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Blake Morgan - State Aid Introduction

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Blake Morgan - State Aid Introduction

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To introduce State Aid and how it will affect the Creative Research & Development Partnerships as part of the Creative Industries Clusters Programme. Presented at the Award Holders Workshop held in Belfast in February 2019 and facilitated by Emyr Lewis, Partner, Blake Morgan and prepared in consultation with Clwstwr Creadigol, Cardiff University.

Transcrição

  1. 1. 08/04/2019 1
  2. 2. State Aid, Universities and RD&I Emyr Lewis AHRC, Belfast 26th February 2019
  3. 3. Bore Da 08/04/2019 3 Emyr Lewis PARTNER T: +44 870 905 0760 E: emyr.lewis@blakemorgan.co.uk
  4. 4. 4 Outline • Session 1 – Background to State Aid law – why is it there? – Basic principles – what is ‘unlawful aid’ – Understanding the leeway: ‘no aid’ and exemptions – Universities and State Aid – Funding research projects – Funding research infrastructures – Collaborative research – Innovation centres – Don’t panic – it might not be aid
  5. 5. 5 Background • State Aid Law is European Law • World War II and the Treaty of Rome • Free trade within Europe – free movement of goods, services, capital and labour • State Aid law exists to combat protectionism within Europe, but paradoxically in the case of RD&I it is arguably protectionist • State Aid is not of itself unlawful • The European Commission – police • The European Court of Justice • What happens if Brexit happens – draft Regulations and role of the CMA
  6. 6. 6 Unlawful State Aid - 1 • Article 107(1) of the Treaty on the Functioning of the European Union • 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, in so far as it affects trade between Member States, be incompatible with the common market
  7. 7. 7 Unlawful State Aid - 2 For aid to be unlawful, there must therefore be: • a grant of aid • through state resources • which distorts or threatens to distort competition • by favouring certain undertakings or the production of certain goods (“selectivity”) • with an effect on trade between member states All or nothing – if any element is not present, it is not unlawful aid
  8. 8. Universities and State Aid • State Aid is relevant to Universities in two main circumstances – Where they are recipients of public funds or other benefits, they may be recipients of aid – Where they are paying others or conferring benefits on them, they may be giving aid e.g. in state-funded research projects involving businesses 08/04/2019 8
  9. 9. 9 Is it Aid? • Aid can be direct: – Giving money – grants or subsidies – Giving other resources – Providing assets or services at an undervalue • Aid can be indirect – Tax breaks – Regulation – Resources for which the State has paid benefiting businesses: e.g. Infrastructure projects, University research centres
  10. 10. 10 Is it from State Resources? • Public funds administered by the Member State through central, regional, local authorities or other public or private bodies designated or controlled by the State • Note that there need not be State control – e.g. Big Lottery Fund • Therefore also research councils • Also European funds administered by the State – e.g. ERDF
  11. 11. 11 Is it selective? • Does it favour certain undertakings or the production of certain goods? • Does it select individual businesses, sectors, areas, sizes of business, or production of certain goods? • In other words, does it mean there is no level playing field? • Aid available to all businesses within a State (e.g. tax breaks across the board) is not selective, and is not unlawful
  12. 12. 12 What is an undertaking? • If an entity receiving the benefit of state resources is not an undertaking, it will not be aid, let alone unlawful aid • An undertaking is “an economic operator” • An entity which carries out economic activity • i.e. an activity for which there is a comparable market in goods or services • Need not be a private business – could be a public body, a voluntary organisation or a Charity • It is the nature of the activity that matters, not the nature of the entity • In some Member States there may be a market, in others not
  13. 13. 13 Does it distort or threaten to distort competition? • Very low threshold • If it’s selective it’s almost guaranteed to distort or be capable of distorting competition
  14. 14. 14 Does it affect inter-state trade within the EU? • This includes potential effects • Since most goods and services are traded across state boundaries within the EU, once more this is a low threshold • Internationalisation of business ownership • Hyper-local businesses – e.g. hairdressers. But grocers?
  15. 15. 15 Exceptions and the Commission’s Approval • In the Treaty, there are 3 categories completely excepted from being unlawful aid – in practice not of everyday relevance • There are several more which are capable of being excepted, including aid for economically poor regions and culture and heritage conservation • But European Commission approval is needed first – if no approval, automatically unlawful • European Commission can approve either through regulation or following notification
  16. 16. 16 Approving Aid – Commission’s tests • In deciding whether or not Aid is compatible with the Common Market, the Commission applies a three-step “balancing test”. This balances the positive impact of the measure against the potentially negative impact through distortion of trade and competition. The three steps are: – Is the aid measure aimed at a well-defined objective of common interest (e.g. growth, employment, cohesion, environment)? – Is the aid well-designed to deliver the objective of common interest i.e. does the proposed aid address the market failure or other objective? – Are the distortions of competition and effect on trade limited, so that the overall balance is positive?
