Levelling up the UK: the role of state aid

Executive Summary

The TUC supports an active industrial strategy that promotes high quality jobs, employment standards and inclusive growth in communities in every part of the UK. We support dynamic state intervention that:

• Supports decent jobs through intelligent social value procurement.
• Uses strategic funds in support of regional development, decent work and employment standards with a key role and voice for devolved authorities and social partners, including trade unions.
• Targets support for industries and companies and their long-term development, with conditions attached in support of decent jobs, contributions to the UK economy and tax base – including taking equity shares on a something-for-something basis.

Negotiating a good deal with our largest trading partner, the European Union, is essential to securing jobs, protecting employment rights and securing lasting peace in Ireland. This requires a level of compatibility with EU level playing field provisions (as opposed to WTO or other light touch regulation).

At present, it is unclear what the government in the UK intends state aid to look like beyond the transition period. But as this report makes clear, there is an urgent need for government to intervene in the economy now to save jobs and businesses, as well as to meet the Government’s stated aim of ‘levelling up’ the UK in terms of access to good quality work.

Experience of state intervention and industrial strategy in the UK and across the EU suggests that progressive state intervention in support of jobs, businesses and inclusive growth is compatible with both the current state aid rules, and a trade relationship based on a level playing field. Government cannot hide behind the current EU regime as an excuse not to act.

Workers and businesses across the UK need the government to secure a good trade deal with the EU that supports UK jobs and businesses, based on a level playing field that ensures employment rights for UK workers remain in line with those in the EU. This report sets out how a new state aid regime can be compatible with that aim and can help achieve our goal of decent work across the UK.

Introduction

The UK will have to choose which state aid and public procurement strategy it will follow once it is no longer bound by EU rules. At present it is not clear what the government’s preference is, but this paper makes the case for a system that supports industrial policy, local jobs and businesses and the promotion of world class employment standards, particularly for communities that are set to suffer the most from the UK exit from the EU.

While the UK has yet to set out what state aid strategy might look like, it is expected that interventions could be targeted in support of three aims – all expressed at various points by Government:

• Levelling up local economic capacity and growth across all parts of the UK.
• Supporting transitional change across the economy – with a particular focus on growing domestic businesses in key sectors such as AI, tech and digital services.
• Enhancing the UK’s trade relationships across the globe – with increased UK capacity in tradeable goods and services.

This paper sets out to look at what state aid might look like beyond 2020, how it might differ from current practice and what we think a progressive and effective state aid strategy should look like.

This report

• looks at current state interventions across the UK;
• assesses possible options under consideration by the current government;
• sets out the principles that the TUC believes should govern a new approach to state aid in the UK.

Current state interventions in the UK and EU

State intervention in support of specific sectors, regions or individual businesses can take many forms. Both WTO and EU state aid rules are designed to prohibit the allocation of state resources that provide advantage to domestic enterprises in a way that distorts competition in the global or EU internal market. However, within these rules, governments can deploy their resources to provide strategic support to their economies.

The OECD states that some of the forms of state aid that nations can employ include “government procurements, exemptions from antitrust laws, regulatory barriers to competition, access to credit, arranged mergers and acquisitions, control of acquisitions of national companies by foreign investors, easy access to commodity resources and the products of monopolist companies. National champions may be created or protected in a number of ways, such as by the granting of state aid, the encouragement of domestic mergers, or the opposition to a takeover of a domestic company by a foreign company.” [1]

In this section we look at the following three areas:

• Public procurement designed to (i) support growth of local jobs and businesses to support economic growth and address disadvantage and (ii) promote environmental, social and labour standards.
• Industrial strategy in support of key sectors, business clusters and economic rebalancing.
• Deployment of strategic funds in support of business and regional development.

Public procurement

The TUC believes public procurement must play a crucial role in supporting sustainable development, key sectors and quality public services. To be successful, positive procurement approaches need robust enforcement, evaluation and sanctions regimes - all of which are lacking currently.

Increasingly public bodies in the UK at both a national and local level have been using intelligent procurement in support of these broader policy goals. Permissive legislation, including the Public Services (Social Value) Act 2012, the Public Contracts Regulations 2015 (derived from the 2014 EU Public Procurement Directive), the Equality Act 2010 and public procurement legislation in Wales and Scotland provides the scope for this – enabling public bodies to move away from price-based competition and incorporate broader social, environmental and employment considerations where this is relevant to the nature of the contract. This can include support for labour market initiatives for excluded and disadvantaged groups, diversification of supply chains in support of SMEs, co-operatives and social enterprises, support for skills, training and apprenticeships and support for decent employment standards. And while this potential has yet to be fully exploited, we are seeing things moving in the right direction.

