8. EU aid and incentives

8.1 Next Generation EU

Against the backdrop of the global health crisis caused by the COVID-19 pandemic and in order to respond to the serious social and economic impacts stemming from such pandemic, the European Council held a special meeting from July 17 to 21, 2020, which resulted in an agreement to approve a raft of extraordinary measures aimed at supporting the recovery of the economy of the European Union and its Member States in this difficult environment.

Accordingly, and coupled with reinforcing the Union’s multiannual budget for 2021-2027, endowed with €1,074 billion, the creation of the European Recovery Instrument “Next Generation EU” (“NextGen”) was approved. The instrument seeks to mobilize up to €750 billion during the period from 2021 to 2023, of which €390 billion will be structured as non-repayable financial transfers to the Member States, that is, as outright grants, and €360 billion will be earmarked for loans. In short, a total of €1.8 trillion in aid for the recovery of the European economy, representing the largest ever stimulus package financed out of European funds.

According to initial estimates, of the €750 billion available to the Member States, Spain, one of the main recipients, could receive aid of around €140 billion (between non-repayable transfers and loans). The mobilization of such a significant volume of resources opens up a special opportunity for Spain, comparable to the economic transformation process that Spain underwent when it joined the Union.

To fund the recovery, the EU will go to the international debt market thanks to the new possibility provided for in Council Decision 2020/2053, of 14 December 2020, on the system of own resources of the European Union (“Own Resources Decision”), which also resulted from the negotiations conducted at the special meeting of the European Council held in July 2020. However, for the Commission to be able to issue bonds, all of the Member States must have ratified the Own Resources Decision in accordance with their respective constitutional procedures. In the case of Spain, the government has already obtained the relevant authorization from the parliament, so the ratification is expected to be completed shortly.

The legal basis for the European Recovery Instrument lies in Council Regulation (EU) 2020/2094, of 14 December 2020, the objective of which is to drive the transformation and modernization of the Member States’ economies, mainly from the standpoints of the green and digital transition, while also contributing to the recovery and enhanced resilience of the European Union as a whole against future crises.

The measures that the Recovery Instrument seeks to finance are essentially aimed at (i) restoring labor markets and creating jobs; (ii) reinvigorating potential for sustainable growth and strengthening cohesion among Member States; (iii) providing support to businesses affected by the impact of the COVID-19 crisis, in particular SMEs; (iv) strengthening research and innovation as mechanisms to respond to crises; (v) enhancing the Union’s preparedness for serious emergencies; (vi) ensuring a just transition to a climate-neutral economy; and (vii) increasing the ability to respond in this context also from the standpoint of agriculture and rural development.

8.1.1 European Recovery and Resilience Facility

Structurally, NextGen is made up of 7 individual programs, among which the total budget of the Instrument will be allocated as follows:

• Recovery and Resilience Facility: €672.5 billion.
• REACT-EU: €47.5 billion.
• Horizon Europe: €5 billion.
• InvestEU: €5.6 billion.
• Rural Development: €7.5 billion.
• Just Transition Fund: €10 billion.
• RescEU: €1.9 billion.

Given its quantitative scope, it is worth taking note of the “Recovery and Resilience Facility” (RRF) which seeks to provide financial aid that enables the Member States to undertake the reforms and investments required to transform their economies in the medium and long terms, in accordance with their respective National Recovery and Resilience Plans. These Plans, which may include measures started by the States from February 1, 2020 onwards, must be consistent with the national reform programs, with the priorities set for each country in the European Semester for coordinating economic policies (“European Semester”) and must be aligned with the goals set in the Paris Agreement, the National Energy and Climate Plans, the Just Transition Plans, the Youth Guarantee implementation plans, the operational programs adopted under the Union funds, as well as with the UN Sustainable Development Goals, among others.

The RRF is governed by Regulation (EU) 2021/241, of 12 February 2021, of the European Parliament and of the Council, and its scope of application is structured around the following 6 pillars:

1. Green transition.
2. Digital transformation.
3. Smart, sustainable and inclusive growth, including economic cohesion, jobs, productivity, competitiveness, research, development and innovation, and a well-functioning internal market with strong SMEs.
4. Social and territorial cohesion.
5. Health, and economic, social and institutional resilience.
6. Policies for the next generation, children and the youth, such as education and skills.

The total amount of the resources allocated to the RRF is broken down into (i) €312.5 billion for non-repayable aid or grants and (ii) €360 million for loans.

