Clause 44 - Amount of penalty: fixed amount

Civil Aviation Bill – in a Public Bill Committee at 12:15 pm on 6th March 2012.

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Photo of John Woodcock John Woodcock Shadow Minister (Transport) 12:15 pm, 6th March 2012

I beg to move amendment 46, in clause 44, page 29, line 28, leave out ‘10%’ and insert ‘15%’.

Photo of Linda Riordan Linda Riordan Labour, Halifax

With this it will be convenient to discuss amendment 47, in clause 45, page 30, line 41, leave out ‘0.1%’ and insert ‘0.15%’.

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

These amendments are simply designed to try to get the Minister to spell out the reasoning behind the size of the penalty imposed on a person who breaks the licence. What is the rationale for deciding that the penalty should not be higher than 10% of a person’s turnover for the qualifying period? We have suggested a penalty of 15%, but that is an equally arbitrary figure. We have tabled the amendment so that the Minister can explain why she believes that 10% is an appropriate figure. Why should the penalty not be higher—or, indeed, lower—than that?

In a similar vein, amendment 47 increases the daily penalty to 0.15% of a person’s qualifying turnover for the qualifying period. Why was the original figure of 0.1% decided on as the maximum level of the daily penalty charged for breaking a licence? Why is that figure not higher or lower than that?

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

I rise to oppose the amendment, and to pose a couple a questions about how the penalties are calculated.

Penalties based on turnover can be burdensome for any business. If a business is operating on a low margin, a fine based on turnover can more than obliterate the entire profit made in the given period. However, we are talking about a licensed operator abusing its market power, or breaching its conditions, in such way that a penalty is appropriate. That means that a serious offence has occurred. A significant financial penalty should act as an effective deterrent to such behaviour, and I have no objection to that.

According to the regulatory accounts of Heathrow Airport Ltd for the most recent financial year to 31 March 2011, its total revenue was about £1.8 billion and its regulatory operating profit was £538 million. A 10% fine based on that total revenue would effectively account for a third of its profits. We may accept that as reasonable, and I suspect that Heathrow could probably stand that type of fine on a one-year basis.

However, if we are trying to encourage airports to invest in improving the quality of service, letting fines sneak up to 15% of turnover or higher seems to be detrimental. We all know that other airports across the country, which I accept are not currently regulated, are struggling to make any money at all. Allowing the CAA to impose ever-increasing fines, regardless of an airport’s profit or return, would not be a sensible way to encourage the investment that our airports need.

I would say that 10% seems a relatively sensible level. It would certainly be a significant cost to any business, and I do not think that any airport would engage in anti-competitive behaviours or other flagrant breaches of its licence because it thought that penalty too slight to be worth worrying about.

My real concern is exactly what we are including in the definition of turnover. In fact, subsection (7) allows the Secretary of State, by regulation, to modify the definition of qualifying turnover. I know subsection (8) suggests what those modifications might be, but there is no actual definition of what could be done. Will the Minister run through the scenarios for which she thinks she needs that power?

I accept that I may have missed this somewhere, but, from my reading, the Bill is not entirely clear whether turnover based on regulatory accounts means revenue from airport charges or from other revenue, too. Heathrow’s accounts, for example, contain revenue from retail operations, property revenue, rail revenue and other revenue. Are we talking about a fine based on total turnover that includes all those things, or are we talking about a fine that only affects the area in which a breach occurred, which may well be in the airport operations, rather than all those other things?

I am intrigued by what happens when an airport operator with retail or catering operations sells a long-term franchise for an upfront fee and therefore does not generate any annual turnover. There might be an accounting distortion in which a fine could get at the retail and catering income of some airports, whereas airports that have lost such income seven years ago for a flat fee are not accounted for in that way. Will the Minister clarify the scope of the power she is taking in subsection (7) and how we can ensure that fines are imposed on a consistent basis across all regulated airports?

Photo of Theresa Villiers Theresa Villiers The Minister of State, Department for Transport

Like my hon. Friend, I am not convinced that amendments 46 and 47 seek the right changes, so I hope that they will not be pressed to a vote. I also hope I am able to provide some reassurance in response to the shadow Minister’s questions.

Like the shadow Minister, I propose to address the amendments in the round as they both seek to raise the maximum penalty for contravening a licence condition by 50%. Amendment 46 seeks to raise the annual penalty from 10% to 15% of an airport’s annual turnover and amendment 47 seeks to raise the daily fine from 0.1% to 0.15% of annual turnover.

In response to my hon. Friend the Member for Amber Valley, I should say that the qualifying turnover referred to in subsection (7) is total revenue, so it does include revenue in addition to landing charges.

Looking at airports currently subject to economic regulation is useful when considering the impact that the Bill and the amendments would have in practice. At Heathrow, amendment 46 would increase the potential maximum 10% fixed-penalty from £186 million to £278 million; at Gatwick, the maximum fine would go up from £46 million to £69 million; and at Stansted, the maximum fine would go up from £22 million to £33 million.

I listened carefully to what the shadow Minister said. I agree that there are convincing arguments in favour of setting the maximum penalties for contravening airport economic regulation at high levels. Such arguments are applicable across many spheres of competition law, where the 10% and 0.1% figures, contained in the clauses, are also employed.

The shadow Minister asked what the rationale was for selecting those figures. They are in use in other contexts—for example, in relation to important aspects of European competition law. We need high maximum  fines in this regard because breaching rules on competition and economic regulation can sometimes be profitable. That is why the maximum penalties need to be substantial enough to hurt, in the event that the regulator chooses to impose them.

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

Does the Minister have to hand the European parallels that she mentioned and will she illuminate the Committee about those?

Photo of Theresa Villiers Theresa Villiers The Minister of State, Department for Transport

Yes, certainly. My example is article 23 of Council regulation EC No. 1/2003 of 16 December 2002 on the implementation of the rules on competition, which applies, as I said, to maximum penalty levels of 10% return on the financial liability of businesses. That is a fundamental plank of European competition law.

The reality is that the maximums in the Bill are high; I do not see a case for raising them further. A fine of more than £180 million is tough enough to be a genuine deterrent, even for a company as large and successful as BAA. None of the witnesses who gave oral evidence to the Committee asked for that change and it was not requested, so far as I know, in written evidence. Indeed, the Airport Operators Association said to the Transport Committee, during pre-legislative scrutiny, that the proposed levels were too high.

The cap of 10% of turnover for a fixed penalty represents the maximum threshold available to other regulators, such as the Office of Fair Trading under section 36(8) of the Competition Act 1998. We have already covered the use of the same 10% threshold in European law. It is worth hon. Members recalling the points made by Iain Osborne of the CAA when these matters were raised with him. In his words, it is rare—almost unheard of—for fines to hit that high 10% figure. In many ways, we seek to provide a deterrent.

It is worth drawing the Committee’s attention to the reputational effect of having been fined at all. The reputational effect of the fine, apart from its financial impact, is an important means of ensuring that management teams change their behaviour and remedy the non-compliance. Undoubtedly, we have a tough penalties regime and we have the balance about right: it would provide an effective deterrent and I do not see the need to raise the thresholds in the way that the shadow Minister advocates. I hope that he asks to withdraw his amendment.

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 44 ordered to stand part of the Bill.

Clauses 45 to 47 ordered to stand part of the Bill.

Schedule 3 agreed to.

Clauses 48 and 49 ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 50 ordered to stand part of the Bill.