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Articles about the UK Civil Service and Regulation

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£10+ Billion Deregulation since 2010 – or ‘Alice in Wonderland’ Statistics?

I was not the only commentator who found it difficult to understand Ministers’ claims that they had ‘reduced regulatory costs for business by £10 billion during the 2010-15 Parliament’. But I have recently re-read an excellent NAO report which explained how this was calculated and – just as important – what it did and did not include.

First, the £10bn is calculated as follows. Let’s say a regulation which costs business £20m a year was abolished in 2010. The saving over the coming five year Parliament is assumed to be 5 times this amount – £100m. Fair enough! But what happens if it was abolished in 2015 – during the last year of the Parliament? It is then still reported as £100m over the Parliament. That is a seriously weird way of reporting the figure.

A much better way of reporting the savings would be to take the annual savings as perceived by business – which started quite low but had built up to around £2.2bn over the five years to 2015. That is still a worthwhile saving – except ….

There are major exclusions before the net savings are calculated. These include massive areas such as:

  • tax administration (particularly Income Tax, Corporation Tax and VAT),
  • European Union regulation,
  • the National Minimum Wage (see further below),
  • the Living Wage (ditto),
  • the Apprenticeship Levy,
  • compulsory Workplace Pensions,
  • fees and charges imposed by government or regulators, such as the fees paid by care homes to the Care Quality Commission.

The result of these exclusions is as follows.

2010-15: The NAO reckon that almost half (46%) of the 951 regulatory decisions made during the 2010-15 Parliament were not included in the estimated savings of £10bn. These 46% were estimated to have imposed annual costs of £2.8bn, rather more than the £2.2bn annual savings that had been achieved by the end of that period. In other words, the burden of regulation increased over those five years, not decreased.

2015-16: The Government claimed net savings of £0.9m during the period from the beginning of the next Parliament through to the date the NAO prepared its report. This however excluded the cost of the introduction of the National Living Wage (£4.1bn) as well as the increased minimum wage  – adding another £3.1bn to businesses’ costs. This was clear cherry picking of the measures that HMG chose to include in its targets. Other exclusions added up to around £0.8bn bringing the total to £8.0bn, a good deal more than the savings of £0.9bn!

The inclusions – those savings that are claimed by the Government – are interesting, too. Over 90% of the £10bn claimed savings 2010-15 were due to 10 changes, including:

  • changing the inflation index used to increase pension benefits,
  • reducing audit requirements for small companies, and
  • streamlining the guidance relating to contaminated land.

These were hardly the sort of deregulation that would be appreciated by a typical SME.

The inclusion – as deregulation – of the new law requiring larger retailers to charge £0.05 per plastic bag was particularly odd. This was counted as a regulatory saving amounting to £1.0bn over five years because the shops would now spend less on buying the plastic bags. But was this really deregulation? As one MP noted: “we imposed this regulation on business to [make them] do something they were not previously doing, [and yet] we are claiming £1bn towards our target. That is like something out of Alice in Wonderland.”

And note, by the way, that if this £1.0bn figure is excluded from the net saving of £0.9bn, there was in fact no progress at all towards the government’s target during the 2015-16.

Note too that subsequent research showed that the gross proceeds from the plastic bag charge had been around half of the Government’s first estimate, so the true five year saving to business (if it was a saving) was only £0.5bn. But the reported figures will not be revised.

Indeed, the NAO also pointed out that departments seldom monitor the ongoing impact of their regulatory decisions, And departments are supposed to evaluate their new regulations within five years of implementation – but they don’t. 83 regulatory decisions were made in 2011. By 2016, only seven reviews had been scheduled of which only two had been completed.

A detailed history of deregulation in the UK may be found here.

Martin Stanley

Editor Understanding Regulation

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How to Earn Loads of Money in Whitehall – Senior Salaries Analysed

I have annotated the government’s fascinating list of 442 central government public servants paid more than £150k a year. Click here to download the spreadsheet. 

First, I have re-ordered the list so that the highest paid appear at the top of the spreadsheet.

I have then highlighted in BOLD those civil servants who work in Whitehall departments reporting directly to Ministers.  I have thus excluded those (mainly non-civil servants) who work in:

  • semi-commercial organisations such as Network Rail
  • the NHS
  • the Armed Forces
  • Parliamentary Counsel’s Office
  • ‘Next Steps Agencies’, and
  • various regulators.

Within this EMBOLDENED category, I have then highlighted in red those who seem to me to have traditional civil service roles as distinct from having been recruited (probably at a senior level) as commercial, procurement and other specialists.  There are only 26 of these.

