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

European Commission, DG CompetitionEuropean Commission, DG Competition

Brussels, 21 November 2008Brussels, 21 November 2008

The new approach to State aidsThe new approach to State aids- recent reforms under the State Aid Action Plan and next steps - recent reforms under the State Aid Action Plan and next steps


The reformed policy frameworkThe reformed policy framework

Bente Tranholm SchwarzBente Tranholm Schwarz

Juergen FoeckingJuergen Foecking


What is the State Aid Action Plan? What is the State Aid Action Plan?

A consultation document on how to A consultation document on how to reform State aid policyreform State aid policy

A road map covering the revision of A road map covering the revision of rules 2005-2009 rules 2005-2009

Adopted by the Commission in 2005Adopted by the Commission in 2005


What was the aim of SAAP? What was the aim of SAAP?

Support renewed Lisbon StrategySupport renewed Lisbon Strategy

Better governance and transparencyBetter governance and transparency


How did we promise to do that? How did we promise to do that?

A A comprehensivecomprehensive and and consistentconsistent reform reform package based onpackage based on

• less and better targeted aidless and better targeted aid• a refined economic approacha refined economic approach• more efficient procedures, better more efficient procedures, better

enforcement, higher predictability and enforcement, higher predictability and enhanced transparencyenhanced transparency

• shared responsibility between the shared responsibility between the Commission and Member StatesCommission and Member States


Was it comprehensive? Was it comprehensive?

Communication on InnovationCommunication on Innovation Adopted Adopted 20052005

Decision/Guidelines and Directive on SGEIDecision/Guidelines and Directive on SGEI Adopted 2005Adopted 2005Communication on Short Term Credit InsuranceCommunication on Short Term Credit Insurance Adopted 2005Adopted 2005Guidelines on Regional AidGuidelines on Regional Aid Adopted 2006Adopted 2006Guidelines on Risk CapitalGuidelines on Risk Capital Adopted 2006Adopted 2006Framework on Research, Development & InnovationFramework on Research, Development & Innovation Adopted 2006Adopted 2006Block Exemption on Regional AidBlock Exemption on Regional Aid Adopted 2006Adopted 2006Block Exemption De MinimisBlock Exemption De Minimis Adopted 2006Adopted 2006Guidelines on Environmental ProtectionGuidelines on Environmental Protection Adopted 2008Adopted 2008Communication on Reference and Discount RatesCommunication on Reference and Discount Rates Adopted 2008Adopted 2008Communication on GuaranteesCommunication on Guarantees Adopted 2008Adopted 2008General Block Exemption RegulationGeneral Block Exemption Regulation Adopted 2008Adopted 2008


Was it consistent?Was it consistent?

Rules are based on the “Balancing Rules are based on the “Balancing test” and a more effects-based test” and a more effects-based approachapproach

Guidelines have the same structure Guidelines have the same structure Rules incorporate new assessment Rules incorporate new assessment

architecture architecture


How will the reform ensure How will the reform ensure better targeted aid?better targeted aid?

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?

REFINED ECONOMIC APPROACH


How is the new How is the new assessment architecture?assessment architecture?

Three-stream system:Three-stream system:

GuidelinesGeneral Block

Exemption Standard assessment

Detailed assessment


How will the General Block How will the General Block Exemption simplify our lives? Exemption simplify our lives?

GBER aims at measuresGBER aims at measures

• which target the most obvious market failureswhich target the most obvious market failures• which we know would have limited distortionswhich we know would have limited distortions• for which assessment criteria can be clearly for which assessment criteria can be clearly

articulated and implemented by Member articulated and implemented by Member States States

Such aid can be granted by Member Such aid can be granted by Member States without prior notification to States without prior notification to the Commissionthe Commission


What kind of measures are covered What kind of measures are covered by the General Block Exemption? by the General Block Exemption?

GBER delivers a comprehensive and solid toolbox, GBER delivers a comprehensive and solid toolbox, in particular for SMEsin particular for SMEs

26 (up from 10) measures included in the GBER 26 (up from 10) measures included in the GBER are available to SMEs, e.g. in the areas ofare available to SMEs, e.g. in the areas of

• Access to financeAccess to finance• Stimulating entrepreneurshipStimulating entrepreneurship• Research & DevelopmentResearch & Development• InnovationInnovation• TrainingTraining• EmploymentEmployment• EnvironmentEnvironment

NB! measures must respect GBER conditions NB! measures must respect GBER conditions


What is a standard assessment?What is a standard assessment?

The typical assessment under The typical assessment under guidelines before SAAPguidelines before SAAP

Generally used for schemes Generally used for schemes


What is a detailed assessment? What is a detailed assessment?

