State Aid for Policymakers – “Don’t get busted by Brussels!”

Aims & Objectives

• Who we are / What we do • Introduce the concept of State aid • Learn how to spot State aid by applying basic tests • If it

is

State aid, understand how it can be given compliantly

State Aid Unit

• Provide advice and analysis across Government and the wider public sector • SG Corporate resource – Advice, awareness raising, liaison with DBIS/UKRep • Advice to any body with the authority to grant public funding • Separate rules for Transport, Agriculture & Fisheries and Industrial

What do the following have in common?

• Scottish Parliament • Visit Scotland • Shetland fishermen

What is State Aid?

State aid is defined in Article 107 of the Treaty on the Functioning of the European Union: “Save as otherwise provided in this Treaty, any aid granted by a Member State or through State Resources, in any form whatsoever, which distorts, or threatens to distort competition by favouring certain undertakings or the production of certain goods, shall insofar as it affects trade between Member States, be incompatible with the internal market”

Why does the EC Control State Aid?

• To avoid a ‘subsidy race’ • To ensure a level playing field across the EU • To maintain competitiveness and encourage innovation and restructuring

Is State Aid present? State aid can only be present when the award is made to an

undertaking

defined as follow: Is the award beneficiary involved in economic activity? (i.e. any activity consisting in offering goods and services on a given market) Not an

undertaking

– therefore no State Aid present Probably an

undertaking

- apply 4 State aid tests

The Four State Aid Tests

1. Is the aid from a Member State or through State resources?

2. Does it confer a selective economic advantage on an undertaking?

3. Does it have the potential to distort competition?

4. Is it likely to affect intra-community trade?

1. Is the Aid from a Member State or through State resources?

• This includes resources directly or indirectly under the control (or at the disposal) of the State. • Can be granted by central government, devolved administrations, local authorities, public bodies.

• Can include ‘aid’ granted by DMOs to third party beneficiaries.

2. Does it confer a selective economic advantage

Selectivity can be: • Geographical • Sectoral • Type of firm, e.g. SME

2. Potential to confer a selective economic advantage

State aid is an Advantage and a

benefit granted which – “

lightens the burden normally assumed in an undertaking’s budget and which are to be regarded as an economic advantage that the recipient undertaking would not have obtained under normal market conditions

”. • Transfer of resources, grants; loans; provision of services, or relief from charges – tax exemption • Advantage is for free or without adequate consideration

3. Potential to distort competition

•

Potential

to distort is sufficient for this test to be met • Small amounts of aid can lead to distortion

4. Effect on intra-community trade

• Most goods and services are tradable • Commission interpret this test widely • ‘Local trade’ argument difficult to make • Not only applies where trade has been affected but also where they may be an effect on trade

The four tests summarised:

The measure involves the transfer of state resources

NO

The beneficiaries receive a selective economic advantage The measure has the potential to distort competition

NO NO State Aid is unlikely to be present

The measure is likely to affect intra community trade

NO State Aid is likely to be present YES TO ALL FOUR TESTS

Some examples of State aid:

• Grants to firms • Loans and guarantees at below market rates • Tax reliefs or exemptions • Provision of goods and services at preferential rates • Free or subsidised advice/consultancy or training • Sale of public land at less than market value • Public funding of infrastructure benefitting a specific operator/end user

What’s not State aid:

Not all public support is necessarily State aid. Examples of ‘non-Aid’ measures are: • General measures • Aid to individuals or non-undertakings • Payment for goods/services at market rates • Loans at commercial rates / (MEIP)

Case Study 1

• A village hall has fallen in to a state of disrepair. The local authority has decided it will no longer fund it. The local community form a Trust and the council agrees to transfer ownership of the hall to the Trust for a nominal fee.

Case Study 1 (cont/d)

• The Trust will operate on a not-for-profit basis and will be run mainly by volunteers. The aim is to make the hall self sustaining and it will be used mainly by local groups, including a playgroup and a youth club who will pay for use. However, the hall is in a popular fishing village and the Trust applies for public funding to renovate the main room and grounds in order to attract weddings and events such as concerts and film screenings.

• There is a tea room and a hotel in the village.

1. Is the Community Trust an undertaking?

2. If so, use the five State aid tests to consider whether State aid is present in the proposed transactions.

Case Study 1: Is the Trust an undertaking?

