After Smurfit Kappa: the Commission opens a formal investigation into regional aid to Propapier

Thanks to Fiona Wishlade, Director of the EPRC at the University of Strathclyde, for today’s blog

The European Commission has opened a formal investigation into regional investment aid granted by Germany to Propapier: see press release IP/13/435 The Commission had in fact approved in April 2008 the aid notified to it by the German authorities in October 2007 (Case N 582/2007). However, this decision was appealed by competitor Smurfit Kappa to the General Court, which annulled the Commission Decision in July 2012 (Case T-304/08).

By way of background, it can be noted that the RAG coupled with the General Block Exemption Regulation (GBER) make specific provisions for handling aid to large investment projects. Where the amount of aid proposed exceeds the amount for which a €100 million investment could qualify in that region, aid must be notified individually to the Commission. For its part, the Commission, on the basis of paragraph 68 of the RAG, assesses whether specified market share and capacity thresholds are exceeded – sometimes referred to as market ‘screens’. If the thresholds are exceeded, the Commission proceeds to a formal investigation and will only approve the aid following a detailed assessment under the Large Projects Guidance (OJ C 223/3 2009) – only aid to Dell Poland (Decision 2010/54/EC) has been through this process to date.

In the case of Propapier, the Commission initially found that the project did not fall foul of the paragraph 68 market screens. The original decision then noted that the Commission “had limited its discretionary power to undertake a detailed verification that the benefits of the aid outweigh the distortions of competition to a situation where one of the thresholds in paragraph 68(a) or (b) of the RAG is exceeded” and accordingly approved the aid proposed. The Commission’s interpretation of paragraph 68 was not shared by the General Court which took the view that the “sole effect of that provision is to require the Commission to initiate the formal investigation procedure where those thresholds have been exceeded; that provision certainly does not have the effect of preventing it from doing so in cases in which the thresholds in question have not been reached.” The Court held that, by inferring that the aid complied with the guidelines because the market screens were not exceeded without assessing the importance of the project for regional development, the Commission had both misconstrued the scope of the guidelines and failed to exercise its discretion. Accordingly, it annulled the contested decision.

As a result of this, the Commission has opened an investigation into aid to Propapier to reassess the measure in the light of the Court’s judgment. This will involve determining whether the positive effects of the aid on regional development outweigh the potential distortion of competition and effect on trade between Member States; this will be based on the information available when the annulled decision was adopted.

The ruling in Smurfit Kappa does, however, have wider implications than the case in question. The architecture of regional aid control is calibrated to reflect the perceived risk to competition and effect on trade. The vast majority of awards are not scrutinised by the Commission but covered by the terms of the GBER. Aid to eligible expenditure exceeding €50 million is subject to reduced aid intensities and individual reporting (but not case-by-case scrutiny). Aid higher than that for which a €100 million investment would qualify is subject to notification. Where the market screen thresholds are exceeded, a detailed assessment ensues. The Smurfit Kappa judgment calls into question the capacity of the market screens in focusing Commission attention on those cases considered to pose the greatest threat to competition and creates uncertainty for granting authorities and potential recipients of aid over the notification threshold since it is no longer clear that aid will be deemed compatible if the market screens are not exceeded.

As noted elsewhere on this blog, the Regional Aid Guidelines are currently under review with a new text likely to be adopted in June 2013. The Draft RAG published in January 2013 does not include market screens like the current RAG. It seems likely that the judgment in Smurfit Kappa played a role in the demise of the paragraph 68 screens, although there were indications of Commission dissatisfaction with the screens that predate Smurfit Kappa. Under the Draft RAG, all notified projects would be assessed under the balancing test set out in the guidelines. The scope of cases likely to be subject to this process is currently uncertain for several reasons. In particular, the Draft RAG proposes the exclusion of large firms from regional investment aid in ‘c’ areas, which would likely reduce the number of cases arising. However, the Draft GBER published on 8 May implies that aid for initial investment in new activities by large firms will be eligible in ‘c’ areas. In addition, the GBER leaves open the question of how ad hoc aid (offered outside an aid scheme) would be treated. Last, the economic climate will, of course, affect the extent to which projects of this scale are undertaken at all.


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