Royal Ministry of Local Government and Regional Development

Revision of the Regional Aid Guidelines – Comments from Norway

Reference is made to the non-paper from the services of DG Competition on the review of the Regional Aid Guidelines.

1 General comments

As stated in the non-paper from DG Competition, the review of regional aid must not be seen as an isolated issue, but rather as part of a general reform of state aid policies. The context for this general reform is the Council conclusions which call for less, but better targeted state aid throughout the EU. The Norwegian Government welcomes the Commission’s objective of reducing the overall level of state aid. Apart from aid to Research and Development, Norwegian state aid to industry has been continuously reduced over the last decade and we find the proposed levels of maximum aid intensity as sufficient. We also share the Commission’s view on the importance to target state aid better and welcome the proposal that regional aid should be limited to the regions most in need.

We have with special attention noted that the particular problems of the low population density areas have been acknowledged in DG Competition’s first consultation paper and in the latest non-paper of January 2005. The existing Regional Aid Guidelines do not deal adequately with the challenges relating to depopulation and decreasing economic activity that are facing certain areas today. It is therefore of great importance to ensure that the new Regional Aid Guidelines provide for greater flexibility to address the specific challenges in such areas.

2 Geographical scope in low population density areas

The Norwegian Government welcomes the proposal from the Commission to continue to include low population density areas with less than 12,5 inhabitants per km ²> at NUTS level III in the regional aid map. This includes the Commission’s proposal to continue to allow for transport aid in these regions to compensate for extra transport costs.

However, it is of importance for Norway to allow for some flexibility in the delimitation of the regional aid map in order to reflect the regional challenges throughout Norway. Norway has a topography characterised by a long cost line and fjords which stretches several hundred kilometres into the mainland. According to the Nordregio report Mountain areas in Europe, 93 % of the Norwegian territory are covered by mountain areas, which contain 63% of the population. Several of the mountainous regions have very low population density if considered at NUTS level IV or NUTS level V.

These regions face severe challenges because of their remote location. Low accessibility indicates poor quality of transport infrastructure with regard to connectivity, capacity, travel speeds, waiting times etc. In addition, these regions are characterised by a harsh climate and depopulation. These are factors that weaken their economic and social development. The competitive disadvantages also tend to have a cumulative effect, which puts the areas in a unique and particularly difficult situation.

Norway has also many islands communities without a direct connection to the mainland. These communities face specific challenges as regards to low accessibility due to natural handicaps and problems similar to those of low population density areas.

In addition to the above mentioned regional challenges, the individual counties in Norway are also very heterogeneous. Some regions in central parts of the counties have high population density and are performing well as measured by economic activity, while most parts of the same counties have low population density and struggle with depopulation. This applies both to counties with population densities below and above 12,5 inhabitants per km ^2. >Thus, a regional aid map based strictly on NUTS level III would not reflect the real situation in Norway as regards regional challenges related to sparse population, climatic conditions and economic disadvantages.

With the revision of the Regional Aid Guidelines several new municipalities in counties with less than 12,5 inhabitants per km ² >might be included in the regional aid map. This is to a large extent municipalities with high population densities, with an average of 28,9 inhabitants per km ²>. Inversely, municipalities today inside the regional aid map, and with an average population density of 4,9 inhabitants per km ²>, will be defined as ineligible. These are mainly mountain and fjord regions in addition to island communities where accessibility is difficult.

There are thus municipalities adjacent to counties within the regional aid map that will suffer from competitive disadvantages compared to the municipalities on the opposite side of the county border. It is important to emphasise that administrative borders in many cases differ from labour markets and local and regional economic markets.

To illustrate, if a strict definition based on NUTS level III is used to define the regional aid map, all municipalities in the counties of Sør-Trøndelag, Møre og Romsdal, Hordaland, Rogaland, Vest-Agder and Buskerud will be excluded from regional aid. All these counties have large mountain areas with very low population density. These municipalities face exactly the same problems as the neighbouring municipalities in counties with population density below 12,5, inhabitants per km ²>.

