Universities and Subsidy Control

Introduction

Subsidy Control law regulates public sector funding towards “economic activities”, as these activities are generally carried out by businesses on a commercial basis in the market, the fear being that a subsidy may provide its recipient business (known as “an enterprise”) with an unfair advantage against its market competitors.   

In the main, public funding of the “core activities” of a University is not regarded as funding towards economic activities and hence not a subsidy. Core activities typically include teaching, dissemination and conduct of research projects whether itself or in effective collaboration with others. A research project involves a set of activities leading up to and including the development of foreground IP (such as patents, know how or copyright). An effective collaboration is where foreground IP is equitably shared amongst the parties and commensurate to their respective contributions in developing it.

Activities outside these core activities may well involve the University straying into the commercial markets and hence involving economic activities. Public funding towards these may therefore involve a subsidy to the University.

Public funding 

Public funding of a University can occur directly from a variety of sources including Central Government initiatives such as Innovate UK/UKRIP or Local Authorities. It may also occur indirectly from tuition fees as these are ultimately sourced from sub-commercial Central Government loans and grants to students.  

Endowments to Universities from the private sector (for instance a private charitable foundation), while not commercial in nature, are nonetheless not regarded as publicly sourced for Subsidy Control purposes and hence do not as a rule involve public funding. Neither does funding sourced from “extra-national” sources such as Horizon or other international bodies, or from commercial revenues like land transactions. In such cases subsidy only arises if these are “matched” by domestic public funding.

Subsidy to the University 

Where public funding is provided to a University towards its economic activities it may give rise to a subsidy to it. An example of economic activity would be where the University collaborates with a third party on a research project but its share of foreground IP generated does not compensate it adequately for its cost of participation (ineffective collaboration). Other examples would be where it performs research entirely for the benefit of a third party who then owns all the foreground IP (contract research), or where it delivers other activities for which there are active commercial markets such as business consultancy, hire of assets and commercial training.

That said, if economic activity is merely incidental to its core activities a subsidy need not arise. In general, an activity is incidental if not more than 20% of the total activity is economic. So for instance if the University receives a grant from a local authority to refurbish and equip a five story building, four floors of which are forecast to be dedicated to conducting a research project with industrial partners where there is a genuine sharing of foreground IP between the parties (core activity), then the grant will not be a subsidy to the University even if the fifth floor (20% floorspace) is hired out to businesses seeking to commercialise the IP (economic activity). Another example would be where not more than 20% of staff time is forecast as engaged in delivering contract research to a company, while the balance is dedicated to teaching and dissemination. 

Whether economic activity is incidental or not may be measured on a project by project basis rather than for the University as a whole, provided the project is suitably separated from the University’s other activities so as to minimise the risk of cross subsidy to these and maximise transparency.

Even if the economic activity is substantial (more than 20% of the project activity), there may still be no subsidy to the University if the real beneficiaries are third party enterprises. An example would be where a University is provided a grant from a local authority to deliver consultancy services and training to enterprises at sub-commercial rates. Although these are economic activities, the University may be able to show that the grant merely covers the costs of delivery to the enterprises for which it is not adequately compensated due to the sub-commercial basis of delivery. Instead the enterprise is receiving an indirect subsidy as it is not paying market rates for the service, and the University is a mere intermediary, passing the benefit of the grant onwards to it. On this basis the University doesn’t receive the advantage (and hence there is no a subsidy to it), but the enterprises do (and there is a subsidy to them).

Subsidies by a University 

A University may itself provide subsidy to an enterprise. This may be a direct subsidy from its own public sector sourced reserves such as tuition fees backed by sub-commercial Central Government student loans and grants. Or it could be indirect, where it is passing on the benefit of public funding from another authority to the enterprise (as discussed above).  

In the former case the University is the subsidy provider and has to “manage” the subsidy itself so that it is seen to be provided lawfully. In the latter case it will be the public authority funding the University who will be the subsidy provider (the University will be regarded as a mere intermediary) but doubtless the University would need to assist the public authority in managing the indirect subsidy to enterprises.

Managing a subsidy at either level

The longstop position is that the provider of the subsidy has to self-assess it as a reasonable use of public funds by reference to a set of Subsidy Control Principles. Whether or not the University is the subsidy provider, it will be significantly engaged in this process. This may be time consuming and resource intensive, particularly if the self-assessment is in some cases audited by the Competition and Markets Authority.

There are certain exemptions from the need to self-assess. There are two of particular relevance to Universities. The first is a Streamlined Subsidy Scheme for research, development and innovation, which acts as a kind of “block exemption” for a clearly defined sequence or cluster of activities constituting a distinct foreground IP generating project. The exemption has a set of detailed requirements in terms of eligibility, subsidy intensity, maximum subsidy amounts and incentive effect which need to be followed.

The second is considerably less complex to apply, but is consequently restricted in amount, and is the Minimal Finance Assistance provision. This exempts subsidies of up to £315,000 per recipient (including its corporate group if any), taking into account any other such subsidy received in the expired part of the current and immediately prior two tax years. The limit can be increased to £725,000 for certain projects benefitting individuals designated as services of public economic interest.

The additional benefit of using these exemptions is legal certainty. A challenge from a competitor for instance will be restricted to whether the terms of the exemption are complied with, rather than the reasonableness of the subsidy itself (though this may nevertheless be part of the subsidy provider’s wider appraisal for judicial review purposes).

Conclusion

A University may receive a direct subsidy if the public funding it receives is directed to predominantly economic activities, in that these activities are not merely incidental to its core activities. However if it merely acts as an intermediary in passing the public funding through to other enterprises, then indirect subsidy arises to them, and not to the University. Either way, the University will still need to be actively engaged in managing the subsidy so that it is granted lawfully.

This article covers an area which is complex and hence not a substitute for detailed legal and accountancy advice. For further information or guidance please contact the author.