Op-Ed: “The Brave New World of State Aid in Post-Brexit UK” by Phedon Nicolaides
The UK has launched a consultation to elicit views on the future regime for State aid control. It considers the EU’s system to be bureaucratic, inflexible and prescriptive. Not only is this description of the EU system based on a misconception, it also underestimates the challenge of designing a system with predictable and enforceable rules that can provide legal certainty and address the needs of businesses.
There will be a benefit from the withdrawal of the UK from the EU, regardless of which side of the Brexit divide one stands. Brexit is a policy experiment on a huge scale. As the UK removes or relaxes the rules it inherited from the EU, we should all watch and learn. If the UK prospers, the EU should follow suit.
One of the very first attempts at reform is for the regime of State aid control. In a press release published on 3 February 2021, the UK Secretary of State for business, Kwasi Kwarteng, set out the broad features of a new subsidy system in the UK for ‘providing more flexible and tailored financial support to businesses’ and launched a public consultation process.
The Trade and Cooperation Agreement between the EU and the UK requires the UK to establish a system to control subsidies [Article 3 of Chapter 3 of Title XI of Heading One of Part Two of the Agreement]. Article 3.4(1) stipulates that ‘each Party shall have in place and maintain an effective system of subsidy control’. In addition, Article 3.9(1) requests ‘each Party [to] establish or maintain an operationally independent authority or body with an appropriate role in its subsidy control regime’. Until about a year ago, that independent body in the UK was supposed to be the Competition and Markets Authority. The UK has already abandoned that idea. Initial proposals copied the EU’s system of substantive and procedural rules. Now the UK wants a more ‘flexible’ system.
The establishment of a new system is not only a contractual obligation for the UK. It is an economic necessity. Given that in addition to the central government in Westminster, the UK has three ‘devolved administrations’ in Scotland, Wales and Northern Ireland, there is a real prospect of a subsidy race within the UK if no new system is put in place. As Mr Kwarteng acknowledged, the future ‘UK-wide subsidy control regime will ensure that subsidies do not unduly distort competition within the UK’s internal market’.
At the same time the Business Secretary stressed that ‘the government has always been clear that the regulation on subsidy control is a reserved matter. The UK Internal Market Act 2020 clarifies that the UK Parliament alone should legislate for the regulation of subsidies’. Although the central government will make the rules, it does not necessarily follow that the devolved administrations will blithely comply or that compliance will be easy. Flexible or simple rules need not be understood and applied uniformly across the UK.
Flexibility v predictability
And here lies the fundamental dilemma facing the UK as it seeks to design a ‘flexible’ system that at the same time can provide ‘tailored’ support to businesses. Flexibility and custom-made support require broad rules that allow a wide margin of discretion to those who grant the subsidies. Wide discretion and use of a diverse range of instruments make monitoring of compliance much harder for the simple reason that new instruments may or may not be considered as constituting a subsidy and new procedures may or may not be presumed to distort competition unduly.
It is instructive to recall that the very first judgment of the Court of Justice on 23 February 1961, in case C-30/59, De Gezamenlijke Steenkolenmijnen, was whether a bonus for miners was State aid. In a much quoted phrase, the Court held that ‘the concept of aid is nevertheless wider than that of a subsidy because it embraces not only positive benefits, such as subsidies themselves, but also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without, therefore, being subsidies in the strict meaning of the word, are similar in character and have the same effect’. Experience has shown that what ‘mitigates charges which are normally included in the budget of an undertaking’ requires case-by-case assessment. Prescriptively simple methods will not do.
In the EU the interpretation of the concept of State aid has evolved over time because public authorities are creative. They find new and innovative ways to support businesses. The evolution of the EU’s State aid rules necessarily has had to reflect developments in public policies. If, in the case of the UK, ‘flexible’ means rules which are tailored to the specific needs of each sector of the economy at a point in time, they will soon be outdated and not fit for purpose. If ‘flexible’ means broad and general rules that can apply to many different situations across sectors and over time, they will give rise to disputes of interpretation and will cause friction with devolved administrations. There is no escape from the trade-off between flexibility and predictability.
The EU’s solution to the trade-off between a flexible, malleable, evolving notion of State aid and predictability has been to assign to the European Commission the exclusive competence to assess all new aid. For this purpose, the Commission issues guidelines to ‘guide’ Member States to notify measures that it will be in a position to authorise.
The guidelines themselves have evolved significantly over time, both in substance and number. This evolution is a response to changing needs of Member States and the structure of their economies and to demands for greater clarity and certainty. Critics see the amount of detail in Commission guidelines as a straitjacket. By contrast, for many public authorities that is necessary to make rules and their application clearer. In other words, guidelines have brought more predictability to the system. Whether the balance between flexibility and predictability is right, is, however, an open issue.
The EU’s system of control has also changed as public authorities gained a better understanding of the breadth of the concept of State aid and more experience in applying State aid measures. The EU went from a system of controlling everything through prior notification to a system of hardly controlling anything through the use of block exemption regulations. According to the Commission’s 2019 Annual Competition Report, the current General Block Exemption Regulation (Regulation 651/2014, ‘GBER’) is used as the basis for more than 95% of new aid measures implemented by Member States.
The Commission and Member States laud the current system for reducing administrative burden by relieving them of the obligation to notify the vast majority of their aid measures. But here too there is a trade-off. When all new aid measures used to be notified for authorisation, national support policies were transparent. It was visible how Member States interpreted the relevant rules and designed their aid measures. Now, that transparency has disappeared. Although Member States have to publish their measures on some website, it is practically impossible for stakeholders to monitor measures published in national languages by multiple authorities in 27 countries. Flexibility, predictability and low administrative burden have come at the expense of transparency and understanding of national measures.
