Subsidy Control Act 2022: Scrutiny of another referral by Subsidy Advice Unit
June 2023Introduction
We have written previously about the UK’s Subsidy Control Act 2022, which received Royal Asset on 28 April 2022 and came into force on 4 January 2023 (see article here: https://beale-law.com/article/uk-state-aid-control-and-the-subsidy-advice-unit-a-duty-to-ask-but-not-to-listen/).
The meaning of subsidy is quite broad. This can encompass any benefit provided from public resources whether in cash or non-cash form. That may include the provision of subsidies or transactions between public sector bodies on terms that are favourable to the private sector body (for example, sales of public assets at an undervalue or loans given by public bodies at below market interest rates). Subsidies can cause a serious distortion of competition.
Post Brexit, public bodies across the UK required to comply with an interim subsidy control regime, primarily set out in the UK Trade & Cooperation Agreement (“TCA”). This act diverges from the EU’s State aid regime and replaces the interim regime and sets out the framework under which public authorities should award subsidies going forward.
The Act sets out a four-step process for public authorities to follow when contemplating the award of public funds:
- Is it a subsidy?
- If it is a subsidy, is the subsidy automatically unlawful?
- If the subsidy is not rendered automatically unlawful, do any exemptions apply, or is the subsidy awarded under a scheme or streamlined route?
- Does the subsidy comply with the subsidy control principles?
Competition and Markets Authority
Post-Brexit, the Competition and Markets Authority has the role of overseeing the provision of subsidies and avoiding adverse effects on competition. Previously, this role was undertaken by the EU Commission although there are some marked differences in the way the CMA will function under the SCA.
Under Article 107 and 108 TFEU, no public subsidy (termed “State aid” in EU law) may be implemented without the ex-ante approval of the EU Commission. Failure to notify or obtain consent for a subsidy can lead to an order from the Commission for that to be recovered by the public body.
Whilst the CMA will have some comparable duties of enforcement, it will perform a more advisory function than the Commission. Fewer subsidies in the UK system will require advance clearance prior to being granted.
The Act introduces two distinct categories of subsidies – Subsidies of Interest (“SOI“) and Subsidies of Particular Interest (“SOPI“). Public bodies granting SOIs and SOPIs need to analyse compliance with the Subsidy Control Principles.
The Act does not define what falls within each of these categories. Instead, a draft Regulation, published for consultation on 25 March 2022 (“Draft Regulation“), proposes the definitions for SOIs and SOPIs as below:
- “Subsidies of Interest” (SOIs):
- Rescue subsidies: i.e. a subsidy for the purposes of rescuing an ailing or insolvent enterprise; or for rescuing an ailing or insolvent deposit taker (a person who has permission to carry on the regulated activity of accepting deposits) or insurance company
- For the purposes of supporting liquidity provision for an ailing or insolvent deposit taker or insurance company
- All other subsidies of between £5 to £10 million which do not meet the SOPI criteria are SOI
- “Subsidies of Particular Interest” (SOPIs):
- Restructuring subsidies: i.e. a subsidy for restructuring an ailing or insolvent enterprise, or for restructuring an ailing or insolvent deposit taker or insurance company;
- The total amount of the subsidy (including any related subsidies to the same beneficiary) is more than £5 million and is granted in a sensitive sector; or
- The total amount of the subsidy (including any related subsidies to the beneficiary) is more than £10 million; and the subsidy is notgranted in a sensitive sector.
Subsidy Advice Unit
Subsidies of particular interest must be referred to the new Subsidy Advice Unit (“SAU”) at the CMA before award.
The SAU is a reporting body, and its main role is to give independent advice by analysing the extent to which referred subsidies comply with the subsidy control requirements and publish a report within 30 working days. These reports will not be binding on the public authority and the SAU cannot prohibit the making of any subsidy.
