State Aid (EU Exit) Regulations 2019

Lord Henley Excerpts

Thursday 14th March 2019 Lords Chamber

Moved by

[Lord Henley]

That the draft Regulations laid before the House on 21 January be approved.

Relevant documents: 15th and 16th Reports from the Secondary Legislation Scrutiny Committee (Sub-Committee B)

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, I beg to move that the draft State Aid (EU Exit) Regulations be approved. I will speak also to the draft European Structural and Investment Funds Common Provisions and Common Provision Rules etc. (Amendment) (EU Exit) Regulations 2019, which were laid before the House on 28 January.

The draft State Aid (EU Exit) Regulations transpose the existing EU state aid regime into UK domestic law by correcting deficiencies in retained EU law. In doing so, they transfer the state aid regulatory functions of the European Commission to the UK’s Competition and Markets Authority. The regulations will ensure that state aid rules continue to operate in a domestic context and will come into force on exit day in the event of a no-deal exit.

State aid rules govern the way subsidies can be given, and exist to stop companies getting an unfair advantage over their competitors. The rules are not intended to prevent public authorities supporting industry, but rather to do so in a way that minimises distortions to competition. Where there are good justifications for state aid, the rules enable it to be given. The state aid rules are about supporting fair and open competition. Ultimately, they are good for taxpayers, consumers and businesses.

The existing principles for the regulation of state aid will remain substantively unchanged in the domestic regime, in accordance with the aims and powers under the withdrawal Act 2018. The provisions in the regulations will therefore have minimal impact on public authorities that grant state aid or entities that receive it.

The main practical change under the new regime is that the rules will be regulated by the CMA. To prepare for EU exit and its new state aid role, the CMA received £20 million for 2019-20. This is in addition to the £23.6 million it received for 2018-19. The Government are working to ensure that the CMA will be ready to take on this new role and have every confidence in its ability to do so.

The CMA will adopt the Commission’s existing state aid guidelines, which provide clear parameters for how and when aid should be approved. It will also receive enforcement powers broadly equivalent to those of the Commission. I should, however, explain one point of divergence from the EU regime. Under EU rules, the European Council has the power in exceptional circumstances to intervene and approve aid before the Commission has reached a decision.

We do not consider it necessary or appropriate to use the regulations to vest the Government with similar powers. Ultimately, the Government could bring forward legislation to amend the state aid rules if deemed absolutely necessary. This option is not readily available to the European Council in the EU context.

[Lord Wigley (PC)]

Will the Minister give way?

[Lord Henley]

I shall not give way at the moment. I will take advice from the noble Lord, Lord Adonis, who pointed out earlier that the noble Lord will have his moment to speak later. It would probably be helpful if I get through what I want to say and the noble Lord can speak later.

I mentioned earlier that state aid rules will ensure fair and open competition throughout the UK. Over the past year, the Government have engaged extensively with each of the devolved Administrations and shared drafts of the regulations. The Government have also offered to sign a memorandum of understanding about the operation of the state aid regime with the devolved Administrations, which we hope to agree. These discussions have indicated broad agreement on the substance of the Government’s policy to establish a UK-wide state aid regime that mirrors the EU’s. We will of course continue to work closely with the devolved Administrations on state aid policy.

In conclusion, as we leave the EU, these regulations will give certainty to public authorities and recipients of state aid, and help maintain confidence for businesses across the UK.

I turn now to the overview of the structural funds SI. In a no-deal scenario, this instrument will repeal the European regulations concerning the European structural funds, while ensuring that they can continue operating domestically. It will also repeal the regulations for the Cohesion Fund, for which the United Kingdom is not eligible. Structural funds include the European Regional Development Fund and its cross-border European Territorial Cooperation component, and the European Social Fund. Structural funds support regional investment across the UK and are funded via the EU budget, with match-funding from project participants. In a no-deal scenario, the United Kingdom is expected to lose access to European funding.

