Opinion of the Committee of the Regions on 'The impact of regional policy on incentive packages for investment: a different approach in the use of Structural Funds'
Date: 1999-11-18
Institutions: European Committee of the Regions, Provisional data
Subjects: Structural Funds, business start-up, investment promotion, regional policy

29.2.2000

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Official Journal of the European Communities

C 57/61

Opinion of the Committee of the Regions on ‘The impact of regional policy on incentive packages
for investment: a different approach in the use of Structural Funds’

(2000/C 57/09)

THE COMMITTEE OF THE REGIONS,

having regard to the decision of the Bureau of 10 March 1999 to draw up, in accordance with the fourth
paragraph of Article 198c of the Treaty establishing the European Community, an opinion on the subject,
and to instruct Commission 1 for Regional Policy, Structural Funds, Economic and Social Cohesion,
Cross-Border and Inter-Regional Cooperation in liaison with Commission 6 to prepare the Committee’s
work on the subject;

having regard to the contribution of Commission 6 for Employment, Economic Policy, Single Market,
Industry and SMEs [rapporteurs: Mrs Oldfather (UK, PSE) and Mr Schranz (A, PPE)];

having regard to the draft opinion (CdR 127/99 rev. 2) adopted by Commission 1 on 6 October 1999
[rapporteurs: Mrs Klasnic (A, PPE) and Mr Färm (S, PSE)],

adopted the following opinion at its 31st plenary session of 17 and 18 November 1999 (meeting of
18 November).

1. General background

1.1. Many business activities are becoming increasingly
global. Technological progress and the rapid internationalisa-
tion of business markets are contributing factors. The capacity
of Community companies to compete on this market is of key
importance for future growth and prosperity in the EU.

1.2.
The attainment of EMU has resulted in the disappearan-
ce of some of the traditional means of attracting investment.
A fixed rate of exchange puts an end to currency fluctuations.
Member States can no longer be tempted to resort
to
devaluation to boost their competitiveness.

EMU also changes conditions on the credit market and
1.3.
the evaluation of other economic factors. Competition is
becoming fiercer and companies can more easily compare
lenders’ terms. A common currency also highlights discrep-
ancies between salaries, taxes and charges.

1.4.
A uniform common market with a common currency
makes it easier for firms to divide up their activities. Labour-
intensive components that do not require a particularly skilled
workforce are assigned to areas with low labour costs. Research
and development, along with activities requiring highly-trained
workers, are sited in expanding areas with top universities.
This is a natural development, where comparative advantages
are weighed up; however, if taken to extremes, it creates major
problems.

1.5.
In the more favoured regions a large number of
low-skilled jobs are disappearing. The result can be a two-tier
labour market, where a strong market for highly trained
workers may co-exist with high unemployment in vulnerable
groups. In less prosperous regions there is a risk of perpetua-
ting a structure dominated by manufacturing jobs. This
highlights the need to focus support measures in less-favoured
regions on developing infrastructure, education and training
and other social services.

1.6.
Imminent EU enlargement is already influencing com-
panies’ investment decisions. The countries concerned repre-
sent a large, important future market, with potential growth
and increased demand. The accession of these countries will
have an enormous effect on the labour market, especially in
the neighbouring states. During a transitional period the lower
costs of labour and the fact that environmental and social
standards will not be reached immediately will be significant
factors for investment.

2. The role of European regional policy in the context of

promoting the establishment of enterprises

One of

the major aims of

2.1.
the EU is expressed
in Article 158 (2) of the Treaty establishing the European
Community. ‘The Community shall aim at reducing disparities
between the levels of development of the various regions and
the backwardness of the least favoured regions or islands,
including rural areas.’

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2.2.
Furthermore the task of the European Regional Deve-
lopment Fund is defined in Article 160 of the Treaty. The
ERDF is intended to help to redress the main regional
imbalances in the Community through participation in the
development and structural adjustment of regions whose
development is lagging behind and in the conversion of
declining industrial regions.

conditions and development momentum in less-favoured
areas. The aim here should be to find long-term solutions to
foster a local environment which is more conducive to growth
so as to generate sustainable job opportunities. The Member
States will then be able to live up to the aim, set out in the
Amsterdam Treaty’s employment chapter, of achieving a high
level of employment.

