State Aid (Revocations and Amendments) (EU Exit) Regulations 2020

Motion to Approve

That the draft Regulations laid before the House on 29 October be approved.

My Lords, these draft regulations are made under the powers in the European Union (Withdrawal) Act 2018 as amended by the European Union (Withdrawal Agreement) Act 2020, which I will refer to as the withdrawal Act. The purpose of these regulations is to remove redundant EU state aid law from the domestic statute book after the end of the transition period. This is both appropriate and necessary to provide legal certainty for UK businesses and public authorities that EU state aid rules no longer apply in the UK, except where they apply directly under the Northern Ireland protocol.

I begin by explaining the European Union’s approach to subsidy control, which is known as state aid. State aid is support in any form, from any level of government, which gives a business or other entity an advantage that could not be obtained in the normal course of business. If this advantage has the potential to distort competition within the internal market and affect trade between EU member states, then state aid is present and the rules for state aid are triggered. The state aid rules were devised by the European Union to ensure that EU member states operate in a way compatible with the internal market, and the rules are of course very much a European Union concept. They derive from Articles 107 to 109 of the Treaty on the Functioning of the European Union, which, together with the EU regulations and decisions made under that treaty, control how and when member states can grant aid. Responsibility for enforcing the rules sits with the European Commission. However, having left the European Union and the single market, the UK will no longer be bound by EU state aid rules after the end of the transition period.

If changes to domestic law are not made in time for the end of the transition period, EU state aid law would become part of UK law, as retained EU law through the withdrawal Act, but the law would then contain some fundamental deficiencies. These deficiencies would make this retained EU law on state aid inoperable in the United Kingdom. Revoking the EU law on state aid will make it clear to businesses, courts and public authorities that state aid rules will no longer apply in the UK, except, as I said, where they apply directly under the Northern Ireland protocol. Instead, the UK has announced that we will have our own subsidy arrangements to support a competitive, dynamic market economy.

From 1 January, the Government will follow World Trade Organization rules on subsidies and other international commitments agreed in free trade agreements, and we will consult on whether to go further, including whether to legislate on this matter. We will, of course, work closely with businesses and public authorities across all parts of the United Kingdom to consider how best to design an approach to subsidy control that works for the United Kingdom economy.

In terms of the technical detail, this statutory instrument disapplies and revokes retained EU state aid rules that are preserved by Sections 3 and 4 of the withdrawal Act. As I mentioned earlier, Articles 107 to 109 of the Treaty on the Functioning of the European Union, together with the EU regulations and decisions made under that treaty, govern the state aid regime. Article 107(1), for example, defines state aid and sets out the general prohibition on giving aid. That prohibition operates by providing that aid is incompatible with the EU internal market in so far as it affects trade between member states, unless the aid has been approved by the European Commission.

Moved by

At end insert “but that this House regrets that the Regulations replace retained European Union State Aid rules with a yet to be defined new subsidy regime, and calls on Her Majesty’s Government to delay implementation of the regulations until (1) they have consulted widely on their proposals, (2) they have sought the agreement of the devolved administrations, and (3) the primary legislation detailing how the United Kingdom’s new subsidy regime will operate after the end of the transition period has received Royal Assent.”

My Lords, I thank the Minister for his introduction of the statutory instrument. My amendment calls on the Government to delay implementation of these regulations until they have consulted widely on their proposals; in particular, until they have consulted and sought the agreement of the devolved Administrations and the primary legislation detailing how the UK’s new subsidy regime will operate after the end of the transition period has received Royal Assent. I will listen very carefully to comments made during the debate, particularly to the response of the Minister, but I give notice that I intend to divide the House on this issue.

This amendment stems from three primary sources. First is the 30th report of the Secondary Legislation Scrutiny Committee, which, inter alia, said:

“The disapplication of EU State aid rules appears to be a reversal of the previous Government’s policy position, which sought a continuity approach in the case of a ‘no deal’ scenario”,

and that:

“This approach raises the question whether it would have been more appropriate to take forward such a policy change through primary rather than secondary legislation, enabling Parliament to scrutinise the new approach more fully”.

The second is an amendment in the name of the noble and learned Lord, Lord Thomas of Cwmgiedd, supported by a vote on Report deleting Clause 44 of the internal market Bill, which he said purported

“to make state aid a reserved matter by the device of expanding or extending the competition policy reservation.”—[Official Report, 25/11/20; col. 317.]

