By Jonathan Branton, Alexander Rose and Alex Eaton, DWF Law LLP

The long awaited Subsidy Control Bill has been awarded Royal Assent, thereby putting into law a statutory UK State aid regime.  This will develop, change and build upon the interim Subsidy Control regime which has been in place within the UK since 11pm on 31 December 2020 (which came directly from the subsidy provisions of the EU/UK Trade & Cooperation Agreement (TCA) of December 2020). The main elements of the new Subsidy Control Act 2022 are expected to come into force in Autumn 2022. 

What is the Subsidy Control Act?

The Subsidy Control Act regulates the award of financial assistance, as subsidy, by public authorities and their agents to organisations which are engaged in economic activities.  In order to be lawfully awarded, a subsidy will need to satisfy the relevant requirements set out in the Subsidy Control Act 2022 and be checked to ensure that there is no “appreciable risk” of triggering a dispute under any other applicable rules, such as those emanating from the UK’s now independent membership of the WTO.   The Subsidy Control Act 2022 has progressed from an initial Subsidy Control Bill, through amendments via the House of Lords and on to the final Act (for which we await confirmation of final version).

When does the Subsidy Control Act come into force?

Some elements, such as the ability for the Secretary of State to make Regulations to flesh out the new regime (for example, specifying which subsidies must go for review by the Competition and Markets Authority) come into effect immediately, however the main elements of the new Subsidy Control Act regime are expected to come into force in Autumn 2022.  The precise date will be set out in Regulations issued by the Secretary of State in due course.

What are the main elements of the Subsidy Control Act 2022 regime?

1. The definition of “Subsidy” is amended, so that it differs in substance from that of a “State aid”. 

Under the Subsidy Control Act 2022, a “Subsidy” means any financial assistance given directly or indirectly through public resources by a public authority that confers a specific economic advantage on one or more enterprises, with respect to the production of goods or the provision of services, and which is capable of having, an effect on competition or investment within the United Kingdom or trade or investment between the United Kingdom and another country.

This makes it very plain that the UK law is there to regulate competition on a domestic as well as an international level.  Therefore the arguments which were sometimes used in EU State aid law matters to claim that there could be no State aid through lack of potential effects on trade between Member States (often very optimistically given the European Commission’s statement at paragraph 191 of the Notion of State aid) appear to fall away under the new regime, which focusses not only on the relationship with the European Union, but also upon the UK’s internal market.

• Minimal Financial Assistance

The ‘Minimial Financial Assistance’ route is a Subsidy Control exemption that allows up to £315,000 of subsidies to be awarded to an enterprise within a three year period.  In many ways this exemption mirrors the De Minimis Regulation route under EU State aid law.  However the £315,000threshold for the Minimal Financial Assistance route is more generous than the €200,000 threshold for De Minimis.  

• Service of Public Economic Interest

The ‘Service of Public Economic Interest’ route is a Subsidy Control exemption that allows the State to entrust a third party to deliver tasks “in the public interest (including public service obligations)” on its behalf.  The rules ensure that the funding is limited to what is necessary to deliver the service and a reasonable profit, as identified in a transparent manner in advance.  The Service of Public Economic Interest route is likely to be used for subsidies such as a local authority setting up a social housing association, or the commissioning of transport services to remote areas that would not otherwise pay for themselves.  This largely mirrors the comparable provisions for services of general economic interest at EU level.

• The Subsidy Control Principles

The “Subsidy Control Principles” listed at Schedule 1 of the Subsidy Control Act 2022 are:

Common interest

1. Subsidies should pursue a specific policy objective in order to— (a) remedy an identified market failure, or (b) address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).

Proportionate and necessary

• Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.

Design to change economic behaviour of beneficiary

• (1) Subsidies should be designed to bring about a change of economic behaviour of the beneficiary.

(2) That change, in relation to a subsidy, should be:

(a) conducive to achieving its specific policy objective, and

(b) something that would not happen without the subsidy.

Costs that would be funded anyway

• Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.

Least distortive means of achieving policy objective

• Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means.

Competition and investment within the United Kingdom

• Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.

Beneficial effects to outweigh negative effects

• Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on— (a) competition or investment within the United Kingdom; (b) international trade or investment.

This adds a seventh principle (F, above) to those already in place via the TCA, while clarifying the wording slightly.  These Subsidy Control Principles are likely to be used for many awards and therefore it is important that there is a clear and consistent understanding of each, and what reasonable evidence is required to be obtained in order to suitably satisfied of each.  Draft illustrative guidance has been published by the Department for Business, Energy and Industrial Strategy with this intention. 

It should be noted that in the event of a Subsidy Control challenge that a Court would methodically work through each Subsidy Control Principle, assessing the arguments and evidence for each addressed against standards of reasonable decision making under UK public law .  Therefore whilst there may be a temptation to fall back on stock statements or upon economic theory, we would recommend that the emphasis is upon always having in place a robust record as to how each individual Subsidy Control Principle has been met for every case. 

• The Subsidy Advice Unit

The Subsidy Advice Unit is part of the Competition and Markets Authority which will be tasked under the Subsidy Control Act 2022 with reviewing Subsidies of Interest (SoI) as may be notiofied to it for an individual opinion prior to award, and Subsidies of Particular Interest (SoPI) as must be notified to it prior to award. 

