Operators of research infrastructure do not benefit from State aid, if they fully pass on the aid to the users of the infrastructure. The amount of aid must be quantified.
Introduction
The beneficiaries of State aid to support R&D are normally those who carry out research. However, in the case of aid to research infrastructure there may be two categories of beneficiaries: the operators or managers of infrastructure and the users of infrastructure. Then aid has to be assessed at both of the two levels. In some situations, operators are requested to act as intermediaries to channel the aid to users. When State aid is passed on, two questions arise. First, do the intermediaries retain any benefits? And, second, how much aid is eventually received by the final beneficiaries? In the case that is reviewed below the Commission concluded that there was no State aid either at the level of intermediaries or the final beneficiaries.
Lithuanian Operators of Research Infrastructure
Lithuania notified a measure whose objective was to transfer state-owned buildings to two science and technological parks [STPs], namely, Kaunas STP and Klaipeda STP, under a 20-year contract. The Commission examined the measure and authorized it in decision SA.41540.[1]
Under the measure, STPs manage and rent the buildings to SMEs which engage in applied research and implementation of innovative activities. The STPs are prohibited from transferring ownership to anyone else or mortgaging the buildings.
Before the notification, the two STPs had also been leasing buildings owned by the state. The leases were set at market prices determined through public tender procedures. The buildings were used to provide facilities and to offer innovation, advisory and consultancy services to SMEs and to support research projects.
Under the notified measure, STPs are exempted from payment for the lease. The question that arose was whether the exemption constituted State aid.
Kaunas STP and Klaipeda STP are the only STPs in Lithuania that operate in state-owned buildings. Other STPs own their buildings or rent them from private entities. Lithuania intends to extend the same treatment of no payment to any STP that rents buildings from the state.
The purpose of the notified measure is to pass all aid [that is equivalent to the forgone rent] in the form of de minimis aid to the final beneficiaries which will be the incubated SMEs. No advantage will remain at the level of STPs.
Kaunas STP was established as non-profit public law legal entity. Its main fields of activity are the provision of business and innovation support services to knowledge-intensive companies and incubation services to newly established companies. Klaipeda STP was also established as non-profit public law legal entity. It specialises in marine transport and environmental research.
According to the Commission decision, the two beneficiary STPs will not have to pay rent during the 20-year contract. The total amount of rent is estimated at EUR 5.9 million on the basis of historical data and reasonable projections.
The advantage of the not paying rent will be fully passed on to incubated SMEs in the form of free or cheaper services. The total monetary value of the free or cheaper services will not exceed the de minimis threshold of EUR 200,000 per undertaking per three-fiscal year period.
The STPs will monitor compliance with the de minimis rules and they will be responsible for clawing-back any aid amount exceeding the de minimis threshold. The estimated annual average value of the rent and services to be passed-on to an SME is relatively small varying between EUR 2,000 and EUR 5,300.
The services provided by the two STPs generally fall into the following eight categories:
- access to physical infrastructure and services related to its maintenance;
- technical and technologic services;
- technologic partnership services;
- innovation management services;
- support services for access to innovation funding;
- intellectual property management services;
- support for dissemination of scientific and technical information;
- innovation promotion services.
The prices of consultancy services provided to the SMEs by the STPs are calculated on the basis of their expenses which on an hourly basis vary from EUR 15/hour to EUR 17/hour.
Commitments and provisions for claw-back of excess aid
Lithuania made the following commitments:
First, at the beginning of each year both STPs will make publicly available on their websites the following information:
- the price lists of all services and rental rates;
- the rules and conditions under which SMEs will be admitted for incubation;
- the price discounts for services and rent.
Second, the Lithuanian authorities will perform annual audits in each STP. The audits will be carried out by independent auditors and will verify and compare:
- the amount of the rent foregone by Lithuania;
- the amount resulting from the difference between the prices paid by the incubated SMEs to the two STPs and the corresponding market prices, multiplied by the actual volumes of services effectively provided by each STP.
Should the comparison between (1) and (2) reveal the existence of an advantage remaining at the level of a STP, such an advantage will be offset on an annual basis in the year which follows the audit period either by means of a claw-back mechanism to pay the state or by means of an increase in the volume and diversity (resulting in an increase of the total value) of the services to be provided to the incubated SMEs in the following year. At the end of the 20-year period, any economic benefit remaining at level of each STP will be returned to the state budget.
Third, a de minimis declaration will be made by the incubated SMEs. Each STP commits to verify on an annual basis whether the conditions for de minimis aid continue to be fulfilled by each of the incubated SMEs. The annual de minimis amounts will be verified by external auditors.
Assessment of the existence of State aid
The Commission considered the existence of State aid, first, at the level of the two STPs and, then, at the level of the incubated SMEs.
There is no doubt that the two STPs perform economic activities. Despite their non-profit status they are undertakings. There is also no doubt that the measure transfers state resources and that it is selective. The question is whether the two STPs derive an advantage and whether the measure has the potential to affect trade and distort competition.
