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Ex-post assessments of state aid: an economic framework developed for the European Commission

State aid control has been a top priority on Margrethe Vestager’s agenda as the European Commissioner for Competition. This has led to a number of high-profile state aid investigations that have made the headlines around the world and have involved multinationals such as Apple and Starbucks.[1]

State aid control has also evolved as a result of the Commission’s state aid modernisation initiative.[2] This has led to a significant increase in the scope of the General Block Exemption Regulation, which gives member states the authority to approve aid, under certain conditions, without notifying the Commission.[3] In 2016, nearly 80% of all aid measures were block exempted, which represented an increase of around 20% relative to 2013.[4]

The greater role for member states comes, however, with greater obligations. Going forward, the Commission will increasingly require member states to carry out ex post assessments. It remains to be seen what the consequences will be in the event that an assessment identifies significant detrimental effects as a result of a particular state aid measure. While a reversal of the measure seems unlikely, it is possible that the measure would need to be revised going forward, or remedies introduced.

In light of these significant developments, the Commission asked Oxera to develop a framework that can be used to assess the competitive effects of aid, and to gain further insights into the actual impact of aid measures on competition. We therefore developed an economic framework for DG Competition for evaluating the effect of aid on competition, which we subsequently applied to four different approved aid measures.[5] This study is likely to have a significant impact on future state aid control.

How to assess the impact of aid on competition?

Although state aid control is designed to ensure fair competition across the EU, an extensive competitive assessment of the impact of the aid is not always undertaken. However, this is expected to change going forward, as state aid control is brought more in line with other areas of competition policy such as merger control, anticompetitive agreements, or abuse of dominance, where competitive assessments are at the heart of the practice.

While assessments in these areas vary, they essentially explore the impact of a particular event, such as a merger or acquisition. We therefore developed our framework from approaches that are already established in other areas of competition law and economics, with adjustments to reflect the specifics of state aid control.

Our framework consists of the following three main steps.

Step 1: what are the main characteristics of the aid and the affected markets?

As the impact of the aid is likely to vary according to its characteristics, the first step is to identify the objectives of the aid, the aid instrument, the form of the aid, the number of firms receiving the aid, and the amount of aid granted. To understand why this matters, consider the form of aid. If aid reduces marginal costs, it is more likely to distort competition in the short run than aid that affects fixed costs. This is because changes to marginal costs influence firms’ short-run pricing decisions.

The impact of the aid also depends on the characteristics of the market in which it is granted. To identify the markets that may have been affected by the aid, the tools developed in antitrust and merger control can be used.

Step 2: what are the potential effects of the aid on competition?

The second step is to understand what would have happened in the absence of the aid, in order to assess its potential effects. The impact of the aid reflects the difference between the situation that occurred following the aid and what would have occurred in a scenario where the aid was not provided (i.e. the ‘counterfactual’).

Member states are often required to identify the likely counterfactual scenario(s) at the notification stage in their evaluation plans. The counterfactuals set out in these plans therefore represent an obvious starting point when considering what would have happened in the absence of the aid. However, for the purposes of an ex post evaluation, these counterfactual scenarios are likely to need updating to reflect subsequent developments.[6]

Once we have a detailed description of the competitive environment that is likely to have existed in the absence of the aid, the next step is to identify hypotheses that can be tested to assess the potential effects of the aid. Testable hypotheses could include a hypothesis that the aid has increased the beneficiary’s market power, or that the aid has distorted the competitive entry and exit process by supporting inefficient companies.

Step 3: what is the actual impact of aid on competition?

The final step is to assess the actual impact of the aid on competition by comparing the actual outcome with the counterfactual scenario.

For an ex post analysis, this assessment should ideally be based on a series of indicators, obtained over sufficiently long timescales, both before and after the aid was granted. However, if it is not possible to obtain the necessary data, a significant part of the assessment could rely on qualitative insights and descriptive analysis.

The simplest approach to assessing the competitive impact of the aid is to examine the evolution of the key variables of interest. Any breaks in the data may indicate the impact of the aid. However, if several effects occurred at the same time, this approach would not yield conclusive results. In this case, a more sophisticated approach such as econometric analysis could help to disentangle the different effects.

Applying the framework to real world cases

In our study for the Commission, we applied the above framework in four case studies (relating to environmental aid, regional development aid, research and development aid and a service of general economic interest) to assess the actual impact of four aid measures on competition. The results from these above case studies suggest that three factors represent the main drivers of the likely impact of aid on competition.

  • The size of the aid. In the energy and research and development case studies, the amount of aid was small relative to the market size, and we found that it was unlikely to have distorted competition. In contrast, in the airport case study, the amount of aid received by the airport in question represented a significant proportion of the total revenues of airports in the surrounding region, and we concluded that the aid might have caused distortions to competition.
  • Frequency of the aid. The airport and postal case studies suggested that aid is likely to have a greater impact on competition where it is granted on a repeated basis. This is consistent with the greater potential for aid that is granted on a rolling basis to affect operating costs, while aid that is granted as a one-off is more likely to affect fixed costs. As changes in operating costs tend to have a more immediate effect on firms’ behaviour than changes in fixed costs, one-off government support is less likely to distort competition than continuous support is. In addition, granting aid on a rolling basis in markets that are characterised by a degree of entry and exit is more likely to confer a competitive advantage on companies than it is on potential entrants.
  • Breadth of the aid. In the energy case study, we concluded that it was unlikely that aid granted for the construction of the individual biomass plant created any competitive distortions. However, it is possible that support by the French Environment and Energy Management Agency (ADEME) to a number of biomass plants in France could have affected competition (as discussed further in the box below).

