The UK's Subsidy Control regime has now been in force for over 650 days and it seems an opportune time for the Government to consult stakeholders on how the rules can be improved, including the creation of more, better targeted Streamlined Routes.
What are Streamlined Routes?
Streamlined Routes (also called Streamlined Subsidy Schemes) are Subsidy Control exemptions for specific situations, written into law, which can be used by public authorities to make compliant awards of subsidies when the relevant conditions are satisfied. They are often seen as an equivalent of Block Exemption Regulations at EU law, in that a public authority is able to provide a subsidy with legal certainty provided it can be sure it complies with all relevant conditions set out in the Streamlined Route relied upon.
Section 10 of the Subsidy Control Act 2022 sets out that Streamlined Routes can be created by a Minister of the Crown and must be laid before Parliament.
Are there any Streamlined Routes in place at this time?
Yes. Three Streamlined Routes were created at the time the regime was established, which run from 5 January 2023 until 4 January 2029. These are:
- Local Growth (subsidy control number: SC10782);
- Research, Development and Innovation (subsidy control number: SC10780); and
- Energy Usage (subsidy control number: SC10781)
The choice and scope of the Streamlined Routes was a surprise to many at the time, because the UK had negotiated the Joint Declaration on Subsidy Control Policies within the EU-UK Trade and Cooperation Agreement, which appeared to offer a skeleton set of conditions for exemptions to be created in respect of Subsidies for the development of disadvantaged areas, Transport (including ports and airports) and Research and Development.
Of the three subjects in the Joint Declaration, only R&D was taken forward as a Streamlined Route. The terms of this Streamlined Route closely resemble the EU State aid provisions for R&D&I in the General Block Exemption Regulation ("GBER") but with much lower maximum subsidy value thresholds.
The Local Growth exemption allows grants of up to £400,000 to SMEs for business development projects, with an intervention rate of between 95% of eligible costs for start-ups and 15% for medium enterprises. The Energy Usage exemption allows awards of up to £15m for Green Heat Networks and up to £3m for energy demand reduction projects.
The Streamlined Routes published so far have been used under 400 times since the UK Subsidy Control regime was established, with the national transparency database recording that the:
- Local Growth Streamlined Route has been used 3 times;
- Research, Development and Innovation Streamlined Route has been used 391 times; and
- Energy Usage Streamlined Route does not appear to have been used.
This is c. 2.15% of the 18,257 subsidies listed so far on the national transparency database. In 2019, around 95% of EU State aid law measures proceeded under the cover of block exemption such as the GBER. As a result it appears there is a material difference between how the majority of subsidies are administered under the UK and EU systems.
In assessing the data, it should be noted that there is no obligation to declare awards via the Streamlined Routes of under £100,000 on the national transparency database and public authorities also have three months in which to satisfy their transparency duties. Therefore it is to be expected that there will be some additional awards made under the Streamlined Routes that have not been made public at this time.
Why are Streamlined Routes important?
Streamlined Routes are useful for smaller, lower risk and regularly encountered types of subsidies because they provide added legal certainty and reduce the level of administration for funders and recipients alike.
This is because funders have the confidence of knowing that a subsidy award which satisfies the conditions of a Streamlined Route is regarded to be automatically lawful and does not require an individual examination under the Subsidy Control Principles set out at Schedule 1 of the Subsidy Control Act 2022. Individual assessments under the Subsidy Control Principles are often complex and involve a high degree of subjective assessment of difficult economic and financial issues, in addition to competition assessments, which many public authorities are ill-equipped to do. To illustrate this, a £100 subsidy to a business that has no remaining threshold under the Minimal Financial Assistance route would require the funder to carry out bespoke assessment against the Subsidy Control Principles.
An additional factor is that where the terms of a Streamlined Route are met, a subsidy would not need to be notified to, and a view obtained from, the Competition & Markets Authority (CMA), before it is awarded.
As things stand, it is unlikely that anything permitted by the existing Streamlined Routes would need to go to the CMA anyway on the basis the usual value threshold for this is £10m+, but Streamlined Routes could be used as a tool for minimising CMA referrals in specific situations considered unlikely to be particularly distortive, and of course Streamlined Routes set the conditions for compliance in the first place so can be as prescriptive as required to the levels of subsidy allowed as against eligible costs, and all other requirements.
In the EU system, the GBER contains a wide range of exemptions with comparatively high maximum subsidy thresholds which results in the large majority of subsidies in the EU (estimated at 95%) being provided with State aid law cover. This offers public authorities relative legal certainty and clarity, particularly because the relevant conditions for satisfaction tend to be clear cut and not at all as subjective as compliance with the Subsidy Control Principles. The European Commission has expanded the GBER in recent years, so that it now contains 80 exemptions and will run until 31 December 2026. Additional GBER categories include exemptions for 'Investment aid for energy infrastructure' and 'Connectivity vouchers'.
