The Community State Aid Action PlanAlena Zemplinerova, CERGE-EI, joint working place Charles University

and Academy of Sciences

The International Conference “The Reform of ECand Greek Competition Law”

June 1-2, 2007, National Bank of Greece, Athens

Introductory remarks• The EU's policy for controlling State aid is an integral part of the Union's

Competition policy. State aid “discriminates” other firms and creates barrier to entry to the market and provides firm with market power

• State aid is prohibited by EC Treaty Article 87 • State aid granted in 2005 by EU-25 was estimated at €64 billion• State aid is allowed by EC Treaty Article 87

• With trade liberalization and restructuring the pressures to provide state aids are increasing (non-tariff protection)

• Providers of state aid are governments, beneficiary of tax exemptions and investment subsidies are often multinational companies.

• State aid which is approved on national or European level must not be accepted by rivals on global markets (more cases are pending before the courts, international arbitrations or by WTO)

Outline of presentation

1. Problems with State aid control

2. How European State Aid Action Plan tries to solve the problems

3. Economic asessment of State aid

(1) Problems with State aid control

Aims of the state aid: - Efficiency consideration- Promotion of equity (redistribution)

Magnitude and number of cases- 500 cases each year (300 notifications, 200 complaints), 350 decisions, investigation is costly

and lenghtly, high demands for expertise- Big and complex cases and number of small cases

Information asymmetry and transparency of aid: - Aid can be channeled “off-budget” - Aid can take a variety of forms

– R&D (through universities or military)– infrastructural projects– enterprise zones– state aid provided to private enterprises through state enterprises or institutions or non-profit organizations– advertising on State owned television– legislation to protect market share– “verbal aid”

Rules and legal framework

• The Commission publishes continuously the criteria it uses when deciding about exemptions and compatibility → The Treaty is complemented through an extensive number of legislative acts that provide for a number of rules of the legal framework for decisions (Regulations, Guidelines, Communications, Frameworks, Notices, Directives etc.). There are about 800 pages of these secondary rules → the law is soft and flexible

• It creates not only uncertainty of businesses but also of state authorities about their legal position.

• In these legislative acts three main aid categories under Article 87 (3) can be distinguished: Horizontal aid, Regional aid (Sometimes regional aid is placed in horizontal aid) and Sectoral aid.

EU-15 Total state aid by objectives in 2005

Regional development n.e.c. 20%

Sectoral aid17%

Research and development

13%

SME11%

Training and Employment aid

11%

Environment and energy saving

28%

http://ec.europa.eu/comm/competition/state_aid/studies_reports/2006_autumn_en.pdf, own adjust.less agriculture, fisheries and transport

(2) The State Aid Action Plan 2005-2009

• What should be achieved ?• less State Aid• better targeted state aid• Less administrative costs• Efficient enforcement of rules

• How it should be achieved?• Focus on large and complex cases with cross-border effects• economic assessment • higher predictability and transparency• shared responsibility between the Commission and Member

States.

What was done during 2005-2007?

• October 2005, the EC adopted new Regional Aid Guidelines• Regional Block Exemption Regulation has been adopted to spare

administrative costs with notifying small regional aid schemes.

• November 2005 Framework on Services of General Economic Interest

• July 2006 EC adopted the new Risk Capital Guidelines for SMEs (“the first implementation of refined economic approach in a 'legislative' text”)

• November 2006 new R&D and Innovation Framework developing a refined economic approach to properly assess 'big' cases

• December 2006 EC adopted the new de minimis Regulation – doubling the threshold to €200,000 over 3 years, and setting a guarantee ceiling of €1.5 million. It is assumed that this will diminish the bureaucratic burden of state aid control as these such aids do not have to be notified

What is planned to be done during 2007-2009

• first draft of the Guidelines on environmental protection will be out very soon

• The major piece of legislation to simplify and consolidate existing block exemptions is expected by the issue of “general block exemption” as by mid 2008

• the general block exemption Regulation would exempt environmental aid, aid in the form of risk capital and exempting research and development aid (R&D) in favor of large enterprises up to 50% of project costs to companies carrying out industrial research.

• Block exemption regulations should simplify agenda and reduce the

administrative costs and allow the Commission to concentrate on large and important cases

(3) Economic assessment of the costs and

Effects of State Aid • Effect on the economy in a long-term• - distortion of incentives and strategic environment• - rent seeking activities instead on productive activities • - impact on state budgets and on level of taxation

• Effects on the firms receiving state aid• - allows for anticompetitive behavior• - creates comparative advantage• - creates market power

• Effects on other firms in the same market not receiving aid• - more efficient firms exit the market • - effects on up-stream and down-stream markets

• Correcting Market Failures– Positive externalities– Asymmetric information– Provision of public goods

• Equity / Social Reasons– Social and Economic

Cohesion– Economic adjustment

• Create Market Failures– Create or strengthen Market

Power (Dominant position)– reduce dynamic efficiency– Subsidy / tax competition– Increase budget deficits / tax

burden • Reduce Fairness• Administrative costs

Benefits Costs

Are distortions of competition balanced with the

reduction of market failure?

Concluding remarks • Ex ante subsidy control and evaluation of its effects can help to prevent

government failure and inter-state competition

• Application of general principles in concrete cases might not be straightforward and quantifications of effects and externalities can be costly →Administrative costs of state control can rise

• Transparency of public budgets is improving efficiency of state aid

• Private enforcement of the competition laws may contribute to the transparency of the „off budget state aid“