Download Compatibility of regional aid under the regional aid guidelines 2014

Compatibility of regional aid under the
regional aid guidelines 2014-2020
Péter Staviczky, State aid attaché – Hungarian
Permanent Representation to the EU, Brussels
Aim of the regional aid
• To develop poor regions compared to
EU/national average – while preserving level
playing field and preventing subsidy race
between States
• Increase living standards of people via vitalizing
the „local” economy
• Reducing the differences between the regions in
Europe is making the whole stronger (cohesion)
• In very-very limited cases operating aid can also
be granted
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Aim of the regional aid
In case of (very) large firms:
• Attract investment (FDI) to the country
• Keep companies in the country with further
investments
• Incentivize modernization
In case of smaller firms:
• Help them to create their own business
• Growth opportunity
• Assist to become suppliers
• Incentivize modernization
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How to achieve regional development?
• To attract and promote new, additional investments
and create new jobs in the region
• Infrastructure is needed
• Stronger activity of undertakings already settled and
attracting new firms
• Stronger cooperation between undertakings
• Cooperation between undertakings and training
institutions
• Corporate Social Responsibility
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Assessment of compatibility in general
• Art. 107 3. The following [aid] may be considered to
be compatible with the internal market:
(a) aid to promote the economic development of areas where
the standard of living is abnormally low or where there is
serious underemployment, and of the regions referred to in
Article 349, in view of their structural, economic and social
situation;
(c) aid 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;
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Assessment of compatibility in general
• „May be compatible” means that the European Commission
has the sole right to establish compatibility conditions and
check them
• Limited judicial review from Luxemburg
• The Commission can issue soft law to clarify its practice, more
transparent for everybody – equal treatment
• Soft law is only binding on the Commission not on Member
States, but consequencies are on both sides
• If the Commission adopts guidelines it cannot disregard them
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Common assessment principles – balancing test
to establish compatibility
Overarching principles after the State Aid
modernization in all State aid rule
a) Contribution to well-defined objective of common objective
b) Need for state intervention – existence of market failure
c) Appropriate policy instrument – other measures would not
lead to the desired outcome
d) Incentive effect
e) Proportionality of aid (aid intensity, funding gap)
f) Avoidance of undue negative effects – crowding out other
operators, entry barriers
g) Transparency of aid – publication of the relevant information
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Initial investment is needed to quality for
regional aid
(a) * an investment in tangible and intangible assets related to:
— the setting-up of a new establishment,
— the extension of the capacity of an existing establishment,
— the diversification of the output of an establishment into
products not previously produced in the establishment, or
— a fundamental change in the overall production process of an
existing establishment; or
(b) an acquisition of assets directly linked to an establishment
provided the establishment has closed or would have closed if it
had not been purchased, and is bought by an investor unrelated
to the seller. The sole acquisition of the shares of an undertaking
does not qualify as initial investment
*limited scope in c) regions
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Assessment of compatibility in general
Compatibility assessment is applicable to both schemes
ad to ad hoc aid
… and also to large investment cases (>50 million € within
3 years)
COM also check whether other provisions of EU law are
complied with
– No restriction is allowed for having headquarters in Serbia,
predominantly established in Serbia, using predominantly
Serbian products or services….
–Compliance with environmental rules
–Public procurement
– etc…
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Contribution to the common objective
• Different conditions for shcemes – individual aid and for
operating aid
For schemes
• MS should prove that the measure is part of a coherent
regional development stategy
• Some sort of general document, decsion of the
Government or the Parliament, stategy, impact
assessment, evaluation of previous measures is needed
• Objective selection criteria has to be used
• EU Funds are presumed to be part of a regional
development strategy – preaccession funds?
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Contribution to the common objective
• In ‚a’ areas investment aid is allowed for large
undertakings and for SMEs
• In ‚c’ areas for large undertakings only for new
activities (greenfield) • Individual projects have to contribute to the regional
strategy’s objectives – MS has to check
• Eligible costs either the investment or the wages
• Investment (jobs) to be maintained for 5 years, 3
years for SMEs after completion – no aid for the
replacement of the assets
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Contribution to the common objective
• Job to be filled in three years
• 25% own resources to be provided, without any aid
including de minimis aid
• Compliance with environmental requirements –
permits
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Contribution to the common objective
For individual aid
• Beside the general conditions MS has to use some
indicators to prove the positive effect
–
–
–
–
–
–
Direct /indirect jobs at suppliers to b created
Training activities
Clustering effect, involvment of local firms
Transfer of technology to other undertakings
Cooperation with local higher education institutions
Duration of the investment and possible extension in the
future
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Contribution to the common objective
Operating aid
• Limited to
– SMEs in ‚a’ areas
– Remote oversea (outermost) territories, sparsely
populated areas
Challenges to be defined in advance
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Need for State intervention
• Diagnose the problem – then start thinking about the
solution
• State aid can never be the first solution from the MS
• To correct market failure in a proportionate and
targeted way
• Regional aid map – assumption from the COM
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Appropriateness of the aid
• Check other less distortive measures – regulation,
development of the infrastructure, general taxation, training
measures – show that they are not efficient, not enough or
take to much time to solve the problem identified (e.g.
regional underdevelopment)
• Additional arguments are needed for sectoral schemes
• Impact assessment of the measure to compare with other
govermental measures
• Form of the aid? – less distortive forms are preferred,
addtional argument in case direct pecuniary advantages,
exemption for EU sources
– With certain form of aid (i.e. soft loan) it is not possible to reach the
aid intensity level allowed referring to the level of underdevelopment.
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Necessity of the aid
• Incentive effect is a key point during the assessment
• To avoid windfall profit – extra efforts are needed from
the beneficiary, additional investment or location change
• No state aid can be granted for investment to be realized
anyway, changing the behaviour!
