EU Regional State Aid Policy

DG Competition DG Competition DG CompetitionDG Competition

EU Regional State Aid Policy

Miek Van der WeeEuropean CommissionDG Competition

Committee of the RegionsLunchtime meeting3 July 2014

DG Competition DG Competition

Overview

1. Rationale for State aid control

2. Basic principles of EU State Aid policy

3. Regional aid

4. State aid Modernisation (SAM)

5. Conclusion

6. Q&A




3. Regional State aid


5. Conclusion

6. Q&A


Why do we control State aid ?

■ MS are tempted to subsidise national firms to strengthen their competitive position or to delay restructuring

■ Negative effects: ► Distorted price signals inefficient allocation of resources

► Weakening of dynamic incentives to innovate and adapt

► Subsidy races Impact on public finance and cohesion


Question 1

The less developed Member States grant higher levels of State aid than the more developed Member States

True

False


State aid and cohesion - 1

2007-2012 10 Richest MS 7 Poorest MS

GDP per capita (EU27 = 100)

129 33

State aid (as % of GDP)

0.64% 0.86%

State aid (annual, per capita)

€ 212 € 72

State aid Volume(billion € / year)

€ 44 bn € 6 bn


State aid and cohesion - 2


Why do we control State aid ?

■ State aid is not always “bad” though:

► Markets do not always deliver optimal outcomes due to market failures:

● Externalities, ● Imperfect information● Equity issues

► SA can be effective instrument to overcome market failures

■ Therefore: Need for a nuanced approach to State aid






5. Conclusion

6. Q&A


Basic principles of SA policy - 1

■ EU SA policy established in 1958 Treaty of Rome

■ Main objective:► Avoid distortion of competition in internal market

► Support economic and social cohesion



■ Substance (Article 107 TFEU):► SA in principle “incompatible” with the common market

► Exemptions from ban defined in the Treaty

■ Procedure (Article 108 TFEU): ► COM has exclusive competence to control exemptions

► Ex ante control: Notification + Standstill obligation

► Violation of SA rules:●Complaints + Ex Officio investigations●EC orders recovery of illegal & incompatible SA



Two key questions in State aid:

Q 1: When does a measure constitute “State aid” ?

Definition of “State aid”

Q 2: When is a State aid measure “compatible” with theInternal Market?

Compatibility of State Aid?


Question 1:

When does a measure constitute “State aid”?


Definition of “State aid”

Definition of “State aid” is contained in Art. 107(1) TFEU:

Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market”


Definition of State aid

■ Four criteria defining a measure as “State aid” : ► Aid granted by a Member State or through State

resources;

► Providing an advantage (“favouring”) to an undertaking

► It is selective (“certain” undertakings or “certain” goods)

► It effects trade between Member States

■ All four criteria need to be fulfilled simultaneously!


Definition of State aid: Examples

■ Examples of state aid measures:► Grants to individual companies ► Reduction of corporate tax rate & social security

contributions► Interest rate subsidy► Land sold below market price

■ Examples of non-aid measures:► Measures applying to all companies in all sectors (no

discretionary power)

► Regulatory measures with no state resources


Question 2:

When is a State aid measure compatible with the internal market ?


Compatibility: “Exemptions”

■ TFEU defines exemptions from ban on SA such as:► Aid to promote the development of less developed regions

or of certain economic activities

► Aid to promote culture and heritage conservation

■ Exemptions are not unconditional: ► Aid should contribute to an objective of common interest

► Aid should “not adversely affect trading conditions to an extent contrary to the common interest”

► COM controls application of exemptions


Compatibility: “Balancing test”

■ Assessment of compatibility “balancing test”:► Benefits (contribution to objective of EU interest)

► Costs (distortion of competition and trade)

■ Compatibility assessment covers i.a. ► Contribution to objective of common interest?

► Incentive effect?

► Is the aid proportional?

► Distortions of competition limited?


