In advising local authorities on treasury and financial management, Arlingclose has observed a trend where many councils offer financial assistance to local businesses and subsidiaries on terms that would be deemed below the standards set by commercial lenders. While this practice is permissible under the Subsidy Control Act, it is crucial that local authorities ensure such financial assistance aligns with the Subsidy Control Principles and does not fall into a category expressly prohibited by the Act. I explored these nuances in detail in my previous insight, “What are the new UK Subsidy Rules?”
Additionally, any subsidies exceeding £100,000 must be reported on a public database. Certain categories of subsidies, known as ‘Subsidies and Schemes of Interest and Particular Interest’, may also require referral to the Subsidy Advice Unit (SAU). Such referrals must include the local authority’s assessment of the subsidy’s compliance with the rules, along with the relevant evidence.
However, challenges arise when local authorities attempt to provide financial assistance to local businesses, or even their own subsidiary companies, on terms they believe to be market-appropriate. It is essential in these instances to comply with the Commercial Market Operator (CMO) principle within the Act. This principle dictates that public authorities must offer financial assistance on terms that a private operator with commercial objectives would consider acceptable. To adhere to this principle, authorities must ensure that the terms of the loan mirror those available in the market under similar conditions. A key aspect of this process is the due diligence required, particularly when assessing the creditworthiness of the borrower to establish accurate benchmark rates.
What we frequently encounter is local authorities lending to borrowers with terms such as PWLB rates plus 2%. However, this approach is often speculative, and we believe that in many cases, the necessary due diligence has not been properly undertaken. This leaves councils vulnerable to challenges at the Competition Appeal Tribunal, most likely from competitor organisations that believe the beneficiary of the loan has received an undue financial advantage.
Arlingclose has developed a robust methodology to ensure compliance with the CMO principle. We have access to the scorecards of major credit rating agencies and carry out thorough financial due diligence to estimate the indicative credit rating a borrower might receive. By utilising live market data, we can ensure that the loans are provided on terms that would be available to similarly rated organisations. If you would like us to conduct this analysis and provide a substantiated market interest rate, or even guide you through the subsidy process, please do not hesitate to get in touch by emailing pmarshom@arlingclose.com.
Related Insights
The First Subsidy Control Regime Judgement