Subsidy Control Bill (First sitting)

Simon Baynes Excerpts

Tuesday 26th October 2021 Public Bill Committees

[The Chair]

Dr Pazos-Vidal, could you speak up a little bit?

Dr Pazos-Vidal: Yes, sorry. I withdrew from the mic. The general provisions are more state aid-like than just regional aid guidance received in the assisted areas, as my colleagued referred to previously. On the issue of assisted areas, it is important to highlight that assisted areas of regional aid guidance, as they used to be known, were done in complement to the so-called structural funds. Likewise, it is important that we develop the UK’s shared prosperity fund. It appears there will be an announcement on that in tomorrow’s statement by the Chancellor.

As we have seen so far from the pilots of the shared prosperity fund that are already running—the community renewal fund or the levelling-up fund more generally—they already do some special targeting. It makes sense that the assisted areas map that might be developed should complement the geographical prioritisation that we have seen, and probably want to see now in the shared prosperity fund. Sometimes to reinforce that, and sometimes because these things were not prioritised by the shared prosperity fund subsidies or grants, policy outcomes could be promoted by way of public subsidy. It is important to develop both the shared prosperity fund and the assisted areas map in parallel to make sure they are consistent.

As I said earlier, the UK has incredible advantages in terms of the amount of data that it has. For instance, I know from my experience of international work on EU legislation that it was very common for UK impact assessments of UK input of EU law to be taken as a reference for other countries, because they were very well done. We have a huge degree of knowledge that we can use in the UK to develop maps that deliver, and to learn from possible mistakes, or non-optimal allocation of subsidies in the past in the UK.

Perhaps connected to that is the ongoing work on better regulation by the UK Government, and the need for special and better input of the rules. That is something that the UK will be well equipped to provide, if the Government are allowed to be helped by different parts of the UK and the competent authorities there.

[Simon Baynes (Clwyd South) (Con)]

Q Thanks to both our witnesses for their excellent presentations this morning. I want to look at this issue of the maps from the point of view of a north-east Wales MP. That area has really missed out on a great deal of subsidy compared with west Wales and south Wales, as you mentioned, Professor. That is obviously due to the assisted area map. You raised points about perhaps questioning exactly how that is drawn up. As a former county council and town councillor, I feel that it is often at the council level that the areas of deprivation are properly understood, rather than at the devolved Administration level. I feel that the Subsidy Control Bill gives us an opportunity to recast the way in which we provide subsidies, so that we are more flexible and not so obsessed by area maps; you just alluded to their shortcomings. Another Member mentioned the question of how you deal with issues at the boundaries, which is always a major problem. Does the Bill gives us an opportunity to be more flexible and drill down to the local level, which is often where the knowledge lies of what should be done about areas of deprivation?

Professor Fothergill: I would not deny that there are huge amounts of knowledge at local level, but local economies tend to operate beyond the boundaries of individual local authorities. Local economies do not operate at the level of standard statistical regions, but neither do they operate on the small geographical scale of most local authorities; they tend to span several neighbouring areas.

The problem is that if we do not have a map and some sort of discrimination in favour of less prosperous areas, you would be treating potential investment in Guildford, let us say, on the same basis as potential investment in Grimsby. You would not be attempting to incentivise the levelling up of the United Kingdom. In certain places, if we really are serious about levelling up, we have to put more resources into that effort, and we have to use state aid as one of the tools for delivering new jobs.

There is a lot of evidence, accumulated over many years, that state aid subsidies for investment do work and deliver extra jobs in the more disadvantaged areas. It is an effective policy tool, as long as we do it properly and do not squander public money by giving grants automatically; obviously, we would have to scrutinise each case individually, within a set of broad rules. In west Wales and the valleys, for example, it has been possible to give investment projects capital grants of up to 30%, whereas in the more prosperous parts of south-east England, it has not been possible to support investment at all. There has been that positive discrimination in favour of the less prosperous places.

There is a boundary problem; that is inherent in any drawing up of maps. Maps can be drawn sensitively, though, and in a hierarchical way. You do not have to have an area that is entitled to loads of money, and have the rest of the country entitled to no support. You can have a gradation of areas. Indeed, we had a gradation of areas under the old EU system, and under the old UK system before we joined the European Union.

