Ninth Survey on State Aid in the European Union.

(presented by the Commission)

Contents

INTRODUCTION

Background

Conceptual remarks

SUMMARY and CONCLUSIONS

Summary

Conclusions

Part I - OVERALL VOLUME OF NATIONAL AID IN THE COMMUNITY

Part II - AID TO THE MANUFACTURING SECTOR

2.1. Volume and trend of aid

2.2. Comparisons between Member States

2.3. Aid objectives

2.3.1. Overview

2.3.2. Changing trends - Horizontal Objectives

2.3.3. Changing trends - Aid for Particular Sectors

2.3.4. Changing trends - Regional Objectives

2.3.5. Trends and Patterns of State aid in Member States

2.4. Types of aid instrument

2.5. State aid given on an ad-hoc basis

Part III - AID TO AGRICULTURE

Part IV - AID TO FISHERIES

Part V - AID TO COAL MINING

Part VI - AID TO THE TRANSPORT SECTOR

6.1 Railways

6.2 Air transport sector

6.3 Maritime transport

6.4 Inland waterways

6.5 Combined transport

6.6 Road transport

Part VII - AID TO OTHER SERVICE SECTORS

7.1 Aid to the Financial Services Sector

7.2 Aid to Tourism, Media and Culture

Part VIII - AID FOR EMPLOYMENT AND TRAINING

Part IX - A VIEW OF THE YEAR 2000

Part X - RETROSPECTIVE

10.1 Overview

10.2 Country analysis

Part XI - SERVICES - CHANGING PATTERNS IN STATE AID

ANNEXES

ANNEX I Technical Annex

1. Scope of the Study - Fields excluded

2. Categories, forms and objectives of aid

3. Sources of data and methods of assessing the aid element

4. Specific issues

ANNEX II Statistical Annex

ANNEX III

1. Community Funds, Instruments and Programmes and ECSC operations

2. Statistical Data

Tables and Figures

TABLES

Table 1 Overall national State aid in the Community - annual averages 1995-1997 and 1997-1999 in constant prices (1998)

Table 2 State aid per capita in the Member States - annual averages 1995-1997 and 1997-1999 in constant prices (1998)

Table 3 Overall national aid in the Member States in percent of GDP, in Euro per person employed and in percent of government expenditure 1995-1997 and 1997-1999 in constant prices (1998)

Table 4 Overall national aid in the Member States - breakdown according to main sectors 1995-1997 and 1997-1999

Table 5 State aid to the manufacturing sector in the Community - annual values 1995-1999 in constant prices (1998)

Table 6 State aid to the manufacturing sector in the Community - annual values 1995-1999 in constant prices (1998)

Table 7 State aid to the manufacturing sector in the Member States - annual averages 1995-1997 and 1997-1999 in constant prices (1998)

Table 8 State aid to the manufacturing sector in the Member States - breakdown by main objectives 1995-1997 and 1997-1999

Table 9 State aid for CO2 emission tax schemes 1995-1999

Table 10 State aid for foreign direct investment carried out by SMEs 1995-1999

Table 11 Aid to the Shipbuilding sector

Table 12 Aid to shipbuilding in the Member States in percent of contract value of ships 1997-1999

Table 13 Shipbuilding development aid 1995-1999 as approved by the Commission

Table 14 Shipbuilding - total number of new ships supported by State aid 1995-1999

Table 15 State aid approved to the motor vehicle sector 1995-1999 (not including cases below the notification ceilings)

Table 16 Regional aid per eligible capita in Euro and regional aid as a percentage of total GDP

Table 17 Absolute levels of State aid granted directly by or specifically aimed at the outermost regions of the Union

Table 18 State aid granted directly by or specifically aimed at the outermost regions of the Union expressed as a percentage of the respective regions' GDP

Table 19 State aid to the manufacturing sector in the Member States - breakdown according to sector and function 1995-1997

Table 20 State aid to the manufacturing sector in the Member States- breakdown according to sector and function 1997-1999

Table 21 State aid to the manufacturing sector in the Member States - breakdown according to type of aid instrument 1997-1999

Table 22 State aid on an-hoc basis awarded in manufacturing (including Treuhand), and services sectors in the Community 1993-1999

Table 23 State aid on an-hoc basis awarded in the manufacturing (including Treuhand), and services sectors in the Member States - annual averages 1995-1997 and 1997-1999

Table 24 State aid to Agriculture in the Member States in percent of GDP, annual averages 1995-1997 and 1997-1999

Table 25 State aid to fisheries in the Member States in percent of value added in this sector, calculated on the basis of quantities landed and average prices- annual averages 1995-1997 and 1997-1999 in constant prices (1998)

Table 26 Community interventions in the fisheries sector in the framework of the common organisation of the market and structural policy 1995-1999

Table 27 State aid to coal mining 1995-1997 and 1997-1999 in constant prices (1998)

Table 28 State aid to railways in the Member States in percent of value added in inland transport services 1995-1997 and 1997-1999

Table 29 State aid to the transport sector in the Community - annual values 1995-1999

Table 30 State aid to the financial services sector in the Community - annual values 1995-1999

Table 31 State aid to tourism, media and culture in the Member States by way of specific programmes 1995-1997 and 1997-1999

Table 32 State aid for Employment and Training in the Member States by way of specific programmes 1995-1997 and 1997-1999

Table 33 Ad hoc cases by Member State in 2000

Table 34 Ad Hoc cases by sector in 2000

Table 35 Ad hoc cases by objective in 2000

Statistical Annex

Table A1: State aid to the manufacturing sector in current prices 1995-1999- (in national currency)

Table A2: State aid to the manufacturing sector in current prices 1995-1999- (in euro)

Table A3: State aid to the manufacturing sector in constant prices 1995-1999- (in euro)

Table A4: German State aid to the new Bundesländer - yearly average 1997-1999

Table A5/1-15: Total State aid by Member State - annual average 1997-1999

Table A5/16: Total State aid in the EU - annual average 1997-1999

Table A6/1-15: Total State aid by Member State - annual figures 1995-1999

Table A6/16: Total State aid in the EU - annual figures 1995-1999

Community Funds and Instruments

Table A: Annual Community expenditure 1995-1999

Table B: Other Community instruments 1995-1999

Table C: Community average annual expenditure by Member State 1995-1997

Table D: Community average annual expenditure by Member State 1997-1999

Figures

Figure 1 State aid as a percentage of overall EU GDP

Figure 2 State aid as a percentage of overall EU GDP of aided sectors

Figure 3 State aid as a percentage of National GDP in 1995-1997 and 1997-1999

Figure 4 Overall State aid in Member States broken down to main sectors averages 1995 - 1997 and 1997 - 1999

Figure 5 State aid to the manufacturing sector in the Member States as a percentage of value added. Annual averages 1995-1997 and 1997-1999

Figure 6 Aid for R&D, SMEs, environmental protection and energy saving in the Member States - as a percentage of aid to manufacturing 1995-1997 and 1997-1999

Figure 7 Regional aid as a percentage of national GDP

Figure 8 State aid to the manufacturing sector in the Member States - distribution by budgetary expenditure and tax foregone 1997-1999

Figure 9 State aid to manufacturing -- percentage share by aid instrument 1991-1999

Figure 9 continued, State aid to manufacturing - percentage share by aid instrument 1991-1999

Figure 10 Overall State aid in the European Union 1990-1999

Figure 11 The shares of overall State aid directed towards Agriculture and Fisheries, Manufacturing, Rail Transport, Coal and other aided sectors 1990-1999

Figure 12 Share of Aid for Horizontal objectives, particular sectors and regional development granted to the manufacturing sector 1990-1999

Figure 13 Share of horizontal aid objectives as a proportion of all horizontal aid

Figure 14 State aid to services, other than rail transport, in the EU

Figure 15 Total National and EU State aid as percentage of National GDP and EU GDP

INTRODUCTION

Background

1. Community Competition Policy is one of the pillars upon which the action of the European Commission in the economic field rests. This action is inspired by the principle laid down in the Treaty, of "an open market economy with free competition". The Treaty thus acknowledges the fundamental role of the market and of competition in guaranteeing consumer welfare, in encouraging the optimal allocation of resources and, in providing the appropriate incentives for the pursuit of productive efficiency, quality and innovation. By way of this policy therefore, the Commission seeks to reinforce the growth and competitiveness of European industry by ensuring effective competition in the Internal market and creating the conditions for markets to function well, whilst accounting for Europe's particular social market economy.

2. A key element of Competition policy is Community State aid control, the benefits of which are clear. State aid can frustrate free competition by preventing the most efficient allocation of resources and posing a threat to the unity of the Internal market. In many cases, the granting of State aid reduces economic welfare and weakens the incentives for firms to improve efficiency. Aid also enables the less efficient to survive at the expense of the more efficient. In addition to creating distortions within the Internal market, the grant of State aid can affect trade between the EU and third countries thereby encouraging them to adopt retaliatory measures that may be a source of further inefficiency. The unique system of control that exists throughout the European Union and indeed the European Economic Area is aimed at reducing all of these inefficiencies. Based on an agreed set of rules firmly anchored in the European Treaties, this system of control makes an important contribution towards fully realising the benefits of the Internal market and economic and monetary union.

3. However whilst the Internal market and economic and monetary union offer new possibilities to European industry, both contribute to the fundamental changes that are taking place in the environment where this industry operates. These changes are driven not only by developments for which the Community is the instigator, but also by external factors such as the changing nature of globalisation and the growing opportunities and challenges offered by the markets on which Europe depends. Europe's economy has in the course of the past two decades undergone significant change and it is now on the threshold of further transformation. The process of economic integration continues apace and even before the Candidate countries actually become Members of the European Union, the degree of integration between them, as indeed between other countries that comprised the former USSR and the Union, is increasing at an unprecedented rate.

