Seiner Exzellenz Herrn Frank-Walter STEINMEIER Bundesminister des Auswärtigen Werderscher Markt 1 D - 10117 Berlin Commission européenne, B-1049 Bruxelles – Belgique/Europese Commissie, B-1049 Brussel – België Telefon: 00 32 (0) 2 299.11.11

EUROPEAN COMMISSION

Brussels, 11.III.2008 C(2008)849 final.

In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus […].

PUBLIC VERSION

WORKING LANGUAGE

This document is made available for information purposes only.

Subject: State aid N 195/2007 (Germany). Individual R&D-aid for Rolls-Royce Deutschland – BR725 project

Dear Sir,

1. PROCEDURE

(1) By letter dated 4 April 2007, registered at the Commission on the same date, the German authorities notified, according to Article 88(3) of the EC Treaty, a planned individual aid to Rolls-Royce Deutschland.

(2) As the information received was not sufficient to assess the measure's compatibility with the common market, the Commission considered the notification to be incomplete. Thus, by letter of 14 May 2007, the Commission asked Germany for supplementary information. The German authorities responded by letter dated 20 June 2007, registered on the same day.

(3) The Commission considered that information not to be sufficient and therefore asked for additional information, by letter of 16 August 2007. The German authorities responded by letter of 5 October 2007, registered on the same day. By e-mail of 8 October 2007, the Commission asked the German authorities to provide legible versions of certain attachments to their letter of 5 October. The German authorities sent these documents by e-mail of 9 October 2007, registered on the same day

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(4) Since the information provided thus far was still not a sufficient base for assessing the measure's compatibility with the common market, the Commission requested further information, by letter dated 28 November 2007. The German authorities responded by letter dated 11 January 2008, registered on the same day. By e-mail dated 28 February 2008, registered on the same day, the German authorities provided an explanation of a technical term used in an annex to their letter dated 11 January 2007.

2. DESCRIPTION OF THE AID

2.1. General objective of the aid; aid instrument

(5) The notified aid will be granted to Rolls-Royce Deutschland Ltd.&Co KG, for the experimental development of the new 'BR725' business-jet engine. […]∗ The purpose of the aid is mitigating the risk inherent to that development project. The aid will be granted in the form of a repayable advance. Reimbursement depends on the project's successful outcome.

2.2. Implementing authority; legal basis; budget and duration

(6) The notified aid will be granted under the authority of the German Ministry of Economic Affairs and Technology (Bundesministerium für Wirtschaft und Technologie).

(7) The programme's legal base is:

– the Annual Federal Budget Act 2006, Budget Line 870 94-634 (Gesetz über die Feststellung des Haushaltsplans für das Haushaltsjahr 2006 vom 18.7.2006, Titel 870 94-634 (Haushaltsgesetz 2006));

– the Federal Budget Regulation (Bundeshaushaltsordnung (BHO));

– the Act on the Administration of the ERP Special Purpose Funds (Gesetz über die Verwaltung des ERP-Sondervermögens (ERP-Verwaltungsgesetz))

(8) The funds will derive from the European Recovery Programme (ERP) Special Purpose Fund (ERP-Sondervermögen) which, at the time of the notification of the measure, was administered by the Ministry of Economic Affairs and Technology. Pursuant to the Act on the Administration of the ERP Special Purpose Funds, ERP monies are Special Purpose State Funds (Sondervermögen des Bundes).

(9) The repayable advance will amount to up to EUR 83.6 million. The aid will be disbursed in annual instalments, from the date of the approval by the Commission until 2011 inclusive.

2.3. Beneficiary of the aid

(10) Rolls-Royce Deutschland Ltd.&Co KG (thereinafter 'RRD') will be the recipient of the aid and will carry out the aided R&D-project's essential parts. RRD is active in

∗ Business secret

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the aircraft engine sector. It is a 100%-affiliate of Rolls-Royce plc, London (thereinafter 'RR plc'). RR plc is the world's number-2 aircraft engine manufacturer, and probably number 1 in business jet engines.

(11) In 2000, RRD became a 100% subsidiary of Rolls-Royce plc. RRD's annual turnover was EUR 950 million in 2006 and is expected to be up to EUR 1,000 million in 2007 (based on an estimate dated 4/2007).

(12) Currently, RRD's workforce is approximately 2,000 personnel. It has two operating sites in Germany: Dahlewitz, near Berlin, and Oberursel, near Frankfurt am Main. RRD is active in integrating and after-sales service for the BR710-, TAY- and V2500-engines. It is currently developing the TP400-engine for the future Airbus A400M, together with MTU, ITP and SNECMA. Its R&D-activities further focus on industrial and experimental R&D, and development in after-sales service, to correct defects and increase performance.

(13) The current BR710-engine is used in very long range business jets and is making up for more than […] % of RRD's turnover. […].

(14) The BR725-project will be the very first complete development of a new engine under RRD's own responsibility. Thus, RRD will significantly upgrade its capability with the notified project.

(15) In the framework of the project, RRD will carry out the essential development activities. Certain tasks will be commissioned to 19 companies in the EU (UK, France and the Czech Republic), and to 2 companies in the U.S.

2.4. Customers; existing contractual obligations to deliver the new engine; tender procedure

(16) The new business jets that will be equipped with BR725-engines will be manufactured by Gulfstream Aerospace (USA; thereinafter "GA") […]. In that segment, GA offers its 'G550'-jet family […].

(17) RRD has already concluded a development-, certification-, production-, delivery- and maintenance contract, with GA. That contract was awarded after a tender procedure. […].

(18) The tender procedure in the run-up to the delivery contract with GA can be summarised as follows:

1. On 18 November 2004, GA sent a 'request for information' to engine manufacturers. As can be seen from internal documentation provided by RRD that request exclusively concerned technical specifications, in order to verify the feasibility of such a project. The request did not contain any commercial criteria, e.g. a price. According to the German authorities and RRD, it can not be excluded that at least one EU-based manufacturer, probably SNECMA, also responded to this technical request for information.

2. GA evaluated the responses to its request for information. Based on the results, GA sent a 'request for proposal' to several engine manufacturers,

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on 29 July 2005. This request contained commercial criteria. According to internal documentation provided by RRD, no other EU-based manufacturer than RRD was invited to submit a proposal. The request was sent to

– RRD

– General Electric

– Pratt & Whitney

3. On 28 August 2005, RRD sends GA its proposal, with the proviso that the actual launch of the project is subject to final approval by RR plc's board (Internal procedures oblige RRD to obtain the approval of the RR plc board to launch the project and sign the delivery contract).

4. On 15 September 2005, the board agrees to the launch of the project, after RRD had improved its business case, in particular with the prospect of government funding.

5. On 18 May 2006, RRD and GA concluded the delivery contract.

2.5. The BR725-project

2.5.1. Place of R&D-activities

(19) RRD will carry out the R&D-activities in question in Land Brandenburg, which is an assisted area in the sense of Art. 87 (3) (a) of the EC Treaty.

