State aid in the time of coronavirus: what help for business is too much?

Almost everyone agrees that the Covid-19 crisis requires huge payouts by governments to support business. That poses challenges for any regime that seeks—as the EU does—to regulate public subsidies in the general interest of making sure that, in a market without borders, industries in one country are not hit by unfairly subsidised exports coming from another.

The way in which the EU state aid regime deals with those challenges remains a matter of direct concern for the United Kingdom, even after Brexit. That is for two reasons.

Most immediately, under the Withdrawal Agreement negotiated by the Johnson government in October 2019 (the WA), the UK will spend (at least) the rest of 2020 in the transition period established by Article 127 of the WA. In that period, almost all EU law—including all EU state aid law—continues to apply in the UK: the UK remains in the EU state aid regime.

But even after the end of the transition period—which the government is still protesting will not be extended—little will change as far as Covid-19 subsidies are concerned. That is because EU state aid law will, under Article 10 of the Ireland/Northern Ireland Protocol to the WA, continue in perpetuity to have substantial application in the UK. Article 10 provides that, even after transition, any UK measure that potentially affects trade in goods between Northern Ireland and the EU will still be caught by EU state aid rules and (as Article 12 makes clear) will still be subject to regulation by the European Commission and the jurisdiction of the European Court of Justice.

Given the scale of the Covid-19 measures and their potential impact on all aspects of trade, any similar measures implemented beyond the end of transition will almost certainly also be subject to the EU state aid rules. They will therefore be unlawful unless and until they are approved by the commission—a rule that all UK courts will have to enforce as if it were part of domestic law as a result of Article 4 of the WA. (For some mysterious reason, the government has been unwilling to discuss these provisions in the agreement that it concluded in October, leading the House of Lords EU Select Committee to comment in its letter of 2nd April to the Department for Business, Energy and Industrial Strategy that “It is troubling that no one we heard from thought that the UK Government had a clear understanding of what state aid provisions it had signed up to in the Protocol,” and to call for those provisions to be renegotiated—a call that will be impossible to heed if the government is serious about keeping to the current negotiating timetable.)

That all means that, when it comes to designing support packages for businesses affected by the Covid-19 crisis, the UK will have to live with the state aid rules both this year and thereafter. What constraints are they going to place on what can be done?

It is important to bear in mind that not everything the UK government has done or may want to do will be caught by state aid rules. Support that applies equally to all businesses is not state aid, since it is not selective. Measures like postponing the date at which all business have to pay tax or supporting all workers who are furloughed are not selective and are not state aid. Also, support for work done by bodies that is not business activity (for example, free food banks or supporting vulnerable people for free) is not state aid. In addition, even when measures are targeted at commercial businesses or sectors of the economy, and so amount to state aid, they may be covered by general exemption rules and can be implemented without any further ado (an example being most kinds of support for cultural activity and voluntary and amateur sporting activity).

That said, the reality is that the programmes of support that are needed to deal in any real way with this crisis will be state aid. Governments will want to give support to particular sectors (small businesses; tourism and leisure; retailers) and to strategic businesses floored by this crisis. And the scale and nature of the support needed are far greater than anything covered by the standard exemptions. That means that, for the measures to be lawful, the commission has to agree them before they are implemented. And if this step is ignored or if aid is granted outside the scope of agreed programmes, the recipient will be liable to pay back the benefits it has received and anyone objecting to the aid can call on national courts to stop it.

The commission’s stance is largely determined—as always—by the powers and duties it has under the EU Treaties. The commission is obliged, under Article 107(2)(b) of the Treaty on the Functioning of the EU (TFEU), to agree to state aid which makes good the damage suffered by businesses as the result of exceptional circumstances. That covers businesses in sectors particularly hit by the outbreak, and has been used, for example, to approve aid to event organisers whose events have been cancelled and to airlines such as SAS. However, under this head, the commission has to make sure that the amount paid is no more than the amount the business has directly lost as a result of the crisis. So the commission is also deploying its wider power under Article 107(3)(b) and (c) TFEU to approve aid needed to remedy a serious disturbance in the economy of a member state, and to support businesses facing serious financial difficulties.

