EUROPEAN COMMISSION. State aid No. N 303/2008 Creating value-added agricultural products Latvia

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1 EUROPEAN COMMISSION Brussels, C(2009) PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Subject: State aid No. N 303/2008 Creating value-added agricultural products Latvia Sir, 1. PROCEDURE (1) By electronic notification of 23 June 2008, registered at the Commission on the same day (REG SANI 1186), the Latvian authorities notified the abovementioned measure concerning a regional sectorial aid scheme for the value-added agricultural production. (2) By letter dated 11 August 2008 (*D/24170) the Commission requested additional information. The Latvian authorities submitted the requested information by letter of 22 September 2008 registered by the Commission on the same day (*A/19344). (3) On 8 October 2008, a meeting was held between the Latvian authorities and the Commission's services. (4) By letter dated 7 November 2008 (*D/54395) the Commission requested additional information on the notified measure. The Latvian authorities submitted the requested information by letter of 16 December 2008 (*A/27187) and of 10 February 2009 (*A/3152), registered at the Commission on the same day. Viņa ekselence Māris RIEKSTIŅA kungs Ārlietu Ministrs Brīvības bulvāris 36 LV-1395 Rīga Commission européenne, B-1049 Bruxelles Belgique Europese Commissie, B-1049 Brussel België Tālrunis: (0)

2 2. DESCRIPTION OF THE AID MEASURE 2.1. Objective of the aid scheme (5) The notified regional aid scheme supports investment projects, which aim at the activities related to the processing of agricultural products falling within the scope of Annex I of the EC Treaty into non-annex I products of the EC Treaty. The notified scheme is part of the measure "Creating value-added agricultural products" of the Latvian Rural Development Programme Legal basis (6) The legal basis of the scheme is: - Cabinet of Ministers Regulation No. 255 of 8 April 2008 "Regulations on State and European Union aid for rural development within the framework of the Latvian Rural Development Programme measure "Creating value-added agricultural products""; - Draft Cabinet of Ministers Regulation concerning Amendments to Cabinet Regulation No. 255 of 8 April 2008 "Regulations on state and European Union aid for rural development within the framework of the Latvian Rural Development Programme measure "Creating value-added agricultural products""; - Cabinet of Ministers Regulation No. 298 of 21 April 2008 "Procedures by which State and European Union Aid is Granted for Rural and Fisheries Development through an Open Tender" Administration of the scheme/authority granting the aid (7) The aid under the notified scheme will be granted on a discretionary basis, following a decision of the authorities. The decision will be made on the basis of administrative, qualitative and specific criteria, which are established in regulations. (8) The Rural Support Service, a state administration institution under the supervision of the Ministry of Agriculture, is responsible for the scheme's administration Geographical and sectorial scope of the scheme (9) The scheme is applicable in the rural areas of Latvia, the whole territory of which qualifies as an assisted region under the derogation in Article 87(3)(a) of the EC Treaty, in conformity with the Commission decision of 13 September 2006 on the Latvian regional aid map for (10) The notification indicates that the scheme is sectoral as it is targeted at the activities related to the processing of agricultural products falling within the scope of Annex I of the EC Treaty into non-annex I products of the EC Treaty. 1 Commission decision of 13 September 2006 in case N 447/2006 Latvia Regional aid map , OJ C 287, , p

3 2.5. Beneficiaries (11) The scheme will apply to micro, small and medium-sized enterprises (SMEs) 2 and to other undertakings, which have more than 250 employees and a net turnover exceeding EUR 50 million. The aid under the scheme will not be granted to undertakings employing at least 750 employees that have a net turnover of at least LVL million. The foreseen number of beneficiaries is in the range from 101 to 500. (12) The scheme will not apply to undertakings that are in difficulty in the meaning of the Community guidelines on State aid for rescuing and restructuring firms in difficulty Duration of the scheme (13) The scheme comes into effect after its approval by the Commission. The last date until which the aid under the scheme can be granted is 31 December Budget of the scheme (14) The overall amount of the scheme's planned budget is LVL million (ca. EUR 79.5 million) 4. The scheme will be financed from the European Agricultural Fund for Rural Development (EAFRD) and the state budget in accordance with the Latvian Rural Development Programme for Definition of initial investment under the scheme (15) Under the notified scheme a beneficiary will be entitled to a grant provided inter alia that the supported investment project results in the setting up of a new processing establishment, the extension of an existing establishment, diversification of the output of an establishment into new, additional products, or a fundamental change in the overall production process of an existing establishment. (16) Under the notified scheme the acquisition of material assets must be related to the implementation of a specific investment project, which leads to the processing of agricultural products falling within the scope of Annex I of the EC Treaty into non- Annex I products of the EC Treaty. (17) Replacement investments are not eligible for aid under the scheme. (18) No aid for costs related to the acquisition of assets in case of a takeover is foreseen under the scheme. (19) The Latvian authorities confirm that only projects for which expenses are incurred after the date of publication of the scheme on the Internet 5 are eligible for aid under the scheme. 2 As defined in Annex I of the Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation), OJ L 214, , p OJ C 244, , p The exchange rate on 24 June 2008 was 1 EUR = 0,7025 LVL, OJ C 159, , p

