Economy and Fair Work Committee

Meeting date: Wednesday, January 19, 2022

Official Report 584KB pdf

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Subsidy Control Bill

The next item of business is a further evidence session on the Subsidy Control Bill, which is UK Parliament legislation. The bill’s provisions cover the whole UK and impact on areas that are devolved to the Scottish Parliament and on the executive competence of the Scottish ministers. The bill continues its passage through Westminster; I understand that it is due to have its second reading in the House of Lords today. The bill establishes a domestic subsidy control regime for the UK following its exit from the EU, and it provides a legal framework for public authorities to make subsidy decisions.

The committee is required to consider and report on the Scottish Government’s legislative consent memorandum. The Scottish Government does not recommend that the Scottish Parliament give its consent to the bill in its current form.

The committee took evidence on the bill last week, and we have a number of issues to follow up on and ask about this morning. I welcome Ivan McKee MSP, the Minister for Business, Trade, Tourism and Enterprise, who is joined by Hilary Pearce, the head of the European structural funds and subsidy control division; and Jen Willoughby, the head of the national and international regulatory alignment unit.

As always, I ask witnesses and members to keep their questions and answers as concise as possible. I invite the minister to make a short opening statement.

Thank you, convener, and good morning. I thank the committee for the opportunity to set out the views of the Scottish ministers on the proposed legislation. I look forward to taking questions. Before that, I will make a few brief remarks to outline my key concerns.

My first concern relates to the case-specific sweeping powers of the secretary of state to ignore the devolution settlement, and to the risk of UK ministers intervening in devolved areas without proper consultation or knowledge of local circumstances.

Secondly, the absence of formal regulatory and enforcement arrangements could undermine confidence in the process, and it could hinder the ability of grant-awarding bodies to make awards to recipients as they have done previously.

My third concern relates to the inclusion of agriculture in the provision. We believe that it should not be included for many good reasons.

My fourth concern relates to the time periods involved, particularly the fact that interested parties will have only one month to appeal any decisions.

Lastly, much of the provision remains unclear, even at this stage, due to the absence of draft subordinate legislation and detailed guidance. Notwithstanding the concerns of principle, the absence of such detail makes it difficult to take a considered view and give consent.

That is a brief outline of my concerns. I look forward to taking questions from the committee.

Thank you, minister. Are you still in discussions with the UK Government? I know that we are at the latter stages of the bill making its way through Westminster, but can you see any possible amendments being made before the conclusion of the bill’s passage?

We are still in discussions. At the end of last week, Mairi Gougeon, the Cabinet Secretary for Rural Affairs and Islands, and I met Paul Scully to go through the issues that I have just outlined, but we did not reach any agreement. We shared our concerns again, as we have done on many occasions. Officials continue to discuss such matters regularly, but unfortunately we have not been able to reach a conclusion on those important issues.

I appreciate the tensions and frustrations that have built up around the bill. I asked last week’s witnesses about that, and they suggested that some of the Scottish Government’s requests, such as the ability to veto, would be unworkable and unrealistic. The UK Government would argue that it will take decisions in the best interests of the UK and that it will take Scottish interests into consideration. Do your concerns about that relate to a lack of clarity in the bill? It sounds as though there is distrust of the UK Government in relation to the statements that it has made. Are you seeking assurances that the UK Government will behave in the way that it has outlined when it comes to consideration of devolved Parliaments and nations?

You have raised a few different issues. The lack of guidance suggests a lack of detail, which makes it difficult to take a view on some issues. The inclusion of agriculture, as I mentioned, is clearly a concern.

Our concern relates to the use of powers in devolved areas of competence. The UK secretary of state will have powers across the whole UK—they will have a whole list of powers with regard to the operation of the scheme, when it is up and running—but there is no equivalent power for the Scottish ministers in devolved areas. That imbalance runs against the devolution settlement.