1. Hiring the community hall to youth clubs etc. would likely be considered as economic activity as there is likely to be a market for these services.

2. Furthermore, if the Trust begins to use the venue for weddings, concerts or film screenings, then that too is clearly an economic activity The Trust is therefore an undertaking in this example

Case Study 1: The Five State Aid Tests

1. Is the aid through State resources?

Yes; Public funding required to renovate hall. The LA has also sold the hall for a nominal fee.

2. Does it confer an economic advantage on an undertaking?

Yes; the Trust does not pay full price for hall and further public funding covers renovation costs.

3. Is it Selective?

Yes; only the Trust receives money.

4. Does it have the potential to distort competition?

Yes; could be other private operators doing similar things.

5. Does it have the potential to affect intra-community trade?

Probably: Local trade argument may be difficult to make given the intention to host weddings/concerts.

Case Study 2

• A furniture factory is currently funded by an independent charity, but will lose the funding next year. The factory employs 53 people, two thirds of whom are disabled.

Case Study 2 (cont/d)

• The factory needs to relocate to new premises and would like the local council to waive business rates for the first year. This is worth £85,000. The Government has pledged £300,000 but has still to finalise how this will be allocated.

• New machinery is required, and the employees will need to be trained to use it. The company is also willing to take on four new members of staff, who will be employed as apprentices.

1. Is the factory an undertaking?

2. Apply the five State aid tests to determine whether there is State aid present

Case Study 2: Is the factory an undertaking?

1. The manufacture and sale of furniture products is clearly an economic activity 2. The fact that the company was funded principally by a charity in the past has no bearing on its status as an undertaking The factory is therefore an undertaking

Case Study 2: The Five State Aid Tests

1. Is the aid through State resources?

Yes; funding is from the Scottish Government and the Local Authority.

2. Does it confer an economic advantage on an undertaking?

Yes; it would relieve the business of costs that competitors would have to bear themselves.

3. Is it Selective?

Yes; provided to one selected business.

4. Does it have the potential to distort competition?

Yes; business may have its competitive position strengthened in comparison to competitors by input of state resources.

5. Does it have the potential to affect intra-community trade?

Yes, the activity is common across several member states.

What if it

is

State aid?

Compatible Aid

• Article 107(2) & (3) • Guidelines & Frameworks • General Block Exemption Regulation • Approved Schemes • De minimis Regulation

Article 107(2)

(a) Aid of a social character (lifeline air routes in Scotland) (b) Aid to remedy damage by natural disaster/exceptional occurrence (volcanic ash, 9/11) (c) Aid to compensate for the re-unification of Germany

Discretionary Exceptions Article 107(3)

Discretionary Exceptions (a) Regional Aid (EC Criteria) (b) Projects of EC Interest/ serious Disturbances to National economy (c) Regional Aid (National and EC Criteria) Sectoral Aid (d) Culture and Heritage Conservation (e) Residual Clause

Article 107(3)

a) Economic development of areas with abnormally low living standards. (currently includes H&I, attracts higher aid intensities) b) Promotion of project of common European interest or serious disturbance to economy. ( bank bailouts during economic crisis) c) Development of certain economic activities/areas (majority of approved support in Scotland provided under this provision) d) Promotion of culture/heritage e) Other categories as specified by the EC

Guidelines & Frameworks

Horizontal rules • Research & Development & Innovation • Regional Aid • Environmental Protection • Risk Capital • Rescue & Restructuring • Sale of Public Land & Buildings • Services of General Economic Interest

Sectoral Rules

• Transport

–Aviation –Road & Rail –Maritime

• Agriculture & Forestry • Fisheries

A word on State aid for Industrial or Agricultural projects…

• Activity determines which rules should be applied • Primary agricultural production (Annex 1 products) = agricultural rules • Marketing and processing of Annex 1 products (and beyond) = industrial rules

The 'sensitive sectors'

There are various guidelines relating to granting aid in some sectors which may be in overcapacity. These take precedence over any other State aid rules. The ‘sensitive’ sectors are as follows: • Audio-visual Production • Broadcasting • Coal • Electricity • Motor Vehicles • Synthetic Fibres • Shipbuilding • Steel

General Block Exemption Regulation (GBER)

• Regional Investment • SME Investment and Employment • Consultancy and Trade Fairs • Entrepreneurship • Training • Environmental Protection • Research & Development & Innovation • Risk Capital • Disadvantaged and Disabled Workers • Simpler & quicker notification process

Approved Schemes

• Property Development • Structural Funds • SME Investment • Historic Environment Regeneration • Research & Development • Renewables Obligation • Must be approved by Commission prior to implementation

De minimis

Aid

• €200k over a three year fiscal period - industrial sector • €100k over same period for road transport sector • €30k over same period for fisheries sector • €7.5k over same period for agricultural sector • Limit per undertaking – not per project Exclusions: Export aid, firms in difficulty and purchase of road freight transport vehicles • No notification requirements but can involve significant administration

If State aid is present…

Probable State aid is identified Is there cover under any existing approved schemes?

