REPORT ON THE DRAFT LAW ON STATE AID TO UNDERTAKINGS

Transcription

1 HARMONISATION OF PUBLIC PROCUREMENT SYSTEM IN UKRAINE WITH EU STANDARDS REPORT ON THE DRAFT LAW ON STATE AID TO UNDERTAKINGS Dr Eugene Stuart And Mr Sigitas Cemnolonskis March 2014 A Project funded by the European Union and implemented by a consortium led by Crown Agents Ltd

2 The contents of this Report are the sole responsibility of the Crown Agents and its consortium partners and the opinions expressed in this Report are not to be understood as in any way reflecting an official opinion of EUROPEAID, the European Union or any of its constituent or connected organisations. 2

3 TABLE OF CONTENTS Page Executive Summary 5 1. Introduction 7 2. Assessment of the Draft Law on State Aid to Undertakings - Introduction - Overview of the Draft Law on State Aid to Undertakings - Analysis of the Draft Law on State Aid to Undertakings 3. Conclusions and Recommendations - Conclusions - Recommendations Annexes 40 Annex 1: Text of Draft Law on State Aid to Undertakings 41 Annex 2: Text of Draft Law on State Aid to Undertakings with proposed 52 amendments added. 3

4 ABBREVIATIONS: AC AMCU CM CEFTA DCFTA EEC ENPI EU MEDT MINFIN MJ PCA SAA SCMA SFI TFEU TRIMS WTO Accounting Chamber Anti-Monopoly Committee of Ukraine Cabinet of Ministers Central European Free Trade Agreement Deep and Comprehensive Free Trade Area European Economic Community European Neighbourhood & Partnership Instrument European Union Ministry of Economic Development and Trade Ministry of Finance Ministry of Justice Partnership and Cooperation Agreement Stabilisation and Association Agreements Subsidies and Countervailing Measures Agreement State Finance Inspection Treaty on the Functioning of the European Union Trade Related Investment Measures Agreement World Trade Organisation 4

5 EXECUTIVE SUMMARY The EU funded Project: commenced work in Kiev on 11 November The Project is being implemented by a consortium led by the leading international firm CROWN AGENTS Ltd and will operate until November The Project is working to support the development of both the public procurement and state aid systems of Ukraine to meet EU standards. The present Report examines the extent of approximation of the Draft Law on State Aid to Undertakings which completed its first reading in the Verkhovna Rada on 8 October 2013 with EU standards. In addition, it proposes amendments considered necessary to correct technical deficiencies to bring the draft Law into full compliance with EU standards. State aid is essentially about the impact on competition and trade of subsidies, tax breaks and other forms of government concessions which benefit some firms and, therefore, can impact negatively on other firms. In the modern era of free trade, these types of state economic intervention are now regarded as problematic when they have a significant impact on trade and competition. With the opening up of trade and the international position of a country (including EU integration and WTO membership) a key consequence is that international rules concerning state support to economic activity (and the interests of new trading partners in the impact of state aids and subsidies on trade and competition) need to be taken fully into account. Consequently, since the 1990s, State Aid regulatory systems are required by the EU in its pre-accession agreements and trade related agreements with a range of countries including the new Member States (Europe Agreements), the countries of the former Soviet Union (PCA) and the Balkans (SAA). These systems are also required under CEFTA 2006 and the Energy Community Treaty and, in turn, they assist in regard to compliance with WTO rules in the context of several agreements, notably the SCMA and the TRIMS. The current legal framework for EU-Ukraine relations is the PCA which entered into force in Subsequently, the ENPI Action Plan of 2005 further elaborated certain relevant points as regards priorities and progress in applying certain PCA provisions. In regard to state aid, the PCA provisions required Ukraine to refrain from granting State Aids, insofar as they affected trade between the EU and the Ukraine, and Ukraine was also required to gradually approximate its legislation with EU law. The provisions of the Action Plan concerning state aid highlighted the importance of the early development of legislation compatible with EU rules and the establishment of monitoring and transparency mechanisms. In addition, on 1 February 2011, Ukraine became a Contracting Party to the Energy Community Treaty. Accordingly, Articles 18 and 19 of the Energy Community Treaty, which require EU compatible rules as regards State Aid in the energy sector, became applicable in Ukraine together with the application of a range of EU sectoral energy legislation. In March 2007 negotiations on a new EU - Ukraine Association Agreement and DCFTA were launched to replace the PCA. In 2012 the negotiations were completed and the relevant draft documents were initialled by the representatives of Ukraine and the EC in July The proposed Association Agreement provides, among other provisions, that Ukraine should accomplish a number of comprehensive reforms in several spheres, including State aid regulation (Articles 262 to 267) within a specified transitional period. Thus, the provisions of the Association Agreement and DCFTA regarding state aid are intended to further elaborate, prioritise and timetable the steps to be taken to achieve functioning systems in Ukraine which would be fully compatible with EU standards. Nonetheless, existing commitments provided, and continue to provide, sufficient clarity as regards what needs to be done to establish a state aid system in Ukraine compatible with EU standards. At the same time, it is appropriate to take account of the fact that the Association Agreement was signed on 21 March 2014 (while this Report was being finalised), even though the economic chapters of the Agreement (including the detailed commitments regarding state aid) will not come into force for the time being. 5