In 2017, the Crown Commercial Service published new guidance on placing social value at the heart of public procurement, requiring “buyers of public sector services to consider whether there are related social, economic or environmental benefits that can be delivered through the contract”. HM Treasury published its new outsourcing playbook in 2019, stating that “social value is one way of driving innovation through procurement by encouraging employment opportunities, developing skills and improving environmental sustainability” and requiring public sector bodies to “maximise social value effectively and comprehensively through its procurement and account for social value in the evaluation criteria”. And in September 2020, the Cabinet Office issued new procurement guidance that “social value should be explicitly evaluated in all central government procurement, where the requirements are related and proportionate to the subject-matter of the contract, rather than just ‘considered’ as currently required under the Public Services (Social Value) Act 2012” with a minimum 10 per cent weighting given to social value considerations on all central government contracts.

Furthermore, governments in Wales and Scotland have used a combination of legislation and voluntary codes to push social value procurement. The Welsh Government’s Code of Practice for Ethical Employment launched in March 2017, developed in partnership with unions and public service employers, places an expectation on all public sector organisations, businesses and third sector organisations in receipt of public sector funding to sign up to a code of practice that promotes decent jobs, a living wage and protects against blacklisting and other forms of exploitation. The Procurement Reform (Scotland) Act 2014 goes much further than the Public Contracts Regulations enforced in England and Wales, requiring all public bodies to have a procurement strategy in place that supports community benefits, the living wage and the economic, social and environmental well-being of the local area.

Examples exist of councils taking the initiative on this. The London Boroughs of Southwark and Islington have both incorporated elements of Unison’s Ethical Care Charter into their commissioning and procurement of adult social care services, requiring contractors to pay a living wage and offer guaranteed hours contracts to their staff. Newcastle City Council has incorporated good work metrics into its social value framework, including measures around workforce representation, zero hours contracts, equality and diversity and flexible working. And the Greater Manchester Combined Authority is looking at how it can incorporate elements of its own Employment Charter into its procurement strategy.

In addition to promoting good employment standards, social value procurement has been used by some councils as part of a strategy to develop local economies. Community wealth building initiatives by councils such as Salford, Newham and Preston have sought to maximise procurement spend across public bodies in their local area to help develop local supply chains, diversify provision through supporting local cooperatives, community organisations and SMEs – as well as promoting in-house provision of services.

The London Borough of Newham is looking to increase its local spend from its current level of 28 per cent, working with other ‘anchor institutions’ including the police, NHS, local colleges and business groups to harness procurement in support of local supply chains across the borough. The council will be encouraging existing and new contract providers to use local companies within their supply chains through social value measures, setting out specific requirements for engaging with SMEs in the area and embodying community wealth building objectives within the tendering process across all council service areas.

Other countries use public procurement to pursue social objectives. Germany for instance uses pay clauses for workers under public contracts, which are a way to set a wage floor in the absence of a statutory national minimum wage. Thus, public transport companies operating under public contracts must accept the full provisions of locally prevailing collective agreements, even if these agreements are not generally applicable (like UK agreements).

Sweden uses public procurement as a strategic tool to achieve social sustainability and local administrations in France and Spain have similar schemes: in Nantes [2] , a Responsible Purchasing Promotion Scheme was adopted to support SMEs in the area and recruitment of more disadvantaged people in several sectors of the labour market. This scheme has been so successful that French national banks have been persuaded to take social and environmental criteria into account when they negotiate loans for entrepreneurs. In Barcelona [3] , tendering companies are required to offer higher wages than those set by the sector agreement as well as stable employment contracts.

There are further examples where the government’s public procurement policy could help local communities in the UK. Most recently the PM has promised [4] that the government would ensure enough contracts were available to keep Harland and Wolff’s newly acquired Appledore yard (near Barnstaple in north Devon) viable for decades. The shipyard is due to reopen in January 2021, directly employing 350 people and supporting about 1,000 more subcontractors and supply chain jobs, helping to rebuild the local economy and offering opportunities through a new apprenticeship scheme. Coastal towns that have seen industrial decline in the past could level up if the government were willing to invest again in these areas. 29,000 people are employed in UK shipbuilding, with a further 40,000 jobs in the supply chain. The shipbuilding industry is said to be worth between £1.5bn and £4.3bn a year, depending on the size of Royal Navy contracts [5] .

