Subsidy Control Bill

Viscount Chandos Excerpts

Committee stage
Monday 31st January 2022 Grand Committee

[Lord Wigley (PC)]

My Lords, I apologise for appearing to hog the Committee at this early stage. I will have a self-denying ordinance as things go forward, I promise. Amendments 2 and 3 are in my name and go to the heart of the use of subsidies as a legitimate tool for securing economic objectives. From the Minister’s remarks at Second Reading, it is clear that the Government accept that in some circumstances the payment of subsidies may be legitimate. Surely that must be right.

Let us take as an example the Covid crisis. If the payment of subsidies was necessary to enable a company to bring forward a vaccine more quickly, say, or to enable an adequate supply of face masks to be available for hospital and home care workers, if that is the only way of securing such socially necessary provision, no one in their right mind would oppose such payments being made. Equally, if subsidies were made to one company to give it an unfair advantage over another, that would clearly not be an acceptable use of public funds, unless it was to enable economic or social benefits to become available in a manner that would not have been possible by paying similar subsidies to other potential providers.

This brings us to the fundamental question of the circumstances in which the payment of subsidies is legitimate and who decides that that is the case. I do not pretend for one moment that we can define in legislation all the circumstances and eventualities in which a credible argument can be made for the use of subsidies, although there clearly needs to be transparency and the circumstances need to be defined in terms that can be appreciated by those who might want to supply goods or services for which subsidy payments may arise. This might be difficult to define in words that are both comprehensible and able to withstand scrutiny in the courts.

To make that process easier, I believe that it would be helpful if some of the principles on which a determination of the efficacy and appropriateness of subsidies could be defined in the Bill. If such a detailed approach is difficult—or, indeed, impossible in some circumstances—at the very least there should be some principles spelled out in legislation for the benefit of the Governments of the four nations of these islands and for the guidance of those involved in the provision of goods and services, who have the right to know the ground rules within which they operate.

Amendment 2 seeks to deal with a set of considerations that may well arise for Governments trying to operate within the framework of the Bill. For colleagues to appreciate the background against which I bring it forward, I draw the Committee’s attention to the way in which successive Governments in Wales have tried to tackle the endemic unemployment levels that have blighted Wales for most of the last century, consistently running at twice the level experienced in England. To tackle this, the Welsh Government have—absolutely rightly, to my mind—tried to ensure that public sector contracts for the provision of goods and services in Wales go, as far as possible, to contractors based in Wales or those that will make it their policy to employ people living in Wales to undertake the work.

Clearly, there has to be value for money and tender prices are a factor that cannot be ignored, but that is only one of several relevant factors. The best deal for the community as a whole is not necessarily ensured by insisting that tender prices are the only factor that determines where widgets must be purchased. Quality of product, security of supply, and aftersales service are absolutely legitimate considerations which may trump a pure price consideration.

There is also the effect on the local economy. It is worth noting that in pursuing a local sourcing policy, which clearly can also have significant environmental benefits by cutting unnecessary transport costs, the Welsh Government have succeeded in raising the level of local sourcing from under 35% to some 55% over the past 20 years. The target is to push that figure to 70%. To my mind, that is an absolutely valid approach. If sandwiches for Welsh hospitals can be made locally rather than brought in from Birmingham or London, they most certainly should be sourced locally, as should service provision contracts. There was a nonsense a few years ago when a contract for grass cutting in schools in Anglesey was apparently placed with a company in the east Midlands.

The net effect of this approach has been to reduce Welsh unemployment figures so that they now stand below the level in England for the first time in my lifetime. Activity rates have also increased.

I readily concede that this approach does not solve all our problems. The level of GDP per head of population remains stubbornly low, and I understand that this argument has to be confronted. The quality of work and the added value must also come into the equation. Our Governments, in Wales and Scotland as well as Westminster, must take these considerations on board when developing public policy.

In this amendment I seek to write into the Bill a provision that states that it is absolutely acceptable for Governments to seek to secure economic activity within the communities for which they have responsibility and that it is legitimate in some circumstances to pay subsidies to businesses that employ people within those communities and pay taxes to local government in those areas, and whose profits may circulate in those local economies.

