Methodology used in State aid assessment
Building up on the experience developed and on the expertise acquired over time, the State aid reform package introduced a more refined economic approach in the assessment of State aid cases. Setting out more precise economic criteria and methodology to evaluate positive and negative elements of a State aid measure aimed to achieve the goal of a “less but better targeted aid”.
The assessment of aid compatibility is essentially a balancing of the positive effects of aid (in terms of contributing to the achievement of a well-defined objective of common interest) and its negative effects (namely the resulting distortion of competition and trade) (the “balancing test“). In order to be declared compatible, the aid must be necessary and proportionate to achieve a particular objective of common interest.
The refined economic approach, however, does not mean that each and every State aid case undergoes a specific in-depth assessment. Using the economic rational of the balancing test, the Commission reflected the economic requirements when setting the general State aid rules, while at the same time allowing for the most appropriate control system. As a result, the least distortive cases are not considered to be State aid (de minimisaid).
Secondly, cases for which it is possible to design easily applicable ex ante set of compatibility criteria are exempted from the notification requirement (State aid set up by the General Block Exemption Regulation).
The next level, the standard assessment, allows the Commission to assess most cases through predefined conditions (including set aid intensities) which aim to ensure the proportionality and necessity of the aid and its limited distortive effects, i.e. for which the refined economic assessment is done en blocin advance and is reflected in the legal assumptions of the rules.
The last level of control – the detailed assessment – is applied for the potentially most distortive cases where the Commission verifies the economic rational of the aid on a case by case basis.
The basic element of the more refined economic approach is the balancing test.
This is essentially a cost-benefit analysis of the proposed measure.
The balancing test sets forth the following elements of analysis:
1. Well-defined objective of the common interest
Aid should be aimed at a well-defined objective of a common interest (such as growth, employment, cohesion, environmental protection, etc).
This can include both efficiency and equity objectives. The efficiency objective aims at correcting a market failure (e.g. externalities, imperfect information, coordination problems). The equity objectives can include, for example, the employment of disabled workers, or encouraging firms to set up factories in disadvantaged regions. In some cases aid can also be authorised in order to promote the transition to better functioning markets.
2. Well-designed instrument
The basic issue here is to ascertain whether the aid is well designed to deliver the objective of the common interest identified above. In order to do that, the answers to the following three questions will be crucial:
- Is the aid an appropriate policy instrument? Without interfering with the Member States choice of policy instruments, State aid should be used where the advantages of using a selective instrument (such as State aid) are established and demonstrated.
- Is there an incentive effect? Does the aid change the behaviour of the beneficiary? The beneficiary should, as a result of the aid, engage in activities that it would (i) not carry out without the aid at all or (ii) carry out only in a restricted or different manner. The aim is to avoid State aid for an activity which the company would undertake in any case, even without the aid, in the same extent (e.g. a training which the company would have to do for its employees in any case in order to operate).
- Is the aid measure proportionate to the problem tackled? This question addresses whether the same change in behaviour could have been achieved with less aid. The amount and intensity of the aid must be limited to the minimum necessary for the activity to take place. Normally, aid is deemed proportional if the maximum aid intensities set by legislation are respected.
In oder to perform the analysis, the Commission must identify a counterfactual scenario. The idea is to compare the aided project with a hypothetical situation that no aid was given. Only in such way can some of the objectives of the common interest (e.g. a market failure) and the incentive effect (did the behaviour of the beneficiary change?) be analysed.
3. Balancing of the positive and the negative effects/overall balance positive
This question addresses the possible negative effects of the aid and their magnitude against which its positive effects are balanced.
The negativ effects are primarily distortive effects on competition and trade. They may include prevention of exit and keeping inefficient firms afloat, crowding out of private investment, disrupting dynamic incentives, costs of State aid linked to fiscal spending etc.
In order for the aid to be found compatible, a high magnitude of negative effects needs to be sufficiently offset by a corresponding high level of positive effects of the aid. In order to perform such analysis, the effects on both sides of the equation should be expressed both in qualitative and, insofar as possible, in quantitative terms. The Commission will make an overall assessment of their impact on producers and consumers in the markets concerned by the aid measure. The overall outcome will depend on a series of features of the proposed aid measure and will be assessed on a case by case basis for measures subject to the detailed assessment.