Regional aid and Article 56 GBER Eszter Hargita

Regional aid and Article 56 GBER Eszter Hargita State Aid Monitoring Office Prime Minister’s Office, Hungary

Content 1. Notion of aid – a crash course 2. Regional investment aid & Investment aid for SMEs 3. Investment aid for local infrastructures 2

When do we apply State aid rules? � The following rules are applicable if the planned measure falls under Article 107 (1) TFEU � If one of the below elements are missing, no need to comply: 1. The presence of an economic activity (notion of an "undertaking") 2. Financing through State resources 3. The presence of an economic advantage for the beneficiary 4. Selectivity 5. Effect on trade ”Local-local” 6. Effect on competition ”Monopoly” 3

Non economic activity Non selective measure No State resource No effect on trade No advantage No effect on competition 4

Aid under GBER � Common ◦ ◦ ◦ ◦ provisions Scope, excluded sectors Transparent aid Incentive effect Cumulation (Publication (+20 working days)) Transparency (as of 1 July 2016) Duration (until 31 December 2020) Compliance with other EU provisions � Specific rules related to the aid category 5

Selecting the aid category T EN M T E ES SM INV FOR AID A LO ID CA FO L R IN FR A REGIONAL INVESMENT AID 6

Regional investment aid Art. 13 -14 Investment aid for SMEs Art. 17 7

Specific rules related to regional investment aid • • • Excluded sectors+ Special rules for broadband research infrastructure No relocation Initial investment Regional aid map - maximum aid intensity Eligible costs (new assets – except for SMEs) Maintenance for 3/5 years 25% own resource (free of any public support) Single Investment project (SIP) 8

Scope • Excluded sectors/activities: – Common provisions: Export aid: - Depends on export performance, or - Is contingent on the use of domestic instead of imported goods Export, fishery, aquaculture, primary agricultural production, firm in difficulty, – Regional aid specific rules: �aid which favours activities in the steel sector, the coal sector, the shipbuilding sector, the synthetic fibres sector, the transport sector as well as the related infrastructure, energy generation, distribution and infrastructure �Stricter rules – broadband, research infrastructure • No sectoral scheme is allowed (except for tourism, broadband processing and marketing of agricultural products) • Aid to beneficiary closed or intends to close down similar activity in EEA (potencial relocation) 9

Initial investment New establishment Extension Fundamental change Diversification New location Same product, same process, more product Same product, completely different process New product + Acquisition of assets belonging to an establishment which closed or would have closed had it not have been purchased.

New conditions for excluding replacement investment Initial investment 1. Setting up of a new establishment; 2. Extension of an existing establishment; 3. Diversification into products not previously produced in the establishment; 4. Fundamental change in the production process of an existing establishment 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 Book value of reused = 10 million Eligible cost > 30 million 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 Depreciation (last 3 years) = 50 million Eligible cost > 50 million 11

Assisted areas Regional aid map � Regional areas � aid can only be granted in assisted 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 (2011 -2013) ◦ Sparsely populated areas ◦ Other problem regions with population of at least 50, 000 12

Initial investment Large undertaking– a) region + SME on the regional aid map Large undertaking– c) region New establishment Extension Fundamental change Diversification Only if the new NACE code is different 13

Regional aid maps The regional aid map also places limits on the amount of investment aid that can be granted in each region: Assisted area (% EU GDP/head) Large firms 'a' areas (<45%) 50% 'a' areas (45%-60%) 35% 'a' areas (60%-75%) 25% Former 'a' areas (until end ‘ 17) 15% Sparsely populated areas, external border areas 15% Other 'c' areas 10% SME "bonus": ■ 10% for mediumsizes firms and ■ 20% for small firms

Regional aid maps 15

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 EUR 100 million, if the part covered by the above 34% is granted (even partly) Eligible cost = EUR 150 million, max. aid intensity 50% Max. aid= 50*0. 5+50*0. 5=EUR 37. 5 million Max. aid= 50*0. 5+50*0. 5*0. 34=46 million (with notification) 16