4. Accompanying this process of economic integration has been an unparalleled process of deregulation or liberalisation of industries that previously were in the national domain. As examples we have airlines, power generation and telecommunications. The liberalisation of these sectors has opened them up to greater competition within and from outside the European Union.

5. In parallel with the structural changes that have resulted from liberalisation, we are witnesses to changes in behaviour. Given the Internet and the global awareness it engenders, compounded with the removal of the many cross-border obstacles that existed hitherto, the most dynamic, innovative and profitable activities are becoming even more mobile than in years past. The drive for optimal use of global resources is becoming unstoppable. Political priorities have also changed. Finding expression in the Amsterdam Treaty they have for example increased the emphasis on environmental protection and employment. The issues that now confront the Commission and Member States in the development of State aid control policy and State aid policies are therefore becoming more exacting.

6. When market failures caused not least by this changing environment are being addressed, it is recognised that Community or government intervention can be justified. For example such intervention may be used to mitigate the effects of undesirable market outcomes regarding resource allocation or income distribution. Moreover intervention might also be required either to reinforce policies that would not be sustained by market forces alone or, provide services that bring positive external benefits beyond their market value. Nevertheless, if such interventions do take the form of State aid, State aid control will attempt to ensure that the distortive effects on competition by each individual aid proposal, is minimised. And although a basis for addressing the cumulative distortive effect of the high levels of State aid in some sectors was not provided for under the Treaties, over the years State aid control has been instrumental in attenuating many of the worst symptoms of State aid.

7. However at the European Council Summits in Lisbon and then in Stockholm, the necessary political impetus was given to address the root cause. It was recognised that in order for Europe to be capable of sustainable economic growth, with more and better jobs and greater social cohesion, it will be necessary to improve its competitive position not only by ensuring that European society itself is both dynamic and knowledge-based, but also by reducing levels of State aid. The overall strategic goal is being supported by a series of measures [1], but it is in the context of the economic reform process that the importance of State aid control and reduction of State aid levels is found.

[1] An information society for all ; Establishing a European Area of Research and Innovation ; Creating a friendly environment for starting up and developing innovative businesses, especially SMEs; Economic reforms for a complete and fully operational internal market ; Efficient and integrated financial markets ; Co-ordinating macro-economic policies: fiscal consolidation, quality and sustainability of public finances ; Education and training for living and working in the knowledge society ; More and better jobs for Europe: developing an active employment policy ; Modernising social protection ; Promoting social inclusion ;

8. Nevertheless outside of the economic reform process, the rational for State aid control and the use of State aid is more than just contributing to the competitiveness of European industry. It is essential that sound State aid control and the judicious use of state resources lead for example to the reduction in the disparities between prosperous regions and regions where there is either a concentration of crisis-ridden sectors or indeed no jobs at all. The risk of polarization may be relatively high in Western Europe given that the mobility of labour is relatively lower than in many of our main trading partners' regions. To avoid the entrenchment of poverty, social mobility must either match the movement of capital or regions must be supported in the development of their own comparative advantages and by doing so, create employment.

9. In this context, investment in European economies is crucial and one measure of how attractive is Europe to investors, is the level of inward foreign direct investment. It is of concern that particularly in a few Member States, levels of FDI are below levels of State aid and Community funding whilst in others FDI dwarfs such government support. Clearly in the pursuit of the Lisbon objectives, investment must be encouraged and State aid, in tandem with other policies, should ensure that Europe can offer a skilled and educated work force and a tax and regulatory environment that encourages entrepreneurship. The effects of wage flexibility and the importance of incentives for worker mobility should be investigated. There is a body of theoretical work that is developing on whether firms should be encouraged to cluster. This and other research should contribute to thinking on the evolution of State aid policy. The difficulty is sometimes the development of creative policies that attract new industries whilst providing the necessary accompanying investment in human resources. As some industries decline, others need to be waiting in the wings to provide new employment opportunities.

10. Member States have at their disposal a number of instruments to intervene on markets and it is essential that the economically most efficient is used to achieve the objective at hand. If State aid is considered as being the most appropriate instrument, then its objectives should be sufficiently well defined so that it is possible to monitor its effectiveness and compare its success with other types of intervention in order to assess its efficiency. Monitoring and follow-up of State aid expenditure are therefore essential components of national State aid policies and Community State aid control policy.

11. A policy of transparency in the control and use of State aid should also accompany monitoring and follow up. The publication of this Ninth Survey underlines the continued commitment of the Commission and all Member States to this policy. Compiling and publishing data on the amounts of aid that are awarded is one primary means by which the Commission demonstrates that it is constantly keeping a close watch on the results of its control policy and the respective aid policies of each Member State.

12. As State aid policy in the European Union evolves, it has to account for the international context and, in particular, the multilateral obligations imposed by WTO rules: the WTO Agreement on Agriculture and the WTO Agreement on Subsidies and Countervailing Measures.

13. Bilateral agreements concluded with candidates for membership to the European Union contain a clear obligation for them to abide by Community rules on the grant of State aid. Full compliance with these rules is still needed, with transparency being the first step that should be taken towards their enforcement. Bilateral agreements have been signed with other countries and, in most cases, a State aid control dimension has been included. The provisions on transparency are essential and should, consequently, be implemented at an early stage. This Survey continues to provide an example of what we should expect in terms of transparency from these and our other trading partners.

Conceptual remarks

14. Since 1988 the Commission has regularly published State aid Surveys. The First Survey covered the period 1981-1986 and subsequent Surveys were updated every two years. [2] In order to further enhance transparency, provide more timely information and enable the Commission to detect at an early stage new trends in the award of State aid and therefore, respond more rapidly to changing circumstances, the Commission decided in 1998 to publish the Survey on an annual basis. The Ninth Survey, which covers the period from 1995 to 1999, is the third annual Survey.

[2] References: COM (88) 945 COM (90) 1021 COM (92) 1116 COM (95) 365 COM (97) 170 COM (98) 417 COM (99) 148 COM (00) 205

15. Commission departments in close co-operation with Member States drew up the figures used for this Survey. Historical data, upon which previous Surveys were based, have been updated with figures for 1999. Historical data have also been updated to account for reimbursement of incompatible aid and to include figures on public support that, after investigation by the Commission, has been deemed as constituting "non-notified" aid. In addition Member States have continued to verify and, if necessary, modify historical data, thus ensuring that a relatively high degree of reliance can be placed on the figures. For example the recent in-depth reviews by the Italian and Swedish national authorities on their respective data, have contributed to the reliability of the Survey.

16. If the Commission, taking account of changing circumstances, decides on the State aid character of a measure that was previously considered as not constituting State aid, the aid amount is fully integrated in the Survey. For example, following an examination of Irish corporation tax, the Commission decided in December 1998 that this existing scheme constituted State aid. As a result of this decision, levels of State aid in Ireland have markedly increased when the period 1997-1999 is compared with 1995-1997, although this increase does not represent any voluntary change in the Irish Government's State aid policy.

17. State aid may be granted by way of State resources of any form. The notion of State resources is very wide and covers not only the central budget of the State but all the resources of the State including those foregone by way of State aid, for example, that is granted by way of various tax benefits. In addition State resources comprise the different administrative entities of the State, agencies that act on behalf of the State, other para-State entities and may also include public-owned undertakings irrespective of whether they are governed by public or private law. Advantages in kind such as use of facilities made available by the State may also constitute State aid.

18. State aid implies that certain economic sectors, regions or activities are treated more favourably than others in order to promote economic activity. However the notion of State aid does not cover all types of state intervention to lower the cost of acquiring certain goods or services. For example grants given to homebuyers may be of indirect help to the building sector, but would not always be considered as distorting competition and affecting trade between Member States and therefore, as being State aid.

19. This Survey covers national State aid as defined under Article 87(1) EC Treaty [3] that is granted by the fifteen Member States and has been examined by the Commission. Compensation granted in accordance with Article 86(2) [4] to undertakings that perform a public service obligation may, according to recent court decisions [5], constitute State aid. As a consequence, the procedural provisions in Article 88 apply and in principle prior authorisation by the Commission is requested as of recently. However, in the past Member States often failed to report on this type of State aid. Only in the transport sector different rules have been applied following specific obligations contained in Community legislation based on Articles 73 regarding land transport and 80, in connection with 86(2), EC Treaty, regarding aviation and maritime transport. Rules on reporting exist in particular for compensation granted in rail transport, compensating for its exemption from the notification procedure of Article 88(3), which has not been affected by the recent Court rulings. Data pertaining to public service obligations are therefore included in the Survey only for rail transport but may sometimes (irretraceably) be contained in Commission State aid decisions in the rare cases of aids being justified under Article 86(2). Financial aspects of public air or sea transport services are for example dealt with under Articles 86(2) but also 87(2)a as the case may be. General measures and public subsidies that have no affect on trade and do not distort or threaten to distort competition are not dealt with in the Survey as they are not subject to the Commission's investigative powers.

[3] Save as otherwise provided in this Treaty, 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 undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market.

[4] Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in this Treaty, in particular to the rules of competition, insofar as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned therein. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community.

[5] See Court of First Instance cases: T-106/95; T-46/97 and C-332/98

20. The Commission has, by means of an exemption regulation, decided that certain aids do not meet all the criteria of Article 87(1) and that they are therefore exempted from the notification procedure provided for in Article 88(3) as long as aid granted to the same undertaking over any period of three years does not exceed EUR100.000. Such De minimis aid is not included in the Survey.

