2009/179/EC: Commission Decision of 21 October 2008 on the State aid C 9/07 (ex N 608/06) which Spain intends to grant to Industria de Turbo Propulsores (notified under document number C(2008) 6011) (Text with EEA relevance)
Date: 2008-10-21
Institutions: European Commission
Subjects: Spain, State aid, aeronautical industry, aid to undertakings, control of State aid, engine, exchange of information, explosive, research and development

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Official Journal of the European Union

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(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

II

DECISIONS

COMMISSION

COMMISSION DECISION

of 21 October 2008

on the State aid C 9/07 (ex N 608/06) which Spain intends to grant to Industria de Turbo
Propulsores

(notified under document number C(2008) 6011)

(Only the Spanish version is authentic)

(Text with EEA relevance)

(2009/179/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty
Community,
and in particular
Article 88(2) thereof,

establishing the European
subparagraph of
the

first

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to those provisions (1),

(2)

(3)

By letter of 21 March 2007, the Commission notified to
Spain its decision to initiate proceedings based on
Article 88(2) of the EC Treaty on the abovementioned
measure.

The decision of the Commission to initiate proceedings
was published in the Official
the European
Union (2). The Commission invited interested parties to
submit their observations on the measure.

Journal of

(4)

Spain submitted its observations on 4 June 2007.

Having regard to those comments,

Whereas:

1. PROCEDURE

(1)

By letter of 11 September 2006, Spain notified to the
Commission the measure relating to State aid that it
intended to grant to Industria de Turbo Propulsores.

(5)

(6)

(7)

By letter of 13 June 2007, the beneficiary of the aid,
Industria
ITP),
submitted its observations.

Propulsores

(hereinafter

de Turbo

By letter of 13 June 2007, Rolls-Royce (hereinafter RR),
which in the decision to open proceedings had been
indirect aid,
indicated as a potential beneficiary of
submitted its observations.

By letter of 19 June 2007 the Commission forwarded
these observations
to Spain, which submitted its
comments on 12 July 2007.

(1) OJ C 108, 12.5.2007, p. 18.

(2) See footnote 1.

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(8)

The Commission requested supplementary information
from the
dated
19 December 2007 to Spain, ITP and RR.

in letters

in the

parties

case

(9)

ITP replied by letter of 25 February 2008.

(10)

Spain replied by letter of 29 February 2008.

(11)

RR replied by letter of 5 March 2008.

(12) On 12 March 2008, the Commission forwarded to Spain
the information received from ITP and RR. Spain
submitted its comments on this information on 9 April
2008.

(13)

By letter of 26 June 2008, the Commission has requested
further information from Spain.

(14)

Spain replied by letter of 17 July 2008. Spain then
submitted a revised version of this letter on 7 August
2008.

shares are held by Sener Aeronáutica (53,125 %) and
Rolls-Royce (46,875 %).

(19)

(20)

(21)

ITP is an engine manufacturer in the aerospace sector. Its
activities are the design, R & D, manufacture, assembly
and testing of aeronautical engines and gas turbines. It
was created in 1991. It has participated in the develop­
ment of other engines, in the military sector, such as the
EJ200 for the Eurofighter Typhoon, and in the civil
sector,
It has
such as Trent 500 and Trent 900.
received aids for these last two programmes (3).

The notified measure concerns support for the research
and development (R & D) activities carried out by ITP for
the Trent 1000. Besides the Trent 1000,
the B787
aircraft will also be powered by another engine, called
GenX, which is being developed by General Electric
together with a number of partners.

risk and revenue sharing partners

The Trent 1000 is being developed by RR and a number
(RRSP) which
of
include, beyond ITP, the following companies: Mitsubishi
Heavy Industries, Kawasaki Heavy Industries, Goodrich,
Hamilton Sundstrand and Carlton Forge. The Trent
1000 received airworthiness certification on 7 August
2007. Its entry into service is however delayed because
of major delays in the development of the aircraft itself
with respect to the initial schedule.

(15)

Finally, by letter of 18 September 2008, Spain provided a
final calculation of the amount of the aid, together with
corrected payment and reimbursement schedules.

(22)

ITP participates as a RRSP in the Trent 1000 project with
a share of 11 %. A Memorandum of Understanding was
signed with RR on 28 September 2004. The final risk
and revenue sharing agreement (RRSA) was signed by the
two companies on 15 July 2005.

2. OBJECTIVE OF THE MEASURE

(16)

The Spanish authorities would like to grant aid to ITP for
its participation in the Trent 1000 engine, which is being
developed by RR for the Boeing B 787 aircraft. The
project started in 2005 and will end in 2009.

(17)

The aid beneficiary — ITP — is an aero engine company
located in Spain. Its main site is located in an assisted
area in the Basque country. Other
facilities around
Madrid are also located in an assisted area (Article
(87(3)(c) of the EC Treaty).

(23)

(24)

The total investment by ITP in the project amounts at
EUR […] (*), divided as follows: EUR […] for R & D
costs; more than EUR […] for industrial
investments
for the production of the turbine; EUR […] of other
costs (IT, certification, transport, etc.).

ambitious

the new engine. The

ITP is in charge of developing the low pressure turbine
for
technological
objectives fixed by RR for the development of the low
pressure turbine are: reduction of the acquisition cost by
[…] %; reduction in the design time by […] %; reduction
in weight by […] %; reduction of the noise level by […]
dB.

(18)

ITP is a large enterprise: its total sales in 2006 amounted
to around EUR 439 million. The number of employees
of ITP and its subsidiaries is around 2 400 people. Its

(3) Cases C 38/01 and N 165/03, respectively.
(*) Business secret.

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(25)

To achieve these objectives, the R & D activities carried
out by ITP face several challenges:

— there was a doubt on the application of the regional

bonus,

— new materials and processes: new materials will be
used for the first time for some components, thus
requiring new processes,

— there was a doubt on the application of the bonus for

international collaboration,

— mechanical
system of
improve the structure,

technology:
ITP will develop a new
sealing, optimise the embedding and

— there was a possible indirect aid to RR,

— aerodynamics: new design of profiles,

— there was a doubt on the relevant market and on the

impact on competition.

— technology and methodology: the time required for
the design of this engine is one year less than for
previous engines; for RR to achieve this requirement,
ITP has to introduce adequate tools for
iterative
calculations.

3. DOUBTS RAISED IN THE DECISION TO OPEN
PROCEEDINGS

(26)

The Commission decided to open proceedings in the first
place because it did not have at its disposal sufficient
information concerning the aid decision (only the
second tranche had been notified by Spain). Even after
two detailed requests for information had been sent (4),
factual information on the aid granted was insufficient.

(27)

Secondly, the Commission had doubts or lacked infor­
mation, or both, on various issues:

— the market failure needed to be demonstrated,

— the incentive effect was not proven,

— there were various doubts concerning the classifi­
cation of the activities under the R & D categories
and on the eligibility of the costs,

(28) Given the factual uncertainties and the number of doubts
raised, the decision will in the first place define its scope,
in particular concerning the decision-making process
(and the two-step approach adopted by the Spanish auth­
orities). Subsequently,
the decision will examine the
presence of aid and will clarify the rules applied in
order to assess the compatibility of the measure. It will
then clarify all the doubts raised in the decision to open
proceedings.

(29)

to avoid repetitions and facilitate compre­
the information gathered during the investi­
including the observations provided by Spain

In order
hension,
gation,
and by the parties, will be presented for each issue.

4. TWO TRANCHES OF A SINGLE AID

(30)

(31)

in the decision to open proceedings

Firstly,
the
Commission had a doubt concerning the scope of the
notified measure, notably whether
aid under
assessment was limited to the notified aid, or whether
it included also a loan that Spain had already granted to
ITP for the same project under an existing aid scheme.

the

ITP requested the aid in general terms in June 2004 with
a first letter to the Ministry of Industry, Tourism and
the Ministry). On 29 September
Trade (hereinafter
2004, ITP made a formal request for aid for its partici­
pation in the Trent 1000, for an estimated amount of
EUR 40 million.

