At a Subsidy Control conference in June 2024, then Competition Appeal Tribunal President Mr Justice Marcus Smith spoke about the logic of the UK having a domestic Subsidy Control regime, noting that the UK is an outlier in having such a system of purely domestic control of state subsidies. With a new government in place and over 18 months having now passed since the entry into force of the Subsidy Control Act 2022 (the Act), now seems a good time to take stock of what the Act has achieved and what it hasn’t, and to explore whether a common understanding has emerged of what the purpose of the UK Subsidy Control regime actually is.
What Was the Rationale When the Act Was Created?
As the consultation on what was then the Subsidy Control Bill concluded, the Government noted the outcome of that consultation:
The UK has left the European Union and we are no longer bound by the EU’s prescriptive and bureaucratic State aid rules…The government is bringing forward legislation for a new, tailored UK-wide subsidy control framework. This will reflect our strategic interests, strengthen our Union, and help to drive economic growth and prosperity across the whole of the UK as we build back better from the pandemic.
The content of the Act was largely defined against what it wasn’t: EU State aid law. But no sooner does the above statement celebrate UK public authorities no longer being ‘bound’ by ‘bureaucratic State aid rules’ than it seeks to bind them to national ‘strategic interests’ (to be set, of course, from the centre) and to the task of ‘strengthening the Union’ (something that was always less an objective than a justification for limiting, both in the UK Subsidy Control regime and in the United Kingdom Internal Market Act 2020, the powers of devolved governments which would otherwise have been expanded by the end of the UK’s EU membership).
Indeed, other than driving economic growth (and the implication of some form of accompanying economic and industrial strategy in the phrase ‘build back better’) there is little in this mission statement to indicate what the UK Subsidy Control regime was meant to achieve.
(1) The Competing Visions of the UK Regime
There are competing visions for what the Act should be achieving. On one view, the regime is primarily one of economic regulation, at its core about driving growth and reducing geographical inequality through increasing the scope for public intervention while seeking to preserve efficient markets. On another, it is primarily a system of political regulation, about ensuring value for money and respect for public law standards of decision making, and that UK public authorities (and especially devolved public authorities) do not use their new powers to engage in a “race to the bottom”. And of course in the background, and not to be forgotten, there is the need to ensure that the UK complies with its obligations under the UK-EU Trade and Cooperation Agreement (TCA), an ex post regime of private enforcement rights that feels a world away from the ex ante regulation of EU State aid law.
Before the new UK government’s first budget sees it get going with so much of its new ‘securonomic’ industrial policy as has survived contact with its recent discovery that the Treasury cupboard may be a little bare, we should contemplate those alternative and sometimes competing, even incoherent, ‘visions’. Which of them we choose to prioritise matters because it is central to some key ‘micro’ questions of how the Act should be interpreted, both in cases of ambiguity but also on a more day to day basis. It also matters because it is central to a broader ‘macro’ question: does the UK’s Subsidy Control regime actually do what it is trying to do? And if not, how should the new government reform it?
It was a little over three years ago in June 2021 that Boris Johnson’s business secretary Kwasi Kwarteng (who would later go on to play a key role in the shortest-lived government in British political history) announced the UK’s new policy for post-Brexit Subsidy Control. At that time, flexible powers and debt-funded spending were the order of the day and the policy outlined in the announcement of the Bill was focused on removing ‘bureaucratic’ EU rules and replacing them with a system:
… designed to be more flexible, agile, and tailored to support business growth and innovation, as well as maintain a competitive free market economy and protect the UK internal market…[with] a clear, proportionate and transparent set of principles underpinned by guidance [to] ensure public authorities fully understand their legal obligations and embed strong value for money and competition principles.
It is that logic – more discretion to give support for business growth and innovation within the constraints of a competitive economy, a single UK internal market, and value for money – that underpins the Act and determines how the courts approach the task of interpreting and applying it. There was no mention in Mr Kwarteng’s foreword of the TCA (which had entered into effect a few weeks earlier) or the UK’s duties under that to regulate public subsidies.
But three years is a long time in politics and the political and economic context in which the Act is being implemented has shifted dramatically. A November 2023 report by The Economist noted that UK government spending on aid to businesses had risen from 0.35% of GDP in 2015 to 1.19% of GDP in 2021 and 1.13% of GDP in 2022. But since 2022 and Mr Kwarteng’s ill-fated mini-budget, the money available to support local and central government incentives to business has only become more restricted, with the focus now less on rebuilding the UK economy through an expansive industrial strategy and more on achieving value for money through small, targeted interventions alongside private investment. Nothing demonstrates this more than the Labour Party’s revised budget for investment in net zero and cancellation of a number of major infrastructure projects. At the same time, it has only become clearer and clearer that years of largesse have barely moved the dial on regional economic inequality in the UK.