I make it clear that this is not a block on tendering for contracts to provide goods and services for an area. Those who are primarily based away from that area should not be debarred, but surely it is necessary that when such decisions are made, consideration is given to whether companies are willing to locate an office in the areas offering subsidies, to purchase supplies from within those economies and to have a transparent policy of recruiting people in those areas, preferably to work within their communities.

My amendment states that no payment should

“be regarded as a subsidy”

for the purpose of this Bill

“if it is equally … available to all enterprises”

that undertake “economic activity” to which the subsidy relates “within the territory” of the governmental body making any such payment.

In his wind-up speech at Second Reading, the Minister stated that it would continue to be in order for a public authority to give subsidies if in doing so it is “addressing regional inequality”, so I hope that he will either accept the amendment or undertake to bring forward his own, either at the end of Committee or preferably on Report when it can be voted on. It may be that the wording of this amendment needs to be tightened and more focused. What I now seek is an indication as to whether the UK Government appreciate that other Governments must have their hands free to improve the economic well-being of their communities and that the judicious use of subsidies is a perfectly legitimate tool in trying to stimulate economic activity.

Briefly, Amendment 3 is different in nature but relates also to ensuring that Governments are not precluded by this Bill from making payments for the provision of local services by public bodies in their territory. There are many aspects of local services that may be provided by both public authorities and private contractors. One has to think only of care homes, refuse collection, recycling or highway maintenance to see areas where there could be arguments as to whether public authorities are subsidising activities in competition with the private sector.

My amendment is tabled to give the Minister an opportunity to state categorically that the Bill, when enacted, will not constrain public authorities from making such payments and to point out in the Bill where such safeguards are provided, if indeed they are. If they are not, we will need to return to these matters on Report. I believe I may be knocking on an open door with this amendment but I will listen to what the Minister has to say. I beg to move.

[Viscount Chandos (Lab)]

My Lords, I support Amendments 2 and 3 in the name of the noble Lord, Lord Wigley. With the agreement of the Committee, I shall speak to my Amendment 2A. My amendment would add just one word to Clause 2(2) and I will try to be commensurately brief.

Clause 2(2) lists examples by which financial assistance may be given, starting with

“a direct transfer of funds (such as grants or loans)”.

It does not purport to be exclusive or comprehensive, so why do I think it is important to add equity to the examples given of grants and loans? The guidance published last week, following Second Reading, includes the following:

“Subsidies can be provided in many different forms, including grants, soft-loans, loan guarantees, and tax breaks. Other forms, such as taking an equity stake in firms … may also constitute subsidies [to be inserted—link to future section on determining whether an intervention is a subsidy].”


That prospective insertion of a link to a future section—further evidence of the Government’s ill-preparedness for a Bill that they have known for months, if not years, was needed—gives a clue as to why it is important to add equity to the examples given in the Bill.

A grant from central or local government is self-evidently a subsidy. It is relatively easy—not totally simple, but not rocket science either—to gauge whether a loan is, for the borrower, more favourable than market terms and hence has a subsidy embedded within it. A loan will ordinarily carry the requirement to pay regular interest and, by final maturity, to have repaid all the principal amount. The arithmetic is pretty simple. Equity is much more difficult to analyse as the future returns are unpredictable. The risk of loss is total and the potential returns unlimited. Professional venture capital and other investors can take strongly divergent views about the prospects for any one company, which explains the huge dispersion of returns between different funds.

I acknowledge that it can be difficult to say whether an equity investment is made on market, and hence unsubsidised, terms. A judgment has to be made about the share of the company concerned received for the investment made; the speed with which a decision to invest is made; the proportion of the funding contributed; any liquidation preference attached to different classes of shares; and a whole range of other conditions, whether imposed or waived. Even if private sector investment is made pari passu with the public sector’s commitment, that may not be prima facie evidence that the public sector’s investment is on market terms, since the commitment, particularly if as a significant cornerstone investment, may in itself attract private sector investment in a way that could disadvantage competitor companies.

