Do yourself a favour... consider the risk of state aid

The public procurement regulations are not the only legal constraint for a public body to consider when looking to purchase.

If a public body has a requirement with a value below the relevant OJEU thresholds (£172,514 for services and supplies contracts and £4,322,012 for works contracts) and the contract is not likely to be of cross-border interest, or if the requirement is outwith the scope of the procurement regulations (e.g. if it is a concession contract), public bodies may consider that they are not exposed to legal challenge if they enter directly into a contract with a supplier.

While aggrieved suppliers may not have a remedy under the procurement regulations in such circumstances, the state aid rules may cause difficulties for the public body. State aid is when a public body gives an advantage, in any form, to one enterprise over another. Many people think of grant funding when they think of state aid but the advantage conferred by the public body does not have to take the form of grant assistance - for example, the provision by a public body of a guarantee, the sale of land at less than value and the waiver of dividends or interest payments can all constitute state aid. As can contracting on favourable terms.

If a public body enters into a contract with a supplier in terms of which it pays considerably more than the market rates for what it is procuring, accepts restrictions on the supplier's liability which it would not normally do or otherwise agrees non-commercial terms, the public body could be conferring state aid on the contractor. Unless it falls within the scope of the de minimis rules or is otherwise exempt, state aid is illegal and if the European Commission finds that state aid has been granted, the state aid must be repaid, with interest. The main risk of an adverse state aid decision is arguably therefore with the contractor but the public body would be likely to suffer too - as well as the fact that its aims under the contract will not be achieved, it is likely to suffer reputationally.

One of the ways in which a public body can seek to ensure that it is contracting on commercial terms and so mitigate the risk of an adverse state aid decision is to run a sufficiently open, transparent and fair competition prior to entering into the contract. While no public body would want to engage in an unnecessary, overly-bureaucratic or time-consuming process for no benefit, taking appropriate and proportionate measures to run a competition can be a good investment of time and resources if there is a state aid risk.

Jill is an associate with Harper Macleod LLP and can be contacted at jill.fryer@harpermacleod.co.uk.