Subsidy Control Bill

Lords Hansard - Part 1 & Report stage
Tuesday 22nd March 2022 Lords Chamber

Report

17:39

Clause 2: “Subsidy”

Amendment 1

Moved by

[Viscount Chandos]

1: Clause 2, page 2, line 26, after “grants” insert “, investment in equity securities”
Member’s explanatory statement
This amendment would specifically include investment in equity securities on the face of the Bill, as well as it being an example in the Illustrative Regulations and Guidance.

[Viscount Chandos (Lab)]

My Lords, when I spoke to a similar amendment that I tabled in Committee, I was encouraged by the support of the noble Lords, Lord Lamont and Lord Fox, my noble friend Lord McNicol and other noble Lords, so I felt it was worth trying one more time to persuade the Minister to make this small but, I believe, important change.

I have changed the wording of my amendment slightly in response to the concern expressed by the noble and learned Lord, Lord Thomas of Cwmgiedd, that the use of the simple word “equity” as a form of investment risked being confused with the use of “equity” in the social justice sense on which he is so focused. Although participants in financial markets have become used to thinking about equity in both senses, I was happy to change my amendment to include “investment in equity securities” as an example of when a subsidy can be given to avoid any possible misunderstanding.

I acknowledged in Committee that Clause 2(2) did not purport to be comprehensive and that the related guidance includes equity investment as a possible means of subsidy, but I continue to believe it is highly desirable that it is included as an example in the Bill. When responding to my amendment in Committee, the Minister, the noble Baroness, Lady Bloomfield, said that

“attempting an exhaustive list could be counterproductive, implying that measures not listed would not be considered subsidies.”—[Official Report, 31/1/22; col. GC 130.]

I am tempted to say “The prosecution rests, m’Lady.” The Government have chosen to include some examples in Clause 2(2), and although they are not intended to be exhaustive, the inclusion of six means by which financial assistance can be given, without any reference to investment in equity securities, risks exactly what the Minister said she was concerned about; that is, implying that a measure not listed would not be considered capable of being a subsidy. My amendment would not make the list exhaustive and, if it did, surely that would make a compelling case that the exclusion of equity investment was all the more unacceptable.

As I said at Second Reading and in Committee, equity investment is the most complex and hardest to measure of all of the transactions through which a subsidy can be given. Equity is the highest-risk form of capital and should therefore offer the highest prospective return, even if it is not precisely predictable from the outset. A market return on an equity investment is based on assumptions about the cash flow of the company concerned and often relies wholly or predominantly on the terminal value when the investment is realised. Let us say that, based on a company’s business plan, a public body makes an equity investment on terms that are projected to generate an internal rate of return of 10% per annum over 15 years. That may seem a good return compared with, say, the risk-free rate of return on a 15-year gilt, but a commercial venture capital fund would require a return of, say, 15% per annum and if that was the only source of funding for the relevant company’s competitors, the public body’s equity investment would have embedded in it a subsidy equal to 30% of the total amount of the investment being made.

Equity investment is a key instrument for state support for innovation and strategic investment, which, if implemented selectively, carefully and transparently, I strongly support. In their funding of, for instance, OneWeb, the Government would appear to agree with this, although whether it was implemented selectively, carefully and transparently I am not sure. That company’s dependence on Russian rocket launching is a belated reminder of the uncertainty and risks involved in this type of investment.

This Bill seeks to bring transparency and fairness to government support for private enterprise, first and foremost to ensure a level playing field for all participants in the market but also, as a by-product, to improve scrutiny of the use of public funds. This Bill is proceeding with an unusual degree of bipartisanship, as demonstrated by the amendments tabled in the names of both the Government and Opposition Front-Bench spokesmen. I urge the Minister to respond to my amendment in that same spirit and add equity investment to the six other examples of means by which a subsidy can be given. I beg to move.

17:45

[Lord Thomas of Cwmgiedd (CB)]

My Lords, I will speak to Amendment 9 and I am grateful for the support of the noble Lords, Lord Ravensdale and Lord Wigley, and the noble and learned Lord, Lord Hope of Craighead. I should first say how grateful I am to the Minister and to others for the amendments they have made to Schedule 1 to bring in the words “local or regional disadvantage”, to give some concrete context to the words “equity rationale”. This is an important and considerable advance. I am also grateful for the change to Clause 18, which again takes out any argument that if you are trying to attract a business to an area of disadvantage you can be penalised by that call.

However, despite that praise, there is a problem—I see the Minister smile—and it is this: what is lacking are the standards to ensure that there is some proper objective basis for the Secretary of State, the CMA and others to assess whether the use of the subsidy for this purpose is one that is properly justifiable, proportionate to the policy objectives and complies therefore with the subsidy control principles.

The proposal does not, as the Minister may think, seek to constrain local authorities from being imaginative, from being ingenious or from thinking what is the best standard or what is the best way to spend money for their local area. It does not seek to do any of that. What it seeks to do is to set standards to ensure that there is an objective basis for judging whether these bright ideas—this local freedom, which I welcome—are actually objectively justifiable. In short, the amendment seeks first to provide for efficiency and to ensure that scarce government money is spent wisely on thought-through and justifiable schemes that are proportionate to the policy objectives.

It also has another purpose: to ensure that all parts of our kingdom which are not economically disadvantaged cannot use this rationale to grant a subsidy. Levelling up is essential and subsidies can achieve that objective. As I said in Committee—but need not repeat in the time we have available for this important Bill—there has been a lot of controversy about the way in which the shared prosperity or levelling-up fund was used. That was very damaging. It is not appropriate for us to enter into that controversy tonight, but you have to have clear and objective standards. Some say that there were standards for the way in which those funds were distributed. If so, they were not clear and they plainly did not achieve a view among most people that the funds had been well spent. That controversy shows a number of things. First, there will be close examination of the way in which the subsidies are given and whether they are being properly directed to the right areas of our kingdom and not to the wrong areas. Secondly, you will never persuade the disadvantaged that something is being done for them unless it can be objectively shown that the use of funds across the kingdom is directed to helping those who need it most. The only way to do this is to set out clear criteria, and a failure to do so will be damaging to the unity of our kingdom.

In Committee, some commented that one of the terrible issues of the past number of years is that the rich have got richer and the poor poorer. We cannot go on like that, and we must not allow subsidies to facilitate that. I advocated a map. I have listened to what was said and moved away from that. What I therefore advocate are principles, and it seems to me that these principles are simple and could easily be adopted. I will listen carefully to what the Minister has to say, because my amendment is not the only way.

This Bill is going to have guidance, and I am not going to repeat what I said about the undesirability of legislating on an important matter with guidance. It is bad enough doing things by regulation. Guidance is just a step down the road away from what we should be doing. I have to be realistic and I very much hope therefore that, when the Minister responds, he will make it clear that guidance will cover this, will set objective standards and will include the standards to which I have referred. There is a lot of research on this, but we must be very clear. If we are not, we will waste money, be inefficient and make the rich richer. That is something we must not do.

[Lord Wigley (PC)]

My Lords, I am delighted to follow the noble and learned Lord, Lord Thomas, to whose amendment I have added my name. We discussed these matters in Committee at some length. I am also delighted to see the Government’s Amendment 2, which is a step in the right direction. However, we need to address the purpose of having subsidies and how the achievement of that purpose or failure to achieve such objectives is measured, and we need some quantified basis on which to monitor and fine-tune policy.

We in Wales, unfortunately, have had far too long an experience of so many parts of our country having to depend on assistance to try and overcome economic difficulties. From the rundown of coal and steel in the 1950s and 1960s through to now, that has happened. There has been investment from the public purse to areas such as the north-west of Wales, including Anglesey, and the Gwent valleys, where the income per head is a 10th of the level of Kensington in west London; clearly, policy has failed. Objective criteria were laid down by the European Union with regard to the Objective 1 funding and the subsequent programmes we have had since 1999. They were based on areas below 75% of GVA per head being eligible for assistance. Millions of pounds have gone into programmes of that sort, but they have not necessarily solved the problem. We are looking for a mechanism that enables the economies of these areas to become self-regenerative, not to depend on handouts for ever and a day. That must be the objective. Therefore, there need to be clear criteria.

It is a good step that the Government recognise the need for there to be a regional and social dimension to this, but there needs to be a means of monitoring and fine-tuning and ensuring the growth of the economy from within. Rather than just compensation for not having that economic growth, the ability must be created among people and businesses to generate growth and economic well-being for the future. If we get it right in this Bill, it could be a very important step forward. If we fail, it will be a missed opportunity.