4 2.9. Eligible expenses under the scheme (20) Under the scheme, the eligible expenses are costs related to both material (buildings, plant/machinery and equipment) assets forming part of an initial investment project. Immaterial assets will not be supported under the notified scheme. (21) Under the notified scheme the following costs directly related to processing of agricultural products into non-annex I products are eligible where they do not exceed 30 per cent of the total eligible costs of construction: costs related to the new construction or reconstruction of administrative premises; costs related to the setting up of security and gatehouse premises; installation of security alarms, including video surveillance systems; auxiliary premises; costs related to the setting up of premises for staff; and costs related to the improvement of the facility (asphalting the area or other surfacing, planting of lawns, installing exterior lighting and building fences). The Latvian authorities confirm that the abovementioned costs form an integral part of the supported investment project. (22) Under the scheme the acquired assets forming part of an initial investment project must be new, also in case of SMEs. (23) According to the legal basis of the scheme, the costs of preparatory studies and consultancy costs, which are linked to the investment project, are included in the eligible expenditure for SMEs. The legal basis also stipulates that these costs of preparatory studies and consultancy, which are directly related to the preparation or development of the investment project, shall not exceed 50 per cent of the total actual costs incurred. (24) Costs for acquisition of land and buildings under lease are not eligible for aid under the notified scheme. Costs related to the acquisition of equipment under lease are eligible for aid under the notified scheme if the financial lease contract contains an obligation to purchase the equipment at the expiry of the term of the lease Starting date of the project and incentive effect principle (25) The scheme provides that the application for aid must be submitted before works are started on the project. According to the Cabinet Regulation No. 298, the implementation of the project eligible for aid under the notified scheme shall not commence prior to the conclusion of a contract with the Rural Support Service, except for general costs incurred for preliminary feasibility studies that are directly connected to the preparation and execution of the investment project Form of the aid and aid intensity (26) The aid will be awarded in the form of a direct grant. The aid intensity under the scheme is expressed as a percentage of the investment project's gross total eligible expenditure. (27) The maximum allowable aid intensity under the notified scheme is 40 per cent Gross Grant Equivalent (GGE). (28) The Latvian authorities inform that the notified scheme does not foresee bonuses for SMEs. 4

5 (29) Under the scheme there is no restriction on the number of projects per one applicant during the Programming period from 2008 to However, the total amount of eligible costs under the notified scheme is limited depending on the sector of an aid beneficiary and ranges between LVL and LVL Own contribution (30) The Latvian authorities confirm that in all cases the beneficiary will provide a contribution of at least 25 per cent of the value of the total eligible costs either through its own resources or by external financing, in a form which is free of any public support, including de minimis support Maintenance of the investment (31) The Latvian authorities confirm that the notified scheme requires a beneficiary (irrespective of its size) to maintain the investment in the territory of Latvia for a minimum period of five years after its completion. In this regard the Rural Support Service will perform monitoring and financial control of investment projects, which are supported under the scheme Cumulation of aid (32) According to the legal basis of the notified scheme, aid under the notified measure shall not be combined with public financing under other aid programmes or individual aid projects, including de minimis aid, in relation to the same eligible expenditure of the project, regardless of whether the public financing is provided from local, regional, national or European Union financial sources, thereby ensuring that the aid intensity ceilings as laid down in the notified scheme shall not be exceeded Contribution of the sectorial aid measure to regional development (33) The Latvian authorities indicate that the notified scheme will apply in rural areas which are characterised by low standard of living and high unemployment rates. The implementation of the aid scheme will thus facilitate economic development in Latvia, by promoting the extension and diversification of activity of enterprises in Latvia and encouraging the establishment of new manufacturing facilities. In addition, the performance of firms, which process agricultural products into non- Annex I products, will improve, 70 direct and indirect jobs will be created, and the added value of goods will increase. 3. ASSESSMENT 3.1. State aid character of the scheme (34) According to the proposed aid measure, the aid in the form of a direct grant will be granted to undertakings carrying out investment projects, which lead to the processing of agricultural products falling within the scope of Annex I of the EC Treaty into non-annex I products of the EC Treaty. 6 Commission Regulation (EC) No 1998/2006 on the application of Articles 87 and 88 to de minimis aid, OJ L 379, , p. 5. 5

