Subsidy Control Bill (First sitting)

Seema Malhotra Excerpts

Tuesday 26th October 2021 Public Bill Committees

[The Chair]

Thank you. Professor Fothergill, you have one minute for a brief statement, because time is very limited.

Professor Fothergill: I will do my best. There are two points I want to make by way of introduction. First, we need subsidy control. Subsidies can be expensive and they can be distortive, but they can also deliver valuable objectives—things like regional development, the green agenda and so on—so we do need rules.

The second point I would like to make—this is the big concern I want to air in front of the Committee as we proceed—is about the relationship between the Bill and the levelling-up agenda. The Subsidy Control Bill is potentially a very useful tool in delivering the levelling-up agenda, but at the moment the details are very thin. In particular, there is an absence of an assisted area map, and no commitment to developing one. That would be extremely helpful in promoting growth in the less-prosperous local economies of the United Kingdom.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

Q Thank you, Professor Forthergill, for joining us today. I have two brief questions on your comments about the interface between the Bill and the levelling-up agenda. First, what more needs to be done to the Bill to strengthen the involvement and the achievement of the levelling-up agenda in relation to targets and policy? Should there be reporting on that? Should the Competition and Markets Authority’s report consider the geographical distribution of subsidies, for example?

Secondly, do you think that the UK Government and the devolved Administrations will have a common way of delivering policy goals under the subsidy control principle—on market failure and equity rationales, for example? How might that be interpreted by different levels of government? Does more need to be done for a stronger relationship between Westminster and the devolved Administrations and local government on the implementation of the measures?

Professor Fothergill: Okay—there is quite a lot in that. Let me clarify the point I was trying to make about how an assisted area map would strengthen the levelling-up agenda, and how it might be incorporated into the legislation.

An assisted area map would define the areas where you could give additional subsidies to firms to promote investment, to bring in businesses from abroad, and to strengthen existing businesses in the locality, for example. We had an assisted area map under the old EU state aid rules, but let me be quite clear: the whole idea of an assisted area map was not something that was imposed on the UK from Brussels; we had an assisted area map in the UK long before Britain even joined the EU. There were maps back in the ’60s and early ’70s defining the areas where it was legitimate to give additional aid to businesses to promote new jobs or protect existing ones.

I do not think we need some after the event audit of how the geography of subsidies has worked out. What we need, in advance, are some clear criteria defining the places where enhanced subsidies can be given. That sends an important signal to businesses in particular that if they were interested in investing in one of the less-prosperous parts of the UK, they might be able to draw down significant financial assistance. At the moment, the legislation does not rule out an assisted area map, but equally, it does not rule one in. I have to say, with due respect to the Minister, that that leaves a huge amount of discretion in the hands of the ministerial team. In the absence of any commitment in the legislation to defining how an assisted area map should be drawn up, I think it is perhaps taking the whole issue away from the scrutiny of Parliament. That is how the legislation should be strengthened on that point.

On the question of the relationship between the UK Government and the devolved Administrations, it is perhaps fair and reasonable that the whole of the UK operates under broadly the same rules, but there is then a subsidiary issue of whether the different tiers of government in the UK actually take advantage of those rules. That has always been the case. It was the case under the old EU state aid rules; we had rules about what you could and could not do, but the different parts of the United Kingdom put larger or smaller amounts of funding into different schemes to support businesses. As long as that was all within the rules, that was okay. In terms of the detailed implementation of the legislation, and I think a lot of the real operation of this legislation does depend on the details—the devil is in the details—then, clearly, it would be good to have that meaningful dialogue between Westminster and the devolved Administrations, even if we are, at the end of the day, working within a single set of rules for the whole United Kingdom.

[The Chair]

Q Thank you. Dr Serafin, would you wish to comment?

Dr Pazos-Vidal: Yes. I could only agree, in general terms, with what has been said already. I will take the questions in order. Quite clearly, there is an expectation from local authorities that there is a specific targeting of given areas, because that will provide legal certainty for public authorities, but also for economic operators, about whether the subsidies can or cannot be applied. That makes sense, and it is clearly a message that comes from many councils across Scotland, particularly from those that have benefited from assisted area status. It is worth recalling, in the case of Scotland for instance, that the regional selective assistance scheme has been running for many years, awarding around £20 million through 60 or so awards a year. That is something that local authorities want to retain, but the same could be applied to colleagues from the rest of the UK.

