Chapter 6: Future UK policy: State aid
The impact of EU State aid rules in the UK
170.As we noted in Chapter 2, witnesses drew our attention to various issues experienced by UK bodies and authorities in relation to EU State aid rules, and noted that the opportunity for greater freedom in the provision of State aid outside the EU had featured in the UK’s 2016 EU referendum debate.188
171.Given the public debate on this matter, we expected to receive greater evidence on the possibility for the Government to pursue a more ‘interventionist’ approach to State aid post-Brexit. Most witnesses to this inquiry, however, were keen to emphasise that, despite frustrations with the application of the rules, it was unclear how far they had actually curtailed successive UK Governments’ ability to grant State aid.
172.UKSALA observed that the UK (under both Labour and Conservative Governments) had played a significant role in shaping EU State aid policy, and had generally been “vigorously” supportive of the EU’s overall policy approach. While acknowledging that delays could be frustrating to Ministers, UKSALA argued that “checks and balances [were] not always a bad thing”, and that the discipline imposed by the EU regime often resulted in a “significantly improved policy”.189
173.Prof Fothergill told us:
“The fundamental problem that we face in Britain at the moment is less the EU rules and more the failure of the UK Government to exploit the present rules to the full”.190
A similar view was reflected in the Coalition Government’s 2014 Balance of Competences review, in which stakeholders attributed the perceived problems with EU State aid rules to “an over-interpretation or under-interpretation at national level of what was allowed, either too laissez-faire or too restrictive”.191 Berwin Leighton Paisner suggested that “Ministers have sought to hide behind the State aid rules as a reason for not pursuing interventions”, and that the recent steel crisis was an example of this.192
174.Several witnesses pointed to the historic disparity between the amount spent by the UK on State aid and that spent by other Member States. Oxera, for example, told us that the UK spent on average €100 per capita on State aid between 2009 and 2015, compared to €181 per capita in Belgium, €224 per capita in France, and €266 per capita in Germany over the same period. This implied that the EU State aid rules had not been a “significant limiting factor in UK policy interventions”.193
Figure 1: Total State aid expenditure as % of GDP in 2015, less railways
Source: European Commission State Aid Scoreboard 2016 (16 November 2016): http://ec.europa.eu/competition/state_aid/scoreboard/technical_note_en.pdf [accessed 24 November 2017]
175.Witnesses pointed to the UK’s positive record in securing approval for State aid measures notified to the Commission. Herbert Smith Freehills highlighted the Commission’s approval of the UK Government’s “support package” for the construction of the Hinkley Point C nuclear power station in 2014 as an example of how EU rules had been “sufficiently flexible to enable UK State intervention in a number of significant and novel cases”.194
State aid and the future UK-EU trade relationship
176.The European Council’s guidelines for negotiating the UK’s withdrawal from, and future relationship with, the EU specify:
“Any future free trade agreement must ensure a level playing field, notably in terms of competition and state aid, and in this regard encompass safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices”.195
In light of this—and to avoid having to justify potential competition from subsidised UK businesses to EU voters—UKSALA was confident that State aid controls would be a ‘red line’ for the EU in trade negotiations with the UK.196
Precedents for State aid control in EU trade agreements with third countries
177.Herbert Smith Freehills explained that there were two principal forms of State aid control in existing EU FTAs with third countries:
(a)‘Parallel’ State aid systems, substantially equivalent to the EU’s State aid regime; and,
(b)‘WTO plus’ systems, which extend the WTO rules for subsidy control.197
Parallel systems
178.The recent Ukraine-EU Association Agreement could be a model for the type of parallel State aid system the EU will seek for its future relationship with the UK. Baker McKenzie explained that, under this agreement, Ukraine had to implement a domestic system of State aid control with “an operationally independent authority”, and to apply State aid rules using sources of interpretation including the CJEU and Commission frameworks and guidance. Ukraine and the EU also agreed to report to each other annually on the State aid each has granted.198
179.Mr Peretz observed that these provisions did “not look like a relationship of equals”: it was “clear who [was] following whom”. He noted that the UK had “been faithfully applying the State aid rules for a very long time”, and so might be able to “get something that looks a little less uneven” in any UK-EU FTA.199
180.Eversheds Sutherland (International) pointed out that parallel State aid systems in recent EU trade agreements applied to countries “interested in achieving full EU membership”. Although this would not be the case for the UK, they thought that the EU might still “seek to ensure that any access to its internal market, is conditional on approximation of various EU competition law requirements including in relation to State aid legislation”.200