2.5.2. Project phases

(20) The project commenced in October 2005. Its very last phase is expected to be finished by 2014. The following schedule was established. Phases may overlap and thus allow gaining time:

Date Milestone

10/2005 Development of engine concepts and alternative concepts; preliminary design

[…] Preliminary design review: verification whether the preliminary design will presumably be up to requirements; decision to work out that design in detail

[…] Start of detail design and development

[…] First development test run (end of detail development and start of validation phase)

[…] Start of validation (Testing of the development engines and components in ground test beds)

[…] Certification of a first prototype.

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[…] Certification of a second prototype

6/2009 Commencing flight tests

3/2011 Certification of aircraft and engine. All prototypes that have been built prior to this phase will not be marketable. They will have been heavily used in test runs and were not built to fit any particular type of aircraft in the first place.

3/2011 till approx. 2013/14

Last development phase: Entry into service and regular service. Experience gained in regular service will result in a large number of technology improvements, even consisting of completely new component designs.

The aid will only be granted for the phases until the certification of a first prototype.

(21) […].

2.5.3. The BR725-engine

(22) The engine will be capable of propelling the next generation of very-long range' (VLR)/'large cabin'-business jets. A VLR-business jet fitted out with one pair of such engines could cover up to 7,000 nautical miles (approx. 13,000 km) and reach a speed of up to Mach 0.93. Nevertheless, such plane will be able to touch down on even small airfields, due to its relatively low maximum take-of weight (MTOW) of only 100,000 lb (45 to).

(23) Below graph, provided by the German authorities and RRD, shows the new GA-'next-generation' VLR's estimated position in the market (existing market):

(24) According to information provided by the German authorities, completely new

designs will be developed in the project. RRD has given specific information on each element that will be explored and provided a number of details on the new technologies to be implemented in the engine's fan module, compressor, combustion chamber, turbine, and gear bow such as, for example, the introduction of a 'blisk' (disc + blades in a single elements rather than assembly of blades onto a disc), multidisciplinary optimisation of components, new material (Titanium-Aluminium alloys), multistage calculation methods, optimized mixer for reduced levels of noise, etc.

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(25) […].

(26) The new engine will predominantly consist of new components, as compared to the predecessor engine BR710. The German authorities assert that even components which will not be new developments will have to be adapted and refitted. RRD calculated an overall share of new components in the engine to be in 70 – 80%-range, depending on the weighting of the components, as compared to the predecessor BR710. The table hereunder shows the share of new components per system:

Engine component Share of new parts within that component

Fan 100 %

Compressor 55 %

Combustion chamber 15 %

High-pressure turbine 80 %

Low-pressure turbine 90 %

Structural components 100 %

Transmission 50 %

Nacelle 100 %

Engine control 100 %

(27) The table hereunder shows a comparison of key performance parameters between BR710 and the new BR725: (BPR means bypass ratio; T/W means thrust-to-weight ratio; SFC means specific fuel consumption):

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(28) Environmental aspects: Compared to the current BR710-series, the new BR725-equipped business jet's novelty can be described as follows:

NOx-emission 4 % less

CO2-emission More than 4 % less

Noise-emission 5 db less

Fuel-consumption

More than 4 % less

2.5.4. Eligible costs

(29) The estimated total project costs amount to EUR […] million. However, only costs up to EUR 253.2 million will be eligible for aid.

Costs Million EUR

Overall development costs […]

- Costs incurred outside Germany […]

= Total costs incurred in Germany = […]

- ineligible development costs incurred in Germany, after licensing of the first prototype

[…]

= Eligible costs incurred in Germany = 253.2

(30) The eligible costs will exclusively fall within the category of experimental development. Eligible costs will be broken down according to the costs categories shown hereunder:

Cost category (all costs directly incurred as a result of the research project) Million EUR

Personnel costs: researchers, technicians and other supporting staff to the extent employed on the research project. Based on a composite hourly rate (Mischstundensatz), personnel costs will also include part of the following costs: assembling of component groups (Baugruppen) and engines and dissembling after testing for evaluation purposes; costs for carrying out tests, test rig personnel and materials (e.g. fuel for test runs)

[…]

Instruments and equipment to the extent and for the period used for the research project: […]

Contractual research, technical knowledge, patents bought or licensed from outside sources at market prices, where the transaction has been carried out at arm’s length and there is no element of collusion involved, as well as costs of consultancy and equivalent services used exclusively for the research activity

[…]

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Other operating expenses, including costs of materials, supplies and similar products. This includes costs of components of prototypes that will be used in different validation and certification tests; special parts, including construction costs in order to accommodate an engine or parts thereof in a test rig. Based on a composite hourly rate, this cost category will also include part of the following costs: assembling of component groups (Baugruppen) and engines and dissembling after testing for evaluation purposes; costs for carrying out tests, test rig personnel and materials (e.g. fuel for test runs)

[…]

Total eligible costs 253.2

[…] […]

[…] […]

(31) The German authorities explicitly assured that the project based accounting system will prevent any double entry of the costs. Further, they asserted that the composite hourly rate is a standard method applied by the industry for certain activities, in particular for engine testing.

2.6. Aid instrument, aid intensity and funding conditions

(32) The repayable advance will amount to EUR 83.6 million at most. The aid will be disbursed in annual instalments, from the date of the Commission's approval of the aid 2007 till 2011 inclusive. The amount of annual instalments will depend on the project's advancement, based on estimated eligible costs of the subsequent year. In total, the reimbursable advance will under no circumstances exceed 33 % of eligible costs incurred in Germany. This amounts to […] % of the overall development costs;

(33) The conditions for the reimbursement of the repayable advance depend on the outcome of the R&D-project. Based on sales forecasts, the German authorities and RRD expect that […] engines will be sold from […] till […]. In the event this forecast applies, 100% of the repayable advance will be reimbursed by the end of […].

(34) Thus, the project will be deemed to be 100% successful if […] units will have been sold. Germany expects full payback by […], e.g. […] years after disbursement of the first instalment. The schedule hereunder will apply:

When this percentage of sales will be reached…

(e.g. units sold)

…this percentage of the advance will have been repaid:

[…] % […] […]%

[…] % […] […] %

[…] % […] […] %

(35) Below graph illustrates the estimated repayment of the principal, depending on the quantity of engines sold: […]

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(36) The German authorities will calculate the interest rate applicable on the basis of the effective interest rate of quoted Federal Government Bonds (börsennotierte Bundesanleihen), plus a top-up of 0.625 percentage points. According to information provided by the German authorities, the interest rate payable for the loan agreement in question will be above the applicable rate resulting from the application of the Commission notice on the method for setting the reference and discount rates1. In order to substantiate this assertion, the German authorities provided a comparison of said interest rates 2002 – 2006:

Year Reference rate for Germany

Effective interest rate of quoted Federal Government Bonds with a residual term between 9 and 10 years

Interest rate column three + 0.625 percentage points

2002 5.06% 5.10% 5.725%

2003 4.45% 4.30% 4.925%

2004 4.43% 4.20% 4.825%

2005 4.08% 3.50% 4.125%

2006 4.09% 4.00% 4.625%

(37) Further, the German government has reserved its right to agree on even higher rates

with RRD. The German Federal government will be entitled to receive payment beyond repayment of the advance amount including interest, of USD […] per unit sold, as from the sale of the […]th unit (estimated sales price per unit = EUR […]) with no limitation in time.