21. In future the Survey will include data on State aid granted by way of aid schemes and ad-hoc aid that is exempted from notification under the group exemption regulations. Currently two such exemption regulations have been adopted, one for training aid [6] and another for State aid to small and medium-sized enterprises [7]. In both cases, Member States are obliged to provide annual reports on State aid that is granted under the terms of these Commission Regulations. These data will be available for analysis in 2002.

[6] Commission Regulation (EC) No 68/2001 of 12 January 2001

[7] Commission Regulation (EC) No 70/2001 of 12 January 2001

22. The principal objective of State aid is to resolve market failures in various economic sectors, to support national, regional or Community policy objectives or reduce the potential social cost of structural changes that are occurring throughout European economies. The conditions under which aid may be granted are laid down in one or more of the numerous EU rules that pertain to the control of State aid. In theory therefore, a clear, unambiguous assessment of State aid levels may be carried out from both a functional and rules-based point of view. In practice, the benefits that accrue from an individual grant of aid often reflect the complexity of our economies and are therefore associated with a juxtaposition of objectives and rules. For example, aid granted in support of specific sectors may also be considered as reinforcing regional and/or social objectives. On the other hand, aid granted under regional aid rules can quite legitimately be used to support certain economic entities such as SMEs or activities such as training or R&D.

23. Consequently and within the constraints imposed by the current, but continually improving, degree of detail in the available data, this Survey presents an assessment of levels of State aid from both the above vantage points. In keeping with previous editions of the Survey, this edition concentrates its analysis on aid to manufacturing. Moreover, given the continued importance of aid granted to further certain policy aims such as R&D, SMEs, environmental protection and reductions in CO2 and other emission gases, the analysis that was introduced in the 8th Survey has been maintained. Chapters on aid devoted to particular manufacturing sectors and objectives have been reorganised and the chapter on aid instruments has been extended. In addition, a short chapter has been added on certain trends that can already be identified in the year 2000.

24. Aid granted to the agricultural, fisheries, coal and transport sectors is also reported on, but given the lower level of detail currently available, information on the final objectives of such aid and the aid instruments that are used is not highlighted. However where new trends or policies have been identified then these are presented. Given the growing importance of the service sector in the European economy, Member States were asked to provide information on the service component of major aid schemes that are open to many sectors. An overview of the data obtained from three Member States is presented in this edition of the Survey and will be developed for the whole of the EU in future.

25. When comparing patterns in the grant of national State aid between each Member State, the analysis concentrates on the annual average over the current three-year reporting period 1997-1999. Annual averages over this period are compared with annual averages for the period 1995-1997 when trends in the grant of aid are being analysed. Given that annual figures do not always allow for reliable conclusions to be drawn on changing medium and long-term trends, these data are not generally used for purposes of comparison. However where it is important to highlight rapid changes, 1999 annual figures have been commented upon. For the first time an historical overview is given on levels of State aid since 1990. Also for the first time since the Fifth Survey, data on aid granted to the agricultural sector are broken down by Member State.

26. In order to make the figures quoted in the Survey comparable all are expressed in constant 1998 prices [8].

[8] Figures for national State aid to manufacturing in current prices are given in Annex II, the statistical annex on national State aid.

27. General explanations of the methodology used are given in the Technical Annex (Annex I). The Statistical Annex (Annex II) contains basic statistical data on national State aid to the manufacturing sector and overall national State aid. Community funds and instruments are therefore, not included in national State aid figures. Information on these funds and instruments and the respective data are given in Annex III.

SUMMARY and CONCLUSIONS

Summary

28. The importance of the data analysis associated with the Survey is growing. It contributes to improve transparency in the implementation by Member States of Commission State aid decisions. Provisional data for 1999 were used to support certain proposals that are included in Commission Recommendations for Broad Economic Policy Guidelines and the recent Synthesis report that was presented at the Stockholm European Council. Given therefore the changing context that surrounds the Survey, Member States have responded to the Commission's request to ensure that the current as indeed the historical data they provide are as reliable as possible.

29. In the context of the commitments made by Member States at Stockholm, a selection of data have been presented in a way that will provide information that might allow more informed choices to be made with regard to State aid reductions and where these reductions may be possible. In order to comply with the undertaking to demonstrate a reduction in State aid by 2003, if ever State aid expenditure in 2000 and 2001 has increased, Member States will have to react very quickly in order to ensure a downward trend in 2003. This edition of the Survey should provide some of the information necessary if Member State expenditure plans need to be changed in the near future.

30. The European Union is a service-driven economy. The commercial service sector accounts for a large proportion of total GDP and this proportion is even larger when social and public services are included. Given the importance of services, a growing emphasis is being put on the analysis of aid granted in this sector and contingent upon information provided by Member States, a more detailed picture of the trends and patterns in the grant of aid will be presented in future.

Overall Results

31. The results of the Survey show that overall levels of State aid in the European Union have continued to fall. Moreover the disparities between Member States in the resources allocated to national State aid are diminishing. The results also show that the process of major restructuring in productive industries that took place in some Member States during the 1990s is coming to a close. Restructuring of certain service industries such as airlines and finance also appears to be winding down following the relatively recent liberalisation of these sectors.

32. The overall level of national State aid in the EU has dropped from an annual average of EUR102 billion during 1995-1997, to EUR90 billion during 1997-1999. Whilst the decreases in aid to manufacturing, transport and agriculture contributed most to this EUR12 billion drop, decreases were also seen in levels of aid granted to the coal sector. In contrast with the overall downward trend, when comparing the two reporting periods, increases were seen in aid to fisheries and to the service sector. A full series of data from 1995 to 1999 is not available for employment and training therefore a comparison between these two periods cannot be made. However a comparison of recent annual data shows that aid devoted to both of these objectives has increased each year since 1997.

33. The level of State aid has decreased in every Member State except in Denmark, Ireland, Luxembourg and the Netherlands. The marginal increase in Denmark is due to substantial increases in aid that is now granted to combat unemployment and support training in this country. The increase in Ireland is largely caused by the inclusion of figures for Irish Corporation tax that has been considered as a State aid only since 1998 combined with smaller increases in aid to agriculture and financial services. In Luxembourg the rise is entirely due to the recent sharp, albeit temporary, increase in subsidies paid for the additional investment in that country's railway network; a network that benefits communications between many Member States. In the Netherlands the increase seen in aid granted to the agricultural and railway sectors have more than outweighed decreases seen elsewhere. The two Member States that have contributed most to the EUR12 billion decrease are, as in previous periods, Germany and Italy with reductions of almost EUR6 billion and EUR5 billion respectively.

34. However, it is not only the volume but also the composition of State aid that influences its impact on competition in the Internal market. In the period 1997-1999, sector-specific aid is still relatively high in Belgium (railways), Germany (coal and railways, but declining in absolute terms), Greece (railways), Spain (railways, coal and shipbuilding) and France (railways and financial services). About one half of all aid granted in Portugal is regional aid that is almost entirely directed towards the service sector in the form of tax breaks.

Detailed findings and specific issues

35. The overall amount of aid granted to manufacturing throughout the Community, calculated in real terms over 5 years from 1995 to 1999 confirm the findings of the three previous Surveys where a peak in aid was observed in 1993. Since then there has been a gradual decrease in the EU level of aid. Compared with the reporting period from 1995 to 1997 when the annual average level of aid was EUR36 billion, the annual average during the current reporting period is EUR28 billion. This decrease is encouraging especially as the annual EUR6 billion decrease between 1997 and 1998 was repeated between 1998 and 1999.

36. Whilst the overall total of aid granted to manufacturing decreased by ca. 23% from the previous to the current reporting period, this decrease is due to a EUR3 billion reduction in Germany and a EUR4 billion reduction in Italy. Smaller reductions are seen in Belgium, Greece, Spain, Luxembourg, the Netherlands and the UK.

37. The three new Member States, Austria, Finland and Sweden contribute less than 4% of total aid to manufacturing, however their current share represents an increase compared with their less than 3% share only two years ago.

38. Disparities remain between Member States in their award of aid to the manufacturing sector. The spread is sizeable when this aid is expressed in percent of value added: the 4.3% level observed in Greece is over 7 times higher than the lowest aid level in the European Union; 0.6% observed in the United Kingdom. The Member States with the lowest levels of aid for manufacturing are the United Kingdom, Sweden, Portugal and the Netherlands where aid levels are well below the EU average.

39. When disparities between Member States are considered in regard to cohesion, it appears that the share of aid in the four cohesion countries, Greece, Ireland, Portugal and Spain, has only increased from 9% of total aid to the manufacturing sector during the pervious period to approximately 10% in 1997-1999. Furthermore this increase is mainly due to the inclusion of data on an Irish Corporation tax scheme that the Commission considers since 1998, as being a State aid. This aid scheme accounts for approximately 1% of all manufacturing aid. By way of comparison, the share of the four big economies, Germany, Italy, France and the United Kingdom, in manufacturing aid has decreased from 82 to 79%. (Germany accounts for 36%, Italy for 21%, France for 17% and the United Kingdom for 5% of the total.)

40. Insofar as the objectives pursued are concerned, the change in the shares of aid granted to horizontal objectives, particular manufacturing sectors and assisted regions has been relatively small. Variations have remained at less than 9% in most Member States. The only countries where larger variations have been seen are Belgium and Spain with considerable decreases in sectorial aid and Sweden where the increase in aid to horizontal objectives matches the decrease in regional aid. At the EU level, aid granted for horizontal objectives, inter alia, for the promotion of research and development, for environmental protection and to support small and medium-sized enterprises, accounts for 37%. The share of sectorial aid in overall manufacturing aid has dropped to 7%. Overall the largest share of manufacturing aid in the European Union, 56%, is spent on regional objectives, most of which is targeted to the least developed regions, i.e. areas qualifying for regional aid under Article 87(3)a EC Treaty. This share drops to 53% when the exceptional aid granted by THA and its successors to the new German Bundesländer is not taken into account.