Subsidy Control Bill

Viscount Chandos Excerpts

Committee stage
Wednesday 9th February 2022 Grand Committee

I hope that this amendment will be agreed to but, if the Government are unwilling to extend the current arrangements, can the Minister at least commit to allowing referrals outside that window in certain cases? I beg to move.

[Viscount Chandos (Lab)]

My Lords, I will speak briefly in support of the amendment in the name of my noble friend Lord McNicol, spoken by my noble friend Lady Blake. It is one of the most important amendments that the Committee has considered. In my speech at Second Reading, I made the point that the combination of transparency and comprehensiveness of the data that is provided and the time period allowed to interested parties to appeal it lies at the core of the effectiveness of any new regime. As my noble friend Lady Blake pointed out, there is asymmetry between the length of time given to public authorities to put data into the public domain and the very short time period proposed for interested parties to appeal it. Can the Minister name any instance where the Government are subject to a one-month deadline for a significant decision that they have to make?

I do not even think that the one-month deadline is particularly helpful in reducing the workload that may come to the tribunal because, the shorter the deadline, the more an interested party may feel that it has to submit an appeal without having had the time to do the work fully to assess the position. So I urge even more strongly than my noble friend Lady Blake that the Minister considers the case for a change to three months, and I ask him to say, if he is not willing, why he thinks that the one-month deadline is fair and effective.

[Baroness Randerson (LD)]

My Lords, I am pleased to speak in support of this modest amendment. As the noble Baroness said, the issue has been raised before, and one month is a totally unrealistic timescale. To my mind, it indicates a clear governmental preference to reduce scrutiny of decisions on subsidies that are made in general.

It is especially an issue because this also involves agricultural subsidies and agriculture is, in large part, based on small businesses. I shall give you a picture: farmers in Wales are not commonly monitoring the decisions taken by local authorities in, for instance, eastern England, which might cause them to feel aggrieved. It might take them some time to get up to speed on the implications of those decisions. It might surprise some people, sitting in the centre of London, to know that wi-fi in the centre of Wales is not wonderful. Many communities still rely on the postal service and weekly newsletters, for example from the farming unions. There can be lots of reasons why information that would worry small businesses affected by a subsidy decision would take some time to filter through.

In general, I can think of a host of reasons why one might miss this deadline—for example, summer or Christmas holidays provide an interruption of several weeks to ordinary business. I join the noble Viscount in his point that it could simply be counterproductive. People may think that, if in doubt, they should lob in an appeal to the tribunal because, in reality, they would not be able to find all the information required in the timescale this Bill provides. On a previous group of amendments, the Minister referred to the pre-action information request process. I believe that process will find itself exceptionally heavily used, if the Government do not see that this timescale is far too tight to be practical.

Subsidy Control Bill

Viscount Chandos Excerpts

Lords Hansard - Part 1 & Report stage
Tuesday 22nd March 2022 Lords Chamber

Moved by

[Viscount Chandos]

1: Clause 2, page 2, line 26, after “grants” insert “, investment in equity securities”
Member’s explanatory statement
This amendment would specifically include investment in equity securities on the face of the Bill, as well as it being an example in the Illustrative Regulations and Guidance.

[Viscount Chandos (Lab)]

My Lords, when I spoke to a similar amendment that I tabled in Committee, I was encouraged by the support of the noble Lords, Lord Lamont and Lord Fox, my noble friend Lord McNicol and other noble Lords, so I felt it was worth trying one more time to persuade the Minister to make this small but, I believe, important change.

I have changed the wording of my amendment slightly in response to the concern expressed by the noble and learned Lord, Lord Thomas of Cwmgiedd, that the use of the simple word “equity” as a form of investment risked being confused with the use of “equity” in the social justice sense on which he is so focused. Although participants in financial markets have become used to thinking about equity in both senses, I was happy to change my amendment to include “investment in equity securities” as an example of when a subsidy can be given to avoid any possible misunderstanding.

I acknowledged in Committee that Clause 2(2) did not purport to be comprehensive and that the related guidance includes equity investment as a possible means of subsidy, but I continue to believe it is highly desirable that it is included as an example in the Bill. When responding to my amendment in Committee, the Minister, the noble Baroness, Lady Bloomfield, said that

“attempting an exhaustive list could be counterproductive, implying that measures not listed would not be considered subsidies.”—[Official Report, 31/1/22; col. GC 130.]