Quite clearly, as has been mentioned, the Bill does not say one thing or the other. The supporting documents do say, more or less, that there might be some guidelines or guidance on the special targeting of assisted areas, which, as has been mentioned, has been a feature of the UK policy toolbox since the 1930s. The Bill could, for instance, define what an assisted area is. That would be encouraged, and there would be limited discretion on that for whoever the Minister might be in however many years’ time.

That would be helpful, but it is also important to distinguish that having assisted areas does not mean having European-style assisted areas. After all, the geographies that we have seen in the assisted area maps so far have been developed by Eurostat, according to —I would say—very technocratic approaches that did not fit the geographies of the UK. It created a certain degree of lineation by imposing certain geographies that are not recognisable in the UK, so we should not necessarily look at just having the old maps.

The good thing however, is that the UK, and Scotland, and different parts of the UK, are very privileged in the amount of data that is available at a very local level—sub-municipal level, sub-local level, ward and street level—which will allow the granularity that we perhaps did not have under the EU system. Now that we are moving to creating a home-grown system of assisted areas, that could be very much put to use, in a way that has perhaps not been used at the same level during the time of EU membership.

We should not underestimate the importance for this Bill of the participation of the devolved Administrations, and also local government. After all, we are talking about policy choices, not competition policies. It is about policy outcome and political rationale, and we have a very divided system of Governments, which is asymmetric in certain respects. If a decision is just taken by a Minister, or a Minister just issues guidance, as set out in clause 79, that will not work.

We should not underestimate the constitutional impact that the United Kingdom Internal Market Act 2020 had on the territorial constitution and the governmental relations of the UK. That needs to be addressed—one issue with the Act is subsidy control—by taking a more inclusive approach in terms of how rules are made, even if the Minister has to say at the end, “We need to have a system of engagement and consultation.”

In my view, that should also be specifically incentivised, mentioned and encouraged in the Bill itself, so that it is not a question of the Government of the day just deciding to engage or not to engage. This is quite important—it is part of the role of intergovernmental relations. I should also say that, in a statement to this House in March 2018, the UK Government committed to engage with local government when designing the new rules. That is actually one of the ways of honouring the Government commitment.

[Seema Malhotra]

Q May I follow up on how the guidance should be developed more inclusively? Where in the Bill are there gaps relating to the involvement of the devolved Administrations? Is it in the development of the guidance? Are there powers for the Secretary of State that the devolved Administrations do not have, such as the ability to call in and make challenges? I would be very grateful for your view on that.

Dr Pazos-Vidal: You are absolutely right. Ideally, the Bill should be the framework of how this engagement should be done. Under clause 79, the Secretary of State should consult anybody whom they consider it appropriate to consult before issuing statutory guidance. In our view, that is too general and not reflective of the territorial constitution of the UK as it stands. There should be a provision that the Secretary of State must consult the devolved Administrations in a dedicated system that should also involve local law. There should be a duty to make sure that different parts of the UK have full ownership of the final outcome—it is true that the Secretary of State will issue the guidance—but also the intelligence and the local know-how about these ideas. It is very easy to see things in a certain way in Westminster, but when you are in different parts of the UK, they do not look like that.

On the call-in powers, it is true that UK Ministers have responsibilities only for England on some issues, whereas other Ministers across the UK have responsibilities on the same issue in other parts of the UK. It makes sense that whenever the competent authority is in a devolved part of the UK, the same consultation mechanism should be provided, mutatis mutandis, before the Secretary of State decides to call in a subsidy. That seems to be quite inclusive. I have to say that the intergovernmental review, which was updated in March this year, tends to go in the other direction, but as the supporting document suggests, we cannot wait for the intergovernmental review to happen, because it will take its time.

Subsidy control is potentially a sensitive constitutional and political issue. We are already introducing provisions to make sure that the mechanism of consultation happens. It is quite consistent with the direction of travel in which we should be going. As I say, the intergovernmental review really goes in that direction, but that is a wider piece of work, and I think we should introduce those social provisions in the Bill.