Enjoy!

Martin Stanley

Editor, the UK Civil Service and Understanding Regulation

Notes

  1. The original spreadsheet lists those jobs whose salaries are set by Ministers (or by the Treasury on behalf of Ministers).  It thus excludes much of the public sector, such as local authorities, the police, the BBC etc. Click here if you want to read a definition of the civil service and a description of the various sorts of public body in the UK.
  2. It is interesting that, apart from the Permanent Secretaries, the highest paid central government public servants all have an engineering or commercial background, or are senior lawyers or medics.  And those engineering /commercial specialists who work in Whitehall will all, I suspect, have been direct entrants at a senior level and will not have risen through the ranks.
  3. Click here to see the original spreadsheet, which includes more detail than my version.

(Indian) Civil Service Reform (1854)

Those interested in the history of the Civil Service will enjoy reading the 1854 Macaulay Report on the selection and training of entrants into ‘the Civil Service of the East India Company’.  The report was in some ways a 19th century version of the 1968 Fulton Report on the structure of the UK Civil Service.

Like the Northcote Trevelyan Report, published around the same time, the text is mercifully short and to the point, and the authors were delightfully honest when not 100% sure of their recommendations:-

“… we are inclined, though with much distrust of our own judgment, to think that …”.

They were also well aware of how their recommendations could be perverted:

“We propose to include the moral sciences in the … examination … Whether this study shall have more to do with mere words or with things, whether it shall degenerate into a formal and scholastic pedantry, or shall train the mind for the highest purposes of active life, will depend, to great extent, on the way in which the examination is conducted.”

And the training was to be thorough:

“[The new recruit] should study [Indian history], not merely in the works of Orme, of Wilks, and of Mill, but also in the travels of Bernier, in the odes of Sir William Jones, and in the journals of Heber. … He should understand the mode of keeping and checking accounts, the principles of banking, the laws that regulated the exchanges … [etc.].”

I have added the report to my online reference library. Or, to go straight to the report, click here.

 

Martin Stanley

www.civilservant.org.uk

Understanding Regulation

 

Electricity Prices – Government Report Blames Government

Dieter Helm’s report, published today, blames excessive and wrong headed government intervention for high electricity prices.

The report is an economic and regulatory tour de force. It recommends that £100 billion of climate change costs should be isolated and charged outside regular energy bills, with industrial customers being exempt.  The agricultural sector and Ofgem should be reduced in size.

How will politicians react?  They should agree with everything that Professor Helm recommends. But that would mean taking brave decisions …

Here are key extracts from the report’s summary recommendations.

“This review has two main findings. The first is that the cost of energy is significantly higher than it needs to be to meet the government’s objectives and, in particular, to be consistent with the Climate Change Act (CCA) and to ensure security of supply. The second is that energy policy, regulation and market design are not fit for the purposes of the emerging low-carbon energy market, as it undergoes profound technical change.”

“The [£100 billion] legacy costs from the Renewables Obligation Certificates (ROCs), the feed-in tariffs (FiTs) and low carbon contracts for difference (CfDs) are a major contributor to rising final prices, and should be separated out, ring-fenced, and placed in a ‘legacy bank’. They should be charged separately and explicitly on customer bills. Industrial customers should be exempt. Once taken out of the market, the underlying prices should then be falling.”

“In electricity, the costs of decarbonisation are already estimated … to be around 20% of typical electricity bills. These legacy costs will amount to well over £100 billion by 2030. Much more decarbonisation [i.e the response to climate change] could have been achieved for less; costs should be lower, and they should be falling further.”

“Government has got into the business of ‘picking winners’. Unfortunately, losers are good at picking governments, and inevitably – as in most such picking winners strategies – the results end up being vulnerable to lobbying, to the general detriment of household and industrial customers.  … the government now determines the level and mix of generation to a degree not witnessed since these were determined by the nationalised industries …. Investment decision-making has been effectively quasi-renationalised.”

“The overwhelming focus on electricity rather than agriculture, buildings and transport has added to the cost. Agriculture in particular contributes 10% greenhouse gas (GHG) emissions, and the costs of reducing these emissions are much lower than many of the chosen options because the economic consequences of a loss of output in agriculture are small. Agriculture comprises just 0.7% GDP and at least half its output is uneconomic in the absence of subsidies. With the development of electric vehicles (EVs) it is apparent that transport can contribute more.”

