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Regional aid, like all State aid, must be necessary and proportional. Regional aid is necessary when investment in an assisted region is more costly. Regional aid is proportional when it does not exceed the amount which can make the investment sufficiently profitable or offset the cost disadvantage of investment in an assisted region.

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Introduction

In July 2014, the European Commission announced its decisions on four projects concerning investments by car manufacturers in assisted regions. Germany, Hungary and Spain wanted to grant regional aid to Volkswagen (Audi & Porsche), BMW and Ford. The Commission authorised German aid of EUR 44 million to Volkswagen (Porsche) in Leipzig. For BMW, also based in Leipzig, the Commission found that only part of the planned aid was necessary and authorised only EUR 17 million out of the EUR 45 million that was to be granted by Germany. On the same date, the Commission opened the formal investigation procedure with respect to aid that Hungary proposed to grant to Volkswagen (Audi). Finally, the Commission closed a formal investigation into regional aid for Ford in Spain, after Spain reduced the aid from EUR 25 million to EUR 11 million and withdrew the notification.

Since then, the decision with respect to Porsche Leipzig was published in the Official Journal on 31 October 2015. The decision with respect to BMW Leipzig has not yet been published, but I have managed to obtain a copy of it. In the meantime, BMW has initiated proceedings before the General Court against the Commission [T-671/14]. The investigation into Audi is still continuing.

In this article I review and compare the two decisions concerning investments in Leipzig and then make a number of more general comments concerning the methodology for determining the impact of regional aid.

Part I of the article is published this week. Part II will be published next week.

Part I:

Commission decision 2015/1966 concerning regional aid granted to Porsche Leipzig.[1]

In this case the Commission carried out a detailed assessment of the measure because it supported a large investment project in the meaning of the regional aid guidelines.

The purpose of the measure was to promote regional development through a direct grant to Porsche Leipzig for the production of a new car model. The investment would take place in Leipzig, Saxony, which was an assisted area under Article 107(3)(c). The standard rate for regional aid for large enterprises was 20%.

Porsche Leipzig is a subsidiary of Porsche AG which itself is a subsidiary of Volkswagen. In 2013, the VW Group operated a total of 106 factories in 19 European countries and eight other countries, employing close to 600,000 people and manufacturing about 10 million cars. It had a share of about 13% of the worldwide passenger car market and its revenue reached almost EUR 200 billion. Porsche AG employed 20,000 people, manufactured 160,000 cars and its revenue was a bit more than EUR 14 billion.

The investment project was an extension of the existing Leipzig plant in order to manufacture the new model Porsche Macan – a sport utility vehicle. The project involved investments in buildings, machinery, equipment and intangible assets, including the construction and equipment of a car body and a paint shop, exclusively for the production of the new model. The investment was an upgrading of the site to a full manufacturing plant. The production capacity created by the project was in the range of [40,000-100,000] cars per year [the precise numbers are not given as they are deemed to be business secrets].

The total eligible investment costs of the project were EUR 550 million in nominal value. In present value it was EUR 522 million.[2]

Amount of aid

Germany intended to grant aid of EUR 44 million [present value]. Since the total eligible expenditure for the project was EUR 522 [EUR 550 million in nominal value], the aid intensity was 8.37% GGE.

Reasons for formal investigation

The Commission opened the formal investigation procedure because, although the measure complied with the standard compatibility criteria laid down in the regional aid guidelines [RAG], and the aid amount and intensity did not exceed the maximum allowable levels, the Commission was not certain whether there was conformity with the requirements of the RAG concerning large investment projects. The Commission has to open the formal investigation when the beneficiary's market share exceeds 25% or when the capacity created by the investment exceeds 5% of a market that is in relative or absolute decline.

