Subsidy Control Bill (Second sitting)

Bill Esterson Excerpts

Tuesday 26th October 2021 Public Bill Committees

[Stephen Flynn (Aberdeen South) (SNP)]

Q Thank you for your helpful answers and input so far, Dr Barker. I think earlier you alluded to—those who gave evidence this morning certainly alluded to it—the lack of detail behind the Bill, the lack of guidance and the powers that sit with the Secretary of State. That prevailing situation is unlikely to change before the Bill comes into law. Do you think that is a help or a hindrance to businesses as it stands?

Secondly, we know that historically the UK’s spend when it comes to state aid, as it is more commonly known, has fallen well below that of European partners. Do you think the Bill will change that in any way, shape or form? Is there any indication in the Bill as it stands that it will change, certainly from a business perspective?

Dr Barker: I do think that more clarity is needed around a number of the concepts in the Bill. The need for more detail increases with the number of public bodies that are being empowered to grant subsidies. To give some examples, there is uncertainty around what would constitute a subsidy of particular interest, which is a subsidy that requires much more detailed pre-assessment by the CMA. Will that apply to a significant proportion of potential subsidies, or will that be done just on an exceptional basis? The answer will affect the nature of the entire system. At the other end of the spectrum, I think we still lack detail about the streamlined subsidies that can benefit from fast-track approval.

Another area that is important, particularly for IoD members, is the extent to which this regime can facilitate the support of start-ups, particularly those companies that do not have a long-standing financial track record and are still some way from generating profit or even revenue. I think that the proposed regime in this respect is preferable to the previous European Union regime, which had a prohibition over supporting undertakings in difficulties, which really ruled out start-ups. Within this measure, the only thing that is ruled out is the support of ailing or insolvent companies, which increases the scope of what can be supported. However, we still need clarity about what kind of going-concern assessments will be conducted to ensure that a potential recipient is eligible.

To answer your first question, there is still some way to go to provide all the interested parties with more clarity about how the system will operate. With your regard to your second question—do I think that this framework indicates that we will have more state support of business?—in itself, the answer is no. As I said before, it provides a framework in which that kind of policy could be pursued, but there is nothing about it that necessarily implies that it will be pursued. As I have said previously, in certain sectors there is a need for a changed approach to match those of our key competitors. That is really how the IoD is viewing it—is it going to be useful for that purpose? The answer is that it could be.

[Bill Esterson (Sefton Central) (Lab)]

Q Good afternoon, Dr Barker. I would like to go over a few things that you said and put them back to you to see if you have answers to the questions that you put to us. You began by talking about ideally having a system that is easy to navigate with enough certainty that businesses and awarding bodies are not going to be challenged. First, what is your top priority in the legislation that you would like to see strengthened or changed? Secondly—this comes back to a point that you made a couple of times about international comparisons; you talked about what our competitors are doing—what is the top thing that you would like to learn from which is going on internationally? On your point about the subsidy advice unit, is your big concern about lack of capacity in the Competition and Markets Authority?

Dr Barker: Yes. To address your first point, the factors that will ultimately make this most predictable include, first, guidance on the principles under which subsidies will be granted. It is a tricky balance between providing guidance that is too prescriptive, which becomes difficult to penetrate and understand, and, on the other hand, principles and advice that are too sparse and which try to be nimble but leave too much uncertainty on the table in specific instances. It is about finding the balance.

Secondly, it is about the subsidy advice unit operating effectively and being really useful, informative and timely in being able to assist the various parties and point them in the right direction. The third part of the process is the tribunal. One would hope that the number of cases coming to tribunal is minimised, but at least it provides timely, transparent and understandable rulings that assist parties in future in how they assess their ability to give subsidy. Those are my answers to that question.

[Bill Esterson]

Q Sorry to interrupt—I am trying to tease out the issues. That is interesting. I think that you are suggesting that this is going to evolve through practice—that is what you are looking for. Is that a fair characterisation?

