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

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

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

4. 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

5. Question 1
The less developed Member States grant higher levels of State aid than the more developed Member States
True
False

6. State aid and cohesion - 1
10 Richest MS
7 Poorest MS
GDP per capita
(EU27 = 100)
129 33
State aid
(as % of GDP)
0.64%
0.86%
(annual, per capita)
€ 212
€ 72
State aid Volume
(billion € / year)
€ 44 bn
€ 6 bn

7. State aid and cohesion - 2

8. 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

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

10. 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

11. 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

12. 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?

13. Question 1:
When does a measure constitute “State aid”?

14. 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”

15. 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!

16. 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

17. Question 2:
When is a State aid measure compatible with the internal market ?

18. 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

19. 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?

20. 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:
tml

21. 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”

22. State aid Architecture
NO AID
De Minimis
Too small to distort trade
No Notification
No Information
Cumulation control
AID
Block Exemption Regulation
Routine aid
Clear compatibility criteria
Limited risk of distortion
Information sheet
Guidelines,
frameworks,
etc.
Criteria published
Potential compatibility issues (distortion, incentive effect, …)
Ex Ante Notification
Directly on TFEU
Very limited experience
No criteria published
Ad hoc assessment

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

24. Regional State aid - Importance
Regional aid
Total State aid (€360 bn)
EU cohesion policy (€347 bn)
Regional aid
(€98 bn)*
* estimates

25. Regional aid Purpose of regional aid: How?
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?

26. 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 ( )
Sparsely populated area s
Other problem regions with population of at least 50,000

27. Regional aid maps
Comparison population coverage and :
Types of region
'a' areas
25.8%
33.0%
- GDP/cap < 75%
24.9%
32.1%
- Outermost regions
0.9%
‘c’ areas
21.8%
13.6%
- Former ‘a’ regions
6.9%
- Sparsely populated
0.6%
- Other ‘c’ areas
14.3%
Total ‘a’ + ‘c’
47.6%
46.6%

28. Regional aid maps
Regional aid map also places limits on the amount of investment aid that can be granted in each region:
Assisted area
(% EU GDP/head)
Large
firms
Medium firms
Small
'a' areas (<45%)
50%
+10%
+20%
'a' areas (45%-60%)
40%
35% “
'a' areas (60%-75%)
30%
25%
Ex 'a' areas (until end ‘17)
15%
Sparsely populated areas, external border areas
Other 'c' areas
10%-15%
10%

29. Regional aid maps 2013

30. Regional aid maps 2014-2020 Population coverage (%) Total 2014
‘a’ areas
‘c’ areas
Bulgaria, Estonia, Latvia, Lithuania
100.0
Greece
45.9
54.1
Malta
Poland
86.3
13.7
Romania
89.4
10.6
Slovenia
52.9
47.1
Slovakia
88.5
Czech Republic
88.1
Portugal
85.0
69.2
15.8
Hungary
76.7
70.4
6.3
Spain
68.6
6.8
61.8
Ireland
51.3
Cyprus
50.0
Italy
34.1
29.0
5.0
Belgium
29.9
30.0 UK
27.0
3.9
23.2
Finland
26.0
Germany
25.8
Austria
France
24.1
2.9
21.2
Sweden
12.3
Denmark
8.0
Luxembourg
Netherlands
7.5

31. 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!

32. 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)

33. 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

34. 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)

35. 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

36. Rationale for State aid control
Basic principles of EU State Aid policy
Regional State aid rules
State aid modernisation (SAM)
Conclusion
Q&A

37. 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

38. State aid under GBER schemes
Situation 2011  63% of aid measures in EU were implemented under GBER
63%
23%
14%
GBER
Notified Schemes
Notified Individual Aid
Ambition  90% of aid under GBER

39. 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

40. Regional aid under GBER schemes

41. 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

42. Rationale for State aid control
Basic principles of EU State Aid policy
Regional State aid rules
State aid modernisation (SAM)
Conclusion
Q&A

43. 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

44. Thank you !