Strategic commercial interventions: due diligence guidance

3. Due Diligence

Undertaking appropriate due diligence is a critical part of any decision-making process and should always be undertaken as soon as possible when considering an intervention. The process allows SG officials to better understand the business, the benefits and risks, and crucially any gaps in information before options or a recommendation is put in front of Ministers.

Strategic Commercial Intervention processes by their nature are fast-paced usually because businesses have exhausted all other options before making an ask of Government or an external shock has caused unforeseen challenges. In instances where a business is struggling and directors sign the notice of intention to appoint an administrator, they have 10 days of protection when no creditor can take any recovery action, thus giving a short period to decide on a suitable way forward.

Decisions therefore need to be undertaken at pace and may require assistance both internally and externally (financial, technical, commercial and legal advisors). If the time period is insufficient for all aspects of due diligence then this should be reflected in the advice to Ministers as a key risk of intervening. This document provides broad guidance to help you approach the early stages of a potential intervention. This preparatory work must be undertaken prior to any provision of support, financial or otherwise from SG to private business.

By their nature, interventions take different forms depending on the ask of business, the resources available to respond and a number of other factors. When undertaking due diligence to later inform drafting a business case, the ‘Five Case Model’ should always be used to frame the key elements to be considered.

It is also important to assess the wider policy context in any investment decisions that are considered by SG. Consideration should be given to implications that relate to human rights, equality, fair work, environment, integrity and economic policy objectives.

3.1 Due Diligence Stages

Information Gathering – this stage should focus on gathering all necessary information during your due diligence process.

Analysing Information – The information gathered should be used to construct an overall picture of the proposed intervention.

This information can then be considered to help assess the inherent risks to SG, and can be used to help inform the completion of a business case thereafter.

3.2 Process Considerations

3.2.1 Accountable Officer Requirements

Due Diligence should be carried out in line with the requirements of the SPFM and at the decision stage the Accountable Officer will be required to demonstrate that the following tests have been met:

• Powers of intervention
• Regularity of expenditure
• Propriety
• Value for money

Further detail on these requirements including how due diligence undertaken to this point will assist in considering these tests, as well as a decision flow chart can be found using the following links:

Annex A: Business Investment Framework - Scottish Public Finance Manual - gov.scot (www.gov.scot)

Accountable+Officer+Tests+Flow+Chart.pdf

The following chart summarises the overall process and stages to consider when a new case for SG intervention is being considered within SCAD.

New case

• allocated
• There is a clear and quantifiable request for intervention.
• Checks have been made on whether other sources of finance have been sought first by the company.
• Ministers have been consulted on providing a stand-up response if a new case.

Stage 1 Due Diligence

• SMART objectives for the intervention have been set.
• A long-list of options has been generated and sifted against objectives during a workshop with key stakeholders to agree the short-list of options.

Governance and Stakeholders

• A working group involving key specialists including i.e OCEA, corporate finance, SGLD, subsidy control has been established.
• Governance arrangements have been agreed, including the option to initiate project board and reporting requirements to any porfolio board / Strategic Assets Review Group / ET investment committee.
• The Business Investment Framework in the SPFM has been consulted.

Initial Approvals

• Strategic Assets - Insights & Assurance Unit has been consulted and ongoing advice / assurance sought.
• Relevant information and available data has been gathered and analyssed on the company and sector via outreach to OCEA, Scottish Enterprise, business engagement colleagues as well as high level desk-top research.
• Due diligence lead has spoken with relevant enterprise agency and the business requiring support.
• Stage 1 of Due Diligence guidance has been consulted and is being followed.

Options and Objectives

• Stage 1 Due Diligence exercise has been completed and there are no 'red flags'.
• Regularity, propriety, and value for money has been assessed in line with AO process.
• Decision has been made on requirement for consultancy support and Accountable Officer and Ministerial Approvals have been made.
• A screening exercise to determine impact assessments requirements has been undertaken.

