The Situation: The European Commission has launched its largest ever stimulus package to support recovery of EU economies from the COVID-19 pandemic’s unprecedented economic and social disruption. Each EU Member State must submit a recovery plan and funding requests for Commission review. The Commission has made clear that all investment projects must comply with EU State aid rules to qualify for public funding.
The Result: Member States have until April 30 to submit national recovery plans to the Commission, which, in turn, has committed to complete its State aid review within six weeks.
Looking Ahead: Given the EU’s warning on State aid, Member States are likely to evaluate and select only those projects that are compatible with those rules. Businesses that have submitted or plan to submit investment projects to their national governments for inclusion in the national recovery plan should evaluate whether the project satisfies EU State aid requirements. Moreover, encouraging the Member State to include the State aid compatibility assessment in its recovery plan submission may increase the likelihood of Commission approval.
The Recovery and Resilience Facility
The Commission’s Recovery and Resilience Facility ("RRF") provides large-scale financial assistance to help Member States recover from the economic crisis prompted by the COVID-19 pandemic. The RRF will include €675.5 billion in grants and loans to finance reforms, to support investment in public works projects, and to accelerate Member States’ economic recovery.
To benefit from the RRF, each Member State must prepare and submit to the Commission a recovery and resilience plan that includes a "coherent package of reforms and public investment projects," consistent with the Commission’s RRF directives. Under this initiative, Member State recovery plans must include minimum expenditures on green and digital projects, 37% for climate investments and 20% for "digital transition." Within these "twin transitions," the Commission has identified several European "flagship areas" on which Member State investment and reform should focus:
- Clean and renewable ecological technologies;
- Energy efficiency of buildings;
- Sustainable transport and charging stations;
- Expanded broadband services, data cloud capacity, and sustainable processors;
- Digitalization of public administration; and
- Education and retraining to support digital skills.
All of these reforms and investment projects should be implemented by 2026.
State Aid Rules and the RRF
Under the Treaty on the Functioning of the European Union ("TFEU"), any form of public financial support selectively granted to businesses that distorts competition is deemed unlawful State aid and therefore prohibited. However, the Commission may authorize State aid if it falls under one of the categories exempted under the TFEU (e.g., economic development in special areas or sectors, social aid, natural disasters, etc.) and provided that a number of requirements are met (appropriateness, necessity, proportionality, and incentive effect).
The RRF guidelines make clear that the investment projects included in Member State recovery plans must comply with State aid rules. The Commission published practical guidance for swift treatment of projects under State aid rules, as well as a number of sector-specific templates to help Member States design and prepare the State aid elements of their recovery plans.
The 13 sector-specific State aid templates follow a uniform structure, providing industry-specific guidance as to when:
- The financial support does not qualify as State aid, and therefore prior notification to the Commission is not necessary.
- The financial support is State aid but notification is not required, and specific rules may apply (in case of aid exempted from the notification obligation).
- The financial support is State aid and an individual notification is necessary.
Consistent with its objectives for the focus of the stimulus package, the EC devotes a majority of the templates to aid for energy and environmental projects. For example, the template dedicated to energy from renewable sources including hydrogen states that if a Member State requests aid for an investment project in this category exceeding €15 million, the State aid exemption will not be applicable and the Member State must notify and receive approval from the Commission before it will fund the project. In its compatibility assessment, among other criteria, the Commission will assess whether the aid meets the incentive effect requirement (i.e., without public support the project would not be implemented), and whether the aid is proportionate to the minimum aid required to address a market failure. The template also notes that the Commission will conduct a balancing test to determine whether the positive effects (i.e., contribution to the common interest objective in reducing CO2 emissions) outweighs the negative effects (i.e., distortion of competition).
The Commission’s review of national recovery plans will be a top priority. Member States must submit their national recovery plans by April 30, 2021, and the Commission has promised that its review will take no more than two months overall, including just six weeks for the State aid elements. EU Council review (and authorization) will follow Commission review. The EU has promised to pay 13% of the total support granted to each Member State within two months of approval.
What to Expect
Although one might expect the Commission to take a more lenient approach to its application of State aid rules to Member States’ recovery plans, the Commission’s clear message is that all relevant projects will undergo a thorough State aid review. As a result, recovery plan projects that implicate State aid are likely to face challenges in Commission review unless they contain the requisite background analysis to support a request for State aid. For example, the Commission will be more likely to reject a funding request that is missing a credible counterfactual analysis (i.e., comparing the cost of the project with and without the public support) or one in which funding exceeds the ceilings (aid intensity) authorized in the Commission’s past decisions.
Companies that have submitted or are planning to submit investment projects to their national governments for inclusion in the national recovery plan must therefore be prepared to assist (or even encourage) the Member State to include a fulsome State aid analysis for each project. Jones Day is assisting clients in the assessment of the compatibility under State aid rules of investment projects that have been included in national recovery plans.
Three Key Takeaways
- The EU Commission has warned that it will not authorize Member State stimulus funding requests as part of its Recovery and Resilience Facility unless those projects pass State aid review. The State aid rules prohibit Member State financial support of private industry that results in a competitive advantage for the recipient, subject to certain exceptions.
- There is significant risk that the Commission will reject private investment projects in a Member State recovery plan that do not adhere to the limits and requirements set forth in the relevant EC State aid law and practice.
- Businesses that expect to have a project included in a Member State recovery plan should consider whether to develop their own State aid compatibility assessment that can be shared with Member State officials for inclusion in the recovery plan. The Commission is more likely to approve projects that are demonstrably consistent with its State aid rules.