Subsidy Control Bill (First sitting)

Kevin Hollinrake Excerpts

Tuesday 26th October 2021 Public Bill Committees

[Stephen Kinnock (Aberavon) (Lab)]

Q I have a question for Professor Fothergill about aid intensity. As we know, under the previous state aid regimes, there were upper limits on the percentage of state aid that could be given. There is no guidance on what the aid intensity percentages should be in this legislation. Could you briefly set out what your thoughts on that are —I would certainly assume that aid intensity should be higher than was the case previously—and why that should be?

Professor Fothergill: The detail is not there in the legislation. It is all to be determined; it will follow in the guidance, one presumes. Under the old EU rules, the aid intensity ceiling varies from scheme to scheme and from place to place, but if we were talking about regional investment aid, for example, the maximum aid you could give in the top tier of assisted area was 30% for a larger business. It actually rose to 50% for a very small business, but the problem that we had under the old EU rules was that in the lowest category of assisted area, which covered most of the assisted areas in England, the ceiling for regional investment aid was only 10%. Frankly, at 10%, that is very marginal and very unlikely to make much of a difference to business decisions. If a decision is that marginal, really, come on: is it going to tip the balance? Incidentally, the EU has recently raised that lower threshold to, I think, 15%.

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

Q Are you talking about the turnover?

Professor Fothergill: The 10% to 15%?

[Kevin Hollinrake]

Of turnover?

Professor Fothergill: No, that is 10% of the cost of a capital investment. It has recently been raised to 15%. Certainly, if we are setting aid intensity ceilings in the UK under the detailed guidance, we need to set them at levels that really can make a difference; otherwise, you are probably ending up just giving money to projects that would have gone ahead anyway, which is not the objective and is actually contrary to the principles of the legislation.

[Kevin Hollinrake]

Q Subsidies are allowed only for enterprises. Are we missing anything out? Does that mean that social enterprises are excluded? Are the thresholds—£500,000 and £315,000—the right ones? That is pretty much mirrored in what we have already in the EU. Is that the right level? Should it be lower or higher for scrutiny purposes, and should there be a central register of subsidies, rather than those being held at local authority level?

Professor Fothergill: I do not think I have a definitive answer on your first point. I was asked the same question a couple of days ago, and I was not actually sure where charitable and third-sector businesses stood in all this. On your third point, which is about a central register, I think there is a lot of merit and transparency in the whole system.

I hope I have understood your second point correctly. The intention behind the Bill is that there will be what is called, in technical terms, a de minimis threshold, below which you do not have to comply with the rules.

[Kevin Hollinrake]

Q You do not have to report it.

Professor Fothergill: Yes, you can just get on and do things. Colleagues with whom I work in local government say that when they are involved in giving small amounts of financial support to businesses, or would like to do so—when we are talking about small amounts, it is unlikely to distort competition within the UK, or indeed international competition—there are too many hurdles if you have to go through lots and lots of paperwork.

[Kevin Hollinrake]

Q But £500,000 is not a small amount.

Professor Fothergill: We may be talking about slightly different things. I am talking about the de minimis threshold, which the Bill sets at £315,000 over three years or thereabouts.

[Kevin Hollinrake]

Q There are two different levels: £500,000 inside a scheme and £315,000, accumulative, outside a scheme. Do you think those are the right levels?

Professor Fothergill: I do not have a view on the £500,000 issue. Is that about reporting?

[Kevin Hollinrake]

Yes.

Professor Fothergill: I see no reason that things should be reported. This is a personal view, not the view of the alliance, but I know that the local authorities that I work with in the Industrial Communities Alliance have welcomed an increase in the de minimis threshold. Operationally, that makes sense and does not lead to big damage to competition across the country, or indeed to damage to international trade.

[Seema Malhotra]

Q May I ask for some final clarification on that? Part of the question was about the reporting. If all the decisions have been made and the work has been done on a subsidy, reporting—putting an entry on the database—should not be an onerous matter. Are you objecting to that also?

Professor Fothergill: No, I am not objecting to reporting. By the way, when I speak of reporting, I should clarify that the alliance has not taken a particular view on the issue. If I am speaking about reporting, I am expressing a personal opinion that it should not be too onerous. I would have to consult some of my local authority colleagues to clarify their precise views on that, but I know that their precise view on the de minimis threshold is that the increase is a good idea.

--- Later in debate ---

[Andrew Bowie]

Q Why do other countries around the world choose not to do it?

Thomas Pope: That is a very good question. I think there are various benefits, and in our research we have outlined them. I think there is a particular case, in a system where competing jurisdictions can offer subsidies, for worrying about subsidy races. Actually, that is effectively a co-ordination problem, and a subsidy control regime is effectively that co-ordination.

