EU Competition Law Volume IV: State Aid (EU Competition Law series, 4) [2 ed.] 907764430X, 9789077644300

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EU COMPETITION LAW VOLUME IV

STATE AID Second edition

BOOK ONE

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EU COMPETITION LAW SERIES Volume 1 Procedure (2 ed.) Gian Luigi Tosato and Leonardo Bellodi Volume 2 Mergers and Acquisitions (2 ed.) Götz Drauz and Christopher Jones Volume 3 Cartels and Collusive Behaviour (2 ed.) Mario Siragusa and Cesare Rizza Volume 4 State Aid (2 ed.) Nicola Pesaresi, Koen Van de Casteele, Leo Flynn and Christina Siaterli Volume 5 Abuse of Dominance Under Article 102 TFEU Francisco Enrique González-Díaz and Robbert Snelders Volume 6 Vertical Restraints Mario Siragusa and Gianluca Faella Volume 7 EU Competition Law & Intellectual Property Robbert Snelders and Thomas Graf Volume 8 EU Competition Law & Fundamental Rights Francisco Enrique González-Díaz and Ben Holles de Peyer

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EU COMPETITION LAW VOLUME IV STATE AID Second edition BOOK ONE EDITORS Nicola Pesaresi, Koen Van de Casteele, Leo Flynn and Christina Siaterli

CONTRIBUTORS A. Avallone M. Balossino T. Beranger J. Bokobza E. Cabrera Maqueda B. Cattrysse P. Cesarini M. Chovino G. Conte A. S. Dupont L. Flynn C. Galand D. Grespan C. Grozea-Knuth V. Guigue-Koeppen A. Held

G. Ianakiev R. Ianus N. Imbert A. Jarosz-Friis C. Kerle M. Lienemeyer P.J. Loewenthal J. Majcher-Williams G. Mamdani S. Medghoul I. Neale-Besson P. Nemeckova S. Noë V. Nozar A. Nykiel-Mateo R. Peduzzi

A. Pelin N. Pesaresi J. Rapp S. Ritzek-Seidl L. Rossi G. Sapi T. Scharf C. Schoser O. Stehmann C. Tenreiro F. Tomat K. Van de Casteele R. Van de Ven V. Verouden J. Wiemann

CLAEYS CASTEELS 2016

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All views expressed are strictly personal. The opinions expressed in individual chapters are those of the author in question.

© 2016 The authors

ISBN 978 9077 644 300 The paper and board used in the production of this book is sourced exclusively from replanted forests. All rights reserved. This publication, in whole or in part, may not be copied, reproduced nor transmitted in any form without the written permission of the copyright holder and the publisher. Applications to copy, transmit or reproduce any part of this work may be made to the publisher.

Published in 2016 by Claeys & Casteels Law Publishers Deventer (The Netherlands) – Leuven (Belgium) P.O. Box 2013 7420 AA Deventer The Netherlands www.claeys-casteels.com

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Contents-summary

CONTENTS-SUMMARY

BOOK ONE PART I

Introduction

PART II

The concept of State aid

BOOK TWO PART III

Compatibility rules

PART IV

SGEI

PART V

Procedures

v

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TABLE OF CONTENTS Contents-summary................................................................................... v Table of contents ..................................................................................vii Tables of cases and legislation (book one) .............................................. xlv BOOK ONE PART 1

INTRODUCTION ....................................................1

Chapter 1

Introduction.............................................................. 1

Chapter 2

State aid modernisation ............................................ 5

1. 2.

3. 4.

The SAM context ................................................................................................ 5 The SAM priorities ............................................................................................. 6 2.1 Foster ‘good aid’ ...................................................................................... 7 2.2 Increase the efficiency of State aid control......................................... 8 2.3 Address the shortcomings of the State aid framework ................. 11 Common principles.......................................................................................... 13 State aid control “post SAM” ......................................................................... 16

Chapter 3 1. 2. 3.

4. 5.

The economics of State aid control ............................17

Introduction ....................................................................................................... 17 The basic rationale of State aid control in the Union ............................... 19 When is a measure State aid? ........................................................................ 23 3.1 The concept of “advantage” ................................................................ 23 3.2 The Market Economy Investor Principle ......................................... 26 3.3 Investments in line with market conditions - some principles .... 30 3.4 Distortion of competition and effect on trade ............................... 35 Assessment framework for the compatibility of aid ................................. 38 State intervention: objective and rationale .................................................. 40 vii

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5.1

6. 7.

8.

9.

Market failures ....................................................................................... 42 5.1.1 Externalities.......................................................................... 42 5.1.2 Information asymmetries .................................................. 46 5.1.3 Coordination problems ..................................................... 48 5.1.4 Market power ...................................................................... 51 5.2 Equity considerations .......................................................................... 52 Incentive effect.................................................................................................. 54 6.1 Methodology ......................................................................................... 54 6.2 Financing constraints .......................................................................... 59 The negative effects of State aid .................................................................... 60 7.1 Theories of harm in Union State aid control – a typology .......... 60 7.1.1 Allocative inefficiencies (loss of welfare) ....................... 62 7.1.1.1 Product market distortions ............................ 62 7.1.1.2 Distortions in input markets / locational decisions .......................................... 70 7.1.1.3 Distortions between different sectors .......... 72 7.1.1.4 The shadow cost of taxation ........................... 72 7.1.2 Distributional concerns (shifts in welfare) .................... 73 7.1.2.1 Distribution of welfare across Member States ................................................................... 73 7.1.2.2 Distribution of welfare within Member States ................................................................... 77 7.2 The incentive effect as a screen for competition analysis .............. 78 Other applications of economic insights .................................................... 82 8.1 Empirical insights on the effectiveness of regional State aid ....... 83 8.2 State aid and efficiency incentives: Compensation for SGEI ...... 87 8.3 State aid and price signals: aid to compensate firms for increased ETS costs ........................................................................ 90 Concluding remarks ....................................................................................... 92

Chapter 4 1. 2. 3.

State aid evaluation ................................................. 95

Introduction ....................................................................................................... 95 The role of evaluation in policy-making ....................................................... 96 The new evaluation requirements in State aid control ............................. 99 3.1 The objective of the aid scheme to be evaluated ...........................103 3.2 The evaluation questions ...................................................................103 3.3 The result indicators ...........................................................................104 3.4 The envisaged methods to conduct the evaluation ......................104 viii

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4.

5.

3.5 The data collection requirements ....................................................104 3.6 Timeline of the evaluation ................................................................105 3.7 The body conducting the evaluation and its independence .......105 3.8 Publicity ................................................................................................106 Relevant methods for the evaluation of State aid schemes.....................106 4.1 Examples for randomization ...........................................................109 4.2 Quasi-experimental studies...............................................................111 4.2.1 Instrumental Variables Estimation ................................111 4.2.2 Regression discontinuity design (RDD) .....................113 4.2.3 Difference-in-Differences method estimator .............115 4.3 General remarks and further methodological issues ...................116 Lessons learnt so far and conclusions..........................................................117

Chapter 5 1. 2.

3.

Why control? ...................................................................................................119 1.1 Why control State aid in the Union? ..............................................119 1.2 Why control subsidies at world level? ............................................122 What is controlled and how? .......................................................................124 2.1 Scope – goods and services versus goods only ..............................124 2.2 Is State aid the same as subsidy? .......................................................124 2.3 Control..................................................................................................129 2.4 Enforcement ........................................................................................131 Outlook.............................................................................................................135

Chapter 6 1. 2. 3. 4. 5.

External aspects of State aid policy – part 1: WTO ..119

External aspects of State aid policy part 2: accession ................................................................141

Introduction .....................................................................................................141 Europe Agreements, Association Agreements and Stabilisation and Association Agreements ........................................................................144 Accession negotiations – how do they work? ..........................................147 The Competition chapter ..............................................................................148 Existing aid/transition periods .....................................................................154 5.1 Notion of “existing aid” .....................................................................154 5.2 The interim mechanism and the sunset clause ..............................157 5.2.1 Standard of review - procedural aspects .......................160

ix

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5.2.2

6.

Notion of measures “put into effect” before accession..............................................................................161 5.2.3 Notion of measures “applicable after” accession.........161 5.3 Investor protection under pre-accession bilateral investment treaties ...................................................................................................164 5.4 Transitional and permanent State aid provisions ........................167 5.4.1 Fiscal measures ..................................................................168 5.4.2 Environmental aid measures ...........................................169 5.4.3 Provisions for the steel sector .........................................170 5.4.3.1 The model of Poland, the Czech Republic and Romania ....................................................171 5.4.3.2 The case of Slovakia ........................................174 5.4.3.3 The case of Bulgaria ........................................175 5.4.3.4 The case of Croatia .........................................175 5.4.3.5 The case of Turkey ..........................................176 5.4.4 Provisions for the shipbuilding sector ..........................176 5.4.5 Provisions for the agriculture sector .............................179 5.5 Safeguard clauses .................................................................................182 Enlargement – lessons and new challenges in State aid control ...........183

PART 2 Chapter 7 1. 2.

3. 4.

THE CONCEPT OF STATE AID ...................................187 Introduction............................................................187

General context ...............................................................................................187 Specific sectors .................................................................................................188 2.1 Agriculture ...........................................................................................189 2.2 Transport ..............................................................................................189 2.3 Services of general economic interest .............................................189 2.4 Coal and Steel ......................................................................................189 2.5 Nuclear energy.....................................................................................190 2.6 Defence .................................................................................................191 2.6.1 Commission Decisional Practice...................................193 2.6.2 Case law ..............................................................................195 Interaction with other Treaty Provisions ...................................................197 Territorial scope...............................................................................................197

x

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Chapter 8 1. 2. 3. 4. 5. 6.

Concept of undertaking ................................................................................201 Legal status .......................................................................................................201 Social objectives and solidarity principle ...................................................204 Exercise of public authority ..........................................................................206 Purchasing activities and other market activities ......................................208 Infrastructure funding....................................................................................208

Chapter 9 1. 2.

3.

Notion of undertaking .............................................201

State resources and imputability ..............................211

State origin of the measure ............................................................................211 State resources ..................................................................................................211 2.1 Notion of “Member State” ................................................................212 2.2 Notion of “State resources” ...............................................................212 2.3 No State resources...............................................................................214 2.4 Costs to the State ................................................................................225 2.5 “In any form whatsoever” ..................................................................228 2.6 Parafiscal taxes .....................................................................................229 2.7 Granting access to State-controlled resources or to a certain activity/market..........................................................238 Imputability......................................................................................................246 3.1 Notion of imputability ......................................................................246 3.2 The case law before Stardust Marine ..............................................246 3.3 Stardust Marine, the landmark case ................................................248 3.4 The case law after Stardust Marine .................................................252 3.4.1 Pearle ..................................................................................252 3.4.2 Deutsche Bahn .................................................................253 3.4.3 Ufex II .................................................................................253 3.4.4 Olympiaki Aeroporia .......................................................254 3.4.5 SIC .......................................................................................254 3.4.6 Elliniki Nafpigokataskevastiki .......................................254 3.4.7 Nitrogénművek Vegyipari ...............................................255 3.4.8 Doux Élevage .....................................................................256 3.4.9 Commerz Nederland .......................................................257 3.4.10 Austria v Commission .....................................................258 3.5 Conclusion ..........................................................................................259

xi

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Chapter 10 1. 2.

3.

General remarks ..............................................................................................263 Material selectivity ..........................................................................................264 2.1 De jure and de facto selectivity .........................................................268 2.2 Selectivity stemming from discretionary administrative practices ................................................................................................272 2.3 The three-step test ...............................................................................274 2.3.1 Identification of the reference system ..........................276 2.3.2 Derogation from the system of reference.....................278 2.3.3 Justification by the nature or general scheme of the system of reference ................................................279 Regional selectivity .........................................................................................281 3.1 The three scenarios of the distribution of competences..............282 3.2 Asymmetrical devolution of powers – the autonomy test .........284 3.2.1 Institutional autonomy ....................................................285 3.2.2 Procedural autonomy .......................................................286 3.2.3 Economic and financial autonomy ...............................286

Chapter 11 1. 2.

Selectivity ................................................................263

Advantage ...............................................................289

The concept of advantage – general considerations.................................289 1.1 Introduction.........................................................................................290 1.2 The concept of advantage – general considerations ....................291 Market economy operator principle ..........................................................303 2.1 Neutrality principle and the State as economic actor .................304 2.2 Comparable circumstances ...............................................................307 2.3 Hindsight .............................................................................................312 2.4 Specific obligations and prerogatives of the State ........................313 2.5 The State as Investor – Capital injections, guarantees and loans ...............................................................................................315 2.5.1 Introduction – profitability of the investment ...........315 2.5.2 Profitability of the investment or measure ..................316 2.5.3 Purely economic return ...................................................318 2.5.4 Repeated interventions /capital injections ..................321 2.5.5 Establishing compliance with market conditions: pari-passu transactions .....................................................323 2.5.6 Establishing compliance with market conditions: Benchmarking..............................................325 xii

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2.5.7

3.

Establishing compliance with market conditions: Other assessment methods .............................................326 2.5.8 Establishing compliance with market conditions: Specific considerations to establish whether the terms for loans and guarantees are in line with market prices .....................................................................329 2.6 The State as vendor or buyer - sale and purchase of assets, goods and services ...............................................................................331 2.6.1 Introduction ......................................................................331 2.6.2 Sale of land and buildings ...............................................332 2.6.3 Privatisations ......................................................................334 2.6.4 Summary of generally applicable considerations - establishing MEOP compliance through tenders and evaluations ..................................................................338 2.7 The State as a creditor (Market Economy Creditor Principle) 341 Indirect aid .......................................................................................................345 3.1 Types of indirect aid in the Commission practice ......................346 3.2 Case law on indirect aid ....................................................................348 3.3 The features of indirect aid ..............................................................350

Chapter 12 1. 2. 3. 4. 5. 6.

Two very broad notions .................................................................................355 The duty to state reasons................................................................................358 The case of “closed markets”..........................................................................360 Commission decisional practice ..................................................................363 Commission guidance ...................................................................................370 Final remarks ....................................................................................................371

Chapter 13 1. 2. 3.

Distortion of trade and competition ........................355

De minimis ..............................................................375

Introduction: Foundations of the “ de minimis” rule ..............................375 The de minimis rule: standing on shaky grounds? ...................................378 2.1 Coexistence of de minimis aid and aid not affecting trade ........380 2.2 De minimis is generally policy neutral ...........................................383 Substantive conditions ...................................................................................385 3.1 Exclusions from the scope of Regulation 1407/2013 .................385 3.1.1 Export aid ...........................................................................385 xiii

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3.1.2 3.1.3 3.1.4 3.1.5

4.

5. 6. 7. 8.

9.

Sectorial exclusions ...........................................................386 Agriculture and fisheries sectors ....................................387 Transport sector ................................................................388 Undertakings active both in excluded and non-excluded sectors ........................................................389 3.2 Undertakings in difficulty make a come-back ..............................390 3.3 The de minimis ceiling .......................................................................392 3.4 Condition of transparency ...............................................................394 3.4.1 Introduction.......................................................................394 3.4.2 Grants and interest rate subsidies ..................................395 3.4.3 Loans ..................................................................................395 3.4.4 Guarantees..........................................................................397 3.4.5 Risk capital and capital injections .................................399 Determination of the beneficiary of de minimis aid ................................400 4.1 Introducing the concept of single undertaking ............................400 4.2 Clarification as to the application of the ceiling per Member State.......................................................................................402 4.3 Direct links to a public administration ..........................................403 4.4 The reference period of three fiscal years .......................................403 4.5 Treatment of mergers, acquisitions and splits of undertakings ........................................................................................404 Cumulation of de minimis aid with State aids ..........................................405 Prohibition of fractioning an aid amount into smaller ..........................408 de minimis aids ...............................................................................................408 Monitoring and transparency requirements .............................................409 7.1 A choice between declarations and register is maintained .........409 7.2 Sanctions in case of non-compliance ..............................................411 Application in time of the de minimis rule ................................................412 8.1 The determining moment of the grant ...........................................412 8.2 Transition period between 1 January 2014 and 1 July 2014......413 8.3 Retroactive application of de minimis regulations.......................413 The use of de minimis in a recovery context ..............................................414

Chapter 14 1.

Application to specific fields – fiscal aid ...................417

Introduction .....................................................................................................417 1.1 The Member States’ competence in the taxation field ................417 1.2 Fiscal competition, aggressive tax planning and State aid rules........................................................................................................417 xiv

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2.

The selectivity analysis ...................................................................................424 2.1 The three-step test ...............................................................................424 2.1.1 Identification of the reference system ...........................425 2.1.2 Derogation from the system of reference.....................430 2.1.3 Justification by the nature or general scheme of the system of reference ................................................437

Chapter 15 1. 2. 3.

4. 5.

Application to specific instrument – state guarantees ....................................................445

Introduction .....................................................................................................445 Scope of the Notice ........................................................................................446 Common difficulties in relation to guarantees .........................................447 3.1 The evaluation has to be made ex-ante ...........................................447 3.2 There are numerous types of guarantees ........................................448 3.3 The lack of traceability leads to suspicion ......................................449 3.4 The treatment of guarantees constituting aid differs from those of other types of aid .......................................................449 The beneficiary of aid .....................................................................................450 Guarantees not constituting aid...................................................................450 5.1 Individual guarantees as non-aid ....................................................451 5.1.1 The standard situation .....................................................451 5.1.1.1 The borrower is not in financial difficulty ............................................................451 5.1.1.2 The extent of the guarantee can be properly measured when it is granted .........452 5.1.1.3 The guarantee does not cover more than 80 per cent of each outstanding loan .........452 5.1.1.4 A market-oriented price is paid for the guarantee ..........................................................453 5.1.2 Specific case of SMEs .......................................................454 5.2 Guarantee schemes as non-aid .........................................................455 5.2.1 Standard situation ............................................................455 5.2.1.1 The scheme has to be self-financing ............455 5.2.1.2 The adequacy of the level of premiums have to be reviewed annually ............................ 456 5.2.1.3 Premium coverage...........................................456 5.2.1.4 Transparency ....................................................457 5.2.2 Specific case of schemes for SMEs .................................457 xv

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6. 7.

8. 9.

5.3 No automaticity ..................................................................................457 Guarantees constituting aid ..........................................................................458 6.1 Aid element in individual guarantees .............................................458 6.2 Aid element in guarantee schemes ..................................................459 Unlimited guarantees .....................................................................................460 7.1 Definition .............................................................................................460 7.2 Provisions of the Notice regarding unlimited guarantees ..........460 7.3 Presence of aid in unlimited guarantees .........................................461 7.3.1 Unlimited guarantees are likely to constitute an advantage ......................................................................461 7.3.2 Unlimited guarantees cannot benefit from de minimis ..........................................................................461 7.4 The specific issue of implied unlimited guarantees ......................462 7.4.1 State resources....................................................................462 7.4.2 Advantage ...........................................................................463 7.4.3 Practical consequences for undertakings with a public law status ...................................................464 7.5 Conclusion as regards the presence of aid in unlimited guarantees and issue of the recovery ...............................................465 Reporting ..........................................................................................................465 Conclusion .......................................................................................................466

BOOK TWO PART 3 Chapter 16 1. 2. 3. 4.

COMPATIBILITY RULES .............................................493 General block exemption regulation ........................493

Introduction .....................................................................................................493 Role of the GBER ...........................................................................................495 Structure ...........................................................................................................495 Common provisions .......................................................................................496 4.1 Scope .....................................................................................................496 4.2 Notification thresholds ......................................................................502 4.3 Transparency of aid ............................................................................505 4.4 Incentive effect ....................................................................................506 4.5 Cumulation ..........................................................................................508 xvi

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5. 6. 7.

4.6 Publication and information ............................................................510 Monitoring .......................................................................................................511 Transitional provisions...................................................................................513 Specific provisions for different categories of aid .....................................513 7.1 Aid to SMEs.........................................................................................513 7.1.1 Definition of SME ............................................................515 7.1.2 Common provisions.........................................................516 7.1.3 Investment aid to SMEs ..................................................516 7.1.4 Aid for consultancy in favour of SMEs .......................516 7.1.5 Aid to SMEs for participation in fairs ..........................517 7.1.6 Aid for cooperation costs incurred by SMEs participating in European Territorial Cooperation projects .......................................................517 7.1.7 Broader categories .............................................................518 7.1.8 Additional “SME bonuses” .............................................518 7.2 Training aid ..........................................................................................519 7.2.1 Common provisions.........................................................520 7.2.2 The compatibility conditions for training aid ............520 7.3 Aid for disadvantaged workers and for workers with disabilities....................................................................................522 7.3.1 Common provisions.........................................................524 7.3.2 Definition of disadvantaged workers ............................524 7.3.3 Definition of workers with disabilities .........................525 7.3.4 Aid for the recruitment of disadvantaged workers in the form of wage subsidies ..........................525 7.3.5 Aid for the employment of workers with disabilities in the form of wage subsidies .....................525 7.3.6 Aid for compensating the additional costs of employing workers with disabilities .........................526 7.3.7 Aid for compensating the costs of assistance provided to disadvantaged workers...............................526 7.4 New categories of aid .........................................................................527 7.4.1 Aid to make good damages caused by natural disasters ...............................................................................527 7.4.1.1 Rationale behind the exemption .................527 7.4.1.2 Legal basis.........................................................528 7.4.1.3 Derogations from the general compatibility conditions ...............................528 7.4.1.4 Scope of the exemption and notification threshold ....................................528 xvii

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8.

7.4.1.5 Specific compatibility conditions ...............529 7.4.1.6 Eligible costs.....................................................530 7.4.1.7 Aid intensity ....................................................530 7.4.2 Social aid for transport of residents of remote regions ..............................................................531 7.4.2.1 Rationale behind the exemption .................531 7.4.2.2 Legal basis.........................................................531 7.4.2.3 Derogations from the general compatibility conditions ...............................531 7.4.2.4 Scope of the exemption and notification threshold ....................................531 7.4.2.5 Specific compatibility conditions ................532 7.4.2.6 Eligible costs.....................................................533 7.4.3 Aid for culture and heritage conservation ...................533 7.4.3.1 Rationale behind the exemption ................533 7.4.3.2 Scope of the exemption and notification threshold ....................................534 7.4.3.3 Derogations from the general compatibility conditions ...............................535 7.4.3.4 Aid Amount and aid intensity .....................536 7.4.3.5 Eligible costs.....................................................536 7.4.4 Aid for sport and multifunctional infrastructures .....538 7.4.4.1 The rationale behind the exemption ...........538 7.4.4.2 Scope of the exemption and notification threshold ....................................538 7.4.4.3 Specific compatibility conditions ................539 7.4.4.4 Aid amount and Intensity .............................540 7.4.4.5 Eligible costs.....................................................540 7.4.5 Aid for local infrastructures............................................541 7.4.5.1 The rationale behind the exemption ...........541 7.4.5.2 Scope of the exemption and notification threshold ....................................541 7.4.5.3 Specific compatibility conditions ................542 7.4.5.4 Aid amount and intensity .............................542 7.4.5.5 Eligible expenses..............................................543 Final remarks ....................................................................................................543

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Chapter 17 1. 2.

3.

4.

Introduction .....................................................................................................545 Existence of State aid ......................................................................................548 2.1 Support of research organisations and research infrastructures 548 2.2 Support to undertakings through research organisations and research infrastructures ..............................................................554 2.3 Public procurement of research and development services........556 Compatibility assessment of State aid ........................................................557 3.1 Scope of the rules (GBER and R&D&I Framework).................557 3.1.1 General principles and exclusions .................................558 3.1.2 Scope and definitions .......................................................562 3.2 Rule-based compatibility assessment (GBER) .............................565 3.2.1 Notification thresholds ....................................................567 3.2.2 Eligible costs.......................................................................570 3.2.3 Aid intensities ....................................................................571 3.3 Effect-based compatibility assessment (R&D&I Framework)....574 3.3.1 Contribution to a well-defined objective.....................575 3.3.2 Need for State intervention ............................................576 3.3.3 Appropriateness of the aid ..............................................578 3.3.4 Incentive effect ..................................................................579 3.3.5 Proportionality ..................................................................582 3.3.6 Avoidance of negative effects..........................................588 3.3.7 Transparency ......................................................................593 3.4 Evaluation, reporting and monitoring ............................................594 Conclusion .......................................................................................................595

Chapter 18 1.

Research, development and innovation ....................545

Energy and environment..........................................597

Introduction .....................................................................................................597 1.1 A rapidly evolving policy context ....................................................597 1.2 State aid modernisation as stimulus and framework to review State aid in the energy and environmental field .........599 1.3 Towards a common State aid assessment across the EEAG .......600 1.4 Simplification and focus on more distortive large State aid measures ................................................................................................602 1.4.1 GBER ..................................................................................602 1.4.2 Investment aid ..................................................................603 1.4.3 Notification thresholds ...................................................604 xix

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2.

3.

4.

5. 6.

7. 8.

9.

State aid in the context of the EU Emissions Trading Scheme (ETS) ..................................................................................................604 2.1 State aid in the wider ETS context ..................................................604 2.2 The ETS State aid Guidelines and their application ...................606 2.2.1 Sector and subsector eligibility ......................................606 2.2.2 Types of aid measures .......................................................609 2.2.2.1 Aid for indirect emission costs .....................609 2.2.2.2 Investment aid for highly efficient power plants .....................................................611 2.2.2.3 Aid involved in free allowances for the modernisation of electricity generation .........................................................612 2.2.2.4 Aid involved in the exclusion of small installations and hospitals from the EU ETS ......................................................613 2.2.3 Mid-term review clause....................................................613 Aid to RES and CHP.....................................................................................614 3.1 Introduction ........................................................................................614 3.2 Investment aid for RES ......................................................................615 3.3 Operating aid for RES .......................................................................615 3.4 Aid for biofuels and biomass ............................................................617 3.5 Aid for CHP ........................................................................................618 Aid for ‘traditional’ environmental measures ............................................619 4.1 Energy efficiency measures in buildings.........................................619 4.2 Aid for energy efficient district heating and district cooling .....................................................................................620 4.3 Aid for waste management ...............................................................621 Aid to energy infrastructure .........................................................................623 Aid for generation adequacy .........................................................................626 6.1 Policy context ......................................................................................626 6.2 EEAG provisions ................................................................................627 6.3 Commission Decision on UK capacity market............................630 Aid for energy intensive users .......................................................................631 7.1 Reductions in environmental taxes .................................................631 7.2 Reductions from the funding of RES support .............................632 Coal Decision 2010 - Aid for the closure of uncompetitive coal mines .........................................................................................................635 8.1 The Council Decision ........................................................................636 8.2 Monitoring of closure plans ..............................................................637 Nuclear energy .................................................................................................637 xx

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9.1 9.2

Links with the Euratom Treaty ........................................................637 Case practice ........................................................................................639

Chapter 19 1. 2. 3.

4. 5.

Access to finance......................................................641

Introduction .....................................................................................................641 1.1 The rules for risk capital aid in force before 1 July 2014 ............641 1.2 The review process in the context of State Aid Modernisation.643 The new system of rules for access to finance aid .....................................645 2.1 A new legal architecture ....................................................................645 2.2 New notification requirements ........................................................646 Existence of State aid ......................................................................................648 3.1 Aid to private investors ......................................................................649 3.2 Aid to financial intermediaries and entrusted entities ................650 3.3 Aid to the undertakings receiving the investment .......................653 Rationale for State aid to enhance access to risk finance ........................653 4.1 Objective of common interest..........................................................653 4.2 Failures in business finance markets ................................................655 Demand-side measures: risk finance aid schemes.....................................657 5.1 Eligible investees ................................................................................658 5.1.1 Schemes falling under the new GBER .........................658 5.1.2 Notifiable schemes ............................................................662 5.2 Financial instruments: admissible forms of investments and financial parameters ....................................................................663 5.2.1 Schemes falling under the new GBER .........................664 5.2.1.1 Minimum private investment ratios ...........664 5.2.1.2 Risk-sharing arrangements between the public and private investors ...................666 5.2.1.3 Pass-on of the aid to the final beneficiaries ......................................................667 5.2.2 Notifiable schemes ............................................................668 5.2.2.1 Schemes allowing for lower levels of private investor participation than required under the new GBER...........668 5.2.2.2 Schemes providing private investors with a more favourable loss protection than allowed under the new GBER ............669 5.3 Eligible financial intermediaries and funding structures ............672 5.3.1 Schemes falling under the GBER ..................................672 xxi

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5.3.2 Notifiable schemes ............................................................674 Fiscal instruments: admissible incentives and financial parameters ............................................................................................676 5.4.1 Schemes falling under the new GBER .........................676 5.4.2 Notifiable schemes ............................................................677 Start-up aid and supply-side measures ........................................................679 6.1 Start-up aid ...........................................................................................679 6.2 Aid for alternative trading platforms ..............................................680 6.3 Aid for scouting costs .........................................................................682 Specific exceptions to general rules .............................................................683 7.1 Cumulation ..........................................................................................683 7.2 Undertakings in difficulty .................................................................684 7.3 Publication requirements ..................................................................684 7.4 Transitional and appropriate measures...........................................685 7.5 The role of national development banks in implementing financial instruments ...............................................686 5.4

6.

7.

Chapter 20 1. 2.

3.

Regional aid ............................................................689

Introduction ....................................................................................................689 Context, challenges and objectives of the revision ..................................691 2.1 Context ................................................................................................691 2.1.1 Economic context and coherence with Union cohesion policy.....................................................691 2.1.1.1 Economic context ..........................................691 2.1.1.2 Coherence with the Union’s cohesion policy ...............................................691 2.1.2 Experience with regional aid rules during 2007-2013 ..........................................................................692 2.2 Challenges and objectives of the revision .....................................696 2.2.1 Ensuring effectiveness and efficiency of regional aid ........................................................................696 2.2.2 Stricter treatment of large enterprises ..........................697 2.2.3 Identifying the negative effects of regional aid ..........697 Scope and architecture of regional aid rules..............................................698 3.1 Sectoral scope .....................................................................................698 3.2 Geographical scope ............................................................................701 3.2.1 Regional aid coverage and its distribution ..................702 3.2.2 Regional aid maps ............................................................704 xxii

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3.2.3

4.

Article 107(3)(a) of the Treaty ......................................705 3.2.3.1 ‘a’ areas ..............................................................705 3.2.3.2 Aid ceilings ......................................................706 3.2.3.3 Mid-term review ............................................707 3.2.4 Article 107(3)(c) of the Treaty ......................................707 3.2.4.1 Predefined ‘c’ areas .........................................707 3.2.4.2 Non-predefined ‘c’ areas ................................709 3.2.4.3 Aid ceilings and border regions ...................709 3.2.4.4 Mid-term review ............................................710 3.3 Types of regional aid .........................................................................710 3.3.1 Investment aid ..................................................................711 3.3.1.1 Initial investment in ‘a’ areas ........................711 3.3.1.2 Initial investment in ‘c’ areas .......................712 3.3.1.3 ‘Initial investment in favour of new economic activity’ ..........................................713 3.3.1.4 ‘Diversification of an existing establishment into new products’ and ‘new process innovations’ ......................714 3.3.2 Operating aid ....................................................................715 3.3.2.1 Operating aid in ‘a’ areas ...............................715 3.3.2.2 Operating aid in outermost regions ...........715 3.3.2.3 Operating aid in sparsely populated areas ...................................................................716 3.4 Architecture of the rules....................................................................716 3.4.1 Categories covered by the GBER .................................718 3.4.1.1 Regional investment aid schemes ................718 3.4.1.2 Regional operating aid schemes ..................718 3.4.1.3 Individual investment aid..............................719 3.4.2 Aid categories falling under the RAG 2014 ...............720 3.4.2.1 Regional investment aid schemes ...............720 3.4.2.2 Regional operating aid schemes ..................720 3.4.2.3 Individual investment aid .............................721 Compatibility assessment of regional aid ..................................................721 4.1 Per se rules (GBER) ...........................................................................722 4.1.1 Investment aid (Article 15 of the GBER) ...................722 4.1.1.1 Contribution to a common objective (cohesion objective) ......................................722 4.1.1.2 Incentive effect ...............................................723 4.1.1.3 Proportionality: aid intensities and eligible costs ............................................723 xxiii

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4.2

Chapter 21 1.

4.1.2 Operating aid (Article 16 of the GBER) ....................724 Rule of reason (RAG 2014) ............................................................725 4.2.1 Investment aid schemes ..................................................726 4.2.1.1 Contribution to a common objective ........727 4.2.1.2 Appropriateness ..............................................729 4.2.1.3 Incentive effect ...............................................729 4.2.1.4 Proportionality ...............................................730 4.2.1.5 Avoiding undue negative effects on competition and trade .............................731 4.2.1.6 Transparency ....................................................732 4.2.1.7 Evaluation ........................................................732 4.2.2 Operating aid schemes ....................................................733 4.2.2.1 Contribution to a common objective ........733 4.2.2.2 Appropriateness .............................................733 4.2.2.3 Incentive effect ...............................................733 4.2.2.4 Proportionality ...............................................734 4.2.2.5 Avoidance of undue negative effects ..........734 4.2.3 Individual aid ....................................................................734 4.2.3.1 Contribution to a common objective ........735 4.2.3.2 Appropriateness .............................................735 4.2.3.3 Incentive effect: formal requirements .......736 4.2.3.4 Incentive effect: counterfactual scenario....737 4.2.3.5 Proportionality: maximum aid intensities used as cap .......................................................739 4.2.3.6 Proportionality: net extra cost approach ..739 4.2.3.7 Avoidance of undue negative effects on competition and trade .............................740 4.2.3.8 Manifest negative effects ..............................741 4.2.3.9 Negative effects: balancing test ..................741 Rescue and restructuring .........................................745

Background ......................................................................................................745 1.1 Economic rationale for the control of rescue and restructuring aid ..................................................................................745 1.2 Short history of the Commission’s policy on aid to firms in difficulty ................................................................................................748 1.3 Adoption of the 2014 Guidelines ...................................................751

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2.

3.

4.

5.

General principles ...........................................................................................754 2.1 Sectoral scope ......................................................................................754 2.2 Eligibility ..............................................................................................757 2.3 The “one time, last time” principle ..................................................762 2.3.1 Grounds for the principle ...............................................762 2.3.2 Aid which triggers the “one time, last time principle” ............................................................................763 2.3.3 Exceptions ..........................................................................765 2.3.4 Ownership issues ..............................................................766 2.4 Objective of common interest..........................................................767 2.5 Transparency, reporting and monitoring .......................................771 Rescue aid .........................................................................................................772 3.1 Concept and purpose of rescue aid .................................................772 3.2 Appropriateness ..................................................................................772 3.3 Proportionality ....................................................................................774 Temporary restructuring support ................................................................775 4.1 Concept and purpose of temporary restructuring support........775 4.2 Appropriateness ..................................................................................776 4.3 Proportionality ....................................................................................777 Restructuring aid.............................................................................................777 5.1 Objective of common interest: restructuring plan and return to long-term viability .....................................................778 5.1.1 Content of the restructuring plan .................................778 5.1.2 Restructuring period ........................................................779 5.1.3 Restructuring measures....................................................780 5.1.4 Return to viability and long-term viability..................782 5.2 Need for State intervention and incentive effect .........................785 5.3 Appropriateness ..................................................................................786 5.4 Proportionality (aid limited to the minimum) ............................787 5.4.1 Own contribution ............................................................787 5.4.1.1 Form of own contribution ............................787 5.4.1.2 Comparable effect to aid granted ................790 5.4.1.3 Amount of own contribution and restructuring costs...........................................791 5.4.2 Burden-sharing ..................................................................793 5.4.2.1 Absorption of losses and preventing cash outflow .....................................................794 5.4.2.2 Exceptions ........................................................795 5.4.2.3 Reasonable share of future gains for the State ......................................................795 xxv

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5.5

6.

Negative effects....................................................................................795 5.5.1 Grounds for measures to limit distortions of competition ...................................................................796 5.5.2 Extent of competition measures ....................................796 5.5.3 Structural measures ..........................................................799 5.5.4 Reductions in capacity or market presence .................801 5.5.5 Behavioural measures .......................................................803 5.5.6 Market-opening measures ...............................................803 5.6 Implementation and amendment of restructuring plans............804 5.6.1 Implementation of the restructuring plan ...................804 5.6.2 Amendment of the restructuring plan .........................805 5.6.3 Aid granted during the restructuring period...............806 Special cases ......................................................................................................807 6.1 SMEs .....................................................................................................807 6.2 Services of general economic interest .............................................808 6.3 Aid to cover the social costs of restructuring ................................811

Chapter 22 1. 2.

3.

4.

Export credit insurance ...........................................817

Introduction .....................................................................................................817 General reflections on export aid ................................................................817 2.1 What is export-credit insurance? ....................................................819 2.2 The OECD Export Credit Agreement of 1976 ...........................819 2.3 Union legislation.................................................................................821 2.4 Trade policy..........................................................................................821 The Communication ......................................................................................823 3.1 Aid for insurers and exporters ..........................................................825 3.2 Measures restoring fair competition ...............................................826 3.3 Temporarily non-marketable risks ..................................................826 3.4 Conditions for providing cover for temporarily non-marketable risks .........................................................................827 Commission’s decisions on export credit insurance ................................828 4.1 Decisions under the Communication ...........................................828 4.1.1 Non-existence of comparable private coverage...........830 4.1.2 Quality of State cover and underwriting principles .831 4.1.3 Adequate pricing ...............................................................832 4.1.4 Transparency and reporting ...........................................833 4.1.5 Exemptions for Greece ...................................................833 4.1.6 Decisions regarding ECAs and their affiliates ............833 xxvi

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5.

4.2 Decisions under the 1997 Communication .................................834 4.3 Decisions on medium- and long-term export credit insurance 836 Conclusion .......................................................................................................837

Chapter 23 1. 2.

3.

4.

Broadband ..............................................................839

Introduction .....................................................................................................839 The broadband sector: market and technological developments .........841 2.1 The Digital Agenda and State intervention in the broadband sector.................................................................................841 2.2 Broadband technology ......................................................................843 2.3 Competition in the broadband sector............................................848 2.3.1 High market concentration at network level ..............848 2.3.2 Infrastructure competition vs. service-based competition ........................................................................848 State aid control in the broadband sector ..................................................853 3.1 Presence of aid .....................................................................................854 3.1.1 The Market Economy Investor Principle ....................857 3.1.2 Services of general economic interest ..........................860 3.2 Compatibility assessment in the broadband sector .....................863 3.2.1 General principles of compatibility in the broadband sector ..............................................................863 3.2.2 The Broadband Guidelines .............................................864 3.2.3 General Block Exemption Regulation (GBER) in broadband ......................................................................866 3.3 Ex post monitoring .............................................................................867 Recent case practice ........................................................................................868 4.1 Rules for infrastructure......................................................................868 4.2 Compatibility ......................................................................................869 4.2.1 The scope for intervention ..............................................869 4.2.2 Common compatibility issues .......................................872 4.2.2.1 Competitive selection procedure ................872 4.2.2.2 Definition of NGA ........................................874 4.2.2.3 Technological neutrality................................874 4.2.2.4 Open and effective access ..............................875 4.2.2.5 Ultra-fast broadband networks ...................877 4.2.2.6 Existing infrastructure ...................................878 4.2.2.7 Claw-back .........................................................878 4.2.2.8 Transparency ....................................................878 xxvii

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4.2.2.9 Role of NRAs ..................................................879 4.2.2.10 SGEIs outside Altmark ..................................879 Chapter 24 1. 2.

3.

4.

Broadcasting ...........................................................881

Introduction .....................................................................................................881 The development of the Commission’s policy approach .......................882 2.1 The early decisional practice of the Commission .........................882 2.2 Development of a general legal framework ..................................884 2.3 The 2009 Broadcasting Communication.......................................887 The assessment of State aid to public broadcasters .................................889 3.1 The State aid quality of compensation payments for public service obligations ..................................................................889 3.1.1 General considerations ....................................................889 3.1.2 State aid qualification of the different funding mechanisms .......................................................892 3.1.3 Qualification as new or existing aid ..............................896 3.2 Compatibility of aid to public service broadcasting under the 2009 Broadcasting Communication ............................898 3.2.1 Definition of the public service remit ..........................899 3.2.1.1 General considerations .................................899 3.2.1.2 Elements of the remit .....................................900 3.2.1.3 Inclusion of new services into the public service remit (the so-called ex-ante or Amsterdam test) ..........................904 3.2.2 Entrustment ......................................................................907 3.2.3 Supervision of the public service mission ....................908 3.2.4 Proportionality ..................................................................909 3.2.4.1 Determination of the net public service costs ......................................................910 3.2.4.2 Financial control and avoidance of overcompensation ......................................912 3.2.4.3 Other possible market distortions due to the State funding ................................916 Outlook.............................................................................................................917

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Chapter 25 1. 2.

2.3

3.

Culture and sport ....................................................921

Introduction .....................................................................................................921 State aid and culture .......................................................................................921 2.1 Application of Article 107(1) of the Treaty to culture ...............921 2.1.1 Economic activities...........................................................921 2.1.2 Effect on trade ...................................................................925 2.2 The notion of culture in the Treaty and the scope of Article 107(3) (d) of the Treaty ..................................................927 2.2.1 The control of the cultural content of audio-visual products ......................................................929 2.2.2 The promotion of culture by video games ...................931 2.2.3 The promotion of languages under Article 107(3)(d) of the Treaty ...................................................932 2.2.4 Other cases .........................................................................933 Compatibility of State aid to promote culture .........................................935 2.3.1 The general rules on aid for culture and heritage conservation .......................................................936 2.3.2 Compatibility of aid to audio-visual production .......937 2.3.2.1 Scope of the Cinema Communication ......938 2.3.2.2 The general legality principle .......................940 2.3.2.3 Aid intensity ....................................................941 2.3.2.4 Aid supplements..............................................941 2.4 Conclusion ...........................................................................................942 State aid and the sports sector .....................................................................942 3.1 The application of Article 107(1) of the Treaty to the sport sector ...........................................................................................942 3.2 Compatibility of State aid to sport infrastructure .......................946 3.2.1 Sport infrastructure aid under the General Block Exemption Regulation .........................................947 3.2.2 The Commission’s decisional practice on the compatibility of aid to the construction and use of sport infrastructure .......................................948 3.3 State aid to professional sport clubs ................................................950 3.4 Conclusions .........................................................................................951

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Chapter 26 1. 2.

3.

Aviation...................................................................953

Introduction .....................................................................................................953 Market and policy developments.................................................................954 2.1 The European aviation sector: history and recent trends ...........954 2.1.1 The liberalisation of the air transport sector ...............954 2.1.2 Summary of developments in the airport industry ....955 2.2 State aid policy in the aviation sector .............................................956 2.2.1 The 1994 and 2005 guidelines .......................................957 2.2.2 Need for review of the 1994 and 2005 Guidelines ....958 The 2014 Aviation Guidelines......................................................................960 3.1 Overview – integration in SAM......................................................960 3.2 Scope of the guidelines ......................................................................963 3.3 Application in time ............................................................................964 3.4 Sector-specific guidance on the presence of State aid .................965 3.4.1 Notion of undertaking .....................................................965 3.4.2 Effect on competition and trade ....................................968 3.4.3 Advantage ...........................................................................968 3.4.3.1 Public financing of airports ..........................968 3.4.3.2 Airport-airline arrangements .......................969 3.4.3.3 Application of the incremental profitability test ...............................................972 3.4.3.4 Conclusion .......................................................973 3.5 Interplay with other horizontal rules ..............................................974 3.5.1 SGEI ....................................................................................974 3.5.1.1 Scope of SGEI ................................................974 3.5.1.2 Compatibility of SGEI compensation .......978 3.5.2 General Block Exemption Regulation (GBER) .........979 3.5.3 Rescue and restructuring .................................................980 3.5.4 Regional aid .......................................................................982 3.5.5 Other horizontal rules .....................................................983 3.6 Aid to airports .....................................................................................983 3.6.1 Investment aid to airports ...............................................983 3.6.1.1 Contribution to a well-defined objective of common interest .......................984 3.6.1.2 Need for State intervention ..........................987 3.6.1.3 Appropriateness of State aid as a policy instrument ........................................................988 3.6.1.4 Existence of an incentive effect and proportionality of the aid amount ......989 xxx

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3.6.1.5

4.

Avoidance of undue negative effects on competition and trade..............................995 3.6.1.6 Notification of schemes and individual measures ............................................................996 3.6.2 Operating aid to airports.................................................997 3.6.2.1 Contribution to a well-defined objective of common interest .................... 1000 3.6.2.2 Need for State intervention ....................... 1001 3.6.2.3 Appropriateness of State aid as a policy instrument, presence of an incentive effect and proportionality .......................... 1002 3.6.2.4 Avoidance of undue negative effects on competition and trade........................... 1005 3.6.2.5 Notification of schemes and individual measures ......................................................... 1006 3.7 Aid to airlines ................................................................................... 1007 3.7.1 Link between aid to airport and aid to airlines ....... 1007 3.7.2 Start-up aid to airlines................................................... 1008 3.7.2.1 Contribution to a well-defined objective of common interest .................... 1009 3.7.2.2 Need for State intervention ....................... 1010 3.7.2.3 Appropriateness of State aid as policy instrument......................................... 1011 3.7.2.4 Presence of an incentive effect................... 1011 3.7.2.5 Proportionality ............................................. 1011 3.7.2.6 Avoidance of undue negative effects on competition and trade........................... 1012 3.7.2.7 Notification of schemes and individual measures ......................................................... 1012 3.8 Aid of a social character .................................................................. 1013 Conclusion .................................................................................................... 1014

Chapter 27 1.

Ports and maritime transport.................................1017

Ports ................................................................................................................ 1017 1.1 Introduction...................................................................................... 1017 1.2 The State aid policy in the port sector ......................................... 1018 1.2.1 Background legislation and early Commission Decisions ......................................................................... 1018 xxxi

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1.2.2 After Leipzig Halle ........................................................ 1020 Investment aid to ports: compatibility assessment ................... 1027 1.3.1 Seaports............................................................................ 1028 1.3.2 Inland ports and intermodal platforms ..................... 1031 1.4 Conclusions ...................................................................................... 1033 Maritime Transport ..................................................................................... 1033 2.1 Competition in maritime transport: roots of the tonnage tax regime .......................................................................... 1033 2.2 Maritime Guidelines ..................................................................... 1035 2.2.1 Tonnage tax ..................................................................... 1037 2.2.1.1 Qualified beneficiaries ................................ 1038 2.2.1.2 Flag requirement .......................................... 1041 2.2.1.3 Qualified activities ....................................... 1041 2.2.1.4 Non-qualified activities .............................. 1044 2.2.1.5 Ring fencing measures................................. 1046 2.2.2 Labour related costs....................................................... 1047 2.2.3 Training aid .................................................................... 1048 2.2.4 Short sea shipping .......................................................... 1049 2.2.5 Investment aid ............................................................... 1051 2.2.6 Aid ceiling ....................................................................... 1051 2.2.7 Restructuring aid ........................................................... 1052 2.2.8 Public service obligations ............................................. 1053 Conclusions................................................................................................... 1055 1.3

2.

3.

Chapter 28 1. 2.

3.

Land transport ......................................................1057

Introduction .................................................................................................. 1057 Liberalisation of the land transport sector ............................................. 1059 2.1 Road transport.................................................................................. 1060 2.2 Railway transport ............................................................................. 1061 2.3 Inland waterway transport ............................................................. 1064 2.4 Combined transport ....................................................................... 1064 Coordination of transport ......................................................................... 1065 3.1 What does coordination of transport entail?............................. 1065 3.2 What forms of aid? .......................................................................... 1066 3.3 Compatibility under Article 93 of the Treaty............................ 1073 3.3.1 Aid which may be compatible with the internal market............................................................................... 1073

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3.3.2

4.

5.

The aid must contribute to an objective of common interest ............................................................ 1074 3.3.3 The aid must be necessary and have an incentive effect................................................................ 1075 3.3.4 The aid must be proportionate.................................... 1076 3.3.5 The aid/aided activity must be open to all users on a non-discriminatory basis ...................... 1077 3.3.6 The aid must not lead to distortions of competition contrary to the common interest ................................ 1077 3.4 Compatibility under the Railway Guidelines ............................ 1078 3.4.1 Scope of the Guidelines ................................................ 1078 3.4.2 Aid for infrastructure use, reducing external costs and interoperability ............................................. 1079 3.4.3 Aid for research and development ............................. 1080 3.4.4 Other forms of transport coordination aid .............. 1081 3.5 Compatibility under the Cableways Communication ............ 1081 Public service obligations ........................................................................... 1083 4.1 When is aid present: the Altmark criteria .................................. 1083 4.2 Compatibility under the ancien régime: Regulation (EEC) No 1191/69 ......................................................................... 1085 4.3 Compatibility under Regulation (EC) No 1370/2007........... 1087 4.3.1 Introduction.................................................................... 1087 4.3.2 Scope of application ...................................................... 1088 4.3.3 Public service contracts and general rules (Article 3) ........................................................................ 1089 4.3.4 Mandatory requirements (Article 4) ......................... 1090 4.3.5 Award rules (Article 5) ................................................. 1094 4.3.6 Compensation rules (Article 6 and the Annex) ...... 1098 4.3.7 Publication and transparency (Article 7).................. 1099 4.3.8 Transitional provisions (Article 8) ............................. 1100 4.3.9 Compatibility with the Treaty (Article 9) ................ 1100 4.3.10 Application in time........................................................ 1101 4.4 Compatibility under Article 93 of the Treaty............................ 1104 4.4.1 Is Regulation (EC) No 1370/2007 exhaustive? ...... 1104 4.4.2 Residual categories of public service compensation for land transport ............................... 1106 Residual categories of aid to the land transport sector......................... 1107 5.1 Introduction...................................................................................... 1107 5.2 Road transport.................................................................................. 1107 5.3 Railway transport ............................................................................. 1112 xxxiii

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6.

5.4 Inland waterway transport ............................................................. 1117 5.5 Combined transport ....................................................................... 1118 5.6 Short sea shipping ............................................................................ 1119 Conclusion .................................................................................................... 1121

Chapter 29 1. 2. 3.

4.

5.

Banking .................................................................1123

Introduction .................................................................................................. 1123 Scope of the Crisis Communications ..................................................... 1127 Instrument-specific rules ............................................................................ 1128 3.1 Liquidity support............................................................................. 1128 3.1.1 State guarantees .............................................................. 1128 3.1.2 Direct lending by the State and other types of liquidity support ....................................................... 1130 3.1.3 Provision of liquidity by central banks ..................... 1130 3.2 Capital support ................................................................................ 1132 3.2.1 Ordinary shares - equity ............................................... 1132 3.2.2 Hybrid capital instruments .......................................... 1132 3.3 Impaired asset measures.................................................................. 1133 Rescue and restructuring aid ..................................................................... 1136 4.1 Rescue and restructuring aid in the Crisis Communications . 1136 4.2 Rescue and restructuring pursuant to the 2013 Banking Communication .............................................................................. 1137 4.2.1 Introduction ................................................................... 1137 4.2.2 Safeguards and incentives to limit restructuring aid to the minimum necessary ................................... 1139 4.2.3 Pre-notification and capital-raising ............................ 1140 4.2.4 Obligation to restructure and notification of a restructuring plan ................................................... 1141 4.2.5 Rescue recapitalisations in exceptional circumstances .................................................................. 1142 4.3 Schemes ............................................................................................. 1143 4.3.1 Recapitalisation schemes for small institutions ...... 1143 4.3.2 Schemes for guarantees and liquidity support ........ 1144 Compatibility assessment in individual restructuring, resolution and liquidation cases ................................................................................... 1144 5.1 Introduction...................................................................................... 1144 5.2 Restoration of long-term viability ................................................ 1145 5.3 Limiting aid to the minimum necessary / burden-sharing ..... 1149 xxxiv

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5.3.1

6. 7.

8.

Limitation of the restructuring costs to the minimum ......................................................................... 1149 5.3.2 Own contribution by the aid beneficiary.................. 1150 5.3.3 Burden-sharing by shareholders and subordinated debt holders ........................................... 1151 5.4. Measures limiting distortion of competition ............................. 1154 5.4.1 Introduction ................................................................... 1154 5.4.2 Types of competition measures .................................. 1156 5.4.3 Calibration of competition measures ....................... 1157 5.4. Compatibility assessment of liquidation aid ............................. 1160 5.4.1 Applying the compatibility conditions mutatis mutandis ........................................................... 1160 5.4.2 Aid to the buyer and to the (sold) economic activity ............................................................................. 1162 5.4.3 Compatibility assessment of aid to the sold entity ................................................................................. 1164 5.4.4 Schemes............................................................................ 1165 Monitoring .................................................................................................... 1166 State aid rules and the Banking Union – overview and outlook ....... 1167 7.1 Possibility to grant State aid after 1 January 2015 (within and outside resolution) .................................................... 1168 7.1.1 Aid to banks in difficulty outside resolution ........... 1168 7.1.2 Aid to banks in difficulty within resolution ............. 1172 7.2. Interplay between State aid rules and BRRD/SRM ................ 1173 7.2.1 Procedure ........................................................................ 1173 7.2.2 State aid in resolution – practical relevance of State aid control ........................................................ 1174 7.2.3 The BRRD’s provisions on bail-in and conversion of capital instruments and the burden-sharing regime of State aid control .............. 1175 Conclusion .................................................................................................... 1176

Chapter 30 1.

Important projects of common European interest ..................................................................1179

Introduction .................................................................................................. 1179 1.1 Past decisional practice ................................................................... 1180 1.2 Reasons for a Communication on IPCEI .................................. 1181

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1.3

2.

3.

4. 5.

Relation between the IPCEI Communication and other Guidelines ....................................................................... 1183 Eligible projects ............................................................................................ 1184 2.1 Common European interest .......................................................... 1185 2.1.1 General cumulative criteria .......................................... 1185 2.1.2 Minimum number of Member States participating in the IPCEI ........................................... 1187 2.1.3 General positive indicators .......................................... 1189 2.1.4 Specific criteria for R&D&I projects......................... 1189 2.2 Importance of the project .............................................................. 1190 Compatibility criteria ................................................................................. 1191 3.1 Necessity and proportionality of the aid .................................... 1192 3.1.1 The counterfactual ......................................................... 1192 3.1.2 The funding gap approach ........................................... 1193 3.1.3 Matching clause .............................................................. 1194 Some procedural issues specific to IPCEIs ............................................. 1195 Conclusion .................................................................................................... 1197

Chapter 31 1. 2. 3. 4. 5.

Agriculture and forestry ........................................1199

Treaty provisions on State aid in the agricultural sector ...................... 1199 The Common Agricultural Policy and State aid ................................... 1201 2.1 State aid in the pre-2014 CAP ...................................................... 1201 2.2 State aid and the 2014-2020 CAP ............................................... 1204 Forestry sector and State aid ...................................................................... 1207 De minimis rules in the agricultural and forestry sectors .................... 1208 Compatibility rules in the agriculture and forestry sectors: the ABER and the Agricultural State aid guidelines 2014-2020....... 1209 5.1 Measures covered by the State aid instruments in the agriculture and forestry sectors ..................................................... 1209 5.2 The ABER ......................................................................................... 1211 5.3 The Agricultural State aid guidelines........................................... 1212 5.4 Application of the common compatibility principles in the agricultural and forestry sectors ........................................ 1213 5.5 Overview of the specific compatibility rules applicable to measures in the agricultural and forestry sectors .................. 1215

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5.5.1 5.5.2 5.5.3

Chapter 32 1. 2. 3. 4.

5.

Aid in favour of undertakings active in the primary production, processing and marketing of agricultural products ............................................... 1216 Aid for the forestry sector ........................................... 1218 Aid in rural areas co-financed by the EAFRD or granted as additional national financing to such co-financed measures ...................................... 1219 Fisheries ................................................................1221

Introduction .................................................................................................. 1221 The Common Fisheries Policy .................................................................. 1222 2.1 Introduction...................................................................................... 1222 2.2 The European Maritime and Fishery Fund ............................... 1224 The applicability of Articles 107-109 of the Treaty in the fishery and aquaculture sector ................................................................................ 1225 The Fishery and Aquaculture de minimis Regulation .......................... 1228 4.1 Introduction...................................................................................... 1228 4.2 Scope of the Fishery and Aquaculture de minimis Regulation ......................................................................................... 1230 4.3 The notion of de minimis aid ........................................................ 1232 4.4 Further provisions ........................................................................... 1234 4.4.1 Calculation of gross grant equivalent (Article 4) .... 1234 4.4.2 Cumulation (Article 5)................................................. 1234 4.4.3 Monitoring (Article 6).................................................. 1235 4.4.4 Transitional provisions and entry into force (Article 7) ........................................................................ 1235 The Fishery Block Exemption Regulation (the FIBER) ...................... 1236 5.1 General ............................................................................................... 1236 5.2 Chapter I – Common provisions ................................................. 1237 5.3 Chapter II - Monitoring ................................................................. 1240 5.4 Chapter III – Specific provisions for different categories of aid .................................................................................................. 1241 5.4.1 Aid for activities that may be supported by the EMFF 1241 5.4.1.1 Sustainable development of fisheries (Section 1) ..................................................... 1242 5.4.1.2 Sustainable development of aquaculture (Section 2) ..................................................... 1244

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5.4.1.3

6.

Market and processing related measures (Section 3) ..................................................... 1245 5.4.1.4 Other categories of aid (Section 4) .......... 1245 5.4.2 Article 45 ......................................................................... 1246 5.5 Chapter IV Final provisions .......................................................... 1247 The Guidelines for the examination of State aid to the fishery and aquaculture sector ............................................................................... 1247 6.1 Introduction...................................................................................... 1247 6.2 Outline of the Fishery and Aquaculture Guidelines ................ 1248 6.3 Aid that shall be compatible with the internal market............. 1250 6.4 Aid that may be compatible with the internal market ............. 1251 6.4.1 Aid for categories of measures covered by a block exemption regulation ......................................... 1252 6.4.2 Aid falling within the scope of certain horizontal guidelines ..................................................... 1252 6.4.3 Aid to make good the damage caused by adverse climatic events .................................................. 1252 6.4.4 Aid for the prevention, control and eradication of animal diseases in aquaculture .......... 1253 6.4.5 Aid financed through parafiscal charges .................. 1254 6.4.6 Operating aid in outermost regions ........................... 1255 6.4.7 Aid for other measures .................................................. 1255 6.5 Procedural matters (Section 6) .................................................... 1255

Part 4 – SGEI .....................................................................................1257 Chapter 33 1.

2.

Altmark and the Communication ..........................1257

Background ................................................................................................... 1257 1.1 The nature of public services and their recognition in the Treaties.................................................................................... 1257 1.1.1 Article 106(2) of the Treaty......................................... 1258 1.1.2 Other relevant Treaty provisions ................................ 1260 1.2 The case law before Altmark .......................................................... 1262 The Altmark judgment and the SGEI packages .................................... 1264 2.1 Facts and procedure ......................................................................... 1264 2.2 The four conditions ......................................................................... 1265 2.3 Scope and implications of the Altmark judgment .................... 1268 xxxviii

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3.

4.

2.4 Outline of the 2005 (“Monti-Kroes”) SGEI package .............. 1269 2.5 Outline of the 2011/12 (“Almunia”) SGEI package ................ 1270 The Altmark conditions.............................................................................. 1273 3.1 First Altmark condition: entrustment with a clearly defined public service obligation .................................................. 1273 3.1.1 Definition of a SGEI ..................................................... 1274 3.1.2 Limits when defining the SGEI .................................. 1279 3.1.2.1 Public services subject to Union legislation....................................................... 1280 3.1.2.2 Market failure ............................................... 1283 3.1.2.3 Universal and compulsory nature of the SGEI ................................................... 1284 3.1.3 Entrustment .................................................................... 1285 3.2 Second Altmark condition: parameters established in advance .......................................................................................... 1289 3.3 Third Altmark condition: Absence of overcompensation ...... 1292 3.4 Fourth Altmark condition: Tender or efficiency of costs ........ 1295 3.4.1 Level of compensation is the outcome of a public procurement procedure ............................ 1296 3.4.2 Level of compensation is determined on the basis of the costs incurred by an efficient undertaking ..................................................................... 1301 The SGEI de minimis regulation .............................................................. 1306 4.1 SGEI specificities ............................................................................. 1306 4.2 Differences resulting from the amendments to the general de minimis regulation............................................ 1306 4.3 Similarities between the de minimis regulations ....................... 1307

Chapter 34 1. 2.

3.

Compatibility – Part 1: the Exemption Decision ...1309

Introduction .................................................................................................. 1309 Subject-matter and scope ........................................................................... 1310 2.1 Material scope ................................................................................... 1310 2.1.1 Exemption based on the limited amount of aid involved ................................................................ 1311 2.1.2 Exemption based on the sector concerned ............... 1313 2.1.3 Temporal limitation of the entrustment ................... 1316 2.2 Temporal Scope ................................................................................ 1318 Compatibility criteria ................................................................................. 1318 xxxix

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4.

3.1 Entrustment ...................................................................................... 1318 3.2 Compensation .................................................................................. 1320 3.3 Control of overcompensation ....................................................... 1323 3.4 Transparency ..................................................................................... 1324 Availability of information and reporting............................................... 1325 4.1 Availability of information ............................................................ 1325 4.2 Reporting ........................................................................................... 1326

Chapter 35 1. 2.

3.

Compatibility – Part 2: the Framework .................1327

Introduction .................................................................................................. 1327 Scope of the 2011 SGEI Framework ....................................................... 1328 2.1 Material scope ................................................................................... 1328 2.2 Temporal scope................................................................................. 1331 2.3 Relationship to rules on SGEI in sectoral guidelines ............... 1333 2.3.1 Aviation Guidelines ....................................................... 1334 2.3.2 Maritime Guidelines ..................................................... 1335 2.3.3 Third Postal Directive ................................................... 1336 2.3.4 Unfair burden ................................................................. 1339 2.3.4.1 Conditions related to cost sharing mechanisms..................................... 1339 2.3.4.2 Public procurement .................................... 1340 2.3.5 Conclusion ...................................................................... 1341 Compatibility conditions under the 2011 SGEI Framework ............ 1342 3.1 Genuine service of general economic interest ........................... 1342 3.2 Entrustment ..................................................................................... 1343 3.3 Duration of the entrustment ......................................................... 1344 3.4 Compliance with Directive 2006/111 ........................................ 1345 3.5 Compliance with Union public procurement rules ................. 1346 3.6 Absence of discrimination ............................................................. 1350 3.7 Amount of compensation .............................................................. 1353 3.7.1 Multi-annual ex ante approach ................................... 1353 3.7.2 Net avoided cost methodology ................................... 1355 3.7.2.1 Definition of the counterfactual scenario ......................................................... 1358 3.7.2.2 Estimation of the profit of the operator under the counter-factual scenario with the profitability cost approach......... 1363

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3.7.2.3

Calculation of the net cost of the SGEI under the profitability cost approach ................................................ 1363 3.7.3 Methodology based on cost allocation ..................... 1365 3.7.4 Relevant revenues ......................................................... 1369 3.7.5 Reasonable profit .......................................................... 1370 3.7.5.1 Reasonable profit under the cost allocation methodology in the 2011 SGEI Framework ........................................ 1370 3.7.5.2 Reasonable profit and net avoided cost methodology (profitability cost approach) .............................................. 1375 3.7.6 Efficiency incentives ...................................................... 1376 3.7.7 Overcompensation ........................................................ 1381 3.8 Additional requirements ................................................................ 1381 3.9 Transparency ..................................................................................... 1384 3.10 Reporting and Evaluation .............................................................. 1385 Part 5 – Procedures ............................................................................1387 Chapter 36 1. 2.

The 2005 State Aid Action Plan ............................................................... 1389 The 2012 State Aid Modernisation .......................................................... 1389

Chapter 37 1. 2.

3.

Introduction..........................................................1387

Definitions ............................................................1393

Brief remarks on the concept of “aid” ...................................................... 1393 The definition of existing aid ..................................................................... 1394 2.1 Aid preceding the Treaty ................................................................ 1395 2.2 Compatible aid ................................................................................. 1402 2.3 Aid notified and approved by lack of action by the Commission ............................................................................... 1402 2.4 Aid in respect of which the period for recovery has lapsed..... 1403 2.5 Measures which have become aid due to the evolution of the internal market...................................................................... 1404 The concept of new aid ............................................................................... 1407 xli

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4. 5. 6.

Aid scheme and individual aid .................................................................. 1407 Unlawful aid.................................................................................................. 1409 Misused aid.................................................................................................... 1409

Chapter 38 1.

1.7

2.

Procedure before the Commission .........................1411

Review of notified aid ................................................................................. 1411 1.1 Requirement to notify .................................................................... 1411 1.2 Stand still obligation ....................................................................... 1416 1.3 Exemption from the obligation to notify .................................. 1418 1.4 Simplified notification and the Notice on Simplified Procedure ....................................................................... 1420 1.5 Complete notifications ................................................................... 1423 1.5.1 Information required ................................................... 1423 1.5.2 Request for information ............................................... 1425 1.5.3 Notification withdrawn ............................................... 1425 1.5.4 Notification to be considered as complete ............... 1425 1.6 Preliminary examination and decision ........................................ 1426 1.6.1 Member States’ commitments in the preliminary examination .............................................. 1428 1.6.2 Decision to initiate the formal investigation procedure ........................................................................ 1429 Formal investigation and decision ............................................................ 1431 1.7.1 The role of the Member State granting the aid ........ 1435 1.7.2 Request for information made to other sources ...... 1439 1.7.3 The use of external experts by the Commission ...... 1444 1.7.4 Extension of the formal investigation ........................ 1445 1.7.5 Positive decision after the formal investigation ....... 1446 1.7.6 Conditional decision after the formal investigation .................................................................... 1447 1.7.7 Negative decision after the formal investigation .... 1449 1.7.8 Notification and publications of decision after the formal investigation ...................................... 1449 1.7.9 Duration of the formal investigation ......................... 1450 1.8 Revocation of a decision ................................................................. 1452 Review of unlawful aid ............................................................................... 1453 2.1 Examination of complaints by the Commission ....................... 1455 2.2 Preliminary investigation of unlawful aid................................... 1460 2.3 Formal investigation of unlawful aid .......................................... 1461 xlii

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3. 4.

5. 6. 7. 8. 9.

Applicable rules ratione temporis ............................................................. 1462 Interim measures .......................................................................................... 1464 4.1 Information injunctions ................................................................. 1464 4.2 Suspension injunction..................................................................... 1469 4.3 Recovery injunction ........................................................................ 1471 Control of misused aid ............................................................................... 1472 Review of existing aid .................................................................................. 1473 Investigation into sectors of the economy and into aid instruments 1477 Annual reports and on-site monitoring .................................................. 1478 The role of third parties .............................................................................. 1480 9.1 Third parties’ comments on the opening decision .................... 1481 9.2 Complainants ................................................................................... 1485 9.3 Addressees of request for information......................................... 1486 9.4 Third parties’ access to documents in State aid procedures .... 1487

Chapter 39 1. 2. 3. 4. 5.

The direct applicability of Article 108(3) of the Treaty....................... 1489 The interpretation of the concept of “State aid” by the national courts .............................................................................................................. 1492 Recovery of aid by national courts .......................................................... 1495 Non-contractual liability of the Member State and other remedies . 1505 Member State liability for infringement of the State aid rules committed by the national courts............................................................. 1508

Chapter 40 1. 2. 3. 4. 5.

Role of the national courts ....................................1489

Recovery of unlawful and incompatible aid ............1511

The execution of the recovery decision by the national authorities .. 1514 The content of the recovery decision ....................................................... 1520 The direct effect of the decision ................................................................ 1526 The parties affected by the recovery order .............................................. 1526 Legal limits to the enforcement of a recovery decision ........................ 1537 5.1 Proportionality, nature and reasoning of the recovery order.. 1538 5.2 Absolute impossibility .................................................................... 1539 5.3 Legitimate expectation, legal certainty and rights of the defence and good administration ................................................. 1543 5.3.1 Legitimate expectation ................................................. 1543 5.3.2 Legal certainty ................................................................ 1554 xliii

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5.3.3 5.3.4 5.3.5

Rights of defence ............................................................ 1557 Good administration .................................................... 1558 Limitation period to order recovery ......................... 1559

Chapter 41

Role of the Council................................................1561

Chapter 42

Challenges to Commission decisions .....................1567

1.

2. 3. 4. 5. 6. 7.

Introduction .................................................................................................. 1567 1.1 Action against a regulatory act which is of direct concern to the applicant and does not entail implementing measure ............................................................................................. 1569 1.2 Legal Interest .................................................................................... 1574 Challenges to positive decisions adopted at the end of the ................ 1577 preliminary investigation............................................................................ 1577 Challenges to decisions initiating the formal investigation ................ 1579 Challenges to final decisions...................................................................... 1582 Challenges to decision concerning aid schemes .................................... 1589 Actions for failure to act ............................................................................. 1593 Challenges against Commission guidelines ........................................... 1595

Index Book One .....................................................................................................................467 Book Two .................................................................................................................. 1599

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Table 1 List of Court of Justices judgements

Table 1 List of Court of Justice judgments (numerical by case number) Note: A complete list of all judgments as well as an effective search engine that enables the user to find judgments on the basis of name, number and date of the judgment, as well as the full tekst, is available online at: http://curia.europa.eu/jcms/ jcms/j_6/

1

Case Number

Name

ECLI 1

Book paragraph

30/59

De Gezamenlijke Steenkolenmijnen in Limburg v ECSC High Authority

ECLI:EU:C:1961:2

2.322 2.484 2.7

42/59 and 49/59

S.N.U.P.A.T. v ECSC High Authority

ECLI:EU:C:1961:5

5.463

25/62

Plaumann v Commission of the EEC

ECLI:EU:C:1963:17

5.486

14/63

Forges de Clabecq v ECSC High Authority

ECLI:EU:C:1963:60

5.504

6/64

Costa v E.N.E.L.

ECLI:EU:C:1964:34

5.281

12/64 R

Ley v Commission of the EEC

ECLI:EU:C:1964:25

5.231

10/68 and 18/68

Eridiania Zuccherifi ci and others v Commission

ECLI:EU:C:1969:66

5.540

6 and 11/69

Commission v France

ECLI:EU:C:1969:68

3.988

47/69

Commission v France

ECLI:EU:C:1970:60

2.152

The European Case Law Identifier (ECLI) is an identifier for case law in Europe, implemented by the European Union Court of Justice, the European Court of Human Rights, the European Patent Office and several EU Member States. The identifier consists of 5 parts separated by colons: ECLI:[country code]:[court identifier]:[year of decision]:[specific identifier].

xlv

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Table 1 List of Court of Justices judgements

41-44/70

International Fruit Company and others v Commission

ECLI:EU:C:1971:53

5.546

10/71

v Muller

ECLI:EU:C:1971:85

3.1557

70/72

Commission v Germany

ECLI:EU:C:1973:64

5.244 5.268 5.345 5.474 5.53

77/72

Capolongo v Azienda Agricola Maya

ECLI:EU:C:1973:65

5.387 5.288

120/73

Gebrüder Lorenz GmbH v Bundesrepublik Deutschland and others (‘Lorenz’)

ECLI:EU:C:1973:152

5.39 5.281 5.282 5.284

127/73

BRT v SABAM

ECLI:EU:C:1974:25

4.70

173/73

Italy v Commission (“Italian Textiles”)

ECLI:EU:C:1974:71

2.6 2.117 2.135 2.251 2.278 2.320 2.325 2.326 2.333 2.346 2.710 5.244

15/74

Centrafarm others v Sterling Drug

ECLI:EU:C:1974:114

2.645

51/74

Van der Hulst v Productschap voor Siergewassen

ECLI:EU:C:1975:9

3.2122 5.26

74/74

CNTA v Commission

ECLI:EU:C:1975:59

5.433 5.454

74/76

Iannelli & Volpi

ECLI:EU:C:1977:51

2.35 2.147

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Table 1 List of Court of Justices judgements

78/76

Steinike & Weinlig v Germany

ECLI:EU:C:1977:52

1.412 2.78 2.135 5.155 5.283 5.387

82/77

Van Tiggele

ECLI:EU:C:1978:10

2.85

156/77

Commission v Belgium

ECLI:EU:C:1978:180

3.1646 3.1653 3.1683

83/78

Redmond

ECLI:EU:C:1978:214

3.2122

97/78

Fritz Schumalla

ECLI:EU:C:1978:211

3.1705

177/78

Pigs and Bacon Commission

ECLI:EU:C:1979:164

3.2117 3.2122

59/79

Fédération nationale des producteurs de vins de table et vins de pays v Commission

ECLI:EU:C:1979:188

5.170

61/79

Amministrazione delle fi nanze dello Stato v Denkavit Italiana

ECLI:EU:C:1980:100

2.249, 2.345

73/79

Commission v Italy

ECLI:EU:C:1980:129

3.1309

139/79

Maizena v Council

ECLI:EU:C:1980:250

3.2118

730/79

Philip Morris Holland BV v Commission

ECLI:EU:C:1980:209

2.507 2.511 2.517 3.654 3.921 3.2053

172/80

Zürchner v Bayerische Vereinsbank

ECLI:EU:C:1981:178

4.59

188, 189 and 190/80

France, Italy and United Kingdom v Commission

ECLI:EU:C:1982:257

2.15

7/82

GVL v Commission

ECLI:EU:C:1983:52

4.59 4.70

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Table 1 List of Court of Justices judgements

84/82

Germany v Commission

ECLI:EU:C:1984:117

2.363 5.69 5.107 5.110 5.116 5.121 5.125

205 to 215/82

Deutsche Milchkontor GmbH

ECLI:EU:C:1983:233

5.435

237/82

Jongeneel Kaas and Others

ECLI:EU:C:1984:44

3.2123

296 and 318/82

Netherlands and Leeuwarder Papierwarenfabriek v Commission

ECLI:EU:C:1985:113

2.521

323/82

Intermills v Commission

ECLI:EU:C:1984:345

1.74 5.261 5.268 5.391 5.514

264/82

Timex v Council and Commission

ECLI:EU:C:1985:119

5.530

91/83 and 127/83

Heineken

ECLI:EU:C:1984:307

5.26 5.34 5.69 5.107

214/83

Germany v Commission

ECLI:EU:C:1985:385

5.69

240/83

Procureur de la République v ADBHU

ECLI:EU:C:1985:59

4.16 4.33

290/83

Commission v France

ECLI:EU:C:1985:37

2.75 2.78 2.100 2.182

52/84

Commission v Belgium

ECLI:EU:C:1986:3

5.244 5.425

169/84

Cofaz v Commission

ECLI:EU:C:1986:42

5.528 5.544

216/84

Commission v France

ECLI:EU:C:1988:81

3.2123

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Table 1 List of Court of Justices judgements

234/84

Belgium v Commission (‘Meura’)

ECLI:EU:C:1986:302

2.373 5.130 5.262

248/84

Germany v Commission

ECLI:EU:C:1987:437

2.77 2.233 3.654

40/85

Belgium v Commission (“Boch”)

ECLI:EU:C:1986:305

2.357 2.373 2.379 2.395 5.130

67/85, 68/85 and 70/85

Van der Kooy and others v Commission

ECLI:EU:C:1988:38

2.183 5.244 5.544 5.548 5.549

118/85

Commission v Italy

ECLI:EU:C:1987:283

2.49

223/85

RSV v Commission

ECLI:EU:C:1987:502

5.32 5.171 5.444

249/85

Albako v BALM

ECLI:EU:C:1987:245

5.332

259/85

France v Commission

ECLI:EU:C:1987:478

2.507 5.130

265/85

Van den Bergh en Jurgens v Commission

ECLI:EU:C:1987:121

5.447

282/85

DEFI v Commission

ECLI:EU:C:1986:316

5.548

310/85

Deufi l v Commission

ECLI:EU:C:1987:96

2.6 2.117 2.346 3.654 5.422

90/86

Zoni

ECLI:EU:C:1988:403

3.2123

30/87

Bodson v Pompes funèbres des régions libérées

ECLI:EU:C:1988:225

2.645

62/87 and 72/87

Exécutif regional wallon v Commission (‘Glaverbel’)

ECLI:EU:C:1988:132

3.2063 3.2071 3.2079

63/87

Commission v Greece

ECLI:EU:C:1988:285

5.425

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Table 1 List of Court of Justices judgements

106 to 120/87

Asteris AE and others v Greece and EEC

ECLI:EU:C:1988:457

2.249, 2.345

102/87

France v Commission (“Codevi”)

ECLI:EU:C:1988:391

2.484

C-142/87

Belgium v Commission (“Tubemeuse”)

ECLI:EU:C:1990:125

1.74 2.353 2.514 2.585 3.988 3.1012 3.2197 5.287 5.323 5.344 5.422 5.426

C-301/87

France v Commission

ECLI:EU:C:1990:67

2.322 5.60 5.131 5.215 5.228 5.287

103/88

Fratelli Costanzo v Comune di Milano

ECLI:EU:C:1989:256

5.282

112/88 R

Greece v Commission

ECLI:EU:C:1988:240

5.231

C-143/88 and C-92/89

Zuckerfabrik Süderdithmarschen v Hauptzollamt Itzehoe and Zuckerfabrik Soest v Hauptzollamt Paderborn

ECLI:EU:C:1991:65

5.335

C-152/88

Sofrimport v Commission

ECLI:EU:C:1990:259

5.433

C-202/88

France v Commission

ECLI:EU:C:1991:120

4.1

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Table 1 List of Court of Justices judgements

C-303/88

Italy v Commission (“ENI Lanerossi”)

ECLI:EU:C:1991:136

1.74 2.184 2.357 2.400 2.475 5.389 5.425

C-5/89

Commission v Germany

ECLI:EU:C:1990:320

5.32 5.447 5.448 5.450

C-30/89

Italy v Commission (‘Alfa Romeo’)

ECLI:EU:C:1990:114

5.408

C-74/89

Commission v Belgium

ECLI:EU:C:1990:82

5.425

C-86/89

Italy v Commission

ECLI:EU:C:1990:373

3.360 3.2123

C-104/89 and C-37/90

Mulder and others v Council and Commission

ECLI:EU:C:1992:217

5.433

C-213/89

The Queen v Secretary of State for Transport, ex parte Factortame

ECLI:EU:C:1990:257

5.335

C-261/89

Italy v Commission

ECLI:EU:C:1991:367

5.167

C-305/89

Italy v Commission (“Alfa Romeo”)

ECLI:EU:C:1991:142

2.75 2.184 2.353 2.363

C-6/90 and C-9/90

Francovich and Bonifaci v Italy

ECLI:EU:C:1991:428

5.324

C-41/90

Höfner and Elser v Macrotron

ECLI:EU:C:1991:161

2.49 2.52 4.7

li

160323_state_aid_voorwerk_deel_1.indd li

24-3-2016 17:05:32

Table 1 List of Court of Justices judgements

C-78/90, C-79/90, C-80/90, C-81/90, C-82/90 and C-83/90

Compagnie Commercial de l’Ouest and others v Receveur Principal des Douanes de La Pallice Port,

ECLI:EU:C:1992:118

2.147

C-179/90

Merci convenzionali porto di Genova

ECLI:EU:C:1991:464

3.1263 3.1557 4.52 4.56

C-312/90

Spain v Commission

ECLI:EU:C:1992:282

5.246 5.520

C-313/90

CIRFS and others v Commission

ECLI:EU:C:1993:111

5.246 5.544

C-324/90 and C-342/90

Germany and Pleuger Worthington v Commission

ECLI:EU:C:1994:129

5.215 5.220

C-354/90

Fédération nationale du commerce extérieur and others v France (‘FNCE’)

ECLI:EU:C:1991:440

3.2130 5.155 5.281 5.283 5.284 5.285 5.287 5.299 5.326

C-47/91

Italy v Commission (‘Italgrani’)

ECLI:EU:C:1992:284

5.38 5.55 5.225 5.246 5.520 5.532

C-72/91 and C-73/91

Sloman Neptun v Bodo Ziesemer

ECLI:EU:C:1993:97

2.87 2.89 2.90 2.105 2.327

lii

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24-3-2016 17:05:32

Table 1 List of Court of Justices judgements

C-150/91

Sanders Adour and Guyomarc ’ h Orthez v Directeur des Services Fiscaux des Pyrenées-Atlantiques

ECLI:EU:C:1992:261

2.147

C-159/91 and C-160/91

Poucet and Pistre v AGF and Cancava

ECLI:EU:C:1993:63

2.50 2.61

C-183/91

Commission v Greece

ECLI:EU:C:1993:233

5.362 5.425

C-189/91

Kirsammer-Hack v Sidal

ECLI:EU:C:1993:907

2.91

C-198/91

Cook v Commission

ECLI:EU:C:1993:197

5.107 5.116 5.118 5.121 5.122 5.511

C-225/91

Matra v Commission

ECLI:EU:C:1993:239

1.495 2.35 2.147 3.742 3.781 3.1309 4.217 5.511 5.116 5.121 5.122

C-320/91

Corbeau

ECLI:EU:C:1993:198

4.86

C-6/92

Federmineraria and others v Commission

ECLI:EU:C:1993:913

5.548 5.550

C-34/92

GruSa Fleisch v Hauptzollamt Hamburg-Jonas

ECLI:EU:C:1993:317

5.457

C-188/92

TWD v Bundesrepublik Deutschland (“Deggendorf ”)

ECLI:EU:C:1994:90

5.419 5.495 5.528 5.552

liii

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24-3-2016 17:05:32

Table 1 List of Court of Justices judgements

C-278/92 to C-280/92

Spain v Commission (“Hytasa”)

ECLI:EU:C:1994:325

1.73 2.373 2.443

C-364/92

SAT Fluggesellschaft v Eurocontrol

ECLI:EU:C:1994:7

2.65

C-387/92

Banco Exterior de España v Ayuntamiento de Valencia

ECLI:EU:C:1994:100

1.59 2.129 2.322 2.332 2.361 4.9 5.246

C-44/93

Namur-Les assurances du Crédit v Offi ce national du ducroire and Belgian State

ECLI:EU:C:1994:311

2.182 5.26 5.27 5.28 5.29 5.155

C-46/93 and C-48/93

Brasserie du pêcheur v Bundesrepublik Deutschland and The Queen v Secretary of State for Transport, ex parte Factortame and others

ECLI:EU:C:1996:79

5.324 5.325

C-63/93

Duff and others

ECLI:EU:C:1996:51

5.434

C-329/93, C-62/95 and C-63/95

Germany and others v Commission (“Bremer Vulkan”)

ECLI:EU:C:1996:394

5.388

C-415/93

Bosman

ECLI:EU:C:1995:463

3.1324

C-465/93

Atlanta Fruchthandelsgesellschaft and others (I) v Bundesamt für Ernährung und Forstwirtschaft

ECLI:EU:C:1995:369

5.333

C-348/93

Commission v Italy

ECLI:EU:C:1995:95

5.119 5.388

liv

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Table 1 List of Court of Justices judgements

C-350/93

Commission v Italy (“Lanerossi II”)

ECLI:EU:C:1995:96

5.362 5.425

C-392/93

The Queen v H.M. Treasury, ex parte British Telecommunications

ECLI:EU:C:1996:131

5.324 5.325

C-5/94

The Queen v Ministry of Agriculture, Fisheries and Food, ex parte Hedley Lomas (Ireland)

ECLI:EU:C:1996:205

5.325

C-39/94

SFEI and others

ECLI:EU:C:1996:285

2.353 2.367 5.63 5.66 5.283 5.286 5.287 5.299 5.322 5.323 5.330 5.334 5.450

C-122/94

Commission v Council (‘’Italian wines distillation’’)

ECLI:EU:C:1996:68

3.2130 5.475

C-157/94

Commission v Netherlands

ECLI:EU:C:1997:499

4.86

C-241/94

France v Commission (“Kimberly Clark”)

ECLI:EU:C:1996:353

1.59 2.6 2.117 2.262 2.322 2.324 2.327 2.332 2.346 2.463 2.704

C-244/94

FFSA and others v Ministère de l’Agriculture et de la Pêche

ECLI:EU:C:1995:392

2.51

lv

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24-3-2016 17:05:32

Table 1 List of Court of Justices judgements

C-311/94

IJssel-Vliet Combinatie v Minister van Economische Zaken

ECLI:EU:C:1996:383

3.2117

C-24/95

Land Rheinland-Pfalz v Alcan Deutschland

ECLI:EU:C:1997:163

5.425

C-169/95

Spain v Commission (‘PYRSA’)

ECLI:EU:C:1997:10

3.646 3.654 3.2053 5.80

C-183/95

Affish v Rijksdienst voor de keuring van Vee en Vlees

ECLI:EU:C:1997:373

5.454

C-242/95

GT Link v De Danske Statsbaner

ECLI:EU:C:1997:376

3.1263 3.1557 4.52 4.56

C-280/95

Commission v Italy

ECLI:EU:C:1998:28

5.425 5.429

C-309/95

Commission v Council

ECLI:EU:C:1998:66

3.2130

C-343/95

Cali & Figli v Servizi Ecologici Porto di Genova

ECLI:EU:C:1997:160

2.65 2.66 3.1555

C-355/95 P

TWD v Commission (‘Deggendorf ’)

ECLI:EU:C:1997:241

3.19 3.130 5.111 3.855 5.167

C-367/95 P

Commission v Sytraval and Brink’s France

ECLI:EU:C:1998:154

5.107 5.116 5.117 5.121 5.198 5.260 5.484 5.511

C-1/96

Compassion in World Farming

ECLI:EU:C:1998:113

3.2122

C-35/96

Commission v Italy

ECLI:EU:C:1998:303

2.49 2.53

lvi

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Table 1 List of Court of Justices judgements

C-67/96

Albany

ECLI:EU:C:1999:430

2.51, 2.61

C-266/96

Corsica Ferries France v Gruppo Antichi Ormeggiatori del porto di Genova and others

ECLI:EU:C:1998:306

3.1263 4.52

C-288/96

Germany v Commission (‘Jadekost’)

ECLI:EU:C:2000:537

5.132

C-342/96

Spain v Commission (“Tubacex”)

ECLI:EU:C:1999:210

2.460

C-409/96 P

Sveriges Betodlares Centralförening and Henrikson v Commission

ECLI:EU:C:1997:635

5.544

C-6/97

Italy v Commission

ECLI:EU:C:1999:251

2.332 2.361

C-52/97, C-53/97 and C-54/97

Viscido and others v Ente Poste Italiane

ECLI:EU:C:1998:209.

2.92

C-75/97

Belgium v Commission (‘Maribel bis/ter’)

ECLI:EU:C:1999:311

2.129 2.242 2.244 2.742 5.429

C-104/97 P

Atlanta v European Community

ECLI:EU:C:1999:498

5.433

C-107/97

Rombi and Arkopharma

ECLI:EU:C:2000:253

5.434

C-200/97

Ecotrade v Altiforni e Ferriere di Servola

ECLI:EU:C:1998:579

2.7 2.93 2.131 2.267

C-204/97

Portugal v Commission

ECLI:EU:C:2001:233

5.107

C-207/97

Commission v Belgium

ECLI:EU:C:1999:17

5.170

C-251/97

France v Commission

ECLI:EU:C:1999:480

2.323 2.327

C-256/97

DM Transport

ECLI:EU:C:1999:332

2.130 2.261 2.353 2.463 2.464

lvii

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Table 1 List of Court of Justices judgements

C-295/97

Piaggio

ECLI:EU:C:1999:313

2.131 2.267 5.32

C-372/97

Italy v Commission (‘Italian road haulage companies’)

ECLI:EU:C:2004:234

3.921 5.445

C 414/97

Commission v Spain

ECLI:EU:C:1999:417

2.16

C-15/98 and C 105/99

Italy and Sardegna Lines v Commission

ECLI:EU:C:2000:570

5.26 2.521 2.523 5.207 2.519 5.551

C-83/98

P France v Ladbroke Racing and Commission

ECLI:EU:C:2000:248

1.402 2.5 2.81 3.1192

C-99/98

Austria v Commission (‘Villach’)

ECLI:EU:C:2001:94

5.40 5.41 5.97 5.99

C-106/98 P

Comité d’entreprise de la Société française de production and others v Commission

ECLI:EU:C:2000:277

5.550

C-107/98

Teckal

ECLI:EU:C:1999:562

4.94

C-156/98

Germany v Commission

ECLI:EU:C:2000:467

2.35 2.129 2.130 2.332 3.343 3.360 3.742 3.1758

C-180/98 to C-184/98

Pavlov and others

ECLI:EU:C:2000:428

2.49 2.53

C-324/98

Telaustria and Telefonadress

ECLI:EU:C:2000:669

3.1722 4.95

lviii

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Table 1 List of Court of Justices judgements

C-332/98

France v Commission (‘CELF’)

ECLI:EU:C:2000:338

5.76 5.78

C-337/98

Commission v France

ECLI:EU:C:2000:543

3.1723

C-351/98

Spain v Commission (‘Renove I’)

ECLI:EU:C:2002:530

2.240 2.497 2.510 2.565 2.592 5.85

C-378/98

Commission v Belgium

ECLI:EU:C:2001:370

5.384

C-379/98

PreussenElektra

ECLI:EU:C:2001:160

1.401 1.403 2.75 2.94 2.101 2.102 2.103 2.104 2.105 2.120 3.1193 5.21

C-390/98

Banks

ECLI:EU:C:2001:456

2.174 2.322 5.317 5.394 5.327 5.408

C-480/98

Spain v Commission (“Magefesa”)

ECLI:EU:C:2000:559

2.326 5.369

lix

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Table 1 List of Court of Justices judgements

C-143/99

Adria Wien Pipeline and Wietersdorfer & Peggauer Zementwerke

ECLI:EU:C:2001:598

1.407 2.237 2.243 2.271 2.280 2.727

C-157/99

Smits and Peerbooms

ECLI:EU:C:2001:404

2.265

C-197/99 P

Belgium v Commission

ECLI:EU:C:2003:444

5.53

C-205/99

Analir and others

ECLI:EU:C:2001:107

4.62 4.66 4.198

C-208/99

Portugal v Commission

ECLI:EU:C:2001:638

5.509

C 234/99

Nygård

ECLI:EU:C:2002:244

2.160 2.162

C-309/99

Wouters and others

ECLI:EU:C:2002:98

2.53

C-310/99

Italy v Commission

ECLI:EU:C:2002:143

2.511 5.106 5.372

C-321/99 P

ARAP and others v Commission

ECLI:EU:C:2002:292

5.55

C-328/99 and C-399/00

Italy v Commission and SIM 2 Multimedia SpA v Commission (‘Seleco’)

ECLI:EU:C:2001:492

2.412 5.394 5.409

C-334/99

Germany v Commission (“Gröditzer”)

ECLI:EU:C:2003:55

2.374

C-382/99

Netherlands v Commission (“Dutch service stations”)

ECLI:EU:C:2002:363

2.347 2.349 2.488 2.489 2.634 2.674 3.1758 5.106 5.369

lx

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Table 1 List of Court of Justices judgements

C-400/99

Italy v Commission (‘Tirrenia’)

ECLI:EU:C:2001:528

5.6 5.32 5.120 5.206 5.230 5.520 5.235 5.246

C-403/99

Italy v Commission

ECLI:EU:C:2001:507

5.433

C-428/99

Van den Bor

ECLI:EU:C:2002:3

3.2122 3.2123 3.2124

C-475/99

Ambulanz Glöckner

ECLI:EU:C:2001:577

2.60 2.164

C-482/99

France v Commission (‘Stardust Marine’)

ECLI:EU:C:2002:294

1.78 1.402 2.75 2.80 2.83 2.98 2.102 2.179 2.181 2.185 2.187 2.189 2.190 2.193 2.197 2.198 2.199 2.359 2.371 2.779 5.21 5.212

lxi

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Table 1 List of Court of Justices judgements

C-499/99

Commission v Spain (“Magefesa I”)

ECLI:EU:C:2002:408

5.429

C-36/00

Spain v Commission

ECLI:EU:C:2002:196

5.38

C-50/00 P

Unión de Pequeños Agricultores v Council

ECLI:EU:C:2002:462

5.490

C-53/00

Ferring

ECLI:EU:C:2001:627

2.270 2.285 3.1685 4.16 4.22

C-74/00 P and C-75/00 P

Falck and Acciaierie di Bolzano v Commission

ECLI:EU:C:2002:524

5.130 5.268 5.434

C-113/00

Spain v Commission

ECLI:EU:C:2002:507

3.360 3.2122

C-209/00

Commission v Germany

ECLI:EU:C:2002:747

5.364

C-277/00

Germany v Commission (“SMI”)

ECLI:EU:C:2004:238

5.344 5.369 5.389 5.398 5.407 5.408 5.409 5.415 5.426

C-278/00

Greece v Commission

ECLI:EU:C:2004:239

2.519 5.106

lxii

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Table 1 List of Court of Justices judgements

C-280/00

Altmark Trans and Regierungspräsidium Magdeburg

ECLI:EU:C:2003:415

1.57 1.289 1.399 1.418 2.332 2.505 2.509 2.512 2.524 2.564 3.182 3.1114 3.1180 3.1243 3.1625 3.1633, 3.1686 4.17 4.19 4.20 4.23 4.49 4.77 4.85 4.91 4.144 4.155 4.220

C-298/00 P

Italy v Commission

ECLI:EU:C:2004:240

5.552 5.553

C-398/00

Spain v Commission

ECLI:EU:C:2002:382

5.40

C-404/00

Commission v Spain

ECLI:EU:C:2003:373

5.429

C-409/00

Spain v Commission (‘Renove II’)

ECLI:EU:C:2003:92

2.240 2.565 2.566 2.592

C-456/00

France v Commission

ECLI:EU:C:2002:753

3.2117

lxiii

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Table 1 List of Court of Justices judgements

C-457/00

Commission v Belgium (‘Verlipack’)

ECLI:EU:C:2003:38

2.496

C-501/00

Spain v Commission

ECLI:EU:C:2004:438

5.170 5.466

C-5/01

Belgium v Commission

ECLI:EU:C:2002:754

2.332

C-13/01

Safalero

ECLI:EU:C:2003:447

5.356

C-34/01 to C-38/01

Enirisorse

ECLI:EU:C:2003:640

4.56 5.320

C-82/01 P

Aéroports de Paris v Commission

ECLI:EU:C:2002:617

2.73 3.1362 3.1551

C-83/01 P, C-93/01 P and C-94/01 P

Chronopost v Ufex and others

ECLI:EU:C:2003:388

2.369 2.370 4.112 4.317

C-91/01

Italy v Commission (‘Solar Tech’)

ECLI:EU:C:2004:244

5.81

C-126/01

GEMO

ECLI:EU:C:2002:273

2.237 2.258 2.332 4.15 4.16 4.19 4.22

C-159/01

Netherlands v Commission (“MINAS”)

ECLI:EU:C:2004:246

2.35 2.291 2.745

C-224/01

Köbler

ECLI:EU:C:2003:513

5.339

C-261/01 and C-262/01

Van Calster and Cleeren

ECLI:EU:C:2003:571

1.412 2.148 5.67 5.315 5.320 5.321 5.326

lxiv

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Table 1 List of Court of Justices judgements

C-264/01, C-306/01, C-354/01 and C-355/01

AOK-Bundesverband and others

ECLI:EU:C:2004:150

2.61

C-297/01

Sicilcassa and others

ECLI:EU:C:2003:416

5.53

C-308/01

GIL Insurance and others

ECLI:EU:C:2004:252

2.744 2.271 2.277 2.285

C-500/01

Commission v Spain

ECLI:EU:C:2004:8

2.746

C-42/02

Lindman

ECLI:EU:C:2003:613

2.689

C-66/02

Italy v Commission

ECLI:EU:C:2005:768

2.277 2.751 3.2063 3.2069 5.106

C-99/02

Commission v Italy (“Employment measures”)

ECLI:EU:C:2004:207

5.344 5.349 5.368 5.372 5.425

C-110/02

Commission v Council (“Portuguese pig farmers”)

ECLI:EU:C:2004:395

3.2130 5.474

C-173/02

Spain v Commission

ECLI:EU:C:2004:617

3.2123

C-174/02

Streekgewest

ECLI:EU:C:2005:10

5.67 5.315

C-175/02

Pape

ECLI:EU:C:2005:11

5.67 5.315

C-183/02 P and C-187/02 P

Demesa and Territorio Histórico de Álava v Commission

ECLI:EU:C:2004:701

5.445

C-232/02 P(R)

Commission v Technische Glaswerke Ilmenau

ECLI:EU:C:2002:601

5.231

lxv

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Table 1 List of Court of Justices judgements

C-345/02

Pearle and others

ECLI:EU:C:2004:448

2.99 2.136 2.202 2.682 5.21

C-17/03

VEMW and others

ECLI:EU:C:2005:362

5.433

C-26/03

Stadt Halle

ECLI:EU:C:2005:5

4.94

C-78/03 P

Commission v Aktionsgemeinschaft Recht und Eigentum (“ARE”)

ECLI:EU:C:2005:761

5.511 5.513 5.541 5.544

C-88/03

Portugal v Commission

ECLI:EU:C:2006:511

1.408 2.275 2.288 2.295 2.296 2.299 2.303 2.312 2.318 2.746

C-128/03 and C-129/03

AEM and AEM Torino

ECLI:EU:C:2005:224

3.343

C-172/03

Heiser

ECLI:EU:C:2005:130

1.407 2.277 2.331 2.332 2.512 2.565 2.566 2.575

C-173/03

Traghetti del Mediterraneo

ECLI:EU:C:2006:391

5.341

lxvi

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Table 1 List of Court of Justices judgements

C-182/03 and C-217/03

Belgium and Forum 187 ASBL v Commission (‘Forum 187’)

ECLI:EU:C:2006:416

2.277 2.704 5.433 5.438 5.440 5.442 5.453 5.456 5.463 5.52

C-205/03 P

FENIN v Commission

ECLI:EU:C:2006:453

2.71

C-283/03

Kuipers

ECLI:EU:C:2005:314

3.2123

C-346/03 and C-529/03

Atzeni and others

ECLI:EU:C:2006:130

3.2132, 3.2274, 5.445, 5.461, 5.554

C-379/03 P

Pérez Escolar v Commission

ECLI:EU:C:2004:580

5.560 5.273

C-399/03

Commission v Council (“Belgian coordination centres”)

ECLI:EU:C:2006:417

3.2130 5.474

C-415/03

Commission v Greece (“Olympic Airways”)

ECLI:EU:C:2005:287

5.364 5.369 5.399

C-442/03 P and C-471/03 P

P&O European Ferries (Vizcaya) v Commission

ECLI:EU:C:2006:356

5.53 5.63 5.80 5.172

C-451/03

Servizi Ausiliari Dottori Commercialisti

ECLI:EU:C:2006:208

4.73

C-485/03 to C-490/03

Commission v Spain

ECLI:EU:C:2006:777

5.366 5.386

C-71/04

Xunta de Galicia

ECLI:EU:C:2005:493

5.65

C-148/04

Unicredito Italiano

ECLI:EU:C:2005:774

2.751 3.2063 3.2069 5.106 5.370

lxvii

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Table 1 List of Court of Justices judgements

C-222/04

Cassa di Risparmio di Firenze and others

ECLI:EU:C:2006:8

2.72 2.240 2.485 2.511 2.516 2.752

C-237/04

Enirisorse

ECLI:EU:C:2006:197

2.343

C-266/04 to C-270/04, C-276/04 and C-321/04 to C-325/04

Casino France and others

ECLI:EU:C:2005:657

2.148

C-368/04

Transalpine Ölleitung in Österreich

ECLI:EU:C:2006:644

5.281 5.283 5.285 5.306 5.307 5.316 5.323 5.327

C-393/04 and C-41/05

Air Liquide Industries Belgium

ECLI:EU:C:2006:403

5.318

C-408/04 P

Commission v Salzgitter

ECLI:EU:C:2008:236

5.43 5.421

C-517/04

Koornstra

ECLI:EU:C:2006:375

2.160

C-519/04 P

Meca-Medina and Majcen v Commission

ECLI:EU:C:2006:492

3.1324

C-525/04 P

Spain v Commission (‘Lenzing’)

ECLI:EU:C:2007:698

1.79 2.5 2.353 5.541

C-526/04

Laboratoires Boiron

ECLI:EU:C:2006:528

5.319

C-49/05 P

Ferriere Nord v Commission

ECLI:EU:C:2008:259

5.121 5.157 5.160 5.170 5.271

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Table 1 List of Court of Justices judgements

C-207/05

Commission v Italy

ECLI:EU:C:2006:366

5.344 5.364 5.372 5.384 5.386

C-119/05

Lucchini

ECLI:EU:C:2007:434

5.283 5.342 5.359

C-232/05

Commission v France (‘Scott’)

ECLI:EU:C:2006:651

1.412 1.417 1.420 5.344 5.351 5.356 5.358 5.384 5.386 5.420 5.489

C-260/05 P

Sniace v Commission

ECLI:EU:C:2007:700

5.537 5.538 5.540

C-441/06

Commission v France

ECLI:EU:C:2007:616

5.371

C-337/06

Bayerischer Rundfunk and others

ECLI:EU:C:2007:786

3.1194

C-125/06 P

Commission v Infront WM

ECLI:EU:C:2008:159

5.485

C-454/06

pressetext Nachrichtenagentur

ECLI:EU:C:2008:351

3.1723

C-341/06 P and C-342/06 P

Chronopost and La Poste v UFEX and others

ECLI:EU:C:2008:375

5.212

C-206/06

Essent Netwerk Noord and others

ECLI:EU:C:2008:413

2.109

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Table 1 List of Court of Justices judgements

C-521/06 P

Athinaïki Techniki v Commission

ECLI:EU:C:2008:422

5.185

C-428/06 to C-434/06

Unión General de Trabajadores de la Rioja

ECLI:EU:C:2008:488

2.295 2.296 2.303 2.315 2.316

C-487/06 P

British Aggregates Association v Commission

ECLI:EU:C:2008:757

2.288 2.742 2.746 5.117 5.542

C-199/06

CELF and ministre de la Culture et de la Communication

ECLI:EU:C:2008:79

1.412 5.81 5.321 5.323 5.326 5.327

C-494/06 P

Commission v Italy and Wam

ECLI:EU:C:2009:272

2.511 2.521 2.586

C-419/06

Commission v Greece

ECLI:EU:C:2008:89

5.356 5.365 5.368 5.370

C-214/07

Commission v France

ECLI:EU:C:2008:619

5.366 5.401 5.402 5.426 5.428 5.431

C-334/07 P

Commission v Freistaat Sachsen

ECLI:EU:C:2008:709

3.1738 4.186 5.160 5.211

C-384/07

Wienstrom

ECLI:EU:C:2008:747

5.310 5.321

lxx

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Table 1 List of Court of Justices judgements

C-333/07

Régie Networks

ECLI:EU:C:2008:764

2.149 3.343 3.742 5.162 5.315

C-222/07

UTECA

ECLI:EU:C:2009:124

3.1294

C-113/07 P

Selex Sistemi Integrati v Commission

ECLI:EU:C:2009:191

2.65 2.69

C-431/07 P

Bouygues and Bouygues Télécom v Commission

ECLI:EU:C:2009:223

2.176

C-504/07

Antrop and others

ECLI:EU:C:2009:290

3.1691

C-519/07 P

Commission v Koninklijke FrieslandCampina

ECLI:EU:C:2009:556

5.434 5.440 5.66

C-520/07 P

Commission v MTU Friedrichshafen

ECLI:EU:C:2009:557

5.222

C-139/07 P

Commission v Technische Glaswerke Ilmenau

ECLI:EU:C:2010:376

5.6 5.280

C-404/08 P

Commission v Salzgitter

ECLI:EU:C:2009:563

5.459

C-169/08

Presidente del Consiglio dei Ministri

ECLI:EU:C:2009:709

2.729

C-89/08 P

Commission v Ireland and others

ECLI:EU:C:2009:742

5.32

C-325/08

Olympique Lyonnais

ECLI:EU:C:2010:143

3.1324

C-91/08

Wall AG

ECLI:EU:C:2010:182

3.1723

C-203/08

Sporting Exchange

ECLI:EU:C:2010:307

2.265

C-399/08 P

Commission v Deutsche Post

ECLI:EU:C:2010:481

4.33 4.90

C-389/08

Base and others

ECLI:EU:C:2010:584

4.210

C-537/08 P

Kahla Thüringen Porzellan v Commission

ECLI:EU:C:2010:769

5.69 5.443

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Table 1 List of Court of Justices judgements

C-507/08

Commission v Slovakia

ECLI:EU:C:2010:802

5.450

C-78/08 to C-80/08

Paint Graphos and others

ECLI:EU:C:2011:550

2.707 2.746 2.271 2.276 2.277 2.287 2.288 2.289 2.290 2.715 2.729 2.730 2.746 2.753 2.754 2.755

C-279/08 P

Commission v Netherlands (“NOx”)

ECLI:EU:C:2011:551

2.167 2.178 2.248 2.251 2.271 2.272 2.288 2.724 2.728 2.746

C-1/09

CELF and ministre de la Culture and de la Communication

ECLI:EU:C:2010:136

5.305 5.305 5.308 5.309 5.309 5.312 5.439

C-67/09 P

Nuova Agricast and Cofra v Commission

ECLI:EU:C:2010:607

5.69 5.438 5.440

lxxii

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Table 1 List of Court of Justices judgements

C-71/09 P, C-73/09 P and C-76/09 P

Comitato «Venezia vuole vivere» and others v Commission

ECLI:EU:C:2011:368

2.340 5.374 5.489 5.106 5.418 5.546 5.555

C-83/09 P

Commission v Kronoply and Kronotex

ECLI:EU:C:2011:341

5.124

C-106/09 P and C-107/09 P

Commission and Spain v Government of Gibraltar and United Kingdom

ECLI:EU:C:2011:732

2.252 2.256 2.274 2.291 2.308 2.325 2.698 2.734 2.737 2.738 2.745 5.126 5.130 5.131

C-138/09

Todaro Nunziatina & C.

ECLI:EU:C:2010:291

5.31 5.35 5.69

C-140/09

Fallimento Traghetti del Mediterraneo SpA v Presidenza del Consiglio dei Ministri

ECLI:EU:C:2010:335

4.83

C-194/09 P

Alcoa Trasformazioni v Commission

ECLI:EU:C:2011:497

5.32 5.113

C-210/09

Scott and Kimberly Clark

ECLI:EU:C:2010:294

5.366

C-302/09

Commission v Italy ( Venezia Chioggia”)

ECLI:EU:C:2011:634

5.349

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Table 1 List of Court of Justices judgements

C-304/09

Commission v Italy

ECLI:EU:C:2010:812

5.361 5.364 5.365 5.366 5.368 5.386

C-305/09

Commission v Italy

ECLI:EU:C:2011:274

5.360 5.372

C-319/09 P

ACEA v Commission

ECLI:EU:C:2011:857

5.47 5.417 5.555

C-322/09 P

NDSHT v Commission

ECLI:EU:C:2010:701

5.185

C-329/09 P

Iride v Commission

ECLI:EU:C:2011:859

5.557

C-331/09

Commission v Poland

ECLI:EU:C:2011:250

5.364 5.427

C-362/09

Athinaïki Techniki v Commission

ECLI:EU:C:2010:783

5.175 5.176

C-407/09

Commission v Greece

ECLI:EU:C:2011:196

5.348

C-454/09

Commission v Italy (“New Interline”)

ECLI:EU:C:2011:650

5.344 5.365 5.400 5.427 5.428

C-465/09 P to C-470/09 P

Diputación Foral de Vizcaya and others v Commission

ECLI:EU:C:2011:372

5.42 5.66 5.171 5.201 5.372

C-480/09 P

AceaElectrabel Produzione v Commission

ECLI:EU:C:2010:787

5.391

C-496/09

Commission v Italy

ECLI:EU:C:2011:740

5.348

C-529/09

Commission v Spain (“Magefesa II”)

ECLI:EU:C:2013:31

5.400 5.406

C-47/10 P

Austria v ScheucherFleisch and others

ECLI:EU:C:2011:698

5.119 5.513

lxxiv

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Table 1 List of Court of Justices judgements

C-81/10 P

France Télécom v Commission (‘taxe professionnelle’)

ECLI:EU:C:2011:811

2.344 5.44 5.471

C-111/10

Commission v Council (Lithuania)

ECLI:EU:C:2013:785

3.2131 5.31 5.476

C-117/10

Commission v Council (Poland)

ECLI:EU:C:2013:786

3.2131 5.476

C-118/10

Commission v Council (Latvia)

ECLI:EU:C:2013:787

3.2131 5.476

C-121/10

Commission v Council (Hungary)

ECLI:EU:C:2013:784

3.2131 5.31

C-124/10 P

Commission v EDF

ECLI:EU:C:2012:318

2.360 2.361 2.371 2.372 2.375 2.822 3.1105 5.212

C-243/10

Commission v Italy (“Hotel industry in Sardinia”)

ECLI:EU:C:2012:182

5.106 5.349

C-275/10

Residex Capital IV

ECLI:EU:C:2011:814

2.424

C-399/10 P and C-401/10 P

Bouygues and Bouygues Télécom v Commission

ECLI:EU:C:2013:175

2.124 2.178 2.365 2.405

C-403/10 P

Mediaset SpA v Commission

ECLI:EU:C:2011:533

2.244 2.476 2.484 2.491 3.1146 5.363 5.369

C-446/10 P(R)

Alcoa Trasformazioni v Commission

ECLI:EU:C:2011:829

5.231

lxxv

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Table 1 List of Court of Justices judgements

C-452/10 P

BNP Paribas and BNL v Commission

ECLI:EU:C:2012:366

2.292 2.293 2.747

C-459/10 P

Freistaat Sachsen und SachsenAnhalt v Commission

ECLI:EU:C:2011:515

3.360

C-555/10

Commission v Austria

ECLI:EU:C:2013:115

3.1634

C-556/10

Commission v Germany

ECLI:EU:C:2013:116

3.1634

C-73/11 P

Frucona Košice v Commission

ECLI:EU:C:2013:32

2.353 2.572

C-138/11

Compass- Datenbank

ECLI:EU:C:2012:449

2.65 2.69

C-167/11 P

Cantiere navale De Poli v Commission

ECLI:EU:C:2012:164

5.211

C-197/11 and 203/11

Libert and others

ECLI:EU:C:2013:288

2.566 2.513 2.523 3.2197 4.52

C-200/11 P

Italy v Commission (‘Naval construction’)

ECLI:EU:C:2012:165

5.30

C-262/11

Kremikovtzi

ECLI:EU:C:2012:760

1.500 5.25

C-288/11 P

Mitteldeutsche Flughafen AG and Flughafen Leipzig-Halle GmbH v Commission

ECLI:EU:C:2012:821

3.247 3.1326 3.1548 3.1553 3.1557 3.422

C-405/11 P

Commission v Buczek Automotive

ECLI:EU:C:2013:186

2.473

C-583/11 P

Inuit Tapiriit Kanatami and others v Parliament and Council

ECLI:EU:C:2013:625

5.491

C-615/11 P

Commission v Ryanair

ECLI:EU:C:2013:310

5.181

lxxvi

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Table 1 List of Court of Justices judgements

C-630/11 P to C-633/11 P

HGA and others v Commission (‘Sardinian hotel industry’)

ECLI:EU:C:2013:387

3.788 5.30 5.156 5.234 5.438

C-646/11 P

3F v Commission

ECLI:EU:C:2013:36

5.124

C-677/11

Doux Élevage and Coopérative agricole UKL-ARREE

ECLI:EU:C:2013:348

2.134 2.144 2.215 5.21

C-6/12 P

P

ECLI:EU:C:2013:525

2.268 2.699 2.704 2.720 2.758

C-77/12 P

Deutsche Post v Commission

ECLI:EU:C:2013:695

5.487

C-129/12

Magdeburger Mühlenwerke

ECLI:EU:C:2013:200

2.351 5.68

C-132/12 P

Stichting Woonpunt and Others v Commission

ECLI:EU:C:2014:100

5.242

C-133/12 P

Stichting Woonlinie and others v Commission

ECLI:EU:C:2013:336

5.499

C-214/12 P, C-215/12 P and C-223/12 P

Land Burgenland and others v Commission

ECLI:EU:C:2013:682

2.372 2.377 2.378 2.438 2.456

C-224/12 P

Commission v Netherlands and ING Groep

ECLI:EU:C:2014:213

2.360 2.376 2.377 5.109

C-262/12

Association Vent de Colère

ECLI:EU:C:2013:851

1.403 2.111 2.476

C-272/12 P

Commission v Ireland and others (‘Alumina’)

ECLI:EU:C:2013:812

2.206 5.477

lxxvii

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Table 1 List of Court of Justices judgements

C-274/12 P

Telefónica v Commission

ECLI:EU:C:2013:204

2.716 5.495 5.496 5.499

C-284/12

Deutsche Lufthansa

ECLI:EU:C:2013:755

2.270 5.114 5.313 5.314

C-287/12 P

Ryanair v Commission (“Alitalia/CAI”)

ECLI:EU:C:2013:395

5.110 5.542

C-353/12

Commission v Italy

ECLI:EU:C:2013:651

5.425

C-533/12 P

SNCM and France v Corsica Ferries France

ECLI:EU:C:2014:2142

2.396

C-551/12 P(R)

EDF v Commission

ECLI:EU:C:2013:157

5.231

C-559/12 P

France v Commission

ECLI:EU:C:2014:217

2.425 2.426 2.822 2.833 2.837 2.840

C-587/12 P

Italy v Commission

ECLI:EU:C:2013:721

5.78

C-69/13

Mediaset

ECLI:EU:C:2014:71

5.302

C-242/13

Commerz Nederland

ECLI:EU:C:2014:2224

2.218 2.779

C-303/13

Commission v Andersen

ECLI:EU:C:2015:340

3.1738 5.213

C-344/13 and C-367/13

Blanco and Fabretti

ECLI:EU:C:2014:2310

2.689

C-456/13

P T & L Sugars and Sidul Açúcares v Commission

ECLI:EU:C:2014:2283

5.496

lxxviii

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Table 1 List of Court of Justices judgements

C-518/13

Eventech

ECLI:EU:C:2015:9

2.131 2.178 2.241 2.551 2.575

C-522/13

Navantia

ECLI:EU:C:2014:2262

2.722 2.746 2.758

C-574/13 P(R)

France v Commission

ECLI:EU:C:2014:36

5.231

C-620/13

P British Telecommunications v Commission

ECLI:EU:C:2014:2309

2.278

C-15/14 P

Commission v MOL

ECLI:EU:C:2015:362

2.269

lxxix

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160323_state_aid_voorwerk_deel_1.indd lxxx

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Table 2 List of General Court judgements

Table 2 List of General Court1 judgments (numerical by case number) Note: A complete list of all judgments as well as an effective search engine that enables the user to find judgments on the basis of name, number and date of the judgment, as well as the full tekst, is available online at: http://curia.europa.eu/jcms/ jcms/j_6/

1

No.

Name

ECLI 2

Book paragraph

T-138/89

NBV and NVB v Commission

ECLI:EU:T:1992:95

5.505

T-24/90

Automec v Commission

ECLI:EU:T:1992:97

2.569 5.199

T-49/93

SIDE v Commission

ECLI:EU:T:1995:166

2.37 3.1293 5.122

T-435/93

ASPEC and others v Commission

ECLI:EU:T:1995:79

5.532 5.532 5.541

T-442/93

AAC and others v Commission

ECLI:EU:T:1995:80

5.532

T-447/93, T-448/93 and T-449/93

AITEC and others v Commission

ECLI:EU:T:1995:130

5.532

Prior to the coming into force of the Lisbon Treaty on 1 December 2009, it was known as the Court of First Instance.

2

The European Case Law Identifier (ECLI) is an identifier for case law in Europe, implemented by the European Union Court of Justice, the European Court of Human Rights, the European Patent Office and several EU Member States. The identifier consists of 5 parts separated by colons: ECLI:[country code]:[court identifier]:[year of decision]:[specific identifier].

