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University European Regional Development Fund applicants must manage state aid issues, says expert

Out-Law Analysis | 08 Feb 2016 | 4:37 pm | 4 min. read

FOCUS: UK universities applying to the European Regional Development Fund (ERDF) for funding towards planned projects must ensure that their use of any award complies with EU state aid rules - or risk having to repay aid.

The state aid rules are designed to prevent the distortion of competition that would occur if state resources were used to give some organisations an advantage over others. The rules are designed to protect competition and so generally do not affect public functions such as the provision of higher education. However, state aid rules can be engaged where a university becomes involved in the supply of goods or services in a given market, or where it distributes state funds to other entities or provides services at less than the corresponding market price.

As part of a managing authority’s decision to grant ERDF funding, it must be satisfied that the applicant complies with the EU state aid rules. A university applicant must be able to demonstrate a solution to any potential state aid issues that arise and, if successful in its application, be able to ensure that this solution is being implemented properly. Failure to do so can result in any discrepancies being flagged during an audit and the university being required to pay back any funding granted in breach of the rules.

The process of identifying a suitable state aid solution and monitoring compliance can be daunting for those new to the rules, as there are a number of exemptions and schemes available which can be difficult to navigate. This article sets out some of the main state aid issues that can arise as part of the ERDF application process.

Initial analysis

A full state aid analysis should identify:

  • Who could be in receipt of state funds as a result of the application – for example the university itself, delivery partners, ‘end users’ such as SMEs or other private sector entities;
  • Whether these funds meet the definition of state aid in respect of each of these recipients, as set out in the Treaty on the Functioning of the European Union (TFEU).

The TFEU prohibits “any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods … in so far as it affects trade between member states”, subject to the exemptions.

Where the analysis reveals that state aid is involved, the university will need to consider whether the aid measure must be notified to and approved by the European Commission before it can be implemented, or whether it benefits from an exemption.

Exemptions

There are two ways in which a university can avoid having to fully notify the European Commission of an aid measure:

  • ‘de minimis’ aid;
  • aid that meets the criteria of one of the exemptions set out within the General Block Exemption Regulation (GBER).

These two categories of aid can be implemented without the need for prior notification and approval.

Universities will be most familiar with the ‘de minimis’ exemption, which permits aid that does not exceed €200,000 over a period of three fiscal years subject to certain exceptions. However this has obvious limitations, particularly where the value of any ‘aid’ to be granted exceeds this threshold.

The GBER sets out a number of categories of aid that are exempt from the notification requirements, as these categories achieve the EU’s policy objectives. There are 43 separate exemptions set out within the GBER, each with its own specific rules including notification thresholds and aid intensity levels. All 43 exemptions are also subject to general rules in relation to cumulation, incentive effect and publication.

When analysing potential GBER exemptions, universities should pay particular attention to the permitted aid intensity levels as not all GBER exemptions permit 100% publicly funded measures. Some exemptions require some form of private sector ‘match’. Universities must therefore take into account other sources of public funding that may be provided in addition to EDRF monies, to ensure that these aid intensity levels are respected.

Monitoring compliance

If the managing authority approves the university’s ERDF application, the university must ensure that it complies with the state aid solution set out within its application form. This may require it to establish a process for monitoring the amount of aid granted to specific undertakings if it is ‘passing on’ any aid under the project to other entities.

Declarations and application forms should be designed to capture the information required under the exemption relied upon. For example, the De Minimis Regulation sets out very specific requirements concerning the content of offer letters to be provided to recipients of de minimis aid. Similarly, if applying a GBER exemption, the university must ensure that the relevant thresholds and aid intensity levels are respected. Application forms, grant agreements and offer letters, and guidance can assist with their process, together with ensuring that staff are aware of how to apply the GBER exemptions relied upon.

Other factors to consider

The state aid solution identified may also affect whether the project is deemed a ‘revenue generating project’ under articles 61 and 65(8) of the European Structural and Investment Funds (ESIF) Common Provisions Regulation.

This is of particular importance where the university will be charging ‘market rates’ for its services and, as a result, will incur some profit – no matter how small. This means that the managing authority may have to reduce the amount of ERDF grant in line with the potential net revenue generated by the project. There are various mechanisms which will ensure compliance with these rules, and these should be discussed with the managing authority at the earliest opportunity.

The Department for Business, Innovation and Skills (BIS) and the Department for Communities and Local Government (DCLG) have produced guidance on the topic of state aid generally (12-page / 847KB PDF) and on use of the GBER (26-page / 377KB PDF). These are published for guidance only and do not have legal effect. However, they can be useful points of reference for discrete queries.

Stuart Cairns is a competition law expert and Claire Gamage is a universities law expert at Pinsent Masons, the law firm behind Out-Law.com.