41. As to the instruments used when aid is granted to the manufacturing sector at Community level, budgetary expenditure is the preferred form with its share being approximately 75%. However in comparison with tax forgone, the preference for the more transparent instrument of budgetary expenditure is unequally distributed amongst Member States. Whereas in some countries practically all manufacturing aid is given in the form of budgetary expenditure, in other countries, such as Denmark, France and Ireland, over 35% of aid is given in the form of tax breaks.

42. As witnessed in the previous Surveys, a relatively large but continually decreasing volume of aid falling outside schemes promoting horizontal, sectorial or regional objectives is granted on an ad-hoc basis to individual enterprises. In the manufacturing, financial services and transport sectors, a limited number of large individual aids account for a disproportionate part of the total aid granted. Ad hoc aid, which is granted mainly for rescue and restructuring of companies, is most prone to distort competition. In the manufacturing sector, it increased in volume to 11%, of total aid to this sector in 1994 before dropping back to 1,7% in 1999. If aid granted to the new German Bundesländer via the Treuhandanstalt/BvS is added - such aid can be considered similar to ad hoc aid - the share in overall aid to manufacturing increased to 37% in 1994 and has subsequently fallen back to 4,7% in 1999.

Conclusions

43. In a rapidly changing world an on-going review of State aid control policy is necessary to ensure that it remains fair and equitable for Member States, industry and consumers alike. The application of its basic principles must evolve to keep pace with the fundamental changes that are taking place in the environment where European industries operate and to underpin the evolution of industrial and social policies.

44. The purpose of government intervention and in particular intervention that takes the form of State aid, is to remedy the unwanted outcomes of market processes. However not unlike any other form of government action, intervention by way of State aid has to be constantly justified, critically examined and open to scrutiny. Apart from the need to minimise distortion to competition, the grant of aid must also be balanced against constraints on national public finances whilst in the European context the grant of aid must be consistent with the framework of economic and monetary union and the Stability and Growth pact. Public resources must be used restrictively and efficiently.

45. In the European Union the need for fiscal discipline is recognised. The debate is over what level of public goods and services should be supplied and the efficiency with which they can be provided. This Survey deals with government intervention that is apprehended under the concept of State aid as defined under article 87 of the EC Treaty and is written in the full knowledge of the recent commitment by all Member States to reduce levels of aid as a proportion of GDP.

46. In order to support Member States' compliance with the commitment made in Stockholm on the necessity to reduce levels of State aid, an instrument is needed that will transcend the objectives of this Survey. A much more detailed level of monitoring and follow-up of State aid measures is needed. Moreover the experience gained by 15 Member States in the implementation of national, regional and local State aid policies needs to be shared. The complex dynamic of State aid policy and other government interventions on markets and provision and cost of public goods needs to be understood. In order to contribute to this ambitious undertaking, the first version of a State aid Register of all Commission decisions pertaining to State aid has already been opened on the Union's Internet provider, EUROPA [9]. In the near future a State aid Scoreboard will be published.

[9] The State aid Register is found on: http://europa.eu.int/comm/competition/state_aid/register/

47. The objective of these new transparency instruments is threefold. Firstly they should provide further the understanding of the Community's State aid system and raise awareness in the need for a central State aid control. They should also contribute to the availability of information on the Commission's decisional processes whilst providing information on how Member States implement Commission decisions. Most importantly they must provide all Member States with a means to facilitate the exchange of information and experience on their respective State aid policies. In this way the Register and particularly the Scoreboard will provide a vehicle for improving the process of analysis of the effectiveness and efficiency of State aid measures with respect to other government measures that do not distort competition. In the short term these two instruments will complement information currently provided by way of the Annual Surveys on State aid in the Union. At a later stage they will replace the Surveys. The data provided by Member States will continue to provide the statistical basis for these instruments and the economic indicators will help to identify where and how reductions in State aid levels as a percentage of GDP can be made.

48. The task of reducing State aid levels will not be easy. The greatest room for Member States' manoeuvre is certainly to be found in aid for particular manufacturing and service sectors and that part of regional aid, very marginal in cohesion countries but more important in the most prosperous Member States, that is not co-financed with Community funds. As a matter of fact, the framework of the current structural fund and therefore co-financing of Community support with national State aid has already been defined until 2006. Furthermore, agreement on spending was also reached in the areas of agriculture and fisheries until the year 2006. Finally, in addition to the already fixed pattern of spending in the aforementioned areas, there are already agreements on the reduction of volumes of aid to the coal industry until 2005.

49. Each Member State will find its own policy that best meets the Stockholm commitment. And in providing the necessary data, the Survey must facilitate monitoring of the levels of aid by Member States and thus contribute to maintaining continued budget discipline; a discipline that is required to provide the conditions for a strong and durable expansion of investment, output and employment. Whilst the declining amounts of State aid in most Member States presented in this Survey are certainly also a reflection of this discipline, the cumulative level of aid reported are still high. There may therefore still exist a margin for manoeuvre in regard to further efforts to reduce State aid. The continued rigorous enforcement of the Community State aid rules will support this process.

50. In parallel with the development of new transparency instruments, there is still a need to address other more traditional issues. There is a continued need to maintain an ongoing refinement of State aid control that currently finds expression in a number of ways. New Community guidelines and frameworks are being drawn up not only to address developing market needs, but also to fine-tune existing Community State aid control rules. A new environmental protection framework has been published [10] and its impact on State aid levels will be closely followed up. A revision of the current Multi-sectorial, Employment and R&D guidelines is ongoing and rules on the provision of State aid to stimulate the provision of venture capital to provide an important boost to the development of companies and employment have been developed. Work also continues on identifying harmful tax measures in the form of State aid. [11]

[10] Community Guidelines on State aid for Environmental protection OJ C37 of 3.02.2001, p3.

[11] Communication on the application of State aid rules to measures relating to direct business taxation OJ C 384 of 10.12.1998, p3.

51. Aid granted in the area of SMEs and Training, responding to strict criteria currently have been approved by the Commission [12], will be exempted from notification requirements. Such group exemptions should ensure a reduced level of administrative effort on the part of Member States and the Commission prior to implementation of aid targeted towards these objectives, thereby allowing a greater focus on monitoring the effectiveness of such aid. An analysis of group exemptions will be available in 2002.

[12] See reference to group exemption regulations on page 13.

52. In July 2002, the ECSC Treaty will expire and with it the State aid rules that currently regulate the granting of State aid to ECSC coal and steel products. As reported in the Survey, the level of State aid granted in these two areas has dropped, particularly in the case of ECSC steel products. A decision will be taken in the near future as to what rules will apply to these sectors once they are subject to State aid control under the EC Treaty.

53. The Commission will also continue to monitor developments in newly liberalised sectors so that the long-term competitive advantages gained from deregulation will not be lost by the granting of subsidies to prop up loss-making activities. In particular, increasing attention is being paid to the energy, telecommunications and postal sectors. As these and other sectors enjoy a gradually increasing level of deregulation, the Commission must carefully assess government measures that previously were not considered as constituting State aid, may in the wake of deregulation acquire this characteristic. Such measures must be closely monitored and if necessary, evaluated under State aid rules.

54. In regard to cohesion within the European Union, the findings of the Survey indicate that the gap between the level of State aid granted in the richest Member States and in the four cohesion countries has hardly diminished. With a view to correcting regional disparities, financial assistance is vital and its effectiveness must not be compromised by the granting of disproportionate national State aid elsewhere. The Commission will, insofar as is possible under current State aid control rules, continue to reduce the cohesion gap.

55. The process of enlargement has continued apace. The establishment in these countries of a competitive environment such as that of the Community has, therefore, become urgent. In view of their future aspirations, compliance with the State aid "Community acquis", well in advance of accession proper, is essential in meeting the accession criteria in the competition area, as established in 1993 at the Copenhagen European Council. The Commission, therefore, continues to follow closely the developments in State aid in these countries and, by way of the Survey, provides an effective benchmark on the basis of which the necessary degree of comparability and transparency should be achieved.

Part I - OVERALL VOLUME OF NATIONAL AID IN THE COMMUNITY

56. The overall volume of national State aid granted in the EU to the sectors covered by this Survey is presented in Table 1. Amounting to an annual average of EUR90 billion during the period under review, it is a perceptible decrease in comparison with the EUR102 billion spent in the previous period. When this overall figure is broken down, the contribution of the largest sectors in terms of aid, agriculture, manufacturing, coal and transport, to this decrease can be seen. For employment and training, a reliable comparison cannot yet be made for the reasons given under Part VIII below. However it should be noted that the year-on-year figures presented in Annex II show that from 1997 aid supporting these activities has increased.

Table 1 Overall national State aid in the Community - annual averages 1995-1997 and 1997-1999 in constant prices (1998)

EUR Billion

>TABLE POSITION>

57. Table 2 shows overall national aid per capita in the European Union during the two reporting periods. Relatively high values are seen in Finland and Luxembourg, whilst the UK and Greece grant, in per capita terms, the lowest amounts of national State aid. Of the four cohesion countries, only Ireland is above the EU average during the current reporting period, whilst of the four largest EU economies the UK and Italy are below this average in the same period.

Table 2 State aid per capita in the Member States - annual averages 1995-1997 and 1997-1999 in constant prices (1998)

>TABLE POSITION>

58. Table 3 shows Member States' total aid expenditure as a percentage of gross domestic product per person employed and, relative to total government expenditure.

