We will now hear from Jonathan Branton, partner at the DWF Group; Alexander Rose, director at the DWF Group; and Richard Warren, head of policy and external affairs at UK Steel. They are all here in person. We have until 3.40 pm for this session. Can the witnesses please introduce themselves in turn for the record—perhaps we will go left to right, starting with Mr Rose—and give a brief opening statement? I will then move to Seema Malhotra for questions.
I am Richard Warren, head of policy and external affairs at UK Steel, which is the trade association representing the steel industry in the UK. The steel industry is a recipient of various forms of state aid approved under the EU regime, so we have an active interest in the system that replaces it.
Q Thank you to our witnesses for coming in today. We are very appreciative of your time. I will ask two questions to cover the areas that you have commented on. First, I am interested to know your view on the question of transparency in the Bill around decisions that are made on how challenges might be brought if there are concerns about subsidies and their impact. Secondly, more positively, what might the opportunities be for the Bill and its regime? What would success look like in terms of how it positively affects the areas that we, on both sides of the House, are interested in, such as levelling up and the transition to net zero? Will the scheme actively support delivering them?
I would probably be best placed to start with the opportunity side of things, rather than transparency. As we see it, the opportunity for the Bill, briefly, is that it creates a more flexible and light-touch regime, which I am sure many of your witnesses have already spoken about.
The EU system, certainly the way we view it, effectively says, “State aid or subsidy is banned, except for a list of things that you’re allowed to do.” The new UK regime seems to take the opposite approach and says, “Basically everything is allowed apart from a select list of things that we ban.” At least ostensibly or theoretically, the Bill, as we see it, sets out a regime that will give us considerably more flexibility and room for manoeuvre in what we are able to do.
Some of the regimes that we are recipients of—the most beneficial for the UK steel sector—are around some of the subsidies and exemptions we receive on the costs of renewables and carbon taxes in relation to electricity prices. That is a really big issue for the steel sector. The UK steel sector pays between 80% and 100% more for its electricity than its counterparts in the EU. Those exemptions have reduced our electricity prices. There is a still a big gap, but they are really important to improving competitiveness in the UK.
The system in the EU has a very complicated, convoluted way of saying, “You can do this. If you introduce this scheme, you have to follow this rule. You can’t do this. This is the percentage that you are allowed to reward, etc. etc. etc.” Now the UK may choose to follow that, and it may not simplify the rules, but at least theoretically it can say, “I don’t have to follow any of your rules. I have a complete clean slate to redesign the process,” and award the compensation or the exemption in a targeted fashion that is most beneficial to the UK sector. Without giving too many other examples, although I have a long list if people want to hear them at a later date, the main benefit is that the framework is transparent.
The second element is the process for providing approvals if a local authority or national Government want to introduce a scheme. From our perspective, it is a lot more light touch and a lot more straightforward. There are a number of examples that we can give where the UK introduced or tried to introduce a system to benefit the steel industry. It was either blocked by the EU Commission or it said, “You need to go back and change this regulation.” You have actually got examples where state aid had been stuck in consideration or investigation for two years before eventually being given up on by member states. The process where you can actually approve schemes should be a significant benefit.
The final thing I would say before handing over to others on the panel is that that is all theoretical and I am sure questions will be posed at a later point. I think probably the biggest barrier to the use of state aid in the UK has not necessarily been the EU rules, although they have proven tricky at times. It has perhaps been a culture in the UK that says that state aid is not necessarily what we want and perhaps a last resort. The data bear that out; we tended to use about a third of the amount of state aid that Germany has and about half the amount that France has used. The proof of the pudding will be more in the answer to whether there is a different approach or a different cultural approach within the UK to wanting to use state aid.
Shall I pick up? First, to talk about the opportunity, it is really important to set the context of the Bill in the fact that we already have a new regime away from the EU regime. The opportunity of the Bill is to take forward the regime that has come out of the trade and co-operation agreement, which is already in force and in use. The fundamental point is how the Bill takes that and improves upon it to help to pursue the UK’s interests in a safe and secure way.