Perhaps the UK will design a better system. But to establish a system that is better than that of the EU, the UK needs to have a good understanding of the EU system. Undoubtedly, Mr Kwarteng’s statement of 3 February was intended to drum up political support. There was the unavoidable exaggeration. But it also revealed much misconception of how the EU’s system operates and miscomprehension of the complexity of the task of designing a new system.
Misconceptions about the EU
The press release of 3 February made a number of statements concerning the alleged features of the EU system and the desired features and objectives of the future UK system, which are quoted below:
- ‘The new system will be a clear departure from inflexible and bureaucratic EU state aid regime, and tailored to better support start-ups, small businesses and new industries.’
- ‘The new subsidy control system will be replacement for the EU’s prescriptive state aid regime.’
- ‘Previously, public authorities had to follow a bureaucratic, detailed set of EU controls – and may have needed prior approval from the European Commission.’
- ‘Under the proposed UK system, local authorities, public bodies and the devolved administrations in Edinburgh, Cardiff and Belfast will be empowered to decide if they can issue taxpayer subsidies by following a set of UK-wide principles.’
- ‘These principles will ensure subsidies are designed in such a way that they deliver strong benefits and good value for money for the UK taxpayer, while being awarded in a timely and effective way.’
- ‘The new system will be designed to be more flexible, agile and tailored.’
- ‘The system would also better enable the government to deliver on key priorities such as levelling up economic growth in the regions, tackling climate change, as well as supporting our economic recovery as we build back better from the COVID-19 pandemic.’
The statements above can be grouped in three categories: how the EU system functions, the scope of the substantive EU rules, and the conditions they impose on Member States.
With respect to the functioning of the system of State aid control, the statements above do not reflect reality. Since more than 95% of all new aid measures in the EU are not notified to the Commission for prior authorisation, Member States can implement them immediately and effectively, without having to go through bureaucratic controls. Also the EU system of control is graduated. Only large amounts of aid and aid outside the GBER are subject to prior notification.
With respect to the scope of the rules, the GBER covers almost all types of subsidies. For other subsidies such as aid for corporate restructuring or aid to financial institutions, the Commission has issued guidelines. Collectively, block exemption regulations and guidelines cover almost any conceivable type of State aid. Member States are not prevented from supporting regions, tackling climate change or remedying the damage caused by the pandemic. And if anything falls outside the scope of the regulations and guidelines, it can be assessed directly on the basis of the Treaty. As the Court of Justice has recently held in the Hinkley Point C case, even aid for nuclear power plants can be deemed to ‘facilitate the development of a certain economic activity’ within the meaning of Article 107(3)(c) TFEU (Austria v Commission, C-594/18 P).
With respect to the conditions that Member States have to comply with, State aid has to be shown to be necessary, capable of changing the behaviour of the recipient, proportional and not to cause an excessive distortion to trade and competition. These are the minimum conditions in order for state intervention in the economy to be effective and efficient.
It is in the nature of rules to have limits and thresholds. The same is true of State aid rules. They apply to certain companies [for example SMEs], in certain regions [Article 107(3)(a) areas], at certain rates [for example 50% for industrial research], for certain purposes [such as start-up companies]. One can always argue where regional boundaries should be drawn or whether the aid intensity should be 60% instead of 50% or whether a company which is eight years old should also be classified as a start-up.
The limits and thresholds in EU rules are not sacrosanct. Perhaps the UK will be able to define different limits and thresholds that suit better its own needs. But public resources will certainly be wasted if the future UK regime does not ask as a minimum whether subsidies are necessary, proportional and avoid excessive distortions to competition. With respect to these fundamental principles, the UK will or should not deviate from the EU regime. It is now forgotten that when the EU began to reform its State aid regime and convert its legalistic approach into a more economically rational assessment of state aid in 2005 [with the State Aid Action Plan] and in 2012 [with the State Aid Modernisation], it drew inspiration from the UK and the Treasury’s ‘Green Book’ on policy appraisal and evaluation which asks basically the same questions and is based on the same principles as those of the EU. Indeed, the UK provided much support to the Commission’s reform initiatives.
The consultation that was announced on 3 February seeks views from businesses and public authorities on the following issues:
- whether the UK should apply its own additional principles on subsidy control, as well as those set out in the UK-EU Trade and Co-operation Agreement;
- how best to ensure transparency across the system;
- the possible roles and responsibilities of the independent body that will oversee the new system;
- how this independent body could have some role in supporting enforcement of the principles, alongside normal judicial review standards; and
- how the system could seek to introduce exemptions consistent with our international obligations, such as ensuring subsidies of low value, those given to support natural disaster relief or in response to global economic emergencies.
Depending on the feedback that the government will receive, the UK may decide to establish a ‘light’ regime that relies on each authority to comply with the concept of subsidy and dispenses with prior authorisation and block exemption regulations. Inevitably this light system will result in disputes before courts. A system that depends on judicial review is not efficient because courts cannot give guidance as to what is an acceptable subsidy in a future hypothetical situation. A light regime will be a litigious regime with little predictability.
Since the UK wants subsidies to stimulate growth, it will find that businesses need a predictable regime. Since the UK also wants a flexible regime with tailored measures, it will need a central authority or body to manage the variation in subsidies that will inevitably arise and to provide guidance.
In Aldus Huxley’s masterpiece Brave New World, the government controlled the population with ‘soma’ – a psychosomatic drug. People did not have to be coerced because they ‘loved their servitude’. There is no ‘soma in State aid, only rules that need to be clear, appropriate and enforceable.
Phedon Nicolaides is a Professor at the University of Maastricht.