“State aid can occur whenever state resources are used to provide assistance that gives organisations an advantage over others. It can distort competition, which is harmful to consumers and companies in the EU.” (Department for Business Innovation & Skills – State Aid: The Basics Guide, July 2015)
The definition of state aid is broad because ‘an advantage’ can take many forms, for example:
- tax breaks
- the use or sale of a state asset for free or at less than market price.
Public authorities (which include local authorities in England and Wales) are responsible for ensuring that their policy measures and projects comply with the rules. State aid rules continue to apply in the UK during the Implementation Period following Brexit.
In the annex to the Department for Education’s November 2019 document “Securing Developer Contributions for Education” it is stated that unlawful state aid can arise in connection with developer contributions towards education.
If a developer is required to build a new school as part of a development, which will be secured under a s.106 agreement, but the viability of the development as a whole means that the developer cannot afford to provide all of the new school but can only a contribution towards its delivery with the local authority providing the balance, then this is where the risk of state aid arises.
“7. If planning law/policy only requires the developer to make a partial contribution then no incompatible state aid should arise merely because the local authority (or another public sector body) funds the balance of those costs. This is subject to the relevant public sector body satisfying itself (through benchmarking and/or a cost consultant's report) that the developer's costs of building the school are not more than market costs. This would apply even if the initial application of planning policy dictated that the developer makes a full contribution but after applying planning viability principles (taking account of the total infrastructure burden on the development) the developer's contribution was reduced.
8. National Planning Practice Guidance says that for the purpose of plan making, an assumption of 15-20% of gross development value may be considered a suitable return to developers, in order to establish the viability of plan policies. A local authority’s contribution to school delivery which supports a higher profit margin for a particular developer may be considered a voluntary contribution (see below) and a selective benefit to one developer, which may amount to unlawful state aid.”
The delivery of social infrastructure under a s.106 agreement where the authority is contributing a benefit, perhaps a contribution towards fit out costs, may therefore be unlawful state aid. Viability assessments will need to be full and transparent, and subject to assessment by the local authority’s advisers. The developer’s profit will need to be consistent with policy, case law, and established practice for the local authority in question. A higher level of profit will need to be carefully justified. The National Planning Policy Framework states that: “alternative figures may also be appropriate for different development types.”1
State aid risk also comes with the delivery of physical infrastructure. Enabling infrastructure is likely to be required in order to deliver large scale housing schemes. This might include a new road, or other access improvements. If the highway authority is funding and delivering the infrastructure and it is required solely to serve the housing scheme, it may be unlawful state aid. The converse is likely to be true where it is required for a variety of purposes, as it is public infrastructure that cannot be commercially exploited. If the housing developer is paying a fair contribution towards the infrastructure pursuant to a s.106 agreement, this is unlikely to be unlawful state aid. Again, if the authority is providing some advantage to the developer in respect of the funding or delivery of the infrastructure, care needs to be taken in relation to viability assessments and developer profit.
The General Block Exemption Regulation (GBER) means that a local authority can provide an advantage to a developer which forms part of a package of s.106 obligations without it constituting unlawful state aid. Those most relevant are:
- aid for environmental protection;
- social aid for transport for residents for remote regions;
- aid for broadband infrastructures;
- aid for culture and heritage conservation;
- aid for sport and multifunctional recreational infrastructures; and
- aid for local infrastructure.
A local authority could therefore fund or partially fund: the remediation of a heavily contaminated site, the conversion and preservation of a listed building, archaeological investigations or new sports facilities, where a developer is undertaking works or making a financial contribution pursuant to a s.106 agreement. There are specific requirements relating to each GBER measure which it will be important for a local authority to comply with.
The De Minimis Regulation may also be available to prevent unlawful state aid arising. This allows small amounts of aid (less than €200,000 over three consecutive fiscal years) to a single undertaking for a wide range of purposes. Again there are conditions that will need to be complied with. Lower thresholds are in place for agriculture, fisheries and road freight transport.
For developers and local authorities the aim should be early identification of a possible state aid issue so that legal advice can be taken to ensure compliance. The rules can be complex and getting it wrong can mean recovery of state aid and suspension or withdrawal of aid schemes.