In our last post, we wrote about how a hopeful Barcelona fan wants to block Messi’s transfer to PSG with competition law. He argued that the French football authorities have not enforced financial fair play rules against PSG, so that the Ligue 1 giant can dominate Europe. And this could amount to ‘state aid’, or public assistance, which is when a country grants favourable treatment to a company—i.e., reduced tax, subsidies, cheap loans, cancelling debt—to the exclusion of the company’s competition.
It is like if the bank in a game of monopoly gave a certain player M1,000 every time she passed Go, but only gave the remaining players M200.
Governments may use state aid for a range of reasons: to create national champions that can compete overseas, to correct market failures, to protect an industry, and to encourage or guarantee investment, etc.
Competition law frowns on state aid because it allows a government—and not the forces of competition—to pick the winner in a market. The government can tip the scales, and rig the market, in favour of a specific company. As such, state aid rules aim to prevent countries from behaving anti-competitively.
Europe has the most popular state aid regime. Any action which improves a beneficiary’s financial position, or prevents it from deteriorating, is considered to be state aid. And for such aid to be illegal, it must create a selective (or unique) advantage and have the potential to distort competition.1
All aid must be approved by the European Commission (EC) before being granted by a country. Failing to do so is unlawful, and the recipient will be ordered to pay it back.2
Some aid is always permitted—indiscriminate aid to consumers and aid to remedy natural disasters. And others may be permitted—i.e., for socioeconomic development, important projects, growing sectors, and culture and heritage conservation.
For instance, after the 2008 Financial Crisis, the EC approved the UK’s restructuring plan of Lloyds Bank, which saw the bank receive £17 billion to keep it afloat.
Meanwhile, in 2016, the EC found that Apple received tax benefits from Ireland that were worth £11 billion, and that this amounted to illegal state aid. However, the finding was struck out by the General Court (because the EC failed to prove the existence of a ‘selective advantage’), and the EC has appealed this judgment.
Besides the EU, the WTO has specific rules on subsidies. But these don’t extend to state aid more generally. And they are not as strict as Europe. It assumes that subsidies are generally good, while the EU almost takes a guilty until proven innocent stance.
Also, the WTO does not have to approve subsidies, subsidies cannot be recovered, and the WTO cannot intervene on its own. Instead, illegal subsidies can only be challenged after the fact by countries (not businesses, like in the EU), and the WTO encourages countries to offset the harm through retaliatory duties.
In Africa, only the ECOWAS Regional Competition Authority has state aid powers,3 and these are similar to the EU’s rules. But there is no notification requirement. Instead, other member states or legal persons must apply to the authority to order compensation from the infringer.
Other regions have rules that only govern subsidies, like the WTO. For instance, the rules for the Common Market for Eastern & Southern Africa, and the Southern African Development Community are identical to the WTO’s rules. Same with the rules for the East African Community Competition Authority, but subsidies here must be notified, and the authority can recover illegally granted subsidies from recipients, like the EC.
However, these authorities are yet to intervene against illegal state aid or subsidies.
In 2012, the Competition Commission of South Africa (CCSA) was presented with an opportunity to investigate a state aid complaint, which alleged that a ZAR 5 billion guarantee by the National Treasury to South African Airways was an illegal state aid. However, the CCSA refused to investigate; stating that it had no power to prevent illegal state aid.
But there is hope: the Phase II Negotiations of the African Free Trade Area—where competition policy will be discussed—will start later this year. State aid is bound to feature. You can’t discuss competition policy in a free trade area without considering how countries can distort competition by assisting their favoured companies.
Restraints must be placed on member states who wish to (unfairly) ensure that their indigenous companies dominate Africa.
Restraints may also need to be placed on export free zones—which provide incentives for companies to export from a particular country, in order to improve the country’s ability to export. Many African countries have emulated China’s use of these zones.
However, these zones could amount to illegal state aid. Say, a company (‘A’) uses an export free zone in Cameroon to sell its goods in Uganda. Depending on how the zone is structured, it could allow A to operate at such low costs that it has an unfair advantage over Uganda’s domestic players—thus distorting the Ugandan competitive landscape because of its assistance from the Cameroonian government.
