The reform of State aid rules on SGEI
An economic perspective on compensation
Lorenzo Coppi
GCLC SGEI Conference
Bruges, 30 September 2011
Outline
•
Altmark and SGEI compensation
•
The 2005 Package’s approach to compensation –
Applying Altmark?
•
The 2011 Package’s approach to compensation –
Clarifying Altmark, achieving fiscal discipline, or both?
•
Conclusions
2
Altmark
The Altmark judgement identifies four conditions under which compensation
for a SGEI confers no advantage, hence no aid:
1.
Clearly defined public service obligation
2.
Objective and transparent compensation parameters
3.
No overcompensation (including reasonable profit)
4.
Efficiency: either effective public procurement procedure, or
compensation based on the costs of a typical well-run undertaking
Is the rationale behind the efficiency condition:
•
the efficient delivery of SGEIs?
•
or an application of the market investor principle?
3
The logic of the Altmark compensation test
Well-run
Undertakings
PSO
Undert.
The logic
Public procurement is
assumed to ensure lowest
cost solution (i.e., cost of
well-run undertaking)
•
Compatible aid?
Procurement
Cost
Cost
Compensation
is not aid
Cost
If compensation is no
higher than the costs of a
well-run undertaking -> no
advantage, no aid
(consistent with MEIP)
•
Receipts
Reason.
Profit
Reason.
Profit
Reason.
Profit
4
The test application in the 2005 Framework
Well-run
Undert.
PSO
Undert.
No discussion of costs of well-run
undertaking
Specifies compensation calculations
Comm.
Costs
Contr.
Cost
PSO
Fix
Costs
PSO
Var.
Costs
Reason.
Profit
PSO
Reason.
Var.
Profit
Costs
•
Benefits to be netted out of the compensation
•
Compatible
aid
Compensation
is not aid
•
Reasonable profit
•
•
Not exceeding industry average
Costs
•
•
•
All
advanReceipts
tages
All advantages granted – not just receipts
Variable Costs related to SGEI
Fixed Costs directly related to SGEI
Contribution to Fixed Common Costs
If compensation < “cost plus” of PSO
aid is compatible
5
The issues with the 2005 Package
The issues with the 2005 framework
• No clarification of the well-run undertaking test
• Advantages – how to value non-monetary (strategic) advantages?
• Reasonable profit – difficult calculation due to lack of benchmark
The consultation – stakeholders’ requests regarding compensation
• Clarification of which advantages should be included
• Clarification of cost calculation method
• Clarification of benchmark for well-run undertaking
• An open public tender should be sufficient to rule out State aid
• Quality should be as important as price
6
The 2011 Package’s approach to compensation
• New
•
•
cost methodology
(New and preferred) Net Avoided Cost methodology: compensation cannot
exceed the net avoided cost of the SGEI (plus a reasonable profit)
(Old) Cost Allocation methodology: compensation cannot exceed the sum of
SGEI’s direct costs and a contribution to indirect common costs (plus a
reasonable profit)
• New reasonable profit calculation
(New) cap: swap (interbank) rate + 1%
• (Old) cap in case of significant commercial risk: return on capital of
comparable businesses
•
• Efficiencies
•
•
provisions
Member States can define efficiency targets whereby the level of
compensation is dependent upon meeting these targets
Stricter, economically sound conditions, but may need some fine tuning
7
Net Avoided Cost methodology and potentially
paradoxical results
Well-run
Undert.
PSO
Undert.
Reduction in compensation
Net Avoided Cost likely to allow less
compensation than Allocated Costs
•
Comm.
Costs
Contr.
Costs
PSO
Fix
Costs
PSO
Var.
Costs
Reason.
Profit
PSO
Reason.
Var.
Profit
Costs
Allocated
Cost
•
Procurement
Open procurement not a safe harbour
Net Avoided
Cost
•
Reduction in amount of Reasonable Profits
(see next slide)
More likely a paradoxical result where public
procurement (no aid?) would award more
compensation than “cost plus” compensation
(compatible or even incompatible aid)
• Public procurement
All
advantages
not a “safe harbour”, even
with competing bidders (¶60 Draft
Communication?)
8
Reasonable profit is reduced
• 2005 Framework:
Appropriate rate of return on capital, given risk
• Not above normal rate of return in sector
•
• 2011 Framework:
•
•
•
Reference rate:
Return on Capital Employed = Interbank Rate + 1% (liquidity premium)
Can be higher in the presence of commercial risk
(back to normal rate of return in the sector)
What about e.g., country risk? Should the company’s cost of capital be
considered?
• The
new reference rate will likely result in a reduction in the level of
“reasonable profit”
9
Efficiency provisions may result in
overcompensation
• Efficiency provisions
2011 package introduces the possibility that the level of compensation is
related to reaching efficiency targets
• The undertaking can keep the difference between the compensation and the
reduced cost level
•
• Would this lead
to overcompensation?
Possibly, but a Private Investor would also use these incentives over pure
“cost plus” methodologies
• Moreover, it fosters economic efficiency and so is consistent with goal of
efficient delivery of SGEI
• True account separation should ensure that overcompensation would limit
distortions of competition
•
• But... is
fostering the efficient delivery of SGEI an admissible goal of State aid
control?
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Conclusions
•
Effective public procurement is not a sufficient condition to avoid
overcompensation in the presence of fixed common costs
•
New Avoided Costs methodology likely to result in lower compensation
•
New Reasonable Profit calculation also likely to result in lower
compensation
•
Efficiency incentives will also lower compensation in the long run, may
create overcompensation in the short run, but are well-worth it
•
The new framework drives towards more efficient provision of SGEIs, is this
the role of State Aid provisions?
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Questions?
www.compasslexecon.com
Email: [email protected]
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