The UK regime has specifically set out not to recreate GBER. This is because of concerns about creating a 'cookie cutter' culture whereby public authorities go straight to exemptions, rather than exploring the flexibility which comes from individual and bespoke assessments using the Subsidy Control Principles. This was understood to be the policy rationale for creating only a few Streamlined Routes and limiting the maximum subsidy values they allow.
This is a legitimate policy choice but what it has resulted in is very limited use of the Streamlined Routes that have been adopted. It has also led to public authorities spending time and money on administering subsidies that have not been particularly controversial and which would have, under EU State aid law, routinely passed through under GBER without difficulty.
This is the case even though the Statutory Guidance to the Act includes wording to the effect that assessments under the Subsidy Control Principles should be proportionate to the risk of distortion presented. Unfortunately such wording offers no legal certainty as to what is the precise legal standard of assessment required. In our experience, public authorities normally insist on thorough assessments against the Principles in order to avoid being criticised in the event of a challenge.
What needs to change?
The opportunity to make improvements to Subsidy Control law should be taken. Nearly two years have passed since the regime was introduced and stakeholders have had the opportunity to evalutate its strengths and weaknesses.
In respect of Streamlined Routes, this does not necessarily mean the UK should replicate the GBER or adopt a GBER-lite Streamlined Route. The policy choice not to do this was taken in order to encourage public authorities to make greater use of the flexibilities within the UK system. This position has merit.
That said, as the regime matures it is right to evaluate whether the UK has secured the right balance between Streamlined Routes and Subsidy Control Principles assessments.
Our view is that the UK doesn't have the right balance at this time. We consider the contrast between the proportion of State aid enacted under GBER (95%) against the proportion of subsidies enacted under Streamlined Routes (2.15%) to indicate that there is an opportunity to use Streamlined Routes for a greater number of low risk, uniform awards.
Better targeted Streamlined Routes would reduce the level of administration faced by public authorities. It would save cost as well as enabling many measures to be awarded more quickly.
The absence of targeted Streamlined Routes may result in the adoption of a proliferation of individual subsidy schemes by different public authorities. Subsidy schemes are allowed by the Act (as they are in EU law) and offer a basis for multiple subsidy awards with minimised administration. However this cedes control of the design of such schemes and their respective conditions to the public authorities adopting them, and also creates a risk of different conditions applying to similar activities in different parts of the UK. If there was a greater availability of Streamlined Routes for relatively routine activities then the incentive for public authorities to adopt their own subsidy schemes would be reduced.
Fundementally the point of a Streamlined Route is to offer clarity and legal certainty to public authorities, providing cover for the award of low risk, routine subsidies provided these meet the relevant conditions.
Streamlined Routes are not there to deal with complex and sensitive scenarios which will always default to the Subsidy Control Principles, and to CMA referral in high value or high risk of distortion cases.
This would remain the case if the UK introduced more Streamlined Routes, albeit always noting that the maximum subsidy value allowed in each case is a critical point for the Streamlined Route's value to the market.
Conclusion
Now that over 650 days have passed since the Subsidy Control regime came into force, stakeholders across the regime have built up experience to make an informed assessment about what works well and what doesn't.
We therefore consider it an opportune time for the Government to launch a consultation inviting stakeholders to put forward ideas to improve the Subsidy Control regime, including what kind of Streamlined Routes they want in place, inputting on the range of activities that might be covered and maximum subsidy value. More Streamlined Routes would also bring a greater degree of consistency to assessments across the UK single market, noting that even if more did exist they would not represent any compulsion to use them if public authorities wished to do something different and apply their own judgement against the Subsidy Control Principles.
A consultation would be an opportunity for public authorities and potential beneficiaries to make the case for particular Streamlined Routes for example, covering culture, museums and heritage. It would also provide the opportunity for the CMA to input into the process, identifying particular conditions which add to the effectiveness of such exemptions and limit the risk of distortion of competition specific to each category.
It might be prudent to go further, inviting other suggestions on how to improve the UK Subsidy Control regime, whether that be upgrading the functionality of the national transparency database or including an obligation to consider the environmental impact of measures when assessing Principle G. Ultimately the entire economy can benefit from an effective Subsidy Control regime - a consultation into improvements, such as the introduction of more and better targeted Streamlined Routes could reduce the level of administration involved in many lower risk awards, whilst improving legal certainty.
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