What precisely will constitute SoIs and SoPIs is currently the subject of a public consultation due to close on 6 May 2022.  This will be particularly important and will build in further procedural scrutiny for larger subsidies deemed more likely to have a potential to distort competition. 

For example, the consultation currently contemplates all subsidies to individual enterprises of a value in excess of £10m will become SoPIs subject to this additional requirement, whilst also anticipating smaller value subsidies in certain pre-definned sensitive sectors such as automotive production to be similarly affected.  Once notified the CMA will be responsible for issuing an advisory report which takes account of the effects of the proposed subsidy or scheme on UK competition and investment, and may include recommendations for alteration or further enquiry.

      6)  Subsidy Control Enforcement

Under the Subsidy Control Act 2022, the Competition Appeal Tribunal (rather than simply the High Court) will review subsidy decisions. Challenges may be brought by way of Judicial Review, by any “interested party”. 

An “interested party” for the purposes of Subsidy Control is any person whose interests may be affected by the giving of the subsidy or the making of the subsidy scheme.   The Secretary of State always has standing as an interested party.

      7)  Streamlined Subsidy Schemes

The Subsidy Control Act introduces a mechanism for government to adopt Streamlined Subsidy Schemes to operate as conditional exemptions under the Subsidy Control regime.  Provided the funder is able to satisfy the relevant requirements of the Streamlined Subsidy Scheme, it is understood that such awards will be regarded as having complied with the Subsidy Control regime without requiring an individual assessment under the Common Principles as described above.  A Streamlined Subsidy Scheme is therefore understood to operate much like a block exemption Regulation at EU level.  It is therefore understood that measures brought forward under Streamlined Subsidy Schemes will also automatically be excluded therefore from qualifying as a SoPI and requiring notification to the CMA.

One of the weaknesses of the new Subsidy Control regime is that it can create greater administration for some lower value awards than under EU State aid rules.  This is because over 95% of State aid awards proceeded on the basis of well used block exemptions, such as the GBER. 

The Government is eager to encourage greater innovation in the award of subsidies, which it hopes to ensure by limiting the creation of Streamlined Subsidy Schemes, at the same time as seeking to ensure funders to do subject more “routine” and uncontroversial interventions to any more administrative burden and/or legal uncertainty than is necessary.  Indeed the Government’s Press Release refers to very specific activities being the subject of future Streamlined Subsidy Schemes, including funding towards national security and tackling floods.

Observations on the Subsidy Control Act

The ability of the UK to mastermind its own State aid regime was presented as one of the best opportunities of Brexit and with good reason.  Astutely targeted State subsidies can dramatically improve economies, nurturing the businesses of tomorrow and creating new jobs.  Provided certain rules are applied, this can be achieved without having an unduly negative effect on competition. 

In comparison with the EU State aid regime, the Subsidy Control Act creates a system where it should be easier and faster to fund the largest projects, which would otherwise have required notification to the European Commission for individual assessment, a process which could take a notoriously long time to see through to conclusion – indeed notifications often runn to years, not just months. 

The Government has chosen not to recreate the European Commission’s role in a domestic context and instead to keep the Competition and Markets Authority in an advisory role, while otherwise entrusting the national courts to deliver relevant enforcement judgments to keep the system working well.  Obviously in time to come the regime may evolve further still but for the time being the Subsidy Control Act builds a comprehensive regime and it is signfiicant to note that the regime goes further (in solidifying a domestic competition regime) than it was simply required to do under the UK’s free trade commitments to the EU in the TCA.  This shows the UK as eager to have an effective competition regime in place for its own sake and not merely to fulfil international commitments.

The Subsidy Control Act regime involves some additional administration for some smaller, regular awards.  This is because, unless these fall within the Minimal Financial Assistance route, a case needs to be developed against the Subsidy Control Principles which requires the funder to have the capacity and capability to undertake a detailed Subsidy Control assessment.   An easy route to solve this would be to introduce Streamlined Subsidy Schemes, but the Government seems intent on only using that route sparingly.  One would hope that the Government will involve experts from the public and private sector in the design of such Streamlined Subsidy Schemes, given their importance to the new regime. 

Fundamentally the Subsidy Control Act regime relies upon the organisations administering public funding acting as responsible custodians of public finances, in particular making the appropriate enquiries to ensure that they are only ever providing the proportionate and minimum subsidy necessary for each case.  All of the Subsidy Control Principles are clearly sensible and represent best practice around grant giving, but recording the necessary evidence for compliance to be relied upon represents a new way of doing things.  Undoubtedly this new regime will grow and develop from the discomfort of public bodies which fail to properly adapt to the new rules and therefore fall prey to Judicial Review challenge.  In doing so, the system will gradually become more certain for the body administering the award, as well as the subsidy recipient.

Jonathan Branton, Alexander Rose and Alex Eaton, DWF Law LLP

On 25 March, BEIS issued a consultation on the regulations that will define what subsidies have to be referred to the CMA before implementation (“subsidies of particular interest”) and what subsidies can be referred, either by the granting authority or by the Secretary of State (“subsidies of particular interest”). The Bill leaves the power to define those classes to the Secretary of State.