2.3.
One key aim of EU regional policy is to support
development in vulnerable regions which will generate new,
sustainable jobs. For many years the EU Structural Funds have
provided valuable support in promoting the development of
ailing regions. There are many good examples of how EU aid
has made a positive contribution in less favoured regions and
in industrial areas hit by recession. The Structural Funds are
a major common instrument
in creating new jobs and
strengthening EU competitiveness.

2.4.
However, the Committee of the Regions is concerned
about distortions of the Structural Funds’ fundamental aims.
The aim of EU regional policy should be to ensure that direct
subsidies do not simply lead to a shift in existing jobs from
one area of Europe to another one. For this reason, if it comes
to a lowering of the subsidies available to industry in Europe,
support should be given to a policy which aims to take
consistent account of the regional development disparities
referred to in Article 158 of the EC Treaty. In this regard, the
Structural Fund programme for 2000-2006 adopted with
Agenda 2000 at the Berlin European Council will have a key
role to play.

2.5.
Demographic trends mean that Europe has an ageing
workforce. At the same time it is experiencing very rapid
technological change. Great efforts are needed to ensure that
the skills of the workforce keep pace with changes in general,
and to cope with sharp international competition. When
the supply of young and newly-trained workers declines,
companies have to find new ways of meeting their recruitment
needs (1).

3.

Incentive packages as an instrument of attracting
investments within European regions

The right of companies to transfer their operations to
3.1.
other locations in the European Union is conferred by the
European Treaties and by the creation of the Single European
Market. There can be major concerns when public aid is
offered to encourage companies to change location and these
concerns can be magnified when relocation decisions seem to
have been motivated by incentives which do not promote
sustainable employment.

3.2.
EU regional policy has done much to develop Europe’s
regions and improve the Union’s balance and cohesion.
However, there is a growing public debate about incentive
packages for companies, because of the failure to comply with
Community rules in a few exceptional cases. The main aspects
which are questioned are as follows:

— subsidising, or providing free of charge, land, premises and
other facilities for companies shifting their production
from one part of the EU to another;

— the combination of such support with a proliferation of
local/regional/national aid which falls completely outside
EU structural support regulations and seems directly at
odds with the EU’s competition policy and rules on state
aid;

The primary role of the national programmes now
2.6.
being introduced in the Member States to implement the EU’s
new Structural Fund programme should therefore be to
support training measures to boost the skills of the labour
force throughout the Union. Further, the Structural Funds’
main task should be to continue to assist the development of
infrastructure, training and R&D, and productive investment,
and generally to help foster a stable, advantageous basic

— in addition to these two forms of support, employers may
cut back terms of employment in some Member States.
This poses a serious risk to social cohesion in the European
Union, one of the defining features of which is a high level
of social protection for workers. It is therefore essential to
avoid social dumping by aligning working conditions
within the framework of the Community Charter of the
Fundamental Social Rights of Workers, enshrined in the
Treaty on European Union;

(1) see also Directorate-General V’s ‘Demographic Report 1998’
and ‘A Society for All Ages’, a conference paper prepared by
Directorate-General V for the similarly named conference held in
Vienna on 12 and 13 October 1998.

— in some cases, special tax incentives (fiscal dumping). For
instance, it is an established fact that capital and company
taxes differ sharply from one Member State to another,
and even from one region to another within individual
Member States, and that
this is currently tending to
stimulate extensive business relocations at regional level

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solely on tax grounds. The risk is that level of taxation may
be compressed so far that major difficulties arise in funding
education and social security.

taking a decision on location. This process also calls for a
variety of measures on the part of society, taking due care to
respect basic EU principles regarding fair competition and a
ban on aids which can cause distortion.

3.3. Measures need to be taken to ensure that incentive
packages do not distort competition and give unfair subsidies.
State aids must be used to promote competition which
generates economic efficiency, sustainable growth and the
generation of viable jobs. Aid packages are important in some
regions to compensate for the region’s structural disadvantages
for economic development and to help economic and social
cohesion within the EU.

In the early 1990s the European Commission investiga-
4.3.
ted the regions’ competitiveness in terms of attracting inves-
tors. This survey was conducted in connection with work on
completion of the single market. Regions were divided into
three categories (developed regions, ailing industrial regions
and less-favoured regions) and 37 different factors for regional
competitiveness were identified. The firms which participated
in this survey were asked to indicate the factors to which they
gave the highest priority.