— there were doubts concerning the aid instrument and

on the aid intensity,

(4) Commission’s letters of 10 October 2006 and 30 November 2006.

(32)

The Spanish authorities gave their support to the project
in two tranches, allowing the public agency CDTI to
grant a loan to ITP.

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(33)

(34)

(35)

(36)

(37)

The decision on the first tranche was taken by the CDTI
on 30 November 2005, covering the costs for that year.
The first tranche was a zero interest loan, based on an
existing scheme (5), for an amount of EUR 9 million.

the project. This aid was not notified to the
of
Commission since it was based on an approved aid
scheme and was below the thresholds for individual noti­
fication.

The decision on the second tranche was taken by the
CDTI on 26 June 2006, covering the remainder of the
costs. The second tranche was also a zero interest loan,
but whose reimbursement seemed to depend on the sales
of
the engine. This tranche corresponds to the aid
notified by Spain to the Commission on 11 September
2006 for an amount initially set at EUR 27,85 million.

(40) On the basis of the documentation provided and espe­
cially taking into account the changes in the administra­
tive competencies, the Commission is able to arrive at
the conclusion that the two loans should be considered
as being two tranches of the same aid.

The Spanish authorities explained this two-step approach
on the grounds of
the changes incurred during that
period in the administration regarding the body with
competence to process the substantial R & D aid in
the aeronautic sector. In fact, as the Spanish authorities
have shown, by providing, inter alia, minutes of various
meetings, these competencies were transferred from the
Ministry to the CDTI, and this transfer took place over a
fairly long period of time.

(41)

(42)

The Commission notes that Spain recognises that it made
a mistake in notifying only the second loan and that the
total amount of the two loans should be assessed by the
Commission in this case.

Individual aid to R & D projects can be granted on an
ad-hoc basis or on the basis of an approved aid scheme.
The criteria for the assessment of the cases subject to
individual assessment are contained in chapter 7 of the
R & D & I Framework.

Spain explained thus that in 2005 CDTI was able to
grant only a first loan of limited amount. When the
transfer of competencies was
the
CDTI took the decision to give the second part of the
loan, which was (the measure) notified by Spain.

finally completed,

There is no internal documentation of the Ministry or of
the CDTI prior to the notified measure confirming in a
clear and definite way the intention of the Government
to support the project. On the other hand, in the docu­
mentation provided by Spain it
is possible to find
numerous references to the project and to its importance
for the Spanish economy.

(43) On the basis of these criteria, it is not acceptable for a
Member State to artificially split aid to large projects into
several parts, as this would lead to very easy circum­
vention of the notification thresholds, and of the rules
concerning the detailed assessment of
cases.
Allowing Member State to divide up projects would
thus mean abandoning the principle of concentrating
the control of the Commission on the more distortive
cases.

large

(44)

(38) Also, it should be noted that there is no letter from the
Government to ITP confirming the intention to grant the
aid, but some indirect references to a scheme in support
of aero-engines (6), with the B787 explicitly mentioned.
This scheme would have been based on the previous
cases approved by the Commission (7). According to
Spain, the 2005 decision by the CDTI has to be seen
as the confirmation for ITP of
the
Spanish Government to provide support to the entire
project.

the intention of

(39)

Finally, Spain claims that ITP had legitimate expectations
of receiving the aid, because aid had been granted in the
meantime by the CDTI to ITP, covering the 2005 costs

(45)

(5) According to Spain, the scheme managed by the CDTI was in force
before the accession of Spain to the European Community in 1986.
(6) It should also be noted that ITP is the sole Spanish producer in the

sector.

(7) C 38/01 and N 165/03.

that

the Commission cannot accept

In any case,
ITP
would have had legitimate expectations of receiving the
aid. Due to the limited competencies of the CDTI, any
support granted by this agency could not be seen as a
promise by the State to grant a larger amount of aid. The
negotiations between the CDTI and ITP which took place
before the definitive grant decision indicate that while the
Spanish authorities had expressed a favourable stance
towards supporting the project, ITP had no legitimate
expectation of receiving any specific amount of aid.
Finally,
ITP was not entitled to receive the entire aid
before the decision on the second tranche was actually
taken.

taking into account

situation created by the changes

the
To conclude on this aspect,
in the
exceptional
Spanish administration during the grant process,
the
Commission is able to conclude that the two loans are
tranches of the same aid and that they should have been
notified together by Spain. Accordingly, the decision is
taken on the total amount of the two loans.

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(46)

The Commission also notes that the assessment of the
grant process would have been made easier if the Spanish
authorities had initially confirmed to ITP their intention
to grant the aid, without necessarily entering into details
concerning the amount and the conditions at the initial
stage. Such a letter of intent, with its necessary reference
to the suspension clause linked to the obligation to
notify the aid to the Commission, would have helped
the assessment of the case, particularly with regard to
the incentive effect of the aid (8).

5. EXISTENCE OF AID

(47) As indicated in the decision to open proceedings, the
falls within the scope of
the Treaty. This conclusion was not

measure under assessment
Article 87(1) of
disputed by any of the parties.

(48)

The Spanish authorities notified the measure as a State
aid. The measure consists of state resources, in this case
managed by a public agency under an aid scheme. As
mentioned in its website (9), the CDTI is a Spanish public
organisation under the Ministry of Industry, Tourism and
Trade, whose objective is to help Spanish companies to
enhance their technological profile. The measure has a
beneficiary, the ITP group, which receives an advantage.
ITP is active in a sector where there is extensive trade
among Member States and the project concerns a
product which involves the participation of several inter­
national partners. The impact on trade is thus confirmed
and the measure should be considered as a State aid on
the basis of Article 87(1) of the Treaty.

6. COMPATIBILITY

(49)

The Commission has
assessed the measure under
Article 87(3)(c) of the Treaty, in particular on the basis
of the provisions concerning aid for R & D, which, since
1 January 2007, has been the Community Framework for
State aid to R & D & I (10) (hereinafter the R & D & I
Framework).

(51)

(52)

(53)

(54)

(55)

(56)

(50) As indicated in the decision to open proceedings, the
Commission has assessed the aid under the R & D & I
is clearly
Framework, because in its section 10.3 it
indicated
this
framework to all aid projects notified in respect of
is called upon to take a decision after the
which it
framework is published in the Official
Journal, even
where the projects were notified prior to its publication’.

‘the Commission will

apply

that

(8) A similar provision is contained in point 38 of the Guidelines on
National Regional Aid (OJ C 54, 4.3.2006, p. 13), which request
that the Member State notifies to the beneficiary its intention to
grant the aid through a letter of intent.

(9) www.cdti.es
(10) OJ C 323, 30.12.2006, p. 1.

issues.

In its assessment of the notification, the Commission
sent two requests for information (11), which raised a
number of
the Commission
In those letters
clearly pointed out that the provision on consecutio legis
in the R & D & I Framework (point 10.3 mentioned
above) indicates that the Commission has to assess the
case on the basis of the rules in force at the moment of
the decision.

Furthermore, in the second letter of 28 November 2006,
the Commission indicated that the case might require
opening a procedure based on Article 88(2) of
the
Treaty.

The Spanish authorities requested that the Commission
assess the case under the 1996 R & D Framework which
was in force at the moment of the notification, since the
measure was notified on 11 September 2006 and since
the aid was requested by ITP in 2004.

Referring to the Graphischer Maschinenbau case (12),
Spain argues that if it had granted the aid illegally, the
1996 R & D Framework would apply. Since, according
to Spain, the R & D & I Framework in application after
1 January 2007 is more restrictive than the 1996 R & D
Framework, in applying the new rules the Commission
would thus penalise the Member State which has notified
the aid.

