This piece was originally published in an abridged version on the Guardian Public Leaders Network.
The Government have said that the Big Society Bank will be delayed because of ‘state aid rules’. What are these rules? And what does this mean for the much heralded Bank?
Be reassured - you are not alone. Most civil servants and Ministers don’t really understand state aid either. Anyone who claims they do is probably lying, including this author. But when banks are propped up by governments, when the voluntary sector earns much of its income through trading, when public services are opened up to market forces and the borders between public, private and social are ever more blurred, these rules are not to be underestimated. The state aid rules matter.
Broadly these laws follow from the Common Market principle that European governments shouldn’t throw money around in way that favours some businesses above others – and is therefore unfair and distorts competition.
So a good civil servant and a responsible Minister should ensure that their spending programme stays the right side of the rules. This may mean checking with the departmental legal team, speaking to the state aid experts in the Department for Business, holding an informal “non-meeting" to discuss an unofficial “non-paper” (yes, really) with the EU Competition Commission or kicking off more formal notification to get approval from Brussels.
But if impatient Ministers or hasty officials ignore these risks and a disgruntled competitor who didn’t see the cash cries foul , then the European Commission can come knocking. If the rules have been broken, then it’s Sheffield Forgemasters, the banks, the small Scottish fishing community or the fragile social enterprises who have to pay back the money. In practice, this is actually the crux of the issue – will someone else feel hard done by and kick up a fuss?
Let’s take the Big Society Bank as an example. As patient followers of the Bank’s development will know, the plan is to use unclaimed assets to get it going. As the Government had to legislate to free up these assets and as Ministers will direct this money, we are into dreaded State Aid territory (even if the bank operates independently when set up).
But this doesn’t mean the Government’s plans are scuppered. It does mean, however, that to avoid “distorting competition against the common interest”, the Bank will either have to operate on commercial terms like other banks, or only pass on subsidies in a way that Brussels, other banks and businesses are comfortable with. Hence the delay. But surely, as the whole point of this wonderful Bank will be to act in the common interest, the Government can find a way through?
Let’s give it a go, despite the limits of our knowledge. What will this Bank be up to? The Government says it will not invest in frontline charities, mutuals and social enterprises. But it will invest in those who already do that job, building their size and strength. In other words, an investment bank. As we now know, these investment banks are complicated. So there could be as many as four different areas where the Bank might stir up trouble.
First, when money flows initially to the new Bank. If the Government invite that nice Sir Ronald Cohen to manage the money, then won’t Charity Bank feel hard done by? Or indeed Barclays Capital? Or HSBC? So there should probably be some kind of fair and open competition to run the Bank’s operations. And perhaps a new ‘neutral’ body should be set up to actually own the money rather than giving it to an existing organisation. Shouldn’t this new body have strict limits to define its scope so money doesn’t leak out into other investors’ territory, step on their toes or undermine their work?
Government has some recent experience here as the Department for Communities has just endowed their Communitybuilders Fund to the charity who manage it – the Adventure Capital Fund. Likewise, the Department for Business has just provided £60m in loans and grants to the CDFA to pass on to social lenders (Hmm. Investing money in a body that invests in social lenders? That sounds rather like our Bank… )
We can imagine how this bold decision by CLG, for example, must have been crawled over by government lawyers and state aid experts. A transfer of tens of millions of pounds to an independent business (especially with the forthcoming Bank under such close state aid scrutiny) could not have been taken lightly and not without some serious cross-government discussions. So to avoid the chaos of immediate legal challenge and a lengthy investigation by the European Commission (which could put the stoppers on similar programmes) there must be some pretty strict conditions attached to this gift.
Perhaps the ACF will need to be absolutely transparent around their group structure, activities and finances. We might expect the money to be used within strict parameters. And perhaps the ACF will have to avoid ‘economic activity’ - competing in the market and bidding for other contracts. Without these kind of conditions, there could be some serious trouble ahead. (Although much would depend on whether the disgruntled parties who didn’t get a chance to pitch for the money were really disgruntled enough to kick up a fuss.)
