Clause 81 - Modifications to subsidies and schemes

Subsidy Control Bill – in a Public Bill Committee at 12:15 pm on 18th November 2021.

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Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy) 12:15 pm, 18th November 2021

I beg to move amendment 83, in clause 81, page 46, line 39, leave out “of up to 25%” and insert

“up to the rate of inflation”.

This amendment would prevent modifications that increase subsidy budgets by up to 25% from being permitted, and would instead permit modifications that increased subsidy or scheme budgets by up to the rate of inflation.

Photo of Caroline Nokes Caroline Nokes Chair, Women and Equalities Committee, Chair, Women and Equalities Committee

With this it will be convenient to discuss the following:

Amendment 84, in clause 81, page 46, line 41, leave out “paragraph (g)”.

This amendment would prevent extensions of subsidy schemes from being permitted modifications.

Amendment 85, in clause 81, page 47, line 10, leave out “25%” and insert “inflation rate”.

This amendment relates to Amendment 83.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

It is a pleasure to move amendment 83 and to speak to amendments 84 and 85. The clause establishes that unless a modification of a subsidy or scheme is a “permitted modification” listed in subsection (3), including an uplift of up to 25% of the budget or an extension by up to six years, changes to a subsidy or scheme will be regarded as a new subsidy or scheme. Consequently, the public authority will have to comply with the subsidy control requirements. The clause outlines that most modifications to subsidies or schemes must result in said subsidies or schemes being treated as new. The issue is that it also outlines a list of permitted modifications that can be made without having to re-establish the subsidy.

Labour recognises the importance of allowing certain modifications to subsidies, especially under a regime that is intended to be quicker, where there is leave to support a subsidy’s outcomes in line with the control principles and the underlying goals and principles of the legislation. However, such permitted modifications must be reasonable; otherwise, they risk allowing subsidies to undermine the principles of the regulations set out in the legislation.

I wonder whether the Minister has considered in detail subsection (3)(f), which allows an increase in a subsidy’s budget by what seems to be a fairly high and fairly arbitrary 25%. I question whether that is a reasonable modification. There is also a question about subsection (3)(g), which allows the extension of a subsidy scheme by six years. That is longer than a parliamentary term. Again, I wonder whether detailed consideration was given to that. Perhaps the Minister can enlighten us on the basis for deciding to make a six-year extension and a 25% increase permitted modifications.

There is a risk that such modifications will have significant effects on subsidies and schemes. They could cause a previously finely-tuned subsidy to distort the market or become out of proportion. As such, we should question whether they should be allowed to occur without any checks or renewed transparency. Otherwise, there is a risk in increasing a subsidy, particularly a large subsidy, by up to 25%,and, indeed, in extending a subsidy scheme by six years—that is well beyond the period for which local authorities, devolved Administrations or almost anyone in any Administration is elected in this country—without it being subject to some renewal. There does not seem to be a clear explanation of why the clause is framed as it is.

We therefore also propose amendment 83, which would allow for subsidies to adapt to changing economic circumstances by allowing a subsidy’s budget to be increased by no more than the rate of inflation, rather than by a whole 25%. While allowing for adaptation to changing economic circumstances, the amendment would ensure that any significant changes to subsidy amounts were still subject to appropriate transparency.

Amendment 85 would scrap subsection (3)(g), because those long extensions could have significant consequences for the market, and the market could change in that period of time. Any extension of a scheme’s timetable should be subject to full transparency, and it should be treated as though a new subsidy was being created.

I would be grateful if the Minister could respond to our legitimate concerns and explain what underlies the decisions that led to subsections (3)(f) and (3)(g). If there is something that we have missed, we would be happy to reconsider, but in the interests of transparency, value for money and public confidence, we think these are two points that should be addressed.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Clause 81 allows for limited amendments to be made to subsidies or schemes. A permitted modification will not be treated as a new subsidy or scheme as long as it meets the parameters set out in the clause. First, let me cover amendments 83 and 85. These amendments would remove from the list of permitted modifications an increase of up to 25% of the original budget of a subsidy or scheme. Instead, increases only up to the rate of inflation would be treated as permitted modifications. In doing so, the amendments would greatly reduce the flexibility afforded to public authorities to moderately increase the budget of a subsidy or scheme without facing additional administrative burdens.

