Early days of UK’s state aid scheme reveal weaknesses

Early days of UK’s state aid scheme reveal weaknesses

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Good afternoon. After the hot air of the party conference season, I wanted to go back today to some post-Brexit nitty gritty, and revisit a policy area — subsidy control — that was a huge bone of contention during the 2020 trade deal negotiations.

To recap quickly, as part of the EU’s desire to create a “level playing field” the European Commission wanted the UK to replicate the EU’s “state aid” regime to control the handing out of subsidies by public bodies. 

The UK refused, arguing that the EU’s ex ante regime was too cumbersome and restrictive for post-Brexit Britain because it required all subsidies over €200,000 (that weren’t covered by some 60 exempted categories) to be approved in advance by Brussels.

The British government argued that such a bureaucratic regime was needed in the EU single market to create a level playing field among 27 countries, but that the newly sovereign go-it-alone UK had no need of it. After all, ministers pointed out, other sovereign countries like Canada had no formal subsidy regime at all. 

The UK therefore wanted something nimbler: an ex post regime underpinned by the same seven broad principles as EU state aid (not distorting markets unnecessarily, or propping failing enterprises etc) but that was much faster and easier to operate.

In simple terms this turned the EU system on its head so that grant-giving bodies don’t need to seek advance permission from the competition authorities for most subsidies. 

Full recap here, but under the UK regime grants of up to £315,000 over a three-year period can be dished out pretty much freely, with all awards above £100,000 required to be added to a transparency database. Anyone who believes the awards are illegal is then free to seek a judicial review via the Competition Appeal Tribunal. 

Big awards that exceed £10mn over three years must be referred to a new Subsidy Advice Unit at the Competition and Markets Authority — but, crucially, the CMA merely advises on how a grant-giving body’s compliance assessment might be improved. It doesn’t give a firm green or red light, like Brussels’ DG Competition.

Last month BMW announced it would invest £600mn to produce electric Mini cars in Oxford, supported by about £75mn in state subsidies, according to people familiar with the matter © Bloomberg

It’s now been nearly 10 months since the UK regime came into force via the Subsidy Control Act 2022 — long enough for the first cases and disputes to come to light, and to give early impressions about how the UK system is operating.

So, how’s it going? This week I spoke to four leading UK subsidy lawyers — George Peretz KC, Alexander Rose, Totis Kotsonis and James Webber — about those first impressions. Here are the key takeaways:

The UK database doesn’t work very well

There was widespread agreement among the lawyers that the Department for Business and Trade’s website for posting subsidies is not fit for purpose.  

The point of the website is “transparency” so that companies or other stakeholders that might be impacted by a subsidy can have a chance to review the grants given and then — if necessary — challenge them in court.

By definition, a subsidy involves a distortion of competition so it’s vital it can be clearly reviewed to show that the subsidy is justified in the name of delivering an agreed public benefit, explains Kotsonis, the head of subsidies at law firm Pinsent Masons. 

“But the subsidy database doesn’t work in an optimal way,” he says. “It only requires very basic information — the name of the grant-giving body, the value of subsidy, the beneficiary and some description — but doesn’t provide a sense of why it’s justified to give that amount of money.” 

Rose, a subsidy and competition law specialist at law firm DWF, said the same: “It lacks basic search functions. You can’t get notices about subsidies to competitors.”

He adds that part of the problem is that there is no proper sanction for failing to post the information online, which encourages lax behaviour. “There’s a strong suspicion that many public bodies aren’t engaging and posting the subsidies online,” he added.

So in short, given that under the new UK system subsidies are policed by businesses taking public bodies to court after a subsidy has been granted — not the regulator — it’s a source of significant concern that information about those subsidies is apparently so poor. 

Speed and cost

Two other issues of concern have arisen in the first year of the operation of the UK system — the speed at which challenges must be made (despite there being poor information) and the cost of doing so.

Firstly, costs. In one of the early cases (The Durham Company vs Durham county council [2023]), the company accused the council of unfairly subsidising recycle bin collections. Initially the Competition Appeal Tribunal set a costs cap of £50,000 on the company and £60,000 on the council. 

But this was overturned by the Court of Appeal. So as Peretz of Monckton Chambers notes, those bringing subsidy control claims look unlikely to get the protection of a costs cap — that’s likely to have a deterrent effect on businesses wanting to challenge subsidies, especially as they do not get any direct financial benefit from getting a subsidy decision overturned.

Secondly, the need for speed. In the second major case so far, British Gas, Eon and Scottish Power challenged the government over its high-profile sale of Bulb to Octopus during the post-Ukraine energy crisis.

The companies accused the government of a “lack of transparency” about the billions of pounds in taxpayer support it had offered when selling Bulb, arguing they would have made a bid if they’d been properly informed. 

The complainants lost their case in the High Court last March (currently on appeal), but the judgment raised some significant questions both about the permissiveness of the UK subsidy regime (the judgment set a very low bar on the government’s justification of the subsidy) and also what Peretz calls the apparently “infeasible speed” at which claims have to be lodged.

In the Bulb case the Divisional Court found that the companies challenging the sale were guilty of “undue delay” even though it was brought within three days of the government releasing information about the subsidy. The time limit set out in the EU-UK Trade & Co-operation Agreement is a month, and in some cases even longer.

In short, companies that want to challenge subsidies have poor visibility of subsidies being granted and very tight timeframes for making claims. 

