Subsidy Control Bill

Lord Callanan Excerpts

2nd reading
Wednesday 19th January 2022 Lords Chamber

Moved by

[Lord Callanan]

That the Bill be now read a second time.

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

My Lords, the Subsidy Control Bill creates a new, bespoke, UK-wide subsidy control regime that delivers on our national priorities. This Bill demonstrates the Government’s clear determination to seize the benefits arising from Brexit and design a UK-tailored regime that departs from the previous prescriptive and burdensome EU state-aid system. We have designed a regime that works for the whole of the United Kingdom while at the same time maintaining our reputation as a trusted and respected partner on the world stage. This Bill helps us to honour our international obligations under World Trade Organization rules, under the UK-EU Trade and Co-operation Agreement and other free trade agreements.

The regime that the Government have set out in this Bill will help public authorities to deliver subsidies where they are needed, without facing excessive bureaucracy or lengthy pre-approval processes, as seen under the previous EU system. It allows for greater flexibility and autonomy for public authorities to deliver on local priorities. However, the Government are clear that this freedom does not extend to harmful and excessively distortive subsidies. We are not in the business of propping up businesses that are unviable or doomed to fail without government support.

It is also important to set out clearly what this Bill is not. It is not about intruding on spending decisions for local authorities or the devolved Administrations, and it will not dictate the policy decisions that this Government make in supporting our strategic priorities, from levelling up to net zero. Public authorities will maintain their spending decisions in relevant areas and will be supported by clear guidance on how to grant subsidies in line with the new regime. We will continue to make the right strategic decisions, to support the people’s priorities.

For the first time, local authorities, public bodies and the devolved Administrations in Scotland, Wales and Northern Ireland will be empowered to decide for themselves if they can issue taxpayer-funded subsidies, by following a set of UK-wide principles. This will provide them with new freedom and flexibility to design subsidies and subsidy schemes which meet local needs, as well as national policy objectives such as reaching net zero. The seven principles that they will need to follow are clear and proportionate and form the basis of our new regime. They set out that subsidies awarded under the new regime must be justifiable on policy grounds. The subsidy must be appropriate, proportionate, and designed to minimise any distortions to competition and investment in the United Kingdom. These principles, along with additional considerations for energy and the environment, will ensure that public authorities design subsidies that bring out the best in our communities while ensuring consistency. The Government are clear that subsidies are there to support and encourage businesses, not to prop them up.

The Government are committed to our international obligations and relationships with our valued trading partners. Therefore, the principles also require a public authority to carry out a balancing test and to proceed only if the benefits of the subsidy outweigh any distortions to international trade, in addition to UK competition and investment. These principles will be underpinned by clear guidance, which will be published ahead of implementation of the regime. This guidance will support public authorities to ensure that subsidies deliver strong benefits and good value for money for the UK taxpayer, and ensure that subsidies are being awarded in a timely and effective way, to give businesses the certainty and confidence that they need. The guidance will also ensure that public authorities fully understand their legal obligations, and make clear which subsidies are permitted and which are prohibited.

We want public authorities to be able to deliver subsidies quickly, easily and without undue burdens. The Government want low-risk subsidies to proceed with minimum bureaucracy and maximum certainty, so we will create streamlined subsidy routes for subsidies that are at low risk of causing market distortions, and that promote UK-wide strategic policy objectives. These routes will make demonstrating compliance even simpler than the baseline method of principle-by-principle assessment. I appreciate that streamlined routes are a novel approach to subsidising and that further explication is required. To aid understanding, we will shortly publish a policy statement and two draft illustrative routes. Together, they will describe in detail the Government’s thinking in this area and demonstrate exactly how these routes will work.

[Lord Forsyth of Drumlean (Con)]

I know we have had Covid, but I can still ask a question at Second Reading, even though it is unusual. Can my noble friend explain why the guidance and the information that he is describing has not been made available before we got to Second Reading?

[Lord Callanan (Con)]

My noble friend makes a good point. We will be publishing the guidance as soon as it is available. We are still in discussions with the devolved Administrations and others on the exact design of the regime and the possibility of obtaining legislative consent Motions.

The Bill also establishes the UK subsidy advice unit, hosted by the Competition and Markets Authority. The unit will monitor and oversee how the regime is working, as well as conducting a mandatory, non-binding review on public authorities’ assessments for subsidies of particular interest. Subsidies or schemes of interest may be referred to the subsidy advice unit. A subsidy or scheme of particular interest must be referred to the unit, which will then publish a report detailing its decision within 30 working days. This quick process will allow public authorities to act with far greater agility than before, while upholding the highest standards of accountability or transparency. We are clear that this Bill will allow for agile delivery and proportionate scrutiny at the same time.