The consultation paper discusses general thresholds set by reference to the size of the subsidy, as well as additional criteria based on the economic sector (eg cars, steel, shipbuilding, and aircraft) or type of subsidy (eg rescue and restructuring subsidies).

The closing date for responses is 6 May.

If anyone would be interested in contributing to the response of the Joint Working Party of the UK Bars and Law Societies on Competition Law to this consultation, please let me know (gperetz@monckton.com).

GEORGE PERETZ QC

It has been a turbulent couple of years for those involved in subsidy control, and 2022 will be equally challenging. The Subsidy Control Bill (Bill) will take effect in 2022. It will form the backbone of the UK’s new subsidy control regime, but many commentators have raised questions over the transparency and efficacy of the new approach. Early drafts of illustrative guidance, illustrative regulations, policy statements and illustrative examples have just been published by the Government to show how three key areas of the new subsidy control regime will operate:

The Subsidy Control Principles (Principles);

Streamlined routes; and

Subsidies or schemes of interest/particular interest.

Subsidy Control Principles

The Principles are broadly drafted, and our experience with the current interim regime has been that they can be difficult to interpret and apply, particularly at a sub-central level where the granting authority may not have sufficient oversight to determine what standard of evidence is required in order to demonstrate the subsidy’s compliance with the Principles. Clear guidance which directs a granting authority as to the evidence required to demonstrate compliance with the Principles would be extremely helpful here. This will be vital for smaller authorities which do not have the same resources to undertake economic appraisals as larger authorities, or government departments.

The Illustrative Guidance (Guidance) published by the Government is intended to give a sense of what the final guidance on the practical application of the Principles will be like, and it should be noted that it is subject to change.

The Guidance sets out a four-part framework (essentially a grouping of the Principles) for public authorities to use to ensure that a subsidy is consistent with the Principles. It confirms that the depth of analysis needs to be proportionate to the size and potential distortive impact of the subsidy or scheme in question. Where the subsidy is relatively lower in value or has very few potentially distortive features, it will require a less detailed analysis, whereas, more extensive analysis will be required for novel and contentious subsidies, and those with more distortive design features. This will be the case for Subsidies/Schemes of Interest or Subsidies/Schemes of Particular Interest for which there will be a separate Annex to the Guidance for granting authorities to consider – although this is not yet available. This approach is as anticipated, but the Guidance appears to require a detailed analysis even in the case of low value subsidies. It may be that this process is ‘short circuited’ for low value/less distortive subsidies by the establishment of streamlined subsidy schemes (see below).

The draft Guidance is currently incomplete, but it is clear that a significant effort will be required from public authorities applying the Principles. Much of this should be done as part of the granting authority’s business case in respect of a particular action in any event. However, the Guidance appears to require significant analysis of certain economic matters which are unlikely to be within easy reach of many sub-central authorities without seeking external support. Therefore, it appears that there is a risk that under the new UK regime, subsidies can be granted by authorities with imperfect information which may have distortive effects which were not anticipated, or which were disregarded in the pursuance of a particular objective.

How rigorously will the Principles be applied?

Public authorities have, of course, been used to applying the State aid rules, which give a fairly prescriptive route to determining whether a State aid exists and whether it can be granted lawfully or not. This was often a question for lawyers. However, as well as ensuring compliance with the legal process, public authorities now need to undertake a level of economic, policy and commercial analysis which was not previously required. While clearly some level of analysis in these areas has always been necessary for robust decision making, the Guidance appears to require a far higher standard of assessment. Although these are not questions of law, the involvement of legal teams may provide a stronger and more consistent approach. If decisions on compliance with the Principles are taken without legal support, there is a danger that wider issues (for example, relating to prohibited subsidies) and/or the Principles will be misinterpreted or not properly applied, and in these circumstances an authority may grant a subsidy unknowingly.

A less than rigorous approach can soon become institutionalised, and because the Competitions and Markets Authority (CMA) does not currently appear to be able to instigate an investigation into a subsidy on its own initiative, there is a risk that this type of issue goes undiscovered. This is compounded by the fact that subsidies which are given ‘unknowingly’ will not find their way onto the transparency database, and therefore, cannot be subject to scrutiny in that manner either.

Although significant discretion is afforded to granting authorities, the decision-making process must not become a ‘tick box exercise’, undermining the effectiveness and reliability of the new regime and putting authorities at risk of successful challenge.

Streamlined Subsidy Schemes/Streamlined Routes

Clause 10 of the Bill provides a power for ministers to make ‘streamlined subsidy schemes’. The Policy Statement issued by the Government on Streamlined Routes (or Streamlined Subsidy Schemes as they are referred to in the Bill) provides that these are routes for public authorities to grant subsidies more quickly, where the subsidy is routine and low risk or aligned to UK priorities. These Streamlined Routes will be designed by the Department for Business, Energy & Industrial Strategy (BEIS), and some illustrative examples have been published for Heat Networks (Clean Heat) and Research, Development and Innovation (RD&I), although the Policy Statement suggests that other ‘clean heat’ and RD&I projects may be captured by these routes in future.