The Commission notes that
in its view the Spanish
argument is irrelevant and that this case law does not
apply to the present case because point 10.3 of the R &
D & I Framework clearly spells out the rules that the
Commission would apply when assessing cases.

that
is not

Furthermore, the Commission considers that the Spanish
the R & D & I Framework is more
argument,
restrictive,
correct. The provisions on the
assessment of individual cases involving large amounts
of aid simply request a more detailed demonstration of
the various aspects of
including its positive
the aid,
effects. An increased level of detail cannot be considered
the
as being more
Commission considers that
the
rules have remained constant or have changed only
marginally: definition of the R & D activities, eligible
costs, aid intensities, etc.

contrary,
the main aspects of

restrictive. On the

(57)

In its observations, Spain also says
since the
Commission indicated in its letter that it might have
doubts, it should have opened proceedings immediately.

that,

(11) See the first paragraph in the decision to open proceedings.
(12) Judgment of the Court of First Instance of 14 May 2002 in case T-
126/99, Graphischer Maschinenbau Gmbh v Commission [2002] ECR
II-02427.

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(58) However, the Commission notes that an earlier decision
to open proceedings would not have changed anything
in terms of applicable rules for the final decision, since in
any event the applicable rules would have been those in
force at the time of the final decision.

7.1. Asymmetry of information

(64)

Spain provided additional arguments to support
the
existence of market failures linked to the existence of
an asymmetry in the information.

(59)

In any case, Spain has provided all the necessary infor­
the R & D & I
mation requested in chapter 7 of
Framework for
individual
projects. This information allows the Commission to
take a complete view of the case.

assessment of

large

the

7. MARKET FAILURE

(60)

To assess properly aid for a large R & D project, it is
necessary to assess the objectives of the measure, notably
which market failures it aims to tackle.

in the notification,

Firstly,
the Spanish authorities
indicated that the measure aims at correcting imperfect
and asymmetrical information, notably concerning long-
term projects and the unavailability of private finance in
a particular sector characterised by high technological
risks and returns in the very long term. The Commission
has recognised the existence of such a market failure
concerning
in the
aerospace sector in previous decisions (13).

large programmes

funding of

(61)

(62)

Secondly, the Spanish authorities considered that the fact
that R & D activities were to be carried out in assisted
areas should be taken into account in the assessment of
the market failure. R & D activities in less developed
areas would be characterised by more positive exter-
nalities and knowledge spillover, and by imperfect and
asymmetric information.

(68)

(65)

(66)

Spain first referred to the specific business model of aero
engine development.
It showed that since the upfront
investment is very important, with returns only over a
very long period (the cash-flow of the project becomes
positive in a stable way only after [> 10] years;
in
[> 15]
cumulated terms,
years), projects are shared by various partners in order
to reduce the overall risks.

it becomes positive after

Secondly, according to Spain, for companies in the sector
on the source of funding is the cash-flow derived from
older projects. Since revenues from a project come in
only after more than a decade, because they derive
more from the sale of spare parts than from the initial
sale of
long
succession of programmes can fund new investments.

engine, only companies with a

the

(67) According to Spain, ITP is a relatively young company,
since it was established only in 1989. Because of its age,
ITP would not be able to benefit yet from the positive
cash-flow deriving from past investments.

in the project.

it encountered in raising funds

Thirdly, ITP has provided information on the difficulty
that
to finance its
ITP did not produce a
investment
specific letter from a bank rejecting such a request for
funding but it did submit exchanges of e-mails between
intermediaries and business organisations (14)
financial
the unavailability of bank financing for
which reveal
this type of project.

by

and

caused

peripherality

the Commission needs to take into account:

(63) However, point 7.3.1 of the R & D & I Framework states
‘(i)
that
other
disadvantages
regional specificities;
(ii) specific local economic data,
social and/or historic reasons for a low level of R & D
& I activity in comparison with the relevant average data
and/or situation at national and/or Community level as
appropriate;
indicator
showing an increased degree of market failure’. Without
a demonstration based on these criteria, the Commission
was not in a position to confirm the existence of regional
disadvantages for the case under assessment.

any other

and (iii)

relevant

(13) See for instance Commission’s decisions on cases N 165/03 (Spain,
aid to ITP for the Trent 900), N 372/05 (France, aid to Snecma for
the engine SaM 146), N 120/01 (United Kingdom, aid to Rolls-
Royce for the development of
the Trent 600 and Trent 900
engines), and more recently on cases N 195/07 (Germany, aid to
Rolls-Royce Deutschland),
to
Turbomeca).

and N 447/07 (France,

aid

(69) As mentioned above in paragraph 61 and footnote 13,
the Commission has recognised in several situations that
the specific business model of aero engine development
is characterised by asymmetry of information. However,
this conclusion does not mean that any project in the
sector would face a market failure. It is evident that in
several occasions, various companies in the sector have
been able to fund new projects either through their own
means or through the financial market. The Commission
must assess the presence of the market failure in the
specific case under assessment.

(14) In particular HEGAN, which is the Basque platform in the aero­

nautic sector.

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(70)

(71)

In the present case, as already noted in the decision to
open proceedings, the arguments provided by Spain on
the presence of a market failure were considered to be
sufficient and the Commission did not raise a specific
doubt.

the new elements,

Taking into account
including the
information submitted by ITP, the Commission is able
to conclude that the present case is characterised by an
asymmetry of information. It notes that in the case of
ITP the asymmetry is partly linked to the development
phase of the company, which is however reaching an age
where it will be able to finance new projects with the
revenues from older programmes. In other words, ITP is
reaching the situation where the business model of an
aero engine company can function normally.

(72)

The Commission is therefore able to conclude that in the
present case there is a market failure. As indicated in the
it has then to assess
decision to open proceedings,
whether
regional disadvantage
a
increases the degree of this market failure.

the presence of

(77)

(78)

(79)

(80)

7.2. Regional disadvantage

(73)

forward a number of
In its submissions, Spain put
arguments to support the presence of a regional disad­
vantage that would increase the degree of market failure.

(81)

(74)

(75)

that R & D
In the first place, Spain pointed out
contributes to the Lisbon objectives and that
in the
context of the agreement on the Financial Perspectives
2007-2013 (15), Spain was allocated an additional EUR 2
billion of structural
funds to increase R & D & I.
According to Spain this earmarking clearly shows that
the country is lagging behind in the field of R & D
activities.

(82)

In the second place, Spain pointed out that the R & D
activities in the project under assessment will be carried
out
scope of
Article 87(3)(c) of the Treaty (16).

falling within the

in assisted areas

Further, according to Spain, the project contributes to the
development of a scientific (research organisations), tech­
nological
(engineering
school) infrastructure in the region.

(test centres) and educational

Finally, according to Spain, the project contributes to the
development of a network of subcontractors able to
work in a highly advanced field. Currently, ITP can buy
only [< 50] % of its input in Spain; its ambition is to
increase this ratio significantly.

To conclude, Spain argues that the regional disadvantage,
and the positive impact of the project at regional level,
contribute to the market failure and that this should be
recognised by the Commission.

if

that

Spain also adds
the Commission does not
the
recognise such an advantage,
it would contradict
approach contained in the 1996 R & D Framework,
which provided for an automatic bonus of 5 % to
projects carried out in assisted areas falling within the
scope of Article 87(3)(c) of the Treaty (the bonus being
of 10 % for areas falling under Article 87(3)(a) of the
Treaty).

It is true that in terms of R & D expenditure, the statistics
show that Spain is lagging behind with respect to the EU
average. However, the Commission notes that this is not
per se a sufficient argument to justify an individual aid,
but rather an argument that would support a more hori­
zontal approach towards the promotion of R & D (17).

taking place

that by not

In the second place, the Commission notes that the R &
in assisted areas. The
D project
is
Commission also notes
including the
regional aid bonus in the R & D & I Framework it has
simply contributed to better targeting State aid to those
projects which contribute to economic efficiency. The
Commission has recognised that State aid can contribute
either to equity objectives, such as regional development,
or to efficiency objectives, i.e. to respond to market defi­
ciencies (18). Accordingly, the Commission has revised the
various State aid rules in a coherent way, aligning the
conditions for compatibility to the objective of
the
measures adopted by the States (19).

(76)

Spain has also stressed that the development of ITP in
the Basque Country would contribute to regional devel­
opment in an area affected by industrial restructuring
(closing of heavy industry).

