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Articles about the UK Civil Service and Regulation

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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.

 

 

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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.]

 

Q. Why Streatham Hill, Telford Avenue? A. The Brixton Cable Tramway

South Londoners are well used to hearing that their bus is going to ‘Streatham Hill, Telford Avenue’. Few know that this site was originally the terminus of the Brixton Cable Tramway which linked Kennington, Brixton and Streatham Hill. Brixton Hill had previously been found too steep for all but the lightest of horse-drawn trams

Kennington Changing PlaceThe cable tramway connected with three horse-drawn tramways at Kennington Gate – presumably near the Oval at the junction of Kennington Road and Kennington Park Road. The horse cars were initially uncoupled from their horses and coupled to a gripper car which drew them all up the hill to Streatham.   The Board of Trade objected to the gripper cars carrying passengers until after the line had been in operation for some time.  But the American inventor of the system was not impressed:-

Gripper CarMR. HIRAM S. MAXIM, the inventor, is contributing to the Engineering Magazine a series of articles on various differences in industrial conditions between England and the United States. He has been especially impressed by what he terms an ignorant prejudice in England against American products. This he illustrates with an amusing bit of personal experience: 

“A short time ago an American cable line was established in Brixton, a suburb of London. Upon first visiting Brixton I failed completely to recognize the system, as each car was provided with a small and extremely ugly locomotive. Upon closer inspection, however, I found that the locomotive carried simply the clamping device. Upon asking the ‘driver,’ or the man at the clamp, the object of the apparatus, he said: 

“‘ Oh, this is the locomotive. This draws the car.’

“‘ Oh,’ I said, ‘how nice! Please explain it.’

“‘Well, underground here is a wire rope; this ‘ere thing goes down through this ‘ere slot and clamps the rope, and the rope pulls the locomotive, and the locomotive pulls the carriage, don’t you see?’ 

“‘What is the object of the locomotive?’

“‘Why, to draw the car, of course.’

“‘But why not put the clamp on the car and dispense with the locomotive altogether?’

“After he had thought the matter over a short time, I asked again:

“‘What is the use of the locomotive?’

“His reply was:

“I’ll be hanged if I know.’

“Now, if this system had been introduced into a country like Germany, France, or Spain the natives would have had sufficient respect and confidence in American engineers and systems to have put it up in the exact manner that it was imported; but as the English engineers were used to a locomotive and wished to make some change in the American model, they added the ‘locomotive,’ which certainly looks very awkward, and is, without question, superfluous.”’

The tramway was opened around 1891 during a period when London was expanding rapidly to the south.  Streatham Hill Railway Station had been opened in 1856 and Brixton Railway Station in 1862.  The cable tramway was replaced by regular trams around 1905.

Brixton Road tram shedThe cable system was driven by steam powered winding gear at Streatham Hill. Its maximum speed was 8mph (14kph).  There was a tram shed near the Oval – The building is now a church at 20 Brixton Road – photo opposite.

It is perhaps slightly odd that the tramway began as far north as Kennington, but this may have been to help the trams get up the sharp hill outside St Marks Church, further along  which the Effra River originally tumbled on its way to Bermondsey.

The Streatham Hill tram shed was eventually renamed Brixton Bus Garage, a name that caused much confusion. Lang Rabbie explains that ‘For years, people heading out of Brixton heading for Streatham Hill were confused by this, and stood at the bus stops by the tube while buses to Streatham Hill sailed past with misleading destination boards saying Brixton Garage.’  London Buses eventually relented around 2000 and renamed the bus stop (and terminating point for bus routes) as Telford Avenue.

Further information is on the Cable-Car-Guy and Brixton Society blogs/websites.

If you found this interesting then you may also like to explore my websites which provide accessible information about:

as well as

 

Martin Stanley

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

Post-Brexit Bureaucracy: Rules of Origin

It took many years of patient negotiation, led by the UK, to transform the EU’s tariff-free zone into a genuine Single Market free of regulatory barriers. This blog explains why the post-Brexit reintroduction of Rules of Origin for UK imports and exports might cause problems, even if we achieve a zero-tariff agreement with the EU27.

Why are rules of origin needed? The short answer is that (assuming we leave the single market) such rules will be needed to show that the UK is not being used by third countries to gain low tariff access to the single market. Let’s assume that the EU27 want to impose higher tariffs on imports from China than on imports from the UK – which will post-Brexit hopefully be tariff-free.   The EU27 are clearly not going to allow the UK to import Chinese goods, pack them in a different box, and sell them on to the EU as if they originate here. All UK exporters will therefore need to comply with the EU’s ‘Rules of Origin’ bureaucracy – and the EU will have to comply with ours.

(I am told that the rules go back at least as far as to a case involving Singer typewriters which were made in Japan, assembled in the UK & described as British.)

