Considered in Grand Committee
My Lords, 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. The new regime 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.
Section 11 of the Act enables the Secretary of State to make secondary legislation to define subsidies and schemes of interest and of particular interest. For subsidies or schemes that meet the definition of a subsidy or scheme of interest or of particular interest, Part 4 of the Act establishes the mechanism for their referral to the Subsidy Advice Unit, the SAU, a new unit established in the CMA. Voluntary referral will apply to subsidies or schemes of interest. Subsidies or schemes of particular interest will be subject to mandatory referral.
Upon the referral of a subsidy or scheme, the SAU will evaluate the public authority’s assessment of compliance with the subsidy control requirements and a report will be published with its findings. This light-touch review constitutes an additional layer of scrutiny for 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.
During the Bill stages, the Government committed to seek further feedback on the terms of these regulations before laying them. Between March and May 2022, the Government therefore ran a full public consultation setting out their intended approach to the criteria and definitions. Respondents to this consultation expressed broad support for the proposed approach. The Government’s response to the consultation was published in August 2022.
On the criteria of monetary thresholds, these regulations define subsidies and schemes of interest and of particular interest using a clear set of criteria. They are based, first, on simple and transparent monetary thresholds. Subsidies of above £10 million, or which cumulate with other related subsidies to 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.
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. Subsidies in these sectors are subject to the lower monetary threshold of £5 million, to be defined as a subsidy of particular interest because they have a greater potential for substantial distortion, even at lower values. A list of these sensitive sectors is in the regulations.
The monetary thresholds are cumulative. As such, a subsidy of £4 million may be above the threshold for a subsidy of particular interest if the recipient has already received a related £7 million subsidy within the last three financial years. In addition, the regulations set out a minimum value for a referral of £1 million. This means that where related subsidies accumulate above the £10 million threshold for subsidies of particular interest, public authorities will have to refer the most recent subsidy only if that subsidy exceeds £1 million. This feature of the regime was included following consideration of consultation responses and will have the effect of avoiding referrals to the SAU of very small subsidies.
I now turn to the second element of the criteria: specific categories of subsidy. Subsidies designed to rescue an ailing or an insolvent enterprise are subsidies of interest, and restructuring subsidies are subsidies of particular interest. This reflects the fact that both rescue and restructuring subsidies have a greater potential to cause excessive levels of market distortion. Since rescue subsidies are time critical—given that the enterprise may require the subsidy urgently or else go out of business—the Government propose to define them as subsidies of interest and are thereby subject to only voluntary referral. Restructuring subsidies will generally not be subject to these time pressures and so it is appropriate for the SAU to review them before they are given. The final specific categories of subsidies are those that are explicitly conditional on relocation of the recipient within the UK. These subsidies are prohibited entirely unless they have a beneficial effect on economic or social disadvantage in the UK as a whole. Subsidies in this category are subsidies of interest if they are of £1 million or below and are subsidies of particular interest if they are above £1 million.
These regulations also apply to subsidy schemes. A subsidy scheme will set out parameters under which subsidies may be given under it. Under the terms of the Subsidy Control Act 2022, the assessment of compliance with the subsidy control requirements will be carried out for the whole scheme rather than for each subsidy subsequently 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 principle applies to schemes of interest. Any referral will occur once at scheme level. Subsidies given under schemes will never be referred to the SAU.
In conclusion, these regulations set out in clear and easily understandable terms 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 within the UK or on international trade or investment. To ensure the effective functioning of the UK’s new subsidy control regime, these subsidies and schemes will be subject to an additional layer of pragmatic scrutiny by means of voluntary and mandatory referral to the Subsidy Advice Unit. I commend these regulations to the House.
My Lords, I am very grateful to the Minister for her careful exposition: she must have mentioned the word “subsidy” several hundreds of times in that short explanation, and no doubt I will too.
The subsidy regime proposed by the Bill allows for quicker and easier subsidies to be granted to businesses which, of course, we on our side support, not least because we think it may well assist in the push for growth in the economy. What I would like to understand from the Minister is her responses to a number of questions. It is important that the additional steps in this instrument do not undermine the overall effect. Will those additional steps be reviewed from time to time?
While the Bill itself lacks transparency and accountability in key areas, we felt that the Lords amendments improved those issues, although significant issues remain. The new subsidy control regime will identify subsidies and schemes that have greater potential to lead to undue distortion and negative effects on competition and investment within the United Kingdom or on international trade and investment.
These subsidies and schemes should be subject to more in-depth assessment by the public authority before they are given and, in some cases, they will need to be referred to the new Subsidy Advice Unit within the CMA for additional scrutiny and review of the public authority’s assessment. How many referrals does the Minister expect to be made? Are the Government confident that the SAU will be adequately resourced to deal with them and will this be reviewed from time to time as well?
The Act provides for the following subsidies and schemes to be subject to additional scrutiny before they are given or made: subsidies or schemes of interest as defined in the regulations, which may be referred to the SAU by the public authority giving or making the subsidy or scheme and over which the SAU has discretion, over whether to accept the referral; and, of course, subsidies or schemes of particular interest as defined in the regulations, which must be referred to the SAU by the public authority giving or making the subsidy or scheme. In those circumstances, it seems that the SAU must accept all referrals of subsides or schemes of particular interest.
