The financial crisis has made it clear that some EU Member States grant state aid more readily than others. Sarkozy has put millions of Euros towards the Peugeot rescue effort; Berlusconi has helped to ensure that Alitalia remains in Italian hands.
This has led to substantial political debate of the question whether Austrian, Danish or Dutch taxpayers should pay for the national industries of France, Italy or Greece. In 2009 it was agreed amongst European political leaders that Member States are free to support their own national industries as long as this does not hamper the European economy. The more lenient approach in recent years has led to an increased level of state aid.
The European Commission has been consulting on new rules relating to rescue and restructuring aid since 2007. The crisis has shed new light on the modernization of the rules. This is reflected in the new draft guidelines on state aid for rescuing and restructuring non-financial undertakings in difficulties recently published by the European Commission..
These draft guidelines draw on the Commission's experience in applying the existing rules and the principles of the state aid modernization agenda.
The main elements of the Commission's proposals are:
- a new concept of temporary restructuring support, designed to simplify the grant of State aid for the restructuring of SMEs while reducing distortions of competition;
- better filters, to improve the targeting of aid and ensure that aid is only given in cases where it is truly in the public interest;
- options for introducing the concept of burden sharing, to ensure that a company's investors make a fair contribution to the costs of the restructuring.
Temporary restructuring support
Whereas rescue aid is by its nature temporary, restructuring aid must restore the long-term viability of the beneficiary on the basis of a feasible, coherent and far-reaching restructuring plan.
In the current guidelines no distinction is made between the type of restructuring aid given: loans, guarantees, capital injections, debt waivers and cash grants are all treated alike. The European Commission proposes to have a more lenient approach towards liquidity assistance (loans and guarantees) for restructuring aid taking into account that such assistance, if limited in amount and duration, cause less distortion than other forms of aid.
The draft guidelines allow for liquidity support to be made available to SME's in difficulty for a period of 12 or 18 months (the time frame is part of the consultation). The new guidelines propose that recipients of temporary restructuring support do not have to submit a full restructuring plan, but are required to provide a simplified plan that identifies the actions that they intend to take to restore their long-term viability.
Truly public interest
While the current guidelines already contain strong conditions to minimize the distortions of competition caused by such aid, the European Commission deems the guidelines less effective in ensuring that aid is well targeted at cases where intervention serves a real public interest.
The draft guidelines contain new filters designed to check that aid is truly in the public interest. First, the aid must pursue an objective of common interest, in the sense that saving the undertaking would prevent social hardship or address market failures. The draft guidelines set out a non-exhaustive list of situations in which aid would be justified under this provision; a separate provision for SMEs applies a less strict standard and identifies situations that are more relevant to the position of SMEs. Second, the European Commission will require a feasible, coherent and far-reaching restructuring plan to restore the beneficiary’s long-term viability.
The European Commission introduces the concept of "burden sharing". Although burden sharing is not completely absent in the current guidelines, there are no strict rules on the form such burden sharing should take. The current guidelines provide that "aid beneficiaries will be expected to make a significant contribution to the restructuring plan from their own resources".
In the new guidelines the European Commission takes the position that, the high returns that shareholders obtain when a firm is performing well should be balanced against the risk of losses that they bear. The European Commission considers that there is no justification for expecting taxpayers to bear losses in place of shareholders.
The draft guidelines propose two options by which the private investors could be involved in the restructuring process. Both options contain an identical first paragraph which makes clear that the type of contribution must match the nature of the undertaking's difficulties: equity shortages should be dealt with by capital-enhancing measures, while liquidity problems require contribution in a form that raises cash for the business.
The first option provides that contributions will normally be considered to be adequate if (i) the amount is at least as high as the aid amount and (ii) if the contribution by incumbent shareholders and creditors is "reasonable in view of the likely losses that they would have suffered in the event of insolvency". It is questionable whether this second test as currently drafted, referring to a reasonableness-test, would actually create a clearer framework for such contributions.
The second option is more precise. It requires that (i) all past losses be borne by shareholders and if that is not sufficient, (ii) that subordinated creditors must also contribute.
Undertakings in difficulty
Rescue and restructuring aid can only be granted to firms in difficulty. Since their viability is in question, they are also generally barred from receiving other types of aid. Therefore it is important to have a clear view of the definition of "undertakings in difficulty". The draft guidelines set out proposals to make the definition more objective and precise by referring to 'hard' criteria such as debt to equity ratio and interest coverage ratio. The European Commission invites stakeholders' views on such definition.
Of all types of aid, rescue aid and restructuring aid are deemed to distort competition the most. Therefore the European Commission (and the Dutch government) takes the view that such aid should only be granted in exceptional circumstances and on strict conditions which mitigate the harm to competition.
As concerns trade between the EU Member States this does indeed seem the right approach. On the other hand, neither the US nor the WTO have a system for controlling state aid. As long as there is no global approach to restricting state aid, EU countries may as a result of the EU rules, effectively be at a disadvantage.
The consultation on the Commissions proposed guidelines on state aid for rescuing and restructuring non-financial undertakings in difficulties closes 31 December 2013.