Select Committee on European Union Fortieth Report


SERVICES DIRECTIVE (8413/06)

Letter from Ian Pearson MP, Minister for Trade, Investment and Foreign Affairs, Department of Trade and Industry/Foreign and Commonwealth Office to the Chairman

  I am writing to update your Committee on progress on this dossier in the light of the European Parliament's First Reading, which took place on 16 February 2006. The adopted position of the European Parliament (EP) diverges in many significant respects from the position that had been reached in Council under the UK Presidency. The EP amendments exclude a number of sectors from the Scope of the Directive, whilst offering a new approach to facilitating the free movement of services in Article 16 and deleting articles 24 and 25, on reducing administrative burdens for the posting of workers.

  The full effect of these amendments is still being analysed. The EP excluded several large service sectors, essentially on the basis of concerns over the country of origin principle. Given the new approach to Article 16 adopted by the EP, there no longer appears to be a case to exclude such a wide number of sectors. In particular, I believe that two of the economically significant sectors excluded from scope by the EP, namely all legal services and privately funded healthcare, would benefit from, and should remain covered by, the Directive.

  The new article 16 is unclear and possibly internally inconsistent so requires clarification. It is also important that its provisions are robust and make a genuine difference to temporary service providers.

  The EP excluded all labour law from the scope of the Directive and removed Articles 24 & 25. Like many supporters of the Directive, the UK would have preferred to retain key administrative simplification measures relating to the "posting of workers" (Art 24). However, labour law is problematic for a significant number of Member States and the Commission are likely to accept that agreement will not be possible unless they follow an approach similar to that of the EP.

  The Commission have indicated that whilst the EP text will form the basis for their revised proposal, expected on or after the 4 April, they will resist accepting all the EP amendments en bloc. There will not be any working groups until after the Commission has produced its revised proposal. There is a Competitiveness Council 29-30 May, and a further provisional date for one on 29 June. The majority of Member States do not want to rush into agreement without having time to work on improving the text. It is possible, however, that the Austrians may attempt to push through political agreement during their Presidency.I will of course submit a new explanatory memorandum on the revised Commission proposal as soon as the text is available.

10 March 2006

Letter from the Chairman to Ian Pearson MP

  Thank you for your letter of 10 March 2006, which Sub-Committee B considered at its meeting on 19 April 2006.

  We have been following the progress of the Services Directive with great interest and it was the subject of our report, Completing the Internal Market in Services,[40] published in 2005. We intend to conduct a follow up inquiry into the revised draft Directive. Now that this has been published, can you give an indication as to when we can expect the Explanatory Memorandum which you mention?

  We would be grateful if you would keep us informed of any developments.

24 April 2006

Letter from the Chairman to Ian Pearson MP

  Sub-Committee B considered this document (8413/06), and your Explanatory Memorandum, at its meeting on 3 May 2006.

  As we have just commenced an inquiry into the draft Services Directive, we will maintain scrutiny on this proposal at this stage, and look forward to hearing your views on 17 May.

4 May 2006

Letter from the Chairman to Lord Sainsbury of Turville, Parliamentary Under-Secretary of State for Science and Innovation

  As you will be aware, Sub-Committee B has been conducting a short follow up Inquiry into the Commission's Revised draft Directive on Services in the Internal Market. We were grateful to your colleague Ian McCartney MP for the oral evidence which he gave to us on 17 May 2006. We have revisited our inquiry of last summer, Completing the Internal Market in Services, and sought the views of some key contributors to that inquiry on how they view the revised draft. I enclose a short document that summarises the views received, and provides the Committee's emerging conclusions on the revised draft Directive, ahead of the Competitiveness Council on 29-30 May.[41] A full report will be published in due course.

  While the Committee is not prepared to release the proposal from scrutiny at this point, we would, on the basis of the assurances and information received from you, be content to the UK agreeing to the text of the Directive in its current form, or if amended to meet the UK's priorities. We would not consider such an agreement to constitute an override of scrutiny, and ask that you provide the Committee with a full report following the Council.

25 May 2006

Letter from Rt Hon Ian McCartney MP, Minister for Trade, Investment and Foreign Affairs, Department of Trade and Industry/Foreign & Commonwealth Office to the Chairman

  Further to your letter to Lord Sainsbury of 25 May 2006 on EM 8413/06, I am writing to update your Committee that political agreement was reached on the Services Directive at the Competitiveness Council on Monday 29 May 2006. I am grateful to note that your Committee will not record this as an override of the scrutiny reserve, in spite of the reserve not having been lifted. I await the publication of your full report.

