Over the last couple of years, we have experienced an increase in the number of local authorities requiring independent state aid advice to demonstrate that the receipt of ERDF[1] grant will comply with the rules.  We have prepared these for a wide range of projects, for example, to replace flood gates and construct sea defences, link roads and lake infrastructure to support the development of 1,800 new homes.  In doing so, we have noticed that funders pay close attention to capital projects that have the potential to generate revenue.  This article explains what the issue is, and some of the options for dealing with it.

What's the issue?

ERDF grant is one of the European structural funds, and is administered by Department for Communities and Local Government.  Grant recipients must comply with the very detailed requirements in the related EU regulations, for example, 1299 / 2013, 1301 / 2013 and 1303 / 2013 (the Common Provisions Regulation).  Hidden in the 150-page Common Provisions Regulation is article 61, which in effect says that if your project will generate net revenue then the grant offered at the outset will be reduced by that figure.  Alternatively, unforeseen net revenue could be clawed back at a later date.  There is a limited exemption if the project support is wholly exempted under the General Block Exemption Regulations[2] or the De Minimis Regulations.[3]

When does the issue arise?

Projects to construct incubation centres in our experience frequently fall into this category, and so require careful thought about how best to ensure they comply with the aid rules.  This is because generating net revenue can potentially benefit the local authority grant recipient delivering the project.  The local authority is also unlikely to be able to use the exemption from article 61 as article 27 (innovation clusters) of GBER will often not apply.

What are the options for compliance?

Projects like this can result in aid at three levels: (1) to the local authority (2) to the centre's operator and (3) to the centre's users.  Aid at the second and third levels can often be dealt with by relying on the market economy operator principle (i.e. paying / charging market rates), or by using the De Minimis Regulations (level three only).  Aid at the local authority level can usually be made compliant by structuring the project so that it acts only as an intermediary through which funding is passed i.e. the authority receives no residual benefit.  This can often be achieved by:

  1. tendering contracts competitively under the Public Contracts Regulations 2015, including one to operate the centre after completion;
  2. calculating whether any net revenue is or will be generated by using the methods allowed under the Common Provisions Regulation (and explained in more detail in the ERDF Guidance on Revenue Generating Projects ESIF-GN-1-004 Version 1; 29 September 2015 - available here);
  3. committing to the funder to reinvest net revenue into eligible project costs to be incurred over the reference period.

In most cases, these steps will be sufficient to satisfy the funder that the project will comply with the state aid rules, although the emphasis will vary to reflect the facts of the case.  For an example of how the European Commission recently considered the issues in similar circumstances, please see the decision here.

If you would like to discuss any part of this article, please contact the author of this article, Edward Reynolds, or, David Owens.




[1]              European Regional Development Fund.

[2]              No 651 / 2014.

[3]              No 1407 / 2013.

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