Table 3 Overall national aid in the Member States in percent of GDP, in Euro per person employed and in percent of government expenditure 1995-1997 and 1997-1999 in constant prices (1998)

>TABLE POSITION>

59. In spite of the convergence, which is stronger in terms of aid as a percentage of GDP and percent of total government expenditure than in Euro per person employed, disparities between Member States in the granting of State aid are reflected here. Of note is the gradual overall EU decrease in total aid as a percentage of GDP. With the exception of Denmark, Ireland, Luxembourg and the Netherlands where aid levels have slightly increased due to the growing importance of environmental protection, training and employment aid measures, levels have dropped everywhere. Data pertaining to Luxembourg reflect an important increase in railway investment.

60. The figures below present overall EU State aid as a percentage of overall EU GDP.

Figure 1 State aid as a percentage of overall EU GDP

>REFERENCE TO A GRAPHIC>

Figure 2 State aid as a percentage of overall EU GDP of aided sectors

>REFERENCE TO A GRAPHIC>

61. Figures 1 and 2 show the gradual decrease in State aid that has been seen in all areas between 1995 and 1999. Figure 2 presents State aid as a percentage of GDP in all sectors except those which do not generally receive aid. i.e. Public administration and defence, compulsory social security, Education, Health and Social work and other community, social, personal advice activities, Private households with employed persons and, Extra-territorial organisations and bodies.

62. Figure 3 below shows in graphical form the data presented in Table 3 on State aid in each Member State when expressed as a percentage of their respective GDP. A more detailed analysis of aid granted in each Member State since 1990 is given in Part X of the Survey.

Figure 3 State aid as a percentage of National GDP in 1995-1997 and 1997-1999

>REFERENCE TO A GRAPHIC>

63. Table 4 shows by Member State, the share of overall national aid that is granted in the sectors commented upon in the Survey. During the two periods covered by the Survey, the share of aid granted in each sector has remained fairly constant at the EU level with the biggest overall change in share being seen in manufacturing. On the national level shares are also fairly stable with the largest variations being seen in transport aid in Ireland, Luxembourg and Portugal. Almost three-quarters of Finnish national aid was granted to the agricultural and fisheries sectors during the period under review. During the same period the share of aid granted to manufacturing in Greece, Ireland and Italy accounted for more than 40% of their respective national aid. The bulk of aid granted in support of transport services is directed towards rail transport and during the period under review, over 50% of national aid was granted to this end in Belgium, Luxembourg and Sweden. Aid granted specifically for services has remained relatively low in most Member States except in Portugal where a single regional aid tax scheme accounts for the relatively large share of aid directed to services in this country.

Table 4 Overall national aid in the Member States - breakdown according to main sectors 1995-1997 and 1997-1999

>TABLE POSITION>

64. Figure 4 give a graphical representation of the above data for each Member State.

Figure 4 Overall State aid in Member States broken down to main sectors averages 1995 - 1997 and 1997 - 1999

>REFERENCE TO A GRAPHIC>

Part II - AID TO THE MANUFACTURING SECTOR

2.1. Volume and trend of aid

65. During the current reporting period from 1997 to 1999, State aid to the manufacturing sector accounts for 31% of the total annual average volume of aid granted in the Community.

66. Table 5 shows the annual amounts of aid to the manufacturing sector in the Community in the years 1995-1999.

Table 5 State aid to the manufacturing sector in the Community - annual values 1995-1999 in constant prices (1998)

EUR Million

>TABLE POSITION>

The figures above confirm that the trend in aid granted in the Union has not only continued on the gradual downward path observed since 1993 [13], during the last two years of the period under review, the trend has accelerated.

[13] In comparison with the data presented in the Eighth Survey, the figures above have varied slightly, reflecting the revisions carried out by Member States.

A downward trend is also seen when, as in Table 6, aid to the manufacturing sector is expressed as a percentage of value added and per person employed in this sector. [14]

[14] Since a small but not exactly quantifiable part of the aid amounts has to be attributed to the service sector, the figures shown may be slightly overestimated.

Table 6 State aid to the manufacturing sector in the Community - annual values 1995-1999 in constant prices (1998)

>TABLE POSITION>

Expressed in percent of value added in the manufacturing sector - aid levels have dropped continuously since 1995.

The average amount of aid per person employed in the manufacturing sector dropped each year from EUR 1287 in 1995 to EUR 716 in 1999.

2.2. Comparisons between Member States

67. Table 7 compares the average annual levels of aid in manufacturing sector for each Member State [15] for the periods 1995-1997 and 1997-1999, expressed in percent of gross value added and aid amounts per person employed in this sector. Absolute amounts of aid are also given.

[15] Germany has been divided in to the old and new Bundesländer in order to show clearly the different development in the two German areas, marked by the unprecedented adjustment process of the new Bundesländer economy to a market system.

Table 7 State aid to the manufacturing sector in the Member States - annual averages 1995-1997 and 1997-1999 in constant prices (1998)

>TABLE POSITION>

68. The annual average aid for the manufacturing sector in the EU during the current reporting period, 1997-1999, is approximately EUR 28 billion, representing a decrease of 23% in comparison with 1995-1997. This decrease is half as large again as that reported in the previous Survey. It is evident from Table 7 that the overall reduction of aid in absolute terms in the Community is almost entirely due to the continued strong decreases of 32,6% and 45% respectively in the new German Bundesländer and Italy. Reductions are also seen in Belgium, Greece, Spain, Luxembourg; the Netherlands and the United Kingdom. When comparing the two reporting periods aid levels in the seven other Member States are higher in the current reporting period than during the previous period.

69. These two apparently contradictory trends of increases in seven Member States and an overall decrease at the EU level are explained when Table A3 is considered. This table confirms the long-term downward trend in overall EU aid to manufacturing and also confirms the medium-term downward trend in almost all Member States. On a year-on-year basis there are decreases in 13 Member States. With the exception of Belgium and Sweden, there is evidence that levels of aid for manufacturing are decreasing in Member States. However as the rate of decrease during the current reporting period is less in seven countries than their respective rates of increase during the previous reporting period, their respective 1997-1999 annual averages are higher than their 1995-1997 annual averages.

70. When considering the overall differences in the Community under the aspect of cohesion, Table 7 shows that the volume of aid in the four cohesion countries has hardly increased. It has only grown from 9% in 1995-1997 to almost 10% of aid to the manufacturing sector in the Community in 1997-1999. Furthermore this increase is mainly due to the inclusion of data on an Irish Corporation tax scheme since 1998. When comparing the same periods, the share of the four big economies has decreased from 82% to 79%. In this context it should also be noted that, in addition to national State aid, the manufacturing sector benefits from Community interventions via the Structural Funds (see Annex III). In relative terms, the largest beneficiaries of this expenditure are the four cohesion countries, which see their relative aid position improved to a level that better reflects their weaker socio-economic situation. However, the effectiveness of these Community instruments in reducing disparities depends crucially on their not being outweighed by an unbalanced development in the use of State aid measures in other Member States.

Figure 5 State aid to the manufacturing sector in the Member States as a percentage of value added. Annual averages 1995-1997 and 1997-1999

>REFERENCE TO A GRAPHIC>

71. Expressed as a percentage of value added, the highest levels of aid granted to the manufacturing sector in 1997-1999 are found in Greece, Italy and Denmark (see Figure 5). These countries rank above the Community average, although the long-term decreasing trend in Italy continues. The increase seen in Ireland is due to the inclusion of figures from 1998 on an Irish tax scheme that is now being phased out. If this were discounted the underlying trend in Ireland would also be downwards.

72. Due mainly to the aforementioned tax scheme, aid per person employed in Ireland is the highest of all Member States during the period 1997-1999 followed by Denmark, Luxembourg, France and Germany. The high but decreasing figure for the new German Bundesländer is due both to the high level of aid granted and a sharp decline in the number of employees engaged in manufacturing in this part of Germany. The continued decrease in aid levels reflects that the peak of the restructuring process following German reunification in 1990 was already reached during earlier review periods. At the same time, aid per person employed in the old Bundesländer is among the lowest in the Community. Countries where levels of aid remain low are, in descending order, Portugal, the United Kingdom, the Netherlands and Sweden.

2.3. Aid objectives

2.3.1. Overview

73. Aid to the manufacturing sector is classified according to the primary objectives for which it is given or the sector to which it is directed, as follows:

Horizontal objectives

- Research and development

- Environment

- Small and medium-sized enterprises

- Trade

- Energy saving

- Rescue and restructuring [16]

[16] Rescue and restructuring aid is classified amongst other types of horizontal aid given that it is limited to neither certain sectors of the economy nor to certain regions.

- Other objectives

Particular sectors

- Shipbuilding

- Steel

- Other manufacturing sectors

Regional objectives

- Regions falling under Article 87(3)a

- Regions falling under Article 87(3)c

74. In some Member States aid schemes classified under the primary objective of regional aid and approved according to the regional aid guidelines may also support secondary objectives such as research and development, training and employment. Similarly, secondary objectives may also be attained by way of aid schemes whose primary objective is for example, aid for SME's. Consequently, observations concerning changing trends and comparisons between Member States, as indicated in Tables 8 and 9 respectively, are limited to the primary objectives of the schemes concerned.

2.3.2. Changing trends - Horizontal Objectives

75. As regards the development over time, the distribution of aid to the manufacturing sector between the above three different main objectives is shown in Table 8. The share of aid granted for horizontal objectives has increased and whilst this type of aid continues to be ranked second, it now absorbs 34% of aid granted to the manufacturing sector. A further 3% was also granted for rescue and restructuring and its breakdown by Member State is also indicated in Table 8. The share of horizontal aid, not including rescue and restructuring, has risen in thirteen countries and consistently remains well above the EU average in Denmark, Finland and the Netherlands. Moreover the share is below the EU average in only Greece, Germany and Italy. The most significant increase appears to be in Ireland. However this is due to the inclusion of data, since 1998, on the ICT [17].