Stage 2 Due Diligence

• Specialist consultants which may include both legal and commercial consultants have been appointed.
• Stage 2 of Due Diligence Guidance has been consulted and followed including engagement with relevant policy areas.
• A full five case business case aligned with HMT Green Book has been produced involiving specialist such as OCEA, corporate finance where appropriate.

Advice on Intervention

• The business case has been completed and reviewed by governance groups / boards.
• AO template has been completed and approved by the Accountable Officer.
• Advice has been issued to Ministers.
• Parliament has been consulted if contingent liabilities are to be created.

Intervention

• A monitoring and evaluation plan has been created.
• Lessons learnt reports from previous interventions have been reviewed.
• Clear roles and responsibilities for the allocated lead official / sponsor team have been created.
• Delegated Authorities are in place.

3.3 Due Diligence Considerations

3.3.1 Preliminary Checks

The preliminary checks below form an important first stage in any due diligence process in order to gather the necessary background information, and prior to any detailed analysis being undertaken.

3.3.1.1 The Ask of Scottish Government

This section should be used to give an overview of the issues faced by the business and to briefly outline any early options being considered for the proposed support.

It is essential to gain assurance that the proposed SG support would not inadvertently lead to displacement of private sector activity.

Prior to SG considering providing financial support, a business would have to demonstrate that it has exhausted all other support. The following questions should be considered in this regard:

• Has the company exhausted all private sector support and financing options (including loans, overdrafts, commercial finance, cost reduction etc.), including those outwith the UK? If seeking a combination of support from the private sector and SG what are the details of the funding split?
• Has the company considered traditional support from SE, SNIB and other public sector providers of finance (R&D grants for example)?
• Has the company received previous SG/Enterprise Agency support (i.e. does SG/SE have a stake already)?
• Has the company exhausted support from UK Government schemes?
• Should we consider referring the request to UKG if support cannot be met from within existing budgets?

Examples of structures which could be considered and have been utilised by SG in previous interventions are set out in the Intervention Options and Case Studies.

3.3.1.2 Company Background

This should be factual and should be used to outline the business’ background using publicly available information. Enterprise agencies should also be engaged with at this stage as they may already have a relationship with the business, or have undertaken their own due diligence which would expedite the process.

It is crucial to understand the ownership of the business, corporate relationships and key figures within the operation. This information is required to ensure proper due diligence can be undertaken as to the owners and associated personnel of a business to ensure reputational risk to SG is considered.

Examples of important background information and considerations are detailed below:

Registered office

• If not registered in Scotland then consider legal and other implications (insolvency event etc).

Company number

• Obtain in line with good record keeping.

Jurisdiction

• Important legal consideration.

Employees

• Number of employees and location.

Auditors

• Are the auditors reputable?
• When was last audit undertaken?
• Unqualified audit opinion given?

Company Accounts

• Demonstrates the businesses’ ability to meet operational/statutory requirements.
• Are accounts filed on time?
• To understand the company’s financial position at a date in time and to understand whether the company profit making and what the company’s net asset position is.

Online company checks

• To assist with background.

Key personnel

• Understand who the key individuals in the business are and what their background and associations are.

Related parties*

• Understand ownership, corporate relationships and any risks this may present to SG.
• Understand any wider reputational risk.

Key customers and suppliers*

• Understand corporate relationships.
• Understand any wider reputational risk.
• Consider reliance on specific customer/supplier(s).
• Consider any geo-political implications.

*The business may be required to provide this information

3.3.1.3 Integrity Due Diligence

Building on looking into the background of the company, a further and more detailed assessment may also be required regarding individuals and corporate entities. Integrity due diligence reports can be commissioned procuring Commercial Advisers to produce a summary of the following from publicly available information:

• For corporate entities this will include details of their registration, including when and where it is registered, relevant addresses, contact details, and its directors and beneficial owners.
• A brief overview of the subjects’ backgrounds, including history of projects and recent financial performance.
• Any litigation where the subjects are involved as a defendant.
• Notes of the subjects’ links to government entities or officials and whether they are registered on the UK HM Treasury Consolidated List of Sanctions, or the US Government’s Consolidated Screening List.
• Reports of the subjects’ involvement in ‘noteworthy issues’^[1].

