March 2021 SUBSIDY CONTROL CONSULTATION RESPONSE FROM THE RAILWAY INDUSTRY ASSOCIATION (RIA)
1. INTRODUCTION 1.1 This submission constitutes the response from the Railway Industry Association (RIA) to the Subsidy Control: Designing a New Approach for the UK, Consultation, published by the Department for Business Energy and Industrial Strategy (BEIS).
2. BACKGROUND TO RIA 2.1 RIA is the trade association for UK-based suppliers to the UK and world-wide railways. It has some 300 companies in membership covering all aspects of rolling stock and infrastructure supply and a diverse range of products and services. As well as most of the larger, multi-national companies, 60% of RIA's membership base is comprised of SMEs. 2.2 The Oxford Economics 2018 report shows that the UK rail sector contributes annually over £36bn Gross Value Added (GVA) to the UK economy, employs some 600,000 people and generates £11bn in tax revenues. For every £1 spent on rail, £2.20 of income is generated in the wider economy, meaning rail is not just an important sector in its own right, but it is also crucial for UK plc, its economy and connectivity. 2.3 Rail has been a growing industry with the number of rail journeys expected to double in the next 25 years, along with significant growth in rail freight traffic, regardless of shocks such as the present Coronavirus crisis. The full report Oxford Economics report can be accessed here. 2.4 The Oxford Economics report also highlights the fact that the UK rail industry is a significant exporter, selling £800 million in goods and services abroad each year, whilst the European rail trade body UNIFE’s recently-released World Rail Market Study report predicts annual rail market growth of between 1 and 2.3% until 2025, when an annual volume of approximately €204bn per annum could be expected. 2.5 RIA recognises that equality, diversity, and inclusion drive innovation, financial performance and success. Together with Women in Rail, RIA is promoting an Equality, Diversity & Inclusion Charter for Rail, which has the potential to support social mobility, grow UK STEM skills, create local opportunities, and increase the talent pool from which the future leadership of the rail sector will be drawn. 2.6 RIA provides its members with extensive services, including: • Representation of the supply industry's interests to Government, Network Rail (NR), TfL, HS2, ORR and other key stakeholders; • Providing opportunities for dialogue and networking between members, including several Special and Technical Interest Groups; • Supply chain improvement initiatives; • Provision of technical, commercial and political information every week; • Export promotional activity, through briefings, rail trade missions overseas, hosting inwards visits; and • Organising UK presence at rail exhibitions overseas on Great branded UK Pavilions. 1 / 13
3. SUMMARY OF KEY PRIORITIES FOR SUBSIDY CONTROL •
Overall subsidy control reforms: RIA welcomes this review, the Government commitment to a competitive market economy in which rail businesses can trade, and the development of a risk-based and proportionate regime. We recommend that the future UK subsidy control regime should continue to respect the unique position of rail and further seek to ensure appropriate levels of funding for rail research and development
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Leadership on free trade: We recommend that the UK should use its influence in the World Trade Organisation, and other trade bodies and negotiations to remove harmful and distortive subsidies and protections such as disproportionate use of ‘buy local’ rules, such as Buy America.
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Innovation: RIA recommends the development of an ambitious Government innovation strategy for rail and for construction, to support the new Government ‘Plan for Growth’; and we note that innovations developed and procured in the UK, by UK public bodies, can support global exports. We further note, in particular, France’s use of an Innovation Partnership Procedure, to enable the development of the next generation of high-speed trains and signalling. We recommend the removal of the ‘undertakings in difficulty’ definition.
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Economic regulation and private investment: RIA supports an independent body having a role and recommends also retaining a role for sector regulators with specialist expertise. In the context of Government proposals for Infrastructure and Green Banks we would support the development of co-funding models for rail. The development of both these subsidy control proposals, and the Williams Rail Review, should seek to support this. We note that the Channel Tunnel was built on a Build Own Operate Transfer Model with a 65year operating concession and that other regulated sectors such as water and airspace (NATS) have benefitted from effective use of Government underwriting and public private partnership models.
