Era of large scale State aid is nearing an end

The State's decision to withdraw the offer of grant aid to Intel for the planned extension of its Leixlip plant signals the beginning of the end for an era of large scale State-assisted investment.

But smaller projects initiated by firms that are not in a dominant position in their industry should continue to receive state aid as they will not contravene new EU rules introduced in 2004.

Since then, all investment projects which involve capital spending worth more than €50 million, have to be notified to the European Commission for clearance. And the negative soundings given by Brussels to the Government's proposed aid package to Intel reflects a much stricter interpretation of state aid rules.

These rules depend on a range of factors such as the economic status of the region in which a project is located and the nature of the investment. They are intended to prevent a distortion of the internal EU market and between member states.

Intel fell foul of a clause within the commission's Multisectoral Framework on Regional Aid for Large Investments, dealing with firms that hold a dominant position in their industry. In essence, the rules exist to prevent companies like Intel from gaining an unfair advantage in the EU market considering their already powerful position.

The Government lobbied hard in the drafting of the rules to install a footnote enabling the State to offer aid in cases where an investment offers genuine technological advancement. But, despite getting this footnote in the text of the framework, the Government was convinced that the commission planned to block its grants.

Seán Dorgan, IDA chief executive, and the Minister for Enterprise, Trade and Employment, Micheál Martin, said yesterday they had been given clear signals that the grant aid package would be refused. They criticised the commission for undermining Europe's competitiveness against other global competitors, such as the US and Israel. These were the two countries with existing Intel locations that competed with Leixlip for the €1.6 billion Intel investment announced last year.

The likelihood is that they will become more attractive as IDA Ireland cannot add grants to its package of incentives to lure investment.

Intel, which now faces a bill of somewhere between €50 and €100 million, has already signalled that future expansions will have to be reassessed in light of a change in rules on state aid.

The firm's Leixlip site has space for at least two extra fabrication plants, which could bring more employment and the latest technology to the Republic.

Clearly, the tougher line from the commission on State aid could hurt the Republic's attractiveness for future investments, particularly in the biotechnology sector where it faces intense competition from Singapore and Puerto Rico. The IDA yesterday confirmed that a €540 million project agreed with a subsidiary of the pharmaceutical firm Johnson & Johnson is about to be notified to the commission. The Government expects the Centocor project to pass the Brussels test, but added bureaucracy and uncertainty are unwelcome for multinational investors.

There is merit in the Government's argument that the new tougher line on State aid will undermine Europe's competitiveness and the European Commission's Lisbon agenda goals.

No other European country was competing for the investment by Intel and the manufacturing technology that is being introduced in Leixlip is the most advanced in the world.