Second, this new Bank shouldn’t favour those in which it invests. That sounds rather paradoxical. In practice, this could mean that either the Bank must either invest at commercial rates or that the criteria and process for any subsidy is transparent, objective and open to all, at the very least. What if the Bank invests in Triodos Bank but not Southwark Credit Union? Or in Fair Finance but not the Stroud and Swindon Building Society? The losers are going to have to accept that decisions have been made fairly if they are going to take it on the chin.
Third, money going to these investors shouldn’t be passed on cheaply to social enterprises, thereby undercutting those investors who didn’t get money from the Bank. Again, Government has lots of experience in this area with its existing investment programmes for social enterprises. So far, they seem to have stayed just about the right side of the line, using the body of existing case law and ‘block exemptions’ as a guide to how far subsidies are allowed. For example, to help employment and training or environmental objectives, or below certain thresholds. (Or perhaps they have crossed the line but the disgruntled simply don’t have the appetite, resources or incentives to mount a legal challenge?)
The architects of the new Bank may also seek to explore how European case law may cut a bit of slack to civil society organisations. At the highest level, the rules are blind to legal form and do not discriminate between profit seekers and those with a little more heart. If you are operating in the market, the playing field must be level for all. But then again, there are chinks of light in some rulings which suggest flexibility where organisations are “not seeking to engage in gainful activity, but fulfilling a social function or duty to work for the benefit of society as a whole rather than be governed by private special interests, based on the principles of solidarity and non-profit-making”. But a block exemption for charities and CICs is surely a cheeky rather than a realistic ask.
Finally, there is a risk that co-investors with the Bank will stand to receive favourable terms if the Bank is investing with a softer approach. So perhaps the Bank could operate some kind of auction when it seeks a co-investor, ensuring that no other investors can cry “Hey – I would have done that but on even better terms”.
So there we are. Easy?!
The state aid rules as they stand are really just the sum of the answers to questions that have been put to the Commission or settled in court since the Treaty of Rome. But as this is the first time the question of a Big Society Bank has been posed, getting the go ahead may still take some time. So, based on the above, what ideas could be put to the Commission to give the Bank the nod? How about:
1. The Bank must invest or raise money on commercial terms. (The Government has been talking about this quite a lot recently. But the problem here is that most people agree the market for investments in social enterprise isn’t really ready for that).
2. If not investing at commercial rates, then the Bank must at least find matching investment on the same terms to prove the bank is not undercutting the market. (The problem here is that if others are willing anyway, why do we need a fancy and complicated new Bank?)
3. Any subsidies must be contingent on delivering some social or environmental benefit. In effect, not really a subsidy as the Bank gets something in return. For example, “we will knock one per cent off the interest rate for every tonne of carbon you save”. This is interesting as it actually goes straight to the heart of the argument for social enterprise – that rather than a clear dividing line between making money and doing good, it can be more effective to combine the two. (The problem here is almost certainly in measuring social value. If you thought the state aid debate was dull and impenetrable, then try social metrics.)
4. Everything the Bank does must be transparent. And open to others to jump in if they fancy an investment the Bank was about to make. In other words, giving the market the chance to cry fowl in advance is the best way to prevent tears after the event.
So principles like these could be wired into the workings of the Bank, following a fair and open competition to run it, the creation of a new, neutral and restricted body to hold the funds and some clear and consistently applied investment criteria. That may be more or less enough to avoid the threat of legal challenge - which is probably the main risk
Stepping back again, where does that leave us and what do we think we know? That those horrible, annoying state aid rules mean the Bank will need to i) avoid throwing money away unless it really needs to ii) prove its worth iii) bring in as much co-finance as possible; and iv) be open and transparent about what it does.
Is that really so annoying and a reason to halt the progress of this promising Bank? Or are these just some of the basic principles of any sound public investment?