(15) Point 54bis of document 15931/05 of the European Council on the

Financial Perspectives 2007-2013.

(16) See Commission’s decision on case N 626/06, on the Spanish

Regional Map, adopted on 20 December 2006.

(17) In 2007 and 2008 the Commission approved several aid schemes

supporting R & D activities notified by Spain.

(18) See for example the State aid Action Plan — Less and better
targeted State aid: a roadmap for State aid reform 2005-2009,
COM(2005) 107 final, adopted by the Commission on 7 June
2005.

(19) Accordingly, there is no regional bonus in the recently adopted
Commission Regulation (EC) No 800/2008 of 6 August 2008
declaring certain categories of aid compatible with the common
market
the Treaty
(General block exemption Regulation) (OJ L 214, 9.8.2008, p. 3).

in application of Articles 87 and 88 of

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(83)

(84)

In the

In the third place, the Commission notes the argument
put forward by Spain on the need to set up the necessary
infrastructure in the fields of research, technology and
education.
case under assessment, however,
Spain has not demonstrated that in the present case,
the aid granted to an individual company,
is
necessary to develop the knowledge
infrastructure.
Further, the Commission notes that the measure under
assessment is an individual aid to a single beneficiary. Its
impact on the abovementioned infrastructure can only be
very indirect.

ITP,

Finally, the Commission notes that the aid is aimed at
contributing to the development of a network of subcon­
tractors. While, in terms of regional development, such
objectives would indeed be relevant,
from a wider
European perspective, it is not certain that there would
be an increase in infrastructures or a network of subcon­
tractors around each large company, especially in an
integrated sector such as the aeronautic sector. In such
a technologically specialised and advanced sector, where
programmes involve multiple partners from all over
Europe and worldwide, while the benefits of developing
a network of subcontractors in an assisted area are not
obvious, it is also true that relying for [> 50] % of its
strong
inputs
dependency on international partners, and therefore a
risk factor.

country shows

from outside

the

a

(85)

the specific
The Commission therefore considers that
situation in the assisted area where the project
is
carried out shows a very moderately increased degree
of market failure, in particular as regards the availability
of technologically advanced subcontractors that could be
viable risk-sharing partners.

7.3. Conclusion on the market failure

(93)

(86) On the basis of these arguments, the Commission is able
to conclude that there is a market failure in the case
under assessment.

8. INCENTIVE EFFECT

(87)

Taking into account the information available at that
stage of
in the decision to open
proceedings the Commission expressed doubts about
the incentive effect of the aid.

the investigation,

(94)

(89) As also mentioned above in paragraphs 31 et seq., the
Spanish authorities have indicated that
the aid was
requested by ITP before the start of the project, thus
respecting the provision contained in the
second
paragraph of chapter 6 of the R & D & I Framework.

(90) As also mentioned above, the Commission had concerns
regarding the decision-making process and because of the
late notification. The information submitted by Spain
makes it possible to conclude that the notified measure
relates to a single aid measure, which was granted in two
tranches. The assessment of the incentive effect must
therefore be carried out for the entire aid.

(91)

(92)

the

decision-making

the
Concerning
Commission would stress that the particular conditions
in the case — transfer of competencies,
two-step
approach and transition to new State aid rules —
these conditions peculiar in the
make assessment of
present case.

process,

that

firstly,

The Commission notes,
it normally has
doubts concerning the incentive effect of a measure
when several grant decisions are adopted in relation to
a single project.
It also doubts the incentive effect
whenever the formal decision to grant the aid is taken
by the State at a point in time when the project is well
advanced. In the case of R & D it is essential that the aid
has an impact on the behaviour of the company by
leading it to make a larger or a speedier investment in
a project. Without such an impact, the aid would have
no incentive effect and would not be necessary.

In order to have such an impact, the aid has to be
decided by the State, either
formally, albeit with a
suspensive clause pending the necessary approval by
the Commission of the compatibility of the aid on the
basis of Article 88(3) of the Treaty, or through a letter of
intent (20), which would not give rise to legitimate expec­
tations but would be sufficiently strong to indicate the
State’s willingness to support a project.

The Commission also notes that a necessary condition
for the compatibility of aid to a R & D project is the
prior notification of the aid under Article 88(3) of the
Treaty. A notification of aid to a project which is close to
completion would mean that the State is not convinced
about the aid it intends to grant or not able to give an
assurance about such aid. If, in the face of this uncer­
tainty, the company is able to carry out the project, and
even to conclude it, it is likely that the aid is not wholly
necessary for the company itself.

8.1. Necessity of aid

(88) According to chapter 6 of the R & D & I Framework the
Commission has first to look at whether the request for
the aid was submitted by the beneficiary before the start
of the R & D project.

(20) See also paragraph 31 above.

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8.2. Basic indicators

(95) According to chapter 6 of the R & D & I Framework, the
Commission has to assess, for all individual measures, a
number of criteria indicating the incentive effect of the
aid, relating to the increase in size, scope or speed of the
project or the increase in the total amount spent by the
beneficiary on R & D.

(96)

In its observations Spain has submitted a number of facts
to demonstrate that the basic criteria mentioned above
were met.

(97)

(98)

(99)

(100)

Firstly, according to Spain, the aid was necessary for ITP
to make an investment equivalent to 12 % of the project,
involving an increase in size and scope. Without the aid,
ITP would not have been able to make such a large
investment (21).

Secondly, according to Spain, the aid would have allowed
an increase in the speed of the project. Spain argues that
the time required for development of the Trent 1000 is
much shorter than for previous engines.

Thirdly, Spain notes that ITP’s average R & D personnel
costs (24 %) are higher than the average in the sector
(19 %). Further, ITP has heavily invested in R & D in
recent years,
since the ratio between R & D and
turnover was 16 % in 2005, 26 % in 2006 and 22 %
in 2007. Spain compares these figures with a European
average for the sector of 11 % in 2005 and 2006. Spain
indicates that without the aid for the Trent 1000, the
figures for R & D/turnover would have fallen to […] %
and […] % in 2006 and 2007 respectively.

detailed

information about

ITP has provided
its
personnel. It indicates that, starting from the hypothesis
that without the aid it would have not been able to carry
out the project, it would have difficulties in relocating the
[…] full-time equivalent jobs of staff who have been
working on the project. ITP says that a minimal part
could be moved to more upstream work (on research
and technology), but that it would have difficulties in
retaining the other researchers. According to ITP, the
fact
this high level of R & D
spending indicates that the aid has an incentive effect.

it maintains

that

had an incentive effect on the scope and size of the
project.

(102) However, the Commission notes the ambiguity of the
figures concerning R & D spending. While it is true
that ITP has high levels of R & D spending compared
with competitors in the sector, this may depend more on
its lack of revenues from older programmes as described
above (22) than from its R & D intensity. Further, the
Commission cannot accept
that maintaining constant
levels of R & D spending and personnel would prove
that the aid has an incentive effect. On the contrary, in
normal circumstances, it would seem that if the aid has
no effect on R & D spending or on R & D personnel, it
would mean that the effect of the aid is rather to support
a project that replaces older projects which have been
finished rather than to support brand-new efforts by the
beneficiary.

(103)

in the assessment of an individual aid
In any case,
measure, the Commission has to undertake a detailed
assessment of
the
Member State and by the beneficiary, in addition to the
basic indicators mentioned above.

information submitted by

the

8.3. Alternative scenarios

(104)

the
In its detailed assessment of
Commission has based itself on point 7.3.3 of the R &
D & I Framework.

the incentive effect,

(105)

ITP has submitted the presentation made to its Board
when it took the decision to invest in the project. The
documentation shows that the company had looked at
several alternatives before negotiating with RR, with the
business plans
for each alternative, both with and
without the aid:

— […] % of engine (whole Low Pressure Turbine),

— […] % (Low Pressure Turbine less Nozzle Guide

Vanes),

— […] % (Low Pressure Turbine less Nozzle Guide

Vanes and Seals),

(101) The Commission notes that the assessment of these indi­
cators depends on the alternative scenario which would
have materialised without the aid. If the aid has indeed
allowed ITP to engage in a larger project, then the aid has

— […] % (Tail Bearing Housing and Disc); in this case
ITP would have been merely a sub-contractor.

