Subsidy Control Bill (First sitting)

Stephen Flynn Excerpts

Tuesday 26th October 2021 Public Bill Committees

[The Chair]

Thank you. Could I have Stephen Flynn?

[Stephen Flynn (Aberdeen South) (SNP)]

Q Thank you, Professor Fothergill and Dr Pazos-Vidal. A lot of what we have heard from you both has been incredibly helpful, but it perhaps shows the limitations of the Bill—we are talking about is what is not in the Bill. Dr Pazos-Vidal, in your last answer you touched on the impact that the lack of detail and certainty could have. I would like to tease that out a little bit more with both of you. What impact do you think the lack of detail and certainty behind the provisions in the Bill will have on the devolved nations in the UK when it comes to making investment decisions? What impact will it have on local government and the decisions that it makes? Finally, Dr Pazos-Vidal, I think you said a wee while ago that the Bill as it stands is not reflective of the territorial constitution of the UK. Could you elaborate on that statement?

Professor Fothergill: Could I emphasise that the Bill settles remarkably little? It deals with the basic principles that will underpin the UK subsidy control regime. Those principles are very sound—they are not out of line with what we previously lived within and they do make sense. It settles the principles and some of the mechanisms legally, but it does not actually tell us what you can or cannot do. That is all going to come forward in the secondary legislation—the statutory instruments, is that the term? Ministers will be able to issue the secondary legislation within the framework of the Bill. From the point of the view of the devolved Administrations, for example, the passage of the Bill will still leave them pretty much in the dark as to what they can and cannot do. The important element in all of this is the guidance that will be issued subsequently. Quite what that guidance will say or is required to say is not specified in detail in the Bill.

Dr Pazos-Vidal: Absolutely, I completely agree. The Bill provides a good skeleton to start working on the guidance. In an ideal world, that would be enough—everybody would have the same understanding and there would be a very cohesive set of ideas on what needs to be done, what the priorities are and so on. Some countries in northern Europe are like that—they are very consensual democracies. I think the UK is a bit more complicated than that and therefore there should be a bit more detail. The UK is complicated and asymmetric, and therefore some of the provisions ideally need to be in the Bill. It is not about being too prescriptive—that is not the UK way —but about marking the direction of how the secondary legislation should be carried out.

In respect of the territorial constitution, it is just an academic expression. Quite clearly, the internal market Act could be considered part of the constitution because of the way it repatriates EU powers and the way it treats common frameworks. Irrespective of that, the Scotland Act always recognised that the UK level—Westminster Ministers—has powers over the internal market. That has always been the case, but in a way the internal market goes a step further. At the same time, public authorities, devolved Administrations and local government have competencies on local economic development, provision of public services and so on. Those powers also need to be recognised. Ideally, and this goes back to the point I made earlier, the Bill needs to be reflective of the powers of the UK Westminster Government and the internal market of the UK, and of the specific powers that local authorities and the devolved Administration Parliaments have in those policy areas. At the moment, the territorial element—the devolved and local element of the Bill—is limited, to put it politely. It would be helpful for the coherence of the system and to avoid problems of political interpretation in the future if some of that is put into the Bill. It does not have to be very detailed, but some improvements to the Bill would be helpful for the scheme in the long term.

[The Chair]

I am going to request that Members are brief, because many of you wish to ask questions.

--- Later in debate ---

[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.