181.COMBAR pointed out that Switzerland was an exception to the general requirement to comply with EU State aid rules.201 Hogan Lovells explained that there were some State aid provisions in the 1972 EU-Swiss FTA and the 1999 EU-Swiss air transport agreement, but neither of these agreements contained enforcement powers, and Switzerland was not required to establish a national enforcement authority to ensure compliance.202 Mr Peretz, however, emphasised that the EU had expressed “extreme unhappiness” over its arrangements with Switzerland on State aid. It was “very unlikely that the EU would extend that historical accident to us”.203
‘WTO plus’
182.Herbert Smith Freehills pointed to the EU-South Korea FTA and the EU-Canada Comprehensive Economic Trade Agreement (CETA) as examples of the ‘WTO plus’ model, though the two agreements provided for very different systems. The EU-Korea FTA “supplements the WTO anti-subsidy rules by adding to the list of so-called prohibited subsidies”, while the CETA only enhances procedural provisions such as reporting obligations. Herbert Smith Freehills noted that these agreements did not require the establishment of a State aid enforcement authority, but also that they did not “envisage market integration akin to that within the EU internal market”, which the UK may seek to achieve after Brexit.204
183.UKSALA concluded that State aid controls would probably form a key part of any future “deep and special” partnership between the UK and the EU, but argued this should not necessarily be regarded as “an unwelcome price” for the UK, given that such rules would also “serve a number of important purposes within the United Kingdom”.205
State aid under WTO rules
184.As Alan Davis, Head of the Competition, EU & Trade Group at Pinsent Masons, pointed out, in a ‘no deal’ scenario the UK would still be bound by obligations under the WTO’s anti-subsidy regime.206
185.Prof Biondi explained that the central element of this regime was the Agreement on Subsidies and Countervailing Measures (ASCM), which contains specific provisions to prohibit subsidies and defines a ‘subsidy’ under broadly similar terms to those in Article 107(1) TFEU.207 On the other hand, several witnesses emphasised the significant differences between the WTO and EU regimes, including that:
- The provisions on subsidies in the ASCM only apply to goods (not services)208;
- The ASCM has no mechanism for ex ante approval, so there is the risk that subsidies given will subsequently be deemed illegal;
- EU rules allow businesses and individuals to bring State aid complaints to the Commission—and to bring claims in national courts—while the WTO relies on state-to-state enforcement, so businesses who believe there has been a breach of ASCM rules have to persuade their government to take action on their behalf;
- The EU emphasises the removal of anti-competitive effects through the recovery of illegal State aid. By contrast, the WTO focuses on dispute resolution by a requirement to withdraw the measure in question (without the need to repay aid received to date) or by the use of trade defence instruments (TDIs). TDIs are typically duties imposed on imported goods sold below market price (anti-dumping measures) or to offset subsidies given to the producers of those goods in their countries (anti-subsidy, or countervailing, measures);
- Unlike the EU, the WTO has no concept of an ‘approvable’ aid with benefits (such as public interest grounds) that can be balanced against any negative effect on trade;
- The ASCM’s ‘threshold’ for complaint is high—to obtain a decision terminating a subsidy, complainants must prove the existence of serious threat to the interests of another WTO member as well as the impairment of market access.209
186.There was general agreement that the WTO subsidy rules were more limited than those of the EU, though some witnesses questioned how far operating under the ASCM would change levels of state funding provided in the UK. Dr Chirita told us that favourable tax arrangements, for example, could still be considered a subsidy under WTO rules, while BEIS thought that WTO members would be likely to challenge subsidies either to industries which had world surpluses (such as steel), or to highly competitive sectors like the automotive industry.210
187.Oxera also questioned the economic desirability of the UK using any freedom offered by ASCM rules to “unilaterally [increase] the level of state support or selective tax benefits to industry”; any such action would require analysis of potentially distortive effects on competition.211
188.Dr Wardhaugh argued that it would be a “grave error” for the UK to use Brexit as an opportunity to encourage export industries and national champions, as this would be “susceptible to capture by rent-seekers”, who might seek to secure a “monopoly for themselves or protection for their industry”.212 Eversheds Sutherland (International) believed that this approach would also be inconsistent with the Government’s message that international businesses would able to “compete on the UK markets on the basis of a level-playing field” after Brexit.213
Devolution implications
189.BEIS drew our attention to the fact that the ASCM had no domestic application: “If only WTO rules applied there would be no State aid control within the UK. There would therefore be a risk of domestic subsidy races and distortions of competition between various parts of the UK”.214 Hogan Lovells also highlighted the risk of subsidy races between devolved administrations, noting that “EU state aid rules have ensured a degree of coherence of industrial strategy across the UK”.215 Most of our witnesses therefore agreed that the UK would need some form of domestic State aid regime, regulated at the national level.