  17. 17. 17 Types of exceptions • Services of General Economic Interest (SGEI)– entrustment and transparency (not dealt with today) • Market Economy Operator Principle (MEOP) – not aid at all • Block Exemption Regulations (“GBER”) • De Minimis – small amounts of aid • Special instruments
  18. 18. 18 An exception at work - Museums • The Ecomusees case which appears to lay down a principle (slightly qualified) that museum activities do not involve inter-state trade • On the other end of the scale, in a sequence of cases, mostly involving Austrian museums, the Commission has decided that although there was aid (and in some cases unlawfully administered, because the Commission had not been asked to make a compatibility assessment beforehand), it was compatible with the Common Market, and therefore acceptable • In these cases, however, it appears that the museums were all charging entry fees, i.e. the principal activity was itself an economic activity
  19. 19. 19 General Block Exemption Regulation 2014 -1 • The GBER contains categories of State aid that the Commission has declared compatible with the Treaty if they fulfil certain conditions • Applies to “transparent” aid – i.e. grants and other direct benefits • Must show incentive effect – NB prior application needed. SMEs automatically show incentive effect • and must be proportional • Investment Aid (capital funding) and Operational Aid (revenue funding) • Schemes and ad hoc aid • No need for prior approval, but there must be notification of each scheme and ad hoc aid within 20 working days • Different aid ceilings and aid %age intensities • covering eligible costs • %age can be increased, e.g. for SMEs and in convergence areas
  20. 20. 20 GBER – Some relevant types of aid • regional aid; • SME investment and operating aid and access to finance; • aid for environmental protection; • aid for research, development and innovation; • training aid • aid for culture and heritage conservation; • aid for sport and multifunctional recreational infrastructures; and • aid for local infrastructures.
  21. 21. 21 Market Economy Operator Principle • The theory: If state resources are used in a way which a market operator would use them, that is not unlawful aid • So, equity investments and loan investments in a business or enterprise can be made using public money • But you must be able to show that a market investor would do the same • Best evidence is investing on terms which are at least equal to those enjoyed by a co-investing private entity • If no such co-investment, economic analysis (for equity investment) and Reference Rate methodology for loans • In assessing commerciality, you can rely on your special knowledge of the investee (Blue Skies case)
  22. 22. 22 Disposals of Assets • Disposal of asset at an under value could be state aid • Commission Notice on the Notion of State aid (2016/C 262/01) provides that: – “In the case of sales of land, an independent expert evaluation prior to the sale negotiations to establish the market value on the basis of generally accepted market indicators and valuation standards is in principle satisfactory.”
  23. 23. 23 De minimis - basics • De Minimis Aid Regulation (1407/2013) applies until December 2020 • Principle: Small amounts of aid are deemed not to have a distortive effect on competition or affect trade between EC member states • Threshold figure of EUR 200,000 for grants and 1,000,000 for loans, below which Article 107 (1) is deemed not to apply • Over any period of 3 fiscal years – so you must always look back 3 years to see how much aid they’ve had in the past • Can’t use de minimis aid to “top up” block exemption aid
  24. 24. 24 De minimis aid – ensuring compliance • When giving de minimis aid, you must: – Tell the recipient in writing of the prospective amount of aid and of its de minimis character, and refer to the de minimis regulation – Get 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 checking that this will not raise the total amount of de minimis aid above the permitted ceiling • Thorough record keeping is an absolute requirement
  25. 25. Universities and State Aid • REMEMBER: State Aid is relevant to Universities in two main circumstances – Where they are recipients of public funds or other benefits, they may be recipients of aid – Where they are paying others or conferring benefits on them, they may be giving aid 08/04/2019 25
  26. 26. Universities as recipients of aid - 1 • For state aid to be present, the recipient must be an undertaking • An undertaking is an entity which is engaged in economic activity, ie it offers goods or services for sale on a market • On the face of it, therefore, it would be rational to assume that Universities are undertakings, since HE is sold on a very competitive market 08/04/2019 26
  27. 27. Universities as recipients of aid - 2 BUT: EC Notice - The Notion of Aid (2016/C 262/01) • Public education organised within the national educational system funded and supervised by the State may be considered as a non-economic activity. • The non-economic nature of public education is in principle not affected by the fact that pupils or their parents sometimes have to pay tuition or enrolment fees which contribute to the operating expenses of the system. Such financial contributions often only cover a fraction of the true costs of the service and can thus not be considered as remuneration for the service provided. • Such public education services must be distinguished from services financed predominantly by parents or pupils or commercial revenues. For example, higher education financed entirely by students clearly fall within the latter category. In certain Member States public entities can also offer educational services which, due to their nature, financing structure and the existence of competing private organisations, are to be regarded as economic. 08/04/2019 27
  28. 28. Universities as recipients of aid - 3 • How do UK Universities fit in? • The shift from a predominantly grant-funded model to a predominantly fees-funded model suggests that they are shifting towards being undertakings • But – the predominant source of funding for most Universities is still public funds (student loans to pay for fees) and – the significant factor is what the activity is that is being funded 08/04/2019 28
  29. 29. Universities as recipients of aid - 4 • 'research organisation' means an entity (such as universities or research institutes, technology transfer agencies, innovation intermediaries, research-oriented physical or virtual collaborative entities), irrespective of its legal status (organised under public or private law) or way of financing, whose primary goal is to independently conduct fundamental research, industrial research or experimental development or to widely disseminate the results of such activities by way of teaching, publication or knowledge transfer. Where such entity also pursues economic activities, the financing, the costs and the revenues of those economic activities must be accounted for separately. Undertakings that can exert a decisive influence upon such an entity, for example in the quality of shareholders or members, may not enjoy a preferential access to the results generated by it. • (General Block Exemption Regulation 2014 and Research Development and Innovation Framework 2014) 08/04/2019 29
