Subsidy Control Bill (Second sitting)

Kevin Hollinrake Excerpts

Tuesday 26th October 2021 Public Bill Committees

[Seema Malhotra]

Q Specifically on what is in there—I am conscious of the time—are there recommendations you would make, based on that experience, around what may need to be tightened up within the Bill? That would be quite helpful, because there are questions about the de minimis threshold, about whether an entry should take six months, and about how long things should be open to challenge.

Jonathan Branton: On the challenge point, I think one month is too short, because that requires people to be extremely alert about checking things. The database is not readily searchable. It does not send prompts when particular information is put on at a sectoral level. If you were keeping an eye on it, you would have to be checking it every other day to see that something was coming forward about which you were concerned.

In terms of searching for amounts and dates on which things have been recorded, all that is not regulated. What we really need—I will hand over to Alex in a second as I know he has strong views on this—is something that sets out in very clear detail exactly what needs to come in on every entry. Then, in practice, when you actually come to making those entries, it must require you to put in the correct answers to those questions in order for the entry to go live on the website. If that does not happen, you should get pushed back. That is clearly not working well enough.

Alexander Rose: As Jonathan says, essentially, the key piece of information on that website is the date the entry is made, and the reason that is so important is that the challenger has as little as a month to challenge once that information is placed on the website. To put some numbers on what Jonathan said, first and foremost there are only 501 entries. There are a lot of subsidies, so there is no way that only 501 subsidies have been awarded since 11 pm, 31 December 2020.

Secondly, of those 501, some 257 are recorded as having a zero or nil value. In order to bring a digital review—

[Kevin Hollinrake (Thirsk and Malton) (Con)]

Q How many, sorry?

Alexander Rose: Two hundred and fifty seven out of 501. In order to bring a digital review challenge, you are probably going to have to spend between £25,000 and £40,000, so if you are seeing a nil value, you are very unlikely to bring a claim.

Some of those are going to be schemes, and I will bring out some of the schemes on that website at the moment. SC10261, the Tees Valley Capital Grant Scheme, is listed as having been posted on the website on 1 April 2020, but the website did not exist on 1 April 2020. SC10388 is a real estate grant of £675,000 in Girton in Cambridgeshire—I picked this one because it is the last—and that one does not have a date at all. There is no way that somebody wanting to challenge would be able to know that date unless, as I have personally done, they have been saving the spreadsheets and comparing them.

Now, essentially, what we have here, therefore, is a mousetrap that is lacking a spring. Unfortunately, the Bill does not fix that. The way to fix it is at clause 32, which relates to the database, and it must expressly say that there needs to be two things. First and foremost, that information has to be included—the date it is actually entered and/or modified. Secondly, I think you need to end up having a search function that gives you three pieces of information. You need to have the date an entry was entered or modified; the name of the funder, because that is currently not searchable; and the name of the beneficiary, which is on there at the moment. Those are the three key pieces of information. The other element is, in order to capture that scenario where people simply are not putting into the database, you need to have some sanction if you fail to put it on.

The other issue that needs to be considered is that, at the moment, you have up to six months to put that information on the database. A large enough subsidy could make a business insolvent within that six months, so it feels to me that the period needs to be shorter. Likewise, the period to challenge needs to be longer. There is no obvious reason for having a shorter period for what is rightly described as the most important piece of post-Brexit legislation than for a planning permission judicial review. It should be longer. The next point is that there should be some level of sanction if that information is not put online. For example, maybe a sensible level would be the challenge period is extended to six months.

Jonathan Branton: The challenge period is not validly started if the right information is not put online. That is one way of looking at it. If it is not validly started, it never ends.

[Stephen Flynn]

Q Thank you all for that very helpful information. There are perhaps two different elements of discussion in relation to the Bill going on here. Richard referred to the Bill perhaps providing more of a light touch in that regard, and it may well be beneficial. We heard from individuals earlier today in relation to the lack of guidance or understanding as to how the Bill will operate. How do you get to that conclusion, notwithstanding the lack of guidance that sits behind the Bill that is due to come from the Secretary of State in future? Ultimately, do you foresee a situation where the Bill will actually provide an increase in state aid, as I am sure your organisation would like to see?

Alexander and Jonathan, if I may say so, you gave quite a devastating indictment of current practices and we would all hope that the Bill will improve on that situation. Do you think it will, as it stands?

