On 2 August 2017 the state aid regime, based on the requirements of the EU-Ukraine Association Agreement (the "Association Agreement"), fully entered into force in Ukraine. Before this there were no state aid rules in place, and state support was distributed by the Ukrainian authorities as was deemed appropriate according to fast-changing industrial and regional policy objectives. The Ukrainian government has, traditionally, heavily supported producers in a number of so-called "priority" industries such as steel, fuel and energy, coal mining, aircraft manufacturing and shipbuilding. In the energy sector alone, total budget revenue relinquished under special tax benefits allowed to undertakings accounted for up to 3.5% of GDP annually. The introduction of state aid control is expected to bring more transparency and higher standards in the management of public spending. In particular, all existing state aid programmes implemented before 2 August 2017 should be notified to the Antimonopoly Committee of Ukraine (the "AMC") until 2 August 2018, and all new state aid may be granted only following the prior approval of the AMC.
This article provides a brief overview of the state aid framework in Ukraine, its particularities as compared with the EU's regime, and the results of the first year of state aid enforcement. It also covers the upcoming regulatory steps to be taken by the AMC for further development of the state aid framework, as well as opportunities and challenges that the state aid regime offers to businesses in Ukraine.
1. The Legal Framework
The Law of Ukraine "On State Aid to Undertakings" (the "State Aid Law", adopted on 1 July 2014 and fully entered into force on 2 August 2017) is a core framework law which provides the foundation for a new system of the regulatory control of state aid and the development of secondary legislation. In contrast to the EU's gradual development of state aid control, which evolved over the past 60 years, Ukraine has undertaken to pursue an accelerated approach in order to develop the system of secondary state aid legislation within three years after the entry into force of the Association Agreement.
Under the Association Agreement, the Ukrainian state aid rules shall be in line with the EU's principles and be interpreted in view of the relevant jurisprudence of the Court of Justice of the EU, as well as secondary legislation, frameworks, and guidelines in force in the European Union. As Ukraine is not an EU member state, such direct application of principles of the EU acquis is unique for Ukraine.
Аnna Аrtemenko: “It is important to note that the State Aid Law does not establish particular rules of conduct for undertakings, but rather defines general principles and the legal framework for further development of the rules and procedures of state aid control. In particular, it is based on the acts and regulations of the Cabinet of Ministers of Ukraine (the "Government") and the AMC. This is similar to the EU's approach, where Article 107 of the Treaty on the Functioning of the European Union (the "TFEU") provides general principles of state aid control while secondary legislation, frameworks and case law define specific regulations and guidelines.”
The AMC is the authorised body responsible for state aid control and monitoring in Ukraine. In particular, the AMC has powers to approve state aid schemes and individual aid grants, and to suspend and to order the recovery of state aid measures that have been unlawfully granted. The AMC is also responsible for the review of existing state aid programmes (i.e. those in place as of 2 August 2017) and their alignment with new requirements, as well as for maintaining the State Aid Register and for the annual reporting of state aid in Ukraine.
2. What is State Aid
Definition of state aid
According to the State Aid Law, state aid is defined as any support granted to undertakings using state or local resources in any form whatsover, and which distorts or threatens to distort competition by favouring the production of certain goods or carrying out certain business activities. To be recognised as state aid, the following conditions should be cumulatively met:
(i) the aid is financed through state resources or the resources of local authorities;
(ii) the aid confers a selective advantage for the production of certain products or services; and
(iii) the aid distorts or threatens to distort competition.
Although the Association Agreement defines state aid in a fashion similar to that of Article 107 of the TFEU, the above definition provided in the State Aid Law is missing the forth criterion, i.e. that the aid may affect trade between Ukraine and the European Union.
Аnna Аrtemenko: “The AMC now considers suggesting the respective amendments to the State Aid Law by adding the fourth criterion (the effect on trade between Ukraine and the European Union) to Article 1 of the State Aid Law in order to bring the definition of state aid in line with the EU Ukraine Association Agreement. At the same time, we understand that as a matter of practice the criteria of distortion of competition and effect on trade are often considered by the European Commission as "inextricably linked”. In most cases if a certain measure affects competition, it is likely to affect trade as well. Before such changes are implemented, the AMC will assess state aid based on its potential effect on competition.”
