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Draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022

Debated on Monday 14 November 2022

The Committee consisted of the following Members:

Chair: James Gray

† Baron, Mr John (Basildon and Billericay) (Con)

† Brereton, Jack (Stoke-on-Trent South) (Con)

Byrne, Liam (Birmingham, Hodge Hill) (Lab)

† Docherty-Hughes, Martin (West Dunbartonshire) (SNP)

Duffield, Rosie (Canterbury) (Lab)

† Hart, Sally-Ann (Hastings and Rye) (Con)

† Hollinrake, Kevin (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)

† Kawczynski, Daniel (Shrewsbury and Atcham) (Con)

Lloyd, Tony (Rochdale) (Lab)

† McDonnell, John (Hayes and Harlington) (Lab)

† Malhotra, Seema (Feltham and Heston) (Lab/Co-op)

† Morris, David (Morecambe and Lunesdale) (Con)

† Morrissey, Joy (Beaconsfield) (Con)

† Mumby-Croft, Holly (Scunthorpe) (Con)

† Owen, Sarah (Luton North) (Lab)

Skidmore, Chris (Kingswood) (Con)

† Stevenson, Jane (Wolverhampton North East) (Con)

Liam Laurence Smyth, Committee Clerk

† attended the Committee

First Delegated Legislation Committee

Monday 14 November 2022

[James Gray in the Chair]

Draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022

I beg to move,

That the Committee has considered the draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022.

It is a pleasure to serve under your chairmanship, Mr Gray. These regulations were laid before the House on 20 October 2022. The Subsidy Control Act 2022 provides for a new UK-wide subsidy control regime that will enable public authorities to give subsidies that are tailored to their local needs and that drive economic growth. It does this while minimising distortion to UK competition and investment and protecting our international obligations. Section 11 of the 2022 Act enables the Secretary of State to make secondary legislation to define subsidies and schemes of interest or particular interest.

I will briefly summarise the implications of a subsidy or scheme meeting the definition of a subsidy or scheme of interest or particular interest. Part 4 of the 2022 Act establishes the mechanism for the referral of subsidies and schemes to the subsidy advice unit—a new unit established within the Competition and Markets Authority. Voluntary referral will apply to subsidies or schemes of interest. Subsidies or schemes of particular interest will be subject to mandatory referral. When a subsidy or scheme is referred, the public authority’s assessment of compliance with the subsidy control requirements will be evaluated by the SAU and a report will be published with its findings. This adds an additional layer of scrutiny for the small proportion of subsidies and schemes that have greater potential to lead to undue distortion and negative effects on competition or investment in the UK or on international trade or investment.

The Government ran a public consultation between March and May 2022 that sought views on the categories of subsidies and schemes and the Government’s intended approach to setting out the criteria and definitions. Respondents expressed broad support for the Government’s approach. In our response to the consultation, published in August this year, we set out our final proposals, which built on the constructive feedback received from the consultation.

In the regulations, subsidies and schemes of interest or particular interest are defined based on clear criteria. They are, first, based on simple monetary thresholds. Subsidies above £10 million, or that accumulate above this threshold, are subsidies of particular interest. Subsidies between £5 million and £10 million are generally subsidies of interest. However, if they are awarded in a sensitive sector, they are subsidies of particular interest.

These Committees might not be the most exciting part of parliamentary life, but we should try to at least understand what we are dealing with. I have found my way around the SOI and the SOPI and the SAU part of the CMA, but what defines a “sensitive sector”? It does not seem to be laid out anywhere, as far as I can see.

That is a very good question. I was just getting on to that. Sensitive sectors are areas of economic activity in which there is a record of international trade policy disputes, evidence of global overcapacity within the sector or evidence that one or both of these features will apply to the sector in future.

If the right hon. Gentleman looks at the last part of the regulations, he will see that it lists the sectors that would be defined as sensitive, and those include automotive, steel and other sectors. Subsidies in those sectors have greater potential for substantial distortion, even at lower values. That is why those sectors are subject to a lower monetary threshold, of £5 million, to be defined as a subsidy of particular interest. The Government have set out a list of these sectors in the regulations.