Subsidies awarded under a Streamlined Route will be exempt from referral to the CMA and cannot be subject to call-in – although they are still open to challenge by way of judicial review. However, the intention is that these subsidies have been pre-assessed as being compliant with the Subsidy Control regime, and so the risk of challenge may be lower (although that will of course depend on whether the Streamlined Route is properly designed and applied).

The Streamlined Routes appear to work in a manner similar to the General Block Exemption Regulation (GBER), in that there are specific parameters within which a subsidy may be granted. However, both illustrative schemes published appear to require further development before they could be used effectively.

If the Streamlined Route approach is delivered effectively, it would provide much needed certainty for granting authorities, enabling them to make subsidies quickly and efficiently within certain parameters. This assumes the conditions imposed are sufficiently user-friendly to enable sub-central authorities to confidently apply them. Care will be needed to ensure any conditions do not require granting authorities to undertake a disproportionate level of assessment, otherwise the streamlined subsidies may be no quicker than applying the Principles.

Subsidies/Subsidy Schemes of Interest and of Particular Interest

The Policy Note on Subsidies and Schemes of Interest and Particular Interest provides that granting authorities intending to grant subsidies or schemes of interest will have the option to make a voluntary referral to the CMA for assessment of their subsidy prior to award. Whether a subsidy will be a subsidy of interest will be defined by regulation, but the recently published policy notes provide that subsidies over a certain value threshold, or with certain design features (not yet confirmed), or subsidies for rescuing an ailing or insolvent enterprise (or certain other subsidies of a similar nature which are subject to restrictions under the Bill) will fall into this category.

If the criteria for a subsidy to be a subsidy of interest are not clearly defined and limited, there is a risk that the CMA may become overly burdened by public authorities seeking the CMA’s views. Legal certainty is very important to public authorities and many funding recipients, and in the absence of clear rules and guidance, there is a real risk that referrals to the CMA will become a matter of course when granting a subsidy which falls within this category. Clear guidance for application of the new regime has been promised but is still clearly a work in progress.

Some subsidies (those ‘of particular interest’) must be subject to scrutiny by the CMA before they are made. A subsidy of particular interest will be defined by regulations, but the policy note says that these will be subsidies concerning a ‘sensitive sector’ in excess of a particular value threshold, all subsidies (regardless of sector) over a certain value threshold, and all subsidies for restructuring ailing or insolvent enterprises, which are subject to additional requirements in the Bill. These subsidies are subject to mandatory referral to the CMA because they are more likely to pose a substantial risk of negative effects on domestic competition and investment or international trade.

The approach taken in the Bill and the regulations made under it may have a significant impact on the way that the subsidy regime works. If a risk-averse approach is taken, then a significant number of subsidies may require prior consideration by the CMA before they can be granted. On one hand, this may diminish the perceived flexibilities gained by allowing public bodies to take their own decision as to whether a subsidy complies with the new regime and slow down the granting of subsidies, but conversely, it may offer authorities the certainty they are looking for when granting higher risk subsidies.

Final comments

A recurring theme for subsidy control is balancing flexibility with certainty. Given the Government’s stated desire to maintain a level playing field and the need to comply with international subsidy commitments, subsidies must be justifiable and balanced against any negative consequences. Government will need to ensure its expectations for the level of analysis required by public authorities are proportionate and realistic, otherwise it may find many authorities relying on streamlined subsidy schemes rather than taking advantage of the flexibility offered under the new regime. The extent to which this is a problem will depend on the breadth and depth of the streamlined subsidy schemes of course.

The illustrative documents published by the Government are still in very early form, and in many cases will require significant development before they can be used by granting authorities. It is clear that the Government is seeking to provide clarity, but much of the essential detail is still missing from the published documents, and it remains to be seen whether the right balance is struck between giving much desired legal certainty, and ensuring that authorities have the confidence and flexibility to take full advantage of the new regime.

While the early publication of draft indicative guidance and regulations is welcomed, there is still a lot of work to be done in ensuring that these provide the clarity and certainty needed for public authorities to confidently provide subsidies in accordance with the new regime.

Authors

Angelica Hymers | angelica.hymers@brownejacobson.com

Senior Associate, Angelica works across Browne Jacobson’s Government & Infrastructure practice. Angelica specialises in subsidy control, state aid and public procurements.

Alex Kynoch | alex.kynoch@brownejacobson.com

Legal Director, Alex heads up the subsidy control team which is part of the firm’s Government & Infrastructure practice. Alex specialises in public procurement, subsidy control and complex public sector commercial projects, with a particular interest in regeneration and energy projects. He regularly provides training sessions to local and central government departments and speaks at seminars on subsidy control and public procurement.

This was first published on Local Gov on 8th March 2022.

                                                                                                                                                                                                                                                              

One concern that has been widely expressed during the passage of the Subsidy Control Bill through Parliament is its relationship with the current government’s “levelling-up” agenda.  Although that agenda is somewhat inchoate (although it may become a bit clearer after the White Paper is published), and is likely to involve spending that does not raise any subsidy control issues (such as spending on public services and general infrastructure), subsidies to private business conditional on locating activity in particular areas and justified by the need to address relative disadvantage or deprivation in those areas is likely to play a key part.  How does the Bill address subsidies of that kind (which I will refer to as “regional development subsidies”), and does it do so in a satisfactory way?