Although we can expect that public authorities will take their obligations under this regime seriously, we also recognise the need for a direct route to challenge by interested parties, so there will be a meaningful, time-limited process for enforcement, through the competition appeal tribunal. This will ensure that the subsidy recipients have legal certainty once the window for a challenge has passed. A key part of effective enforcement is ensuring that we are as transparent as possible with information on what subsidies have been awarded. My department listened to the concerns expressed in the other place about the operation of the subsidy database. We are editing the database to improve the quality of information that is available publicly. Of course, the database is still relatively new. Officials are actively developing further enhancements over the coming months, in advance of the new regime coming into force.

A UK-wide subsidy control regime is necessary to ensure that subsidies do not unduly distort competition within the UK’s internal market. I repeat, as we have many times before, that we are wholeheartedly committed to ensuring that the new regime works for the whole United Kingdom. That is why the Government have worked closely with the devolved Administrations, including sharing the consultation response document ahead of publication and carefully considering their representations. We have met with DA officials 45 times and Ministers 13 times to talk about the regime, since July 2020, and we will continue to discuss its development with DA counterparts ahead of implementation. We will work closely with the devolved Administrations, but it is important to reiterate that subsidy control is a matter reserved for this Parliament. Noble Lords will remember the robust debates that we had on this matter during the passage of the UK Internal Market Bill, but I assure them that the devolved Administrations are and will remain responsible for spending decisions on devolved subsidies within any domestic subsidy control system.

As it currently stands, and according to the terms of the Northern Ireland protocol, subsidies for services in Northern Ireland will be within scope of the new domestic regime. It is this Government’s view that it is no longer necessary for Northern Ireland to be subject to the EU state aid regime, which is why we have proposed a change to the Northern Ireland protocol to bring all subsidies within scope of the domestic regime. As noble Lords will be aware, discussions continue at pace with the EU on the Northern Ireland protocol. However, no matter the outcome of these negotiations, the Bill will deliver for the people of Northern Ireland and ensure that there is clarity on which rules to follow.

This new independent subsidy control regime will help ensure that people in all areas of the UK, from Belfast to Bangor, Derby to Dundee, feel the benefits of targeted subsidies in their areas, and that prosperity and opportunity is spread right across the UK. This includes investment in skills, local infrastructure and new technologies, as well as into research and development. We have the opportunity here to facilitate subsidies that support people’s priorities, from tackling regional inequalities, to combating climate change, to increasing R&D and innovation. The common-sense energy and environment principles in Schedule 2 of the Bill support the UK’s net-zero ambitions, as well as contributing to a secure, affordable energy system. Under this regime, public authorities at all levels of government will be empowered to give subsidies to help address regional disadvantages, supporting our levelling-up aims.

Noble Lords will be aware of the delegated powers in the Bill. I assure them that the powers to make regulations are reasonable and necessary. The regime will need to change over time in response to a number of factors, such as exchange rate fluctuations. Where the Bill includes powers to amend primary legislation, these have been drafted to be as narrow as possible. However, we will of course take into account the findings from the Delegated Powers and Regulatory Reform Committee’s report and we will review accordingly.

The illustrative regulations that we will publish before Committee will help to demonstrate to noble Lords how the Government will exercise, with care, the powers contained in the Bill. I am, as usual, very happy to engage and I will very much welcome feedback from all sides of the House on these products in due course.

We are seizing the opportunities of Brexit. The Bill before us today is an important move away from prescriptive state aid rules. Public authorities across all parts of the UK will have the autonomy and flexibility to deliver subsidies that work for their local area. We are returning decision-making to the hands of the decision-makers in local communities up and down the country. This legislation ensures that our new subsidy system will maintain the competitive, free-market economy central to the UK’s economic success and to our national prosperity. I beg to move.

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[Lord Callanan (Con)]

I thank all noble Lords for their engagement ahead of today’s debate and their contributions this evening on this important Bill. It has been a good debate, despite the relatively late hour. I apologise to our two Green ladies, but I am not responsible for the timings, which were primarily driven by the time that the House dealt with previous business. However, we have had some informed and thoughtful speeches from all sides, which have given me much food for thought. I am particularly fascinated by this emerging unholy alliance between my noble friend Lord Forsyth and the noble Baroness, Lady Jones, who are at opposite ends of the political spectrum. I look forward to seeing how long this lasts when confronted with the reality of politics. It will be fascinating to see, and will no doubt give great amusement in Committee.

