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

European Commission, DG Competition The reformed policy framework Bente Tranholm Schwarz Juergen Foecking

European Commission, DG Competition What is the State Aid Action Plan? A consultation document on how to reform State aid policy A consultation document on how to reform State aid policy A road map covering the revision of rules A road map covering the revision of rules Adopted by the Commission in 2005 Adopted by the Commission in 2005

European Commission, DG Competition What was the aim of SAAP? Support renewed Lisbon Strategy Support renewed Lisbon Strategy Better governance and transparency Better governance and transparency

European Commission, DG Competition How did we promise to do that? A comprehensive and consistent reform package based on less and better targeted aidless and better targeted aid a refined economic approacha refined economic approach more efficient procedures, better enforcement, higher predictability and enhanced transparencymore efficient procedures, better enforcement, higher predictability and enhanced transparency shared responsibility between the Commission and Member Statesshared responsibility between the Commission and Member States

European Commission, DG Competition Was it comprehensive? Communication on InnovationAdopted 2005 Decision/Guidelines and Directive on SGEIAdopted 2005 Communication on Short Term Credit InsuranceAdopted 2005 Guidelines on Regional AidAdopted 2006 Guidelines on Risk CapitalAdopted 2006 Framework on Research, Development & InnovationAdopted 2006 Block Exemption on Regional AidAdopted 2006 Block Exemption De MinimisAdopted 2006 Guidelines on Environmental ProtectionAdopted 2008 Communication on Reference and Discount RatesAdopted 2008 Communication on GuaranteesAdopted 2008 General Block Exemption RegulationAdopted 2008

European Commission, DG Competition Was it consistent? Rules are based on the Balancing test and a more effects-based approach Rules are based on the Balancing test and a more effects-based approach Guidelines have the same structure Guidelines have the same structure Rules incorporate new assessment architecture Rules incorporate new assessment architecture

European Commission, DG Competition How will the reform ensure 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

European Commission, DG Competition How is the new assessment architecture? Three-stream system: Guidelines General Block Exemption Standard assessment Detailed assessment

European Commission, DG Competition How will the General Block Exemption simplify our lives? GBER 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 articulated and implemented by Member Statesfor which assessment criteria can be clearly articulated and implemented by Member States Such aid can be granted by Member States without prior notification to the Commission

European Commission, DG Competition What kind of measures are covered by the General Block Exemption? GBER delivers a comprehensive and solid toolbox, in particular for SMEs GBER delivers a comprehensive and solid toolbox, in particular for SMEs 26 (up from 10) measures included in the GBER are available to SMEs, e.g. in the areas of 26 (up from 10) measures included in the GBER are 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

European Commission, DG Competition What is a standard assessment? The typical assessment under guidelines before SAAP The typical assessment under guidelines before SAAP Generally used for schemes Generally used for schemes

European Commission, DG Competition What is a detailed assessment? Refined economic approach: Balancing test spelled out on big individual cases Refined economic approach: Balancing test spelled out on big individual cases Idea: Disentangle the positive and negative effects resulting from the aid Idea: Disentangle the positive and negative effects resulting from the aid Only for cases where aid amounts are very high Only for cases where aid amounts are very high Information requested is normally information that the beneficiary should have Information requested is normally information that the beneficiary should have Detailed assessment does not necessarily imply opening of procedure or prohibition of the aid Detailed assessment does not necessarily imply opening of procedure or prohibition of the aid

European Commission, DG Competition Was did this reform bring? Consistent and comprehensive Consistent and comprehensive Better economic reasoning better targeted aid more Lisbon Better economic reasoning better targeted aid more Lisbon New three stream assessment architecture New three stream assessment architecture Simplification package to come … Simplification package to come … An evolution not a revolution!

European Commission, DG Competition Economic analysis in practice Some recent case experience Damien Neven Chief Economist 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.

