EU Regional State Aid Policy

EU Regional State Aid Policy Miek Van der Wee European Commission DG Competition Committee of the Regions Lunchtime meeting 3 July 2014

Overview • Rationale for State aid control • Basic principles of EU State Aid policy • Regional aid • State aid Modernisation (SAM) • Conclusion • Q&A

Rationale for State aid control Basic principles of EU State Aid policy Regional State aid State aid Modernisation (SAM) Conclusion 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

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

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

Basic principles of SA policy - 2 • 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

Basic principles of SA policy - 3 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 the Internal 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

Regional State aid - Importance Regional aid Total State aid2007-2013(€360 bn) EU cohesion policy2007-2013(€347 bn) Regional aid (€98 bn)* * estimates

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 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:

Regional aid maps 2013

Regional aid maps 2014-2020

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

Rationale for State aid control Basic principles of EU State Aid policy Regional State aid rules State aid modernisation (SAM) Conclusion 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

14% GBER Notified Schemes 23% Notified Individual Aid 63% State aid under GBER schemes • 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

Rationale for State aid control Basic principles of EU State Aid policy Regional State aid rules State aid modernisation (SAM) Conclusion 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