A number of noble Lords raised concerns regarding the role of the devolved Administrations. I thank the noble Baronesses, Lady Blake of Leeds and Lady Bryan, the noble and learned Lord, Lord Thomas of Cwmgiedd, and the noble Lords, Lord Whitty, and Lord Bruce of Bennachie, for their considered contributions. I emphasise that the devolved Administrations are and will remain responsible for the spending decisions on devolved subsidies within any subsidy control system. We have produced a Bill that not only protects but strengthens our union, through the creation of a single, coherent framework that empowers public bodies across all four nations to design subsidies that are tailored to local needs. It is in all our interests to ensure that the regime works for the whole United Kingdom and enables the UK’s domestic markets to function properly and efficiently, which is precisely what this Bill does.

It is important that I draw attention again to the point that Ministers and officials have engaged in and continue to engage extensively with the devolved Administrations on the new regime. Such discussions have also been paramount in informing the policy development from the outset. This is not to say that we have agreed to everything. Clearly, we have not—there are some areas of disagreement. However, our proposal aligns with their views on the majority of issues, including the regime’s objectives, their foundational principles and the need to respect the devolution settlement and to enable support for levelling up. Therefore, we hope that the devolved Administrations can understand and support our approach and that ultimately, they will give their legislative consent.

A number of noble Lords raised the issue of the Secretary of State’s powers within this Bill, but they are limited and appropriate. The regulation of subsidies is a matter reserved to the UK Parliament, and the Secretary of State therefore has responsibility to ensure that the new regime is enforced consistently across the whole of our United Kingdom. The Secretary of State must also ensure that the UK is compliant with our international obligations.

A number of noble Lords across the House have also raised concerns about transparency. I reassure my noble friend Lord Forsyth and the noble Viscount, Lord Chandos, that my department is working on a programme of improvements to the subsidy database. These will be completed soon and will address a number of the specific concerns raised here and in the other place. The Government will continue to reflect carefully on the points raised today and will engage further on our findings with parliamentarians in both Houses as the Bill progresses.

With regard to secondary legislation and the regime’s guidance, I thank the noble Baroness, Lady Blake, the noble and learned Lord, Lord Thomas, and other noble Lords for their contributions. To directly address the point made by my noble friend Lord Forsyth and the noble Lord, Lord Bruce, around this Bill being a framework, I draw attention to the testimony provided by the parliamentary counsel for domestic legislation in the House of Commons, Daniel Greenberg. He emphasised the need for the Bill to take the form that it does in order to give the flexibility for the ongoing relationships between the different powers concerned by the substance of the Bill.

As I mentioned earlier in response to the intervention by my noble friend Lord Forsyth—I am sorry if I gave him the impression that he was not permitted to intervene; he was entirely right to do so if he wished—and also addressing the point made by the noble Lord, Lord Fox, we will shortly publish a package of illustrative products that will set out much more information on the regime. We have been keen to ensure that relevant stakeholders have had the appropriate opportunity to provide input in the development of these regulations and guidance. They will be published early next week in time to support the Grand Committee debate of the Bill and will include draft regulations on subsidies of particular interest and guidance on the application of the principles. The final guidance will be made available in advance of the new regime’s commencement to ensure that public authorities understand it and can prepare for it.

On the specific request raised by the noble Lord, Lord Purvis of Tweed, on future impact assessments, I can assure him that we will produce further such assessments where appropriate, and we will provide more information on that in due course.

A number of noble Lords raised questions around net zero. I reassure the House—in particular, the noble Lord, Lord Ravensdale, and the noble Baronesses, Lady Bennett and Lady Sheehan—that the Bill supports our net-zero goal. The principles provided under the Bill are common sense and clearly support the UK’s priorities on net zero and on protecting the environment. An explicit principle on net zero, in our view, is therefore not necessary.

A number of noble Lords also commented on levelling up and disadvantaged areas. I reassure the House that this Bill supports the Government’s levelling-up agenda. It gives public authorities the flexibility to grant subsidies where they are best served to support economic growth in local places, but without the excessive bureaucracy or pre-approval processes. This directly addresses the proposal of an assisted area map such as those under the EU state aid regime, a point made by the noble Lords, Lord Ravensdale, Lord Fox and Lord McNicol. These maps were a necessary feature of the EU state aid regime, in which subsidies were prohibited unless specifically permitted. Assisted area maps were therefore required to facilitate an exemption for subsidies addressing regional inequality.

