The Community State Aid Action Plan Alena Zemplinerova, CERGEEI, joint working place Charles Univers

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The Community State Aid Action PlanAlena
Zemplinerova, CERGE-EI, joint working place
Charles University and Academy of Sciences

• The International Conference The Reform of
  ECand Greek Competition LawJune 1-2, 2007,
  National Bank of Greece, Athens

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Introductory remarks

• The EU's policy for controlling State aid is an
  integral part of the Union's Competition policy.
  State aid discriminates other firms and creates
  barrier to entry to the market and provides firm
  with market power
• State aid is prohibited by EC Treaty Article 87
• State aid granted in 2005 by EU-25 was estimated
  at 64 billion
• State aid is allowed by EC Treaty Article 87
• With trade liberalization and restructuring the
  pressures to provide state aids are increasing
  (non-tariff protection)
• Providers of state aid are governments,
  beneficiary of tax exemptions and investment
  subsidies are often multinational companies.
• State aid which is approved on national or
  European level must not be accepted by rivals on
  global markets (more cases are pending before the
  courts, international arbitrations or by WTO)

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Outline of presentation

• Problems with State aid control
• How European State Aid Action Plan tries to
  solve the problems
• Economic asessment of State aid

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(1) Problems with State aid control

• Aims of the state aid
• Efficiency consideration
• Promotion of equity (redistribution)
• Magnitude and number of cases
• 500 cases each year (300 notifications, 200
  complaints), 350 decisions, investigation is
  costly and lenghtly, high demands for expertise
• Big and complex cases and number of small cases
• Information asymmetry and transparency of aid
• Aid can be channeled off-budget
• Aid can take a variety of forms
• RD (through universities or military)
• infrastructural projects
• enterprise zones
• state aid provided to private enterprises through
  state enterprises or institutions or non-profit
  organizations
• advertising on State owned television
• legislation to protect market share
• verbal aid

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Rules and legal framework

• The Commission publishes continuously the
  criteria it uses when deciding about exemptions
  and compatibility ? The Treaty is complemented
  through an extensive number of legislative acts
  that provide for a number of rules of the legal
  framework for decisions (Regulations, Guidelines,
  Communications, Frameworks, Notices, Directives
  etc.). There are about 800 pages of these
  secondary rules ? the law is soft and flexible
• It creates not only uncertainty of businesses but
  also of state authorities about their legal
  position.
• In these legislative acts three main aid
  categories under Article 87 (3) can be
  distinguished Horizontal aid, Regional aid
  (Sometimes regional aid is placed in horizontal
  aid) and Sectoral aid.

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(No Transcript)
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(2) The State Aid Action Plan 2005-2009

• What should be achieved ?
• less State Aid
• better targeted state aid
• Less administrative costs
• Efficient enforcement of rules
• How it should be achieved?
• Focus on large and complex cases with
  cross-border effects
• economic assessment
• higher predictability and transparency
• shared responsibility between the Commission and
  Member States.

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What was done during 2005-2007?

• October 2005, the EC adopted new Regional Aid
  Guidelines
• Regional Block Exemption Regulation has been
  adopted to spare administrative costs with
  notifying small regional aid schemes.
• November 2005 Framework on Services of General
  Economic Interest
• July 2006 EC adopted the new Risk Capital
  Guidelines for SMEs (the first implementation
  of refined economic approach in a 'legislative'
  text)
• November 2006 new RD and Innovation Framework
  developing a refined economic approach to
  properly assess 'big' cases
• December 2006 EC adopted the new de minimis
  Regulation doubling the threshold to 200,000
  over 3 years, and setting a guarantee ceiling of
  1.5 million. It is assumed that this will
  diminish the bureaucratic burden of state aid
  control as these such aids do not have to be
  notified

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What is planned to be done during 2007-2009

• first draft of the Guidelines on environmental
  protection will be out very soon
• The major piece of legislation to simplify and
  consolidate existing block exemptions is expected
  by the issue of general block exemption as by
  mid 2008
• the general block exemption Regulation would
  exempt environmental aid, aid in the form of risk
  capital and exempting research and development
  aid (RD) in favor of large enterprises up to 50
  of project costs to companies carrying out
  industrial research.
• Block exemption regulations should simplify
  agenda and reduce the administrative costs and
  allow the Commission to concentrate on large and
  important cases

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(3) Economic assessment of the costs and Effects
of State Aid

• Effect on the economy in a long-term
• - distortion of incentives and strategic
  environment
• - rent seeking activities instead on productive
  activities
• - impact on state budgets and on level of
  taxation
• Effects on the firms receiving state aid
• - allows for anticompetitive behavior
• - creates comparative advantage
• - creates market power
• Effects on other firms in the same market not
  receiving aid
• - more efficient firms exit the market
• - effects on up-stream and down-stream markets

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Are distortions of competition balanced with the
reduction of market failure?
Benefits ?
Costs ?

• Correcting Market Failures
• Positive externalities
• Asymmetric information
• Provision of public goods
• Equity / Social Reasons
• Social and Economic Cohesion
• Economic adjustment

• Create Market Failures
• Create or strengthen Market Power (Dominant
  position)
• reduce dynamic efficiency
• Subsidy / tax competition
• Increase budget deficits / tax burden
• Reduce Fairness
• Administrative costs

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Concluding remarks

• Ex ante subsidy control and evaluation of its
  effects can help to prevent government failure
  and inter-state competition
• Application of general principles in concrete
  cases might not be straightforward and
  quantifications of effects and externalities can
  be costly ?Administrative costs of state control
  can rise
• Transparency of public budgets is improving
  efficiency of state aid
• Private enforcement of the competition laws may
  contribute to the transparency of the off budget
  state aid