6 On 8 October 2013, the Draft State Aid Law completed its first reading with no changes made to the text. No timetable has yet been set for the second and third readings of the Draft State Aid Law. While the adoption of the Draft State Aid Law would represent an important milestone for the development of Ukraine s state aid system, the draft contains a number of deficiencies which should be taken into account and, if possible, remedied in the remaining stages of the parliamentary process. These corrections would ensure that the Law, even as a framework law, is sufficiently in line with EU standards to successfully create the basis for a fully functioning state aid system in Ukraine. Chapter 2 of this Report analyses the Draft Law in detail and proposes a total of 14 specific amendments. These are summarised in the recommendations of Chapter 3 which also prioritises the suggested changes to the Draft Law. In particular, we attach major importance to the revision of Articles 6 and 7 and we propose a detailed new text for Article 6 and a simplified text for Article 7. The importance of these inter-cconnected recommendations lies in the fact that, unless Articles 6 and 7 are revised along the lines we propose, there is a real risk that the Law would become unworkable and a virtual certainty that it would fail, in practice, to comply with EU standards. The present text of the Draft Law is set out in Annex 1 to this Report and Annex 2 presents the text with the inclusion of all proposed changes arising from the analysis in this Report. 6

7 1. INTRODUCTION The Project and this Report The EU funded Project: commenced work in Kiev on 11 November The Project is being implemented by a consortium led by the leading international firm CROWN AGENTS Ltd and will operate until November The Project is working: to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian state aid system. Support activities primarily focus on expert advice on policies, legislation and institutional structures and operations together with a range of training activities and awareness raising and public outreach activities and initiatives. The main beneficiaries of the Project are the Ministry of Economic Development and Trade (MEDT) and the Anti-Monopoly Committee of Ukraine (AMCU). At the same time, the scope of work of the Project anticipates collaboration with a wider range of stakeholders including the Cabinet of Ministers, the Parliament (Verkhovna Rada), the Ministry of Finance, the Ministry of Justice, the Accounting Chamber, the State Finance Inspection (SFI) and other organizations involved and with an interest in the public procurement and state aid sectors. The present Report examines the extent of approximation of the Draft Law on State Aid to Undertakings, which completed its first reading in the Verkhovna Rada on 8 October 2013, with EU standards. In addition, it proposes amendments considered necessary to correct technical deficiencies to bring the draft Law into full compliance with EU standards 1. General Background State aid is essentially about the impact on competition and trade of subsidies, tax breaks and other forms of government concessions which benefit some firms and, therefore, can impact negatively on other firms. Every country (including all Member States of the EU and the WTO) support economic activity (i.e. they assist industrial sectors, particular firms, regional development, innovation, investment, trade development, small business development, and key sectors such as transport, agriculture and defence industries) to a greater or lesser extent by various instruments including subsidies, tax reliefs and other less direct supports. This type of state activity is as old as the most traditional Finance function of government (tax raising + public spending). However, in the modern era of free trade, these types of state economic intervention are now regarded as problematic when they have a significant impact on trade and competition. With the opening up of trade and the international position of a country (including EU integration, WTO and CEFTA membership) a key consequence is that international rules concerning state support to economic activity (and the interests of new trading partners in the impact of state aids and subsidies on trade and competition) need to be taken fully into account. From the 1950 s there was a concern in the EU that the creation of a single common market could be undermined by the unregulated subsidisation of businesses by EU Member State governments. A further concern was that EU competition rules (regulating the market behaviours of businesses) would not achieve the desired results if governments remained free to create distortions of competition and trade via state aids to selected business entities. These concerns continue 1 This fulfills a planning commitment by the Project under Component 5.1 of the Inception Report of January

