The Government’s The Big Society programme presents many charities and social enterprises with an opportunity to expand their operation into public services and deliver more extensive social outcomes. Charities and social enterprises involved in the provision of public services, and particularly those who receive direct or indirect support from the State, do though need to be aware of the rules relating to State Aid.
What is State Aid?
Put simply, State Aid is funding or support provided by the public purse which places some organisations at a competitive advantage over their peers, and which therefore threatens to distort competition and affect trade within the European Union. It can take many forms, the most obvious being a donation of money from Government. Alternatively, it could take the form of tax reliefs or the lending of additional resources or support.
Why does this matter?
Unless State Aid is authorised by the European Commission, prior to the arrangement being effected, it is unlawful. The European Commission can prevent unlawful State Aid from being provided and order the repayment of any sums already paid out. Between 2000 and 2012 the European Commission declared that State Aid was unlawful in 172 separate cases and ordered recovery of sums amounting to a total of €15.7 billion. Clearly the issue of State Aid is one which the European Commission takes very seriously and is one which charities and social enterprises need to be alive to.
Can you give any practical examples of State Aid?
We will briefly consider 3 recent decisions of The European Commission as to whether State Aid was being provided:
1) Support for cinema in Sardinia
We shall start with a fairly clear example of State Aid. In this case, the Region of Sardinia wished to support the production of audiovisual works in its region and the distribution of audiovisual works with an artistic content and links with the region’s culture. It purported to do this through a number of measures, including principally by providing aid, particularly grants, to various bodies who produced, promoted, distributed and exhibited films of regional interest.
It is important to remember that State Aid applies to the application of all state resources, including by local government. In this case, it was clear that the support from the local government did strengthen the position of a selected group of businesses as compared with their counterparts and therefore constituted State Aid.
2) Green Investment Bank in the UK
In this case, the UK authorities wished to establish and fund the Green Investment Bank for the purpose of providing financing to ‘green projects’, such as offshore wind power projects, within the UK. The intention was for the funding to be provided alongside other funding from private investors. This example is interesting since it potentially involved two levels of State Aid. The first level of State Aid was to the Green Investment Bank itself as the recipient of government money, and the second level was to the projects which were receiving government money from the Green Investment Bank. This again highlights the importance of being able to recognise ‘state resources’ as benefiting particular organisations.
The European Commission only considered the first level and ruled that the funding provided to the Green Investment Bank did constitute State Aid. A decision on the second level was not made, since it was outside the European Commission’s remit, but it is likely that, if such a similar case was to come before the European Commission, this too would be found to constitute State Aid.
3) Ultra low-emission vehicles in the UK
A slightly more complicated example of State Aid involved the UK, which intended to setup a grant scheme to support the purchase of ultra low-emission vehicles. The UK recognised the significant environmental benefits of these vehicles but noted that they were significantly more expensive, as compared with traditional internal combustion engine vehicles. The UK therefore proposed to provide a grant to individuals and businesses to reduce the expense and encourage them to buy the vehicles.
Clearly the proposal involved the use of government money, which was being provided to businesses which decided to purchase the vehicles. The European Commission considered that this in itself was not State Aid since the offer was open to all businesses and did not therefore place one at a competitive advantage over another.
However, the European Commission did consider that there was indirect State Aid. Only some car manufacturers actually produced cars that were capable of meeting the criteria for the grant. Therefore these particular manufacturers had a competitive advantage over other manufacturers who did not and could not benefit, albeit indirectly, from the grant. This is not an obvious example of State Aid and many may have only considered the direct form, available to the purchasers. This case does illustrate the need to think carefully about the effects, even indirect ones, of receiving government support.
Lessons for charities and social enterprises
In involving themselves in the delivery of public services, and receiving state support to do so, charities and social enterprises need to be mindful that they are not unwittingly receiving unauthorised State Aid. The danger is that a social enterprise will have to repay any funding it has received and this is the case even where it is blameless or the repayment may adversely affect it (perhaps where it has already started incurring expenditure).
Increasingly, we are seeing grant agreements that state that the grant provider gives no guarantee that State Aid is not being provided and shall not be liable if a recovery is later sought by the European Commission. The risk is therefore very much with the charity or social enterprise in receipt of support, and therefore the onus to ensure the rules are complied with.
In each of the 3 above cases The European Commission did actually allow the support to continue. However, this does not detract from the importance of charities and social enterprises being able to recognise instances which may potentially constitute State Aid. As already mentioned, State Aid must be approved in advance by The European Commission. Whenever a charity or social enterprise receives support from the state, or is involved in delivering public services, it should from the outset consider carefully whether this is potentially placing it, or particular businesses, at a competitive advantage against others.