Ukrainian State Aid Control on Paper and in Practice

Ukraine changed the sprint run into a marathon in pursuit of implementing state aid regulations. Bringing Ukrainian state aid regulations into compliance with EU legislation is expected to get to the definitive stage soon.

Regardless of the fact that a major portion of legislation has already been deve­loped and adopted, an authorized body established, staffed and empowered, an on-line state aid register launched and functioning, no substantive results are yet visible in terms of effective control of exis­ting and new state aid.

Therefore, we need to look at the issue of state aid regulations and practice with a pinch of constructive criticism to figure how the state aid system can become more effective.

Go Hard or Go Home

There are no better words to describe the amount of work conducted by the Antimonopoly Committee since the Ukraine–European Union Association Agreement was signed on 21 March 2014. Law of Ukraine No. 1555-Vll On State Aid to Undertakings  and a set of sector-specific state aid compatibility criteria were adopted, multiple clarifications and guidelines on state aid application issued by the AMCU and more criteria will be adopted in the near future. This huge amount of work was completed by the end of 2018.

The Law was a good starting point, but considering the first tiny steps taken as to the Law’s implementation taken, people came to realize that certain amendments were obviously needed to make the Law work efficiently.

The AMCU initiated legislative amendments based on the provisions of the Association Agreement and the need to remedy legislative drawbacks, which appeared in the course of the first efforts at implementation. The major proposed changes to the Law include: effect on trade between Ukraine and the EU to be added as another criterion for qualifying a particular measure as state aid; explicit definition of the concept of undertaking; adding direct obligation to pay annual interest for use of state aid to be recovered; clarification of certain powers of the AMCU allowing the latter to request information necessary for deciding on the compatibility of state aid; inclusion of the Law into the framework of Ukrainian legislation on protection of economic competition.

Amendments to the Law are particularly important after the first Ukrainian report on state aid (approved by the AMCU in August 2018) displayed a manifest reluctance of some central and municipal authorities to notify the AMCU on state aid provided. Many experts believe that the actual amount of state aid which is subject to notification is many dozen times more than the amount of the aid notified during the first year of the Law’s validity.

In the course of 2018, there were 916 state aid notifications filed with the AMCU and 185 decisions adopted by it were available in the register. Only 5% of notifications related to existing aid, as the remaining 95% were new state aid notifications. However, there were only 2 out of 11 decisions where the aid was considered by the AMCU as incompatible with the market and consequently it asked for recovery of the aid. In the vast majority of other notifications, the AMCU decided that the state support provided did not constitute state aid or that (in some very rare cases) the state aid was compatible. In many cases the AMCU reviewed the state support provided to social field players, including the ridiculously small subsidies to kindergartens, hospitals and other public service institutions.

While the number of state aid notifications and cases was rising constantly at the beginning of 2019, EU experts recognize that the AMCU’s decisions on state aid need to be better structured and substantiated. Moreover, the soon-expected first litigations will reasonably test the quality of AMCU decisions on incompatible state aid measures.

Too Big to Fail, Too Scared to Act

Although the role of Ukrainian courts in state aid matters is yet to be understood in practice, the AMCU is now preparing and publicly discussing drafts of state aid compatibility criteria for certain vital sectors of the Ukrainian economy. These include the coal industry, banking sector and other industries. Although the AMCU may target picking on the historic lessons and chopping off the anchor of industries that absorb state resources without reasonable grounds, it does not just copy EU precedents but tries to bear in mind the challenges of the Ukrainian economy.

It can be said for the time being that the idea to clearing the market of distortions of competition financed from state coffers resides mostly in piles of well-written papers.

With all the entrusted efforts and ambition in the AMCU, the hope remains that once the final pieces of legislation are adop­ted, it will target powerful companies that illegally benefit from receiving incompatible state aid. As of now, in many cases the AMCU wastes its resources when reviewing obvious cases relating to state support which do not affect competition on a market.

In the current troubled situation when most aid is far away from being notified, the AMCU, in unison with other state authorities, should find a tactic and approach to move away from small or no-aid cases to large and important cases.

Truth without Dare

The absence of any large cases or domestic market leaders under state aid review may also have another explanation: with the laws and many supplementary pieces of legislation adopted, it is difficult to enforce procedural aspects of monitoring and evaluating state aid measures.

First, even though state aid providers are legally obliged to submit notifications on both existing aid and new aid, there is a lack of immediate sanctions for failing to report existing state aid. The AMCU needs to find a way to collect state aid notifications, and the approaches to be applied should be much more persuasive than the declaratory provisions of the Law. The Cabinet of Ministers should develop and introduce a mechanism to ensure that large providers finally start notifying their state aid measures and that they will do so in a timely and proper way.

Moreover, the practice of the Ukrainian Parliament initiating legislative acts which often envisage state aid, is much more common and widespread than in the EU. That is why in 2018 AMCU the initiated a draft law whereby all Ukrainian draft laws are required to be assessed on state aid substance before adoption.

Second, the AMCU appears to believe that it cannot monitor and review the exis­ting state aid until it is formally classified as such. Following this logic, it does not intend to start any formal legal procedures until it receives an official notification from the state aid provider. Under AMCU logic, unless an aid provider willingly predisposes itself for a review, the former won’t be able to carry out its functions of controlling state aid. Thus, the AMCU can apply a lot of effort to implement the Agreement and the Law, to advocate and share knowledge of state aid, but there are certainly many unhelpful procedures in the adopted mechanism of control of existing state aid.

Third, there is also the poorly regulated issue of reviewing the complaints filed by  concerned parties. The right of the AMCU to collect, use, and check the information from alternative sources, including the information provided by third parties, whose market rights and interests were or could be violated by the beneficiaries of state aid, is declared by the Law. This rule has not yet been rationally applied due to several reasons. First, there are few market players ready to take a proactive position in protecting their rights to fair competition by filing a formal complaint with the AMCU. Second, when a market player decides to address the AMCU in search of a fair remedy against existing but not notified state aid, it may face reluctance on the part of the AMCU to commence a formal procedure.

The AMCU is undoubtedly putting significant emphasis on advocating market awareness and pre-notification work. AMCU priorities for 2019 include bringing legislation into full compliance with the Association Agreement and further advocating state aid system among providers, beneficiaries and concerned parties. All these efforts should be directed to achieve one of the main targets: to considerably cut the number of irrelevant notifications. Still, it can be said that the issue of one incompatibility and recovery decision by the AMCU in a large case may bring much more market awareness about state aid than hundreds of seminars and consultations.

Practice Makes Perfect

Driving conclusions half-way through the implementation of the Agreement is not as suitable as evaluating future prospects. There are a few years left until Ukraine should align existing state aid with the rele­vant regulations. The legislative and advocacy work carried out by the AMCU can be highly evaluated. The AMCU received a number of necessary tools, such as qualified staff, EU assistance and po­wers to influence market competition. Nonetheless, it continues to consider a huge number of irrelevant notifications, instead of sustaining fair competition in postal services, shipbuilding, energy, aviation and other prospective industries.

Unless the AMCU and other state authorities complete and improve the legal architecture, ensure that state aid provi­ders are responsible for their non-compliance and market players revise their positions, state aid legislation can hardly become a working and effective mechanism of protecting economic competition.

At the same time, even the currently avai­lable imperfect regulations on Ukrainian state aid contain all the basic elements and enable control over state aid in Ukraine. In any case, market players should assess the efficiency of state aid control in Ukraine in practice and not on paper.