Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non

200 Pages·2016·1.98 MB·English

Ex-post evaluation
of the

impact of restructuring aid decisions
on the viability of aided

firms
(non financial)
Final report
Competition
EUROPEAN COMMISSION
Directorate-General for Competition
E-mail: [email protected]

European Commission
B-1049 Brussels
Ex-post evaluation of the
impact of restructuring aid
decisions on the viability of
aided (non-financial) firms
Final report
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Luxembourg: Publications Office of the European Union, 2016
Catalogue number: KD-01-16-104-EN-N
ISBN 978-92-79-54920-5
doi: 10.2763/375518

© European Union, 2016
Reproduction is authorised provided the source is acknowledged.

Authors:

Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms
FINAL REPORT
Abstract

Financial distress at the company level plays a signalling role in an economy, indicating that a firm is not making optimal
use of its resources. While financial distress and consequent market exit play a key role in ensuring an efficient allocation
of resources, they can have negative economic consequences. The European Commission (EC) has allowed state aid to
firms in difficulty. This aid can only be given under strict conditions, set out in guidelines on state aid for rescuing and
restructuring firms in difficulty. The overall objective of the EU policy is to contribute to successful restructuring of firms
and their return to viability.
This study “Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms”
has the overall objective of evaluating the EC’s ex-ante assessment of restructuring plans submitted by the Member
States. Particular focus is given to investigating whether support was provided only in the context of a restructuring plan
that was likely to return the firms to long-term viability within a reasonable period of time. The evaluation is based on the
analysis of 12 evaluation questions – providing first a descriptive assessment followed by detailed analysis of
effectiveness and efficiency.

Résumé

La détresse financière au niveau de l'entreprise joue un rôle de signalisation dans une économie, indiquant qu'une
entreprise n’utilise pas les ressources de manière optimale. Bien que la détresse financière et la sortie du marché qui en
résulte jouent un rôle clé dans l’allocation efficace des ressources, elles peuvent avoir des conséquences économiques
négatives. Dans ce contexte, la Commission Européenne (CE) a autorisé des aides d'État à des entreprises en difficulté.
Cette aide ne peut être accordée que dans des conditions strictes, énoncées dans les lignes directrices concernant les
aides d'État au sauvetage et à la restructuration des entreprises en difficulté. L'objectif global de la politique de l'UE est
de contribuer à la réussite de la restructuration des entreprises et leur retour à la viabilité.
Cette étude "Ex-post évaluation de l'impact des décisions d'aide à la restructuration sur la viabilité des aides (non-
financières) aux entreprises" a comme objectif principal l'appréciation de l' évaluation ex-post, par la CE, des plans de
restructuration soumis par les États membres. On a fait spécialement attention à assurer que le soutien ait été fourni
seulement dans le contexte d'un plan de restructuration qui serait susceptible de remettre les entreprises viables à long
terme dans un délai raisonnable. L’évaluation est basée sur l’analyse de 12 questions d'évaluation – donnant d’abord
une évaluation descriptive suivie d’une analyse détaillée de l’efficacité et de l’efficience

The information and views set out in this study are those of the author(s) and do not necessarily reflect the official opinion
of the Commission. The Commission does not guarantee the accuracy of the data included in this study. Neither the
Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made

of the information contained therein.
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Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms
FINAL REPORT