3.4.
The competition to attract companies — facing a
persistently high level of unemployment — is becoming
increasingly fierce. The danger is that sustainable employment
will be undermined by short-term measures designed to entice
companies.

3.5.
If a company’s location decision is based more on a
variety of subsidies than on a region’s more permanent relative
advantages, it is also likely to be short-lived. The offer of new,
more advantageous subsidies can trigger further location
decisions. There are several examples of this happening. When
regions go in for this kind of game, where companies could
play them off against one another, they should be aware that
they are in danger of being the ultimate losers. The obligation
to meet the Maastricht-criteria on the one hand and the race
to offer a maximum of state-aid including tax-reduction can
lead to serious problems, which may have an adverse effect,
for Member States as well as regional and local authorities.

4.4.
Despite differences between the three categories of
regions, the following factors came consistently top of the list:

— borrowing costs

— income and company tax

— access to a qualified workforce

— indirect labour costs

— labour market legislation

— degree of economic growth

— payroll costs.

4. Relocation as a consequence of the use of incentive

packages

4.1.
Restructuring is a natural and necessary facet of
industrial and internal market development. An inevitable
side-effect is the total or partial closure of companies, the
setting up of new companies and the relocation of businesses
or activities. Some 10 % of jobs disappear every year, to be
replaced by roughly the same number of new ones. This places
a heavy strain on the adaptability of individuals, companies
and regions.

4.2.
In a healthy market economy, businesses weigh up the
respective advantages of different areas and regions when

4.5.
In this connection, the European Commission also
drew attention to a large number of measures to boost regional
competitiveness for which local and regional authorities
bear responsibility. These included factors as the educational
system, infrastructure, regional policy, the regional economy
and social services.

4.6.
Assessments are partly influenced by the nature of the
activity concerned. A company which is looking for a skilled,
highly trained workforce will come to a rather different
conclusion than another which is seeking a site for labour-
intensive industry. Several other surveys show that companies
in sunrise sectors with a highly skilled workforce place
increasing emphasis on ‘soft’ factors such as availability of
good schools, the environment, recreational facilities, health
care and other social services; a low crime rate is important
too.

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5. The actual role of the European Commission

5.1.
In 1997 the EU Commission adopted new guidelines
for national aid to regions. These guidelines include in
points 4.10 and 4.14 a provision that Member States may only
grant regional aid to a company if the investment and the jobs
remain in the area for a period of no less than five years. By
1 January 2000 the Member States must undertake an overhaul
of their national state aid regimes so as to bring them into line
with the new rules. These guidelines also define the concept of
initial investment, which may be funded with regional aid.

As regards the forthcoming EU regional aid program-
5.2.
me 2000-2006, the Regulation on the general provisions for
the Structural Funds contains a corresponding rule in
Article 30 (4) regarding relocation of businesses. It is specified
that a company may only continue to receive support from
the Funds if it does not undergo substantial restructuring
primarily caused by plant closure or a transfer of location. This
rule is to take effect within five years of the date on which the
competent national authority has taken a decision on EU
Structural Fund support.

The guidelines being drawn up by the Commission for
5.3.
the next programme period include a statement that the
Structural Funds should not be used solely to relocate existing
activities.

5.4.
One of the European Commission’s most important
tasks is to monitor compliance with competition legislation
and the rules on state aids. In principle state aids which distort
terms of competition are precluded. The balance between, on
the one hand, the need for support to develop less-favoured
areas and, on the other, fair terms of competition in a single
market
is not always easy to achieve. Since April 1998
multisectoral framework provisions on regional support for
large investment projects have been in force (1). These provi-
sions seek to provide a basis for more stringent control over
state aids in connection with major investments. At the same
time a balance should preferably be struck between three key
EU policy aims, viz. to prevent distortion of competition in
the single market, strengthen economic and social cohesion
and sharpen industrial competitiveness.

5.5.
The global importance and the high mobility of the
car-industry convinced the Commission to also focus especially
on this industry-sector in order to avoid distortion of competi-
tion among enterprises by receiving outranging state-aid

offers. A special regime was established with the Community
framework for state aid to the motor vehicle industry (2), where
a detailed analysis of the investment decision has to be
provided to the Commission before approval. Depending on
the experience with this framework there should be similar
provision for other sectors like telecommunication. Further-
more,
the framework should be applied to other highly
competitive and shrinking industrial sectors.

