British Steel to collapse: No EU state aid to save it.

British Steel is on the verge of administration as it continues to lobby for government backing, sources say.

The UK’s second-biggest steel maker had been trying to secure £75m in financial support to help it to address “Brexit-related issues”.

If the firm does not get the cash it would put 5,000 jobs at risk and endanger 20,000 in the supply chain.

Company sources said that the direction of talks with the government would become clearer in the coming hours.

British Steel’s main plant is at Scunthorpe, but it also has a site in Teesside.

The request for emergency financial support from the government is understood to have been reduced from £75m to about £30m.

The report said British Steel shareholder Greybull Capital and lenders had agreed to pump new money into the firm.

Unless a deal is reached by Tuesday afternoon, the firm could go into administration within 48 hours. EY would be expected to be appointed as administrators on Wednesday.

If a company goes into administration, then the insolvency practitioners appointed to run the business will try to rescue it by selling it, or parts of it, as a going concern.

But if that is not possible it will be liquidated, meaning that it will be closed down and its saleable assets will be sold.

In a statement, the Department for Business, Energy and Industrial Strategy (BEIS) said: “As the business department, we are in regular conversation with a wide range of companies.”

In April, British Steel borrowed £100m from the government to enable it to pay an EU carbon bill, so it could avoid a steep fine.

Union leaders held crunch talks with the Business Secretary Greg Clark on Tuesday, with administrators EY expected to be called in as soon as Wednesday if a deal is not reached.

In answer to an urgent question in the House of Commons on Tuesday, the government acknowledged that speculation about British Steel’s future was creating uncertainty for workers but declined to clarify what support may or may not be in place.

“We cannot comment on details at this stage,” Andrew Stephenson told the Commons, adding that the government would “continue to do whatever is within our power to support the steel sector”.

British Steel’s lenders, as well as shareholder Greybull Capital have agreed to put extra money into the company, according to Sky News.

The company is requesting £30m of government funding to allow it to continue, down from £75m previously.

Labour MP, Rachel Reeves, chair of the Commons Business Committee, accused the government of presiding over the decline of the British steel industry.

Ms Reeves pointed to: “The closure of Redcar in 2016, the lack of assurances from Greybull when they took over British Steel, the chaotic handling of Brexit and the failure to agree a sector deal which they have been crying out for.”

Last week British Steel announced it had the backing of its key stakeholders and that operations would continue as normal.

It said on Thursday: “We are pleased to confirm that we have the required liquidity while we work towards a permanent solution.”

A Unite spokesperson said: “We would urge Greybull to reach a deal with the Government. Thousands of jobs depend on the outcome.

“And we will be speaking with the Government first thing in the morning.”

The EU does not allow state support of a business if it would distort competition in the single market.

Possible exceptions

There are some ways round the rules.

The first is national security. Under the 1957 Treaty of Rome, one of the founding treaties of the EU, countries can “take any measures necessary” if an industry is essential to national security.

This is supposed to refer to arms, munitions and “war material”. Does it apply to hot rolled steel? Legal experts think it’s unlikely, although Lord West, the former First Sea Lord and Chief of the Naval Staff has told the BBC that UK production is vital for the defence sector.

The second is a move to avoid “a serious disturbance to the economy”. This was one of the arguments used to justify the bank bailouts.

When state aid isn’t state aid

The last option isn’t state aid at all. A government can own a company under state aid rules but it is not allowed to keep it going if it would otherwise fail.

This is the closest the government can come to “nationalisation”.

If the government can convince the European Commission that buying a business is a sensible move that any investor would make for a profit then it is not classified as state aid.

No state aid.

Dr Ruth Bender, Associate Professor of Corporate Financial Strategy, was interviewed on Radio 5 Live Breakfast show on 31st March, discussing why the Government could not give State aid to save British Steel, and how this might be affected if the UK were to leave the EU. The following text expands on some of the comments she made.

There is a strong public and political demand to save British Steel. In the short term it is unlikely that this could be done with private money, as there appear to be no imminent buyers, and so the demand is that the State step in with public funding. Nationalisation has been suggested as an option, reflecting the way the banks were rescued at the time of the financial crash. Unfortunately, this is not legal under the State aid rules.

What is State aid?

State aid means using taxpayer-funded resources to provide assistance to an economic undertaking in a way that gives it an advantage that it could not get in the open market. The State aid rules in the UK come from EU law.

Would it be against EU regulations to provide funding to British Steel in a time of need?

