Opinion of the European Economic and Social Committee on the "Draft Commission Regulation amending Regulation (EC) No 70/2001 as regards the extension of its scope to include aid for research and development"
Date: 2003-12-10
Institutions: European Economic and Social Committee
Subjects: ESC opinion, State aid, research and development, small and medium-sized enterprises

30.3.2004

EN

Official Journal of the European Union

C 80/1

II

(Preparatory Acts)

ECONOMIC AND SOCIAL COMMITTEE

404th PLENARY SESSION, 10 AND 11 DECEMBER 2003

Opinion of the European Economic and Social Committee on the ‘Draft Commission Regulation
amending Regulation (EC) No 70/2001 as regards the extension of its scope to include aid for
research and development’ (1)

(2004/C 80/01)

On 3 June 2003, the European Commission decided to consult the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, on the ‘Draft
Commission Regulation amending Regulation (EC) No 70/2001 as regards the extension of its scope to
include aid for research and development’.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on this subject, adopted its opinion on 12 November 2003. The rapporteur was
Mr Wolf.

At its 404th plenary session on 10 and 11 December 2003 (meeting of 10 December), the Committee
adopted the following opinion by 103 votes in favour, and one against.

1.

Introduction

Articles 87 and 88 of the EC Treaty broadly speaking
1.1.
ban aid. They also define the exceptions to the general rule
that State aid is incompatible with the principles of the
common market, and lay down corresponding procedures.
Under Article 88(3), the Commission must be notified of such
aid so that it can submit its comments and take a decision on
the matter (prior notification/information requirement).

Under Regulation (EC) No 70/2001, certain State aid
1.2.
for small and medium-sized enterprises (SMEs) has, up to now,
been exempt from the notification requirement. Above all,
this regulation also lays down thresholds below which the
Commission waives the notification requirement that would
otherwise apply (exemption regulation). The draft regulation
that the Commission is now submitting amends and consider-
ably amplifies Regulation (EC) No 70/2001 which has been
applicable up to now, principally by adopting the Com-
mission’s new definition of SMEs and including aid for R&D.

Up to now, the procedures for State R&D aid for all
1.3.
companies,
including SMEs, have been governed by the
Community framework for State aid for research and develop-
ment (2) (R&D Community framework) and all such aid has
been subject to prior notification/information. This Com-
munity framework remains in force and continues to apply to
all State R&D aid not exempted under this draft regulation.

2. Gist of the draft Commission document

2.1.
The main purpose of the proposed amendments to
Regulation (EC) No 70/2001 is to exempt R&D State aid for
SMEs below certain thresholds or ceilings from the prior
SME-related
notification/information requirement. Other
aspects covered by the amendments include:

— R&D carried out in collaboration between enterprises and

public research establishments;

(1) OJ C 190, 12.8.2003.

(2) OJ C 45, 17.2.1996, p. 5.

C 80/2

EN

Official Journal of the European Union

30.3.2004

— the definition of

research’,
research’, and ‘precompetitive development’;

‘fundamental

‘industrial

— eligible costs;

— aid intensity (maximum percentage of aid calculated on

the basis of the sum of the eligible costs);

— aid for patenting costs and feasibility studies;

— large individual aid grants (exemption ceilings);

— aid remaining subject to prior notification to the Com-

mission.

In addition, the definition of small and medium-sized
2.2.
enterprises (SMEs)
in Annex I of the regulation has been
amended in line with Commission Recommendation 2003/
361/EC of 6 May 2003 (1). The new definition takes effect
from 1 January 2005.

2.3.
There is also to be a final settlement of any aid
granted before the entry into force of this regulation without
Commission authorisation.

2.4.
Also, the specific reporting provisions as laid down in
Annex III of the regulation are in future to be replaced by the
unified and simplified annual reporting system pursuant to
Article 27 of Regulation (EC) No 659/1999.

3. General comments

3.1.
In many of its earlier opinions, the Committee has
expounded the key conditions for prosperity and economic
and social progress. Among these, competition, equal oppor-
tunities and knowledge enhancement play a fundamental role.

3.1.1.
Generally speaking, therefore, aid is to be rejected as
it distorts equal opportunities and competition raises the tax
burden across the economy as a whole and generates a
considerable need for regulation. Processing aid also involves
an extensive degree of administrative work for all concerned.

