Ms Julie Evans
State Aid Branch
Department of Trade and Industry
Kingsgate House
66-74 Victoria Street
London, SW1E 6SW
Dear
3 September 2004
Regional Aid 2007-2013
- European Commission Proposals on Regional State Aid
The Scottish Council for Development and Industry (SCDI) is an independent membership network, which strengthens Scotland’s competitiveness by influencing Government policies to encourage sustainable economic prosperity. It is a broad-based economic development organisation, with membership drawn from Scottish business, trades unions, public agencies, educational institutions, non governmental organisations, local authorities, and the voluntary sector.
Please find attached our response to the consultation on Regional Aid 2007 - 2013. This outlines our perspective on the proposals as they would affect Scotland.
SCDI continues to support a flexible state aid framework which allows the Member States to work with internal regions and agree assistance and promotion mechanisms which, at the same time, do not adversely affect the operation of the European Single Market. European
Commission oversight remains important but regional disparities across an area the size and complexity of the extended European Union will require flexible action at Member State level rather than a fixed framework. A one-size framework will not fit all regions.
In summary -
1.
SCDI supports transitional arrangements for areas which were eligible before enlargement but are now hampered by the statistical effect - if they cannot be designated as Article 87(3)a).
2.
Identification of regions with competitiveness problems should ideally be at NUTS2 or even NUTS3 level to help avoid regional aid blind-spots.
3.
A new basket of identifying indicators should be researched and adopted as the GDP indicator remains too blunt for accurate identification of problems and targeting of support resources.
4.
SCDI continues to believe that the geographical re-shaping of the EU after enlargement further emphasises peripherality issues for the compass rim regions such as Scotland and that this brings about a set of issues which have not been adequately researched or assessed by the European Commission as it reforms both the Regional
Policy and Regional State Aid Frameworks. The UK Government should press for the inclusion of a new peripherality criteria accepted under Article 87(3) as part of the new frameworks.
A copy of this response has also been forwarded to Sandra Reid at the Scottish Executive.
Yours sincerely,
Roland Diggens
SCDI Policy Analyst

Regional Aid 2007-2013
European Commission : DG Competition Proposals on Regional State Aid
SCDI response
The Scottish Council for Development and Industry (SCDI) is an independent membership network, which strengthens Scotland’s competitiveness by influencing
Government policies to encourage sustainable economic prosperity. It is a broadbased economic development organisation, with membership drawn from Scottish business, trades unions, public agencies, educational institutions, non governmental organisations, local authorities, and the voluntary sector.
Background to the Consultation:
The European Commission DG - Competition has proposed changes to State Aid
Guidance - known as Regional Aid Guidelines or RAG. These define assisted areas and the aid intensities allowed within them. These changes will broadly bring the
RAG into line with the realisation of an enlarged European Union and a new DG -
Regional Policy sponsored Regional Policy framework from 2007-2013. (This separate Regional Policy framework has been commonly referred to in Scotland as the
“Structural Funds”.)
The DTI have indicated that the “proposals would result in reductions in eligibility for such aid in the UK and the other long standing Member States, though additional levels of aid would be permitted for SMEs outside the assisted areas”.
The RAG defines eligibility for support and therefore gives permission to provide assistance but not the actual funds. The key map of regions eligible for regional aid expires on 31 st
December 2006 and the main article of legislation under discussion in this consultation is Article 87 of the European Treaty. These proposals are particularly linked to aid such as RSA but other types of aid (the horizontal aid allowed across the
EU) are not, or are less, affected.
In principle, the proposed guidance brings a closer geographical match to the separate state aids and regional policy frameworks and strives for reduced levels of state aid across the whole of the EU. These proposals also reflect the agreement to concentrate funds to support regional policy in the states which are new members of the European
Union as, generally speaking, they have lower GDP levels than the rest of the EU.
In short, the aim is “less and better-targeted state aid” as requested at the Barcelona
European Council. This backs up the European Commission position that regional aid should be the exception, rather than the rule.
These proposals are being consulted on by DG Competition during summer 2004 but are considered likely to attain the full status of Commission proposals and, after discussion with Member States reaches agreement, to be accepted as the framework for the years 2007-2013. Consultation currently continues and at the end of September
2004 a multilateral meeting will be held to discuss the draft guidelines. That meeting is the next point of influence on the proposals and this response will provide information for the DTI as it prepares a case and responds on behalf of the UK.

