Gerry Sutcliffe MP

UK PRESIDENCY SEMINAR ON STATE AID

The reform of the Commission’s State aid rules is very important. Important to the UK. Important to the whole of Europe. Important to Governments. But also important for businesses and for consumers.

Reform matters not just to central Government - here and elsewhere -, but also to regional and local tiers of administration. Arm’s length Government agencies are affected as well. The Commission’s willingness to consult on their proposals, and to listen to feedback and act on such important reforms is most welcome.

We here in the UK welcome this initiative. And we support the thrust of the reforms.

For many years we have been strong supporters of the rigorous application by the Commission of State aid rules. We share the Commission’s desire to clamp down on subsidies which distort competition. This is because competitive markets are central to industrial innovation, which is vital for Europe’s future prosperity. And competitive markets are also needed to deliver a fair deal for consumers.

We want businesses able to compete on a level playing field. Without the distorting effects of unwarranted support altering the market. And confident that they can win new customers and new market share on the strength of their products, their services, and their skills. Rather than facing an uphill struggle against competitors with unfair advantages.

And we need empowered consumers who have the confidence and the knowledge to use their power in the markets to get the best deal. To avoid those who provide shoddy goods or poor service. And by doing so, spur firms to new heights – innovating, exploring new markets, and delivering for the consumer.

State aid allows business to be less responsive to customer demands. It can therefore reduce innovation, perpetuate poor quality and lead to loss of competitiveness. We need strong and enforceable State aid rules which prevent this from happening.

But the State aid rules have become too complex and intrusive:

· They impose disproportionate administrative burdens and delay for public authorities acting in ways which hardly distort competition at all.
· They catch very small, local-level Government activity which has no practical impact on cross-border trade.
· They obstruct flexible use of the non-profit sector to deliver Government objectives;
· They tend to treat as outright subsidies payments to companies which are designed to achieve social, cultural or environmental objectives and which confer little or no benefit on those that receive them. These payments aim to deliver behaviour that the market would not deliver and compensate for the costs that companies face in moving away from the market. True, they may have a subsidy element, because it is sometimes impossible to quantify the level of incentive necessary to shift behaviour, but they are not the same as pure subsidies and must be treated differently.
· And the rules are so convoluted that even officials who have devoted large parts of their careers to them, let alone Ministers like me, struggle to master them completely.
· This complexity leads to aid not being notified, even though it is distortive. It also leads to projects being abandoned for fear of State aids problems, even when there is no likely distortion of competition arising.

The answer has to lie in three key steps.

Firstly, in simplification of the rules.

Secondly in better economic analysis of proposed aids, as the Commissioner proposes.

And thirdly in focusing the attention and the powers of the Commission on the most distortive aid.

We are still consulting internally on our response to the Commission’s Action Plan, but that response is likely to include elements of the four following major pillars of change:

Until the very wide interpretation of what constitutes State aid can be changed in the European Courts, the Commission must focus its attention on substantially extending the State aid Block Exemptions.

If a state payment is a State aid, only a Block Exemption prevents it needing to be notified to the Commission in Brussels, with all the administrative burden that entails. Widening Block Exemptions will allow swathes of activity currently caught by the rules or subject to legal uncertainty, but which have minimal effect on competition, to no longer need to be notified.

The UK wants to see the Block Exemptions cover more small-scale aid under the De Minimis rule. We would like to see the rules on cumulating different “de minimis” aids made much easier to administer.

We want to see Block Exemptions for many of the innovation activities of universities and research bodies.

We want to see wider exemption of cultural and heritage aids.

The position of many health and education facilities similarly remains unclear and needs to be clarified. If it proves impossible, for example, to maintain the line (which we support) that publicly funded hospitals and other deliverers of health services are not caught by the State aid rules at all, the Commission should block exempt public funding for health services provided to meet a public need.

The Commission has ruled that there is normally no State aid in the development of infrastructure. The benefit to end users of the infrastructure is generalised and unquantifiable. The intermediaries used to develop the infrastructure will also not be in receipt of State aid if chosen by competitive tender. We think this is correct.

This principle could be extended to cover other areas. Wherever the state is paying for something the market will not or cannot deliver, where the benefit to end users is likely to be generalised or De Minimis and where the intermediary is selected competitively, there will be little or no distortion of competition.

State aid for the supply of small business support infrastructure and services could be substantially simplified in this way. So could some State aid for regeneration of land in deprived urban areas for example.

For those measures which remain, the Commission could demand that Member States analyse the impact of a spending measure on the structure of competition in markets before they make new spending commitments.

Our Office of Fair Trading is currently examining how this might be done more systematically in the UK. Sir John Vickers will say more about this after the break. If we can make this work, notifications could then contain a market impact analysis for each proposed aid, identifying whether serious distortion of competition would be likely to result.

Member States might decide to have this done by an independent body or independent competition authority, so that it had maximum credibility. The Commission would have to retain the flexibility, however, to conduct its own market assessment in the event of a complaint or if it felt that the assessment performed by the Member State was faulty or inadequate. We are still thinking through how this might work in practice.

The Commission should then build into its guidelines and frameworks criteria for what constitutes serious distortion of competition. It could give greater weight in this way to the effect of aid as well as the nature of the payment. Only those aids likely to result in substantial distortion of competition would then need to be investigated further.

But, there would have to continue to be a presumption against approval of highly distortive aid.

There must be equality of treatment between the public, private and not-for-profit sectors when it comes to State aid. Too often Commission practice has tended to ignore potential State aid problems when an economic activity is performed in or by the public sector, but identify State aid difficulties as soon as it is conferred to a private or not-for-profit body.

This can be illogical. Sometimes an activity is likely to be more distortive of competition when performed in the public sector with no constraint and often no possible competition.

The State aid rules must be neutral on forms of ownership. Rather than discriminating in favour of public ownership, problems must be resolved transparently through Block Exemptions and approvals that apply equally to private and not-for-profit solutions.

It cannot be right, for example, that the State aid rules encourage Member States to tie up capital in the public sector for land regeneration, when it would cost less to incentivise the private sector to achieve the same result. These decisions must be left to Member States, without bias in the EU rules.

We will, of course, flesh out these ideas in more detail in our formal reply to the Commission. Our consultations may lead to changes of emphasis and new ideas coming through and we will have a number of other specific comments to make on areas covered in the Action Plan.

Overall, though, our position is close in spirit to that of the Commission. The State aid rules must be more effective in tackling subsidies which seriously distort competition and less intrusive where threats to competition are minor. And the burden of administration must be proportionate to the risk involved.