There will be no State Aid by a public authority if a rational private investor might have entered into the transaction on the same terms, having regard to the foreseeability of obtaining a return and leaving aside all social and policy considerations. Where the authority acts in a way that corresponds to normal market conditions, the transaction cannot be regarded as State Aid.  This is the market economy investor principle.

The principle has been considered by the Court of Appeal in R (Sky Blue Sports & Leisure Ltd) v Coventry City Council (2016) EWCA Civ 453.  The Court of Appeal held that a loan of £14.4 million by the City Council was not State Aid.

The loan was to a company that was at the time the City Council’s half-owned subsidiary, which operates the Richoh Arena, which contains the Stadium where Coventry City Football Club and now also Wasps Rugby Club play. A commercial interest rate in accordance with EU Commission guidelines was charged, the loan was in other respects on commercial terms, and there was a realistic prospect of the City Council’s shareholding in the company acquiring significant value. There was no selective advantage for the company.  A private investor in the position of the Council would not have focussed exclusively on the loan to value ratio.

Tomlinson LJ observed that the analysis of risk involved in the application of the market economy investor principle requires public undertakings, like private undertakings, to exercise entrepreneurial skills which, by the very nature of the problem, implies a wide margin of judgment on the part of the investor: paragraphs 11, 16, and 23-29, especially 25.

In R (Orbital Shopping Park Swindon Ltd) v Swindon BC [2016] EWHC 448 (Admin) Patterson J summarised, so far as relevant to the case before her, the statutory scheme with respect to the Community Infrastructure Levy (“the CIL”), charged by a local authority under Section 206(1) of the Planning Act 2008 (“PA 2008”) and the CIL Regulations 2010, as amended, in respect of development in the authority’s area, as follows:-

1. A local authority’s power to charge CIL in respect of development within its area arises when development is commenced in reliance on a planning permission involving chargeable development: Section 208 of PA 2008;
2. The ability to charge CIL is a discretionary one on the part of a charging authority: Section 206 of PA 2008;
3. The CIL Regulations can provide for works of a specified kind not to be treated as development;
4. That is what Regulation 6 of the CIL Regulations is concerned with;
5. Regulation 6(1) sets out expressly which works are not to be treated as development for the purposes of Section 208 of PA 2008;
6. That includes work in respect of an existing building for which planning permission is required only because of Section 55(2) of the Town and Country Planning Act 1990 (“TCPA 1990”);
7. Section 55(2)(a) of TCPA 1990 sets out uses of land or operations which are not to be taken to involve development;
8. Section 55(2)(a)(i) states that works which affect only the interior of the building do not involve development;
9. Section 55(2A) empowers the SoS, by Development Order, to specify or describe circumstances in which Section 55(2) does not apply to operations set out in Section 55(2)(a);
10. The SoS has made the Town and Country Planning (Development Management Procedure) (England) Order 2015;
11. CIL can be imposed only when both the liability and the amount of the liability are clearly defined.

The Council had acted unlawfully by interpreting two separate planning permissions as one. The Claimants had taken advantage of a legislative scheme which permitted it to submit two separate planning applications for each act of operational development that it wished to pursue. There was no manipulation of the system for any ulterior and/illegal motive in splitting the operational works.

Case C-460/14, brought by the City of Wroclaw in Poland, concerns the award of a public contract for the construction of a ring road in Wroclaw.  The project benefited from EU financial assistance. The City stipulated in the tender specifications that the successful tenderer was to perform at least 25% of the works covered by the contract using its own resources. The public authority in Poland competent to verify proper use of the EU funding took the view that that stipulation infringed the principle of fair competition and therefore was inconsistent with Directive 2004/18/EC.  As a consequence, that authority imposed on the City a flat rate correction of 5% of the amount of eligible costs borne by public funds. The City challenged the financial correction before a Polish Administrative Court, which made a reference to the ECJ.  On 17 November 2015 Advocate General Sharpston gave her Opinion.