Coventry City Council city centre redevelopment referral request
Recently, on 22 June 2023, the SAU published a notice announcing that it has accepted a referral from another local authority. This relates to Coventry City Council’s proposed subsidy award of £37.285million to Shearer Property Group Limited (SPG) (development partner), and Hill Holdings Limited (Hill) (funding partner), in respect of a large-scale redevelopment.
Following war-time bomb damage, the centre of the city of Coventry had been redeveloped during the 1950s and 1960s. These buildings are reaching end of their life and have fallen into disrepair. As a result, the Council has formed the view that Coventry’s shopping, city centre living and leisure facilities require a wholesale upgrade, focusing its initial efforts on the redevelopment of the southern part of the city centre (an area known as “City Centre South”).
Beginning in 2015, Coventry City Council undertook a regulated procurement process to procure a development partner with the commitment, expertise, and resource to deliver a high-quality, mixed-use retail, leisure, and residential regeneration scheme within Coventry City Centre.
The request relates to a Subsidy of Particular Interest and due to its high value (over £10million) it is a mandatory referral under the Subsidy Control Act 2022.
Following a procurement process, the development partner SPG was appointed to deliver a high-quality, mixed-use retail, leisure, and residential regeneration scheme within Coventry City Centre South (CCS). SPG further appointed Hill as its funding partner who has shareholding in a SPG subsidiary (Shearer Property Regen Limited (SPRL)) that will be taking the development forward.
The Council will provide financial support to SPG/Hill amounting to approximately £37.285 million for qualifying expenditures, including the assembly and remediation of the site and the construction of public infrastructure works. The subsidy is considered necessary to address market failure and promote the redevelopment of City Centre South and the provision of social housing in Coventry.
The scale of Council financial support has increased as it imposed additional requirements on SPG to deliver social and affordable housing units, adding to the cost. It expenditure for the development will be a subsidy to SPG/Hill (via SPRL) for contractually pre-determined “qualifying expenditure (subject to verification).
The Council believes that the subsidy is necessary both to meet a market failure and also to promote an equity rationale, in particular the redevelopment of CCS and the provision of much needed social housing.
The SAU will prepare a report, which will evaluate Council’s assessment of whether the subsidy complies with the subsidy control requirements (Assessment of Compliance) and complete the repost by 3 August 2023 (30 working days).
The awaited report is yet to see whether the Subsidy Advice Unit (SAU) will carry out a detail scrutiny of the Council’s “seven principles” assessment.
Comment
This case will be of immense interest to developers and infrastructure contractors, on the one hand and public authorities, on the other. They should pay close attention to the approach taken by the CMA in its assessment, which will assist them in structuring developments in a way which does not run into difficulties with the provisions of the Act.
If nothing else, the case serves as a reminder to both types of organisations of the need to consider whether subsidies are present in any public-private land development scheme. Whilst the appointment of contractors or service providers through a competitive tender process will mean there is no subsidy involved (because the deal is on market terms), this will not always be the case. Certain ferry services in Scotland for example involve the provision of subsidies to operators selected competitively.
Frequently that may be the case if, for example, there is a lease or disposal of public land or use of compulsory purchasing powers to assemble the necessary land parcels. Failure to take these matters into account could result in a project being subject to judicial review by third parties who may object it puts them at a disadvantage competitively or who merely want to seize on a legal pretext to disrupt a project they are not keen on.
Thames Water – the next big subsidy case?
On 28 June it was reported that the future of Thames Water is in doubt as a result of its enormous debt pile. There are significant concerns as to the disruption that would be caused by the insolvency of the utility, which is responsible for the provision of water to millions of homes in London and the south east.
The Government has confirmed it stands ready to help. The form of assistance it has in mind remains unclear at the present time. Clearly, TW needs substantial amounts of capital in order to stave off a liquidation event. It will need to be mindful of the requirements under the Act for rescue aid, which will potentially require an assessment by the SAU before funding can be provided.
Aside from shedding light on the operation of the rules on rescue aid, this scenario may be a useful test of the CMA’s ability to undertake an expedited assessment, given the imperative of rapid action to avoid a collapse.
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