Our analysis was based on information volunteered by market participants and/or data that was publicly available. Although there were no formal requirements for parties to provide data and information, a number of meaningful conclusions about the impact of aid on competition were still drawn. However, our study highlights that, in order to ensure that a full set of hypotheses can be tested, the infrastructure must be put in place at the time when the aid is granted to ensure that aid recipients can provide the necessary data for the ex post evaluation.

Conclusions

Oxera’s framework can be used by the Commission to evaluate the impact of aid on competition. It is similar to the frameworks used for antitrust investigations and merger control, but must be tailored to take into account the specificities of state aid control.

Overall, the results from Oxera’s study show that the impact of aid varies according to the amount of aid relative to the size of the market, the breadth of the aid, and the frequency of the aid.

In light of the growing importance of ex post evaluations in state aid control, and the increasing role for sophisticated assessments of the competitive effects of aid, Oxera’s study could have significant implications for future state aid control.

Enno Elits, Oxera, State Aid, Competiton Law Blog Nicole Robins, Oxera, State Aid, Competiton Law Blog
Enno Eilts is a Partner at Oxera and Head of company’s offices in Berlin. He specialises in competition and competition-relates litigation. In his litigation work, Enno advises both claimants and defendants. He has provided expert advice in follow-on damages claims in Germany such as those relating to car glass, bearings, occupant safety systems, rail tracks, sugar, pre-stressing steel, and cathode ray tubes. Enno’s experience in competition economics includes work on merger analysis, abuse of dominance, and state aid. In the context of state aid, Enno led Oxera’s study for European Commission on ex-post assessments of state aid.Enno also regularly teaches at Oxera’s external training courses on utility regulation and competition economics. Other training courses he has taught on include Advanced Competition Economics at the University of Johannesburg (South Africa), Quantifying Antitrust Damages for the OECD (international), and various State Aid modules at the Academy of European Law in Trier (Germany) and the European Institute of Public Administration in Maastricht (the Netherlands). Before joining Oxera in 2010, Enno worked for two competition watchdogs—the UK Competition Commission (now the Competition and Markets Authority), and the New Zealand Commerce Commission. He is listed in The International Who’s Who of Competition Lawyers & Economists. Nicole Robins is a Partner at Oxera and heads Oxera’s State Aid practice. Based in Oxera’s Brussels office, Nicole leads Oxera’s advice to clients on a diverse range of state aid matters across sectors including transport, financial services, health, telecoms and communications, energy, real estate and sports infrastructure.Her advice covers a broad range of economic and financial issues in state aid cases relating to assessments of the market economy operator principle (MEOP), the application of state aid rules for services of general economic interest (SGEI), and the compatibility of aid. She provides advice on state aid compliance, and advises beneficiaries, complainants and member states during investigations by the European Commission and in state aid litigation cases in front of the European courts. She has given expert evidence on state aid matters on a number of occasions in front of the General Court.Nicole teaches the state aid module on the postgraduate diploma in Economics for Competition Law at King’s College London, and provides training for EU Judges on the economics of state aid. She is listed among the ‘30 in their 30s’ Notable Women Competition Professionals. Nicole has a wide breadth of experience in the field of state aid, and regularly speaks at, and chairs, state aid events (including chairing the Global Competition Review’s annual state aid conference in 2016 and 2017). She publishes on state aid matters in the leading competition journals.

To learn more about state aid from Nicole, join us at the 27th annual Advanced EU Competition Law conference where she will be sharing her expert insights in a dedicated state aid session.

 

[1] European Commission (2017), ‘Commission Decision (EU) 2017/1283 of 30 August 2016 on State aid SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP) implemented by Ireland to Apple’, Official Journal of the European Union, 19 July. European Commission (2017), ‘Commission Decision (EU) 2017/502 of 21 October 2015 on State aid SA.38374 (2014/C ex 2014/NN) implemented by the Netherlands to Starbucks’, Official Journal of the European Union, 29 March.

[2] European Commission (2012), ‘Communication from the Commission to the European Parliament, The Council, the European Economic and Social Committee and the Committee of the Regions, EU State Aid Modernisation (SAM)’, COM(2012) 209 final, 8 May. See also Oxera (2013), ‘A brave new world? Implications of state aid modernisation’, Agenda, March[linkhttps://www.oxera.com/Latest-Thinking/Agenda/2013/A-brave-new-world-Implications-of-state-aid-moder.aspx].

[3] For further details on the General Block Exemption Regulation, see European Commission, ‘Legislation > Block Exemption Regulations’[http://ec.europa.eu/competition/state_aid/legislation/block.html], accessed 19 January 2018.

[4] See European Commission (2017), ‘State Aid Scoreboard’[http://ec.europa.eu/competition/state_aid/scoreboard/index_en.html], accessed 20 January 2018.

[5] Oxera (2017), ‘Ex post assessment of the impact of state aid on competition’, prepared for the European Commission, December[link], accessed 12 January 2018.

[6] The Commission’s 2014 evaluation guidelines outline a number of factors that need to be taken into account when identifying the counterfactual. See European Commission (2014), ‘Common methodology for state aid evaluation’, Commission Staff Working Document, 28 May, section 3.4.

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