Running the gauntlet

Traffic lights iStock 000003944828XSmall 146 x 219Alison Deighton and Philip Roberts examine some important developments for local authorities and other public bodies in relation to state aid.

As spending cuts continue to bite, local authorities are being forced to consider new models of service delivery and new opportunities for income generation. 

These new ways of working increasingly involve the use of separate legal bodies for the provision of services rather than direct provision through the local authority itself. These separate legal bodies can come in many shapes and sizes. From authority owned vehicles, such as Teckal companies or trading companies, to fully independent bodies such as staff mutuals.

The establishment of these new bodies, and the ongoing nature of their relationship with the local authority, can pose a challenging array of legal issues. One of these issues is state aid.

Many local authority lawyers are familiar with the basics of state aid, for example, what constitutes state aid and when it may arise. Rather than go over this well trodden ground, this article will look at two relatively recent developments that could affect the analysis of state aid issues when establishing these new vehicles. There is some bad news, in terms of the risk of challenge. But there has also been some good news, in terms of the range of new exemptions for ensuring compliance.

The bad news - the risk of challenge

The newly established bodies will often operate in a commercial market. Private organisations will be looking closely at the impact of these bodies on their market share. They will also be alive to any public support that gives an apparently unfair advantage. In recent years there has been an increased awareness of state aid, by public bodies and potential complainants alike, and in particular of its potential for causing significant disruption to a project. 

Despite a recent change that requires a complainant to demonstrate that its interests might be affected by the granting of the aid, it remains relatively easy for a competitor to raise a complaint to the European Commission. From the authority's perspective, at best this can often involve a delay as the Commission considers the merits of the complaint. At worst, the Commission can initiate a lengthy investigation and ultimately may order repayment of any aid, which could potentially be catastrophic for the recipient of the aid and for the supported project.

So far this will all be very familiar. So what's changed? 

The starting point is the standstill requirement under the Treaty on the Functioning of the European Union. This prohibits the provision of any state aid pending notification to and subsequent approval from the European Commission. As a result of this standstill requirement, where the Commission has launched a formal investigation into allegedly unlawful aid that has not been notified, a suspension applies to the provision of the aid pending the outcome of the investigation. Any aid granted in breach of this suspension is automatically deemed as unlawful and can be subject to repayment. 

However until recently it has proved difficult to obtain a remedy for a breach of this suspension obligation as the Commission has limited powers to order repayment until it concludes its investigation and it was considered that any action at a national court level required a finding by the national court that there was in fact state aid present. 

A recent case significantly changed this picture. In the Deutsche Lufhansa case, the claimant, Deutsche Lufthansa AG, brought proceedings in the German national court in 2006. They alleged that Ryanair had received unlawful state aid from Flughafen Frankfurt-Hahn GmbH, the publicly owned operator of Frankfurt airport, in the form of marketing support and exemptions from airport fees. In 2008, the Commission initiated an investigation into the possible state aid. The German national court sought the opinion of the European Court of Justice (ECJ) regarding the relationship between the national court and the Commission in respect of the standstill requirement. The ECJ ruled that it is possible for a national court to order the suspension and repayment of any allegedly unlawful state aid where the Commission has launched a formal investigation. Crucially, the ECJ considered that it is not necessary for the national court to establish that the measure is state aid; it is sufficient that the Commission has initiated a full investigation.

It is therefore significantly easier for complainants to apply to a national court for an order for suspension and repayment of aid on the basis of breach of the standstill obligation, and so disrupt an authority's project.

This ruling has contributed to increasing numbers of private companies bringing claims at a national court level alongside the more usual route of issuing a complaint to the Commission.

The good news – a range of new exemptions under the General Block Exemption Regulation

Thankfully for authorities there has been some good news too. This comes in the guise of the revised General Block Exemption Regulation (GBER), which came into force in July 2014.

The GBER provides a wide ranging set of exemptions from the obligation to notify state aid to the Commission for approval. The GBER could be the subject of a lengthy article in of itself, but the focus here is to suggest a number of exemptions under the GBER that may be relevant to an authority's involvement with vehicles being established for new ways of working:

  • Aid to SMEs: It is likely that the new body will fall within the definition of a SME. If this is indeed the case there are a number of potential options available. This includes exemptions for investment in tangible and intangible assets, loans and guarantees at non-market terms, and provision of consultancy services.
  • Regional aid: Is the aid being granted in an "assisted area"? If so, there are exemptions for investment aid. The Department for Business Innovation and Skills have produced a map illustrating the assisted areas.
  • Aid for environmental protection: There are a variety of exemptions that are focussed on aid for environmental protection. These could be relevant if, for example, the authority is establishing an Energy Services Company for the delivery of energy efficiency projects. Exemptions are available for, amongst other things, investment aid for energy efficient district heating and cooling projects and investment aid for energy infrastructure.
  • Aid for culture and heritage conservation: A number of authorities have established independent trusts for the provision of heritage services such as museums and archives. There are exemptions under the GBER for investment and operating aid in relation to such activities.

Final thoughts

More so than ever, state aid is an issue that can trip authorities up. This is particularly relevant when authorities establish separate legal bodies to facilitate innovative models of service provision and income generation. Private companies are aware of these developments and are prepared to challenge when they feel that their market share is unfairly threatened. The Deutsche Lufthansa case has made it easier for them to do so. Thankfully for authorities, there are a wide variety of options for ensuring compliance, not least through the revised GBER.

Local authorities are recommended to consider the state aid implications early, making sure they structure the project to ensure compliance or potentially facing serious consequences.  

Alison Deighton is a partner and Philip Roberts is a commercial associate at TLT. Alison can be reached on 0333 006 0160 or This email address is being protected from spambots. You need JavaScript enabled to view it..