Likewise, because the Government committed to a consultation mechanism with local government a couple of years ago, there should be some provisions for that. That is what we had when the European Commission used to draft the guidelines. The member states had a special legislative committee, and there were specific procedures for local government. There was even a statutory procedure through the European Committee of the Regions. There was a whole infrastructure to help the Commission design the rules. We do not have to replicate exactly the same things, but at the very least we should have the same level of ownership as we had during our EU membership—or more. That is only right and proper if we are to ensure that the system works in the long term.

Equally, the new subsidy control unit in the CMA could benefit from the work of the devolved state aid units, which are not mentioned in the Bill or the supporting documents, but naturally these teams have a lot of experience working with local authorities, sorting out the practicalities of how to assign a subsidy. It would be a shame if all this knowledge was not properly used to design the system and rules that will emerge from the Bill.

Professor Fothergill: May I amplify my remarks on the consultation and the involvement of the devolved Administrations? The crucial thing is to include a commitment to consultation and to their involvement in the drawing up of the detailed guidance, because the guidance really matters. Let me illustrate how this might work in the context of an assisted area map, if we are to have such a map; I know from personal involvement that an assisted area map has been drawn up the last three times round, and a full consultation process has been undertaken. Indeed, there was a two-stage consultation process, in which the principles underlining the map were out for consultation first, because the map was largely drawn here in the UK, though parts of it were set by Europe, and then the draft map went out to consultation.

I am also aware that the devolved Administrations largely drove the detailed drawing of that assisted area map within their own patch. There needs to be a commitment to undertake a similar sort of procedure.

[Bill Esterson (Sefton Central) (Lab)]

Q Good morning, Dr Pazos-Vidal and Professor Fothergill. You have talked a lot about the assisted area map, Professor, and I certainly take your points about its history and benefits, not least as an MP from Merseyside, which has benefited enormously from state aid over many years. However, there are some criticisms of the way that assisted area maps interact with area boundaries. For example, there are cases where an area that needs investment and support is inside the assisted area, yet the businesses that could deliver that support are outside. Could you say a bit about what the counter-argument is, and what the answer to those sorts of boundary issues might be? I suspect that may be part of our deliberations.

Professor Fothergill: I think that we can draw a map better this time if it is simply drawn here in the UK. Last time, the way that the system worked was that certain areas under EU rules automatically qualified for assistance, such as west Wales and the valleys, the highlands and islands, and Cornwall. There was also a particular deal over Northern Ireland, which meant that the whole of Northern Ireland automatically qualified. The rest of the map beyond those limited areas was drawn within the UK, but it was drawn within an overall population envelope, in terms of population coverage, that was set by Brussels, so it was a question of, “We have so much coverage to allocate. Where do we allocate it?”.

The Government went through a very difficult procedure to try to target the areas that were most in need, as well as places within or close to those areas where there were genuine opportunities to promote jobs and support businesses. In a sense, it is no good putting a line around a residential area and saying, “That is eligible for business support”, because there are not businesses in most residential areas; it is the big areas of trading estates and so on that need to be targeted.

Obviously, within a fixed population envelope, not everywhere that perhaps deserved coverage was able to get coverage. If we are drawing a map here in the United Kingdom under our own rules, we can increase the population coverage of that assisted area map to better reflect the true extent of economic disadvantage in the United Kingdom. Under the old EU rules, only about a quarter of the entire UK population was on the map. That really does not accurately reflect the extent of areas that need levelling up in the United Kingdom.

--- Later in debate ---

[The Chair]

A lot of Members have indicated that they want to speak now. I have the list and I will call those whose eye I have caught—I will try to call Members whom I have seen first. Seema Malhotra, do you have a question?

[Seema Malhotra]

I am happy to come back in later.

[The Chair]

Thank you. Could I have Stephen Flynn?

--- Later in debate ---

[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.

[The Chair]

Dr Serafin, do you wish to add anything, briefly?

Dr Pazos-Vidal: Some of the EU rules are there because one size fits all. Even the level of the threshold is low because the prices in some countries are much lower than you experience in the UK, so it makes complete sense to raise the threshold, which is welcome.

On the level of reporting, the feedback we got from councils in Scotland, and from colleagues across the UK as well, is that it should not be even more onerous than what we had in the EU. Perhaps the proposed system goes in a direction whereby it is less onerous, and that should definitely be the way forward.

--- Later in debate ---

[The Chair]

Thank you. I call Seema Malhotra.

