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 II: Assessment of the compatibility of the aid
Since there was no doubt that the measure constituted State aid, part II of this article focuses on how the Commission assessed the compatibility of the aid with the internal market. This was carried out on the basis of the RAG 2014-2021.
Promoting regional development through real and sustained contribution
Relying on the indicators in the RAG, the Commission established that the objective of the measure was to support regional development.
Substantive incentive effect [“scenario 2” of the RAG]
“(109) The Member State must provide clear evidence that the aid has a real impact on the investment choice or on the choice of investment location. To that end, the Member State must provide a comprehensive description of the counterfactual scenario in which no aid would be granted to the beneficiary. The Commission must verify that this alternative scenario is realistic and credible.”
“(110) Paragraph 71 of the RAG indicates that for scenario 2 […] the Member State could prove the incentive effect of the aid by providing company documents that show that a comparison has been made between the costs and benefits of locating the investment in the assisted region, and the costs and benefits of locating the investments in the alternative location(s).”
“(111) To verify the viability of the project in a scenario 2 context, all relevant costs and revenues have to be taken into account, with the exception of possible subsidies available in the alternative location, where this alternative location is in the EEA.”
“(112) The financial business case calculations comparing the two locations indicated that [city of the alternative location] was superior to Iváncsa in terms of economics: the NPV of the Iváncsa investment was calculated at EUR 126 million (without aid), while for the [city of the alternative location] investment it was calculated at EUR [350-360] million (without aid). […] The prospect of State aid amounting to EUR 209 million, in nominal value, included in the indicative offer received on 19 January 2021 from the Hungarian authorities, was decisive for the final location decision. The aid would compensate, for a large part, the profitability disadvantage associated with Iváncsa, and would decrease the cost disadvantage from EUR [220-240] million to about EUR [60- 70] million in NPV. […] In addition, SKI considered qualitative factors when selecting Iváncsa, such as the established relations with the Hungarian authorities, which have been developed in the course of the earlier investment as well as the possibility of an alignment with the existing plant and sharing of know-how and HR knowledge.”
“(114) According to paragraph 68 of the RAG, a counterfactual scenario is credible if it is genuine and relates to the decision-making factors prevalent at the time of the decision by the beneficiary regarding the investment. The Commission notes that the calculations and cost estimates for the two locations were carried out at the same level of accuracy and are based on the same types of cost items and characteristics of the investment project. SKI calculated all the costs, expenditures and revenues expected over the useful lifetime of the Investment Project ([10-15] years) for both the Hungarian and the [EEA country of the alternative location]locations. Then, it discounted the expected cash flows to 2021 present value and compared the two locations.”
“(115) The newly built plant in either location (Hungary or [EEA country of the alternative location]) would produce the same products, at the same capacity, for the same geographical market, using the same technology, and the products would be sold at the same price. Consequently, sales revenues are the same for the two location options.”
“(116) The advantage of the [EEA country of the alternative location] location are lower operating costs, in particular due to lower labour and utilities costs. The Hungarian location, on the other hand, benefits from reduced costs of land plot and lower corporate income tax rate.”
“(118) Hence, with regard to the substantive incentive effect, the Commission considers – based on genuine, contemporary, and realistic evidence submitted by the Hungarian authorities – that the aid effectively has an impact on the choice of location of the investment. By reducing the viability gap in favour of [city of the alternative location], [EEA country of the alternative location], the aid was decisive in triggering the location decision in favour of Iváncsa, Hungary.”
Need for state intervention and appropriateness of the aid
In view of the fact that the chosen site was in an Article 107(3)(a) area, the Commission concluded that the aid was necessary to remedy regional handicaps.
“(125) According to paragraph 50 of the RAG, the notified aid measure must be an appropriate policy instrument to promote regional development. The RAG underline that an aid measure will not be considered compatible if other less distortive policy instruments or other less distortive types of aid instruments are available. Section 3.4 of the RAG therefore introduces a double appropriateness test. Under the first appropriateness test, Member States, in particular, have to identify the bottlenecks to regional development and the specific handicaps of firms operating in the target region, and to clarify to what extent bottlenecks to regional development could also successfully be targeted by non-aid measures. Under the second appropriateness test, the Member State has to indicate why – in view of the individual merits of the case – the chosen form of regional investment aid is the best instrument to influence the investment or location decision.”