One of the distinctive features of this facility is the swiftness with which the resources are intended to be effectively implemented by the Member States: 70% of its amount (roughly €48.7 billion in Spain’s case) must be legally committed by December 31, 2022, and the remaining 30% (€20.8 billion in Spain’s case) by December 31, 2023. According to the preamble to the Regulation, this is to ensure that the financial aid is effective and is frontloaded in the initial years after the COVID-19 crisis.

As already noted, although most of the resources made available to the Member States to implement their respective National Plans will be structured through non-repayable transfers, the Regulation also envisages the possibility of the aid taking the form of loans, subject, in such case, to the conclusion of a specific agreement with the Commission, on the basis of a duly substantiated request by the Member State concerned. This application should be justified by the higher financial needs linked to additional reforms, in particular for the green and digital transitions, and by a higher cost than the maximum financial contribution allocated to the State concerned via the non-repayable contribution. It will be formalized by means of a loan agreement between the Commission and the Member State concerned, essentially specifying its amount, average maturity, the pricing formula, maximum number of installments and repayment schedule.

In the case of Spain, according to Annex IV of the Regulation, the amount of the non-repayable financial aid (or the maximum financial contribution allocated) is €69,528 million, although the amount of the funds actually transferred will change depending on the costs included in the National Plan finally approved by the Commission.

In any event, as a general rule, the actual release of the funds to the Member States will take place in installments and will be conditional on the satisfactory fulfillment of the milestones and targets set out in the respective Recovery and Resilience Plans. For this purpose, the Regulation stipulates that States can submit requests for payment twice a year, although States may obtain an advance (pre-financing) of an amount of up to 13% of the financial contribution granted, if they so request when submitting their National Plan and which will be paid within two months after its approval by the Commission.

The above entails that, before the Commission decides to disburse the financial contribution (whether a non-repayable transfer or a loan), it should ask the Economic and Financial Committee for its opinion on the satisfactory fulfillment of the relevant milestones and targets by the Member States on the basis of a preliminary assessment by the Commission. If, exceptionally, one or more Member States consider that there are serious deviations from the satisfactory fulfillment of the relevant milestones and targets, they may request the President of the European Council to refer the matter to the next European Council for examination.

In addition, the Regulation introduces a number of measures linking the possibility of qualifying for the funds offered by the Facility to the implementation of sound economic governance. If a State fails to comply, the Council may, following a proposal by the Commission, suspend all or some of the commitments or payments subject to a maximum of 25% of the commitments or 0.25% of nominal GDP, depending on the specific case.

8.1.2 Spanish Economic Recovery, Transformation and Resilience Plan

As noted, to be able to receive the funds from the RRF, Member States must submit a National Recovery and Resilience Plan including a description of the reforms and investments to be undertaken, as well as the measures required to implement them, before April 30, 2021.

The Commission will be responsible for assessing the relevance, effectiveness, efficiency and coherence of the Recovery and Resilience Plan submitted by each State, taking into account a number of criteria set out in Annex V to Regulation 2021/241. The Commission must assess the plan within two months after its official submission by the Member State. The Commission will then submit a proposal to the Council for an implementing decision in which, among other points, it will propose (i) the financial contribution for the Member State; (ii) the description of the reforms and of the investment projects and the amount of the estimated total costs; (iii) the time limit for completion (no later than August 31, 2026); and (iv) the indicators relating to the fulfillment of the milestones and targets, etc. The Council will adopt the implementing decision within four weeks of the adoption of the Commission proposal. Once this step has been completed, the Member State and the Commission will enter into a specific agreement documenting the legal commitment between them. In the case of Spain, on October 7, 2020, the government presented the broad outlines of the draft of the future National Recovery, Transformation and Resilience Plan “España Puede”, as a “country project” that “draws the road map for modernizing the Spanish economy, relaunching economic growth and creating jobs, for solid, resilient and inclusive economic reconstruction after the COVID crisis”, with the goal of mobilizing a significant volume of public and private investment that enables Spain to speed up the change of its production model.

The “España Puede” Plan is structured around 4 strategic or cross-cutting pillars, which will form the backbone of the transformation of Spain’s entire economy and guide the recovery process, spurring the structural reforms and investments that are implemented. In particular, these pillars are:

1. Green transition, as a key element in the reconstruction phase, based on the circular economy as a lever for industrial modernization, the strategic framework of energy and climate as a parameter for the transition of the energy system, water management and its infrastructure, the resilience of the coast or soil quality and sound territory management.