2.7. Cumulation with other aid

(38) The German authorities declared that the aid in question will not be cumulated with any other State aid. According to the German authorities, it is true that certain technologies that will be applied in the new engine have been co-financed under State aid schemes. However only costs incurred for fundamental and industrial research activities had been eligible under these schemes. The German authorities further asserted that R&D-projects funded with said schemes form the technological foundation for the further experimental development of components under the project in question. The German authorities expressly assured that the experimental development activities in the framework of the BR725-project are new and had never been funded before under any State aid measure.

1 OJ C 273; 9.9.1997; p.3.

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3. ASSESSMENT OF THE AID

3.1. Existence of State aid

(39) The notified individual aid will be awarded to an enterprise engaged in economic activity, namely RRD. Hence, the aid measure falls under Art.87 (1) EC. The notified individual aid measure is funded through ERP-Special Purpose State Funds (ERP-Sondervermögen), and therefore through State resources. It favours one individual undertaking, namely Rolls-Royce Deutschland Ltd.&Co KG (RRD). Hence, the measure is selective. In addition, the grant makes it possible for RRD to improve its overall financial condition and to enhance its market position, by obtaining State financing it could not obtain from the private market. The notified aid therefore entails an advantage to RRD Further, RRD is engaged in intra-Community trade, since it competes with other European aircraft engine manufacturers, e.g. SNECMA (France), as well as with manufacturers of engine components, e.g. VOLVO-Aero (Sweden).

(40) The Commission therefore assumes that the grant under scrutiny is likely to distort competition and thereby affect trade between Member States. Hence, the Commission has come to the conclusion that the individual aid measure constitutes State aid within the meaning of Article 87(1) EC.

3.2. Legality

(41) The Commission notes that the German authorities have complied with Article 88(3) EC and have notified the individual aid before it has been implemented. The measure’s entry into force is subject to the Commission’s approval.

3.3. Basis for compatibility assessment

(42) According to the notification documents submitted by the German authorities, the notified reimbursable advance will be granted for R&D&I-related activities, namely experimental development activities. The Community Framework for State aid for Research and Development and innovation2 (thereinafter "the Framework") sets forth criteria, based on which the Commission will assess whether aid for certain R&D-activities, including experimental development, is eligible for compatibility under Article 87(3) (c) of the EC Treaty.

(43) The Framework provides for several Chapters. This structure translates into two different levels of assessment. First, Chapter 5 sets forth a series of conditions and parameters in respect of the aided activity, aid intensities and conditions attached to compatibility. In Chapter 6, the Framework provides for more specific rules on the necessity and incentive effect of the aid. As regards the first level of assessment, the Commission considers that it is in principle sufficient that the measure concerned is in line with the conditions described in Chapter 5, provided that the conditions in Chapter 6 to presume the incentive effect are fulfilled.

(44) The second level of assessment requires additional scrutiny. This applies to aid measures which the Commission considers to constitute higher risks for

2 OJ C 323, 30.12.2006, p. 1.

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competition and trade, due to the activity, aid amount, or type of beneficiary. Such assessment will apply to aid exceeding the threshold set in section 7.1 of the Framework.

(45) Chapter 8 of the Framework applies to all aid measures falling under the Framework. That Chapter contains rules for the cumulation of the aid concerned with other State aid.

3.4. Assessment on the basis of Chapter 5 of the Framework

3.4.1. Eligible activities – category of research

(46) According to the German authorities, the repayable advance is intended to mitigate the risk inherent to experimental development activities. Section 2.2 g) of the Framework provides for a definition of 'experimental development'.

(47) The Commission notes that component technology used for the project concerned is based on the result of previous fundamental and industrial research programmes. Hence, existing knowledge will be used or the development of a new product. Based on the comparison with its predecessor product BR710, shown above (2.5.3), the Commission considers the BR725-engine to be a new product, due to its significantly advanced performance as well as the predominant share of completely new developed components it will contain.

(48) The project phase that is eligible for aid started in October 2005, with the development of engine concepts and alternative concepts and a preliminary design (above, 2.5.2). The aid will be given up to the certification of a first prototype. The Commission notes the German authorities declaration that this prototype's components will still need further optimisation and that safety requirements will necessitate further long-term ground- and flight-testing. Further, the prototype will not be designed for integration in any specific aircraft. Beyond that, it will have been subject to high mechanical stress during the test phase. Therefore, the Commission finds that the first prototype will be used only for demonstration and validation purposes.

(49) Therefore, the activity that is eligible for the notified aid is 'experimental development' in the sense of Section 2.2 g) of the Framework.

3.4.2. Eligible costs

(50) Point 5.1.4 of the R&D&I Framework defines eligible costs of R&D projects, which shall be allocated to a specific category of R&D.

(51) As all eligible costs as described above, 2.5.4, will be allocated to a specific category of R&D and are in conformity with the definitions set out in Point 5.1.4 of the Framework, that condition is met.

3.4.3. Aid intensity

(52) Germany will grant a repayable advance which qualifies as State aid within the meaning of Article 87(1) of the EC Treaty. Therefore, the rules of Section 5.1.5 of the Framework apply.

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(53) Pursuant to Section 5.1.5 of the Framework, the advance may cover up to a maximum of 40 % of the eligible costs for the experimental development phase of a project. The Commission notes that Germany has notified the aid expressed as a percentage of the eligible costs incurred in Germany during the above described eligible project phase. The amount disbursed will amount to EUR 83.6 million at most. Eligible costs are estimated to amount to EUR 253.2 million. Accordingly, the aid intensity is 33% of the eligible costs. The Commission notes that the aid intensity is […] % of total project costs incurred in Germany, and […] % of overall project costs.

3.4.4. Successful outcome of the project as a condition for repayment

(54) According to the definition, as laid down in section 2.2 h) of the Framework, ‘repayable advance’ means a loan for a project which is paid in one or more instalments and the conditions for the reimbursement of which depend on the outcome of the R&D&I project. As is shown above, (33) et seq., these criteria are met.

(55) Section 5.1.5 of the Framework further stipulates that that the definition of a successful outcome of a project has been established on the basis of a reasonable and prudent hypothesis. The Commission examined compliance with that rule based on detailed information provided by the German authorities, as summarised hereunder.