As a consequence, regions in more central parts of Norway with high population densities that are performing well measured by economic activity can be included in the regional aid map. Inversely peripheral regions which face competitive disadvantages of location will be excluded from regional investment aid. The Norwegian authorities believe this scenario is not in line with the ambition of achieving less and better targeted aid.

We would therefore like to stress the importance of a flexible approach to the delimitation of regions that should be eligible for regional aid in low population density areas in order to ensure that regional investment aid can be granted in regions where such aid is most needed.

Such a flexible approach is not a new principle and could be made similar to the current guidelines for regional transport aid. This is a well-known approach that is very transparent regarding the delimitation of the regional aid map.

The aim of a more flexible approach to the delimitation of a regional aid map is not to increase the overall number of inhabitants in the eligible area, but to target aid more precisely to regions that suffer from low population density, natural handicaps, economic disadvantages and resulting depopulation. This will in our view not have any consequences for other countries than Norway, and possible Sweden and Finland.

The proposal in the latest non-paper implies a population coverage within the Norwegian regional aid map of around 30 %. The effect of a more flexible approach, as described above, will be a regional aid map, which reflects the regional challenges in Norway. In such a situation, Norway would consider a reduction in the population coverage of 30 % allowed according to the proposal. This would also be in line with the overall aim of a general reduction in the state aid.

3 Other forms of operating of aid to counter depopulation

In the non-paper, DG Competition also proposes that other forms of operating aid than transport aid may be authorised to counter depopulation in very low population density areas. This is a follow-up of a similar proposal in the DG Competition’s first consultation paper. The Norwegian Government welcomes this proposal, which addresses problems that are specific to areas with very low population density.

An acceptance of such aid would be consistent with the Lisbon objective of better-targeted aid. It would allow for the most cost-efficient measure to prevent depopulation and to stimulate employment and settlement in sparsely populated regions, such as regionally differentiated social security contributions.

As mentioned above, parts of Norway and some of the other Nordic countries are characterised by very low population density, long distances and a harsh climate. Depopulation due to lack of employment opportunities is a problem in many of these areas. The very low population density makes these areas more vulnerable to any negative population trend. More permanent and targeted measures to promote employment and thereby counter depopulation in these regions are therefore needed.

For decades the system of regionally differentiated social security contributions was the single most important regional aid measure in Norway. The fact that the prevailing guidelines on regional aid do not allow for such measures has been a setback for an efficient regional policy in Norway.

The Norwegian system of a regionally differentiated social security scheme was designed to promote employment in the relevant areas in the least distorting way. Lower tax rates were paid on gross salary payments of employees resident in particular sparsely populated areas. In this way the measure was directly linked to the employment of people resident in these areas. The tax rates applied automatically to all firms, irrespective of trade, business sector, nationality, profitability or size. The decisive factor was solely the residence of the employee.

The measure is widely considered, also by Norwegian economists, to be the most targeted and efficient state aid measure to stimulate employment and settlement in sparsely populated regions. The incentive structure is clear and the distortion of competition is kept to a minimum (reference is also made to our letter of 3 July 2003). In addition a system of regionally differentiated social security tax is transparent and predictable and has low costs of administration.

Other measures are less efficient or insufficient to promote employment and thereby counter depopulation in these vulnerable regions. When the objective is employment of residents in the specified regions, labour subsidies are the most efficient measure. The effect on employment is higher when labour is directly subsidized.

Imperfections in the capital market are reflected in the lack of capital to profitable projects. In these very sparsely populated areas with long distances to central markets, the main problem might, however, be a lack of profitable new investment projects rather than a lack of risk capital. The average aid intensities applied on investments projects, including SME projects, in these regions in Norway are substantially lower than the level allowed by the EFTA Surveillance Authority.

There may also be a relatively low rate of potential Research and Development (R&D) projects in these regions. In 2002 the Norwegian Government introduced a tax credit scheme for R&D expenditures. This is a nation-wide scheme which applies automatically to all firms investing in R&D, provided the project and costs are in accordance with the state aid guidelines on R&D. The figures so far indicate that the relative number and size of R&D projects in the sparsely populated regions is much lower than in the more central areas.