With respect to the existence or not of advantage, the Commission states that it “(43) […] recognized in point 22 of the R&D&I Framework that under certain conditions, research infrastructure is not considered to be a beneficiary of State aid if it acts as a mere intermediary for passing on to the final recipients the totality of the public funding. In this case, the Commission considers that these conditions apply and that the measure does not confer an economic advantage on Kaunas STP or Klaipeda STP.”[2]
Before continuing a remark is in order here. The Commission refers to point 22 of the R&D&I Framework which concerns research infrastructures. However, what in fact is described in the decision is the provision of incubation or innovation services. The decision does not indicate why it makes no use of the rules of the Framework concerning innovation clusters. Perhaps it is because the rules on innovation clusters make no mention of the possibility that innovation clusters can act as intermediaries. At any rate, what the decision does indicate, at least indirectly, is that research infrastructure can also be used as an innovation cluster for the purpose of incubating SMEs.
Then the Commission goes on to explain that “(44) Firstly, the public funding and the advantage to the two STPs are quantifiable and an appropriate pass-on mechanism to incubated SMEs is envisaged through transparent, ex ante identifiable, price reductions. The aid element contained in the long-term and free-of-charge trust contract for the State-owned buildings will be fully passed-on to the final beneficiaries – the incubated SMEs … in the form of discounted rental and support services. Should a residual advantage remain at the level of the STPs, this will be offset on an annual basis in accordance with the commitments undertaken by the Lithuanian authorities […]. By this mechanism the Lithuanian authorities ensure that no financial advantage will remain at the level of the STPs at the end of any given year.”
“(45) Secondly, it should be noted that Kaunas STP and Klaipeda STP have been selected on the basis of an objective criterion which ensures that the same type of support would be available to any STP operating from rented State-owned premises. This criterion should also be seen in the light of the specific situation characterising real estate ownership in Lithuania in the context of the on-going privatisation process. Indeed, the Commission understands that any STP that rents (or will in the future rent) premises from the State is (or will be) entitled to the same funding, in which case the recipient SMEs are entitled to acquire equivalent services from any such STP.”
The Commission also discounted the possibility that trade could be affected. “(46) Even assuming that the measure would allow Kaunas STP and Klaipeda STP to enjoy a competitive advantage resulting from their ability to provide rental and support services at discounted prices, it is unlikely that such advantage would distort (or threaten to distort) competition and affect trade between Member States.”
“(47) In the first place, given the nature and magnitude of such a potential competitive advantage, it is highly unlikely that the measure could determine an appreciable shift in the demand for these services to the benefit of Kaunas STP and Klaipeda STP. In fact, as regards Klaipeda STP, the measure is not such as to hurt the market position of any other competitor as Klaipeda STP is the only STP in Lithuania currently providing specialized services in the field of blue and green technologies. Moreover, as regards both Kaunas STP and Klaipeda STP, the information at the Commission’s disposal shows that both STPs are already now, prior to the entry into force of the measure, operating at virtually full capacity […], which means that the measure cannot be expected to lead to an increase in the demand for their services, to the detriment of other STPs.”
“(48) In the second place, considering the insignificant amount of aid that will be passed-on to each individual incubated SMEs […], it is not foreseeable that the measure would have more than a marginal effect on the conditions of cross-border establishment. Therefore, it cannot be assumed that the measure could have a distortive effect on trade between Member States.”
At the level of the incubated SMEs, the aid will remain below the de minimis threshold. The Commission took into account the commitments of the Lithuanian authorities and concluded that the existence of State aid was ruled both at the level of the STPs and SMEs.
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Conclusions: Is there really no advantage?
SMEs that receive a maximum of EUR 5000 do obtain an advantage but this advantage is clearly de minimis in nature [provided all the other conditions of Regulation 1407/2013 are satisfied].
The question is whether the STPs obtain any advantage that goes beyond the amount of the rent whose monetary equivalent is passed on to the users of the research infrastructure.
In answering this question, advantages such as those that the STPs can obtain from normal commercial relations should be ignored. For example, the STPs may strengthen their market position and the quality of their product because they get to develop relations with incubated SMEs that extend beyond the latter’s use of the infrastructure or they may be able to improve their services on the basis of the feedback and experience they gain. The STPs would derive that kind of advantage regardless of whether the incubated SMEs subsidised or not.
The relevant advantage in the context of State aid assessment is something that STPs can benefit from, only because of the aid that they pass on to SMEs. Normally, the most direct advantage in such a situation is the ability to attract more customers. If there are economies of scale in the operation of infrastructure [and it is very likely that average costs decline as a result of increased use of already built infrastructure], then the provision of free services, enabled by State aid, confers an advantage.
But in this particular case, the STPs are working close to capacity so they cannot attract and benefit from more customers. Nevertheless, there is another way that the provision of free services can be converted into an advantage.
