Executive Summary:
- State aid may remedy market failure but may also cause “crowding out” of market-based activities.
- The possibility of crowding out can be minimised by channelling state aid to riskier or less profitable activities which receive less funding from market operators.
- The state may also invest with instruments that are free of state aid even where market operators are unwilling to provide funding.
- Pari passu investment with private investors is free of state aid.
Table of Contents:
- Introduction
- HBOR mission and aid measure
- HBOR activities
- Activities involving state aid
- Activities free of state aid
- Avoidance of crowding out
- Funding of non-economic activities
- Commission assessment
Introduction
Every intervention of the state in the economy causes some distortion, even when the purpose of the intervention is to correct market failure. This is because every intervention creates some negative side-effects. The typical example is the distortion caused by taxes that raise revenue to finance subsidies. And, the administration of subsidies is also not costless, either for the grantors or the recipients.
A side-effect of state aid, apart from the competitive advantage it confers to the recipient undertakings, is that it may discourage future investment by competitors and, consequently, prospective market innovation. Competitors may have little incentive to develop their own activities in sectors where undertakings are supported by public subsidies. So, a side-effect of subsidies is the crowding out of private initiative.
Recently, the Commission had to assess possible crowding out of private initiative in a case involving capital injection in the Croatian Bank for Reconstruction and Development [HBOR]. The capital injection was notified to and approved by the Commission in decision SA.121107.[1]
There are several reasons that make this case particularly interesting. First, safeguards have been designed by the Croatian authorities to prevent crowding out by channelling support to undertakings that have been refused market funding. Second, funding that involves state aid will be granted in conformity with the relevant GBER provisions. Third, other funding will be ensured to be free of state aid through pari passu investments with market operators.
HBOR mission and aid measure
HBOR was established in 1992 and is fully state owned. Its mission is to promote balanced social and economic development and support the growth of both the public and private sectors. It is not a “normal” credit institution, but a sui generis legal entity in Croatia’s banking sector with a specific legal framework and business model. Its liabilities are guaranteed by the state and all profits are re-invested in support of its mission.
The capital injection is approximately EUR 411 million and it is earmarked for two purposes: (i) EUR 277 million to support digital and green investments and (ii) EUR 133 million to support investments in defence and security.
As of 31 December 2025, HBOR’s total equity stood at EUR 1.67 billion and total assets were EUR 4.06 billion, amounting to 4.3% of the Croatian banking sector assets. The notified measure will result in an increase of assets of HBOR to EUR 4.51 billion.
Interestingly, the Commission decision notes that the “(11) HBOR recapitalization, …, is based on the Implementing Decision* of the Council of the European Union of 11 November 2025 as proposed by the European Commission which envisages the implementation of two measures to recapitalize HBOR in the total amount of EUR 411 million.”
* Council Implementing Decision 14448/25 of 11 November 2025 amending Implementing Decision 14448/25 of 28 July 2021 on the approval of the assessment of the recovery and resilience plan for Croatia.
HBOR activities
As explained in the Commission decision “(21) HBOR acts as an impact investor; that is, when investing, it also takes into account broader societal returns potentially at the expense of its own financial returns. HBOR’s investments constitute a form of State aid, some of which falls under de minimis rules. Furthermore, in certain cases, HBOR operates as a market economy operator (“MEO”). Specifically, HBOR grants loans that can deviate from standard market financing in terms of loan duration, a higher risk profile of the borrower, the use of fixed (rather than variable) interest rates, lower collateral requirements, among other factors. These adjustments are made to achieve social goals such as employment growth, regional development, infrastructure projects, public policy objectives, and social progress. Nonetheless, the Croatian authorities consider that these loans are granted on market terms, in compliance with the Commission’s Reference Rate Communication. They argue these loans address market failures, without any State aid”.
“(22) HBOR achieves its objectives using the following instruments:
(a) debt and debt-related instruments, including loans, interest rate subsidies, and the recourse and non-recourse purchase of receivables;
(b) guarantees and counter-guarantees. In this regard, HBOR issues performance-based export guarantees and counter-guarantees and guarantees for investment loans (for example established under the National Recovery and Resilience Plan to support mid-caps and large companies, or counter-guarantee schemes implemented in cooperation with the European Investment Fund (EIF) and the European Investment Bank (EIB) etc).
(c) equity and quasi-equity investments, including junior or subordinated debt, mezzanine or convertible instruments;
(d) export credit insurance and reinsurance of non-marketable risks; and,
(e) other activities prescribed by the HBOR Act, namely the participation of HBOR in the implementation of national and EU financial instruments, both involving State aid and on market terms. This includes HBOR either acting as a vehicle to channel and manage funds, or as a co-investor, in compliance with State aid rules. Such activities cover both centrally managed EU financial instruments and nationally managed funds.”