   The objective is to attain a climate-neutral economy, boosting, in keeping with the National Integrated Energy and Climate Plan, public and private investment that makes it possible to reorient the production model, driving decarbonization, energy efficiency, the deployment of renewable energy sources, the electrification of the economy, the development of energy storage and solutions based on nature and improved resilience in all economic sectors.

2. Digital transformation, ensuring that society as a whole has access to digital environments and fostering the digitalization of enterprises (particularly SMEs and startups) and industry, R&D&I and digital skills training for people.

   To this end, the Plan seeks to support, in keeping with the 2025 Digital Agenda for Spain, the urgent modernization of the business world, driving its internationalization, the renewal of its technological capital and its adaptation as well to the green transition, backing it with infrastructure and services that open up new opportunities for enterprises, reducing digital divides, with reliable technologies that promote a dynamic and sustainable economy, including vectors like cybersecurity, the data economy and artificial intelligence.

3. Gender equality, as a key factor for growth and social justice, reducing structural barriers that hinder women’s access to the labor market on an equal footing and with equal rights, raising the female employment rate and strengthening, improving and reorganizing the long-term care system, as well as increasing educational potential and equality of opportunity.
4. Social and territorial cohesion, promoting employment policies in quantitative and qualitative terms, paying special attention to young people and continually assessing strategies aimed at helping people to enter and re-enter the labor market, creating high-quality jobs and reducing inequality.

   In this area, it is considered necessary to strengthen the care economy, based on the dependency system, long-term care and home care, as well as to shore up territorial cohesion ties, harnessing the promotion of digitalization and telework so that it translates into a higher degree of market integration that makes it possible to limit the centripetal dynamics of recent decades.

Based on the above pillars, the draft Plan proposes structuring them into 10 policy levers that cover up to 30 projects or lines of action, aligned with the 7 European flagship initiatives approved by the 2021 Annual Sustainable Growth Strategy, as outlined below:

1. Urban and rural agenda, fight against depopulation and development of agriculture (to which 16% of the expected funds would be allocated).

   Based on the key role of cities in the economic and social transformation, thanks to their ability to generate activity in the short term throughout Spain with a knock-on effect on industry and other key sectors such as construction, as well as the need to craft specific measures for depopulated areas that facilitate the development of new professional projects and to have a sound agri-food system and the highest food safety standards, this policy lever would include projects such as the following:

   • Action plan for sustainable mobility, which is safe and connected to urban and metropolitan areas (low emission areas, mass rollout of charging infrastructure, modernization of clean vehicle fleet).
   • Housing refurbishment and urban regeneration plan (intelligent applications in buildings, deployment of solar roofs and distributed renewable energy sources).
   • Transformation and digitalization of the logistics chain of the agri-food and fishery system (green production, seasonal and proximity consumption, reduced food waste, value generation in the agri-food system from the primary sector to commercial distribution).
2. Resilient infrastructure and ecosystems (to which 12.2% of the assigned resources would be allocated).

   Given the ability of infrastructure to mobilize large volumes of investment in the short term and to generate a structural impact on society and the economy as a whole, including high-growth industries at the global level in which Spain can achieve a strategic position, this specific policy would include the following projects:

   • Conservation and restoration of ecosystems and their biodiversity (green infrastructure, reforestation, fight against desertification).
   • Preservation of coastal areas and water resources (restoration, integral water management, treatment, sewerage, reuse, recovery and optimization of water infrastructure).
   • Sustainable, safe and connected mobility (modernization, digitalization, safety and sustainability of key transportation and intermodal infrastructure and development of main European corridors).
3. Just and inclusive energy transition (to which 8.9% of the total of assigned funds would be allocated).

   Trying to take advantage of a decarbonized, competitive and efficient energy sector that makes it possible to maximize Spain’s renewable potential and to improve the competitiveness of several sectors of crucial importance derived from the same, this policy would comprise projects such as the following:

   • Mass deployment of renewable generation facilities aimed at developing this generation technology (renewable generation facilities, own use, integration of renewables into construction and production sectors, biogas, wind, marine, energy communities).
   • Electric infrastructure, promotion of intelligent networks and deployment of flexibility and storage (technological update of transportation networks and distribution, demand management, storage).
   • Renewable hydrogen road map and its industry integration (pilot and commercial projects, support to the energy-demanding industries).
   • Just transition strategy (creation of activity in territories affected by the energy transition).
4. A Government for the 21st Century (to which 5% of the total resources assigned to the Plan would foreseeably be allocated).