(56) RRD established its sales forecast on the basis of four parameters:

– Development of profits of U.S.-based enterprises: […];

– Development of private wealth: […];

– Technical necessity to replace an ageing fleet: […];

– Development of demand outside the U.S: […].

(57) Further, the forecast took the following assumptions into account:

– The current BR710-engine is to be taken as a reference model;

– Since its naissance in the early sixties, the business jet market has seen steady, long-term growth: The market segment that is expected to absorb BR725-engines is estimated to grow at […]% annually. This estimate is based on the BR710 reference-market, which shows a […] %-growth per year (from […] till […], based on units ordered);

– The market for large, long-range business jets will continue to be shared between GA and […];

– The increase in shared ownership of business jets, from […] in 2000 to […] in 2006 (annual […] %-growth).

(58) Based on of alternative, comprehensible and prudent hypothesis. The essential parameters of the underlying scenarios can be summarised as follows:

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BR725-market volume 2006 till 2025 (RRD estimates) […] BR725-engines

BR725-market volume 2012 till 2024 (GA estimates; based on planned production capacity). GA expects an annual […] %-growth of the VLR/large cabin business jet market and thus expects to […] the number of jets delivered by 2020.

[…] BR725 engines

RRD's business case as to the BR725-project's profitability (for notification purposes)

Sales of […] BR725 units to GA; Sales to […] included:

[…] BR725 units.

RRD's business case as to the BR725-project's profitability, based on most recent calculations (June 2007)

[…] units to GA; […] units to […]

[…] BR725 units

(59) Given the estimated total market share of the BR725-engine and GA's estimate based on planned aircraft production capacity, and given the statistical data as regards the possible future development of the VLR-business jet market, the Commission concludes that […] units sold is a sufficiently reasonable and prudent estimate.

3.4.5. Interest rate; extra-payments in case of success exceeding forecasts

(60) Section 5.1.5 of the Framework further stipulates that, in case of a successful outcome, the measure must provide that the advance is repaid with an interest rate at least equal to the applicable rate resulting from the application of the Commission notice on the method for setting the reference and discount rates. Based on information provided by the German authorities (above, 2.6), that aid measure will be in line with this provision.

(61) Pursuant to Section 5.1.5 of the Framework, the Member State concerned should be entitled to request payments beyond repayment of the advance amount including interest according to the reference rate foreseen by the Commission, in case of a success exceeding the outcome defined as successful. As was shown further above, (37), this condition will be met.

(62) Lastly, Section 5.1.5 of the Framework stipulates that, normally, the repayment secured must be in proportion to the degree of success achieved. As was shown further above, (34) , that condition will be met, too.

(63) The conditions of the repayable advance in question are therefore in line with the Framework. The notified aid's assessment under Chapter 5 of the Framework is complete.

3.5. Assessment on the basis of Chapter 6 of the Framework – incentive effect of the aid

(64) In a subsequent step, the Commission examined whether the conditions to presume the incentive effect are fulfilled. Pursuant to Chapter 6 of the R&D& Framework, State aid must have an incentive effect, i.e. result in the recipient changing its behaviour so that it increases its level of R&D&I activity. The Commission

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considers that the aid does not present an incentive for the beneficiary in all cases in which the R&D&I-activity has already commenced prior to the aid application by the beneficiary to the national authorities.

3.5.1. Date of the application for aid

(65) Germany demonstrated that the R&D-activity had not commenced prior to the application for aid. On 9 July 2005, RRD addressed the German government and asked for a preliminary appraisal of the planned project's eligibility for government funding. Attached to this letter is an annex that contains information on the project, the product and the enterprise. The annex is titled "application for partial funding for the development of a new engine" (Antrag auf Teilfinanzierung einer Triebwerksneuentwicklung). In response, by letter dated 20 July 2005, the German Government informed RRD that the German Federal Budget for the year 2005 has a budget line for engine development co-financing and that funding for the project could in principle be possible on that basis. The letter further explains that certain preconditions need to met, namely the lift of the Budget Committee's freeze of that budget line3 the Commission's approval of the aid, and also meeting the economic framework conditions for the aid. On 15 September 2005, the board of RR plc agrees to the launch of the project, after RRD had improved its business case, in particular with the prospect of government funding. The project was therefore only launched after the application for aid had been submitted to the national authorities.

3.5.2. Indicators for an incentive effect

(66) Chapter 6 provides for a list of aid measures for which the Commission considers that the incentive effect is automatically met. The aid in question does not fall within any one of the aid measures enumerated in this list. Hence, the Commission requires that an incentive effect is demonstrated by the notifying Member State. Such evaluation must be made ex-ante, on the basis of an analysis comparing a situation without aid and a situation with aid. According to Chapter 6, relevant indicators are increases in project size, -speed, -scope and amount spent. If a significant effect on at least one of these elements can be demonstrated, taking account of the normal behaviour of an undertaking in the respective sector, the Commission will normally conclude that the aid proposal has an incentive effect.

3.5.3. Comparison of an aid-scenario with a no-aid scenario

(67) According to the German authorities, the project would not have taken place without the aid. In order to substantiate that assertion, the German authorities provided information as well as internal documentation.

(68) RRD has presented the business case for the project, based on a comparison between a scenario with aid and a "no-aid"-scenario:

3 Parliament's Budget Committee had decreed a freeze on that commitment

(Verpflichtungsermächtigung) when it was entered into the budget, since the details of any future use (amount, conditions, beneficiary…) were uncertain at the time of establishment of the Budget 2005. Such freeze is standard procedure, intended to allow for parliamentary control of the actual use of a budget commitment. In such cases, the competent Budget Committee lifts the freeze when the concrete use of a commitment is established (amount, project, granting agreement, State aid notification submitted)

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Without aid With aid

Internal rate of return (IRR) […] % […] %

Net present value (NPV) […] MEUR […] MEUR

Year of break-even […] […]

Maximum negative cash-flow […] […]

Level of technical and commercial risks

too high acceptable

(69) The Commission enquired whether any alternative plans that would apply in case the aid is refused had been taken into consideration. In particular, the Commission noted that RRD had established its business case considering a 'no-aid scenario'. In response, Germany confirmed that RRD had no reason to doubt that an application for aid would be approved by the German government or the Commission. According to information provided by Germany, RRD acted on the following assumptions: First, RRD had evaluated the prospect for aid based on the previous Community Framework for State Aid for Research and Development4 and the relevant positive Commission decisions on State aid for aircraft engine development in application of that Framework. According to the German authorities, a diligent commercial risk evaluation led to the conclusion that a State aid notification to the Commission would be successful. RRD was convinced that all conditions for the compatibility of the aid with the EC-Treaty were present. For this reason, RRD did not factor in any alternative scenarios in its proposal to GA.

(70) With regard to profitability even without aid (IRR-comparison further above) and the fact that RRD is contractually obliged to deliver the engine, the Commission requested information and documentation on the considerations that eventually led to the RR-plc board decision to approve project launch.

(71) […].

