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Brussels, 21 November 2008

Brussels, 21 November 2008. The new approach to State aids - recent reforms under the State Aid Action Plan and next steps. The reformed policy framework. Bente Tranholm Schwarz Juergen Foecking. What is the State Aid Action Plan?.

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Brussels, 21 November 2008

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  1. Brussels, 21 November 2008 The new approach to State aids - recent reforms under the State Aid Action Plan and next steps European Commission, DG Competition

  2. The reformed policy framework Bente Tranholm Schwarz Juergen Foecking European Commission, DG Competition

  3. What is the State Aid Action Plan? • A consultation document on how to reform State aid policy • A road map covering the revision of rules 2005-2009 • Adopted by the Commission in 2005 European Commission, DG Competition

  4. What was the aim of SAAP? • Support renewed Lisbon Strategy • Better governance and transparency European Commission, DG Competition

  5. How did we promise to do that? A comprehensive and consistent reform package based on • less and better targeted aid • a refined economic approach • more efficient procedures, better enforcement, higher predictability and enhanced transparency • shared responsibility between the Commission and Member States European Commission, DG Competition

  6. Was it comprehensive? Communication on Innovation Adopted 2005 Decision/Guidelines and Directive on SGEI Adopted 2005 Communication on Short Term Credit Insurance Adopted 2005 Guidelines on Regional Aid Adopted 2006 Guidelines on Risk Capital Adopted 2006 Framework on Research, Development & Innovation Adopted 2006 Block Exemption on Regional Aid Adopted 2006 Block Exemption De Minimis Adopted 2006 Guidelines on Environmental Protection Adopted 2008 Communication on Reference and Discount Rates Adopted 2008 Communication on Guarantees Adopted 2008 General Block Exemption Regulation Adopted 2008 European Commission, DG Competition

  7. Was it consistent? • Rules are based on the “Balancing test” and a more effects-based approach • Guidelines have the same structure • Rules incorporate new assessment architecture European Commission, DG Competition

  8. REFINED ECONOMIC APPROACH Balancing test Aid aimed at well-defined objective of common interest? Distortions of competition and trade limited so balance positive? Aid well designed to deliver the objective of common interest? How will the reform ensure better targeted aid? European Commission, DG Competition

  9. How is the new assessment architecture? Three-stream system: Guidelines General Block Exemption Standard assessment Detailed assessment European Commission, DG Competition

  10. How will the General Block Exemption simplify our lives? GBER aims at measures • which target the most obvious market failures • which we know would have limited distortions • for which assessment criteria can be clearly articulated and implemented by Member States Such aid can be granted by Member States without prior notification to the Commission European Commission, DG Competition

  11. What kind of measures are covered by the General Block Exemption? • GBER delivers a comprehensive and solid toolbox, in particular for SMEs • 26 (up from 10) measures included in the GBER are available to SMEs, e.g. in the areas of • Access to finance • Stimulating entrepreneurship • Research & Development • Innovation • Training • Employment • Environment NB! measures must respect GBER conditions European Commission, DG Competition

  12. What is a standard assessment? • The typical assessment under guidelines before SAAP • Generally used for schemes European Commission, DG Competition

  13. What is a detailed assessment? • Refined economic approach: „Balancing test“ spelled out on big individual cases • Idea: Disentangle the positive and negative effects resulting from the aid • Only for cases where aid amounts are very high • Information requested is normally information that the beneficiary should have • Detailed assessment does not necessarily imply opening of procedure or prohibition of the aid European Commission, DG Competition

  14. Was did this reform bring? • Consistent and comprehensive • Better economic reasoning  better targeted aid more Lisbon • New three stream assessment architecture • Simplification packageto come … “An evolution not a revolution!” European Commission, DG Competition

  15. Economic analysis in practice Some recent case experience Damien Neven Chief Economist DG COMP, European Commission* (*) Disclaimer: the views expressed in this presentation are those of the author and are not necessarily those of the European Commission. European Commission, DG Competition

  16. Overview • Introduction • Some insights after two years of implementation • Market failures • Incentive effects • Distortions of competition • Conclusion European Commission, DG Competition

  17. Introduction • Economic Rationale for state aid control • Member states aim to foster own economic development by attracting investment. • They may also affect the competitive position of domestic firms in international markets • Member states do not consider spillover effects on other countries (shift employment, rents, reduce investment abroad) • Uncoordinated actions may degenerate in excessive support • But state aid can still contribute to sound public policy objectives and hence should not be banned per ser European Commission, DG Competition

  18. Introduction • “Less and better targeted aid”: enhance effectiveness of state aid by striking a better balance between • benefits of state aid efficiency rationales: correcting market failures equity rationales: redistribution/cohesion • costs of state aid (distortions) • Formulated as a “balancing test” • Locus: Art. 87(3) EC • Economics is about better targeted aid – no presumption about the level of aid European Commission, DG Competition