(21) This argument is discussed in more detail in the next section (see

(22) Trent 500 and Trent 900, the subjects of cases C 38/01 and N

the next section in the decision, paragraphs 104 et seq.).

165/03, respectively.

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(106)

It should be remembered that the project is the final
result of a negotiation between ITP and RR. It is very
difficult to guess what the outcome of such negotiation
would have been in the absence of the aid.

would be against any business logic to invest in a project
with negative returns. The Commission notes that in this
type of project the main indicator used by the company
in its investment decision is the IRR, which is positively
impacted by the aid, since it enables it to go beyond the
average cost of capital for the sector.

ITP,

in the sense that

(107) As a matter of fact, while there were alternative possibi­
really counterfactual
these were not
lities
for
they depend also on the
projects,
other party in the negotiation. Also, on the basis of
the arguments submitted by RR,
it would seem that
they were not interested in a limited participation by
ITP (e.g. around […] %), as it would have forced RR to
take more risks, to carry out some of the work directly
or to find other partners.

(113) The Commission notes that, as in aero engine projects,
the amount of initial investment is particularly important
and that the time path of cash flows is characterised by a
negative cumulated cash flow, in the present case for the
first 19 years.

(108) Further, even if financial calculations for the project with
and without the aid were also presented to ITP’s Board, it
would seem that the availability of the aid was taken into
account
in the decision by ITP to engage in the
project (23).

(114) Finally, the Commission has assessed the level of risk
ITP has listed the

involved in the research project.
main risks of the project:

in

some

factors

(109) Finally, on the basis of the analysis carried out by ITP of
the various alternative participations, it would seem that
the decision was based mainly on a number of fairly
qualitative
SWOT
(summarised
diagrams), rather than on the quantitative ones (such as
the expected internal rate of return (IRR), for instance),
which were also made available to the Board. It should
be noted that the IRR is not at all high compared with
the average cost of capital of […] %. The IRR calculated
at 25 and 50 years probably shows that without aid, the
project would not be sufficiently profitable for
the
company to invest in it. The low level of the final IRR,
even with aid, also confirms that ITP’s real objective in
agreeing to invest with expected low return,
to
strengthen its position in the market.

is

(110) Therefore

the Commission

aid
undoubtedly triggered an investment by ITP in a larger
project with a more ambitious scope.

notes

that

the

— technical risks involved in achieving the specifications
for the first certification, and over a reduced period
compared with previous programmes,

— technical

risks of having to redesign in early

production phases,

— commercial risks deriving from the pricing policy

(which is outside the control of ITP),

— the

foreign exchange
denominated in dollars), and

risks

(because

sales

are

(111) The Commission also notes that it is difficult to establish
an exact counterfactual project, since there were various
initial alternatives, which had in any case to be subse­
quently negotiated with the leader of the project, RR.

— risks relating to the unit production cost, which was
implying a […] % cost
set by Boeing at a level
reduction compared with previous engines. This
cost is affected mostly by the novelty of the design
and the cost of raw materials.

(112) The Commission notes that the project is profitable, as it
is normal for projects concerning aero engines, since it

to potential difficulties

(23) It should also be noted that in the same presentation, reference is
in the discussions with the
made
Commission, albeit referring at worst to some adjustments to the
amounts and conditions without mentioning the risk of full prohi­
bition of the aid. This reference, however, does not give rise to any
legitimate expectation from the company of receiving the aid itself.
It simply reflects the experience of the company in two previous
State aid cases.

(115)

ITP has produced estimations of the variation of the net
the project on the basis of
present value (NPV) of
changes in some of these parameters. These estimations
the NPV may easily become substantially
show that
negative either
the
exchange rate is less favourable or the cost of raw
material becomes higher.

sales are below expectations,

if

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for

the

instance

foreign exchange

(116) The Commission notes that the risks of the project are
significant. It notes that not all the risks indicated by ITP
are equally significant in terms of their assessment, such
as
risk. The
ITP has been able to
Commission further notes that
provide detailed calculations of the financial aspects of
including their sensitivity to risk factors.
the project,
These calculations
the
show in the first place that
project
compared with the
average cost of capital for the company. In the second
place they show that the technical and commercial risks
are significant, especially compared with the amount of
investment and its expected cash-flow.

is modestly profitable

(117) On the basis of these criteria, the Commission is able to
accept that the aid has an incentive effect, since it allows
ITP to engage in a project on a scale that it would not be
able to afford without aid.

9. PROPORTIONALITY

(118)

In order to assess the proportionality of the measure, the
Commission first has to assess the eligible costs, notably
whether
the doubts raised in the decision to open
proceedings have been clarified; it then has to examine
the aid instrument, again assessing whether any of the
doubts raised have been clarified; thirdly, it must examine
whether the bonuses for the regional disadvantage and
for collaboration are applicable to the project; and finally,
it has to define the aid intensity and verifying that it
respects the conditions set in the R & D & I Framework.

9.1. Eligible costs

(119)

In the decision to open proceedings, the Commission
raised four doubts concerning the eligible costs of the
project receiving the aid:

(a)

the classification of the expenditure according to the
research categories was made on the basis of a theo­
retical model and did not reflect the real costs (and
not even the projected costs) of the beneficiary;

(b) in the classification of the expenditure, the level of
studies preparatory to experimental development was
particularly high compared with the other cost cate­
gories, especially considering other engine develop­
ment projects;

(c) several specific aspects were questionable: the amount
allocated to technical management in the first year of
the project and the expenditure relating to equipment
(in particular where such equipment was used exclu­
sively for the project); and

(d) the inclusion of some costs incurred by ITP in the
period 2008 and 2009, after the certification of the
engine.

(120) The Commission raised doubts concerning the classifi­
cation of the activities on the basis of the definition of
industrial
development
included in section 2.2(f) and (g) of the R & D & I
Framework, as well as on its own practice in the field
of R & D (24).

experimental

research

and

(121) The Commission raised a doubt regarding the eligible
costs, notably on the expenditure related to equipment,
on the basis of point 5.1.4 of the R & D & I Framework.

(122)

In reply to the decision to open proceedings, Spain has
provided a new classification of costs which reflected the
activities effectively performed or planned, with the
resulting classification in terms of R & D categories.
The new information provided by Spain allowed the
Commission to analyse in detail each work package
and to verify that the classification of the R & D activities
was correct.

(123) Further, the Spanish authorities have accepted that the
for considering eligible costs is the
upper time limit
certification of
the costs that
the aircraft. Given that
were incurred after certification were minor, this does
not affect significantly the total amount or the distri­
bution of costs between the R & D categories.

(124) Spain has also agreed to consider the work carried out
between certification of the engine and of the aircraft as
Experimental Development instead of Industrial Research,
since this work is performed on prototypes of
the
turbine module.

(125) The Spanish authorities have also agreed to include
100 % of the work performed on tasks relating to the
testing of components (EUR […]) in the category Experi­
mental Development. This is consistent both with the
classification used for other tasks and with the definition
proposed by ITP itself, according to which tests dedicated
to accumulated hours of operation (and fatigue tests
belong to this category) are to be considered as Experi­
mental Development.

(24) Notably in the projects funded under the Framework Programme
for R & D — see Decision No 1982/2006/EC of the European
Parliament and of the Council of 18 December 2006 concerning
the Seventh Framework Programme of the European Community
for
demonstration
activities (2007 to 2013) (OJ L 412, 30.12.2006, p. 1) — and in
its experience in the assessment of State aid cases in the aero
engines sector.

technological

development

research,

and

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(126)

In its observations, beyond its support for the arguments
put forward by Spain,
ITP also acknowledged that its
internal accounting system did not allow separation of
R & D costs according to the different categories. This
explained why the categorisation was made on what
appeared as a theoretical model. ITP also stated that it
had started adapting its accounting system in order to
allow such categorisation, since it is also required by the
IFRS accounting standards (25).

sement of the principal of the loan proportional to the
success of the project — and of a soft loan — with no
interest payable by the beneficiary. The Commission, in
its decision to open proceedings, raised doubts regarding
this hybrid instrument, which would give a double
advantage to the beneficiary, combining the risk-sharing
element of an advance with the certainty of an advantage
in terms of interest not paid. The combination of these
two advantages would have
rendered the aid too
generous for the beneficiary.

