COVID-19 and State aid: Local Government Impacts

Fenella Morris QC and Kelly Stricklin-Coutinho set out what local authorities need to consider in relation to state aid if they are looking to provide support during the COVID-19 outbreak.

The European Commission has enacted a Temporary Framework under which Member States may assist those industries or businesses which need help as a result of the impact of COVID-19 on them. The Temporary Framework requires an application for a clearance on the part of the Member State, and the Commission has set up a specific, and quick, system by way of which such an application can be made. It has turned around some applications in 24 hours and all applications have been dealt with in a matter of days.

The Commission has also emphasised that aid may be given in the usual way under the GBER.

Local Authority Impacts

Local authorities may be asked to deal with the impacts of COVID-19 in a number of ways which might ordinarily trigger the state aid rules. The types of measure which could be affected include:

• Businesses asking for a waiver or deferral of charges otherwise payable by them, particularly where business rate relief does not apply to them
• Businesses asking the Council for guarantees, loans or other financial assistance
• Local authorities seeking to comply with their obligations for the provision of services where the providers of those services need financial assistance
• Assisting sporting venues which have been forced to close
• Providing financial assistance for the conversion of sites to field hospitals and other temporary medical facilities.

Application of State aid rules

While the European Commission has been quick to step in to ensure Member States can give assistance without State aid difficulty, it has been clear that aid must be given within the scope of the rules, and must be given as a result of the COVID-19 situation.

Aid which would not fall within the prohibition set out in Article 107 TFEU may still be given. Measures which otherwise fit within the GBER or other exemptions will also continue to be permissible. Many of the above measures, however, are unlikely to fall within those circumstances.

Temporary Framework

The Temporary Framework [1] set up by the European Commission is based on Article 107(3)(b), which concerns situations where the aid is required to remedy a serious disturbance in the economy of a Member State. It provides for five types of permissible aid:

1. Direct grants, selective tax advantages and advance payments, whereby Member States can set up schemes to grant up to €800,000 to a company to address its urgent liquidity needs.
2. State guarantees for loans taken by companies from banks
3. Subsidies public loans to companies with favourable interest rates, with the intention of helping businesses cover immediate working capital and investment needs
4. Safeguards for banks that channel State aid to the real economy, particularly SMEs (which is direct aid to the banks’ customers, not to the banks themselves)
5. Short-term export credit insurance.

Each of those categories has its specific conditions, and some have sector specific requirements.

Measures which are sought to be given under the Temporary Framework must be notified to the European Commission, although the Commission has committed to a very rapid turnaround of such measures. So far, it has turned around applications in the shortest order. 

The Commission has also set out what is required in a notification application, which includes reference to the scope of the measure (geographical, budget, form, beneficiaries and duration), as well as the causal links between the COVID-19 outbreak and the damage suffered, and the causal links between the damage and the aid. Further commitments are also required to prevent double dipping of aid provided with insurance payments or other forms of damages.

Danish clearance

Prior to the Temporary Framework being put in place, the Commission cleared (in 24 hours) an application from Denmark to permit it to provide a compensation scheme for the cancellation of events related to COVID-19 for a specified time frame. The budget of the scheme is around €12 million and is for events planned between 6-31 March 2020. The Commission considered the measure to be one which would constitute aid within the meaning of Article 107(1) TFEU, but relied on Article 107(2)(b) TFEU, which concerns aid to make good damage caused by natural disasters or exceptional occurrences. The Commission held in this decision that COVID-19 is an exceptional occurrence.

Other factors the Commission took into account were the causal link between the scheme and COVID-19 that the measure was targeted and proportionate, and that applications for funding must be backed by evidence. 

Other measures

The Commission has set out that it will consider alternative measures to the ones set out in the Temporary Framework, and that measures for compensation for particularly badly affected sectors (such as transport, tourism, culture, hospitality and retail) may be considered on the same basis as the Danish clearance. 

Measures designed in line with the GBER will not even require the involvement of the European Commission. 

Interaction with other sources of damages

The Commission requires that authorities which give aid must also ensure that they recover the aid if other damages are paid out, for example, by way of arbitration, insurance payment or litigation.

What to consider

If local authorities wish to give assistance, they should consider whether such assistance falls under existing GBER or other permissible aid. If it does not, they will need to consider applying to notify of the specific measures they intend to provide. Guidance on what such an application should contain must be followed for the best chance of a positive outcome.

Authorities may also wish to consider circumstances in which they are obliged to assist, either by commercial imperative, or as a result of their duties. State aid law continues to apply in those circumstances.

Measures which are not directly related to the impact of COVID-19 will be dealt with separately, although there may be some circumstances where original circumstances are worsened by the impact of the COVID-19 outbreak.

Fenella Morris QC and Kelly Stricklin-Coutinho are barristers at 39 Essex Chambers. Fenella can be reached by This email address is being protected from spambots. You need JavaScript enabled to view it. and Kelly can be reached by This email address is being protected from spambots. You need JavaScript enabled to view it..

[1] https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_temporary-framework.pdf