The SAU’s review will scrutinise the public authority’s assessment of the subsidy or scheme and publish a report, which may include non-binding recommendations of ways in which the assessment or the subsidy design itself may be improved. What criteria will the SAU be considering? Will it have particular and specific priorities? Upon acceptance of the referral, I understand that, under normal circumstances, the SAU will publish its report within 30 working days. Can the Minister explain what the process will be following publication of the report?
These regulations define which subsidies and schemes are
“subsidies and schemes of interest or particular interest”.
They set out general monetary thresholds which, as the Minister has explained, will determine whether a subsidy or scheme is of interest or of particular interest. Subsidies granted outside of sensitive sectors are of particular interest if they are over £10 million. All other subsidies of between £5 million and £10 million which do not meet the SoPI criteria are SoI. At what point does that kick in? Lower monetary thresholds seem to apply to subsidies granted in sensitive sectors. Will these sectors be subject to change or review at all? These will be subsidies of particular interest if they are over £5 million. Can these subsidies be assumed to be more likely to have a distortive effect than those of equivalent value granted outside of sensitive sectors?
The consultation received some 40 responses. Respondents seem to have included a broad range of stakeholders from across the UK, including charities, academics, members of the public, business representative organisations and trade industry groups, as well as local government and other public sector organisations, which is very welcome. A clear majority of respondents expressed broad and comprehensive support for the approach set out in the document and in the accompanying regulations. From my reading, some 73% of respondents agreed with most of the proposals set out by the Government.
In general terms, we have no problem with the approach, but I hope that the Minister will be able to answer the points that we and others have made during the consultation, and that I have made during my brief comments this afternoon.
I thank the noble Lord, Lord Bassam, for his valuable contribution to this very short debate. I shall aim to respond to as many of the points that he raised as possible.
I begin by reminding the Committee of the purpose of these regulations. They set out the clear definitions and criteria for the two categories of subsidies and schemes, which have been identified as having greater potential to lead to distortive effects. These are subsidies of interest or particular interest. As regards subsidies or schemes of interest, the public authorities giving or making these will have the option of referral to the Subsidy Advice Unit established within the CMA, while those public authorities giving or making the subsidies or schemes of particular interest must refer them to the Subsidy Advice Unit.
Upon the referral of the subsidy or scheme, the Subsidy Advice Unit will evaluate the public authority’s assessment of compliance with the subsidy control requirements, and a report containing the findings will be published. These regulations set out definitions and criteria based on the two elements, clear monetary thresholds and specific categories of subsidy. I am confident that they strike the correct balance between protection from undue distortive and negative effects on competition or investment within the UK, or on international trade or investment, while being administratively simple for public authorities to apply.
In response to the noble Lord, who asked about the periodic review of these regulations, the Subsidy Advice Unit in the CMA will publish its first monitoring report in 2026. We will consider any improvements that we can make to the regulations and guidance in response to that report, or whenever the evidence calls for it. That will include definitions of sensitive sectors. The SAU may then make recommendations on changes to the list to the Secretary of State.
On the number of likely referrals, earlier this year the Government published an analytical document that considered this question. Based on past experience, the thresholds would have captured 15 subsidies or schemes of particular interest, and 11 subsidies or schemes of interest. The definitions and criteria for subsidies and schemes of interest and of particular interest have been very narrowly drawn, so that they capture only a small proportion of subsidies and schemes that have a greater potential to lead to undue distortion and negative effects. For subsidies and schemes of interest that are subject to voluntary referral, the SAU has discretion over whether to accept that referral. It recently consulted on its guidance, which included the prioritisation principles that it will use to inform its decisions to ensure that it is focusing its resources most effectively.
On SAU resourcing, which the noble Lord asked about, the SAU has recruited colleagues to ensure that it can fulfil its role in the new subsidy control regime, ready for January 2023. It has established a framework for referral processes to ensure that it can meet the demands placed on it, and has published guidance to that effect. The CMA was allocated funding of £20.3 million at the spending review in 2020 to establish three new functions, the subsidy control function being one.
The noble Lord asked about sensitive sectors and how they would be evaluated. Sensitive sectors are areas of economic activity in which there is a record of international trade policy disputes, evidence of global overcapacity in the sector or evidence that one of those features could apply. Subsidies to those sectors have a greater potential for distortion, even at lower values; that is why they are subject to a lower monetary threshold. The Government define these sensitive sectors in the regulations, by reference to a list of activities identified in the standard industrial classification of economic activities published by the ONS. In brief, they include copper, aluminium and steel; the manufacture of motor vehicles, motorcycles, air and spacecraft; the building of ships and floating structures; and the production of electricity.
To conclude, these regulations are key to the effective functioning of the new UK subsidy control regime. They define the small proportion of subsidies in schemes that will have greater potential to lead to undue distortion and negative effects and should be subjected to additional scrutiny by the Subsidy Advice Unit.
Lastly, I did not answer the question about the length of the referral process. The Subsidy Advice Unit must produce its report within 30 working days after providing a notice that the referral has been correctly received. This will be followed by a cooling-off period of five working days at the end of the process, if the subsidy or scheme was subject to a mandatory referral. However, the reporting period may be extended by agreement between the SAU and the public authority or by the Secretary of State, further to a request from the SAU.
If there are any additional questions that I have not answered, I shall do so in writing to the noble Lord. In the meantime, I commend these draft regulations to the House.
Committee adjourned at 5.29 pm.