In this post, Imogen Proud of Monckton Chambers provides a summary of the second in a series of six webinars on EU Relations Law (“EURL”) from Monckton Chambers on “The UK legal regime after Brexit – what every lawyer needs to know”. The second webinar was entitled: “Subsidy control law – navigating the new ‘post-state aid’ regime”.
The speakers were:
Chair: Professor Panos Koutrakos
The webinar covered the following topics: the subsidy control provisions in the EU-UK Trade and Cooperation Agreement (“TCA”); the implementation of those provisions into domestic law; the provisions of the Ireland/Northern Ireland Protocol; and the relationship with EU State Aid law.
Below is a brief summary of the discussion. A YouTube recording of the webinar can be found here.
Professor Panos Koutrakos began by describing subsidy control as “one of the most innovative and controversial features” of the TCA. He asked a series of eleven questions to members of the panel, and their answers are summarised below.
1. Is the absence of the term ‘State aids’ in the TCA significant?
Anneli Howard: When we look at the panoply of legislation that will cover ‘State aid’ there are two major shifts. The first is the lexicon and the deletion of EU terminology. The TCA makes no reference to ‘State aid’. We now refer to ‘subsidy control’. Likewise, we no longer refer to ‘undertakings’ but instead ‘economic actors’. We do not talk of aids being ‘selective’ but rather now ‘specific’. However, when we go through the provisions, the underlying concepts are strangely familiar.
That reflects the removal of EU state aid law from the domestic regime for England, Wales and Scotland by virtue of The State Aid (Revocations and Amendments) (EU Exit) Regulations 2020. Articles 107 and 108 TFEU and the accompanying state aid Regulations are not carried across as “EU Retained Law” so will no longer have effect. Instead, the UK will devise its own national subsidy control regime (which has not been published yet).
The second shift is the move to an international law framework. The TCA is just one trade agreement, which fits within a “global jigsaw”. Any public authorities, recipients or competitors will need to assess the subsidy, not just under the TCA but will also need to look to the WTO, the circa 40 ‘continuity FTAs’ which the UK has entered into or is entering into with other countries around the world, which will also have subsidy provisions. We need to be aware of the slight differences between those international agreements, for example the TCA covers goods and services, whereas the WTO covers goods only. There is also the prospect of the UK’s entry into the CPTPC to bear in mind. Lastly, even where a subsidy if given to an English entity, it make still engage the EU state aid regime if there is an effect on trade between the EU and Northern Ireland under the Northern Ireland Protocol.
2. What are the underlying principles in relation to subsidy control in the TCA?
Alan Bates: This is a big question, but there are potentially 4 key things to note:
First, the UK must have an effective system of subsidy control. Subsidies are to be granted only where they pursue a public policy objective and are proportionate. Subsidies should not compensate for costs which would have to be borne anyway in doing business. These considerations are similar to those of for the Commission when deciding when to authorise State aid.
Second, there is no requirement for ex ante control ie there is no requirement to obtain prior approval whether from the CMA or any other body. The Commission’s block exemptions strictly don’t apply either. UK authorities can effectively authorise their own subsidies.
Third, some forms of subsidy are simply prohibited eg aids in form of unlimited guarantees; subsidies for restructuring where this is not based on a credible restructuring plan. These prohibitions go beyond the specific prohibitions in the WTO rules.
Fourth, enforcement is available through domestic courts, which can make orders that subsidies be repaid by beneficiaries.
3.What does the new regime say about services of general economic interest?
Anneli Howard: This question is important because there are huge opportunities for foreign investors and operators in relation to public service contracts, government procurement and public-private partnerships (e.g., US interest in NHS or overseas investors in national infrastructure projects). Those arrangements tend to confer exclusive rights, creating automatically a powerful position in the market with the chance of spill-over or cross-subsidy in related markets.
We won’t necessarily have all of the Commission guidance or staff working papers that aided our interpretation of the State aid regime
Services of general economic interest are an often overlooked but very important sector of the market. Article 106 TFEU applies a prohibition on the creation or operation of national monopolies that are contrary to important Treaty rules like competition law, State aid and public procurement rules. There was a carve-out in Article 106(2) for services of general economic interest and services in the general interest (covering, for example, services justified by a wider policy justification, or environmental reasons, or by social diversity issues). Those provisions will continue to apply in Northern Ireland. For the rest of the UK, Article 106 TFEU has been carried across as EU Retained law (unlike Commission guidance and communications which will not be retained).
In Chapter 4 of the TCA, there are specific provisions for statutory monopolies, now called ‘covered entities’: including any enterprise which is more than 50% state owned or is granted special rights. When carrying out commercial activities (as opposed to non-profit making activities), they are obliged to prevent any distortion of competition. They are not allowed to discriminate against EU goods and services nor favour domestic goods and services. This carries across the spirit of Article 106(1) but the detailed EU rules no longer apply.