  19. Balancing test • Is the aid measure aimed at a well-defined objective of common interest? • Is the aid well designed to deliver the objective of common interest ? In particular, does the proposed aid address a market failure (efficiency) or enhance equity • Is State aid an appropriate policy instrument? • Is there an incentive effect, i.e. does the aid change the behaviour of firms? • Is the aid measure proportional to the problem tackled, i.e. could the same change in behaviour be obtained with less aid? • Are the distortions of competition and effect on trade limited, so that the overall balance is positive? European Commission, DG Competition

  20. Implementation • In Guidelines/BER • Risk capital (2006) • R&D&I (2006) • Regional aid (2006) • BER (2008), Environmental aid (2008) • In cases • So far mainly in the field of R&D&I (Neoval, Soitec, Homes, TVMSL, Bernin, Osiris, ITP, Genesis,, Maxssimm, Quero, Minimage, VHD, LowCo2motion, H2E, ADNA …) • Training aid cases European Commission, DG Competition

  21. "The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method, rather than a doctrine. An apparatus of the mind, a technique of thinking, which helps its possessors to draw correct conclusions." Keynes European Commission, DG Competition

  22. Balancing • A balancing exercise requires a common framework to evaluate the elements being weighted • Analyse the impact that state aid has on the welfare of all stakeholders (recipient, competitors, input suppliers, consumers) • Aid changes the incentives and constraints of the recipient (Induces entry, delays or accelerate exit, expands output, R&D) • Which triggers changes in the strategy of competitors (output, investment, R&D) European Commission, DG Competition

  23. Objectives of common interest • Can be formulated comprehensively in terms of efficiency (does is contribute to higher output/income) and/or equity (how is distributed) • Efficiency is analysed in terms of market failures • Equity • Are positive effect felt in less developed regions ? • Do socially disadvantaged groups benefit ? • Potential trade-offs European Commission, DG Competition

  24. Market failures • Not a reference to perfect markets • Rather a set of factors which lead firms to make incorrect decisions from a public policy prospective • Positive externalities/knowledge spill-overs • Imperfect and asymmetric information • Inability to credibly commit/convey information => inadequate funding • Incomplete contracts => coordination problems • Network effects, self fulfilling expectations => coordination problems European Commission, DG Competition

  25. European Commission, DG Competition

  26. Market failures • Some misunderstanding. E.g. risk • Careful consideration of underlying principles (e.g. pecuniary external effects) • Validation remains crude • Frequent environmental externalities • Government failures European Commission, DG Competition

  27. Incentive effect • Incentive effect: does the aid change the behaviour of the firm? • Counterfactual: what would the company do without aid? • Indicators : • Net present value (internal documents, business plans, project finance analysis) • Probability of success ? Different scenarios. Fall back option in case of failure • “critical probabilities of success” • Cost of capital European Commission, DG Competition

  28. Incentive effects • Financing constraints • Internal ? Scope for abuse • External ? Bank loans and equity • Confidence in the numbers presented by the parties • But improvements in business plans • Reports from analysts, banks • Marginal effect of public support on overall financial prospects European Commission, DG Competition

  29. Distortions of trade and competition • General concern about dynamic incentives. Rents are allocated by governments rather than competition • Effects on competitors, which in turn respond and affect market outcomes : reduce output, RDI, investment - Particular concern for effects across borders • Effects on employment (and more generally input markets) in other members states • Focus on the competitors and input suppliers. Effects on consumers as secondary criteria European Commission, DG Competition

  30. Distortions of trade and competition • The tool box of competition economics is useful to understand and evaluate the effects on competitors and market outcomes • Market definition to understand which competitors are affected (substitution between products) • Misleading to suggest that because state aid control is about state competition and disciplines in the internal market, distortions of competition among firms should not be the focus • Interactions among states take place through firms and markets European Commission, DG Competition

  31. Concluding • Important progress – learning • Transparent trade-offs • Beware of outcomes – self selection • Complementarity with procedural reform European Commission, DG Competition

  32. Brussels, 21 November 2008 The new approach to State aids - recent reforms under the State Aid Action Plan and next steps European Commission, DG Competition

  33. The New Approach to State Aids: Recent reforms under the SAAP and next steps, Brussels, 21 November 2008. PROCEDURAL REFORM : THE ROAD TO SIMPLIFICATION Barbara BRANDTNER Harold NYSSENS European Commission, DG Competition

  34. THE SIMPLIFICATION ROADMAP OBJECTIVES AND COMPONENTS • JOINT COMMITMENT: • MEMBER STATES AND COMMISSION • Enhanced cooperation • Speedier, more transparent and more predictable state aid procedures • Better enforcement at national level • COMPONENTS • BEST PRACTICES CODE • SIMPLIFIED PROCEDURE • ENFORCEMENT NOTICE European Commission, DG Competition