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Table 2 List of General Court judgements

T-459/93

Siemens SA v Commission

ECLI:EU:T:1995:100

3.360 5.356 5.370 5.376 5.377 5.435

T-480/93 and T-483/93

Antillean Rice Mills and others v Commission

ECLI:EU:T:1995:162

5.504

T-178/94

ATM v Commission

ECLI:EU:T:1997:210

5.517

T-260/94

Air Inter v Commission

ECLI:EU:T:1997:89

2.164

T-266/94

Skibsvaerftsforeningen and others v Commission

ECLI:EU:T:1996:153

5.268

T-330/94

Salt Union v Commission

ECLI:EU:T:1995:194

5.240

T-358/94

Air France v Commission

ECLI:EU:T:1996:194

2.79 2.98 2.185 2.233 2.412 3.1192

T-371/94 and T-394/94

British Airways and others and British Midland Airways v Commission

ECLI:EU:T:1998:140

5.125 5.262 5.276 5.279

T-380/94

AIUFFASS and AKT v Commission

ECLI:EU:T:1996:195

3.642

T-398/94

Kahn Scheepvaart v Commission

ECLI:EU:T:1996:73

5.548

T-11/95

BP Chemicals v Commission

ECLI:EU:T:1998:199

1.75 1.79 2.365 2.404 2.405 5.117 5.169 5.533 5.536

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Table 2 List of General Court judgements

T-106/95

FFSA and others v Commission

ECLI:EU:T:1997:23

2.6 2.117 4.9 4.17 4.18 4.57 4.86 4.315 4.345 5.155

T-129/95, T-2/96 and T-97/96

Neue Maxhütte Stahlwerke and Lech-Stahlwerke v Commission

ECLI:EU:T:1999:7

2.353

T-140/95

Ryanair v Commission

ECLI:EU:T:1998:201

3.970 5.122 5.166

T-214/95

Vlaams Gewest v Commission

ECLI:EU:T:1998:77

2.509 5.515

T-234/95

DGS v Commission

ECLI:EU:T:2000:174

2.633

T-14/96

BAI v Commission

ECLI:EU:T:1999:12

2.366

T-16/96

Cityflyer Express v Commission

ECLI:EU:T:1998:78

2.353 2.371

T-17/96

TF1 v Commission

ECLI:EU:T:1999:119

3.1164 5.201 5.203

T-86/96

Arbeitsgemeinschaft Deutscher Luftfahrt Unternehmen and Hapag Lloyd Fluggesellschaft v Commission

ECLI:EU:T:1999:25

5.548

T-95/96

Gestevisión Telecinco v Commission

ECLI:EU:T:1998:206

3.1164 5.201 5.202 5.203 5.205

T-102/96

Gencor v Commission

ECLI:EU:T:1999:65

5.504

T-129/96

Preussag Stahl v Commission

ECLI:EU:T:1998:69

5.439

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Table 2 List of General Court judgements

T-132/96 and T-143/96

Freistaat Sachsen and other v Commission

ECLI:EU:T:1999:326

2.5 5.515

T-158/96

Acciaierie di Bolzano v Commission

ECLI:EU:T:1999:335

5.261 5.514

T-37/97

Forges de Clabecq SA v Commission

ECLI:EU:T:1999:66

2.130

T-46/97

SIC v Commission

ECLI:EU:T:2000:123

3.1163 4.17

T-81/97

Regione Toscana v Commission

ECLI:EU:T:1998:180

5.518

T-189/97

Comité d’entreprise de la Société française de production and others v Commission

ECLI:EU:T:1998:38

5.517

T-197/97 and T-198/97

Weyl Beef Products and others v Commission

ECLI:EU:T:2001:28

2.35 2.147 4.217

T-204/97 and T-270/97

EPAC v Commission

ECLI:EU:T:2000:148

2.121 2.130 2.771

T-288/97

Regione autonoma FriuliVenezia Giulia v Commission

ECLI:EU:T:2001:115

2.506 5.46 5.261 5.483 5.515

T-296/97

Alitalia v Commission

ECLI:EU:T:2000:289

2.397 2.411 2.412

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Table 2 List of General Court judgements

T-298/97, T-312/97, T-313/97, T-315/97, T-600/97 to T-607/97, T-1/98, T-3/98 to T-6/98 and T-23/98

Alzetta and others v Commission

ECLI:EU:T:2000:151

2.506 2.524 5.46 5.48 5.551

T-613/97

UFEX and others v Commission (‘Ufex II’)

ECLI:EU:T:2006:150

2.207 2.369 5.198 5.279

T-72/98

Astilleros Zamacona v Commission

ECLI:EU:T:2000:79

5.155

T-73/98

Prayon-Rupel v Commission

ECLI:EU:T:2001:94

1.495 5.107 5.118 5.122 5.124 5.125

T-128/98

Aéroports de Paris v Commission

ECLI:EU:T:2000:290

3.1362 3.1391

T-156/98

RJB Mining v Commission

ECLI:EU:T:2001:29

2.37

T-159/98

Torre and others v Commission

ECLI:EU:T:2001:121

5.504

T-13/99 R

Pfizer Animal Health v Council

ECLI:EU:T:1999:130

5.231

T-36/99

Lenzing v Commission

ECLI:EU:T:2004:312

1.79 2.263 2.464 2.469

T-55/99

CETM v Commission

ECLI:EU:T:2000:223

2.237 2.272 2.285 2.333 2.516 3.1752

lxxxv

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Table 2 List of General Court judgements

T-127/99, T-129/99 and T-148/99

Territorio Histórico de Álava and others v Commission

ECLI:EU:T:2002:59

2.261 2.263 5.31

T-152/99

Hijos de Andrés Molina, SA (HAMSA) v Commission

ECLI:EU:T:2002:188

2.261 2.464 2.465 2.468 2.497 3.931

T-228/99 and T-233/99

Westdeutsche Landesbank Girozentrale v Commission

ECLI:EU:T:2003:57

1.74 1.79 1.88 2.353 2.355 2.359 2.361 2.374 2.381 2.391 2.398 2.403 2.415 5.131 5.133 5.260 5.261 5.265 5.276 5.515

T-269/99, T-271/99 and T-272/99

Diputación Foral de Guipúzcoa and others v Commission

ECLI:EU:T:2002:258

2.517

T-323/99

INMA and Itainvest v Commission

ECLI:EU:T:2002:38

5.215 5.220

lxxxvi

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Table 2 List of General Court judgements

T-354/99

Kuwait Petroleum (Nederland) v Commission

ECLI:EU:T:2006:137

5.106 5.126 5.363 5.268 5.369 5.372

T-92/00 and T 103/00

Diputación Foral de Álava v Commission

ECLI:EU:T:2002:61

2.257 2.744

T-98/00

Linde v Commission

ECLI:EU:T:2002:248

2.497

T-190/00

Regione Sicilia v Commission

ECLI:EU:T:2003:316

3.988 5.169 5.170

T-212/00

Nuove Industrie Molisane v Commission

ECLI:EU:T:2002:21

5.504

T-228/00, T-229/00, T-242/00, T-243/00, T-245/00 to T-248/00, T-250/00, T-252/00, T-256/00 to T-259/00, T-265/00, T-267/00, T-268/00, T-271/00, T-274/00 to T-276/00, T-281/00, T-287/00 and T-296/00

Gruppo ormeggiatori del porto di Venezia v Commission

ECLI:EU:T:2005:90

5.557

lxxxvii

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Table 2 List of General Court judgements

T-254/00, T-270/00 and T-277/00

Hotel Cipriani SpA and Others v Commission

ECLI:EU:T:2008:537

5.34 5.43 5.65 2.339 5.378 5.418

T278/00,T280/00, T-282/00, T-286/00, T-288/00, T-295/00

Albergo Quattro Fontance and others v Commission

ECLI:EU:T:2013:77

3.2069

T-308/00

Salzgitter

ECLI:EU:T:2004:199

2.247 5.32 5.458

T-308/00 RENV

Salzgitter v Commission

ECLI:EU:T:2013:30

5.459

T-318/00

Freistaat Thüringen v Commission

ECLI:EU:T:2005:363

5.219 5.223 5.398

T-324/00

CDA Datenträger Albrechts v Commission

ECLI:EU:T:2005:364

5.398

T-366/00

Scott v Commission

ECLI:EU:T:2007:99

2.416 2.431 2.438 2.439

T-369/00

Département du Loiret v Commission

ECLI:EU:T:2003:114

5.6 5.51 5.210 5.471 5.472

T-26/01

Fiocchi Munizioni v Commission

ECLI:EU:T:2003:248

2.16 2.19 2.30 2.31

lxxxviii

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Table 2 List of General Court judgements

T-30/01 to T-32/01 and T-86/02 to T-88/02

Diputación Foral de Álava Commission

ECLI:EU:T:2009:314

5.42 5.52 5.131 5.200 5.440 5.447 5.448 5.521

T-41/01

Pérez Escolar v Commission

ECLI:EU:T:2003:175

5.273

T-88/01

Sniace v Commission

ECLI:EU:T:2005:128

5.538

T-109/01

Fleuren Compost BV v Commission

ECLI:EU:T:2004:4

2.334 3.2215 4.185 5.68 5.446 5.448

T-111/01 and T-133/01

Saxonia Edelmetalle v Commission

ECLI:EU:T:2005:166

5.221 5.234 5.256 5.344 5.389

T-116/01 and T-118/01

P&O and Diputacion Foral de Vizcaya v Commission

ECLI:EU:T:2003:217

5.63 5.171

T-157/01

Danske Busvognmænd v Commission (“Combus”)

ECLI:EU:T:2004:76

2.335 3.1690

T-176/01

Ferriere Nord v Commission

ECLI:EU:T:2004:336

5.160 5.271 5.457

T-195/01 and T-207/01

Government of Gibraltar v Commission

ECLI:EU:T:2002:111

5.26 5.32 5.33 5.43 5.107 5.231 5.269 5.520

lxxxix

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Table 2 List of General Court judgements

T-198/01

Technische Glaswerke Ilmenau v Commission

ECLI:EU:T:2004:222

2.518 2.843 5.132 5.159 5.268 5.272 5.279

T-230/01 to T-232/01 and T-267/01 to T-269/01

Diputación Foral de Álava and Gobierno Vasco v Commission

ECLI:EU:T:2009:316

2.509 2.519 2.523 5.265 5.557

T-273/01

Innova Privat-Akademie v Commission

ECLI:EU:T:2003:78

5.443

T-274/01

Valmont v Commission

ECLI:EU:T:2004:266

1.79 2.416 2.439 5.155 5.218 5.223 5.224

T-297/01 and T-298/01

SIC v Commission

ECLI:EU:T:2004:48

5.563

T-301/01

Alitalia v Commission

ECLI:EU:T:2008:262

5.154 5.159

T-17/02

Olsen v Commission

ECLI:EU:T:2005:218

3.1207 3.1705 4.74 4.236 4.315 5.169

T-27/02

Kronofrance v Commission

ECLI:EU:T:2004:348

5.510

xc

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Table 2 List of General Court judgements

T-34/02

Le Levant 001 and others v Commission

ECLI:EU:T:2006:59

2.521 2.585 3.988 5.126 5.270

T-137/02

Pollmeier Malchow v Commission

ECLI:EU:T:2004:304

2.633

T-181/02 R

Neue Erba Lautex v Commission

ECLI:EU:T:2002:294

5.231

T-196/02

MTU Friedrichshafen v Commission

ECLI:EU:T:2007:252

5.222

T-210/02 RENV

British Aggregates v Commission

ECLI:EU:T:2012:110

2.277 2.722 2.724

T-210/02

British Aggregates v Commission

ECLI:EU:T:2006:253

5.511 5.513

T-217/02

Ter Lembeek v Commission

ECLI:EU:T:2006:361

5.107

T-266/02

Deutsche Post v Commission

ECLI:EU:T:2008:235

4.90

T-276/02

Forum 187 v Commission

ECLI:EU:T:2003:151

5.526

T-292/02

Confservizi v Commission

ECLI:EU:T:2009:188

5.543

T-297/02

ACEA v Commission

ECLI:EU:T:2009:189

2.519 2.528 5.26 5.106 5.557

T-300/02

AMGA v Commission

ECLI:EU:T:2009:190

5.557

T-301/02

AEM v Commission

ECLI:EU:T:2009:191

2.528 5.26

T-309/02

Acegas v Commission

ECLI:EU:T:2009:192

5.498 5.557

T-351/02

Deutsche Bahn v Commission

ECLI:EU:T:2006:104

2.83 2.105 5.198

T-357/02

Freistaat Sachsen v Commission

ECLI:EU:T:2007:120

2.681 5.40 5.99

T-358/02

Deutsche Post and DHL v Commission

ECLI:EU:T:2004:159

5.541

xci

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Table 2 List of General Court judgements

T-378/02 R

Technische Glaswerke Ilmenau v Commission

ECLI:EU:T:2003:216

5.204

T-388/02

Kronoply and Kronotex v Commission

ECLI:EU:T:2008:556

5.542

T-20/03

Kahla/Thüringen Porzellan v Commission

ECLI:EU:T:2008:395

3.931 5.38 5.55 5.438

T-68/03

Olympiaki Aeroporia Ypiresies v Commission

ECLI:EU:T:2007:253

2.208

T-75/03

Banco Comercial dos Açores v Commission

ECLI:EU:T:2009:322

2.523, 2.511 2.519, 5.344 5.450

T-95/03

Associación de Empresas de Estaciones de Servicio de Madrid and Federación Catalana de Estaciones de Servicio v Commission

ECLI:EU:T:2006:385

5.117 5.118 5.204 5.273 5.544

T-141/03

Sniace v Commission

ECLI:EU:T:2005:129

5.506

T-189/03

ACM Brescia v Commission

ECLI:EU:T:2009:193

2.528 5.26

T-289/03

BUPA and others v Commission

ECLI:EU:T:2008:29

3.1207 3.1208 3.1705 4.68 4.69 4.73 4.76 4.87 4.88 4.109 4.156 4.315

T-348/03

Koninklijke Friesland Foods v Commission

ECLI:EU:T:2007:256

5.434 5.440 5.456

xcii

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Table 2 List of General Court judgements

T-388/03

Deutsche Post and DHL International v Commission

ECLI:EU:T:2009:30

5.118 5.122

T-442/03

SIC v Commission

ECLI:EU:T:2008:228

2.209 3.1208 3.1210 3.1229 3.1234 3.1249 4.75 4.236 5.75

T-25/04

Gonzáles y Díez v Commission

ECLI:EU:T:2007:257

5.172 5.174

T-117/04

Werkgroep Commerciële Jachthavens Zuidelijke Randmeren and others v Commission

ECLI:EU:T:2006:276

5.540 5.541 5.544

T-155/04

SELEX Sistemi Integrati SpA v Commission

ECLI:EU:T:2006:387

2.70

T-156/04

EDF v Commission

ECLI:EU:T:2009:505

2.516 2.517 2.523 2.526 2.822 5.126 5.262 5.269

T-167/04

Asklepios Kliniken v Commission

ECLI:EU:T:2007:215

5.203 5.514 5.561

T-196/04

Ryanair v Commission

ECLI:EU:T:2008:585

3.1363 3.1367

T-211/04 and T-215/04

Government of Gibraltar and UK v Commission

ECLI:EU:T:2008:595

2.308 2.736

xciii

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Table 2 List of General Court judgements

T-222/04

Italy v Commission

ECLI:EU:T:2009:194

2.528 5.26 5.35 5.45 5.106 5.378

T-233/04

Netherlands v Commission

ECLI:EU:T:2008:102

2.167 5.509

T-239/04 and T-323/04

Italy v Commission

ECLI:EU:T:2007:260

5.96 5.106

T-265/04, T-292/04 and T-504/04

Tirrenia di navigazione v Commission

ECLI:EU:T:2009:48

5.31 5.235 5.506

T-304/04 and T-316/04

Italy and Wam v Commission

ECLI:EU:T:2006:239

2.521 2.585 2.586 3.988

T-309/04, T-317/04, T-329/04 and T-336/04

TV 2/Danmark A/S v Commission

ECLI:EU:T:2007:66

3.1192 3.1193 4.55 4.72 4.81 4.159 5.503 5.505 5.509

T-327/04

SNIV v Commission

ECLI:EU:T:2008:146

5.169

T-344/04

Bouychou v Commission

ECLI:EU:T:2007:234

5.489

T-348/04

SIDE v Commission

ECLI:EU:T:2008:109

5.213

T 360/04

FG Marine v Commission

ECLI:EU:T:2007:235

5.489

T 395/04

Air One v Commission

ECLI:EU:T:2006:123

5.203 5.514 5.559 5.561

xciv

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Table 2 List of General Court judgements

T-425/04, T-444/04, T-450/04 and T-456/04

France and others v Commission (“France Télécom”)

ECLI:EU:T:2010:216

2.124 5.507 5.509

T-427/04 and T-17/05

France v Commission (‘France Télécom taxe professionnelle’)

ECLI:EU:T:2009:474

4.185 5.66 5.68 5.126 5.130 5.262 5.269 5.443 5.471

T-475/04

Bouygues and Bouygues Télécom v Commission

ECLI:EU:T:2007:196

2.176 2.177 5.200

T-136/05

Salvat père & fils and others v Commission

ECLI:EU:T:2007:295

5.553

T-211/05

Italy v Commission

ECLI:EU:T:2009:304

2.523 2.742 5.106 5.120 5.126 5.131 5.159 5.206 5.235 5.269

T-303/05

AceaElectrabel v Commission

ECLI:EU:T:2009:312

2.520 2.523 5.391

T-315/05

Adomex v Commission

ECLI:EU:T:2008:300

5.538

T-354/05

TF1 v Commission

ECLI:EU:T:2009:66

4.156 5.240 5.241 5.242 5.504

xcv

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Table 2 List of General Court judgements

T-362/05 and T-363/05

Nuova Agricast v Commission

ECLI:EU:T:2008:541

4.185 5.68

T-415/05, T-416/05 and T-423/05

Greece v Commission

ECLI:EU:T:2010:386

2.365 2.405 5.154 5.156 5.376 5.391 5.404 5.428

T-416/05 R

Olympiakes Aerogrammes v Commission

ECLI:EU:T:2006:173

5.231

T-424/05

Italy v Commission (‘Fondo Chiuso’)

ECLI:EU:T:2009:49

2.516 2.517 2.519 5.120 5.126 5.159 5.235 3.584

T-445/05

Associazione Italiana del risparmio gestito and Fineco Asset Management v Commission

ECLI:EU:T:2009:50

2.517 2.518 2.750

T-455/05 R

Componenta v Commission

ECLI:EU:T:2006:114

5.231

T-8/06

FAB v Commission

ECLI:EU:T:2009:386

3.1146

T-24/06

MABB v Commission

ECLI:EU:T:2009:388

3.1194 5.516

T-36/06

Bundesverband deutscher Banken v Commission

ECLI:EU:T:2010:61

5.105 5.117 5.123 5.124

T-58/06

HALTE v Commission

ECLI:EU:T:2009:125

5.563

T-62/06 RENV-R

Eurallumina v Commission

ECLI:EU:T:2011:261

5.231

xcvi

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Table 2 List of General Court judgements

T-69/06 R

Aughinish Alumina v Commission

ECLI:EU:T:2006:225

5.231

T-80/06 and T-182/09

Budapesti Eromu v Commission

ECLI:EU:T:2012:65

1.503 5.25 5.521

T-193/06

TF1 v Commission

ECLI:EU:T:2010:389

5.540

T-231/06 and T-237/06

Netherlands and NOS v Commission

ECLI:EU:T:2010:525

3.1253 5.26 5.36 5.126 5.130 5.268

T-273/06 and T 297/06

ISD Polska and others v Commission

ECLI:EU:T:2009:233

5.126 5.159 5.169 5.442

T 288/06

Regionalny Fundusz Gospodarczy S.A. v Commission

ECLI:EU:T:2009:234

1.534

T-291/06

Operator ARP v Commission

ECLI:EU:T:2009:235

5.403 5.408

T-332/06

Alcoa Trasformazioni v Commission

ECLI:EU:T:2009:79

5.31 5.120 5.113 5.443 5.520

T-369/06

Holland Malt v Commission

ECLI:EU:T:2009:319

2.520 2.523 5.107

T-22/07

US Steel Košice v Commission

ECLI:EU:T:2009:158

1.538

T-25/07

Iride SpA and Iride Energia SpA v Commission

ECLI:EU:T:2009:33

2.340

T-54/07

Vtesse Networks v Commission

ECLI:EU:T:2011:15

5.538 5.540 5.541

xcvii

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Table 2 List of General Court judgements

T-81/07, T-82/07 and T-83/07

KG Holding and others v Commission

ECLI:EU:T:2009:237

2.523 5.156 5.389 5.428

T-102/07 and T-120/07

Freistaat Sachsen and others v Commission

ECLI:EU:T:2010:62

2.351 5.66

T-177/07

Mediaset v Commission

ECLI:EU:T:2010:233

1.64 2.484 2.491 5.363 5.450

T-188/07

Fastweb v Commission

ECLI:EU:T:2008:524

5.504

T-53/08

Italy v Commission

ECLI:EU:T:2010:267

5.130 5.131

T-62/08

ThyssenKrupp Acciai Speciali Terni v Commission

ECLI:EU:T:2010:268

5.131 5.268 5.363 5.436 5.443

T-64/08

Nuova Terni Industrie Chimiche v Commission

ECLI:EU:T:2010:270

2.249 2.345

T-189/08

Forum 187 v Commission

ECLI:EU:T:2010:99

5.504 5.543

T-244/08

Konsum Nord v Commission

ECLI:EU:T:2011:732

2.455

T-267/08 and T-279/08

Région Nord-PasdeCalais v Commission

ECLI:EU:T:2011:209

5.78 5.176 5.269

T-268/08 and T-281/08

Land Burgenland and Austria v Commission

ECLI:EU:T:2012:90

2.353 2.455

T-304/08

Smurfit Kappa Group v Commission

ECLI:EU:T:2012:351

3.636 3.746

T-391/08

Ellinika Nafpigeia v Commission

ECLI:EU:T:2012:126

2.34 2.211 2.328

xcviii

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Table 2 List of General Court judgements

T-394/08, T-408/08, T-453/08 and T-454/08

Regione autonoma della Sardegna and others v Commission

ECLI:EU:T:2011:493

2.663 5.30 5.35 5.61 5.156 5.157 5.234 5.423 5.435 5.438 5.440 5.522 5.566

T-396/08

Freistaat Sachsen und Land Sachsen-Anhalt v Commission

ECLI:EU:T:2010:297

3.360

T-443/08 and T-455/08

Freistaat Sachsen and others v Commission (‘Leipzig-Halle‘)

ECLI:EU:T:2011:117

3.247 3.1131 3.1368 3.1390 3.1553 3.1560 5.212

T-452/08

DHL Aviation and DHL Hub Leipzig v Commission

ECLI:EU:T:2010:427

2.328

T-468/08

Tisza Erömü kft v Commission

ECLI:EU:T:2014:235

2.352

T-494/08 to T-500/08 and T-509/08

Ryanair v Commission

ECLI:EU:T:2010:511

5.280

T-565/08

Corsica Ferries France v Commission

ECLI:EU:T:2012:415

2.332 3.1106 3.1616

T-568/08 and T-573/08

M6 and TF1 v Commission

ECLI:EU:T:2010:272

3.1208 3.1243

xcix

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Table 2 List of General Court judgements

T-570/08 RENV

Deutsche Post v Commission

ECLI:EU:T:2013:589

5.216 5.217 5.224 5.506

T-579/08

Eridania Sadam v Commission

ECLI:EU:T:2011:608

5.162 5.171 5.204 5.467

T-87/09

Andersen v Commission

ECLI:EU:T:2009:468

5.521

T-90/09

Mojo Concerts and Amsterdam Music Dome Exploitatie v Commission

ECLI:EU:T:2012:30

5.540 5.541

T-115/09 and T-116/09

Electrolux and Whirlpool v Commission (‘Fagorbrandt’)

ECLI:EU:T:2012:76

3.860 3.954 3.955

T-123/09

Ryanair Ltd v Commission (“Alitalia/CAI”),

ECLI:EU:T:2012:164

5.69 5.404

T-139/09

France v Commission (‘Oniflhor’)

ECLI:EU:T:2012:496

2.75 2.142

T-226/09 and T 230/09

British Telecommunications and BT Pension Scheme Trustees v Commission

ECLI:EU:T:2013:466

2.278 2.325 2.340

T-327/09

Connefroy and others v Commission

ECLI:EU:T:2012:155

5.557

T-347/09

Germany v Commission

ECLI:EU:T:2013:418

2.57 2.58

T-379/09

Italy v Commission

ECLI:EU:T:2012:422

2.237 2.248

T-407/09

Neubrandenburger Wohnungsgesellschaft v Commission

ECLI:EU:T:2012:1

5.191

T-520/09

TF1 and others v Commission

ECLI:EU:T:2012:352

5.96 5.98 5.107 5.124

T-18/10

Inuit Tapiriit Katanami and others v Parliament and Council

ECLI:EU:T:2011:419

5.485 5.491 5.493

c

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Table 2 List of General Court judgements

T-29/10 and T-33/10

Netherlands and ING Groep v Commission

ECLI:EU:T:2012:98

3.1879

T 79/10

Colt Télécommunications France v Commission

ECLI:EU:T:2013:463

2.452 4.67 4.68 4.78 4.84 4.101 4.102 5.96 5.98 5.105 5.118

T-137/10

CBI v Commission

ECLI:EU:T:2012:584

4.54 4.72 4.73 4.74 4.75 4.132 4.146 4.156 4.159 4.250 4.345

T-154/10

France v Commission

ECLI:EU:T:2012:452

2.425 2.426 2.822

T-182/10

Aiscat v Commission

ECLI:EU:T:2013:9

2.115 5.21 5.542

T-219/10

Autogrill España v Commission

ECLI:EU:T:2014:939

2.245 2.246 2.284 2.717

T-221/10

Iberdrola v Commission

ECLI:EU:T:2012:112

2.716 5.495 5.557

ci

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Table 2 List of General Court judgements

T-225/10

Banco Bilbao Vizcaya Argentaria v Commission

ECLI:EU:T:2012: 139

5.557

T-234/10

Ebro Foods v Commission

ECLI:EU:T:2012:141

2.716

T-257/10

Italy v Commission

ECLI:EU:T:2012:504

5.131 5.132 5.176

T-258/10

Orange v Commission

ECLI:EU:T:2013:471

4.59 4.67 4.68 4.78 4.84 4.101 4.102

T-262/10

Microban International and Microban (Europe) v Commission

ECLI:EU:T:2011:623

5.493

T-303/10

Wam Industriale v Commission

ECLI:EU:T:2012:505

5.32 5.176 5.376

T-325/10

Iliad and others v Commission (‘Hauts-de-Seine’)

ECLI:EU:T:2013:472

4.67 4.68 4.78 4.84 4.101 4.102

T-344/10

UPS Europe and United Parcel Service Deutschland v Commission

ECLI:EU:T:2012:216

5.540 5.541 5.564

T-454/10 and T-482/11

Anicav and others v Commission

ECLI:EU:T:2013:282

5.485 5.493

T-499/10

MOL v Commission

ECLI:EU:T:2013:592

2.237 2.269

T-533/10

DTS Distribuidora de Televisión Digital v Commission

ECLI:EU:T:2014:629

2.151 3.1174 3.1208 3.1210 3.1246 3.1256

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Table 2 List of General Court judgements

T-551/10

Fri-el Acerra v Commission

ECLI:EU:T:2013:430

3.788 5.440 5.457

T-57/11

Castelnou Energía v Commission

ECLI:EU:T:2014:1021

4.57 4.217 4.218 5.75

T-92/11

Jørgen Andersen v Commission

ECLI:EU:T:2013:143

3.1737 3.1738 5.213

T-151/11

Telefónica de España and Telefónica Móviles España v Commission

ECLI:EU:T:2014:631

3.1174 3.1210 3.1246 3.1247 3.1248 4.315 5.26 5.35 5.270 5.545

T-209/11

MB System v Commission

ECLI:EU:T:2013:338

2.790

T-251/11

Austria v Commission

ECLI:EU:T:2014:1060

2.223

T-261/11

European Goldfields v Commission

ECLI:EU:T:2012:157

5.504 5.505 5.508

T-275/11

TF1 v Commission

ECLI:EU:T:2013:535

3.1174 4.345

T-279/11

T&L Sugars and Sidul Açúcares v Commission

ECLI:EU:T:2013:299

5.496

T-291/11

Portovesme v Commission

ECLI:EU:T:2014:896

2.511

T-308/11

Eurallumina v Commission

ECLI:EU:T:2014:894

2.511

T-319/11

ABN Amro v Commission

ECLI:EU:T:2014:186

3.1857 3.1887

T-380/11

Palirria Souliotis v Commission

ECLI:EU:T:2013:420

5.491 5.498

T-387/11

Nitrogénművek Vegyipari v Commission

ECLI:EU:T:2013:98

2.213

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Table 2 List of General Court judgements

T-399/11

Banco Santander and Santusa v Commission

ECLI:EU:T:2014:938

2.245 2.717

T-400/11

Altadis v Commission

ECLI:EU:T:2013:490

2.716

T-430/11

Telefónica v Commission

ECLI:EU:T:2013:489

5.487 5.495 5.496 5.500 5.505 5.539 5.557

T-488/11

Sarc v Commission

ECLI:EU:T:2014:497

3.222

T-489/11

Rousse Industry v Commission

ECLI:EU:T:2013:144

2.471 5.25

T-542/11

Alouminion v Commission

ECLI:EU:T:2014:859

5.31

T-551/11

BSI v Council

ECLI:EU:T:2013:60

5.498

T-601/11

Dansk Automat Brancheforening v Commission

ECLI:EU:T:2014:839

5.501 5.539 5.544

T-615/11

Royal Scandinavian Casino Århus v Commission

ECLI:EU:T:2014:838

5.501

T-1/12

France v Commission (“SeaFrance”)

ECLI:EU:T:2015:17

2.406 2.407 3.932

T-309/12

Zweckverband Tierkörperbeseitigung v Commission

ECLI:EU:T:2014:676

2.339 2.527 4.56 4.61 4.65

T-319/12 and T-321/12

Spain and Ciudad de la Luz v Commission

ECLI:EU:T:2014:604.

1.87 2.423 3.1111

T-412/12

Post Invest v Commission

ECLI:EU:T:2013:382

5.508

T-461/12

Hansestad Lübeck v Commission

ECLI:EU:T:2014:758

2.282 5.499

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Table 2 List of General Court judgements

T-507/12

Slovenia v Commission

ECLI:EU:T:2013:25

5.231

T-517/12

Alro v Commission

ECLI:EU:T:2014:890

5.314

T-27/13

Elan v Commission

ECLI:EU:T:2013:122

5.231

T-129/13

Alpiq RomIndustries and Alpriq RomEnergie v Commission

ECLI:EU:T:2014:895

5.523

T-140/13

Netherlands Maritime Technology Association v Commission

ECLI:EU:T:2014:1029

2.60 5.75

T-462/13

Comunidad Autónoma del País Vasco and Itelazpi v Commission

ECLI:EU:T:2013:546

5.231

T-103/14

Frucona Košice v Commission

ECLI:EU:T:2014:255

5.231

T-172/14 R

Stahlwerk Bous v Commission

ECLI:EU:T:2014:558

2.340

T-215/14

Gmina Miasto Gdynia and Port Lotniczy Gdynia Kosakowo v Commission

ECLI:EU:T:2014:733

5.231

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Table 3 List of legislation (State Aid regulation)

Table 3 List of legislation Note: The full text of all legislation is available online at: http://ec.europa.eu/competition/state_aid/legislation/legislation.html

I – TREATY PROVISIONS ON STATE AID I.1

STATE AID

Article 107 of the Treaty on the Functioning of the European Union (hereafter “the Treaty”) Article 108 of the Treaty Article 109 of the Treaty I.2

SERVICES OF GENERAL ECONOMIC INTEREST

Article 106 of the Treaty Protocol (No 26) on Services of general interest, OJ C 115, 9.5.2008, p. 308 I.3

AGRICULTURE AND FISHERIES

Article 42 of the Treaty I.4

TRANSPORT

Article 93 of the Treaty

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Table 3 List of legislation (State Aid regulation)

II – RULES ON PROCEDURE II.1

PROCEDURAL REGULATION

Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union , OJ L 248, 24.9.2015, p. 99 (which replaces as of 14.10.2015 Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union, OJ L 83, 27.03.1999, p. 1, as amended) II.2

IMPLEMENTING REGULATION

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 Treaty, OJ L 140, 30.04.2004, p. 1 –

Commission Regulation (EU) No 372/2014 of 9 April 2014 amending Regulation (EC) No 794/2004 as regards the calculation of certain time limits, the handling of complaints, and the identification and protection of confidential information, OJ L 109, 12.4.2014, p. 14

–

Commission Regulation (EC) No  1125/2009 of 23  November 2009 amending Regulation (EC) No 794/2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, as regards Part III.2, Part III.3 and Part III.7 of its Annex I, OJ L 308, 24.11.2009, p. 5

–

Corrigendum to Commission Regulation (EC) No 794/2004 of 24 April 2004 implementing Council Regulation (EC) No 659/1999 laying detailed rules for the application of Article 93 of the EC Treaty, OJ L 25, 28.1.2005, p. 74

–

Corrigendum of the Corrigendum to 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 Treaty, OJ L 131, 25.5.2005, p. 45

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Table 3 List of legislation (State Aid regulation)

–

Commission Regulation (EC) No 1627/2006 of 24 October 2006 amending Regulation (EC) No 794/2004 as regards the standard forms for notification of aid, OJ L 302, 01.11.2006, p. 10

–

Commission Regulation (EC) No 1935/2006 of 20 December 2006 amending Regulation (EC) No 794/2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty , OJ L 407, 30.12.2006, p. 1

–

Commission Regulation (EC) No 271/2008 of 30 January 2008 amending Regulation (EC) No 794/2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L 82, 25.03.2008, p. 1

–

Commission Regulation (EC) No 1147/2008  of 31 October 2008 amending Regulation (EC) No 794/2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, as regards Part III.10 of its Annex 1, OJ L 313, 22.11.2008, p. 1

–

Consolidated Version (02-05-2014) of 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 Treaty, OJ L 140, 30.04.2004, p. 1

II.3

SIMPLIFICATION PACKAGE REGARDING STATE AID PROCEEDINGS

Commission Notice on a  Simplified procedure for the treatment of certain types of State aid, OJ C 136, 16.06.2009, p. 3 Corrigendum to Commission Notice on a Simplified procedure for the treatment of certain types of State aid, OJ C 157 10.07.2009, p. 20 Commission Notice on a Best Practices Code on the conduct of State aid control proceedings, OJ C 136, 16.06.2009, p. 13

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Table 3 List of legislation (State Aid regulation)

III - BLOCK EXEMPTION REGULATION III.1 ENABLING REGULATION Council Regulation (EC) No 1588/2015 of 13 July 2015 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid, OJ L 248, 24.9.2015, p. 1 (which replaces as of 14.10.2015 Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 (now 87 and 88 respectively) of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 142, 14.05.1998, p. 1, as amended) III.2 GENERAL BLOCK EXEMPTION REGULATION (GBER) Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ  L 187, 26.6.2014, p. 1 III.3 DE MINIMIS AID Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1

IV - STATE AID TEMPORARY RULES ESTABLISHED IN RESPONSE TO THE ECONOMIC AND FINANCIAL CRISIS IV.1 FINANCIAL SECTOR Communication from the Commission of 30 July 2013 on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (“Banking Communication”), OJ C 216, 30.7.2013, p. 1 Communication from the Commission of 6 December 2011 on the  application, from 1 January 2012, of State aid rules to support measures in favour of banks in the context of the financial crisis, OJ C 356, 6.12.2011, p. 7

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Table 3 List of legislation (State Aid regulation)

Communication from the Commission of 1 December 2010 on the  application, after 1 January 2011, of State aid rules to support measures in favour of banks in the context of the financial crisis, OJ C 329, 7.12.2010, p. 7 Commission Communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules, OJ C 195, 19.8.2009, p. 9 Communication from the Commission of 25 February 2009 on the Treatment of Impaired Assets in the Community Banking sector, OJ C 72, 26.03.2009, p. 1 Commission Communication of 5 December 2008 on the Recapitalisation of financial institutions in the current financial crisis: limitation of the aid to the minimum necessary and safeguards against undue distortions of competition, OJ C 10, 15.1.2009, p. 2

V – HORIZONTAL RULES V.1

IMPORTANT PROJECTS OF COMMON EUROPEAN INTEREST

Communication from the Commission — Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest, OJ C 188, 20.06.2014, p. 4 V.2

AID TO DISADVANTAGED AND DISABLED WORKERS

Communication from the Commission - Criteria for the compatibility analysis of state aid to disadvantaged and disabled workers subject to individual notification, OJ C 188, 11.8.2009, p. 6 V.3

TRAINING AID

Communication from the Commission - Criteria for the compatibility analysis of training state aid cases subject to individual notification, OJ C 188, 11.8.2009, p. 1

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V.4

REGIONAL AID

Guidelines on regional State aid for 2014-2020, OJ C 209, 23.07.2013, p. 1 V.5

RESEARCH AND DEVELOPMENT AND INNOVATION

Framework for State aid for research and development and innovation, OJ C 198, 27.06.2014, p. 1 V.6

ENVIRONMENTAL AID

Guidelines on State aid for environmental protection and energy 2014-2020, OJ C 200, 28.6.2014, p. 1 Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post 2012, adopted on 22.05.2012 OJ C 154, 05.06.2012, p. 4 Amendment regarding electricity consumption efficiency benchmarks, adopted on 6 December 2012, OJ C 387 of 15.12.2012, p. 5 Council Decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines, OJ L 336, 21.12.2010, p. 24 V.7

RISK CAPITAL

Guidelines on risk finance aid for 2014-2020, OJ C 19, 22.01.2014, p. 4 V.8

RESCUE AND RESTRUCTURING AID

Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1

VI – SECTOR-SPECIFIC REGULATION VI.1 AGRICULTURE Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 – 2020, OJ C 204, 1.7.2014, p. 1

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Table 3 List of legislation (State Aid regulation)

Commission Regulation (EU) No 702/2014 of 25 June 2014 declaring certain categories of aid in the agricultural and forestry sectors and in rural areas compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union, OJ L 193, 1.7.2014, p. 1 Commission Regulation (EU) No 1408/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agriculture sector, OJ L 352, 24.12.2013, p. 9 VI.2 AUDIOVISUAL PRODUCTION Communication from the Commission on State aid for films and other audiovisual works, OJ C 332, 15.11.2013, p. 1 VI.3 BROADBAND 15.01.2013 EU Guidelines for the application of state aid rules in relation to the rapid deployment of broadband networks, OJ C 25, 26.01.2013, p. 1 VI.4 BROADCASTING Communication from the Commission on the application of State aid rules to public service broadcasting, adopted by the Commission on 2 July 2009, OJ C 257 of 27.10.2009, p. 1 VI.5 ELECTRICITY (STRANDED COSTS) Commission Communication relating to the methodology for analysing State aid linked to stranded costs – Adopted by the Commission on 26.07.2001, Commission letter SG (2001) D/290869 of 6.8.2001 VI.6 FISHERIES Commission Regulation (EU) No 1388/2014 of 16 December 2014 declaring certain categories of aid to undertakings active in the production, processing and marketing of fishery and aquaculture products compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union, OJ L 369, 24.12.2014, p. 37

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Commission Regulation (EU) No 717/2014 of 27 June 2014 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the fishery and aquaculture sector, OJ L 190, 28.6.2014, p. 45 Guidelines for the examination of State aid to the fishery and aquaculture sector, OJ C 217, 2.7.2015, p. 1 VI.7 POSTAL SERVICES Notice from the Commission on the application of the competition rules to the postal sector and on the assessment of certain State measures relating to postal services, OJ C 39, 06.02.1998, p. 2 VI.8 TRANSPORT VI.8.1 AIR Guidelines on State aid to airports and airlines, OJ C 99, 4.4.2014, p. 3 VI.8.2 MARITIME Community guidelines on State aid to maritime transport, OJ C 013, 17.01.2004, p. 3 Communication from the Commission providing guidance on State aid complementary to Community funding for the launching of the motorways of the sea, OJ C 317, 12.12.2008, p. 10 Communication from the Commission providing guidance on State aid to ship-management companies, OJ C 132, 11.6.2009, p. 6 VII.8.3 RAIL AND ROAD Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, OJ L 315, 3.12.2007, p. 1

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Communication from the Commission on interpretative guidelines concerning Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road, OJ C 92, 29.03.2014, p. 1 Community guidelines on State aid for railway undertakings, OJ C184, 22.07.2008, p. 13

VII – SPECIFIC AID INSTRUMENTS VII.1 STATE GUARANTEES Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 155, 20.06.2008, p. 10 Corrigendum to Commission notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 244, 25.09.2008, p. 32 VII.2 PUBLIC LAND SALES Commission Communication on State aid elements in sales of land and buildings by public authorities, OJ C 209, 10.7.1997, p. 3 VII.3 EXPORT CREDIT INSURANCE Communication from the Commission to the Member States on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to short-term export-credit insurance, OJ C 392, 19.12.2012, p. 1 Communication from the Commission amending the Annex to the Communication from the Commission to the Member States on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to short-term export-credit insurance, OJ C 215, 1.7.2015, p. 1 VII.4 FISCAL AID - DIRECT BUSINESS TRANSACTION Commission notice on the application of the State aid rules to measures relating to direct business taxation, OJ C 384, 10.12.1998, p. 3

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VIII – REFERENCE/DISCOUNT RATES AND RECOVERY INTEREST RATES VIII.1 METHODOLOGY New Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.1.2008, p. 6

IX – TRANSPARENCY OF PUBLIC UNDERTAKINGS Commission Directive 2006/111/EC of 16 November 2006 transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings (Codified version), OJ L 318, 17.11.2006, p. 17 Commission Communication to the Member States: Application of Articles 92 and 93 [now 87 and 88] of the EEC Treaty and of Article 5 of the Commission Directive 80/723/EEC to public undertakings in the manufacturing sector, OJ C 307, 13.11.1993, p. 3

X – SERVICES OF GENERAL ECONOMIC INTEREST (SGEI) Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4 Commission Decision 2012/21/EU of 20 December 2011 on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3 Communication from the Commission, European Union framework for State aid in the form of public service compensation (2011), OJ C 8, 11.01.2012, p. 15 Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest, OJ L 114, 26.4.2012, p. 8 cxvi

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Commission Directive 2006/111/EC of 16 November 2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L 318, 17.11.2006, p. 17

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PART 1 – Introduction Chapter 1 – Introduction

BOOK ONE PART 1 – INTRODUCTION Chapter 1 Introduction

The first edition of this work appeared in September 2008. Some seven years later, the landscape of State aid law and policy has shifted dramatically.

1.1

While the Treaty provisions on State aid are unaltered, the State aid Modernisation (‘SAM’) programme has ushered in significant modifications to the procedural regime for State aid, a major expansion in the range for aid exempted from notification to the Commission and a comprehensive overhaul of the detailed rules on compatibility of State aid. During the same period, the global financial crisis and the subsequent sovereign debt crisis made the State aid discipline one of the main instruments by which the European Union could first rescue and then restructure large parts of its banking sector, and subsequently underpin the moves to new economic governance within the Eurozone. In other critical policy fields, such as moving to a low-carbon economy, ensuring security of energy supplies, and re-launching investment for sustainable growth, Member States resorted regularly to the tools of public support which the Commission must scrutinize to avoid the implementation of aid that is incompatible with the internal market. More recently, the State aid rules have gained an even greater prominence with the realisation that the practices of some national authorities may involve issues of State aid that were not previously appreciated by national policy-makers and by Union citizens more generally, be it in the fiscal area or in the public financing of infrastructures investments. And all the while, the Union courts have been increasingly used by alleged beneficiaries and by competitors as a forum in which arguments based on State aid can be deployed to great effect.

1.2

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1.3

Set against that background, the editors believe that the second edition of this work is particularly timely. The main elements of the SAM programme have been introduced and had some time to settle into place, apart from the prominent absence at the time of writing of the Notice on the Notion of Aid. Of the almost 25% by assets of the Union’s banking sector whose situation had to be examined by the Commission on the basis of the so-called “Crisis Communications”, the overwhelming majority have had restructuring plans reviewed and approved, while the Union is in the early stage of a new legal regime on banking supervision and bank resolution in which the State aid rules will have a prominent part to play. A new generation of European Structural and Investment Funds is starting to be implemented, in which the State aid rules will complement efforts to secure productive investment and efficient use of limited public resources. And the Union Courts, having revisited key notions concerning the presence of State aid, such as the applicability of the market economy operator principle, selectivity, State resources and imputability, seem to be increasingly destined to be used by all actors within the field of State aid to tease out those issues still further.

1.4

It is risky to single out issues which we think will be considered at the end of the next seven years as having been as important as they might now appear. Distance gives perspective. Even so, it is fair to say that there are some constants in the debates and discussions that take place in State aid circles, and that many of them are likely to continue to be considered crucial at the end of the present decade, and for good reason.

1.5

The vision of the State aid discipline in the Treaty as a system based on a bilateral relationship between the Member State seeking to grant aid and the Commission as the guardian of the internal market and of the Union’s common interest will never be uncontroversial. Prediction is risky but if any of the issues which have been prominent over the past seven years will be as relevant in 2022 as it is now, it is likely to be the inter-relation between Union interest, national interest and private interest. The representatives of beneficiaries and competitors will probably not cease to call for reforms to the State aid procedure to better protect their interests, and if they fail to convince the Union’s legislative branch (which has been the case to date) they will continue to advocate that case as persuasively as they can to the Union Courts. Those Courts at the same time are likely to build on the increased procedural opportunities which their case-law has given to complainants vis-à-vis the Commission, at a time when the resources available to the latter as an enforcement body will probably not increase. The Commission’s mantra under the SAM programme has been summarized as “big on 2

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big, small on small”, but that phrase is likely to be as much as a statement of what is possible rather than what is desirable when the brutal facts of more scope for Commission action under the State aid rules (or greater obligations on it to act) are combined with the choices that a public authority cannot avoid making as to how it uses the limited resources it is given. Those pressures will at some stage have to spill over into the Member States’ courts, where the Court’s recent rulings on the role of Commission opening decisions have made the national judges an ever more obvious target for State aid arguments. More generally, it is likely to give rise to questions what the role of Member States themselves can be. Will that remain a scenario whereby Member States see State aid control as a barrier, operating as the last hurdle to be cleared before implementation of measures, or could it evolve towards a more collaborative process? Transparency and evaluation could be stepping stones for such an evolution. Commissioner Vestager has made clear that she sees the full and correct implementation of the State Aid Modernisation programme as being as important as the reform itself, and she has called for multilateral and bilateral partnerships with the Member States to be strengthened to that effect. For the modernisation project to be a success, more is required than modification of the Commission’s systems of control. State aid control systems and practices at the national level ought to be reformed as well, so as to deliver better results and a smoother process. The enlarged scope of the General Block Exemption Regulation, increasing the scope for State measures to be put into force without prior notification, could allow for more strategic enforcement in key areas relevant for the internal market. It is also likely to pose a political challenge, notably in fields where the scope for reform is greater.

1.6

We hope that the present work will make a contribution to those on-going debates, to understanding what the current state of law and policy is in relation to State aid and to appreciating how it has developed, and to assisting all within the community of State aid practitioners to have a better informed and critical sense of the field in which we work.

1.7

It has been possible for the editors to pursue those ambitions only as a result of the contributions of many individuals. We would like therefore to thank, in particular, all the authors for their endurance and commitment, Giorgia Imbriani for her superb organisational assistance throughout the process, Irene Jansen, Federich Romby, Peter Schedereit and Milosz Wiatrowski for their highly valuable editorial support.

1.8

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1.9

In any work such as this second edition, there will always be changes between the end of writing and the moment of publication that cannot be taken into account by the authors. The Union Courts have been as prolific as ever during 2015, there have been significant decisions adopted by the Commission during this calendar year and we were rather disconcerted to see in September 2015 the appearance in the Official Journal of codified versions of the Enabling Regulation and the Procedural Regulation. Where possible, account has been taken of developments after 1 January 2015 but in general the chapters deal with the law and policy of State aid as it stood on that date. The editors, Brussels, October 2015

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Chapter 2 State aid modernisation The State aid modernisation initiative (SAM) was launched in May 2012 through a Commission Communication1. The Communication set out the main contextual challenges and priorities for the Commission’s action, as well as a description of a reform programme. Within two years, almost all State aid regulations and guidelines2 were revised, and several new features of State aid control were introduced (evaluation, transparency, guidance on aid to important projects of common European interest, new procedural tools). While the effects of the new rules will only materialise progressively, State aid modernisation has already created a new landscape for State aid control.3

1.

The SAM context

The SAM reform cannot be understood in isolation from the overall “Europe 2020” strategy, aiming at making Europe a smart, sustainable and inclusive economy. State aid reform was seen as one of the tools to overcome the crisis and pave the way to economic recovery, competiveness, employment and growth. That central role for State aid control has led, in particular, to greater consistency between State aid rules and other EU policies in each of their respective areas (energy and environmental protection, research, transport, competitiveness, cohesion policy, etc.). The new framework was therefore designed as an incentive for Member States and public authorities to contribute to the Europe 2020 strategy.

1 2 3

1.10

1.11

Communication of the Commission on EU State Aid Modernisation (SAM), COM(2012)209, 8.5.2012. With the exception of a few sectoral guidelines of the SGEI package (which had been revised not long before) and of the guidelines for crisis aid to the financial sector. See also Flynn and Pesaresi, Main developments in State aid control in 2014: a focus on the State aid modernisation package and the evolution of the jurisprudence, Competition Law and Policy Debate, vol. 1, issue 2, May 2015.

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The SAM reform took place in a context of sovereign debt crisis and fiscal consolidation. State aid control policy became one of the most important instruments to deal with the economic and financial crisis, especially in the banking sector, where it contributed to the coordination of Member States’ crisis interventions, avoiding contradicting and distortive measures, and promoting bank restructuring. In addition SAM aimed at promoting best value for money, in a context of scarcity of resources and diverging national economic trends. State aid control was seen as a key tool to help limiting imbalances in the internal market, while also securing that scarce public resources are efficiently spent, in particular through greater transparency and evaluation of the use of public money.

1.13

Although not explicitly mentioned, SAM also has to be seen in the context of the enlargement of the Union to a growing number of countries. In an enlarged Union of 28 Member States, the State aid control system needed to be modernised to become at the same time more proportionate and more effective.

1.14

The expiry of several regulations and guidelines in 2014 was an opportunity to adapt the State aid framework to those new challenges. From the start, the reform was meant to be ambitious in scope, in order to provide a common denominator to the new applicable texts. Several recurring issues also needed to be addressed, such as the ever-increasing body of case-law regarding the notion of aid, or the fact that too many cases investigated by the Commission were of limited relevance for the internal market (especially complaints, but not only).

2. 1.15

The SAM priorities

The SAM reform, which was virtually completed in 2014,4 is based on three priorities which can be summarised as follows: –

Foster ‘good’ aid, which aims at rectifying actual market failures and is directly linked to the EU 2020 objectives;

–

Increase efficiency through focusing on most important and potentially distortive cases;

–

Address the shortcomings of the State aid framework and of the procedures.

4

With the notable exception of the Notice on the Notion of aid, which was only published as a draft for public consultation.

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2.1 Foster ‘good aid’ The notion of ‘good aid’ is not as such new: the ‘balancing test’ introduced by the State aid action plan5 in 2005 was already an attempt at better framing the balancing between the positive effects of the aid (i.e. the contribution to an objective of common European interest) and its negative impact on competition and trade. In the SAM Communication, “good aid” is defined as “aid which is well-designed, targeted at identified market failures and objectives of common interest, and least distortive”.

1.16

The new State aid frameworks were therefore designed so as to promote growthenhancing and less distortive forms of public support to firms. For instance, the new GBER facilitates the granting of State aid for a large array of public interest objectives (cohesion, research & development, support to young innovative SMEs, environment, culture, broadband access, etc.). The revised guidelines also provide rules in new areas (for instance in the field of energy policy, or with regard to important projects of common European interest): those rules provide a policy framework and legal predictability to Member States and companies on how State aid notifications will be assessed by the Commission.

1.17

The Commission increased the emphasis on the quality and efficiency of public support. This is ensured through “common principles” of compatibility. In particular, incentive effect of the aid and the proportionality of the aid are checked more thoroughly in the context of notifications under the State aid guidelines. Ex-post evaluation of schemes also aims at verifying that the objectives of the measures are reached, and at identifying opportunities for improvements in the long-term.

1.18

That focus on the quality of public spending was criticised in some instances, on the grounds that State aid control should only address competition distortions, and that it is for the State’s own assessment to check whether a measure is efficient or not. It is true that SAM innovates in that regard, by explicitly mentioning as an objective the appropriate use of taxpayers’ money.6 However, that

1.19

5

6

State aid action plan - Less and better targeted state aid: a roadmap for state aid reform 2005-2009, COM/2005/0107 final. It should be noted in that regard that the State aid action plan called for “less and better-targeted aid”. While the objective of “better targeting” the aid has been kept by the Commission, the quantitative objective of “less aid” has been dropped – acknowledging the role of “good aid” in an efficient internal market (and not only its distortive effects). That difference between the State aid action plan and the SAM is far from being a minor shift. “By putting an emphasis on the quality and the efficiency of public support, State aid control can also help Member States to strengthen budgetary discipline and improve the quality of public finances – resulting in a better use of taxpayers’ money.” (Communication on EU State aid Modernisation, §14).

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principle is also rooted in competition considerations. In addition, the impact on the internal market remains a fundamental assessment criterion, which aims at limiting distortions of competition and preserving a level-playing field in the internal market.

2.2 Increase the efficiency of State aid control 1.20

The Commission has the exclusive responsibility to assess compatibility of State aid with the internal market. That responsibility results in an obligation to decide on all aid measures notified to the Commission and on all complaints addressed to the Commission, even those of rather local nature and with minor impact on trade and competition.

1.21

As regards the notification of aid, SAM meant a significant move towards more exemptions for projects which create fewer competition concerns. The possibility to exempt aid measures from the notification obligation was already widely used before SAM, but it did not apply to several policy areas or types of measures and was limited to smaller aid measures. SAM led to a ‘horizontal’ and a ‘vertical’ increase of the exemption area, in the sense that its scope was enlarged to new categories and new forms of aid measures as well as to measures with larger individual budget. A first analysis presented by the Commission services at the time of the reform7 showed the possibility that 75% of aid measures could be exempted in the future, and up to 90 per cent (as opposed to two-thirds before the reform) if Member States design their aid measures in light of the GBER - for instance by following the standard conditions of the GBER, or granting aid below the new notification thresholds. In terms of amount, more than twothirds of amounts could be block-exempted in the future against approximately one-third before the reform. In a nutshell, block-exempted measures will be the norm, while notifications will be the exception.

1.22

That shift is meant to enable the Commission to prioritise its enforcement activity on the most important and potentially distortive cases, such as cases with large individual amounts (above the GBER’s notification thresholds), cases where the market failure or the appropriate support mechanisms have to be demonstrated (and do not fall under the standard categories of the GBER), as well as rescue and restructuring aid cases.

7

See Commission’s MEMO/14/369, dated 21/05/2014.

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In practice, such prioritisation should considerably reduce the delay for companies to receive aid, given that the ex ante compliance check will be carried out by the granting authorities themselves in a vast majority of cases, on the basis of simplified criteria.

1.23

To balance out that extended scope for exemptions, several safeguards have been designed, such as monitoring, evaluation of large aid schemes and transparency of aid awards. In that way, SAM contributes to a shift from ex ante checks (sometimes more of an administrative nature) towards more substantive ex post controls on the side of the Commission and greater responsibility and accountability on the side of the Member States:

1.24

–

The Commission therefore announced a reinforcement of “monitoring”, i.e. the ex post controls of legality carried out on a number of random schemes and individual aid awards inside schemes. That increased effort is the result of an observation that the Commission made several times8 in the course of the SAM reform, that past monitoring exercises showed rather problematic results in many cases. That evidence clearly calls for more action on the Member States’ side, coupled with appropriate mechanisms on the Commission’s side to control compliance and encourage best practices at national level.

–

Ex post evaluation of large aid schemes9 does not serve the purpose of checking legality, but aims at providing solid evidence useful in answering questions such as whether the aid really changed the behaviour of the beneficiaries, whether the effects differed significantly across beneficiaries, whether the scheme led to spill-over effects on the activity of other firms, whether the scheme contributed to the desired policy objective or whether the chosen aid instrument was the most appropriate one. While evaluation was already carried out by some Member States in specific situations, the introduction of a systematic evaluation requirement for large aid schemes will provide a solid knowledge of the economic impact of State aid, benefitting both the Commission in its decision-making and Member States in the design of their future schemes.

8

9

“The current results of the monitoring of the implementation of block exempted measures by Member States reveal frequent lack of compliance with State aid rules” (Communication on EU State aid Modernisation, §21). Block-exempted aid schemes with an average annual State aid budget of at least EUR 150 million in the fields of regional aid, aid for SMEs and access to finance, aid for research and development and innovation, energy and environmental aid and aid for broadband infrastructures. Other categories of schemes assessed under the guidelines may be also subject to the evaluation requirement.

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–

1.25

The newly introduced transparency requirements (see box below) will serve two purposes. First, it will allow competitors and the wider audience to check whether an aid has been granted legally: while the information to be published remains limited, the basic elements of the aid award will be known (aid amount, beneficiary, etc.), so as to allow State aid enforcement to be ensured through scrutiny at local level. Second, that increased scrutiny should improve discipline and accountability within granting authorities, allowing them to demonstrate the rationale for granting State aid to certain beneficiaries.10

In the context of fewer ex ante controls at the European level, it is interesting to mention two other proposals, made by some Member States and stakeholders during the public consultations on the new rules, which the Commission did not take up. They dealt with the (objective) notion of aid, which is subject to the exclusive authority of the Union’s Courts. The first was an increase of the de minimis threshold from EUR 200,000 to EUR 500,000, while the second was a widening of the notion of “no affectation of trade between Member States” (even beyond the de minimis threshold). –

The first proposal was not retained. The Commission considered that de minimis assistance cannot be per se considered as “good aid”, given that it comes without any conditions such as the identification of a market failure or the demonstration of an incentive effect. In addition, it would have had a limited impact in terms of avoided notifications, given that most of those small awards are already granted under schemes and not individually notified.

–

The second proposal was partially addressed in the draft Notice on the notion of aid, and in a number of recent decisions on aid of local nature.11 In the latter in particular, the Commission seemed to exploit to the maximum extent the boundaries of the Court’s jurisprudence and provided some guidance on the concept of ‘appreciability’ of the affectation of trade, moving away from a pure hypothetical impact.

10

In that respect, transparency can also be considered as a policy advocacy tool. Most transparency efforts carried out by Member States on their own motion served the purpose of presenting the investment policy of the granting authority, also showing the outcome of the public support. See Commission press release IP15/4889.

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As regards complaints, the amendments to the Procedural Regulation enable the Commission to prioritise its enforcement on substantiated complaints issued by interested parties that have legal standing. The confirmation that only complaints by interested parties must give rise to decisions by the Commission gives some scope for the Commission to put aside cases of no relevance for the internal market while preserving the possibility of acting on the basis of information collected or on its own motion (“ex officio”), when necessary, as also stated in the SAM Communication.12

1.26

2.3 Address the shortcomings of the State aid framework State aid rules have developed over time into a complex legal framework, with a large number of regulations, guidelines and other guidance documents. While it is not possible to group all the different texts into a unique set of rules, the SAM reform was an opportunity to improve the consistency of the various rules. Improved consistency has been sought through the development of common principles for the compatibility analysis of State aid (see below). Those principles, which build on the Commission’s experience with the so-called “balancing test”, apply similarly across the guidelines, with some flexibility according to the type of aid. While they do not apply explicitly to aid assessed directly under the Treaty (i.e. aid not covered by existing guidelines), it is to be expected that, also in that situation, the Commission will apply those principles mutatis mutandis.

1.27

The Notice on the notion of aid would be the first attempt to officially provide comprehensive clarification on such a notion, based on the Court of Justice’s extensive and sometimes complex jurisprudence. In the SAM context, providing clear guidance when a measure involves aid was considered as even more important, as many granting authorities are called to take greater responsibility for their action and for compliance with the rules. The Notice, beyond the general principles, should touch upon several specific situations involving complex economic assessments, with the overall objective of contributing to an easier, more transparent and more consistent application of the notion of aid across the Union. The exercise however proved not so straightforward, as the possibility to provide general operational guidance would require going beyond the current jurisprudence, notably in some areas like infrastructure and fiscal measures where the case-law is not so consolidated yet. The Commission itself acknowl-

1.28

12

“Such modernisation of procedures would also allow the Commission to undertake more ex officio investigations into significant distortions of competition hampering internal market.” (Communication on EU State aid Modernisation, §23).

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edged the limits of the exercise.13 The Notice remains to date the missing element of the SAM reform – although the stated intention of the new Commissioner for Competition is to carry out that initiative in the course of her mandate.14

1.29

Finally, the review of the Procedural Regulation provided a number of targeted improvements in order to deliver better decisions within shorter timelines. In addition to the already mentioned clarifications for complaints-handling, the Procedural Regulation brings in new tools for gathering information directly from market participants (“market information tools”) and for conducting sector inquiries. Those new tools will be relevant in the context of the formal investigation procedure, where the decision-making period often extends to more than a year, especially in case of unlawful aid. Finally, the codification of the cooperation with national courts will ensure a coherent application of State aid rules across Member States by encouraging private enforcement of State aid law before national courts15 – an area where much progress can still be achieved. One could wonder whether the review of the Procedural Regulation was ambitious enough, notably in view of the lack of sufficient financial incentives for public authorities to abide by the rules (recovery does not leave the Member State worse off ), but it has to be recalled that further innovations would have likely run into the Member States’ opposition and would have put at risk the improvements which have been obtained eventually. Main “horizontal” achievements of SAM

13

14

15

–

Facilitation of the award of ‘good aid’, i.e. aid which promotes growth and quality of public spending (common principles, transparency, evaluation).

–

Extension of block-exemptions, now covering a large majority of aid measures and leading to speedier processes for companies and public authorities, while allowing the Commission to focus on the most distortive cases.

“The Commission’s role in that respect is limited to providing clarification as to how it understands and applies the provisions of the Treaty, as interpreted by the Court of Justice” (Communication on EU State aid Modernisation, §23). Commissioner Vestager’s speech at the High Level Forum of Member States, 18 December 2014: “Once I have had the chance to better assess where the limits of State aid control are, I intend to propose a Communication to the College for adoption”. See Brandtner, Lessenich and Beranger, Private State Aid Enforcement, in EStAL, No. 1, 2010, p. 23.

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–

Shift from ex ante to ex post assessment (notably for aid schemes), through monitoring and evaluation, aimed at identifying shortcomings in rules compliance and in their effectiveness.

–

Transparency of aid measures and aid awards, promoting accountability of granting authorities and checks by competitors, citizens and the civil society.

–

Improved consistency across the State aid framework through the definition of common principles applicable to the compatibility analysis of all measures.

–

New process for complaints and ex officio actions, improving the Commission’s ability to tackle illegal aid (market investigation tools and sector inquiries).

–

First time comprehensive clarification on the notion of aid (pending).

3.

Common principles

A key pillar of SAM is the definition of “common principles”: those principles lay down the main elements of the compatibility analysis of aid measures and the consolidation of all guidelines into a coherent framework. Each of the new guidelines now follows the same pattern, although with a degree of flexibility, and the compatibility analysis will be based on a similar assessment, thus providing stakeholders with reasonable expectations as to how an aid measure will be treated. This should result also in new standard formats for notifications, complaints and decisions.

1.30

The common principles consist in a series of seven compatibility criteria which have to be met cumulatively:16

1.31

16

In other words, all criteria have to be met for an aid to be found compatible. For more details on the application of each principle, see the chapters related to the compatibility assessment under the different guidelines.

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–

contribution to a well-defined objective of common interest: a State aid measure must aim at objectives of common interest in accordance with Article 107(3) of the Treaty; it also covers in principle Europe 2020 flagship initiatives (smart, sustainable and inclusive growth);

–

need for State intervention: a State aid measure must be targeted towards a situation where aid can bring about a material improvement that the market cannot deliver itself, for example by remedying a market failure or addressing an equity or cohesion need;

–

appropriateness of the aid measure: the proposed aid measure must be an appropriate policy instrument to address the objective of common interest;

–

incentive effect: the aid must change the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity, which it would not carry out without the aid or would carry out in a restricted or different manner or location;

–

proportionality of the aid (aid to the minimum): the amount and intensity of the aid must be limited to the minimum needed to induce the additional investment or activity by the undertaking(s) concerned;

–

avoidance of undue negative effects on competition and trade between Member States: the negative effects of aid must be sufficiently limited, so that the overall balance of the measure is positive;

–

transparency of aid: Member States, the Commission, economic operators, and the public, must have easy access to all relevant acts and to pertinent information about the aid awarded thereunder.

1.32

Certain categories of aid schemes may further be subject to a requirement of ex post evaluation.

1.33

The common principles replace the previous analysis pattern based on the “balancing test” (balancing of positive against negative effects of the aid). However, they build on the positive experience of the more economic approach advocated in previous reforms, and most of the criteria were already in use in past years, although not spelled out in the same way. For instance, the incentive effect and proportionality tests were reinforced, with an analysis based on the “net extra 14

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cost” calculation for the assessment of notified individual aid. Those changes will mean, in practice, a more thorough economic analysis of the company’s need (e.g. compared to a mere check of the aid intensity), but, as described above, that assessment will apply only to those aid measures above the new notification thresholds. The other aid measures, in principle less distortive and entailing lower aid amounts, will fall under the simplified criteria of the GBER. Transparency The new transparency requirements17 build on the experience of several Member States, as well as the experience in the field of European regional and agricultural funds. As from July 2016, Member States are requested to establish comprehensive State aid websites at regional or national level and to publish information on aid measures and their beneficiaries. To ensure that the information remains meaningful, a standard format is required, allowing the information to be searched, downloaded and easily published on the Internet. The information to be published covers information on the measure itself (link to the text, information on the granting authority) and on the beneficiaries (identity, form of aid granted and amount, date of granting type of undertaking, location and sector of activity). That obligation applies to all aid awards above EUR 500,000. For tax advantages and risk finance aid, individual amounts can be displayed in wide ranges rather than in exact figures. The information must be published within six months after the aid has been granted (with longer deadlines for fiscal aid). Transparency is a compatibility requirement, which means that an aid not published within the six-month delay would become incompatible. It is however foreseen that, for unlawful aid, Member States will be required to publish the information ex post within six months from the date of the Commission decision.

17

Those transparency principles are set out in Article 9 of the GBER and in the Commission Communication amending the Communications from the Commission on EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, on Guidelines on regional State aid for 2014-2020, on State aid for films and other audio-visual works, on Guidelines on State aid to promote risk finance investments and on Guidelines on State aid to airports and airlines. C(2014)3349 of 21.5.2014.

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4.

State aid control “post SAM”

1.34

The new rules clearly give an increased role to Member States and to granting authorities in the State aid framework. Most aid measures will fall under their responsibility, while the Commission will limit itself in most cases to ex post controls. In several Member States, there are already institutional systems at national level to ensure State aid discipline and provide legal predictability to firms. In particular, some Member States have put in place administrative bodies to control aid granted under block-exemptions, or have set up central registers for all aid amounts across granting authorities (enabling, among others, efficient checks of aid cumulation). Many of those practices are inspired or promoted by the obligation imposed under the European Structural and Investment (“ESI”) Funds, which required Member States to demonstrate “the existence of arrangements for the effective application of Union State aid rules in the field of the ESI Funds”.18

1.35

Training granting authorities and appropriate information of all stakeholders are clear requirements identified by the Commission during the reform process. The Commission has called for a “partnership approach”, whereby a better cooperation between DG Competition and the Member States will be promoted. Specific multilateral working groups are also put in place on the model of the existing set-up in other economic policy areas.

1.36

A large part of the reform’s output will depend on how Member States will seize the opportunities of the new rules, such as an increased use of exemptions,19 the ability to better inform businesses of aid granted, or a better assessment of aid schemes. Firms, especially SMEs, will benefit from the shorter delays linked to block-exemptions and to the simplification of the checks. Their role in promoting compliance is incentivised by the changes in the Procedural Regulation. Finally, reforms relating to transparency and evaluation should eventually lead to an increased legal and political responsibility of aid grantors, through wider and more transparent public debate over State aid as spelled out in the Commission’s communications and confirmed by Commissioner Vestager in late 2014: “So far, we have been talking about the responsibility of the Commission and Member States. However, the money involved is taxpayers’ money, and ultimately it is citizens who must hold us all to account for the quality of State support”.20 18 19 20

This was part of the “ex ante conditionalities”, i.e. pre-conditions for effective and efficient use of all ESI Funds, as foreseen by the Common Provision Regulation (Regulation 1303/2013). The use of the GBER varies greatly across Member States. Op cit. Commissioner Vestager’s speech at the High Level Forum of Member States, 18 December 2014

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Chapter 3 The economics of State aid control21 1.

Introduction

Public authorities give subsidies to firms which potentially affect their business decisions including entry, exit, the level of output, the level of R&D, the location of their facilities and the choice of their inputs. While such State aid may be used by Member States for sound public policy reasons, it may also distort competition between firms and trade between Member States, providing the rationale for controlling such subsidies within the Union.

1.37

State measures which constitute State aid within the meaning of Article 107(1) of the Treaty are subject to State aid control and such State aid is in principle prohibited. State aid measures can however be allowed under Article 107(3) of the Treaty when they are deemed to be in the common interest (such measures are referred to as “compatible aid”).

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The amounts of State aid given in the Union are considerable. According to Eurostat data, in 2013, approximately EUR 63 billion in aid was spent in the Union as a whole, or 0.5 per cent of EU GDP.22 Similarly, the amount of State aid as a proportion of the overall public budget amounted to approximately 1 per

1.39

21

22

This chapter builds on a text written by Damien Neven and Vincent Verouden in the first edition of this book. The authors are grateful for the very substantial input provided by (former) colleagues from the European Commission, in particular Stan Maes, Geza Sapi, Kai-Uwe Kühn (on an earlier version) and Xavier Boutin (idem). See also http://ec.europa.eu/competition/state_aid/scoreboard/non_crisis_en.html. The number reported refers to the so-called non-crisis State aid (excl. subsidies to railways), i.e. it does not incorporate aid granted to the financial sector as a response to the financial and economic crisis. It also does not incorporate certain forms of State support not (previously) identified as aid, e.g. certain support schemes in the renewable energy sector involving large amounts of aid.

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cent at Union level.23 Those aggregate numbers conceal considerable differences among countries, with some countries achieving aid levels exceeding 1.5 per cent of their GDP.24 For comparison: EU-27 general government expenditure on education amounts to about 5.0 - 5.5 per cent of GDP.25 Public financial support handed out to firms likewise plays an important role in countries outside the Union, even if exact comparisons are hard to make.26

1.40

Over the years, there has been a growing willingness at the level of the Union and the Member States to consider the effectiveness of State subsidies in pursuing public policy objectives, and to look more closely at the costs and benefits of State aid. Various changes in the requirements set out in Union rules for approving State aid have resulted from that changed approach. At the same time, there have been calls to strike a better balance between considering the positive and negative effects on a case-by-case basis (as for individually notified State aid cases) and block exempting State aid on the basis of clear per se rules formulated ex ante.

1.41

In 2014, the Commission largely completed the State Aid Modernisation (SAM) process,27 with the aim of better targeting State aid and making the award process for public authorities simpler and clearer, in particular for cases involving small or moderate levels of aid. The purpose of this chapter is to provide an insight into the main economic questions pertaining to State aid control in the Union, mainly as applied to the non-financial sector (although certain references will be made to the financial sector where appropriate).28

23

24

25 26

27

28

The overall public budget in the Union amounts to almost half of GDP. See Eurostat: Government revenue and expenditure, 2013. Available at http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Government_finance_statistics. That group includes Greece (EUR 2.9 billion in 2013), Malta (EUR 0.1 billion), Hungary (EUR 1.5 billion) and Slovenia (EUR 0.6 billion). In absolute numbers, the Member States spending most on State aid are France (EUR 13.0 billion), Germany (EUR 12.0 billion) and the UK (EUR 4.6 billion). Eurostat: EU-27 general government expenditure on education, 2012. Exact comparisons are hard to make partly because of definitional issues (e.g. in relation to what constitutes State aid), partly because of the incomplete availability of data. See e.g. WTO - World Trade Report 2006; Buigues P. and K Sekkat, Public Subsidies to Business: An International Comparison, Journal of Industry, Competition and Trade, Springer, vol. 11(1), pp. 1-24, March 2011. For a more detailed discussion, see chapter 5 of this volume. Communication on State Aid Modernisation of 8 May 2012, COM(2012)0209 final. The SAM builds on earlier rounds of reform, in particular the Commission’s 2005 State aid Action Plan - less and better targeted State aid: a roadmap for State aid reform 2005 to 2009, available at ec.europa.eu/comm/competition/ State_aid/reform/saap_en.pdf. For an in-depth discussion of the economic questions pertaining to aid to the financial sector, the reader is referred to e.g. S. Mavroghenis and S. Maes: State Aid in Banking. In: Ph. Werner and V. Verouden, EU State aid control: Law and Economics, Kluwer Law International (2016, forthcoming).

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The main economic questions can be grouped in three broad themes. First, there is the question of the economic rationale of State aid control: why is it that the Union has a system of controlling State aid in the first place? That question will be addressed in section 2.

1.42

Next, there is the question of what exactly constitutes “State aid” in Union law. Whereas in many cases it is fairly straightforward to determine whether a State measure favours certain companies (for instance when the State gives a grant to start up a new production facility in a particular region), in many other situations, however, it is much less straightforward - in particular, in the context where public authorities invest equity in companies, buy or sell assets or provide loans or guarantees. When do those forms of support involve State aid? This question is addressed in section 3.

1.43

The final sections will present an economic framework for assessing the compatability of State aid with the internal market. They will address the question under what circumstances State aid is more likely to be effective in reaching the public policy objectives concerned and under what circumstances State aid is likely to be particularly distortive, drawing both upon the economic literature and the experience gathered in the application of the State aid rules.

1.44

2.

The basic rationale of State aid control in the Union

Suppose that a certain subsidy has an impact (positive or negative) only within the boundaries of a given Member State. One would expect that Member State to be able to weigh the positive and negative effects on its own territory in an optimal way reflecting the preferences of the Member State. It follows that intervention against State aid at the supranational level needs some justification.

1.45

It is possible to distinguish between three main potential justifications for supranational State aid control in the context of the Union.29 The first is that national decisions will typically not take into account the effects of the measures in question on other Member States. Cross-border externalities will therefore drive a wedge between national interests and the collective (Union) interest. Second, and very much related, there is the internal market perspective. Finally, there may be an interest of Member States themselves to delegate some authority on

1.46

29

Cf. See also Friederiszick, H.W., L.-H. Röller and V. Verouden, “European State aid Control: an economic framework”, in Handbook of Antitrust Economics, (Paolo Buccirossi, ed.), MIT Press 2007. Spector, D. State aids: Economic Analysis and Practice in the EU, in X. Vives ed., Fifty Years of the Treaty: Assessment and Perspectives of Competition Policy in Europe, Oxford University Press, 2009.

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decision making as a commitment mechanism that may resolve internal governance problems. Those rationales are discussed in turn.

1.47

Cross-border externalities occur when national governments do not take into account the (negative) side-effects of their intervention on other Member States. When granting State aid, the Member States typically aim to foster the economic or social development only in their own territories, and not at the level of the Union. That domestic focus is a particularly relevant aspect in the Union context, not only because the Union constitutes a highly integrated trade zone (so that the scope for cross-border distortions is quite significant) but also because the budgets of the individual Member States dwarf that of the EU institutions (unlike in the USA, for example, where the federal level effectively controls the bulk of the public budget).30

1.48

Negative cross-border externalities may arise in various forms. For instance, Member States may have an incentive to shift welfare to themselves by seeking to appropriate a larger share of international trade and profits. This may include measures to (a) attract or keep firms within the territory (location decisions) or (b) to strengthen the competitive position of the firms on own territory vis-à-vis their foreign rivals. The anticipated welfare gain for the Member State in question is associated (in whole or in part) with the loss of welfare suffered by other Member States.

1.49

Such incentives are typically referred to as “strategic trade” objectives. It is well understood in the economics literature that they can lead to subsidy races between different countries that have a “prisoners’ dilemma” feature: all countries could be better off by committing not to use subsidies for rent shifting purposes.31

1.50

Alternatively, the Member State may pursue public policy objectives not connected to rent shifting (such as environmental policy, social policy), that may nevertheless generate negative cross border consequences. For example, a measure to encourage a specific environmental technology that the government wants to foster may make foreign production processes uncompetitive. 30

31

It is worth noting that especially after the sovereign crisis in the eurozone, national macroeconomic policies are (slowly) starting to become more coordinated (cf. the Union’s Macroeconomic Imbalance Procedure, part of the reinforced Stability and Growth Pact which entered into force in December 2011 with new rules for economic and fiscal surveillance). Brander, J.A. and B.J. Spencer (1985): Export Subsidies and International Market Share Rivalry. Journal of International Economics, 18, 83-100. For an application in a context of integrated markets, see Collie, D. (2000), State aid in the European Union: The prohibition of subsidies in an integrated market, International Journal of Industrial Organization, 18 (2000) 867–884.

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In either case, the presence of negative cross-border effects provides a rationale for establishing a mechanism that seeks to coordinate the actions of the Member States, so that the negative cross-border effects are properly taken into account. There is a clear link between that rationale and the internal market objective of the Union. The concept of the “internal market” (and all measures taken to support the internal market) is based on the rationale that a more integrated European market will - by increasing competition and by allowing companies to restructure and achieve scale - promote economic growth.32 Given that view, national State aid measures may be counterproductive, because they not only directly harm other countries (the basic externality argument) but may also undermine the functioning of the European internal market in a wider sense, by preventing (successful) firms from achieving scale and effectively competing, both within the Union and outside the Union.

1.51

A third possible justification for State aid control in the Union is based on the idea that it may be instrumental for (national) governments in solving potential domestic governance problems (also referred to as political economy problems). The basic idea is that governments understand that they often have difficulties refusing subsidies even when they are socially not optimal.33 Political pressures may make it impossible to refuse granting aid in a specific situation, but governments understand that they would have been better off if they had been able to commit not to grant the aid.34 Firms have smaller incentives to become efficient when they can (correctly) anticipate that the government will have no choice but to bail them out when the need arises.35 As a result, market efficiency and the country’s national welfare may be adversely affected. Moving the decision making to a supranational authority may increase Member States’ ability to commit to more stringent rules. That

1.52

32 33

34

35

See also Midelfart-Knarvik and Overman (2002), p. 325. For more details on the ways in which State aid may hamper efficient market processes, see section 7 below. Cf. Kornai, J. (1980): The Soft Budget Constraint. Kyklos, 39, 1, 3-30. See also Dewatripont, M. and P. Seabright (2006): Wasteful public spending and State aid control. Journal of the European Economic Association April-May 2006 4(2–3):513–522, who note that politicians sometimes also use State aid as an instrument to “signal” to voters that they actively pursue their interest. An important example is the recent bailout of banks. Governments would like to commit not to bail out banks in order to avoid an implicit subsidy to banking activities and moral hazard problems on the side of bank management. However, in the face of a systemic crisis it may be impossible to maintain such a commitment. See e.g. S. Mavroghenis and S. Maes: State Aid in Banking. In: Ph. Werner and V. Verouden, EU State aid control: Law and Economics, Kluwer Law International (2016, forthcoming). That insight also underlies the various ‘lump sum’ compensation methods for operating aid put forward in e.g. the SGEI Framework, the Aviation Guidelines, the Regional Aid Guidelines (RAG), and the Energy and Environmental Aid Guidelines (EEAG). Where aid is determined on the basis of ex post calculations (making good for any deficits as they arise), the firms in question do not have much incentive to contain costs and become more efficient over time, nor to attract new customers.

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motivation is analogous to the idea behind creating independent central banks or sector regulators to avoid undue political pressure on decision making. Delegating State aid control to a supranational authority may have similar beneficial effects. It may be argued that the Commission is less able, or possibly less willing36, to enter into ex-post renegotiation than national authorities would.

1.53

The extent to which national commitment problems are a justification for supranational State aid control remains more controversial, however. While the Commission may be better placed to resolve commitment problems, it may also be less well informed about national circumstances.

1.54

A supranational institution may, in principle, be an instrument to alleviate domestic governance problems. At the same time, it would appear that this perspective provides for a weaker justification for supranational State aid control than the problem of cross-border externalities. Note that there would be significant consequences if resolving national commitment problems were in itself a major purpose of State aid control. It would mean that cross-border effects of aid were of much less importance for deciding whether State aid should be allowed or not. At the same time, it has also been argued that an institution such as the Commission, which is already designated to control State aid (with a view to avoiding cross border effects), is well placed to intervene when it is confronted with excessive aid also in cases where the cross-border dimension is less pronounced.37

1.55

All in all, it would appear to us that the strongest economic rationale for State aid control in the Union lies in the cross-border externalities and the internal market objective, not in the domestic governance issues it may solve. Furthermore, the cross-border effects (trade effects) are the clear legal prerequisite for State aid control to apply.38 Yet, insofar as controlling State aid properly-socalled (i.e. with trade effects) also enhances good governance of the economy at national (or subnational) level, it is clearly to be welcomed. In assessing the overall benefit of having a system of State aid control in the Union, the effects on governance are an important aspect to take into account. 36

37 38

A supranational authority may have higher reputation losses. For example, the Commission has to approve measures such as rescue and restructuring aid on a fairly regular basis while national governments provide those means less often. Furthermore, a negative European precedent results in dynamic inefficiencies across the Union, changing the relation of short term benefits (which are often national only) and long term losses in dynamic incentives (which are Union-wide). Cf. Dewatripont, M. and P. Seabright (2006): Wasteful public spending and State aid control. Journal of the European Economic Association April-May 2006 4(2–3):513–522. See also the next section.

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3.

When is a measure State aid?

The Treaty applies a negative presumption to all forms of State aid. Article 107(1) of the Treaty states: “Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the internal market”.39

1.56

The case law identifies the following four criteria to be fulfilled for a measure to constitute State aid in the meaning of Article 107(1) of the Treaty40: (i) there must be an intervention by the State or through state resources (transfer of State resources); (ii) the measure must confer an advantage on the recipient (economic advantage); (iii) it must distort or threaten to distort competition (distortion of competition); and (iv) it must be liable to affect trade between Member States (effect on trade). Those conditions are cumulative, thus only if all of the four conditions are fulfilled, a measure qualifies as being State aid – and falls under the scrutiny of State aid control.

1.57

This section will first describe the concept of “advantage”, and the way it relates to the other elements of the test under Article 107(1), in particular the distortion of competition and the effect on trade. Then it will address how to establish that a measure confers such an advantage.

1.58

3.1 The concept of “advantage” In principle, there are different ways to think about the concept of “advantage on the recipient”. One approach under Article 107(1) considers any measure which relieves a company from the charges which are normally included in the budget of the company as giving rise to an economic advantage.41 Accordingly, the approach taken in determining whether a company receives an advantage follows a strong accounting logic. Any transfer of resources by the State to a company that it would not have received in the normal course of business (e.g. for selling goods or services to the State) is considered to constitute the economic advantage to the firm. Typically, under that logic, the economic advantage is 39 40

41

1.59

In the European context, the term “common market” stands for the European (EU) market. See Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, at para. 75. For a detailed description of the notion of aid, see the (Draft) Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, as well as Part 2 of this volume. Case C-387/92 Banco Exterior de España v Ayuntamiento de Valencia ECLI:EU:C:1994:100, para. 13; Case C-241/94 France v Commission, ECLI:EU:C:1996:353, para. 34.

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equated with the transfer of resources by the State to the firm, not with the net financial or commercial advantage the firm receives from the measure as such.

1.60

An alternative possibility would be to interpret the notion of conferring an “advantage on the recipient” as the recipient firm being financially better off with the measure than without. However, that interpretation is potentially problematic as it might miss out on (important) cases where State subsidies have negative effects on competition and trade. Consider, for instance, subsidies that are given for the purchase of more environmentally friendly (and expensive) equipment. It may well be that such a measure does not give a net financial or commercial advantage to the recipient firm as such (when the subsidy merely compensates for the net extra costs of buying the equipment), but it may give an advantage to the various suppliers of the equipment in question as the measure creates more demand for this type of equipment.42 Likewise, a subsidy given to a firm to support the production of a loss-making product (e.g. cars produced in underutilised plants) might be just enough to compensate the firm for the extra losses incurred, yet it will distort competition in the market concerned.

1.61

More generally, by inducing an activity that would not happen without aid, State aid can have an impact on competition that goes beyond the mere financial or commercial benefit to the direct recipient. In the State aid context, therefore, the notion of conferring an “advantage on the recipient” is therefore in general best understood as “advantage to the activity”, as shorthand for the advantages that accrue to the various stakeholders in the firm, i.e. not only shareholders but also suppliers, employees and customers. That wider interpretation would indeed seem to fit the wording and purpose of Article 107(1), which not only refers to favouring “certain undertakings” but also to favouring “the production of certain goods”.43 In the examples just given, the recipient firm might indeed not enjoy a net financial or commercial advantage, but the aid would result in an increase in the production of certain goods (e.g. the production of environmentally friendly equipment, or the production of cars).

42

43

One could argue that State aid control should “follow the money” and focus on all individual actors that receive a net financial advantage from the aid, whether they are the direct recipient of the aid, or rather indirect benecifiaries. It is not clear that such an approach would work in practice, especially not in contexts where the indirect beneficiaries are highly dispersed (e.g. numerous firms in the supply chain) or not even “undertakings” to begin with (e.g. the workforce). When recovery is impractical or impossible as a result, Member States might be inclined to give aid anticipating it would go largely unchecked. Article 107(1) reads “(…) by favouring certain undertakings or the production of certain goods (…)”. Emphasis added.

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In a limited number of cases the Commission has, however, more explicitly identified the indirect beneficiaries of the measure.

1.62

Illustration: Digital Decoders (Mediaset) (2007) In the context of the digital switchover of television signals in the early 2000s, Italy granted a State subsidy of EUR 70-150 to every user who purchased or rented equipment (decoders) for the reception of digital TV signals. It gave the subsidy, however, only for decoders suitable for terrestrial signals, not for decoders receiving satellite signals.

1.63

Following complaints filed by satellite broadcasters, in 2007 the Commission found that the subsidy constituted State aid to digital terrestrial broadcasters offering pay-TV services.44 While the subsidy was paid to users (direct beneficiaries), the main benefit arose for indirect beneficiaries (the providers of terrestrial digital decoders and, notably, digital terrestrial network operators such as Mediaset). Since the measure only applied to terrestrial decoders it was considered not technologically neutral. The Commission concluded that the subsidy led to an unnecessary distortion of competition, as it discriminated against other platforms and satellite decoders. ■

1.64

A practice has grown to take one aspect of competition distortion, namely the question of whether the company receives an advantage (in the broad sense of the term) apart – the idea being that if there is no such advantage, there is also no distortion of competition. The “advantage” is therefore a screen for competive harm. For reasons of administrative efficiency, it may indeed make sense to focus on the potentially simpler question of advantage (criterion (ii) in the application of Article 107(1)) and only proceed to the more substantive questions of distortion of competiton and effect on trade (criteria (iii) and (iv)) if indeed the measure confers such an advantage.

1.65

Even so, it is not clear that the analysis of economic advantage is indeed always easier than that of distortion of competition/effect on trade. Think of a capital injection by a local council into the city theatre hall, for example. The analysis of whether the injection took place at market conditions may be very complex whereas it may be clear from the outset that the impact on trade is very limited or even non-existent.

1.66

44

Commission Decision of 24 January 2007 on State aid C 52/2005 (ex NN 88/2005, ex CP 101/2004) implemented by the Italian Republic for the subsidised purchase of digital decoders (OJ L 147, 08.06.2007 , p. 1). A challenge to the decision was rejected by the General Court in Case T-177/07 Mediaset v Commission ECLI:EU:T:2010:233.

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1.67

Having described the concept of “advantage”, the next subsection addresses the question of how to determine whether a State measure confers an advantage.

3.2 The Market Economy Investor Principle 1.68

In many cases it is fairly straightforward to determine the advantage conferred by a State measure. For example, when a State gives a subsidy to a firm to start up a new production facility in a particular region, the amount of State resources transferred can be deemed equal to the amount of the subsidy given.

1.69

In many other situations, however, it is much less straightforward - in particular, in the context where governments invest in companies, buy or sell assets or provide loans or guarantees. In such cases, the “Market Economy Investor Principle (MEIP)” (or the Market Economy Operator Test (MEOP), as it is now often called) is used to assess whether the measure constitutes an advantage to the firm.45 The MEIP has become a central element of State aid control. Over the past 30 years it has been developed by European Commission Decisions and judgments of the Union Courts.

1.70

The basic intuition of the MEIP is as follows: If a public authority invests in an enterprise on terms which are comparable to those which would also be applied by a private investor operating under normal market conditions, the government intervention would not create any economic advantage for the enterprise.46 As a result, the measure would not qualify as State aid and therefore it would not be subject to State aid scrutiny. There are mainly two ways to assess whether the MEIP is fulfilled: the “concomitance/pari passu” test and the individual assessment of a measure.

1.71

Most straightforward is the case where the State and a private investor invest in the same project, under similar conditions (in particular with regard to risk and yield) and at the same point in time. In such cases, if the private operator’s participation is significant, it is clear that the terms accepted by the State are also acceptable to a private investor and hence the MEIP is presumed to have been fulfilled. By contrast, if public bodies take part in the same transaction at the same time but under less favourable terms, this normally indicates that the intervention of the public body is not in line with market conditions. In Citynet 45 46

For a detailed overview of the Commission’s methodological approach in recent cases, see Chapter 11 of this volume. As an illustration, assume the government would offer the company a credit on terms which are identical to those which the firm could also obtain on the market.

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Amsterdam the Commission established a number of evaluation criteria for assessing the pari passu principle, in particular whether (1) the State investment has economic importance in comparison to the private investment, (2) whether the private and public investment happen at the same point in time (concomittance), (3) whether the investment conditions are the same for all different investors,47 and (4) whether there are other conditions which would imply that with regard to the particular project the State would act differently from other actors.48 In the second scenario no private investor is involved in the project. In that case an in-depth assessment of the individual circumstances typically becomes necessary.

1.72

Basically, it needs to be verified that the investment decision is in line with what a normal, prudent private investor would have done at the same time and under the same conditions. Such verification requires establishing a correct benchmark investor (counterfactual). Depending on the individual case, it can be a difficult task. The State is in a different position from private actors: it has much larger funds, far-reaching powers (e.g., as tax collector or regulator) and can therefore choose forms of intervention which are not available to a private actor. In individual cases, it may therefore be difficult to establish whether a private investor would have acted the same way under the market conditions prevailing at the time.49

1.73

For the application of the MEIP, it is assumed that a private investor aims to maximise her (expected) risk adjusted return.50 That approach finds support in WestLB, where the General Court pointed out that “normally a private investor is not content merely with the fact that an investment does not cause him a loss or that it produces only limited profits. He will seek to achieve the maximum

1.74

47

48 49

50

For instance, the State may in parallel also provide additional support measures which may be considered State aid (as a guarantee mechanism). In Citynet Amsterdam, in addition it was verified whether the State had already carried out preliminary investments which would reduce the risk of later private investments. In Citynet Amsterdam it was for instance investigated whether private investors only participated in the project to establish a good business relationship with the city of Amsterdam. To do so, a distinction must be made between the obligations of the State for instance as the owner of share capital of a company and its obligations as a public authority. In the case of public ownership, it is necessary to establish whether a private investor would have provided equity on comparable terms, given the expected profitability of the investment. Cf. Joined Cases C-278/92 to C-280/92 Spain v Commission (Hytasa), ECLI:EU:C:1994:325, paras 21 and 22. Where a capital injection would, even in the long-run, not generate profitability, such an investment should be considered to be State aid, cf Case C-303/88 Italy v Commission (ENI/Lanerossi) ECLI:EU: C:1991:136. In terms of risks, the Court considers that a private investor would, for instance, not invest into a company which does not have sufficient self-financing, cf Case 323/82 Intermills v Commission ECLI: EU:C:1984:345 and Case C-142/87 Belgium v Commission (Tubemeuse) ECLI:EU:C:1990:125.

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reasonable return on his investment […]”.51 It would hence not be sufficient to establish that a particular transaction is reasonable for the State itself (from some policy viewpoint), or even that the State “breaks even” (from a commercial viewpoint). What counts, for the application of the MEIP, is whether the State obtains a return that is in line with what a normal, prudent private investor would have required in a similar situation. For the State’s action to be equivalent to that of the comparator private operator implies pursuing “maximum reasonable returns”, taking into account the risk involved.52

1.75

When the State has prior equity or debt exposure to a company, this needs to be taken into account. In that case the new investment may be profitable conditional on the value of the existing equity/debt.53 To ensure, however, that in such situation the private investor is in the same ownership position as the State, such prior public investment cannot include State aid which by itself was not carried out under market conditions.54

1.76

Apart from the fact that private investors form a heterogeneous group, encompassing financial institutions, corporations, individuals or partnerships, in addition, many investment projects are idiosyncratic. As a result, with the exception of highly liquid markets, it is often not possible to establish a precise market benchmark. For instance, while there is a clearly-defined market benchmark for some financial products (e.g. a five-year government bond), the benchmark is more approximate for other products (e.g., price of built residential square metre in rural Denmark). A reasonable benchmark would have to be established on the basis of information that would have been available to a private operator at the time the transaction is decided upon. Such a comparison can be made by looking at different indicators, such as benchmarking with similar transactions in the market, on the basis of a sound business plan which has been validated by external experts etc. 51 52

53 54

Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU: T:2003:57, paras 314 and 315. The reference to the prudent private investor being in a “similar situation” is important. Consider the following example. The State typically enjoys a lower borrowing rate than banks. The State could argue that it could therefore also charge a lower interest rate to firms to which it lends money and still make a “normal return”, i.e. the cheap State loans would not give rise to State aid. The question is however whether a prudent private investor would indeed have been satisfied with a “normal return” if it were more efficient (had lower borrowing costs) than other banks. The answer is no. It would probably take the interest rates of other banks as a starting point (and mildly undercut these) so as to obtain a higher return. In other words, the aid-free benchmark is the interest rate observed in the market, not necessarily the rate that would still give the State a “normal” return. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU: T:2003:57, paras 314 and 315. See e.g. Case T-11/95 BP Chemicals v Commission ECLI:EU:T:1996:91, paras 170 and 171.

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Benchmarking often does not establish one “precise” reference value, but rather it establishes a range of possible values by assessing a set of comparable transactions. Where the aim of the assessment is to consider whether or not the State intervention is in line with market conditions, it is typically appropriate to consider measures of central tendency such as the average or the median of the set of comparable transactions. Where there is a considerable variation in the observed returns, one might also consider ranges around those measures (e.g. around the median or the average). However, some caution is needed in this context given that the benchmark transactions are actual market transactions, whereas the transaction under consideration is not. There is always some degree of uncertainty as to how comparable the benchmark group really is.

1.77

It is important to note that the MEIP assessment needs to be done taking the perspective at the time when the transaction took place.55 Only in that case can it be verified that the State investment behaviour was in line with the MEIP. One would furthermore expect any private investor to develop a prudent business plan and carry out a due diligence assessment before making a considerable financial commitment.56 That expectation precludes an ex-post fabrication of an “MEIP scenario”, as a private investor would only be able to use contemporaneous information when making its investment decision.

1.78

In its assessment, the Commission can select the analytical tool which it finds most appropriate for the particular case. When applying a particular benchmark, however, the Commission would still have to evaluate all other relevant issues of the particular investment, including the particular circumstances of the beneficiary.57 For instance, in a situation where the beneficiary has previously received aid, further provision of capital can hardly rely on the MEIP approach if the profitability of that capital injection depends on the prior granting of aid.58 The Commission has significant discretion when considering complex economic issues. Where the evaluation of the MEIP requires such a complex economic

1.79

55 56

57 58

C-482/99 France v Commission (Stardust Marine) ECLI:EU:C:2002:294, para. 70. An investment could therefore fail the MEIP test if the business plan is found to be unrealistic. On the other hand, there may of course be exceptions where MEIP could apply even if no business plan was drawn up prior to the event. As an example, the UK’s Competition Appeal Tribunal (CAT) found that the transport company, Stagecoach, had not drawn up a business plan before launching a set of routes involving hiring 70 staff ; in that case, the CAT concluded that the ommission did not mean that Stagecoach was not behaving in a manner consistent with a company attempting to maximise its profits in undertaking such an expansion. Competition Appeal Tribunal, Stagecoach Group plc v Competition Commission, [2010] CAT 14, para. 75. T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T:2003:57, para. 251. See e.g. Case T-11/95 BP Chemicals v Commission ECLI:EU:T:1996:91.

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analysis, the Court supervision concentrates on procedural issues, whether the case has been correctly described59 and whether there is not a manifest misinterpretation of the context of the case.60 The Court, however, maintains the right to verify the Commission’s economic interpretation if it is necessary to do so.61 It has carried out such verifications in particular where the Commission based its decision on external studies. In Valmont62 the General Court held that the Commission should not have simply relied on the existence of an independent expert’s assessment to determine whether a sale of land involved the granting of State aid. Instead, the General Court required that the Commission should also have verified its evidential value (which then was done by the General Court itself ).

3.3 Investments in line with market conditions - some principles63 1.80

When should a public equity investment be viewed as in line with market conditions? The corporate finance literature provides a rather simple principle of when a private investor should carry out an investment project: an investment is individually rational if the expected return on this investment is higher than the opportunity cost of capital, i.e. the return that the investor can expect to make with other investments of similar risk in the capital markets. That principle holds for all rational and risk averse private investors.

1.81

The most common way (and indeed the most meaningful way) to determine the annual return on an investment is to calculate the internal rate of return (IRR) of the investment.64 One can also evaluate the investment decision in terms of the Net Present Value (NPV),65 which produces results equivalent to the IRR in

59

60 61 62 63

64 65

In West LB, for instance, the Court accepted the Commission’s approach to establish the criterion of a minimum compensation for a particular investment. However, it criticised the Commission’s insufficient justification of its assumptions to establish such a minimum value. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:2003:57, paras 358 and 394. Compare Case: T-36/99 Lenzing v Commission ECLI:EU:T2004:312, para. 150. See Case C-525/04 Spain v Commission (Lenzing) ECLI:EU:C:2007:698, para. 57 Case T-274/01 Valmont v Commission ECLI:EU:T:2004:266, paras 37 and 43. This part draws upon Friederiszick, H.W. and Troege, M., ‘Applying the Market Economy Investor Principle to State Owned Companies - Lessons Learned from the German Landesbanken cases’ , EC Competition Policy Newsletter No. 1 - Spring 2006. The IRR is defined as the discount rate for which the Net Present Value (NPV) of a stream of cash flows equals zero. The NPV is the difference between the positive and negative cash flows over the lifetime of the investment, discounted at the appropriate return (the cost of capital). It is the difference between the positive and negative cash flows over the life time of the investment, discounted at the appropriate return i.e. at the cost of capital. For instance, when the NPV of an investment equals EUR 10 million that means that the positive cash flows (e.g. revenues form the investment in the future) exceed the negative cash flows (e.g. the initial investment cost) by an amount of EUR 10 million.

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most cases.66 The IRR and the NPV are not based on accounting earnings in a given year, but take into account the stream of future cash flows that the investor expects to receive over the entire lifetime of the investment. The riskier the project, the higher the rate of return that fund providers will expect or require, i.e. the higher the cost of capital. The estimation of the opportunity cost of capital is usually one of the most technically contentious elements when establishing whether State aid is present. The cost of capital is usually computed as the Weighted Average Cost of Capital (WACC). As the name suggests, the WACC is a weighted average between the costs of the two main sources of capital: equity and debt. A credible and sufficiently robust estimation of the WACC is decisive to determine the profitability of an investment.

1.82

The cost of equity capital is given by the average return an equity investor would expect to make on investments in companies or projects with the same (or similar) business and financial risk as the one under consideration. A widely used method to establish the cost of equity, is the Capital Asset Pricing Model (CAPM)67. The CAPM postulates that the expected return on a risky investment is the sum of the return on a risk free investment (e.g. the return on a government bond or T-Bill68) and a risk premium. In perfect capital markets this risk premium will depend on the general market risk premium and on the (non-diversifiable) risk69 of the investment, measured by its so-called beta coef-

1.83

66

67

68

69

There is a clear relationship between NPV and IRR. Where the NPV of an investment is positive, it implies that the project has an IRR that exceeds the required rate of return (opportunity cost of the investor). In that case, the investment is worth carrying out. If the project has an NPV that is equal to zero, the IRR of the project equals the required rate of return. In that case, the investor is indifferent between carrying out the investment and investing elsewhere. Where the NPV is negative, the IRR is below the cost of capital and the investment is not profitable enough as there are better opportunities elsewhere. The NPV method is recommended, however, when it comes to comparing the profitability of mutually exclusive investment projects. See T. Copeland and F. Weston, Financial Theory and Corporate Policy, 3rd edition (1988), p. 31. The CAPM model has been subject to a reasonable amount of criticism, notably in the academic world. Cf. Fama, E.F. and K.R. French (1992). The Cross-Section of Expected Returns. Journal of Finance, 47, 427465; Cochrane, J. (1999), New Facts in Finance, Economic Perspectives, Federal Reserve Bank of Chicago (available at http://faculty.chicagobooth.edu/john.cochrane/research/papers/ep3Q99_3.pdf ). However, it is fair to say that it remains a ‘workhorse model’ in the private sector. Cf. S. Shojai and G Feiger. Economists’ Hubris – The Case of Asset Pricing. Journal of Financial Transformation, 11/2009, Nr. 27, p. 10. It is also used by many regulatory agencies and central banks. Typically, a short-term T-Bill is used but, in principle, for it to be really risk-free, a time horizon needs to be used that is similar to the horizon of the investment under consideration. Otherwise, there will be refinancing risk or the risk stemming from price changes of long-term bonds over short horizons. When considering the cost of capital, it is important to note that fund providers are not necessarily concerned about the risk of the project as such, but rather about risk they cannot “diversify away” by investing in a large portfolio of projects or firms, cf R. Brealey and S. Myers, Principles of Corporate Finance, 4th Edition (1991) McGraw-Hill, p.181. Brealey and Myers argue that risks associated with various sorts of “bad outcomes” (such as failed R&D projects, cost overruns, etc.) may well reflect unique (i.e. diversifiable) risks

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ficient (the extent to which the return of the share of the company moves or covaries relative to the return movements of a broad market index). When the company is not quoted, the beta may also be established by considering a sample of comparable companies that are quoted.

1.84

In principle, one could also obtain an estimate of the cost of equity by looking directly at industry profitability benchmarks. The appropriate benchmark for equity investments should, however, not be historical returns but the “forward looking” returns an investor can expect to achieve by buying shares of a similar risk in the stock market. The forward looking nature (involving predictions of future returns by benchmark companies) makes it inherently difficult to establish a reliable benchmark in this way. However, it may sometimes be possible to resort to an “industry consensus” as to the cost of capital in a particular line of business (e.g. views expressed in industry reports, or in the annual reports published by comparable companies).

1.85

Another approach is to consider the returns that private investors obtain in actual market transactions as the relevant cost of capital. That approach would be appropriate when the mechanism which is used to select the private partner is a competitive one, so that the terms under which the private partner is participating in the project are indeed (close to) the minimum level that the market expects for that type of investment.

1.86

As regards the cost of debt, one can refer to the Commission’s Reference Rate Communication, which provides proxies for the market price of debt.70 However, if comparable transactions have typically taken place at a lower price than that indicated as a proxy by the reference rate, one can consider that the lower price is the market price. By contrast, if the same company has carried out recent similar transactions at a higher price than the reference rate, the reference rate may not constitute a valid proxy of market rates for that specific case and a more case specific assessment needs to be undertaken.

70

which would not affect the expected rate of return demanded by investors nor, for that reason, the appropriate discount rate to evaluate the project. Of course, whether or not investors (and/or their shareholders) have this possibility to diversify away risk is an empirical matter, and may differ from investor to investor. See the Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.1.2008, p. 6.

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Illustration: Ciudad de la Luz (2012) Ciudad de la Luz is a major film studio complex in Alicante (region of Valencia), Spain. The Valencian regional government started construction of the film studio complex in 2002. The Spanish authorities had not notified the Commission of the proposed public investment in the film studio complex, based on their stated belief that the MEIP was fulfilled. However, following complaints from two competitors in different Member States the Commission opened a formal State aid investigation into the public funding of the complex which was concluded with a negative final decision in 2012.71 On 3 July 2014 the General Court rejected challenges to the Commission Decision.72

1.87

In most previous cases, the MEIP assessment involved using certain benchmarks such as average industry returns. In the Ciudad de la Luz case, a simple standard would not suffice for an MEIP calculation as it would disregard the significant risk involved in a green-field investment of that size. As a result, the level of indepth economic assessment73 undertaken by the Commission in that case goes significantly beyond any previous investigation.74

1.88

Prior to starting the construction works in 2002, the Spanish authorities requested several external consultants to analyse the feasibility, scope and business case of the development of Ciudad de la Luz. The conclusions of the business plan were positive as to the business case, including its profitability prospects in the medium to long run. A further study commissioned in 2004 also concluded positively on the profitability of the project.75 The return of the project, which was entirely equity funded, was projected at that time to be 5.74 per cent.

1.89

71

72

73

74

75

Spain had to recover the entire amount of the aid (approximately EUR 265 million). Already heavily indebted, with results far behind those predicted in the business plans, Ciudad de la Luz ceased operations and had to be sold. Press release 8 May 2012: http://europa.eu/rapid/press-release_IP-12-459_en.htm. Commission Decision of 8.5.2012. OJ L 85/1 of 23.3.2013, p. 1. With one minor exception, it rejected all arguments made in the annulment actions brought against that decision in Joined Cases T-319/12 and T-321/12 Spain and Ciudad de la Luz v Commission ECLI:EU:T:2014:604. See in more detail: A. Claici, G. Siotis, O. Chatterjee and O. Stehmann, The Market Economy Investor Principle – lessons learnt from the Ciudad de la Luz case, in: Competition Law and Economics (2015, forthcoming). One group of cases that have started to contribute to the development of an empirical assessment of the MEIP are the German Landesbanken cases. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T:2003:57. The positive return until 2014 was estimated to an internal rate of return (IRR) 8.23 per cent and a net present value (NPV) of EUR 77 million. The business plan included alternative scenarios which were displaying also positive returns for the investment on longer term horizons.

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1.90

In line with Valmont, the fact that a public authority bases its investment decision on the results of consultancy studies is not sufficient for fulfilling the MEIP test. In that regard, the in-depth investigation of Ciudad de Luz demonstrated that those studies were based on assumptions which were overly optimistic and not robust. As a prudent private investor, the regional authority would be required to check the validity of such estimations before taking an investment decision of that size.

1.91

The Commission’s assessment was based on the principles of corporate finance discussed above, according to which private investors only undertake investments that have a positive Net Present Value (NPV), or put differently, have an IRR in excess of the cost of capital. According to the business plan of the Spanish authorities (taken at face value), the project would result in a return to equity of 5.74 per cent.

1.92

Since the analysis of the case was undertaken almost 8 years after the investment decision, the Commission had to look for estimates to calibrate the CAPM parameters that were contemporaneous to the investment decision and fitting the industry (i.e. cinema studios) as well as the country/region where the investment was made (in that case, the region of Valencia).76

1.93

Probably the most controversial parameter in the calculation of the required cost of equity is the beta.77 Theoretically, a beta below 1, as was suggested by the Spanish authorities,78 would characterize a project with a risk-profile below that of the stock market index. The Commission considered that, even intuitively, such a level cannot be correct for an investment in the film studio industry given that beta’s below 1 are typically only observed for very “stable” businesses such as the utility sector.

1.94

The Commission instead relied on reports published by financial specialists assessing the financial and risk profile of other comparable film studios. They reported a beta for Carrere of 1.8 and 1.5 for Studio Babelsberg. An average of the two provided a lower-bound proxy for the beta of Ciudad de la Luz of 1.59. On 76

77 78

For the risk-free rate, the Commission took the average annual return on ten-year government bonds in Spain (publicly available). In 2004, that rate stood at 4.1 per cent. For the market risk premium, the Commission relied on academic papers assessing the historical risk premiums for Spain. See point 1.83 above. The Spanish authorities reported a beta of 0.395 based on historical estimations (performed with Bloomberg data on equity returns on Pinewood). Those data were not sufficiently robust, however. By changing only the frequency of the data from daily observations (as used by Spanish authorities) for instance to weekly or monthly ones the beta changed considerably.

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that basis the Commission computed a cost of equity of 14.9 per cent. By taking the IRR estimated by the Spanish authority at face value79 (5.74 per cent), the Commission concluded that the investment made by the Spanish authorities in Ciudad de la Luz did not yield an expected positive NPV.80 ■ The Commission’s MEIP assessment in Ciudad de la Luz highlights the importance – and the difficulty – of establishing a proper benchmark. It has to be done on a case-by-case basis. While in some cases it may be justified to compare the expected return of a project with the average return of the industry, in an industry characterised by over-capacity and low, if not negative, average returns, a reasonable private investor would certainly not take the average return of the sector as its yardstick. Instead, a private investor can be expected to consider primarily the risks associated with the specific investment. The average return of the sector may still be part of the investment decision, but rather as a crosscheck.

1.95

3.4 Distortion of competition and effect on trade The existence of a distortion of competition (or the threat of it) and the prospect that trade between Member States will be affected are necessary conditions to establish the existence of State aid under Article 107(1).

1.96

According to case law, those conditions are in most cases considered to be fulfilled if the measure is selective in terms of granting an advantage.81 A measure is deemed selective if it is capable of affecting the competitive balance between the recipient firm and its competitors in the Member State concerned.82 “Selectivity” is what differentiates State aid measures from so-called general measures, which apply equally to all firms in all economic sectors in a Member State (e.g. most nation-wide fiscal measures). A scheme is also considered selective, if the authorities administering the scheme enjoy a degree of discretionary power. The

1.97

79

80

81 82

Taking the IRR estimated by the Spanish authority at face value was a conservative approach, given the nature of the project as well as the characteristics of the market. The Commission does not systematically take business plans at face value, however. For a recent illustration, see for instance Commission Decision of 26.02.2015 in Case SA.35388 – Poland - Setting up the Gdynia-Kosakowo Airport. The Spanish authorities proposed a WACC of 5.15 per cent, leading to a positive NPV in the range of EUR 50 million. For the WACC estimated by the Commission (14.9 per cent), the NPV is negative, in the range of – EUR 130 milion. Only a combination of beta lower than 0.5 and a market risk premium lower than 4 per cent could provide for a WACC such that the project would be profitable (give rise to a positive NPV). The Commission’s assessment indicated that neither of those parameter values would be reasonable. For more details, see Chapter 12 of this volume. Measures which are de jure not selective may de facto have a divergent economic impact on firms, sectors or regions.

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selectivity criterion is further satisfied if the scheme applies to only part of the territory or a specific industry of a Member State (this is the case for all regional and sectoral aid schemes).

1.98

The selectivity criterion is somewhat peculiar in that it is defined with respect to companies operating within the Member State concerned. For instance, when the Irish government in the mid 1990s was confronted with an investigation into the reduced corporate taxation rate in a number of its regions, that measure was deemed selective and constituting State aid.83 The response of the Irish government was to widen the application of the reduced taxation rate to the whole of Ireland. It was therefore no longer considered selective, but one can argue that the impact of the measure on trade and competition in the Union had become greater. Likewise, a measure targeting only SMEs may well be selective, but it is not clear that a measure that supports all companies is necessarily more benign from the perspective of intra Union competition and trade.

1.99

Still, there is a potential rationale to the selectivity approach used. First of all, the Treaty signatories have chosen to leave national general taxation policy in the hands of the Member States, something which is to be respected.84 Second, it is possible to rationalise the approach from a competition and trade perspective. The more tax measures are open to all companies, the lower the probability that they are used (abused) by Member States to support specific individual firms in international competition: the more the State has to give subsidies to everyone, the more costly it is. Furthermore, there is a “political economy” argument. It is well documented that often the most effective lobbying comes from the side where the economic stake is bundled in the hands of a few (e.g. beneficiaries of State support), rather than from the side where interests are dispersed among many (e.g. tax payers).85 Focusing on support schemes that are (highly) selective may not be a bad idea, as they may be the ones most strongly motivated by private industrial interests.

83

84

85

See the appropriate measures proposed to Ireland on 22 July 1998 in cases E 1/98 IRLANDE Centre International de services financiers (IFSC) et zone franche aéroportuaire de Shannon (SCAZ) and E 2/98 IRLANDE Impôt irlandais sur les societies”. This is not to say that there are no demands for increased coordination of tax policies at the Union or international level. Cf. the various initiatives of the OECD to avoid tax evasion by corporations who exploit gaps in the architecture of the international tax system to artificially shift profits to places where there is little or no economic activity or taxation. See http://www.oecd.org/tax/aggressive/. See eg George J. Stigler, “The Theory of Economic Regulation”, Bell Journal of Economics and Management Science, vol. 2 (Spring 1971), pp. 3-21. S. Becker, A Theory of Competition Among Pressure Groups for Political Influence, The Quarterly Journal of Economics, Vol. 98, No. 3. (Aug., 1983), pp. 371-400.

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The notion that a distortion of competition arises when the competitive balance is affected would seem to accord with intuition, even if the notion of competitive balance would need to be made more precise. The competitive balance among firms will be affected by State aid when recipient firms are led to behave in ways which reduce the profit of their competitors or impair their ability to compete. State aid is in turn likely to affect the market behaviour of recipient firms when it changes the costs or benefits associated with taking a particular action.

1.100

A prime example of that phenomenon is when a subsidy lowers the marginal costs of the recipient firm. Reductions in marginal cost increase the profit margin that companies obtain on their products, thereby inciting them to produce more than they otherwise would have done. For instance, the marginal costs of an electricity firm are reduced when it is exempted from paying fuel or energy consumption taxes. It will then want to produce more electricity.

1.101

Likewise, State aid can change investment and entry decisions. Whereas without the prospect of aid, a company may not wish to expand its production facilities or its scope of activities because it would not be profitable to do so, a subsidy may tip the balance in favour of making the investment. For instance, a State subsidy may incite the beneficiary to invest in new production capacity, whereas it would otherwise not have done so because the additional benefits would not weigh up against the additional costs. Similarly, a subsidy to invest in a given region may change a company’s location decision.

1.102

Exit decisions are a further category of decisions that may be affected by State aid. If a company finds it unprofitable to continue a specific business line, for instance because it is loss-making in the short or longer run, then a subsidy by the State with the aim to convince the company to stay active in that business line obviously has a real impact on the market. Likewise, the decision whether or not to continue production at a particular site may be influenced by the prospect of receiving State aid.

1.103

It is however more difficult to see how a lump-sum payment by the State without specific conditions attached can affect company behaviour in ways which have a direct impact on competitors.86 Indeed, the provision of liquidities will

1.104

86

Of course, when the State transfers money to companies without any explicit conditions, one may wonder why the State does so in the first place. One cannot exclude that the money comes with implicit conditions, e.g. not to close factories, not to lay off people, or a commitment next time to invest at a later stage in the country concerned. See also Section 7 for a more detailed description of the theories of harm in State aid control.

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not by itself trigger the development of new projects. If the company is efficiently run and does not face financing constraints it will have executed all projects that promise a sufficiently high return (given their risk profile) and will not execute those projects which are not sufficiently profitable. The profitability of any given project is not changed when more funds become available. Firms (at least when they are efficiently run) would just replace money they would otherwise have raised on the capital market with money from the subsidy, but investment incentives would not be affected. In such a case, the subsidy will result in a mere windfall profit to shareholders.

1.105

Of course, in the presence of financing constraints, matters may be different. In those circumstances, there are internal projects with a return in excess of that accruing from external opportunities that cannot be financed, or only at a high cost. A lump sum may trigger the development of those projects and thereby have an effect on competition. In the end, it is an empirical question as to whether (and to which extent) the beneficiary companies face significant financing constraints.

4.

Assessment framework for the compatibility of aid

1.106

The focus on whether aid brings about a selective advantage for firms implies that in the State aid practice, any change away from the counterfactual, the market situation that would have resulted in the absence of aid, is typically deemed a distortion. Distortions need not be per se negative, however.87 Distortions can result in both negative effects and positive effects. Indeed, under the assessment of State aid compatibility, the aid should be approved if and only if, the distortion caused by the aid has sufficient positive effects (in terms of contributing to an objective of common interest) to outweigh any negative effects.

1.107

The general principle behind the Commission’s compatibility assessment is to balance the positive impact of the aid measure (pursuing an objective of common interest) against its potential negative effects (distortions of trade and competition). For instance, the 2013 Broadband Guidelines provide for an explicit “balancing test” which compares the advantage of State intervention (to address a market failure) with possible distortive effects. The Guidelines stipulate a number of criteria which have to be met to ensure a positive balance. 87

The use of the term “distortion of competition” can generate some confusion in that regard, because it is used differently in State aid from its use in the economics literature. For example, it is typically argued that subsidies that correct a market failure (e.g. due to an environmental externality) do not bring about a distortion but rather correct a distortion. Cf. Nitsche, R. and P. Heidhues (2006): Methods to Analyse the Impact of State aid on Competition. European Economy No. 244, February 2006.

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In most cases, however, such a balancing is not carried out explicitly, but rather by reference to predetermined criteria or proxies. The approach taken in the GBER (General Block Exemption Regulation) and most enforcement guidelines as to the compatibility of aid schemes is to define a set of objectives and eligible costs on the basis of which companies may receive State aid. The amount of subsidy is specified in terms of maximum aid intensities of the eligible costs. The implicit balancing inherent in that approach is to obtain the positive impact of the aid measure by declaring expenses eligible which target objectives of common interest (such as investment in an environmentally friendly techniques or specific R&D projects) while restricting the possible distortions of competition by limiting the aid intensity.88

1.108

Over the years, however, there has been a growing willingness at the level of the Union and the Member States to consider the effectiveness of State subsidies in pursuing public policy objectives, and to look more closely at the costs and benefits of State aid. It has led to both changes in the requirements set out in GBER and to an increased focus on the effects of the aid in individual notifications.

1.109

In particular, in the context of the recent State Aid Modernisation89 (SAM), the Commission has identified and defined a set of “Common Principles”, guiding its assessment of notified cases (individual cases and schemes). According to those principles, which are now systematically reflected in most enforcement guidelines, the Commission will consider a State aid measure compatible with the internal market only if it satisfies each of the following criteria:

1.110

(a)

contribution to a well-defined objective of common interest: a State aid measure aims at an objective of common interest in accordance with Article 107(3) of the Treaty;

(b)

need for State intervention: the State aid measure is targeted towards a situation where aid can bring about a material improvement that the market alone cannot deliver, for example by remedying a well-defined market failure;

88

89

The maximum aid intensities can be seen as a (rudimentary) means to avoid that aid is granted which goes beyond what is necessary. As such, they reflect the requirement of proportionality in the sense of “aid to the minimum”. They can also be seen to reflect a different kind of proportionality, the aim of which is to prevent the use of State aid for those projects for which the aid may be necessary but for which the ratio between the aid amount and eligible costs is to be considered “disproportionate”, i.e. giving rise to a high risk of distortion or reflecting poor “value for money” (or both). Communication on State Aid Modernisation of 8 May 2012, COM (2012) 0209 final. The SAM builds on earlier rounds of reform, in particular the Commission’s 2005 State Aid Action Plan - less and better targeted State aid: a roadmap for State aid reform 2005 to 2009, available at ec.europa.eu/comm/competition/State_aid/reform/saap_en.pdf.

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1.111

(c)

appropriateness of the aid measure: the proposed aid measure is an appropriate policy instrument to address the objective of common interest;

(d)

incentive effect: the aid changes the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity which it would not carry out without the aid or which it would carry out in a restricted or different manner;

(e)

proportionality of the aid (aid kept to the minimum): the aid amount is limited to the minimum needed to incentivise the additional investment or activity in the area concerned:

(f )

avoidance of undue negative effects on competition and trade between Member States: the negative effects of aid are sufficiently limited, so that the overall balance of the measure is positive;

(g)

transparency of aid: Member States, the Commission, economic operators, and the public, have easy access to all relevant acts and to pertinent information about the aid awarded thereunder.

The next sections will address some of the common principles in greater detail.90 In particular, those sections will focus on the objective and rationale of State intervention (principles a) and b)), the incentive effect (principle d)) and the negative effects of aid (principle f )). Reference will be made to a few cases in which the same principles have already been applied in the past.

5. 1.112

State intervention: objective and rationale

State aid may be authorised by the Commission if it contributes to the achievement of one or more of the objectives of common interest identified in Article 107(3) of the Treaty. Whether a measure contributes to an objective of common interest can be understood either in terms of its contribution to economic efficiency91 (increasing welfare) or in terms of equity (redistributing welfare).

90 91

For a full discussion of the Common Principles, see also Chapter 2 of this volume. In economics, the term “efficiency” refers to the extent to which welfare is optimized in a particular market or in the economy at large. In its strictest meaning, an efficient outcome corresponds to a situation where the allocation of resources is optimal in the sense that no one can be made better off without making someone else worse off (Pareto efficiency). It is a rather strict test to satisfy. In practice, weaker versions of efficiency are used, whereby it is assumed that increases in welfare can be (potentially) redistributed so as to make everybody better off.

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The first main rationale for State intervention relates to the efficiency of the economy. Even if competitive markets tend to bring about efficient results in terms of prices, output and use of resources, under certain conditions markets, if left to their own devices, they are unlikely to produce such outcomes. Those instances are referred to as “market failures”. In such circumstances, State intervention (and, possibly, State aid92) may improve the level of efficiency of the economy (“make the cake bigger” compared to the counterfactual in the absence of the State intervention), as long as the benefits of such public intervention outweigh the costs. Subsection 5.1 will give a more detailed overview of the main market failures relevant for State aid control.

1.113

The second main rationale for State intervention, which will be discussed in some more detail in subsection 5.2, relates to equity objectives. Even if competitive markets are necessary to promote efficient outcomes in terms of welfare generation and the allocation of goods, the outcome of that process might be perceived as inequitable/unfair. State intervention may then lead to a better distributional outcome (“a better division of the cake”).

1.114

The “strategic trade” rationale is a separate rationale for State intervention.93 It is linked to the efficiency rationale but nonetheless clearly distinct. It refers to the idea that by financially supporting domestic firms, a country is able to place these firms in a better competitive position in a Union or international trade context, which may allow the country to capture a greater part of trade revenues and profits. The same perspective applies to a country giving financial incentives to attract economic activity in order to increase e.g. tax revenues. While possibly increasing the welfare level of a country in a given context (ceteris paribus perspective), the difference with the efficiency rationales related to market failures is that one should take into account the likely reactions by the other trading partners. For instance, if one country starts using subsidies (or other means) to support the domestic industry, others may well follow suit, leading to a subsidy race and overall worse outcomes. Indeed, the likelihood of a subsidy race among Member States is precisely one of the main rationales for having State aid control in the Union. The remainder of this section will therefore focus on the two “benign” rationales, i.e. the efficiency (market failure) rationale and the equity rationale.

1.115

92

93

It is important not to assume that when there is a case for State intervention there is also a case for State aid. As will be highlighted later in this section, market failures can also, and possibly even better in certain instances, be remedied via market regulation or tax policy (e.g. taxing pollution as opposed to subsidizing clean production). Cf. Brander, J.A. and B.J. Spencer (1985): Export Subsidies and International Market Share Rivalry. Journal of International Economics, 18, 83-100.

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5.1 Market failures 1.116

It is generally accepted that competitive markets tend to bring about efficient results in terms of prices, output and use of resources. Under certain conditions however, markets, if left to their own devices, are unlikely to produce efficient outcomes. They are referred to as “market failures”.

1.117

A market failure arises if, from a welfare creation point of view, the market outcome results in either too much or too little production of a certain product. This may, for instance, be the case if certain costs of production (e.g. the costs of pollution) are not taken into account by the company producing the product. On the other hand, there may be too little supply of products, e.g. when the production process brings about positive side effects for other actors in the economy (e.g. knowledge spillovers). In both cases, there is an efficiency loss.

1.118

The mere fact that a certain product is not available on the market, or a certain activity is not undertaken in a particular geographic area (e.g. transport services in sparsely populated areas in Germany, international film productions in the region of Valencia, touristic flights to the moon), by itself does not constitute a “market failure”. These activities may (or may not) be worth subsidizing, depending on preferences in society, but that is a distinct question from the question whether the market outcome is efficient or not94.

1.119

The presence of market failures is a direct source of inefficiency (loss of welfare) in the economy. As long as the benefits of public intervention outweigh the costs, it is in principle worthwhile to direct public policy at correcting market failures so as to improve the level of efficiency (welfare) in the economy.

1.120

The main market failures which may be relevant in the context of State aid are externalities, imperfect information, in particular asymmetric information, and coordination failures.95

5.1.1 Externalities 1.121

Externalities arise when actions by one actor have consequences for other actors which are not taken into account by the former in its decision making. Those effects may be negative (“negative externalities”) or positive (“positive externali94 95

See section 5.2. For summaries of the arguments regarding market failures see J.E. Stiglitz, Economics of the Public Sector, 2000 (3rd edition) or R. Meiklejohn, The Economics of State aid, European Economy, 1999: 3, 25-31.

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ties”). Given that those effects are not taken into account by the decision maker, they drive a wedge between the private benefits of a given action (to the decision maker) and the overall economic benefits of the action, resulting in an inefficient market outcome (“market failure”).96 To illustrate, when producers do not take into account the deterioration of the environment induced by their activities, negative externalities may arise; it may for instance increase the cost of other companies in the economy that rely on a clean environment to produce goods (farmers, camping sites, water companies). In those circumstances, the market produces too many environmentally harmful goods and provides too few incentives for the polluting companies to invest in environmental improvements, even though it would be beneficial for the economy if they did. In such cases, State intervention can change the incentives of the market players so that they do take the costly side effects into account.97

1.122

Illustration: aid to renewable energy under the EEAG (2014) In 2014, the Commission published its revised Energy and Environmental Aid Guidelines (EEAG), with new rules for the support of renewable energy.98 The core rationale for State aid to support green electricity generation (i.e. electricity produced with renewable energy sources such as solar and wind) is rooted in the negative externality that stems from of the emission of CO2 and other greenhouse gases in the generation of electricity with fossil fuels. Those greenhouse gases are widely understood to negatively affect the global climate. Tackling those externalities, by supporting alternative sources of electricity generation, is a means to reduce the (long term) costs associated with climate change.

1.123

It is however important to note that what matters is not the emissions per se, but rather whether there are any externalities in a context where other instruments (legislative measures, taxation, industry standards and specific ownership rights) are already meant to address the problem of emissions to a large extent. In point of fact, the Union’s Emission Trading System (ETS) has been set up as a technology-neutral, market-based system to expose large emitters to the external

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96

97 98

Fundamentally, the presence of externalities can be traced back to the absence of adequate property rights which make that the externalities cannot become the subject of efficient trade. That problem is also referred to as the problem of missing markets. See R. Coase, The Problem of Social Cost, Journal of Law and Economics, 3, 1-44 (1960). An alternative response could be to design an adequate system of tradable emission rights, allowing the holders of such rights to emit a given amount of pollution, as in the case of the ETS which is discussed below. See chapter 18 of this volume for more details. For a further discussion, see K. Struckmann and G. Sapi, Environmental and Energy Aid. In: Ph. Werner and V. Verouden, EU State aid control: Law and Economics, Kluwer Law International (2016, forthcoming).

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cost of their emissions. It is successful in its main mission, which is to cap emissions.99 However, insofar as there remain certain externalities in that field, additional support measures may be warranted. For instance, a second(ary) objective of ETS has been to foster or accelerate the large scale deployment of new green technologies, in order to bring about a cost reduction in the use of these technologies (in the current trading period and/or the next period). To the extent ETS has not been able to bring about that change, there may be a distinct residual case for State subsidies supporting the development of green technologies.100

1.125

The case of renewable energy is also a good illustration of the fact that market failures need not to be taken as a fixed. The ETS is itself evolving, and so are the externalities that remain unaddressed. Further, where certain green technologies were immature and not economically viable until only a few years ago (e.g. solar, on-shore wind), these technologies may have become more mature and viable in the present context. In other words, the nature and depth of the (residual) market failures may well be receding, leading to a reduced need for support schemes. That observation also underlies the stricter rules as to which support systems are allowed in the period 2014-2020 in terms of the types of renewable energy that can be supported (the less mature), the way aid is to be provided (more market price based) and the way the aid is to be allocated (greater use of auctions). ■

1.126

The process of R&D exhibits examples of positive externalities. When a company undertakes R&D, that activity may have spill-over effects to the benefit of other companies, notably through the diffusion of knowledge. Even when the company concerned has intellectual property rights over the results of its R&D, it may be difficult to appropriate all the benefits of R&D that accrue to other companies. As a result, the individual company may undertake too little R&D from the point of view of society as a whole. State intervention, in the form of subsidies to R&D, can establish a more efficient outcome. R&D can also lead to positive spillover effects in the form of companies and customers deriving increased benefits from product improvements.

1.127

A number of indicators may be used to establish whether a market failure in R&D exists. The extent to which the benefits of the R&D effort can be reaped 99 100

In relation to those sectors for which it has been designed (the electricity sector takes an important place in this regard) and in the ETS trading period concerned. The argument that the simultaneous taxing of emissions (or using ETS prices) and the sponsoring of new technologies through subsidies may be efficient, i.e. cost minimizing, has been made by e.g. Acemoglu, D., P. Aghion, L. Bursztyn and D. Hemous (2012), The environment and directed technical change, American Economic Review 2012, 102(1): 131-166. In their logic, the subsidies to foster or accelerate the large scale deployment of new green technologies are closely related to subsidies fostering R&D.

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by the firms in question is an important one. R&D does not only cost money. If successful, it is also likely to bring extra revenues. Product improvements resulting from R&D may well generate extra sales volumes and increase market shares. In principle, customers are willing to pay a higher price for new and improved features of a product or a service. Not all “benefits” of R&D in terms of improved product features should therefore be seen as externalities (i.e. not already being taken into account in the decision making of the firms). It is only the part that cannot be monetised by the firms undertaking the R&D. If similar R&D projects are being undertaken in the market without the support of State aid, it is normally a strong indicator that the aid does not address a market failure. The market already produces the innovations sought after. By the same token, duplication of R&D effort may bring about few additional benefits, neither to consumers nor in terms of knowledge creation.

1.128

Illustration: VHD (2007) In 2007, the Commission launched a formal investigation procedure into a French support measure to support the development of a hybrid diesel car (VHD).101 France planned to grant EUR 96 million aid to car maker PeugeotCitroën and 16 partners in the form of grants and repayable advances for the development of various parts of a hybrid diesel car. The total R&D costs of the project amounted to EUR 470 million out of which EUR 271 million would constitute costs eligible for aid.

1.129

The aim of the VHD programme was to produce a car that emits less CO2 and has lower fuel consumption. At the same time, the programme aimed at substantially reducing the additional costs of buying a hybrid car.102

1.130

The development of less polluting cars is in itself a laudable objective. Likewise, an increase of R&D in the Union is likely to contribute to economic growth and sustainable development. However, in the present case, the Commission had doubts whether a market failure existed in that field (and whether PeugeotCitroën, the second-largest automobile manufacturer in Europe, would have undertaken that project anyway, even in the absence of a State subsidy), noting

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101 102

C51/2007 – France – Soutien de l’Agence de innovation industrielle en faveur du programme VHD. The case was subsequently withdrawn (http://europa.eu/rapid/press-release_IP-07-1679_en.htm). The most important innovations envisaged were a cost reduction of the main components by a factor of three, the development of components and systems maximising the use of electric and thermal energy, the development of other components contributing to the reduction of fuel consumption (braking system with energy retrieval, low resistance tyres, etc.) and a reduction of the vehicle’s weight (doors, lighting, seats, ...).

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that the automobile sector is one of the most R&D intensive in the Union’s economy and that similar innovation projects were being executed or had been announced by competitors.

1.132

The Member State eventually withdrew the notification and the aid was not given. Whether Peugeot-Citroën effectively pursued the VHD project in the end is difficult to verify. The company started to introduce cars with hybrid diesel engines as of 2011,103 but whether those cars fully corresponded in terms of functionality to the cars envisioned in the VHD project is not clear from the available information. ■

1.133

Closely related to the problem of externalities is the provision (or absence thereof ) of public goods. Public goods are goods which are non-rivalrous in consumption (the use of the good by one person does not reduce the possibilities of others persons to use or consume it) and for which it is difficult or impossible to exclude anyone from consuming it (and hence making users pay for the goods).

1.134

Examples of pure public goods are relatively rare, but they do exist. Public freeto-air broadcasting is a classic example. In the financial sector, financial stability, market confidence, liquid markets, transparency are all good examples of public goods. Fostering security of supply in the field of energy likewise may be understood as being efficiency related (security as a public good, benefitting all in society).104

1.135

In a sense, public goods represent an extreme case of externalities, as suppliers of such goods cannot appropriate the benefits that people derive from it. As a result, public goods are not normally provided by the market. The public provision of such goods or services may then be an efficient response.

5.1.2 Information asymmetries 1.136

Information is not necessarily of a kind that is accessible and verifiable to everyone. In certain markets, there is a discrepancy between the information available to one side of the market (e.g., the supply side) and the information available to the other side of the market (the demand side).

103 104

SAE International of 26-Oct-2011 “PSA Peugeot Citroen launches world’s first production diesel hybrid car”, available at http://articles.sae.org/10310/. Sometimes, services of general economic interest (SGEI) are also deemed “public goods”, mainly because they are, de facto, available to everyone (i.e. impossibility to exclude any individual user) and the cost of providing the service to additional individual users is rather minimal.

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A well-known example arises in the context of financing, where the company demanding finance (e.g. loans or equity finance) is typically better informed about the state and prospects of the company than banks or investors. If companies have little scope for credibly transmitting the information required on their business, it is difficult for banks or investors to distinguish “good” from “bad” loans or investments, giving rise to so-called adverse selection problems. Investors can invest in research in order to reduce the scope of the asymmetry, but will typically only do so for potential investments of a minimum size, in view of the costs involved. Likewise, to the extent that the performance of the companies being financed cannot be verified, banks will suffer from a problem of moral hazard. Contracts (e.g. specifying conditions on the behaviour of the company invested in) can be designed in order to address that issue, but they are costly as well and may involve a degree of inefficiency, relative to the outcome that would prevail in the presence of full information. As a result of those factors, market finance may not be made available, not even for firms worth the investment.

1.137

Young firms, in particular in dynamic industries, may suffer from the problem of information asymmetry, insofar as they have not gained a reputation yet for developing new products and bringing them to the market, a reputation that would be instrumental in obtaining finance. They may also not have the necessary collateral to obtain loan financing.

1.138

Under such circumstances, providing incentives to the financial sector to increase financing to small and medium-sized companies can be an appropriate response in terms of efficiency. The problem of asymmetric information in the provision of finance is indeed the main motivation behind the Commission’s policy towards State support to risk capital in the context of SMEs.105

1.139

At the same time, when it comes to subsidy policy, it must be mentioned that the State may not be able to do better than private investors because the State has no better information. Hence, there have to be particular benefits of relieving the asymmetric information that cannot be internalized by a private party. It is an important constraint on sound public policy.

