Introduction
Most State aid to “large” investment projects is granted by the Member States in Central and Eastern Europe. Moreover, most of the aid goes to induce companies to locate their projects in those countries and to overcome regional handicaps that make the investments less profitable or even loss-making than in other locations.
By contrast, regional aid granted to large projects by older Member States is relatively rare. In addition, it is also rare for aid to aim to make a project profitable when it is unprofitable in any location in the EEA.
Recently, the Commission examined such a project in case SA.100238. It concerned a regional investment grant to Cobre Las Cruces [CLC] to convert an existing mono-metallurgical refinery, located in Andalucia, into a new poly-metallurgical refinery.1 Spain notified the aid measure in October 2021. The Commission approved it two years later in August 2023 and the decision was made public in February 2024.
CLC is a large enterprise producing copper. It is owned by a Canadian mining company. At its Andalucian plant, CLC produces copper with 99.999% purity. As raw material it uses ore that is mined locally. However, the local deposits are depleted and CLC needs to invest in a new technology to produce copper from lower grade ore. The proposed investment will also produce other metals such as zinc, lead and silver. Without the investment, the plant would have to close down with a loss of about 170 jobs. The envisaged investment would create about 70 new jobs.
CLC intends to invest in both the local mining activities and the refinery production. However, only the refinery production is eligible to receive State aid.
Fundamental change
Spain argued that the investment in the new process constituted a “fundamental change in the production process” in the meaning of the Regional Aid Guidelines [RAG] and the GBER. The aid would be granted in the context of a GBER-based measure but it had to be notified individually because the project qualified as “large” and the scaled-down amount of aid exceeded the GBER threshold for individual notification.
Eligible costs
The notified eligible investment costs amount to approximately EUR 193.8 million in nominal value. In discounted value, the total eligible investment costs are EUR 190.1 million. The discount rate at the time of notification was 0.55% [= base rate of – 0.45% + 1%]. Only the investment costs for the refinery were notified. The costs for the mine were not eligible.
Aid intensity and amount of aid
The maximum aid intensity in that region is 30%. The region qualifies for regional aid under Article 107(3)(a) TFEU. The amount of aid in nominal terms is EUR 26.7 million, made up of a national grant of EUR 23.3 million and a grant from the regional authority of EUR 3.4 million. In real (discounted) terms, the total aid is EUR 26.2 million [EUR 22.8 million + EUR 3.4 million], corresponding to an actual aid intensity of 13.8% [= 26.2/190.1]. After the application of the scaling down-mechanism, the maximum permissible aid amount in that region, for a standard rate of 30%, is EUR 31.7 million [= (50 x 0.3) + (50 x 0.3 x 0.5) + (90.1 x 0.3 x 0.34)], corresponding to a maximum rate of 16.67% [= 31.7/190.1]. Therefore, amount of aid to be granted remains below the maximum adjusted aid amount.
This is because there are two aid caps in the RAG; the aid intensity rate and the amount of aid derived from the net present value [NPV] calculation that can bring the profitability of the project to an acceptable level.
Need for aid
The cost of the whole project [mine & refinery] is EUR 501.5 million, made up of EUR 195 million for the refinery and EUR 306 million for the mine.
According to the calculations of CLC for the whole project [mine & refinery], the NPV of the whole project over a 20-year period is EUR 82.3 million. The CLC’s WACC is 8%, while the derived IRR is 10.7%. Since the IRR exceeds the cost of capital, the project should be feasible without aid. However, the hurdle rate for CLC is 12%. Therefore, the project would not have been approved without aid. The notified aid raises the NPV to EUR 121.7 million and the IRR to 12.2% making the project acceptable to CLC. This, of course, raises the question whether the state should reduce the risk of otherwise viable projects and make them more profitable for shareholders. Apparently, in the absence of aid, CLC would close down the refinery.
Compatibility of the aid with the internal market
Since the two grants were undoubtedly State aid, the Commission moved quickly to assess their compatibility with the internal market. The rest of this article reviews only the salient
issues which relate to the special features of the project [its relative profitability, its qualification as a fundamental process transformation, the proportionality of the aid, its impact on the environment, etc].
Fundamental process transformation
Regional aid may be granted for initial investment or expansion of existing investment. However, according to point 19 of the RAG, initial investment also includes a fundamental change in the production process. The Commission accepted that the project would bring about such a change because in its current state the refinery can produce only copper from rich ore. In the future it will be able to produce several other metals and copper from lower quality ore or recover copper from other sources.
Incentive effect
The formal incentive effect was satisfied as the project did not start before the application for the aid.
With respect to the substantive incentive effect, the Commission began its analysis by recalling the two scenarios it uses to determine the presence of incentive effect. In this case it used scenario 1 according to which the investment would not take place in any location without aid. The decisive element was the fact that the aid raised the IRR from 10.7% to 12.2% which exceeded slightly the hurdle rate for new investments undertaken by CLC.
Proportionality
The Commission recalled in its decision that “(120) as a general rule, the Commission will consider notifiable individual aid to be limited to the minimum, if the aid amount corresponds to the net-extra costs of investing in the area concerned, compared to the counterfactual in the absence of aid, with maximum aid intensities as a cap (paragraph 95 RAG). For scenario 1 situations (investment decisions), the aid amount should therefore not exceed the minimum necessary to render the project sufficiently profitable, for example to increase its IRR above the normal rate applied by the undertaking in other investment projects of a similar kind or, when available, to increase its IRR above the cost of capital of the beneficiary as a whole or above the rates of return commonly achieved in that industry (paragraph 96 RAG). Member States must demonstrate proportionality with documentation, such as that referred to in paragraph 70 RAG.”
In this case the aid was proportional because it did not go beyond what was necessary to make the project acceptable to CLC and, at any rate, it did not exceed the maximum permissible intensity rate of 16.7%.
Negative effects
Then, the Commission examined the possible negative effects of the aid. For this purpose it had to define the relevant product and geographic market. It found, in particular, that the aid would not create overcapacity in a market that was in absolute decline.
It also found that the aid had no counter-cohesion effect, since this was a possibility only in scenario 2 situations, where the aid recipient has a choice between several locations. CLC would not invest in any other region in the EEA. In addition, there was no relocation from another region and, interestingly, the Commission noted that job losses at a related plant in Finland were caused by the depletion of the mine there.
What is also interesting is that the Commission decision makes no reference to the conformity of the aid with other EU law – a check that is now standard for all Commission assessments. It must be said, however, that the decision did mention that the Andalusia plant had fulfilled all the environmental impact requirements.
Conclusion
Since the notified measure complied with all of the requirements of the RAG, the Commission considered the aid to be compatible with the internal market.