“(126) As regards the first test, of whether State aid is an appropriate policy instrument to achieve the development sought, the Commission notes that the hardship of Central Transdanubia, in general, is confirmed by its status as a region eligible for regional aid in accordance with Article 107(3)(a) TFEU. […] The Commission considers that infrastructural developments and other general measures alone are insufficient to reduce the given regional disparities.”
This statement repeats what was said earlier about the need for state intervention and does not really address the question whether the regional handicaps could be remedied through non-aid means, apart from reiterating axiomatically the general views of the Commission.
“(127) As regards the question of whether a cash grant constitutes an appropriate aid instrument, the Hungarian authorities argue that investment aid in the form of a direct pecuniary advantage (direct grant) is necessary to incentivise the beneficiary to carry out the investment in Hungary, rather than in the alternative counterfactual location in [EEA country of the alternative location]. The aid in the form of a direct pecuniary advantage (cash grant) allows the beneficiary to increase the competitiveness of the Iváncsa (Hungary) establishment, when compared to the alternative investment site in [city of the alternative location]( [EEA country of the alternative location]).”
This statement is also incomplete. It does not really explain how the aid was to increase competitiveness.
“(128) The Commission considers that, as argued by the Hungarian authorities and in line with previous Commission practice, with other forms of aid, e.g. guarantees or soft loans, it would, indeed, be more difficult to bridge the viability gap of EUR [220-240] million, between the two alternative investment locations and, thus, to offer the necessary incentive to attract the investment to the ‘a’ area in question. The Commission accepts that the chosen aid is adequate to achieve the desired objective, namely to provide the amount of aid necessary to bridge the viability gap between the two locations and thus support an investment contributing to the development of the ‘a’ area concerned.”
The assertions of the Commission in paragraph 128 are trivially true. Aid in all forms must be converted into the gross grant equivalent [GGE] in order to establish that it does not exceed what is necessary to incentivise the investment. Therefore, regardless of the form of the aid, it is the GGE that matters. Moreover, regional aid in any form is supposed to bridge the viability gap.
In other large investment projects, Hungarian authorities typically offered aid in a mix of cash grants and relief from income tax. But, the amount of income tax relief that can actually be realised depends on future profits. Therefore, the beneficiary undertaking experiences the positive impact of that kind of aid at a point in the future. And, of course, there is no certainty that profits will be realised. Even though the GGE of cash grant today and of an equivalent future tax relief are the same, their usefulness in a world of rapid changing technology can be different. Perhaps this is the real reason that the aid, unusually, was granted in cash and why the alternative location in the other country was not chosen even though on paper the investment there would have been able to be self-financing and more profitable.
Proportionality
First, the Commission explained that “(131) as a general rule, notified individual aid will be considered to be limited to the minimum, if the aid amount corresponds to the net extra costs of implementing the investment in the area concerned, compared to the counterfactual scenario in the absence of aid. Pursuant to paragraph 80 of the RAG, in scenario 2 situations (location incentives), the aid amount should not exceed the difference between the NPV of the investment in the target area with the NPV in the alternative location, while taking into account all relevant costs and benefits. However, where the alternative location is in the EEA, subsidies granted in that other location are not to be taken into account.”
“(132) On the basis of the viability gap (described in recital (112)) the proportionality test is met. The notified aid of HUF 76 362 million (EUR 209 million) in nominal value represents EUR [160- 170] million in present value using the beneficiary’s discount rate of [7-8%]. The comparative calculations concluded that an investment in Iváncsa would incur a cost disadvantage in comparison to an investment in [city of the alternative location] of about EUR [220-240] million (NPV). The aid therefore does not exceed the calculated cost disadvantage of EUR [220-240] million between the two possible locations. Moreover, in line with paragraph 80 of the RAG, the comparison does not take into account any aid offered in the alternative location in [city of the alternative location](recital (64)).”
