EU Revises State Aid Rules for Important Projects of Common European Interest

Background

The Treaty on the Functioning of the European Union ("TFEU") prohibits Member States from selectively granting public financial support to businesses that distorts competition and affects trade among Member States. However, the Commission may authorize State aid if it falls under an exempted category in the TFEU and provided that the aid meets a number of requirements (e.g., necessity, appropriateness, proportionality, incentive effect).

IPCEIs are large pan-European projects financed by both Member States and industry to overcome purported market failures or societal challenges, and that lead to positive spill-over effects for the EU economy. IPCEIs typically fall within EU State aid rules, which prohibit selective Member State public support absent notification to the Commission, followed by approval under one of the exceptions to the State aid rules.

The Commission has long recognized an exception to the State aid rules for IPCEIs, but recent Commission State aid decisions and changing policy priorities led to the need for updated guidance. In particular, the Communication reflects the Commission's experience in three decisions approving IPCEIs that enabled breakthrough innovation in microelectronics (in December 2018) and in the battery value chain (in December 2019 and January 2021), as well as its decision approving an infrastructure IPCEI, namely the Fehmarn Belt fixed rail-road link (in March 2020).

The Communication also includes references to key EU initiatives, such as the EU Green Deal (climate change) and NextGenerationEU (pandemic stimulus and digital transformation) and shows that IPCEIs can be a powerful tool for Member States to better achieve the EU's updated policy objectives, including strengthening the EU's open strategic autonomy, green and digital transition, and economic recovery from the COVID-19 pandemic. The Commission has notably mentioned the hydrogen, cloud, health, and microelectronics sectors as potential beneficiaries of the new rules on IPCEIs.

The Communication replaces the prior IPCEI Communication, released in 2014, and will apply to all IPCEI projects notified to or under review by the Commission as of January 1, 2022. 

A Wider Scope and a Focus on the Environment

The Commission adjusted the scope of IPCEI rules in a number of ways. First, the Commission widened the eligibility criteria of IPCEIs, by making them more open to integrated projects (i.e., groups of single projects inserted in a common structure, roadmap, or program aiming at the same objective and based on a coherent systemic approach), other Member States, and small and medium-sized enterprises ("SMEs"). Integrated projects may now include individual components or participants that are no longer "necessary" but that merely "significantly add value" for the achievement of EU objectives. The Commission will view favorably any projects that involve SMEs, including start-ups, and which support the development of more disadvantaged regions. In addition, the notifying Member States must now demonstrate that all Member States have been informed of the possible emergence of a project (for example, by way of preparatory contacts and meetings) and been given a genuine opportunity to participate (this was only a possibility under the old rules). 

The Commission also restricted certain eligibility criteria, introducing a minimum cross-border threshold and stricter environmental rules. A project is eligible for an IPCEI exemption only if at least four Member States participate in the project (and in any event no less than two Member States in exceptional cases). The beneficiary of aid also must now provide "important" co-financing, although the IPCEI does not provide guidance about how Commission will assess the extent of co-financing in practice.

Further, IPCEI projects must now comply with the "do no significant harm" principle within the meaning of the EU Taxonomy Regulation for sustainable activities (and in particular Article 17). Under that principle, activities that are environmentally harmful will not be eligible for the IPCEI exception (and therefore, may not receive public financing). The Communication also presumes that new projects identical to State aid measures that the EU Council approved in 2020 in the national recovery plans will not cause significant harm to the environment. Consistent with the EU Green Deal, which seeks to channel investments toward sustainable projects, the "do no significant harm" principle is becoming a new general criterion to assess public subsidies under EU State aid law. Beyond the Communication, this principle has, for example, already been taken into account in the Regional Aid Guidelines 2022‑27 and the new Climate, Environmental Protection and Energy Aid Guidelines (replacing the Guidelines on State aid for environmental protection and energy 2014-2020), which were formally adopted on January 27, 2022. 

Adjusted IPCEI Compatibility Criteria

The Communication introduces several new criteria to assess the compatibility of IPCEIs with the EU internal market. But as with the prior IPCEI Communication released in 2014, it remains a generous State aid instrument, as the maximum aid amount may reach 100% of eligible costs identified in the funding gap analysis.

First, the Commission clarified its definition of a first industrial deployment ("FID") based on its own decision-making practice. The IPCEI rules now define an FID as the upscaling of pilot facilities, demonstration plants, or first-in-kind equipment and facilities covering the steps subsequent to a pilot line. As before, a Member State may finance an FID with State aid so long as it follows on from R&D activities. In practice, the distinction between an FID, which a State may subsidize, and mass production or commercial activities, which a State may not subsidize, can be difficult to discern. In addition, a Member State may support certain infrastructure projects in the environmental, energy, transport, health, or digital sectors that do not involve R&D activities until they become fully operational after construction. 

Second, the Communication explains that a Member State may combine IPCEI funding with EU funding or other State aid under different rules, as long as the total amount of public funding granted in relation to the same eligible costs does not exceed the most favorable funding rate set forth in the applicable EU rules.

Third, the Commission may now require that Member States implement a clawback mechanism if the project is more profitable than planned. Drawing on previous practice, in particular in the banking and broadband sectors, a clawback is an ex post profit-sharing mechanism in which additional gains resulting from investments whose rate of return exceeds the beneficiaries' cost of capital should, at the request of the Commission and according to a pre-defined methodology, be distributed in a balanced manner to all project participants. While the details of such a clawback mechanism are project-specific, the Commission will need to ensure that it maintains strong investment and performance incentives for the beneficiaries of State aid. 

Impact of Revised IPCEI Rules on Companies

Although the revised IPCEI rules are targeted, they increase the transparency of IPCEIs and encourage involvement of more Member States, ordinarily, at least four States. The new rules also facilitate the participation of SMEs and clarify the criteria for the combination of EU and national funding. With respect to SMEs, the Commission will adopt a less stringent assessment of the compatibility criteria, for example, more limited co-financing than otherwise required, no clawback mechanism, and easier demonstration of the counterfactual scenario, which corresponds to the situation where no aid is awarded by any Member State.

Moreover, incorporation of recent EU policy objectives into the Communication is likely to change the Commission's State aid review of IPCEIs. For example, the objective of EU's open strategic autonomy may cause the Commission to adopt a more favorable stance toward certain industrial projects. To that end, the Commission's recent Communication on competition policy announced that, in the context of the COVID-19 pandemic, it was ready to engage EU funds and participate in a Health IPCEI to design new medical countermeasures or manufacturing technologies available in the EU. 

Similarly, the Commission's focus on green polices (and the incorporation into State aid review) signals that the Commission may be more likely to consider negative environmental externalities in its assessment of the effects of the aid on competition and trade. That change could force Member States and project participants to develop more robust arguments showing that an IPCEI does not significantly harm the environment. The Commission seems to be committed to thoroughly screen genuinely green IPCEIs, and instead dismiss "greenwashing" projects that would, in its view, harm consumers.