Subsidy Control Bill (Fourth sitting)

Bill Esterson Excerpts

Thursday 28th October 2021 Public Bill Committees

[Paul Scully]

I said that the clause does not prevent local authorities from offering subsidies to support regeneration. None the less, we will supply more support through guidance, because we want to give public authorities the confidence to apply subsidies in that scenario and similar ones.

The purpose of the clause overall is to prohibit wasteful subsidies that serve only to poach economic activity from one area to another. I must say, the ears of the good people of Guildford must be burning after their third mention in a couple of days—

[Bill Esterson (Sefton Central) (Lab)]

What about the good people of Mayfair?

[Paul Scully]

As Minister for London, I do not think that this is aimed at the good people of Mayfair.

We do not want to prevent levelling-up subsidies that attract investment to disadvantaged areas. The clause achieves that by prohibiting subsidies that explicitly require enterprises to relocate existing economic activities from one area of the UK to another, where that relocation would not have occurred without the subsidy. We have said that. The amendment, however, risks delaying the commencement of the clause, which might allow subsidies to be granted that could poach economic activity from disadvantaged areas.

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[Paul Scully]

That is exactly right. Look at subsidy control regimes around the world. Witnesses in the evidence sessions focused on America and the subsidy race between various states, which is exactly what we are trying to avoid through this sensible and proportionate measure. Accordingly, we believe that requiring the Secretary of State to report to Parliament on clause 18’s consistency with the Government’s strategic priorities to do with supporting deprived areas and freeports is not necessary. The new UK domestic regime is designed to ensure that disadvantaged areas have maximum freedom and reassurance to receive levelling-up subsidies that best suit the characteristics of the area. I request that the amendment be withdrawn.

[Bill Esterson]

It is great to see you back in the Chair, Ms Nokes.

Clause 18 is crystal clear about preventing the use of subsidies to enable businesses to move from one location within the UK to another. The example of the high street is crystal clear, as is the example of the freeports. I will come back to the point about promoting new investment in freeports shortly.

The Minister talked about issuing guidance to go with the provision. That is the way the legislation has been crafted, which I think we can all understand. However, guidance will always be open to interpretation, and what takes priority? Is it the primary legislation—the very clear statement set out in clause 18 that a subsidy is prohibited if

“the relocation of those activities would not occur but for the giving of the subsidy”?

How is that overcome by the guidance? That is the point that all Opposition Members who have spoken have tried to get to, whether with the example of the regeneration of high streets or that of freeports.

The Minister talked about the justification for freeports and the support that the Government have given. My hon. Friend the Member for Feltham and Heston made the point that freeports were not part of the consultation for the legislation, and they are ruled out by the clause. It could not be much clearer.

On the point about freeports being just about new investment, the evidence base—the report published by the UK Trade Policy Observatory, and the commentary by Adam Marshall when he was director general of the British Chambers of Commerce—shows all too clearly that they are exactly about relocation and displacement, and all the things that the Minister said that they should not be about. His point that they do not deliver displacement from one deprived area to another is undermined by the evidence base provided by the UKTPO and the British Chambers of Commerce.

I am afraid that we have not had an adequate answer from the Minister on how all those circles will be squared, and how the primary legislation of clause 18, which he wants to go through unamended, will not override attempts to use subsidies to support local areas in the examples that we have given him and that he says we should not worry about. I am afraid it comes back to a point that we have made a number of times, and will continue to make, I suspect, through the Committee’s deliberations: specific statements need to be added to the Bill to provide reassurance and to make the framework a much more workable system of subsidy.

Without that, things will be left wide open. As much as the Minister defends the Government’s freeport policy, notwithstanding the analysis that I have given from those experts, and claims that local authorities will be able to sort their high streets, and despite his response to my hon. Friend the Member for Aberavon about supporting more deprived areas otherwise, I am afraid that without additional content going in at this stage, or on Report, or in the House of Lords, we will be left in a position where the framework will leave awarding bodies open to judicial review because of the uncertainty and the contradiction that will almost inevitably be left in place between the primary legislation of clause 18 and whatever he puts in guidance.

