EUROPEAN COMMISSION. State Aid/Hungary SA (2016/N) Temporary aid granted in the frame of the Agricultural Széchenyi Card Loan Programme

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1 EUROPEAN COMMISSION Brussels, C(2016) 4712 final Subject: State Aid/Hungary SA (2016/N) Temporary aid granted in the frame of the Agricultural Széchenyi Card Loan Programme Sir, The European Commission ("the Commission") wishes to inform Hungary that, having examined the information supplied by your authorities on the State aid scheme referred to above, it has decided not to raise any objections as it is compatible with the internal market pursuant to Article 107(3)(c) of the Treaty on the Functioning of the European Union ("TFEU"). The Commission has based its decision on the following considerations: 1. PROCEDURE (1) By letter of 27 June 2016, registered by the Commission on 28 June 2016, Hungary notified, according to Article 108(3) TFEU, the above mentioned scheme. The Hungarian authorities have sent further additional information on 30 June DESCRIPTION 2.1. Title (2) Temporary aid granted in the frame of the Agricultural Széchenyi Card Loan Programme. His Excellency Péter Szijjártó Minister of Foreign Affairs and Trade Bem rkp.47 HU-1027 Budapest Commission européenne/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË

2 2.2. Objective (3) With the present notification the Hungarian authorities wish to introduce an aid scheme to provide temporary financing for farmers in the dairy and pigmeat sectors. The objective of the aid scheme will be to help farmers to bridge acute but temporary liquidity shortage caused by the market crisis in these sectors and thereby helping them not to eliminate their breeding stock Legal basis (4) A draft decree of the Minister of Agriculture (A földművelésügyi miniszter /2016. ( ) FM rendelete az Agrár Széchenyi Kártya Konstrukciók keretében nyújtott egyes kedvezőtlen piaci helyzetben lévő agrárgazdasági ágazatok támogatásáról) Duration (5) From the approval of the scheme by the Commission until Budget (6) The overall budget of the scheme is HUF 3,500 million (EUR 11.1 million), of which HUF 2,000 million (EUR 6.3 million) is destined for interest rate subsidy, HUF 1,000 million (EUR 3.2 million) for guarantee fees and HUF 500 million (EUR 1.6 million) for direct grants for the reimbursement of the other costs of the loan Form of the aid (7) The aid will be granted in the form of a subsidised loan with reimbursement of the loan guarantee fee and the other fees and costs of the loan. The gross grant equivalent of the aid related to the guarantee fee will be calculated using an already approved calculation method (SA.25318) Beneficiaries and eligibility (8) The beneficiaries are small and medium-sized enterprises (SMEs) as defined in Annex I of Commission Regulation (EU) No 702/2014 1, which are active in the primary production of agricultural products in the dairy and pigmeat sectors. (9) The eligible undertakings are undertakings which operate in the Hungarian territory, are up to date with their tax and social security payments, and have fulfilled their registration obligations under Law XVII of 2007 (A mezőgazdasági, agrár-vidékfejlesztési, valamint halászati támogatásokhoz és egyéb intézkedésekhez kapcsolódó eljárás egyes kérdéseiről szóló évi XVII. törvény). (10) The Hungarian authorities estimate the number of beneficiaries to be between 6,000-7,000 undertakings. 1 OJ L 193, , p. 1. 2