It is also worth mentioning that unlike the EU system, where public support of non-economic activities of enterprises is not subject to state aid rules, in Ukraine, where the legal concept of an undertaking is not based on the functional approach and the scope of economic activities is understood differently, practically any activity of a legal entity (undertaking) is considered to be economic and, therefore, falls under state aid control. The AMC is to adjust the definition of "undertaking", harmonising it with the EU approach, so that public funding of non-economic activities, such as public services provided by schools, hospitals, and cultural institutions etc., would fall outside of state aid control. However, it is not yet clear how soon such changes will be implemented.
De minimis aid and other exemptions from the state aid regime
State aid is generally prohibited unless it falls under an exemption established by the legislation or an approval of the AMC is obtained before the aid is granted (please see Infographics No. 1 for details on the procedure of notification of new state aid in Ukraine).
The following categories of public support to enterprises are exempt from the requirement of notification and do not need AMC approval:
(i) De minimis aid, which is financial support provided to a single undertaking of an amount up to €200,000 during any three-year period
(ii) Aid to undertakings operating in the following sectors:
- agricultural production and fisheries;
- production of weapons for the needs of the Armed Forces, law-enforcement and national security operations;
- investments in public infrastructure projects through the use of public procurement procedures
(iii) Compensation of the costs of services of general economic interest ("SGEI"), if the costs are well-justified. Whereas SGEI meets the so-called Altmark1 criteria they are considered to be based on market principles and, therefore, no overcompensation is present in such situations – such SGEI are exempt from the State Aid Law.
In addition to the above, the AMC may establish “block exemptions” for certain categories of state aid, which relieve their grantors from the requirement of notification of aid, except for rescue and restructuring aid. As of the date of this publication, no block exemptions have yet been adopted.
Аnna Аrtemenko: “The adoption of the block exemptions for notification of state aid should be based on the respective enforcement practice of the AMC. Since state aid control is relatively new in Ukraine having become fully operational only from 2 August 2017, the inventory of existing State aid schemes is still underway, it is too early to speak about block exemptions. Only after developing a sufficient enforcement practice will the AMC be in a position to exempt certain aid measures from the notification requirement, where such aid measures are unlikely to distort competition and affect trade. We believe that implementation of the state aid rules should be both "reasonable" and ensure a balance between the unavoidable impact of state aid on competition and benefits that the economy and consumers obtain as a result of aid. This principle is fully compliant with the EU approach and allows taking into account the specific national environment.”
The SGEI framework
SGEI falls outside the State Aid Law in so far as compensation is limited to well-justified costs relevant to the provision of such services. In its Explanatory Note on SGEI dated 20 March 2018, the AMC clarified that, as with the EU approach, compensation for SGEI might not constitute state aid if the four of the Altmark criteria are cumulatively met:
(i) a recipient undertaking must have public service obligations which must be clearly defined;
(ii) parameters for calculating compensation must be objective, transparent and established in advance;
(iii) compensation should not exceed the costs incurred in the discharge of the public service obligations plus a reasonable profit; and
(iv) compensation should be determined either through public procurement or, where no public tender is held, a recipient should be compensated in line with the costs of a typical, well-run company.
According to the State Aid Law, the Government has powers to define a list of services of general economic interest. Such list adopted by the Government on 23 May 2018 includes a number of public services in the electricity and natural gas sectors. These include the purchase of electricity from renewable sources under the feed-in tariff (including solar, wind and hydro energy produced by micro, mini and small hydropower stations and certain other types of alternative energy as defined by law). Importantly, however, it is not excluded that public support granted to providers of the SGEI may still constitute state aid.
Аnna Аrtemenko: “The AMC is considering transposing Altmark criteria to the State Aid Law to ensure compliance with the EU acquis. As regards the list of SGEIs, according to the Communication from the European Commission2, in the absence of specific Union rules defining the scope for the existence of SGEI, Member States have a wide margin of discretion in defining certain services as SGEI and in granting compensation to providers of such services. At the EU level there is no act that would define a list of SGEIs; however, the SGEI Package of 2011 lists a number sectors where SGEIs may be defined, such as postal services, public transport, energy supply, electronic communication services, infrastructure networks, waste management, and healthcare. That is why the list of SGEIs defined by the Government is not exhaustive, and certain services may constitute SGEI in the meaning of EU state aid acquis. As of the date of publication, the AMC has issued five decisions concluding that compensation granted to certain operators in the sectors of public passenger transport and telecommunications did not amount to state aid as the services provided by such operators constitute SGEI; although not included on the list of SGEIs adopted by the Government but taking into consideration the respective EU rules and case law.”
