Introduction
The UK subsidy control regime is a nascent policy area for public authorities to understand. The regime places obligations on public authorities to assess a subsidy or subsidy scheme to ensure that it is compliant with the subsidy control principles and other requirements. The Statutory Guidance explains the subsidy control principles and provides a four-part assessment framework to support public authorities in designing their subsidies in a way that is consistent with the principles.1 Public authorities must ensure sure that the depth of their analysis on a subsidy is commensurate to the size and potential distortive impact of the subsidy.
Various public authorities have completed assessments for subsidies of particular interest; thus far, the Subsidy Advice Unit (SAU) has provided 12 non-binding reports to evaluate their assessments across a range of sectors and focuses including redevelopment, energy and Net Zero.
This article aims to distill the key insights and learnings identified throughout these reports, using specific examples from the advice with an eye to advising on key considerations for public authorities in submitting assessments to the SAU. Although the nature of those subsidies which have been assessed varies broadly (in terms of subsidy structure, policy objectives, the nature of the underlying market failure etc), these learnings are generalist such that they can be applied across the board.
Five Key Economic Insights from SAU referrals
One overarching theme is that public authorities should systematically refer to the statutory guidance throughout their assessment or make better use of it. In several reports, including that of Warrington’s Own Buses, the SAU note that Assessments could be strengthened by following the Statutory Guidance more closely eg, in relation to Principle A, aligning with the categorisation of market failures set out.
Some of the themes emerging from the SAU reports are as follows.
1. Link market failures to the policy objective.
Assessments should provide clear, explicit articulation of the market failures or equity rationale underpinning the policy objective. Where there are a range of objectives, directly linking a specific policy objective to an identified market failure or equity objective. This was noted in the Reports on English National Opera, Stoford Digbeth Ltd, Stena Line Ports and Energy Bills Discount Scheme.
2. Justify assumptions appropriately.
All assumptions made throughout the assessment should be justified appropriately. This has been raised in several reports in the context of assumptions underlying any modelling and underpinning the counterfactual (ie, the scenario in the absence of the subsidy). For instance, in its report on Warrington’s Own buses, the SAU commented that the Council could have better evidenced the key assumptions underpinning the model and considered a sensitivity analysis to demonstrate the reasonableness of forecasts. In the report on Energy Bill Discount Scheme, the SAU note the Council could have considered in more detail the assumptions on which the counterfactual is based, ensuring that they are supported by adequate evidence.
3. Use sufficient detail to explain selection of the counterfactual.
Several SAU reports highlight that assessments would be strengthened by providing additional evidence and analysis behind key assumptions made in selecting the relevant counterfactual. For instance, the Stoford Digbeth Ltd Assessment could have been improved by providing additional evidence and analysis used to select the most likely counterfactual, with consideration of different redevelopment possibilities and a detailed description of the underlying assumptions. The National Nuclear Laboratory Assessment would be strengthened by providing additional evidence and analysis behind the key assumptions which have been made in selecting the counterfactual.
On the Warrington LiveWire Assessment, the SAU comment that it would be strengthened with further evidence as to why the Council concluded that the counterfactual of liquidation was the most likely. In the report on Stena Line Ports, the SAU comment that the assessment could be improved through consideration and analysis of the incentives on Stena absent the subsidy, taking account of the possible future closure of the Port (as proposed in the counterfactual), in addition to the anticipated decline in revenues from service disruption.
One report (Sumitomo Electric Industries) commented that the assessment could have been strengthened by considering the most likely counterfactual over the short, medium and long-term by incorporating predictions about how the relevant market is likely to develop.
4. Identify and evaluate (quantitively or qualitatively) the benefits and negative effects.
In relation to carrying out the balancing exercise, public authorities are required to establish that the benefits (in relation to the specific policy objective) of the subsidy outweigh the negative effects. Several reports highlight that it would have been possible to take a qualitative view of the scale of costs and benefits for balancing the impacts of a subsidy, even where it is not possible to quantify or value those impacts (eg, in the Contracts for Difference Report). Consumer costs could also be considered within this assessment, and public authorities should also draw a conclusion on weighing the benefits against the negative effects. The report on Stena Line Ports found that the assessment in relation to Principle G could be improved by considering if there are any negative effects on international trade and investment.
5. More comprehensive competition and investment analysis
Principle F states that subsidies should be designed to achieve their specific policy objective while minimizing any negative effects on competition or investment within the UK.
A point stressed by the SAU across numerous reports (Warrington LiveWire, Warrington Own Buses, Stoford Digbeth Ltd, Stena Line Ports and the Refugee Housing Programme Scheme) relates to the need for more comprehensive competition and investment analysis. One key theme arising is that a range of services should be considered separately to allow for the identification of the relevant competitive market and an assessment of whether alternative approaches to providing these services may be possible.
The report on Sumitomo Electric Industries commented that the assessment in relation to Principle F could have been strengthened by providing further reasoning and evidence in support of the definition of the market (both product and geographic) within which the subsidy will be given, and by explaining how the design features described will limit distortions to competition and investment.
Further, competition assessments could benefit from a clearer approach to defining the market, identifying relevant competitors and the potential impact on those competitors, and being more specific on distortions to competition. Appraisals should be forward looking and dynamic (ie, consider entry and exit over time, or impacts of the subsidy in a future scenario). Fuller consideration should be given to effects on competition and investment taking into account markets where activity could have a distortive effect or for which there are commercial markets.
Conclusion
Despite the spectrum of markets covered by the SAU reports thus far and characteristics that are unique to each, there are key themes arising which can be used by public authorities to refine any forthcoming assessments. It is challenging for readers to understand how public authorities’ assessment of compliance can be improved without having sight of the underlying submissions and the level of detail or analysis provided, but the themes point to areas where public authorities may want to place additional focus. Critically, public authorities should systematically refer to the statutory guidance throughout their assessment, and consider the type of analysis, evidence and sensitivity testing that may be appropriate to comply with the subsidy control requirements.