4. CONTEXT 4.1 The UK Government is consulting on proposals for a new subsidy control regime – reflecting the UK’s Exit from the EU (replacing the EU state aid regime). Proposals include: i) confirmation of new principles, to inform decision making; and ii) objectives aligned with World Trade Organisation (WTO) Rules, and reflecting the UK Government’s strategic priorities, including levelling up, zero carbon, the need to maintain a competitive, dynamic market economy, and a level playing field in the UK internal market. Under the WTO, subsidy control rules apply only to trade in goods, although some Free Trade Agreements – such as the one between the UK and Japan – also apply to trade in services, where proposals include transparency and notification requirements, and de-minimis thresholds. 4.2 Typical examples of subsidy include funding to support Research & Development (R&D), innovation and zero carbon goals, and regional funding for transport for residents in remote and socially deprived areas. Subsidies to ailing firms without a credible restructuring plan, and the use of unlimited guarantees, are prohibited. The Government also proposes to set up a new independent body to oversee the regime – although the powers of this body are not expected to go as far as those of EU competition authorities. “In limited circumstances” the domestic courts may have power to recover subsidies that have been granted improperly. 2 / 13
RIA understands that implementation of these proposals will require primary legislation. In the meantime, the UK regime is set by the principles in the UK EU Trade & Cooperation Agreement (TCA) and the WTO. 4.3 RIA’s submission is as follows.
5. INTRODUCTION – SUBSIDY CONTROL AND RAIL 5.1 RIA welcomes this consultation and we support the Government’s commitment to a competitive market economy in which rail businesses can trade. 5.2 We welcome the opportunity to inform the Government’s commitment to ensure subsidies are only used appropriately, to support strategic objectives and to avoid inappropriate market distortion. 5.3 We further welcome the Government’s commitment to spending 2.4 % of GDP on R&D by 2027, and its proposals for an Advanced Research & Invention Agency based on the US model. This is long overdue – even this commitment is below the levels of funding by countries such as Germany (3.1%), South Korea (4.5%) and the US (2.8%)1. 5.4 Rail is not a typical business sector and we note that globally rail and transport are often subject to distinct, Government-backed, funding regimes, recognising the valuable public service role that mass public transport plays. This is not surprising, as rail delivers significant social, environmental and economic benefits, including what RIA calls the ‘3 Gs’: • Growth: As mentioned in the Oxford Economics report, in Section 2.2 above, rail projects generate significant investment – for every £1 spent on the rail network, £2.20 is generated in the wider economy; • Geography: Rail projects support investment in all regions and nations of the UK, including areas of social deprivation where investment and regeneration is urgently needed – supporting local jobs, productivity and the Government’s ‘levelling up’ agenda; and • Green: Rail is a green mode of transport, and investing in rail will ensure the economic recovery is also an environmentally beneficial one. Rail is the only mode with a ready solution to zero carbon, long distance, heavy freight and has a major role to play in modal shift. 5.5 Nevertheless, since privatisation of UK rail in 1992, until 2019, the last year before the Coronavirus pandemic, the share of rail funding provided by consumers and the private sector grew year on year compared to public funding. By 2019 private investment reached near record levels of £1.1bn and the income from passenger revenue had increased to £10.3bn2. Together this meant that operational expenditure on passenger services (as opposed to infrastructure Operational, Maintenance, Renewals and Enhancement expenditure) was largely covered by non-public funding following a number of years where the Train Operating Companies had returned premiums to the Department for Transport. 5.6 Since privatisation rail freight expenditure has been fully covered by freight customers – other than a relatively small grant scheme reflecting the environmental, congestion and safety benefits of rail freight. Through April 2015 to March 2019, this funding helped to remove
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https://commonslibrary.parliament.uk/research-briefings/sn04223/ https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/851082/rail -factsheet-2019.pdf 2
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between 891,000 and 961,000 lorry journeys a year that would otherwise have gone by road.3 5.7 Whilst Government subsidies also reached record levels between 1992 and 2019, this was due to the increased funding and investment for major rail projects, including HS2 and Crossrail4. The Williams Rail Review evidence paper ‘Rail Sector in Numbers’ also noted that, of total costs for the existing rail system of £19.4bn, over half (£10.4bn) were met by passengers and other revenues in 2017/18.5. 5.8 This demonstrates that rail is a hybrid system, which is likely to continue to need its own bespoke funding and subsidy control systems in order to maximise the benefits of both the public and private sectors. The Williams Rail Review should therefore take account of this when designing the future governance and legal framework of the rail sector. 5.9 RIA notes that transport and construction have typically lagged in both R&D funding, and that UK public funding (transport funding in particular) of R&D is below that of other countries and sectors6. McKinsey research has consistently highlighted the productivity and innovation gap for infrastructure7. This may be partly due to this hybrid status, as Government funds core investment and services, and the need for R&D funding is underestimated. 5.10 Rail has the potential to unlock significant value for passengers and freight users, communities and the economy. RIA therefore recommends that any future UK subsidy control regime should both continue to respect the unique position of rail and further seek to ensure appropriate levels of funding for rail R&D. Future rail regimes, including reforms which come out of the Williams Rail Review, should build on the unique position of rail and seek to maximise the potential benefits of private sector investment.
