Revision of Regional Aid Guidelines Comments from Norway

Reference is made to the Staff Working Document on the Review of the Regional Aid Guidelines, published on 15 July 2005 by the services of DG Competition.

General Comments
As stated in the State Aid Action plan, and in previous communications from DG Competition, the review of the regional aid guidelines must not be seen as an isolated issue, but rather as part of a general reform of state aid policies. The context of this general reform is the Council conclusions, which call for less, but better targeted state aid throughout the EEA. The Norwegian Government welcomes the Commission’s objective of reducing the overall level of state aid. Apart from aid to Research and Development, Norwegian state aid to industry has been continuously reduced over the last decade. We also share the Commission’s view on the importance of better targeted state aid, and welcome the proposal that regional aid should be limited to the regions most in need.

We have noted with particular interest that the distinctive problems of the low population density areas have been acknowledged in DG Competition’s first consultation paper and in the latest staff working document of 15 July 2005. The existing Regional Aid Guidelines do not deal adequately with the challenges relating to depopulation and decreasing economic activity that are facing certain areas today.

Geographical scope in low population density areas
The Norwegian Government welcomes the Commission’s proposal that low population density areas with less than 12.5 inhabitants per km ²> at NUTS level III, should continue to be eligible for regional aid, according to the method for the selection of eligible regions specified in section 5, paragraph 78. This method will allow a certain flexibility in the selection of regions eligible for aid, and thus permit national authorities to target aid to regions suffering from peripheral location, low population density and other natural handicaps. This is important in order to meet the real challenges to regional development in countries such as Norway.

Operating aid to prevent or reduce depopulation
The Norwegian Government welcomes in particular the proposal to allow operating aid intended to prevent or reduce depopulation in the least populated regions as this would allow the use of cost efficient and targeted measures to promote employment and settlement in such regions, e.g. such as general regionally differentiated social security contributions. However, we would like to add a few comments on certain paragraphs in the draft guidelines related to this subject.

Comments on paragraph 73
In paragraph 73 of the draft guidelines it is stated that the Commission will not approve any operating aid to the financial services sector under the regional guidelines. The list of sectors referred to also includes NACE code 74, which in fact comprises many different activities like legal activities, accounting, architectural and engineering activities, business and management consultancy activities, advertising, industrial cleaning, photographic activities, packaging activities and secretarial and translation activities. According to the draft guidelines operating aid granted to these sectors has only a very limited likelihood to promote regional development but a very high risk of distorting competition.

We strongly recommend that this restriction should not apply to schemes that are applied automatically, without any discretion, on the basis of fixed and objective criteria, to all undertakings in all sectors within the scope of paragraph 6 of the guidelines.

The original Norwegian system of a regionally differentiated social security contribution was designed to promote employment in the relevant areas in the least distorting way. One of the key elements was that the lower tax rates applied automatically to all undertakings, irrespective of economic sector, nationality, profitability or size. The decisive factor was solely the place of residence of the employee. The measure was not directed at supporting specific industries or firms, but at the employment of persons resident in the designated area. When the objective is employment of persons resident in specific regions, the most efficient measure is labour subsidies.

We can see no reason to assume that such a measure would not have the intended effect on regional employment in certain service sectors, e.g. the financial service sector. As long as the number of employees in a particular sector within the relevant region is not fixed and independent of total labour costs, a lower tax ratio for labour could influence the regional employment in this particular sector as in other sectors. An additional linking of aid to specific sectors would therefore reduce the efficiency of the measure. Moreover, excluding specific sectors from such a tax scheme would favour employment in certain sectors as opposed to other sectors within the region, and thereby introduce unnecessary distortions to competition, especially in the regional labour market.

In order to stimulate a differentiated labour market and make the assisted areas more attractive as regions of residence for young people with higher education, it is important that all sectors are included in the scheme. (With regard to the financial service sector in particular, we would in addition point out that financial services are the most important sources of external finance for regionally and locally based enterprises. Financial services located in the regions may therefore be particularly important for promoting regional development.)

This could be clarified by adding a footnote to paragraph 73 stating that this paragraph does not apply to schemes where the granting of aid is automatic without any discretion, only subject to fixed and objective criteria, and available to all undertakings in all sectors within the scope of paragraph 6 of these guidelines, e.g. schemes that take the form of a general reduction in social security contributions in the least populated regions.

Comments on paragraph 75
We note that an operating aid scheme may be approved only for the duration of these guidelines, i.e. the scheme is to be reviewed before the end of 2013. We would, however, like to emphasise the need for a high degree of stability and predictability if a tax scheme such as a general regional differentiated social contribution is to function well. When the lower tax rate is applied automatically to all employers as a fixed rate in relation to labour cost, employers take this into account when deciding on the regional location of their activity and the method of production (i.e. capital/labour ratio), provided the measure is expected to be maintained for a certain period of time.

Comments on paragraph 79
The Government’s view continues to be that a measure designed to prevent or reduce depopulation should be accepted in all low population density areas, i.e. population density < 12.5 inhabitants per km2), cf. our previous letters in this connection. We can see no reason why the most efficient and least distorting measure aimed at stimulating settlement should not be accepted for all low population density areas. If, however, the eligible areas are restricted to the most vulnerable parts of the low population density regions, we find the current wording in paragraph 79 to be quite adequate.

For the purpose of clarification and to prevent any misunderstanding we suggest some minor amendments to the first sentence of the second bullet point of paragraph 79. We believe it would be more consistent to use the expression “ to prevent or reduce depopulation” both in the main text and in footnote or at least to insert the words “to prevent” in the footnote 57: “It is the task of the Member State to demonstrate that the aid is necessary and appropriate to prevent ortoreduce depopulation, and to demonstrate that the aid will not affect trading conditions to an extent contrary to the common interest.” When evaluating the need for a possible prolongation of a scheme intended to prevent or reduce depopulation, due account should be taken of the fact that such a measure has already been in place. If not, one could end up with a ”stop and go” regime. Reference is also made to our comments to paragraph 75 above.

Aid for enterprise in assisted areas
The Norwegian authorities welcome the increased flexibility and focus on entrepreneurial activity and business start-ups that is reflected in the draft guidelines. The first three to five years are often critical for a new business start-up. Increased entrepreneurial activity is also in line with the Lisbon objectives and is central to Norwegian innovation and regional policy.

However, we also believe the proposed chapter has been included at a relatively late stage in the RAG-revision process. We therefore ask the Commission to further specify costs eligible for such aid, as well as a clear definition of what constitutes a business start-up, in order to avoid conflicting interpretations and unnecessary distortions. The effectiveness of maximum aid intensities is dependent on the eligible expenses being clearly identified. It is our view that the maximum aid intensity is an appropriate criterion in order to secure that the amount of aid is appropriate for individual projects and that possible distortions are minimised. The level of aid intensity is considered sufficient. We would also emphasise that the size of business start-ups does not normally exceed that of micro firms. We therefore agree that the proposed aid to enterprise should be limited to small firms.

Yours sincerely,

Jan Sandal
Director General