The ancien regime

Before Brexit, the EU State aid regime dealt with regional development subsidies in two main ways.  First, and most importantly in practice, the General Block Exemption Regulation (“GBER”) created a “safe harbour” for regional development subsidies if they (a) provided for investment in particular areas set out in a “regional aid map” approved at EU level and (b) ticked various boxes in terms of the proportion of investment supported by the aid (“aid intensity”) and other criteria, the strictness of which varied as between different areas as set out in the regional aid map.  That meant that local authorities could confidently grant regional development subsidies, without fear of objection or challenge under State aid rules, as long as (a) the area concerned was in the right part of the regional aid map and (b) the subsidies ticked the necessary boxes. 

The other way in which the EU regime dealt with regional development subsidies was that, where the proposal fell outside GBER, it had to be notified to the Commission for clearance – and in deciding whether to approve it the Commission would take a view as to whether the regional development justification  was a good one (viewing the matter from an EU-wide perspective) and whether the subsidy was proportionate, limited to what was necessary, and justified overall in the EU public interest.  That analysis could be challenged by an interested party before the EU courts, but only on narrow, judicial review, grounds (manifest error of fact, irrationality, error of law), and few such challenges succeeded given the wide margin of discretion given to the Commission in this area.

The Bill

The structure of subsidy control under the Bill will be very different.  The starting point is that it will be for the granting authority itself, under clause 12, to assess any proposed regional development subsidy against the subsidy control principles in Schedule 1 and to be satisfied that the subsidy complies.  Where the subsidy is one that would have been covered by the “regional aid” provisions of GBER, that requirement to assess imposes a new obligation on the granting authority: it is no longer enough to tick the GBER boxes.  On the other hand, where the subsidy is one that would not have fallen under GBER, there is no longer any need to wait for the subsidy to be notified and cleared by the Commission: subject to the provisions in Part 4 requiring large grants (“subsidies of particular interest”, the scope of which is yet to be defined but may well be confined to subsidies of over £5 million) to be referred to the CMA for it to advise – advice that the granting authority is not bound to take – the granting authority can proceed to make the assessment itself and, if the proposal passes that assessment, to proceed.  The only prohibitions of likely relevance to most regional development subsidies will be on rescue and restructuring aid without a credible path back to viability (clauses 19-20) and a narrow provision in clause 18 that prohibits subsidies that are conditional on relocation of activity from one part of the UK to another (a provision that does not, as the Minister confirmed in the public bill committee debates, page 128, apply to cases where the subsidy is not conditional as a matter of contractual obligation on cessation of activity elsewhere but merely has the effect of causing that cessation as an economic  consequence of starting activity in the subsidised location). It remains to be seen whether the clause 18 prohibition on express relocation conditions is included in the final Bill.

What all that means is that (in contrast to the regional aid provisions in EU law) there is nothing in the Bill that expressly favours regional development subsidies to promote development in Hartlepool rather than in Hertford, making the former acceptable in cases where the same subsidy in the latter would be prohibited, or at least subject to more stringent controls.  Rather, the arena in which the boundary between acceptable and unacceptable regional development subsidies will be drawn is the assessment by granting authorities of proposed regional development subsidies against the subsidy control principles..  That gives rise to two critical questions: what the subsidy control principles have to say about regional development, and how that boundary is to be defined and policed.  That second question is particularly important in the context of regional development, because (a) territorial granting authorities (devolved governments, the UK government when it acts for England, and local authorities) will have every reason to find that the subsidy control principles are consistent with a subsidy that promotes investment in their area rather than elsewhere and (b) granting authorities elsewhere will have every reason to be concerned by subsidies that displace activity from their area or cause it not to be located there in the first place.

The principles

First, then, what do the subsidy control principles have to say about regional development?  Principle A deals with the objective of a subsidy: they should have a policy objective of either remedying an identified market failure or of “addressing an equity rationale (such as social difficulties or distributional concerns)”.  Though the former phrase might apply in some cases to regional development aid, it is the latter phrase that seems particularly apt.  But that phrase is not free from difficulty: as the former Lord Chief Justice Lord Thomas of Cwmgiedd asked during the Bill’s second reading in the House of Lords, “what does that actually mean?”  In particular, what does “distributional concerns” mean in the context of regional development?  Would it cover a concern by a local authority for a relatively prosperous county (say, Surrey) about an area that was (on various measures) disadvantaged compared to the rest of Surrey but rather more advantaged than most areas of the United Kingdom?  How free is a local authority able to be in choosing measures that tend to point to the area at issue being disadvantaged as opposed to other measures that do not?

Principle B requires subsidies to be proportionate and limited to what is necessary to achieve it.  That principle is likely to be particularly important in the context of “subsidy races” (contests between different territorial authorities for particular investment): the effect of principle B should be to stop an authority winning such a race by offering more than what is needed to meet the policy objective of addressing the regional development rationale. 

