Introduction
The implementation of the UK’s subsidy control regime has brought a number of new concepts for public authorities to grapple with. Amongst those changes are two new categories of subsidy: Subsidies or Schemes of Interest (SSoI), and Subsidies or Schemes of Particular Interest (SSoPI). The statutory guidance describes these as “subsidies which potentially pose a substantial risk of negative effects on competition or investment in the UK, or on international trade or investment” and thereby require “closer scrutiny”. Under the Subsidy Control Act 2022, a SSoPI must be referred to the Competition and Markets Authority (CMA). A SSoI, by contrast, can be referred but this is not mandatory. In this article I will look at some of the likely considerations for public authorities in deciding whether to voluntarily knock on the door of the CMA.
What is a Subsidy or Scheme of Interest (SSoI)?
Unlike other concepts of the new regime, SSoIs have no equivalent provision from the EU State aid rules (or the interim subsidy control regime under the Trade and Cooperation Agreement). This new concept is defined in the Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022, which provide that the following awards are SSoIs:
- Subsidies above £5 million (including cumulation of other related subsidies);
- Subsidies of £1 million or less which engage the rules in the Subsidy Control Act 2022 regarding relocation of activities;
- Subsidies of any value when they engage the provisions of the Act in respect of rescuing, or liquidating/liquidity provision for deposit-takers or insurance companies; or
- Subsidies given under a subsidy scheme in the form of a tax measure.
(Awards which qualify as a SSoPI (for example relocation awards of over £1 million, or any awards over £10 million) are not SSoIs.)
Aside from the financial values and focus of the subsidy, another key distinction between these two new concepts relates to the corresponding referral obligations. As above, in the case of SSoIs there is no requirement to refer. Unlike SSoPIs, the CMA is also not obliged to accept SSoIs – it has a discretion whether to do so. Where a SSoI referral is accepted, or where the referral is a SSoPI, the CMA will then provide a non-binding report. This evaluates the public authority’s assessment of compliance with the subsidy control principles and is subsequently published on the CMA website.
The legal position
Under section 56(1) of the Act a public authority:
…“may request a report from the CMA before giving a subsidy, or making a subsidy scheme, of interest.”.
Section 79(6) provides that a public authority:
…“must have regard to guidance issued under this section (so far as applicable to the authority and the circumstances of the case) when giving a subsidy or making a subsidy scheme.”
From paragraph 10.24, he statutory guidance, sets out the circumstances in, which authorities are “encouraged” to refer the SSoI in question. These are:
– There is evidence of a subsidy race: another authority is offering a subsidy for the same or similar investment, and the recipient cannot accept both;
– The same, or substantially similar, subsidy has been repeatedly made to the same recipient: where “one or more” of the “objectives, projects, costs or activities” supported by a previous subsidy are the same or substantially similar to the SSoI in question;
– The nature of the cost being covered: where the authority has identified that the SSoI in question covers ‘day-to-day’ costs;
– The breadth of beneficiaries and the selection process: where the subsidy is only available to one enterprise, rather than being “available to a broad set of recipients”; or
– Market power and concentration: where the recipient has a degree of market power, or the subsidy relates to a concentrated market
Interestingly, at the time of writing it is not clear whether any SSoIs have been referred to the CMA, (There are certainly no accepted referrals giving rise to a published report on the website).
What are the benefits of referral?
Whilst the CMA’s report is non-binding, many commentators expect that it is likely to be highly persuasive in the event of any legal challenge. The prospect of a favourable CMA report therefore offers a very welcome confidence boost to both authority and recipient alike, prior to having legally committed to the award. Similarly, a positive report would do nothing to whet the appetite of any potential challengers. This is particularly so given that the precise standard of review in the CAT for challenges under the Act remains to be seen – applying judicial review principles, authorities will hope that the CAT applies a “light touch” review. Whilst the case was not brought under the Act, the judgment in Bulb1 offers hope in that regard. By contrast, the CMA’s reports to date evidence that it will very much delve into the specific, technical details of an award. An authority might well take the view that if they can satisfy the CMA, they are very likely to also satisfy the CAT.