[Seema Malhotra]

Q Thank you, Mr Sharma. I thank Professor Rickard and Thomas Pope for coming in today to give evidence. I will pick up on the issue of transparency first. What specific additions to the Bill might you recommend to increase transparency? I am also interested in your view on whether there should be some form of reporting for all subsidies under the Bill or whether there should be a threshold. Could that be done in a more streamlined way to allow for that transparency?

Could I also ask for your view on whether the six-month reporting deadline is necessary? In your view, could that threshold be reduced if decisions had already been made about the subsidy? Those questions are for both our witnesses. Finally, do you believe that the one-month challenge window is sufficient in the context of how the scheme is being designed and is likely to operate in order to make sure there can be an effective challenge to any subsidies?

Thomas Pope: On transparency, as most of you know, there is the £315,000 de minimis threshold. If the subsidy is below that level, we need not worry whether it is complying with the system. There is then a higher £500,000 threshold. If a subsidy complies with a scheme that has already been approved, it need not be put on the database if it is below £500,000.

[Seema Malhotra]

Q Can I clarify one thing, because I want it to be clear? Being below £315,000 means that the subsidy does not need to comply with the principles—does not need to be checked against those—and does not need to be reported?

Thomas Pope: Yes, that’s right. The purpose of having a de minimis threshold is that we are worried only about subsidies that are likely to distort competition or investment. The judgment has been made. It is quite hard to know exactly what the right level there is. I think a bit higher than the EU level, which was €200,000, seems about right, so £315,000 certainly seems reasonable.

My view is that there is a benefit to more transparency. Therefore, it is worth having a lower threshold for publishing to the database than for someone having to think about whether they are complying with the regime and all its principles. There are a couple of reasons for that.

First, I think we want to understand how the system is actually working and the impact of different decisions that we are making in the system. One of the big policy levers we are pulling in the system is the £315,000 de minimis threshold, and we want to understand how influential that is. Are lots of subsidies bunching at £300,000 or £310,000 so as not to comply with the system? That is not necessarily a problem, but we want to understand what impact the system is having on how subsidies are offered. If we censor everything so we see only the stuff above £315,000, we have a less good sense of how the system is operating.

Likewise, with the £500,000 threshold for subsidies that are approved under a scheme, we want to understand how often a scheme is being used and how much public authorities are going down that route. Again, we want to know whether a £400,000 subsidy is being approved under a scheme. I do not think that means we should pull the transparency limit down to £500 or £1,000.

Personally, I think a public authority also has to ask the question, “Is this a subsidy?” With quite big amounts of money, such as £100,000 or £200,000, they will be thinking about that. For £1,500 here or there, I imagine that would be quite a big additional burden. Realistically, we are never going to move the de minimis threshold down to £1,500 or £50,000. A level on the transparency database of around the EU level or a bit lower—about £175,000; I know that was in the original consultation as a possibility—would be a reasonable compromise between those two concerns. We could even have fewer things that needed to be put on the database if the subsidy was below £315,000, although we might want it on the database somewhere.

Professor Rickard: I will give a few examples of things that could be changed to help to improve transparency. The first would be to lower that threshold and report subsidies even if they were below £350,000 over three years. Report subsidies that were included in a scheme, even if they were less than £500,000. Report subsidies even if they were subsidies for the public economic interest.

I would shorten that time for reporting; I think six months is too long. If it is a tax break for 12 months, after 12 months a competitor might be out of business, so I certainly think that there would be scope to shorten the time to reporting. I would increase the time to challenge. One month is too short, particularly if someone is learning about a subsidy only through the public reporting and the database. Remember, for subsidies not publicly reported in the database, how will we know about them? Where will we learn information about them? I would increase the time that people had, or people with interest had, to challenge a subsidy.

I would maintain the information on the subsidy for longer than six years. Six years is mentioned in the Bill. I do not see a good justification for deleting information after six years, particularly if we want to analyse how the regime is working. We need this over-time data, this long-time thing, to ask, is the regime working? Are we achieving what we want to achieve with our subsidies? Are we getting good value for money? Are we helping disadvantaged areas? Are we helping to create economic activity? To assess that, we need to have this information and we should not delete it after a certain time.

I would ensure that certain types of information were reported. At the moment, the Secretary of State is given the discretion to ask for certain types of information, but I would want to see as much information as we could possibly get, while protecting commercially sensitive information.