The Government have committed to reducing administrative burdens on public authorities wherever possible. That includes giving them the flexibility to make limited amendments to a subsidy or scheme without having to jump through additional procedural hoops. An increase of up to 25% is appropriate, as this level of uplift is unlikely to greatly change the distortionary effects of a subsidy or scheme, which is what we are measuring.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy)

Will the Minister write to me in advance of Report setting out what would happen if the increase of 25% takes the subsidy above a certain threshold, whether that is the de minimis threshold or the threshold for reporting? It strikes me that it would be possible to use the provision in a negative way to get round the system. I am sure that it is not the Government’s intention, so it would be useful to have advice on what might happen should that subsidy hit the threshold.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

To avoid the bureaucratic burden I talked about, the clause allows for a limited degree of modification without reassessment. That creates the right balance, and public authorities would need to determine whether the change is just administrative or not.

Permitted modifications do not have to be reassessed, and therefore it would not need to be considered whether they bump into subsidies of interest or subsidies of particular interest, for example, because those criteria apply only to new schemes. The public authority will have already carried out an assessment of compliance with the principles and other requirements for all the subsidies and schemes, so the increase in value is unlikely to meaningfully alter that. Clearly, if a public authority was attempting to mislead or exploit that as a loophole, it could be subject to judicial review on general public law grounds.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

I may have said in my remarks that amendment 85 scrapped subsection (3)(g), but it was amendment 84, as the Minister has outlined. It is important for our deliberations that the point raised by the hon. Member for Aberdeen North is addressed in writing. It is a fundamental point, and there does seem to be a loophole. Surely, we would not want an inefficiency in the regime that could mean public money being pushed through that little loophole by design. An increase of 25% is significant and could result in the subsidy being pushed over a particular threshold against the requirements of the legislation. Surely, we should design out loopholes rather than designing them in. It would be important, for the purposes of our deliberations and to have confidence in the regime, if the Minister were able to address that point, in writing, for the Committee.

On the Minister’s point about “unlikely to”, surely we do not want to design a system based on things that are unlikely. The way the legislation is drafted could incentivise particular behaviours. We do not want a regime or legislation that make more likely things that we want to be unlikely. There is a small financial incentive for people to look at ways of working around the legislation.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London) 12:30 pm, 18th November 2021

I am happy to formally write again to clarify the situation, if necessary, but I am pretty sure that I would be repeating what I have just said in response to the hon. Member for Aberdeen North, which will be in the Official Report.

The likelihood and unlikelihood point goes back to the fundamental issue of the regime being a permissive one. If we regimented everything, we would be recreating the EU state aid scheme, which is far more prescriptive.

On the comments about the increases in values and times, let me cover why we believe that the 25% increase is appropriate. Even the strictest subsidy control regime in the world provides for the types of permitted modifications that are included in the clause. The EU state aid regime allows for an increase of up to 20% in the original budget of an existing aid scheme before public authorities need to notify and seek approval from the EU Commission. As I have said, the regime in the legislation is a far lighter-touch regime. I do not mean to suggest that we should start benchmarking every aspect of our subsidy control framework against EU state aid rules, but it is worth noting that the amendments would make the UK’s rules on modifying subsidies far more restrictive than the previous bureaucratic rules. By providing for that level of budget uplift, clause 81 will help to reduce unnecessary processes and provide maximum certainty to public authorities and recipients of subsidies.

As I stated when addressing the preceding amendments, clause 81 allows for permitted modifications to be made for subsidies or schemes without them being treated as a new subsidy or scheme. Amendment 84 would remove from the list of permitted modifications the extension of a subsidy scheme by up to six years. Any extension to a scheme beyond the date on which it would otherwise have been terminated would therefore be treated as a new scheme.