  As you are aware, this is an important step towards achieving a truly open market for services in the European Union and will provide a major boost to Europe's economy. It is an example of an enlarged Europe delivering major economic reform. Due to the nature of our economy, the UK is likely to be one of the biggest beneficiaries, to the tune of £5 billion per year. Businesses, consumers and jobseekers will all benefit.

  As I explained to the Committee on 17 May, I am keen to ensure that the Directive delivers for UK business and protects UK interests in sensitive areas. In short, that it achieves a balance between opening up markets and upholding standards.

  The Government promised to ensure that standards in sensitive areas such as health and safety are not disturbed, that the vulnerable such as children and the elderly are protected and that the procedures for establishing in another Member State work well, add real value and are not needlessly costly.

  I am sure your Committee will agree that political agreement reached at the Council is an excellent result for the UK and achieves our negotiating objectives. Whilst the text of the Directive remains broadly unchanged, amendments on our key remaining issues were secured. Pressures to further reduce the scope of the Directive and the impact of some of the deregulatory measures were largely resisted.

  In particular, existing wording for certain important areas, such as in the field of labour law, was maintained, and clarifications on health and safety and other matters were secured. Further exemptions from the Directive were successfully resisted, with one exception, that of notaries. Significantly, the screening provisions which require Member States to review their legislation and remove barriers to trade have been strengthened. I have supplied a copy of the revised Directive to the Committee Clerk.

  The draft Directive will now be considered again by the European Parliament, possibly before the end of the Austrian Presidency. Although it is hoped that the text agreed at the Council will largely be retained, the Parliament may propose amendments and we will need to ensure that the Directive continues to protect the UK's sensitive policy areas and that the market opening provisions are not diluted.

  I am grateful to the Committee for the attachment outlining emerging conclusions on the revised draft Services Directive and for their ongoing thorough examination of the draft Directive. I will of course inform you and the Committee members of the outcome of the Parliament's second reading.

6 June 2006

Letter from Lord Sainsbury of Turville to the Chairman

  Thank you for your letter of 25 May on EM 8413/06. I am writing to update your Committee that political agreement was reached on the Services Directive at the Competitiveness Council on Monday 29 May. I am grateful to note that your Committee will not record this as an override of the scrutiny reserve, in spite of the reserve not having been lifted, I await the publication of your full report.

  As you are aware, this is an important step towards achieving a truly open market for services in the European Union and will provide a major boost to Europe's economy. It is an example of an enlarged Europe delivering major economic reform. Due to the nature of our economy, the UK is likely to be one of the biggest beneficiaries, to the tune of £5 billion per year. Businesses, consumers and jobseekers will all benefit.

  As I explained to the Committee on 17 May, I am keen to ensure that the Directive delivers for UK business and protects UK interests in sensitive areas. In short, that it achieves a balance between opening up markets and upholding standards.

  The Government promised to ensure that standards in sensitive areas such as health and safety are not disturbed, that the vulnerable such as children and the elderly are protected and that the procedures for establishing in another Member State work well, add real value and are not needlessly costly.

  I am sure your Committee will agree that political agreement reached at the Council is an excellent result for the UK and achieves our negotiating objectives. Whilst the text of the Directive remains broadly unchanged, amendments on our key remaining issues were secured. Pressures to further reduce the scope of the Directive and the impact of some of the deregulatory measures were largely resisted.

  In particular, existing wording for certain important areas, such as in the field of labour law, was maintained, and clarifications on health and safety and other matters were secured. Further exemptions from the Directive were successfully resisted, with one exception, that of notaries. Significantly, the screening provisions which require Member States to review their legislation and remove barriers to trade have been strengthened. I have supplied a copy of the revised Directive to the Committee Clerk.

  The draft Directive will now be considered again by the European Parliament, possibly before the end of the Austrian Presidency. Although it is hoped that the text agreed at the Council will largely be retained, the Parliament may propose amendments and we will need to ensure that the Directive continues to protect the UK's sensitive policy areas and that the market opening provisions are not diluted.

  I am grateful to the Committee for the attachment outlining emerging conclusions on the revised draft Services Directive and for their ongoing thorough examination of the draft Directive. I will of course inform you and the Committee members of the outcome of the Parliament's second reading.

7 June 2006

Letter from the Chairman to Lord Sainsbury of Turville

  Thank you for your letter of 7 June, replying to my letter of 25 May. Sub-Committee B considered your letter at its meeting on 19 June.

