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Slightly amended in August 2022, the EU-wide state-guarantee system is still a vital instrument to evaluate and assess whether the system (under the name of Guarantee Notice, which has not been revised since 2008), remains “fit for purpose”. The EU intends to identify any existing shortcomings and revealing possible scope for improvement and simplification in loans and other financial instruments concerning state aid efficiency.
Background
The most direct way to rule out aid is for the state governance to set the guarantee premiums equivalent to those charged by private operators. If there is no equivalent transaction, market conformity may instead be established using market benchmarks from comparable market transactions on that company, or on a sample of comparable companies.
In practical terms, most of the Commission’s assessments of guarantee measures focus on a situation where a state acts alone, and where no reliable or consistent market benchmarks exist. In those cases, the EU member states may develop their own methodologies to calculate market proxies for the guarantee premium.
At the same time, the Guarantee Notice sets out conditions for ruling out state aid: it also helps the member states set up measures involving a specific state aid element to provide conditions on how to accurately calculate the aid amount in the state guarantee.
Thus, under the Guarantee Notice, a member states can, subject to the Commission’s approval, set up methodologies that achieve market conformity by taking into account the specific risk and cost elements that are typically considered by market operators. However, some simplified options, including a safe-harbor option, are also provided to for SMEs.
Guarantee Notice remains a useful tool to help the member states providing guarantees to developers in line with EU competition rules. At the same time, financial markets have evolved and revealed several economic areas where it should be updated to reflect market developments and be simplified to reduce complexity. The Commission intends to address these issues to ensure the rules remain clear, consistent and fit for present economic growth.
More on state guarantee in: https://eur-lex.europa.eu/EN/legal-content/summary/state-aid-guarantees.html
Main legal document: Commission notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (OJ C 155, 20.6.2008, pp. 10-22).
Comments on the guarantee system
The EU-wide guarantee system, the so-called Guarantee Notice, describes how the Commission assesses state guarantees on loans to businesses; the assessment was last reviewed in 2008 and adjusted in 2022.
The Commission is going to evaluate now the existing Guarantee Notice that have functioned for about two decades. The evaluation will focus on the effectiveness, efficiency, relevance, coherence and the EU-wide added-value of the Notice.
Already in 2022, it was noted that the guarantee system for aid discriminated against small enterprises and benefits large ones. If the EU wants to compete with the US, it must invest in micro companies and start-ups. The current system is so absurd that the SMEs and micro-enterprise after obtaining aid for an R&D project in the form of a grant, have had to pay the full amount of the aid into the bank and over paying them commission to the bank. To this end, it would be preferable not to give them money until the end of the project once the project has been justified.
It is always the same: the state gives benefit to developers and the latter is given to the bank (integrated with the state) so that a company can get a guarantee and simultaneously will be charged for this. In the end, a company doesn’t have the money to perform a project and above all the bank does business at your expense.
By gathering evidence, the Commission plans a public consultation, targeted consultations and a study.
Source: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13466-State-aid-rules-for-assessing-State-guarantees-on-loans-evaluation_en
Main findings of the present evaluation
The evidence gathered in the evaluation process has shown the following:
= The Guarantee Notice has a clear added value, as it provides a framework within which the Commission can approve guarantee methodologies developed by the member states. The Guarantee Notice has therefore increased predictability and legal certainty and ensured a level playing field among the EU member states.
= The Guarantee Notice remains relevant as it describes the conditions for ensuring that a state guarantee is awarded on market terms and hence is free of aid. The continued relevance of the Guarantee Notice for developers is also clear from the increasing number of the member states’ (pre-)notifications of guarantee methodologies.
Improved guarantee notice
The evaluation also shows that the Guarantee Notice could be improved in the following specific areas:
= Due to developments in the financial markets, the evolution of interest rates, and the changes in capital requirements applicable to lenders since 2008, the implementation of the Guarantee Notice may result in an underestimation of the aid amount (i.e. the premium charged for a state guarantee may be too low). However, for the simplified approach that can be applied for a state guarantees to smaller companies (the so-called ‘safe harbor option’), there may be an overestimation of the aid amount (i.e. the premium charged may be too high), especially for the state guarantees targeting riskier SMEs.
= It may be the case that lenders do not fully pass through to borrowers the risk-reduction benefits they obtain through the state’s guarantees, although this effect is insufficient for lenders to achieve any statistically significant aggregate gains.
= Compliance with the provisions of the Guarantee Notice can be complex and costly, especially for smaller measures and smaller EU member states. In addition, there is insufficient availability of reliable data on approved guarantee measures, which demonstrates that the reporting framework of the Guarantee Notice is not functioning as intended; this could be due to the costs involved.
= The Guarantee Notice contains elements that are incoherent with the broader state aid framework. Most notably, there are some inconsistencies over the use of market benchmarks and the mechanisms for ruling out aid to lenders, which are both established under the Commission Notice on the notion of State aid as referred to in Article 107(1) TFEU (‘Notice on the Notion of Aid’). This notice is expected to foster public investment in the EU by helping to create public funding schemes that do not distort competition. This instrument stems, in particular, from the Commission’s state aid decisions on tax rulings.
More on the “notion of aid” in: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52016XC0719(05)