Dr Barker: I think that that is reasonable. It will need to evolve. As it evolves, hopefully confidence in the system will grow, along with predictability based on past rulings and decisions. That is the key thing that we are trying to get to—a degree of predictability so that everyone concerned knows how it is going to work and whether or not it is going to work without having to resort to a more legal framework.

On your second question, yes, we do need to learn the lessons of other major countries that seem to be doing a better job than the UK in terms of building technology companies and science-intensive-type enterprises. What is it that they are doing that we are not? I do not think they have achieved their success entirely by business acting alone and Governments simply stepping out of the way. A lot of the industries of the future are those that require very close collaboration between business and Government. Certainly, the green industrial revolution that we are all seeking to work towards in order to achieve net zero is also something that will require a lot of partnership between business and Government, so for me, an effective subsidy system can be part of that.

[Bill Esterson]

Q Do you have a specific example from another country that brings this to life for us?

Dr Barker: Certainly in the United States, which on the face of it is a free market-oriented economy, there is still a significant degree of public subsidy going into sectors such as artificial intelligence and quantum computing, for example. The EU is subsidising to a high degree the development of semiconductor manufacturing capability, and of course Asian countries also provide many examples.

[Bill Esterson]

Q Thanks. On the point about the SAU and CMA capacity, I think you were saying that your concern there is that you want confidence that there are enough staff to answer the inquiries in a timely fashion, otherwise the whole thing grinds to a halt.

Dr Barker: That is right. The CMA is increasingly playing a central role in many aspects of our economic life, and we are asking it to do more and more, not least in the digital space. It would be incredibly beneficial to this new regime if the CMA and its advice unit had the capacity to really assist the process.

[Stephen Kinnock (Aberavon) (Lab)]

Q Dr Barker, may I ask you about your members who are based in Wales, and whether you have had any conversations with them, or feedback from them, about this new legislation? Have they raised any concerns with you about the potential confusion that might exist between the different levels of government, particularly given that they are working in areas that they have come to know as devolved policy areas where their main interface is with the Welsh Government? Have they raised any concerns about this issue with you, or has it not really come on to their radar screens yet?

Dr Barker: They are aware of this issue in each of the devolved nations. The IoD as a whole does not take a view, for example, on whether the subsidy regime should be a devolved matter or a reserved matter for the UK central Government, but they certainly are concerned to ensure that that does not get in the way of a levelling-up agenda that could be very needed in, and very beneficial to, a country such as Wales.

--- Later in debate ---

[Stephen Kinnock]

Q I have two questions, Mr Peretz. The first is around the idea of assisted area maps; do you think there is a connection between the need for an assisted area map and the commitments that were made in the TCA? The joint declaration on subsidy control policies within the TCA says:

“Subsidies may be granted for the development of disadvantaged or deprived areas or regions. When

determining the amount of subsidy, the following may be taken into account: the socio-economic situation of the disadvantaged area concerned; the size of the beneficiary; and the size of the investment project.”

I would be interested in your view as to whether that constitutes an actual obligation to have an assisted area map, or some way of defining disadvantaged areas based on the terms of the TCA?

My other question was around article 10 of the Northern Ireland protocol; I am sure you will not be surprised to hear that, we have discussed it many times. What is your sense now of the state of play around article 10 of the Northern Ireland protocol? To what extent could it be interpreted so broadly as to effectively drive a coach and horses through this legislation?

George Peretz: I will deal with the regional aid map first. The schedule to the TCA is permissive. It allows the parties to do things: it does not require them to do anything. If the UK Government just did not think that regional aid was appropriate at all, they are entirely free not to do it—ditto the EU. There is also a bit of a danger in holding on to old state aid law thinking. The position of regional aid maps in the state aid law regime was there because there was a basic prohibition on state aid unless it went through the process of going to the Commission and getting cleared, unless it fell within block exemptions. Regional aid maps played their role within the block exemptions. They meant that if you were giving a grant that fell within the conditions of regional aid in certain areas, you could give grants in an area that benefited from assisted area status that you would not be allowed to give, for example, in Guildford without going through the process of notification and clearance. If you did it in an assisted area, you could just do it without going through that process.