3 (11) Only those agricultural producers that were not firms in difficulty within the meaning of point (35)15 of the European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to (the "Guidelines") on 1 September 2015 can benefit from the aid. (12) The aid cannot be paid if the beneficiary still has at its disposal an earlier unlawful aid that was declared incompatible by a Commission Decision, until that beneficiary has reimbursed or paid into a blocked account the total amount of the unlawful and incompatible aid including the corresponding recovery interest Description of the aid scheme Justification of the scheme (13) The macro-economic data submitted by the Hungarian authorities show that the dairy and pigmeat sectors in Hungary have been seriously hit by a market crisis caused by various events (e.g. Russian ban, significant price drops and input price increases etc.), as detailed in the below recitals. (14) As regards milk, prices have dropped to 70 HUF/litre (0.22 EUR/litre) in May 2016, which is 13% less than 1 year and 35% less than 2 years before that date. The Hungarian price drop was one of the biggest across the Member States. On a yearly basis (between April 2015 and April 2016) only in Ireland, on a 2 years basis only in the Baltic countries, Belgium and Ireland were higher price reductions recorded. The prices in April 2016 were the lowest in Hungary after the Baltic countries. The reasons of the price drop were the indirect impact of the Russian trade embargo, the decrease of the Chinese import demand, the abolishment of the EU milk quota, and the production growth of the major global producer countries. In addition to the fall of milk prices, drought in the summer of 2015 resulted in an increase of feed prices (N.B.: feed accounts for about half of the total production costs). Furthermore, gross wages in the milk sector increased by 3.6% in As a result, production costs increased to at least 91 HUF/litre (0.29 EUR/litre), which may have been further increased in the last months following the growth path of the feed and labour costs. Consequently, the producer prices were about HUF/litre ( EUR/litre) lower than the production costs in April The sources of the above data are the Research Institute of Agricultural Economics (Hungary) and the DG AGRI Milk Market Observatory. (15) As regards the pigmeat sector, the impact of the Russian ban was also considerable. Producer prices started to decrease significantly in August 2014 and they dropped by 25%, to 309 HUF/kg (0.98 EUR/kg) in live weight until April 2016, or by 24% to 1.33/100 EUR/kg in carcass weight for type S pigmeat during the same period. At the same time production costs have increased, since the low global maize output resulted in an increase of maize prices in the second half of 2015 and the first half of 2016: maize prices in January-April 2016 exceeded by 13% the value of the previous year. In addition to this, gross wages in the swine sector increased by 5.8% in 2015, and by 5.1% in the first quarter of this year. Preliminary FADN data show a 1% increase of the production costs in 2015 to 371 HUF/kg (1.18 EUR/kg; N.B.: the cheap feed bought in early 2015 covered 2 OJ C 204, , p. 1, as amended by Commission Notice amending the European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020 (OJ C 390, , p.5). 3

4 the majority of the year, therefore the increase of feed prices affected production costs only in late 2015/early 2016). Producer prices were about 62 HUF/kg (0.20 EUR/kg or 17%) lower than the production costs in The sources of the above data are the Research Institute of Agricultural Economics (Hungary) and the FADN. (16) The Hungarian authorities therefore consider that the recent developments in the Hungarian dairy and pigmeat sectors point to an overall downturn, when compared to previous periods. (17) Due to the economic situation described above, intermediaries are unwilling to lend to milk and pigmeat producers, especially to SMEs, or are willing to lend only at very high costs. Hence, SMEs in the dairy and pigmeat sectors are currently facing an acute liquidity shortage. (18) According to the Hungarian authorities, the liquidity shortage and lack of access to credit that SMEs are currently facing represent a sufficient market disruption to justify the introduction of financial instruments to help SMEs in the sectors concerned. To that end, a system of guaranteed loans will be set up in order to reduce the amount of capital tied up by financial intermediaries and to encourage the granting of credits to SMEs. (19) Without such aid, the undertakings hit by the market crisis will not be able to continue their production and, therefore, will have to close their businesses. The guaranteed loans will allow them to bridge their temporary financial difficulties and restore the long-term viability of the sectors concerned. Description (20) The objective of the aid scheme is to facilitate the access of milk and pigmeat producers (beneficiaries) to a bank loan which is provided according to the market conditions of the banking system. (21) The loan is granted to the beneficiary by private credit institutions participating in the Agricultural Széchenyi Card Loan Programme (a subsidised loan and loan guarantee scheme). The private credit institution has to enter into agreement with KAVOSZ Zrt (established by the National Association of Entrepreneurs and Employers (Vállalkozók és Munkáltatók Országos Szövetsége) and the Hungarian Chamber of Commerce and Trade (Magyar Kereskedelmi és Iparkamara)), which manages the Agricultural Széchenyi Card Loan Programme on behalf of the State. (22) The loan guarantee is provided by the Rural Credit Guarantee Foundation (Agrár- Vállakozási Hitelgarancia Alapítvány, AVHGA). AVHGA has been established in 1991 by the Ministry of Agriculture and several banks. Its Board of Trustees and Board of Supervisors both include the representatives of several banks, the Ministry of Agriculture and the Ministry of the Economy. The guarantee covers 80% of the amount of the loan. (23) In order to receive a loan, the undertaking has to first contact a credit institution participating in scheme and make an application for the credit. After a positive granting decision by the credit institution, the beneficiary receives the loan. (24) Credit institutions can ask for the reimbursement of the interest and the handling fees quarterly; and for the reimbursement of the guarantee fee (that they have paid 4