Directive 2004/18 coordinates at EU level national procedures for the award of public contracts above a certain value.  It aims to ensure the effects of the principles of freedom of movement of goods, freedom of establishment, and freedom to provide services and the principles deriving therefrom, including the principles of equal treatment, non-discrimination and transparency. It also aims to guarantee the opening-up of public procurement to competition. The Directive contains provisions on subcontracting, in order to encourage the involvement of small and medium-sized undertakings in the public contracts procurement market.   Pursuant to the first paragraph of Article 25 (“Subcontracting”), in the contract documents, the contracting authority may ask or may be required by a Member State to ask the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. Under Article 26 (“Conditions for performance of contracts”), contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law and are indicated in the contract notice or in the specifications.

Article 1(1) of Council Regulation No. 2988/95 provides: “For the purposes of protecting the European Union’s financial interests, general rules are hereby adopted relating to homogenous checks and to administrative measures and penalties concerning irregularities with regard to EU law.” Article 1(2) defines “irregularity” as “any infringement of a provision of EU law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the European Union or budgets managed by it, either by reducing or losing revenue accruing from own resources collected directly on behalf of the European Union, or by an unjustified item of expenditure”.  Article 2 provides in particular that administrative checks, measures and penalties shall be introduced in so far as they are necessary to ensure the proper application of EU law. They shall be effective, proportionate and dissuasive so that they provide adequate protection for the European Union’s financial interests.

Regulation No. 1083/2006 lays down general rules governing the Funds, i.e. the European Regional Development Fund, the European Social Fund and the Cohesion Fund, including principles and rules on financial management, monitoring and control on the basis of responsibilities shared between the Member States and the European Commission.

Advocate General Sharpston said:-

“30. Directive 2004/18 is designed not only to avoid obstacles to freedom to provide services in the award of public service contracts or public works contracts but also to guarantee the opening-up of public procurement to competition.  Recital 32 in the preamble to that directive states that the possibility of subcontracting is liable to encourage small and medium-sized undertakings to get involved in the public contracts procurement market. Subcontracting enables such undertakings to participate in tendering procedures and to be awarded public contracts regardless of the size of those contracts.  Subcontracting thus contributes to achieving the Directive’s objectives by increasing the number of potential candidates for the award of public contracts.

31.      Accordingly, Article 25 of Directive 2004/18 not only envisages that a tenderer may subcontract part of the contract but also sets no limit in that regard.  Indeed, Directive 2004/18 confirms explicitly that an economic operator may, where appropriate and for a particular contract, rely on the economic, financial, technical and/or professional capacities of other entities, regardless of the legal nature of the links which it has with them.  Consequently, a party may not be eliminated from a procedure for the award of a public service contract solely because it proposes, in order to carry out the contract, to use resources which are not its own but belong to one or more other entities.

32.      That said, contracting authorities do have a legitimate interest in ensuring that the contract will be effectively and properly carried out. Where an economic operator intends to rely on capacities of other economic operators in a tendering procedure, it must therefore establish that it actually will have at its disposal the resources of those operators which it does not itself own and whose participation is necessary to perform the contract.  A tenderer claiming to have at its disposal the technical and economic capacities of third parties on which it intends to rely if it obtains the contract may be excluded by the contracting authority only if it fails to meet that requirement.

33.      The contracting authority may not always be in a position to verify the technical and economic capacities of the subcontractors when examining the tenders and selecting the lowest tenderer. The Court has held that in such cases Directive 2004/18 does not preclude a prohibition or a restriction on subcontracting the performance of essential parts of the contract. Such a prohibition or restriction is justified by the contracting authority’s legitimate interest in ensuring that the public contract will be effectively and properly carried out. Directive 2004/18 does not require a contracting authority to accept performance of essential parts of the public contract by entities whose capacities and qualities it has been unable to assess during the contract award procedure.

