- State aid may cover up to 100% of the funding gap of a project.
- The funding gap demonstrates that the aid has an incentive effect.
- The aid is proportional if it does not exceed the funding gap.
- State aid in the fisheries sector may have to comply with both Regulation 2022/2473 [FIBER] and the fisheries guidelines.
Introduction
The Commission recently approved the granting of EUR 5.4 million of individual ad-hoc aid to the Dutch auction house Visveiling Urk [VU], an SME located at the town of Urk on the coast of Ijsselmeer. VU auctions the daily catch of fish.
The purpose of the aid was to enable VU to modernise its facilities and improve the handling of fish and more specifically, “(19) the infrastructure related to the distribution and processing of fish marketed through the fish auction hall”.
Funding gap
The amount of the aid was determined on the basis of a funding gap analysis. The eligible costs were: Earthworks, construction of building, building installations, cooling and freezing equipment, warehouse shelving, solar panels, lifting equipment and other machinery, general costs, and corporate income tax over the subsidy. The Commission decision does not indicate the precise amount of eligible costs, but only a range of EUR 11-14 million. The aid intensity is also given in the range of EUR 30%-40%.
The factual scenario comprised the project. The counterfactual scenario consisted of no alternative project. Therefore, the funding gap was the difference between the discounted costs of the project and the discounted revenue, over the life-time of the project. According to the Commission, “(26) the Dutch authorities explained that if it had been financially possible for the beneficiary to finance the investment itself, it would have done so, since the development of land-based fishing related activities has started a few years ago without government intervention.”
However, for two reasons, it is questionable whether indeed there was no counterfactual scenario. First, as paragraph 20 of the decision indicates, the project also aimed to improve the safety of fish handling and lower spoilage. However, it does not indicate whether the safety improvements were legally mandated. Nor, does the decision clarify whether such improvements effected the revenue stream. “(20) According to the Dutch authorities the measure aims to optimise the distribution space and warehouse shelving and minimise the risk of accidents by improving the safety and working conditions. The investments would lead to an improvement of the quality control and traceability of the landed products due to the better storage facilities and circumstances. The improved storage processes will also reduce the environmental burden. Moreover, the installation of solar panels will improve the energy efficiency of the fish auction hall requiring a lot of electricity.
Second, paragraph 21 of the decision further suggests that the future of VU was at stake. It is possible, therefore, that the scope of the counterfactual scenario should not have been just zero revenue and costs but worsening of the existing revenue stream and possible exit from the market with significant loss of income. In such a scenario where state aid prevents future losses, the funding gap could be significantly smaller. “(21) These investments are necessary to achieve the objectives of the measure, considering the general challenges fish auction halls and the fishery sector are facing. The auction hall itself is under increasing pressure due to higher landings and modern quality requirements. The facilities have become outdated and no longer meet contemporary needs in terms of efficiency, food safety, and digital integration. Thus, the measure is intended to foster the development of the fish auction hall by way of improving its infrastructure.”
At any rate, the funding gap was the NPV of factual scenario minus the NPV of the counterfactual scenario, or
FG = EUR – 5.4 million – 0 = EUR – 5.4 million
The funding gap with state aid was still slightly less than EUR 5.4 million.
The discount rate that was used to calculate the funding gap was VU’s weighted average costs of capital [WACC]; i.e. the weighted cost of its equity and debt. The WACC was estimated as follows:
- E = equity = 6.436
- D = debt = 10.237
- rf = risk free rate 0.76%*
- Unlevered beta = 0.94
- ERP = equity risk premium = 4.12%*
- DP = debt premium = 3.30%**
- T = corporate tax rate = 25.80%
* The rf and ERP values were drawn from the Innovation Fund Relevant Costs Methodology, 2024.
** The DP was calculated by taking a bank offer received by VU for a long-term loan, minus the risk-free rate as included in this WACC calculation.
The above values led to the following results:
- β = equity beta = 2.05
- Cost of equity = 9.2%
- E/(D+E) = 38.6%
- Cost of debt (after tax) = 3.0%
- D/(D+E) = 61.4%
- WACC = 5.4%
Safeguards
The state aid would be granted only of the internal rate of return [IRR] of the investment would not exceed the normal rates of return applied by VU to other similar investment projects or the cost of capital of VU or beyond the rates of return normally observed in the sector. It should be noted that the IRR takes into account the future cash flows the investor expects to receive over the lifetime of the project. The decisions does not indicate what was the derived IRR. It only mentions that “(47) the IRR in the presence of the aid constitutes […]%, which does not exceed the WACC ([…])” that was calculated on the basis of the values indicated above.
Assessment of the compatibility of the state aid with the internal market
The Commission assessed the compatibility of the aid on the basis of the fisheries guidelines and Article 29 of the fisheries block exemption regulation [Reg 2022/2473] [FIBER], because section 3.2 of the guidelines refers to “Aid for categories of measures covered by Regulations on block exemptions”.
The Commission found that the aid promoted the development of an economic activity, the aided measure and the conditions attached to it did not infringe any other provision of EU law, the aid was appropriate and necessary, it had an incentive effect and was proportional because it did not exceed the funding gap, and since the aid did not enable VU to expand its activities, the distortion caused by the aid was minimised.
