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Péter Staviczky, attaché responsible for State aid Permanent Representation of Hungary to the EU 22 March 2013 Special rules for SMEs also in this field Commission has more favorable approach ◦ Aid to smaller companies have smaller distortive effects ◦ Real need – market failure is more easy to prove ◦ Positive effects (employment, internalization, innovation) 2 Logic of the State aid soft law ◦ Establishing no aid measures based on the jurisprudence of the Courts ◦ All the rest is State aid under Art. 107. of the TFEU Notification under Art. 108, or Block exemption (Regulation 800/2008/EC) 3 No aid measures ◦ Investments, loans and guarantees at market terms no advantage ◦ No effect on trade is rarely accepted Risk capital Preferential loans State guarantees De minimis aid – flexible as regards the form 4 Risk Capital guidelines adopted in 2006 (first notice from 2001) ◦ Under revision in the frame of the State Aid Modernization initiative – risk finance? The General Block Exemption Regulation (800/2008/EC) has a specific chapter on risk capital measures 5 Compatibility ground Art. 107 (3) c) economic development of certain areas ◦ Market failure at the risk capital market is acknowledged by the Commission ◦ Assimetric information ◦ Risk averse investors – innovative projects ◦ Too small projects with high upfront costs 6 Balancing test: ◦ Common interest ◦ Proportionality, necessity and incentive effect ◦ Smaller distortive effects Real need Guidelines with simplified and in-depth notifications 7 Advantage possible at 3 levels ◦ Aid for the target companies ◦ Aid for the private investors involved (no pari passu terms, significant portion) ◦ Aid for the fund/manager – tendering leads to market fee Forms for intervention ◦ Establishing a fund (fund of funds) or investment company ◦ Incentives for investors ◦ Guarantees for investors ◦ Tax measures for investors (even personal income tax) 8 Balancing test is met without further proof (simplified procedure) ◦ ◦ ◦ ◦ ◦ ◦ Investment in SMEs (expansion phase) EUR 2.5 million/12 month 70% in the form of equity / quasi equity 30-50% private participation Commercial fund management Exit strategy and due diligence 9 If some of the conditions are not met – detailed assessment Recent market study needed Crowding out effects are analized Size of the Fund (efficiency) 100% State funding is allowed for seed capital Special rules for cumulation 10 Block exemption – basic scenario but up to EUR 1.5 million / undertaking De minimis EUR 1 equity = EUR 1 aid no transparent form Revision of the rules – Commission tends to be more flexible (no draft) 11 Hungarian experiences – using Structural Funds mostly ◦ Jeremie I and II funds for seed and growth investment ◦ Setting the fund of funds took a long time ◦ Financial incentives both up and downside ◦ Tendering of the fund managers ◦ n+2 rule ◦ Regional Fund under approval (de minimis already used) 12 Market economy creditor principle – to establish the presence of the advantage ◦ ‘Unlimited’ resources at the State ◦ Can be applied even for tax deferrals ◦ Commission sets the proxy for the market rate for normal cases ◦ If there is advantage State aid rules should be complied with ◦ Cumulation issues 13 Reference rate set by the Commission 1 year interbank offer rate for the given country (average of the previous year) Plus risk premiums for the company based on ratings and the collaterals + 400 bp / year for undertakings without rating, startups Individual notification is possible Affiliates cannot have better rates than the mother company 14 Premiums Risk category Collaterals High >70% Average 70-30% Low <30% Strong(AAA-A) 60 75 100 Good (BBB) 75 100 220 Statisfactory (BB) 100 220 400 Weak (B) 200 400 650 Bad / 400 650 1000 Financial difficulties (CCC és alacsonyabb) 15 Hungarian experiences: ◦ Different aid grantors: Hungarian Development Bank, Managing Authorities, local governments, ◦ Setting the mechanism for calculating the aid element is important ◦ Present value calculations with the reference rate ◦ Cumulation rules should be taken into account 16 State intervention at the time when the risk is taken Specific forms, importance of the national law (see judgment La Poste T-154/10.) Can be market conform If not, aid element should be calculated and State aid rules applied Aid to the borrower and to the lender as well in some cases 17 Commission adopted a notice on State guarantees in 2008 Establishes when the guarantee is no aid ◦ Borrower is not in financial difficulties ◦ The amount of the guarantee can be precisely established (not unlimited) ◦ Up to 80% of the loan or obligation with exeptions and pro rate risk bearing ◦ Market fee is paid ◦ Self financing scheme including operational costs 18 Aid element of guarantee is 0 if, ◦ The guarantee fee is established under an approved methodology ◦ The guarantee fee for SMEs is in line with the safe harbours, or ◦ reference rate + the risk premium of the company/project ≤ price of the loan + price of the guarantee paid 19 Specific rules for SMEs: Safe harbour premium (0.4- 6.3% per year) Simplified single premium allowed for schemes with guarantees not exceeding EUR 2.5 million Notification of the calculation methodology is accepted – especially for de minimis and block exempted aid 20 Hungarian experiences Aim: establish a calculation of the guarantee aid element acceptable for the COM Low aid element: higher loans to be covered, cumulation and use of other de minimis aid Two guarantee institution backed with budgetary counter guarantee 21 Only SME clients Facilitate acces to finance Agrucultural and non-agri portfolios Investment and working capital loans also covered Undertakings in difficulties are excluded No full risk assessment is made as required by the notice 22 80% guarantee (70% counter guarantee) Loans between 1-25 years Highest amount 2.5 million € Fee can by paid yearly or in advance for the whole period (present value) Income from recoveries is shared with the budget and the bank proportionally 23 Establish a hypothetical market price - aid element is calculated as the difference (in each year) compared to this fee Risk segments were created with different risk levels Historical data was used to establish the average of failures and recoveries in a segment – 3-10 year data 24 Operating expenses of the institutions is proportionately divided among the risk segments – self financing schemes Segments made by type of the loan guaranteed In each segment working capital and investment loans were separated Working capital is more risk – higher fees (1.7%-3.4%) Premiums recalculated yearly 25 Risk capital: Reference rate Guarantees ◦ http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:5200 6XC0818(01):EN:NOT ◦ http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:3200 8R0800:EN:NOT ◦ http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:5200 8XC0119(01):EN:NOT ◦ http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:5200 8XC0620(02):EN:NOT 26