For SGEIs/SSGIs, there is a provision in Article 3.3 TCA allowing the government to set up designated entities that carry out tasks in the public interest (ie not just economic but also social). This is key, for example, to the government policy of ‘levelling up’ to overcome regional differences. There is a requirement that the award of any public service contract must be subject to certain principles in Article 3.4: it must be designed to address certain market failures or social difficulties, the level of compensation must be proportionate and must not exceed the reasonable costs of providing the service with a reasonable profit margin. The concepts and principles are familiar from Altmark but are nowhere near as detailed as the thresholds and requirements under the Commission’s SGEI guidance. This was a fiendishly complicated area, and the UK has the opportunity now to simplify the regime. We will wait to see how the UK develops its own regime.
4. What is the role of domestic courts in the new system?
Ben Rayment: There is a role for domestic courts. The TCA doesn’t impose an obligation to create a new court or tribunal, and therefore the Administrative Court, unless and until any enforcement powers are conferred upon the independent authority when established, will, for the time being, be the sole enforcer of the new subsidy control regime. The Court must be able to review the compliance of decisions by granting authorities, or the Independent Authority once that is established in accordance with the principles set out in Article 3.4. The standard to be applied will be the ordinary JR standard. In questions of economic assessment, the decision maker is afforded a margin of discretion/judgment. However, there will be rigorous scrutiny of the reasoning and the legal concepts involved.
The TCA imposes specific rules on standing. It allows for wide rights for competitors, trade associations, or any person whose interests “might be affected by the granting of a subsidy”. This is as wide as the domestic ‘sufficient interest’ test. Organisations like pressure groups will probably be able to bring challenges.
Remedies are a crucial area. The TCA says there must be effective remedies for breaches of domestic law. Those remedies are potentially prohibition, suspension, damages, and recovery. However, remedies are only available if they were available on the entry into force of the TCA. Those available only due to the European Communities Act 1972 will not be available, which means damages may not be available in the UK. Although the general principle is to retain existing remedies, there is a requirement to create a new remedy of recovery of subsidies unlawfully granted.
The TCA modifies the domestic limitation rules. The basic time limit is 1 month from publication of certain basic information about the subsidy. That information is required to be published within 6 months on an official website, which is still under construction. Tax cases have a longer limitation period. Interested parties have the right to ask for fuller information on the basis of subsidies. The effect of such a request is to extend limitation to 1 month from the provision of the further information. An area which may need attention in the future is the interrelationship between these limitation rules and those in other areas like public procurement.
5. What are the issues in relation to subsidy control and Northern Ireland?
George Peretz QC: Those who supported Brexit because they disliked the State aid regime may be disappointed that we now have two subsidy/State aid regimes instead of one: one in the TCA and one in the Ireland/Northern Ireland Protocol (“the Protocol”). Article 10 of the Protocol applies EU State aid law to any UK measures (acts of any UK public authority) but confines that application to measures that have an effect on trade between Northern Ireland and the EU in the area of goods (or electricity).
There is a dispute as to whether “effect on trade” has to be read in same way as is read by the Commission and the Court of Justice in the EU law context. The Commission’s Notice of 18 January 2021 says that the phrase is to be read in the same way as in Article 107(1) of the Treaty (“liable to” affect trade, and with a presumption of effect where a beneficiary operates on a market in competition with others), and goes on to say that it could catch measures that give an advantage to GB companies whose goods are on sale in NI. BEIS produced statutory guidance on 31 December 2020 which takes the view that Article 10 will only bite in much more limited circumstances: only where there is a “clear benefit from and a genuine, direct link between the subsidy and companies in Northern Ireland” (the grammar is odd in the original). This seems quite a gloss on both the text of Article 10 and on the EU declaration in the Joint Committee, and, though public authorities are required to have regard to the BEIS guidance (section 48(4) of the UK Internal Market Act), when they do so they may well take the view that it is overly robust (and NB that it would not bind a court, let alone the ECJ, which is the final arbiter here). In any event there is a real clash of guidance here between the Commission (which enforces Article 10) and BEIS: and beneficiaries are under no obligation to have regard to the BEIS guidance, let alone to prefer it to the Commission’s. Where they are advised that there is a serious risk that Article 10 applies, and where no block exemption applies, and where normally the answer would be to go to BEIS and persuade them to notify, this is tricky because the political pressure on BEIS not to notify will be immense: in some cases the result of BEIS refusal to notify may well be that beneficiaries and banks financing a project decide that the risk of breach of Article 10 is too great and pull out of the project.
6. What provision is made for dispute resolution?
Alan Bates: This is an interesting feature of the subsidy control provisions. The general dispute resolution procedures have been considered insufficient. The main additional possibility in relation to subsidy control is remedial measures, which are available where there is risk or there is believed to be a risk of an impact on trade and investment between the parties. A party who fears such a risk can give notice to the other party, which triggers a period of consultation of 60 days. If at the end, the party that feels aggrieved feels it has reliable evidence of harm, the economic actors can unilaterally impose their own remedial measures provided that measures are proportionate. There is a possibility for arbitration but this does not have a suspensive effect on the remedial measures adopted.