Alexander Rose: First and foremost, I think that the general structure of the Bill is good. I think it is quite sensible. My concern is in terms of those details. I think there is capacity to refine the Bill so it is better. I agree that transparency is a concern.

The other area I am very concerned about is the ability to create schemes because the schemes can then only be challenged in the period they are set up. Why that nil point is so important is that, essentially, you have got a situation where there is an unlawful aid––an unlawful subsidy––but you can only challenge it within the month the subsidy is set up. I struggle to see how an organisation could ever really know that it is going to be affected by that subsidy scheme unless it identifies the competitors who are going to get a subsidy and the amount.

Clause 70(2) needs to be amended to add some wording at the end along the lines of providing that, at the time of entry of information about the subsidy scheme on the subsidy database, sufficient information has been made available for an interested party to make an informed decision as to whether and to what extent their interest may be affected. To my mind, the transparency database and the addressing the schemes point are the two issues that will most damage the award of subsides in future if not rectified.

Jonathan Branton: I would second that. The transparency register is relatively easily fixed, I would have thought. The schemes point is a potential loophole that, if not closed, could lead to some frankly bad schemes being adopted and then being impervious to challenge on the basis that the time had passed since the scheme had been published, but the actual awards pursuant to that scheme were somehow protected.

That is at odds with the fundamental principle that interested parties ought to be able to see what is out there and affecting them so that they may challenge it, and they cannot see that until an actual award has been made to a competitor or another party in which they are interested. Until cash is parted with, they do not see that, and that is arguably at odds with at least the spirit of the TCA provisions around schemes, and I think that could be very much tightened up.

Broadly, the Bill does a good job. It will help the regime to mature and become more effective, but it must be recognised in huge part that it puts in place a framework to achieve a whole load of things that have not yet been decided. There is talk of streamlined subsidy schemes, referrals to the CMA and so on, but the Bill does not say what will be in a streamlined subsidy scheme or what will be the subject of a referral, so all those details will come in the future. I absolutely applaud the creation of the framework to be able to implement a streamlined subsidy scheme. What will matter—the proof of the pudding—will be what is actually within that scheme in due course.

A final point: a lot of people have mistaken the detail of the Subsidy Control Bill and the subsidy control framework regarding their effectiveness for remedying, levelling up, or whatever might be the question of the day. The Bill does not set the division of funding to different places and activities, which is a fundamental part of the redistribution of wealth. A lot of misconceptions suggest that the Bill should achieve all that, but the fundamental point of how the cash is carved up and distributed is not necessarily a question for subsidy control law.

Richard Warren: Just to go back to the question about problems that might arise with a light-touch approach, from our perspective the difficulties we have had with the system that we are replacing—the European system that we removed ourselves from—have been on the more prescriptive side. When we have asked the Government to introduce x, y and z, the response has often been, “The EU doesn’t say you can do it, so we assume you can’t.”

Other Governments have taken a different approach. When we proposed to the Government that they should provide an exemption from the cost of the capacity market within electricity pricing, BEIS said that as EU state aid law did not provide explicit rules on that, it could not introduce an exemption. The Polish Government took a different approach, saying, “We’ll come up with one and introduce it.” The more prescriptive approach in the EU has been limiting, certainly as the UK Government approached it, so we feel that we will be more empowered as industry to bring forward proposals with greater confidence that they will be within the UK scheme for subsidy control because, as I said in response to a previous question, everything is allowed apart from what is explicitly not allowed, so we will be in a stronger position to be confident of saying, “Actually, this is allowed by UK subsidy control rules.”

My final point is that the biggest barrier has probably been the UK’s culture of not using the power. Time and again, the reason why we cannot do x, y and z that has been given by either Ministers or officials is that the state aid rules will not allow it. We have often taken a different view, but that excuse has been an almost permanent barrier to doing things. The new regime might reveal whether the excuse has been something to hide behind, or if there is a general culture of preferring not to use state aid rules or subsidy. That is probably a more important point for the steel sector than the Bill, which broadly provides the right framework—we have no major concerns about it.

Let me briefly touch on the regional point that Jonathan made. It is valid, in that the new system opens up a huge amount of flexibility for regional development. Historically, the UK has not done a huge amount of regional development. If we look at the split of what we have spent in the past few years, barely anything has been spent by the UK on regional development in terms of state aid. The system gives us an awful lot of flexibility to redefine which areas we want to give regional development to.