190.Nonetheless, COSLA (representing Scottish local authorities), argued that a State aid regime developed and controlled by Westminster alone would be “at odds with the constitutional nature of the UK”, and unacceptable to the devolved administrations.216 A similar view was reflected in written evidence from the Scottish and Welsh Governments. The Scottish Government noted that the “effective functioning of the internal UK market [would] require close co-operation on State aid between all the UK administrations”, and emphasised it would be “vital” for the devolved administrations to be fully involved in developing the post-Brexit UK State aid regime.217
191.The Welsh Government also accepted there would be a need for “some form of domestic State aid authority … to oversee the UK internal market”, but stressed that the devolved administrations should be involved as “equal partners” in the development of a UK State aid framework. Any State aid authority would need to be seen to be independent of the UK Government, “in order to develop and retain credibility”.218
192.The Welsh Government also drew our attention to the principles agreed by the Joint Ministerial Committee (EU Negotiations)—the mechanism established for the UK Government to engage with the devolved administrations on Brexit issues—on 16 October 2017. At this meeting, the UK and devolved governments—with Northern Ireland represented by the Parliamentary Under Secretary of State for Northern Ireland and a senior civil servant from the Northern Ireland Civil Service—agreed that common frameworks setting out a UK, or GB, approach should be established in areas where EU law currently intersects with devolved competence, in order to ensure the functioning of the UK internal market and compliance with international obligations after Brexit. The JMC (EN) agreed that any frameworks developed will:
- respect the devolution settlements, including that the competence of the devolved administrations will not normally be adjusted without their consent;
- maintain flexibility to tailor policies to the specific needs of each territory; and,
- lead to a significant increase in decision-making powers for the devolved administrations.219
We note that these issues remain under discussion, including in the context of Clause 11 of the European Union (Withdrawal) Bill, which limits the competence of the devolved legislatures to amend “retained EU law”, whether or not that law relates to matters that have hitherto been either devolved or reserved.220
193.Given the political situation in Northern Ireland it was not possible to receive evidence from the Northern Ireland Executive during this inquiry.
