Dealing with State Aid

State aid is an issue which can affect CLH schemes as much as any other where a grant, loan, use/ownership of assets (including land) or guarantees are involved and where these are:

  • granted by the State or from State resources;
  • confer a selective advantage on one or more undertakings carrying on economic activity (putting goods or services on a market);
  • distort competition or have the potential to do so; and
  • affect trade between Member States or have the potential to do so

All of the above elements must be present for there to be State aid incompatible with EU law.  In this context the European Commission takes a very wide interpretation of what constitutes a distortion to competition and/or an effect or trade between Member States.

The tests are broadly worded and a wide variety of measures can be considered unlawful State aid, and this is not limited to cash payments such as grants.  State aid can include other measures such as guarantees, the sale of assets or land at less than market value or at preferential rates, tax exemptions, grants or loans at preferential rates, or the writing off of debts.

There is the potential that a council could provide unlawful State aid if it were to dispose of land and property at an undervalue to a specific purchaser and so caution should be exercised here. 

It is therefore important for any project which involves public funds or the use of public resources to identify whether there is any State aid and, if there is, whether or not it would be unlawful.  This means assessing whether or not all four tests above are met and, if they are, identifying whether there are any exceptions or exemptions to State aid rules that might apply.

Possible exemptions

Exemptions may exist under:

  • the General Block Exemption Regulation  – we do not consider that any of the block exemptions would apply to aid given by the council to a wholly owned commercial entity;
  • the De Minimis Regulation  – a maximum of €200,000 of aid received by the recipient in any three financial year cycle would be considered “de minimis” and as such not have any impact on competition or trade between Member States;
  • in relation to “Services of General Economic Interest”  – these are economic services identified as being of particular importance to the public.  They are characterised by an entrustment of a public service mission by a public authority and the universal / compulsory nature of the service delivery.  Examples include public postal services and electricity supplies.  There is an argument to say that provision of social housing might fall within this exception, but the provision of private housing for sale or rental would not

State aid that does not fall within an exemption must be notified to the EU Commission for prior approval. 

De Minimis

Often, the only exemption that would be available if the council gave State aid that would be considered unlawful will be de minimis. The de minimis threshold of €200,000 is often not considered sufficiently high enough to be of any significant use.  Wherever possible support (including any support services) should designed to ensure that there is no State aid – i.e. the council seeks full cost recovery and applies market terms on loans and grants.

Perhaps the only area in which the de minimis rules may be helpful is if a business case is reliant on minor deviations away from market terms – for example interest rates on loans that are marginally below those that would be offered by a private investor in the same circumstances (and see further below in relation to the market economy investor principle), where the “aid” element is the difference between the rate agreed and the rate that would be available on the marketplace.  Where this is the case, and any State aid can be precisely calculated (what is described as the “gross grant equivalent”), the de minimis rules may be applied as there is transparency in relation the “aid” value.

The Market Economy Investor Principle

In relation to any loans made by a council, and in relation to ensuring the council receives best consideration for any land transferred, the concept known as the market economy investor principle (“MEIP”) is relevant.  When determining whether an investment by the council could constitute State aid (or incorporate an element of State aid), the council should assess whether, in the same or similar circumstances, a private investor of a size comparable to the council operating in the market economy could have been prompted to make the investment in question.

Where the council relies on the MEIP, it must be confident that it can demonstrate why it considers it is acting as a private entity acting in the market would act.  If a council is to accept loan notes or deferred consideration when it transfers land, it will be important to be able to demonstrate that the terms of those transactions (including, for example, any interest that is payable) are consistent with terms that would be found in the market economy.

The MEIP is equally applicable to the decision of the council to invest other than in relation to the transfer of land; where the council contributes to the working capital of a company, for example, this should be on market terms to avoid State aid rules applying.  This can be by way of equity (i.e. shares in a company) or loan.

Sale of land at an undervalue

The European Commission has provided guidance on how to minimise the State aid risks when land is being transferred or sold by the public sector. This guidance is expressly formulated in a way which should allow public bodies to comply without changing their normal procedures, recognising that most Member States have place rules and procedures that require public property not to be sold below its value.

The guidance differentiates between a sale through an “unconditional bidding procedure” and one without such a procedure.  Where there is a bidding procedure that is sufficiently well-publicised, open and unconditional, then accepting the best (or only) bid is “by definition at market value and consequently does not contain State aid”.  If there is no unconditional bidding procedure, then the guidance suggests obtaining an independent expert evaluation:  this should be carried out by one or more independent asset valuers prior to the sale negotiations, to establish the market value based on generally accepted market indicators and valuation standards.  It should be noted that this market price is considered to be the minimum purchase price that the council can agree without granting any State aid.

Compliance with section 123 is achieved by securing market value on the disposal of the site, and achieving that market value (as determined by the independent valuation) also confirms that the council is not granting any unlawful State aid.

Implications of Brexit

There is the possibility that both procurement and State aid rules will be affected in the future by the vote to leave the EU.  However, while this may be a consideration eventually it is some way ahead at present.


Last updated in May 2018