European Commission, DG Competition Introduction Introduction Some insights after two years of implementation Some insights after two years of implementation Market failuresMarket failures Incentive effectsIncentive effects Distortions of competitionDistortions of competition Conclusion Conclusion Overview

European Commission, DG Competition Introduction Economic Rationale for state aid control Economic Rationale for state aid control Member states aim to foster own economic development by attracting investment. Member states aim to foster own economic development by attracting investment. They may also affect the competitive position of domestic firms in international markets They may also affect the competitive position of domestic firms in international markets Member states do not consider spillover effects on other countries (shift employment, rents, reduce investment abroad) Member states do not consider spillover effects on other countries (shift employment, rents, reduce investment abroad) Uncoordinated actions may degenerate in excessive support Uncoordinated actions may degenerate in excessive support But state aid can still contribute to sound public policy objectives and hence should not be banned per ser But state aid can still contribute to sound public policy objectives and hence should not be banned per ser

European Commission, DG Competition Introduction Introduction Less and better targeted aid: enhance effectiveness of state aid by striking a better balance between Less and better targeted aid: enhance effectiveness of state aid by striking a better balance between benefits of state aidbenefits of state aid efficiency rationales: correcting market failures equity 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 presumption about the level of aid Economics is about better targeted aid – no presumption about the level of aid

European Commission, DG Competition Balancing test 1.Is the aid measure aimed at a well-defined objective of common interest? 2.Is the aid well designed to deliver the objective of common interest ? In particular, does the proposed aid address a market 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 behaviour of firms?Is there an incentive effect, i.e. does the aid change the behaviour of firms? Is the aid measure proportional to the problem tackled, i.e. could the same change in behaviour be obtained with less aid?Is the aid measure proportional to the problem tackled, i.e. could the same change in behaviour be obtained with less aid? 3.Are the distortions of competition and effect on trade limited, so that the overall balance is positive?

European Commission, DG Competition Implementation 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 cases In cases So far mainly in the field of R&D&I (Neoval, Soitec, Homes, TVMSL, Bernin, Osiris, ITP, Genesis,, Maxssimm, Quero, Minimage, VHD, LowCo2motion, H2E, ADNA …) So far mainly in the field of R&D&I (Neoval, Soitec, Homes, TVMSL, Bernin, Osiris, ITP, Genesis,, Maxssimm, Quero, Minimage, VHD, LowCo2motion, H2E, ADNA …) Training aid cases Training aid cases

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

European Commission, DG Competition Balancing A balancing exercise requires a common framework to evaluate the elements being weighted A balancing exercise requires a common framework to evaluate the elements being weighted Analyse the impact that state aid has on the welfare of all stakeholders (recipient, competitors, input suppliers, consumers) Analyse the impact that state aid has on the welfare of all stakeholders (recipient, competitors, input suppliers, consumers) Aid changes the incentives and constraints of the recipient (Induces entry, delays or accelerate exit, expands output, R&D) Aid changes the incentives and constraints of the recipient (Induces entry, delays or accelerate exit, expands output, R&D) Which triggers changes in the strategy of competitors (output, investment, R&D) Which triggers changes in the strategy of competitors (output, investment, R&D)

European Commission, DG Competition Objectives of common interest Can be formulated comprehensively in terms of efficiency (does is contribute to higher output/income) and/or equity (how is distributed) Can be formulated comprehensively in terms of efficiency (does is contribute to higher output/income) and/or equity (how is distributed) Efficiency is analysed in terms of market failures Efficiency is analysed in terms of market failures Equity Equity Are positive effect felt in less developed regions ?Are positive effect felt in less developed regions ? Do socially disadvantaged groups benefit ?Do socially disadvantaged groups benefit ? Potential trade-offs Potential trade-offs

European Commission, DG Competition Market failures Not a reference to perfect markets Not a reference to perfect markets Rather a set of factors which lead firms to make incorrect decisions from a public policy prospective Rather a set of factors which lead firms to make incorrect decisions from a public policy prospective Positive externalities/knowledge spill-overs Positive externalities/knowledge spill-overs Imperfect and asymmetric information Imperfect and asymmetric information Inability to credibly commit/convey information => inadequate fundingInability to credibly commit/convey information => inadequate funding Incomplete contracts => coordination problemsIncomplete contracts => coordination problems Network effects, self fulfilling expectations => coordination problemsNetwork effects, self fulfilling expectations => coordination problems