6 (35) The scheme will be financed using the state resources and the resources from the European Agricultural Fund for Rural Development (EAFRD). The resources of the EAFRD are transferred to the Latvian authorities to implement activities set in the Rural Development Programme for Latvia for The Latvian authorities are responsible for implementing and managing the Rural Development Programme, including the selection of beneficiaries and projects under the specific measures and payment of financing to the ultimate selected beneficiaries for realisation of their projects. Therefore, the financing from the EAFRD is imputable to the Latvian authorities, and it is also at the disposal of the Latvian authorities. Hence it can be concluded that the aid under the notified scheme will be provided by public authorities of the Member State through State resources within the meaning of Article 87(1) of the EC Treaty. (36) The aid foreseen under this scheme constitutes an economic advantage because it allows the beneficiaries to reduce the investment costs that they should normally bear in order to develop this type of projects. It may therefore distort or threaten to distort competition. (37) The scheme is selective because it applies only to undertakings which implement projects, which lead to the processing of agricultural products falling within the scope of Annex I of the EC Treaty into non-annex I products of the EC Treaty. Moreover, the State has a discretionary power in selecting projects and awarding grants under the scheme. (38) Finally, as the scheme concerns sectors and undertakings involved in trade between Member States, there is a risk that the aid could affect that trade. (39) Consequently, the proposed aid scheme constitutes State aid within the meaning of Article 87(1) of the EC Treaty Legality of the aid measure (40) The Latvian authorities have fulfilled their obligation according to Article 88(3) of the EC Treaty by notifying the aid scheme before putting it into effect Compatibility of the aid measure (41) Having established that the notified scheme involves State aid within the meaning of Article 87(1) of the EC Treaty, it is necessary to consider whether the scheme can be found to be compatible with the common market. (42) The Commission has examined the proposed aid scheme in the light of Article 87(3)(a) of the EC Treaty and in the light of the Guidelines on national regional aid ("RAG") 7. This assessment has lead to the observations laid down below. (43) Pursuant to paragraph 10 of the RAG, regional aid as a general rule should be granted under a multi-sectoral aid scheme which forms an integral part of a regional development strategy with clearly defined objectives. Where, exceptionally, it is envisaged to grant aid confined to one area of activity, it is the responsibility of the Member State to demonstrate that the project contributes towards a coherent regional development strategy and that, having regard to the 7 Guidelines on national regional aid for , OJ C 54, , p

7 nature and size of the project, it will not result in unacceptable distortions of competition. (44) The notified State aid scheme can be seen as a sectoral measure because it is confined to one area of activity processing of agricultural products falling within the scope of Annex I of the EC Treaty into non-annex I products of the EC Treaty. (45) As regards the need for the special treatment of the processing of agricultural products falling within the scope of Annex I of the EC Treaty into non-annex I products of the EC Treaty and its contribution to regional development, the Commission notes that the notified scheme complies with the objectives set in the Latvian Rural Development Programme for , Measure "Creating valueadded agricultural products". (46) The notified scheme is important from the socio-economic point of view. It is estimated that the scheme will in the long run create 70 direct and indirect jobs in economically less-developed parts of Latvia and will prevent rural-urban migration. The implementation of the aid scheme will thus facilitate economic development in Latvia, by promoting the extension and diversification of activity of enterprises in Latvia and encouraging the establishment of new manufacturing facilities. In addition, the performance of firms, which process agricultural products into non-annex I products, will improve, and the added value of goods will increase. (47) Considering the likely effects of the aid on competition, it should be noted that the maximum total amount of eligible expenditure a beneficiary can incur for different activities to be supported under the notified scheme are limited (ranging between LVL and LVL ). Further, the maximum allowable aid intensity under the notified scheme is 40 per cent GGE and the cumulation of aid under the scheme in question with other aid measures and de minimis aid in relation to the same eligible expenditure of the project is excluded. Thus taking into account the nature and size of projects to be supported by aid under the notified scheme, the potential distortions of competition will be limited. (48) In light of the foregoing considerations, the Commission considers that although the notified scheme is sectoral, it is on balance acceptable since it contributes towards a coherent regional development strategy of Latvian and, having regard the nature and size of the projects, it will not result in unacceptable distortions of competition. (49) In line with paragraph 9 of the RAG, the scheme will not apply to undertakings that are in difficulty in the meaning of the Community guidelines on State aid for rescuing and restructuring firms in difficulty 8. (50) In line with paragraph 34 of the RAG, the scheme relates to initial investment as it covers investment in material assets relating to the setting up of a new establishment, extension of an existing establishment, diversification of the output of an establishment into new, additional products, or a fundamental change in the overall production process of an existing establishment. Thus the notified aid is regional investment aid which will be awarded for initial investment projects. 8 OJ C 244 of , p. 2. 7