“Ofgem’s role in regulation should be significantly reduced …”

“Not to implement these recommendations is likely to perpetuate the crisis mentality of the industry, and these crises are likely to get worse, challenging the security of supply, undermining the transition to electric transport, and weakening the delivery of the carbon budgets. It will continue the unnecessary high costs of the British energy system, and as a result perpetuate fuel poverty, weaken industrial competitiveness, and undermine public support for decarbonisation. We can, and should, do much better, and open up a period of falling prices as households and industry benefit from the great technological opportunities over the coming decades.”

Further background is in the Energy Regulation section of the Understanding Regulation website.

The full Helm Report is here.

 

 

GDP will be Lower if Immigration Turns Negative

Much of the Brexit debate has been about UK population growth, especially that caused by immigration from the rest of the EU. It’s therefore worth remembering that GDP is broadly proportional to population.  GDP/Head is a better indicator of economic success. This chart compares UK data since 1971.

Screen Shot 2017-10-15 at 14.29.21

c0.8% pa of recent GDP growth may be attributed to population growth:

Screen Shot 2017-10-15 at 14.29.41

GDP is now 17% higher because of our increased population since the 1970s – that is the gap between the blue and red lines in the first chart above:

Screen Shot 2017-10-15 at 14.29.58

Implications?

  • GDP growth will decrease if EU immigrants leave.
  • Much government expenditure is broadly proportional to population so HMG could then spend less.
  • But long term international political influence depends on economic strength.
  • Could there, in particular, be serious implications for e.g. defence and infrastructure expenditure?

Martin Stanley

Uber: Regulation isn’t just about Encouraging Competition

Transport for London’s (TfL’s) decision that it will not (yet?) renew Uber’s licence has upset a great many people, particularly those who had been delighted to see an innovative new taxi service competing with black cabs and minicabs.   I still shudder when I remember how hard it used to be to get a black cab to come ‘South of the River’ – across a central London bridge which is all of 10 minutes walk from my home.

But we all need to remember that even economic regulators need to worry about more than just competition and prices.  All of us who have worked in competition authorities love to show that competition lowers prices, as it so often does. But we also need to ensure that price-constrained entities do not increase their profits in other ways – in particular by sacrificing quality or service – or by risking their customers’ safety. We all focus on electricity prices, for instance.  But let’s not forget that electricity suppliers are fiercely quality controlled in that they must supply alternating current with high reliability and fixed voltage etc..

So TfL have an important duty to worry about much more than Uber’s pricing.  They have, quite properly not released the detailed decision letter that they will have sent to Uber.  But they and we have seen the Met Police’s April 2017 letter to Uber.  I also recommend this detailed analysis of TfL’s decision:

https://www.londonreconnections.com/2017/understanding-uber-not-app/ .

TfL themselves say that:  “TfL has concluded that Uber London Limited is not fit and proper to hold a private hire operator licence.”  This is because “TfL considers that Uber’s approach and conduct demonstrate a lack of corporate responsibility in relation to a number of issues which have potential public safety and security implications. These include:

  • Its approach to reporting serious criminal offences.
  • Its approach to how medical certificates are obtained.
  • Its approach to how Enhanced Disclosure and Barring Service (DBS) checks are obtained.
  • Its approach to explaining the use of Greyball in London – software that could be used to block regulatory bodies from gaining full access to the app and prevent officials from undertaking regulatory or law enforcement duties.” (emphasis added)

Much criticism of TfL’s decision seems to assume that their safety and regulatory access issues are mere pretexts for closing down the service.  This is a pretty serious charge and, if it is true, then this will become clear on appeal.  But if TfL do indeed have genuine safety etc. concerns, then surely they are acting responsibly?  Uber may not be as important a part of the London transport system as buses, tubes and trains, but none of us want our children or young friends – or indeed ourselves – to be using potentially unsafe transport.  And it is surely much better for TfL to act now than after some dreadful incident?

Equally, good regulation requires early intervention when a problem is spotted.  If weak warnings are issued, and a problem is allowed to continue, the company could later, with some justification, claim that the issue cannot be that serious or the regulator would have acted earlier.

Also, in this particular case, I rather agree with James O’Brien who tweeted “I think getting caught developing [Greyball] software specifically intended to obfuscate the work of regulators is also likely to backfire, you know”.

Mind you, the competition issues are interesting in one way. The (unlikely) disappearance of Uber from London’s streets has been treated as such a major calamity that it is all over the national news. Many London-based journalists – presumably frequent Uber customers – seem genuinely to believe that all Londoners should be concerned at this terrible threat to the city. I have my doubts, I must say, for London has one of the best public transport systems in the world.  But if the commentators are correct then maybe Uber is getting close to becoming ‘too big to fail’?  If this is so, then Uber surely has become just a bit too powerful.  Regulators including TfL must then have the guts to stand up to Uber, and not exempt it from complying with standards that have to be met by all its competitors, however powerful Uber’s PR machine may be.

