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.