(72) […].

(73) Several weeks before submission of its proposal to GA, RRD made an urgent demand for aid, which was instrumental to make an offer which was financially sustainable. RRD sought a preliminary statement of the German government on whether or not the project could be eligible for a repayable advance. Germany provided a copy of that letter. According to RRD, that letter's tenor, together with RRD's perception of the legal practice at that time did not raise any serious doubts that the legal requirements for obtaining the aid could be met.

(74) RRD has provided the minutes of the board meeting on 15 September 2005 where the approval was given. According to these minutes, the approval was given after

4 (96/C/ 45/06); OJ C 45; 17.2.1996, p.5. That Framework expired on 31.12.2006 and was replaced

by the Community Framework for State aid for Research and Development and Innovation.

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RRD had sufficiently improved its business case. Three factors were considered as relevant:

– price escalation treatment

– lower sales-related costs

– government funding

(75) Among these three factors, the prospect for the reimbursable advance was the most determining aspect. Without the prospect to obtain the aid, the board would not have given RRD permission to definitively enter into the binding delivery contract with GA. The history of the decision-finding process therefore demonstrates that the notified project would not have been launched as such in Europe without the aid.

(76) The Commission asked Germany to substantiate its assertion that the aid is necessary to mitigate the risk and, above all, to demonstrate that no other private risk sharing was available. In response, Germany argued that, firstly, banks were not ready to provide such funding at project level. While the unavailability of bank financing was evident for RR plc decision makers at the time of the board's approval, RRD sent project information to […] and asked whether the bank would provide project based funding. On 6 June 2007, […] declined that request, due to the high commercial risk and an expected positive cash flow only as from […]. RRD provided this letter to the Commission. According to […], such funding falls within the domain of risk capital providers.

(77) Subsequently, RRD asked the bank […] to explore whether it could provide project-based co-financing. In its letter dated 29 August 2007, […] replied that the project's risk do not correspond to its business policy. Such policy would not allow sharing the risks of manufacturing enterprises. RRD provided this letter to the Commission.

(78) As to the availability of risk-and-revenue sharing partners (RRSP's), Germany declared that RRD had sought RRSP's early on. Risk-and revenue sharing arrangements consist in granting industrial partners (usually major subcomponent assemblers) a share of the programme's future revenue in exchange of participation either to the development risks or to the fabrication and volume risks. An additional entry fee, to be paid either in cash, in providing hardware or in workforce participation to the project development, may also be required. This mode of financing can be viewed as an investment in the programme by industrial partners. RRD examined the viability of RRSP's based on the criteria hereunder:

– […];

– […];

– […].

(79) In the process, RRD pre-selected 5 companies. Germany informed the Commission of the potential RRSP's capabilities and explained in detail why RRD only selected one final RRSP, namely […]. Based on information available, the Commission finds that RRD did its utmost to obtain risk-and-revenue sharing partners.

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(80) It is true that the project would still be profitable without aid. However, Germany demonstrated that the cash-flow would be negative till […] inclusive. It was further credibly asserted that banks are not ready to provide sufficient financing. The prospective aid was the decisive element in the board's consideration to allow RRD to launch the project.

(81) The development of the new BR725-engine will be an additional activity that will not have been carried out to the planned or would have even be dropped completely extent without the aid. The R&D-related project costs, incurred in Germany, to the amount of EUR 253.2 million, are therefore additional R&D-expenses.

(82) RRD will hire more R&D-personnel for the project. 150 new employments will be created between 2005 and 2011 and directly assigned to development activities in RRD's site in Land Brandenburg. Approximately 30 new employments are expected in RRD's site in Land Hesse sites. RRD currently employs 600 persons in its R&D-department. The table below shows new employments broken down to job categories and sites:

Assignment Brandenburg Hesse

Development (engineering and assembling) […] […]

Programme management […] […]

Purchasing […] […]

total 150 30

(83) Below graph shows the additional BR725-development expenses in comparison to

RRD's usual activities till 2015 (TEUR; historical data and current 10-year planning): […]

3.5.4. Conclusion

(84) The Commission took into consideration information and documentation, according to which the prospect for aid played a decisive role in the decision to start the project. Since the project brings about an increase in the number of people assigned to R&D&I activities as well as an increase in total R&D&I spending by the aid beneficiary, the Commission considers two indicators set forth in Chapter 6 of the Framework to be met.

(85) However, Chapter 6 of the Framework stipulates that in cases where the Commission undertakes a detailed assessment of an individual measure, above said indicators may not be considered sufficient demonstration of an incentive effect, and the Commission may need to be provided with complementary evidence.

3.6. Cumulation of aid

(86) Chapter 8 of the Framework stipulates that, where the expenditure eligible for aid for R&D&I is eligible in whole or in part for aid for other purposes, the common portion will be subject to the most favourable ceiling under the applicable rules. This limitation does however not apply to aid granted in accordance with the

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Community guidelines on State aid to promote risk capital investments in SME5. Aid for R&D&I shall not be cumulated with de minimis support in respect of the same eligible expenses in order to circumvent the maximum aid intensities laid down in the Framework.

(87) The German authorities affirmed that the aid in question will not be cumulated with any other State aid. The measure therefore complies with Chapter 8 of the Framework.

4. INTERMEDIATE CONCLUSION

(88) Based on the above reasoning, the Commission concludes that the notified measure is in line with Chapters 5, 6 and 8 of the Framework.

5. DETAILED ASSESSMENT

(89) Section 7.1 of the Framework sets forth thresholds of aid amounts the transgressing of which will require the detailed assessment of an aid measure. As regards R&D-project aid, that Section provides for specific thresholds for predominantly fundamental research, predominantly industrial research and all other projects.

(90) The notified reimbursable advance will amount to up to EUR 83.6 million and will cover part of the eligible costs of an experimental development project. The aid will be granted to one undertaking, namely RRD. Hence, the aid in question is subject to a detailed assessment, as it falls under the category 'all other projects', as laid down in Section 7.1 of the Framework. The corresponding threshold is EUR 7.5 million per undertaking, per project.

(91) Consequently, the Commission carried out the detailed assessment based on Sections 7.3 and 7.4 of the Framework. These Sections provide for positive and negative elements which will apply in addition to the criteria set out in Chapter 5. In the light of these positive and negative elements, the Commission balances the effects of the measure and determines whether the resulting distortions adversely affect trading conditions to an extent contrary to the common interest.

5.1. Positive Effects of the Aid

5.1.1. Existence of a market failure

(92) According to Section 7.3.1 of the Framework, State aid may be necessary to increase R&D&I in the economy only to the extent that the market, on its own, fails to deliver an optimal outcome. Therefore, the Commission will take into consideration adequate information on whether the aid refers to a general market failure regarding R&D&I in the Community, or to a specific market failure. Based on information provided by the German authorities, the Commission examined the presence of a market failure of the private capital market, due to asymmetric information.