I also think that, in general, there are benefits to setting out very clearly what the principles are by which you are going to offer subsidies. An interesting analogy—it is not quite the same—is fiscal rules; they are not legally binding in the same way, but these rules are set out by politicians to indicate what we think is sensible policy. They can sometimes help you to resist, for example, political pressure to save a business that is going under but that has no long-term prospects. Those rules can also be quite helpful.

In general, it is quite hard to hold the line on those things, and that probably explains why there are not domestic subsidy control regimes in general, because this is Governments tying their own hands. In general, it is quite hard to do that. It just so happens that we have an international obligation that requires us to do that, but I think that is actually a benefit rather than a cost. That would be my answer as to why there are not lots of subsidy control regimes elsewhere. Professor Rickard may know better than me on that.

Professor Rickard: No, Mr Pope is absolutely right. You are committing to saying that the regions within the United Kingdom will not compete with each other in trying to win business, jobs and investment by awarding subsidies. It is difficult to give up that ability, and say that we will not engage in that type of subsidy war, but we have seen the damage that competitive subsidy provisions have caused. Estimates suggest that in the United States $80 billion a year is spent by states competing for business with subsidies. If they agreed not to do it, and had their own subsidy control regime, real income in manufacturing alone would increase by 5%, so there are real economic gains to tying your hands and saying, “We’re not going to engage in subsidy races.”

Evidence suggests that subsidy races do not work in the long term. Even providing big subsidies does not necessarily guarantee that you will get businesses where you want them to be. For example, the US biotech industry is concentrated in five cities with world-leading universities and very deep and highly educated labour pools. Businesses locate there despite the fact that 41 out of 50 states have very generous subsidies to try to lure them to their regions, so evidence suggests that spending subsidies to try to attract jobs may not always work, and doing so is really a waste, in terms of spending a lot of money in a way that potentially hurts productivity and real income.

[Kevin Hollinrake]

Q Professor Rickard, Mr Pope said that he felt that the level for reporting should be lower than £500,000; it should be £175,000. You agreed, but you did not specify a level. What level do you think it should be?

Professor Rickard: I don’t have a strong feeling on the level. I am not sure where the £175,000 number came from. I heard Mr Pope mention it. I do not know the logic behind it.

[Kevin Hollinrake]

I think it’s the EU level.

Professor Rickard: Okay, thank you. I do not see why it could not be lower. I recognise that there is a concern that we are putting a burden on granting authorities, but the granting authorities have this information. They have already collated it and made a decision. Increasingly, with tech, I do not think it is a huge burden to upload that type of information to a database, so I would argue for an even lower threshold than £175,000. If I gave you a number, it would be an arbitrary number—as I suggested, all thresholds are arbitrary numbers—but it could be as low as £100,000. I think that would not unduly burden governing authorities, but would increase transparency to ensure value for money and compliance with the principles.

Thomas Pope: I completely agree that all of these numbers are somewhat arbitrary. The reason I mentioned £175,000 specifically is that it is the EU level, and it is the number that was in the Government’s consultation at the start of the year. That was a question in the consultation, but in the end the level was higher. It is very hard to say whether the right number is £100,000, £80,000, £150,000, £175,000 or £210,000. It should be low enough that we have a good sense of how the system is actually affecting how subsidies are offered.

[Seema Malhotra]

Q I want to follow up on a couple of points, starting with the duty to provide pre-action information—primarily, clause 76. There are ways in which a public authority may refuse or suggest that it would be difficult to give information based on a number of categories—commercial sensitivity, confidentiality and so on—without it seeming to be clear how that could then be challenged. I wonder whether transparency, and being able to bring a challenge with the information needed, needs to be stronger, or whether the role of the CMA might need to be stronger to support requests for information.

Thomas Pope: I am not an expert on that, and you will probably want to ask other witnesses. I think part of the point here is that a failure to comply with something like this could be challengeable, not directly, under the process set out in this Bill, but that is also a violation of public law. But as I say, it would be better to ask a lawyer than me on that.

Professor Rickard: One possibility, potentially, when you are talking about commercially sensitive information is not to limit the amount of commercially sensitive information that would be in the database but, when you do get a public request, to do something similar to what they do with Nomis and the labour data, which is very disaggregated by firms. You have to sign a declaration saying why you are using this information and that you are not going to use it in a commercial way. That may be a way to provide the necessary information to a potential challenger, but in a way that protects information that is potentially commercially sensitive. So I certainly think there are ways around it, and I think that it would be important to explore some of those mechanisms.