1.140

The consequences of a firm not receiving finance may well go beyond that single firm, in particular in the presence of growth externalities. As will be set out in

1.141

105

Community Guidelines on State aid to promote risk capital investments in small and medium-sized enterprises OJ C 19, 22.01.2014. In the context of risk capital (equity financing of companies in their early growth stages), the capital market imperfections preventing the supply of risk capital from meeting demand at a price acceptable to both sides is known as the “equity gap”.

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more detail in Section 7.1, many successful sectors witness productivity growth not because firms present in the market gain in productivity, but rather because the more efficient and technologically advanced firms grow at the expense of the less efficient ones (or ones with obsolete products). To the extent that this process is disturbed by potentially successful firms not being able to obtain finance, the wider consequences for productivity growth are likely to be negative. Specifically, allowing a wider base of companies to enter the market sharpens the selection effect, leading to more efficient surviving firms and thus faster growth. Under such circumstances, providing incentives to the financial sector to increase financing to smaller companies (entrants) can be an appropriate response in terms of efficiency.106

1.142

Imperfect and asymmetric information, in conjunction with coordination failures (see below), can also give rise to systemic failure in the financial sector. Banks may have private information about the characteristics of their investments that cannot be verified by the financial markets. Where a crisis of confidence erupts, as was the case e.g. in the aftermath of the bankruptcy of Lehman Brothers in 2008, asymmetric information and the failure of market players to coordinate action may cause the financial markets (in particular interbank lending markets) to come to a halt.107

5.1.3 Coordination problems 1.143

Coordination problems may lead to market failures where the costs of contracting, uncertainty about the collaborative outcome and network effects108 prevent the effective design or even the conclusion of contractual agreements, thus leading to inefficiently low levels of coordination and output. Coordination problems generally increase with the number of players involved and to the degree to which interests between them diverge. Coordination problems may further be exacerbated by information problems (discussed above), in that imperfect and asymmetric information make it difficult to write adequate contracts governing the cooperation between the various players. Information problems may thus prevent firms from taking mutually beneficial decisions. 106

107 108

Since the better selection is an effect at the aggregate level, not for a specific contract, a bank will not be able to internalize it, while a government can. Thus there is an externality from reducing the impact of asymmetric information that justifies government intervention. For more details, see e.g. S. Mavroghenis and S. Maes: State Aid in Banking. In: Ph. Werner and V. Verouden, EU State aid control: Law and Economics, Kluwer Law International (2016, forthcoming). In economics, a network effect (also called network externality) is the effect that one user of a good or service has on the value of that product to other users. When a network effect is present, the value of a product or service increases with the number of other users. Examples: the telephone network, social network sites.

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Market failures due to coordination problems may arise in the context of research cooperation agreements. Suppose partners in a research project contribute very different skills and knowledge that may or may not turn out to be valuable. A research project may yield results that lead to different development strategies that are hard to predict ex ante, at the stage of drafting contracts. As a result, contracts between parties involved in investment projects will be incomplete109 and some parties may not undertake the efficient levels of joint investment (in particular those parties that exercise little control in case of unforeseen events) or fail to invest at all (e.g. when it is necessary to incur sunk costs before a contract can be signed between parties). Those coordination problems and the cost of coordinating tend to increase with the number of contractual partners.

1.144

Coordination problems may also stem from the need for a given technology, standard or practice to have reached a certain critical mass before it makes sense to adopt it or to build complements for it. For instance, alternative fuels for cars may only be developed when fuelling stations are expected to be built, and vice versa. In that case, there is a coordination role for the State, e.g. in the provision of complementary infrastructure.

1.145

Illustration: Dutch marginal offshore gas fields (2010) In 2009, the Netherlands notified a specific tax measure (tax reduction) with a view to foster the optimal exploration and exploitation of the country’s offshore gas reserves in the North Sea.110 The measure was specifically targeted at incentivising the use of so-called marginal gas reserves, typically smaller reserves that were not exploited yet by the gas companies active in the North Sea, because the revenues of doing so (measured over time) were almost, but not quite sufficient to cover the costs (including a reasonable return on capital).111

109

110 111

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A contract is called complete when it covers all possible contingencies that may occur and has all the relevant decisions (on payments, price, quantity, product characteristics, etc.) depend on verifiable variables. By contrast, when the contract does not cover all possible contingencies and, hence, leaves open what to do in those cases, a contract is called incomplete. At the origin of contract incompleteness is, of course, that it may be very costly (or even impossible) to write complete contracts. Commission Decision of 20.7.2010 in case N 718/2009 – The Netherlands – Development of marginal offshore gas fields. OJ C 270, 06.10.2010, p. 1. The revenue of a gas field is determined mainly by the recoverable reserves, the oil or gas price and tax regime. The costs are mainly determined by the location of the field (including the distance to existing network infrastructure), reserves and productivity. Gas reserves were deemed marginal if they had a Value Investment Ratio (defined as the ratio between the NPV of the project and the initial investment cost) below 0.2 and were not yet being exploited.

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1.147

There were several reasons for the Dutch authorities to introduce the measure. For instance, fostering investment in the exploration and exploitation of otherwise untapped gas reserves would increase the availability of gas supplies in the years to come, thereby increasing to some extent security of supply (which can be considered a public good).112

1.148

Another reason for the measure was related to a clear network externality. To exploit gas fields, those fields need to be connected to a gas network infrastructure (e.g. pipes and other facilities) to transport the gas to the mainland. The marginal reserves were mostly located in areas in the North Sea where there were already larger existing gas platforms and network infrastructure. However, those gas fields were expected to be exhausted in 10 to 15 years. The economics of exploiting any gas field depends inter alia on the allocated share of the operational cost (e.g. the cost of maintenance) of the existing infrastructure to which the field or prospect is connected. Each new gas field that is connected to the network contributes to the economics of the network, yet the firm in question may not be able to reap the full benefits.

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As the existing production was in decline and because operational costs were allocated on a throughput basis, the share of the operational costs would increase with time, as more and more fields were being discontinued. If no new fields were connected in the next five to ten years, the platforms and infrastructure in question would be dismantled and removed. Their removal would have direct consequences for the other (remaining and new) gas fields in the area.

1.150

By sponsoring the exploitation of the marginal fields, the measure meant that those fields were developed at a time where the network infrastructure was still in place. Further, the new fields would enhance the usage of the network, thereby rendering it more efficient and extending its economic life, allowing for more gas to be extracted over time. ■

1.151

Coordination problems may further occur in the context of regional development and cluster formation. In the presence of agglomeration externalities (cluster effects) a firm’s profitability increases when it is located close to its com112

Furthermore, one reason why the gas fields were “marginal” (lacking profitability from a private operator point of view) was that revenues from gas exploitation were subject to a special tax. In addition to Corporate Income Tax (CIT), under the Mining Act mining companies had to make an additional payment to the Dutch State, the so-called State Profit Share (SPS), based on the result of the cost and revenue of the gas fields exploited. While this tax allowed the State to obtain additional revenue from extracted gas, it also led to fewer gas reserves being exploited than otherwise would have been the case. Through the tax reduction, the Dutch authorities could partially “undo” that levy-induced underutilisation of gas reserves.

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petitors, suppliers and customers. A market failure arises where coordination problems prevent efficient agglomeration to occur. In that context, smaller firms may be more subject to coordination failure than large firms, as the latter are typically better able to “organise” clusters or initiate their emergence.113 The efficient provision of insurance may also be hampered by coordination problems. It applies in particular to insurance against so-called aggregate risk, where the risk is correlated with macro-economic conditions (so that it is difficult to diversify it away). In principle, it is efficient to spread risk associated with aggregate shocks over many insurers,114 but coordination failures may make it impossible. At some point, it may be efficient to have the State (tax payers) provide the insurance.

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Finally, coordination failures may give rise to systemic failure in the financial sector. Where a systemically important bank is in financial distress, its difficulties expose other banks to a risk of default. A failure to coordinate action may cause the financial markets (in particular interbank lending markets) to end up in a “bad” equilibrium, one in which banks are unwilling (or unable) to extend credit to each other as they anticipate that other banks will likely suffer from liquidity problems. That process may turn into a state in which interbank lending comes to a halt. State aid may be beneficial in alleviating coordination problems, notably by providing access to liquidity.

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5.1.4 Market power Another specific reason why the market may not lead to an efficient outcome is the existence of market power (“failure of competition”). Significant degrees of market power, e.g. related to positions of monopoly, lead to prices that are too high from society’s point of view, thereby hampering efficiency. State aid measures can, in principle, reduce market power, for instance by fostering entry into a given market that would not occur without the State aid.115

113 114 115

1.154

For instance, large firms may have more confidence in the fact that its main suppliers will follow its lead when it decides to start a greenfield investment. Given that economic actors are typically to some extent risk averse, the cost of insurance can be reduced by spreading the risk over many actors. It should be noted that other forms of State intervention may also alleviate market power. For instance, the State could regulate prices. However, price regulation may be hard to implement and may create new problems (for instance, it may be hard to properly incentivize new investment by the monopolist). The authors thank Koert van Buiren for pointing this out.

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1.155

In most markets where some players enjoy a certain degree of market power, and where markets may not be considered fully efficient, the Commission will normally not accept it as a sufficient justification for granting State aid to other players, e.g. smaller players.

1.156

An exception may arise where there is a persistently high degree of market power in the provision of infrastructure that is complementary to a lot of other economic activities. Such is the case for broadband networks which are a necessary infrastructure for the development of a digital single market. Arguably, the significant growth potential from innovative digital services is hampered by dominant incumbents who may be reluctant to invest into high speed “NGA” connections.116 The 2013 Broadband Guidelines therefore allow State aid for broadband development in so-called grey areas, where the area is served by a monopolistic provider at unsatisfactory conditions.

5.2 Equity considerations 1.157

The second main rationale for State intervention relates to equity considerations. Even if competitive markets tend to promote efficient outcomes in terms of welfare generation and the allocation of goods (in the absence of a market failure), the outcome of that process might be perceived as inequitable.

1.158

For instance, companies, when deciding where to locate, would normally look for the commercially most attractive location for its activity, possibly leaving more peripheral regions aside in their choice. From a distributional perspective, that outcome may be non-desirable. Similarly, urban areas typically tend to attract a lot of investment in broadband connectivity, whereas less densily populated areas may be left underserved given that the business revenues to not cover the cost. In such cases a “digital divide” may emerge, in which some parts of the country (or the society) have access to fast broadband, whereas other parts do not. Governments may therefore wish to intervene for purposes of creating a more equitable outcome of the market process.

116

Cf. Chapter 23 on EU State aid control in the broadband sector.

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The equity rationale is particularly relevant for regional aid117, aid for the employment of disabled people and in many types of SGEI. Furthermore, apart from being a distinctly European societal value in its own right, equity is also important insofar as a lack of it is prejudicial to the sustainability of economic growth.

1.159

Both efficiency and non-efficiency related rationales provide a potential rationale for State aid. From a cost-benefit perspective it can nonetheless be useful to determine the extent to which State aid contributes to either of the two objectives (or possibly, to both). For instance, even if both R&D aid and rescue and restructuring aid may qualify as aid “for the development of certain economic activities or of certain economic areas” within the meaning of Article 107(3)(c) of the Treaty, the former is more likely to be efficiency enhancing and to carry the prospect of fostering GDP growth, whereas the latter may well come at the expense of efficiency. Similarly, whereas an efficiency-oriented measure leaves all actors better off (at least potentially), an equity measure entails, a priori, a certain trade-off between actors (between those actors that will be better off as a result of the measure and actors that will be worse off ).118 In that sense, interventions to tackle market failures can be viewed as “less political” than those to address equity problems.

1.160

In any event, it should be noted that “economics”, as such, does not advocate a particular choice between the State aid objectives of efficiency and equity: both can be valid objectives. The conceptual distinction between efficiency and equity has the benefit of making more explicit and transparent the costs and benefits associated with the various aid measures. However, the choice to foster one objective more than the other is ultimately a political choice based on value judgements.119

1.161

117

118 119

This is not to say that the decision of a firm to invest in a specific region may not result in significant positive externalities for that region. However, where the firm’s decision is not about whether to invest but about where to invest (i.e. a location choice), the externalities accruing to the region of choice would otherwise have accrued (to a greater or lesser extent) to the alternative region. There is thus a strong distributional aspect (equity) to such cases, at least from a static viewpoint. In the long run, however, the objective of regional aid is potentially in line with the objective to foster economic growth in the Union as a whole, given that also rich regions stand to gain from increased levels of economic activity in the assisted areas. That outcome may be in line with the very objective of the aid, of course (the objective to redistribute). Furthermore, measures that are a priori redistributive may in the long work out well for growth and efficiency. See also Friederiszick, H.W., L.-H. Röller and V. Verouden, “European State aid Control: an economic framework”, in Handbook of Antitrust Economics, (Paolo Buccirossi, ed.), MIT Press 2007, at p. 642.

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1.162

As indicated, certain types of aid may address both equity and efficiency issues, e.g. aid targeting market failures in disadvantaged regions. Where possible, that approach (as opposed to one that merely redistributes funds without seeking to tackle market failures) should probably be favoured.

6.

Incentive effect

1.163

If there is a market failure, intervention by the State has the potential to increase economic efficiency. The existence of a market failure is, however, a necessary but not sufficient condition for State aid to be effective. To be effective, State aid must lead to the recipient of aid changing its behaviour. This is referred to as the aid having an “incentive effect”.

1.164

Whether State intervention results into a positive change in the targeted activity is the issue at stake. That impact may include the amount, scope or the timing of the targeted activity and, in regional aid cases, also the location of the activity. The incentive effect can (only) be identified by an analysis of the counterfactual, namely the level of targeted activity that would prevail in the absence of aid. The difference in activity between the outcomes with aid and without aid can be viewed as the impact of the aid measure and captures the incentive effect.120

6.1 Methodology 1.165

Assessing whether an investment project is individually rational (profitable) for a company with State aid but not without will shed a direct light on the incentive effect.

1.166

As indicated in Section 3, the most common way to assess the commercial rationale of a specific project is by measuring its Net Present Value (“NPV”). When the NPV of a project is positive, it implies that the project has an internal rate of return (IRR) that exceeds the required rate of return. In other words, the project is worth carrying out.

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Relevant factors in the NPV assessment are the amount and time path of expected cash flows and the risk associated with the project. The investment is 120

The analysis of the incentive effect is related to, but distinct from the analysis of external effects and the presence of a market failure. The analysis of the incentive effect investigates whether a particular company will, on its own, undertake a particular project. The analysis of external effects investigates whether the market achieves an efficient outcome. First, the analysis of incentive effects is only relevant if there is a market failure in the first place. Second, the absence of an incentive effect does not necessarily imply that there is “no” market failure: it is possible that a failure in the market is alleviated by the aid, but not solved entirely.

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thus, ceteris paribus, less profitable from the company’s perspective when the risk and the start-up investment are high and when future cash flows are small or in the far future. When the project has a negative NPV, it is said to face a “funding gap”.121 When there are no other factors to take into account (relating e.g. to the strategic nature of the project), some financial incentive is in principle necessary to make the project sufficiently profitable and persuade the firm to do the project.

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However, when there are alternative projects to consider, it is not so much the profitability of the project as such that is relevant for deciding whether aid is needed, but rather the profitability of the project relative to other possible projects the firm can undertake. In that case, it is the difference (shortfall) in NPV relative to these other projects that defines the need for aid. In State aid terminology, that difference in NPV is referred to as the “net extra cost” of doing one project instead of another.

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Illustration: Dell Poland (2009) In 2009, the Commission authorised EUR 54.5 million of regional aid (in expected nominal terms), which the Polish authorities intended to grant to Dell Products Poland (a subsidiary of Dell Inc.) for the establishment of a manufacturing plant in Łódź (Poland).122 Dell intended to build a plant for the production of desktops, notebooks and servers, expected to create up to 3.000 direct jobs in the Łódzkie region in Poland, an assisted area in the sense of Article 107(3)(a) of the Treaty. The investment costs amounted to EUR 189 million.

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The Commission’s investigation found that the aid provided an incentive for Dell to locate its manufacturing plant in Łódź by compensating for less favourable investment conditions in comparison with the other envisaged location in Central-Eastern Europe, namely Nitra (Slovakia). The aid was found to be limited to the amount necessary to compensate for the net extra cost of locating the plant in Łódź as compared to Nitra.

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121

122

This meaning of the term “funding gap” is somewhat specific to the EU State aid rules and structural funds. It would be more precise to speak of an “NPV gap” or a shortfall in profitability. Funding problems may, in a more general sense, also relate to liquidity issues (e.g. difficulty to attract debt financing). Commission Decision of 23.09.2009 in Case C46/2008 LIP Poland - Aid to Dell Poland, OJ C 25, 31.01.2009, p. 9 and OJ L 29, 02.02.2009, p. 8. The Commission assessed the aid on the basis of the provisions of the 2006 Regional Aid Guidelines (RAG) and in accordance with the 2009 criteria for the in-depth assessment of regional aid to large investment projects (IDAC), which set out how to evaluate the positive and negative effects of such aid.

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The assessment was performed on the basis of internal company documents of Dell, made before the decision to locate in Poland was taken, identifying and reviewing the cost factors representing the key differences for assessing the comparative advantages of the two locations (differences relating to e.g. labour cost, labour availability, logistics costs).123

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The document also contained a quantitative comparison of the cost difference in net present value (NPV) terms between the two locations considered for the project. That NPV analysis, calculated over the period 2007-2018, concluded that, overall, in the absence of aid (both in Łódź and Nitra), it would have been more advantageous for Dell to locate the project in Nitra rather than in Łódź (cf. Table 1). Table 1: Cost differentials between Łódz and Nitra Cost category

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Net Present Value (NPV, in EUR)

Category 1

[…] mln

Category 2

[…] mln

Category 3

[…] mln

Category 4

[…] mln

Total disadvantage of the Łódz region (excluding State aid)

40,3 mln

Aid amount

39,4 mln

Given that the aid amount was of comparable magnitude (in NPV terms) as the cost differential of the two locations, the aid was deemed to be proportional. ■

123

The revenue streams for the two projects were identical, hence the focus on the cost factors.

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The valuation of R&D and innovation projects differs somewhat from “normal” investment projects, such as building a new production facility or entering into a new market segment, in so far as it is not certain that a final product will eventually be sold. In that context the NPV analysis can be usefully extended to explicitly account for the likelihood that the project will fail in technological terms.124 The possibility that a project will not pay off in the future because it fails technologically will then, ceteris paribus, translate into a lower expected level of future cash flows (i.e. the amount of cash flows in case of technological success times the probability of technological success). Indeed, important strands in the corporate finance literature advocate using a specific probability of success to the calculation of expected cash flows rather to use increased discount rates to reflect the risk of R&D projects.125

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The NPV value is normally not calculated on the basis of one foreseeable development only. Rather different scenarios are considered with possibly different inputs into the NPV calculation. The NPV can then be calculated for each possible outcome, and if a specific probability is attributed to each scenario, a final expected NPV can also be calculated.

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Illustration: CCS pilot project at Buggenum power plant (2010) The case is about a subsidy to an energy innovation project (called “CO2 catch up”) directed by Nuon Energy Sourcing NV (Nuon), a Dutch subsidiary of the Vattenfall group.126 The project was a demonstration project (pilot) with the aim of experimenting with, and trying to optimise, a new CO2 capture technology at Nuon’s power plant in Buggenum, the Netherlands. The total cost of the pilot project amounted to over EUR 40 million, the aid element being EUR 10 million in subsidies.

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The project formed part of a wider push by Nuon to implement Carbon Capture and Storage (or “CCS”) to reduce CO2 emissions from electricity production.127 If the project proved to be successful and the necessary permits would be secured, Nuon intended to implement the technology in its Magnum power plant, a large-scale multi-fuel power plant that was under development at the time. As for the counterfactual, the Dutch authorities indicated that without

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124 125 126 127

That method is sometimes referred to as the risk-adjusted NPV method (rNPV). Cf. Brealey and Myers, supra note 68 above, at p. 197. Commission Decision of 26.05.2010 in Case N190/2009 – Netherlands – CO2 Catch-up pilot project at Nuon Buggenum plant, OJ C 238, 03.09.2010, p. 1. The CCS process is a technique for trapping carbon dioxide before it is emitted, compressing it and transporting it to a suitable storage.

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the aid, Nuon would also implement CCS at Magnum, but it it would do so on the basis of (less efficient) technology procured on the market.

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The analysis of the incentive effect focused on whether the aid would lead Nuon to undertake the pilot, whereas it would not have done so in the absence of aid. For this purpose, the Dutch authorities submitted an NPV calculation comparing the profitability of implementing CCS in the Magnum plant on the basis of the pilot project (both with and without the aid) and the profitability of implementing CCS in the Magnum plant on the basis of procured technology (the claimed counterfactual).

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The NPV calculations showed that both with and without aid, the NPV of the pilot project in case of success was higher than the NPV of the basic procurement scenario (NPV1 > NPV0).128 Obviously, success of the project was not guaranteed and the appropriate treatment of the project risk was a key issue in the analysis.

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Conceptually, one can distinguish between two types of risk: the technological risk at the pilot stage and the “normal” business risk related to the subsequent implementation. The latter form of risk is normally already taken into account by the firm in the form of the discount factor for the calculation for the NPV (i.e. the cost of capital relevant to its business, here Nuon’s electricity generation activities). Therefore, instead of increasing the discount factor to reflect the higher project risk of the pilot project, the Commission chose to explicitly incorporate the probability of success by using it as a multiplication factor (P) to assess the expected NPV of the pilot project.129 Specifically, the Commission computed the “critical” probabilities of success, below which Nuon would indeed need State support to make the pilot project profitable enough for it. The approach followed by the Commission is summarized in Table 2.

128

129

Para. 51. The difference in NPV was largely related to cost savings due to the increased efficiency of the carbon capture process. The discussion in the Commission Decision is phrased in terms of IRR, but this amounts to the same assessment. The discount rate (cost of capital) used in the analysis was 8%. Para. 52.

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NPV of the project in case of the pilot being a success

Procurement scenario (no pilot)

Pilot project without aid

Pilot project with aid

NPV0

NPV1

NPV1 + subsidy

P%

P%

P % x NPV1

P % x NPV1 + subsidy

Probability of pilot being a success NPV0 Expected NPV

The critical probability of success obtained using this approach was rather high, approximately 70-80 per cent. In other words, it would appear that a 20-30 per cent probability of the results of the project not being implemented would be enough to make the pilot non-profitable. This was of course an approximation, not really an exact estimate (this is inherent to NPV analysis far into the future). Nonetheless, the result did give some insight into the relevant orders of magnitude, and was deemed by the Commission to be illustrative of the likely need for aid. ■

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6.2 Financing constraints When a project has a positive NPV, it should in principle be undertaken as it will increase the value of the company. In that context, one should be wary of the argument that individual business divisions of large corporations lack the finance to make investments as a result of a company’s policy with respect to the allocation of capital (investment budgets) among divisions. If the investment project of any particular division is profitable (given the appropriate cost of capital at the company level), one would expect the necessary capital to be allocated internally. Yet, internal allocations of capital may be part of the wider issue of designing appropriate mechanisms of incentives and control within the company. One cannot exclude that fixed budget or temporary cash constraints at the level of divisions may have a role to play in that respect, so that internal capital would not allocated despite a positive NPV. It may thus be appropriate to make some allowance for such circumstances and conclude that there is an incentive effect despite the fact that the investment is profitable without aid but provided that the company is able to factually demonstrate that the division faces important financing constraints. There is however a risk that State aid may then be preferably allocated to companies which have ineffective mechanisms of capital allocation. That approach is also potentially open to abuse to the extent that internal mechanisms for the allocation of capi-

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tal can be designed (or presented) in such a way as to ensure that aid is required. Hence, safeguards are needed. Mechanisms elaborated in tempore non suspecto should be given greater credence. In any event, it would seem appropriate to confront the arguments of internal financial constraint with the more objective project valuation methods. A large discrepancy between the two approaches, in particular the presence of strong returns, might cast doubt on the claims of the division as to the financing constraints it faces.130

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Finally, it would appear that the reason as to why State aid is needed is also relevant for the form in which such aid should be allowed. Where State support is not needed to increase the profitability of a project, but rather to overcome financing problems in the early investment stages, it would be appropriate to limit the support to what is required to address that constraint. In other words, it should suffice for the company to receive a loan or guarantee from the government (at a rate which is still compatible with maintaining a sufficient level of profitability for the project), or else support in the form of a repayable advance.

7.

The negative effects of State aid

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In section 3, we have seen that the focus on the selectivity of aid implies that in the Commission’s State aid practice, any change away from the counterfactual is deemed a distortion. Distortions need not be negative, however: they can result in both negative effects and positive effects. This section aims to describe the main negative effects of State aid the Commission is concerned with.

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What are exactly the negative effects of State aid from the Union perspective? That question can probably only be answered in the light of the underlying objectives of State aid control. Why does the Union have a system of (supra-national) State aid control?

7.1 Theories of harm in Union State aid control – a typology 1.188

While the avoidance of negative cross border effects can be viewed as the central rationale of Union State aid control (see section 2), such effects can arise in a number of different ways or forms. The more specific hypotheses as to how or in what form negative effects may arise can be considered the “theories of harm” in State aid control. 130

Additional analysis should in those cases try to further ascertain the credibility of company’s claims, notably by inspecting internal documents of the company such as business plans, and by verifying whether public statements or other pieces of information corroborate the claims of the company.

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The following two main categories of theories of harm can be distinguished: A.

Allocative inefficiencies (loss of welfare) – – – –

B.

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Product market distortions Distortions in input markets and location decisions Distortions between different sectors Shadow cost of taxation

Distributional concerns (shifts in welfare) – –

Distribution of welfare across Member States Distribution of welfare within Member States

The theories of harm are discussed in further detail below. It should be noted from the outset, however, that the theories of harm are not mutually exclusive. The fact that subsidies are high may be considered harmful in its own right because they lead to redistribution of funds away from tax payers to the owners of the aided firms. But they can also be deemed negative because they lead to product market distortions or distortions in the input market. At the same time, it is very well possible for a subsidy not to be “excessive” (e.g. the aid is limited to the minimum necessary) but nevertheless to create product market distortions.

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Negative effects can further be analysed from two different perspectives. First, one can look at an individual subsidy (and its effect) in isolation. It entails assessing the extent to which the specific subsidy engenders a negative effect.

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Second, one can look at the equilibrium effect (taking into account that subsidy policy will also be determined by the expectations of subsidy policy in other Member States). That perspective brings into the picture that a support measure taken by one Member State may provoke a subsidy race between Member States. In individually notifiable cases or schemes, it is in principle possible to focus the analysis on the assessment of case-specific effects. It will not be necessary to consider equilibrium effects because any aid will only be accepted if the positive effects outweigh the negative ones (including the external effect on other Member States). In addition, any later response by another Member State will be subject to the same State aid test. Hence, even for a sequence of individually notifiable cases there will not be the prisoners’ dilemma effect.

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However, there may be some areas of State aid in which it is of importance to consider equilibrium effects, even in the context of individual cases. For example, in regional aid, different Member States may be bidding for the same project. In that case an excessive aid amount may be the very result of the fact that other regions also competed for the project. Equilibrium effects should further be taken account of at the level of designing rules for block exemption (GBER), i.e. for cases (or schemes) in which there is no explicit assessment and balancing of the negative and positive effects of the case. In designing the rules one has to anticipate that a subsidy race can develop within the limits created by the rules.

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Below we do not explicitly distinguish whether we are looking at an equilibrium negative effect or a negative effect from a single aid project, but it should be kept in mind that the application of the principles presented will be slightly different depending on the context.

7.1.1 Allocative inefficiencies (loss of welfare) 7.1.1.1 Product market distortions 1.195

There are multiple ways to characterise the various potential distortions of product market competition that may arise in the area of State aid. One way is to differentiate between the three following main theories of harm131: (i) Interfering with the competitive entry and exit process (ii) Distorting dynamic incentives/moral hazard (iii) Creation or maintenance of market power. As discussed, State aid should be concerned with such distortions insofar as they lead to a negative impact on those countries that do not financially support their firms. In other words, there must be a cross-border dimension. Interfering with the competitive entry and exit process

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One potentially harmful effect of State aid is that it prevents the exit of inefficient firms. Indeed, it is a sign of a well-working market process that inefficient firms end those business activities at which they are not good at, restructure their activities or stop doing business altogether.

131

See also Friederiszick, H.W., L.-H. Röller and V. Verouden, “European State aid Control: an economic framework”, in Handbook of Antitrust Economics, (Paolo Buccirossi, ed.), MIT Press 2007.

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It is well documented in the economic literature that many successful sectors in the economy do not witness productivity growth necessarily because all firms present in the market gain in productivity, but rather because the more efficient and innovative firms grow at the expense of the less performing firms (e.g. firms that are less efficient or have less appealing products).132 That process of market entry, expansion and exit is known as the “churn process”.

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It is the loss of market share and/or the exit of inefficient firms that allows the replacement of such firms by potentially more efficient companies, raising average productivity. If there is an anticipation that State support is available to avoid exit, both exit and entry will be reduced, with the consequence that industrywide productivity improvements are slowed down. The long run effect on the overall performance of the sector is likely to be negative.

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State aid, by interfering with the allocation of rents through markets, may inhibit that process and thus have long term dynamic effects. Where it has the effect of maintaining in business firms or groups of firms that otherwise would have lost market share or would have exited the market, State aid acts as a break on other firms’ incentives to invest and compete, resulting in distortions across the economy and a reduction in long term growth.

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In the past 10-15 years, productivity growth has been distinctly lower in the Union than it has been in the US and other major trading blocks. For instance, whereas average USA growth in labour productivity in the period 2000-2013 amounted to 1.5 per cent, average growth in labour productivity in the EU-15 amounted to only 0.7 per cent.133

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132

133

See e.g. Bailey, M., Hulten, C., and Campbell, D. (1992). Productivity dynamics in manufacturing plants, In: Brookings Papers on Economic Activity: Microeconomics, Vol. 4, pp. 187–267, Brookings Institute; L. Foster, J. Haltiwanger, and C. J. Krizan, ‘Aggregate Productivity Growth: Lessons from Microeconomic Evidence’ in C. R. Hulten, E. R. Dean, and M. J. Harper (eds), New Developments in Productivity Analysis (Chicago: University of Chicago Press, 2001); R. Disney, J. Haskel, and Y. Heden, ‘Restructuring and Productivity Growth in UK Manufacturing’ (2003) 113(489) Economic J 666; E. Bartelsman, J. Haltiwanger, and S. Scarpetta, ‘Microeconomic Evidence on Creative Destruction in Industrial and Developing Countries’, World Bank Policy Research Working Paper No 3464 (2004); L. Foster, J. Haltiwanger, and C. J. Krizan, ‘Market Selection Reallocation and Restructuring in the US Retail Trade Sector In the 1990s’ (2006) 88(4) Rev Econ and Statistics 748; Aghion, Ph. and P. Howitt, Appropriate Growth Policy: A Unifying Framework, Joseph Schumpeter Lecture, Journal of the European Economic Association, Vol. 4, No. 2-3, pp. 269-314 (2006); Economic Advisory Group on Competition Policy (EAGCP; B. Lyons, J. Van Reenen, F. Verboven, X. Vives), Commentary on EU Rescue and Restructuring Aid Guidelines (2008);. R. Veugelers, “A post-crisis policy agenda to revive Europe’s Schumpeterian growth capacity”, Reflets et perspectives de la vie économique, 2010/2 Tome XLIX, p. 15-24; A. Bravo-Biosca, ‘Exploring Business Growth and Contraction in Europe and the US’, NESTA Research Report (2010); C. Syverson, ‘What Determines Productivity?’ Journal of Economic Literature, 49(2): 326-65 (2011). Source: The Conference Board Total Economy Database, January 2014, available at: http://www.confer-

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One important explanation lies in differences in the degree of market dynamism. There are clear indications that the churn process is significantly slower in the Union than it is in the USA. The following graph134 provides the composition of firms in the industry according to growth category (ranging from shrinking firms on the left to growing firms on the right). It shows that in the Union there is much bigger proportion of what could be called “static” firms than in the USA. In the USA, there appears to be a more powerful dynamic process in which certain firms grow fast, at the expense of other firms. That pattern is observed across different sectors and across different classes of company size.

Source: Bravo-Biosca (2011). Reproduced with permission.

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In declining markets, aid for a specific firm can also change the order of exit of more and less efficient firms, potentially leading to less efficient firms surviving longer than more efficient firms.

134

ence-board.org/data/economydatabase. Figure represented is the arithmetic mean of annual growth in labour productivity (GDP per person employed). EU-15: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK. A clear difference in average growth figures is also visible in Total Factor Productivity (also known as multifactor productivity). For country details, see also OECD Productivity Statistics, available at: http://www.oecd-ilibrary.org/ employment/data/oecd-productivity-statistics_pdtvy-data-en. Source: Bravo-Biosca (2011), A look at business growth and contraction in Europe, NESTA. (http://www.nesta.org.uk/publications/look-business-growth-and-contraction-europe)

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Examples include State aid to rescue and restructure firms in financial difficulty, sector specific aid to support ailing industries by purchasing their products at inflated prices, and industry sector arrangements (e.g. SGEI contracts) shielding certain incumbent operators from effective competition. In particular aid granted in markets featuring overcapacity and aid given in declining industries is likely to be negative.

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Such aid, since it affects product market competition as defined above, may lead to a negative impact on those countries that do not financially support their firms. There can be an impact of trade (e.g. change in trade patterns, import/ export figures of individual countries) to the detriment of such countries. This theory of harm me be relevant especially when there are large differences in the implicit costs of public funds as one would expect between richer and poorer countries.

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Illustration: Restructuring aid for PSA Peugeot Citroën (2013) In 2012, the French government announced that it would support the Banque PSA Finance (BPF), the financial arm of car producer PSA PeugeotCitroën. BPF provides car loans to purchasers of Peugeot and Citroën vehicles and finances the stocks of vehicles and spare parts for the two brands’ distribution networks.135

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In that period, the PSA group faced severe problems, as witnessed by sharply decreasing sales volumes and market shares, and steep losses. Because of the problems experienced by the PSA group, Banque PSA Finance found it impossible to refinance itself at viable terms. The ability of the bank to access the financial markets plays a decisive role in the PSA group’s industrial activity. The main support measure was a State guarantee covering future bond issues by BPF (until 31 December 2016) up to a maximum of EUR 7 billion.136

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Following a formal investigation procedure, the Commission concluded that the restructuring aid was compatible with the internal market. First, it verified that the structuring plan of PSA would indeed restore the group’s viability. Viability is a central compatibility requirement, as keeping unviable firms in the market is the worst possible scenario for the sector as a whole.

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135 136

Commission Decision of 29.7.2013 in Case SA.35611 Aide à la restructuration du groupe PSA. The guarantee would be priced at 2.60 per cent, which was below market price considering the fact that bonds of BPF in the secondary bond market were trading at rates implying a 4.91 per cent credit risk margin. Based on that comparison, the subsidy element (GGE) contained in the EUR 7 billion guarantee was estimated to be EUR 486 million.

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Second, the Commision established that PSA offered a sufficient degree of “own contribution” in the financing of the cost of executing the restructuring plan, thereby keeping the volume of the State guarantee limited to the minimum.137

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Third, the Commision imposed a number of “compensatory measures”, i.e. measures to limit the distortions of competition. The Commission considered that the State guarantee for bonds issued by PSA/BPF would primarily enable it to obtain cheaper debt. That advantage might be necessary for the group’s return to viability, but should not allow it to offer too cheap credit for the purchase of vehicles, which would artificially increase the PSA group’s sales and harm its competitors any more than necessary. The French authorities therefore undertook to apply a “pricing formula” for the State guarantee allowing PSA to restructure, while reducing to a minimum the damaging effects for competitors who have not received support from public funding. For that purpose, the price of the guarantee paid by PSA was based on the “penetration rate” of BPF financing, i.e. the proportion of Peugeot and Citroën vehicles sold with financing from BPF. Starting from a 2.60 per cent base price for the guarantee, if the penetration rate of BPF were to increase substantially, the price of the guarantee would go up in a gradual manner and eventually (when the penetration rate would be similar to the one obtained by its peers) increase to 4.91 per cent, corresponding to the market price for such guarantees estimated by the Commission, and thereby avoiding any further effect of the State guarantee.138

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In that way, the restructuring plan, together with the commitments from the French authorities, would enable the PSA group to return to viability, while at the same time protecting in a balanced way the interest of preserving competition on merit. ■

137

138

It is worth noting that the “own contribution” requirement under the old Rescue & Restructuring Guidelines of 2004 (applicable at the time of the PSA case) is essentially a liquidity requirement. For instance, using the proceeds of a sale of assets or debt issues (inclusing loan extensions) would count as an “own contribution”. With the new Rescue & Restructuring Guidelines adopted in July 2014, the firm will not only have to show a sufficient own contribution in terms of liquidity, but also contribute in terms of solvency, to make sure that shareholders and (subordinated) debt holders bear part of the losses. This “burden sharing” is meant to avoid moral hazard problems and address the problem of artificially low costs of debt. Some other compensatory measures were imposed as well. PSA group promised to maintain the credit margin for loans granted by Banque PSA Finance to dealers and to refrain from making major acquisitions during the period covered by the restructuring plan. Further, a foreseen R&D grant of EUR 85.9 million to PSA was transformed into a repayable advance, meaning that PSA will have to pay back the money in case the project concerned is successful. For a critical review of the concept of compensatory measures in EU State aid control, see U. Soltész and B. Lyons: Rescue and Restructuring Aid. In: Ph. Werner and V. Verouden, “EU State aid control: Law and Economics”, Kluwer Law International (2016, forthcoming).

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Distorting dynamic incentives/moral hazard State aid may negatively affect the investment incentives of firms, thereby decreasing the dynamic efficiency of markets. The central concern in that context relates to the crowding out of potentially more efficient suppliers.

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When a given company receives aid to invest in e.g. production capacity or R&D, it generally increases the presence of this company in the (future) product market. In turn, rivals that are not subsidized (including possibly more efficient firms) may revise downward their future revenue prospects from their own investments and adjust their own investment plans accordingly.

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The effect may be particularly harmful if the aid allows the recipient to force (more efficient) competitors to exit or not to enter in the first place. Such aid raises entry barriers by signalling that firms’ own effort and competitive advantage is not the only criterion for winning market shares. More generally, firms anticipating that profits will be affected by State aid in addition to their own efforts may find it optimal to reduce their own efforts and effort into lobbying for State aid support.

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An important distortion of dynamic incentives comes from an interaction with exit reducing effects of aid. When a firm anticipates that it will be saved, its cost of capital - i.e. the weighted cost of equity and cost of debt - will be artificially reduced, as the credit risk of the company is effectively covered by a (free) implicit guarantee by the State.139 That lower cost of capital may result in artificially high market expansion and growth. In fact, the more likely a firm is to be bailed out (for example if it is specifically important to a region or systemically important as a financial institution), the implicit guarantee is effectively higher, leading to lower capital costs for larger firms, distorting the relative growth of these firms against other firms.140

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139

140

It should be pointed out that implicit public support (linked to market expectations that the State will likely step in in case the company faces financial distress) does not formally contitute State aid. It does not meet the conditions of Article 107(1) insofar as no State resources are committed for the purpose. However, the example does illustrate the distortions that come about from (anticipated) rescue and restructuring aid. Indeed, actual disbursed rescue and restructuring (R&R) aid to one company may create anticipations as regards the likelihood of that same company receiving R&R aid in the future or of other companies in that sector (or country) receiving such aid. The ‘one time last time’ principle should normally rule out the former anticipation but cannot rule out the latter. See also Commission Staff Working Paper, The effects of temporary State aid rules adopted in the context of the financial and economic crisis (2011), available at: http://ec.europa.eu/competition/publications/reports/temporary_stateaid_rules_en.html.

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There is a considerable body of evidence illustrating the role of implicit public support in lowering the capital costs of systemically important banks (also referred to as Too-Big-To-Fail, or TBTF). For instance, Ueda, and Weder di Mauro (2013) find that banks in major countries enjoyed an estimated funding cost advantage of 60 basis points in 2007 and 80 basis points in 2009.141 Survey results point to estimates of a comparable magnitude, or even to higher estimates for certain individual banks.142 Illustration: The Danish experience with bail-in legislation (2010)

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The importance of implicit public support in lowering the capital costs of systemically important banks is well illustrated by a legislative initiative that Denmark took in 2010 in relation to the winding up of banks in difficulty. In 2010 Denmark introduced stricter rules on bank resolution, including a comprehensive bail-in regime for senior creditors of banks in financial distress (requiring those creditors to accept important “haircuts” on their claims, as a condition for State support).

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Denmark was, in many ways, a “front runner” with that policy. When the consequences of that new regime became clear,143 however, credit rating agencies reduced the credit rating of several large Danish banks.144 That reduced credit rating was reflected in higher funding costs for Danish banks vis-à-vis banks in other Member States (who were not exposed to similar legislation), creating a non-level playing field. It led the Danish autorities to subsequently take measures to soften the effects of its new policy,145 in anticipation of a more coordinated introduction of bail-in rules at Union level. ■

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A specific concern when it comes to aid that prevents exit is the moral hazard problem.146 When firms can count on being bailed out when they run into prob141 142

143 144 145

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Ueda, K. and B. Weder di Mauro (2013), Quantifying structural subsidy values for systemically important financial institutions. Journal of Banking & Finance 37(10), 2013, 3830-3842. For an overview, see OECD (2014), Why do implicit bank debt guarantees matter? A note describing some indirect evidence, DAF/CMF(2014)22; Schich, S., and Y. Aydin (2014), “Measurement and Analysis of Implicit Guarantees for Bank Debt: OECD Survey Results”, OECD Financial Market Trends, 106. The consequences became clear following the collapse of the Danish bank Amagerbanken. Cf. Financial Times (2011), ‘Concerns grow over Denmark’s bail-in rules’, May 23. Moody’s assigned a lower level of “systemic support” to large Danish banks, leading to a two-notch lower rating for most of them. On 25 August 2011, Denmark introduced the ‘Consolidation Package’. Among other measures, the package aimed to incentivise healthy banks to take over distressed banks, thereby avoiding that a winding down with potential debt-write down for senior creditors would take effect. That problem is especially relevant in the banking sector.

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lems, it may incentivise them to become more risk seeking and expansionist as they know that they face limited downside risk. In that context it is worth noting that the Commission, in its approval of aid to banks during the financial crisis has systematically required a degree of “burdensharing” by the aided banks, i.e. contributions from the bank’s existing shareholders and subordinated debt holders, so as to make them bear part of the losses. Likewise, the new Rescue & Restructuring Guidelines, adopted in July 2014, require that a firm that receives R&R aid will not only have to show a sufficient “own contribution” in terms of liquidity (as was the pre-exisiting requirement), but also contribute in terms of capital (i.e. to improve solvency).147 That burdensharing requirement is meant to avoid moral hazard problems and to address the problem of artificially low costs of debt.

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Creation or maintenance of market power In principle, State aid measures can have the effect of increasing or maintaining market power by a single firm (or a group of firms).148 It should be stressed that the mere receipt of finance does not strengthen market power directly. Any mechanism would have to work through discouraging entry of new competitors or inducing exit. Even measures to subsidize production may not increase market power but decrease it in the sense that the subsidized firm becomes more competitive in the market and reduces price.149

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In the Commission’s decisional practice, the market power theories of harm do not appear to be so frequently relevant. Indeed, it would seem to be very hard to substantiate a theory of foreclosure of competitors (potentially from other Member States) supported by State aid in all but some very clear settings.150 It would typically involve aid to firms with already very strong market positions to show that the aid would serve to further strengthen that position. However, some examples exist of cases where the strong market position of the benefiary played an important role.

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147 148

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Communication from the Commission — Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.7.2014, p. 1. See also Chapter 21 of this volume. Market power is the power to influence market prices, output, innovation the variety of 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 economic literature on “mixed oligopoly” (assessing the role of State-regulated firms in an oligopoly context) shows that in the presence of market power subsidizing a firm may lead to welfare improvements by reducing prices towards marginal costs. It holds true even if one accepts that the standard of proof for foreclosure in the context of State aid control may be less stringent than in the context of antitrust or merger control.

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Illustration: aid for Estonian electricity generation capacity (2011)

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In 2011, the Commission opened an in-depth investigation into an Estonian project to grant State support of up to EUR 75 million per year (over 20 years) for the operation of two oil-shale power plants in order to increase its domestic electricity generation capacity.151 The aid would be paid for the availability of the plants, provided that they were mainly fuelled with oil-shale, a hydrocarbon widely available in Estonia.

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Estonia claimed that planned domestic generation capacity and electricity interconnections with other Member States in the Baltic region were insufficient to address future risks to its security of supply. While the Commission acknowledged the importance of securing energy supplies, it had doubts that the proposed measure would be the least distortive means to achieve that objective.

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In particular, no competitive tender was foreseen: the most likely beneficiary of the measure would be the fully vertically integrated incumbent energy company Eesti Energia, which had significant activity along the whole value chain from mining to electricity distribution, with shares of more than 75 per cent in all those activities in Estonia. The concern was that the substantial amount of aid and the long duration of the scheme would solidify Eesti Energia’s already strong market position, by discouraging investment into alternative technologies in Estonia and in neighbouring Member States and in crowding out competitors, who would have to operate in the market without such aid. ■

7.1.1.2 Distortions in input markets / locational decisions 1.225

Subsidies may not have an impact on the product markets in which the beneficiary is active, but rather on markets which are upstream or downstream of those product markets. Such effect could arise if State aid directly or indirectly subsidises the use of particular inputs such as certain types of fuel, specific types of equipment, labour, or capital (through a financial injection).

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To illustrate, consider a subsidy scheme encouraging companies to invest in environmentally friendly production techniques. Such aid may have no impact on either of the financial position of the beneficiaries (when the subsidy just compensates for the extra cost the new equipment) or the competitive position of the companies (when the new equipment does not make the company more 151

Case SA.30531 – Estonia – Aid for Capacity Payments for Oil-Shale Fuelled Electricity Production. The case was subsequently withdrawn (http://europa.eu/rapid/press-release_IP-11-349_en.htm).

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efficient). The main effect such aid may have is to sponsor suppliers of environmentally friendly equipment in the country concerned.152 Another important potential distortion in the input markets arises with respect to the choice of a particular location (which can be thought of as an input).153

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The purpose of regional aid is to attract investment into the region. Two scenarios can be distinguished.154

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In the first scenario (“Scenario 1”), the aid gives an incentive to undertake an investment that would otherwise not be profitable for the company involved, not in the region concerned or elsewhere. In that case, the aid has the effect of adding production capacity into the market, extra production capacity that may shift production away from more efficient competitors in other Member States.

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In the second scenario (“Scenario 2”), the aid induces the company to invest in one region instead of another. The aid will not have a big effect on product market competition as the investment into capacity would have been made regardless of the aid. However, the aid may lead to allocative inefficiencies, if the region from which the aid was drawn has a comparative advantage for that specific type of production.

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Besley and Seabright (1999) analyse the efficiency properties of subsidy races in the context of countries seeking to attract foreign direct investment (FDI) in relation to regional investment projects.155 When a company chooses to locate a plant in a particular region, that investment may give benefits to other players in the region concerned as well, benefits which are not taken into account by the investing company. Those positive (localised) externalities are the reason why regions often “compete” to attract the investment. If countries/regions are heterogeneous, the benefits to attract investment vary over regions. From an overall efficiency point of view, it would be optimal if the region where the spillover effects are highest would obtain the investment concerned. If so, a “bidding

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152 153

154

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Note that Article 107(1) of the Treaty may apply not only when the aid helps the direct beneficiary but also when it favours the production of certain goods. Cf. The Commission’s Draft Communication ‘Common principles for an economic assessment of the compatibility of State aid under Article 87.3 EC’ (2009), para 49 (available at http://ec.europa.eu/competition/ consultations/2009_common_principles/index_en.html). Cf. Commission Guidelines on regional State aid for 2014-2020, OJ C 209, 23.07.2013, p. 1; Communication on the in-depth assessment of regional aid to large investment projects (2009), OJ C 223, 16.9.2009, p. 3. Besley, T. and P. Seabright (1999): The Effects and Policy Implications of State aids to Industry: an Economic Analysis. Economic Policy, 15-53.

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contest” between regions would allow the region with the highest benefits to obtain the investment. Besley and Seabright thus find that a subsidy competition between countries to attract FDI can result in an efficient allocation of investment across regions.156 However, the efficient outcome may not be achieved when some countries (e.g. the poorer countries) are resource constrained. In such a case, poor countries will easily be outbid by rich countries independently of whether the investment is most efficient in the region or not. Hence, in the Union, where there are considerable differences in the budgetary means of different countries, there is a clear risk that a subsidy race for regional investment results in inefficient outcomes.157

7.1.1.3 Distortions between different sectors 1.232

Allocative inefficiencies may also arise beyond the confines of the product market for which the aid is given or its related input markets. For instance, input market distortions like labour market distortions or systematic investment aid to some sectors relative to others can lead to an inefficient use of scarce resources across sectors. State aid to sectors in structural decline can have particularly undesirable consequences by delaying the reallocation of scarce resources from declining to growing sectors.

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Another example of sectoral aid that may have implications for other sectors is aid to compensate users of electricity for the increase in carbon costs relating to ETS. The more a sector is shielded from the price signals of ETS (by a subsidy that keeps down the price of electricity), the less those sectors will curb the use of electricity and the more other sectors in the economy are exposed to the need to curb emissions.

7.1.1.4 The shadow cost of taxation 1.234

One often disregarded allocative effect comes from the fact that State aid is costly for the Member State. It involves using State funds that need to be raised 156

157

See also OECD (2010), State aids and Subsidies, Background paper of the proceedings of the OECD Global Forum on Competition Roundtable on Competition, section 2.2. Available at: http://www.oecd.org/ regreform/sectors/48070736.pdf. A distinction on competition can be drawn between competition for new investment and competition resulting in the relocation of existing facilities. If an existing facility is being shut down in one location and moved to another location, it may entail various adjustment/transition costs in the region that lost the investment. Likewise, suppliers in the region may have made specific investments for the facility concerned, employees may have developed specific skillsets that are not easily employable in other contexts, etc. A relocation of an exisiting facility may therefore be considerably more costly in terms of welfare than a change in location for a new investment project.

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through distortive taxation (shadow cost of taxation) and could also have been used in other domains of government (opportunity costs of State aid). In principle one can assume that the cost of taxation is taken into account by the Member State giving the subsidy itself, but in situations in which one has to consider the equilibrium effects of aid and therefore need to worry about subsidy races, the shadow costs of taxation may be an important part of the inefficiency created. Empirical estimates of the shadow cost of taxation range from to country (partially reflecting differences in existing tax levels), but it would appear that the shadow cost can easily amount to 1.15 - 1.3.158 As a result, for every euro of subidy, it would cost an additional 15 to 30 cents to raise the funds through taxation.

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7.1.2 Distributional concerns (shifts in welfare) 7.1.2.1 Distribution of welfare across Member States The potential distributional concerns are very much related to the distortions described above. By supporting domestic production and attracting foreign investors, Member States directly intervene in the international allocation of resources, thereby affecting trade flows and inducing a shift in the localisation of economic activities across Member States. In both instances, national governments may have an interest in supporting domestic production and in attracting foreign investors, because of the positive implications for employment, tax revenues and the business environment in the Member State. Those measures can lead to negative spill-over effects (shifting of rents) for other Member States when the good or service is traded.

158

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C. Ballard, J. Shoven and J. Whalley, 1985, General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States, American Economic Review, vol. 75 (1), 128-138; D. Jorgenson and K. Yun, 1990, Tax Reform and US Economic Growth, Journal of Political Economy, vol. 98 (5) ; D. Jorgenson et K. Yun, 1991, The Excess Burden of Taxation in the United States, Journal of Accounting and Finance, vol. 6 (4), p. 487. See also OECD (2010), State aids and Subsidies, Background paper of the proceedings of the OECD Global Forum on Competition Roundtable on Competition, section 2.1 (available at: http:// www.oecd.org/regreform/sectors/48070736.pdf ). Criscuolo et al (2012) use a shadow cost of 1.3 in their analysis of the UK Regional Selective Assistance scheme. Takalo et al . (2013) refer to a ‘plausible’ shadow cost of 1.2 for Finland (Takalo T., T. Tanayama and O. Toivanen, Estimating the Benefits of Targeted R&D Subsidies, March 2013, Review of Economic and Statistics Vol. 95, No. 1, pp. 255-272). Barrios et al (2013) appear to arrive at higher estimates for the shadow cost. Considering EU wide figures, the average value for the shadow cost of labour taxes would be 1.90, ranging from 1.30 in Estonia to 2.41 in France. For energy taxes, the shadow cost would, however, only be 1.08 (S. Barrios, J. Pycroft, B Saveyn (2013), The marginal cost of public funds in the EU: the case of labour versus green taxes, Taxation Papers WP N.35 – 2013.

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To give an example, consider a situation in which rescue and restructuring aid is given to a failing firm in one Member State that faces competitors located in other Member States. Assume that the industry is in decline, forcing a gradual exit of certain producers. In such a situation exit will typically depend on firms’ ability to commit to stay in the industry.159 A unilateral commitment to subsidize one of the firms can alter the order of exit, and induce the immediate closure of firms located in other Member States.

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Another example of aid with potential distributional concerns is given by regional development aid. Member States typically compete directly against each other in the context of regional aid (especially in the so-called “Scenario 2”, where the aid has as the direct effect that the location of economic activity is shifted to one region away from another). But in so far as such aid is used to attract investment to assisted regions in the Union160, such a distributional impact is viewed favourably. Regional assistance is the one setting where such state support is specifically allowed, even if it means that the investment is thereby attracted away from other regions.

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Distributional effects may be particularly large when different Member States have differential shadow costs of public funds. Typically we would expect richer countries to have lower shadow costs of public funds than poor countries (for a given site of the public budget) because raising taxes will be harder in the poorer country. In the situation of subsidy races the country with the lower cost of public funds will therefore tend to subsidize more, have more State aid projects, etc. leading to a redistribution of activities (and rents) from the poorer to the richer countries. Allowing such aid would lead to significant anti-cohesive effects. This is probably one of the main distributional issues that State aid control in the Union is designed to address. Illustration: Dell Poland (2009)

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In 2009, the Commission authorised EUR 54.5 million of regional aid, which the Polish authorities intended to grant to Dell Inc. for the establishment of a manufacturing plant in Łódź (Poland), creating up to 3000 direct jobs in the region.161 159

160 161

The classical reference on such type of exit models are Fudenberg, D. and J. Tirole (1989): A Theory of Exit in Duopoly. Econometrica, 54, 943-960; Ghemawat, J.J. and B. Nalebuff (1985): Exit. The RAND Journal of Economics, 16, 2, 184-94; and Ghemawat, J.J. and B. Nalebuff (1990): The Devolution of Declining Industries. Quarterly Journal of Economics, 105, 1, 167-86. In broad terms, assisted regions are regions with income levels per head significantly below the Union average or with income and employment levels below the average of the particular Member State concerned. Commission Decision of 23.09.2009 in Case C46/2008 LIP Poland - Aid to Dell Poland, OJ L 29/8,

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Prima facie, one could argue that the aid served an objective of common EU interest, i.e. to foster investment in the Łódzkie region in Poland. The Łódzkie region was (and still is) eligible for regional aid under Article 107(3)(a) of the Treaty as an area with an abnormally low standard of living and high unemployment. As a result of the investment permitted by the aid, the region of Łódź would receive substantial economic benefits, in terms of job creation and regional development.

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Regarding the negative effects of the aid, the Commission found that the aid would not cause the crowding-out of competitors or the creation of significant production capacity in an underperforming market (desktops) since it had been demonstrated that Dell had decided to build additional capacity in any event, regardless of the aid. Instead, the main concern in this case was the redistributive effect of the aid, i.e. the impact that the aid would have on the location choice of Dell and hence on employment in other regions.162 While a location effect is in most cases inherent to the purpose of regional aid,163 it is necessary to observe that the alternative location is exposed to the negative effects of the aid measure in that it has missed out on extra levels of economic activity that would have materialised in the region in the absence of the aid.

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A first important question was whether the aid did not merely serve to relocate productive assets from Limerick (Ireland), the main existing production location of Dell in the Union at the time. However, the Commission found that the decisions taken by Dell to locate its new manufacturing plant in Łódź and to reduce production at its existing manufacturing plant in Limerick were independent. In particular, it occurred that even without aid Dell would have opted to increase capacity in Central-Eastern Europe, the only question was in which location exactly. The Commission therefore concluded that any job losses in Dell’s manufacturing facility in Limerick were not a consequence of the aid granted by the Polish authorities.

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02.02.2010. This is illustrated by the then Competition Commissioner Neelie Kroes, who said: “For cases like this, which could present a high risk of distorting competition and where job losses in other Member States have been pointed to, we need to conduct a detailed economic analysis of the market and of the impact of the aid before taking a decision.” Commission Press release “Commission approves €54.5 million investment aid to Dell plant in Łódź, Poland”, available at http://europa.eu/rapid/press-release_IP-09-1348_en.htm At least in so-called scenario 2 cases of the guidance notice for the in-depth assessment of regional aid to large investment projects (IDAC), as well as of the Regional Aid Guidelines of 2014.

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The Commission’s investigation found that the aid provided an incentive for Dell to locate its manufacturing plant in Łódź by compensating for less favourable investment conditions in comparison with the other envisaged location in Central-Eastern Europe, namely Nitra (Slovakia). The aid was found to be limited to the amount necessary to compensate for the net additional costs of locating the plant in Łódź as compared to Nitra.

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In accordance with paragraph 53 of the guidance notice, if it had been the case that without aid the investment would have located to a poorer region (more regional handicaps – higher maximum regional aid intensity) or to a region considered to have the same regional handicaps as the target region (same maximum regional aid intensity), this would have constituted a negative element in the overall balancing test unlikely to be compensated by any positive elements because it runs counter the very rationale of regional aid. The maximum aid intensity applicable in Nitra was 40 per cent GGE, whereas it was 50 per cent GGE in the Łódzkie region. The Łódzkie region was therefore considered to be a more disadvantaged region than Nitra. According to the Commission, this implied that, a priori, the benefits in terms of EU cohesion of attracting the investment to the Łódzkie region were to be considered greater than the negative effects associated with the investment not going to Nitra.164

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On balance, the Commission therefore concluded that the positive effects of the aid outweighed the negative effects on trade in the alternative location. ■

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In quite a large number of other regional aid cases subject to in-depth assessment, mainly in the car sector, the Commission expressed doubts as regards the compatibility of the aid with the State aid rules, and the Member States subsequently withdrew the State aid notification.165 In part, those doubts related to 164

165

Beyond the difference in the level of regional handicaps, there were several other indicators that the aid measure was likely to improve the level of cohesion in the Union. For instance, while GDP per capita levels had increased in both Západné Slovensko and Łódzkie since 2002, the growth has been considerably higher in the former. Moreover, in 2006, the unemployment rate in Západné Slovensko was 9.19 per cent, compared to 17.48 per cent in Łódzkie, which indicated better conditions of the labour market in Západné Slovensko. Further insights were obtained from statistics regarding migration rates, which can be viewed as an indicator of regional development as they relate to the opportunities that a region can offer to its inhabitants. Migration rates showed a net inflow into Slovakia, whereas Poland had experienced a net outflow in recent years. See http://europa.eu/rapid/press-release_IP-14-792_en.htm. The cases involved regional investment aid for Audi in Hungary (Case C31/2009 – Hungary – Aid to Audi Hungaria Motor Ltd); for Volkswagen in Germany (Case SA.32169 – Germany – Aid to Volkswagen Sachsen GmbH); for car parts supplier Linamar in Germany (Case SA.33152 LIP - DE - Linamar Powertrain GmbH), for Fiat in Poland (Case SA.30340 LIP - Fiat Powertrain Technologies PL), for Revoz, a subsidiary of Renault/Nissan, in Slovenia (Case SA.33707 LIP - Regional aid for Revoz d.d.), and for Ford in Spain (Case SA.34998 LIP - Aid for Ford España).

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whether or not the aid had an incentive effect in the first place, in part to the question of the counterfactual: even if the aid had an incentive effect, which was the ‘direction’ of the change in location? The latter question is important to verify whether the aid does not affect other regions with a similar or worse socio-economic situation that might have attracted the investment if the aid had not been offered.166

7.1.2.2 Distribution of welfare within Member States As indicated above, Member States may have an interest in financially supporting domestic production and in attracting foreign investors, because of the positive implications for employment, tax revenues and the business environment in the Member State.

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However, such subsidies always involve redistribution from the tax payer to the owners of the firm. To the extent that such redistribution of rents is undesirable within countries, rules that limit the amount of aid to what is necessary to achieve the public objective, would allow such distributional concerns to be addressed. That certainly appears to be an issue of prime concern to the Commission when preventing subsidy races. Indeed, when regions trying to attract regional investment are “close subsititutes” in the eyes of the firm (i.e. the firm is relatively indifferent between the two) the subsidy race is likely to get particularly fierce, resulting in most of the regional benefits that in principle arise from the investment being competed away (i.e. given away to the firm).167

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One may distinguish subsidies that are excessive (e.g. overcompensating) due to subsidy races from other situations in which subsidies can be deemed excessive, e.g. in a context of overcompensation for SGEI. The latter overcompensation can be the result of factors that have nothing to do with competition between Member States, but rather with factors internal to the Member State (e.g. poor quality of cost assessments by national authorities, lobbying by firms, fraud). The case for controlling, in the framework of State aid control, the second type of “excessive” aid is less compelling, insofar as there is no real cross-border dimension of competition. However, when the firms receiving the SGEI compensation are also active internationally, there may well be a cross-border dimension to be concerned about.

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166 167

See also http://europa.eu/rapid/press-release_IP-14-792_en.htm. Cf. Besley, T. and P. Seabright (1999): The Effects and Policy Implications of State aids to Industry: an Economic Analysis. Economic Policy, 15-53.

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7.2 The incentive effect as a screen for competition analysis 1.251

As indicated, it is only possible to assess the effects of aid (be they positive or negative) with respect to a properly defined counterfactual. In order to understand the impact of aid, including any “distortions”, one needs to have an understanding of what would have happened in the absence of aid.

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The concept of the counterfactual is closely related to that of the incentive effect of aid: does the aid change the behaviour of the company (compared to the noaid situation) in a way that is in line with the official objective of the aid (e.g. to increase the level of environmental protection or the level of innovation activities of the beneficiary).

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There are a number of logical connections between the analysis of the incentive effect and the analysis of the distortions to competition and trade168.

1.254

Consider a State subsidy to a firm to invest in a new, environmentally friendly and efficient production technology. Suppose, first, that the aid has an incentive effect. As a result, the company will now invest in the green technology, whereas otherwise it would not. That additional investment is likely to have an impact on competition in the relevant product market, as the new technology allows the company to save on the use of inputs and thereby obtain lower marginal costs of production. The increased efficiency will normally allow it to increase market share at the expense of rivals, including rivals in other Member States.

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Suppose now that the aid has no incentive effect. In other words, the company would have invested in the green technology anyway. Logically, it would seem that the aid can have no direct impact on product market competition in the relevant market concerned in the sense that, both with and without the aid, the company would have made the investment in green technology and would have become more efficient. Nonetheless, competition might still be influenced in the two following ways:

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First, there is an effect on product market competition because the aid amounts to a windfall profit for the company (“free money”). As discussed, effects on product market competition may arise when the company faces some finance constraints and the aid allows the company to execute other (profitable) projects 168

See also V. Verouden: EU State Aid Control: The Quest for Effectiveness. Input Statement for the workshop “An Enquiry into the Forces Shaping Subsidy and State Aid Laws” (SHAPE), University of Birmingham, May 18-19, 2015.

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that it was unable to finance before the aid. Note that the effect of aid may in that case well arise in markets which are fully unrelated to the market directly concerned by the environmental subsidy. Second, it is possible that the aid does not have an incentive effect in the proper sense of the word (i.e. it does not change the company’s behaviour in line with the objective of common interest pursued), but is meant to induce the company to take other steps than the one directly targeted by the subsidy. In particular, in cases where investments are mobile (in the sense that they could be undertaken in one of several locations), the aid may distort location decisions across Member States. Think of setting up a research project in the context of the development of a new pharmaceutical product. Suppose that a company would undertake the research project anyway given that it wants to bring the pharmaceutical product to the market, but that the only question is in what location the research project is undertaken. In that case, aid given to that company would not have an incentive effect (given that the company would have done the research anyway), but might persuade the company to do the research in the country that gives the aid instead of another country. In that case the aid exerts a negative externality on the latter country169, and may set off a wasteful subsidy race among Member States.

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Other examples would be aid given under the banner of environmental aid, or training aid, meant to persuade a company not to lay off employees at a given production site, or to buy supplies from domestic suppliers. Even if anecdotal, there are indications that politicians sometimes see the granting of aid, even if not officially given for employment purposes, as a quid pro quo for maintaining employment in the country or region concerned.170 Further, there have been several cases where the Commission explicitly raised the concern that the aid, in the absence of a (proper) incentive effect merely served to attract economic activity to the region concerned.171

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There is one setting where State support to investment is specifically allowed, even if it means that the investment is thereby attracted away from other regions. This is the case of regional aid given Member States to attract investment into so-called assisted regions. For instance, when Bekaert, a large Belgian industrial firm active in steel wire transformation and coatings, announced in 2012 that it would shed a large number of employees in response to worsening economic conditions, questions were asked in the Flemish parliament as to whether previously given innovation aid (amounting to EUR 16 million) could be recovered from the firm. Opposition leader Van Malderen was quoted as saying: “Companies do not get these subsidies merely as a present. We expect these firms to make an effort as regards employment and [job] security” (own translation). Source: De Standaard of 02.02.2012, Peeters onderzoekt terugvordering steun aan Bekaert. See e.g. case Ford Genk (2006), discussed below, Commission Decision of 04.04.2007 in case C 14/2006, General Motors Antwerp, OJ L 243, 18.09. 2007, p. 71, and Commission Decision of 12.09.2007 in case C

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Illustration: Ford Genk (2006)

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In 2005, the Belgian authorities notified a subsidy of EUR 12 million to car producer Ford for a training programme of the employees in its Genk production plant.172 Part of the training related to the introduction of a new flexible manufacturing system allowing the production of the next generation of the Galaxy model and another car model as well as the Mondeo already produced in Genk. The total cost of the training component of the investment programme was EUR 34 million.

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In principle, there is little to object to a training programme. The purpose of the training programme, raising the skills of the employees in question, is normally considered to be an objective of common European interest. To the extent that the aid incentivises Ford to better train its employees, it should normally be approved.173 However, the Commission was concerned that the aid would not really increase Ford’s incentive to train its staff, but rather influence Ford’s decisions as to where in Europe to invest in the production of its new car models.

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The Commission paid particular attention to the broader context of the car industry in Europe. Over the years, one could observe that car manufacturers were increasingly putting their production plants in different European countries in competition with each other for the production of new models. Car makers compare several plants with a view to producing a new product and then decide where to locate the production on the basis of total operating and investment costs. Government support of any kind, including training aid, enters directly into the equation of where to invest.

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According to the Commission, it was clear that a substantial part of the training programme was directly linked to the launch of new car models. At the end of 2003, as part of a general restructuring of Ford Europe, the company announced the investment programme in Genk for the production of new car models. In the car industry the production of a new model is necessary to maintain competitiveness. The launch of a new model is a normal and regular feature of the car industry. The related training costs necessary for launching the new model are therefore normally incurred by car makers on the sole basis of market incentive. Consequently, the training activities in question would have been undertaken

172 173

35/2007, Volvo Ghent, OJ C 265, 07.11.2007, p. 14. Commission Decision of 04.07.2006 in case C 40/2005, Ford Genk, OJ C 265, 07.11.2007, p. 21. In theory, training aid might negatively affect competitors of Ford but, on balance, it is probably appropriate to ignore that remote concern.

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by the company in any event, even without aid. The Commission was therefore of the opinion that the aid did not raise Ford’s training effort in any way, but rather distorted Ford’s choice to locate the production of the new models, at the expense of other Ford production sites in Europe. ■ Summarising, if an aid has no incentive effect, it is appropriate to declare it incompatible. If there is no incentive effect, there is no positive effect in line with the official objective of the aid (e.g. to increase the level of environmental protection or to increase innovation). There are however potential negative effects, either because of windfall gains accruing to the company or because the aid serves to pursue other objectives, at the expense of other Member States. In case there is no incentive effect, the presumption should be that the aid has overall negative effects.

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The reasoning concerning the incentive effect of aid also applies to the concept of proportionality of aid (in the sense of aid to the minimum). If the aid is not proportional, there are windfall gains to the company. Further, the aid not being proportional may be the expression of an attempt of the Member State to pursue other objectives (attract/maintain business activity) and be the very result of a subsidy race.

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The main benefit of having an incentive effect screen is that it in fact allows us to disregard the possibility that “free money” or any other implicitly subsidized activity may have positive effects. Even if, for example, there is a market failure that leads to specific financing constraints, aid that relieves such a constraint can be given explicitly. Allowing “free money” (i.e. disproportionate aid or aid without an incentive effect) without a dedicated purpose is not necessary to generate the positive effects. Hence, in the most difficult cases for the assessment of negative effects (e.g. the impact of the aid on dynamic incentives), the test of the incentive effect will make such an explicit analysis of negative effects simply unnecessary.

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It is true that the number of cases in which the incentive effect is clearly absent (or the aid is clearly disproportional) may be rather limited. Most of the time, the analysis will not be clear cut or will require a significant investigative effort. In that case it would make sense to proceed with the assessment of the potential magnitude of negative cross-border effects (both in the scenario that where is an incentive effect and in the scenario where there is none) so as to determine whether the case can be approved directly and/or to see how much effort must be put into further analysing the incentive effect. That approach amounts to

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a “proportionate assessment”, whereby the amount of effort on a case is made dependent on the extent to which the case has the potential to lead to negative effects.

8.

Other applications of economic insights

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The previous sections outlined a number of elements relevant for the assessment of compatibility. Those elements are, in principle, both relevant for the design of the rules and in the application of case-by-case analysis.

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A certain trade-off arises between keeping the rules simple (which would call for per se rules, e.g. a per se ban on certain types of aid, or a simple compatibility requirement for other types of aid) and trying to achieve the optimal outcome on a case-by-case basis (which would call for strengthened conditions on e.g. checking the incentive effect and the negative effects of aid).174

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Specifically in relation to the effectiveness of the aid, one can point in this regard at the new GBER of 2014, which has a longer list of types of aid for which the incentive effect is presumed to exist than before.175 Instead, the GBER sets out new ex-post evaluation requirements for large aid schemes. In view of the greater potential impact of such schemes on trade and competition, aid schemes with an average annual budget exceeding EUR 150 million are in principle subject to State aid evaluation. The aim of the evaluation is to verify the effectiveness of the aid measure in the light of its general and specific objectives.176. In essence, therefore, the State Aid Modernisation has resulted in a shift from an ex ante check of the effectiveness of aid (of the incentive effect) to an ex-post check.

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This remainder of this section discusses three specific areas where the Commission has opted to introduce new but general per se rules, based on economic insights. First, it will discuss the important changes brought about in the elibility criteria for regional aid in the so-called ‘c’-areas. Second, it will highlight some new rules for operating aid aimed at maintaining incentives for firms to 174

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For a further discussion, see L. Hancher and Ph. Nicolaides, ‘Article 107(3) TFEU: General Principles’ in: Ph. Werner and V. Verouden, EU State aid control: Law and Economics, Kluwer Law International (2016, forthcoming); and V. Verouden: EU State Aid Control: The Quest for Effectiveness. Input Statement for the workshop “An Enquiry into the Forces Shaping Subsidy and State Aid Laws” (SHAPE), University of Birmingham, May 18-19, 2015. Whereas the 2008 GBER included, next to a ‘formal’ incentive effect test (a basic requirement regarding the timing of the company’s application for state aid), also a ‘substantive’ incentive effect test for larger companies, this latter requirement has now been dropped (with the exception for ad hoc aid given to large enterprises, i.e. aid to large enterprises not part of an aid scheme). See chapter 4 of this volume for more details.

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be or become efficient (with a focus on SGEI). Third, it will present the policy design used for allowing compensation for ETS costs, highlighting the need not to undermine price signals in environmental measures.

8.1 Empirical insights on the effectiveness of regional State aid177 As part of the State Aid Modernisation programme, the Commission has increased the scope for swiftly allowing aid,178 in particular for certain types of aid (e.g infrastructrure aid) and for certain types of firms (e.g. SMEs). In other areas, however, it has proposed significantly stricter rules where it was of the opinion that there was sufficient evidence that aid was either not effective, or even harmful. An example is that of regional investment aid given to large firms. Whereas under the previous GBER and Regional Aid Guidelines (RAG), it was possible for public authorities to grant such aid to all firms, the new rules confine such aid in the so-called ‘c’-areas179 to SMEs and to large companies starting up truly new activities (“greenfield investments”).

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The Commission relied on a range of elements to support its proposal. It quoted evidence from studies that had statistically evaluated the impact of State aid on regional investment, as well as experience from case practice.

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One of the key challenges in empirically assessing whether or not State aid is effective in attracting business is that it is very difficult to ascertain what the firms would have done in the absence of the aid.180 Even if one can control for various regional and firm-specific factors that drive the investment decisions of companies, there are still measurement problems that may bias the results. In particular, in order to identify the true causal effect of aid, one has to deal with the problem that stems from the fact that some factors driving investment behaviour are unobservable and/or endogenous.

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For this subsection, the authors are heavily indebted to input provided by Geza Sapi, Xavier Boutin and KaiUwe Kühn. In particular, via the General Block Exemption Regulation (GBER). Areas eligible for regional aid under Article 107(3)(a) of the Treaty, commonly referred to as ‘a’ areas, tend to be the more disadvantaged within the Union in terms of economic development. Areas eligible under Article 107(3)(c) of the Treaty, referred to as ‘c’ areas, also tend to be disadvantaged but to a lesser extent. For more details, see also Common methodology for State aid evaluation, Commission Staff Working Document, 28.5.2014, SWD (2014) 179 final, available at: http://ec.europa.eu/competition/state_aid/modernisation/state_aid_evaluation_methodology_en.pdf. This was also underlined in a report commissioned by the Commission to obtain a fuller understanding of the role and effectiveness of regional investment aid. P-P. Combes and T. van Ypersele, “The role and effectiveness of regional investment aid; The point of view of the academic literature” April, 2012 Luxembourg, available at: http://ec.europa.eu/competition/consultations/2013_regional_aid_guidelines/literature_review_study_en.pdf

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For example, if all firms in a given region are in principle eligible for investment support, one may observe that the group of firms receiving aid indeed invest more than the group of firms not receiving aid. However, it is likely that only firms applied for aid that actually had an investment project to start with. This means that the comparison of investment levels between the two groups of firms may identify the difference in performance between those firms that have a project and those that do not, rather than the effect of the aid itself.181 Whereas there are possible solutions to that measurement problem, many studies attempt to assess the role of regional policy without considering this measurement problem, and very few do it in manner that can be deemed appropriate.182

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Among the few studies that assess the difference in impact between aid to SMEs and aid to large enterprises in a manner that is adequate from the statistical point of view, one can refer to the study of Criscuolo et al. (2012)183 and the study of Bondonio and Martini (2012).184 Both find that regional aid is more effective and efficient when geared towards SMEs.

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The study by Criscuolo et al. (2012) adopted a suitable methodology to identify the effects of State aid, making use of multiple changes in the areas eligible for UK Regional Selective Assistance under European State aid rules between 1986 and 2004. Since changes in the borders of eligible areas are not influenced by the decisions of firms and aid grantors, the authors can allocate (after having controlled for observable factors) the difference in outcomes between firms that benefitted from aid and otherwise similar firms that did not qualify to the presence or absence of aid. The authors reached the conclusion that while there is a large and statistically significant average effect for employment and investment185, the positive treatment effect is confined to smaller firms (e.g. with under 150 workers). As for the reason for that result, the authors refer to larger firms 181

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Likewise, if the grantor for some reason tends to systematically favour higher productivity firms in its decision whom to support, than simply comparing the productivity of aid recipients with non-recipients would yield a biased (in that example too high) estimate for the effect of aid on productivity: this is because subsidised firms have higher productivity by selection and not only due to the aid itself. Cf. Combes P-P. and T. van Ypersele, “The role and effectiveness of regional investment aid; The point of view of the academic literature” April 2012, at p. 6. Study available at: http://ec.europa.eu/competition/ consultations/2013_regional_aid_guidelines/literature_review_study_en.pdf. C. Criscuolo, R. Martin, H. Overman, J. Van Reenen (2012), “The causal effects of an industrial policy”, mimeo Centre for Economic Performance, London School of Economics (version published at: http:// www.nber.org/papers/w17842.pdf ). Bondonio and Martini (2012) Counterfactual impact of cohesion policy: impact and cost-effectiveness of investment subsidies in Italy. Report for the European Commission, DG REGIO. A 10 per cent investment subsidy was found to cause about a 7 per cent increase in employment with about half of that increase (3.6 per cent) arising from incumbent firms growing (the intensive margin) and half due to greater net entry (the extensive margin).

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being more able to “game” the system and take the subsidy without changing their investment and employment levels, possibly combined with the presence of financial constraints for smaller firms.186 Bondonio and Martini (2012) have studied Law 488, which is the main financial support scheme for investment available throughout Italy and various SME schemes in the region of Piemonte. They compared firms who saw their aid application approved (i.e. the aid beneficiaries) with comparable firms who saw their aid application rejected as the budget that was available for the aid had reached its limit.187 The difference in performance between (just) successful applicants and (closely) rejected applicants provided a reliable estimate of the effect of aid. Using that metholodogy, the authors found that the impact of Law 488 was confined to SMEs, while large enterprises were using the money for projects they would have carried out anyhow. They also found that, even allowing for firm size, smaller grants were much more cost-effective than larger ones.188

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The Commission further commissioned a study to evaluate the need of regional aid and the effects of that aid on a sample of 28 large projects for which aid was awarded between 2007 and 2013.189 Those projects were undertaken by large enterprises in the following sectors: pharmaceuticals, solar, internal business services, car manufacturing, cement and paper industry. The study illustrates that regional aid is typically one of the factors but not a determining one to invest or to locate in a disadvantaged region. The determining factors are whether the firm has a pre-existing base in the region, labour costs, availably of skilled labour force, availability of transport infrastructure or of natural resources, growing demand or existing competition that leads to the need to modernise existing production facilities. On that basis, the consultant concluded that the majority of the evaluated projects would most probably have been located in disadvantaged regions in Europe even without aid.

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186 187

188 189

Cf. C. Criscuolo, R. Martin, H. Overman, J. Van Reenen (2012), “The causal effects of an industrial policy”, mimeo Centre for Economic Performance, London School of Economics, p. 1. The use of rejected applicants in the evaluation is particularly useful to avoid the selection bias which typically arises if one were to just compare applicants with non-applicants. That group of firms had passed the first quality check, which means that they all had a credible investment project. Therefore, they shared with the aid beneficiaries the same ambition to invest in a credible project. However, because of budgetary limits (rationing), they did not receive aid. Cost per jobs averaged EUR 79,000 for the smallest grants (less than EUR 125,000), rising to EUR 489,000 for the largest grants (above EUR 500,000). Ex-post evaluation of the Ex-Post evaluation of the Regional Aid Guidelines 2007-2013 (case study report by Ramboll Management & Matrix), available at: http://ec.europa.eu/competition/consultations/2013_ regional_aid_guidelines/index_en.html.

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Enforcement experience of the Commission confirmed the doubts about the incentive effects of regional aid. In several cases which the Commission investigated in detail, the Member States were unable to prove that the aid beneficiary would in the absence of aid indeed have carried out its investment in an alternative location. That inability was in particular evident for aid to car producers to expand pre-existing manufacturing sites by diversifying the existing production (e.g. introduction of a new car model) or extending capacity.190

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The apparent lack of incentive effect for large companies, as identified in studies and in the Commission’s case practice, was a major driver of the decision to become stricter in allowing regional investment aid to large companies.

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In shaping the rules, the Commission faced a certain trade-off between keeping the rules simple (which would call for per se rules, e.g. a ban on aid to investment projects by large companies) and trying to achieving the optimal outcome on a case-by-case basis (which would call for strengthened conditions on checking the incentive effect and the negative effects of aid).191 Ultimately, the choice was made to exclude aid to large companies in ‘c’-areas from GBER (with the exception of greenfield investments), and to allow such aid only under very strict conditions under the Regional Aid Guidelines.

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The Commission considered that the direct negative effects of aid in favour of projects implemented by large companies in ‘c’-areas were more likely to outweigh any positive effects. As regards the negative effects, for projects implemented by large companies in general, the Commission considered the potential distortions of trade and competition to be significant, in view of the apparent lack of incentive effect. Large enterprises typically have more leverage (bargaining power) vis-à-vis public authorities than SMEs, as they are relatively more important to the region than individual SMEs. Accordingly, large enterprises have a particularly large rent extraction potential, leading to concerns of excessive aid (“free money”) flowing to that category of firms. At the same time, even where there is an incentive effect in ‘c’-areas, it may be that it is of the “wrong” kind, i.e. aid serving to draw away investment from the ‘a’-areas.

190 191

European Commission, Impact Assessment Report accompanying the Guidelines on regional State aid for 2014 – 2020, SWD (2013) 215, p. 33. See also Kühn K.U., Making State aid Rules More Effective: The Reform of the Regional Aid Guidelines, presentation held at the EStALI Conference in Brussels, 7-8 June 2012.

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As the ‘a’-areas are the least developed from a Union perspective, it was still deemed desirable to ensure that investment aid can be granted to all types of companies (subject to a verification under the RAG, where applicable) to cater for the possibility that aid would have an effect in some cases. As ‘a’-areas are less developed than ‘c’-areas, the contribution to regional development of investment projects (in those cases where aid would have an incentive effect) is proportionally more important than in ‘c’-areas. On balance, therefore, the Commission thought it was appropriate to adopt stricter rules mostly for the ‘c’-areas, less so for the ‘a’-areas.

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8.2 State aid and efficiency incentives: Compensation for SGEI192 One of the State aid areas in which Member States have the greatest degree of discretion concerns the SGEI.193 SGEI cover a large set of activities with special characteristics, ranging from traditional public services (with typically some natural monopoly characteristics: postal delivery, broadband access, energy provision, passenger rail transport, etc.) to more specific services provided in the general interest (for instance security of supply in the field of energy). For a service to qualify as a SGEI there has to be an argument that the service cannot be satisfactorily provided by the market and that it is addressed to citizens or is in the interest of society as a whole. Member States have, however, a considerable margin of discretion in what they can define as an SGEI (subject to a manifest error constraint).

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Despite the wide margin of discretion, the State aid rules on SGEI impose considerable safeguards with respect to preventing negative externalities between Member States194 as well as ensuring good governance within Member States. SGEIs have to be carefully designed with specific objectives and have to be established through an entrustment act (i.e. legislative instrument or contract).

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194

This part draws upon Kühn, K.U., S. Lorincz, V. Verouden and A. Wilpshaar, Economics at DG Competition, 2011-2012, in: Review of Industrial Organization, Vol. 41, p. 251–27 (2012). For an elaborate description of the State aid rules applicable to SGEI, see part 4 of this volume. For a critical review, see L. Coppi, SGEI Compensation in the Almunia Package – An Economics View, EStAL – Issue: 2/2012 – pp. 37-50; J. Kavanagh (2013), Financing Services of General Economic Interest: The European Commission’s Economic Tests, in E. Szyszczak (ed.), Financing Services of General Economic Interest: Reform and Modernization, Springer. For instance, specific rules apply for large SGEIs in network industries such as telecoms, energy, rail transport, and postal delivery, in order make sure that the aid does not give rise to an undue competitive advantage in other (non-domestic) markets. Cf. EU Framework for State aid in the form of public service compensation (OJ C 8, 11.01.2012, p. 15), in particular Section 2.9 (“Additional requirements which may be necessary to ensure that the development of trade is not affected to an extent contrary to the interests of the Union”).

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That act must specify the content and duration of the obligations and the parameters for calculating, controlling, and reviewing compensation, as well as arrangements for avoiding overcompensation.

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The main focus of the State aid rules in the field of SGEI is to ensure that firms are not “overcompensated” for the performance of SGEIs - i.e., receive too much State aid. Economic insights have led to a strong preference in treatment for SGEIs that are allocated to firms by tendering procedures. The realization that tendering minimizes rents and maintains high powered incentives for cost reduction ex-post has made this a preferred solution for implementing SGEIs.195

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Court jurisprudence has made it clear that when SGEIs are tendered “at least cost for the community” it can be viewed as standard public procurement and that such SGEIs do not confer an advantage to the firms in question.196 However, the term “at least cost for the community” has, until recently, often been understood as “at lowest price”, which may have discouraged the use of, for instance, multi-attribute tenders (tenders where not only price matters, but also the quality of the SGEI). For that purpose it has been clarified in the new rules that were published in 2012 that certain scoring auctions can also be viewed as “at least cost for the community”197, following the economic insight that efficient trade-offs between cost and quality can be revealed through the auctioning process itself. Arguably, that approach allows for a more efficient design of SGEIs.

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Nevertheless, there are some SGEI where tendering is not possible, for instance because there is only one player who can reasonably fulfill the service. In those cases traditional approaches of assessing overcompensation for SGEI providers have focussed on the ex-post assessment of realized returns and comparing these to some benchmark distribution of returns in an industry.198 A greater emphasis 195

196 197 198

See also Economic Advisory Group on Competition Policy (EAGCP), Services of General Economic Interest, Opinion prepared by the State aid Group of EAGCP, June 29 2006, available at http://ec.europa.eu/ competition/state_aid/legislation/sgei.pdf. Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EI:C.2003:415. See Communication from the Commission on the application of the European Union State aid rules to compensation granted for provision of SGEIs (OJ C 8, 11.01.2012, p. 4), para. 67. The previous rules on SGEI (published in 2005, in response to the Altmark judgment), while in principle allowing for efficiency gains to be recognised, also imposed annual checks for overcompensation on the basis of incurred costs and receipts. In doing so, they may have inadvertently prompted public authorities to opt for compensating the net cost incurred in providing the SGEI on an ex post basis and in full. If the whole net cost is fully compensated ex post, however, the provider has no incentive to improve its efficiency. Cf. N. Pesaresi, A. Sinnaeve, V. Guigue-Koeppen, J. Wiemann and M. Radulescu, The New State aid Rules for Services of General Economic Interest (SGEI), Competition Policy Newsletter 2012-1, available at: http://ec.europa.eu/competition/publications/cpn/2012_1_11_en.pdf.

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on the economic impact of such an approach has led to the recognition that such ex-post assessment is equivalent to cost-plus contracts or rate-of-return regulation with all of the resulting perverse effects on cost reduction incentives. After all, when the cost incurred in providing the service of general economic interest is essentially compensated ex post in full, and any surpluses observed ex post are clawed back by the public authority, the incentive to contain cost or become more efficient over time are minimal.199 The 2012 rules on SGEI now recognize that issue and, for the larger directly awarded contracts, contain an obligation for Member States to include cost reduction incentives into the SGEI contract.200 The amount of compensation can be established on the basis of either the expected costs and revenues (i.e. as a fixed lump sum), or the costs and revenues actually incurred, or a combination of the two, depending on the efficiency incentives that the Member State wishes to provide from the outset. Likewise, the 2012 rules take a contract-oriented approach, rather than an annual approach. In consequence, a provider can receive overcompensation for a certain year, as long as there is no overcompensation for the whole duration of the contract. Such relative flexibility better fits the aim of moving towards compensation schemes that provide for efficiency incentives, given that the provision of such incentives typically requires a multi-annual perspective.

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The new rules recognise that it may still be worth deviating from lump-sum compensation (particularly in order to limit excessive ex ante rents due to the asymmetry of information between the public authority and the firm in question as regards the likely costs and revenues of the SGEI contract), but provisions for cost reduction incentives in that case have to be specified explicitly and justified in the compensation design. Those changes to the rules can be understood as bringing the insights from incentive regulation and contract theory into the State aid rules that govern public services contracting in the Union.

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The above discussion illustrates the approach taken in relation to SGEI compensation.201 A similar logic underlies the various ‘lump sum’ compensation

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199

200

201

There is an extensive economic literature on the risk and incentive properties of contracts regulating the commercial policy of firms. Cf. J.J. Laffont and J. Tirole, A theory of incentives in regulation and procurement, MIT Press, 1993. For smaller contracts, Member States are encouraged to design mechanisms that provide efficiency incentives to the SGEI provider, by explicitly allowing for such designs (and advocating their use) and by defining a fairly low benchmark for the return on investment that the SGEI provider can make if it does not face any meaningful risk in performing the contract (as would be the case when the contract is of the [ex post] cost plus type). For an application of the same principles in the context of a spectific SGEI case, see e.g. Case SA.14588 (C

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methods in relation to operating aid put forward in other guidelines such as the Aviation Guidelines, the Regional Aid Guidelines (RAG), and the Energy and Environmental Aid Guidelines (EEAG). Those Guidelines point out that where aid is determined on the basis of ex post calculations (making good for any deficits as they arise), the firms in question do not have much incentive to contain costs and become more efficient over time.

8.3 State aid and price signals: aid to compensate firms for increased ETS costs202 1.294

During the negotiations over the next phase for the European Emission Trading System (ETS) in 2009 (i.e., the cap-and-trade system for greenhouse gas emissions), Member States carefully kept an eye on the impact of ETS on energy prices for European industry. Because that third phase of ETS entailed a significant tightening of the cap, the expectation was that prices for emission rights would substantially increase, leading in particular to higher electricity prices (the electricity sector being a major emitter).203 The valid economic concern was that this might lead to a reduction in the competitiveness of electro-intensive industries in the Union and, in particular, to “carbon leakage”: electro-intensive industries leaving the Union in response to the higher electricity prices would leave total carbon emissions unaffected (in view of the cap), or even to an increase in other geographic areas (the areas to which the industries would relocate). Such carbon leakage would therefore be directly against the primary objective of ETS, to reduce greenhouse gas emissions. In order to avoid such relocation, it was decided at the time of adoption of the new ETS regime (2009) that there should be compensation for those industries for which relocation of production was considered likely.204

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For some industries it is relatively straightforward to assess whether movement of production outside the ETS area is likely. For example, the aluminium industry has a very high electro-intensity and at the same time is very mobile in its decisions where to locate production capacity. In contrast, the concrete industry is electro-intensive in production, but depends very much on relatively local delivery, making leakage unlikely. Unfortunately, it is very hard to identify footloose industries in general, and there are little good data that would have allowed a

202 203 204

20/2009) implemented by Belgium in favour of De Post-La Poste (now bpost), OJ L 170, 29.06.2012, p. 1. This part draws upon Kühn, K.-U., S. Lorincz, V. Verouden and A. Wilpshaar, Economics at DG Competition, 2011–2012, in: Review of Industrial Organization, Vol. 41, p.251–27 (2012). For a description of the third phase of the EU Emissions Trading System (EU ETS), running from 2013 to 2020, see http://ec.europa.eu/clima/policies/ets/index_en.htm. For a description of the State aid rules applicable to ETS, see chapter 18 of this volume.

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good estimation of trade (and direct investment) diversion away from Europe. The inclusion of industries thus had to be based on a rather simple qualitative assessment and was bound to be subject to political compromise. The challenge for economics is to suggest compensation rules that do not unnecessarily distort the incentives provided by the ETS even if in the end the rules possibly allow too broad a set of industries becoming eligible for compensation. If, as could have occurred, compensation for increased electricity prices would have been allowed in proportion to realized output, this would have undermined the incentives of the ETS. Such a mechanism would have amounted to a reduction in the effective price (per MWh) of consuming electricity. In those circumstances, the ETS price signal would simply have been muted or eliminated for the sectors in question, leading to no incentives for users in those sectors to improve energy efficiency over time, and exposing firms in other sectors to an increased abatement burden.

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In recognition of that problem, the State aid rules for ETS adopted a quasilump-sum approach, in which compensation is based on historical production. While compensating for the costs of increased electricity bills, the approach means that the price signal of ETS remains fully internalized by firms and thus the scheme does not distort energy saving investments by firms. To address the leakage problem, the subsidy is withdrawn (only) if output is reduced by a large percentage. In a very imperfect policy-making world in which there is no perfect choice of industries to target, that incentive scheme was the most appropriate in order to maintain the incentive properties of the ETS while at the same time avoiding leakage.

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The above example illustrates the approach taken in relation to ETS costs. A similar logic underlies the changes subsequently introduced in the new GBER and EEAG in relation to compensation for environmental taxes. For instance, the GBER nowadays specifies that in order to better preserve the price signal for companies which the environmental tax aims to give, Member States should have the option to design the tax reduction scheme based on a fixed annual compensation amount (tax refund) disbursement mechanism.205

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GBER, Article 44(3) and Recital 64. For an in-depth discussion of the various trade-offs involved, see K. Struckmann and G. Sapi, Environmental and Energy Aid. In: Ph. Werner and V. Verouden, EU State aid control: Law and Economics, Kluwer Law International (2016, forthcoming).

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9.

Concluding remarks

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This chapter has reviewed three main economic questions pertaining to State aid control in the Union. First, the question of the economic rationale of that State aid control: why is it that the Union has a system of controlling State aid in the first place? Second, what exactly constitutes “State aid”? Third, is there an economic framework for assessing the compatibility of State aid with the internal market?

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The more economics-based approach in State aid, as it has evolved over the last years, should not be understood as implying that State aid control has become a fully “economic” field in the application of law, in a way similar to antitrust or merger control. State aid control is, inherently, a special field of Union competition policy, if only because political trade-offs are in many instances inevitable. For instance, there is often no “economic” way of weighing the benefits of State aid (fostering public policy objectives such as regional or social cohesion) and the costs of State aid (distorting competition or affecting trade). However, where economic analysis can help is in rendering the positive and negative implications of State aid more explicit and the evaluation of their relative magnitude more systematic. A more systematic assessment of the positive and negative effects of the aid, in particular for aid measures involving large amounts of aid, allows for a more precise sorting between desirable and undesirable aid.

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A consistent implementation of the “common principles” defined in the context of the State Aid Modernisation (SAM) should contribute substantially to a policy shift towards better targeted aid. In part, we believe the common principles have largely found their way into the State aid system, by “scoping” the various guidelines and the GBER (e.g. by defining or describing what types of aid are likely to address a market failure) and by pushing the design of the State aid rules to make them more effective and efficient (cf. the various lump sum compensation rules).

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Specifically in relation to the effectiveness of the aid, it is true that the new GBER contains a longer list of types of aid for which the incentive effect is presumed to exist than before. At first sight, this might seem to be at odds with one of the main aims of SAM, i.e. to improve the effectiveness of state aid.206 However, the GBER contains, apart from a number of stricter rules (e.g. in relation to regional aid in ‘c’-areas), new requirements on the ex-post evaluation of large aid schemes. In essence, therefore, the State Aid Modernisation has resulted in a 206

SAM Communication, at para 12.

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shift from an ex ante check of the effectiveness of aid (of the incentive effect) to an ex-post check, at least for the largest schemes. The implementation of a rigorous economic assessment in individual cases remains useful in those cases where the aid amount is substantial enough to warrant extra scrutiny by the Commission. The assessment has hitherto been hampered by limited powers of investigation: obtaining much of the necessary information hinges on a sufficient level of cooperation by Member States and the provision of information by third parties. In our opinion, the recent changes to the Procedural Regulation in that regard are a welcome and necessary step to improve the effectiveness of State aid control in case-by-case assessments.

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Chapter 4 State aid evaluation207 1.

Introduction

Evaluation represents one of the main innovations of the State Aid Modernisation. It extends to large aid schemes (as defined in view of their annual budget) in certain categories of aid falling under the 2014 General Block Exemption Regulation (GBER), as well as to other schemes subject to the new State aid guidelines and frameworks adopted by the Commission between late 2012 and mid-2014.

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To date, when applying EU State aid rules, relatively limited importance has been attached to ex-post evidence on what has actually been achieved with public funds or on the impact of State aid on competition. It is however essential for decision makers both at the Member State and Union level to consider the measurable results of State aid granted in the past, and the lessons learnt. Such information will help to ensure that schemes financed by State aid are more effective, efficient and create less distortion in markets, and is likely also to improve future rules for granting State aid.

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It is fair to say that the fact that Member States are required to carefully evaluate a selection of large aid schemes is a fundamental novelty in State aid control. Importantly, Member States must notify to the Commission an evaluation plan, a detailed study design explaining the methodology and data sources of the intended evaluation. Those evaluation plans are carefully scrutinised by the Commission. The logic behind evaluation, the procedure and requirements will be the focus of this chapter, which is organised as follows: a first section briefly discusses evaluation in general and the role it can play in improving policy-mak-

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European Commission, DG Competition, respectively State aid strategy Unit and Chief Economist Team. The authors would like to thank Mr. Raffaele Spallone for his assistance.

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ing. A second section describes the new evaluation requirements in State aid control and the key elements of an evaluation plan. The third and final section discusses some of the relevant methods for impact evaluation, deriving from micro-econometrics.

2.

The role of evaluation in policy-making

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The expansion of the role of the State in the economy and the growth in public expenditures have created a demand to better understand the nature of social problems and to assess the impact of public policies. Increasingly, social science methods have been used to produce a refined, both quantitatively and qualitatively, picture of social needs and outcomes. Scientifically rigorous studies and analysis have been introduced in the public policy debate.

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There has been in recent years a general trend in advanced economies towards what has been called “evidence-based policy-making”. In that perspective, evaluation is a key instrument for the different actors involved in the decision-making process that can help answer key questions such as: what works, what doesn’t, where, why and for how much?

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Among the recognised pioneers of formal evaluation was James Coleman, a sociologist, who implemented statistical analysis on the educational system of the United States and the impact of integration on learning outcomes. In 1962, the US Department of Education asked him to draft a report on educational equality. The so-called Coleman Report (“Equality of Educational Opportunity”) pointed out that school funding had little effect on student achievement. In particular, the evidence suggested that student background and socioeconomic status were much more relevant in determining educational outcomes.

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By the 1990s, many OECD countries started a series of organisational reforms inspired by an “ideal” policy process – or cycle – of “planning-doing-checkingacting”. In 1993, the United States Congress adopted the “Government Performance and Results Act”, the first of a set of acts designed to improve government project management. In particular, the act requires US federal agencies to set goals, measure results, and report on their progress. In Europe, the Evaluation and Quality Agency in Spain (Agencia de Evaluación y Calidad –AEVAL), the Centre for Strategic Analysis in France (CSA), the Impact Evaluation Expert Working Group in Netherlands and the Agency for Growth Policy Analysis in Sweden are all examples of the efforts towards consistent policy evaluation systems. 96

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While those national systems, their rules and procedures, the actors involved and their scope vary, one can note overall the increasing role of governmentwide mandates for policy evaluation, with rich veins in several policy areas such as healthcare, education, labour, development, poverty alleviation or business support.

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In particular, the use of evaluations to assess the impacts of development projects has expanded rapidly. In 2011, the World Bank has launched the Development Impact Evaluation (DIME), a global programme that aims to increase the use of impact evaluations in the design and implementation of policies and increase institutional capacity for evidence-based policy-making.

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Among the most comprehensive strategies of policy evaluation, one can mention the “Magenta Book” published in 2011 by the UK Treasury Department. The book “presents standards of good practice in conducting evaluations, and seeks to provide an understanding of the issues faced when undertaking evaluations of projects, policies, programmes and the delivery of services.”

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Despite the increasing attention that evaluation has received in the political and the academic world, there is no single definition of the concept. That fuzziness is mainly due to the fact that there are several types of evaluations. They vary, depending on the driving criteria (relevance, effectiveness, efficiency, overarching impact and sustainability), on the degree of independence of the body conducting the evaluation (internal or external) and on the timeframe.

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According to the World Bank, evaluation means “assesse[ing] changes in the well-being of individuals, households, communities or firms that can be attributed to a particular project, program or policy”. Another definition comes from OECD: “assessment of how the intervention […] affects outcomes, whether these effects are intended or unintended”.

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At EU level, the Commission has been very active for many years in developing and implementing high quality evaluations of financial programmes and, more recently, of policies and regulatory initiatives. The Commission evaluation practice is constantly being improved, also by embedding an ‘evaluate first’ culture and improving the quality of evaluations.208

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208

See COM(2013)686 final of 02.10.2013 – ‘Strengthening the foundations of Smart Regulation – improving evaluation’.

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A large evaluation experience has been developed in the framework of the EU Structural Funds, as the governing regulations have included evaluation requirements for several programming periods and most recently have increased their focus on the impact of the interventions. According to the general regulation for the 2014-2020 programming period, the effectiveness, efficiency and impact of assistance from the Funds will be evaluated in order to improve the quality of design and implementation of programmes.

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Turning specifically to State aid, both the European Court of Auditors209 and the Council210 have highlighted the importance of effective evaluation. It is in the common interest of the Commission and of the Member States to obtain solid evidence on the actual impact of State interventions in the markets.

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It is also consistent with a growing interest in recent years in the impact evaluation of business support or industrial policy programmes.211 The economic literature provides a wide variety of studies on the issue (cf. section 3), but there are also interesting analysis conducted by public authorities from several Member States. Looking at countries that are already attempting to evaluate their industrial policy interventions, the Netherlands provides an interesting example. The Impact Evaluation Expert Working Group was established in 2012 with the aim to assess the so-called “Top sector initiatives”, a key component of the Dutch industrial policy. The Group not only provides expertise and skills for evaluation analysis but has also put forward specific recommendations on policy design. Other examples can illustrate as well how evaluation is a beneficial learning process in the field of business support.

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In the UK, starting from 2001, regional aid programmes have been thoroughly evaluated. Those evaluations have applied “quasi-experimental” techniques that have been designed to estimate the causal impact of the aid on the beneficiaries (see an example below in section 4.2.1). The findings from the evaluations have influenced the design of successor schemes.

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In 2001, Slovenia approved the “Monitoring of State Aid Act”, and based on it, the Government has established a system to measure the efficiency of State aid. Every year, a report should indicate the objectives of the aid, the expected effects, and the indicators intended for measuring the efficiency of the aid grant209 210 211

See Special Report No 15/2011. See Council conclusions on Reform of State aid control of 13 November 2012. See e.g. Warwick, K. and A. Nolan (2014), “Evaluation of Industrial Policy: Methodological Issues and Policy Lessons”, OECD Science, Technology and Industry Policy Papers, No. 16, OECD Publishing.

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ed. For Slovenia, the findings from the evaluations have influenced the design of successor schemes.

3.

The new evaluation requirements in State aid control

Recognising the central importance of evidence-based policy making, the Commission has incorporated evaluation requirements as part of the State Aid Modernisation launched in 2012.

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The introduction of evaluation in the State aid control system required to address a certain number of preliminary questions. First, since ‘evaluation’ is a broad concept encompassing various types of analysis and methods, its specific meaning in the framework of State aid control had to be defined so as to provide a consistent and workable platform for common assessment. Second, it had to be decided whether evaluations had to be conducted by the Commission or the Member States. Third, the scope of evaluation had to be set out, in relation to the aid schemes that would be subject to it. Also, the procedural and legal requirements in the guidelines and particularly in the GBER had to be clarified.

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As set out in the May 2014 Commission Staff Working Document on a “Common methodology for State aid evaluation”212, evaluation for the purpose of State aid control has to be understood as a tool to identify and estimate primarily the direct impact of a specific aid scheme213 in relation to its objectives, and in particular with regard to the expected incentive effect. I.e. the aid must change the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity, which it would not carry out without the aid or would carry out in a restricted or different manner or location. In addition, State aid evaluation should also provide an indication of the general positive and negative effects of the aid scheme on the attainment of the desired policy objective and on competition and trade, and examine whether the aid was proportionate and limited to the amount necessary and the chosen aid instrument was the most appropriate one.

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212 213

SWD(2014)179 final of 28.05.2014. An ‘aid scheme’ is defined by Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty as ‘any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite amount’.

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The Commission considered it appropriate for evaluation to be an integral part of the public authorities’ policy making and therefore had to be performed by the Member States. To do so required, however, setting out common standards to ensure high quality in all the evaluations.

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As to the timing, it was crucial to ensure that evaluation is embedded in the decision-making process from the start and that the system for the collection and analysis of data is defined upfront. That imperative led to the conclusion that evaluation had to be preceded by evaluation plans to be drafted at the time of the introduction of the aid scheme.

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A key requirement for Member States is accordingly the notification to the Commission of an evaluation plan at the outset of an aid scheme’s implementation. The Commission’s assessment should ensure equal treatment and a consistent level of quality across the board while respecting the need for a proportionate, case-by-case approach to evaluation. Moreover, early planning of evaluation is crucial for its success and is also likely to reduce its costs.

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The evaluation results, once available in a few years, will assist in the design and assessment of the follow-up scheme(s). More general policy recommendations might be developed in the medium term once sufficient evidence for a specific type of aid instrument is available.

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The Commission considered that while evaluation could potentially extend to all the main fields of State aid policy, given its relatively new character, it could be limited in a first period to schemes having certain characteristics. Indeed the Commission included evaluation requirements in the revised guidelines for broadband, regional aid, risk finance, aviation, research, development and innovation, environmental and energy aid and for rescue and restructuring aid. All those communications provide the possibility for the Commission to require evaluations for schemes with large aid budgets, containing novel characteristics or when significant market, technology or regulatory changes are foreseen.

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Evaluation has also been integrated in the new GBER for a number of aid categories (regional aid, aid for SMEs and access to finance, aid for research, development and innovation, energy and environmental aid and aid for broadband infrastructures).214

214

See Article 1(2)(a) of Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty.

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Following the publication in December 2013 of the draft regulation for public consultation, an intense discussion took place on the detailed arrangements for that incorporation.

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First, the proposed threshold above which an evaluation will be required for a scheme, which in the draft GBER was fixed at EUR 100 million in annual expenditure and 0.01 per cent of the national GDP, was considered too low, too difficult to apply and potentially discriminatory between larger and smaller Member States due to the reference to the national GDP. The Commission took those comments into account by modifying the threshold in three ways: first, by increasing it to EUR 150 million, second, by using the average annual budget rather than the level of annual expenditures as the relevant criterion, third, by dropping the reference to the national GDP. According to simulations, that threshold should capture overall between 10 and 15 schemes in average per year, most of them in the larger Member States.

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A second debated issue concerned the requirement, present in the draft regulation, for Member States to notify those large schemes and implement them only once the evaluation plan was approved by the Commission. According to some Member States and stakeholders, that provision may have resulted in delays in the operation of such schemes, including those co-financed by the EU Structural and Investment Funds. In order to address those concerns while maintaining the evaluation requirement in place, the Commission decided to allow schemes subject to the obligation of ex-post evaluation to be implemented immediately, like other GBER schemes, but limiting the exemption under the Regulation to six months. Therefore, those schemes cannot operate further unless the Commission has approved an evaluation plan to be notified within 20 working days from the scheme’s entry into force.

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Starting the implementation of the scheme before the approval of the evaluation plan could be inevitable in case the obligation to evaluate has not been anticipated properly. However, that option carries higher uncertainty regarding the continuation of the scheme. It is therefore preferable to engage as early as possible on a discussion regarding the content of the evaluation plan, and certainly ahead of the legal deadline for the notification of the evaluation plan.

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Following the publication of an Issues paper in April 2013, meetings with evaluation experts and a public consultation on a draft between November 2013 and January 2014, a Commission Staff Working Document on a “Common methodology for State aid evaluation” (referred to as the “Guidance Paper” in the

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remaining of this chapter) was published in May 2014.215 The Guidance Paper describes the key elements of the required evaluation plans, in order to assist Member States in preparing and conducting evaluations of their aid schemes. The evaluation plans should in particular include information on: 1. 2. 3. 4. 5. 6. 7. 8.

The objective of the aid scheme to be evaluated; The evaluation questions; The result indicators; The envisaged methods to conduct the evaluation; The data collection requirements; The timeline of the evaluation, including the date of submission of the final evaluation report; The description of the independent body conducting the evaluation or the criteria that will be used for its selection; The modalities for ensuring the publicity of the evaluation.

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In addition to that guidance, DG Competition published on its website in July 2014 a provisional supplementary information sheet for the notification of an evaluation plan.216 While at this stage it is provisional and non-mandatory, until a final version is approved as part of the forthcoming revision of the so-called Implementing Regulation,217 DG Competition recommends that Member States use it for the notification of an evaluation plan in the interest of a smooth process.

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Impact evaluation is likely to be successful if a sufficient amount of information, time and resources are allocated to it at the start. Therefore, it is essential that a comprehensive plan for evaluating a State aid scheme be drafted at an early stage, in parallel with the design of the scheme. Early planning is also likely to significantly reduce the resources required for the evaluation and ultimately to improve its quality.

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Indeed, it is generally recognised that evaluations are more effective when properly planned and prepared for in advance. According to the UK Treasury ‘Magenta Book’ “minor changes to policy design can dramatically improve evaluation options and quality. Conversely, failure to consider the evaluation early enough can limit those options and the reliability of the evidence obtained”. 215 216 217

SWD(2014)179 final of 28.05.2014. http://ec.europa.eu/competition/state_aid/modernisation/sis_evaluation_plan_en.doc 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 Treaty.

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Setting out an early evaluation plan can help to review and collect existing evidence and data, thereby highlighting areas on which the evaluator might focus on. In addition, an early plan can guide to the design of data collection and monitoring processes, so that the right information is available, as soon as possible, for evaluating the intervention. As pointed out by the World Bank: “The earlier one starts, the more flexibility one has in terms of evaluation design, including data collection. Some of the most rigorous evaluation methods […] cannot be used if project implementation has already begun”.218

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3.1 The objective of the aid scheme to be evaluated The first step when looking to set up an evaluation is to identify the core policy elements as precisely as possible: the aims and objectives of the intervention; the information requirements for the evaluation; how to ensure an appropriate evaluation approach; how to ensure the quality, transparency and policy relevance of the evaluation findings.

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It is crucial to set out clearly the underlying ‘intervention logic’ of the aid scheme, describing the needs and problems the scheme intends to address, the target beneficiaries and investments, its general and specific objectives, and the expected impact. In order to define the scope of the evaluation it could be useful to build up a list of questions that should be answered quantitatively and with the necessary supporting evidence. For example, an evaluator should try to understand if the aid had a significant effect on the observed results indicators or if the aid had an effect on the course of action or on the situation of the beneficiaries, or, more in general, to what extent the policy adopted had the expected effects.

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3.2 The evaluation questions The evaluation questions should, first and foremost, focus on the direct impact of aid scheme on its beneficiaries (e.g. has the aid had a significant effect on the course of action taken by the aid beneficiaries?). Such questions typically tackle the type of impact that can most robustly be measured and it can provide valuable insight into the types of indirect effects and distortions to be expected.

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In addition, it is recommended to include questions about the indirect impacts of the scheme (e.g. positive impacts on regional growth, negative impacts on compe-

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218

See: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTISPMA/0,,co ntentMDK:21094789~menuPK:435951~pagePK:148956~piPK:216618~theSitePK:384329,00.html.

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tition) and on the proportionality and appropriateness of the aid scheme. When developing the evaluation questions, it is important to consider what constitutes a proportionate and realistic evaluation given the resources and data available, and what kind of questions better relate to the final objectives of the scheme.

3.3 The result indicators 1.344

The evaluation questions are inextricably connected with the choice of specific result indicators that capture quantified information about the outcomes of the State aid scheme. Thus, it is crucial that the chosen result indicators are the most relevant for measuring the impact of an aid scheme; indeed, they can be combined to provide answers to the evaluation questions.

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Indicators for measuring achievement of the objectives should be chosen according to generally accepted criteria, such as SMART (Specific, Measurable, Attainable, Realistic and Timely).

3.4 The envisaged methods to conduct the evaluation 1.346

The evaluation should be able to identify the causal impact of the scheme itself. To do so, it is typically necessary to construct a counterfactual based on the most comparable non aided firms (control group219). That point is discussed separately in the next section.

3.5 The data collection requirements 1.347

The collection of data required for an evaluation should be planned before policy activity starts. Obviously an early identification of any existing databases, or other ongoing data collection processes will ensure best use of resources and effort. The evaluation plan therefore needs to review the existing data sources, decide whether they provide sufficient information for the evaluation and ensure that access to them will be possible within the relevant timeframes.

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In addition, due to the fact that consistent and sufficient data must be collected on both the aid beneficiaries and the control group, as soon as the aid scheme is approved, a mechanism should be put in place to monitor the intervention and to collect and process the necessary data. It is likely to significantly reduce the costs of the evaluation. 219

I.e. a group of undertakings which should be as similar as possible to the group of undertakings that received the aid — except that they have not benefitted from that aid.

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With the exception of data on aid applications (including rejected applicants, when available) the data sources for aid beneficiaries and for the control group must be identical to be comparable. The evaluator may need to extract and combine data from existing data sources. Those data are often available to evaluators only under certain conditions relating to privacy and confidentiality of business data. Understanding the existing limitation to data access is another important aspect to take into consideration during the preparation of the evaluation plan. The availability and the consistency of data are crucial elements in the choice of the proper evaluation methods that will be used to identify the casual impact of the aid.

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3.6 Timeline of the evaluation The evaluation plan should contain information on the timeline of the evaluation, set in accordance with the duration of the scheme. In particular, the Commission has clarified that those evaluations should be carried out during the implementation of a scheme and that the results should be available before (at least six months) its completion. That requirement is of crucial importance to ensure that the results can effectively be taken into account in the design and the assessment of any follow-up scheme.

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This implies that not all the medium to long term results and impacts of a scheme will be captured by the evaluation and therefore the evaluation plan and the final report should be explicit about possible limitations.

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3.7 The body conducting the evaluation and its independence The evaluation plan should describe the body conducting the evaluation or, if not yet chosen, the criteria that will be used for its selection.

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The quality of an evaluation strongly depends on the independence of the body conducting the evaluation. Any assessment of the impact of State aid schemes should be objective, rigorous, impartial and transparent. According to OECD guidelines on evaluation “Evaluators should be independent from the development intervention, including its policy, operations and management functions, as well as intended beneficiaries. Possible conflicts of interest are addressed openly and honestly. The evaluation team is able to work freely and without interference. It is assured of co-operation and access to all relevant information”.220

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220

See OECD DAC Network on development cooperation (2010), “Evaluating Development Co-operation – Summary of Key Norms and Standards”.

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Only an evaluation delivered in time, and presented in an accessible format, can ensure optimal use of the results. For that purpose a systematic dissemination and publicity of the evaluation report is a fundamental step to maximise the learning benefits of the evaluation.

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Indeed, the evaluation should be made public. As such, both the evaluation plan and the final evaluation report, once approved, should be given adequate publicity by being made available, for example, on a website. The Commission could also make those documents public on their own website. The authority granting the aid should ensure appropriate involvement of relevant stakeholders, who should be consulted during the implementation of the evaluation plan and once the assessment is made public. For example, stakeholders could be invited to discuss initial evaluation findings on the basis of an interim report.

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Whenever possible, data should be made publicly available with the evaluation results and reports. Availability of data could reduce the costs of future evaluations, and can facilitate the works of other researchers to review the methods and confirm the results of an evaluation.

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Any evaluation has the final aim to meet the needs of the policy-makers and the potential beneficiaries of the aid policy. Any relevant evidence, conclusion, recommendation should be used by Member States to improve the policy design and the implementation of any future State aid schemes. In addition, the Commission could learn from the evaluations in order to improve State aid rules in the future.

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Relevant methods for the evaluation of State aid schemes

While novel in State aid policy, the ex-post evaluation of government support to firms is a very widely studied question in economics.221 Several particularly influential studies emerged from development economics222, labour econom-

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For a discussion of statistical methods used to evaluate state aid measures, see also Xavier Boutin, Rodrigo Peduzzi, “Searching for ‘Good Aid’: The Role of Evaluation,” European State Aid Law Quarterly Volume 14 (2015), Issue 2, p. 250 - 259. See for example the evaluation studies surrounding the Mexican PROGRESA programme launched in 1997, at http://www.ifpri.org/dataset/mexico-evaluation-progresa (retrieved on 14. April 2015). The Mexican government provided cash transfer to millions of families conditional upon the household committing to a set of behaviours designed to improve health and nutrition.

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ics223, and also increasingly from industrial economics.224 The typical questions researchers aim to ask in those studies are the following: Did the support result in more of the desired activity by the firms? If yes, how large was the effect? Was the support more effective for some type of firms than for others? In general, how should we change the policy to make it more effective? They are precisely the questions ex-post evaluation of State aid schemes should answer to. This section provides an overview of the key challenges evaluators face, outlines the main analytical methods for conducting ex-post micro-econometric evaluation and illustrates each method on an example drawn from the literature.

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One of the key questions the ex-post evaluation of State aid schemes should address is whether the public support provided to firms shows an incentive effect. In the economic literature the incentive effect is often referred to as “additionality”: did the aid lead to any additional desired activity, which the firms would not have implemented in the absence of the aid?

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The key challenge studies evaluating the impact of State aid must tackle in order to reliably establish a causal relationship between the aid and economic outcomes is to define a reasonable counterfactual to receiving the aid: what would have happened in the absence of aid and how did the aid change the outcome? Or put in a different way: are the observed changes in the outcome all attributable to participating in the support programme?

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The main difficulty in answering those questions roots in the fact that it is never possible to observe both states (participation and non-participation) for the same enterprise at the same time: one of the states is “counterfactual”. Although the counterfactual cannot be observed and remains a hypothetical scenario, it can be approximated provided sufficient data about the firms and the process in which the State aid is allocated at its disposal. Typically, the evaluator must reconstruct the counterfactual based on data obtained on enterprises other than the actually supported ones, but which are similar enough to infer what would have happened to the subsidised firms absent the support. Finding a well-suited control group is necessary to enable a reasonable comparison but doing so is far from a trivial task in most cases because firms benefitting from a subsidy usually

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For an overview of several influential evaluation studies of labour market programmes see for example Card, David, Jochen Kluve, and Andrea Weber. “Active Labour Market Policy Evaluations: A Meta-Analysis*.” The Economic Journal 120.548 (2010): F452-F477. Directly related to State aid evaluation, studying the impact of R&D subsidies has attracted a particularly large body of literature. A recent survey is Zúñiga-Vicente, José Ángel, et al. “Assessing the effect of public subsidies on firm R&D investment: a survey.”, Journal of Economic Surveys 28.1 (2014): 36-67.

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differ in more ways than just participation. A naïve comparison of the average outcomes observed for participants with non-participants will in most cases be of limited use, because it will not allow attributing all observed changes in outcomes alone to participating in the measure. The major challenge the evaluators face is thus to ensure that the observed differences between the performances of the firms who benefit from aid and those who do not (or do to a lesser extent) can be fully attributed to the receipt of the aid. Failing to account for those effects can show up as an artificial causal effect of the subsidy generating additional activity.

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There is a large variety of studies as to approach and format. In general a good study should carefully explain the identification strategy of the effect of aid. Relatedly, studies adopting modern econometric techniques based on actually observed outcomes deserve more credit than those relying on “industrial survey” techniques, where managers at a sample of firms having received aid are asked to give their subjective assessment of what they would have done had they not received the aid.225,226

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A comparison that may appear straightforward for assessing the effect of aid is looking at how the observed outcomes for recipient firms changed before and after aid. That approach may be a helpful first screener, because it can show whether the aided firms improved at all compared to the period when they did not benefit from the aid. However, the simple before-after comparison of aided firms in itself is not likely to be of much relevance because it does not delineate the effect of aid from other factors that are likely to influence the outcomes. Perhaps most notably, firms experience general economic trends over time. Consumer demand or input costs may have changed over time, which are important determinants of firms’ economic decisions. If those trends and other factors affect the firms at the same time as the aid, then a before-after comparison cannot disentangle the effect of aid from those confounding factors. 225

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The main reason for cautious treatment of the results of questionnaire-based studies has to do with the fact that the recipients of subsidies may have an incentive to strategically answer the questions in order to maintain funding: we can expect that verbal reports are overly optimistic about the effect of received subsidies. Such behaviour casts some doubt on the credibility of optimistic results about the effectiveness of aid in industry surveys but it also implies that verbal reports showing that the support had very little or no effect may deserve attention, because those results go strongly against the expected bias. See also page 2 of Criscuolo, Chiara, et al. (2012) “The causal effects of an industrial policy”, No. w17842. National Bureau of Economic Research; Rye, M. (2002): “Evaluating the Impact of Public Support on Commercial Research and Development Projects - Are Verbal Reports of Additionality Reliable?”, Evaluation April 2002 vol. 8 no. 2 227-248; Martini, A. and D. Bondonio (2012), “Counterfactual impact evaluation of cohesion policy: impact and cost effectiveness of investment subsidies in Italy”, Report for European Commission, DG Regio.

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Beyond economic trends that may influence firm behaviour, there is another very important source of bias inherent in the evaluation of business support programmes: firms that apply for aid are likely to differ from those not applying in the first place.227 There are several reasons why applicants may differ from non-applicants. Perhaps the management of firms applying for public support is more skilled, and better able to tap available public resources. It is possible that applicant firms are generally more innovative and thus better able to present a convincing project that is then deemed worthy for support than the nonapplicants. However, in such cases one would expect those firms to do better than the non-applicants also absent the aid, since both good management and innovativeness are expected to contribute to market success. If a naïve evaluator of State aid leaves those effects unaddressed, she is prone to obtaining a biased estimate for the effect of State aid.228 While there are statistical methods that help alleviate such biases, the crucial ingredient in a successful ex post evaluation exercise is a good assessment of the factors that are likely to influence the firms’ choices, including the application procedure.229

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4.1 Examples for randomization One way to reduce or even eliminate the selection bias is randomization, i.e. a random assignment of firms to the treatment and comparison groups.230 In this case a sample of firms is selected from the population of interest. The latter may not necessarily be a random sample of the entire population of firms and can be selected based on observable firms’ characteristics. For example, one can often restrict the population of firms within which aid will be randomly allocated to those residing in certain regions or being active in particular industries, or even 227

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That factor is backed by the observation of general low application rates for subsidy schemes with minimal bureaucratic costs on applicants. For example, in an evaluation study of a major Finnish R&D support scheme between 2000 and mid-2002, with over 14000 being potentially eligible applicants, the managing agency TEKES received some 3000 applications per year. It appears to be a surprisingly low application rate even if extrapolated over the entire evaluation period, given that successful applicants on average received over 130 000 EUR support, and the authors found “estimated application costs low on average”, so that “for an evaluation of the actual policy, application costs may not be of first-order importance”. See Takalo, Tuomas, Tanja Tanayama, and Otto Toivanen, “Estimating the benefits of targeted R&D subsidies.” Review of Economics and Statistics 95.1 (2013): 255-272. Economists refer to it as “selection bias”. See Takalo, Tuomas, Tanja Tanayama, and Otto Toivanen, “Estimating the benefits of targeted R&D subsidies.”, Review of Economics and Statistics 95.1 (2013): 255-272, who emphasize for the example of R&D subsidies that “one needs to understand how firms make their application and R&D decisions, how government authorities allocate subsidies, and how the firms and the authorities interact.” That observation applies for all types of aid evaluated. “Treatment group” in the common terminology of evaluation refers to the group of firms receiving State aid. The “control group” refers to the non-aided firms.

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to firms having projects that fulfil certain attributes. This experimental sample is then divided randomly into two groups: the treatment group (those receiving support) and the control group (non-aided firms). The average treatment effect can then be estimated as the difference in average outcomes in the two groups, but controlling for other possible influencing variables. Randomization makes sure that there are no systematic differences between recipients and nonrecipients. This allows differences in outcomes to be reliably attributed to the policy that is evaluated.

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From an evaluation perspective, randomization is an excellent way to allocate aid among recipients as it essentially eliminates the selection bias, the source of every difficulty in evaluation. The main objections often expressed against taking this approach to allocate State aid are largely practical or even ethical. In particular, commentators often claim that it would not be “fair” to allocate State aid randomly. Although that argument deserves to be taken seriously, there are reasons to believe the associated difficulties are overemphasized. Randomized trials are routinely used in essentially all developed nations to get new pharmaceutical products licensed. For those tests the allocation of treatment may involve life and death questions, yet randomization is widely regarded as the right way to test whether the treatment works.231 Social policies such as State aid often involve more significant amount of funds232, yet randomization is not a prerequisite. Leigh (2009) summarizes the ethical question and a natural response nicely: “One common objection of policy makers is the question when you have a program that you think is effective, how can you toss a coin to decide who receives it? The simplest answer to this is that the reason we are doing the trial is precisely because we do not know whether the program works.” 233 In fact, randomized control trials are routinely used in several key areas of economic and social policy, such as for allocating development aid234, labour market programmes235 but also 231

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In the medical context patients may even be provided “sham surgeries”, widely accepted as an important clinical control in order to avoid placebo effects. See Sihvonen, Raine, et al. “Arthroscopic partial meniscectomy versus sham surgery for a degenerative meniscal tear”, New England Journal of Medicine 369.26 (2013): 2515-2524 and also the dedicated Wikipedia page: https://en.wikipedia.org/wiki/Sham_surgery. For example, in 2008 the major government programmes granting money for entrepreneurial activities were estimated to be responsible for 4 per cent of the total budget of the Finnish government and almost one per cent of Finland’s GDP, see Koski, H., & Tuuli, J. (2010), “Business subsidies in Finland: the dynamics of application and acceptance stages” (No. 1225), ETLA discussion paper. Leigh, A. (2010). Evidence-based policy: Summon the randomistas? In Productivity Commission Strengthening evidence based policy in the Australian Federation, Volume 1: Proceedings, roundtable proceedings. Productivity Commission, 17–18 August 2009, Canberra. See Bloom, N., B. Eifert, and A. McKenzie Mahajan. “D. and Roberts, J.(2012),“Does management matter: evidence from India”, Quarterly Journal of Economics 128.1. See Behaghel, Luc, Bruno Crépon, and Marc Gurgand, “Private and public provision of counseling to jobseekers: Evidence from a large controlled experiment”, No. 6518. Discussion Paper series, Forschungsinstitut

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in business support.236 There are increased efforts from influential scholars to make wider use of random experiments for evaluating social policies.237 Another often ignored feature of randomized control trials in social policy is that randomization does not necessarily have to be full. Even partial randomization can drastically reduce the selection bias in many cases.238 In summary, randomized trials constitute a very promising, but so far admittedly little used way to allocate State aid. It appears fair to say that lessons learned from carefully evaluating an aid scheme based on that design is likely to be extremely influential.