8 to the present day and become more acute with every enlargement of the EU and the opening of trade relations and EU integration processes with non-eu countries. Accordingly, the EU state aid regulatory system aims to ensure that government interventions do not distort competition and trade. The provisions of the original EEC Treaty have remained substantially unchanged over the years and the present Treaty provisions are to be found in Articles 107 to 109 of the Treaty on the Functioning of the European Union which came into force in December Article 107 of the Treaty on the Functioning of the European Union sets out a general prohibition on state aid; while recognising that, in some circumstances, government interventions are necessary for a well-functioning and equitable economy. Thus, with the agreement of the European Commission, certain types of state aid are allowed for certain purposes and within the limits set down by a series of legal acts regarding exemptions from the general prohibition on the granting of state aid. Normally, where an EU Member State seeks to have a state aid measure exempted, it must first notify the measure to the European Commission and await a decision on (a) whether the measure is a state aid and (b) whether or not it can be exempted; either with or without conditions. Since the 1990s, State Aid regulatory systems are required by the EU in its pre-accession agreements and trade related agreements with a range of countries including the new Member States (Europe Agreements), the countries of the former Soviet Union (PCA) and the Balkans (SAA). These systems are also required under CEFTA 2006 and the Energy Community Treaty and, in turn, they assist in regard to compliance with WTO rules in the context of several agreements, notably the SCMA and the TRIMS. The current legal framework for EU-Ukraine relations is the PCA which entered into force in Subsequently, the ENPI Action Plan of 2005 further elaborated certain relevant points as regards priorities and progress in applying certain PCA provisions. In regard to state aid, the PCA provisions required Ukraine to refrain from granting State Aids, insofar as they affected trade between the EU and the Ukraine, and Ukraine was also required to gradually approximate its legislation with EU law. The provisions of the Action Plan concerning state aid highlighted the importance of the early development of legislation compatible with EU rules and the establishment of monitoring and transparency mechanisms. In addition, on 1 February 2011, Ukraine became a Contracting Party to the Energy Community Treaty. Accordingly, Articles 18 and 19 of the Energy Community Treaty, which require EU compatible rules as regards State Aid in the energy sector, became applicable in Ukraine together with the application of a range of EU sectoral energy legislation. In March 2007 negotiations on a new EU - Ukraine Association Agreement including a Deep and Comprehensive Free Trade Area (DCFTA) were launched to replace the PCA. In 2012 the negotiations were completed and the relevant draft documents were initialled by the representatives of Ukraine and the EU in July The proposed Association Agreement provides, among other provisions, that Ukraine should accomplish a number of comprehensive reforms in several spheres, including State aid regulation (Articles 262 to 267) within a specified transitional period. It also provides that the EU, for its part, will provide Ukraine with the necessary technical assistance and budget support to approximate and implement the new legal framework. Thus, the provisions of the Association Agreement and DCFTA regarding state aid are intended to further elaborate, prioritise and timetable the steps to be taken to achieve functioning systems in Ukraine which would be fully compatible with EU standards. Nonetheless, existing commitments provided, and continue to provide, sufficient clarity as regards what needs to be done to establish a state aid system in Ukraine compatible with EU standards. On 21 March 2014, the political part of the Association Agreement was signed leaving the economic chapters for signature later in These latter chapters include the state aid system requirements of the Agreement and this analysis takes due account of these provisions in the context of the international obligations of Ukraine with regard to state aid as specified in the Preamble to the Draft Law on State Aid to Undertakings. 8

9 The Ukrainian Context A lack of State aid control is regarded as one of the weaknesses in the Ukraine s public finance management system; resulting in selective state support measures for certain enterprises (for instance for state owned enterprises) which in turn reduces competition and imposes limitations on the functioning market economy in Ukraine. Moreover, to promote good governance and to better allocate scarce budget resources, it is necessary to develop transparency and modern regulation in the field of state aid. Accordingly, the Governmental Concept for public finance management system reform and the Programme for Economic Development of Ukraine in indicated the necessity to develop state aid legislation and adopt a State Aid Law. The Draft State Aid Law was prepared in 2012 by a working group representing the main central government stakeholders and with the support of an earlier EU funded project. In 2012 the Government adopted the Draft and submitted it to the Verkovna Rada. Subsequently, the newly elected Parliament returned the draft for further elaboration and re-submission. On 8 October 2013, the draft State Aid Law completed its first reading with no changes made to the text as submitted by the Cabinet of Ministers. It is currently planned for adoption and signature by end Even if this timetable is met, extensive secondary legislation will also be required together with a significant institutional effort to make the new state aid system operational. While the extent of State aid in Ukraine remains generally unknown and somewhat secret, Ukraine submitted its new and full notification of subsidies to the WTO on 2 July 2013 covering the following. 9

10 Subsidies Ukraine WTO Subsidies under the SCMA (period 2011 and 2012) 2 Value (thousand UAH) HORIZONTAL PROGRAMMES Special Economic Zones and Priority Territories 377,250 Technological Parks 0 SECTORAL PROGRAMMES Shipbuilding 55,966 Aircraft 2,390,194 Machinery for agriculture No data Space industry 527,000 Coal Mining 22,608,310 Book-publishing 9,400 TOTAL 25,968,119 While the adoption of the Draft State Aid Law would represent an important milestone for the development of Ukraine s state aid system, the draft contains a number of deficiencies which should be taken into account and, if possible, remedied in the remaining stages of the parliamentary process. These corrections would ensure that the Law, even as a framework law, is sufficiently in line with EU standards to successfully create the basis for a fully functioning state aid system in Ukraine. 2 WTO Committee on Subsidies and Countervailing Measures, New and Full Notification pursuant to Article XVI:1 of the GATT 1994 and Article 25 of the Agreement on Subsidies and Countervailing Measures, G/SCM/N/253/UKR, 11 July

