How The State Aid Rules Restrict The Government’s Room
If the media reports are anything to go by, things are looking pretty desperate for British Steel. There are growing predictions of its imminent collapse into administration, although the possibility of either nationalisation or a management buy-out (MBO) is also being reported.
Everyone knows that the steel industry has been struggling in the UK over many years now. However, last month saw a new low for British Steel when it was forced to effectively borrow £120 million from the Government, so as to meet its obligation to buy allowances under the EU’s Emissions Trading Scheme and thereby avoid a fine of half a billion pounds.
This is where the State aid rules come into play. If a Government intervention is not on arm’s length, commercial terms, then it could involve unlawful State aid. The Government’s lawyers and financial advisers will no doubt have been working feverishly behind the scenes to carry out the necessary legal and economic analysis to prove that the transaction was on commercial terms and therefore not unlawful State aid. It appears that the terms of the £120 million deal gave the British taxpayer a 50% share in any financial upside if allowances go up in value, and that British Steel was required to underwrite any downside. The Government was presumably advised that these terms were enough to protect against any perceived risk of British Steel’s insolvency.
The new request for a further loan of up to £75 million will be a much harder proposition to justify from a State aid perspective, given British Steel’s precarious financial position. The State aid rules do sometimes allow emergency support to be given to a business to rescue it from immediate collapse and support it through a restructuring process, but there are strict conditions and approval is required from the European Commission. To make matters worse, the existing guidelines on this ‘rescue and restructuring aid’ do not apply to support given to businesses in the steel sector and so the chances of the European Commission approving a rescue package for British Steel must be very slim indeed.
Therefore, any further intervention by the Government to save British Steel must be free of State aid. Whilst the Government will no doubt be keen to do what it can to help British Steel given the strategic importance of the UK’s steel industry and the number of jobs at risk, it will be extremely difficult to prove that a further Government loan is on commercial terms and therefore free of unlawful State aid. It appears that the owners, Greybull Capital, and British Steel’s lenders are willing to put in more funds, which would reduce the funding requirement down to £30 million. The fact that they are willing to risk more money may go some way towards helping the Government to establish that any further Government loan is on commercial terms. However, reaching a ‘no State aid’ position will still be difficult. Given that Greybull Capital is already invested in British Steel and so has much more to lose than the Government if British Steel were to fail, this in theory is likely to make it more inclined to provide extra funding to save the business, because this may be the best way to protect its existing investment. The Government, on the other hand, may have to charge considerably more for any further loan in order to show that it is on commercial terms. If there is no real prospect of British Steel surviving into the medium or long term, it may be impossible to establish that any further Government loan does not involve unlawful State aid.
If you would like more information, please do not hesitate to contact Bethan Lloyd, a Partner at Geldards specialising in State aid, public procurement and competition law.