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4.2 Quasi-experimental studies Researchers conducting data-driven evaluation usually resort to various statistical methods to assess the effect of a subsidy and tackle the potential selection bias. The Commission’s Staff Working Document on “Common methodology for State aid evaluation” lists the most common, so called quasi-experimental methods: Differences-in-Differences, Regression Discontinuity Design and Instrumental Variables estimation. This section illustrates those methods with examples drawn from the applied economic literature focusing on the ex-post evaluation State aid – or more broadly – various government support schemes to businesses.

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4.2.1 Instrumental Variables Estimation Using instrumental variables is one of the key methods to deal with the fact that participation in a State aid scheme is likely to be endogenous. Broadly speaking, in the context of State aid evaluation an “instrument” is a variable in regression analysis that is correlated with the probability of receiving the aid but does not directly affect the outcome variable. An application of the instrumental variable method is nicely illustrated in Criscuolo et al (2012).239 The authors look at the

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zur Zukunft der Arbeit, 2012; Graversen, Brian Krogh, and Jan C. Van Ours, “How to help unemployed find jobs quickly: Experimental evidence from a mandatory activation program.”, Journal of Public Economics 92.10 (2008): 2020-2035. Bakhshi, Hasan, et al. “An experimental approach to industrial policy evaluation: The case of Creative Credits.”, Institute of Small Business and Entrepreneurship Conference, 2012. See for example Duflo, Esther, Rachel Glennerster, and Michael Kremer, “Using randomization in development economics research: A toolkit.”, Handbook of development economics 4 (2007): 3895-3962. For example, firms may be randomly assigned detailed information about a subsidy programme, or the subsidy intensity may be randomly set among them. See Criscuolo, C., Martin, R., Overman, H., & Van Reenen, J. (2012), “The causal effects of an industrial policy” (No. w17842), National Bureau of Economic Research.

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UK Regional Selective Assistance scheme in the years 1986 to 2005 and combine data on various forms of state support received with firm- and plant-level employment and financial information. Their aim is to assess the effect of aid on investment, employment and productivity. The programme gave investment grants to (mostly manufacturing) firms in economically disadvantaged areas of Britain. The grants were discretionary upon two main conditions. First, the supported project had to involve an investment into plant, property or machinery in an assisted area. Second, the project had to create additional employment either by creating new jobs or preventing existing jobs getting lost.

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Overall, the programme was strongly targeted at under-performing firms in deprived areas. Since participation in the programme was voluntary, the issue of endogeneity arises: participation may be more likely among poorly performing firms that are less able to invest and to demonstrate additional employment generated by their projects. If that relationship is ignored, the estimated effect of the aid may be biased (in that case a naïve analysis would likely underestimate the effect of aid). With good instrumental variables the endogeneity bias may be significantly mitigated. The task of the researchers evaluating the effect of the programme on firm employment and productivity is to find an appropriate instrument: an observable variable that influences programme participation but does not otherwise affect the outcome variables, in that case employment and productivity. Criscuolo et al. (2012) argue that the level of maximum aid intensity available in an area is a valid instrument that carries those properties. The maximum aid intensity is regulated by EU (regional) State aid rules and it changes over time and across regions.240 Indeed, maximum regional aid intensity is likely to correlate with programme participation: other things equal it is likely that more firms participate in the programme in regions where they can get a larger share of their investment subsidised. Also, changes in regional maximum aid intensity do not otherwise seem to directly influence the outcome variables of productivity and employment.

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The results of the study also illustrate the importance of tackling the endogeneity issue: the estimated effect of programme participation on employment and productivity is much (up to three times) larger with instruments than without.241

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In the data used it varied between 10 per cent and 35 per cent. See pp. 17-18 of Criscuolo, C., Martin, R., Overman, H., & Van Reenen, J. (2012), “The causal effects of an industrial policy” (No. w17842), National Bureau of Economic Research.

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4.2.2 Regression discontinuity design (RDD) Regression discontinuity design (RDD) is an increasingly popular approach to conduct policy evaluation.242 The method can be applied if the State aid scheme sets some thresholds that either exclude certain firms from participation in the scheme or define significantly different conditions for them. For example, a State aid scheme may be targeted at firms with a number of employees below a certain threshold. Taking as starting assumption that the threshold is exogenous to the firms, RDD essentially compares outcomes for firms closely below and above that threshold.

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For example, if an aid scheme is limited to SME’s with less than 250 employees, then a comparison of eligible firms having 200-250 employees with excluded but otherwise similar firms having 251-300 employees can be informative for the effect of aid. Beyond regional location, age, size and other typical candidates, thresholds that can be fruitfully exploited by RDD are multi-faceted.243 It is the task of the researcher conducting evaluation to understand the scheme and make use of discontinuities arising from its eligibility and other criteria for the purpose of evaluation. However, it is also the task of the aid-grantor to be conscious about the value of various discontinuities in the scheme: such discontinuities can be added to the scheme in the form of eligibility or aid-intensity thresholds in order to allow for a better evaluation.

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The main limitation of the RDD approach is rooted in its very nature: since it focuses on comparing firms around a particular threshold, the conclusions we draw about the effectiveness of aid are primarily valid for firms that are close to that threshold. The further firms are from the threshold, the more likely it is that aid would have a different impact on them than on the firms close to the threshold. For example, focusing on the 250 employee threshold in the example above may be relevant to gauge the effect of aid for firms of 200-300 employees, but the study is likely to lose on validity for both smaller and larger firms.244 In

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See Lee, D. S., and T. Lemieux (2010), “Regression discontinuity designs in economics,” Journal of Economic Literature, 48, 281–355. An interesting threshold for RDD can be based on quality scores of project applications. A State aid granting authority can rank applicant projects by a score and provide funds only for those above a certain threshold. Then projects close enough to but just below that threshold may be valuable comparators to the aided ones in evaluation. That approach is taken to evaluate the impact of R&D subsidies in Belgium in Decramer, Stefaan. “How effective are investment subsidies in Flanders? An RDD approach.” (2014), Univesity of Leuven Working Paper, VIVES Discussion Paper 45. Evaluation studies very often find that the effect of aid depends crucially on firm size. Typically support policies have a greater beneficial effect on smaller firms than on larger ones, see Bronzini, R., and E. Iachini (2011), “Are incentives for R&D effective? Evidence from a regression discontinuity approach”, Discus-

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addition, the decision about which interval around the threshold to focus at for the comparison has to be taken largely arbitrarily, but it can significantly influence the results.245

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Several articles rely on an RDD approach to evaluate the effect of State support policies. Bronzini and de Blasio (2006) investigate the effect of support provided under the ’Law 488’ programme, the main Italian regional policy.246 The authors focus on rejected firms as control group and also adopt RDD specifications limiting the sample to firms that are in the middle of the ranking.

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A recent article by Cerqua and Pellegrini (2014) illustrates well the RDD logic.247 The authors focus on Southern Italy and evaluate the Italian Law 488/92 regional aid programme during 1995 and 2004. From an evaluation perspective, a particularly appealing feature of that programme is that regions allocate subsidies mimicking an auction: they issue a “call for tender” whereby firms submit investment projects along with a funding requirement. Those project proposals are then scored and ranked by the regions, and only the most worthy projects (those above a threshold) are supported. The threshold is a single score based on five equally weighed criteria: 1) the share of owners’ funds on total investment; 2) the new job creation by unit of investment; 3) the ratio between the subsidy requested by the firm and the highest subsidy applicable; 4) a score related to the priorities of the region in relation to location, project type and sector; and 5) a score related to the environmental impact of the project.

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One of the main assumption underlying micro-econometric causal studies is that aid is assigned in a random manner. That assumption is not credible when the policy analysed is based on a deliberate selection process. In that case the participation decisions of firms are likely to introduce biases in the analysis. Cerqua and Pellegrini (2014) also illustrate the value of data on rejected applications to mitigate the selection bias: rejected applications went through a preliminary screening that checked whether some investment project was developed by the firm. Therefore, the difference between firms that just passed the threshold to receive aid and those that just remained below are relatively minor. In that case,

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sion paper, Bank of Italy, Cerqua, A. and Pellegrini, G. (2014), “Do subsidies to private capital boost firms’ growth? A multiple regression discontinuity design approach”, Journal of Public Economics, 109, 114-126, Criscuolo, C., Martin, R., Overman, H., & Van Reenen, J. (2012), “The causal effects of an industrial policy” (No. w17842), National Bureau of Economic Research. Robustness checks may give some confidence about the reasonability of such assumptions. Bronzini, R., and G. de Blasio (2006), “Evaluating the impact of investment incentives: The case of Italy’s Law 488/1992”, Journal of Urban Economics, 60(2), 327–349. Cerqua, A. and Pellegrini, G. (2014): “Do subsidies to private capital boost firms’ growth? A multiple regression discontinuity design approach,” Journal of Public Economics, 109, 114-126.

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the observed difference in outcomes between those groups can be reasonably attributed to the aid.

4.2.3 Difference-in-Differences method estimator The Difference-in-Difference method (“DiD”) requires panel data, i.e. information about the same firms for at least two time periods, with observations before and after (or during) the receipt of the subsidy (treatment).248 With panel data stretching over more than two periods a possible variant of the DiD might be the “within”- or fixed-effects estimator widely used in the panel data literature. The “within”-estimator is closely related to the “differences-in-difference”-estimator.249

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Although it comes in many forms, the simplest setup for the DiD estimator is where outcomes are observed for the aided and non-aided group of firms for two time periods. The aided firms (treatment group) are exposed to the aid in the second period but not in the first period. The non-aided firms (control group) are not exposed to aid during either period. The average outcome in the control group is subtracted from the average outcome in the treatment group. It removes biases in second period comparisons between the two groups of firms that result from time-invariant differences, as well as biases from comparisons over time in the treatment group that could be the result of trends. The main advantage of that method is to delineate the effect of aid from general trends that are common in the treated and control groups. Such trends can be for example general macroeconomic developments, the regulatory environment and several other economic factors that affect all firms in the sample and are constant over time.

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A study that illustrates the DiD method for evaluating business support is Branstetter and Sakakibara (1998).250 The authors examined the performance of the State-subsidised research consortia in a range of Japanese high-technology industries, combining interview and econometric techniques. They obtained data on 226 firms’ annual R&D spending, sales, capital stock, labour and materials usage, and patenting in the US as well as in Japan, for the years 1983-

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A very accessible discussion of practical issues related to the difference-in-differences technique is provided in Lechner, Michael, “The estimation of causal effects by difference-in-difference methods”. Now, Foundations and Trends in Econometrics, Vol. 4, No. 3 (2010) 165–224. See “Fixed Effects Estimation”.on p. 466-474 of Wooldridge, Jeffrey M. (2013), “Introductory Econometrics: A Modern Approach” (Fifth international ed.). Mason, OH: South-Western. Branstetter, L., Sakakibara, M., 1998. Japanese research consortia: a microeconometric analysis of industrial policy. Journal of Industrial Economics 46 Ž2., 207–233.

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1989. Furthermore, as key explanatory variable the authors collected data on the membership of those firms in various research consortia at every point in time. Those research consortia have been heavily subsidised in Japan, so membership indicates that the firm benefitted from subsidies.251 The authors looked at how the number of research consortia in which a firm was member influenced R&D spending, controlling for firm size, industry and time trends. The results revealed a positive and significant effect for State-subsidised consortium membership on R&D spending.

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It is important to note that it is not the econometric method applied that makes an evaluation good. The use of a particular econometric technique does not in itself guarantee the success of an evaluation study. The main task of the researcher conducting the evaluation is to understand the scheme and come up with a convincing control group to the treated firms. The main econometric techniques mentioned here are not mutually exclusive. Often elements from each approach are applied in combination.

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The evaluators also need to make sure that the right data on the right level and frequency will be at disposal.252

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A further important issue for the ex post evaluation of State aid schemes relates to spill overs. The Commission’s Staff Working Document on “Common methodology for State aid evaluation”, as well as most quantitative evaluation studies, focuses primarily on the policy’s impact on subsidized firms. Such an exercise tends to largely ignore possible spill overs to other firms. That outcome is due to the dependence on the so called Stable Unit Treatment Value Assumption (SUTVA), essentially the assumption that firms do not interact with each other. This assumption is admittedly not entirely straightforward in the State aid context, where often the very reason for granting aid is rooted in the belief that the aid will generate positive spill overs among firms. For example, R&D aid granted to firms is often expected to improve the research efforts and outcomes of non-recipients as well, if they interact and cooperate with grant recipients. If it is the case, a simple comparison of aid recipients with non-recipients before and after aid is granted may underestimate the effect of the policy. Observed dif251 252

141 of the 226 firms participated in at least one research consortium during the sample period, while the remaining 85 firms did not. In particular, it is crucial that the evaluation is conducted using firm-level or even more detailed data. Studies focusing on regional or even higher level data will almost certainly not lead to meaningful evaluation.

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ferences may appear small because both recipients and non-recipients improved research outcomes. The former may have done so directly due to the grant, the latter indirectly due to positive spill overs from the recipient. There are severe empirical difficulties in disentangling the spill over effects from more relevant confounding factors. However, doing so is not impossible. It is the task of the evaluator to take stock of avenues through which spill overs are likely to materialize in the context of the evaluated policy, assess potential biases and design the evaluation exercise – and especially the control group - in an appropriate manner to minimize those biases. Although it may be challenging, doing so is possible, as shown by the significant body of literature that has studied practical ways for taking into account spill overs in evaluation.253

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Lessons learnt so far and conclusions

The requirement to conduct a careful evaluation to assess the effects of a selection of aid schemes is a true novelty in EU State aid rules. While it will still take a few years to see the first results of those evaluations, the Commission is already building significant experience regarding the assessment of the notified evaluation plans. Since 2014 the Commission has approved several evaluation plans, so far mostly in the field of regional aid.254 At the time of writing this chapter several evaluation plans in the regional aid and R&D&I aid domains have been notified and are being assessed by the Commission. Some tentative conclusions can be drawn from that initial experience.

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First, while State aid schemes had been evaluated in the past, the methodological guidance of the Commission constitutes a novelty in many cases. While some stakeholders were critical about the increased focus on the economic soundness of evaluations, responses highlighting the importance of robust counterfactual methods are actually more frequent. An achievement of the new policy on

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For a very accessible guide to the spillover issue in the development context see Angelucci, Manuela, and Vincenzo Di Maro, “Program evaluation and spillover effects”, Impact-Evaluation Guidelines, Technical Notes No. IDB-TN-136, Office of Strategic Planning and Development Effectiveness, Inter-American Development Bank (2010). An overview of the methodological issues spillovers impose for evaluating business support policies is provided in Cerqua, A. and Pellegrini, G. (2014), “Do subsidies to private capital boost firms’ growth? A multiple regression discontinuity design approach”, Journal of Public Economics, 109, 114126. A State aid evaluation study that explicitly takes into account spillovers is Branstetter, L., Sakakibara, M., 1998. Japanese research consortia: a microeconometric analysis of industrial policy. Journal of Industrial Economics 46 Ž2., 207–233. See e.g. SA.38751 (CZ) “investment incentive scheme”, SA.39273 (UK) “Regional Growth Fund”, SA.39669 (HU) “Development Tax Benefit”, SA.39460 (DE) Federal regional aid scheme (GRW), SA.40523 (PL) “Special Economic Zones”.

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evaluation is to promote counterfactual evaluation methods. Several notified evaluation plans are explicit about the Member State choosing to conduct the evaluation relying on micro-econometric counterfactual methods due to the Commission’s guidance.

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Second, the initial experience suggests that the exchanges with the Member States on the notified evaluation plans are more fruitful when they are conducted involving experts on both sides with the necessary methodological expertise and knowledge of national data landscape.

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Third, Member States and some stakeholders are looking forward for further clarifications about the way the Commission intends to use in the future the final evaluation reports and their results. What is already clear today is that the evaluations’ findings and recommendations will serve both the Member States and the Commission to improve the design of subsequent aid schemes and of future rules. It is in the common interest of all interested stakeholders to design more effective and efficient State aid measures.

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Chapter 5 External aspects of State aid policy – part 1: WTO

1.

Why control?

The State aid control regime of the Union and the Agreement on Subsidies and Countervailing Measures (SCM Agreement) of the World Trade Organisation (WTO) are arguably the world’s two most developed systems of control of public support to companies. Their co-existence has practical implications for policy makers, aid-granting authorities and aid beneficiaries. It also has implications for the regulatory frameworks in countries with whom the Union enters into international trade agreements. To understand how those two systems interact (or, to be even more practical, to assess, for instance, the risk of an aid approved by the Commission being attacked by a WTO Member), one needs to understand the reasons for their respective developments before looking into the mechanics of how they work.

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1.1 Why control State aid in the Union? It is useful to briefly recall the rationale behind the State aid control system in order to contrast it with the WTO subsidy regime. Also, it is worth considering the tension the system is operating under, not least on account of having been increasingly put into question over the last few years in the public debate on globalisation and in the aftermath of the financial crisis.255 The removal of a 255

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As an illustration, reference be made to a letter to the Editor of the Financial Times that the then Competition Commissioner Neelie Kroes felt obliged to publish on 16 February 2009 defending the single market (“single market is the goose that lays the golden Egg of European prosperity”), and resisting any attempts to weaken the Commission’s role in State aid enforcement as well as calls for a laxer application of State aid rules; available online at http://webcache.googleusercontent.com/search?q=cache:NfFdpVFuj48J:www.ft.com/ cms/s/0/1b3e504e-fbc8-11dd-bcad-000077b07658.html+&cd=1&hl=en&ct=clnk#axzz3Qm4agoMV.

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proposed new reference to “free and undistorted competition” from the draft article on the objectives of the Union at the Brussels European Council of June 2007 is symptomatic of its tone, even if it bore no legal consequences.256 The financial crisis and the large sums of State support channelled to the banking sector257 subsequently exacerbated a critical view of the State aid discipline,258 although the critics were not univocal. Some wanted to attack the large amounts of State aid needed to rescue banks and thus pleaded for a stricter State aid control. Others, however, claimed that the Union should relax its State aid control in crisis times to allow banks to continue lending money to the private sector and thus that the Union should allow higher amounts of aid.

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This chapter will not go into detail on why the founding fathers felt it necessary to pool sovereignty, transfer the competence for controlling an important instrument of economic policy to the supranational level,259 and vest upon a supranational institution an exclusive competence for its control. The following brief comments should nevertheless be made to frame the analysis.

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See Brussels European Council, 21 and 22 June 2007, Presidency conclusions, Annex 1, point 3 and footnote 16. Initial comments on those conclusions of the European Council were divided on the legal significance of that change. It also prompted a reaction of the Competition Commissioner, see the press release “Statement of the European Commissioner for Competition Neelie Kroes on results of June 21-22 European Council – Protocol on Internal Market and Competition”, 23 June 2007, MEMO/07/250, and Questions and Answers on the ICG mandate for a Reform Treaty, 10 July 2007 MEMO/07/283. Furthermore, Protocol N° 27 to the TEU and TFEU, the “Protocol on Internal Market and Competition”, confirms that internal market is based on undistorted competition and even forsees a possible recourse to the exeptional provision of Article 352 of the Treaty, “if necessary”. Importantly, the competition Articles, including the State aid control provisions, of the Treaty remained unchanged. Essentially, competition is not and never has been an objective itself, but a mean to an end, namely to ensure an effectively functioning single market. In the period 2008-2012, the overall volume of aid used for capital support (recapitalisation and asset relief measures) amounted to EUR 591.9 billion (4.6 % of the Union’s GDP in 2012), see: http://ec.europa.eu/ competition/state_aid/scoreboard/financial_economic_crisis_aid_en.html. For a more general overview of State aid as a response to the financial crisis: Lienemeyer, Kerle and Malikova “The New State aid Banking Communication: The Beginning of the Bail-In Era Will Ensure a Level Playing Field of Enhanced BurdenSharing”, EStAL 2/2014, p. 277. An extreme, but no less illustrative, example of that phenomenon can be seen in the critical statements by Arnaud Montebourg, then France’s Minister for industrial rejuvenation, attacking the Commission’s State aid enforcement as effectively out of touch with the necessity to rebuild the industrial base in the Union, see: Le Figaro, “Montebourg veut démanteler la Concurrence à Bruxelles”, 25.02.2014, http://www.lefigaro. fr/flash-eco/2014/02/25/97002-20140225FILWWW00113-montebourg-veut-retirer-la-concurrence-abruxelles.php. In that context, the Union’s supranational system of State aid control is quite unique, see Buts, Joris and Jegers in “State Aid Policy in the EU Member States”, EStAL 2/2013, p. 330.

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The Commission as a supranational institution tests whether aid fulfils an objective of national or common European interest and how the resulting affectation of trade and competition affects other Member States so that it may weigh the positive and negative effects of State aid from a common European interest perspective. That entrustment avoids control being left at the mercy of national administrations which might be more attuned to national political interests,260 and thus more likely to consider operating under the “beggar thy neighbour” principle, paying out aid in a competitive manner to seek to attract employment and generate growth.261

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Even before the financial crisis, following the call by the European Council for less and better targeted State aid in 2005262 and the subsequent adoption by the Commission of the State Aid Action Plan,263 the rationale for State aid control gained an additional nuance by focusing more on the economic analysis of the positive and negative effects of State aid measures.

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That focus on the effects of State aid was further developed during and after the financial crisis in the context of the State Aid Modernisation programme under the stewardship of Vice-President Almunia, during which the State aid discipline also witnessed a reorientation for it to contribute to growth and innovation as part of the so-called “modernisation” process.264 One of the main objectives of that modernisation was to enable the Commission to focus on the most distortive cases while leaving more flexibility to Member States to put in place “aid which is well designed, targeted at identified market failures and objectives of common interest, and least distortive (“good aid”)”.265 A higher degree of

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260 261

262 263 264

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See also: Buts, Joris and Jegers in “State Aid Policy in the EU Member States”, EStAL 2/2013, p. 330. Member States paid out substantial sums by way of State aid: Non-crisis aid reached EUR 62.7 billion or 0.49% of EU 28 GDP in 2013, see State aid scoreboard: http://ec.europa.eu/competition/state_aid/scoreboard/non_crisis_en.html. The benefits of aid are debatable in economic terms, see in respect of effect on employment, Buts and Jegers, “Does State Aid Create jobs? The Short and Mid-Term Employment Effects of Subsidies”, EStAL 4/2013, p. 651. See European Council, Brussels, 22 and 23 March 2005, Presidency conclusions, paragraph 23. “State Aid Action Plan. Less and better targeted State aid: a roadmap for State aid reform 2005 – 2009”, Brussels, 7.6.2005, COM(2005) 107 final. See Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, State Aid Modernisation (SAM) COM/2012/0209 final. See also Bernstiel, Bungenberg and Heinrich (eds.) “Europäisches Beihilferecht”, 1st ed. 2013, pp. 65-67. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, State Aid Modernisation (SAM) COM/2012/0209 final, para 12; see report on Competition Policy 2013, SWD(2014) 148 final, p. 7: “government support can also have a positive impact when it is well-targeted, tackles market failures, and creates incentives for investments and ventures that would not take place otherwise. ‘Good’ State aid can stimulate innovation and human-capital development. EU State aid policy can also help national authorities make

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transparency as regards state aid measures was required from the Member States granting the support.266

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The State aid modernisation process also stressed that: “… State aid policy – far from being a bureaucratic obsession of Brussels Eurocrats – is a very important tool to better focus the use of public resources and avoid the waste of taxpayers’ money.”267 Other than being a discretionary spending of taxpayers’ money, State aid comes - at least – at a double cost:268 the cost of opportunity (money spent on State aid to firms has not been spent on something else, e.g. education) and the cost of the additional distortion to the economy coming from the need to raise taxes to finance State aid (referred to in the economic literature as the shadow cost of taxation).269

1.2 Why control subsidies at world level? 1.397

The rationale for agreeing to control subsidies in the WTO is to achieve similar objectives to those pursued in the Union, even though it is embedded in the

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the most of dwindling resources in times of budget constraints. Promoting public spending on growthoriented policies is a key priority for the EU in this economic context and the main rationale of the State aid Modernisation strategy”. Communication from the Commission amending the Communications from the Commission on EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, on Guidelines on regional State aid for 2014-2020, on State aid for films and other audiovisual works, on Guidelines on State aid to promote risk finance investments and on Guidelines on State aid to airports and airlines, OJ C 198, 27.6.2014, p. 30. Speech by then Competition Commissioner J. Almunia, London, 11 January 2013: “Doing more with less – State aid reform in times of austerity: Supporting growth amid fiscal constraints”; http://europa.eu/rapid/ press-release_SPEECH-13-14_en.htm. An argument could even be made to say that effective competition policy encompassing State aid control is also important in view of more macroeconomic policy considerations such as monetary policy. Arguably both competition policy and monetary policy are concerned with the pursuit of price stability, see EUVertragsreform: Folgen für die Geldpolitik” EU-Monitor 50, Deutsche Bank Research, 23 October 2007. For more explanations on the costs of State aid, see Part I, chapter 3 on “the economics of State aid control”. Furthermore, it is interesting to note that precisely that aspect, i.e. the financing of State aid with taxpayers’ money, has in the past raised interest in State aid issues in the USA, a jurisdiction that does not have any formal State aid control. In particular, the Cuno v. DaimlerChrysler case sparked a lively debate on the use of tax incentives by governments of the States to attract and retain investment, and on whether they should be constrained. DaimlerChrysler had received USD 280 million worth of tax incentives in exchange for building a new car factory in the city of Toledo in Ohio. A number of Ohio-based companies and individuals filed suit, arguing that the incentives violated the inter-State commerce clause of the US constitution. For more on that case and the US debate on the wrongs and merits of inter-State tax and subsidy competition, see e.g. Zelinsky “Ohio Incentives Decision Revisited” in Tax Analyst 2005, State Tax Notes, 19 September 2005, p. 869, and Schenk “The Cuno Case: a Comparison of U.S. Subsidies and European State Aid”, in EStAL 1/2006, p. 3. For another case where discriminatory taxation was found to violate inter-State commerce, see US Supreme Court judgment in West Lynn Creamery, inc. v. Healy, U.S., No. 93-171 of 17 June 1994.

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trade distortion logic rather than competition distortion logic,270 and despite the use of different instruments. The benefits of multilateral trade liberalisation would be (at least partly) jeopardised if lowering of tariffs and quantitative restrictions was not accompanied by some discipline over another major trade barrier in the form of subsidies. It is worth briefly recalling the obvious, namely that companies receiving State subsidies will almost always benefit from a relative competitive advantage compared to their competitors which did not receive subsidies. Hence, it is arguable that any trade liberalisation can only be as effective as the subsidies regime applicable in parallel to it. Even though the focus of WTO anti-subsidy rules is not directly the protection of competition or achieving a level playing field, it aims at a similar goal by offering protection against injury caused by subsidised imports.271 The tension between free trade and free markets on the one hand and State support for industries on the other is well-known: politicians across the political spectrum have sought more flexibility in the application of the State aid regime in order for Union undertakings not to lose out against competitors perceived to benefit from State support in their home countries.272 We would argue that strengthening the State aid regime at home will facilitate strengthening the subsidies discipline in the WTO context, both of which will, albeit in the medium- to long-term, be more cost-effective and beneficial for all than increasing subsidies in response to perceived advantages granted by third countries. A policy of “retaliation by aid”, similar to the “beggar thy neighbour” behaviour by Member States,273 can only

270

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Of course, the Union has ultimately a more far-reaching goal than the one ascribed to the WTO by its Members, since unlike the WTO it aims to create an internal market and ultimately a political union; see Slotboom, “Subsidies in WTO Law and in EC Law”, Journal of World Trade [2002] 36(3):517-542. See Slocock “EC and WTO Subsidy Control Systems – some Reflections”, EStAL 2/2007, p. 249. See for instance European Parliament resolution of 19 June 2007 on the Report on Competition Policy 2005 (2007/2078(INI), paragraph 36, or the joint letter of President Sarkozy and Chancellor Merkel on Lisbon strategy to Mr José Sokrates, President of the European Council, “Reinforcing the Lisbon strategy through external economic measures” of 10 September 2007; see also footnotes 1 and 4 for more recent examples. For a description of the mechanism, see for instance: Frederiszick, Röller and Verhouden, “EC State Aid Control: an economic perspective”, in “The EC State Aid Regime – Distortive effects of State Aid on Competition and Trade” Sanchez-Rydelski ed., p. 162 “negative cross-country externalities are thus a strong justification for a supranational control system of national State aid measures”, and Schenk “The Cuneo case: a comparison of U.S. Subsidies and European Aid” EStAL I/2006, p. 1 where in the context of tax incentives she wrote: “since all States continue to offer tax incentives, State government and municipalities’ believe they must use them in order to counter competition from other States” (p. 5). The twin WTO cases about subsidies to Boeing and Airbus respectively are worth mentioning in that context. In those cases, both the Union and the US accused each other of granting WTO inconsistent subsidies to Airbus/ Boeing – see Chianale: “The WTO Airbus Dispute: Findings of the panel and of the Appelate body”, EStAL 2/2013, p. 290.

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lead to more tax money being spent intervening in the markets on all sides274 and ultimately could impede a fully functioning market economy.

2.

What is controlled and how?

2.1 Scope – goods and services versus goods only 1.399

One of the most evident differences between regimes under the WTO and under the Treaty is that the latter covers not only goods but also services275 and even culture,276 while the SCM Agreement only applies to goods. Subsidies to services are thus outside the scope of the WTO subsidies discipline altogether.277

2.2 Is State aid278 the same as subsidy? 1.400

Is a State aid under Union law the same as a subsidy in WTO law? Some of the constitutive elements of State aid of Article 107(1) of the Treaty resemble those of a subsidy contained in Articles 1 and 2 of the SCM Agreement: transfer of State resources in the Treaty, and the financial contribution by the government in the SCM Agreement, advantage in the Treaty and benefit in the SCM Agreement, selectivity in the Treaty and specificity in the SCM agreement. It is debatable whether the concept of a subsidy is wider in one or the other system. 274

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It is therefore only logical that, whilst calling for a more flexible application of State aid rules, the then European Commission’s President Barroso underlined the need for a framework in order to avoid an “aid competition” among Member States: see article in FAZ 11/09/07 “Kommissionspräsident Barroso will flexiblere Beihilfen – Wirtschaftsinteressen der EU nach außen verteidigen”. See e.g. N 889/2006 – Aid to Iberdrola for the improvement of the electrical service, OJ C 152, 06.07.2007, p. 1; The provision of aid for the starting an alternative stock trading platform C 36 / 2005 – Investbx, OJ L 45, 20.02.2008, p. 1; or N 187/2007 – Modification of Regionally Differentiated Energy Tax for the Service Sector (N 593/2005), OJ C 173, 26.07.2007, p. 1, and case law such as Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, which was about the compensation for public (transport) services. See for instance numerous decisions on aid to audiovisual productions, such as N 461/2005 – UK Film Tax Incentive, OJ C 9, 13.01.2007, p. 1 or N 593/2006 – Northern Ireland Screen Fund (the “Screen Fund”), OJ C 77, 05.04.2007, p. 8. Article XV of the GATS acknowledges that subsidies may in certain cases have distortive effects on trade in services, and mandates WTO Members to enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such trade distortive effects. Article XV further calls on Members to exchange information concerning all subsidies related to trade in services that they provide to domestic suppliers. Until now little progress was made, also as regards transparency. For a discussion on subsidies to services, see the OECD Trade Policy Working Paper No. 66 “Analysis of Subsidies for Services: the Case of Export Subsidies” by M.G. Grosso, 30.01.2008, avaiable online at: http://www.oecd.org/officialdocuments/ publicdisplaydocumentpdf/?doclanguage=en&cote=tad/tc/wp(2007)15/final. This very succinct section aims merely at pointing to the elements along which the differences and similarities between the notion of State aid in Union law and the SCM Agreement notion of a subsidy can be analysed. For a thorough discussion of the notion of State aid, see Part II of the book “The Concept of State Aid”.

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Arguably, the WTO recognises a subsidy not only when there is an actual transfer of State recourses, but also when there is (merely) entrustment or direction to a private body to confer a benefit,279 whereas the State aid concept in the Union in principle requires, at least since the PreussenElektra case,280 an actual transfer or a sufficiently concrete risk of the transfer of (State) resources.

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WTO case-law has also developed a rather wide interpretation of the notion of a “government or any public body”,281 which includes regional and local government. So far, no real difference to the Union’s regime. However, the Appellate Body’s report in US-DRAMS282 as well as the Panel’s report in EC-DRAMS283 clarified284 the interpretation of the terms to “entrust” or to “ direct” in item (iv) of Article 1.1(a)(1)(iv) of the SCM Agreement to cover situations where government entrusts or directs private bodies to commit financial resources. In that case, the panel found that: “ in cases where the financial contribution was provided by a private body, as the investigating authority considered to have been the case on a number of occasions with respect to support for Hynix, the disciplines of the SCM Agreement will not apply as there is no financial contribution by the government, unless it can be demonstrated that the private body was entrusted or directed by the government to provide such a financial contribution”.285 Hence even private undertakings’ contributions can be seen to fall under the SCM Agreement provided it can be shown that the government entrusted or directed the private undertaking to make the contribution.286 It can be argued

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282 283 284

285 286

See Slotboom, “Subsidies in WTO Law and in EC Law”, Journal of World Trade [2002] 36(3):517, where it is suggested that a cost to government does not need to be demonstrated in order to establish a subsidy within the meaning of the SCM Agreement. Case C-379/98 PreussenElektra ECLI:EU:C:2001:160, paragraphs 59-61 and 66 and Case C-262/12 Vent de Colère, paragraphs 19 following, ECLI:EU:C:2013:851. See also, for instance, Kreuschitz/Rawlinson in Lenz/Borchardt (Ed), EUV/EGV, 4th Ed, Linde Verlag [2006], art. 87, paras 11-17. Article 1.1.(a)1 of the SCM Agreement. See for example the discussion of the Panel ruling in Canada-Aircraft in Luengo Hernandez de Madrid (2007), Regulation of Subsidies and State Aids in WTO and EC Law: Conflicts in International Trade Law, 55 European Monographs, Kluwer Law International, 2007, pp. 104-106. See US-DRAMS, WT/DS296/AB/R, 27 June 2005. See EC-DRAMS, WT/DS299/R, 17 June 2005. Slotboom argued before the DRAMS case that a subsidy in WTO law does not necessarily involve a charge on the public account, and specifically ventured that PreussenElektra type government measures would be caught by the SCM Agreement, see his article “Subsidies in WTO Law and in EC Law”, Journal of World Trade [2002] 36(3):517, but see also criticism of that contribtution by Van de Casteele, “The International Dimension of State Aid”, in Rydelski (ed.), The EC State Aid Regime: Distortive Effects of State Aid on Competition Trade, 2006, Cameron May Ltd.: London, pp. 789-804. WT/DS299/R, at 7.50 Arguably, the evidentiary burden for showing entrustment or direction to a private body can be quite high. The panel held that such evidence should be “probative and compelling and this will obviously differ from case to case. In this respect, we consider that evidence which demonstrates merely that the government encouraged or facilitated private investment would not be sufficient to conclude that the government entrusted

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that the WTO’s approach now resembles the Union concept of imputability as developed by the Court of Justice in Stardust Marine which accepted that, provided the resources in question were State resources (as opposed to purely private ones) they could be imputable to the State on the basis of “a set of indicators arising from the circumstances of the case and the context in which that measure was taken”.287 That approach to imputability has been argued to “constitute a subtle step towards further liberalisation of the public sector by discretely pushing back State influence in publicly owned undertakings through the use of State aid law”.288 Importantly, however, the concept of imputability in State aid is one which only would come into play where it has been established that the money in question is public money.289 In the EC-DRAMS report, where entrustment or direction was found, there was no further consideration as to whether the money in question was in fact State money.290

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or directed such private actions. Something more will be required” (at para 7.59). On the other hand, the panel also held that “such delegation or command should invariably take the form of an affirmative act. But it does not necessarily need to be “explicit”. It could be explicit or implicit, informal or formal. The key is being able to identify such entrustment or direction in each factual circumstance. This will obviously need to be determined, on a case-by-case basis, whether an investigating authority could reasonably have concluded on the basis of all of the relevant and probative evidence before it that such entrustment or direction existed.” (at para 7.57). Thus, it appears as if ultimately the determination can only be made on a case-by-case basis and will depend on the evidence available. Only future dispute settlement cases will probably be able to clarify whether the standard for entrustment or direction is a very high one or not. Case C-482/99 France v Commission (‘Stardust Marine’) ECLI:EU:C:2002:294, paragraphs 55 and 56. Lübbig and von Merveldt “Stardust Marine: Introducing imputability into State Aid rules – Plain Sailing into calm seas or rowing back into shallow waters?” [2003] E.C.L.R. 629, 633. Case C-482/99 France v Commission (‘Stardust Marine’) ECLI:EU:C:2002:294, paragraphs 24 and 44 following. See also Case C-83/98 P France v Ladbroke Racing and Commission ECLI:EU:C:2000:248, paragraph 50, where the Court found that “the fact that they [i.e. privately held funds] constantly remain under public control, and therefore available to the competent national authorities, is sufficient for them to be categorised as State aid”. See more generally: Slotboom, “Subsidies in WTO Law and in EC Law”, Journal of World Trade [2002] 36(3):517. See Report WT/DS299 European Communities – Countervailing Measures on Dynamic Random Access Memory Chips from Korea, for instance at 7.133 following. There the panel analyses the situation of one particular bank which participated in a rescue operation of Korean DRAM producers Hynix and was at that time 43.17 per cent Korean government owned. Hence, there could be a doubt as to whether under Union law, such moneys could still be seen to constitute public funds. Furthermore, see the case of Citibank Korea. Whils, in that case the Panel accepted that there was “government entrustment and direction” on the facts, in large part due to that institution’s lack of cooperation with the Union investigators, the Panel did not exclude that such a finding could be made also in case of full cooperation and assuming there was no Korean government control over Citibank, stating: “The government had no shareholder power in Citibank. While it is correct that Citibank had a close relationship with the government since the late 1960’s, and was clearly an important player in assisting Korea’s economic recovery after the 1997 financial crisis, this does not necessarily demonstrate that the government had some form of control over Citibank. Hence, the quality of the evidence with regard to Citibank will have to be higher to demonstrate that the government actually directed Citibank to participate in the October 2001 Restructuring Programme.” In other words, even in spite of the fact that there was no government shareholding power over Citibank a finding of entrustment and direction could still be made. In Union law, a financial contribution by Citibank would in all probability not be considered to represent public money and hence it would fall outside the definition of State aid even

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A more substantive difference between the two regimes could derive from the fact that the SCM Agreement foresees a way of identifying a subsidy other than that of a financial contribution made by a government, namely “any form of income or price support in the sense of Article XVI of GATT 1994”.291 As Luengo Hernandez de Madrid remarks, “the importance of this second alternative has been forgotten both by the doctrine as well as the Panels and the Appellate Body”,292 and in fact is hardly ever used.293 However, the existence of that alternative means that price support that could escape qualification as State aid in Union law further to PreussenElektra294 may in fact constitute a subsidy under the WTO rules. Of course any practical implications, namely whether such a scheme could be countervailed or challenged through the WTO dispute settlement mechanism, would depend on whether such schemes would have an impact on international trade.

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As for the WTO notion of benefit, it comes close to the Union law concept of an advantage. That similarity became more pronounced with the Panel and subsequently Appellate Body’s report in Canada-Aircraft which established that the notion of benefit for the purposes of establishing the existence of a subsidy is to be interpreted in the context of Article 14 of the SCM Agreement, a provision that also includes a concept similar to the Union’s market economy operator principle.295

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The differences become more apparent when one examines the Union notion of selectivity and the SCM Agreement notion of specificity. Unlike Article 107(1) of the Treaty, the SCM Agreement defines ‘specificity’ separately in Article 2 from the definition of a subsidy in Article 1. While according to the Treaty State aid per definition is selective, in the SCM Agreement subsidies can also be nonspecific. Only those subsidies which meet the specificity test are subject to its disciplines. There are potentially many situations where a measure that would be considered selective under Union law would not be found specific within

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291 292 293

294

295

if entrusted or directed. See Article 1.1(a)(2) SCM Agreement. Luengo Hernandez de Madrid (2007), Regulation of Subsidies and State Aids in WTO and EC Law; Conflicts in International Trade Law, 55 European Monographs, Kluwer Law International, 2007, p. 118. One of the rare cases in which the Panel has endeavoured to make an interpretation of “ income or price support” was DS414 (China-GOES), see para 7.81-7.88 (in particular 7.83-84). In DS426 (Canada - FIT Programme) the second alternative is briefly discussed, but not actually applied. A mere transfer of purely private money even if on the basis of a law made specifically to subsidize a sector will not be recognised as State aid, see Case C-379/98 PreussenElektra ECLI:EU:C:2001:160, paragraphs 59 and 60, and more recently Case C-262/12 Association Vent de Colère ECLI:EU:C:2013:851, esp. paragraphs 30-37. Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R of 20 August 1999.

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the meaning of Article 2 of the SCM Agreement. They concern in particular the different view taken by each regime of the concept of general measures and regional subsidies.

1.406

As regards general measures, Article 2.1(b) of the SCM Agreement states that: “Where the granting authority, or the legislation pursuant to which the granting authority operates, establishes objective criteria or conditions2 governing the eligibility for, and the amount of, a subsidy, specificity shall not exist, provided that the eligibility is automatic, and that such criteria and conditions are strictly adhered to. The criteria or conditions must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification.” Footnote 2: “Objective criteria or conditions, as used herein, mean criteria or conditions which are neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.”

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It follows that, for instance, certain forms of SME support would be non-specific on the basis of that provision, while they would be considered selective under Union law. Under Union law there is selectivity when, for example, a measure favours a whole sector of the economy, (but not others).296 The Court of Justice has specifically held that “The fact that the number of undertakings able to claim entitlement under the measure at issue is very large, or that they belong to different sectors of activity, is not sufficient to call into question its selective nature and therefore, to rule out its classification as State aid”.297 However, the practical effect of that difference is likely to be limited as generalised SME subsidies available across industrial sectors would in any case be unlikely to be actionable under WTO law, because of, for instance, the difficulty in establishing material injury to a particular industry.

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As for regional subsidies, the second sentence of Article 2.2 of the SCM Agreement explicitly states that “It is understood that the setting or change of generally applicable tax rates by all levels of government entitled to do so shall not be deemed to be a specific subsidy for the purposes of this Agreement”. That feature of the WTO regime was at the time it was adopted another important point of 296

297

See Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke ECLI:EU:C:2001: 598, in which a tax rebate to the manufacturing sector was found capable of constituting aid: “[…] the supply of energy on preferential terms to undertakings manufacturing goods, which is the end result of national legislation such as that at issue in the main proceedings, is capable of constituting State aid”(at paragraph 40). Case C-172/03 Heiser ECLI:EU:C:2005:130, paragraph 42.

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divergence with Union law, when the Commission determined the specificity of a tax measure in relation to the national tax framework. However, following the judgment in the Azores298 case, the identification of State aid in region-specific rates of taxation requires analysis of the autonomous status of the region and of the transfers between the central and local government. Thus, that difference may have become less important in practical terms.

2.3 Control The State aid regime in the Union and the WTO rules on subsidies present, for all similarities they share, a number of fundamental differences which are arguably most noticeable when one considers how each regime is controlled and enforced.

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As far as the Union regime is concerned, aid measures are in principle subject to prior approval by the Commission by virtue of Article 108 of the Treaty.299 Exceptionally, aid which is considered to be “de minimis” by virtue of Commission Regulation (EC) No 1407/2013300 is exempted from the requirement of prior notification, while aid fitting into the framework set by the General Block Exemption Regulation (GBER)301 is exempted from notification as it is deemed compatible.

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The assessment of compatibility rests exclusively with the Commission.302 No aid may be granted before the Commission has approved it.303 Any aid granted before an approval is automatically unlawful304 and that illegality cannot be cured by a subsequent Commission assessment establishing that the aid could nevertheless be compatible with the internal market.305 Hence, such aid should in principle

1.412

298 299 300

301 302

303 304 305

1.411

Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511. Kreuschitz/Rawlinson, in Lenz/Borchard (ed.) EUV/EGV, 4 ed. Art. 88 para 2. Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty to de minimis aid, OJ L 352, 24.12.2013, p. 1. No notification is required because such measures do not meet all the conditions of Article 107(1) of the Treaty since they are considered not to affect intra-Union trade and/or distort competition. Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.6.2014, p. 1. Case 78/76 Steinike & Weinling ECLI:EU:C:1977:52, in which the Court therefore held that before the Commission has exercised its powers under the Treaty individuals cannot simply challenge the compatibility of an aid before national courts or ask them to decide as to the aid’s compatibility. See Article 108(3) of the Treaty. See definition of unlawful aid in Article 1 of the Procedural Regulation. See for instance Joined Cases C-261/01 and 262/01 Van Calster and Cleeren ECLI:EU:C:2003:571, paragraph 63.

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be recovered.306 Such an obligation of recovery also applies for aid granted before an approval which is later found to be compatible aid, in respect of the time period that elapses until the Commission adopts a compatibility decision.307 That consequence provides for a strong incentive to notify aid ex ante.

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By contrast the WTO system does not provide for any prior authorization of subsidies. However, the SCM Agreement does require WTO Members to notify any “specific” 308 subsidy309 granted or maintained to the Committee on Subsidies and Countervailing Measures on a bi-annual basis. The notifications should be sufficiently detailed to enable other WTO Members to evaluate the trade effects of the subsidy, the content of the notification being set out in the SCM Agreement.310

1.414

As for the assessment of subsdies, the WTO system provides for a three-tier approach to subsidies. In a first tier it lists a number of subsidy types that are prohibited. They are essentially export subsidies and subsidies depending upon favoring directly or indirectly the use of domestic over imported goods.311 The SCM Agreement sets out a second type of subsidies, so-called “actionable” subsidies. The grant of actionable subsidies, whilst not per se being prohibited, nevertheless entitles other WTO Members to protect themselves in so far as they cause “adverse effects” to them.312 In the third tier are “non-actionable” subsidies. They are non-specific or meet certain conditions such as assistance for research activities, assistance to disadvantaged regions or assistance to promote adaptation to new environmental requriements.313 306

307

308

309 310 311

312 313

See for instance Case C-232/05 Commission v France ECLI:EU:C:2006:651, where the Court held that the recovery order should prevail by being ensured an immediate and effective execution even in the face of opposing national legislation, in that case the suspensory effect provided for actions brought against demands for payments. See also Case annotation by Metaxas “Recovery Obligation and the Limits of National Procedural Autonomy” EStAL2/2007, p. 407. Though in such situation it would seem that only the recovery of the interest could be sought, see in particular Case C-199/06 CELF and ministre de la Culture et de la Communication ECLI:EU:C:2008:79, paragraph 55. Specific in that context is referring to subsidies where access is limited to certain undertakings or to a designated geographic region, Article 21 and 2.2. SCM Agreement, thus akin to the notion of selectivity in the Union State aid regime. See further: Van Bael & Bellis, “Anti-Dumping and other Trade Protection laws of the EC”, 4th ed.2004, para 14.3. Article 25.2 SCM Agreement. See Article 25.3 SCM Agreement. See Article 3 SCM Agreement and “ illustrative list” in Annex I to the SCM Agreement. Art. 3 SCM Agreement prohibits subsidies which are “contingent, in law or in fact, […] upon export performance”. Contingent has been interpreted as to mean “conditional” or “ dependant” for its existence upon, see Appellate Body report in Canada-Aircraft, WT/DS70/AB/R. See Article 5 SCM Agreement. See Article 8 SCM Agreement.

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The SCM Agreement provides for expedited procedures for dealing with disputes concerning prohibited subsidies,314 which may ultimately culminate in a panel report recommending that the measure in question be withdrawn without delay if it is found to constitute a prohibited subsidy.315 For actionable subsidies, the SCM Agreement also provides for remedies, but only to WTO Members which themselves suffered “adverse effects”. That latter notion essentially means serious prejudice or injury to their domestic industry as a result of the subsidisation.316 Remedies consist on the one hand in the imposition, further to an investigation, of countervailing measures (in the form of duties to offset the injury caused by the subsidy to a WTO Member’s domestic industry),317 or318 in refering the dispute over the subsidy in question to dispute settlement after prior “consultations” with the subsidizing WTO Member in order to seek and solve the issue.319 For non-actionable subsidies consultations and a potential referral to the Committee on Subsidies and Countervailing Measures are foreseen.320

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2.4 Enforcement The conception of subsidies under the WTO regime leads to differences in enforcement as compared to State aids. In the Union, unlawful and incompatible State aid is in principle subject to recovery.321 The purpose of recovery is to re-establish the situation that existed on the market prior to the granting of the aid. Where negative decisions are taken in cases of unlawful aid, the Commission must in principle decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary (recovery orders). In 314 315 316

317 318

319 320 321

1.416

See Article 4 SCM Agreement. See further: Palmeter and Mavroidis, “Dispute settlement in the World Trade Organization – Practice and Procedure”, 2nd ed. Cambridge 2004, p.186. See Article 7 SCM Agreement together with Article 5 and 6. Article 5 lists as “adverse effects” not only injury to the domestic industry, but also serious prejudice more generally and “nullification or impairment of benefits accruing directly or indirectly to other members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994”. See Part V of the SCM Agreement. Footnote 35 to Article 10 SCM Agreement foresees that countervailing measures may be imposed to offset both prohibited and actionable subsidies. However, countervailing measures may not be imposed if measures under dispute settlement procedures have been imposed. Another issue is the extent to which “retaliatory” or “matching” subsidies are permissible under WTO law: arguably, the Panel in the EC-Vessels case did not rule out the possibility for a WTO Member to grant subsidies to offset the injury suffered by the subsidies of another member, see further Ehlermann and Goyette, “The interface between EU State Aid control and the WTO Disciplines on Subsidies”, EStAL4 [2006] 695, though interpretations of that particular point differ. See Article 7 SCM Agreement. See Article 9 SCM Agreement. Notice from the Commission: “Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid”, OJ C 272, 15.11.2007, p. 5.

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the WTO, even if prohibited subsidies are granted, the system depends upon another WTO Member challenging the measure in question before a dispute settlement panel. That task may be seen to be facilitated by the duty for WTO Members to notify any “specific” subsidy granted or maintained. Also, just as in the Union context, competitors will tend to be aware of subsidies granted to undertakings and urge their (WTO) Member States to bring an action if the subsidy is seen to have an impact on their business. However, there are limitations to those two instruments, notifications and the reliance on complaints by the industry. As for the notifications, the effective lack of sanction for not notifying, or for late or incomplete notification means that the incentive for WTO Members to comprehensively notify is low.322 As for complaints, the industry itself faces a complex set of incentives that may sometimes prevent them from complaining. There is, for instance the risk of retaliation by the accused government for example in procurement markets, or the hope of benefiting from foreign subsidies if part of the value chain is established in granting jurisdictions.

1.417

The focus of the enforcement is also different. In the Union State aid regime recovery orders are made against particular undertakings as such even if the subsidy was used for the production of a particular type of product by the benefiting undertaking. The State aid regime considers that the competitive position of a beneficiary undertaking as a whole profits from the grant of State aid. Therefore, recovery orders are to be enforced against an undertaking even if, for instance, the production of the particular type of product which was originally meant to be supported by the grant of aid has since ceased.323

1.418

By contrast, in the WTO system the focus is essentially on the effect that subsidies may have on individual products.324 It leads to a particular difficulty for the enforcement of the anti-subsidy regime, as it requires a complaining WTO Member State to analyse the case of a particular product having benefited from the subsidy in order to determine whether injury has been suffered by a domestic “ like product”. The notion of like product is defined in the SCM Agreement as “a product which is identical, i.e. alike in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product 322 323

324

It is not excluded that a WTO member could be condemned by the Dispute Settlement Body for not notifying, but the retaliatory measures authorised would be likely to be minimal. Thus, in Case C-232/05 Commission v France ECLI:EU:C:2006:651, the Court found that France was obliged to set aside a national law suspending immediate recovery of aid, in spite of the fact that the aid had been granted a long time ago and the undertaking since been sold on and production of the relevant product at that site had actually ceased. See Slocock “EC and WTO Subsidy Control Systems – some Reflections”, EStAL 2/2007, p. 249.

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under consideration”.325 That definition has lead to considerable case-law on the meaning of “ like product”. Furthermore, as injury being caused by the actionable subsidy has to be demonstrated, there is an evidentiary hurdle which has no counterpart in the Union regime. Comparatively, the required evidence as regards the impact on trade is light in the Union regime,326 and the distortion of competition can be a potential one and is thus generally assumed.327 Leaving aside the possibility to install countervailing measures on the basis of a prior investigation,328 another way the WTO regime differs in comparison with that in Union law is that its enforcement depends upon a dispute settlement system between sovereign States as opposed to a fully-fledged court of law with established powers to rule on cases brought both by Member States and individuals or companies, including, for instance, the possibility to grant interim relief. Inevitably, a dispute settlement regime is less powerful and suffers from a number of weaknesses. For instance, the credibility of the systems arguably rests, ultimately, on the WTO Members abstaining from defying WTO principles.329 It is in that vein that the Understanding on Dispute Settlement stipulates that “the use of the dispute settlement procedures should not be intended or considered as contentious acts and that, if a dispute arises, all Members will engage in these procedures in good faith in an effort to resolve the dispute”.330

325 326

327 328

329 330

1.419

Article 15.1 SCM Agreement, footnote 46. Hence, in Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, a potential effect on trade between Member States was seen to exist by the fact that the conditions on the local public transport market in the middle of eastern Germany may make it more difficult for competititor from other Member States to provide transport services. The Court also recalled in that case that: “there is no threshold or percentage below which it may be considered that trade between Member States is not affected. The relatively small amount of aid or the relatively small size of the undertaking which receives it does not as such exclude the possibility that trade between Member States might be affected” (at paragraph 81). This is only the logical consequence of aid conferring an advantage on a beneficiary, see Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, paragraph 84. Which however are in any event themselves potentially the subject matter of dispute settlement procedures. Furthermore, the SCM Agreement provides for national judicial, arbitral or administrative review to be available to review the imposition of countervailing measures (Article 23 SCM Agreement). In the Union, as the SCM Agreement is essentially implemented into Union law by Council Regulation (EC) No 384/96 of 22 December 1995 on protection against dumped imports from countries not members of the European Community, OJ L 56, 6.3.1996, p. 1 and Council Regulation (EC) No 2026/97 of 6 October 1997 on protection against subsidized imports from countries not members of the European Community, OJ L 288, 21.10.1997, p.1 (as last amended by Regulation (EC) No 461/2004), such review is available by challenging the Council Regulations imposing countervailing duties on the basis of the Basic Anti-subsidy Regulation before the CFI. For an overview comparison between WTO and EC Safeguard measures, see: Clough, “WTO and EC Safeguard Measures – Legal Standards and Jurisprudence”, [2003] Int. T.L.R, p. 70. Horovitz “On Good Governance and WTO Disputes” [2002] Int.T.L.T. 169. DSU Article 3.10.

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1.420

Furthermore, the absence of the threat of a recovery order arguably constitutes a weakness of the WTO subsidies regime. Should a subsidy be found to be prohibited under the SCM Agreement, it will be recommended that the subsidy be withdrawn without delay.331 Whilst one might consider that the notion of “withdrawal” only implies a prospective remedy (contrary to the Union’s repayment obligation), the Dispute Settlement body has in a case and on the facts of that case, interpreted it as implying repayment of the subsidy332 though that report’s actual implementation did apparently not involve the full reimbursement.333 Contrary to the situation under Union State aid regime, the “withdrawal” of a subsidy does not seem to include the notion of a full restitution to the status quo ante, and therefore does not, for instance, require repayment with interest.334

1.421

The most important difference from the Union regime is arguably in the possibility for WTO Members to have recourse to countervailing measures as set out in part V of the SCM Agreement. That entitlement enables WTO Members to impose countervailing duties on imports from another WTO Member if, further to a fact-based investigation, it has been established that a countervailable subsidy has been granted which causes injury to the imposing Member’s industry and there is a causal link between subsidised imports and injury. Nevertheless, the effectiveness of the countervailing duties is confined to the injury suffered from imports in the domestic markets. It does not offer a remedy against injury caused by foreign subsidisation in export markets, or for goods where competition takes place on a global scale and which do not cross a border point and 331 332

333

334

See Article 4.7 SCM Agreement. Panel report on Australia - Automotive Leather II (Article 21.5 - US) WT/DS126/RW, where, addressing the question whether partial repayment can be sufficient, if repayment is necessary to “withdraw the subsidy”, the Panel Stated: “Having concluded that Article 4.7 of the SCM Agreement encompasses repayment, we can find no basis for concluding that anything less than full repayment would suffice to satisfy the requirement to ‘withdraw the subsidy’ in a case where repayment is necessary” para 6.45. In the settlement between Australia and the US in the Australia - Automotive Leather II case, even if some money was reimbursed, it fell short of full repayment, so in that sense the remedy was ultimately not in line with the panel report. See Mavroidis, “Remedies in the WTO Legal System: Between Rock and a Hard Place”, European Journal of International Law, 2000, No. 4, p. 763, who argues that “the effectiveness of the WTO remedies depends on the relative “persuasive” power of the WTO Member threatening with countermeasures”. Again, in Australia - Automotive Leather II (Article 21.5 - US), the Panel rejected the inclusion of interest in the repayment of prohibited subsidies, opining that the remedy under Article 4.7 was not designed to fully restore the status quo ante nor was it a remedy intended to provide for reparation or compensation (para 6.49) – compare to the situation in Union law: Case C-232/05 Commission v France ECLI:EU:C:2006:651, paragraph 42: “According to the case-law the Member State to which a decision requiring recovery of illegal aid is addressed is obliged under Article [288 TFEU] to take all measures necessary to ensure implementation of that decision […]. This must result in the actual recovery of the sums owed”, and this includes interest from the time of granting”. See also Article 14(2) of the Procedural Regulation.

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hence cannot be imposed there (e.g. ships). For those two latter cases the only remedy remains the dispute settlement track and the possibility to withdraw the trade benefits towards the subsidising country. In conclusion, the anti-subsidy regime is applicable between the WTO Member States and is largely prospective: only once a subsidy has been found to exist can countervailing duties be imposed and/or a challenge be brought to the dispute settlement body. There is no mechanism for prior approval,335 and enforcement of the SCM Agreement depends upon WTO Members bringing action before the dispute settlement body and/or taking countervailing measures. Whilst in the case of prohibited subsidies which are brought to a panel, the remedy is withdrawal of the subsidy, that mechanism has not so far been seen to include the reestablishment of the status quo ante. The rationale behind the WTO regime is arguably essentially concerned within ensuring free trade among its Member States.336

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The Union regime goes further as it ultimately aims at ensuring that undertakings in the internal market all benefit equally from undistorted competitive conditions, and thus has to be considered with the aim of the creation of a common market in mind.337 The Union regime effectively governs the relationships between Member States and their economic actors by subjecting any grant of State aid within the meaning of Article 107 to a prior approval by the Commission. The regime is backed up by the threat of illegality of any non-notified aid and its potential subsequent recovery with interests.

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3.

Outlook

As discussed above, even though the Union and WTO State aid control systems differ, in particular as regards their enforcement powers and scope of coverage, they nevertheless also respond to a similar and partly shared objective: to limit distortions of competition and trade caused by State support. Due to that shared fundamental objective, differences with the SCM Agreement are not such that they exercise pressure for change on the Union’s State aid policy. 335 336

337

1.424

At least no longer: there used to be one, albeit in any event lighter than the Union State aid notification regime in Article 8 SCM Agreement which has now lapsed (cf. Article 31 SCM Agreement). Sanchez Rydelski, “EG und WTO Antisubventionsrecht”, Baden-Baden 2000, p. 327; see also Slocock “EC and WTO Subsidy Control Systems – some Reflections”, EStAL 2/2007, pages 249, who wrote that “The WTO system, consistent with the mercantilist workings of the organisation, is built around the concepts of trade distortion and of effects, injury, prejudice to others”. But see Slocock “EC and WTO Subsidy Control Systems – some Reflections”, EStAL 2/2007, p. 249, who wrote that “(…) one should not conclude... that the aims of the systems pursue different objectives, but the different choice of tools may be capable of producing different outcomes”.

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1.425

With its Communication “Global Europe: competing in the world” of October 2006, the Commission adopted a “no protectionism at home, activism abroad” policy.338 It set out an increased effort to promote principles of effective control of trade-distorting State aid on the international scene: “The absence of competition and State aid rules in third countries limits market access as it raises new barriers to substitute for tariffs or traditional non-tariff barriers. The EU has a strategic interest in developing international rules and cooperation on competition policies to ensure European firms do not suffer in third countries from unreasonable subsidisation of local companies or anti-competitive practices. There is much to be done in this area. In most countries, there is little transparency over the granting of aids”.339

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That policy response was also a consequence of the analysis of potential Union gains from further trade liberalisation. With successful lowering of tariffs on most products, it is the non-tariff trade barriers behind the border, including State aid, that hamper free trade. As a result, the gradual lowering of external trade barriers will not fully benefit Union interests unless conditions on foreign markets are competitive so that Union exports or Union enterprises can actually compete on them. In other words, there should be some form of control of trade-distorting State aid.

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While the Union’s commitment to the WTO has been repeatedly confirmed, a new instrument for regulatory convergence has emerged: the new generation of bilateral Free Trade Agreements (FTAs). They focus on tackling non-tariff trade barriers “through regulatory convergence whenever possible” in order to ensure real market access. Regulatory issues, including competition and State aid, feature among those that are addressed.

1.428

The Union has embarked on an impressive number of bilateral and regional (trade) negotiations. It is negotiating or has already concluded over 30 trade agreements containing competition clauses with partner countries or regions. All of the ten agreements concluded since 2006 contain subsidy/State aid provisions which go further than what is already applicable in the SCM Agreement (“WTO plus”). They range from provisions allowing an exchange of informa338 339

Commission Communication “Global Europe: competing in the world. A contribution to growth and jobs strategy”, COM(2006) 576 final, 4.10.2006. Commission Communication “Global Europe: competing in the world. A contribution to growth and jobs strategy”, COM(2006) 576 final, 4.10.2006, point 3.2, page 8. One need to add though that it is not the absence of formal rules per se but the actual use of State aid by third countries in a trade-distorting manner that may motivate the Union to seek some sort of international disciplines.

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tion on subsidies to services, through provisions prohibiting certain kinds of subsidies (beyond export subsidies and local content rules), to provisions which indicate that third countries will take over the whole State aid acquis of the Union. All those negotiations and the resulting agreements have opened the door for promoting convergence in rules and practice bilaterally, thereby trying to ensure fair and open access of European companies to global and foreign markets. The Free Trade Agreement (FTA) with Korea was one of the first FTAs with far-reaching provisions on subsidies.340 They aim at ensuring that any benefits gained from the bilateral trade liberalisation as a result of the negotiated FTA are not mitigated by trade-distorting subsidisation in the market for which greater access is sought.341 In that particular FTA a “WTO plus” standard has been achieved by including clauses on the prohibition of unlimited guarantees and subsidies for ailing companies without a credible restructuring plan, as well as some enhanced transparency provisions on the granting of subsidies. In addition, the FTA includes an enforceable, and therefore credible, dispute settlement system with commercial sanctions. As a result, the FTA provides for a first step being taken towards a subsidy/State aid discipline being enforced in Korea.

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In more recent FTAs, such as the one concluded with Singapore342 and the EU textual proposals for the the trade agreement with the USA,343 the Union increasingly focuses also on provisions for subsidies to services to overcome one of the main shortcomings of the SCM Agreement, the fact that it is only applicable for goods. Subsidies for services can be as distortive to competition and trade as subsdies to goods. Moreover, in the current global trade context services are becoming increasingly important.

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The agreements with Ukraine344 and Moldova345 even stipulate that both countries agree to take over the whole EU acquis as regards State aid. Both countries accepted the ambitious goal of introducing a fully fledged State aid control system accompanied by a functional State aid authority.

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340 341

342 343 344 345

See text and further details online at: http://ec.europa.eu/trade/policy/countries-and-regions/countries/ south-korea/. See Jarosz-Friis, Pesaresi and Kerle in “EU-Korea FTA: a Stepping stone towards better subsidies’ control at the international level” Competition Policy Newsletter 1/2010 available online at: http://ec.europa.eu/ competition/publications/cpn/2010_1_19.pdf See http://trade.ec.europa.eu/doclib/docs/2013/september/tradoc_151764.pdf. See http://trade.ec.europa.eu/doclib/docs/2015/january/tradoc_153031.pdf. See http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150981.pdf (summary of the DCFTA) and http://eeas.europa.eu/ukraine/pdf/5_ua_title_iv_trade_and_trade-related_matters_en.pdf (full text). See http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22014A0830(01)&from=EN.

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1.432

In that context the Union aims to maintain WTO consistency in the provisions being negotiated. The Union stance is that the agreement on rules to be achieved in FTAs is to complement the WTO provisions (not to replace them) and achieve a higher level of commitments than what is currently agreed in the WTO.346

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What interest do other countries have in agreeing to some State aid disciplines, other than to reach an overall trade liberalisation agreement with the Union? Some commentators pointed to the “free riding problem”347 as a strong disincentive for the Union’s trading partners to commit to any State aid control beyond the SCM Agreement. While acknowledging the strength of that argument, one should not neglect that there may be internal policy reasons for which such control may be welcome, as it may be easier to accept coming from an external source than if it was to be agreed domestically.

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Indeed: “(…) the principles underlying the EU State aid control – justification for State intervention stemming from market failure or equity objectives, proportionality of aid to the objective pursued, incentive effect of aid – are those of sound public policies. Policy evaluation, good governance in taxation, sustainable public finance, optimal use of public funds given the needs of the economy and their opportunity cost – all these are well served by following the principles of State aid control. And all these contribute to creating framework conditions for companies to invest, grow and employ”. 348

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Having said so, one should not forget that the Union has defensive interests with regard to State aid, too. Apart from the obvious, namely the support to agriculture under the common agricultural policy, Member States grant a large amount of compatible State aid to industry and services every year (up to EUR 63 billion in 2013, which constituted 0.49% of the Union’s GDP). The volume of State aid given by the Member States may weaken the Union’s position in seeking international disciplines on State aid, especially towards countries with smaller public budgets. However, two elements mitigate such arguments. First, no recent concrete data exists to prove that the Union gives more State aid/subsidies than other countries or regions. The Union is very transparent about the

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347

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See Lowe, “Competition Policy as an Instrument of Global Governance”, in: Monti, v. u. z. Liechtenstein, Vesterdorf, Westbrook and Wildhaber (Eds.), Economic Law and Justice in Times of Globalisation, Festschrift Carl Baudenbacher, (Baden-Baden, 2007), 489-501. Understood as a situation where country A, having limited its use of State aid in an FTA with the Union, unwillingly affords the benefit of such limitation to a country B, which is not party to the negotiations, who can “ free ride” on the already achieved deal. It is the difficulty of excluding free riders that lowers the incentives to commit beyond multilateral levels in a bilateral agreement. See Lowe “Competition policy as an instrument of global governance”, in: “Economic Law in Times of Globalisation”, Festschrift Carl Baudenbacher.

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support it gives, which is not the case for other countries. This does not mean however that the Union gives more support. Second, even if it emerged that the Union would be equally or more generously providing support to enterprises, that support is subject to strict rules under the State aid control framework, balancing the positive and the negative effects of the aid. All in all one sees an increasing degree of awareness of State aid/subsidy issues in the broad sense and progress is made to be transparent about and control such support.

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Chapter 6 External aspects of State aid policy part 2: accession349

1.

Introduction

State aid control has developed significantly since the founding in 1957 of what is now the European Union (the EU). The various rounds of EU enlargement after 1995 brought differences in both scale and quality with regard to the routine of granting State aid and the systems of control in the acceding Member States. Before the 1995 enlargement, any aid granted before accession to the EU was considered as existing aid. The 1995 enlargement introduced some novelties, in that for a year prior to accession the EFTA Surveillance Authority, a supranational body, was responsible for supervising the granting of aids in the new Member States.

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The scale of the 2004 enlargement was unprecedented. Although the candidate countries established national State aid control bodies before accession, they were not subject to any supranational control, and hence there was a risk that some of their decisions might not comply fully with Union law and might therefore substantially disrupt the internal market.

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The new Central and Eastern European Member States underwent major economic changes in a relatively short period of time. In some of them there were a large number of companies which found it difficult to adjust to the new market circumstances. In this situation, their national authorities were inevitably tempted to use State resources to support the restructuring of large undertakings and encourage new investors to take an interest in their less developed regions. That

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This chapter draws on the first edition of this book. The author would like to thank Agnieszka StobieckaKuik and Andrea Bomhoff for being able to build on their work.

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being so, it should be stressed that the aim of introducing State aid control in those countries before accession was not to restrict the amounts of aid granted in terms of volume, as the amounts disbursed were no greater than those granted as aid by the “old” Member States.350 The objective was to ensure that State resources were focused on areas where there was a need for an additional incentive to develop the economy. The Commission proposed what it considered most appropriate to ensure strict control of State aid measures, while also allowing some State aid measures which would have been prohibited under normal Union rules to continue temporarily, so that they could be phased out smoothly. This is why closer scrutiny of aid measures already granted before accession was required.

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It was therefore crucial to establish criteria making it possible to classify aids as either new or already existing before accession. This classification had important procedural consequences, since measures not classified as aid existing before and applicable after accession could be made subject to a recovery order following the accession of the Member State concerned. That innovation was particularly useful as a means of guarding against the risk of “last-minute” grants of aid when the accession took longer than expected.

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The 2007 enlargement brought new challenges, as for a long time the Commission did not consider that the national State aid controlling authorities in Bulgaria and Romania met the standards of independence and transparency required for the Union to recognise that the State aid measures they cleared qualified as existing aid.351 When those countries’ Accession Treaty352 was signed, it was necessary to introduce additional safeguard clauses to guarantee that Union law would be respected.353

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Each candidate country is different, and it is difficult to predict at this stage what challenges the current negotiations on future accessions will bring. The Union, and especially the Commission, will confront them making full use of the very substantial experience acquired in the recent past. This is already clear from the 350

351

352 353

http://epp.eurostat.ec.europa.eu/tgm_comp/refreshTableAction.do;jsessionid=9ea7d07d30f4ede852fb8 5b64e2281d7e3a0d1851c55.e34MbxeSaxaSc40LbNiMbxeNbN0Qe0?tab=table&plugin=1&pcode=co mp_ai_sa_01&language=en. 2004 Regular report on Romania’s progress towards accession of 6 October 2004, COM(2004) 657 final, SEC(2004)1200. 2004 Regular report on Bulgaria’s progress towards accession of 6 October 2004, COM(2004) 657 final, SEC(2004)1199. State aid scoreboard, spring 2006 update, COM(2006) 130. Treaty concerning the accession of the Republic of Bulgaria and Romania to the European Union (2005), OJ L 157, 21.06.2005, p. 11. Annex V, section 2 of the Act concerning the conditions of accession of the Republic of Bulgaria and Romania and the adjustments to the Treaties on which the European Union is founded, OJ L 157, 21.06.2005, p. 203.

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benchmarks the Commission has introduced in order even to open negotiations with the current candidate countries. The developments in the case of Turkey are particularly interesting. Despite the conditions of the EU’s Customs Union with Turkey, for a long time that country did not respect the obligation to introduce State aid control,354 a situation which is hardly acceptable for the Union given the scale of Turkey’s economy, the importance of its heavy industry and the classification of the territory from the point of view of regional investment aids. The Commission’s role in establishing the standards to be met by any Member State’s State aid authority cannot be underestimated. Transitional State aid measures introduced by particular Accession Acts are country-specific and tailormade following the negotiation process; they also depend on the skill and negotiating powers of the Member State concerned. In fact, a Member State is not always best placed to appreciate, for example, the needs of a particular undertaking in the restructuring process. This is illustrated by the difficulties experienced by new owners of steel undertakings, who had to implement government restructuring plans approved by the Commission taking into account both the different business solutions needed in the changing market circumstances and a tight timeframe. Appropriate peer review at national level and the sharing of best practices could be of help to newcomers.

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This chapter focuses on the process of introducing State aid control systems in the Member States whose links to the Union began with Europe Agreements (the EA), Association Agreements (the AA) or Stabilisation and Association Agreements (the SAA), rather than immediately with Accession Acts. It gives an overview of the most important notions specific to that transitional system of State aid control, which has by now been exhaustively covered in the literature,355 with a focus on the most relevant or recent developments, and pro-

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355

Agreement establishing an Association between the European Economic Community and Turkey, OJ L 217, 29.12.1964, p. 3687. Peers, Living in Sin: Legal Integration under the EC-Turkey Customs Union, (1996) EJIL 411-430. See among others Cremona, “State aid control: Substance and procedure in the Europe Agreements and the Stabilisation and Association Agreements”, ELJ Vol. 9, No 3, 2003, p. 265-287; Marmagioli, “State aid in the New Member States”, in: Sanchez Rydelski (ed), The EC State aid regime. Distortive effects of State aid on competition and trade, Cameron May LTD; Merola, and Ballester, “State aid and enlargement, specificities of new Member States”, in Geradin, D. (ed), Modernisation and enlargement: two major challenges for EC competition law, Intersentia, Antwerp, 2005; Petersen. “State aid: the specificities of the new member States”, in Geradin (ed.), Modernisation and enlargement: two major challenges for EC competition law, Intersentia, Antwerp; Ross, “The EU and Poland: Issues Surrounding Harmonisation of Policies on State Aid, Communist Economies and Economic Transformation,” Vol. 8. No. 3. 1996, p. 363-391; Schütterle, “State Aid Control in the New Member States – Challenges ahead”, in: New Developments in European State Aid Law 2004, Proceedings from the 2nd Experts Forum held in Brussels on 29 April 2004, European State Aid Law Institute, Lexxion Verlag – NP NewLaw Publishers, Berlin; Rapp, State aid in the accession

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viding examples of specific Commission decisions. It concludes with an attempt to evaluate the effectiveness of the system.

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Europe Agreements, Association Agreements and Stabilisation and Association Agreements

The Europe Agreements,356 Association Agreements357 or Stabilisation and Association Agreements358 provided a framework for trade and internal marketrelated matters for dealings between the European Community and each candidate country, to prepare it for accession to the Union. The majority of Europe Agreements contained basic substantive State aid rules similar to those in the

356

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358

countries, in Hancher, Ottervanger and Slot (ed), “EC State aids”, 2006; Van de Casteele, The International dimension of State Aid, in Sanchez Rydelski (ed), The EC State Aid Regime. Distortive Effects of State aid on Competition and Trade, 2006. Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Bulgaria, of the other part, OJ L 358, 31.12.1994; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Czech Republic, of the other part , OJ L 360, 31.12.1994; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Estonia, of the other part, OJ L 68, 09.03.1998; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Latvia, of the other part, OJ L 26, 02.02.1998; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Lithuania, of the other part, OJ L 51, 20.02.1998; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Hungary, of the other part, OJ L 347, 31.12.1993; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Poland, of the other part, OJ L 348, 31.12.1993; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and Romania, of the other part, OJ L 357, 31.12.1994; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Slovakia, of the other part, OJ L 359, 31.12.1994; Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Slovenia, of the other part, OJ L 51, 26.02.1999. The full text of the Europe Agreements with the candidate countries can be found at http://www.consilium. europa.eu/cms3_Applications/applications/Accords/searchparty.asp?lang=EN&cmsid=297. Agreement establishing an Association between the Republic of Cyprus and the European Economic Community, OJ L 133, 21.05.1973, p. 101; Agreement establishing an Association between the European Economic Community and Malta, OJ L 61, 14.03.1971, p. 2; Agreement establishing an association between the European Economic Community and Turkey, OJ L 217, 29.12.1964, p. 3687. Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Croatia, of the other part, OJ L 26, 28.01.2005, p. 3. Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the former Yugoslav Republic of Macedonia, of the other part, OJ L 84, 20.03.2004, p. 1. Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Albania, of the other part, OJ L 107, 28.04.2009, p. 166. Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Montenegro, of the other part, OJL 108, 29.04.2010, p. 3. Stabilisation and Association Agreement between the European Communities and their Member States of the one part, and the Republic of Serbia, of the other part, OJ L 278, 18.10.2013, p. 16.

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Treaty,359 whereby any State aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is incompatible with the proper functioning of the Agreement concerned, insofar as it may affect trade between the Community and the country in question. The December 1994 Essen European Council conclusions invited each associated country to establish a single national authority to control the granting of State aids.360 The authority had to be independent and operate on the basis of transparent legislation. The role of such authorities was particularly important for candidate countries whose Agreements did not contain specific State aid rules, like Cyprus and Malta. However, the majority of the Agreements envisaged the adoption of State aid implementing rules (the Implementing Rules),361 according to which the candidate countries would establish national State aid control authorities to monitor the granting of State aid control on their territory, applying criteria similar to the acquis. More detailed rules, including procedures,362 were provided directly in Protocols to the Agreements363 for State aid granted in the steel sector, showing the importance the Union attached to this sector.

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Although the Implementing Rules did not require the exact reproduction of the Union State aid procedures, those procedures were adopted grosso modo as national monitoring and control systems. The Implementing Rules also provided for consultation, monitoring and problem-solving procedures in case of conflicts between the Union and the candidate country concerned.

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The effectiveness of enforcement of decisions of the Association Council has not been tested so far. Although enforcement provisions were not used, they were important because they were the basis on which the candidate countries started to implement their national State aid control systems. The candidate countries were given procedural choices as to how to establish their State aid authorities.

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359 360 361

362 363

E.g. Article 64 EA with Poland. This event has been taken as a cut-off date for considering aids as existing in the meaning of Article 1 (b) of the Procedural Regulation, OJ L 83, 27.03.1999, p. 1. See e.g. 2001/615/EC: Decision No 3/2001 of the EU-Poland Association Council of 23 May 2001 adopting the implementing rules for the application of the provisions on State aid referred to in Article 63(1)(iii) and (2) pursuant to Article 63(3) of the Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Poland, of the other part, and in Article 8(1)(iii) and (2) of Protocol 2 on European Coal and Steel Community (ECSC) products to that Agreement, OJ L 215, 09.08.2001, p. 39. See e.g. Article 8 (6) of Protocol 2 to the Europe Agreement with Poland. See e.g. Protocol 2 to the Europe Agreement with Poland.

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Some opted for independent central bodies,364 while others assigned the task to already existing ministries.365 Though their full independence might sometimes be doubted, the respect of adopted State aid legislation which mirrored the acquis still represented a major step forward.

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As already suggested above, there were – and are – some special cases. In principle the Agreements became obsolete when the candidates acceded to the Union, except for a particular situation regarding the provisions concerning State aid for the steel sector in Protocol 2 to the EA with Bulgaria, which is discussed in more detail below. Since Cyprus and Malta did not have provisions concerning State aid, the Commission introduced appropriate requirements to be met by their national authorities during the accession negotiation process.

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With regard to the Customs Union concluded with Turkey in 1964 (the Ankara Agreement), both the State aid rules in force and the enforcement practice in the Union at that time were significantly less developed. There were two set of rules, one concerning horizontal State aid,366 the other relating only to the steel sector.367 So far Turkey has not met its obligations under the AA, even though it was one of the conditions for achieving the Customs Union. That situation will no doubt have to be rectified in the context of the negotiations on the competition chapter.368

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Given its experience of delays with the adoption of Implementing Rules, and in the effort to avoid such delays, the Commission has insisted that the texts of the Stabilisation and Association Agreements concluded with Croatia, the former Yugoslav Republic of Macedonia, Albania, Bosnia and Herzegovina, Montenegro, and Serbia directly include provisions corresponding to the Implementing Rules to previous EAs.

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365 366 367 368

E.g. the Polish Office for Competition and Consumer Protection in Poland, Pełka, “Future Role of the Former National Monitoring Authorities and Existing aid in Slovenia, Poland and Estonia - State aid in Poland”, EStAL, 3/2004, p. 375. E.g. Latvia, Lagzdina, “The State Aid Control Procedures in the Czech Republic, Latvia and Lithuania before and after Accession - The State aid control procedure in Latvia”, in EStAL, 2/2005 p. 265. Agreement establishing an association between the European Economic Community and Turkey, OJ L 2/2005, 217, 29.12.1964, p. 3687. Article 26 of the Agreement establishing an association between the European Economic Community and Turkey. Turkey 2013 Progress Report, SWD(2013) 417 final.

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3.

Accession negotiations – how do they work?

Article 49 of the Treaty on European Union States that “Any European State may apply to become a Member of the Union.” All candidate countries which fulfil the four Copenhagen criteria369 may apply for Union membership. The accession negotiations are conducted by the Commission, acting in the name of the Union. During the accession negotiations, the acquis communautaire is divided into separate negotiation chapters, one of which is devoted to competition policy.

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The first step of the negotiations, the so-called screening process, enables the candidate country to familiarise itself with the acquis communautaire, and the Commission to evaluate the extent of the candidate’s preparations for each chapter and to identify possibly contingent areas. As a basis for launching the negotiation process, the Commission establishes a “screening report” for each chapter and each country.

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To start the negotiations on each chapter, the Commission either recommends their immediate opening or sets opening benchmarks. Its recommendation for the opening or closure of a chapter is submitted to the Council.

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With the assistance of the Union and Member States, the candidate country must adopt and implement the entire acquis for each chapter, although transitional periods can also be negotiated to allow a candidate to reach full implementation in a longer timeframe. The progress of each candidate country is closely monitored by the Commission and the Member States. The Commission publishes an annual comprehensive report on the progress of each country. Negotiations are completed when all the chapters have been closed.

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Once global agreement on accession conditions is reached, the results of the negotiations are incorporated in an accession treaty and act. On the Union side it is submitted to the Council for approval and to the European Parliament for

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369

According to conclusions of the Copenhagen European Council in 1993 agreed that the candidate country must meet the following basic standards: establish stable institutions that guarantee democracy, the rule of law, human rights and respect for and protection of minorities, (the Political Criteria); introduce a functioning market economy and the capacity to cope with market forces and competition within the Union (the Economic Criteria); adopt and implement the entire body of Union law (the acquis communautaire); and adhere to the aims of political, economic and monetary union. In 1995 the Madrid European Council further clarified that a candidate country must also be able to put Union rules and procedures into effect. Another important consideration is that the Union, in turn, must have the capacity to absorb new members, while maintaining the momentum of European integration. See Rapp, “State aid in the accession countries”, in Hancher, Ottervanger and Slot (ed), EC State aids, 2006.

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assent. After signature, the accession treaty and act are passed to the Member States and the candidate country for ratification, which in some cases involves a referendum. When those actions are completed, the treaty takes effect and the candidate becomes a Member State on an agreed date.

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The results of the negotiations with each Member State on the competition chapter are embodied in its respective Accession Act.370 The main issues with regard to State aid,371 namely the measures considered as existing aid, any transitional provisions, and the permanent provisions and possible safeguard clauses, are stipulated in each Act. Long periods might elapse between the closure of the negotiations, the signature of the Act and the date of accession. That fact is taken into consideration in the Act’s provisions and such cases are examined below in general terms, with a particular focus on the more important issues.

4.

The Competition chapter

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As stated above, State aids are dealt with as part of the competition policy chapter,372 and the particularities of the negotiation process with a given candidate country depend not only on the stage of development of State aid control in that country, but also on the consolidation of that control in the Union. For each individual country the Commission identifies the most important areas that need special treatment, such as tax havens, the treatment of regional investment aid or the restructuring of shipyards or the steel sector. The overall framework of the negotiation process seeks to preserve a balance between ensuring the smooth transition of the candidate country’s economy to the Union system and its functioning within the internal market, and protecting trade and competition in the already functioning internal market.

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Accession negotiations have dealt with four major State aid issues: (i) what measures could be treated as existing aid, (ii) what transitional provisions diverging from the acquis should be accepted for a limited period; (iii) what permanent provisions concerning application of State aid rules should be introduced in primary law; and (iv) what exceptions from the acquis could be applied in situations that arose prior to accession. Another significant instrument used in connection with the competition chapter, and State aid in particular, has been the introduction of various types of internal market safeguard clauses. The negotiations, 370 371 372

http://europa.eu.int/eur-lex/lex/en/treaties/index.htm#accession . See Schütterle, “Enlargement: Pre-Accession State Aid after Accession”, EStAL, 1/2003, p. 29. See e.g. 2004/648/EC: Council Decision of 13 September 2004 on the principles, priorities and conditions contained in the European Partnership with Croatia, OJ L 297, 22.09.2004, p. 19.

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starting with the screening exercise and continuing through progress reports and the process of opening and closing the competition chapter, are crucial for preparing the candidate country’s economy to function in the internal market. The Commission has been eager to insist on phasing-in a State aid discipline well before accession, so that when they accede the new Member States have already dealt with the most distortive instances of State aid, such as operating aid to ailing companies, unlimited guarantees etc. That process should also contribute to reducing differences in economic development by compelling all stakeholders, public authorities as well as companies, to act in an environment corresponding to a market economy rather than an economy in transition. In case of countries with formerly centrally planned economies, where direct and ad-hoc State intervention had been a common economic policy tool, it could prove particularly difficult to introduce rules regulating such State intervention. The governments of those countries had to change their policy goals, favouring more long-term planning and less individual State intervention, combined with a more strategic approach of seeking investment initiatives from the business community. Adopting the State aid rules before accession certainly cushioned the shock resulting from the sudden application of the State aid acquis from one day to the next.

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Moreover, for some of those countries the introduction of rules on State intervention helped to influence their governments to undertake the politically sensitive restructuring of industries requiring thorough modernisation, such as the steel industry. Such large-scale restructuring, almost inevitably accompanied by closures and job losses, represents political challenges in any Member State, but some governments were able to use the opportunity of the accession to the Union to take difficult decisions on restructuring their industries and, more generally, on approximating their competition rules and their enforcement to Union requirements. There was also the question of a particular candidate country’s image in the outside world, not only to the Union, its Member States and other trading partners, but also the business and investor community. The impact of the various progress reports on the business environment in a candidate country would certainly be an interesting subject of study.

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Finally, the accession negotiations should also be seen as an opportunity for the candidate countries to understand the State aid policy clearly, and on that basis to formulate transitional provisions enabling them to postpone the obligation to comply fully with State aid law immediately as of the day of accession. It is difficult to speculate on why the new Member States from the 2004 and 2007 en-

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largements took a particular approach by requesting transitional provisions for some State aid measures but not for others. One example is the transitional provision concerning State aid for meeting Union standards on the environment,373 which only Poland requested, although it might have been supposed that other candidate countries would have similar difficulties in fulfilling these obligations.

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In other words, the accession process can be thought of as a catalyst for the inevitable economic transformation and a litmus test of the economy’s readiness to stand on its own two feet and be able to compete effectively in the internal market. That pre-accession preparation appears to be a win-win situation, as it enables candidate countries (and businesses) to become accustomed to the new legal environment by the continuous phasing-in of the competition rules, while protecting the internal market from delays by the candidate countries in phasing-out anti-competitive practices until after accession.

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It should be noted that as a result of the Union’s growing integration, its capacity of absorption and the lessons learned from past enlargements, the requirements set by the Commission for opening or closing the negotiations on the competition chapter have become more demanding. That trend is particularly present in the State aid field. On the basis of the Copenhagen criteria, the Commission generally requires candidate countries to demonstrate that they have national competition laws reflecting the principles of Union law, and national competition authorities to implement these laws and have a credible enforcement record in all areas of competition policy.374

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For the 1995 enlargement, a number of principles concerning State aid control were already established before accession, as Finland, Austria and Sweden joined the EU after being members of the European Economic Area. When they acceded, their economic situation was similar to that of the existing Member States. With later candidate countries the situation was very different. Most of them had already introduced State aid control systems on the basis of the Europe Agreements and its Implementing Rules provisions. As noted above, Cyprus and Malta had no particular State aid provisions in their AAs, but established national State aid control systems during the negotiations.375 Moreover, in the process of 2004 enlargement, the Commission introduced for the first time a system for a double review, first by the national competition authority and then by the Commission, of the existence and compatibility of State aid put 373 374 375

Annex XII to the 2003 Accession Act. See e.g. http://ec.europa.eu/comm/competition/international/enlargement/index.html. See e.g. the regular report on Cyprus’ progress towards accession SEC(2001) 1745.

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into effect prior to accession but applicable after accession.376 The governments of the candidate countries, not to mention the beneficiaries of particular aid measures, may not have been fully aware of the consequences of not submitting measures for review according to that system, as they used that opportunity only to a limited extent and often at the very last moment377, even though measures not reviewed would, if they constituted State aid, become illegal new aid on the date of accession, and be subject to full-fledged Commission scrutiny and possibly recovery from that date. The steel sector was already subject to close Commission scrutiny in the preaccession period, on the basis of Steel Protocols to the EAs. It had to be ensured that the obligations stipulated in those Protocols were incorporated in the Accession Acts. The case of Bulgaria is particularly interesting in that context and will be discussed further below.

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With the 2007 enlargement, special additional safeguards including a postponement clause were introduced in the Accession Treaties of Bulgaria and, more particularly, Romania. The Accession Treaty with Romania also contained an unprecedented specific provision on the existing aid mechanism, which went so far as to allow the Commission to recover incompatible aid granted prior to accession.378 Those provisions too are discussed in more detail below. The experience of the 2007 enlargement showed the importance of applying a strict approach at a much earlier stage. Recourse to “emergency” measures at the stage of conclusion of the Accession Treaty, as in the case of Romania, could potentially have resulted in an undesirable outcome for both the Union and the candidate country.

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Croatia’s Accession Treaty was signed in December 2011 and Croatia became a member of the Union on 1 July 2013. The restructuring of the Croatian shipyards through a privatisation process was one of the most difficult issues to be solved in the accession negotiations with Croatia. As the privatisation process had not yet been completed, special provisions were included in Annex VIII to

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376

377 378

This covers existing aid pursuant to Annex IV, point 3 of the 2003 Accession Act under both letters b) and c). Känkänen, “Accession negotiations brought to successful conclusion”, Competition Policy Newsletter, No. 1, 2003. Devuyst, Känkänen, Lindberg, Orssich and Roebling, “EU enlargement and competition policy: where are we now?”, Competition Policy Newsletter, No. 1, 2002. Lowe, “Promoting competition in the enlarged European Union”, Competition Newsletter, special edition 2004. Van de Casteele, “Next EU enlargement: Romania and State aid control”, Competition Policy Newsletter, No. 1, 2005. Känkänen, “Accession negotiations brought to successful conclusion”, Competition Policy Newsletter, No. 1, 2003. Devuyst, Känkänen, Lindberg, Orssich and Roebling, “EU enlargement and competition policy: where are we now?”, Competition Policy Newsletter, No. 1, 2002.

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the Accession Act to ensure that the restructuring plans would be implemented as they had been approved by the Croatian Competition Authority and accepted by the Commission. The privatisation contracts themselves should be signed by the day of accession. Otherwise, Croatia would be required to recover all the restructuring aid granted since 2006.

1.471

The Commission’s experience with past enlargements has led to a new generation of negotiations, with a benchmarking system which already emphasises certain problematic issues at the opening of the negotiations. That approach should both take the pressure off from closing negotiations on a given chapter and make the whole process more transparent, as the priorities are clearly set from the beginning. It remains to be seen whether that system will allow the governments of candidate countries and their interested stakeholders to use it to develop transitional measures better tailored to their needs.

1.472

Turkey is a candidate country which started accession negotiations on 3 October 2005. However, the competition chapter is not open yet for negotiations. The screening reports on the Competition Chapter379 and the 2013 progress report380 point out deficiencies in the State aid control system.381 The Union stresses the importance both of a functioning national State aid control system based on the same principles as the acquis communautaire in that field, and of the restructuring of the steel sector on the basis of National Restructuring Plan, which is subject to review and approval by the Commission. On that basis the Council decided on several benchmarks for opening the Competition Chapter for Turkey. In October 2010 Turkey adopted a State Aid Law and set up a State Aid Monitoring Authority in line with the requirements of the Customs Union. The law also includes a procedure for the alignment of all State aid schemes with the Union rules. However, to date, Turkey has postponed the entry into force of the legislation implementing the State Aid Law. The State Aid Authority still needs to establish a formal State aid inventory. It is also expected to enact an action plan for aligning all State aid schemes with the acquis.

1.473

Iceland applied for EU membership in July 2009. The Commission issued a favourable opinion in February 2010, and the Council decided in June 2010 that accession negotiations would be opened. In May 2013, the Icelandic government took the decision to put the accession negotiations on hold. At the time of 379 380 381

Screening report, Turkey, Chapter 8, Competition Policy, 3 May 2006, at http://ec.europa.eu/enlargement/ pdf/turkey/screening_reports/screening_report_08_tr_internet_en.pdf Turkey 2013 Progress Report, SWD(2013) 417 final Ibid. Turkey 2013 Progress Report, SWD(2013) 417 final.

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that decision, 27 of the negotiating chapters had been opened, of which 11 provisionally closed, including the Competition chapter. Iceland already enjoyed a high degree of integration with the EU through membership in the European Economic Area (EEA) and the European Free Trade Association (EFTA). On 12 March 2015, the Icelandic Government sent an official letter to the Union that it did not intend to restart accession negotiations. Hence, the Icelandic government considers that Iceland is no longer a candidate country.382 Setting benchmarks clearly represents a considerable leap forward in the enforcement of competition rules in the pre-accession context. It could also be perceived as a reflection of the Commission’s and Member States’ weariness with the lack of progress achieved under the applicable bilateral agreements.

1.474

Accession negotiations with Montenegro started on 29 June 2012. Following the screening exercise, Opening Benchmarks have been set for eleven Chapters, including the Competition Chapter. Montenegro established a State aid authority and introduced State aid law in 2007. However, State aid secondary legislation has yet to be fully aligned with the acquis and the independence of the State aid authority is still to be secured. Subsidies to firms in difficulty remain an issue of serious concern and a number of existing fiscal aid measures need to be aligned with the acquis.383

1.475

In line with the decision of the European Council in June 2013 to open accession negotiations with Serbia, the Council held the 1st Intergovernmental Conference with Serbia in January 2014. The screening exercise is currently ongoing. In the area of State aid, State aid authority was established in December 2009 and the State aid law was introduced in July 2009. The Commission for State Aid Control still has to demonstrate its independence notably from State aid grantors. Moreover, State aid control needs to be enforced consistently and new State aid measures need to be systematically notified before being put into force. State-controlled, monopolistic structures remain in a large number of sectors. Most importantly, the current exemption from State aid rules given to enterprises that are being privatised must be repealed. The majority of the existing State aid schemes, including the fiscal aid schemes, still need to be aligned with the acquis.384

1.476

382 383 384

The letter to the EU can be found here, http://www.mfa.is/media/gunnar-bragi/Bref-ESB-ENS-pdf.pdf Montenegro 2013 progress report, Communication from the Commission to the European Parliament and the Council ‘Enlargement Strategy and Main Challenges 2013-2014’,COM(2013)700 final. Serbia 2013 progress report, Communication from the Commission to the European Parliament and the Council ‘Enlargement Strategy and Main Challenges 2013-2014’,COM(2013)700 final.

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In December 2005 the European Council granted the Former Yugoslav Republic of Macedonia the status of a candidate country, although accession negotiations have not started yet. Albania received the candidate country status in June 2014. Other Western Balkan countries are potential candidate countries at this stage: Bosnia and Herzegovina, and Kosovo. The Union has repeatedly reaffirmed its commitment to eventual membership for the Western Balkan countries, provided they fulfil the accession criteria.

5. 1.477

Existing aid/transition periods

As stated above, among the major State aid issues generally dealt with in the accession negotiations is the treatment of State aid put into effect prior to accession, in particular the question of how to treat such aid after accession (existing or new aid) and the question of temporary exceptions from the full application of the State aid rules after accession (transition arrangements). Below we examine in greater detail how those two questions were dealt with in the recent enlargements.

5.1 Notion of “existing aid” 1.478

Defining aid as “existing” has important consequences, as the Commission cannot order the recovery of such aid, but must launch the appropriate measures procedure385 with the Member State’s authorities.386 Before the 1995 enlargement and the adoption of the Procedural Regulation, any aid granted before accession was treated as “historical aid”. Since the Procedural Regulation was adopted, the definition in its Article 1(b)(i) of existing aid relevant for the enlargement context387 is applicable, namely: (…) All aid which existed prior to the entry into force of the Treaty in the respective Member States, that is to say aid schemes and individual aid which were put into effect before, and are still applicable after, the entry into force of the Treaty.

385 386

387

Chapter V of the Procedural Regulation, OJ L 83, 27.03.1999, p. 1. According to some authors the disbursement of Structural Funds after 1 May 2004 depended on the existing nature of the aids involved in the structural measures: see Di Bucci “State aid law and the New Member States”, in: Antitrust between EC law and national law, LIDC VI Conference 13-14 May 2004 in Treviso ed. E.A. Raffaelli, Bruylant, p. 422. It was certainly important for classifying such aids as legal or illegal. Existing aid in the meaning of the Procedural Regulation is a larger concept, and pre-accession aid is only one of the types of existing aid. See further Article 1 (b) (ii) – (v) of the Procedural Regulation and Van de Casteele, “Next EU enlargement: Romania and State aid control”, Competition Policy Newsletter, No. 1, 2005.

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The State aid provisions included in the 1994 Accession Act388 nuanced that approach. Austria, Finland and Sweden were parties to the EEA Agreement389 and therefore subject to EFTA Surveillance Authority (ESA) scrutiny of State aids granted during 1994 before their EU accession. That legal situation was reflected in Article 172(5) of the 1994 Accession Act, which did not recognise aids granted in 1994 in contravention of the EEA Agreement or not notified to the EFTA Surveillance Authority as existing in the meaning of Article 108(1) of the Treaty. Under Article 172(7) of the Act, a duly reasoned Commission decision could even have overruled a decision adopted by ESA. Although that possibility was not used, it shows that State aid compatibility was not taken for granted even when a supranational authority was involved in the system of control.

1.479

Since the 2003 Accession Act, a new category of existing aids in the meaning of Article 108 of the Treaty has been agreed between the contracting parties and introduced into the State aid control system. Annex IV to the 2003 Accession Act, based on Article 22 of the 2003 Accession Act, Annex V to the 2005 Accession Act, based on Article 22 of the 2005 Accession Act, and Annex IV to 2011 Accession Act, based on Article 16 of the 2011 Accession Act, introduced more elaborate systems for classifying aids as existing in the meaning of Article 108(1) of the Treaty,390 which has been recognised in the definition in Article (1)b of the Procedural Regulation.391 For measures other than those concerning transport or Annex I products (but including fisheries products), the following definition of existing aid was introduced in Chapter 3 of Annex IV to the 2003 Accession Act and Chapter 2 of Annex V to the 2005 Accession Act:

1.480

388

389 390 391

Accession Act concerning the conditions of accession of the Kingdom of Norway, the Republic of Austria, the Republic of Finland and the Kingdom of Sweden and the adjustments to the Treaties on which the European Union is founded, OJ C 241, 29.08.1994, p. 9. Agreement on the European Economic Area, OJ L 1, 31.01.1994, p. 598. Dias, “Existing aid in the acceding countries”, Competition Policy Newsletter, No. 2, 2004. Roebling, “Existing Aid and Enlargement”, Competition Policy Newsletter, No. 1, 2003. Amendment of Article 1(b)(i) of Procedural Regulation No 659/1999 by the 2003 Accession Act, Annex II, 5 (6). Amendment of Article 1(b)(i) of Council Regulation 659/1999 by Council Regulation (EC) No 1791/2006 of 20 November 2006 adapting certain Regulations and Decisions in the fields of free movement of goods, freedom of movement of persons, company law, competition policy, agriculture (including veterinary and phytosanitary legislation) transport policy, taxation, statistics, energy, environment, cooperation in the fields of justice and home affairs, customs union, external relations, common foreign and security policy and institutions, by reason of the accession of Bulgaria and Romania, OJ L 363, 20.12.2006, p. 1.

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1.481

1.482

“a)

Aid measures put into effect before 10 December 1994;392

b)

Aid measures listed in the Appendix to the Annex of the Act;

c)

Aid measures which prior to the date of accession were assessed by the State aid monitoring authority of the new Member State and found to be compatible with the acquis, and to which the Commission did not raise an objection on the grounds of serious doubts as to the compatibility of the measure with the common market, pursuant to the procedure set out in paragraph 2.”

For measures other than those concerning Annex I products, the following definition of existing aid was introduced in Chapter 2 of Annex IV to the 2011 Accession Act: “a)

Aid measures put into effect before 1 March 2002;

b)

Aid measures listed in the Appendix to this Annex;

c)

aid measures which prior to the date of accession were assessed by the Croatian Competition Agency and found to be compatible with the Union acquis, and to which the Commission did not raise an objection on the grounds of serious doubts as to the compatibility of the measure with the internal market, pursuant to the procedure set out in paragraph 2.”

So far the Commission has not identified many State aid measures in the new Member States as existing under the terms of point a) above. The possibility to list State aid measures in the Appendix to the Annexes of the Act as provided in point b) has not been used extensively either, most probably because of administrative hurdles which were difficult for the national authorities to overcome. The procedure indicated in point c), often referred to as the “interim mechanism”, as well as specific transitional and permanent State aid provisions included in the 2003 Act, the 2005 Act and the 2011 Act, will be described in more detail below.

392

See Rapp, “State aid in the accession countries”, in Hancher, Ottervanger and Slot (ed.), EC State aids 2006. This is the date of the Essen Council, and although by then the majority of candidate countries were already required according to the Europe Agreements to respect the State aid rules, it was used mainly to protect legitimate expectations of beneficiaries of aids. There was no direct effect from the Europe Agreement because State aid systems are a matter to be dealt with between the Commission and each Member State.

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Different rules for establishing whether a particular measure constitutes existing aid were provided for agriculture (except for fisheries, which were subject to the horizontal system) and transport. Pursuant to Chapter 4, point 4, second paragraph of Annex IV to the 2003 Accession Act, aid schemes and individual aid put into effect in the 10 countries which joined the Union in 2004 before the date of accession and still applicable after that date are regarded as existing aid in the meaning of Article 108(1) of the Treaty, on condition that the Commission was informed of them four months after the date of accession (the so-called ‘sunset clause’). After 1 May 2007, any aid found to be incompatible with the applicable State aid rules is considered as new aid.393 The sunset clause mechanism for State aid measures in the agriculture sector applies to the accession of Bulgaria and Romania. The sunset clause mechanism for State aid measures in the agriculture and fisheries sectors applies to the accession of Croatia.

1.483

Measures which do not fulfil the conditions of existing aid as set out in the relevant Accession Act are considered as new aid in the meaning of Article 108(1) of the Treaty, and are subject to notification and the standstill clause on the date of accession.

1.484

5.2 The interim mechanism and the sunset clause As already stated, the interim procedure was introduced to ensure a smooth transition from the old to the new State aid control system. The duration of the negotiations meant that technically there was more than enough time for the Commission to undertake a review of measures notified to it. However, despite the intentions of those who devised that procedure, in case of the 2004 enlargement the majority of State aid measures were notified on the eve of the 2004 accession.

1.485

Pursuant to point 2 of Chapter 3 of Annex IV to the 2003 Accession Act, point 2 of Chapter 2 of Annex V to the 2005 Accession Act, or point 2 of Chapter 2 of Annex IV to the 2011 Accession Act, the interim procedure was as follows. The measure had to be first approved by the national State aid control author-

1.486

393

In order to ensure equal treatment in the application of appropriate measures to undertakings from the 15 ‘old’ Member States and the 10 Member States which acceded in 2004, the Commission decided to introduce a special provision in para 196 of the Guidelines whereby the previous Community Guidelines for State aid in the agricultural sector, applicable on 31 December 2006 (OJ C 28, 01.02.2000, p. 2), would remain applicable until 31 December 2007 for the assessment of aid schemes and individual aids regarded as existing aid in accordance with point 4, Chapter 4 of Annex IV. to the 2003 Accession Act, provided such existing aid complied with those Guidelines by 30 April 2007 at the latest. Otherwise, existing aid schemes in the 10 ‘new’ Member States would have had to be amended by 1 May 2007 to comply with the new Agricultural Guidelines, while in the 15 old Member States that period would have been at least half a year longer.

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ity, which then submitted to the Commission a summary information on the measure (in English), including any information essential for assessing the compatibility of that measure with the State aid rules. If within three months the Commission did not object to the measure because of serious doubts as to its compatibility with the common market, the measure was considered as existing aid and was published in the Official Journal.394 The Commission could request additional information during the three months before it decided whether to object to a measure. If its serious doubts were not alleviated, either the measure was withdrawn, or the Commission took a decision to initiate the formal investigation procedure according to the general rules in the Procedural Regulation, which came into effect on the date of a Member State’s accession.

1.487

In addition to the general provisions on the interim mechanism, the 2005 Accession Act contained specific arrangements for Romania, where the interim mechanism was to apply only after Romania’s State aid enforcement record in the pre-accession period reached a satisfactory level, i.e. when it was shown that full and proper State aid control was being applied consistently, including the adoption and implementation of fully and correctly reasoned decisions by the Romanian State aid monitoring authority. The Commission had to decide on a starting date on the basis of continuous monitoring. The date eventually chosen was 1 May 2006395 and the Commission was entitled, on the ground of serious doubts on the compatibility with the internal market, to object to any aid measure granted between 1 September 2004 and the starting date of the interim mechanism, by a decision to initiate the formal investigation procedure within the meaning of the Procedural Regulation.396 Romania made only very limited use of the interim mechanism, as the time between its introduction and Romania’s accession was short. Although Bulgaria’s possibility for using the interim mechanism was less limited, it did not use it extensively either.397

394 395 396 397

A number of those aid measures were included in a list of existing aid measures published in April 2004. OJ C 88, 08.04.2004, p. 2. Commission staff working paper, Romania, May 2006 Monitoring Report, COM (2006) 214fin, SEC (2006) 596, at: http://ec.europa.eu/enlargement/pdf/key_documents/2006/monitoring_report_ro_en.pdf. If such a decision was taken before accession, it was regarded to come into effect upon the date of accession. Publication of a list of measures considered by the Commission as existing aid, within the meaning of Article 108(1) of the Treaty, upon accession of Bulgaria and Romania to the European Union, OJ C 65, 11.03.2008, p.10; available at http://ec.europa.eu/comm/competition/State_aid/register/bg_ro.pdf; State Aid Scoreboard, Spring 2008 update, COM(2008) 304 final.

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Agricultural policy and transport were exempted from the general existing aid mechanism under both the 2003 and the 2005 Accession Acts. Both sectors were shielded by the sunset clause, whereby measures put in effect before accession and still applicable afterwards were, if certain procedural conditions were fulfilled, considered as existing aid for the first three years after accession.398

1.488

In the field of agricultural policy, the Accession Acts399 do not require the Commission to be provided with detailed information on the scope, duration, budget or conditions of such measures, as those elements were not among the criteria for aid to be considered as existing within the meaning of Article 108(1) of the Treaty according to the sunset clause.400 When necessary, the 2004 Member States had to amend their aid measures to comply with the State aid rules in force by 1 May 2007, and Bulgaria and Romania by 31 December 2009 at the latest. Those amendments did not need to be specifically notified to the Commission, unlike the general rules in cases where substantial changes concerning scope, budget or eligible costs are introduced to existing aid measures.

1.489

The provisions governing State aid to transport401 were virtually identical to the agricultural policy sunset clause, except that for transport there was no requirement for the Commission to publish measures notified to it. The deadline for the alignment of existing aid was set, as in the field of agricultural policy, as 1 May 2007 for the 2004 Member States and 31 December 2009 for Romania and Bulgaria.402

1.490

Agriculture and fisheries were exempted from the general existing aid mechanism under the 2011 Accession Act. Both sectors were shielded by the sunset clause, whereby measures put in effect before accession and still applicable afterwards were, if certain procedural conditions were fulfilled, considered as existing aid for the first three years after accession. The 2011 Accession Act did not require Croatia to provide the Commission with detailed information on the scope, duration, budget or conditions of such measures, as those elements were not among the criteria for aid to be considered as existing within the meaning of Article 108(1) of the Treaty according to the sunset clause. Croatia will have to adapt its aid measures or schemes by 30 June 2016 at the latest, if necessary.

1.491

398 399 400 401 402

Van de Casteele, “Next EU enlargement: Romania and State aid control”, Competition Policy Newsletter, No. 1, 2005. Point 4 of Chapter 4 of Annex IV to the 2003 Accession Act; letter b) of Chapter 3 of Annex V to the 2007 Accession Act. Commission Communications, OJ C 147, 17.06.2005, p. 2, and OJ C 206, 23.08.2005, p. 10. Point 4 of Chapter 2 of Annex V to the 2005 Accession Act. To date no Accession Act has contained any transitional provisions for the transport sector.

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1.492

Those amendments will not have to be specifically notified to the Commission, unlike the general rules in cases where substantial changes concerning scope, budget or eligible costs are introduced to existing aid measures.

1.493

That simplified solution of not requiring review by the national State aid control body struck a balance between the Union interest and the human resources capacities of the respective Directorates-General to review the State aid measures. As a trade-off, the sunset clause gave Member States and beneficiaries no guarantee that a measure had the status of existing aid beyond the dates laid down in the relevant Acts, so responsibility for the potential consequences if aid was found to be incompatible remained with the new Member States.

1.494

The Commission’s competence to use the interim mechanism is, however, restricted to measures put into effect before accession which are still applicable after accession. The standard of review is also somewhat different from the regular State aid procedure, as the measures must give rise to “serious doubts” as to their compatibility with the internal market. Those three notions will be analysed in more detail below.

5.2.1 Standard of review - procedural aspects 1.495

The language of the provisions establishing the interim mechanism suggests that the Commission is only required to conduct a thorough analysis of a measure which raises “serious doubts”, and not just simple doubts as in the case of the usual investigations conducted pursuant to Article 6 of the Procedural Regulation.403

1.496

The notifications in the interim procedure were set out in the form of summary tables, with the full text of decisions by the national authorities in the original language. The main language for correspondence between the national authority and the Commission was English. The summary tables provide simplified information about the measures, unlike the information required in the course of normal notifications on the basis of Regulation 794/2004.404 If the Commission decided to object to the measure, as its decision only came into force on the date of accession, the text was published in the language of the new Member State as well. 403

404

It is not certain that any difference is intended; the expression “serious doubts” has been used by the Court as setting the standard in non-accession situations, see eg. Case C-225/91 Matra v Commission ECLI:EU:C:1993:239, para 33, Case T-73/98 Prayon-Rupel v Commission ECLI:EU:T:2001:94, paras 42-47. Implementing Regulation No 794/2004, OJ L 140, 30.04.2004, p. 1.

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Thus although measures reviewed under the interim mechanisms have the status of existing aid, it should be possible to revisit them if, owing to circumstances brought to the Commission’s attention at a later stage, new elements important for the assessment came to light. The procedure to be followed in such cases would be that of appropriate measures under Article 18 of the Procedural Regulation, unless it was proved that the Commission had been deliberately misled.

1.497

5.2.2 Notion of measures “put into effect” before accession The notion of measures put into effect before accession has been examined in depth in a number of decisions,405 as it was a prerequisite for the Commission to use the interim mechanism and was also important for determining the legal framework applicable to the assessment.406 If it was found during the investigation that the measure as a whole was not covered by a legally binding act407 by which a national authority undertook to grant the aid, the interim mechanism no longer applied, and the Member State was invited to re-notify the measure according to the normal procedure laid down in Article 2 of the Procedural Regulation.408 Even then, however, the consequences for the assessment of the case were different, in that while amounts granted before accession were taken into consideration in the overall assessment of the case (for example, in the case of restructuring aid the amounts were calculated to check whether the requirement to restrict aid to the minimum necessary was met), if the Commission finally concluded that the aid was not compatible with the internal market, only the amounts granted after accession would be subject to the recovery obligation.

1.498

5.2.3 Notion of measures “applicable after” accession The traditional division of State aid measures into aid schemes or individual aid provided in Article 1(d) and (e) of the Procedural Regulation was not sufficient for ensuring a smooth transition of State aid control between national systems and the supranational system established by the Commission. As the Procedural 405

406 407 408

1.499

Čierna, “Determining Commission’s competence: past aid and new aid – application on restructuring aid to Polish shipbuilding”, Competition Policy Newsletter, No. 3, 2005. Battista, “The Commission opens investigation procedure regarding aid to Polish car producer FSO (ex DAEWOO)”, Competition Policy Newsletter, No. 2, 2005. See also Commission Decision of 07.04.2006 in case C 25/2005, Frucona, OJ L 112, 30.04.2007, p. 14; Invitation to submit comments to the case C 3/2005, Fabryka Samochodow Osobowych (FSO), OJ C 100, 26.04.2005, p. 2. See point 104 of 2004 Rescue and Restructuring aid guidelines, OJ C 244, 01.10.2004, p. 15. Case T-109/01 Fleuren Compost v Commission ECLI:EU:T:2004:4, para 74. Commission Decision of 25.09.2007 in case C 43/2005 Compensations of stranded costs in Poland; para 292, and Commission Decision of 03.02.2004 in case PL 1/03, Compensations of stranded costs in Poland, letter C(2004)167fin dated 3 February 2004.

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Regulation provided for the possibility to introduce the appropriate measures procedure only for schemes classified as existing aids409, it was not an appropriate and efficient means of discouraging last-minute aid grants to individual beneficiaries which could result after accession in an exposure of State budgets that was unlimited in time and scope. The 2003 Accession Act410 provided the necessary safeguards to prevent such situations by introducing the following provision, which was reproduced in the 2005 Accession Act and in the 2011 Accession Act: “All measures still applicable after the date of accession which constitute State aid and which do not fulfil the conditions set out above shall be considered as new aid upon accession for the purpose of the application of [Article 108(3) of the Treaty].”

1.500

In other words, all aid measures not fulfilling the definition of existing aid within the meaning of the Accession Acts, but granted before accession and still applicable thereafter, are considered as new aid. Moreover, the Annexes to Accession Acts on Existing aid establish a rule whereby the relevant time to assess whether a State measure constitutes State aid is the moment of accession to the Union. That interpretation was confirmed by the Court in relation to Annex V to the Accession Act of Bulgaria and Romania in Kremikovtzi411: “50. Moreover, it follows from Article 2 of the Act of Accession that [Articles 107 to 109 of the Treaty] and Regulation No 659/1999 are applicable in Bulgaria only as from its accession to the European Union on 1 January 2007, under the conditions laid down in the Act of Accession. 51. As regards aid implemented in Bulgaria before it acceded to the European Union, Title 2 of Annex V to the Act of Accession provides for a monitoring mechanism. That mechanism aims inter alia to limit the range of aid measures which could be regarded as ‘existing aid’ at the time of accession for the purposes of [Article 108(1) of the Treaty]. 52. Under that mechanism, measures implemented before accession but which, firstly, are still applicable post-accession and, secondly, satisfy the cumulative requirements of [Article 107(1) of the Treaty] on the date of accession, are subject to the specific rules laid down in Annex V to the Act of Accession, either as existing aid for the purposes of [Article 108(1) of the Treaty] when 409 410

411

Although the Commission may be able to use that procedure if there was an individual aid with continuing effects that it wanted to stop, there is no precedent yet. Second para of Point 1 of Chapter 3 of Annex IV to the 2003 Accession Act; second para of point 1 of Chapter 2 of Annex V to the 2005 Accession Act; second para of Point 1 of Chapter 2 of Annex IV to the 2011 Accession Act. Case C-262/11 Kremikovtzi EU:C:2012:760.

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it comes within one of the three categories referred to in that annex, or as new aid on the date of accession for the purposes of application of [Article 108(3) of the Treaty] where it does not come within one of those three categories.” The notion of measures applicable after accession must be viewed in light of the legal and economic effects they produce for the Member State’s budget liability. Those provisions of the Accession Acts thus include both schemes and individual aids which, although linked to a specific project, are not limited in time or do not specify the amount of the liability to which the Member State is exposed. If that exposure was not determined unequivocally before accession and the measure did not fall into one of the existing aid categories, the measure is deemed to constitute new aid. On the other hand, any individual aid measure which specifically defines the State’s exposure to potential future liabilities does not constitute a measure applicable after accession, and is considered as past aid, whose compatibility the Commission cannot investigate.

1.501

That interpretation of the provisions concerning the interim mechanism was communicated to the accession countries by the Director General of DG Competition.412 A number of individual aid measures that might have been considered as applicable after accession were notified on the basis of the interim mechanism, and the Commission adopted several decisions which applied its understanding of the notion of measures applicable after accession. Some of those decisions have been contested by the beneficiaries or their competitors. The decisions concerning the notion of “applicable after” in individual cases mainly concern tax breaks for indefinite amounts or periods, or open-ended guarantees.413 Formulae indicating the factors to be taken into account in future calculations, which either made the amounts dependent on the beneficiary’s behaviour414 or made the Member State liable to bear the majority of the economic risks415 were not accepted as sufficiently precise to be considered as not applicable after accession.416

1.502

412

413

414 415 416

Letter of 4 August 2003, the Commission’s services have informed the accession countries about its understanding of the notion “applicable after accession” in respect to individual aid measures. That approach was confirmed for example in Commission decision of 03.03.2004 in case CZ 58/2003 Evrobanka, OJ C 115, 30.04.2004, p. 39, paras 22 and 23. Commission decision of 24.04.2007 in case E 12/2005 Unlimited guarantee to Poczta Polska, whereby the Commission closed the existing aid proceedings on the basis of Poland’s commitment to abolish the unlimited State guarantee in favour of the Polish Post by 30 June 2008. Commission decision of 18.7.2007 in case C 27/2004, Agrobanka, OJ L 67, 11.03.2008, p. 3. Commission decision of 25.9.2007 in case C 43/2005, Polish stranded costs, OJ L 83, 28.03.2009, p. 1. See inter alia Commission decision of 28.01.2004 in case CZ 14/2003 Ceska sporitelna, a.s., OJ C 195, 31.07.2004, p. 2 and Commission decision of 03.03.2004 in case CZ 58/2003 Evrobanka, a.s., OJ C 115, 30.04.2004, p. 39. See as well: Rapp, “State aid in the accession countries: sorting through the confusion”,

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1.503

Good examples of how the Commission understands the notion of “applicable after” are provided in the Hungarian and Polish stranded cost decisions. Those cases concerned so-called power purchaser agreements (PPAs), which are longterm contracts for supplies of energy. The General Court upheld the Commission’s conclusion that the Hungarian PPAs, despite the fact that they were concluded before Hungary’s accession, were still applicable after the accession.417 Furthermore, the General Court confirmed that the PPAs could not be considered as existing aid and referred to Annex IV to the Accession Act. As they were not covered by any category listed in the Annex, the General Court confirmed that they should be regarded as new aid if they constituted State aid within the meaning of Article 107(1) of the Treaty at the moment of accession; their compatibility with State aid rules should also be assessed as from Hungary’s accession to the European Union (i.e. as from 1 May 2004 until the moment of their termination). The General Court also pointed out that Hungary’s Accession Act specifically provided that a measure which was not regarded as State aid when it was introduced could become State aid at the time of accession. It also confirmed that the Commission was right not to apply Article 1(b)(v) of Regulation No 659/1999 (measure becoming existing aid due to the evolution of the common market), since the only relevant legal framework to determine whether the measures qualify as existing aid was the Accession Act.

1.504

The Commission in parallel to the Hungarian PPAs decision adopted a final conditional decision regarding the Polish stranded costs system, finding that although the Polish PPAs were measures applicable after accession and constituted illegal and incompatible aid (the contracts were not notified under the interim mechanism and the aid did not fulfil the Stranded Cost Communication criteria), the new system providing compensation for the stranded costs replacing the PPAs encompassed the former advantages. The Commission accepted that for the undertakings covered by the scope of the new law, the old advantages could be offset in the stranded cost calculations and no recovery of State aid was necessary.

5.3 Investor protection under pre-accession bilateral investment treaties 1.505

A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one State in another State. Most BITs grant investments made by an investor of one contracting State in the territory of the other a number of guarantees, which typi-

417

European Competition Law Review 2005, v.26, n.7, July, p. 410. Joined Cases T-80/06 and T-182/09 Budapesti Erömü v Commission ECLI:EU:T:2012:65.

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cally include fair and equitable treatment (FET) and protection from expropriation. Generally, the BITs allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated can have recourse to international arbitration, often under the auspices of the International Centre for the Settlement of Investment Disputes (“ICSID”), rather than suing the host country in its own courts. Member States have concluded over 1,000 BITs, but mainly with third countries (“extra-EU BITs”). However, following the 2004 and later accessions to the Union, almost 400 of those treaties became intra-EU BITs.

1.506

When the Lisbon Treaty entered into force in December 2009, the Union was granted exclusive competence over its Member States for dealing with “foreign direct investment”. On 9 January 2013, a new European regulation dealing with the status of extra-EU BITs came into force.418 In a nutshell, extra-EU BITs from before December 2009 can stay in place until a new BIT is concluded between the Union and the third country concerned. Extra-EU BITs concluded after that date, are subject to review by the Commission.

1.507

That leaves open the question of how to deal with intra-EU BITs. That issue can be examined in the context of an alleged breach by Hungary of the Energy Charter Treaty (“ECT”) in relation to the PPAs which pre-dated its accession to the Union.

1.508

MVM, a Hungarian State-owned electricity supply company, had entered into a PPA with Dunamenti, a Hungarian generator. The PPA provided for the supply of capacity in return for the payment of a capacity fee. Electrabel, a Belgian energy generation and sales company, had become majority shareholder in Dunamenti. The Commission had issued a final negative decision in June 2008 in which it held that MVM’s purchasing obligations under the PPAs constituted State aid to Dunamenti and other generators, which was incompatible with the internal market.

1.509

Dunamenti brought Hungary before an arbitration panel which accepted jurisdiction,419 notwithstanding the argument submitted by Hungary:

1.510

418

419

Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, OJ L 351, 20.12.2012, p. 40. http://www.italaw.com/sites/default/files/case-documents/italaw1071clean.pdf; recital 4.166: “…the Tribunal has found no legal rule or principle of EU law that would prevent this Tribunal from exercising its functions in this arbitration under Article 26 of the ECT.”

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“The Tribunal should take the Commission’s Final Decision into account – including its findings that the PPAs are illegal, and that any compensation paid by Hungary to generators in order to replicate the illegal benefits of the PPAs would itself run foul of [EU] law – as a critically important fact in its application of ECT standards”.

1.511

The Commission took a more restrained approach and basically submitted that there was no inconsistency between both legal frameworks: “Accordingly, compliance by an EU Member State with the legal obligations stemming from EC State aid law cannot be regarded as a violation of the Energy Charter Treaty, as long as the EC is considered to protect investor’s rights, as regards both the substantive guarantees offered and the mechanisms controlling their observance, in a manner which can be considered at least equivalent to that provided by the relevant ECT standards.”

1.512

However, it should be noted that the Union is itself a member of the Energy Charter Treaty, which makes it different from a genuine intra-EU BIT scenario. Therefore, it cannot be considered as entirely conclusive on the matter.

1.513

The Micula case420 is the first one where the Commission has had to take a position under State aid control rules with regard to an arbitration award by ICSID under a genuine intra-EU BIT.

1.514

In 1998 Romania set up a State aid scheme to attract investments in disadvantaged regions assuring, among other advantages, tax breaks and exemptions or refunds of custom duties on raw materials. The scheme was to remain in place for 10 years, starting from the date a region was officially designated as disadvantaged. As part of the process of accession to the Union and to align its incompatible State aid schemes with State aid rules, Romania abolished the scheme in question in 2005, since the incentives under the scheme were deemed to be incompatible operating aid. An arbitral award of December 2013421 found that by revoking an investment incentive scheme in 2005, four years prior to its scheduled expiry in 2009, Romania had infringed a bilateral investment treaty between Romania and Sweden. The arbitral tribunal ordered Romania to compensate the claimants, investors with Swedish citizenship, for not having benefitted in full from the scheme. 420 421

SA.38517, Commission decision 30.3.2015, not yet published. https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/casedetail.aspx?CaseNo=ARB/05/20&tab= PRO

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Following an in-depth investigation, the Commission concluded that compensation to be paid by Romania to the Swedish investors pursuant to the tribunal award for an abolished investment aid scheme breached State aid rules. The beneficiaries have to pay back all amounts already received, which are equivalent to those granted by the abolished aid scheme.

1.515

By paying the claimants compensation, Romania actually would grant them advantages equivalent to those provided for by the abolished aid scheme. Those advantages would be selective insofar as they would only be granted to the investors protected under the BIT. The Commission therefore concluded that the compensation amounted to incompatible State aid to be paid back by the beneficiaries.

