Economic Activities of a Research Organisation (Part I)

The revenue from the economic activities of a research organisation must cover the full cost of those activities.

Introduction

Member States use extensively the GBER to support R&D schemes. If we exclude the measures that were implemented in the context of covid-19 and now those which are financed by the recovery and resilience fund, not more than a dozen measures have been notified to the Commission for prior approval since 2014.

Therefore, it was rather unusual that in December 2020, France notified to the Commission an R&D measure. Even more unusual were the contents of the measure. Normally, Member States notify specific projects. In this case, however, the French measure concerned an industrial research agreement [abbreviated in French as CRI] between IFPEN and Axens. The Commission approved it about a year later, in November 2021, with decision SA.59170.[1]

IFPEN is the Institut Français du Pétrole Énergies Nouvelles which is a public research organisation with the status of an “etablissement public a caractère industriel et commercial” [EPIC]. Axens is a subsidiary of IFPEN, that pursues exclusively economic activities.

The notified measure is basically the same as a previous measure that was first approved by the Commission in July 2008 in decision SA.20292 and later renewed by Commission decision SA.33491. It eventually expired on 31 December 2020. The current notification concerns a 10-year extension.

IFPEN qualifies as a research and knowledge dissemination organisation in the meaning of point 15 (ee) of the 2014 RDI Framework and is financed by the national budget. It performs independent R&D with the aim of developing innovative technologies and materials in the fields of energy, sustainable mobility, environmental protection and decarbonisation. Axens is the only fully owned subsidiary of IFPEN.

Because of the importance of the case, it is necessary to review it in detail. Therefore, this article is divided into two parts. Part I examines the links between IFPEN and Axens and the Commission’s reasoning why this case falls within the scope of Article 107(1) TFEU. Part II covers the assessment of the compatibility of the aid with the internal market.

Part I

Links between IFPEN and Axens give rise to State aid

 As indicated in the Commission decision, “(8) the activities and relation covered by the notified measure between IFPEN and Axens fall outside the scope of its non-economic activities in so far as they give rise to commercial exploitation by Axens. For the sake of completeness, outside the scope of the notified measure, IFPEN carries out economic activities of renting equipment and premises, providing staff and providing legal services to subsidiaries, and providing contractual research on behalf of third parties and on behalf of its subsidiaries.”

The Commission also noted that its 2008 decision established “(11) the presence of aid to the IFPEN Group under the measure based on the following findings: First, the public financing granted to IPFEN does not distinguish between financing for non-economic activities of IFPEN outside the field of Axens’ activities and IFPEN’s activities in the exclusive of field of Axens. Second, the Commission qualified the latter activities of IFPEN as economic since they give to commercial exploitation by Axens, whereby the Commission stated that the “objective of exploiting the results of R&D lies at the heart of IFP’s development strategy as set out in its contract of objectives with the State”. Third, the Commission concluded that Axens cannot be distinguished from its parent entity IFPEN but that they must be considered as an economic unit with a view to the level of economic integration between the two entities.”

“(12) Fourth, the Commission concluded that there was a cross-subsidisation of these (IFPEN’s and Axens’) economic activities through State financing of IFP’s noneconomic activities, based on the following analysis: The Commission examined (then) IFP’s accounts in order to identify the possible amount of public subsidy allocated to their commercial activities. While the Commission noted that (then) IFP and its subsidiaries are distinct legal entities and their accounts are separate, the Commission stated that, if there is any subsidisation of economic activities, it results from the level of the remunerations paid by the subsidiaries concerned to the parent company and that this would be reflected in IFP’s accounts. Analysing IFPEN’s accounts, the Commission concluded that IFPEN’s activities in the exclusive area of Axens are not fully financed from own resources, notably financial contributions paid by Axens to IFPEN, and therefore benefit from the financing granted by the State to IFPEN.”

The description of the links between IFPEN and Axens in paragraphs 8 & 9 of the decision are important in order to understand how public subsidies to research organisations may fall within the scope of State aid rules.

