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State Aid for Regional Development & SMEs: An Assessment Prof P. Nicolaides Themes Amounts and ranking Where do MS appear to get it wrong? Difficulties with concepts/definitions A case study on SME definition Total aid (excl rail), 2014 2014: EUR 101.2 billion [0.72% of GDP] 2013: EUR 62.7 billion [0.5% of GDP] 2012: EUR 66.7 billion Aid objectives & changes in volume of support Environment & energy: EUR 43.6 billion Regional aid In 2014 prices 2012 Total amount of aid Blockexempted aid 2013 2014 12,537.9 13,124.6 15,437.1 6,213.9 6,181.6 9,776.1 SME aid (including risk capital) In 2014 prices 2012 Total amount of aid Blockexempted aid 2013 2014 4,283.2 3,682.0 3,856.2 1,904.6 1,643.2 1,606.9 Block exempted aid (2014) Total Amount (billion) 27.2 Regional Environment/energy Research Employment 9.8 7.7 5.0 1.7 SME 1.6 ECA annual report on EU budget Source of irregularities: • Public procurement • State aid Types of irregularities in state aid: • No incentive effect • Ineligible costs • Aid in excess of maximum ceilings ECA special reports on financial instruments for SMEs Special report 19/2016: Implementing the EU budget through financial instruments – lessons to be learnt from the 20072013 programme period Special report 8/2015: Is EU financial support adequately addressing the needs of micro-entrepreneurs? Special report 7/2014: Has the ERDF successfully supported the development of business incubators? Special report 2/2012: Financial instruments for SMEs cofinanced by the European Regional Development Fund Cont. Main comments concern the following: • Absence of well-defined policy objectives • Low leveraging • Aid not necessary • Ineligible costs • Non-compliance with maximum aid ceilings Difficult issues concerning regional aid Incentive effect for ad-hoc aid to LE: what is “material” increase? [Art 6] Must MS inform beneficiaries that aid is granted on basis of GBER? [Art 9] What is “fundamental” change in production process? How to verify that an activity was not closed in previous 2 years down or will not close down in next 2 years [Art 13] Is diversification into new activity = diversification into new product? Aid to large enterprises Initial investment GBER RAG 2(49) setting-up of new establishment, extension of capacity of existing establishment, diversification of output of establishment into products not previously produced in the establishment or fundamental change in overall production process of an existing establishment 20(h) setting-up of new establishment, extension of capacity of existing establishment, diversification of output of establishment into products not previously produced in the establishment, or fundamental change in overall production process of an existing establishment Initial investment 2(51) setting up of new establishment, in favour of new or diversification of activity of economic activity establishment, under condition that new activity is not same activity as activity previously performed 20(i) setting up of new establishment, or diversification of activity of establishment, under condition that new activity is not same activity as activity previously performed Compatible aid [Art 107(3)(c), aid to large enterprises] 15 granted for initial investments that create new economic activities, or for diversification of existing establishments into new products or new process innovations Notifiable aid [“c” areas] Art 14 shall only be granted for initial investment in favour of new economic activity 24 granted to large undertaking to diversify existing establishment into new products Difficult issues concerning SMEs What is “fundamental” change in production process? Definition of SME [especially in case of spin-off or JV with large university where university has 51% share] Art 21(13): Risk finance shall be implemented via financial intermediaries selected through open procedure • Does it exclude direct granting of loans & guarantees? [Art 38 of Reg 1303/2013] Case study: Linked SMEs through natural persons HaTeFo GmbH v Finanzamt Haldensleben, C-110/13 Linked enterprises: • majority share or voting rights • right to appoint / remove board /management • exercise of dominant influence through contract Enterprises which have such relationships through natural persons acting jointly are also considered linked enterprises [if they are active in same relevant market or adjacent market] Cont. Absence of formal links does not mean enterprises are not linked SME definition must be interpreted on basis of its aim • Aim: Identify enterprises that suffer an economic handicap due to their size HaTeFo Wife of A A Mother of A B 25% Managing Director C 63% D 12% HaTeFo Managing Director 50% 50% Company X It manages orders and represents HaTeFo It carries out HaTeFo’s technical management, computer management and research Cont. ECJ: Links give those persons opportunity to work together in order to exercise influence over commercial decisions of enterprises concerned which precludes those enterprises from being regarded as economically independent of one another The two companies are single economic unit through a group of natural persons acting jointly Annex I: GBER provisions on regional development Art 13: Scope of regional aid Art 14: Investment aid Art 15: Operating aid Art 16: Urban development aid Annex II: GBER provisions on SMEs Art 17: Investment costs Art 18: Consultancy costs Art 19: Cost of participation in trade fairs Art 20: Cooperation costs in ETC Art 21: Risk finance aid Art 22: Aid for start-ups Art 23: Alternative trading platforms Art 24: Scouting costs Art 28: Innovation aid for SMEs