[Lord Ravensdale (CB)]

My Lords, starting with the government amendment to Clause 18, I must thank the Minister for listening to my concerns in Committee and for responding by putting forward this amendment, which addresses my concerns with the impact of Clause 18 on the levelling-up agenda and meets the intent of my original stand part amendment. I must also thank the officials for the work they put into drafting and finding an acceptable way forward and for engaging with me throughout the process. I thank the noble Baroness, Lady Blake, the noble Lord, Lord McNicol, and the noble and learned Lord, Lord Thomas, for all their support throughout.

The Government have proposed a comprehensive amendment in Amendment 14, which will ensure that subsidies that target regional disadvantage are exempted from the prohibition on relocation of economic activities. It will address concerns from stakeholders I worked with in the Midlands Engine, home to many of the most deprived regions in the UK, that this would be a constraint on supporting disadvantaged areas; and it will address concerns from local authorities and other disadvantaged regions. I believe it will prove an important part of the Government’s toolkit in levelling up, through allowing productive relocation activities that reduce economic disadvantages within the UK as a whole.

I also welcome the clarification, provided through Amendment 2, to the equity rationale in Schedule 1 to the Bill, that it covers subsidies aimed at regional economic disadvantage. This whole package of amendments goes a long way to address concerns expressed by noble Lords in Committee. However, there is always more that can be done.

I very much support Amendment 9 in the name of the noble and learned Lord, Lord Thomas of Cwmgiedd, to which I have added my name. It addresses an issue in that the way the common principles are drafted can be viewed through a local context; there is nothing in the Bill to define what a disadvantaged area is, as opposed to an advantaged area. If national direction is absent, there is no means via subsidy control to steer intervention to those areas that need it most. The amendment seeks to set objective criteria to define a deprived area, which would resolve this difficulty. It would also give legal certainty for business on which areas would count as deprived, and hence work to drive investment into those areas.

The other way this could be approached is through streamlined routes. A streamlined route or routes could be created, through the mechanism in the Bill, to provide national direction on funding into deprived areas. This could be on the basis of the same economic indicators as in the amendment of the noble and learned Lord, Lord Thomas, where any one of several markers of deprivation is present. Again, the legal certainty that comes from this route would then help direct business investment into the deprived areas. There would be a clear definition of what a deprived area is, and therefore the areas of the country for which support would be available through the streamlined routes. Obviously the streamlined route would not prevent subsidy in a non-deprived area. It would just mean that the giving of a subsidy in a non-deprived area would be more complex, require more scrutiny and therefore help direct investment into deprived areas.

I would be most grateful if the Minister could give some clarity on a couple of things. First, to echo the request from the noble and learned Lord, Lord Thomas, can the Minister provide some reassurance that the Government will provide some specification or objective criteria of what a deprived area is within guidance? Secondly, can he provide some detail on the government programme for streamlined routes and how these will feed into the levelling-up agenda?

In concluding, I was delighted to see the appointment of Professor Sir Paul Collier to the Government’s levelling-up advisory council. Several years ago he wrote that what was needed was a shock to expectations, which in itself would provide the momentum required to level up the country. Noble Lords will recall Mario Draghi saying that he would do “whatever it takes” to save the euro. In a similar way, the Government need to take on the challenge of levelling up by stating that they would do whatever it takes to level up the regions. The Bill will be a key part of the Government’s toolkit for achieving just that.

[Lord Fox (LD)]

My Lords, before speaking to this group, I must say that our colleagues, my noble friends Lady Randerson and Lord German have been struck down with Covid, so, although there are amendments in their names, we will struggle on without them. Happily, my noble friend Lord Bruce has been restored from his bout, so at least we are not completely bereft.

I would characterise the purpose of this group of amendments largely as trying to avoid levelling down. I would put it down as damage limitation, and I think many of these amendments go some way towards that process. On Amendment 1, in the name of the noble Viscount, Lord Chandos, having dealt with the dual meaning of the word “equity”, I agree with him that this is a really important principle that ought to be enshrined in the Bill. It is not too late, and I hope the Minister can once again reflect on the wise advice of the noble Viscount and bring something back when we get to Third Reading.

18:00

Government Amendments 2 and 14 in the name of the Minister and countersigned by the noble Baroness, Lady Blake, and the noble Lord, Lord Ravensdale, really are a step forward. An amount of delight has been expressed from various Benches and I have a modicum of delight myself that some movement has been made. I would characterise this as important movement by the Government on a number of fronts throughout the Bill. However, Amendment 9, as eloquently proposed by the noble and learned Lord, Lord Thomas, is ideally where we would be. If there had been room, I would have signed it too, but others got there first.

The central failing of the Bill, as set out, is the absence of a definition of social and economic deprivation. Without that, there is no guide for how the Bill will work. The Minister repeatedly parades the virtue of this Bill as being that it is permissive. I am sure that phrase will come up, if not in this context in others. We would counter that that is also its weakness because it is not well defined within that permissive world. As it was set out, areas that need subsidies the most need to be targeted. Yet, in the way this Bill is structured, the authorities that have the money will be best able to deliver subsidies.

Those authorities with a low council tax base, which almost always have high levels of social need at the same time, are the ones that will not have the wherewithal in the context of how the Bill will work to deliver the subsidies needed. As the noble and learned Lord, Lord Thomas, said, there is a real danger that the rich get richer in a regional sense, which is why I framed this as damage limitation. The noble and learned Lord sets out a rational definition for the role of subsidies in promoting equity across the United Kingdom. This was backed up by a very good speech from the noble Lord, Lord Ravensdale, and the noble Lord, Lord Wigley. This sets out the reasons the Minister should think again, look at this advice and find a way—either in the law or through other routes suggested—to fix a central flaw in this Bill.

[Baroness Blake of Leeds (Lab)]

My Lords, I declare an interest as a vice-president of the LGA. I also express—I like the term—a personal “modicum of delight” at having been released from the Covid nightmare and enforced isolation which has unfortunately hit too many of us in this group.

I sincerely recognise the movement from the Government in the amendments tabled. I thank the Minister for taking our comments on board. We have all expressed our reservations and commented from wide experience and knowledge from the front line of how significant these subsidies are—particularly, as has been said, in the context of driving investment, regeneration and putting some substance behind the rhetoric around levelling up. We have given examples of discrepancies in investment and funding, and the real disadvantage that that has caused too many communities across the United Kingdom.

I express my gratitude for the quality of the discussion on the amendments in this group, particularly for several conversations my noble friend Lord McNicol and I have had with the noble Lord, Lord Ravensdale, about what it is like being part of a body with the responsibility for delivering on the ground. The issue here is bridging that gap between the words in the Bill and the reality of how you make this happen on the ground.

My noble friend Lord Chandos has, as ever, expressed his views eloquently. I cannot add to what he has said, other than to thank him for his reasonable and measured approach, which highlights the significance of his comments around the investment in equity securities and how we must ensure that the discrepancies between the contents and the supporting documentation are resolved. We hope that the Minister can offer helpful clarifications on this subject.

Like other noble Lords, we on these Benches are very pleased that the Government have been persuaded of the case for strengthening the Bill’s focus on local and regional economic disadvantage. These points have been raised consistently both in another place and in your Lordships’ House. Without wishing to sound churlish, we feel it is a case of “better late than never”. It seems obvious to use whatever instruments are to hand to bring advantage to all parts of the country.

It may be that the Bill never prevented subsidies from being used to level up deprived areas, but the clarification in Amendment 2 will be helpful for public authorities at all levels. The exemption for relocation subsidies, introduced via Amendment 14, is also a hugely significant step. As we will all recall, we had a very interesting debate on relocation in Grand Committee and how, perversely, not addressing this matter could have caused real damage, inadvertently perhaps. I am glad that we have some movement and some common sense in this area.

I understand the intention behind Amendment 9, in the name of the noble and learned Lord, Lord Thomas of Cwmgiedd. In an ideal world, the Bill would indeed contain further detail on how the equity rationale will work in practice. As has been said several times, the amendment is looking for that clarification—the standards and principles—for how we can ensure that there are no grounds for misinterpretation and confusion. I am fairly confident that the Minister will say that this is exactly the kind of information that will be contained in future guidance, but, again, we must bear in mind the recipients of that guidance and how it will be interpreted. The subsidies must be a force for good. They must clearly demonstrate purpose and benefit to the communities where they are applied. I emphasise the clarity that will be needed around this. Talking to various stakeholders in the field, it is about the level of advice and clarification, and about ensuring that everyone feels that there is a level playing field and that interpretation in different areas is not bringing disadvantage as a knock-on effect.