Principles F and G both require territorial authorities to consider the effects of the proposed subsidy across the United Kingdom: principle F requires that the subsidy minimise negative effects on competition or investment within the United Kingdom and principle G requires that the benefits of the subsidy exceed its negative effects on (among other matters) competition and investment in the United Kingdom.  In the case – very likely in the case of regional development subsidies – where the counterfactual is investment in another part of the United Kingdom, those principles require a territorial granting authority to carry out the task of evaluating and giving weight to the harm caused by the proposed subsidy outside its territory: a task which is somewhat awkward given that any territorial authority in a democracy is properly accountable to, and serves the needs of, its own voters.

The subsidy control principles are therefore capable of permitting regional development subsidies, but their application is likely to be deeply contestable.  As pointed out above, given the potential for real conflict between different territorial authorities, that makes the question of who defines and polices the boundaries of proper application of the principles rather critical.

Enforcement of the principles

The first candidate for policeman is the Secretary of State, as having the power, under clause 79, to issue guidance to which all granting authorities must pay regard when applying the principles.  Draft guidance has already been issued.  That guidance confirms that an equity rationale may include “Levelling up a deprived or disadvantaged area”.  It does not, though, do much to address the question of how deprivation or disadvantage are to be established, noting only that the analysis “should include measures or statistical indicators set against appropriate comparators (such as regional or national averages)” (thus rather dodging the questions of whether the poorest corner of Surrey is to be regarded as a “deprived or disadvantaged area” and how free territorial authorities are to choose particular comparators that suit the case for regional development aid in their area).  The draft guidance does not yet address the questions of how to apply principles F and G: but it does have a section that would urge granting authorities to be “cautious about subsidy races occurring as these may lead to a displacement of investment away from locations where the public benefits are the greatest and it may incentivise firms to use their leverage to secure larger subsidies than would have been possible had public authorities not been bidding against each other to secure the investment”, going on to refer to principle B (proportionality and necessity) and suggesting a “more extensive” analysis of the counterfactual, including a comparison of disadvantage between the area sought to be assisted and the area where the investment would otherwise have occurred.   

Although the guidance has yet to be finalised, it does not look as if it will resolve the difficulties identified above: and, in any event, it is not binding (though granting authorities must have regard to it and the CMA and Competition Appeal Tribunal (“CAT”) probably will have regard to it).

The second candidate for policeman of the boundary is the CMA.  The CMA has the advantage of being a UK-wide body, though the government has so far rejected attempts to give the devolved governments any right to appoint, or to have a formal say in appointing, the members of the subsidy advice unit who will be charged with this work (those appointments being for the Secretary of State, who is also, of course, a Minister with territorial responsibilities for England).  It would appear to be open to the CMA to take a prescriptive approach to the way in which granting authorities should assess how the equity rationale applies to proposals for investment in particular areas.  However, the CMA’s function is only advisory: a granting authority can, if it wishes, ignore any such advice.  Moreover, the CMA is only required to be involved in the case of “subsidies of particular interest”: in the case of other subsidies, the CMA either has no role at all or (in the case of “subsidies of interest”) has a role only if called in by the granting authority or by the Secretary of State.  Quite how much that matters will depend on how the Secretary of State defines the categories of “subsidies of [particular] interest”: a policy statement suggests that in the usual case the subsidy will need to be over £5-10 million to be a “subsidy of particular interest”.

The third candidate for policeman is the CAT.  Judicial review in the CAT can be started by the Secretary of State or by any “interested person”: though that term does not obviously include a territorial authority concerned by the impact of another authority’s subsidy on its territory (it could indicate a narrower financial interest), the Minister confirmed in the Commons that it was intended to do so (see pages 308-309).   However, it is unclear to what extent the CAT will give – or to what extent it would be appropriate for it to give, bearing in mind the economic and policy questions involved – any firm steer on the difficulties identified above: or to what extent it would be prepared to say (or would be appropriate for it to say) that failure to follow the CMA’s position on those issues (if it takes one) would of itself be irrational or an error of law. 

The technical route for the CMA to take a prescriptive line would be to read the principles as having a hard-edged legal meaning, despite their open texture.  However, such an outcome would create a regime that – in determining the key question of what subsidies are justified and which are not – was more prescriptive and court-oriented than the EU system (which leaves the Commission with a huge margin of discretion).  That would seem a somewhat paradoxical consequence of Brexit.

On the other hand, for the CAT to take relatively hands-off approach would allow territorial authorities to interpret and apply the principles in a way that permits regional development subsidies even where there is a strong case that those subsidies are (from a UK perspective) not directed at areas of most need and create more harm than good in terms of levelling-up.

Policy consequences

What does all that mean from a policy perspective?

One possible result is that the uncertainties, need to analyse measures within a particular framework, and risk of challenge will deter authorities from granting regional development subsidies in cases where they are clearly the right policy response.  The obvious route to avoid that result will be for the government to created streamlined subsidy schemes under clause 10 that provide a safe harbour for large categories of regional development subsidies: and such schemes could sensibly define areas where less strict conditions applied for a subsidy to fall under the scheme, recreating some of the advantages of the State aid system: moreover, the risk of distorting the terms of subsidies so as to fit under the scheme (a real problem in the EU system) is less pronounced because it would always be open to a granting authority to take the, fairly secure, view that a subsidy that fell just outside the terms of a scheme would nonetheless be safe given that it was only just outside the safe harbour.

