UK: UK Subsidy Control: Government Consults On What Subsidies Are To Be Referred To The CMA As "Subsidies Of Interest" And "subsidies Of Particular Interest"

On 25 March 2022, the UK Government published a consultation on how "subsidies of interest" and "subsidies of particular interest" are to be defined under the UK's new subsidy control regime. These concepts are fundamental, as they determine which subsidies are to be referred to the UK's Competition and Markets Authority ("CMA") for evaluation.

The Government's proposed approach is based primarily on financial thresholds relating to the value of the subsidy, which are set at relatively low levels. For "subsidies of particular interest", which must be referred to the CMA, the threshold is to be generally £10 million, with a lower threshold of only £5 million in certain sensitive sectors such as steel, automotive and electricity production. Certain subsidies are also to be referred regardless of value, including restructuring subsidies and relocation subsidies.

The proposed value thresholds are considerably lower than those under the EU State aid regime's general block exemption regulation ("GBER"). As a result, many more subsidies may be subject to CMA referral compared to those subsidies that would have had to be notified to the European Commission under the previously applicable EU State aid regime, and the new UK subsidy control regime may ultimately be more intrusive than it first seemed.

The additional scrutiny of lower value subsidies may be appropriate from a systemic perspective, given the focus of the new regime on addressing distortions to the UK's own internal market. But it will place greater burdens on public authorities and subsidy recipients in having to prepare for and navigate the CMA referral process, while also increasing legal risks should that process not be followed.

Overview of the UK subsidy control regime and the CMA's role

The Government set out its detailed proposals for the UK's domestic subsidy control regime in its Subsidy Control Bill in June 2021, which we summarised in an earlier blog post. As we explained, while the substantive aspects of the new regime are similar to the previously applicable EU State aid regime, there are significant differences in process and enforcement, with a shift away from ex ante pre-approval towards a regime that is based more on ex post enforcement by complainants through private litigation.

The Bill does, however, provide for certain categories of subsidies to be referred to the CMA for evaluation of their consistency with the subsidy control principles, prior to the granting of the subsidy - so-called "subsidies of interest" and "subsidies of particular interest" - which are meant to represent the most potentially distortive subsidies. Subsidies of interest are subject only to voluntary referral by granting authorities, whereas subsidies of particular interest are subject to mandatory referral.

While the CMA's evaluation report is formally to be advisory only and non-binding, we explained in our earlier blog post that the referral procedure may de facto become akin to an ex ante pre-approval process, as the grant of subsidies in deviation from the CMA's findings would leave those subsidies vulnerable to being overturned in the event of an appeal brought by complainants. The definitions of "subsidies of interest" and "subsidies of particular interest" are therefore important, as subsidies falling within their scope may be subject to an additional regulatory process with significant legal and practical implications.

Definition of subsidies of interest and subsidies of particular interest

The Government's proposed approach to defining subsidies of interest and subsidies of particular interest is comprised of three main elements:

• General value thresholds, which apply to subsidies in most sectors;
• A lower value threshold for subsidies of particular interest in certain designated sectors which are considered to be sensitive; and
• Subsidy "type" based criteria, which define certain types of subsidy as subsidies of interest or subsidies of particular interest, regardless of value.

General value thresholds

The Government proposes a general value threshold of £10 million for subsidies of particular interest and £5 million for subsidies of interest. Subsidies in excess of £10 million would therefore be subject to mandatory referrbn would be subject to voluntary referral.

The thresholds are to be applied on the basis of the "gross grant equivalent" of the subsidy, i.e. the aid element, which in the case of a subsidised loan for example, would be the difference between the terms of the loan and the market rate, rather than the nominal amount of the whole loan.

There will also be cumulation of subsidies granted to the same enterprise during a rolling three-year period in order to prevent that subsidies meeting the thresholds are split up into smaller subsidies in order to evade CMA referral.

Lower threshold for subsidies in sensitive sectors

The Government proposes that a lower threshold of £5 million should be used to define subsidies of particular interest in certain designated sensitive sectors, where there is evidence of global overcapacity and an existing record of international trade disputes (or evidence that this will occur in the future). An exhaustive list of such sectors and economic activities is proposed, as follows:

• Manufacture of basic iron and steel and of ferro-alloys;
• Aluminium production;
• Copper production;
• Manufacture of motor vehicles;
• Building of ships and floating structures;
• Manufacture of motorcycles;
• Manufacture of air and spacecraft and related machinery; and
• Production of electricity.

Input activities for these sectors and economic activities, e.g. the production of automotive batteries, will also be included.

This list of sectors and economic activities will be kept under review and adapted if necessary in light of changes in economic conditions. Indeed, the consultation already sets out certain further sectors and economic activities that could be added in future - the manufacture of man-made fibres and the manufacture of electronic components such as semi-conductors - where there has also been evidence of global overcapacity or international trade disputes.

Types of subsidies defined as subsidies of interest or subsidies of particular interest irrespective of value
The Government proposes that certain types of subsidies, which are considered as being the most potentially distortive by nature, be defined as either subsidies of interest or subsidies of particular interest, irrespective of their value:

• Rescue and restructuring subsidies: These types of subsidies are among the most competitively distortive, as in their absence, the beneficiary enterprise would go out of business and exit the market.

Rescue subsidies, i.e., subsidies in the form of temporary liquidity support in order to keep an enterprise in business while a restructuring programme can be devised, are to be considered as subsidies of interest, which are subject to voluntary referral. Because of the time-critical nature of such subsidies, the Government proposes that they may be granted before the CMA has issued its report, should the circumstances demand it.