Finally, I would look to make sure that all the information was self-contained in the database, without having links to local councils or other information. As we know, links break and information gets lost. I understand that there is this concern about putting a burden on granting authorities. One possibility may be to ask the recipients themselves to help to provide some of the information, so we could cross-reference and make sure that we had the correct information from the granting authority and the correct information from the recipients.

Those are just some ideas that would help to improve transparency. Through transparency, we can get better compliance and better value for money, and we can help to ensure that the subsidies that are being granted meet the goals that we are setting out to achieve.

[Stephen Flynn]

Q Thank you both for your contributions so far. Thomas, if I picked you up correctly at the start, you made a reference to damaging schemes. Can you elaborate on that and what you are thinking in that regard?

I also have a question for both of you. Thomas, you touched on this in your remarks in relation to this being a skeleton of a Bill. We heard earlier from Professor Fothergill and Dr Pazos-Vidal about the potential implications of that lack of clarity about what sits behind the Bill and what the Government will be coming forward with: statutory instruments or secondary legislation. Do you see the lack of detail in the Bill having a consequence for the investment decisions of public bodies right across the UK?

Thomas Pope: On schemes, my specific concern—and this links to the one-month challenge window—is that a scheme gets added to the database or is set up. There is then a 28-day window where a potential interested party—someone who might be damaged by a subsidy that could be offered under the scheme—has a chance to appeal and to ask for more information and go through the process as set out in the Bill. Once that challenge window has passed, the scheme is approved and subsidies that fit with that scheme can then be offered with no opportunity to challenge.

The risk is that, if I am a competitor business and a business I am competing against is going to get a subsidy under a scheme, but has not yet got that subsidy at the point when the scheme has been set up, I will probably not know that the scheme is here and the clock is ticking. Here is this subsidy that will come later, and I am an interested party because a subsidy could go to my competitor. It is not even clear that that business would be an interested party, so my concern is that there is a benefit to using schemes in that you do not need to go through a separate process for every subsidy, but there is a corresponding risk that if there is not sufficient scrutiny of the schemes when they are set up, there is almost a sort of free pass if a scheme slips through the net and it allows you to give quite damaging subsidies. Once the time limit has passed, there is nothing you can do about that.

In terms of the Bill being a skeleton, there is a trade-off here. We want to be flexible and we want to be able to update elements of our regime over time. Things that are set in primary legislation are harder to change, but at the same time there are bits of the Bill where there is a lot of power given to the Secretary of State, with very little indication about how he or she might need to, for example, decide what constitutes a subsidy of interest or of particular interest. Those are subsidies that would have to be sent to the Competition and Markets Authority before they could be offered. More detail there would be good.

As to whether it will actually cause uncertainty and affect investment decisions, I do not talk directly to public authorities in the same way that some of your other witnesses will. To the extent that you can write very good guidance and have clear secondary legislation, that need not be a major issue. There are other ways that legal certainty can be provided. There probably is an extent to which this system will take a bit of bedding in. It is not clear how the Competition Appeal Tribunal is going to treat appeals and what the burden of evidence will be, or how easy it will be to challenge a subsidy subject to the principles. Probably that means there will be a bit of caution, at least initially while that beds in, because there will be legal precedent that will build up as well. Again, I do not think that will be a permanent feature necessarily.

Professor Rickard: I will weigh in briefly on the streamlined routes that have been proposed. The Government could propose a streamlined route, and they would bring it to Parliament, so there would be some room for scrutiny, but once that streamlined route or scheme is set up, granting authorities can just designate that subsidy as falling within that scheme, and then it is assumed to comply. That is a potentially interesting situation where you have a scheme and granting authorities say, “Yes, the subsidy is part of the scheme.” If we then assume compliance and do not see these subsidies showing up in the database, that potentially allows some leeway for subsidies that are not fully compliant with all of the principles. That would be one potential way in which the streamlined scheme would lay on top of the individual subsidies.

It is a route, of course, for the Government to set priorities and say, “This is an area in which we would like to see subsidies.” They are signalling a policy direction in which they would like to go. Of course, when you get a new Government, you might get new schemes. That would be right and proper. In a democratic system, you have a new Government with a new platform, and the voters have chosen that platform, but it does set up, potentially, a situation where you would have a streamed route scheme full of subsidies, and when there is a new Government there is a new streamed route scheme for subsidies. I am thinking about how to transition between them and the potential uncertainty generated for both businesses and granting authorities.