11 2. ASSESSMENT OF THE DRAFT LAW ON STATE AID TO UNDERTAKINGS 2.1. INTRODUCTION This Report overviews the provisions of the Draft Law On State Aid to Undertakings based on the text currently before Parliament (reproduced in Annex 1 to the Report). It then identifies the deficiencies in the Draft Law vis-à-vis EU standards and as appropriate, with regard to practical implementation considerations. Recommendations are then advanced based on the analysis and include draft amendments to the present Draft Law (which are brought together in Annex 2 of the Report) OVERVIEW OF THE DRAFT LAW The Draft Law begins with the following Preamble: This Law establishes the legal basis for monitoring of state aid to undertakings, control over compatibility of such aid with competition in order to ensure protection and development of competition, to enhance transparency of operation of the state aid system and compliance with international obligations of Ukraine with regard to state aid. Accordingly, the Preamble to the Draft Law makes clear that it addresses the monitoring and the control of State aid in Ukraine. Monitoring is a necessary administrative function in order to know what State aid is being given or planned in the country. The control function focusses on the ex-ante examination of the legality of State aid measures in the context of their actual or potential effects on competition. A further function of the legislation relates to the transparency of State aid and this refers to the updating of data (via the state aid inventory) and the reporting element of the State aid system. Moreover, the Preamble specifies the three inter-related functions of the Law, which are: - to ensure the protection and development of competition; - to enhance transparency of operation of the State aid system and - to comply with the international obligations of Ukraine with regard to State aid. The Draft Law is structured in 9 Chapters as follows: Chapter 1- General Provisions. This Chapter includes Articles 1 to 4. They cover definitions of terms, the principle of incompatibility of State aid with competition, the scope of the Law and forms of State aid. Chapter 2 - Compatibility of State Aid. Chapter 2 has three articles - Articles 5 to 7. They cover de jure compatible measures, State aid measures which may be compatible and which are subject to discretionary approval and the establishment of block exemption regulations regarding the obligation of State aid providers to notify State aid measures. Chapter 3 - Authorised Body. This Chapter contains one article, Article 8, which covers the powers and functions of the AMCU as the future regulator of State aid in Ukraine. 11

12 Chapter 4 - New State Aid. Chapter 4 (Articles 9 to 12) provides for notification procedures, preliminary (review) and investigative (consideration) stages of State aid assessment by the AMCU and a fast-track procedure for the adoption of an opinion on the compatibility of a State aid measure at the request of an interested party with the right of legislative initiative. Chapter 5 - Illegitimate State Aid and inappropriate use of State aid. This Chapter has two important articles (Articles 13 and 14). They cover investigations of unlawful (illegitimate) State aid and misused (inappropriate use of) State aid. Chapter 6 - Return of State Aid Incompatible with Competition. This Chapter addresses (Article 15) the procedure for State aid recovery in regard to unlawful state aid which is incompatible with competition and misused state aid. Chapter 7 - Current State Aid. Chapter 7 sets out the procedure for the review of existing State aid by the AMCU in one article (Article 16). Chapter 8 - State Aid Monitoring. Articles 17 and 18 provide for the establishment and updating of a national register of State aid at the AMCU, annual reporting on State aid to the Government and the right of appeal against State aid decisions taken by the AMCU. Chapter 9 - Final and Transitional provisions. Chapter 9 contains standard drafting provisions and substantive rules regarding the entry into force of the Law (three years after its publication). These include the requirement for all State aid providers to notify the AMCU of State aid programmes existing at the time the Law enters into force and the requirement that the AMCU reviews these State aid programmes. In parallel with the Draft Law, it can be noted that a separate Draft Amendment to the Budget Code of Ukraine is also currently before the Verkovna Rada. This provides for the insertion in Article 35 of the Budget Code of the following requirement: 4. If a budget request provides granting of aid to undertakings through state or local budget in any form, principal entities in charge of budgetary spending attach together with the budgetary request a copy of a decision of the Authorised body in charge of State aid, made as a result of the review of the notification of a new State aid or as a result of a review of a State aid case according to the Law of Ukraine On State aid to Undertakings, or notify in a written form about the relief from an obligation to notify of a new State aid referring to the provisions of the aforementioned Law and other normative acts (secondary legislation), which establish conditions for such a relief.. It also provides that the new provision to be inserted in the Budget Code shall come into force at the same time as the Law on State aid to Undertakings. In the next Section we examine the provisions of the Draft State Aid Law in detail ANALYSIS OF THE DRAFT LAW ON STATE AID TO UNDERTAKINGS CHAPTER 1 (ARTICLES 1 to 4) Article 1: Definition of terms - Summary of substance Article 1 sets out definitions for the interpretation and implementation of the Law. It covers the main terminology (such as State aid to undertakings, current State aid, illegitimate State aid and services of general economic interest). It also 12