8 (51) Under the scheme the eligible costs of investments in material assets involve the costs of buildings, plant/machinery/equipment (cf. paragraph 34 of RAG). The aid is calculated on the basis of expenditure that is considered eligible under the RAG and meets the respective conditions specified therein (cf. paragraph 50). The acquired assets (equipment) will be new (cf. paragraph 54 of the RAG). (52) Under the scheme the costs of preparatory studies and consultancy costs linked to the investment project are eligible for SMEs up to 50 per cent of the actual costs incurred, in line with paragraph 51 of the RAG. (53) In line with paragraph 53, costs related to the acquisition of equipment under lease are eligible within the notified scheme if the financial lease contract contains an obligation to purchase the equipment at the expiry of the term of the lease. (54) Immaterial assets will not be supported under the notified scheme, therefore, the condition of paragraph 55 of the RAG do not have to be fulfilled. (55) In accordance with paragraph 34 of the RAG, the scheme ensures that replacement investments will not be supported. (56) In line with paragraph 54 of the RAG, the scheme ensures that the acquired assets are new. (57) In accordance with paragraph 41 of the RAG, the level of aid is calculated as a percentage of the value of the investment project's eligible costs and will not exceed the applicable regional aid ceiling. (58) The scheme takes into account the applicable Latvian regional aid map for and the maximum allowable aid intensities are in conformity with the regional aid map. Aid under the notified measure shall not be cumulated with public financing under other aid programmes or individual aid projects, including de minimis aid, in relation to the same eligible expenditure of the project, regardless of whether the public financing is provided from local, regional, national or European Union financial sources, thereby ensuring that the aid intensity ceiling as laid down in the notified scheme shall not be exceeded. (59) Under the scheme the award of aid is discretionary and in all cases an administrative decision to grant the aid is required. The scheme provides that the application for aid must be submitted before works are started on the project. The implementation of the project eligible for aid under the notified scheme shall not commence prior to the conclusion of a contract with the Rural Support Service, except for general costs incurred for preliminary feasibility studies that are directly connected to the preparation and execution of the investment project. If works on the project are started before the conclusion of the contract, all the project's costs are considered as ineligible for aid under the scheme. Thus, the condition on the incentive effect as laid down in paragraph 38 of the RAG is respected. (60) In accordance with paragraph 108 of the RAG, the scheme excludes the award of aid to projects which have started before the publication of the scheme on the Internet. (61) The scheme includes a clause stipulating that the beneficiary makes a financial contribution of at least 25 per cent of the total eligible costs and that this 8

9 contribution will be free of any public support in accordance with paragraph 39 of the RAG. (62) As an investment project, which total value is above EUR 50 million, will not be eligible for aid under the notified scheme, the conditions of section 4.3 of the RAG concerning regional aid for large investment projects do not have to be fulfilled. (63) The aid under the scheme is conditioned on the obligation of maintaining the investment in the territory of Latvia during a minimum period of five years after its completion in accordance with paragraph 40 of the RAG. (64) The duration of the scheme is in line with the duration of the regional aid map for Latvia. The scheme will expire on 31 December (65) In view of the above, the Commission considers that the notified aid scheme is compatible with the common market in accordance with Article 87(3)(a) of the EC Treaty. 4. DECISION (66) The Commission has accordingly decided to consider the aid scheme to be compatible with the EC Treaty. (67) The Commission reminds the Latvian authorities that the reporting conditions described in the Commission Regulation (EC) No. 794/2004 implementing Council Regulation (EC) No. 659/1999 laying down detailed rules for the application of Article 93 of EC Treaty 9 have to be respected. (68) The Commission further reminds the Latvian authorities that all plans to modify this aid scheme have to be notified to the Commission. If the Commission does not receive a reasoned request by fifteen working days of the date of the receipt, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition State Aid Registry B 1049 Brussels Fax No: Yours faithfully, For the Commission 9 OJ L 140, , p. 1. 9

10 10 Neelie KROES Member of the Commission