10:45  

We are concerned about that in principle, but we are also concerned about operational aspects, in relation to knowledge and understanding and the specific impact on Scotland. How events unfold in Scotland should have an impact on the nuances of any decisions that are made and on the relative importance of different decisions or subsidies, and the detailed knowledge of such matters is clearly in Scotland.

There is a point of principle about the powers and the erosion of the devolution settlement, but there is also the practical point that we are much closer to the issues than somebody in Whitehall would be.

You have talked about uncertainty because of the lack of guidance. Last week, although it was recognised that the bill could present opportunities for different subsidies within the UK, there was a concern that the uncertainty would lead to risk aversion, particularly in relation to whether public bodies decide to make any investments. Do you recognise those concerns?

Absolutely. We are already seeing that. There are examples—I will not go into the details for reasons of commercial confidentiality—in which our legal teams have had to have a good look to understand whether we are able to move forward. They take, as they often do, a very safe view on what is and is not allowed. In the absence of the pre-authorisation process that existed previously, there is an inclination to operate on the side of safety, which means that we have to take a different view on things that we might have done in the past. That is obviously concerning.

I want to focus on the specific example of the Scottish National Investment Bank. The rules are certainly not yet clear as to what determines market failure. SNIB was set up when we were in the EU, when there was a clear set of rules in that regard. The bill has now passed its third reading in the House of Commons, but we have no certainty whatsoever on the rules relating to market failure. We heard in last week’s evidence that that could impact and limit our net zero ambitions. Do you have any specific concerns about SNIB, given its importance to Scotland’s economic development?

Yes, I echo what you have just said. The underlying point is that there is a lack of clarity and a lack of available guidance. My understanding is that the bank has raised those points. Much of the bank’s work involves lending at commercial rates in a commercial environment, but in a scenario of market failure or a similar scenario in which the bank felt that there was a need to lend money, given its mission, it would require clarity on what was and was not allowed. The lack of clarity in the guidance raises a concern about what may or may not be possible.

Given that the bill has been through its third reading, the suggestion is that it will be left to officials in the Department for Business, Energy and Industrial Strategy to further define the rules. We have our own constitutional consideration in the Scottish Parliament, but I suggest that, regardless of where you sit, having an unelected official in BEIS making the decisions, without reference to the House of Commons or to the Scottish Parliament and the Scottish ministers, is not entirely desirable from a democratic perspective. What is your view on that?

That is absolutely right and applies across a range of issues, and it goes back to the points that I made earlier. The bank will have to decide whether things may or may not be done under the subsidy control regime, and if the guidance is not clear, at the first level, that might stop the bank doing things that it might otherwise have done, because of those concerns. As you said, decisions on devolved issues would be made at the UK level, but devolved institutions should be making the decisions based on the specific economic environment in Scotland.

At all levels, it would be preferable and desirable, from a democratic point of view and from an economic and practical point of view, for Scotland to make such decisions and for the Scottish ministers to have powers equivalent to those of the secretary of state.

I will ask a final wee question. Have you had any discussions about the potential cooling effect on much-needed investment in the light of post-Covid recovery? Surely any Government would want to encourage investment. It would surprise me if it did not. I say “cooling effect” because we have been told that the rules not being clear could lead to legal battles, which are obviously expensive, so the likes of local councils would probably not want to take the risk. Have you had any discussions about that? Have you made that point clear? Is it understood?

We have made that point repeatedly at every opportunity, as I said earlier. There have already been situations relating to support for investment in which there has not been the clarity that there has been previously. The view of lawyers is to be safe rather than to move things forward, so we have had to have discussions in that context, which is concerning because it leads to delays in the processes. As you said, it has a chilling effect and slows things up. In some cases, it might prevent things from happening that otherwise would have happened, because we do not have clarity in advance on what is and is not permissible. Taking a safety-first approach could lead to advice being given that we should not go ahead with something, which is a concern.

