Subsidy Control Bill (First sitting)

Kirsty Blackman Excerpts

Tuesday 26th October 2021 Public Bill Committees

[The Chair]

Thank you. I am going to call Kirsty Blackman first, then Steve Kinnock, Kevin Hollinrake, Alexander Stafford and Mr Millar. As already indicated, and looking at the time, could we stick to brief questions and brief answers to carry on up to the allocated time?

[Kirsty Blackman (Aberdeen North) (SNP)]

Q I have two questions, but the first one is a yes/no answer. The first is: has COSLA been consulted on what the forthcoming guidance is likely to say? The second question is for both of you. Schedule 1, principle F says:

“Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.”

Can I ask you both if that sounds like it is meaningful, and if it is meaningful, what does it mean?

Dr Pazos-Vidal: I assume that the first question was addressed to me. We have had a number of discussions, it is true, in the preparation of the Green Paper and the consultation, and some of this work was facilitated by other organisations, such as ones you are going to speak to later today. I think when we are talking about consultation, we are talking about consultation as something that is structured, something that is predictable, something that has more accountability and something that approaches corporate action to a certain extent. That is something that in the UK is far more touch and go compared with other countries. I think this is an opportunity, on something as potentially economically and politically sensitive as this, to have a much more structured system of consultation, rather than the issue of a local approach. That sometimes works fine—no problem—and I have said to myself that perhaps we could possibly do that many times over the years. Here it is a rather serious matter that is also very political as well, and we should have a very predictable and pre-set system. I should have mentioned that there is a precedent in the UK with the Localism Act 2011. Part 2 deals with subsidies and passing down funds from the EU. At the time, we negotiated a system of proper consultation with local government, in this case from the UK Government, so perhaps that is an issue at present that we can look at in terms of implementing this Bill.

Professor Fothergill: Subsidies are something that you should only use sparingly and where they really deliver something that is beneficial. That is why we need the principles that are set out in the legislation. Indeed, it is hard to see how we can get away from those principles that are set out in the legislation, because all bar one are embodied in the trade and co-operation agreement that was signed with the EU last December. The additional point that the UK Government have added is basically to stop one area entering into a bidding game with another area within the UK, and that, in a sense, is a sensible addition. These are meaningful principles: you use subsidies sparingly, but you use them where they really can deliver something that you think is socially and economically valuable.

[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%.

--- Later in debate ---

[Seema Malhotra]

Q To clarify, that is the maximum amount.

Thomas Pope: We could make it shorter within our own legislation if we wanted to.

[Kirsty Blackman]

Q My questions focus particularly on chapter 3, which is about the subsidy database and transparency. Do you have any idea what the logic is behind the tax entries in the database? It seems to me that if something relates to a subsidy measure that is taxed, it may not need to be reported for almost two years—or even longer—because it is a year past the first declaration on the tax. Does that make sense, or would it be better to have something different?

I have two more questions. In the event of cumulative subsidies, where an organisation receives various subsidies from various organisations and it takes them over the threshold of the three-year period, who is responsible for ensuring that that is put on the subsidy database? I am not clear on that.

Lastly, EU state aid rules have a number of de minimis exemptions for agriculture and various other things. Does the fact that the Bill does not include them cause problems, or is it more of a tidying-up exercise?

Thomas Pope: On tax, again, that is a longer allowance that is in the TCA, and that is why it looks like that in the Bill. Of course, the bigger question is why it was permitted in the TCA in the first place. I think it is because tax measures tend to operate on a slightly different cycle—we have our financial years and budgets—and that is why there is a different time period, but I am not quite sure.

In terms of cumulative subsidies, I am not sure that they would end up on the database—I do not believe that is the case. In terms of monitoring that, and knowing whether subsidies have exceeded a de minimis limit, I think that is the responsibility of the recipient rather than the public body. However, I am afraid that is one where you would have to ask some lawyers.

Professor Rickard: I do not know the logic behind the 12 months, but as I said in my opening remarks, I think that is quite a long time. If a competitor is benefitting from a discriminatory tax break, then after 12 months I could be out of business. So it does seem like a very long time, and I would think about the potential benefits of shortening it.

The cumulative subsidies question is an excellent point, and it highlights the arbitrariness of having these thresholds. The monetary thresholds are potentially obscuring these cumulative subsidies, exactly as has been suggested. In my own research on procurements, not in the UK but elsewhere, I find that Governments break up their procurement contracts specifically to get them below the threshold so that they do not have to report them and they are not open to scrutiny. I am not suggesting that happens in terms of subsidies, but these cumulative subsidies could potentially take on that kind of logic where you are breaking up a subsidy or collaborating on providing subsidies below that threshold that actually end up going above the threshold.

Finally, in terms of exemptions, there are exemptions included in this Bill. Sometimes they may be legacy exemptions, but I think that the benefits of having this information surely outweigh the costs. If we understand where the subsidies are going and who is getting subsidised, we can have a better understanding of whether these subsidies are working and achieving their goals. If you are weighing up the costs and benefits, I think the benefits of having fewer exemptions would outweigh the costs.

[Kirsty Blackman]

Q To follow that up, probably with Mr Pope, it says specifically that indirect subsidies are to be included. In the event that an indirect subsidy occurs, who is responsible for ensuring that there is transparency and information about that?

Thomas Pope: That is a very good question, and one that I am afraid I do not know the answer to.

[Andrew Bowie (West Aberdeenshire and Kincardine) (Con)]

Q Thank you very much for your evidence this morning. Coming to Mr Pope first, you spoke about the domestic subsidy control regime being almost unique, and said that we were charting our own course. On balance, do you think having a subsidy control regime is a good thing?