NO YES

Speak with scheme administrator to arrange project delivery Is there cover under the General Block Exemption Regulation?

NO YES

Register/notify a GBER scheme to meet policy aim Is there cover under the

de minimis

Regulation?

NO YES Speak to State Aid Unit and consider notification against Treaty, or other solutions

Follow guidance on administering

de minimis

awards

Notification

• Considered on face of the Treaty • Commission carry out detailed assessment • Benefits of aid must outweigh distortion of competition • Will normally take >6 months • No aid should be disbursed prior to EC approval

Case Study 1

• A village hall has fallen in to a state of disrepair and the local authority has decided it will no longer fund it. The local community form a Trust and the council agrees to transfer ownership of the hall to the Trust for a nominal fee.

• The Trust will operate on a not-for-profit basis and will be run mainly by volunteers, with a few part time employees. The aim is to make the hall self-sustaining and it will be used mainly by local groups, including a playgroup and a youth club who will pay for use. However, the hall is in a popular fishing village and the Trust applies for public funding to renovate the main room and grounds in order to attract weddings and other events such as concerts and film screenings.

• There is a tea room and a hotel in the village.

1. Are there ways in which some or all of the State aid which is present could have been awarded compliantly?

2. How might the council manage the transfer differently to avoid State aid being present?

Case Study 1

•

How could the Aid be made compatible?

–

Scope under GBER (SME investment aid, SME consultancy).

–

Give difference between nominal property price and market price as de minimis aid.

– –

Give funding as a soft loan, using de minimis.

Depending on aid amount overall, de minimis.

•

Could the council have managed the transfer differently, so that State aid is avoided?

–

LA could sell hall at market rate/unconditional bidding procedure.

–

Hall could be rented/sold (possibly at a lower market rate) with restrictions on use

–

LA could rent hall at market rate.

Case Study 2

• A furniture factory in currently funded by an independent charity, but will lose the funding next year. The factory employs 53 people, two thirds of whom are disabled.

• The factory needs to relocate to new premises and would like the local council to waive business rates for the first year. This is worth £85,000. The Government has pledged £300,000 but has still to finalise how this will be allocated.

• New machinery is required, and the employees will need to be trained to use it. The company is also willing to take on four new members of staff, who will be employed as apprentices.

How could the State aid be delivered compatibly?

Case Study 2

•

How could the Aid be made compatible?

– – – –

Local Authority could provide rates relief as de minimis aid, provided thresholds not breached. (under €200k) Scope under GBER for capital costs and staff training costs (SME investment aid, training aid). Subject to relevant Aid Intensities SG could provide £300k funding as a loan at market rates to avoid the presence of State aid.

SG could provide part or all of the £300k funding as an equity investment on market terms, again ruling out presence of State aid

Getting it Wrong!

• Potential investigation by Commission • Aid can be halted • Any illegal aid must be repaid, with interest, by the recipient • Potential action by aggrieved competitors – possibility of recovery order and damages by national courts • Undermines UK government’s commitment to tighter State aid control and reduction in aid

State Aid Modernisation

• Majority of the existing State aid regulations expired either at end of 2013 or have been rolled over until 30 June 2014. The EC is undertaking an ambitious modernisation programme in reviewing these rules.

Key principles of SAM: • Foster growth in a strengthened, dynamic and competitive internal market • Focus enforcement on cases with the biggest impact on the internal market • Streamlined rules and faster decisions

State Aid Unit – contact details

E-mail [email protected]

Website – www.stateaidscotland.gov.uk

Specific contact details for policy leads on ‘contacts’ page of website.

State Aid Unit Scottish Government Business Directorate 3rd Floor 5 Atlantic Quay 150 Broomielaw Glasgow G2 8LU