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Sharpe Edge features news, views and analysis from our team of specialist local government lawyers working at the heart of the latest legal developments. Sharpe Edge platform is also the only place where local government lawyers can get e-access to two law books by our Head of Local Government Rob Hann: The Guide to Local Authority Charging and Trading Powers (‘LACAT’) and The Guide to Local Authority Companies and Partnerships (‘LACAP’).

 

                                                                                                  

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First Impressions on the New Subsidy Control Bill

Last week the Government published its new Subsidy Control Bill. The Bill represents a significant shift in the way in which subsidies are assessed and also provides some clarity about the regime that will replace the EU State aid regime, writes Peter Collins.

There are significant reasons for cheer for public authorities in terms of the new Subsidy Control Bill. In particular:

(1) The Bill provides public authorities with principle based regulation. This approach steps away from the prescriptive approach of the EU State aid regime and general block exemption rules and expands the freedoms of public authorities. We consider this is the right approach and is critical at a time when the UK faces climate and levelling up challenges. Widening the potential ambit of lawful subsidies represents an opportunity for greater and more innovative interventions. However, in stepping away from the prior prescriptive EU State aid regime, there is less certainty for public authorities as to what is and is not lawful. The Bill provides some steps to address this including the prospect of Guidance and streamlined subsidy schemes.

(2) The Bill provides a clear route for enforcement. However enforcement and challenges are time limited and this will provide greater certainty for beneficiaries of subsidies and public authorities alike.

(3) The Government has resisted the urge to impose a detailed further sequence of rules and has largely transposed the provisions of the Trade and Cooperation Agreement in to law. We consider this is a positive step as alignment of the two regimes is helpful. Where the two regimes diverge there will be a question about how domestic legislation should be interpreted within the context of the Trade and Cooperation Agreement.

Just how far the new Bill allows public authorities to stray from prior EU State aid principles and rules is not yet clear – although it is apparent that some greater freedoms are in place. It is also important to stress and remind ourselves that for certain matters EU State aid rules still apply. Particularly those subsidies covered by the Northern Ireland Protocol and certain subsidies provided from EU funding. It will be important for public authorities to consider this when assessing subsidies going forwards.

The Bill is working is way through Parliament and remains subject to Parliamentary process. However we set out below some initial thoughts and questions with regard to what the government is proposing:

(1) Public Bodies Investing on Market Terms – Clause 3(2) states that financial assistance will not be deemed to confer an economic advantage unless it is provided on terms that are more favourable to the enterprise that might reasonably have been expected to be available on the market to the enterprise. This is effectively the preservation of the market economy operator principle (“MEOP”). This means that where public authorities lend at market rate then they should not be providing a prohibited subsidy. It is worth noting that Clause 3(2) is enterprise specific – as such when assessing a MEOP analysis the relevant reference is to the specific undertaking itself. We consider it is likely to remain the case that the best ways to satisfy the MEOP test are:

An Actual Comparator – This is where a public body is able to point to an actual private operator investing as the public body is investing.

Audit – The second way of demonstrating compliance is to point to a hypothetical comparator. This should be supported by financial advice to demonstrate that a rational private operator might act in the same way that the public body is proposing to act. Forming a coherent audit trail is a critical part of this approach. While no longer applicable, reference to EU reference rates and margins will be prudent in the shorter term absent any more specific guidance.

(2) Specificity – As with the prior EU State aid regime, specificity (similar to selectivity) is a requirement for a matter to constitute a subsidy. This means financial assistance will only be a subsidy where it favours one entity over and above another. This may sound self-evident but it is often overlooked by awarding public bodies. There is also helpful clarity regarding principles for tax measures in Clause 4. We return to consider specificity further below regarding the Northern Ireland Protocol.

(3) Enterprises – The bill contains a wide definition of “enterprise” capturing both the person engaged in the market activity but also the wider group entities. This again is a critical consideration as it will be necessary to consider indirect benefits to group companies in respect of any subsidy. Also the definition of “enterprise” relates to persons carrying out an economic activity. However Clause 7(2) contains an interesting qualification that activities will not be considered “economic activities” where they are not carried out for a purpose that is economic. This is potentially quite a wide loop hole. By way of example, consider a public authority providing a subsidy to a wholly controlled SPV running a district heating scheme. If we consider that the aim of the SPV is simply to break even and support social goals it is questionable whether that would be considered to be carried on for an “economic purpose”.

(4) Effects on Competition and Investment – Part of the qualifying criteria for a matter to constitute a subsidy is that it has an effect on:

  • competition or investment in the UK;
  • trade between the UK and a nation outside the UK; or
  • investment between the UK and a country or territory outside the UK.

There is a question as to how this will be interpreted. Under the prior EU State aid regime there was a comparable qualification that (for a matter to be considered “aid”) a matter had to “affect trade between member states”. This qualification was always treated in its widest possible sense to the extent where it largely became meaningless. Whether or not the same will be true when the English courts interpret the new qualification for a subsidy is not yet clear.

(5) Regulated Water and Electricity – There is an interesting question for regulated utilities who generate revenues from customers via a licence. Clause 2(3) states monies not from public funds may be considered a subsidy where the decision to give the financial assistance is in substance the decision of the relevant public authority. In this regard it is interesting to consider price controls by Ofwat and Ofgem that determine amounts regulated companies can collect from customers.

