1. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY 1 Bölgesel Rekabet Edebilirlik Operasyonel Programı’nın Uygulanması için Kurumsal Kapasitenin Oluşturulmasına Yönelik Teknik Yardım Technical Assistance on Institutional Building for the Implementation of RCOP in Turkey This project is co-financed by the European Union and the Republic of Turkey PROJECT DEVELOPMENT & APPRAISAL PART II “Project Development under IPA” 7 February 2013 Alberta Criscuolo – Senior State Aid Expert Presentation 1 Introduction to state aid

2. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY 2 State aid is a measure by which a Public Authority grants an advantage to one or more “undertakings”over all the others. Article 107 paragraph 1 TFEU – gives the definition of what must be considered a State aid. This article indicates 4 cumulative elements. If a measure contains all the 4 elements, the measure is a State aid. If one of the 4 elements is missing, the measure is not State aid. CONSEQUENCES

3. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY 3 FIRST CONSEQUENCE: If it is NOT State aid, then the public authority DOES NOT HAVE TO RESPECT State aid rules, but only IPA or STRUCTURAL FUNDS rules. Thus, the State has more freedom. NO AIDONLY IPA RULES

4. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY 4 SECOND CONSEQUENCE: If it is State aid, the measure is, IN PRINCIPLE, prohibited. It cannot be implemented. HOWEVER, Article 107 TFEU paragraphs 2 and 3 indicate under which conditions a State aid measure can be deemed compatible with the common market and therefore implemented. If it is State aid, then the public authority will have to respect BOTH: IPA rules and State aid rules. Thus, the State has less freedom. STATE AID IPA RULES STATE AID RULES

5. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Article 107.2 TFEU : automatically compatible: aid having social character, granted to individual consumers, provided that ….; aid in case of damage caused by natural disasters or exceptional occurrences, if (see Commission practice); aid granted to the economy of certain areas of the Federal Republic of Germany, in so far as…

6. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Article 107.3 TFEU: may be considered to be compatible: (a) aid to promote the economic development of areas where the standard of living is abnormally low …; (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; (c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest; (d) aid to promote culture and heritage conservation where …..

7. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY In order to understand WHAT IS AN AID, in principle prohibited, one must understand the aim of EU competition law. Competition law aims at ensuring undistorted competition on the “market”. Undistorted competition should ensure fair play among efficient economic operators and, therefore, the best quality good/service at the best price for the EU citizens.

8. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Quality/ Price Quality/ Price Quality/ Price competition

9. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY FIRM (1): BENEFITS HAVE TO COVER ALL THE COSTS + RETURN FIRM (2): BENEFITS HAVE TO COVER LESS COSTS (REAL COSTS – AIDED COSTS) + RETURN BENEFITS FIRM (1): MARKET PRICE FIRM (2):PRICE ARTIFICIALLY LOWER THAN MARKET PRICE PRICE FIRM (1): ALL COSTS MUST BE COVERED BY BENEFITS FIRM (2): NOT ALL COSTS COVERED BY BENEFITS: PART OF COSTS COVERED BY THE AID COSTS Prices offered by competitors

10. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Firm 1/ aid Non efficient Firm 2/ No aid Efficient Firm 3/ No aid Efficient Distorted competition competition Benefits must NOT cover costs Benefits must cover costs MARKET Economic Activity

11. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Given the aim of competition law: 1. State aid is in principle prohibited; 2. the existence of State aid is an objective (economic) notion, independent of legal formalities. The only relevant thing is the MARKET and fair conditions of competition. If there is a market, where economic actors trade goods or services, there must be undistorted competition. It does not matter if the actors are not formally “enterprises”.

12. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY If it is State aid, it distorts competition and it must be prohibited. However, if the disadvantage of distorting the competition is counterbalanced by the pursuing of an objective of common interest (regional development, R&D&I, environment protection), the State aid – within certain limits – can be authorized. Remember paragraphs 2 and 3 of article 107 of TFEU.

13. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY ARTICLE 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, in so far as it affects trade between Member States, be incompatible with the internal market.

14. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY THE FOUR ELEMENTS 1. Any aid (ADVANTAGE); 2. granted by a Member State or through State resources in any form whatsoever (IMPUTABILITY TO THE STATE) 3. which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods (SELECTIVITY) 4. in so far as it affects trade between Member States (EFFECT ON TRADE)

15. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY 1. THE ADVANTAGE: “Aid is any advantage that the undertaking (firm or other entity) could not obtain according to the market” ; “The advantage covers a cost that the undertaking (firm or other entity) must bear in the normal running of its business”. Does the form of the aid matter ? Transfer of money, tax exemptions, discount on a good or a service price ? Does the legal form of the beneficiary matter ? Private or public, profit vs no profit ?

16. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Who can receive State aid ? AN ENTERPRISE. in competition with other entities. THUS, whoever carries out an ECONOMIC ACTIVITY is an ENTERPRISE. ECONOMIC and FUNCTIONAL APPROACH: enterprise is an entity which operates in a market, selling services or goods in competition with other entities. THUS, whoever carries out an ECONOMIC ACTIVITY is an ENTERPRISE. Please read the SMEs DEFINITION economic activityirrespective of its legal form “An enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form. This includes, in particular, self-employed persons and family businesses engaged in craft or other activities, and partnerships or associations regularly engaged in an economic activity.”

17. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY SEE ALSO the “Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest (SGEI)” http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2012:008:0004:0014:EN:PDF Point 2.1.1 - a) the status of the entity under national law is not decisive; b) the application of the State aid rules as such does not depend on whether the entity is set up to generate profits; c) the classification of an entity as an undertaking is always relative to a specific activity. in as much as they are engaged in economic activity CONSEQUENCES: hospitals, schools, social security entity; public employment offices CAN, in as much as they are engaged in economic activity, BE ENTERPRISES.

18. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY WHAT IS NOT AN “ECONOMIC ACTIVITY” ? In principle In principle, do not constitute economic activities: A) matters which are intrinsically prerogatives of the State (such as ensuring internal and external security, the administration of justice, the conduct of foreign relations and other exercises of official authority); B) services such as national education and compulsory basic social security schemes (functioning on the principle of solidarity, non-profit making and where the benefits paid are not proportional to the amount of the compulsory contributions).

19. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Through the grant there is an advantage to an enterprise, but (second element) 2. It must be imputable to the State. A measure is imputable to the State when the State (meaning a Public Authority or an entity/enterprise on which the PA exercises its control) decides to grant the aid AND finances it through State resources: in a positive or negative way.

20. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Advantage + Imputable to the State + 3. It must distort competition by favouring certain enterprises or production. In the State aid policy the requirement of “distorting the competition” is quasi automatic. There are no thresholds. Even a potential distortion has to be taken into account. CONSEQUENCE: Even little aids or aid granted to very small firms may fall under the provisions of article 107.1 of the Treaty..

21. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Advantage+ Imputable to the State + Distorts competition + 4. It must affect trade between Member State. Like for the distortion of competition, the requirement “it affects trade” is almost automatically met. It is almost a presumption. Nevertheless, there have been cases where the European Commission and the Court have considered that trade was not affected.

22. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY Point 40 of the Commission’s Communication on SGEI explaines what is a “local activity”, such as:  swimming pools to be used predominantly by the local population;  local hospitals aimed exclusively at the local population; local museums unlikely to attract cross- border visitors;  local cultural events, whose potential audience is restricted locally.

23. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY TO BE STATE AID ALL ELEMENTS MUST BE PRESENT: Advantage + imputable to the State + Distorts competition by being selective + Affects trade between Member States. IF ONE OF THESE ELEMENTS IS NOT PRESENT, THE SUPPORTIVE MEASURE IS NOT A STATE AID MEASURE.

24. This project is co-financed by the European Union and the Republic of Turkey REPUBLIC OF TURKEY MINISTRY OF SCIENCE, INDUSTRY AND TECHNOLOGY If it is State aid, THEN you decide whether A) Ensure its compatibility with the internal market (regulations and guidelines based on Treaty’s article 107, paragraphs 2 and 3). This implies the respect of certain conditions regarding, among other, the possible beneficiaries and the amount of aid. OR A) Deny that it is State aid.