The STPs are obliged to pass on to SMEs the monetary value of the rent they would have paid to the Lithuanian authorities. They can very well do that and at the same time raise the price of certain services they provide. The Commission decision explicitly states that “Klaipeda STP is the only STP in Lithuania currently providing specialized services in the field of blue and green technologies”. Although it is presumed that the aid to Klaipeda STP will not harm competitors who do not offer those services [but the decision is silent on how easy it will be for competitors to enter the market for those services], it does not prevent Klaipeda STP from exploiting its customers through higher prices. It can pass on the value of the free rent to its customers and at the same time charge them higher prices for some of its services. The customers may in fact be happy if the overall price for the package of rent and services is lower than what they paid previously. In this case, the STP manages to raise its profits as well as to fully pass on the aid. In fact, the aid is that which makes possible the increase in the prices of services and eventually profits. The annex provides numerical examples.
Annex: Economies of scale and price adjustment of services offered by subsidised infrastructure
Example 1: Economies of scale
Assume that an infrastructure operator incurs the following costs:
Fixed costs, other than rent (F) = 100
Rent (R) = 50
Cost of services per customer (AVC) = 10
Number of customers (N) = 20
Total costs (TC) = F + R + AVCxN = 100 + 50 + 10×20 = 350
Total cost per customer (ATC) = 350/20 = 17.5
The rate of profit is assumed to be 5.7% of total costs. This means that the operator must charge a price that covers TC plus profit or 350 + 350×0.057 = 350 + 20 = 370.
Price charged per customer (P) = 370/20 = 18.5
Total profit = 20 [or a profit of 1 per customer]
If the number of customers increases to 30, then we have the following:
Fixed costs, other than rent (F) = 100
Rent (R) = 50
Cost of services per customer (AVC) = 10
Number of customers (N) = 30
Total costs (TC) = F + R + AVCxN = 100 + 50 + 10×30 = 450
Total cost per customer (ATC) = 450/30 = 15
If the operator still charges a profit of 1 per customer, the price that customers pay drops from 18.5 to 16 (15+1), but total profits increase from 20 to 30 and the rate of profit rises from 5.7% to 6.5%.
Example 2: Adjustment of prices as a result of subsidies
Take the same numbers as above. Initially the infrastructure operator incurs the following costs:
Fixed costs, other than rent (F) = 100
Rent (R) = 50
Cost of services per customer (AVC) = 10
Number of customers (N) = 20
Total costs (TC) = F + R + AVCxN = 100 + 50 + 10×20 = 350
Total cost per customer (ATC) = 350/20 = 17.5
Price charged per customer (P) = ATC + 1 = 18.5
Total profit = 20
As a result of the state aid, the operator pays no rent, but is obliged to pass that benefit to customers. The operator has now the following options.
Option 1: Aid is fully passed on, no price adjustment:
Fixed costs, other than rent (F) = 100
Costs of services per customer (AVC) = 10
Number of customers (N) = 20
Total costs (TC) = F + AVCxN = 100 + 10×20 = 300
Total cost per customer (ATC) = 300/20 = 15
Price charged per customer (P) = ATC + 1 = 16
Total profit = 20
Customers receive the full amount of the aid which is 50/20 or 2.5 per customer. This is indeed reflected in the price they pay which is reduced from 18.5 to 16 [= 2.5].
Option 2: Aid is fully passed on, but prices are adjusted:
The operator can also charge a higher price on other services it provides apart from accommodation. The numbers change as follows:
Fixed costs, other than rent (F) = 100
Cost of services per customer (AVC) = 10
Accounting charge for services per customer = 10.5
Number of customers (N) = 20
Total accounting costs (TC) = F + AVCxN = 100 + 10.5×20 = 310
Total accounting costs per customer (ATC) = 310/20 = 15.5
Price charged per customer (P) = ATC + 1 = 16.5
Total accounting profit = 20. However, total true profit is 16.5×20 – 300 = 30
Customers receive the full amount of the state aid because if they would pay a price including rent, it would be 19 [= (310 + 50)/20 + 1]. Now they pay only 16.5. The difference is 2.5, as above. Customers are also happy because the price drops from 18.5 to 16.5. But, as is shown above, the operator increases its real profit by 50% by exaggerating its other costs.
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[1] The full text of the decision can be accessed at:
http://ec.europa.eu/competition/state_aid/cases/258080/258080_1850847_195_2.pdf.
[2] Point 22 of the R&D&I Framework states that “the Commission will not consider the research organisation or research infrastructure to be a beneficiary of State aid if it acts as a mere intermediary for passing on to the final recipients the totality of the public funding and any advantage acquired through such funding. This is generally the case where:
(a) both the public funding and any advantage acquired through such funding are quantifiable and demonstrable, and there is an appropriate mechanism which ensures that they are fully passed on to the final recipients, for example through reduced prices, and
(b) no further advantage is awarded to the intermediary because it is either selected through an open tender procedure or the public funding is available to all entities which satisfy the necessary objective conditions, so that customers as final recipients are entitled to acquire equivalent services from any relevant intermediary.”
Point 23 states that “where the conditions in point 22 are fulfilled, State aid rules apply at the level of the final recipients.”