The TCA has already diverged massively from the EU state aid regime and created a whole lot of flexibility and ability to do things at speed, which is supposedly what the UK is particularly interested to secure. In terms of the opportunity presented by the Bill, there is an opportunity to improve upon that framework to make it better fit for purpose to monitor and secure a subsidy-controlled platform in the UK in a way that preserves competition, but also enhances the ability of Government and various different public authorities up and down the land—I do not just mean central Government, but regional government and local government—to influence policy and to make active interventions in order to achieve positive outcomes. There is an enormous opportunity to do that better, but also a risk of compromising some of the freedoms and flexibilities that have been achieved by the TCA in the first place. It is important to put that in context.
In terms of transparency, that is one of the bedrocks of an effective regime if you look at it from the perspective of maintenance of competition and the ability of third parties to come forward and to be able to challenge that subsidies have been carried through in a clear and effective way, through sound decision-making and appropriate thought as per the commitments within the TCA to respect the common principles that have been set out.
For the level playing field to be preserved, if you like, it is vital that there is a remedy, an enforcement system. That system can only come out when there is public knowledge of what is going on. Such public knowledge is also generally seen to enhance decision making on account of the scrutiny that it necessarily brings to the process as a result. Primarily, the main point of the transparency is to enable people to come forward and say, “Okay, this particular subsidy has created a negative effect,” and make sure that that is scrutinised by a suitably empowered authority, in this case the national courts.
Transparency is super important to that process. What has happened already is that there are commitments to transparency via the TCA—those are minimum commitments that the UK has made—and they must be respected because they are international commitments. What has happened in practice, however, is that a national transparency register has been established, but when you look at that register and at the relevant rules around it, you do not see that it is functioning well.
A lot of the entries there at the moment look somewhat incomplete, and you will notice that lots of the entries have a zero for the amount of money that is committed, all of which leads to an inability for the market to be able to see what is actually going on. If you cannot see what is going on, you do not know what to challenge, or even if to challenge.
The other point about the transparency register is its brevity, frankly. Given how long the new regime has been in force, which is the best part of 10 months, and given the number of public authorities that are out there making interventions on this, that and the other form, it is clear that not everything that has been awarded in that 10 months is in that register—not by a long shot. Something is going awry in terms of the implementation of that particular transparency register.
Q Specifically on what is in there—I am conscious of the time—are there recommendations you would make, based on that experience, around what may need to be tightened up within the Bill? That would be quite helpful, because there are questions about the de minimis threshold, about whether an entry should take six months, and about how long things should be open to challenge.
On the challenge point, I think one month is too short, because that requires people to be extremely alert about checking things. The database is not readily searchable. It does not send prompts when particular information is put on at a sectoral level. If you were keeping an eye on it, you would have to be checking it every other day to see that something was coming forward about which you were concerned.
In terms of searching for amounts and dates on which things have been recorded, all that is not regulated. What we really need—I will hand over to Alex in a second as I know he has strong views on this—is something that sets out in very clear detail exactly what needs to come in on every entry. Then, in practice, when you actually come to making those entries, it must require you to put in the correct answers to those questions in order for the entry to go live on the website. If that does not happen, you should get pushed back. That is clearly not working well enough.
As Jonathan says, essentially, the key piece of information on that website is the date the entry is made, and the reason that is so important is that the challenger has as little as a month to challenge once that information is placed on the website. To put some numbers on what Jonathan said, first and foremost there are only 501 entries. There are a lot of subsidies, so there is no way that only 501 subsidies have been awarded since 11 pm,
Secondly, of those 501, some 257 are recorded as having a zero or nil value. In order to bring a digital review—
Two hundred and fifty seven out of 501. In order to bring a digital review challenge, you are probably going to have to spend between £25,000 and £40,000, so if you are seeing a nil value, you are very unlikely to bring a claim.
