Draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022

Kevin Hollinrake Excerpts

Monday 14th November 2022 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kevin Hollinrake)]

I beg to move,

That the Committee has considered the draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022.

It is a pleasure to serve under your chairmanship, Mr Gray. These regulations were laid before the House on 20 October 2022. The Subsidy Control Act 2022 provides for a new UK-wide subsidy control regime that will enable public authorities to give subsidies that are tailored to their local needs and that drive economic growth. It does this while minimising distortion to UK competition and investment and protecting our international obligations. Section 11 of the 2022 Act enables the Secretary of State to make secondary legislation to define subsidies and schemes of interest or particular interest.

I will briefly summarise the implications of a subsidy or scheme meeting the definition of a subsidy or scheme of interest or particular interest. Part 4 of the 2022 Act establishes the mechanism for the referral of subsidies and schemes to the subsidy advice unit—a new unit established within the Competition and Markets Authority. Voluntary referral will apply to subsidies or schemes of interest. Subsidies or schemes of particular interest will be subject to mandatory referral. When a subsidy or scheme is referred, the public authority’s assessment of compliance with the subsidy control requirements will be evaluated by the SAU and a report will be published with its findings. This adds an additional layer of scrutiny for the small proportion of subsidies and schemes that have greater potential to lead to undue distortion and negative effects on competition or investment in the UK or on international trade or investment.

The Government ran a public consultation between March and May 2022 that sought views on the categories of subsidies and schemes and the Government’s intended approach to setting out the criteria and definitions. Respondents expressed broad support for the Government’s approach. In our response to the consultation, published in August this year, we set out our final proposals, which built on the constructive feedback received from the consultation.

In the regulations, subsidies and schemes of interest or particular interest are defined based on clear criteria. They are, first, based on simple monetary thresholds. Subsidies above £10 million, or that accumulate above this threshold, are subsidies of particular interest. Subsidies between £5 million and £10 million are generally subsidies of interest. However, if they are awarded in a sensitive sector, they are subsidies of particular interest.

[John McDonnell (Hayes and Harlington) (Lab)]

These Committees might not be the most exciting part of parliamentary life, but we should try to at least understand what we are dealing with. I have found my way around the SOI and the SOPI and the SAU part of the CMA, but what defines a “sensitive sector”? It does not seem to be laid out anywhere, as far as I can see.

[Kevin Hollinrake]

That is a very good question. I was just getting on to that. Sensitive sectors are areas of economic activity in which there is a record of international trade policy disputes, evidence of global overcapacity within the sector or evidence that one or both of these features will apply to the sector in future.

If the right hon. Gentleman looks at the last part of the regulations, he will see that it lists the sectors that would be defined as sensitive, and those include automotive, steel and other sectors. Subsidies in those sectors have greater potential for substantial distortion, even at lower values. That is why those sectors are subject to a lower monetary threshold, of £5 million, to be defined as a subsidy of particular interest. The Government have set out a list of these sectors in the regulations.

The monetary thresholds are cumulative. As such, a subsidy of £5 million may be above the threshold for a subsidy of particular interest if the recipient had already received a related £6 million subsidy within the last three financial years. This avoids public authorities salami-slicing subsidies to avoid scrutiny. In addition, the regulations set out a minimum value for referral of £1 million. That means that where related subsidies cumulate above the £10 million threshold for subsidies of particular interest, public authorities will have to refer only the most recent subsidy if it exceeds £1 million.

The second element of the criteria is specific categories of subsidy. Subsidies designed to rescue an ailing or insolvent enterprise are subsidies of interest, and restructuring subsidies are subsidies of particular interest. That reflects the fact that both rescue and restructuring subsidies have greater potential to cause undue distortion, but rescue subsidies are often time-critical, since the enterprise may need the subsidy urgently if it is not to go out of business. The final specific category of subsidies is those that are explicitly conditional on relocation. Such subsidies are prohibited entirely, unless they have a beneficial effect on economic or social disadvantage in the UK as a whole. Subsidies in that category are subsidies of interest if they are £1 million or below, and subsidies of particular interest if above that value.

The regulations also apply to subsidy schemes. A subsidy scheme will set out the parameters under which subsidies may be given. The assessment of compliance with the subsidy control requirements will be carried out for the whole scheme, rather than for each subsidy given under that scheme. As such, if a subsidy of particular interest can be awarded under a scheme, that scheme is a scheme of particular interest and is subject to the referral procedures. The same applies to subsidies and schemes of interest. The referral can occur once, at scheme level. Subsidies given under schemes will never be referred to the SAU.

[Mr John Baron (Basildon and Billericay) (Con)]

I thank the Minister for bringing these matters to our attention. Now that we have left the EU, where does all this fit into the big scheme of things? Do we now have greater freedoms with regards to state subsidies, or is an element of liaison still required to ensure we meet our obligations?

[Kevin Hollinrake]

That is a good question, and I thank my hon. Friend for it. The trade and co-operation agreement includes some oversight; clearly, we made some commitments in that agreement regarding subsidies, which is what the statutory instrument and the previous legislation have both sought to address. However, we believe that the approach we are taking to subsidies is far more effective and quicker to deliver than the European Union one. Under that approach, we would have to take a scheme to the European Union, have it approved and then have it come back, which might take several months. Our approach sets out a broad set of principles: a local authority or central Government can set out a scheme and, as long as it adheres to these principles, the subsidy can be delivered far more quickly. In our view, that is a far more effective process.

Finally, a distinct approach will apply to tax schemes. All tax schemes will be schemes of interest and may be referred to the subsidy advice unit. The cumulation rules will apply differently to subsidies given under tax schemes. Only subsidies given as part of the same tax measure within the last three financial years will count towards the cumulative threshold for subsidies of particular interest.

