By Jonathan Branton and Alexander Rose, DWF Law LLP
The Financial Times reports that the UK Government is split on the design of the UK’s future State aid regime, with a faction led by Dominic Cummings arguing that the UK should adopt a “vague and non-statutory” regime. An alternative group, said to include Chancellor of the Exchequer, Rishi Sunak, is championing strong statutory State aid rules. The Prime Minister has yet to indicate his position, beyond the statement in his Greenwich speech on 3 February 2020, that the UK shall continue to have subsidy control rules after the transition period ends, but not those of the European Union.
The report comes at a time when it appears that progress is slowly being made with the EU on a trade deal. Reuters reports that the EU now recognises the UK will not follow EU State aid rules once the Transition Period ends and David Frost appears to have successfully argued that the CJEU will not have oversight of any future arrangements. However, it is recognised that a trade agreement will only be reached if the UK can put forward a subsidy regime which provides sufficient assurance to the EU that businesses will compete upon a “level playing field”.
“Even putting aside the EU dimension, there are good arguments for having in place a domestic State aid regime” wrote former ERG Treasurer, David Gauke in an article published on the Conservative Home website at the weekend. In particular, effective subsidy controls help ensure taxpayers’ money is spent wisely and are a means to ensure the State’s finite resources are allocated productively and as evenly as possible in order to maximise economic growth. Other reasons for the UK adopting a meaningful post-Brexit State aid regime include enabling the Public Sector to avoid subsidy auctions between different parts of the UK, coordinate spending across the UK’s 650+ public bodies, protect against cronyism (NB. it is easy to foresee the potential scandals arising from unfettered grant awards with accompanying accusations alleging undue influence etc).
Having a domestic State aid regime across the UK’s own union is also vital for consistency with the rest of the UK’s pre-existing competition regime (ie. merger control and other prohibitions of anti-competitive behaviour). It should be recalled here that all competition laws pursue the same ultimate agenda of preservation of a level playing field in which private investment is incentivised and open competition can thrive. Why spend vast resources preventing suspect mergers, for example, when competition can just as easily be heavily disrupted by unregulated and uneven State handouts?
Dominic Cummings argues the UK should have weak State aid rules in order to make the most the opportunities of Brexit, although even while having the same State aid laws, countries like Germany have shown that they will spend proportionally much more then the UK, which is a political choice not law.
In a “no deal” scenario, the Cummings position doesn’t appear sustainable – after all with an 80 seat majority the Government will be able to design its own State aid rules, tailored to its own economic objectives. In practical terms, if Central Government wanted to back a novel initative such as the Advanced Research Projects Agency it could specify that this to be a legitimate (and therefore lawful) investment when setting up its regime. If the Government appointed a regulator and subsequently did not agree with a particular decision, then Parliament would have the ability to overrule such decision, or Parliament could adopt a law exempting a particular project from usual subsidy scrutiny to begin with. In this way, the UK could have a regulator and regime to govern the vast majority of State interventions but reserve the ability to go outside this for a few key central government initiatives when necessary.
In the context of trade negotiations, the Cummings position makes more sense. As an act of brinksmanship, implying that the UK will seek to undercut the EU seems astute. The EU has itself stated how much it wishes to avoid this scenario, even though history suggests it is unlikely, noting again the German example mentioned above, when for example in 2018 as a proportion of GDP it spent four times as much on State aid than the UK, while acting under the same laws).
There does come a point, however, when the UK will need to ‘play its hand’ and reveal the detail of its intended State aid/ subsidy regime. This is necessary in order to move forward in the EU trade negotiations and to navigate Parliamentary procedure (noting that if the new regime is particularly ambitious that it would be prudent to carry out a consultation). As Tim Nixon points out in the Times, “the priority for the government should be clear: regardless of the outcome of the EU negotiations, it needs urgently to put in place a robust, independent, rules based domestic anti-subsidy regime to become effective at the start of next year”. It is also necessary in order to create legal certainty (avoiding some sort of vacuum from 1 January 2021) thus allowing investments to proceed, safe in the knowledge that State support may be safely received and spent without fear. We believe that time has come and look forward to the Government unveiling details of its new UK subsidy regime.
By far the simplest option (especially given the pressing urgency) would seem to be to start with the existing regime the UK already has and which the UK has been heavily involved in developing over many years, and simply convert it to being administered by and for the UK. This may then be adjusted once the UK has had time to consult and consider properly which areas it wishes to prioritise and what strategic aims and policy agendas it most wishes to pursue, eg. regional investment and R&D. Starting with something like the regime it already works under might also be considered most likely to facilitate agreeing a manageable free trade deal with the EU in the time afforded. That is not an insignificant consideration.
Indeed, appointing a properly resourced regulator and setting out clear processes (and timescales) for its decision making would appear to meet the terms for a new State aid regime that were circulated to the press during the 2019 election campaign. This would include clearly defining what constitutes a regulated subsidy (and thus also what is not), what constitutes a permitted subsidy and ideally setting out a procedure for regulating and subjecting to further scrutiny the largest and most controversial interventions. This could create a faster decision making process and achieve greater certainty for those considering investing in the UK. A mechanism whereby Parliament could vote to overrule a decision by the regulator not to approve a significant investment would achieve the objective of ensuring “greater discretion over whether or not an aid is appropriate“. Finally, we note and support the commitment to “develop these rules in full consultation with British Business” who will surely want to know terms on which they can receive Government support but also raise concerns when their competitors receive the same.
Jonathan Branton and Alexander Rose, DWF Law LLP
4 August 2020