Compatibility of regional aid under the regional aid guidelines 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 2

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 3

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 4

Assessment of compatibility in general Art 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; 5

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 6

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 7

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 8

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… 9

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? 10

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 11

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 12

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 13

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 14

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 15

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. 16

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 17

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 18

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 19

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. 20

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 21

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! 22

Regional aid maps Large undertakingMedium undertaking Small undertkaing a) regions, GDP below 45% a) regions, GDP between 45% and 60% a) regions, GDP between 60% and 75% Ex a) regions, below 90% until c) regions

Large investments No SME bonus applicable Scaling down mechanism: – For investment part 0-50 million EUR 100% aid intensity – For investment part 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) 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

M anifest 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) 32

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) 33