State aid affairs and Brexit

A recent action where a company claimed the Government gave state aid unlawfully has been dismissed. LC Management Services (Scotland) Ltd argued that awards to undertakings within Global Energy Holdings Ltd, relating to the redevelopment of Nigg Energy Park (Nigg Yard), were in breach of European Union state aid law.

LC had bid unsuccessfully to purchase part of Nigg Yard, which was bought for an undisclosed sum for redevelopment by a Global Energy company. The land had been used for various oil and gas related services, with several public bodies having made awards and been involved with the yard. LC now sought recovery of the state aid plus interest and damages from the Scottish ministers and Highlands & Islands Enterprise.

Threshold and aid calculation

In his opinion ([2019] CSOH 72; 25 September 2019), Lord Ericht reviewed EU state aid law and considered the relevant minimum threshold. If the aid was below the threshold, it would be considered compatible with the internal market under article 107 of the Treaty on the Functioning of the European Union and exempt from notification under article 108. Article 108(3) requires member states to notify aid in advance and not award any aid until it has been approved (the “standstill obligation”).

Aid not complying with article 108 is known as unlawful state aid. Where the European Commission becomes aware of this, and finds it incompatible with the internal market, it will order the state to abolish the aid measure and recover any aid granted plus interest. Although only the Commission can examine whether the aid is compatible with the internal market, the courts can enforce the standstill obligation and a competitor can apply to uphold these rights.

The pursuers argued that in terms of the Commission’s guidelines the notification threshold should be calculated at €11.25 million. It was further claimed that the designation of Nigg Park as an assisted area under the Capital Allowances Act 2001 attracted incentives such as advantageous business rates and enhanced capital allowances, which should be considered state aid and added into the calculation.

Rejecting these arguments, Lord Ericht held the notification threshold was €15 million, and neither capital allowances nor rates relief should be counted. The grants totalled just over £10.3 million, well below the threshold and the action was dismissed.

What if Brexit goes ahead?

At the moment state aid is wholly governed by European legislation. In general, the European Union (Withdrawal) Act 2018 (EUWA) will, on exit day, convert EU law as it stands into UK law (“retained law”), empowering delegated legislation to correct any perceived deficiencies.

With that in mind the Government proposed draft State Aid (EU Exit) Regulations 2019, in order to introduce a UK state aid system and transfer regulatory powers to the Competition & Markets Authority. The explanatory memorandum confirms that there will be no material change to the definition of aid or the prohibition on giving aid, but the retained law needs to have references to EU concepts, the internal market and functions of the Commission removed.

The draft regulations would also exclude any power of the CMA to set aside an Act of Parliament on the basis that it provided incompatible state aid (which the Commission can eventually do at present), and the Government would not be obliged to take into account the CMA’s opinion on incompatibility. This could mean fewer rights for aggrieved competitors to hold the Government to account (fertile ground for unintended consequences ranging from near-monopolies to a dearth of any bidders given the enormous cost associated with tendering). Arguably positive changes include shorter timescales for the CMA to deal with notifications, and the ability to make notifications direct (instead of to the Government).

However, at the time of writing, the regulations have not yet been made, and the European Union (Withdrawal Agreement) Bill has been “paused” pending the general election. The draft Withdrawal Agreement (“EUWA”) makes provision for the state aid rules to continue during the transition period.

If the EUWA is not passed into legislation by exit day (i.e. a no-deal Brexit results), either:

(a) the regulations are made by exit day, state aid rules continue and the CMA deals with control and enforcement of state aid; or

(b) if the regulations are not made, state aid rules could continue but with the CMA having no role and the UK courts being left to determine disputes in relation to state aid. The EUWA prevents the Government from granting aid until it has been approved in accordance with the state aid rules – but neither the Commission nor the CMA would have any role to play.

So a “no-deal” scenario could leave us with a variety of unanswered questions about state aid and how it is to be monitored and enforced. For example, what happens in relation to currently ongoing enforcement procedures, and what if there is no control over devolved governments making grants (aka indulging in spending sprees)? A further intriguing aspect is the role of the mysterious Government Kingfisher project as a means of providing state aid to companies, combined with the general sweeping statements on state aid made by parties in the run-up to the election – and how any of this will operate with or diverge from state aid rules. Watch this space.