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Preparing for the Subsidy Control Act 2022

The Government has published proposed routes to award regular and sensitive subsidies. Jonathan Branton, Alexander Rose and Alex Eaton look at the detail.

The Government has published important information on how the new Subsidy Control regime will work in practice. This includes what kinds of subsidy will be classed as "sensitive" and therefore may be subject to review by the Competition and Markets Authority. It also includes two illustrative "Streamlined Subsidy Schemes", a new route for low risk subsidies that DWF has championed as a means to reduce unnecessary bureaucracy for public bodies engaged in administering regular, lower value awards.

Context

The Subsidy Control Bill has been described as the "most important bit of post-Brexit legislation yet". It sets out a framework under which public sector resources may be lawfully awarded to businesses and any other organisations engaged in economic activity. Therefore this is a means by which the Government can shape the UK economy, for example the Subsidy Control Bill could be used to make it easier to nurture new technologies, achieve Net Zero or Level Up using public funds.

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Since the Subsidy Control Bill was published in June 2020, there have been questions as to how parts of the Bill will operate in practice, especially in terms of additional examination by some form of regulatory authority. For example, the rules around "Subsidies of Interest" and "Particular Interest" (which is the new terminology for sensitive subsidies) stated that the Secretary of State would identify which subsidies would fall within these categories in due course, by way of regulation.

Over 200 days had passed by the time the Bill was debated in the House of Lords, leading to several peers criticising the Government for not providing clarification as to the meaning of these terms. To counter this, the UK Government has published guidance (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1050006/subsidy-control-bill-principles-illustrative-guidance-practical-operation.pdf and draft regulations (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1049847/subsidy-control-bill-illustrative-regs-subsidies-schemes-interest-particular-interest.pdf) as to Subsidies (or Schemes of Interest and Particular Interest https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1049847/subsidy-control-bill-illustrative-regs-subsidies-schemes-interest-particular-interest.pdf), explaining how such subsidies will proceed under new regime set out in the Subsidy Control Bill.

It has also provided illustrative examples of how Streamlined Routes (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1049849/subsidy-control-bill-policy-statement-streamlined-routes-objectives-operation.pdf) under Article 10 of the Bill may be developed. The Streamlined Routes are a form of "safe harbour" and DWF lawyers argued for greater use of this route at the Subsidy Control Select Committee on 26 October 2021.

Subsidies or Schemes of Interest / Particular Interest

Under Section 11 of the draft Subsidy Control Bill, the Government included a mechanism whereby additional scrutiny and review will be given to subsidies "that are more likely to cause negative effects on competition and investment within the" UK or effect the UK's trading partners.

These two categories are:

  • Subsidies or Schemes of Interest; and
  • Subsidies or Schemes of Particular Interest.

How will Subsidies or Schemes of Interest / Particular Interest be defined?

Section 11 of the Subsidy Control Bill does not specify what constitutes "of interest" or of "particular interest". The new draft regulations offer an indication as to how they could be defined, albeit these could still be changed in due course.

As currently drafted, a subsidy will be classed as a Subsidy of Particular Interest where one of the following tests are met:

  • "the subsidy concerns a "sensitive sector" in excess of £[1 to 5]m per enterprise;
  • regardless of the sector which the subsidy concerns, it is in excess of £[5 to 10]m per enterprise; or
  • the subsidy is given "for restructuring ailing or insolvent enterprises, including insurance companies and deposit takers".

"Sensitive sectors" will include areas of activity which have "a record of international trade policy disputes [or] evidence of global overcapacity within the sector" including:

  • the manufacture of basic iron and steel;
  • aluminium or copper production;
  • the manufacture of motor vehicles or motorcycles;
  • the building of ships and floating structures;
  • the manufacture of air and spacecraft; and
  • the production of electricity.

In contrast, a subsidy will be classed as a Subsidy of Interest where one of the criteria apply:

  • "the subsidy is in excess of £[1 to 5]m per enterprise but does not fall within the definition of Subsidies or Schemes of Particular Interest; or
  • the subsidy is given "for rescuing ailing or insolvent enterprises, or for liquidating or providing liquidity support to deposit takers or insurance companies".

How can subsidies of interest and particular interest be awarded?

The Subsidy Control Bill, as clarified by the draft Regulation, provides a route forward for subsidies of interest and of particular interest to be awarded.

Where a public authority intends to grant a subsidy which is categorised as a Subsidy or Scheme of Interest, it "will have the option [of sending] their assessment to the [Subsidy Advice Unit] for review prior to award".

In contrast, where a public authority intends to grant a subsidy which is categorised as a Subsidy or Scheme of Particular Interest, they "will be required to send their assessment to the [Subsidy Advice Unit] for review prior to" the subsidy being awarded (though the Unit's reports will be non-binding "regardless of whether the referral is voluntary or mandatory").

The Government intends to publish additional guidance in due course to help public authorities "identify when a subsidy or scheme meets the criteria for Subsidies or Schemes of Interest or Particular Interest" and to set out the referral processes to the Subsidy Advice Unit.

It is disappointing that at this stage of the legislative process that it is still not possible to clearly identify what kinds of subsidy will need to go through a more involved route (in particular it seems unnecessary to include square bracket values when the legislation is not in final form). Having to make mandatory filings will significantly impact upon the anticipated delivery cycle for many awards, particularly from a timing perspective (NB. although it is anticipated that a notification should yield a view within one month, it will inevitably take time to draft notifications and the Competition & Markets Authority (CMA) will be expected not to allow time to start to run until it is fully satisfied with the completeness of each notification).