Here are the main potential problems if rules of origin need to be enforced in future in respect of trade between the UK and the EU:

Paperwork: Every exporter – however small – will have to work out whether their goods originate in the UK or abroad. They will therefore need to understand important concepts such as preferential and non-preferential origin, percentage rules, diagonal and full cumulation, and minimal processing. These are explained in the annex to this blog.

There are unlikely to be any SME exemptions – even if you are selling only via Etsy or eBay. UK origin may often be obvious, but what if you are a small scale exporter of handmade chocolates, say, or handicrafts?  The cocoa or raw materials will most likely originate outside the UK – so do you have to declare non-UK origin and pay EU customs duties?

Customs delays could be much more serious. Many manufacturers work on a ‘just in time’ basis so as to avoid holding stocks which need to be stored and financed. Modern customs processes are pretty efficient but even spot checks to ensure compliance with rules of origin could devastate a production schedule. And who in Germany is going to buy a Christmas present from the UK if it not going to arrive quickly, especially when customs checks delay an already stressed Christmas postal system?

It must also be of some concern that a very large percentage of UK exports to the EU will go via Dover, Calais and other Channel ports which don’t currently have the infrastructure to process or spot-check a large number of lorries per day.  So – if the UK exits the Single Market before the French authorities have either had the time or the inclination to upgrade the facilities at the French ports – do we end up with a queue of lorries half-way back to Birmingham within a week? There will presumably also be queues back towards Brussels if we don’t start building new facilities at Dover (or Calais?) pretty soon now – unless HMG is absolutely confident that we will not need them, maybe because our external tariffs are very low.

And what happens at the Irish/Northern Irish border? Somebody will need to build and operate customs facilities either here or at the Irish, French and Spanish ports.

This in turn leads to possible underhand non-tariff barriers. Protectionist pressure can lead to Customs authorities inspecting imports in considerable detail, opening random boxes and taking products apart to inspect components, as the French did in their famous use of Poitiers as a border port some years ago. We clearly hope to achieve an amicable divorce from the EU27, but who is to tell whether this friendship will last forever?

I wonder, too, whether there could be pressure to remove UK components from EU27 products so as to avoid those products being reclassified as non-EU because they contain UK components? An Airbus without British wings is unlikely, I guess, but less prominent examples might start to appear. Angela Merkel has already started encouraging German owned manufacturers to consider investing in Eastern Europe rather than the UK.

Notes

What does originating and non-originating mean? As the purpose of this blog is to draw attention to the consequences of leaving the Single Market, it might be helpful if I stress the importance of understanding the voluminous HMRC guidance in this area. This is summarised here. I do not expect many to read it – but you might like to draw it to the attention of anyone who is currently exporting or importing within the EU, but not outside it. They have around two years to get their heads around this stuff!

OECD studies of trade costs have indicated that trade facilitation measures such as simplified documentary requirements, automation of customs procedures, availability of advance customs rulings, and risk based clearance can deliver significant cost savings to businesses engaged in trade. I have seen estimates that the absence of such trade formalities can increase the average cost to trade by the equivalent of 10%+ of the value of the traded goods, although this figure seems high and has been challenged – see the first comment below. It is to be hoped, of course, that our eventual agreement with the EU will eventually enable our businesses to avoid some of these costs, but it will be impressive if we have negotiated many of them away by March 2019 … or perhaps for a good time after that.

This note should be read in conjunction with my previous blog on non-tariff barriers. As with that blog, I do not claim specific expertise in this area and would be glad to be corrected if I have misunderstood or exaggerated anything. Any corrections will be incorporated in this blog, and significant changes will be notified via Twitter.

Martin Stanley

 

The UK, led by Margaret Thatcher, drove the creation of the Single Market. Here’s how we could lose if we now leave it.

The creation of the European Single Market was driven by Prime Minister Margaret Thatcher and her appointee as a European Commissioner, Lord Cockfield. They recognised that a genuinely open market had to be free of all regulatory obstacles (aka non-tariff barriers) to the free movement of goods and services. The Single Market was essentially completed by 1992 and exporters can now call on the European Commission and European courts to remove any new obstacles.

The downside, of course, was that individual member states could no longer develop regulations to suit their own cultures and economies – and so we see a certain Europe-wide homogeneity. Indeed, much standard setting is now worldwide: Ford’s Mondeo being the first of many vehicles designed for a worldwide market.

But the growth of ‘just in time’ manufacturing means that many firms are still very concerned that their businesses on both sides of the UK/EU border might experience significant post-Brexit impediments and delays in ports and at customs posts.  I understand that one major bank has estimated that – if the UK were to lose unfettered access to the Single Market – the consequential non-tariff barriers could impose a cost on exporters equivalent to a tariff of 10-15%.