5 to AVHGA on behalf of the beneficiaries) until the end of the month following the entry into force of the loan contract. These requests shall be made to KAVOSZ Zrt, which in turn forwards them to the Paying Agency (Mezőgazdasági és Vidékfejlesztési Hivatal, MVH) after a preliminary administrative check. (25) As regards the other fees related to the loan (registration fee, one-off valuation of the collaterals, one-off notary fee, appraisal fee), beneficiaries can submit a request for reimbursement to the MVH within 15 days from the entry into force of the loan contract. (26) All the interests and fees described in recitals (21) to (25) are 100% reimbursed by the scheme within the following limits: (a) The maximum amount of the loan is HUF 500,000 (EUR 1,600) per livestock unit (LU). The LU value is calculated on the basis of the declaration made in the single application for direct payments for the year One dairy cow equals 1 LU, one breeding pig equals 0.5 LU, and one fattening pig equals 0.15 LU. (b) The maximum amount of the loan is HUF 50 million (EUR 0.16 million) per beneficiary. (c) The maximum amount of the aid is EUR 15,000. This amount will not be exceeded even in the case of the maximum loan amount as follows. The interest payable after a HUF 50 million (EUR 0.16 million) loan is HUF 2.5 million (EUR 7,900), the guarantee fee is approximately HUF 1.3 million (EUR 4,100) while the other fees amount to approximately HUF 0.6 million (EUR 1,900); i.e. the total costs amount to approximately EUR 13,900. (27) The loans will have a maximum maturity period of 12 months, and an interest rate of 1-month BUBOR + 4 percentage points. The loans shall be repaid upon maturity. Non-payment will be sanctioned according to general banking principles (penalty interest rate, bailiff etc.), the details of which are laid down in the general terms and conditions of the Agricultural Széchenyi Card Loan Programme. (28) With the above conditions, the scheme is proportional to and limited to what is strictly necessary to overcome the temporary liquidity shortage, since the aid does not exceed the losses of the beneficiaries. More precisely, using the data in recitals (14), (15) and (26), as well as the average production of dairy cows in Hungary 3 (5,800 litre/year) and textbook data 4 on the average weight of pigs for slaughtering ( kg), the annual loss during the past 12 months was around HUF 116, ,000 (EUR ) per LU for dairy cows and HUF 45,000-58,000 (EUR ) per LU for pigs for slaughtering, while the aid amounts to EUR 139 per LU. 3 4 Source: Eurostat Source: 5

6 (29) The application for the loan is at the same time the application for the aid, i.e. the application for the aid precedes the signature of the loan contract. The application will contain at least the applicant's name and size. (30) Value added tax (VAT) related to the handling fees referred to in recital (24) and to the other fees referred to in recital (25) is not eligible for aid, except in the case of applicants for whom it is not-recoverable under national VAT legislation. (31) The Hungarian authorities provided assurances that the aid scheme does not apply to export aids or aids favouring domestic over imported goods, that the aid amount is not fixed on the basis of the price or quantity of products put on the market and that the aid is not directly or indirectly linked to measures breaching other provisions of the TFEU, notably as regards the free circulation of goods. (32) The aid under this scheme is not expected to have an adverse impact on the environment. (33) The Hungarian authorities confirmed that the full text of this aid scheme will be published on the national website 5 prior to its implementation. This information will remain available to the public for a period of at least 10 years. (34) The Hungarian authorities have confirmed that the notification does not contain business secrets. (35) The Hungarian authorities confirm their acceptance that the Commission decision is adopted in the English language, due to exceptional circumstances. 3. ASSESSMENT 3.1. Existence of aid - Application of Article 107(1) TFEU (36) For Article 107(1) TFEU to apply, the scheme must provide an economic benefit to an undertaking which it would not have received in its normal course of business, the aid must be granted to certain undertakings, the benefit must be granted by a Member State or through State resources and the scheme must be capable of affecting trade between Member States. (37) The scheme in question confers an advantage (recital (7)) on its recipients. This advantage is granted through State resources and it favours agricultural producers (recital (8)). According to the case law of the Court of Justice, the mere fact that the competitive position of an undertaking is strengthened compared to other competing undertakings, by giving it an economic benefit which it would not otherwise have received in the normal course of its business, points to a possible distortion of competition. 6 (38) Pursuant to the case law of the Court of Justice, aid to an undertaking appears to affect trade between Member States where that undertaking operates in a market Judgment of the Court of 17 September 1980 in Case 730/79 Philip Morris Holland BV v Commission of the European Communities, ECLI:EU:C:1980:209. 6

