State Aid Modernisation: First Results

There has been an impressive increase in the use of the General Block Exemption Regulation. However, Member States still notify measures which are acknowledged by the Commission with “comfort letters”.

 

Introduction[1]

In May 2012, the European Commission launched its State Aid Modernisation [SAM] initiative. After two years of consultations with the Member States, a set of new State aid rules came into effect on 1 July 2014.[2] A full list of all the relevant SAM documents can be found on the website of the Commission.[3] On the second anniversary of the new rules becoming operational it is worth considering what has been achieved so far.

The main purpose of the SAM was to streamline the various State aid rules, focus Commission action on the most distortionary types of aid and relieve as much as possible Member States from the administrative burden of notifying their every State aid measure, regardless of its size and impact on the internal market.

Objectives of the State Aid Modernisation

The State Aid Modernisation Communication of 2012 set the following objectives:[4]
“(i) to foster sustainable, smart and inclusive growth in a competitive internal market;
(ii) to focus Commission ex-ante scrutiny on cases with the biggest impact on internal market whilst strengthening the Member States cooperation in State aid enforcement;
(iii) to streamline the rules and provide for faster decisions.”

In addition, State aid control would “help Member States to strengthen budgetary discipline and improve the quality of public finances – resulting in a better use of taxpayers’ money”, contribute to “more effectiveness in public spending [use of State aid only where it represents a real added–value” and lead to “cost-effective and growth enhancing aid”].

To achieve the objective of fostering growth, the Commission proposed to:
Define “common principles applicable to the assessment of compatibility”; undertake “revision and streamlining of state aid guidelines, to make them consistent with those common principles”; and pursue a “more systematic assessment of the potential negative effects of State aid – notably in terms of distortions of allocative and dynamic efficiency, subsidy races and market power.”

For the purpose of focusing Commission ex-ante scrutiny on measures with the biggest impact on internal market, the Commission proposed to “review the de minimis Regulation” and “extend the General Block Exemption Regulation”.

In order to streamline the various rules and reach faster decisions, the proposed actions were “better explanation of the notion of State aid” and revision of the “Procedural Regulation with regards to complaint-handling and market information tools”.

The spectacular success of the GBER

A search of the data base of the DG Competition indicates that between 1 July 2014 and 31 May 2016, DG Competition dealt with 700 State aid cases. Most of these cases were assessed on the basis of the guidelines that expired on 30 June 2014. There is always a backlog of cases simply because it takes some time for the Commission to assess fully each measure.

Further refinement of the search criteria reveal that the new rules that came into effect on 1 July 2014 were applied only to about 30 cases concerning R&D, risk finance, regional aid, other than regional aid maps, and about 50 cases of environmental and green energy aid, of which 20 concerned windfarm projects in Germany. Many other measures that came under the scrutiny of the Commission concerned aid to ports, airports, airlines, intermodal transport, and infrastructural projects.

Aid for environmental protection and green energy, regional development, R&D and risk finance accounts for close to 85% of all horizontal aid that is granted in the EU. If the results of the search of the Commission’s data base are correct, it means that in the period from July 2014 to June 2016, the visibility of how the most important State aid rules are implemented is extremely low. This may be caused by two different factors.

First, the search engine may not identify all the relevant cases. Second, the low numbers are likely to be the result of the spectacular success of the Commission to induce Member States to use the General Block Exemption Regulation [GBER] [Regulation 651/2014]. According to the latest Annual Competition Report [June 2016], close to 90% of all State aid measures implemented by Member States have been adopted on the basis of the GBER. Indeed, the purpose of the GBER is to relieve Member States from the obligation to notify their measures to the Commission.

Lower visibility?

The other side of the coin of the success of the GBER may be that little is now publicly known about the quality of the measures implemented by Member States and the extent of their conformity with the spirit as well as the letter of the GBER. The Commission certainly has a much better view of what Member States do. But the important point is that this knowledge is not public. To the extent that such knowledge contributes to the design and uniform application of State aid measures and fair competition across the EU, its relative decline must have a non-negligible negative effect on compliance and perhaps, indirectly, on cross-border competition and investment.

One may counter-argue that the SAM is also supposed to raise the transparency of State aid measures. As of the end of this year, Member States will have to publish all individual awards of aid exceeding EUR 500,000. Although this in itself is a welcome development, it cannot compensate for the limited understanding of how rules are interpreted and applied by Member States.


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One may further retort that ex-post monitoring by the Commission is increasingly covering more measures [currently, the size of the sample of monitored measures appears to be about 7%]. So far, however, most monitored measures are still those that were adopted in the previous period 2007-13. New measures will be mostly covered as of 2017. The results of the ex-post monitoring are not public. Nor, is it clear whether and how the ex-post monitoring contributes to reduction of the rate of “irregularities” and other design mistakes by Member States.

Whenever Member States have doubt, they can ask the Commission for clarification. These contacts, however, are private and bilateral. The answers given by the Commission are not necessarily spread to other Member States.

Admittedly, some of these answers find their way in the frequently asked questions on the GBER. However, not all questions are included in the FAQ document which is posted on DG COMP’s website. Also, the FAQ document is not so frequently updated [only twice so far]. More importantly, the FAQ document provides generic answers to general questions. The public understanding of State aid rules and of the range of possible public measures to which they can apply depends even more on the Commission’s assessment of specific cases and identification of faulty programme designs and ineligible objectives, procedures or costs. The FAQ document does not identify errors or mistakes.

