Last year, the Czech government provided subsidies worth an average 40% of the cost of an investment to more than 60 projects across the country. But under new EU rules, the level of subsidies granted in the Czech Republic and across the EU could drop significantly.
Although the EU currently bans state aid, foreign firms investing in an EU country may be eligible for subsidies or tax breaks from a national government if they can satisfy certain EU criteria and invest in certain regions. But this criteria will change from July 2014.
The EU regions that can in principle utilise state aid are being recategorised. This is because state aid is supposed to focus on underdeveloped regions. As regions have attracted investment in the past decade or so, they have become more developed.
Regions may be classified as underdeveloped or less developed, also known as 'A' and 'C' regions. A regions are granted higher maximum levels of state aid – known as state aid intensity – than C regions. By being recategorised from A to C, some regions will see their state aid intensity fall quite considerably.
In the Polish region of Kielce, for example, state-aid intensity (expressed as a percentage of the total so-called eligible costs of the project) was 50%, but from July will be only 35%. Bearing in mind that the actual investment is usually far less than the maximum, this means that realistically state aid in that region could now be as low as 20%. The Warsaw region has lost state aid funding possibilities altogether. Slovenia and Malta have lost their countrywide A-region statuses, with Malta moving entirely to a C region.
The rebalancing will be most acutely felt in those former communist countries that have joined the EU in the past decade or so, such as Poland. Those countries will lose out to the new accession countries, Romania and Bulgaria, where many regions will be classified as A and so be able to offer significant state aid to foreign investors.
Alex Ash, director of business and location consulting at professional services firm Jones Lang LaSalle in London, says: “Although we haven’t seen all the regions yet, it is pretty certain that the likes of Poland, the Czech Republic and Slovakia are going to lose out. This is logical given that the whole point about state aid is that it is anticompetitive but justifiable if it can help a region develop.”
Investment promotion agencies are acutely aware of the imminent problem. In the Czech Republic, for instance, a CzechInvest spokesperson says: “There is a danger that the new guidelines will substantially diminish the inflow of new investments as well as the number of expansions of existing investors in the Czech Republic.”
The recategorisation of the regions is not the only change. The amount of aid that investors can tap is dependent on the size of their enterprise, and the new rules make it more difficult for large enterprises to receive state aid. Mr Ash explains: “Currently, large enterprises in the C regions can be granted state aid even if it is for expanding an existing project. But the new rules say that the project must be a new economic activity [or a new, diversifying product] to be eligible. This means that many larger companies may find that they can no longer get state support for a current project.”
Even if the enterprise has demonstrated its activity is genuinely new, there is then a detailed assessment by the European Commission (EC) of the project’s costs. This affects the actual level of state aid to the investor. Under the new rules, which cover the period 2014 to 2020, the EC will use what is known as the net-extra-cost approach and counterfactual analysis which, broadly speaking, compares the eligible costs of an investment with and without state aid.
The new rules emphasise the need for investors to show that state aid is a significant factor in their investment decision. But some investors, such as high-tech companies, may find it difficult to do this. Martina Maier, partner at law firm McDermott Will & Emery in Belgium, says: “The EC may argue that these investors are uninfluenced by state aid and more influenced by aspects such as the available labour pool, political stability, the transport and infrastructure, local markets and so on. Investors must therefore ensure that they have the necessary documents ready to prove that the aid was actually necessary for the realisation of the concrete project.”
In some regions, it may be that state aid is indeed not that significant. “When it comes to inward investment we know that the skills of our people [in Scotland], along with our highly supportive business infrastructure and world-class academia, are key factors in any investment decision,” says Adrian Gillespie, managing director operations at investment promotion agency Scottish Enterprise.
By contrast, there are other sectors for which the effect of a change in the aid rules may make investors reconsider. Ms Maier says: “There are industries where public money makes a lot of difference, such as those exposed to tough international competition. For example, the automotive industry, where companies are deciding whether to invest within or outside of the EU.”
A spokesperson for Slovakia’s investment promotion agency, Sario, is more upbeat, making the point that the actual amount of aid has always been less than the maximum allowed anyway and these new levels are broadly in line with the existing levels given in Slovakia over the past decade or so. “We do not expect any major changes in companies’ decisions to claim investment aid. Even now, the actually awarded aid is usually below the maximum threshold [intensities], at about 20% between 2002 and 2012, being close or lower than the intensities proposed in the new guidelines,” says the spokesperson.