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State aid question mark over social investment bank

Finance | Gemma Ware | 8 Apr 2008

The government is in talks with the European Commission over whether its plans to create a social investment bank would breach European rules on state aid.

The wholesale bank, which the Office of the Third Sector (OTS) hopes to fund through money left abandoned in dormant bank accounts, would sit behind and strengthen existing third sector funders, such as community development finance institutions.

However, it is unclear whether the bank would fall foul of state aid law, designed to ensure fair markets and prevent serious distortion of competition.

Charities minister Phil Hope told Charity News Alert:  “We’re talking to the European Commission around what are the rules and how the state aid operates”. 

Hope said the social investment wholesaler would be “a funder to provide different forms of equity, different forms of loan finance, different forms of loan guarantees and so on behind these major retail banks that then fund the third sector”.

Commission ‘likely to approve plans’

David O’Keeffe, a specialist in European state aid at law firm Hammonds, believed it was likely the Commission would use its discretion to approve the plans, particularly if the UK government put forward a strong argument that the wholesale bank would not affect trade between member states – a key part of state aid law.

O’Keeffe said the issue would centre on whether the public money distributed through the bank would be used to fund economic activities, such as operating a charity shop or funding a not-for-profit enterprise that would be in competition with other for-profit businesses.

He said the Commission might allow the bank to go ahead subject to its money being distributed on the understanding that recipients would operate under normal market conditions.

“I know that the Commission is very much supportive of social issues and often does not want to be seen putting a dampener on government proposals to be creative in the social sector,” he said.

A spokesman from the OTS confirmed the discussions over the issue of state aid were ongoing: “The UK government is working together constructively with European partners to harness support for what would be the first social investment institution of its kind.”

Meanwhile, the Rockefeller Foundation announced last week it would give US$500,000 for a feasibility study on the creation of UK social stock exchange for social enterprises. The stock exchange will be launched in 2009 if the study finds there is a demand for it.

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Who's Who: Gemma Ware