Separate accounts are indispensable to avoid subsidisation of economic activities, but on their own are not enough when the cost of research is not fully covered by the income from economic activities or when the research results are passed on to the department, subsidiary or entity that carries out their commercialisation. Therefore, in addition to account separation, the economic part must bear the full cost of its own activities and must remunerate the non-economic part for the full value of its research results.

Paragraphs 19 & 20 of the decision outline the broad areas of cooperation between IFPEN and Axens. Then paragraphs 21-22 explain how the cooperation will help France reach its climate change and energy objectives.

But from a State aid perspective the observations of the Commission on how IFPENS and Axens have agreed to work together are instructive.

“(24) The measure defines the conditions for cooperation between the parties at various levels:

Joint research projects between IFPEN and Axens.

Exploitation of IFPEN results by Axens: The exclusive licence framework agreement […] provides that Axens may sub-license IFPEN’s present and future intellectual property, primarily in terms of processes in its field of activity, to provide engineering services to customers in relation to those processes, and to transmit to them the right to use the related technologies in the form of patent licensing. […] Axens is free to sell licences for technologies, processes, products and related services to any customer, in a non-discriminatory manner, irrespective of the customer’s nationality and place of establishment/location.”

“(25) In addition, the measure defines the possibilities for collaborative research of IFPEN with other enterprises in Axens’ fields of activity. [.].. IFPEN may initiate a project in the field of activities of the subsidiaries concerned only in so far as Axens does not wish to carry out the research project. These first refusal rights are granted to Axens at the end of each phase of the works on the feasibility studies. Similarly, IFPEN has a right of first refusal over all the research work the subsidiaries concerned may wish to carry out. It is only after IFP has exercised the right of first refusal that the subsidiaries concerned have the opportunity to propose the research project to other undertakings.”

“(26) In return, Axens pays IFPEN, royalties under the licence agreements and, second, a remuneration for access to IFP’s research capacity and cooperation activities.”

“(27) In the previous decisions, the Commission described the functioning of the aid instrument as follows: “Under this measure, the State aid at issue will hence result from a transfer of public funds corresponding to the difference between the total own resources made available [including mainly financial contributions from Axens] and the total costs incurred by IFPEN for research carried out in the exclusive fields of Axens […]”.

“(29) To conclude on the aid instrument, based on the provisions of the notified measure, when applied to a specific project, Axens benefits from more favourable conditions of the cooperation compared to that that would apply under normal market conditions. The remuneration paid by Axens to IFPEN that does not cover the full costs incurred by the latter for research works and royalties under the framework and product licence agreements, in the exclusive field of Axens […] Deficits are covered/compensated by the public financing that IFPEN receives in its capacity as a public research organisation.”

Points 27-30 of the RDI Framework provide guidance on how to avoid State aid in collaborative projects between research organisations and undertakings. Like all Commission guidelines, the RDI Framework does not provide an exhaustive list of possibilities that captures all options. Therefore, the findings of the Commission in paragraph 29 above are relevant and significant. If the terms of a collaborative project do not fit into points 27-30 of the RDI Framework, they should be tested against the normal market conditions or the terms that could be agreed by a market operator who would want to maximise the return on its investment in research. The arrangements between IFPEN and Axens are unique. Nonetheless, they deviate from normal market conditions because they allow Axens to have access to research results on more favourable terms or lower fees than would apply to a third party.

Commission assessment

 Existence of State aid

The Commission began its assessment by establishing the status of IFPEN.

Selective advantage to an undertaking financed from State resources

“(53) The Commission notes first, that in the case at hand, IFPEN receives public funding from the national French budget”.

“(54) IFPEN is publicly owned and […] has the status of an “Établissement Public à caractère Industriel et Commercial” (“EPIC”). This means that insolvency and bankruptcy procedures under ordinary law do not apply to IFPEN”.

“(55) The Commission notes that IFPEN qualifies as a public research organisation in the meaning of point 15 (ee) of the RDIF 2014, an entity entrusted by law with a certain mission, namely developing innovative technologies and materials […] It carries out non-economic and economic activities in the meaning of point 19 RDIF 2014.”