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OBJECTIVES – ACHIEVING BENEFITS AND AVOIDING DISTORTION Question 1: What type of subsidies are beneficial to the UK economy? Question 2: What type of subsidies are potentially most harmful and distortive? Question 3: Do you agree with the Government’s objectives for a future subsidy control regime? Are there any other objectives that the Government should consider? Question 4: We invite respondents’ thoughts on further sources of evidence that would help to strengthen our analysis of policy impacts. In particular: • Additional datasets (other than the European Commission’s Transparency Award Module) on local or regional subsidy awards (e.g. by value, sector or category) • Research and evaluation projects that have been conducted on the impacts of different types of subsidy awards on domestic competition and trade (e.g. by value, sector or category)
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European Commission decision on Prolongation of the Mode Shift Revenue Support Scheme https://ec.europa.eu/competition/state_aid/cases1/201949/282071_2115256_126_2.pdf 4 https://dataportal.orr.gov.uk/media/1547/rail-finance-statistical-release-2018-19.pdf 5 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/787082/rail -sector-in-numbers.pdf 6 https://commonslibrary.parliament.uk/research-briefings/sn04223/, https://www.instituteforgovernment.org.uk/explainers/state-aid, and https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/researchanddevelopmentexpenditure/datas ets/scienceengineeringandtechnologystatisticsreferencetables 7 https://www.mckinsey.com/~/media/McKinsey/Industries/Capital%20Projects%20and%20Infrastructure/Our%20 Insights/The%20next%20normal%20in%20construction/The-next-normal-in-construction.pdf
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Question 5: We invite respondents' views on whether our proposed subsidy control regime, including the way it functions, may have any potential impact on people who share a protected characteristic (age, disability, gender re-assignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex (gender) or sexual orientation), in different ways from people who don’t share them. Please provide any evidence that may be useful to assist with our analysis of policy impacts. 6.1 RIA agrees that any subsidies should deliver value for the UK taxpayer and seek to address market failures. As noted above, investment in rail can unlock such value for passengers and freight customers, communities (including connectivity and skills development) and environmental benefits, including by incentivising zero carbon, air quality improvements and congestion reduction. Modal shift to rail can unlock significant benefits and public funding, and subsidy control regimes should be used to incentivise such positive benefits. 6.2 However, the subsidy regime should also support competition and private investment – subsidies should not crowd out opportunities for private investment, and where private financing and delivery will increase the available funding for rail and create better incentives for effective and efficient benefit delivery. RIA agrees that subsidies which do not provide direct public benefit or deliver to the Government’s strategic outcomes can generate inefficiencies and be harmful and distortive. 6.3 There is an opportunity for the UK to demonstrate leadership in its approach to open competition and subsidy control, and we support the Government’s strategic objectives, as outlined below: i) Facilitating interventions to deliver on the UK’s strategic interests. RIA is supportive of the Government’s view to provide subsidies where they deliver in line with the UK’s strategic interests. Public subsidy in rail delivers on important environmental, social and wider economic benefits, which are fully aligned with the UK’s strategic interests in decarbonising the economy and ‘levelling up’ the nation. ii) Maintaining a competitive market economy in which rail businesses can trade. While subsidies enable vital public services to be carried out and can facilitate important strategic investment, they must not impinge upon a competitive market economy in which rail businesses can trade. Government may wish to consider whether funding innovation through complex and relatively small innovation calls is always the best way to do this, other sector such as aviation and automotive provide larger strategic calls for industrial scale up activities for example. See also section 10 below on research and development. See also section 10 below on R&D. iii) Protecting the UK internal market. RIA agrees that subsidy control should be coordinated across the UK. However, this should not preclude subsidisation of transport services in specific localities where a public service is provided or significant public benefit is realised, such as modal shift from road to rail or regional subsidies with particular benefits for rural and socially deprived communities. iv) Acting as a responsible trade partner. For the long-term stability of the UK’s international trade relationships, it is clearly important that the UK respects its international obligations. Not only does this provide a clear domestic framework, but it incentivises good governance internationally and minimises disruption with important global trade partners. There is an opportunity for the UK to demonstrate global leadership on free trade and we welcome this and recognise that exports and inward investment can support a vibrant, innovative and competitive industry.
