Draft State Aid (EU Exit) Regulations 2019

Nick Smith Excerpts

Wednesday 10th April 2019 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

I beg to move,

That the Committee has considered the draft State Aid (EU Exit) Regulations 2019.

It is a great pleasure to serve under your chairmanship, Mr Hanson. The draft regulations were laid before the House on 21 January. They transpose into UK domestic law the EU state aid regime, as set out in articles 107 and 108 of the treaty on the functioning of the European Union and in various EU regulations. By so doing, they transfer the state aid regulatory functions of the European Commission to the UK’s Competition and Markets Authority. The draft regulations will therefore ensure that state aid rules continue to operate in a domestic context after exit day in the event of a no-deal exit. If passed, the regulations will come into force on exit day.

State aid is any Government subsidy or support provided to an economic operator that gives it an advantage that it could not get on the open market and that distorts competition between EU member states. The EU therefore has tough rules governing the way that subsidies can be given, to stop companies gaining an unfair advantage over their competitors. However, there are good policy justifications for state aid—when the rules enable it to be given—if the benefit from giving aid outweighs the potential harm that a subsidy would cause.

The rules are intended not to prevent public authorities from supporting industries and business, or indeed nationalising assets, but to minimise distortion to competition. Ultimately, spending decisions within the framework of the rules—how much, to whom and for what—are for successive Governments, the devolved Administrations and local authorities to make. To be clear, the state aid rules are about supporting fair and open competition, and the UK has long been a vocal proponent of them. Ultimately, the rules are good for taxpayers, consumers and businesses.

There are three main reasons to maintain the state aid rules and establish a UK regime when we leave the EU. First, it will provide continuity and clarity for public authorities that grant state aid and for organisations that receive it. That will give confidence to the wider business community, which will benefit from the continued protection provided by the rules. Secondly, it will help to maintain a level playing field throughout the whole of the United Kingdom.

[Nick Smith (Blaenau Gwent) (Lab)]

In appendix 1, there is a letter from Mick Antoniw AM, who chairs the Constitutional and Legislative Affairs Committee of the National Assembly in Cardiff. The letter is dated 6 February 2019. It points out the

“problem that the Welsh Government and the UK Government disagree as to whether State Aid is devolved.”

Mr Antoniw states:

“The Welsh Government has requested from the UK Government, an explanation of their legal position but there has been no response.”

Can the Minister please give us the Government’s legal position on that?

[Kelly Tolhurst]

The hon. Gentleman may be referring to the commitment, made by my noble Friend in the other place, to write to the Committee. He still plans to do so. The Government’s position is that state aid is a reserved matter.

--- Later in debate ---

[Kelly Tolhurst]

No, I am afraid I disagree. Currently, the devolved Administrations are responsible for aid givers, and they will potentially be aid givers. Under current EU regulations, the devolved Administrations have to notify the Commission of the giver of that aid. The SI will not change that. In a no-deal situation, the CMA will act as the notified body. There is no change. I disagree with the hon. Gentleman’s statement, but I respect his attempt to push that point and get further clarification.

[Nick Smith]

Mr Antoniw’s letter was dated 6 February, which is now over two months ago. May I press the Minister on when we will get the Government’s legal position? Can she give us a date, please?

[Kelly Tolhurst]

I thank the hon. Gentleman for his intervention. I believe that the Secretary of State replied to that letter, but I will have to go back and look at what letters he has sent before I can clarify further. I am more than happy to let the hon. Gentleman know after the Committee, if that is agreeable to him.

--- Later in debate ---

[Bill Esterson]

I am grateful to the Minister for that intervention, which tells us that we have not had the response from the Secretary of State. I am pleased that we got that on the record.

The Secondary Legislation Scrutiny Committee (Sub-Committee B) report, published on 7 February, refers to this issue and asked

“whether the Devolved Administrations were content with the approach”.

It is pretty clear that there has not been an answer to that question, let alone the more detailed letter published as evidence given to that Committee, which my hon. Friend the Member for Blaenau Gwent quoted from earlier and which I will quote from in more detail now. Not only are those responses not recorded, but it does not appear they have been made.

[Nick Smith]

I think what we heard from the Minister in her intervention on my hon. Friend was that the Government have still not published their legal position on this matter. We have all been effectively waiting for it for two months. Can he try to elicit from the Minister when we are likely to see that legal position made clear?

