Subsidy control: what it is, and why it is important
When a public body seeks to provide financial assistance (such as an equity investment, grant or loan) to any private entity[1], which may have an impact on competition or investment within the UK, or on international trade, it needs to consider the compliance of this assistance with subsidy control regulation. Subsidy control regulation seeks to strike the balance between allowing government entities (including local authorities) to achieve their policy objectives whilst limiting the potential harmful impacts of such activities on competition, as well as fulfilling UK’s international commitments and obligations.
When implemented in line with subsidy control guidelines, subsidies have the ability to correct market failure, create employment opportunities, rebalance localised and regional inequalities, and more. However, failure to thoroughly consider the potential impacts of government financial assistance through a subsidy control lens can have significant consequences, both financial (e.g. if the assistance is successfully challenged, the funding recipient may be required to ‘pay back’ the subsidy, which can lead to financial distress), and reputational (e.g. further attempts to offer financial assistance are likely to attract greater scrutiny). It could also mean that the UK breaches its international commitments, including the Trade and Co-operation agreement negotiated with the EU following Brexit. Ultimately, this can lead to government policies not being met, and can lead to a worsening of the market failure which the financial assistance was intended to correct.
Subsidy control regulations
The primary legislation that governs UK’s subsidy control is the recently enacted Subsidy Control Act 2022 (the Act).[2] In addition, the EU-UK Trade and Cooperation agreement (the TCA)[3] that governs the relationship between the EU and the UK after Brexit, contains subsidy control provisions. Further, the UK has entered into a number of other arrangements which require consideration of subsidies, including World Trade Organisation Agreement on Subsidies and Countervailing Measures[4] (WTO ASCM) agreements and bilateral treaties with countries.
BEIS published a very useful Summary Guide[5] to awarding subsidies which sets out the UK’s international subsidy control commitments. However, this was published before implementation of the Act and so does not cover all elements – including an additional principle which requires the aid given to consider the impact of the subsidy on competition/investment within the UK in addition to the impact on international trade.
Subsidy control assessment process
BEIS guidance suggests public authorities should consult and follow a five-step process to promote compliance subsidy obligations. These steps have been designed to help public authorities award subsidies within the UK’s international obligations. A slightly enhanced version of the process (which also considers assessment under the Act) is outlined here:
While all steps outlined above are important in completing a subsidy control assessment, application of economics principles is particularly important when:
Assessing whether proposed support constitutes a subsidy; and
Justifying the subsidy under the principles outlined in the Act (and the TCA).
One of the key questions when assessing whether proposed support constitutes a subsidy is determining whether the support confers an economic advantage to the recipient that is not available on market terms (the other questions being whether support is provided by a public authority and whether it impacts competition and/or trade). This involves carrying out a Market Economy Operator Principle (MEOP) test. That is, assessing if the terms of support are such that a commercial operator would also (or already does) invest on similar terms. The MEOP test usually requires an investment risk assessment, and rate of return benchmarking exercise to be undertaken. Even if the MEOP test indicates the support is likely to be considered a subsidy, proposed support structures can be reviewed, and adjustments can be made, so that the MEOP test is more likely to be satisfied.
However, if the support is indeed likely to constitute a subsidy, the Act (and the TCA) require an assessment of the subsidy under seven principles listed in the Act. The principles, and some considerations in demonstrating compliance include:
As the guidelines are nuanced and do not have yes or no answers, the subsidy control process is far from a tick box exercise.
The seven principles in the Act are interlinked and are based in economic theory/terminology and require consideration of economic principles.[6]
Further, the CMA does not have the power to approve or reject subsidies, which can only be done through judicial review. The granting authority therefore cannot be certain the support it grants will not fall foul of subsidy control requirements. Given this lack of certainty, and serious consequences of getting it wrong, a thorough subsidy control assessment should be undertaken to assess the risk of a successful challenge before the subsidy is granted, to inform the granting authority of the level of risk taken on and to provide strong backing for why the subsidy should be allowed in any possible judicial review.
[1] When a public body provides assistance to another public body who does not engage in commercial activity (e.g. Treasury to the NHS), subsidy control rules do not apply.
[2] https://www.legislation.gov.uk/ukpga/2022/23/enacted
[3] https://www.gov.uk/government/publications/ukeu-and-eaec-trade-and-cooperation-agreement-ts-no82021
[4] https://www.wto.org/english/tratop_e/scm_e/scm_e.htm
[5] https://www.gov.uk/government/publications/complying-with-the-uks-international-obligations-on-subsidy-control-guidance-for-public-authorities/technical-guidance-on-the-uks-international-subsidy-control-commitments
[6] A summary of a good example of the assessment against principles is that of the Shared Rural Network, which can be found in its transparency notice: https://www.gov.uk/government/publications/shared-rural-network-transparency-commitment-publication/shared-rural-network-srn-transparency-commitment-publication