My Lords, again, I am grateful to the noble Lord, Lord Wigley, for tabling his amendments, and to all noble Lords for participating in the debate.
Clause 2, as the noble Lord, Lord Fox, said, is the cornerstone of the new subsidy control regime as it sets out the definition of a subsidy for the purposes of the Bill. The definition consists of a four-limb test, and all four limbs must be satisfied for a financial measure to be considered a subsidy. I also draw the Committee’s attention to Clauses 3 to 8, all of which are necessary to understand the definition of “subsidy”. I believe that those provisions collectively provide sufficient clarity and legal certainty to ensure that all public authorities can give subsidies with confidence. We will provide guidance on this matter as the Bill comes into force.
In response to my noble friend Lord Lamont, I believe the Bill sets out a series of overarching principles that provide a level playing field for all public authorities in the UK. The Bill is not a framework for funding; therefore, in response to my noble friend, spending decisions are of course for the Chancellor. It is a set of rules that all public authorities must follow in their decision-making when they give a subsidy or make a scheme. I do not recognise the criticism that it is too streamlined or too narrow, or that it will not be accessible to the devolved Administrations and to other public authorities outside Westminster. The streamlined subsidy schemes that we create will be beneficial but also entirely voluntary for public authorities to use. I note too that we have adopted helpful suggestions from the devolved Administrations for the illustrative Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations on the treatment of rescue and restructuring subsidies to ailing businesses, as well as in relation to the identification and selection of sectors of interest.
Amendment 2, proposed by the noble Lord, Lord Wigley, would exclude from the definition of a subsidy financial assistance offered by a public authority to all enterprises operating wholly or largely within its territory. I entirely agree with the noble Lord that it is of the utmost importance that public authorities are responsible for the financial assistance that they provide within the areas for which they are accountable, and that when a devolved Administration—or, for that matter, a local authority—design a scheme that is general to enterprises in their territory, subsidies should not be specific. Of course, those subsidies should be designed in support of the economy and community for which the public authority is responsible in order to address market failures or issues of disadvantage. I am pleased to inform the noble Lord that that is what Clause 2 provides, with particular reference to the notion of what constitutes a specific subsidy in Clause 2(1)(b) and Clause 4. I am grateful to him for raising this important point.
The requirement that is relevant to the noble Lord’s amendment is that a subsidy must be specific. In order to be specific, Clause 2(1)(c) provides that it must benefit one or more enterprises over one or more other enterprises with regard to the production of goods or the provision of services. When determining whether a subsidy benefits one or more enterprises over others, it is necessary to consider what constitutes the reference framework for that subsidy by reference to the legal basis for that subsidy, the authority giving the subsidy and how it is financed, in order to determine who is in the same legal and factual position.
Where a UK-wide power is conferred on a UK Minister, the reference framework is the whole of the UK, while a subsidy that will benefit only enterprises in a specific part of the UK—such as Wales or, indeed, London—will meet the definition of a specific subsidy. However, when an Administration covering a discrete area, such as a devolved Administration, make a subsidy under the powers conferred on them, the reference framework will be the territory of that Administration.
Therefore, in the case of Wales, for example, a disadvantaged workers’ subsidy scheme that is available equally to all enterprises in Wales will in most cases not be specific because the subsidy will not favour any enterprise in Wales over another enterprise in Wales in the absence of factors limiting the availability of the subsidy. However, a disadvantaged workers’ subsidy by the Welsh Government limited to enterprises in Newport, or which was otherwise limited in availability, would be a specific subsidy because it favoured enterprises in Newport over other enterprises in Wales. It can also be said, with reference to Clause 4(2), that the notion of the reference framework is inherent in the design of subsidies by the devolved Administrations because they can act only in pursuance of their devolved competences.
Similar provisions are made in relation to taxation in Clause 4 to ensure that, where a devolved Administration are acting autonomously in relation to a devolved tax or a variation of a national tax, there will not be a subsidy if the scheme of taxation does not contain elements that are specific to their areas of responsibility. Acting autonomously includes having the competence to set the tax and being responsible for the fiscal consequences of setting the tax at the chosen level.
I hope to persuade the noble Lord, therefore, that the discretions he wishes to maintain for subsidies that are general to enterprise in Wales—and not confined to certain enterprises in Wales—are inherent in the general principles in the Bill, which are derived from the TCA, without need for a specific amendment.