Unfortunately, yes. The fact that all the economic factors go against the UK steel industry is not relevant, nor is the potentially devastating impact on the wider local economy were it to close. The EU has already ruled on this: in January 2016 the competition commissioner ruled that the Belgian government had illegally provided €211m to steel companies in one of its depressed regions, and ordered that the money be repaid. She also announced an investigation into €2bn of similar aid given by the Italian government to support its steel industry.

The EU takes the view that State aid cannot be used if it distorts competition, and that EU regional funding is available to help with the social consequences of closing down industries that are uncompetitive.

So how come the banks were bailed out?

There is a fundamental difference between banks and steel. If the UK, or Belgian, or Italian steel industry has to shut down, then other steel companies will pick up their contracts. Such commercial competition is the thrust behind most of the legislation: saving any of the ailing companies would adversely affect the other steel providers, who would not be able to take those contracts. In the case of the banks, their mutual interdependence made that impossible. Because they had all lent to each other, the collapse of any of the banks would have led to the collapse of the whole financial system. So, saving the banks was not anti-competitive, it was in fact supporting the market economy.

Then the EU bent the rules for the banks?

No, it did not bend the rules, it used provisions in the Rescue and Restructuring Guidelines which enable State aid in certain very limited circumstances. Unfortunately, this would be difficult to apply to steel.

The ‘Rescue’ part of the R&R Guidelines is very limited, and provides that State aid can be given for a limited amount, and a limited duration (months), and is reversible. The ‘Restructuring’ part is slightly more flexible, and is what was used for the banks. However, it involves having a clear plan for return to viability, in a relatively short time (albeit years rather than months), and needs co-investment of about 50% alongside the State funds.

Neither of these forms of funding appears to be available for the steel industry in any of the EU countries, mostly because global economic conditions show no sign of changing in the foreseeable future, and without an increase in economic activity, and a decrease in Chinese steel exports[1], there is little possibility of a viable plan for recovery. And, any such plan would need significant co-investment funding, which is not really available.

R&R is probably the way in which the Scottish government has managed to fund the Dazzell and Clydebridge steel plants, as bridging finance during the sales process which was already underway. However, it will be more difficult to find a funded buyer for the Port Talbot plant, although the politicians are now actively working on finding such a solution. Without a credible and immediate buyer, this route is very unlikely.

So how did the Government manage to nationalise East Coast Rail?

When the National Express East Coast Rail franchise collapsed in 2009 the government nationalised the line (although it has since re-privatised it). This, I understand, came under an exemption to protect essential infrastructure.

Would we be able to provide State aid if we left the EU?

At first sight, you’d think that should be the case. EU law prevents State aid, so leave the EU and all will be fine. However, once you start looking at the situation, this is not the case.

The UK trades internationally, and therefore needs trading agreements with all other countries and trading blocs. At the moment, our trading agreements are done through the EU. Were we to leave the EU, we would need to implement other arrangements, so that we could carry on trading.

If Brexit takes place, there are various alternatives, as illustrated in the diagram below. At the centre is EU membership, and I’ve split out the core EU countries, those who signed up to Schengen, the euro and everything, from the outer circle of countries, including the UK, who have opted out of certain matters. EU regulations on State aid cover all of the countries in the blue EU circles.

One alternative for Brexit would be to emulate Norway, and join the European Economic Area (EEA). This would give us access to the EU single market, although we would still have to renegotiate trade agreements with all the non-EU countries/trading blocs. However, counties in the EEA are bound by the EU’s State aid rules, so it would not change the steel situation. (EEA countries are actually bound by a lot of the EU’s regulations, and have to pay a considerable sum into the EU budget, but that is a topic for another day.)

The next layer out is EFTA, the European Free Trade Area. This is the trading model used by Switzerland. EFTA means partial access to EU markets, and accordingly, being subject to fewer EU regulations. However, my understanding is that Switzerland still has to abide by the EU State aid regulations.

The third alternative, I’ve just called ‘bilateral agreements’. This covers a range of alternatives including, for example, customs union such as Turkey has with the EU, or the extensive agreements that Canada has concluded, after 10 years of negotiation. Bilateral agreements will mean that products sold into the EU have to comply with EU regulations, but not that countries have to adopt EU regulation more generally. So, the EU State aid rules won’t apply. However, at that point we would still be subject to the World Trade Organisation rules.

World Trade Organisation rules apply to EU countries already – for example, the WTO ruled that various subsidies given for the development of Airbus were illegal. As with the EU, the WTO’s main aim is to avoid factors that distort competitive markets. The relevant regulation goes under the title of Subsidies and Countervailing Measures, and clearly includes State rescue of ailing organisations in its definition of Subsidies.