Options for UK State aid control
194.Mr Peretz expressed concern that the Government had said very little publicly regarding its position on State aid, suggesting that this silence “may, like the dog that did not bark in the night, tell you something”.221
195.Isabel Taylor, a Partner at Slaughter and May, noted that the EU (Withdrawal) Bill, as introduced, would incorporate the EU rule prohibiting State aid—unless notified to and approved by the Commission222—but not other aspects of the EU regime, and that the Bill did not specify what UK body would have the power to assess and approve State aid.223 Mr Peretz described this as a “deficiency”, which would need to be addressed by the Government “one way or another”.224
The need for a domestic State aid authority
196.The Law Society of Scotland told us that, if the UK chose to operate a system of State aid control, this would require a dedicated authority.225 Prof Biondi agreed, stating that the UK would need a domestic authority to “provide reassurance that public spending will be transparent, fair and not distort the market”.226 Eversheds Sutherland (International) believed that, if the UK adopted an EU model with an automatic prohibition on State aid pending assessment of compatibility with State aid rules, then an “independent regulator” would be needed to investigate proposed aids, decide whether they were compatible with whatever State aid rules the UK put in place, and to consider complaints.227
197.On the other hand, the CLLS Competition Law Committee did not think that a UK State aid authority would be needed to enforce subsidy agreements that “operated purely as part of an international trade agreement”, and suggested that any domestic State aid rules could be applied directly by the organisations involved with enforcement through UK courts.228 Berwin Leighton Paisner also thought that State aid enforcement should be “in the hands of judges”.229 UKSALA, however, strongly opposed this approach, arguing that courts would be “ill-equipped” to assess whether public policy objectives justified “the distortion of competition inherent in State support”.230
198.Dr Chirita suggested that “governmental action” would be sufficient to control State aid, but COSLA warned against a system where “one tier of government would be both regulator and beneficiary”. COSLA suggested that an “independent, partnership based regulator” would be “more in line with the political and constitutional realities of the UK”.231
199.If the UK decided to establish a domestic State aid authority, the CLLS Competition Law Committee thought the CMA would be the “obvious candidate”. There was a “strong logic for grouping expertise on State aid control with other aspects of competition policy and enforcement”.232 UKSALA said that the CMA already had “the necessary combination of legal, economic and policy expertise”, and its “independence is widely recognised”.233
200.On the other hand, the BICL suggested that taking on the role of State aid authority could strain the relationship between the CMA and the Government, particularly if the CMA took “enforcement action against the Government for providing unlawful State aid”.234
201.When we put the possibility of expanding the CMA’s remit to include State aid, Lord Currie told us that the CMA was “not pitching for extra work”, but he could see that it was a task that might have the CMA’s “name on it”.235
202.The wider post-Brexit institutional competition framework is discussed in Chapter 7.
The EEA model
203.The Government has ruled out the possibility of UK membership of the EEA after it leaves the EU.236 Nonetheless, Mr Peretz believed the UK could still “dock in” to EEA membership for the purposes of State aid. He acknowledged that this would require the agreement of the other EFTA states, which might be “politically difficult”.237
204.Prof Biondi explained that, under the terms of the EEA Agreement, the EFTA Surveillance Authority (ESA) undertook a State aid function “almost identical to that exercised by the European Commission”, with judicial oversight provided by the EFTA Court.238
205.The UKSALA argued that using the EEA mechanism for State aid control “would be the most pragmatic approach”, and noted it would have the further advantage of preventing trade defence instruments between parties to the agreement.239
Administration of the future State aid regime
206.A number of witnesses considered how regional State aid could be administered more efficiently after the UK’s withdrawal from the EU. The LGA explained that regional support funds—including the European Structural and Investment Funds (ESIF), the Regional Growth Fund, and Enterprise Zone grants—have required “clearance under the EU’s regional aid regime”, and noted that after Brexit the Government would be able to “create its own approach to regulating regional aid”. The LGA argued that the UK’s future State aid policy should be simple to implement, including “light-touch notification and reporting requirements; rapid and transparent assessment and … a national training programme for local authority aid practitioners”. LGA also favoured a de minimis threshold of £500,000 over three years, compared to the current EU limit of €200,000 over three years.240
A local focus
207.COSLA saw Brexit as an opportunity to develop a more consistent, simple set of State aid rules, drawing on the accumulated knowledge of local authorities. They stressed that any UK new State aid regime should be designed “in partnership” with central, devolved and local governments.241
208.The LGA also called for successor arrangements to the EU regional aid funds to be “place-based to enable local areas to set their own priorities”. For example, the LGA said that if broadband were recognised as a “fourth utility alongside water, electricity and gas”—and UK State aid rules set accordingly—councils would be able to address current and future gaps in broadband provision through their own initiatives or public-private partnerships.242
