State Aid: Commission Endorses Aid to Rolls-Royce Germany

European Commission, BRUSSELS: The European Commission has authorised, under EC Treaty State aid rules, financial support Germany intends to grant to Rolls-Royce Deutschland Ltd. & Co KG. The aid will be given for the experimental development of a new jet engine. 
 
The Commission found the aid to be in line with the criteria laid down in its Framework for Research and Development and Innovation (R&D&I Framework). The Commission's assessment showed that the aid would address a genuine market failure, namely the private sector's reluctance to provide sufficient risk-sharing capital for such projects, due to imperfect and asymmetric information. 
 
The Commission also found that the aid amount, as well as its repayment depending on the success of the project, would ensure that it is appropriate and limited to the minimum necessary. The amount of aid involved is a business secret. 
 
Competition Commissioner Neelie Kroes said: “This is one of the most important state aid cases in the aeronautics sector the Commission has assessed since the entry into force of the new R&D&I Framework on 1st January 2007. It will strengthen the technological basis and create new jobs in Brandenburg, one of the EU assisted regions. Last but not least, the case exemplified how important unreserved cooperation of the Member State is.” 
 
The aid would stem from European Recovery Programme-funds and would be granted in the form of an interest-bearing loan. The reimbursement of the loan would depend on the project's successful outcome, i.e. when a prudently predefined sales target is met. 
 
The major part of the development project is carried out in Rolls-Royce Deutschland's site in Dahlewitz, in the German Federal State Brandenburg. The new engine will be designed to propel next-generation business and regional jets. First customer orders have been booked and the first engines are expected to leave assembly lines in 2011. The project would be the first complete development of a new engine under Rolls-Royce Deutschland's responsibility since its integration into the Rolls-Royce Group in 2000 and would constitute a significant and sustainable upgrade of the Brandenburg site. The project will also have an international dimension, as 19 companies in the EU and two in the US are involved. 
 
After scrutinising the planned aid measure, the Commission found that the private capital market is reluctant to provide sufficient risk sharing capital for projects of such size, scope and duration. The Commission therefore concluded that the aid would address a specific market failure. Moreover, the loan's amount, repayment conditions and effectiveness in proportion to the project's success will ensure that, only the minimum necessary is given and that the aid is appropriate to reach its objective. 
 
The Commission took into account that the engine development project would bring about positive spill-over in the region, notably through new employment and an upgrade of the local supplier structure. Further, the Commission established that Rolls-Royce Deutschland's competitors are engaged in parallel civil projects as well as national defence programmes. All competitors are large and their past investments are locked in to few and long-term R&D&I trajectories. This is why the Commission found that competitors would not be discouraged from investing. 
 
Beyond that, Rolls-Royce Deutschland is facing the strong buyer power of aircraft manufacturers and the Commission found evidence that purchasers would seek to preserve sufficient competition in the market. Thus, the aid would not enable Rolls-Royce Deutschland to use market power to the detriment of consumers, e.g. by influencing market prices. 
 
On balance, the Commission found that the aid corresponds to what R&D&I state aid rules are intended to achieve – it is aimed at a relevant market failure and the distortion of competition cannot considered being contrary to the common interest. 
 
Not least, the Commission welcomes that the new generation engine would emit 4% less NOx, more than 4% less CO2, and would be 5 db less noisy than the current model. 
 
The non-confidential version of the decision will be made available under the case number N 195/2007 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.