Position on Fitness Check of 2012 State Aid Modernisation Package, Railways Guidelines and short-term Export Credit Insurance

The European Commission launched a fitness check of State aid modernisation, the railways guidelines and the short-term export credit insurance communication to check whether the rules have actually worked in the way intended and are fit for their purposes.

The Lithuanian Free Market Institute (LFMI) welcomes the European Commission‘s (EC) fitness check of the 2012 State Aid Modernisation package and the in-depth analysis and evaluation of the state aid rules in an open dialogue with stakeholders.

State Aid Rules play an important role in ensuring competition in the internal market as they ensure a level playing field for all enterprises in the internal market, regardless their origin or place of establishment. Therefore, state aid must be transparent and justified. State aid rules provide the necessary framework to ensure efficient public resource spending as well as restricts public authorities from unjustifiably intervening into the market.

The EC’s role is to ensure that efficient functioning of the EU internal market and fair competition would remain one of the core goals State aid rules aim at delivering. Given the peculiarities of market functioning and fair competition, it is key to maintain that State aid would be an exception rather than a common practice. In this sense, the fact that some Member States provide State aid to deliver EU policies is not sufficient to justify a wide application of State aid.

State aid modernisation is to be constructed in such a way as to prohibit or at least prevent Member States from unjustifiably financing enterprises owned and (or) controlled by the state.

In order to obtain the set goals of State aid modernisation the following principles should be met and promoted:

1) market-based economy, promotion of private commercial activities;
2) prohibiting public institutions establishing and pursuing commercial activities themselves;
3) efficient public spending;
4) prohibiting in-house transactions (transactions between state owned and controlled undertakings);
5) transparent ex-ante and ex-post assessment of State aid compatibility;
6) transparency of amounts of support given to any undertaking;
7) stricter enforcement.

When considering granting state aid to selected market participants, it must be kept in mind, that private undertakings may be supported by horizontal or vertical measures. Horizontal measures imply the reduction of regulations. Such measures benefit all market participants as they reduce the costs of business activities and overall ensure the efficient functioning of the internal market and fair competition. Vertical measures, such as state aid, imply support granted on a discretionary basis using state finances. Such measures potentially distort competition and the functioning of the market as companies that have been granted state aid have a competitive advantage and do not take market risks. Moreover, the application of vertical measures may affect the incentives of engaging in economic activity.

Deregulation of the business environment would allow all entities to benefit from such support as their business costs would decrease. Thus in order to ensure the efficient functioning of the market, EU institutions should encourage Member States to use horizontal measures, rather than State aid to support businesses.
In-house transactions (transactions made between contracting organisations and companies controlled by contracting organisations without applying public procurement rules) must also be considered under State aid rules. In-house transactions intersect between internal market, competition and public procurement rules, and they potentially impede competition in the market and allow avoiding the assessment under the State aid rules.
Moreover, it is evident that many Member States are reluctant to notify state aid to the EC, and, so far, no culture of discipline to respect a ‘stand-still’ obligation could be claimed. In order to achieve a higher level of efficiency and transparency the EC should apply additional measures to monitor and sanction Member States for non-compliance of the prior notification rules.

Even when Member States pursue their public policy aims through state aid by justifying its necessity arguing that particular support is necessary to achieve EU policy objectives, such aid should be assessed comprehensively under state aid rules avoiding formalistic and declaratory decisions.

Many EU public policies (e.g. energy and climate change) put an obligation to Member States to act in a certain manner. This creates a paradoxical situation, where the Member States are incentivised to act themselves by interfering, rather than improving market conditions and removing barriers for private companies to contribute to the public policy objectives through market mechanisms. In order to ensure greater transparency and efficient functioning of the market, the EC should encourage Member States to propose more market-based measures to pursue EU or national public policy objectives when assessing the necessity and proportionality of state support.
Furthermore, the initiative to focus EC’s enforcement measures on the most problematic cases would imply broadening the range of aid measures that are exempt from the notification obligation. In such a way, economic nationalism will be programmed and will open ways to support state-owned and (or) state-controlled companies. In the long-term, this would increase legal and economic uncertainty for companies denied of state aid.

State aid grants selected market participants with economic advantages that distort competition. The modernisation of State aid rules should not compromise between the general prohibition of State aid and eagerness for prioritisation of aid control with the higher impact on internal market.

Full LFMI position on Fitness Check of 2012 State Aid Modernisation Package, Railways Guidelines and short-term Export Credit Insurance can be found here.