The complexities of State aid and the importance of early consideration in projects and funding applications
Friday, 27th November 2015
Compliance with the State aid rules should always be considered at the outset of a project where any form of financial assistance (support or funding) is being provided by (or through) a public body to selected organisations.
State aid rules
So… what is State aid? Please see here.
The State aid rules are complicated; it is not always clear if State aid is present.
Any funding or economic/financial support from a public body will be a transfer of State resources even if it originated from private sources before hitting the public body''s bank account. The presence of State aid in arrangements is not always obvious. An applicant for State aid may be acting as a "conduit" only by flowing all of the aid to third parties and therefore, when applying the State aid criteria, all potential recipients and beneficiaries of the aid must be considered, including any delivery partners, contractors or end users.
The following examples are all likely to be caught by the State aid rules and involve State aid:
- Land sold or rented at below market value
- Loans and guarantees with preferential terms, e.g. below market interest rates
- Public contracts not procured competitively
- Funding of infrastructure projects
- Funding for investment, research, training
- Selective promotion of private companies
- Funding to write off losses
- Funding of social enterprises and charitable organisations engaged in economic activity
A public body can only provide State aid if the proposed aid can be structured as compatible State aid, being aid:
- Provided in accordance with a relevant exemption or derogation
The application of exemptions and derogations is complex, where each exemption and derogations has its own conditions that must be fully met. For example:
(i) When seeking to rely on a block exemption, all general conditions in the General Block Exemption Regulation 2014 must be fully satisfied as well as the specific conditions necessary for the particular block exemption you wish to use.
(ii) There are a number of sectors and activities that are excluded from falling within exemptions.
(iii) The size of an undertaking can be decisive on whether an exemption will validly apply and applies to the whole group structure including subsidiaries in other Member States and outside the EU.
(iv) Eligible costs and aid intensities are different for each block exemption.
(v) Cumulation rules apply and need careful attention where a project involved multi-funding streams.
(vi) The De Minimis exemption requires you to obtain details of all de minimis aid the proposed recipient has received in the relevant 3 financial year period to assess the availability of the exemption.
- Notified to the European Commission and approved (before it is granted)
This process typically takes between 6 and 12 months. Each notification triggers a preliminary investigation by the European Commission, based on the relevant European Commission Guidelines or Framework for the particular category of aid involved.
- Provided in accordance with an existing aid scheme notified to and approved by the European Commission.
These schemes are normally bespoke and contain their own set of conditions. Their use for a particular project must be assessed on a case-by-case basis to ensure the project fully comes within the scope of the approved scheme.
Implications of breaching the State aid rules
If unlawful State aid is given, the consequences can be severe:
- A challenge from third parties (10 year limitation period).
- European Commission investigation (this can result in funding programmes being put on hold and the decision is published in the EU''s Official Journal).
- Full repayment with interest from the date granted - the repayment burden sits with the recipient(s) of the unlawful aid. Consequently recovery orders can have knock-on effects and risks of insolvency to recipients, particularly SMEs and project companies.
- Political and reputational consequences for the public body concerned and the UK government.
What can you do to ensure State aid is considered and considered early?
It is imperative that State aid is considered early on in projects. Remember, the potential presence of State aid does not necessarily mean that a project cannot proceed, provided that it is awarded in compliance with State aid rules. Early consideration gives much greater opportunities to ensure that a project can be structured and developed in a way that will ensure State aid compliance - attempting to do this at the later stages of development once key structures have been agreed can prove extremely difficult.
Practical steps and considerations to help ensure compliance:
- Review and update internal policies to flag State aid as an initial consideration in all projects, the process to follow, and the contact details of the relevant "go-to" person for any queries.
- Ensure that all application forms for funding and support include a State aid section and that applicants are asked to show they have properly considered whether or not they believe State aid is present.
- Undertake a detailed State aid assessment for all occasions where you are proposing to award public funding or support - this needs to confirm the State aid status of the proposals at all levels of potential beneficiaries of the funding/support and detail exactly how the proposals are State aid compliance. State aid assessments also have the benefit of identifying any potential risks that can then be picked up via warranties from the recipients in the Funding Agreement.
- Build in at least 9 months to project timetables where State aid notification to the European Commission is required.
- Remember - Projects can be restructured to ensure that State aid is not present or is capable as being provided as compatible State aid. Consider whether procurement processes for the project or contracts to be awarded under the project can assist with State aid compliance.
- If at all in doubt, seek further advice. For more information, please contact a member of our State Aid Team.