Subsidy control and streamlined routes

The Government has published proposed exemptions for use in the new Subsidy Control regime. Jonathan Branton and Alexander Rose consider the plans.

Ahead of the new Subsidy Control regime coming into force on 4 January 2023, the Government has published three draft Streamlined Routes. The Streamlined Routes will operate in a similar manner to block exemptions in EU State aid law. A measure which properly satisfies all the requirements of a Streamlined Route is considered automatically compliant without the funder needing to apply extensive individual analysis - therefore these are a useful mechanism to reduce bureaucracy for awards of lower value, high frequency subsidies. At this stage, the Government has put forward three limited Streamlined Routes, but time will tell whether these will be followed in due course by a much wider array of similar exemptions.

What are Streamlined Routes?

Streamlined Routes are Subsidy Control exemptions for specific situations, written into law, which can be used by public authorities to make compliant awards of subsidies when the relevant circumstances fit the Schemes in question. Provided all the conditions of the relevant Streamlined Route are satisfied, a subsidy award made on the basis of such a Streamlined Route is deemed automatically lawful and does not require an individual examination under the Subsidy Control Principles set out at Schedule 1 of the Subsidy Control Act 2022 ("the Act"). The other benefit of a Streamlined Route is that if its terms are met, a subsidy will not need to be notified to and a view obtained from the Competition & Markets Authority (CMA), before it may be awarded.

Which Streamlined Routes have been published?

Three draft Streamlined Routes have been published by the Government in December 2022. These are for Local Growth, Research, Development and Innovation and Energy Usage. These are in draft form at this time, but expected to be laid in Parliament once the new rules come into force on 4 January 2023.

The Local Growth exemption allows grants of up to £400,000 to SMEs for business development projects, with an intervention rate of between 95% of eligible costs for start-ups and 15% for medium enterprises. The Research, Development and Innovation allows subsidies for feasibility studies, industrial research and experimental development, at different intervention rates, with a maximum value of £3m. The Energy Usage exemption allows awards of up to £15m for Green Heat Networks and up to £3m for energy demand reduction projects.

How do the new Streamlined Routes compare to the General Block Exemption Regulation in EU law?

Under EU State aid law, around 95% of measures proceeded on the basis of compliance with the General Block Exemption Regulation ("GBER").

The Streamlined Routes published so far are much more limited. For example, the GBER allows subsidies for industrial research with a value of €20m and experimental development with a value of €15m, compared to the UK's Streamlined Route maximum of £3m. Furthermore, the GBER sets out over 55 different categories of State aid that can be awarded, so far broader than the UK's Streamlined Routes (to date).

We understand this is a deliberate policy. A decision has been made by the UK Government to have only a few limited exemptions in the new Subsidy Control regime, in order to encourage public authorities to make use of the Subsidy Control Principles route, ie. individual examination against a series of different flexible tests.

The concern is that too many exemptions would lead to public authorities to adopt a "cookie cutter" approach, only taking forward projects that fit within the Streamlined Routes. By limiting the options with Streamlined Routes it is hoped to force public authorities to explore the possibilities of the Subsidy Control Principles in more imaginative ways.

Although more demanding in terms of administration, the Subsidy Control Principles are drafted in general terms and therefore provide flexibility. The funder doesn’t face the same hard and fast limitations when applying the Subsidy Control principles to the specific circumstances of each case, but in contrast the lack of flexibility can in some cases lead to ambiguity and legal uncertainty. 

To mitigate the levels of administration faced by public authorities, the Government has stated in its Statutory Guidance (paragraph 1.43) that the assessment of the Subsidy Control principles should be proportionate to the value and potential distortion of the award. No such statement is set out in the Act, but while this seems a sensible approach, it is also imprecise again and what a Court would have to decide when faced with a challenge is whether the relevant authority properly and reasonably assured itself of compliance with each of the Principles in the case in question.

Conclusion

The concept of Streamlined Routes is universally popular with funders because they provide a degree of legal certainty and reduce the level of administration for lower value, frequently awarded subsidies. Notwithstanding, the Government has so far chosen to establish only a few limited Streamlined Routes in the hope that this will encourage funders to more frequently use the Subsidy Control Principles. 

Our view is that after perhaps a year of operation of the new Subsidy Control regime, the Government might wish to consult with public authorities and the CMA in order to gauge the effectiveness of the new regime to see what kind of Streamlined Routes they want. This might be informed, for example, by the CMA observing a series of notifications of particular types of subsidy that it is not unduly concerned about. Indeed, we recall in this respect that the development of the breadth of block exemptions in the EU was informed by the European Commission wishing to avoid various different categories of notifications that it received frequently but was not particularly concerned about.

Such a review might also allow further time to evaluate the respective advantages and disadvantages of making awards under the Subsidy Control principles whilst under the new requirement for mandatory CMA notifications for so-called Subsidies of Particular Interest. This will allow public authorities to put forward the case for exempting more categories of subsidy (for example towards areas such as Arts, Culture and Heritage or capital infrastructure in deprived areas) as well as to make the case for higher value thresholds as might be consistently required.

Jonathan Branton is a Partner and Head of Government & Public Sector and Alexander Rose is a Legal Director at DWF.