This workshop explores the basics of state aid, identifying state aid and de minimis state aid.

1. State aid workshop
London, September 2017

2. Introductions
Alex Kynoch – 0115 976 6511
alex.kynoch@brownejacobson.com
Angelica Hymers – 0115 976 6092
angelica.hymers@brownejacobson.com

3. Welcome
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4. Agenda:
• Refresher on State aid principles – 1:00 – 1.30
• Workshop 1.30 – 2.30
• Break – 2.30 – 3.00
• Workshop 3.00 – 4.15

5. State aid: the basics

6. What is State aid?
Any assistance or subsidy given by a
Member State which distorts or threatens
to distort competition.

7. Why does State aid compliance
matter?
• Unauthorised State aid is unlawful!
– Reputational damage
– Legal costs and fines
– Recipients of aid may be ordered to repay the aid, even if this
leads to insolvency
– The ability to rely on the General Block Exemption Regulations
can be withdrawn

8. What sort of thing can be State aid?
• Grants
• Soft loans
• Provision of services
• Transfer of land or assets
• Writing off debts
• Anything that is provided at below market value

9. Identifying State Aid: Key Tests

10. How to spot State Aid
The key criteria for State Aid to be present are identified as follows:
• The aid is granted by the State or through State resources;
• The aid confers an advantage on the recipient;
• The aid is selective, favouring only certain undertakings or the
production of certain goods;
• It distorts or threatens to distort competition;
• It affects, or has the potential to affect trade between Member
States.
All 5 tests have to be met for it to be considered to be State Aid.

11. Test 1: Granted through state
resources
“Granted by a Member State or through state resources in any form
whatsoever“
- Member State
including regional or local authorities; and
other public or private bodies designated or controlled by the state
- State resources
includes funds not permanently belonging to the state but under
state control i.e. Lottery funds, EU funding
- Tax exemptions

12. Test 2: Confers an advantage
• Could either be:
– Transfer of resources i.e. grant, soft loans, provision of services,
guarantees, transfer of land at an undervalue; or
– Relief from charges which an undertaking normally has to bear
eg. tax exemptions
• Advantage is either for free or without adequate consideration

13. Test 3: Is a selective measure
• Favouring certain undertakings or the production of
certain goods
– Geographical
– Sectoral
– type of firm e.g. SMEs
• Can apply to charities, voluntary organisations
• General measures available to all businesses across UK
are not selective e.g. generic tax benefits

14. Test 4: Has potential to distort
competition
• Aid could strengthen competitive position of
beneficiary relative to competitors (cost base)
• Distortion does not need to be substantial or significant
• Assumption that all aid distorts competition
• Small size of beneficiary, small amount of aid or small
market share does not exclude distortion

15. Test 5: Affects trade between
member states
• Wide interpretation
– It is sufficient that a product or service is subject to trade between
Member States e.g. insurance, construction
– Even if aid beneficiary does not export, or exports all of its
production outside EU
• Case law examples – property development, museums
• This criterion is normally fulfilled as most activities are viewed as
tradable.

16. When is State aid a risk?
• Making grants
• Selling land
• Buying services?
• Administering ERDF or Government funding
• Regeneration and development projects
• Giving loans
• Giving access to services or equipment

17. Case Study
• Format:
– Read case study
– Discuss legal principles
– Group discussion on case study questions
– Test your knowledge by voting

18. Case Study
• Part 1 :
– Undertakings
– Public realm infrastructure
– De-minimis
– MEOP (basics)
– GBER (basics)
• Part 2:
– External public funding
– Aid in loans and guarantees
– MEOP and GBER in detail

19. Part 1: Undertakings

20. What is an undertaking?
• An undertaking is an entity which is engaged in an
economic activity, irrespective of its legal form.
• Economic activity means an activity which consists in
offering goods or services on a given market and which
could, at least in principle, be carried out by a private
operator in order to make profits.

21. What is an undertaking?
• Status under national law is not relevant
• Profit making is not relevant
• Relative to a specific activity
• May be made up of two or more separate legal entities

22. Questions – join in with Sli.do
• Which of the following parties are undertakings?
A- Cowboy Co
B- Mr Grumble
C- Hipster Co
D- The Council
E- All of the above

23. Part 1: Public Realm
Infrastructure

24. Public Realm Infrastructure
• Public funding of infrastructure that will not be
commercially exploited is exempt from the State
aid rules
• Infrastructure that will be used for activities that
the State performs as part of its public functions
are also exempt
• Where infrastructure is used for both economic and
non-economic activities?

25. De minimis

26. De minimis aid
De minimis aid is exempt from notification because the
Commission considers that such a small amount of aid will
have a negligible Impact on trade and competition.

27. Regulation 1407/2013
• Came into force on 1 January 2014
• Threshold is EUR 200,000 per recipient
• Over 3 fiscal years
• Aid given under a notified scheme does not count
towards the threshold

28. Restrictions on the De minimis
Regulation
• The threshold is cumulative
• Only of application to ‘transparent aid’

29. Process
• Ensure that the award of aid does not breach the
threshold
• Grantor is required to obtain a declaration from the
recipient as to any other aid it has received under the
Regulation in the last three years
• Grantor must advise the recipient that it is receiving De
minimis State aid

30. Part 1: Market Economy
Investor/Operator

31. Market Economy Operator Test
• Do the terms go beyond those that a private investor, operating
under normal market economy conditions, and having regard to
the information available and foreseeable developments at the
time, would find acceptable?
• An acceptable return on the provision of funds within a reasonable
period of time. The test does not require comparison with a
private investor placing capital with a short term view of
profitability.
• Alfa Romeo No.1 [1991]) “the conduct of a private holding
company or a private group of undertakings pursuing a structural
policy – whether general or sectoral – and guided by prospects of
profitability longer term”.