Under the EU system, the map of which areas of the UK were considered to be category A was pretty limiting. One of them happens to be where Port Talbot is based, but it has been a slightly moot point because it has not received a lot of regional aid anyway. The point is: the Government can redesign it, and that will be a key element if they are to use their new subsidy control regime to the maximum flexibility to pursue their levelling-up agenda.

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[Stephen Kinnock]

Q Just zooming out for a second, I know that you all have an interest in this levelling-up agenda. The stated priorities of the Bill are to be able to drive forward both the levelling-up agenda and the transition to net zero. Mr Rose and Mr Branton, do you think it is possible to achieve the levelling-up agenda without an assisted areas map or some way of actually focusing resources? There is also the issue that relocations are prohibited. What impact does that have on the levelling-up agenda?

We will achieve net zero in this country only if our steel industry transitions towards it. Mr Warren, what kind of state aid support do you think would be needed for that? Do you think there should be more explicit guidance in the Bill about how to achieve the transition to net zero as part of this overall strategy?

Jonathan Branton: I will start with the levelling-up question. I think you were asking whether it is possible to do something there without the equivalent of a regional aid map. The short answer is yes. You do not have to have a map of the country with shades of different colours for different levels of qualification in order to do something similar. The point is to give some form of preference or favouritism to areas based on some kind of measure of comparative disadvantage.

You could quite easily do that if you established a series of criteria. If you found that a given area had exhibited one or more of those criteria—and there would obviously need to be quite some thought given to what they were—that would be a means establishing that somewhere is regionally disadvantaged. Obviously, you can layer that with all sorts of different complications and grades of disadvantage, if you wish. That might be complicated or overly political, but you can establish the fundamental point of something being disadvantaged or not by reference to, I would like to think, a set of criteria, which would not be too hard.

For the relocation point, the wording in the Bill talks about something prohibiting subsidy that was given as a condition of relocation. In some ways, to my mind, that invites somebody to give a relocation that is not a condition, but achieves it anyway. Maybe that is just lawyers being cynical. Perhaps it is not fit for what it seeks to achieve, but is that a good thing anyway? I have seen a number of situations where a relocation has taken place, which has been positive for several reasons—perhaps someone relocates to make physical space for an infrastructure project, for example. Linking that back to levelling up, relocations can be advantageous and good in the grand scheme of things, and definitely positive for redistributing wealth. Having a prohibition in the Bill, even a badly worded one, is potentially too blunt a tool, which might backfire.

Alexander Rose: I have a slightly different position on clause 18. I think the way to resolve it would be to put in a value figure—maybe £20 million. I also agree that relocations can be hugely beneficial. Schedule 1 outlines the common subsidy principles and paragraph F is designed essentially to avoid competitions developing within the internal market.

I think that the issue trying to be resolved here is avoiding what would be regarded as a distortive subsidy. The way to deal with that is to define distortive subsidy and say that that would then be referred to the CMA, or however that works. That leaves you with the potential to include a replacement additional principle—you mentioned levelling up and net zero. I note that the strategy announced last week requires all civil servants to take account of net zero, yet these rules will be used by more than 550 public bodies. That is a great opportunity to instil that kind of thinking in every single subsidy.

Jonathan Branton: Without necessarily preventing them.

Richard Warren: To answer very briefly, yes, undoubtedly decarbonisation of the steel sector will require considerable subsidy or state aids, however we wish to term it. In sectors such as the power sector, we see billions of pounds’ worth of subsidy to decarbonise, and the steel sector will need precisely the same. Net zero or low-carbon forms of steel production will add anything from 30% to 50% to the costs of steel production, depending on which route you go down. 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.

There are two key areas where we would like to see additional movement. Again, I come back to competitive electricity prices. Fixing the issue there will require some sort of intervention. Secondly, we need pretty hefty support for capital investment in carbon capture and storage, hydrogen or even new electric arc furnaces. That will require hundreds of millions of pounds of investment.

On your final point about whether we need anything further in the Subsidy Control Bill to direct us towards that, I think that the light-touch approach is the right way to go. It does not exclude the Government from doing anything and it leaves open a huge number of options.