European Commission, DG Competition

Market failures Market failures Some misunderstanding. E.g. risk Some misunderstanding. E.g. risk Careful consideration of underlying principles (e.g. pecuniary external effects) Careful consideration of underlying principles (e.g. pecuniary external effects) Validation remains crude Validation remains crude Frequent environmental externalities Frequent environmental externalities Government failures Government failures

European Commission, DG Competition Incentive effect Incentive effect: does the aid change the behaviour of the firm? Incentive effect: does the aid change the behaviour of the firm? Counterfactual: what would the company do without aid? Counterfactual: what would the company do without aid? Indicators : Indicators : Net present value (internal documents, business plans, project finance analysis)Net present value (internal documents, business plans, project finance analysis) Probability of success ? Different scenarios. Fall back option in case of failureProbability of success ? Different scenarios. Fall back option in case of failure critical probabilities of successcritical probabilities of success Cost of capitalCost of capital

European Commission, DG Competition Incentive effects Financing constraints Financing constraints Internal ? Scope for abuseInternal ? Scope for abuse External ? Bank loans and equityExternal ? Bank loans and equity Confidence in the numbers presented by the parties Confidence in the numbers presented by the parties But improvements in business plans But improvements in business plans Reports from analysts, banks Reports from analysts, banks Marginal effect of public support on overall financial prospects Marginal effect of public support on overall financial prospects

European Commission, DG Competition Distortions of trade and competition General concern about dynamic incentives. Rents are allocated by governments rather than competition General concern about dynamic incentives. Rents are allocated by governments rather than competition Effects on competitors, which in turn respond and affect market outcomes : reduce output, RDI, investment - Particular concern for effects across borders Effects on competitors, which in turn respond and affect market outcomes : reduce output, RDI, investment - Particular concern for effects across borders Effects on employment (and more generally input markets) in other members states Effects on employment (and more generally input markets) in other members states Focus on the competitors and input suppliers. Effects on consumers as secondary criteria Focus on the competitors and input suppliers. Effects on consumers as secondary criteria

European Commission, DG Competition Distortions of trade and competition The tool box of competition economics is useful to understand and evaluate the effects on competitors and market outcomes The tool box of competition economics is useful to understand and evaluate the effects on competitors and market outcomes Market definition to understand which competitors are affected (substitution between products) Market definition to understand which competitors are affected (substitution between products) Misleading to suggest that because state aid control is about state competition and disciplines in the internal market, distortions of competition among firms should not be the focus Misleading to suggest that because state aid control is about state competition and disciplines in the internal market, distortions of competition among firms should not be the focus Interactions among states take place through firms and markets Interactions among states take place through firms and markets

European Commission, DG Competition Concluding Important progress – learning Important progress – learning Transparent trade-offs Transparent trade-offs Beware of outcomes – self selection Beware of outcomes – self selection Complementarity with procedural reform Complementarity with procedural reform

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

European Commission, DG Competition PROCEDURAL REFORM : PROCEDURAL REFORM : THE ROAD TO SIMPLIFICATION The New Approach to State Aids: Recent reforms under the SAAP and next steps, Brussels, 21 November Barbara BRANDTNER Harold NYSSENS

European Commission, DG Competition 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

European Commission, DG Competition A MUTUALLY AGREED PLANNING (MaP) A STAGED PROCEDURE FOR COMPLAINTS AGREED SUSPENSION OF THE PROCEDURE PREDICTABILITY EFFICIENCY TRANSPARENCY I- A BEST PRACTICES CODE

European Commission, DG Competition ENHANCED PRE-NOTIFICATION CONTACTS STREAMLINING INFORMATION EXCHANGE MEETING DEADLINES - ENFORCING EXISTING PROCEDURAL MEANS PREDICTABILITY TRANSPARENCY I- A BEST PRACTICES CODE EFFICIENCY

European Commission, DG Competition PUBLICATION OF NOTIFICATION SUMMARIES STATE OF PLAY MEETINGS BETTER INFORMATION OF COMPLAINANTS PREDICTABILITY EFFICIENCY TRANSPARENCY I- A BEST PRACTICES CODE

