The Subsidy Control Principles - Applying them in practice

Jay Mehta sets out the key considerations for public authorities when it comes to the provision of subsidies.

Where there is public authority involvement in a project, for instance by way of grants, loans, co-investment, asset transfers or tax breaks, the first question to ask is whether a subsidy arises. If the answer is “yes”, then it must be managed by the public authority granting it.

Unless exempt from doing so (generally for small subsidies or those falling within a designated scheme) the public authority will “manage” the subsidy by self-assessing it as reasonable. It must do so by reference to a set of principles in Schedule I (and in some cases Schedule 2) of the Subsidy Control Act 2022. In cases where the subsidy is particularly large or sensitive, the self-assessment may be reviewed by the Competition and Markets Authority (CMA).

It is therefore important for a public authority to identify exactly who the recipient of the subsidy is (this is not always straightforward where indirect subsidies are granted to third parties) and then self-assess as reasonable using the principles as focused on the circumstances of that beneficiary.

Schedule I Subsidy Control Principles

There are seven principles (A-G) to address in Schedule I. These principles can be addressed by the public authority focusing on answering three questions for every intervention:

1. Does the public authority have a policy objective which needs addressing (A, F and G); if so
2. Does the project under consideration assist in meeting that objective (as above); if so
3. Is the subsidy the only way to implement the project under consideration (B,C,D,E).

Answering these questions requires explanations based on evidence, such as project appraisals, which (as suggested by UK Government) can be cross referenced into an internal record addressing them called a “principles table”. This record becomes useful as an aide memoir if there is a challenge, or if the subsidy has to be reviewed by the CMA. In general, it is also useful in meeting the public authority’s wider judicial review obligations.  

While the Statutory Guidance to the Act suggests the evidence backing the analysis is proportionate to the size of the subsidy, there is little indication as to what that means. The following are therefore suggestions on the minimum evidence which would be useful in meeting them.  

Useful evidence in applying the Principles

When appraising a project on the focus points above, it is important to hone in on the particular beneficiary receiving the subsidy. For instance an appraisal could cover a masterplan, where an intermediary body is charged with passing on public support to third party businesses. In such cases it is often useful to perform the appraisal as a scheme, rather than a series of ad hoc subsidies, particularly where the ultimate beneficiary is not yet known at the time the public support is provided to the intermediary.

Whether considering a scheme or an ad hoc subsidy, the following evidence for each focus point above would be useful where appropriate to the project:

1.  Usage of market surveys, public and stakeholder consultations, focus group feedback and so on to show market failure or a regeneration need behind a particular objective. This would also assist in assessing latent demand and the crowding out, displacement and leakage effects on the local economy of implementing that objective.
2. Honing the above from an overarching masterplan, local or spatial plan to the well-defined parameters of a particular activity (a project) which is functionally and financially self-contained. A five-case options appraisal often highlights the project as a “preferred option” to other means of attaining the objective in 1 above.  However other methods are useful for particular projects for instance R&D interventions (where there is more focus on dissemination and exploitation of results).
3. Viability Gap forecast - numbers speak a thousand words. In simple terms such a forecast shows that net earnings from a project do not meet its initial set up costs (for instance capital costs of construction) leaving a resource need for a subsidy. Further information on such forecasts can be found in our paper Use of Viability Gap in Subsidy Control. Viability Gap forecasts provide evidence of need, change of behaviour and the subsidy being the best resourcing solution (as opposed to commercial loans etc).

In developing the principles table, it is useful for a public authority’s project appraisal team to work closely with legal to consider the Statutory Guidance and how the CMA applies the principles in its referrals as a basis for adapting the appraisal’s findings (for instance value for money, benefit cost ratio and similar analyses) to the principles.  

Where several public authorities intervene (for instance a local authority and Homes England for a mixed-use development with social housing elements) each should consider the principles, cooperating where possible with each other and the beneficiary.

It is also necessary to consider whether the additional principles in Schedule 2 need to be addressed.

Schedule 2 Energy and Environmental Principles

Where the subsidy’s specific policy objective (or one of its objectives) relates to energy or the environment, an additional set of principles set out in Schedule 2 of the Subsidy Control Act need to be considered. These are referred to as “Schedule 2 considerations” so as to avoid confusion.  

This is an oddity of the regime, since one would expect that green energy projects would have an easier ride in being justified as reasonable, in comparison with (say) a “normal” project offering only ancillary environmental benefits. However, this is not the case, and such projects must therefore follow an additional set of principles for them to be considered reasonable.

That said, satisfying the Schedule 2 considerations would go a long way in satisfying the Subsidy Control Principles in Schedule I as this would presumably provide clear answers to the focus points 1-3 above, particularly if the viability gap is evidenced by the additional capital or operating costs of engaging in lower emissions investments vis a vis their “conventional” counterparts.

The strange case of Services of Public Economic Interest (SPEI)

These are subsidies towards activities which ultimately benefit individuals such as social housing, rehabilitation of disadvantaged people into social and working life, necessary transport for residents and so on. It is for a public authority to designate a project as an SPEI and once it does so, it must follow certain processes (assessing viability gap forecasts, monitoring and so on) when implementing an SPEI.

Like the Schedule 2 considerations above, SPEI is another oddity of the regime. Again, one would be justified in expecting the application of the principles to be less onerous than an “ordinary” project like a commercial property development, given the significant public benefit involved. However apart from providing an exemption for small subsidies, the principles appear to be applicable in the same way as any other project.

There is a “carve out” in the Statutory Guidance suggesting that the principles need not be considered if doing so would prevent the SPEI being implemented. There is no further indication of when such a situation may arise and further guidance on this would be welcome. Until then a possible situation where SPEI “trumps” the principles could be where its implementation causes a significant market distortion (say in a transport or skills training programme) while delivering the public benefit.  

Conclusion

The above principles and considerations need to be assessed by the subsidy provider(s) where a subsidy arises and is not exempt from their assessment. 

The principles apply in equal force to all subsidies, even though in some cases like SPEIs or low value or less distortive subsidies, one would expect a “light touch” approach in their assessment. While this is mentioned in the Statutory Guidance, at this point there appears no specific description of what “light touch” would entail and as a result we would always recommend the principles are analysed in as much detail with as much evidential backing as feasible.

However this is a useful opportunity for the public authority’s appraisal team to work closely with its legal team in adapting appraisal evidence to meet Subsidy Control requirements.

Jay Mehta is a Legal Director at Hill Dickinson.

This article covers an area which is complex and hence not a substitute for detailed legal and accountancy advice. For further information or guidance please contact the author.