It is also important to remember that the commission’s approval decisions may challenged by member states or by companies with a particular interest in the matter by way of judicial review in the EU General Court: and that is not at all academic, even in the current crisis (for example, Ryanair has threatened to seek judicial review of the commission’s decision to approve Danish aid to SAS).

Nonetheless, the commission has a wide range of approaches it can adopt to the use of its powers. In relation to the current crisis, the relevant part of the commission—the Directorate-General for Competition—published very early on a “Temporary Framework” (TF). The TF sets out types of support that will get very rapid clearance. But the TF is not by any means exhaustive, and the commission can also clear Covid-19 related aid falling outside that framework—something that it has now done on a number of occasions, including the Danish subsidy to SAS, and again rapidly.

So the TF is in effect a checklist setting out aid measures that are guaranteed to get fast-track clearance, which will simply make sure that the relevant boxes are correctly ticked. One category of fast-tracked aid is grants of less than €800,000 per business. Another is guarantees or interest subsidies on loans to businesses. The TF also covers aid to support research and development in matters relating to Covid-19, supporting production of products relevant to Covid-19, and strengthening infrastructure in areas relevant to Covid-19. There are a number of conditions, including that aid is not given to businesses that were already in financial difficulty before the crisis started (aid to such businesses has to be notified outside the TF). There are slightly different rules, and lower maximum amounts payable, for businesses in the agriculture and fisheries sectors. The schemes should stop paying out money by 31st December 2020.

The UK has so far had three schemes cleared, all under the TF. The Coronavirus Business Interruption Loan Scheme and the CBILS Grants scheme were both cleared within two days of being notified. In addition the commission has approved the UK’s £50bn temporary framework for loan guarantees (of up to 90 per cent) and grants of up to €800,000 for all businesses except financial institutions as well as support for Covid-19 related R&D. That was approved in under two weeks. Other UK measures such as the postponement of VAT and income tax bills and the general furloughing scheme are (as explained above) not state aid and did not require approval.

The €800,000 limit per business has caused some implementation problems. For example, under the scheme designed to help small retailers, businesses that run chains of small shops cannot claim grant support above a total of €800,000, while (for example) each business in a franchise where each shop is run by a separate business has been able to claim separately for each shop. Another issue has been applying the condition (required under the TF) that businesses that were already in financial difficulty before the crisis should not get support: that has led lenders (concerned that the state guarantee may be unenforceable if they don’t) to ask various technical questions and ask for various kinds of information before agreeing loans under the schemes, causing delay. There are also various complications where a company is part of a group, and where it has already received state aid under other schemes. Those are all technical points that need to be looked at again.

But the TF will also need to be reconsidered more generally as the crisis moves on: as prospects of a swift return to normal recede, it may cease to be right to give tick-box approval to aid to businesses in sectors which are bound to emerge on the other side in a much-reduced form. On the other hand it is becoming clearer that loan schemes will often not be enough and that, for example, many businesses of strategic importance will need grants or equity purchases of over €800,000 to see them through. The commission has started to consult member states about how to deal generally with that kind of large-scale support for individual businesses, what conditions to impose on that support and on the conduct of the businesses that get it, but has not yet reached any conclusions.

Is this all pettifogging bureaucracy at a time when vast sums of money need to be laid out to save businesses from a crisis that could not have been predicted, was largely uninsurable, and was not their fault? The problem, though, with abandoning these rules at a time of crisis is that there is still a risk that governments could use the crisis to assist some businesses more than is required. It is notable that support for enforcement of the rules has come particularly from poorer member states concerned that they cannot match the firepower of richer ones (just as the Welsh Government, with less fiscal firepower than richer nations of the UK, has been a keen supporter of a strong UK anti-subsidy regime post-Brexit). But the fact that some member states (and some nations of the UK) are better placed to deal with this crisis than others raises policy and institutional questions which go well beyond state aid.