Regional Aid, RDI Aid Ramona IANU Country coordinator for Romania, DG Competition 1

REGIONAL AID

Overview 1.Regional State aid & Cohesion 2.Regional aid: Where? 3.Regional aid: What for? 4.Compatibility assessment of investment aid 5.Conclusion: Main changes RAG

Regional aid maps

EU Regional State aid policy Exemption from the general ban on State aid for regional aid measures: "Aid to promote the development of areas where the standard of living is abnormally low or where there is serious underemployment…" (Art. 107(3)(a) TFEU) "Aid to facilitate the development of … certain economic areas…" (Art. 107(3)(c) TFEU) Criteria for the application of the regional aid exemptions: Successive Communications since early 1970’s Successive Regional Aid Guidelines (1998, 2006, 2013) Block Exemption Regulations (2006, 2008)

Support to enterprise and innovation (€70-80 bn) EU cohesion policy (€347 bn) Non- cofinanced state aid Regional aid (€98 bn)* R&D&I aid (€74bln)* Environment aid (€91 bn)* Other horizontal aid (training, employment SME) (€168 bn)* Total state aid (€360 bn) * * estimates EU Cohesion policy – State aid

Regional aid reform and "SAM" ■Communication on "State Aid Modernisation" (2012) More with less: Support growth with constrained public budgets Target enforcement on most distortive cases More effective/efficient control: Simplify rules & streamline procedures ■Impact on review of regional aid rules: Stricter rules for most distortive types of regional aid Sectoral aid schemes, large individual aids, … RAG : Adopted in 28 June 2013 Less distortive regional aid measures  GBER Widening of scope + lighter requirements than RAG adopted in first half 2014

RAG Purpose of regional aid: To promote the development of disadvantaged areas by addressing their economic handicaps To promote economic cohesion of the EU How? Support for investment and job creation by undertakings Support for operating expenses of undertakings (exceptionally) Criteria set out in RAG: Where can regional aid be granted? What can aid be granted for? How much aid can be granted?

1.Regional State aid & Cohesion 2.Regional aid: Where? 3.Regional aid: What for? 4.Compatibility assessment of investment aid 5.Conclusion: Main changes RAG

Regional aid maps For regional aid to be effective, it needs to be focused on the regions that suffer the most serious difficulties Regions with abnormally low standard of living  Art. 107(3)(a) Reference point is EU average Criterion  GDP/cap lower than 75% EU average  Outer Most Regions (Art. 349 TFEU) Other disadvantaged areas  Art. 107(3)(c) Ex-Article 107(3)(a) regions ( ) Sparsely populated area s Other problem regions with population of at least 50,000

Regional aid maps Assisted area (% EU GDP/head) Large firms Medium- sized firms Small firms 'a' areas (<45%)50%60%70% 'a' areas (45%-60%)35%45%55% 'a' areas (60%-75%)25%35%45% Former 'a' areas (until end ‘17)15%25%35% Sparsely populated areas, external border areas 15%25%35% Other 'c' areas10%20%30% Regional aid map also places limits on the amount of investment aid that can be granted in each region:

Regional aid maps - 3

Regional aid maps MS ‘a’ areasPredefined ‘c’Non-predefined ‘c’Total Austria25.8 Belgium Bulgaria Czech Republic88.1 Cyprus50.0 Denmark8.0 Estonia Finland France Germany Greece Hungary Ireland 51.3 Italy Latvia Lithuania Luxembourg8.0 Netherlands 7.5 Malta Poland Portugal Romania Slovakia88.5 Slovenia Sweden12.3 Spain UK EU Total [2013 situation] [22.5] [25.9] [100.0] [88.6] [50.0] [8.6] [100.0] [33.0] [18.4] [29.6] [100.0] [50.0] [34.1] [100.0] [16.0] [7.5] [100.0] [76.7] [100.0] [88.9] [100.0] [15.3] [59.6] [23.9]

1.Regional State aid & Cohesion 2.Regional aid: Where? 3.Regional aid: What for? Initial Investment Operating aid 4.Compatibility assessment of investment aid 5.Conclusion: Main changes RAG

Investment aid: “Initial investment” ■Investment in tangible and intangible assets relating to In 'a' regions & SME in 'c' areas: - Setting up of a new establishment; - Diversification of output of establish-ment into products not previously produced in the establishment; - Extension of the capacity of an existing establishment; - Fundamental change in the production process. ■ Acquisition of assets linked to establishment that has closed or would have closed ■ No replacement investment!