3.2. Where aid is permitted, however, standard definitions
and uniform provisions should be sought as far as possible in
order to minimise the administrative work for all the players
concerned, and, at the same time, make it easy to keep
track of the relevant rules. This is a particularly important
consideration for SMEs with their more limited administrative
machinery.

Unfortunately, in the light of competition-driven cost-
3.3.
cutting constraints, the trend for companies — and SMEs in
particular — is in any case to underinvest in R&D because of
the high costs involved, the need for highly specialised experts
and equipment and the uncertainty of research findings. This
is particularly true of fundamental research where it is basically
impossible to predict whether economically viable results can
be produced within a foreseeable timeframe.

Under the Commission’s proposed regulation,

3.4.
the
competent authorities in the Member States can, within a
given framework, target aid to SMEs’ R&D activities without
the need to notify the European Commission in advance. This
is particularly important since SMEs frequently come off
second best in competition with large companies or non-
European rivals and thus often need support quickly and with
as little red tape as possible.

3.4.1.
The draft Commission regulation is thus designed to
cater for SMEs’ specific needs. The Committee basically
welcomes this approach.

3.4.2.
The Committee has already highlighted SMEs’ key
role in R&D-driven innovation on many occasions, most
notably in its opinion on the European research area (see
point 7.5 ff of that opinion) (2).

The Committee feels therefore that

the proposed
3.5.
Commission regulation is an important tool in furthering the
objectives laid down at the 2000 Lisbon summit, in order to
give new impetus to research as a whole, to boost the share of
GDP spent on research, and to strengthen the key role of
SMEs.

3.6.
That said, the Committee does have certain reservations
about whether some of the provisions are sufficiently practical
and technically feasible. Also, more effort should be put into
standardising the various legal texts concerned.

Aid may be granted only in exceptional cases, for
3.1.2.
instance as part of research policy, SME policy and regional
policy. Its aim is to give EU enterprises the competitive impetus
they need to take on their rivals (including those from outside
Europe) but which they cannot, for the moment, generate by
themselves.

The Committee is aware of the difficulties involved
3.7.
both in harmonising the definitions and criteria used in the
various exemption regulations, and in making the present
proposal to incorporate R&D aid into the SME exemption
regulation compatible with the R&D Community framework.

(1) OJ L 124, 20.5.2003.

(2) OJ C 204, 18.7.2000.

30.3.2004

EN

Official Journal of the European Union

C 80/3

For that reason, the Committee would recommend
3.7.1.
that in future the criteria for individual notification require-
ments should be standardised and simplified in the various
exemption regulations. If progressive rates are used, they must
in future be readily understandable and sound reasons must
be given for their introduction.

the Committee recommends that, in future, the Community
and the Member States pursue policies that encourage their
start-up (among other things by simplifying and reducing the
administrative requirements involved) and take better account
overall of their specific operating requirements.

One way of achieving that might be, in general (1), to
3.7.2.
base single notification requirements (exclusively) on total
(gross) aid levels, giving explicit reasons for any exceptions
that may be necessary.

The upcoming revision of the R&D Community
3.7.3.
framework, which the Committee considers urgent should
thus also take (gross) aid levels as the sole yardstick for the
individual notification requirement. If, however, the resultant
thresholds for mandatory notification are too low, they must
be raised as appropriate.

3.8.
The 1996 version of the R&D Community framework
remains virtually unchanged. With only minor alterations (2),
it has been prolonged (3) despite the changes in the R&D
environment in the intervening years (as a result, for instance,
of the expiry of the WTO support rules). The framework
should therefore be urgently revised and brought into line with
the new realities. Amendments will thus also be required to
the exemption regulation.

3.8.1.
Another reason why this is important is that many
research projects are carried out jointly between SMEs and
larger enterprises. In such cases, SMEs also remain subject to
the R&D Community framework rules (see recital 11 of the
regulation). Thus, SMEs need to be familiar with — and know
how to handle — both the R&D Community framework that,
in general terms, applies to larger companies, and the proposed
R&D exemption regulation under discussion here, which
applies exclusively to SMEs. This clearly generates an additional
administrative difficulty for SMEs if the exemption regulation
and the Community framework are not sufficiently compatible.

