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Refining the rules of state aid

OFT proposes practical economic basis for EC assessments

217/05    23 November 2005

The OFT today presented to the European Commission (the Commission) proposals for reforming state aid controls, so that the impact on competition is taken into account.

Download European state aid control (pdf 546 kb).

The proposals set out a two-phase assessment that recognises the characteristics of the subsidies and the markets they are targeted at which are critical to competition. The OFT also recommended a formal advisory role for national competition authorities in helping the Commission to decide whether to approve state aid.

The OFT believes that the current system for assessing state aid allows aid that can distort competition significantly while subjecting aid that may not do so to too much scrutiny.

John Fingleton, OFT Chief Executive, said:

'We welcome the Commission's commitment to reform the state aid regime so that it captures the actual effects on competition. Our proposals set out a practical, tested, two-phase procedure that would allow for better targeting of the Commission's efforts. It would enable less distorting aid to be approved more readily while focusing in greater detail on those that are likely to distort competition significantly.'

See market studies area of this website.

NOTES

1. State aid is any type of support to business that has the potential to distort competition and affect trade between Member States by favouring certain businesses or the production of certain products. It may take the form of a grant, tax break, soft loan or other benefit provided by government to an organisation. The Commission examines proposed state aid within a framework of regulations, guidelines and procedures to assess whether it is compatible with the common market. Over €37 billion or 0.4 per cent of EU GDP was spent on state aid by member states in 2003.

2. The European Commission published for consultation its action plan for the reform of state aid controls in June 2005. The OFT published its outline response  to the EC action plan in September 2005 (download outline response pdf 131 kb). Today's report sets out in detail the two-stage assessment that the OFT recommends the EC incorporate into its procedures for approving state aid.

3. The OFT's recommendations are based upon its two-stage study of public subsidy design. The first part of its study, published in November 2004 (see press release 190/04), provided a framework for analysing the impact of different types of subsidies upon firms and markets of varying characteristics. This framework has subsequently been tested through a number of case studies on different types of supports for business (such as research and development, broadband infrastructure and regional development) which feature a range of the characteristics that are more or less likely to lead to distortion to competition.

4. Article 87(1) EC of the Treaty of Rome sets out a general prohibition on state aid. Articles 87(2) and 87(3) EC then give a number of exceptions to this. Under Article 87(2) EC aid to address certain specific issues, for example state aid to make good the damage caused by natural disasters, is permitted as compatible with the common market. Article 87(3) EC, permits aid falling within specified categories, which relate to Community objectives, and confers on the Commission discretion to permit as compatible with the common market, state aid that falls within those categories.

5. The interaction between government and markets, in government's capacity as a purchaser, regulator, supplier and subsidiser, is one of five priority areas for the OFT. See press release 58/05 and download the OFT's Annual Plan (pdf 182 kb).

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