Even where deficiencies are identified, the CMA reports do at least set out ways in which the subsidy principles assessment can be strengthened. Whilst a positive report will obviously be the preference, even a mixed or negative report then might inadvertently assist, if it serves to bolster the legal robustness of the final award in due course.
Aside from viewing this through the narrow lens of the challenge perspective, there are other benefits to referral. Any constructive criticism offered by the CMA offers the authority an opportunity to improve the design of its award, arguably ensuring a better use of public funds.
What are the drawbacks of referral?
Whilst it need not necessarily be a drawback (particular for a prudent authority who has considered subsidy control at an early stage!), the referral process will inevitably add time to the process of awarding a subsidy. Prior to award, authorities are encouraged to engage in pre-referral discussions. Where there is a desire to proceed, next would come a formal referral. The authority would need to compile the information and evidence required by section 56(2) of the Act, including their subsidy principles assessment, and other relevant information (for example any viability gap assessments or third-party reports). Given the public nature of the report, it would not be surprising for authorities to spend additional time on their principles assessment in these cases. The CMA then has 5 working days to accept or decline this referral. If it accepts, then a (new) 30-day time period begins for the actual report to be prepared. This is subject to extension in certain circumstances (by agreement with the authority, or at the direction of the Secretary of State), although this does not yet appear to have happened for any referrals to date. Unlike SSoPIs, post-publication there is no five working days standstill period. However, a prudent authority will want to afford time to digest the report in full, and most likely take further professional advice on its implications. Depending on the level of critique, there may be a need to make changes to the project, and relevant documentation (including the funding agreement). It seems likely, then, that a voluntary referral is realistically going to add, at the very least, two months to the award process. For public authorities operating in an environment where there is often management and political desire to get money out the door and project delivery underway, this should not be underestimated. Likewise, authorities should engage the recipient’s views on referral, and whether those timescales are workable (particularly in light of any other timescales to which the recipient may be subject via project-related funding or contracts).
Referral also shines a very public light on the authority’s principles assessment. Whilst the CMA has to date provided a diplomatic critique, there is the prospect of both reputational embarrassment and publicising the proposed award to potential challengers. One of the least favourable reports to date surrounded Warrington Borough Council’s proposed subsidy to LiveWire. The BBC website reported that, after the CMA report, the Council decided to abandon the proposed award for fear of legal challenge. This brings into sharp focus the fact that public authorities can face risk on having homework publicly marked Those risks are at least brought forward, rather than coming to light when legally binding commitments have been made via funding agreements. This avoids the risk of formal challenge in the CAT post-award, with associated legal and resource costs and a possible recovery order.
Conclusion
The decision of whether to refer a SSoI to the CMA will invariably be specific to the public authority, and the dynamics of any given case. This will include the views of relevant stakeholders, including the recipient. How ever, here time allows it, referral is certainly the safest option. This is particularly true for awards considered to be at greater risk of challenge. Like many areas of subsidy control, early legal involvement can be crucial in spotting potential SSoIs at the outset, and managing timescales and expectations accordingly.
If opting not to refer, authorities should record the reasons for that decision. This would sensibly include acknowledging any relevant elements of the statutory guidance which “encourage” referral, and setting out why such encouragement is not being heeded. It is an established principle of public law that guidance need not be followed slavishly, and in any event the guidance merely “encourages” referral, a fairly soft-edged obligation. Aside from any alleged failure to consider the subsidy principles, public funding awards are of course capable of being challenged on public law grounds (for example, failure to consider relevant matters). This approach then would assist to demonstrate that the statutory guidance, as a highly relevant consideration, had been afforded suitable weight in their decision-making.
Whatever route the authority takes, careful consideration of relevant factors and robust record-keeping should assist it in navigating the new voluntary referral regime.