7 open to intra-eu trade. 7 The beneficiaries of aid operate on the milk and pigmeat markets where intra-trade takes place. In 2014, more than 98 million tons of raw milk were produced in the EU-28, and the intra-trade of milk and dairy products exceeded 20 million tons and EUR 30 million. In 2015, 23 million tons of pigs were slaughtered in the EU-28, and the intra-trade of pigmeat exceeded 5 million tons and EUR 10 million. 8 The sectors concerned are open to competition at EU level and therefore sensitive to any measure in favour of the production in one or more Member States. Therefore, the present scheme is liable to distort competition and to affect trade between Member States. (39) In light of the above, the conditions of Article 107(1) of the TFEU are fulfilled. It can therefore be concluded that the proposed scheme constitutes State aid within the meaning of that Article. The aid may only be considered compatible with the internal market if it can benefit from one of the derogations provided for in the TFEU Lawfulness of the aid Application of Article 108(3) TFEU (40) The scheme was notified to the Commission on 3 June It has not been implemented yet. Therefore, Hungary has complied with its obligation under Article 108(3) TFEU Compatibility of the aid Application of Article 107(3)(c) TFEU (41) Under Article 107(3)(c), an aid may be considered compatible with the internal market if it is found to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. (42) The aid granted under the present scheme is not covered by the Guidelines, or by any other relevant State aid rule 9. As provided for in point 30 of the Guidelines, it is assessed on the basis of Article 107(3)(c) TFEU, taking into account the CAP and by analogy the Guidelines. The Member State notifying the aid must demonstrate that the aid meets the common assessment principles laid down in Chapter 3 of Part 1 of the Guidelines. (43) By excluding firms in difficulty on 1 September 2015 from the scope of the scheme, as indicated in recital (11), the Hungarian authorities are ensuring that aid will not be granted to undertakings which were already in structural difficulties before the beginning of the current market crisis See in particular the judgment of the Court of 13 July 1988 in Case 102/87 French Republic v Commission of the European Communities, ECLI:EU:C:1988:391. Source: Eurostat. Data on the production of milk and dairy products is still incomplete for 2015 that is why 2014 data is used. The Guarantee Commission Notice is not applied to this scheme because the points 3.4(d) (as regards the self-financing nature of the scheme since the State budget also contributes to it) and 3.4(f) (as regards the premiums of the scheme, normally payable by the beneficiaries, which are fully reimbursed) of the Notice are not fulfilled (see Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (OJ C 155, , p. 10)). 7