It is fair to say that the Welsh Government have consistently voiced concerns that the original Bill treated Mayfair and Merthyr in the same manner, and with these changes we are definitely making progress. However, as regards other elements of the Bill and the changes that have been made, we must emphasise the significance and importance of the review process, making sure that that is done in a transparent way at every stage of the game. We are talking about value for money, delivery, the spend of the public pound, making sure that all the concerns around the decisions that have led to investment decisions—which have been fairly, from our point of view, criticised—must be addressed. This is a powerful opportunity and I hope that through the changes that we are seeing, the opportunities are not missed.

As we speak, there is discussion about the spend of the shared prosperity fund, the delay in the skills element of that and the fact that ESIF will fall out next year, and there will be a gap if we do not pick up these issues. All those matters need to be brought together so that the spirit behind the gain-share agreements with all the devolved areas can be delivered with local determination, bringing benefit to all. This is a current and very important debate and I look forward with interest to the Minister’s response.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

I start by welcoming the noble Baroness back to her rightful place on the Front Bench, fully recovered. In fact, I say that with more than a modicum of delight—to use my favourite phrase of the week so far. For the noble Lord, Lord Fox, that is the equivalent of being damned with faint praise. So as not to be sexist about this, it is good to see the noble Lord, Lord McNicol, back as well.

The interaction of the subsidy control regime with the Government’s levelling-up agenda has rightly occupied many noble Lords during their consideration of the Bill, both in Committee and on Report. I hope that so far I have been able to provide sufficient reassurance that public authorities are no less able to give subsidies to address regional disadvantage under the Bill than they were under the previous EU state aid regime. Indeed, moving away from the EU’s default prohibition on subsidies and the resulting exemption for certain categories of subsidy in specified areas will allow public authorities greater ability to design measures that address not only regional disadvantage but the stark differences in social and economic opportunity that exist at a much more granular local level.

It is important that public authorities understand the way that they are empowered by this regime to give levelling-up subsidies, so I recognise the value of noble Lords’ suggestions that this would benefit from being made clear in the subsidy control principles. Amendment 2 to Schedule 1 therefore makes it clear that addressing local or regional disadvantage is considered to be an equity rationale for the purpose of assessing compliance with principle A. That was urged on me by many noble Lords in Committee and I am delighted to be able to put that forward—with more than a modicum of delight —on behalf of the Government. This puts it beyond any doubt or confusion that a subsidy to address local or regional disadvantage can be given, provided, of course, that the other principles and requirements of the regime are met.

I am grateful to the noble Baroness, Lady Blake, and the noble Lord, Lord Ravensdale, for supporting this amendment—I am not sure that there are many occasions when people put their name to my amendments but I am more than delighted when they do so. I am also happy to reassure noble Lords, the noble Lord, Lord Ravensdale, in particular, that beyond this change to the Bill, the Government will be exploring the creation of streamlined routes to support levelling up. I reassure the noble Lord that these streamlined routes may have deprivation-related eligibility criteria, although it is important to note that levelling up is about improving opportunities in the whole of the UK.

A streamlined route could therefore facilitate interventions—high street regeneration is one example—that could be used by a range of public authorities, but particularly those who wish to address deprived areas. Although streamlined routes will be produced by the Secretary of State, none of this prevents local authorities or other public authorities making subsidy schemes that have deprivation-related eligibility criteria.

18:15

We must also be clear that a streamlined route is no more than a procedural facilitation and not a source of funds. Routes will create significant value by making it easier for public authorities to distribute certain subsidies, but creating a streamlined route in itself does not guarantee that those subsidies will be given. It is perhaps more important to look at where the money is coming from. For example, the £4.8 billion levelling-up fund invests in infrastructure that improves everyday life across the UK, including regenerating town centres and high streets, upgrading local transport and investing in cultural and heritage assets. The fund has adopted a prioritisation index that takes account of need according to objective criteria. Using this, the majority of funding in the fund’s first round was allocated to category 1 areas that are most in need of levelling up.

Turning to Amendment 9 from the noble and learned Lord, Lord Thomas of Cwmgiedd, I want to address the fundamental question that he implied here: how to ensure that public authorities’ use of subsidies to tackle disadvantage or other equity rationales remains objectively proportionate and justified. In general, the answer to that question is found in the subsidy control principles as a whole and in the common law duties of public authorities, including the need to act in a rational and unbiased way. That is a clear requirement of public law and provides a baseline of protection against the kind of abuses that I think the noble and learned Lord fears.

The principles then provide further reassurance, including principle A itself. I hesitate to say it to the noble and learned Lord, Lord Thomas, and the noble Lord, Lord Ravensdale, but the illustrative guidance makes it clear that public authorities must use supporting evidence that demonstrates the need for the subsidy. For a social equity intervention, it specifies that this should include measures or statistical indicators set against appropriate comparators such as regional or national averages. The Bill requires public authorities to have regard to this guidance, as I think the noble and learned Lord implied.

Principle B then makes it clear that the subsidy should be proportionate to the policy objective, principle E states that the subsidy should be an appropriate policy instrument for achieving its objective and principle G sets out that the benefits of the subsidy should outweigh any negative effects it may cause. Those negative effects must be assessed and evaluated over the lifetime of the subsidy or scheme before a decision to give a subsidy or make a subsidy scheme is taken. The Government therefore consider it unnecessary for the Secretary of State to set out extra conditions to establish the validity of the public authority’s rationale for an intervention.

I turn to the amendment’s provisions that would require the Secretary of State to set out specific measures that would justify a subsidy on an equity rationale. As I understand it, this is to prevent such subsidies being used in wealthy areas. That was the noble and learned Lord’s implication, and I understand his concern, but I do not think the amendment fits with the nature of the levelling-up agenda or the subsidy control regime. This is also goes to the heart of the point made by the noble Lord, Lord Fox.

Conceptually, as the Prime Minister has said, levelling up is a nationwide project, not a jam-spreading operation. It is about unleashing potential, so improving opportunities in the poorest parts of the country does not need to involve limiting them in richer parts. It is not a problem if a wealthier public authority has the resources to give a subsidy that improves social or economic opportunities in its area—even in the wealthiest boroughs, there are some areas of deprivation—provided, of course, that it is compliant with the subsidy control requirements.

I make the point to the noble Lords, Lord Wigley and Lord Fox, that where central government is giving out money for levelling up and wishes to target those funds at the most deprived places, it makes sense that this happens through the eligibility criteria for accessing those funds. Instead of doing it in an inflexible and general manner through this subsidy control regime, this allows the targeting to be done in a way that fits with the purposes and nature of those funds. For example, as I noted earlier and as the noble and learned Lord implied, the levelling-up fund has used a needs-based index of priority places to help direct those funds. It is also worth noting that an equity rationale does not necessarily have to be specific to a geographical area. For example, a subsidy scheme might be set up to support certain categories of disadvantaged worker into employment. It is all about giving ourselves the maximum flexibility.

In short, the subsidy control regime—in particular the principles and the guidance—already ensures that all subsidies, including those given for an equity rationale, must be used transparently for a defined purpose that has an objective justification, and proportionately. Where there is a need to direct central government’s levelling-up interventions towards the most deprived places, the way to do that is through the administration of those funds themselves, not by introducing general restrictions in this subsidy control regime. I hope that the noble and learned Lord is reassured and is therefore able not to move his amendment.

I turn to Amendment 14. I again thank the noble Lord, Lord Ravensdale, for his interest in and the discussions he has had with me and officials on the prohibition on subsidies contingent on the relocation of economic activity. The prohibition is there to prevent subsidy races, in which public authorities attempt to outbid each other in providing subsidies to attract investment, which is an inefficient use of public money; and to prevent public authorities poaching economic activity, which will tend to have highly distortive effects on competition.

Nevertheless, I accept the argument made by the noble Lord, Lord Ravensdale, the noble Baroness, Lady Randerson, and other noble Lords that there may be circumstances in which the relocation of economic activity is a legitimate way of delivering on levelling up. It might be needed to help with the regeneration of high streets, for example, or to move economic activity to disadvantaged rural or seaside areas. Therefore, I have tabled an amendment that exempts from the prohibition those relocation subsidies that have the effect of reducing social or economic disadvantage. At the same time, of course, the subsidy must still comply with the principles and other requirements. The test in principle G to balance the positive effects of the subsidy against the negative will be particularly important.

However, the reason for maintaining the general prohibition is that relocation subsidies carry some significant risks. This remains true even when the subsidy is given to tackle disadvantage. Clearly, relocation to place B involves leaving place A and potentially aggravating disadvantage there. The drafting of this amendment therefore includes extra safeguards to mitigate this risk. It requires the public authority not only to consider that the subsidy reduces disadvantage in the area to which the relocation takes place but to consider the United Kingdom as a whole—that is, to look, as a minimum, at the vacated area as well as the place to which the economic activity is subsequently moving—and be content that the subsidy reduces the overall level of disadvantage. I hesitate to say this to the noble and learned Lord, Lord Thomas, but the Government will of course produce guidance to assist public authorities in making this assessment.