Editor  Understanding Regulation

 

 

Francis Maude Fluffed His Chance to Achieve Lasting Change

Ex-Cabinet Office Minister Francis Maude has renewed his criticisms of senior civil servants. According to The Times, he believes that they routinely mislead Ministers, waste billions of pounds, “turkey farm” poor performers (promoting them or moving them sideways) and treat outsiders as “country members of their club.  Whitehall has ‘a bias to inertia’ and needs to be fundamentally reformed, he says.

His use of the word ‘club’ is interesting – and pretty accurate.  The club like nature of the Senior Civil Service has been one of its great strengths. The club’s culture has fostered great integrity, commitment to public service, mutual support in times of real crisis, and – yes – an admirable willingness to forgive occasional error rather than eject everyone who takes risks that go wrong.

The clubby atmosphere is however also its greatest weakness. Forgiveness of mistakes morphs too easily into tolerance of poor performance.  ‘Turkey farming’ is indeed widespread. New recruits from outside are indeed eyed with considerable concern until they have shown that they will not rock the club’s boat too much. Senior women have to be ‘the right sort of chap’.

But I don’t buy his accusation that Ministers are frequently deliberately misled or disobeyed.  He has said this before, been challenged to quote examples, and failed to do so. I suspect that the truth is that some of his reforms were deeply unpopular with his Ministerial colleagues (as well as civil servants) and so failed to gain traction.  There was certainly great bitterness, for instance, in Vince Cable’s department when they obeyed Cabinet Office orders to buy ICT from smaller firms and found themselves unable to identify any one provider willing to take responsibility for ensuring that an expensive new system actually worked.  They wished they had dragged their feet like some others – including the Treasury who strongly opposed the creation of new central functions and in due course totally opted out of Francis Maude’s disastrous recruitment and training reforms.  If (now) Lord Maude has criticisms, they should be directed at George Osborne.

As for ‘wasting billions of pounds’ – tell that to the many high level project management recruits from the private sector.  They despair at having to implement major projects with unclear and changing objectives, ridiculous politics-driven timescales and inadequate resourcing.  Think Universal Credit – or Brexit ….

What about the “bias to inertia”? Maybe it’s “Look before you leap, Minister!”

The real shame is that Francis Maude and his officials missed their golden opportunity to reform Whitehall when embarking on what they described to the Public Administration Committee as “intense change” and a “dramatic change in culture”. “The civil service will inevitably become much smaller, flatter and less hierarchical, as it should do.” But they reckoned that they could achieve this change without any sort of plan. The Minister and his officials, including Gus O’Donnell, Head of the Civil Service, said that there was “no blueprint” and proposed to implement the changes “for the first time without a White Paper”. “A lot of this is just common sense – not revolution”.

To their credit, Committee Chair, Bernard Jenkin, and other committee members were openly sceptical. Surely every successful change programme needed to be planned? “Having a plan is an act of leadership.” In response, ex-Accenture and loyal official Ian Watmore declared that he was a change expert, recruited from the private sector, and saw no need for a plan – a statement so ridiculous that it would undoubtedly have led to failure in any appointment or promotion interview whether within the civil service or with his previous employer.

Reporting in 2013 Sir Bernard’s committee said that “The Government has not … identified any fundamental problem with the Civil Service and the Minister, Francis Maude, says he does not believe that fundamental change is necessary. We conclude that “incremental change” will not achieve the change required. Unless change is clearly heralded and given high profile leadership by a united team of ministers and senior officials, it is bound to fail.”

The Liaison Committee – made up of the Chairs of all the Commons Select Committees – then agreed, even after they had met the Prime Minister: “We remain unconvinced that the Government’s Civil Service Reform Plan … is based on a strategic consideration of the future of the Civil Service. The Prime Minister’s evidence to us in September did nothing to suggest that the Government has a coherent analysis of why things in Whitehall go wrong. We endorse the recommendation of the Public Administration Select Committee that the Government should ask Parliament to establish a Parliamentary Commission into the Civil Service.”

The Government’s January 2014 response was an extremely – almost rudely – thin and bland document which said very little more than that “The Government is not persuaded by the Committee’s argument in favour of a Parliamentary Commission”. 

