UK state-aid regime still shrouded in Brexit fog

23 Aug 2019 12:44 pm

The UK government insists it’s ramping up advice for businesses to get them through a no-deal Brexit at the end of October. But companies looking for financial support to cushion the blow have little guidance to go on, as the post-exit rulebook on state aid remains in limbo.

Companies hard hit by the UK's withdrawal from the EU without a deal may be eligible for a state bailout via a project known as "Kingfisher," the government has said. However, the secondary legislation to introduce a UK state aid regime, and hand enforcement powers to the national antitrust regulator has yet to be approved by lawmakers, eight months after it was first published in January.

The Department for Business, Energy and Industrial Strategy — responsible for pushing the legislation through Parliament — declined to respond to questions from MLex on the chances of the draft regulations becoming law by Oct. 31.

"We continue to work closely with businesses across the country to help ensure they are fully prepared for when the UK leaves the EU on Oct. 31, and are considering how best to support them in the run-up to or immediately after Brexit,” a BEIS spokesperson said.

The continuing lack of clarity will aggravate the uncertainty not only for those companies depending on aid, but also for the national and regional government bodies that will be responsible for doling it out.

Aid regime

Kingfisher will target “fundamentally viable businesses that may have the occasional cash flow or other issue” following a no-deal exit, said Michael Gove, the cabinet minister in charge of no-deal planning, during a visit to Belfast earlier this month. The government has not specified which sectors, although it's said it is aware of the risks facing sheep farmers from new EU tariffs.

The core principles of Europe's state-aid regime — contained in Articles 107 and 108 of the Treaty on the Functioning of the EU — will be captured in UK law when it exits the bloc, under the EU (Withdrawal) Act, the legislation intended to prepare the statute book for Brexit.

The secondary legislation — the State Aid (EU Exit) Regulations 2019 — is intended to make amendments so the regime is operable in a UK context.

The Competition and Markets Authority, currently responsible for antitrust enforcement in the UK, will take on responsibility for approving aid, conducting investigations and recovering any aid wrongly paid.

If the UK secures a withdrawal deal that includes the planned two-year implementation period, the CMA would have a long lead-in time to prepare for its new workload and give guidance to authorities that will be granting aid in future. But a no-deal exit, followed by a flood of emergency support from the Treasury, would present a baptism of fire for the CMA. The regulator says it has contingency plans in place for a high caseload.

Lack of clarity

It’s not clear how the Kingfisher aid will be structured to be compliant with the UK’s new regime. Asked by MLex, BEIS declined to comment.

The stalling of the draft regulations isn’t helping. They met opposition from lawmakers earlier this year, following a standoff with the Scottish government over whether introducing them would be compatible with the UK’s devolution settlement.

Once the legislation is approved, however, the CMA will be required to issue finalized procedural guidance on the operation of the state-aid regime. It will also have to issue domestic versions of existing EU guidelines, frameworks, communications and notices on state aid, with any amendments to fit them to a UK context.

In addition, it would be open to Business Secretary Andrea Leadsom to issue further guidance to the regulator on state aid to handle a no-deal Brexit.

Gove’s remarks that support would be targeted at viable companies may point away from the use of aid under a UK variant of the EU’s rescue and restructuring rules, said Jonathan Branton, law firm DWF's head of public sector and EU competition. These are intended for companies that would otherwise “almost certainly” go out of business in the short-to-medium term.

Instead, it may mean loans on commercial terms or low-value sums of aid under the “de minimis” exemptions, he said. At the same time, the government could also look to a range of schemes under the EU’s General Block Exemption Regulation, which specifies which aid is exempt from standard approval processes.

The picture is much clearer on the other side of the Irish Sea. The Irish government has set out a number of loan and grant schemes it plans to use to support any exporters exposed to UK tariffs following a no-deal exit, including 100 million euros ($110 million) of support for beef farmers. The European Commission has said it will help Dublin find “pragmatic and efficient support solutions” in line with EU law.

Regulatory lapse

The proposed regulations, drafted under Theresa May's administration, reflect her aspiration for a close relationship with the EU and desire for legal continuity where possible, even in the event of a no-deal exit.

BEIS’s refusal to commit to their entry into law by Brexit day is striking. This would present a serious deficiency. While the general prohibition on state aid under Article 107 of the EU treaty would be retained in UK law under the EU (Withdrawal) Act, so too would Article 108's standstill obligations — which prevent a national government from issuing aid until it has been approved by the European Commission — even thought the EU regulator would no longer have jurisdiction in the UK.

Even if this were disregarded, the absence of a UK-wide state-aid regulator would mean no control over subsidies granted by the devolved governments of Scotland, Northern Ireland and Wales, or of local governments. This raises the prospect of subsidy races between the regions — a scenario the UK government has been keen to avoid.

An absence of state-aid controls and a spending splurge may also, of course, expose the UK to the risk of countervailing duties by its trade partners — a scenario the UK government is unlikely to wish to risk. Failing to put in place a new state-aid framework would “take away one of the fundamental pillars of a competitive market” and put the UK "in a terrible position for achieving any trade deal with anybody,” Branton said.

There could be advantages to such a scenario, however. It would spare the CMA the political headache of blocking aid to hard-hit industries during a crisis, said James Webber, partner at Shearman and Sterling in London.

“It may actually suit everyone concerned — except possibly the taxpayer," he said. "Companies face many fewer legal hurdles to receive aid, the government has much greater flexibility to use public money to compensate for 'no-deal' costs — and the CMA is spared a traumatic start to its mandate as a state-aid control agency.”

The course may become clearer after UK parliament returns on Sept. 3, when it becomes clear what, if any, legislation the government hopes to push through before exit day. But the titanic nature of the effort to prepare for a no-deal Brexit, and the political fight to stop it, means even such fundamentals as a functioning state-aid regime risk being sidelined by both lawmakers and ministers.

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