32. MEOT – key points
• Investor, lender, vendor, purchaser
• How to validate :
– Private investor
– Benchmarking, business plan, experts, hypothetical private operator
– Procurement exercise

33. Part 1: General Block
Exemption Regulation

34. GBER - General
• Allows granting of aid without first notifying the
Commission
• Commission Regulation 651/2014 – declaring certain
categories of aid compatible with the internal market
in application of Articles 107 and 108 of the Treaty
• Does not apply in all sectors

35. GBER – key principles
• Incentive Effect
– aid must incentivise the recipient’s behaviour
• Eligibility
– of the recipient
– of the proposal
– of the costs the aid is to be applied to
• Aid intensity
– Varies according to type of aid and size of recipient – 10%
medium enterprises and 20% small enterprises
• Thresholds
– Reporting and Notification

36. Investment aid for Local
Infrastructures – Article 56
• Aid may be provided for the construction or upgrade of local
infrastructures which contribute at a local level to improving the
business and consumer environment and modernising and
developing the industrial base
• Only available to fund difference between eligible costs and
operating profit

37. Investment aid for Local
Infrastructures – Article 56
• Infrastructure must be made available to interested users on an
open, transparent and non-discriminatory basis
• The price charged for sale or use of the infrastructure shall
correspond to market price
• Any concession to a third party to operate the infrastructure shall
be assigned on an open, transparent and non-discriminatory basis,
having regard to the procurement rules

38. Part 2: External Public Funding

39. External Public Funding
• Common in large regeneration projects
• Alters the State aid risk profile – need to satisfy
another party of State aid compliance
• Often requires a specific legal opinion

40. External Public Funding
• Can result in aid to a local authority
• Is possible to act as a ‘conduit’ for funding if
simply passing it on – but need to ensure no
downstream aid

41. Part 2: Aid in loans and
guarantees

42. Aid in Loans
• Where a loan is provided under ‘standard’ commercial terms
the aid element of the loan will be the difference between
the actual interest rate and the ‘market’ interest rate
• 2008 Communication from the Commission sets out the
reference interest rates which are determined by the
financial standing of the borrower and collateral provided.
• Reference rates are regularly updated

43. Aid in Guarantees
• Guarantees are usually performance or financial
• Again, aid is the difference between the ‘value’ of the
guarantee at market prices and the premium charged for the
guarantee
• Aid can be to both guaranteed party and the beneficiary of
the guarantee
• 2008 Commission Notice on Guarantees sets out conditions
for financial guarantees to the State aid compliant

44. 2008 Notice on Guarantee:
requirements
• Borrower must not be in financial difficulty
• Extent of guarantee can be measured when granted
• Guarantee does not cover more than 80% of outstanding loan or
obligation (is an exception for a SGEI provider where is only
providing one SGEI entrusted by the guarantor)
• A ‘market-oriented’ price is paid for the guarantee
– If no guarantee premium benchmark can be identified, price is the
difference in the total cost of the loan with or without the guarantee
– Notice sets out safe-harbour premiums based on borrower’s status

45. Part 2: MEOT in joint ventures
and aid to SPVs

46. MEOT in joint ventures
• 2 ways to satisfy MEOP:
– Proportionate sharing of risks and rewards?
– What would a hypothetical operator do?

47. Aid to SPVs
• Loans and guarantees at below market rates can
result in aid to SPVs
• Support services – e.g. back-office services and
accommodation
• Avoided costs – for example consultants’ fees

48. Part 2: GBER District Heating
Exemption

49. GBER Article 46
• General GBER provisions still apply:
– Incentive Effect
– Eligibility
– Aid intensity
– Thresholds
• Permits funding for energy efficient district
heating, split into production plant and distribution
network costs

50. GBER Article 46
“Energy Efficient” DH system must
• use at least 50% renewable energy, 50% waste heat, 75%
cogenerated heat (e.g. CHP) or 50% of a combination of such
energy and heat
and
• consume less input energy per unit of energy delivered than a
business as usual approach (e.g. individual boilers)

51. GBER Article 46
Production plant:
– Eligible costs are the extra costs for generation units
for an energy efficient DH system compared to a
‘conventional’ production plant
– Aid intensity = 45% of these extra costs (increased
for SMEs and assisted area)

52. GBER Article 46
Distribution Network
• Eligible costs: all investment costs
• Aid intensity: the difference between the eligible
costs and the operating profit (i.e. the viability
gap)

53. GBER Article 46
Calculating eligible costs and aid intensity
– In most cases, specialist technical and financial
advice will be required to calculate the additional
costs compared to a conventional production plant
and the operating profit of the distribution network.
– These advisers will need guidance from your legal
advisers on the permitted costs set out in GBER

54. All information correct at time of production.
The information and opinions expressed within this document are
no substitute for full legal advice. It is for guidance only and
illustrates the law as at the published date. If in doubt, please
telephone us on 0370 270 6000.
© Browne Jacobson LLP 2017 – The information contained within
this document is and shall remain the property of Browne
Jacobson. This document may not be reproduced without the prior
consent of Browne Jacobson.