5 OJ C 194, 18.8.2006, p. 2.

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(93) As will be further explained below, the project involves high technical and commercial risks, is complex and requires significant initial investments. Further, it has a very long time scale. A positive cash flow is expected more than […] years after the launching of the project.

(94) It is established that the company tried to find external financing in order to limit the risks of the project, but failed to a large extent. Germany and RRD provided internal documentation as to the failed effort to acquire financing from the private capital market. The unavailability of further risk-and-revenue sharing partners was demonstrated, as well (further above, (76) et seq.).

(95) The Commission considers that the failure of the private capital market to provide financing that is sufficient to mitigate the risk of projects of that nature is symptomatic for the jet-engine sector concerned. That sector is characterised by the following

– few products, that cannot be easily compared with each other;

– a long life time of products and long development cycles;

– development projects are capital intensive;

– in the civil-engine sector, positive cash-flow is to be expected only on the long-term - as a rule, more than […] after the start of engine development. With reference to the engine sector, the Commission found that "[…]. Return on investment is achieved through the sales of spares and support and maintenance services. Due to this specificity, engine programmes usually do not break even before […] years after the engine development is launched. Investors may have to wait […] years before a standard profit rate can be achieved."6

– due to the very high confidentiality of technical and commercial data of these very large development projects, manufacturers cannot run the risk of sharing all information with the private capital market;

– industrial risk-and-revenue sharing partners must meet very demanding requirements;

– manufacturers seek to contain the risk at project level.

(96) These characteristics have to be weighed against the private capital market's expectation to see quicker returns6. Obviously, the private capital market is reluctant to assume the commercial and technical of such project. The Commission notes that RRD had done its utmost to attract risk-and-revenue sharing partners. The Commission ascribes this reluctance to an asymmetry of information on the risk and revenue aspects of the engine development project in question.

6 State aid cases: N 120/2001 - Aid to Rolls-Royce for the development of the TRENT 600 and

TRENT 900 engines; OJ C, 16.3.2002, p.33; N 301/2003 - State loan to Volvo Aero for Research and Development; OJ C 138, 7.6.2005, p.2; N 165/2003 – Research and development aid to ITP for its participation in the TRENT 900 project; OJ C 88, 21.4.2007, p.14; (all decision texts: http://europa.eu.int/comm/secretariat_general/sgb/state_aids/)

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(97) Said capital market failure directly affected the investment in question. As mentioned above, the Commission has confirmed the existence of such a market failure affecting similar engine development projects in its decision practice, also for other firms. Therefore, aid seems to address a genuine market failure.

5.1.2. Increased degree of market failure in an assisted region

(98) Section 7.3.1, last subparagraph of the Framework, applies to State aid targeting R&D&I projects or activities located in assisted areas. in view of that, the Commission will take into account the following indicators:

– disadvantages caused by the peripherality and other regional specificities;

– 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;

– any other relevant indicator showing an increased degree of market failure.

(99) In that respect, the German authorities asserted that the region concerned shows a complete lack of component suppliers and contractors that have a sufficient capital base to enter into risk-and-revenue-sharing partnerships with RRD. Presently, RRD's suppliers that are based in the region only provide components with a low degree of processing, as compared to those based in other regions. While there are enterprises available that have the capabilities required to manufacture certain individual components, there are no sub-system suppliers in the region with that capability.

(100) Further, the degree of collaboration among undertakings concerned is low, compared to other regions in Germany. Germany informed the Commission that that RRD is currently undertaking coordination efforts to remedy that situation. To that end, it is implementing training- and qualification-programmes, in a so-called 'Netzwerk Initiative Triebwerkstechnik' (Engineering Network Initiative). This initiative involves SMEs and research organisations.

(101) The Commission therefore considers that the specific situation in the assisted area where the project is carried out shows an increased degree of market failure, n particular a regards the availability of viable risk-and-revenue sharing partners.

5.1.3. Appropriate instrument

(102) Pursuant to Section 7.3.2 of the Framework, the Commission will assess whether and to what extent State aid for R&D&I can be considered an appropriate instrument to increase R&D&I activities, given that other less distortive instruments may achieve the same results.

(103) Given the particular risks involved and the high amount of funding required, the Commission finds that only the aid instrument in question ensures a sufficient limitation of risk in the event of failure. General measures would neither have the scope nor be specifically targeted enough to remedy the market failure referred to above. Any measure that would aim at limiting the risk, i.e. sharing the risk to some extent, would necessarily constitute State aid. The Commission also considers the aid instrument appropriate, since it is significantly less distortive than a direct grant,

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which is an instrument that is in principle permitted by the Framework, up to an aid intensity of 25% for experimental development projects. Such instrument's potential to distort competition, however, is significantly stronger, since its financial advantage will remain with the beneficiary in any case, even when the project's success exceeds expectations.

(104) Below graph illustrates the aid's value during the project's estimated duration: […]

(105) The aid intensity of the reimbursable advance in question is below 33%. In that

regard, the Commission notes that this aid intensity is calculated on the basis of experimental development costs incurred in Germany. The aid intensity is even lower when calculated on all experimental development costs.

(106) The information at hand demonstrates that the aid amount is limited to the minimum necessary, since RRD had done its utmost to acquire risk-and-revenue sharing partners. Above all, the aid is reimbursable in the case of success, at an interest rate being above the reference rate. Beyond that, RRD will have to pay a royalty for each engine in case project success exceeds expectations. Thus, the aid intensity could further be reduced and the aid's distortive impact even further attenuated. The aid intensity, being 33 % of the eligible costs incurred in Germany, is considerably below the R&D&I-Framework's 40%-ceiling, applicable to repayable advances for experimental development.

(107) The Commission therefore concludes that the aid instrument in question is appropriate.

5.1.4. Incentive effect and necessity of the aid

(108) Section 7.3.2 of the Framework provides for elements that are to be taken into account in addition to the indicators set forth in Chapter 6.

5.1.4.1. Specification of intended change

(109) The aid will enable RRD to develop a new engine under its own responsibility. This is an activity RRD has not pursued since it was integrated in Rolls-Royce plc in 2000, after BMW retreated from a joint venture of BMW and Rolls-Royce plc. that had been established in 1990.

(110) Before the start of the BR725-project, RRD carried out

– industrial research and experimental development (no new engine development);

– development activities in collaboration with MTU, ITP and SNECMA, concerning the new TP400-engine for the Airbus A400M;

– development activities in the framework of technical after-sales service, comprising the modification of existing products of the BR710 and -715, Tay620 and -650 and V2500-engines […].

(111) RRD will continue above activities in the medium term, in parallel with the BR725-development project in question (see graph further above, (83). The Commission

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therefore finds that the intended change in behaviour of the RRD is well specified, namely the launch of a new project due to the aid.

5.1.4.2. Counterfactual analysis

(112) The Commission examined whether the change of behaviour can be identified by counterfactual analysis, by comparing the level intended activity with and without aid.

