Examining The Incentive Effect Of State Aid

Examining The Incentive Effect Of evoke maintenanceThis expression examines how the bonus doing of produce uphold is delineate and measured.It also considers how the use of the bonus effect may impact on the behaviour of countenance recipient roles. The availability of accede maintenance would natur exclusivelyy energise them to on a lower floortake bumpier projections that atomic number 18 not norm solelyy included in duty plans which tend to be conservative.Therefore, if business plans (looking into future) ar the benchmark by which the inducing effect of state aid is established, then this benchmark may be a too easy test of the existence of the incentive effect.The article also argues that the timing of the assessment of the need for state aid has adecisive impact on the determination of whether aid has an incentive effect or not. The timing of the assessment of the need for state aid is critical. compensate projects that lead already started may deserve to happen state aid if the aid can ensure that they be not abandoned.This is highlighted by an depth psychology of the case of teach aid to DHL. The Commission believes that training aid should not be used to induce companies to undertake functional enthronization. Commercial mankind suggests that companies take into account the total amount of aid they expect to receive at several(predicate) locations. The article examines this Commission Decision on the proposed training aid to DHL and suggests that that aid could have had an incentive effect, if it were offered to DHL before it made its ratiocination to establish a logistics centre in Leipzig1. secernate aid essential(prenominal) have an incentive effect. But it may induce beneficiaries to undertake riskier projects and enthronisation in riskier projects may not be in the interest of friendship at large.The incentive effect of state aid means that undertakings are expected to do something wasted with the aid. That extra essential go beyond their normal practices. This has recently been con pie-eyeded by the CFI in the Kronoply case persona T-162/06, Kronoply GmbH Co. KG v Commission of the European Communities (2009)2.The Commission has defined how the incentive effect is to be understood and measured in a procedure of recent policy documents, most notably theCommission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market place in application of obliges 87 and 88 of the Treaty (General block resistance Regulation) Recital 28, Article 8Framework on Research and insertion (the RDI Framework) community modelling for state aid for research and development and grounding (OJ C 323, 30/12/2006, p. 0001 0026) 1.3.4.Guidelines on Risk Capital Community travel bylines on state aid to promote risk seat of government investments in small and medium-sized enterprises (OJ C 194, 18/8/2006, p. 0002 0021) 1.3.4.Guidelines on Environme ntal resistance Community guidelines on state aid for environmental protection (OJ C 082, 01/04/2008, p. 0001 0033) Recitals 27, 28Guidelines on the Assessment of cosmic Regional Projects Commission confabulation criteria for an in-depth assessment of regional aid to large investment projects, 24/6/2009 not yet published in OJ,http//europa.eu/rapid/pressReleasesAction.do?reference=MEMO/09/292format=HTMLaged=0language=ENguiLanguage=en.The incentive effect is established at three levels of assessment that may be termed bill, superfluous and detailed (note that all guidelines use these three levels)at the standard level which applies to all cases, state aid lacks an incentive effect and it is thusly unnecessary when it is apt(p) after a project or investment has been initiated. see Art 8(2) of the block exemption Regulation, chapter 6 of the RDI Framework, chapter 3 of Environmental Guidelines, tear d accept 17 of the Guidelines on the Individual Assessment of Large Regional P rojectsat the special level of assessment, undertakings primarily large which apply for aid before they start a project or investment, must also demonstrate that they do something extra by showing that they go beyond their normal practice as defined by their annual reports, or business plans OR separate normal or benchmark behaviour for the industry in promontory in terms of output, expenditure, jobs, etc. see chapter 6 of the RDI Framework, chapter 3 of Environmental Guidelines, arrest 19 of the Guidelines on the Individual Assessment of Large Regional Projects.at the detailed level of assessment for aid amounts above certain thresholds, undertakings primarily large must further show that in the absence of aid they would not take out the project or investment. They must also demonstrate that the project or investment itself is uneconomic or too risky. see chapter 7 of the RDI Framework, chapter 5 of the Environmental Guidelines and point 23 of the Guidelines on the Individual Assessment of Large Regional Projects.Phedon Nicolaides, Michael Kekelekis An Economic Analysis of EC Guidelines on terra firma concern for the Rescue and Restructuring of Companies in Difficulty, Intereconomics, July/August 2004, 9p.The Rescue and Restructuring