Refined economic approach: „Balancing test“ Refined economic approach: „Balancing test“ spelled out on big individual casesspelled out on big individual cases

Idea: Disentangle the positive and negative Idea: Disentangle the positive and negative effects resulting from the aideffects resulting from the aid

Only for cases where aid amounts are very highOnly for cases where aid amounts are very high

Information requested is normally information Information requested is normally information that the beneficiary should havethat the beneficiary should have

Detailed assessment does not necessarily imply Detailed assessment does not necessarily imply opening of procedure or prohibition of the aidopening of procedure or prohibition of the aid


Was did this reform bring?Was did this reform bring?

Consistent and comprehensiveConsistent and comprehensive Better economic reasoning Better economic reasoning better better

targeted aidtargeted aid more Lisbon more Lisbon New three stream assessment architectureNew three stream assessment architecture Simplification packageSimplification package to come …to come …

““An evolution not a revolution!”An evolution not a revolution!”


Economic analysis in practice Economic analysis in practice Some recent case Some recent case

experience experience Damien NevenDamien Neven

Chief EconomistChief Economist

DG COMP, European Commission*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.


Introduction Introduction

Some insights after two years of Some insights after two years of implementationimplementation

• Market failures Market failures • Incentive effectsIncentive effects• Distortions of competition Distortions of competition

Conclusion Conclusion

OverviewOverview


IntroductionIntroduction

Economic Rationale for state aid control Economic Rationale for state aid control Member states aim to foster own economic Member states aim to foster own economic

development by attracting investment. development by attracting investment. They may also affect the competitive position of They may also affect the competitive position of

domestic firms in international marketsdomestic firms in international markets Member states do not consider spillover effects Member states do not consider spillover effects

on other countries (shift employment, rents, on other countries (shift employment, rents, reduce investment abroad)reduce investment abroad)

Uncoordinated actions may degenerate in Uncoordinated actions may degenerate in excessive supportexcessive support

But state aid can still contribute to sound public But state aid can still contribute to sound public policy objectives and hence should not be banned policy objectives and hence should not be banned per serper ser


IntroductionIntroduction

““Less and better targeted aid”: enhance Less and better targeted aid”: enhance effectiveness of state aid by striking a effectiveness of state aid by striking a better balance betweenbetter balance between• benefits of state aidbenefits of state aid

efficiency rationales: correcting market failuresefficiency rationales: correcting market failuresequity rationales: redistribution/cohesionequity rationales: redistribution/cohesion

• costs of state aid (distortions)costs of state aid (distortions) Formulated as a “balancing test” Formulated as a “balancing test” Locus: Art. 87(3) EC Locus: Art. 87(3) EC Economics is about better targeted aid – no Economics is about better targeted aid – no

presumption about the level of aidpresumption about the level of aid


Balancing testBalancing test

1.1. Is the aid measure aimed at a well-defined Is the aid measure aimed at a well-defined objective of common interest? objective of common interest?

2.2. Is the aid well designed to deliver the Is the aid well designed to deliver the objective of common interest ? In particular, objective of common interest ? In particular, does the proposed aid address a market does the proposed aid address a market failure (efficiency) or enhance equity failure (efficiency) or enhance equity

• Is State aid an appropriate policy instrument? Is State aid an appropriate policy instrument? • Is there an incentive effect, i.e. does the aid change the Is there an incentive effect, i.e. does the aid change the

behaviour of firms?behaviour of firms?• Is the aid measure proportional to the problem tackled, i.e. Is the aid measure proportional to the problem tackled, i.e.

could the same change in behaviour be obtained with less could the same change in behaviour be obtained with less aid?aid?

3.3. Are the distortions of competition and effect Are the distortions of competition and effect on trade limited, so that the overall balance on trade limited, so that the overall balance is positive? is positive?


ImplementationImplementation

In Guidelines/BER In Guidelines/BER Risk capital (2006) Risk capital (2006) R&D&I (2006)R&D&I (2006) Regional aid (2006)Regional aid (2006) BER (2008), Environmental aid (2008) BER (2008), Environmental aid (2008)

In casesIn cases So far mainly in the field of R&D&I (Neoval, So far mainly in the field of R&D&I (Neoval,

Soitec, Homes, TVMSL, Bernin, Osiris, ITP, Soitec, Homes, TVMSL, Bernin, Osiris, ITP, Genesis,, Maxssimm, Quero, Minimage, VHD, Genesis,, Maxssimm, Quero, Minimage, VHD, LowCo2motion, H2E, ADNA …)LowCo2motion, H2E, ADNA …)