[Seema Malhotra]

I listened to the Minister’s response and the contributions to the debate. I remain concerned that the clause is worryingly worded in terms of what could be permissible under it and what might not be. In the light of that, it is important that we press what is a very measured amendment to a vote.

Question put, That the amendment be made.

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[Seema Malhotra]

I thank the Minister for his comments. He has our concerns on the record. We will not oppose the clause, but I think this is an important area. Perhaps I will write to the Minister about this, which I hope will help to make sure the provision is as positive as it can be for the purposes of the Bill.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Clause 19

Rescuing

[Bill Esterson]

I beg to move amendment 14, in clause 19, page 10, line 29, after “exceptional circumstances” insert

“including the protection of critical national infrastructure and industries of strategic national importance,”.

This amendment clarifies that protecting critical national infrastructure and industries of strategic national importance may constitute exceptional circumstances.

[The Chair]

With this it will be convenient to discuss amendment 15, in clause 20, page 11, line 15, after “exceptional circumstances” insert

“including the protection of national security and industries of strategic national importance”.

This amendment clarifies that protecting critical national infrastructure and industries of strategic national importance may constitute exceptional circumstances.

[Bill Esterson]

We broadly support the measures in clause 19 on rescue subsidies, and we want to strengthen the measures by adding, with amendments 14 and 15, the important areas of critical national infrastructure and security.

Clause 19 prohibits subsidies from being given to ailing and insolvent enterprises unless the subsidy would prevent social hardship or severe market failure. In these cases, the subsidy should act only as “temporary liquidity support” to provide the enterprise with time to prepare a restructuring plan. That is exactly the right way to phrase the clause thus far, because we recognise that public money should not be used to prop up failing businesses. We are pleased that the Government are in the right place here.

However, we recognise that the Government have a poor track record on protecting and supporting industries of national importance. I am afraid that the case of the steel industry a few months ago is a prime example. Until 5 pm on the day before the trade remedies were due to expire, the Government had not intervened to overturn the recommendations of the then trade remedies investigation directorate, which right at the end came into operation as the Trade Remedies Authority. Its recommendations were to drop steel safeguards, and it took significant lobbying from the steel sector, individual businesses, trade unions, the Trades Union Congress and Labour Front Benchers to push the Government to realise what a catastrophic mistake it would have been had those safeguards been dropped at that time.

The steel industry outlined how the industry was then lurching from crisis to crisis, and to a degree it still is. Over a number of years, the laissez-faire approach to the production of steel has been at the heart of that. Steel is a crucial national industry: it is critical to our national security and it is critical, or it should be, to our infrastructure production. We should be supporting that industry. That is what our amendments are about, and steel is a very important example. There are other examples of the Conservatives’ reluctance to show an interest in nationally significant businesses, such as the takeover of Morrisons by Clayton, Dubilier & Rice just recently—another business of great importance to national infrastructure.

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[Bill Esterson]

Morrisons, as one of the big four supermarkets, is crucial to our national economy. The problem is that the Government do not show enough interest in businesses of such strategic importance.

[Andrew Bowie]

Will the hon. Gentleman give way on that point?

[Bill Esterson]

As the hon. Gentleman has been wearing a mask today, I will.

[Andrew Bowie]

I thank the hon. Member; he is too kind. The decision to allow Morrisons to be taken over, in the way that it was, was made because it was deemed that that would be good value for shareholders, but also good for the company in general—it would be able to reinvest in its infrastructure here, in the United Kingdom. The decision was actually supporting one of the big four supermarkets to provide jobs and employment for this country. To try to define it in this way and say that the Government should step in when businesses like that are under threat of takeover—even when those takeovers could be to the advantage of that company and to the British people—would be, I think, a retrograde step.

[Bill Esterson]

I am grateful to the hon. Gentleman for intervening. I think he is rather missing the point, which I tried to explain the first time around. I am making the point that the Government showed no interest in what was going on with Morrisons, nor the merits of what was happening.

Coming back to steel, the Government have belatedly woken up. Before I was intervened on, I was actually going to say that perhaps there are signs of improvement on this front. The Government have shown some interest in improving things, because there are amendments in the Budget that would give the Secretary of State for International Trade powers to overrule the recommendations of the Trade Remedies Authority. I am therefore mildly hopeful that we are seeing an improvement in policy and approach from the Government on that measure alone.