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6.4 Whilst there is an opportunity to demonstrate leadership in the UK’s approach to competition and subsidy control, RIA notes, however, that some countries use local procurement rules and de-minimis thresholds disproportionately, and so we recommend that the UK seeks reciprocity. For example, RIA members cite the “Buy America” provisions of the US Surface Transportation Act as effectively preventing the sale of UK manufactured goods to the US rail industry where there is any Federal funding. 6.5 We have argued that to deal with this situation, UK Government Procurement Policy should state that: “Bids for contracts where the product is not of UK origin should be required to declare that the country of manufacture would not impose trade restrictions or tariffs if UK manufacturers wished to export such products to that country.” The EU also has 51% local content rules which will now work against UK suppliers, and so we recommend that the UK should also use its influence in the WTO and other trade negotiations to remove harmful and distortive subsidies and protections. 6.6 RIA recognises that Equality, Diversity & Inclusion drive innovation, financial performance and success – hence the development and promotion of our joint RIA Women in Rail, Equality, Diversity & Inclusion Charter (EDI) for Rail, which now has over 160 signatories. RIA does not believe that the proposed subsidy control regime will have any disproportionately affect with regard to EDI. Indeed, appropriately targeted subsidies can recognise the full value of rail, and have the potential to support social mobility, grow UK STEM skills, create local opportunities, and increase the productivity of the UK.
7. SCOPE: THE DEFINITION OF A SUBSIDY Question 6: Do you agree with the four key characteristics used to describe a support measure that would be considered a subsidy? If not, why? 1. It must constitute a financial contribution provided by a ‘public authority’, including, but not limited to, central, devolved, regional or local government or any other person providing financial assistance originating from public resources. The financial contribution could be a grant, loan or loan guarantee or other form of financial assistance, such as forgoing of revenue that is otherwise due. 2. The award of the subsidy must confer a benefit on persons supplying goods or services in the course of a business, which would not be available under commercial terms. 3. The subsidy must be specific which means it benefits a particular enterprise, or enterprises in a particular sector, industry, or region. 4. It has, or could have, a harmful or distortive effect on trade or investment within the UK or internationally. Question 7: Should there be a designated list of bodies that are subject to the new subsidy control regime. If so, how could that list be constructed to ensure that it covers all financial assistance originating from public resources? Question 8: Do you think agricultural subsidies in scope of the AoA and fisheries subsidies should be subject to the proposed domestic arrangements? If so, what obligations should apply? Question 9: Do you think audio-visual subsidies should be subject to the domestic regime? Please provide a rationale for your answer. 7.1 RIA agrees with the four characteristics used to describe a subsidy. As above, RIA thinks rail should retain its bespoke regime but also have access to the new subsidy regime, where appropriate, given the public private nature of rail. We are not sure what the purpose would be of any list of designated bodies. The EU regime made effective use of block exemptions and deminimis thresholds to simplify access to aid – we recommend the UK system similarly minimises bureaucracy for low risk subsidies, in order to maximise potential benefits. 6 / 13
8. PRINCIPLES BASED APPROACH, EXEMPTIONS AND PROHIBITIONS Question 10: Do you agree with the inclusion of an additional principle focused on protecting the UK internal market by minimising the distortive effects on competition? Question 11: Do you think there should be any additional principles? Question 12: What level of guidance or information would be helpful for public authorities to assist with their compliance with the principles? Question 13: Should the threshold for the exemption for small amounts of financial assistance to a single recipient replicate the threshold in the UK-EU Trade and Cooperation Agreement at 325,000 Special Drawing Rights over a three-year period? If not, what lower threshold would you suggest and why? Question 14: If you consider the small amounts of financial assistance threshold should replicate the UK-EU Trade and Cooperation Agreement, should it be fixed at an amount of pound sterling (GBP)? Question 15: Do you agree that subsidies under the proposed small amounts of financial assistance threshold be exempt from all obligations under the domestic regime, except for the WTO prohibitions? If not, why? Question 16: Should relief for exceptional occurrences be exempted from obligations regarding principles, prohibitions and conditions in the subsidy control regime? Question 17: Should subsidies granted temporarily to address a national or global economic emergency be exempted from the rules on prohibited subsidies and any additional rules set out below? Question 18: Should the threshold for the exemptions for Services of Public Economic Interest replicate the relevant thresholds in the UK-EU Trade and Cooperation Agreement at 750,000 Special Drawing Rights over a three-year period, and for transparency obligations at 15 million Special Drawing Rights per task? If not, what lower threshold would you suggest and why? Question 19: If you consider the SPEI thresholds should replicate the UK-EU Trade and Cooperation Agreement, should they be fixed at an amount of pound sterling (GBP)? 