The UK’s domestic regime is fundamentally different, and it is aligned with the rest of the world. It is a permissive regime that allows public authorities to assess for themselves whether their subsidy or scheme can be given by reference to the sets of principles that I outlined earlier and of prohibitions and requirements. I can therefore reassure the noble Lord, Lord German, and the noble Baroness, Lady Bennett, that the absence of a dedicated regional aid exemption does not mean that public authorities are any less able to give aid or to address regional inequality. As long as a subsidy is justifiable on policy grounds, such as addressing regional inequality, and the public authority considers that it is compliant with the basic set of principles and prohibitions, then it can indeed be given.

I move on to the vital subject of Northern Ireland and points raised by my noble friend Lord Forsyth, the noble Lords, Lord Purvis and Lord Dodds, and the noble Baroness, Lady Hoey. In relation to the Bill’s interaction with Northern Ireland, I reiterate that the UK will of course continue to be a responsible trade partner that respects its international obligations, and our commitments made under the Northern Ireland protocol are no exception. There will be no double regulation of subsidies. Subsidies that are subject to the protocol, which complies with EU state aid rules, will be exempt from the requirements of this new domestic regime. Under current arrangements, subsidies within the scope of the Northern Ireland protocol of the withdrawal agreement in respect of goods and wholesale electricity markets, which affect NI-EU trade, will still need to comply with EU state aid rules. Subsidies for services will ordinarily comply with the more flexible UK domestic subsidy regime.

The noble Lord, Lord Purvis, also referred to technical guidance, noting that in specific circumstances it may be useful for companies to keep separate accounts. This is one possible way to demonstrate that a subsidy given in Great Britain is not being used to cross-subsidise a subsidiary in Northern Ireland, but it is not a legal requirement and nor is it relevant to all companies.

I can reassure the noble Lord, Lord Dodds, that, subject to negotiation with the EU, the intention is that all types of subsidy would be within scope of the domestic regime. The Government will create streamlined routes for public authorities across the UK to award subsidies that help achieve UK-wide priorities. We will continue to work closely with the DAs while developing this policy both at official and ministerial level, and we are committed to continue our close engagement on this with the devolved authorities.

[Lord Fox (LD)]

Sorry to intervene, but to be clear so that I understand: what the Minister has just said is, I think, that if I have a business which has an operation in County Antrim and an operation in Hereford, and they are both technically eligible for a subsidy for the goods they make, the operation in Hereford would be eligible for a subsidy under the UK scheme but the operation in County Antrim would not be. Is that correct?

[Lord Callanan (Con)]

It would depend on a number of factors, and whether the subsidy complies with the set of basic principles that we outlined earlier under the UK regime. But under the current system—and obviously negotiations are ongoing—and if it was for a good, then the operation in Norther Ireland would be subject to the EU state aid regime because Northern Ireland is subject to that under the current terms of the protocol. If my interpretation is not correct, I will write to the noble Lord.

I assure the noble Baroness, Lady Randerson, that devolved Administrations, as primary public authorities, can also set up schemes for use by other public authorities where that is within their existing functions and powers. For example, the Welsh Government are perfectly within their rights to set up a scheme, if they wish, that can be used and accessed by all local authorities in Wales.

I move on to the role of the CMA and the subsidy advice unit. I agree wholeheartedly with my noble friend Lord Lamont, who noted the importance of independent oversight and robust scrutiny of our new regime. The subsidy advice unit will have an important advisory role for a relatively small number of cases, and an overall monitoring role for the system as a whole. Most subsidies granted are low risk, so it is right that the unit’s focus should be on the small number of subsidies with a greater likelihood of causing distortion in the market. The subsidy advice unit will provide advice that is genuinely useful to public authorities in designing their subsidies and assessing against their regimes’ requirements. This strikes the right balance between improved freedom for public authorities while providing confidence to interested parties, investors and the general public.

My noble friend also raised the issue of the Competition Appeal Tribunal. I can assure him that the regime will be robustly enforced through this UK judicial system, with the Competition Appeal Tribunal hearing judicial reviews of the award of a subsidy or the making of a subsidy scheme. The Competition Appeal Tribunal is UK-wide, has extensive expertise in the related area of competition law and is well suited to hearing challenges to the award of subsidies. In our view, the roles afforded to the Competition Appeal Tribunal and to the new subsidy advice unit will foster a regime that is robust, while empowering public authorities to deliver subsidies more quickly, more easily and more flexibly if that is what they choose to do.

