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Public subsidies

Launched: April 2004

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Purpose of the study

To consider the effects of Government subsidies given to private business on competition.

(Study followed in-house work.)

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Phase 1: Public subsidies have the potential to distort competition. While this is limited by the rules and guidance governing subsidy provision, there is still scope for distorting subsidies to be implemented. These could impose a cost to the economy and taxpayers that is not fully considered.

Phase 2: A failure fully to assess competition risk posed by certain public subsidies resulted in their true cost to the economy not being recognised.

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The recommendations of the study were:

1. A practical framework by which UK government departments and agencies can identify the costs and benefits of a proposed subsidy, including its potential impact on competition - to be used alongside the HMT Green Book.
2. Proposals to the European Commission (EC) for reforming state aid controls to avoid distorting competition. A two-stage assessment process was suggested which examines the characteristics of the subsidies and the markets involved. OFT recommended a formal advisory role for national competition authorities in helping the Commission decide whether or not to approve state aid.

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Action following market study

1. OFT's work with the Commission has been cited directly in a number of EC papers. Recent drafts of the state aid framework for research and development and risk capital for small and medium sized enterprises (SMEs) reflect the principles OFT proposed and there seems to be a degree of common agreement on these.

2. OFT published guidance in January 2007 to enable subsidy providers to assess whether a proposed subsidy is likely to have a significant effect on competition and, if so, incorporate this effect into the wider appraisal of the subsidy. The guidance applies to subsidies that carry the highest risk of distorting competition. These are subsidies of more than £500,000 to an individual firm which has a market share exceeding 5 to 10 per cent of the affected market.

3. OFT guidance incorporated into HMT's Green Book in March 2007.

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Market study details and report

Download the OFT Report 'Public subsidies: A report by the Office of Fair Trading' November 2004 (pdf 730 kb)

Download Annexe C 'The effects of public subsidies on competition' November 2004 (pdf 271kb)

See press release 'Towards better subsidy design: new research analysis impact upon competition' 24 November 2004

See John Vickers' speech to the state aid conference 'State aid and distortion of competition' 14 July (pdf 130 kb)

OFT response 'OFT response to the European Commission's Action Plan on state aid reform' (pdf 131kb). September 2005.

Download European state aid control (pdf 894 kb)

Download Annexe C (pdf 102 kb) November 2005

Download Case studies of public subsidies (pdf 239 kb). January 2006

Download Public subsidies (pdf 730 kb)

Download OFT and HM Treasury 'Guidance on how to assess the competition effects of subsidies (pdf 192 kb). January 2007 

Download new guidance (pdf 192 kb)
Download the Green Book Guidance from the HM Treasury website. September 2007

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Background information

Announcement of study - see press release 6 April 2004.

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