8.1 RIA agrees with the principles proposed. Although it is important that railway passenger services receive subsidy to provide essential public services, the way in which that subsidy is currently granted does not apply as a Service of Public Economic Interest (SPEI). The SPEI rules may however apply to rail suppliers. This hybrid approach has reflected the public private partnership nature of rail, and the new regime should continue to allow subsidies for rail suppliers in appropriate circumstances. 8.2 We recommend that the exemptions for small amounts and for SPEI should be the maximum allowed under the TCA to allow the UK regime flexibility to support appropriate aid with minimum bureaucracy. Transparency, notification and oversight by an independent body and courts where appropriate will ensure appropriate use of aid, so that arbitrary lower thresholds are not required – this will help maintain a level playing field with the EU. We can see the logic for denoting thresholds in pound sterling, so long as the values remain subject to review and aligned over time. 8.3 We note that under EU rules the majority of decisions were either determined to be non aid or covered under block exemptions and agreements. We can therefore see significant value in identifying pre-set ‘low risk’ categories of subsidy, as it would enable funds to be dispensed more quickly and efficiently. This could include subsidies with clear environmental, decongestion or safety benefits. 8.4 RIA supports proposed prohibitions for subsidies which are conditional on the exporting performance of the recipient and subsidies contingent upon the use of domestic over imported goods or services in accordance with WTO rules. We have no suggestions for additional prohibitions.
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8.5 We support flexibility for crisis and emergencies – it will not be possible to anticipate all the circumstances under which a subsidy may be appropriate. As shown throughout the Coronavirus pandemic, flexibility to enable state support is invaluable to businesses in urgent need of revenues. However, any aid granted should remain subject to transparency obligations and subject to challenge if appropriate. 8.6 In summary, RIA supports the Government’s proposed principles, exemptions and prohibitions – and we recommend retaining the maximum value flexibilities allowed under the TCA. We can see the logic for denoting thresholds in pound sterling so long as the values remain aligned over time. Clear statutory guidance – including options for simplifying access to subsidies such as block exemptions – should be considered. Proposed Principles: 1. Subsidies are provided to meet a specific public policy objective to remedy an identified market failure or to address an equity concern. Public authorities will need to consider, explain and assess the policy objective behind the subsidy to ensure there is a benefit to wider society in providing the subsidy. Social equity objectives could include providing transport for residents of remote areas. 2. Subsidies are proportionate and should be the minimum size necessary to achieve the stated public policy objective. Subsidies should be the minimum necessary to achieve the desired aim. In choosing a subsidy the body granting the subsidy (“the public authority”) must adopt those causing Subsidy control - Designing a new approach for the UK 24 the least possible disruption in pursuit of the public policy objective. 3. Subsidies are designed to bring about a change in the practices of the subsidy beneficiary that would not be achieved in the absence of a subsidy and that will assist with achieving the stated public policy objective. Subsidies must incentivise and lead to a change in the behaviour of the beneficiary. They must help to address the public policy objective being pursued. 4. Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy. Subsidies should be targeted to bring about an effect that is additional to any that would occur in the absence of the subsidy. They should not normally cover everyday business expenses. 5. Subsidies are an appropriate policy instrument to achieve the stated public policy objective and that objective cannot be achieved through other less distortive means. Alternative policy levers that are likely to cause less distortion to competition should be considered before turning to subsidies. 6. Public authorities should seek to minimise any harmful or distortive effects on competition within the UK internal market that might arise from a subsidy. Public authorities should assess the material competition effects which are likely to arise from providing the subsidy. This is a domestic test to ensure that a subsidy does not unduly favour one firm to the detriment of a competitor or new entrants to the UK market, or unduly reduce competition within the UK market. 7. Subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on domestic competition and international trade or investment. Public authorities will need to assess the material effects on competition and international trade or investment and judge whether the benefits of the subsidy are greater than the harmful impacts of providing the subsidy.
