Back in April this year, we wrote about State aid issues surrounding the Government’s support to Fiat. The Serbian Government is once again aiding domestic producers – this time assistance has been provided to the company Simpo, the largest furniture manufacturer in Serbia.
According to the official Government’s website, at its session held on 28 August 2013, the Government granted to Simpo a short-term, interest-free loan in the amount of RSD 1.5 billion (around EUR 13 million) to finance repayment of the company’s accumulated debt for mandatory pension contributions. The Government also gave its consent that the Serbian Development Fund, a state-controlled entity, issue a guarantee for (another) loan for working capital. Both decisions cry “State aid”, defined by the Law on State Aid Control as “any actual or potential public expenditure or reduction of public revenues by which the beneficiary of State aid acquires more favorable position on the market in comparison to its competitors, which distorts or threatens to distort competition.”
A loan from the state to an economic undertaking amounts to State aid if the interest rate is lower than the rate the recipient would have to pay on the market, as this puts the beneficiary of the loan into a more favorable position compared to its competitors. Pursuant to Article 2, item 7 of the Decree on the Rules for Grating of State Aid, in case assistance is granted in the form of a loan, the amount of State aid is determined as a difference between the interest rate applicable to the loan at hand and the reference market rate determined by the Ministry of Finance. By extending to Simpo an interest-free loan, the Government granted the furniture manufacturer State aid equal to the amount of foregone interest calculated at the market reference rate.
The guarantee to be provided to Simpo by the Serbian Development Fund also qualifies as State aid. Namely, the mentioned Decree sets out specific conditions for a guarantee issued by the state to an economic undertaking not to be considered as State aid, including that the company whose debt is guaranteed for is not in financial difficulty, which is not the case here. The amount of State aid equals the price that Simpo would need to pay on the market in order to obtain equal guarantee.
State aid is not prohibited per se. However, no aid may be granted before the Commission for Control State Aid vets it for legality. There is no information on the Commission’s website on any decision approving the State aid to Simpo. In any event, the interest-free loan to Simpo would not qualify for approval by the Commission because one of the conditions for legality of such State aid to undertaking in financial difficulty is that the loan bears market interest rate. The guarantee promised for Simpo’s debt could be potentially permissible, provided that its term is not longer than six months. The Government has not revealed the details of the guarantee to Simpo and we therefore do not know whether this form of support is within the realm of potentially permitted State aid.
The Government support to Simpo may also run afoul of Article 38 of the Interim Trade Agreement (i.e. Article 73 of the Stabilization and Association Agreement, which entered into force on 1 September 2013). ITA and SAA declare incompatible with the agreement any State aid which distorts or threatens to distort competition by favoring certain undertakings or products, in so far as this may affect trade between Serbia and the EU. In the Simpo case, the EU dimension is present since Serbia imports furniture from the EU.
Controversies surrounding the Government’s aid to Fiat ended by the Government abolishing the disputed decree on 20 May 2013. It remains to be seen whether assistance to Simpo will come under similar attack of stakeholders.
