The UK’s new domestic subsidy control regime came into force on 4 January 2023, introducing a new way in which subsidies are determined and regulated.
We will be publishing a series of bitesize briefings which seek to explore the nuances and features of the new regime as set out under the Subsidy Control Act 2022 (“SCA”) and accompanying regulations. In this article, we will explore the rules on subsidies provided for services of a public economic interest.
Services of a Public Economic Interest (SPEI) are essential services provided to the public which could not be supplied by the market without a subsidy. Such services were previously referred to as Services of a General Economic Interest (SGEI) under the EU State aid regime.
Examples of the types of services which could be classed as SPEI are:
It is for a public authority to designate a service as a SPEI, and when doing so, it must be satisfied that:
The designation of a SPEI is dependent on the needs of the local community and the prevailing market conditions in which the SPEI is being delivered. Certain bus services in rural communities, for example, may be financially unviable and therefore designated as a SPEI, but the same type of service would not be designated as a SPEI if being provided in a city centre.
The Government’s guidance helpfully explains the substantive requirements, and procedural requirements for the compliance of these types of subsidy under the SCA.
The substantive requirements applicable to SPEI subsidies are:
1. Compensation (Section 29(2) SCA): A subsidy for the provision of SPEI should be regarded as a form of compensation for delivery of those services. Such compensation should be limited to the net costs of delivering the services, and the making of a reasonable profit. The basis for how compensation is calculated is ultimately down to the public authority’s discretion, but it must only cover the costs directly associated with the provision of the SPEI services. This can include a reasonable profit, which should determined by a benchmarking exercise.
2. Compatibility with the subsidy control principles (Section 29(8) SCA): Public authorities are still required to assess SPEI subsidies against the subsidy control principles (see Part 3 of our Subsidy Control Bitesize articles). However, if the subsidy is inconsistent with the principles, it may still be given if the principles prevent the SPEI services from being carried out (note this exception does not apply to the energy and environment principles).
The procedural requirements applicable to SPEI subsidies are:
1. Transparency (Section 29(2)-(4) SCA): The subsidy must be given in a transparent manner, which means either a written contract or other legally enforceable written arrangement and contain specific terms, including information on:
2. Regular review (Section 29(6)-(7) SCA): The subsidy should be regularly reviewed during the delivery period to ensure it continues to be limited to what is necessary to deliver the SPEI services. A public authority must take steps to recover any subsidy to the extent this goes beyond what is necessary. Such reviews should take place at least every three (3) years and at the end of the delivery period.
As set out in Part 2 of our Subsidy Bitesize Articles, a subsidy will be exempt where the total financial assistance given to the SPEI enterprise does not exceed £725,000 over the current financial year and two preceding financial years.
The SCA greatly simplifies the SPEI regime which we had under the SGEI EU State aid regime; the legal requirements for SPEI are set out in one section of the SCA, rather than over several communications and decisions from the EU Commission. Whilst the substantive requirements are similar, there is greater flexibility and discretion for public authorities in the designation of SPEI and the calculation of the compensation that is payable. It will be interesting to see how case law develops in this area, and whether the courts will be inclined to take into account any EU decisions when making their judgments.
If you have any further or specific queries in relation to the Subsidy Control regime, please do get in touch with our Public Sector Team.