(127) Spain provided a corrected and final version of

the
eligible costs, which is presented in the table below.
Total eligible costs of the project for the entire period
2005-2008 amount to EUR 73,567 million. Of these the
costs relating to activities classified as industrial research
amount to EUR 29,296 million (39,8 % of total eligible
costs). Experimental development activities costs are EUR
44,212 million (60,1 %). Preparatory studies worth EUR
59 000 are also included in the project.

Table — Eligible costs

(in million EUR)

R & D Category

2005

2006

2007

2008

Total

Industrial research

Feasibility studies

Experimental devel­
opment

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

29,296

0,059

44,212

Total

[…]

[…]

[…]

[…]

73,567

(128) Taking into account the detailed information provided by
Spain, its acceptance of the observations on the specific
aspects relating to the time limit of the project and the
the
classification of
expenditure,
types
Commission is able to have a complete view of
the
eligible costs and of their categorisation.

some

of

(131) A repayable advance is defined by section 2.2(h) of the R
& D & I Framework. The conditions for its compatibility
are defined in point 5.1.5 of the R & D & I Framework.

(132) A soft loan is a loan with a reduced interest rate (in this
case a zero interest rate). The aid element is the amount
of interest not paid by the beneficiary, calculated by the
difference between the market rate applicable to the loan
and the interest actually paid. In the present case the
market rate was the reference rate, with no additional
basis points added, and the interest paid was zero. The
Commission,
in its decision to open proceedings, also
raised a doubt about the interest rate to be used in the
calculation of the aid element of the loan. As described
below, this aspect is no longer relevant.

(133)

In their observations, the Spanish authorities recognised,
the existence of such a double advantage and
firstly,
the aid instrument. The authorities
agreed to correct
they would propose granting the aid
indicated that
through a soft loan. According to Spain, the reason for
using a soft loan is simply that they thought it would be
more easily approvable by the Commission.

(134) The same position was taken by ITP in its observations.
However, ITP also added that it could agree to the aid
instrument taking the form of a repayable advance (26).

(129)

In conclusion, the eligible costs include only activities
eligible for aid under point 5.1.4 of the R & D & I
Framework, correctly allocated to the respective cate­
gories of industrial research and experimental develop­
ment, as defined in section 2.2 of the same Framework.

(135)

In its letter of 19 December 2007,
mentioned that
repayable
guarantee greater proportionality in this case.

the Commission
advance would probably

9.2. Aid instrument

(130)

In the original notification the Spanish authorities
intended to use an instrument which combined the
characteristics of a repayable advance — with reimbur­

(136) The Commission noted that adapting in 2007 the aid
instrument as proposed by Spain into a loan with zero
interest would have been to the advantage of the ben­
eficiary because in that case commercial risks would have
been somewhat reduced, since sales of the engine were
increasing.

(25) These standards allow for a different classification in the accounts
of expenditures relating to industrial research, classified as expense,
and experimental development, classified as an asset.

(26) In its letter of 25 February 2008, ITP notes that it had applied for a

‘reimbursable loan in case of success of the project’.

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(137)

that

In the case at hand, the aid would have played the role of
an advance,
in that it would have assured ITP that it
would have enough cash to make the investments,
time it would have spared ITP the
while at
ITP would not only have repaid only the
interest.
principal but would also have avoided paying an extra
fee in case of success. The Commission considered this to
be an excessive advantage for the firm and asked the
Spanish authorities
reducing it,
either by changing the instrument or by introducing
clauses and conditions which would have linked the
instrument to the risk.

to suggest ways of

(145) The prudent forecast of engines sold is of […] engines
(based on […] aircraft), and does not
include repla­
cements. This
internal
figure
business plan of ITP presented to the board in view of
its decision to invest in the project.

is mentioned in the

(146) Reimbursements have to be considered as amounts of
euro per engine sold; the amount per engine will vary
as follows: until […] engines sold (40 % of the final
forecast) ITP will pay EUR […] for each engine; from
[…] to […] engines (up to 85 % of the final forecast),
ITP will pay EUR […] for each engine; from […] to […]
engines (the final forecast), ITP will pay EUR […].

(138) The Commission further pointed out

that

repayable
advances are a risk-sharing instrument which,
in case
of the success of the projects, allow for a more than
if
proportionate reimbursement
sales forecasts are fulfilled, the aid is fully reimbursed,
including interests. If sales remain below the forecasts,
If
the
reimbursement
sales are above forecasts,
the reimbursement exceeds
the amount of the advance received.

reduced proportionally (27).

from the beneficiary:

is

(147)

that

In setting these amounts, Spain has taken into account
the fact
the first engines are sold at greater
commercial discount. It has also taken into account the
cash-flow for the project, which is already negative for
the first years
is very
significant and sales are spread over at least twenty years.

since the initial

investment

(139)

In the assessment of the case, the Commission and Spain
arrived at
the appropriate aid
instrument for this type of aid is a repayable advance,
with the specific characteristics outlined below.

the conclusion that

(140) The aid instrument is structured around the reasoning
the two
forward by the Spanish authorities that
put
grant decisions in this case are two tranches of
the
same aid, with a single request for aid.

(148) After the target forecast of […] engines is reached, ITP
will pay an additional success fee of 1 % of the turnover
deriving from sale of each engine until the year 2043 (28).

9.3. Regional bonus

(149) The Spanish authorities recognise that according to the R
& D & I Framework in place since 1 January 2007 no
regional bonus can be granted for projects carried out in
assisted areas. However, they indicated that they would
like to give this bonus at least for the eligible costs of the
year 2006.

(141) The modified schedule for
following elements.

the aid is based on the

(150)

(142) The disbursement of

the aid follows

the schedule

foreseen for the two tranches.

In its assessment, the Commission can only base itself on
the rules it has spelled out, which are contained in the R
& D & I Framework. On that basis, considerations
regarding the potential disadvantage to the project that
would derive from the fact of being carried out in an
assisted area have to be demonstrated and taken into
account in the assessment of the market failure and of
the incentive effect.

(143) The reimbursement is calculated on the basis of the total
aid received by ITP adjusted at the reference rate for
2005 (4,08 %).

(144) The target date is […], when full adjusted reimbursement
should be deemed complete, based on the forecast below.

(27) And the distortion of competition is less, since the product has not

been a success.

(151) As indicated above, the aid has to be assessed in its
entirety under the applicable rules, which is the R & D
& I Framework. The R & D & I Framework no longer
provides for the possibility of increasing the aid intensity
for projects carried out in assisted areas. Therefore the
Commission cannot agree that the aid intensity should
include such a bonus.

(28) The R & D & I Framework explicitly foresees that in case of success
exceeding the outcome defined as successful, the Member State
concerned should be entitled to request payments exceeding
repayment of the advance (see the sixth paragraph of section 5.1.5).

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9.4. Collaboration bonus

(152) The Spanish authorities have indicated that in their view
the notified project should be entitled to receive a bonus
for
their
ITP is participating in an international
arguments,
project
the Trent 1000
for
engine (29).

cooperation. According

the development of

international

to

for

(153) The R & D & I Framework in point 5.1.3(b) defines very
precise conditions for a project to be entitled to ad­
‘The
ditional bonus
international
project involves effective collaboration between at least
two undertakings which are independent of each other
and the following conditions are fulfilled: […] the project
must […] be cross border, that is to say, the R & D
two different
activities are carried out
Member States’.

cooperation:

in at

least

(154)

(a)

In the decision to open proceedings, the Commission
raised two doubts:
the Commission doubted that
ITP and RR can be considered as independent under­
takings, since RR is a shareholder of ITP with almost
47 % of the shares; and (b) the R & D activities of the
notified project could not be carried out entirely outside
Spain.