3. Compatibility of State Aid
State aid expressly permitted
The State Aid Law sets forth two categories of state aid which are deemed automatically compatible with competition:
(i) aid having a social character, granted to individual consumers, provided that it is granted without discrimination related to the origin of the products concerned; and
(ii) aid to make good damage caused by natural disasters or exceptional circumstances.
Although these categories of aid are defined as compatible by law, they still need to be notified so that the AMC can verify whether a particular measure indeed falls within any of the above categories of expressly permitted state aid.
State aid that may be considered compatible with competition
The following types of aid may be permitted as compatible with competition:
(i) aid to promote the economic development of areas with a poor standard of living or serious unemployment;
(ii) aid to promote the execution of national development programmes or the resolution of common social and economic disturbances;
(iii) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not contradict Ukraine's international obligations; and
(iv) aid to promote cultural and heritage conservation where it does not significantly affect competition.
The compatibility of the above listed categories of state aid is assessed by the AMC based on criteria which are defined by the Government, in particular, the forms of aid and types of eligible costs that may be covered, maximum amounts of aid, and categories of aid recipients. The Government has already adopted a number of guidelines for horizontal state aid measures which provide compatibility criteria for (i) professional training aid, (ii) employment aid, (iii) rescue and restructuring aid, (iv) research & development and innovation; (v) regional aid and (vi) aid for small and medium-size enterprises. The AMC has developed the above criteria based on the respective case law, secondary legislation, frameworks and guidelines of the EU.
Аnna Аrtemenko: “The AMC is working on developing the criteria for compatibility of environmental aid (the "Environmental Guidelines") such as aid for:
(i) early adaptation to future ecological standards, adaptation to new standards or for increasing the level of environmental protection in the absence of specific standards;
(ii) environmental studies;
(iii) remediation of contaminated sites;
(iv) reduction of greenhouse gases;
(v) production of energy from renewable sources, for energy efficiency, and energy infrastructure;
(vi) waste management;
(vii) relocation of undertakings; and
(viii) aid in the form of exemptions from environmental taxes.
The Environmental Guidelines, in particular, will define forms of compatible state aid, the allowable aid intensity and eligible costs, maximum aid amounts, and will also establish the prohibition of granting aid to firms in difficulty. As regards aid for the production of electricity from alternative energy sources, the draft Environmental Guidelines provides criteria for the compatibility of aid for:
(i) production of electricity from wind energy where an installed electricity capacity of 3MW or three generation units applies; other production of electricity from alternative energy sources with an installed electricity capacity of less than 500 kW; and aid to biofuel production installations with annual production below 50,000 tonnes (except for producers of food-based biofuel);
(ii) compensation of operating and/or investment costs for the production of electricity from alternative energy sources. In particular, the current draft of the Environmental Guidelines suggests that this type of aid should be granted on the basis of a premium in addition to the market price obtained in a competitive bidding process through which the generator sells its electricity directly into the market.”
4. The Treatment of Unlawful State Aid
According to the State Aid Law, state support constitutes unlawful aid if granted:
(i) without the AMC's authorisation or before it is obtained; or
(ii) where a negative decision is taken by the AMC i.e. declaring state aid incompatible with competition.
The AMC may initiate the investigation based on its own monitoring or on complaints from third parties. A complaint (application on unlawful aid and/or misuse of aid) may be filed by potential or actual grantors of state aid or other business entities or associations whose interests may be affected by state aid measures.
Unlike the EU's state aid framework, in Ukraine the recovery of unlawful and incompatible state aid does not require payment of interest – only the sum of the aid received is subject to recovery. The limitation period for recovery of state aid is 10 years from date of entry into force of the respective act upon which the aid was granted.
Аnna Аrtemenko: “The main purpose of the recovery of state aid is to restore effective competition and the situation that existed on the market before the unlawful aid was granted, rather than to financially punish the recipient of the aid. The AMC is to suggest respective changes to the State Aid Law so that the recovery of aid also includes payment of interest. Such changes will bring Ukrainian state aid regulations into compliance with the principles of the EU acquis.”
