An Important (and so far, Unique) Project of Common European Interest

State aid for important R&D projects of common European interest can cover different costs than the RDI Framework and at different rates of intensity.

Introduction

Several Member States have demanded a more active industrial policy to counteract perceived unfair foreign competition. The Commission’s response has partly been that current rules do allow cross-border cooperation for the development of innovative products. A case in point is an R&D project in microelectronics jointly notified by four Member States: SA.46578 [Germany], SA.46705 [France], SA.46595 [Italy], SA.46590 [UK].[1] But, as will be seen later on, this project also highlights the risk to internal EU competition from the cooperation of too many companies.

This project is unique in several ways. It is the first joint notification by more than two Member States in the past 15-20 years. It is also the first non-infrastructure project in the past two decades or so which is classified as an “Important Project of Common European Interest” [IPCEI]. The other IPCEIs are two infrastructure projects between Denmark and Sweden and Denmark and Germany, respectively, and another R&D project by seven Member States on the development of batteries. The latter project was approved recently, on 9 December 2019, but the text of the Commission decision is not yet in the public domain.[2]

I believe the microelectronics project is also the first where aid is authorised by the Commission for “first industrial deployment” activities. And it is probably also the first project where the Commission accepted commitments by Member States in order to minimise the impact on competition. Commitments are not unusual in the area of State aid. It is standard practice in the case of rescue and restructuring aid and has been used extensively in the authorisation of aid to financial institutions. But in the area of R&D it is very rare. Perhaps it was the Commission that asked for this kind of “compensatory measures” but it is an issue that is not clarified in its decision.

A complex process

The process of gaining Commission approval by the four Member States must have been rather complex. Although the project was formally notified in November 2018 and, rather impressively, was approved in less than a month later, in December 2018, it was in fact already pre-notified in October 2016. Between 2016 and 2018, several bilateral and multilateral meetings took place between the Commission and the four Member States.

The end result is a 100-page Commission decision, full of technical material. The first 33 pages are devoted to a description of the project, its various stages and work packages. The project involves 29 partners cooperating in six work packages covering semiconductors, sensors, optical equipment and compound materials. Some participating companies with cross-border operations receive aid from more than one Member State.

The 29 partners comprise 27 companies and two research organisations. However, the Commission assessment does not cover the research organisations. Because of “(249) their research organisation status and performance of non-economic activities, and the fact that their economic activities comply with the ancillarity principle as defined by point 20 of the R&D&I Framework, these research organisations shall not be considered as beneficiaries of aid.”

This is a significant statement because it confirms that research organisations can collaborate with undertakings in research projects of economic nature without losing their status as non-undertakings as long as the extent of their involvement remains below 20% of their annual capacity.

A complex project

The large number of participating companies is necessitated by the complexity of the research and the need for multiple interconnections between different technologies that have to fit together. “(103) Because of its breadth and level of scientific and technological complexity, the IPCEI Microelectronics requires a large number of partners to work together on alternative technologies.”

Paragraphs 99 to 125 of the Commission decision explain the multi-faceted complexity of the project and the different kinds of collaboration and integration: between companies, across borders, between technologies, and at different stages of research.

What is also rather unique to this project is its “governance” structure. According to the description in the Commission decision, (85) the governance of the IPCEI Microelectronics will supervise, monitor and assure the implementation of the IPCEI microelectronics at large. This especially concerns the monitoring of the implementation progress of individual partners as well as the consortium as a whole. The focus of the implementation is on both, technological advances as well as the spillover activities to disseminate these advances, which the individual beneficiaries have committed themselves.”

“(86) The governance will be performed by the Supervisory Board (SB) incorporating

– the Public Authority Board (PAB), with representatives of the Member States participating in the IPCEI Microelectronics;

– a representative of the European Commission; and

– the IPCEI Microelectronics Facilitation Group (FG).”

Although the Commission representative will have a “guest” status [indicated in paragraph 88 of the decision] and will be from DG CNECT, rather than DG Competition, I wonder whether all potential conflicts of interest will be avoided.