Germany argued that the aid was compatible for the following reasons:

i) Positive effects of the aid. The investment would contribute to regional development:

  • It would secure 833 jobs and 29 trainee posts and would create 1040 new jobs and 30 new trainee positions.
  • In addition, a large number of indirect jobs would be created. The employment multiplier was taken to be 2.5, indicating about 2,700 additional indirect jobs.
  • The aid beneficiary was involved in various network and cluster initiatives
  • The beneficiary was highly active in basic and further training of its employees.

ii) Appropriateness of the aid. State aid was an appropriate means to promote the regional development of lagging regions.

  • The GDP per capita in Saxony was 73% of the German average.
  • The unemployment rate was almost 50% higher than the German average.

iii) Incentive effect and counterfactual. Germany argued that the aid incentivised the beneficiary to carry out the full investment in the Leipzig plant rather than locating it partly in another region. This was shown by company documents which explained how Porsche decided about the location of the investment. The investment and location decision on Macan was taken in a multi-stage decision-making process. At each stage, comparative calculations for different production scenarios at three alternative locations in Germany were prepared and considered. These scenarios also took into account the prospect of splitting the investment between Leipzig and the other locations or making it wholly in Leipzig. In addition, they took into account the production costs attributable to each location. In the end, the two best options were identified, one of which was the Leipzig location. However, without any aid, the Leipzig location was at a disadvantage to the tune of EUR 65 million as compared to the other option. Since the maximum amount of aid in Leipzig would be EUR 48 million, the net (after aid) production costs would decrease to EUR 17 million. In addition, under the alternative scenario of locating to the other region, a small investment would still have been made in Leipzig and it could benefit from aid of about EUR 10 million. This meant that the difference between the two regions after aid was taken into account for both options in fact increased from EUR 17 million to EUR 27 million.

Despite its cost disadvantage, the option of locating all investment on a single site had some extra advantages:

  • Reduced risk from less need to transport partly completed cars.
  • Optimised production process.
  • Potential deficiencies or errors could be identified and eliminated quicker.

On the basis of the above considerations, Leipzig was in the end chosen.

iv) Proportionality of the aid. The calculations that demonstrated the incentive effect of the aid could also show its proportionality [not excessive] because there was still a cost disadvantage of EUR 27 million.

v) Negative effects of the aid on competition and trade. Germany argued that since the aid merely compensated for the regional disadvantage of Leipzig, in the absence of aid, the investment would have been undertaken in another region and, therefore, the impact on competition would have occurred anyway.

Compatibility assessment

There was no doubt that the measure involved State aid. The Commission had to carry out a detailed investigation on the basis of the RAG 2007-13 because the aid was granted before 1 July 2014. The assessment had three objectives: i) It had to confirm that the measure was compatible with the general provisions of the RAG. ii) It had to verify whether the market share test and capacity increase/market performance test were positive. iii) In case they were positive, the Commission had to conduct a detailed assessment.

Conformity with the standard compatibility criteria

  1. Porsche Leipzig or its parent companies were not in financial difficulty.
  2. The project concerned initial investment as there was diversification of the output of an existing establishment, allowing it to manufacture a new passenger car model, the Porsche Macan.
  3. Identified costs were eligible for investment aid.
  4. The beneficiary was obliged to maintain the investment in the region for a minimum of 5 years after completion of the project.
  5. The beneficiary contributed at least 25% of the eligible costs.
  6. Its contribution was free of any public support.
  7. No aid had been granted for investment on the same site in the previous three years.
  8. According to the scaling down mechanism in the RAG, the eligible expenditure incurred leads to a maximum allowable aid intensity of 8.37% GGE.
  9. The intensity of the proposed aid [EUR 44 million in present value] did not exceed the maximum allowed aid intensity.
  10. The aid was not combined with further regional investment aid.

Analysis of market share and capacity share

The Commission, after extensive review of the various product configurations, could not conclude with any certainty whether the sports utility vehicle segment was the relevant market. It concluded, however, that the market share of the VW group exceeded 25% of a broad definition of the relevant market.

With respect to the increase in capacity, the Commission was able to conclude with more certainty that the planned investment would exceed 5% of all plausible markets for SUVs in the EEA. It then proceeded to carry out the in-depth assessment of the impact of the project on competition.