Structurally, that does not really fit into the new regime, because it does not have that basic prohibition element in it. Instead, it requires all public authorities to think about the principles, which will inevitably apply in a somewhat different way. They are bound to be affected by the region in which they are given. For example, the principle in paragraph A(b) of schedule 1—

“address an equity rationale (such as social difficulties or distributional concerns)”—

will apply very differently in the Welsh valleys than in Guildford, because the social difficulties and distributional concerns are different.

One possibility that could arise under the structure of the Bill is that the Government might well issue streamlined schemes that make reference to the areas concerned—something that a streamlined scheme could certainly do. They could say, “This scheme applies,” and effectively there is automatically no risk of the CMA having to look at it, and you do not have to go through the process of thinking about the application of the subsidy control principles for grants in Pontypridd, as you would were you making the grant in Guildford. That is where something like the regional aid map might come back in, but it is not in the Bill; it will depend on what the Government decide to do about streamlined subsidy schemes.

I have probably written far too much on article 10. The current state of play is that, if I am advising a client such as a local authority or a subsidy recipient, my immediate problem is that I have to look at two sets of guidance—one issued by the European Commission and one by the Department for Business, Energy and Industrial Strategy—that in some important respects tell me very different things. If I am advising a client who is the prospective recipient of a grant from an English local authority, but my client sells a significant quantity of goods in Northern Ireland, the Commission guidance essentially tells me that article 10 is likely to apply. The BEIS guidance tells me that it is unlikely to apply. I am capable of making up my own mind about that, but I would obviously have to draw my client’s attention to the different guidance, and if it ever got to court the court would be entertained with the different guidance and would have to decide what to do, so there is a difficulty.

The fundamental problem is the effect on trade test. Assuming that it is meant to mean the same sort of thing as it means in the EU state aid law rules, which is probably, though not certainly, right, it catches an awful lot of things. It famously caught the question of whether taxi cabs in London could drive in bus lanes, according to the European Court, even though one might struggle to see quite why that affected trade between member states.

The real problem is that the European Court has consistently upheld reasoning on effect of trade, which is extremely thin, based on assumptions, and it does not really include much of what any economist would recognise as economics. An effect on trade has been deduced and that makes it a bit difficult. The boundary line is therefore just obscure. The Bill effectively says that anything that falls under that regime is excluded from the Bill, but you do have the problem that the boundary line is not very clear.

[Bill Esterson]

Q Good afternoon, Mr Peretz. You have been giving a lot of the very detailed challenges and saying how some of the problems might come out and be addressed. Can I ask you to look at the Bill as presented and give an overview of what you think the Committee’s top priorities to address in the Bill might be?

George Peretz: We have touched on a couple of the main issues. The devolution issue that we have discussed is quite important. There is an issue with enforcement, particularly in relation to measures that are not regarded by the public authority as being subsidies, but are just a grey area—and that view could simply be wrong—and how those are dealt with. The Bill does not really address on its face how those will be dealt with. One can sort of work out how they are likely to be dealt with but it would be better if that situation was more expressly catered for and dealt with.

There is an enforcement problem in that, ultimately, unless the Secretary of State decides to refer things to the Competition and Markets Authority—of course, there will be cases where things have to go to the CMA—the mechanism does very much rely on private enforcement by, at the moment, interested parties, who are going to be commercial operators and probably not public interest ones or local authorities. You cannot always rely on commercial operators to enforce things like this. There are all sorts of reasons why they may not. Quite a lot of commercial operators are hoping for the same subsidy themselves, so they will keep quiet, or they get the same subsidy themselves and will therefore be quiet, whereas actually there is a real public interest problem.

You will get situations with quite small companies who are concerned about subsidies being given to a much bigger competitor. They will understandably be reluctant to annoy both the granting authority, probably, and the bigger competitor. There are also the inevitable costs and risks of litigation. In a new regime, those costs and risks are greater, because various points have to be sorted out and decided in the first few cases until you get some case law on it. So inevitably the risks and costs are greater. There is more chance that you will end up in the Court of Appeal on a point than there would be once the regime has bedded in.

