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Subsidies at the forefront of the UK Government's new plans to become an "Innovation Superpower".

29 July 2021

The UK Government has launched its new Innovation Strategy ("the Strategy") announcing ambitious "plans to cement the UK’s position as a world-leader in science, research and innovation".  At the forefront of the Strategy are a series of public funded programmes which aim to "to put the UK at the front of global innovation race".  In this article we consider the Strategy in more detail and set out ways the new Subsidy Control Bill could assist the UK to become an "Innovation Superpower".

The Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng announced the Innovation Strategy on 22 July 2021, stating that it could help "build the foundations for the new industries of tomorrow" to help to "ensure British firms are at the front of the pack to turn world-leading science into new products and services".

What are the aims and features of the Strategy?

The Strategy aims to support "private sector investment in R&D across the…the UK", and in turn, "create the right conditions for all businesses to innovate". The Strategy also identifies seven key areas (1) "where the UK has globally competitive R&D strength". 

From a Subsidy Control perspective, key aspects of the Strategy include plans to:

  • increase annual public investment in research and development ("R&D") to £22 billion; 
  • invest £200 million in the "British Business Bank’s Life Sciences Investment Programme to target the growth-stage funding gap faced by UK life science companies";
  • inject "a £50 million package for innovation infrastructure projects"; 
  • introduce "£25 million of funding for the Connecting Capability Fund [to] help drive…economic growth through university-business innovation"; and
  • create a "£10 million innovation seed fund" for "early-stage patient capital [in] high potential businesses".

The Strategy also describes how five regional projects will benefit from a share of £127 million from the Strength in Places Fund. Set to be delivered by UK Research and Innovation, these allocations are: 

  • £22.6 million in the North of England to "help the Advanced Machinery & Productivity Initiative" develop "emerging technologies such as robotics";
  • £18.3 million in the Midlands for the "Midlands Industrial Ceramics Group to improve manufacturing processes in advanced ceramics";
  • £21.3 million in Scotland and Cumbria for "the Digital Dairy Value-Chain project" to help "create a more sustainable dairy industry";
  • £22.2 million in Wales for the media.cymru project to "develop new products and services for global markets"; and
  • £42.4 million in Northern Ireland for the Smart Nano NI project to encourage "the development of new nano-scale optical components". 

Other initiatives under the Strategy include proposals to:

  • encourage government procurement to be more proactive and supportive to help provide "a route to market for innovative new products and services"; 
  • establish a "Regulatory Horizons Council to consider how best to support innovation through regulation";
  • consult with key stakeholders as to "how regulation can ensure that the UK [can] extract the best value from innovation";
  • "introduce High Potential Individual and Scale-up visa routes" to help "attract and retain high-skilled, globally mobile innovation talent";
  • develop "an online finance and innovation hub between Innovate UK and the British Business Bank within the next 12 months"; and
  • establish "the Government Office for Technology Transfer to support public sector organisations in identifying wider uses for their innovations".

The importance of getting Subsidy Control right for grants and funding bids

The Subsidy Control rules are the current legal requirements that apply to the award of subsidies in the United Kingdom with effect from 11pm 31 December 2020.  The UK currently has an interim regime in place, with the Subsidy Control Bill 2021 expected to be consolidate the new regime in due course.  This is currently expected to considered by Parliament in Autumn 2021. 

It's important that organisations awarding public funding (for example, Government Departments, Mayoral Combined Authorities, Catapults and Universities) understand the Subsidy Control rules because a failure to correctly satisfy the requirements can lead to the rejection of a funding application, or the recovery of funding and significant reputational damage later following an award.

There are five core considerations which a public body must take into account to satisfy the Subsidy Control rules, these being:

  • the EU Trade And Cooperation Agreement ("TCA");
  • the Northern Ireland Protocol;
  • the Withdrawal Agreement;
  • the WTO rules; and
  • other trade agreements which the UK has entered into and which include Subsidy commitments.

In most cases, funders oblige applicants to explain how the funding will comply with the rules and then build up the case taking account of any other information held by the public body. 

Lower value awards may be able to fit within the thresholds set out at Article 364(4) of the TCA, which allows 325,000 Special Drawing Rights of subsidy to be awarded in a three year period (NB. approximately £330k at present, which the Subsidy Control Bill proposes to fix at £315k). 

Subsidies outside this threshold may still proceed by satisfying a six part substantive test called the "Common Principles", set out at Article 366 TCA. Probably uppermost among the considerations there is a need to show that the subsidy awarded is proportionate to the public policy aim being pursued and no more than necessary to secure that objective.

DWF is well placed to advise on how to comply with the Subsidy Control rules and DWF's experts are mentioned seven times in the recent House of Commons Subsidy Control Report. 

How can the Subsidy Control Bill help support R&D and cutting edge businesses?

The Subsidy Control Bill is not a completely new system but instead builds upon the commitments within the TCA (already been in force since 11 pm 31 December 2020).  

At the moment the Subsidy Control Bill doesn't specify what public policy objectives deserve to be supported, nor give preferential weight to certain activities, for example R&D or patenting intellectual property rights.  Instead, over 500 public sector bodies must make their own assessments as to which objectives are considered appropriate.  The result of this may be that different priorities emerge across the country. 

We would suggest that a significant step in turning the UK into an innovation superpower would be to recognise that most public sector interventions and subsidies awarded will not be problematic, and to make life easy for those awards, while retaining the higher levels of scrutiny for the larger and more potentially distortive awards.  

This may include identifying situations where there will be no subsidy at all, eg. general research by universities or other public research organisations such as the various R&D "Catapults".   At the same time the Government might already consider specific safe harbours and/or streamlined subsidy schemes whereby the majority of awards of acknowledged subsidies can avoid having to apply the Common Principles (because they have been applied at a higher level already to give certainty to certain designated funding situations).  

We would also recommend looking again at the requirements around 'ailing and insolvent actors', recognising that these may become problematic in practice particularly for technology start-ups which can take a long time to realise profits, particularly in the more speculative areas of R&D where arguably the biggest gains may be made, but which on the other hand normally also represent the biggest risks. 

Overly stringent rules about the sort of organisations that can be funded in this respect can have a cooling effect, as was a particular criticism of the previous EU State aid regime and the exclusion of so-called "undertakings in difficulty" defined in rigid ways. 

Finally, we would strongly suggest that the Government seeks to simplify the process wherever possible recognising that many smaller start ups will often not have access to expert lawyers with specialist technical knowledge.  The new system should be simple enough to enable promising businesses to receive funding quickly, easily and with a degree of certainty that the funding will not be recovered in due course. 

Comments

The Government's aim of putting the UK at the front of the "global innovation race" is highly ambitious and to be welcomed.  We believe that subsidies should be used to nurture the businesses and successes of tomorrow, but that the Subsidy Control rules need to be designed to complement such investment. 

DWF Law LLP has exceptional experience in public funding issues, including setting up programmes of support which satisfy government guidance, advising upon how to compliantly procure services and satisfy the Subsidy Control rules. Members of our Public Sector team having worked within the Central Government, Local Government, the European Commission and with private sector bodies on high profile public funding initiatives.  This means that we are a safe pair of hands when it comes to managing issues such as this. Feel free to get in touch, if it would be useful to discuss any of the issues raised in this article or other matters related to public funding.

References:

(1) Advanced materials and Manufacturing; AI, Digital and Advanced Computing; Bioinformatics and Genomics; Engineering Biology; Electronics, Photonics and Quantum; Energy and Environment Technologies; and Robotics and Smart Machines.

Further Reading