The other possible result of the problem that the boundaries between acceptable and unacceptable regional development subsidies are neither clear or firmly policed – particularly when combined with the absence of any provisions in the Bill to police cases where a granting authority wrongly decides that what it is doing is not a subsidy at all (for example by taking an implausible view of what a private investor would do and relying on clause 3(2)) – is a real danger that regional development subsidies that are likely to harm the UK economy as a whole and which have a weak distributional justification will be let through.  That risk is partly addressed by the role of the CMA – but it remains to be seen how willing the CMA is to put down boundaries in this area or to what extent its boundaries are respected by authorities or enforced by the CAT. 

Either way, the overall effect of the Bill on “levelling up” subsidies is both complex and murky. 

GEORGE PERETZ QC

(With thanks to Alex Rose for comments on an earlier draft of this post: any errors are, of course, mine.)

As the Subsidy Control Bill is now before Parliament, I thought it would be useful to collect together resources on the Bill, debates on it, and articles being written about it. I will also try to summarise key issues that are debated and pick up any statements likely to be useful in interpretation of the legislation under Pepper v Hart principles.

Please let me know (gperetz@monckton.com) if there is anything that I have missed – in particular any further articles and comment that I could usefully link to. I will try to keep this post updated.

Bill texts

Text of Bill as introduced to the House of Commons

Explanatory Notes to Bill as introduced

Text of Bill as introduced to the House of Lords

Other material published by the Government in relation to the Bill

On the definition of “Subsidies/Schemes of Interest/Particular Interest“

These definitions will control what subsidies/schemes must be, or may be, considered by the CMA

Statement of Policy Intent

Draft regulations

Draft Guidance

Clause 79 of the Bill permits the Secretary of State to issue guidance to which granting authorities must have regard. Illustrative guidance has been published

Streamlined routes

Clause 10 of the Bill provides for “streamlined subsidy schemes” made by the Secretary of State and laid before Parliament. The CMA does not consider those schemes (clause 64(1)(a)). The government has published a statement of policy intent, and two examples (clean heat and R&D).

Debates and evidence

Commons

Second Reading debate (Commons)

Evidence given to, and debates of, the Public Bill Committee (Commons)

Witnesses were: Professor Fothergill of the Industrial Communities Allieance and Dr Pazos-Vidal of the Convention of Scottish Local Authorites; Thomas Pope of the Institute for Government and Dr Stephanie Rickard of the LSE; Dr Roger Barker of the Institute of Directors; George Peretz QC of Monckton Chambers; Alex Rose and Jonathan Branton of DWF, and Richard Warren of UK Steel; Daniel Greenberg, Counsel for Domestic Legislation at the House of Commons; Rachel Merelie, senior director for the Office for the Internal Market at the Competition and Markets Authority; Ivan McKee, Scottish Government Minister for Business, Trade, Tourism and Enterprise.

Various points on interpretation of the legislation arising from the debates so far (rewferring to pages of the consolidated evidence and debates above):

On the subsidy principles, the Committee rejected an amendment to principle G that that would have required all granters of subsidies to consider as negative effects any adverse effects on the UK meeting its net zero climate commitments. The Minister stated that “it is unnecessary explicitly to require public authorities on the face of the Bill to consider the negative effects of subsidies on the UK’s net zero commitment as part of their compliance with principle G. Public authorities will clearly need to consider the effects of subsidies in the round before awarding them, but the amendment would give undue prominence to net zero considerations with respect to subsidies that may have entirely unrelated objectives, such as high street regeneration or providing training opportunities for young people.” [97]

The Committee rejected an amendment that would have enabled devolved administrations to make streamlined subsidy schemes (subsidy schemes that are not liable to be referred to the CMA). The Minister stated that “The Government intend that streamlined subsidy schemes
will be a pragmatic means of establishing schemes for commonly awarded subsidies, including in areas of UK strategic priority, that all public authorities in the UK would able to use if they wish. They will therefore function best when they apply across the entire UK.” [108] It also rejected an amendment that would have required the Secretary of State to consult with the devolved governments before making regulatations that define the categories of subsidy “of particular interest” that must be referred to the CMA: the Minister stated that the UK government was committed to engagement with the devolved administrations but that the amendment would lead to delay

The Minister confirmed that clause 18 applies only to “subsidies that explicitly require enterprises to relocate economic activities from one area of the UK to another, where this relocation would not have occurred without the subsidy” [128]. Since subsidies that explicitly require relocation are going to be rare (at least when legal advice is taken) clause 18 is unlikely to have much application.

The Committee rejected amendments that would have required granting authorities to furnish compete and accurate information to the database and for there to be an audit of the database. The Minister stated that as a matter of general public law, the obligation to put information on the database included an obligation for that information to be complete and accurate, and that if the public authority did not properly fulfil its obligation to upload the required information, the clock for the end of the limitation period would not start, so the subsidy or scheme could be challenged indefinitely [151].