Diffusion of knowledge

With so many companies involved, there is also a non-negligible risk that the facilitation of a pan-European cooperation will come at the expense of competition. Perhaps it is for this reason that another unusual feature of the project is the establishment of a “facilitation group” [FG] that will “(94) be responsible to organize and foster the collaboration and the communication within the project and to third parties which can benefit from the IPCEI Microelectronics results but are not partners in the project. For this, effectively two instruments will be implemented by the FG: 1) The annual IPCEI Microelectronics conference, 2) the IPCEI Microelectronics website.” “(95) The annual IPCEI Microelectronics conference will be devoted to inform the interested expert community on the R&D-progress and the technical results of the IPCEI Microelectronics. The IPCEI Microelectronics conferences will be associated to the European Forum for Electronic Components and Systems (EFECS) that takes place annually in autumn (usually Nov.) at different locations in Europe. The EFECS is the largest conference for innovation in Microelectronics in Europe.”

In addition a “(96) central IPCEI Microelectronics website will be set-up shortly after the notification. It will foresee a restricted area for IPCEI Microelectronics participants only in order to organise the implementation of the project.” “(97) At the same time, the website will host public information about the project and all involved partners. Moreover, the website will serve as the dissemination and interaction channel of the IPCEI Microelectronics project to engage with non-IPCEI Microelectronics organisations. For this, the website will list all spillover activities to which the individual IPCEI partners have committed themselves and that are addressed to interested European organisations and companies outside the IPCEI Microelectronics. This information will be presented in form of an “Events Calendar” with the concrete dates and a brief description of the activity. The interested community will have the opportunity to register for participation at the activities directly with the IPCEI partner who is in charge of the specific activity, being it a roadshow, a hackathon or any other activity as committed by the individual partners. The website thus also will also serve as a basis for the annual reporting on the delivery of the committed activities. The FG will collect qualitative and quantitative information for each activity, i.e. who participated with which feedback and the immediate impact of the participation. The FG will aggregate this information within the annual progress reports and by this demonstrates the spillover impact of the IPCEI Microelectronics as a whole.”

Moreover, the notifying Member States submitted a number of “(127) concrete and detailed examples of spillover and dissemination for the benefit of European economy at large, not limited to the IPCEI Microelectronics consortium nor to the participating Member States.” “(129) The 29 partners of the IPCEI Microelectronics will publish themselves some of their R&D results in the various international scientific journals, and will present their results on numerous conferences. In addition, a large part of the software tools will be developed under an open source license and will be widely disseminated.”

In a marked departure from other R&D notifications, paragraphs 127 to 169 provide detailed information on the spillovers that are expected to be generated by the project and the dissemination activities that will be undertaken by the project partners.

Paragraphs 170 to 195 describe the research problems and risks involved. Then paragraphs 196 to 243 list the targeted outcomes and results.

Aid measures and eligible costs

In all four Member States the companies participating in the project were selected either through a call for proposals [France and Germany] or through a pre-project appraisal [Italy and the UK]. [Paragraph 244]

The total project costs are estimated to be over EUR 7.8 billion. EUR 5.3 billion will be spent on “first industrial deployment” [FID] and EUR 2.5 billion will be spent on the R&D that will precede FID.

Paragraph 250 presents four tables, one for each Member State, with the total costs per company [FID & R&D], the estimated funding gap and the amount of aid in both nominal and real figures. All data are given in ranges because the precise amounts are considered to be business secret.

Although most aid will be in the form of grants, some aid will also be delivered through loans. [Paragraphs 253-256]

FID is defined in paragraph 23 of the decision as the “development of new products with high research and innovation content and/or the deployment of fundamentally innovative production processes.” Please note, however, a slightly different definition of FID in footnote 1 of the Annex to the Commission’s IPCEI Communication: “First industrial deployment refers to the upscaling of pilot facilities, or to the first-in-kind equipment and facilities which cover the steps subsequent to the pilot line including the testing phase, but neither mass production nor commercial activities.” And that “the industrial deployment follows on from an R&D&I activity”.

It is difficult to know whether the different wordings of the two definitions entail any substantial differences in practice. The Commission does not seem to have approved any other case involving aid for FID. What is probably more interesting is that while “experimental development”, as defined in the GBER and the RDI Framework, includes pilot projects, FID goes beyond the pilot stage. Therefore FID comprises activities for which normal R&D aid would not be allowed.

