EU state-aid – A hidden capital market anomaly

Tom Pippingsköld,
CFO,
Finnlines Plc,
Finland

EU Commission has made it clear in its working document “Overview of the State aid rules and Public Service rules applicable to the maritime sector during the COVID-19 pandemic”, that “Any public intervention in the transport sector should be designed to avoid undue distortions of competition during and after the crisis” and, moreover, “In the interest of the EU economy and consumers, Member States should design their measures on a non-discriminatory basis and in a way which preserves the pre-crisis market structures and paves the way for a speedy economic recovery”.

Unfortunately, these principles are not respected by many authorities, on the contrary, the latest initiatives of some national authorities contradict of the above principles. In some member states, authorities have laid down specific restrictive rules for receiving State-aid, which are: 1) distortive, 2) inefficient, and 3) discriminatory.

Firstly, authorities have not investigated the pre-crisis market structures e.g. in maritime transport sector, the competitive effects of aid to other companies where the aid is granted only to few operators, have not been investigated. According to EU Commission the distortive aid must be minimised. To this end, aid schemes targeted to few operators only e.g. via restrictive terms, through which, many maritime transport operators are excluded, should be avoided. Secondly, aid cannot be granted on selective and discriminatory grounds. Instead, support measures that take into account all operators are preferred by Commission rather than individual measures which are, per se, more distortive and discriminatory. Aid schemes that allow all operators to preserve their pre-existing position in the market are to be preferred over aid measures that benefit single operators, even if inefficient, at the expense of others.

The COVID-19 struck certain segments in global economy with severe consequences, and its depth and severity left governments and politicians with no choice but to step in. EU has for several years revived EU economy with monetary policy where central banks have intervened into capital markets and central banks’ balance sheets have exploded during the past three-four years.

A global pandemic has shifted our basic understanding of the role of capital and capital market. Regardless of the distressed economy, the Governments and politicians have forgotten to consider the role of capital markets in their state-aid schemes. They have failed to observe the fact that both the stock market and the bond market has functioned properly and efficiently throughout the pandemic. Rather than transfer tax-payers’ money to distressed companies, they should combine and incentivise the utilisation of the capital market along any state-aid scheme. This means that the form of state-aid should be either in the form of share capital or in the form of debt capital, whereas other forms of intervention should have a residual application, if any.

Why is this? Because, the shareholders/bondholders have invested money in form of share capital/debt capital into the company with an expectation to receive a certain return either in the form of dividends or in the form higher share price, or in case of debt certificate, in the form of interest income. Normally, shareholders and debtholders are receiving dividends and interest income or benefit from capital gains, but currently, tax-payers’ cash investment into these distressed companies is used without any expectation to receive a certain return either in the form of dividends or in the form higher share price or in the form of interest income. That return can only be received, if the tax-payers receive, in exchange to their cash investment, either shares or debt certificates.

The emergence of huge EU state-aid schemes has created an anomaly in the capital markets, since some corporates are now receiving huge support packages which are financed by the tax-payers who do not get any securities, neither in the form of shares nor in the form of debt certificate. The only way to correct this gratuitous cash investment is to change the terms of all existing and future EU state-aid to be given either in the form of equity or in the form of debt (or debt guarantees with guarantee fee). Tax-payers’ money is as valuable money as institutional and private investors’ money and should be given a chance to earn the same rate of returns as capital market investors earn. This should apply also in case of aid to support SGEI providers, as EU rules guarantee a reasonable return on invested capital also for public service purposes. Over the years, investors, corporates, advisors, policymakers, regulators, etc. have built strong and well-functioning capital markets with reasonable expectations for risks and returns over any time frame, 1- to 30-year time frames and even longer. Tax-payers of EU member states, whose funds are transferred to the distressed corporates, are not allowed to harvest any acceptable return, not to mention, receiving an equity stake or a bond in exchange of their cash investment. Currently, many EU member States’ authorities do not value their citizens’ money that way, in turn, the authorities have introduced a new asset class, which does not have any share or debt characteristics, any return expectation or any pay back obligation – this new “tax-payers’ asset class” is a hidden capital market anomaly.

Email: tom.pippingskold@finnlines.com

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