But Whitehall is of course well overdue for reform.  There have been many successful management and efficiency reforms, including under Francis Maude.  Longer ago, ‘Fulton’ and ‘Next Steps’ were very positive developments but they didn’t touch the fundamental questions that so concern Lord Maude.  Indeed, there hasn‘t been a proper look at the relationship between Parliament, Ministers and the Civil Service since Lord Haldane reported in 1918. I am far from sure that I know the answers but it is surely reasonable to ask questions such as:

  • What is the right balance between cost and service quality – in terms of both the service provided by ‘Whitehall’ to Ministers and the service provided by the wider (and much larger) Civil Service to the public?
  • Are senior officials now spending too much time defending their Ministers, and not enough time speaking truth to power?
  • Is there no way of allowing officials to demonstrate promotability other than by moving from job to job every couple of years?
  • How much freedom should officials have to innovate and respond to local needs?
  • Do we still need a single ‘Civil Service’ as distinct from a number of grouped departmental administrations?
  • Or, looking the other way, do we still need a single Civil Service comprising only 8% of, and quite separate from, the rest of the public service?

It’s a great pity that Francis Maude did not allow these questions to be asked when he had the chance.

Martin Stanley

Editor The UK Civil Service

Brexit could Harm Competition within UK

Experts at the Centre for Competition Policy have analysed the effect of Brexit and concluded that:

  • It will create new freedoms for the UK to shape its competition policy outside the EU,
  • but these freedoms come at a cost and could prove damaging to competitive markets.
  • In merger control, the UK will be free to intervene, for instance  to protect jobs (‘public interest interventions’). Such interventions could be particularly targeted at foreigners attempts to buy UK companies.   But these powers could be misused and create uncertainty.
  • There will be pressure for greater protection of UK industries through state interventions, such as subsidies, but such freedom will constrain, and be constrained by, the UK’s new trade arrangements and could prove wasteful.
  • The UK will be free to set its own path in many areas, for example by fully criminalising cartels,
  • but cooperation with other EU competition agencies will dwindle.
  • The resources of the Competition and Markets Authority may need to be doubled.

An abstract is here.

[Further information about the UK’s current competition policies may be found on the Understanding Regulation website.]

Better Regulation for Regulators

Martin Stanley introduces his new ‘Understanding Regulation’ website

There can nowadays be very few policy makers whose work does not involve regulating something.  Indeed, delegation of policy making to regulators must rank alongside devolution and joining the EU as one of the three major constitutional changes over recent years.  Trading standards regulation can be traced back to the Romans, but the modern ‘regulatory state’ took off when economic regulators were tasked with controlling the newly privatised industries.  The subsequent creation of Ofsted, Ofcom, the Care Quality Commission, NICE and the rest have forced both Ministers and departmental officials to become intelligent customers of their regulatory arms length bodies.

Or has it? Where are the training materials and courses?  I vividly remember being asked to set up the postal regulator and finding little to guide me other than the experience of staff that I managed to poach from previously established bodies.  (Sorry Ofgem!)  We were sensibly sceptical about the motivation of large organisations and their executives, but I was personally unfamiliar with concepts such as principal-agent theory, group-think, cognitive dissonance, or the MacWhirr Syndrome – an understanding of which would certainly have helped us understand the organisations that we were regulating – nor was relevant educational material and training easily available.  And how exactly were price controls put together?

I was later asked to lead the Competition Commission but again found that there was no easily accessible material which could help departmental officials, as well as stakeholders such as journalists and politicians, understand our work. Lawyers and economists understood concepts such as market definition and abuse of dominance very well, but it was very hard for others to understand competition decisions – despite their sometimes enormous impact. Our inquiries included, for instance, those into Sky’s acquisition of shares in ITV, BAA’s ownership of Heathrow, Gatwick & Stansted, the London Stock Exchange, and Supermarkets.

And then came a series of regulatory disasters. Regulators failed to stop the 2008 financial crisis, the Deepwater Horizon disaster in the Gulf of Mexico, and the appalling neglect of patients at a Stafford hospital. How could this be? More importantly, what lessons could be learned and passed on to the next generation who are struggling to react to self-driving vehicles, or the ominous power of the internet giants – seemingly unconstrained in their willingness to broadcast murder, suicide and bomb-making instructions?

My answer was to collect together a wide range of comment, advice and information about effective and well-balanced regulation and deregulation on the ‘Understanding Regulation’ website ( www.regulation.org.uk ).  I hope that its publication will help all those who wish to understand a complex area, as well as those embarking on a regulatory career for the first time.

[This blog was first published in Civil Service World.]

 

The UK is already a Member of the EEA – But will it be Forced to Leave?

The UK is already a member of the European Economic Area. But will it be forced to leave the EEA when it leaves the EU?

