State aid in new members: a major headache

Date: 25/11/04

By Alan Riley

STATE aid is hardly uncontroversial among the 'old' EU-15 as the European Commission tries to stop aid-addicted national governments propping up their favoured corporate bankrupts “just one last time”.

With the enlargement of the Union, the Commission will see a lot more pressure for state aid and industry will suffer far greater legal hazard.

The core of the central and eastern European (CEE) state-aid problem stems from their command economy past.

The public sector of the CEE states was significantly larger than in western Europe and, as a consequence, aid has been endemic. The tradition of aid has been compounded by some CEE states engaging in bidding wars against one another for foreign direct investment (FDI), with aid as one of the chief weapons.

The burden is all the heavier because, prior to enlargement on 1 May, the CEE national competition authorities (NCAs) were responsible for state-aid supervision and that supervision was weak.

The NCAs found themselves under pressure from their own governments to clear aid to attract FDI projects and to accept debt wipe-off schemes for loss-making state industries.

As a consequence of the aid tradition, the aid bidding wars and lax surveillance of pre-accession state aid, the Commission, which obtained exclusive jurisdiction over state aid on 1 May, is faced with a sizeable increase in state-aid work.

Its competition directorate-general (DG), already significantly under-resourced, is facing a case load increase of more than 40%. Even though the department has recruited a significant number of new officials from the CEE states, it must be open to question how the EU executive will manage this increase in state-aid work, along with all the other demands on its resources. Nor is this upsurge likely to be short term: as FDI pours into the CEE states, as more western firms enter CEE markets and as more CEE firms compete with western firms, the state-aid issue will result in more notifications - or complaints regarding illegal state aid - to the Commission.

But there is a strong argument for saying that the workload problems faced by the Commission pale in comparison to the potential legal insecurity faced by businesses operating in the CEE states.

In all earlier enlargements, the rule that was applied was that aid granted prior to accession was deemed to be 'existing aid' and, as such, the Commission could only modify the aid measure with effect for the future and existing aid could not be recovered.

This is not the case for the accession of the CEE states. There is a closed list of aids deemed 'existing aids', where the measure was approved by the NCAs and the Commission did not object to the measure. That list closed in November 2002. Outside that list, and aside from transitional and special regimes, the rule is that aid is new aid if granted after 10 December 1994.

Hence, notification of an aid is required to ensure that the aid is lawful and, if aid is not notified, the Commission can recover the aid (with interest), even though it was granted prior to accession.

This rule has had the effect of compounding the Commission's state- aid burden, with competitors filing complaints and those in receipt of aid filing notifications in the run up to accession. In addition to Commission investigation and recovery orders, there is also the possibility post-1 May of national courts in the CEE member states granting recovery orders or injunctions at the behest of competitors to stop future payments of aid.

For foreign investors, the retroactive state-aid regime operating in the CEE states will require very heavy due diligence of potential acquisitions to ensure that there are not significant non-notified state-aid liabilities attached.

In a case involving aid to Czech banks in the mid-1990s, the Commission took the view that the aid measures would not apply after accession and, therefore, were beyond its jurisdiction.

So it may be that the harshest edges of the retroactive application of the state-aid rules are to be blunted in some cases.

But firms would be unwise to rely on Commission discretion. There are substantial legal arguments over the extent to which such a retroactive rule can be upheld, in terms of legal certainty and even constitutional rights.

For instance, how will the European Court of Justice view such a retroactive application of the law?

Executives will not want to go down the road of costly and uncertain litigation. They will want a speedy solution now.

This solution will require due diligence, plus contact with and notification to the Commission.

The consequence will be even more notifications to DG Competition to ensure protection of valuable FDI.

The Commission, in response, is likely to be tempted to adopt more state-aid block-exemptions to generate greater legal certainty and reduce the number of notifications.

On reflection, would it not have been better in the first place to have adopted the usual rule that 'new aid' which must be repaid dates only from accession and is not calculated retroactively?

A note to the Commission's teams currently negotiating with Bulgaria and Romania, perhaps?

• Alan Riley is a senior lecturer in European competition law at Nottingham Law School and an associate research fellow at the Centre for European Policy Studies, Brussels.

Article suggests that with the 2004 enlargement of the European Union, the European Commission is going to see a lot more pressure for state aid and industry will suffer far greater legal hazards.