State Aid

Wayne Butcher

The UK’s transition arrangements with the EU are set to end on the 31st December of this year and whilst many of us will be welcoming the new year with a sore head, state aid is an area which is going to be giving both the UK government and EU a headache long before 2021.

For many involved in the towns fund deals, the development of the plans typically involves a variety of sources of funding and the proposed delivery of interventions through multiple partners across different structures. This means that state aid is a topic which will require some careful thinking and continuous monitoring given the uncertainty still surrounding what happens from 1 January 2021.

At the moment, the UK has to comply with the rules set out in the General Block Exemption Regulations (GBER) on State Aid but what exactly does this mean?

Undertaking in difficulty test

The first consideration in respect of state aid is to determine the 'undertaking' and apply the tests to ensure it is not an 'undertaking in difficulty' (UID). This looks at the financial performance of the undertaking over the last two years considering the debt to equity ratio and EBITDA (earnings before interest tax depreciation amortisation). This will be particularly relevant for interventions centred around the re-purposing of an existing arrangement and/or asset and will need further exploration.

If it is a UID then it is likely to fall at the first hurdle. 

If it passes and depending on the nature of the undertaking’s economic activity, the GBER determines the maximum aid level and eligible expenditure thereafter. From our experiences, this may be negotiable dependent on the circumstances and investment sought. Early examination will be essential to allow the proposed deals to be structured in a manner which balances the commercial aspirations of all and the state aid considerations.

Funding sources and entity structure

A further consideration on state aid is around the sources of funding for the project and the ratio between the organisation’s own sources and UK government sources.

For example, why does a large multinational company that generates profits and has access to cash require state aid? It may be that the alternative option to deliver the project in another country is more cost effective so the state aid bridges the difference and creates jobs which benefits the UK economy.

Based on the above for the Towns Fund, the towns need to consider the vehicle and legal status through which they plan to deliver their interventions alongside the financial standing of potential partner organisations. Furthermore, the context of the projects they intend to deliver and the split between private funding and government funding that will be required. This should then be used to evaluate the viability of the plans.

So what next?

This is a complex technical area, and one which the PM is trying change as part of the trade negotiations with the EU.  We all need to be mindful that things could change in the short term and this should be noted by all towns.

Despite the uncertainty though, towns should seek to create a sure-footing for themselves in this area and seek formal advice where required given the approach is principles-based with every scenario likely to be different and  requiring a customised approach to reach the correct answer.