Training aid cases Training aid cases


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


BalancingBalancing A balancing exercise requires a common A balancing exercise requires a common

framework to evaluate the elements being framework to evaluate the elements being weightedweighted

Analyse the impact that state aid has on Analyse the impact that state aid has on the welfare of all stakeholders (recipient, the welfare of all stakeholders (recipient, competitors, input suppliers, consumers)competitors, input suppliers, consumers)

Aid changes the incentives and constraints Aid changes the incentives and constraints of the recipient (Induces entry, delays or of the recipient (Induces entry, delays or accelerate exit, expands output, R&D)accelerate exit, expands output, R&D)

Which triggers changes in the strategy of Which triggers changes in the strategy of competitors (output, investment, R&D)competitors (output, investment, R&D)


Objectives of common interestObjectives of common interest

Can be formulated comprehensively in Can be formulated comprehensively in terms of efficiency (does is contribute to terms of efficiency (does is contribute to higher output/income) and/or equity higher output/income) and/or equity (how is distributed)(how is distributed)

Efficiency is analysed in terms of market Efficiency is analysed in terms of market failures failures

Equity Equity • Are positive effect felt in less developed Are positive effect felt in less developed

regions ? regions ? • Do socially disadvantaged groups benefit ? Do socially disadvantaged groups benefit ?

Potential trade-offsPotential trade-offs


Market failures Market failures

Not a reference to perfect marketsNot a reference to perfect markets Rather a set of factors which lead firms to Rather a set of factors which lead firms to

make incorrect decisions from a public policy make incorrect decisions from a public policy prospectiveprospective

Positive externalities/knowledge spill-overs Positive externalities/knowledge spill-overs Imperfect and asymmetric informationImperfect and asymmetric information

• Inability to credibly commit/convey information => Inability to credibly commit/convey information => inadequate funding inadequate funding

• Incomplete contracts => coordination problems Incomplete contracts => coordination problems • Network effects, self fulfilling expectations => Network effects, self fulfilling expectations =>

coordination problemscoordination problems


Areas Specific assessment criteria

Externalities:

R&D&I Training Environment aid

Existence of similar projects Possibility to appropriate the benefits of the activity notably through contracts, Intellectual

Property Rights, secrecy Level of dissemination foreseen Specificity of the externality produced Transparency about the nature and magnitude of the external effects produced towards

consumers and trading partners

Imperfect information

Risk Capital,

R&D&I

Employment Rescue aid

Type of beneficiary, probability of default – collateral Scope for ex ante evaluation and ex post monitoring of the targeted activity, notably as

regards its profitability and/or quality Availability of information and expertise in the targeted sector and/or about the targeted

activity and recipient

(Coordination problems)

R&D&I

Employment aid Number of undertakings needing to collaborate

Intensity of previous collaboration Diverging interests between collaboration partners Problems in designing contracts, importance of unknown contingencies Problems to coordinate collaboration (linguistic issues, time, distance, travel costs, lack of

easy communication channels, sensitive information)


Market failuresMarket failures

Some misunderstanding. E.g. risk Some misunderstanding. E.g. risk Careful consideration of underlying Careful consideration of underlying

principles (e.g. pecuniary external principles (e.g. pecuniary external effects)effects)

Validation remains crudeValidation remains crude Frequent environmental Frequent environmental

externalities externalities Government failures Government failures


Incentive effectIncentive effect

Incentive effect: does the aid change the Incentive effect: does the aid change the behaviour of the firm? behaviour of the firm?

Counterfactual: Counterfactual: what would the what would the company do without aid? company do without aid?

Indicators :Indicators :• Net present value (internal documents, Net present value (internal documents,

business plans, project finance analysis)business plans, project finance analysis)• Probability of success ? Different scenarios. Probability of success ? Different scenarios.

Fall back option in case of failure Fall back option in case of failure • ““critical probabilities of success” critical probabilities of success” • Cost of capitalCost of capital


Incentive effectsIncentive effects

Financing constraintsFinancing constraints• Internal ? Scope for abuse Internal ? Scope for abuse • External ? Bank loans and equity External ? Bank loans and equity

Confidence in the numbers presented Confidence in the numbers presented by the partiesby the parties

But improvements in business plansBut improvements in business plans Reports from analysts, banksReports from analysts, banks Marginal effect of public support on Marginal effect of public support on

overall financial prospectsoverall financial prospects


Distortions of trade and competition Distortions of trade and competition

General concern about dynamic incentives. General concern about dynamic incentives. Rents are allocated by governments rather Rents are allocated by governments rather than competition than competition