I am tempted to say “The prosecution rests, m’Lady.” The Government have chosen to include some examples in Clause 2(2), and although they are not intended to be exhaustive, the inclusion of six means by which financial assistance can be given, without any reference to investment in equity securities, risks exactly what the Minister said she was concerned about; that is, implying that a measure not listed would not be considered capable of being a subsidy. My amendment would not make the list exhaustive and, if it did, surely that would make a compelling case that the exclusion of equity investment was all the more unacceptable.

As I said at Second Reading and in Committee, equity investment is the most complex and hardest to measure of all of the transactions through which a subsidy can be given. Equity is the highest-risk form of capital and should therefore offer the highest prospective return, even if it is not precisely predictable from the outset. A market return on an equity investment is based on assumptions about the cash flow of the company concerned and often relies wholly or predominantly on the terminal value when the investment is realised. Let us say that, based on a company’s business plan, a public body makes an equity investment on terms that are projected to generate an internal rate of return of 10% per annum over 15 years. That may seem a good return compared with, say, the risk-free rate of return on a 15-year gilt, but a commercial venture capital fund would require a return of, say, 15% per annum and if that was the only source of funding for the relevant company’s competitors, the public body’s equity investment would have embedded in it a subsidy equal to 30% of the total amount of the investment being made.

Equity investment is a key instrument for state support for innovation and strategic investment, which, if implemented selectively, carefully and transparently, I strongly support. In their funding of, for instance, OneWeb, the Government would appear to agree with this, although whether it was implemented selectively, carefully and transparently I am not sure. That company’s dependence on Russian rocket launching is a belated reminder of the uncertainty and risks involved in this type of investment.

This Bill seeks to bring transparency and fairness to government support for private enterprise, first and foremost to ensure a level playing field for all participants in the market but also, as a by-product, to improve scrutiny of the use of public funds. This Bill is proceeding with an unusual degree of bipartisanship, as demonstrated by the amendments tabled in the names of both the Government and Opposition Front-Bench spokesmen. I urge the Minister to respond to my amendment in that same spirit and add equity investment to the six other examples of means by which a subsidy can be given. I beg to move.

--- Later in debate ---

There is no question that an investment in equity securities may constitute a subsidy if it is made on more favourable terms than those dictated by the market. But there is no utility in attempting an exhaustive list on the face of the Bill. Not only is it unnecessary but it also runs the risk of implying that a measure not listed would not be considered a subsidy. The proper place to provide more extensive lists of examples is in guidance and, as the noble Lord mentions in his explanatory note, equity investments made on favourable terms are already mentioned in the illustrative guidance published by my department in January. I am happy to confirm that I will ensure that this remains beyond doubt in the final version of the guidance. I therefore hope that the noble Lord will feel able to withdraw his amendment.

[Viscount Chandos (Lab)]

I thank noble Lords who have spoken to this group, in particular the noble Lord, Lord Fox, and my noble friend Lady Blake, in confirming their view that this was a worthwhile and important amendment. Therefore, it is disappointing to hear the Minister repeat the same arguments as were made by the noble Baroness, Lady Bloomfield, in Committee, and I have to say that he showed no sign of having listened to my response to those arguments in the remarks that I made in introducing this amendment.

As I have said earlier, the Government’s argument that there is a danger in an example of a means by which a subsidy can be made being left out of that being interpreted as being that it is not susceptible to being used for a subsidy; that is precisely the argument that I was making. Six different examples are listed, which the Minister just read out. What I was suggesting did not make it exhaustive in itself. The Economic Affairs Committee, of which I am privileged to be a member, has heard over recent weeks about how important contracts for difference have been in helping to stimulate the growth in the generation of renewable energy. That may be a guarantee or a purchase of future services, but it is a good example—something that is fairly specialised and rare, which I do not think that it is appropriate to have as an example. But equity investment is one of the principal means by which a Government or a public body can give support, and it is perverse to exclude it.

That said, while I shall consider what I might do at Third Reading, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.