HM Government have guaranteed funding for structural funds projects signed before the UK leaves the EU. The guarantee also enables new projects to be signed after exit until 2020. This guarantee covers UK beneficiaries, all beneficiaries of the PEACE programme in Ireland and Northern Ireland, and Interreg VA in Ireland, Northern Ireland and Scotland.

This instrument facilitates the domestic delivery of structural funds in a no-deal situation. It repeals the European regulations for these funds, as they would become inoperable retained law. It also ensures that for European Regional Development Fund and European Social Fund projects started before exit, current fund delivery rules are upheld through existing funding arrangements—without keeping redundant EU regulations. The powers to continue paying beneficiaries for projects already exist under domestic law. This instrument does not make provisions for projects started after exit. New projects will none the less continue to be signed using existing domestic powers and delivery systems, with appropriate simplifications. Structural funds delivery will also remain a devolved matter.

The instrument also makes special provisions for European Territorial Cooperation programmes that fund collaborative projects. It includes a transitional provision that enables the guarantee to be paid out to bodies involved in a European Territorial Cooperation programme. The power to fund beneficiaries of cross-border programmes currently comes from European law, and therefore needs to be continued in domestic law through this instrument to protect beneficiaries in a no-deal situation. The EU has made special provisions to enable the United Kingdom to continue in PEACE and Interreg VA in a no-deal scenario if the United Kingdom continues to pay its share of the programmes. The transitional provisions in this instrument enable the United Kingdom to make such payments to the EU. This is consistent with the United Kingdom’s commitments to PEACE and Interreg VA.

In this arrangement, the European regulations do not need to be retained. The United Kingdom will sign an agreement with the EU to ensure that programme beneficiaries continue to follow relevant rules. The EU regulation does not resolve the question of payment powers addressed by this instrument. That is why we need both the EU regulation and this instrument to safeguard these programmes. The transitional provision to pay the guarantee to European Territorial Cooperation beneficiaries also ensures that beneficiaries of cross-border programmes other than PEACE and Interreg VA can be paid through the guarantee. Without this instrument, delivery departments would lack the powers to pay out the guarantee to beneficiaries of European Territorial Cooperation programmes.

In conclusion, in a no-deal scenario, this instrument repeals redundant European law while ensuring that projects previously supported by the EU, including those supporting peace in Northern Ireland, are protected. I commend the regulations to the House and I beg to move.

Amendment to the Motion

Moved by

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[Lord Purvis of Tweed (LD)]

My Lords, I am happy to follow my noble friend Lord Fox. I endorse the strong points he made towards the end of his speech, because I live in a very rural part of the Scottish Borders. On my journey to this House every week, I drive past a number of local infrastructure investments that have been made and areas where projects have been brought about by the partnership between the devolved Administration in Edinburgh and the support of the UK Government, but funded by EU structural funds. There is a whole suite of different funds, which the Scottish Borders local authority has been able to link with directly.

I can only emphasise the point made by my noble friend. The Scottish Borders can be excluded from certain types of funding from the normal budget-per-capita distribution of funds of the Scottish or UK Government. However, it has been able to use the fact that it has the second-lowest wage profile in the country to tap into cohesion funds, because these have been set at a European level on a certain set of parameters, which are not the same as the budgetary distribution formula from the Treasury used by the UK Government. This has meant that the Scottish Borders has benefited from projects from these direct funds and the way they have been established, using objective criteria that are not used in the normal way of distributing funds. Therefore, it would be most helpful if the Minister could provide a degree of clarity as to how the formula would be used for any successor support that would be provided. If it is different from what is currently used, there will need to be some urgent readjustment from the local authorities and the Scottish Government in how they will offer match funding.

Linked with that, in the multiannual financial framework 2014-20, including all European funds, Scotland received 14% of the UK funds with a population of just 8.3% of the UK. This is because of the particular circumstances of the Scottish industries and the Scottish economy. It would be a major disruption if that kind of financial balance had to be adjusted over a short period, especially in the context of a no-deal Brexit.