Effects on competitors, which in turn respond Effects on competitors, which in turn respond and affect market outcomes : reduce output, and affect market outcomes : reduce output, RDI, investment - Particular concern for RDI, investment - Particular concern for effects across borders effects across borders

Effects on employment (and more generally Effects on employment (and more generally input markets) in other members states input markets) in other members states

Focus on the competitors and input suppliers. Focus on the competitors and input suppliers. Effects on consumers as secondary criteriaEffects on consumers as secondary criteria


Distortions of trade and competition Distortions of trade and competition

The tool box of competition economics is The tool box of competition economics is useful to understand and evaluate the effects useful to understand and evaluate the effects on competitors and market outcomeson competitors and market outcomes

Market definition to understand which Market definition to understand which competitors are affected (substitution between competitors are affected (substitution between products) products)

Misleading to suggest that because state aid Misleading to suggest that because state aid control is about state competition and control is about state competition and disciplines in the internal market, distortions of disciplines in the internal market, distortions of competition among firms should not be the competition among firms should not be the focusfocus

Interactions among states take place through Interactions among states take place through firms and marketsfirms and markets


Concluding Concluding

Important progress – learning Important progress – learning Transparent trade-offsTransparent trade-offs Beware of outcomes – self selection Beware of outcomes – self selection Complementarity with procedural reformComplementarity with procedural reform





PROCEDURAL REFORM :PROCEDURAL REFORM :

THE ROAD TO SIMPLIFICATIONTHE ROAD TO SIMPLIFICATION

The New Approach to State Aids:Recent reforms under the SAAP and next steps,Brussels, 21 November 2008.

Barbara BRANDTNER

Harold NYSSENS


THE SIMPLIFICATION ROADMAP

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

OBJECTIVES AND COMPONENTS


A MUTUALLY AGREED PLANNING

(MaP)

A STAGED PROCEDURE FOR COMPLAINTS

AGREED SUSPENSION OF THE PROCEDURE

PREDICTABILITY EFFICIENCY TRANSPARENCY

I- A BEST PRACTICES CODE


ENHANCED PRE-NOTIFICATION CONTACTS

STREAMLINING INFORMATION EXCHANGE

MEETING DEADLINES - ENFORCING EXISTING PROCEDURAL MEANS

PREDICTABILITY TRANSPARENCY


EFFICIENCY


PUBLICATION OF NOTIFICATION SUMMARIES

STATE OF PLAY MEETINGS

BETTER INFORMATION OF COMPLAINANTS

PREDICTABILITY EFFICIENCY TRANSPARENCY



SWIFT APPROVAL OF STRAIGHTFOWARD

CASES : SAFE HARBOURS; EXISTING PRECEDENTS

CLEAR SAFEGUARDS AND EXCLUSIONS

MERGER PRECEDENT

SIMPLIFICATION PREDICTABILITY TRANSPARENCY

II- A SIMPLIFIED PROCEDURE


PRE-NOTIFICATION CONTACTS

SUBMISSION OF COMPLETE NOTIFICATION

ACCELERATED TIME LINE OF 1 MONTH




ILLUSTRATIVE LIST OF POTENTIAL CANDIDATES

PUBLICATION OF NOTIFICATION SUMMARIES

DETAILED STEPS




GENUINE PRIVATE ENFORCEMENT AT NATIONAL LEVEL

PREVENTING ILLEGAL AID, RECOVERY, DAMAGES, INTERIM MEASURES

BASED ON SETTLED CASE-LAW

GUIDANCE COOPERATION

III- THE ENFORCEMENT NOTICE


STREAMLINED EXCHANGE BETWEEN COMMISSION AND COURTS

REQUESTS FOR INFORMATION - OPINIONS

BASED ON ANTITRUST PRACTICE

GUIDANCE COOPERATION

III- THE ENFORCEMENT NOTICE


AT THE END OF THE ROAD…

General Block

Exemption

Simplified

Procedure

Best Practices

Code

Safe harbours/

Precedents

Other cases

Exempted

cases

MODERN ARCHITECTURE

Enforcement notice -

National Courts


New ChallengesNew ChallengesThe Financial CrisisThe Financial Crisis

Blanca RodriguezBlanca Rodriguez

The new approach to State Aid21 November 2008


Summary Summary 1.1. Recent History of State Aid control in the banking sector: Recent History of State Aid control in the banking sector:

August 2007-September 2008August 2007-September 2008

2.2. September 2008: Intensification of the banking crisis and September 2008: Intensification of the banking crisis and need for adapted responsesneed for adapted responses

