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Partner, Marchenko Partners*
*In September 2021 he joined Nobles as a partner.
Senior Associate, Antitrust & Competition, Marchenko Partners
State Aid in Ukraine: What Next?
State aid regulations have been in place in Ukraine since 2017. Thus, for almost half a decade, the Antimonopoly Committee of Ukraine should have been developing and perfecting all the necessary regulations as well as applying them in practice. Let’s discuss whether the real developments (especially the most recent) meet the relevant expectations of EU and state aid practitioners who understand how vital the relevant regulations are for Ukraine.
State Aid in Ukraine: Now More Important than Ever
State aid regulations in the EU became an indispensable part of the EU legal system. State aid regulations are important because they allow both for the establishment of a level playing field for private companies not backed up by government subsidies and other types of support and controlling the flow of public resources by making sure that they are spent on projects that don’t entail overcompensation of certain market players which may lead to ineffective public spending.
If properly set, a state aid monitoring and control system could allow Ukraine to attract more private investment (of course, proper state aid control would serve as a plus for investors, but wouldn’t be a cornerstone for them in deciding whether to invest in Ukraine), to manage efficiently available public funds and to ensure that foreign monetary support to Ukraine wouldn’t be useless.
While some of the deadlines set by the EU-Ukraine Association Agreement get closer (e.g. the deadline for establishing a comprehensive inventory of aid schemes), it is time for Ukraine and the Antimonopoly Committee of Ukraine to draw some preliminary conclusions on how it worked for the past four years and to speed up the relevant processes for the time that remains.
Are We Ready to Rumble?
One should note that, in terms of legislation, Ukraine generally has most of the relevant acts in place. Unfortunately, for a long period now there have been a number of state aid compatibility criteria developed but not yet approved by the government. These include criteria applicable to environmental protection, banking, and general state aid compatibility criteria.
Moreover, the need to modify the regulations which are already in place will most likely be constant and the Antimonopoly Committee of Ukraine and legislative bodies will have to address the issues which appear in terms of enforcement of state aid rules to make sure the control and monitoring system works properly and effectively. For example, it is necessary to bring some clarity to the procedural rules governing the provision of information related to state aid issues. As of now, there are no clear rules which may help the AMCU to enforce receipt of the information necessary to review state aid cases. Fortunately, it recently announced that it has already prepared a draft bill that may at least partly address the mentioned enforcement issues. Additionally, the AMCU lacks the powers to fight against state aid grantors which manifestly ignore state aid rules.
Although it might seem that minor legislative drawbacks do not influence the overall pace of reform, it is important to understand that only a systematic approach may bring us somewhere near the level of EU state aid regulations and practice. Thus, even minor issues should be properly dealt with in order to avoid any big trouble which might occur right before the deadline.
Only Practice Makes Perfect
As has been stressed many times by state aid practitioners, a state aid monitoring and control system could be tested and improved in the event that the AMCU begins to review big, high-profile cases. In the meantime, it still spends a lot of time taking care of numerous notifications made by local authorities. Of course, it is necessary to review day-to-day issues. Nevertheless, it is also important to stress test the relevant rules and instruments in terms of truly important cases and to show that Ukraine is ready to perform its commitments.
The pioneering Ukrposhta case, which was triggered by a complaint from Nova Poshta, doesn’t have all the necessary elements to be called a model one. Moreover, the AMCU hasn’t yet completed any high-profile cases involving leading private market players having disputes against each other or state-owned companies, so there is still a lot of room for improvement. Even more, the AMCU somehow managed to avoid significant deliberations in 2020, while making decisions that the state aid provided for the development of the logistic network recently granted to Ukrposhta was compatible.