The 1992 EEA agreement is here:-

http://www.efta.int/media/documents/legal-texts/eea/the-eea-agreement/Main%20Text%20of%20the%20Agreement/EEAagreement.pdf

The UK was (and still is) a contracting party, as well as (what is now) the EU.

Adding territories:- Further countries have been added since 1992 – such as Croatia – but their membership only comes into force once it is ratified under the law of that country – which has not yet happened in the case of Croatia.

Withdrawal from the EEA:- Countries can withdraw from the EEA – although the EU treaties require EU member states to join the EEA, as Croatia is now doing. This has the interesting consequence that the UK cannot leave the EEA before it leave the EU, but it can linger in the EEA after leaving the EU. (But see the debate about the meaning of Article 126 – below.)

The EEA withdrawal legislation is in Article 127:-

article-127

Article 2(c) governs the interpretation of the EEA agreement if and when there is any doubt about whether obligations fall upon the EU (as one of the contracting parties) or upon individual contracting parties such as the UK.:-

article-2c

But this Article does not appear to be relevant to the question of whether the UK remains in the EEA once it has left the EU. A more detailed explanation is in Annex A below.

Article 126:- On the above analysis, it seems that the UK will remain a member of the EEA even if we leave the EU, unless we deliberately withdraw by giving notice under Article 127. However, Article 126 defines the territories to which the agreement applies as follows:-

article-126

But the meaning of this Article is not entirely clear. Does it apply ‘only’ to those territories? If so then the UK will be compelled to leave the EEA after Brexit. But Professor Yarrow thinks not; his paper is here:-

http://www.rpieurope.org/Publications/Yarrow_Brexit_and_the_single_market.pdf

I reproduce the key part of his paper below, at Annex B.

If Professor Yarrow is right then the UK will remain in the EEA post-Brexit unless we give notice to leave under Article 127 of the EEA agreement.

Postscript:  A QC agrees – see comment attached to this blog, reproduced here for convenience:-
“Isn’t the short answer that, given Article 127 provides an express mechanism for withdrawal, it implicitly excludes other implied mechanisms for withdrawal such as ceasing to be a member of the EU? Moreover, the notion that withdrawal from the EU automatically delivers a withdrawal from the EEA is weakened by the fact of other, non-EU, EEA members?”

And several more interesting comments have since been added and are well worth reading. You will find them at the end of this blog.  

Martin Stanley

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Annex A: Article 2(c)

The position is that there is a set of Contracting Parties (the UK is one:  it signed as the UK, and the Agreement was ratified in the usual (UK) constitutional way).  Another (one of 32) Contracting Party is the “EU”.

Any agreement obviously places obligations on the parties – e.g. there will be provisions that say “a Contracting Party is expected to do X”.  The EU however, operates with shared competences – on some things the “EU” has competence, on other things the competence lies with the “Member State”, in yet others there is a joint competence.  The question is then as follows:  When text in the Agreement says “Contracting Parties are expected to do X”, where does the responsibility to do X lie?  The “EU” is, in fact, a distinct Contracting Party precisely because, on some things, it has a responsibility to do X.

The question – where does the competence lie – only arises for the EU and its member states.  For Liechtenstein, Iceland and Norway (and for the UK post Brexit) there is no ambiguity about who should do X.  The responsibility lies with the Contracting Party concerned.  That is why Article 2(c) only addresses the Community and its Member States.  It simply says “If, within the EU set up, you want to know who is responsible for doing X, look at what the relevant provision in the Agreement is about and then look to see where, within that set up, the relevant competence lies.

Art 2(c) has nothing to do Contracting Party status, its acquisition or its abandonment.  The list of Contracting Parties is set out at the outset.  It is as it is.  As for leaving, there is only one provision, Article 127, which can only be invoked by the Contracting Party wishing to withdraw (in our case, the UK).

Annex B: Professor Yarrow on Article 126

Article 126 of the EEA Agreement may look like a small matter, but it has very large potential consequences for the Brexit negotiations and their outcome. It therefore merits some careful thought.

In discussions of the proposition that UK exit from the EU does not imply UK exit from the EEA – and hence that it does not imply that the UK, should it wish to remain part of the Single Market, will have to apply for and negotiate “access” – the most frequent objection elicited from lawyers is that this is to ignore Article 126 of the Agreement. Their argument is a simple one and goes as follows.

The text of Article 126(1) is:

“The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is applied and under the conditions laid down in that Treaty, and to the territories of Iceland, the Principality of Liechtenstein and the Kingdom of Norway.”