(113) RRD did not consider any actual alternative plans, in the event the aid would be disapproved, since it acted on the assumption that all conditions for the aid's compatibility with the EC-Treaty were fulfilled. Further, according to the distribution of technology capabilities within the Rolls-Royce group, RRD had exclusive competency to carry out the project in question. Therefore, RRD had no doubts that the project would be carried out in its Brandenburg site, with the aid.

(114) As was shown without the prospect to obtain the aid. Hence, the notified project could have been dropped completely, since the proposal submitted to GA was not binding at the time the board considered the business case. Alternatively, RRD might have chosen to revise the project completely, as regards the structure and assignment of work packages, location of activities, cost estimates etc. and would have had to seek the board's approval for that solution.

(115) In conclusion, the Commission finds that Germany has sufficiently evidenced that the notified project would either not have been carried out at all without the aid, or would not have been launched in the scope and in the location as it was intended at the time of notification, at best.

5.1.4.3. Level of profitability

(116) The Commission notes that the project would have been profitable even without the aid, however to a lesser extent (see business case above, (68).

5.1.4.4. Amount of investment and time path of cash flows:

(117) Below table shows the estimated development project costs, broken down according to cost categories, year and eligibility ("ff" = eligible; "nf" = not eligible): […]

(118) Below table shows RRD's cash-flow estimates for the entire BR725-project, based

on 2005-price levels […]

(119) Below table shows RRD's cost estimates for the entire BR725-project, based on

2005-price levels: […]

(120) Based on information provided by the German authorities, as shown above, the

Commission finds that the project is characterised, firstly, by a high start-up investment, with total development costs (eligible + ineligible) amounting to EUR […] million. Secondly, the overall cash-flow is expected to be […].

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5.1.4.5. Level of risk involved in the research project

(121) Based on information provided by the German authorities, three categories of risk are inherent to the project in question, namely a technical risk, a market risk and a commercial risk.

(122) Technical risk to be borne by RRD: Due to the product's novel technology, feasibility can only be tested very late in test runs. While a first test-run of a development phase engine is scheduled for […], flight tests will only commence in […]. Germany informed that, based on previous experience, only then RRD will be in a position to determine whether additional efforts will have to be made to comply with the required technical specifications. […].further above (3.5.3), the board would not have given RRD permission to definitively enter into the binding delivery contract with GA

(123) Germany further pointed out that a particular technical risk is due to the following particularities:

– the maximum take-off weight is limited to 100,000 lbs, in order to assure the aircraft's ability to touch down on smaller local airfields. At the same time, the necessity to ensure an intercontinental cruising range at very high speed makes demands as regards the engine. Consequently, the technical margin for solutions is very narrow;

– the new jet is planned to cruise at speeds in the upper sub-sonic range at very high altitude. This will strain the rotor blade considerably. However, the effects of such speed at such altitude on the planned rotor blade have not yet fully been investigated.

(124) The market risks: Due to its performance and technical specificities, the next generation of 'ultra-long range'/'large cabin'-business jets will open up a new market segment. Estimating sales and price acceptance is therefore risky.

(125) The commercial risks: An […] and break-even in […] without aid were considered unacceptable, as these rates would be combined with unmitigated risks. The very basis for the decision to commence the project however had been the prospect of limiting the risks to an acceptable degree. Since GA had launched a tender for delivery of an engine with the aforementioned specifications, and RRD had to compete with other offers, RRD was not in a position to mitigate the risk through a higher price per engine. As was demonstrated further above (79), RRD efforts to mitigate said risks by entering into further risk-revenue-sharing partnerships failed.

(126) GA, which is currently developing the new VLR-business jet that is planned to be propelled by BR25-engines will be obliged to acquire engines for aircraft that actually have been ordered by end customers. At present, none of the future aircraft has been ordered at all, as even its development had not been publicly announced at the time when RRD applied for the aid. The delivery contract stipulates that GA will order at least […] units of the BR725-engine until […], provided that GA accomplishes the development project. […]. Even taking into account a possible non-repayment of the State aid in question, being EUR 83.6 million at most, considerable risk remains to be borne by RRD. […];

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(127) In order to illustrate the risk, RRD informed us of the consequences a failure of the project would have at the level of RRD (based on the 2005 balance sheet). […].

(128) […].

(129) As regards reflection of the project risk in the business case of the project, the German authorities argue that fundamental risks are not reflected in business cases and that this is standard practice in the industry. According to Germany, such risk can also not be reflected in other documentation. Nevertheless, calculable risks such as an increase of development costs had been adequately factored into the business case. Germany pointed out that fundamental risks such as failure of the project or of acceptance of the future jet on the market could reasonably not be presented in a business case, and thus do not influence commercial decisions.

(130) The project apparently implies a […] risk for which adequate provision must be made. The Commission considers that this risk, in combination with the information asymmetry mentioned further above (5.1.1), was the very reason why RRD did not obtain financing from the capital market. The Commission further finds that this is a general phenomenon in this industry, and engine projects of such a magnitude are normally not undertaken if there is no sufficient risk-and-revenue sharing or risk-mitigating State aid, in the form of repayable advances. The Commission has already established that situation in the past, e.g. in State aid case N 120/2001 referred to further above6.

5.1.4.6. Continuous evaluation:

(131) The project in question is subject to continuous evaluation, based on well specified milestones (above, (20). The aid will be disbursed in instalments that will correspond to the progress of the project, measured by estimated development costs to be incurred in the subsequent year. Thus, the granting authority is informed of the project's advance. According to RRD, failure to deliver an engine that meets the required technical specifications on deadline and failure to remodel the engine in a reasonable time frame would result in termination of the project.

5.1.5. Proportionality of the aid

(132) The Commission examined whether the aid is limited to the minimum necessary. In that respect, the Commission notes, firstly, that the aid intensity is below the maximum aid intensity permitted for experimental development. Secondly, the German authorities chose an instrument that will not constitute any benefit cash at the level of the beneficiary in the event of a successful outcome of the project. Corresponding estimates had been established on the basis of a reasonable and prudent hypothesis. Thirdly, the Commission notes that the aid will only be calculated on a part of the experimental development costs (EUR 253.2 million), while costs after licensing of the first prototype will not be funded. However, all prototypes built until certification of both the engine and the aircraft will not be commercially usable. Lastly, Costs incurred outside Germany are not eligible at all.

(133) In view of the above, the Commission has no reason to doubt that the German authorities have calculated the aid in a way to ensure that it is limited to the minimum necessary.

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5.1.6. Positive spill-over in an assisted region

(134) According to information provided by the German authorities, the positive impact on the region will last even beyond the project's lifetime, as the aid will have allowed an upgrading of the competencies in the region, […]. According to the German government, the project will only be second to the very large airport project in the south-east of Berlin (Berlin-Brandenburg International 'BBI'), as regards its positive effects on the region.