“(23) Subsidies and soft/subsidized loans are the main State aid instruments of HBOR. Subsidies are financed from HBOR, national or EU funds (for example the RRF).”
“(24) HBOR does not provide any grants. In line with the relevant Union rules, HBOR, in cooperation with the relevant ministries and the Commission, develops and currently implements five instruments co-financed by the Cohesion Fund with elements of capital rebate, while other instruments are in the preparatory phase.”
“(26) In particular, HBOR undertakes the following activities:
(a) direct lending and on-lending activities, both on in the form of State aid and on MEO terms. This involves obtaining wholesale financing from the market or multilateral financial institutions such as the EIB and the EIF as well as from other national promotional banks — which HBOR then on-lends either directly or in cooperation with financial institutions operating in Croatia;
(b) the participation in national, international or EU financial instruments, both in the form of State aid and on MEO terms. HBOR can act either as a vehicle to channel and manage funds or as a co-investor. Such participation includes, among others, centrally managed EU financial instruments (such as InvestEU, COSME or Horizon 2020), the European Structural and Investment Funds (“ESIF”), the European Fund for Strategic Investments (“EFSI”);
(c) arrangement activities, whereby HBOR secures wholesale funding from market sources or multilateral institutions such as the EIB and the EIF, as well as from other national promotional banks — for financial institutions operating in Croatia. These funds must then be used to finance companies within HBOR’s remit, with oversight, impact monitoring and coordination conducted by HBOR.”
“(27) All HBOR’s financial products that enable direct financing, envisage the possibility of granting State aid (except the OECD aligned instruments). HBOR occasionally performs transactions on a risk-sharing basis with commercial banks, or grants syndicated loans (3 or more banks). If extended directly, these loans are in most cases extended in parallel with commercial banks (not a risk sharing model, but each bank extends its own loan), or to existing clients of commercial banks, i.e. undertakings which spread their financing among few banks. This is done by using a market benchmark approach. These are the clients that cooperate with couple of commercial banks on regular basis.”
Activities involving state aid
The Commission decision also outlines the activities of HBOR that contain state aid or de minimis aid.
“(29) HBOR currently carries out or could in the future carry out financing activities that fall under the following categories:
(a) activities covered by the General block exemption regulation (“GBER”), the Agricultural Block Exemption Regulation (ABER) or the Fisheries Block Exemption Regulation (FIBER);
(b) activities covered by de minimis Regulation, the Agricultural de minimis Regulation or the Fisheries de minimis Regulation; or
(c) other State aid measures notified to the Commission for assessment: in particular, measures assessed under the Framework for State aid for research and development and innovation (“RD&I”), the Guidelines on State aid to promote risk finance investments (Risk Finance Guidelines), the Guidelines on State aid for environmental protection and energy or any other applicable State aid instruments.”
Then, in paragraph 30 of the decision, there is a long list of the GBER provisions used to deliver the majority of state aid granted by HBOR.
Activities free of state aid
Market-conform transactions are carried out by HBOR where market failure has been established ex ante. Indeed, the existence of market failure as such does not in principle prevent the state from carrying out profit-seeking investments.
It is explained that HBOR has so far focused on “(33) market failures already identified in the Union State aid framework. The relevant MEO measures and their associated market failures, as recognised by the GBER and the ABER or the Risk Finance Guidelines are governed by the eligibility conditions set out therein.”
Paragraph 34 provides another long list of GBER provisions which establish ex ante the existence of market failure.
It is further clarified that “(36) HBOR is investing only in private equity funds managed by independent professional management companies alongside other investors on pari-passu basis and all such funds have at least 30% of private investors. HBOR does not make direct investments into equity except for co-investment on a transaction-by-transaction basis within which at least 30% of investments are made by independent private investors.”