Executive Summary
Financial distress at the company level plays a signalling role in an economy, indicating that a firm is not making optimal
use of its resources. If it does not manage to remedy this suboptimal use of resources, the firm will disappear from the
market. But while financial distress and market exit play a key role in ensuring an efficient allocation of resources, they
may also have negative social and economic consequences.
The European Commission (EC) has, at least since the 1970s, allowed state aid to firms in difficulty on the basis of the EU
Treaties. This aid can only be given under strict conditions, set out in guidelines on state aid for rescuing and restructuring
firms in difficulty. It requires an agreed and realistic restructuring plan setting out the measures necessary to restore the
viability of the firm. The amount of aid allowed is kept to the minimum necessary to implement the plan and appropriate
measures are taken to minimize the adverse impact on competition. The overall objective of EU policy for restructuring aid
to the non-financial sector is to contribute to successful restructuring of firms, i.e. a return to viability.
To evaluate whether the EC is effective in regard to this overall objective, the Directorate-General for Competition (DG
Competition) commissioned the study: “Ex-post evaluation of the impact of restructuring aid decisions on the viability of
aided (non-financial) firms”. The consortium formed by WIFO, SPI, Ecorys, ZEW and Idea Consult was asked to provide the
study.
The overall objective of the study is to evaluate the EC’s ex-ante assessment of restructuring plans submitted by the
Member States. Particular focus is given to investigating whether support was provided only in the context of a
restructuring plan that was likely to return the firms to long-term viability within a reasonable period of time.
The study methodology addresses descriptive questions and analyses two standard evaluation criteria recommended for
EC evaluations: effectiveness questions and efficiency questions. The analysis under these headings required developing
answers to 12 specific evaluation questions which were defined by the EC.
Data collection and analysis was conducted as below:
• Literature review – which provided an analysis of the relevant academic publications to develop the basis for the
activities included in the study by: confirming that the scope was properly defined, validating the methodology
chosen for the different stages of the process, and highlighting the results of previous work.
• Overview of restructuring aid cases – which provided a general analysis of the positive (compatible aid)
restructuring decisions concerning individual firms in difficulty (in the non-financial sector, excluding the agricultural
and the fishery sectors), adopted between the 1 January 2000 and the 31 December 2012. In total, the study
covered a final sample of 60 companies.
• Case studies – a significant element of the methodology was the development of the case studies. A total of 6 case
study companies were analysed, 3 of which had less than 250 employees. The case studies normally involved 8-10
interviews and an analysis of financial data. Cooperation on the part of the case study companies was voluntary. A
number of other companies that were contacted for inclusion as a case study refused to cooperate. The remaining 6
companies agreed only under strict confidentiality reassurance to participate in the study, hence all company-
specific information has been fully anonymised in this report.
• Counterfactual analysis – which aimed at constructing a counterfactual group to enable a reliable comparison of the
survival probability between 56 of the aid-receiving firms and (56/168 – depending on the methodology used) most
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Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms
FINAL REPORT
similar non-aid-receiving firms by matching techniques. Based on the sample restricted to aid recipients and the
matched non-aid recipients the dynamic of survival was analysed by survival models and the development of
financial viability was analysed using order logit models.
Strengths and limitations of the data and methods
The main strengths and limitations of the methodology applied in this study are the following:
Strengths:

• Full analysis of restructuring State Aid decisions.
• Combination of several methods and cross-checking the results across definitions, methods and cases.
• Careful qualitative coverage of various dimensions of effectiveness and efficiency, and analysis of
developments over time.
• Range of assessment methods and data sources: literature review, case studies, counterfactual analysis,
descriptive analysis; secondary data (AMADEUS) and primary data (from restructuring plans and notifications,
decision, interviews).
• Number of stakeholders involved (mainly for the case studies).
• Range of techniques applied in the counterfactual analysis.

Limitations:

• Many findings in the case studies were initially based on statements by stakeholders - although they have then
been cross-checked and various groups participated in the interviews. Further, financial analysis of the case
study companies across several years complements the statements of stakeholders.
• It was not possible to interview all former managers, bank officials, court officials/judges and competitors in all
the 6 cases could be interviewed.
• Caution should be used when extrapolating findings to future cases, as all the 60 cases may not be fully
relevant to all Member States specific schemes and also inference can depend on macroeconomic factors linked
to, for instance, the global financial crisis.
Findings of the evaluation
An overview of the results of the analysis for each of the 12 evaluation questions defined by the EC are provided below,
categorized through descriptive questions, effectiveness questions and efficiency questions.

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Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms
FINAL REPORT

Descriptive Questions:
Evaluation Question 1: How many of the aid recipients are still active on their original market today? If they are not, what
happened to them (exited, merged, changed activity, etc.)? Can these developments be related to a typology of key
reasons?
• 31 companies are still active on their original market; 14 companies have been acquired by other companies or
groups, which have changed their structure of ownership; 8 companies are in state of bankruptcy1 and 7
companies are bankrupt2.
• From the feedback of the interviewees across the 6 case studies, we can infer reasons that have contributed to
companies not being active in the market: Unavailability of timely financing/ delayed disbursement of loans;
declining profit margins and increasing losses; high labour costs and pressure from labour unions; increasing
competition from producers in the emerging economies; contraction in business/ reduction in market size; and
the global economic crisis.