  30. 30. Universities as recipients of aid - 5 Certain activities of universities and research organisations fall outside the scope of the State aid rules: (a) education for more and better skilled human resources; (b) the conduct of independent research and development for more knowledge and better understanding, including collaborative research and development; (c) the dissemination of research results. (Commission guidance – “Notion of Aid”) 08/04/2019 30
  31. 31. Economic activities carried on by Universities • Contract research • Renting out buildings for conferences • Developing land to raise money • Investing in or supporting spin-off companies • State funding of these things is capable of being aid • They must be accounted for separately 08/04/2019 31
  32. 32. Funding Research • Funding the University to do research projects will not amount to unlawful aid where – the research is not economic in nature; or – none of the costs are borne by public funds, whether directly or indirectly (eg where there is no use of publicly funded infrastructure) 08/04/2019 32
  33. 33. “Ancillary” economic activity • Paragraph 20 of the RD&I Framework: Commission confirms that provided economic activities consume exactly the same inputs as the non-economic ones and do not exceed “20% of the relevant entity’s annual capacity”, this will be treated as “purely ancillary” – and therefore not economic • The relevant entity is the specific infrastructure that is being funded, not the entire institution – The 20% threshold will be assessed at the level of the "relevant entity", that is to say every individual entity (such as a laboratory or department) that, with the organisational structure, capital, material and workforce that it effectively has at its disposal, could alone perform the activity concerned. (Commission response to set of questions from Czech Republic) 08/04/2019 33
  34. 34. Research Infrastructure • research infrastructure means facilities, resources and related services that are used by the scientific community to conduct research in their respective fields and covers scientific equipment or set of instruments, knowledge-based resources such as collections, archives or structured scientific information, enabling information and communication technology-based infrastructures such as grid, computing, software and communication, or any other entity of a unique nature essential to conduct research. Such infrastructures may be 'single-sited' or 'distributed' (an organised network of resources) (2014 RDI Framework, 2014 GBER) • NB: – Not only physical infrastructure as normally understood; – Must be of unique nature essential to conduct research – But not confined to Universities/Research Organisations (remember policy – for the benefit of EU competitiveness) 08/04/2019 34
  35. 35. Funding Research Infrastructure • At Universities provided 20% capacity threshold not crossed – will be treated as no aid – including for shared / distributed infrastructure; • What if 20% threshold crossed? • Article 26 GBER 2014 – “Investment Aid for research Infrastructures” • Also applies to non-universities • exempts aid for “the construction or upgrade of research infrastructures that perform economic activities” (i.e. exempts them from prior notification – provided all the conditions are met) 08/04/2019 35
  36. 36. Article 26 – the detail • NB investment aid – not operating aid • Threshold: €20Million per infrastructure • Aid intensity: no greater than 50% of eligible costs, namely investment costs in intangible and tangible assets. • Price charged for operation or use of the infrastructure “shall correspond to a market price” • Open access must be granted on an open and transparent basis • Undertakings who have financed at least 10% of the investment costs can have preferential access, but this must be proportionate to the contribution, and must be made publicly available 08/04/2019 36
  37. 37. Article 26 – special rules for mixed use infrastructures • Only the funding of economic activities triggers state aid rules • Where a research infrastructure pursues both economic and non-economic activities, the financing, costs and revenues of each type of activity shall be accounted for separately on the basis of consistently applied and objectively justifiable cost accounting principles. • Where a research infrastructure receives public funding for both economic and non-economic activities, Member States shall put in place a monitoring and claw-back mechanism in order to ensure that the applicable aid intensity is not exceeded as a result of an increase in the share of economic activities compared to the situation envisaged at the time of awarding the aid. 08/04/2019 37
  38. 38. Article 26 - Claw-back • Total investment cost of Research Infrastructure = €10M • 60/40 split envisaged in non-economic / economic use • Non-economic component 100% funded by state resources = €6M • Assume 50% maximum aid intensity for economic component = €2M • If economic use increases to, say, 50%, then the additional 10% has received 100% subsidy, when it should have received only 50% • So there will be clawback of 50% x 10% x €10M = €500,000 08/04/2019 38
  39. 39. Research infrastructure operating costs • What about personnel costs, facilities costs etc. of research infrastructures (eg support and maintenance costs for ICT infrastructure)? • There is no explicit provision in GBER which enables the grant of aid to cover these costs. • So, to the extent that the use of resources relates to economic activities, it cannot on the face of it be subsidised by state funds • BUT – Under the Framework, if use is <20%, then ancillary, so no aid to the University so long as market rate is charged for access; – Costs might in any event be covered in individual cases by Article 25 GBER 2014 - Aid for research and development projects 08/04/2019 39
  40. 40. Innovation Clusters • ‘innovation clusters’ means structures or organised groups of independent parties (such as innovative start-ups, small, medium and large enterprises, as well as research and knowledge dissemination organisations, non-for-profit organisations and other related economic actors) designed to stimulate innovative activity through promotion, sharing of facilities and exchange of knowledge and expertise and by contributing effectively to knowledge transfer, networking, information dissemination and collaboration among the undertakings and other organisations in the cluster; • NB: – Not just shared facilities, there needs to be exchange of knowledge and expertise – Emphasis on knowledge transfer and collaboration 08/04/2019 40
  41. 41. Article 27 GBER 2014 – aid for innovation clusters • NB: Aid can be granted exclusively to the legal entity operating the innovation cluster (“cluster organisation”) • Both investment aid and operating aid can be given • Threshold: €7.5 Million per cluster – no distinction between investment and operating aid • Access to the cluster's premises, facilities and activities shall be open to several users and be granted on a transparent and non-discriminatory basis. • The fees charged for using the cluster's facilities and for participating in the cluster's activities shall correspond to the market price or reflect their costs. 08/04/2019 41
  42. 42. Innovation clusters – investment aid • Construction and upgrade of innovation clusters • Aid intensity: no greater than 50% of eligible costs, namely investment costs in intangible and tangible assets. • Intensity can be increased in assisted areas • Undertakings which have financed at least 10% of the investment costs can have preferential access, but this must be proportionate to the contribution, and must be made publicly available • No express claw-back requirement 08/04/2019 42