The Government are also considering whether some or all of these subsidies should be deemed subsidies of interest or particular interest and therefore be referred to the subsidy advice unit for extra scrutiny. These types of subsidies will be defined in regulations that will be laid in draft and debated before commencement of the wider regime. As I have said, the Government intend to launch a public consultation on this in the coming weeks. This exemption and the safeguards that go with it will ensure that public authorities have the broadest range of tools to enable them to tackle disadvantage and help to level up the UK, and for that reason I commend it to the House.

Finally, I address the amendment tabled by the noble Viscount, Lord Chandos. He will be pleased to know that I shall not repeat at length the arguments that I made to the similar amendment tabled in Committee. In short, I believe that it is important to emphasise that subsidies come in many forms, and the Bill therefore sets out a fairly comprehensive test for public authorities to apply to all situations where financial assistance is being considered to identify whether a subsidy exists: from grants to loans, to loan guarantees, to benefits in kind, to contractual payments to provide services of public economic interest. The purpose of giving examples in the clause is to make it clear that this diversity exists, ensuring that no one makes the mistake of thinking that all subsidies are given in the form of grants. There are a number of different forms.

There is no question that an investment in equity securities may constitute a subsidy if it is made on more favourable terms than those dictated by the market. But there is no utility in attempting an exhaustive list on the face of the Bill. Not only is it unnecessary but it also runs the risk of implying that a measure not listed would not be considered a subsidy. The proper place to provide more extensive lists of examples is in guidance and, as the noble Lord mentions in his explanatory note, equity investments made on favourable terms are already mentioned in the illustrative guidance published by my department in January. I am happy to confirm that I will ensure that this remains beyond doubt in the final version of the guidance. I therefore hope that the noble Lord will feel able to withdraw his amendment.

[Viscount Chandos (Lab)]

I thank noble Lords who have spoken to this group, in particular the noble Lord, Lord Fox, and my noble friend Lady Blake, in confirming their view that this was a worthwhile and important amendment. Therefore, it is disappointing to hear the Minister repeat the same arguments as were made by the noble Baroness, Lady Bloomfield, in Committee, and I have to say that he showed no sign of having listened to my response to those arguments in the remarks that I made in introducing this amendment.

As I have said earlier, the Government’s argument that there is a danger in an example of a means by which a subsidy can be made being left out of that being interpreted as being that it is not susceptible to being used for a subsidy; that is precisely the argument that I was making. Six different examples are listed, which the Minister just read out. What I was suggesting did not make it exhaustive in itself. The Economic Affairs Committee, of which I am privileged to be a member, has heard over recent weeks about how important contracts for difference have been in helping to stimulate the growth in the generation of renewable energy. That may be a guarantee or a purchase of future services, but it is a good example—something that is fairly specialised and rare, which I do not think that it is appropriate to have as an example. But equity investment is one of the principal means by which a Government or a public body can give support, and it is perverse to exclude it.

That said, while I shall consider what I might do at Third Reading, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Schedule 1: The subsidy control principles

Amendment 2

Moved by

[Lord Callanan]

2: Schedule 1, page 52, line 7, after “as” insert “local or regional disadvantage,”
Member’s explanatory statement
This amendment clarifies that Principle A of the subsidy control principles covers subsidies aimed at addressing local or regional disadvantage.

Amendment 2 agreed.

18:30

Amendment 3

Moved by

[Lord Whitty]

3: Schedule 1, page 53, line 6, at end insert—
“(c) progress towards targets under section 1 of the Climate Change Act 2008 (UK net zeroe emissions target), and section 5 of the Environment Act 2021 (environmental targets).”Member’s explanatory statement
This amendment requires public authorities to consider whether proposed subsidies would have any negative effects on progress towards the UK’s legally binding net zero and environmental targets.

[Lord Whitty (Lab)]

My Lords, I shall also say a few words about Amendments 51 and 61 in this group. I do so in lieu of the noble Baroness, Lady Boycott, who, unfortunately, has to be at a funeral this afternoon. I declare my interests as set out in the register but in particular a very new one, which is that I have become a director of Peers for the Planet.

This amendment is pretty straightforward. It says that our climate change strategy, our net-zero strategy, about which the Government have been very clear, should be taken into account in their subsidy policy. It is odd that it is not in the Bill, either in Schedule 1, which we are discussing, or virtually anywhere. However, we are lucky tonight because the Minister is of course also Minister for many aspects of net zero. I therefore assume that my amendment will be received with acclaim by the Government Benches. They might think they have a better form of words that they want to bring forward later, but I think my form of words is fairly clear.

We are on Schedule 1 to the Bill, which is headed “The Subsidy Control Principles”. That a flagship policy of the Government which has been said by Ministers time and again should apply across all government policy is not included in that schedule is very odd indeed, and it must surely be an oversight. Even more surprising, it is not referred to in Schedule 2, which relates to energy and efficiency principles, because that is mainly about energy policy. There is a reference which could be said to be relevant, which is to subsidies directed towards the reduction of carbon use and to help decarbonisation, but those are specific subsidies. What my amendment is concerned about is that all subsidy schemes should take into account their implications for our target zero policy and climate change objectives.

I would find it difficult to think the Government could reject that. Ministers have said on many occasions that it is one of our most important policies and strategic commitments. The Public Accounts Committee has recently said that all government departments must take it into account, and that includes new legislation. This is substantial new legislation which may not obviously directly affect climate change, but everything indirectly affects it. Subsidies after all, whatever their form, are about interfering with the market to get a different outcome. It would be odd indeed if the Government did not accept that, if the market was moving in the direction which was more or less in line with our climate change agenda, we should not intervene with a subsidy which reversed it or at least offset it. We are not saying that every subsidy has to be directed at climate change, but the implications have to be taken into account when considering the validity of that subject.

I am expecting a positive response from the Government. I do not think it would cost them a lot in terms of the overall nature of the Bill, but it would give credibility to the overall policy that our net-zero targets should be followed through across the whole of government and all public authorities. If the Government reject it, I will find that very difficult to accept, and I think we would wish to test the opinion of the House. I hope that the Government will be reasonable and either come up with their own wording or just accept the wording which the noble Baroness, Lady Boycott, and I are proposing. I beg to move.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise with great pleasure to follow the noble Lord, Lord Whitty, who has powerfully and clearly introduced this group of amendments. I will offer the Green group’s support for Amendments 3, 51 and 61. Were we not in a state of continual juggling of different Bills, I am sure that we would have attached one of our names to them.

Amendment 3, on which the noble Lord indicated he is likely to test the opinion of the House, is particularly important in considering the negative effects. I am influenced in that view by a visit I made yesterday to a village called North Ferriby and a site threatened with the development of an enormous Amazon warehouse, with significant environmental effects. From those environmental effects flow effects to people’s lives and well-being. It is the absolute reverse of levelling up in that it is making people’s lives much worse. It is clear that, when talking about economic development, there is inadequate consideration of local environmental effects and the broader effects on the state of our world.

However, I rise chiefly to speak to Amendment 5 in my name. Rather than trying to stop damage, this amendment is trying to lead the Government in a positive direction, which could help them deal with some of the issues facing them today and will be tackled by the Chancellor tomorrow.

Amendment 5 is all about helping small-scale community energy projects to make a big impact in the energy system. In Committee, the Minister suggested that community energy is not within the scope of the Bill, but I hope we might see a broader response today, and at least a positive response and acknowledgement from the Minister that this is a huge lacuna in government policy that desperately needs to be filled.

This amendment adds community energy to the list of circumstances that may be used to determine a subsidy, where the generator is a community energy project. What we see is that the rural community energy fund is soon winding down, despite its success. The Minister and I have, in another context, discussed the lack of any other community energy schemes, despite the Government’s promises to deliver them.

You might ask, “Why would subsidies be needed?” The fact is that community schemes often need early-stage seed funding to get them to the stage where they can seek investment. Without that, many communities, desperately keen to set up their own scheme, are never able to get one off the ground. What we are talking about is perhaps something like an electric car club, where a community can generate its own energy. I saw this in Stroud a few years ago: solar panels on the roof of a doctor’s surgery powered an electric car club car. This had all been supported by community investment and was run by the community, with the nature of the project being chosen by the community.

It is clear that this can unlock more than £64 million in private capital investment. It is an incredible opportunity for public money to kick-start a community-led green revolution. Importantly, thinking about the levelling-up agenda, this means that communities with money can put it into their local community and get the money circulating around that community. This is a cost-effective way of unleashing the possibility of many new green jobs.