• Exemption for investments in ‚a’ regions with EU funds
• Two scenarios to prove, previously applicable only for
large investments when in-depth assessment was needed
– Scenario I: Investment is not feasible without the aid
– Scenario II: Location would be different without the aid
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Necessity of the aid
For schemes
• Works cannot be started before submitting the
application for the aid
• Annex of the guidelines is the standard application
form to prove the contrafactual situation: what
would be without the aid?
• Scenario I or II to be explained in every case
• Large companies need to submit additional
documentary evidence
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Necessity of the aid
For individual aid
• Works cannot be started before submitting the
application for the aid
• Annex of the guidelines is the standard application form
to prove the contrafactual situation: what would be
without the aid?
• Scenario I or II to be explained in every case
• Large companies need to submit additional documentary
evidence
• the Member State must provide clear evidence not just
credibility check, that the aid effectively has an impact on
the investment choice or the location choice
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Necessity of the aid
For individual aid
• Comparison with the contrafactual
• Scenario I is met, if insufficient profitability is proven:
NPV or IRR or ROCE of the project and comparison with
similar project, industry average or capital costs (WACC)
• Scenario II is met, if comparison has been made between
the costs and benefits of locating in the area concerned
and those in alternative, COM verifies. The final location
cannot be more developped than the alternative.
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Necessity of the aid
For operating aid schemes, the incentive effect of the
aid will be considered to be present if it is likely that, in
the absence of aid, the level of economic activity in the
area or region concerned would be significantly
reduced due to the problems
• It is enough to prove the existence of problems in the
region
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Proportionality – aid limited to the minimum
• To save public resources
• Minimum has to be given to induce the investment
– Regional aid maps for the given country on the one hand, and
– Net extra costs of the investment based on the contrafactual on
the other
• Scenario I: minimum to make the project profitable enough
• Scenario II: the difference between the costs (NPV) of the
contrafactual
• The aid cannot be higher than any of the two above
• In case of schemes and for SMEs the regional aid map
has to be applied only!
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Regional aid maps
Large undertaking
Medium
undertaking
Small undertkaing
a) regions, GDP
below 45%
50
60
70
a) regions, GDP
between 45% and
60%
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45
55
a) regions, GDP
between 60% and
75%
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35
45
Ex a) regions, below
90% until 2018
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25
35
c) regions
10
20
30
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Large investments
• No SME bonus applicable
• Scaling down mechanism:
– For investment part 0-50 million EUR 100% aid intensity
– For investment part 50 -100 million EUR 50% aid intensity
– For investment part above 100 million EUR 34% aid
intensity
• Individual notification above 100 million EUR, if the
part covered by the above 34% is granted (even
partly)
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Eligible costs
• Either the investment costs or the wage costs
• National authority’s and beneficiary’s decision
• If combined: the total aid must not exceed the
highest aid amount resulting from either calculation
up to the maximum permissible aid intensity for the
area concerned
– In case of investment costs 100 and wage costs 60 (50%
region) for a large undertaking no more can be granted
than 50, but only 30 if the wage costs is the base, if costs
are combined in different schemes 50 can be granted from
different sources
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Investment costs
• New assets, except for SMEs or acquisition of an
establishment
• SMEs: 50% of the costs of the preparatory studies
• Fundamental change: costs must exceed the depreciation
of the assets linked to the activity to be modernised in
the course of the preceding three fiscal years
• Diversification of an existing establishment: costs must
exceed by at least 200 % the book value of the assets
that are reused, as registered in the fiscal year preceding
the start of works
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Investment costs
Lease
• land and buildings: the lease must continue for at
least five years after the expected date of completion
of the investment for large companies, and three
years for SMEs
• plant or machinery, the lease must take the form of
financial leasing and must contain an obligation for
the beneficiary of the aid to purchase the asset at
the expiry of the term of the lease
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Investment costs
• acquisition of an establishment: only the costs of
buying the assets from third parties unrelated to the
buyer should be taken into consideration. The
transaction must take place under market conditions
• for large undertakings intangible assets are eligible
only up to a limit of 50 % of the total eligible
investment costs for the project
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Investment costs
• Intangible assets
must remain associated with the assisted area concerned
and must not be transferred to other regions, and
(a) they must be used exclusively in the establishment
receiving the aid;
(b) they must be amortisable;
(c) they must be purchased under market conditions from
third parties unrelated to the buyer
must be included in the assets of the undertaking receiving
the aid and must remain associated with the project for 5/3
years
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Wage costs
• expected wage costs arising from job creation as a
result of an initial investment over a period of two
years
• Scenario I and II to applied here as well for individual
aid (profitability or location comparison) +
proportionality check
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Negative effects on competition & trade
• must be limited and outweighed by the positive
effects
• Main effects: product market distortions and location
effects
– Additional capacity on a declining market
– Maintenance of inefficient market structure
– Weaken competitors, maintain or create market power,
discourage new entrants
– Loss of activity elsewhere
• Member State has to has to demonstrate that these
negative effects will be limited to the minimum
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Manifest negative effects
•
•
•
•
Not compatible
Over the regional aid map
Scenario I: on declining market with structural problems
Scenario II: location in a region with a regional aid
intensity which is higher or the same as the target region
• Where the beneficiary closes down the same or a similar
activity in another area in the EEA and relocates that
activity to the target area, if there is a causal link (COM
checks)
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Cumulation
• Investment aid may be awarded concurrently
under several regional aid schemes or
cumulated with ad hoc aid, provided that the
total aid from all sources does not exceed the
maximum permissible aid intensity per project
that must be calculated in advance by the first
granting authority (incentive effect)
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