5. Actions before National Courts
The AMC may bring a claim before the District administrative court of Kyiv against a grantor of state aid which did not fulfil its obligations on the abolition and/or recovery of state aid. As a result, the legislative act which set forth the state aid scheme may be invalidated.
The AMC decision on state aid may be appealed to the District administrative court of Kyiv within one month by any interested party – such as grantor, aid recipient, any legal entities or individuals – whose interests may be affected by the state aid measure. Importantly, the court proceedings do not suspend the effect of the AMC's decision, which remains in force until the court decision enters into force.
6. Existing State Aid
All the existing state aid programmes that were in place when the State Aid Law entered into force on 2 August 2017 should be notified to the AMC within a transitory period ending on 2 August 2018. Upon review of the notification, the AMC decides if the notified measure constitutes state aid, and whether it is compatible with competition or may require certain changes to ensure its compatibility. The state aid should be brought in line with the State Aid Law according to the requirements and the term established in the AMC's decision, but in any case by no later than 2 August 2022.
7. First Results of the State Aid Enforcement
During the period from 2 August 2017 until 30 June 2018 the AMC received 444 notifications of state aid: 399 notifications of new state aid programmes and 45 (10%) of existing state aid. The notified state support was represented by government subsidies (59% of all notifications), expenditure financing (19%), current/capital transfer deeds (11%), tax privileges (7%) and increases in charter capital (4%)3.
The AMC has already received two private complaints on unlawful state aid, in the postal services and transport services sectors. In particular, one of the leading providers of express delivery parcels in Ukraine, namely Nova Poshta ("NP"), filed a complaint against its rival state-owned postal operator Ukrposhta. According to the publicly available information on the complaint, Ukrposhta benefits from exceptionally low cost for its rental of state-owned and communal premises, i.e. in the amount of UAH 1 per year (approx. EUR 0.03). This amount of rental payment, which is established for state-funded organisations, applies to Ukrposhta in view of its obligations of delivery of state-owned/generated and communal periodical literature. After the expiry of transitory period for notification of the existing aid on 2 August 2018, the AMC shall issue the decisions on complaints like this under the general rules for review of complaints on alleged unlawful state aid and/or misuse of aid described in Infographics 2.
Despite the impressive speed in developing secondary legislation, there remains much work to be done to fill in the existing gaps in state aid regulations and to bring them in line with the EU acquis. In particular, the AMC is working on amendments to the Tax and Customs Codes of Ukraine and developing compatibility criteria for environmental aid. By the end of 2018, the AMC also plans to develop compatibility criteria for state aid in the coal and banking sectors.
While the European Commission is taking the path of simplification of state aid rules and adopting State Aid Modernisation Agenda to focus ex ante scrutiny on cases with the biggest impact on the market, Ukraine is only at the initial stage of architecture of the state aid regime. The AMC is facing the challenges of finding the right balance between implementation of the EU acquis and factoring in the specifics of the national legal framework. At the same time, Ukrainian businesses in subsidised sectors will need to kick the habit of enjoying competitive advantages from state aid measures and adapt to the new rules, which do not tolerate anticompetitive state support. The benefits and advantages of the state aid control for protection and development of competition will largely depend on the efficiency of the complaints mechanism, the eagerness of businesses to complain about the practices of rivals that receive unlawful aid, and the AMC's proactivity in monitoring state aid.
Аnna Аrtemenko: “As regards state aid monitoring, the AMC is likely to focus on socially important and sensitive markets such as transport, energy and financial services. We believe that competitors of state aid recipients will help us to identify other markets where the AMC intervention may be required to protect competition from the negative impact of state aid. That is why the AMC is actively promoting opportunities for private complaints against unlawful or anti-competitive state aid. Complaints from competing undertakings will not only allow for the protection of interests of consumers and taxpayers, but also will help the AMC to identify those markets that are most heavily subsidised through state resources and which, therefore, require special attention.”
1. Altmark criteria were established in the Altmark judgment of the European Court of Justice (Case C-280/00 Altmark, judgment of 24 July 2003).
2. Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.1.2012
3. The statistics provided are as of 29 May 2018.
By Anna Artemenko, State Commissioner of the Antimonopoly Committee of Ukraine, Anastasia Usova, Counsel, Anna Vyshnevska, Junior Associate, Redcliffe Partners