Jonathan Branton and Alexander Rose outline some key issues with the Subsidy Control Bill as it reached the second reading in Parliament this week.
The Subsidy Control Bill is set to establish a UK wide statutory framework for awarding grants and other forms of subsidy that over 500 public bodies across the UK will need to follow in future.
The main objective of the Subsidy Control Bill is to create a regime that ensures the UK meets its international commitments in respect of subsidies, whilst avoiding the rigidity and unnecessary bureaucracy of the EU State aid rules. The Bill is likely to be controversial because it will raise issues as to when public funding should be used and what safeguards ought to be in place to avoid taxpayer money being wasted, but also it has wider implications for devolution and the 'levelling up' agenda.
Ultimately the prize for legislators is the creation of a new national regime that enables public bodies to be able to make awards of public funding that create new jobs and nurture the business sectors of tomorrow, whilst avoiding wasting public funds, stifling the free market or breaching the UK's international trade agreements.
As the Subsidy Control Bill begins its passage through Parliament we have set out some key questions legislators will need to consider. In doing so, we note that Parliament does not have an entirely free hand in deciding the shape of the new regime, its fundamental boundaries are already set by the Subsidies Chapter of the EU/UK Trade & Cooperation Agreement of 24 December 2020 ("TCA"). This established high-level obligations between the UK and EU and formed the basis for an interim regime that the UK currently has in place. That said, legislators still have significant discretion to create a system which meets the needs of the UK.
1) Is the strategy of having looser rules for the award of subsidies in the UK's interests?
At a time when taxes are rising and the country is emerging from the worst economic slump in over 300 years, legislators need to decide whether they want a lighter set of controls to apply to the award of subsidies. Whilst greater discretion is naturally attractive to Ministers, it is important to appreciate that these rules will also apply to hundreds of public bodies and most likely to future administrations too.
Our view is that the UK was right to choose not to 'copy and paste' EU State aid rules, which were of course written to regulate the entirety of the EU, thus embracing many different governments, traditions and different styles of economy, rather than for just the UK. The UK now only needs to develop a regime to suit the UK, albeit in saying that of course it does need to cover the whole of the UK and all its constituent parts.
However, we were surprised that the UK Government did not include within its core objectives of the new regime an express commitment to avoid wasteful and unnecessary subsidies. Very few types of subsidy are ruled out under the new regime. Most subsidies can proceed provided they fall within six broad principles (the Bill also proposes to add a seventh). Legislators will need to decide whether they are satisfied with such a system.
2) How can the Subsidy Control Principles be improved?
The Subsidy Control Bill envisages that many awards of subsidy will be made on the basis that they satisfy the broad Subsidy Control principles set out at Schedule 1. These general principles are (with the exception of Subsidy Principle F) based on the text agreed with the EU in the TCA.
We agree with the objective of the principles, which aim to ensure that subsidies show certain characteristics, including that they are directed towards common interest activities, limited to what is necessary and represent the least distortive means to achieve the identified policy objective.
The problem is that these principles are very broadly drafted. As a result there is a lack of clarity as to what they mean and how they may be deemed satisfied, which in turn leads to inconsistent application. We believe that legislators should scrutinise the wording to ensure that funding may only be awarded where there is a strong case for intervention. In particular, awards should only be considered to be consistent with the Subsidy Control Principles where there is tangible and measurable evidence in place. This will improve the Subsidy Control regime by providing greater certainty and helping awarding authorities and businesses alike know where they stand.
The new Subsidy Control Principle proposed is that 'subsidies should be designed to achieve their specific policy objective whilst minimising any negative effects on competition or investment within the United Kingdom'. This is designed to clarify that the regime is as concerned with domestic competition as with trade with the EU, but also to avoid different parts of the country competing against each other to secure investment. However this suffers from the same problems as the other Subsidy Control Principles in that it is currently a vague and uncertain statement. We would recommend that the wording is removed and subsidies which are classed as being part of a "Subsidy Race" should be referred to the Competition and Markets Authority ("CMA") before being awarded (see Question 4).
3) What rights should businesses have to challenge unlawful subsidies?
The main form of remedy or challenge under the new regime is Judicial Review in the national courts. The Subsidy Control Bill proposes that the Competition Appeal Tribunal will hear such Judicial Review cases, determining whether the Subsidy Control Act has been followed and therefore the subsidy is lawful. The period in which a competitor may bring a case under the Subsidy Control Bill is capable of being as little as one month provided a correct transparency notice has been posted online. Legislators need to consider whether there are sound reasons why the Judicial Review period for subsidies is potentially shorter than for any other decision that is subject to public law. It may be that legislators decide to make the challenge period consistent with the wider Judicial Review process.
Legislators should also be mindful that in most cases the Competition Appeal Tribunal will be assessing whether the public sector body has followed the correct process under the Subsidy Control Bill and thereafter whether it has made a sound decision or not. Where an adverse finding is made, this may indicate that the process has been incorrectly applied in other instances.
4) What kind of subsidies will be subject to the referral process?