In 2003, something similar happened in Europe: a German export scheme was found to have breached state aid rules. The scheme subsidised office space abroad and paid for foreign trade assistance in the target country for one year. Through this, Germany was distorting competition by, effectively, financing the increased presence of certain companies in other countries.
A balance must be struck, though. Africa is at a stage where many industries require some government help.4 Our state aid rules must contend with the ultimate objective of African growth. It should not prevent, say, Rwanda from creating a tax relief scheme to encourage important investment from a specific company into a sector. Nor should it prevent, say, the Egyptian government from saving a critical business.
For example, Europe’s strict state aid rules prevented the UK government from rescuing British Steel Ltd. from insolvency—putting thousands of jobs at risk. Instead, British Steel was sold to the Chinese Jingye Group, despite genuine concerns about China controlling a core UK sector.5 Strict state aid rules in the EU are also to blame for why the Netherlands and Portugal have struggled to assist their national airlines (KLM and TAP, respectively) to mitigate the economic effects of the pandemic.6
An African state aid regime has huge potential: it can prevent countries from unfairly assisting the likes of Dangote and Safaricom to dominate Africa. But if strictly enforced, it can stunt the economic growth that Africa desperately needs.
We must exercise caution.
Before you go…
…here are some recent developments in the world of competition law:
Chinese antitrust: This year alone, China’s competition authority has: (i) fined Alibaba $2.75 billion for abuse of dominance; (ii) blocked a $5.3 billion merger between two video streaming services; and (iii) imposed remedies on Tencent for failing to file its acquisition of 61.64% in China Music Group. Highest ever fine, first merger blocked, first ever remedies for failing to notify—China isn’t holding back. And this has implications for Africa: China’s ambassador to SA urged Africa (especially SA) to improve competition law enforcement (especially against technology companies). Let’s ignore China’s history with government monopolies for a moment. What if China used its leverage over Africa (loans, debt, and aid, etc.) to demand a particular outcome from antitrust enforcement? Well, then, that would be quite worrying.
India & Google: The Competition Commission of India (CCI) recently ruled on an alleged tying abuse. This was for Google integrating Meet, its video conferencing service, as a pre-installation that could only be hidden but not deleted from Gmail, its dominant mail service. The CCI held that Google was not guilty as there was no coercion. This was partly because consumers could still seamlessly use competing services, such as Zoom and Teams with their Gmail accounts. Interestingly, in similar cases, the EU has adopted a more stringent standard for coercion by requiring a seller (Google in this case) to overcome end-user inertia by persuading consumers to ignore a pre-installation. EU’s rationale is that despite there being no obligation to use the tied product, the result is likely to be the same as consumers tend to opt for the most convenient route. Click here to read a through opinion of this decision.
Updated Merger Regulations: The Nigerian competition authority has updated its merger review regulations—in particular, it has reduced the processing fees to be paid for transactions, and it clarifies the relevant turnovers for calculating fees for global transactions and transactions involving private investment entities. See more here.
‘Selective advantage’ is determined through the market economy investor principle test, which asks: would a profit-oriented private investor have supported the recipient under normal market conditions? If the answer is no, then there has been a selective advantage.
Aid is not notifiable if it is: (i) below €200,000 over a period of three years; and/or (ii) under the General Block Exemption Regulation.
Actually, the West African Economic and Monetary Union has regulations on state aid and has intervened against Senegal and Togo. But these are, rather conveniently, either in French or behind a paywall.
European state aid has been reducing as reliance on private capital has increased—which suggests that, as a country becomes more developed, the need for state aid reduces. The opposite is also true: while a country is undeveloped, there is a higher need for state aid.
This actually became a bipartisan issue: Boris Johnson and Jeremy Corbyn both argued for a relaxation of state aid rules in post-Brexit Britain.
Coincidentally, ministers in Austria, Denmark, and the Czech Republic recently wrote an open letter requesting for Europe’s state aid rules to be relaxed, so that they (and other countries) can respond better to the pandemic.