Some of those are going to be schemes, and I will bring out some of the schemes on that website at the moment. SC10261, the Tees Valley Capital Grant Scheme, is listed as having been posted on the website on
Now, essentially, what we have here, therefore, is a mousetrap that is lacking a spring. Unfortunately, the Bill does not fix that. The way to fix it is at clause 32, which relates to the database, and it must expressly say that there needs to be two things. First and foremost, that information has to be included—the date it is actually entered and/or modified. Secondly, I think you need to end up having a search function that gives you three pieces of information. You need to have the date an entry was entered or modified; the name of the funder, because that is currently not searchable; and the name of the beneficiary, which is on there at the moment. Those are the three key pieces of information. The other element is, in order to capture that scenario where people simply are not putting into the database, you need to have some sanction if you fail to put it on.
The other issue that needs to be considered is that, at the moment, you have up to six months to put that information on the database. A large enough subsidy could make a business insolvent within that six months, so it feels to me that the period needs to be shorter. Likewise, the period to challenge needs to be longer. There is no obvious reason for having a shorter period for what is rightly described as the most important piece of post-Brexit legislation than for a planning permission judicial review. It should be longer. The next point is that there should be some level of sanction if that information is not put online. For example, maybe a sensible level would be the challenge period is extended to six months.
Q Thank you all for that very helpful information. There are perhaps two different elements of discussion in relation to the Bill going on here. Richard referred to the Bill perhaps providing more of a light touch in that regard, and it may well be beneficial. We heard from individuals earlier today in relation to the lack of guidance or understanding as to how the Bill will operate. How do you get to that conclusion, notwithstanding the lack of guidance that sits behind the Bill that is due to come from the Secretary of State in future? Ultimately, do you foresee a situation where the Bill will actually provide an increase in state aid, as I am sure your organisation would like to see?
Alexander and Jonathan, if I may say so, you gave quite a devastating indictment of current practices and we would all hope that the Bill will improve on that situation. Do you think it will, as it stands?
First and foremost, I think that the general structure of the Bill is good. I think it is quite sensible. My concern is in terms of those details. I think there is capacity to refine the Bill so it is better. I agree that transparency is a concern.
The other area I am very concerned about is the ability to create schemes because the schemes can then only be challenged in the period they are set up. Why that nil point is so important is that, essentially, you have got a situation where there is an unlawful aid––an unlawful subsidy––but you can only challenge it within the month the subsidy is set up. I struggle to see how an organisation could ever really know that it is going to be affected by that subsidy scheme unless it identifies the competitors who are going to get a subsidy and the amount.
Clause 70(2) needs to be amended to add some wording at the end along the lines of providing that, at the time of entry of information about the subsidy scheme on the subsidy database, sufficient information has been made available for an interested party to make an informed decision as to whether and to what extent their interest may be affected. To my mind, the transparency database and the addressing the schemes point are the two issues that will most damage the award of subsides in future if not rectified.
I would second that. The transparency register is relatively easily fixed, I would have thought. The schemes point is a potential loophole that, if not closed, could lead to some frankly bad schemes being adopted and then being impervious to challenge on the basis that the time had passed since the scheme had been published, but the actual awards pursuant to that scheme were somehow protected.
That is at odds with the fundamental principle that interested parties ought to be able to see what is out there and affecting them so that they may challenge it, and they cannot see that until an actual award has been made to a competitor or another party in which they are interested. Until cash is parted with, they do not see that, and that is arguably at odds with at least the spirit of the TCA provisions around schemes, and I think that could be very much tightened up.
Broadly, the Bill does a good job. It will help the regime to mature and become more effective, but it must be recognised in huge part that it puts in place a framework to achieve a whole load of things that have not yet been decided. There is talk of streamlined subsidy schemes, referrals to the CMA and so on, but the Bill does not say what will be in a streamlined subsidy scheme or what will be the subject of a referral, so all those details will come in the future. I absolutely applaud the creation of the framework to be able to implement a streamlined subsidy scheme. What will matter—the proof of the pudding—will be what is actually within that scheme in due course.