As I said, that issue and many others, including the issue relating to the bank, have been raised repeatedly with the UK Government at official level and at ministerial level.

Good morning, minister. I want to cover agriculture. In its submission on the Subsidy Control Bill, NFU Scotland has said:

“It is critical that devolved governments can continue to develop agricultural policies that suit the unique domestic needs and policy ambitions that are essential for rural businesses and the communities and the economies they underpin. The inclusion of agriculture in the Subsidy Control Bill could severely constrain this.

Safeguards are already in place to secure the integrity of the UK internal market through existing international commitments (WTO Agreement on Agriculture) and the UK controls”.

It also says:

“Agricultural policy is devolved and must not be re-nationalised via the back door by UK-wide subsidy control measures.”

Given that even the agricultural leadership of NFU Scotland is saying that, in terms of your discussions, why is the UK Government including agriculture when it is not normally put together with other subsidies and subsidy control measures? Why is that happening?

That is a good question and we have raised it. The cabinet secretary, Mairi Gougeon, had extensive discussions with Paul Scully on this last week. The position that you outlined is correct. Agriculture is normally excluded from subsidy control regimes. It has separate treatment by the World Trade Organization and the EU, through a separate process.

Secondly, agriculture is fully devolved. It is a prime example of an area where we are seeing encroachment of UK Government powers into devolved areas.

Thirdly, of course, Scotland has specific circumstances. That goes back to the point that was made earlier about the fact that the characteristics of the sector in Scotland are different to those in much of the rest of the UK, which means that the ability to have different regimes for subsidies in agriculture within Scotland in practical terms may well evolve over time. Clearly, given that it is a devolved area, we want Scottish ministers and the Scottish Parliament to be able to make decisions on the most appropriate subsidy. Control regimes in wider WTO and trade agreement limitations help us to do that and not to be running the risk of falling foul of concerns raised south of the border about what we are doing. I believe that the Welsh Government is aligned with our position on that.

Can you make clear that the Scottish Government is in support of subsidy control measures but that they have to be the right ones for Scotland? The Subsidy Control Bill is a consequence of Brexit, but even those in favour of Brexit wanted to see economic growth. As we have heard, risk aversion is implicit in the practical measures of this legislation. If the UK Government could deal with the constitutional aspects and the asymmetry of this, everybody could focus on trying to get the bill right in terms of its measures.

If we forge ahead on net zero with a combination of contributions from the private and public sectors, there is a real danger for one of the biggest areas for economic growth, not just for Scotland but for the rest of the UK. Those practical measures, if they are not addressed—whatever your views on Brexit—will end up having a negative drag on what should be an economic growth opportunity. What are your comments on that?

You are absolutely correct, and you are right to raise the importance of a net zero Scotland. We have seen the developments with ScotWind this week, and there are many examples of Scotland’s globally leading position in many of the technologies and opportunities in relation to the just transition to net zero. We need to be in a position where we have the ability to provide support as we see fit within a set of rules that is transparent, clear and predictable. All of that is important.

If you are asking me whether there is a risk that, as a consequence of where we are at the moment with this bill, we will find it difficult, more time-consuming or impossible to do things that we would otherwise do, I would say that that is absolutely the case. There have already been examples where support has been delayed and we have had to deal with a more complicated process internally as a consequence of a lack of clarity on the guidance and where that takes us.

In answer to your earlier point, of course we agree that there should be subsidy control or state aid regimes in place. It is essential from a good governance point of view and from a global trade point of view that we have those rules at the global level, a bilateral level and EU level. We absolutely recognise the need for that because it works in both directions. It gives certainty to Scottish exporters as well as giving certainty to the steps that the Government and others take within Scotland. The key point is that there needs to be clarity and a process that allows those decisions to be clear in advance and allows for clear guidance about what can and cannot be done.

