Subsidy control and the effects question

Weis v Greater Manchester Combined Authority (GMCA) is the first Court of Appeal subsidy control challenge and was dismissed. The case brings into focus a question that was always likely to require clarification: to what extent should subsidy control be concerned with procedural discipline, and to what extent should it be concerned with the economic effects of public financial assistance?

To put it another way, when a public authority lends money, what will the analysis in any challenge principally focus on: whether the authority documented its commercial assessment in sufficient detail, or if the borrower in fact received an economic advantage capable of producing adverse effects on competition or investment? The first is a lawyer’s question; the second, the economist’s concern.

In the case, the challenge arose from loans made by GMCA under the Greater Manchester Housing Investment Loans Fund to special purpose vehicles associated with developer the Renaker group, for residential developments. Mr Aubrey Weis, a rival developer, argued that the loans were unlawful subsidies because they were not made on terms that would have been available from a commercial lender.

The Competition Appeal Tribunal (CAT) found that while GMCA may neither have formally conducted the various tests set out in the Subsidy Control Act nor documented these, the terms of the loans were akin to those that would have been offered by a commercial operator, thus meeting the commercial market operator (CMO) principle. As such, there was no subsidy and the challenge was dismissed.  

Weis took the case to the Court of Appeal, which, consistent with the CAT, determined the key point was that the funding was not a subsidy when tested against the CMO principle. The appeal was dismissed. This has made the case a very practical test of what the Subsidy Control Act is really intended to police: public sector funding, as such, or public sector funding that confers a non-market advantage.

Under the Subsidy Control Act 2022, public financial assistance is only a subsidy if key conditions are met. One is that it confers an economic advantage on an enterprise. For a loan, that usually means asking whether it was on terms more favourable to the borrower than could have been obtained in the market.

The CMO principle is central to this issue, as it was in Weis v GMCA. If a rational commercial lender may have advanced the money on comparable terms, then the borrower can’t be said to have received an economic advantage just because the lender was a public authority.

This made the Weis challenge a useful test case, because the allegation was not just that GMCA had lent money. It was that GMCA had allegedly lent on terms that lowered Renaker’s cost of capital, or relaxed its financing constraints, in a way unavailable to competing developers. 

The courts’ decisions make perfect sense from an economic perspective. Genuine subsidy control is not intended to prevent public authorities from pursuing public policy objectives. Nor is there an economic reason to treat every intervention involving public money as inherently problematic.

The economic purpose of subsidy control is to prevent selective public support from changing competitive conditions by giving one undertaking an advantage that could have adverse effects on competition or investment.

A grant may reduce project costs, a below-market loan may reduce financing costs, a guarantee may shift risk away from the borrower. Each can change investment, entry, expansion, pricing or output decisions. But, if a loan sits within the range a commercial market operator would accept, the recipient is not receiving cheaper, less risky or preferential capital. The advantage is the key question, the core of Weis v GMCA, the conclusion of which was economically coherent: no advantage means no subsidy, and therefore no relevant adverse effects on competition or investment of the kind the Act is designed to address.

This effects-based framing is important because the statutory language of the UK regime is not only concerned with whether assistance is granted, but with whether it is capable of influencing competition or investment. In economic terms, the relevant question is therefore not merely whether the state has intervened, but whether the intervention changes the recipient’s constraints, incentives or opportunities in a way that could alter competitive outcomes.

So, what role does process play? A key question on appeal was whether the CAT had gone too far by deciding for itself whether the loans satisfied the CMO principle, rather than simply reviewing the material before GMCA on conventional public law grounds. In other words, should the CAT have just asked whether GMCA’s process was lawful and rational, or was it justified in asking the more direct question of whether the loans were subsidies?

The Court of Appeal held the CAT was justified. But, that does not make process irrelevant. Public authorities should show their workings, and good process creates discipline. It requires decision-makers to test market comparators, assess risk, consider creditworthiness, document assumptions and explain why a transaction is commercial. Likewise, it gives competitors, taxpayers and courts confidence that the authority has not simply asserted a transaction is market conforming after the event.

Economists naturally focus on outcomes and the counterfactuals: What would have happened in the market absent the public intervention? Did the recipient obtain capital on terms it could not otherwise have achieved? Did the intervention alter incentives or market outcomes? If the answer is no, economic harm is hard to locate.

But procurement lawyers worry about the route by which the public authority got to the answer. If public bodies are not required to document their analysis properly, the discipline of the Subsidy Control Act risks being weakened. Authorities could arrive at the right answer by instinct, or justify it retrospectively, without the contemporaneous scrutiny that the regime is intended to encourage.

The point can be illustrated by the familiar educational analogy of mathematics examinations: should a correct answer receive full credit if the workings are not shown? The economist’s instinct is often sympathetic to the “right answer” view. If the loans are commercially priced, there is no economic advantage and therefore no subsidy-control distortion. The legal perspective, however, places weight on the value of showing the workings: transparency, accountability and disciplined public decision-making are themselves important features of the regime.

The Court of Appeal’s judgment strikes a sensible balance. Process matters, but it is not the ultimate object of the regime, and a flawed paper trail does not automatically create a subsidy if the underlying transaction is commercial. Equally, a neat paper trail should not rescue a transaction that transfers value on below-market terms. The purpose of the process is to illuminate the substantive economic question, not to replace it.

To put it another way, the Subsidy Control Act is not a guide for perfect public administration, but a law to tackle selective financial assistance that could have adverse effects on competition or investment. The decision in Weis v GMCA will no doubt help it achieve that.