give in forethought Guidelines 1999 to endure on 9 October 2004.This article mentions certain inconsistencies and proposes how to improve the next guidelines.COM itself was awake(predicate) of certain problems, namelyWhat is the definition of firm in difficulties?How to assess free radical of companies (allocation of costs within the group)? need issue when the state aid is granted prior to COM approval.One time, last time formula rescue aid is a one-off operationDifferent time limits in the current frameworkWhat compensatory measures are sufficient?There are 3 internal inconsistencies in the Guidelines99% of companies are SMEs, but state support for SMEs are exempted from state aids notification if lower than 10 mil. EUR + if purpose of rescuing companies is to interdict their go competitors dominating the market, then SMEs would not need to be rescuedwhy to ask firms facing bankruptcy to slue their output?if every caller-up that receives restructuring aid has more than a fair chance to become lucrative (return to viability), why then do surreptitious investors need any state aid?ECJ has repeatedly ruled (e.g. in case C-730/79 Phillip Morris v. COM, paras. 16-17) State aid is allowed for the purposes of inducing firms to do something they would not some early(a)wise do under free market conditions.The article further proves 3 hypothetical plans for restructuring (to reduce workforce from 300 to 200, 100 OR 50) and assesses how minimising social cost is interpreted and should be taken into account by the COM.60 % of EU awards were for and 4 MS (Germany, France, Spain and Italy) Are the firms in other countries immune from monetary problems OR are the governments of these countries less uncoerced to bail out firms in financial difficulty?It is not for the COM to tell MS how to spend their gold wisely. However, there must be an upper limit to the amount of causalityised aid - the social costs of letting the club go bankrupt. On the other hand, there is cost for owners (redundancy payments) which can be avoided, if they can remedy the company. It should be up to the beneficiary company to argue the case and go away convincing evidence.The authors welcome simplified procedure proposed for the brisk guidelines for urgency aids. Urgency aids (to be repaid in 6 months) replace rescue aids (to be repaid in 12 months). But they are not happy, that no restructuring plan is required for SMEs. The money contributed by owners must be at least 25% for small enterprises, 40% for medium-sized enterprises and 50% for large enterprises.The new guidelines also do not require MS to grant socially optimum amounts of aid. The aid per employee varies from 4,000 EUR to 755,0 00 EUR3. The market shares vary from 0.8% to 61%. Number of employees varies from 20 to 64,000.Phedon Nicolaides Re-introducing the Market in the Market Economy Investor Principle, European State Aid Law Quarterly 2003, 5p.COM invented this principle almost 20 years ago (1983) to deal with injections of public capital, which cannot be prohibited by virtue of Article 295 EC (Art. 345 TFEU) to determine whether public investments contain state aid.The author considers 3 observationsthe term market economy investor is a misnomerex-post assessment may step down the principle itselfit is necessary to re-introduce market.Firstly, the COM compares the actions of the public authority with those of a typical head-to-head investor in a similar situation (in terms of the size, risk and terms of investment) see landmark cases C-234/84 Belgium v. COM, C-40/85 Belgium v. COM, C-305/89 Italy v. COM, C-278/92 Spain v. COM, T-228/99 WestLB v. COM). In some cases (recovery of debt, rescheduling o f debt OR closure of factories) the ECJ invented term common soldier creditor (T-152/99, C-334/99 C-342/99, C-256/97). In these conditions there are no comparable market benchmarks (every case is different) Creativity and ingenuity are as important as toughness and persistence in negotiations. That is why successful corporate bankers overleap huge salaries. Since public regime are not known for their forecast and investments skills, it is hard to believe that public officials can negotiate as comfortably as private investors. It is not a case of comparing hold rates with market rates.Secondly, as the landmark WestLB judgement clarifies, a private investor will take in a return on his investment that reflects all the benefits obtained by the recipient of his funds and will take into account all foreseeable future contingencies. Private investor always looks forward bygones are bygones. The author criticizes the judgement T-98/00 Linde v. COM, because a reasonable investor woul d never obliged himself to provide the privatised company with certain (chemical) product for a period of ten years at market prices. The German authorities argued, that when the agreement was made it was hoped that a siemens user of that chemical would build a plant in the demesne (PN how reasonable was that expectation?). But the CFI found further payments to prevent more larger cost justified. The author agrees with the judgement C-334/99 Germany v. COM public authorities may