[17] ICT - Irish Corporation Tax is a tax scheme now being phased out and that can be considered as being a horizontal aid since it benefits the whole manufacturing sector.

Table 8 State aid to the manufacturing sector in the Member States - breakdown by main objectives 1995-1997 and 1997-1999

>TABLE POSITION>

76. An increasing share of manufacturing aid was directed towards horizontal objectives in the period from 1997 to 1999 and 14% and 12% were directed towards research and development [18] and small and medium-sized enterprises respectively. The share of aid granted for rescue and restructuring, a category of aid that is also considered under horizontal objectives dropped. However in contrast with the former objectives, the highly distortive effects of rescue and restructuring aid are normally not matched by important positive externalities. Such aid has, therefore, to be very strictly controlled. It is discussed further under 2.5, ad-hoc aid.

[18] For the reasons explained in Annex I, point 11.1, the R&D figures contained in Table 8 may be underestimated.

77. An analysis of aid that supports R&D, SMEs, environmental protection and energy saving and as such is considered as generating positive externalities, shows a slightly different picture with increases in twelve Member States. Figure 6 clearly shows the vast disparities between Member States in respect of the level of State aid for these four objectives. Whilst figures, particularly for Greece, hide the fact that some aid classified as regional aid also supports horizontal objectives, it cannot be ignored that in some Member States the relative weight of horizontal objectives did not increase in the reporting period.

Figure 6 Aid for R&D, SMEs, environmental protection and energy saving in the Member States - as a percentage of aid to manufacturing 1995-1997 and 1997-1999

>REFERENCE TO A GRAPHIC>

78. Included in the category aid for environmental protection is a sub-category of schemes that is gradually increasing in importance. CO2 emission tax schemes have been established by some Member States to encourage a reduction in emissions of CO2 and other gases resulting from the combustion of fossil fuels and to support the use of renewable sources of energy. The principle rationale for such schemes is the need for the EU and the individual Member States to meet the commitments they entered in to under the terms of the Kyoto Agreement and the more general aim of achieving sustainable development.

79. Two types of State aid instruments are used and often in combination: tax exemptions and grants. In general, the Member States concerned have established schemes that levy taxes on energy or on CO2, NOx and SOx emissions. Given that very few countries have as yet set up such measures, a concern expressed by Member States is that the extra tax burden may result in their industries' competitive position being undermined. Therefore, the tax schemes have been introduced in a progressive way with energy-intensive industries being granted partial and temporary exemptions.

80. The second element of many of the State aid schemes in question is the extra incentive provided to industry by way of grants for the adoption of modern technology, that will increase the use of renewable energies and contribute to energy saving and reductions in the level of emissions. The grants are paid from emission tax receipts or from the general budget. Currently Denmark, which accounts for the bulk of this aid, Germany, Finland, France, the Netherlands, Sweden and the United Kingdom use such measures. In the near future the number of other Member States expected to adopt similar measures is likely to increase.

Table 9 State aid for CO2 emission tax schemes 1995-1999

EUR Million

>TABLE POSITION>

81. A sub-category of aid for SMEs that may constitute State aid, comprises government support measures for foreign direct investment outside the EU. These measures may be compatible with the common interest if they promote the competitiveness of European industry, for example, by assisting the development of SMEs or contributing to other Community objectives, such as the adjustment of the economies in transition or economic development in the Third World. Since 1993, a small number of schemes proposed by Member States specifically for this objective, has been approved by the Commission. The programmes concerned are only available to SMEs, nevertheless their geographical coverage is world-wide, thus responding to a need not only to reinforce support to the major sources of employment in the EU, but also to facilitate the widening of their horizons.

Table 10 State aid for foreign direct investment carried out by SMEs 1995-1999

EUR Million

>TABLE POSITION>

2.3.3. Changing trends - Aid for Particular Sectors

82. The proportion of manufacturing aid granted specifically to particular sectors as given in Table 8, continues to decrease and in the period under review dropped to 7% of all manufacturing aid in the Community. The decrease in the share of aid to particular manufacturing sectors in ten Member States has largely outweighed the marginal increases in four others. In Italy the share has remained constant. Whilst this category of aid is not always recognised as generating the positive externalities attributed to most horizontal aid, it is often granted in regions qualifying for regional assistance and may therefore contribute to general regional support policies.

83. The reductions in aid for particular sectors are due to the almost complete halt in rescue and restructuring aid specifically directed to the steel industry and the decrease in aid to shipbuilding, which nevertheless still represents almost two-thirds of this category of aid (see Table A5/16). In Belgium, no sectorial aid was granted during the period under review whilst the relatively high, albeit decreasing, level in Spain is due to the restructuring aid granted for shipbuilding. A detailed picture of these sectors is given below.

2.3.3.1 The steel industry

84. In the steel sub-sector of the manufacturing sector, the bulk of the aid granted during the period covered by this Survey was for restructuring and derives from eight cases that were approved on the basis of Article 95 ECSC Treaty. State aid that benefited ECSC products in the period under review was also granted in compliance with the Fifth and Sixth Steel Aid Codes of 1991 and 1996 [19] respectively. Aid granted outside the ECSC steel sector was regulated under the 1988 Framework for certain steel sectors not covered by the ECSC Treaty. [20]

[19] Commission Decisions No 3855/91/ECSC of 27.11.1991 and No 2496/96/ECSC of 18.12.1996 establishing Community rules for State aid to the steel industry.

[20] Framework for certain steel sectors not covered by the ECSC Treaty, 13.12.1988.

85. Together these grants of aid decreased from an annual average of EUR 797 million during the period 1995-1997 to an annual average of EUR 130 million during the current reporting period, thus reflecting a significant reduction of over 84%. It should be noted moreover that the 1999 level was down to only EUR33 million. These figures do not include the marginal amounts of aid granted to this sector in the context of schemes supporting R&D, environmental protection and energy saving. However, they do show that the major restructuring and concomitant capacity reductions that have been undertaken since 1994 in Austria, the new German Bundesländer, Spain, Ireland, Italy and Portugal are now almost complete.

2.3.3.2 Shipbuilding

86. During the reporting period the granting of aid for shipbuilding, a sub-sector of the manufacturing sector, was governed by the Seventh Shipbuilding Directive [21], which applied from 01/01/1991 until 31/12/1998 and, since then, Council Regulation 1540/98 [22]. The average annual amounts of aid granted in the periods 1995-1997 and 1997-1999 are given in Table 11.

[21] OJ L 380 of 31.12.1990.

[22] OJ L 202 of 18.07.1998

Table 11 Aid to the Shipbuilding sector

>TABLE POSITION>

87. During the period 1997-1999, restructuring aid averaged EUR 622 million per year; a decrease from the EUR 752 million granted during the period 1995-1997. In addition to restructuring aid, Table 11 also shows contract related operating aid granted for new constructions including ships for developing countries and conversions. Given decreases in operating aid in all countries except Finland and France, the overall average annual level of all aid granted to this sector decreased from EUR 1.634 million during 1995-1997 to EUR 1.254 million during 1997-1999 [23].

[23] Figures in this table are higher than those reported in Third Report from the Commission to the Council on the Situation in World Shipbuilding, COM(2000)730 final, dated 15.11.2000. The discrepancy between these figures comes from the fact that figures presented in the report to the Council were limited to those relating to new constructions and which benefited from the normal application of article 4 of the seventh Directive (max 9% of the contract price, 4,5 % for smaller vessels). The Survey includes all contracts benefiting from aid (development aid contracts and conversion contracts). Moreover the figures given in the Survey are in constant EUR 1998 and not nominal values.

88. The aid ceilings under the Directive and Regulation prevailing during the reporting period were 4.5% of contract value both for ships with a contract value of less than EUR 10 million and for conversions, and 9% of contract value for ships with a contract value of more than EUR 10 million. However, this ceiling did not apply to aid for the construction of ships for developing countries for which the minimum is 25% of the contract price. Table 12 presents the average aid ceilings, only including direct grants to shipyards or ship owners, in each Member State.

Table 12 Aid to shipbuilding in the Member States in percent of contract value of ships 1997-1999

>TABLE POSITION>

* Small ships are those with a contract value of less than EUR 10 million. For these the maximum aid intensity allowed is 4.5% of contract value. ** Large ships are those with a contract value of more than EUR 10 million. For these the maximum aid intensity allowed is 9% of contract value. - Note that a dash indicates missing information, whereas a blank indicates no aid.

89. Aid granted for the construction of ships for developing countries is given in conformity with Article 4.7 of the Seventh Shipbuilding Directive and Article 3.5 of Council Regulation 1540/98. Although there is a sharp increase in this type of aid in 1999, the annual average level of State aid that was granted to European shipyards for this purpose during the period 1997-1999 was EUR 103 million. This represents a 30% reduction when compared with the annual average of EUR 148 million granted during the period 1995-1997. The distribution of this development aid by country is given in Table 13.

Table 13 Shipbuilding development aid 1995-1999 as approved by the Commission. (The reference year corresponds with the Commission's decision date).

EUR Million

>TABLE POSITION>

90. In order to put the above figures into context, Table 14 presents information on the total number of new ships for which aid was granted during the period 1995-1999. As would be expected, the 1995 peak in building corresponds with the 1995 peak in operating and development aid granted to Europe's shipbuilders.

Table 14 Shipbuilding - total number of new ships supported by State aid 1995-1999

>TABLE POSITION>

2.3.3.3 The motor vehicle industry

91. Whilst there are no aid schemes in the EU that are specific to this sub-sector, State aid as shown in Table 15 is approved to the sector and mainly by way of regional, rescue and restructuring and training aid. The awarding of this type of aid by Member States remains within tight limits that are imposed by a specific motor vehicle framework. It is not possible at present to draw any conclusions as regards the general trend because of the very small number of cases.