There will be times when public authorities, in monitoring the outcomes of a subsidy scheme, decide it is beneficial to moderately prolong the length of the scheme. If a public authority incurs delays in rolling out the new scheme, for instance, it may wish to bridge the gap by extending the existing scheme. It is appropriate to provide public authorities with the ability to extend a scheme without requiring an assessment against the subsidy control requirements, as an extension of up to six years is unlikely to greatly increase any negative effects stemming from the scheme.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

It is important to recognise that if there are to be permitted modifications, they should be designed with transparency in mind, and with ways of tracking how and where they are used. The Minister has just said that the EU regime allows a 20% budget uplift and has an approvals process. The Government are proposing a 25% uplift, but there does not seem to be any clarity in the legislation about the publication of any decisions. Do the Government envisage that, in the event of a permitted modification—of over 5% or 10% of the budget, say—there will be public knowledge of that decision, and if so, where would that information be published?

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Other tools exist to provide the transparency in public authority spending, such as the data published by local authorities under the local government transparency code. The regime is not intended to replace other mechanisms for ensuring that we have transparency and good management of public money.

I do not want to compare and contrast every single element of the regime against the EU, but on timescales, the Committee may find it useful to know that the EU state aid regime also allows for prolongation of an existing scheme by up to six years. The amendment would therefore make the UK’s rules around the modification of subsidies and schemes much stricter than those under the EU without bringing any corresponding benefit. I therefore request that the amendment be withdrawn.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy)

I appreciate the Minister’s attempt to explain the 25% and what would happen should the subsidy increase above a certain threshold. However, I would very much appreciate it if he would write to us about what is likely to happen should that threshold be hit.

Subsection (3)(g) specifically relates to the length of time for subsidy scheme extensions. An enterprise could conceivably not have existed during the original term of the subsidy scheme but be later affected by the extension of the scheme, with no ability to challenge that scheme because the extension gives no opportunity for it to be challenged. This is not only about the length of time. We discussed the way in which individual subsidies made within a scheme cannot be challenged. It is distinctly possible that that could inadvertently distort competition for new enterprises that pop up during the period of a scheme and so have no ability to challenge it and no recourse to make their concerns known, because a system just does not exist for them to do so if they are outwith the period of being able to challenge the original scheme. If a scheme is not classed as new but extended, there is a bit of a problem.

I understand what the Minister says about the EU, and I assume—although he did not say this—that six years was likely chosen because that is analogous with the length of time the EU gives. However, because of the differences between this scheme and the EU state aid scheme, lifting the same number of years does not work as well as it could, because individual subsidies cannot be challenged. Only the scheme can be challenged, and there will be no ability for new enterprises to challenge the schemes, even though they may have a major distortive effect on competition.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

I thank the hon. Lady for her comments. We are extremely concerned about the Government’s lines on this. I do not think there has been any clear explanation, nor any proper assessment of what this could mean and how it could create quite a significant loophole. We will push amendment 83 to a vote.

Question put, That the amendment be made.

Division number 26 Subsidy Control Bill — Clause 81 - Modifications to subsidies and schemes

Aye: 4 MPs

No: 8 MPs

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The Committee divided: Ayes 4, Noes 8.

Question accordingly negatived.

Amendment proposed: 84, in clause 81, page 46, line 41, leave out “paragraph (g)”.—(Seema Malhotra.)

Question put, That the amendment be made.

Division number 27 Subsidy Control Bill — Clause 81 - Modifications to subsidies and schemes

Aye: 4 MPs

No: 8 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

The Committee divided: Ayes 4, Noes 8.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

The clause allows for limited amendments to be made to subsidies or schemes, referred to as permitted modifications. They can be made to subsidies made under the terms of the Bill or to legacy schemes and withdrawal agreement schemes. Modifications are also permitted to legacy and withdrawal agreement subsidies or schemes in accordance with their terms. They can involve an increase of up to 25% of the original budget or the extension of a subsidy scheme by up to six years.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

The holes in this clause are bigger than those in a big piece of Swiss cheese, and I am concerned about that. We will not be voting against it, but if we had an equivalent of abstain, we would be doing that.

Question put and agreed to.

Clause 81 accordingly ordered to stand part of the Bill.