[Bill Esterson]

That is absolutely the right question to ask. I will just make clear exactly what questions we want answered by quoting from the letter published on the website as evidence to the Secondary Legislation Scrutiny Committee, which raised significant concerns:

“These Regulations transfer functions to non-devolved public authorities, namely the Competition and Markets Authority and the Secretary of State”—

we will come back to him later—

“and giving functions to non-devolved public authorities restricts the legislative competence of the National Assembly for Wales.”

It also said that

“there is the added problem that the Welsh Government and the UK Government disagree as to whether State Aid is devolved”,

and quoted the advice of the Welsh Government Counsel General, which said:

“‘The Welsh Government’s position is that State aid is a devolved matter and not a reserved matter under any heading of the Reserved Matters Schedule in the Government of Wales Act 2006. However, the UK Government do not consider it as such’”—

the Minister has made that point already—

“‘(as was noted in the Intergovernmental Agreement) and therefore they have not requested Welsh Ministerial consent. The Welsh Government has requested from the UK Government, an explanation of their legal position but there has been no response.’”

As we have just confirmed, that is still the case.

The Welsh Government go on to say:

“The approach being adopted by the UK Government therefore appears to be a breach of paragraph 8 of the Intergovernmental Agreement”

on the European Union (Withdrawal) Act 2018, which states:

“The UK Government will be able to use powers under clauses 7, 8 and 9 to amend domestic legislation in devolved areas but, as part of this agreement, reiterates the commitment it has previously given that it will not normally do so without the agreement of the devolved administrations. In any event, the powers will not be used to enact new policy in devolved areas; the primary purpose of using such powers will be administrative efficiency”.

It is pretty clear that the Welsh Government think this is a matter significantly beyond administrative efficiency. They say:

“In reaching this view we also note that the UK Government has not responded to the Welsh Government’s request for an explanation of their position that State Aid is a reserved matter.

In his letter to us”—

the Welsh Government—

“the Counsel General has confirmed that the Welsh Ministers do not intend on granting to the UK Government unilateral consent for these Regulations.

It is our understanding that discussions between the Welsh Government and the Secretary of State for Business, Energy and Industrial Strategy are ongoing.”

I understand that the Scottish Government have similar concerns, but I have been unable to find public confirmation in writing. Perhaps the Minister will be able to clarify one way or the other—I do not think we quite got that from her earlier.

I mentioned the phrase “constitutional crisis”. I do not know whether that is a fair representation or not, but it sounds pretty serious to have such substantial disagreement. Given the seriousness and the importance of these regulations, I suggest that it would have been extremely beneficial to have resolved this before it came to the Committee.

Paragraph 10.2 of the explanatory memorandum refers to the August 2018 technical notice and discussions with a variety of stakeholders, including the Confederation of British Industry and the Federation of Small Businesses. The responses to the technical notices have not been published with the explanatory memorandum. Paragraph 12.3 states that

“the instrument will not have a significant impact on business.”

From this discussion so far, it is pretty clear that how the CMA chooses to operate the state aid regime, and how funding to the regions and nations of the UK is operated—for example, to replace ERDF funding—will have an enormous impact on business and the economy, as well as on our constituents in the poorer parts of the country.

The Minister might wish to comment on what I have already said, and I also have a number of questions for her. She said earlier that the CMA has expertise, but these are entirely new responsibilities. Hence I referred to the cost-benefit analysis of whether a new body should be created or whether these powers should go to an existing organisation. The decision was taken to give them to the CMA, which is taking on the role of national regulator in addition to its significant current responsibilities.

How are the preparations going for the CMA to take on those new responsibilities? How many staff have been recruited? Has it even been possible to identify the necessary staff with the skills, experience and expertise needed to fulfil the functions required under those new responsibilities? Does the CMA have the capacity to discharge these new duties? Why have the Government chosen to significantly expand this agency in London, missing the opportunity to support the economy across the country? This is a form of state aid, is it not? We might think it ironic that we have regulations on state aid but the Government have chosen not to use such an opportunity to support the economy and jobs in other parts of the country.