8 (44) Beneficiaries with an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market are excluded from the scope of the scheme (see recital (12)). (45) The aid scheme does not apply to activities listed in paragraph 28 of the Guidelines (see recital (31)) Common assessment principles (46) According to Chapter 3 of Part I of the Guidelines, the common assessment principles apply to aid granted in accordance with Article 107(3)(c) TFEU. Contribution to a common objective (47) Pursuant to point (43) of the Guidelines, the Commission finds that the temporary aid scheme pursues common objectives which can be considered to be valid in the light of the CAP objectives set out in Article 39 TFEU. 10 (48) The aid scheme aims at allowing SMEs in the dairy and pigmeat sectors to overcome their temporary financial difficulties and thereby helping them not to eliminate their breeding stock (see recital (3)). It can therefore be deemed to contribute to restoring the long-term viability of the sectors concerned. (49) The aid under this scheme is not expected to have any adverse impact on the environment (see recital (32)). Need for State intervention and appropriateness of aid (50) As described in recitals (14) and (15), the price development for both milk and pigmeat has led to considerable income losses, which could affect the long term sustainability of these sectors. The data provided by the Hungarian authorities also show that undertakings in the dairy and pigmeat sectors are facing an acute liquidity shortage due the effects of the market crisis (see recitals (16) to (18)). (51) The Hungarian authorities have explained that without aid to overcome their current financing difficulties, milk and pigmeat producer SMEs in Hungary will not be able to continue their production and, therefore, will have to close their businesses (see recital (19)). That would be detrimental to the development of the dairy and pigmeat sectors. (52) The Commission therefore considers that the Hungarian authorities have sufficiently well demonstrated the presence of a sectorial market disruption in order to justify the introduction of the temporary aid scheme for SMEs active in milk and pigmeat production. (53) Moreover, the Hungarian authorities have confirmed that: (a) the scheme will be limited in time since applications can only be submitted until 31 December 2016 (see recital (5)) and the duration of the loan cannot exceed 12 months (see recital (27)); 10 Notably Article 39 TFEU, point b), as regards ensuring a fair standard of living for the agricultural community and c), as regards stabilising agricultural markets. 8

9 (b) the aid will be granted only to SMEs (see recitals (8)); (c) the maximum aid amount per beneficiary cannot exceed the gross grant equivalent of EUR 15,000; and (d) there is a limit to the aid per livestock unit as well (see recital (26)). (54) On the basis of the above, the Commission concludes that the aid scheme can be considered to fulfil the conditions laid down in Sections 3.2 and 3.3 of Chapter 3 of Part I of the Guidelines, as regards the need for State intervention and the appropriateness of the aid. Incentive effect (55) Under the scheme, beneficiaries will submit an aid application through the credit institutions to the competent national authority before entering into the loan contract for which the aid is provided. The application will also contain at least the applicant's name and size (see recitals (24) and (29)). (56) On the basis of the above, the Commission concludes that the aid scheme can be considered to fulfil the conditions laid down in Section 3.4 of Chapter 3 of Part I of the Guidelines, as regards the incentive effect. Proportionality of the aid (57) The Hungarian authorities have demonstrated that the aid amount per beneficiary is limited to the minimum needed to achieve the objectives of helping SMEs to overcome their liquidity shortage (see recital (28)). (58) Value added tax (VAT) is not eligible for aid, except where it is not-recoverable under national VAT legislation (see recital (30)). Avoidance of undue negative effects on competition and trade (59) It can, in the light of the above, be concluded that the sectors concerned are considerably hit by the market crisis and that the aid scheme has clearly defined objectives in terms of bridging liquidity shortage or encouraging production limitation. Moreover, the aid will only be granted to SMEs. Finally, the granting of aid will be limited to 2016, the duration of the loan cannot be longer than 12 months and the aid amount per beneficiary can be considered to be proportionate and does not exceed the maximum aid amount of EUR 15,000 per beneficiary. (60) Accordingly, it is not likely that the scheme will have an important effect on competition and trade between Member States. (61) On that basis, the Commission finds that any possible distortion of competition or adverse effect on trade between Member States resulting from the present aid scheme can only be limited, so that the overall balance with regard to the objective of common interest is positive. Transparency and reporting (62) It follows from recital (33) that Hungary has committed to comply with the transparency requirements. 9

10 (63) The Commission concludes that the notified aid scheme contributes to the development of the sector in such a way that it clearly outweighs the risks of distorting competition in the internal market and affecting trade between Member States. (64) The Commission notes that the Hungarian authorities confirmed that the notification does not contain business secrets (see recital (34)). (65) The Commission furthermore notes that the Hungarian authorities accepted that the decision is adopted in the English language, due to exceptional circumstances (see recital (35)). 4. CONCLUSION The Commission has accordingly decided not to raise objections to the notified aid on the grounds that it is compatible with the internal market pursuant to Article 107(3)(c) TFEU. For the Commission Phil HOGAN Member of the Commission 10