3.3.1.4 Publicly Available Information

Related to the above, officials should also consider the potential reputational impact of an intervention and supporting a business as part of the preliminary checks. This would include interrogating publicly available information such as google, Companies House and the following websites to identify any concerns in terms of the company or its Directors:

• Amnesty International
• Human Rights Watch
• Transparency International
• Business and Human Rights Resource Centre
• World Bank list of ineligible companies

3.3.1.5 Creation of a Public Corporation

As outlined in the existing guidance within the Business Investment Framework (SPFM), careful consideration should also be given to the implications for businesses that are being brought into the public sector through majority control such as SG’s intervention of Ferguson Marine. This will impact areas such as pay policy, procurement of goods and services, and a company’s ability to borrow.

3.3.1.6 Strategic / Policy Considerations

Although the focus of the guidance is on undertaking appropriate financial, commercial, technical and legal due diligence, it is important that all aspects of due diligence are considered to ensure that Ministers have as full a picture as possible before making any investment decisions.

It is important to address strategic and policy considerations as part of any due diligence exercise. Interventions commit Scottish Ministers to significant financial spend and they have the potential to contribute to or be in contradiction to wider policy goals. Colleagues should recognise this and as part of the due diligence exercise highlight alignment / divergence from SG policies that should form part of the strategic case element of the business case and highlight to Ministers / senior decision-makers.

Although not intended to be an exhaustive list, officials should consider the following areas in the context of due diligence to take account of the overall SG aims, policy objectives and goals they are working towards and consider if those can be advanced or hindered by any proposed intervention.

International Trade

• Is the intervention compliant with international trade rules?

Fair Work

• Does the business align with SG’s fair work policy aims in relation to payment of the real living wage, zero hour contracts and action to address gender pay gap?

National Strategy for Economic Transformation (NSET)

• How will the intervention advance the policy objectives of NSET?
• Is the intervention aligned with a growth sector defined in NSET?
• If not how will the intervention support Scotland’s future economy?

Green Transition

• How will support of the business contribute to SG’s Net Zero aims?
• Will intervention have a material impact on the local environment i.e will the intervention create localised pollution?

Human Rights

• Careful consideration should be given to a company’s human rights record and whether providing support would misalign with Ministerial human rights ambitions and have a reputational impact on Scottish Ministers.
• Has a check been undertaken on the reputation and business practices of the company / group / management team?

Environment

• Does the business contribute to wider climate change, net zero and environmental policy goals?
• Does the business have a negative impact on the environment or climate?

Trade and Business Links with sanctioned States

• Does the intervention comply with SG advice that companies should not have links with sanctioned states such as Russia and Belarus, and should sever any existing links?

3.3.1.7 International Trade Rules

Any intervention must be compliant with international trade rules. World Trade Organization (WTO) rules, which SG is subject to, are concerned with ensuring fair international competition and equal opportunity between domestic and foreign entities in the market. When an intervention takes the form of a subsidy^[2], or the intervention will result in a State-Owned Enterprise that engages in commercial activity relating to the importation or exportation of goods^[3], SG must consider the impact on trade. A failure to do so may result in a legal challenge from another WTO member, on the basis that they can prove an adverse effect or injury to their own market as a result of the intervention.

Case Study example on WTO – In the 1990s the Australian government provided loans to two leather production companies to support their production. Whilst there was no explicit requirement to export, the size of the loans and the increase in production that resulted from these financial contributions meant the domestic market could not sustain the amount of leather that was being produced, thus incentivising the companies to export. The WTO found this to be a prohibited subsidy due to the direct impact on export volume. Therefore, when conducting due diligence, SG must consider what kind of impact the intervention may have on the strategic asset’s market share and its engagement in international trade.

