Date of publication: 27 May 2016
Oleksandr Fefelov, Attorney at Law, Head of Antitrust and Competition Practiсe
In May 2016 the Ministry of Justice of Ukraine registered order of the Antimonopoly Committee, which approved the procedure for consideration of cases on state aid. Recently, the AMC has completed establishment of the state aid monitoring department. It was done pursuant to the obligations specified in the Association Agreement between Ukraine and the European Union, and can be a significant step towards ensuring transparency of use of budget funds.
Pursuant to the Agreement on partnership and cooperation between Ukraine and the European Communities and their Member States, signed yet on June 14, 1994, our country undertook to cooperate with the EU as regards correction or elimination of anti-competitive actions. According to Article 49 of the agreement, the state should ensure the availability and performance of laws against restrictions on competition, resorted to enterprises located in its jurisdiction. Ukraine should also refrain from providing any state aid to individual undertakings or production of goods other than primary products as defined by the GATT, and from provision of services that distort or threaten to distort competition.
At the same time the Association Agreement between Ukraine and the EU envisaged for Ukraine the specific and clear obligations to establish the mechanism for provision of aid using state resources, which would make it impossible to distort or threaten distortion of competition through the provision of benefits incompatible with the proper functioning of the agreement to separate enterprises and production of certain goods. As well as to ensure transparency in the field of state aid, including in relations between the public authorities and the state-owned enterprises.
State aid which distorts or may distort competition by providing the advantages to some producers or production of certain goods shall be considered incompatible with the proper functioning of the Association Agreement with the EU.
To perform the undertaken obligations, Ukraine should adopt the national legislation on state aid and establish an independent body, which will be empowered inter alia to settle the schemes of state aid and individual cases of provision of aid in accordance with the criteria defined by the agreement. In addition, the state should create a complete register of schemes of state aid, which was provided before the creation of the said body, to bring these schemes in compliance with the criteria defined by the Association Agreement.
The agreement envisages that the state aid, which distorts or may distort competition by providing the advantages to single producers or production of certain goods, shall be considered incompatible with its proper functioning to the extent it may affect trade between the parties. However, the document also regulates certain cases when the state aid is considered to be acceptable. They mainly refer to settlement of important social issues or economic development issues, including development of individual regions.
Conditions of state aid provision are set forth in Chapter 10 “Competition” of the Association Agreement. In the first place during its provision the following aspects should be clearly monitored:
• allocation of government funds to public authorities directly or indirectly (e.g. through the state (municipal) enterprises or financial institutions) to the state-owned enterprises;
• the true purposes for which funds are allocated.
In addition, it is necessary to ensure the correct display in separate accounting records of financial and organizational structure of any enterprise that enjoys special or exclusive right provided by the government, or is authorized to provide services with a common economic interest, and that receives compensation for providing public services. It should be done in such a way to accurately track costs and revenues connected with any goods or services for which the company is granted such rights, or that have a common economic interest, and that the enterprise is authorized to grant, as well as full details of the methods for allocation of costs and revenues.
For this purpose, the obligation to provide an annual report to the EU on the total amount, types and sectoral distribution of state aid, which may affect trade between the EU and Ukraine. The appropriate notifications should include information about purposes, form, volume and budget, agencies that provide aid and, whenever possible, about the recipients.
Particular importance deserves the introduction of state aid control system, which would be based on the EU fundamental principles in the field of state aid, and ensuring development in Ukraine of subordinate legal acts on state aid, taking into account the criteria arising from the practice of application of Articles 106, 107 and 93 of the Treaty on the Functioning of the EU, case law of the EU Court of Justice, provisions of the framework agreements, guidelines and other effective EU administrative acts.
As part of performance of the Association Agreement the Verkhovna Rada adopted the Law “On State Aid to Business Entities”, which establishes the legal framework for monitoring of such state aid and exercising control over its admissibility for competition.
In fact, with a few exceptions, the law considers state aid inadmissible for competition. However, if provision of state aid envisages provision to the relevant entities of certain advantages as compared to other entities, the purpose of the law is maximum minimization of the negative effects for competition while increasing the efficiency of use of public resources.
Thereto, the law recognizes as permissible the state aid that is provided to supply the consumers with the socially important goods (provided that it is not discriminatory in relation to the place of origin), and for compensation of damages to the persons affected by emergency situations of technogenic or natural character. Further, the state aid allocated for specific purposes as provided by the law may be declared admissible in accordance with the admissibility evaluation criteria that will be determined by the Cabinet of Ministers.
All persons providing state aid before the beginning of August 2018 shall submit to the AMC the notification on business entities support programs at the expense of state or local resources that will exist at that time, and any effective state aid recognized by the AMC as inadmissible for competition must be brought in compliance with the law.
At the same time, the decisions on recognition of aid as admissible will be made by the AMC that as an authorized body obtained certain statutory powers on exercising control over the admissibility of state aid for competition and will be able to determine whether measures to support business entities refer to state aid; assess the admissibility of state aid for competition; gather information about measures to support business entities; monitor the state aid and maintain its registry; consider cases on state aid and decide on suspension or termination of illegal state aid and its return. The Committee will provide the mandatory recommendations on changing the conditions of provision of state aid and clarifications on state aid related issues.
It should be noted that all persons providing state aid before the beginning of August 2018 shall submit to the AMC the notification on business entities support programs at the expense of state or local resources that will exist at that time, and any effective state aid recognized by the AMC as inadmissible for competition must be brought in compliance with the law.
Whereas the Law defines mainly the general principles of regulation of relations in the field of state aid, to implement its provisions as part of the requirements of the Association Agreement the AMC approved a number of important provisions, namely:
• procedure for provision and registration of notifications of a new state aid and amending the conditions of the effective state aid;
• procedure, forms and requirements to submitting to the AMC the information about the effective state aid to business entities;
• procedure for keeping and accessing the register of state aid to business entities;
• procedure for monitoring of state aid to business entities.
It should be noted that the procedure for monitoring of state aid applies to any support of business entities at the expense of the state or local resources for the production of goods or carrying out of certain types of economic activity, except as envisaged by Article 3(2) of the Law. It details the procedure for collection and analysis of information about measures to support business entities, control over compliance with legal requirements on some categories and forms of state aid, permissible state aid intensity, eligible costs, the allowable level of accumulation of amounts of aid by the recipients, ensuring control over state aid, the persons providing which are exempt from the obligation to notify the AMC, and small-size state aid, and envisages creation and maintenance of register of state aid.
In May of the current year the AMC order was registered in the Ministry of Justice, it approved the procedure for consideration of cases on state aid. The document details the procedures for consideration of cases on state aid to business entities, and the procedure for withdrawal of decisions made consideration of notifications of a new state aid or cases on state aid.
By approval of the above procedures and creation in the Committee of the Department for Monitoring of Public Procurement and formation of its staff the AMC defined organizational and legal grounds for meeting the requirements of the Law “On State Aid to Business Entities”, other regulations of the state and international treaties, which Ukraine undertook in the field of state aid.
Therefore, it is possible to note some progress in the development of statutory support of relations in the field of granting state aid as envisaged by some international treaties of Ukraine, in particular, the relevant provisions of the Association Agreement. It, in turn, largely approximates solution of the issues in the field of granting state aid to the EU standards.