State Aid is something of a European hot potato as the European Commission is currently in the process of reforming the rules surrounding State Aid.

This reform process is the key priority for Robert Hankin, head of the Regional Aid Unit at the European Commission.

State Aid involves support given by a member state to businesses, in the form of subsidies or tax breaks for example, and has a wide-ranging impact throughout Europe. The European Commission polices State Aid very strictly due to its potential to affect trade between member states of the European Union and to distort competition.

At the Scottish Competition Law Forum (SCLF) in Edinburgh last month, Robert Hankin discussed the Commission’s approach to the enforcement of State Aid and new regional aid guidelines.

In Scotland, State Aid has proved to be a lifeline for the Highlands & Islands region, which is deemed to be one of the poorer areas of the European Union where regional investment aid can be permitted. As Scotland consists in large part of rural and disparate communities, if State Aid stops we could become less competitive relative to our European neighbours.

The UK government also has the possibility to designate other areas of Scotland as eligible for regional aid, albeit at lower levels than those allowed in the Highlands, within a global population allocation for the UK.

Mr Hankin recognised that, as with other parts of the EU, some parts of Scotland could lose their eligibility to provide regional investment aid. However, those regions should be encouraged to use alternative forms of aid, for example to encourage research, development and innovation, to support SMEs to close the equity gap and to encourage risk capital investments.

Companies need incentives and motivation to operate in such unique environments. While not discussed at the SCLF meeting, a recent example of the controversy surrounding State Aid involved the operations of Caledonian MacBrayne. When ferry routes operated by CalMac were opened up to competitors, funding of these services to lowly populated and remote areas of Scotland became a divisive issue.

CalMac has traditionally received state funding, and when Ministers put the ferry network out to competitive tender recently, competitors such as Arran Ferries and Western Ferries - both private companies - felt they were at a disadvantage in having to compete with CalMac, due to the latter's state subsidies. This lead to some parties pulling out of the tendering process altogether and V-ships, another private company, is currently considering its position in the tendering process. Mr Hankin commented on this type of situation, "One has to consider what would happen if a company chooses not to send out a tender. In the opinion of the European Commission this could result in the consumer not always receiving the best product, as if only one company puts its product forward, this company will then be able to control the market. The tendering process has to be fair to all companies involved."

Mr Hankin highlighted the need for the Commission to simplify State Aid rules and refine economic analysis of subsidies in order to better target cases that genuinely distort competition. He would like to see a more pro-active use of State Aid rules by companies to challenge unlawful subsidies that are granted to their competitors. He also wants to speed up recovery of aid that has been unlawfully granted by member states.

Over the coming months, the European Commission will publish new regulations regarding de minimis aid (the level beneath which public support is considered not to affect trade and competition at EU level), risk capital, research, development and innovation. This means that in order to create appropriate aid schemes, member states must ensure an accurate interpretation of the EC legal requirements and have an understanding of the approach adopted by the Commission. In this respect, case study analysis and exchange of experiences with officials from Community institutions and member states is essential. The SCLF plays a valuable role in this process.

So far, the Commission has published new guidelines that will make access to finance easier for SMEs in the early stages of development. In Scotland, this could boost growth and help create more jobs. The guidelines are part of the Commission’s State Aid Action Plan (SAAP) to promote competitiveness of EU industry and boost job creation.

So while, as Mr Hankin pointed out, every aid does distort competition within the EU, when countries such as Scotland consider State Aid, we need to take account of the legal, political and economic angles which come into play in this area. Scotland needs State Aid, but it appears that in future this will require to be reduced and better targeted than is currently the case.

Gordon Downie, a partner at Shepherd and Wedderburn, is convenor of the Scottish Competition Law Forum.

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