A final point: a lot of people have mistaken the detail of the Subsidy Control Bill and the subsidy control framework regarding their effectiveness for remedying, levelling up, or whatever might be the question of the day. The Bill does not set the division of funding to different places and activities, which is a fundamental part of the redistribution of wealth. A lot of misconceptions suggest that the Bill should achieve all that, but the fundamental point of how the cash is carved up and distributed is not necessarily a question for subsidy control law.
Just to go back to the question about problems that might arise with a light-touch approach, from our perspective the difficulties we have had with the system that we are replacing—the European system that we removed ourselves from—have been on the more prescriptive side. When we have asked the Government to introduce x, y and z, the response has often been, “The EU doesn’t say you can do it, so we assume you can’t.”
Other Governments have taken a different approach. When we proposed to the Government that they should provide an exemption from the cost of the capacity market within electricity pricing, BEIS said that as EU state aid law did not provide explicit rules on that, it could not introduce an exemption. The Polish Government took a different approach, saying, “We’ll come up with one and introduce it.” The more prescriptive approach in the EU has been limiting, certainly as the UK Government approached it, so we feel that we will be more empowered as industry to bring forward proposals with greater confidence that they will be within the UK scheme for subsidy control because, as I said in response to a previous question, everything is allowed apart from what is explicitly not allowed, so we will be in a stronger position to be confident of saying, “Actually, this is allowed by UK subsidy control rules.”
My final point is that the biggest barrier has probably been the UK’s culture of not using the power. Time and again, the reason why we cannot do x, y and z that has been given by either Ministers or officials is that the state aid rules will not allow it. We have often taken a different view, but that excuse has been an almost permanent barrier to doing things. The new regime might reveal whether the excuse has been something to hide behind, or if there is a general culture of preferring not to use state aid rules or subsidy. That is probably a more important point for the steel sector than the Bill, which broadly provides the right framework—we have no major concerns about it.
Let me briefly touch on the regional point that Jonathan made. It is valid, in that the new system opens up a huge amount of flexibility for regional development. Historically, the UK has not done a huge amount of regional development. If we look at the split of what we have spent in the past few years, barely anything has been spent by the UK on regional development in terms of state aid. The system gives us an awful lot of flexibility to redefine which areas we want to give regional development to.
Under the EU system, the map of which areas of the UK were considered to be category A was pretty limiting. One of them happens to be where Port Talbot is based, but it has been a slightly moot point because it has not received a lot of regional aid anyway. The point is: the Government can redesign it, and that will be a key element if they are to use their new subsidy control regime to the maximum flexibility to pursue their levelling-up agenda.
Before I bring in Simon Baynes, may I remind panellists that five more Members wish to ask questions? Could we keep the answers succinct, please?
Q One quick question. I think it was Mr Rose who said that the transparency register would be relatively easy to fix. Is there any comparable register that we could look at to learn from? This is perhaps not applicable, but from my own experience as a trustee of arts and heritage organisations, the requirements of the Arts Council and the lottery are very stringent in terms of transparency and what information you have to provide. Is that a comparable situation?
Absolutely. In terms of improving, you are starting from a relatively low base, so it is quite easy. There are plenty of databases, but ultimately it is about service functions. For example, I receive updates every day from Government on what they are doing. That kind of technology is there and it is ready to be put in place.
I would second that. It is really difficult to argue against transparency and say, “Why wouldn’t you have transparency about the dispensation of public money in this way?” There is an overwhelming case for having a strong database that is searchable by whatever means anybody wants to search it, quite frankly. You can insist on that and be very plain. All the enforcement and strength flows from that later.
Q Just zooming out for a second, I know that you all have an interest in this levelling-up agenda. The stated priorities of the Bill are to be able to drive forward both the levelling-up agenda and the transition to net zero. Mr Rose and Mr Branton, do you think it is possible to achieve the levelling-up agenda without an assisted areas map or some way of actually focusing resources? There is also the issue that relocations are prohibited. What impact does that have on the levelling-up agenda?