  43. 43. Innovation clusters – operating aid • Must not exceed 10 years. • The eligible costs are personnel and administrative costs (including overhead costs) relating to: – (a) animation of the cluster to facilitate collaboration, information sharing and the provision or channelling of specialised and customised business support services; – (b) marketing of the cluster to increase participation of new undertakings or organisations and to increase visibility; – (c) management of the cluster's facilities; organisation of training programmes, workshops and conferences to support knowledge sharing and networking and transnational cooperation. • The aid intensity of operating aid shall not exceed 50 % of the total eligible costs during the period over which the aid is granted. 08/04/2019 43
  44. 44. The University as provider of aid • If the University charges a market rate for its services, it will not be providing aid, because of the MEOP • Universities often administer public research funds, where undertakings receive grants or other assistance for carrying out research • “Pass-through” of aid – where entire advantage is passed on to the beneficiary – no aid to the University 08/04/2019 44
  45. 45. Source of funds • There will be no aid unless it’s state funds • Not all University funds are state funds – Funds from donors / foundations earmarked for special use – General funds available for investment – Can they be used for non-economic activities? (NB charity law constraints) 08/04/2019 45
  46. 46. Funding research under GBER 2014 and the four UK Research Schemes No Name Activities covered Maximum Aid Intensity (assuming SME) 18 Aid for Consultancy in favour of SMEs consultancy services provided by external consultants 50% 25 Aid for research and Development fundamental research; industrial research; experimental development; feasibility studies 100% 60% to 80% depending on type of beneficiary and nature of project 35% to 65% depending on type of beneficiary and nature of project 60% to 70% depending on type of beneficiary and nature of project 28 Innovation Aid for SMEs obtaining, validating and defending patents and other intangible assets; secondment of highly qualified personnel from working on RD&I activities in a newly created function within the beneficiary; innovation advisory and support services; 50% 50% 100% up to EUR200,000, thereafter 50% 29 Aid for process and organisational innovation Innovation projects covering improving production or delivery methods or enhancing business practices, workplace organisation and external relations (recital 51 GBER – full definitions in Art 2(96) and (97)) 50% 08/04/2019 46
  47. 47. “Effective Collaboration” • RD&I Framework: - A project is considered to be carried out through effective collaboration where at least two independent parties pursue a common objective based on the division of labour and jointly define its scope, participate in its design, contribute to its implementation and share its financial, technological, scientific and other risks, as well as its results. One or several parties may bear the full costs of the project and thus relieve other parties of its financial risks. The terms and conditions of a collaboration project, in particular as regards contributions to its costs, the sharing of risks and results, the dissemination of results, access to and rules for allocation of IPR, must be concluded prior to the start of the project. (a sort of extension of the MEOP) 08/04/2019 47
  48. 48. Effective Collaboration - 2 • Where collaboration projects are carried out jointly by undertakings and Universities, the Commission considers that no indirect state aid is awarded to the undertakings through if one of the following conditions is fulfilled: • (a) the undertakings bear the full cost of the project, or • (b) the results which do not give rise to IPR may be widely disseminated and any IPR resulting from the activities of Universities are fully allocated to those entities, or • (c) any IPR resulting from the project, as well as related access rights are allocated to the different collaboration partners in a manner which adequately reflects their work packages, contributions and respective interests, or • (d) the research organisations or research infrastructures receive compensation equivalent to the market price for the IPR which result from their activities and are assigned to the participating undertakings, or to which participating undertakings are allocated access rights 08/04/2019 48
  49. 49. Effective Collaboration - 3 The Commission will consider that the compensation is equivalent to the market price if (a) the amount of the compensation has been established by means of an open, transparent and non-discriminatory competitive sale procedure, or (b) an independent expert valuation confirms that the amount of the compensation is at least equal to the market price, or (c) the University, as seller, can demonstrate that it effectively negotiated the compensation, at arm's length conditions, in order to obtain the maximum economic benefit at the moment when the contract is concluded, while considering its statutory objectives, or (d) in cases where the collaboration agreement provides the collaborating undertaking with a right of first refusal as regards IPR generated by the collaborating University, where those entities exercise a reciprocal right to solicit more economically advantageous offers from third parties so that the collaborating undertaking has to match its offer accordingly. 08/04/2019 49
  50. 50. A structured approach to analysing aid • The purist approach: – Assume there is aid – Can you rely on GBER? – If not, can you use de minimis? – If not, notify • A more practical approach – Can you structure it so that there is no aid – non-economic activity (incl Ancillary), MEOP, effective collaboration? – If not, can you use de minimis? – If not, can you rely on GBER? – If not, notify • Principle: do whatever you can lawfully to simplify it 08/04/2019 50
  51. 51. Example: Research Infrastructure: Working with industrial partner(s) • How much investment is coming from – State resources – Non-state resources (e.g. private foundations, private investors, the University’s own non-state resources) – The Partner(s) • How much use/access does the partner(s) need to the infrastructure (including as the beneficiary of research carried out by the University)? Is this proportionate to their investment? • Will any other undertakings be using or accessing the infrastructure? • Can you design the funding so that there is no aid? 08/04/2019 51
  52. 52. 52 So where are we in this jungle? • Be clear about what it is you want to do • Be clear about what resources are being deployed and how, and what the sources of any funds are • Be clear about who is getting what including indirect benefits • Is there any non-economic activity? – no aid • Is the benefit available to everyone without restriction? – no aid • Is any benefit being paid for at a market price? – no aid
  53. 53. 08/04/2019 53

Descrição

To introduce State Aid and how it will affect the Creative Research & Development Partnerships as part of the Creative Industries Clusters Programme. Presented at the Award Holders Workshop held in Belfast in February 2019 and facilitated by Emyr Lewis, Partner, Blake Morgan and prepared in consultation with Clwstwr Creadigol, Cardiff University.