That leads to my next point. I have heard the Minister commit to offering security for funded projects to be supported for their lifetime. I stress, from my direct experience of having been elected in the Scottish Borders and working very closely with the then local enterprise company and the local authority, that the typical long-term basis of the six-year period of the multiannual financial framework has been pivotal, especially in the context that these funds have to secure match funding, which can be over two or three spending review periods of any Government, either a UK Government or a devolved Administration. That period has been critical when there have been other funds and they have had to secure other forms of match funding. If there will be simply a normal three-year spending review period replacing the longer-term multiannual financial framework, that will be very damaging to the ability to secure some of the projects associated with it.

That is also why it has been typical in my area of Scotland for projects often to run on from the funding period. That has been a beneficial approach by the European Commission, which instituted the principle of n+1, n+2 and n+3 so that projects that have been initiated and are operating can continue to receive funds after the formal closing of that funding period. The funding has been committed but there is no guillotine period at the end of the funding round. In certain areas that has been pivotal. An equivalent commitment would be helpful.

We now have reference to the areas linking in with the devolved Administrations, certainly for Scotland, and we have the UK fiscal framework, which has been negotiated between the UK Government and the Scottish Government and is the basis on which the non-own revenue funding that the Scottish Parliament is responsible for is distributed. Is it the Government’s plan that there will be discrete funding components, as my noble friend asked for clarity on, or is it their intention that the funding will be operated through the UK fiscal framework? I can tell the Minister straightaway that if it is the latter I can see a situation where certain parts of Scotland will be harmed because they will not be able to tap into the targeted methodology of many of these project funds. Clarity on that would be very important.

Furthermore, it is also very important to know whether the Government intend to continue the principle that some funds can be bid into. Scotland has a better record of success in bidding into EU-wide funds that are open for bids because of its particular set of circumstances and its economy. In my experience, it has been a very positive element to ensure that all levels of government—local authorities, the Scottish Government and the UK Government—work together with local enterprise leaders to ensure that bids into EU projects have been the strongest they can possibly be. If that is weakened, the whole quality of economic development policy will be harmed. Do the Government intend that there will be some funds that can be bid into? That has been a positive element.

Finally, on the element of the structural funds in this support, is it the Government’s intention in their negotiations that, if we are to leave the European Union, parts of the UK will be able to continue bidding into European-funded projects, as those in Norway can? I understand that the Minister may say that this will depend on a negotiation with the rest of the EU, but a signal that this is the Government’s intention would be most helpful.

Turning to state aid, I am most grateful to the noble Lord, Lord Stevenson, for tabling his amendment to allow us to ask these questions. The points he raised are very important. He and I—and the noble Viscount, Lord Younger, who I see on the Government Front Bench—have debated at length the interaction with the devolved Administration on trade issues as a whole, but also on state aid as a component part of them. In leading up to this statutory instrument, the Minister said that the Government have been working closely on state aid issues. It would be helpful to know if the Government formally communicated the draft text to the Scottish Government before bringing forward this statutory instrument. The Minister will be aware of the operation of Section 2 of the Scotland Act 2016, which states:

“It is recognised that the Parliament of the United Kingdom will not normally legislate with regard to devolved matters without the consent of the Scottish Parliament”.


It is the view of the Scottish Government, endorsed by the Parliament, that state aid is an issue of competence, and that when areas of EU competence in state aid issues are brought back to the United Kingdom, they should fall fully within the legislative competence of the Scottish Parliament. It is an area of dispute between the UK Government and the Scottish Parliament. I am assuming—and hope the Minister can clarify—that this issue has now been resolved. It would be fairly regrettable if this statutory instrument was brought forward without any consultation with the Scottish Government, given that they believe that this will be fully within the legislative competence of that Parliament.

This leads directly on to the very good point made by the noble Lord, Lord Stevenson, and my noble friend Lord Fox: what will be the interaction with the CMA? Ordinarily, UK regulatory bodies operate within reserved areas, and the devolved Administrations know that if there is interaction between a devolved Administration and a UK regulator, whether it is Ofgem or Ofcom, the statutory underpinning is UK-reserved legislation.