1.516

The decision explicitly states that intra-EU BITs, such as the BIT upon which the claimants base their claim, are contrary to Union law since they are incompatible with provisions of the Union Treaties and should therefore be considered invalid.422,423

1.517

5.4 Transitional and permanent State aid provisions The Accession Acts contain special provisions on State aid for specific areas of activity, negotiated by the candidate countries according to the particular needs of their industries, services or sectors. Most candidate countries since the 1995 enlargement requested some transitional measures for their industry or services,424 or obtained special treatment for State aids to the agricultural sector. The majority of those transitional measures were adopted for a strictly limited period, to ensure the smooth transition of national State aid systems to Union-compatible aids. Some of those special rules were introduced as permanent provisions,425 others as transitional.426 The former rank as primary law and may not be altered 422

423 424 425 426

1.518

See response of Commissioner De Gucht to Parliamentary oral Question O-000043/2013/rev.1 in which he stated “The Commission agrees that bilateral and investment treaties (BITS) between EU Member States do not comply with EU law”, debate of the plenary of 22 May 2013. See, further, Commission Staff Working Document of 3.2.2012 on capital movements and investments in the EU - Commission Services’ Paper on Market Monitoring, SWD(2012)6 final, page 13. See also, Commission Staff Working Document of 15.4.2013 on the free movement of capital in the EU, SWD(2013)146 final, pages 11 and 14; Commission Staff Working Document of 18.3.2014 on the free movement of capital in the EU, SWD(2014)115 final, page 12; and European Commission, Monitoring activities and analysis, Bilateral Investment Treaties between EU Member States (intra-EU BITs) 2012; available at: http://ec.europa.eu/internal_market/capital/ analysis/monitoring_activities_and_analysis/index_en.htm. Para. 102 of the Decision in the Micula case. Except for Estonia, Latvia, Lithuania and Slovenia. See e.g. Art. 9 of the 2003 Accession Act. See e.g. Art. 7 of the 2003 Accession Act.

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without the consent of all the parties to that particular Treaty, while the latter may be altered according to the same procedures as those applicable to measures amended by virtue of the Accession Treaty.

1.519

The vast majority of special compatibility State aid rules are based on Articles of the Treaty that do not allow subsequent changes without the consent of all the contracting parties. Some of the most interesting provisions are presented below.

5.4.1 Fiscal measures 1.520

In the course of its negotiations with candidate countries, the Commission identified a number of tax schemes in force which were incompatible with the acquis. They may be divided into two main groups: fiscal advantages to attract investments, with unlimited aid intensity, and offshore tax schemes.427

1.521

In principle, the incompatible fiscal aid for small and medium-sized enterprises offered by Hungary,428 Malta429 and Poland430 had to be phased out by the end of 2011 or 2010, while incompatible fiscal aid to large companies in Hungary,431 Malta,432 Poland433 and Slovakia434 had to be converted into compatible regional, training, R&D, employment or environmental investment aid. Fiscal advantages granted by Poland to the motor vehicle manufacturing sector in Special Economic Zones could be continued, provided they were limited to 30 per cent of accounted costs. Those provisions in fact allowed more generous treatment for beneficiaries who had already acquired their rights before accession.435 If the conditions of the transitional arrangements were not fulfilled, aid granted after 427

428 429 430 431 432 433 434 435

See more in: Blazejova, “Approximation of the Czech Tax Legislation to the Acquis Communautaire”, European Taxation (2003), p. 210-215; Center for European Economic Research, “Company Taxation In The New EU Member States, Surevey of the Tax Regimes and Effective tax Burdens for Multinational Investors”, Ernst & Young 2003; Erdös and Ory, “The Survival of the Current Hungarian Tax Incentives Following the Introduction of the EC State Aid Rules”, European Taxation (2002), p. 142-148; Smetkowski, “Polish special economic zones as an instrument of regional and industrial policy”; Stobiecka-Kuik, “Legal implications of the EU accession process on the Special Economic Zones in Poland”, EStAL, [year,n°]; Tsangaris, “EU accession and the Cyprus tax system”, European Taxation 2004, v. 44, n. 2/3, p. 107-114. Annex X (4)(1)(a)(i) to the 2003 Accession Act. Annex XI (3)(2)(a)(i) to the Accession Act. Annex XII (5)(1)(a)(i) to the 2003 Accession Act. Annex X (4)(1)(a)(ii) to the 2003 Accession Act. Annex XI (3)(2)(a)(ii) to the 2003 Accession Act. Annex XII (5)(1)(a)(ii) to the 2003 Accession Act. Annex IV (4)(1)(a) to the 2003 Accession Act. Eligible costs were accounted for only from 1 January 2001 for Poland, and from 1 January 2003 for Hungary.

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accession would constitute new and probably incompatible aid. The Member States concerned were to provide reports on the implementation of these conditions. Cyprus436 and Hungary437 offered offshore tax measures that had to be terminated on the date of accession for new beneficiaries, while undertakings already benefiting from the system could keep their advantages only until the end of 2005.

1.522

The alignment of Croatian fiscal schemes with State aid acquis was identified as an opening benchmark for the negotiations on the Competition Chapter. The Profit Tax, the Investment Promotion Act and the Free Zones Law respectively were amended by the Croatian Parliament in May 2006, in December 2006 and July 2008.

1.523

5.4.2 Environmental aid measures Poland negotiated a transitional period covering the State aid measures on environmental protection, which concerned investments relating to implementing environmental standards.438 It is surprising that only Poland requested a transitional period for environmental investment aid, as businesses in other new Member States probably did not manage to implement all environmental standards before accession either. Such investments are costly and not always attractive for businesses, since often they do not have direct impact on productivity. A possible explanation might be the amount of heavy industry in Poland, which might have necessitated longer periods for implementing the environmental rules.

1.524

An example of how the Commission applies that transitional period is a case concerning the prolongation of a scheme for landfill investments.439

1.525

436 437 438 439

Annex VII (4) to the 2003 Accession Act. Annex X (4) 2 to the 2003 Accession Act. Annex XII (5) (2) to the 2003 Accession Act. Commission decision of 28.6.2007 in case N 7/2007 Horizontal aid for investments aiming at adaptation of landfills to requirements of environmental protection, OJ C 301, 13.12.2007, p. 4.

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5.4.3 Provisions for the steel sector 1.526

The steel industry played an exceptionally important role in the economies of some candidate countries.440 Special State aid rules for that sector, which had suffered from over-capacity for a number of years,441 had already been included in the Protocols to the Europe Agreements on ECSC products442 in the 1990s. According to their provisions, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia were to implement restructuring plans for their steel undertakings within five years from the signature of the Agreements by rationalising production and reducing capacity, with State support limited to the minimum necessary to ensure the undertakings’ viability. Poland and the Czech Republic did not comply with those rules by the envisaged deadline and requested additional transitional periods for restructuring their industries. As the ECSC Treaty had meanwhile expired443 it was decided to carry out a new evaluation of the situation, and more detailed conditions were set out in the form of national restructuring plans for the countries concerned.444 On the basis of the Commission’s evaluation of those plans, the Council prolonged the grace period for granting of the aid by Poland445 and the Czech Republic until the end of 2003, and for finalising the restructuring until the end of 2006. Slovakia did not request such a prolongation, but later nevertheless negotiated a transitional period for one steel mill.

1.527

The rules for granting State aids to the steel sector were then included in the Accession Acts of the Czech Republic (Protocol 2 to the 2003 Accession Act),446 Poland (Protocol 8 to the Accession Act)447 and Slovakia (Annex XIV to the 2003 Accession Act).448

440 441 442 443

444 445

446 447 448

For more details, see Lienemeyer, “State aid for restructuring the steel industry in the new Member States”, EC Competition Policy Newsletter No 1, 2005. See Commission Decision No 2496/96/ECSC, OJ L 338, 28.12.1996, p. 42 and the Commission Communication on rescue and restructuring aid and closure for the steel sector, OJ C 70, 19.03.2002, p. 21. E.g. Article 8(4) of Protocol 2 of the Europe Agreement with Poland. The ECSC Treaty expired in 2002. See the Communication from the Commission concerning certain aspects of the treatment of competition cases resulting from the expiry of the ECSC Treaty, OJ C 119, 22.05.2002, p. 22. E.g. Restructuring and development plan for the Polish Iron and Steel industry, March 2003. Council Decision 2003/545, EU-Poland Association Council Decision of 23.10.2002, extending the period set in Article 8(4) of Protocol 2 on European Coal and Steel Community products to the Europe Agreement, OJ L 186, 25.07.2003, p. 38. Protocol No. 2 on the restructuring of the Czech steel industry, OJ L 236, 23.09.2003, p. 934. Protocol No. 8 on the restructuring of the Polish steel industry, OJ L 236, 23.09.2003, p. 948. Annex XIV, Chapter 4(2) to the 2003 Accession Treaty, which allows the application of a fiscal aid scheme to one beneficiary company, US Steel Košice.

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The situation in the 2007 accession was similar. Both Bulgaria and Romania requested an extension of the five-year grace period following the entry into force of the Europe Agreement. Bulgaria was meant to complete restructuring before the accession449 and therefore did not request a transitional period, but Romania negotiated a transitional period on the basis of a national restructuring plan. The conditions for that transitional period are described in Annex VII to the 2005 Accession Act. State aid for steel restructuring in Romania followed exactly the same pattern, and the rules in Protocols 2 and 8 to the 2003 Accession Act will therefore be analysed together with Annex VII to the 2005 Accession Act.

1.528

The approach to Slovakia, Bulgaria and Turkey was different and will be considered at the end of this section.

1.529

Croatia adopted a national restructuring programme for the steel sector in June 2008, which was accepted by the Commission, in line with the provisions of Article 5(3) of Protocol 2 on steel products to its Stabilisation and Association Agreement. However, the implementation of the national restructuring programme was disrupted by the economic crisis, as a result of which specific provisions had to be foreseen in the Accession Act (see below).

1.530

5.4.3.1 The model of Poland, the Czech Republic and Romania Protocols 2 and 8 to the 2003 Accession Act and Annex VII to the 2005 Accession Act only concern restructuring aid for the steel industry. The rules on control of steel restructuring aid lay down far-reaching consequences for breaching any of the conditions stipulated in the Protocols, such as the amount of the aid, a beneficiary of aid listed in the Annexes to the Protocols, the capacity limitations or the closing date of the restructuring period. They include the recovery not only of aid granted in contravention of the conditions provided for by the end of the grace period, but also of aid granted before accession. It is only possible because the Accession Acts expressly provide for the possibility of such recovery,450 as Articles 107 and 108 of the Treaty apply only to Member States.

449 450

1.531

Council Decision 2004/746/EC of 18.10.2004, OJ 2004 L 328, 30.10.2004, p. 101; EU-Common Position of June 2004 (CONF-BG 18/04). Point 20 of Protocol 2 to the 2003 Accession Act, point 18 of Protocol 8 to the 2003 Accession Act, Chapter 4, part B, point 17 of Annex VII to the 2005 Accession Act.

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1.532

Only the Commission or, where appropriate, the Council, may alter the conditions stipulated in the National Restructuring Plans.451 In the absence of special rules in the Accession Acts the Procedural Regulation applies, so if a condition in the Accession Acts or National Restructuring Plans is altered or breached, the Commission must open a formal investigation procedure. Although the text of the Protocols provides that they cease to be in force if the conditions concerning the amounts of aid or the restricted group of beneficiaries are violated, in practice the Commission has interpreted that provision more leniently by considering the recovery of the illegally granted aids to be sufficient, and has not also annulled all transitional arrangements for other beneficiaries. That solution seems much more proportionate to the objective sought. Last but not least, the Commission carefully verifies that the conditions of the Protocols are fulfilled.452

1.533

The Commission has adopted a number of decisions in connection with different provisions of the Protocols, some of which are particularly worth mentioning here.

1.534

An interesting illustration of the application of Protocol 8 is a decision concerning restructuring aid to steel producer Huta Częstochowa S.A.453 Under Poland’s National Restructuring Plan454 that undertaking was to be liquidated in a bankruptcy procedure, so aids granted to it in the past were not taken into account in Protocol 8, and it was not included in the list of the beneficiaries in Annex II to the Protocol or made subject to the capacity limitations in point 7 of the Protocol. However, due to positive developments in the steel market and modifications of national bankruptcy procedures, the idea of liquidating the company was eventually abandoned, and Huta Częstochowa’s private and public creditors came to an agreement on restructuring the company’s debts and selling it as a going concern. Since that scenario was not in accordance with the National Restructuring Plan, the Commission opened a formal investigation procedure455 into both the past aid granted to Huta Częstochowa before 451 452

453 454 455

Point 12 of Protocol 2 to the 2003 Accession Act, point 10 of Protocol 8 to the 2003 Accession Act, Chapter 4, part B, point 10 of Annex VII to the 2005 Accession Act. Report from the Commission to the Council and the European Parliament – First monitoring report on steel restructuring in the Czech Republic and Poland, Brussels, 7.7.2004, COM(2004)443 final, p. 1. Report from the Commission to the Council and the European Parliament – Second monitoring report on steel restructuring in the Czech Republic and Poland, Brussels, 3.8.2005, COM(2005) 359 final, p.1. Report from the Commission to the Council and the European Parliament – Third monitoring report on steel restructuring in the Czech Republic and Poland, Brussels, 9.12.2006, COM(2006) 814 final, p.1. Commission Decision of 05.07.2005 in case C 20/2004, OJ L 366, 21.12.2006, p. 1. Restructuring and development plan for the Polish iron and steel industry, March 2003. Invitation to submit comments to case C 20/2004 Restructuring aid to steel producer Huta Czestochowa SA, OJ C 204, 12.08.2004, p. 6. See: Lienemeyer, “The Commission opens investigation procedure regard-

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accession and the alleged application of the market economy investor test after accession. The Commission finally concluded456 that the market economy investor test was satisfied, but ordered recovery of past aids that were found to be incompatible according to other State aid rules. Thus the conditions of Protocol 8 were not breached, as Huta Częstochowa did not benefit from restructuring State aid between 1997 and 2006. The Commission’s right to order recovery under Protocol 8 was challenged before the General Court. The General Court confirmed that the steel protocol created a lex specialis granting the Commission such right to order recovery.457 In the formal investigation procedure concerning Třinecké Železárny458, a Czech steel undertaking, the Commission first examined whether the measures subject to investigation were taken according to the market economy investor principle, and then whether the aid measures could be found compatible with environment, R&D, closure or training aid principles, since Protocol 2 prohibits only restructuring aid. It finally concluded459 that none of the measures constituted illegal aid: the purchase of shares in Třinecké Železárny by the government took place according to normal market conditions; the training support was granted in accordance with the applicable Union rules, and the third measure had not been implemented by the government at all.460

1.535

A good illustration of an application for the modifications of conditions stipulated in an individual restructuring plan is the decision concerning Mittal Steel Ostrava (MSO).461 The Czech Republic asked the Commission to approve changes in the implementation of compensatory measures and the postponement and amendment of the investment plan. The Commission considered that it could not accept postponement of the implementation of the investment plan beyond 31 December 2006, the deadline for the restructuring period set out in Protocol 2 to the 2003 Accession Act. However, it concluded on the basis

1.536

456

457 458 459 460 461

ing aid to Polish steel company Huta Czestochowa”, EC Competition Policy Newsletter No 3, 2004. Commission decision of 5.7.2005 in case C 20/2004 Restructuring aid to steel producer Huta Częstochowa SA, OJ L 366, 21.12.2006, p. 1. See: Lienemeyer, “The restructuring of Huta Czestochowa - the Commission’s decision finding compliance with private creditor test but ordering recovery of some previously granted restructuring aid”, EC Competition Policy Newsletter No 1, 2006. Case T-288/06 Regionalny Fundusz Gospodarczy S.A. v Commission ECLI:EU:T:2009:234. Invitation to submit comments on case C 45/2004, Restructuring aid to the Czech steel producer Trinecké Železárny, OJC 22, 27.01.2005, p. 2. Commission Decision of 08.09.2006 in case C 45/2004, Restructuring aid to the Czech steel producer Třinecké Železárny, OJ L 119, 09.05.2007, p. 37. Ewa Szymańska, “Aid in favour of Trinecké Železárny, a.s. a steel producer in the Czech Republic”, Competition Policy Newsletter, No. 1, 2005. Commission decision of 13.9.2006 in case N 350/2006, Change of restructuring plan of MSO, OJ C 280, 18.11.2006, p. 4.

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of an external study that postponing the investment plan would not affect the restoration of MSO’s viability, and the essential condition in Protocol 2 that the company should finalise its restructuring by the end of 2006 would therefore be fulfilled.

1.537

To complete the picture, it is worth referring to the decision on the restructuring of Arcelor Huta Warszawa,462 where Poland sought approval for a change of conditions stipulated in the National Restructuring Plan. However, owing to the circumstances of the case, the Commission did not agree to the proposed changes, and also concluded that part of the aid had been misused and must be recovered.

5.4.3.2 The case of Slovakia 1.538

Although the provisions of the ECSC Protocol to the EU-Slovakia EA made Slovakia subject to the same rules as the Czech Republic and Poland concerning restructuring aid for the steel sector, it did not follow the same approach as those countries. Instead it negotiated fiscal advantages until 2009 for one particular steel mill, US Steel Košice, subject to a number of conditions related to limits in production, sales, range of products, maximum aid amounts and employment levels.463 Unlike Protocols 2 and 8, Annex XIV to the 2003 Accession Act has no explicit provision allowing recovery of aids granted prior to accession. However, non-fulfilment of any of the conditions in that Annex could lead to the revocation of the transitional provisions.464 In 2004 Slovakia asked the Commission to approve excess production in exchange for reduction of the State aid.465 In 2007 US Steel Košice has brought an action before the General Court concerning the scope of application of Annex XIV to the 2003 Accession Act,466 and a second action, in the context of establishing CO2 emission limits, regarding the interpretation of Annex XIV with regard to the time limit for application of the transitional provisions.467 Both actions were dismissed as inadmissible.

462 463 464 465 466 467

Commission decision of 11.12.2007 in case C 51/2006, Misuse of aid by Arcelor Huta Warszawa, OJ L 143, 03.06.2008, p. 31. Chapter 4 (2) of Annex XIV of the 2003 Accession Act. Chapter 4 (2) (e) of Annex XIV to the 2003 Accession Act. Commission decision of 22.9.2004 in case SK 5/2004 concerning reduction of tax concession granted by Slovakia to US Steel Kosice, C(2004)3496 fin. Case T-22/07 US Steel Košice v Commission ECLI:EU:T:2009:158. Case T-27/07 US Steel Košice v Commission, appealed in Case C-6/08 US Steel Košice v Commission ECLI:EU:C:2008:356.

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5.4.3.3 The case of Bulgaria Bulgaria was a special case. The provisions of the ECSC Protocol to the EUBulgaria EA made it subject to the same rules as Poland, the Czech Republic and Romania concerning steel sector restructuring, but it was agreed in the negotiations that both the grace period for granting aids and the restructuring period were to be finalised before accession. In those circumstances no special provisions concerning the Bulgarian steel sector restructuring were included in the 2005 Accession Act. In 2006, however, the Commission learnt through its regular monitoring that Bulgaria was having difficulties in implementing the restructuring plan by the originally envisaged deadline, and appropriate measures were taken before accession to ensure the fulfilment of the conditions imposed on the beneficiary in return for allowing a longer restructuring period.468 The Union obtained an undertaking from Bulgaria to recover restructuring aids granted prior to accession in case of failure to respect the conditions stipulated in the individual restructuring plan for Kremikovtzi.469

1.539

5.4.3.4 The case of Croatia Under Protocol 2 on steel products to the Stabilisation and Association Agreement and to the Interim Agreement which entered into force on 1 March 2002,470 the grace period during which aid may be granted for the restructuring of the Croatian steel sector expired on 28 February 2007. Croatia adopted on 28 February 2007 the Restructuring Programme for the Croatian Steel Industry for 2007-2011 (NRP), which includes two undertakings (Željezara Split d.d. and Valjaonica cijevi Sisak d.o.o.). The plan was positively assessed by the Croatian Competition Agency and accepted by the Commission. However, the economic and financial crisis affected the two steel mills negatively. The Croatian authorities initiated bankruptcy proceedings in March 2011 for Željezara Split d.d.. As for the mill CMC Sisak d.o.o, which was bought by the US company CMC and in a better economic situation, a deviation from the original business plan had occurred. As a result, the individual plans of both companies and the NRP became obsolete. However, since the management of CMC Sisak decided 468

469 470

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Proposal for a Council Decision on a Community position in the EC-Bulgaria Association Council on the amendment of Article 3 of the Additional Protocol to the Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Bulgaria, of the other part, with regard to an extension of the period laid down in Article 9(4) of Protocol 2 to the Europe Agreement, COM(2006) 772. Monitoring report on the State of preparedness for EU membership of Bulgaria and Romania, COM(2006) 549 final. OJ L330, 14.12.2001, p. 87.

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to make a voluntary reimbursement of all the aid received, it was no longer necessary to update the NRP. The commitment of Croatia to recover the aid (plus compound interests) by the date of accession was enacted in Annex IX to the 2011 Accession Act. A provision enabling the Commission to order Croatia to recover the aid, including compound interests, failing the effective reimbursement of the aid by 1 July 2013 was also added to the Accession Treaty. According to Title IV Article 36 of the Accession Act, the Commission would closely monitor the reimbursement of the restructuring aid, plus compound interests, received by CMC Sisak.

5.4.3.5 The case of Turkey 1.541

Finally, a few words concerning Turkey. In 1996 a Free Trade Agreement (FTA) between the European Community for Coal and Steel (ECSC) and Turkey entered into force, complementing the 1995 EU-Turkey Customs Union. That FTA prohibits any State aid to coal and steel products, except if specifically authorised under the ECSC State aid rules. With the expiry of the ECSC Treaty, State aid rules apply unless the latter are more stringent than at the time of the conclusion of the FTA.

5.4.4 Provisions for the shipbuilding sector 1.542

In the 2004 enlargement Malta was the only candidate country which negotiated a transitional period for the full implementation of State aid rules for its shipbuilding and ship repair industry. Chapter 3(3) of Annex XI to the 2003 Accession Act allowed Malta to grant aid until the end of 2008 for the restructuring of two shipbuilding companies, Malta Drydocks and Malta Shipbuilding, on the basis of restructuring plans and subject to output limitations. Malta had to provide the Commission with regular monitoring reports on the progress of the restructuring.

1.543

Despite its large shipbuilding industry, Poland did not request any transitional measures. In October 2004 Poland informed Commission about the aid it had granted to the yard before it joined the Union. However, in June 2005 the Commission adopted a decision in which it concluded that part of the aid had been granted to the yard after the date Poland joined the Union and therefore fell under the Commission’s jurisdiction. It is worth noting that in the same decision, the Commission underlined that, whereas the Commission had no power to assess the compatibility of the aid granted prior to Poland’s accession, it however took that aid into account when assessing the compatibility of the 176

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aid granted after accession, in particular to assess the entire distortion of competition created by the aid granted to the yard and to conclude whether the aid was limited to the minimum necessary.471 In 2006 the Polish authorities who hold a controlling share in Gdynia Shipyard, decided that Gdansk and Gdynia shipyards should be separated and Gdansk shipyard should be privatised. The Commission requested that the privatisation process be conducted in an open and transparent way and that the State duly inform potential investors about the situation of the company, in particular about the ongoing State aid investigation. To make sure that the aid would remain limited to the minimum necessary, as required by the Guidelines, the Commission required the State, as seller of the yard, to impose no conditions on the future owner with regard to the future activity of the company, including the planned level of employment, the nature of investments or the business profile of the company. The only condition that had to be announced to potential buyers was the need to prepare a restructuring plan for the yard to restore its long-term viability. As regards compensatory measures, the Commission requested, in the first place, that State aid and the restructuring process should not be used, to the detriment of the competitors, to finance expansion of the yard’s shipbuilding activity, thereby prolonging the distortion of competition already caused by the State bail-out of the yard. Second, the Commission requested the yard’s production capacity to be actually reduced and the capacity-shedding necessary should be decided before the start of the privatisation process, so that investors could take an informed decision on the prospects and capabilities of the yard. The Commission adopted its positive final decision in July 2009. The restructuring of the Croatian shipyards (Brodosplit, Brodotogir, 3.MAJ and Kraljevica)472 through a privatisation process was one of the most difficult issues to be solved in the accession negotiations with Croatia. Croatia agreed to carry out the restructuring of the shipbuilding companies through their privatisation on the basis of a competitive tendering process. Restructuring plans for each of the shipyards under restructuring were submitted by the bidders and accepted by the Croatian Competition Agency (CCA) and the Commission in 2011.

471

472

1.544

Commission Decision of 6.11.2008 on State aid C 17/05 granted by Poland to Stocznia Gdynia, OJ L 33, 04.02.2010, p. 1; Commission Decision of 22.07.2009 on State aid C 18/05 awarded by Poland to Stocznia Gdańsk, OJ L 81, 26.03.2010, p. 19; Commission Decision of 6 .11.2008 on State aid C 19/05 granted by Poland to Stocznia Szczecińska , OJL 5, 08.01.2010, p. 1. As regards the Uljanik yard, the Croatian authorities provided compensation to the shipyards for the expropriation of the maritime domain in 1996. That compensation enabled the Uljanik yard to reimburse all restructuring aid received since 1 March 2006. As a result, the yard was no longer subject to the rules on rescue and restructuring aid.

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1.545

As the privatisation process had not yet been completed at the closing of the negotiations, special provisions were included in Annex VIII to the Accession Treaty to ensure that the plans would be implemented as they had been approved by the CCA and accepted by the Commission: –

The starting date of the restructuring process, and therefore the date from which all aid granted to the shipyards was to be considered as restructuring aid, was set at 1 March 2006.

–

The own contribution by the buyers of the shipyards should represent no less than 40% of the restructuring costs.

–

The total production capacity for the five shipyards under restructuring was set at 372,346 Compensated Gross Tonnage (CGT).

–

The total annual production output for the five shipyards under restructuring was limited to 323,600 CGT for a ten-year period. Whereas individual production limits were attributed to the shipyards, a flexibility mechanism was foreseen in order for the shipyards to review their individual production limits and, on the basis of binding agreements, to cede to each other a portion of their individual production quota.

1.546

The restructuring plans that had been accepted by the Croatian Competition Agency and by the Commission were to be incorporated in the respective privatisation contracts. The companies should not receive any new rescue or restructuring aid until at least 10 years have elapsed since the date of signing of the privatisation contract. The privatisation contracts should be submitted to the Commission and signed before Croatia’s accession.

1.547

The Accession Act also foresaw that the Commission would closely monitor the implementation of the restructuring plans, including the level of State aid, the implementation of the commitments and conditions concerning the own contribution, compensatory measures (including the production limitation) and the measures taken to ensure the return to viability until the end of the restructuring period as set out in the restructuring plans.

1.548

A provision enabling the Commission to order Croatia to recover any rescue or restructuring aid, including compound interests, in case any of the above mentioned conditions were not fulfilled was added to the Accession Treaty.

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Any subsequent change to the restructuring plans had to respect those conditions, and be submitted to the CCA and to the Commission for acceptance. For a number of reasons, the drafting of the privatisation contracts by Croatia was delayed and Croatia formally submitted revised restructuring plans. On 16 August 2012, the Commission approved an amended restructuring plan and associated privatisation contract for Brodosplit. The Commission approved a second amendment to the restructuring plan and a revised privatisation contract for Brodosplit on 20 February 2013. On 20 March 2013, an amended restructuring plan and privatisation contract for Brodotrogir were approved. The main change in the revised plans consisted of an increase of restructuring costs. To approve the increased State aid (amounting to 60% of the total restructuring costs), the Commission required that the shipyards renounce the flexibility mechanism offered by the Annex VIII to the Accession Treaty and to offer additional compensatory measures to offset the distortion of competition caused by the increased aid amounts.

1.549

The same approach was followed for the amendment to the restructuring plan of 3.MAJ as regards compensatory measures. Moreover, given the change of buyer, Croatia committed to appoint an independent trustee to assist with the monitoring of the main conditions and obligations for the privatisation of 3.Maj. Following the withdrawal of the initial bidder, 3.Maj would be taken over by Uljanik, which is another Croatian shipyard recently privatised but not included in the list of shipyards in difficulty and therefore not subject to the commitments of Annex VIII to the Accession Act. The Commission adopted the decision regarding the amendments to 3.MAJ restructuring plan on 19 June 2013.

1.550

As no solution could be found for Kraljevica, the smallest of the four shipyards in difficulty, that yard filed for bankruptcy in August 2012.

1.551

5.4.5 Provisions for the agriculture sector The Accession Acts specify the conditions under which State aid measures will be considered as existing aid after accession. The Acts modify some of the rules applicable to the Common Market Organisations and the compatibility conditions for structural measures for rural development which influence the State aid compatibility conditions for the new Member States.

1.552

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It is noteworthy that the 1995 Accession Act provided a transitional period for the application of certain State aid measures to Sweden, Finland and Austria. Those Member States informed the Commission about their existing agricultural aid schemes,473 and as a result the Commission adopted two decisions approving the Austrian and Finnish programmes for implementing Articles 138 to 140 of 1995 Accession Act.474 The Commission also authorised Finland and Sweden to grant long-term aid to ensure the maintenance of agricultural activity in their northern regions, and determined the regions concerned and the levels of aid in two decisions issued under Article 142 of the 1995 Accession Act.475 Article 141 of the Finnish Accession Treaty provides a basis for temporary special support programmes for farmers in southern Finland. The Commission could authorise such support to help farmers to integrate into the Common Agricultural Policy (CAP). The decision allowed farmers in southern Finland to receive national support in addition to normal aids from the CAP. As a counterpart the farmers got increased support for the improvement of farm structures, in particular investment aid and aid for young farmers. Interestingly, the Commission recognised that it was still appropriate in 2008 to apply that transitional provision.476

1.554

The realities of the CAP have changed significantly since 1995 and the economic realities of the new Member States were also different, so their Accession Acts reflected these differences. In analysing the system it should be borne in mind, firstly, that although direct payments are not subject to State aid control under Article 108 of the Treaty, the support given via Union resources has a significant impact on the economic realities for farmers. A phasing-in system of direct Union payments477 was adopted for the 2004 and 2007 enlargements in the respective 2003 and 2005 Accession Acts. It included specific derogations

473 474

475

476 477

XXV Competition Report, p.83. On 13 February 1995 the Commission adopted two decisions approving the Austrian and Finnish programmes for the implementation of Articles 138–40 of the 1995 Accession Act (which provided for the granting of transitional, digressive national aid for agricultural products), XXV Competition Report, p. 83. Commission Decision of 09.06.1995 on the long-term national aid scheme for agriculture in the northern regions of Finland OJ L 126, 09.06.1995, p. 35 as last amended by Commission Decision of 24.05.2002, OJ L 139, 29.05.2002, p. 38 and Commission Decision of 28.02. 1996 on a long-term national aid scheme to assist farmers in northern areas of Sweden OJ L 76, 26.03.1996, p. 29, as last amended by Commission Decision of 30.03.2004, OJ L 94, 31.03.2004, p. 61. The most recent decisions were adopted in 2004 and it remains to be seen when the 1995 transitional measures will definitively expire. Commission approves special support for farmers in Southern Finland, IP/08/321. Council Decision 2004/281/EC of 22.03.2004 adapting the Act concerning the conditions of accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic and the adjustments to the Treaties on which the EU is founded, following the reform of the common agricultural policy, OJ L 93, 30.03.2004, p. 1.

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regarding payments which applied to some new Member States,478 but waived the requirement to fulfil the cross-compliance obligations.479 During the transitional periods after the 2004 and 2007 accessions, enterprises can benefit from investment aid to meet minimum standards regarding the environment, hygiene and animal welfare, provided they comply with the relevant standards by the end of the transitional period or the investment period, whichever is earlier.480 The scope of the investment aid provision is limited to agricultural holdings which will only attain economic viability when the realisation of the investment is complete.481 The less stringent conditions aimed to assist farmers from the new Member States to adjust rapidly to the new market situation.482 They ended after the adoption of the EAFRD Regulation on 1 January 2007, except for higher aid intensities for investments necessary to comply with the so-called Nitrate Directive.483 Under the 2003 Accession Act the new Member States were temporarily allowed to support rural development484 beyond and above the support envisaged for the existing Member States in the 2004-2006 programming periods.485 The 2005 Accession Act contains similar transitional measures regarding direct payments and temporary rural development measures for 2007-2013.486 Annex VI 478

479 480 481 482

483

484

485

486

1.555

This made the granting of complementary national direct payments possible during 2004-2006; see Article 33h of the 2003 Accession Act, p. 367. This does not concern Cyprus, which provided such support prior to accession, see 2003 Accession Act, p. 371. Derogation from Article 26(1) second indent of Regulation (EC) 1257/1999 for the 2003 Accession Act. Articles 4 and 5 of Regulation 1972/2005. Derogation from Article 5 first indent of Regulation (EC) 1257/1999 for the 2003 Accession Act. The investment criteria are more lenient than the usual criteria applicable to investments in the old Member States, which only allow investment aid to undertakings that are viable and already meet the requisite Union standards. Article 26(2) and the Annex to Council Regulation (EC) 1698/2005 on support for rural development from the European Agricultural Fund for Rural Development (EAFRD) OJ L 277, 21.10.2005, p. 1. Those intensities are reflected in the Community Guidelines for the Agriculture and Forestry Sector, para 28. Point 26.1 of Annex II, Ch. 6, to the Accession Act OJ L236, 23.09.2003, p. 365; see also additional support applicable to Malta (SMPPMA), p. 367. Derogation from Article 7(2) of Regulation (EC) 1257/1999 for 2003 Accession Act: the maximum total amount of support envisaged (expressed as a percentage of the volume of eligible investment), could reach 50 per cent, and in less-favoured areas 60%. Those thresholds could be increased by a further 5 per cent for young farmers. The levels applicable to the new Member States are 10 per cent higher than the regular allowances for such support for the ‘old’ EU Member States. Derogation from Article 7(2) of Regulation (EC) 1257/1999 for 2003 Accession Act. Article 7 of Council Regulation (EC) 1257/1999 of 17 May 1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (EAGGF) and amending and repealing certain regulations OJ L 160, 26.06.1999, p. 80. For existing State aid in the agriculture sector, p. 271; for phasing in of direct payments and complementary payments, p. 251; for special temporary additional rural development measures, see Annex VIII to the Act, p. 369. The Council adopted a rural development adaptation package with a view to the accession of Bulgaria and Romania to the EU during the 2739th Agriculture and Fisheries Council meeting in Luxembourg on 19 June 2006. The package consists of a regulation adapting Regulation (EC) 1698/2005 on support for rural

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to the 2011 Accession Act also foresees the possibility of temporary additional rural development measures for Croatia. Thus support for semi-subsistence farms undergoing restructuring, compliance with Community standards, establishment of producer groups, technical assistance and Leader+ type measures could all benefit from derogations applicable to the new Member States.

1.556

Finally, it is noteworthy that under special protocols to the relevant Accession Treaties,487 the State aid rules (including the rules applicable to agriculture) do not apply in their entirety to some territories of the Union. In such cases the Commission is only entitled to comment on planned State aid measures.488 The outermost regions,489 the Aegean Islands, together with Croatian islands Dugi otok, Vis, Mljet and Lastovo also benefit from the special status with regard to both the CAP and the State aid rules.490

5.5 Safeguard clauses 1.557

According to Article 36 of the 2003 Accession Treaty, Article 37 of the 2005 Accession Treaty and Article 38 of the 2011 Accession Treaty, if there is a risk of “a serious breach of the functioning of the internal market, including any commitments in all sectoral policies which concern economic activities with crossborder effect […]”, the Commission may adopt regulations or decisions establishing appropriate measures. Both clauses could be invoked for up to three years after accession. Those provisions could arguably be used if there were serious

487

488

489

490

development by the European Agricultural Fund for Rural Development (EAFRD) (9248/06); and two Decisions adapting the Accession Act of Bulgaria and Romania as regards rural development (9605/06 and 9608/06). See e.g. Article 1(2) of Protocol No.3 to the 1972 Accession Act on the Channel Islands and the Isle of Man; the Community rules regarding trade in agricultural products applicable to the UK also apply to the Isle of Man. In accordance with Article 2 of Council Regulation (EEC) 706/73, the Treaty provisions regarding State aid, in particular Article 108(1) and the first sentence of Article 108(3) of the Treaty apply to the Isle of Man, see Decisions N 338/2002, N 339/2002, N 340/2002. See Article 349 of the Treaty; Council Regulation (EC) 1448/2001 of 28 June, 2001 amending, as regards structural measures, Regulation (EEC) 3763/91 introducing specific measures in respect of certain agricultural products for the benefit of the French overseas departments OJ L 198, 21.07.2001, p. 3; Council Regulation (EC) 1453/2001 of 28 June 2001 introducing specific measures for certain agricultural products for the Azores and Madeira and repealing Regulation (EEC) 1600/92 (Poseima) OJ L 198, 21.07.2001, p. 26, Council Regulation (EC) 1449/2001 of 28 June 2001 amending Regulation (EEC) 1600/92 concerning specific measures for the Azores and Madeira relating to certain agricultural products as regards the structural measures OJ L 198, 21.07.2001, p. 5; Draft agricultural guidelines, point ref; Decision NN 40/2004 Banana producer groups support (Guadeloupe and Martinique). Council Regulation (EC) 442/2002 of 18.02.2002 amending Regulation (EEC) 2019/93 introducing specific measures for the smaller Aegean islands concerning certain agricultural products OJ L 68, 09.03.2001, p. 4.

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breaches of State aid rules, since State aids are presumed to disturb the functioning of the internal market. However, it is not clear what conditions would have had to be fulfilled to trigger the application of this “internal market safeguard clause”. For example, in the absence of other specific provisions Article 37 of the 2005 Accession Treaty might have been used in the case of failure to respect the obligations related to the steel sector restructuring in Bulgaria. Articles 37 and 38 of the 2003 Accession Treaty, Articles 36 and 37 of the 2005 Accession Treaty and Articles 37 and 38 of the 2011 Accession Treaty allowed both the old and new Member States to adopt protective measures in the event of difficulties which are “serious and liable to persist in any sector of the economy or which could bring about serious deterioration in the economic situation of a given area.” Article 39 of the 2005 Accession Treaty provided for an additional special safeguard clause if Bulgaria or Romania did not meet all the requirements indicated in the Commission’s opinion concerning their readiness to join the Union.491 However, those provisions were not used, and both countries acceded as envisaged on 1 January 2007.

6.

1.558

Enlargement – lessons and new challenges in State aid control

Earlier in this chapter we explained the legal framework within which the new Member States acceded to the State aid acquis, focusing mainly on the last three enlargements. It is obvious that there is a clear correlation between the nature of the economic system in the candidate countries, the general developments in State aid control under the Treaty during the past 15 years, and the attention given to State aid matters in the enlargement process. What lessons can be drawn from the recent experience for the various stakeholders?

1.559

First, as already discussed above, experience shows that for the candidate countries and the Commission the emphasis should be on phasing in the State aid rules through a national pre-accession system of State aid control, notwithstanding the institutional, political and administrative challenges that it represents. One important consequence of that phasing-in is that it enables the early identification of areas which represent particular problems and on which the negotiation should focus, and which in some cases could best be covered by transitional periods. A matter for political negotiations and compromise agreements before accession becomes a hard letter of law after accession, offering much less flexibility for ad hoc solutions. The Commission’s post-accession State aid control,

1.560

491

The postponement clause was not used, following the findings of the 2006 Monitoring Report, see Commission staff working document, 16.05.2006, SEC (2006) 596, COM (2006) 214 final.

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which must ensure equal treatment of all Member States, does not allow for the gradual phasing-out of old interventionist habits.

1.561

This is not the only crucial aspect of the pre-accession phase. Experience has shown that postponing difficult issues leads to outcomes which are undesirable both in terms of political considerations and for a stable business and investment environment in the candidate country, such as the threat of delaying accession. It is essential for both the Commission and the candidate country to adopt a serious approach from the outset of the accession negotiations. The more detailed State aid provisions in the Stabilisation and Association Agreements and the use of opening benchmarks are instrumental for achieving that objective.

1.562

Third, the role of the national authorities in the pre-accession control of State aid is vital for adapting the national legal order to the requirements of Union law. Although views differ on the extent to which “accession conditionality”492 actually influenced the pre-accession behaviour of candidate countries in the past enlargements, the setting up of appropriate control systems prior to accession certainly helped to phase in the State aid acquis. Those authorities had the novel and complex tasks of devising aid schemes or assistance programmes free of State aid and of supervising individual interventions by their governments, with the additional complication that they themselves formed part of the national administration, however independent they might have been.493 In that context the Croatian competition authority, for instance, had an enormous task; explaining that it was necessary to implement State aid legislation in order to advance negotiations on the competition chapter was often not palatable for public opinion. Previous enlargements have shown the importance of ensuring the independence of the State aid authorities. The challenge has been to reconcile that independence with the need to understand and apply the State aid 492 493

Gwiazda, “Europeanization of Polish Competition Policy”, European Integration, Vol. 29:1, p. 109-131, 2007. See further concerning individual national State aid authorities in European State Aid Law Quarterly, Lexxion Verlag – NP New Law Publishers: Andreou (2005), “State Aid Control in Cyprus”; Bednar (2005), “The State Aid Control Procedures in the Czech Republic, Latvia and Lithuania before and after Accession - The State aid control procedure in the Czech Republic”; Cemnolonskis (2005), “The State Aid Control Procedures in the Czech Republic, Latvia and Lithuania before and after Accession - The State aid control procedure in Lithuania”; Haber (2004), “State Aid control in Malta”; Hargita and Remetei Filep (2004), “State Aid Control in Hungary”; Jagodic-Lekocevic, “Future Role of the Former National Monitoring Authorities and Existing aid in Slovenia, Poland and Estonia - State aid in Slovenia”; Lagzdina (2005), “The State Aid Control Procedures in the Czech Republic, Latvia and Lithuania before and after Accession - The State aid control procedure in Latvia”; Pełka, (2004), “Future Role of the Former National Monitoring Authorities and Existing aid in Slovenia, Poland and Estonia - State aid in Poland”; Vosu (2004), “Future Role of the Former National Monitoring Authorities and Existing aid in Slovenia, Poland and Estonia State aid in Estonia”.

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acquis. Despite the relative isolation of the national State aid authorities in the pre-accession stage, that model of decentralised State aid control proved successful and instrumental in preparing the candidate countries for accession. Of course, the national authorities yielded their competence to the Commission following accession, but they will remain excellent tools for administering the State aid agenda in the new Member States by taking part in preparing legislation and notifications, and for monitoring purposes. Fourth, the experience has also identified areas where the Commission should be more active in the period before accession. One of them is State aid advocacy with regard to both the national authorities, which are potential grantors of aid, and the business community. That task was largely left to the national authorities, although the Commission organised and financially supported seminars on State aid in candidate countries.494 In that regard it seems that particular attention should be given to the tax and social security authorities and the courts active in that area. Due to budgetary constraints, the new Member States tend to support their businesses by means of soft budgetary instruments such as tax deferrals and write-offs. State aid advocacy in the judiciary should not be underestimated either, bearing in mind, for example, the involvement of judges in bankruptcy proceedings. Extending that advocacy work to the business community should help to prepare it for the legal environment in which it will operate post-accession, and encourage it to play an active part in the pre-accession process, for example in devising transitional measures. Finally, State aid in the context of privatisation is likely to be particularly relevant in the new Member States. Awareness of the State aid rules is also important in the context of privatisation of State-owned enterprises: properly conducted due diligence covering State aid issues should help to avoid surprises for the new owners.

1.563

What are the likely post-accession challenges for State aid control? It is obvious from the State aid statistics and the Commission’s experience to date in dealing with State aid cases from the new Member States that issues specific to those States especially concern individual aid cases. In particular, some new Member States should work towards introducing more aid schemes rather than proceeding on a case-by-case basis. In the pre-accession stage the majority of State resources targeted the restructuring of ailing undertakings, a trend that is visibly changing since accession. Also, as noted above, budgetary constraints mean that the use of soft budgetary instruments such as guarantees and public debt deferrals is significantly more frequent than in the old Member States;495 it creates

1.564

494 495

For example, the State aid seminars regularly organised by EIPA Maastricht. http://epp.eurostat.ec.europa.eu/tgm_comp/refreshTableAction.do;jsessionid=9ea7d07d30f4ede852fb8

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particular challenges in terms of quantifying State aid, especially for companies in financial difficulties.496 Further, it has been observed that the newer Member States have brought to the Commission’s concern types of measures which have so far rarely been examined under the State aid rules, such as measures benefiting higher education in the Czech Republic497 or prisons in Latvia. The State’s position as a creditor in the context of bankruptcy procedures has already been examined in several Slovak and Polish cases.498

1.565

The 2004 and 2007 enlargements have brought new challenges not only for the national authorities but for the Commission itself, in terms of both human resources and new areas to be covered. The negotiations for Croatia’s Accession built upon the lessons learnt in 2004 and 2007, using Opening and Closing benchmarks to foster State aid control and solve as early as possible recurring issues in candidate countries. The first State aid reform was very timely in that respect, as an expected increase in notifications and investigations to be handled required new tools in the form of block exemption regulations and to ensure monitoring and transparency. The greater awareness and involvement of the national authorities should help to police the State aid field. Overall, therefore, the accession negotiations and procedures can be considered as a successful two-way learning process.

496

497 498

5b64e2281d7e3a0d1851c55.e34MbxeSaxaSc40LbNiMbxeNbN0Qe0?tab=table&plugin=1&pcode=co mp_ai_sa_01&language=en See for example Commission decision of 20.12.2006 in case C 3/2005, Fabryka Samochodów Osobowych (FSO), OJ L 187, 19.07.2007, p. 30, challenged in Case T-88/07 Fabryka Samochodów Osobowych v Commission, which was subsequently removed from the register. Commission decision of 8.1.2006 in NN 54/2006, Vysoka skola logistiky, OJ C 291, 30.11.2006, p. 18. The following cases concern the arrangement procedures in which a company in financial difficulties seeks its creditors’ approval to restructure its debt: Commission decision of 5.7.2005 in case C 20/2004, Restructuring aid to steel producer Huta Czestochowa SA, OJ 2006 L 366, 21.12.2006, p. 1. Commission Decision of 16.10.2013 on State aid C 25/2005 granted by the Slovak Republic for Frucona Košice a.s., OJ L 176, 14.06.2014, p. 38. Commission decision of 26.9.2006 in case C 42/2005, Restructuring aid to Konas, OJ 2007 L 91, 31.03.2007, p. 37. Commission decision of 2.4.2008 in case N 472/2007, Restructuring aid to Compel Rail, OJ C 168, 03.07.2008, p. 1. Commission Decision of 23.10.2007 on State Aid C 23/06 which Poland has implemented for steel producer Technologie Buczek Group, OJ L 116, 30.04.2008, p. 26 concerns the interaction between the State aid recovery procedure and bankruptcy proceedings.

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PART 2 – THE CONCEPT OF STATE AID Chapter 7 Introduction

1.

General context

Article 107 of the Treaty contains the substantive provisions of the Treaty on State aid. Although that provision concerns the sources and the effect of the aid, it does not lay down a clear definition of “aid”. Article 108 of the Treaty describes, in a rudimentary form, the procedure to be followed in State aid matters, as well as the obligations of the Member States, and the (limited) role of the Council.499 Article 109 of the Treaty, finally, empowers the Council to enact secondary legislation of a procedural nature. The Council also has the power to legislate as to the substance of State aid pursuant to Article 107(3)(e) of the Treaty.

2.1

Under Article 107(1) of the Treaty, any aid granted by a member State or through State resources in any form, which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States, is incompatible with the internal market.

2.2

There are thus four constitutive elements for there to be State aid within the meaning of Article 107(1):

2.3

1. 2.

499

it must be granted by a Member State or through State resources; there must be a selective advantage (it must favour certain undertakings or the production of certain goods); See Van de Casteele, “The European Court of Justice clarifies the powers of the Council in State aid cases”, [2004] Competition Policy Newsletter No. 3, p. 21.

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3. 4.

there must be a (threat of ) distortion of competition; there must be affectation of trade between Member States.

2.4

Those conditions are cumulative.500 State aid thus identified is in principle prohibited.

2.5

The Court has established that the notion of State aid is an objective one, and that the Commission enjoys no discretion in the determination of whether or not there is State aid.501 The same is not true of the Commission’s evaluation of certain factual elements to determine whether the conditions of Article 107(1) are met.502 Furthermore, since the assessment by the Commission is often ex ante and is a forward-looking exercise trying to assess potential distortions of competition, control by the Union Courts will be more limited in that respect.503

2.6

Case law also emphasises that the effect of the measure counts, rather than the objective pursued.504 A measure’s status as State aid is unaffected by the intention of the aid granting authority, or the fact that the aid beneficiary had no choice but to receive the aid.

2.7

The Court has also made it clear that the notion of aid covers not only positive benefits, but equally comprises reductions in charges a company normally would have to bear.505

2.

Specific sectors

2.8

Article 107(1) of the Treaty forbids State aid only “save as otherwise provided in this Treaty”. Article 107(2) and (3) of the Treaty provide for exemptions from that prohibition.

2.9

The aid prohibition applies in principle to all areas of the economy. Certain specific arrangements do however exist for individual sectors.

500 501 502 503 504

505

European Competition Policy 1996, p. 31. Case C-83/98 P France v Ladbroke Racing and Commission EU:C:2000:248, para 25. But within certain limits, see Case C-525/04 P Spain v Lenzing EU:C:2007:698, paras 56-61. Joined Cases T-132/96 and T-143/96 Freistaat Sachsen and others v Commission EU:T:1999:326, para 211. See e.g. Case C-173/73 Italy v Commission (Italian textiles) EU:C:1974:71, para 13; Case 310/85 Deufil v Commission EU:C:1987:96, para 9; Case C-241/94 France v Commission EU:C:1996:353, paras 20-21; Case T-106/95 FFSA and others v Commission EU:T:1997:23, para 139. Case 30/59 De Gezamenlijke Steenkolenmijnen in Limburg v ECSC High Authority EU:C:1961:2, at page 19, and Case C-200/97 Ecotrade v Altiforni e Ferriere di Servola EU:C:1998:579, para 34.

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2.1 Agriculture Article 42 of the Treaty states that the rules on competition shall apply to the production of and trade in agricultural products506 only to the extent determined by the Council.507

2.10

2.2 Transport Article 93 of the Treaty relates to transport and provides that “aids shall be compatible with this Treaty if they meet the needs of coordination of transport or if they represent reimbursement for the discharge of certain obligations inherent in the concept of a public service”.508

2.11

2.3 Services of general economic interest Article 106(2) of the Treaty states that undertakings entrusted with the operation of services of general economic interest shall be subject to the competition rules, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them.509

2.12

2.4 Coal and Steel For coal and steel, until 23 July 2002 the provisions of the ECSC Treaty applied. That Treaty contained an absolute aid prohibition in Article 4(c) ECSC,510 which in practice was softened through regulations adopted on the basis of (what is now) Article 107(3)(e) of the Treaty. Since the expiry of the ECSC Treaty, coal and steel fall under Articles 107 and 108 of the Treaty.511 Originally some transitory rules were adopted for both sectors, most of which expired by now.512 506 507 508 509 510

511 512

2.13

Defined in Article 38(1) of the Treaty: “‘Agricultural products’ means the products of the soil, of stockfarming and of fisheries and products of first-stage processing directly related to these products”. See Chapter 31 for a more detailed description of the application of the State aid rules to agriculture and fisheries. See Chapter 28 for a more detailed description of the application of the State aid rules to the transport sector. See Chapter 33 for a more detailed description. “The following are recognised as incompatible with the common market for coal and steel and shall accordingly be abolished and prohibited within the Community, as provided in this Treaty: […] (c) subsidies or aids granted by States, or special charges imposed by States, in any form whatsoever; […]” For a more detailed description on coal, see Chapter 18. See Communication from the Commission concerning certain aspects of the treatment of competition cases resulting from the expiry of the ECSC Treaty, OJ C 152, 26.06.2002, p. 5. For coal: see Council Regulation (EC) No 1407/2002 of 23 July 2002 on State aid to the coal industry, which expired on 31 December 2010. Council Decision (EU) 2010/787 of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines, OJ L 336, 21.12.2010, p. 24 allowed for closure aid for uncompetitive coal mines linked to

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2.14

Although steel falls in principle under the general State aid rules, there are still some particularities. It is excluded from regional aid,513 as well as from the rescue and restructuring guidelines.514 Steel is also identified as one of the energyintensive sectors which may receive support because it faces a very high burden from levies charged for renewables support as an intensive user of electricity and because it would put steel at a disadvantage towards competitors from outside the Union where electricity prices are lower.

2.5 Nuclear energy 2.15

For nuclear energy, Article 305(2) of the EC Treaty stated that the rules contained in the EC Treaty apply, including the State aid provisions, as far as those are not in opposition with the goals pursued by the Euratom Treaty.515 That provision was repealed by the TFEU. Article 106a(3) of the Euratom Treaty itself now provides that the provisions of the Treaty on European Union and of the Treaty on the Functioning of the European Union shall not derogate from its provisions. Hence, as long as the application of the Treaty does not imply derogation from the Euratom Treaty, the Treaty applies.516,517

513 514

515

516

517

closure by 2018. For steel, see Communication from the Commission: Rescue and restructuring aid and closure aid for the steel sector, OJ C70, 19.03.2002, p. 21, which expired on 31 December 2009. Guidelines on regional State aid for 2014-2020, OJ C 209, 23.07.2013, p. 1. Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, Official Journal C 249, 31.07.2014, p. 1: “ However, in the present conditions of significant European and global overcapacity, State aid for rescuing and restructuring steel undertakings in difficulty is not justified. The steel sector should therefore be excluded from the scope of these guidelines”. Joined Cases 188, 189 and 190/80 France, Italy and United Kingdom v Commission EU:C:1982:257, para 32; Commission decision of 22 September 2004 on the State aid which the United Kingdom is planning to implement for British Energy plc, OJ L 142, 06.06.2005, p. 26, recitals 239-245. For an interesting recent example, see paragraphs 264ff in the opening of the formal investigation procedure in case SA.34947 Electricity Market Reform - Investment Contract (early Contract for Difference) for the Hinkley Point C New Nuclear Power Station, OJ C 69, 07.03.2014, 60; see also the Commission decision in case N506/2010 regarding the partial financing of decommissioning of two already shut down nuclear plants in Slovakia (A1 and V1); OJ C 162, 07.06.2013, p. 3 For a more detailed description on State aid to nuclear energy, see Chapter 18.

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2.6 Defence518 Article 346 of the Treaty519 contains a special exception for essential security interests. As with any exception to the internal market rules, Article 346 needs to be interpreted restrictively.520 In such circumstance, to address distortions of competition, a special procedure applies which is laid down in Article 348 of the Treaty.521

2.16

Article 346(1) of the Treaty includes two sub-paragraphs with slightly different fields of application. Article 346(1)(a) provides for a general exception protecting Member States against an obligation to supply information the disclosure of which they would consider contrary to the essential interests of their security. In order to benefit from the derogation under Article 346(1)(b) of the Treaty more restrictive conditions need to be met and a Member State’s measure must:

2.17

1.

concern the production of or trade in arms, munitions and war material enumerated on the 1958 list;

2.

be necessary for protecting the essential interests of a Member State’s security;

3.

not adversely affect the conditions of competition regarding products which are not intended for specifically military purposes.

518 519

520 521

Based on Van de Casteele, “State aid control and the defence exception”, in Concurrences N° 3-2007, 66. 1. The provisions of the Treaties shall not preclude the application of the following rules: (a) no Member State shall be obliged to supply information the disclosure of which it considers contrary to the essential interests of its security; (b) any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes. 2. The Council may, acting unanimously on a proposal from the Commission, make changes to the list, which it drew up on 15 April 1958, of the products to which the provisions of paragraph 1(b) apply. Case C-414/97 Commission v Spain EU:C:1999:417, paras 21-24; Case T-26/01 Fiocchi Munizioni v Commission EU:T:2003:248. If measures taken in the circumstances referred to in Articles 346 and 347 have the effect of distorting the conditions of competition in the internal market, the Commission shall, together with the State concerned, examine how these measures can be adjusted to the rules laid down in the Treaty. By way of derogation from the procedure laid down in Articles 258 and 259, the Commission or any Member State may bring the matter directly before the Court of Justice if it considers that another Member State is making improper use of the powers provided for in Articles 346 and 347. The Court of Justice shall give its ruling in camera.

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2.18

The scope is well explained in an interpretative communication on the application of what is now Article 346 of the Treaty in the field of defence procurement.522

2.19

According to the Court, it is clear that Article 346(1)(b) of the Treaty “ is not intended to apply to activities relating to products other than the military products identified on [that] list”.523 The Commission had always followed a similar line.

2.20

At the same time, the interpretation of Article 346(1)(b) of the Treaty and the definition of its field of application must also take into account the evolving character of technology and procurement policies. With regard to technology, the 1958 list seems sufficiently generic to cover recent and future developments. On the other hand, the 1958 list includes only equipment which is of purely military nature and purpose.

2.21

The nature of the products on the 1958 list and the explicit reference in Article 346 of the Treaty to “specifically military purposes” confirms that only the procurement of equipment which is designed, developed and produced for specifically military purposes can be exempted from Community rules on the basis of Article 346 of the Treaty.

2.22

The Commission Communication “Towards a more competitive and efficient defence and security sector”524 adopted in July 2013 recalled the general applicability of the State aid rules in the defence sector, including for aid “ in the pure military sector” when the conditions for the application of Article 346 are not met. The Communication also recalled the strict interpretation of the derogation provided under Article 346, including the need for Member States to be able to demonstrate that “the concrete measures in the military sector are necessary and proportionate for the protection of their essential security interests and that they don’t go beyond what is strictly necessary for that purpose”.

2.23

In practice, Article 346(1)(b)of the Treaty has only been invoked in the context of notifications for State aid granted to companies with mixed production (producing both civil products and military products). 522 523 524

Interpretative communication on the application of Article [346] of the Treaty in the field of defence procurement, COM/2006/0779 final. Case T-26/01 Fiocchi Munizioni v Commission EU:T:2003:248, paragraph 61; see also point 30 of the Opinion of Advocate General Jacobs in Case C-367/89 Richardt EU:C:1991:199. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Towards a more competitive and efficient defence and security sector, COM(2013)542 final, 24.07.2013..

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2.6.1 Commission Decisional Practice The Commission provided a more detailed analysis of the treatment of defencerelated aid in relation to measures taken and envisaged by Bremen in Germany in favour of Lürssen Maritime Beteiligungen GmbH & Co. KG.525 The case was unusual in the sense that the Commission had applied normal State aid rules and opened a formal investigation procedure whereupon Germany (and the beneficiary) invoked Article 346 of the Treaty. The special procedure provided for by Article 348 of the Treaty was not followed. It is the only case where necessity and spill-overs were examined in some detail. Eventually the Commission accepted that the aid was necessary and that there were no spill-overs.

2.24

In other cases, the Commission has not actually dealt with possible defence issues and seems to have accepted systematically that it was not competent for defence issues, without a detailed investigation whether or not the conditions of Article 346 of the Treaty were met. For example, when dealing with the restructuring of Koninklijke Schelde Groep in the Netherlands,526 a civil/military shipyard where part of the restructuring aid pertaining to the civil activities was recovered as it did not comply with the restructuring guidelines, the Commission rejected the argument from the Dutch authorities claiming that all measures fell within the scope of Article 346 of the Treaty. The reasoning from the Commission was very brief:

2.25

(76) The Netherlands has provided information regarding the essential security interests involved in this case. The Commission cannot deny that such interests exist. At the same time, it is clear that the Netherlands has rescued and restructured the whole company and not just the military part. First, the financial resources provided to KSG have not been used for its military activities, but for its commercial activities. It is therefore clear that the measures have indeed affected the conditions of competition as regards commercial products. Therefore, in accordance with its standard practice, the Commission must assess the measures in the light of the State aid rules in so far as they distort, or threaten to distort, competition in markets for products that are not caught by Article [346].

525

526

Commission Decision 1999/763/EC of 17 March 1999 on the measures taken and envisaged by Land Bremen, Germany, in favour of Lürssen Maritime Beteiligungen GmbH & Co. KG, OJ L 301, 24.11.1999, p. 8. Commission Decision of 5 June 2002 on the measures to restructure and privatise Koninklijke Schelde Groep implemented by the Netherlands, OJ L 14, 21.01.2003, p. 56.

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2.26

The Commission has followed a similar concise reasoning in a few other decisions where it was confronted with certain defence-related aspects.527

2.27

Article 346 of the Treaty was also invoked in the IZAR case. In the context of the follow-up of an earlier final negative Commission decisions with recovery addressed to Spain on IZAR, Spain invoked Article 346 of the Treaty. Spain wished to transfer to a newly-created shell company the military yards of IZAR and thereafter to transfer that new company to SEPI. (The rest of ) IZAR would then be put into bankruptcy proceedings and the aid to be recovered registered as a claim towards the “rest- IZAR” within those proceedings. That procedure would allow the implementation of the Commission decisions while saving IZAR’s military activities. In that context, Spain requested the cooperation procedure provided for under the first subparagraph of Article 348 of the Treaty to solve problems linked to potential distortion of competition. The solution found consisted among others in limiting the civil share of the new company to maximum 20 per cent, and putting in place a coherent monitoring system with separate accounts for the civil and military part.528

2.28

The procedure provided under Article 348 of the Treaty was also used by the Commission in the AgustaWestland case. In 2009 the Commission found that the funding by Italy of two military projects undertaken by AgustaWestland (the helicopter A139 and the tilt-rotor BA609) indeed fell within the scope of the derogation provided under Article 346 of the Treaty529. However, in view of the fact that civil applications had been developed, the Commission considered that distortions of the internal market for products which are not intended solely for military use have resulted from the measure. It therefore initiated discussions with Italy on the basis of Article 348 of the Treaty to explore ways of adjusting the measures and reducing the distortions. The procedure was concluded 527

528

529

Commission Decision of 28 October 1998 on aid granted by Germany to Neptun Industrie Rostock GmbH, OJ L 144, 09.06.1999, p. 21: “Its limited activities in the repair of small vessels belonging to the German navy are outside of the scope of [Article 107 of the Treaty], owing to the provisions of [Article 346 of the Treaty].” Case NN 42/2001 which examined an Italian law concerning R&D in the aeronautical sector, follows the same logic in singling out R&D aid for building a prototype of a military helicopter from the other R&D projects which were assessed under the R&D framework: “the Commission has consistently held that [Article 346(1)(b) of the Treaty] should apply to measures with a military purpose, to the exclusion of other Treaty provisions. Likewise, in the present case [Articles 107 and 108 of the Treaty] shall not apply and the Commission should raise no objections to aid granted to the EH-1001 programme.”, see IP/05/649, 1.6.2005. That same principle of separation of accounts between civil and military part appears in another Commission decision for the Polish shipyards run by Huta Stalowa Wola; see Commission Decision of 10 March 2009 on the State aids C 43/07 (ex N 64/07) and C 44/05 (ex NN 79/05, ex N 439/04) granted by Poland to Huta Stalowa Wola SA, OJ L 81, 26.03.2010, p. 1. Commission Decision 2010/564/EC of 28.10.2009 on aid scheme C 61/03 (ex NN 42/01) implemented by Italy for the aeronautical industry, OJ L 247, 21.09.2010, p. 85.

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in January 2011530 with an agreement requiring AgustaWestland to reimburse an amount of up to EUR 25 million for the A139 project and an amount per tilt-rotor increasing with time for a maximum duration of 20 years and up to the total amount of aid received by the company for the BA609 project. A similar approach was followed in the ELVO-case,531 where the Commission also adopted a negative decision with recovery. ELVO was the main supplier of motor vehicles to the Greek army. In addition to military vehicles, ELVO produced a wide range of civilian vehicles (jeeps, trucks, buses...) and spare parts. Following a complaint, the Commission started an investigation into a number of State measures in favour of ELVO, including a waiver on tax debts. According to Greece, the aid favoured only the military production of ELVO and therefore fell under Article 346 of the Treaty. Although the 1958 list does include (point 6) “tanks and specialist fighting vehicles: … (b) Military type vehicles, armed or armoured, including amphibious vehicles; (c) armoured cars…”, the Commission took into account the fact that ELVO’s production concerned not only products which fell within the field of application of Article 346 of the Treaty but also products which were either suited for dual use or intended for purely civilian use. Since there was no accounting separation, the tax waivers could not be seen to favour only the military production. Recovery was ordered for the part which was assumed to have benefitted the civil production. On the other hand, the Commission accepted that a loan guarantee benefitted exclusively the military activities and could thus be considered to fall within the scope of application of Article 346 of the Treaty. The same approach was applied in Case C16/2004 – Commission decision of 2 July 2008 on the measures implemented by Greece in favour of Hellenic shipyards.

2.29

2.6.2 Case law The General Court has confirmed in Fiocchi Munizioni that the normal State aid control rules do not apply to an aid measure in favour of production or trade in arms, munitions or war material appearing on the Council’s list of 15 April 1958 based on considerations linked to the need to protect the essential interests of its internal security.532 Hence, the measure does not need to be notified.

530 531 532

2.30

See press release IP/11/27 of 12.01.2011. State aid No C 47/2005 (ex NN 86/2005) — ELVO (Hellenic Vehicle Industry S.A.), OJ L 118, 12.05.2010, p. 81. Case T-26/01 Fiocchi Munizioni v Commission EU:T:2003:248, para 61.

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2.31

However, if State aid measures adopted under Article 346(1)(b) of the Treaty seem “to be a source of distortion of competition in the [internal] market, for example because it benefits activities connected to products which are on the Council’s list of 15 April 1958 but are capable of being put to civilian use as well (products called mixed use [products]) or products covered by the said list but intended for export, it therefore follows from the first paragraph of Article [348 TFEU] that, by derogation from the usual procedure for examination of State aid laid down by Article [108 TFEU], the Commission undertakes with the Member State concerned a bilateral examination of the measure in question.” 533

2.32

The judgment seems to introduce a distinction between the production of or trade in arms, munitions and war materials which is necessary for the protection of the essential interests of a Member State’s security and production or trade which is destined for export.

2.33

A key question is whether spill-over effects into markets for military products should also be looked into, as is done in the field of mergers. In Fiocchi Munizioni the General Court appears to have endorsed such an approach, which seems to imply that the Commission can examine under Articles 346 and 348(1) not only spill-over effects on dual use products, but also effects on military products for which a derogation cannot be justified as necessary for the protection of the essential interests of a Member State’s security such as products intended for exports.

2.34

In Case T-391/08534, the General Court was asked to review certain aspects of the Hellenic Shipyard decision. The General Court confirmed that a distinction can be made between relying on Article 346 at the stage of the examination of the measures and relying on that provision at the stage of recovery,535 with reference to the IZAR decision. The General Court held that a Member State cannot invoke Article 346 of the Treaty to justify aid intended for civil production at the stage of the examination of the measure. Therefore, the Commission was entitled to find that aid for civil production is incompatible and to order its recovery. The General Court seems to accept, however, that in such a situation Article 346 of the Treaty could be invoked at the stage of recovery. The overall result would therefore be that if recovery of aid for civil production would lead to a company’s bankruptcy, the Member State concerned could then rely 533 534 535

Case T-26/01 Fiocchi Munizioni v Commission EU:T:2003:248, para 63 Case T-391/08 Ellinika Nafpigeia v Commission ECLI:EU:T:2012:126. There was related litigation in Case T-384/08 Elliniki Nafpigokataskevastiki and others v Commission EU:T:2011:650. Case T-391/08, para. 42.

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on Article 346 of the Treaty to prevent recovery, provided it can show that the company’s survival is necessary to ensure the protection of the essential interests of its security.

3.

Interaction with other Treaty Provisions

The Commission cannot authorise aid that may contravene other Treaty provisions if the following criteria are met536: –

There is an indissoluble link between the object of the aid and the breach of other Treaty provisions;

–

It constitutes a breach of Union law.

2.35

Furthermore, in its assessment the Commission cannot take into account the breach as such, but only whether it adds to the distortion of competition and trade caused by the aid.

2.36

The issue arose in RJB Mining,537 where the General Court found that the Commission had a duty to take into account alleged State aid granted to merging parties in the context of a merger review. Consistency with Articles 101 and 102 of the Treaty was also raised in the CELF saga538 and was one of the elements invoked by the General Court when it ruled that the Commission should have opened the formal investigation procedure.

2.37

4.

Territorial scope

Article 52 of the Treaty on the European Union in conjunction with Article 355 of the Treaty establishes the territorial scope of application of the Treaties.539

2.38

Pursuant to Article 355(1) of the Treaty, the provisions of the Treaties (including on State aid control) apply to the French overseas departments (French Guyana, Guadeloupe, Martinique, Mayotte, and Réunion), Saint-Barthélemy, Saint

2.39

536

537 538 539

Case 74/76 Iannelli & Volpi EU:C:1977:51, para 14; Case C-225/91 Matra v Commission EU:C:1993:239, paras. 41-45; Case C-156/98 Germany v Commission EU:C:2000:467, paras 78, 85-86; Joined Cases T-197 and 198/97 Weyl Beef Products and others v Commission EU:T:2001:28, paras 75-77; C-159/01 Netherlands v Commission (“MINAS”) EU:C:2004:246, paras 59-61. Case T-156/98 RJB Mining v Commission EU:T:2001:29, paras. 112ff Case T-49/93 SIDE v Commission EU:T:1995:166, para. 72. More generally on the territorial application, see Kochenov, “The application of EU law in the EU’s overseas regions, countries, and territories after the entry into force of the Treaty of Lisbon” in Michigan State International Law Review, 2012, p. 669.

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Martin, the Azores, Madeira and the Canary Islands. Nevertheless, Article 349 of the Treaty requires that the specific characteristics of those so-called outermost regions must be taken into account.540

2.40

The Treaty and its secondary legislation do not automatically apply to the overseas countries and territories (“OCT”) listed in Annex II to the Treaties (among others, Greenland, French Polynesia, the Dutch Antilles), with the exception of a number of provisions which explicitly provide for the contrary. Although not third countries, the OCTs do not form part of the internal market and must comply with the obligations imposed on third countries in respect of trade. Those OCTs are dependent territories that have a special relationship with one of the Member States. The relationship with the Union is governed by Part Four of the Treaty (Articles 198-204), which provides for the possibility to conclude an association agreement.541 Part Four lays down the objectives of the association (Article 198), the levying of customs duties (Articles 200 – 201), freedom of movement for workers (Article 202), the right of the Council to lay down provisions as regards the detailed rules and the procedure for the association (Article 203) as well as the status of Greenland (Article 204).

2.41

In addition, the Treaties do not apply to the Faeroe Islands (Article 355(5)(a) of the Treaty). The Channel Islands ( Jersey and Guernsey) and the Isle of Man take part in the free movement of goods, but not the other freedoms (Article 355(5)(c) of the Treaty).

2.42

For the latter two groups (OCTs and Faroe Islands, Channel Islands, Isle of Man), State aid control rules do not apply as such.

2.43

That was clearly one of the considerations which played in the assessment by the General Court in Le Levant: 542 115. First, regarding the condition in Article [107(1) of the Treaty] relating to trade between Member States being affected, it is apparent from the contested decision that the aid in question concerns the operation of a vessel intended for operation in Saint-Pierre-et-Miquelon (title and recital 5).

540 541

542

See Rojo De La Viesca and Lemoigne, “EU competition policy and aid for the outermost regions” in Competition Policy Newsletter, 2008 No. 1, p. 18. Council Decision 2013/755/EU of 25 November 2013 on the association of the overseas countries and territories with the European Union, OJ L 344, 19.12.2013, p. 1; Article 60 contains language on competition policies but it does not cover State aid control. T-34/02 Le Levant 001 and others v Commission ECLI:EU:T:2006:59.

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116. It must be borne in mind that the islands of Saint-Pierre-et-Miquelon constitute a French administrative area situated in the north Atlantic off the coast of Newfoundland. It is one of the ‘overseas countries and territories’ (OCTs) which are not part of the territory of the Community. 117. In not offering any explanation on this point, the contested decision does not explain how the aid granted in the context of the Le Levant operation is likely to affect trade between Member States as contemplated in Article [107(1) of the Treaty]. On the other hand, being a beneficiary situated in the OCTs, Faroe Islands, Channel Islands or the Isle of Man would not necessarily be sufficient to escape entirely the application of State aid control rules as can be seen e.g. in the Commission decision on Eik Banki.543 Eik Banki P/F was a Danish bank based in the Faroe Islands, with a subsidiary, Eik Bank Danmark A/S, based in Copenhagen. The Commission concluded in that respect: “Given that Eik Banki P/F and Eik Bank Danmark A/S were both active in the financial sector, which is open to intense international competition, any advantage from State resources would have the potential to affect intra-Union trade and to distort competition. Although it is located in the Faroe Islands, which are not part of the Union, Eik Banki P/F has activities within the Union through its subsidiary Eik Bank Danmark A/S and competes with Union financial institutions on the Faroe Islands banking market. Therefore, the measures granted to the whole Eik bank group have the potential to affect intra-Union trade and distort competition.”

2.44

Outside of the specific cases of the OCTs, Faroe Islands, Channel Islands and the Isle of Man, State aid rules have been applied to other territories with special status, e.g. in the case of Gibraltar,544 Aland Islands545 or the French overseas departments.546

2.45

Finally, it should be noted that the Port of Trieste also has a special status as special zone by virtue of a pre-existing international treaty, the Paris Peace Treaty of 1947, which granted the Free Port of Trieste independence in customs, tax, commercial and industrial issues.547

2.46

543 544 545 546 547

SA.31945 Denmark - Rescue of EIK Bank, OJ C 274, 17.09.2011, p. 3. T-195/01 Government of Gibraltar v Commission ECLI:EU:T:2002:111, para. 12. Commission Decision in C55/2001, Finland - Aland Island - Captive insurance, OJ L 329, 05.12.2002, p. 22. Commission Decision in N236/2002 France - Fonds régionaux de participation – DOM, OJ C 175, 24.07.2003, p. 8. For details, see http://www.porto.trieste.it/eng/port/free-port.

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PART 2 – The concept of State aid Chapter 8 – Notion of undertaking Koen Van de Casteele

Chapter 8 Notion of undertaking

1.

Concept of undertaking

Based on Article 107(1) of the Treaty, the State aid rules only apply where the recipient of an aid is an “undertaking”. The concept of undertaking is not defined in the Treaty and had therefore to be established by the Union Courts.

2.47

The general approach of the Union Courts is functional in the sense that it focuses on the nature of the activity performed and not on the actors. The only question is whether the entity is engaged in an economic activity. The reason for that functional interpretation is that the scope of application of the competition rules cannot depend on national legal classifications/funding arrangements, but only whether the entity is capable of engaging in actions the effects of which the Treaty tries to prevent.

2.48

2.

Legal status

The Court of Justice held on a consistent basis that the concept comprises “any entity engaged in an economic activity, irrespective of its legal status and the way in which it is financed.” 548 Economic activity is defined as offering goods and services in the market.549

548 549

2.49

Case C-41/90 Höfner and Elser v Macrotron EU:C:1991:161, para 21. Case 118/85 Commission v Italy EU:C:1987:283, para 7; Case C-35/96 Commission v Italy EU:C:1998: 303, para 36; and Joined Cases C-180/98 to C-184/98 Pavlov and others EU:C:2000:428, para 74.

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2.50

The question whether a market exists for certain services may depend on the way those services are organised in the Member State concerned550 and may thus vary from one Member State to another. Moreover, due to political choice or economic developments, the classification of a given activity can change over time. What is not an economic activity today may turn into one in the future, and vice versa.

2.51

It also follows that the legal status of the entity is not relevant, e.g. entities which according to national law constitute non-profit associations can nevertheless constitute an undertaking within the meaning of Article 107 of the Treaty.551

2.52

Furthermore, the fact that certain activities are generally reserved to public actors has no impact. One has to look at the concrete activities: “[…] employment procurement is an economic activity. The fact that employment procurement activities are normally entrusted to public agencies cannot affect the economic nature of such activities. Employment procurement has not always been, and is not necessarily, carried out by public entities. That finding applies in particular to executive recruitment”.552

2.53

Members of the liberal professions, insofar as they are not employees, are engaged in an economic activity because they provide services against remuneration on markets.553 Neither the fact that the activity is intellectual,554 requires authorisation or is otherwise regulated,555 nor the complexity and technical nature of the services provided, can alter that conclusion.

2.54

Entities which offer goods for free may nevertheless be considered as undertakings engaged in economic activities.556

2.55

An entity can also be engaged in non-profit activities where it behaves like a charity fund and at the same time competes with other operators for another part of its activity by performing financial or real estate operations.557 The clas550 551 552 553 554 555 556 557

Joined Cases C-159/91 and C-160/91 Poucet and Pistre v AGF and Cancava EU:C:1993:63, paras 16 to 20. Case C-244/94 FFSA and others v Ministère de l’Agriculture et de la Pêche EU:C:1995:392, para 21; Case C-67/96 Albany EU:C:1999:430. Case C 41/90 Höfner and Elser v Macrotron EU:C:1991:161, paras 21 and 22. Case C-309/99 Wouters and others EU:C:2002:98, para 48. Case C-35/96 Commission v Italy EU:C:1998:303, para 38. Joined Cases C-180/98 to C-184/98 Pavlov and others EU:C:2000:428, para 77; Case C-309/99 Wouters and others C:2002:98, para 49. See recital 19 of Commission decision N 37/2003 of 1.10.2003, UK – BBC digital curriculum, OJ C 271, 12.11.2003, p. 47. See Commission Decision N 560/2001 of 9.4.2002, UK - national heritage fund for Brighton West Pier

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sification of an entity as an undertaking is always relative to a specific activity. An entity that carries out both economic and non-economic activities is to be regarded as an undertaking only with regard to the former. Nevertheless, based on its existing decisional practice, the Commission has confirmed in the new Framework for State aid for research and development and innovation558 with regard to research infrastructure, that certain activities may be of an ancillary economic nature only (in the context of research assumed to be maximum 20 per cent of the entity’s overall annual capacity) compared to the largely non-economic activities of the infrastructure, and hence fall outside State aid rules. One can assume that the Commission would take a similar view outside the specific area of research infrastructure.

2.56

That approach seems somewhat at odds with a judgment of the General Court559 regarding German nature conservation organisations. Although nature conservancy is considered to be equivalent to the exercise of powers of public authority and hence non-economic, the nature conservation organisations also perform ‘ancillary activities’, such as the sale of timber plus the granting of hunting and fishing rights and tourism. The General Court looked into whether those ancillary activities are connected with nature conservation. The ancillary activities are intended as sources of income to enable nature conservation. Nevertheless, the General Court established that nature conservation does not make the performance of ancillary activities necessary or obligatory. Consequently, the General Court came to the conclusion that the nature conservation organisations must be considered to be undertakings in respect of their ancillary activities.

2.57

It is submitted that this apparent contradiction can be explained by the openended nature of the ancillary activities in the German nature conservation case. The main (or at least the first) consideration put forward by the General Court is the fact that the ancillary activities were not circumscribed precisely,560 meaning that their ancillary character was in no way guaranteed.

2.58

558 559 560

Trust, OJ C 239, 04.10.2002, p. 3. OJ C 198, 27.06.2014, p. 1, see point 20. Case T-347/09 Germany v Commission ECLI:EU:T:2013:418. Case T-347/09 Germany v Commission ECLI:EU:T:2013:418, paras 35 and 36 (English text not yet available – emphasis added): “ il convient de relever que les lignes directrices ont été formulées de manière très large. …. Ainsi que le fait valoir la Commission au point 25 de la décision attaquée, les organisations de protection de l’environnement peuvent générer des recettes « notamment, mais pas exclusivement » par les activités secondaires qui y sont énumérées. Il s’agit donc d’une liste non-exhaustive, ce qui est confirmé par la République fédérale d’Allemagne, qui constate dans ses écritures qu’ « [i]l n’est pas exclu que, dans une faible mesure, l’utilisation des terrains du patrimoine naturel procure encore d’autres sources de recettes»”.

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3.

Social objectives and solidarity principle

2.59

The existence of social objectives will not as such deprive an activity of its economic character. For example, the competition rules apply to postal service providers and public television broadcasters.

2.60

Medical aid organisations, providing emergency transport and ambulance services, have also been considered as undertakings irrespective of their status. The Court concluded in Ambulanz Glöckner561 that the medical aid organisations providing emergency and patient transport services were involved in an economic activity because “such activities have not always, and are not necessarily, carried out by such organisations or by public authorities”. In fact, Ambulanz Glöckner, a private undertaking, had itself previously provided both types of service after which it started the proceedings because the State refused to renew its authorization.

2.61

Bodies managing social security schemes, that have social objectives, also may be still be engaged in an economic activity562. However, if activities are dominated by the solidarity principle they are considered to be of a non-economic nature.563 Here the State is assumed to carry out activities that the market could not provide.564

2.62

The dividing line may nevertheless not always be clear-cut. Of particular interest is the comprehensive list of criteria that the Commission put forward in the opening of the formal investigation procedure in SA.23008 and SA.33363 where it examined alleged aid to SZP and VZP, two State-owned health insurers.

561 562 563

564

Case C-475/99 Ambulanz Glöckner EU:C:2001:577, para 20. Case C-67/96 Albany EU:C:1999:430, paras 71 to 87. See in particular Joined Cases C-264/01, C-306/01, C-354/01 and C-355/01 AOK-Bundesverband and others EU:C:2004:150, para 47, and Joined Cases C-159/91 and C-160/91 Poucet and Pistre v AGF and Cancava EU:C:1993:63, paras 15 and 18. Communication from the Commission, Report on competition in professional services, 9.2.2004, COM(2004)83 final, para 67.

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PART 2 – The concept of State aid Chapter 8 – Notion of undertaking Koen Van de Casteele Elements possibly pointing to economic nature of the activity

Elements possibly pointing to non-economic nature of the activity

–

–

–

–

–

Presence of several private insurers on the Slovak market competing for the same insured and healthcare providers. All insurers (private and State-owned) are organised as private law joint stock companies functioning under Commercial code rules which allows for profit distribution among shareholders. Competition between insurers on quality, variety and accessibility of services in order to attract insured: • insurers offer additional entitlements/ benefits free of charge under the compulsory health insurance scheme; • insurers compete for healthcare providers through selective contracting and negotiations on price & quality of services, aiming to improve their individual offer of services to insured; • additional customer services offered to insured. Activity already declared/considered open to competition by national courts. The Slovak Constitutional Court stated that compulsory health insurance has been “included in the realm of competition”

–

–

–

Social objective (though not exclusive: also economic objective, since the activity is for-profit). Solidarity: • compulsory enrolment; • all Slovak citizens are guaranteed the same minimum level of benefits (“solidarity package”); Constitutional entitlement to free health care and right to health insurance • contributions are unrelated to benefits on an individual level, as contributions are fixed by law (no competition on prices); • there is risk-solidarity among insurers: RES and community rating564 (however such risk-solidarity is also frequent in voluntary health insurance which is essentially economic in nature). Restrictive regulatory framework, subject to supervision by the State: status, rights and obligations of all health insurance companies are established by law. However, the degree of this supervision is lessened by the fact that companies legally operate under private commercial rules.

In the final decision565,566 the Commission concluded that on balance, given all of the social and solidarity characteristics, as well as the strong regulatory framework, the Slovak compulsory health insurance system is non-economic in nature, so that SZP/VZP cannot be considered to qualify as an “undertaking” within the meaning of Article 107(1) of the Treaty.

565

566

2.63

2.64

Community rating as a basis for premium calculation requires insurers to offer health insurance policies within a given territory at the same price to all persons without medical underwriting, regardless of their health status. Thus, insurers may not calculate premiums on the basis of the risk factors attaching to the particular person wishing to purchase an insurance contract, but rather the risk factors applying to all persons within the market as a whole (insurers evaluate risk factors of market population, and not those of any one person when calculating premiums). SA.23008 Alleged State aid to SZP and VZP (Slovak health insurance), OJ L 41, 17.02.2015, p. 25.

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4. 2.65

Generally speaking, unless the Member State concerned has decided to introduce market mechanisms, activities that intrinsically form part of the prerogatives of official authority and are performed by the State do not constitute economic activities. Examples are activities related to: (a) (b) (c) (d) (e) (f ) (g)

2.66

Exercise of public authority

the army or the police567; air navigation safety and control568; maritime traffic control and safety569; anti-pollution surveillance570; the organisation, financing and enforcement of prison sentences571; the collection of data of companies for public purposes imposed by law572; dredging.573

A private company that had been entrusted by a Member State with the task of anti-pollution surveillance was considered to be not engaged in an economic activity.574

567 568

569 570 571 572 573

574

Commission Decision of 7 December 2011 on State aid SA.32820 (2011/NN) – United Kingdom –Aid to Forensic Science Services, OJ C 29, 02.02.2012, p. 4, recital 8. Case C-364/92 SAT Fluggesellschaft v Eurocontrol EU:C:1994:7, para 27; Case C-113/07 P Selex Sistemi Integrati v Commission EU:C:2009:191, paragraph 71. Guidelines on State aid to airports and airlines, OJ C 99, 04.04.2014, p. 3, paras 35 to 37 Commission Decision of 16 October 2002 on State aid N 438/02 — Belgium — Aid to port authorities, OJ C 284, 21.11.2002, p. 2. Case C-343/95 Cali & Figli v Servizi Ecologici Porto di Genova EU:C:1997:160, para 22. Commission Decision of 19 July 2006 on State aid N 140/06 — Lithuania — Allotment of subsidies to the State Enterprises at the Correction Houses, OJ C 244, 11.10.2006, p. 12. Case C-138/11 Compass- Datenbank EU:C:2012:449, para 40. Dredging constitutes an example of an activity which may – depending on the way services are organised in Member States – be economic or non-economic. In the Commission Decision of 27.03.2014 on the Port of Salerno (SA.38302), OJ C 156, 23.05.2014, p. 10, recital 35, the investments for dredging and the extension of the port entry were considered as an economic activity since they were directly related to the development of the dock, which was commercially exploited, and because not all the operators in the port would have benefitted from them. On the other hand, in the Commission Decision of 11.03.2014 on the Liverpool City Council Cruise Liner Terminal (SA.35720), OJ C 120, 23.04.2014, p. 4, recitals 56 to 58, the Commission concluded that the dredging in question was to be regarded as “public works in the general interest”, since it was not solely related to the construction and operation of the terminal, but was funded by the authorities to improve access to the river, thus benefitting indistinctly all the operators located in the estuary and along a further inland waterway. Case C-343/95 Cali & Figli v Servizi ecologici porto di Genova EU:C:1997:160, paras 22 to 25.

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In 2001, the Commission decided that youth training centres managed by professional football clubs did not constitute an economic activity.575 The Commission considered that the provision of sport training to young people falls within schooling. Schooling is within the core tasks of the State and does not represent an economic activity. Even if the activity is entrusted to a private commercial operator (the club), the latter, with respect to the specific task of educating young people, is not to be regarded as an undertaking. Therefore the subsidies were not considered to be State aid.

2.67

The Commission has taken a similar approach regarding aid to cover part of the wage costs of prisoners as part of a measure aimed at giving incarcerated people the possibility to work and getting work experience in the State enterprises at correction houses.576 The Commission found that the organization, financing and enforcement of correctional measures in order to ensure the enforcement of the penal system came under the prerogative of the State. The employment of the prisoners by the State enterprises cannot be separated from the activities of the correction houses. Due to that inseparable link, the State enterprises are part of the system of correction houses which is an exclusive prerogative of the State. The activity of making products or providing services is therefore an ancillary activity to rehabilitation efforts, which cannot be separated from the correctional system. Hence, the Commission concluded that the measure fell outside the scope of State aid rules.

2.68

In so far as a public entity exercises an economic activity which can be separated from the exercise of public powers, that entity, in relation to that activity, acts as an undertaking. On the contrary, if that economic activity cannot be separated from the exercise of public powers, the activities exercised by that entity as a whole remain connected with the exercise of those public powers and therefore fall outside the notion of undertaking.577

2.69

575 576 577

Commission decision of 25.4.2001, N 118/2000, France - Aide aux clubs sportifs professionnels, OJ C 333, 28.11.2001, p. 6. Commission decision of 19.7.2006, N 140/2006, Lithuania - Allotment of Subsidies to the State Enterprises at the Correction Houses, OJ C 244, 11.10.2006, p. 12. Case C-138/11 Compass-Datenbank ECLI:EU:C:2012:449, para 38, and Case C-113/07 P Selex Sistemi Integrati v Commission EU:C:2009:191, paras 72 et seq.

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5.

Purchasing activities and other market activities

2.70

In Selex578 as regards the activities of Eurocontrol, the General Court found that the purchase of goods cannot be dissociated from the subsequent use to which the goods are put.

2.71

That approach was confirmed in FENIN,579 which concerned the application of Union competition rules to public bodies entrusted with the task of managing the Spanish social security system. Since it is the activity consisting in offering goods and services on a given market that is the characteristic feature of an economic activity, the General Court ruled that there is no need to dissociate the activity of purchasing goods from the subsequent use to which they are put in order to determine the nature of that purchasing activity, and that the nature of the purchasing activity must be determined according to whether or not the subsequent use of the purchased goods amounts to an economic activity. The judgment was upheld on appeal.

2.72

The mere fact of holding shares, even controlling shareholdings, is insufficient to characterise as economic an activity of the entity holding those shares, when it gives rise only to the exercise of the rights attached to the status of shareholder or member, as well as, if appropriate, the receipt of dividends, which are merely the fruits of the ownership of an asset. This is different where an entity which, owning controlling shareholdings in a company, actually exercises that control by involving itself directly or indirectly in the management thereof. In such circumstances it must be regarded as taking part in the economic activity carried on by the controlled undertaking.580

6. 2.73

Infrastructure funding

The 2013 ruling by the Court in Leipzig-Halle created quite some controversy. Many considered non-dedicated infrastructure to be outside the economic sphere. The Union Courts have clarified that infrastructure cannot be seen independently from the wider economic activities which they serve. An airport is an economic activity,581 hence the construction of a landing strip cannot be seen in isolation. The construction of infrastructure with a view to its subsequent commercial use, is an economic activity. If public support is provided, that will 578 579 580 581

Case T-155/04 SELEX Sistemi Integrati SpA v Commission EU:T:2006:387 Case C-205/03 P FENIN v Commission EU:C:2006:453. Case C-222/04 Cassa di Risparmio di Firenze and others EU:C:2006:8, paras 111 and 112. Case C-82/01 P Aéroports de Paris v Commission EU:C:2002:617.

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normally be aid to the owner or operator (often the same entity which both owns and operates the infrastructure). Although that principle is relatively easy to apply to most infrastructure (e.g. airports, ports, sport infrastructure), there are still some activities where such an analysis may be less clear-cut. Arguably, a road or bridge funded by public authorities for which a EUR 1 toll charge would be levied does not suddenly turn into an economic activity. On the other hand, where that levy becomes more of a price charged for a service/good provided, the activity becomes economic. In most cases, where a separate operator has been selected, one can assume that the charge will be more of a price for a service. Even in such cases, the State aid analysis may not always be straight-forward. Further guidance can be expected once the Commission adopts its notice on the notion of State aid.582

582

2.74

The draft text can be found here http://ec.europa.eu/competition/consultations/2014_state_aid_notion/ index_en.html

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PART 2 – The concept of State aid Chapter 9 – State resources and imputability Eduardo Cabrera Maqueda and Giuseppe Conte

Chapter 9 State resources and imputability583

1.

State origin of the measure

The granting of an advantage directly or indirectly through State resources and the imputability of such a measure to the State are close elements of the notion of State aid, as they both refer to the State origin of a given measure. For that reason, they have sometime been examined together by the Union Courts.584 However, their case law has clarified that those two elements constitute two separate and cumulative conditions for State aid to exist.585 They will therefore be examined separately below.

2.

State resources

The aid must be awarded by a Member State or through State resources.

583

Section 2 on State resources by Eduardo Cabrera Maqueda; Section 3 on imputability by Giuseppe Conte. This chapter draws from the first edition of this book. The authors would like to thank Koen Van de Casteele and Davide Grespan for being able to build on their work.

584

Before Case C-379/98 PreussenElektra EU:C:2001:160, it was not very clear that the imputability of a measure to a Member State and its financing through State resources are two separate and cumulative requirements for that measure to qualify as a State aid. Thus, in some older cases the Court examined those two aspects together: see for instance, Case 290/83 Commission v France EU:C:1985:37, para 15, and Case C-305/89 Italy v Commission (‘Alfa Romeo’) EU:C:1991:142, paras 13-16. But in some cases following PreussenElektra the Union Courts have also examined together the imputability of a measure to a Member State and its financing through State resources without clearly distinguishing these two requirements: see for instance Case T-139/09 France v Commission EU:T:2012:496, para 88. See for instance Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294, para 24.

585

2.75

2.76

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PART 2 – The concept of State aid Chapter 9 – State resources and imputability Eduardo Cabrera Maqueda and Giuseppe Conte

2.1 Notion of “Member State” 2.77

The notion of Member State is a wide one and includes all levels of public authorities, regardless of whether it is a national, regional or local authority.586

2.2 Notion of “State resources” 2.78

Despite the wording of Article 107(1) of the Treaty, the Union Courts have clarified that there is no need to differentiate between aid granted by a Member State or through State resources: “the prohibition contained in Article [107(1) of the Treaty] covers all aid granted by a Member State or through State resources without its being necessary to make a distinction whether the aid is granted directly by the State or by public or private bodies established or appointed by it to administer the aid”.587

2.79

According to the General Court in Air France, “Article [107(1) of the Treaty] and Article 61(1) of the EEA Agreement refer to aid granted by the States or through State resources ‘ in any form whatsoever’. Consequently, those provisions must be interpreted not on the basis of formal criteria but rather by reference to their purpose, which, according to Article 3(g) [EC], is to ensure that competition is not distorted. It follows that all subsidies from the public sector threatening the play of competition are caught by the abovementioned provisions, it being unnecessary for those subsidies to be granted by the government or by a central administrative authority of a Member State.” 588

2.80

The distinction serves to not only tackle direct forms of State aid, but also more indirect forms of aid. A typical example would be aid measures granted through public undertakings.589 In Stardust Marine590 the Court of Justice for the first time expressly stated that all the resources of public companies could constitute State resources within the meaning of Article 107(1) of the Treaty: 586 587 588 589

590

Case C-248/84 Germany v Commission EU:C:1987:437, para 17. Case 78/76 Steinike & Weinlig v Germany EU:C:1977:52 para 21; Case 290/83 Commission v France EU:C:1985:37, para 15. Case T-358/94 Air France v Commission, EU:T:1996:194, para 56. See Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings, as amended by Directive 93/84/EC of 30 September 1993, and by Directive 2000/52/EC of 26 July 2000, OJ L 193, 29.07.1980, p. 75, Article 2(a). The Directive defines a public undertaking as any undertaking over which the public authorities may exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation therein, or the rules which govern it . Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294, paras 37-39.

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“Article [107(1) of the Treaty] covers all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector. Therefore, even if the sums corresponding to the measure in question are not permanently held by the Treasury, the fact that they constantly remain under public control, and therefore available to the competent national authorities, is sufficient for them to be categorised as State resources. […] The State is perfectly capable, by exercising its dominant influence over such undertakings of directing the use of their resources in order, as occasion arise, to finance specific advantages in favour of other undertakings. […] the position of a public undertaking cannot be compared with that of a private undertaking. Through its public undertakings, the State may pursue objectives other than commercial ones […].” It follows that the term “State resources” also applies to funds that the State sets up by law to fulfil particular tasks. Even private funds over which the State acquires the faculty to decide on their use at some point in time are considered State resources for the purposes of Article 107(1) of the Treaty.591 For example, lottery proceeds (even if the operation is run by a private company), part of which are allocated by law to a fund, amount to “State resources”.592

2.81

Where public or private institutions are entrusted with the granting of State aid, there is however an issue of proof – can the behaviour of the institution be imputed to the State?

2.82

The case law has confirmed that the assessment of the imputability to the State is separate from the question whether aid was granted through State resources. They are separate and cumulative conditions.593

2.83

The Stardust Marine judgment and its implications are discussed in more detail in section 3.3 below.

2.84

591 592

593

Case C-83/98 P France v Ladbroke Racing Ltd and Commission EU:C:2000:248, para 50. See Commission Decision of 9.4.2002 in cases N 560/01 and NN 17/02, UK, Brighton West Pier, OJ C 239, 04.10.2002, p. 2 and Commission Decision of 27.5.2003 in case NN 11/2002, UK, National Heritage Memorial Fund, OJ C 187, 07.09.2003, p. 9. Case C-482/99 France v Commission (Stardust Marine) EU:C:2002:294, para 24; Case T-351/02 Deutsche Bahn v Commission, EU:T:2006:104, para 103.

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2.3 No State resources 2.85

State aid rules do not apply when there is no transfer of State resources, as is clear from van Tiggele.594 That case related to criminal proceedings instituted against a seller who was accused of selling alcoholic beverages at prices below the minimum prices fixed by a product board. The Court of Justice decided that the fixing of minimum retail prices with the objective of favouring distributors at the exclusive expense of consumers did not constitute State aid, since the advantage which this minimum price entailed for the distributors was not granted, directly or indirectly, through State resources.

2.86

A related situation arises where a Member State refrains from enforcing legislation on undertakings. The Commission decided that a failure by the Spanish authorities to enforce environmental regulations did not in itself constitute State aid within the meaning of Article 107(1) of the Treaty since it did not involve any transfer of State resources.595

2.87

In Sloman Neptun,596 the Court also had to consider the issue of State resources. The shipping company Sloman Neptun registered a vessel in the German international shipping register. Ships inscribed in that register sailed under German flag, but the employment contracts with the crew were not subject to German law if they had no fixed address in Germany. As a result, the pay of the crew with no fixed address in Germany was lower than that of their German counterparts. With a view to engaging several Filipino seafarers, Sloman Neptun sought the agreement of the Seebetriebsrat (Seafarers’ Committee), who refused to give its consent. In the proceedings instituted before the Labour Tribunal of Bremen, the Seebetriebsrat submitted that the arrangements resulting from registration in the German international shipping register constituted State aid. The main advantage for the ship owners was the low wage costs, while at the same time there was a corresponding loss of social security contributions and tax revenues for the State.

2.88

Advocate General Darmon pleaded for a broad interpretation of the notion of State resources:

594 595 596

Case 82/77 Van Tiggele EU:C:1978:10, paras 23-25. Commission Decision 99/395/EC of 28 October 1998 on State aid implemented by Spain in favour of SNIACE SA, mentioned in Twenty seventh Report on Competition Policy (1997), point 224. Joined Cases C-72/91 and C-73/91 Sloman Neptun v Bodo Ziesemer EU:C:1993:97.

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“The “public” nature of the aid which is implicit in Article [107(1) of the Treaty] relates more to the authority which adopted the measure - the State and its agencies - thereby disrupting normal market conditions, than to the body or the person financing the aid. The revenue of the State is provided by private individuals, through direct or indirect taxation and, ultimately, whatever the nature and the number of intermediate entities, the financing of the aid is to a greater or lesser extent borne in any event by individuals and traders. […] There is no special need, therefore, to take account of the origin of the funds. Where an undertaking is favoured, as a result of a derogation arising from specific conduct by the State, regardless of the origin of the financing, the conditions of competition are affected and Articles [107] and [108] of the Treaty must then be applied.” 597

2.89

The Court did not follow the Advocate General. In its ruling, it referred to van Tiggele and noted that advantages granted from resources other than those of the State do not fall within the scope of the provisions on State aid. As a result, it was necessary to determine whether or not the advantages for the ship owners were to be viewed as being granted through State resources. The Court concluded that the benefit to the ship owners, insofar as it concerned social security concessions and lower taxation, was inherent in the system and that the system did not seek to create an advantage which would constitute an additional burden for the State.598

2.90

The same line of reasoning was followed in Kirsammer-Hack.599 According to German law, an employee must be reinstated or offered compensation in case of unfair dismissal, except in the case of firms with no more than five employees. A German court asked the Court of Justice whether the exclusion of small businesses from the system of protection against unfair dismissal entailed State aid to those businesses. As in Sloman Neptun, the Advocate General sought a wider definition of State aid to encompass a consideration of the extent to which regulatory provisions enable firms to compete on equal terms. However, the Court, referring to Sloman Neptun, noted that the exclusion of a certain category of businesses from the system in question derived solely from the intention of the legislator to provide a specific legislative framework for small businesses and to avoid imposing on them financial constraints which might hinder their development. Therefore, no transfer of State resources to undertakings was involved.

2.91

597 598 599

Opinion of Advocate General Darmon in Joined Cases C-72/91 and C-73/91 Sloman Neptun v Bodo Ziesemer EU:C:1993:97, points 40-41. Joined Cases C-72/91 and C-73/91 Sloman Neptun v Bodo Ziesemer EU:C:1993:97, paras 21-22. Case C-189/91 Kirsammer-Hack v Sidal EU:C:1993:907, and Opinion of Advocate General Darmon in that case, EU:C:1992:458.

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2.92

Another example of that reasoning can be found in Viscido.600 At the time, under Italian law, employment under fixed-term contracts was permitted only in a number of specified exceptional cases. An Italian court asked the Court whether a national provision relieving Poste Italiane for a certain period of time from the generally applicable legislation to recruit staff under contracts of indeterminate duration constituted State aid. The Court decided that by doing so, the Italian legislation did not provide for any direct or indirect transfer of State resources to Poste Italiane. As Advocate General Jacobs had explained in his opinion by referring to Sloman Neptun, even if employment under fixed-term contracts could result in costs for the State in the form of lost tax revenue or unemployment benefits, such costs “are inherent in the system and are not a means of granting a particular advantage” to Poste Italiane.

2.93

Ecotrade601 stands in the same line as Sloman Neptun. In that case, the Court was basically inquired whether State aid could be granted to a specific undertaking by applying to it the system of special administration, i.e. a derogation from the ordinary Italian laws relating to insolvency. The Court came to view that “the possible loss of tax revenue for the State as a result of the application of the system of special administration […] did not in itself justify treating that system as aid. That consequence is an inherent feature of any statutory system laying down a framework for relations between an insolvent undertaking and the general body of creditors, and the existence of an additional financial burden borne directly or indirectly by the public authorities as a means of granting a particular advantage to the undertakings concerned may not automatically be inferred therefrom.” Notwithstanding that observation, the Court went on to examine the specific features of the system (in particular the fact that the State or public bodies were among the principal creditors of the undertakings concerned, which could involve an additional burden for the public authorities) and concluded that the system of special administration entailed aid.

2.94

The landmark judgment in PreussenElektra602 deserves a detailed analysis. The case involved a German law requiring electricity distributors to purchase at fixed minimum prices electricity produced from renewable energy sources. At the same time, upstream suppliers of electricity from conventional sources were obliged to partially compensate the distributors for the additional costs caused by that purchase obligation. The Court was requested to give a preliminary ruling on whether such system would entail State aid. 600 601 602

Joined Cases C-52/97, C-53/97 and C-54/97 Viscido and others v Ente Poste Italiane EU:C:1998:209. Case C-200/97 Ecotrade v Altiforni e Ferriere di Servola EU:C:1998:579. Case C-379/98 PreussenElektra EU:C:2001:160.

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The Court ruled that the measure entailed an advantage for the producers of electricity from renewable sources as they could sell their production at prices higher than would otherwise be the case. However, for a measure to rank as State aid, it was not enough that there was an advantage. The advantage had to be provided directly or indirectly through State resources:

2.95

“[…] the fact that the purchase obligation is imposed by statute and confers an undeniable advantage on certain undertakings is not capable of conferring upon it the character of State aid within the meaning of Article [107(1) of the Treaty].

2.96

That conclusion cannot be undermined by the fact […] that the financial burden arising from the obligation to purchase at minimum prices is likely to have negative repercussions on the economic results of the undertakings subject to that obligation and therefore entail a diminution in tax receipts for the State. That consequence is an inherent feature of such a legislative provision and cannot be regarded as constituting a means of granting to producers of electricity from renewable energy sources a particular advantage at the expense of the State.”

2.97

A detailed read of PreussenElektra shows that the notion of control is key in deciding whether a given resource can be considered a State resource. Therefore, not only public funds can be State resources; also private funds can be considered State resources.603 What counts is whether the State controls those resources and influences their use. Advocate General Jacobs in his Opinion in Stardust Marine604 wrote that “State resources are not involved where the public authorities at no stage enjoy or acquire control over the funds which finance the economic advantage in issue”. In his Opinion in PreussenElektra, he noted that “the common denominator of all the relevant cases is however that in one way or another the State exercised control over the resources in question […] In the present case the sums to be transferred […] never are and never will be at the disposal of the German authorities. No public authority enjoys at any moment any rights with regard to those sums. In fact they never leave the private sphere”. In line with that reasoning, the Court concluded that the measure did not involve any direct or indirect transfer of State resources.

2.98

603

604

Case T-358/94 Air France v Commission EU:T:1996:194. The aid granted by the Caisse des Dépôts et Consignations (CDC) – a public body under the control and supervision of the State – was financed with voluntary deposits of private citizens, which they could withdraw at any time. That did not change the conclusion that they were State resources. Indeed, the CDC was able to use the funds from the balance as if they were permanently at its disposal. Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294.

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2.99

In the situation at issue in PreussenElektra the role of the State is rather limited. The State establishes a purchasing obligation, fixes a minimum price and allocates the financial burden resulting from that purchase obligation amongst private electricity suppliers and upstream private electricity network operators. The payments are made directly by private companies obliged to buy green electricity to private companies producing that electricity. There is no public body or fund that collects the payments in question and manages the resources with a view of implementing the policy determined by the State.605

2.100

PreussenElektra has been subject to much discussion, in particular because it seems to create a category of support measures which are not State aid (given that there is no transfer of State resources) but which have the same economic effects of State aid. In that respect, the Court had already stated that “[…] Articles [107] and [108] leave no scope for a parallel concept of “measures equivalent to aid” which are subject to different rules from those which apply to aid properly so-called.”606 That concept was explained in detail in a case concerning the German renewable energy law. The case relates to several complaints against two laws to support electricity from renewable energy sources and from combined heat-and-power production which oblige operators to connect “green” power generation installations to the electricity grid, to purchase as a priority green electricity and to pay a minimum price for green electricity above the market price. Those laws clearly gave an economic advantage to operators of “green” electricity installations and had the potential to distort competition in a liberalised electricity market. Even so, in view of PreussenElektra, the Commission decided that they did not fall under the definition of State aid under Article 107(1) of the Treaty.607 The Commission considered that since the obligations apply both to numerous private and some public net operators, the German laws could not be considered to involve any State subsidies. That conclusion seemed justified as the laws treat the public and private companies in exactly the same way, and as there is no indication that State resources are transferred via the public companies to the beneficiaries. 605

606 607

Likewise in Pearle, the Court of Justice emphasised the importance of the requirements of control by the public authorities of a given resource and the need of a link between the use of that resource and the implementation of a public policy. In that case the money spent by the fund for an advertising campaign was not considered as State resource because those resources were never made available to the national authorities. The levies imposed on members were earmarked for the financing of an advertising campaign decided by the private association of opticians for the collective benefit of its members without any cost for the State. Therefore, the public body was not implementing any public policy decided by the public authorities (Case C-345/02 Pearle and others EU:C:2004:448, paras 36-38). Case 290/83 Commission v France EU:C:1985:37, para 18. Commission Decision of 22.5.2002 in case NN 27/2000 Germany, renewable energy law, OJ C 164, 10.07.2002, p. 5.

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However, a measure which has the same negative effects on competition and intraUnion trade as aid financed through State resources is likely to infringe the rules on free movement, such as Article 34 of the Treaty.608 In PreussenElektra609 the Court held that “the purchase obligation imposed on electricity supply undertakings applies only to electricity produced from renewable energy sources within the scope of that statute and within the respective supply area of each undertaking concerned, and is therefore capable, at least potentially, of hindering intra-[Union] trade” and thus to constitute a measure having equivalent effect to quantitative restrictions on imports infringing Article 34 of the Treaty. However, taking into account the environmental protection objective of the provision in question, and, second, the particular features of the electricity market, it found that Article 34 of the Treaty had not been infringed given the state of the Union law at that time. Moreover, where special or exclusive rights610 are involved, Article 106(1) of the Treaty in conjunction with Article 102 of the Treaty or with internal market rules could be a further instrument to tackle the distortions of competition and trade where, due to the requirement of State resources, the State aid rules do not apply.611

2.101

Another question which is left open by PreussenElektra is what would have happened if in the same situation the undertakings charged with the obligation to purchase green electricity at minimum price had been public undertakings. As clarified in Stardust Marine612 resources of public undertakings are State resources. Apparently the Court itself attached importance to that circumstance in that it asked the German government to clarify the ownership structure of the undertakings required to purchase green electricity.613

2.102

At first sight the answer would seem to be that when the undertakings required to make the payments are public, the same measure examined in PreussenElektra would constitute State aid. Such reasoning would lead to odd results, since some producers of green electricity would receive aid while others would not, and could be regarded as discriminatory.614

2.103

608 609 610 611

612 613 614

Opinion of Advocate General Jacobs in Case C-379/98 PreussenElektra EU:C:2000:585, point 158. Case C-379/98 PreussenElektra EU:C:2001:160, paras 68-81. See section 2.7 below. Moreover, according to point 18 of the Opinion of Advocate General Jacobs in Case C-379/98 PreussenElektra EU:C:2000:585, “the danger of the Member States adopting on a large scale support measures for certain domestic undertakings which are financed through private resources, have the same anticompetitive effects as normal State aid and escape the Commission s control, should not be exaggerated. The undertakings required to finance such measures will use all legal and political means at their disposal to combat the measures in question”. Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294, paras 37-39. Case C-379/98 PreussenElektra EU:C:2001:160, paras 55-56. According to point 175 of the Opinion of Advocate General Jacobs in Case C-379/98 PreussenElektra

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2.104

Another possible answer could be to consider that if the majority or a significant proportion of undertakings required to purchase green electricity are public, then the scheme as a whole would be State aid. That solution raises some doubts too. It could create legal uncertainty because the State aid character of the measure would depend on the ownership structure of the undertaking concerned, which moreover could vary over time. Moreover, defining a threshold about the proportion of public undertakings involved could be arbitrary.615

2.105

The last possibility could be to consider such a measure in the light of the Sloman Neptun jurisprudence.616 Accordingly, a measure which confers an advantage on one group of undertakings at the expense of another, regardless of the ownership structure of the latter, would not be State aid even if that measure could potentially imply a diminution of resources of public undertakings. Such measure would not seek, through its object and general structure, to grant an advantage to certain undertakings through the use of resources held in public undertakings but rather to alter the market situation in favour of one group of undertakings. Any potential loss of State resources would be a consequence inherent to the system.617

2.106

In its decisional practice the Commission seems to follow the second option (i.e. to consider that if the majority or a significant proportion of undertakings required to purchase green electricity were public, the scheme as a whole would be State aid). Indeed, it appears that PreussenElektra relates more to the notion of “Member State” than to that of “State resources”.618 It is unclear whether the Court would have decided in the same way if all electricity supply undertakings had been in public hands and the Member State had decided to impose the purchase obligation by legislative means as opposed to using its control over those companies and their funds. The Commission in its decisional practice has applied that distinction.619 For instance, the Commission approved as compatible

615

616 617 618 619

EU:C:2000:585, that “would have absurd results in that a Member State would probably have to exempt the publicly owned undertakings from the obligations affecting the other undertakings in order to comply with the State aid rules. That would obviously distort competition between the different types of undertakings on the financing side of the measure”. Advocate General Jacobs rejects that solution when one or a small number of undertakings is partially or totally owned by the State. Opinion of Advocate General Jacobs in Case C-379/98 PreussenElektra EU:C:2000:585, point 175. Joined Cases C-72/91 and C-73/91 Sloman Neptun v Bodo Ziesemer EU:C:1993:97. Opinion of Advocate General Jacobs in Case C-379/98 PreussenElektra EU:C:2000:585, point175. In that sense, see also paragraph 3-017, p. 61, Hancher, Ottervanger and Slot (eds.) EU State Aids , Sweet & Maxwell, 2012. Commission Decision of 9.11.2005 in case N 602/2004, Denmark, Support to environmentally friendly electricity production, OJ C 21, 28.01.2006, p. 6.

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State aid support for the production of combined heat and power, of wind power and of certain other renewable energy in Denmark. The support consisted of price supplements fixed by law and paid by the system-responsible organisations to the producers. Before 2005, there was one public and one private systemresponsible organisation. The Commission found, on the basis of PreussenElektra, that there were no State resources at stake since the system involved both private and public bodies which were financing the support and the State made no distinction between the public and the private bodies. However, as of 1 January 2005, the system changed and there was only one, public, system-responsible organisation in Denmark. In such circumstances, the Commission decided that PreussenElektra could not be applied.

2.107

PreussenElektra has had some impact in the Commission’s practice, in particular for environmental cases. In Green electricity certificates Belgium,620 the Commission relied on PreussenElektra to declare that a measure whereby the distributors had to buy annually a certain quantity of green certificates did not involve State resources.621 Equally, the Commission decided that the issuing of certificates by State authorities in order to prove that the green electricity corresponds to the definition given in the law did not involve State resources.622

2.108

However, the Court has departed from the PreussenElektra line of reasoning in a number of recent judgments in the electricity sector, despite the similarities between the measures under assessment. Essent Netwerk623 was a preliminary ruling on the legality of a system to compensate Dutch electricity supply undertakings for stranded costs which as a consequence of the liberalisation could not be expected to be recovered in the liberalised electricity market. Under Dutch law, domestic purchasers of electricity were required during a transitional period to pay to their net operator a price surcharge on the amounts of electricity transmitted to them. The funds collected were paid by the net operator to a company designated by the legislature for the purpose of defraying non-market-compatible costs which had arisen as a result of obligations incurred, or investments made, by that company prior to the liberalisation of the electricity market. In

2.109

620 621

622 623

Commission Decision of 25.7.2001 in case N 550/2000, Belgium, Green electricity certificates. OJ C 330, 24.11.2001, p. 3. For the same line of reasoning, see Commission Decision of 28.11.2001 in case N 678/2001, the Netherlands, zero rate for green electricity, OJ C 30, 02.02.2002, p. 16, Commission Decision of 28.11.2001 in case NN 30/B/2000, the Netherlands, zero tariff for green electricity, OJ C 30, 02.02.2002, p. 16 and Commission Decision of 28.11.2001 in case N 504/2000, UK Renewables obligation and Capital Grants for Renewables Technologies, OJ C 30, 02.02.2002, p. 15. Commission Decision of 28.11.2001 in case NN 30/B/2000, the Netherlands, zero tariff for green electricity, OJ C 30, 02.02.2002, p. 16. Case C-206/06 Essent Netwerk Noord and others EU:C:2008:413.

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its judgment, the Court noted that the designated company was not entitled to use the proceeds from the charge. The Court moreover observed that that designated company “was at one and the same time the centralising body for the tax received, the manager of the monies collected and the recipient of part of those monies” but that the laws made it possible “to distinguish those different roles and to monitor the use of the monies”. The Court concluded that the funds remained under public control and therefore available to the national authorities, which is sufficient for it to be categorised as State resources.

2.110

The Court distinguished Essent Netwerk from PreussenElektra in that in the latter case, the undertakings had not been appointed by the State to manage a State resource, but were bound by an obligation to purchase by means of their own financial resources.

2.111

The Court continued to refine its post-PreussenElektra jurisprudence in Vent de Colère.624 That case concerns an incentive set up by France to promote the production of “green electricity” by imposing on electricity distributors an obligation to purchase that electricity from the producers at a rate decided by the State, often above market price. At the same time, the State set up a charge payable by the final consumers of electricity located in national territory in proportion to the quantity of electricity consumed, which fully offset the additional costs incurred by the distributors. The mechanism is the following: consumers pay those charges to distributors, which debit the amount of their own additional costs and channel the rest to the public body Caisse des dépôts et consignations (CDC). The CDC centralises the sums collected in a special account before paying them out to the operators concerned, thereby acting as an intermediary in the management of the funds.

2.112

The Court concluded that the offset mechanism constituted an intervention through State resources. It first recalled that Article 107(1) of the Treaty covers all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector. The Court then noted that the charge was imposed on final consumers through legislation and that it was subject to a penalty in case of non-payment. On that basis, the Court concluded that the fact that distributors retained the charges received from final consumers and that part of the funds were not channelled through the CDC is not sufficient to exclude there being an intervention through State resources.

624

Case C-262/12 Vent De Colère and others EU:C:2013:851.

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The Court then examined the role of the CDC and came to the view that it operates under a mandate from the French State and concluded that the sums managed by the CDC must be regarded as remaining under public control. In support of its conclusion, the Court observed that the French State was obliged by law to cover in full the obligation to purchase, thereby requiring the State to discharge past debts and to cover in full additional costs resulting from the purchase obligation should the sum of the charges collected from final consumers be insufficient to cover those additional costs.

2.113

As in Essent Netwerk, the Court also distinguished Vent de Colère from PreussenElektra in that in the latter the private undertakings had not been appointed by the Member State concerned to manage a State resource, but were bound by an obligation to purchase by means of their own financial resources, noting in addition that in Vent de Colère the State offered private operators the certitude that their additional costs would be covered in full.

2.114

As such, the level of intervention and control of the public authorities seems central in determining whether the resources at stake can be deemed State resources for the purposes of Article 107(1) of the Treaty. The Court has made that point very clear in AISCAT.625 The case concerns two alternative parallel toll roads, both owned by the Italian State: the privately-operated Tangenziale and the Passante. The latter is a motorway built by ANAS (the Italian public company managing the public road network on behalf of the State), whose exploitation was awarded to the public undertaking CAV, which is 50% owned by ANAS. The concession agreement provided that CAV would reimburse to ANAS all the expenses incurred for the construction of the Passante. In return, CAV was to receive the tolls of the Passante as well as the proceeds of a toll increase on the Tangenziale established by an inter-ministerial decision. The amounts resulting from the toll increase were collected from the users by the private concessionaires running the Tangenziale. Those amounts were then transferred to CAV either directly by the concessionaires or through the private company Telepass (in case of payment by tele-toll or prepaid card).

2.115

AISCAT, an association of motorway concessionaires in Italy, brought an action against a letter of the Commission rejecting their complaint concerning State aid to CAV. The Commission’s letter concluded that there were no State resources “since the toll was paid directly to CAV by the drivers on the Tangenziale”. The General Court was asked to decide whether the toll increase on the Tangenziale implied a transfer of State resources for the benefit of CAV. In its judgment, the

2.116

625

Case T-182/10 Aiscat v Commission EU:T:2013:9.

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General Court referred to PreussenElektra and Ladbroke Racing and concluded that in the case before it, “the sums corresponding to the result of the increase of the toll are paid directly to CAV [by] private companies. The sums in question therefore are transferred directly and exclusively between private companies, without any public body thereby acquiring, if only transiently, possession or control. Consequently, they are not State resources […]”. The General Court did not further elaborate its reasoning and on that basis rejected the annulment action.626

2.117

Cases such Essent Netwerk, Vent de Colère or AISCAT constitute examples of the inconsistency which exists in the case law, which often states the principle that one should not look at the objective of the measure but rather to its effect.627

2.118

On the other hand, the Commission has always given a narrow reading to PreussenElektra, as can be observed from a number of decisions like for instance the one in the §19 StromNEV case.628 That opening decision concerns network charges granted in Germany for large electricity consumers. Since 2011, large electricity consumers are exempted from paying network charges by means of law. Since 2012, that exemption is financed by the final electricity consumers who must pay a special levy, the so-called §19-surcharge. The Commission took the preliminary view that the §19-surcharge may constitute a State resource and also expressed doubts as to whether the exemption was financed from State resources in 2011 when the §19-surcharge was not yet levied.

2.119

Despite the similarities with PreussenElektra, the Commission assessed the different degree of State involvement in the case at stake and emphasized the similarities of the case with Essent Netwerk in order to conclude that State resources were present: “[…] the Commission observes that, as was the case in Essent, the State has imposed a special levy/surcharge on electricity consumers that is designed to finance the advantage. In addition, like in Essent, the State has appointed an undertaking to administer the charge. Also, like in Essent, the State has established rules governing the use and destination of the surcharge; In particular, the State has determined 626

627

628

It is however to be noted that that principle seems to be limited to a case of horizontal transfer of resources between two concessionaires entrusted with the concession of two roads, it being irrelevant that the transfer had been imposed by the State. See e.g. Case 173/73 Italy v Commission (‘Textile industry’) EU:C:1974:71, para 13; Case 310/85 Deufil v Commission EU:C:1987:96, para 9; Case C-241/94 France v Commission, EU:C:1996:353, paras 20-21; and Case T-106/95 FFSA v Commission EU:T:1997:23, para 139. Commission decision of 6.3.2013 opening the formal investigation procedure in case SA.34045 (2013/C) (ex 2012/NN) – Germany – Exemption from network charges for large electricity consumers (§19 StromNEV), OJ C 128, 04.05.2013, p. 43.

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what has to be done with any surcharge collected in excess of the amount necessary to finance the advantage. Finally, like in Essent, there are control mechanisms in place that allow the State to monitor the financial flows.”629

2.4 Costs to the State On the basis of PreussenElektra, it is sometimes argued that a cost to the Member State needs to be shown630 before State aid would be present. However, that statement must be nuanced.

2.120

That cost-approach is at odds with the line taken by the Commission (and endorsed by the Union Courts) in many areas. For example, the Commission uses a reference rate631 as a proxy for a market rate to determine whether or not an undertaking has received an advantage. The rate applied should normally be higher than the cost of borrowing to the State, so that there is no additional cost to the State where it grants financing to an undertaking at a cost higher than its own borrowing costs. Nevertheless, the Commission considers that there can be State aid if the interest paid by the undertaking remains below the reference rate (possibly adjusted to take account of specific risks of that undertaking). Other examples are State guarantees, where at most one could argue that there is a potential cost to State aid.632

2.121

629

630

631

632

See for instance Biondi, “State aid is falling down, falling down: An analysis of the case law on the notion of aid” (2013) 50 CMLRev 1719. Biondi concludes that one of the major flaws in adopting a restrictive reading of the State resources criteria is that the definition of aid cannot be made entirely dependent on the Member State s discretion as to what kind of level of regulation and what type of measure it intends to adopt. See point 116 of the Opinion of Advocate General Jacobs in Case C-379/98 PreussenElektra EU:C:2000: 585, “On the other hand, Article [107(1) of the Treaty] may be read as stating that aid must necessarily be financed through State resources and that the distinction between aid granted by a State and aid granted through State resources serves to bring within the definition of aid not only aid granted directly by the State, but also aid granted by public or private bodies designated or established by the State. Under that second narrower interpretation the measure at issue must necessarily cost the State money and financing through public resources as a constitutive element of the definition of State aid”. See also Slotboom, Subsidies in WTO law and in EC law , Journal of World Trade 2002, p. 517; and Luengo Hernandez de Madrid, Regulation of Subsidies and State Aids in WTO and EC Law, Kluwer 2007, p. 443. Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.01.2008, p. 6; 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 Treaty (chapter V – Interest rate for the recovery of unlawful aid), OJ L 140, 30.04.2004, p. 1; Commission notice on a technical adjustment to the reference and discount rates for Greece, OJ C 66, 01.03.2001, p. 7; Commission notice on technical adaptations to the method for setting the reference and discount rates, OJ C 241, 26.08.1999, p. 9; Commission notice on the method for setting the reference and discount rates, OJ C 273, 09.09.1997, p. 3; Commission letter to MS on reference/discount rates, 18.08.1997. Joined Cases T-204/97 and T-270/97 EPAC v Commission EU:T:2000:148.

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2.122

The argument was also used by the Commission in its decision in BerlinBrandenburg DVB-T,633 concerning the switch-over to digital terrestrial broadcasting. The regional media authority Medienanstalt Berlin-Brandenburg (“Mabb”) granted a financial contribution to commercial broadcasters towards their transmission costs in the DVB-T system. In the decision to initiate the formal investigation procedure, the Commission stated that advantages granted by a public or private body designated or established by the State fall within the scope of Article 107(1) of the Treaty. It maintained that Mabb should be considered a public body established or appointed by the State which performs a public task and that the advantages granted by that body should be considered State resources. Germany contested that finding replying that, for a measure to rank as State resources, it must constitute a burden for the State budget. Since the funding did not represent a financial burden for the budget of the Länder but was financed from the licence fee collected from TV viewers, the funding did not, in Germany’s opinion, constitute State resources.

2.123

The Commission rejected both arguments. In its view, the advantage provided by Mabb was granted indirectly through State resources – and was moreover imputable to the State – since it originated from Mabb’s budgetary resources. Irrespective of whether the licence fee, which provided Mabb’s budgetary resources, was to be regarded as forming part of State resources, these monies were to be considered State resources as of the moment they became part of Mabb’s budget. The fact that they were collected from private individuals does not contradict the finding that Mabb’s budget ranks as State resources. By analogy, tax revenues collected from private individuals become State resources once the taxes have been levied and collected by the State. Clearly, the costs incurred by Mabb in conferring the advantage constituted a burden for Mabb’s budget. It should be noted that the Commission had previously considered that license fees constituted State resources.634

2.124

The Union Courts have provided additional clarifications of that question of additional costs in the context of the Bouygues judgments.635 That litigation relates to a Commission decision of 2004 according to which a EUR 9 billion credit line 633

634

635

Commission Decision of 9.11.2005 in case C-25/2004, on the State Aid which the Federal Republic of Germany has implemented for the introduction of digital terrestrial television (DVB-T) in Berlin-Brandenburg, OJ L 200, 22.07.2006, p. 14, para 50 et seq. See Commission Decision of 22.5.2002 in case N 631/2001, UK, BBC license fee, OJ C 23, 30.01.2003, p. 6; Commission Decision of 01.10.2003 in case N 37/2003, UK, BBC Digital Curriculum, OJ C 271, 12.11.2003, p. 47. Joined Cases T-425/04, T-444/04, T-450/04 and T-456/04, France and others v Commission (‘Bouygues’), EU:T:2010:216; Case C-399/10 P Bouygues and Bouygues Télécom v Commission and others EU:C:2013:175.

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offered by the French authorities to France Télécom in December 2002, in the context of earlier declarations made by the French authorities that same year,636 constituted incompatible State aid which however did not have to be recovered. The General Court annulled the Commission’s decision, having first explained that for finding State aid, the Commission had to establish for each measure the presence of advantage, State resources and the link between these two elements. It then dismissed the global approach of the Commission to consider the credit line “in the context of the declarations made by the French authorities” and to base its finding for State aid on that link, as well as the Commission’s reasoning that the credit line was a “realisation of the earlier statements”. As regards State resources, the General Court ruled, by reference to inter alia to Sloman Neptun and PreussenElektra, as follows:

2.125

“It is apparent […] that the advantage identified […] must derive from a transfer of State resources. That requirement of a connection between the advantage identified and the commitment of State resources presupposes, in principle, that the advantage in question is closely linked to a corresponding charge included in the State budget or to the creation, on the basis of legally binding obligations entered into by the State, of a sufficiently real economic risk to that budget […]”. The General Court on that basis assessed the declarations of the French authorities and came to the view that these were too vague, conditional and revocable and could not be compared to a State guarantee. In those circumstances, it concluded that those declarations did not involve any commitment of State resources.