Another state aid case that has yet failed to meet the high expectations is the one involving Philip Morris (as an alleged recipient of state aid). The relevant case started in January 2020, triggered by a complaint of unlawful state aid filed by Vynnyky Tobacco Factory — a local competitor of Philip Morris. This time nothing prevented the AMCU from formally opening a case and assessing allegedly unlawful or even incompatible state aid. By comparison, in the Ukrposhta case where the aid in question already existed before the adoption of the relevant legislation, the AMCU maintained the slow pace of case review. At the same time, after more than one and a half years, one cannot observe any significant improvements or considerable progress in the Philip Morris case.
Now state aid practitioners rely on EU practice (applicable in some cases under the EU-Ukraine Association Agreement) as well as on a small number of AMCU state aid cases (including few reviewed by the courts) to assemble the puzzle, understand how state aid works in Ukraine and to advise stakeholders on the relevant matters.
For example, there is an interesting case on state aid granted by the Construction and Housing Department of Kyiv City Council to several communal enterprises. The mentioned case may be of special interest due to being the first in which a court turned down the AMCU’s decision on state aid. The latter ruled that certain aid granted to several communal enterprises was incompatible and subject to recovery from such enterprises. Such a decision was further appealed to the court by the Department. The court of first instance examined the evidentiary basis used by the AMCU to adopt its decision and accepted plaintiffs’ arguments on services of general economic interest and Altmark criteria. The appeal and cassation courts further upheld the greater part of the conclusions drawn by the court of first instance.
It is not enough to simply review the court decision as shown in the public registry to have an opinion on how the Ukrainian state aid system works. However, it is good that we now understand that courts will be ready to review and double-check the AMCU’s decisions, not leaving the latter to decide everything on merit and taking care only of the procedural aspects. With more of such cases to come, we will have a better understanding of the arguments which should be used in state aid cases during review by both the AMCU and the courts. Such practice is vital for assembling the puzzle we mentioned above.
New Challenges and Further Improvements
Additionally, the COVID-19 pandemic and other factors which influence the AMCU’s activities should not be ignored. The rise in state support, including the extension of state aid programs, became a common thing for EU countries, and Ukraine was no exception. Although much later than expected, only in spring 2021, the Cabinet of Ministers of Ukraine adopted compatibility criteria for the state aid granted to mitigate the negative consequences of COVID-19.
The granting of state aid related to COVID-19 is extremely important, and one may understand some cases when state aid rules weren’t fully enforced because some critical support was granted. However, it looks rather strange and even outrageous when the Ukrainian Parliament adopts laws that provide some exclusions from state aid rules. This is how Parliament invented a new method on how to grant state aid (probably to fulfill some political promises) and to avoid lengthy compliance procedures with the Antimonopoly Committee of Ukraine.
We hope that the AMCU will further enhance its efforts to fight such “inventions” before they lead to either the non-performance or breach of the EU-Ukraine Association Agreement and undervalue the state-aid-related progress already made in Ukraine. We strongly believe that the AMCU will be able to do so and effectively oppose these attempts to circumvent state aid regulations. This is partly because of the pioneering injunction imposed by the AMCU in the recent Dnipro Airport state aid case, where it suspended UAH 1.5 bn worth of financing in order to first review the state aid aspects. One may consider this to be a positive sign in terms of the development of state aid practice in Ukraine.
Another hot topic that may soon arise before the AMCU is the state aid-related aspects of the green tariff in Ukraine. There are already some public activists trying to push this issue forward with the AMCU, and it has already asked energy market regulators to submit state aid notifications in order to review the issue properly. Additionally, some experts already claim that Ukraine may try to use the state aid system as a legal instrument to at least reduce green tariff payments, while the previous methods used by Ukraine to stop or cut the relevant payments failed and have already led to investor-state disputes. In the latter case, the AMCU may face one of its most challenging and complex state aid processes.
It is very difficult to summarize the recent developments in the field of state aid in Ukraine. On the one hand, we see some reluctance on the part of the AMCU and other government bodies, while on the other, we witness groundbreaking state aid injunctions and plenty of state aid advocacy activities. Thus, we can but observe these developments and keep up with the new challenges which businesses might face due to the changeable nature of the development of state aid in Ukraine.