Thomas Pope: Yes.

--- Later in debate ---

[Seema Malhotra]

Q May I ask one further follow-up question in relation to this? I am not saying that there would be, but there may be circumstances in which accurate information is not always reported. What mechanisms do you see in the Bill—or does there need to be more on this—in relation to potential audit and checking of the accuracy of the information being submitted, and who should be doing that?

Professor Rickard: I think you are right that we are not only trusting the governing authorities to mark their own exams, but trusting them to provide accurate information about what they have done. So I think there are two possibilities—this is blue-sky thinking. One, as I have suggested before, is to collate information—get the information from the granting authority, but also request information from the body or entity that has received the subsidy. And then you can confirm: do these numbers match? This happens in trade all the time: you say, “What is the export data? What is the import data? Can we match these data?” And if not, what is the problem; why do they not appear to match? One way to have a check and balance on the information that is being provided by the governing authority is to seek this kind of information from the people who received the subsidy. It could even be a condition of receiving the subsidy that you will report this information.

The second suggestion, which is one that Mr Pope offered previously, is giving the CMA a bigger role for audits, and even beyond that. I am glad to see that the CMA has been tasked with doing five-yearly reports, but I really think that there is a lot of additional room for ex post scrutiny, not only of the regime but of individual subsidies, to say, “Did this subsidy achieve this goal? Was the subsidy successful? Did it engender jobs, business and economic opportunities?” I think that is a really important role for the CMA or another entity like that, but in order to be able to do this kind of auditing, this ex post analysis, we need more information, which means we need more transparency.

Thomas Pope: I would agree with all of that. What I would say is that I think there is an incentive to get the information right, in that I think if you are found to have got it wrong, probably your 28-day time limit after you have offered accurate information does not apply. So you do want to make sure that you are providing accurate information here. But I completely agree about some role for the CMA or some other body in getting the information from recipients—it sounds like a very good idea to me—and checking that, subject to how burdensome that would be. Yes, that is a good cross-validation. I suppose the concern here would be that the CMA ends up a sinkhole of time, just looking through every single thing that goes on the database, but if you just have a flag to say, “Hold on, the information doesn’t match here,” and then the CMA looks further, they are two strategies that work together quite well, I think.

[Kirsty Blackman]

Q Professor Rickard, you mentioned the subsidy database that there is already. I have had a bit of a look at that. Do you think that it is a model for how we should take this forward, or do you think that there are significant amounts of information that we need to add to it in order that it will make sense to people? You did touch on this, but could you just expand on it?

Professor Rickard: I think it is a commendable first step. I think it is great that it is publicly available, that it is online, that it is relatively transparent. There would be some more things that I would like to see. For example, there are many cases, as you will know from looking at it, where it just says “other” or “not available”, and there are a lot of cells that have not been filled in or do not look as if they have been filled in correctly. I encourage some mechanism to ensure that you cannot just say “other” or “not available”. Sometimes the amounts are listed as zero; I am not sure I understand why that is the case. I also think best practice could be followed in terms of international comparability. For example, you could put on these codes that we use to identify the sector, like NACE codes—internationally standard codes that would identify the sector to which these subsidies are going.

The Bill is really commendable and is a great initial step, and I am glad to see it up there, but there are ways that it could be improved by providing more information, and more consistent and detailed information, and by using some of these international standard codes that exist in databases that we use—for example, for imports, employment, industries or firms.

[Seema Malhotra]

Q I am keen to get your views on the subsidy advice unit and its role, responsibilities and powers as defined in the Bill. Do you think that the unit should have some further external voices on it, whether on the board or involved in its work? It seems to have a huge amount of responsibility, but its membership can only be drawn from within the CMA, from which panels might be appointed to undertake reviews. To give confidence, a process of review will need to be robust and have knowledge of devolved competencies, regional issues and so on. Do you think the unit will be strong enough, or do you think it needs some adaptation in order to make it the most effective it needs to be?

Thomas Pope: I certainly think that the CMA and/or the subsidy advice unit should have a membership and input reflecting its four-nation role in the UK and the fact that, although subsidy control is a reserved matter, it affects devolved competence and the operation of policy in all four nations of the UK. I therefore think it is appropriate that there be better devolved representation. These statutory responsibilities go to the CMA and are then exercised by the subsidy advice unit and the Office for the Internal Market. I think it is time for a look at the CMA’s governance, although that is obviously slightly beyond the scope of the Bill.

There could certainly be ways that the subsidy advice unit could get input. A particular concern could be that, because the regional economies of the UK can look quite different, you may need a different set of local expertise when the CMA or SAU were looking into a particular subsidy in Scotland from what you would need in the north of England, which has quite a different industrial structure. There are lots of creative ways that the SAU could do that. You could have regional panels that have that expertise. I would go further and have a real look at the governance of the CMA as well, because ultimately, while it is the SAU doing the subsidy control, those are the CMA’s powers.

Professor Rickard: I was surprised to see in legislation that members of the SAU can only be employees of the CMA. There may be very good reasons for that. The key for the SAU is to ensure that it is insulated from politics and that the decisions it makes are really not only economic logic but are consistent with the principles. Of course, there is a role for politics in that—people saying, “We want to achieve these particular outcomes”—but I think you really want the SAU to be a technocratic body staffed by experts who will review a subsidy on balance, in line with the principles. With those goals in mind, there may be scope for expanded membership, or certainly at least for ensuring some sort of feed-in from experts on the particular issues, subsidies or areas that the SAU happens to be investigating.