Authorization of State aid pursuant to Article 61 of the Agreement on the European Economic Area (1) and Article 1 (3) of Protocol 3 to the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice (2) Cases where the EFTA Surveillance Authority raises no objections (Aid No 94-001) (94/C 250/03)

Summary of the EFTA Surveillance Authority Decision not to raise objections to the aid which the Austrian Government plans to provide to BMW Motoren Gesellschaft mbH in support of an R& D and investment project in Steyr, Austria

By letter dated 4 February 1994, received by the Surveillance Authority on that day, the Austrian Government notified the EFTA Surveillance Authority, in conformity with Article 1 (3) of Protocol 3 to the Surveillance and Court Agreement, of its plan to award aid totalling 467,3 million Austrian Shillings (öS) to BMW Motoren Gesellschaft mbH in support of an R& D and investment project at its engine plant in Steyr, Austria. Modified notifications were submitted by letters of 25 February 1994 and 29 April 1994, registered by the Surveillance Authority on the same days, inter alia reducing the planned aid amount to a maximum of öS 454,8 million.

The project involves research, process and product development in the area of diesel and petrol engine technology, with the aim of reducing fuel consumption and carbon emission levels, together with measures to enhance environmental protection at the plant and for the training of employees. Moreover, the project foresees related investments in production facilities.

The overall cost of the project, which will be realized over a period of three years, is estimated at öS 3 396,7 million, of which öS 2 855,6 million is considered eligible for State aid. The maximum total amount of aid proposed by the Austrian Government in support of the projects is öS 454,8 million, in the form of a grant according to Article 1 (b) (1) of the Guarantee Act of 1977 and grants according to regional and local aid schemes. The aid will be paid in equal instalments over four years starting in 1994.

Of the total project costs, research and development expenditure accounts for öS 1 314,6 million, of which öS 817,5 million is expenditure eligible for R& D aid. This is in turn grouped into basic industrial research (öS 140 million), applied research (öS 381 million) and process development (öS 296,5 million), and the aid amounts are, respectively, öS 70,0, 95,25 and 44,48 million. For environmental protection the project costs are öS 129 million for measures reaching significantly beyond requirements and öS 62 million for measures fulfilling new legal requirements, and the corresponding aid amounts are öS 38,7 and 9,3 million. Training expenditure is öS 110 million, of which öS 66 million is eligible for aid as basic training (öS 29 million) and on-the-job training (öS 37 million), and the respective aid amounts are öS 14,5 and 9,25 million. Investment costs amount to öS 1 781,1 million and the proposed regional investment aid is öS 173,28 million.

BMW Motoren Gesellschaft mbH, Steyr, is a wholly owned subsidiary of Bayerische Motoren Werke Aktiengesellschaft, Munich, producing a core range of diesel and petrol engines for the parent company. The plant has a production capacity of 400 000 units per year, and in 1992 its production was all exported to other EEA countries. In 1996, when the project will have been concluded and the reconstructed and extended production lines have become fully operative, the production capacity will increase to 450 000-460 000 units per year. However, the capacity expansion is exclusively intended to supply BMW's new assembly plant in the USA. Employment at the plant will increase from 2 124 in 1992 to 2 300 in 1996.

The planned support is in the form of grants from central, regional and local government and would therefore be granted through State resources in the meaning of Article 61 (1) of the EEA Agreement. As there is substantial trade in motor vehicle engines between the Contracting Parties to the EEA Agreement and the support measures will relieve the enterprise concerned from part of the investment costs, they threaten to distort competition and affect intra-EEA trade. The measures therefore constitute State aid in the meaning of Article 61 (1) of the EEA Agreement.

In these circumstances it should be assessed whether any of the derogation clauses under Article 61 (2) and (3) of the EEA Agreement are applicable in order that the proposed aid may be exempted from the general prohibition of aid under Article 61 (1). In particular, it is relevant to examine the aid proposal with regard to Article 61 (3) (c) and the rules on State aid to the motor vehicle industry, as set out in Chapter 23 of the Surveillance Authority's Procedural and Substantive Rules in the Field of State Aid (3).

These rules aim to establish full transparency of aid flows to the motor vehicle industry and at the same time impose a strict discipline with regard to the granting of aid in order to prevent distortion of competition. The proposed aid to the BMW project has several objectives. According to the rules on aid to the motor vehicle industry the assessment criteria vary depending on the objective pursued by the aid. It is therefore necessary to examine separately the individual aspects of the proposed aid.

As outlined in the rules on aid for research and development (4) the EFTA Surveillance Authority recognizes, in general, the potential beneficial effects of R& D activity on economic development and takes a favourable view of aid to such activity, provided that is not likely to adversely affect trading conditions to an extent contrary to the functioning of the EEA Agreement. The assessment of such aid takes into consideration several factors such as the nature of the project, whether it really relates to genuinely innovative products or processes, the technical and financial risk involved and the risk of distortion of competition.

For basic industrial research the level of aid should, as a general rule, not exceed 50 % of the gross eligible costs. As the activity being aided gets nearer to the market place, involving the areas of applied research and development, the Surveillance Authority looks in principle for progressively lower levels of aid.