Good morning, minister. I want to explore the impact on economic development a little more. We know that the economic development landscape in Scotland is different to that in the rest of the UK and we have heard in the evidence we have already gathered that this new regime has the potential to create greater uncertainty, higher costs and more risk aversion, and that there is a particular issue around the incentive for more community-based support and community-focused schemes. Can you outline some of the impacts that you have identified in this area? If we can mitigate them through discussions with the UK Government, that is fine, but if we cannot, what options are open for us to ensure that we do not suffer those negative consequences?

Yes, that is a concern and I know you have taken evidence that has covered some of these issues already from COSLA and others, who will be closer to some of the practicalities of this. From a Government and Government agency point of view, we are in a position where we can access legal advice and we can take a view on things. We are typically talking about larger sums of money, bigger investments and so on. It makes the process more complicated, more difficult, more challenging and more uncertain, and, for smaller organisations that are dealing with the issues and trying to support economic development locally, those challenges are multiplied. It is too early to see examples of the impacts that you mention, but I have concerns the situation that you outline may well be the case.

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On the second part of your question, which concerned what we can do about it, clearly, we will continue to challenge the UK Government on these issues, but we are open to having conversations about the specific organisations that may find themselves in that situation and how we could work with them to help them navigate the uncertainties that exist as part of this process.

One of our concerns, as Fiona Hyslop has already mentioned, is the asymmetry of power as it applies to the balance between communities at a very local, if not regional, level. I appreciate what you say. It may be too early to identify examples of issues arising, but are you or your officials looking at a specific area of work to ensure that we do not lose very specific community-focused development opportunities that may not apply or relate to some of the broader principles and broader examples that would be done on a bigger geographical level?

Yes, we are very conscious of that. I know that the Cabinet Secretary for Finance and the Economy was with you earlier and that you spoke about the guidance and so on. Those issues are very much to the fore in terms of how we support local economic development. It is a priority for the Government and for me.

The issue will be the chilling effect. Risk aversion is part of the issue. We need to be open and clear with those in Scotland who may find themselves in that position. They may look at something and think that it is too difficult and that they do not want to take those risks.

For us to understand examples of that, it is important that they are brought to our attention. We are open to having those conversations and to looking for examples with local authorities and others of where that may be a risk so that we are aware of it and are able to work with those who might be affected and can help them navigate the process as necessary.

As the minister may know, I am a substitute member of the committee, so I may not be quite as up to speed as some of my colleagues on this subject. I noted your fifth point in your introductory comments, which was about lack of detail and I want to focus on that. I saw in last week’s evidence that Professor Steve Fothergill talked about how the lack of detail in the bill is worrying, so I want to explore that a little bit more. There was also the argument that EU legislation in the past and state aid was all very much a tick-box process and was very black and white, but the new approach is meant to be more principles-based. What is your view on that?

I looked at some of the evidence from last week and that is absolutely the case. There has been a shift from a much more rules-based process to one that is more open. The principles are laid down, but the most important part is how different people and organisations interpret them. The risk of organisations not taking steps that they properly should in terms of economic development and other opportunities is a concern.

I will hand over to Hilary Pearce in a minute to give a bit more detail on the conversations that our officials have had with the UK Government about guidelines and some of the specific gaps there. Suffice it to say that, although there have been a lot of conversations with the UK Government at ministerial and official levels, the reality is that the UK Government has been slow to come forward with the details of what the guidelines look like underneath the very broad-brush principles. That matters because organisations need to understand where the lines are, what is allowed and what is not allowed in various scenarios, which may not be obvious from the broad-brush principles.

Scottish Government officials in my team and in agriculture have had fairly regular engagement with BEIS and Department for Environment, Food and Rural Affairs officials on the details of the bill and the guidance and subordinate legislation around it, but that has tended to be in the form of briefings by UK departments to us. There has been little of the joint working that we would have wanted or expected. We have a meeting set up for next week to talk about the definition of subsidies of particular interest and points that the devolved Administrations want to make around that, but it is late in the course of the bill to look at that level of detail. That is fairly concerning.