For example, the clean steel fund of £250 million that we hope will be confirmed in the spending review tomorrow is perfectly legitimate under the current regime. Maybe under the EU system, which says, “You can do this, you can’t do that”, you would have had to go through a more complicated approvals process. By the time you start introducing explicit requirements for certain industries, you will get a bunfight where everyone wants something mentioned in the Bill. You may end up down a route of, “If it’s not mentioned, maybe we shouldn’t be doing it”, so I think that the light-touch approach is the best way to go.

[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.

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[Seema Malhotra]

Q May I come back on two brief points? There is not a requirement to have representation from all four nations, as far as I understand. That seems to be slightly at odds with the UKIM set-up, which has been a cause of concern for what needs to have a four-nations approach and buy-in. Would it be a concern to you if there was that requirement in the Bill? Secondly, the question I do not think I heard an answer to was, where should there be a function for either audit or checking of the accuracy of information put on the subsidy database? Would that need to be within BEIS rather than the CMA?

Rachel Merelie: Perhaps, again, I will pick up on the second one first. Yes, at the moment, given that the database sits within BEIS, it would be most appropriate for that sort of checking function to be part of its remit. Obviously, if it were decided for that database to sit with the CMA, we would need to have the requisite resources and powers associated with it.

On representation from all four nations, as you say, there is currently no formal requirement in the Bill. The CMA, as I said, is a pan-UK body. It does have good relationships across all four nations, and is very used to working with them. We are not the policy makers here—that is important to underline—we take on board and do our best to implement the policy set by the Government and by Parliament.

[Kevin Hollinrake]

Q If you have a monitoring requirement, you would think the obvious place for you to go to look at would be the database, yet we heard evidence earlier that fewer than half the entries on that database even have a figure for how much subsidy has been allocated. Is that not a concern to you, because how else will you gather the information other than looking at the database?

Rachel Merelie: That is a very good question. I think we will need to understand how that database is operating, and I am sure you are right; that will be one of the ways in which we will gather information. We may also be going directly to public authorities to ask them questions. I guess we would also be doing some market analysis, some desktop analysis, and so on, of how the subsidy regime is operating more widely. I think there will be a number of different ways in which we gather information, but you are absolutely right—the database will be an important part of that.

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[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.

[Kevin Hollinrake]

Q On the minimal financial assistance, how are you going to monitor that? It is up to the company to record the assistance it receives. A company could receive assistance from numerous local authorities if it has premises in different parts of the country—for example, through the business rate grants that we saw last year. Those items will not be recorded anywhere. How would you monitor that?

Rachel Merelie: We will be taking the submission from the public authority, and it will be assessing its subsidy against the seven principles that are set out. It will then be for us to look at whether it is providing the evidence that we need to take a view on the strength of its assessment against those principles. That is what we will be relying on in order to do our assessment. Where necessary, we will be able to ask questions of third parties, but in the time available, we will be largely reliant on the public authority giving us the information we need.

[Kevin Hollinrake]

Q I realise that your primary focus is going to be very large schemes—not hundreds of thousands of pounds, but millions of pounds. Nevertheless, somebody has to monitor the smaller stuff as well to make sure that people are not abusing the system. I do not see how anybody can monitor that. To monitor that, you would have to monitor every local authority in the country and stitch all their contributions together against a certain entity.

Rachel Merelie: In the way the Bill is currently set up, that wider monitoring on a day-to-day basis is not something that we will be involved in.

[Seema Malhotra]

Q I want to come back on a couple of points. This is in relation to helping make sure that there is a regime that commands confidence and provides the information to public authorities, which are engaging with some of this activity for the first time. To what extent do you think more needs to be done to engage with public bodies and prepare them to be able to grant subsidies effectively and efficiently to enterprises under the regime? It is likely that a lot of that burden could end up with public bodies approaching the subsidy advice unit. Are you factoring that in to how you see the unit working, or do you think that some of that needs to be done elsewhere?

Rachel Merelie: That is a very good question. I am sure that you are right—there will be quite a process to educate and support the public authorities as they embrace the new regime. I think that a lot of this will come from central Government and the guidance that they will publish. The subsidy advice unit, I suspect, will need to flesh out that guidance with respect to the very large subsidies and the information that we will need to carry out our assessment. We are keen to work with public authorities to make sure that they understand what will be required. Yes, we are aware of the need to do that guidance, which is one reason why, I suspect, it will take a little time between Royal Assent and the commencement of the Act, as there will be a need to get that guidance and detail out there and give confidence to those who want to operate under the regime to do so.