(135) The project will bring about significant employment effects: For each job directly related to the BR725-project at the Blankenfelde-Mahlow site in the assisted region, an average 1.9 jobs is expected to be generated overall (2005-2049), and 1.34 during the development phase (2005-2014). According to an independent study provided by the German authorities7, the employment effect is as follows (development phase and production phase):

Phase Employments

Development phase 2005 – 2014 343

Direct employment RRD 147

Primary sector 0

Secondary sector 147

Tertiary sector 0

Indirect employment 196

Primary sector 1

Secondary sector 100

Tertiary sector 95

Production phase 2010 – 2024 910

Direct employment RRD 910

Primary sector 0

Secondary sector 508

Tertiary sector 0

Indirect employment 401

Primary sector 8

Secondary sector 215

7 PricewaterhouseCoopers Corporate Finance Beratung 0GmbH. Gutachten für Rolls-Royve

Deutschland Ltd&Co KG100

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Tertiary sector 178

After sales phase 2025 – 2049 197

Direct employment RRD 100

Primary sector 0

Secondary sector 100

Tertiary sector 0

Indirect employment 97

Primary sector 1

Secondary sector 52

Tertiary sector 44

(136) An efficient use of knowledge by other firms situated in the assisted region as well

as an expected increase in other firms' R&D, in order to absorb more of the knowledge generated by the project, are also to be expected.

5.1.7. Environmental effects

(137) There will be measurable environmental positive externalities, compared to the existing BR710-technology:

NOx-emission 4 % less

CO2-emission More than 4 % less

Noise-emission 5 db less

5.2. Negative effects of the aid measure: analysis of the distortion of competition and trade

5.2.1. Distortion of dynamic incentives to invest

(138) According to Section 7.4.1 of the Framework, the main concern related to R&D&I aid to undertakings is that competitors’ dynamic incentives to invest are distorted. For the purpose of analysing such potential distortion, this Section provides for specific elements to be taken into consideration:

(139) In that respect, the Commission considered the particular structure of the market concerned. First, the fact that the aid beneficiary is a large market player could raise concerns about a possible crowding-out. However, the main competitor has an even larger share.

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(140) The graph below, provided by the German authorities in cooperation with RRD, illustrates the market share per competitor in business jet engines (delivery market share in 2006; the market segment targeted by the new engine is highlighted):

(141) The Commission is aware that the jet-engine industry operates on a bidding market, where usually the winner of a bid 'takes it all', where contracts are large compared to a bidder's turnover and each new tender kindles new vigorous bidding. As regards this latter aspect, the Commission reminds that the market concerned is such that competitors participate in parallel civil projects as well as national defence programmes that provide for sufficient incentives to invest.

(142) Beyond that, RRD is facing strong buyer power of the aircraft manufacturers, which limits RRD's market position. The tender procedure described above is a strong indication that the buyer (GA) sought to preserve sufficient competition in the market.

(143) All of RRD's competitors are large and the competitors’ past investments are locked in to few and long-term R&D&I trajectories, which is typical for the industry concerned.

(144) Hence, the Commission finds that any risk of distorting dynamic incentives will be mitigated by the characteristics of the market, such that the aid is neither expected to have a crowding out effect, nor to enable the aid beneficiary to use market power to the detriment of consumers.

5.2.2. Creating market power

(145) Pursuant to Section 7.4.2 of the Framework, market power is the power to influence market prices, output, the variety or quality of goods and services, or other parameters of competition on the market for a significant period of time, to the detriment of consumers. For the purposes of its examination of this aspect of the aid, the Commission considered the following: First, the project in question is not aimed at extending market power into a new market, but rather […]. Second, the market environment in general and GA's tender procedure in particular are sufficient indicators that the aid will not enable RRD to influence market prices, output, the variety or quality of goods and services, or other parameters of

29

competition on the market for a significant period of time, to the detriment of consumers.

5.2.3. Maintaining inefficient market structures

(146) In this step of its analysis, the Commission consider whether the aid will be granted in markets featuring overcapacity, in declining industries or in sensitive sectors. Concerns are less likely in situations where State aid for R&D&I aims at changing the growth dynamics of the sector, notably by introducing new technologies.

(147) Based on information provided by the German authorities, the Commission considers the aid to be precisely targeted at one specific experimental development activity. The new engine will introduce new technologies, on which the German authorities had provided detailed information. Most importantly, the market segment concerned is characterised by a domination of one of RRD's competitors, who holds 60% of the market share (see graph (140). Therefore, the aid is to be considered a stimulus for competition in that market rather than a means to maintain an inefficient structure.

5.3. Balancing and conclusion

(148) Based on above considerations, the Commission balanced the positive effects of the aid with its negative effects and established the following:

– the aid addresses a specific market failure of the private capital market, namely an information asymmetry, which hampers the availability of risk sharing capital;

– the reimbursable advance in question is an appropriate instrument, given its intensity, repayment conditions and effectiveness in proportion to the degree of success of the project;

– the aid has an incentive effect on RRD, as it will induce RRD to pursue R&D&I which it would not otherwise have pursued,

– the aid is proportional, as Germany will provide only the minimum necessary;

– the aid will bring about positive spill-over in an assisted region; – the aid will also bring forward an improvement of the environmental

performance of RRD's business jet engines. However, such improvement is not the aid's principal objective;

– Given the particular situation of the market concerned, any distortion of dynamic incentives to invest can be ruled out;

– Given the particular situation of the market concerned, the aid will not enable RRD to influence market prices, output, the variety or quality of goods and services, or other parameters of competition on the market for a significant period of time, to the detriment of consumers.

– The aid will not maintain an inefficient market structure.

(149) In conclusion, the Commission finds that the notified aid's positive effects outweigh its negative ones. The aid is therefore in line with the Framework.

6. DECISION

(150) The Commission decides that the notified State aid measure N 195/2007 - Individual R&D-aid for Rolls-Royce Deutschland – BR725 project is compatible

30

with the common market, pursuant to Article 87(3) (c) of the EC Treaty. It accordingly decided not to raise objections to the notified measure.

(151) The Commission reminds the German Government that, in accordance with Article 88 (3) of the EC Treaty, all plans to refinance, alter or change this aid scheme have to be notified to the Commission.

(152) The Commission further reminds the German authorities to submit annual reports on the measure, in line with the requirements of Regulation (EC) No 659/19998 and Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty9, including information as required by Section 10.1.1 of the Framework.

If this letter contains confidential information, which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, 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:

http://ec.europa.eu/community_law/state_aids/index.htm Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition Directorate for State Aid State Aid Greffe B – 1049 Brussels Fax No.: +32 2 296 12 42

Yours faithfully, For the Commission

Neelie KROES Member of the Commission

8 OJ L 83, 27.3.1999, p.1. 9 OJ L 140, 30.4.2004, p. 1. Regulation as amended by Regulation (EC) No 1627/2006 (OJ L 302,

1.11.2006, p. 10).