At the end of March 1999 the European Commission
5.6.
published its seventh report on state aids, in which it observed
that national state aids were as high as 95 billion euro per
annum, of which 38 billion euro was allocated to manufactu-
ring industry. Though the Commission noted a consistent
downwards curve, state aids were still excessive and frequently
inconsistent with fair competition in the single market.

5.7.
In addition, there were sharp differences from one
Member State to another. Admittedly the downwards trend
had been visible for some time, but not in all Member States.
In half of them state aids had increased or remained static
during the period 1995-1997 compared with 1993-1995.
Hence Commission monitoring of aids will continue be a top
priority. The Commission observes that rules already exist, but
many Member States fail to observe them. Is it also important
to give the Commission the resources it requires in order to
maintain high standards of monitoring.

5.8.
The relocation of existing jobs has been the subject of
discussion between the relevant Commission directorates-
general on many occasions in recent years, especially when
such relocation has been combined with EU support or
national state aids. In a number of cases attention has focused
on the role played by the workforce’s conditions. Large
sections of EU labour law and worker protection legislation
result from the drive to curb social dumping. The five year rule
for Structural Fund support can also be seen in this light.

5.9.
The Amsterdam Treaty steps up cooperation on the
social dimension as well as environmental protection. The
social partners jointly bear major responsibility for ensuring
that common rules are observed and working conditions
improved for the workforce. Such closer cooperation also
gives the EU Commission greater authority in monitoring
compliance with the common rules. The Commission needs
to be provided with the requisite resources. The forthcoming
accession of new Member States from central and eastern
Europe will make this even more necessary.

(1) OJ C 107, 7.4.1998, p. 7.

(2) OJ C 279, 15.9.1997, p. 1.

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5.10.
The discussions in progress within the Commission
between the relevant directorates-general have resulted, among
other things, in the instigation of a study of business relocation
decisions. This study, which has been commissioned from an
external consultancy firm and should be ready for autumn
1999,
is intended to identify the factors which condition
decisions concerning business relocation.

5.11.
On taxes and fiscal dumping, the Commission has set
up a group of experts headed by the UK Paymaster General,
Dawn Primolo. Criticism is mounting against the inclusion of
tax and charge concessions in incentive packages to attract
investors.

6.3.
The group of experts observes that extensive structural
changes lie ahead and will affect many industrial sectors and
regions. Its report contains a long list of recommendations to
place the Member States in a better position to cope with
the inevitable socio-economic side-effects of change. These
recommendations include measures to develop modern educa-
tion and training, as well as infrastructure systems, schemes to
boost small and medium-sized firms, and special promotion
of sunrise sectors. One major conclusion was that firms
themselves ultimately bore responsibility for restructuring. The
single market must be completed. Any form of concealed
obstacle to free, fair competition must be removed. That
includes the ending of any aid which distorts terms of
competition; all aid, including tax incentives, must be fully
visible and transparent so as to ensure an even playing field.

6. A different approach of local and regional authorities

to regional policy

6.1.
During the 1990s we have seen a number of examples
of jobs being relocated from one area of the EU to another. In
many cases, various state aids (with or without Structural Fund
resources) have been included. Worse conditions for the
workforce (not just pay but also terms of employment in
general) have also played a role. In areas hit by plant closures,
it has often been hard to find alternative jobs, resulting
in increased unemployment bringing economic and social
problems in its wake. This goes to show that the current
agreements within the EU need to be strengthened. An
overhaul must therefore be undertaken, to prevent EU support
leading to unhealthy competition among local and regional
authorities.

At

the

the November 1997 Employment Summit

6.2.
in
Luxembourg it was decided to set up a high level group of
experts headed by
former Volvo chairman, Mr
P.G. Gyllenhammar, with the task of analysing the social and
economic implications of structural changes within industry.
This group has focused on providing guidance on measures to
promote employment and sharpen competitiveness, foster a
labour market that operates smoothly and pave the way for
changes in these areas. Its final report was completed in
November 1998 (an interim report was presented in April
1998) and is addressed to political decisionmakers, captains of
industry and the social partners (1).

(1) ‘Managing change — Final report of the high level group on
economic and social implications of industrial change’, published
by the European Commission, Directorate-General V.