Table 15 State aid approved to the motor vehicle sector 1995-1999 (not including cases below the notification ceilings)

EUR Million

>TABLE POSITION>

2.3.4. Changing trends - Regional Objectives

92. The overall EU level of regional aid continues to drop slightly. Apart from Greece, none of the other Member States with shares of regional aid to manufacturing that are above the EU average, are cohesion countries. Table 8 shows that during the period under review, 56% of manufacturing aid in the Union is spent on regional objectives with most being targeted at the least prosperous areas, the so-called Article 87(3)a regions. [24] This figure includes aid amounting to an annual average of EUR 2,179 million that is granted to the new German Bundesländer by way of the Treuhandanstalt (THA) and its successors. If no account were taken of this exceptional aid, aid for regional purposes would represent 53% of total aid to manufacturing.

[24] A list of these regions is given in Annex I, point 9.2.

93. Figure 7 below presents the level of Regional State aid in each Member State as a percentage of total national GDP. In five Member States the levels have been relatively constant during the current reporting period. In contrast significant decreases are seen in Germany, Greece, Ireland, Italy and Luxembourg. Smaller decreases are seen in Belgium, Sweden and the UK.

Figure 7 Regional aid as a percentage of national GDP 1995 - 1999

>REFERENCE TO A GRAPHIC>

94. In Member States where the share of regional aid is close to or below the EU average, their respective overall levels of manufacturing aid, expressed as a percentage of value added, are also below the European average. The one notable exception is Denmark where although the share of regional aid is the lowest in the Union, this country's level of manufacturing aid is the third highest in the EU. Conversely, where the share of regional aid is above the EU average, it then appears, with the exception of Sweden and the UK whose aid levels are amongst the lowest in the Union, that the respective Member States' level of manufacturing aid is also above the EU average.

95. Table 16 below compares regional aid per head of population in the assisted regions (per eligible capita) in Euro and regional aid as a percentage of total national GDP. In terms of aid per eligible capita, the highest levels are seen in Germany, Italy, Luxembourg and Sweden. Portugal gives by far the lowest level of regional aid to manufacturing, followed by Spain and Denmark. (If the regional aid that Portugal grants in Madeira by way of tax exemptions to the island's service industry were included, its level of aid per eligible capita would increase from EUR 3,4 to EUR 80.)

96. Whilst not all aid granted in assisted regions is jointly financed with Community funds, to appreciate the full weight of regional aid, a regional aid multiplier should be applied in order to account for the contribution made by Community funds to those schemes that are jointly financed. In many assisted regions that benefit from the derogation foreseen in Article 88 3a, Community funding for certain schemes may be as much as three times as high as the respective national State aid. In assisted regions that benefit from the derogation foreseen in Article 88 3c, Community funding may add a further 30 to 50% to respective national State aid.

Table 16 Regional aid per eligible capita in Euro and regional aid as a percentage of total GDP

>TABLE POSITION>

97. During the period under review, the process of reorganising the economy of the new German Bundesländer continued. The reunification of Germany is of particular importance for Community State aid policy. In 1997-1999, an average annual volume of EUR 6,9 billion was granted in aid to manufacturing in the new Bundesländer. This, although on a high level, is a considerable further decline in comparison with 1995-1997, when over EUR 10 billion was granted. In addition, this reduction is accompanied by a stabilisation in aid to the old Bundesländer, which now stands at EUR 2.9 billion during 1995-1997 and 1997-1999. The breakdown into the different aid instruments used in the new Bundesländer is given in Table A4 in Annex II.

98. With the exception of some specific aspects of the rescue and restructuring guidelines, [25] in the period 1997-1999 normal State aid rules applied to the new German Bundesländer. Guarantees averaging EUR1,084 billion per year and loans averaging EUR5,978 billion per year were given by Bundesanstalt für vereinigungsbedingte Sonderaufgaben (BvS). Based on its previous experience, the Commission is of the opinion that 20% of both amounts can be regarded as aid, which is included in the Survey. During the same period, grants were used for expenditure amounting to an annual average of EUR767 million, so that the total amount of aid granted by BvS, the former Treuhandanstalt, equals a yearly average of EUR2.2 billion.

[25] Community guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 368 of 23.12.1994 and Community guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 288 of 09.10.1999.

99. By virtue of the Article 299 EC Treaty, outlying regions of the Union enjoy a special status that reflects their structural social and economic situation that is compounded by their remoteness. The respective aid intensities in these regions may be higher than elsewhere and operating aid, which is not progressively reduced and limited in time, is allowed when it compensates for additional transport costs. The status of these outlying areas was further reinforced after the Treaty of Amsterdam and the new Article 299 2 [26] entered into force. These regions now benefit automatically from the derogation foreseen under Article 87 3(c) of the Treaty. Secondly in the outermost regions qualifying for exemption under Article 87 3(a) and (c) of the Treaty, operating aid, which is not both progressively reduced and limited in time, may be granted not only for additional transport costs, but also in order to offset other additional costs arising in the pursuit of economic activity from the factors identified in Article 299 2. It is the task of Member States to determine the amount of the additional costs and prove they are linked to the factors identified in Article 299 2.

[26] Article 229 2 ( ex Article 227)

100. A preliminary overview of the level of aid that is granted directly by or, that is specifically aimed at the outermost regions of the Union is presented in Table 17 below. In Table 18, the level of aid in each of the regions is expressed as a percentage of the respective region's GDP.

Table 17 Absolute levels of State aid granted directly by or specifically aimed at the outermost regions of the Union

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Table 18 State aid granted directly by or specifically aimed at the outermost regions of the Union expressed as a percentage of the respective regions' GDP

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2.3.5. Trends and Patterns of State aid in Member States

101. The trends and patterns of aid that is granted to the manufacturing sector in each Member State is as follows:

- In Austria, the average annual amounts of aid during the two three-year periods under review are fairly steady. This steady medium term trend is the result of a gradual increase in annual aid levels until 1997 that was followed by similar reductions in annual levels until 1999. When comparing the two three year periods, there was a significant decrease in aid to rescue and restructuring aid. Together aid for R&D, environment and SMEs accounted for the largest share of aid to manufacturing. Aid for particular sectors has remained stable and its share of aid to manufacturing is low whilst the share of regional aid, particularly in article 87(3)a regions, increased with respect to the first reporting period.

- In Belgium, the medium term downward trend in levels of aid that is seen when comparing the two reporting periods is due to a single sectorial scheme that, accounting for some 23% of all Belgian aid to manufacturing, was abolished in 1996. However since 1997 the absolute amount of manufacturing aid has slowly crept upwards again as resources directed towards R & D and SMEs have increased. A constant element of manufacturing aid policy in Belgium that complements action under R&D and SME schemes, is support given by way of other horizontal schemes that encourage the reconversion of industry and improvement of its technical base. These schemes now represent approximately 20% of all Belgian manufacturing aid. Regional aid to article 87(3)c regions is relatively constant. The shares of horizontal and regional aid have risen at the expense of aid to particular manufacturing sectors.

- In Denmark, the average annual amounts of aid during the two three-year periods under review show a very slight increase. However this medium term trend is the result of a gradual annual increase until 1997 that was subsequently followed by slightly smaller annual reductions until 1999. Horizontal aid in Denmark accounted for the largest share of aid to manufacturing with gradually increasing resources being directed towards the main beneficiaries, R&D, environment and energy saving. These increases are due to the increasing level of support afforded to energy saving and environmental protection, mainly in the form of exemptions from energy/CO2 taxes. When comparing the two periods, the most significant decrease was seen in aid for shipbuilding. Regional aid in Denmark is the lowest in the Community.

- In Germany the average annual amounts of aid during the two three-year periods under review reflect the continued reduction of aid in the new German Bundesländer. At the same time the share of horizontal aid is gradually increasing as the shares of sectorial and overall regional aid drop. However these changes hide the more subtle variations in the grant of aid. In absolute terms aid supporting most horizontal objectives except R&D and rescue and restructuring has now dropped each year since 1995. Regional aid remains the most important objective in Germany. However whilst aid granted in the article 87(3)a regions continues to decline rapidly, it now appears that aid granted in article 87(3)c regions is no longer decreasing.

- In Greece, most aid is classified as regional aid, which has decreased not only when the two reporting periods are compared, but also almost every year since 1995.

- In Spain, when comparing the two reporting periods, the level of overall manufacturing aid has diminished as a result of a considerable decrease in aid granted to the steel sector and a drop in shipbuilding aid. However aid for shipbuilding remains the most important element of State aid in Spain and in spite of an approximately 20% decrease in absolute terms between the previous and current reporting periods, it still represents 25% of all manufacturing aid. The share of horizontal aid, particularly for R&D, SMEs and energy saving, increased in the current reporting period as well as regional aid.

- In Finland, a comparison of the average annual amounts of aid during the two three-year periods under review shows a slight increase. This apparent medium term trend is the result of an increase in annual aid levels until 1997 that was followed by smaller reductions in annual levels until 1999. Horizontal aid, especially that benefiting R&D, SMEs and energy saving, continues to account for a large share of manufacturing aid. The share of regional aid has decreased slightly. Even though the share of sectorial aid appears to have increased, with shipbuilding benefiting the most, aid to shipbuilding in Finland has, on an annual basis, dropped very sharply since 1997 when it was recorded for the first time.

- In France, the underlying trend in the grant of aid is similar to Finland. A comparison of the average annual amounts of aid during the two three-year periods under review shows a ten percent increase. This apparent medium term trend is the result of an increase in annual aid levels until a peak was reached in 1997, followed by a gradual reduction in annual levels until 1999. The grant of large amounts of rescue and restructuring aid compounded with a sharp increase in regional aid caused this peak. When comparing the two reporting periods the share of regional aid and aid directed to particular sectors has increased, whilst the share of horizontal aid has decreased.