This is an area where there is not agreement. The Scottish Government and Parliament believe that state aid issues are fully within the legislative competence of the Scottish Parliament. What will the interaction be of a UK regulator not operating under UK legislation when one part of the United Kingdom believes that this is fully within the scope of a devolved Administration? I can tell the Minister that conceptually it is not a new idea. When the Committee on Climate Change was established, the Scottish Parliament made a conscious decision that it would have an oversight role and a formal link to the devolved Administration. That was proactively asked for by the Scottish Parliament, and a mature relationship then developed. It would be very regrettable if this was the reverse—if the UK Government were insisting that a regulatory body had some form of oversight of devolved competences when they themselves will have no regulatory or formal relationship with that devolved Administration. I cannot see it working, but maybe the Government will be able to clarify.

I hope that the Government are able to provide a degree of clarity on the areas where I believe there is still dispute. It would be very regrettable if something so critical to many parts of the Scottish economy started with a major constitutional dispute about the competences and how it will be interactive.

[Lord Henley]

My Lords, I will start by dealing with one or two of the points made by the noble Lord, Lord Purvis of Tweed. He lives just north of the border and, as he is probably aware, I live north of Hadrian’s Wall but just south of the border, so we both have an interest in that area. I presume he noticed the announcement, among many others, by my right honourable friend the Chancellor in his Statement yesterday about the £260 million available for the new borderlands deal. He is probably also aware of what my right honourable friend the Secretary of State for Scotland said about welcoming that deal. Irrespective of all other matters that we might discuss, this is a wonderful example of cross-border working which he and I, and no doubt others who have slightly less interest in the immediacy of the Anglo-Scottish border, would welcome.

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[Lord Fox]

We would be satisfied with that kind of comment if we knew what vehicle the debate about these future issues will come in. Will it be in primary legislation brought to this House straight away? Would it be merely a series of Command Papers? If the Minister could explain the structure by which future negotiation or legislation will go ahead, we could perhaps be more satisfied by that.

[Lord Henley]

I will see how I get on in my response to the various remarks made by the noble Lord, Lord Fox, and others. I was going to start with state aid rather than on structural funds but we all know about the shared prosperity fund. I think it was back in July that my right honourable friend made a Written Ministerial Statement on that subject. The noble Lord will know, as that Statement made it clear, that it is designed to tackle inequalities between communities, especially in those parts of the country whose economies are furthest behind. It will achieve that by investing in the “foundations of productivity” and so on, as outlined in our industrial strategy, which is now—gosh, it is a year and a half old. But it will be an integrated, simplified fund, operating across the UK. I do not know at this stage whether it will need primary or secondary legislation, or whatever, and it would be wrong to speculate.

[Lord Purvis of Tweed]

Before the Minister moves on to the structural funds, I want to come back on the previous issue. I understand that there may well be a difference of opinion between the UK Government and the Scottish Government, in particular, on where the legislative competence on state aid issues arises. But it does not matter if there is a difference of opinion because we operate on a statutory basis. The Scotland Act 1998, as a constitutional Act, provides for the legislative competence of the Scottish Parliament to be total unless there are specific areas reserved in its Schedule 5. So it does not matter what the Government’s opinion might be since unless that is reflected in Schedule 5 to that Scotland Act, as amended by the 2016 Act, the legislative competence falls within the Scottish Parliament.

Even if this statutory instrument were on an emergency basis—the basis of leaving the European Union—that statutory competence would therefore be the Scottish Parliament’s, unless the Government bring forward an amendment to the Scotland Act to reserve it. It is important that this is now resolved in this statutory instrument, as in others, because unless the Government intend to amend Schedule 5 as per the Scotland Act 2016, the legislative competence for state aid will rest with the Scottish Parliament.

[Lord Henley]

My Lords, I do not accept the point that the noble Lord is making. I made it clear that we believe that state aid is a matter reserved for HMG. As I said, we recognise that there is a difference of view; that can be resolved in due course but I do not think it necessarily needs to be resolved in advance of this SI. He and I will obviously have to continue to disagree on that matter.