Transcrição

  1. 1. 08/04/2019 1
  2. 2. State Aid, Universities and RD&I Emyr Lewis AHRC, Belfast 26th February 2019
  3. 3. Bore Da 08/04/2019 3 Emyr Lewis PARTNER T: +44 870 905 0760 E: emyr.lewis@blakemorgan.co.uk
  4. 4. 4 Outline • Session 1 – Background to State Aid law – why is it there? – Basic principles – what is ‘unlawful aid’ – Understanding the leeway: ‘no aid’ and exemptions – Universities and State Aid – Funding research projects – Funding research infrastructures – Collaborative research – Innovation centres – Don’t panic – it might not be aid
  5. 5. 5 Background • State Aid Law is European Law • World War II and the Treaty of Rome • Free trade within Europe – free movement of goods, services, capital and labour • State Aid law exists to combat protectionism within Europe, but paradoxically in the case of RD&I it is arguably protectionist • State Aid is not of itself unlawful • The European Commission – police • The European Court of Justice • What happens if Brexit happens – draft Regulations and role of the CMA
  6. 6. 6 Unlawful State Aid - 1 • Article 107(1) of the Treaty on the Functioning of the European Union • 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, in so far as it affects trade between Member States, be incompatible with the common market
  7. 7. 7 Unlawful State Aid - 2 For aid to be unlawful, there must therefore be: • a grant of aid • through state resources • which distorts or threatens to distort competition • by favouring certain undertakings or the production of certain goods (“selectivity”) • with an effect on trade between member states All or nothing – if any element is not present, it is not unlawful aid
  8. 8. Universities and State Aid • State Aid is relevant to Universities in two main circumstances – Where they are recipients of public funds or other benefits, they may be recipients of aid – Where they are paying others or conferring benefits on them, they may be giving aid e.g. in state-funded research projects involving businesses 08/04/2019 8
  9. 9. 9 Is it Aid? • Aid can be direct: – Giving money – grants or subsidies – Giving other resources – Providing assets or services at an undervalue • Aid can be indirect – Tax breaks – Regulation – Resources for which the State has paid benefiting businesses: e.g. Infrastructure projects, University research centres
  10. 10. 10 Is it from State Resources? • Public funds administered by the Member State through central, regional, local authorities or other public or private bodies designated or controlled by the State • Note that there need not be State control – e.g. Big Lottery Fund • Therefore also research councils • Also European funds administered by the State – e.g. ERDF
  11. 11. 11 Is it selective? • Does it favour certain undertakings or the production of certain goods? • Does it select individual businesses, sectors, areas, sizes of business, or production of certain goods? • In other words, does it mean there is no level playing field? • Aid available to all businesses within a State (e.g. tax breaks across the board) is not selective, and is not unlawful
  12. 12. 12 What is an undertaking? • If an entity receiving the benefit of state resources is not an undertaking, it will not be aid, let alone unlawful aid • An undertaking is “an economic operator” • An entity which carries out economic activity • i.e. an activity for which there is a comparable market in goods or services • Need not be a private business – could be a public body, a voluntary organisation or a Charity • It is the nature of the activity that matters, not the nature of the entity • In some Member States there may be a market, in others not
  13. 13. 13 Does it distort or threaten to distort competition? • Very low threshold • If it’s selective it’s almost guaranteed to distort or be capable of distorting competition
  14. 14. 14 Does it affect inter-state trade within the EU? • This includes potential effects • Since most goods and services are traded across state boundaries within the EU, once more this is a low threshold • Internationalisation of business ownership • Hyper-local businesses – e.g. hairdressers. But grocers?
  15. 15. 15 Exceptions and the Commission’s Approval • In the Treaty, there are 3 categories completely excepted from being unlawful aid – in practice not of everyday relevance • There are several more which are capable of being excepted, including aid for economically poor regions and culture and heritage conservation • But European Commission approval is needed first – if no approval, automatically unlawful • European Commission can approve either through regulation or following notification
  16. 16. 16 Approving Aid – Commission’s tests • In deciding whether or not Aid is compatible with the Common Market, the Commission applies a three-step “balancing test”. This balances the positive impact of the measure against the potentially negative impact through distortion of trade and competition. The three steps are: – Is the aid measure aimed at a well-defined objective of common interest (e.g. growth, employment, cohesion, environment)? – Is the aid well-designed to deliver the objective of common interest i.e. does the proposed aid address the market failure or other objective? – Are the distortions of competition and effect on trade limited, so that the overall balance is positive?