All of those will be quite off-putting to a lot of private enforcement. Ultimately, that is the keystone on which the whole enforcement mechanism depends, because if nobody brings challenges to this, public authorities will often get away with pretty sloppy reasoning and genuflection to the principles rather than serious engagement with them. I think that is a concern.

[Kirsty Blackman]

Q I have a couple of questions. In the event that BEIS is the granting authority, the only person, realistically, who can make a referral to the CMA to look at it is the Minister, who is in charge of the granting authority. Is there an argument for other people to be added so that a conflict of interest does not arise?

George Peretz: That is absolutely a fair point. If the subsidy measure comes from central Government or even if it is BEIS that is the granter, is it realistic to expect the Secretary of State to call it in or make a post-award referral? You are obviously going to be concerned, from a Scottish perspective, with the possibility that you have a BEIS decision—there is serious concern about this in Scotland—that has an adverse effect on the Scottish economy in some way or another. That is the point I was making. It does seem to me right, as matter of principle, that in those circumstances the Scottish Ministers at least—and potentially other people—would have the right to send the matter off to the CMA to consider.

Bear in mind that the CMA report is not binding, so in a situation where the Secretary of State wanted to say, “Well, I hear what the CMA says, but I just disagree: I still think that this measure is wholly compliant with the principles and the CMA has just got it wrong in suggesting that I change it”, he can go ahead. It is then a risk of litigation—it might be better if the Scottish Ministers had a clear right to bring that litigation too, but that is the current position.

--- Later in debate ---

[Kevin Hollinrake]

Q In terms of the thresholds for reporting—I think it is £500,000 and the minimum financial assistance threshold is £315,000—are they the right level to achieve the transparency you are looking for?

Jonathan Branton: I think probably yes. In terms of the small amounts of financial assistance, it is basically double what the EU’s de minimis has been. The feedback I have had so far across the piece is that the doubling has been a sensible, long overdue move. Frankly, that has been set by reference to what the TCA sets anyway, so we do not have a lot of flexibility to play around with that. Setting it at a fixed, sterling level is immediately sensible. There can be no debate about that.

In terms of the transparency, yes, you have to draw the line somewhere and the £500,000 seems like a sensible, rounded figure. I certainly do not have a strong view that it should be put at a different level—not yet, anyway.

Alexander Rose: The £500,000 is for schemes. I think that the question ultimately is that if you amend clause 70(2) in order to address this gap in terms of, essentially, accountability, you will need some level of incentive to use schemes. It appears that transparency has been chosen as that route.

Personally, I think that the £500,000 seems quite high, but you do need some kind of incentive; otherwise, people will not go down the route of using schemes, when clearly a decision has been made that that is a good idea.

[Bill Esterson]

Q I want to ask Mr Rose and Mr Branton about this. You have both talked about building the framework and the additional details have to come later. Are there any elements of the additional details that you think should be in primary legislation? I think that Mr Warren has ruled that out, but he may want to comment on that.

Looking at the other things you have said, rather than saying in general terms that the reporting period should be less than six months, do you have a particular figure in mind? Similarly, do you have a figure in mind to replace the one-month opportunity to appeal?

Jonathan Branton: I will take those questions in reverse order. There is the clearest possible case for extending as soon as possible the period in which someone can appeal—but not to more than three months, which is the standard time limit for judicial review. I think that is relatively clear.

On the six months, I have yet to hear a really persuasive case for why you need that long to publish the fact that you have made a award. Why do you need six months to get yourself together to publish that something has been done? I would think that that could possibly be as much as halved.

[Bill Esterson]

Two lots of three months, then.

Jonathan Branton: Yes—without compromising anything, it seems to me.