34.      In my view, considering the essential role subcontracting plays in promoting the objectives of Directive 2004/18, no other prohibition or restriction is permissible. …

35.      It follows that a stipulation such as that in issue in the main proceedings is clearly not consistent with Directive 2004/18.”

“43. I … conclude that Directive 2004/18 precludes a contracting authority from stipulating in the tender specifications of a public works contract that the successful tenderer is required to perform part of the works covered by that contract, specified in abstract terms as a percentage, using its own resources.”

The further question therefore arose, given that the City’s project benefited from EU financial assistance, whether the infringement of the EU procurement rules constituted an “irregularity” within the meaning of Article 2(7) of Regulation No. 1083/2006, giving rise to an obligation on the part of the Member State concerned to impose a financial correction.  The Advocate General’s view (paragraphs 46-56) was that it did, even if the infringement did not result in any actual quantifiable financial loss to the Funds; and (paragraphs 57-61) that the competent national authorities may apply flat-rate corrections when they identify an infringement of EU public procurement rules, provided that the corrections reflect appropriately the nature and gravity of the various irregularities to which they apply and do not result in disproportionate corrections.

The Supreme Court has, dismissing the appeal, found by a 4-3 majority in R (Rotherham MBC) v Secretary of State for Business (2015) UKSC 6 that decisions made by the SoS concerning the allocation of EU Structural Funding between UK Regions were not unlawful.  Lord Sumption and Lord Neuberger both gave reasoned Judgments for the majority.

Lord Sumption notes that the allocation made by the SoS is amenable to judicial review, but a Court should be cautious about intervening, because it: (i) was a discretionary decision of a kind Courts have traditionally been reluctant to disturb; (ii) involved particularly delicate questions about the distribution of finite domestic and EU resources, in which the legitimacy of the decision-making process depends to a high degree on Ministers’ political accountability; and (iii) has been approved by the EU Commission.  Lord Neuberger agrees that this is “classic territory” where executive decisions should be afforded a wide margin of discretion, but emphasises that the fact that a matter is one for democratic decision does not remove the need for judicial oversight.

CLG has, on 17 November 2014, issued a Consultation, for response by 19 December 2014, on proposed amendments to the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003, as amended, in relation to the use of capital receipts arising from the disposal of council housing assets, to come into force on 1 April 2015.  The purpose of the proposed amendments is stated to be to enable local housing authorities to calculate the “poolable” amount derived from the disposal of assets for the years 2015-2016 and 2016-2017.  The proposed amendments deal directly only with the calculation of allowable debt, the local authority share and the Treasury share.  It is proposed that this calculation will remain unchanged.  It is also proposed that the calculation of the local authority share cap will remain unchanged; and that the calculation of share ratio will remain unchanged; save in the case of a small number of identified authorities which are in the process of transferring their stock.

A challenge by a number of local authorities from the South Yorkshire and Merseyside Regions to the decision of the Secretary of State for Business, Innovation and Skills (“the SoS”) to change the allocation of EU Structural Funds in a manner that was disadvantageous to them, having failed at first instance, R (Rotherham BC) v SoS [2014] EWHC 232 (Admin), (2014) LGR 389, save in relation to the PSED, has now failed in the Court of Appeal, [2014] EWCA Civ 1080.  In particular, the claimant authorities sought to challenge the allocation of EU Structural Funds for the period 2014-2020 as between the four countries of the United Kingdom, and as between the English regions.  Articles 174-178 of the Treaty on the Functioning of the European Union require the EU to promote its overall harmonious development and strengthen its economic, social and territorial cohesion by reducing disparities between the levels of development of the various regions through the Structural Funds.  The allocation of the Structural Funds is determined by EU Council Regulations and the authorities of the Member States.  In March 2013 the SoS took a decision, effectively, to allocate higher funding than previously to Northern Ireland, Scotland and Wales.  In a further decision in June 2013 allocations were reduced for South Yorkshire and Merseyside.  Overall, the claimant authorities suffered a substantial fall in funding.  They alleged that the two decisions by the SoS have produced discriminatory and disproportionate funding cuts for their Regions, and breached the EU law principles of equal treatment and proportionality. 