I am not expecting the amendment to pass today, but there is a huge opportunity here. The crisis the Government are facing is clear: the cost of living crisis and concern, particularly in the context of the tragic situation in Ukraine, about energy self-sufficiency. But there is energy all around us: energy from the sun, the wind and people within communities desperate to help tackle the climate crisis and meet the needs of their own communities. Let us make sure that we have a subsidy scheme that can support all that physical and human energy and put it to good purposes to improve the lives of us all and our environment.

[Baroness Sheehan (LD)]

My Lords, I rise to speak to Amendments 3, 51 and 61, to which I have added my name. I have checked with the Public Bill Office that my name is on those amendments—it is online but it has not made it to the printed copy. I should also add that I am a director of Peers for the Planet.

The reason I have added my name to these amendments is that I feel strongly about this. I hope that the noble Lord, Lord Whitty, will be press Amendment 3 to a Division if the Minister is unable to meet us half way or come some way towards what we are looking for, which is some recognition of an alignment with our climate change and natural environment concerns.

Just last month the IPCC published its sixth report, which is full of dire warnings about the climate. Time is running out and we are fast approaching a 1.5-degree rise. The raw science tells us that we really have to act now. The concentration of carbon dioxide in the atmosphere is at an unprecedented 419 parts per million; it has never been at that level, records show, in the last 800,000 years. It is going up in a straight-line vertical trajectory at the moment, so we really need to act as quickly as we can. The NASA website shows that many other of the planet’s vital signs are moving in the wrong direction and those adverse changes are accelerating.

A Bill laying out a new subsidy regime is an important policy lever to meet our climate ambitions. However, as things stand, there is a deafening silence on climate and nature alignment in the Bill. Amendments 3, 51 and 61 seek to fill that void, not in a prescriptive manner but by allowing the Government to determine how the aims should be achieved. Notwithstanding what the Minister’s response will be to the amendments, I hope that nevertheless he will confirm from the Dispatch Box that the guidance to the Bill will specifically include how public authorities should approach climate and wider environmental considerations with respect to subsidies. The Minister said as much in his letter to my noble friend Lord Purvis but it would be good to have it reiterated on this occasion.

[Baroness Hayman (CB)]

My Lords, I support Amendments 3, 51 and 61. I declare my interests as set out in the register.

The amendments seek to ensure that considerations around net zero and the environment are embedded in the legislation at the stage of principles, at the stage of guidance and at the stage of reporting. They are very similar to amendments well discussed in Committee. I have to say that when responding to those amendments the Minister did not show even a modicum of delight; he said that we were banging on—although he did not use that term—about our favourite topics, a term he did use, and said he had a sense of déjà vu. I am afraid it is déjà vu all over again, because these issues are too important for us not to return to them.

I believe there is a disjuncture in the Government’s attitude. When responding, the Minister made absolutely clear the Government’s view that

“net zero is of critical importance.”—[Official Report, 31/1/22; col. GC 159.]

That is not something between us. He also recognised the relevance of the subsidy regime that we are discussing in achieving the Government’s aims, and pointed out that environmental and net-zero schemes had already been agreed under the interim subsidy control mechanism. So we have a situation where the Government recognise the severity of the climate crisis, the fact that economically we need to shift the economy and growth into a sustainable pattern and into areas that will be productive in terms of jobs—and, indeed, will create the sorts of jobs that support the levelling-up agenda we were just talking about, because they are the sort of infrastructure jobs that go across the country—and that we need to support jobs that will provide energy security in future.

18:45

All those point to the importance and relevance of making sure that the regime we are setting up—not for the crisis we are in at the moment but for the long-term interests of our economy and people—should recognise the importance of statutory climate and environmental obligations that the Government have accepted.

I am profoundly disappointed that the Government have not been able to move or even have serious discussions on these issues in the way they have on other areas of the Bill. They have not put forward suggestions so that we could meet in the centre in a way that both sides would feel was productive. There is now nothing in this Bill to guarantee that an issue that is of supreme importance to the Government is carried through into legislation. I am afraid that we are in another area where the policies sound great but the delivery and coherence are not—an area of fine words and unbuttered parsnips. I therefore support these amendments.

[Lord Hope of Craighead (CB)]

My Lords, I will say a word in support of Amendment 5 in the name of the noble Baroness, Lady Bennett of Manor Castle. Her list of small projects reminds me of the position of the many small islands around the coast of Scotland, in the Northern Isles, the Western Isles and the Inner Hebrides.

About 15 years ago I spent a week on the island of Fair Isle, which lies midway between Shetland and Orkney. It is too far away from the mainland and from those islands to have any electricity supply provided from outside; when I went there it was largely reliant on diesel generators, which were expensive and wasteful and could not run all the time. People had been relying on the diesel generator coming on at, say, six in the evening to fire up their cooking utensils and so on, but just before we got there someone with funding had been able to put up a wind turbine. It was there, and I remember the thrill of the islanders when it was put into operation and provided a reliable source of electricity which was available all day because it did not involve wasteful use of diesel oil.

That would fall well within the small projects in proposed new sub-paragraph (2)(d)(v); it is just one example of the value of these small projects to small islands such as that. I do not know how many like Fair Isle there are still relying on diesel generators, but anything that can be done by introducing and supporting projects of this kind to stop them using carbon fuels and relying instead on the renewables listed here would be of great value. Of course there is a climate change aspect to it, but it also has a real practical value for the communities themselves—otherwise, they are driven to spending money on carbon fuels, which we would all like to stop having to use.

Subsidy schemes for small projects have a real value in these remoter communities that cannot be linked into the grid around the mainland or some of the larger islands which can have their own generating facilities. The list is very interesting and valuable, and I hope the Minister will pay attention to it.

[Lord Fox (LD)]

I rise to support briefly Amendments 3, 51 and 61. On the point made by the noble and learned Lord, Lord Hope, and our Green friend, I was not aware that this scheme excluded small projects. What it will exclude is us finding out about them as they will all come in under the threshold and will not be reported. I hope that the Minister can perhaps come back and report on them; we will not find them in the database.

We have heard fantastic speeches on Amendments 3, 51 and 61. I will not repeat them but want to pre-empt a little what the Minister’s response might be. I have a hint of that; I suspect that he is guided by his feelings about Ukraine. Since its invasion, the mood will have changed, and that will be his line. The Russians are indeed committing atrocities in Europe as we speak, and it is terrible, but the climate crisis is not standing back while this happens. With this amendment, we are asking the Government to walk and chew gum at the same time. Yes, we have to deal with the consequences of the war and we understand how hard that is, but we have to do that within the context of attacking the net-zero challenge. Unless the Minister can officially announce that global warming is performing a ceasefire, this amendment has to be there for us to meet both the important things that this country has to face right now.

[Baroness Blake of Leeds (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Boycott, for tabling her amendments and sorry that she cannot be here to move them today; I am grateful that my noble friend Lord Whitty stepped into the breach much more than adequately. I want also to recognise the contribution of the debate and the importance of getting on to the front foot with its urgency on such a range of different issues. Obviously we have the climate emergency, but we have to mention Russia’s illegal invasion of Ukraine and the West’s urgent discussions about how to lower its dependence on Russian oil and gas.

These discussions are happening at the highest possible level. For some, I fear that they will give a convenient excuse to promote activities that will cause significant environmental damage if unchecked, whether that is firing up coal-fired power stations, resuming fracking, or indeed Shell’s announcement just this morning that it will look again at the Cambo field. For many, the focus is on the acuteness of the energy security issues that we are facing, which have come to the forefront, and the ever greater need to develop energy self-sufficiency; that means focusing on the climate imperative together with security issues, regeneration and the new green jobs that will come along.

Following COP 26, the UK remains a key player in driving implementation of the various agreements reached. What hope do we have of ensuring that other countries follow through on their commitments if we do not play our leading role in this global fight? Another aspect is that we know the Government want a degree of flexibility for public authorities at every level, but we do not see anything in Amendment 3 that takes that flexibility away. The Minister has been keen to use the example of Welsh steel during our discussions on this matter. If, when conducting the so-called balance test, the Welsh Government decide that the short-term economic benefits outweigh the costs of emissions, they will be able to award the subsidy. However, as a general principle, public money should be used for public good, and what greater public good can there be than preserving our planet for future generations?

Now is the time for us to double down on our commitments to renewables and nuclear rather than being swayed by those who are seeking to turn back the clock. I finish by picking up on the comments of my noble friend Lord Whitty about pressing Amendment 3 to a vote. If he does indeed decide to do so, we will support him.

[Lord Callanan (Con)]

My Lords, first, I thank all noble Lords who have spoken on these amendments, which were introduced so ably, as always, by the noble Lord, Lord Whitty. I will respond to them all together since they all relate to climate change and energy matters.