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9.
DEFINITIONS – RISK BASED PROPORTIONATE REGIME Question 20: Do you agree with the Government’s approach to prohibitions and conditions? Should any types of subsidy be added to either category? If so, why? Question 21: Would more detailed definitions of any of the terms set out in this section, including the definition of “ailing or insolvent enterprises” be useful to ensure a consistent and proportionate approach to compliance? If so, what should these be? Question 22: Should the Government consider any additional ways to protect the UK internal market, over and above the inclusion of a specific principle to minimise negative impacts? If so, what? Question 23: Would an additional process for subsidies considered at high-risk of causing harmful distortion to the UK internal market add value to the proposed principles? If so, how should it be designed and what criteria should be used to determine if the subsidy is at highrisk of causing distortion? Question 24: Should public authorities be obliged to make competition impact reviews public? If not, why? Question 25: Should public authorities be permitted to override competition impact review e.g. in the case of emergencies? If so, why? Question 26: Should there be additional measures to prevent subsidies that encourage uneconomic migration of jobs between the four nations? Question 27: Could additional measures help ensure that lower risk subsidies are able to proceed with maximum legal certainty and minimum bureaucracy? What should be included within the definition of ‘low-risk’ subsidies? Question 28: What guidance or information would be helpful for public authorities to assist on lower risk subsidies? 9.1 RIA welcomes transparency requirements, including competition impact reviews. Where subsidies are high risk there should be full transparency of any decisions. We can see the case for flexibility in the event of an emergency. However, full transparency of any decisions to override a competition impact review should still apply – even if this is completed retrospectively. 9.2 Regarding transport subsidies, public authorities should be appraised of the role that subsidies can play to prevent the marginal external costs (MECs) which would otherwise fall on society. The European Commission produces a handbook on the external costs of transport8, which is used as a basis to calculate the MECs and associated Modal Shift Benefits (MSBs) of proposed transport subsidies. A similar UK-specific handbook, against which all proposed transport subsidies could be measured, may be beneficial as a consistent ‘yardstick’. 9.3 With regard to definitions, the EU “undertakings in difficulty” definition has caused significant issues for highly innovative companies making significant investments in R&D. Innovate UK R&D grants are extremely important in enabling technology based Start-ups and SMEs to invest in R&D to create the high quality jobs and high growth that are essential for economic recovery. The current EU State Aid rules which are still being applied, are preventing most such companies from applying for R&D grants and more recently for emergency Coronavirus help such the Coronavirus Business Interruption Loan Scheme (CBILS). 9.4 The EU rules prohibit aid for companies “where more than half of its subscribed share capital has disappeared as a result of accumulated losses”. This effectively eliminates the
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Handbook on the external costs of transport, European Commission https://op.europa.eu/en/publication-detail/-/publication/9781f65f-8448-11ea-bf12-01aa75ed71a1
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most deserving businesses that tend to invest as much as possible in development. This rule would have covered many of today’s global technology giants. 9.5 Subsidy Control should distinguish these businesses from “sunset” or mature businesses for whom such aid is likely to be unnecessary or may just delay bankruptcy. A better approach would be to consider using a “going concern” definition and/or requiring appropriate funding exit plans. One simple way to do this would be to allow Tech companies to add back their spend on R&D into the calculation on solvency. For many companies this is easily measured and controlled by using their R&D Tax credit claims. This would enable targeted aid to companies that should be encouraged and should meet any objections from the EC. Companies may miss out in comparison to global competitors with more flexible regimes and the Crown may lose the opportunity to generate UK intellectual property. 9.6 As noted above, we recommend that the Government maximises the opportunities to review the approach to promoting innovation – including through procurement rules, appropriate R&D funding, and by the removal of the undertakings in difficulty rule. 1.1 10. SECTOR SPECIFIC RULES AND RESEARCH AND DEVELOPMENT Question 29: Should the specific rules on energy and environment subsidies apply only in so far as they are necessary to comply with trade agreements? Or should they apply under the domestic regime more generally? Question 30: Which sectors or particular categories of subsidy (such as for disadvantaged areas, R&D, transport, skills etc) would benefit from tailored provisions or specific guidance on subsidy control? If so, why, and what should the nature, extent and form of the provisions be? 10.1 Guidance to public authorities on how the rail sector is funded through Network Rail (NR) and train operators could be beneficial in ensuring that public authorities have a strong understanding of how to interact with the rail sector’s conventional funding arrangements. As highlighted previously, under EU rules rail transport benefited from a range of bespoke subsidy provisions, such as EU Regulation 1370/2007. Replicating such provisions in UK law will be important to preserve the public service nature of rail. 10.2 Given the bespoke nature of rail funding and procurement we have repeated here some of the arguments made in our response to the Procurement Green Paper (para 10.4 below). Government funding and subsidy rules should seek to maximise the potential benefits of rail and we welcome Government ambitions to support better procurement for innovation. Subsidy control rules and public procurement rules should align to support innovation and the Government should seek to ensure that the fact a sector receives public funding for services does not undermine the argument for adequate R&D funding. 