  We note the outcome of the Competitiveness Council on 29 May. We very much hope that this agreement will be "an important step towards achieving a truly open market for services in the European Union" and that it will "provide a major boost to Europe's economy". We nevertheless share your concern that the market-opening elements of the text of the Services Directive are not diluted further. We trust that the Government is taking steps to brief UK MEPs to this effect and we would be grateful for any updates on the Directive's progress.

  We would like to take this opportunity to thank you personally, and your Department, for all the cooperation you have provided with our inquiry into the Commission's revised draft Directive. We will of course be sending you a copy of our report, which will be published at the beginning of July.

20 June 2006

Letter from the Chairman to Lord Sainsbury of Turville

  Please find enclosed a corrected version of the Committee's Emerging Conclusions which were sent to you with my letter of 25 May ahead of the Competitiveness Council on 29 May. The original document contained a drafting error in the final paragraph.

  I would be grateful if you could replace the Emerging Conclusions which you have on record with this corrected version for future reference.

23 June 2006

Annex A

EMERGING CONCLUSIONS ON THE REVISED DRAFT SERVICES DIRECTIVE

INTRODUCTORY REMARKS

  The European Union Treaty sets out the free movement of goods, persons, services and capital as a central principle governing the internal market. Service industries account for approximately two thirds of the GDP of EU Member States and a similar proportion of the labour force. In the European Council in February 2005, the European Commission identified the creation of a better functioning internal market for services in the EU as key to making progress on the Lisbon Agenda and called for urgent action to achieve it. We were supportive of the first draft Services Directive and its attempt at legislation to speed up the liberalisation of services provision. We recognise the considerable differences of view engendered by that first draft, not least those concerned with ensuring a balance between social, environmental and labour market issues on the one hand and the drive to complete the internal market in this important area on the other. The current revised draft Directive from the Commission appears to have broader political support across the EU, not least following extensive discussions in the European Parliament. The new draft has, of course, yet to be finally considered by the Council of Ministers. Whilst we welcome this broader consensus, we have felt it important for us to examine how this revised version differs from the original and to comment on any significant issues arising.

  Our latest inquiry and these emerging conclusions relate largely; but not entirely, to those parts of the revised Directive that deal with the provision of services on a "temporary basis" as opposed to on an established business basis. We recognise the importance of the measure relating to the latter but the main controversies have concentrated upon the former. We comment below on five issues; a horizontal Directive; the basis of the freedom to provide services; derogations and exclusions; the points of single contact; and implementation. We end with some concluding remarks.

A HORIZONTAL DIRECTIVE

  We warmly welcome the fact that the Directive remains horizontal in conception and application. This should greatly assist ease the path of legislative process and implementation.

THE FREEDOM TO PROVIDE SERVICES

  We continue to recognise the considerable importance that provision of services on a temporary basis has particularly for small and medium sized firms wishing to "test the water" of market entry into another Member State in the EU without becoming formally established there. It also helps market flexibility in often fast moving service sectors and where business opportunities are occasional in nature rather than based on long term contracts of supply.

  The first draft Directive offered considerable comfort to this need for flexibility by setting out a "Country of Origin Principle" (CoOP) under which a firm could operate temporarily in another member state under rules applicable in its country of origin. That principle has been replaced in the new draft by a switch to country of destination or host country basis of operations. At the same time, the revised Directive seeks to set clearer limits to what host countries can impose on businesses operating there on a temporary basis. This combined package of host country rules with clearer limits on constraints to doing business is the basis of a Freedom to Provide Services.

  In our first Report we saw the CoOP as "an essential part of enabling SME service providers to break into the markets of other Member States". We have considered whether or not the change in the underlying basis for temporary provision of services in other Members States from the CoOP principle to the Freedom to Provide Services is achange of substance and whether it will change the effectiveness of the draft Directive in ensuring an effective single internal market in services.

  We welcome the fact that the temporary [non-established] basis of provision of services across borders of Member States remains fully supported. One view expressed to us is that not a lot of substance is changed by the revised draft Directive. Since the EU Treaty contains a freedom, reinforced by court decisions, to provide services on a temporary basis, the role of the Directive is arguably to reiterate that freedom, to provide a more explicit framework within which that freedom can be exercised and to provide a convenient source to which a service provider operating outside its home base can point if challenged.