Restructuring subsidies, i.e. more enduring support granted on the basis of a restructuring programme, are to be considered as subsidies of particular interest, which must be referred to the CMA.

• Relocation subsidies: Subsidies that are conditional on the beneficiary enterprise relocating economic activity from one part of the UK to another, are evidently significantly distortive of investment in the UK. While these kinds of subsidies were to be prohibited under the original version of the Subsidy Control Bill, the Government has now changed its position, on the basis that relocation subsidies might yet be justified if they have the effect of reducing particular social or economic disadvantage in a particular region.

Given their significant distortive potential however, the Government proposes that they be subject to additional scrutiny. The consultation raises various options, including potentially defining all such relocation subsidies as subsidies of particular interest irrespective of their value, or where they fall within a particular monetary range (not exceeding £10 million), or based on certain indicators or design features, such as the number of jobs relocated.

Recommendation to refer certain subsidies of interest

While subsidies of interest are subject only to voluntary referral, the Government considers that subsidies exhibiting certain features are more likely to be distortive and therefore ought to be referred in order to allow additional scrutiny. The Government will publish detailed guidance setting out these kinds of features, but according to the consultation, they are likely to include the following:

• There is evidence of a subsidy race between public authorities;
• The same, or a substantially similar, subsidy has been repeatedly made to the same recipient;
• The subsidy is linked to the ongoing economic activity of an enterprise, rather than being a one-off activity; and
• The subsidy is only open to one firm (i.e., there is no competition in the granting of the subsidy).

Where one or more of these design features are present, public authorities will be advised to make a referral to the CMA.

The contours of the new regime are emerging and it may be more intrusive and intensive than it first seemed

As explained above, the definitions of "subsidies of interest" and "subsidies of particular interest" are important, as they determine the scope of the CMA's referral jurisdiction and therefore the extent to which the UK's subsidy control regime may effectively involve aspects of ex ante pre-approval, rather than being based just on ex post enforcement.

In this regard, the value thresholds proposed by the Government seem relatively low, with the result that the CMA's referral jurisdiction looks set to have a broad reach and play a significant role in the new regime. The thresholds for subsidies of particular interest - generally £10 million and only £5 million in certain sensitive sectors - are considerably lower than the thresholds applicable under the EU State aid regime's GBER, under which various categories of State aid fulfilling certain criteria can be granted without pre-approval from the European Commission, and under which the great majority of all State aid is granted in the EU. By way of example, the GBER exempts State aid of up to ?20 million for industrial research projects and for research infrastructures; up to ?50 million for energy infrastructures; and up to ?100 million for fixed broadband networks and mobile networks. Under the Government's proposed thresholds however, all of these aids would need to be referred to the CMA for review.

The lower thresholds may be justified in light of the intrinsic differences between the two regimes. The EU State aid regime is primarily concerned with addressing distortions in competition between EU Member States in the EU's larger internal market, whereas the new UK subsidy control regime is focused on addressing distortions in the UK's own domestic internal market. It may therefore be appropriate also to scrutinise lower value subsidies which may still have significant local effects within the UK. The consequence of this approach however, will be to place greater burdens on public authorities and subsidy recipients in having to prepare for and navigate the CMA review process while also increasing legal risks should that process not be followed.

This is exacerbated by the lower value threshold that will apply in relation to subsidies in so-called sensitive sectors. It is further notable that these sectors have been chosen due to their sensitivity from an international trade perspective (i.e. evidence of global overcapacity and an existing record of international trade disputes) rather than due to the competitive conditions in the domestic markets and the propensity for local distortions in the UK's internal market. This suggests that international trade and investment considerations will also be a key factor in the assessment under the new UK subsidy control regime. Subsidies have been a major source of international trade disputes over the past years, including the long-running US-EU dispute in relation to subsidies in the aviation sector (Boeing-Airbus), and it is notable that the UK's first WTO dispute since Brexit, which was initiated by the EU last week, concerns the UK's subsidy programme in relation to renewable energy generation - its contract for difference (CfD) scheme. Indeed, it may be that the Government envisages using the additional scrutiny and evaluation of the CMA referral process as a shield against possible complaints raised by its international partners.

Finally, while subsidies of interest are subject only to voluntary referral, the Government's position that public authorities would be well advised to refer such subsidies to the CMA when certain features are present, may de facto turn such subsidies into subsidies of particular interest that are subject to mandatory referral. This is because if public authorities nonetheless decide not to refer such subsidies, despite the clear recommendation from Government, that would be an obvious ground of criticism that complainants could raise on appeal. Again, this has the effect of broadening the scope of the CMA's referral jurisdiction and the consequent burdens and risks for public authorities and subsidy recipients.

It is important of course to bear in mind that the UK's new subsidy control regime remains under construction and it remains to be seen where the Government will ultimately land on these issues. Various other material elements are also yet to be determined, including how the Government will use its ability to set up so-called "streamlined routes", which analogous to the GBER, will be exempt from CMA referral.

But in sum, if the Government's proposals in relation to subsidies of interest and subsidies of particular interest are followed, the UK's new subsidy control regime may ultimately be more intrusive and intensive that it may have first seemed. Diligence in relation to State aid control, now subsidy control, looks set to remain as a fundamental consideration in any operation or transaction involving the State and public authorities, and subsidy recipients, counterparties and other interested parties will need to bear this in mind and act accordingly.

The consultation is open for the next five weeks, and closes on 6 May 2022. Responses can be sent using the online form, or by email to subsidycontrolconsultation@beis.gov.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.