In terms of other bits of the Bill that ought to be in primary legislation, that gives rise to the question: what would the streamlined subsidy schemes be? There is certainly a case for making a number of different ones. The obvious thing is to go down the path of the old block exemption—the general block exemption regulation, or GBER—which made non-controversial interventions easy. That was the good thing about that regime: you knew that if you were well within those limits, you could just get on and do it and you were not blocked from anything. If anything has been lost in the new regime, it is that those easy interventions now seem more difficult and require more thought and more risk, in the sense that nobody is quite sure if they have ever hit the mark or not.

You could go into some quick and easy streamlined subsidy schemes. I am thinking of areas like arts and culture. Regional aid and levelling up is possibly more complicated and will require a bit more thought, but something like arts and culture is easy and obvious. Research and development is easy and obvious—I think everybody agrees that that is a priority. Employment, training and skills are also the sorts of areas in which you might do it. I do not see why we would need to wait around and overthink those. The key with a streamlined subsidy scheme is to make it quick, easy and simple.

Alexander Rose: I completely agree with what Jonathan has said. On the elements where it would be useful for there to be greater clarification, presumably in primary legislation, I think there is a gap in terms of the interested party. It would be useful for public bodies to be able to challenge. If, for example, employment in their area is going to be significantly affected by an unlawful subsidy, it feels right that they should have the ability to challenge in that scenario. It would be good to address that.

Another element is the issue in clause 55 whereby only the Secretary of State can call in these subsidies. At the moment, that seems to be rather strangely limited to prospective subsidies, which does not seem particularly sensible. You could almost end up in a cat-and-mouse game whereby subsidies are issued quickly, so that no one can be called in. That does not seem like a good idea.

Likewise, however, it does not seem particularly sensible to limit the ability to call in the subsidy to the largest awarder of subsidies in the country. Therefore, it would seem that we need some kind of alternative—

[The Chair]

Order. I am sorry to have to cut you off, but that brings us to the end of the time allotted for this panel. I am sorry to those Members who did not get to ask questions. I thank the panel for their evidence, and we will move on to the next witness.

Examination of Witness

Daniel Greenberg gave evidence.

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[Bill Esterson]

Q You mentioned the monitoring role, and I think you have just given a bit of further information there. I wonder, when you identify things that are not going right, what will you do with that information? If you could answer that, I will then come back to some other questions.

Rachel Merelie: Sorry—I did not quite understand. Did you ask what we will do with information that we get when our monitoring role identifies things that we are doing right?

[Bill Esterson]

If things are not working, or you identify a problem, what will you do with the information?

Rachel Merelie: Well, in our monitoring role, we will be producing a report on a five-yearly basis, which will be published. That will give information about our understanding of how the regime is working. It will then be for Government to decide whether they want to make any adjustment—for example, to the definitions of the subsidies of interest or particular intertest, or to the streamlined groups, or any other mechanism—based on both what we identify in our monitoring report and, of course, other information that they may also choose to look at.

[Bill Esterson]

Q Five years seems like a bit of a long time to wait if there are specific examples of inappropriate applications of subsidies. I wonder if there might be a way for the information you are gathering to find its way into an investigation or a challenge.

Rachel Merelie: There are also the enforcement mechanisms that will be in place for subsidies to be challenged in the tribunal. That will be a more immediate way of looking at the impact of individual subsidies. If we are asked by the Secretary of State to provide insights sooner than that, we can do that too, so I think the opportunity to offer advice more quickly than that is there. Again, we are the disposal of BEIS, if you like, on that.

[Bill Esterson]

Q Sorry to continue with this, but it feels as though, if you identify something that is wrong on an individual subsidy level, that will only really get anywhere if somebody asks you about it, so they will have to identify it separately to you. It seems that your process is lacking a proactive part, unless I am really missing something.

Rachel Merelie: There are two parts to our process. First, there is the review mechanism on the individual subsidies, on these particular subsidies of interest and particular interest. On that one, we will be assessing the assessments carried out by the public authority against the subsidy principles and, where relevant, against the environmental and energy principles. On those ones, there is a rapid, 30-day process that we have to operate. We have to publish a report within that timescale on the specific subsidy of concern. That is the sort of short-term mechanism—

[Bill Esterson]

Q That is if you have been asked to investigate, isn’t it?