The PM suggested that building new patrol boats for search and rescue in the Channel might be a new line of government contracts; or fishing trawlers should the fishing industry see a revival through a new UK fishing policy. Yet questions remain as to how the government will award contracts for the shipping industry and whether price alone will remain the central consideration of the new procurement rules.

Currently the UK is part of the World Trade Organisation's Government Procurement Agreement (GPA) through the EU's membership. The UK government plans to accede to the GPA as an independent country once the transition period ends at the end of December 2020. The GPA aims to liberalise and increase access to member states’ public procurement markets.

The TUC has concerns that the GPA contains a much lighter touch approach to social value considerations. While there are social value criteria in UK procurement rules currently – largely due to the transposition of the EU Procurement Directive 2014 - we are concerned that the government could roll back these criteria, just as the Prime Minister and members of the Cabinet have talked in the past about repealing EU derived rights such as the Working Time Directive and the Agency workers directive [6] .

Most of the current procurement law will be automatically retained beyond the end of the transition period, through the terms of the European Union (Withdrawal Agreement) Act 2020. However, it is worth noting that after 31st December 2020, the government has powers to make secondary legislation, including temporary powers to amend retained EU law that would otherwise no longer operate appropriately once the UK has left the EU. It is hoped that the recent moves from the Cabinet Office and HM Treasury signals an intention to continue to promote social value procurement in support of employment, skills and decent work.

Industrial strategy in support of sectors and business clusters

EU member states including Finland, France, Germany, the Netherlands and Sweden have taken a proactive approach to supporting domestic industries through a combination of

• increasing state investment in R&D
• developing the infrastructure for knowledge transfer between business, government and academia
• providing ministerial level support for specific cluster development projects and using strategic government procurement
• using export credits to enable domestic businesses to compete on a level playing field in global markets
• regulating foreign takeovers of key businesses and supporting domestic mergers and other strategies to defend against this.

Traditionally UK governments have been less dynamic in this area but in recent years, industrial strategy has been back in favour. The Boris Johnson-led Conservative government inherited an industrial strategy from its predecessor, launched in 2017, that saw a revamped Department for Business, Energy and Industrial Strategy oversee a range of measures, including:

• Five foundational workstreams focussed on ‘ideas’, ‘people’, ‘infrastructure’, ‘business environment’ and ‘place’ - including ambitious targets for increased R&D spend, more incentives for research spending through tax credits and the Industrial Strategy Challenge Fund, supporting new business growth through a British Business Bank, greater investment in infrastructure, support for place-based local industrial strategies and a national retraining programme.
• Sector deals providing targeted support around several key sectors, including aerospace, automotive, creative industries, life sciences and nuclear.
• Strategies designed to address five thematic ‘Grand Challenges’ looking at ‘AI and the data revolution’, ‘mobility’, ‘an ageing society’ and ‘clean growth’.

Subsequent announcements in the March 2020 budget have increased commitments to infrastructure spend and doubling government-funded R&D spend by 2024/25. And the Prime Minister, in his speech to party conference in October, committed to ensure the UK leads the green industrial revolution, and low-cost clean power generation in particular, though investing £160m in ports and factories across the country, to manufacture the next generation of turbines [7] .

However, progress was slow even prior to the onset of the Covid pandemic. In February of this year, Andy Haldane the Chair of the Independent Industrial Strategy Council set up to oversee progress commented that the “policies are not yet operating with the consistency and co-ordination, nor with the scale, necessary to meet these challenges”.

With the focus now as much on protecting jobs and at-risk sectors through the recovery, it remains to be seen how much of the ambition of the industrial strategy will remain intact. While the Treasury was quick to act with the Job Retention Scheme and Job Support Scheme and other remedial measures, the Chancellor has been reluctant to provide sector-specific support packages. With HM Treasury playing a greater role in determining economic and industrial policy than BEIS, there is significant scepticism about the future of vertical and sectoral interventions.

This is particularly the case when businesses and sectors are perceived to be lacking the support they need in the current period. Cases such as Arm Technologies highlighted below, at risk of a US takeover that could put the future of the Cambridge-based company in doubt, Alexander Dennis Buses in Falkirk facing increasing job cuts as a result of government failure to provide funding for new eco-friendly bus contracts and the lack of opportunities provided to UK steel producers from HS2 orders is leading many to fear that, when it comes to the crunch, typically laissez-faire government inaction is leaving companies stranded.