The monetary thresholds are cumulative. As such, a subsidy of £5 million may be above the threshold for a subsidy of particular interest if the recipient had already received a related £6 million subsidy within the last three financial years. This avoids public authorities salami-slicing subsidies to avoid scrutiny. In addition, the regulations set out a minimum value for referral of £1 million. That means that where related subsidies cumulate above the £10 million threshold for subsidies of particular interest, public authorities will have to refer only the most recent subsidy if it exceeds £1 million.

The second element of the criteria is specific categories of subsidy. Subsidies designed to rescue an ailing or insolvent enterprise are subsidies of interest, and restructuring subsidies are subsidies of particular interest. That reflects the fact that both rescue and restructuring subsidies have greater potential to cause undue distortion, but rescue subsidies are often time-critical, since the enterprise may need the subsidy urgently if it is not to go out of business. The final specific category of subsidies is those that are explicitly conditional on relocation. Such subsidies are prohibited entirely, unless they have a beneficial effect on economic or social disadvantage in the UK as a whole. Subsidies in that category are subsidies of interest if they are £1 million or below, and subsidies of particular interest if above that value.

The regulations also apply to subsidy schemes. A subsidy scheme will set out the parameters under which subsidies may be given. The assessment of compliance with the subsidy control requirements will be carried out for the whole scheme, rather than for each subsidy given under that scheme. As such, if a subsidy of particular interest can be awarded under a scheme, that scheme is a scheme of particular interest and is subject to the referral procedures. The same applies to subsidies and schemes of interest. The referral can occur once, at scheme level. Subsidies given under schemes will never be referred to the SAU.

I thank the Minister for bringing these matters to our attention. Now that we have left the EU, where does all this fit into the big scheme of things? Do we now have greater freedoms with regards to state subsidies, or is an element of liaison still required to ensure we meet our obligations?

That is a good question, and I thank my hon. Friend for it. The trade and co-operation agreement includes some oversight; clearly, we made some commitments in that agreement regarding subsidies, which is what the statutory instrument and the previous legislation have both sought to address. However, we believe that the approach we are taking to subsidies is far more effective and quicker to deliver than the European Union one. Under that approach, we would have to take a scheme to the European Union, have it approved and then have it come back, which might take several months. Our approach sets out a broad set of principles: a local authority or central Government can set out a scheme and, as long as it adheres to these principles, the subsidy can be delivered far more quickly. In our view, that is a far more effective process.

Finally, a distinct approach will apply to tax schemes. All tax schemes will be schemes of interest and may be referred to the subsidy advice unit. The cumulation rules will apply differently to subsidies given under tax schemes. Only subsidies given as part of the same tax measure within the last three financial years will count towards the cumulative threshold for subsidies of particular interest.

If I am being dim here, I apologise, but I have gone through the explanatory notes to find out the definition of a sensitive area, and it is not there. The schedule to the regulations contains a table showing the various industries—copper, aluminium and so on— but regulation 6 does not explain how a sector becomes defined as sensitive. The Minister can write to me on this question if an explanation is not forthcoming, but I am curious how that list was compiled. Does it come from the primary legislation? I could not find a definition there either. For example, aviation is referred to separately in the main body of the legislation, but that might well be defined as a sensitive area. Obviously, I have a natural interest in this issue.

It is experiential; it is based on the record of international trade policy disputes and evidence of global overcapacity. Automotive may sit within that.

That is how they have been defined. I am happy to write to the right hon. Gentleman with further detail.

Simply, the legislation before us does not seem to describe the principles or the process by which a definition can occur. I might have got it completely wrong, but it would be useful to understand that at least.

It is a fair point. In the interest of time, I will consult on this and write to the right hon. Gentleman.

In conclusion, the regulations set out the definitions and criteria for the categories of subsidies and schemes that will have greater potential to lead to undue distortion and negative effects on competition or investment in the UK or on international trade or investment. These subsidies and schemes will be subject to an additional layer of scrutiny in the form of referral to the subsidy advice unit. That is crucial to the effective functioning of the UK’s new subsidy control regime, which will give public authorities the flexibility and freedom to deliver bespoke subsidies that meet the needs of the UK economy. I commend the regulations to the Committee.

