control systems, involving a co-ordinated exercise in which two or more member states verify the tax liability of businesses, to investigate cross-border VAT fraud. However, the UK Government’s position on VAT fraud is that it should be dealt with at a national level, not an EU level, as it is primarily a national resource.
As for the other detailed points that the hon. Member for Wolverhampton South West raised, I will write to him on the specific policies outlined in the explanatory memorandum to the Commission’s “Fight against fraud 2014 Annual Report”, which, as he said, I signed on 24 August. I reassure him that it did not get in the way of the Gauke family holiday, much excitement though there would have been at the opportunity to run through the memorandum on a wet afternoon in north Wales. In the event, it did not interrupt us and I think we played Uno instead.
On missing trader intra-community fraud, it is worth pointing out that the estimates of attempted MTIC fraud have now decreased from some £2.5 billion to £3.5 billion in 2008-09, which I suspect we debated back then, to between £0.5 billion and £1 billion, which has held steady over the past four years. Nevertheless, we recognise that fraud poses a constant threat, but HMRC remains vigilant. HMRC has been in the vanguard of member states developing tools and arguments to deal effectively with VAT fraud, MTIC fraud in particular, and is active in EU forums to ensure the spread of good practice and greater co-operation between tax authorities.
Rather than attempt a definitive definition of the reverse charge this afternoon, I will include one in my letter. In short, it is about shifting the responsibility for reclaiming input taxes within a chain of transactions involving VAT. The reverse charge was something used by the previous Labour Government to counter MTIC fraud. I will write to hon. Members with a definitive definition.
On the European Public Prosecutor’s Office, the UK will not participate in the establishment of any European Public Prosecutor. Nevertheless, the Government retain a considerable interest in negotiations on the European Public Prosecutor, given its potential impact on us and bodies such as Eurojust in which we currently play a role. The Home Office leads on that matter.
The role of the anti-fraud co-ordination service varies across member states. The UK’s role includes investigating irregularities involving criminal behaviour—a function that the City of London police is well placed to perform. The AFCOS has attended EU conferences designed to facilitate the sharing of information and best practices across member states, enhancing co-operation on the important issue. The UK’s AFCOS actively supports OLAF in investigations in Brussels through facilitating interviews, statements and visits to the UK.
On structural funds, the ECA has indicated that a significant proportion of errors in its audits are related to public procurement procedures, which is partly due to the complexity of the rules. The ECA acknowledged in a recent special report on public procurement issues the good practices introduced by the UK since the errors in 2009-10. The UK authorities are aware of the need to continue improvement of public procurement procedures in structural funds programmes for the 2014 to 2020 period.
The UK welcomes the fact that the ECA recognised the different definitions of customs audit applied across member states and revised its assessment accordingly. The hon. Member for Wolverhampton South West raised a further point about preventing the falsification of documents—one of the primary ways in which fraud is committed. The UK has a number of policies in place. The Government support efforts to reduce fraud in the EU, including the work of the European anti-fraud office, OLAF, in detecting and tackling fraud, and in seeking financial redress for the EU budget when it is found.
Finally, the hon. Member for Kirkcaldy and Cowdenbeath raised the issue of different countries’ practices in ensuring compliance with EU aid spending. Member states are responsible, but ultimate responsibility lies with the Commission, which needs to ensure compliance across the EU by issuing clear guidelines and ensuring that effective control systems are in place.
I hope that those points of information and clarification are helpful to the Committee. I thank hon. Members for their ongoing engagement with the issues and for their continued support of the Government’s strong position on financial management and fraud.
Question put and agreed to.
Resolved,
That the Committee takes note of European Union Document No. 11470/15 and Addenda 1 to 6, a Commission Report: Protection of the European Union’s financial interests—Fight against fraud 2014 Annual Report, and unnumbered European Union Documents, the European Court of Auditors’ 2014 Annual Reports on the implementation of the budget and on the activities funded by the 8th, 9th, 10th and 11th European Development Funds; agrees that budgetary discipline and robust financial management at all levels remains crucial, and that EU taxpayers must have confidence that their funds are being effectively managed and implemented at an EU level; expresses disappointment that the error rate for EU budget payments shows only a slight improvement on last year; supports the Government’s efforts to continue to engage with the Commission and Member States to drive improvements to reduce the error rate, in particular, advancing the simplification agenda; stresses the importance of the EU budget achieving results as well as being compliant; and presses the Commission for a clear action plan to address the European Court of Auditors’ recommendations relating to the European Development Fund in order to improve its error rate.