10.3 We note that the paper refers to the levelling up fund and shared prosperity fund. In practice Government has multiple funding pots and multiple bodies involved in innovation – including the proposed new Advanced Research Projects Agency, Innovate UK and the Catapults. In this complex landscape it can be hard for project promotors and suppliers to identify the best form of funding available and to arguably competition for this funding may be less effective than it could be. A significant amount of innovation funding for rail comes through NR and HS2 and this is welcome – however Government might want to consider whether, given its public monopoly status, this is always the best way to secure innovation in rail. At the very least the Government could do more to ensure transparency by providing clear information in one place, reflecting all the relevant funding available for particular sectors. 10.4 RIA recommends the development of a Government innovation strategy, including rail and construction to support the new Government Plan for Growth; and we note that innovations 10 / 13
developed and procured in the UK, by UK public bodies can support global exports. We note in particular French use of the Innovation Partnership Procedure to enable the development of the next generation of high-speed trains and signalling. 10.5 RIA views on innovation and procurement are repeated below for ease of reference: • The new Procurement Act should seek to create flexibility to future proof the regulations and anticipate potential future innovations, including effective use of data and digital technologies as far as possible. Outcome based procurements and procurement for open data have the potential to accelerate UK strengths in the development of synthetic environments, data analysis, and project modelling and cyber security. • The Government should use its regulatory and contractual powers to remove barriers and unlock open data across the rail sector. In order to drive innovation and creativity, Government should also introduce interoperability standards for data sharing, ticketing, and fares. These standards should be aligned across transport modes. • Currently, too often Government and clients offer grants for the development of initial ideas with no route to market, and existing procurement for difference rules has not been used as intended. RIA would welcome powers which enable clients to procure innovations which have been successful in pilot stages. Procurement should weight tender scoring in favour of innovative ideas provided by the tenderer. • We recommend that Government also considers options for supporting the development of supplier intellectual property (IP) – for example, IP could be licensed by Government, or where Government owns the IP suppliers could be licensed to deliver. The Government should also review state aid rules relating to innovation funding (as highly successful US high tech companies have demonstrated, sometimes innovations take years of R&D before becoming profitable). • RIA welcomes the commitment to project outcome-based evaluation, which is essential to support innovation. As technology advances at an increased rate, over specification of requirements and standards constrain innovation and reduces the incentive for suppliers to invest in UK based products and systems. • We strongly recommend that the Innovation Partnership Procedure (IPP) from the Public Contract Regulations 2015 is retained. Although this procedure has not been widely used in the UK, it is intended for situations where the required product does not yet exist and so the procurement is about choosing the right partners to work with to evelop the new product. In RIA’s view the IPP is an ideal vehicle to help the UK develop and retain the Intellectual Property of the next generation of technology across key sectors. Whilst the proposed measures to support innovation are welcome, they do not support the most difficult high-risk challenges to the same degree as the IPP. • The potential in the rail industry is illustrated by the fact that SNCF (French Railways) are using the procedure to develop the next generations of French high-speed trains and signalling, and thus supporting the retention of a national capability in these high value areas. In a more modest way NR are increasingly using the IPP as part of their innovation programme. • Innovative funding models o Reforms have the potential to unlock both greater competition and collaboration. Procurement frameworks should allow for Project 13 co-clienting and enterprise delivery models (Project 13 is an industry-led initiative to improve the way highperforming infrastructure is delivered and managed – see here). Planning should also consider opportunities for alternative funding models, noting that the Channel Tunnel was built on a Build Own Operate Transfer Model with a 65-year operating concession. o RIA members have global experience of project design, funding and financing, and would welcome the opportunity to share expertise and work with the Government on plans for the new Infrastructure Bank co-funding, co-delivery, concession and joint venture models. 11 / 13
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RIA recommends the development of a Government innovation strategy, including rail and construction to support the new Government Plan for Growth; and we note that innovations developed and procured in the UK, by UK public bodies can support global exports.
