How the Subsidy Control Act 2022 has impacted UK social housing sector and regeneration projects
The UK subsidy control regime is a little over 18 months old, but it is already making its presence felt in the area of social housing and regeneration projects. Procurement and subsidies expert Brendan Ryan looks at its impact.
The Subsidy Control Act 2022 (the Act), which came into force at the beginning of last year, replaced the legacy EU state aid rules, other than in very limited circumstances. While both regimes share many substantive principles (even if the terminology has changed), they are unrecognisable from each other in terms of procedure.
The Act requires that most subsidies given by public authorities should be assessed against a range of provisions set out in the legislation, including seven subsidy control ‘principles’. Subsidies given for energy and environmental reasons must also be assessed against a set of nine further principles relevant to those sectors. Exemptions exist, including for very low value subsidies, natural disasters and ‘exceptional circumstances’, economic emergencies and certain tax measures.
In very broad terms, the principles are designed to ensure that subsidies serve a public policy objective; are necessary; are designed to be limited to the minimum necessary; are proportionate; and to ensure that the granting public authority has identified and minimised any competitive effects and weighed up the benefits of the subsidy against any negative impact (in terms of competition or investment, for example).
How and why subsidies are reviewed by the Subsidy Advice Unit
In the case of relatively high-value subsidies (above £10 million lower in some cases) these assessments must be submitted to the Subsidy Advice Unit (SAU) – which is part of the Competition and Markets Authority – before the subsidy can be given. If the assessment meets certain statutory requirements in terms of its content, the SAU will then review the assessment, invite comments from third parties and publish an advisory report within 30 working days.
Importantly, the SAU cannot ‘approve’ a subsidy in the same way that the European Commission can under the EU state aid regime.
While SAU reports are technically non-binding, the Act permits aggrieved parties to bring a challenge to the Competition Appeal Tribunal, including on the basis that they believe that a subsidy does not comply with the subsidy control principles. A successful challenge could result in a subsidy having to be repaid, together with interest. Accordingly, a prudent public authority would need a compelling reason not to follow the SAU’s advice.
Impact on grant recipients
Whilst the statutory obligation to prepare an assessment of compliance (and, if necessary, to submit it to the SAU) rests with the public authority granting the subsidy, in practice there will very often be a need for the recipient and its advisors to participate, to a greater or lesser extent, in preparing the assessment. Given the very significant commercial risk that lies with subsidy recipients, they too clearly have an interest in getting a positive SAU report, or in ensuring that negative reports are acted on by the public authority. This applies also to social housing providers who might be in receipt of funding from central government or other public sector bodies.
We have even seen recent examples in practice of central government authorities making it a condition of grant funding that the recipient ensures the funding is compliant with the subsidy control principles.
Key takeaways for future subsidy assessments
To date, there have been a number of SAU reports which relate specifically to funding for social housing and regeneration projects. These include a proposed Homes England subsidy to Barking Riverside, the Social Housing Decarbonisation Fund (Wave 3), the Welsh Government’s Social Sector Medium and High-rise Fire Safety Scheme, the Greater London Authority’s Refugee Housing Scheme, and subsidies which form parts of the Digbeth regeneration in Birmingham and the Brent Cross and Cricklewood regeneration in London.
Although it can sometimes be challenging to distill key points from an SAU report given that the underlying submission is not published, there are a number of general points which parties should be aware of in preparing their assessments (which will also apply to assessments for lower value subsidies not referred to the SAU):
- Viability gaps: For projects in which the need for a subsidy is justified on the basis of a viability gap, the public authority and recipient should work together to produce robust evidence both for the existence and the size of the viability gap. The SAU would most likely expect to see some independent verification of the analysis and / or evidence that the public authority has tested any commercial hurdle rate (expected rates of return) on which the recipient relies.
- Alternatives to a subsidy: Assessments should explain why a subsidy is necessary by methodically excluding all other possible non-subsidy options. Depending on the circumstances, this might include a commercial loan, equity investments or joint ventures, selecting the recipient by competitive tender or regulatory solutions. Don’t assume that the SAU understands your market in detail and so all options should be considered and discounted, even if they might seem obvious. Informal pre-referral discussions with the SAU can help to mitigate the risk of any misunderstandings in this regard.
- Competition analysis: A feature of the new regime is the increased attention on the competitive impacts of a subsidy, which sometimes requires input from economic advisers (particularly for higher value subsidies). Assessments should clearly identify the markets that would be affected by a subsidy including, where appropriate, the geographic market. Competition assessments have been identified as an area for improvement in a significant number of SAU reports.
- Funding from multiple sources: One of the principles requires that subsidies should be proportionate to their public policy objective. In a number of recent reports, the SAU has pointed out that where a recipient receives funding from different sources for the same project, the assessment should take account of the cumulative value of the subsidies when assessing proportionality.
- Confidential information: Parties should be aware of the SAU’s rules on the treatment of confidential information. Given that the grant recipients typically have no direct interaction with the SAU, any confidential information provided to the public authority should be clearly flagged at the outset, along with an explanation of why the information is considered to be confidential.
- Language of SAU reports: Whereas earlier SAU reports typically identified areas where assessments ‘could’ be improved, a welcome development in recent reports is the identification of areas which, in the SAU’s view, ‘should’ be improved. This clearly creates a hierarchy in terms of the importance which the SAU attaches to particular points. Another notable development is the increased focus on identifying positive aspects of assessments (not just areas for improvement). These positive points can be viewed as best practice in preparing future assessments.
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