209.The East of England European Partnership noted that ‘Assisted Area Status’ (for which see footnote 42 in Chapter 2) had been effective in “nudging investment towards otherwise overlooked areas”. However, they considered the EU rules were “quite restrictive”, and called on the Government to provide more flexibility for “differently sized companies” or to increase the “intensities of public aid that can be provided” after Brexit.243
The Government’s position
210.BEIS explained that the intention of the EU (Withdrawal) Bill was to “preserve the EU State aid rules and to give a UK body the power to police those rules”. They did not, however, clarify whether they intended that body to be BEIS itself, the CMA, or a new State aid authority.244 When asked about the option to extend the CMA’s remit to take on the role of State aid authority, the Minister said this was a possibility to which the Government would “have regard”.245
211.When pressed on the possibility that the EU (Withdrawal) Bill could create a ‘legal hiatus’ in relation to State aid authorisation, the Minister told us that the Government had “not arrived at a settled policy” on the UK’s post-Brexit State aid regime—though Bridget Micklem, Deputy Director for State aid Policy at BEIS, reassured us that the Government was clear it would need to have a policy by the time it got to “day one, or exit point”.246
212.The Minister was able to comment on the principles informing the Government’s consideration of its future policy on State aid. Firstly, she noted that the UK had “always been in the vanguard of supporting open markets”, and pointed to the Prime Minister’s Florence speech, during which she said: “Trying to beat other countries’ industries by unfairly subsidising one’s own is a serious mistake”.247
213.Secondly, Ms James emphasised that the Government wanted to ensure there would be no distortions of competition within the UK, so that “wealthier areas are not simply able to outspend other areas without regard to the interests of the UK as a whole”. The Minister was also “very mindful indeed of our responsibility to involve the devolved administrations closely” in discussions on the UK’s future State aid policy.248
Conclusions
214.While it is clear that the EU’s State aid rules have been the source of some frustration in the UK, successive Governments have found them flexible enough to provide support for major projects. Moreover, other EU Member States spend significantly higher sums on State aid. This indicates that the EU rules have not been the decisive factor in limiting State aid in the UK, during the time it has been an EU Member State.
215.The EU has, in almost every case, insisted that trade agreements with third countries include some form of controls on State aid, and it is highly likely that any deep and comprehensive UK-EU Free Trade Agreement (FTA) will include State aid provisions. There is also likely to be a link between the level of access to the Single Market the UK hopes to secure and the degree of coherence with the EU State aid regime the UK is required to maintain.
216.If no agreement is reached with the EU—or in the unlikely event that the agreement does not contain State aid provisions—the UK will still be bound by its obligations under the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (ASCM). This would be a less intrusive system of subsidy control than the EU regime, but the extent to which it would change levels of state support in the UK is questionable.
217.We recognise that after the UK leaves the EU there may be domestic pressures for a more interventionist industrial strategy with greater use of State aid measures at national, devolved, and local levels. On the other hand, should the Government significantly increase State aid to UK businesses, this could undermine the UK’s ambition to become an open, global trading nation after Brexit. We therefore welcome the Prime Minister’s assurance that the Government will not attempt to “beat” other countries’ industries by unfairly subsidising our own.
218.The ASCM has no domestic application and therefore would not regulate State aid within the UK. Outside the EU, a UK-wide State aid framework will be necessary to avoid the risk of domestic subsidy races and distortions of competition between various parts of the UK. A UK State aid authority may also be required in some form, whether by extending the remit of an existing authority or creating an entirely new entity. We note the possibility that the CMA could take on this role but also that it has no experience in this activity. It would also be important to ensure that such an extension of the CMA’s remit did not detract from its existing responsibilities.
219.In developing this framework, the Government should take into account calls from local authorities for a less complex and burdensome approval process than under the current EU regime. The Government should also involve and secure the support of the devolved administrations in this process, including in agreeing the terms of reference, remit and priorities of any new UK State aid authority. It was made clear to us that any approach where the UK Government was perceived to be both ‘rule maker’ and ‘rule taker’ would probably be unacceptable to local and devolved governments.
220.The EU (Withdrawal) Bill, as introduced, seeks to preserve the general prohibition on unapproved State aid, but does not specify what approval mechanism State aid would be subject to after Brexit. We urge the Government to clarify this omission, and its position on the shape of the future UK State aid regime, as soon as possible, to provide certainty to local authorities and businesses.
