Call for transparency in state aid

Date: 18/07/1996

By Tim Jones

ILLEGAL state aid to the manufacturing industry is eroding Europe's competitive edge and investigations into such subsidies must be opened to scrutiny outside the corridors of the European Commission, says a leading industrialist.

“We believe that state aid could be undermining the market structure of Europe and that is a major issue,” says Dirk Hudig, UK chemicals giant ICI's national manager for Belgium and chairman of the state aid working group at the European employers' federation UNICE.

In a recently published study, the group found that subsidies often encouraged recipient companies to drive down prices to such a level that smaller firms operating in the same markets were driven to the wall.

“We believe that aided investments tend to lead to price erosion because aided parties tend to be bailed out,” Hudig maintains.

“Studies have shown that some companies in capital-intensive sectors did not even earn the cost of capital. It is in that kind of competitive environment where the aided and the unaided are on a collision course, and it is this that lies behind the work of our group - trying to better understand how distortions of competition can be contained and reduced.”

Work already carried out by DGIV, the Directorate-General for competition, in clarifying the different types of state aid and procedures for investigating them has been valuable, says Hudig. But UNICE wants the Commission to go further and show in detail how the system works, how the rules are applied, how third parties are consulted, how to appeal against decisions and the rights of unaided firms to seek compensation.

“These all exist in bits and pieces in communications to member states, but it has never really been systematised.”

Hudig also wants what he calls the 'grey areas' of state aid policy to be made much clearer.

“There is a whole tranche of legitimate state aid which is being better defined by the Commission, but there are still quite a few gaps and the biggest one we are trying to get them to fill is that of guarantees,” he says, adding: “Sometimes guarantees are given which underwrite an entire project, even if they are economically viable.”

Providing guarantees for the huge debts incurred in infrastructure projects such as the high-cost Trans-European Networks programmes is one thing, but blatant subsidies to help finance the operating costs of a manufacturing company are quite another.

“Infrastructure is more neutral in terms of its competitive effects, but some of these are actual aids to manufacturing, operating aids; you make a loss and we will give you the money. What is much more common is guarantees on loans or those which underwrite the ability to raise money so the cost of capital is much lower,” says Hudig.

“We have asked for a regulation on procedures for state aid which would also define state aid, meaning that these grey areas would have to be dealt with.”

According to Hudig, this new clarity would not only be a help to the unaided companies which are keen to challenge decisions, but would also assist the firms receiving the subsidies.

“There have been cases when recipients have not been sure whether the aid they were receiving was legal or not and whether they would have to pay it back. Recipients need to be able to plan and have some security that the aid they are getting is legitimate,” he insists.

Hudig believes that the Commission and member states should use the 1989 Merger Regulation as a model for their state aid rules - mandating set times for decision-making as well as providing for third parties to take part in hearings. These are vital if companies with an opinion are to give their views.

“There is a culture not to blow the whistle, but if one is invited to comment, one does,” he says.

The Commission would also, through the participation of outside commentators from an early stage in the proceedings, be given an idea of the competitive effects of deciding in favour of an aid package.

“This is currently a problem for the Commission's services: how can they know the effects the decision will have on competition? We think this is not a legal issue but a commercial and economic one, so it needs to be given legal and economic tests. If there is overcapacity already, what would further state-aided capacity lead to? To what extent would that erode prices for which state-aided companies would have a buffer because their fixed costs would be down but the unaided companies would run into trouble fairly quickly, and so on?” asks Hudig.

He is quick to add, however, that “this is not a witch-hunt against aid as such but a plea to make it more transparent”.