The European Commission has revised its rules for assessing Member States’ support measures to rescue and restructure companies in difficulty. The new guidelines aim to ensure that public funding is channelled where it is needed most and that investors in failing firms carry their fair share of the costs of restructuring, rather than leaving the burden to taxpayers. The rules adopted apply only to non-financial firms in difficulty; a separate set of rules is in place for banks and other financial institutions. The new guidelines will enter into force on 1 August 2014.
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State aid granted by EU Member States to companies in financial distress keeps companies alive that would otherwise have exited the market. The Commission says such aid has a high potential to distort competition in the Single Market: It shifts the burden of structural adjustment to others and puts the more efficient and innovative players who receive no such aid at a disadvantage. Such aid also risks impairing economic growth, since the exit and replacement of inefficient firms is one of its key drivers, and it could waste taxpayers’ money. For all these reasons, it is subject to strict conditions.
The new guidelines replace the previous ones adopted in 2004 (the so-called “Rescue and Restructuring” guidelines). Some of its key principles remain unchanged:
- Aid to companies undergoing financial difficulties may be granted temporarily for a period of 6 months (“rescue aid”).
- Beyond this period the aid must either be reimbursed or a restructuring plan must be notified to the Commission for the aid to be approved as “restructuring aid”. The plan must ensure that the long-term viability of a company is restored without further state support, that the distortions of competition induced by the state support are addressed by specific measures and that the company contributes to the costs of restructuring.
- Restructuring aid may be granted only once over a period of ten years (‘one time, last time’ principle), to prevent companies that are not viable being kept artificially alive through public support.
The main changes in the guidelines adopted today are the following:
- New rules allowing temporary restructuring support for SMEs, designed to simplify the granting of state funding for restructuring while reducing distortions of competition by favouring measures that are less distortive, such as loans and guarantees, over structural aid such as direct grants or capital injections. Such support can now be granted for at most 18 months i.e. three times as long as the period for receiving rescue aid on the basis of a simplified restructuring plan. This will allow Member States to better help SMEs address liquidity problems, something that is particularly important in the current economic context.
- Better filters to ensure that state aid is used where it is really needed and to avoid waste of taxpayers’ money. Member States will have to demonstrate that the aid is needed to prevent hardship, for example in areas of high unemployment, and that the granting of restructuring aid will make a difference in that respect, for example by reducing the scale of job losses.
- New rules ensuring that investors pay a fair share of the costs of the firm’s restructuring (“burden sharing”). Company investors will be primarily responsible for covering incurred losses before any state aid is granted, and the state will receive a fair return on its investment if the restructuring plan succeeds. This concept was developed during the financial crisis, when burden sharing became necessary to protect the interests of taxpayers and consumers where large amounts of public money were made available to banks, and is now extended to apply to non-financial firms.
Background
These new rules are an important component of the Commission’s State Aid Modernisation initiative launched in 2012, which aims to reform state aid control in order to foster “good” aid measures that boost economic growth and further other objectives of common EU interest, while discouraging “bad aid” which distorts competition in the Single Market and wastes taxpayers’ money. The reform package also aims to focus the Commission’s scrutiny on cases with the biggest impact on competition.
The Commission has already reformed its state aid procedures and considerably extended the scope of exemptions of certain categories of aid measures from prior notification to the Commission. In addition, the Commission has adopted new guidelines on state aid for broadband, regional development, cinema, airports and airlines, risk finance, energy and environment, research, development and innovation as well as important projects of common European interest.
The new guidelines replace a set of rules on the rescue and restructuring of companies that have been in force since 2004. They were originally due to expire in 2009, but have been extended twice, most recently in 2012 to avoid pre-empting the discussions on the modernisation of state aid policy.
The Commission started the review that led to the adoption of the new rules in December 2010, and invited stakeholders to comment on a draft set of rules in November 2013. The guidelines adopted today draw on the results of that consultation as well as the Commission’s experience in applying the existing rules and the principles of the state aid modernisation agenda.