SCDI Response :
1 SCDI welcomes the recent enlargement of the European Union and recognises the economic and financial imperative of the changes to the EU Regional Policy framework which will now increasingly shift resources towards raising the economic growth of the new member states - or the “Convergence” priority. The new Regional
Policy framework also allows for a “Regional Competitiveness and Employment” priority which, again, SCDI supports.
2 The newly proposed DG Competition Regional Aid Guidelines (RAG) appear, at first, to be a further tidying up exercise which brings the state aids policies more closely into line with that shift of resource availability and policy flexibility to the new Member States. However, SCDI cannot support the newly proposed RAG if this is likely to result in limiting the domestic funding of assistance aimed at promoting the development of companies or would lead to further reduced flexibility in a region’s existing ability to counteract structural changes or shocks to its economy.
3 There is a balance to be struck between achieving a level playing field across the EU and allowing regions to assist in growing their companies, improving competitiveness and dealing with unusual economic circumstances or market distortions. SCDI believes that the new RAG, in limiting further the scope of state aids in the UK and EU, would place undue restrictions on Scotland and many other regions within the EU. SCDI supports the UK government view that Member States should be allowed to operate “non-distorting aid schemes in a pro-active manner which respond to market difficulties as they arise”.
4 For Scotland, the key issue is maintaining the flexibility within the EU framework to allow the UK Government and Scottish Executive to respond to geographical disparities as they see fit, ensuring that EU legislation does not actually preclude freedom to act on regional problems in Scotland.
Response to Consultation Questions :
Q1 - To what extent would the Commission’s proposed changes to the RAG, in your view, limit scope to provide business support in the regions generally or a particular region in which you or your organisation is mostly interested?
5 In previous years, Scotland has benefited significantly from inward investment projects, triggered in part by RSA. The current incoming investment trend is far lower than in the 1980’s and early 1990’s and the RSA system has been adjusted to better fit the needs of indigenous businesses seeking to expand. The loss of assisted areas status and RSA would therefore have a negative impact on the region’s permission and ability to support growing indigenous businesses in certain areas (and esp. those in the manufacturing sector). This would almost certainly be harmful to the region’s economy.
Q2 - Views are invited on the Government’s objectives for State aid reform in general and, in particular, reform of regional state aid. Do you consider these are the right objectives?

6 SCDI continues to support a flexible state aid framework which allows the
Member States to work with internal regions and agree assistance and promotion mechanisms which, at the same time, do not adversely affect the operation of the
European Single Market. European Commission oversight remains important but regional disparities across an area the size and complexity of the extended European
Union will require flexible action at Member State level rather than a fixed framework. A one-size framework will not fit all regions.
In summary -
5.
SCDI supports transitional arrangements for areas which were eligible before but are now hampered by the statistical effect - if they cannot be designated as
Article 87(3)a).
6.
Identification of regions with competitiveness problems should ideally be at
NUTS2 or even NUTS3 level to help avoid regional aid blind-spots.
7.
A new basket of identifying indicators should be researched and adopted as the GDP indicator remains too blunt for accurate identification of problems and targeting of support resources.
8.
SCDI continues to believe that the geographical re-shaping of the EU after enlargement further emphasises peripherality issues for the compass rim regions such as Scotland and that this brings about a set of issues which have not been adequately researched or assessed by the European Commission as it reforms both the Regional Policy and Regional State Aid Frameworks. The
UK Government should press for the inclusion of a new peripherality criteria accepted under Article 87(3) as part of the new frameworks.
For Article 87(3)a) areas -
Q3 - Do you support the Commission's proposal to identify areas assisted under
Article 87(3)(a) of the EC Treaty at NUTS2 level?
7 Identification at NUTS2 is certainly preferable to identification at NUTS1 level. However NUTS2 still covers large sub regions and leaves less scope for close targeting of support action which is the Commission’s preference. SCDI would have no objection to the use of NUTS3 if statistical indicators of adequate quality were in place or to be developed.
Q4 - Do you support the Commission’s proposal that areas in the EU eligible for
Structural Funds should have state aid coverage? and
Q5 - Do you support the Government’s initial view that Article 87(3)a) areas should not be restricted to areas eligible for Structural Funds? If so, do you agree that identifying these areas at NUTS3 level or by finding a means to take account of a wider range of economic performance within NUTS2 regions would give better targeting?
8 SCDI supports the UK Government view in that restricting 87(3)a) areas to only those absolutely matching Structural Funds areas would open up the likelihood of creating economic blind-spots which are intense in nature but cover only a small