Is there a plan to review how the existing state aid guidelines operate in a UK-only context once the new regime has been set up? What will be the engagement and involvement of the devolved Administrations according to the Government’s plan, notwithstanding the fact that the way this is addressed has yet to be resolved? What is their plan on the involvement of local and regional government, industry bodies, trade unions and civil society?

The Secondary Legislation Scrutiny Committee not unreasonably asked for clarity on whether primary legislation would be needed to introduce state aid, and under what circumstances that might apply. This is referred to in a number of places in the explanatory memorandum, including in paragraph 7.6. I should be grateful for clarification from the Minister on what certainty exists around the regime that is being created by these regulations and whether, given the complexities involved, these regulations are in fact inadequate. As the explanatory memorandum says, primary legislation is needed. When will that legislation be introduced? Perhaps she can tell us of any plans to do that.

Will the CMA retain the strict EU interpretation of state aid rules or allow a loosening of them to enable support for the economy, not least given the loss of EU funding and those Treasury forecasts of economic contraction after we leave the EU? If that is not to happen, why are the Government not moving straight to a less strict system, as covered by WTO rules, rather than via this halfway house given that we will no longer be governed by EU state aid rules once we leave? Usually the answer to such questions is that this is because under the withdrawal Act these regulations are deliberately limited in scope, but if that is true, why are the Government not complying with the withdrawal Act in respect of competences and the devolved Administrations, as I think we have demonstrated in some detail—it is certainly the opinion of the Welsh Government from the letter that I quoted earlier? It seems that the Government are content to follow the process of creating SIs when it suits, but not with any consistency. Again, the oversight appears to be of concern, as so often with this Government. The Secretary of State will have oversight day to day, but Parliament will have to wait to receive reports from the CMA. Perhaps the Minister can spell out the system of reporting to Parliament.

Then there is the consultation by the CMA itself, which ended on 18 March. Would it not have been a good idea if, along with the response to the Welsh Government, we had been shown the responses to that consultation before considering this instrument? We know the Government have been struggling with consultation and impact assessments, and ensuring that all regulations are in place on Brexit day, whenever that is, but for this SI there is the additional concern that there is a massive economic imperative, the need for state aid support across the country, and for the replacement of significant investment in communities such as the ones that my hon. Friends and I represent. The concerns about CMA capacity and expertise, and the uncertainty about whether primary legislation will be needed and about overreach into devolved national competences, are therefore all of real concern. The lack of expert evidence is especially important, on a subject that is so significant to our country, our economy, our constituents and our communities.

I am afraid that the way this matter has been addressed suggests a lack of understanding or interest from the Government on state aid. UK state aid is less than a third, proportionately, of the scheme in Germany, and slightly more than half that in France. The Government did not support Sheffield Forgemasters in 2010, and abandoned Labour’s plans to do so. They failed to ensure that contracting supported domestic train manufacturing at Bombardier and steel production at SSI, and stopped the EU using trade remedies to defend our steel industry in the 2015 steel crisis. We know the Government’s attitude to state aid. Sadly, their casual approach with the regulations shows that they are ill prepared for Brexit. Yet again they are failing to support industries, economies, jobs and communities across the country.

It is entirely understandable that our Labour colleagues in the House of Lords tabled a motion of regret that the draft regulations were not accompanied by a strategy for consultation on the use of state aid after the UK has left the EU. I entirely agree with their lordships. The entirely unsatisfactory approach to engagement with the Welsh and Scottish Governments further reinforces the perception that the Lords were absolutely right in their regret of the way that the regulations have been handled.

--- Later in debate ---

[Kelly Tolhurst]

As I have already outlined to the hon. Gentleman, the Government are clear that we believe state aid to be a reserved matter. I have tried to outline that a number of times, and I have outlined that there will be no loss to the devolved Administrations.

As I have said, under the current regulations, when the devolved Administrations decide to give aid they have to notify the European Commission. In the future, they will notify the CMA. As I have outlined, the Secretary of State will continue to consult, work with and have conversations with the devolved Administrations on any future aid policy. The Secretary of State has made that commitment, and there is no reason to suspect that it will not happen.

[Nick Smith]

Surely the Minister accepts that, although she may assert what the Government think, it is fair and reasonable for us to ask them to give us the legal explanation for their view. That is all we are asking for, and we should have it.