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UK government sets out benefits of subsidy control regime

20 November 2020

The government has recently published a policy paper which makes some arguments in favour of the UK having its own subsidy control regime, whether or not a deal is struck with the EU. Read our summary.

On 17 November 2020, the government published a policy paper: Reservation of subsidy control which makes some arguments in favour of the UK having its own subsidy control regime, whether or not a deal is struck with the EU.

The arguments are made in the context of safeguarding trade within the United Kingdom and facilitating the UK's own "internal market".  This is the stated objective of the UK Internal Market Bill  which at Part 6 expressly amends the Scotland Act 1998, the Northern Ireland Act 1998 and the Government of Wales Act 2006 so that subsidy control is very clearly a reserved matter controlled by the UK Parliament and not the devolved administrations. 

The policy paper presents this legislation as simply reiterating the status quo, arguing that because the devolved administrations were previously unable to set their own subsidy control rules (as this was covered by the EU state aid framework) that the UK Parliament having control of this should not be regarded as a change. 

Having established that "the regulation of state aid is a reserved matter" the policy paper then makes the consistent point that any legislative regime would be designed by the UK Parliament to "apply to the whole of the UK".  

The possible impact of the Northern Ireland Protocol (which at Article 10 applies EU State aid law to measures which affect trade between Northern Ireland and the EU) is played down, noting that such provisions only apply "to trade subject to the Protocol, which is limited in scope to goods and wholesale electricity markets".

In terms of a UK State aid regime the paper states: "it is important that we take a coherent approach to subsidy control across the UK. The UK as a whole has an interest in ensuring that there is a consistent approach to ensure the functioning of the UK Internal market, including, if considered appropriate though legislation. Given this, the future subsidy control mechanisms should be the responsibility of the UK Parliament to determine. If we do not take this important step there could be divergence regarding the approach adopted in different parts of the UK and that could have a negative impact on the functioning of the UK internal market with ensuing effect on welfare (for example discouraging investment, increasing costs to supply chains and consumers, creating an incentive for subsidy races)."

Each of these is a sensible reason to have meaningful State aid / subsidy control rules. We would add that such rules are also useful as they incorporate sensible standards such as transparency into the public funding process.  Furthermore, they provide a level of certainty to the subsidy process which benefits both the public sector and businesses preparing applications for investment support.  Further reasons are set out in our article from August 2020 " The future of State aid law in the UK – should the UK adopt strong or weak rules?".  

The government has previously refused to be drawn on the positives of subsidy control.  In September, the government published plans for a minimalist WTO approach to subsidies in the event of a "no deal". 

Although there was a very brief mention in this that it is helpful to have rules to stop subsidy providers being played off against one another, the focus was very much on a light touch regime in contrast to that of the EU State aid rules.  The WTO rules are not designed to act as a domestic subsidy control regime and therefore there are grave deficiencies in what is covered,  if ultimately that is what they are used as a yardstick for. The WTO rules set only very minimal rules for what constitute prohibited subsidies and thereafter are largely concerned only with trade defence remedies to deal with situations where subsidies in one Member are seen, through their effect on exports of particular goods from that Member, to cause injury to the domestic industry producing the like product(s) in another Member's territory.  To this extent they operate very much alongside other trade defence instruments such as anti-dumping, rather than as a comparator to the EU State aid regime. 

Perhaps the most fundamental challenge is that a WTO only regime lacks the legal certainty for the vast majority of grants and other support measures used on a daily basis across the UK (and indeed) the rest of the EU today.  Such legal certainty is currently achieved via the use of so-called "block exemptions" which set out different categories of investments and other scenarios that are deemed suitable for certain levels of State assistance, and provided these limits are respected in each case such aid is lawful.  It is vital for public authorities and companies needing aid to facilitate their investments to be able to give and receive in certainty that the measures are lawful, and therefore a grant received towards a particular investment would not need to be given back later once the money has been spent.  

The WTO rules contain no block exemptions or equivalent and this is what a new UK regime urgently needs clarity on if the many different arms of government, both central, regional and local, are to keep on functioning in the way they do today.  The new regime is due to take effect within a matter of only six weeks from the time of writing.  This is ever more critical against the backdrop of an economy that has suffered a huge shock from the pandemic in 2020 and arguably now needs State-supported pump priming in order to incentivise new investment as never before. 

The government's new publication comes at a time when there are reports that the UK and EU are engaged in a final push to strike a deal.  Any future regime will take account of the UK's Treaty commitments, such as that agreed recently with Japan, but also potentially with the EU.  However, regardless of the outcome of the EU negotiations further guidance will most urgently be needed in order to clarify new rules for public bodies to consider for what they can and can't support as of 1 January 2021.  A UK adoption of the current block exemptions would provide continuity until such time as the UK had been able to consider properly what changes it wishes to make to facilitate change and different types of new investment (for example a more layered approach to regional investment aid support to encourage the levelling-up agenda).

DWF Law LLP has exceptional experience in State aid and public funding issues, working within the European Commission, Central Government, Local Government and with private sector bodies on high profile initiatives for over 25 years. We are on hand if it would be useful to discuss the issues raised in this article or any other element of State aid law.

Further Reading