Investment aid: “Initial investment” ■Investment in tangible and intangible assets relating to In 'a' regions & SME in 'c' areas: - Setting up of a new establishment; - Diversification of output of establish-ment into products not previously produced in the establishment; - Extension of the capacity of an existing establishment; - Fundamental change in the production process. LEs in 'c' areas: - Setting up of a new establishment; - Diversification of activity of establishment, if new activity is not same as or similar to activity previously per-formed in the establishment; - Diversification of existing establishments into new products or new process innovations. ■ Acquisition of assets linked to establishment that has closed or would have closed ■ No replacement investment!

Investment aid: “Eligible costs” Two ways to calculate “eligible costs”: ■Costs calculated on the basis of investment costs: Material assets (land, building, equipment) Immaterial assets: Transfer of technology Patents, operating or patented and non-patented know-how licenses For large enterprises, limited to 50% of eligible costs Costs calculated on the basis of wage costs: Wage costs arising from job creation as a result of the initial investment (two-year wage cost)

Investment aid: “Conditions” ■Conditions for regional investment aid: Maintenance of investment (or jobs) in the region: 5 years for large enterprises 3 years for SMEs 25% of investment should be from own contribution or external finance, but totally free of public support Formal application for aid before works on the project started (formal incentive effect)

Investment aid: “How much aid?” ■Maximum allowable aid is defined as a percentage of eligible costs of the initial investment (GGE) ■Maximum aid intensity is set in the regional aid maps and depends on: The level of development of the region The size of the enterprise The size of the investment project Regional aid ceilings set in regional aid maps apply to investments with a total eligible cost of less than 50 Mio € For larger investment projects (LIPs): scaling down of maximum aid intensity ceiling

Investment aid: “LIPs” ■LIP: Large Investment Project with eligible cost > 50 mio €: ●LIPs less affected by regional handicaps of assisted areas ●Higher risk of distortive effects (competitors, competing regions) Reduced aid: Adjusted max. aid amount = RAC x [ (50 + (0.5 x B) + (0.34 x C) ] (B = Cost between 50 Mio and 100 Mio; C = Cost above 100 Mio) Notification threshold: Notification required if: 10% RegionAid > € 7.5 Mio 15% RegionAid > € Mio 25% RegionAid > € Mio 35% RegionAid > € Mio 50% RegionAid > € 37.5 Mio

Operating aid ■Operating aid: aimed at reducing a firm‘s current expenses not linked to initial investment ■Normally prohibited ■Permitted exceptionally in cases where investment aid alone is not enough to trigger a process of regional development: The least developed ‘a’ regions (SME only) The sparsely populated ‘c’ regions (SME + LE) Outer Most Regions (SME + LE)

Operating aid: “Conditions” ■MS has to demonstrate that the aid is : ●An appropriate instrument for addressing the specific problem ●Proportionate to the specific handicap ■Aid should be limited in time and progressively reduced, except in the following cases: ●Permanent handicaps of the outermost areas ●Permanent aid to offset depopulation in the least densely populated areas ●Permanent transport aid in the outermost and low population density areas

1.Regional State aid & Cohesion 2.Regional aid: Where? 3.Regional aid: What for? 4.Compatibility assessment of investment aid 5.Conclusion: Main changes RAG

Compatibility: Sectoral scope v forum shopping Excluded from RAG but covered by other guidelines: ■ Agriculture, forestry ■ Fisheries, aquaculture ■ Transport, incl. airports ■ Energy sector Regional aid prohibited: ■ Steel ■ Synthetic fibres No aid under GBER but to be notified under RAG: ■ Shipbuilding Covered by RAG but with specific additional conditions (transparency, fair access): ■ R&D infrastructure ■ Broadband networks