There are additional rules beyond the WTO principles created by trade agreements which the UK is party to, such as the EU-UK Trade and Cooperation Agreement, that must also be considered. These rules differ between agreements and may have compliance requirements that go beyond the WTO’s rules. Business and Regulatory Impact Assessments (BRIA) can be undertaken to identify the impact on trade of any proposed legislation, codes of practice, or guidance in development. This can help support compliance with international trade rules. It is important to engage with the DITI Trade Strategy team as early as possible in the process to assess any potential international trade impacts.

3.3.1.8 Fair Work

While employment law is reserved to the UK, SG is doing all it can with the powers available to promote fair working practices.^[4]. SG wants to support companies that uphold the best modern business practices – embracing principles of fairness, equality, opportunity and innovation.

When considering support for a business, officials should consider to what extent a company can evidence how it meets SG’s fair work policy aims such as:

• Payment of the Real Living Wage.
• No inappropriate use of Zero Hours Contracts.
• Action to address gender pay gap (proportionate to the size of the company).

3.3.1.9 National Strategy for Economic Transformation

SG published Scotland's National Strategy for Economic Transformation in March 2022^[5]. The strategy sets out the priorities for Scotland’s economy as well as the actions needed to maximise the opportunities of the next decade to achieve our wellbeing economy goal. When considering an intervention particular focus should be given to how it will advance the bold new policy programmes of action to:

• Establish Scotland as a world-class entrepreneurial nation founded on a culture that encourages, promotes and celebrates entrepreneurial activity in every sector of our economy.
• Strengthen Scotland's position in new markets and industries, generating new, well-paid jobs from a just transition to net zero.
• Make Scotland's businesses, industries, regions, communities and public services more productive and innovative.
• Ensure that people have the skills they need at every stage of life to have rewarding careers and meet the demands of an ever-changing economy and society, and that employers invest in the skilled employees they need to grow their businesses.
• Reorient our economy towards wellbeing and fair work, to deliver higher rates of employment and wage growth, to significantly reduce structural poverty, particularly child poverty, and improve health, cultural and social outcomes for disadvantaged families and communities.

3.3.1.10 Green Transition

SG has set the ambitious target of achieving net zero emissions by 2045^[6]. Private business^[7] is being asked to play their part in reducing emissions. When considering an intervention consideration should be given to the businesses’ current approach to achieving net zero and / or if their business will help achieve the aims of net zero (e.g. renewables sector).

If seeking planning, building regulation and/or any other licencing consents that might be required (e.g. SEPA air quality, odour or other pollution prevention control consents or Control of Major Accident licences). In terms of demonstrating an intervention’s green credentials it is helpful to consider the following questions:

1. Will the intervention support transition away from fossil fuels and help to reduce carbon emissions?

2. Does the intervention take a systems approach i.e circular waste as its premise?

3. How will waste water be treated? I.e will bacteria and pathogens will be removed as part of the process.

4. Will the intervention support the circular economy based on using material that would otherwise go to landfill / be incinerated?

5. How will pollution be treated?

3.3.1.11 Human Rights

Scotland is a modern, inclusive nation which respects, protects and fulfils internationally-recognised human rights. SG has always been clear that Scotland should set standards and show leadership on human rights. SG is embedding equality and human rights into the day-to-day business of government^[8] and this aim should extend to the businesses we intervene in. As such, careful due diligence should be undertaken into the human rights records of the business, any parent company or associated companies and the people on the board or directors of the business seeking assistance.

Human rights due diligence should be carried out on any activity which could lead to an investment relationship or agreement with a third party. This may include circumstance where direct financial support is provided through grants, loans, financial investments, equity shares and guarantees; or through non-financial support, such as acting as a broker between two or more private sector partners when securing a buyer for or investment in a project, programme or business.

We have a legal obligation to ensure new policy and legislation meets legal obligations, such as the International Covenant on Economic, Social and Cultural Rights (ICESCR)^[9] and International Labour Organization (ILO)^[10] and doesn't breach human rights. Our National Performance Framework includes the human rights outcome: 'We respect, protect and fulfil human rights and live free from discrimination'. This also links to the United Nations Sustainable Development Goals.