European Commission, DG Competition SWIFT APPROVAL OF STRAIGHTFOWARD CASES : SAFE HARBOURS; EXISTING PRECEDENTS CLEAR SAFEGUARDS AND EXCLUSIONS MERGER PRECEDENT SIMPLIFICATION PREDICTABILITY TRANSPARENCY II- A SIMPLIFIED PROCEDURE

European Commission, DG Competition PRE-NOTIFICATION CONTACTS SUBMISSION OF COMPLETE NOTIFICATION ACCELERATED TIME LINE OF 1 MONTH SIMPLIFICATION PREDICTABILITY TRANSPARENCY II- A SIMPLIFIED PROCEDURE

European Commission, DG Competition ILLUSTRATIVE LIST OF POTENTIAL CANDIDATES PUBLICATION OF NOTIFICATION SUMMARIES DETAILED STEPS SIMPLIFICATION PREDICTABILITY TRANSPARENCY II- A SIMPLIFIED PROCEDURE

European Commission, DG Competition GENUINE PRIVATE ENFORCEMENT AT NATIONAL LEVEL PREVENTING ILLEGAL AID, RECOVERY, DAMAGES, INTERIM MEASURES BASED ON SETTLED CASE-LAW GUIDANCE COOPERATION III- THE ENFORCEMENT NOTICE

European Commission, DG Competition STREAMLINED EXCHANGE BETWEEN COMMISSION AND COURTS REQUESTS FOR INFORMATION - OPINIONS BASED ON ANTITRUST PRACTICE GUIDANCE COOPERATION III- THE ENFORCEMENT NOTICE

European Commission, DG Competition 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

European Commission, DG Competition New Challenges The Financial Crisis Blanca Rodriguez The new approach to State Aid 21 November 2008

European Commission, DG Competition Summary 1. Recent History of State Aid control in the banking sector: August 2007-September September 2008: Intensification of the banking crisis and need for adapted responses 3. New framework: Art 87 3 b and the banking Communication 4. The practice developed so far: Case law, figures and benchmarks 5. What lays ahead: Review and restructuring phase 6. Conclusion

European Commission, DG Competition Recent History August 2007-September Individual cases in a few Member States 2. Northern Rock (UK), Sachsen LB(G), IKB (G), WestLB (G), Bayern LB (G), Roskilde (DK) 3. Calls for a new legal basis : Article 87 3b)… 4. …use of the classical legal framework: Article 87 3 c) and Rescue/Restructuring assessment 5. But we act fast

European Commission, DG Competition September 2008… 1. Intensification of the crisis affecting fundamentally sound banks, systemic banks 2. Structural measures potentially going beyond the usual 6 months rescue phases 3. New forms of State intervention: General rescue schemes rather than measures aimed at individual banks 4. Different forms of State interventions: guarantees, recapitalization, purchase of assets….

European Commission, DG Competition A new framework… 1. A different legal basis allowing exceptional emergency measures = Art 87 3 b) 2. New Guidance: Banking Communication 3. The 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

European Commission, DG Competition The practice so far… 1. Some figures: 21 rescue schemes under review of which 11 already approved, and a number of individual measures in benefit of specific banks also authorized 2. Common benchmarks developed by this new case law: - Eligibility: subsidiaries of foreign banks, systemic branches -6 months as normal duration of schemes with review clauses -Limitations on the issuance windows for guarantees, limitations in the maturity of the debts (3 years) -Minimum remuneration of capital…

European Commission, DG Competition The near future 1. In 6 months: Review of the measuresReview of the measures Notification of restructuring plan for beneficiary entitiesNotification of restructuring plan for beneficiary entities 2. Assessment of the adequacy of the measures and of their distortive effects

European Commission, DG Competition Conclusion State aid rules are part of the solution, not part of the problem! Thank you very much l

European Commission, DG Competition Outlook Herbert Ungerer Deputy Director General DG Competition European Commission

European Commission, DG Competition

No subsidy races between Member States

European Commission, DG Competition Challenges The crisis The crisis Energy/Climate change, R&D&I, Risk Capital, Regional development Energy/Climate change, R&D&I, Risk Capital, Regional development SMEs SMEs

European Commission, DG Competition Essentials Speed Speed Discipline Discipline Targeting Targeting

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