[Stephen Kinnock]

My hon. Friend is making some very important points. We have clearly sparked a debate about what constitutes critical national infrastructure and what constitutes businesses that are vital to our national security and our national interest. We can certainly have a debate about businesses operating at the consumer end of the spectrum, but there are other examples. The steel industry is an obvious one, but look at the issues around AstraZeneca and the attempted hostile takeover by Pfizer; look at Arm, or at the way in which private equity is taking over our defence industry. Our country has become the capital of the world for hostile foreign takeovers. We have more than any country in the OECD, and we face a world in which aggressive Chinese-backed investment vehicles and businesses are looking to take over businesses that are potentially coming out of the pandemic distressed and vulnerable.

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[Bill Esterson]

I am grateful to my hon. Friend for adding some extremely important examples to my point.

[Kevin Hollinrake]

Can I give the hon. Gentleman some other examples?

[Bill Esterson]

Not yet; let me answer my hon. Friend first before I take what I am sure will be an incredibly important and insightful intervention, as always—it does not mean he is right. It is extremely important that we take nationally significant businesses seriously, that we have a regime that enables us to support them when appropriate, and that we take on board what is in the national interest. That is the purpose of our amendment. I will take the intervention from the hon. Member for Thirsk and Malton, even though he is not wearing a mask today—he did partly on Tuesday.

[Kevin Hollinrake]

I understand the hon. Gentleman’s point about national infrastructure and inward investment, but would he and the hon. Member for Aberavon not concede that Tata’s investment in the UK steel industry is important? Investments in Jaguar Land Rover, which was a failing business before it was taken over, were important for the UK and they protected and effectively created lots of jobs. If the hon. Member for Sefton Central thinks that foreign direct investment in the UK is bad—I know Morrisons is an important company in Yorkshire—is it also bad that our UK-based private equity businesses invest in other countries?

[Bill Esterson]

No, not at all. I have no idea at all why the hon. Member thinks that is where my or my hon. Friend’s arguments were going. We are very much in favour of foreign direct investment to this country and investing overseas as well. Indeed, the success of foreign direct investment in the north-east of England under the Thatcher Government has been put at risk by the attitude of this Government towards the Japanese and the rather strained relations, which hopefully are beginning to repair since the UK-Japan deal. However, let us not underestimate the reputational damage that was done by the way some of that was handled.

[Alexander Stafford (Rother Valley) (Con)]

Conservative Members appreciate what you are trying to say, but the fact that there is a lot of confusion and concern about how you are saying it shows me that the amendment should not stand. Rather than just saying “exceptional”, which covers what we need it to do, we have this definition. Even under “critical national infrastructure”, 13 industries are officially defined by the Centre for the Protection of National Infrastructure, none of which is steel. We can argue for steel, but it is not actually listed in the official categories. It just creates confusion. That is why I do not think the amendment works.

[The Chair]

I remind Members that interventions need to be short, and can we lose the yous, please?

[Bill Esterson]

Thank you, Ms Nokes. That intervention rather makes the point that I was making in the previous debate about the need for definition in the Bill around what we mean by various terms and the need to avoid leaving things open to chance in guidance and interpretation. I take the hon. Gentleman’s point, but this is why we need a bit more clarity in primary legislation.

Continuing with the steel industry, not least because we took evidence from UK Steel, if some support is not given in the short term to the UK steel sector to support its decarbonisation and reduce the massive energy costs associated with the industry, we could soon see steel, which is a vital strategic industry for the UK, facing imminent threat. I do not think anybody disagrees on the strategic importance of the steel industry at a national level.

In the evidence sessions, Richard Warren spoke about the costs of renewables and carbon taxes in relation to electricity prices:

“The UK steel sector pays between 80% and 100% more for its electricity than its counterparts in the EU. Those exemptions have reduced our electricity prices. There is a still a big gap, but they are really important to improving competitiveness in the UK.”––[Official Report, Subsidy Control Public Bill Committee, 26 October 2021; c. 50, Q72.]

