Subsidy Control: Lessons from the National Theatre’s £26 Million Grant

September 2024

Paul Henty and Deen Taj

Introduction

The application of the Subsidy Control Act 2022 (SCA) often requires a careful balancing exercise between protecting competition and supporting projects with a public interest, such as cultural initiatives. The grant of subsidies from public resources to enterprises in competitive markets can lead to distortions and unfair advantages. On the other hand, the continuation of institutions such as museums and theatres often require the injection of public cash in order for the valuable work of these organisations to continue.

The Competition and Markets Authority (CMA) is the regulatory body responsible for determining whether individual subsidies or schemes of subsidies should be permitted. The UK’s subsidy control framework is evolving as an increasing number of CMA decisions address these questions are issued.

One such decision, recently issued, involved the proposed subsidy to the National Theatre. Under the SCA the support package fell within the definition of a Subsidy of Particular Interest (SOPI). As discussed below, these are the most potentially harmful types of subsidies and will need to be reviewed by the CMA, which will issue a nonbinding advisory opinion on conformity with the SCA.

The CMA’s decision provides important lessons for how cultural subsidies can be aligned with subsidy control principles while balancing public benefit and market impact.

What is a SOPI?

Under the SCA, certain subsidies are classified as SOPIs due to their potential to distort competition or affect trade. According to Regulation 3 of the Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022, a subsidy is considered a SOPI if it:

exceeds £10 million per individual award;
involves rescue or restructuring aid to an enterprise in financial difficulty;
is granted in sensitive sectors where competition risks are higher, such as energy, transport, or large-scale manufacturing;
exceeds £1m and related subsidies have been granted to the same enterprise in excess of £10m; and/or
has a potential cross-border impact on trade with EU or non-EU countries.

Moreover, Regulation 6 states that subsidies of at least £5 million may also qualify as SOPIs if they are likely to create significant barriers to entry or expansion in the recipient’s market, especially if the recipient holds a dominant position.

These SOPIs are subject to heightened scrutiny by the Subsidy Advice Unit (SAU) within the CMA to ensure compliance with subsidy control principles, which include ensuring the subsidy is proportionate, targeted to a specific public policy objective, and designed to minimise distortion to competition.

In the CMA’s National Theatre decision, the subsidy exceeded the £10 million threshold, prompting a detailed review by the SAU to ensure compliance with these statutory requirements. The full report issued by the SAU can be found here: https://www.gov.uk/cma-cases/referral-of-the-proposed-subsidy-to-the-national-theatre-by-the-department-for-culture-media-and-sport.

Overview of the National Theatre Subsidy

The Department for Culture, Media, and Sport (DCMS) referred the National Theatre’s £26 million subsidy to the SAU for review under the SCA. The subsidy is intended to fund critical repairs and infrastructure upgrades at the theatre’s South Bank estate, a move aimed at preserving the institution’s renowned status while ensuring continued public access to the arts at affordable prices.

Policy Objective and Market Failure

A central aspect of the SAU’s evaluation was whether the subsidy addressed a specific market failure or equity concern. The National Theatre faces a unique challenge: it does not operate on a fully commercial basis, as its focus is on offering high-quality productions at accessible prices. This is an essential public good that justifies government intervention. The SAU recognised this, noting the positive externalities the National Theatre generates, such as improved public wellbeing, support for the creative economy, and reduced inequalities in access to the arts.

The SAU also acknowledged the equity rationale behind the subsidy. The National Theatre’s outreach programmes target young people and marginalised communities, groups that are often underserved by commercial arts providers. The continued deterioration of the theatre’s infrastructure would have jeopardised these programmes, making the subsidy essential for preserving this social good.

Proportionality and Avoiding Market Distortion

One of the SAU’s key findings was the need to ensure that the subsidy was proportionate to the objectives and limited to what was necessary. The SAU noted that the National Theatre’s financial position (operating with a significant deficit) meant that without the subsidy, essential capital works would either be delayed or funded through commercial means, potentially compromising its ability to provide affordable cultural programming.

The SAU also examined the potential distortive impact of the subsidy on competition, acknowledging that other comparable theatres may not receive similar support. However, it concluded that the National Theatre’s unique public mission, combined with its significant cultural and economic contributions, justified the subsidy despite these concerns.

Balancing Public Benefits and Competitive Impacts

The balancing exercise conducted by the SAU weighed the public benefits of maintaining a world-class cultural institution against the potential competitive disadvantages it could create for other theatres. While the SAU acknowledged that the subsidy provided the National Theatre with a clear advantage, it ultimately found that the overall public benefit (e.g. in the form of continued affordable access to high-quality theatre performances), outweighed these potential negatives.

Key Takeaways for Future SOPIs

The National Theatre decision highlights several key trends in how the CMA is approaching SOPIs:

Clear Policy Objectives: subsidies must pursue well-defined objectives that align with public policy goals, such as addressing market failures or social inequalities.
Counterfactual Analysis: a robust counterfactual scenario, detailing what would happen without the subsidy, is crucial in proving additionality and justifying the need for intervention. A finding that the recipient would have to scale back operations, be forced to forego new initiatives or potentially have to cease functioning altogether will obviously weigh in favour of granting the subsidy.
Proportionality and Minimisation of Distortive Effects: subsidies should be limited to what is necessary, ensuring that the level of public support is proportionate to the intended outcomes without distorting competition more than necessary.
Balancing Public and Market Considerations: even in cases where a subsidy may give a recipient a competitive edge, the overall public benefit can still justify its provision.

Conclusion

The National Theatre subsidy is a valuable case reflecting how the UK’s new subsidy control regime is being applied. It demonstrates the balancing act required to support public goods, such as cultural institutions, while maintaining fair competition.

We are increasingly seeing that public bodies providing financial assistance are seeking assurances from beneficiaries as to whether the financial assistance qualifies as a subsidy, often requiring a subsidy control statement. Where the financial assistance does qualify as a subsidy, beneficiaries are being asked to provide reasoning as to why the assistance complies with the subsidy control principles to assist the public body with any potential referral to the SAU. This, to some extent, shifts the burden for SCA compliance from the grant body (or other provider of public support) to the recipient.

Parties should take note of these factors and get ahead of the curve when analysing potential SOPIs. This means ensuring that they proactively assess the compliance of their financial assistance with subsidy control requirements and are prepared to provide the necessary justifications if their projects fall within the scope of the SCA.

For businesses and public authorities navigating the subsidy control landscape, this case underscores the importance of aligning subsidies with broader policy objectives, ensuring proportionality, and thoroughly evaluating their potential impacts on the market. Being proactive in preparing for potential SAU referrals will be crucial for staying compliant and minimising delays.

Another recent case illustrated the need for beneficiaries to comply with the strict requirements of grant agreements in order to ensure the continuation of funding and viability of the supported project: Don’t Take Subsidies for Granted: Procurement Legal Battle May Leave Contractor Out of Pocket | Beale & Co (beale-law.com). These recent developments underscore the need for specialist legal advice when relying on public subsidies to support an initiative.

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