geographic area (or affect areas up to NUTS3 level). These areas would be underperforming their local regional average which could still be higher than the regional aid criteria and therefore be “missed” by regional aid support which is too inflexible or set at too high a trigger level.
We agree that identification at NUTS3 level or by using a new basket of indicators at
NUTS2 level would be very helpful in improving targeting.
Q6 - Are there any other options for defining the Article 87(3)a) areas which you consider the UK should argue for, bearing in mind that they would need to be consistent with the legal requirement for consistency across the EU?
9 On other options for identifying Article 87(3)a) areas, SCDI does not believe that the increasing peripherality of the compass rim regions of the EU (including for example Scotland, Munster, Galicia, Lappland or Crete) has been adequately understood and argued by the UK and other Member State Governments or the
European Commission (in relation to the core of the EU and the shift of the EU’s centre of gravity to the East brought about by recent expansion). Peripherality, accessibility issues, population patterns and other issues have not been properly considered in the context of the compass rim regions ability to compete fairly at the
EU scale. These are issues which should be investigated in more detail and, if proven to be restrictive, could provide further indicators to broaden the options for defining
Article 87(3)a) areas.
For Article 87(3)c) areas -
Q7 - Do you support the Commission's proposal to identify areas assisted under
Article 87(3)(c) of the EC Treaty at NUTS2 level?
10 As stated above, identification at NUTS2 is certainly preferable to identification at NUTS1 level. However NUTS2 still covers large sub regions and leaves less scope for close targeting of support action which is the Commission’s preference. SCDI would have no objection to the use of NUTS3 if statistical indicators of adequate quality were in place or to be developed.
Q8 - Do you support the Commission’s proposals that areas losing 87(3)a) status purely as a result of EU enlargement should be eligible as 87(3)c) areas?
11 SCDI considers that deselection for areas through the statistical effect is unfair, not warranted in real economic terms and that such areas should retain 87(3)a) status or, at least, transitional arrangements until their need has reduced in real terms.
Q9 - Do you support the Government's initial view that to achieve better targeting, the
87(3)(c) areas should be identified in terms of smaller geographical units than NUTS2 level? and
Q10 - If so, should these geographical units be at NUTS3 level, or should the
Government press for even greater flexibility to define areas?

12 Identification at NUTS3 levels or below is the ideal situation providing flexibility to Member States and regional authorities and SCDI supports this. Such state / regional / local identification is more clearly in line with the principle of subsidiarity.
Q11 - Should indicators other than GDP per head be taken into account in defining which areas should be eligible to receive regional State aid?
13 SCDI has long argued that the GDP per head indicator is simply too blunt and especially so when used across large geographical areas. SCDI supports the use of a wider basket of indicators and calls on the UK Government and the European
Commission to research and create an acceptable set of new indicators. (These might include socio-economic indicators, employment and unemployment data, business birth and death rates and demographic data.)
Q12 - Do you support the Commission's proposal to reduce aid intensities within the assisted areas in principle?
14 Although in broad agreement with the aim of less and better targeted state aid, the Commission must be careful to retain aid intensities which provide realistic levels of support which is truly additional rather than merely an indicative gesture of support.
Q13 - Do you support the Commission's proposal to define initial investment on the basis of Gross Grant Equivalent rather than Net Grant Equivalent?
15 In the interests of transparency and comparability of state aid across the EU,
SCDI feels that it is important to retain the use of Net Grant Equivalents. Without allowing for a Net calculation, the different rates of national taxation could lead to anomalies which are not intended by the RAG.
Q14 - Should the Government argue for the guidelines to contain provisions to prevent aid from being used to displace projects from one part of the EU to another, and if so how might this best be achieved?
16 Although an ideal outcome, this prevention of displacement is very difficult to define and achieve. It is also probably the case that global patterns of investment and trade are stronger than intra-EU patterns. The guidelines could, however, provide for different intensities in the case of indigenous and foreign investors. A new RAG framework which is sufficient in coverage and flexibility to enable regions to improve their competitiveness should be the overall aim. Success in achieving that will limit displacement problems.
Q15 - Should the Government press for retention of the scope for modernisation investment?
17 SCDI supports the UK Government in pressing for the retention of the scope for modernisation investment as this remains particularly important to the manufacturing sector and will also help to limit displacement effects.

