Subsidy Control Bill

Written evidence submitted by Rolls-Royce plc to the Subsidy Control Bill Committee (SCB02)

SUBSIDY CONTROL BILL 2021

Rolls-Royce plc (R-R) pioneers cutting-edge technologies that deliver clean, safe and competitive solutions to meet our planet’s vital power needs. We are a significant contributor to the UK economy across our Civil Aerospace, Defence and Power Systems businesses.

We welcome the chance to comment on certain aspects of the Bill. We have interacted frequently with EU state aid law. We took the opportunity to input comments at earlier stages of the legislative process. At this stage, we’d like to focus on a few key points, as below. We’d be happy to discuss these further, including the practical impact of these points on R-R and the wider UK aerospace industry.

1. Section 24: definition of "ailing or insolvent" enterprise

· Being classed as an "ailing or insolvent" enterprise entails significant restrictions on the sorts of subsidies that can be given. We have no objection to that. It is reasonable that subsidies should not be given to prop up failing or inefficient businesses.

· There is a similar EU law concept of "undertakings in difficulty". The definition there is notoriously strict and arguably catches a number of companies which are facing short term problems but are well capable of trading through.

· We are pleased that the definition in the Bill differs from the EU law concept.

· We have a potential issue with one part of the definition, in s.24(1)(c), where an enterprise is "ailing or insolvent" where:

"the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities".

· Taken at face value, if applied on a "snap-shot basis" the formulation could at any point in time capture a number of viable businesses with good long-term prospects, who have taken on debt to fund long-term business plans. This could apply not only to companies with long-term business models and high R&D costs, but also start up companies which often take on significant debts to fund rapid growth.

· We note, though, that these words are identical to those in Section 123(2) of the Insolvency Act 1986, which states that:

"A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities."

· And we also note, that in relation to that test, there is a helpful line of case-law suggesting that the test should be applied in the light of all the facts available, and not on a "snap-shot basis". So for example in BNY Corporate Trustee Services Ltd v Eurosail-UK [2013] (Eurosail), the Supreme Court held that a court should be very careful not to leap to conclusions when being asked to apply the test. It said that allowance would be made for debts where the maturity date is some time in the distance, and uncertainty over exchange rates and hedging etc., meaning that the company stands a good prospect of being able to trade through and meet its liabilities as they fall due.

· We assume that Parliament’s intention is to apply the same approach to the test in s.24(1)(c) of the Bill that the Court has adopted to the same wording in insolvency legislation. But we would appreciate confirmation.

2. Section 11 : subsidies and schemes of interest and particular interest

· We note the procedural consequences of subsidies being classified as "subsidies of interest" and "subsidies of particular interest".

· One of the most difficult features of EU state aid law has been that, up-front approval by the European Commission has been burdensome and very slow.

· We do not object to the principle of optional or mandatory guidance by the Competition and Markets Authority (CMA) (depending on the categorisation of the subsidy). But we are conscious that, if "subsidies of interest" and "subsidies of particular interest" are defined too broadly, it could result in a partial return to some of the regulatory burden and delay that we have seen in the past.

· We note that the definitions are to be made by statutory instrument, and potentially by reference to subsidy value, and / or the sector in which the beneficiary operates.

· R-R’s aerospace and nuclear businesses particularly, operate in sectors with very high fixed costs, and where R-R is often the only player in the UK.

· We would appreciate definitions being drafted with that in mind, so that what was routine R&D assistance (through e.g. the Aerospace Technology Institute) does not in future require up-front rigorous scrutiny by the CMA, with the cost and delay that might involve.

3. Section 45 : national security

· We welcome an exemption for subsidies given for the purpose of safeguarding national security.

· We assume that "national security" will not be defined.

· Under EU law, complex case-law has developed around "dual use" products, and the limits on aid that can be given to companies which produce them.

· We would welcome more flexibility in this area under UK law.

Again, we would be happy to give more detail on any of these points.

Point of contact:

Helen Kennett, Director UK Government Relations, Rolls-Royce.

October 2021

 

Prepared 29th October 2021