(159) Finally, according to Spain, independence is also proved
by the duration of the negotiation between ITP and RR
on the project, which took two years before an
agreement could be reached.

(160) These arguments were also put forward by ITP in its
observations.
its inde­
pendence from RR is obvious, since ITP sales to RR
are only 25 % of its turnover in 2008, with a tendency
to decrease.

In addition, according to ITP,

(161)

In its letter of 19 December 2007, the Commission also
sought RR’s views on whether ITP and RR could be
considered to be independent. Further, according to RR,
‘ITP is a legally and financially independent company and
[…] is not controlled by RR. […] Nevertheless, ITP is an
civil
important
programmes, notably the Trent 500 and 900 engines,
and RR maintains its shareholding in ITP partly to
protect its interests in those collaborative programmes
and also to help develop ITP as an independent player
(and partner) in the aeronautical sector’.

for RR in

collaborator

certain

9.4.1. ITP and RR are not independent enterprises

(155) Spain provided various arguments in support of the inde­

pendence of the two enterprises.

(162) RR also writes that ‘establishing relationships with long
term independent strategic partners who can share risk,
provide design capabilities and make resources available
is a logical and not unusual step for OEMs involved in
the design and manufacture of gas turbines’.

(156)

In their view, ITP is participating in the project as risk-
sharing partner, under
as other
partners: the fact that the conditions for the contract
are the same as for the other RRSP partners would
show that ITP is at the same level as the other RRSP
with whom RR has no shareholding link.

conditions

similar

(157) Secondly, according to Spain, if ITP was not independent,
it could not work for competitors of RR such as General
Electric and Honeywell.

(158) Thirdly, RR has only 47 %, which is not a controlling
stake, compared with 53 % held by the other share­
holder,
board members
nominated by RR are the minority (four out of a total
of nine), the remaining being nominated by the largest
shareholder.

Sener Aeronautica.

The

(29) Spain also argues that such a bonus was allowed for the previous

cases concerning ITP.

(163) The Commission has assessed in detail the relationship
between ITP and RR. RR is a large shareholder (47 %),
with several board members. RR members abstain when
RR projects are discussed, but on the other hand are
present when strategies are decided.

(164) Secondly, the Commission notes that ITP has participated
in several other RR projects (the Trent 1000 being the
third largest engine in which ITP is involved).

(165) The provision in the R & D & I Framework relating to
‘independent’ has to be interpreted as being different
from ‘not controlled’. In other words, it is not enough
not to be controlled by another company to be viewed
as being independent from it.

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(166) By analogy with the definition of small and medium-
sized enterprises (SME) (30), companies having capital
links with one another
(in this case a 47 % share)
should be considered as linked enterprises. They could
still be considered to be independent for the purpose of
merger control (31) or
from the point of view of
accounting rules, since ITP is not consolidated in RR’s
accounts.

(167) The relevant aspect in this case is that two linked enter­
prises active in the same sector have no difficulty in
collaborating. This is confirmed if one looks at
the
if ITP
issue from a substantial point of view, that is,
and RR face difficulties in collaborating in R & D
projects.

(168) RR’s investment in ITP was made precisely in order to
develop a stable long term relationship (32), which is a
common feature in the sector between the OEMs and
their main partners. For instance, RR refers to the roles
of Snecma and MTU as long-term partners of General
Electric and Pratt & Whitney, respectively.

In the present case,
ITP and RR have an established
collaboration in the field of aero engines. The project
under assessment is the third large engine developed by
RR in which ITP is participating with a significant role
(and always for the same component, the low pressure
turbine). RR itself recognises that this prior participation
does
in fact make future collaborations easier and
smoother.

(169)

(170)

9.4.2. The R & D activities of the notified project will be

carried out entirely in Spain

(172)

In any case, the second condition concerning the cross-
border nature of the project is not met either.

(173) The Spanish authorities argue that

the Commission
should assess the project for the engine in its entirety
and not only the part to be developed by ITP.

in at

(174) The second indent of point 5.1.3(b) of the R & D & I
Framework requires that the R & D activities are carried
out
In the
present case, the project under assessment is the low
pressure turbine developed by ITP. Most of the R & D
activities eligible for the project take place only in Spain,
and eligible costs are incurred by ITP in its sites.

two different Member States.

least

(175)

In conclusion, the Commission considers that it is not
possible to apply the collaboration bonus to the present
aid, because ITP and RR cannot be considered inde­
pendent and the R & D activities take place mostly in
Spain.

(176) However, as it did above for the regional bonus (34), the
Commission notes that the non-application of the colla­
boration bonus has no practical implication, since the aid
intensity remains below the level set in the R & D & I
Framework.

In its assessment of the aid to ITP for its participation in
the Trent 500 (33), the Commission noted that the first
significant participation of ITP in a RR engine was char­
acterised by an international collaboration, but did not
foresee any specific bonus. As is recognised by RR,
however, the involvement in successive projects brings
an additional mutual knowledge which progressively
reduces the difficulties relating to collaboration.

9.5. Aid intensity

(177) According to point 5.1.5 of the R & D & I Framework,
the applicable aid intensities for R & D projects funded
through repayable advances are 60 % for
industrial
research and 40 % for experimental development. As
indicated above, no bonuses can be added to the
project under assessment.

(171) Two linked companies with a stable long-term part­
nership do not have any difficulty in collaborating.
Therefore, the Commission has arrived at the conclusion
that ITP and RR cannot be considered independent of
each other in the sense required by the collaboration
bonus for R & D projects.

(30) Commission Recommendation 2003/361/EC (OJ L 124, 20.5.2003,

p. 36).

(31) Council Regulation (EC) No 139/2004 of 20 January 2004 on the
control of concentrations between undertakings (the EC Merger
Regulation) (OJ L 24, 29.1.2004, p. 1).

(32) In RR’s words: ‘RR has developed a productive working relationship
with ITP and ITP has gained an in-depth understanding of RR
working practices, procedures, tools and methods’.

(33) Case C 38/01 (OJ L 61, 27.2.2004, p. 87).

(178) As mentioned above,

is characterised by
research and around
experimental development. The overall

around 39,82 % of
60,18 % of
maximum aid intensity therefore is 47,93 % (35).

the project
industrial

(179) Taking into account that the total eligible costs are EUR
73,567 million and the aid amount that the Spanish
authorities initially intended to grant was EUR 36,850
million (the sum of the two grant decisions), the resulting
aid intensity would have been 50 %, above the maximum
allowable intensity.

(34) See paragraphs 149 to 151 above.
(35) 60,1 × 40 % + 39,82 × 60 % = 47,93 %.

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the re-classification of

(180) Therefore, the Spanish authorities acknowledged that, as
a consequence of
the eligible
expenditures, as mentioned above in paragraphs 119 to
129, they had to reduce the amount of aid in order to
respect the maximum intensity of aid. In their letter of
18 September 2008, Spain indicated that the final aid
amount would be EUR 35,2624 million. Spain also
provided
reimbursement
payment
schedule, along the lines indicated above in paragraphs
141 to 148.

revised

and

a

(181) Therefore the aid remains below the maximum aid

intensity set by the R & D & I Framework.

9.6. Conclusion on proportionality

aid remains proportionate

(182) The Commission is able to conclude that the classifi­
cation of eligible costs,
the modified aid instrument
and the adaptation of the amount of aid ensure that
to the
the
minimum. Further, these conditions, which are similar
to those applied in comparable cases (36), also ensure
fully reimbursed in normal market
that
conditions,
even
beyond, if sales exceed forecasts.

including with interest

the aid is

and kept

rates, or

10. IMPACT ON COMPETITION

(183)

In the decision to open proceedings, the Commission
proposed that the relevant market for the case was to
be considered the market for aero engines, which is a
worldwide market. It sought the view of interested parties
on this aspect.