The third is the fact that the rollover continuity free trade deal with Japan, discussed in your Lordships’ House last week, replicates the restrictions on subsidies being repealed by this very SI. If we are still honouring international treaties, this will need to be legislated for, so why is this SI being progressed today?

My Lords, I thank my noble friend for his presentation and explanation of these regulations. I recognise the difficult position the Government are in this year as a result of the pandemic’s impact on preparing the UK’s rules after the end of 2021. However, as I explained during the passage of the internal market Bill, I have significant concerns about the Government’s adherence to issues such as the Northern Ireland protocol and the delicate balance of power within all four devolved Administrations of our United Kingdom.

On the measures we are debating today, I have significant sympathy with all the points made by the noble Lord, Lord Stevenson of Balmacara. I too regret that these measures are being proceeded with. The Welsh Government, for example, have particularly expressed concerns that these regulations will amend UK legislation in devolved areas which hitherto were supposed to require consent under the intergovernmental agreement, especially issues that relate to the water industry and other areas. The Welsh Government have stated their concerns about removing current state aid rules without putting any alternative subsidy regime in place.

Concerns about these measures were reinforced by the House of Lords Secondary Legislation Scrutiny Committee saying that this

“is neither a welcome nor … acceptable use of secondary legislation”

and that it should rather be done with full parliamentary scrutiny in primary legislation. Following the concerns expressed by the Welsh and Scottish Administrations, can my noble friend say how the proposed shared prosperity fund will interact with any new state aid regime? When will the details of the future proposals for this regime be produced? What consultation will happen?

Finally, I repeat my concerns at the Government’s proposal to break the terms of the Northern Ireland protocol. Article 10(1) of the protocol requires the UK to follow EU state aid rules rather than the WTO rules, which are more like a free-for-all. I know that we have dealt with a number of these issues in the United Kingdom Internal Market Bill and that a number of these concerns have been addressed by various amendments made by your Lordships’ House. However, I ask my noble friend, in the light of the ongoing free trade negotiations that have been, and continue to be, under way with other nations, and in the light of the concerns expressed by the devolved Administrations and the House of Lords Secondary Legislation Scrutiny Committee, whether the Government might consider it appropriate to delay the introduction of these measures in order to offer time either to agree a deal or to have the necessary consultations and consents from the other areas of the United Kingdom.

My Lords, I am grateful to the Minister for his explanation of these regulations and their effect in revoking retained EU state aid rules so that they are not part of domestic law for part of the United Kingdom. However, nothing in these regulations affects the continued application of EU state aid provisions, as provided for in Article 10 and Annex 5 of the Northern Ireland protocol, after 31 December 2020. The Minister, when he was introducing the regulations, somewhat skirted over that issue. This has significant and far-reaching implications for businesses and consumers in Northern Ireland. I know that time was short, but it was very much an afterthought and will have significant effects on business in Northern Ireland.

Great Britain will have its own domestic subsidy control regime that follows WTO rules and other international commitments agreed under free trade agreements. It would be good to have some idea of what the Great Britain regime is going to be. We in Northern Ireland need to see the detail. Some flexibilities have been promised, given that we are going to have this hybrid situation in the United Kingdom. I would be grateful if the Minister could indicate when we are going to see the Great Britain rules for the subsidy control regime.

In his reply, will the Minister spell out which areas will be covered in Northern Ireland by the EU state aid regime? He mentioned goods and electricity. Services, as I understand it, will not be covered. However, that can lead to a problem when it comes to which businesses will be subject to which regime in Northern Ireland. We know about manufacturing, but a lot of the value is in services. Will businesses in Northern Ireland be under the EU regime, the Great Britain regime or what? That needs to be clarified as a matter of urgency. We are almost four weeks away from these matters having to be settled and it is important that they are settled and clarified very quickly.

My Lords, it will not surprise the House to hear that I strongly support these regulations and do not support the amendment tabled by the noble Lord, Lord Stevenson of Balmacara. I particularly welcome any statutory instrument that removes EU-derived law from our statute book. It may take a long time to remove it all, and it is clearly not a top priority, but when excellent opportunities such as this arise, we should grasp them.