Compatibility: “Codification of criteria”

■ COM codified “compatibility criteria” for main categories of SA► Criteria: Eligible projects and costs, max. aid intensities …

► Guidelines, Regulations, Notices for : ● Horizontal aid: Regional aid, SME, Training, RTD,

Environment, …● Sectoral aid: Broadband, Airlines, Audiovisual, …

■ Published on DG Competition’s website:http://ec.europa.eu/competition/state_aid/legislation/compilation/

index_en.html


Compatibility: “Procedural aspects”

■ General Rule: All aid to be notified & approved

■ Exceptions:► Aid under approved aid schemes

► Aid under General Block Exemption Regulation (GBER)● COM defined clear compatibility criteria for certain types

of aid (SME aid, Regional Investment aid, …)● Aid measures satisfying these conditions are exempted

from notification & standstill requirement

■ Aid not falling under these exceptions and granted without Commission approval is “illegal aid”


State aid Architecture

NO AID

De Minimis Too small to distort tradeNo NotificationNo InformationCumulation control

AIDBlock Exemption Regulation

• Routine aid• Clear compatibility criteria• Limited risk of distortion

No NotificationInformation sheet

AIDGuidelines,frameworks,etc.

• Criteria published• Potential compatibility issues

(distortion, incentive effect, …)

Ex Ante Notification

AIDDirectly on TFEU

• Very limited experience• No criteria published • Ad hoc assessment

Ex Ante Notification






5. Conclusion

6. Q&A


Regional State aid - ImportanceRegional aid

EU cohesion policy2007-2013(€347 bn)

* estimates

Total State aid2007-2013(€360 bn)

Regional aid(€98 bn)*


Regional aid

■ Purpose of regional aid:To promote the development of disadvantaged areas by addressing their economic handicaps

■ How?►Support for investment and job creation by undertakings ►Support for operating expenses of undertakings

■ Criteria set out in RAG + GBER:►Where can regional aid be granted? ►What can aid be granted for?►How much aid can be granted?


Regional aid maps

To be effective: regional aid should target problem areas

■Areas with abnormally low standard of living Art.107(3)(a)

► Reference point is EU average

► Criterion GDP/cap lower than 75% EU average

Outer Most Regions (Art. 349 TFEU)

■Other disadvantaged areas Art. 107(3)(c)

► Ex-Article 107(3)(a) regions (2011-2013)

► Sparsely populated area s

► Other problem regions with population of at least 50,000


Regional aid maps

Types of region 2014-2020 2006-2013

'a' areas 25.8% 33.0%

- GDP/cap < 75% 24.9% 32.1%

- Outermost regions 0.9% 0.9%

‘c’ areas 21.8% 13.6%

- Former ‘a’ regions 6.9%

- Sparsely populated 0.6%

- Other ‘c’ areas 14.3%

Total ‘a’ + ‘c’ 47.6% 46.6%

Comparison population coverage 2006-2013 and 2014-2020:


Regional aid maps

Regional aid map also places limits on the amount of investment aid that can be granted in each region:

Assisted area(% EU GDP/head)

Large2006-13

firms2014-20

Medium firms

Small firms

'a' areas (<45%) 50% 50% +10% +20%

'a' areas (45%-60%) 40% 35% “ “

'a' areas (60%-75%) 30% 25% “ “

Ex 'a' areas (until end ‘17) 15% “ “

Sparsely populated areas, external border areas

15% 15% “ “

Other 'c' areas 10%-15% 10% “ “


Regional aid maps 2013


Regional aid maps 2014-2020 Population coverage (%) Total 2014 ‘a’ areas ‘c’ areas

Bulgaria, Estonia, Latvia, Lithuania 100.0 100.0Greece 100.0 45.9 54.1Malta 100.0 100.0Poland 100.0 86.3 13.7Romania 100.0 89.4 10.6Slovenia 100.0 52.9 47.1Slovakia 88.5 88.5Czech Republic 88.1 88.1Portugal 85.0 69.2 15.8Hungary 76.7 70.4 6.3Spain 68.6 6.8 61.8Ireland 51.3 51.3Cyprus 50.0 50.0Italy 34.1 29.0 5.0Belgium 29.9 30.0UK 27.0 3.9 23.2Finland 26.0 26.0Germany 25.8 25.8 Austria 25.8 25.8France 24.1 2.9 21.2Sweden 12.3 12.3Denmark 8.0 8.0Luxembourg 8.0 8.0Netherlands 7.5 7.5


Investment aid: “Eligible projects”

■ Investment in tangible and intangible assets relating to

In 'a' regions & SME in 'c' areas:- Setting up of a new establishment;

- Diversification of output of establish-ment into products not previously produced in the establishment;

- Extension of the capacity of an existing establishment;

- Fundamental change in the production process.