He made the point that it was in the national interest to support the industry. He said:

“Net zero or low-carbon forms of steel production will add anything from 30% to 50% to the costs of steel production”.

On the cost of steel production, he said:

“If other countries are not moving at precisely the same speed or putting the same constraints on their industries, you will need some sort of intervention to correct that market failure.”––[Official Report, Subsidy Control Public Bill Committee, 26 October 2021; c. 57, Q77.]

That is why we think there is a very strong case for putting this provision into primary legislation.

More widely on the issue of net zero, this point is backed up by the written evidence from the Institute for Government, which says that it is

“sensible to require some additional process to ensure that the subsidy is designed well.”

That was in relation to major infrastructure that could contribute towards net zero. That is what our amendments are trying to achieve, and it is why we think they are so important.

Anything that is in the national interest or the interests of national security demands an additional level of support and attention, including attention to the way it is worded. Again, I am afraid we come back to the point that not having this set out in primary legislation creates weaknesses, and leaves the prospect of challenge and of the regime not operating as well as it should.

[Paul Scully]

As we have heard, amendment 14 relates to clause 19. The Bill provides that in order to give either a rescuing or a restructuring subsidy, the public authority giving that subsidy must be satisfied either that it contributes to the objective of the public interest by

“avoiding social hardship or preventing a severe market failure”,

or that there are

“exceptional circumstances that justify the subsidy”

despite that test not being met. The amendments would specify that those exceptional circumstances would include the protection of critical national infrastructure, industries of strategic national importance and, in the case of amendment 15, national security.

I fully agree that public authorities should be allowed to grant necessary and appropriate rescue and restructuring subsidies in order to protect critical national infrastructure, national security, and industries of strategic national importance. I am therefore pleased to be able to provide reassurance to the hon. Member that, as it stands, the Bill does so. The reasons are twofold: first, clause 45 contains a general exemption from all subsidy control requirements for the giving of a subsidy with the purpose of national security. Secondly, the conditions set out in clauses 19 and 20 will allow for rescue and restructure subsidies in order to protect critical national infrastructure and industries of strategic national importance. In my view, many hypothetical rescue and restructure subsidies for those purposes could in principle meet the first test in clause 19(4)(a) and clause 20(5)(a) of being in the public interest by

“avoiding social hardship or preventing a severe market failure”.

Where that condition is not met on the facts, but there are other exceptional circumstances in play, clauses 19(4)(b) and 20(5)(b) already provide for exactly that situation, so it is not necessary to attempt an exhaustive list of potential exceptional circumstances that could be relevant to the clause. That would risk unduly influencing public authority behaviour. On the one hand, it risks encouraging inappropriate rescue and restructure subsidies in circumstances that are not genuinely exceptional on the facts, and where they could have excessive harmful effects on domestic competition. On the other hand, it could discourage the use of rescue and restructure subsidies in circumstances that are genuinely exceptional and merit such interventions, but are not specifically listed in the Bill.

The purpose of clauses 19 and 20 is to prevent aimless bail-outs of failing enterprises, while allowing public authorities to provide temporary rescue support for enterprises that it is in the public interest to rescue and restructure. Those subsidies should not be undertaken lightly, in order to maintain a competitive free-market economy and facilitate compliance with our international obligations, including those in the TCA with the EU. As such, I ask the hon. Member to withdraw his amendment.

[Bill Esterson]

I am grateful to the Minister for drawing the Committee’s attention to where the points covered by our amendments exist elsewhere in the Bill. I have reservations about the strength of those clauses, which I explained in my speech and will not revisit, but there is reference to the protection of national security in the Bill. Whether it is adequate, time will tell. I know that the Minister or a member of his team will bring these measures forward in secondary legislation. We think they are better in primary legislation and that there should be more detail at this stage, but we accept the assurances the Minister has given, and we will not push the amendment to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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[Paul Scully]

The clause prohibits restructuring subsidies to ailing or insolvent enterprises unless four specific conditions are met. This clause does not apply to deposit takers or insurance companies. Again, the enterprise must have prepared a restructuring plan and, unless there are exceptional circumstances, a restructuring subsidy must only be offered if it is in the public interest. Restructuring subsidies can only be given to enterprises that are small or medium-sized, and they must also be contingent on an enterprise’s not having received a restructuring subsidy before, or five years having passed since it did, although there are exceptions to that.