An additional useful reference point is SG’s human rights due diligence for investment decisions: Guidance on due diligence: human rights - gov.scot (www.gov.scot). This Guidance sets out recommendations on how we, our executive agencies and non-departmental public bodies (NDPBs) should undertake appropriate due diligence on companies, including their human rights record, before entering into an investment relationship with them.

It is of the utmost importance that SG upholds the highest standards when entering a business relationship with a third party. Appropriate due diligence will ensure that checks are made on the reputation of the company ‘group and senior managers within the company / group. As referenced earlier, the first stage in undertaking in-house due diligence is to undertake an internet search of managers and the company / group.

The references below can also be consulted to gain information on the reputation of companies that should be highlighted on due diligence:

• Procurement - World Bank Listing of Ineligible Firms and Individuals
• Norges Investment Bank Excluded Companies Report
• UN Guiding Principles on Business and Human Rights
• Institute for Human Rights and Business
• Business and Human Rights Resource Centre
• Corporate Human Rights Benchmark initiative

Consideration should be given to whether the company and the intervention comply with SG’s non-binding policy that companies should not have links with Russia (and should sever existing links). This is not a legally binding obligation, unlike the UK Sanctions List which must be adhered to.

Stop trading with Russia - gov.scot (www.gov.scot)

Checks must include compliance with the UK Government’s legally-binding regime of international sanctions, which provides details of individuals and businesses subject to sanctions measures.

The UK Sanctions List: Guidance

Russia Sanctions: Guidance

3.4 Detailed Due Diligence

Upon completion of the preliminary checks and once the key strategic and policy aims have been considered, assuming no significant red flags or concerns have been identified, the next stage of the process is for more detailed due diligence to be undertaken. SG interventions have historically been undertaken at pace. As such, it may be that technical, financial, commercial and legal advice is required from external advisors to undertake due diligence, complete a business case and advise Ministers.

3.4.1 Commercial Finance

Financial due diligence will form a key part of the business case for intervention and should be undertaken by policy leads with the support of specialists in SG Finance, SGLD, OCEA, and external consultants as required.

The key actions summarised below are required to enable a robust review of the performance and underlying health of the business:

• Perform analysis of current and previous financial statements which would include financial ratio analysis, sector comparisons and an understanding of the strength of the balance sheet and where financial risk lies;
• Perform analysis of recent management accounts which would include an assessment of company performance and trends, understanding success against KPI’s and identifying risk within the accounts;
• An assessment of the quantum (and financial context) of any Government support and detailing any affordability concerns.

The commercial finance aspects of the business are also required to be analysed in detail alongside this. In most cases this analysis will form part of the detailed financial and/or legal due diligence, however this can also be undertaken by external advisors with a specialism in the particular sector. Important questions to consider are:

• Does the board have the key skills required to manage the business, are there any skills gaps?
• What is their business model? Does it make sense, is it viable and profitable now & if under pressure? Risks? Vulnerabilities?
• Does the organisation have a developed risk register, what are the key risks identified?
• Are any other organisations using this model and making it work?
• Who are their competitors and what is their market share?
• What are their pricing strategies and what influences this?
• What are their channels to market and how effective are they?
• Who are the business’ key customers? Any concentration level risks? Strength of relationships with their customers?

Consideration should also be given to the immediate requirement of a business and whether there is an option to provide short term financial support to allow time for a fuller analysis and understanding of the position. This ‘bridging loan’ could enable more time for more detailed options to be scoped out

3.4.2 Contingent Liability

In assessing the requirement from a business, policy areas should consider whether the provision of financial support will lead to the creation of a contingent liability (CL) for SG.

The accounting standard definition of a contingent liability is as follows:

• A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity's control; or
• A present obligation that arises from past events but is not recognised because it is not probable that a transfer of economic benefits will be required to settle the obligation; or the amount of the obligation cannot be measured with sufficient reliability.

Typically, for SG these arise when it provides a guarantee, an indemnity, a letter of comfort or a commitment to make good on a contract or perform an obligation.

Policy areas are responsible for assessing the potential existence of this and notifying central finance.

