Don't trip up over state aid

Provisions in the Localism Act on payments towards EU financial sanctions mean it is more important than ever for local authorities and other bodies to avoid falling foul of state aid rules. Laana Chandler explains the background.

New provisions in the Localism Act 2011 (sections 48 to 57) empower the Government to order that public authorities contribute towards financial sanctions imposed by the European Commission. Councils and other bodies with non-devolved functions (which are public authorities for the purposes of the Act) should be aware that this relates to an infraction of public procurement or state aid rules.

Part 2 of the Localism Act enables the Government to demand payments in respect of certain EU financial sanctions. A Minister can issue a warning notice which the public authority will have the opportunity to respond to before a final notice is issued which will set out the proportion of the financial sanction that the public authority will be expected to meet. The Act specifies that payment can be made either as a lump sum or as periodic payments. With this in mind it is worth revisiting the basics of state aid to ensure that public authorities do not find themselves faced with a financial penalty for an infraction of the rules.

In basic terms state aid is the granting of aid to business by the state. This is prohibited under European law in order to protect the common market by making it unlawful for Member States to provide assistance to support their own businesses.

Criteria

For assistance to be considered state aid, the following four criteria must all be met:

1. Aid must be granted by the State or through State resources;
2. Aid must favour certain undertakings or the production of certain goods;
3. Aid distorts competition or threatens to do so; and
4. Aid affects trade between Member States.

Where all of the above criteria are met the aid is caught by the general prohibition.

The first limb includes aid granted by central and local government and includes private organisations that are controlled by the state. The meaning of ‘aid’ is interpreted widely and is most commonly in the form of a cash grant, but it does not cover commercial loans or the promotion of economic activity.

When considering the second limb of the test it should be noted that an ‘undertaking’ is an entity engaged in economic activity (this can include voluntary and non-profit making bodies). It is possible to favour an undertaking both directly and indirectly by conferring an advantage that cannot be found on the open market. Therefore any aid that is open to all undertakings will not be state aid.

The third limb of the test is always taken to apply.

The fourth limb of the test is taken to include actual and potential effects, so is likely to apply where aid is granted.

Exemptions

If it is considered that the proposed aid is state aid, you can look to establish if the aid is compatible or excepted. There are many types of aid that can be compatible or excepted provided that the aid complies with the rules set out in the applicable Regulations or exemptions.

The most common exemptions relied upon in local government are the de minimis exemption and the General Block Exemption (GBER).

The de minimis exemption applies to aid that is under €200,000 granted within a rolling three year period. Where this is to be granted the provider must inform the recipient that the aid is intended to be de minimis, the provider must obtain information from the recipient that it has not received aid over the de minimis threshold in the three year period and only grant it where such confirmation is received.

The GBER covers 26 categories of aid (including SME investment, certain types of research, training and energy saving measures) that must comply with certain proportions of aid to non-aid amounts and maximum amounts of aid. For example, newly created small enterprises can receive up to €2 million in the first three years of business depending on where the business is based and subject to annual limits.

At Enfield Council, state aid is always considered at an early stage of a proposal to ensure compliance with European Law – this has become even more important since the Localism Act has been made law.

If it is found that a proposal does not meet the requirements, it can be adapted by ensuring that there is an element of competition in the proposal, by opening the aid up to all undertakings, or by ensuring that the aid is at market value.

Another option that can be considered is notifying the Commission of the proposal. If this approach is taken a period of six months must be factored in for the Commission to consider the proposal.This will be done by reference to guidelines and frameworks that are already published. Where the Commission does not find that the proposal is compatible with the Treaty as it affects competition and trade between Member States the aid cannot be granted.

Enforcement

The granting of an illegal state aid can be enforced in two ways. An individual with standing can bring a claim in a national court against the granting of the aid with the potential of damages being awarded. The Commission is empowered to investigate a breach of the Treaty and to levy a fine against the Member State. Any such fine can now be handed down in whole or part to a Council under the provisions of the Localism Act.

The provisions of the Localism Act are not yet in force (the Government is currently out to consultation on the Policy Statement for Part 2 of the Act) and will only apply prospectively, giving councils time to ensure that their houses are in order.

Laana Chandler is a solicitor in the Major Contracts & Commercial Team at Enfield Council. She can be contacted on 020 8379 6484 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..