[Bill Esterson]

The Opposition do not oppose this clause.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Restructuring deposit takers or insurance companies

Question proposed, That the clause stand part of the Bill.

[Paul Scully]

The clause sets out specific conditions for subsidies for the purpose of restructuring ailing or insolvent deposit takers or insurance companies.

[Bill Esterson]

The fact that subsidies should not be given to ailing or insolvent banks, insurance companies or other deposit takers unless certain conditions are met, such as that the subsidy is given on the basis of a restructuring plan that is likely to restore long-term viability, is an eminently sensible measure that we are content to see in the Bill. We also recognise that such companies should receive subsidies only when they have contributed to their restructuring costs from their own resources. We are pleased to see the clause included in the Bill. There are some concerns relating to this clause that I will come to in clause 24, but I think they are better dealt with there.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.

Clause 22

Liquidating deposit takers or insurance companies

Question proposed, That the clause stand part of the Bill.

[Paul Scully]

The clause prohibits subsidies for insolvent deposit takers or insurance companies that are unable to demonstrate credibly that they can be restored to long-term viability, unless they are able to satisfy specific conditions.

[Bill Esterson]

We are happy to support clause 22.

Question put and agreed to.

Clause 22 accordingly ordered to stand part of the Bill.

Clause 23

Liquidity provision for deposit takers or insurance companies

Question proposed, That the clause stand part of the Bill.

[Paul Scully]

The clause sets out specific conditions for subsidies that are for the purpose of supporting liquidity provisions to ailing or insolvent deposit takers or insurance companies.

[Bill Esterson]

We support clause 23.

Question put and agreed to.

Clause 23 accordingly ordered to stand part of the Bill.

Clause 24

Meaning of “ailing or insolvent”

Question proposed, That the clause stand part of the Bill.

[Paul Scully]

The clause defines “ailing or insolvent” in relation to the giving of rescue and recovery subsidies to deposit takers, insurance companies and enterprises. The definition of ailing or insolvent in this Bill incorporates both domestic and international terminology. It combines the existing concept of insolvency in UK law with the wider concept of ailing or insolvent agreed in the TCA. The definition is compliant with our international commitments and has a strong basis in British law. Subsections (1)(b) and (c) use the existing insolvency test in the Insolvency Act 1986. Subsection 1(a) uses the TCA definition of “ailing or insolvent”. An enterprise being unable to pay its debts or the value of its assets being less than its liabilities are British tests for declaring an enterprise “insolvent”. Subsection 1(a) builds on this by extending the tests to include enterprises that are “ailing or insolvent”—those which would go out of business in the short to medium term without subsidies.

Subsection (2) allows the Secretary of State to make regulations on what is meant by

“would almost certainly go out of business in the short to medium term without subsidies”.

While the definition of “insolvency” reflects existing domestic law, “ailing” has no such domestic definition. A narrow power such as this allows the Secretary of State to make further provision on the meaning of ailing, should that be necessary.

[Bill Esterson]

We recognise the importance of clauses 21 to 27. We have some questions about the definitions of “ailing” and “insolvent”. The definitions of those terms in the Bill are arguably more demanding than those under EU state aid rules, which require an enterprise to be almost certain to go out of business in the short or medium term, and to be unable to pay its debts as they fall due; also, the value of its assets must be less than the amount of its liabilities. Why have the Government chosen broader definitions for ailing and insolvent enterprises than those in the regime that is being replaced?

Alexander Rose from DWF raised concerns that these broader definitions risk harming tech and research-and-development heavy start-ups because they require significant expenditure before they start making profits. As I am sure many Members will know, that can be months, if not years. Can the Minister explain what consideration has been given to these broader definitions where they relate to start-ups that are capital-intensive for significant periods before profits are made? What are the Government going to do with the regime to ensure that start-ups are not harmed by the legislation? I am sure that the Minister agrees that it is sensible to support our innovators and to allow them to take the time to become profitable. It will be interesting to see how he intends to do it. We need to be competitive internationally, which is crucial for an export-led recovery.

