89: Post-brexit: new subsidy control bill
The Subsidy Control Bill was introduced to parliament on 30 June 2021. It sets out the government’s legislative proposal for a new UK subsidy control regime.
As we explained here and here, from 1 January 2021 (end of transition), EU state aid rules no longer apply in the UK (or, more accurately, Great Britain, given the continued operation of the Northern Ireland protocol). Instead, we have a new subsidy regime comprising the (largely) international obligations contained in:
- the World Trade Organisation’s (WTO) subsidy rules, primarily the Agreement on Subsidies and Countervailing Measures (ASCM) (trade in industrial goods) and the Agreement on Agriculture (AoA) (trade in food and other agricultural products); and
- the subsidy-related commitments in specific Free Trade Agreements (FTAs) with other countries, notably the agreement reached between the UK and EU, known as the Trade and Cooperation Agreement (TCA) (which we reviewed here).
Between 3 February and 31 March 2021, the government held a public consultation on the UK’s future subsidy control proposals. It is now legislating to give domestic effect as necessary to the international obligations and to make further provisions for a domestic subsidy regime.
Purpose and overview
In introducing the Bill, the Secretary of State for Business, Energy and Industrial Strategy, Kwasi Kwarteng, said:
‘This new regime has been designed to reflect our strategic interests, strengthen our Union and help to drive economic growth and prosperity across the whole of the UK. The new regime will be flexible, agile, and tailored to support business growth and innovation, as well as help to maintain a competitive free market economy and protect competition and investment in the UK.’
The government announcement highlights four key aims:
- to empower local authorities, public bodies, and central and devolved governments to design subsidies that deliver strong benefits for the UK taxpayer;
- to enable public authorities to deliver subsidies that are tailored and bespoke for local needs to support the UK’s economic recovery and deliver UK government priorities such as levelling up, achieving net zero and increasing UK research and development investment;
- to provide certainty and confidence to businesses investing in the UK, by protecting against subsidies that risk causing distortive or harmful economic impacts, including to the UK domestic market; and
- to contribute to meeting the UK’s international commitments on subsidy control, including its international commitments at the World Trade Organisation, in free trade agreements and the Northern Ireland protocol.
The Bill seeks to do this by providing a legal framework for public authorities to award subsidies in line with the UK’s new subsidy control principles. It contains a statutory duty for public authorities to consider these principles and only award a subsidy if the subsidy is consistent with these principles. The Bill introduces a number of prohibitions to prevent public authorities granting subsidies with distortive or harmful economic impacts, and certain full and partial exemptions which, in specified circumstances, give public authorities the freedom to provide subsidies. It also introduces a requirement for public authorities to use a new transparency database, which will contribute to the effective management of the regime (and facilitate challenge by those aggrieved).
The Bill establishes a Subsidy Advice Unit (located within the Competition and Markets Authority) to provide monitoring and oversight of the new regime. The Subsidy Advice Unit will also advise public authorities on specific subsidies in a limited number of cases, for subsidies that are more likely to distort UK competition and investment and international trade. The Bill would enable interested parties to challenge subsidy decisions on judicial review grounds in the Competition Appeal Tribunal.
It also provides that the Secretary of State for Business, Energy and Industrial Strategy can issue statutory guidance for the subsidy control regime, especially to support public authorities to apply the requirements.
Let’s have a look at the Bill in more detail.
Part 1 contains a number of definitions of key concepts used in the Bill, notably ‘subsidy’ (clause 2).
In this Act, ‘subsidy means financial assistance which:
- is given, directly or indirectly, from public resources by a public authority,
- confers an economic advantage on one or more enterprises,
- is specific, that is, is such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services, and
- has, or is capable of having, an effect on:
- competition or investment within the United Kingdom;
- trade between the United Kingdom and a country or territory outside the United Kingdom; or
- investment as between the United Kingdom and a country or territory outside the United Kingdom.
