By Genevra Forewood, Partner, Marc Israel, Partner, and Kate Kelliher, Associate, at White & Case
“State aid” is perhaps a lesser-known area of EU competition law, but in the run up to the conclusion of Brexit negotiations that resulted in the Trade and Cooperation Agreement (“TCA“) on Christmas Eve 2020, the term became common parlance as one of the final sticking points in the EU-UK negotiations. State aid should already be familiar as a concept to companies in the UK (and elsewhere) that rely on government support to carry out their activities. State aid support schemes in the UK include, among others, renewable energy subsidies to generators under the Contract for Difference (CfD) and Capacity Market schemes, grants for training schemes and, more recently, some of the COVID-19 support that has been used to prop up ailing companies suffering the ill-effects of the pandemic, including, for example, the Coronavirus Business Interruption Loan Scheme (CBILS) launched in March 2020.
In the EU-UK negotiations, one of the key conundrums was how to reconcile the EU’s desire to ensure the UK was satisfactorily constrained from subsidising its own industries in a manner that would not unfairly advantage them over their EU competitors, i.e., ensuring a “level playing field”, with the UK’s determination to forge its own path, once it was no longer bound by EU State rules.
The compromise reached in the TCA was that the UK will need to design its own domestic subsidy control regime in the coming months, but that regime will need to achieve compliance with a set of “principles” that are drawn from the EU State aid rulebook.
Subsidy vs. State aid: what are the main differences between the EU and UK regimes?
The UK regime remains to be developed, with a consultation by the Department of Business, Energy and Industrial Strategy (BEIS) on design options due to close on 31 March. However, we can elicit some of the main features of the regime from the TCA.
- Subsidies and Semantics…
“State aid” as a term will be abandoned in the UK going forward, with the TCA focusing on the grant of “Subsidies”. However, the definition of a “Subsidy” in the TCA broadly replicates all the key features associated with State aid so this could be a question of form over substance. However, one cannot exclude differences emerging over time as the courts are called upon to interpret these terms.
- Assessments
As part of the new Subsidy regime design, the UK will be free to define assessment criteria and other guidance. We do know, however, that the ultimate goal will be to demonstrate that any UK ‘subsidy’ conforms to the six “principles” defined in the TCA. These mirror the assessment criteria that the European Commission applies to the assessment of State aid measures, for example, they must pursue a specific public policy objective to remedy a market failure, and comply with considerations such as proportionality, necessity, incentive effect, and their positive contributions must outweigh the negative effects on trade and competition.
- Ex-ante vs. Ex-post Approval?
One obvious absence in the TCA is any commitment by the UK to institute an ex-ante approval system. The EU State aid regime operates on the principle that, unless an exemption applies, State aid cannot legally be granted until it is formally approved. This requirement has not been replicated in the TCA, which means that the UK is free to design a regime that does not require prior approval for a Subsidy to be granted. However, as under EU State aid rules, the TCA envisages that in the UK there will be the possibility for ‘interested parties’ (typically competitors to aid beneficiaries) to challenge the grant of a subsidy, and obtain an effective remedy, including the suspension of the measure, an award of damages, and/or the recovery of the subsidy by the grantor. In practice, such ‘private’ enforcement of the subsidy rules could be as significant as enforcement by the relevant authority.
- Sectoral conditions
Like the EU regime, the TCA contemplates extra conditions for certain sectors. For example, there are extra conditions applicable to subsidies for banks, credit institutions and insurance companies including rescue and restructuring measures; export subsidies; energy and environment measures; and to air carriers for the operation of certain routes. Whilst the EU also imposes more specific conditions on airports, railways, maritime transport, research, development and innovation, broadband deployment, and public passenger transport by road and rail, the UK is not required to do so under the TCA, although it will be free to develop its own sectoral conditions if it so chooses. It is also notable that the subsidy rules under the TCA do not apply to the audio-visual sector.
This is one area in which we might expect the UK to adopt targeted guidance on how compliance with those conditions can be achieved in affected sectors, but that is all still to come.
