Recent enforcement practice under the R&D&I Framework Prague, 18 July 2013

1. Recent enforcement practice under the R&D&I FrameworkPrague, 18 July 2013 Paolo CesariniHead of Unit, DG Competition, State aid for R&D&I and risk capital

2. Some key issues from recent case practice • The on-going discussions on the revision of the R&D&I Framework have raised, amongst others, the following key issues • Assessment of State funded research infrastructures • Aid to pilot lines and prototypes involving subsequent commercial use • Allocation of IPRs within collaborative research projects and distinction of economic and non-economic activities • Appropriateness of aid instruments and minimisation of aid for close-to-market projects • Four cases will illustrate the Commission’s approach to these issues • The Green Labs/DK case (2011) • The Wave Energy Demonstration Plant/SW case (2011) • The Genesys/FR case (2013) • The Diehl Aircabin/DE case (2009)

3. 1. Research infrastructures: the Green Lab case (2011) • Objective and design of the scheme. • Promoting innovation for climate, environment and energy efficient technologies through the establishment of testing and demonstration facilities (Green Labs) • Targeted mainly at SMEs affected by coordination and sub-critical mass problems hindering the set up of independent facilities • Grants awarded to Green Labs selected via open calls and on the basis of transparent, non-discriminatory criteria • Open-access facilities for rent to users at market prices, without prejudice to a discount applicable during a specified period • 100% economic use • 50% private financing • Private investors do not enjoy lower access prices but preferential access conditions within strict limits (limited period and maximum capacity utilisation)

4. 1. Research infrastructures: the Green Lab case (2011) • Compatibility grounds construed on current R&D&I rules • Currently no specific legal basis for assessing compatibility of research infrastructures carrying out non-ancillary economic activities • The Danish government conceived a complex construction by designing the aid measure under two separate aid categories: • Aid to innovation clusters => investment aid to Green Labs • Aid for innovation advisory and support services => pass-on to infrastructure users • Possibility of de minimis aid at users' level, notably for large undertakings

5. 2. Pilot lines and demonstrators: the Wave Energy Demonstration Plant case (2011) • Project characteristics • System of 420 wave energy converters (WEC) with varying power output • Transformation of the electricity to alternating current suitable for transmission • Development of two submarine electrical systems: • Low voltage marine substation (LVMS) • Medium voltage marine substation (MVMS) • Connection to grid and testing

6. 2. Pilot lines and demonstrators: the Wave Energy Demonstration Plant case (2011) • Design of the aid measure • Project financing: contributions by Seabased (a spin-off of Upsala university), Fortun (a Swedish electricity producer and distributor) and an ad hoc grant to Seabased by Sweden • Grant: 43% of Seabased R&D eligible costs • Advantage for Seabased: ownership of patents possibly resulting from successful experimental development of the pilot plant • Transfer of ownership of the pilot plant to Fortun for connection to the grid and further testing of plant properties • Negative NPV: project with aid well below Fortun’s profitability rate, even taking into account possible revenues from future electricity sales • If NPV > 0 Fortun will repay the corresponding amounts with interest • Safeguard: any subsequent commercial use of the prototype will be monitored to ensure claw-back of revenues beyond break-even point

7. 2. Pilot lines and demonstrators: the Wave Energy Demonstration Plant case (2011) • Assessment • Positive effects and proportionality of the aid • Market failure: bank financing unavailable absent demonstration of wave energy technology; strong positive externalities • Incentiveeffect: « no-project » as conterfactual scenario; profitability for Seabased occurring only potentially from future applications; negative NPV and slightly positive IRR for Fortun in a scenario with aid • Proportionality: aid below maximum aid intensities coupled with claw-back mecanism • Limited market distortions • Market definition • Undistorted dynamic incentives • No market power

8. 3. Allocation of IPRs within PPPs: the Genesys case (2013) • Objective and design of the aid measure • R&D to develop 3rd generation bio-refineries (based on ligno-cellulose biomass) for several downstream sectors (energy, food, chemicals) • Grant and capital injection in a start-up (Pivert) set up to manage fundamental and industrial research (articulated in clearly defined sub-programs) within a 50%/50% Public/Private Partnership (PPP): • Public actors: 3 universities and a consortium of 14 research organizations • Private actors: 6 industrial partners • Genesys project coming within the R&D programs of the ROs concerned • Investment in open-access facilities (Biogis Center) • Expected outcome: • pool of 40 (enabling) patents in 10 years co-owned by the public actors • licensing at market terms by Pivert • knowledge dissemination through about 100 publications per year

9. 3. Allocation of IPRs within PPPs: the Genesys case (2013) Subvention R&D 50% 50%

10. 3. Allocation of IPRs within PPPs: the Genesys case (2013) • Assessment under the R&D&I Framework • Necessary and proportionate aid to Pivert(beneficiary) • "external" technology licensing as economic activity • Proof of market failure and incentive effect • Aid kept to a minimum • No aid to Academic members: revenues from Pivert licensing activities allocated amongst members in line with their contributions and re-invested in public independent research • No aid to Industrial members: • Open access to Industrial Club by interested competitors • IPRs' ownership allocated to public partners (Academic members) • IPRs' management entrusted with the start-up (Pivert) • IPRs' access by Industrial Club members (on exclusive or non-exclusive basis) at market conditions • Possibility for outsiders to compete for IPR licenses

11. 4. Revolving instruments for close-to-market innovation: the Diehl Aircabin case (2009) • Objectiveof the aid measure • Supporting two distinct R&D projects for the development of systemic components by a tier 1 Airbus supplier (DA) • Product specifications fixed by Airbus • DA selected by Airbus through a competitive process • Technological challenge: integration of advanced materials for weight reduction and fuel efficiency • Market failure mainly in the form of asymmetry of information • High technical and commercial risks and long-term credit periods • Presence of risk-sharing partners but profitability gap deterring bank lending

12. 4. Revolving instruments for close-to-market innovation: the Diehl Aircabin case (2009) • Design of the aid measure • Aid awarded under the German "Aircraft Supplier Scheme" • Eligible costs falling entirely under experimental development • Two aid instruments • A state aid-free loan (8% of eligible costs) • A (25% of eligible costs) • repayable advance • Appropriate reimbursement conditions, interest rate and royalty beyond full repayment for the repayable advance • "Successful outcome" as a condition for repayment • Risk mitigation and profitability levels of the project based on different scenarios of future A 350WXB sales (determined through independent expertise).

13. 4. Revolving instruments for close-to-market innovation: the Diehl Aircabin case (2009) • Appropriateness of the instrument in view of its positive and negative effects • Aid necessary to ensure the participation of a tier 1 supplier to the development of an innovative long haul aircraft • Close-to market innovation for critical components • The repayable advance was structured so as to correspond to a risk-mitigation and profit-sharing balance based on a prudent business scenario • Same type of financial instrument initially sought by DA and that the market could not deliver • Compliance with all other conditions (incentive effect, proportionality) • Limited negative effects having regard to the nature of the aid instrument

14. Thank you for your attention