We will achieve net zero in this country only if our steel industry transitions towards it. Mr Warren, what kind of state aid support do you think would be needed for that? Do you think there should be more explicit guidance in the Bill about how to achieve the transition to net zero as part of this overall strategy?
I will start with the levelling-up question. I think you were asking whether it is possible to do something there without the equivalent of a regional aid map. The short answer is yes. You do not have to have a map of the country with shades of different colours for different levels of qualification in order to do something similar. The point is to give some form of preference or favouritism to areas based on some kind of measure of comparative disadvantage.
You could quite easily do that if you established a series of criteria. If you found that a given area had exhibited one or more of those criteria—and there would obviously need to be quite some thought given to what they were—that would be a means establishing that somewhere is regionally disadvantaged. Obviously, you can layer that with all sorts of different complications and grades of disadvantage, if you wish. That might be complicated or overly political, but you can establish the fundamental point of something being disadvantaged or not by reference to, I would like to think, a set of criteria, which would not be too hard.
For the relocation point, the wording in the Bill talks about something prohibiting subsidy that was given as a condition of relocation. In some ways, to my mind, that invites somebody to give a relocation that is not a condition, but achieves it anyway. Maybe that is just lawyers being cynical. Perhaps it is not fit for what it seeks to achieve, but is that a good thing anyway? I have seen a number of situations where a relocation has taken place, which has been positive for several reasons—perhaps someone relocates to make physical space for an infrastructure project, for example. Linking that back to levelling up, relocations can be advantageous and good in the grand scheme of things, and definitely positive for redistributing wealth. Having a prohibition in the Bill, even a badly worded one, is potentially too blunt a tool, which might backfire.
I have a slightly different position on clause 18. I think the way to resolve it would be to put in a value figure—maybe £20 million. I also agree that relocations can be hugely beneficial. Schedule 1 outlines the common subsidy principles and paragraph F is designed essentially to avoid competitions developing within the internal market.
I think that the issue trying to be resolved here is avoiding what would be regarded as a distortive subsidy. The way to deal with that is to define distortive subsidy and say that that would then be referred to the CMA, or however that works. That leaves you with the potential to include a replacement additional principle—you mentioned levelling up and net zero. I note that the strategy announced last week requires all civil servants to take account of net zero, yet these rules will be used by more than 550 public bodies. That is a great opportunity to instil that kind of thinking in every single subsidy.
To answer very briefly, yes, undoubtedly decarbonisation of the steel sector will require considerable subsidy or state aids, however we wish to term it. In sectors such as the power sector, we see billions of pounds’ worth of subsidy to decarbonise, and the steel sector will need precisely the same. Net zero or low-carbon forms of steel production will add anything from 30% to 50% to the costs of steel production, depending on which route you go down. If other countries are not moving at precisely the same speed or putting the same constraints on their industries, you will need some sort of intervention to correct that market failure.
There are two key areas where we would like to see additional movement. Again, I come back to competitive electricity prices. Fixing the issue there will require some sort of intervention. Secondly, we need pretty hefty support for capital investment in carbon capture and storage, hydrogen or even new electric arc furnaces. That will require hundreds of millions of pounds of investment.
On your final point about whether we need anything further in the Subsidy Control Bill to direct us towards that, I think that the light-touch approach is the right way to go. It does not exclude the Government from doing anything and it leaves open a huge number of options.
For example, the clean steel fund of £250 million that we hope will be confirmed in the spending review tomorrow is perfectly legitimate under the current regime. Maybe under the EU system, which says, “You can do this, you can’t do that”, you would have had to go through a more complicated approvals process. By the time you start introducing explicit requirements for certain industries, you will get a bunfight where everyone wants something mentioned in the Bill. You may end up down a route of, “If it’s not mentioned, maybe we shouldn’t be doing it”, so I think that the light-touch approach is the best way to go.