I was going to deal with these matters in the order that I originally set out, starting with questions relating to state aid and in particular to the amendment moved by the noble Lord, Lord Stevenson. What is important on this occasion is that we do not conflate the rules that govern the overall aid framework with the provision of aid itself. Decisions by public authorities on how and when to provide funding to business and industry after EU exit are quite separate from the decision in front of the House today, which is on whether to approve a state aid framework to ensure fair and open competition throughout the UK. By keeping the rules as close as possible to how they operate today, compared to what has been the case, will provide continuity and certainty in the immediate aftermath of the UK’s departure from the EU. This will ensure that aid can be provided in a similar way to now.

Individual choices on how and when to give aid within that regulatory framework will obviously be for each public authority to make. That applies equally to successive Governments, the devolved Administrations and local authorities. As with the other public authorities granting that state aid, the Government will of course continue to consult individual spending authorities where it is appropriate to do so after the UK leaves the EU. But our strategy for supporting business and industry before and after EU exit is comprehensively set out in the industrial strategy, which we have debated on various occasions. As I said, it was launched almost a year and half ago and is already having an impact. That is how it should be set out.

As I made clear, and I repeat it, we have engaged constructively and intensively with each of the devolved Administrations on the state aid regime, including discussing the details of the proposed regulations and the accompanying set of commitments to underpin how the regime will operate. I think the noble Lord, Lord Fox, wanted more detail on this—perhaps it was the noble Lord, Lord Purvis—and we hope to conclude a memorandum of understanding in due course with the devolved Administrations. No doubt when we have concluded that, it can be published. Our discussions over the last year have shown a broad alignment on the substance of the policy to establish a UK-wide state aid regime that mirrors the EU’s. We will continue to work with the devolved Administrations and, as agreed, each of them will be responsible for managing communication between their respective aid givers and the CMA. They will not need to go through my department, as is the case at the moment.

[Lord Fox]

I thank the noble Lord for beginning to flesh this out. Rather than continue the debate here, it would be helpful if the Minister could go back to his department and then write to us about the basis for the assertion by Her Majesty’s Government that they have predominance on this issue over Scotland and the devolved authorities. On what basis in law do the Government assert that UK-wide role? Can he also flesh out the mechanics for the CMA operating in Scotland? Rather than detain the Minister at the Dispatch Box, a written response would be helpful.

[Lord Henley]

I am more than happy to offer a written response, but the Government have been clear throughout. My noble and learned friend Lord Keen set out our position in various debates on the withdrawal Bill and so on. I will dig that out and offer it to the noble Lord. Other Ministers, equally learned in the law, have also made similar points in another place. As I said to the noble Lord, Lord Purvis, this is a matter for the Government but we believe we should continue to consult the devolved Administrations.

The noble Lords, Lord Fox and Lord Stevenson, also wanted me to flesh out the role of the CMA and asked whether it would have the power to overturn legislation. I repeat that our intention is to make sure that the regime covers the same sectors, applies to the same actors and does the same job as it does at the moment. It is worth noting that there are very limited circumstances in which aid is granted directly by Act of Parliament. To ensure that aid granted by any future Act of Parliament can be reviewed in a non-binding way by the CMA, which is the domestic regulator, Schedule 3 creates a process for it to consider aid that may be granted directly by an Act of Parliament. It provides for a Minister of the Crown to seek a non-binding advisory opinion on proposals for grant aid by an Act of Parliament. It also provides for interested parties to request the CMA to prepare a non-binding advisory opinion. I hope that explains the matter, but I will expand on it in any letter that I write to noble Lords in future.

The noble Lord, Lord Stevenson, also asked how we were intending to use this provision in future. I will expand on this a little more. The rules are not intended to prevent public authorities supporting industries or businesses, or even—dare I say it—nationalising assets. A rigorous state aid system is good for taxpayers and consumers and ensures an efficient allocation of resources. There is a large degree of flexibility in the rules to ensure that a wide range of interventions can still be deployed, but in a way that minimises distortions to competition. The future regime will still allow the Government to act swiftly if necessary, much as they have been able to under the existing one. EU state aid rules do not prevent, and have not prevented, the UK pursuing its active industrial strategy. In practice, the existing EU rules have always been sufficiently flexible to allow the UK to make innovative state aid interventions where necessary.

