Introduction
According to the latest edition of the State aid Scoreboard, in 2021, Member States granted EUR 14 billion of aid to support regional development. That amount corresponded to about 10% of the total non-crisis aid. What is perhaps more interesting is that close to EUR 12.5 billion or 90% of the total regional aid was granted on the basis of the General Block Exemption Regulation [GBER]. The amount of EUR 12.5 billion represented about 20% of the total amount of GBER-based aid.
Individually notified regional aid is rather rare. Since 2014, the Commission has approved not more than 35 individually notified measures. The vast majority of them concerned aid to incentivise the location of otherwise profitable projects in assisted regions. In the absence of aid, investment in those projects would have taken place in other regions.
Such a case was the subject of Commission decision SA.63328 which approved State aid for SK On Hungary [SKOH] to support its investment in a new battery plant. SKOH is owned by the South Korean SK Group.1 The investment took place in Fejér in Hungary that is part of the NUTS 2 region of Central Transdanubia, a region eligible for aid under Article 107(3)(a). The standard aid rate for that region is 35%. The project was expected to create about 1,900 direct jobs and about 950 indirect jobs. This was the third battery plant established in Hungary by SKOH.
Because of the complexity and importance of this case, this article is in two parts.
Part I: The project and the choice of location
Eligible costs and aid amount
The total notified eligible investment costs for the project amounted to HUF 592,630 million (EUR 1,623 million) in nominal value, or HUF 556,387 million (EUR 1,524 million) in discounted
value. The exchange rate at the time of the decision was 1 EUR = 365.13 HUF, while the discount rate was 2.94%.
The eligible costs were the costs for buildings, plant, machinery, and other equipment. Only new assets were accepted as eligible expenditure. Lease costs or intangible assets were excluded from eligible costs.
The aid was in the form of a non-refundable grant that was provided in the context of a GBER-based measure [SA.63819]. However, because it exceeded the relevant threshold for regional aid, it had to be individually notified to the Commission.
The aid amount was HUF 76,362 million (EUR 209 million) in nominal value or HUF 71,097 million (EUR 196 million) in discounted value. The aid was to be paid out in several instalments over the period 2022-2029.
Cumulation
The Commission also checked that the SK Group had not received aid for another initial investment in the same NUTS 3 region over the three-year period preceding the date of the start of work on the project. This is because all State aid in the same NUTS 3 region for a three-year period has to be cumulated.
Cumulation with de minimis aid was also prohibited for the same eligible costs.
Scaling-down of aid
Regional aid for projects exceeding EUR 50 million had to be scaled-down on the basis of the formula that was laid down in the GBER before its revision of 30 June 2023. For individually notified aid, the formula that had to be used was defined in the Regional Aid Guidelines [RAG]. The resultant maximum aid amount was HUF 71,450 million (EUR 196 million) in 2021 discounted value.
The calculation of the permissible maximum amount of aid [using the total discounted eligible costs of EUR 1,524 million and the regional aid intensity of 35%] was as follows:
0-50 million: 35% x 50 = 17.5 million
50-100 million: 35% x 0.5 x 50 = 8.75 million
100-1524 million: 35% x 0.34 x 1424 = 169.5 million
Total = 195.75 million = ~EUR 196 million
While the maximum permissible amount of aid was EUR 196 million, the actual amount was a bit less resulting in aid intensity of 12.78 % in discounted values.
No closure or relocation
Regional aid rules prohibit aid for the purpose of inducing closure of other activities and relocation from one EEA region to another. Therefore, SKOH also confirmed that it had not closed down (at group level) the same or similar activity in the EEA in the two years preceding
the aid application and that it did not intend to close down the same or similar activity elsewhere in the EEA within a period of up to two years after the completion of the project.
Maintenance of the investment, own contribution, environmental impact assessment
The Commission also verified that SKOH committed itself to keep the investment for at least five years, that it would contribute at least 25% of the costs with its own resources free of any public funds and that it would undertake an environmental impact assessment for the project, as required by the RAG.
Incentive effect
Large regional projects are subject to intense scrutiny by the Commission in order to confirm that the aid has an incentive effect. That is, the aid must be capable of inducing the beneficiary to make the investment, instead of not investing, or to invest in the assisted region, instead of an alternative region.