It is a pleasure to serve under your chairship, Mr Gray. This statutory instrument fills important gaps left by the Subsidy Control Act 2022, which received Royal Assent earlier this year. It defines subsidies or schemes of interest or particular interest. It is an important instrument, and we support it. I think we all agree that it is in the interests of levelling up, place-based prosperity, national growth and our green transition that the Act becomes operational as soon as possible.

I am surprised and sorry that the Act leaves unanswered crucial questions that I and Labour colleagues raised during its passage—having had four Secretaries of State and four Ministers may have something to do with that, but the Minister may have a different view. As we made clear, Labour recognises the need for a new statutory framework for subsidy control. It is required by the trade and co-operation agreement that the UK entered into with the European Union and by our wider international commitments as a World Trade Organisation member.

Subsidies, when effectively used, are an essential element of industrial strategy for businesses large and small, but they need to be effective, fair and accountable. We need Government to get behind the businesses and industries that will deliver growth, jobs and prosperity in every part of our country in the years ahead, and to deliver on national missions and a long-term plan that will help provide confidence for investment. At the same time, we need rules and processes to ensure that that is done in a fair and transparent way, so that fair and beneficial competition is preserved and not distorted, businesses and industries are not unfairly disadvantaged, and public money is not spent on the basis of personal favours or improper political considerations.

In short, we need a clear focus on impact, transparency and value for money. The regulations provide much-needed clarity and criteria on issues that were not resolved by the 2022 Act and that were left for secondary legislation. Those specifically concern the definitions of subsidies and schemes of interest or particular interest under the Act. Part 4 of the Act provides for certain subsidies or schemes to be referred to the Competition and Markets Authority. A public authority must request a report from the CMA on a subsidy or scheme of particular interest before the subsidy or scheme is given or made. A public authority may request a report from the CMA on a subsidy or scheme of interest before the subsidy or scheme is given. In each of those cases, the CMA must advise the Secretary of State whether the subsidy or scheme is consistent with the subsidy control principles and whether there are any changes to its design that could ensure better compatibility. I will come back to the issue of the recommendations from the CMA being non-binding.

As the Minister said, the instrument sets the minimum threshold for subsidies and schemes of particular interest at £1 million. A subsidy or scheme will be of particular interest where the total value given to a business exceeds £10 million in three financial years, regardless of which public authorities have given those subsidies; where the total value exceeds £5 million in three financial years but the business is in a sensitive sector, we will also come back to that briefly; where it is provided to restructure an ailing or insolvent business; or where it is conditional on the beneficiary relocating and has a value of over £1 million. Other subsidies between £5 million and £10 million, individually or cumulatively, will be subsidies of interest.

The challenge is ensuring that thresholds are set at a level that captures cases that merit the specified level of scrutiny, without imposing burdens on the CMA or ultimately frustrating much-needed initiatives, perhaps needed at speed to strengthen businesses in particular industries or places. We must be careful that the standard thresholds identified do not capture too much in some areas and too little in others. It would be helpful to understand the process for reviewing the impact, transparency and value for money. The CMA will, I think, report initially after three years on the whole process, but it would be helpful to understand whether the Minister or the Secretary of State will request earlier reports. We support the introduction of thresholds, but it would be helpful if the Minister expanded on the Government’s reasoning for setting the threshold at £1 million. Did respondents to the Government’s initial consultation—I have a copy here—recommend and agree to such a threshold?

The instrument also specifies areas of economic activity termed “sensitive sectors”, which my right hon. Friend the Member Hayes and Harlington raised, where levels of scrutiny will automatically be higher because there is thought to be, according to comments to the consultation, greater risk of subsidies distorting competition or damaging industrial development. The sectors specified are primarily in the areas of metals production, including iron and steel; transport manufacture, including aerospace and automotive; and electricity production. Why is that important categorisation not subject to wider debate, as we called for during the passage of the Subsidy Control Bill?