The rest of this post contains examples of the various non-tariff barriers that might appear post-Brexit, without seeking to draw conclusions about the likely impact of those barriers, which is for others, more expert than me, to assess.

The most quoted example was the Germans attempt to impede the import of Cassis de Dijon, a blackcurrant liqueur which has an alcohol content of only 15-20%. German law used to require all fruit liqueurs to have an alcohol content of at least 25%. While this may have pleased the producers of German spirits, the rule was bad news for the French producer and denied German consumers the delights of French crème de cassis. The EU court said that the German rule interfered with free movement of goods: it stopped French cassis (which had been lawfully produced in France) from being sold in Germany. The Germans sought to justify their rule on the grounds of public health, as they wanted to avoid the proliferation of alcoholic beverages with low (<25%) alcohol content since these might be a stepping stone to indulging in stronger concoctions. The court wasn’t convinced. The German rule was found to be against EU law and so had to be removed.

More recently, Bulmers Cider used the European Courts to ensure that it could sell its product in 0.33l bottles despite a Belgian Royal Decree that such bottle sizes were banned. This led to importers into the UK being able to ignore UK ‘prescribed quantities’ whilst domestic packers had to comply – so the UK, too, then had to abandon  prescribed quantities. A neat bit of deregulation courtesy of Europe!

It might be helpful if we look at seven different types of non-tariff barrier:

1. Innovation: There could be problems if the EU were to develop regulations affecting the sale of UK products elsewhere in the EU without input from the UK. Vehicle regulations, for instance, are frequently amended to permit the introduction of new technologies, to improve cyclist safety, to reduce emissions and so on. This isn’t a problem as long as

  • UK officials (briefed by UK companies) are on the committees that present the changes to Ministers for approval, and
  • we have plenty of notice of the date on which the changes come into force.

However, if we leave the Single Market, there will no longer be any UK officials at EU meetings, so we may no longer know what changes are being proposed, nor when they are likely to be introduced, and we can be pretty certain that our competitors will encourage their governments to promote changes that will disadvantage those products in which UK manufacturers have strengths not shared by EU competitors.

This problem is mitigated in the case of established products by a complex set of international agreements which facilitate the international marketing of vehicles and many other products – see Andrew Chapman’s first very helpful comment below for more detail.

But the problem will be greatly magnified if we are interested in selling new technology, such as bio-engineered products or the control systems that will permit driverless cars. It will be very difficult quickly to take such products to market if we are not able to influence the regulations that will allow such products to be sold throughout the EU.

Vehicle emissions rules are a good example of the sort of problem that can arise.  A German backed proposal would have allowed manufacturers to work to an average of their emissions across their whole fleet – so BMW could produce luxury cars that produce more emissions than the average but offset those with smaller, less polluting models.  This was a big problem for Jaguar Land Rover, who only make top-end luxury cars.  The UK eventually gained a derogation to protect JLR in the emissions rules.  But this would not have been possible if we had not been involved in the design of the regulations.

James Dyson (inventor of bag-less vacuum cleaners) hit a similar problem when he was surprised by new EU energy-saving rules which meant that competitors’ machines were only tested when they were empty of dust which therefore under-recorded the environmental impact of the vacuum cleaners that used bags. The result was that he is no longer allowed to make vacuum cleaners with a motor that exceeds 1,600 watts. (This rule change had been mistakenly approved by Department of Energy officials and Ministers who had not realised the implications for Dyson.)

It is, however, only fair to point out that Eurosceptics complain that the need to achieve harmonisation can significantly delay the innovative process. It would be much better, in their view, if we could innovate as fast and as often as we wish, and leave the rest of the world clamouring to buy UK products.

2. Intellectual Property Rights (IPR), and Manufacturing Regulations and Standards: Trade will be disrupted if there develop two separate systems of IPR protection, and of the certification of safety etc. standards in fields such as chemicals, medicines, IT, and communications. These are, for instance, currently harmonised in the form of CE Marks, the Restriction of Hazardous Substances (i.e. lead/mercury-free) Directive, the REACH (chemicals) Regulations and the Good Manufacturing Practice Guidelines. Maybe we can safely assume that the UK will continue to impose such European regulation on UK business, in order to help exporters and importers? But UK Ministers and officials may not be able to influence the future development of such regulations, and may come under pressure to develop our own regulations maybe leaving us in a weaker (and more regulated) situation than now.

3. Food health scares (whether justified or not) almost inevitably lead to import restrictions which usually continue far longer than necessary following lobbying by domestic farmers and other producers. The United States, for instance, only began to allow the import of British beef and lamb from January 2017, nearly 20 years after they were deemed unfit for consumption during the UK’s vCJD (mad cow disease) scandal. This is worth £35 million a year. But the EU was persuaded by the UK to lift its import ban (which had anyway applied to beef only) much more quickly – around ten years ago.