The logic underpinning a regime built against a background of post-Brexit divergence from EU-style ‘bureaucracy’ and Treasury largesse for boosting British businesses and levelling up the regions (a phrase itself now ‘firmly Tippex-ed out’ of government policy according to what is now once again the Ministry of Housing, Communities and Local Government), may not hold in an era of constrained budgets and reconciliation with the EU as the UK’s main trading partner. And if that logic no longer works, then it is at least arguable that the Act doesn’t either.
(2) Interpreting and Applying the Act
At the Subsidy Control conference in June 2024 referenced above, Mr Justice Marcus Smith articulated the point, lest there be any room for doubt: the CAT’s approach to interpreting and applying the Act is based in no small part on the logic and purpose of the UK regime that Parliament had in mind when it passed it.
Thus, for example, the decision of the CAT in Durham Company Ltd v Durham County Council [2023] CAT 50. Since at least the European Commission’s decision in relation to the Liverpool City Council Cruise Liner Terminal (SA.35720) it had been understood that a public body that transferred resources to its own economic or commercial activities could be giving State aid to those activities. That is because the EU notion of an ‘undertaking’ is not particularly concerned with legal entities but rather with economic activity.
In a system designed to ensure fair competition between domestic businesses and those from other Member States, this approach makes sense – a business from another Member State will be just as disadvantaged by a subsidised domestic competitor irrespective of whether that is a commercial activity undertaken at arm’s length by another legal entity or by the subsidising authority itself.
However, the CAT found in Durham that “the very essence of a subsidy, as defined in the 2022 Act, is that the subsidy conferred moves from (or, to use the statutory wording, is “given by”) one person (the public authority) to another person (the enterprise)” (emphasis in original text). This approach turns partly on the legislator’s choice of language (enterprise rather than undertaking) – and the CAT noted that the approach to this in the statutory guidance was difficult to reconcile with the statutory wording – but is also tied to an analysis of the different roles of public authorities and private firms in a market economy.
The relationship between those roles and the UK’s Subsidy Control regime is central to a number of other points of interpretation that remain to be litigated.
Firstly, it is relevant to the question of what constitutes an ‘economic activity’ for the purposes of the definition of enterprise in section 7 of the Act. Durham tells us that the same person cannot be both the public authority and enterprise in respect of a given subsidy, but does not answer the question of when a public authority is itself acting as an enterprise when it receives financial assistance from someone else. The answer is no longer axiomatic. As examples of financial assistance that may not meet this test, the statutory guidance suggests assistance to NHS providers of health services who do not provide goods or services on a market, ringfenced grants to charities, and support for organisations whose economic activities are only ancillary to non-economic ones (such as a café attached to a free tourist attraction).
But section 7 tells us no more than that an economic activity “entails offering goods or services on a market” and that “an activity is not to be regarded as an economic activity if or to the extent that it is carried out for a purpose that is not economic”. A public authority, though, will almost always have purposes for its activities that are not economic (as, indeed, did Durham County Council). The purpose of local authority leisure facilities is primarily public health and recreation, not the generation of revenues. The purpose of local authority commercial property developments is primarily economic development and regeneration, not the generation of a return. It could even be argued that rules such as the Local Government (Goods and Services) Act 1970 rule out the concept of certain categories of public body being engaged in economic activity at all.
Secondly, it is relevant to the question of when an advantage is conferred. Is the “Commercial Market Operator” (CMO) rule in section 3(2) of the Act really the same as the Market Economy Operator Principle under the State aid rules? Will a public authority ever truly be investing or contributing funds on terms that would be available to the recipient on the market? If so, why is that contribution required from public funds in the first place? If public bodies (as the CAT implied in Durham) are never truly operating as market actors, does their involvement simultaneously suggest that there is a ‘gap’ that the public authority needs to fill and also offer an implicit guarantee of future support that has its own value (including to a pari passu investor)?
Another example of when this might arise is investment in infrastructure. Where is the line between the public sector’s role in economic development and regeneration and assistance to a particular developer? Is the question primarily one of object (i.e. why the public authority is building a road) or effect (does the road unlock one developer’s site or the development of an area more broadly)? Is a road that unlocks development of a particular site and no other a subsidy to the owner of that site or a duty of a roads authority? Does it therefore matter who the public body is and what purposes or functions they might be exercising?
Thirdly, it is relevant to the question of distortion. The Act introduces the possibility of “purely local subsidies” – that is, those that only affect competition within the UK and do not distort trade with anywhere outside it. It also includes restrictions in section 18 on subsidies that are conditional on relocation from one part of the UK to another. But distortions of this kind are inevitable if public bodies are to achieve their function of ‘levelling up’ disadvantaged parts of the UK, and neither of these restrictions is necessary in order to comply with the TCA. Are these really best understood as controls on public spending rather than rules designed to preserve a functioning market economy? If so, they could be more targeted at the real mischief.
The upshot is this: if the Act is really about complying with the TCA, or about preventing the public sector unfairly distorting the market (which is after all what the State aid rules and TCA are about), then it seems poorly drafted if it excludes self-subsidy (per Durham), concerns itself with purposes rather than effects, and adds unnecessary restrictions on purely local subsidies and relocation subsidies.
