Seb Elsworth: New rules on subsidy control could significantly change how public bodies fund the sector

Energy and leadership from the sector will be needed to ensure that the new rules lead to more enabling interpretation than with state aid

It is possible that the government’s current consultation on future subsidy control may have passed you by.

Given the challenges of the past few months, for this you can be forgiven.

However, new rules to replace the EU’s state aid regime following the end of the transition period hold the potential for significant change to how public bodies fund the sector.

Making public subsidies available to private businesses or civil society organisations always has the potential to create market distortion and stifle competition. But they are also crucial tools in addressing market failures.

Getting this balance right is tricky. However, our sector can legitimately feel that the state aid regime resulted in a disproportionate fear of market distortion from public bodies, which has, at times, inhibited sufficient support from flowing.

The government is couching the new rules as giving the UK freedom to pursue its national interest and seeks to meet four broad objectives:

  1. Facilitating strategic interventions to support government priorities, likely to include pursuing policies such as the 'levelling-up' agenda, and supporting economic recovery post-Covid-19.

  2. Responding to the individual needs of home nations and the UK’s own internal market, suggesting that the government will want to prevent too much devolution on subsidy control.

  3. Protecting the UK’s “competitive and dynamic market economy”.

  4. Ensuring that the UK meets its international trade commitments.

This last point reminds us that, while the government is using the language of freedom, the UK is bound not only by the new free trade agreement with the EU, but wider World Trade Organisation rules also apply.

The approach proposed in the consultation to making subsidy available therefore has more similarities than differences to the state aid regime it replaces.

Just as in the past, a public body will need to apply four tests to determine whether a proposed payment counts as subsidy and is subject to the rules, one of which is that such a payment has the potential to distort competition.

If those tests are met, then the subsidy has to be approved or justified via a particular scheme, or be sufficiently small to be considered immaterial (“de minimis”).

So far, so familiar. However, there are also a few practical differences in what is being proposed.

One is that the possibility of market distortion may need to be considered within the UK itself (between home nations and regions) and not just between EU member states.

Second, and potentially useful to our sector, the consultation proposes a slightly higher de minimis threshold of about £340,000 over three years, and up to about £800,000 in emergencies (de minimis is the justification most commonly used to provide grant support to charities and social enterprises).

The approach also sets out how higher de minimis levels could apply to certain activities, such as providing social housing or rural transport, which the market cannot satisfactorily address – which, again, should chime with much of the work undertaken by our sector.

While similar rules applied under state aid, there seems to be scope for a broader interpretation of this in the new rule.

So while the rules themselves may not look radically different, the changes in tone suggested in the consultation may be significant.

Tone and interpretation has proved important over the years where we have seen inherently conservative application of state aid rules across the public sector.

Obscure case law, cautious lawyers, and a fear of breaking the rules that was out of proportion to the scale of any punishment which could follow, all aided this conservative approach.

So with this change in tone, and the fresh start of interpretation, there is the opportunity for a more proportionate application of the rules.

This could enable public bodies to be bolder in supporting charities and social enterprises which (in the vast majority of cases) are operating in response to market failure and so, by definition, will not distort wider functioning markets.

The prospects of challenge in such cases might also feel even more remote than it ever was from within the EU rules.

So while there are reasons to be hopeful about a new, more sensible, risk-based interpretation of subsidy rules, resulting in more grants and investments in the sector being considered to lie outside of the scope of the rules, there are two dangers.

First, that the application of market distortion assessment to potential distortion within the UK could result in similarly conservative judgements.

Second, as was always the case with state aid, the flow of public money downstream through layers of accountability still provides the potential for a conservative view, at any link in the chain, to lead to hands being tied at the front line, regardless of the merits of any particular case, and regardless of how far-fetched the argument of market distortion might be.

Energy and leadership from the sector will be needed to ensure that the new rules lead to more enabling interpretation, and that the fundamental role of our sector in stepping in when markets fail is recognised.

The government’s consultation ends on 31 March. It is certainly worth engaging with.

Seb Elsworth is chief executive of Access, a foundation that helps widen access to social investment for charities and social enterprises

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