The same point applies to scale-ups, a point Rolls-Royce made in its written evidence. It has that concern about start-ups, and quoted some case law from the Supreme Court saying that courts should be careful not to leap to conclusions when asked to apply the test about insolvency, and that allowance should be made for debts when the maturity date is some time in the distance. Is the difference between liabilities that are due in the short term and long-term liabilities and debts picked up in the primary legislation? How is the Minister planning to ensure that a distinction is made between short-term and long-term liabilities?

Interestingly, Rolls-Royce made the point about national security, going back to our earlier debate. In addition to mentioning what we raised before, it asked about dual use. What is the Government’s plan on subsidies where dual use includes national security investment and non-national security investment, which is common in areas such as aerospace?

[Paul Scully]

The Bill is clear that an ailing or insolvent enterprise is one that would almost go out of business in the short to medium term without subsidies. Importantly, this definition applies only to the giving of rescue and recovery subsidies. I hope my opening remarks help the hon. Gentleman’s understanding of where we go in some of the definitions. Just to repeat: subsection (2) allows the Secretary of State to make regulations on what is meant by

“would almost certainly go out of business in the short to medium term without subsidies”.

While the definition of insolvency reflects existing domestic law, “ailing” has no such domestic definition. Therefore, there is allowance for the Secretary of State to make further provision on the meaning of “ailing”, should that be necessary. We went down that route because the EU’s “undertaking in difficulty” test is disliked by stakeholders, is highly prescriptive and in some cases prevented the giving of subsidies to viable businesses with a longer route to market and profitability. These were businesses such as medical technology firms and start-ups. The definition that we are using has a much more restricted application, but where it does apply it provides greater flexibility while also preventing the use of subsidies to bail out unsustainable companies.

The hon. Gentleman talked about national security exemptions as well. We are going to get on to—

[Bill Esterson]

Before the Minister moves on, I want to tie down the difference between short-term and long-term liabilities. From my dim and distant accountancy past, there seems to me to be quite a good definition for this from insolvency legislation—from memory. We may have other accountants with us who can confirm or deny that. Does the hon. Gentleman know that that is the kind of distinction that the Secretary of State is likely to make in regulation?

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[Paul Scully]

The clause establishes conditions on subsidies granted to air carriers for the operation of routes. Subsidies not meeting one of those conditions are prohibited by the clause.

[Bill Esterson]

We recognise that subsidies to an air carrier for the operation of a route should be prohibited unless certain conditions are met, and those conditions are listed. I cannot help noting the irony of the reduction in taxes on travel for short-haul flights, and the fact that one can get a ticket from London to Glasgow for COP26 for £45 on the railway and it is about £145 to fly. That is possibly going slightly beyond the scope, other than to say that again this is not consistent with what the Minister said earlier about the intention of travel, so to speak, on moving towards net zero.

[Seema Malhotra]

My hon. Friend may be aware that it is part of the application, if someone is going to COP26, to show how they are—

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[Michael Tomlinson]

It was a great effort.

[Bill Esterson]

I think I understood my hon. Friend’s excellent intervention. She was correcting me: actually, one can get a ticket for £25 from London to Glasgow, not £45.

[The Chair]

I am still not convinced that this is on the substance of the Bill.

[Seema Malhotra]

The Government requires that delegates state their method of travel.

[Bill Esterson]

Yes, there is the irony that the Government are requiring delegates to COP26 to show their method of travel to the conference. I hope that we will see subsidies supporting rail travel. In my constituency, I have been long campaigning for a rail link from the port of Liverpool rather than a new road, and in the run-up to COP26 that would make sense, rather than concentrating on air travel. There is a serious point that we need to use the subsidies to support rail and low-carbon transport, and reduce the reliance on, and support that the Budget gave for, air travel.

Question put and agreed to.

Clause 28 accordingly ordered to stand part of the Bill.

Clause 29

Services of public economic interest

Question proposed, That the clause stand part of the Bill.

[Paul Scully]

The clause sets out the requirements for giving subsidies for services of public economic interest.