In fact the decision later on confirms that FID covers costs other than those that are eligible under the RDI Framework. “(335) The industrial deployment concerns „the development of a new product or service with high research and innovation content and/or the deployment of a fundamentally innovative production process“ and does not constitute „Regular upgrades without an innovative dimension of existing facilities and the development of newer versions of existing products“, „the upscaling of pilot facilities, or [to] the first-in-kind equipment and facilities which cover the steps subsequent to the pilot line including the testing phase, but neither mass production nor commercial activities“, and „follows on from an R&D&I activity and itself contains a very important R&D&I component which constitutes an integral and necessary element for the successful implementation of the project“. In relation to the costs, the Commission has assessed, in particular, that they relate to „the capital and operating expenditures (CAPEX and OPEX), as long as the industrial deployment follows on from an R&D&I activity and itself contains a very important R&D&I component which constitutes an integral and necessary element for the successful implementation of the project“.

The decision refers at various points to “very important RDI component” or “very high RDI content” but does not use any explicit quantitative or qualitative criterion. However, it does state that beneficiaries demonstrated that their FID “constitutes an integral and necessary element for the successful implementation of the individual project” and that the Commission “assessed [it] against the most up-to-date publicly available information” concerning similar activities. [Paragraphs 335 & 340]


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Existence of State aid

As there is hardly any doubt that the public support to the project satisfied the criteria of Article 107(1) TFEU, the Commission established the existence of State aid in a mere seven paragraphs.

Compatibility with the internal market

The legal basis for the assessment of the compatibility of the aid was Article 107(3)(b): Aid for the support of important projects of common European interest. The Commission assessed conformity with both the eligibility and compatibility criteria of the IPCEI Communication.

With respect to conformity with the eligibility criteria, the Commission, in paragraphs 271-312, verified that:

  • The notified measure constitutes a “project” with an identifiable beginning and end and well-defined deliverables.
  • The measure is in the common European interest as it involves more than one Member State, working together on jointly defined objectives which are expected to generate benefits for other Member States as well.
  • The project is important, quantitatively and qualitatively, it is innovative and adds significant value.

The assessment of the conformity with the compatibility criteria is described in paragraphs 313-375.

The Commission began its compatibility assessment by clarifying that “(315) having regard to the conclusion that the general eligibility criteria are fulfilled by the IPCEI Microelectronics, […], the Commission considers that the presence of a market failure or important systemic failure, and the contribution to a common European interest can be presumed in this case.”

Necessity of the aid

Aid is necessary, according to point 28 of the IPCEI Communication, when it does “(317) not subsidise the costs of a project that an undertaking would anyhow incur and must not compensate for the normal business risk of an economic activity. Without the aid the project’s realisation should be impossible, or it should be realised in a smaller size or scope or in a different manner that would significantly restrict its expected benefits. [In addition] the aid application must precede the starts of the works, which is either the start of construction works on the investment or the first firm commitment to order equipment or other commitment that makes the investment irreversible, whichever is the first in time. […] the Member State should provide the Commission with adequate information concerning the aided project as well as a comprehensive description of the counterfactual scenario which corresponds to the situation where no aid is awarded by any Member State.”

“(319) The Member States have submitted information demonstrating that the aid has an incentive effect for all aid beneficiaries, i.e. that the aid will induce a change of the behaviour of the beneficiaries by means of allowing them to engage in their IPCEI-covered individual projects in their full ambitious scope and in the time span of the project as notified.”

“(320) In their majority, these counterfactuals affirm that absent the IPCEI Microelectronics public financing, some of the aid beneficiaries would not undertake their individual projects at all, and others would not undertake their projects as ambitiously and/or as fastly.”

“(321) These counterfactual scenarios are explained by the different types of especially high risks which the Member States associate with the IPCEI Microelectronics and therefrom with the individual projects (such as technological, financial, coordination, dissemination, market, etc.), which would have prevented the companies from undertaking the same projects absent the aid.”

“(322) The Member States also submit that some of the aid beneficiaries have brought forward certain deliberations of relocation of their activities outside the EU due to, for example, some offers they allegedly received from third countries or due to lower operational costs in those third countries locations, where they already operate certain production facilities.”