The amendment in the name of the noble Lord, Lord Stevenson, mirrors the concerns expressed by the Secondary Legislation Scrutiny Committee of your Lordships’ House in relation to not using primary legislation to introduce a new state aid regime. We are not being asked to approve a replacement state aid regime. We are being asked to approve this statutory instrument, which should be judged on its own merits and not in relation to the legislative process that may or may not be followed for any replacement state aid regime. The merits of these regulations are clear. They will remove from our statute book the state aid rules that apply to those within the single market. We will no longer be in the single market at the end of this year, except to the extent required by the Northern Ireland protocol. That should be the end of the story.

I have to say to my noble friend Lady Altmann that I do not understand the concerns expressed by the Welsh Government that she relayed. The legislation is redundant and keeping it would be confusing.

The question of what kind of state aid rules we need for the UK’s own internal market is an entirely separate issue and should have no bearing on this order. As noble Lords are aware, the Government have committed to consulting on their plans for a scheme of subsidy control for the UK’s internal market. I am sure that this will include consultation with the devolved Administrations, and so we do not need this amendment to bring that about.

My Lords, it is always a pleasure to follow the noble Baroness, Lady Noakes, who is such a strong and loyal Member of the Benches opposite. I particularly liked her reference to the “wrecking ball” that we took to the internal market Bill, because, obviously, we were in fact helping the Government not to break the law. I think that is part of what we should be doing in your Lordships’ House. I know that when I follow her, all I have to do is go in the opposite direction and I will be absolutely fine.

The Minister was very soothing in his description of what this statutory instrument does, but I had some fears about it being done through secondary, and not primary, legislation, which were reinforced by the comments of the noble Lord, Lord Stevenson. It seems that, rather than the usual EU exit tweaks that most statutory instruments do, this is actually repealing the whole body of EU state aid laws—all the rules—except for Northern Ireland, under the Northern Ireland protocol, leaving us only with WTO rules and anything that is agreed with other countries in our future trade deals. Somehow it seems quite a lot within a very simple mechanism that, I feel, is not perhaps appropriate for it. It does feel like too big a change to be a legitimate use of the statutory instrument powers in the EU withdrawal Act and goes way beyond anything the Government actually said they would use these powers for.

The change should be made by primary legislation. There has been lots of time to do it; there has been time in our schedule but, because the Government have not actually decided their policy, they are just falling back on WTO rules. Also, the fact that this statutory instrument is coming so late in the day rather suggests that this is another hard-line tactic for the EU negotiations, which I think is very sad. What kind of state aid rules are the Government negotiating in their trade deals? Is that something we have access to? What kind of state aid restrictions will the UK subject itself to? Are the Government going to ensure that public authorities are aware of the state aid rules and the changes that will result from this SI?

My Lords, I thank the Minister for introducing these regulations and welcome them. They are necessary to prepare for the introduction of a UK domestic subsidy control regime. As my noble friend has made clear, the EU state aid rules, which would otherwise have been transposed into UK law, would have been inoperable under the withdrawal Act and, in any case, they would have been redundant.

The Government have made it clear that the UK will follow the WTO’s subsidy rules and will also adhere to any relevant obligations entered into under free trade agreements. Among those obligations are those entered into under the CEPA with Japan. Could the Minister explain what the difference is between the Government’s offer to the EU on state aid, which, I understand, is similar to that included in the EU-Canada free trade agreement, and what has been agreed between the UK and Japan? The Financial Times has reported that the UK-Japan agreement replicates the restrictions on subsidies in the EU-Japan deal that went into effect last year. That agreement prohibits the Governments from indefinitely guaranteeing the debts of struggling companies or providing an open-ended bailout without a clear restructuring plan in place.

Of course, as far as state aid is concerned, the EU should put its own house in order. Accusations of dumping cannot easily be made against the UK. As the Prime Minister said in his inspiring Greenwich speech in February:

“France spends twice as much on state aid as the UK, and Germany three times as much … In fact, the EU has enforced state aid rules against the UK only four times in the last 21 years, compared with 29 enforcement actions against France, 45 against Italy—and 67 against Germany.”

But as my noble friend Lady Noakes pointed out with her usual forensic acumen, today’s debate is about our domestic state aid rules. In that regard, I do not support the amendment to the Motion in the name of the noble Lord, Lord Stevenson of Balmacara.

The noble Lord, Lord Mann, and the noble Baroness, Lady McIntosh of Pickering, have withdrawn from this debate, so I call the noble Lord, Lord Liddle.