Avoidance of crowding out
This is probably the most interesting part of the Commission decision. “(38) To avoid undue distortions of competition, when carrying out activities on MEO terms, HBOR will apply the following “no-crowding-out” measures”:
(a) HBOR will invite the recipient to obtain private sector financing, and the recipient will have to demonstrate in objectively acceptable manner that it tried but was not able to obtain the financing under the objectively acceptable conditions. Examples of objectively acceptable conditions would include inter alia offers with collateral requirements, maturities, or guarantee coverages that are comparable to those requested by the potential recipient for HBOR’s funding or guarantee, or;
(b) the recipient has to confirm that it had issued an open call for investment/financing which did not provide the funding needed under the objectively acceptable conditions or the recipient has to disclose which financiers have been approached but did not want to provide sufficient financing under the objectively acceptable conditions. Examples of objectively acceptable conditions would include inter alia offers with collateral requirements, maturities, or guarantee coverages that are comparable to those requested by the potential recipient for HBOR’s funding or guarantee;
(c) when MEO co-financing with a private financier the price charged by HBOR on the remaining amount must not be more favourable than the price received from the private financial institution as long as the latter private transaction does not incorporate elements that lower its price, e.g. higher collateral requirements, very short maturities etc;
(d) if other private institutions in the market are not willing to provide the financing or if, in case of co-financing, the private transaction incorporates elements that lower its price (as described in point (b)), HBOR will calculate a hypothetical market rate for loans on the basis of proxies provided by the Reference Rate Communication, for guarantees on the basis of proxies in line with the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (“the Guarantee Notice”) or market comparable rate for investment, which a market operator would deem appropriate in comparable circumstance;
(e) HBOR will not take majority stakes (in terms of voting shares) in undertakings;
(f) HBOR will establish a complaint process where any third party, be it companies or self-employed persons, can file complaints against its activities and the detailed procedure for filing such complaints will be published on HBOR’s website;
(g) HBOR will update, at least on a yearly basis, its relevant bodies on complaints and whether complaints have been settled/dealt with;
(h) With or without complaint, HBOR will cease activities which have been found to have an undesirable effect on competition on the market as soon as possible but no later than within one year.”
Notably, undertakings in difficulty are not excluded, but state investments in such undertakings carry more legal risk in addition to the financial risk. For this reason “(39) for guidance or legal certainty, HBOR may choose to notify such investments to the Commission for a ‘no-aid’ decision.”
“(40) Should a planned intervention or set of interventions fall outside the scope of the market failures as referred to in recitals (33) to (35), the Croatian authorities will demonstrate the market failure to the Commission on the basis of an economic study and will consult with the Commission prior to the implementation of the measure(s).”
There is higher risk of crowding out when public measures target whole sectors or the whole economy. For this reason, “(41) in cases where HBOR targets market failures affecting the entire market, HBOR will apply the following further “no-crowding-out” measures, beyond those outlined in recital (38):
(a) HBOR will conduct a market assessment and engage openly with a broad range of stakeholders, including the investment community and financial institutions, to identify specific areas suffering from a structural lack of finance. This lack of finance must be inhibiting a particular type of economic activity critical to fulfilling HBOR’s objectives. HBOR will then seek to develop innovative finance solutions to develop that economic activity;
(b) when developing any investment opportunities, HBOR will — from the outset — consider all options for involving private sector investment partners in the provision of the investment. This can involve co-investment on a transaction-by-transaction basis, co-investment in a fund procured by or set up by HBOR to deliver investment in a specific sector, and/or the private sector offering the same or a similar financial product to the market where there is greater demand than either HBOR or the private sector is able to provide;
(c) Croatia will notify the Commission in advance on the occurrence of any such whole market failures.”
Funding of non-economic activities
Falling within the mission of HBOR is also funding for activities which are not economic in nature. Even though Member States are not obliged to notify such funding, the Croatian notification also lists the non-economic activities that may receive funding from HBOR.
“(46) HBOR will provide financing in the form of loans and guarantees (including counter-guarantees) in relation to non-economic activities including:
(a) financing of entities in the field of research, development and innovation which are research and knowledge dissemination organisations (research organisations as defined in point 16(ff) of section 1.3 of the RDI Framework (26),) or research infrastructures (as defined in point 16(gg) of section 1.3 of the RDI Framework, and point 91 of Article 2 of the GBER), such as universities, research institutes, labs and other. HBOR will finance primary activities of such research organisations and research infrastructures in line with section 2.1.1 of the RDI Framework and section 2.5 of the Commission Notice on the Notion of State aid;
(b) financing of transport infrastructure: HBOR will fund the transport infrastructure (road and rail) that does not have an economic use at the level of the developer or owner, at the level of the operator, or at the level of the end-user of the infrastructure (in line with section 7 of the Commission Notice on the Notion of State Aid);
(c) financing of energy efficiency measures in residential buildings having as final beneficiaries only natural persons to the extent that those do not exercise an economic activity;
(d) financing of territorial administrative units’ infrastructure, namely public administrative units at county level and local level (towns, cities, communes), as well as to public utilities companies to the extent that they do not exercise an economic activity;
(e) financing of healthcare addressed solely to public sector entities with activity in the healthcare infrastructure which comprises of primary care, emergency care, specialized care, hospital and pharmaceutical care, health care for professional practice and coordination of the health insurance system to the extent that such activities are noneconomic in nature in line with section 2.4, points 24 and 25 of the Commission Notice on the Notion of State aid. The activities of the potential addressees are entirely based on the principle of solidarity under State supervision, and their healthcare is directly funded from social security contributions and other State resources. It provides its services free of charge on the basis of universal coverage.”