Thanks for those helpful responses. Scottish Enterprise and others mentioned the specific phrase, “streamlined subsidy schemes”, which seemed to be an area that they were looking for a lot more guidance on. I take the point that there has not been an awful lot of discussion up until now. Do we expect the UK Government to consult on all of those guidelines and secondary legislation or do we not know?

It has had consultations at a general level but I am not aware if it will do consultation on the guidelines—Hilary Pearce might know that. You are right to say that we are waiting to see what it will come forward with. The streamlined area is an example of one where the secretary of state has powers that the devolved ministers do not have. That is concerning because, if there was any debate about what the streamlined powers allow or do not allow or how they operate and when they would operate, the decision would be up to the secretary of state and, even if the issue involved a devolved matter in Scotland, we would not have any ability to act in the same way.

On streamlined areas, the UK Government has just started to consult the devolved Administrations on our thoughts about that, but that has only just started happening, and, again, it is very late in the day. The difficulty is that we cannot be clear about the impact of the bill as a whole in all sorts of areas because we are so far behind in knowing what the guidance will look like. It is difficult to judge.

That is helpful. To tidy up with a final point, does the Scottish Government want to have the decision-making power in streamlined subsidy schemes or would it just want to have input into the wider scheme?

Our ask is that devolved ministers would have equivalent powers to the secretary of state in that regard.

During the bill’s passage in the UK Parliament, particularly at committee stage, Labour has highlighted the key issue of the lack of a preferential system for support to disadvantaged regions. How should targeting areas of economic deprivation be reflected in the bill?

It is possible to identify more disadvantaged areas, outline what those disadvantages are and have scope to deploy support in a different way to those areas. Such a process has been in place previously through EU processes; it has different categorisations of regions.

As I have said, from a regional economic development point of view, we are focused on supporting all regions and communities in Scotland to maximise their potential. That might require support to encourage investment or other activity. We want to be able to take those steps in a different way, depending on the specific needs of different parts of the country. It is important that we have that ability and that there is clarity around that, but there is no provision for that in the bill. It is interesting how that works against the UK Government’s stated aim of levelling up. That is another area in which there is a lack of clarity as to exactly how the measures will operate.

On the issue of levelling up, we took evidence from Professor Fothergill last week. He highlighted that very point and questioned how you could have a levelling-up strategy without an assisted-areas map. That is not specified in the bill. Does the Scottish Government share the view that provision for an assisted-areas map be specified in the bill? COSLA has suggested a new clause 7 in the bill to define an assisted area. As you said, that concept existed in EU state aid.

We must have clarity. As has been said, there are questions about exactly how things will operate and there are concerns about the lack of guidance. There are also concerns that decisions would go to, and fall under the powers of, the secretary of state. Decisions will be taken at the UK level without regard to what is happening in Scotland or in other devolved Administrations.

On whether there should be more detail in the bill, and certainly in the guidelines, on there being different scope to act in different parts of the country, we support that call.

At last week’s session, I asked Professor Bell and George Peretz about transparency. I highlighted Prestwick Airport Ltd, GFG Alliance and Ferguson Marine as examples in which large amounts of taxpayer money has been used to support businesses and there have been, in some cases, concerns about the transparency of those deals and the lack of ability to scrutinise them for a number of reasons. Will the bill improve transparency on the use of public money? Do you have any concerns in that regard?

We have made representations that there should be a review of the timelines in the bill. I mentioned in my opening remarks that interested parties do not have long enough to appeal. We think that the one-month period in which to give notice of an appeal could be extended to allow those parties to raise any issues. In terms of transparency, that has been our commentary on the bill.

Will the bill improve transparency and the ability to scrutinise deals, or will it not have an impact? I am thinking in particular about the GFG Alliance case.

Transparency will depend on how good the database is. Awards will be logged on to the database and the information will be available for people to access and look at. However, much will depend on how effectively the database operates—I know that there have been teething problems with the database that has been used for the subsidy control regime. Providing that the database works as it should, that information will be available for people to interrogate.