Also increased investment in infrastructure will usually be insufficient or/and far more costly, because of the nature of the terrain and the remoteness of the location, and the small number of people being served in each region combined with the economic of scale of such investments.

In short, the horizontal and regional instruments available do not fully address the specific problems connected to employment and settlement in these low population areas.

As regarding the wording in the non-paper, as it now reads, we find them more adequate than in the consultation paper. The chosen wording is rather general, however it clearly states that the instrument approved has to be targeted at a specific objective, namely to counter depopulation. The authorities would have to assess any proposed measure on this basis.

A population density criterion for the delimitation of eligible regions is a predictable and objective criterion. In our view it would be preferable if a measure aimed at preventing depopulation could be permitted in all low population density areas eligible under Article 87(3)c, (regions < 12,5 inhabitants per km ²>). Limiting the eligibility to the very low population density regions (regions < 8 inhabitants per km ²>) would, however, limit the measure to the areas that are most vulnerable to any negative population trend.

However, it is not clearly spelt out in the non-paper which level of NUTS units the Commission sees as relevant regarding other forms of operating aid. In our letter of 2 July last year, we have suggested NUTS level II as the basis for defining the regional area. In addition, we proposed that smaller adjacent and contiguous areas that meet the same population criterion should be eligible for aid. If NUTS level II were to be the basis, it is of great importance that such adjacent regions could be included. If not, there would be a discrimination between otherwise similar and neighbouring regions just because they happen to be situated in different NUTS II regions. This may cause some unjustifiable distortions between neighbouring regions/municipalities. In any event the total area eligible would be small compared with the areas within the former Norwegian scheme.

The definition proposed in our letter of 2 July is almost identical to the definition of areas included in protocol 6 to the Treaty of accession of Finland and Sweden to the European Union (and the similar negotiated Treaty of accession of Norway, which of course did not come into effect) 1The Accession Treaties, Protocol No 6 on special provisions for Objective 6 in the framework of the Structural Funds in Finland, Norway and Sweden :.Article 2: Areas covered by Objective 6 shall in principle represent or belong to regions at NUTS level II with a population density of 8 persons per km2 or less. In addition, Community assistance may, subject to the requirement of concentration, also extend to adjacent and contiguous smaller areas fulfilling the same population density criterion.. In the protocol 6 also the words “in principal” are inserted which allow for certain flexibility, see footnote[1].

We would once again emphasise that our concern in this case is not the level of aid allowed, but the form of aid applied in these regions. We fully agree with the Commission’s efforts to reduce state aid, especially the most distorting form of aids. We see competition as key to growth and welfare. State aid may provide for the survival of the favoured firms, at the expense of more efficient competitors. To allow the use of a cost efficient and targeted measure to promote employment and settlement in the least populated regions would however not contradict the Lisbon objectives of less and better aid.

4 Other issues

We support the proposal to exempt transparent forms of regional investment aid from prior notification to the Commission/EFTA Surveillance Authority. We also agree to integrate the Multi-Sectoral Framework 2002 into the Regional Aid Guidelines.

5 Conclusions

The Norwegian Government is very pleased to be participating in the ongoing revision of the Regional Aid Guidelines and the general debate in this field.

We welcome the proposal from the Commission to continue to include low population density areas with less than 12,5 inhabitants per km ² >at the NUTS level III in the regional aid map. We will, however, underline the importance for Norway that the new guidelines open for some flexibility in the delimitation of eligible areas as described above.

We also welcome the proposal to permit other forms of operating aid in the least populated regions to prevent and reduce depopulation. This would allow the use of the most cost-efficient measure to stimulate employment and settlement in these regions. It is important that the regions covered may be extended also to adjacent smaller regions fulfilling the same population density criterion.

We would be pleased to provide any further information that may be needed.

Yours sincerely,

Jan Sandal (b.a.)

Director General

Copy: EFTA Surveillance Authority