Evaluation Question 2: To what extent, and at what point in time, have firms that have benefitted from restructuring aid
actually returned to viability, and to what extent have they remained viable?
Viability of the firms can be ascertained from calculating Profit before Taxes (PBT) and Return on Capital Employed
(ROCE).
• In regard to PBT:
o 13 firms that had negative PBT at the time of the decision benefitted from the restructuring aid such that
they have positive PBT as measured with latest available data. Of these 13 firms, 62% returned to viability
after 1 year, 15% after 2 years, 8% after 3 years and the remaining 15% after 6 years;
o Overall, 68% of all the firms have improved their performance with regard to PBT.
• In regard to ROCE:
o 13 firms that had negative ROCE at the time of the decision have positive ROCE as measured from the
latest available data. Of these 13 firms, 54% returned to viability after 1 year, 15% after 2 years, 8% after
3 years and the remaining 23% after 6 years;
o Overall, 61% of all the firms have improved their performance with regard to ROCE.
• Using an alternate measure of viability, the Altman Z score, 26 firms’ signalled sufficient financial viability in current
year as compared to 17 firms in the decision year.

1 Companies in state of bankruptcy are active companies in insolvency proceedings. The company will either return to normal operation, or will be
reorganized (parts of its activity can be restructured or sold) or if not, then it will be liquidated/dissolved.
2 Bankrupt companies are companies that are dissolved and no longer operate in the market.
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Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms
FINAL REPORT
Evaluation Question 3: What is the survival probability of aided firms compared to the survival probability without aid?
• Using a combination of propensity score matching and exact matching we identify our control group. On average, we
find an absolute 14% to 18% difference in survival probability between restructuring aid receiving firms and the
counterfactual group: depending on the chosen definition of survival, 82% to 86% of the aid-recipients but only 62%
to 68% from the counterfactual group survived.
• Subsequently we analyse two subsamples separately – aid received earlier than 2005 and aid received earlier than
2008. Employing OLS estimations, we find that the difference in survival probability between aid-recipients and the
counterfactual group is significantly higher in the pre-2005 sample. This can both mean that aid is more effective in
the long-term, but also that it had a bigger impact on survival during the financial crisis and its aftermath.
• We also measured the viability of a firm in categories of the Altman Z-Score. Using an ordered logit model, we find
that aid recipients have a significantly higher probability to improve their financial viability. The difference in the
probability of financial recovery between aid recipients and the counterfactual group is highest in the long-term.
• Conducting survival model analyses we find restructuring aid to increase a firm’s lifecycle by approximately 8 to 15
years and to decrease the hazard rate by 44% to 56%.
• Restructuring aid receiving firms appeared to be less likely to be acquired since the impact of restructuring aid on
survival probability is always highest for definitions of survival which consider acquisitions as a firm’s market exit.
• Overall, the counterfactual-based analysis indicates that restructuring aid has achieved its aim, at least in part, of
improving viability of the aided companies.

Effectiveness Questions:
The case studies were the main, although not only, source of the analysis for the effectiveness questions.
The results for evaluation question 4 and 6 are provided together.
Evaluation Question 4: Did the aided firm achieve the main financial and operational targets (e.g. net profit, cash flows,
return on capital, debt, employment) set in the restructuring plan endorsed by the Commission, within the envisaged
timeframe? How much of that was achieved by the restructuring measures and how much by (favourable or
unfavourable) developments in the market context? To what extent did the compensatory measures impact the
performance of the firm in this respect?
Evaluation Question 6: To which extent was the outcome influenced by the restructuring measures (including
compensatory measures to mitigate the distortion of competition and own contribution) laid down in the Commission's
decision and effectively implemented by the firm?
• The case studies show that many times the aided company did not fully achieve the main financial and operational
targets as set in the restructuring plan.
• Delays in preparation of the restructuring plan at Member State level can negatively affect the outcome, for
example rendering targets foreseen in the restructuring plan unrealistic. The final outcome or the ability to attain
targets are also affected by the fact that restructuring measures are not fully implemented.
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