Amendment 3, tabled by the noble Baroness, Lady Boycott, and the noble Lord, Lord Whitty, seeks to include specific mention of our “net zero emissions target” and “environmental targets”. It would require public authorities to consider the negative impacts, with respect to our Climate Change Act and Environment Act targets, when making a balancing test under principle G of Schedule 1. Amendment 61 would allow the Secretary of State to issue guidance to support public authorities with this assessment.

I understand noble Lords’ keen interest in ensuring that subsidies and schemes granted within the UK further our climate change and environmental targets, wherever practical, and that public authorities should be supported by the Government in making robust assessments of the impacts that their subsidies or schemes may have on these targets. The Government share this objective, and our record in office demonstrates that. I make it clear that this applies to some of the other amendments to which I will be coming later: the UK’s net zero target is, and remains, the law of the land. Nothing in this Bill changes or undermines that fact. The Government remain resolutely committed to net zero by 2050. At this point, I welcome the addition of the noble Lord, Lord Fox, to my speechwriting team. However, it is right and proper, particularly in the current crisis, that we keep in mind that our energy transition to net zero is an issue not only of decarbonisation but of national security and—especially at the moment—national importance.

In response to the noble Lord, Lord Whitty, I make it clear that the balancing test in principle G already requires public authorities to take into account all relevant “negative effects”, which would include negative effects in relation to climate change and the environment. Similarly, subsidies that support our net zero and environmental targets should also take those positive impacts into account in the balancing tests. Principle G emphasises particularly “competition”, “trade” and “investment” effects because minimising harmful distortions in these areas is the primary purpose of a system of subsidy control. However, it is not intended to suggest that these factors should override all other policy-making considerations. There is no implication that public authorities should set their climate and environmental obligations—or, indeed, any other duties or objectives—to one side.

I reassure the noble Baronesses, Lady Sheehan and Lady Hayman, and others, that the Secretary of State will issue guidance on the practical application of the subsidy control principles, and regarding the energy and environment principles. This guidance will include instructions on how to take into account, where relevant, any impacts the subsidy or scheme may have on targets under the Climate Change Act or the Environment Act—or, indeed, signpost the public authority to existing guidance to this effect.

It is also worth pointing out that environmental policy is a devolved matter. This regime is designed to empower public authorities with democratic mandates to use subsidies in pursuit of their own policy objectives—within certain bounds which merely protect UK competition and investment—and safeguard our international obligations. It is not seeking to direct the devolved Administrations, or any other public authority, to spend on one specific policy objective, however important and worthwhile that policy objective may be. For that reason, I am highly reluctant to impose any additional constraints on other public authorities which are fundamental neither to subsidy control policy nor to implementing our international obligations. There are later amendments in which noble Lords will seek to persuade me to do the opposite in respect of the devolved Administrations, so I hope that noble Lords will not be so hypocritical as to repeat those arguments back to me then. I believe that these amendments are therefore unnecessary, and I ask the noble Lord, Lord Whitty, to withdraw Amendment 3.

19:00

I turn to Amendment 51, tabled by the noble Baronesses, Lady Boycott, Lady Sheehan and Lady Altmann. Clause 65 specifies that the Competition and Markets Authority will periodically undertake a review of the operation of the subsidy control regime. This amendment would require that review to include an assessment of the impact of the operation of the Act on progress towards the target under Section 1 of the Climate Change Act 2008 and the targets under Section 5 of the Environment Act 2021.

I thank the noble Baronesses for tabling this amendment and assure them that the aims of the Government are entirely in line with the spirit of it. However, we do not believe that it is necessary to include these additional reporting requirements, not only because the report will, as the Bill currently stands, provide an appropriate level of scrutiny of the impact of the energy and environment principles, but because the appropriate monitoring and reporting mechanisms for the Government’s net-zero and environmental targets are already set up and have much wider scope than the subsidy control regime.

The new subsidy control regime will support environmental goals by allowing public authorities to make subsidies that address a market failure or equity rationale in relation to environmental and net-zero objectives with minimal delay. The Bill also sets out common-sense principles that promote energy efficiency, sustainable energy and environmental protection through the energy and environment principles set out in Schedule 2. The subsidy advice unit’s report will cover all aspects of the regime, including the operation of Schedule 2. These provisions provide an appropriate level of detail to enable the subsidy advice unit to fulfil its reporting function under Clause 65, and we believe that this strikes the right balance for monitoring the environmental and climate aspects of the regime.

I highlight that the Government already have robust reporting requirements on the meeting of net-zero and environmental targets. We have debated them extensively in this House. The Climate Change Act 2008 sets out monitoring and reporting requirements regarding compliance with the 2050 net-zero target and our carbon budgets. This includes laying before Parliament a report setting out current proposals and policies for meeting the UK’s carbon budgets, most recently the net-zero strategy; the UK’s energy and emissions projections, a world-leading approach to projecting the UK’s future emissions; and scrutiny by the independent Climate Change Committee, including an annual report by it to which the Government already must respond. We have also committed to update annually on progress on the net-zero strategy, and we comply with the UNFCCC’s emissions reporting obligations via annual submissions of the UK greenhouse gas inventory. Under the Environment Act the Government must report regularly on the progress made towards improving the environment.

The Climate Change Committee and the Office for Environmental Protection also have a function in holding the Government to account for progress towards climate targets and improving the environment respectively. Unlike the subsidy advice unit, these bodies specialise in climate and environmental matters respectively and can bring that expertise to bear on all the Government’s activities in that respect, including the subsidies they give. Furthermore, the Climate Change Act 2008 provides for parliamentary scrutiny. It is therefore our position that these are the sufficient and proper channels to ensure that these goals are being met and it is unnecessary to duplicate this work at the SAU. I therefore hope that this amendment will not be moved.

On Amendment 5 to Schedule 2, tabled by the noble Baroness, Lady Bennett, as noble Lords will know, Schedule 2 relates to subsidies and schemes in relation to energy and the environment. Under the terms of the Bill, principle C in Schedule 2 enables a non-competitive process to be utilised for the award of subsidies in relation to renewable energy or co-generation in limited and specific circumstances. These are where: first, projects are operating in a market with insufficient supply to ensure a competitive process; secondly, the project in question is a demonstration project; or, thirdly, the eligible capacity is unlikely to have a material effect on competition and investment within the United Kingdom or on international trade and investment. In any of these cases measures must also be in place to prevent overcompensation.

This amendment lists additional criteria for a number of small renewable energy or cogeneration projects that, under the terms of the amendment, could be granted without being subject to a competitive process, provided the other conditions in principle C are met. I understand the noble Baroness’s ongoing interest in this issue. It is important to note that the terms of Schedule 2 implement the UK’s international obligations under the trade and co-operation agreement with the European Union. Changing the terms of that schedule, as the noble Baroness’s amendment would do, would jeopardise the implementation of the UK’s international obligations and for that reason I cannot support the amendment. Furthermore, the Government understand the importance of supporting small-scale renewable energy projects of the kind set out in the noble Baroness’s amendment.

I point out that under the terms of principle C(2)(b), a non-competitive process may be used to determine a subsidy for renewable energy or cogeneration if appropriate measures are put in place to prevent overcompensation and if the subsidy is not likely to have a material effect on competition or investment within the UK or trade and investment between the UK and its trading partners. It is very likely that many of the projects caught within the terms of the noble Baroness’s amendment would already be included within these exemptions. Therefore, I believe that the noble Baroness’s amendment is unnecessary and I hope that, given the reassurance I have been able to give her, she will feel able not to press it.

With respect to energy and environment objectives, Schedule 2 of the Bill establishes a clear and flexible framework for the awarding of subsidies in relation to energy and the environment. This reflects the Government’s ongoing priorities on net zero and protecting the environment, while also ensuring that the UK complies with its various international obligations. All subsidies to which the subsidy control requirements apply, including small projects of the kind set out in the noble Baroness’s amendment in relation to energy and environment, should comply with these principles, not least of which is good value for taxpayers’ money.

I stress to noble Lords that the UK’s existing commitments and practices in relation to this critical priority are extensive and world leading, including, for instance, the various principles set out in the Environment Act which Ministers must give regard to when making policy. I believe, therefore, that we already have the right framework in place. For the reasons that I have set out, I hope that the amendment can be withdrawn.

[Lord Whitty (Lab)]

My Lords, I cannot really hide that I am deeply disappointed by the Minister’s response. One modicum of comfort, if that is the phrase, is that he did say that guidance to public authorities would include a reference to the climate change objectives. I therefore can see no possible reason for him rejecting Amendment 61 on that basis.