6.4.
Partnership among all the various players is one of the
key issues in the group’s report. Social dialogue must be
stepped up and play a full part at all levels. Broad cooperation
on the part of those concerned is a prerequisite for effective,
successful implementation of structural change. On a basis of
broad consensus, action is needed in firms and regions
affected by restructuring to encompass, for instance, training
programmes to develop workers’ capacity to cope with change
as well as measures to promote small and medium-sized firms
in the regions concerned. An economic development strategy
needs to be framed to enable regions in the throes of structural
change to combat social problems.

The Committee of

6.5.
the Regions regards the work
accomplished by the group of experts as a valuable contribu-
tion to the Community’s objective of promoting social and
economic cohesion within the EU. Taking this work as starting
point, the Committee calls for a code of conduct for the
implementation of structural change.

6.6.
The social partners’ role and responsibilities in such
matters should be stepped up. Moves in that direction are
already discernible in several places and the social dialogue
needs to be further reinforced at all levels.

6.7.
A code of conduct should be drawn up in the form of
a list of recommendations to be adopted with the broad
consensus of the parties concerned (governments, regions,
social partners). The aim should be to foster a sound basis for
economic and social cohesion via a regional policy designed
to boost competitiveness and economic growth. The aim is for
this code to serve as an instrument in curbing unfair competi-
tion rooted in social, fiscal and environmental dumping. Its
core component should be to provide European regional
policy with a streamlined set of rules and policy programme,

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with dynamic investment in education, training and infrastruc-
ture and with productive investment, and to ensure that
Structural Fund support is not used for purposes of relocating
existing jobs.

7. Conclusions

The Committee of the Regions:

1) notes that the right of companies to relocate within the
European Union is enshrined in the European Treaties but
that this movement must not be promoted through the
unfair use of incentives, and that there needs to be a strict
enforcement of the state aids policy which outlines eligible
aids and which promotes fair competition;

2) believes that EU regional policy is a key policy area which
promotes economic and social cohesion. Aid packages are
important in some regions to compensate for the regional
and structural disadvantages which hamper economic
development. It is essential that these packages promote
sustainable economic development and viable jobs;

3) states that one of the concerns of EU policy should be to
reduce gradually direct subsidies for industrial locations,
taking into account the objectives set out in Article 158 of
the EC Treaty, i.e. reducing disparities between the levels
of development of the various regions and the backward-
ness of the least favoured regions;

4) will keep a close eye on the inquiry into business location
decisions commissioned by the European Commission,
especially when it comes to ascertaining how, and to what
extent, Structural Fund resources are included in the
incentive packages offered to attract firms to establish
activities in various regions;

5)

recognises that the European Commission’s Seventh Re-
port on State Aids has pointed out that state aids in

Brussels, 18 November 1999.

manufacturing industries are being reduced. While the
COR welcomes this reduction, it is important that surveil-
lance of state aids continues because every example of
company relocation due to unjustified subsidies can have
severe consequences for the regions and localities which
have lost employment. A programme should tighten up
existing rules and monitoring arrangements but also put
forward proposals for a code of conduct for the relevant
players in this sphere. The code of conduct should be
based, inter alia, on the guidelines proposed in the report
of the group of experts directed by the European Council
to investigate the economic and social
implications of
structural change;

6) calls upon the European Parliament and the Council to
support the European Commission in its efforts to reorga-
nise the monitoring of state aids and to combat social and
environmental dumping more effectively;

7) proposes that a proactive drive be made to focus the
EU structural programme for the forthcoming period
2000-2006 more closely on the challenges facing the EU.
Measures to support the creation of new jobs in eligible
regions should concentrate on programmes to promote
investment, infrastructure, education, research, public ser-
vices and similar schemes aiming to promote growth and
help boost competitiveness and the capacity to meet new
challenges, as well as generating a larger number of
sustainable jobs. To this end measures to support producti-
ve investment that generates new jobs should include the
requirement that they do not involve direct aid for a
relocation alone,
i.e. aid not considered as an ‘initial
investment’ under the terms set out in the Community
guidelines for state aid for regional purposes;

8)

recommends that a special Community framework for
state aid in highly competitive and shrinking industrial
sectors should be drawn up. This should be similar in
nature to the Community framework for state aid to the
motor vehicle industry.

The President

of the Committee of the Regions

Manfred DAMMEYER