A number of noble Lords, including the noble Lords, Lord German and Lord Bruce, and the noble Baroness, Lady Bryan, raised the issue of the inclusion of agriculture. In our view, the inclusion of agriculture and fisheries subsidies will help to protect competition and investment in these sectors in the UK. This position was supported by the majority of the respondents to the UK Government’s consultation who answered the question on agriculture and fisheries. Although agriculture and fisheries subsidies are not in scope of the subsidy control provisions in the UK-EU TCA, they are still subject to other international rules. The proposed approach will provide consistency for granting authorities while retaining sufficient flexibility for the devolved Administrations and all public authorities to deliver support where it is needed and how they see fit, given their responsibilities.

[Lord Bruce of Bennachie (LD)]

The Minister said that this was supported by the majority across the UK, but he has not acknowledged that it was not supported by the agricultural representatives in Scotland or Wales.

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[Lord Callanan (Con)]

I do not have a regional breakdown of the responses to the consultation, but this is a UK-wide system and regime. If there is a regional breakdown, I will certainly provide it to the noble Lord.

I will move on to answering the point made by the noble Lord, Lord McNicol, and the noble and learned Lord, Lord Thomas, about the DPRRC report. I am grateful to the committee for the production of the report; I read it with interest. Of course, I recognise the strength of feeling in this House; it has come across today and been conveyed to me by a number of noble Lords, especially with regard to Clause 47. There is a lot to consider there in terms of striking the right balance on this and the other issues raised in the report, but I can commit to reading it very carefully and considering what policy steps we may take in response.

The noble and learned Lord, Lord Thomas, also referred to the Treasury’s powers. Measures implemented by central banks in pursuit of monetary policy have always been considered outside the scope of EU state aid regimes and rules—just as well given the massive amount of subsidies that it has imposed in recent years. In the joint declaration on monetary policies and subsidy control, the EU and the UK confirmed their mutual understanding that activities conducted by a central bank in pursuit of monetary policy are outside the scope of the subsidy control requirements in the trade and co-operation agreement. One of the Bank of England’s independent statutory functions is to maintain UK price stability and, subject to that, support the Government’s economic policy. It is both appropriate and necessary that the domestic subsidy control regime exempts monetary policy subsidies and schemes in pursuit of these objectives.

I assure my noble friends Lord Lamont and Lord Trenchard, and the noble Viscount, Lord Chandos, that this Government do not intend to return to the policies of the past, such as the failed 1970s approach of attempting to run the economy by bailing out fundamentally unsustainable companies. I suspect that this will probably not be the subject of a new agreement between the noble Lord, Lord Forsyth, and the noble Baroness, Lady Jones, but, nevertheless, that is our policy.

The principles in this Bill make it clear that subsidies need to address either identified market failure or an equity rationale as a legitimate objective in order to be awarded. It is important to note that not every example of government spending is a subsidy, of course. The Bill sets out a detailed definition: if a public authority purchases goods or services on market terms, that is public procurement and not a subsidy. Parliamentary oversight of spending and managing public money, as well as the Green Book requirements, will continue to apply and are important protections against bad government spending decisions.

[Lord Purvis of Tweed (LD)]

The Minister is being generous in giving way this evening. For the record, will the Minister say—it was hard to discern from the comments on the processes—what the geographical area of a market is? The Bill refers to market failure, and the Minister has referred to it. He also referred to many public bodies that will be local authorities. When I emailed the subsidy control email inquiry, asking, as a resident of the Scottish Borders, whether Northumberland is a market, in order to discern whether it will be a market failure, I was told that there is no Northumberland market. So, what are the geographical areas of a market? The Government are not going to have the geographical indices for deprivation, whereas previously, we knew what the markets were in respect of state aid support.

[Lord Callanan (Con)]

I will reflect on that, speak to officials and write to the noble Lord about the appropriate definition, is that is okay with him.

I will respond to the question from my noble friend Lord Trenchard, the noble Lord, Lord Fox, and others about transparency thresholds. Regarding thresholds at which subsidies are uploaded to the database, I listened carefully to the debate in the other place and the comments from noble Lords this evening. In our view, the current transparency provisions seek to strike a balance between reducing the administrative burdens and costs to public authorities and ensuring that the necessary information on subsidies is available. In our view, this is vital to ensure that interested parties are able to challenge potentially harmful subsidies. However, I accept that there is a legitimate debate about the level at which those thresholds are placed.

Let me conclude by reaffirming what I said in my opening remarks. In our view this Bill creates a robust yet agile system that allows public authorities to provide subsidies where they are needed most. At the same time, it will allow us to maintain a competitive free-market economy as we build back better from the pandemic, and to chart a new course as an independent trading nation. I look forward to discussing many of these points further in Committee, but in the meantime, I commend this Bill to the House.

Bill read a second time and committed to a Grand Committee.