This “independence” tension can be caused by different personalities, misunderstandings or a lack of constant or consistent communication, particularly about the authority’s expectations. Strangely, this tension also manifests itself with the push and pull of procurement and State aid law. State aid compliance pushes a trading company to be more independent, having to refuse subsidy from the authority and acting like an independent operator. If providing works or services back to the authority, EU procurement law pulls the trading company into behaving as if it were an internal department of the authority – this is the rationale behind the “Teckal” or now Regulation 12 exemption which allows the authority to award contracts directly to its subsidiaries in certain circumstances.

State aid

State aid law enforces a level playing field, avoiding State resources unfairly subsidising commercial activity. For example, imagine a local authority giving an interest-free loan of £3million to a property development subsidiary, and it competing against other developers in the private market – it is reasonably clear that competitors in the private sector may be unhappy!

There are a number of lawful ways of investing in your trading subsidiary. In general terms, State aid is only a problem where you give your trading subsidiary advantages that it would not have received in a purely private market position. Not all State aid is unlawful. Small amounts of aid are allowed and some forms of aid are permitted under the “General Block Exemption Regulation” which is complex.

It is worth getting to grips with State aid so that you have a way forward which is consistent with the degree of independence the authority envisages for the trading company – different solutions will be appropriate in different circumstances. The State aid strategy behind a trading company with a high degree of independence should be to not give any State aid at all, ensuring market terms for all investment by the authority. The strategy for a less independent trading company may involve making maximum use of the relevant Block Exemptions which allow soft loans or provision of free premises etc. in certain situations.

Procurement

A company will need to be a “Teckal” subsidiary if it is to be awarded contracts by the authority without competition. This reduces the amount of independence the trading company is permitted. The procurement regulations require the authority to exercise decisive influence over both the strategic objectives and significant decisions of the trading company in order to qualify as a “Teckal” subsidiary. There is also a requirement that at least 80% of the trading company’s activities are those “entrusted” to it by the authority, which can create problems if there are plans to attract new external business, and so a company that complies with Regulation 12 may not be capable of significant trading or of taking an independent commercial view. There are structures involving two trading subsidiaries that allow for both external and internal trading – with one subsidiary being an internally facing company which shares its assets and people with another subsidiary which only attracts work from external customers. This sounds complex on paper but is workable in practice.

Where the authority does not need or want to place a contract with the trading subsidiary, there are no control issues from a procurement perspective and the trading company can have a higher degree of independence, and the majority of its activities can be for third party customers, giving greater scope for genuine trading.

Independent then?

Tempting though it may be to wait to see if “hard Brexit” relieves the UK of procurement and State aid law, that point may be a long way off. Even then, Theresa May’s announcement at the Tory party conference confirmed that the EU law status quo may be retained for a long time to come under the “Great Repeal Bill”.

Neither State aid nor procurement usually causes problems by themselves, and they are both manageable if tackled in advance. The issue comes when either is used to justify positions in any battle about the degree of independence which should be afforded by the trading company. This can be avoided by the authority having a consistent and planned view about the degree of independence and State aid and procurement positions stacking up behind this. The tail should not wag the dog - and nor does it need to if there is careful planning and forward thinking.

Further information

For more information, please contact Richard Brooks or Gayle Monk.

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