  17. 17. 17 Types of exceptions • Services of General Economic Interest (SGEI)– entrustment and transparency (not dealt with today) • Market Economy Operator Principle (MEOP) – not aid at all • Block Exemption Regulations (“GBER”) • De Minimis – small amounts of aid • Special instruments
  18. 18. 18 An exception at work - Museums • The Ecomusees case which appears to lay down a principle (slightly qualified) that museum activities do not involve inter-state trade • On the other end of the scale, in a sequence of cases, mostly involving Austrian museums, the Commission has decided that although there was aid (and in some cases unlawfully administered, because the Commission had not been asked to make a compatibility assessment beforehand), it was compatible with the Common Market, and therefore acceptable • In these cases, however, it appears that the museums were all charging entry fees, i.e. the principal activity was itself an economic activity
  19. 19. 19 General Block Exemption Regulation 2014 -1 • The GBER contains categories of State aid that the Commission has declared compatible with the Treaty if they fulfil certain conditions • Applies to “transparent” aid – i.e. grants and other direct benefits • Must show incentive effect – NB prior application needed. SMEs automatically show incentive effect • and must be proportional • Investment Aid (capital funding) and Operational Aid (revenue funding) • Schemes and ad hoc aid • No need for prior approval, but there must be notification of each scheme and ad hoc aid within 20 working days • Different aid ceilings and aid %age intensities • covering eligible costs • %age can be increased, e.g. for SMEs and in convergence areas
  20. 20. 20 GBER – Some relevant types of aid • regional aid; • SME investment and operating aid and access to finance; • aid for environmental protection; • aid for research, development and innovation; • training aid • aid for culture and heritage conservation; • aid for sport and multifunctional recreational infrastructures; and • aid for local infrastructures.
  21. 21. 21 Market Economy Operator Principle • The theory: If state resources are used in a way which a market operator would use them, that is not unlawful aid • So, equity investments and loan investments in a business or enterprise can be made using public money • But you must be able to show that a market investor would do the same • Best evidence is investing on terms which are at least equal to those enjoyed by a co-investing private entity • If no such co-investment, economic analysis (for equity investment) and Reference Rate methodology for loans • In assessing commerciality, you can rely on your special knowledge of the investee (Blue Skies case)
  22. 22. 22 Disposals of Assets • Disposal of asset at an under value could be state aid • Commission Notice on the Notion of State aid (2016/C 262/01) provides that: – “In the case of sales of land, an independent expert evaluation prior to the sale negotiations to establish the market value on the basis of generally accepted market indicators and valuation standards is in principle satisfactory.”
  23. 23. 23 De minimis - basics • De Minimis Aid Regulation (1407/2013) applies until December 2020 • Principle: Small amounts of aid are deemed not to have a distortive effect on competition or affect trade between EC member states • Threshold figure of EUR 200,000 for grants and 1,000,000 for loans, below which Article 107 (1) is deemed not to apply • Over any period of 3 fiscal years – so you must always look back 3 years to see how much aid they’ve had in the past • Can’t use de minimis aid to “top up” block exemption aid
  24. 24. 24 De minimis aid – ensuring compliance • When giving de minimis aid, you must: – Tell the recipient in writing of the prospective amount of aid and of its de minimis character, and refer to the de minimis regulation – Get 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 checking that this will not raise the total amount of de minimis aid above the permitted ceiling • Thorough record keeping is an absolute requirement
  25. 25. Universities and State Aid • REMEMBER: State Aid is relevant to Universities in two main circumstances – Where they are recipients of public funds or other benefits, they may be recipients of aid – Where they are paying others or conferring benefits on them, they may be giving aid 08/04/2019 25
  26. 26. Universities as recipients of aid - 1 • For state aid to be present, the recipient must be an undertaking • An undertaking is an entity which is engaged in economic activity, ie it offers goods or services for sale on a market • On the face of it, therefore, it would be rational to assume that Universities are undertakings, since HE is sold on a very competitive market 08/04/2019 26
  27. 27. Universities as recipients of aid - 2 BUT: EC Notice - The Notion of Aid (2016/C 262/01) • Public education organised within the national educational system funded and supervised by the State may be considered as a non-economic activity. • The non-economic nature of public education is in principle not affected by the fact that pupils or their parents sometimes have to pay tuition or enrolment fees which contribute to the operating expenses of the system. Such financial contributions often only cover a fraction of the true costs of the service and can thus not be considered as remuneration for the service provided. • Such public education services must be distinguished from services financed predominantly by parents or pupils or commercial revenues. For example, higher education financed entirely by students clearly fall within the latter category. In certain Member States public entities can also offer educational services which, due to their nature, financing structure and the existence of competing private organisations, are to be regarded as economic. 08/04/2019 27
  28. 28. Universities as recipients of aid - 3 • How do UK Universities fit in? • The shift from a predominantly grant-funded model to a predominantly fees-funded model suggests that they are shifting towards being undertakings • But – the predominant source of funding for most Universities is still public funds (student loans to pay for fees) and – the significant factor is what the activity is that is being funded 08/04/2019 28
  29. 29. Universities as recipients of aid - 4 • 'research organisation' means an entity (such as universities or research institutes, technology transfer agencies, innovation intermediaries, research-oriented physical or virtual collaborative entities), irrespective of its legal status (organised under public or private law) or way of financing, whose primary goal is to independently conduct fundamental research, industrial research or experimental development or to widely disseminate the results of such activities by way of teaching, publication or knowledge transfer. Where such entity also pursues economic activities, the financing, the costs and the revenues of those economic activities must be accounted for separately. Undertakings that can exert a decisive influence upon such an entity, for example in the quality of shareholders or members, may not enjoy a preferential access to the results generated by it. • (General Block Exemption Regulation 2014 and Research Development and Innovation Framework 2014) 08/04/2019 29