Section 52 of the Subsidy Control Bill envisages that subsidies of "particular interest" must be directed to the CMA for review prior to award, the outcome of which will be a formal report including a recommendation as to whether the award should proceed. However what types of subsidy will be of "particular interest" is not yet known at this time. We believe that it would be helpful for the secondary legislation setting out these categories to be published at the earliest opportunity given the potential impact on the functioning of the new Subsidy Control regime. It is self-evident that if almost all subsidies must go through the referral process, then the funding landscape will be radically different.
The Bill also envisages creating a system whereby it will be possible to seek the CMA's view prior to award of a subsidy. While it can of course be helpful to discuss a matter with a competent authority there needs to be very clear parameters and boundaries to a procedure like this, and clarity as to the value of the procedure, and any inferences to be drawn from seeking such views or failing to seek such views. If this is not done then seeking a CMA view may become almost standard which will not only tie up significant resources and be costly (and therefore may become more a luxury for wealthier authorities as against others) but it will also be time consuming and run counter to any desire to keep the overall process nimble and effective.
5) How will the Streamlined Subsidies be drafted?
The mechanism for Streamlined Subsidies is an ability for the UK Government in future to declare categories of subsidy which may proceed quickly without complicated individual assessments against the Common Principles. This is to be welcomed as a pragmatic step to facilitate the easy delivery (with maximum legal certainty) of low level subsidies in supposedly uncontroversial situations.
According to the European Commission statistics over 95% of EU State aid is awarded on the basis of block exemptions, which achieve this same effect. This means that funding can be lawfully awarded without further checks provided it meets certain conditions.
The Government is right to include a mechanism under which it can set up Streamlined Subsidy Schemes in order to create simple exemptions where merited, but at the moment it has not published what these might look like. Given how fundamental the Streamlined Subsidy Schemes are likely to be for the majority of awards, we recommend that this process is accelerated and the headings of the categories of scheme are published for legislators to consider.
It should be noted that in drafting its block exemptions, the European Commission ran a consultation and sought the views of practitioners from both the public and private sector, and the existing suite of block exemptions in the EU now has evolved over nearly 20 years. We recommend that alongside the legislation some sort of similar process takes place.
6) How can the Subsidy Control Bill better support Levelling Up?
However imperfect the EU systems may have been, one principle the State aid regime has at its core has been preferential treatment for disadvantaged regions, recognising that they need assistance to deliver new investments and thereby progressively even up disparities between regions. This seems to be a very similar rationale as for the Levelling Up agenda. Under these circumstances it seems strange that the UK Subsidy Control regime does not place levelling up somewhere at its heart. Can it be right that the rules do nothing to facilitate a subsidy in Grimsby over one in Guildford? Even though the Subsidy Control Principles consider such notions as proportionality and minimum necessary, this relates to issues such as investment costs and if these would be higher in wealthier areas then a subsidy could be based on that. There is nothing built into the assessment system necessarily to compare investment in one area with another.
One might say that levelling up has more to do with the allocation of funds (e.g. future UK Shared Prosperity Fund and/or the Levelling Up Fund) rather than the legitimacy of spending those funds on subsidies in particular areas, but it still seems a possible missed opportunity that the Subsidy Control rules do not factor this in somehow.
7) Hampering R&D start-ups by over-regulating the prohibition on subsidy to ailing or insolvent enterprises?
One of the consistent complaints against the EU's block exemptions was its rigid prohibition of aid to so-called "undertakings in difficulty". This was an overly prescriptive test which meant many early stage companies were prohibited from accessing support.
The interim regime based upon the TCA provided a welcome release on this point. It contained a comparable provision only prohibiting subsidy to "ailing or insolvent enterprises". This term was not defined and was understood as those likely to go out of business in the short to medium term absent the subsidy under consideration. Therefore, provided some sort of basic "going concern" demonstration could be provided, then a subsidy was able to proceed. In practical terms, this removed an obstacle that had affected public funding to help early start-ups in the tech and R&D sectors for whom there can be years of trading prior to income being generated. Such companies arguably need subsidy the most.
The Subsidy Control Bill at Section 24 contains a prescriptive test for "ailing and insolvent" which threatens to dilute the benefits realised. It is not clear to us that this extra rule is required on the basis that in any event the relevant funders are already considering the long term viability prospects of the applicants concerned.
The ability to mastermind its own State aid regime was put forward as one of the best opportunities for the UK post-Brexit, and with good reason. Cleverly targeted State subsidies can dramatically improve economies and provided due care is taken this should not fracture a strikingly pro-competitive free market. At the same time wasteful subsidies make poor use of scarce public resource, can undermine the functioning of markets and breach the UK's international agreements. With a Parliamentary majority of 80, the Subsidy Control Bill is almost certain to pass quickly through Parliament, but it is sufficiently important to the prospects of the UK to merit careful scrutiny.
Ultimately the new Subsidy Control regime must strike a difficult balance: it needs to take full advantage of new opportunities, whilst not opening the floodgates to wasteful and damaging subsidies.
For many decades, the UK has prided itself on being fiercely pro-competition and non-interventionist. Although public spending has increased, the high standards that the UK has developed around managing public money should not be diluted. Ultimately the new regime must only allow subsidy to be awarded where there is a clear and demonstrable rationale for intervention, but should also contain sufficient checks and balances to ensure public funding is always applied proportionately.