By Daniel Hunter

The number of state aid approval requests made to the European Union (EU) by the Department for Business Innovation and Skills (BIS) on behalf of the UK Government increased 53% in the last twelve months, according to Sweet & Maxwell, the legal information provider.

Twenty-six requests were made by BIS for a detailed assessment of whether Government plans would break EU state aid rules in 2012 (year ending Dec 31st), up from 17 in 2011 (see graph).

According to Sweet & Maxwell, a Thomson Reuters business, the EU state aid rules prevent member states from using public resources to boost or protect national industries, because it distorts competition in the free market.

Sweet & Maxwell explains that as state aid is often directed at sectors or businesses that are underperforming, a large number of applications for state aid could be associated with a poorly performing economy.

During the depths of the banking crisis in 2009, the number of state aid applications by the UK hit a peak of 34. For example, the Vehicle Scrappage Scheme was introduced, which gave people money off new vehicle purchases in exchange for their old car, in an attempt to boost the faltering UK car industry.

Leigh Hancher, Of Counsel at Allen & Overy and author of Sweet & Maxwell’s EU State Aids, comments: “State aid can provide short-term relief to businesses in an underperforming economy. High numbers of state aid requests often indicate that the Government has recognised that businesses could use a helping hand and is taking steps to intervene in the free market.”

“It is not a great indicator for the UK economy that the number of applications for state aid approval is slowly creeping back up to the 2009 level.”

Sweet & Maxwell says that recent examples of state aid used by the UK Government include:

- Green Investment Bank — £3bn of government money has been set aside to invest in areas such as renewable energy. The UK government has set up the bank in the hope that its investment in a green economy will stimulate growth;

- Mobile Infrastructure Project - A £150m project that will increase mobile phone coverage in rural areas;

- Invest Northern Ireland Growth Loan Fund — It will provide loans of between £50,000 and £500,000 in order to get money flowing to small and medium sized enterprises (SMEs) struggling to access finance from banks and other lenders;

- Expenditure on plant and machinery for use in designated assisted areas — Tax incentives for specific regional areas where the government is trying to stimulate business investment.

Leigh Hancher says: “The Green Investment Bank is a good example of how the Government is trying to intervene in industry in a bid to get the economy moving. A state-backed injection of capital into a project or business can often create investment and jobs but it has to be done in a way that doesn’t break the EU competition rules.”

Sweet & Maxwell points out that the EU is reluctant to approve state aid unless it can be justified for general economic development reasons because it doesn’t want member states to prevent fair competition .

Leigh Hancher explains: “The EU believes that it’s important to have a level playing field and that businesses in some countries should not get an unfair advantage over others thanks to support from their respective governments.”

“If an industry has become uncompetitive, state aid might be able to keep it alive, but this comes at a long term cost, as public money is invested in a failing industry and more productive competitors are prevented from growing because they are at a competitive disadvantage.”

“State aid can cause long-term harm to the economy by preventing competition and reducing improvements to productivity.”

In 2012, the European Commission proposed changing State Aid rules to allow for quicker decisions to be made about the provision of aid. Under the changes, more block exemptions would be adopted, meaning that less proposed measures for aid would need to be assessed by the EU. The changes were designed to provide an economic boost to EU member states that had been affected by the financial crisis.

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