Clifford Chance

In the first case heard by the UK's Competition Appeal Tribunal (CAT) under the Subsidy Control Act 2022 (SCA), the CAT has thrown into doubt the notion of "cross-subsidisation" and has shown itself willing to take its own UK-focussed approach to subsidy control law.

Under the SCA, a person whose interests are aggrieved by a subsidy decision may apply to the CAT for review of that decision.

Durham Company Limited (trading as Max Recycle (Applicant)), provides commercial waste collection services, including in Durham, where it competes with Durham County Council (DCC). The Applicant sought review by the CAT of DCC's alleged decision to grant a subsidy to its commercial waste business.

Background to the challenge

DCC has a statutory duty to arrange for the collection, in Durham, of both: (i) household waste (free of charge in most circumstances) and (ii) commercial waste (upon request and for a reasonable charge). Household waste collection costs are funded through council taxes and other public funding.

On 31 March 2023, DCC decided the annual charges for its commercial waste customers pursuant to what DCC submitted was a subsidy scheme for commercial waste collection established on 18 March 2020.

The Applicant argued that DCC was effectively "cross-subsidising" between its household and commercial waste collection operations by using the same vehicles and employees to collect all household waste and the majority (78%) of commercial waste. The economies of scale from its publicly funded household waste business allowed DCC to offer services to its commercial waste business at below-market prices, undercutting private operators such as the Applicant and thereby distorting competition in the market.

Legal issues for consideration by the CAT

In its judgment, the CAT considered whether, within the meaning of section 70 of the SCA, (i) DCC had made a "decision" capable of review, and (ii) the "decision" under review constituted a subsidy.

Was there a subsidy?

The SCA defines a subsidy as financial assistance which: (i) is given, directly or indirectly, from public resources by a public authority; (ii) confers an economic advantage on one or more enterprises; (iii) is specific, in that it benefits one or more enterprises over one or more other enterprises; and (iv) has, or is capable of having, an effect on competition or investment within the UK, or trade or investment between the UK and another country. The SCA defines both a "public authority" and an "enterprise" (including partnerships and both corporate and unincorporated bodies) as "persons".

The CAT found that the true construction of the SCA is that financial assistance must move between persons – namely, from the public authority, whose assets are thereby depleted, to another person, which has an enforceable right to that financial assistance and whose assets are thereby increased. As such, the CAT concluded that the person giving the subsidy cannot be identical to the person receiving the subsidy. In the CAT's view, therefore, the notion of self-subsidisation is illogical as the economic benefit arising from the financial assistance merely circulates within the same entity.

This conclusion marks a notable point of departure from EU State aid law, which applies a "functional" approach, whereby the same legal entity can be viewed as both public authority and an undertaking in respect of the same subsidy, depending on the activity carried out.

The CAT therefore concluded that a subsidy had not arisen within the meaning of the SCA, and for this reason alone, the Applicant's challenge had to be dismissed.

In the alternative, the CAT argued that even were its reading of the SCA incorrect, no subsidy arises for two reasons. First, any economic advantage granted by DCC to its commercial waste business merely enables that business to charge lower prices to consumers (as DCC cannot, on public law grounds, generate a surplus from exercising its statutory duty to collect commercial waste). Accordingly, the benefit of a lower cost base is sustained by the consumer, not the commercial waste business itself, in the form of lower prices. Second, the definition of an "enterprise" in the SCA requires that the person be engaged in an "economic" activity, which is not met here as commercial waste was collected in fulfilment of a statutory duty primarily driven by environmental and health concerns.

Was there a "decision" to grant a subsidy?

The CAT rejected DCC's claim that it had put in place a subsidy scheme, which would not have been challengeable under the SCA, given the amount of time that had passed. DCC's March 2020 decision was therefore nothing more than DCC's consideration as to the amount it might charge customers for commercial waste collection services in the future. Its March 2023 decision setting the actual charges for the following year was a "decision" for the purposes of the SCA, and therefore challengeable, even if it amounted to a repeat decision of materially unchanged matters previously considered.

Conclusion

This judgment will be welcomed by public authorities, but not by their third-party competitors. It appears to invite public authorities to adopt a more relaxed approach to some instances of cross-subsidisation, contrary to accounting policies that have evolved with reference to the position on cross-subsidisation under EU State aid law. Similarly, the judgment appears to weaken the authority of the Government's Statutory Guidance on the UK subsidy control regime (to which public authorities must have regard), which expressly adopts the "functional" approach. It is unlikely, therefore, that the Government intended a monumental shift of approach by adopting "person", instead of "undertaking", as the SCA's unit of account.

However, the judgment does not necessarily give local authorities absolute freedom to undercut competing providers of commercial services. Depending on the circumstances, it might still be open to businesses to challenge any flow of funds from central Government (which is unquestionably a different person for the purposes of the SCA) to the economic activities of a local authority, on the basis that the funding is not remunerated by the local authority at a rate that a private investor would expect to obtain, or that the funding does not satisfy the compliance principles of the SCA.