Blogged: #StateAid bear traps await the unwary local authority

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In September 2016, BBC Oxford carried a seemingly innocuous article about Oxfordshire County Council’s proposed closure of 26 children’s centres throughout the county at the end of March 2017 as it struggles to achieve £6M worth of savings across the Council. (The original article can be accessed here – £1M fund for axed Oxfordshire’s children’s services).

So far, so unremarkable as public bodies across the United Kingdom, and further afield, struggle to balance finite financial resources in this current ‘Age of Austerity’.  However, the #StateAid angle to this news story emerged as BBC Oxford reported that Oxfordshire County Council had approved a motion by local Green Party leader, Cllr David Williams, to scrap rental charges for charities and community groups wishing to occupy the closure threatened centres.

Speaking in support of Cllr Williams’ motion, the BBC reported Labour councillor Gill Sanders as saying:

“Not having to pay rental charges will be a huge benefit to very many groups and will give them the additional time to find alternative financial support.”

Under-threat Oxfordshire children’s centres would have rents waived

And herein lies the dilemma for any State Aid practitioner, or indeed any local authority solicitor, is where does a sincerely held and laudable policy intervention to reduce social inequalities and combat poverty end and State Aid control begin?

As another local Oxfordshire politician noted, Cllr Yvonne Constance of the Conservative Party who abstained on the motion, perhaps presciently, [that it was a] “very difficult amendment to support” because it was an “open-ended commitment to spend” (Ibid). It is precisely the unknown quantum of Council financial support to third parties for non-statutory services that sets the proverbial klaxons ringing in the ears of State Aid practitioners.

To bring some order and rationality, the author shall carry out a high level State Aid compatibility assessment of Oxfordshire County Council’s policy resolution based upon publicly available information sources.  The purpose and rationale behind this exercise is neatly encapsulated in the UK Department of Business, Innovation & Skills State Aid guidance document (available here) which (helpfully!) reminds readers that

“A scheme can be State Aid even if it is designed to benefit society” (p. 4)

adding that;

“If your policy includes state aid, it doesn’t necessarily mean you can’t do it; it does mean you will need to devote time and resource to ensuring it is legal.” (Original emphasis, Ibid)

The starting point for any meaningful State Aid assessment is the ‘four tests’; viz

1. The assistance is granted by the state or through state resources;

“Granted by the State” in a UK context is a broad brush definition, capturing not only Central (UK), National (the Devolved Administrations in Northern Ireland, Scotland and Wales) and Local Government bodies, but also seemingly autonomous bodies such as the twelve National Lottery funding bodies which distributes public funds raised by the sale of Lotto tickets.

Oxfordshire County Council is, immutably, a public (or State) authority.  [Indeed, one tracing its statutory roots all the way back to the Local Government Act of 1888 as Council Archivist, Chris Gilliam, informs readers in this 2011 note].

Since 1961, the European Court of Justice has consistently interpreted the concept of State Aid solely by reference to its effects (see case C-30/59 De Gezamenlijke Steenkolenmijnen in Limburg v High Authority of the European Coal and Steel Community) where the Court found that the decisive criterion is not the form the State intervention takes, its legal nature or the aim it pursues (however noble in public policy terms), but the result to which it leads.

As further developed in C-173 Italy v Commission, 1974 ECR 709,

“Any intervention which gives rise to an economic advantage, accompanied by a corrective decrease in state resources, and benefits a particular undertaking or sectors of production [in this case the Italian textile industry] is, in principle. State Aid for the purposes of Article 87 [107 TFEU] of the Treaty”

Following the Court’s reasoning, there can be little doubt that the approved Council motion involves the Council foregoing financial income otherwise due to it from rental income from the children’s centres in question, thereby the use of state resources is engaged and this is question is answered affirmatively.

2. It favours certain undertakings or the production of certain goods;

The Council is currently assessing bids from charities and other community based groups for the occupation and management of the said children’s centres.  As established in CJEU Case C-41/90 Hoefner and Elser v Macrotron GmbH, an “undertaking” is defined as any entity engaged in economic activity, regardless of its legal form or method of funding.

Charitable bodies, community groups, non-profit organisations and even government bodies (e.g. the Irish Housing Finance Agency in case N209/2001) can all fall under the definition of an “undertaking” when it is offering goods and services on the market (see Fenin v Commission T-319/99).  In other words, economic activity being defined as activity for which there is a market for comparable services offered by commercial competitors.

The rationale behind Oxfordshire County Council’s decision to seek to close almost half of its children’s centres is that it no longer wishes or is able to fund non-statutory services from the centres it wishes to close.  By logical extension, therefore, the activities which it wishes to no longer fund are non-statutory services, outside the remit of its core functions as a local authority and therefore unless very carefully defined otherwise, economic activities.

By offering to waive, on a seemingly open ended basis, the rental charges due on its closure threatened centres it is offering a selective advantage that would not normally be available to other tenants of Council owned facilities.