Q In terms of the thresholds for reporting—I think it is £500,000 and the minimum financial assistance threshold is £315,000—are they the right level to achieve the transparency you are looking for?
I think probably yes. In terms of the small amounts of financial assistance, it is basically double what the EU’s de minimis has been. The feedback I have had so far across the piece is that the doubling has been a sensible, long overdue move. Frankly, that has been set by reference to what the TCA sets anyway, so we do not have a lot of flexibility to play around with that. Setting it at a fixed, sterling level is immediately sensible. There can be no debate about that.
In terms of the transparency, yes, you have to draw the line somewhere and the £500,000 seems like a sensible, rounded figure. I certainly do not have a strong view that it should be put at a different level—not yet, anyway.
The £500,000 is for schemes. I think that the question ultimately is that if you amend clause 70(2) in order to address this gap in terms of, essentially, accountability, you will need some level of incentive to use schemes. It appears that transparency has been chosen as that route.
Personally, I think that the £500,000 seems quite high, but you do need some kind of incentive; otherwise, people will not go down the route of using schemes, when clearly a decision has been made that that is a good idea.
Q I want to ask Mr Rose and Mr Branton about this. You have both talked about building the framework and the additional details have to come later. Are there any elements of the additional details that you think should be in primary legislation? I think that Mr Warren has ruled that out, but he may want to comment on that.
Looking at the other things you have said, rather than saying in general terms that the reporting period should be less than six months, do you have a particular figure in mind? Similarly, do you have a figure in mind to replace the one-month opportunity to appeal?
I will take those questions in reverse order. There is the clearest possible case for extending as soon as possible the period in which someone can appeal—but not to more than three months, which is the standard time limit for judicial review. I think that is relatively clear.
On the six months, I have yet to hear a really persuasive case for why you need that long to publish the fact that you have made a award. Why do you need six months to get yourself together to publish that something has been done? I would think that that could possibly be as much as halved.
Yes—without compromising anything, it seems to me.
In terms of other bits of the Bill that ought to be in primary legislation, that gives rise to the question: what would the streamlined subsidy schemes be? There is certainly a case for making a number of different ones. The obvious thing is to go down the path of the old block exemption—the general block exemption regulation, or GBER—which made non-controversial interventions easy. That was the good thing about that regime: you knew that if you were well within those limits, you could just get on and do it and you were not blocked from anything. If anything has been lost in the new regime, it is that those easy interventions now seem more difficult and require more thought and more risk, in the sense that nobody is quite sure if they have ever hit the mark or not.
You could go into some quick and easy streamlined subsidy schemes. I am thinking of areas like arts and culture. Regional aid and levelling up is possibly more complicated and will require a bit more thought, but something like arts and culture is easy and obvious. Research and development is easy and obvious—I think everybody agrees that that is a priority. Employment, training and skills are also the sorts of areas in which you might do it. I do not see why we would need to wait around and overthink those. The key with a streamlined subsidy scheme is to make it quick, easy and simple.
I completely agree with what Jonathan has said. On the elements where it would be useful for there to be greater clarification, presumably in primary legislation, I think there is a gap in terms of the interested party. It would be useful for public bodies to be able to challenge. If, for example, employment in their area is going to be significantly affected by an unlawful subsidy, it feels right that they should have the ability to challenge in that scenario. It would be good to address that.
Another element is the issue in clause 55 whereby only the Secretary of State can call in these subsidies. At the moment, that seems to be rather strangely limited to prospective subsidies, which does not seem particularly sensible. You could almost end up in a cat-and-mouse game whereby subsidies are issued quickly, so that no one can be called in. That does not seem like a good idea.
Likewise, however, it does not seem particularly sensible to limit the ability to call in the subsidy to the largest awarder of subsidies in the country. Therefore, it would seem that we need some kind of alternative—
Order. I am sorry to have to cut you off, but that brings us to the end of the time allotted for this panel. I am sorry to those Members who did not get to ask questions. I thank the panel for their evidence, and we will move on to the next witness.