David Hansom, from law firm Veale Wasbrough Vizards, steers through some of the issues and new regulations
Article 107(1) of the EU Treaty lays down the principle that ‘state aid’ is prohibited. As readers may be aware, the regime prohibits financial assistance from state resources, targeted at specific undertakings and which could distort competition and trade between EU member states. The detailed principles (and exemptions) are set out in regulations, case law and guidance.
At first glance, this seemingly wide definition could capture a wide range of HEI funded/supported projects or grant arrangements, as well as joint ventures, commercial research and development activity.
There are new regulations which offer further clarity and flexibilty to HEIs. State aid only arises where selective assistance is given to an operator in a commercial marketplace. All four of the limbs of state aid are required in each case for the regime to apply. Practically, a particular structure should be analysed on a case-by-case basis as to whether it offends all four of the tests, ie:
1. Are state resources involved? The answer to this question will generally be ‘yes’ where the HEI is being funded by state resources or its own (public) funds are to be committed. Aid can arise other than simply by way of direct funding – for example, tax relief, rent-free periods, free staff secondment or providing IT at no cost on favourable terms.
2. The effect of the aid must be to give the recipient undertaking an advantage on a selective basis. This has two parts. Firstly, the recipient must be an ‘undertaking’ so it must be engaged in economic (commercial/competitive) activity where there is a market in comparable goods or services. An ‘economic activity’ is the offering of services or goods onto a market and which could, in theory at least, be delivered by a private operator for profit.
The funding of ‘non-economic’ functions (including providing public tertiary education) fall outside of the scope of the state aid. This analysis may change in the future as, for example, the higher education market continues to evolve including the rise of the Massive Online Open Course (MOOC) and/or creation of privately funded universities.
It is important to note that a charity, not-for-profit group or public sector body could be an ‘undertaking’ for the purpose of the rules. It is the activity, not the type of entity, which drives the analysis.
Secondly, the measure must be selective. The aid must favour that one undertaking or type of undertaking. This would, of course, include funding to a specific HEI or company but could also catch support to a particular industry, sector, or to undertakings located in specific geographical areas or regions.
3. The third test is concerned with the actual or potential impact on competition. Generally (but not always), if the first two tests have been met, the European Commission (‘Commission’) has adopted a relatively low threshold in assessing potential impact on competition. Clearly, higher value aid will be more likely to be anti-competitive but, looking at the case law, even smaller amounts can have a material impact. This is particularly in new markets or where, for example, small- and medium-sized enterprises (SMEs) are active.
4. The fourth test is that the measure must be likely to affect trade between EU member states. Again, the Commission has been willing to look at this provision broadly when assessing whether or not a measure amounts to state aid.
Aid issues can and do become more significant where HEIs are active in the placing of goods or services on a competitive market and typically arise in two circumstances. The first is where the HEI itself is receiving state funding (for example, to undertake research and development activities). The second situation is where the HEI is making its funding available to recipients to support wider commercial activity or, for example, to set up joint ventures.
Not all financial assistance will amount to unlawful state aid. There are a range of potential justifications for aid and, if no justification exists, there is a mechanism to notify (seek approval from) the Commission to seek to clear the aid. This route has historically been time consuming and the outcome often not guaranteed. Whilst there is a new simplified notification regime in the new rules, this approach should, practically, generally be the HEI’s last resort.
For HEIs being funded to undertake research, the new framework for state aid in Research and Development and Innovation (in force from 1 July 2014) makes a range of changes to the regime.
Broadly, the framework distinguishes between non-economic and economic activities that a research and knowledge dissemination organisation (‘RO’), such as an HEI, may undertake. Non-economic research activity is not generally considered state aid. In each case, there are specific conditions and caps in terms of total aid and intensity which must be met.
Any economic activity in research (such as renting out laboratory space) must be accounted for separately. It is often possible to structure economic research activity in a state aid compliant way. An example of this is where the HEI simply acts as a conduit and passes the funding on to end users, so that the state aid rules apply at the level of the end user.
Other types of assistance may be permitted under the new General Block Exemption Regulation (GBER). which sets out types of fundable activity and caps on both the total and the ‘intensity’ of the state aid – which is the percentage of state aid as against the total project cost. The GBER in force from 1 July 2014 opens up new types of funding which could be eligible to proceed without notification to the Commission. Expressly permitted is funding for investment in research infrastructure and financial support to so-called ‘innovation clusters’.
For HEIs receiving and making funding available (for example, via selective grants) there is a general exemption for low value aid of no more than 200,000 euros in any three-year financial period. This so called ‘de minimis’ threshold considers funding from all ‘state’ sources, not just the HEI, and so recipients should be required to keep records of state funding and the amounts to ensure compliance.
Another possible route through state aid is the ‘Market Economy Investor Principle’ (‘MEIP’), This justification for no aid arises where it can be shown that the HEI is participating in a project or investing on commercial terms equivalent to those available in the private sector. For example, an HEI setting up a 50/50 joint venture with the private sector to undertake research could structure its participation in the vehicle on market terms. If the HEI receives, for example, a commercial rate of return on its investment and contribution, particularly around the intellectual property it creates, there could be no benefit to the undertaking and, therefore, no aid.
State aid compliance is costly to ignore but often a self-assessment on risk. Non-compliance with the rules can lead to investigation and action by the Commission, including orders to recover unlawful aid from the recipient for up to 10 years after the date of the aid plus compound interest.
The lack of clarity in some areas of the law mean that a practical approach is essential when analysing potential risk issues. Even if aid is found to exist, there may be steps that can be taken to mitigate its impact. These can be built into your overall project plan and therefore, impact on the project delivery can be minimised.
The biggest practical risks come when state aid issues are not addressed until the end of the project – as by this time it is often too late to adopt a risk mitigation strategy. Although state aid infraction proceedings are often targeted at the highest profile, largest scale projects (eg where HEIs seek to funnel large amounts of public funding into the private sector), smaller scale projects or grants are not immune to a complaint. The new flexibilities, for example in the GBER, should provide some additional comfort to HEIs. This is, however, an evolving area where the boundaries continue to be pushed as HEIs look to innovate with their supply chains, partnerships and commercial activities.