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Amendment 2A proposes adding equity investment to the examples of direct transfers of funds which may be considered a subsidy if the other conditions are met. Clause 2(2) already includes two examples of types of direct transfers of funds, which I believe illustrate clearly what is meant. A grant is a good example of a direct transfer of funds which will almost always be a subsidy, assuming it is given to an enterprise and meets the other conditions. A loan is a good example of a direct transfer of funds that may or may not be a subsidy, because it is of course possible for both commercial providers and public authorities to provide a loan at a market rate, but also possible for public authorities to provide a loan on favourable terms to subsidise the borrowing enterprise.
An equity investment is clearly a direct transfer of funds under Clause 2(2)(a) if it comes from the resources of a public authority, and it is not necessary to specify it. Governments may choose to make equity investments in companies on commercial terms, in which case there is no economic advantage conferred, or they may do so on favourable terms that meet the other
limbs of the definition set out in Clause 2(1), in which case it will be a subsidy. A conversion of loan to equity, as the noble Lord, Lord Fox, raises, would not be a loophole here. In response to his further questions on customer preference, in relation to the letter written to his noble friend by my noble friend Lord Callanan, I will write with further details.
I am happy to commit to ensure that our guidance is absolutely clear on the point that equity investment may be considered a subsidy. I note that the current guidance on our international subsidy control commitments addresses this. It suggests that a public authority making a financial contribution in the form of an equity investment will need to ask itself if the terms of that investment are more favourable than the recipient could have received from a commercial investor. However, I do not believe the Bill is served by listing every possible type of subsidy; indeed, attempting an exhaustive list could be counterproductive, implying that measures not listed would not be considered subsidies. The examples given in the Bill provide, in my view, helpful illustration of the concepts involved, which clearly apply also to equity investments.
Amendment 3, also proposed by the noble Lord, Lord Wigley, would appear to carve out financial assistance to public bodies with responsibility for the provision of public services. To that effect, I would argue that the amendment is unnecessary. The second and third limbs of the definition of a subsidy set out in Clause 2 establish that a subsidy must confer an advantage on one or more enterprises, and that it must be specific—that is to say, it benefits one or more enterprises over others. In the majority of cases, therefore, a subsidy will be given from a public authority to an enterprise, rather than to a public body. Ordinary public funding, such as that provided to a government department or local authority that is used to procure or directly provide a public service is not a subsidy.
An enterprise is further defined in Clause 7 as a person or group of persons
“engaged in an economic activity that entails offering goods or services on a market”.
If the activity is carried out for a purpose that is not economic, it does not meet that test. It is possible for an entity to be considered an enterprise for some of its activities and not others. It is therefore hypothetically possible that financial assistance given to a public body might be classed as a subsidy because the public body in fact meets the definition of an enterprise in respect of the particular economic activity being subsidised. I cannot comment on a specific case but can envisage a public body, perhaps with charitable status, that both provides a publicly funded public service and has a commercial arm. If the commercial arm received specific financial assistance, that could be considered a subsidy, while funding for the public service it provides would be something separate. In those specific circumstances, it is appropriate that the subsidy control requirements would apply. It is right that the test applies to the activity being subsidised, rather than providing a loophole based on the characteristics of the recipient.
I also take the opportunity to explain that the Bill sets out specific rules to facilitate the provision of public services where they are indeed delivered by
enterprises operating for economic purposes. That could include, for example, rural bus services or social housing. These services are known as services of public economic interest, or SPEIs. Such public services are important to deliver but would not otherwise be delivered by enterprises at the necessary level without subsidisation. Clause 38 sets out an exemption for SPEIs from the subsidy control requirements for up to £725,000 over three years, which is higher than the £315,000 minimal financial assistance exemption for general subsidies. Clause 29 sets out specific provisions for higher-value SPEIs, which ensure that those subsidies can be given in a way that protects UK markets and allows essential public services to be provided.
I believe that it is an important principle for our subsidy control regime that a public authority may not simply write a blank cheque to an enterprise, even where the goal is the provision of public services on which its constituents are dependent. This would be inconsistent with the aims of the domestic subsidy control regime and could also cause the United Kingdom to contravene its international obligations.
Finally, I apologise to noble Lords for the perceived lateness of the publication of the illustrative products last week; it was perhaps later than ideal. I welcome further engagement and comment from noble Lords on these before the versions are made in due course. For these reasons, I humbly request that the noble Lords do not press these amendments.