Short-term impact on UK businesses
So, what does this mean for UK businesses in the interim? Support that meets the “Subsidy” criteria can still be granted, certainly. The practical effect of the absence of a legislative regime means that it will be down to the local authority or other Subsidy-granting entity to determine if the Subsidy they are granting is compliant with the TCA. To do this they will need to refer to the six principles.
In practice, most UK public bodies that grant subsidies are likely to continue to refer to EU State aid rules as a yardstick until the new regime is adopted. There are practical issues with this approach, however. With respect to COVID-19 support in particular, the EU rules (under the EU “Temporary Framework”) have evolved since Brexit. For example, the EUR 800,000 ceiling that used to apply to direct grants to individual companies has been raised (again) to EUR 1.8 million. Other ceilings have also been raised. No doubt, the UK authorities would not consider it appropriate for local authorities and other bodies to track the iterative changes to the EU rules in the interim, but that does leave public bodies somewhat on their own until the new regime emerges with more definitive guidance.
Long-term impact on UK businesses
The long-term impact with respect to practicalities and procedures will not emerge until the UK’s new legislation is adopted. There are particular points where changes can be expected. Of particular note will be whether the UK decides to mirror the EU’s ex-ante approach. It seems likely the UK will not do so, given the apparent lag associated with the introduction of the new regime. Indeed, if it were the UK’s intention to mirror the EU’s ex-ante position, one might expect to see the implementation of new measures announced in the interim, including those announced by the Chancellor of the Exchequer in his March 2021 budget, delayed until the procedures were enacted. There is no indication the UK intends to do this at present, so we could well see a move to a more generalised approval mechanic; possibly based on ex-post review or more generalised exemptions. Ultimately, however, this all remains to be seen.
Whether the new regime relies on pre-approvals or not, the UK will also need to designate an independent body to administer the regime. The Competition and Markets Authority (“CMA“) is the obvious candidate and was also the body designated to fulfil that function under the 2019 Brexit deal that was previously rejected by the UK Parliament. This would represent a substantial new mandate for the CMA, which is already expecting a huge increase in its merger control and antitrust enforcement workloads as a result of Brexit. The government has remained notably circumspect, however, on whether the CMA will indeed get the nod.
In terms of other potential candidates, the BEIS has already been given a prominent part to play, publishing both the technical guidance for the Subsidy control aspects of the TCA and being charged with the launch of the transparency database for Subsidy measures envisaged by it. BEIS is not independent enough of government to fulfil the criteria for the ‘independent body’ contemplated by the TCA, but it is not inconceivable that it may be the future home for an independent unit or organisation in future.
Impact on EU companies
The new UK Subsidy regime will not change the conditions upon which EU companies may receive support in the form of State aid from their own Member States. Indeed, the TCA gives a rather helpful indication of the likely changes they can expect to EU State aid rules in future by, for example, signalling the prospect of an increased de minimis threshold.
The crux of the impact on EU companies will manifest in the rights they will be granted to complain about UK Subsidy grants to their competitors. Certainly, the UK government will be free to replicate the EU complaints mechanism if it so chooses, which allows competitors to complain on a broad range of grounds, but only judicial review is contemplated by the TCA at present. If legal proceedings through the UK courts is the only forum for grievances to be brought, it comes with obvious cost implications.
EU companies will also want to keep an eye on the substance of the rules for general and sectoral grants, particularly those which had been (while the UK was subject to EU law) regular beneficiaries of State aid. The extent that the UK deviates from the traditional State aid metrics in areas like energy and environment, for example, will also be important for companies active in that space, as they will need to adjust their own internal systems to ensure they can demonstrate compliance with what may be an entirely new set of eligibility criteria.
Points to watch
Whilst the UK is considering its next steps, we will certainly be watching closely what the final form of the Subsidy regime will have to say on rights of appeal and complaints, any block exemptions or equivalent pathways to assume compliant Subsidies, and any guidance on how the conditions applicable to particular sectors should be assessed. Another complexity, which is a whole other topic in itself, is how the UK’s subsidy rules and procedures can be reconciled with the devolved powers of its nations and regions. Perhaps the first major indicator will be the designation of the administering body, from which we would expect guidance and policy statements to emerge.
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