  35. I- A BEST PRACTICES CODE TRANSPARENCY PREDICTABILITY EFFICIENCY • A MUTUALLY AGREED PLANNING (MaP) • A STAGED PROCEDURE FOR COMPLAINTS • AGREED SUSPENSION OF THE PROCEDURE European Commission, DG Competition

  36. I- A BEST PRACTICES CODE TRANSPARENCY EFFICIENCY PREDICTABILITY • ENHANCED PRE-NOTIFICATION CONTACTS • STREAMLINING INFORMATION EXCHANGE • MEETING DEADLINES - ENFORCING EXISTING PROCEDURAL MEANS European Commission, DG Competition

  37. I- A BEST PRACTICES CODE TRANSPARENCY PREDICTABILITY EFFICIENCY • PUBLICATION OF NOTIFICATION SUMMARIES • STATE OF PLAY MEETINGS • BETTER INFORMATION OF COMPLAINANTS European Commission, DG Competition

  38. II- A SIMPLIFIED PROCEDURE TRANSPARENCY SIMPLIFICATION PREDICTABILITY • SWIFT APPROVAL OF STRAIGHTFOWARD CASES : SAFE HARBOURS; EXISTING PRECEDENTS • CLEAR SAFEGUARDS AND EXCLUSIONS • MERGER PRECEDENT European Commission, DG Competition

  39. II- A SIMPLIFIED PROCEDURE TRANSPARENCY SIMPLIFICATION PREDICTABILITY • PRE-NOTIFICATION CONTACTS • SUBMISSION OF COMPLETE NOTIFICATION • ACCELERATED TIME LINE OF 1 MONTH European Commission, DG Competition

  40. II- A SIMPLIFIED PROCEDURE TRANSPARENCY SIMPLIFICATION PREDICTABILITY • ILLUSTRATIVE LIST OF POTENTIAL CANDIDATES • PUBLICATION OF NOTIFICATION SUMMARIES • DETAILED STEPS European Commission, DG Competition

  41. III- THE ENFORCEMENT NOTICE GUIDANCE COOPERATION • GENUINE PRIVATE ENFORCEMENT AT NATIONAL LEVEL • PREVENTING ILLEGAL AID, RECOVERY, DAMAGES, INTERIM MEASURES • BASED ON SETTLED CASE-LAW European Commission, DG Competition

  42. III- THE ENFORCEMENT NOTICE GUIDANCE COOPERATION • STREAMLINED EXCHANGE BETWEEN COMMISSION AND COURTS • REQUESTS FOR INFORMATION - OPINIONS • BASED ON ANTITRUST PRACTICE European Commission, DG Competition

  43. AT THE END OF THE ROAD… MODERN ARCHITECTURE Best Practices Code Other cases Enforcement notice - National Courts Safe harbours/ Precedents Simplified Procedure Exempted cases General Block Exemption European Commission, DG Competition

  44. The new approach to State Aid 21 November 2008 New ChallengesThe Financial Crisis Blanca Rodriguez European Commission, DG Competition

  45. Summary • Recent History of State Aid control in the banking sector: August 2007-September 2008 • September 2008: Intensification of the banking crisis and need for adapted responses • New framework: Art 87 3 b and the banking Communication • The practice developed so far: Case law, figures and benchmarks • What lays ahead: Review and restructuring phase • Conclusion European Commission, DG Competition

  46. Recent HistoryAugust 2007-September 2008 • Individual cases in a few Member States • Northern Rock (UK), Sachsen LB(G), IKB (G), WestLB (G), Bayern LB (G), Roskilde (DK) • Calls for a new legal basis : Article 87 3b)… • …use of the classical legal framework: Article 87 3 c) and Rescue/Restructuring assessment • But we act fast European Commission, DG Competition

  47. September 2008… • Intensification of the crisis affecting fundamentally sound banks, systemic banks • Structural measures potentially going beyond the usual 6 months rescue phases • New forms of State intervention: General rescue schemes rather than measures aimed at individual banks • Different forms of State interventions: guarantees, recapitalization, purchase of assets…. European Commission, DG Competition

  48. A new framework… • A different legal basis allowing exceptional emergency measures = Art 87 3 b) • New Guidance: Banking Communication • The main principles - Non discrimination - Limitation in time - Aid limited to the minimum - Contribution from beneficiaries - Behavioral commitments - Structural adjustments European Commission, DG Competition

  49. The practice so far… • Some figures: 21 rescue schemes under review of which 11 already approved, and a number of individual measures in benefit of specific banks also authorized • Common benchmarks developed by this new case law: - Eligibility: subsidiaries of foreign banks, systemic branches • 6 months as normal duration of schemes with review clauses • Limitations on the issuance windows for guarantees, limitations in the maturity of the debts (3 years) • Minimum remuneration of capital… European Commission, DG Competition

  50. The near future • In 6 months: • Review of the measures • Notification of restructuring plan for beneficiary entities • Assessment of the adequacy of the measures and of their distortive effects European Commission, DG Competition

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