First, the project must satisfy the “formal” incentive effect which is that the application for the aid precedes the start of the project. This was indeed the case with the SKOH project.
Next, the aid recipient has to demonstrate that the project would not be undertaken without State aid. There are two ways to prove that. The recipient undertaking has to show either that the project has a negative net present value in any location, or that the project is less profitable [or even loss-making] in the assisted region in relation to being more profitable or profitable in an alternative location. Then the maximum permissible amount of aid is that which turns a negative NPV into just positive, in the first case, or bridges the difference of NPV between the two locations, in the second case.
Paragraphs 35-76 of the Commission decision, explain the process by which SKOH chose the assisted region in Hungary. SKOH, first, decided on the size of the project, in the context of its strategic plan, and then searched for suitable sites. The evaluation of the various candidate locations involved both qualitative and quantitative criteria. The search team scoured many potential locations in several European countries and ranked them in terms of criteria such as distance from the main customers, wage costs, infrastructure access, etc. The search team also used qualitative criteria such as manufacturing environment, workforce, utilities, plot features, zoning rules, etc.
In the end, the financial results between the site in Hungary and the best alternative location in the EEA [which was kept a business secret] was as follows:
NPV (million, euro):
Best alternative location in the EEA without State aid: [350-360]*
Site in Hungary without aid: 126
Locational disadvantage of Hungarian site without aid: [220-240]*
Site in Hungary with aid: 290
Locational disadvantage of Hungarian site with aid: [60-70] *
* The precise number is not published for being a business secret.
The discount rate used to calculate the NPV was [7-8%] which was the WACC of SKOH.
The alternative location was also in an assisted area eligible for State aid under Article 107(3)(a), but at the lower rate of 25%. Its advantages in relation to the Hungarian site were lower construction and operational costs over the life of the project [10-15 years] due to lower labour and utility costs. However, the Hungarian site had an advantage in terms of lower land acquisition costs and lower corporate taxation of 9%.
The numbers above indicate that this case is very unusual. Aid was granted to a project that was profitable without aid. However, the purpose of the aid was to induce SKOH to locate in Hungary rather than the more profitable site in the other country. And yet, the aid did not bridge the full difference in profit between the two sites.
The Commission decision also presents the reasons why SKOH decided in favour of the Hungarian site despite its locational disadvantage of [EUR 60-70] million.
“(72) A first element was the possibility of sharing operations know-how and HR knowledge, gained from the experience of operating a manufacturing plant in the Hungarian business environment in Komárom. This can allow an easier deployment of skilled workers (operators) for setting up the processes in the new plant. Operational risks, like delays in production, can be thereby be mitigated. Furthermore, SKI considered that such experience would also ease the hiring process of qualified workforce.”
“(73) Secondly, SKI considered that the risk of delays and shortages in [[…]], which is inherent to the establishment of a new manufacturing plant, can be mitigated if the manufacturing plant is aligned with an already existing one (increased flexibility).”
“(74) Thirdly, SKI valued its already established network with Hungarian local providers as regards […]. Thus, the existing experience and network can mitigate risks regarding the planned date for start of production. In [EEA country of the alternative location], SKI would have to conduct research to identify adequate providers.”
“(75) In addition, providers in Hungary already have experience in the batteries business. Thus, no additional time or effort is required in that regard, which is important to SKI, in view of the tight project schedule.”
“(76) Finally, the administrative efficiency and political stability, which SKI experienced during their establishment and operation of their plants in Hungary contribute to SKI’s confidence that the project schedule can be met.”
The last three of the five reasons quoted above highlight the importance of familiarity of investors with the local business and regulatory environment and also the importance of business-friendly administrative procedures.
However, the first two of the five reasons above also raise questions about how investors identify qualitative advantages and how they take them into account in the choice of the location of the investment. Naturally, financial calculations of NPV exclude qualitative or non-
quantifiable advantages and disadvantages. The problem is that we do not know whether those were the only qualitative advantages that were taken into account and whether they could have been sufficient to persuade SKOH to locate in Hungary even in the absence of aid.
1 The full text of the Commission decision can be accessed at:
