Leveraging public funding into co-operative based projects can create exciting opportunities.
Co-operatives are often particularly well suited to make use of public funds for the benefit of their wider community in line with the seventh co-operative principle, concern for community.
Public funds are available for an incredibly diverse range of projects. Recent examples of projects we have been involved in include a refurbishment of a local landmark for community use, development of an ultra-fast fibre network to support local business and a project to provide free hot meals to vulnerable people.
Currently, significant amounts of public grant funding is administered through the European Regional Development Fund and European Structural and Investment Funds. Post-Brexit it is anticipated that these funds will be replaced by the UK Shared Prosperity Fund, though details of this new fund are not expected until 2020.
State aid – a common frustration!
State aid is public funding that is or could be used to subsidise business activity. The State aid rules, which govern how State aid can be distributed and spent, can become a barrier to co-operatives securing public funding. A common requirement for funding applications is a “comfort letter” from legal advisers explaining how the funds would be used lawfully, as State aid law is very complex. This article aims to give a short insight into some of the most common solutions available to ensure public funds can be received without breaching the State aid rules to help inform co-operatives that are considering making a bid for public funding.
Why does State aid compliance matter?
In one word – clawback. Where an organisation receives unlawful State aid, the EU Commission can require that the unlawful State aid is repaid (plus interest). In practice the impact of clawback can be disastrous as funds are often already spent, meaning a requirement to repay those funds can impact an organisation’s cash flow and reserves.
State aid – the basics
Is there a risk of State aid?
There are four tests which must all be met for State aid to exist:
- an organisation receives public funding (or an equivalent benefit);
- that organisation is engaged in any sort of business activity (even not for profit or charitable organisations can be caught here);
- that gives it a selective advantage over competitors; and
- which could distort competition and affect trade between EU Member States.
If it can be shown that any one test is not met, the grant or funding will not be State aid and the rules are not engaged.
Many organisations wrongly assume that the last test makes State aid law irrelevant to them. However, that test is very widely interpreted and even the potential of any impact on investment flows, or movement of people across Members States will be said to affect trade. For example, investing in any sort of property using State aid, possibly to start to regenerate an area, might have an impact on trade or investment if it is possible that EU citizens might own or buy property in the regeneration area.
For areas of funding other than property or regeneration, sometimes arguing that there is no effect on EU trade can be an effective way to avoid getting caught up in the more complex aspects of State aid law! However, it can be a risky approach, and often an exemption will need to be relied upon.
There are several exemptions which allow limited State aid. The purpose of some of the exemptions is to encourage investment in areas which will ultimately benefit the public. Many of the exemptions relate to investment in the low carbon economy, SME businesses, research and development, cultural projects or training for people who are disadvantaged in the employment market.
These exemptions are obviously very welcome, but even the exemptions are subject to numerous conditions before their use is permitted. For example, there are maximum amounts of aid which can be exempted, obligations to provide “match” funding, and reporting and record keeping obligations.
There is a further separate exemption relating to State aid received for providing services which benefit society. Commission guidance suggests that services such as health care, social care and social housing can all come within the exemption.
There is also an exemption for small amounts of State aid, allowing any one organisation to receive up to €200,000 of State aid over a rolling 3 year period for general State aid, or €500,000 where the aid is for providing important public services. Often, using this exemption (in State aid speak this is called the “De Minimis” exemption) is the most straightforward course, but several Government departments and regional offices are not keen on grant applicants using De Minimis if there are other exemptions available.
Does Brexit mean you don’t need to worry about State aid?
Unfortunately, no! On a “no deal” Brexit, the Competition and Markets Authority (CMA) have produced guidance that the CMA will take over the role of the UK State aid enforcement authority, in place of the European Commission and the State aid rules will largely be transposed into UK law unamended on exit day.
Should a successful deal be reached with the EU it is anticipated that the position will look similar to “no deal”, though with an implementation period following exit day following which the CMA will take on its new role as UK State aid enforcement authority.
Keys to success
In the majority of cases, State aid issues can be minimised and its avoidance planned into projects, to ensure a smooth funding application and project delivery. However, all too often, deadlines loom and State aid is put on the back burner. This causes problems because organisations find out too late that either:
- their project does not quite match the exemptions available, or
- their proposed level of match funding is not sufficient to use the exemptions, so the amount of funding available is reduced, or
- a slightly different approach to a funding application could have taken the project out of the scope of State aid altogether.
For these reasons, it is really important to seek assurance that your project will be State aid compliant, or out of scope, at a very early stage in the funding process.
We have worked with our lawyers Anthony Collins Solicitors to produce this blog to keep our members up to date with the latest legal developments to affect co-operatives.
If you have any questions or need support, please contact the Co-operatives UK Advice Team.