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[Baroness McIntosh of Pickering]

Could my noble friend confirm the match-funding aspect of what would have been paid by Brussels, and that the UK Government will pay not just what they would have paid in match funding, but the whole amount the Commission would have paid—effectively both parts of the fund?

[Lord Henley]

The noble Baroness is too fast for me. I had two final points, one of which was to deal with concerns about match funding and whether that guarantee would underwrite it. The guarantee will underwrite the funding previously received by the EU. Match funding will continue to be provided by existing match-funding providers, such as the National Lottery.

My noble friend also asked about our future participation in Horizon. All I can say at the moment is that decisions on future such EU programmes will come as part of the spending review.

I appreciate I have not answered all the questions that have been put to me, but I believe I have answered most of those that are directly relevant to the statutory instruments before us. I appreciate that the noble Lord, Lord Fox, would like—and will receive—a letter. That letter will set out more about the possibilities for the future, and I will write to the noble Lord, Lord Purvis, in greater detail about our possible disagreement on where responsibility lies.

[Lord Fox]

The Minister may have answered this question, so I apologise if I missed it. In dealing with the shared prosperity fund and its disbursement, we come back to that paradigm of what happens in the United States, for example. Do the Minister and the Government foresee that the CMA will have a role in policing that process? If not, how do we prevent regions bidding up, which we have experienced in some RDAs? The Minister again said we will have ample opportunity to debate this in the future, but it is not clear to me through what vehicle this debate will continue.

[Lord Henley]

I am sure the noble Lord will find it easy to raise the subject, and will do so. Whether there will be the opportunity through primary, secondary or whatever legislation, I do not know. On his broader questions about the shared prosperity fund, he will have to wait for the guidance that the right honourable Secretary of State will provide. That might be his moment to consider such matters. With that, I beg to move.

[Lord Stevenson of Balmacara]

I notice the noble Lord did not ask me to withdraw my amendment. I am sure he therefore wants to accept it, but I am going to disappoint him because I will be withdrawing it anyway, so he does not need to panic too much.

Having said that, I am afraid we did not get answers to many of the deeper and far-reaching questions about state aid or the European structural and investment funds’ continuation schemes. That is partly because the particular issue is the need to cope with a no-deal Brexit and, therefore, some of the bigger issues do not come into play. For the record, I do not feel that we have had a sensible answer to my question about why the Government are asserting that state aid rules are necessary to ensure that competition with the EU is not distorted. If we are leaving the EU under a no-deal situation, they will be a series of third countries and there is no logic in trying to make sure that our competitive approaches are maximised. There would be a good argument for saying that, if we have to leave the EU with no deal, and we are therefore just competing with them, we ought to use the maximum freedom available under the WTO to subsidise all our exporting companies as much as possible, for the benefits of UK plc. I am not supporting that; I am just saying that there is an alternative. The argument for why we need the proposed comprehensive set of rules needs to be explained better.

Secondly, we have not had an answer to why Parliament has not been brought into this process. Again, this is an issue of supreme importance to many people; the sums of money are enormous. The impact of the structural funds and European investment over the years has been fantastic; in times of austerity, they have saved many communities, economies and lives, and we should not forget that. Therefore, Parliament should have a role. We are not getting the right answers on how the devolved Administrations will operate in this new process and we are certainly not getting answers about how the CMA and its powers will operate.

However, these issues are for the future. I am sure that, once we read Hansard, a number of issues will be clearer. I will do that, and I also hope that a few letters will come from the mighty pen opposite, which will also help. If the Minister feels that a meeting to discuss some of these issues might help to clear the air, we would be willing to do that. With that, I beg leave to withdraw my amendment.