3.3. New framework: Art 87 3 b and the banking New framework: Art 87 3 b and the banking CommunicationCommunication

4.4. TThe practice developed so far: Case law, figures and he practice developed so far: Case law, figures and benchmarksbenchmarks

5.5. What lays ahead: Review and restructuring phaseWhat lays ahead: Review and restructuring phase

6.6. ConclusionConclusion


Recent HistoryRecent HistoryAugust 2007-September 2008August 2007-September 2008

1.1. Individual cases in a few Member StatesIndividual cases in a few Member States

2.2. Northern Rock (UK), Sachsen LB(G), IKB (G), Northern Rock (UK), Sachsen LB(G), IKB (G), WestLB (G), Bayern LB (G), Roskilde (DK)WestLB (G), Bayern LB (G), Roskilde (DK)

3.3. Calls for a new legal basis : Article 87 3b)…Calls for a new legal basis : Article 87 3b)…

4.4. ……use of the classical legal framework: Article use of the classical legal framework: Article 87 3 c) and Rescue/Restructuring assessment87 3 c) and Rescue/Restructuring assessment

5.5. But we act fastBut we act fast


September 2008…September 2008…

1.1. Intensification of the crisis affecting Intensification of the crisis affecting fundamentally sound banks, systemic banks fundamentally sound banks, systemic banks

2.2. Structural measures potentially going beyond Structural measures potentially going beyond the usual 6 months rescue phasesthe usual 6 months rescue phases

3.3. New forms of State intervention: General rescue New forms of State intervention: General rescue schemes rather than measures aimed at schemes rather than measures aimed at individual banks individual banks

4.4. Different forms of State interventions: Different forms of State interventions: guarantees, recapitalization, purchase of guarantees, recapitalization, purchase of assets….assets….


A new framework…A new framework…

1.1. A different legal basis allowing exceptional A different legal basis allowing exceptional emergency measures = Art 87 3 b)emergency measures = Art 87 3 b)

2.2. New Guidance: Banking CommunicationNew Guidance: Banking Communication

3.3. The main principlesThe main principles

- Non discrimination- Non discrimination - Limitation in time- Limitation in time - Aid limited to the minimum- Aid limited to the minimum - Contribution from beneficiaries - Contribution from beneficiaries - Behavioral commitments- Behavioral commitments - Structural adjustments- Structural adjustments


The practice so far…The practice so far…

1.1. Some figures: 21 rescue schemes under review of which Some figures: 21 rescue schemes under review of which 11 already approved, and a number of individual 11 already approved, and a number of individual measures in benefit of specific banks also authorizedmeasures in benefit of specific banks also authorized

2.2. Common benchmarks developed by this new case law:Common benchmarks developed by this new case law:

-- Eligibility: subsidiaries of foreign banks, systemic branchesEligibility: subsidiaries of foreign banks, systemic branches- 6 months as normal duration of schemes with review clauses 6 months as normal duration of schemes with review clauses - Limitations on the issuance windows for guarantees, Limitations on the issuance windows for guarantees,

limitations in the maturity of the debts (3 years)limitations in the maturity of the debts (3 years)- Minimum remuneration of capital…Minimum remuneration of capital…


The near futureThe near future

1.1. In 6 months:In 6 months:

• Review of the measures Review of the measures • Notification of restructuring plan for Notification of restructuring plan for

beneficiary entitiesbeneficiary entities

2.2. Assessment of the adequacy of the Assessment of the adequacy of the measures and of their distortive measures and of their distortive effectseffects


ConclusionConclusion

State aid rules are part of the solution, State aid rules are part of the solution, not part of the problem!not part of the problem!

Thank you very muchThank you very much

http://ec.europa.eu/comm/competition/sectors/financial_services/financial_crisis_en.htmlhttp://ec.europa.eu/comm/competition/sectors/financial_services/financial_crisis_en.html


OutlookOutlook

Herbert Ungerer Herbert Ungerer Deputy Director GeneralDeputy Director General

DG CompetitionDG CompetitionEuropean CommissionEuropean Commission


Total State aid in EU-27 Member States for industry and services in 2007: €49 billion

Environmental protection & energy saving

25%

Regional development20%

R&D15%

Employment and training6%

Coal7%

Rescue and restructuring5%

Other sectoral8%

Other horizontal (including culture, risk

capital)14%


No subsidy races between No subsidy races between Member StatesMember States


ChallengesChallenges

The crisisThe crisis

Energy/Climate change, Energy/Climate change, R&D&I, Risk Capital, Regional R&D&I, Risk Capital, Regional developmentdevelopment

SMEsSMEs


EssentialsEssentials

SpeedSpeed

DisciplineDiscipline

TargetingTargeting




Documents

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