- In Ireland, whilst a comparison of the average annual amounts of aid during the two three-year periods under review shows a substantial increase, this is entirely due to the inclusion of data on Irish Corporation Tax (ICT) since 1998. During the period under review ICT accounted for approximately 56% of all aid to manufacturing. When ICT and the remaining aid to manufacturing are considered separately, it can be seen that both of these components are gradually decreasing. The most significant reduction since 1996 is in regional aid that has almost halved. Sectorial aid has also dropped considerably.

- In Italy, the long-term downward trend has continued and in fact accelerated during the current period under review. Given decreases in all areas and particularly drastic reductions in rescue and restructuring and in major regional aid programmes, the shares of horizontal, sectorial and regional aid have remained relatively stable. Even if regional aid increases in 2000 as current estimates indicate, the current downward trend in aid to manufacturing that has lasted since the period 1990-1992, should not be interrupted.

- In Luxembourg, the contribution of horizontal aid has increased from the first to the second reporting period. In contrast at the end of the current reporting period there was a significant reduction in regional aid. In spite of this reduction, regional aid still accounts for almost two thirds of aid to manufacturing.

- In the Netherlands, a comparison of the average annual amounts of aid during the two three-year periods under review shows a slight decrease reflecting a gradual reduction in the amount of aid to manufacturing since 1996. Horizontal aid, especially that benefiting R&D, environmental protection and energy saving, continues to account for a large and increasing share of manufacturing aid. The share of aid for particular manufacturing sectors has decreased from 9% to 3% given a large reduction in aid to shipbuilding. The share of regional aid has also decreased slightly.

- In Portugal, levels of aid to manufacturing have kept within a relatively narrow band for a number of years demonstrating a stable State aid policy characterised by small long-term variations in trends and patterns. Given the relatively low levels of aid, it is only sporadic grants of sectorial aid that increase aid levels over the EUR200 million mark. Most recently in 1999, an increase in resources directed towards the textile sector led to the slight increase in the current reporting period. Complementing horizontal aid measures such as R&D, SME and energy saving is a single horizontal scheme that accounts for approximately 30% of all manufacturing aid. The share of horizontal aid in Portugal has risen slightly and in the period 1997-1999 accounts for almost two-thirds of all manufacturing aid whilst aid for particular sectors dropped in the same period to 18%.

- In Sweden [27], a gradual increase in aid levels can be seen when comparing the two reporting periods. This increase reflects the two principle trends since 1995: the strong increase in environmental aid that has only partly been offset by small but continual reductions in regional aid. This is the only Member State where there is no sectorial aid so as the share of regional aid drops, the share of horizontal aid increases. The only components of this latter category are, R & D, environmental protection, SME and energy saving.

[27] The change of basis for the fiscal year in Sweden as from 1997 made it necessary to find a practical solution for the presentation of the figures for the years 1995 and 1996. Figures for these two years have therefore been calculated from the 12-month average equivalent of the 18-month period for the prolonged fiscal year 1995/96 that ran from the 1st July 1995 until the 31st December 1996.

- In the United Kingdom, the gradual decrease in aid levels that can be seen when comparing the two reporting periods reflects the downward trend in manufacturing aid since a peak was reached in 1996. Given the across-the-board reductions in levels of aid, the shares of aid granted for horizontal, sectorial and regional objectives have remained very stable. SME, R&D and Regional aid still account for the largest proportion with over a quarter of the latter being spent in Northern Ireland.

102. The above analysis only considers patterns and trends in national State aid expenditure. A part of this expenditure is co-financed by Community funding that also benefits the manufacturing industry in the EU. Figures on Community funding are provided separately in Annex III.

Table 19 State aid to the manufacturing sector in the Member States - breakdown according to sector and function 1995-1997

Percent

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Table 20 State aid to the manufacturing sector in the Member States- breakdown according to sector and function 1997-1999

Percent

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2.4. Types of aid instrument

103. Table 21 presents the distribution, as a percentage of total manufacturing aid, of the various types of aid instrument that were used by Member States during the current reporting period.

Table 21 State aid to the manufacturing sector in the Member States - breakdown according to type of aid instrument 1997-1999

>TABLE POSITION>

104. The overall situation in the period 1997-1999 is very similar compared with that presented in the Eighth Survey for the period 1996-1998. Grants, interest rate subsidies and tax exemptions, which are classified as group A forms of intervention, are still by far the most frequently used form of aid in the Community. Within this group and with the exception of France and Ireland, grants are more often employed than tax exemptions.

105. Aid in the form of State equity participation, classified under group B, represents only 3% of all aid to the manufacturing sector granted in the European Union. However, in one Member State, France, equity participation is relatively important.

106. Aid classified in group C encompasses loans at reduced interest rates and tax deferrals. Tax deferrals, mainly accelerated depreciation and the constitution of tax-free reserves, is the form that is least used in the Community, with the exception of the Netherlands, where it accounts for 8% of all manufacturing aid. Soft loans are an important instrument in Austria, Germany, Portugal and Sweden.

107. The share of guarantees in overall levels of aid, group D, continues to be relatively limited in all Member States.

Figure 8 State aid to the manufacturing sector in the Member States - distribution by budgetary expenditure and tax foregone 1997-1999

>REFERENCE TO A GRAPHIC>

108. Figure 8 gives a breakdown of aid to the manufacturing sector according to the mode of financing. Budgetary expenditure, which is composed of grants, interest rate subsidies, equity participation, soft loans and guarantees, is the preferred way of financing aid in the European Union. This holds particularly for Greece, Spain, Finland, Luxembourg, and the UK where all or virtually all aid is financed through the budget. In contrast, tax foregone, i.e. tax exemptions and tax deferrals, is used to the largest extent in Denmark, France and Ireland.

109. The evolution of patterns in the use of the various aid instruments does not become evident for most Member States until a relatively long time span is considered. Comparison between the two reporting periods covered by this Survey is not sufficient. Therefore in order to identify the gradually changing distribution of aid instruments the period from 1990 to 1999 is considered below and presented graphically in Figure 9.

Figure 9 State aid to manufacturing -- percentage share by aid instrument 1991-1999

>REFERENCE TO A GRAPHIC>

110. As regards guarantees their use has decreased in all Member States and now account for no more than 3% of aid to manufacturing compared with 8% during the period 1990-1992. Tax deferrals were never used to a great extent and they have represented only 1% of EU manufacturing aid since 1990-1992. The only Member State that has recently made avail of this instrument is the Netherlands. During the 1990's soft loans were used throughout the EU. The level of equity participation remained low throughout the EU during the 1990's. The only country where levels of equity participation have consistently stayed above the EU average, is France. During certain periods levels in Ireland and Italy were also above the EU average.

Figure 9 continued, State aid to manufacturing - percentage share by aid instrument 1991-1999

>REFERENCE TO A GRAPHIC>

111. Changes in the patterns of aid instruments are also found when considering grants and tax exemptions. At the EU level, there has been a decrease in the share of tax exemptions from 33 to 22% that has almost been matched by the rise in the share of grants from 51 to 61%. However of note are the relatively important changes in patterns that are found in some Member States. Belgium and Greece have increased the share of grants at a faster rate than the EU as a whole, whilst Denmark, Ireland and the Netherlands have in contrast with the overall EU trend, decreased the share of grants. Given the relative stability in the use of other aid instruments in these countries, the decreasing share of grants is matched by an increasing share of tax exemptions. It is only in France where there appears to be an increase in the use of both grants and tax exemptions.

112. The reasons for these variations are due to important changes in policy in some Member States, the implementation of which requires the use of certain aid instruments. Increases in tax exemptions in Denmark and the Netherlands are due to the growing importance of CO2 emission tax schemes. In France the increase in the share of tax exemptions over the past decade is due to their importance in the implementation of R&D and Regional support programmes. However in Ireland the apparent sharp increase in the use of tax exemptions does not reflect a change in policy, only the inclusion of data on the ICT scheme since 1998. In regard to Germany, the drop in the use of tax exemptions is due to the gradual discontinuing of tax exemptions for investment purposes in the new German Bundesländer. Budgetary expenditure therefore increased its relative share as overall aid amounts dropped in Germany. On the EU level, the use of tax exemptions for schemes supporting SME's decreased sharply between 1990 and 1995.

2.5. State aid given on an ad-hoc basis

113. The foregoing analysis of State aid data attempts to identify the medium and long-term trends in the EU Member States and is based upon State aid granted by way of schemes that promote horizontal, sectorial or regional objectives and State aid that is granted ad-hoc, i.e. outside of such schemes. Since an analysis of aid that is granted by the aid awarding authorities outside of pre-established schemes sheds a light on other necessities of national State aid policy, an analysis of ad-hoc aid is presented below. For completeness, reference is also made to ad-hoc aid in the air transport, financial and other service sectors.

114. For the purposes of this analysis ad-hoc aid is split into four sub-categories. The relatively high proportion that was granted for the purpose of restructuring in the new German Bundesländer, ad-hoc aid that was granted in most other Member States for the purpose of restructuring manufacturing capacity and, ad-hoc aid that is granted to restructure various service industries. The fourth sub-category is ad-hoc aid granted for horizontal objectives such as Research and Development and Environmental protection.

115. Table 22 shows that the peak in ad-hoc aid to the new German Bundesländer was reached in 1994 and since then has dropped considerably. A similar trend is found in ad-hoc aid that was granted in other Member States to certain sections of their respective manufacturing industries. In so far as ad-hoc aid to services is concerned the trend in aid used for the restructuring of certain companies in the air transport se