It is not clear whether the alleged foreign subsidies or the lower production costs abroad were enough to compensate for the higher risks of the project. And, at any rate, the possibility that companies could obtain benefits abroad implies the following. If those benefits could compensate for the higher risk, then the subsidies granted by the four Member States ought to merely match the foreign subsidies or merely offset the lower costs abroad. If those benefits could not compensate for the higher risk, they were moot and therefore irrelevant. In other words, if the foreign subsidies or the claims of lower costs abroad were credible, they should have set an upper limit for the subsidies granted by the four Member States.

Interestingly the Commission did not elaborate on those claims but went on to make the following observations:

“(323) In all instances where a counterfactual scenario was described in any way (see recitals (320) to (322) above), it was not demonstrated by the Member States by the appropriate evidence that said companies have clearly considered such possibilities as precisely defined and sufficiently predictable alternatives in their internal decision making at the time of taking the decision to apply for the public support. Moreover, it was not further substantiated by any financial calculations of the costs, revenues and profitability of such alternatives to be compared with the scenarios of the aided project.”

That is, the counterfactual was a situation with no project.

“(324) From the foregoing (recitals (319) to (323) above), the Commission concludes for the purposes of the application of the IPCEI Communication, requiring in point 29 that the counterfactual scenario to be considered should represent “a clearly defined and sufficiently predictable alternative project considered by the beneficiary in its internal decision making”, that for all aid beneficiaries there is no counterfactual scenario – i.e. the counterfactuals consist in the absence of alternative projects.”

“(325) In the absence of clearly defined and sufficiently predictable alternative projects, considered by the beneficiaries, the Commission further verified that the aid was necessary to induce the change of the behaviour of the aid beneficiaries by bringing their individual IPCEI-related projects to a sufficient degree of profitability, corresponding to the company’s weighted average cost of capital (“WACC”), as commonly applied by them as minimum internal benchmark for selection of projects. As represented by the funding gap analyses, submitted by the Member States for all aid beneficiaries, the aid is needed in order to cover the funding gap of the individual projects (the net present value of all these projects, calculated by using the respective WACCs as a discounting factor, is negative).”

“(326) The Member States also submit (also where the aid would not cover the full funding gap (see recital (250) above) that the aid helps to induce the change of the behaviour of the aided companies due to further strategic long-term considerations (such as to offer innovative and differentiating products, to preserve the EU-based technological, research and technical capabilities, strategic KETs importance, strategic security considerations, etc.).”

As shown by the tables in paragraph 250 of the decision, for some of the companies the remaining funding gap after the aid is considerable, with the aid covering less than 50% of the funding gap. This raises at least two important questions: why companies went ahead with the research and how much monetary value they attached to other “strategic” considerations?

No answers are provided by the Commission which “(327) consider[ed] that the Member States have sufficiently demonstrated that the aid measures do not subsidize the costs of the projects that the undertakings would anyhow incur and do not compensate for the normal business risks of the companies.”

Proportionality of the aid

The Commission explained that “(329) according to point 30 of the IPCEI Communication, in the absence of an alternative project, the Commission will verify that the aid amount does not exceed the minimum necessary for the aided project to be sufficiently profitable, e.g. by making it possible to achieve an internal rate of return (IRR) corresponding to the sector or firm specific benchmark or hurdle rate. According to point 31 of the IPCEI Communication, the maximum aid level should be determined with regard to the identified funding gap and to the eligible costs. The aid could reach up to 100% of the eligible costs, provided that the aid amount does not exceed the funding gap.”

“(330) The Member States have submitted, for all beneficiaries of aid, detailed calculations of the eligible costs for their IPCEI specific R&D&I and FID projects and funding gap calculations. In the individual project descriptions, the contents of the companies‘ individual R&D&I and FID projects falling into the scope of IPCEI Microelectronics are detailed.”

“(331) In its assessment of the eligibility of the costs, for the individual R&D&I projects, the Commission has, firstly, verified individually for all aid beneficiaries, that their projects contain R&D&I of major innovative nature, going beyond the state-of-the art in the sector concerned.” Here there is a footnote that states: “42. On this point, the requirements of the IPCEI Communication are more ambitious than in the R&D&I State aid framework.“

I suppose the word “ambitious” here means more rigorous or more demanding. Although it is true that the RDI Framework does not require proof that the RDI is of “major innovative nature”, it is not clear how in practice the IPCEI Communication is “more ambitious” than in the RDI Framework, given that the Framework provides in point 74, concerning the proportionality of aid, that “the acuteness of the market failure, such as the expected externalities in terms of dissemination of knowledge” is taken into account.