Compatibility Assessment ■Common principles: contribution to an objective of common interest necessity of the aid appropriateness of the aid aid limited to the minimum necessary avoidance of undue negative effects (black-list) transparency of aid ■NO aid if one principle is NOT respected

GBER v Guidelines (RAG, RDI) COMMON PRINCIPLE GBERRAG, RDI Contribution to common objective PresumedTo be demonstrated Need for state intervention (market failure, cohesion objective) Presumed for the aid categories under GBER RAG: Defined by Commission (regional aid maps) RDI: to be demonstrated AppropriatenessPresumedTo be demonstrated Incentive effectApplication for aid before start of works Ad hoc aid to large enterprises (stricter) Stricter formal requirements + in depth analysis of the counterfactual for notified individual aid ProportionalityMaximum aid intenstiesNet extra costs+max aid intensities Negative effectsLimited by excluding more distortive aid from GBER Description of negative effects + BLACK list Transparency of aidPublication only for aid >

Notification v block exemption Exempted under new GBER: ■ Multi-sectoral schemes ■ Operating aid schemes: Transport aid schemes for outermost regions + sparsely populated areas Operating aid schemes for outermost regions up to 10% of annual sales revenues or turnover ■ Ad hoc aid To be notified under RAG: ■ Sectoral schemes; ■ Other operating aid schemes ■ Large schemes (annual budget > 150 million EUR) ■ Individual aid > notification thresholds ■ Individual aid for new products and new process innovations ('c' regions) ■ Aid linked to relocation (closing down similar activities in the EEA in 2 years before or after)

Assessment of notified aid schemes Objective of common interest: Assumed for co-financed schemes To be demonstrated for other schemes Appropriateness: schemes are appropriate instrument Incentive effect (formal requirements): start of the project after application for aid For SMEs: application form For large enterprises: application form +documentary evidence of the counterfactual Credibility check by granting authority for SMEs+LEs Proportionality: net extra cost + cap (aid intensity on total costs) For SMEs: total costs + aid intensity For large enterprises: net extra cost with a cap (aid intensity on total costs) Limitation of negative effects: to ensure that aid is not attracting an investment from a poor(er) region (i.e. higher or same aid intensity as the target region) 28

Notified individual awards Objective of common interest: demonstration that aid contributes to regional development strategy Appropriateness: aid instrument is appropriate Incentive effect: formal requirements (start of the project after submission of application form); demonstration of the counterfactual scenario Proportionality: net extra cost + cap (aid intensity on total costs) Black list (negative effects outweigh any positive effects): NO investment aid if it attracts an investment from a poorer region NO investment aid if relocation of an investment due to the aid NO investment aid if investment takes place on a market with structural overcapacity 29

1.Regional State aid & Cohesion 2.Regional aid: Where? 3.Regional aid: What for? 4.Compatibility assessment of investment aid 5.Conclusion: Main changes RAG

Main changes 2014 ■Stricter requirements under RAG Compatibility assessment for notified measures outside SF operations Incentive effect Proportionality Necessity of aid Limits on eligibility of initial investment projects by LE’s in ‘c’ areas No forum shopping Evaluation + increased transparency requirements ■Widening of scope of GBER Lighter compatibility assessment requirements

AID FOR RESEARCH, DEVELOPMENT AND INNOVATION

Modernised R&D&I State-aid rules  Objective - Competitiveness and growth: State aid for more and better R&D&I in the common interest. Mobilisation of private R&D&I-investment. Limitation of any negative effects of R&D&I State aid. Clearer and simpler rules  Achieving the objective – modernised rules More scope for the automatic approval of R&D&I aid – the General Block Exemption Regulation New aid objective ‘Research Infrastructure’; innovation aid simplified and more generous rules - the General Block Exemption Regulation More flexible aid ceilings for large individual aid measures – the R&D&I-Framework Greater legal certainty for public-private R&D-collaboration and for demand-side measures (pre-commercial public procurement) that foster innovation – the R&D&I- Framework More precise criteria for the detailed economic assessment of R&D&I-aid – faster assessment procedure - the R&D&I-Framework 33