The prior approval of the Parliament (via the Finance and Constitution Committee) must be secured before entering into any specific guarantee, indemnity, or letter or statement of comfort unless:

• there is specific statutory requirement to do so;
• it is of a standard type and arises as an unavoidable feature of and activity authorised by statute; or
• the sum at risk is less than £2.5m.

SG undertake to notify the Finance and Constitution Committee of all contingent liabilities between £300,000 and £2.5m. The Committee will then have the opportunity to decide what action if any it wishes to take on the contingent liability.

Engagement with the Committee should take the form of a letter from the responsible Cabinet Secretary or Minister to the Convener of the Finance and Constitution Committee. The letter should:

• Give particulars of the contingent liability and explain the circumstances including a full appraisal of the risk analysis process and any other options that have been considered; and
• Be prepared by the relevant business area in consultation with the relevant SG Finance Business Partner (or equivalent).

Finally, the submission to the responsible Cabinet Secretary or Minister should be copied to the Cabinet Secretary for Finance, Economy and Fair Work and the SG liaison officer for the Finance and Constitution Committee.

Further information is available at: Contingent liabilities - Scottish Public Finance Manual - gov.scot (www.gov.scot)

3.4.3 Commercial Legal

Detailed legal commercial due diligence and early engagement with SGLD, as well as external advisors is crucial to consider the proposed implications for SG on any intervention (including but not limited to the potential subsidy control requirements). It is essential that there is an effective management of the intervention process, and in particular, the due diligence exercise to allow us to obtain sufficient information to effectively undertake an audit of a business’ legal affairs which will be vital to:

• Provide us with critical information as part of the consideration of a case;
• Reduce the risk of issues emerging during and after the intervention; and
• Enable Scottish Ministers to determine whether the proposed financial support represents a sensible commercial investment.

Generally, we will seek to undertake legal due diligence on a business to establish:

• Whether the business has good title to the assets being targeted for acquisition.
• The full extent of any liabilities that will be assumed.
• Areas of risk that could be potentially subject to specific indemnities.
• The scope of the warranties that could be potentially needed in the purchase agreement.
• Any ongoing litigation.
• The ownership structure of the business.
• Its governance structure.
• Its legal jurisdiction and UK tax residency status.
• Its health and safety record and certification.
• The position of the business under its key customer and supplier contracts.
• The extent to which the company is conducting itself in a legally compliant manner.
• Any Subsidy Control / Commercial Market Operator issues.

3.4.4 Subsidy Control

All SG interventions must be subsidy control^[11] compliant. Subsidies are payments, tax breaks, or other forms of economic support given to certain industries or sectors to aid or support key parts of the economy or national infrastructure.

Set out below are some additional details on assessing public support to an organisation, where it has been identified that the support is a subsidy and therefore falls within the Subsidy Control regime. It includes triggers and the overall process for making a referral to the UkGov Subsidy Advice Unit (SAU) which may be relevant.

3.4.5 Four limb test

First of all, the funding body needs to assess whether there is a subsidy present. This is done by using the four limbed test as set out in the Act. If the acquisition of any business is not carried out under commercial terms it is highly likely that there would be a subsidy to the buyer. If all four limbs are met then a subsidy is present:

• Limb A – Is the financial assistance given, directly or indirectly, from public resources by a public authority
• Limb B – Does the financial assistance confer an economic advantage on one or more enterprises?
• Limb C – Is the financial assistance specific, such that it benefits one or more enterprises over one or more enterprises with respect to the production of goods or services?
• Limb D – Does the financial assistance have, or is it capable of having, an effect on competition or investment within the UK, or international trade or investment?

3.4.6 The Commercial Market Operator (CMO) Principle

This is the Principle by which financial assistance must confer an economic advantage on an enterprise to meet the definition of a subsidy. Financial assistance does not confer an advantage if it is provided on terms that would have been available on the market to the enterprise analysed through the (CMO) principle. There are a number of different versions of the CMO test; however, the economic and financial tools are similar.

The CMO test assesses whether the State has acted on market terms, and therefore has not conferred an advantage to an enterprise. If this is not done correctly and compliantly, then any transaction or dealings would be at risk of complaint and potential judicial review.