Rachel Merelie: Absolutely right.

[Bill Esterson]

Q I was asking about if you identify something when you are carrying out your monitoring role. There seems to be a gap there in you referring information. That is the concern I am raising.

Rachel Merelie: I do understand that concern. I think what you are saying is that at the moment we do not have any powers to look at specific subsidies under our own initiative where there might be an issue, other than through that broader monitoring role.

[Bill Esterson]

Q Thanks for clearing that up; I do appreciate it. Coming to your points about the budget and the settlement, you have talked about the 2021-22 settlement, and there is a fund available for the three new functions. How much has been allocated for the subsidy advice unit?

Rachel Merelie: The figure that I think we have publicly is that there is around £20 million for the three new functions in ’21-22. Obviously the majority of that is not for the subsidy advice unit, because we are only just setting that up now. I think it will be more relevant to look at the numbers that we get through the spending review, which will be agreed tomorrow.

[Bill Esterson]

Q Okay, so you cannot really say how much at this stage. You mentioned bringing in board members and other members of staff from around the four nations to fulfil your responsibilities; the reason for asking the question, really, is just to understand what your expectations are of the level of work as compared with your capacity to meet it. An earlier witness said that there is a concern that it could really slow things down if the workload was too high. I appreciate that it is difficult to say because you are not yet in operation, but what is your sense of how flexibly you will be able to address that concern?

Rachel Merelie: It is a very good question. As you say, it is difficult to get a reliable estimate of the workload. The BEIS impact assessment has so far estimated that if the current definitions of subsidies of interest or particular interest were applied to the last few years’ worth of data, we would be looking at, I think, between five and 20 in each of those categories. However, it is quite difficult to know the extent to which subsidy giving will change under the new, more flexible, faster and more agile regime that is being put in place, so that is one question.

Also, there may be a tendency for public authorities to choose to send subsidies of interest to us, even though those are not mandated. In the early days they might be cautious about awarding subsidies without going through the advisory process with us. There are therefore quite a few uncertainties about our likely workload, but we have modelled our requirements based on the upper end of each of those—so assuming that we might get around 40 references a year. With the recruitment plans that we are putting in place, we think that we will be able to service those, alongside performing our longer-term monitoring role.

[Bill Esterson]

Q Two final thoughts. How long do you think an investigation is likely to take? And, on your point about local authorities, have there been representations as part of the consultation from local authorities to say that they are more likely, or for that matter less likely, to make referrals?

Rachel Merelie: On the second one, it was BEIS carrying out the consultation. We have not actually been in the frontline of engagement with stakeholders yet, partly because we are at this quite early stage of the Bill’s passage through Parliament. We will obviously be engaging with public authorities much more actively post Royal Assent, and perhaps in the run-up to Royal Assent as well. We do not yet have that information; BEIS may be able to answer that question.

On the question about how long an investigation would take, we have a very tight deadline for the reviews that we are undertaking of subsidies of particular interest. We are being asked to do those in 30 days, so there will be a bit of a run-in period—a pre-notification, to make sure that we have all the relevant information. Once we have published, I think there is a five-day cooling-off period and then the ability for the public authorities to implement their subsidies. They are quite tight timescales. You could imagine a team having a maximum of a couple of months on a particular review, then moving on to another one.

[Simon Baynes]

Q Just a quick question. We have talked rather a lot in this session about the four nations, but the terms of the Bill are such that the devolved Administrations take their place alongside local authorities, public bodies and central Government in being involved in delivering the subsidies to businesses. Therefore, do you agree that they are of equal importance in this endeavour and that, in a sense, the whole point of the Bill is that it spreads the responsibility across the UK and across different levels of government?

Rachel Merelie: Thank you for the question. It is really important that all granting authorities are treated fairly and equitably, regardless of whether they are in the devolved nations or in England. Yes, certainly the spreading of the load across the different granting authorities, and the ability for the subsidy advice unit to engage with each of those on an equal footing, is very important.