“(56) To the extent that IFPEN is active in areas in the field of Axens, its activities must be considered to be of economic nature. First, the Commission notes that IFPEN has outsourced several activities to Axens, creating an economically active subsidiary […] rather than conducting these economic activities itself (as was the case before Axens was set up).”

“(57) Second, the Commission notes that Axens and IFPEN, cannot be seen as two separate undertakings but form an economic unit. This finding was established in the previous Commission decisions. No details indicate that the relevant indicators would have changed. Hence, for the sake of the present assessment, IFPEN and Axens must be considered as one economic unit (IFPEN Group).”

“(58) The Commission further takes note that the RDIF 2014 contains specific considerations and rules concerning the existence of aid in a situation where a research organisation receives funding and conducts both economic and noneconomic activities: Where the same entity carries out activities of both economic and non-economic nature, the public funding of the non-economic activities will not fall under Article 107(1) of the TFEU if the two kinds of activities and their costs, funding and revenues can be clearly separated so that cross-subsidisation of the economic activity is effectively avoided. Upon reversion, the amount of public funding used to cross-subsidize economic activities of the research organisation is considered aid even if the relevant part of the public funding was not explicitly granted or earmarked for the economic activity by the funding authority. “

“(59) To establish such cross-subsidisation, the Commission first notes that the public financing granted to IFPEN does not differentiate between the non-economic activities of IFPEN and the activities conducted in the exclusive area of Axens.”

“(60) Second, the Commission notes that the measure does not guarantee total coverage of the costs incurred by IFPEN for research works and royalties under the framework and product licence agreements, in the exclusive field of Axens […] On the contrary, Axens benefits from more favourable conditions in its cooperation with IFPEN, compared to that that would apply under normal market conditions. Any remaining deficit is compensated by the public financing that IFPEN receives in its capacity as a research organisation from the French national budget.”

“(61) Such finding is in line with the previous decisions, according to which IFPEN does not receive a market conform compensation for its contribution but covers its own the costs for any R&D activities in Axens’ research area from the financing by the State to IFPEN. The measure would not guarantee full coverage of the costs carried out by IFPEN.”

At this point, footnote 57 states: “This advantage stems from the fact that their own resources do not cover R&D’s activities in the fields of activity of Axens […] The non-coverage of IFP’s costs in the fields of Axens […] results from the intragroup transfer mechanisms, as established by the exclusive agreements between IFP and Axens […] The Commission considers, therefore, that the existence of the aid has come about as a result of the concomitance of the existence of commercial subsidiaries and the signature of exclusive agreements between those subsidiaries and the parent company, insofar as those agreements do not guarantee total coverage of the costs of work carried out by IFP”.

“(62) Moreover, the amount of the advantage is defined as the difference between the amounts of annual costs incurred by IFPEN in the exclusive domain of Axens and the total own resources of IFPEN (incl. financial contributions (remuneration and royalties) received from Axens), allocated to Axens’ exclusive areas”.

“(63) Further to that, to fall within the scope of Article 107(1) of the TFEU, a State measure must grant such advantage certain undertakings or the production of certain goods. The Commission takes note that these preferential terms do not apply to any cooperation between IFPEN and other undertakings.”

“(64) Therefore, the notified measure, as described above, that reintroduces the measure, as amended, provides for a selective advantage stemming from state resources to economically active IFPEN Group. Hence the Commission concludes that there is a selective advantage to an undertaking financed from State resources the meaning of Article 107(1) TFEU”.

Effect on trade and competition

“(65) Public support to undertakings only constitutes State aid under Article 107(1) of the TFEU if it ‘distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods’ and only insofar as it affects trade between Member States.”

“(66) The Commission notes that such potential of the measure was established in the previous decision, most recently in 2012 (recital 127 of the 2012 decision). The Commission further notes that the situation has not changed in a way that would put such conclusion in question.”

“(67) Therefore, the notified measure, as described above, that reintroduces the measure, as amended, constitutes aid to the IFPEN Group within the meaning of Article 107(1) TFEU”.

[1] The full text of the Commission decision can be accessed at:

https://ec.europa.eu/competition-policy/competition-case-search-0_en

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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