But more importantly, whereas the RDI Framework has two ceilings on maximum aid – the aid intensities and the funding gap – the only ceiling imposed by the IPCEI Communication on the amount of aid is the funding gap. The two ceilings in the RDI Framework apply to individually notified aid.

Moreover, the RDI Framework lays down different rates of maximum aid intensity, depending on whether the research is fundamental, industrial, or experimental. The IPCEI Communication does not make such distinctions. All types of research are supported at the same rate which is the funding gap.

Prevention of undue distortions of competition and balancing test

This section shows that the Commission was seriously concerned about the competition implications of too many companies cooperating on the same project.

“(353) The Member States submit in their notifications of the measures their reasoning as to why State aid is the appropriate policy instrument to support the IPCEI Microelectronics. In their view, due to the exceptional size of the project and the synergies it requires from the various partners, the IPCEI Microelectronics could not be achieved and such technological breakthroughs could not be created without the support of the Member States involved in the financing of this project; otherwise the participating companies would have focused on their own roadmaps to the detriment of innovations whose spillover effects will largely benefit EU ecosystems.”

“(357) The Commission’s analysis of undue distortions to competition is always specific to the particular case. The IPCEI at hand involves an unusually large number of companies, each with several products present in various product markets. Key Enabling Technologies by nature diffuse to several applications along the value chain, which further increases the number of markets potentially affected by the State aid measures. For this reason, in this particular case, the Commission adopted a two-step approach, as described below, in order to identify potential significant competition distortions which might result from the aid measures.”

“(358) First, the Commission filtered, based on uniformly available metrics, the companies for which the risk of competition distortions may be considered more likely. Second, for the group of companies where the first step resulted in the conclusion that the competition distortions could be more likely, a more detailed assessment of market conditions and competitive forces has been carried out to assess the risk of competition distortions.”

In the first step the Commission used two indicators:

“Indicator 1: The share of the company’s production value in EU production in the PRODCOM category over the last three years with data available. The reason behind this indicator is that aid flowing to companies with larger sectoral production shares is likely to be more distortive to competition because those beneficiaries may use the aid to expand an already significant production share.”

“Indicator 2: The ratio of aid on annual production value. This indicator is an approximation for the ability of the aid to increase the production share of the recipient at the cost of competitors.”

“(360) Taken together, the two indicators filter the companies that have been showing high productions shares in the EU in the aided products and receive an amount of aid that is likely to expand their production share further. Higher values on these two indicators may also imply a higher potential risk of market foreclosure and dominance.”

“(362) In a second step, the Commission assessed the detailed information about the competitive landscape these companies face, as provided by the Member States, including the risk of market foreclosure and dominance.”

As a result, additional dissemination and licensing-out obligations were imposed on the companies that were more likely to distort competition. [Paragraphs 364-367]

The acceptance of those obligations led the Commission to conclude that “(368) the overall positive effects of the IPCEI Microelectronics encompass its concrete contribution to several objectives of common European interest (as specified in recitals (281) to (290) above) and its benefits of wider relevance to the EU economy, as ensured by the combination of the spillovers at the level of the IPCEI Microelectronics with the ones at individual companies‘ level (see recitals (293) to (299) above), including the additional actions as specified in recitals (364) to (367) above.”

“(369) The Commission considers therefore that the possible negative effects of the IPCEI Microelectronics in terms of potential distortions of competition are limited and outweighed by the overall positive effects of the IPCEI Microelectronics.”

On the basis of the above analysis the Commission concluded that the aid was compatible with Article 107(3)(b).

Conclusion

This is an important case. It is an IPCEI funded by four Member States, it engages 29 partners, it involves aid to first industrial deployment, the proportionality of aid was ensured with the use of the funding gap method, it contains commitments on knowledge diffusion to mitigate any negative impact on competition and it establishes a governance structure in which the Commission also participates as an observer.

————————————

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

https://ec.europa.eu/competition/state_aid/cases1/201952/277367_2120330_254_2.pdf.

[2] See Commission press release:

https://ec.europa.eu/commission/presscorner/detail/en/ip_19_6705.

[Photo by Laura Ockel on Unsplash]

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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 presently holds positions at the College of Europe and the University of Maastricht. 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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