General BlockExemption Regulation (GBER) 2014 ! Notification thresholds higher than under GBER 2008 ! R&D-project aid research infrastructures Innovative start- upspr’s. Process & organ’l innovation innovation clusters R&D&I -Framework 2014 presence/absence of State aid all large individual R&D&I aid above notification thresholds Assessment criteria for large schemes – focus on evaluation by MS Notification threshold Allows ad-hoc aid for large enterprises. Large aid schemes not eligible. Only transparent aid instruments. All eligible R&D&I-aid objectives. Innovation aid for SMEs 34 R&D&I State aid rules - architecture

Presence of State aid in R&D&I-typical situations (Chap. 2 R&D&I-Framework) Situation - public funding for economic activities of research organisations and research infrastructure Situation - R&D-services carried out by publicly financed research organisations on behalf of industry Situation - R&D-collaboration between publicly financed research organisations and industry New: Public R&D-procurement situation  The Framework’s R&D&I-specific explanations are complementary to, and more detailed than, those given in the forthcoming Communication on the Notion of Aid. 35

Presence of State aid in public funding for economic activities of research organisations and research infrastructure 36

Public funding for research organisations/infrastructure  Non-economic activities (point 19): Primary activities: Public education organised within the national educational system; independent R&D; wide dissemination of research results on a non-exclusive and non-discriminatory basis; Knowledge transfer conducted by the research organisation/infrastructure or jointly with/on behalf of other such entities; all profits reinvested in primary activities.  Economic activities: e.g. renting out equipment or laboratories to undertakings, R&D services, contract research for industry.  Cross-subsidisation of economic activities is avoided by separating the costs, revenues and financing of economic from non-economic activities –  Lack of clear separation → Entire research organisation and its funding are subject to State aid rules!  Separation e.g. demonstrable in annual financial statements 37

Public funding for research organisations/infrastructure New presumption: If RO/RI is both publicly and privately funded → State aid is present if  public funding allocated to the relevant entity for a specific accounting period exceeds the costs of non-economic activities incurred in that period (point 20 – footnote 22).  Example: Project of EUR 200 million Public funding = EUR 160 million (80% of the total costs) allocated to non-economic activities → no State aid Remaining EUR 40 million are financed through means that do not include State resources → no State aid If the public funding of the research infrastructure exceeds EUR 160 million (80% of the total costs) – presumed State aid ('spill-over' of public funding) 38

Public funding for research organisations/infrastructure  New concept: 'Ancillary economic activities' (point 20) not subject to State-aid rules if directly related to and necessary for the operation of the RO/RI or intrinsically linked to RO/RI main non-economic use. Must be limited in scope - consuming exactly the same inputs as non-economic activities and allocated capacity is ≤ 20 % of relevant entity's overall annual capacity  ! Claw-back of excessive aid resulting from a higher proportion of economic activities in comparison with ex-ante estimations!  No State aid to RO/RI as an 'intermediary': Any advantage through public funding is quantifiable and demonstrable, and is fully passed on to the final recipients (e.g. price-reduction) → State aid compatibility/de-minimis conditions at customer level, and no further advantage for intermediary - selected with open tender procedure, or customers are entitled to acquire services from any intermediary. 39

Example of claw-back situations Scenario 1 Economic activity <20% Cost of investment: EUR 10 million Economic Excessive support: 50% * (EUR 10 million - EUR 7 million) = EUR 1.5 million Scenario 2 Economic 30% Support for business: 50% * (EUR 3 million) = EUR 1.5 million Support for non-economic activities: EUR 7 million Economic activity 30% -> 40% Excessive support: 50% * (EUR million) = EUR 500,000 40

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Presence of indirect State aid (Section 2.2) to industry through R&D-services carried out by publicly financed research organisations (Point 2.2.1) 42

Indirect aid to industry Contract research or research services – How to avoid indirect State aid to undertakings?  Research service or contract research at market price, or where there is no market price: full costs of the service + margin commonly applied in the sector of the service concerned, or arm's length negotiations where research organisation/ infrastructure negotiates to obtain maximum economic benefit at the moment when the contract is concluded and covers at least its marginal costs.  New option: Market value of IP-ownership or IP access may be deducted from the price if these remain with the research organisation/ infrastructure.  New presumption: Specific research service/contract research for the first time on behalf of a given undertaking, on a trial basis and during a clearly limited period of time → Price charged is considered as market price if service/contract research is unique and no market for it. 43