In terms of scope, the CMO principle will consider the market at the time at which the financial assistance is given.

If a public body is relying on the CMO principle, it is important that they obtain sufficient evidence to show that the financial assistance provided could be made available in the market by a private operator with commercial objectives, and is provided on terms that would be acceptable to such a private operator.

It is possible to establish compliance with the CMO principle directly by using evidence that is specific to the financial assistance in question, for example where financial assistance is given at the same time and on the same terms as a significant investment by a private operator (also known as ‘pari passu’). However, other evidence based assessments may be undertaken, including the use of benchmarking and profitability analysis.

Any evaluation of compliance with the CMO should be undertaken with input from experts with appropriate skills and experience. In cases where the commercial assessment is not straightforward, the public body should commission a reputable third party to conduct a report as evidence that the actions proposed to be taken are in accordance with the CMO principle.

3.4.7 Tendered sale and purchase of goods and services

Where financial assistance concerns the sale or purchase of goods or services, the public body can show compliance with the CMO principle where the financial assistance is carried out through a procurement process which is tendered at the market price and is open and competitive.

To rely on this method, you would need to ensure that the procurement process:

• gives equal and non-discriminative treatment to all bidders;
• is open and transparent; and
• is carried out in a proportionate manner.

Evidence of compliance with these rules is essential in demonstrating the CMO principle is met.

If only one bid is received in a tendered process, it is key that you can demonstrate that the process was open to multiple tenders and that adequate safeguards were in place to ensure genuine and effective competition in the procurement process. You should also verify that the outcome corresponds to the market price, using additional analysis, such as benchmarking analysis.

3.4.8 Subsidy competitions

For the purposes of CMO, the presence simply of some kind of competitive process is not sufficient to demonstrate that the financial assistance is not a subsidy.

Where conditions for a subsidy are met, a competition will not eliminate the presence of a subsidy. However, a competition that applies objective and appropriate assessment criteria would assist in demonstrating that the subsidy is the minimum that is necessary to achieve the objective of the subsidy, as required by the subsidy control principles.

3.4.9 Subsidy Control Principles (only relevant if CMO is not satisfied)

Substantive evaluation of assessment against the Principles is required in all cases, but all the more-so if making a referral to the CMA Subsidy Advice Unit (SAU) as information will be in the public domain. The Principles must clearly evidence/demonstrate why we want to support a particular project. The information contained in the assessment must provide the evidence necessary to justify any decision. Subsidy Control legal experts advise that this information would be the first document shared by solicitors should a challenge be made.

• Principle A – Common interest. Subsidies should pursue a specific policy objective in order to:
  • remedy an identified market failure, or
  • address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns)
• Principle B – Proportionate and necessary. Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
• Principle C – Design to change economic behaviour of beneficiary. Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change, in relation to a subsidy, should be:
  • conducive to achieving its specific policy objective, and
  • something that would not happen without the subsidy
• Principle D – Costs that would be funded anyway. Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
• Principle E – Least distortive means of achieving policy objective. Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means.
• Principle F – Competition and investment within the United Kingdom. Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.
• Principle G – Beneficial effects to outweigh negative effects. Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on:
  • competition or investment within the United Kingdom
  • international trade or investment

3.4.10 Sensitive Sectors

Any subsidies provided to sectors classed as a sensitive for the purposes of the Subsidy Control regime are classed as Subsides of Particular Interest (SSoPI). Where the value of the subsidy is over £5m the case and all the details of the support package would need to be referred to the SAU before being granted.

Cumulation rules require subsidy amounts to be aggregated for compliance purposes. SG would need to consider the requirement to make a referral to the SAU if the Head of Terms and the proposed buyer acquisition are found to comprise subsidy of £5m or above.