It was common ground that, in making the first and second decisions, the SoS was acting within the scope of EU law and that accordingly the EU law principles of proportionality and equal treatment apply.  It was also common ground that the “margin of discretion” allowed by EU law may be broad or narrow according to the circumstances of the case, in particular the identity of the decision-maker, the nature of the decision, the reasons for the decision and the effect of the decision. Of these factors, the Court of Appeal said, at para 54, that “the nature of the decision is usually the most important”.  The Court of Appeal considered, at para 56, that the margin of discretion was “a wide one in the circumstances of this case”.  They stated, at para 57:-

“In our view, the first and second decisions were plainly concerned with matters of high level policy and economic, social and political judgment.  They involved the making of choices as to funding allocations between the regions. … Even if the only objective was the reduction of the disparities between levels of economic development of regions, that would involve the making of complex assessments of their respective economic circumstances.  These are not hard-edged decisions which admit of clear and straightforward answers. … In our view, this is classic territory for affording the decision-maker a wide margin of discretion.  … the Court should only interfere if satisfied that the decisions were manifestly inappropriate or manifestly wrong.”

The Court of Appeal then proceeded to consider whether the decisions were disproportionate and/or irrational.  They concluded, at para 64, that they came nowhere near to being that.

Turning to equal treatment, the Court of Appeal observed that the equal treatment principle requires that comparable situations must not be treated differently and different situations must not be treated in the same way, unless such treatment is objectively justified.  The question in the case was whether there was a failure to treat like cases alike and unlike cases differently, or rather what margin of discretion (if any) should be afforded to the SoS in deciding whether different categories are like or unlike each other (“the comparability issue”).  The Court of Appeal said:-

“70.     … We see no reason in principle why the width of the margin of discretion in relation to a decision on comparability should be approached differently from any other decision made within the scope of EU law.  In other words, it may be broad or narrow according to the circumstances of the case and in particular the nature of the decision: … In a simple case of discrimination, there may be no margin of discretion at all in deciding the comparability issue.  … But some comparisons are less straightforward and are not so clear cut.  They may involve making complex evaluative judgments as to which there is real scope for differences of opinion.  In principle, the more complex and the more judgment-based the decision, the greater the margin of discretion should be afforded to the decision-maker.”

“72. … The context in which the first and second decisions were taken is critical to the intensity of the court’s review of them. … The Secretary of State was required to have regard to a number of different overlapping considerations, and the regulation does not prescribe the weight to be given to each of them. … the reduction of regional disparities does not involve a simple comparison of the development level and economic performance of one region with another.  … It is a complex exercise. It includes not only making comparisons of the economic performance of different regions, but also inter alia of their respective employment rates for different age groups, their respective conditions for research and development and their respective  greenhouse gas emissions.  Each of these comparisons might individually involve making judgments.  Overall, the exercise of comparing one region with another is or ought to be multi-factorial.  It involves making a substantial number of value judgments of an economic and social nature.  In our view, the decision-maker is entitled to a wide margin of discretion in making such a decision.”

The Court of Appeal expressed its overall conclusion on the equal treatment issues as follows, at paragraph 86:-

“… For the reasons already given, the Secretary of State was entitled to a wide margin of discretion in deciding questions of comparability.  We agree with the judge that the court should only interfere if a high standard of unreasonableness is met.  The evidence of Dr Baxter shows that the Secretary of State approached the task of allocating the funds in a careful and systematic way and had particular regard to the relative position of the different regions.  He gave particular consideration to the position of Merseyside and South Yorkshire.  We are satisfied that the high threshold for interference by the court has not been crossed in this case.”