   In order to foster the updating and improved efficiency and services of the Government, under this policy in particular, a project would be undertaken to modernize the Government from a broad perspective, which includes, specifically, the digitalization of the Government (both at the crosscutting level and in relation to the strategic areas of justice, health, public employment services, public health data, consulate management and territorial administration of the State), the plan to reinforce and deploy cybersecurity, the energy transition of the Central Government, modernization in human resources management, as well as the comprehensive reform and modernization of the justice system.

5. Modernization and digitalization of the industrial fabric and the SME, recovery of tourism and boost to entrepreneurial Spain (which would take in 17.1% of the resources).

   The aim is to support and strengthen Spanish industry already positioned in sectors like renewable energy, energy efficiency, electrification or the circular economy and, moreover, to reorient and align the creation of enterprises in new value chains, new products and new markets associated with the huge global challenges considered, driving both cross-border projects and participation in Projects of Common European Interest, in keeping with the plan to digitalize the entire value chain in sectors that drive growth, without ignoring the key role that tourism plays in the Spanish economy.

   Against this backdrop, the following projects would be included under this policy lever:

   • Spanish Industrial Policy 2030 aimed at fostering the modernization and productivity of the Spanish industry-services ecosystem, including the following sub-plans: Plan for digitalization of the strategic health, automotive, tourism and trade sectors, for modernization and sustainability of industry, for boosting “green” innovation economies and circular economy strategy.
   • Boost to the SME, specifically through a specific digitalization plan, with the reform of financing instruments in support of internationalization, and with the launch of the Spain Entrepreneurial Nation Strategy with a view to promoting the creation and growth of enterprises, and to generate a startup ecosystem.
   • Modernization and competitiveness of the tourism sector in order to bolster the resilience, sustainability, diversification and value added of this key sector of the economy, paying special attention to the Balearic Islands, the Canary Islands and depopulated areas.
   • Digital connectivity, boost to cybersecurity and rollout of 5G to ensure territorial cohesion, driving the technological development and growth of the country based on the country’s leading role in high speed networks.
6. Pact for Science and Innovation and the strengthening of the National Health System (to which 16.5% of the resources would be allocated).

   Assuming that it is not possible to undertake a transformation of the country without basing it on science and knowledge and in light of the shortcomings that the health crisis has revealed when it comes to the level of investment in science and innovation in general, and in some strategic sectors in particular, it is necessary to adopt forceful measures to rebuild and reinforce both the science and innovation system in addition to the capacities of the Spanish public health system in various areas, by means of the following projects:

   • National Artificial Intelligence Strategy (specifically, by promoting Artificial Intelligence in the production system, the economy and the data society).
   • Institutional reform and strengthening of the capacities of the national science, technology and innovation system (by reinforcing calls for applications for projects relating to R&D&I, human resources and technical-scientific equipment, reinforcing regular financing for CDTI business projects; creating new centers for excellence, promoting specific plans in key areas such as biomedicine, health and vaccine research, the aeronautical industry or advanced computing technologies).
   • Renewal and expansion of the capacities of the National Health System (particularly by reinforcing the strategic capacities of analysis and prevention, the preservation and promotion of professional talent, technological modernization, equipment renewal, the strategic reserve of medical devices and medicines and the promotion of the industrial sector in line with health needs).
7. Education and knowledge, ongoing training and skills development (to which 17.6% of the resources would be allocated).

   Assuming the importance that the strengthening of human capital has on the transformative impact sought by the Plan, as well as the need to strategically tackle the training of society as a whole, reorienting and harnessing existing talent and skills, the Plan proposes to undertake a raft of projects linked (i) to the national digital skills plan, including upskilling and reskilling; (ii) the strategic plan to boost vocational training and; (iii) to modernizing and digitalizing the education system.

8. New care economy and employment policies (to which 5.7% of the total resources would be allocated).

   Taking into account the need to reinforce the care economy in Spain and, in general, to adapt employment policies, this policy lever would include the following projects:

   • Action plan for the care economy and the strengthening of equality and inclusion policies (new telecare networks, modernization of dependent person care systems, new care infrastructure).
   • New public policies for a dynamic, resilient and inclusive labor market, aimed at (i) tackling the structural problems of the labor market in Spain (stabilization of temporary layoff procedures (ERTEs), reduction in temporary employment and job instability, simplification of the types of employment contracts, etc.; (ii) the deep reform of active employment policies (improved connection with business needs); and (iii) the promotion of employment integration policies around the deployment of the minimum living wage.
9. Culture and sports industry (to which 1.1% of the total would be allocated).