13 clarifies that certain important definitions in the Law of Ukraine On Protection of Economic Competition will also apply in the present Law notably terms such as undertaking, economic competition etc. The following definitions are set out in Article 1: state aid to undertakings; parties concerned; individual state aid; state aid monitoring; state aid provider; disadvantaged person; de minimis state aid; illegitimate state aid; inappropriate use of state aid; new state aid; state aid beneficiary; notification of new state aid; services of general economic interest; state aid programme; state resources; local resources; venture capital; current state aid. Comments on Article 1 The definition of State aid to undertakings. The core provisions of Articles 107 and 108 of the Treaty on the Fiunctioning of the European Union (TFEU) set out a prohibition on state aid (based on its nature (state resourced) and its effects: creating a selective advantage coupled with undue or unacceptable effects on trade and competition). The definition of State aid in Article 1 applies to measures which are provided by or through state resources, which create a selective advantage for one or more aid recipients and which distort or threaten to distort competition. Accordingly, it is clear that the fourth condition of EU law for State aid to exist an effect on trade is not specifically included. An aid that meets the criteria of advantage, specificity and distortion of competition is not State aid within the meaning of the Article 107 and is not prohibited aid in EU Law if no trade effect can be implied. The measures that meet all the four criteria specified above are considered to constitute State aid according to Article 107(1) of the TFEU and thus covered by the general prohibition principle. Any aid that does not meet the criteria specified in Article 107 is not prohibited. Examples of aid which do not meet the criteria include the following: aid to public institutions or entities that are not engaged in economic activities (i.e. not undertakings); support measures to persons that do not grant any exceptional benefit to individual undertakings; general support measures applied to all undertakings throughout the country; public procurements in the acquisition of goods and services at market prices (in relation to open and transparent tenders); measures that do not involve the use of the funds of the State or municipal budgets, including dedicated funds such as the budget of the social insurance system; 13

14 measures applied to public institutions when public institutions behave like a private market investor; support to infrastructure where the aid does not provide any exceptional benefit to one or several users; individual cases of provisions of State guarantees. While it would be desirable that the definition in the Draft law would include the criterion of an actual or potential effect on international trade, it is recognized here that this can be a complex and sometimes confusing matter in a national regulatory system (where the scope of the term trade in particular would require delineation). Moreover, the number of instances where the three other criteria are met and no effect on trade can be implied are extremely rare in practice. Thus, the Draft Law provides a reasonably elegant solution in that the Preamble makes clear reference to the international obligations of Ukraine as regards State aid. This reference is important as regards the implementation of the rules of State aid control as, under the terms of the Association Agreement/DCFTA, in particular, the Ukrainian rules must be similar in their application to those of the EU. Therefore, it can be reasonably inferred that the provisions of the Law will be applicable to those support measures that are considered as State aid (in EU terms). At the same time, to avoid doubt, it is desirable that Article 1 refers, not just to any support, but to any direct or indirect support. The definition disadvantaged worker. In EU law the definition 'disadvantaged worker' means any person who: (a) has not been in regular paid employment for the previous 6 months; or (b) has not attained an upper secondary educational or vocational qualification ; or (c) is over the age of 50 years; or (d) lives as a single adult with one or more dependents; or (e) works in a sector or profession in a Member State where the gender imbalance is at least 25% higher than the average gender imbalance across all economic sectors in that Member State, and belongs to that underrepresented gender group; or (f) is a member of an ethnic minority within a Member State and who requires development of his or her linguistic, vocational training or work experience profile to enhance prospects of gaining access to stable employment; 3 It was recently proposed by the European Commission to include in the definition people who are between 15 and 24 years of age and also people who are within two years after completing full-time education and who have not previously obtained their first regular paid employment. Disadvantaged person as defined in Article 1 of the Draft Law refers only to a person who is over 50 years, who has no regular source of income over the last six months and who lives together with one or more his or her dependents. Under the definition in the Draft Law, all of these conditions must be met for a worker to be regarded as disadvantaged. EU Law, by contrast sets out six conditions for workers to be considered disadvantaged and these are not cumulative. Therefore the definition of disadvantaged person needs to be corrected, a) so that it has a direct reference to the employment status of a person (not just a person but a worker ) and b) so that the conditions are listed as individual characteristics of a worker s disadvantaged position and not cumulatively, as it is currently defined. It is also to be noted here that EU Law provides also for State aid supporting Disabled workers - any person who is recognised as disabled under national law or has a recognised limitation which results from physical, mental or psychological impairment, hindering their effective participation in a work environment on an equal basis with other 3 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Article 87 and 88 of the Treaty (General block exemption Regulation) 14