  On the other hand, there may be a gap between perceptions and legal rights, acting as a brake on service provision. A business may understand its obligations in its home country but be wary of legal requirements and nuances in up to 24 other Member States. Thus witness views differed on the practical extent of the freedom. The Federation of Small Business considered that the ease and benefits of temporary operations had largely been lost in the new draft, whereas the law firm Clifford Chance told us that the change of emphasis from the CoOP to the Freedom to Provide Services within the revised draft had no effect upon the existing rights of businesses under the EU Treaty as upheld in the European Court of Justice.

  In practice, however, SMEs may feel that the emphasis will still, as now, be upon understanding and meeting all the rules and regulations of up to 24 other Member States before testing out markets elsewhere in the EU, notwithstanding that the revised draft seeks in Article 16 to limit the restrictions that can be imposed upon them. It may be that the appetite of small business for testing particular local restrictions on service activity through the courts is not strong. Businesses will as a result of the Directive have the new right to sue for damages against a Member State which infringes these rules, once transposed, in Member States courts.

  On a more positive note, the sets of reasons why temporary provision of a service may or may not be permitted has been clearly set out and might be regarded as quite rigorously drawn. These are set out in Article 16 of the revised draft Directive. It includes directly only issues of public policy, public security, public health and the protection of the environment, and these must be proportionate and must not be discriminatory. There is a "blacklist" of illegitimate reasons for restricting the freedom to provide services; for example a service provider need not hold an identity document specific to a particular service activity. We consider this framework a good first step in liberalising service provision under a host country approach.

  The Government's Revised Partial Regulatory Impact Assessment concludes that the loss of economic benefits by moving from a CoOP to the Freedom to Provide Services is in the order of 10-20 per cent of potential benefit to the GDP. The Assessment also concludes that the effects of the negative change away from the CoOP probably outweighs the positive effects of deleting some general derogations and clearer limits on what host Member States may impose. There are, however, important non-economic benefits in meeting concerns in the social and environmental areas and securing agreement on a draft Directive to free up trade in services. Overall, the Government's assessment is that the net annual benefit of the revised proposal compared with no Directive will be in the range of £7.7 and £8.6 billion. 44 per cent of the UK GDP and of UK employment is in services industries covered by the freedom to provide services in revised Directive, while 49 per cent of GDP and employment is covered by improvements in the freedom to establish a business across the EU [Tables 2, 3, pages 24, 25].

EXCLUSIONS AND DEROGATIONS

  Some changes have been made between the revised version of the draft Directive and the original draft in the list of exclusions and derogations. Exclusions are those sectors which are entirely removed from the provisions of the Directive. Derogations are sectors to which the Freedom to Provide Services does not apply. Services that are generally publicly provided across all EU countries (services of general interest, in the language of the Directive) are excluded. Several of the significant excluded sectors, for example Financial Services, Transport and Electronic Communications Services, and Health are the subject of other Directives relating to free movement. There are significant derogations from the key Article 16 (the Freedom to Provide Services) listed in Article 17. The main elements here are Gas, Electricity, Water and Postal Services, which have their own Directives.

  Nevertheless, as noted above 44 per cent of the UK GDP and of UK employment is in services industries covered by the freedom to provide services in revised Directive, while 49 per cent of GDP and employment is covered by improvements in the freedom to establish a business across the EU. We are persuaded that the lists of exclusions and derogations are less daunting than they might seem and that the revised draft Directive covers a substantial part of the services sector such that it can make a major contribution to the growth of cross-border services provision within the EU.

POINTS OF SINGLE CONTACT

  The draft Directive provides [Article 6] that Member States shall ensure that it is possible for service providers to complete appropriate procedures and formalities at contact points known as points of single contact. Articles 7 and 22 state that Member States shall ensure that specified information is easily accessible to providers and recipients of services via the points of single contact. A fee may be payable for the services at or by the point of contact.

  Given the new framework of the Directive, under which a good knowledge by a business of its home country requirements is insufficient to enable it to carry out the activity in another Member State, the Point of Single Contact assumes considerable significance in facilitating cross-border trade across the EU. It will also be helpful to recipients of services provided across borders.

  In its EM and Revised Partial RIA [RPRIA], the Government makes a distinction between a point of information and a point of completion. Article 6 of the revised Directive refers to possible completion of procedure and formalities. The point of single contact should be provided by each Member State by three years after the Directive enters into force.

