Staking your claim

State Aid compliance will be essential to successful Regional Growth Fund bids.  Jonathan Branton and Jay Mehta provide some top tips for staying on the right side of the rules.

The second round of applications for the Coalition Government's £1.4bn "Regional Growth Fund" (RGF) is shortly to close (1 July).  Experience from Round 1 as well as the recent RGF road show run by the government department responsible for its administration (DBIS) has made plain that State aid compliance is a fundamental aspect to any bid which if not satisfied will cause that bid to fall at the first hurdle.  It is therefore plain and simple that any proposal for government funding must be State aid compliant.  DBIS has indicated that while it will be sympathetic to different State aid positions, even those that require individual notification to the European Commission for prior approval before implementation, they must all be fundamentally sound.

The State aid justification in a first RGF application need not be written up in extreme detail, but it must be made clear.  Those bids that are successful will then enter a due diligence phase in which the State aid justification must be articulated in more depth and pass a higher degree of scrutiny.  To that extent then, even if the State aid justification was not heavily articulated during an application, it needs to "hold water" during due diligence, so it pays to have been clear on this all along.

What is State aid?

State aid is the European Union law by which any EU Member State may not legally give money to business in any old fashion.  An exhaustive set of rules and principles exist to regulate this, as monitored and regulated by the European Commission.  For State aid to be legal it has to qualify within a recognised approval set out by the Commission before it is granted to the beneficiary.  Commission approval is given via one of three methods, namely:

(i) fit within a so-called "block exemption" – a published set of situations and corresponding conditions under which the Commission has pre-authorised aid to be given across the EU (NB. this is the most useful for RGF bids as explained below); or

(ii) fit within a prior approved national scheme, namely a national framework scheme which the Commission has approved on reference from a given Member State, and which sets out criteria and limitations within which aid may be given in that State; or

(iii) notify a project individually to the Commission and obtain an individual approval decision.

Of course, the other great way of finding a State investment to be State aid compliant is to conclude by reference to the law that it does not qualify as State aid at all.  There are limited examples of this likely to help RGF bids, but some may be of use as considered below.

Methods of achieving State aid compliance (1) – no State aid at all!

The best way of finding a State investment to be State aid compatible is to conclude by reference to the law that it does not qualify as State aid at all.  If this is the case there are no notification requirements, no volume limitations and no further concerns albeit of course there is a risk in case the assessment is wrong - that ultimate risk being that a beneficiary found to have received illegal and unauthorised aid could be asked to repay the aid plus interest from the date of grant. That said, if the intention of an RGF bid is to obtain specific funding towards a business in order to fund a particular project, finding no State aid at all will normally be difficult.  Nevertheless, here are some of the often used possibilities:

• Have the State invest rather than grant (market investor behaviour).  If the State can be seen to behave as would a market investor – eg. invest in a project on market terms, preferably alongside private investors, there is no State aid.

• Structure projects in a way that they primarily benefit the public at large.  Another example of a no aid finding is the State assisting projects that essentially benefit the public at large, where specific benefit to individual persons and undertakings may be seen to be incidental. This lends itself in particular to projects of general infrastructure for example.

• Structure a project such that the State retains activity within itself and does not act in a manner that distorts competition.  There is precedent for finding no aid through the State conducting mere "direct development", ie. the State uses own funds to develop own land and properties.  Assuming it does not subsequently sell or lease to private parties at less than open market value (OMV – achieved by open tender or expert testimony), no aid is involved.  For example, the State may remediate its own polluted site then sell at OMV, even if the whole costs are not fully recovered.  No one is disadvantaged because absent intervention the site would remain derelict due to imbalance of cost to value, and the buyer pays OMV anyway.

• Structure a project to be a service of general economic interest.  Without granting aid, the State may fund and entrust a company with the provision of a clearly defined service to the public, provided there is a clearly defined need to fulfil, the parameters of compensation are defined in advance, and the price paid is no more than market value (established by competitive tender or prior study of the costs a well-run undertaking would incur plus reasonable profit).

Methods of achieving State aid compliance (2) – fit in block exemption

In 2008 the European Commission adopted the so-called General Block Exemption Regulation (GBER) to consolidate the various other instruments that had existed previously into one convenient place and thus simplify matters.  Put simply, provided aid can be fitted into the different categories set forth in GBER and kept to the individual limits also set out, the aid may be given without the need for individual Commission notification.  This is the point of GBER, to make life easier and simpler for Member States when aiding those areas of activity the EU has deemed beneficial to subsidise, and in amounts that are not so big as to particularly endanger free competition.  A non-exhaustive table of the most commonly used GBER aid methods is as follows:

The above is non-exhaustive and hides many further nuances which must be borne in mind, but nevertheless is a useful quick reference point.  Of course, it should be recalled that the maximum amount figures given are not absolute – GBER simply says that if these amounts are to be exceeded, an aid will need notifying to the European Commission for prior approval before it may be given.  It may reasonably be expected that DBIS will prefer projects that do not require such notification, but the biggest projects attracting the biggest job creations undoubtedly will, and this need not ultimately be a problem, just a delay factor.

Outside GBER, the other well known block exemption is known as "de minimis".  This effectively states that for minor amounts (up to €200,000 per undertaking in any three year period), they are so small as to be of no consequence.  This is unlikely to be of much use in a GBER project requesting aid in excess of £1m, but can be very important in circumstances where there may be multiple beneficiaries, for example so-called "programme bids".

Methods of achieving State Aid compliance (3) – fit in a prior approved national scheme

This is likely to be of limited relevance but the UK has previously notified and received approval for some framework schemes, which if circumstances fit can offer a further State Aid justification route.  The examples are highly specific but may just work in some cases.  Examples include contributions towards the extra costs of remediating derelict land, gap funding for housing, and aid for the costs of maintaining heritage sites.  RGF is not a pre-notified and approved scheme of this nature, because RGF does not specify the method in which its funds will be spent, or by whom.

Methods of achieving State Aid compliance (4) - individual notification to the Commission

If all else fails this should not be discounted.  It will also be important for the largest RGF bids which exceed GBER maximum amount thresholds as some RGF (round 1) successful bids have.  The only things to be conscious of however are that if a European Commission notification is required, an aid application must stand up to the extra levels of scrutiny that the Commission will apply (which means very careful reference to relevant case law and guidelines documents as may apply on the facts), and be ready for the inevitable delay that seeking Commission approval entails.  Even in a best case scenario this will mean two to three months of delay and often considerably more.  Nevertheless, for the biggest projects the effort required and the delays are definitely worth the effort assuming final approval is given.

Concluding remarks

The above are non-exhaustive examples of how State Aid may be used to support RGF bids.  There are many more ways again, particularly if companies are happy not to see all the aid sought paid directly to them, for the purposes of driving future profits.  It is important that RGF bids comply in some manner or else disappointment awaits.

Jonathan Branton and Jay Mehta are solicitors at Cobbetts

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