The present aid proposal groups the R& D activities of the project into four categories. A nominal aid intensity of 50 % is proposed for basic industrial research, which corresponds to the abovementioned maximum ceiling in the rules on aid for research and development. The aid intensity of 25 % proposed for applied research is also deemed to be acceptable. With regard to process development the respective activity has been examined by an independent expert and considered to be genuinely innovative on a European level. On that basis the proposed aid intensity of 15 % can be justified. No aid will be awarded in support of the product development phase of the project.

The project expenditure on environmental protection involves firstly measures which aim at achieving levels of environmental protection significantly higher than those required by legal or mandatory requirements. The proposed aid for this purpose implies a nominal aid intensity of 30 %. Secondly, an aid intensity of 15 % is proposed in support of measures aiming to fulfil new legal requirements. In both cases the aid intensity corresponds to the maximum limits stipulated in the rules on aid for environmental protection (5) and is therefore deemed to be compatible with the EEA Agreement.

In relation to the development of the new products and production processes and the introduction of a new assembly work structure the project foresees measures for training of the company's workforce. The total project expenditure on vocational training of öS 110 million includes öS 44 million for wages of trainees, which the Austrian Government rightly does not consider eligible for aid. The remaining öS 66 million has been classified as basic training (öS 29 million) and on-the-job training (öS 37 million). The proposed aid corresponds to an aid intensity of 50 % for basic training and 25 % for on-the-job training.

In view of the nature of the project it is considered that the vocational training measures will correspond to genuinely qualitative changes in the required qualifications of the workforce and relate to a significant proportion of the workforce. On this basis and since the level of aid is within resonable limits, the proposed aid for training is considered acceptable.

The eligible regional investment expenditure of the project amounts to öS 1 781 million and the proposed maximum amount of aid for this purpose is öS 173,3 million. Having taken into account the timing of the projected investment on the one hand and of the disbursements of aid on the other, the discounted gross grant equivalent of the proposed aid is 8,9 %.

The rules on State aid to the motor vehicle industry as set out in Chapter 23 of the Surveillance Authority's Procedural and Substantive Rules in the Field of State Aid acknowledge the valuable contribution to regional development which can be made by investments in new or expanded motor vehicle and component production facilities in disadvantaged regions of the EFTA States. This position coincides with the Surveillance Authority's generally positive attitude towards investment aid granted in order to help overcome structural handicaps in disadvantaged regions.

According to the EFTA Surveillance Authority Decision of 11 May 1994 on the map of assisted areas (Austria) the region of Steyr-Kirchdorf (Oberösterreich) is accepted as eligible for regional aid under Article 61 (3) (c) of the EEA Agreement, up to a maximum aid intensity of 15 % (NGE). The level of the regional aid element in the present proposal is well below this ceiling.

However, in view of the sensitive nature of the motor vehicle sector and high risk of distortion of competition, it is necessary to ensure that the aid granted is in proportion to the problem it seeks to resolve and that due account be taken of possible adverse effects on the sector as a whole, such as the creation of important overcapacity. A cost/benefit analysis has been carried out by an independent consultant aiming to identify and quantify all additional costs and benefits arising for BMW from its decision to extend its production facilities in Steyr as compared to an equivalent expansion at an existing site in a central non-assisted region. This comparative analysis related to additional investment costs as well as to incremental operating costs and benefits of the early years of production.

The main result of the analysis that the estimated net additional costs or structural handicaps facing BMW due to the geographical location of the expansion programme is estimated to represent 5,9 % of the eligible regional investment.

As concerns the possible adverse effects on the motor vehicle sector in the territory covered by the EEA Agreement, the Surveillance Authority notes that the planned capacity expansion from 400 000 units in 1992 to 450-460 000 units in 1996 is exclusively intended to supply BMW's assembly plant in the United States. The investment will therefore not lead to the creation of overcapacity in the relevant sector at European level, which would have been to the detriment of BMW's competitors. For this reason an increase in aid intensity, a so-called to-up, of 3 % can be allowed as an additional incentive for the regional investment, implying an aggregate level of acceptable aid intensity of 8,9 %, which coincides with the proposed aid intensity.

In view of the expected positive effects on regional development and given that the investment is deemed not to produce adverse sectoral effects at European level and that the proposed level of aid is in reasonable proportion to the regional handicaps facing the investor, the EFTA Surveillance Authority may accept the proposed aid intensity.

In conclusion, the EFTA Surveillance Authority considers that the aid proposed by the Austrian Government is reasonable when account is taken of the nature of the research, environmental protection and training measures involved, the importance of these activities and the related investment in production facilities to the development of the declining industrial region of Steyr and the associated cost disadvantages for the investor and that the investment will not produce adverse sectoral effects on the relevant European market.

Therefore, the EFTA Surveillance Authority has decided, pursuant to Article 61 (3) (c) of the EEA Agreement, not to raise objections to the proposed aid measures.

(1) Hereinafter referred to as the EEA Agreement.

(2) Hereinafter referred to as the Surveillance and Court Agreement.

(3) 'Procedural and Substantive Rules in the Field of State Aid`. Guidelines on the application and interpretation of Articles 61 and 62 of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance and Court Agreement. Adopted and issued by the EFTA Surveillance Authority on 19 January 1994.

(4) See Chapter 14 of the Surveillance Authority's Procedural and Substantive Rules in the Field of State Aid.

(5) See Chapter 15 of the Surveillance Authority's Procedural and Substantive Rules in the Field of State Aid.