“(133) In addition, according to paragraph 107 of the RAG, the aid intensity must not exceed the permissible adjusted aid intensity, calculated on the basis of eligible costs. Sections 3.6.1.1 and 3.6.1.2 of the RAG explain which investment costs can be taken into account as eligible costs. In the present case, section 3.6.1.1 applies as the eligible costs for the proposed investment aid are calculated on the basis of investment costs. The acquired assets will be new and no leasing costs or intangible assets are taken into account. The investment concerns an initial investment in the form of the setting-up of a new establishment. Thus, the Commission notes that the eligible costs are established in accordance with the RAG (see also recital (122)).”
“(134) The applicable regional aid ceiling for large undertakings in Central Transdanubia is 35% (recital (5)). In view of the expected higher distortion of competition and trade, the maximum aid intensity for large investment projects must be scaled down using the mechanism as described at paragraph 20(c) of the RAG. As indicated in recital (24), the maximum possible aid amount for the Third Battery Plant is HUF 71 450 million (EUR 196 million) in discounted value and corresponds to an aid intensity of 12.78 %. The notified aid amounts to HUF 71 097 million (EUR 195 million) in discounted value. It therefore does not exceed the maximum aid amount that results from applying the scaling down mechanism and the maximum aid intensity applicable in the region.”
Therefore, the aid satisfied the principle of proportionality.
Avoidance of undue negative effects on competition and trade
No manifest negative effect
The Commission found that there was no manifest negative effect on trade and competition for the following reasons:
- The adjusted aid intensity ceiling was not exceeded.
- The aid did not create overcapacity in a market in absolute decline.
- There was no counter-cohesion effect [the aid intensity of the alternative region was lower].
- No relocation had occurred or was likely to occur.
- The aid did not increase or preserve substantial market power. Indeed, given that without the aid the investment would have gone ahead in the alternative location, the impact on the market would have been the same.
Balancing of positive and negative effects of the aid
The Commission is required by the case law of the Court of Justice to balance the positive and negative effects of the aid. As shown below, in practice it reiterates the positive effects of the aid and, if there are no undue distortions of trade and competition, it concludes that the positive effects outweigh the negative effects.
“(155) The assessment of the above requirements showed that State intervention is needed, that the aid is appropriate, that the counterfactual scenario presented is credible and realistic and that the aid has incentive effect and is limited to the amount necessary to change the location decision of the beneficiary. By triggering the location of the investment in an assisted region, the aid contributes to the regional development of Central Transdanubia. The assessment also showed that the aid has no manifest negative effect: it does not lead to the creation or maintenance of overcapacity in a market in absolute decline, or to excessive effects on trade, it respects the applicable regional aid ceiling, it has no manifest counter-cohesion effect, and it is not causal for the closure of activities elsewhere and their relocation to Iváncsa.”
“(157) In the light of the above considerations, and as the aid is limited to the amount necessary to change the location decision and thus does not make available more resources to the aid beneficiary than needed to trigger the location decision, the Commission considers that the aid has no undue negative effect on competition.”
“(158) As the aid respects the applicable regional aid ceiling, and the aid measure has no counter-cohesion or relocation effects, the Commission considers that its effects on trade are limited and not contrary to the common interest.”
“(159) The aid however has substantial positive effects on the regional development of Central Transdanubia, in particular through the employment (job creation) and knowledge and technology transfer (see recital (104)).”
“(160) As the aid meets all minimum requirements, has no manifest negative effects nor undue negative effect on competition, and only very limited effects on trade, the Commission considers that the substantial positive effects of the aid on the regional development of Central Transdanubia, and in particular the employment, knowledge and technology transfer clearly outweigh any negative effects.”
No breach of EU law
The Commission is also required by the case law of the Court of Justice not to authorise aid that infringes any other provision of EU law.
The Commission explained that “(163) it does not result from the notification that the aid or the conditions attached to it, or the economic activities facilitated by the aid, could entail a violation of a relevant provision of Union law. In particular, the Commission has not sent a reasoned opinion to Hungary on a possible infringement of Union law that would bear a relation to this case and the Commission has not received any complaints or information that might suggest that the State aid, the conditions attached to it or the economic activities facilitated by the aid might be contrary to relevant provisions of Union law.”
Therefore, the Commission approved the aid measure.
1 The full text of the Commission decision can be accessed at:
