Thomas Cook: Could the Government have intervened within State aid law?

What are the State aid rules?

The State aid rules are part of EU Competition Law, which regulate the award of subsidies to businesses. 

A 'State aid' is a measure which demonstrates the characteristics set out in Article 107(1) of the Treaty of the Functioning of the European Union ("TFEU"). A State aid will be unlawful unless it is either brought forward within the terms of a block exemption or receives European Commission approval through a process called notification. In practice, almost all awards are either designed to be outside the characteristics of Article 107(1) of the TFEU or within the terms of a block exemption. For instance, one block exemption called the General Block Exemption Regulations 651/2014 has been used for 97% of awards of State aid since 2014. 

Could the Government have intervened with the State aid rules?

The short answer is yes. There were ways and means to intervene over the weekend, including purchasing the shares using the Market Economy Investor Principle or by seeking to apply the relevant rescue and restructuring guidelines. In both cases though there needs to be a credible commercial rationale. In the first route, that the investment aligns with that which may be undertaken by a commercial investor in the same circumstances, in the latter that there is a credible plan to make the business competitive again. 

An alternative would be to provide State aid to a prospective purchaser. In this situation, there are more options available, especially if the purchaser was able to provide additional funds to undertake investments. 

As always though, the easiest way to provide State aid compliant funding is before the underlying issues have reached crisis point. This follows the general point that GBER excludes making aid awards to "undertakings in difficulty", ie. insolvent in immediate danger of insolvency. 

Should the Government have intervened using State aid funding?

Ultimately this is a decision for the government of the day. Prime Minister Boris Johnson confirmed on Monday that a decision was made not to rescue Thomas Cook because it would create a "Moral Hazard" whereby other businesses come to expect the taxpayer to step in. 

This position was supported by Foreign Secretary, Dominic Raab who stated on the Andrew Marr show that Ministers do not "systematically step in" when businesses are in difficulty unless there was "a good strategic national interest".  

It would appear there is a concern about setting a precedent. A concern which is likely to be all the greater given Brexit. There is also a value for money consideration to be factored into the decision making, ultimately could the public funding generate more positive returns if directed elsewhere? Furthermore, there may not have been long term benefit to the plan submitted by Thomas Cook as outlined by Transport Secretary Grant Shapps who said "I fear it would have kept them [Thomas Cook] afloat for a very short period of time and then we would have been back in the position of needing to repatriate people in any case".

Conversely, a very different approach was taken during the 2008 banking crisis in which the Gordon Brown administration of the day determined that the greater interest was overwhelmingly served by intervention and government investment to secure the future of banks such as RBS.

Conclusion

Whilst State aid law is often cited as an obstacle when businesses fail, the reality is that there are often ways and means to intervene within the rules, if there is a political will to do so.  Based on reported statistics the UK has historically been a more reluctant deployer of State aid in the economy (NB. Germany spends three to four times as much as percentage of GDP).  However even when State aid law permits an intervention this creates no right or presumption that public funds will be made available on the basis that is ultimately a policy decision at the relevant governmental level.