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European Commission

MEMO

Brussels, 21 May 2014

State aid: Commission adopts new rules facilitating support for research, development and innovation – main changes

The new R&D&I state aid rules consist of two complementary parts:

  • The new General Block Exemption Regulation (GBER) sets out the conditions under which R&D&I-aid (among other types of state aid) is exempt from the obligation of prior notification to the Commission ('block-exempted').

  • The new Framework for State aid for research, development and innovation (R&D&I Framework) contains rules for the assessment of R&D&I aid that is not eligible for block-exemption. The Commission will assess measures notified by Member States according to these criteria.

The overall objective of the modernised R&D&I aid rules is

  • to contribute to achieving by 2020 the target of spending 3% of EU GDP on R&D, and thereby ensure smart and sustainable growth, and

  • to limit distortions of competition due to R&D&I aid.

Below are the principal novelties and differences between the situation now and then, and how they contribute to achieving the overall objective.

I. More flexibility to grant aid

More scope for exempting R&D&I-aid from the notification obligation

Under the previous GBER, aid for process and organisational innovation and for innovation clusters was not exempted. Moreover, ad hoc aid to large enterprises was excluded from its scope. The new GBER embraces all eligible R&D&I aid, even ad hoc aid. It also includes a new exemption category: aid for the construction or upgrade of research infrastructure. The thresholds up to which aid can be granted without prior Commission scrutiny have been significantly increased, as shown in this table:

Aid objective

Previous rules

New rules

R&D projects:

- Fundamental research

EUR 20 million

EUR 40 million

- Industrial research

EUR 10 million

EUR 20 million

- Experimental development

EUR 7.5 million

EUR 15 million

- Specific provisions

Double R&D-project thresholds for EUREKA projects

Double R&D-project thresholds for EUREKA and Article 185 and 187 Joint Undertakings

50% increase for repayable advances

Feasibility studies

EUR 7.5 – 20 million depending on subsequent research category

EUR 7.5 million

Research infrastructure

No such aid objective

EUR 20 million

Innovation clusters

Not block-exemptible

EUR 7.5 million per cluster

Process and organisational innovation

Not block-exemptible

EUR 7.5 million per undertaking, per project

SME innovation aid

Different conditions for each category

EUR 5 million per undertaking, per project

Added value: Extended possibilities to grant state aid without prior notification to the Commission means quicker deployment of aid for beneficiaries. Compliance with the conditions for the exemptions encourages the award of 'good' aid which promotes economic growth without unduly harming competition.

II. Higher aid levels permissible

A. Extended aid intensities for fundamental research, industrial and experimental development and research infrastructure

Under the new rules, the aid intensities (i.e. the percentage of the costs of the project up to which state aid can be granted) remain stable for block-exempted R&D&I-aid, but are significantly increased under the R&D&I-Framework. Infrastructure aid also benefits from flexible aid intensities.

Large enterprise

Medium-sized enterprise

Small enterprise

Aid objective

Range of allowed aid intensities

from basic to maximum incl. collaboration/dissemination bonuses

- Fundamental research

100%

100%

100%

- Industrial research

  • GBER

  • Framework

50-65%

60-70%

60-75

70-80%

70-80%

80-90%

- Experimental development

  • GBER

  • Framework

25-40%

60-70%

35-50%

70-80%

45-60%

80-90%

Research infrastructure

  • GBER

  • Framework

50%

60%

50%

60%

50%

60%

Added value: The possibility for Member States to grant higher aid intensities allow enough margin to cover the 'financing gap' of R&D-investments (i.e. the part of the project that cannot get private funding). It also takes into account the global dimension of competition.

B. Easier transition from the development to the production stage - Aid for prototypes and pilot lines

Under the previous rules, aid for prototypes and pilot lines was possible only in the experimental-development stage, with a basic aid intensity of up to 25% for large enterprises. Any commercial revenues from e.g. a pilot wave-energy plant that already feeds some electricity into the grid had to be offset against the aid.

For aid under the new GBER, higher aid amounts can be granted since commercial revenues from prototypes or pilot projects no longer need to be offset with the aid.

Under the new R&D&I-Framework, significantly higher aid intensities will apply, subject to a detailed analysis by the Commission to avoid undue distortions of competition. For instance, large companies could receive aid representing up to 60% of eligible costs for experimental development projects. Foreseeable commercial revenues will be taken into account for assessing the aid's proportionality.

Under both texts, aid for laboratory-scale prototypes and pilot lines will also be possible at the stage of industrial research. As this stage is farther from the market than experimental development, higher aid intensities can be granted: 50% basic aid intensity for large enterprises under the GBER, as compared to 25% for experimental development.

Added value: Allowing aid at those stages supports a swift transition from development to production, in particular in fast-moving technology markets. This can contribute to keeping European companies competitive in the global market place.

III. Simplification and legal certainty

A. Market failure

The new R&D&I-Framework provides more details and examples on how Member States can demonstrate the existence of a market failure, which is a condition for granting R&D&I-aid.

Example:

  • The new text provides that "any available sectorial comparisons and other studies" can be adduced by Member States to prove a market failure.

  • Moreover, there is now a legal presumption of the necessity of aid for projects that are also EU co-financed.

Added value: Clear-cut assessment principles give greater legal certainty and speed up the assessment process.

B. Incentive effect of the aid

A principle of EU state aid control is that aid must have an "incentive effect" – i.e. it must change the behaviour of the company that receives it, not just subsidise activities it would have undertaken anyway.