[John McDonnell]

If I am being dim here, I apologise, but I have gone through the explanatory notes to find out the definition of a sensitive area, and it is not there. The schedule to the regulations contains a table showing the various industries—copper, aluminium and so on— but regulation 6 does not explain how a sector becomes defined as sensitive. The Minister can write to me on this question if an explanation is not forthcoming, but I am curious how that list was compiled. Does it come from the primary legislation? I could not find a definition there either. For example, aviation is referred to separately in the main body of the legislation, but that might well be defined as a sensitive area. Obviously, I have a natural interest in this issue.

[Kevin Hollinrake]

It is experiential; it is based on the record of international trade policy disputes and evidence of global overcapacity. Automotive may sit within that.

[John McDonnell]

It’s not defined in the legislation.

[Kevin Hollinrake]

That is how they have been defined. I am happy to write to the right hon. Gentleman with further detail.

[John McDonnell]

Simply, the legislation before us does not seem to describe the principles or the process by which a definition can occur. I might have got it completely wrong, but it would be useful to understand that at least.

[Kevin Hollinrake]

It is a fair point. In the interest of time, I will consult on this and write to the right hon. Gentleman.

In conclusion, the regulations set out the definitions and criteria for the categories of subsidies and schemes that will have greater potential to lead to undue distortion and negative effects on competition or investment in the UK or on international trade or investment. These subsidies and schemes will be subject to an additional layer of scrutiny in the form of referral to the subsidy advice unit. That is crucial to the effective functioning of the UK’s new subsidy control regime, which will give public authorities the flexibility and freedom to deliver bespoke subsidies that meet the needs of the UK economy. I commend the regulations to the Committee.

--- Later in debate ---

[Kevin Hollinrake]

I thank the shadow Minister for her comments, and all Members for their thoughtful contributions. I begin by reminding the House what the regulations aim to do. They set out clear definitions and criteria for two categories of subsidies and schemes that have been identified as having greater potential to lead to distorting effects. These are subsidies and schemes of interest or particular interest.

Public authorities giving or making subsidies or schemes of interest will have the option of referring these to the subsidy advice unit established within the Competition and Markets Authority, while those giving or making subsidies or schemes of particular interest must refer them to the unit. The definitions and criteria set out in the regulations are based on clear monetary thresholds as well as specific categories of subsidy. I am confident that they strike the right balance when it comes to providing protection from undue distortion or negative effects on competition or investment within the UK or international trade or investment, while being administratively simple for public authorities to apply.

I have committed to write to the right hon. Member for Hayes and Harlington with more detail on the categories of subsidy; the shadow Minister also addressed that in her remarks. She will be aware, having read the consultation, that we consulted in full on the question of sensitive sectors and published accompanying analytical information. The Government’s response to the consultation sets out a rationale for the selection of these particular sectors, but I am very happy to write to her too.

[John McDonnell]

There is a difference between clarity in a consultation paper and clarity in legislation. I would like to hear about the legislation.

--- Later in debate ---

[Kevin Hollinrake]

I take that point and commit to writing to the right hon. Gentleman about that.

On the shadow Minister’s point about the non-binding nature of judgments from the SAU, they are obviously subject to a potential legal challenge. If a public authority declined to accept the recommendations of the SAU, which seems quite unlikely, it would open itself up to legal challenge, either by a competitor or organisation in receipt of subsidies, another country or the EU, for example. It seems an unlikely state of affairs, but we believe the public authority should be able to use its judgment, obviously while heeding the advice of the SAU.

In terms of scrutiny, any referral to the SAU is published on its database, showing what referrals have been made, and any recommendations by the SAU are published. That provides for scrutiny over the decisions made by either the SAU or the public authority.

[Seema Malhotra]

The Minister is right that referrals made to the SAU and its reports will be published, but the question was whether a subsequent disagreement would be published anywhere. If a public authority chooses not to go along with the recommendations, is there any transparency over that?

[Kevin Hollinrake]

There is certainly transparency in terms of any referral, which would be on the public record. The response from the SAU would also be public. I do not understand the hon. Lady’s further point. It is a decision for public authorities, at that point. If they choose to ignore the advice, on their head be it.

[Seema Malhotra]

I thank the Minister for his generosity in giving way again. For example, as part of the process, a public authority that disagreed with the recommendations in a report within 30 days from the SAU could need to send it a letter to say, “We have taken your report, but have chosen to disagree with the recommendations.” That would then be on the public record.

[Kevin Hollinrake]

That is a fair point. I will take it away and write to the hon. Lady.

I mentioned sensitive sectors in my previous points. On what was and was not in the Bill—the hon. Lady raised that earlier—the reason we did it this way around is to allow for feedback, and not just from parliamentarians debating the sensitive sectors, for example. We think that it is important to get feedback from the sectors themselves—the stakeholders. We published our position in January, had a consultation from March to May, then introduced draft regulations that we believe deal with the issues raised.

It is true that the devolved Administrations said that they would not contribute directly to the consultation, but they have engaged with us to a great degree, including through correspondence and in a number of meetings. Their positions were all points of clarification. No objections were raised to the measures. I do not know whether the resources that the hon. Lady referred to have been allocated, but will happily write to her on that. The way we are dealing with tax subsidies mirrors how the EU dealt with them. We felt that that was appropriate, rather than doing something different. There are specific reasons for that, particularly with regard to how the Treasury operates.

I thank hon. Members on both sides of the Committee for their valuable contributions to this excellent and informative debate. The draft regulations are crucial to the effective functioning of a new UK subsidy control regime. They define the small proportion of subsidies and schemes that will have greater potential to lead to undue distortion and negative effects, and should be subjected to additional scrutiny by the SAU. As such, I commend the draft regulations to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022.