The Welsh Government’s scope to attract jobs and investment from other parts of the UK and internationally will be curtailed under new post EU state aid rule legislation.
The UK Government said its Subsidy Control Bill, currently going through parliament, is designed to effectively prevent the poaching of business and investment from one part of the UK to another - although it is not intended to capture subsidies that may substantially improve the attractiveness of investment in a specific area and thereby have an indirect effect of recipients relocating.
As well as impacting Wales, it could equally apply to say a local authority in the north-east of England seeking to use subsidies to attract say a manufacturing firm from Kent.
The legislation has been criticised by the Welsh Government, describing it as another example of the UK Government’s “assault on devolution”, alongside the post EU Internal Market Act and the successor to European Union structural funding in the Shared Prosperity Fund, which unlike EU funding will not be administered by the Cardiff Bay administration.
While grants and financial support from the Welsh Government is mainly focused on firms already based in Wales, funding is often used as a means of attracting investment and jobs from other parts of the UK and internationally.
Even if a particular subsidy is not caught by the new legislation, public authorities will still need to take into account its effects on other parts of the UK when assessing the subsidy against the principles.
The UK Government said public funding for a fintech skills programme to induce a firm say based in London to relocate to Wales, was an example of how disadvantaged locations could be made more attractive for investment. It said other examples could include subsidised office space in a particular town centre, or a grant to enable a firm to expand in a particular region and to employ staff in a disadvantaged group.
It said it will also not prevent levelling up subsidies that attract investment to disadvantaged areas.
On freeports, where an agreement between the UK and Welsh government is expected in a matter of weeks for their establishment in Wales, the Westminster government said they fall outside the scope of the bill as their subsidy principles were set out in the UK-EU Trade and Cooperation Agreement.
The UK Government said: “The Subsidy Control Bill seeks to empower all public authorities. It would in no way advantage English authorities over Welsh authorities – or vice versa - in any respect including in the ability to attract inward investment.”
However, a Welsh Government spokesman said; “The Subsidy Control Bill is yet another component of the UK Government’s assault on devolution. It reflects only the narrow political interests of the UK Government rather than the wider needs of the whole UK. Despite repeated requests to UK ministers for changes to be made, we’re still extremely concerned that the Bill could create two tiers of legislation across the UK and will make it more difficult to identify and support less advantaged regions.
“It will be the very opposite of ‘levelling up’ if the bill ends up making it harder to identify Mayfair from Merthyr. Without significant changes to the bill, it is not something the Welsh Government can support.”
The UK Government said the subsidy regime wouldn’t impact on the activities of the Welsh Government’s wholly-owned investment bank, the Development Bank of Wales.
While the majority of the development bank’s lending activity is focused on indigenous firms, it has used equity in particular to attract firms into Wales from other parts of the UK. It said that its investment activities were at market rates and in terms of equity deals it looked to private investors to invest on the same basis.
A spokesperson for the bank said: “We have taken advice on the draft Subsidy Control Bill as it relates to funds managed by the Development Bank of Wales. The bill states that financial assistance is only treated as a subsidy when it is provided on terms more favourable than might reasonably be expected on the market. Loans and equity investment from the Development Bank of Wales are offered on commercial terms and benchmarked with the market and we understand these do not qualify as subsidy.”
Partner with law firm Geldards, and who also heads up its public sector team in Wales, Bethan Lloyd, said: “The Subsidy Control Bill provides that financial assistance does not confer a subsidy if it is provided on terms that are no more favourable to the recipient than the terms one could reasonably expect to be available to the recipient on the market.
“This means that a loan provided at a market rate of interest will generally not involve a subsidy but, of course, a range of factors such as the borrower’s credit rating and the value of any security provided in return for the loan are relevant for determining what the market rate is in any particular case.
“This rule that a market terms transaction does not involve a subsidy is currently set out in black and white terms in the Subsidy Control Bill, without any caveats. It is interesting to compare the position under the EU’s state aid regime where there are certain caveats, since the fact that a transaction is aligned with market terms does not always guarantee that there is no state aid.”
Public authorities will be responsible for determining which subsidies are appropriate in any specific area, subject to the subsidy control principles. This, for example, requires the subsidy to address either a market failure or an equity objective, and to minimise distortions of competition.
The UK Government said it will provide guidance to support authorities in making these assessments. Certain subsidies that are more likely to cause undue distortion (as defined in regulations) will be referred to a new Subsidy Advice Unit in the Competition and Markets Authority .
However, ultimately, subsidies can be challenged in the Competition Appeal Tribunal – which will assess legality rather than attempting to second guess the public authority’s own judgements.
A spokesperson for the Scottish Government said; “The Subsidy Control Bill is only a framework and it is difficult to discern real benefits from the new regime. It is unclear how long it will take for full implementation. Statutory instruments setting out the detail and detailed guidance will be published after Royal Assent.”