If it is instead about preventing public money from being wasted or ensuring good standards of decision making then it does not seem like the best tool to address that. That is not least because of the number of gaps there are in the regime. Three in particular can be drawn out.
(3) The Missing Links in the Chain
Firstly, there is the issue of ‘shadow subsidies’ – that is, subsidies that escape any scrutiny under the Act because the granting authority incorrectly (or, at least, questionably) concludes that they are not subsidies covered by the Act at all. This issue was identified during the Parliamentary debate on the Subsidy Control Bill, including by the then Shadow Minister for Business and Consumers Seema Malhotra who noted that this:
… leaves a black hole for accountability where a public authority wrongly concludes that it is not granting a subsidy. Such payments will not be published on the database and interested parties will therefore not be able to challenge them. In Committee, Labour tabled new clause 3, which would have given the CMA the power to investigate subsidies that may be of concern and subsidy schemes on its own initiative. Unfortunately, the Lords amendments have failed to address that issue.
Ms Malhotra had opened her contribution to that debate noting that:
… any subsidy regime must provide sufficient transparency and accountability for the spending of billions of pounds of public money each year.
The issue has been brought to the fore by Weis v Greater Manchester Combined Authority, the second challenge under the new regime. The case relates to the property development market and whether proposed loans can be demonstrated to be given on a ‘no subsidy’ basis. Documents lodged with the Competition Appeal Tribunal on 7 June 2024, indicate that the appellant will argue that the loans to be given by the GMCA have been made in order to further the authority’s public policy objectives and functions and not on terms that would be available to the recipient on the market. By reaching that conclusion – a conclusion that would have gone unscrutinised but for Mr Weis’ legal action – the documentation claims GMCA avoided the need to comply with any transparency rules or to consider whether these loans were consistent with the Subsidy Control Principles.
Secondly, there is the connected issue (also identified by Ms Malhotra) that absent diligent, determined and well-funded challengers like Mr Weis, there is no mechanism for holding public authorities to account for their subsidy decisions. The system relies almost entirely on the capacity of officials within public authorities, particularly in their legal and financial functions, to identify subsidies and ensure that the Act is complied with. But at a time of serious financial constraints, particularly on local authorities, there is limited capacity to do so.
Thus, caught between political pressure to deliver results, a lack of streamlined means of giving subsidies (including routes and access to schemes developed by third parties), and a lack of resources to undertake proper analysis of subsidies against the principles, the easiest route is all too often to seek to avoid satisfying the statutory definition of a subsidy. This is all the more so when political timetables are not compatible with, for example, the timetable for a referral to the Subsidy Advice Unit.
Thirdly, if the regime is intended to ensure that public money is spent transparently and in a way that delivers value, then it has missed its target. Of course the Subsidy Control regime does not exist in isolation, and other duties exist under (for example) the Local Government Act 1999, Public Finance and Accountability (Scotland) Act 2000, Local Government in Scotland Act 2003 and Local Audit and Accountability Act 2014. However, none of the Subsidy Control Principles (which are derived from the TCA, a regime which as noted has different objectives) relates to value for money per se. If the UK’s regime is meant to recognise the special role of public authorities in delivering public goods, in the words of the CAT to ensure that “different values are respected and embedded in a market economy”, then a broader and more robust ‘best value’ duty (of the sort contained in section 3 of the Local Government Act 1999) might be a far more useful way of achieving that.
Concluding Thoughts
The Act is, then, trying to do three things at once which are not necessarily either mutually compatible or capable of being coherently delivered. It is trying to free up public bodies to take decisions that have economic impacts, to boost growth and reduce inequality. It is also trying to ensure that they follow stringent decision-making procedures and secure the best value for the public pound. And (presumably) it is trying to ensure that public bodies – and therefore the UK as a whole – comply with the rules in the TCA.
Affording public bodies greater flexibility and discretion is a departure from the UK’s sometimes centralising tendencies and something to be applauded for that reason alone, but in practice it faces severe hurdles. Many public bodies – especially local authorities – would prefer certainty and lack the resources to undertake complex case by case assessments. This, combined with a burdensome but hardly airtight transparency regime, leads many to shoehorn what they can into the CMO rule or other ‘no subsidy’ conclusions. This is not satisfactory by reference to any of the three potential aims that the UK’s Subsidy Control regime might have. It does not satisfy the UK’s TCA obligations. It is not sound as a matter of public law. And it is not the most effective way of balancing economic and social goods. It would be far better to combine the comfort and certainty of a more systemic streamlined route – a “general block exemption streamlined subsidy scheme” – with a more effective transparency regime (of the sort that the Procurement Act 2023 will introduce) including for public sector loans, guarantees and equity investments, and a CMA investigation and enforcement capability. That approach would provide greater certainty, transparency, more practical and therefore effective remedies, and a more efficient regime overall.