  30. 30. Universities as recipients of aid - 5 Certain activities of universities and research organisations fall outside the scope of the State aid rules: (a) education for more and better skilled human resources; (b) the conduct of independent research and development for more knowledge and better understanding, including collaborative research and development; (c) the dissemination of research results. (Commission guidance – “Notion of Aid”) 08/04/2019 30
  31. 31. Economic activities carried on by Universities • Contract research • Renting out buildings for conferences • Developing land to raise money • Investing in or supporting spin-off companies • State funding of these things is capable of being aid • They must be accounted for separately 08/04/2019 31
  32. 32. Funding Research • Funding the University to do research projects will not amount to unlawful aid where – the research is not economic in nature; or – none of the costs are borne by public funds, whether directly or indirectly (eg where there is no use of publicly funded infrastructure) 08/04/2019 32
  33. 33. “Ancillary” economic activity • Paragraph 20 of the RD&I Framework: Commission confirms that provided economic activities consume exactly the same inputs as the non-economic ones and do not exceed “20% of the relevant entity’s annual capacity”, this will be treated as “purely ancillary” – and therefore not economic • The relevant entity is the specific infrastructure that is being funded, not the entire institution – The 20% threshold will be assessed at the level of the "relevant entity", that is to say every individual entity (such as a laboratory or department) that, with the organisational structure, capital, material and workforce that it effectively has at its disposal, could alone perform the activity concerned. (Commission response to set of questions from Czech Republic) 08/04/2019 33
  34. 34. Research Infrastructure • research infrastructure means facilities, resources and related services that are used by the scientific community to conduct research in their respective fields and covers scientific equipment or set of instruments, knowledge-based resources such as collections, archives or structured scientific information, enabling information and communication technology-based infrastructures such as grid, computing, software and communication, or any other entity of a unique nature essential to conduct research. Such infrastructures may be 'single-sited' or 'distributed' (an organised network of resources) (2014 RDI Framework, 2014 GBER) • NB: – Not only physical infrastructure as normally understood; – Must be of unique nature essential to conduct research – But not confined to Universities/Research Organisations (remember policy – for the benefit of EU competitiveness) 08/04/2019 34
  35. 35. Funding Research Infrastructure • At Universities provided 20% capacity threshold not crossed – will be treated as no aid – including for shared / distributed infrastructure; • What if 20% threshold crossed? • Article 26 GBER 2014 – “Investment Aid for research Infrastructures” • Also applies to non-universities • exempts aid for “the construction or upgrade of research infrastructures that perform economic activities” (i.e. exempts them from prior notification – provided all the conditions are met) 08/04/2019 35
  36. 36. Article 26 – the detail • NB investment aid – not operating aid • Threshold: €20Million per infrastructure • Aid intensity: no greater than 50% of eligible costs, namely investment costs in intangible and tangible assets. • Price charged for operation or use of the infrastructure “shall correspond to a market price” • Open access must be granted on an open and transparent basis • Undertakings who have financed at least 10% of the investment costs can have preferential access, but this must be proportionate to the contribution, and must be made publicly available 08/04/2019 36
  37. 37. Article 26 – special rules for mixed use infrastructures • Only the funding of economic activities triggers state aid rules • Where a research infrastructure pursues both economic and non-economic activities, the financing, costs and revenues of each type of activity shall be accounted for separately on the basis of consistently applied and objectively justifiable cost accounting principles. • Where a research infrastructure receives public funding for both economic and non-economic activities, Member States shall put in place a monitoring and claw-back mechanism in order to ensure that the applicable aid intensity is not exceeded as a result of an increase in the share of economic activities compared to the situation envisaged at the time of awarding the aid. 08/04/2019 37
  38. 38. Article 26 - Claw-back • Total investment cost of Research Infrastructure = €10M • 60/40 split envisaged in non-economic / economic use • Non-economic component 100% funded by state resources = €6M • Assume 50% maximum aid intensity for economic component = €2M • If economic use increases to, say, 50%, then the additional 10% has received 100% subsidy, when it should have received only 50% • So there will be clawback of 50% x 10% x €10M = €500,000 08/04/2019 38
  39. 39. Research infrastructure operating costs • What about personnel costs, facilities costs etc. of research infrastructures (eg support and maintenance costs for ICT infrastructure)? • There is no explicit provision in GBER which enables the grant of aid to cover these costs. • So, to the extent that the use of resources relates to economic activities, it cannot on the face of it be subsidised by state funds • BUT – Under the Framework, if use is <20%, then ancillary, so no aid to the University so long as market rate is charged for access; – Costs might in any event be covered in individual cases by Article 25 GBER 2014 - Aid for research and development projects 08/04/2019 39
  40. 40. Innovation Clusters • ‘innovation clusters’ means structures or organised groups of independent parties (such as innovative start-ups, small, medium and large enterprises, as well as research and knowledge dissemination organisations, non-for-profit organisations and other related economic actors) designed to stimulate innovative activity through promotion, sharing of facilities and exchange of knowledge and expertise and by contributing effectively to knowledge transfer, networking, information dissemination and collaboration among the undertakings and other organisations in the cluster; • NB: – Not just shared facilities, there needs to be exchange of knowledge and expertise – Emphasis on knowledge transfer and collaboration 08/04/2019 40
  41. 41. Article 27 GBER 2014 – aid for innovation clusters • NB: Aid can be granted exclusively to the legal entity operating the innovation cluster (“cluster organisation”) • Both investment aid and operating aid can be given • Threshold: €7.5 Million per cluster – no distinction between investment and operating aid • Access to the cluster's premises, facilities and activities shall be open to several users and be granted on a transparent and non-discriminatory basis. • The fees charged for using the cluster's facilities and for participating in the cluster's activities shall correspond to the market price or reflect their costs. 08/04/2019 41