7. What provision is made for enforcement?
George Peretz QC: There is a requirement to establish an Independent Authority which must have “an appropriate role”. There are a number of things that Independent Authority could usefully do:
First, it could issue safe harbour block exemptions. This would mean a public authority need not even ‘go through the thinking process’ because that which is exempted is not capable of falling within the subsidy control provisions. There is an opportunity for these to be less rigid and artificial than the EU block exemptions, which are this way because they must apply across all Member States.
Second, it could issue guidance on how to apply the principles of subsidy control. This could be guidance to which the courts as well as public authorities must have regard, which the courts would be likely to welcome.
Third, it could have some form of ex ante powers, even if this was a voluntary system. Public authorities and beneficiaries could go to the Independent Authority to ‘get its blessing’ by means of a formal clearance decision in order to insulate themselves against subsequent challenge in court.
8. What approach will the courts take to the evidence which is required in challenges?
Anneli Howard: We don’t yet know the standard of review the courts will apply: either judicial review or an appeal on the merits. There is a trend at the moment towards Judicial review making that standard more likely. The TCC, in the Stagecoach rail franchising litigation, conducted a painful scrutiny of the evidence and the reasoning in the Secretary of State’s decision-making. It was not enough simply to present the ministerial submissions and key papers submitted – the Court wanted to know (and see the paper trail) for the exact considerations in the decision-maker’s mind at the time of the decision. In the Administrative Court too there is now a closer scrutiny of the underlying evidence and the reasons for decisions. What we can say is that the authorities will need to support their decisions with a credible evidence base and a clear paper trail.
9. What factors will grantors and recipients of a subsidy have to worry about?
Ben Rayment: Grantors will find themselves in culturally a different regime where they are much more “on the front line”. They are taking the decision, not notifying someone else of the decision, and therefore have to “own the decision” and have a lot more responsibility. We will see how the role of the Independent Authority will impact upon this.
As regards recipients, the potential for recovery challenges is a concern. They may be worried about how high the hurdle is going to be for “impact on trade and investment”. They may be worried that if enough information about a ‘subsidy’ is not put into the public domain at the right time, there is a risk of challenge and recovery for some time hanging over them. We may see something like the voluntary disclosure notices in the area of procurement where people try to flush out potential challenges to get sufficient certainty.
In summary, the new regime has freedoms and opportunities but the downside of more uncertainty.
10. What can UK companies do when they see a UK competitor has been given subsidy or tax break?
Alan Bates:
First, look to the Northern Ireland Protocol. If the subsidy recipient is engaged in any trade in goods between NI and the EU then they may be able to rely upon the State aid rules.
Second, even under the TCA regime, there is plenty of opportunity for direct domestic enforcement by a UK based company in relation to aid granted to another UK company. The grantor must comply with publication requirements within 6 months. Interested parties (a term defined broadly in Art 3.76 TAC as being any natural or legal person whose interests might be affected by the granting of a subsidy) can then seek further information. That information must be provided by the public authority within 28 days. The challenger then has 1 month to bring a challenge by way of JR.
11.What could an EU company do if unhappy that a UK competitor had been granted a subsidy?
Anneli Howard: There are 3 main routes:
First, the Northern Ireland Protocol: Litigation involves legal risk, and the familiarity with the EU regime provides more legal certainty for challenges to any subsidy that has an effect on trade between the EU And Northern Ireland. Claimants could complain to the EU Commission that a State aid is implemented without notification and/or commence judicial review proceedings.
Second, public Enforcement under the TCA: This is lower cost, but it is state-to-state dispute resolution so there is an immediate loss of control. This involves a complaint to the Commission or their EU27 Government, asking them to invoke the dispute resolution provisions in the TCA. The private entity making the complaint has no direct rights of participation in that process even though they may be a competitor excluded from the market. There may be a way for private entities to have an indirect role and help to shape or influence the process. For instance, dispute resolution (which must be started on the basis of credible evidence). Complainants can help by providing detailed evidence of the economic advantage conferred or the distortion of competition and effect on trade which might help trigger the fast-track process for rebalancing measures. Or they can make use of the opportunities for consultation for which TCA provides as part of the conciliation or dispute settlement process (for example as interested parties, “relevant persons” or as domestic advisory groups and experts).
Third, private enforcement: There is a direct right of access to UK courts by bringing national proceedings under s.29 of the Future Relationship Act and challenging the subsidy for being contrary to the provisions of the TCA or the domestic regime.
What’s coming up next?
Full details of the entire Monckton webinar programme (and registration forms) are available here. The next webinar, on Thursday 4 February 2021 at 1pm – 2pm is entitled “Competition Law”. You can sign up here.
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