2.126

The Court set aside the General Court’s judgment and observed that several consecutive measures of State intervention can, for the purposes of Article 107(1) of the Treaty, be regarded as a single intervention. Therefore, the General Court had erred in law by requiring for each State intervention a close connection between the advantage and the commitment of State resources. In addition, the Court of Justice observed that:

2.127

636

Commission Decision of 2.8.2004 on the sate aid implemented by France for France Télécom, OJ L 257, 20.9.2006, p. 11. See recital 36 of the decision: “In an interview published in Les Échos on 12 July 2002, the French Minister for Economic Affairs, Finance and Industry [...] said that: ‘The State shareholder will behave like a prudent investor and would take appropriate steps if France Télécom were to face any difficulties ... I repeat, if France Télécom were to face any financing problems, which is not the case today, the State would take whatever decisions were necessary to overcome them’”. Further statements of the French authorities followed in September and October 2002.

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“[…] for the purposes of establishing the existence of State aid, the Commission must establish a sufficiently direct link between, on the one hand, the advantage given to the beneficiary and, on the other, a reduction of the State budget or a sufficiently concrete economic risk of burdens on that budget […]. However, contrary to what the General Court found, it is not necessary that such a reduction, or even such a risk, should correspond or be equivalent to that advantage, or that the advantage has as its counterpoint such a reduction or such a risk, or that it is of the same nature as the commitment of State resources from which it derives”.

2.5 “In any form whatsoever” 2.128

The form in which the aid is provided (grant, interest rebate, tax relief, loan guarantee, etc.) is not relevant to its assessment under Article 107(1) of the Treaty.

2.129

It is not required that there is a positive transfer of resources, e.g. an economic subsidy of that kind that is present for instance in the case of a direct grant or a capital injection. The notion of State resources also comprises measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which without being subsidies are similar in character and have the same effect.637 State aid is therefore defined by reference to its effects.

2.130

As a result State guarantees,638 reductions of taxes,639 reduction of social security contributions,640 the sale of assets or shares below price, debt deferrals and debt waivers and several other types of measures641 can also be considered aid granted by a Member State or through State resources.

2.131

Furthermore, derogations from the normal insolvency rules, which allow undertakings to continue trading in circumstances in which it would not be allowed if the ordinary insolvency rules were applied, may involve an additional burden for the public authorities if the State or public bodies are among the principal creditors of those undertakings or where such action amounts to a de facto waiver 637

638 639

640 641

Case C-387/92 Banco Exterior de España v Ayuntamiento de Valencia EU:C:1994:100, para 13; Case C-75/97 Belgium v Commission EU:C:1999:311, para 23; and Case C-156/98 Germany v Commission EU:C:2000:467, para 25. Joined Cases T-204/97 and T-270/97 EPAC v Commission EU:T:2000:148. Case C-156/98 Germany v Commission EU:C:2000:467, para 26. This is true even where tax increases occur that are lower for certain products, since these have to be regarded as tax deductions and thus equivalent to State aid, even if the rate has increased across the board for everyone, see Twenty sixth Report on Competition Policy (1996), point 36. Case C-256/97 DM Transport EU:C:1999:332, para 19. Compare Case T-37/97 Forges de Clabecq SA v Commission EU:T:1999:66,paras 65 et seq.

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of public debts. Those derogations are equally caught by Article 107(1) of the Treaty. The same holds with regard to exemptions from the obligation to pay fines642 or other pecuniary penalties, or a reduced rate of tax.643

2.6 Parafiscal taxes The term parafiscal levy is not defined either in Union law or in the case law of the Court. In general, the term is used to describe a compulsory tax or charge levied by a public or private organisation on the production or marketing of products in order to finance activities benefiting the whole or part of the professional sector concerned.

2.132

A parafiscal levy therefore has the same compulsory nature as a general tax. It differs from a general tax in that the use of the yield of the levy is not entered into the general budget but is appropriated to a predetermined body to be used for specific purposes. Moreover, a parafiscal levy differs from an administrative fee because the payment of the tax is based on the quantities produced or processed, rather than on specific administrative services provided by the State.644

2.133

In some instances parafiscal levies originated as voluntary contributions in favour of professional organisations and were subsequently made compulsory for all economic operators working in the sector, whether or not they wish to avail themselves of the services of the professional organisation concerned.645

2.134

Based on the case law,646 the Commission had consistently considered that the revenue from a contribution which the public authorities makes mandatory must be regarded as State resources within the meaning of Article 107(1) of the Treaty, even if the entire yield of the levy is allocated in advance to a particular organisation.

2.135

Pearle647 led to some nuances in that approach. In Pearle, an advertising campaign organised by a product board (a public body under Dutch law) was funded by members who benefited from it through compulsory levies earmarked for

2.136

642 643 644 645 646 647

Case C-518/13 Eventech EU:C:2015:9. Case C-295/97 Piaggio EU:C:1999:313, paras 40-43; Case C-200/97 Ecotrade v Altiforni e Ferriere di Servola EU:C:1998:579, para 45. See e.g. Commission decision of 21.4.2001 in case N 81/2000, Pre-shipment inspection of fruit and vegetables for export to Japan and Taiwan, OJ C 117, 21.04.2001, p. 18. See e.g. Case C-677/11 Doux Élevage and Coopérative agricole UKL-ARREE EU:C:2013:348. In particular Case 78/76 Steinike & Weinlig v Germany, EU:C:1977:52 paras 21-22. See also Case 173/73 Italy v Commission (‘Textile industry’) EU:C:1974:71, para 16. Case C-345/02 Pearle and others EU:C:2004:448.

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the organisation of that campaign. Since the costs incurred by the public body for the purposes of the campaign were offset in full by the levies imposed on the undertakings benefiting from it, the Court considered that the body’s action did not create an advantage which would constitute an additional burden for the State or that public body. Rather, the public body had at no time the power to dispose freely of the collected resources. On that basis, the Court excluded the presence of State aid.

2.137

In practice, for obligatory contributions collected by an intermediary body from all enterprises of a certain business sector not to constitute State resources, the following four conditions must be met: –

– –

–

2.138

the measure in question is established by a professional body that represents the enterprises and the employees of a business sector and does not serve as an instrument for the implementation of policies established by the State; the goals of the measure in question are fully financed by the contributions of the enterprises of the sector; the way of financing and the percentage/amount of the contributions are established in the commercial sector’s professional organisation by representatives of the employers and the employees, without any State interference; the contributions are obligatorily used for the financing of the measure, without the possibility for the State to intervene.

The Pearle judgment is however very lapidary and leaves much room for interpretation.648 As indicated in legal doctrine, the Court probably did not mean to overrule earlier case law.649 It could equally be viewed in the context of the (lack of ) imputability.650 In any event, it is rather unclear and seems at odds with earlier decisions.

648

649

650

Sinnaeve, What to expect from national courts in the fight against unlawful State aid , [2005] EStAL No. 1, p. 1; Vesterdorf, “A further comment on the new State aid concept as this concept continues to be reshaped: Pearle – a further piece of the State aid puzzle?”, [2005] EStAL No. 3, p. 393. Gambaro, Nucara and Prete, Pearle: so much Unsaid! , [2005] EStAL No. 1, p. 3; Alexis, “La Cour de justice précise les notions de resources d’État et d’imputabilité à l’État: l’affaire Pearle BV”, [2004] Competition Policy Newsletter, No. 3, p. 24. Commission Decision of 4.7.2006 in case NN 162/B/2003 and N 317/B/2006, Support of CHP under the Austrian Green Electricity Act (support tariff ), OJ C 221, 14.09.2006, p. 8, para 38.

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Moreover, one can only notice that the Commission has pretty much continued its previous practice – in nearly all cases since then, the Commission has considered that the Pearle conditions were fulfilled and the parafiscal levies constituted State resources.651

2.139

A notable exception is the Belgian sectoral funds scheme.652 In Belgium, in numerous areas of activity, the social partners, on the basis of a voluntary decision, provide for a contribution by employers in the sector to the financing of certain social actions according to the needs of the sector (mainly for training workers), and include the contribution rate in their sectoral collective agreements. The collective agreements concluded and, consequently, the contributions envisaged, are made compulsory by royal decree for all companies belonging to the sector. The social sectoral funds thereby created are financed completely out of contributions from companies in the areas of activity concerned and entirely self-manage the money collected. All the companies contributing to a fund can benefit from the programmes part-financed by that fund. The Commission concentrated on the question whether that system included elements of State aid. It based its assessment on the four cumulative criteria of the Pearle judgment. Applied to the case in question, those four criteria were as follows:

2.140

(i)

the actions financed by the sectoral funds are entirely decided on by the social partners in the sector and not by the State;

651

See for example Commission decision of 20.2.2006 in case N 155/2004, the Netherlands, Aid for production and marketing of quality meat products, OJ C 90, 13.04.2006, p. 29; Commission decision of 24.1.2006 in case N 211/2004, the Netherlands, Fund for social matters to the meat and meat production industry, OJ C 85, 08.04.2006, p. 4; Commission decision of 19.7.2007 in case NN 11/2003, the Netherlands, Amendment of parafiscal levy in the onion sector, OJ C 201, 29.08.2007, p. 1; Commission decision of 14.3.2006 in case N 111/2005, Czech Republic, Aid granted by the wine fund, OJ C 139, 14.06.2006, p. 19; Commission decision of 12.4.2006 in case N 438/2005, the Netherlands, Change in the parafiscal levies for the fruit and vegetables sector, OJ C 144, 20.06.2006, p. 4; Commission decision of 13.9.2006 in case N 462/2006, Belgium, Promotion of the bakery and frozen and canned vegetables sectors, OJ C 259, 27.10.2006, p. 19; Commission decision of 31.8.2006 in case N 499/06, the Netherlands, Modification of the take-over aid schemes of Landbouwschap by the product board of livestock and meat (Productschap voor Vee en Vlees), OJ C 259, 27.10.2006, p. 20; Commission decision of 10.12.2008 in case N 561/2008, France, Financement propre des organisations interprofessionnelles, OJ C 116, 21.05.2009, p. 14; Commission decision of 11.12.2008 in case NN 10/2008, Germany, Animal disease fund (Mecklenburg-Vorpommern), OJ C 63, 18.03.2009, p. 13; Commission decision of 20.11.2013 in case SA.36473 (2013/N), the Netherlands, Développement des connaissances sur l’alimentation des animaux, not yet published; Commission decision of 22.4.2014 in caseSA.37863 (2013/N), Germany, Compensation for animal deaths according to the Law on animal health, OJ C 393, 07.11.2014, p. 15. Commission Decision of 20.10.2004 in case NN 136/2003, Belgium, sectoral funds, OJ C 316, 13.12.2005, p. 3.

652

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(ii)

financing comes 100% from contributions from companies in the sector: the State does not part-finance the funds (if the State did part-finance certain actions of the funds, that co-financing on the part of the State – and it alone – would be characterised as a State resource);

(iii) the financing methods and rates are also determined by the social partners in the sector; (iv)

there is no intervention by the State in the use of the collected resources.

2.141

Those four conditions being satisfied in the case of the Belgian sectoral funds, the Commission noted – by analogy with Pearle – the absence of State resources and of imputability to the State and, consequently, ruled out the presence of State aid.

2.142

After Pearle, the Courts have provided additional guidance and clarity on their approach to parafiscal levies in the form of contributions established by trade organisations. In Oniflhor653 the General Court upheld a Commission decision declaring the presence of State aid to the French fruit and vegetable sector paid under contingency plans to farmers’ organisations. The aid was disbursed by a fund financed by Oniflhor – a public industrial and commercial institution under the supervision of the French State – and by voluntary contributions of farmers’ organisations.

2.143

The General Court first noted, in line with Steinike, that the fact that a subsidy scheme is wholly or partially financed by contributions imposed by the public authority and levied on the undertakings concerned is not sufficient to take away from that scheme its status of aid. In other words, the fact that a measure is financed by both State contributions and voluntary contributions from professionals does not per se exclude the presence of State aid. To assess whether this was the case, the General Court went on to examine whether the contributions by Oniflhor were indeed public, based on the degree of intervention of the public authority in the definition of the measures and their methods of financing. The General Court concluded that State aid was present since the State was in a position, by the use of its dominant influence over the definition and implementation of the measures, to guide the use of the resources and that the economic agricultural committees had no discretion in the application of the measures defined by Oniflhor.

653

Case T-139/09 France v Commission (‘Oniflhor’) EU:T:2012:496.

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In Doux Élevage654 the Court assessed the case of a levy (CVO or “cotisation volontaire obligatoire” [sic]) imposed by a French agricultural inter-trade organisation for the purposes of financing common activities decided by that organisation. The CVO was initially voluntary for the members of the organisation but was later made compulsory by a Ministerial Order. Doux Élevage argued that the compulsory levy amounted to State aid.

2.144

In its judgment, the Court noted that the CVO was made by private-sector economic operators through a mechanism which does not involve any direct or indirect transfer of State resources: the sums provided by the payment of those contributions do not go through the State budget or through another public body and the State does not relinquish any resources, in whatever form (such as taxes, duties, charges and so on), which, under national legislation, should have been paid into the State budget. Moreover, there is no doubt that inter-trade organisations are private law associations and form no part of the State administration. In addition, the French authorities cannot use the resources resulting from the CVO to support certain undertakings. Also, the public authorities had no power to direct or influence the administration of the funds and could exercise no control over a CVO except to check its validity and lawfulness. On those grounds, the Court dismissed the presence of State resources and thus of State aid.

2.145

In the assessment of aid measures financed through parafiscal levies, three issues pop up on a regular basis:

2.146

First, the levies themselves may not violate Union law. In particular, the levies may not amount to customs duties or measures having equivalent effect in the meaning of Article 30 of the Treaty or not result in any discriminatory effect within the meaning of Article 110 of the Treaty.655 Where the method of financing is indissolubly linked to the object of the aid so that it is impossible to evaluate them separately, their effect on the compatibility or incompatibility of the aid viewed as a whole must be assessed under the State aid procedure.656

2.147

654 655

656

Case C-677/11 Doux Élevage Sand Coopérative agricole UKL-ARREE EU:C:2013:348. Joined Cases C-78/90, C-79/90, C-80/90, C-81/90, C-82/90 and C-83/90, Compagnie Commercial de l’Ouest and others v Receveur Principal des Douanes de La Pallice Port, EU:C:1992:118, paras 23-30; Joined Cases C-149/91 and C-150/91 Sanders Adour and Guyomarc ’ h Orthez v Directeur des Services Fiscaux des Pyrenées-Atlantiques EU:C:1992:261. Case 74/76 Iannelli v Meroni EU:C:1977:51, para 14; Case C-225/91 Matra v Commission EU:C:1993: 239; Joined Cases T-197/97 and T-198/97 Weyl Beef Products and others v Commission, ECR, EU:T: 2001:28.

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2.148

Secondly, if the aid measure financed through the parafiscal levies is itself incompatible, the question often arises whether the levies must be reimbursed. In van Calster the Court held that where a tax or charge is levied specifically for the purpose of financing an illegally granted aid, national courts must order reimbursement of the tax or charge.657 That concept of “hypothecation”, as it is called, has been further developed since Nazairdis658 where the Court confirmed that for a tax to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid measure under the relevant national rules, in the sense that the revenue from the tax is necessarily allocated for the financing of the aid and that the amount of aid therefore depends directly on the tax revenue. When the revenue resulting from the contested tax does not directly influence the amount of the (alleged) aid granted (for instance if some discretion is left to a ‘committee’ as to the specific amount of the (alleged) aid that will be granted to each beneficiary, or if the overall amount to be granted is capped by ministerial order), the tax cannot be deemed to be hypothecated to the aid measure and therefore cannot be deemed to form part of the aid.

2.149

Another relevant case as regards the concept of “hypothecation” is Régie Networks.659 Under a French aid scheme to support local radio stations, local radio stations that derived less than 20% of their revenue from advertising and sponsoring were eligible for aid. To fund that aid, a charge was levied on the revenue from advertisements broadcast on radio and television. The charges were also levied on advertisements from abroad, whereas the aid profited only French local radio and TV stations.

2.150

The Court first referred to its judgments in van Calster and Pearle and held that the aid cannot be considered separately from the effects of its method of financing, given that the method by which aid is financed may render the entire aid scheme which it is intended to finance incompatible with the internal market. The Court then noted that it had to be established if the financing method formed an integral part of the aid measure: “For a tax to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid under the relevant national rules, in the sense that the revenue from the charge is necessarily allocated for the financing of the aid and has a direct impact on the amount of the aid and, consequently, on the assessment of the compatibility of that aid with the [internal] market […]”. 657 658 659

Joined Cases C-261/01 and C-262/01 van Calster and Cleeren EU:C:2003:571, para 52; see also point 37 of the Opinion of Advocate General Jacobs, EU:C:2003:227. Joined Cases C-266/04 to C-270/04, C-276/04 and C-321/04 to C-325/04 Casino France and others EU:C:2005:657, paras 34, 40, 46 and 48-57. Case C-333/07 Régie Networks EU:C:2008:764.

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The Court noted that in the case under discussion there was a close link between the financing method and the scheme. It therefore concluded that the charge on advertising companies formed an integral part of the radio broadcasting aid scheme which that charge was intended to finance.660

2.151

Thirdly, following a 1970 judgment of the Court in Commission v France,661 it is clear that where a State aid is notified, its financing must also be communicated by the Member State, as the financing and the combined effect of financing and aid must also be examined by the Commission.

2.152

The fact that both elements of the aid when considered separately may be considered compatible is not in itself sufficient to find that the measure as a whole may be considered compatible with Article 107 of the Treaty. As part of its assessment of the compatibility of the measure, the Commission has to consider whether the combined effect of the aid and the means by which it is financed may adversely affect trading conditions. In making that assessment, the Commission should consider whether the method of financing in question has a distortive effect which goes beyond the aid. That issue has in particular played when the Commission had to examine taxation of imported products.

2.153

In examining the legality of parafiscal taxes, the Commission has been very reluctant to accept taxation on imports from other Member States. In its 1992 Report on Competition Policy, the Commission stated: “In the various cases it has examined to date, the Commission has taken the view, in accordance with the Court’s case law, that aid financed by parafiscal charges levied also on products imported from other Member States is in principle incompatible with the [internal] market because the charge levied on imported products has a protective effect which goes beyond aid properly so-called. Even if equality of treatment is assured between national and imported products on a legislative level, such aid is more favourable to national operators on a practical level since the measures taken inevitably stem from national specializations, needs and deficiencies”.662

2.154

660

661 662

See a contrario Commission decision in case C 38/2009 regarding the new financing of Corporación de Radio y Televisión Española (RTVE), OJ L 1, 04.01.2011, p. 9. The Spanish Government had abandoned advertising on RTVE channels. To ensure the financial viability of the company – which before was financed, at least in part, with advertising revenues –, Spain introduced a new levy on telecommunication operators and commercial broadcasters. The question was whether the financing was hypothecated to the aid in favour of RTVE, i.e. whether it formed an integral part of it. The Commission concluded that there was no hypothecation and consequently adopted a positive decision. The General Court upheld the Commission decision in Case T-533/10 DTS Distribuidora de Televisión Digital v Commission EU:T:2014:629, is currently under appeal in Case C-449/14 P DTS Distribuidora de Televisión Digital v Commission. Case 47/69 Commission v France EU:C:1970:60, paras 7-8 and 16 et seq. Twenty-Second Report on Competition Policy (1992) (published in Conjunction with the General Report

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2.155

Indeed, in many cases the Commission came close to systematically rejecting any aid measures funded through parafiscal charges on imports.663 Notwithstanding those strong statements of principle, there are instances where the Commission has in fact not raised objections to parafiscal levies which were also imposed on products imported from other Member States.

2.156

For example, in certain environmental cases, parafiscal charges on imports have been accepted. In the Danish pesticide cases,664 the Commission did not raise objections to a system of parafiscal levies imposed on the use of pesticides and herbicides (both domestically used and imported) where the yield of the tax was used to finance a variety of measures designed to discourage/reduce pesticide use.665 The Commission’s decision took account of the fact that the measures were explicitly in line with Union environmental policy and in particular the programme of policy and action in relation to the environment and sustainable development. Furthermore, the Commission also took account of the fact that the aid was not intended in any way to promote domestic production of the Member State concerned. According to the Commission’s decision, without imposing the tax on all pesticides used in Denmark the system could not have met its essentially environmental objective. It was also clear that the measures did not have a protective effect going beyond the effects of the aid.

2.157

Moreover, in a Commission decision regarding aid for promoting ornamental plants, a similar approach was followed although in that case the Commission arrived at the conclusion that it was not demonstrated that imported products could benefit equally.666 The Commission had a similar stance in a decision concerning a Portuguese parafiscal charge for the promotion of wine.667

2.158

Hence, taxation of imported products is possible, provided that it can be shown that imported products will benefit equally.

663

664 665 666 667

on the Activities of the European Communities 1992). For example, Commission Decision of 20.7.1999 on an aid scheme applied in Greece to cotton by the Greek Cotton Board, OJ L 63, 10.03.2000, p. 27: “This possibility is however ruled out by the fact that they are financed by a parafiscal charge applied to products imported from other Member States. This mode of financing renders them incompatible with the [internal] market”. Commission Decision in cases N 416/95 and N 224/98, Tax on pesticides and aid for agriculture, OJ C 329, 27.10.1998, p. 8. Referred to in the 1998 Annual Competition Report, p. 240-241. Commission Decision of 20 July 1999 concerning State aid, financed by parafiscal charges, which the Netherlands intended to grant for promoting ornamental plants, OJ L 34, 09.02.2000, p. 20. Commission Decision of 20 July 2010 on the parafiscal charge for the promotion of wine applied by Portugal C 43/04 (ex NN 38/03), OJ L 5, 08.01.2011, p. 11.

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The issue of taxation of imported products from third countries is more controversial – in the agriculture sector, Commission decisions regularly approve taxation of imported (agricultural) products from third countries, while products from Member States are exempted.668 However, subsidies in the agricultural field are subject to a very different kind of regime in the WTO from subsidies to industrial goods.669 Outside agriculture, the Commission has not always looked into whether imports from third countries are taxed and if so670 whether that element was taken into account in the Commission’s assessment. For instance, in a case concerning a French parafiscal tax on certain products,671 the Commission also examined the parafiscal tax with which the aid measures in question were financed. It noticed that there was no discrimination between French products consumed in France and those exported towards Member States and the EEA. Furthermore, imported products from those countries were not subject to the parafiscal tax. Compliance with the WTO rules has thus not been examined in the context of State aid procedures. Prima facie, there seems to be discrimination against imported products from outside the Union and the EEA if those products are subject to the tax. If the discrimination is considered to be in respect of an import charge, falling under Article I GATT 1994, it would probably be covered by the derogations provided under Article XXIV GATT. If however the discrimination is considered to be on a tax under Article III (which seems more likely), Article XXIV would not seem to provide a derogation.

2.159

Taxation of exports follows the same rule as for imports: provided that the parafiscal levy is applied without distinction to products intended for the domestic market and to products for export and that both products can benefit equally,672 the taxation of exported products does not give rise to difficulty.

2.160

Obviously, an exemption of exported products from parafiscal levies will be considered as an export aid, which is by definition incompatible with Article 107

2.161

668

669 670

671 672

See for example Commission Decision N 545/99 of 7.2.2000, the Netherlands, Fonds Kleine Toepassingen Gewasbeschermingsmiddelen, OJ C 71, 11.03.2000, p. 6, though for some years already the Commission in its decisions adds a paragraph stating that it is reviewing its policy regarding taxation of imported products from third countries and that it reserves the right to propose appropriate measures. See Slocock, “EC and WTO Subsidy Control Systems – some Reflections”, [2007] EStAL, No. 2, p. 252. Which it sometimes does, see Article 3 of the Décret no 96-148 du 22 février 1996 créant une taxe parafiscale au profit du comité professionnel de développement de l’horlogerie: “Sont soumises à cette taxe: [...] b) Les importations de ces mêmes produits qui ne sont pas originaires des Etats membres de l Union européenne et des Etats membres de l’Association européenne de libre-échange pour lesquels l’accord sur l’Espace économique européen est entré en vigueur ou qui ne sont pas mis en libre pratique dans ces Etats. [...] – that parafiscal tax applied in case N 496/2000. Commission decision of 10.10.2000 in case N 496/2000, France, Taxe parafiscale sur les produits de l horlogerie, bijouterie, joaillerie et orfèvrerie, OJ C 322, 11.11.2000, p. 11. Case C-234/99 Nygård EU:C:2002:244; Case C-517/04 Koornstra EU:C:2006:375.

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of the Treaty, unless the Member State can demonstrate that exported products derive no benefit whatsoever from the aid measures financed by the levies.

2.162

In particular, the levies may not be imposed on products originating from other Member States, and products of domestic origin marketed outside the country of production should benefit from the measure to the same extent as products marketed in the country of production.673

2.163

Although the yield of parafiscal levies is, in many cases, used to benefit the sector from which the levy is raised, the levy is sometimes collected at a different level from that of the beneficiaries of the aid. Neither the Commission nor the Court seems to have looked into that question. In fact, the inherent logic of imposing parafiscal taxes in order to avoid free riders implies already that there are also within a sector certain players who otherwise would not have participated in the activities funded with the taxes.

2.7 Granting access to State-controlled resources or to a certain activity/market 2.164

The issue discussed in the present section is whether the State, when granting access to a certain resource which it controls or allowing a company to carry out a given activity (in particular, by means of special rights674 and/or exclusive rights675), should require some remuneration for that permission. In particular, if the State does not require a remuneration equivalent to the market value of the permission that it is granting, does that imply a loss of resources for the State and conversely a gratuitous advantage for the beneficiary of the permission? The answer to that question is neither straightforward nor settled. 673 674

675

Case C-234/99 Nygård EU:C:2002:244. According to the Commission, special rights are rights granted to a limited number of undertakings which, within a given geographical area, (i) limit to two or more the number of such undertakings, otherwise than according to objective, proportional and non-discriminatory criteria; or (ii) designate, otherwise than according to such criteria, several competing undertakings; or (iii) confer on any undertaking, otherwise than according to such criteria, any legal or regulatory advantages which substantially affect the ability of any other undertaking to compete in the same geographical area under substantially equivalent conditions (see definition of special rights contained in Commission Directive (EC) 94/46 amending Directive 88/301/EEC and Directive 90/388/EEC in particular with regard to satellite communications, OJ L 268, 19.10.1994, p. 15). According to the Court, a special right exists when “protection is conferred by a legislative measure on a limited number of undertakings which may substantially affect the ability of other undertakings to exercise the economic activity in question in the same geographical area under substantially equivalent conditions” (Case C-475/99 Ambulanz Glöckner EU:C:2001:577, para 24). An exclusive right is the right granted to one undertaking to exercise an economic activity on an exclusive basis, i.e. for each economic activity and in a given territory, there is a single beneficiary, a monopolist (see Case T-260/94 Air Inter v Commission EU:T:1997:89, paras 120-122).

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Concerning the situation where the State grants access or the right to exploit a physical resource, the Commission has recognised in a number of cases related to toll highways that the grant of such a right without remuneration implied a loss of resources for the State. In a decision concerning the prolongation of the concession of certain French toll highways,676 the Commission considered that such a prolongation allowed the concessionaire to benefit from the tolls for a longer period on an exclusive basis, the tolls in themselves constituting State resources. Similarly, in the case concerning the prolongation of the highway concession of the “Société française du tunnel routier du Fréjus” (“SFTRF”),677 the Commission first noted that the prolongation implied granting to SFTRF an exclusive right to collect tolls during the period 2018-2050. It then observed that the tolls are paid by consumers. The Commission analysed whether, in the light of PreussenElektra, the tolls were to be classified as private resources. It gave a negative answer to that question. The Commission observed that the French State had decided to allow SFTRF to continue exploiting the highway, i.e. a public good that manifestly constituted a State resource. De facto, the State was giving up the possibility to collect the tolls directly as from 2018. Moreover, by granting SFTRF the exclusive right to collect the tolls, the French State did not have to directly remunerate SFTRF for the additional task that it had entrusted to the concessionaire. In conclusion, the prolongation of the concession implied a transfer to SFTRF of resources available or potentially available to the French State. The same analysis was repeated in 2006 in the case concerning the prolongation of the concession of the tunnel of the Mont Blanc678 and in 2009 and 2014 as regards the prolongations of the concessions in the context of the French plans for economic recovery.679

676 677

678

679

2.165

Commission Decision of 4.10.2000 in case N 540/2000, Reform of the motorway concession system in France, OJ C 354, 09.12.2000, p. 19. Commission Decision of 20.6.2001 in case N 321/2001, Extension of the duration of the motorway concession granted to Société Française du Tunnel Routier du Fréjus (SFTRF), OJ C 211, 28.07.2001, p. 17, paras 23-24. Commission Decision of 22.2.2006 in case N 420/2005 on the extension of the duration of the concession granted to Sociétés d autoroutes du Tunnel du Mont-Blanc (ATMB) et du Tunnel Maurice Lemaire (TML/ APRR), OJ C 90, 25.04.2007, p. 4. Commission Decision of 17.8.2009 in case N 362/2009 – France – Allongement de la durée des concessions accordées par l’État français aux sociétés concessionnaires d’autoroutes - Plan de relance de l’économie volet autoroutier, OJ C 264, 06.11.2009, p. 1, and Commission Decision of 28.10.2014 in case SA.38271 (2014/N) – France – Plan de relance autoroutier, OJ C 63, 20.02.2015, p. 4.

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2.166

Similarly, in several decisions concerning toll highways in Greece680 the Commission concluded that the modifications of the contracts concerning tolls involved State resources. In those cases, the original concession agreements provided that part of the revenues from the tolls, above a certain threshold, were to be shared between the State and the concessionaires. With the modification of the concession contracts, the State agreed to forego its part of revenues in favour of the concessionaires, thereby waiving State resources. Moreover, the Commission noted that a prolongation of the concession also involved waiving of State resources “in the form of loss of the right of operating and exploiting the motorway, which the State would otherwise enjoy after the end of the concession period”.681

2.167

Likewise, in the case of the allocation of emission trading permits in Denmark682 and the United Kingdom,683 the Commission considered that by granting permits for free the State was giving up resources to which it would have been normally entitled and therefore it was granting an aid. The fact that the Member State had created a market for those licences confirmed that they are valuable immaterial assets.684 The Union Courts confirmed that line of reasoning in the NOx judgments:685 “[…] the Member State, by conferring on those emission allowances the character of tradable intangible assets and by making them available to the undertakings concerned free of charge instead of selling those allowances or putting them up for auction, foregoes public resources”.686 680

681 682

683 684

685 686

Commission Decision of 13.12.2013 in case SA.36877 (2013/N) – Reset of Greek Motorway concession projects - Aegean Motorway S.A., OJ C 50, 21.02.2014, p. 5; Commission Decision of 13.12.2013 in case SA.36878 (2013/N) – Reset of Greek Motorway Concession Projects - Olympia Odos, OJ C 117, 16.04.2014, p. 11; Commission Decision of 13.12.2013 in case SA.36893 (2013/N) – Reset of Greek Motorway Concession Projects - Central Motorway (E65), OJ C 50, 21.02.2014, p. 6; Commission Decision of 13.12.2013 in case SA.36894 (2013/N) – Reset of Greek Motorway Concession Projects – Ionia Odo, OJ C 117, 16.04.2014, p. 12. Commission Decision of 13.12.2013 in case SA.36877 (2013/N) Reset of Greek Motorway concession projects - Aegean Motorway S.A., OJ C 50, 21.02.2014, p. 5, para 29. Commission Decision of 29.3.2000 in case N 653/99 CO2 Quotas, OJ C 322, 11.11.2000, p. 9, para 4. The Commission noted that “the State thus provides electricity producers with an intangible asset for free, which can be sold on a market to be created ... the State foregoes revenues which could derive from auctioning the emission permits.” Commission Decision of 28.11.2001 in case N 416/2001, Emissions trading scheme, OJ C 88, 12.04.2002, p. 16. It could be argued that the existence of an aftermarket where to trade the licence once it has been granted is just an element confirming that a given licence is a valuable asset. However, the absence of an aftermarket should not exclude that the licence has an economic value if in itself it is capable of being used to produce some revenues. Case T-233/04 Netherlands v Commission EU:T:2008:102; paras 74 and 75, and Case C-279/08 P Commission v Netherlands EU:C:2011:551, paras 102-113. Case C-279/08 P Commission v Netherlands C-279/08 P, EU:C:2011:551, para 107.

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Those decisions, if interpreted broadly, may have far-reaching consequences. It could be argued that there is no economic reason to distinguish exclusive rights that relate to the exploitation of a physical resource controlled by the State (e.g. a highway or a tunnel), a licence enabling the licence holder to emit a given amount of greenhouse gases or an exclusive right reserving a certain economic activity to a third party. Indeed, any exclusive right has a value stemming from the fact that it allows the operator to act as a monopolist with no threat of any actual or potential competition.687 For instance, until 2011 the Postal Directives688 allowed for a grant of exclusive rights in the postal sector only to the extent necessary to ensure the maintenance of the universal service under financially balanced conditions. The Postal Directives therefore implied that the exclusive right in that sector could only be granted to satisfy interests of an economic nature.689 In practice, the Postal Directives recognised that an exclusive right over some postal activity was a valuable asset (a source of revenue) because it could be used to offset the extra costs deriving from public service obligations. In the worst case scenario, the value of an exclusive right could be equal to zero.690

2.168

It could thus be argued that where the State grants the right to exploit a physical resource or carry out an activity to a third party without consideration, it foregoes resources that it could obtain were it to exploit the resource or carry out

2.169

687

688

689 690

As the Commission observed in the Poste Italiane Decision, “[Poste Italiane] enjoys the undeniable advantage of being the only firm allowed to operate the reserved services [...]” (Commission Decision of 12.03.2002 on the aid granted by Italy to Poste Italiane SpA (formerly Ente Poste Italiane), OJ L 282, 19.10.2002, p. 29, para 132. See Article 7 and Recital 16 of Directive 97/67/EC of the European Parliament and of the Council of 15 December 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service, OJ L 15, 21.01.1998, 14, and Article 1 of Directive 2002/39/ EC of the European Parliament and of the Council of 10 June 2002 amending Directive 97/67/EC with regard to the further opening to competition of Community postal services sector, OJ L 176, 05.07.2002, p. 21. Article 7 of Directive 97/67/EC was modified by Article 1 of Directive 2008/6/EC of the European Parliament and of the Council of 20 February 2008 amending Directive 97/67/EC with regard to the full accomplishment of the internal market of Community postal services, OJ L 52, 27.02.2008, p. 3. It is not an exclusive right granted to protect non economic public interests like for instance the security of transaction for notaries or public health for pharmacists. Where the expected net present value of the profits from marketing the goods and services based on exploiting this right exceeds the upfront and sunk investment costs including its normal market rate of return, the right to exploit has a market value. Where however the upfront sunk costs of investment exceed the expected net present value of future profits, there will be no private takers of the exclusive right to exploit. Moreover, regulation limiting the freedom of the monopolist may reduce the value of the exclusive right. If the price of the monopolist are controlled by the State, the latter determines more precisely the income generated within the reserved area and thus the value of the exclusive right. Likewise public service obligations may impose costs outweighing the value of the exclusive right. However, unless the four Altmark conditions are met, one has to make a distinction between the granting of an advantage and the imposition of obligations that might outweigh the advantage and make it compatible with the Treaty pursuant to Article 102(2) of the Treaty. See further chapter 33.

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the activity directly. And even in those cases where an economic analysis would show that the exclusive right had no value when it was granted because it intended to eliminate a market failure, it could be the case that from a certain point in time it becomes a valuable asset following economic, technological or legal developments in the internal market. The State’s persistence in not requiring any remuneration would thus amount to a loss of State resources which could be classified as existing State aid.691

2.170

One can argue that such an interpretation makes Article 107 of the Treaty a tool to scrutinise any exclusive right, since every exclusive right could be deemed to entail State aid and thus require a compatibility analysis. As a consequence, the scope of Article 106(1) and (3) of the Treaty, which is intended to regulate the interplay between exclusive and special rights and the rules of the Treaty, would be greatly diminished. Moreover, Article 107 of the Treaty does not clearly oblige the State to act as a profit-maximising operator in the allocation of licences or exclusive rights for certain activities. Member States may pursue different legitimate policy objectives ranging from the promotion of allocative efficiency (grant several licences for free to any company fulfilling objective criteria) to the maximisation of profits (in which case they would grant only one licence and leave the monopolist complete freedom in setting its prices). That interpretation seems more in line with the approach taken in secondary legislation in the telecommunications field692 and by the policy choices of the Member States in the allocation of UMTS licences.693

691

692

693

Council Regulation (EC) 659/1999 laying down detailed rules for the application of Article 108 of the Treaty on the functioning of the European Union, OJ L 83, 27.03.1999, p. 1. Article 1(b)(v) defines existing aid as “aid which is deemed to be an existing aid because it can be established that at the time it was put into effect it did not constitute an aid, and subsequently became an aid due to the evolution of the common market and without having been altered by the Member State”. The use of different allocation methods for the granting of the licence, provided compliance with certain basic principles, is allowed under the Licensing Directive (Directive 97/13/EC of the European Parliament and of the Council of 10 April 1997 on a common framework for general authorizations and individual licences in the field of telecommunications services, OJ L 117, 07.05.1997, p. 15). Moreover Article 11 of that Directive sets out that Member States may impose royalties to ensure optimal use of scarce resources. However royalties cannot be discriminatory and must take into account the need to promote the development of new services and competition. With regard to UMTS licences, in a decision concerning their allocation in France, the Commission affirmed that: “ le droit communautaire, en l’ état actuel, permet aux Etats membres de définir la méthode et les conditions d attribution des licences UMTS (y compris le niveau de la redevance) à condition de suivre des procédures ouvertes, non discriminatoires et transparentes et d’utiliser des critères de sélection objectifs, non discriminatoires et transparents. En revanche, le droit communautaire n’exige pas que les Etats membres fixent la redevance due au titre des licences UMTS à un niveau correspondant à sa prétendue valeur marchande”. (Commission decision of 20.07.2004 in case NN 42/2004, retroactive modification of payments due from Orange and SFR for UMTS licences, OJ C 275, 08.11.2005, p. 3, para 27).

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It could moreover be argued that when the exclusive right is not linked to a physical resource there may be important difficulties in the quantification of its precise market value.

2.171

As a matter of fact it cannot be denied that Member States pursue different legitimate policy objectives in the allocation of licences or exclusive or special rights. Some Member States require a consideration for granting certain type of licences or rights and some others do not, like for instance in the case of allocation of UMTS licences. Also, certain rights or licences to carry out a given activity are granted for free in all Member States (e.g. special rights relating to professional services). The use of Article 107 of the Treaty as an instrument to put into question every public choice of Member States does not seem warranted.

2.172

The issue at hand can only be solved on the basis of a case-by-case analysis having regard to the nature or general scheme of the system of charges in question. This conclusion is supported by the Union Courts’ case law.

2.173

In Banks694 the Court noted that “the Coal Industry Act 1994 […] created a new regulatory body, the Coal Authority, to which ownership of all British Coal’s deposits, whether worked or not, was transferred as from 31 October 1994. The Coal Authority does not, however, itself have the right to carry on mining activities, its function being to grant licences authorising the working of coal and laying down the conditions therefor, and to grant the necessary leases in respect of the various property rights concerned. The Coal Authority is entitled to demand royalties in return for those licences and leases.” The State granted British Coal the operating licences it needed and asked the Coal Authority to grant the corresponding leases. Those licences and leases were granted for no consideration, while other operators – among which Banks – had to pay to the Coal Authority royalties and other considerations for its licences and leases. Banks eventually stopped paying the royalties and the dispute was taken to the national courts, which made a reference to the Court of Justice. In its intervention, the Commission argued that the difference in treatment referred to by the national court was capable of constituting State aid under the ECSC Treaty.695 The Court stated that “an aid consists of a mitigation of the charges which are normally included in the budget of an undertaking, taking account of the nature or general scheme of the system of charges in question […] [It] is [therefore] necessary to determine

2.174

694 695

Case C-390/98 Banks EU:C:2001:456, paras 8-9. The notion of aid under the ECSC Treaty was not substantially different from that under the EC Treaty (later the TFEU) and the case law developed under one Treaty was consistently applied under the other Treaty.

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what is the normal application of the system of charges, in relation to the nature or general scheme of that system”. Taking account of the legal and factual situation of that case, the Court concluded “that the normal situation arising from the nature and general scheme of the system is represented by the payment by the operators of consideration for the licences and leases granted to them”.

2.175

Banks shows that depending on the policy choices of the Member States, the remuneration of a given exclusive/special right (or more in general of an administrative authorisation to carry out certain activities) can be considered as a normal charge of the system having regard to the nature and general scheme of that system. In those circumstances, granting such right without requesting consideration would imply a loss of resources for the State and an advantage for the beneficiary.696 In practice, one should look at all the relevant legal and factual circumstances of the case (legal texts, parliamentary acts, legal precedents, etc.) in order to establish whether remuneration of certain types of rights is a normal charge or not.

2.176

Bouygues seems to confirm that interpretation.697 The case turned on knowing whether the retroactive reduction of the fee due by SFR and Orange pursuant to their respective UMTS licences constituted State aid or not. That reduction intervened when France decided to grant a UMTS licence to a third operator and imposed a lower fee for that third licence. The Commission argued that the granting of those licences was a typical State responsibility (‘activité régalienne’). The licences had no market value and thus economic considerations were not relevant for the public authority allocating those licences. The General Court first recalled that, according to the Court of Justice’s case law, licences enabling operators to offer mobile telecommunication services have an economic value.698 The same conclusion holds for UMTS licences. Those licences allow the occupation or exploitation of a scarce resource which is in the public domain (radiofrequencies). The authority managing that resource has to take into account the economic value of those licences when it fixes the fees due by the concerned operators.699 Again recalling the case law, the General Court observed that in allocating those licences the Member States have a role of regulator and manager of a scarce public resource and confirmed that the exercise of regulatory functions does not exclude that the Member State takes into account 696 697 698 699

See in particular Alexis, 244 “Droits exclusifs ou spéciaux et aides d’Etat. Question Ouvertes”, (2002) Revue du droit de l’Union européenne, Issue 2, p. 185. Case T-475/04 Bouygues and Bouygues Télécom v Commission EU:T:2007:196. Upheld in Case C-431/07 P Bouygues and Bouygues Télécom v Commission EU:C:2009:223. Case T-475/04 Bouygues and Bouygues Télécom v Commission EU:T:2007:196, para 100. Case T-475/04 Bouygues and Bouygues Télécom v Commission EU:T:2007:196, para 101.

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economic data when managing this resource.700 The General Court concluded therefore that the reduction of the fees due by SFR and Orange implied a loss of State resources. However, that loss was not necessarily State aid having regard to the nature and general scheme of the system.701 The notion of nature and general scheme of the system in general refers to the internal logic of a national fiscal measure, which means that the general scheme is determined by having regard to the domestic legal situation. However, in Bouygues, the nature and general scheme of the system is defined, according to the General Court, by the Union framework on telecommunication services.702 That framework leaves Member States the freedom to decide the procedure for the allocation of those licences provided that equal treatment and free competition are ensured. Therefore, the framework gives Member States the possibility to decide whether UMTS licences shall be granted for free, or after a bidding process or on the basis of an uniform tariffs. If the conditions are the same for all the operators then there is no aid. State aid would arise when, all other things equal, there is a difference in the fee to be paid by the different operators having regard to the moment of entry in the market.703 In conclusion, the fact that the State gave up some resources to which it was entitled and that this could have implied an advantage for some operators is not sufficient for State aid to be present, having regard to the specificities of the Union’s telecommunication law. In the present case the State had to forego some resources if it wanted to ensure equal treatment between the three operators.704

2.177

An interesting development can be seen in Eventech.705 In a request for a preliminary ruling, the Court was asked whether the policy of the transport authority of London of permitting London taxis (so-called “black Cabs”) to use the traffic lanes reserved for buses, while prohibiting their use to private hire vehicles (minicabs), involves a commitment of State resources and confers on black cabs a selective advantage. The Court first recalled Bouygues,706 to the effect that it is necessary to establish a sufficiently direct link between the advantage given

2.178

700 701 702

703 704 705 706

Case T-475/04 Bouygues and Bouygues Télécom v Commission EU:T:2007:196, para 104. Case T-475/04 Bouygues and Bouygues Télécom v Commission EU:T:2007:196, para 106. Directive 97/13/EC of the European Parliament and of the Council of 10 April 1997 on a common framework for general authorizations and individual licences in the field of telecommunications services, OJ L 117, 07.05.1997, p. 15; Decision No 128/1999/EC of the European Parliament and of the Council of 14 December 1998 on the coordinated introduction of a third-generation mobile and wireless communications system (UMTS) in the Community, OJ L 17, 22.01.1999, p. 1. Case T-475/04 Bouygues and Bouygues Télécom v Commission EU:T:2007:196, paras 108-110. Case T-475/04 Bouygues and Bouygues Télécom v Commission EU:T:2007:196, para 111. Case C-518/13 Eventech EU:C:2015:9. Case C-399/10 P Bouygues and Bouygues Télécom v Commission EU:C:2013:175.

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to the beneficiary and the reduction on the State budget or a sufficiently concrete economic risk of burdens on that budget. It then differentiated the facts in Eventech from those arising in the NOx case,707 where the Member State had attributed an economic value to those trading permits and had foregone resources by offering them for free. In Eventech, the Court concludes that the fact that the black cabs are not fined for using the bus lanes “ does not involve additional burdens on the public authorities which might entail a commitment of State resources”.708

3.

Imputability

3.1 Notion of imputability 2.179

The imputability (or attributability) of a measure to a Member State is an essential element of the notion of State aid. It is a distinct requirement from the financing of a measure through State resources, although they both concern the State origin of the measure in question and sometime have been examined together by the Union Courts.709 The importance of the imputability of a measure to a Member State was underlined in Stardust Marine,710 where the Court carried out an in-depth examination of that specific aspect and, for the first time, annulled a Commission decision on that ground. Prior to that judgment the case law on that issue was limited and did not emphasise imputability.

2.180

A measure is imputable to a Member State when it is somehow attributable to the public authorities of that State. In the context of the analysis of State aid cases imputability becomes an element to be checked with particular care when the aid is granted to the beneficiary through an intermediate body, and in particular a public undertaking. Such was the factual context giving rise to Stardust Marine. On the other hand, when the public authorities grant aid directly to a given undertaking, their behaviour is by definition attributable to the State.

3.2 The case law before Stardust Marine 2.181

Before the important clarifications provided by the Court of Justice in the landmark Stardust Marine judgment,711 as underlined by Advocate General Jacobs in his Opinion in that case, the case law was not very clear on this point. 707 708 709 710 711

Case C-279/08 P Commission v Netherlands EU:C:2011:551. Case C-518/13 Eventech EU:C:2015:9, para 41. See above footnote 584. Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294. Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294.

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In fact, the criterion of imputability had not been precisely spelled out as one of the constituents of State aid. For instance, Namur-Les assurances 712 shows that the Court of Justice did not intend to emphasise that element. In his Opinion, Advocate General Lenz had developed a complete assessment of the attributability of the measure to the Belgian State whilst the Court of Justice did not even make a reference to it. Only in Commission v France the Court considered necessary to establish in concreto that the particular measure at issue was the result of action of the State.713

2.182

On the contrary, in Van der Kooy,714 the Court inferred the imputability to the State of a preferential tariff for natural gas applied by Gasunie (a private law company in which the Dutch State held a 50 per cent stake) on the basis of indirect evidence. In particular, the Court considered that the Dutch State held control over Gasunie’s capital shares; it appointed the supervisory board; and its prior approval was necessary to allow Gasunie carrying out its operations. However, there was no direct evidence that that precise tariff had been established under the influence of the State.

2.183

Similarly, in Eni-Lanerossi715 and Alfa Romeo716 the Court established imputability to the State of measures adopted by public undertakings, ENI and IRI, on the basis of indirect evidence. In particular, the Court considered that the Italian State directly or indirectly owned the capital of those companies; it appointed their board of directors and board of management; and finally those companies had to abide by the directives of an inter-ministerial committee concerning inter alia the budgetary allocations to bodies administering State holdings.

2.184

Along the same line, in Air France 717 the General Court relied mainly on indirect evidence to establish the imputability to the State of financial support to Air France granted by CDC-P, a French private law company owned by the Caisse des Dépôts et Consignations (‘CDC’). The General Court essentially focused on the public or private nature of the CDC and did not examine whether it took its decisions – in the actual case or even in general – under the decisive influence of the public authorities.718

2.185

712 713 714 715 716 717 718

Case C-44/93 Namur-Les assurances du Crédit v Office national du ducroire and Belgian State EU:C:1994:311. Case 290/83 Commission v France EU:C:1985:37, para 15. Joined Cases 67, 68 and 70/85 van der Kooy v Commission EU:C:1988:38. Case 303/88 Italy v Commission (‘Eni-Lanerossi’) EU:C:1991:136. Case C-305/89 Italy v Commission (‘Alfa Romeo’) EU:C:1991:142. Case T-358/94 Air France v Commission EU:T:1996:194. Opinion of Advocate General Jacobs, Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294, point 62.

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3.3 Stardust Marine, the landmark case 2.186

Stardust Marine concerned a number of capital injections granted between 1994 and 1997 by Altus and CDR (both subsidiaries of Crédit Lyonnais, a Stateowned bank) to Stardust, a subsidiary of Altus. The Commission concluded that those measures were State aid. However, it also noted that the management of Crédit Lyonnais had ceased to play any direct part in the management of Stardust after its transfer to CDR because of the total separation of management between CDR and Crédit Lyonnais, in accordance with a previous Commission decision.

2.187

The Court interpreted the Commission decision as having inferred imputability from the mere fact that those measures were taken by a public undertaking. It concluded that such an approach could not be accepted. The Court considered that it was necessary to “examine whether the public authorities must be regarded as having been involved, in one way or another, in the adoption of those measures”.719 In other words, the measures taken by public undertakings under State control are not per se attributable to the State.

2.188

The Court pointed out that mere potential control of the State based on the ownership of the undertaking granting advantages is not sufficient evidence of actual State involvement. Therefore, a position of control (even of dominant influence) by the State over a public undertaking cannot lead to the presumption that the State has actually exercised its control regarding the decisions taken by that undertaking. It must thus be proved – by any direct or indirect means – that the State has been involved in the adoption of the aid measure.

2.189

However, the Court underlined that, “ having regard to the fact that relations between the State and a public undertaking are close, there is a real risk that State aid may be granted through the intermediary of those undertakings in a non-transparent way”.720 Moreover, the Court noted that “ it will, as a general rule, be very difficult for a third party, precisely because of the privileged relations existing between the State and a public undertaking, to demonstrate in a particular case that aid measures taken by such an undertaking were in fact adopted on the instructions of the public authorities”.721

719 720 721

Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294, para 52. Ibid., para 53. Ibid., para 54.

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Therefore, the Court clarified that “ it cannot be demanded that it be demonstrated, on the basis of a precise inquiry, that in the particular case the public authorities incited the public undertaking to take the aid measure in question”.722

2.190

As a consequence, the Court accepted that imputability to the State may be inferred from a set of indicators arising from the circumstances of the case and the context in which that measure was taken.

2.191

The judgment contains a non-exhaustive list of possible indicators:

2.192

–

the fact that the body in question could not take the contested decision without taking account of the requirements of the public authorities;

–

the fact that those undertakings, through the intermediary of which aid had been granted, had to take account of directives issued by governmental bodies;

–

the integration of the public undertaking into the structures of the public administration;

–

the nature of the undertaking’s activities and the exercise of the latter on the market in normal conditions of competition with private operators;

–

the legal status of the undertaking (in the sense of its being subject to public law or ordinary company law);

–

the intensity of the supervision exercised by the public authorities over the management of the undertaking.

The Court made clear that its list of indicators was not exhaustive. The Court in fact underlined that imputability can be shown through “any other indicator showing, in the particular case, an involvement by the public authorities in the adoption of a measure or the unlikelihood of their not being involved, having regard also to the compass of the measure, its content or the conditions which it contains”.723

2.193

In his Opinion, Advocate General Jacobs also provided a similar non-exhaustive list of possible indicators:

2.194

722 723

Ibid., para 53. Ibid, para 56.

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2.195

–

evidence that the measure was taken at the instigation of the State;

–

the scale and nature of the measure (here there might be some overlap with the market economy operator test);

–

the degree of control which the State enjoys over the public undertaking in question;

–

a general practice of using the undertaking in question for ends other than commercial ones or of influencing its decisions;

–

circumstantial evidence such as press releases.

The indicators listed by the Court and the Advocate General can be divided into two categories: –

direct evidence of imputability, i.e. any indicator directly referring to the alleged State aid measure and establishing the State involvement in the adoption of that particular measure;

–

indirect evidence, i.e. evidence not linked to the State involvement in the adoption of the alleged State measure but more in general referring to the involvement of the State in the operations of the intermediary body. They could be indicators such as organic links (e.g. control of shares, belonging to the public administration, appointment of boards members) and rules regarding the control on the activity of the undertaking (e.g. like prior approval of the public authorities).

2.196

Stardust Marine makes clear that the Commission (or the person alleging the presence of aid in proceedings before a national court) carries the burden of proving imputability. However, it does not make clear what precisely the Commission has to prove and how it should discharge that burden. Between the two boundaries (potential control – incitation to take the aid measure) lies a grey area where the Commission has to find sufficient indicators of imputability.

2.197

As acknowledged by Advocate General Jacobs, establishing a general test to determine whether a given measure of a public undertaking is attributable to the State is not easy.724 As a result it is not clear what level of involvement by 724

See Opinion of Advocate General Jacobs in Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2001:685, point 64.

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the public authorities is required to make a measure imputable to the State. For instance, it is not clear whether an omission of the public authorities could be sufficient. The Advocate General noted that there were no reasons to believe or any evidence that the public authorities even knew about the measures taken by Crédit Lyonnais’ subsidiaries in favour of Stardust.725 However, his Opinion is not clear as to whether imputability could have been established if the public authorities knew about these measures but did not oppose them. The Court did not take position on that issue. It neither excluded nor admitted that imputability may be determined by the failure to act of the authorities charged with the task of controlling the operation of the public undertaking. But the Court’s general formulation, according to which the public authorities must be regarded as having been involved “ in one way or another”, seems to imply that any kind of conduct (active or passive) of the public authorities could potentially be relevant to establish imputability. Furthermore, Advocate General Jacobs added that “the intensity of the Court’s review may depend on how far the public authorities are likely to be involved”.726 That sentence does not clarify the matter. Rather it seems to reflect a circular reasoning. In the absence of evidence of the public authorities’ incitation, the likelihood of the authorities’ involvement is precisely what needs to be proven. Therefore, the intensity of the Commission’s investigation and of the Union Courts’ review cannot depend on that factor.

2.198

It is also worth noting that Stardust Marine admits that imputability could be proven on the basis of merely indirect evidence. The list of possible indicators mentioned by the Court is essentially a collection of indirect demonstrations of imputability. Likewise “the unlikelihood of [the public authorities] not being involved having regard also to the compass of the measure, its content or the conditions which it contains” 727 shows that imputability could be established merely on the basis of some characteristics of the measure at stake, i.e. when they are such as to render unlikely the non-involvement of the State.

2.199

Finally, the specific circumstances of the case must also not be forgotten. Stardust Marine was about alleged State aid granted to the subsidiary (Stardust) of two subsidiaries (Altus and CDR) of a major public bank (Crédit Lyonnais). The case thus involved four levels (the State, a public undertaking, its subsidiary

2.200

725 726 727

Ibid., points 71-73. See Opinion of Advocate General Jacobs in Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2001:685, point 63. Case C-482/99 France v Commission (‘Stardust Marine’) EU:C:2002:294, para 56.

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and a sub-subsidiary). Moreover, the chain of control between the different levels was interrupted to comply with an earlier Commission decision. In addition, in relative terms the measures in question were not of an amount suggesting that the State could have been expected to have been involved. It is thus not surprising that, in such circumstances, the Court did not accept the rudimentary and unsubstantiated reasoning of the Commission.

2.201

To cast some light on the points left open by Stardust Marine it is worth studying the case law following that judgment.

3.4 The case law after Stardust Marine 3.4.1 Pearle 2.202

In Pearle 728 the Court examined a levy imposed by a trade association governed by public law on its members for the implementation of a collective advertising campaign. The Court established that such a levy could not be qualified as State aid because (i) the initiative for the organisation and operation of that advertising campaign was that of a private association of opticians, and not that of the trade association governed by public law and (ii) the latter served merely as a vehicle for the levying and allocating of resources collected for a purely commercial purpose previously determined by the trade and which had nothing to do with a policy determined by the public authorities.729

2.203

Even if the Dutch State had set up trade associations granting them legally binding powers over the private undertakings associated with them (e.g. the power to impose compulsory levies), in the case at hand those powers had been used for a purely commercial purpose (financing a commercial advertisement campaign). The only act imputable to the State was thus the entrustment of the trade association with binding powers under the law. However, that was not sufficient for the Court to accept imputability.

2.204

Pearle seems therefore to imply that, when the State delegates its authority to corporative bodies governed by public law, there is no imputability insofar as those bodies use the binding legal powers entrusted to them for commercial purposes established by private operators, and not to implement public policies.

728 729

Case C-345/02 Pearle and others EU:C:2004:448. Para 37.

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3.4.2 Deutsche Bahn The General Court in Deutsche Bahn730 held that a German law transposing a Directive on the exemption for commercial air traffic from mineral oil tax and affecting the German State budget could not be considered as a measure imputable to the German authorities for State aid purposes. It considered that the action of Germany was limited to implementing the Directive into national law, which did not leave any margin of appreciation to the Member State. Thus, the judgment essentially clarified that if the State’s action is not discretionary but is limited to the implementation of a Union rule, that action is not imputable to the State within the meaning of Article 107(1) of the Treaty even if it implies a loss of State resources.

2.105

Such situation differs from that where Union law simply allows certain national measures and the Member State has discretion (i) on whether to adopt the measures in question or (ii) in establishing the characteristics of the concrete measure which are relevant from a State aid perspective. That distinction has been confirmed by the Court in Alumina.731 It clarified that a Council decision authorising a Member State, in accordance with a tax harmonisation Directive,732 to introduce an exemption from excise duties could not have the effect of preventing the Commission from qualifying such exemption as State aid.733

2.206

3.4.3 Ufex II In Ufex II734 the General Court annulled a Commission decision finding that a free transfer of the Postadex service from La Poste (parent company) to SFMI (a subsidiary of La Poste) did not constitute aid. The General Court considered that such a transfer implies, most of the time, a price. With regard to imputability the General Court ruled that the transfer had been carried out in line with an order of the French Ministry of Posts and Telecommunications so that the measure was clearly attributable to the Member State. In substance, the General Court based its decision on a direct indicator.

730 731 732 733 734

2.207

Case T-351/02 Deutsche Bahn v Commission EU:T:2006:104. Case C-272/12 P Commission v Ireland and others (‘Alumina’) EU:C:2013:812. Article 8(4) of Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils (OJ L 316, 31.10.1992, p. 12). See in particular para 37. Case T-613/97 UFEX and others v Commission (‘Ufex II’) EU:T:2006:150.

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3.4.4 Olympiaki Aeroporia 2.208

In Olympiaki Aeroporia735 the General Court considered that the decision before it was inadequately reasoned with regard to imputability of the prolonged non-payment of airport charges to Athens International Airport by Olympic Airways. The Commission had considered that tolerating the delay in paying the airport charges was a measure attributable to the State. However, the Commission also stated that Athens International Airport operated as a private undertaking. Therefore, it could not assume in the absence of a specific analysis that the prolonged non-payment of airport charges was imputable to the State.

3.4.5 SIC 2.209

In SIC736 the General Court found that the Commission had rightly excluded the imputability to the State of a measure whereby a State-owned undertaking, Portugal Telecom, had accepted late payments for a network fee from the public broadcaster RTP.

2.210

In particular, the General Court noted that, even though Portuguese law formally provided for withdrawal of the licence for late payment only in respect of private broadcasters, Portugal Telecom was not prohibited from interrupting or suspending its services to RTP in the same situation. Moreover, the General Court underlined that the applicant did not contest the Commission’s assessment that the payment facilities were mainly caused by a dispute between RTP and Portugal Telecom as to the level of the network fee (which, as the Commission noted, was confirmed by the national regulatory authority and also indirectly demonstrated by the fact that, following its privatisation, Portugal Telecom’s behaviour did not change).

3.4.6 Elliniki Nafpigokataskevastiki 2.211

In Elliniki Nafpigokataskevastiki737 the General Court endorsed the Commission’s view that the imputability to the State of different measures adopted by a State-owned bank, ETVA, towards the shipbuilding company HSY could be demonstrated without specifically showing the State’s involvement when each of those measures was adopted. It relied on the particular context of the case and, for that purpose, the General Court noted in particular that: 735 736 737

Case T-68/03 Olympiaki Aeroporia Ypiresies v Commission EU:T:2007:253. Case T-442/03 SIC v Commission EU:T:2008:228 . Case T-384/08 Elliniki Nafpigokataskevastiki and others v Commission EU:T:2011:650.

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(i)

Greece had retained a majority shareholding in ETVA and was in a position to control it;738

(ii)

the three most significant decisions regarding ETVA’s shareholding in HSY were not taken independently by ETVA’s management but were adopted by the government and implemented by ETVA;739

(iii)

the State granted very large amounts of aid to HSY during the period 1995 to 2002 and awarded it strategic defence contracts.740

In that context, the General Court thus accepted the Commission’s argument that “ETVA had no other choice than remaining coherent with the policy of strong and continuous support toward HSY adopted by the State. Consequently, […] all the measures implemented by ETVA towards HSY (loans, guarantees, capital injections, etc.) were automatically imputable to the State, and […] it [was] not necessary to bring forward additional evidence of the State’s involvement at the moment when each of these measure[s was] adopted by ETVA”.741

2.212

3.4.7 Nitrogénművek Vegyipari In Nitrogénmüvek Vegyipari742 the General Court endorsed the Commission’s view that the grant of loans at preferential interest rates by a State-owned development bank, MFB, was imputable to Hungary. For that purpose, the General Court noted that: –

738 739 740 741 742 743

2.213

the law which set up MFB provided that it was to pursue certain public policy objectives and that, in particular, its core function was to promote economic development and to contribute effectively to the implementation of the State’s economic and development policy. Thus, the activities of MFB were not those carried out by a commercial bank in normal market conditions, but those of a public development bank operating at preferential rates and pursuing public policy objectives;743

Para. 56. Those decisions were, first, ETVA’s purchase of HSY in 1985, second, the sale of 49% of HSY’s capital by ETVA to HSY’s employees and, third, HSY’s privatisation in 2001 to 2002 (para 57). Para. 57. Para. 58. Case T-387/11 Nitrogénmqvek Vegyipari v Commission EU:T:2013:98. Para. 63.

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2.214

–

MFB had a different legal status from that of any commercial bank and part of the prudential rules pertaining to commercial banks was not applied to that institution, whose shares were not subject to trading;744

–

MFB was subject to intense supervision by the public authorities. In particular, the General Court noted that MFB reported annually about its operations to the competent minister, who exercised the State’s ownership rights in MFB, appointed the auditor and appointed and revoked the members and the Chairperson of the management and supervisory boards, as well as the Chief Executive Officer.745

The General Court therefore endorsed the view that the indirect indicators on the high level of control exerted in general by the public authorities over MFB were sufficient to establish imputability. In addition, the General Court noted that the imputability of those measures to Hungary was confirmed by the fact that two days before the grant of the loans the Hungarian government stated that, for public policy reasons, it would ‘rescue’ the borrower by providing it with funds to resume production and cover operating costs.746

3.4.8 Doux Élevage 2.215

In Doux Élevage 747 the Court examined, inter alia, whether certain activities carried out by inter-trade organisations in favour of their members were imputable to France pursuant to Article 107(1) of the Treaty.

2.216

Taking a different view from that supported by the Commission, the Court gave a negative answer to that question. According to the Court, neither the State’s power to recognise an inter-trade organisation, nor the State’s power to extend to all the traders in an industry an inter-trade agreement introducing the levying of contributions permitted to conclude that the activities carried out by the inter-trade organisation were imputable to the State.748 In particular, the Court noted that the inter-trade organisations retained the initiative to levy contributions for certain activities, while the State was simply acting as a ‘vehicle’ in order to make those contributions compulsory for the purposes established by the inter-trade organisations.749 744 745 746 747 748 749

Para. 64. Para. 65. Para. 66. Case C-677/11 Doux Élevage and Coopérative agricole UKL-ARREE EU:C:2013:348. Para. 41. Paras 39-40.

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The Court therefore considered that the facts of the case were quite similar to those of Pearle and followed the same line, concluding that measures decided by a trade organisation are not imputable to the State if that organisation retains the initiative to adopt the measures in question and establishes their objectives (which implies that such measures pursue private interests, and not public policy goals750), while the State simply makes mandatory the industry contributions.

2.217

3.4.9 Commerz Nederland In Commerz Nederland751 the Court of Justice was asked to clarify whether guarantees provided by Havenbedrijf Rotterdam (the port authority of Rotterdam, which is a public undertaking) were imputable to the municipality of Rotterdam (the public authority controlling that undertaking). The particularity of the case arose from the facts that (i) the director of Havenbedrijf Rotterdam providing those guarantees acted improperly, deliberately kept the provision of those guarantees secret and disregarded that undertaking’s statutes and (ii) the municipality of Rotterdam would have opposed the provision of the guarantees, had it been informed of it.

2.218

In replying to that question, the Court first clarified that the existence of organisational links between Havenbedrijf Rotterdam and the municipality of Rotterdam tended to demonstrate, in principle, that the public authorities were involved or that it was unlikely that they were not involved in the provision of such guarantees.752 For that purpose, the Court made reference in particular to the fact that (i) the municipality of Rotterdam owned all the shares in Havenbedrijf Rotterdam, (ii) the members of that undertaking’s management and supervisory board were nominated by the general meeting of shareholders and thus by the municipality, (iii) the municipal councillor in charge of the port chaired the supervisory board, (iv) the approval of the supervisory board was required for the provision of guarantees such as those at issue in the main proceedings and (v) the object assigned to Havenbedrijf Rotterdam by its statutes was not comparable to that of a purely commercial undertaking, in view of the prominent place given to the public interest.753

2.219

750

751 752 753

In that sense, see also the Opinion of Advocate General Wathelet, who underlined that imputability of certain measures to the State should be excluded where “the initiative for the measures originates from undertakings that are both providers and beneficiaries of the funds” (point 91). Case C-242/13 Commerz Nederland EU:C:2014:2224. Para. 35. See para. 15, to which the Court makes reference in para. 35.

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2.220

The Court then noted that the fact that the sole director of the public undertaking acted improperly does not, of itself, exclude such involvement of the public authorities. The Court underlined that the effectiveness of the rules on State aid would be considerably weakened if their application could be excluded merely because a director of a public undertaking disregarded that undertaking’s statutes.754

2.221

The Court accepted that such circumstance should be taken into account to establish the imputability to the public authorities of the decision to provide the guarantees, just like the fact that the director of Havenbedrijf Rotterdam deliberately kept that decision secret because there were grounds for presuming that, if the public authorities were informed, they would have opposed it. However, the Court concluded that in a situation such as that at issue in the main proceedings, those circumstances could not, in themselves, exclude such imputability.755

2.222

Commerz Nederland provides a very important clarification on the application of the different indicators laid down in Stardust Marine. In fact, the Court seems to establish that, in the presence of strong organisational links between a public undertaking and the public authorities, imputability can be found even in a quite extreme situation where it can be shown that the managers of the public undertaking adopted a measure without informing the public authorities, who would have likely opposed it.

3.4.10 Austria v Commission 2.223

In Austria v Commission756 the General Court examined a system devised to promote green electricity through a private law company (the ÖMAG), which had a public concession to act as settlement centre. The settlement centre had the task to buy green electricity from producers at a fixed price and to sell that electricity at a fixed price to suppliers, who were obliged to buy from the settlement centre a percentage of their overall supply. The suppliers were allowed to pass on to their customers the higher prices due to the mandatory purchase of green electricity, with the exception of energy-intensive business, which therefore benefited from lower electricity prices.

754 755

756

Para. 36. Para. 39. It should be signalled that in that paragraph of the judgment and in the reply to the preliminary question there are certain discrepancies between the English text and the other linguistic versions, probably due to a corrigendum of the Dutch version which was not transposed in the English translation. Case T-251/11 Austria v Commission EU:T:2014:1060.

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Austria contested the Commission decision finding that that mechanism involved the grant of aid to energy-intensive business, arguing inter alia that the actions of the ÖMAG were not imputable to the State. The General Court could easily dismiss the Austrian arguments, simply noting that the mechanism was instituted by law, and therefore was imputable to the State.757

2.224

Interestingly, though, the General Court went on to note that, in any event, the ÖMAG was integrated in a structure regulated by the law, which not only established the nature of its activities and their concrete exercise, but also foresaw an ex post control by State bodies and determined in detail the ÖMAG’s room of manoeuvre in accomplishing the concession’s tasks. The General Court therefore underlined that the ÖMAG could not be considered as a private operator acting freely, with the purpose of making profits, on a competitive market. In that way, the General Court seemed to imply that the public control exerted by the public authorities on the ÖMAG was in itself sufficient to establish imputability.

2.225

3.5 Conclusion As indicated above, Stardust Marine clarified that the imputability to the State of measures adopted by public undertaking cannot be taken for granted, but needs to be shown. When the Commission adopts a decision finding that a measure adopted by a public undertaking constitutes State aid, it carries the burden of proving imputability. However, Stardust Marine did not make clear what precisely the Commission has to prove and how it should discharge that burden. In other words, it did not make clear what level of involvement or type of conduct by the public authorities is required to make a measure imputable to the State. By the same token, Stardust Marine did not clarify if indirect indicators could still be sufficient or their function is limited to reinforce some other direct indicators.

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As regards the question of what level of involvement is required, Stardust Marine establishes that the mere fact that public authorities control as shareholders a public undertaking is not sufficient. However, it would not seem correct to take the opposite view that the initiative for the adoption of the measure must come from the public authorities. In fact, such an interpretation would not be in line with the language used by the Court in Stardust Marine that the public authorities must be regarded as having been involved “ in one way or another” and “ it cannot be demanded that it be demonstrated […] that in the particular

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757

Para. 87.

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case the public authorities incited the public undertaking to take the aid measure in question”. Moreover, such reading would not take into account that the grant of State is often suggested or even requested by an industry, notably in the case of restructuring aid. In other words, the initiative for a State intervention can originate from the industry but still be included in a policy implemented by the State.

2.228

Pearle and Doux Élevage do not support the idea that the initiative for the adoption of the measure must come from the public authorities. In those judgments the Court excluded imputability taking into account not only that the industry retained the initiative for the adoption of the measures in question but also that the industry established the objectives of such measures, which pursued private interests and not public policy goals. That factor was clearly explained by Advocate General Wathelet in Doux Élevage, where he recognised “the fact that numerous State aid measures are adopted by the State at the request of the undertakings concerned”, which “ is typically the case with aid for the rescue and restructuring of distressed undertakings”.758 The Advocate General therefore considered that “private initiative does not preclude, in all cases, the imputability of a measure to the State”.759 However, he noted that the circumstances of the Doux Élevage case were “very different as the initiative for the measures originate[d] from undertakings that [were] both providers and beneficiaries of the funds”.760

2.229

What then is the minimum level of State involvement that makes a measure imputable to the State? It could be argued for instance that knowledge by a public authority of the public undertaking’s decision and subsequent inaction makes that decision imputable to the State. In other words, in a situation in which the public authority tolerates how a public undertaking uses its resources to unduly favour a subsidiary, the latter’s behaviour could be considered as imputable to the public authority. The Court’s formulation “in a way or another” could support that view. The same is suggested by the fact that the Court, unlike Advocate General Wathelet, did not explicitly ask for a positive behaviour of the public authorities in Doux Élevage.

2.230

The view that inaction of an informed public authority is insufficient to establish imputability may be considered as not taking duly into account the warnings of the Court in Stardust Marine about the danger that imputability arguments become the means to circumvent State aid rules (i.e. public undertakings 758 759 760

Para. 91. Ibidem. Ibidem.

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and State have close and opaque relations and it is difficult for third parties to prove the instruction of the public authorities). Another question is whether it is sufficient for the Commission to prove that in general public authorities are involved in the operations of a given public undertaking (in particular due to strong structural links with such an undertaking) or rather whether it is necessary to show a precise influence of those authorities over the adoption by that undertaking of the alleged State measure. The case-law prior to Stardust Marine, which is mainly based on indirect indicators, suggests that proving the general involvement of the State in the operations of the undertaking could be sufficient. Stardust Marine, by mentioning a number of indirect indicators, and notably that in some circumstances the unlikelihood of the public authorities not being involved could be sufficient to establish imputability, strongly suggests that proving a general involvement of the State in the business of a public undertaking could be sufficient to establish imputability.

2.231

That reading is supported by Nitrogénmqvek Vegyipari, where the General Court essentially endorsed the view that indirect indicators on the high level of control exerted, in general, by the public authorities over a public undertaking suffice to establish imputability. In the same direction and in a very clear way, goes Commerz Nederland, where the Court of Justice indicated that strong organisational links between a public undertaking and the public authorities suffice to establish imputability, even if the public authorities are not informed of a given measure and do not support it.

2.232

Another question is which public authorities need to be involved “ in a way or another” in the adoption of the measure. Of course, the involvement of the constitutional powers of the State renders the measure imputable to the State. That requirement is certainly met by the executive, the legislative and the judicial branches of a Member State. Moreover, the Court of Justice has already established that in State aid matters the State also includes regional and local bodies of the Member States, whatever their status and description.761 In addition, Air France clarified that the conduct of bodies belonging to the public sector is necessarily imputable to the State even if they enjoy autonomy from the political authorities of the State.762 That reasoning clearly also covers the involvement of an independent regulatory authority.

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761 762

Case 248/1984 Federal Republic of Germany v Commission EU:C:1987:437, para. 17. Case T-358/94 Air France v Commission EU:T:1996:194, paras 56-62.

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Finally, it is worth signalling that the Union Courts have not yet clarified how to examine the imputability requirement with regard to measures adopted jointly by several Member States. However, the Commission was confronted with this question and, in line with the general principles established by the case-law, took the view that such measures are imputable to all the Member States concerned.763 The same should normally apply when a group of Member States take jointly a measure through a specific institutional body they created.

763

Commission Decision 2010/606/EU of 26 February 2010 on State aid C 9/2009 (ex NN 45/08, NN 49/08 and NN50/08) implemented by the Kingdom of Belgium, the French Republic and the Grand Duchy of Luxembourg for Dexia SA, OJ L 274, 19.10.2010, p. 54.

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Chapter 10 Selectivity764 1.

General remarks

In order to qualify as State aid within the meaning of Article 107(1) of the Treaty a measure must favour “certain undertakings or the production of certain goods”. Selectivity means that the measure in question results in an advantage being granted to certain undertakings or to categories of undertakings (based on their involvement in a given economic sector, their size, their legal form or other characteristics that they have in common).

2.235

Selectivity distinguishes State aid from general measures which fall outside the scope of Article 107(1) of the Treaty.765 The latter are effectively open on equal terms to all undertakings operating within a given Member State.

2.236

The Union Courts interpret the criterion of selectivity in such a broad manner that drawing the distinction between State aid and general measures continues to raise doubts in a number of instances and thus inspire discussions in the State aid literature.766 If not all economic sectors can benefit from a State intervention neither a large number of eligible undertakings nor the diversity and size of the sectors to which they belong provide sufficient grounds for concluding that it

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766

This chapter draws from the corresponding chapter in the first edition of this book. The authors would like to thank Koen Van de Casteele and Mehdi Hocine for being able to build on their work. See e.g. Prek and Lefèvre, The Requirement of selectivity in the recent case-law of the Court of Justice EStAL 2012, 335; Bacon, “State Aids and General Measures” (1997) 17 YEL 269, 270; Slotboom, “State Aid in Community Law: A Broad or Narrow Definition?” (1995) 20 ELRev 289, 297. See e.g., Van de Casteele and Hocine, “Favouring certain undertakings or the production of certain goods: Selectivity, in Mederer, Pesaresi and van Hoof (eds.) EU Competition Law, Vol. 4, State aid (Claeys & Casteels, 2008) at 252; Romariz, “Revisiting Material Selectivity in EU State Aid Law” Or “The Ghost of Yet-To-Come” – EStAL 2014, 39 at 40. The latter author cites Case T-55/99 CETM v Commission ECLI:EU:T:2000:223 as an example of a case of unclear boundaries between selective and general measures.

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constitutes a general measure of economic policy.767 The fact that the scope of application of a measure is determined in an objective manner is not in itself sufficient to establish the general character of the measure and does not exclude selectivity.768

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The distinction between selective and general measures gives rise to doubts most frequently in a set of “borderline” cases, often relating to fiscal schemes or other measures that mitigate the normal charges imposed on undertakings. The caselaw of the Union Courts in that area is subject to analysis in a separate chapter of the present book. This chapter focuses on general principles relating to the application of selectivity as State aid criterion. First, it analyses the material dimension of selectivity, explaining the difference between de jure and de facto selectivity, deals with the significance of the existence of administrative discretion for qualifying a measure as State aid and elaborates on the method of establishing selectivity in those borderline cases, known as the “three-step test”. In the second part, this chapter explains the test developed by the Union Courts for establishing regional selectivity of State measures.

2. 2.239

Material selectivity

As mentioned above, the material selectivity of a measure implies that it applies only to certain (groups of ) undertakings or certain sectors of the economy in a given Member State. If a Member State treats one particular undertaking more favourably than other undertakings (e.g. if the State rescues a company in difficulty), this measure is clearly selective. The notion of selectivity, however, is much broader.

767 768

See, e.g. Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke ECLI:EU:C: 2001:598, para 48. See, for instance, Case T-379/09 Italy v Commission ECLI:EU:T:2012:422, para 47. The measure in question in that case was a partial exemption from excise duty on the diesel used for the heating of greenhouses. The General Court indicated that the fact that the exemption n could benefit all undertakings choosing greenhouse production was not sufficient to establish a general character of the measure; In Case C-126/01 GEMO ECLI:EU:C:2003:622, paras 35 to 39, concerning a scheme for the free collection and destruction of animal carcases and slaughterhouse waste, the Court held that, despite the fact that the beneficiaries of the scheme adopted by national law were defined on the basis of objective and apparently general criteria, its benefits accrued mainly to farmers and slaughterhouses; In that context the reading of the General Court’s judgment in Case T-499/10 MOL v Commission ECLI:EU:T:2013:592, paras 76 to 78 may be somewhat confusing. However, Advocate General Wahl in his opinion on the Commission’s appeal in that case ECLI: EU:C:2015:32, paras 90 to 101, argues that as regards the examination of selectivity and consideration of objective criteria the General Court did not in any way fail to take into account the conclusions to be drawn from the established case-law. See also Nicolaides, Selectivity, Exercise of Discretion and (Non)-Objective Criteria EStAL 2014, 141.

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A measure is also selective, for instance, if it only applies to undertakings having a certain size (e.g. only SMEs769 or only large companies), active in certain sectors or having a certain legal form.770 It is also selective if it applies only to undertakings incorporated during a particular period, to undertakings belonging to a group having certain characteristics or to undertakings entrusted with certain functions within a group.771 A measure that only applies to companies in difficulty is also only applicable to a particular group of companies and therefore selective.772

2.240

Because of the selectivity element, the notion of State aid shows similarities with equal treatment or non-discrimination provisions;773 its scope of application is restricted, however, to economic activities and to situations where there is at least a potential effect on intra-Union trade and where the measure is not purely regulatory (because of the element of “transfer of State resources”).774

2.241

Selectivity is not only present if the measure benefits only one sector. The Court of Justice went further in that respect regarding the Maribel bis/ter measures implemented by Belgium in favour of a wide variety of sectors exposed to international competition. The Court of Justice considered that such measures constitute State aid and that “Neither the high number of benefiting undertakings nor the diversity and importance of the industrial sectors to which those undertakings belong warrant the conclusion that the Maribel bis/ter scheme constitutes a general measure of economic policy”.775 Although the measure benefitted a large variety of different sectors, it was still considered selective.

2.242

In the 1980s, the Commission still considered that measures applying to the whole industrial sector were general enough to escape the qualification as State aid.776 It later abandoned that interpretation and the Court of Justice, in Adria-

2.243

769 770 771 772 773

774

775 776

Case C-351/98 Spain v Commission ECLI:EU:C:2002:530; Case C-409/00 Spain v Commission ECLI: EU:C:2003:92. Case C-222/04 Cassa di Risparmio di Firenze and others ECLI:EU:C:2006:8. See in more detail the sections on fiscal selectivity (book paragraphs 2.689 et seq.). Commission Decision of 15.4.2011 on SA.29150 (C7/2010) – Scheme on the fiscal carry-forward of losses in case of restructuring of companies in difficulty (“Sanierungsklausel”), OJ L 235, 10.09.2011, p. 26. See also Prek and Lefèvre, “The Requirement of selectivity in the recent case-law of the Court of Justice” (2012) 11 EStAL 335, 336 et seq; Lang, “State aid and taxation: Recent trends in the case law of the ECJ” EStAL 2012, 411 at 420. See points 27 to 34 of the Opinion of Advocate General Wahl in Case C-518/13 Eventech ECLI:EU:C: 2014:2239. In certain cases, however, the question whether there is a transfer of State resources is subsumed, in essence, in the question whether certain undertakings are granted a selective advantage, see Case C-518/13 Eventech ECLI:EU:C:2015:9, paras 47 to 53. Case C-75/97 Belgium v Commission (Maribel bis/ter) ECLI:EU:C:1999:311, para 32. Proposal for appropriate measures in case E2/98 Irish Corporate Tax, OJ C 395, 18.12.1998, p. 19.

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Wien Pipeline,777 confirmed the wider interpretation by considering that a rebate on an energy tax applying only to the primary and industrial sectors was indeed selective.778 The Commission also has made clear that even the exclusion of very few sectors can render a measure selective and has considered that tax breaks that apply across the whole economy apart from the banking and insurance sectors can constitute State aid.779 That approach clearly shows that selectivity cannot be excluded on the basis that a measure is quite general and applies to a wide variety of recipients of an advantage from State resources. As such, the notion of a “sufficiently general measure”, which could be considered non-selective, does not exist.

2.244

In academic literature, a distinction is sometimes drawn between measures favouring certain undertakings or sectors, on the one hand, and measures favouring certain actions or activities which are open to all sectors, on the other hand.780 There is indeed the difference as regards those two situations in that the wording of Article 107(1) of the Treaty speaks only of selective treatment as regards undertakings or sectors.781 However, measures favouring certain actions or activities can clearly also constitute State aid because of their effects on undertakings or sectors.782 In some situations where a specific action or the activity can only be carried out by certain undertakings or sectors,783 the measure should be considered even de jure selective.

2.245

In its Spanish goodwill decisions,784 the Commission had found the Spanish corporate tax rules allowing for the deduction of shareholdings in foreign companies to be incompatible State aid. The Commission had concluded that the scheme amounted to incompatible State aid because it treated more favourably foreign acquisitions compared to domestic acquisitions without any objective reason.785 The General Court annulled the Commission’s decisions and held 777 778 779 780 781 782 783 784 785

Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke ECLI:EU:C:2001:598. Advocate General Mischo considered that measures applying to the whole primary and secondary sectors were not State aid, but his Opinion was not followed by the Court of Justice. See Commission Decision of 12 September 2007 in case N 184/2007, Cuneo fiscale, at para 11, summary notice in OJ C 245, 19.10.2007, p. 1. Hancher, Ottervanger and Slot (eds.), EU State Aids (4th ed., Sweet & Maxwell, 2012) 85. The wording “production of certain goods” includes in fact economic activity in all sectors, see e.g. Case C-75/97 Belgium v Commission (Maribel bis/ter) ECLI:EU:C:1999:311, paras 6 and 29 et seq. See the discussion on de facto selectivity in the following section. On a lack of technological neutrality as a cause of selectivity, see Case C-403/10 P Mediaset v Commission ECLI:EU:C:2011:533. Commission Decisions of 28 October 2009 and 12 January 2011 in case C-45/07, Tax amortization of financial goodwill for foreign shareholding acquisitions, OJ L 7, 11.01.2011, p. 48 and OJ L 135, 21.05.2011, p. 1. The Commission considered the measure de jure selective and therefore did not further analyze the effects of the measure in order to demonstrate de facto selectivity.

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that the Commission failed to demonstrate the selective nature of the provision.786 The General Court stated that the Spanish regime does not differentiate between different groups of undertakings or the production of different goods, but rather between different categories of economic transactions. A priori, the Spanish regime would not exclude any category of undertakings since the application is seen as independent of the activity of the undertaking. The Commission has appealed the judgments. Several arguments may support the Commission’s view that the measures at stake are indeed selective. The starting point for the analysis is the wording of Article 107(1) of the Treaty, which requires the favouring of “certain undertakings or the production of certain goods”. The General Court construed that phrase too narrowly since the clearly defined group of undertakings benefitting from a measure can be those undertakings that carry out a specific economic transaction, (in the case at stake undertakings acquiring foreign companies). Moreover, from a competition perspective, measures differentiating between different non-core activities (such as here the acquisition of other companies) of an undertaking can be equally distortive as measures differentiating between different core activities of a company (i.e. different sectors). Moreover, since the General Court admits in its judgment that favorable tax treatment for companies (in any sector) exporting goods is selective,787 there is no reason why an analogous measure for companies exporting capital should be considered nonselective.

2.246

For the selectivity test, the comparison takes place within the Member State granting the alleged aid, and so it is a comparison with the situation of other undertakings in the same Member State.788 Member States often invoke the fact that competitors established in other Member States receive similar advantages such as lower tax rates.789 The element of selectivity can therefore be seen as a test for internal consistency of the Member State’s rules, not as a benchmarking exercise against the competitive position of undertakings in other Member States. However, the territorial reference framework can be narrower than the whole Member State, as further discussed below in the section on regional selectivity.790

2.247

786 787 788 789 790

Case T-219/10 Autogrill Espana and others v Commission ECLI:EU:T:2014:939 and Case T-399/11 Banco Santander and Santusa v Commission ECLI:EU:T:2014:938. Case T-219/10 Autogrill Espana v Commission ECLI:EU:T:2014:939, para 78 et seq. Case T-308/00 Salzgitter ECLI:EU:T:2004:199, para 81. See Quigley, European State aid law and policy (2nd ed., Hart, 2009) 42. See book paragraphs 2.294 to 2.319.

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2.248

The selectivity element is not a check whether a Member State has applied objective criteria, as opposed to acting in a discretionary or arbitrary way. The fact that a measure is governed by objective criteria does not mean that the measure is not selective.791 Indeed many of the distinctions outlined above (such as distinction based on the legal form, the size or the sector) can easily be based on objective criteria. In many cases, the formulation of objective criteria only means that the measure constitutes an aid scheme.792

2.249

The elements of selectivity and of advantage are often closely linked. The Court of Justice has ruled out the existence of an advantage in the cases of a reimbursement of illegally assessed taxes,793 an obligation for the national authorities to compensate for damage they have caused to certain undertakings794 or the payment of compensation for an expropriation.795 Those measures could also be seen as non-selective because they are based on general legal principles of the relevant national law that apply to all entities in a comparable situation.

2.1 De jure and de facto selectivity 2.250

Material selectivity can be established in two ways: de jure and de facto. De jure selectivity results directly from the legal criteria for granting a measure that is formally reserved for certain undertakings. De facto selectivity refers to the situation in which, although the formal criteria for the application of the measure are formulated in general and objective terms without any evident distinction between different (groups of ) undertaking, the effects of the measure still favour a particular group of undertakings.

2.251

There cannot be any doubts that State aid law should not only capture measures that are selective de jure but should also cover measures that are only de facto selective. In its Italian textiles 796 ruling the Court of Justice clearly stated that a measure must be analysed not through its “aims or causes” but through its effects.797 Adopting a formal view and including only measures that are de jure 791 792 793 794 795

796 797

Case T-379/09 Italy v Commission ECLI:EU:T:2012:422. Case C-279/08 P Commission v Netherlands (NOx) ECLI:EU:C:2011:551, para 50; Bacon, European Union law of State aid (2nd ed., OUP, 2013) 76. Case 61/79 Amministrazione delle finanze dello Stato v Denkavit Italiana ECLI:EU:C:1980:100, paras 29 to 32. Joined Cases 106 to 120/87 Asteris and others v Greece and EEC ECLI:EU:C:1988:457, paras 23 and 24. Case T-64/08 Nuova Terni Industrie Chimiche v Commission ECLI:EU:T:2010:270, paras 59 to 63 and 140 to 141, clarifying that while the payment of a compensation for an expropriation does not grant an advantage, an extension ex post of such compensation can constitute State aid. Case 173/73 Italy v Commission (Italian textiles) ECLI:EU:C:1974:71, para 27. On effects-based approach in the selectivity assessment in general, see Nicolaides and Rusu, “The concept

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selective would be far too narrow to limit distortions of competition through State intervention in the internal market, and would leave certain measures outside of State aid control although they can have exactly the same economic effects as de jure selective measures. Focusing on economic effects of a measure and not on its formal characteristics for the selectivity analysis is in line with the general State aid principle of looking at the economic effects of the measure,798 which also applies when determining whether there is an advantage. While it is generally accepted that selectivity can be established de facto, it is difficult to formulate in general terms a simple test for de facto selectivity. The decisive element to establish de facto selectivity has to be the effects of the measure.799 However, in practice no measure will have exactly the same effects on all undertakings and all groups of undertakings. As a result, too strict a notion of de facto selectivity would transform all measures adopted by the Member States into State aid and it would therefore not offer a meaningful criterion to delineate selective from general measures. In the case law of the Union Courts and the decisional practice of the Commission concerning de facto selectivity, the effects of the measures under scrutiny have in fact always favoured a certain group of undertakings to a significant extent. A measure should therefore be considered de jure selective if its effects “significantly favour” a particular group of undertakings.800

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Since the effects of the measure are relevant and not the intention of the public authorities, a measure can also be found selective in the absence of any intention of the public authorities to favour a certain group of undertakings. By contrast, a clear intention to favour a group constitutes an indicator of the selective character of the measure. However, the decisive element remains the effect of the measure.

2.253

For measures mitigating the normal costs of an undertaking (such as tax exemptions) to which the three-step-analysis applies,801 the distinction between de jure

2.254

798 799 800

801

of selectivity: An ever wider scope”, EStAL 2012, 791. On the inherent tension with the first step of the three-step approach, which explicitly recognizes the objective of the system as the reference framework for the selectivity assessment, see Bartosch, “Is there a need for a rule of reason in European State aid law? Or how to arrive at a coherent concept of material selectivity?” (2010) 47 CMLRev 729, 733 et seq. Case C-279/08 P Commission v Netherlands (NOx) ECLI:EU:C:2011:551, para 51. See for instance Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732, paras 91 to 93. The Commission also explains the notion of de facto selectivity in this way in the draft Commission Notice on the notion of State aid pursuant to Article 107(1) of the Treaty, para 122. Nicolaides speaks of a “persistent bias” of a measure, cf. Nicolaides, “Fiscal State Aid in the EU: The Limits of Tax Autonomy”, World Competition 2004, 371. Discussed in detail below, see book paragraphs 2.270 et seq.

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and de facto selectivity is relevant for the second step of the test. In the second step, it is determined whether a measure derogates from the reference system, i.e. whether it differentiates between undertakings in a comparable legal and factual situation. That differentiation can be established either de jure or de facto.802

2.255

One of the earliest Commission decisions dealing with de facto selectivity is the decision in Italian textiles,803 concerning an Italian provision on a reduction in employers’ contribution to the sickness insurance scheme. Under the Italian measure, that reduction was higher for female than for male workers. The Commission considered the scheme selective because it favoured those sectors with a high percentage of female workers, in particular the textile sector.804

2.256

De facto selectivity was also found as regards a reform of corporate taxation in Gibraltar, which in practice favoured offshore companies.805 The reform introduced a system consisting of three taxes applicable to all Gibraltarian companies, namely a payroll tax, a business property occupation tax (“BPOT”) and a registration fee. For the payroll tax and for the BPOT liability was capped at 15 per cent of profits. The Court of Justice found that such a combination of taxes excluded from the outset any taxation of offshore companies as they had no taxable basis due to their lack of employees and lack of business property in Gibraltar.

2.257

De facto selectivity may result from conditions or barriers imposed by Member States preventing certain undertakings from benefiting from a measure. For example, applying a tax measure (e.g. a tax credit or any other favourable tax measure) only to investments exceeding a certain substantial threshold may mean that the measure is de facto reserved for undertakings with significant financial resources806 and therefore is de facto selective. The General Court held, for example, that the restriction by the Basque authorities of a tax credit to investments of over ESP 2 500 million807 meant that the tax credit was reserved de facto to undertakings with significant financial resources.808 802 803 804 805 806 807 808

Micheau, “Tax selectivity in State aid review: a debatable case practice”, (2008) 17 EC Tax Review 276, 282. Commission Decision 80/932/EEC of 15 September 1980, OJ L 264, 08.10.1980, p. 28. The Commission based its decision on the expected effects of the measure, taking at the same time note of the fact that these effects were intended by the legislator. Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732, paras 101 et seq. See, for instance, Joined Cases T-92/00 and T-103/00 Diputación Foral de Álava v Commission ECLI:EU:T:2002:61, para 39. Approximately EUR 15 million. Joined Cases T-92/00 and T-103/00 Diputación Foral de Álava v Commission ECLI:EU:T:2002:61, para 39.

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In the decision on the Dutch International Financing Activities scheme,809 the Commission considered that the limitation of a tax scheme to multinational companies established in at least four countries or two continents had the effect of limiting the scope of the measure to certain companies. Another example of a de facto selective measure can be found in GEMO.810 The Court of Justice recognised that a carcass disposal service essentially benefitted farmers and slaughterhouses, even though it applied also to the owners of domestic animals and certain undertakings such as zoos or some public authorities. The fine delineation between those measures which are general and those which are de facto selective is illustrated by the Commission’s analysis of Danish tax advantages granted to high earning foreign experts working in that Member State. The Commission first considered in a 1992 decision811 that the measure at stake was de facto selective since it targeted only a limited number of undertakings. However, it reconsidered its position in 1999812 following the production by Denmark of data showing that the 1992 measure in fact benefited undertakings of all sizes and in all sectors of the economy. That example shows that either data on the actual past effects of a (similar) measure or reliable estimates of the future effects of a measure may allow general measures to be distinguished from de facto selective measures.

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The general test of whether a measure “significantly favours” a particular group of undertakings applies to all measures, including tax measures, since State aid law does not distinguish based on the legal form of a measure. It therefore also applies to measures reducing the tax burden related to certain activities with a horizontal scope (e.g. training, employment, environmental investment, research and development and innovation). If those tax measures “significantly favour” certain groups of undertakings they should be considered selective. A certain uneven distribution of the effects across sectors or across other groups of undertakings is, in contrast, inherent in any measure and therefore not sufficient to find a measure de facto selective. While the 1998 Fiscal Notice contained language suggesting that such measures should never be considered selective, there is no longer such languages in newer Commission documents. Admittedly, any assessment in that area is particularly complex and depends on all the particularities of the individual case.

2.259

809 810 811 812

Commission Decision of 17.02.2003 in case C51/2001, OJ L 180, 18.07.2003, p. 52, para 88. Case C-126/01 GEMO ECLI:EU:C:2003:622, paras 38 and 39. Referred to in XXXth Report on Competition Policy 2000, SEC(2001) 694 final, para 321. Commission Decision of 3.5.2000, N 41/99, OJ C 284, 07.10.2000.

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2.60

The Commission has also addressed the question of de facto selectivity in its decisions on Spanish schemes involving leasing and financing through tax relief. The Commission assessed a scheme set up in 2002 and made of several tax measures. It came to the conclusion that several elements of the scheme as well as the scheme as such were selective. The Commission relied in particular on the fact that vaguely defined eligibility conditions and (discretional) authorizations by the tax authorities were de facto only applicable to certain operations as regards the lease and sale of newly built sea-going vessels. The Commission also concluded that de facto selectivity was confirmed by the fact that all of 273 cases of application of the scheme concerned sea-going vessels.813 In contrast, the Commission found that the successor scheme did not constitute State aid. The Commission had found that while the scheme contained certain conditions on the financing of assets, it applied in principle to all assets that are financed through leasing contracts, without prior authorization anymore and that the conditions attached were clearly defined and justified by the logic of the system.814

2.2 Selectivity stemming from discretionary administrative practices 2.261

Measures which prima facie apply to all undertakings, but are or may be limited to certain (groups of ) undertakings by the discretionary power of the Member State’s public administration, are selective.815 As a result, there is selectivity already due to the assignment of discretionary powers to the public authority responsible for the application of a rule, and not only at the moment when those authorities exercise that discretion later when applying the rule.

2.262

Discretionary powers of the public administration are a rather wide notion. The public administration has discretion, for example, where meeting the criteria established under national law for a measure does not automatically result in an entitlement to the measure. This captures national rules that explicitly provide for a margin of discretion of the administration. However, it also captures situations where the criteria for granting the measure are formulated in a very general or vague manner that necessarily involves a margin of discretion in the 813

814

815

Commission decision of 17.7.2013 on the aid scheme SA.21233 (C/2011) – Tax regime applicable to certain finance lease agreements also known as the Spanish Tax lease System, OJ L 114, 16.04.2014, p. 1, paras 146 and 156. Commission decision of 20.11.2012 on the aid scheme SA.34736 (2012/N) – Early depreciation of certain assets acquired through a financial leasing, summary notice in OJ C 384, 13.12.2012, p. 1. The decision was upheld by the General Court, Case T-140/13 Netherlands Maritime Technology Association v Commission ECLI:EU:T:2014:1029. See Case C-256/97 DM Transport ECLI:EU:C:1999:332, para 27; Joined Cases T-127/99, T-129/99 and T-148/99 Territorio Histórico de Álava and others v Commission ECLI:EU:T:2002:59, para 149; Case T-152/99 HAMSA v Commisssion ECLI:EU:T:2002:188, para 157.

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assessment. If the administration is bound by certain administrative guidelines in the exercise of its discretion, it is sufficient that the guidelines provide that the administration can in exceptional circumstances depart from the guidelines to render the measure selective.816 The mere fact that the decisions of the public authorities may be appealed against before a national court cannot call into question the existence of a margin of discretion on the side of the public authorities.817 The decisive element is that the public authorities have a margin of discretion. It is, in contrast, not necessary that the public administration acts in an arbitrary way.818 There is no reason why it should not fall within the scope of the State aid rules if a public authority implements, through its discretion, a well-designed and consistent policy of favouring certain undertakings.

2.263

The group of undertakings favoured by the discretionary rule does not need to be clear from the outset.819 It is sufficient to find selectivity that the public administration has discretion and that it can apply the rule in a way favouring certain undertakings. There only has to be a potential group that can benefit from the measure, the group that benefits from the measure does not need to be known in advance.

2.264

The fact that a measure, including a tax relief, requires prior administrative authorisation does not in itself mean that it constitutes a selective measure. If the public administration is applying clear, objective and non-discriminatory criteria set out in advance, it has no discretion that would render the measure selective. A system of prior administrative authorisation has to be based on a procedural system which is easily accessible and capable of ensuring that a request for authorisation will be dealt with objectively and impartially within a reasonable time. Applicants whose applications are refused have to be able to challenge the refusal in judicial or quasi-judicial proceedings.820

2.265

816 817 818

819 820

Case C-241/94 France v Commission ECLI:EU:C:1996:353, paras 23 and 24. See for example Commission Decision of 20.12.2006 in case C46/2004, OJ L 112, 30.04.2007, p. 41, para. 130. Joined Cases T-127/99, T-129/99 and T-148/99 Territorio Histórico de Álava and others v Commission ECLI:EU:T:2002:59, para. 154; Case T-36/99 Lenzing v Commission ECLI:EU:T:2004:312, paras 129 and 132. Quigley, European State aid law and policy (2nd ed., Hart, 2009) 46. See Case C-157/99 Smits and Peerbooms ECLI:EU:C:2001:404, para 90; Case C-203/08 Sporting Exchange ECLI:EU:C:2010:307, para 50.

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2.266

An example of a margin of discretion of the national authorities is the the GIE fiscaux case.821 In that case, the granting of a tax advantage by the French authorities was, inter alia, conditional upon the realisation of investments having a “significant economic and social interest both in general and from an employment standpoint in particular”. The Commission considered that those conditions in essence offered the French authorities a margin of discretion.

2.267

Another example is Ecotrade, where national provisions allowing large firms to continue their business while being placed under special administration – although they fulfilled the criteria of insolvency – were considered to offer the public authorities discretion as to the firms to which the rule was applied.822

2.268

Similarly, in P Oy the Court of Justice held that if the competent authorities have a broad discretion to determine the beneficiaries or the conditions under which a tax advantage is granted on the basis of criteria unrelated to the tax system – such as maintaining employment – the exercise of that discretion constitutes a selective measure.823

2.269

In MOL, in contrast, the General Court held that the margin of assessment left to the national authorities to determine a mining fee was justified by objective reasons, it was limited by objective criteria related to the respective fee system and it in fact enabled the national authorities to take account of equal treatment principles.824

2.3 The three-step test 2.270

When an aid measure takes the form of a grant of money or assets benefitting one or more well identified undertakings, its selective character is straightforward.825 That is probably why sometimes the Court does not even separately analyse the selectivity of a measure, but looks instead in a more holistic manner at the existence of a selective advantage.826 The assessment of selectivity is often more difficult when Member States adopt broader measures, applicable to all undertakings fulfilling certain criteria, which mitigate the charges that those 821 822 823 824 825 826

Commission Decision of 20.12.2006 in case C46/2004, OJ L 112, 30.04.2007, p. 41. Case C-200/97 Ecotrade v Altiforni e Ferriere di Servola ECLI:EU:C:1998:579, para 40. See also Case C-295/97 Piaggio and others ECLI:EU:C:1999:313, paras 36 to 39. See Case C-6/12 P Oy ECLI:EU:C:2013:525, para 27. Case T-499/10 MOL v Commission ECLI:EU:T:2013:592, para 72. The Court considered, as the General Court did, that the measure is non-selective, Case C-15/14 P Commission v MOL ECLI:EU:C:2015:362. See point 52 of the Opinion of Advocate General Mengozzi in Case C-284/12 Deutsche Lufthansa ECLI:EU:C:2013:755. Case C-53/00 Ferring ECLI:EU:C:2001:627, paras 17 et seq.

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undertakings would normally have to pay, for instance, tax or social security contributions. In such cases, the selectivity of the measures should in principle be assessed by means of a three-step analysis. First, the system of reference must be identified. Second, it should be determined whether a given measure derogates from that system insofar as it differentiates between economic operators who, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation. Assessing whether the derogation exists is the key element of that part of the test and allows a conclusion to be drawn as to whether the measure is prima facie selective. If the measure in question does not constitute the derogation from the reference system, it is not selective. However, if it does (and therefore is prima facie selective), it needs to be established, in the third step of the test, whether the derogatory measure is justified by the nature or the general scheme of the reference system.827 If a prima facie selective measure is justified by the nature or the general scheme of the system, it will not be considered selective and will thus escape qualification as State aid.828

2.271

The three-step test was developed mainly in the case law concerning fiscal measures. It clearly applies to all measures mitigating the normal charges of undertakings and it can be argued that the three-step analysis should be followed in all cases, in which selectivity of a measure at stake raises doubts. For example, Bartosch argues that “any attempt to limit the full-scale analysis of selectivity to fiscal measures only would run counter to the very basic rule of State aid law that it applies regardless of the specific instrument that the Member States employ”.829 The case law of the Court also provides some arguments in support of applicability of the three-step test to non-fiscal measures. In CETM830 and NOx831, concerning respectively a Spanish subsidy on the interest payable on loans granted to purchase industrial vehicles and the Dutch nitrogen oxides (“NOx”) emission trading scheme, the Union Courts did not really expressly define the system of reference, but considered whether measures entailing differences in treatment between categories of undertakings were justified by the nature or structure of the system of which they form part.

2.272

827 828 829 830 831

See, for instance, Case C-279/08 P Commission v Netherlands (NOx) ECLI:EU:C:2011:551, para 62, Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke ECLI:EU:C:2001:598. See, for instance, Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, paras 49 et seq.; Case C-308/01 GIL Insurance and others ECLI:EU:C:2004:252. Bartosch, “Is there a need for a rule of reason in European State aid law? Or how to arrive at a coherent concept of material selectivity?” (2010) 47 CMLRev 729, 744. Case T-55/99 CETM v Commission ECLI:EU:T:2000:223, paras 52 et seq. Case C-279/08 P Commission v Netherlands (NOx) ECLI:EU:C:2011:551, para 76.

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2.273

There are, however, cases in which the three-step analysis cannot be applied. In certain exceptional cases it is not sufficient to examine whether a given measure derogates from the reference system as defined by the Member State concerned, but it is also necessary to verify whether the boundaries of the system of reference have been designed in a consistent manner or, on the contrary, in a clearly arbitrary or biased way.

2.274

In the Gibraltar corporate tax judgment,832 the Court of Justice found that the reference system introduced by Gibraltar’s reform of its corporate tax system, although founded on criteria that were of general nature, discriminated in practice between companies which were in a comparable situation with regard to the objective of the proposed tax reform, namely to introduce a general system of taxation for all companies established in Gibraltar.833 The Court found that the fact that offshore companies were not taxed was not a random consequence of the regime, but the inevitable consequence of the fact that the bases of assessment were specifically designed so that offshore companies had no tax base.834

2.3.1 Identification of the reference system 2.275

In order to establish selectivity of a measure, it must be checked whether “within the context of a particular legal system, that measure constitutes an advantage for certain undertakings in comparison with others which are in a comparable legal and factual situation”.835 The reference system constitutes the framework against which the selectivity of a measure is assessed. It defines the boundaries for examining whether certain undertakings benefit from a derogation from the normal rules and are treated in an advantageous way compared to other undertakings covered by the system.

832

833 834 835

Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732. The judgment is widely commented in the literature, see e.g. Rossi-Maccanico, “Gibraltar: Beyond the Pillars of Hercules of Selectivity”, EStAL 2012, 443; Temple Lang, The Gibraltar State Aid and Taxation Judgment – A “Methodological Revolution”? , EStAL 2012, 805; Romariz, “Revisiting Material Selectivity in EU State Aid Law – Or The Ghost of Yet-To-Come” EStAL 2014, 39 at 43 et seq; Prek and Lefèvre, “The Requirement of selectivity in the recent case-law of the Court of Justice”, EStAL 2012, 335 at 339 et seq; Nicolaides and Rusu, “The concept of selectivity: An ever wider scope”, EStAL 2012, 791 at 799 et seq. Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732, paras 101 et seq. Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732, para 106. Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, para 56.

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The reference system is “the common or ‘normal’ regime applicable in the Member State concerned”.836 It is composed of a set of rules that generally apply – on the basis of objective criteria – to all undertakings falling within its scope as defined by its objective. Those rules define the scope of the system, the conditions under which the system applies, the rights and obligations of undertakings subject to it and the technicalities of the functioning of the system.

2.276

In the case of taxes, the construction of the reference system is based on such elements as the tax base, the taxable persons, the taxable event and the tax rates. For example, a reference system could be identified with regard to the corporate income tax system,837 the VAT system838 or the general system of taxation of insurance.839 The same applies to special-purpose (stand-alone) levies, such as levies on certain products or activities with a negative impact on the environment or health, which do not really form part of a wider taxation system. As a result, and with exception mentioned above in the context of Gibraltar corporate tax case, the reference system is, in principle, the levy itself.840

2.277

For non-fiscal measures the system of reference could be e.g. the general social security system,841 the system of obligations regarding the limitation of certain emissions or the system concerning the rules on loans for the purchase of vehicles.842 In British Telecommunications and BT Pension Scheme Trustees the General Court agreed with the Commission’s definition of the reference system as the system consisting of all the measures established to protect pensions in the event of the insolvency of the employer.843

2.278

836 837

838 839 840

841 842 843

Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 49. See Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 50. The Court sometimes applies in that context the term of “the ordinary tax system”( (see Joined Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission ECLI:EU:C:2006:416, para 95) or “the general tax scheme” (see Case C-66/02 Italy v Commission ECLI:EU:C:2005:768, para 100). See the Court s reasoning concerning selectivity in Case C-172/03 Heiser ECLI:EU:C:2005:130, paras 40 et seq. See Case C-308/01 GIL Insurance and others ECLI:EU:C:2004:252, paras 75 and 78. See Case T-210/02 RENV British Aggregates v Commission ECLI:EU:T:2012:110, paras 49 and 50. Even if a levy is introduced in the national legal system to transpose a Union directive, that levy remains the system of reference. Case 173/73 Italy v Commission (Italian textiles) ECLI:EU:C:1974:71, paragraph 15. The two last examples are not based on the case law even if they make reference to NOx and CETM judgments. Joined cases T-226/09 and T-230/09 British Telecommunications and BT Pension Scheme Trustees v Commission ECLI:EU:T:2013:466, para 110; appeal rejected in Case C-620/13 P British Telecommunications v Commission ECLI:EU:C:2014:2309; See also von Bonin, Rodenhausen, “Privatisations, Pensions and Exemptions, Annotation on the Judgment of the General Court of 16 September 2013 in Joined Cases T-226/09 and T-230/09 British Telecommunications plc and BT Pension Scheme Trustees Ltd v European Commission (‘BT and BTPS’)” EStAL 2014, 600 at 604.

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2.279

Nevertheless, it must be admitted that the identification of the system of reference is not always easy. In certain cases it can be difficult to relate a measure to a wider framework844 or to define the circle of undertakings whose treatment should be compared.845 Those difficulties arise because the notion of the system of reference is an ad hoc concept created for the purposes of the State aid analysis. The cases of fiscal reverse-engineering846 should be treated as an exception rather than a rule. The State aid rules raise, in general, many problems as regards their application in the area of tax measures as they were not developed for this type of measures. Matsos even argues that the State aid rules violate constitutional principles of taxation.847

2.3.2 Derogation from the system of reference 2.280

Once the reference system has been established, the next step of the test requires examining whether a measure in question derogates from that system. To do so, it is necessary to determine whether the measure is liable to favour certain undertakings in comparison with other undertakings which find themselves in similar (comparable) legal and factual situation.848 If therefore all the employers must pay social security contributions at a certain rate, reduction of that rate for undertakings active in a certain sector constitutes a derogation from the general scheme.

2.281

Certainly, the assessment of which undertakings find themselves in comparable legal and factual situation is not always straightforward. In Hansestadt Lübeck the General Court found that airlines departing from airports other than Lübeck were not in a situation comparable to that of the airlines using the Lübeck airport. The General Court indicated that when assessing whether a schedule of charges established by a public undertaking for the provision of goods and services is selective, it should be analysed whether the schedule of charges discriminates between the actual and potential users of the goods and services in question.

844 845 846

847 848

See Romariz, “Revisiting Material Selectivity in EU State Aid Law – or “The Ghost of Yet-To-Come”” EStAL 2014, 39 at 41. See Prek and Lefèvre, “The Requirement of selectivity in the recent case-law of the Court of Justice” Prek EStAL 2012, 335 at 340. See Van de Casteele and Hocine, “Favouring certain undertakings or the production of certain goods”: Selectivity”, in Mederer, Pesaresi and van Hoof (eds.) EU Competition Law, Vol. 4, State aid (Claeys & Casteels, 2008) at 267 et seq. See Matsos, “Systematic Misconceptions of State Aid Law in the Area of Taxation” EAtAL 2014, 491 at 495. See Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke ECLI:EU:C: 2001:598, para 41.

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If the users of other airports that cannot or do not want to use the goods or services in question were to be taken into account, the scope of the notion of aid would be extended in an excessive manner.849

2.282

If a measure favours certain undertakings or the production of certain goods which are in a comparable legal and factual situation, that measure will be considered to be prima facie selective. It may, however, still escape the definitive qualification as selective and thus State aid, if it is justified by the nature or general scheme of the system of reference.

2.283

As said in section 2.1, the General Court seems to have departed from this classic approach in Spanish goodwill where it pointed out that a measure may constitute a derogation from the system of reference and still be potentially available to all the enterprises so as not be found selective. According to the General Court judgements, against which the Commission has lodged an appeal, it is necessary to determine which category of enterprises is favoured by the measure at stake and a measure the applicability of which is independent of the nature of an undertaking’s activity is, a priori, not selective.850

2.284

2.3.3 Justification by the nature or general scheme of the system of reference It is worth noting that, as regards the third step of the selectivity test, the terminology used by the Union Courts has not always been consistent. Indeed, they have referred variously to “justification by the nature or general scheme of the system”,851 justification “by the nature or structure of the system”852 or by “logic of the system”.853 For the purposes of this chapter we will stick to the first of those terms, which seems to be the one recently preferred by the Court.

2.285

Prek and Lefèvre see the role of that part of the test as being to allow the Member State concerned to demonstrate that a differential treatment does not amount to a violation of the principle of equal treatment because such treatment is objectively justified.854

2.286

849 850 851 852 853 854

Case T-461/12 Hansestadt Lübeck v Commission ECLI:EU:T:2014:758, paras 49 to 54. Case T-219/10 Autogrill España v Commission ECLI:EU:T:2014:939, paras 34 to 61. Case C-308/01 GIL Insurance and others ECLI:EU:C:2004:252, para 72. Case T-55/99 CETM v Commission ECLI:EU:T:2000:223, para 52. Case C-53/00 Ferring ECLI:EU:C:2001:627, para 17. Prek and Lefèvre, “The Requirement of selectivity in the recent case-law of the Court of Justice”, EStAL 2012, 335 at 342.

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2.287

A measure is justified by the nature or general scheme of the system of reference if it derives directly from the intrinsic basic or guiding principles of the reference system or where it is the result of inherent mechanisms necessary for the functioning and effectiveness of the system.855

2.288

In that context, a distinction must be made between, on the one hand, the objectives attributed to a particular (tax) regime and which are extrinsic to it and, on the other, the mechanisms inherent in the (tax) system itself which are necessary for such objectives to be achieved.856 External policy objectives which are not inherent to the system cannot be relied upon in that third step of the selectivity test.857

2.289

The basis for a possible justification could, for instance, be the need to fight fraud or tax evasion, the need to take into account specific accounting requirements, administrative manageability, the principle of tax neutrality, the progressive nature of income tax and its redistributive purpose, the need to avoid double taxation,858 and the objective of optimising the recovery of fiscal debts.859

2.290

In Paint Graphos the Court stressed that Member States should introduce and apply appropriate control and monitoring procedures to ensure that derogatory measures are consistent with the logic and general scheme of the tax system.860 It is, moreover, necessary to ensure that those measures are consistent with the principle of proportionality and do not go beyond what is necessary to achieve the legitimate objective being pursued, in that the objective could not be attained by less far-reaching measures.861

855 856 857

858

859 860 861

See for example Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 69. See Joined Cases C-78/08 to C-80/08, Paint Graphos and others ECLI:EU:C:2011:550, para 69; Case C88/03 Portugal v Commission ECLI:EU:C:2006:511, para 81. See Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, paras 69 and 70; Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, para 81; Case C-279/08 P Commission v Netherlands (NOx) ECLI:EU:C:2011:551; Case C-487/06  P British Aggregates v Commission ECLI:EU:C:2008:757. In Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, the Court referred to the possibility of relying on the nature or general scheme of the national tax system as a justification for the fact that cooperative societies which distribute all their profits to their members are not taxed themselves as cooperatives, provided that tax is levied on the individual members (paragraph 71). See Commission notice on the application of the State aid rules to measures relating to direct business taxation, OJ C 384, 10.12.98, p. 3, points 23-27. Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 74. Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 75.

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In line with well-established case law, it is for the Member State which has introduced a differentiation of treatment of undertakings to show that that differentiation is actually justified by the nature and general scheme of the system in question.862

2.291

In BNP Paribas and BNL, however, while the Court confirmed that the burden of proof as regards the existence of the justification by the nature or general scheme of the tax system lies on the Member State that invokes it, the Court also found that in carrying out the necessary comprehensive review of the aid character of the tax scheme at issue, the General Court had to examine whether the differentiation between undertakings arising from that scheme was due to the nature or general scheme of the tax system of which it formed part. Since it had failed to do so, the Court set aside the judgment of the General Court and delivered itself the final judgment in the matter, coming, in fact, to the same conclusion as the General Court and confirming the Commission decision.863

2.292

The measure at stake in BNP Paribas and BNL related to the Italian fiscal regime for the preferential taxation of capital gains accruing following disposals between companies of company assets in consideration for stock. According to the Court, the tax scheme at issue conferred a tax advantage on certain banks that had carried out specific restructuring operations, which was not justified by the nature and general scheme of the Italian tax system.864

2.293

3.

Regional selectivity

Regionally selective measures are measures favouring undertakings in a particular geographic area of a Member State. Those measures are also often referred to as geographically or territorially selective measures. Typically, regional selectivity covers measures designed in the context of regional development policies providing support for undertakings willing to invest in designated geographical areas. The identification of selectivity in those cases does not raise any particular difficulty.

2.294

In principle, only measures applicable in the entire territory of the Member State are not selective. However, as outlined below, the reference system is not necessarily the entire territory of the Member State.865 A measure favouring un-

2.295

862

863 864 865

See Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732, para 146; Case C-159/01 Netherlands v Commission ECLI:EU:C:2004:246, para 43. Case C-452/10 P BNP Paribas and BNL v Commission ECLI:EU:C:2012:366 paras 102 to 106. Case C-452/10 P BNP Paribas and BNL v Commission ECLI:EU:C:2012:366 paras 136, 137. Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, para 57; Joined Cases C-428/06 to

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dertakings active in a part of the national territory are therefore not automatically selective.

2.296

As established by the Court of Justice in Azores866 and further developed in UGT-Rioja,867 measures with a regional or local scope of application may escape the geographical selectivity criterion if certain requirements are fulfilled.868 The regional selectivity test was established in two cases concerning fiscal measures (in Azores lower corporate and personal income tax rates; in UGT-Rioja a lower corporate tax rate). However, regional selectivity being a general concept, the principles set out by the Court of Justice apply to other types of measures as well.

3.1 The three scenarios of the distribution of competences 2.297

In the two leading judgments, the Court distinguished between three different scenarios concerning the distribution of competences:

2.298

In the first scenario, the central government of a Member State unilaterally decides to apply a more favourable treatment to undertakings in a certain territory, for instance a lower level of taxation within a defined geographical area. In that scenario, the measure is clearly selective.

2.299

In the second scenario, all infra-State authorities at a particular level (regions, districts or others) of a Member State have the autonomous power to decide on a measure, for example to set the applicable tax rate within their territory, independently of the central government. The second scenario is described as a symmetrical devolution of legislative powers.869

2.300

In that case, the measures decided by the infra-State authorities are not selective as it is impossible to determine a national reference value, e.g. a “normal tax rate”, capable of constituting the reference framework. The Commission recog-

866 867 868

869

C-434/06 Unión General de Trabajadores de la Rioja ECLI:EU:C:2008:488, para 47. Case C-88/03 Portugal v Commission, ECLI:EU:C:2006:511. Joined Cases C-428/06 to C-434/06 Unión General de Trabajadores de la Rioja ECLI:EU:C:2008:488. For an analysis of the judgments see, inter alia, da Cruz Vilaca, “Material and Geographic Selectivity in State aid – recent developments”, EStAL 2009, 443; Traversa, “The selectivity test: the concept of “regional aid””, in Rust and Micheau (eds.), State aid and tax law (Kluwer, 2012). On the Azores judgment see LindsayPoulsen, “Regional autonomy, geographic selectivity and fiscal aid: between “the rock” and a hard place”, [2008] ECLR 43. See point 60 of the Opinion of Advocate General Geelhoed in Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511.

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nised in a decision concerning the Italian regional tax on productive activities870 (IRAP) that if a Member State devolves in a symmetric manner tax competences to regions, those regions can constitute the system of reference for State aid purposes. If all the regions have the same competences, the central government can also establish a national “base” or “reserve” tax rate (from which all the regions can deviate); the existence of such a rate does not call into question that there is a symmetrical devolution of powers.871 For example, in Germany the rate of the trade tax (Gewerbesteuer) is determined independently by each municipality. In the literature a system of that kind has been considered as a symmetrical devolution of tax powers and therefore not selective.872

2.301

In the third scenario, only certain regional or local authorities can adopt the relevant measures applicable within their territory (e.g. set the tax rate), while in the other parts of the Member State a national standard applies (e.g. the standard national tax rate). That scenario is described as an asymmetrical devolution of legislative powers.

2.302

In that case, the assessment of the selective nature of the measure depends on whether the public authority concerned is sufficiently autonomous from the central government of the Member State. The regional or local authority can be considered sufficiently autonomous from the central government of the Member State if it plays a fundamental role in the definition of the political and economic environment in which the undertakings operate.873 An infra-State authority plays such a fundamental role when three cumulative criteria of autonomy are fulfilled: institutional, procedural and economic autonomy.874 If all of those criteria of autonomy are present when a regional or local authority decides to adopt a measure that is applicable only within its territory, then the area in question, as opposed to the whole Member State, constitutes the geographical reference framework.

2.303

870 871 872

873

874

See Commission Decision of 7.12.2005 in case N198/2005, IRAP, OJ C 42, 18.02.2006, p. 3. Moreno Gonzalez, “Regional fiscal autonomy from a State aid perspective: the ECJ’s judgment in Portugal v Commission”, European Taxation 2007, 328 (335 et seq.). Hancher, Ottervanger and Slot (eds.), EU State Aids (4th ed., Sweet & Maxwell, 2012) 330; Arhold, “Steuerhoheit auf regionaler oder lokaler Ebene und der europäische Beihilfebegriff ”, Europäische Zeitschrift für Wirtschaftsrecht 2006, 717 (721); Blumenberg and Kring, “Europäisches Beihilferecht und Besteuerung”, IFSt Schrift Nr. 473/2011, p. 59. Joined Cases C-428/06 to C-434/06 Unión General de Trabajadores de la Rioja ECLI:EU:C:2008:488, para 55. It is, however, not a precondition to the application of the three criteria that the respective region plays a fundamental role in the definition of the political and economic environment , cf. paras 53 to 60 of that judgment. Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, para 67.

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2.304

In UGT-Rioja, the Court considered the competences of two levels of intraState entities – the region (the Autonomous Community of the Basque Country) and the three provinces – together because of the sharing of areas of competence between the two levels, which required close collaboration between both levels.

3.2 Asymmetrical devolution of powers – the autonomy test 2.305

In its decision regarding the exercise of fiscal autonomy by the Azores government the Commission proceeded on the basis that any asymmetrical devolution of powers to a region can constitute State aid if it leads to the application of a lower rate of taxation than in the rest of the Member State.875 The Commission based its reasoning on the principle that the Member State is the relevant body under State aid law – as in Union law in general – and that internal distributions of competences within the Member State are a question of national law without relevance for the State aid assessment. That position was rejected by the Court, which held that the framework of reference could also be an infra-State authority if three cumulative criteria are fulfilled.876

2.306

The conditions were further clarified in UGT-Rioja, a subsequent preliminary ruling. In that case, the Court did not take a final view whether the three criteria were fulfilled and held that it was for the national court to apply the principles set out by the Court to the specific facts.

2.307

The criteria developed by the Court can be seen as a circumvention test. Regional aid should not become a non-aid measure just by transferring formal competences to a lower level.877 On the other hand, State aid rules should also respect constitutional settings of the Member States that entail a true and substantial devolution of the competences to lower administrative levels.

875 876 877

See Commission Decision of 11.12.2002 in case C35/2002 Azores, OJ L 150, 18.06.2003, p. 52. For a critical analysis of the three criteria see Urraca Caviedes, “La séléctivité régionale”, in EC State Aid Law/ Le droit des aides d’Etat dans la CE: Liber Amicorum Francisco Santaolalla Gadea (Kluwer, 2008), 125. Hancher, Ottervanger and Slot (eds.), EU State Aids (4th ed., Sweet & Maxwell, 2012) 331. The Commission had argued in its Azores decision that accepting a regional reference framework could undermine Article 107 of the Treaty because Member States could avoid its application by modifying the internal distribution of competences.

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The test developed in Azores and UGT-Rioja was figured in the Gibraltar corporate tax case at first instance. The General Court held that Gibraltar was sufficiently autonomous from an institutional, procedural and economic and financial point of view for it to be the reference system within which selectivity had to be established.878

2.308

As the Azores case shows, regional tax measures do not have to be completely separate from a more general tax system in order not to constitute State aid. In particular, it is not necessary that the tax system in question (tax base, tax rate, tax recovery rules and exemptions) is fully devolved to the infra-State body. In the Azores case, the region was only authorized to reduce the corporate tax rate by 30 per cent. Therefore, corporate tax devolution limited to the power to vary rates within a limited range, without devolving the ability to change the tax base, including tax allowances and exemptions, can be considered as fulfilling the procedural autonomy condition if the pre-defined rate bracket allows the region to exercise meaningful autonomous powers of taxation and provided that the central government is not able to intervene as regards its content.

2.309

The autonomy criteria do not require the rules on tax collection to be devolved to the regional/local authorities, nor do they require the tax revenues to actually be collected by those authorities. The central government may continue to be responsible for collecting devolved taxes if the collection costs are borne by the infra-State authority.

