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Project Birch: UK Government set to announce rescue deal with Tata Steel

26 June 2020
Project Birch is the UK Government's new emergency assistance plan under which public funding shall be made available to strategically important, large companies across all sectors in the UK with the objective of ensuring these survive the financial damage caused by the COVID-19 pandemic.  It is reported that the UK Government is close to agreeing a deal with Tata Steel to help preserve up to 8,000 jobs. If confirmed, then this would be Government's first "Project Birch" intervention that has been made public. 

Reports state that the UK Government is set to agree a deal with Tata Steel worth hundreds of millions, in order to help preserve up to 8,000 jobs. The deal would be the first authorised under the Government's "Project Birch", which aims to support strategically important, large UK companies to ensure they survive the financial damage caused by the COVID-19 pandemic. 

According to Stephen Kinnock, Tata Steel has asked the UK Government for a State loan worth £500m. 

The Financial Times reports that "Government officials have discussed a mechanism under which some of the debt due to be provided to Tata Steel in the rescue deal could be converted into equity under certain circumstances". This would mean that the UK Government would buy a stake in the business.

The UK steel sector in context

The steel sector has experienced widely reported difficulties that predate the COVID-19 outbreak. In May 2019, the Government rejected British Steel's request for emergency financial assistance, stating that it was constrained by EU State aid rules. The case revived questions over the UK's ability to reshape its State aid regime after Brexit to allow for greater support to sectors such as steelmaking. In June 2019, the House of Lords' EU Internal Market Sub-Committee called upon DWF's Jonathan Branton and Alexander Rose to give evidence on how the steel sector can be supported within EU State aid rules. The steel sector has sector-specific limitations to what is possible in State aid terms, but by no means are there no possibilities for assistance, as many different steel companies around Europe have demonstrated over many years.

Project Birch

In May 2020, UK Chancellor Rishi Sunak authorised "Project Birch", which is the Government's plan to offer preferential loans to, or take equity in, strategically important companies affected by the COVID-19 pandemic. However, the UK Government indicated that it is only prepared to rescue large companies "in exceptional circumstances" and as a "last resort" where an otherwise viable company has "exhausted all options" and its failure would "disproportionately harm the UK economy". 

State aid considerations

Details of the Government's proposed deal with Tata Steel have yet to be revealed.  State aid compliance will need be factored into the decision making process because for the duration of the transition period (currently due to end on 31 December 2020) the UK remains subject to EU State aid law.  

The steel sector is subject to some special restrictions in State aid law depending on the type of aid a particular steel manufacturer might seek.  However, if the Government can show that the transaction aligns with that which might reasonably be undertaken by an ordinary market investor in the same or similar circumstances then the measure may be considered "no aid", ie. not State aid at all.  This means any special steel sector limitations are not applicable.  The difficulty with this route arises in collecting appropriate evidence that a market operator might reasonably engage in such a transaction, especially given the "last resort" requirements of Project Birch, but this certainly does not mean it would not be possible depending on the terms of the proposed investment.  

Where "no aid" routes are not available it is necessary to consider compatible State aid exemptions. We explored some of these in our earlier Project Birch article. 

Conclusion

The Tata rescue deal is the first apparent Project Birch intervention in the public domain, but it is unlikely to be the last.  The fund will come to the fore in the coming weeks as the extent of the economic damage arising from the Covid-19 pandemic becomes apparent.  Any selective fund will inevitably be a target of challenge by those refused support and therefore we recommend that any businesses looking to obtain Project Birch support get specialist legal advice at the outset. 

DWF has exceptional expertise in public funding matters.  Our team as experience of working within Central and Local Government on high profile grant, loans and equity investments.  Please get in touch if we can be of assistance to you.

Further Reading