3. It distorts, or threatens to distort, competition

Almost all aid has the potential to distort, or threaten to distort competition.  It is important to note that Article 107 TFEU which contains the general prohibition on State Aid does not place a quantum on the amount of State Aid that is judged to be distortive. Settled case law of the ECJ (e.g. Case T-214/95, Vlaams Gewest v Commission, 998 ECR II-717) that even aid of a relatively modest amount is likely to distort competition.  

Competition is distorted if the State Aid in question strengthens the competitive position of the recipient by, say, reducing its operating or investment costs in relation to its rivals (Case 234/84 Belgium v Commission, 1986 ECR 2263, at para 22).  As BIS’ State Aid guidance states “Almost all s aid will have potential to distort competition – regardless of the scale of potential distortion or market share of the aid recipient”. Once again, the State Aid test for this question is held as found.

An important qualification to the above statement can be found in the De Minimis Regulation (EU/1407/2013) which specifies that aid of no more than €200,000 over a rolling three year period does not have a material effect in terms of distorting competition or the functioning of the Internal Market, but more about de minimis later….

4. It affects trade between Member States

The Commission’s interpretation of this is broad – it is sufficient that a product or service is subject to trade between Member States, even if the aid beneficiary itself does not export to the EU.

Aid may help local firms to maintain, or even increase, their domestic production at the expense of undertakings in other Member States (which have less chance of exporting their products/services to the Member State that granted the aid).  Consequently most activities are viewed as tradable.

The only exception to this are single person businesses, for example a hairdressers, with a purely local market and not located close to a Member State border (A relatively straightforward criterion for the bulk of mainland Great Britain, with the obvious exception of Northern Ireland and, possibly, those areas in close proximity to the Channel Tunnel and the border with France.  And Gibraltar!).

The test is held.

Outcome

This, admittedly, high level State Aid assessment aims to demonstrate that if not de jure than certainly de facto that there is the very real and present danger of incompatible State Aid being awarded by Oxfordshire County Council if it acts in strict adherence to the terms of the motion approved by Elected Members very recently.

This a serious situation for any public authority to find itself in, all the more so that it is the beneficiaries, or recipients, of the State Aid (in this case the very same community groups and/or trusts) whom receive and benefit from the aid who will have the liability (potentially personal liability in the cases of unincorporated community associations) for repaying the aid, plus interest.  Similarly, the responsibility would lie with the United Kingdom Government to take concrete actions to recover the State Aid, lest it face infringement proceedings itself in the European Court by the Commission for failure to recover State Aid as the tweet below illustrates:

So what solutions present itself?  After all, just because a measure is State Aid doesn’t automatically mean that it can’t be awarded albeit it may need to be re-designed or revised in order to ‘shelter’ under a compatible State Aid umbrella.

De Minimis

The European Commission considers that State Aid of no more then €200,000 (~£179,810 at November 2016’s InforEuro exchange rate) over a rolling 3 year period to be non-distortive aid.

There are (reasonably!) detailed requirements for a public authority considering awarding de minimis aid in that the aid (in cash terms or if awarded in any other form as the Gross Equivalent Grant) be quantified prior to award (in this case, this would be the value of the rental charges waived)

Where an aid provider grants de minimis aid, it must:

  • Inform the recipient in writing of the prospective amount of aid and of its de minimis character, referring to the de minimis regulation;
  • Obtain from the recipient full information about any other de minimis aid received during the previous two fiscal years and the current fiscal year;
  • Only grant the new de minimis aid after having checked that this will not raise the total amount of de minimis aid received by the undertaking during the relevant period of three years to a level above the permitted ceiling.

Additionally, the Council would be obliged to record information necessary to demonstrate that the requirements of the de minimis Regulation has been complied with, and to keep records of all de minimis aid paid for ten years from the date of the last payment.

Alternative compliant State Aid options

Possibilities for compliant state aid also, potentially, occur through utilisation of the General Block Exemption Regulation.  In particular Article 15 (SME Investment and Employment Aid); Article 16 (Aid for Small enterprises newly created by female entrepreneurs) or even Article 39 (Training Aid) dependent upon various factors, a demonstrable incentive effect, aid intensity limits and accumulation etc.

Conclusion

Whilst the initial reaction of most public servants can often be to hide under their desks when the issue of State Aid rears its ugly head, it need not necessarily be so.  What this blog post hopes it has demonstrated is that the status quo as exemplified by OCC’s decision simply to waive rental charges at its closure threatened family centres in favour of community groups, trusts etc willing to take them over is untenable in State Aid terms without some additional policy actions to ensure that both it – and the community groups in question – do not fall foul of EU State Aid regulations which will continue to be extant up until the point post 2 years after formal submission of Article 50.

Up until that point, if it is ever reached, State Aid bear traps await the unwary local authority!