ELIGIBLE COSTS - Two ways to calculate 1. Costs calculated on the basis of investment costs: ü Material assets (land, building, equipment, machinery) ü Immaterial assets: • Transfer of technology • Patents, operating or patented and non-patented knowhow licences • For large enterprises, limited to 50% of eligible costs 2. Costs calculated on the basis of wage costs: ü Wage costs arising from job creation as a result of the initial investment (two-year wage cost) Example: Investment cost = 100 Wage costs =60 Max. aid intesity = 50% For a large undertaking the max aid for this project is 50, but only 30 if it is based on the wage costs, if costs are combined in different schemes maximum 50 can be granted from different sources. 17

Single investment project 2007 -2013 Investments which are linked functionally, technically and geographically BUT! 2014 -2020 Investments started by the same beneficiary (at a group level) within a period of three years from the date of start of works on another aided investment in the same NUTS 3 region Example: Investment year Eligible costs Aid 2016 40 million 2017 60 million ? 18

Obligatory notification � Relocations – not actual, but in case of partly closing down � Sectoral aid schemes � Aid for shipbuilding and coal � Individual notification threshold Planned aid is more than an investment with EUR 100 million is entitled for. � Non transparent aid measures 19

Investment aid for SMEs �Initial invesment �+10/20% �Same eligible costs as in the case of regional aid �Potential beneficiaries: SMEs in transport and energy sectors, outside the regional aid map 20

Investment aid for local infrastructure Art. 56 21

Investment aid for local infrastructure � � � � Construction or upgrade of local infrastructures Contribution at a local level to improving the business and consumer environment and modernising and developing the industrial base No aid for dedicated infrastructure Available for users on an open, transparent and nondiscriminatory basis for market price Concession or other entrustment to a third party to operate open, transparent and non-discriminatory tender Eligible costs: Costs of the investment (tangible and intangible) Maximum aid amount ≤ difference between the eligible costs and the operating profit of the investment (ex ante or claw back) How to control? Who will control? 22

Examples for aid for local infrastructure § § § § Industrial parks, logistic centres, business incubators (if it is not R&D related) Dwellings Electric car charging station P+R parking facilities Development of railway tracks within industrial parks Modernisation of railway stations Hotels 23

Funding gap I Investment: Industrial park (EUR 1 million) Discount rate: 4% Relevant lifetime: 25 years EUR 2018 Revenues 200, 000 Costs 199, 900 100 100 Operating profit Aid intensity 2019 …. . 2042 99. 84% 24

Funding gap II Investment: Industrial park (EUR 1 million) Discount rate: 4% Relevant lifetime: 25 years EUR 2018 2019 …. . 2042 Revenues 200, 000 Costs 150, 000 Operating profit 50, 000 Aid intensity 21. 89% 25

Comparison Regional investment aid Investment aid for SMEs Investment aid for local infrastructure GBER Chapter I and Articles 13&14 Chapter I and Article 17 Chapter I and Article 56 Size of the beneficiary No restrictions SME No restrictions, however in practice state or municipality owned entities Scope Sectors excluded in Chapter I and energy, transport, shipbuilding, coal, steal, … Sectors excluded in Chapter I + no aid for dedicated infrastructure Eligible costs Costs of investment (restrictions for immaterial assets) Costs of investment 26

Comparison Regional investment aid Investment aid for SMEs Invesment aid for local infrastructure Max. aid intensity Regional aid map 10/20% Financial gap up to 100% Upper limit Amount of aid of an investment with EUR 100 million (50% region – EUR 37. 5 million) Aid of EUR 7. 5 million per project Aid of EUR 10 million per project or EUR 20 million eligible costs Other conditions - Initial investment - Initial - Maintenance for 3/5 investment years - Maintenance - 25% own resource for 3/5 years - SIP - No relocation - Stricter rules for broadband research infra - Operation by third parties on the basis of tender - Financial gap during the relevant lifetime of the project - Open and nondiscriminatory access to users 27

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Renovation of a hotel Initial investment? 29

Industrial park Regional investment aid or local infra? 30

„Life, like poker, has an element of risk. It shouldn't be avoided. It should be faced. ” (Edward Norton) State aid, like poker, has an element of risk. It shouldn't be avoided. It should be faced. Bon courage! 31