   Given the essential role that the culture industry plays in generating wealth and employment in Spain, this policy lever envisages providing support to the following projects:

   • Revitalization of the culture industry, by providing support to patronage and private support that complements public support, boosting tourism and economic activity deriving from emblematic cultural events, heritage protection, support for areas in demographic decline, etc.).
   • The creation of the Spain Audiovisual Hub, with a view to positioning Spain as a go-to center for audiovisual protection and the videogame industry, by simplifying requirements and bolstering the ecosystem of enterprises and professionals from the sector. Promoting the sports industry, with the promotion of business meetings, the organization of large sporting events, the promotion of sports tourism, the modernization of sporting infrastructure, and the bolstering of networks of high performance and sports technique centers.
10. Modernization of the tax system for inclusive and sustainable growth.

    Given the need to adopt measures to modernize Spain’s current tax system in order to guarantee the medium-term financial sustainability of its economy following the increase in public expenditure and debt assumed by the country to cope with the situation brought about by the pandemic, the Plan proposes undertaking a raft of initiatives such as (i) the law to prevent and combat tax fraud, with measures aimed at addressing the underground economy and strengthening the tax system’s collection capacity; (ii) adapting the tax system to the reality of the 21st century (with the foreseeable introduction of a tax on certain digital services and on financial transactions); (iii) improving the effectiveness of public spending; and (iv) the sustainability of the public pension system under the Toledo Pact.

Following the submission of the draft Plan in October 2020, there have been numerous contacts between representatives from the European Commission and the Spanish government in order to flesh out certain aspects of its contents. The final version of the Plan is expected to be formally submitted in March for approval by the EU institutions.

However, given the challenge that the adequate absorption of these funds poses in the tight timeframe imposed by the European Union, the Spanish government approved – on December 30, 2020 – Royal Decree-Law 36/2020, adopting a series of essential urgent measures to facilitate the scheduling, budgeting, management and implementation of the eligible initiatives with a charge to the European Recovery and Resilience Instrument (and, in particular, to the RRF) with a view to (i) crafting a suitable governance model for the selection, monitoring, assessment and coordination of the various investment projects and programs linked to the future National Recovery, Transformation and Resilience Plan; (ii) adopting horizontal legislative reforms that make it possible to simplify administrative procedures, particularly in the area of public procurement and subsidies; and (iii) ensuring the utmost efficiency in spending, while maintaining the safeguards and controls required by the EU legislation.

Notable among the main changes brought about the Royal Decree-Law are the introduction of a new form of public-private partnership through the mechanism of Strategic Projects for Economic Recovery and Transformation (known as “PERTEs” by the Spanish abbreviation), regarding as such those projects or group of structured projects that (i) represent a significant contribution to economic growth and to the creation of jobs and to the competitiveness of Spanish industry, due to their positive knock-on effects in the domestic market and society; (ii) make it possible to combine knowledge, experience, financial resources and economic operators to remedy significant market or systemic shortcomings and social challenges; (iii) have a significant innovative character or added value in terms of R&D&I; (iv) stand out for their quantitative or qualitative significance or because they display a very high level of technological or financial risks; (v) favor the integration and growth of SMEs and the generation of collaborative environments; and (vi) contribute in a specific, clear and identifiable manner to one or more objectives of the National Recovery, Transformation and Resilience Plan, as well as to the goals set at the European level in the European Recovery Instrument.

It will fall to the Council of Ministry to declare a project as a Strategic Economic Recovery and Transformation Project, and its implementation will be structured, in each case, through as many mechanisms as may be envisaged in the law, respecting at all times the principles of equality and non-discrimination, competition, disclosure, transparency and proportionality.

Enterprises interested in participating in PERTEs must apply for registration in a State Register – to be created shortly – and such registration will serve as evidence that the enterprise pursues activities linked to the public interest as envisaged in such PERTE. This registration may be regarded as a requirement to qualify for aid only where it is necessary to safeguard some overriding reason of general interest and there are no other less restrictive or distorting measures for the economic activity in order to accomplish the same goals. In any event, enterprises applying for the aid must be offered the possibility, as an alternative to registration, to evidence that they fulfill the qualitative or quantitative conditions required by the body granting the subsidy.