There are other areas of concern with the UK regime, including why there are not more “streamlined routes” (the UK has three, compared to the EU’s 60-plus “block exemptions”) which means that smaller subsidies that sailed through in the EU exempted regime (for example, for arts bodies) are now subject to potential scrutiny.

This is time-consuming and expensive for smaller grant-giving bodies, like local councils or arts foundations, because even if the UK regime is more permissive, there is still the need to show that you have properly considered if the subsidy is legal. That creates a sometimes bigger bureaucratic burden than the EU system.

Will the system mature?

It remains to be seen how the UK regime evolves. It’s still early days. The database should improve over time and the concerns about the toothlessness of the regime raised by the judgment in the Bulb case may yet be resolved if the complainants get leave to appeal.

Webber, a partner at law firm Shearman & Sterling, who has long made the case for the UK approach, recognises the issues raised, but believes that it will mature.

He’s also against calls for the UK adding more “streamlined routes” because he believes that risks a return to the “rigidity” of the EU system while losing the innovative flexibility that the UK regime was designed to inculcate.

“In general, there shouldn’t be a worry about enforcement,” he said. “These are public authorities. They mostly try hard to comply with the rules. CMA guidance and the oversight of the National Audit Office is sufficient, with judicial review only for outlying cases.”

Peretz is less sure, warning that if grant-giving bodies don’t perceive any real threat of judicial review, it will become inevitable that they will be minded to take a risk “even in cases where the subsidy control justification is shaky”. 

There is, of course, a balance to be struck. But as Peretz points out, one person’s “nimbler” or “more permissive” is another person’s “unprincipled” or “lax”. Kotsonis tends to this view also. “We’re a small country so we don’t want taxpayers’ money spent subsidising businesses on the market unless it’s justified,” he said.

A question for Labour

One final thought in what is already a long post. The woolier UK subsidy regime may present questions for Labour if — as the party has said — it wants to move “closer to the EU”.

Already there are areas of divergence. In the Durham case, for example, the Competition Appeal Tribunal ruled that a public authority (which was doing the bin collections) could not grant a subsidy to itself. The EU system takes the opposite view (more details here). 

Rose at DWF argues that a move by a future British government to get closer to the EU could yet reopen the question about whether the UK has an effective subsidy enforcement system in place. 

It’s early days, but as things stand, the UK system when viewed through the prism of EU state aid looks decidedly laissez-faire — particularly not having a regulator that can actually block subsidies it deems non-compliant.

This is something Brussels is already watching closely, and may well want to address — though Webber argues the Commission already has plenty of firepower under the TCA and Windsor framework.

As Rose puts it: “If the next government were to sit down with the European Commission to renegotiate the TCA, then an independent regulator with the power to proactively investigate subsidy control compliance is likely to be at the top of the European Commission’s wish list.”

We’ll see. That might be one to watch for the Britain after Brexit newsletter at some point after next year’s election!

Brexit in numbers

This week’s chart comes from an extensive piece of work by Public First and the UK in a Changing Europe think-tank examining the nature of “Bregret” through polling and focus groups. It’s worth a read.

The chart I’ve chosen shows that, in most areas of concern to UK voters, well over half see Brexit — to some degree — as a significant factor, mostly for the worse.

There are two ways to read this. Sophie Stowers of UKICE who co-authored the report says that it shows that Covid and the war in Ukraine have muddied the waters of perception, even for Remain voters. 

“You could argue that it’s lucky for the Leave campaign that the pandemic and war in Ukraine intervene — most people can’t quite disentangle why the NHS has got worse, or what’s behind the staff shortages — so voters as a whole will blame a mix of factors,” she says.

That gives political cover to the government responsible for delivering the current Brexit arrangements which, as anyone who has ever listened to a government minister being interviewed on the radio, they are only too happy to duck behind.

The other way of reading that chart, however, is that since well over half of voters blame Brexit to some degree, then Labour should be bolder about pointing the finger, particularly on bread and butter issues.

That’s the argument made by the likes of Stella Creasy, the chair of the Labour European Movement, who argues that offering detailed prescriptions about how the party intends to address the failings of Brexit, neutralises the “betrayal” or “secret rejoiner plot” attack lines deployed by the Tory party and the Brexit-supporting press. 

But Manchester university politics professor and esteemed Brexit analyst Rob Ford isn’t so sure, arguing that if voices clearly identified as pro-EU — like Creasy or half the shadow cabinet — start talking about Brexit, it will actually close down the space for discussion.

“People’s willingness to blame Brexit is not independent of the fact that Brexit is not being discussed,” he says, arguing that if Brexit became an issue on the political tribal dividing line then Leave voters would likely be much less willing to blame it for the country’s ills.

Still, Ford says he’s been surprised at how quickly public opinion has shifted against Brexit. He reckons the test will be how “sticky” that shift proves to be when the political conversation around Brexit reactivates, as it must to some degree if Sir Keir Starmer wins in 2024.

“I wouldn’t have expected opinion to have changed so far, so fast,” Ford concludes. “So if in three years you have 70 per cent for rejoining and a solid majority saying Brexit was a major failure then perhaps you do get to a situation where you can open a conversation with the electorate on whether, in the long run, it’s the only way to a better future.”

I shall be away next week on half term duties, but I shall leave you in the capable hands of my colleague in Dublin, Jude Webber, who will give you the latest on the DUP and the implementation of the Windsor framework.

Britain after Brexit is edited by Georgina Quach today. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.

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