My Lords, I shall speak to Amendment 11A, which is an amendment to government Amendment 11. Amendment 11A is really only a place- holder to discuss some broader concepts about this Bill and about paragraph 2 of Schedule 2 in particular.
I confess that I paid little attention to the government amendments ahead of our first day in Committee. Like other noble Lords, I was completely overwhelmed by the huge groupings and the lack of explanation that arrived before they were tabled—hence, I tabled Amendment 11A only yesterday. I am certainly grateful for the explainer that was circulated yesterday. I have not yet read all 60 pages, but a reasonable summary is something like this: “We are trying to keep the new UK procurement code as close as possible to EU rules.”
This is at the heart of one of my main problems with this Bill: we have not created a UK code at all. The Bill may well have simplified or reduced the number of different sets of rules, but that has not achieved a significant simplification of the rules to any meaningful degree. Furthermore, it uses terms and concepts that are comprehensible only to procurement practitioners and in a way that is often alien to the way in which we do things in other areas. It has few principles and a whole load of pernickety rules, of which this schedule is one. In short, this is the EU way of doing things and not the UK way of doing things. I believe that we have missed an opportunity to create something that would have worked better for UK businesses and, indeed, for the UK public authorities that have to comply with it.
I turn to the specifics of Amendment 11A. The amendment would delete new sub-paragraph (2A) in Schedule 2, which is contained in my noble friend’s Amendment 11. Sub-paragraph (2A) is not new, as it rewrites sub-paragraph (2)(c) of the existing Bill. The effect of sub-paragraph (2A) denies the vertical arrangements exemption that my noble friend has just described if the body concerned has even one share held by other than a public authority. I think that this is nonsense. Holding one share or any other kind of minority holding does not change the nature of control, which is what paragraph 2 purports to base the vertical exemption on. It would restrict the exemption to bodies that are wholly owned by the public sector, in effect, and I can see no economic rationale for that.
I also want to challenge two other aspects of paragraph 2, arising out of new sub-paragraph (2B), which is a rewrite of the existing sub-paragraph (2)(b).
There is one material change from the existing sub-paragraph (2)(b). It is similar to the issue that I raised in the context of Amendment 4, which we debated on our first day in Committee. The existing sub-paragraph (2)(b) refers to a person who
“exerts, or can exert, a decisive influence”.
The new version merely talks about a person who “exerts a decisive influence”. I explained on Monday that the conventional UK approach when looking at things such as control is to use a test based on the capacity to control rather than actual control. Curiously, paragraph 2 uses that concept of capacity to control because it uses the basic definition of control via the parent undertaking definition in Section 1162 of the Companies Act 2006. Under that section, control exists if a parent undertaking holds a majority of voting rights or has the right to appoint or remove a majority of the board. That is, control exists for the basic purpose of this clause if there is the ability to control, whether or not the right is used. Can my noble friend explain why the Government are using one approach to control but another for decisive influence, deliberately caused by the amendment that he has just moved?
I now turn to the concept of decisive influence itself. If someone other than a controlling authority exercises decisive influence, the vertical arrangement exemption does not apply, so it is important to find out what it means. I expected to find a definition of the term “decisive influence” in the Bill, because it is not a term that is found in general use related to companies or the control of organisations, but I cannot find a definition.
Interestingly—I say “interestingly” as I find it interesting, but I am a bit of an anorak on these things—Section 1162 of the Companies Act contains the concept of dominant influence, which is an alternative way of establishing whether a parent undertaking exists. A dominant interest is defined in Schedule 7 to that Act and requires a right to give directions to a board of directors that the board of directors has to comply with. The Companies Act does not use “decisive influence”; it uses “dominant interest”.
How then do we establish whether decisive influence exits? Do we assume that because the Bill does not use the Section 1162 definition it means something different? That might imply that it is something below the level of control, but precisely what it is getting at seems unclear. As far as I can tell, decisive influence is not a term used in English law, which comes back to my point that we are still rooting ourselves in EU law. It is found in EU competition law and, in that context, it is used as part of a rebuttable presumption of control, so that if a majority of shares are held the parent undertaking is assumed to exercise decisive influence on the subsidiary undertaking.
If it means a variant of control, we end up saying that vertical arrangements will not be exempt even if a contracting authority can control a body. If another body in fact controls that body, it does not matter if the other body can control it but does not do so; it just looks at whether it exercises control. However, the exemption is denied if a tiny fraction of the shareholding of the undertaking is held outside the public sector. There is another leg, which is if less than 80% of the activity is carried out for the contracting authority.
There is a confusing set of thresholds for denying the exemption. It is even more complicated if joint control is involved, but I will not go into that. I submit that logic and common sense have somehow gone missing in paragraph 2 and that it needs a rethink.
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