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Refining Subsidy Control
The Government is consulting on what it terms a 'refinement' of the UK Subsidy Control Regime. The UK's subsidy system was designed to adapt to changing policies and evolving national priorities. In that context it is unsurprising that a new government is considering changes.
Consultation closes on the 21 January – link: Refining the UK subsidy control regime - GOV.UK
The two specific areas being consulted on, if implemented, are likely to reduce some of the administrative burden and cost of subsidy control compliance.
The potential changes are:
increasing the thresholds for when Authorities must obtain a report from the Competition and Markets Authority (CMA) before giving Subsidies or making Subsidy Schemes of Particular Interest (both SSOPI) and the, to date unused, voluntary right of Authorities to seek a report the CMA before such a subsidy is given.
whether more streamlined subsidy schemes (streamlined routes) should be made, and if so for what sectors. Streamlined routes are subsidy schemes which parliament approves, and these operate as pre-consents to subsidies providing that Authorities comply with that particular streamlined route's conditions. It means Authorities are not required to undertake a separate subsidy assessment or refer subsidies given under that route to the CMA.
Thresholds
Increasing the thresholds is likely to reduce the number of referrals to the CMA; The Subsidy Control Act 2022 (the Act) mandates that Authorities must obtain a report from the CMA if they propose to give a subsidy of more than £1 million and that project has over the same (and previous two) financial year(s) received more than £10 million in subsidies from all public sources. The rules for a Subsidy Scheme of Particular Interest are based on the same threshold, though the test is whether the particular subsidy scheme is structured so that an subsidy given under it could exceed the £10 million threshold. The current threshold for SSOPI in sensitive sectors reduces from more than £10 million to exceeding £5 million.
This Government expressed surprise at the number of mandatory referrals made to the CMA. When the bill was guided through Parliament, it struck us that the volume and total of subsidies awarded by devolved, regional and local authorities were significantly underestimated.
The issue for Authorities submitting a request to the CMA is the extent and detail of evidence which may be required to justify an Authority's subsidy assessment. This can involve material costs. The Act adopts a crude mechanism for determining what the risk of a subsidy distorting investment or competition is. This is based solely on monetary values and ignores the relevant risk of particular sectors or subsidies in respect of distorting investment and competition. For example, low risk sectors included within Services of Public Economic Interest (SPEI) are treated no differently to more market orientated activity. SPEIs include affordable housing, social care and other activities which the market does not support without public intervention.
The consultation also refers specifically to sensitive sectors which tend to be those subject to World Trade Organisation special rules and/or restrictions in various UK international trade arrangements. We suspect that the UK may want to consider changes which have been implemented in the EU and the United States in respect of those sensitive sectors and compare whether or not the UK's regime is now much more restrictive than its international competitors.
In summary we think a more nuanced approach to thresholds for CMA referrals should be adopted. As the government suggests the amounts should, as a minimum, be indexed by inflation. SPEIs should have a materially increased threshold or streamlined routes or both to reduce the costs and time burden on evaluating low risk activities. For sensitive sectors, we would recommend a threshold commensurate with the thresholds other economies have adopted.
Streamlined routes
The second area of consultation is about streamlined routes. These are pre-consents (subject to compliance with their conditions) which enable Authorities to grant subsidies without undertaking subsidy assessments or referrals to the CMA. A frustration, many of our public sector clients have with the Subsidy Control Regime, is the limited number of streamlined routes (3 in total) which have so far been adopted. These are R&D and Innovation, Energy usage and Local growth.
To date the impression given by regulations and guidance is that streamlined routes should be used sparingly, that the Subsidy Control Regime has given Authorities the freedom to structure their subsidies as they see fit (subject to compliance with the subsidy principles) and that they should use that freedom. While this may be true, it is somewhat 'central government centric', in that departments are better resourced to undertake subsidy analyses for their large funding programmes than other tiers of government.
Understandably, previous ministers wanted to ensure there was flexibility for public bodies to award subsidies and respond quickly to changes in economic and policy circumstances. The Act provides a framework to do that whether or not streamlined or other subsidy schemes are in place. The Act does not prevent an Authority from designing its own subsidy structure (and complying with the Act's requirements) even if a relevant streamlined route exists. What a streamlined route does is to provide a 'safe harbour' for Authorities to quickly award subsidy and also ensure subsidy control compliance.
The government's ambitions of increasing economic growth and fairness together with significantly boosting the supply of housing (including affordable housing) may benefit from targeted streamlined routes which support the delivery of those policies.
For many public authorities streamlined routes have the potential to reduce costs and resources devoted to giving subsidies. This is particularly relevant for sectors which have a low risk of impacting on UK investment or competition and/or international trade and investment. The streamlined subsidy routes would themselves ensure subsidy compliance and may speed up the delivery of key projects.
The consultation has a catch-all question about anything else you would like to change in the subsidy control regime; we will leave that to you.
Paul McDermott and Victoria Thornton
Subsidy Control team
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