Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

REGULATORY FRAMEWORK: STATE AIDEven if the European Union declares the principle of incompatibility between State Aid and the common market, some derogations have beenestablished (Art. 87.3a and 87.3c of the Treaty which establishes the European Community).From such derogations it follows that Member States may grant aid for investment in disadvantaged regions (the so-called ‘Regional AidSchemes’) or rather targeted at particular sectors (the so-called ‘horizontal aid’ to small and medium sized enterprises, R&D, professionaltraining, protection of the environment etc.) respecting the Guidelines on State Aid, through a prior authorization scheme from the Commissionof the aid proposed by the Member State.Implementing Article 87 (3a,c) of the Treaty, the Commission may consider state aid as compatible with the common market when granted toimprove the economic development of certain disadvantaged areas within the European Union. These kind of aid are commonly referred to asRegional State Aid. This is considered indeed financial support for investments favouring large enterprises, or rather, in certain circumstances,operating aid destined to specific regions, in order to re-balance regional disparity. Such aid, by addressing the handicaps of the disadvantagedregions promotes the economic, social and territorial cohesion of Member States and the Community as a whole. Local specificity is indeed adifferentiator between the regional State aid and the other forms of horizontal aids, such as aid for research, development and innovation,employment, which pursue different objectives of common interest. In line with the relevant provisions of the EC Treaty, the EuropeanCommission adopted new Community Guidelines for Regional State aid (2006/C 54/08), to be applied between 2007-2013. The Guidelinesspecify rules for the selection or regions, that are eligible for regional aid, and define the maximum permitted levels of this aid.With the Regulation (EC) 1628/2006 the Commission expressly established that ‘transparent’ regional aid shall be exempt from the notificationrequirement to the European Union; to this end, regional aid schemes will be ‘transparent’ when it is possible to calculate precisely the GrossGrant Equivalent as a percentage of eligible expenditure ex ante, without need to undertake a risk assessment.State Aid may be declared compatible when pursuing Community interests, or when the Commission establishes, in absence of it, that themarket forces would not allow beneficiary businesses to adopt some target desirable behaviours.The Commission’s assessment is based on the following principles: a compensatory justification and the real need for the aid; following thesedirections, various categories of ‘horizontal aid’ have been identified. This is, indeed, a State aid applicable without geographical constraints,whose aim is to support business modernization and development and to address certain problems of general scope.Horizontal classifications, providing the criteria establishing when a certain aid may benefit of a presumption of compatibility, are related atpresent to aid for small and medium-sized enterprises, employment, training, research, development and innovation, aid for the environment,and for risk capital.3.3.1.3 Feasibility and option analysisThe feasibility of the project should be verified evaluating both the technological features (e.g. theproduction technologies employed) and the economic/financial ones (the financial solidity and theeconomic efficiency of the company and the possible dynamics of the product market). Moreover, it couldbe important to make a more in-depth analysis with regard to the:- management skills and capabilities;- organisational activities described in the business plan supplied by the companies, like logistics, supplychain and commercial policies.The options analysis should consider:- location;- alternative methods of financing (e.g. financing the interest account instead of the capital account,financing a leasing contract, or other methods of financing);- technical or technological alternatives to the proposed project and the global alternatives (e.g.supplying low-cost real services).3.3.1.4 Demand analysisThe forecast for the future market demand for the products to be produced is a key issue in order toevaluate the profitability and sustainability of an industrial investment project.The first step should be a general overview of the estimated Gross Domestic Product over the next tenyears.After this, it would be essential to assess growth dynamics or the specific productive segment. The keyquestions are: ‘is this an innovative (fast growing but potentially high-risk) industrial sector?’ and ‘how isthe future demand likely to depend on the economic cycle and eventual global economic weakness?’It would be useful to try to make some assumptions about the yearly percentage growth of the sector.Starting from this point, analysts should try to deduce the relative performance of the company ascompared to the sector as a whole.106