188 See for example written evidence from Herbert Smith Freehills LLP (CMP0029). See also ‘The Labour case for a leave vote in the EU referendum’, The Guardian (21 June 2016): https://www.theguardian.com/politics/2016/jun/21/the-labour-case-for-a-leave-vote-in-the-eu-referendum [accessed 20 December 2017]
191 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Competition and Consumer Policy Report (Summer 2014): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332779/Review_of_the_Balance_of_Competences_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 5 December 2017]
193 Written evidence from Oxera (CMP0012). Oxera’s analysis of these figures was based on the European Commission State Aid Scoreboard 2016 and population data from the World Bank.
194 Written evidence from Herbert Smith Freehills LLP (CMP0029). See also European Commission, ‘State aid: Commission concludes modified UK measures for Hinkley Point nuclear power plant are compatible with EU rules’ (8 October 2014): http://europa.eu/rapid/press-release_IP-14-1093_en.htm [accessed 28 November 2017]
195 European Council, Guidelines following the United Kingdom’s notification under Article 50 TEU (29 April 2017): http://www.consilium.europa.eu/media/21763/29-euco-art50-guidelinesen.pdf [accessed 4 December 2017]
197 Written evidence from Herbert Smith Freehills LLP (CMP0029). Herbert Smith Freehills further noted that parallel State aid systems were found in the EEA system (Norway, Iceland and Liechtenstein), EU trade agreements with current accession candidate countries (Albania, Macedonia, Montenegro, Serbia and Turkey), and EU trade agreements with other Eastern European countries which might become accession candidates (Bosnia and Herzegovina, Kosovo, Moldova and Ukraine).
208 We note the particular relevance of this in the UK context, as services account for around 80% of UK GDP and the UK is the second largest exporter of services in the world. See European Union Committee, Brexit: trade in non-financial services (18th Report, Session 2016–17, HL Paper 135)
209 See written evidence from the Competition Law Committee of the City of London Law Society (CMP0017), the Department for Business, Energy and Industrial Strategy (CMP0041), Prof Andrea Biondi (CMP0011), and EEF, the manufacturers’ organisation (CMP0016), and Q 3 (George Peretz)
210 Written evidence from the Dr Anca Chirita (CMP0013) and the Department for Business, Energy and Industrial Strategy (CMP0041)
216 See QQ 40–41 (Prof Steve Fothergill) and written evidence from Herbert Smith Freehills LLP (CMP0029), UK State Aid Law Association (CMP0008), The Law Society (CMP0037) and COSLA (CMP0033)
219 Joint Ministerial Committee (EU Negotiations), Communiqué (16 October 2017): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/652285/Joint_Ministerial_Committee_communique.pdf [accessed 28 November 2017]
220 European Union (Withdrawal) Bill, clause 11 [Bill 5 (2017–19)]
222 Using powers conferred under Clause 4 of the Bill: see the Explanatory Notes to the European Union (Withdrawal) Bill, clause 4
236 See Prime Minister Theresa May, Speech on a new era of cooperation and partnership between the UK and the EU, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 23 November 2017]
240 Written evidence from the Local Government Association (CMP0021)
The ESIF include the: European regional development fund, European social fund, Cohesion fund, European agricultural fund for rural development, European maritime and fisheries fund. They are jointly managed by the European Commission and the EU countries.
The Regional Growth Fund provides financial support for private enterprises in England with the intention of creating sustainable jobs.
Enterprise Zones are designated areas across England where businesses may benefit from tax breaks and Government support.
242 Written evidence from the Local Government Association (CMP0021). We note that ‘aid for broadband infrastructures’ is one of the categories of aid covered by the GBER Regulation with investment allowed to cover broadband-related civil engineering works and for the deployment of: passive broadband infrastructure, basic broadband networks, and next generation access networks. (OJ L 187, 26 June 2014)
247 QQ 48–52 (Margot James MP) and Prime Minister Theresa May, Speech on a new era of cooperation and partnership between the UK and the EU, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 23 November 2017]