On the central issue, the Minister referred to all the existing mechanisms, and there are important existing mechanisms and commitments, but the Climate Change Committee has said to the Government time and again that every new policy ought to include a cross-reference to climate change targets. This is an enormous area of new policy that, rightly or wrongly, we have taken back from the European Union so that we control the levers of power for a new era. Yet the Government stumble at the first hurdle and do not put it in this very important legislation. I do not understand the logic.

To be fair to the Minister, he wants all these things delivered, as the Government appear to do. This is not to say that they override all other policies and objectives, but they should be part of the balance when these things are being considered. There is a danger, in rejecting such amendments to this important legislation, that the interpretation out there—which in a sense has been fed by the media over the last few days—will be of a backing off from commitments to climate change within government circles.

The Government are missing the point and missing a trick here. If they want to reassert that they are still on schedule to deliver the government commitments and the net-zero strategy to which the Minister is committed, that should be in this important legislation. I hope I am wrong, but in order to ensure that this House at least has a chance to give its view on these matters, I am prepared to put this issue to the vote tonight. I beg to move.

19:10

Division 5

Ayes: 133

Noes: 139

19:22

Amendment 4

Moved by

[Lord Bruce of Bennachie]

4: Schedule 1, page 53, line 6, at end insert—
“Agricultural subsidies
H_ Subsidies for agriculture should, in addition to being connected to the purposes under section 1 of the Agriculture Act 2020, take particular account of areas of agriculture disadvantage and levels of marginality of land.”Member’s explanatory statement
This amendment would require agriculture subsidies to take particular account of areas of agriculture disadvantage and levels of marginality of land.

[Lord Bruce of Bennachie (LD)]

My Lords, I shall speak to Amendment 4 in the name of my noble friend Lady Randerson and myself. As has already been reported, my noble friend is unfortunately self-isolating with Covid, but we are cosignatories of this amendment.

I hope to have a short but important debate about the role of agriculture in the context of this Bill. In Committee, we moved for the removal of agriculture from the Bill, and it remains our view that it is not appropriate for agriculture to feature in it. The European Union and World Trade Organization, as well as most countries and other organisations, keep agriculture as a completely separate administration, for all kinds of good reasons to do with issues such as food security and the environment. It is also important for the social and economic life of rural communities. In that context, given that the Government have made it clear that they are determined to keep agriculture in the Bill, we have tabled this amendment to try to ensure that the criteria by which agriculture is treated give some comfort—and, more than comfort, substance and reality—to how our marginal farming areas can prosper in future.

It is no secret that there is real concern among farming communities not only about the consequences of leaving the EU and its agricultural regime but about the trade agreements that the Government are signing with Australia and New Zealand, which open up our market to competitive imports—and without a subsidy regime for our marginal areas, we will simply not be able to compete. For example, 86% of the land area of Scotland is designated as less favoured; it is marginal and difficult to farm. It has mostly been dependent, therefore, on a range of different subsidy regimes, whether that is headage or area payments, market intervention or price support. All of those mechanisms have been designed to ensure that farming can be viable in those communities, and that the rural economy of those areas can be sustained.

Therefore, our amendment would put it into the Bill that particular account should be taken of areas of agricultural disadvantage and the levels of marginality of the land. I have cited the figures for Scotland; I do not have the exact figures for Wales, but it involves a significant proportion of the land area of Wales—and it is important for parts of England, such as the border country with Scotland, the Lake District, Cumbria and the ridge of the Pennines. Left to a completely open market and no subsidy support, agriculture on those hills would pretty well disappear. While it may be that the return of wilding is currently supported, it cannot maintain a viable community if there is no activity on that land that can be sustained.

In simple terms, we ask the Government to recognise that marginal land and land that is agriculturally disadvantaged should be explicitly stated as deserving of support. If the Government recognise that, they will give a degree of assurance to farmers across the areas identified, which they desperately need. It is already clear that subsidies are being reduced, and the marginality of those farms gives rise to real concern that they will not be viable in future—and the whole of our landscape will change.

This is a serious issue. It really matters to our hill farmers that they survive, and it matters to our rural culture that they survive, and this amendment would help to ensure that they do.

[Lord Wigley (PC)]

My Lords, I am delighted to support this amendment. I wish the noble Baroness, Lady Randerson well; it is a shame that she is missing this debate as her heart would very much be in it. She has quoted figures for Wales regarding the marginality of land.

In the context of European funding, which this regime is now replacing, the reality in Wales was that many of the schemes to help rural areas were under European grant systems rather than under specific agricultural systems. There is a coming together of the agricultural support and the support for the rural communities in which those agricultural businesses must exist, and both must work together if they are to underpin the future of the small farms, the hill farms, in Wales. There are many uncertainties at present, as the Minister answering this debate is aware. She has met the farming unions in Wales, and she knows their worries. One way of at least giving some hope for the future is to pass an amendment along these lines; if the Government cannot accept the exact words here, they can come back at Third Reading with an amendment that ensures that there is no inhibition, no prevention, in the new system of helping those rural communities in such vital matters.

[The Duke of Montrose (Con)]

My Lords, I declare my interests in farming in Scotland and as a member of the National Farmers’ Union of Scotland.

Agricultural support in Scotland is fully devolved but is an area where, as the noble Lord, Lord Bruce, has just emphasised, many elements of rural life can qualify as disadvantaged or marginal. Therefore, I sympathise with those who are keen to see that similar areas of the United Kingdom are adequately supported. However, I weigh it up with the fact that my noble friend the Minister has emphasised in earlier stages of our consideration that existing support schemes will be allowed to continue.

Those seeking to put this amendment into the schedule are surely looking at the rules that might apply to any new support schemes, but at the moment we are not looking at many new schemes. The measures put before us yesterday in Grand Committee were largely to do with amending existing support schemes. There is a possible exception in that elements of the lump-sum scheme, which at present is aimed at encouraging farmers to contemplate retirement, appear to contain the possibility that it could be applied to completely different circumstances. I asked the Minister yesterday whether it would apply for those in financial difficulty.

19:30

It is a little surprising to me that this amendment was not grouped with Amendment 2, in the name of my noble friend the Minister, which has been so warmly received on all sides. It is likely to achieve exactly what the noble Baroness and the noble Lord, Lord Bruce, would like to see, so I do not support this amendment.

[Lord Whitty (Lab)]

My Lords, I will say a couple of words in support of the amendment and widen it slightly. In Committee, we argued that agriculture had to be dealt with somewhat differently. Clearly, the most acute issue is those on the uplands and other disadvantaged areas. It is right that this amendment addresses that and that the Government—at least in words, if not in the Bill—accept that this will have to be the case.

There is another aspect to it. If we drive those farmers out of business and there is no farming on the uplands and other disadvantaged areas, relatively well-heeled organisations will buy that land, claim they are reforesting it or engaging in some other form of environmentally desirable activity and receive a government grant for it—but in the meantime they will destroy the communities, the culture and the whole nature of our upland areas.

I add the proviso that, as the new schemes come in, the subsidy policy will have to be reconciled with other aspects of agricultural policy. It will not be a simple area. As the noble Duke just referred to, the SIs we have seen so far do not give us any clear indication of the way that policy will develop. This will be an ongoing issue between the subsidy regime and the agricultural support scheme.

[Lord McNicol of West Kilbride (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Randerson, for tabling Amendment 4 and wish her well in her recovery from Covid—it seems that working on BEIS Bills is a Covid-risky business for us all. I also thank the noble Lord, Lord Bruce, for introducing the amendment.

On our Benches, we have been puzzled by the Government’s decision to include agriculture and fisheries in the new subsidy control framework. These are complicated sectors already governed by their respective post-Brexit Acts of Parliament. Given the complex nature of agriculture, I imagine it will be high up on the list of streamlined subsidy schemes created by the Secretary of State or by devolved authorities with approval.

There are genuine concerns around the Government’s approach to the withdrawal of CAP funding and the seven-year transition to environmental land management schemes, ELMS. We support ELMS and the UK Government and devolved Administrations having far greater flexibility than that afforded under the CAP. Nevertheless, as the NFU president Minette Batters has made clear in recent comments, these are challenging times for UK food producers. There has been a worrying long-term trend in the agricultural sector, as my noble friend Lord Whitty just stated, with smallholdings being snapped up by ever-growing larger conglomerates. We take no issue with the bigger producers being present in the UK, but we are concerned about the ever-increasing squeeze on family farms and hill farmers, who struggle to make a living without stable subsidy support.

I am sure the Minister will tell us that this amendment would raise all sorts of unintended consequences, not least that it would fundamentally undermine the ability of the Welsh Government to support their farming sector. However, due to Her Majesty’s Government’s treatment of subsidy control as an entirely reserved matter, there is not a common framework on this topic. This was already touched on in detail in Grand Committee. Specific nations and regions of the UK may have very different interests from those of their neighbours.