  The DTI favours the point of information approach. The RPRIA calculates that providing the facility to complete necessary processes through a point of single contact rather than information about requirements and where to complete them would cost UK government some £90 million per annum but would add service benefits to business of more than £200 million per annum. The Government has indicated that it would seek to ensure that the single points of contact are points of information, not of completion. In oral evidence, the Minister told us that the main issue was not that of cost but the risk of failure to deliver within the timetable set out a working point of single contact with the capacity to deliver completion of requirements and processes for businesses.

  Businesses, particularly small businesses, would benefit from the more comprehensive approach of a point of completion. The government's own RPRIA put a value of over £200 million per annum for business, mainly for SMEs. However the difficulty is that the beneficiaries of the point of completion are largely based in other countries, so the benefits for UK SMEs would flow from the single points of contact set up in the other 24 Member States. If a full single point of completion is created in all Member States, there will be far greater benefits to the Community as a whole than if each Member State provides a more modest single point of information.

  In some Member States, a single point of information may not provide incoming businesses with a great deal of help in completing necessary formalities etc. If each Member State decides what kind of service it will provide there could be a bewildering variety of contact points, negating the objective of providing ease and simplicity in doing business across the EU. We understand the reluctance of the government to take unnecessary risks with public money. However, this could be mitigated if a phased approach were adopted with points of information provided not later than three years and points of completion no later than five years after the Directive enters into force.

IMPLEMENTATION

  We note the timetables proposed by the Commission, that the Directive come into force within two years and that points of single contact be in place within a maximum of three years of possible adoption in 2006 proposed for the introduction of this measure. This will require a thorough review by each Member State of existing relevant law and actions to repeal or amend that law as appropriate. Articles 15 of the draft Directive requires Member States to assess requirements imposed on access to and exercise of service activities and to make a report to the Commission on the results of that assessment under Article 41. That report must be completed within two years from adoption of the Directive and must specify which requirements the Member States plan to retain and their justifications and also those that have been abolished by that date. These are ambitious timetables. We hope they can be met. It is important for UK service businesses, especially SMEs, that these timetables are met in other Member States as well as in the UK. Thus in the UK we have a specific interest in how the implementation timetables are met throughout the EU.

  We note that the political will must be coupled with a strong programme of staged implementation across all MS, in order that the Directive does not lose impetus. It must be hoped now that a strong consensus has truly been reached not only to agree the draft Directive but also to ensure its speedy and full implementation. The pace and patchiness of implementation of Directives such as those on the liberalisation of Gas and Electricity markets demonstrates the possible gulf between agreement of legislative proposals and their implementation.

CONCLUDING REMARKS

  In the time available, we have interviewed witnesses representing a broad spectrum of both political and economic interests including MEPs, business organisations and theTUC as well as a leading law firm. Whilst there may be voices we have not heard, it is notable that none of the parties questioned was now opposed to the Directive in its current draft. Several would have preferred to see changes, but all could live with it in the current form. We share that view.

  The move away from trade in services on a Country of Origin Principle to a Country of Destination Principle is a matter of regret. It is a backward step from the original draft, but we recognise that the alternative to the revised draft Directive would have been no agreement on the way forward and continued barriers to trade in services across borders within the EU. The revised draft Directive should be supported. Whilst we regret some of the changes, we also recognise that many changes helped meet real concerns about issues wider than the single market and helped achieve a workable compromise. The draft Directive is not the end of the process of liberalising the services market within the EU but it is a significant step forward.

Letter from Rt Hon Ian McCartney MP to the Chairman

  Thank you for your letter dated 20 June to Lord Sainsbury. There has been some progress since then with respect to the process in the European Parliament for the Services Directive.

  Meetings in Brussels between Members of the European Parliament have revealed that most MEPs believe that the Directive will be adopted quickly without a re-opening of the debate. However, services of general economic (and non-economic) interest continue to be a hot topic for discussion: and could continue outside of the context of the Directive, but possibly in parallel with its second reading.

  We now expect the second reading to take place in either November or December of this year. My team have provided MEPs with written briefs and I have made telephone calls to influential members. I am also aware that during the approach to the second reading I will need to be ready to undertake targeted visits to Europe to persuade key groups of MEPs to accept the Council text and avoid upsetting the delicate compromise that they have enabled Council to achieve.

  I shall of course update you further in the autumn on any new developments. In the meantime, I look forward to reading your report.

24 July 2006



40   6th Report of Session 2005-06, HL Paper 23. Back

41   Refer to following letter dated 23 June 2006 from the Chairman to Lord Sainsbury of Turville. Back


 
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