Post-Brexit, the UK will not be a member of the European Economic Community (now the EU) and the UK obviously isn’t Iceland, Liechtenstein or Norway. Ergo the Agreement shall not apply.

Response

An error of logic

The first point to note is the logical error. The deduction would be correct if the Article opened with the words The Agreement shall only apply … . Without the word ‘only’ there is nothing to indicate that the Agreement cannot also apply to countries that do not satisfy the conditions set out in Article 126(1). A fortiori there is nothing to indicate that the Agreement ceases to apply to one of its own Contracting Parties which, by dint of circumstances, no longer satisfies one of the conditions specified.

A possible counter-response is that the word ‘only’ can reasonably be inferred from the surrounding text, the economic and political context in which the Agreement was made, the original intentions of the Contracting Parties to the Agreement, and so on. If that point is made, it goes without saying that there is a burden of proof to be discharged by those who would argue for it, and in this case I think the burden is a heavy one, because this particular flap of a butterfly’s wings would have obvious, very major consequences: it would compel UK exit from the Agreement.

In fact, the arguments for the wing-flap are weak. There is nothing in the rest of the Agreement’s text that provides a clear pointer to an intention that membership of either the EU or EFTA was an essential characteristic for Contracting Parties, and the EU’s broad policy goals in the period 1989-1992 were to bring countries together, not to create new barriers to participation in the Single Market.

De facto the Contracting Parties were, and to date have been, members of the EU or of EFTA, but it is hard to see that this reflects anything other the fact that, in the period 1989-1992, this was an Agreement that would not only contribute in and of itself to the EU’s wider policy goals of the time, but also was feasible within a relatively short time period and could serve as a first, significant step in a more comprehensive programme of economic co-operation.

Another argument for the inclusion of ‘only’ is that without it Article 126(1) is simply descriptive, conveys no information, and therefore would not have appeared in the Agreement at all, but this too is unconvincing. The ‘therefore’ is itself questionable, relying on implicit, auxiliary assumptions to the effect that re-statement, or stating the same thing in a different way, can have no value and that drafters will never ever be inclined to state the obvious. However, the main reason that this argument can be discounted is that Article 126(1) is not informationally redundant: it serves a specific, additive function, and its interpretation and implications should be assessed on the basis of this function.

Inconsistency with principles of international law

Next, consider the argument that an ‘only’ can reasonably be inferred from an interpretative maxim such as expressio unius est exclusio alterius (to express one thing is to exclude another, alternative thing).

The difficulty then is inconsistency with the general intent of the Vienna Convention to protect and preserve as much as is feasible of international co-operation in the face of extraneous political events, illustrated for example by the discrepancy between this maxim and the Convention’s own guidance on interpretation.

To illustrate, if the EU were a fully-fledged political union and had entered into a multilateral agreement with Iceland, Liechtenstein and Norway, Brexit would have the effect of creating two successor states, the UK and the EU minus the UK. The Vienna Convention on Succession of States says, in Article 34, that: “1. When a part or parts of the territory of a State separate to form one or more States, whether or not the predecessor State continues to exist: (a) any treaty in force at the date of the succession of States in respect of the entire territory of the predecessor State continues in force in respect of each successor State so formed; …” In the hypothetical circumstances, therefore, the multilateral agreement would still apply to the UK.

These are not, of course, the actual circumstances. The UK is a Contracting Party to the EEA Agreement in its own right, having signed it and ratified it, factors that serve only to strengthen the case against any forced exclusion. The point is simply that, given the Convention’s approach to successor states, it would be extraordinary to over-ride its purposes and intent via recourse to an interpretative maxim such as expressio unius est exclusio alterius.

Oddities as signifiers

To elaborate further, consider the situation if the word ‘only’ were somehow conjured into the text. There would then be a number of oddities.

First, the question of who can and cannot be a Contracting Party is an important one. Why then is it not set out much earlier in the Agreement where most of the Articles, in the final part, Part IX, of the Agreement which is entitled GENERAL AND FINAL CONDITIONS and which can reasonably be said to be focused on tidying up a number of loose ends.

Second, why do the words “under the conditions laid down in that Treaty” appear in Article 126(1)? What do they mean? Could they not be omitted?