15 workers 4. While we generally recommend the inclusion of the definition in the Draft Law (as the term disabled people is used in the current text of Article 7(1), the absence of a definition of disabled worker is not crucial as, absent a definition, this will remain a matter for Ukrainian Law to interpret vis-а-vis the relevant State aid rules. The definition de minimis State aid. According to the Draft Law this means State aid to one undertaking, the total amount of which does not exceed 2 million UAH over the last three years irrespective of its form and sources. The aforementioned threshold is lower compared to that used in the EU ( 200,000 over any period of three fiscal years) 5. Accordingly, it is recommended here that the amount of national currency is equivalent to 200,000 over any period of three fiscal years. Another comment on this definition is that de minimis aid is not classified as state aid under EU Law. Thus the word state here is superfluous. On the other hand it is not an issue of crucial importance. The definition of current State aid. According to the Draft Law, current State aid means State aid measures existing as of the effective date of the Law or found compatible with competition by the AMCU, and which have not yet expired. This definition is somewhat narrow by comparison with the EU definition of existing state aid 6 which also covers the following cases: State aid which is deemed to have been authorised when the regulator fails to commence a State aid case within the period prescribed for the review of a new State aid notification. State aid with regard to which the limitation period has expired and measures which at the time they were put into effect did not constitute State aid and became State aid later due to the evolution of the market. The definition of a State aid programme. According to the Draft Law a State aid programme means a legal act on the basis of which State aid is granted to certain categories of undertakings for a certain or an indefinite period of time in a definite or indefinite amount. This definition is somewhat different and less precise than the EU definition which is laid down in Commission Regulation (EC) No 659/1999. According to this Regulation, a State aid programme means any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid, which is not linked to a specific project, may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite amount. Missing definitions certain EU terminology related to categories of State aid, which is important in the assessment of compatibility with competition, is not included in the Draft Law. The categorisation of State aid is also important in the EU system as some purposes are generally more acceptable than others. While some of the relevant State aid categories are referred to in the present text of Article 7 of the Draft Law, they could be usefully defined here. This refers, in particular, to: 1) regional development aid; 2) research, development and innovation aid; 3) aid to small and medium business entities; 4) export aid; 5) aid in the form of export credit insurance; 6) rescue and restructuring aid; 7) sectoral aid measures; 4 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Article 87 and 88 of the Treaty (General block exemption Regulation) 5 Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid 6 Council Regulation (EU) No 734/2013 of 22 July 2013 amending Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty 15

16 8) environmental protection aid. In addition some other main definitions, in the context of EU regulation could have been included in the text. This refers for example to eligible costs, State aid intensity as well as date of granting the State aid. The focus of the concept of eligible costs in State aid regulation is on the delineation of the total costs of some activity that is being assisted by state support so that the percentage degree of the state support can be calculated (the State aid intensity). Due to the fact that several conceptually necessary definitions are still not included in the Draft Law, it is probably advisable to have these elaborated and defined in the relevant secondary legislation. This view is subject to one important consideration it is necessary to ensure that secondary legislation to apply the Draft Law fully addresses these 8 categories, regardless of whether they are directly or indirectly referred to in the Draft Law and even if the Draft Law makes no reference them. Suggested changes to Article 1: The definition State aid to undertakings should read: 1) State aid to undertakings (hereinafter, State aid) means any direct or indirectsupport to undertakings through state resources or local resources in any form whatsoever which distorts or threatens to distort economic competition by creating advantages for the production of certain kinds of goods or for carrying out certain business activities; The definition of disadvantaged person should be changed to disadvantaged worker and read 7 : 6) disadvantaged worker means any person who: (a) has not been in regular paid employment for the previous 6 months; or (b) is between 15 and 24 years of age; or (c) has not attained an upper secondary educational or vocational qualification or is within two years after completing full-time education and who has not previously obtained his or her first regular paid employment; or (d) is over the age of 50 years; or (e) lives as a single adult with one or more dependents; or (f) works in a sector or profession where the gender imbalance is at least 25% higher than the average gender imbalance across all economic sectors, and belongs to that underrepresented gender group; or (g) is a member of an ethnic minority and who requires development of his or her linguistic, vocational training or work experience profile to enhance prospects of gaining access to stable employment; A new definition worker with disabilities could be included to provide that: 'worker with disabilities' means any person who: (a) is recognised as a worker with disabilities under national law; or 7 But see also our proposal for the re-drafting of Articles 6 and 7. If this is accepted, the definitions of disadvantaged worker and worker with disabilities and venture capital would not be needed in Article 1, leaving these to be defined, instead, in the relevant secondary legislation. In Annex 2 to this Report, these definitions are not revised for this reason. 16