2.310

3.2.1 Institutional autonomy Institutional autonomy means that the measure has been decided upon by a regional or local authority within its own constitutional, political and administrative status that is separate from that of the central government. The assessment of whether that criterion has been fulfilled in each individual case should include, in particular, an examination of the constitution and other relevant laws of the Member State.

2.311

In the Azores case, the Court observed that the Portuguese Constitution recognised the Azores as an autonomous region with its own political and administrative status and self-governing institutions, which also have their own fiscal

2.312

878

Joined Cases T-211 and T-215/04 Gibraltar v Commission ECLI:EU:T:2008:595, at paras 114-115. The judgment was set aside by the Court of Justice on other grounds without challenging the assessment of the criteria for sufficient autonomy ( Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732). The Commission, by contrast, had considered in its decision that Gibraltar did not meet the Azores criteria.

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competence, and the power to adapt national fiscal provisions to regional particularities.879

3.2.2 Procedural autonomy 2.313

Procedural autonomy means that a measure has been adopted without the central government being able to directly intervene in determining its content.

2.314

The essential criterion for determining whether an infra-State body enjoys procedural autonomy is not the extent of the competence that the body has. It is rather the capability of the body to adopt a decision on a measure independently, i.e. without the central government being able to intervene directly as regards its content. Therefore, as explained above,880 also the limited power to vary only certain elements of a general tax system can provide for sufficient procedural autonomy.

2.315

A consultation or conciliation procedure between the central and regional authorities to avoid conflicts does not preclude the procedural autonomy of an infra-State body. It is, however, necessary, that the latter body, and not the central government, has the final word on the adoption of the measure at stake.881

2.316

The mere fact that the acts which the infra-State body adopts are subject to judicial review does not in itself mean that this body lacks procedural autonomy. The Court of Justice rightly considers judicial review as an inherent feature of the rule of law and therefore not sufficient to exclude procedural autonomy.882

3.2.3 Economic and financial autonomy 2.317

Economic and financial autonomy means that an infra-State body assumes responsibility for the political and financial consequences of a measure. If the infra-State body is not responsible for managing a budget, i.e. when it does not have control of both revenue and expenditure, then that economic and financial autonomy criterion will not be satisfied.

879 880 881 882

See Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, para 70. See book paragraph 2.309. Joined Cases C-428/06 to C-434/06 Unión General de Trabajadores de la Rioja ECLI:EU:C:2008:488, paras 96 to 100. Joined Cases C-428/06 to C-434/06 Unión General de Trabajadores de la Rioja ECLI:EU:C:2008:488, paras 80 to 83.

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For the region to provide the reference system, the financial consequences of the measure in the region cannot be offset by aid or subsidies from other regions or the central government. The existence of a direct causal link between the measure adopted by the infra-State body and the financial support from other regions or the central government of the Member State concerned rules out the existence of economic and financial autonomy. In the Azores case, there was no doubt that the last criterion was not met since, regardless of the tax expenditure suffered by the Azores government, as a result of a solidarity mechanism,883 the region’s budget would be balanced by revenue from the central government. In practice, the criterion of economic and financial autonomy requires a detailed assessment of the financing mechanisms of the region and all transfers between the central government and the region.

2.318

The existence of economic and financial autonomy is not undermined by the fact that a shortfall in tax revenues as a result of the implementation of devolved tax powers (e.g. a lower tax rate) is offset by a parallel increase in the tax revenues due to the arrival of new businesses attracted by the lower rates. That situation is completely different from the situation where a shortfall is offset by transfers from the central government, since the region does not benefit from outside intervention. Instead, the infra-State body only enjoys both the positive and the negative consequences of its measure and assumes its full financial responsibility.

2.319

883

In Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, paras 72 and 73, the Court indicated that according to Portuguese law, the national solidarity principle “was stated to mean that the central State contributes, with the autonomous regional authorities, to the achievement of economic development and the correction of inequalities deriving from insularity and to economic and social convergence with the rest of the national territory, [and that] the application of that principle gives rise to a duty incumbent on both the central and regional authorities to promote the correction of inequalities arising from insularity by reducing local tax burden and by an obligation to ensure an appropriate level of public services and private activities”.

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Chapter 11 Advantage 1.

The concept of advantage – general considerations

Although the two requirements of economic advantage and selectivity are linked in the wording of Article 107 of the Treaty, they are conceptually distinct and must then be analysed separately. As to whether a measure provides an advantage, the issue should be rather straightforward when it is seen in abstract terms. Whenever a State intervention has the effect of improving the financial situation of a company there is an advantage for it. The same holds true when there is no such improvement but without State intervention the financial situation of the company would have deteriorated. A comparison of the company’s financial situation before and after the State interventions should be sufficient to check that point, as the Court of Justice established in Italian Textiles that “ in the application of Article [107(1) of the Treaty], the point of departure must necessarily be the competitive position existing within the [internal] market before the adoption of the measure in issue”.884

2.320

However, when the State carries out commercial transactions (e.g. makes an investment, provides a loan or sells assets), those transactions normally provide a benefit to a specific company and improve that company’s economic situation. Is there a selective advantage in all those cases? A positive answer would lead to an absurd interpretation under which all commercial transactions carried out by the State would be State aid. The notion of selective advantage must therefore be nuanced. As a result, the Union Courts have regularly indicated that a measure is capable of favouring certain undertakings within the meaning of Article 107 of the Treaty if it eliminates a cost that would normally have been included in the budget of the undertaking or if it procures the undertaking an economic advantage that it would not have obtained under normal market conditions.

2.321

884

Case 173/73 Italy v Commission (“Italian Textiles”) ECLI:EU:C:1974:71, para 17.

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1.1 Introduction 2.322

As early as 1961, with regard to the European Coal and Steel Community Treaty, the Court of Justice indicated that the notion of aid is wider than that of a subsidy and includes “ interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking”.885 Therefore there is an advantage when the State intervention covers a normal business cost of the company. Such an advantage arises even if the company has offered in return for the State support some commitment, such as an engagement to undergo a restructuring plan886 or to further some public policy decided by the State.

2.323

For instance the reduction in employers’ social security contributions introduced under the ‘Textile Plan’ by the French government to promote job creation was considered by the Commission as State aid.887 The French government contested that finding, claiming that the relief on social security contributions was only the quid pro quo for exceptional additional costs which the undertakings agreed to assume as a result of the negotiation of collective agreements and that, in any event, taking account of those additional costs, the contested measures were revealed to be financially neutral. In subsequent annulment proceedings, the Court of Justice rejected France’s challenge to the Commission decision.888 It considered that the costs arising from collective agreements con885

886 887 888

In Case 30/59 De Gezamenlijke Steenkolenmijnen in Limburg v ECSC High Authority ECLI:EU:C:1961:2, 19, the Court of Justice defined the notion of State aid for the first time. “The [ECSC] Treaty contains no express definition of the concept of subsidy or aid referred to under Article 4(c). A subsidy is normally defined as a payment in cash or in kind made in support of an undertaking other than the payment by the purchaser or consumer for the goods or services which it produces. An aid is a very similar concept, which, however, places emphasis on its purpose and seems especially devised for a particular objective which cannot normally be achieved without outside help. The concept of aid is nevertheless wider than that of a subsidy because it embraces not only positive benefits, such as subsidies themselves, but also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without, therefore, being subsidies in the strict meaning of the word, are similar in character and have the same effect”. That jurisprudence was confirmed with regard to Article 107(1) of the Treaty in Case C-387/92 Banco Exterior de España v Ayuntamiento de Valencia ECLI:EU:C:1994:100, para 13. See also Case C-301/87 France v Commission ECLI:EU:C:1990:67, para 41, where the Court of Justice indicated that the point was one of checking if, thanks to the State intervention, the company was able to “avoid having to bear costs which would normally have had to be met out of the undertaking’s own financial resources, and thereby prevented market forces from having their normal effect”; and Case C-390/98 Banks ECLI:EU:C:2001:456, para 33: “An aid consists of a mitigation of the charges which are normally included in the budget of an undertaking, taking account of the nature or general scheme of the system of charges in question”. See point 54 of the Opinion of Advocate General Jacobs in Case C-241/94 France v Commission (“Kimberly Clark”) ECLI:EU:C:1996:353. Commission Decision 97/811/EC of 09.04.1997 on aid granted by France to the textile, clothing, leather and footwear industries, OJ L 334, 05.12.1997, p. 25. Case C-251/97 France v Commission ECLI:EU:C:1999:480, paras 40, 46 and 47.

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cluded between employers and trade unions are included, by their nature, in the budgets of undertakings, regardless of whether they have acceded to those agreements or those agreements have been extended to them by regulation.889 Likewise in Kimberly Clark, the Court of Justice upheld the Commission’s finding of State aid in relation to the public funds contributed to an undertaking’s social plan providing for redundancy compensations to its former employees. The Court of Justice rejected the argument of the French government that the cost of the social plan in question went beyond the legal obligations of the undertaking and those excess costs were the result of an agreement between the company and the public authorities. The Court of Justice considered that there was insufficient evidence proving that the social plan imposed on the company costs going beyond its legal obligations.890

2.324

1.2 The concept of advantage – general considerations Only the effect of the measure on the undertaking is relevant, and as result Article 107(1) of the Treaty is indifferent as to the cause or the objective of the State intervention.891

2.325

Whenever the financial situation of an undertaking is improved as a result of State intervention892 on terms differing from normal market conditions, an advantage is present. To assess if such an improvement has been brought about, the financial situation of the undertaking following the measure should be compared with its financial situation if the measure had not been introduced.893

2.326

Since only the effect of the measure on the undertaking matters, it is irrelevant whether the advantage is compulsory for the undertaking in that it could not avoid or refuse it.894 Once it is established that the undertaking would not have

2.327

889

890 891

892

893 894

Contrast with Commission Decision C(2004)3915 final of 20.10.2004 – State aid NN 136/2003 – Belgium – Belgian sectoral funds, OJ C 316, 13.12.2005, p. 3, in which in relation to collective agreements involving the voluntary creation of both side of industry to a sectoral fund and through contributions to such funds, the Commission found no aid in the interventions of those funds which financed training actions. Case C-241/94 France v Commission (“Kimberly Clark”) ECLI:EU:C:1996:353, paras 29 and 35. Case 173/73 Italy v Commission ECLI:EU:C:1974:71, para 13; Joined Cases C-106/09 and C-107/09 Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732, para 87; and Joined Cases T-226/09 and T-230/09 British Telecommunications and BT Pension Scheme Trustees v Commission ECLI:EU:T:2013:466, para 42. The term “State interventions” does not refer to positive actions by the State but also covers the fact that the authorities do not take measures in certain circumstances, e.g. to enforce debts. See, for example, Case C-480/98 Spain v Commission (“Magefesa”) ECLI:EU:C:2000:559, paras 19 and 20. Case 173/73 Italy v Commission ECLI:EU:C:1974:71, para 17. Commission Decision 2004/339/EC of 15.10.2003 on the measures implemented by Italy for RAI SpA, OJ

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received the same economic advantage under normal market conditions or that the State intervention eliminates a cost that would normally be included in the undertaking’s budget, it is irrelevant to establish whether that advantage is compulsory or optional. According to established jurisprudence, the notion of aid depends on the effects of a State measure.895 For instance with regard to State aid granted through consumers, the Commission observed that “as regards the impossibility for beneficiaries to ‘refuse’ the aid … if such argument were to be accepted, Member States would be able to grant indirect aid via consumers without there being any possibility for the Commission to restore normal competitive conditions”.896 If it were accepted that aid is not present when a company is obliged to benefit from the measure it would be easy for Member States to avoid the application of Article 107(1) of the Treaty by only implementing compulsory aid measures.

2.328

Equally, it is irrelevant if the instrument by which the advantage was given to the beneficiary is illegal under national or Union law, so long as that instrument in fact provides the advantage. That analysis is confirmed by the several judgments of the General Court. In DHL Aviation and DHL Hub Leipzig the applicants argued that they had not obtained an advantage for the purposes of Article 107(1) of the Treaty because, by virtue of national law, the contract that the Commission considered conferred an advantage on them was null ab initio and without legal effect. The General Court rejected their argument on the basis that their claim did not alter the fact that the applicants had in effect benefited from an advantage on the market in comparison with their competitors.897 In Hellenic Naval Shipyards the General Court rejected a comparable argument that no State aid had been granted in the case before it because the means used to give an advantage were illegal and could not be implemented, stating that “Such an argument would exclude unlawful State aid from any control by the Commission”.898

895

896

897 898

L 119, 23.04.2004, p. 1, recital 69; point 26 of the Opinion of Advocate General Fennelly in Case C-251/97 France v Commission ECLI:EU:C:1999:480. Commission Decision 2004/339/EC of 15.10.2003 on the measures implemented by Italy for RAI SpA, OJ L 119, 23.04.2004, p. 1, at recital 69. See also point 26 of the Opinion of Advocate General Fennelly in Case C-251/97 France v Commission ECLI:EU:C:1999:480; point 44 of the Opinion of Advocate General Darmon in Joined Cases C-72/91 and C-73/91 Sloman Neptun v Bodo Ziesemer ECLI:EU:C:1993:97; and points 45 to 49 of the Opinion of Advocate General Jacobs in Case C-241/94 France v Commission (“Kimberly Clark”) ECLI:EU:C:1996:353. Commission Decision 2007/374/EC of 24.01.2007 on State aid C 52/2005 (ex NN 88/2005, ex CP 101/2004) implemented by the Italian Republic for the subsidised purchase of digital decoders, OJ L 147, 08.06.2007, p. 1, at recital 184. Case T-452/08 DHL Aviation and DHL Hub Leipzig v Commission ECLI:EU:T:2010:427, para 40. Case T-384/08 Elliniki Nafpigokataskevastiki and others v Commission ECLI:EU:T:2011:650, para 94.

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A similar argument based on Union law was raised before the Court of Justice in Heiser, which set out and rejected the argument as follows:

2.329

Mr Heiser submits, essentially, that the measure at issue in the main proceedings does not constitute an advantage simply because the adjustment itself is, in any event, contrary to [Union] law.

2.330

Even if the [Austrian] legislation providing for the adjustment of deductions […] is unlawful, the fact none the less remains that that legislation is liable to have an impact as long as it is not repealed or, at the very least, as long as its unlawfulness is not established. Consequently it is such as to create a charge which is normally included in the budget of a medical practitioner specialising in dentistry, such as Mr Heiser. The fact that the Republic of Austria subsequently discontinued the adjustment of deductions by a separate measure from that providing for such adjustment, therefore mitigates the charges which are normally included in the budget of such a medical practitioner and, accordingly, constitutes an advantage for him.899

2.331

The precise form of the measure is also irrelevant in establishing whether it confers an economic advantage on the undertaking.900 Not only the granting of positive economic advantages is relevant for the notion of State aid, but relief from economic burdens can also constitute an advantage. The latter is a broad category which comprises any mitigation of charges normally included in the budget of an undertaking.901 In consequence, the notion of advantage covers all situations in which economic operators are relieved of the inherent costs of their economic activities,902 even if they are under no legal obligation to assume those costs.903

2.332

The existence of an advantage is not ruled out by the mere fact that competing undertakings in other Member States are in a more favourable position,904 because the notion of advantage is based on an analysis of the financial situation

2.333

899 900 901

902 903

904

Case C-172/03 Heiser ECLI:EU:C:2005:130, paras 37 and 38. Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para 84. Case C-387/92 Banco Exterior de España v Ayuntamiento de Valencia ECLI:EU:C:1994:100, para 13; Case C-156/98 Germany v Commission ECLI:EU:C:2000:467, para 25; Case C-6/97 Italy v Commission ECLI:EU:C:1999:251, para 15; Case C-172/03 Heiser ECLI:EU:C:2005:130, para 36. Case C-126/01 GEMO ECLI:EU:C:2003:622, paras 28 to 31 on the free collection and disposal of waste. Case C-241/94 France v Commission (“Kimberly Clark”) ECLI:EU:C:1996:353, para 40; Case C-5/01 Belgium v Commission ECLI:EU:C:2002:754, paras 38 and 39; Case T-565/08 Corsica Ferries France v Commission ECLI:EU:T:2012:415, paras 137 and 138. Case 173/73 Italy v Commission ECLI:EU:C:1974:71, para 17. See also Case T-55/99 CETM v Commission ECLI:EU:T:2000:223, para 85.

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of an undertaking in its own legal and factual context with and without the particular measure.

2.334

The classic description of an advantage given by the Court of Justice in Steenkolenmijnen as meaning “ interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking” invites debate as to exactly which costs or charges are those that are “normally included in the budget of an undertaking”. Costs arising from regulatory obligations imposed by the State can in principle be considered to relate to the inherent costs of the economic activity, so that any compensation for those costs confers an advantage on the undertaking. As a result, an advantage may still be granted to a firm even though the benefit it obtains does not go beyond compensating it for a cost borne by that firm as a result of the imposition of a regulatory obligation. For that reason, the General Court held that the fact that an aid measure is intended to assist an undertaking in discharging its legal obligations in the field of environmental protection does not exclude its qualification as aid.905 The same applies to relief for costs that the undertaking would not have incurred had there been no incentive stemming from the State measure.906

2.335

Against that background, it is possible to appreciate the disputes about the Combus ruling of the General Court, delivered in 2004. Denmark had financed a change of status by Combus’ employees’ who, in the context of the privatisation of that firm, surrendered their status of officials and switched to employment on a contract basis with Combus. The State financing was transferred in its totality to Combus’ employees. The Commission had decided that the State financing constituted an indirect aid to Combus. The General Court overturned that finding, holding that: “This finding was, moreover, manifestly correct, since the measure in question had been introduced to replace the privileged and costly status of the officials employed by Combus with the status of employees on a contract basis comparable to that of employees of other bus transport undertakings competing with Combus. The intention was thus to free Combus from a structural disadvantage it had in relation to its private-sector competitors. Article [107(1) of the Treaty] is aimed merely at prohibiting advantages for certain undertakings and the concept of aid covers only measures which lighten the burdens normally assumed in an undertaking’s budget and 905 906

Case T-109/01 Fleuren Compost BV v Commission ECLI:EU:T:2004:4, para 54. For instance, if a company receives a subsidy to carry out an investment in an assisted region, it cannot be argued that the subsidy does not mitigate costs normally included in the budget of the undertaking considering that, in the absence of the subsidy, the company would not have carried out the investment.

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which are to be regarded as an economic advantage which the recipient undertaking would not have obtained under normal market conditions. […] Moreover, instead of paying the DKK 100 million directly to the officials employed by Combus, the Danish Government could have obtained the same result by reassigning those officials within the public administration, without paying any particular bonus, which would have enabled Combus to employ immediately employees on a contract basis falling under private law”907. The quoted paragraph seems to imply that there is no advantage for the undertaking concerned if an economic operator present in a competitive market has to employ civil servants (and if that historic workforce implies higher costs for the operator in question) where the State compensates those workers so that the undertaking can replace the civil servant status of the employees with the status of contractual workers used by its competitors. At the same time, the general statement in the ruling – “The intention was thus to free Combus from a structural disadvantage…” – which underlies that finding, raises the issue of whether the General Court was correct to focus on the intention of the Danish measure, rather than on its effects. More generally, that reasoning of the General Court is very much predicated on the assumption that the compensation to the former civil servants in question could not be considered as a mitigation of a charge normally included in the budget of an undertaking, so that there was no advantage.

2.336

The initial reaction of the Commission to the Combus ruling was tentative. In relation to a financial contribution by Greece to an early retirement scheme implemented by OTE (the previous monopolist telecommunications operator), the Commission refrained from taking an explicit stance.908 The Greek scheme allowed OTE employees enjoying a particular but expensive status for OTE, to retire before they had reached the retirement age. OTE sponsored the scheme and the State contribution covered the difference between the hypothetical cost of a similar scheme for OTE’s competitors and the scheme’s actual cost. The Commission was hesitant as to the “structural disadvantage” theory outlined in Combus in the case before it and concluded that, while the notified measure, “examined in conjunction with the relevant jurisprudence, including the Combus judgment, could be regarded as aid, the matter does not need to be pursued further since, having being examined as an aid, it is in any event compatible with the common market pursuant to Article [107(3)(c) of the Treaty]”.

2.337

907 908

Case T-157/01 Danske Busvognmænd v Commission ECLI:EU:T:2004:76, para 57. Commission Decision C 2/2006 of 05.05.2007 on OTE early retirement scheme in Greece OJ L 243, 11.09.2008, p. 7.

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Subsequently, the Commission’s decisional practice has hardened in relation to undertakings relieved by the State of pension costs associated with the civil servant status formerly held or still held by some of their employees in order to bring their cost structures into line that those of their competitors. For example, in relation to the reform of the pension system of the civil servants employed by the French postal operator La Poste909 the French authorities notified the Commission a reform of the method of financing the pensions of public service employees working for La Poste so that pension charges of La Poste would be equalised to other undertakings in the postal and banking sectors. The French authorities, relying inter alia on Combus, argued that the measure in question does not grant La Poste any advantage over its competitors. It would merely eliminate an abnormal cost that had been imposed exclusively on La Poste.910 The Commission rejected the argument on two bases. On the one hand, it noted that Combus had not been confirmed by later rulings of the Court of Justice and that the judgment seemed to run against the Court’s earlier jurisprudence. On the other, it underlined the factual differences between the situation prevailing in Combus and La Poste.911

2.338

Those two strands of scepticism about Combus (is that ruling bad law?, or is it good law which is only applicable to a very limited set of circumstances?) can be identified in more recent case-law of the Union Courts dealing with State measures alleviating costs said to flow from structural disadvantages.

2.339

There are several rulings of the General Court which do not call into question whether Combus is good law, but which refuse to apply that earlier ruling to the litigation in hand on the basis of factual differences from the case before it. For example, in Hotel Cipriani the General Court examined a Commission decision on an Italian scheme reducing social security contributions from firms in Venice and Choggia, which the beneficiaries and Italy claimed compensated 909 910

911

Commission Decision C 43/2006 of 10.10.2007 on the “réforme du mode de financement des retraites des fonctionnaires de l’Etat rattachés à la Poste”, OJ L 63, 08.03.2008, p. 16. According to the pre-existing system, La Poste covered the full cost of financing the civil servants’ pensions (after deduction of the active civil servants’ contributions). That system was special in that normally any employer under the French system merely has to pay its employer’s contribution to the pension system and nothing else. As such, under the general system, even if the cost of the pension is higher than the contribution, the employer is liberated from any additional payment. La Poste, on the other hand, had to ensure the balance of pension scheme of the civil servants it employed and so had to cover the costs of those pensions in full. See also Commission Decision of 10.10.2007 on the reform of the organization of the supplementary pension regime in the banking sector in Greece (Case N 597/2006), OJ C 308, 19.12.2007, p. 3; Commission Decision C 42/2007 of 10.10.2007 on the “RATP fonds de pension”, OJ L 327, 12.12.2009, p. 21; and Commission Decision C 7/2006 of 11.12.2007 on Finnish Road Enterprise (Tieliikelaitos), OJ L 270, 10.10.2008, p. 1.

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those firms for an unfavourable competitive situation resulting from high costs associated with being located on the islands in the lagoon, constraints due to seasonal flooding and obligations flowing from the protection of the historic landscape and heritage. The General Court distinguished Combus from the facts before it in Hotel Cipriani, pointing out that there was no direct connection between the social security exemptions and the objectives supposedly pursued by the scheme and that there was no evidence of additional costs for most sectors covered by the scheme.912 In Zweckverband Tierkörperbeseitigung the General Court was faced with a claim that there was no advantage given to a body responsible for disposing of animal carcasses in parts of Rhineland-Pfalz and Saarland through contributions paid by the German authorities because that body was also required to decontaminate several sites which it had obtained from the public authorities in 1979. The General Court found that the logic in Combus could not be applied to those contributions because the requirement to decontaminate the sites resulted from national law under which all owners responsible for pollution are required to pay to clear it up.913 At the same time, other rulings of the Union Courts call into question that the presence of an advantage can be excluded in the case of compensation for a structural advantage faced by an undertaking, outside of the specific context of payments for discharging public service obligations.914 The Hotel Cipriani ruling of the General Court was appealed by the beneficiaries of the disputed measure, invoking the structural disadvantage thesis. The Court rejected their claim in Comitato “Venezia Vuole Vivere”, holding that in general the compensatory character of a measure is not relevant to whether it confers an advantage on the beneficiary.915 Subsequently, in the BT Pension Scheme judgment, the General Court expressed scepticism about whether Combus survived in the wake of Comitato “Venezia Vuole Vivere”.916 Most recently, in Stahlwerk Bous, an or912 913 914 915

916

2.340

Joined Cases T-254/00, T-270/00 and T-277/00 Hotel Cipriani v Commission ECLI:EU:T:2008:537, paras 188 to 192. Case T-309/12 Zweckverband Tierkörperbeseitigung v Commission ECLI:EU:T:2014:676, paras 258 to 262. See Part IV of the Book, on Altmark. Joined Cases C-71/09 P, C-73/09 P and C-76/09 P Comitato “Venezia Vuole Vivere” and others v Commission ECLI:EU:C:2011:368, paras 90 and 91. However, in the same proceedings the Commission had lodged a cross-appeal against the Hotel Cipriani judgment insofar as the General Court had invoked Combus before distinguishing that ruling, and the Court rejected the cross-appeal on the basis that the General Court had dealt with Combus in a part of its judgment which was not necessary in order to reach the conclusion it did. Joined Cases T-226/09 and T-230/09 British Telecommunications and BT Pension Scheme Trustees v Commission ECLI:EU:T:2013:466, para 71. The General Court has also apparently implicitly rejected Combus in relation to compensation provided by a Member State to a company for the so-called “stranded costs” it faced as an electricity generator which had invested in power plants before that energy sector was

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der of the President of the General Court rejecting an application for interim measures to suspend the Commission’s opening decision on Germany’s law on energy-intensive users, the President ruled that the Commission could not be faulted for its silence in that opening decision on mitigation of structural disadvantages. According to him, in light of Comitato “Venezia Vuole Vivere” and the BT Pension Scheme judgment, such compensatory or mitigating measures were irrelevant to the existence of an advantage.917

2.341

While the alleviation of a pre-existing structural disadvantage does not exclude the presence of an advantage, matters are different where in a single measure the Member State grants a benefit to a beneficiary while also imposing a burden on it. In those circumstances, the benefit and the burden should be examined together, and there will be no advantage if the benefit is cancelled out by the burden in question. The resulting financial neutrality for the beneficiary means that it does not receive an advantage, as can be seen in the Commission’s decision on pension costs for Belgacom.918 The Belgian authorities notified to the Commission an agreement between Belgacom, the Belgian State and the private shareholders to transfer Belgacom’s so-called “first pillar” pension obligations towards the company’s civil servants to the Belgian State. In the context of the establishment of Belgacom as a limited liability company in 1992, a special pension regime had been imposed on the company according to which Belgacom was obliged to administer and finance the “first pillar” pension rights of former civil servants. As a result of the notified agreement, as of 1 January 2004 Belgacom was relieved of the burden resulting from the special pension regime applicable to civil servants. In return, the Belgian State received a one-off payment from Belgacom amounting to EUR 5 billion as well as yearly continuous contributions guaranteeing the financing of future pension obligations. The Commission concluded that the transfer was financially neutral because Belgacom, in exchange for transferring its pension obligations to the Belgian State, paid the latter an amount corresponding to the net present value of the obligations taken over by the Belgian State. The Commission was satisfied that the evaluation of the net present value of the pension liabilities had been based on actuarial calculations in line with international accounting standards. Therefore, the Commission considered that the transaction did not give Belgacom any advantage.

917 918

liberalised and was accordingly confronted with higher costs than those of its competitors which had entered the market after liberalisation: see Case T-25/07 Iride SpA and Iride Energia SpA v Commission ECLI:EU:T:2009:33, paras 46 to 56. Case T-172/14 R Stahlwerk Bous v Commission ECLI:EU:T:2014:558, para 60. Commission Decision N 567/2003 of 21.01.2004 on the transfer of pension obligations from Belgacom to the Belgian State, OJ C 305, 14.12.2014, p. 11.

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A comparable approach can be seen in Enirisorse, a preliminary ruling by the Court of Justice arising out of an Italian law which in 1985 had authorised ENI, ENEL and ENEA to form a public limited company (Sotacarbo) to develop innovative and advanced technologies in the use of coal. The Italian Civil Code regulates members’ right to withdraw from a limited company. It provides that members opposing a resolution to change the company’s objects or legal form or to transfer its headquarters abroad may withdraw from the company and have their shares redeemed. By way of derogation from those provisions of general law, legislation adopted by Italy in 1999 had granted members of Sotacarbo an exceptional right to withdraw in return for paying up the unpaid balance on their shares. That right of withdrawal was in turn made subject in 2002 to the members relinquishing all claims over the assets of Sotacarbo. Sotacarbo’s members exercised that exceptional right because the conditions for withdrawal laid down under the Civil Code were not fulfilled. They then claimed redemption of their shares, which Sotacarbo refused. The national judge asked the Court of Justice whether the provision precluding Sotacarbo’s members’ right to reimbursement constituted State aid.

2.342

The Court of Justice examined the 1999 and 2002 legislation together, treating them as a single measure which had to be evaluated against the background of the general regime of the Civil Code. It concluded that such national provisions offered an advantage neither to members, who could exceptionally withdraw from Sotacarbo without obtaining the reimbursement of their shares, nor to Sotacarbo, since the shareholders were authorised but not obliged to withdraw from the company even though the conditions laid down in that regard by general law are not fulfilled.919 Consequently, that legislation merely regulated the exceptional right to withdraw granted to members of Sotacarbo and did not seek to reduce a charge which that company would normally have had to bear. However, the Court of Justice added that if the law had also precluded the right to reimbursement in the case of a withdrawal carried out under the general provisions of the Civil Code, that provision might have constituted an advantage for the purposes of Article 107(1) of the Treaty.

2.343

The corollary of Enirisorse is that the existence of an advantage is not excluded where a measure compensates charges of a different nature that are unconnected with that measure.920

2.344

919 920

Case C-237/04 Enirisorse ECLI:EU:C:2006:197, paras 43 to 49. Case C-81/10 P France Télécom v Commission ECLI:EU:C:2011:811, paras 43 to 50.

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2.345

Moreover, the existence of an advantage should be ruled out in the case of a reimbursement of illegally assessed taxes,921 an obligation for the national authorities to compensate for damage they have caused to certain undertakings922 or the payment of compensation for an expropriation.923

2.346

Whether a measure constitutes aid must be established on the basis of the effects of the measure, and not on the basis of the causes or aims of the measure. Consequently, the alleged fiscal nature or social aim of the measure in issue cannot suffice to shield it from the application of Article 107 of the Treaty.924 Likewise the general objectives of the national rules forming the legal basis for the grant of aid (i.e. measures of economic policy within the meaning of Article 121 of the Treaty) are not in themselves sufficient to put it outside the scope of Article 107 of the Treaty.925

2.347

As a result, the general policy objective pursued by the State in granting financial support to certain undertakings (e.g. social policy, environmental protection, improvement of the national economy, etc.) is irrelevant for the purpose of the classification of the measure as State aid under Article 107(1) of the Treaty. It also means that even if the intention of the State was not to give an advantage to certain undertakings aid can nevertheless be present. In Dutch service stations, the Netherlands claimed that its intention was not to grant an advantage to certain undertakings and that the advantage which the Commission had identified arose in reality out of contractual relationships in which the national authorities were not involved and of whose existence they were not even aware. In rejecting that argument the Court of Justice stated that “Article [107(1)] does not distinguish between measures of State intervention by reference to their causes or aims”.926

921 922 923

924 925 926

Case 61/79 Amministrazione delle finanze dello Stato v Denkavit italiana ECLI:EU:C:1980:100, paras 29 to 32. Joined Cases 106 to 120/87 Asteris AE and others v Greece and EEC ECLI:EU:C:1988:457, paras 23 and 24. Case T-64/08 Nuova Terni Industrie Chimiche v Commission ECLI:EU:T:2010:270, paras 59 to 63 and 140 to 141, clarifying that while the payment of a compensation for an expropriation does not grant an advantage, an extension ex post of such compensation can constitute State aid. In the same vein, if a national court or arbitration panel were to award compensation to a beneficiary of incompatible aid which had had to reimburse that aid, such a ruling would constitute an advantage and give rise to State aid. Case 173/73 Italy v Commission ECLI:EU:C:1974:71, para 13; Case C-241/94 France v Commission (“Kimberly Clark”) ECLI:EU:C:1996:353, para 21. Case 310/85 Deufil v Commission ECLI:EU:C:1987:96, para 8. Case C-382/99 Netherlands v Commission (“Dutch service stations”) ECLI:EU:C:2002:363, para 61. See also Commission Decision 1999/581/EC of 9 December 1998 on State aid granted by Germany to a lignite-fired power station in Cottbus, OJ L 220, 20.08.1999, p. 33.

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It is worth nothing, however, that the Commission should take a measure’s objective into consideration for the purposes of assessing the compatibility of the measure. The objective pursued by the State will indeed guide the Commission’s assessment of compatibility towards one of the grounds set out in Article 107(2) and (3) or Article 106(2) of the Treaty.

2.348

While a measure’s cause or aim is not relevant to the present of aid, it does not mean that a measure’s intended or foreseeable economic effects are irrelevant for the purpose of that measure’s classification as aid. The case law makes a subtle distinction between the general policy objective that the measure is supposed to serve and the economic effects that the measure is supposed to produce. That distinction is not always easy to draw and as a result some commentators have drawn the conclusion that in reality the classification of a measure as aid does not only depend on its effects.927 However, that distinction between the policy objective and the intended economic effects is quite clear, for instance, in Dutch service stations.928 In that judgment, the Netherlands challenged a Commission decision which had found that oil companies were indirect beneficiaries of a measure put in place by the Dutch authorities to shield the operators of service stations near the Dutch-German border from an increase in excise duties in the Netherlands. The measure granted service station operators a subsidy capped at EUR 100 000 over a three-year period which was based on the price differential for petrol between the two Member States. The Commission considered that the subsidy to service station operators spared oil companies from having to offer those operators discounts under so-called “price management system clauses” in exclusive supply contracts. After having recalled that Article 107 of the Treaty does not distinguish between measures of State intervention by reference to their causes or aims, the Court of Justice noted that:

2.349

“The aid granted by the Netherlands was intended to prevent the service stations located near the German border from experiencing a drop in turnover as a result of the increase in fuel prices following the rise in excise duties in the Netherlands, given the more competitive rates in Germany … . The same purpose is also served by the [price management system clauses] … . Therefore, the [national measure] applied in circumstances which were such as to trigger the application of the [price management system] clauses. In those circumstances, the aid granted to service stations linked to oil companies by [price management system] clauses had economic effects for the companies concerned since the effect of that aid was, in any event, to release 927 928

See for instance Winter, ‘Re(de)fining the notion of State aid in Article 87(1) of the EC Treaty’, (2004) 41 CMLRev 475. Case C-382/99 Netherlands v Commission (“Dutch service stations”) ECLI:EU:C:2002:363.

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those companies from their obligation to bear all or part of the costs of the forecourt discounts offered by dealers to prevent loss of market share. That State intervention therefore constituted aid to oil companies since its effect was to mitigate the burdens which would normally have affected the budget of companies anxious to maintain their market position in the light of developments in the domestic and international markets”.929

2.350

In essence, the intention of the Dutch authorities was relevant but only to ascertain that, since the aid and the price management system clauses were designed to operate in the same factual circumstances in order to protect the dealer’s turnover, the foreseeable effect of the aid was to mitigate burdens which would normally have affected the budget of oil companies.

2.351

The doctrine that a measure’s effects are the basis on which an advantage is conferred on an undertaking has to be handled carefully in terms of distinguishing foreseeable effects from actual effects. If a company can show that in practice it was not better off when a national measure was implemented than it would have been if the measure was never adopted, does that mean that there is no advantage and so no State aid? That question confuses two separate issues, namely the presence of an advantage for the purposes of Article 107(1) of the Treaty and the quantification of the benefit actually obtained by a beneficiary for the purposes of recovery of any incompatible aid which was unlawfully granted to it. The existence of State aid must be determined by reference to the situation when a measure was implemented which is when an aid is granted.930 An aid is granted at the time that the right to receive it is conferred on the beneficiary under the applicable national rules.931 As such, a beneficiary may have obtained an advantage for the purposes of Article 107(1) of the Treaty even if over the period when the aid measure was in force the beneficiary’s financial situation was not improved.

2.352

That distinction is illustrated by the General Court’s treatment in Tisza Erömü kft of the long-term power purchase agreements (‘PPAs’) concluded between electricity generators in Hungary and MVM, the State-controlled electricity supplier.932 Under the PPAs MVM agreed to purchase each year minimum amounts of electricity from the generators for which the price was set using a 929 930 931 932

Case C-382/99 Netherlands v Commission (“Dutch service stations”) ECLI:EU:C:2002:363, at paras 63 to 66. Joined Cases T-102/07 and T-120/07 Freistaat Sachsen and others v Commission ECLI:EU:T:2010:62, paras 120 and 148. Case C-129/12 Magdeburger Mühlenwerke ECLI:EU:C:2013:200, para 40. Case T-468/08 Tisza Erömü kft v Commission ECLI:EU:T:2014:235.

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formula that shielded the generators from risks related to currency fluctuation, changes in the price of gas and other raw materials, and the costs of maintenance. The PPAs had a lifetime of between 10 and 16 years after Hungary’s accession to the Union, but four years after Hungary became a Member State the Commission adopted a negative decision with recovery that required the elimination of the features of the PPAs which created State aid for the generators. During annulment proceedings Tisza Erőmű, one of the generators, pointed out that without the PPAs MVM would have in fact bought more electricity from it (at the expense of its competitors) than MVM had in fact done. It argued that this effect showed that the PPAs had not granted it any advantage whatsoever. The General Court found that, although during the period in which a PPA was in place for Tisza Erőmű that generator sold less electricity than it would have sold without the PPAs, the absence of any amount of be recovered had no impact on whether Tisza Erőmű had received an advantage at the time the measure was implemented.933

2.

Market economy operator principle

Economic transactions carried out by a public body or a public undertaking do not confer an advantage on its counterpart, and therefore do not constitute aid, if they are carried out in line with normal market conditions.934 That principle has been developed with regard to different economic transactions. The Union Courts have developed the ‘market economy investor principle’ to identify the presence of State aid in cases of public investment (in particular, capital injections): to determine whether a public body’s investment constitutes State aid, it is necessary to assess whether, in similar circumstances, a private investor of a comparable size operating in normal conditions of a market economy could have been prompted to make the investment in question.935 Similarly, the Union Courts have developed the ‘private creditor test’ to examine whether debt renegotiations by public creditors involve State aid, comparing the behaviour of a public creditor to that of hypothetical private creditors that find themselves in a similar situation.936 Finally, the Union Courts have developed the ‘private ven933 934 935

936

2.353

Case T-468/08 Tisza Erömü kft v Commission ECLI:EU:T:2014:235, paras 140 to 143. Case C-39/94 SFEI and others ECLI:EU:C:1996:285, paras 60 and 61. See, for instance, Case C-142/87 Belgium v Commission (“Tubemeuse”) ECLI:EU:C:1990:125, para 29, and Case C-305/89 Italy v Commission (“Alfa Romeo”) ECLI:EU:C:1991:142, paras 18 and 19. See also Case T-16/96 Cityflyer Express v Commission ECLI:EU:T:1998:78, para 51; Joined Cases T-129/95, T-2/96 and T-97/96 Neue Maxhütte Stahlwerke and Lech-Stahlwerke v Commission ECLI:EU:T:1999:7, para 104; and Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T:2003:57. See Case C-525/04 P Spain v Lenzing ECLI:EU:C:2007:698; Case C-73/11 P Frucona Košice v Commission ECLI:EU:C:2013:32; and Case C-256/97 DM Transport ECLI:EU:C:1999:332.

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dor test’ to assess whether a sale carried out by a public body involves State aid, considering whether a private vendor, under normal market conditions, could have obtained the same or a better price.937

2.354

Those principles or tests are variations of the same basic concept that the behaviour of public authorities or undertakings should be compared to that of similar private economic operators under normal market conditions to determine whether the economic transactions carried out by such authorities or undertakings grant an advantage to their counterparts. This section will therefore refer, in general terms, to the ‘market economy operator’ (“MEO”) test as the relevant method to assess whether a range of economic transactions carried out by public authorities, public bodies or public undertakings take place under normal market conditions and, therefore, whether they involve the granting of an advantage (which would not have occurred in normal market conditions) to the undertakings concerned.

2.355

No advantage within the meaning of Article 107(1) of the Treaty is granted by the State if another company in similar circumstances can expect a private investor or shareholder to act in the same way. It is the lack of advantage and not an absence of State resources that ensure that a given intervention by the Member State or by a public undertaking does not contain State aid. In Westdeutsche Landesbank, where Land Nordrhein-Westfalen claimed that State resources were not present, the General Court clarified that: “The Land’s argument amounts in essence to a claim that if State resources are used in a manner which is economically the wisest, they cease to be in the nature of State resources. However, as the Commission has observed, the resources do not cease to be so simply because the use of those resources is similar to that by a private investor. The question whether the State has conducted itself like an entrepreneur is a question relating to the existence of State aid and not to the examination of whether the resources in question are public in nature”.938

2.1 Neutrality principle and the State as economic actor 2.356

The Union legal order is neutral with regard to the system of property ownership939 and so the Treaty expresses no preference for either public or private ownership and accepts the principle of a mixed economy. As a result, the Treaty does 937 938 939

See Joined Cases T-268/08 and T-281/08 Land Burgenland and Austria v Commission ECLI:EU:T:2012:90. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T: 2003:57, at para 181. Article 345 of the Treaty provides that “The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership”.

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not in any way prejudice the right of Member States to act as economic operators. However, Article 106(1) of the Treaty makes it clear that competition rules fully apply to public undertakings, a situation which is reinforced by the limited scope of the derogation provided by Article 106(2) of the treaty which is only envisaged in connection with the entrustment of a service of general economic interest, independently of the ownership status of the company concerned. In consequence, when public authorities directly or indirectly carry out economic transactions in any form,940 they are subject to the Union State aid rules. In order to balance those two principles (neutrality between public and private forms of ownership and the maintenance of the unity of the internal market through the State aid discipline), Union law must ensure that the Member States and the undertakings they control are not penalised where they act as an ordinary economic agent. It is that concern to ensure the equal treatment between the Member State (and public undertakings) in their capacity as economic actors and private undertakings which forms the basis of the MEO principle.

2.357

The MEO test can be traced back to the Commission decision establishing Community rules for aids to the steel industry941 and the Council Directive approving the Shipbuilding Code.942 It was then reflected in early Commission decisions, mostly on restructuring cases,943 and further expanded in the Commission Communication of 1984 on public holdings.944 The Communication of 1984 indicated that “where… it is apparent that a public authority which injects capital by acquiring a holding in a company is not merely providing equity capital under normal market economy conditions, the case has to be assessed in the light of Article [107 of the Treaty]”. In 1993, the Commission Communication on public undertakings945 further developed the MEO test in relation to investments. It was also a declared aim of the Commission Communication of 1993 to extend scrutiny of State funding “to public undertakings in all situations, not

2.358

940 941 942 943

944 945

See, for instance, Case C-40/85 Belgium v Commission (“Boch”) ECLI:EU:C:1986:305, para 12, and Case C-303/88 Italy v Commission (“ENI-Lanerossi”) ECLI:EU:C:1991:136, para 20. Commission Decision 81/2330/ECSC of 7.8.1981, OJ L 228, 13.08.1981, p. 14. See in particular the second recital and Article 1. Council Directive 81/363/EEC of 28.4.1981, OJ L 137, 23.05.1981, p. 39. See in particular the last recital and Article 1(e). Commission Decision 82/653/EEC of 22 July 1982 on aid granted by the Netherlands Government to a paperboard-processing firm (Leeuwarder papierfabriek B.V.), OJ L 277, 29.9.1982, p. 15 and Commission Decision 82/670/EEC of 2.10.1982 in case Intermills I, OJ L 280 02.10.1982, p. 30. Communication to the Member States concerning public authorities’ holdings in company capital. Bulletin EC 9 – 1984. Commission Communication on the Application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector, OJ C 307, 13.11.1993, p. 3.

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just those making losses as is the case at present” and “to all forms of public funds mentioned in the Transparency Directive..., not just for capital injections as is the case at present”.946

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Subsequently, in Westdeutsche Landesbank,947 the General Court conclusively identified the MEO test as the appropriate tool to distinguish between market behaviour by Member States and public undertakings and acts of public authority.

2.360

The Union Courts have recently underlined that the MEO principle is not an exception in relation to the standard test to establish whether a given measure confers an advantage on the alleged beneficiary. As such, the Commission cannot refrain from applying the MEO test on the basis that the Member State has not invoked the MEO principle in its dialogue with the Commission. In EDF the Court of Justice made clear that the MEO principle must be applied if the Member State has acted in its capacity as a market operator and not in its capacity as a public authority.948 As a result, the Commission had been wrong in relation to the measure at issue in EDF (which involved the use by France of its fiscal powers) not to test a national measure against MEO behaviour on the basis that the means used to adopt that measure were instruments of State power. The applicability of the MEO test to a public intervention does not depend therefore on the way in which the alleged advantage was conferred. Instead, it depends on the classification of the intervention as a decision which could have been taken by a market economy operator in relation to the putative beneficiary.949 Where it appears that the MEO test may be applicable, the Commission is therefore under a duty to ask the Member State concerned to provide it with all relevant information enabling it to determine whether the conditions governing the applicability and the application of that test are met.

946 947

948 949

Para 22. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T:2003:57, para 272: “The principle of equal treatment prohibits like cases from being treated differently, thereby subjecting some to disadvantages as opposed to others, without such differentiation being justified by the existence of substantial objective differences […]. However, a public investor is not in the same situation as a private investor. The private investor can count only on his own resources in order to finance his investments and is liable, up to the limits of those resources, for the consequences of his decisions. The public investor, on the other hand, has access to resources fl owing from the exercise of public power, in particular from taxation. Consequently, as the situations of those two types of investors are not the same, there is no discrimination against the public investor if the conduct of an informed private investor is taken into account in order to assess the conduct of the public investor.” See also Case C-482/99 France v Commission (“Stardust Marine) ECLI:EU:C:2002:294, para 39. See, to that effect, Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, paras 78, 81, 92 and 103. Case C-224/12 P Commission v Netherlands and ING Groep ECLI:EU:C:2014:213, para 31.

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The purpose of the MEO test is to assess whether the State has granted an advantage to an undertaking by not acting like a market economy operator with regard to a certain transaction. In that respect, it is not relevant whether the intervention constitutes a rational means for the public authorities in order to pursue public policy (e.g. employment) considerations. Similarly, the profitability or unprofitability of the beneficiary is not in itself a decisive indicator for establishing whether or not the economic transaction in question is in line with market conditions. The decisive element is whether the public authorities acted as a market economy operator would have done in a similar situation. If they have not done so, the beneficiary undertaking has received an economic advantage which it would not have obtained under normal market conditions,950 placing it in a more favourable position to that of its competitors.951

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2.2 Comparable circumstances The conceptual foundation of the MEO principle in the Treaty’s principle of neutrality as to property regimes and in the principle of equal treatment is reflected in point 11 of the 1993 Commission Communication on public undertakings:

2.362

“[...] In certain circumstances public enterprises can derive an advantage from the nature of their relationship with public authorities through the provision of public funds when this latter provides funds in circumstances that go beyond its simple role as proprietor. To ensure respect for the principle of neutrality the aid must be assessed as the difference between the terms on which the funds were made available by the State to the public enterprise, and the terms which a private investor would find acceptable in providing funds to a comparable private undertaking when the private investor is operating under normal market economy conditions (hereinafter ‘market economy investor principle’). [...] if any public funds are provided on terms more favourable (i.e. in economic terms more cheaply) than a private owner would provide them to a private undertaking in a comparable financial and competitive position, than the public undertaking is receiving an advantage not available to private undertakings from their proprietors. Unless the more favourable provision of public funds is treated as aid, and evaluated with respect to one of the derogations of the Treaty, then the principle of neutrality of treatment between public and private undertakings is infringed.” 950 951

Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T:2003:57, para 208. See, to that effect, Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, para 90; Case C-387/92 Banco Exterior de España v Ayuntamiento de Valencia ECLI:EU:C:1994:100, para 14, and Case C-6/97 Italy v Commission ECLI:EU:C:1999:251, para 16.

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2.363

Precisely because of the central role played by equal treatment, any application of the MEO test must ensure that the behaviour of the State or public authority is evaluated in light of that of a (real or hypothetical) private market operator which is in comparable circumstances. In Alfa Romeo952 the Court of Justice held that: “In order to determine whether such measures are in the nature of State aid, it is necessary to consider whether in similar circumstances a private investor of a size comparable to that of the bodies administering the public sector might have provided capital of such an amount”. As a result, the provision of capital under market conditions but on a scale not normally available in the capital market may also constitute State aid.953

2.364

Comparability and compliance with the MEO principle may seem to be shown in some situations where it emerges, on closer scrutiny, that equal treatment is not in fact assured. For example, consider the situation in which a company has accumulated significant debts towards the public authorities and those debts are cancelled, after which the public authorities invest in the now debt-free company. If the two measures (cancellation of debts and fresh investment) are treated separately, the investment could appear to be in line with the conduct of a market economic operator because the level of return on that investment would be in line with market norms. However, if the earlier debt cancellation had not occurred the later investment would not be considered as economically rational by a private investor. Comparability may therefore require a global view of those measures taken together rather than approaching each measure in isolation.

2.365

In certain cases, several consecutive measures of State intervention may therefore be regarded as a single intervention for the purposes of Article 107(1) of the Treaty. That could be the case, in particular, where consecutive interventions are so closely linked to each other, especially having regard to their chronology, their purpose and the circumstances of the undertaking at the time of those interventions, that they are inseparable from one another.954 For instance, subsequent State interventions which take place in relation to the same undertaking in a relatively short period of time, are linked with each other, or were all planned or foreseeable at the time of the first intervention, may be assessed as one intervention. On the other hand, when the later intervention was a result 952 953 954

Case C-305/89 Italy v Commission (“Alfa Romeo”) ECLI:EU:C:1991:142, para 19. See Opinion of Advocate General Slynn in Case 84/82 Germany v Commission ECLI:EU:C:1984:117, at page 1501. Joined Cases C-399/10 P and C-401/10 P Bouygues and Bouygues Télécom v Commission ECLI:EU:C: 2013:175, para 104; Joined Cases T-415/05, T-416/05 and T-423/05 Greece v Commission ECLI:EU: T:2010:386, para 177; and Case T-11/95 BP Chemicals v Commission ECLI:EU:T:1998:199, paras 170 and 171.

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of unforeseen events at the time of the earlier intervention955 the two measures should normally be assessed separately.956 All the relevant circumstances of the particular case should be considered to assess whether certain transactions are in line with market conditions. For instance, there can be exceptional circumstances in which the purchase of goods or services by a public authority, even if carried out at market prices, may not be considered in line with market conditions.957

2.366

In order to apply the MEO test, it is necessary to establish what would be a normal remuneration or return on the transaction under examination. The Court of Justice has underlined that a determination of what is a normal remuneration presupposes an economic analysis taking into account all the factors which an undertaking acting under normal market conditions should have taken into consideration when fixing the remuneration for the services provided.958 That exercise is part of ensuring the application of the MEO test in relation to comparable situations but, as the Chronopost saga demonstrates, it is not always easy to do so.

2.367

In 1997 the Commission adopted a decision concerning alleged State aid granted by France to SFMI-Chronopost, a subsidiary of La Poste.959 The Commission examined logistical assistance granted by La Poste to its subsidiary, which consisted in making available to SFMI-Chronopost the use of the postal infrastructure for the collection, sorting, transport and delivery of its dispatches. The Commission considered that the relevant question was “whether the terms of the transaction between [La Poste] and SFMI-Chronopost [were] comparable to those of an equivalent transaction between a private parent company, which may very well be a monopoly (for instance, because of the ownership of exclusive rights), and its subsidiary”. According to the Commission, there would be no financial advantage if the internal prices at which products and services were

2.368

955 956 957

958 959

Commission Decision of 19 December 2012 in Case SA.35378 Financing of Berlin Brandenburg Airport, Germany OJ C 36, 08.02.2013, p. 10, recitals 14 to 33. See paragraph 2.204 on repeated and linked interventions. In Case T-14/96 BAI v Commission ECLI:EU:T:1999:12 the General Court held that, in the light of specific circumstances of the case, it could be concluded that the purchase of travel vouchers by national authorities from P&O Ferries did not meet an actual need, so that the national authorities had not acted in a manner similar to a private operator acting under normal market economy conditions. Accordingly, that purchase conferred an advantage on P&O Ferries which it would not have obtained under normal market conditions and all the sums paid in performance of the purchase agreement constituted State aid. Case 39/94 SFEI and others ECLI:EU:C:1996:285, para 61. Commission Decision 98/365/EC of 01.10.1997 concerning alleged State aid granted by France to SFMIChronopost, OJ L 164, 09.06.1998, p.37.

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provided between companies belonging to the same group were “ full-cost prices (total costs plus a mark-up to remunerate equity capital investment)”. In that regard, the Commission noted that the payments made by SFMI-Chronopost did not cover total costs over the first two years of operation, but covered all costs other than central and local offices’ overheads. It considered, first, that it was not abnormal that payments made by a new undertaking such as SFMI-Chronopost covered only variable costs in the start-up period. Secondly, it noted that France had been able to show that as from 1988 the remuneration paid by SFMI-Chronopost covered all the costs incurred by La Poste, plus a return on the equity capital invested by the latter. Furthermore, the Commission calculated that the internal rate of return of La Poste’s investment as a shareholder was well in excess of the cost of the company’s equity in 1986. It was therefore above the normal rate of return that a private investor would require under similar circumstances. Consequently, the Commission decided that La Poste had provided logistical and commercial assistance to SFMI-Chronopost under normal business conditions and that assistance therefore did not constitute State aid.

2.369

In Ufex960 the General Court reviewed that assessment and criticised the Commission for not having checked that the transaction in question was comparable to a transaction between undertakings operating in normal market conditions. The Commission had verified merely the costs incurred by La Poste in providing logistical and commercial assistance and the extent to which those costs were reimbursed by SFMI-Chronopost. The General Court observed that “even supposing that SFMI-Chronopost paid La Poste’s full costs for the provision of logistical and commercial assistance, that would not be sufficient in itself to show that no aid within the meaning of Article [107 of the Treaty] was granted. Given that La Poste might, by virtue of its position as the sole public undertaking in a reserved sector, have been able to provide some of the logistical and commercial assistance at lower cost than a private undertaking not enjoying the same rights, an analysis taking account solely of that public undertaking’s costs cannot, in the absence of other evidence, preclude classification of the measures in question as State aid. On the contrary, it is precisely a relationship in which the parent company operates in a reserved market and its subsidiary carries out its activities in a market open to competition that creates a situation in which State aid is likely to exist… the Commission should at least have checked that the payment received in return by La Poste was comparable to that demanded by a private holding company or a private group of undertakings not operating in a reserved sector, pursuing a structural policy - whether general or sectorial - and guided by long-term prospects”.961 The General Court annulled the Commission decision. 960 961

Case T-613/97 Ufex and others v Commission ECLI:EU:T:2000:304. Case T-613/97 Ufex and others v Commission ECLI:EU:T:2000:304, paras 74 and 75.

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On appeal, the Court of Justice annulled the Ufex judgment in Chronopost.962 It ruled that the assessment of the General Court had failed to take account of the fact that an undertaking such as La Poste is in a situation which is very different from that of a private undertaking acting under normal market conditions. La Poste was entrusted with a service of general economic interest within the meaning of Article 106(2) of the Treaty. La Poste had to acquire or was afforded substantial infrastructures and resources (the “postal network”), enabling it to provide the basic postal service to all users, including those in sparsely populated areas where the tariffs did not cover the cost of providing the service in question. Because of the characteristics of the service which the La Poste network was required to deliver, the creation and maintenance of a network such as that available to SFMI-Chronopost was clearly not a market network and would never have been created by a private undertaking. Moreover, the provision of logistical and commercial assistance was inseparably linked to the La Poste network, since it consisted precisely in making available that network which had no equivalent on the market. The Court of Justice ruled that, “Accordingly, in the absence of any possibility of comparing the situation of La Poste with that of a private group of undertakings not operating in a reserved sector, “normal market conditions”, which are necessarily hypothetical, must be assessed by reference to the objective and verifiable elements which are available”.963 It held that the costs borne by La Poste in respect of the provision to SFMI-Chronopost of logistical and commercial assistance could constitute such objective and verifiable elements. Therefore, there would be no question of State aid to SFMI-Chronopost if, first, it were established that the price charged properly covered all the additional, variable costs incurred in providing the logistical and commercial assistance, an appropriate contribution to the fixed costs arising from use of the postal network and an adequate return on the capital investment in so far as it is used for SFMI-Chronopost’s competitive activity and if, second, there was nothing to suggest that those elements had been underestimated or fixed in an arbitrary fashion.964 In summary, when the remuneration related to a service which has 962 963 964

2.370

Joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost v Ufex and others ECLI:EU:C:2003:388, paras 32 to 40. Joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost v Ufex and others ECLI:EU:C:2003:388, para 38. The Court of Justice thereby followed the Opinion of Advocate General Tizzano who had observed at point 54 of his Opinion in Chronopost v Ufex and others ECLI:EU:C:2002:756 that to prove without doubt that Chronopost had benefited from an economic advantage, “the price paid to La Poste would have to be compared with the price La Poste could have obtained if it had offered its logistical and commercial assistance to the express delivery companies concerned on the market. In that way it could really be determined, first, whether SFMI-Chronopost had obtained that assistance at a lower price than its competitors would have paid for the same services and, second, whether the remuneration received in return by La Poste was “ less than that which would have been demanded under normal market conditions”. However, in the absence

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no comparison in the market the Court of Justice considered the test laid out by the General Court to be too abstract and hypothetical. It both stressed the need to refer only to available objective and verifiable data.

2.3 Hindsight 2.371

Whether a State intervention is in line with market conditions must be examined on an ex-ante basis, having regard to the information available at the time the intervention was decided upon.965 In fact, any prudent market economy operator would normally carry out its own ex-ante assessment of the strategy and financial prospects of a project,966 for instance, by means of a business plan. By contrast, it is not enough to rely on ex-post economic evaluations entailing a retrospective finding that the investment made by the Member State concerned was actually profitable.967

2.372

If a Member State argues that it acted as a market operator it must, where there is doubt, provide evidence showing that the decision to carry out the transaction was taken, at the time, on the basis of economic evaluations comparable to those which, in similar circumstances, a rational private operator (with characteristics similar to those of the public body concerned) would have had carried out to determine the transaction’s profitability or economic advantages.968 For that purpose, evaluations made after the transaction was carried out, based on a retrospective finding that it was actually profitable or not, or on subsequent justifications of the course of action actually chosen, are not relevant.969

965

966 967 968

969

of any specific and objective references in the market, the Advocate General considered that assessment by the General Court to be excessively hypothetical and abstract, concluding at point 57 of his Opinion that “ in the absence of adequate information on the market value of the services offered and with no estimates associated with a general group strategy to go on, an undertaking operating under normal market conditions would be obliged to fix the price of such services on the basis of their costs. Consequently, in those particular circumstances, I think the costs represent the only objective and verifiable factor which, pursuant to the SFEI judgment, “an undertaking acting under normal market conditions should have taken into consideration when fixing the remuneration for the services provided””. Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, paras 83 to 85 and 105, Case C-482/99 France v Commission (“Stardust Marine”) ECLI:EU:C:2002:294, paras 71 and 72 and Case T-16/96 Cityflyer Express v Commission ECLI:EU:T:1998:78, para 76. Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, paras 82 to 85 and 105. Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, para 85. Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, paras 82 to 85. See also Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission ECLI:EU:C:2013:682, para 61. Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, para 85.

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2.4 Specific obligations and prerogatives of the State For the purpose of the MEO test, only the benefits and obligations linked to the situation of the State as an economic operator – to the exclusion of those linked to its situation as a public authority – are to be taken into account.970 That limitation is significant because the financial position of public authorities is influenced by factors that have no relevance for a private investor: tax revenues or social security payments are an example.

2.373

In Gröditzer the Court of Justice examined the claim that it would have cost more the State to wind up a company than to privatise it at a negative selling price. The Court determined that the application of the MEO test must take into account only the obligations which the State must assume as owner of the share capital of a company, not its obligations as a public authority. More specifically, a market economy operator would not have been obliged to honour guarantees covering loans granted to an undertaking in clear difficulty, since a market economy operator would not have provided those guarantees in the first place. When the liabilities that would not have arisen for a private investor were discounted, it emerged that winding up the company cost less than selling it at a negative price. As a result, a market economy operator would have chosen to liquidate the company.971 A similar argument based on increased tax revenue was dismissed by the General Court in Westdeutsche Landesbank, since that aspect would have been irrelevant for a private investor.972

2.374

That exclusion of certain costs or benefits in the application of the MEO test is logical because that test is not applicable if the State acts as a public authority rather than as an economic operator. As a result, the Court held in EDF that “ in order to assess whether the same measure would have been adopted in normal market conditions by a private investor in a situation as close as possible to that of the State, only the benefits and obligations linked to the situation of the State as shareholder – to the exclusion of those linked to its situation as a public authority – are to be taken into account”.973 Accordingly, the Union Courts distinguish between the applicability of the MEO test (which cannot be excluded because the means used by the Member State are linked to powers not available to a

2.375

970

971 972 973

Case 234/84 Belgium v Commission ECLI:EU:C:1986:302, para 14; Case C-40/85 Belgium v Commission (“Boch”) ECLI:EU:C:1986:305, para 13; and Joined Cases C-278/92 to C-280/92 Spain v Commission (“Hytasa”) ECLI:EU:C:1994:325, para 22. Case C-334/99 Germany v Commission (“Gröditzer”) ECLI:EU:C:2003:55, paras 133 to 141. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU: T:2003:57, para 318. Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318, para 79 (emphasis added).

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private operator) and the application of the MEO test (which must exclude elements that could not be relevant to a private operator).

2.376

The role of that applicability/application distinction can be seen in relation to the Commission’s decision about a measure in 2009 which modified remuneration terms for capital that had been injection of capital by the Netherlands into a bank, ING, a year earlier in the most severe stage of the financial crisis. The Commission had considered that since the initial capital injection was State aid (a status which was common ground between it, the Netherlands and ING), a private operator could not find itself in the situation of holding such capital in the bank. Accordingly, it did not apply the MEO test to the 2009 measure and only checked to see if the modification of remuneration left ING better off than it had previously been. The General Court annulled the Commission decision for failure to apply the MEO test and on appeal in Netherlands and ING Groep the Court confirmed that the General Court was correct in law to do so.974

2.377

Netherlands and ING Groep deal with the applicability of the MEOP only.975 By contrast, the Court deals with the application of the MEOP in Land Burgenland,976 pointing out that EDF confirms earlier case-law that in the application of the MEO test only benefits and obligations linked to the situation of the State as shareholder – to the exclusion of those linked to its situation as a public authority – are to be taken into account. The dispute before the Court in Land Burgenland concerned a decision in which the Commission had examined if the selection by a Member State of the second-highest bidder for a bank was line with the MEO principle. When the Commission had applied the MEO test it refused to examine the exclusion of the highest bidder in light of the risk that that bidder would cause the activation of Ausfallhaftung (a guarantee provided by the Member State in favour of the bank to be sold), which was a form of State aid. The General Court and the Court both considered that the Commission was correct not to take that risk into account when it applied the MEO test.

974 975

976

Case C-224/12 P Commission v Netherlands and ING Groep ECLI:EU:C:2014:213. Case C-224/12 P Commission v Netherlands and ING Groep ECLI:EU:C:2014:213, para 29: “As a preliminary point, it must be pointed out that the debate before the General Court did not concern the specific application of the private investor test to the amendment to the payment terms of the capital injection, but whether that test was applicable” (emphasis added); and para 34: “[I]n this case, what is at issue is the applicability of the private investor test to an amendment to the redemption terms of securities acquired in return for State aid” (emphasis added). Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission ECLI:EU:C:2013:682.

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In particular, the Court explained that such a risk could not be taken into account in the application of the MEO principle because “since, by granting aid, a Member State pursues, by definition, objectives other than that of making a profit from the resources granted to an undertaking […], it must be held that those resources are, in principle, granted by the State exercising its prerogatives as a public authority”.977 In response to arguments before it that the Member State had sought to make a profit under the Ausfallhaftung, the Court ruled that it was for the Member State to establish unequivocally and on the basis of objective and verifiable evidence that the measure implemented is to be ascribed to the Member State as a market operator and that nothing showed that the introduction or retention of the Ausfallhaftung was based on economic evaluations carried out by the Member State for the purposes of establishing its profitability.978

2.378

2.5 The State as Investor - Capital injections, guarantees and loans 2.5.1 Introduction – profitability of the investment As indicated above, much of the jurisprudence and decisional practice relating to the MEOP is based on cases that concern the injection of capital. Nonetheless, the reasoning applying to capital injections can be transposed to loans, and would appear to apply to other, similar economic transactions such as guarantees mutatis mutandis. As far back as 1986 in the Boch judgment, the Court of Justice held that aid granted in the form of loans and in the form of subscription of capital are equivalent and that the Commission was right in applying “the criterion… of determining to what extent the undertaking would be able to obtain the sums in question on the private capital markets”.979

2.379

The common denominator of measures such as capital injections and loans is the fact that they are transactions that can also be undertaken by private operators. Therefore the question whether the State behaved, in a given situation, as market economy operator, or as a – State aid granting – public authority – is necessarily of higher complexity than when, for example, the State awards a grant.

2.380

977 978 979

Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission ECLI:EU:C:2013:682, para 56. Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission ECLI:EU:C:2013:682, paras 57 to 61. Case C-40/85 Belgium v Commission (“Boch”) ECLI:EU:C:1986:305, paras 12 and 13.

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2.5.2 Profitability of the investment or measure 2.381

The Union Courts have fully endorsed the use of MEO test when it is necessary to assess State capital injections into profit-seeking companies in order to identify if they contain aid.980

2.382

The central question is whether the public investor behaves like a market economy operator or whether – seen from the beneficiary’s point of view – the beneficiary would obtain the same funds on the same terms in the capital market. The financial conditions of the recipient only matter to the extent that they are relevant to the investment choice.

2.383

Measures such as capital injections are in essence investment decisions. They must therefore be assessed against their expected profitability. For example, the Commission noted in ENI-Lanerossi981 that the “financial and economic position of the factories, particularly in view of the duration and volumes of their losses, was such that a normal return in dividends or capital gains could not be expected for the capital invested”.

2.384

Any investment must be assessed with respect to its own risk and expected return. The current profitability of a company does not necessarily indicate the profitability of its future operations and investments. That aspect is particularly relevant for a company seeking funds to expand its business significantly, diversify into other fields of activity, acquire another company or execute a project substantially different from its current or core business.

2.385

In general, all economically relevant aspects of an operation must be taken into account to determine its profitability. For example, the expected return could take the form of payment of dividends or of capital gains through an increase of the share price, and both elements have a bearing on the profitability of an investment.

2.386

The prospective and current states of the sector must be taken into account in determining the expected remuneration of the investment, and thus whether a measure complies with the MEOP. The presence of overcapacity is typically considered as a handicap. In its decision in Leeuwarden982 the Commission 980 981 982

Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU: T:2003:57, paras 208 to 214. Commission Decision 2003/755/EC of 17.02.2003 in case ENI-Lanerossi, OJ L16, 20.01.1989, p. 52. Commission Decision 82/653/EEC of 22 July 1982 on aid granted by the Netherlands Government to a paperboard-processing firm (Leeuwarder papierfabriek B.V.), OJ L 277, 29.09.1982, p. 15.

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pointed out that “The financial structure of the firm... and the overcapacity in the paperboard-processing industry, constituted handicaps indicating that the firm would probably have been unable to raise on the private capital markets the funds essential to its survival. The situation on the market in question provides no reasonable grounds for hope that a firm urgently needing large-scale restructuring could generate sufficient cash flow to finance the replacement investment necessary, even if it received the proposed assistance.” The Commission used similar reasoning in many of the decisions it adopted from 2008 onwards in relation to measures that Member States notified in favour of banks during the financial and economic crisis. The Commission consistently referred to the difficulties of raising capital “ in the current market circumstances”,983 which it considered a strong indicator for the presence of an advantage to the banks in which Member States had invested.

2.387

Loans, unlike the provision of capital, require reimbursement plus payment of interest by the borrower to the lender. Whether the terms of a given loan comply with the MEOP therefore chiefly depends on the loan’s interest rate and duration, taking into account its riskiness.

2.388

Specific considerations apply if the economic relationship between the State and the beneficiary is characterised by the presence of several transactions. For example, if a State is both shareholder and lender to a company, it is sometimes argued that if the company were to refund the State at an interest rate below market value, the State would in its quality as a shareholder benefit from the improved profitability of the company which results from the cheap funding. That argument needs qualification.

2.389

If the State were the only shareholder of the company in that scenario, it would be correct to add to the interest payments all the additional dividends and capital gains that the loan could be expected to generate. In other words, one could apply the standard procedure of identifying all the expected cost and benefits (interest and dividend payments, capital gains) of an operation in order to determine the associated return.

2.390

983

See for example Commission Decision of 24 February 2010 in case N 428/2009, Restructuring of Lloyds Banking Group, OJ C 46, 24.02.2010, p. 2.

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2.391

However, it would be entirely different if instead of the State being the sole shareholder there were other shareholders which would benefit indirectly from the favourable loan without them contributing in an equal way. Such a situation would not accepted by a market economy investor.984

2.392

A similar argument can also be found in the Commission decision OTE. The State had contributed more to OTE’s restructuring plan than the firm’s other shareholders. Though admitting that the special position of the State as a major shareholder could have justified a different behaviour and a different level of engagement than those of the other shareholders, the Commission considered that the State’s extra contribution should have nevertheless been compensated by way of an increased stake in the company or in some other way. There was no correspondingly higher return for the State’s higher risk and the Commission noted that such an outcome would hardly be acceptable for a private investor in a comparable position.985

2.393

During the administrative procedure leading to the OTE decision the interested parties argued that the share price of the company had increased since the announcement of State intervention, a factor which they argued justified the discrepancy between the State’s contribution and its return. The Commission dismissed that argument, pointing out that any financial contribution by the State towards improving the financial position of a quoted company is likely to improve the latter’s share price whether or not such contribution also qualifies as an aid. In fact, a financial contribution that does not have as a counterpart a proportional issue of new shares or of debt is bound to increase the value of the company and the price of its shares. An increase in the company’s stock price can therefore signal an MEO-compliant investment by the State or that the company has received State aid: a detailed analysis is needed before drawing any conclusions.

2.5.3 Purely economic return 2.394

The hallmark of market economy operator behaviour is the focus on economic return alone. Public authorities, however, often act for other motives. Employment and social considerations or concerns for the local economy are typically present in rescue and restructuring interventions; the control of strategic assets 984 985

Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU: T:2003:57, para 316. Commission Decision of 10.5.2007 in case C 2/2006 (ex N 405/2005) Early voluntary retirement scheme of OTE, OJ L 243, 11.09.2008, p. 7, recital 87. See also Commission decision of 9.7.2014 in case SA. 36612, Parex, OJ L 27, 03.02.2015, p. 12, recital 82 et seq.

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motivates investments in utilities; the desire to correct market failures or to provide a service of general economic interest prompts the funding of network industries and media services. All those considerations can play a role in determining the compatibility of an aid measure, but they are extraneous to the MEO test since they are alien to private investors’ behaviour. In Boch the Court indicated that “the test is, in particular, whether in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regional policy and sectoral consideration would have subscribed the capital in question” (emphasis added).986

2.395

That approach does not deny that a private company may also consider, for example, social and employment considerations or environmental issues in its business practice. A private operator would do so, however, to preserve the loyalty of the employees or the (brand) image of the group, but always to maximise the long-term profitability of the company. Within those limits, similar behaviour by public investors could also be accepted.987

2.396

In the same vein, the Court of Justice has not accepted that employees’ participation in the recapitalisation of a company demonstrates that the operation fulfils the MEO test. Employees are not in the typical situation of a market investor, being motivated by the desire to maintain their jobs and more interested in the survival of the company rather than in its profitability.988

2.397

Any behaviour that is inconsistent with long-term profit maximisation is not in line with the MEOP. A private investor would not only make sure that it earns an adequate return in relation to the risk of the investment, but that it also gets as much profit as possible from the operation.989

2.398

986

987

988 989

Case C-40/85 Belgium v Commission (“Boch”) ECLI:EU:C:1986:305, para 13. See also Joined Cases T-129/95, T-2/96 and T-97/96, Neue Maxhütte Stahlwerke GmbH v Commission [1999] ECR II-17, para 132. In Case C-533/12 P SNCM and France v Corsica Ferries France ECLI:EU:C:2014:2142, the Court, referring to the General Court’s judgement, held that “it did not rule out, as a matter of principle, that the protection of the brand image of a Member State as a global investor in the market economy could, under specific circumstances and with a particularly cogent reason, constitute justification for demonstrating the long-term economic rationale of the assumption of additional costs such as additional redundancy payments.” Case T-296/97 Alitalia v Commission ECLI:EU:T:2000:289, para 84. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU: T:2003:57, paras 314-315.

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2.399

Clearly, such behaviour is that of an ‘ideal’ market investor and private operators can be observed acting differently. Nevertheless, that ideal market investor remains the appropriate benchmark for the MEO test, which, ultimately, aims at establishing whether the beneficiary has received an advantage not obtainable under normal market conditions. The odd case of a private investor not aiming at long-term profit maximisation is unlikely to be representative of the conditions typically present in the market or of those that are faced by the competitors of the beneficiary.

2.400

The emphasis on long-term profit is due to the fact that a majority shareholder of a company might take a longer term perspective than a minority investor in deciding on, for instance, a recapitalisation operation (owner effect). When the public investor is in a controlling position, its actions may be compared to those of a private holding pursuing a structural policy. They do not necessarily have to mirror those of a private investor with a short-term investment horizon. The Court of Justice drew a parallel in Lanerossi990 and Alfa/Fiat 991 with a mother company which might decide to carry the losses of a subsidiary to obtain better conditions from an eventual sale, to redirect its activities or to avoid compromising the image of the group. However, it also remarked that a private investor always keep in mind the overall profits of the group and would only suffer losses to the extent that such a strategy maximises long-term profits (or minimises losses) for the group.

2.401

It is well-established in economic theory that only the expected profitability of the investment under consideration matters, and that the value of past investment is irrelevant.992 The choices of a rational market investor will not be influenced by fact that the non-recapitalisation might lead to the liquidation of a company and so to the total loss of past investments. Sunk costs are like ‘spilt milk’ and they should not be taken into account in assessing the merit of a new investment.993

2.402

In essence, the owner of a loss-making company in need of capital has two choices: (a) inject fresh capital in the company and (b) liquidate the company and in990 991 992

993

Case C-303/88 Italy v Commission (“ENI-Lanerossi”) ECLI:EU:C:1991:136, para 22. Case C-305/89 Italy v Commission (Alfa-FIAT) [1991] ECR I-1603, para 20. To take that stance is not to deny the clear link that there might be between ‘old’ and ‘new’ investments. Training employees in the use of a piece of equipment is a profitable investment only to the extent that the equipment had been previously bought. However, the two operations should be assessed independently, each one on the basis of all the additional costs and revenues that they bring to the company. Another popular way of describing that principle is: “ do not throw good money after bad money”. See also Commission decision of 9.7.2014 in case SA. 36612, Parex, recitals 82 et seq.

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vest that amount of capital elsewhere. A private market operator would choose strategy (a) only if it is globally more profitable than strategy (b). The issue of the relevance of past investment was raised by the German authorities in the Westdeutsche Landesbank litigation.994 The General Court robustly rejected their argument:

2.403

“Moreover, as regards in particular the argument relating to the owner effect, it must be pointed out […] that normally a private investor is not content to avoid losses or to obtain a limited return on his investment, but attempts to maximise the return on his assets in accordance with the circumstances and his interests, even in the case of an investment in an undertaking in which he already has a shareholding”.995

2.5.4 Repeated interventions /capital injections In determining if State aid has been granted, repeated capital injections in favour of the same beneficiary will normally be assessed independently of each other. As such, previous findings of State aid do not necessarily mean that subsequent operations will fail to satisfy the MEO test. However, when several capital injections are made over a short period of time it is less obvious that they are truly independent of one another. In those circumstances, it may be necessary to assess them jointly.996

2.404

Such joint assessment may be called for, in particular, where consecutive interventions are so closely linked to each other that they are inseparable from one another.997 Factors which would be relevant to the severability of the interventions would include their chronology, their purpose and the circumstances of the undertaking at the time of those interventions. For instance, subsequent

2.405

994

995 996 997

WestLB and Germany argued that “the Commission failed to take the owner effect into account in the contested decision, an effect which is seen when an investor who is already a shareholder in an undertaking in which he wishes to invest increases the value of his existing shareholding by the introduction of new capital. Often, by virtue of that effect, an investor who has already invested in an undertaking injects further capital into it, even if, when that investment is made, it offers a lower than average profitability”; see Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T:2003:57, para 222. Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU: T:2003:57, para 335. Case T-11/95 BP Chemicals v Commission ECLI:EU:T:1998:199, paras 170 and171. Joined Cases C-399/10 P and C-401/10 P Bouygues and Bouygues Télécom v Commission ECLI:EU: C:2013:175, para 104; Joined Cases T-415/05, T-416/05 and T-423/05 Greece v Commission ECLI:EU: T:2010:386, para 177 and Case T-11/95 BP Chemicals v Commission ECLI:EU:T:1998:199, paras 170 and 171.

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2.406

State interventions which take place in relation to the same undertaking in a relatively short period of time, are linked with each other, or were all planned or foreseeable at the time of the first intervention, may be assessed as one intervention. The General Court endorsed that position in the SeaFrance ruling.998 On the other hand, when the later intervention was a result of events that were unforeseen at the time of the earlier intervention999 the two measures should normally be assessed separately.

2.407

The question of whether an earlier measure and a later measure should be examined separately or together is significant because an investment can appear profitable if some of the expenditure that it entails is not taken into account1000 because, for example, it had been made previously and already cleared under State aid rules. In such circumstances, it is important to avoid any double counting in making the relevant calculations to determine compliance with MEOP. In particular, it has to be verified whether the revenues associated with the later investment are truly additional and specific, as opposed to being a result of the combined interventions.

2.408

A related issue is whether a capital injection that closely follows a recovery order can be accepted as an investment which is line with market conditions. The Commission tackled that question in the cases of the (pre-crisis) recapitalisations of the German Landesbanken that took place after the recovery of previously granted incompatible aid, for example in HSH Nordbank1001 and in Bayern LB.1002 It concluded that the capital increases did not undermine the effectiveness of its recovery policy, since the illegal aid had been entirely recovered and the new operations had been subjected to a robust analysis and found to be entirely in accordance with the MEOP.1003 In such situations, the full recovery of the illegal aid is crucial since that element makes it possible to assess the new investment without contamination by the previous operations.

998 999 1000 1001 1002 1003

Case T-1/12 France v Commission (“SeaFrance”) ECLI:EU:T:2015:17, paras 33, 34 and 41 to 50. Commission Decision of 19 December 2012 in Case SA.35378 Financing of Berlin Brandenburg Airport, Germany OJ C 36, 08.02.2013, p. 10, recitals 14 to 33. Case T-1/12 France v Commission (“SeaFrance”) ECLI:EU:T:2015:17, paras 51 to 55. Commission Decision of 6.9.2005 in case NN 71/2005, HSH Nordbank, OJ C 241, 06.10.2006, p. 12. Commission Decision of 6.9.2005 in case NN 72/2005, Bayern LB, OJ C 242, 07.10.2006, p. 19. Commission Decision of 18.7.2007 in case NN 34/2007, Germany – Capital contributions NORD/LB, OJ C 4, 09.01.2008, p. 1, recitals 54-55.

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2.5.5 Establishing compliance with market conditions: pari-passu transactions Having discussed the underlying principles of the MEO test in particular with regard to instruments such as capital injections and loans, the question arises as to how to determine in practice whether a certain transaction is in line with the MEOP or not. Two broad categories of cases can be distinguished: situations in which the transaction can be shown to be in line with market conditions on the basis of market data specific to that transaction, and situations in which, due to the absence of such data, the transaction’s status in terms of the MEOP has to be assessed on the basis of other available methods.

2.409

Whether a loan, guarantee or capital injection is in line with market conditions can be directly established when the transaction is carried out “pari passu” by public entities and private operators.

2.410

In those situations a transaction is carried out under the same terms and conditions (and therefore with the same level of risk and rewards) by public bodies and private operators who are in a comparable situation (a ‘pari passu’ transaction).1004 It can normally be inferred from such circumstances that the transaction is in line with market conditions.1005 By contrast, if public bodies and private operators who are in a comparable situation take part in the same transaction at the same time but under different terms or conditions, those circumstances normally indicate that the intervention of the public body is not in line with market conditions.1006

2.411

In particular, to consider a transaction ‘pari passu’, the following criteria should be assessed:

2.412

–

whether the intervention of the public bodies and private operators is decided and carried out at the same time (i.e. the interventions are “concomitant”) or whether there is a time lapse and a change of economic circumstances has taken place between those interventions. That temporal dimension is relevant because in the latter situation the behaviour of pri-

1004 The terms and conditions cannot be considered to be the same if public bodies and private operators intervene on the same terms but at different moments, following a change in the economic situation which is relevant to the transaction. 1005 See, in that regard, Case T-296/97 Alitalia v Commission ECLI:EU:T:2000:289, para 81. 1006 However, if the transactions are different and are not carried out at the same time, the mere fact that the terms and conditions are different does not provide any decisive indication (positive or negative) as to whether the transaction carried out by the public body is in line with market conditions.

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vate investors could be influenced by the State’s conduct. The (intervention of the) public authorities can exercise moral persuasion or provide a signal through the investment of their strong interest in a certain project or their intention to assist, presently and in the future, the beneficiary.1007 That point is emphasised in the Commission decision in France Télécom: “The Commission would stress, moreover, that, in applying the concomitance criterion it cannot base the assessment of the State’s conduct on the conduct of other economic operators in so far as their conduct and the market were influenced by the State’s declarations. The State’s declarations, made in July and then repeated, to the effect that it would take the necessary steps to enable the Company to overcome its financing difficulties distort the concomitance test in so far as private investors cannot be considered to have made up their minds on the sole basis of the Company’s situation. This holds true irrespective of whether those declarations contain State aid or not. What is more, the application of the principle of the prudent private investor in a market economy cannot be based on the market situation in December, but must logically be based on the situation of a market uncontaminated by prior declarations and interventions”; 1008 –

whether the terms and conditions of the transaction are the same for the public entities and all private operators involved. That analysis should take into account the possibility that the level of risk for the public entities and their private counterparts may increase or decrease over time;

–

whether the intervention of the private operators has real economic significance, as opposed to being merely symbolic or marginal.1009 If the fi-

1007 See for example points 53 and 54 of the Opinion of Advocate General Geelhoed, Joined Cases C-328/99 and C-399/00 Italy v Commission and SIM 2 Multimedia SpA v Commission (Seleco) ECLI:EU:C:2001:492: “…it may therefore be assumed that those private investors were prepared to do so [provide capital to the beneficiary] only after the government had adopted new measures of support. It is not relevant how far private investors were prepared to take part – the point is rather what a private investor would have done had… [the public entities] not been prepared to inject new capital” and “I would also observe that the involvement of private financiers in a financing operation for a firm that is clearly in difficulties cannot of itself be taken to show that the public authorities concerned have acted in accordance with the criteria of a private investor.” 1008 Commission Decision 2006/621/EC of 02.08.2004 on the State Aid implemented by France for France Télécom (Case C13a/2003), OJ L 257, 20.09.2006, p. 11. 1009 For instance, in the Citynet Amsterdam case, the Commission considered that two private operators taking up one-third of the total equity investments in a company (considering also the overall shareholding structure and that their shares are sufficient to form a blocking minority regarding any strategic decision of the company) could be considered economically significant (see Commission Decision 2008/729/EC of 11 December 2007 on State aid C53/2006 Citynet Amsterdam, the Netherlands. OJ L 247, 16.09.2008,

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nancial effort of the private operator is negligible by comparison to the public intervention, there can still be doubts that the beneficiary would have found a private operator willing to make an investment of a much larger scale;1010 –

whether the starting position of the public entities and the private operators involved is comparable with regard to the transaction, taking into account, for instance, their previous exposure vis-à-vis the undertakings concerned,1011 the possible synergies which can be achieved,1012 the extent to which the different investors bear similar transaction costs,1013 or any other circumstance specific to the private or the public operator which could distort the comparison.

2.5.6 Establishing compliance with market conditions: Benchmarking To establish whether a transaction is in line with market conditions, can also be assessed in the light of the terms and conditions under which comparable transactions carried out by comparable private operators have taken place in comparable situations (benchmarking).

2.413

To identify an appropriate benchmark, it is necessary to pay particular attention to the kind of operator concerned (e.g. a group holding, a speculative fund, or a long-term investor seeking to secure profits in the longer run), the type of transaction at stake (e.g. equity participation or debt transaction) and the market(s) concerned (e.g. financial markets, fast-growing technology markets, utility or infrastructure markets). The timing of the comparator transactions is also particularly relevant when significant economic developments have taken place.

2.414

1010 1011 1012

1013

p. 27 recitals 96 to 100). By contrast, in case N 429/2010 Agricultural Bank of Greece (ATE), OJ C 317, 29.10.2011, p. 5, the private participation reached only 10 per cent of the investment, as opposed to 90 per cent by the State, so that the Commission concluded that ‘pari passu’ conditions were not met, since the capital injected by the State was neither accompanied by a comparable participation of a private shareholder nor proportionate to the number of shares held by the State. See also Case T-296/97 Alitalia v Commission ECLI:EU:T:2000:289, para 81. Case T-358/94 Air France v Commission ECLI:EU:T:1996:194, paras 148-149. See above at 2.400. They must also have the same industrial rationale, Commission Decision 2005/137/EC on State aid C25/2002 Participation financière de la Région wallonne dans l’entreprise CARSID - Acier CECA, OJ L 47, 18.02.2005, p. 28, recitals 67 to 70. Transaction costs may relate to the costs that the respective investors incur for the purpose of screening and selecting the investment project, arranging the terms of the contract or monitoring the performance over the lifetime of the contract. For instance, where publicly owned banks consistently bear the costs of screening investment projects for loan financing, the mere fact that private investors co-invest at the same interest rate is not sufficient to exclude aid.

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2.415

Where appropriate, the available market benchmarks may need to be adjusted according to the specific features of the State transaction (for instance, the situation of the beneficiary undertaking and of the relevant market).1014 Benchmarking may not be an appropriate method to establish market prices if the available benchmarks have not been defined with regard to market considerations or the existing prices are significantly distorted by public interventions. Such distortions appear to be present, for example, in the aviation industry – the Commission considers in the 2014 Aviation Guidelines that “Publicly owned airports have traditionally been considered by public authorities as infrastructures for facilitating local development and not as undertakings operating in accordance with market rules. Those airports’ prices consequently tend not to be determined with regard to market considerations and in particular sound ex ante profitability prospects, but essentially having regard to social or regional considerations. Even if some airports are privately owned or managed without social or regional considerations, the prices charged by those airports can be strongly influenced by the prices charged by the majority of publicly subsidised airports as the latter prices are taken into account by airlines during their negotiations with the privately owned or managed airports. In those circumstances, the Commission has strong doubts that at the present time, an appropriate benchmark can be identified to establish a true market price for services provided by airports. This situation may change or evolve in the future […]”.1015

2.5.7 Establishing compliance with market conditions: Other assessment methods 2.416

If there is no private participation in the transaction (so that no guidance is available using the pari passu doctrine) and if benchmarking is not possible, a transaction’s compliance with market conditions can be established on the basis of a generally-accepted, standard assessment methodology.1016 Such a methodology must be based on the available objective, verifiable and reliable data,1017 which should be sufficiently detailed and should reflect the economic situation at the time at which the transaction was decided, taking into account the level of risk and future expectations.1018 1014 See Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v Commission ECLI:EU:T:2003:57, para 251. 1015 See Commission Guidelines on State aid to airports and airlines, OJ C 99, 04.04.2014, p. 3, point 57 et seq. 1016 See Case T-366/00 Scott v Commission ECLI:EU:T:2007:99, para 134. 1017 See Case T-274/01 Valmont v Commission ECLI:EU:T:2004:266, para 71. 1018 See Case T-366/00 Scott v Commission ECLI:EU:T:2007:99, para 158.

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That analysis is typically carried out by calculating the net present value (NPV) of the project, that is, the sum of the discounted value of all cash flows that it generates – including the original capital investment and the end-of-period or residual value. A company can be expected to carry out all projects that have a positive NPV since that positive (negative) value is the measure of the absolute increase (decrease) in shareholder wealth. In other terms, if the NPV of a project is positive, the operation is ‘profitable’ and the MEOP is respected.1019 That method is also called Discounted Cash Flow (DCF) analysis.

2.417

In the case of investments in share capital, the method can be applied by estimating the company’s expected NPV following the investment (“post-money scenario”) and the company’s value without the investment (“pre-money scenario”). If the difference between the two NPVs is higher than the invested amount, then the capital injection will be in line with the dictates of the MEOP.1020

2.418

The discount factor is a crucial element in the calculation of the NPV. The applied rate must be sufficient to compensate the lenders and shareholders of the firm for the business and the financial risk of the operation.1021 A typical discount factor applied to capital projects is the weighted average cost of capital (WACC) of the firm. The WACC is generally defined as the weighted average of the after-tax cost of debt and of the expected cost of equity where the weights are, respectively, the percentage of debt and the percentage of equity in the firm’s capital structure.1022 The formula is relatively straight-forward to apply since the debt and equity ratios of the company can be observed and its borrowing rate is not too hard to derive.1023

2.419

1019 An alternative to calculating the NPV of a project is to determine its internal rate of return (IRR). The two methods are closely related since the IRR is the discount factor that equalises the NPV to zero. Therefore, if the IRR is equal or higher than the appropriate discount rate, the NPV of the project is null or positive and the project should be accepted. There is a detailed discussion of the two methods in Commission Decision C(2012) 3150 final of 11 May 2012, State aid SA.28855 (N373/2009) (ex C 10/2009 and ex N 528/2008) – The Netherlands – ING – restructuring aid, OJ C 260, 29.08.2012, p. 1. 1020 Commission Decision of 18.7.2007 in case NN 34/2007, Germany – Capital contributions NORD/LB, OJ C 4, 09.01.2008, p. 1, recitals 45-46. 1021 The business risk refers to the risk of operating in a particular industry, which is given by the strength of the relationship between the performance of the industry and that of the entire economy. The financial risk is the risk associated to leverage. The more a company finances itself through debt, the more the shareholders’ residual claim on the firm becomes variable, due to the fixed interest payments that have to be made to the providers of debt financing. The shareholders will therefore require an extra return to compensate for the additional variability (risk). 1022 See Copeland and Weston, Financial Theory and Corporate Policy, 1988, p. 450. 1023 When the company’s debt is not actively traded, reference can be made to traded securities with similar default risk and maturity.

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2.420

The identification of the expected return on equity can be more complex to determine, but it can be derived from the publications of professional investment advisors.1024

2.421

That procedure identifies the return that a firm must be able to generate – given its capital structure – on projects that have typical risk in terms of the company’s business.1025 It is important to note, however, that the WACC ceases to be the appropriate discount rate for projects that: (i) do not have the same business risk as others of the same firm; (ii) are financed in a way that alters the overall capital structure of the company; or (iii) are not small relative to the size of the company. When any of those circumstances applies, the discount factor must be revised accordingly.1026

2.422

Depending on the value of the transaction, the robustness of the evaluation should normally be corroborated by performing a sensitivity analysis. Such an analysis entails assessing different business scenarios, preparing contingency plans and comparing the results with alternative evaluation methodologies. A sensitivity analysis is a very useful complement to the calculation of the NPV of a project. It shows how the final result varies when some of the parameters of the equation are modified, that is to say, how robust are the conclusions that a project is worth undertaking.1027,1028

2.423

A comprehensive assessment of the methodologies which the Commission is entitled to use in its application of the MEO principle can be seen in Ciudad de la Luz.1029

1024 They are the so-called ‘beta books’. According to the capital asset pricing model (CAPM) the risk of an asset can be derived by adding a risk premium to the risk-free rate – that latter rate being usually determined by looking at the interest rate on long-term government bonds. The risk premium is in a certain proportion – the ‘beta’ – of the difference between the market risk and the risk-free rate. 1025 For a treatment of those issues see, for example, Brealey and Myers, Principles of Corporate Finance, 7th ed., 2003 or Copeland and Weston, Financial Theory and Corporate Policy, 1988. 1026 The discount factor used to calculate the NPV of a project is not to be confused with the remuneration rate of the shareholders (Return on Equity), which is applicable only in the case of contributions of equity capital. 1027 See for example Commission Decision of 18.7.2007 in case NN 34/2007, Germany – Capital contributions NORD/LB, OJ C 4, 09.01.2008, p. 1 or Commission decisions of 6.9.2005 in case NN 71/2005, HSH Nordbank, OJ C 241, 06.10.2006, p. 12 and in case NN 72/2005, Bayern LB, OJ C 242, 07.10.2006, p. 19. 1028 For a more detailed description of the case as well as for a discussion of the MEOP see Simon, The application of the Market Economy Investor Principle in the German Landesbanken Cases, EStAL 2007, 499 at 508 and Friederiszick and Tröge, Applying the Market Economy Investor Principle to State Owned Companies — Lessons Learned from the German Landesbanken Cases, Competition Policy Newsletter 1/2006, p. 105 (109). 1029 Joined Cases T-319/12 and T-321/12 Spain v Commission (“Ciudad de la Luz”) ECLI:EU:T:2014:604.

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2.5.8 Establishing compliance with market conditions: Specific considerations to establish whether the terms for loans and guarantees are in line with market prices In the case of guarantees, it is normally necessary to examine a “triangular situation”, involving a public entity as a guarantor, the borrower and the lender.1030 In most cases, aid could only be present at the level of the borrower, as the public guarantee may grant it an advantage by enabling it to borrow at a rate that it would not have been able to obtain on the market without the guarantee1031 (or to borrow in a situation where, exceptionally, no loan could have been obtained on the market at whichever rate). However, under certain specific circumstances, the grant of a public guarantee may also entail aid to the lender, in particular where the guarantee is given ex post on an existing obligation between lender and borrower, or where a guaranteed loan is used to pay back a non-guaranteed one.1032

2.424

Any guarantee granted on more favourable terms than market conditions, taking into account the economic situation of the borrower, confers an advantage on the latter (who pays a fee that does not appropriately reflect the risk assumed by the guarantor).1033

2.425

Unlimited guarantees are in general not in line with normal market conditions. Implicit guarantees stemming from the State liability for debts of insolvent public undertakings sheltered from ordinary bankruptcy rules also depart from normal market conditions.1034

2.426

In the absence of specific market information on a given debt transaction, the debt instrument’s compliance with market conditions may be established on the basis of a comparison with comparable market transactions (i.e. through benchmarking). In the case of loans and guarantees, information on the financing costs of the company may, for example, be obtained from other (recent) loans taken by the company in question, from yields on bonds issued by the company or from credit default swap (CDS) spreads on that company. Comparable market

2.427

1030 On the assessment to be carried out concerning the possible grant of State aid in the form of a guarantee, see also the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 155, 20.06.2008, p. 10. 1031 See Case C-275/10 Residex Capital IV ECLI:EU:C:2011:814, para 39. 1032 See Case C-275/10 Residex Capital IV ECLI:EU:C:2011:814, para 42. 1033 See Case T-154/10 France v Commission ECLI:EU:T:2012:452, para 106, and, on appeal, Case C-559/12 P France v Commission ECLI:EU:C:2014:217, para 96. 1034 See Case T-154/10 France v Commission ECLI:EU:T:2012:452, para 106, and, on appeal, Case C-559/12 P France v Commission ECLI:EU:C:2014:217, para 98.

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transactions may also be given by identifying similar loan/guarantee transactions undertaken by a sample of comparator companies, bonds issued by a sample of comparator companies or CDS spreads on a sample of comparator companies. In the case of guarantees, if no corresponding price benchmark can be found on the financial markets, the total financing cost of the guaranteed loan, including the interest rate of the loan and the guarantee premium, should be compared to the market price of a similar non-guaranteed loan. Benchmarking methods may be complemented with assessment methods based on the return on capital.1035

2.428

To further facilitate the assessment of whether a measure complies with the MEO test, the Commission has developed proxies to determine the aid character of loans and guarantees.

2.429

For loans, the Reference Rate Communication provides the methodology to calculate a reference rate, which should act as a proxy for the market price in situations where comparable market transactions are not straightforward to identify (which is more likely to apply to transactions involving limited amounts and/or transactions involving SMEs).1036 However, that reference rate is only a proxy.1037 If comparable transactions have typically taken place at a lower price than that indicated as a proxy by the reference rate, the Member State can consider that the lower price is the market price. If, on the other hand, the same company has carried out recent similar transactions at a higher price than the reference rate and its financial situation and the market environment have remained substantially unchanged, the reference rate may not constitute a valid proxy for market rates in that specific case. In other words, real world experience trumps the Reference Rate Communication.

2.430

For guarantees the Commission has developed detailed guidance on proxies (and safe harbours for SMEs) in the Notice on Guarantees.1038 According to that Notice, it is normally sufficient to rule out the presence of aid that the borrower 1035 For instance, through RAROC (Risk Adjusted Return on Capital), which is what lenders and investors require for providing finance of similar benchmark risk and maturity to an undertaking active in the same sector. 1036 See the Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.01.2008, p. 6. For subordinated loans, which are not covered in the Reference Rate Communication, the methodology set out in Commission Decision of 11 December 2008 on State aid N 55/2008, GA/EFRE Nachrangdarlehen, OJ C 9, 14.01.2009, p. 1, can be used. 1037 However, where Commission regulations or Commission decisions on aid schemes refer to the reference rate for the identification of the aid amount, the Commission will consider it as a fixed no-aid benchmark (safe-harbour). 1038 Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 155, 20.06.2008, p. 10.

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is not in financial difficulty, that the guarantee is linked to a specific transaction, that the lender bears part of the risk and that the borrower pays a market oriented price for the guarantee.

2.6

The State as vendor or buyer - sale and purchase of assets, goods and services

2.6.1 Introduction In Scott1039 the General Court clarified that “when assessing the value of an aid in the form of a sale of property at an allegedly preferential price, the principle of the private investor operating in a market economy applies. Therefore, the value of the aid is equal to the difference between what the recipient in fact paid and what it would have had to pay in an arm’s length transaction on the open market to buy an equivalent property from a vendor in the private sector at the time of the relevant transaction.”

2.431

In that judgment the General Court took the view that the rationale of the Commission Communication on State aid elements in sales of land and buildings by public authorities1040 is the MEOP. The Commission did not expressly refer to that principle in the text of the Communication but in substance the Communication implemented it by setting out rules to ensure that the behaviour of a public authority willing to sell land resembles as much as possible that of a private operator.

2.432

The Communication concerns only sales of publicly owned land and buildings. It does not concern the public acquisition of land and buildings or the letting or leasing of land and buildings by public authorities. It seems to follow from the basic principles governing the MEOP, however, that the same logic applies mutatis mutandis to those situations, and other economic transactions in which the State buys or sells services or goods on a market: in order to avoid any State aid concern the Member State should behave as a private operator. The following sections will therefore firstly recall the most relevant case law and Commission’s decisional practice as regards the most frequently assessed types of transactions, namely the sale of land and privatisations. It will then aim to conclude with some considerations that appear applicable to any such or similar transaction.

2.433

1039 Case T-366/00 Scott v Commission ECLI:EU:T:2007:99, para 105. 1040 Commission Communication on State aid elements in sales of land and buildings by public authorities, OJ C 209, 10.07.1997, p. 3.

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2.6.2 Sale of land and buildings 2.434

2.435

According to the Land Sale Communication there are two cases where the existence of State aid can be excluded: 1.

A sale of land and buildings following a sufficiently well-publicized,1041 open and unconditional1042 bidding procedure, comparable to an auction, accepting the best or only bid is by definition at market value and consequently does not contain State aid. The fact that a different valuation of the land and buildings existed prior to the bidding procedure, e.g. for accounting purposes or to provide a proposed initial minimum bid, is irrelevant.

2.

In the absence of such public tender, an independent evaluation should be carried out by one or more independent asset valuers prior to the sale negotiations in order to establish the market value1043 on the basis of generally accepted market indicators and valuation standards. The market price thus established is the minimum purchase price that can be agreed without granting State aid. The cost to the public authorities of acquiring land and buildings is an indicator for the market value unless a significant period of time (more than 3 years) elapsed between the purchase and the sale of the land and buildings and unless the independent valuer specifically identified a general decline in market prices for land and buildings in the relevant market.

With regard to the sale through bidding procedure, ‘unconditional’ does not mean that the public authorities cannot impose any condition. The Communication clarifies that restrictions may be imposed for the prevention of public nuisance, for reasons of environmental protection or to avoid purely speculative 1041 An offer is ‘sufficiently well-publicized` when it is repeatedly advertised over a reasonably long period (two months or more) in the national press, State gazettes or other appropriate publications and through real-estate agents addressing a broad range of potential buyers, so that it can come to the notice of all potential buyers. 1042 An offer is ‘unconditional’ when any buyer is generally free to acquire the land and buildings and to use them for its own purposes. 1043 ‘Market value’ means the price at which land and buildings could be sold under private contract between a willing seller and an arm’s length buyer on the date of valuation, it being assumed that the property is publicly exposed to the market, that market conditions permit orderly disposal and that a normal period, having regard to the nature of the property, is available for the negotiation of the sale. Special obligations that relate to the land and buildings and not to the purchaser or his economic activities may be attached to the sale in the public interest provided that every potential buyer is required, and in principle is able, to fulfil them, irrespective of whether or not he runs a business or of the nature of his business. The economic disadvantage of such obligations should be evaluated separately by independent valuers and may be set off against the purchase price. The economic burden related to obligations incumbent on all landowners under the ordinary law are not to be discounted from the purchase price.

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bids. Urban and regional planning restrictions imposed on the owner as a result of domestic law on the use of the land and buildings do not affect the unconditional nature of an offer. If it is a condition of the sale that the future owner is to assume special obligations – other than those arising from general domestic law or decision of the planning authorities or those relating to the general protection and conservation of the environment and to public health – for the benefit of the public authorities or in the general public interest, the offer is to be regarded as ‘unconditional’ only if all potential buyers would have to, and be able to, meet that obligation, irrespective of whether or not they run a business or of the nature of their business.

2.436

It is clear that those conditions do not artificially restrict the number of potential buyers and do not direct the sale of the land towards any of them. Those conditions relate to the exercise by the public authorities of their own legitimate public law powers. Some of those conditions may reduce the value of the land (for instance urban planning restrictions). However, such conditions do not preclude the application of the MEOP to the sale transaction. They relate to a phase prior to the sale and a private seller would also have to respect them and try to maximise its profit taking them into account.

2.437

In summary, an independent evaluation or a bidding procedure are procedural arrangements to arrive at the price a private seller would try to obtain in the market.1044 In their absence, or if there are contradicting indications, the value of the land in the market at the moment of the sale should be determined based on the most reliable method to determine the value of the property.1045 As a result, the market value should equal the maximum price that a seller can get for its land at a given moment of time.1046 Whether a specific potential buyer may value

2.438

1044 In certain circumstances, alternative methods could be employed, such as the Vergleichspreissystem valuation method proposed by Germany (endorsed for agricultural and forestry land in Commission Decision on State aid SA.33167 Proposed alternative method to evaluate agriculture and forestry land in Germany when sold by public authorities, OJ C 43, 15.02.2013, p. 7). However, according to the Court in Case C-239/09 Seydaland Vereinigte Agrarbetriebe ECLI:EU:C:2010:778 at para 52: “ it cannot be ruled out that, in certain instances, the method laid down in that provision of national law may lead to a result far removed from market value. In such circumstances, pursuant to the obligation on all the organs of the State, including the national courts and administrative authorities, to set aside a rule of national law which is contrary to EU law, those courts or administrative authorities which are responsible for the application of that rule are required to disapply the provision of national law in question”. 1045 Case T-366/00 Scott v Commission ECLI:EU:T:2007:99, para 108. 1046 That value does not necessarily correspond to one amount, but could well be a “range”. Moreover, according to the General Court in Case T-366/00 Scott v Commission ECLI:EU:T:2007:99 at para 96, “ it is to be noted in this regard that the Commission may not be faulted because its assessment is approximate. In the case of a non-notified aid, it may be that the circumstances of the case are such that the Commission has difficulty in determining the precise value of the aid, particularly where a significant period of time has elapsed

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the land less than another is irrelevant. For instance, the State may be ready to sell to a given purchaser a plot of land at the price resulting from an independent evaluation. If before the finalisation of the deal the State receives a credible unsolicited higher offer the question arises of whether or not the State should go for that offer.1047 The State should sell at the independently evaluated price only where the higher offer does not look credible or is not binding1048 or when a there are other economic factors than the price that a private vendor would take into consideration. A private operator who had initially intended to sell a good for a given price (based on an independent evaluation) and who received a credible higher bid prior to the sale would decide against selling the land at the initial lower price.1049

2.439

When determining the market price of the land, the uncertainty surrounding the determination of such market price has to be taken into account.1050 The uncertainty arises because the evaluation is taking place after the event, while the determination of the market price must be carried out as though one were at the moment in time when the sale occurred, taking account only of development foreseeable at that earlier moment.1051

2.6.3 Privatisations 2.440

Article 345 of the treaty provides that the “Treaty shall in no way prejudice the rules in Member States governing the system of property ownership.” It lies down a principle of neutrality towards property ownership and requires equal treatment between public or private property ownership. As such, the Treaty does not favour private or public ownership of companies. However, if a privatisation since the sale of the property in question”. 1047 A binding offer provides information on one buyer. An expert valuation provides information of what a rational buyer in specified conditions should be prepared to pay. It will also typically be based on the distribution of buyer’s willingness to pay and might reflect the expected value (average) of the distribution. If the binding offer lies outside the range of values considered by the expert report, the reliability of the report could be questioned. 1048 In general, it is submitted that one should give lower weight to unbinding (relative to binding) offers and lower weight to individual (relative to aggregated) valuations. Hence, unbinding individual price offers should be given least weight and ex ante expert valuations based on sample of credible buyers may be given most weight. 1049 See to that effect, Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission ECLI:EU:C:2013:682, paras 94 to 95. In that case, the Court held that, where a public authority proceeds to sell an undertaking through a tender, it can be presumed that the market price corresponds to the highest (binding and credible) offer, without being necessary to resort to other valuation methods, such as independent studies. 1050 Case T-274/01 Valmont v Commission ECLI:EU:T:2004:266, para 45. 1051 Case T-366/00 Scott v Commission ECLI:EU:T:2007:99, paras 93 to 95.

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of a public company takes place, it must comply with rules on State aid and not grant an advantage either to the buyer or the privatised company (the economic activity as such). Consequently, while selling assets or the shares of the company, the Member State must behave as a private investor maximising the revenues from the sale. If it does not do so then the privatisation involves a foregoing of State resources to the benefit of the buyer or of the privatised company. In the previous section the rules applicable to the sale of land and buildings were discussed. As mentioned, according to the Commission if the sale of land and buildings is conducted under sufficiently well-publicized, open and unconditional bidding procedure, the presence of the State aid can be excluded.

2.441

Similarly, as regards privatisations, the Twenty-third Report on Competition Policy laid down the conditions under which the privatisation process would not involve any State aid. A Commission Staff working Paper on “State aid compliant financing, restructuring and privatisation of State-owned enterprises”1052 recalls and confirms what the Commission set out in the Twenty-third Report. Accordingly, the privatisation of a company, as a whole or in parts, does not to involve aid if:

2.442

–

it is carried out through a competitive tender that is open to all comers, transparent and non-conditional on the performance of other acts such as the acquisition of assets other than those bid for or the continued operation of certain businesses;

–

the company is sold to the highest bidder;

–

the bidders are given enough time and information to carry out a proper valuation of the assets as the basis for their bid.1053

1052 Commission Staff working Paper of 10.2.2012, Guidance paper on state aid compliant financing, restructuring and privatisation of State-owned enterprises, available at http://ec.europa.eu/competition/state_ aid/studies_reports/swd_guidance_paper_en.pdf. 1053 See Twenty-third Report on Competition Policy (1993), p. 256; Twenty-seventh Report on Competition Policy (1997), p. 226; Quigley and Collins, EC State aid law and policy, 2003, p. 38; Evans, Privatization and State aid control in EC law, (1997) 18 ECLR 259. The meaning of the terms “open, transparent and non-conditional” is to be interpreted in the line with the Commission Communication on State aid elements in sales of land and buildings by public authorities, OJ C 209, 10.07.1997, p. 3.

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2.443

The rationale of those procedural rules rests on the MEOP. A private investor that intends to sell its company would do it for the highest price without imposing conditions that would depress the price.1054 The procedural rules contained in the Twenty-third Report aim to ensure that Member States behave in such a way. By the same token, if liquidation is economically more appropriate than privatisation, the national authorities should opt for that solution in order to avoid granting aid.1055

2.444

Likewise, privatisation by the sale of shares on the stock market is assumed to be carried out under market conditions and not to involve State aid. The reason is that the stock market is subject to specific regulation and control, aiming to ensure its openness, transparency and efficiency. Therefore the price obtained is deemed to be the market price reflecting the fair value of the traded asset. However, there must be no discrimination based on the nationality of the prospective buyer.1056 Discrimination may reduce the number of bidders and depress the selling price.

2.445

If the privatisation is not carried out in line with those principles, the measure has to be notified to the Commission. According to the Commission, there are certain situations where the presence of State aid can be presumed. These involve all sales which are: – – – –

2.446

carried out by restricted procedure and between individuals; preceded by writing-off debt by State, other public undertakings or bodies; preceded by conversion of debt in equity or capital increases and carried out on conditions that would not be acceptable to private investors operating in market economy.1057

However, that presumption is rebuttable. For example, in PZL Hydral the Commission assessed whether aid was granted in the conversion of debt into equity followed by a sale of the company. Had the debt-to-equity swap not taken place, the company would probably have gone bankrupt. Against that background, the Commission concluded the price obtained through the sale was higher than 1054 The Court of Justice endorsed the appropriateness of the use of the MEOP in the framework of a privatisation process in Joined Cases C-278/92 to C-280/92 Spain v Commission (“Hytasa”) ECLI:EU:C:1994:325. 1055 See para 2.402 above and para 2.450 below. 1056 See Twenty-third Report on Competition Policy (1993), p. 256. 1057 See Commission Staff working Paper of 10.2.2012, Guidance paper on state aid compliant financing, restructuring and privatisation of State-owned enterprises, p. 10, available at http://ec.europa.eu/competition/state_aid/studies_reports/swd_guidance_paper_en.pdf.

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what the creditors (public authorities) could have obtained in a liquidation, and that therefore the transaction was free of aid.1058 The general principle that can be deduced from that decision is that the write-off, reduction or conversion of debt prior to a privatisation is in line with MEO test as long as the (additional) proceeds from the sale exceed the reduction in debt. The Centrale del latte di Roma decision, in which the Commission concluded that certain conditions of a tender “may be neutralised by the fact that the selected bidder’s offer is substantially higher than the value of the company, as determined by an independent expert”,1059 caused some uncertainty as to which conditions the Commission considers acceptable in a privatization process1060 and thus could be imposed without the need to notify to the Commission.

2.447

The decision in Automobile Craiova casts some light on the situation. In that case, the Romanian authorities had organised a tender for a car factory in a way that ensured a certain output and employment level at Craiova (investors with a different industrial strategy had no realistic chance to win the tender) and had thereby foregone State revenue. The Commission found that those conditions, linked to considerations a private vendor would never have pursued, deflated the sales prices and conferred an economic advantage on the privatized undertaking (but not on the buyer).1061

2.448

Two important insights can be gained from that decision, which were also confirmed shortly afterwards in Tractorul.1062 First, conditions attached to a tender lead to the presence of State aid if they are liable to reduce the sales price and provide an advantage. Second, if the sales price is lower than the market value, it is generally the buyer who benefits from that advantage in the privatisation process. However, the privatised company itself and/or its share-/stake-holders can also benefit from an advantage. Certain privatisation conditions, such as minimum investments or a preservation of a minimum production, might de-

2.449

1058 Commission decision of 04.08.2010 on State aid C 40/08 (ex N 163/08) implemented by Poland for PZL Hydral S.A., OJ L 298, 16.11.2010, p. 51; see also Commission Staff working Paper of 10.2.2012, Guidance paper on state aid compliant financing, restructuring and privatisation of State-owned enterprises, p. 10, available at http://ec.europa.eu/competition/state_aid/studies_reports/swd_guidance_paper_en.pdf. 1059 Commission Decision of 11.04.2000 in case C 28/1998, on aid granted to Centrale del Latte di Roma, OJ 2000 L 265, 19.10.2000, p. 15, recital 91. 1060 See Soltész and Bielesz, Privatisierungen im Licht des Europäischen Beihilferechts, EuZW 13/2004, p. 391 (394). 1061 Commission Decision of 22.02.2008 in case C 46/2007, privatisation of Automobile Craiova (former Daewoo), OJ L 239, 06.09.2008, p. 12, recitals 55 to 66. 1062 Commission Decision of 18.03.2008 in case C 41/2007, Privatisation of Tractorul, OJ L 263, 02.10.2008, p. 5, recital 41.

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press the market and hence the sales price. The buyer might well pay a “market price” (an asset in which the conditions have been “priced in”) but the privatised company, or the economic activity that resides in this company, can obtain an advantage, as was the case in Automobile Craiova.1063 Conditions of that kind ensure, for example, the maintenance of a certain economic activity even where it is not economically viable at the expense of the State since it is likely that the buyer accepts those conditions in exchange of a reduction of the sale price (i.e. a foregoing of State resources).

2.450

In the special case of a sale for a negative price (e.g. including where the State invests more to prepare the sale of the company than the proceeds obtained from privatisation), an open, transparent and unconditional tender is not in itself sufficient to rule out State aid. In such a case, the negative price would still need to be compared to the outcome of a liquidation (or bankruptcy) of the publicly owned company to ensure that the State has chosen the economically most rational option and has minimised its losses.

2.451

Even if liquidation would have been the path chosen by a market operator, the sale at a negative price will normally not confer an advantage on the buyer if the negative sale price is the result of an open, transparent and unconditional tender. However, it can result in an advantage to the economic activity that resides in the privatised company,1064 in the same way as a price-depressing condition can.

2.6.4 Summary of generally applicable considerations - establishing MEOP compliance through tenders and evaluations 2.452

The case law and decisional practice of the Commission, as indicated above, seem in principle to be applicable to any transaction entailing the sale or purchase of assets by the State, and similar transactions, such as for example the lease of goods or granting of concessions. It follows from that case-law that an open, transparent, sufficiently well-publicised, non-discriminatory and unconditional tender procedure is the most straight-forward manner in which to establish that transactions are in line with market conditions. To deliver that result, a tender procedure has to exhibit the following characteristics:

1063 Commission Decision of 22.02.2008 in case C 46/2007, privatisation of Automobile Craiova (former Daewoo), OJ L 239, 06.09.2008, p. 12, recitals 82 and 83. 1064 Commission Decision of 28.01.2012 in case SA 34053, Recapitalisation and Restructuring of Banco de Valencia, OJ C 75, 14.03.2013, p. 1, recitals 84 and 85.

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–

It has to be open to allow all interested and qualified bidders to participate in the process. Accordingly, “open procedure” and “restricted procedure” as defined in the Public Procurement Directive1065 can be considered sufficient to establish the market price, unless interested operators are prevented from tendering without valid reasons.1066

–

The procedure has to be transparent. Accessibility of information, sufficient time for interested tenderers, and the clarity of the selection and award criteria are necessary for a selection procedure to be transparent. A tender has to be sufficiently well-publicised, so that it can come to the notice of all potential buyers.

–

All bidders have to enjoy equal and non-discriminatory treatment: To guarantee equal treatment, objective criteria for the award of the contract should enable tenders to be compared and assessed objectively.

–

A tender for the sale of assets, goods or services is unconditional when any potential buyer is free to acquire the assets, goods and services to be sold and to use them as it pleases for its own purposes. If there is a condition that the purchaser is to assume special obligations which a private seller would not have demanded - other than those arising from general domestic law or decision of the planning authorities - for the benefit of the public authorities or in the general public interest, the tender cannot be considered unconditional.

In addition, the question sometimes arises as to whether a tender would provide a reliable market price if there were only one bid. It is submitted that in order to establish a market price, the tender must be designed so as to give rise to a sufficient level of competition. In the case of procedures where it is apparent that only one operator is realistically able to submit a credible bid, the tender cannot be deemed competitive and thus cannot be considered to adequately establish the market price for the transaction. In consequence, a single bid may be a reliable indicator of the market price only if more potentially interested bidders could – in theory – have submitted a bid, and where not excluded by the design of the tender.

2.453

1065 See Articles 27 and 45 of Directive 2014/24/EU. 1066 See further point 66 of the SGEI Communication, OJ C 8, 11.01.2012, p. 4. See also Case T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463, in which the General Court accepted that a procurement procedure chosen to select a SGEI provider involved some discretion by the French authorities and negotiation between the authorities and companies that submitted a bid, the procedure had still ensured a substantial degree of effective competition and publicity and was therefore in that case considered sufficient to establish compliance with the 4th Altmark criterion (see also section Part 4).

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Regarding the award criteria, a distinction should be drawn between the sale and purchase of assets.

2.455

In the context of sales (and similar transactions such as leases), the only relevant criterion for selecting the buyer should be the highest price,1067 though only credible1068 and binding offers are relevant for selection.1069 On the other hand, when public bodies purchases assets, goods and services, there is of course the possibility to attach and value other conditions that relate to the need of the public authority. Such conditions should be closely and objectively related to the subject matter of the contract and should allow for the most economically advantageous offer to match the market value.1070

2.456

In the context of sales and purchases of assets, running a tender is evidently the royal road to establish MEOP compliance. Contrary to “investment” transactions, there is no need for the use of benchmarks – a tender procedure can always establish the real market value. Nevertheless, the Court and the Commission and have accepted expert evaluations as another method to establish the market price, in particular in the context of the sale of land. The Court also seems to indicate in Bank Burgenland that even for more complex transactions, such as privatisations, evaluations can be relevant.1071

2.457

However, in the same case the Court also appears to have established a hierarchy of methods to establish said compliance, in holding that “where a public authority proceeds to sell an undertaking […] through a […] tender, it can be presumed that the market price corresponds to the highest offer […] In such circumstances, the Commission is not obliged to resort to other methods in order to check the market price, such as such as independent studies.” 1067 Joined Cases T-268/08 and T-281/08 Land Burgenland and Austria v Commission ECLI:EU:T:2012:90, para 87. 1068 An unsolicited bid can also be credible, depending on the circumstances of the case, and in particular if the bid is binding (see Case T-244/08 Konsum Nord v Commission ECLI:EU:T:2011:732, paras 73 to 75). 1069 For instance, mere announcements which are not legally binding would not be considered in the tender procedure: see Joined Cases T-268/08 and T-281/08 Land Burgenland and Austria v Commission ECLI:EU:T:2012:90, para 87 and Case T-244/08 Konsum Nord v Commission ECLI:EU:T:2011:732, paras 67 and 75. 1070 The criteria should be defined in such a way so as to allow for an effective competition that leaves the successful bidder with a normal return, not more. To achieve that outcome requires in practice the use of tenders which put significant weight on the “price” component of the bid or which are otherwise likely to achieve a competitive outcome (e.g. certain reverse tenders with sufficiently clear-cut award criteria). 1071 Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission ECLI:EU:C:2013:682, para 93.

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It would therefore seem that just as real world experience trumps the Reference Rate Communication,1072 real bids trump expert opinions.

2.458

2.7 The State as a creditor (Market Economy Creditor Principle) Normal market behaviour is the benchmark that can be used for assessing all kinds of economic transactions entered into by the public authorities. That category also includes cases in which the State acts in a creditor’s capacity.

2.459

The reference to a Market Economy Creditor Principle can be traced back to the judgment in Tubacex. The Commission had qualified as aid the difference between the default interest rate charged on rescheduled social security debts and the market interest rate at which the company could have borrowed. The Court of Justice annulled the decision since the correct comparison should have been with the interest rate charged in the market for default debts. The Court ruled that, contrary to the “conduct of a private investor laying out capital with a view to realising a profit in the relatively short term”, a private creditor “seeks to recover sums due to it and […] to that end, concludes agreements with the debtor, under which the accumulated debts are to be rescheduled or paid by instalments in order to facilitate their repayment”.1073

2.460

Profit maximisation remains the common denominator of the behaviour of any market economy operator, be it an investor, a creditor, a buyer, a seller and so on. Profit maximisation, however, requires different strategies depending on the circumstances. If the enforcement of a claim may lead to default of the debtor and partial or complete loss of the credit, a creditor may well decide to accept a rescheduling and even a partial waiver of the debt. Similar conduct by the State would not constitute aid.

2.461

The comparison with the hypothetical behaviour of a private creditor in a similar situation is not, however, the only element to consider. It might be the case that the State has laid down precise rules to observe in case of enforcement of its claims on, for example, outstanding taxes and social security contributions. It might also be the case that such rules offer more generous terms than those normally acceptable to a private creditor. As long as those precise rules are generally applicable in relation to all debtors, the fact that they depart from market practice would not be sufficient to determine a presence of State aid. A measure

2.462

1072 See above 2.429. 1073 Case C-342/96 Spain v Commission (“Tubacex”) [ECLI:EU:C:1999:210, para 46.

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only qualifies as State aid if it grants a selective advantage,1074 which would not be the case of payment facilities that are equally accessible to all undertakings of all sectors and whose scope is not limited (or widened) by the discretionary power of the public administration.

2.463

The existence of discretionary power of the public administration is a crucial aspect in judging the general versus selective nature of a given measure.1075 In DM Transport the Court of Justice thus established that: “…payment facilities in respect of social security contributions granted in a discretionary manner to an undertaking by the body responsible for collecting such contributions constitute State aid for the purposes of Article [107(1)] of the Treaty if, having regard to the size of the economic advantage so conferred, the undertaking would manifestly have been unable to obtain comparable facilities from a private creditor in the same situation vis-à-vis that undertaking as the collecting body.” 1076

2.464

Following DM Transport, the Market Economy Creditor test can be summarised as follows. A measure that alleviates a debt towards the State meets the criteria of advantage and selectivity for existence of State aid if1077: –

The facilitating measures in question are more generous than those which a hypothetical private creditor in the same position would have granted (advantage); and

–

either the granting of the measures is governed by discretionary rules; or the measures derive from non-discretionary rules that are capable of favouring particular undertakings and cannot be described as general in nature (selectivity).1078

1074 1075 1076 1077 1078

See Part 2, Chapter 2, “Favouring certain undertakings or the production of certain goods” on selectivity. See Case C-241/94 France v Commission (“Kimberly Clark”) ECLI:EU:C:1996:353, paras 23-24. Case C-256/97 DM Transport ECLI:EU:C:1999:332, para 30. Case C-256/97 DM Transport ECLI:EU:C:1999:332, paras 25 to 28. The approach to selectivity was confirmed by the General Court in Case T-152/99 HAMSA v Commission ECLI:EU:T:2002:188, where certain debt remissions were deemed capable of constituting aid since they did “not fl ow automatically from the application of the law, but from the discretionary decisions made by the public bodies in question” (para 157), and in Case T-36/99 Lenzing v Commission ECLI:EU:T:2004:312, where it was further clarified that the presence of arbitrary conduct by the State is not needed to determine selectivity – discretion is sufficient (para 132). See also Part 2, Chapter 2, “Favouring certain undertakings or the production of certain goods” on selectivity.

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In Hamsa1079 the General Court also elaborated on the aspect of advantage, pondering the analysis made by the Commission of the respective situation of the public and the private creditors of a company in financial difficulties.

2.465

The Commission had qualified the behaviour of the State bodies as aid, relying on the argument that the public authorities had written off a much higher proportion of the company’s debt than the private creditors had. In doing so, the Commission drew an analogy with the case of capital injections, where the concomitance criterion requires that the participation of private investors be significant. The Commission had also observed that the public creditors had preferential or secured claims contrary to most private investors.

2.466

The General Court judged that reasoning too simplistic. The fact the State holds most of the claims cannot limit the possibility of debt renegotiation.

2.467

As for the presence of different categories of debt, that aspect should have been analysed in greater detail. Each creditor, noted the General Court, will opt for the larger of two amounts: the sum that can be negotiated with the debtor and the one that it expects to recover if the debtor is forced into liquidation. Accordingly,

2.468

“Its choice is influenced by number of factors, including the creditor’s status as the holder of a secured, preferential or ordinary claim, the nature and extent of any security it may hold, its assessment of the chances of the firm being restored to viability, as well as the amount it would receive in the event of liquidation. If it turned out, for example, that in the event the firm was liquidated, the realisation value of its assets was only sufficient to cover mortgage and preferential claims, ordinary claims would have no value. In such a scenario, acceptance by an ordinary creditor of the cancellation of a major part of its claim would not really be a sacrifice”.1080 In Lenzing the General Court considered that the Commission had failed to explain how the fact that the State Social Security Fund allowed an ailing company to accumulate debts over a number of years was consistent with the behaviour of a hypothetical private creditor in the same situation. The reference made by the Commission to the actual behaviour of private creditors was not appropriate since the circumstances were different and the credits had a different nature. In particular, the State creditors were generally in a better position thanks to preferential credits guaranteed by securities or mortgages. The reference to the con-

2.469

1079 Case T-152/99 HAMSA v Commission ECLI:EU:T:2002:188. 1080 Case T-152/99 HAMSA v Commission ECLI:EU:T:2002:188, para 168.