There was a discussion of the reason for the 6 month/1 year (tax) time limit for plaing subsidies on the database. The Minister argued that those periods were necessqary to ensure accurate information. He also stated that guidance would be given on the meaning of “tax declaration” [168].

On standing to challenge a subsidy control decision in the CAT, the Minister said, on the key concept of “interested party” that “an interested party is any person whose interests may be affected by the decision in question. We are setting out a new UK-specific subsidy regime with unique rules. In that context, we have set out an intentionally broad definition of whatc onstitutes an interested party. That said, the Competition Appeal Tribunal can exercise its discretion. We want to ensure that in each case the right people are determined to be interested parties. By exercising that discretion, the Competition Appeal Tribunal
can build up a jurisprudence that is specific to and optimally used for the subsidy control context. The Competition Appeal Tribunal is an expert body in competition matters and has the right knowledge to make appropriate decisions on these questions of standing.” He went on to suggest that the clause 70 test was not necessarily narrower than the general test of standing in judicial review in England and Wales. [300] He also stated that a devolved administration or local authority could be an interested party if it was concerned about negative effects of the subsidy on businesses in its area [308-309]

The Minister also confirmed that where tranparency obligations have not been complied with, a subsidy could be challenged at any time [311]: this will be important in cases where granting authorities incorrectly take the view that a measure is not a subsidy and so do not place it on the transparency register.

Written evidence to the Bill Committee by Alex Rose and Jonathan Branton, by Rolls Royce plc, by Antony Collins Solicitors, by the Centre for Public Data, by Ardtornish Hydro, and by the Minister for Business, Trade, Tourism and Enterprise, Scottish Government.

The Rose/Branton paper discusses the absence of any express preference for aid to disadvantaged areas, and argues for a streamlined subsidy scheme to facilitate subsidies in disadvantaged areas vis-a-vis richer ones; for improvements to the transparnecy database; and for it to be possible to challenge subsidy schemes at the point when a subsidy under them is granted (NB as explained here I think the better view is that the CAT would, by analogy with cases such as Boddington, allow challenges to the lawfulness of a scheme at the point of challenge to a subsidy under it, but agree that it would be better to be clear about that).

The Rolls Royce paper seeks clarity about the definition of “ailing and insolvent enterprise”, urges caution about defining subidies of interest and particular interest solely by reference to amounts granted and sector, and welcomes the fact that “national security” is (as is standard) left undefined.

The Antony Collins paper opposes the extension of the definition of “subsidy” to include measures with an impact on competition in the UK but no sufficient effect on international trade or investment.

The Centre for Public Data propose removing the exemptions from the requirement to register for subsidies that fall within the definition of minimal financial assistance and for subsidies that fall under schemes and are for less than £500,000.

Ardtornish Hydro seeks to exclude relief from non-domestic rates for hydroelectric power from the scope of the Bill.

The Scottish Minister sets out in detail the Scottish Government’s concerns on the impact of the Bill on the devolution settlement and the role of the devolved governments under the Bill, and also on the includion of agricultural subsidies.

Report stage and Third reading in the Commons

“Will write” letters

These are letters that set out answers to questions that arose in debate and where the Minister promised to write with an answer to the concerns raised. The foillowing issues are covered

Clause 8: “common control” for the purposes of defining an enterprise

Clause 16 (mechanics for directions on marketable risk countries for the purposes of export credit insurance)

Clause 37: procedural requirements for minimal financial assistance

Clause 60(2): test applied by the Secretary of State in making post-award referrals to the CMA

Clause 68 (subsidy advice unit)

Clauses 70 and 76(2) (appeals to the CAT against subsidies made under a scheme; disputes about whether sufficient pre-action information has been provided) [NB that though the analysis of appeals against subsidies granted under schemes correctly points out that the CAT can review whether the subsidy does actually fit under the scheme, it does not grapple with the question of whether a challenger to a subsidy granted under a scheme can challenge the scheme itself (even where the time for challenge to the scheme itself has passed)]

Lords

Second reading debate on 19 January 2022

Devolution texts

Statement by the Welsh Government on the Bill, and draft Senedd Legislative Consent Memorandum (recommending refusal of consent)

Scottish Government Legislative Consent Memorandum (recommending refusal of legislative consent)

Trade and Cooperation Agreement Subsidy Control Provisions

See Part One, Heading One, Title XI, Chapter 3, Articles 363-375.

Articles and comment

See the list of blog posts on this site.

In addition, see my summary of the Bill, and my articles on the tax implications, devolution implications, and on the public law and constitutional implications of the Bill.

Gordon Downie has written a summary of the Bill’s provisions.

The Institute for Government has commented on the Bill.

Alex Rose’s Twitter thread sums up his concerns about the Bill as it passed the Commons.

Seminars on the Bill

Institute for Government, 21 January 2022

Pinsent Mason/UKSALA 1 December 2021 (dealing with enforcement, CMA, appeals and devolution)

Shearman & Sterling/UKSALA 24 November 2021 (dealing with subsidy definition and scope, schemes, the subsidy control principles)