Our first observations are that the proposed values are low, indeed for many awards the threshold for scrutiny is lower than under EU State aid law. For example, under the GBER investment towards a district heating or cooling distribution network would only need to go to the European Commission for review if it exceeded €20m. It is therefore perhaps a bit surprising that the new UK regime, whilst seeking to proclaim the benefits of less red tape" and moving out of the sphere of EU law, would seek to apply additional interrogation to a range of measures that would pass through on a much quicker basis within EU law.

The other consequence of law value thresholds for notification is of course that a much greater volume must be expected to be generated, thereby placing an inevitable strain on the resources of the anticipated Subsidy Advice Unit within the CMA. Furthermore, if the CMA receives a greater volume than it can reasonably cope with then notifications will inevitably become delayed.

What are the Streamlined Routes under the Subsidy Control Bill?

Article 10 of the Bill enables the formation of Streamlined Routes (referred to as “streamlined subsidy schemes” within the Bill). These are schemes which are established under the Subsidy Control Bill which provide a lawful route to provide certain awards, subject to the relevant conditions being met.

What are the aims of Streamlined Routes?

It is intended that the individual Streamlined Subsidy Schemes "will offer public authorities a way to award subsidies more quickly [whilst promoting] confidence and legal certainty among public authorities and businesses". In particular, Streamlined Subsidy Schemes will be designed to achieve:

  • maximum legal certainty "by facilitating the granting of regularly awarded subsidies which address well-recognised market failures or equity rationales for intervention";
  • minimal administrative burden to granting authorities "by ensuring that [the Streamlined Routes] benefit multiple public authorities or recipients across the UK and are straightforward to implement";
  • minimal distortions to competition "by ensuring they are predominantly used to facilitate the award of subsidies at low risk of being highly distortive to domestic competition and investment";
  • the promotion of UK policy priorities "by ensuring they are developed for policy areas where there is UK-wide demand for the delivery of such subsidies"; and
  • "ambitious…coverage…with significant scope for subsidies relating to UK wide strategic priorities to be awarded under [the] Streamlined Routes".

Linked to the above objectives, the Government expressly states that the Streamlined Routes "will support UK wide priorities such as Levelling Up and transitioning to a Net Zero economy".

What are the key features of Streamlined Routes?

Streamlined Routes are distinct from ordinary Schemes for the following key reasons:

  • they can only be established by the UK Government "and must be laid before Parliament when they are made", in direct contrast to ordinary Schemes, which can be made by any public authority;
  • once approved, they "will be open to all public authorities, who will be able to rely on [their] completed compliance assessment to grant eligible subsidies" (though their use will be voluntary);
  • public authorities "will not need to secure permission to use a Streamlined Route", though they must ensure their proposals meet the parameters of a published Streamlined Route;
  • "subsidies awarded under Streamlined Routes [will be] exempt from referral to the Subsidy Advice Unit as Subsidies or Schemes of Particular Interest"; and
  • details of Streamlined Routes will be required to be "entered onto the Transparency database" and "public authorities will be responsible for disclosing all subsidies above £500,000 made under Streamlined Routes on the Transparency database".

The Streamlined Routes are therefore an important means for lower value awards to proceed with reduced bureaucracy. To assist in understanding the opportunities that Streamlined Routes present the Government has published two examples, relating to Clean Heat (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1049852/subsidy-control-bill-clean-heat-illustrative-example-streamlined-route.pdf) and Research, Development and Innovation (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1049854/subsidy-control-bill-rdi-illustrative-example-streamlined-route.pdf).

How could the Streamlined Routes be improved?

Streamlined Routes are a sensible solution to a significant problem in the new regime. They provide a route for legal certainty for specific pre-defined categories of award, subject to strict limits. In this sense they are expected to work to some degree in the same way as "block exemptions" have applied in EU law.

The problem in the new UK regime currently is that even comparatively low awards, ie. where the Minimal Financial Assistance route is not available, must go through the administratively time consuming process of building a justification under the six (soon to be seven) Common Principles. Based on the provisional rules for Subsidies of Particular Interest, as addressed above, a significant number may also need to be subjected to mandatory pre-notification too.

The Streamlined Route is therefore an "easy win" for lower value and/ or less controversial awards (eg. heritage and culture). The route enables whatever may be the range of pre-defined activities to proceed with certainty and without unnecessary further bureaucracy, beyond an assessment to ensure satisfaction within the criteria of the Streamlined Subsidy Scheme in question. However, much depends on how these are drafted. Our recommendation would be to set up a panel of practitioners from the public and private sector which can help shape the Streamlined Routes.

Conclusion

The additional guidance and regulations are welcome news to both public authorities and businesses, providing additional insight into how the Subsidy Control Bill is likely to operate. There is the opportunity to create a faster, more permissive system than under EU State aid rules and therefore the Government will need to be mindful of striking the right balance between having safeguards in place for public money, whilst also enabling public funding to be deployed swiftly and used effectively.

Jonathan Branton is a partner and Head of Public Sector, Alexander Rose is a Director and Alex Eaton is a solicitor at DWF.

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