  42. 42. Innovation clusters – investment aid • Construction and upgrade of innovation clusters • Aid intensity: no greater than 50% of eligible costs, namely investment costs in intangible and tangible assets. • Intensity can be increased in assisted areas • Undertakings which have financed at least 10% of the investment costs can have preferential access, but this must be proportionate to the contribution, and must be made publicly available • No express claw-back requirement 08/04/2019 42
  43. 43. Innovation clusters – operating aid • Must not exceed 10 years. • The eligible costs are personnel and administrative costs (including overhead costs) relating to: – (a) animation of the cluster to facilitate collaboration, information sharing and the provision or channelling of specialised and customised business support services; – (b) marketing of the cluster to increase participation of new undertakings or organisations and to increase visibility; – (c) management of the cluster's facilities; organisation of training programmes, workshops and conferences to support knowledge sharing and networking and transnational cooperation. • The aid intensity of operating aid shall not exceed 50 % of the total eligible costs during the period over which the aid is granted. 08/04/2019 43
  44. 44. The University as provider of aid • If the University charges a market rate for its services, it will not be providing aid, because of the MEOP • Universities often administer public research funds, where undertakings receive grants or other assistance for carrying out research • “Pass-through” of aid – where entire advantage is passed on to the beneficiary – no aid to the University 08/04/2019 44
  45. 45. Source of funds • There will be no aid unless it’s state funds • Not all University funds are state funds – Funds from donors / foundations earmarked for special use – General funds available for investment – Can they be used for non-economic activities? (NB charity law constraints) 08/04/2019 45
  46. 46. Funding research under GBER 2014 and the four UK Research Schemes No Name Activities covered Maximum Aid Intensity (assuming SME) 18 Aid for Consultancy in favour of SMEs consultancy services provided by external consultants 50% 25 Aid for research and Development fundamental research; industrial research; experimental development; feasibility studies 100% 60% to 80% depending on type of beneficiary and nature of project 35% to 65% depending on type of beneficiary and nature of project 60% to 70% depending on type of beneficiary and nature of project 28 Innovation Aid for SMEs obtaining, validating and defending patents and other intangible assets; secondment of highly qualified personnel from working on RD&I activities in a newly created function within the beneficiary; innovation advisory and support services; 50% 50% 100% up to EUR200,000, thereafter 50% 29 Aid for process and organisational innovation Innovation projects covering improving production or delivery methods or enhancing business practices, workplace organisation and external relations (recital 51 GBER – full definitions in Art 2(96) and (97)) 50% 08/04/2019 46
  47. 47. “Effective Collaboration” • RD&I Framework: - A project is considered to be carried out through effective collaboration where at least two independent parties pursue a common objective based on the division of labour and jointly define its scope, participate in its design, contribute to its implementation and share its financial, technological, scientific and other risks, as well as its results. One or several parties may bear the full costs of the project and thus relieve other parties of its financial risks. The terms and conditions of a collaboration project, in particular as regards contributions to its costs, the sharing of risks and results, the dissemination of results, access to and rules for allocation of IPR, must be concluded prior to the start of the project. (a sort of extension of the MEOP) 08/04/2019 47
  48. 48. Effective Collaboration - 2 • Where collaboration projects are carried out jointly by undertakings and Universities, the Commission considers that no indirect state aid is awarded to the undertakings through if one of the following conditions is fulfilled: • (a) the undertakings bear the full cost of the project, or • (b) the results which do not give rise to IPR may be widely disseminated and any IPR resulting from the activities of Universities are fully allocated to those entities, or • (c) any IPR resulting from the project, as well as related access rights are allocated to the different collaboration partners in a manner which adequately reflects their work packages, contributions and respective interests, or • (d) the research organisations or research infrastructures receive compensation equivalent to the market price for the IPR which result from their activities and are assigned to the participating undertakings, or to which participating undertakings are allocated access rights 08/04/2019 48
  49. 49. Effective Collaboration - 3 The Commission will consider that the compensation is equivalent to the market price if (a) the amount of the compensation has been established by means of an open, transparent and non-discriminatory competitive sale procedure, or (b) an independent expert valuation confirms that the amount of the compensation is at least equal to the market price, or (c) the University, as seller, can demonstrate that it effectively negotiated the compensation, at arm's length conditions, in order to obtain the maximum economic benefit at the moment when the contract is concluded, while considering its statutory objectives, or (d) in cases where the collaboration agreement provides the collaborating undertaking with a right of first refusal as regards IPR generated by the collaborating University, where those entities exercise a reciprocal right to solicit more economically advantageous offers from third parties so that the collaborating undertaking has to match its offer accordingly. 08/04/2019 49
  50. 50. A structured approach to analysing aid • The purist approach: – Assume there is aid – Can you rely on GBER? – If not, can you use de minimis? – If not, notify • A more practical approach – Can you structure it so that there is no aid – non-economic activity (incl Ancillary), MEOP, effective collaboration? – If not, can you use de minimis? – If not, can you rely on GBER? – If not, notify • Principle: do whatever you can lawfully to simplify it 08/04/2019 50
  51. 51. Example: Research Infrastructure: Working with industrial partner(s) • How much investment is coming from – State resources – Non-state resources (e.g. private foundations, private investors, the University’s own non-state resources) – The Partner(s) • How much use/access does the partner(s) need to the infrastructure (including as the beneficiary of research carried out by the University)? Is this proportionate to their investment? • Will any other undertakings be using or accessing the infrastructure? • Can you design the funding so that there is no aid? 08/04/2019 51
  52. 52. 52 So where are we in this jungle? • Be clear about what it is you want to do • Be clear about what resources are being deployed and how, and what the sources of any funds are • Be clear about who is getting what including indirect benefits • Is there any non-economic activity? – no aid • Is the benefit available to everyone without restriction? – no aid • Is any benefit being paid for at a market price? – no aid
  53. 53. 08/04/2019 53

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