Presence of indirect State aid (Chap. 2.2) to industry in R&D-collaboration with publicly financed research organisations (Point 2.2.2) 44

Indirect aid to industry R&D-collaboration with publicly financed research organisations – How to avoid indirect State aid to undertakings? undertakings bear the full project costs, or Non-IPR may be widely disseminated and any IPR generated by research organisations/ infrastructures are fully allocated to those entities, or IPR/access rights allocation reflects work packages, contributions and respective interests, or ‘compensation equivalent to market price’; undertakings' financial and non-financial contributions to the research organisation's/infrastructure's costs that resulted in the IPR may be deducted. 45

Indirect aid to industry - R&D&I-Framework 2014 IPR-transfer in R&D-collaboration with publicly financed research organisations more elaborate explanations of ‘compensation equivalent to the market price’ Research organisations/infrastructures enjoy the full economic benefit of IPR/access rights, and : open, transparent and non-discriminatory competitive sale procedure, or independent expert valuation, or arm's length conditions, or where undertakings have a right of first refusal: research organisations/infrastructures solicits offers from third parties so that the collaborating undertaking has to match its offer accordingly.  If none of above conditions is met → full value of the contribution of the research organisations/infrastructures is considered as an advantage for the collaborating undertakings → State aid rules apply at their level. 46

New in the Framework: Presence of State aid  in public R&D-procurement (Section 2.3) - 47

Public procurement of R&D- services 'exclusive development' Public purchaser reserves all results and benefits exclusively for itself for conduct of its own affairs 'pre-commercial' procurement Public purchaser does not reserve all results and benefits exclusively for itself for conduct of its own affairs Excludes purchase of commercial volumes of final product/service Public-procurement Directives apply Public-procurement Directives do not apply Open tender/restricted procedure pursuant Directives No aid if open, transparent non-discriminatory procedure; clear ex-ante arrangements; no preferential treatment in supply of final products; wide dissemination of non-IP; all IPR allocated to public purchaser, or full free IP-access for public purchaser and non-exclusive access for third parties at market terms 48

Modernised R&D&I State-aid rules – eligible R&D&I-aid objectives - GBER Articles

Aid for R&D-projects  3 research categories: fundamental research industrial research experimental development  New: Industrial research: now including laboratory-scale prototypes and small scale pilot lines. Reason: High technological risk – no commercial use – allow higher aid intensity than for 'experimental development.  New: ex-post deduction of commercial revenues generated by prototypes and pilots from eligible costs no longer applicable. Supporting the transition from development to production - fast- moving technology markets! 50

Interplay between the new GBER and the new R&D&I- Framework. R&D-project aid intensities (incl. top-ups) Large enterprise Medium- sized Small R&D projects -Fundamental research100% -Industrial research -'GBER' -Industrial research – 'detailed assessment' 50-65% 60-70% 60-75% 70-80% 80-90% -Experimental development - 'GBER' -Experimental development - 'detailed assement 25-40% 60-70% 35-50% 70-80% 45-60% 80-90% -Feasibility studies50%60%70% 51

Innovation aid rules – now simpler & streamlined GBER 2008 'Aid for young innovative enterprises' Various SME-innovation objectives: IPR costs, innovation advisory/support, loan of highly qualified personnel. Various levels of aid intensities/ notification thresholds Excluded from GBER: Aid for process and organisational innovation in services; projects must be ICT-related Excluded from GBER: Aid for innovation clusters. Cluster definition implies regional/physical component. Operating aid limited to 5 years. GBER 2014 'Start-up aid' - SME access-to- finance. Various aid-instruments. Single SME- innovation aid category. Regular aid intensity - 50% and 100% if max. 200kEUR/3 years for advisory and support services. Single notification threshold - 5 million EUR/SME Block-exemptible. Higher aid- intensity for SMEs; no obligation to use/exploit ICT Block-exemptible. No longer necessary to operate 'in a region'. Higher aid intensity for investment aid - 50%; operating aid up to 10 years degressive. 52