17 (b) has a long-term physical, mental, intellectual or sensory impairment which, in interaction with various barriers, may hinder that worker s full and effective participation in a work environment on an equal basis with other workers; The definition of current State aid should more accurately refer to existing State aid and read: 18) existing State aid means: - authorised State aid, that is to say, tate aid programmes and individual tate aid which have been authorised by the Authorised Body; - all tate aid which existed prior to the entry into force of the Law, that is to say, tate aid programmes and individual tate aid which were put into effect before, and are still applicable after, the entry into force of the Law; - State aid which is deemed to have been authorised pursuant to Article 10 (7) of the Law when the Authorised Body fails to commence a State aid case within the period for review of a new tate aid notification as required by Article 10(5). - any State aid with regard to which the limitation period has expired pursuant to Article 15(6) of the Law; - State aid which is deemed to be an existing state aid because it can be established that at the time it was put into effect it did not constitute tate aid, and subsequently became tate aid due to the evolution of the market and without having been altered by the tate aid provider. Where certain measures become state aid following the liberalisation of an activity by national law, such measures shall not be considered as an existing state aid after the date fixed for liberalisation. The definition of de minimis State aid 8 should read: 7) de minimis state aid means state aid to a single undertaking of up to the UAH equivalent of 200,000 in total over any period of three fiscal years. The definition of State aid programme should be amended to read: 13) a tate aid programme means any act on the basis of which, without further implementing measures being required, individual state aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which state aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite amount; Article 2: Principle of Incompatibility of State Aid with Competition Summary of substance and Comments Article 2 provides that State aid is, in principle, prohibited because it is incompatible with competition. However, the principle of incompatibility does not amount to a full-scale prohibition of state support to undertakings. Even state support which constitutes State aid, as it is defined in Article 1 (with the key characteristics to be assessed cumulatively), may be granted in conformity with conditions set out in the Law. This general rule is laid down in Article 2 to demonstrate that fair competition essentially may be ensured only if undertakings operate in the market using their own resources. As a point of principle, the provision of State aid creates an uneven playing field for the undertakings in the market. In comparison with competitors, undertakings receiving State aid benefit from lower production costs. Moreover, State aid can artificially sustain inefficient undertakings allowing 8 The Draft Law provides literally for insignificant aid in the Ukrainian text. The Latin expression de minimis could be included in brackets in the Ukrainian text as a synonym in order to adjust the legal terminology to the EU standard. 17

18 them to compete with economically efficient and competitive undertakings. Suggested changes to Article 2 None Article 3: Scope of Law - Summary of substance and comments Article 3 provides for the general application of the Law to all types of state aid. The Article then defines exclusions. The specific exclusions relate to support measures by the state related to: agricultural production and fisheries, the production of weapons and military ammunition to meet the needs of the Armed Forces of Ukraine, other military groups established in accordance with the laws of Ukraine, as well as special-purpose law-enforcement bodies, State special transport services, State special communications and data protection services; business activity associated with the provision of services of general economic interest (SGEIs) to the extent that reasonable expenses for the provision of such services are indemnified in part; business activity associated with investments in infrastructure facilities using public procurement procedures. The exclusion of agriculture, fisheries, the defence sector and certain types of support to SGEIs will be essentially consistent with EU Law and the requirements of the EU-Ukraine Association Agreement provisions. The exclusion of agriculture is justified because contrary to the EU countries Ukraine is not the country to which the EU Common Agricultural Policy applies and it is justified because of the special position of agricultural subsidies reflected in various WTO agreements. The same applies in general terms to the fisheries sector. The fisheries sector in the EU is subject to extensive intervention and support at EU level and State aid to fisheries in EU Member States is justified if it is in accordance with the objectives of EU s Common Fisheries Policy. Therefore the exclusion of fisheries from the scope of application of the Law is logical. With regard to the exclusions of state aid in the defence sector, this exclusion is considered acceptable even though its actual scope may be somewhat difficult to precisely define in the present circumstances in Ukraine. We also note here that the exclusion of support to the State special transport services and the State special communications and data protection services are apparently also related to the Military and Security services of Ukraine and, as such, do not exclude state aid to the providers of normal market services regarding transport or communications. With regard to financial support for infrastructure the general rule in the EU system is that, if the infrastructure is provided for general use (as opposed to a dedicated purpose) and benefits no particular user, there is no selectivity and hence no State aid (for example, the construction of road). Furthemore, if there is no special advantage because the user of the infrastructure contributes to its costs (in case of a public infrastructure installation) and gains no benefit, again there is no State aid. Where, however, the utility services are installed for the benefit of a single firm, which does not in turn meet the costs of these services, then, if state resources are involved, this would meet the selectivity test and would be State aid. If an EU Member State makes available financial support to provide infrastructure such as road or rail services to improve connections to a new or upgraded site on which certain production facilities are to be sited, it may well be concluded that this could amount to a selective benefit to the end user. But if the development of road (or rail) infrastructure costs was normally borne by public funds and the benefit of the infrastructural improvements were not solely to be attributed to the owners of the new or upgraded site, but could be seen to be of wider public benefit, then such a transaction would not constitute State aid given the multi-functionality of the infrastructure. Thus, it is very important that the facility is open to all potential users on a non-discriminatory basis. 18