3.9. Definition of SMEs

The Committee is particularly pleased that the Commission’s
new definition of SMEs, which is to take effect from 1 January
2005, is being incorporated into the proposed draft extending
the scope of the SME exemption regulation to include aid for
research and development.

3.9.1.
This new definition for the first time also includes
micro-enterprises as a separate category. (an enterprise which
employs fewer than 10 persons and whose annual turnover
and/or annual balance sheet total does not exceed EUR 2 mil-
lion). Given the key economic importance of micro-enterprises,

3.9.1.1.
As R&D aid to these micro enterprises is hardly
likely to distort competition, and the idea is to make it much
easier for such enterprises to start R&D in the first place,
consideration could be given to working out a ‘de minimis’
rule under which R&D aid for this category of company would
be subject to simplified criteria. As a point of reference for this
kind of initiative, the Committee would point to the European
Charter for Small Enterprises, which provides for the pro-
motion and support of enterprises such as these.

On the other hand, more effective steps should also
3.9.2.
be taken to boost the innovative potential of medium-sized
high-tech firms which no longer come under the Commission’s
definition of SMEs, but which do not yet have large-company
resources either. The Committee therefore recommends
extending the exemption for R&D aid to SMEs to enterprises
with a workforce of between 251 and 500.

4. Specific comments

4.1.

Legal certainty in applying the rules

The proposed regulation amplifies Article 10 (see also
point 2.3), which, establishes the criteria for (i) notifications
pending at the time of entry into force of the regulation and
(ii) aid granted in breach of the notification requirement before
this regulation. The Committee
the entry into force of
welcomes the proposed application of the more favourable
criteria of this draft regulation. However, where the necessary
requirements for that to happen are not met, it must be made
clear that the criteria that are to be used are consistent with
those that were current or applicable at the time the measures
to be assessed were adopted.

In the interests of

legal certainty, therefore,

the
4.1.1.
Committee recommends clarifying the last subparagraph of
the proposed text as follows (4): ‘Any aid which does not fulfil
these conditions shall be assessed by the Commission in
accordance with the regulations, frameworks, guidelines, com-
munications and notices applicable at the time the notification
was received, or, where there has been no notification, at the
time the measure was carried out or the aid granted’.

(1) Hence also in the case of regional aid.
(2) OJ C 48, 13.2.1998, p. 2.
(3) OJ C 111, 8.5.2002, p. 3.

(4) See also the Commission notice on the determination of the
applicable rules for the assessment of unlawful State aid, 7.5.2002,
COM(2002) 458 fin.

C 80/4

EN

Official Journal of the European Union

30.3.2004

4.2. Options and compatibility with the R&D Community frame-

4.3.

Feasibility studies

work

Like all exemption regulations, Regulation (EC) No 70/2001
also explicitly states that, rather than taking advantage of the
exemption, Member States have the option of notifying aid
schemes and individual aid. Such provisions are to be wel-
comed in principle, but it should be made absolutely clear on
what basis such notifications are assessed.

Since, at the start of a feasibility study, it is impossible
4.3.1.
to predict whether the findings will result in an R&D project
eligible for exemption under the proposed regulation, the
Committee
second part of
Article 5b(2).

recommends deleting the

Although recital 11 of the regulation states that
4.2.1.
‘the Community framework for State aid for research and
development will continue to be used for the assessment of
other aid for research and development, including aid measures
which apply both to large companies and to small and
it remains a moot point as to
medium-sized enterprises’,
whether that also applies to notified aid.

4.2.2.
The Committee would thus recommend amending
recital 11 of the proposed regulation as follows and including
it in an appropriate place in the draft: ‘Regulation (EC) No 70/
2001, as amended by this regulation, applies only to State aid
for research and development granted to small and medium-
sized enterprises. However, if the option to notify this aid is
taken up, the aid will, like other research and development aid,
including aid measures which apply both to large companies
and to small and medium-sized enterprises, be assessed under
the Community framework for State aid for research and
development.’