R&D Projects 1.The aided part of the project shall completely fall within the following categories : (a)fundamental research - experimental or theoretical work undertaken primarily to acquire new knowledge (b)industrial research - planned research or critical investigation for the developing of new or the significant improvement of current products, processes or services (c)experimental development - acquiring, combining, shaping and using existing knowledge and skills to develop new or improved products, processes or services (d)feasibility studies - evaluation and analysis of the potential of a project

R&D Projects Doubling the thresholds: Fundamental research to EUR 40 million Industrial research to EUR 20 million Experimental development to EUR 15 million For a EUREKA project or one implemented by a Joint Undertakings under Article 185 TFEU double the above thresholds Eligible costs cover: personnel costs, costs of instruments and equipment, costs for of buildings and land, costs of contractual research, knowledge and patents bought or licensed, costs of materials 54

Innovation clusters Innovation clusters - structures or organised groups of independent parties designed to stimulate innovative activity Aid may be granted exclusively to the legal entity operating the innovation cluster Notification threshold: EUR 7.5 million per cluster Investment and operating aid (limited to maximum 10 years) Aid intensities: -Investment aid: 50% plus regional bonuses (5/15 percentage points -Operating aid: 50% 55

Innovation aid for SMEs Simplified category of Innovation aid to SMEs with streamlined conditions covering:  Aid for industrial property rights costs  Aid for the secondment of highly qualified personnel  Aid for innovation advisory and support services Single notification threshold – EUR 5 million per undertaking, per project - and aid intensity – 50% Specific provision for aid for innovation advisory and support services allowing to increase the aid intensity up to100% if the aid amount remains below EUR per undertaking within any 3 year period 56

Process and organisational innovation Aid for new or significantly improved production or delivery method (significant changes only) Notification if more than EUR 7.5 million Aid to large undertakings only if they collaborate with SMEs that incur at least 30 % of the total eligible costs 57

Compatibility criteria for large individual aid subject to the notification obligation – the R&D&I-Framework 58

Assessment principle Assessment approach Contribution to increased R&D&I and need for State intervention (market failure) Systematic identification of objective of common interest. Demonstration of general/specific market failure by MS for all notified cases, e.g. through sectoral comparison. Presumption of absence of market failure where there are similar projects in the market. Presumption of presence of market failure for EU funded projects. AppropriatenessTo be demonstrated; presumed for EU-funded project Incentive effectAid application before start of works For large individual aids, MS to support counterfactual analysis of incentive effect with company- and industry-specific elements. Counterfactual scenario may even consist in "the absence of an alternative project" or in "an alternative project that is wholly or partly carried out outside the Union." ProportionalityWhere no alternative project exists: Aid must not exceed the minimum necessary to make the project sufficiently profitable. This is the case if the internal rate of return (IRR) is brought to a level that corresponds to sector or firm specific hurdle rates. Where a counterfactual project exists: Aid must not exceed the net extra costs established by comparing the expected net present values of both alternative investments. Where a counterfactual exists but is too remote from aided project: Hurdle-rate approach may apply. All relevant expected costs and benefits must be considered over the lifetime Negative effectsAnalysis of distorting dynamic incentives, creation of market power and maintaining inefficient market structures. Analysis of choice of location. Analysis of manifest negative effects, in particular if violation of EU law (such as free movement of goods and services). 59

Detailed assessment of large R&D&I-aid – incentive effect, proportionality and the 'counterfactual scenario' 'Counterfactual scenario' - now more elaborately described: "Comprehensive description of what would have happened or could reasonably have been expected to happen without aid". Alternative scenarios clearly defined and sufficiently predictable considered by the beneficiary undertaking in its internal decision making could for instance be described in internal business plans, risk assessments, or in documents submitted to investors. 'Counterfactual scenario' may even consist in "the absence of an alternative project" or in "an alternative project that is wholly or partly carried out outside the Union." 60

New clarification on the cumulation of State aid with EU-funding  total amount of State aid per activity or project per undertaking taken into account  EU-funding not controlled by MS not taken into account  EU-funding and State aid for same eligible costs must not exceed most favourable funding rate laid down in EU-law 61