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[Simon Baynes]

Q But do you support devolving powers to local authorities in general as part of the devolution settlement?

Ivan McKee: Clearly, it depends on what it is. In the devolution settlement, local government is obviously a devolved area, and those areas are for Scotland to decide on.

[Kevin Hollinrake]

Q It seems to me, looking at schedule 1, that you are able to design a scheme that the devolved Administration in Scotland deems appropriate. I think you said that you were worried that, having done that, you might be challenged—by the Secretary of State, for example. However, under clause 70(7)(a), you could challenge another part of the UK on their scheme, too. Why does Scotland have any less discretion in challenging another part of the UK than another part of the UK has in challenging you? It seems to be exactly the same either way.

Ivan McKee: Not really. Look at the calling-in powers, for example, that the Secretary of State has that we do not. The streamlined subsidy schemes, which have not been clarified yet, can be made only by the Secretary of State, not by the devolved Administrations. The cooling-off period, again, has no equivalent powers for the devolved Administrations. Requesting a report from the CMA cannot be done by the devolved Administrations. Referring to the CMA’s subsidy advice unit can be done only by the Secretary of State and not by the devolved Administrations, so the Secretary of State has a range of powers that can operate in areas where the devolved Administrations do not have the authority to do those things as well. That asymmetry in devolved areas is something that we are concerned about.

[Kevin Hollinrake]

Q I am sure that the Secretary of State would argue that that is because it is an umbrella scheme for the United Kingdom, but do you accept that under the Bill you have the powers to design your own scheme for your devolved Administration, and you have the same powers as the UK Government have to challenge a scheme in another part of the UK?

Ivan McKee: In terms of designing the scheme, clearly it is open to challenge within the scope of that. As I have outlined, the Secretary of State has a range of powers that the devolved Administrations do not.

[Kevin Hollinrake]

Q That was not the question that I was asking you. I was asking whether you agree that clause 70(7)(a) gives you the same powers as any other part of the United Kingdom to challenge a scheme?

Ivan McKee: It does not give us the same powers as the Secretary of State, which are much more wide-ranging than those that you mentioned.

[Kevin Hollinrake]

Q That is not the question I asked you. I asked whether under clause 70(7)(a) or (b) you have the same powers to challenge a scheme in any other part of the UK as any other part of the UK has to challenge you?

Ivan McKee: That is true as far as it goes, but that is not the point. The point is that we do not have the same powers that the Secretary of State has under section 55.

[Kevin Hollinrake]

It was my point, though. Thank you.

[Seema Malhotra]

Q We had some discussion about clause 70(7)(a), and there is some point of clarification about the definition of “interested party”, which I do not think is fully clear in relation to the devolved Administrations, but either we agree on the need for the Bill to be taken forward, I hope with some significant improvements, or there is a view that that cannot be achieved. I want to come back on a couple of points that you made, Mr McKee, that I was not fully clear on. The first is on being prepared to be involved in discussions, the question being what outcomes would be achieved. Do you feel clear at the moment on what specific changes, whether in relation to call-in powers, an obligation to consult or consent, you would want to see inserted in the Bill to meet some of those concerns? It would be very helpful to understand specifically what they were. Perhaps that could be in writing afterwards.

Secondly, I was not fully clear on what your view was in relation to local authorities. It seemed that it was more for the Scottish Parliament to decide what local authorities in Scotland may or may not do, rather than local authorities across the UK being able to make subsidies if they felt that they were in line with the subsidy control principles, and beneficial for their area. I was slightly confused on what your view was about local authorities being able to make subsidy decisions in Scotland. Perhaps you could come back on both those points, and put in writing what specific changes you want to see.

Ivan McKee: On the specifics of what our asks would be, I am very happy to put that in writing. In broad terms, it centres around, as I said, the requirement to not have the Secretary of State able to operate in devolved areas, as per the devolved settlement, and for the Scottish Government and Scottish Ministers to be able to do that. For us to have equivalent powers as it refers to devolved areas would be the ask, in broad terms. I have outlined some of that verbally, but I am very happy to come back to the Committee in writing with the details on specifically what that means.

Local authorities have always been able to grant aid within the rules that exist, so effectively nothing changes there. What changes with regard to the Bill is the authority that it gives the Secretary of State that it does not give in devolved areas to Ministers in the devolved Administrations. That is our concern.