LEs in 'c' areas:- Setting up of a new establishment;

- Diversification of activity of establish-ment, if new activity is not same as or similar to activity previously per-formed in the establishment;

- Diversification of existing establish-ments into new products or new process innovations.

■ Acquisition of assets linked to establishment that has closed

■ No replacement investment!


Investment aid: “Eligible costs”

Two ways to calculate “eligible costs”:

■Costs calculated on the basis of investment costs:► Material assets (land, building, equipment)

► Immaterial assets (Transfer of technology, Patents, Know-how licenses, …)

■Costs calculated on the basis of wage costs:

Wage costs arising from job creation as a result of the initial investment (two-year wage cost)


Investment aid: “How much aid?”

■ Maximum allowable aid is defined as a percentage of eligible costs of the initial investment

■ Maximum aid intensity is set in the regional aid maps and depends on:► The level of development of the region

► The size of the enterprise

► The size of the investment project●Regional aid ceilings set in regional aid maps apply to investments with a total eligible cost of less than 50 Mio€●For larger investment projects (LIPs): scaling down of maximum aid intensity ceiling


Investment aid: “Other conditions”

■ Maintenance of investment (or jobs) in the region:► 5 years for large enterprises

► 3 years for SMEs

■ 25% of investment should be from own contribution or external finance, but totally free of public support

■ Formal application for aid before works on the project started (formal incentive effect)


Operating aid

■ Aid not linked to investment project, but aimed at reducing a firm’s current expenses

■ Permitted exceptionally in cases where investment aid alone is not enough to trigger regional development:► The least developed ‘a’ regions (SME only)

► The sparsely populated ‘c’ regions (SME + LE)

► Outer Most Regions (SME + LE)

■ MS to demonstrate that the aid is “proportionate”:► No over-compensation of extra costs facing companies as

a result of specific regional handicaps




3. Regional State aid rules

4. State aid modernisation (SAM)

5. Conclusion

6. Q&A


SAM - Objectives

■ Communication on “State Aid Modernisation” (2012)► Support growth in times of budget constraints

► "More with less“

■ Stricter control of more distortive aid: ► Prove real incentive effect

► Limit aid to what is necessary (proportionality)

■ Simplify rules for "good aid" Review of GBER


State aid under GBER schemes

63%

23%

14%

GBER

Notified Schemes

Notified Individual Aid

■ Situation 2011 63% of aid measures in EU were implemented under GBER

■ Ambition 2014-20 90% of aid under GBER


SAM – Impact on Regional aid

Facilitate granting of less distortive aid that contributes to cohesion:

■Widening the scope of the GBER:► Investment aid schemes

► Individual investment aid (< € 7.5 mio in normal ‘c’ region)

► Operating aid (<10% of turnover or <25% of labour cost)

■No need to notify, but:► Transparency

► Evaluation of large schemes


Regional aid under GBER schemes


SAM - Impact on Regional aid

■ Notification requirement for more distortive aid:► Large investment aid projects

► Investment projects of companies closing down activities

► Operating aid schemes exceeding GBER ceilings

■ Stricter assessment► Incentive effect on the basis of counter-factual analysis

► Proportionality Double ceiling:

● Regional aid intensity ceiling

● Minimum aid needed for project to go ahead

► Black list: Aid linked to delocalisation




3. Regional State aid rules

4. State aid modernisation (SAM)

5. Conclusion

6. Q&A


Conclusion

■ Nuanced approach to SA control ► SA can distort markets + undermine cohesion

► SA can also be effective tool to address market failures

■ TFEU: SA Prohibition + Exemptions controlled by COM

■ SAM:► Facilitate granting of less distoprtive aid measures

contributing to EU2020 objectives

► Stricter control of most distortive aid measures

► This is also reflected in reform of regional aid for 2014-2020


Thank you !

EU Regional State Aid Policy

Documents

Transcript of EU Regional State Aid Policy