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JESSICA: STATE AID PRINCIPLES

Eglé Striungyté, DG CompetitionEuropean Commission*

JEREMIE and JESSICA Conference

Brussels, 30 November 2010

* DISCLAIMER: The views expressed are purely those of the presenters and may not in any circumstances be regarded as an official position of the

European Commission

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Overview• State aid presence:

– Beneficiaries and rationale

• State aid compliance:

– From general principles to specific conditions

• Notification:

– Content and process

• Concluding remarks

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JESSICA: State aid beneficiaries

State aid to project promoters

“Sub-commercial” UDF financing to urban development projects

State aid to HF/UDF managers

“Sub-commercial” remuneration for HF/UDF investment management services

State aid to private investors (at the UDF or project level)

Preferential treatment of private co-investors compared to UDF investments

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JESSICA: State aid rationale• Incentives to change market behaviour to promote

integrated urban development:

– Engage project promoters in urban development activities which they would otherwise not deliver

– Leverage funding from market investors to maximise urban development impact

– Involve investment intermediaries for effective implementation

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State aid compatibility architecture

General Block Exemption

Standard assessment

Detailed assessment

GuidelinesDirectly

under TFEUexceptionally

Specific policy instruments: defined market failures and

limited distortionsDetailed economic assessment:

effect-based balancing test

No notification Notification obligation, approval of the Commission

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State aid compliance • Urban development policy - no specific instrument

in GBER / Guidelines:

– Maximising the application of one set of guidelines - too restrictive

– Applying jointly the mix of rules – cumbersome & complex to apply to integrated urban development

• Direct application of Art 107(3)TFEU:

– Detailed economic assessment – flexible approach, effect-based balancing test

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State aid compliance • Objective of State aid control:

– Change of market behaviour for public interest objectives, whilst ensuring competitive behaviour

• State aid control in the context of JESSICA:

– Promote urban development by remedying market failure and/or enhancing socio-economic equity

– Limit aid to the minimum necessary to achieve the desired market outcome

– Minimize potential distortions of competition and trade

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Objective of common interest• UDF must target projects that are in the public

interest, which is integrated urban development:

– Form part of an Integrated Plan for Sustainable Urban Development (IPSUD):

• UDFs assess compliance with the objectives of IPSUD: expected project results, benefits for end users and impact in tackling urban deprivation issues

– Pursue eligible investment activities:

• UDFs assess nature of investment activities and compliance with the SFs Regulation, further criteria to be developed: only capital investments, not operations, other

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Necessity • UDFs must target projects that would not otherwise

be delivered by the market due to:

– Market failure to achieve the desired outcome:

• UDFs verify if a project corresponds to project types defined ex ante based on a market failure analysis and/or the project is not sufficiently viable to access market financing

– Urban deprivation affecting projects’ viability:

• UDFs verify if urban deprivation makes projects less viable

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Incentive effect• UDFs enable the market to undertake projects of the

public interest and leveraging match funding:

– Overcome market failures to achieve the desired market outcome (efficiency rationale) :

• UDFs mitigate risks, improve projects’ economic viability

– Offset urban deprivation (equity rationale):

• UDFs compensate for the extra costs related to urban deprivation

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Minimum necessary • UDF intervention limited to the minimum

necessary to achieve the desired outcome:

– Limiting expected returns for promoters and private investors in a project/UDF:

• UDFs (i) benchmark required private returns against market rates and (ii) adjust their financing terms accordingly

• Market benchmark rates defined through a competitive process (preference), sometimes independent experts

• Beyond success, public and private investors share proportionally the upside

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Minimum necessary – Maximising performance of HFs/UDFs:

• Repayable investments in economically viable projects: investments based on business plans, defined exit strategy

• Performance-based UDF management incentives • Mechanism in place ensuring that private capital is put at risk

alongside public investment

– Commercially managed HFs/UDFs:

• Independent fund manager, operating at arm length from the public investor, selected in a transparent competitive process

• Investment decision-making involving private investors• Best management practice and regulatory supervision

(regulated funds, EIB involvement)

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Limiting potential distortions• UDF activities should limit potential distortions of

competition and effects on trade

– Member States should provide market impact assessment identifying affected markets and justifying limited potential distortions

– Equal level-playing field to all market participants:

• Available to all project promoters, investors, fund managers, contractors and end users – selection in a competitive process

– Less distortive form of aid (repayable investment) and the set-up involving commercial investment intermediaries

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Notification content• Need to provide complete information:

– Policy rationale:• Objectives: targeted project types, eligible investment activities,

targeted end users; justification of market failures and nature of deprived urban areas based on independent market studies

– UDF set-up, investment policy and terms:• Conditions ensuring that UDFs tackle market failures, equity

objectives, the form of the aid and the beneficiaries, conditions limiting aid to the minimum and ensuring that UDFs maximise public investment performance and are commercially managed

– Market impact assessment:• Information on the relevant markets and expected impact based on

the evidence from a market impact assessment

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Notification process

• Providing guidance to Member States:

– Clarity on assessment principles and criteria

– Clarity on notification content and process

– Feedback on measures to improve quality

• Developing State aid approach:

– Developing State aid principles applicable to urban development and PPPs

– Setting out a coherent set of compliance criteria

Informal pre-notification dialogue

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Notification process• Best Practices Code (OJ C136, 16/06/09, p. 13):

– Pre-notification contacts recommended:

• Written draft General notification form sent via secured email (SANI, PKI), followed by meetings

• Relatively short: 2 months for standard cases, extended for complex

• Mutually Agreed Planning: identified key issues, agreed amendments and time-frame

– Formal notification after the pre-notification phase:

• Complete notification based on the outcome of the PN phase

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Concluding remarks• Well-targeted State aid measures to promote

integrated urban development

• Effective State aid notification process:– Setting out a general compatibility approach and key

compliance criteria - work in progress– Extensive pre-notification dialogue with Member States, the EIB

• State aid policy approach to urban development and PPPs in general:– First decisions will provide guidance, possibly new State aid

guidelines to be developed

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Contacts

Eglé Striungyté

Tel: +32 2 2953524

egle.striungyte@ec.europa.eu

H – State aid: Cohesion, R&D&I and Enforcement DG Competition, European Commission