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Towards better subsidy design

New research analyses impact upon competition

190/04    24 November 2004

New research by the OFT examines the potential for public subsidies to distort competition and highlights gaps in the current EC and national regimes governing the provision of subsidies.

In a report published today, the OFT develops an analytical framework for determining the likely competition distortions caused by subsidies and identifies the need to improve aspects of the current approach to controlling subsidies. It will undertake further work on this issue, using specific case studies, to provide the Government with detailed recommendations on how subsidies affect competition in practice, and how to design subsidies so that their impact on competition is minimised.

Download Public subsidies (pdf 729 kb)
Download Annexe C of the report (pdf 270 kb)

Public subsidies are provided by a range of bodies in the UK, including central government, the devolved administrations, government agencies (particularly regional agencies) and local authorities. The UK spent over £6 billion in 2003 on subsidies to private firms (see note 2).

The framework identifies the characteristics of the subsidy and the market in which the recipient operates that are likely to lead to greater distortion of competition. Using this framework, the OFT found that the rules and guidance that exist at European and national level do limit such competition distortions, but could go further to filter out distorting subsidies.

The study identifies four broad areas to be considered more specifically in the second phase of the study:

• in what way the economic basis of the EC rules on state aid should be strengthened to take better account of the potential for competition distortions to arise  - the Government should continue to press for such changes to the rules
• whether national guidance on subsidy design and appraisal should include competition considerations
• whether subsidy providers should have monitoring procedures in place that assess the impact of the subsidy on competition
• whether central government and devolved administrations should collate and publish more detailed data on the subsidies provided across the UK.  

John Vickers, OFT Chairman, said:

'Subsidies can be  an important policy tool, but their cost to the economy – as well as to the taxpayer –  from distorting competition must be fully recognised and kept to a minimum. Good subsidy design works with competition, not against it.'

The OFT will be seeking views on possible case studies for the second stage of the study.

NOTES

1. The report 'Public subsidies' is available from the OFT by telephoning 020 8673 3272. The OFT commissioned Frontier Economics to develop the analytical framework for assessing the impact, in principle, of subsidies upon competition.

2. A public subsidy is a grant, tax break, low interest loan or other benefit provided by government to a firm engaged in private business. The estimate of £6 billion is based on Public Expenditure figures gathered by HM Treasury and includes subsidies for transport infrastructure, including the Strategic Rail Authority and Network Rail. There is no single source of data about spending on subsidies to business in the UK.

3. State aids are governed by the European Community State Aid Rules and are regularly reviewed. National guidance on UK subsidies are contained in a number of documents including the Green Book and the Scottish Public Finance Manual.

4. The OFT has also published research on the effect of public sector procurement on competition (see press release 16/04 and the statement Public sector procurement research published of 30 September 2004); and has identified further work on the effect of government practices on competition as one of the five key areas in its Annual Plan, which will be published on 1 December.

5. Proposals for possible case studies for the second phase of the OFT's study should be sent to Markets and Policy Initiatives division, Fleetbank House, 2-6 Salisbury Square, London EC4Y 8JX.

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