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Dealing with the public sector? Upsurge in regulatory activity highlights the importance of State aid compliance

30 December 2013

November and December have seen the EU Commission becoming particularly active in enforcing the EU State aid rules. A number of these cases involve situations in the UK (two of which are covered in this note). This highlights an area of risk for companies, of which they need to be aware when dealing with the public sector.

What is State aid law?

State aid is a Member State's financial aid to business which meets all the criteria in Article 107 (1) of the Treaty on the Functioning of the European Union (The TFEU). Article 107(1) declares that State aid, in whatever form, which could distort competition and affect trade by favouring certain undertakings or the production of certain goods, is incompatible with the common market. This general rule is subject to certain exemptions set out in the Treaty and accompanying guidelines of the EU Commission.

State aid can take the form not only of direct subsidies or grants, but also selective tax exemptions, the purchase of private sector assets, guarantees, or goods or services above market price or the sale of public sector assets at below market price. Aid is unlawful unless it falls within a recognised exemption or it has been notified to and cleared by the EU Commission (the body which monitors and enforces the law).

State aid creates risks for both the public and private sector. A recipient of aid may be required to pay back any aid which is unlawful, together with interest on that aid. The recipient can also face lawsuits from third parties (usually competitors) who claim to have been adversely affected by this aid. The risk is highlighted by recent UK-focused activities by the EU Commission aimed at monitoring the enforcement of the State aid rules.

UK SME funding - small not always beautiful

In 2005, the Labour Government set up a 'British Bank', whose purpose was to assist small and medium sized enterprises (SMEs) to obtain credit at a time when the crisis-hit banking sector was reluctant to lend to them. The initiative provided millions of pounds worth of seed capital to SMEs.

The Commission's guidelines allow for State aid to be provided to SMEs which face difficulty in obtaining capital or which operate in underprivileged areas. In November 2013, the EU Commission reviewed the financial assistance which had been provided. It had concerns that, in two particular cases, aid may have been provided which went beyond the guidelines. For example, one fund appears to have invested in two medium-sized companies in the expansion stage that were located in areas not eligible for State aid for regional development.

So far, the Commission has only requested information relating to the British Bank initiative and has not commenced a full-scale investigation. However, this remains a distinct possibility and may well probe all assistance given to SMEs under that initiative. If the Commission discovers breaches of the State aid rules, it could order the illegal aid to be repaid, notwithstanding the detrimental effect this could have on those businesses which received it.

Hinckley Point - EU goes nuclear?

In December 2013, the EU Commission announced the opening of an in-depth investigation to examine whether UK plans to subsidise the construction and operation of a new nuclear power plant at Hinckley Point are compatible with EU State aid rules.

EDF is leading a consortium for the construction of the £16 billion plant, which is being supported with direct funding from the UK Government. The EU has stated that it doubts that there was any market failure surrounding construction of the plant and that subsidies were therefore necessary. The Commission has sought the views of third parties on whether they too share concerns. In our view, there is every likelihood that competitors of EDF will complain that they would risk being harmed by the provision of subsidies on this project. At the very least, this poses serious risk of delay to the Hinckley Point project.

Conclusion - State aid is not just the State's problem

If there is a finding of aid in either of the above cases, the recipients risk an order of compulsory repayment with interest. In the case of SME recipients, this could threaten their existence.

However, this will have no bearing on the matter nor will those entities have the defence that they were unaware of any infringement of the EU rules and that they received the funds in good faith.

These cases send a clear message that private sector entities must be vigilant when dealing with public bodies in a whole range of transactions. This could include, for example, the sale of land to or from public bodies.  Advice should be taken from legal advisers in such situations to gauge the level of State aid risk and to assess whether public bodies are complying with their EU Law duties.

For more information please contact Paul Henty, Partner

T: +44 (0)20 7427 6506