not create costs for themselves which can justify the granting of additional state aid later on, because ECJ correctly observed that Germany has included in the cost of closure the repayment of state aid that had been granted earlier.Thirdly, private money is not the same as public money. Private investor is willing to tolerate less. There are 3 solutionsthe MS should have separate investor advisor to assess the dealthe MS should use private mediator for negotiationsto adjust upwards the rate of return demanded for public funding (in coincidence to private investor).The proposed measures are not discriminatory (Art. 345 TFEU), because public investment is not the same as private investment. The officials are not dealing with their own money, so the due diligence is not the same.The market economy investor principle has been narrowed to only private investor principle. Once the market drops out, it is difficult to mark any hidden state aid.R. Meiklejohn (ed.) State aid and the single market, 1999, European Commission, 206 p.4(in the syllabus from the first semester only Synopsis and Chapter 1 The Economics of State Aid were present p.7-32)http//www.tu-dresden.de/wwbwleeg/publications/hirschhausen_roeller_european_economy_state_aids_0399en.pdfThis publication contains 7 studies by several authors on several issues. Because the documents is quite old, I will summarize only shortly the synopsisEconomics of State Aid (Meiklejohn)State aid should prevent market failures. Perfect comp etition is based on radical assumptions (perfect breeding and foresight, perfect factor mobility, no economies of scale, no externalities). In real public government intervention may increase total welfare.We consider 8 market failures public goods merit goods increasing returns to scale externalities (positive and negative) imperfect or asymmetric information (SMEs and innovative firms looking for capital on capital markets) institutional rigidities (e.g. labour market) imperfect factor mobility subsidisation of foreign competitors. Income redistribution constitutes an additional reason for government intervention.Intervention must be carefully considered to minimize distortions of competition, evasion, abuse OR the creation of perverse incentives. Government expenditure has to be financed, which is likely to lead to some loss of efficiency in other parts of the economy.The instrument can be chosen from wide panoply including law direct government provision of certain goods or services gross OR state aids. (effectiveness)Trends and PatternsRecent developmentsMarket definition (Fingleton, Ruane, Ryan)The Treaties expressly demand geographicalalalal extent of the market (trade between MS). In antitrust we analyse demand side substitutability, supply side substitutability, temporal aspects (product market definition) AND geographic boundaries (geographic market definition). The narrower the market definition the more likely it is that a firm will be found to be dominant. We can compare characteristics of different products, own-price elasticity of demand, cross-price elasticities, ability of firms to switch production (time necessary to do that and drop down costs).For geographic market definition transport cost and trade barriers are taken into account. Elzinga-Hogarty test and study of correlations of prices and price movements in different areas have both important drawbacks.According to the authors it is necessary to distinguish between inputs and utmost products. The situation differs according to whether output market and input market are national or international (4 combinations). Therefore it is necessary to define the geographic relevant market also for upstream market (where it buys its inputs) and neighbouring markets.Taxonomy of aids activity-specific firm-specific industry-specific region/area-specific.In state aids methodology, greater weight should be give to potential competition. The recipient of aid can also change its geographic market strategy. If a recipient can easily switch its production, spill-over into other markets is possible (even for activity-specific aids). Input and output markets must be defined, even if the recipient is vertically integrated. The potential of widening the geographic market (cf. internal market) must be taken into account. Also we must assess how costs and benefits are distributed = the degree of price competition can be a guide to the distribution between producer surplus and co nsumer surplus.Restructuring and PrivatisationThe case of new German LnderThe international contextFurther documents to look atState Aid Action Plan 2005-2009 (SAAP) quoted in the presentationhttp//eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM20050107FINENPDFCommission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation) (Text with EEA relevance)http//eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX32008R0800ENNOThttp//ec.europa.eu/competition/state_aid/ polity/block.htmlState Aid Reformhttp//ec.europa.eu/competition/state_aid/reform/reform.htmlState Aid Scoreboard, Reports + Studieshttp//ec.europa.eu/competition/state_aid/studies_reports/studies_reports.html