4.2.3.
The Committee expressly welcomes the clarification
in recital 11 of how to deal with ‘mixed’ aid, as Member
States’ research programmes (and the Community’s sixth R&D
framework programme) are aimed exclusively at SMEs in
special cases only. As a rule, grants are allocated not only to
public research establishments, universities and SMEs, but also
to large enterprises as well. The Committee feels it would be
extremely detrimental and problematic if the same research
schemes were assessed using two different legal frameworks.
the
Reiterating a point already made in 3.8 and 3.8.1,
Committee therefore strongly advocates that the rules in the
new draft R&D exemption regulation should be worded exactly
the same as the rules laid down in the R&D Community
framework, or that the R&D Community framework rules
should be revised and brought into line with the exemption
regulation. No differentiation should be made unless absolutely
necessary and explicit reasons must be given for any changes
that are made.

4.2.4. Moreover, to ensure that the material provisions of
the R&D Community framework and the proposed SME
exemption regulation also remain as consistent as possible in
the longer term,
the Committee recommends that both
instruments should have the same period of validity (and the
same deadlines for revision) — and should if possible be dealt
with together.

4.3.2.
Although the issue of subcontracting is addressed at
the end of the new Article 5a (in a different context), it is not
clear whether eligible costs within the meaning of the modified
Article 2(k) also include the costs of subcontracting R&D
activities to third parties. Article 2(k)(iv) does mention research
‘bought ... from outside sources at market prices.’ That said,
these costs are, at the same time, to be limited to only 50 % of
the total eligible project costs. However, since lack of specific
capacity or skills means that SMEs in particular are not always
in a position to carry out a considerable part of the requisite
R&D activities themselves, subcontracting should be explicitly
permitted in line with the objective of the proposed regulation
and should, as far as possible with no limitations, be recognised
as eligible for aid. The Commission’s proposal that only 50 %
of these costs should be eligible for aid is particularly prejudicial
to research into fundamental issues, which is a typical part of
R&D subcontracting to higher education establishments and
(publicly run) research institutes — and which, in point of fact,
is a desired feature of research policy.

4.4.

Patenting costs

The Committee welcomes Article 5c which also exempts aid
to be granted for patenting costs from the notification
requirement.

4.5. Definition of research categories:

4.5.1.
The Committee basically endorses the progressive
rates of gross aid intensity laid down in Article 5a(3) in line
with the R&D objective set out
in Article 1(2)(b). The
Committee is also aware that having different levels of gross
aid intensity for different research categories raises intractable
difficulties in delimiting one from the other. To facilitate
processing, consideration might be given to granting Member
States a fair degree of flexibility in establishing the ‘weighted
average’ (Article 5a(3)).

30.3.2004

EN

Official Journal of the European Union

C 80/5

Although it is aware that it may thereby be adding
4.5.2.
to the difficulties of delimiting one from the other, the
Committee — mindful of the potential links and feedback that
exist — and that are, in the final analysis, desired — between
fundamental research and target applications — would first of
all draw attention to its earlier statements on this issue in its
opinion on the European research area (1). Accordingly,
it
would propose new definitions.

‘Fundamental research’ shall mean a research activity
4.5.3.
designed to broaden and deepen fundamental scientific and

(1) OJ C 204, 18.7.2000: see point 7.1 of the above-mentioned
opinion on the European research area: ‘Research and develop-
ment basically form a system embracing different research
categories and thus also stages of scientific development of
potential new technologies: basic research, application-oriented
research, “encyclopaedic” research (e.g. to complete our know-
ledge about substance properties, new substances, active substanc-
es, etc.), technological development and product and process
development. The distinction between these research categories is
sometimes an artificial one, and innovation results from interac-
tion and cross-fertilisation between them.’

technical knowledge in which potential industrial or commer-
cial applications are ancillary to and far removed from the
activity concerned.

The Committee would also point out that the term
4.5.4.
‘industrial research’ is not common in the linguistic usage of
most Member States. ‘Applied research’ is the usual term. The
latest version of the OECD’s Frascati Manual (Proposed standard
practice for surveys on research and experimental development) also
uses the term ‘applied research’.

4.5.5.
The Committee therefore recommends that, follow-
ing coordination with the experts responsible for research
programmes and with the scientific community, the categories
should be redefined and renamed as part of the revision of the
Community framework.

5. Recommendations

The Committee recommends that the Commission document
be approved after revision to take account of the comments
set out above.

Brussels, 10 December 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH