State aid

Under Article 107(1) of the TFEU, Member States are prohibited from granting state aid, unless it is proven to be compatible under article 107(3). The Commission has recently adopted a more economic framework to assess whether aid is compatible under article 107(3).

This past year has seen state aid control become a central concern of the European Commission. The unprecedented severity of the recent financial crisis and recession have resulted in significant amounts of state support being granted to financial institutions and other companies, in order to lessen the effects of the crisis. Any form of state aid needs to be notified to and approved by the European Commission. CRA can help companies and governmental departments to assess the aid and analyse its compatibility with state aid rules.

The European Commission and the Courts have interpreted the concept of state aid widely to include not only state grants, but also less obvious forms of public financing such as tax relief, interest relief, state guarantees and holdings, and the provision of goods and services at below-market rates.

The consequences of a finding of illegal state aid can be serious, with the recipient forced to pay back all the aid granted plus interest. However, state aid is not always found to be incompatible with the common market. For example, aid may be permitted under certain circumstances if it is directed to the protection of the environment, if it is needed to rescue and restructure important firms in difficulty, if it funds a public service obligation, if it is designed to remedy market inefficiencies in the supply of risk capital to small and medium enterprises, if it is designed to improve research and development not supported by the private sector, or if it promotes the development of certain disadvantaged areas.

The European Commission has, over time, moved to a more economic approach to state aid assessment. This process, which began with the State Aid Action Plan in 2005 recently culminated in the publication of European Commission's staff working paper "Common principles for an economic assessment of the compatibility of State aid under Article 87.3 EC-Treaty". CRA is uniquely positioned to apply the economic framework advocated in the working paper.

• CRA has the right skills to assess whether a given measure should be classified as state aid and, if so, whether it should be declared compatible with the common market. For example, we can investigate whether the investment would have been undertaken by a market investor, whether it remedies a market failure, whether it is a proportionate and well designed instrument, whether the aid appreciably distorts competition in the market, and whether it has an impact on trade.
• CRA has significant experience, having prepared reports on the economic impact of state aid for presentation to the European Commission and the European Courts in a number of sectors, including banking and financial services, airlines, broadcasting, telecommunications, pay-TV, energy, entertainment, sport and postal services. CRA acted as advisors to the Dutch Central Bank (2009), the Irish Department of Finance (2009), and individual financial institutions in the context of the bank rescue and restructuring measures adopted in the wake of the financial crisis. Recent cases in which we have been involved include Olympic Airlines (2008), as well as the nationalisation of Northern Rock and Bradford and Bingley in the UK (2008), and other cases in sectors of the real economy hit by the effects of the credit crunch.
• CRA's thought leadership in state aid is demonstrated by a major study carried out for the European Commission on the analytical framework and methods to analyse the impact of state aid on competition (CRA 2006). This methodology is part of the compatibility test, a tool used to prioritise EC state aid control and focus on those cases where true harm to welfare is likely.

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