Interestingly, there is no definition of ‘effect on’ (i) competition or investment, (ii) trade or (iii) investment in the Bill, so we may see those implementing the new regime (see Part 4 below) turning to state aid case law in this regard – almost by default. We suspect the government would not welcome that. The old State aid threshold was very low, with almost any aid conferring an economic advantage potentially having an effect on the internal market. That would appear to run contrary to the government’s aims for the Bill, given the references to enabling public authorities to deliver subsidies that are tailored and bespoke for local needs to support the UK’s economic recovery and to delivering UK government priorities such as levelling up, achieving net zero and increasing UK research and development investment.
Part 2 sets out the mechanics of subsidy control, including:
- duty to consider the ‘subsidy control principles’ (clause 12 and Schedule 1) which broadly align with those in the TCA art. 366, ie
- subsidies should pursue a specific policy objective in order to remedy an identified market failure, or address an equity rationale (such as social difficulties or distributional concerns);
- subsidy to be proportionate and necessary;
- to be designed to change economic behaviour of beneficiary;
- to not be for costs that would be funded anyway; and
- to be least distortive means of achieving policy objective; beneficial effects to outweigh negative effects.
- duty to consider the energy and environment principles (clause 13 and Schedule 2), principally that subsidies are to be aimed at and incentivise the beneficiary in ‘delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market’ or ‘increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy.’;
- clauses 15 to 28 contain certain general prohibitions, eg unlimited guarantees, subsidies dependent on export performance or use of domestic goods, which are derived from WTO rules;
- clause 29 contains transparency requirements in relation to Services of Public Economic Interest (SPEIs) , which are clearly derived from the equivalent TCA provisions; and
- duty to enter subsidies in, and provisions related to, the new central subsidy database (clauses 32 to 34).
Part 3 sets out certain exemptions from control, eg minimal financial assistance, set at £315,000 over the last 3 financial years for most subsidies, but a higher £725,000 for services of public economic interest (SPEI) assistance. Separate exemptions are provided for natural disasters, ‘other exceptional occurrences’, monetary policy interventions, financial stability directions, nuclear energy etc.
Part 4 deals with the CMA’s new role. There is to be a duty to refer a subsidy ‘of particular interest’ to the CMA before it is made (clause 52), although the Bill doesn’t define what that term means; that is to be defined in regulations made by the Secretary of State. Once a referral is made, the CMA must respond within 5 working days indicating whether the request is valid, and then has 30 working days to publish its report (clause 53). Interestingly, if the CMA does not publish a report before the end of the reporting period, the public authority may give the subsidy or make the subsidy scheme on or after the day on which the reporting period expires (clause 54(3)). Clause 55 provides that the SoS may direct a public authority to request a report from the CMA (including up to 20 days after an award has been made, clause 60), and clause 56 provides that the awarding authority may do so of its own accord. There are various exemptions from the regime: subsidy schemes (clause 63), and where certain Part 3 exemptions apply. The CMA also has certain general functions, eg reporting etc., on its new role (clauses 65 to 67).
Part 5 deals with enforcement, primarily the role of the Competition Appeals Tribunal (CAT) in considering appeals from the CMA’s decisions. An aggrieved interested party can apply to the CAT for a review of a subsidy decision on normal judicial review principles, but this must be brought within a month of the ‘transparency date’ (ie when the award is added to the database or when the interested party first knew or ought to have known of the decision) or after the CMA report appeared. The CAT’s powers re granting relief are to be the same as those of the High Court on a judicial review, but also a power to make a ‘recovery order’ (clause 74) which gives an awarding authority a right to recovery an award, and requires the authority to exercise that right.
Clause 76 provides that an interested party may make a request to a public authority for information about a subsidy, or subsidy scheme, that the authority has given or made, in order that an award can be challenged.
The Bill has been introduced into parliament but no date for Second Reading has yet been announced. We will follow the Bill closely, so look out for further blog posts on this interesting topic.