I want to pick up on one thing that Mr Pope said about who can challenge a potential subsidy. This is an area that would benefit from additional scrutiny. Thinking about who has a particular interest in challenging those subsidies, there may be good reasons to expand the potential set of challengers to ensure that it includes not just competitors but maybe also employees, trade unions, taxpayers or interest groups. That would give us more eyes on the subsidies to ensure that they are complying with the principles, ensuring value for money and achieving the economic outcomes that they set out to achieve.

[Seema Malhotra]

Q Can I ask for one quick point of clarification? Would that mean, Professor Rickard, that you would widen the definition of interested parties to include those groups explicitly?

Professor Rickard: Yes. In my opinion, that would be a good strategy. The benefits of ensuring increased scrutiny of how these subsidies are being allocated and how taxpayers’ money is being spent would outweigh any potential costs.

[Seema Malhotra]

Q Would that include the devolved Administrations?

Professor Rickard: That is a good question. I do not have an opinion on that; I do not think I could say.

[Simon Baynes]

Q Thank you, witnesses, for your contributions this morning. Which subsidy system internationally would you consider the best role model for the UK, and why?

Professor Rickard: That is an excellent question. The UK is in a unique position because of the TCA. It is hard to find a perfect analogy internationally because of the TCA, and the structure and the limit of the TCA puts the UK in a unique position.

However, there are world-leading examples in transparency, for example Norway and Germany. They are extremely transparent in their subsidies. States within Germany provide annual subsidy reports that run to 50, 60 or 70 pages. I am not saying that that is necessary, but that is the kind of world-leading transparency that the UK could and should aim for.

What the UK is setting up in the subsidy control regime here is closer to what we see in the World Trade Organisation. The WTO allows subsidies, except for those that are prohibited, a bit like what is suggested here. Granting authorities are allowed to provide subsidies, and they self-certify that their subsidies comply with the rules, as we see in the Bill. Those subsidies then persist until they are challenged. That is the best analogy that we see.

The challenge in the WTO system is that many subsidies that do not comply with the principles, with the agreed upon rules, persist for a long time, and in fact may never be challenged. That is the challenge in the subsidy control regime here: granting the ability to self-assess your own subsidies to ensure that they comply with the principles, but thinking about what happens when a subsidy that does not comply with those principles is enacted. How long does it persist before it is challenged? Certainly in the WTO system they persist for a very long time, because it is difficult to enact that challenge.

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[Bill Esterson]

Q Thanks very much. I will ask you the follow-up question as well, Mr Pope: if not six months, how quickly should that information be there?

Thomas Pope: I will answer the first question first. I agree with many of the suggestions outlined by Professor Rickard. My real concern is that, as that 28-day period is so short, there is a risk that a subsidy or scheme that is concerning is missed by potential interested parties. The issue could be that they do not qualify as interested parties, so you could expand that, or that the time is too short.

I would propose one solution. At the moment, the CMA has a reactive role in the system—deliberately so. It issues reports on subsidies of interest and particular interest before they have been offered, if those public bodies offer the subsidies to the CMA for review. In special cases, where the Secretary of State is concerned about a subsidy, it can issue a post-award referral, and after a subsidy has been awarded, the CMA can issue a report. I think that the CMA should have the ability to do that investigation off its own bat. That would not mean giving it a standing a court, or anything like that, but that it could keep an eye on potentially problematic subsidies. If the CMA reports on a subsidy and raises a concern—there would not be ratings—it is much more likely that interested parties would be aware of that. I would possibly go even further and allow the CMA to have standing in court, but I understand that that is quite a departure from the system and it probably will not be a goer. However, at the very least, the CMA could have the proactive ability to investigate and issue reports ex-post.

The six-month challenge deadline is clearly something that has been brought in from the TCA, and that is the maximum we are allowed. I am afraid that I do not have a very strong view on the right amount. I have not spent enough time actually writing the reports. The public authorities have to be very strong on that.

[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.

--- Later in debate ---

[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.

[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.

[The Chair]

I am afraid that brings us to the end of the time allotted for the Committee to ask questions and, indeed, for this morning’s sitting. I thank our witnesses, on behalf of the Committee, for their evidence. The Committee will meet again at 2 pm this afternoon here in the Boothroyd Room to continue taking oral evidence.