Public authorities will of course be able to do what they deem appropriate in the context of overarching subsidy control principles, but this is one area where we may end up seeing subsidy battles and/or legal appeals. Ultimately, this is an opportunity for us to say that, where agricultural subsidies are given, public authorities should have particular regard to issues around the hardship and profitability concerns of smaller producers. As with Amendment 3, we do not believe this text in Amendment 4 precludes any public authority from awarding any particular subsidy; it merely adds an additional consideration to the decision-making process.

Amendment 4 may not instantly solve the problems faced by Welsh farmers, for example, but let us remember that in terms of the Welsh sheep industry something like 90% of the breeding stock fall within upland areas and 70% are in what are known as severely disadvantaged areas. These farms are a crucial part of the British landscape and, while they may not be as profitable as others, there is a public interest in preserving them. We will listen very carefully to the noble Baroness’s arguments, but at this time we are minded to support Amendment 4.

[Baroness Bloomfield of Hinton Waldrist (Con)]

My Lords, before I turn to this amendment, I want to take this opportunity to correct the record. During the fourth Committee session of the Subsidy Control Bill on 9 February, I stated that data for England from the Rural Payments Agency showed

“that 99.5% of subsidies given to the agriculture industry in the UK would not fall within the remit of the subsidy”.—[Official Report, 9/2/22; col. GC 428.]

This figure was also provided in a letter dated 8 February responding to the points raised by several noble Lords during the third Committee session on 7 February. Late last week, the data was reviewed, uncovering a calculation error. In reality, Rural Payments Agency data for England shows 96.4% and not 99.5% of farm payment recipients are paid below the level of the minimal financial assistance threshold. I wish to clearly correct that for the record today.

But my conclusion still stands. The vast majority of agricultural subsidies will indeed fall below the MFA threshold and will not be subject to the substantive subsidy control rules, including the principles. It is only the largest subsidies, many of which will be to relatively large and well-off landowners, that will need to be assessed to ensure they comply with the common sense principles in this regime.

I turn to Amendment 4, tabled by the noble Baroness, Baroness Randerson—I wish her a speedy recovery—which was so ably introduced by the noble Lord, Lord Bruce of Bennachie. It seeks to add an additional principle to Schedule 1 that would require agricultural subsidies to be connected to the purposes listed under Section 1 of the Agriculture Act 2020. It would also require subsidies for agriculture to take particular account of areas of agricultural disadvantage and levels of marginality of land.

The subsidy control principles set out in Schedule 1 to the Bill are designed to apply equally to all strands of the UK economy. Their central purpose is to help protect domestic competition and investment, as well as trade and investment between the UK and other countries, from undue distortion which can arise from the giving of subsidies. This amendment, however, would radically depart from this. It would create a new principle which is not aimed at reducing distortion to competition, investment, or trade and is of no relevance to most types of subsidies.

The noble Lord, Lord Wigley, is quite correct: I am fully aware of the concerns of the farmers’ unions—particularly those in Wales, whose representatives I have met—and indeed those of the noble Lord, Lord Whitty. I reassure both noble Lords, however, that nothing in the new system will work against the granting of subsidies because, building on what the noble Lord, Lord Wigley, said, both agricultural and non-agricultural subsidies have much in common and need to work together to support rural economies.

The Bill establishes a clear, flexible framework for granting subsidies and will not inhibit public authorities from taking into account areas of agricultural disadvantage if they wish to do so. Agriculture is of course an area of devolved policy under the devolution settlements of Scotland, Wales and Northern Ireland. Spending decisions on agriculture are for the UK Government on behalf of England, and the three devolved Administrations in the areas in which they exercise their responsibilities. It is for them alone to take these spending decisions, so long as they are compliant with their domestic and international obligations, including the subsidy control regime. I cannot accept an amendment that would have the effect of putting further constraints on how devolved authorities exercise their powers.

My noble friend the Duke of Montrose rightly mentioned that the existing agricultural schemes and subsidies will be able to continue. The Bill provides broad and flexible grandfathering provisions for legacy schemes. Subsidies and schemes in existence prior to the Subsidy Control Bill coming into force may continue indefinitely if provided for under the original terms of the scheme. The Bill does not require subsidies made under legacy schemes to carry out an assessment of compliance against the subsidy control principles.

In particular, I cannot accept a reference to the Agriculture Act in this Bill. This section of the Agriculture Act is an excellent list of legitimate reasons to give financial assistance, many examples of which will be considered subsidies under the definition in the Bill. But I do not know whether my counterparts in the Scottish and Welsh Governments and the Northern Ireland Executive would welcome the application of this largely England-only legislation to their own agricultural policy, when it was never intended to serve that purpose.

The Bill has been designed to support public authorities in giving subsidies in line with their policy goals and the specific circumstances of their areas of responsibility, and the subsidy control principles are conducive to that. Principle A, for example, sets out that subsidies or schemes must be designed to remedy a market failure or address an equity concern. A subsidy designed to address agricultural disadvantage could certainly fall under one or both of these categories, depending on the type of disadvantage meant. Indeed, the Government’s amendment to add “local or regional disadvantage”, as an example of an equity rationale, underlines that.

Marginality of land may also need to be factored into the design of the subsidy or scheme where it is relevant. The subsidy control principles require a public authority to design their subsidies and schemes to change the economic behaviour of the beneficiaries, and to limit the subsidy to what is necessary to bring about the policy objective. It may very well be relevant to take into account the marginality of land to ensure that these principles are met. Fundamentally, however, it is not for the subsidy control regime to dictate whether agricultural subsidies—whether given by Defra, the devolved Governments or another authority—should account for less favourable pastoral land. In many cases it may well be appropriate for agricultural subsidies to factor in unfavourable conditions faced by farmers. However, this is for the public authorities themselves to determine and to incorporate into the terms and conditions of their own schemes.

The noble Lord, Lord McNicol, mentioned the common frameworks. The new domestic subsidy control arrangements and the UK common framework on agriculture are complementary. The inclusion of agriculture in the domestic subsidy regime will minimise the risk of distortions to UK competition and investment and ensure consistency across sectors. The common UK frameworks will enable policy proposals to be discussed and areas of disagreement resolved.

I hope I have managed to reassure noble Lords and, for the reasons I have set out, I ask the noble Lord, Lord Bruce of Bennachie, to withdraw the amendment on behalf of the noble Baroness.

[Lord Bruce of Bennachie (LD)]

My Lords, I thank the Minister for her response and all noble Lords who have taken part in this important and useful debate. There are just two or three things that need to be picked up. The noble Duke, the Duke of Montrose, started off with some sympathy for what we were saying but then turned against it, citing the continuation of the existing schemes. As the noble Lord, Lord Whitty, pointed out in his intervention, however, the world is changing—rapidly—and it may well be that, in the coming years, new schemes may be introduced and therefore that assurance would not have validity. Indeed, there is a general concern that marginal farms could be bought up by big institutions and squeezed out of existence.

I take the Minister’s point about the Agriculture Act, but we just wanted to make sure that we could add into the Bill the very good principles in the Act. I accept that it applies to England, but it would be very surprising if the Government of Scotland took issue with the principles in it. The point, nevertheless, is that farmers want an assurance that the support that they have had under various schemes since the Second World War is likely to continue in some form or other. There is a very real worry that that is not the direction of travel in which the Government are heading. That the matter is devolved does not preclude it also costing a significant amount of money, which previously came from the European Union’s common agricultural policy and now has to fall on the budget of the devolved Administrations.

I hope the Minister will understand, therefore, that the reason we are trying to put this in the Bill is to set out an explicit assurance that marginality will be a criterion that will be encouraged, just as a minor detail. Moreover, if that is in the Bill, it will make it more difficult for New Zealand or Australia, for example, to suggest that the subsidy is somehow incompatible with a trade agreement. Speaking with the experience of an MP for a farming constituency, I can assure the House that the suckler cow premium and the hill farmers have been the basis of building up the pre-eminence of Scotch beef and Aberdeen Angus beef. It is a system that has worked extremely well. Take the subsidies away from the hill farmers and prime Scotch beef will be much harder to deliver economically. The same applies to lamb in Wales and in Scotland. The hills of Scotland, Wales, the Borders and the Lake District without lambs and sheep would not be the attraction that they have been in the past.

I regret to say that I do not think that the Minister’s assurances go far enough, and I would like to test the opinion of the House.

19:46

Division 6

Ayes: 110

Noes: 125

Schedule 2: The energy and environment principles

Amendment 5 not moved.

20:00

Consideration on Report adjourned until not before 8.45 pm.