11. TRANSPARENCY Question 31: Do you agree with the proposed rules on transparency? If not, why? Question 32: Do you agree that the thresholds for the obligation on public authorities to submit information on the transparency database should replicate the thresholds set for small amounts of financial assistance given to a single enterprise over a three-year period and for transparency for SPEI? Question 33: If not, should the threshold be lowered to £175,000 over a three-year period to cover all reporting obligations for Free Trade Agreements, enabling all of the UK’s international subsidy transparency obligations to be met through one database? Question 34: Should there be a minimum threshold of £50,000 below which no subsidies have to be reported? Question 35: Do you agree that the obligation should be to upload information within six months of the commitment to award a subsidy? 11.1 RIA agrees the transparency requirements, including the proposed minimum threshold and single database. 12. NEW INDEPENDENT BODY AND LEGAL REDRESS Question 36: What should the functions of the independent body be? Should it be responsible for any of the following: • Information and enquiries; • Review and evaluations; • Subsidy development advice; • Post-award review; and/or, • Enforcement. Question 37: Should any review of a subsidy by the independent body consider all the principles, and the interaction between them, or only some principles, and if so which ones? Question 38: What role, if any, should the independent body play in advising public authorities and reviewing subsidies before they have been awarded? Question 39: If the independent body is responsible for post-award review, what types of complaints should it be able to receive and from whom? Question 40: Which, if any, enforcement powers should the independent body be given? In what circumstances could the body deploy them? What would be the routes of appeal and the interaction with judicial enforcement? Question 41: How should the independent body be established in order to best guarantee its independence and impartiality when exercising its operational functions? Question 42: In addition to the application of time limits, are there any other considerations for implementation of the recovery power? Question 43: Should a specialist judicial forum such as the Competition Appeals Tribunal hear challenges to subsidy schemes and awards? If not, why? 12.1 Given that the UK has flexibility with regard to the establishment of an independent body and its functions, it seems appropriate that a new body does not need to replicate the full functions of the European Commission’s state aid regime wholesale. A new body could take a more proportionate and risk-based approach, fully aligned with UK strategic objectives. RIA agrees with the proposal for a new independent body, with the proposed functions and enforcement powers in principle – subject to further consultation on detailed proposals. 12 / 13
While an independent body should hold overall responsibility for the UK’s subsidy control regime, there is scope for the body to cooperate with sector-specific economic regulators to ensure that the particularities of different markets and the effect that subsidies have within them are well recognised. For rail this would mean building on the well-established role of the Office of Road and Rail (ORR). 12.2 Rail is a particularly unique sector funded by passengers, the taxpayer and private investors. The vast majority of public funds are outside the conventional subsidy control framework. Where subsidies must be awarded through the conventional subsidy control system, consideration should be given to rail’s unique circumstances and we recommend a cooperative approach between the overarching subsidy control body and sector-relevant economic regulation . Williams Rail Review recommendations should align with these proposals – and should in particular seek to recognise the unique position of rail as neither fully public or private. The ORR was originally expected to have more of a role supporting private investment in rail, linked to access guarantees. The freight sector has made very effective use of this model to support significant levels of private investment, including depot and port development. However, the ORR’s role in this space has not been fully developed. 12.3 In the context of Government proposals for Infrastructure and Green Banks, RIA would support the development of co-funding models for rail. The development of both these subsidy control proposals and the Williams Rail Review should seek to support this. We note that the Channel Tunnel was built on a Build Own Operate Transfer Model with a 65year operating concession and that other regulated sectors such as water and airspace (NATS) have benefitted from effective use of Government underwriting and public private partnership models.
If you would like further information, please contact Policy Director Kate Jennings at kate.jennings@riagb.org.uk and 07771 944135.
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