On 26 January 2024 the Subsidy Advice Unit (SAU) within the Competition and Markets Authority published its report on a grant from the Department for Business and Trade (DBT) to BMW to facilitate its transition towards electric vehicles. The report identifies a series of problems with the subsidy assessment that DBT had undertaken that other public bodies can and should learn from.
Background
The Subsidy Control Act 2022 ("the Act"), which has been in force since 4 January 2023, introduced a new subsidy control regime which replaced the previous EU State aid system and represents a significant transformation to the landscape of subsidies.
A key aspect of the new regime, which gives effect to one of the UK's obligations under the UK-EU Trade and Cooperation Agreement, is the creation of the SAU. The primary function of the SAU is the provision of independent advice on certain types of subsidies or schemes which have particular potential to distort competition.
Where a subsidy or subsidy scheme is one of "particular interest" as defined in the Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022, the public authority must refer that subsidy to the SAU. Subsidies and schemes of particular interest include any subsidies which exceed £1 million on their own and over £10m when cumulated with related subsidies to the same recipient – see our previous blog here for more on subsidies and schemes of interest and particular interest. Subsidies that are "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.
Following referral, the SAU must review the assessment that the public authority has undertaken of whether the subsidy complies with the subsidy control principles set out in the Act, and publish a report detailing its observations and advice in relation to that assessment. According to its first annual update published on 1 February 2024 the SAU has already accepted 33 referrals of subsidies and schemes and published 28 reports.
Referral of the proposed subsidy to BMW
On 12 December 2023, the SAU accepted the referral from Department for Business and Trade for its proposed subsidy to BMW. The subsidy takes the form of a £75m grant (which as noted above meets the definition of a subsidy of particular interest), which will sit alongside approximately £500m in investment from BMW in new facilities at BMW's Plant Oxford to modify and adapt the plant to produce electric vehicles. Against the backdrop of the UK's ban on new internal combustion engine vehicles from 2035, DBT views the proposed BMW subsidy as pivotal in supporting the necessary investments in the industry's green energy transition. The subsidy was referred as a subsidy of particular interest based on both its size and the sector in which BMW operates.
SAU report
The SAU report on the BMW subsidy is critical in a number of respects of DBT's basis for concluding that the subsidy is consistent with the subsidy control principles. In particular:
Market failure
The SAU finds that the DBT assessment does not properly articulate or analyse the market failure or social inequity that the subsidy ostensibly seeks to remedy. The DBT identifies three points of "market failure", i.e. three positive externalities that the market would not deliver without the subsidy: the achievement of UK net zero targets, the social benefits of decarbonising the automotive sector, and "levelling up" benefits to central southern England. However the SAU notes that the first two of these do not require electric vehicles to be made in the UK, let alone by BMW at Plant Oxford, and the third is not a market failure.
It can be challenging for authorities to identify market failure and tempting to identify a failure of the market to deliver desirable social outcomes as market failure when it will often be simply a market operating efficiently. The SAU's report is a good reminder that granting authorities do not need to manufacture a market failure where it will in many cases make more sense to identify a social objective rather than an economic one.
Alternative approaches
The SAU notes that DBT's assessment concluded that a grant was necessary because a loan on commercial terms would not have been sufficient to ensure delivery of the subsidy's objectives, but points out that a grant and a commercial loan can be seen as two ends of a spectrum with multiple other options between them, for example loans on non-commercial terms, or the provision of guarantees to mitigate the cost of accessing financing from commercial lenders. Funders should consider all alternatives and not merely a "straw man" against which the intended subsidy looks preferable.
Counterfactual
The SAU suggests that DBT may have accepted BMW's counterfactual scenario (i.e. what it would do without the subsidy) as credible without testing it sufficiently. The report is also a reminder that counterfactual analysis should consider what other market actors would do in the absence of the subsidy, not only the recipient.
Competitive impact
The report also notes that DBT's assessment of the distortive effects of the subsidy on competition is fairly high level. It does not properly explain what the relevant markets and competitors are that would be affected and relies too heavily on the existence of other subsidies to BMW's competitors to balance out the distortion without fully analysing the extent to which BMW's subsidy is qualitatively different from what is available to others and might give BMW a competitive advantage as a result.
Concluding thoughts
As noted, the SAU's report is 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, however critical the report may be. Proceeding to grant a subsidy in relation to which the SAU has expressed concern would not be unlawful, but the subsidy may be at heightened risk of challenge by a third party.
The key lesson to take from this and other SAU reports, though, is that the assessment to be done under the Act requires detailed thought and a proper evidence base. The Subsidy Control Act gives public authorities much more freedom to give subsidies of all kinds than used to be the case under State aid rules, but using that freedom requires a lot of work and that will require the allocation of both time and resources. Once again, with greater power comes greater responsibility.
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.
Upcoming free event: The Subsidy Control Act: A Year in Review
On Tuesday 6 February we are hosting a free event in our Edinburgh offices in collaboration with the Scottish Competition Forum to discuss the first year of the Subsidy Control Act, featuring speakers from the SAU, Scottish Enterprise, Grant Thornton and Brodies. If you are interested you can register here.
