Bid to curb firms subsidy shopping

Date: 29/05/1997

By Chris Johnstone

Karel van Miert is finalising proposals which would allow the European Commission to clamp down on subsidy shopping by multinational companies.

The Competition Commissioner's officials are working on a two-pronged approach to the problem.

The first proposal would force member state governments to seek clearance for heavily aided projects and risk the amounts being eroded, even though they would have been waved through in the past as not exceeding acceptable aid intensities.

Van Miert has already asked governments for their comments on the plan and is expected to present the proposed measure to fellow Commissioners before July.

The second strand of his attack is aimed at pushing down the levels of regional aid throughout the Union. Talks on this thorny issue are not expected to bear fruit before the autumn.

The issue of subsidy shopping - attempts by companies to play governments off against each other in a bid to land the most attractive package of incentives - blew up when French carmaker Renault announced the closure of its Belgian plant at Vilvoorde.

Renault argued that it had too much capacity to keep the Belgian plant open, only to reveal that it was simultaneously seeking subsidies from Madrid to expand one of its plants in Spain.

One issue still being discussed within the Directorate-General for competition (DGIV) and with member states is how big aid packages must be to qualify for increased scrutiny.

“Discussions are at a sensitive stage,” said one EU source this week, adding that Germany and Italy wanted a relatively high level of overall aid to spark a thorough investigation.

Legally, the Commission can adopt the new subsidy rules without approval from member states, but national officials believe it will resist the temptation to proceed regardless and rub them up the wrong way.

Ironically, the car manufacturing sector and other aid sensitive areas such as the production of man-made fibres and shipbuilding will not be covered by the proposed new measures, at least in the early stages.

Competition officials have backtracked from an initial plan to phase out specific aid rules for these sectors within six months of the new disciplines coming into effect.

Instead, the existing strict subsidy rules in these sectors will stay in place until the new regulations are judged to have proved themselves as a suitable replacement.

The change follows heavy lobbying by Europe's rayon and synthetic fibres industries, grouped together as the International Rayon and Synthetic Fibres Committee (CIRFS), against any relaxation of its subsidy rules - the synthetic fibres codes - which could damage the sector.

“Our view has always been that we are very exposed to state aids and we would not want to damage the existing discipline,” said CIRFS director-general Colin Purvis, whose organisation represents major producers such as France's Rhone Poulenc, the UK's Courtaulds, Axa Nobel and Italy's Montefibre.

The European industry lives in dread of new production capacity coming on stream which would worsen chronic overcapacity. It has forced the Commission's trade officials to scrutinise Turkey's subsidy regime for polyester fibres to ensure Ankara is living up to promises to bring them into line with General Agreement on Tariffs and Trade (GATT) rules. An independent assessment of the Turkish rules is due by the end of the year.

CIRFS is also pushing for careful Commission monitoring of central and east European aid to the sector.

Last year, Europe's synthetic fibre companies were working at 80&percent; of capacity, a heavy burden to bear for a capital intensive business. Demand was depressed, with EU clothing production down almost 4&percent; and textile production down 5&percent;. Deliveries of synthetic fibres fell by 3.8&percent; compared with 1995 levels in western Europe, and production was down 7.3&percent; as buyers began to run down the stocks they had built up a year earlier.

Strong exports, up 11.3&percent;, helped mitigate the situation, but the industry complains it is still faced with high prices for raw materials. The first months of this year have, however, seen a slight upturn in demand for synthetic fibres, with deliveries up 9&percent; in the first quarter compared with the depressed levels of 1996.