The consultation outlined some of the criteria, including that there might be a record of international trade disputes or evidence of global overcapacity, but I note concerns raised in the Government’s consultation that some sectors included in the category might be disadvantaged relative to their close competitors in other countries. Others have called for sectors to be added to the list, including transport, ports, airports and air carriers. It would be interesting and helpful if the Minister expanded on the Government’s reason for including certain sectors in this category and not others that were raised, and on the likely impact of being in or out of it.

I highlight the additional level of scrutiny provided for any intervention aimed at supporting the relocation of activities in any sector. We argued during the passage of the Subsidy Control Bill that addressing local or regional disadvantage should be explicitly recognised as an important policy objective—something that a Government who claim to be committed to levelling up opportunities and living standards across the country should have as a key focus. Again, it is essential that the provisions around relocation do not act as a barrier or have a deterrent or chilling effect on initiatives that may be undertaken—by devolved authorities, for example—to attract investment and support job creation in every part of the country.

We raised numerous critical questions during debates on the subsidy control regime, but they have not been answered in the Minister’s speech or in the documentation. During the passage of the Bill, we called for greater powers for devolved Administrations so that they could challenge schemes that they believed might put their visitors and communities at an unfair disadvantage. Does the Minister have any further response to that? The Government’s consultation states that the Scottish and Welsh Governments have not formally responded to it, but that they will instead be providing their views directly in correspondence; I believe that Northern Ireland Ministers have been unable to respond because of the suspension of the Executive Committee. Do we have confidence that the views of the devolved Administrations have been taken into account? Importantly, what dialogue is ongoing with devolved Administrations about the subsidy regime?

We also called for the Competition and Markets Authority to be given more power to proactively investigate subsidies and schemes of concern, addressing the accountability gap that experts have identified in the framework. This SI addresses the question of which subsidies and schemes will be, or can be, referred to the CMA to report on. However, unless the Minister wants to correct me, the recommendations of these reports will still be non-binding, whether or not they relate to schemes of interest or schemes of particular interest. Will the Minister provide examples of instances when the CMA might advise against a proposed subsidy or scheme being given, but it is appropriate for the Secretary of State or another public authority to act against that advice? If he cannot think of such a situation, will he reconsider whether the CMA’s advice should be binding, particularly for schemes and subsidies of particular interest? It would be helpful to understand that.

It would also be helpful to be clear about how we—as taxpayers, as members of the public and as Parliament—will know if a public authority chooses to proceed with a subsidy or scheme of interest or particular interest without taking into account the CMA’s recommendations. Will that be reported on for the sake of accountability and transparency to Parliament, and will the reasons for disagreeing be published?

The impact assessment suggests that the cost is likely to be around £15 million, largely for the subsidy advice unit at the CMA. Will the Minister clarify whether those resources have already been allocated, or whether he might expect them to be? It would be helpful to understand that. I think he will recognise the words “legislation without implementation”, and we can all agree that that is of no help to anyone. I am sure he will be helpful in clarifying that.

We had some debate about tax subsidies during the Bill’s passage. Will the Minister clarify why, as far as I can tell—perhaps he can confirm this or correct me—all tax subsidies will be subsidies of interest, not subsidies of particular interest? Why has that decision been made?

Finally, I note that we have no idea what the Government’s overall plan for business support and industrial strategy is. The 2019 Conservative manifesto was full of promises and ambitions, but nearly three years later what do they have to show for it? The Industrial Strategy Council has been disbanded. There has been a succession of Secretaries of State, most of whom have fallen out of favour. There is still no sign of the Government living up to their rhetoric on levelling up or any sign of the investment we need to put us on track for net zero.

During the passage of the 2022 Act, Labour consistently called for the Government to state or release their strategy for subsidies. The new statutory framework of the subsidy control regime should provide the Government with an opportunity to introduce a comprehensive strategy for subsidies and industry as a whole and for that to be part of a long-term plan for growth, yet we are still waiting.

