On 28 March 2024, the Subsidy Advice Unit ("SAU")published its report to Transport Scotland concerning its proposed subsidy scheme for the "Network Support Grant" to bus operators (the "NSG Scheme").
Legislative context
The Subsidy Control Act 2022 ("the Act"), in force since 4 January 2023, conferred new powers on the Competition and Markets Authority to review and provide independent advice on certain types of subsidies or schemes which have particular potential to distort competition. It exercises those functions through its Subsidy Advice Unit ("SAU"). We have previously written about SAU reports on subsidies by Dundee City Council, the Department for Business and Trade and the Scottish Government/DLUHC.
Subsidy schemes are "umbrella" arrangements under which individual subsidies can be given. Provided that the scheme complies with the procedural and substantive requirements of the Act, individual subsidies are "pre-cleared" as long as they meet the conditions of the scheme. Subsidies and subsidy schemes that are "of particular interest" as defined in the Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022 must be referred to the SAU – see our previous blog here for more on subsidies and schemes of interest and particular interest. Subsidies that are simply "of interest" as defined in those regulations may be referred to the SAU but this is at the discretion of the public body giving the subsidy. In both cases the SAU's role is exclusively advisory.
Transport Scotland concluded that the NSG Scheme qualifies as a scheme of particular interest because at least one enterprise is expected to receive more than £10m under it. A referral to the SAU was therefore mandatory.
The NSG Scheme
The NSG Scheme takes the form of discretionary grants paid by Transport Scotland to approximately 300 bus operators across Scotland. The policy aims of the NSG Scheme are twofold: it primarily supports "bus operators running local bus services in Scotland to keep fares lower and the bus network more extensive than would otherwise be the case" and also supports the costs of operators delivering "community transport services",local transport services for those who cannot make use of conventional bus services.
The NSG Scheme has been in place since 1 April 2022 (before the Act came into force) and predecessor schemes such as the bus service operators grant have been in place for a long time. In anticipation of renewing the scheme for a further five-year period from 1 April 2024, Transport Scotland prepared its subsidy control principles assessment (the "Assessment") on which the SAU has now published its report.
The SAU's comments on the Assessment
The SAU noted that a key issue with the Assessment (as Transport Scotland acknowledged) was the lack of data and supporting evidence to underpin Transport Scotland's conclusions on the NSG Scheme's compliance with the seven subsidy control principles. This was a particular issue in relation to the counterfactual scenario identified by Transport Scotland (i.e. Transport Scotland's assessment of what would happen if the subsidy was not given). The SAU found that the Assessment would have benefited from further quantitative and qualitative evidence from a broader range of stakeholders (for example, a broader range of bus operators and local authorities).
While the SAU considered the Assessment's analysis in relation to the proportionality of the NSG Scheme to be"appropriate", it notably disagreed with Transport Scotland's assertion that the long history of such bus subsidies meant that there would not be any market distortion from simply keeping established subsidies in place for longer, since the distortion needs to be measured against the counterfactual(i.e. no subsidy) scenario and not the status quo ante. The SAU suggested that a more focused and "proportionate competitive analysis" by Transport Scotland would have identified the key beneficiaries of the NSG Scheme, the overall market structure (including how competition was already affected by the level of market concentration), and the effect on other transport modes.
The SAU found that the policy and equity objectives were"clearly set out" and the identified market failures were"plausible", but considered that the Assessment could have been improved by explaining how all of the claimed benefits of the NSG Scheme were linked to the specific policy objective of ensuring affordable and accessible bus services are available to the entire population.
Commentary
The SAU's reports are only advisory and it is ultimately up to the referring authority to decide whether to proceed with a grant that has been subject to SAU scrutiny, though proceeding to grant a subsidy where the SAU has expressed concern might invite a heightened risk of challenge by a third party.The less flattering a report is, the higher that risk may be.
Although the SAU's report in respect of the NSG Scheme was generally positive, and certainly not as critical as others it has issued,public authorities should note the reappearance of key themes including the need for detailed methodical analysis and a proper evidence base when drafting assessments of this type, as well as a stark reminder that the argument that "it's always been done that way" is not relevant to the distortive impact analysis.
Most authorities are still finding their feet in the new regime, but for any public body preparing a principles assessment –particularly one that is going to be scrutinised by the SAU – there is a lot of value in understanding the SAU's views on where other authorities have fallen short.
If you have any questions in relation to the above or in relation to the UK subsidy control regime more generally, please get in touch with Jamie Dunne, Charles Livingstone or your usual Brodies contact.
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