Thank you for that. There also seems to be concern or confusion over what might be considered to be a subsidy and what might be considered to be a straightforward loan. Government loans and guarantees have been used, but there are also straightforward subsidies. Are you confident that the definition, either in the bill or generally, is clear enough?

That is one of the areas in bill in which it is important to have guidelines. We have talked about the Scottish National Investment Bank. Much of what it would do would fit in that space. More detail and clarity in the guidelines as to how that aspect will be looked upon in the regime would be helpful.

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Minister, I want to ask you about the power to refer to the Competition and Markets Authority. In last week’s evidence, one witness said:

“it must be possible for the devolved Administrations to have recourse if they feel that activities in England are undermining their competitiveness or their own markets.”

Another witness said:

“Amendments to that effect were tabled in the House of Commons ... The amendments were voted down.”—[Official Report, Economy and Fair Work Committee, 12 January 2022; c 33, 31.]

Given that the Scottish Government has responsibility for economic development, will having to go to the secretary of state to make such a referral undermine the devolution settlement?

Yes, it would. One power in a list of powers that the secretary of state will have under the bill is that he or she will be able to operate in devolved areas and on devolved matters. We rightly believe, as do the other devolved Administrations, that equivalent powers should be available to devolved Administrations to do exactly as you have said and to address issues. For example, if we saw a potential distortion, we should be able to refer the matter to the CMA and go through the process in the same way as the secretary of state can.

Given that we have tried to amend the bill, where does that leave us in moving forward on that issue?

We continue to push for amendments to the bill in the later stages. At the end of the day, it is a UK bill and the UK Government will take it through Westminster as it sees fit.

We will continue to make the case, argue for those amendments and work with others of a similar view to make changes where we can. However, as I said, the bill will progress through Westminster based on what the UK Government decides it wants to include. It is of concern that the amendments have not been taken on board, which is one reason why we are not recommending that consent be given to the bill.

On another similar issue, the CMA has a subsidy advice unit. The House of Commons heard from the Institute for Government, which said that the unit

“should have a membership and input reflecting its four-nation role in the UK and ... it is appropriate that there be better devolved representation.” —[Official Report, House of Commons, Subsidy Control Bill Public Bill Committee, 26 October 2021; c 32.]

Given where we are with the bill, is there any scope for that still to happen?

To be honest, I am not fully up to speed on where we are with the membership of the unit. Hilary Pearce may have more up-to-date information.

From our point of view, we want proper regard to be given to the specific concerns of and issues in the devolved Administrations in relation to the membership of the unit. To do their jobs properly, it is essential for the unit’s members to understand the various ways in which things are done differently in the devolved parts of the UK.

Hilary, are you aware of the situation with membership of the unit?

We have raised the issue with BEIS. The Competition and Markets Authority subsidy advice unit is staffed by the CMA as an independent body. We have asked if devolved Administration representation can be considered, but we have not had a response on that yet.

I will now move to Alexander Burnett.

Convener, my question has already been covered. I have no further questions, thank you.

I thank the minister for his evidence this morning. Do you have anything to add that you feel has not been covered?

No. Thank you very much for the questions. We have covered all the issues that we wanted to raise, and it is good to get the committee’s perspective on the issues.

You have expressed a desire to amend the bill before it is concluded. If the bill is concluded in its current form, even if we do not approve a legislative consent motion, is the Scottish Government starting to plan how it will try to work with that piece of legislation?

Yes. It is already the case that we work within the interim regulations that are in place. As I said earlier, there have been examples already where we have had to make decisions on whether we feel support is within or outwith the rules, vague as they are. We will do our best to work within the legislation, but that might be more challenging, complex and difficult than it need be.

Thank you, minister. I now move the meeting into private?session.

11:20 Meeting continued in private until 11:50.