Although we support this instrument, I would welcome answers from the Minister to the questions I have raised. I urge the Government to match Labour’s ambitions for business and industry by implementing a proper industrial strategy for our country’s economy that will also help provide direction and strategy for public authorities seeking to make subsidies in line with the intentions under this legislation.

I thank the shadow Minister for her comments, and all Members for their thoughtful contributions. I begin by reminding the House what the regulations aim to do. They set out clear definitions and criteria for two categories of subsidies and schemes that have been identified as having greater potential to lead to distorting effects. These are subsidies and schemes of interest or particular interest.

Public authorities giving or making subsidies or schemes of interest will have the option of referring these to the subsidy advice unit established within the Competition and Markets Authority, while those giving or making subsidies or schemes of particular interest must refer them to the unit. The definitions and criteria set out in the regulations are based on clear monetary thresholds as well as specific categories of subsidy. I am confident that they strike the right balance when it comes to providing protection from undue distortion or negative effects on competition or investment within the UK or international trade or investment, while being administratively simple for public authorities to apply.

I have committed to write to the right hon. Member for Hayes and Harlington with more detail on the categories of subsidy; the shadow Minister also addressed that in her remarks. She will be aware, having read the consultation, that we consulted in full on the question of sensitive sectors and published accompanying analytical information. The Government’s response to the consultation sets out a rationale for the selection of these particular sectors, but I am very happy to write to her too.

There is a difference between clarity in a consultation paper and clarity in legislation. I would like to hear about the legislation.

I take that point and commit to writing to the right hon. Gentleman about that.

On the shadow Minister’s point about the non-binding nature of judgments from the SAU, they are obviously subject to a potential legal challenge. If a public authority declined to accept the recommendations of the SAU, which seems quite unlikely, it would open itself up to legal challenge, either by a competitor or organisation in receipt of subsidies, another country or the EU, for example. It seems an unlikely state of affairs, but we believe the public authority should be able to use its judgment, obviously while heeding the advice of the SAU.

In terms of scrutiny, any referral to the SAU is published on its database, showing what referrals have been made, and any recommendations by the SAU are published. That provides for scrutiny over the decisions made by either the SAU or the public authority.

The Minister is right that referrals made to the SAU and its reports will be published, but the question was whether a subsequent disagreement would be published anywhere. If a public authority chooses not to go along with the recommendations, is there any transparency over that?

There is certainly transparency in terms of any referral, which would be on the public record. The response from the SAU would also be public. I do not understand the hon. Lady’s further point. It is a decision for public authorities, at that point. If they choose to ignore the advice, on their head be it.

I thank the Minister for his generosity in giving way again. For example, as part of the process, a public authority that disagreed with the recommendations in a report within 30 days from the SAU could need to send it a letter to say, “We have taken your report, but have chosen to disagree with the recommendations.” That would then be on the public record.

That is a fair point. I will take it away and write to the hon. Lady.

I mentioned sensitive sectors in my previous points. On what was and was not in the Bill—the hon. Lady raised that earlier—the reason we did it this way around is to allow for feedback, and not just from parliamentarians debating the sensitive sectors, for example. We think that it is important to get feedback from the sectors themselves—the stakeholders. We published our position in January, had a consultation from March to May, then introduced draft regulations that we believe deal with the issues raised.

It is true that the devolved Administrations said that they would not contribute directly to the consultation, but they have engaged with us to a great degree, including through correspondence and in a number of meetings. Their positions were all points of clarification. No objections were raised to the measures. I do not know whether the resources that the hon. Lady referred to have been allocated, but will happily write to her on that. The way we are dealing with tax subsidies mirrors how the EU dealt with them. We felt that that was appropriate, rather than doing something different. There are specific reasons for that, particularly with regard to how the Treasury operates.

I thank hon. Members on both sides of the Committee for their valuable contributions to this excellent and informative debate. The draft regulations are crucial to the effective functioning of a new UK subsidy control regime. They define the small proportion of subsidies and schemes that will have greater potential to lead to undue distortion and negative effects, and should be subjected to additional scrutiny by the SAU. As such, I commend the draft regulations to the Committee.

Question put and agreed to.


That the Committee has considered the draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022.

Committee rose.