19 In determining who may enjoy a selective benefit of an infrastructure project, it is, of course, necessary to examine each of the categories of potential beneficiaries of public assistance the end users, the owners/operators as well as shareholders if a public-private financial construction is used. Even if the facility is subject to open and nondiscriminatory access, the owners or operators of an infrastructure may still receive a selective benefit if they are not selected by means of an open and non-discriminatory procedure and they receive more than a market price to cover the construction and operation costs of the facility in question. An additional relevant factor may be the issue of who should own the infrastructure on completion and whether the overall terms of the transaction are market-based. Support for Infrastructure State Aid or Not? On this issue, the European Commission decision practice confirms that, with respect to end-users, the funding of educational buildings, sewage treatment facilities and waste disposal facilities or the development of industrial and or business parks do not fall within the definition of a State aid. This infracture does not aim at specific undertakings but favours any undertaking which decides to establish itself there. However, if the construction of an industrial park is intended to favour a specific undertaking then aid is involved. On the other hand, if the infrastructure is specifically designed for the use by one undertaking, a benefit can be excluded if the infrastructure is rented out at market conditions. Certain types of infrastructure may be considered multi-functional for example a sports stadium which can be used for concerts or conventions as well as sport events. In these cases, if the project does not in fact create a selective benefit for any potential beneficiaries (operator, owners, shareholders, end users), there is no State aid. In the case of Public- Private Partnerships - if the infrastructure project results in a potential selective advantage it may be necessary to examine whether the public authority is acting as a prudent market economy investor and paying no more than the market price for the infrastructure. Alternatively, if the operator of the infrastructure is being required to assume particular obligations which can be classified as public service obligations it is necessary to examine whether the reward received is commensurate with the net additional costs of providing the services. Establishing a market price in these situations is very important. This price, which excludes aid, will be presumed if the private partner is selected through an open, transparent and non-discriminatory tender procedure. If the project involves an element of financial support for the performance of an SGEI then the question of whether aid is involved, at least in respect to the operating costs of the infrastructure, must be examined on the basis of the so-called Altmark criteria 9. The undertaking must actually be entrusted with public service obligations which are clearly defined, the parameters on the basis of which compensation is calculated must be established in advance in an objective and transparent manner and the compensation must not exceed what is necessary to cover all or part of the costs incurred in the discharge of the public service obligations. Where an undertaking is not chosen pursuant to public procurement procedures (which would allow for the selection of the tenderer capable of providing those services at least cost), the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking would have incurred in discharging those obligations. If an open tender is not used, then the authority commissioning the infrastructure is advised to obtain expert independent advice so as to establish what a fair price should be. It should be noted that a tender itself does not exclude the possibility of some State aid in the transaction. Tenderers may in fact be competing for a subsidy. 9 Case C-280/00, Almark (2003) E.C.R.I

20 Thus, only properly carried out public procurement procedures for public investment are not State aid and the provision here puts this beyond doubt. On the basis of the above comments, it is suggested that particular care will be needed in applying this exclusion to ensure that it only applies in cases where selective advantages can be definitely ruled out. Suggested changes to Article 3 Paragraph 2 of Part 2 of the Article should read: 2) business activity associated with: - investments in infrastructure facilities using public procurement procedures where there is no selective advantage to one or more undertakings; Article 4: Forms of State Aid - Substance and comments As State aid can take many forms, Article 4 of the Draft Law on State Aid to Undertakings includes these provisions and provides an illustrative and non-exhaustive list of different types of State aid. Because of the constantly evolving concept of State aid in EU Law, the Draft Law avoids any temptation to make this an exhaustive list. State aid may include, in the first place, subsidies, i.e., direct payments to undertakings. State aid, however, comprises not only the direct financial support from State institutions to undertakings, but also other indirect measures of support. In general, this may include measures of support to undertakings provided in any way as long as they provide to such undertakings a selective economic benefit. Article 107(1) of the Treaty on the Functioning of the European Union refers to aid: granted in any form whatsoever. The Article does not define the methods of granting State aid. The different methods may include subsidies, low-interest loans, provision of guarantees, tax rebates, increase of capital, etc. As the concept of State aid is constantly evolving (based on new types of State initiatives, regulatory decisions of the European Commission and the judgments of the European Courts), this is a valid approach at EU level and an equally valid approach here in Article 4 of the Draft Law. Suggested changes to Article 4 NONE CHAPTER 2 (ARTICLES 5 to 7) Article 5: Compatible State Aid - Substance and comments Article 5 qualifies the principle of incompatibility in Article 2 by defining two categories of State aid which are always to be deemed compatible with competiton (and with the international obligations of Ukraine in regard to state aid). These are: (a) State aid of a social nature to benefit consumers and (b) State aid to remedy the effects of natural disasters and particular emergency situations. In such cases the Draft Law provides that there is no need for the AMCU to adopt a decision on compatibility. This approach is generally in line with EU State aid rules. Under Article 107(1) of the TFEU, the main principle of incompatibility of aid is set out. Article 107(2) then provides de jure exemptions in respect of aid of a social character, aid for natural disaster relief and to compensate for exceptional occurrences. Where the State aid provided is in any of 20