In-depth assessment

i) Positive effects of the aid. Here the Commission very much reiterated the information submitted by Germany [and which is presented earlier in this article].

Appropriateness of the aid instrument

Appropriateness means that the aid provides specific advantages as compared to other policy measures. According to the Commission, “(106) Germany based its explanation for appropriateness of the aid instrument on the economic situation of the situation in the Saxony region and provided evidence to prove that the region is disadvantaged in comparison with the average of other regions in Germany.” [This evidence is also presented earlier in this article.] “Germany argues that, in this kind of economic situation, a direct subsidy has already been acknowledged by the Commission's case practice as an appropriate means to address the economic shortcomings.” “(107) In view of the socioeconomic situation of the Leipzig region, […], and in line with earlier case practise (e.g. in the Dell Poland decision), the Commission accepts that the granting of State aid is an appropriate instrument to achieve the regional development objective in the region concerned.”

ii) Incentive effect/counterfactual scenario. Since a company may choose for a variety of reasons to locate its investment in a certain region, even in an assisted region without receiving any aid, the Commission has to verify that the aid is necessary for the investment to occur by changing the behaviour of the beneficiary. There are two tests of incentive effect: i) the investment is not profitable without the aid, or ii) the investment would be undertaken in another region without the aid.

The Commission, first, checked that the project started only after written verification by the relevant authorities that, subject to the formal approval of the Commission, the project was eligible to receive aid. Then the Commission accepted the validity and accuracy of the information submitted by Germany, which showed that the cost disadvantage of locating in Leipzig was EUR 27 million after taking the maximum permissible aid into account. [The calculation of the amount is explained earlier in this article.] This disadvantage was mitigated by some qualitative advantages [also explained earlier] which, however, were not quantified. Nonetheless, the Commission confirmed that the aid had an incentive effect in inducing a change in the location of the investment.

iii) Proportionality of the aid. “(122) For the aid to be proportional, the amount and intensity of the aid must be limited to the minimum needed for the investment to take place in the assisted region”. “(123) In general, regional aid is considered to be proportional to the seriousness of the problems affecting the assisted regions if it respects the applicable regional aid ceiling, including the scaling-down of the regional aid ceiling for large investment projects.”

First, the Commission concurred that the intensity of the proposed aid did not exceed the applicable regional aid ceilings corrected by the scaling-down mechanism. But it also went on to consider whether the aid was the minimum necessary. With respect to an induced change in location, “(124) […] the aid is considered proportionate if it equals the difference between the net costs for the beneficiary to invest in the assisted region and the net costs to invest in the alternative location.” The Commission found that indeed the aid was limited to the minimum amount necessary, because it did not exceed the difference in costs between Leipzig and the best alternative location.

iv) Negative effects of the aid on competition and trade. “(127) If the counterfactual analysis suggests that without the aid the investment would have gone ahead in any case, albeit possibly in another location, and if the aid is proportional, possible indications of distortions such as a high market share and an increase in capacity in an underperforming market would in principle be the same regardless of the aid.” “(128) As the aid measure supports [investment in the assisted region instead of an alternative region] and the aid is limited to the minimum, no negative effects on trade and competition could be identified. The investment would have been carried out in another location, resulting in the same level of distortion of competition in any event. Therefore, the Commission considers that the aid has no negative effects on competition.”

 

Part II will be published on 29 December 2015.

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[1] The full text of the decision is published in OJ L 287, 31.10.2015, p. 68–86 and can be accessed at:

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015D1966&from=EN.

[2] The discount rate used to calculate present values is the base rate applicable on the date of the notification, increased by 100 basis points [in accordance with the 2008 Commission Communication on reference and discount rates].

[Photo by Pedro Ribeiro Simoes from flickr.com]

 


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Professor at the College of Europe, Bruges, and at the University of Maastricht, and Academic Director at lexxion training

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