(6) Consider the Principles – The Bill sets out that all subsidies must be considered against and consistent with the specified “Subsidy Control Principles”. These reflect those set out in the TCA and are:

  • Public authorities will need to consider, explain and assess the policy objective behind the subsidy to ensure there is a benefit to wider society in providing the subsidy.
  • Subsidies should be both proportionate and limited to what is necessary to achieve the policy objective.
  • Subsidies must incentivise and lead to a change in the behaviour of the beneficiary. They must help to address the public policy objective being pursued.
  • Subsidies should be targeted to bring about an effect that is additional to any that would occur in the absence of the subsidy. They should not normally cover everyday business expenses.
  • Alternative policy levers, that are likely to cause less distortion to competition and investment in the UK, or trade and investment internationally, should be considered before turning to subsidies.
  • Public authorities should design the subsidy in a way that minimises the impact on competition and investment within the UK. This will require them to assess the effects which are likely to arise from providing the subsidy. This is a domestic test to ensure that a subsidy does not unduly favour one firm to the detriment of a competitor or new entrants to the UK market, or unduly reduce competition within the UK market.
  • Public authorities should assess the material effects on competition and investment in the UK, and international trade and investment, and decide whether the benefits of the subsidy are greater than the harmful impacts of providing the subsidy.

It is important to stress that this is not just a box ticking exercise. Genuine thought should be given to compliance and assessments should be set out and recorded in detail in case of any future challenge. It is worth noting that some of these concepts actually require quite detailed thought – so by way of example consider the final bullet.

This requires a form of balancing exercise weighing positives and harmful impacts. There is not yet any right or wrong way to do this but it is critical that the relevant public authority undertakes the exercise in a way that is defensible if the matter is challenged. The Bill contains the power for the Secretary of State to issue Guidance on the subsidy control principles and any future Guidance should shape exactly how matters should be considered by public authorities.

(7) Specific Energy Principles – Schedule 2 to the Bill sets out a number of energy principles (which must be considered in addition to the principles above). The way in which some of these principles will be interpreted going forwards remains a point of interest. By way of example, Energy Principle A states that:

“Subsidies in relation to energy and environment shall be aimed at and incentivize the beneficiary in: (a) delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market, or (b) increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy. “

This principle begs a question as to whether (in order to satisfy the principle) the sole purpose and impact of the subsidy must be those matters set out in (a) or (b) or whether it is sufficient for a subsidy to meet these criteria AND achieve other objectives (for example regional aid objectives).

(8) Streamlined Subsidy Schemes – Clause 10 of the Bill introduces a new concept of streamlined subsidy schemes. These will be forms of subsidy to be approved by Parliament that are confirmed to be compliant with the Bill. This is helpful as it will prevent a full assessment against the subsidy control principles in all instances and allow certain subsidies to be implemented without extensive assessment.

(9) Schemes of Interest or Particular Interest – The Bill allows the Secretary of State to designate certain subsidies or schemes as subsidies or schemes of interest or particular interest. These schemes will require more extensive analysis as they are deemed to be higher risk. HMG has confirmed that for “Subsidies of Particular Interest” public authorities will be required to undertake more extensive analysis and seek advice from the Subsidy Advice Unit as well as confirmation from the CMA.

(10) Ailing or Insolvent – Helpful context has been added to the Trade and Cooperation Agreement requirement that subsidies should not be provided to rescue ailing or insolvent companies save in certain circumstances. In particular Clause 24 of the Bill provides a definition of when an entity is “ailing or insolvent” as follows:

  • it would almost certainly go out of business in the short to medium term without subsidies,
  • it is unable to pay its debts as they fall due, or
  • the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

The additional clarity is helpful however we query whether limb (a) may create challenges. By way of example where a new environmental project is started by a public body and subsidies are provided – the level of subsidy is often determined as being the “minimum necessary” to enable the business to operate (this is obviously appropriate as it represents public value).

However where this test is met it seems possible that the relevant SPV may fall foul of limb (a) for the value of the subsidy is being provided to make the SPV viable – in effect “rescuing the SPV”. We do not consider the intention of the Bill is to prevent subsidies of this sort and indeed Clause 19 of the Bill actively talks about “rescuing” ailing or insolvent enterprises which implies that the provision only applies to companies that already existed as at the date when the subsidy was given and would not prevent a grant to a newly established project SPV. However it would be helpful for HMG to confirm this.

(11) Transparency – The Bill requires publication of subsidies on a subsidy database. It will be important public bodies comply with this. The Bill appears to require publication both in respect of subsidies and subsidy schemes. This means dual publication may be required where (for example) a competition for grant funding is set up that is open to multiple participants (although we note the requirement to double publish does not apply to certain lower value subsidies). The subsidy database must also be updated where any modification is made to the subsidy.

(12) Enforcement – The regime will be enforced through the UK tribunal system, with interested parties being able to apply to the Competition Appeal Tribunal (CAT) for a review of a subsidy decision. Challenges will need to be made within a short period of time following the publication of the subsidy on the transparency database (in most cases this will be one month). This is a hugely positive development for public authorities as it means certainty as to whether or not a challenge will arise can be obtained.

Peter Collins is a partner at Sharpe Pritchard LLP.


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