Cooperation

The SAM has explicitly sought to strengthen cooperation between the Commission and Member States. It is amply evident that there are more contacts between the Commission and Member States. Some of these contacts must be attributed to the fact that Member States ask for more guidance from the Commission on the application of the GBER. More broadly, discussion of various issues of State aid enforcement has expanded through the establishment of the SAM working group and through bilateral meetings.

Less legal certainty?

Despite the increased use of the GBER, Member States have not stopped notifying measures to the Commission. Because the Commission does not wish or does not consider it necessary to proceed to full blown assessment, it sends “comfort” letters to Member States assuring them of the compatibility of the aid on the basis of the information submitted to it. The legal value of such comfort letters has been extensively debated in the literature. They may provide some assurance to Member States but it is questionable what value they may have in legal proceedings. As they are a symptom of the increased reliance on the GBER, they too have contributed to lowering the common understanding of the application of State aid rules.

Faster decisions?

With respect to the goal of faster decisions, cursory analysis of the time length between the date of notification and the date of final decision, suggests that the Commission needs about 7-8 months to approve measures. This analysis does not take into account the time length of pre-notification contacts.

It seems that the time needed for approval of notified measures has actually increased by 40% to 60% in relation to the period 2007-13 when the average period of approval was thought to be about 5 months. The apparent increase in the time needed by the Commission to authorise aid is probably caused by two factors.

First, Member States notify now more complex measures, as they can use the GBER for many more categories of otherwise routine or simpler measures. Second, since July 2014, notification has always involved detailed assessment of State aid on the basis of the common compatibility principles. Detailed assessment is a cumbersome process, requiring analysis of a large amount of information on market conditions, the need and proportionality of aid and the likely impact of aid on competitors.

A core objective of the SAM was to focus Commission attention on difficult and problematic issues. It has achieved it. Therefore, it is natural that today’s decisions need more time.

Improved quality of assessment

The SAM has raised the quality and rigour of State aid assessment. All the rules [regulations and guidelines] now determine the compatibility of State aid according the same assessment principles. This innovation has had at least three positive effects. First, it has made the enforcement of the rules more uniform across all types of aid. Second, it has enabled Member States to understand better how State aid is assessed by learning from practice across the spectrum of the various types of aid. Third, the common assessment principles have solid theoretical foundations and make more rigorous the previous assessment approach which was often formalistic.

Is the reform agenda complete?

The 2012 SAM Communication also referred to strengthening “budgetary discipline”, improving the “quality of public finances”, “better use of taxpayers’ money”, “more effectiveness in public spending, use of State aid with “real added-value” and “cost-effective” aid.

Although these terms are not further elaborated in the Communication, they suggested that the new rules would lead to some kind of cost-benefit analysis of State aid. The common principles of compatibility, like their predecessor the “balancing test” which was introduced by the 2005 State Aid Action Plan, weigh the positive effects of State aid against the negative effects in terms of distortion of competition. But it is important to understand that this weighing or balancing is not a proper cost-benefit exercise whereby the internal benefits [i.e. gains of the aid recipient] and the external benefits [i.e. other gains for society] of State aid are quantified and compared to the costs of State aid, including its own opportunity cost [i.e. forgone net gain in the best alternative use]. Such cost-benefit exercise takes into account how the aid could have been used alternatively and, therefore, indicates whether state intervention creates “value for money”.

For instance, under current rules, State aid is allowed when it is shown that a project experiences a “funding gap”; i.e. the initial investment cost exceeds the expected stream of net revenue from the project. The presence of a funding gap demonstrates the need for aid. The size of the funding gap shows how much aid is needed [proportionality of aid]. If the project is, for example, a port in a poor region, it can contribute to increased trade in that region and if there is no other port close by its impact on competition would be minimal and the Commission would approve the aid. The funding gap method has placed the assessment of State aid on a technically more rigorous basis.

However, the presence of a funding gap does not mean that the approved aid is money well spent. The aid to the port may have a smaller impact on the regional economy than if it is given to an alternative project, say, of a plant for packaging regional products.

Since 2014, the Commission has prohibited quite a few measures for granting or proposing to grant aid that was unnecessary, excessive [i.e. disproportional] and, in two cases, for not contributing to an objective of common interest [Gdynia airport in Poland and Zweibrucken airport in Germany]. Certainly, when aid is unnecessary, excessive or not able to generate benefits for society, it is not money well spent and does not add value.

Conclusions

In at least two respects, the SAM has been a spectacular success. Through much greater use of the GBER, Member States can avoid the administrative cost of notification and, correspondingly, the Commission can direct its efforts to the most serious cases instead of having to process insignificant cases.

At the same time, the reduction in notification and control by the Commission may have had an unexpected negative impact. It has reduced the visibility of State aid measures and the public understanding of how good or at least compatible measures can be developed within the legal framework of the GBER and the guidelines.

Nevertheless, the SAM may still succeed to shed more light on the actual effectiveness of State aid as Member States subject to ex-post evaluations their State aid schemes with budgets exceeding EUR 150 million. The first results of these ex-post evaluations are expected in 2018-19.

Lastly, the SAM has also advocated that State aid must add value. The Commission will need to clarify whether it intends to proceed to a cost-benefit analysis proper or whether it considers that such an analysis falls outside its mandate of ensuring the compatibility of State aid with the internal market.

—————————————–

[1] I am grateful to Eszter Hargita, Peter Staviczky and two officials who wish to remain anonymous for comments on an earlier draft.
[2] A missing piece in the package of the new rules was the paper on the Notion of State Aid. The paper was eventually published on 19 May 2016.
[3] http://ec.europa.eu/competition/state_aid/modernisation/index_en.html
[4] Commission Communication on EU State Aid Modernisation, COM(2012) 209 final, 8 May 2012. It can be accessed at: http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52012DC0209

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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