Dr Pazos-Vidal: The Bill is, in a way, is an expression of the legal and cultural difference between continental, EU and UK law. In EU and continental law, everything that is not explicitly mentioned is forbidden, whereas in common law, and certainly in this Bill, it is almost the opposite principle: you can do everything that is not specifically forbidden. That works in theory; in practice, it does not, and that is why we need guidelines, block exemptions, and maps. You need commonly understood criteria across the UK to avoid subsidy rises and the opposite, which is doing less, because the UK public sector is much more risk-averse than the public sector in other European or western countries. We see that at the moment. The old EU rules are de facto being used by managers in local authorities across the UK because they are far more detailed, safe and understood than the provisional framework we have at the moment.

If you do not have a common understanding across the UK about how rules should be applied, what subsidies, even if you leave a lot of local latitude, which we support, of course, we might end up going down the track of, “Are these investments that are actually needed?” and that is why this has to be done. In the same way, there has to be a certain common framework across the UK, because if you leave the onus for doing checks on local authorities, some will not have the capacity or resources, and others would. A common understanding across the UK is helpful for everybody, and that also includes maps.

[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?

--- Later in debate ---

[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.

[Simon Baynes]

Q But is there one country, in the overall scope of what we are talking about—not just transparency but effectiveness—that you think is a role model?

Professor Rickard: I think that Norway is an excellent role model, but again it is in a slightly different situation because it is not bound by the TCA. It has a different system, because it does not have devolved Administrations or devolved authorities. It has Parliament providing budgets to particular subsidy categories, and then an independent body assigning subsidies to groups based purely on economic logic and cost-benefit analysis. So there are politics involved in the budgeting—“We allocate this amount of money for subsidies to research and development”—but then the decision making is granted to an independent body of experts. That works particularly well, because there is still democratic accountability at the budgeting level, but the actual decision-making process is apolitical and led by experts, based on economic logic.

[Simon Baynes]

Thank you, Professor. Thomas?

Thomas Pope: As Professor Rickard was alluding to, we are going to be more or less unique in having a domestic subsidy control regime like this. The main examples internationally are the EU state aid system and the WTO system, both of which have that international dimension. We have looked in our research at other systems and what other countries try to do, such as Canada in its inter-provincial free trade agreement. It has more barriers to trade than we do. It has a consulting requirement on subsidies, although it is not a very strong one.

Having looked at other countries, what you see in those countries that do not have a domestic subsidy control regime, which is most of them outside of the EU, are the negative effects of not having one. The US is the obvious example, which other witnesses have alluded to, where you get these quite big subsidy races between cities or states. In Canada, there have also been issues with the risk of subsidy races.

Very centralised countries are in a different situation, because if only one authority can grant subsidies, you are not worried about subsidy races. In a world made up purely of central Governments, I think that it would still be good practice to have a set of rules like this, but you would probably design the rules and the system slightly differently. In the UK, we have the three devolved authorities, which puts us in a different situation and means that, even though we are unique in having a domestic subsidy control regime and even though it is required by our TCA obligations, it is a positive thing and it will be very helpful.

[Simon Baynes]

Q Is there one country that you particularly admire, and how do they do it?

Thomas Pope: As I say, I do not think that there is one that has a domestic regime. We are charting our own course here.

[Bill Esterson]

Q You have both outlined your concerns about the system in relatively general terms. Do you have specific advice on what you would do differently on some of the challenges? Professor, could you speak about the challenges in self-certification and marking your own exams, which you have referred to? Mr Pope, perhaps you could address some of the timeframe points that you started to touch on?

Professor Rickard: That is an excellent question. Some of the things that could help would be lengthening the time available to challenge—extending it beyond a month would be helpful—and clarifying, and potentially expanding, the definition of interested parties who could potentially challenge a subsidy if they are concerned.

Clause 71(3) has this really interesting phrase. It says that the relevant date you can challenge from is the date on which the subsidy has been published to the database or

“the date on which the interested party first knew or ought to have known”

about the subsidy decision in question. That is difficult. What is the date that a potential challenger ought to have known about the subsidy? That is one particular phrase that jumped out at me, and I am curious to think more about it. We should think about extending the time that you can challenge and defining more clearly and broadly who potential challengers may be, but also about how we will learn about a subsidy if it has not been notified and if we do not have publicly available information about it.

Potential challengers can ask the granting authority for information, and the Bill provides a duty on the granting authorities to provide that information. However, it is difficult to know, particularly within this short timeframe, how I will learn of this subsidy. How will I learn that there is a subsidy that is disadvantaging me and that I think is not complying with the principles? How can I learn that in this very short timeframe? Those are some concrete examples of changes that could be made to increase the ability of interested parties, competitors, businesses and others to scrutinise the subsidies that are being provided.