Q16 - Should the Government support the idea of excluding either land in general, or green-field sites only as eligible costs for regional aid investment?
18 Availability of both green field and brown field land will vary dramatically across regions and yet both will be in demand for various uses, of which economic development is certainly one important demand. SCDI would not support exclusion at this stage as it might produce regional anomalies in the market for land.
Q17 - Do you support the Commission's proposals for transitional status for current
87(3)(a) areas that would not otherwise be eligible?
19 SCDI supports retention of 87(3)a) status for regions experiencing a relative growth in GDP due to the statistical effect. If that cannot be achieved, then transitional arrangements should be put in place over the timeframe of the 2007-2013 framework.
Q18 - Do you consider that the Commission should provide for some form of transitional status for some or all of the current 87(3)(c) areas that would not otherwise be eligible? If so, on what basis?
20 SCDI supports instead retention of 87(3)c) status for regions. If that cannot be achieved, then transitional arrangements should be put in place.
Q19 - Do you support the Commission’s proposal to increase the aid levels allowed to be paid to SMEs outside the assisted areas? If so are the levels proposed sufficient?
21 SCDI continues to support mechanisms aimed at promoting the development of SMEs in any region of the EU and would support increased aid levels on the basis of improved flexibility but we are unable to assess if the actual proposed levels are sufficient.
Q20 - Do you consider that the limits within any of the horizontal guidelines should be increased? Would you support the UK Government differentiating regionally in terms of the aid intensities permitted in different areas under the horizontal guidelines?
22 SCDI supports wider bands or limits in principle on the grounds of improved flexibility to react to problems or promote certain policy strands such as environmental sustainability. We would support differentiation by the UK
Government only if it was balanced by appropriate mechanisms for consulting the devolved regions and administrations in the UK.
Q21 - Do you consider that the Government should argue for Member States to be able to pay additional levels of horizontal aid in areas of local economic underperformance?
23 Again, the flexibility of the framework is key and SCDI supports the UK
Government approach on this issue.
Roland Diggens
SCDI Policy Analyst 3/9/04

Background to EU State Aids Framework and this Consultation :
The European Commission DG - Competition has proposed changes to State Aid
Guidance - known as Regional Aid Guidelines or RAG. These define assisted areas and the aid intensities allowed within them. These changes will broadly bring the
RAG into line with the realisation of an enlarged European Union and a new DG -
Regional Policy sponsored Regional Policy framework from 2007-2013. (This separate Regional Policy framework has been commonly referred to in Scotland as the
“Structural Funds”.)
The DTI have indicated that the “proposals would result in reductions in eligibility for such aid in the UK and the other long standing Member States, though additional levels of aid would be permitted for SMEs outside the assisted areas”.
The European Commission views state aid as a distortion of competition. “By giving certain firms or products favoured treatment to the detriment of other firms or products, state aid seriously disrupts normal competitive forces. State aid that distorts competition in the Common Market is prohibited by the EC Treaty.”
Article 87 of the EC Treaty prohibits any aid granted by a Member State or through
State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain firms or the production of certain goods. The aid in question can take a variety of forms as, for instance: state grants; interest relief; tax relief; state guarantee or holding; provision by the state of goods and services on preferential terms.
The EC Treaty, however, allows exceptions to the ban on state aid where the proposed aid schemes may have a beneficial impact in overall Union terms. Article 87 of the
EC Treaty allows the following forms of aid:
 aid having a social character, granted to individual consumers;
 aid to make good the damage caused by natural disasters or exceptional occurrences;
 aid designed to: promote the economic development of underdeveloped areas (regarded as particularly backward in accordance with Community criteria); promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; facilitate the development of certain activities or areas; promote culture and heritage conservation;
(where, in the last two cases, such aid does not affect trading conditions and competition in the Community to an extent that is contrary to the common interest.)

The RAG defines eligibility for support and therefore gives permission to provide assistance but not the actual funds.
The key map of regions eligible for regional aid expires on 31 st
December 2006 and the main articles of policy under discussion in this consultation are Article 87(3)a) and 87(3)c) of the European Treaty.
Article 87(3)a) EC provides that “aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment” can still be considered compatible with the common market.
87(3)a) regions are generally regions with less than 75% GDP per Capita of the EU average. (This matches the old structural funds areas designated as “Objective 1”.)
Article 87(3)c) EC provides that “aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest” can still be considered compatible with the common market.
87(3)c) regions are generally regions identified at Member State level as requiring assistance. This designation does not have an exact match with older structural funds area designations and an outline map of the Scottish areas covered until 2006 is laid out below for information.
Key
30% Aid Limit
20% Aid Limit
15% Aid Limit
10% Aid Limit

Notes -
1.
The Commission has also adopted a number of "block exemption" regulations for state aid to: Small and medium-sized enterprises; aid for training; aid for employment.
2.
NUTS Classifications are EU wide identifiers based on geographical zones and currently used to identify where Regional Policy Funds and Initiatives can or cannot be applied. Funds are normally applied at NUTS 2 level. In
Scotland, the designations are -
NUTS 1 NUTS 2
UKA SCOTLAND UKA1 BORDERS-CENTRAL-FIFE-
LOTHIAN-TAYSIDE
UKA2 DUMFRIES & GALLOWAY,
STRATHCLYDE
NUTS 3
UKA11 BORDERS
UKA12 CENTRAL
UKA13 FIFE
UKA14 LOTHIAN
UKA15 TAYSIDE
UKA21 DUMFRIES AND
GALLOWAY
UKA22 STRATHCLYDE
UKA3 HIGHLANDS, ISLANDS
UKA4 GRAMPIAN
UKA31 HIGHLANDS
UKA32 ISLANDS