(184) The Commission recalls that the aero engine sector is
three large Original
characterised by the presence of
(OEMs) — RR, General
Equipment Manufacturers
Electric (GE) and Pratt&Whitney (PW) — which lead
the engine programmes. At a second level there are a
first-tier partners (Snecma, MTU, Avio in
number of
Europe, MHI,
in Japan, etc.) which in
many cases have long-term relationships with a single
OEM (like Snecma with GE) or work on a project basis
with various OEMs (like Volvo). ITP is the smallest of the
first-tier partners.

IHI and KHI

larger engine market. As mentioned in the decision to
open proceedings, low pressure turbines are an essential
component of the engine but cannot be easily considered
as a separate sub-market, among other reasons because
they can be developed either by the large OEMs or by
first-tier partners.

(186) Besides RR, no other interested party participated in the
proceedings. Taking into account the publicity given to
the decision to open proceedings, and the small number
of actors in the sector and their size (all large enterprises),
the Commission infers from this absence of comments
that no competitor had concerns that this aid may distort
dynamic incentives, create market power or maintain
inefficient market structures.

(187) The Commission is therefore able to conclude that, in the
absence of intervention by competitors or other third
parties, and taking into account the very limited market
share of ITP, the impact on competition is very limited.

11. INDIRECT AID TO RR

(188)

In the decision to open proceedings, the Commission
indirect aid that the
raised a doubt about a potential
notified measure could give to the producer of
the
engine, RR. The Commission noted that RR may be a
potential beneficiary of the aid, since it is the leader of
the Trent 1000 and is a large shareholder of ITP. The
this assessment may be
Commission also noted that
influenced by the specific conditions
the colla­
for
boration, which may have been impacted by the aid.

(189) Already in their comments during the notification phase,
the Spanish authorities had indicated that in their view
there is no indirect aid, as the money paid to RR by ITP
as an entry fee (37) comes from its own resources and it
is not linked to the eligible costs of the project.

the

(190) As requested by the Commission in the decision to open
proceedings,
further
provided all the relevant documents concerning the co­
operation between ITP and RR, notably the 2003
Memorandum of Understanding and the Risk and
Revenue Sharing Agreement.

Spanish authorities have

(185) The Spanish authorities indicated that on the world wide
market of components for aero engines, ITP is a smaller
player than its competitors (in Europe, Rolls Royce,
Snecma, Avio, Volvo, MTU, etc.). Thus, the aid would
have a very limited impact, given the small market size
of ITP, accounting for only [5-10] % of the more limited
gas turbine market, which is a small segment of the

(191) Spain and ITP have observed that the contract between
the CDTI and ITP clearly indicates that eligible expen­
diture are only those incurred in the implementation of
the project, which would exclude the payment of fees by
ITP to RR.

(36) Cases Eurocopter N 186/06, Turbomeca N 447/07 or Rolls-Royce

(37) It is a normal practice in the sector that RRSP pay an entry fee to

Deutschland N 195/07.

the OEM.

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(192) Secondly, Spain indicated that the CDTI will monitor
strictly the implementation of
the contract, and will
pay the aid to ITP only after the expenditure has been
documented.

(199) Secondly, the Commission notes that eligible expenditure
has been incurred only in Spain and that no costs
in RR’s
relating to activities by RR or carried out
premises are included in the eligible project.

(193) Finally, Spain argued that

the prices used in the
commercial
relationship between RR and ITP are
identical to those used in the other RRSP agreements.

(200) Thirdly, the Commission acknowledges that the share­
holding position by RR does not give it an advantage
from the aid to ITP, other than the one deriving from the
establishment of a long-term partnership.

(194)

In its observations, RR first described in detail the nego­
tiating processes between the OEMs and potential RRSPs,
which involve parallel discussion with various partners,
in Europe and abroad. These discussions do not take
place on a component-by-component basis, even if
there are some key technological areas which the OEMs
do not consider for partnering, but involve various levels
of discussion and of possible involvement by the
partners. RR also indicated that programme contributions
by partners — which can comprise cash, engineering
work and the provision of services and development
parts by the RRSP — are negotiated and fixed at the
start of the programme.

(195) RR stated that negotiations were carried out at arm’s
length, on fully commercial terms as with other RRSPs.
It described the agreement with ITP, which is in line with
the agreements reached with the other full RRSPs (38) in
ITP’s overall
the Trent 1000. RR demonstrated that
contribution does not confer any financial advantage to
RR.

(196) Finally RR stated that it will not benefit from the aid
granted by Spain to ITP, since it will be used only in
Spain, for ITP’s activities for the low pressure turbine. RR
would receive a benefit only through the dividends to
which it would be entitled as a shareholder.

(197) The Commission notes, incidentally, that these arguments
also confirm the non-applicability of the collaboration
bonus (see above paragraphs 172 to 176). Since ITP is
the sole beneficiary of the aid, it bears the entirety of the
eligible costs. The first indent of point 5.1.3(i)(b) of the R
& D & I Framework stipulates that no single company
should bear more than 70 % of the eligible costs, which
is clearly not the case here.

(201) The Commission also notes that it is possible to say that
the OEMs have an advantage if their RRSPs benefit from
aid, which allows the RRSPs to invest significantly in
major engine programmes and the OEMs themselves to
share the risks associated with such programmes.

(202) On the other hand, however, the Commission notes that
such advantage is inevitably limited, if compared with the
overall investments by the OEMs in these programmes.
The advantage would be even more limited if compared
with the overall size of the engine market and with the
overall turnover of the OEMs.

(203)

In any case this advantage seems to be impossible to
quantify, as its quantification would need to be based
on
of
programme organisations, given the complexity of the
negotiations concerning the RRSPs.

comparison with

alternative

scenarios

a

(204)

In any case, the Commission notes that this advantage
does not entail a transfer of public funds from the State
to the OEM, especially in this case where the eligible
expenditure was all incurred in Spain.

(205)

In absence of a transfer of State resources, and with a
limited and not quantifiable advantage, the Commission
is therefore able to conclude that there is no indirect aid
to RR as a result of the support granted by Spain to ITP.

(198)

In its assessment of these arguments, the Commission
notes in the first place that the documents submitted
by Spain and the information provided by the parties
indicated that the RRSP agreement between ITP and RR
had indeed been negotiated on commercial terms.

(38) RR has no shareholding link with these companies.

12. BALANCING TEST

(206) According to point 7.5 of the R & D & I Framework, in
the light of the positive and negative elements assessed
above the Commission balances
the
measure and determines whether the resulting distortions
adversely affect trading conditions to an extent contrary
to the common interest.

the effects of

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(207)

In the present case, the Commission finds that the aid
has positive effects in so far as it addresses a market
failure, that it has an incentive effect for the beneficiary
and that it is granted through an appropriate instrument
which ensures that the aid is proportionate.

of EUR 35,2624 million that Spain intends to grant to
ITP for the development of the low pressure turbine of
the Trent 1000 engine developed by RR for the Boeing
787.

(208) The Commission also finds that the negative effects of
the measure are limited, since the distortion of compe­
tition created by the aid is not significant as it does not
crowd out investments by competitors, it does not create
a position of market power and it does not maintain an
inefficient market structure.

(209)

that

the Commission further
In balancing these elements,
notes
the Spanish authorities have agreed to
reduce the amount of eligible costs, to revise their classi­
fication, to adapt the aid instrument and to reduce the
overall amount of aid.

(210) The Spanish authorities will provide an annual report on
the implementation of the aid, allowing the Commission
to monitor the measure.

(213) Finally, the Commission considers that the aid granted by

Spain involves no indirect aid to RR,

HAS ADOPTED THIS DECISION:

Article 1

The State aid which Spain is intending to grant
amounting to EUR 35 262 400,
common market.

to ITP,
compatible with the

is

Implementation of the aid is accordingly authorised.

Article 2

This Decision is addressed to the Kingdom of Spain.

(211)

In conclusion, the Commission is able to say that the
balancing test for the aid under assessment is positive.

Done at Brussels, 21 October 2008.

13. CONCLUSIONS

(212) On the basis of the above, the Commission therefore
concludes that it should raise no objections to the aid

For the Commission

Neelie KROES
Member of the Commission