State Aid – a look at recent cases

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.

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The Big Society and State Aid – looking a gift horse in the mouth

The Government’s Big Society programme was announced with much fanfare and is intended, in part, to open up public services allowing charities and social enterprises the opportunity to undertake to provide specific services. Many charities and social enterprises will no doubt have welcomed the programme as a means of expanding the services that they provide and allowing them to reach more beneficiaries.

What has received less attention is some of the legal detail underlying The Big Society programme, which organisations undertaking these services need to be aware of. In particular, any organisation undertaking to provide a Big Society programme should be aware of the rules relating to State Aid.

What is State Aid?

State Aid is defined in the Treaty on the Functioning of the European Union as any:

“aid granted by a Member State, or through state resources in any form whatsoever, which distorts of threatens to distort competition by favouring certain undertakings or the production of certain goods.”

There are four key elements to consider from this definition:

(i) it is granted through state resources;
(ii) it favours certain undertakings;
(iii) it distorts, or threatens to distort, competition; and
(iv) it affects trade between member states.

Taking each of these in turn:

“State resources” essentially means public funding or support. It will of course include direct support, such as grants, loans, sales at below market value and purchases at above market value, but will also include indirect support, such as tax reliefs that affect the public budget.

“Favouring certain undertakings”, means providing a benefit or advantage to an undertaking, which may include public sector and not-for-profit entities. The benefit has to be available to certain undertakings only, meaning that if the benefit is freely available it will not constitute State Aid.

“Distorting competition”, or “threatening to distort competition”, means an actual or potential improvement in the position of the benefitting body in comparison to its competitors. It is worth noting that the Department for Business Innovation and Skills states that almost all selective aid will have the potential to distort competition.

“Affecting trade between member states” means that there is a potential effect on trade between member states. Again, The Department for Business Innovation and Skills states that almost any business or economic activity is capable of affecting trade between Member States. The only conceivable exceptions are where the trade only operates at a local level not close to a member state border. For example, assistance to a local hairdressers or dry-cleaners will probably not affect trade between member states.

In simple terms, State Aid is the favourable treatment of a particular organisation by a government body or department which places that organisation at a competitive advantage.

Can you give any practical examples of State Aid?

In its guidance, the Department for Business Innovation and Skills gives examples of the most obvious types of State Aid. These include where an organisation receives a direct financial benefit from a member state. For example, where a member state provides a grant to an organisation or provides it with a tax relief, which is not otherwise available to its competitors, the member state will be providing State Aid.

Less obvious examples include situations where a member state has provided consultancy advice to an organisation, where the member state has not undertaken a full competitive tender or where a member state provides free advertising on state owned television to a particular organisation. These are all examples of indirect State Aid which any charity or social enterprise, helping to deliver The Big Society programme, could receive.

Why does this matter?

State Aid is unlawful unless The European Commission provides its approval or it is otherwise covered by an exemption. This approval must be given in advance of the State Aid being given. The European Commission can order the recovery of unlawful State Aid (plus interest) from benefitting parties and this is the case even if that may then have a detrimental effect on that party.

Therefore charities and social enterprises, particularly those involved in providing public services under The Big Society programme, need to be aware of the rules relating to State Aid. The danger is that it may be alleged that, in awarding the public service and/or funding to the organisation, the government provided unlawful state aid.

We are aware that some contracts for the award of services or grants are drafted to state explicitly that the awarding party makes no warranties as to whether the award constitutes State Aid and that it will not bear any liability if a recovery is ordered. Therefore, where unlawful State Aid is later shown to have been provided, the charity bears the risk that its funding or support may be withdrawn and a reimbursement sought.

What are the exceptions to the prohibition on State Aid?

The Treaty itself declares certain types of aid as being compatible with the general prohibition although in practice these types of aid will be rare.

The Treaty also provides that the European Commission may approve certain categories of aid as being compatible with the general prohibition on State Aid. To benefit from this approval, the organisation must make an application to The European Commission in advance of the arrangement being implemented to allow it time to decide whether it constitutes unlawful State Aid and to propose up any necessary amendments to the proposal which must be implemented.

A General Block Exemption, introduced by a European regulation, provides that certain categories of aid will not constitute unlawful State Aid and more information about this can be found in guidance produced by the Department for Business Innovation and Skills.

There is also a de minimis exemption and specific rules for Services of General Economic Interest which may mean that some arrangements are exempt from the notification requirements.

Professional advisers will be able to provide more detailed advice as to whether an exemption can apply.

What can we do to avoid falling foul of the prohibition?

Since the organisation in receipt of State Aid bears the risk of that aid later being recovered or withdrawn, the organisation must consider pro-actively whether the arrangements they are involved in might amount to unlawful State Aid.

In particular, charities and social enterprises should carry out a risk assessment to establish whether they are gaining a competitive advantage because of anything being done by a public body. Is the organisation ‘crowding out’ other commercial organisations?

If, after consideration, you believe that State Aid might be an issue then further advice should be sought. An informal approach to The European Commission may be made for a view on whether the arrangement constitutes State Aid. It may also be possible to adapt the arrangement to ensure that it either fails to meet one of the four conditions or it otherwise falls within an applicable exemption.

Summary

All organisations involved in the delivery of public services should have a basic understanding of the rules relating to State Aid. This is particularly the case for charities and social enterprises involved in the delivery of The Big Society programme and hopefully this article aids that understanding. Whilst charities and social enterprises will of course be grateful of all the support they receive it is important to understand that there may be times when support crosses over to unlawful State Aid. In order to avoid more complicated problems further down the line, it would be prudent to consider the arrangement objectively and in detail from the outset in light of the prohibition on State Aid.