Third, most of the text of Article 126 comes in its second paragraph, which is its only other paragraph. Article 126(2) states that:

Notwithstanding paragraph 1, this Agreement shall not apply to the Åland Islands. The Government of Finland may, however, give notice, by a declaration deposited when ratifying this Agreement with the Depositary, which shall transmit a certified copy thereof to the Contracting Parties, that the Agreement shall apply to those Islands under the same conditions as it applies to other parts of Finland subject to the following provisions:

(a) The provisions of this Agreement shall not preclude the application of the provisions in force at any given time on the Åland Islands on:

(i) restrictions on the right for natural persons who do not enjoy regional citizenship in Åland, and for legal persons, to acquire and hold real property on the Åland Islands without permission by the competent authorities of the Islands;

(ii) restrictions on the right of establishment and the right to provide services by natural persons who do not enjoy regional citizenship in Åland, or by any legal person, without permission by the competent authorities of the Åland Islands.

(b) The rights enjoyed by Ålanders in Finland shall not be affected by this Agreement.

(c) The authorities of the Åland Islands shall apply the same treatment to all natural and legal persons of the Contracting Parties.

The Åland Islands lie in the Baltic Sea between Finland and Sweden. The inhabitants, who number around 28,000, are Swedish speakers, but the islands are part of the territory of Finland. The islanders enjoy a significant degree of autonomy.

The question is: why should these provisions relating to the Åland Islands be bundled together, in the same Article, as a proposition that can, so it is argued, be determinative on such an important matter as entitlement to participation in the EEA Agreement?

Examination of such oddities can often be informative, and in this case it certainly is.

States and territories

The EEA Agreement is an agreement among governments, who are the Contracting parties and of which the UK is one. However, membership of the EU does not require that the whole territory of a State be subject to the EU Treaties. In relation to the Kingdom of Denmark, for example, Greenland and the Faroe Islands are ‘contracted out’.

Similarly, what can be termed ‘special member state territories’ may be ‘contracted in’ to the EU, but with certain conditions applied. For example, the Spanish enclaves of Ceuta and Melilla are part of the EU, but they are excluded from the common agriculture and fisheries policies.

The EEA Agreement necessarily has to address issues arising from these special territories, of which there are a significant number, including overseas territories that became attached to Europe in the age of empires: they are a kind of fossil record of European history. UK examples are the Channel Islands, the Isle of Man and Gibraltar. The reason for this necessity is Article 29 of the Vienna Convention on the Law of Treaties, which states that: “Unless a different intention appears from the treaty or is otherwise established, the treaty is binding on each party in respect of its entire Territory”.

The issues are therefore addressed in Article 126, which expresses the intention of the Agreement in respect of the territories to which it is to apply. It takes the set of Contracting Parties as a given and then, in effect, defines the parts of their territories (generally all or the great bulk of the territories) that are to be covered by the Agreement, applied either in its entirety or subject to special provisions. The relative policy significance of the matter, which reflects the small, relative economic sizes of the special territories, explains its late occurrence in the text of the Agreement.

The potentially complicated exercise of ‘geographic market definition’ for EEA purposes is simplified by the fact that the EU had already gone through this exercise for those of the Contracting Parties who were its own members at the time. The Agreement therefore simply adopts the outcomes of that earlier process – “The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is applied …”. Further, as noted, certain territories may be ‘contracted in’ to the EU Treaties, but subject to certain conditions. This explains the words “… and under the conditions laid down in that Treaty”. Any conditions in the EU Treaty that are relevant to the operation of the Agreement are simply mapped from the EU Treaty into the EEA Agreement, and a potentially time consuming, administrative exercise is avoided.

The same, administratively expedient option was not available for those Contracting Parties who were not members of the EU, and hence these had to be dealt with separately, country by country. Fortunately, these countries, which originally included Austria, Finland and Sweden as well as Iceland, Liechtenstein and Norway, do not have appeared to have raised ‘special territories’ issues, save in the case of Finland.

Finland was the only country with a special territories issue that was a Contracting Party of the EEA before joining the EU. This explains why the matter of the Åland Islands, uniquely among special territories, needed be addressed in the EEA Agreement, and it is so addressed in Article 126(2).

Brexit would imply that that there would need to be “necessary modifications” to the Agreement, but this doesn’t mean that the special territories issue needs to be re-opened in a way that would lead to significant administrative burdens. For example, the text of Article 126(1) could be adjusted to read: “The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is or has been applied …”. That would map the UK arrangements at the time of Brexit into the EEA Agreement without further ado.

Conclusion

The perceived oddities exist only as a result of misinterpretation and the conclusion from all this is simple: there is no case for conjuring the word ‘only’ into the text of Article 126(1). Article 126 was not intended to be, and as it stands is not, determinative of the ability of a country to participate in the Agreement. It is not exclusionary, either by intent or by effect. The purpose of the Article is, starting with the territories of the Contracting Parties, to make negotiated, generally marginal adjustments that take account of the interests of the inhabitants of a number of special territories.

END

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