The government guidance suggests a five stage approach should be undertaken when public bodies assess a subsidy. These stages are:
- determine whether a measure is a subsidy and what international obligations are relevant;
- evaluate whether the measure is a prohibited subsidy;
- if you are in scope of the UK-EU Trade and Cooperation Agreement, assess the subsidy against the principles;
- assess the likelihood of triggering a dispute under the WTO ASCM rules and other FTAs; and
- record the award of the subsidy.
Determining whether a measure is a subsidy involves a consideration of the different definitions of subsidy set out in the new EU – UK Trade and Cooperation Agreement ("TCA"), other UK Trade Deals, the WTO rules and, in certain cases, EU State aid law. Although the guidance sets out some of the requirements, it also states that the information provided "is not exhaustive and is not intended to cover specific situations".
Where a subsidy is present, the same sources should be checked to establish whether the subsidy is prohibited or can be lawfully awarded, in many cases this will be subject to meeting particular conditions.
The requirements in Chapter 3 of the TCA are set out in more detail in our recent article "UK Subsidy Control: how will public funding change now the UK has taken back control of State aid regulation?". In essence, a subsidy under the TCA is defined as:
"financial assistance which:
(i) arises from the resources of the Parties…
(ii) confers an economic advantage on one or more economic actors;
(iii) is specific insofar as it benefits, as a matter of law or fact, certain economic actors over others
in relation to the production of certain goods or services; and
(iv) has, or could have, an effect on trade or investment between the Parties."
In some cases, subsidies may be awarded provided it can be shown certain principles are demonstrated, these being that the:
- subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (“the objective”);
- subsidies are proportionate and limited to what is necessary to achieve the objective;
- subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;
- subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
- subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means; and
- subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.
The risk of a challenge or dispute should be factored into the decision making process, alongside other public sector considerations, such as complying with the rules for Managing Public Money and the Green Book Appraisal.
The final stage involves meeting the transparency requirements. For the TCA this involves satisfying Article 3.7 of Chapter 3, which requires the funder to record on the national transparency database:
- the legal basis and policy objective or purpose of the subsidy;
- the name of the recipient of the subsidy when available;
- the date of the grant of the subsidy, the duration of the subsidy and any other time limits attached to the subsidy; and
- the amount of the subsidy or the amount budgeted for the subsidy
The database has not yet been set up, but is expected to be operational shortly. It should be noted that under the terms of the TCA, interested parties can request an explanation of how a subsidy respects the relevant rules within 28 days of a request being made in writing. Interested parties in this situation are understood to the beneficiary, competitors of the beneficiary and relevant trade associations.
Although the new guidance has been drafted to help public bodies adapt to the new rules, there is no avoiding that the new regime is complicated and requires detailed, technical knowledge from those undertaking the compliance assessment. Moreover, this guidance expects grant authorities to be considering issues they have hitherto not been required to, and at a time when there are many ambitious grant programmes underway to boost investment post-COVID. Therefore we strongly recommend that the government accelerates its promised consultation and to provide certainty for the public sector sets out "safe harbour" provisions at least as generous as the EU State aid block exemptions, in the meantime.
To support our Public Sector clients awarding funding under the new regime, we are hosting a webinar 'Subsidy Control: How will public funding change now the UK has taken back control of State aid regulation?' on Tuesday 12 January 2020 at 11:00am, you can register your place at the webinar here >
DWF Law LLP has exceptional experience in public funding issues, including Subsidy Control, State aid law and WTO law. Members of Public Sector team having worked within the Central Government, Local Government, the European Commission and with private sector bodies on high profile public funding initiatives, meaning we are a safe pair of hands when it comes to managing issues such as this. We are on hand if it would be useful to discuss the issues raised in this article or any other matters related to public funding.