4. Services:- Mutual Recognition: UK professional qualifications are currently widely accepted through the EU. But architects, lawyers, nurses, accountants, hairdressers and many others will not be able to practise outside the UK if there is no reciprocal freedom of movement, and they could anyway well find that they meet ‘interesting’ local barriers if they were to seek to offer their services in the EU after Brexit.

There is a related issue in the financial services sector where the ‘single passport’ system allows e.g. Japanese banks to base themselves in London but offer finance (for instance for vehicle sales) throughout the EU. But continuing to subscribe to this system would mean accepting continued convergence between UK and EU regulations, so limiting the extent to which the UK would be free to go its own way.

The debate about whether EU membership encourages or stifles innovation is very relevant, of course – see above.

5. Packaging and Labeling: This is an easy one. Text TOO BIG, too small, wrong colour? More information needed? Change the regulation and the UK will either have to fall into line or else UK exporters will need to cope with two sets of regulations – one UK, one EU – if they are to avoid having their products stuck in Customs warehouses.

This leads nicely to …

6. Customs Formalities: There are currently almost no customs documentation, checks and delays when products cross the Channel. This will have to change, and this will add delay, and hence cost, to all export businesses – and importers as well. Rules of Origin may well be a huge problem as the other 27 Customs authorities will need to be sure that products being imported from the UK – at UK/EU tariff rates – did not in fact originate elsewhere.

It has been reported, for instance, that northern France has only two border inspection posts for animal and food products.  (Calais does not have that capability because all its imported products come from the UK.) France will quickly need to build new capacity if it is to ensure that we Brits can continue to compete with French farmers.  Anyone willing to bet that they will do so?

It will also become very easy for an unfriendly bureaucracy to hold products for many days or weeks whilst they laboriously double check that the products comply with all the necessary product, labelling, rules of origin, and other regulations. “It’s such a shame that the appropriate expert is on holiday just at the moment and, no, I am not too sure when he will be back. And there is unfortunately such a backlog …”

The classic example was in 1982, well before the creation of the Single Market. The French Government, determined to protect the video cassette recording (VCR) market from the invading Japanese, selected Poitiers to be the customs bottleneck. Poitiers was chosen for two reasons: First, symbolically, because it was the town where the medieval Franks had turned back the Muslim hordes in 732 AD. Second, because Poitiers is right in the middle of France, so maximizing the journey the VCRs would have to take from any French sea-port. The New York Times reported that “tens of thousands of video tape recorders built in Japan and avidly sought by French customers are currently stacking up in warehouses. A handful of customs inspectors, hand-picked for slowness, has cut the clearances from 100,000 per month down to 8,000.”

7. Subsidies: Not really a barrier – but European rules currently prohibit much inter-member state competition to ‘buy’ inward investment, and these ‘state aid’ rules are policed pretty firmly, especially when one member state complains that another member state is being over-generous. But there is likely to be much less concern when the loser is the UK, and the grateful recipient of new investment – and jobs – is within the EU.

We, of course, will be equally free to start subsidising industries that are losing out to EU competition. It is probably one of the reasons why Jeremy Corbyn wants us to leave the Single Market.   You will have your own view about whether this will be a good thing.

So ….

What about Inward Investment? Imagine yourself sitting in Tokyo or Mumbai deciding whether to put down a new production line either in the UK or in an EU member state, both of which are vying for your attention and appear to offer similar costs and benefits – except for the threat of new non-tariff barriers, and the inability to influence European manufacturing policies. Did anyone ever get fired for choosing to invest in a market of 450 million people?

There is no short-term economic damage but slowly, year on year, the UK would begin to fall behind.

But, but, but … surely all these behaviours will reduce competition, raise prices, lower member state economic growth rates and harm EU consumers? Their imposition would surely damage EU GDP, maybe as much as the UK. Yes – but that applies to all trade barriers, including tariffs. Often, however, it makes political and social sense to impose tariffs and non-tariff barriers if they protect jobs in regions of high unemployment and/or in sectors that are under economic pressure. And large companies can be very persuasive when encouraging politicians to protect their business models against ‘unfair’ competition from those awful Anglo-Saxons.

Notes

Exports of goods and services to the EU in 2015 totaled £134bn and £89bn respectively. The equivalent figures for exports to non-EU countries were goods £149bn, services £136bn.

“Access to the single market” is a meaningless phrase. The key question is: “Can we trade without hitting tariff and non-tariff barriers”.

This is the fifth version of a blog originally published in October 2016. I am very grateful to those who have commented – including those who commented below – and so helped me correct and improve the text. Further corrections and additional arguments would be very welcome – to 68rtsw8@gmail.com please.

 

Martin Stanley

www.regulation.org.uk  &  @ukregulation

And also  www.civilservant.org.uk  &  @ukcivilservant

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