Commission assessment
There was little doubt that the capital injection involved state aid. In particular, HBOR obtained an advantage because “(57) the State does not expect a commercial return on the capital injection and that the capital will ensure HBOR’s capital adequacy for its financing and facilitating access to finance activities to address market failures where specific no-crowding out safeguards are put in place … As a result, HBOR receives the capital injection to carry out tasks that private providers of finance would not perform to the same extent or under the same conditions.”
With respect to the compatibility of the aid with the internal market, the Commission considered that the aid facilitated the development of an economic activity, it was necessary and appropriate and had an incentive effect. After all, it is intended to remedy market failure – i.e. where the market underdelivers – and that without state support the risk is too high for market operators.
The Commission also considered that the market-conform activities of HBOR would target “(97) only beneficiaries or projects with insufficient market access … Therefore, … the funding provided by HBOR will be additional to market funding and that HBOR’s interventions on MEO terms will increase the funding available to projects in areas where a market failure exists and where insufficient market funds are available.”
With respect to the proportionality of the aid, “(102) the Commission notes that the aided measures will comply with the eligibility criteria and the limits (such as with regard to aid amounts and aid intensities) set forth by the block-exemption regulations … If all the conditions laid down therein are fulfilled, the aid is presumed to be proportionate. In all other cases, the proportionality of the aided measures will be assessed in individual Commission decisions based on the respective guidelines”.
“(104) With regards to the MEO activities, the Commission notes that since such activities are limited to addressing established market failures … and since HBOR will respect the non-crowding out measures …, the financing provided by HBOR can be deemed proportionate to the established needs.”
At this point, footnote 34 of the decision makes an interesting comment on de minimis aid: “The Commission notes that various elements point to the proportionate use of the de minimis Regulation by Member States in general. In the context of the revision of the de minimis Regulation the data available on the use of the current de minimis Regulation showed that the great majority of beneficiaries receive a quite limited amount. A rather large sample showed that the average amount per beneficiary per year is below EUR 30 000 aid and that the vast majority of beneficiaries receive below EUR 50 000 aid per year, with approximately 70-90% of them receiving less than EUR 10 000 aid per year. As regards the Member States for which the Commission received detailed data on that point, as shown, around 90% of the beneficiaries were micro and small undertakings and more than 95% were SMEs.”
With respect to avoidance of crowding out, the Commission, first, recalled that “(107) any aid measure, even if it effectively facilitates the development of a certain economic activity and is necessary, appropriate and proportionate, can distort competition between undertakings and trade between Member States. In addition, HBOR’s financing and access to finance activities may crowd out private investment. HBOR will limit potential negative effects on competition to a minimum.”
“(108) HBOR will conduct its State aid activities in line with State aid rules, which by itself ensures that potential negative effects are limited to the minimum”.
“(109) Commission takes note that the loans granted by HBOR on MEO terms can involve longer loan duration, higher risk profiles, fixed interest rates, and lower collateral requirements, which differ from standard market practices … Nevertheless, the Commission takes note that that these loans will be granted on market terms in compliance with the Commission’s Reference Rate Communication, minimising any potential negative effects to a minimum, addressing specific market failures”.
“(110) HBOR’s financing activities on MEO terms, …, will be subject to no- crowding-out measures …, whereby HBOR intervenes only when market funding is not sufficient or unavailable. These measures imply that the investee will have to demonstrate that it tried to obtain the required financing from the market but was unable to secure part or whole of the required financing. In addition, HBOR will establish a complaint procedure to facilitate the detection of any distortions through its activities and HBOR will cease activities which have been found to have an undesirable effect on competition on the market”.
“(111) The Commission notes that HBOR might provide financing to undertakings in difficulty … In this case, HBOR will ensure that the financing is provided on MEO basis (that such intervention does not constitute aid within the meaning of Article 107(1) TFEU). The Croatian authorities may choose to notify such investments to the Commission for a ‘no-aid’ decision for reasons of guidance or legal certainty.”
“(112) As already noted … HBOR’s non-economic activities are by their nature not liable to distort competition.”
“(113) Therefore, the Commission finds that the no-crowding-out measures, which will apply for the MEO activities of HBOR, will substantially limit the risk of market distortion.”
On the basis of the above findings, the Commission raised no objections.
[1] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202621/SA_121107_36.pdf