3.4.11 Competition Marketing Authority – SAU

SG Subsidy Control team have established a good working relationship with SAU so we would be able to set up a pre-referral conversation with them sooner rather than later. Although these discussions are voluntary it is important that we provide all the information we can to assist SAU and provide background if they have further questions. Previous discussions and cases already uploaded on the SAU database have shown us that SAU will ask questions on the nature of the referral, the amounts involved, the nature of the support, individual breakdown of the component parts of a transaction and that they are looking for strong documentary evidence across every aspect of government intervention. Successful pre-referral discussions should reduce the risk that the SAU will reject the request as incomplete, and ensure the SAU is provided with the information it needs to evaluate our assessment.

The SAU will not normally make any public statement about pre-referral discussions on a subsidy.

The SAU will not decide whether a subsidy can be given, or directly assess whether it complies with the Subsidy Control Requirements. SG are responsible for taking decisions about subsidies, based on their own Assessment of Compliance, having the benefit of the SAU’s evaluation.

The following sets out the timeframe for work being undertaken by the CMA:

• Pre-referral discussions - No timeframe.
• Preliminary assessment following a referral - 5 working days.
• Substantive assessment after the SAU gives notice to the public authority that it has accepted the referral -30 working days.

Following this the SAU will publish their report or agree an extension.

The SAU’s evaluation of the public authority’s assessment will be included in the SAU report.

The SAU will aim to ensure that its reports are clear and concise. The SAU’s report will not take the form of a ‘pass/fail’ evaluation, but will identify any shortcomings in the public authority’s assessment (or evidence base), and may identify where the assessment is strong.

The report may also include:

• advice about how the public authority’s assessment might be improved
• advice about how the proposed subsidy or scheme may be modified to ensure compliance with the requirements of the Act

Where applicable, the SAU will comply with any regulations made by the Secretary of State as to content or form. Notwithstanding this, the SAU may decide the form and content of the report it provides. The substantive evaluation in the report will generally follow the structure of the principles analysis in the Analytical Framework of this Guidance.

3.4.12 Cooling off period

Scottish Ministers may not give a subsidy until a ‘cooling off’ period of five working days, beginning on the day after the SAU issues its report, has elapsed. The Secretary of State may extend the duration of the cooling off period (up to a maximum of 30 working days beginning on the date the cooling off period would otherwise end) if the SAU has identified in its report serious deficiencies in the public authority’s Assessment of Compliance.

3.4.13 Legal Challenge

A legal challenge could be raised by an interested party, i.e., another company in the same sector, or by the Secretary of State for Department for Business & Trade. The CMA will take care not to overstep its remit. This was addressed recently in the Contracts for Difference (CfD) report published on their website which stated ‘Our report is advisory only and does not directly assess whether the CfD scheme complies with the subsidy control requirements, nor is its purpose to make a recommendation on whether the scheme should continue to be implemented.’

Where a report identifies significant deficiencies in the public authority’s evaluation, aggrieved parties will draw their own conclusions and may seek legal advice with a view to bringing a challenge. From a public authority’s perspective, it may be that the identification of such weaknesses will cause them to think again about whether or not the subsidy would be lawful.

The courts will not hear subsidy control challenges in the new regime (at least not at first instance). The Competition Appeal Tribunal has jurisdiction to deal with challenges, which will be treated in the same way as judicial review cases (section 70). It should be noted that the Act expressly gives the CAT the power to order the recovery of a subsidy in situations where it has already been given (section 73(3))."

3.4.14 New UK Government Subsidy Control Regulations

Subsidy control regulations changed significantly on 4 January 2023, with implications for policy areas across SG. The changes require teams to follow a four-part assessment framework to ensure compliance with new subsidy control principles, including transparency obligations. If your policy area provides subsidies, please ensure that you and your team read the new subsidy control guidance. Failure to comply could cause SG significant legal, financial and reputational damage. 

3.4.15 Technical

If infrastructure development or any other non-standard deal structure is proposed as part of any intervention then specialist technical due diligence should be undertaken, with specific consideration given to:

• Securing heads of terms for lease or purchase of land or buildings.
• Seeking planning, building regulation and/or any other licencing consents that might be required.
• Technical diligence on costs estimates.
• Financial assessment of cash flow projections including the rate of return the business expects.