Under the previous GBER, Member States had to submit annual reports on the incentive effect of aid on large undertakings. Under the new GBER, that obligation is dropped.

For the detailed assessment of the incentive effect under the previous R&D&I-Framework, the profitability of the aided project had to be compared with a counterfactual project that would be carried out without aid. The new R&D&I-Framework maintains this approach but gives more details on the information required, in particular as regards the use of industry-specific information.

Example:

  • The 'counterfactual scenario' is now better described as "a comprehensive description of what would have happened or could reasonably have been expected to happen without aid". Such alternative scenarios must be clearly defined and sufficiently predictable, and must have been considered by the beneficiary undertaking in its internal decision making. The existence of various investment scenarios could for instance be described in internal business plans, risk assessments, or in documents submitted to investors.

  • It is now clearer that the 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."

Added value: Clear-cut assessment principles give greater legal certainty and speed up the assessment process.

C. Proportionality of aid

The previous R&D&I-Framework implied that the proportionality of the aid is appraised on the basis of the beneficiary's business plan – which shows the risks and benefits of the project as compared to a 'counterfactual scenario'; the allowed maximum aid intensities as percentage of the full project costs served as an implicit red line. The new R&D&I-Framework maintains that principle but establishes the proportional aid intensity on the basis of 'net-extra costs'.

Example:

  • The new rules explain that, as a general rule, R&D&I aid must not exceed the minimum necessary to make the aided project sufficiently profitable. This is the case if the aid makes possible the achievement of a sector or firm-specific profitability benchmark or "hurdle rate" (e.g. a certain rate of return).

  • The new text also explains that in cases where a counterfactual scenario exists, the aid must not exceed the net extra costs of the aided project. These are established by comparing the expected net present values of the investment in the aided project and in the counterfactual project. In situations where such an alternative project is too remote from the project for which aid is sought, the "hurdle-rate" approach described above may apply.

  • The new text makes clear that an alternative 'counterfactual' project may not exist for every given project. In such cases, the general rule mentioned above (aid should not exceed the minimum necessary to make the aided project sufficiently profitable) applies (i.e. the sector or firm-specific benchmarks/hurdle rates).

  • The new text emphasizes that all relevant expected costs and benefits must be considered over the lifetime of the project.

Added value: Clear-cut assessment principles give greater legal certainty and speed up the assessment process.

D. Detailed assessment of aid – assessment of the negative effects of aid

Under the previous rules, the foreseeable negative effects of aid on competition in the Single Market had to be assessed - crowding out of dynamic incentives to invest, preventing market entry, creating/maintaining market power, creating/maintaining inefficient market structures. The new rules maintain this approach and add examples of manifest negative effects.

Examples: The new text explicitly stipulates that R&D&I-aid has manifestly undue negative effects on competition in the Single Market and is therefore incompatible if

  • the beneficiary must have its central seat in the aid awarding Member State or must use national products or services, or must exploit the R&D&I results in other Member States;

  • the aid merely leads to a change in the R&D&I-location without changing the nature, size or scope of the project.

Added value: Clear-cut assessment principles give greater legal certainty and speed up the assessment process.

E. Presence of state aid in public funding for research organisations and research infrastructure

Public funding of non-economic activities does not constitute state aid in the meaning of EU rules. To increase legal certainty, the new Framework provides detailed explanations and examples concerning the distinction between economic and non-economic activities of universities and other research organisations or infrastructure. For example, the previous R&D&I-Framework explained that "the dissemination of research results" is a typical non-economic activity. The new rules give details on the characteristics of truly non-economic knowledge dissemination as a "wide dissemination of research results on a non-exclusive and non-discriminatory basis, for example through teaching, open-access databases, open publications or open software". The new rules also introduce the concept of 'ancillary economic activities'. Public funding for such activities is not subject to state aid rules if the activities are directly related to and necessary for the operation of the research organisation or infrastructure, or intrinsically linked to its main non-economic use, and do not use more than 20 % of the entity's overall annual capacity.

Added value: Legal certainty on the presence of state aid will encourage effective funding of non-economic R&D in the public interest, where knowledge is widely disseminated.

F. Public-private R&D-interactions and indirect aid to industry

Funding granted on market terms does not constitute state aid in the meaning of EU rules. The new Framework improves the guidance on how to ensure that R&D-contracts and R&D-collaboration between publicly funded research organisations and private companies are carried out on market terms, in order to avoid indirect state aid to companies. In particular, they better explain the calculation of market prices and 'due compensation', for research organisations and infrastructures. For example, market terms for contract R&D on behalf of industry can be presumed if the compensation "is the result of arm's length negotiations where the research organisation or research infrastructure, in its capacity as service provider, negotiates in order to obtain the maximum economic benefit at the moment when the contract is concluded and covers at least its marginal costs."

Added value: Improved legal certainty on the presence of state aid in public-private R&D-contracts and collaboration will encourage a fruitful exchange between science and industry and will help closing the 'innovation gap'.

G. Public procurement of R&D

The previous Framework provided no explanations on how to avoid giving an undue advantage to a private research company (indirect state aid) through the public procurement of R&D, and in particular pre-commercial R&D-procurement which is not subject to the procurement directives.

The new Framework provides such guidance. It explains, in particular, the necessity of transparent and non-discriminatory selection procedures, clear contractual arrangements, the absence of preferential treatment for the supply of the final products or services and an adequate dissemination of R&D-results.

Added value: Compliance with these requirements will strengthen the internal innovation market and will contribute to improving the quality of public services and administrations.


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