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duct of one particular private creditor with a mortgage was not considered a sufficient indicator either, since it was not accompanied by a more detailed analysis of its choices and relationships with the debtor. Finally, the Commission was not in a position to decide whether the decision to postpone the enforcement of the public claims was justified by prospects of future profitability of the debtor, since no restructuring plan had been submitted to it.1081

2.470

In principle, a private creditor would not refrain from exercising its guarantees and would recover its claims towards a debtor in difficulties. Moreover, it would only extend the credit if it had an expectation that the creditor would eventually be able to pay back a larger amount of the debt, taking into account the additional loan (and risk).

2.471

Rousse Industry centres on that specific issue of behaviour in line with market conduct in the context of debt rescheduling agreements. The General Court held that in situations of debt rescheduling agreements by a debtor in difficulty without clear prospects of a return to viability, a private creditor would not limit itself to ‘soft’ recovery actions (such as charging late payment interest, calls for payment, and the negotiation of a new debt rescheduling), but would rather take decisive action, i.e. proceed at least to the forced execution of the pending debt.1082

2.472

A comparison of restructuring vs bankruptcy scenarios was made by the Commission in its decision on Huta Częstochowa,1083 where it concluded that the debt write-off envisaged by the restructuring plan would have allowed a more profitable privatisation of the company and it therefore met the private creditor test. In that case, it could be shown that the firm had good chances of being restored to viability and that a credible restructuring plan had been prepared. The Commission reached an opposite conclusion in Technologie Buczek,1084 where a proper business plan for the rescheduling of debt was missing and the return to viability of the company concerned was considered highly doubtful. Moreover, the public creditors “were all in the possession of good securities that had a good chance to be transformed into cash in collective insolvency proceedings”.1085 1081 Case T-36/99 Lenzing v Commission ECLI:EU:T:2004:312, paras 155-161. 1082 Case T-489/11 Rousse Industry v Commission ECLI:EU:T:2013:144, paras 36 et seq. 1083 Commission Decision of 5.7.2005 in case C 20/2004 (ex NN 25/2004) on State aid in favour of Huta Czestochowa SA, OJ L 366, 21.12.2006, p. 1. 1084 Commission Decision of 23.10.2007 in case C 23/2006 (ex NN 35/2006) on State aid which Poland has implemented for steel producer Technologie Buczek Group, OJ L 116, 30.04.2008, p. 26. Despite being partially annulled, the decision is worth consulting since it deals with several details as to the application of the market economy creditor test. 1085 Commission Decision of 23.10.2007 in case C 23/2006 (ex NN 35/2006) on State aid which Poland has

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That latter decision was however partially annulled by the General Court in Buczek Automotive, and the Commission’s appeal rejected by the Court of Justice.1086 The Court held that the Commission should have identified and compared the alternative courses of action of the public creditors, and compared their advantages and disadvantages. In the case at hand, the Commission had not taken into account the disadvantages of the insolvency alternative, notably in terms of the duration of the procedure and its costs for the public creditors.

2.473

Nevertheless, Buczek Automotive leaves intact the principle that of all possible strategies, a private creditor would always choose the one that maximises profits (or minimises losses): whether the strategy chosen by the State responds to the same logic is what ultimately needs to be shown to pass the Market Economy Creditor Test. Buczek Automotive mainly puts a higher burden of proof on the Commission to show that the chosen strategy did not do so.

2.474

3.

Indirect aid

In most State aid cases, the aid beneficiary is also the recipient of State resources. However, sometimes the aid beneficiary can be a different entity than the one directly receiving these resources. In other cases, a measure can constitute both a direct advantage to the recipient undertaking and an indirect advantage to other undertakings, for instance, undertakings operating on subsequent levels of activity.1087 That situation is referred to as indirect aid1088 and the beneficiary is said to enjoy an indirect economic advantage.

2.475

In such a situation, the direct recipient of the measure can be either an undertaking or an entity (natural or legal person) not engaged in any economic activity.1089 The most obvious example for the latter case is Article 107(2)(a) of the Treaty which declares “aid having a social character, granted to individual

2.476

implemented for steel producer Technologie Buczek Group, OJ L 116, 30.04.2008, p. 26, recital 91. 1086 Case C-405/11 P Commission v Buczek Automotive ECLI:EU:C:2013:186, paras 51 to 60. 1087 In case an intermediary undertaking is a mere vehicle for transferring the advantage to the beneficiary and it does not retain any advantage, it should not normally be considered as a recipient of State aid. 1088 When the State transfers a certain amount of resources to a public body (or undertaking) in order for the latter to transfer these resources to another undertaking, that situation does not fall into the notion of indirect aid as intended in the present chapter (see for example Case C-303/88 Italy v Commission (“ENILanerossi”) ECLI:EU:C:1991:136. That situation may seem to refer to indirect aid since a (public) body/ undertaking directly receives resources from the State, while a second undertaking actually benefits from them. However, such cases are analysed as involving only one direct beneficiary since the aid has no effect on the behaviour of the intermediate body/undertaking, which is acting as a mere vehicle to transfer the aid to the beneficiary. 1089 Case C-403/10 P Mediaset v Commission ECLI:EU:C:2011:533, para 81.

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consumers, provided that such aid is granted without discrimination related to the origin of the product” compatible with the internal market. It follows from that provision that aid granted to individual consumers may also fall within the notion of State aid provided for by Article 107(1) of the Treaty, and that Article 107(1) also encompasses indirect aid. As a matter of fact, the Court of Justice never misses the chance to underline that “advantages qualify as State aid if, first, they are granted through State resources, either directly or indirectly”.1090

2.477

Such indirect advantages should be distinguished from the mere secondary economic effects that are inherent in almost all State aid measures, which could stem for example from the effects that the increase of output.

2.478

Distinguishing such secondary economic effects from cases of indirect aid is not always a straightforward exercise. This section aims at shedding some light on that issue by firstly describing broad types of cases in which the Commission found indirect aid to exist, reviewing the pertinent jurisprudence and concluding with a few thoughts on what in essences makes a case of indirect aid.

3.1 Types of indirect aid in the Commission practice 2.479

The analysis of the Commission’s decisional practice allows three main types of indirect aid to be identified.

2.480

The first category is that of cases where the State resources are granted to undertaking(s) and result in indirect aid for other undertaking(s).

2.481

In Tourism in Sicily1091 some grants received by tour operators and by Italian and foreign travel agencies aimed at reducing tourists’ costs for transportation to Sicily only had direct financial effects on consumers but they had resulting indirect effects on the entire tourism industry of the island. The Commission considered the latter had received an advantage, albeit unquantifiable. Similarly in Cottbus1092 investment aid granted by Germany to a lignite-fired power station using innovative technology resulted in aid indirectly benefitting the Eastern Germany lignite industry, and more in particular a specific producer, Laubag.

1090 Case C-262/12 Vent De Colère and others ECLI:EU:C:2013:851. 1091 Commission Decision 1999/99/EC of 03.06.1998 concerning Sicilian Regional Law No 25/93 on measures to promote employment, OJ L 32, 05.02.1999, p. 18. 1092 Commission Decision 1999/581/EC of 09.12.1998 on State aid granted by Germany to a lignite-fired power station in Cottbus, OJ L 220, 20.08.1999, p. 33.

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Other examples of that first category include the case of the Dutch service stations,1093 which concerned the grant of subsidies to petrol stations in the form of discounts offered to final customers which were then finally transferred to oil companies, and Berlin-Brandenburg,1094 where Germany subsidised commercial service broadcasting companies to switch broadcasting to digital terrestrial which indirectly benefitted digital terrestrial operators.

2.482

The second category is that of cases where the State resources granted to nonundertakings, such as final consumers/individuals/research centres, result in indirect aid for one or more undertakings.

2.483

By way of example, in Steenkolenmijnen1095 a tax-free bonus in favour of mine workers to be paid by undertakings by deduction from tax paid on wage relieved their employers of costs they would otherwise have born. In Insulating materials1096 an allowance given to consumers on the purchase price of sustainable raw materials indirectly resulted in benefits to producers of those specific materials. Further cases include Codevi,1097 where tax exemptions for certain entities benefitted other undertakings investing in the same entities, and Digital decoders,1098 where a public grant awarded to consumers for the purchase of a digital decoder “ had the main effect to provide an advantage to indirect beneficiaries”, i.e. digital terrestrial broadcasters. A recent case in which the Commission could not exclude the presence of an indirect advantage concerned aid to purchase of ultralow-emission vehicles.1099 Direct grants of 25 per cent of the acquisition cost of the car were awarded to beneficiaries, i.e. both private individuals and business buyers. The Commission detected an element of indirect State aid for the benefit of the car manufacturing sector or dealers active in the low-emissions car segment as compared to other dealers in the same sector in that measure.

2.484

1093 Commission Decision 1999/705/EC of 20.07.1999 on the State aid implemented by the Netherlands for 633 Dutch service stations located near the German border, OJ L 280, 30.10.1999, p. 87. 1094 Commission Decision 2006/513/CE of 09.11.2005 on the State Aid which the Federal Republic of Germany has implemented for the introduction of digital terrestrial television (DVB-T) in Berlin-Brandenburg (Case C 25/2004), OJ L 200, 22.07.2006, p. 14. 1095 Case 30/59 De Gezamenlijke Steenkolenmijnen in Limburg v ECSC High Authority ECLI:EU:C:1961:2, para 27. 1096 Commission Decision of 09.07.2003 on a scheme to promote the use of insulation materials from renewable raw materials (Case N 694/2002), OJ C 197, 21.08.2003, 11. 1097 Commission Decision 87/303/EEC of 14.01.1987 on an FIM (Industrial Modernisation Fund) loan to a brewery, OJ L 152, 12.06.1987, p. 27; Case 102/87 France v Commission (“Codevi”) ECLI:EU:C:1988:391. 1098 Case C-403/10 P Mediaset v Commission ECLI:EU:C:2011:533; Case T-177/07 Mediaset v Commission ECLI:EU:T:2010:233; Commission Decision on State aid C 52/2005, 2007/374/EC of 24.01.2007, OJ L 147, 08.06.2007, p. 1. 1099 Case SA.30741, OJ C 312, 16.10.2012, p. 4.

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2.485

Finally, the third category is that of State resources granted to investors resulting in indirect aid for the undertaking(s) in which the direct beneficiaries had invested. New German Länder,1100 for example, involved a tax concession in relation to investment in undertakings with an office in the new German Länder or in Berlin, where the tax scheme conferred an advantage on certain legal persons (direct beneficiaries) to push them to buy assets from some undertakings (indirect beneficiaries). In Small-caps1101 the reduction of a tax on collective investments resulted in an indirect economic benefit to specialised investment vehicles, as the tax reduction stimulated investors to buy shares in those vehicles. Lastly in Codevi, tax exemptions had a similar effect, if one can consider savers as investors in that case.1102

3.2 Case law on indirect aid 2.486

Dutch service stations and Mediaset are the two leading cases of the Union Courts that are of most immediate relevance for the topic of indirect aid.

2.487

Dutch service stations concerned a Dutch provision increasing the excise duty levied on fuel. To ward off the possible detrimental consequences of that measure for Dutch service stations located along the German border, the Netherlands granted subsidies to service stations located within 10 or 20 km from that border. Several service stations had entered into agreements with oil companies which obliged them to compensate the service stations for losses incurred as a result of extraordinary market conditions (under the so-called “PMS clauses”), including those deriving from legal obligations such as an increase in excise duty. Therefore, the grant to the service stations provided for by the Dutch legislation would have eliminated that cost to the oil companies. In its decision, the Commission stated that the beneficiary of the aid could be a service station but it could also be an oil company.1103

1100 Commission Decision 98/476/EC of 21.01.1998 on tax concessions under para 52(8) of the German Income Tax Act, OJ L 212, 30.07.1998, p. 50. 1101 Commission Decision 2006/638/EC of 06.09.2005 on the aid scheme implemented by Italy for certain undertakings for collective investment in transferable securities specialised in shares of small- and mediumcapitalisation companies on regulated markets, OJ L 268, 27.09.2006, p. 1. 1102 To the extent that investors are considered not to constitute undertakings that category would substantially coincide with the previous one. See Case C-222/04 Cassa di Risparmio di Firenze and others ECLI:EU:C:2006:8. 1103 Commission Decision 1999/705/EC of 20.07.1999 on the State aid implemented by the Netherlands for 633 Dutch service stations located near the German border, OJ L 280, 30.10.1999, p. 87.

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Before the Court of Justice, the Dutch authorities argued that the indirect advantages for the oil companies did not constitute State aid but instead, arose out of contractual relationships in which the national authorities were in no way involved and of whose existence they were not even aware. The Court held that “the indirect advantage to oil companies stems from the aid granted under the [national measure] inasmuch as that aid renders it unnecessary, in practice, to invoke the PMS clauses”. It concluded that:

2.488

“That State intervention therefore constituted aid to oil companies since its effect was to mitigate the burdens which would normally have affected the budget of companies anxious to maintain their market position in the light of developments in the domestic and international markets …”.1104 In that case the Court identifies the following features of indirect aid: 1.

indirect aid does not depend from the aim or purpose of the measure. The purpose is only relevant to ascertain that the measure is intended to produce the same economic effects of the PMS clauses;1105

2.

there must be a causal link between the aid granted through State resources and the advantageous economic effects for the indirect beneficiary;

3.

the advantage consists in removing a cost that the indirect beneficiary would normally (“with a high degree of probability”) have to bear.

Mediaset concerns the 2004 Italian Finance law that granted the subsidy of EUR 150 to every purchaser or renter of digital terrestrial TV equipment with an aggregate subsidy ceiling of EUR 110 million. The 2005 Italian Finance law reduced the subsidy to EUR 70 per consumer and left the ceiling unchanged at EUR 110 million. In its decision of 24 January 2007, the Commission qualified the payments as indirect aid in favour of digital terrestrial broadcasters offering pay-TV services and cable pay-TV operators and found this aid incompatible with the internal market which was incompatible with the internal market and ordered recovery of the aid.

2.489

2.490

1104 Case C-382/99 Netherlands v Commission (“Dutch service stations”) ECLI:EU:C:2002:363, para 62. 1105 Case C-382/99 Netherlands v Commission (“Dutch service stations”) ECLI:EU:C:2002:363, para 65. There is aid to the oil companies even if such an outcome is not at all the declared or tacit purpose of the measure (the national authorities even claimed they were not aware of such an indirect effect).

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2.491

Mediaset, a digital terrestrial programmes broadcaster, challenged the decision. The General Court rejected the annulment action,1106 and Mediaset appealed. The Court confirmed that even if the direct recipient of the payments is a consumer, it can constitute indirect aid in favour of an operator if the subsidies provide an incentive to consumers to purchase or rent certain equipment and thus they reduce costs for operators and enable them to consolidate their position in the market: “In particular, the General Court made the point that building up an audience, which is made easier by the measure at issue, represents a crucial part of the business of television programme broadcasters. The General Court also observed that the measure at issue offered an incentive to consumers to switch from analogue to digital terrestrial mode, while limiting the costs that digital terrestrial television broadcasters had to bear, and enabled those same broadcasters to consolidate their existing position on the market – as compared with the position of new competitors – in terms of brand image and customer retention. […] In those circumstances, the General Court correctly understood Mediaset’s arguments as they were set out in the application at first instance. Further, the General Court did not err in law in rejecting them, in paragraphs 75 and 76 of the judgment under appeal, on the ground that aid the direct beneficiaries of which are consumers can none the less constitute indirect aid to economic operators. As stated by the General Court in paragraph 76 of its judgment, Article [107(2)(a) of the Treaty] would be superfluous if aid granted to individual consumers could never constitute State aid because, if that were the case, the question of its compatibility with the [internal] market would never arise”.1107

3.3 The features of indirect aid 2.492

The analysis of the decisional practice, in substance confirmed by the Union Courts, shows that some arguments are often used to demonstrate the existence of indirect aid while others are invoked rarely. An examination of those arguments can help identify the features of the notion of indirect aid and distinguish it from secondary economic effects that are potentially inherent in any aid measure.

1106 Case T-177/07 Mediaset v Commission ECLI:EU:T:2010:233. 1107 Case C-403/10 P Mediaset v Commission ECLI:EU:C:2011:533, paras 64 and 81.

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Sometimes the purpose of the measure is declared to be irrelevant for the classification of the measure as aid, i.e. even if the final objective of the measure is not to give an advantage to certain undertakings, indirect aid exists anyway. Such a stance was taken in Dutch service stations where Advocate General Léger referred to “the aim … of the aid being irrelevant in this regard” and the Court of Justice states that “Article [107(1) TFEU] does not distinguish between measures of State intervention by reference to their causes or aims”.

2.493

In other cases (sometimes even in the context of the same case), it would seem that the purpose of the measure is considered as relevant for the classification of the measure. For instance in New German Länder, reference is made to the “stated aim”, “purpose … to improve the contractual conditions”, “ declared intention”. Likewise in Dutch service stations, the Commission maintains that “the very purpose of the measure is to compensate the owners of these service stations” and the Court of Justice recalls that it “was intended to prevent the service stations located near the German border from experiencing a drop in turnover”, or again in Insulating materials where the Commission refers to the goal of promoting the use of renewable raw materials and in Digital decoders where it mentions “the aid scheme has been designed in order to…”.

2.494

Those two sets of statements seem to be in tension with one another, and in particular the second set would appear to contradict the traditional jurisprudence according to which the notion of aid is based on the effects of the measure and not on the causes of aim.1108 However, that tension can be explained. The case law seems indeed to make a distinction between the general policy objective that the measure is supposed to serve (social policy, environmental protection, economic development, competitiveness of certain undertakings, etc.) and the economic effects that the measure is intended to produce. The first is considered irrelevant. On the contrary the second is not irrelevant. In other words, when the Commission and the Courts refer to purposes or intention of the measures meaning the intended or foreseeable economic effects that the measure will produce, that factor is of course relevant for the classification of the aid measure and not in contradiction with general case law on the role of effects. A more careful look at those very cases where the intention argument is considered relevant confirms that, by mentioning the intention, the Courts and the Commission are referring to the economic effects of the measure. For instance, in New German Länder it is also noted that “the measure has the consequence”, that “the advantage is the consequence” and reference is made to “the effect of the aid”. Likewise in Dutch service stations, Advocate General Léger underlined that the aid meas-

2.495

1108 See paras 2.325 and 2.351 et seq.

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ure and the PMS clauses produced the same effects. In Insulating materials, the Commission recalled that “as pointed out by Germany… sales are expected to rise”, and in Digital decoders where the Commission added “the aid scheme has been designed in order to and has as main effect to provide an advantage”.

2.496

For those reasons, an indirect advantage appears to be present if the measure is designed in such a way so as to channel its secondary effects towards identifiable undertakings or groups of undertakings. Such an outcome is produced, for example, if the direct aid is, de facto or de jure, made conditional on the purchase of goods or services produced by certain undertakings only (e.g. only undertakings established in certain areas).1109 Such intended or foreseeable effects of the measure should be examined from an ex ante point of view, and can be used in order to distinguish simply secondary economic effects of a measure from the grant of an indirect selective advantage.

2.497

In Dutch service stations, the Advocate General noted that there is a causal link between the aid granted through State resources and the enrichment of the oil companies. A causal link is obviously needed in any case of indirect aid. However, the criterion, unless further specified, does not provide a yardstick to distinguish indirect economic advantage from secondary effects of aid. Indeed, any aid which improves or maintains the activity of the direct beneficiary is likely to have positive indirect effects on the suppliers of that beneficiary. In that sense it can be considered that a causal link exists between the aid and those effects (which otherwise would not come about). In the same case both the Union Courts underlined that the Commission did not exceed the boundaries of its discretion in assessing the economic effects of the measure and concluding it constituted State aid. Those observations would seem to conflict with consistent case according to which State aid is an objective notion and the Commission has no discretion in defining it. However, that does not exclude that when assessing the existence of aid, the Commission may need to make some economic assessments that require a degree of discretionary evaluation like for instance in the application of the market economy investor principle.1110 Likewise some case law recognises a limited margin of appreciation to the Commission in assessing the economic effects of aid.1111 1109 By contrast, a mere secondary economic effect in the form of increased output (which does not amount to indirect aid) can be found where the aid is simply channelled through an undertaking (e.g. a financial intermediary) which fully passes it on to the aid beneficiary. See Case Case C-457/00 Commission v Belgium (Verlipack) ECLI:EU:C:2003:38, para 55 to 61. 1110 Case T-152/99 HAMSA v Commission ECLI:EU:T:2002:188, paras 125 to 127 and 129; and Case T-98/00 Linde v Commission ECLI:EU:T:2002:248, para 40. 1111 Case C-351/98 Spain v Commission ECLI:EU:C:2002:530.

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In some cases, the indirect economic advantage is identified with the reduction of the normal costs of the undertaking. That approach is coherent with the jurisprudence about the notion of advantage. It means that also in cases of indirect aid it should be possible to identify a cost that the indirect beneficiary would otherwise have borne. That cost may be inevitable due to ongoing market developments (like in Steenkoolmijnen), or be highly probable due to the contractual links between the direct and indirect beneficiary (like in Dutch service stations), or be probable due to current business practices (like in Digital decoders).

2.498

In other cases, the increase in sales/turnover/demand is described as being the indirect economic advantage resulting from the aid (e.g. Tourism in Sicily, New German Länder, Insulating materials, Small-caps and Berlin-Brandenburg). As already noted, most of such aid is likely to enable the supplier of the direct beneficiary (undertaking or consumer) to gain an advantage from the aid. As such, increased sales or profits would seem to be an element common to most direct and indirect aid. However, in most indirect aid cases the increased sales or profits does not occur in favour of any potential supplier of the direct recipient of State resources but only in favour of selected undertakings. In other words, there is selectivity also at the level of the indirect beneficiary (companies in the new German Länder rather than any company issuing securities in Germany, service stations close to the German border rather than any service station in the Netherlands, producers of insulating material made from renewable raw material rather than from any material, Small-caps and specialised investment vehicles rather than any company emitting securities and any investment vehicle, Pay-TV operator on DVB-T rather than any Pay-TV operator using a digital platform, etc.).

2.499

The difference between such cases and simple State aid cases is that in the latter cases the measure does not select which undertaking(s) shall indirectly benefit from the aid. An example may make things clearer. An aid granted to a car manufacturer may enable it to increase its sales. That aid may also have a positive impact on the suppliers of the car manufacturer (e.g. tyres manufacturers). However, it is difficult to see which supplier will be more advantaged (unless of course there are specific contractual or economic links between the direct beneficiary and certain suppliers).

2.500

In summary, it is submitted that selectivity at the level of the potential beneficiary is a distinctive feature of indirect aid. Moreover, that criterion may allow a distinction between secondary economic effects of any aid and indirect economic advantage. Finally, that criterion also allows the distortion of competi-

2.501

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tion characteristic of the indirect aid to be identified. Not all the companies which would potentially be in a position to benefit from the indirect economic effects of the aid actually benefit from it, but only those selected by the measure. Therefore, the competitive relations between competitors in a given market are distorted.

2.502

There are however two complications in using that criterion.

2.503

First, the relation between that criterion and the notion of aid to a sector is not entirely clear. Going back to the earlier example, one could say that also aid to a car manufacturer will indirectly benefit only certain industrial sectors (namely ‘car components’ producers). It could be replied that such measure would not distort competitive relations between competitors in a given market and thus would not be aid because the requirement of distortion of competition is not fulfilled.1112

2.504

The second complication is rather a dogmatic issue. Article 107(2)(a) of the Treaty, by declaring compatible with the internal market aid having a social character granted to individual consumers “provided that such aid is granted without discrimination related to the origin of the product”, seems to put selectivity at the level of the potential beneficiary as a criterion for compatibility and not as a requirement for the existence of indirect aid. On the other hand, it could be argued that discrimination based on the origin of the product is a notion different from that of selectivity and selectivity is one of the requirements of State aid pursuant to Article 107(1) of the Treaty.

1112 It is tantamount to saying that sectorial aid exists only when such aid distorts competition between undertakings (in the same or different Member States) operating in the same market.

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Chapter 12 Distortion of trade and competition 1.

Two very broad notions

Public support to undertakings is State aid within the meaning of Article 107(1) of the Treaty only if it “distorts or threatens to distort competition” and only insofar as it “affects trade between Member States”.1113

2.505

The two conditions – distortion of competition and effect on trade – although formally separate and equally necessary, are in practice considered as inextricably linked and are treated as such by the Union Courts:

2.506

“… the two conditions for the application of Article [107](1) of the Treaty, namely that trade between Member States must be affected and competition distorted, are as a general rule inextricably linked. In particular, where State financial aid strengthens the position of an undertaking as compared with other undertakings competing in intra-[Union] trade, the latter must be regarded as affected by the aid”.1114 The concept of distortion of competition is given a broad interpretation in case law. Competition is as a rule considered distorted whenever financial aid granted by the State strengthens the position of the recipient undertaking compared to other undertakings with which it competes. In Philip Morris1115 the Court held that “when State financial aid strengthens the position of an under-

2.507

1113 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para 75. 1114 Case T-288/97 Regione autonoma Friuli-Venezia Giulia v Commission ECLI:EU:T:2001:115, para 41; Joined Cases T-298/97, T-312/97, T-315/97, T-600/97 to T-607/97, T-3/98 to T-6/98 and T-23/98 Alzetta and others v Commission ECLI:EU:T:2000:151, para 81. 1115 Cases 730/79 Phillip Morris v Commission ECLI:EU:C:1980:209, para 11 and 259/85 France v Commission, ECLI:EU:C:1987:478, para 24.

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taking compared with other undertakings competing in intra-[Union] trade the latter must be regarded as affected by that aid”.

2.508

The wide interpretation of the concept of distortion of competition reflects the fact that State aid, unlike mergers and contractual agreements concluded by undertakings, is presumed distortive because it is an external intervention in the normal operation of the markets. In the Spaak report itself, State aid control was conceived as a fundamental safeguard for undertakings against artificial advantages to their competitors,1116 and hence a guarantee for a level playing field. The distortion of competition through aid is therefore in principle a necessary consequence of its granting.1117

2.509

There is consequently no requirement that the distortion be particularly significant. Even a small amount of State support can be considered liable to distort competition1118 and, for all intents and purposes, any amount of aid will be considered to meet the condition of “distortion of competition”: “Where the benefit is limited, competition is distorted to a lesser extent, but it is still distorted”.1119

2.510

Even though the Union Courts recognise that small amounts of aid are capable of distorting competition, they have endorsed the Commission policy of block-exempting very limited amounts of public subsidies as expressed in the de minimis regulations.1120 The Commission has taken the view that very small amounts of aid do not have a potential effect on competition and trade between Member States. It therefore considers that such aid falls outside the scope of Article 107(1) of the Treaty.1121

2.511

Likewise, based on Philip Morris,1122 an effect on trade is normally presumed as soon as a financial support from State resources strengthens the position of 1116 See Report of the Heads of Delegation to the Ministers of Foreign Affairs (“Spaak Report”), Bruxelles, 21 April 1956, p. 57. 1117 See Di Bucci, “Comments on the paper “Selectivity, economic advantage, distortion of competition and effect on trade””, in Derenne and Merola (eds.), Economic Analysis of State Aid Rules (Lexxion, 2007), p. 159. 1118 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para 82. 1119 Case T-214/95 Vlaams Gewest v Commission ECLI:EU:T:1998:77, para 46. See also Joined Cases T-230/01 to T-232/01 and T-267/01 to T-269/01 Diputación Foral de Álava and Gobierno Vasco v Commission ECLI:EU:T:2009:316, para 158. 1120 The currently applicable general de minimis block exemption regulation is Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid (OJ L 352, 24.12.2013, p. 1).See, more generally, chapter 13. 1121 The Court confirmed that long-standing practice of the Commission as being founded in the latter’s discretion to assess the possible economic effects of aid in Case C-351/98 Spain v Commission ECLI:EU:C:2002:530, para 52. 1122 Case 730/79 Philip Morris v Commission ECLI:EU:C:1980:209, para 11.

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an undertaking compared with other companies competing in intra-Union trade,1123 or where it is at least conceivable that the beneficiary of the support is in competition with operators established in other Member States.1124 The Court observes that “the aid distorts competition in so far as it strengthens the financial position and opportunities of the recipient firms with respect to competitors who do not receive the aid. Whenever this effect extends to intra-[Union] trade, the latter is impaired by the aid”.1125 The local or regional nature of a service or the scale of the field of the activity concerned does not determine whether there may be an effect on trade.1126 The Court has thus ruled that even State support to a dentist may have an effect on trade since “ it is not inconceivable (…) that medical practitioners specializing in dentistry (…) might be in competition with their colleagues established in another Member State”.1127

2.512

It is not necessary for the beneficiary undertaking itself to be involved in intraUnion trade. Where a Member State grants aid to an undertaking, activity internal to that Member State may be maintained or increased as a result, so that the opportunities for undertakings established in other Member States to penetrate the market in the Member State are thereby reduced. It may also strengthen the ability of the beneficiary to enter markets in other Member States, should it wish to do so.1128

2.513

Following Tubemeuse,1129 it is established that aid may distort competition within the Union, even if the undertaking receiving the aid exports almost all of its production outside the Union.

2.514

The fact that an aid is granted to all the operators in a given economic sector in a Member State does not exclude distortion of competition. Those operators will enjoy an advantage over their competitors from other Member States (e.g. they will not support a cost that they would have faced under normal conditions).

2.515

1123 See e.g. Case C-222/04 Cassa di Risparmio di Firenze and others ECLI:EU:C:2006:8, paras 140 and 141; Case T-57/03 Banco Comercial dos Açores v Commission ECLI:EU:T:2009:322, para 86. 1124 Case C-494/06 P Commission v Italy and Wam (“Wam I”) ECLI:EU:C:2009:272, para 51. 1125 Case C-310/99 Italy v Commission ECLI:EU:C:2002:143, para 65. See also Case T-291/11 Portovesme v Commission ECLI:EU:T:2014:896, paras 103 and 104 and in Case T-308/11 Eurallumina v Commission ECLI:EU:T:2014:894, paras 74 and 75. 1126 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para 75. 1127 Case C-172/03 Heiser ECLI:EU:C:2005:130, para 35. 1128 E.g. Joined Cases C-197/11 and 203/11 Libert and others ECLI:EU:C:2013:288, para 78, with further references. 1129 Case C-142/87 Belgium v Commission (“Tubemeuse”) ECLI:EU:C:1990:125.

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2.516

The Commission does not need to establish an actual distortion of competition (or effect on trade) but only that the aid is liable to have that effect. Where a State strengthens the position of a firm relative to other firms that compete on the internal market, the latter firms must be considered affected by the aid. The fact that a sector is liberalized in the Union may serve to show a real or potential impact on competition and on trade between Member States.1130 The General Court held that “there is no requirement in case-law that the distortion of competition, or the threat of such distortion, and the effect on intra-[Union] trade, must be significant or substantial”.1131

2.

The duty to state reasons

2.517

The Commission is not required to carry out an economic analysis of the actual situation on the relevant market, of the market share of the undertakings receiving the aid, of the position of competing undertakings and of trade flows of the services in question between Member States, provided that is has correctly explained how the aid in question distorted competition and affected trade between Member States.1132 Those explanations can in most cases be fairly general in nature, relying on the fact that the recipients of aid can act on international markets where they compete with other Union firms, provided that that fact is sufficient, in view of the specific circumstances of the case, to offer reasons for the findings.1133

2.518

The Commission must at least refer to the circumstances in which the aid has been granted where they show that the aid is such as to affect trade between Member States. However, as long as the Commission has provided an adequate explanation it is not required to demonstrate the effect of aid granted. Such a requirement would give Member States which grant unlawful aid an advantage over those which notify aid at the planning stage.1134 1130 Case C-222/04 Cassa di Risparmio di Firenze and others ECLI:EU:C:2006:8, para 143; Case T-424/05 Italy v Commission ECLI:EU:T:2009:49, paras 153 to 156; Case T-156/04 EDF v Commission ECLI:EU: T:2009:505, para 147. 1131 Case T-55/99 CETM v Commission ECLI:EU:T:2000:223, para 6. 1132 See, for example, Case 730/79 Phillip Morris v Commission ECLI:EU:C:1980:209, para 11, and Joined Cases T-269/99, T-271/99 and T-272/99 Diputación Foral de Guipúzcoa and others v Commission ECLI:EU:T:2002:258; Case T-156/04 EDF v Commission ECLI:EU:T:2009:505, para 145. 1133 Case T-424/05 Italy v Commission ECLI:EU:T:2009:49, paras 156 to 158 ; Case T-445/05 Associazione Italiana del risparmio gestito and Fineco Asset Management v Commission ECLI:EU:T:2009:50, paras 102 to 108. 1134 Case T-198/01 Technische Glaswerke Ilmenau GmbH v Commission ECLI:EU:T:2004:222, para 215; Case T-445/05 Associazione italiana del risparmios gestito and Fineco Asset Management v Commission ECLI:EU:T:2009:50, para 102.

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In the case of an aid scheme, the Commission can limit its assessment to the general and abstract characteristics of the scheme without having to examine every single instance of application of the scheme.1135 Where the Commission assesses a scheme which has been implemented without notification, it is not required to make an up-to-date analysis of the scheme’s effect on competition and trade.1136

2.519

However, no matter how strong the element of presumption has become in relation to the criteria of distortion of competitor and effect on trade, there is a minimum standard of reasoning by which the Commission must abide. Even in cases where the very circumstances in which the aid has been granted show that it is liable to affect trade between Member States and distort competition, the Commission must at least set out those circumstances in its decision.1137 General references to case law and unspecified claims that distortion of competition or effect on trade cannot be excluded cannot, by themselves, constitute sufficient reasoning.1138

2.520

In Leeuwarder Papierwarenfabriek the Court annulled the Commission’s decision because it considered that the Commission failed to set out those circumstances “…since the contested decision does not contain the slightest information concerning the situation of the relevant market, the place of Leeuwarder in that market, the pattern of trade between Member States in the products in question or the undertaking’s exports.” 1139 Similarly, in Le Levant1140 the General Court found that the Commission had failed to identify the relevant product and geographic markets and, consequently, had failed to appropriately specify the distortions of competition and the effects on trade under Article 107(1) of the Treaty. The General Court held that “regarding the condition relating to distortion or threat of distortion of competition, it is clear – as acknowledged by the Commission at the hearing – that there is nothing in the contested decision explaining how and on what market competition is affected or likely to be affected by the aid”. In the

2.521

1135 See for example Joined Cases C-15/98 and C-105/99 Italy and Sardegna Lines v Commission ECLI:EU:C:2000:570, para 51; Case C-278/00 Greece v Commission ECLI:EU:C:2004:239, para 24; Case T-424/05 Italy v Commission ECLI:EU:T:2009:49, para 160; Case T-297/02 ACEA v Commission ECLI:EU:T:2009:189, paras 62, 65 and 84; Case T-75/03 Banco Comercial dos Açores v Commission ECLI:EU:T:2009:322, para 92. 1136 Joined Cases T-230/01 to T-232/01 et T-267/01 to T-269/01 Diputación Foral de Álava and Gobierno Vasco v Commission ECLI:EU:T:2009:316, para 153. 1137 Case T-369/06 Holland Malt v Commission, ECLI:EU:T:2009:319, para 59. 1138 See e.g. Case T-303/05 AceaElectrabel v Commission ECLI:EU:T:2009:312, paras 44 and 45. See also Case E-9/12 Iceland v EFTA Surveillance Authority (“Verne Holdings”) EFTA Ct. Rep [2013] p. 454, para 134. 1139 Joined Cases 296 and 318/82 Netherlands and Leeuwarder Papierwarenfabriek v Commission ECLI:EU:C:1985:113, para 24. See also Joined Cases C-15/98 and C-105/99 Italy and Sardegna Lines v Commission ECLI:EU:C:2000:570, paras 64-69. 1140 Case T-34/02 Le Levant 001 and others v Commission ECLI:EU:T:2006:59, para 123.

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same vein, the Commission failed to prove the effect of the relevant measure on the competition and trade between Member States in WAM I1141.

2.522

However, it must be underlined that Le Levant and WAM I concerned atypical situations. In WAM I, the measure under investigation was designed to support exports to non-Union countries. In Le Levant, private investors enjoying a tax advantage had financed the construction of a cruise-ship to be used in the Caribbean by a separate undertaking (CIL). The Commission ordered recovery of the aid from the private investors and not from CIL which was active in the market for leisure cruises in Saint-Pierre-et-Miquelon, which is not part of the territory of the Union. However, nothing in the decision indicated in which market those investors were operating and thus how an aid to them would have distorted competition.

2.523

In fact, WAM I and Le Levant appear to simply illustrate the obvious – and wellestablished – principle that the requirement to state reasons must be evaluated according to the circumstances of each case1142 and thus that the Commission’s duty to state reasons increases in situations where the distortion of competition or effect on trade is not obvious from the facts. More recent case law1143 confirms the main stream of case-law and does not suggest that the Union Courts have increased the standard of the duty to state reasons in respect of those parts of the notion of State aid.

3. 2.524

The case of “closed markets”

Distortion of competition and effect on intra-Union trade can obviously only occur where the recipient undertaking is – or at least could be – in competition with other firms. Where there is no actual or potential competition, i.e. in non-liberalised sectors where no competition exists as a matter of national and Union law, or as a de facto economic development (“closed markets”), the 1141 Joined Cases T-304/04 and T-316/04 Italy and Wam v Commission ECLI:EU:T:2006:239, para 69. Judgment upheld on appeal in Case C-494/06 P Commission v Italy and Wam (“Wam I”) ECLI:EU:C:2009:272. 1142 E.g. Joined Cases C-15/98 and C-105/99 Italy and Sardegna Lines v Commission ECLI:EU:C:2000:570, para. 65; Case T-303/05 AceaElectrabel v Commission ECLI:EU:T:2009:312. 1143 See in particular Case T-369/06 Holland Malt v Commission, ECLI:EU:T:2009:319, paras 45 to 67. See also Joined Cases C-197/11 and 203/11 Libert and others ECLI:EU:C:2013:288,paras 76 to 82; Case T-156/04 EDF v Commission ECLI:EU:T:2009:505, paras 143 to 155; Case T-75/03 Banco Comercial dos Açores v Commission ECLI:EU:T:2009:322, paras 86 to 93; Joined Cases T-230/01 to T-232/01 and T-267/01 to T-269/01 Diputación Foral de Álava and Gobierno Vasco v Commission, ECLI:EU:T:2009:316, at paras 145 to 159; Case T-303/05 AceaElectrabel v Commission ECLI:EU:T:2009:312, paras 41 to 57; Case T-211/05 Italy v Commission ECLI:EU:T:2009:304, paras 86 to 96; Joined Cases T-81/07, T-82/07 and T-83/07 KG Holding and others v Commission ECLI:EU:T:2009:237, paras 60 to 67.

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public support evidently cannot have a distortive effect or an impact on trade between Member States.1144 However, although the absence of a market is not infrequently used to argue that a measure is not aid, the conditions to exclude distortion of competition and effect on trade on that basis are quite restrictive. It requires first that there is no competition possible for the economic activity that is subsidised and that the absence of possible competition complies with both national and Union law (no competition for the market). No competition for the market is a different and stricter test than the mere fact that there may, at a given time, be only one provider of certain goods or services active on a given market where nothing in principle would prevent a competitor moving in (no competition on the market). That condition is not met where the State has chosen to assign a certain economic activity exclusively to a single provider (in-house or external).1145

2.525

Secondly, the beneficiary undertaking must be unable to act on other markets that are open to competition, where it could draw an undue advantage from the benefit received through the subsidies on the “closed” market. Where an undertaking whose home market is closed is active in other Member States there is clearly a potential for effect on trade.1146

2.526

Zweckverband Tierkörperbeseitigung provides an interesting illustration of those elements.1147 The case concerned the disposal of animal carcasses as required by Union rules. In Germany, that activity was entrusted by law to the federal Länder, which in turn could choose to entrust the task to private sub-contractors. A number of local authorities in Rheinland-Pfalz, Saarland and Hessen jointly entrusted those duties to Zweckverband Tierkörperbeseitigung (ZT), a specific body set up by them which enjoyed a legal local monopoly in those areas. ZT was funded by subsidies to the extent that it could not cover its costs with user fees. However, ZT not only handled carcasses within the territory of its local monopoly but also sought out business elsewhere in Germany. Germany argued that the support would not have an effect on trade since ZT had a monopoly on the territory covered by its mandate, while in its decision the Commission had found that the regional monopolies were in most cases assigned through open

2.527

1144 Joined Cases T-298/97, T-312/97, T-315/97, T-600/97 to T-607/97, T-3/98 to T-6/98 and T-23/98 Alzetta and others v Commission, ECLI:EU:T:2000:151, paras 141 to 147 ; Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415. 1145 Commission decision of 31 July 2013 in case SA.35205 (2013/N) – Italy – Restructuring Aid to Abbanoa S.p.A, OJ C 279, 27.09.2013, p. 4. 1146 See Case T-156/04 EDF v Commission ECLI:EU:T:2009:505, paras 143 to 154. 1147 Case T-309/12 Zweckverband Tierkörperbeseitigung v Commission ECLI:EU:T:2014:676.

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tenders (in other words, there would be competition for the market) so that the public subsidies strengthened ZT’s position compared to other potential bidders, including those from other Member States, and strengthened ZT’s position on other markets not covered by its legal monopoly, in which it was competing directly with other operators. The General Court upheld the Commission’s decision. It found that the local authorities had the choice under national law of choosing an in-house provider or turning to external service-providers and that in those circumstances a public subsidy to one undertaking can reduce the opportunity for undertakings established in other Member States to provide services on the same market. The General Court also noted that outside its local monopoly area ZT had entered markets where other undertakings were already present. In respect of Germany’s argument that the Commission had not established crosssubsidies between the subsidies and ZT’s operations on the competitive markets the General Court ruled that the Commission did not need to show such a link since State aid given to an undertaking acting on a monopoly market can affect trade if that undertaking also acts on markets which are open to competition and where the competitors must be considered affected by the subsidy.

2.528

A similar debate was examined by the General Court in the Municipalizzate judgments,1148 which concerned an Italian aid scheme for public utilities companies. In a series of annulment actions against the Commission’s negative decision with recovery on that aid scheme, the beneficiaries argued that the public support did not distort competition or have an effect on trade because the undertakings were not acting on a competitive market. They argued chiefly that the supply of public utilities (electricity, gas, district heating and water) was not open for competition in the period when the aid applied and that the beneficiaries only very rarely operated outside their “home” region. The General Court dismissed those arguments. It first noted that the scheme was very broad and covered a whole range of sectors. In those circumstances it was sufficient that some of the undertakings covered by the scheme operated on competitive markets. As concerned the argument that local public utilities were not a “competitive market”, the General Court noted that undertakings in reality did compete for the award of concessions to provide local public service in the various municipalities. The fact that such contracts may be directly awarded rather than tendered out did not change the fact that there could be competition for the markets. Finally, the General Court noted that several of the firms covered by the scheme were not restricted to the local public service sector. The aid could 1148 Case T-189/03 ACM Brescia v Commission ECLI:EU:T:2009:193; Case T-222/04 Italy v Commission ECLI:EU:T:2009:194; Case T-297/02 ACEA v Commission, ECLI:EU:T:2009:189 and Case T-301/02 AEM v Commission ECLI:EU:T:2009:191.

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therefore facilitate their expansion in other markets open to competition and thus distort competition in other markets both within Italy and abroad. The aid was therefore liable to distort competition. As regards the argument that the aid could not have an effect on inter-State trade, the Court noted that it did not matter that the firms operated only in their local area or indeed in Italy. It sufficed that the aid, by strengthening the position of the beneficiaries, give firms established in other Member States less chance of providing their services on the Italian market and since it would make it less attractive for foreign firms to invest in the utilities sector in Italy. By contrast, the Commission accepted that there was no distortion of competition and effect on trade because of the effective and lawful “closure” of a market in the Network Rail decision1149 which concerned the operation and management of the national railway network in the United Kingdom. The Commission first noted that there was no competition on the market for operation of an integrated national railway network as it is a natural monopoly. It went on to record that there was no competition for the market as the operation and management of the railway network effectively had remained within the purview of the government in all Member States and that there was no requirement of Union law to allow competition for the operation of the rail network infrastructure. The Commission also noted that Network Rail’s licence restricted its remit to the core activity of operating the UK rail network and prohibited any cross-subsidisation such that the public funding “may be used only for the purposes that are directly related to the management and operation of the Great Britain main rail infrastructure network and cannot ‘ leak’ into any other market”. Consequently, the subsidies to Network Rail could not distort competition or affect trade between Member States.

4.

2.529

Commission decisional practice

The vast majority of the Commission’s decisions remain safely within the very broad notion of distortion of competition and effect on trade. Quite often those two criteria are treated in a rather cursory manner, with the Commission simply finding that those effects “cannot be excluded” (which of course they rarely can be). There are nevertheless some decisions in which the Commission has seemed inclined to take a less extensive approach to the notion of effect on trade (and, to a much lesser extent, distortion of competition). That stream of decisions is however both narrow and shallow, and the cases themselves mostly anecdotal,

2.530

1149 Commission decision N 356/2002 of 7.7.2002 United Kingdom – Network Rail, OJ C 232, 28.09.2002, p. 2, at recitals 75 to 84.

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which makes it difficult to distinguish a general policy. A few examples may nevertheless serve to give a flavour of that type of decisions.

2.531

Most “no effect on trade” decisions concern services which typically have a purely local catchment area. In those decisions, the Commission’s analysis has in most cases focussed on whether the aid would be likely to attract business to the detriment of competitors in other Member States.

2.532

In the Dorsten case1150 the Commission found that public support in respect of a local swimming pool in Germany did not affect trade. In the light of the description of the scheme, the Commission concluded that the amenity is used by the inhabitants of the town and the surrounding area. It held that there was a clear difference between such support and aid to promote major theme parks targeted at the national or even international market and advertised far beyond the area where they are located1151. By its very nature, aid in favour of facilities aimed at attracting international visitors is likely to affect trade between the Member States, whereas in the case of the Dorsten swimming pool there was practically no likelihood of intra-Union trade being affected, especially since the catchment area of the swimming pool did not extend to the nearby Netherlands (distant of some 50 kilometres).

2.533

The Visby conference centre decision1152 concerned subsidies to a conference centre located on the Swedish island of Gotland, in the Baltic Sea. The Commission found that it was unlikely that the lower price for conference services that the subsidy could potentially allow “would be a decisive factor inducing users to prefer Visby to alternative conference centres located in other Member States”. The Commission considered that “in the great majority of cases” such a decisive factor would not exist, mainly “given the location and nature of the conference centre and its environment”. However, while the Commission was not doctrinaire on the existence of aid, it added that any State aid that might arise would either be covered by the de minimis rule or, given the envisaged uses taken as a whole, by Article 107(3)(d) or Article 106(2) of the Treaty. 1150 Commission decision N 258/2000 of 21.12.2000, Germany – leisure pool Dorsten, OJ C 172, 16.06.2001, p. 16. For a more recent and very thoroughly argued decision in the same sector, see decision of the EFTA Surveillance Authority 459/12/COL of 5 December 2012, Bømlabadet, OJ L 276, 17.10.2013, p. 8. 1151 For an example of a theme park considered liable to have an effect on trade, see Commission decision C 42/2001 of 2.8.2002, Terra Mítica, OJ L 91, 8.4.2003, p. 23. 1152 Commission decision N 486/2002 of 17.7.2002, Sweden – Aid in favour of a congress hall in Visby — Gotland, OJ C 75, 27.03.2003, p. 2, at recital 13. It is interesting to contrast the Commission’s approach to that instance of real estate in an insular setting in the Baltic Sea to the opposite finding in the final decision in case SA.21654 Ålands industrihus (Commission decision SA.21654 of 13.7.2011, Finland – State aid implemented for Ålands Industrihus AB, OJ L 125, 12.05.2012, p. 33), at recital 89.

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Similar considerations have applied in several decisions concerning subsidies to activities in the borderlands between tourism, culture and other leisure activities. The Commission has in some cases stated that museums, to the extent that they are undertakings at all, do not affect trade since only the very largest institutions which have an international reputation are likely to entice visitors to travel across borders with the purpose of visiting museums.1153 However, there are also decisions concerning museums and comparable cultural facilities in which the Commission has taken the view that an effect on trade could not be excluded, although the decisions do not indicate any obvious difference in the nature or scope of those activities compared to the strand of “no effect” decisions. For instance, the Danish Shellfish Centre1154 case concerned subsidies for the construction of “a museum facility … that can host a permanent exhibition showing autochthonous shellfish and shellfish production within the Limfjorden region, with special focus on oysters and mussels species”. The Commission considered that an effect on trade could not be “completely excluded” in part because the public support to the centre “may contribute to increase the number of visitors to the region of Limfjorden, which would also have a beneficial impact on tourism and hospitality services of the region”.

2.534

The Commission’s concern about the potential impact of the Danish shellfish centre on intra-Union trade flows is all the more striking when contrasted with some more recent decisions. The case of the Archeological Museum of Messara1155 concerned subsidies to build a new museum in Crete to relieve the existing archaeological museum in Heraklion. The new museum (comprising facilities for permanent and temporary exhibitions as well as restaurant and a shop) would be located about 45 km from Heraklion and one hour away from the city’s international airport. The Commission considered that although it “cannot be excluded” that the new museum constitutes an economic activity “the potential of this local archaeological museum to affect intra-EU trade seems very low”. The main reason for that finding seems to be the fact that “Crete is already a tourist destination with a large number of archaeological sites open to visitors … in all likelihood, any visitors to the museum coming from other Member States will have made the deci-

2.535

1153 See e.g. Commission decision N 630/2003 of 18.2.2004, Italy – Local Museums in the Region of Sardinia, OJ C 275, 08.11.2005, p. 3; Commission decision N 377/2007 of 28.11.2007, The Netherlands – Support to Bataviawerf, OJ C 35, 08.02.2008, p. 3; Commission decision N 158/2008 of 21.9.2010, Fußballmuseum Dortmund, OJ C 136, 06.05.2011, p. 1. 1154 Commission decision SA.30649 of 11.5.2011, Denmark – State aid to the Danish Shellfish Centre – OJ C 215, 21.07.2011, p. 21. See also Commission decision in case SA.33433 of 22.12.2011, Czech Republic – Green Knowledge Centre, OJ L 23, 28.01.2012, p. 7. 1155 Commission decision SA.36581 of 6.11.2013, Greece – Construction of Archeological Museum Messara Crete, OJ C 353, 03.12.2013, p. 4.

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sion to visit Crete irrespective of the existence of the Messara Museum…”. A similar reasoning was applied in a decision concerning a cultural Centre for Visual Arts and Research in Nicosia.1156 The Commission considered that the “small size of the centre and the nature of its exhibitions … do not render it capable of (unlike for example certain big national museums) of inducing the deviation of tourist flows from other member States specifically to visit the [Centre]”. The Commission concluded that the subsidies to the Centre would not have an effect on trade. By contrast, in a 2011 decision1157 concerning another cultural centre in Nicosia the Commission considered that, although it was “not obvious” that the support could affect trade (by attracting visitors to Cyprus), such an effect could nevertheless not be “ fully excluded” (but that the Commission did not need to take a final view as any aid would in any event be compatible.)

2.536

An obvious criticism of the “key-hole” approach that seems to underly the Messara Museum decision is that it would disregard the potential aggregate effect on trade of a large number of subsidies which, taken in isolation, may seem negligible. Arguably, the addition of archaeological museums and other venues of interest to visitors may serve to reinforce Crete’s overall status as a tourist destination to the detriment of other regions in the Union. The same could be said about other types of investments which, when added up, may reinforce the economy of a certain region or strengthen a specific industry.

2.537

There are examples of the Commission taking a broader approach to services which, seen in isolation, would appear to have a mainly local attraction. The DAV case1158 concerned local subsidies to climbing walls owned and operated by local sections of the German Alpine Association, the Deutscher Alpenverein e.V. (“DAV”). Concerning the distortion of competition the Commission considered that there was “at least potential” competition between DAV’s subsidised installations and climbing walls run by private operators. As regards the potential effect on trade, the Commission considered that it had to be assessed at the level not of the local installations separately but at the level of the national umbrella association DAV, “a group with branches which operate climbing centres across Germany, and ... performs considerable activities (such as hotel and restaurant services in refuges) in other Member States”. The Commission concluded that there was at least a potential effect on trade. 1156 Commission Decision SA.34466 of 7.11.2012, Cyprus – Centre for Visual Arts and Research (Costas and Rita Severis Foundation), OJ C 1, 04.01.2013, p. 10. 1157 Commission Decision SA.33241 of 8.11.2013, Cyprus – State support to the Cyprus Cultural Centre, OJ C 377, 23.12.2011, p. 8. 1158 Commission Decision SA.33952 of 5.12.2012, Germany – Climbing centres of Deutscher Alpenverein, OJ C 21, 24.01.2013, p. 1.

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Although many of the Commission “no effect” decisions have concerned services in the field of culture, leisure or tourism, there are also decisions in other sectors.

2.538

In the Irish hospitals decision1159 the Commission found that a tax break intended to encourage investments in the construction and refurbishment of hospital buildings lacked effect on trade mainly because the tax incentive seemed too modest to attract investments from other Member States and the increased supply of hospital beds was unlikely to attract patients from other Member States: “The hospitals which receive an advantage from this measure operate on a market where the provision of facilities is liberalised and consequently there could be a potential effect on cross-border trade. However … the measure is not one which benefits hospitals to such an extent that it would in itself be a reason for an operator to decide to create facilities in Ireland rather than in another Member State and it will in practice support the creation of relatively small hospitals. Finally, the aim of the measure is to make available additional beds for public health care services at a local level following on from reports criticising the insufficient availability of public health beds. Consequently, although this effect on trade does exist in potential, it can be considered as in effect non-existent in the case at hand since the effect of this measure is to serve the local market, there exists a clear under-capacity in the local hospital market, and it can be considered not to create complexes which will attract customers from other Member States”.

2.539

Similarly, in the Jean Piaget decision1160 the Commission considered that State support for a 50-bed health care clinic in Portugal would not attract patients from abroad as it was likely that its whole capacity would be absorbed by local demand.

2.540

The Jornal da Madeira decision1161 concerned public support to a newspaper company on the Portuguese island of Madeira. Although the description of the facts would suggest that there was a clear distortion of competition (on which the Commission did not however make an explicit finding), the Commission considered the potential effect on intra-Union trade in the markets for newspaper publishing, broadcasting (as the beneficiary of the subsidy also owned a radio station) and advertising. The Commission considered that there was no effect on trade in view of, amongst other factors, the newspaper’s exclusively

2.541

1159 Commission Decision N 543/2001 of 27.2.2002, Ireland - Capital allowances for hospitals, OJ C 154, 28.06.2002, p. 4. 1160 Commission Decision SA. 34576 of 7.11.2012, Portugal - Jean Piaget / Northeast Medium and Long-Term Continuing Care Unit, OJ C 37, 13.03.2013, p. 1. 1161 Commission Decision SA.33243 of 7.11.2012 Portugal – Jornal da Madeira, OJ C 16, 19.01.2013, p. 1.

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local content and distribution and that the support would not affect the recipient’s ability to compete outside Madeira. The Commission also noted that the information submitted by the complainant and the Member State did not provide any “positive evidence” of investments from other Member States on the relevant markets in Madeira. The Commission concluded that “therefore, even if the measure is liable to strengthen the position of its beneficiary, the Commission concluded that the subsidies could not impact the recipients potential to compete outside the local market, it is not liable to affect trade between Member States…” That decision is interesting because, rather than simply stating – as in so many other decisions – that it could not be entirely excluded that the aid might have a negative effect on investments from other Member States, the Commission based the decision not on the “potentiality” of an effect but on the evidence actually available in the case, which suggests that no such effect can be assumed.

2.542

The recent Isle of Scilly airlinks decision1162 concerned investments in a very small airport (less than 100 000 passengers per year) in a remote set of islands off the coast of Cornwall in the United Kingdom. The airport was found not to compete with any other airport in the region and it was also found not to compete with the ferry link to the mainland, as the services offered by the airport and by the ferries respectively were considered to be on different markets. Considering the fact that the air connections to the airport are exclusively local and the very limited passenger volume, the Commission also concluded that the airport’s “ impact on international air traffic (if any) is insignificant”.

2.543

As mentioned above, the orthodoxy is that – with the exception of situations covered by the de minimis rules – the distortion of competition or effect on trade need not meet any significance test. Even a very small – indeed, even merely potential – distortion or effect on trade is enough to meet the definition of aid. It is therefore interesting to note that there are some cases where the Commission has considered the effect of a subsidy not to be totally absent but so limited as to be insignificant (thus suggesting some sort of significance test). In the Dutch marinas case1163 there was a “very limited” effect on trade but the Commission nevertheless concluded that the conditions of Article 107(1) of the Treaty were not met:

1162 Commission Decision SA.38441 of 7.5.2014, United Kingdom – Isles of Scilly Air links, OJ L 5, 09.01.2015, p. 4. 1163 Commission Decision C 10/2003 of 29.10.2003, Netherlands – Non-profit harbours for recreational crafts, OJ L 34, 06.02.2004, p. 63.

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“In the Enkhuizen marina, on average 14 per cent of the moorings are used by international tourists. Nevertheless, the 235 Enkhuizen moorings represent only 0,15 per cent of the Dutch mooring market and 0,016 per cent of the EU mooring market. Therefore, the impact of the Enkhuizen harbour on the marina market is very limited. […] In addition, the average annual turnover per fixed mooring (less than € 1000) is rather low compared with the costs of maintenance, transport, financing and depreciation of pleasure boats and the additional costs of a water holiday. The effect on trade of any support to daily moorings is by nature very limited. An (international) boat owner or tenant uses the marina which corresponds to the place where he is at a certain date and time and which appears to be appropriate given the size and depth of its hull. His choice is often very limited. In the present case, the turnover generated by the Enkhuizen marina for all daily moorings only represents 18 per cent of its total turnover, of which only 30 per cent originates from international tourists. Finally, it should be noted that the annual turnover of the marina in Enkhuizen is € 316.000. It follows from the above that the support to the Enkhuizen marina (if any) does not have an effect on trade and is therefore not State aid within the meaning of Article [107(1) of the Treaty]. Therefore, the Commission can conclude that, even if some distortion of (local) competition is not excluded, the support (if any) has no effect on trade within the meaning of Article [107(1)].” Likewise, the Espacio Editorial Andaluza decision1164 concerned low amounts of aid to three newspapers distributed only at local level. The Commission considered that it was “ hard to see how an increase in sales … could affect cross-border trade in newspapers or prevent in any appreciable non-Spanish competitors from getting established” in Spain. More interestingly, the decision also considered the fact that the newspapers, although local, belonged to Prisa, one of Spain’s largest media groups, which raised the question whether the aid could provide Prisa with an advantage that it could use on other markets more open to trade. However, given the very small amount of aid compared to the overall size of the Prisa group, “this theoretical effect on trade would be at best not material, and would not modify to any appreciable extent the competitive relationship between a group like Prisa and its competitors”. The conclusion was that the subsidies did not have an effect on trade.

2.544

1164 Commission Decision N 458/2002 of 14.12.2004, State aid to Editorial Andaluza Holding, SL, OJ C 131, 28.05.2005, p. 12.

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5.

Commission guidance

2.545

As should be clear from that sample from the decisional practice, Commission decisions which find that the criteria of distortion of competition or effect on trade are not met are rare. It is difficult to distil general conclusions from them. The Commission has nevertheless attempted to provide some more general guidance on those points.

2.546

In the draft Notice on the notion of State aid1165 of March 2014 the Commission states that there are common features to its decision-making practice finding that certain activities have a purely local impact and consequently do not impact trade between Member States: –

The aid does not lead to demand or investments being attracted to the region concerned and does not create obstacles to the establishment of undertakings from other Member States;

–

The goods or services produced by the beneficiary are purely local or have a geographically limited attraction zone;

–

There is at most a marginal effect on the markets and on consumers in neighbouring Member States.

2.547

In its 2009 Notice on a simplified procedure for the treatment of certain types of aid1166 the Commission provided some guidance on criteria which may be taken as indications that a measure would not have an effect on trade. That guidance is largely in line with the draft Notice on the notion of aid, to which the 2009 Notice adds that the market share of the beneficiary must be minimal on any relevant market definition used and that the beneficiary must not belong to a wider group of undertakings.

2.548

It may also be worth noting that in its (expired) guidelines on State aid for undertakings in deprived urban areas,1167 the Commission stated: “Aid to firms falls within the scope of Article [107(1) of the Treaty] only in so far as trade between Member States is affected. Accordingly, aid to small firms in deprived urban areas which carry on the activities listed in the Annex do not come under Article [107(1)] 1165 http://ec.europa.eu/competition/consultations/2014_state_aid_notion/index_en.html. 1166 Notice from the Commission on a simplified procedure for treatment of certain types of aid, OJ 1999 C 136, 15.05.1999, p. 9, at point 5(b)(viii). 1167 OJ C 146, 14.05.1997, p. 6.

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to the extent that the activities are not of a transnational nature.” The activities listed in the annex included construction, sale and repair of motor vehicles, retail trade and repair of household goods, hotels and restaurants, taxis, health and social work, community, social and personal service activities and domestic services. Finally, it is worth remembering an ambitious but still-born initiative. In 2003 the Commission came forward with a “significant impact test”, composed of two parts, the LASA (lesser amounts of State aid) and LET (limited effect on trade). That project was eventually abandoned.1168 The draft Communication explicitly stated that it did not seek to reinterpret the case law of the Union Courts, or to call into question the concept of effect on trade. “Rather, as part of its discretion to assess the economic effects of aid, the Commission is seeking to identify those characteristics of aid measures which make it possible to consider that the measures will produce only limited effects on trade, and which may therefore be subject to a simplified assessment procedure.” The draft Communication envisaged that LET would only apply to a limited number of activities, listed in an annex, which by their nature do not produce significant cross-border effects. The measures qualified as State aid, but in view of their limited impact could be subject to a light assessment, normally leading to a compatibility conclusion.

6.

2.549

Final remarks

The picture that emerges from the Commission’s practice and as to the outer limits of the notions of distortion of competition and effect on trade is that the Commission sometimes struggles with the very broad interpretation that those notions are given in the case-law.

2.550

1168 The history is summarised in the impact assessment to the State aid Action Plan: “In 2003, DG COMP put forward some proposals in order to improve the prioritisation of State aid policy, through a significant impact test. DG Competition has consulted other services and Member States and comments have been taken into account to the largest possible extent. More specifically, on 17 October 2003 (ref D/56595) an inter service consultation on two Communications, LASA and LET was launched and at the “réunion bimensuelle des chefs de cabinet” on 20 November 2003, a summary was circulated and the drafts were presented to the other Cabinets. On 4 February 2004 the Commission services had a multilateral meeting with experts of the Member States about the LASA/LET Communications. Subsequently, the two Communications were merged and a second inter service consultation was launched on 12 May 2004 and a discussion was held in the “réunion bimensuelle des chefs de cabinet” on 1 July 2004. Other stakeholders also communicated their views on these texts, and notably the industry. While there was a generally positive reaction in favour of an instrument allowing Member States more flexibility to design and implement aid measures, which do not pose significant risks to trade and competition, it appeared that the proposals under LASA/LET were not a viable option for the Commission, notably due to legal uncertainty in their implementation”.

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2.551

Nevertheless, as long as the concepts of distortion of competition and effect on trade under Article 107(1) of the Treaty remain as broad as they are today, the notion of State aid will still catch many cases whose relevance for the internal market is debatable.1169 That wide scope does not chime well with one of the objectives of the State Aid Modernisation, namely “focusing enforcement on cases with the biggest impact on internal market”.

2.552

It is however interesting to note that the new sections 11 (“Aid for culture and heritage conservation”), 12 (“Aid for sport and multifunctional recreational infrastructures”) and 13 (“Aid for local infrastructures”) of the General Block Exemption Regulation1170 (GBER) would seem to a large extent to cover the type and scope of activities that can be found in the Commission’s “no effect on trade” decisions.

2.553

That opening up of the GBER seems to suggest that the Commission, rather than trying the arduous – and perhaps hopeless - route of delineating the notion of aid under the watchful eye of the Union Courts, has focused on a pragmatic approach of block-exempting many of the situations that may typically have a lesser impact on the internal market (and thus a lesser claim on the limited resources of the Union’s State aid enforcer).

2.554

It should however be added that the Commission on 29 April 2015 adopted a package of seven “no effect on trade” decisions.1171 The Commission’s communication1172 on this occasion suggests that this was no coincidence but presents the decisions as intended to complement the new GBER categories by providing 1169 In this respect the Eventech case is interesting. In this reference for a preliminary ruling which concerns alleged advantages to London black cabs, the EFTA Surveillance authority suggested that the Court reconsider its approach to the notion of effect on trade. The decisive point should be whether undertakings established in other Member States have less chance of providing their services in the market in the Member State where the advantage is conferred. AG Wahl (in addition to suggesting an original and restrictive reading of Altmark) seemed to have sympathy for this view and invited the Court to revisit its case law. The Court, however, did not heed those calls to reform but, whilst leaving it to the referring court to make a determination on the facts, responded by a terse reminder of the orthodox Altmark line. Case C-518/13 Eventech ECLI:EU:C:2015:9. For the opinion of AG Wahl see ECLI:EU:C:2014:2239, paras 77-89 1170 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 1171 Commission decisions of 29.04.2015 in the following State aid cases: SA.37432 – Czech republic – Hradec Králové public hospitals, OJC 203, 19.06.2015, p. 2; SA.37904 – Germany - Medical Centre in Durmersheim, OJC 188, 05.06.2015, p. 2; SA.33149 – Germany – Städtische Projektgesellschaft “Wirtschaftsbüro Gaarden – Kiel”, OJC 188, 05.06.2015, p. 3; SA.38035 – Germany – Landgrafen-Klinik, OJC 277, 21.08.2015; SA.39403 – The Netherlands – Investment aid for Lauwersoog port, OJC 188, 05.06.2015, p. 1; SA.37963 – United Kingdom – Glenmore Lodge, OJC 259, 07.08.2015, p. 3; SA.38208 – United Kingdom – Member-owned golf clubs, OJC 277, 21.08.2015, p. 4. 1172 See the Commission’s press release IP/15/4889.

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“Member States and stakeholders with additional guidance to determine which cases do not need to be cleared by the Commission under EU state aid rules.” It is interesting to note how the test of effect on trade is summarized by the Commission: “However, if State support is granted to an activity which has a purely local impact, there may not be an effect on intra-EU trade, e.g. where the beneficiary supplies goods or services to a limited area within a Member State and is unlikely to attract customers from other Member States. Moreover, the measure should have no – or at most marginal – foreseeable effects on cross-border investments in the sector or the establishment of firms within the EU’s Single Market.” The emphasis (which is the Commission’s) in the quote is worth noting as it echoes the hints at a significance test that we have noticed in some older decisions but also adds a new element by indicating that the effects should also be foreseeable (as opposed to purely hypothetical) which, although supported by case law, is rarely emphasized in the more conventional decisions. Although interesting (perhaps mainly for the signals which the Commissions seems to want to pass) it remains to be seen whether the Commission will be able to move beyond the casuistic approach it has followed to date.

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PART 2 – The concept of State aid Chapter 13 – De minimis Camelia Grozea-Knuth

Chapter 13 De minimis1173 1.

Introduction: Foundations of the “de minimis” rule

In 1992 the Commission initiated the “ de minimis” policy, which was originally designed to benefit small and medium-sized enterprises (“SMEs”) in an un-bureaucratic manner: subsidies fulfilling the conditions of the 1992 Notice were considered not to fulfil the conditions of what was then then Article 87(1) of the EC Treaty.1174 That policy has gradually evolved to include any type of subsidies, whether granted to SMEs or large undertakings. Under that policy measures which have the appearance of State aid are deemed not to constitute aid because they are unlikely to have any appreciable effect on competition. That approach has been reinforced in the context of the State Aid Modernisation (SAM) exercise initiated in 2012, where the Commission underlined that the review of the de minimis Regulation which was in place at that time and which was due to expire on 31 December 2013, was directly linked to its goal of being able to give priority to the most distortive forms of aid.1175 The de minimis policy therefore represented an important element of the SAM initiative. Looking at the Commission’s decisional practice, the de minimis rule is regularly used to avoid a detailed analysis of small subsidies.1176

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1173 This Chapter draws from the respective corresponding Chapter of the first edition of this book. The author would like to thank Harold Nyssens for being able to build on his work. 1174 Information from the Commission - Community guidelines on State aid for small and medium-sized enterprises (SMEs), OJ C 213, 19.08.1992, p. 2. 1175 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions EU State Aid Modernisation (SAM), COM/2012/0209 final. 1176 See, for instance, Commission Decision of 30.03.2004 on the aid scheme which the United Kingdom is planning to implement as regards the Government of Gibraltar Corporation tax Reform (2005/261/EC), OJ L 85, 02.04.2005, p. 1, recitals 91 and 145. Commission Decision of 10.12.2003 on State aid in the form of loans from the Wagnisbeteiligungsgesellschaft and the Landesförderinstitut implemented by Germany

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The current de minimis rule is laid down in Commission Regulation 1407/2013,1177 which provides that subsidies of less than EUR 200 000 and granted to an undertaking over a period of three fiscal years do not constitute State aid within the meaning of Article 107 of the Treaty. Subsidies below that amount are presumed to have only negligible effects on competition and trade between Member States. Such measures therefore do not need to be notified to the Commission for approval under Article 108(3) of the Treaty.

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Beyond that general de minimis Regulation, two specific sectorial de minimis Regulations have been adopted, in the fisheries and in the agricultural sectors respectively.1178 In addition to the ceiling for subsidies per undertaking, they contain the distinctive requirement of a cap imposing a maximum overall amount of subsidies which can be granted in the sector concerned by each Member State per year, a feature that is not present in Regulation 1407/2013.

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In addition to the general de minimis Regulation and the sectorial de minimis Regulations, in 2012 the Commission adopted Regulation 360/2012 (the “SGEI de minimis Regulation”),1179 a de minimis Regulation specific to compensation for the provision of a service of general economic interest with a ceiling of EUR 500 000 per undertaking over three fiscal years, as a complement to the general de minimis Regulation which was in place at that time. That higher amount, in comparison to the general de minimis ceiling of EUR 200 000, is justified by the fact that the measures covered by Regulation 360/2012 at least in part compensate for extra costs incurred in the provision of the public service.

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Regulation 1407/2013 is, as already mentioned, one of the products of the SAM. In the SAM Communication,1180 the Commission had announced that it would review the de minimis ceiling of EUR 200 000 as it existed in 2012 to determine whether that threshold still corresponded to market conditions. for Neue Harzer Werke GmbH, (2005/564/EC), OJ L 190, 22.07.2005, p. 6, recital 21. 1177 Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1. 1178 Commission Regulation (EU) No 1408/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agriculture sector, OJ L 352, 24.12.2013, p. 9 and Commission Regulation (EU) No 717/2014 of 27 June 2014 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the fishery and aquaculture sector, OJ L 190, 28.06.2014, p. 45. 1179 Commission Regulation (EU) No 360/2012 on the application of Articles 107 and 108 TFEU to de minimis aid granted to undertakings providing services of general economic interest, OJ L 114, 26.04.2012, p. 8. 1180 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions EU State Aid Modernisation (SAM), COM/2012/0209 final.

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The Commission did not adapt that ceiling when it came to adopting Regulation 1407/2013. As will be described in more detail further on, the unchanged ceiling is the result of a balancing act. Putting it briefly, the Commission had to reconcile, on one hand, the legal grounds underpinning the de minimis rules in the case-law of the Union Courts, which allows the Commission only a limited margin of discretion for determining which support measures are to be regarded as State aid with, on the other hand, the policy decision to retain the pre-existing quantitative threshold in a context in which Member States were not made subject to additional responsibilities for ensuring the correct enforcement of State aid rules were introduced.

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The most controversial issues during the revision of the general de minimis Regulation were the level at which maximum allowable amount of de minimis aid would be fixed and the creation of a central register of de minimis aid in each Member State. The main novelties of that revision process were the clarifications introduced as regards the notion of single undertaking and the possibilities to grant de minimis aid to enterprises in difficulty subject to the special rules for the safe harbours concerning loans and guarantees. All of those issues will be discussed in more detail later in this chapter.

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Both Regulation 1407/2013 and the sectorial de minimis Regulations are anchored in the Enabling Regulation,1181 as were their predecessors. The Enabling Regulation contains the empowerment from the Council to the Commission giving the latter a power to adopt regulations and spelling out under which horizontal conditions the provisions of Article 107(3) and 107(1) of the Treaty can be considered to be fulfilled. More particularly, Article 2 of the Enabling Regulation provides that: “The Commission may, by means of a Regulation [...], decide that, having regard to the development and functioning of the common market, certain aids do not meet all the criteria of Article [107(1)] and that they are therefore exempted from the notification procedure provided for in Article [108(3)], provided that aid granted to the same undertaking over a given period of time does not exceed a certain fixed amount. At the Commission’s request, Member States shall, at any time, communicate to it any additional information relating to aid exempted under paragraph 1”.

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Further in this Chapter we will undertake a qualitative analysis of the foundations of the de minimis rule, the scope of the Regulation as well as the main

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1181 Council Regulation (EC) No 994/1998 of 7 May 1998 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid rules, OJ L 142, 14.05.1998, p. 1.

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applicable rules. We will underline the changes introduced in the last revision and assess their estimated impact in practice as well as highlight a few technical inconsistencies that might give rise to conflicting interpretations. Finally, we will assess the application of the rules in the context of recovery of illegal aid. As the Member States do not report on de minimis aid granted at national level, all the data referred below was mainly provided in the context of the consultation process for the latest revision of the de minimis Regulation.

2.

The de minimis rule: standing on shaky grounds?

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Since its launch, the legality of the de minimis rule has been questioned by certain academics.1182 They raise, in particular, the question of the validity of the de minimis policy in the light of the case-law of the Union Courts stating that even small amounts of aid are liable to have an impact on competition and trade between Member States.1183

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However, when assessing how robust are the foundations of the de minimis rule it should be kept in mind that the Union Courts have been confronted in several cases with the interpretation of the de minimis rule1184 and in none of them has the validity of the de minimis rule has been challenged outright by the parties to the case. Nevertheless that the Courts decided in several of those cases to apply the de minimis rule to the facts at stake, without raising ex officio – as they could have done– the validity of the de minimis rule. According to the principle of law jura novit curia, it is for the Court to apply the law and therefore it would also be for the Court to determine the validity and therefore the applicability of such rules of its own motion. It would be harmful for legal certainty and the protection of the EU legal order to leave illegal regulations to be applied merely because of the absence of a plea of illegality from one of the parties in the proceedings.

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More particularly, in Renove II the Court of Justice stated: “the Commission is of course entitled to take the view in the notices and guidelines [...] that other than in certain sectors where competitive conditions are of a particular kind, aid below certain amounts does not affect trade and is therefore not caught by Articles

1182 See, amongst others, Sinnaeve, Block exemptions for State aid: more scope for State aid control by Member States and competitors , (2001) 38 CMLRev: 1479 and Berghofer, The new de minimis Regulation: enlarging the sword of Damocles? , EStAL 2007, 11. 1183 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para 75. 1184 Case C-172/03 Heiser ECLI:EU:C:2005:130, para 34; Case C-351/98 Spain v Commission (Renove I) ECLI:EU:C:2002:530 and Case C-409/00 Commission v Spain (Renove II) ECLI:EU:C:2003:92.

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[107 and 108] of the Treaty”.1185 Such implicit approval of the de minimis policy is also striking in Heiser.1186 More recently, in Libert and others1187 the Court confirmed the implicit approach as regards the de minimis rule but deferred the decision on the affectation of trade (and possible application to the facts of the de minimis Regulation) to the national referring court. The fact that a sword of Damocles might nevertheless be hanging over the de minimis rule has not escaped the attention of the Commission. It has invoked that case-law to urge Member States not to overstretch the limits of the de minimis rule1188 and especially the amount of subsidies covered by the de minimis Regulations. The issue has also been touched upon at the level of the European Council, which stated in its conclusions of 23/24 March 2006: “The European Council welcomes the Commission’s intention to take fully into account the need to give consideration to amending existing State aid rules relevant to SMEs and to simplifying administrative procedures, inter alia by providing wider block exemptions while maintaining the aim of less and better targeted State aid. [...] It also welcomes the intention of the Commission to examine the possibility of doubling the amount of the de minimis ceiling, whilst taking full account of the ongoing consultations and in line with the Treaty and the existing jurisprudence”.1189 Raising the de minimis ceiling to extreme levels, would, in practical terms, have increased the likelihood that a competitor of a beneficiary of de minimis aid would litigate the legality of such aid, thereby putting into question the Commission’s de minimis policy.

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A commentator1190 has even questioned the very legal basis of the de minimis rule in the Enabling Regulation by arguing that the Commission always had the competence to apply Article 107(1) of the Treaty and put forward guidance for its interpretation and did not need a specific legal basis for that purpose. In fact, the de minimis rule only provides legal certainty to the extent that the presumption of no effect on trade holds in reality.

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1185 Case C-409/00 Spain v Commission (Renove II) ECLI:EU:C:2003:92, para 69. 1186 Case C-172/03 Heiser ECLI:EU:C:2005:130, paras 27 to 35. The Court examined whether the measure at stake was liable to affect trade between Member States. In the context of several arguments concerning the local nature of the medical services concerned, the Court examined the de minimis rule and concluded that all conditions were fulfilled for Article 107 of the Treaty to apply to the facts at stake. 1187 Case C-197/11 Libert and others ECLI:EU:C:2013:288, para. 81-82. 1188 See IP/06/1765 and MEMO/06/482. 1189 Presidency conclusions of the Brussels European Council of 23/24 March 2006 (7775/06), point 33. 1190 Sinnaeve, “The Complexity of Simplification: The Commission’s Review of the de minimis Regulation”, EStAL 2014, p. 262.

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The legality of the de minimis rule should also be seen in the light of its double ratio legis. There is obviously, on the one hand, the justification linked to the absence of impact on trade and competition. There is, on the other hand, the more pragmatic consideration that the de minimis rule facilitates “the Commission’s objective of setting enforcement priorities (…). The Commission also aims to focus its enforcement on cases with the biggest impact on the internal market, and to streamline rules and speed up decision making. SAM contributes to the broader EU agenda for fostering growth while supporting Member States’ ”.1191 That latter policy consideration can only be secondary to the main thrust of the Regulation, as expressed in Article 2 of the Enabling Regulation. It can broadly be considered to belong to the same type of arguments as those which were raised, in the early 1990s, in the area of antitrust, when the General Court explicitly allowed the Commission to concentrate its enforcement action on the most important cases and to reject complaints of secondary importance.1192

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Potential question marks over the validity of the de minimis Regulations seem to have been defused by the efforts of the Commission to maintain the de minimis ceilings within reasonable bounds.1193 Apart from the main condition limiting the amount of the individual subsidies, all of the de minimis Regulations impose specific monitoring provisions. Regulation 1407/2013 also provides for alternative detailed arrangements by which Member States can fulfil their obligation of ensuring that the subsidies they grant remain within the applicable ceilings. Finally, the two specific sectorial de minimis Regulations adopted in the fisheries and agricultural sectors include an additional cap applying to the overall amount of subsidies which can be granted per Member State in the sector concerned.1194

2.1 Coexistence of de minimis aid and aid not affecting trade 2.571

It is interesting to note that, in practice, the cases in which the de minimis rule is applied will continue to coexist with those cases in which the Commission – or potentially an administrative or judicial authority within a Member State – will consider that the conditions of Article 107(1) of the Treaty are not fulfilled for reasons other than the fulfilment of the conditions of one of the de minimis Regulations.

1191 IP/13/1293. 1192 Case T-24/90 Automec v Commission ECLI:EU:T:1992:97. 1193 See, for instance, the comparison made between the level of the de minimis amount and the capital value of potential beneficiaries of de minimis aid in the fisheries sector made in IP/06/1161. 1194 See most notably recital 2 of Regulation 717/2014.

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It is indeed obvious that Regulation 1407/2013 does not exhaust the conditions of Article 107(1) of the Treaty. It cannot even be considered to contain an exclusive interpretation of the condition that subsidies must “affect competition and trade between Member States” which is laid down in Article 107(1) of the Treaty. As a result, any State support measure may essentially be qualified as a formal “State aid” measure fulfilling all conditions of Article 107(1) of the Treaty, as a de minimis measure, or as an aid measure escaping the scope of Article 107(1) of the Treaty for reasons other than the ones laid down in Regulation 1407/2013. The obvious risks to legal certainty raised by those two parallel thresholds of ‘perceptibility’ were recently highlighted by Advocate General Kokott in her Opinion in Frucona Košice: “Indeed, it is not for the European Union Courts, by way of judicial development of the law, to supplement the concept of State aid in [Article 107(1) of the Treaty] with a perceptibility threshold not envisaged by the authors of the Treaties. The Court would thereby open itself to the accusation that it is interfering in the tasks of the Union legislature, which has exclusive competence under [Article 109 of the Treaty] for granting, by way of implementing regulations, block exemptions like those for de minimis aid. The relationship between this written de minimis rule and a possible judge-made unwritten perceptibility threshold would also be unclear. In addition, an unwritten perceptibility threshold would create considerable legal uncertainty.” 1195

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The existence of that double track approach is confirmed by recital 13 of Regulation 1407/2013 which explicitly foresees that a measure not fulfilling the conditions of that Regulation could still be considered – for other reasons –not to fall under Article 107(1) of the Treaty. That coexistence means that it is not necessary to engage in expansive interpretation of the de minimis rule as measures not covered by Regulation 1407/2013 can still escape Article 107(1) of the Treaty for other reasons. Broad interpretations of that kind are in any event also legally risky. Any substitution of the aid amount threshold by some other type of threshold – for instance a threshold based on the fact that the beneficiary of an aid has an annual turnover or annual profits below EUR 200 000 or that the market share of the beneficiary is very low – is thus to be regarded as not covered by Regulation 1407/2013.

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Moreover, any type of reasoning based on the absence of effect on trade between Member States in view, for instance, of the small turnover of the beneficiary should not use de minimis terminology. Such use could trigger challenges to the de minimis policy in the light of case-law mentioned above. It could undermine

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1195 Opinion of Advocate General Kokott in Case C-73/11 P Frucona Koaice v Commission ECLI:EU:C:2012: 535, para. 50.

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the added value of Regulation 1407/2013, as compared to scenarios as that dealt with by the Commission in its Dorsten swimming pool decision.1196 That added value lies precisely in the fact that the de minimis Regulations with their detailed legal framework – including both substantive and procedural conditions – provide legal certainty for all stakeholders involved. The fact that de minimis aid continues to co-exist with what might be described as “Dorsten-type aid” also means that one and the same beneficiary could, in principle, receive, on the one hand, de minimis aid, and, on the other hand, Dorsten-type aid. Such cumulation could be implemented without serious restrictions, as the cumulation prohibition provided in Article 5 of Regulation 1407/2013 only applies to the cumulation of “State aid” and de minimis aid, not to the cumulation of de minimis aid with subsidies not qualifying as State aid.

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The “Dorsten” approach to no effect on trade of local operations was recently reasserted by Advocate General Wahl in his Opinion in Eventech.1197 In essence, he states that if a service has any cross-border potential, then inter-State trade can be assumed to be affected. However, this is true for local services where such a cross-border potential does not always exist. If there is no cross-border potential there also cannot be any cross-border effect. In the specific case, local taxi services are given as an example where a cross-border potential is not evident. Finally, he also cautioned against a too broad approach as regards the effect on trade. In his view, it would mean passing from the presumption of no effect on trade (rebuttable) to an irrebuttable presumption where no threshold is too low to meet the effect on trade requirement. However, the Court limited itself to repeating its standard phrase inspired by Heiser1198 – “ it is conceivable that the practice of permitting Black Cabs to use bus lanes on public roads during the hours when the traffic restrictions relating to those lanes are operational, while prohibiting minicabs from using those lanes, except in order to pick up or set down passengers who have pre-booked such vehicles, may be such as to affect trade between Member States within the meaning of Article 107(1) TFEU” 1199 and left it to the referring court to adjudicate on the matter.

1196 Commission Decision in case N 258/2000 Leisure pool Dorsten – Germany, OJ C 171, 16.06.2001, p. 16. In that case the Commission concluded that the amenity in question was used by the inhabitants of the town and the surrounding area and therefore there was no effect on trade. 1197 Opinion of Advocate General Wahl in Case C-518/13 Eventech EU:C:2014:2239, para. 83-85. 1198 Case C-172/03 Heiser ECLI:EU:C:2005:130, para 32. 1199 Case C-518/13 Eventech ECLI:EU:C:2015:9, para. 71.

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2.2 De minimis is generally policy neutral The de minimis rule is based, as indicated above, on Article 107(1) of the Treaty. In consequence, the compatibility reasoning developed in the context of Article 107(3) of the Treaty is in principle absent from Regulation 1407/2013. As de minimis support constitutes a blind instrument, which does not allow the subsidies concerned to be targeted at any particular objective, when it adopted Regulation 1407/2013 the Commission considered that would not be appropriate to further increase the de minimis support ceiling given the “aggregate effects of a potentially widespread use of the exemption”.1200 The Commission’s intention in updating the de minimis rules was rather to promote well-designed and targeted measures with a limited potential of distorting competition in the internal market can be exempted through the General Block Exemption Regulation (“the GBER”).1201

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As a consequence, the de minimis rule applies both to large and small undertakings alike.1202 It also applies in an identical manner in assisted and non-assisted regions of the Union, whereas other Commission State aid instruments regularly take regional differences into account.1203 Instruments like the regional aid guidelines1204 or the GBER constitute the appropriate tools for adopting State aid measures favouring companies established in assisted areas. By contrast, Regulation 1407/2013 is “aid intensity neutral”: one can provide aid intensities up to 100 per cent – or higher – of the eligible costs concerned, as long as the overall ceiling of EUR 200 000 is respected.

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Regulation 1407/2013 is, as a matter of principle, also neutral with respect to the question of whether or not the aid measure at stake is an investment aid or an operating aid,1205 an ad hoc measure or is granted on the basis of a scheme.1206 The previous distinction between guarantees given under schemes and ad hoc measures has also been removed in Regulation 1407/2013. In Regulation 1998/2006,

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1200 IP/13/1293. 1201 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 1202 Note that the original de minimis rule as laid down in the Communication of 1992 only applied to SMEs, to the exclusion of large undertakings (OJ C 213, 19.08.1992, p. 2). 1203 See Parliamentary question No° E-0948/07EN. 1204 Guidelines on regional State aid for 2014-2020, OJ C 209, 23.07.2013, p. 1. 1205 See Commission Decision of 28.11.2007 in case N 541/2007, Germany, Amendment to the German guarantee method to include guarantees for working capital, points 5 and 22. 1206 For a definition of those concepts, see Article 2 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, OJ L 83, 27.03.1999, p. 1 (the “Procedural Regulation”).

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Article 4(2)d referred only to individual aid provided in the context of a guarantee scheme whereas in the current Article 4(6) of Regulation 1407/2013 it is referred to ‘aid comprised in guarantees’. In practice that modification means that both “ad hoc” guarantees and guarantees granted in context of schemes may benefit of the safe harbour of EUR 1 500 000 under the Regulation 1407/2013.

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The fact that de minimis rule is independent from Article 107(3) of the Treaty also means that its scope cannot be limited by the conditions and criteria laid down by the Commission in other block exemption regulations based on Article 107(3) of the Treaty. Member States have the absolute freedom, for any given (investment) project which they would like to subsidise, to choose whether they label their measure as a “State aid” covered by, for instance, the GBER or as a “de minimis aid” covered by Regulation 1407/2013. Once the choice of labelling is made, however, all applicable conditions under the relevant instrument have to be fulfilled. As a result, if a given investment of, say, EUR 1 500 000 would, under the GBER, be accorded a maximum aid intensity of 10 per cent (i.e. EUR 150 000), the same investment can legitimately be subsidised for an amount of EUR 200 000 using the alternative label of de minimis. The limitation imposed in Article 5 of Regulation 1407/2013 as regards cumulation of aid does not apply to such a scenario entailing a choice by the Member State between two labels. Such a labelling choice for a unique measure cannot be assimilated with the cumulation of two distinct measures on the same eligible costs.

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Regulation 1407/2013 however lays down two exceptions to that rule of neutrality. The first exception is the prohibition of “export aid” which can be found in Article 1(1)(d) of Regulation 1407/2013. That particularity can be traced back to the WTO obligations entered into by the Union.1207

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The second exception relates to Article 3(2) of Regulation 1407/2013, which prohibits aid for the acquisition of road freight transport vehicles by companies performing road freight transport for hire or reward. That approach can be traced back to fact that the Regulation has to maintain an appropriate balance between, on the one hand, a certain simplicity to ensure ease of application and, on the other hand, the need for coherence with the other instruments adopted by the Union’s Institutions in the transport area in the context of the sector’s overcapacity and the objective to avoid road congestion. 1207 See to that effect recital 5 of Regulation 69/2001; Article XVI General Agreement on Tariffs and Trade, as amended; Article 3 Agreement on Subsidies and Countervailing Measures, introduced for the European Union through Council Decision 94/800/EC of 22 December 1994 concerning the conclusion on behalf of the European Community, with regard to matters within its competence, of the agreements reached in the Uruguay Round multilateral negotiations (1986-1994), OJ L 336, 23.12.1994, p. 1.

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3.

Substantive conditions

3.1 Exclusions from the scope of Regulation 1407/2013 Considering that the de minimis rule is policy neutral, the exclusion of certain sectors of industry from the scope of Regulation 1407/2013 has to do with the fact that the types of aid concerned would risk affecting trade between Member States even if they did not exceed the EUR 200 000 ceiling. The same reasoning applies to the two sectorial de minimis Regulations, as well as to the lower ceiling foreseen for the transport sector in Regulation 1407/2013. Those exclusions are described in turn in the paragraphs which follow.

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3.1.1 Export aid The exclusion of export aid from Regulation 1407/2013 stems, firstly, from the WTO obligations entered into by the Union1208 and, secondly, from the fact that, by its very nature, export aid directed to other Member States is fundamentally against the internal market.1209 For those reasons, such aid could never be found compatible and was prohibited both in the GBER and in Regulation 1407/2013. That double origin has also lead to a clarification in the wording of the exclusion which – as compared to Regulation 69/2001 – now explicitly excludes export aid “towards third countries or Member States”.1210

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“Export aid” is defined in Article 1(1)(d) in its traditional manner as: “aid directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current expenditure linked to the export activity”. Both Regulation 1407/2013 and the GBER1211 state, however, in identical terms, that “[aid towards the costs of participation in trade fairs or of studies or consultancy services needed for the launch of a new or existing product on a new market does not normally constitute export aid.” 1212 The most important feature, in practice, is that consultancy services related to export activities are not to be considered as export aid. That type of consultancy can thus constitute a cost explicitly eligible for de minimis aid.

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1208 See explicitly recital 5 of Regulation 69/2001 and implicitly recital 6 of Regulation 1998/2006. 1209 See Keppenne, Guide des aides d Etat en droit communautaire. Réglementation, jurisprudence et pratique de la Commission 1999, pp. 141-142. 1210 The Commission has reverted to its traditional formulation in Article 1(2) of the GBER. 1211 See recital 9 of Regulation 1407/2014. See also recital 9 of the GBER. 1212 The permissible character of those two forms of aid is confirmed by the fact that they are both contained in Articles 18 and 19 of the GBER.

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In the light of the Tubemeuse1213 case-law, extra-Union export aid would generally seem to be considered to have an impact on intra-Union trade. However, in cases like Le Levant1214 and WAM I1215, the Court requested the Commission to consider that inter-dependence in more detail. The spill over of direct foreign investment aid on trade between Member States was closely considered in the context of the Commission decision of 14 October 1998 on a proposal by Austria to grant aid to LiftgmbH.1216 The fact that EEA competitors of the aid beneficiary might also envisage direct foreign investment in China was a strong indication of the extra-Union support having a direct impact on strengthening the beneficiary’s position in the internal market.

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The issue whether export aid towards third countries could be presumed to affect intra-Union trade was more recently raised in WAM I.1217 In its judgment, the General Court spelled out that even for export aid measures the Commission was obliged to consider all conditions of application, including the question whether or not the aid at stake was likely to have any impact on competition and trade between Member States. That judgment was confirmed upon appeal by the Court of Justice.1218

3.1.2 Sectorial exclusions 2.587

Regulation 69/2001, which was the first de minimis Regulation adopted by the Commission, did not apply to a number of sectors of industry, such as the agricultural sector, the fisheries sector and the transport sector.1219 Regulation 1998/2006 reduced the number and the scope of those sectorial exclusions. While Regulation 69/2001 was inapplicable to undertakings exclusively active in primary production of agricultural products1220 and in the sector of fisheries, Regulation 1998/2006 was applicable – under conditions – to the agricultural processing and transport sectors. Regulation 1407/2013 continues that trend by allowing the granting of de minimis aid to the coal sector. That development is a consequence of the expiry of Council Regulation 1407/2002 which State aid to the coal industry.1221 The extension of the scope of Regulation 1407/2014 1213 1214 1215 1216 1217 1218 1219 1220 1221

Case 142/87 R Belgium v Commission ECLI:EU:C:1987:281. Case T-34/02 Le Levant 001 and others v Commission ECLI:EU:T:2006:59. Joined Cases T-304/04 and T-316/04 Italy and Wam v Commission (‘WAM I’) ECLI:EU:T:2006:239. OJ L 142, 05.06.1999, p. 32. Joined Cases T-304/04 and T-316/04 Italy and Wam v Commission (‘WAM I’) ECLI:EU:T:2006:239. The case concerns State aid measures and not de minimis aid measures. Case C-494/06 P Commission v Italy and Wam ECLI:EU:C:2009:272. See Article 1 of Regulation 69/2001. See Article 1(1)(b) of Regulation 1998/2006. That sector is subject to Regulation 1535/2007. Council Regulation (EC) No 1407/2002 of 23 July 2002 on State aid to the coal industry OJ L 205,

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results in the retreat of the sectorial de minimis Regulations, described in the next paragraphs.

3.1.3 Agriculture and fisheries sectors An important expansion of the material scope of application in Regulation 1998/2006 – by comparison with previously applicable agricultural de minimis regulation, Regulation 1860/2004,1222 – is its extension to undertakings active in the processing and marketing of agricultural products. That extension is based on the fact that processing and marketing of agricultural products has largely moved away from the regulated sector of primary production, to resemble more traditional sectors of services and industry which are characterised by an open market.1223 The umbilical cord has not completely been severed, however, as the sector remains subject to a specific additional condition, due to its proximity with the sector of primary agricultural production which remains subject to a common organisation. Those persistent links may explain the presence of a series of agricultural policy considerations in Regulation 1407/2013, of a kind more likely to be encountered in the context of the analysis of Article 107(3) of the Treaty.

2.588

To protect that common agricultural organisation, two scenarios remain excluded from de minimis aid1224:

2.589

(i) (ii)

when the amount of the aid is fixed on the basis of the price or quantity of such products purchased from primary producers or put on market by the undertakings concerned, when the aid is conditional on being partly or entirely passed on to primary producers.

As a result, unless the scenarios of points (i) and (ii) materialise, re-selling foodstuff other than directly on the farm (including agricultural products from other Member States) is an activity which may receive de minimis aid under Regulation 1407/2013. In consequence, agricultural undertakings with an ancillary activity of marketing or processing are eligible for an amount of EUR 200 000 de minimis aid for those ancillary activities, whereas if they were covered by the agricultural de minimis rules, they would be limited to receiving EUR 15 000.

2.590

02.08.2002, p. 1. 1222 OJ L 325, 28.10.2004, p. 4. 1223 See recital 4 of Regulation 1998/2006 and recital 4 of Regulation 1535/2007. 1224 See recital 5 of Regulation 1998/2006 and recital 7 of Regulation 1535/2007.

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3.1.4 Transport sector 2.591

It is important to recall that Regulation 69/2001 excluded the transport sector from its scope of application.1225 Under Regulation 1998/2006, the Commission considered that after liberalisation of important segments of the transport sector, the particularities of that sector as compared to other sectors of industry and trade had greatly diminished. That development eased the path for the inclusion of the transport sector in Regulation 1407/2013.

2.592

Before that extension of the material scope of Regulation 1998/2006, the Court had decided in Renove I and Renove II1226 that the pre-existing exclusion applied only to companies realising transport on behalf of third parties. Companies carrying out transport activities to meet their own needs were not part of the “transport sector” and were thus covered by Regulation 69/2001. That distinction remains valid when one seeks determine under Regulation 1407/2013 which undertakings benefit from the EUR 200 000 ceiling and which are subject to the EUR 100 000 ceiling: bakers delivering bread at home or ambulance companies would not be considered as being part of the “road freight transport sector” and would qualify for EUR 200 000 de minimis aid, whereas cargo companies, for instance, would only be allowed EUR 100 000.

2.593

In the same vein, recital (5) of Regulation 1407/2013 adds a further clarification as regards the provision of ‘integrated services’ where transport is only an ancillary activity to the main activity undertaken by the company. Removal, courier or waste disposal services are considered to be activities where the transport plays only a secondary role compared to the main business object. Such activities may therefore benefit from de minimis aid up to general ceiling.

2.594

Regulation 1407/2013 added a further extension in that sector by expressly allowing companies active in the road passenger transport sector to receive de minimis aid. That approach was taken as a consequence of the development of the road passenger transport firms and the relative increase in size of the undertakings active in that field.

2.595

Therefore, as a matter of principle, the entire sector of transport on behalf of third parties is now subject to Regulation 1407/2013. The segment of the “road freight transport sector” is however, still considered to be too fragmented and 1225 Article 1(a) of Regulation 69/2001. 1226 Case C-351/98 Spain v Commission (Renove I) ECLI:EU:C:2002:530 and Case C-409/00 Spain v Commission (Renove II) ECLI:EU:C:2003:92.

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characterised by overcapacity to be subject to the general ceiling of EUR 200 000. For the same reason and in view of the overcapacity of the sector and the objectives relating to road congestion and freight transport, de minimis aid cannot be used by professional road freight transport companies1227 to buy road freight vehicles.

3.1.5 Undertakings active both in excluded and non-excluded sectors Those exclusions immediately raise the issue of the entitlement to de minimis aid for undertakings active in several different sectors of industry, with some sectors being excluded from Regulation 1407/2013 and others not. It follows that one needs to determine when the EUR 200 000 would in any event constitute the overall maximum. If, for instance, an undertaking is active both in primary agriculture (excluded from Regulation 1407/2013) and in processing and marketing of agricultural products (included in Regulation 1407/2013), it may receive de minimis support up to EUR 200 000 for the processing and marketing part of its activities, on the condition that the criteria foreseen, in particular, in Article 1(1)(c) are fulfilled. On the other hand, the same undertaking could only receive EUR 15 000 for its activities in the field of primary agricultural production, pursuant to Regulation 1408/2013. Furthermore, it would go against the principles underpinning the de minimis rule if it were possible to combine both type of aid (with the undertaking effectively receiving EUR 215 000 de minimis aid).

2.596

In other words, an undertaking active both in the agricultural or fisheries sector, on the one hand, and in a distinct, non-excluded sector, on the other hand, may receive “general” de minimis aid – under Regulation 1407/2013 – up to a maximum amount of EUR 200 000, if related to the non-excluded sector. Such an approach presupposes, however, that any de minimis aid granted under Regulation 1408/2013 and Regulation 717/2014 is taken into account as well for determining whether the overall ceiling of EUR 200 000 is reached.

2.597

As regards the interaction with the SGEI de minimis Regulation, de minimis aid granted in accordance with Regulation 1407/2013 may be cumulated with SGEI de minimis aid up to the EUR 500 000 ceiling.1228 Recital (11) of the

2.598

1227 The concept of undertakings performing road freight transport for hire or reward stems from Council Regulation 792/94 of 8 April 1994 laying down detailed rules for the application of Council Regulation (EEC) No 3118/93 to road haulage on own account (OJ L 92, 09.04.1994, p. 13). See also in the same sense, the draft regulation amending Commission Regulation (EC) No 69/2001, OJ C 144, 14.06.2005, p. 2, point 2.1.1. 1228 Article 5(1) of Regulation 1407/2013 and Article 2(2) of Regulation 360/2012.

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Regulation 1407/2013 establishes the principle that undertakings active in sectors to which lower de minimis thresholds apply should ensure that no ‘general’ aid in addition to the lower threshold is granted to exempted activities. A similar recital is not part of Regulation 360/2012. Mutatis mutandis, however, the same principle as regards cumulation with other de minimis aid should apply also as regards cumulating between general de minimis and SGEI de minimis aids. As a practical consequence, the amount already received under the SGEI de minimis Regulation would have to be considered when granting the ‘general’ de minimis aid. Therefore, a company would not be able to benefit from EUR 200 000 under Regulation 1407/2013 if it has already benefited from EUR 300 000 under the SGEI de minimis Regulation. However the company could, of course, receive the additional EUR 200 000 up to the ceiling laid down in the SGEI de minimis Regulation. If a company benefits from EUR 200 000 ‘general’ de minimis, the same company could benefit from additional aid of up to EUR 500 000 if it was granted for SGEI services in accordance with Regulation 360/2012.

3.2 Undertakings in difficulty make a come-back 2.599

At the time when Regulation 1998/2006 was revised, an important question to be examined was whether undertakings in difficulty should remain excluded. Until 2006, the de minimis rule was applicable to all undertakings because it was considered that the potential effect on trade and competition did not depend on whether or not the beneficiary was in difficulty. Regulation 1998/2006 changed that approach and explicitly excluded undertakings in difficulty, as defined in the Rescue and Restructuring Guidelines.1229 As explained in recital 7 of Regulation 1998/2006, that exclusion was considered necessary as a result of the introduction of a safe-harbour for loan guarantees. In support of that approach, there was the fact that the safe-harbour had been established on the basis of a set of data for viable undertakings. It ensured that the gross grant equivalent of a guarantee of EUR 1 500 000 would not exceed the de minimis ceiling. However, if the beneficiary were to be in difficulty, the gross grant equivalent of such a guarantee would be much higher than EUR 200 000, so that a potential effect on trade and competition could no longer be excluded.

2.600

The issue came back again in the context of the review of Regulation 1998/2006 and was examined in the Impact Assessment1230. A first option considered by the 1229 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1. 1230 See sections 2.4.2, 5.2.2 and 6.2 of the Impact Assessment (see: http://ec.europa.eu/competition/state_aid/ legislation/de_minimis_impact_assessment_en.pdf ).

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Commission was to clarify the definition of undertaking in difficulty by laying down only clear and straightforward criteria that do not require a substantive assessment. That option would have been a simplification compared to Regulation 1998/2006 which made a general reference to the Rescue and Restructuring Guidelines and thus required an additional scrutiny of the so-called “soft criteria” in order to conclude whether a company is in difficulty. The main problem with that approach was that the content of such straightforward criteria had not yet been defined at the time of Regulation 1407/2013 came to be adopted at the end of 2013 as that definition was still under consideration as part of a parallel revision in the context of the new Rescue and Restructuring Guidelines. An alternative was to limit the new definition at least for the purpose of what would become Regulation 1407/2013 to the three existing criteria of the previous Rescue and Restructuring Guidelines (basically loss of half of the capital or eligibility for insolvency proceedings), which were well-established and accepted by Member States. If that option had been chosen, the risk was that the definition would be considered ‘locked down’ by the Member States for the purposes of other instruments (GBER and the Rescue and Restructuring Guidelines) which were only to be adopted later on. That option would therefore have diminished the negotiation power of the Commission in the upcoming multilateral discussions. Even if a different definition could have been envisaged and legally defended, it was not considered good legislative practice to define the same notion differently for the purpose of two legal acts as to have done so would have ultimately created the legal uncertainty for aid grantors and beneficiaries.1231

2.601

A further option examined in the Impact Assessment, and retained in the final draft of what became Regulation 1407/2013, was to simply remove the exclusion of undertakings in difficulty. From a simplification perspective, such an approach had the advantage of reducing the administrative burden for aid granting authorities since they would no longer need to check the situation of each beneficiary before granting de minimis aid. In addition, it would offer Member States the possibility to grant urgent liquidity to a very small undertaking in difficulty, without having to comply with the Rescue and Restructuring Guidelines. However, that approach was hard to reconcile with the introduction of safe-harbours, which were themselves an area of major simplification. As mentioned above, the safe harbours were calculated on the assumption that the recipients are viable undertakings.

2.602

1231 For arguments on retaining that option, please see Sinnaeve, “The Complexity of Simplification: The Commission’s Review of the de minimis Regulation”, EStAL 2014, p. 261 footnote 54 and Section 6.2 of the Impact Assessment.

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2.603

The Commission found a solution to that predicament by only restricting the application of the safe harbours to the beneficiaries which are not insolvent. The resulting solution was achieved by the introduction of a few basic safeguards in Article 4(3) and (6) of Regulation 1407/2013, thereby excluding their use for companies that are clearly in financial difficulty.1232 In practice, any undertaking can henceforth receive de minimis aid in the form of cash grants and aid grantors no longer need to check the economic situation of each beneficiary. If a Member State decides to opt for aid in the form of loans and guarantees and make use of the safe harbours, it must check a few additional requirements which ensure that the undertakings that are clearly in difficulty remain excluded from the use of those instruments.

2.604

The chosen way forward also addresses what was seen as a paradoxical situation where prior to 2006 a de minimis aid measure under the threshold of EUR 100 000, that would also apply to companies in difficulty, was assumed to have no effect on trade. After 2006, the same measure to companies in difficulty was considered as having an effect on trade or at least being outside of the scope of the de minimis rule.

3.3 The de minimis ceiling 2.605

In the context of the 2013 revision of the de minimis rules, the celling was again up for debate. The main argument of Member States which requested an increase was that EUR 500 000 had been allowed on the basis of Article 107(3)(b) of the Treaty as a crisis measure under the Temporary Framework,1233 although not as de minimis but as compatible aid. The European Parliament, the European Economic and Social Committee and the Committee of the Regions, as well as most stakeholders, also called for a higher ceiling. Other stakeholders, however, explicitly opposed any increase.

2.606

A first option examined by Commission in the Impact Assessment consisted of a moderate increase to take account of inflation. However, such an increase would have had little basis in economic reality as the previous ceiling of EUR 100 000 had been doubled in 2006 for the period 2007-2013 in order to take into account expected future economic developments until 2013.1234 In reality inflation for that period turned out to be lower than the forecast, because of 1232 Letter a) was included in both Article 4(3) and 4(6) to exclude from the application of the safe harbours undertakings that are subject to collective insolvency procedure under the applicable national law. 1233 Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis, OJ C 83, 07.04.2009, p. 1, section 4.2.2. 1234 See recital 2 of Regulation 1886/2006.

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the economic crisis. On that basis, using the target inflation rate of the European Central Bank, the inflation-related increase would only lead to a figure of around EUR 230 000 at the end of the period of application of the new Regulation (2020) or EUR 215 000 on average for the whole period. The Commission considered that for such a minor increase it would not be worthwhile changing the ceiling which has become well-established.1235 A second alternative was to raise the ceiling significantly. From a legal and economic perspective, a significantly higher ceiling had to be analysed very carefully since the ceiling should ensure in all instances the absence of an effect on trade or competition within the meaning of Article 107(1) of the Treaty. In that respect, the aggregate effects of widespread use and the potential sectorial effects could have been a cause for concern. Further caution was also warranted on the basis of the data available regarding the use of the EUR 500 000 aid measure under the Temporary Framework that showed a concentration in some sectors and in some Member States only.1236

2.607

Apart from those risks which an increase of the de minimis ceiling would have entailed, the Commission also gave weight to the fact that – on the basis of the information available – the average amounts usually granted were rather small and that the ceiling was in most cases not exhausted. That data further showed that there was no immediate need for an increase. Therefore, on the basis of those elements the Commission decided that a substantial increase of the ceiling was not warranted and that the pre-existing ceiling should be maintained.

2.608

It is noteworthy, however, that the application of the ceiling has changed as regards the transport sector. Under Regulation 1886/2006 a lower ceiling of EUR 100 000 applied to both road passenger and road freight transport, in order to take account of the average small size of transport undertakings. Data on the evolution of the sector showed that the underlying reasons for that stricter treatment were no longer valid for passenger transport, where the average size of undertakings had increased. On that basis, the Commission decided to maintain the lower ceiling only for road freight transport and to include road passenger transport in the scope of the general ceiling, in line with the approach already taken under the SGEI de minimis regulation.1237

2.609

1235 See the analysis in sections 5.1.1.2 and 6.1 of the Impact Assessment (fn. 34). 1236 For details on the Temporary Framework see section 2.1.4 and Table 5 of the Impact Assessment (fn. 34). 1237 See sections 5.1.2 and 6.1 of the Impact Assessment (fn. 34).

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3.4 Condition of transparency 3.4.1 Introduction 2.610

Regulation 1407/2013 keeps the important restriction as regards transparent aid introduced by its predecessor. That feature has been included at the time of Regulation 1998/2006 in order to avoid certain abuses of the past,1238 especially as regards the way in which the gross grant equivalent of guarantees had been calculated by certain Member States.

2.611

Article 4(1) provides that Regulation 1407/2013 only applies to the so-called “transparent” forms of aid, meaning the aid for which it is possible to calculate precisely the amount to be granted, before such amount is paid out to the beneficiary and without the need to undertake a risk assessment. Paragraphs 2 to 6 of Article 4 go on to provide a series of examples of frequently used forms of aid. Capital injections and risk finance measures are only considered as transparent if the total amount does not exceed the de minimis ceiling, since it is too complex to determine their gross grant equivalent.1239

2.612

A more complex situation is raised by the sale of land at prices below market share, a tool often used by municipalities to incentivise investment in the area. The aid involved would not be able to be qualified as de minimis aid even if, it is reasonably possible to make an inquiry into the prices of comparable land plots and calculate the advantage in the form of aid. Such a calculation would still necessitate some type of assessment and evaluation and often some estimations that would essentially make this type of aid non-transparent from the beginning.12401241 1238 See to that effect IP/06/283 of 9 March 2006. See for instance, the gross grant equivalent of 0,5 per cent mentioned, as regards guarantees, in the decision of the Commission of 23 April 2003 on the aid scheme implemented by Germany entitled 394 Guarantee schemes of the Land of Brandenburg for 1991 and 1994 (2003/706/EC), OJ L 263, 14.10.2003, p. 1. 1239 Recital 19 also clarifies that where a de minimis scheme is implemented through financial intermediaries, it should be ensured that the latter do not receive any State aid. That requirement can be respected by, e.g., requiring financial intermediaries that benefit from a State guarantee to pay a premium in line with market conditions or to fully pass on any advantage to the final beneficiaries, or by respecting Regulation 1407/2013 also at the level of the intermediaries. 1240 T-274/01 Valmont v Commission EU:T:2004:266. 1241 Nevertheless, some criticism is possible. The Commission accepts, e.g. in its Communication on State aid elements in sales of land and buildings by public authorities, OJ C 209, 10.07.1997, p. 3, that independent expert reports can be used to determine that there is no advantage. Valmont can be seen as rather specific as it related to expert reports established ex post. In addition, it related to a scenario where the Commission identified an advantage, relying solely on one ex post report and discarding the other one as being without evidential value.

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Article 4(7) offers much needed clarification as regards the forms of aid that have not been listed in paragraphs 2 to 6. Whereas in Regulation 1998/2006 the list of forms of aid for which the gross grant equivalent calculation method was provided was not exhaustive, the current wording of Article 4(7) clarifies that for instruments which are not listed, an ex ante cap on the amount should be provided in order to comply with the “transparency” requirement. In additional, recital (20) underlines that for de minimis aid that is not granted in the transparent forms foreseen by Article 4 the Commission shall decide, upon notification from Member States, whether such aid is within the limits set by Regulation 1407/2013.

2.613

3.4.2 Grants and interest rate subsidies One issue should be clarified as regards the apparently straight forward statement in Article 4(2), particularly the difference between aid granted in the form of interest rate subsidies compared to aid granted through loans.1242 The situation covered by Article 4(2) is that of aid granted to (partially) compensate for the cost of interest in a private loan. As the aid is granted based on a fixed amount that the beneficiary has to pay (the interest), its value will be easy to calculate ex ante and therefore transparent.

2.614

3.4.3 Loans One of the simplifications brought in by the revision which led to the adoption of Regulation 1407/2013 was the extension of the safe harbour rule to loans. That extension of the previously existing guarantees safe harbour was requested by stakeholders, particularly newer Member States or authorities that are less familiar with the State aid rules and the application of the Reference Rate Communication1243 as it would allow them to implement loan schemes in favour of SMEs without red tape and under legally secure conditions.

2.615

Safe-harbours for loans replace the need for calculations based on the Reference Rate Communication by a simple figure which has been established ex ante by the Commission on the basis of a conservative scenario. To build that conservative scenario, a default rate of 13 per cent was used to capture the situation of as many undertakings as possible, but also to avoid enterprises in difficulty.1244 As

2.616

1242 See below Section 5.1.3. 1243 Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ 2008 C 14, 19.01.2008, p. 6. 1244 Recital 15 of the Regulation 1886/2006 (fn. 1) explained that a net default rate of 13 per cent was used for the calculation of the safe harbour for loan guarantees. The same method was used in Regulation 1407/2013.

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long as the safe-harbour is respected, the gross grant equivalent of the measure can thus safely be presumed to remain below the de minimis ceiling.

2.617

The loan safe-harbour concerns loans secured by at least 50 per cent collateral and with a loan amount of EUR 1 000 000 over five years or EUR 500 000 over ten years. A corresponding proportion for lower durations is possible. In that situation, a calculation of the gross grant equivalent must be done pro rata to the reduction in duration and/or the reduction in principal. The condition that the beneficiary must provide collateral covering at least 50 per cent of the loan is necessary in order to ensure that the gross grant equivalent does not exceed EUR 200 000. If the beneficiary is unable to provide collateral, the Member State may still grant de minimis aid but it would have to do the calculations of the gross grant equivalent based on the Reference Rate Communication.1245

2.618

Use of safe harbours under both loans and guarantees1246 are subject to the respect of two safeguards. Their inclusion was triggered by the removal of the general exclusion of undertakings in difficulty discussed in section 4.1. Those additional conditions ensure that undertakings which are in a worse financial situation than the conservative scenario that was considered in order to arrive at the safe harbour amounts should not benefit from such safe harbours due to a high risk that they are unable to repay the loan.

2.619

The first condition requires that the beneficiary is neither subject to collective insolvency proceedings nor fulfils the criteria under its domestic law for being placed in such proceedings at the request of its creditors. The second condition only applies to large undertakings and limits the safe-harbour to undertakings in a situation comparable to a credit rating of at least B-. Both conditions apply only to the use of safe harbours in Article 4(3)(b). In practice, for SMEs the aid grantor only needs to verify that the beneficiary is not eligible for collective insolvency proceedings; in the case of large beneficiaries, the rating should also be taken into account. Those requirements do not prevent Member States from granting de minimis aid in the form of loans to firms which are subject to collective insolvency proceedings on the basis of subparagraph c) of Article 4(3) and calculating the gross grant equivalent by comparison to market rules. . If the large undertaking does not have a credit rating agency a comparable rating by a bank could be used.

1245 See Article 4(3)(c). 1246 See Section 5.1.4. below.

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In simplified terms, Article 4(3)(c) provides that the amount of aid included in a (public) loan is to be determined by comparison with the commercial (market) interest rate. Recital 15 of Regulation 1407/2013 clarifies that the reference rates published regularly by the Commission are to be considered as the market rate, for the purpose of applying Regulation 1407/2013.

2.620

Finally, while the safe harbours in Article 4(3)(b) offer a simplified method to determine the gross grant equivalent of loans applicable to companies that are not subject to collective insolvency proceedings, Member States remain free not to use them and rely on their own calculations. For such circumstances, Article 4(3)(c) provides that the amount of aid included in a (public) loan can be determined by comparison with the commercial (market) interest rate. One example of circumstance in which aid grantors might find it more advantageous to rely on the market rate is the situation of undertakings that are in a very good financial situation or can offer collateralisation which is higher than 50 per cent as those companies would arguably benefit of very low interest rates also on the banking market, thereby triggering a low gross grant equivalent when compared to the rate applicable to a public loan.

2.621

3.4.4 Guarantees A safe harbour for guarantees existed already at the time of Regulation 1998/2006. The memo issued by the Commission at the time of the adoption of that regulation summarises this point of Regulation 1998/2006 as follows: “Given the economic importance of guarantees, the regulation creates a safe harbour covering guarantee schemes as long as the total amount of the guaranteed part of a loan is not higher than € 1.5 million [...]. This will allow Member States to implement guarantee schemes in favour of SMEs without red tape and under legally secure conditions. Member States will, as an alternative, be able to use methodologies for assessing the State aid element contained in guarantees, when such methodology has been approved by the Commission in the context of another State aid regulation, like the block exemption on regional aid. The cap on the total amount of the guaranteed part of a loan ensures that the system will not be abused”.1247 The same considerations remain applicable for Regulation 1407/2013.

2.622

1247 See MEMO/06/482.

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2.623

A new element in Regulation 1407/2013 has been the additional clarification as regards the maximum duration of the guarantees. Previously, Regulation 1407/2006 specified that guaranteed amount of EUR 1 500 000 only applied for guarantees with a duration of five years, while for a ten-year duration the safe-harbour is EUR 750 000. If the amount guaranteed was lower than those amounts and/or the guarantee was for a period of less than five or ten years, the gross grant equivalent was to be calculated pro rata to the applicable ceiling.

2.624

It should be noted that by linking the amount of the safe-harbour to its duration, Regulation 1407/2013 is stricter than its predecessor. The latter did not contain any conditions on the duration of the guarantee. That was probably an omission since the gross grant equivalent of a guarantee depends both on its amount and its duration.

2.625

Regulation 1407/2013 still offers flexibility by allowing not only guarantees based on a scheme but also ad hoc guarantees. Regulation 1407/2013 also provides for two alternative calculation modes for guarantees, which could apply to the forms of guarantees excluded from the benefit of the EUR 1 500 000 million ceiling.

2.626

One such possibility is to calculate the gross grant equivalent based on the safe harbour premiums used by the Commission in the Guarantees Notice.1248 The second would be for a Member State to notify a methodology and get that methodology approved by the Commission in a specific procedure. Member States can thus not use methodologies directly or indirectly approved by the Commission in (older) individual cases. The methodology needs to have been approved upon notification on the basis of a State aid regulation. For example, the Commission approved a calculation methodology in case N 182/10 concerning Italy: National method to calculate the aid element in guarantees for SMEs.1249 On the basis of such an approved methodology, guarantees of an amount higher than EUR 1 500 000 may be validly granted under Regulation 1407/2013: in a German case that approach permits, for instance, guarantees on working capital loans, to be granted a company which belongs to the German rating category 3, for an amount of up to an amount of EUR 4 750 000.1250

1248 Commission Notice on the application of Article 87 and 88 of the EC Treaty to State aid in the form of Guarantees, OJ C 155, 20.06.2008, p. 10. 1249 OJ C 226 21.12.2010, p. 5. 1250 See Commission Decision of 28.11.2007 in case N 541/2007, Germany, Amendment to the German guarantee method to include guarantees for working capital, point 5.

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However, when transposing a general methodology into Regulation 1407/2013 Member States shall ensure “that methodology explicitly addresses the type of guarantees and the type of underlying transactions at stake in the context of the application of this Regulation”. That condition was introduced in order to avoid the more favourable methodologies applying to investment aid to be transposed into the area of operating aid, where the lower level of securities leads to a higher risk for the lenders.

2.627

3.4.5 Risk capital and capital injections The provisions applying to risk capital measures and capital injections are contained in paragraphs (4) and (5) of Article 4. They remain largely unchanged from Regulation 1998/2006. According to the memo issued by the Commission with the adoption of Regulation 1998/2006: “In the case of risk capital measures or capital injections, it is generally difficult to determine the precise aid amount in advance, since this amount depends on the risk associated with the transaction. Such types of State aid will therefore only be covered by the de minimis rule if the overall value of the transaction – the overall capital injection or the overall financial tranche provided by a risk capital investment fund into a target company – does not exceed the de minimis ceiling”.1251 That restrictive approach has been consistently maintained by the Commission throughout the latest adoption process and even clarified further to include ‘quasi-equity’ instruments.

2.628

The wording of Regulation 1407/2013 implies that as long as the final beneficiaries of risk capital schemes cannot receive more than EUR 200 000 over a period of three years, the entire scheme is de minimis. However, recital (19) addresses expressly the situation where a de minimis scheme is implemented through financial intermediaries. In other words, if the condition concerning the aid to be provided to a single undertaking is fulfilled, it shall not be presumed that potential benefits to other indirect beneficiaries of the measure – the investment funds and/or investment fund managers – are also considered de minimis. It is in fact for the Member State to ensure, for example by requiring financial intermediaries to fully pass on the advantage to the final beneficiary or to respect themselves the de minimis ceiling, that the conditions of Regulation 1407/2013 are fulfilled also at the intermediate level.1252

2.629

1251 See MEMO/06/482. 1252 See recital (19) of Regulation 1407/2013.

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The general approach of Regulation 1407/2013 regarding risk capital and capital injections is quite similar: the total value of the transaction at stake should not exceed EUR 200 000. Regardless of that important common feature, there is one significant difference that lies in the fact that, for a public capital injection, only the amount of that (direct) public capital injection is to be taken into account, whereas for risk capital measures, the final amount of risk capital provided to the target enterprise (i.e. the sum of public and private capital) is to be taken into account.

4.

Determination of the beneficiary of de minimis aid

4.1 Introducing the concept of single undertaking 2.631

Two types of questions may arise as regards the recipients of de minimis aid: on the one hand, issues may arise as regards the question whether the beneficiary is an “undertaking” involved in economic activity at all. The second issue is to decide what constitutes a single undertaking for the purpose of ensuring that the aid granted to a single undertaking is within the limits set by Regulation 1407/2013.

2.632

The first issue is, in practice, dealt with in the context of Regulation 1407/2013 in the same way as in all other State aid contexts: if the beneficiary of an aid measure does not qualify as an “undertaking”, then the subsidy at stake cannot be regarded either as a State aid or as a de minimis aid. The concept of “undertaking” encompasses obviously all commercial companies and businesses, but also any other entity engaged in “economic activity”.1253

2.633

The second issue brings about a series of more complex aspects. The case-law of the Union Courts indicates that “In the area of State aid, the question whether an economic unit exists arises primarily where the beneficiary of aid needs to be identified [...]. In that respect, it has been held that the Commission has a wide discretion in determining whether companies forming part of a group must be regarded as an economic unit or as legally and financially independent for the purposes of applying the State aid rules”.1254

2.634

The general Commission practice in the State aid area confirms that the concept of “undertaking” is not limited to one distinct legal entity, but may encompass 1253 The concept of undertaking is explained in more detail in Chapter 8 of this book. 1254 Case T-234/95 DGS v Commission ECLI:EU:T:2000:174, para 124. See also Case T-137/02 Pollmeier Malchow v Commission ECLI:EU:T:2004:304.

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a group of companies.1255 Moreover, in Dutch petrol stations1256 – concerning the de minimis rule in force at the time – the Court of Justice confirmed the approach taken by the Commission in that case to examine who were the real recipients of the aid measure at stake (the petrol companies) beyond the formal addressees of the aid measure (the service stations). More particularly, the Court has confirmed the approach of the Commission regarding the use of the concept of “de facto control” for determining which legal entities are together to be considered as the relevant “undertaking” for de minimis purposes. In view of that case-law and the Commission’s decisional practice, it is understandable why the definition of the single undertaking was one of the contentious issues of the latest revision of the Regulation. Previous de minimis Regulations did not specific how the notion of undertaking should be understood and the practical application of that notion gave rise to considerable interpretation problems. When receiving questions on that notion in the past the Commission usually referred to the jurisprudence of the Court of Justice. Reference to case law such as that of Dutch petrol stations was, however, too abstract to be applied correctly by local aid granting authorities. In practice, as it became apparent from contributions submitted during the consultation process, the notion of undertaking was often confused with that of the legal entity receiving the aid.1257

2.635

In line with the policy options discussed in the Impact Assessment and given the overarching objective of simplification, the most far-reaching option considered in that respect was to accept the application of the de minimis ceiling per legal entity, as requested by many Member States. However, such a formal approach would have conflicted with the notion of undertaking as interpreted by the Union Courts. Furthermore, it would not have been economically defendable since groups with many subsidiaries could potentially accumulate a number of de minimis measures, thereby creating significant distortions of competition.

2.636

The Commission therefore chose an intermediate option, seeking to provide a balance between, on the one hand, the need to apply an economic notion of undertaking and, on the other hand, the objective to provide aid grantors with a clear definition that would not be too complex to verify in each individual case. The inspiration was drawn from the criteria set in the SME definition for ‘linked

2.637

1255 See, amongst others to that effect, Commission Decision of 7.06.2006 in case C 8/2005 (2006/904/EC) Germany - Nordbrandenburger UmesterungsWerke, OJ L 353, 13.12.2006, p. 60, recitals 44 and following. 1256 Case C-382/99 Netherlands v Commission ECLI:EU:C:2002:363, especially para 37, 38 and 79. 1257 The application per legal entity was even defended in literature, see Nicolaides, Puzzles of State Aid: Structural Funds, Cumulation and De minimis , EStAL 2005, 433 at 434.

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entreprises’ and incorporated in the GBER.1258 In fact, those criteria would cover most cases of de iure control, and are thus relatively easy to verify, while partner enterprises and certain instances of de facto control do not need to be checked in order to avoid putting a disproportionate burden on administrations.

2.638

That clarification is important one. It is now clear that all de minimis aid received by legal entities under common “control” is to be added up for the purpose of determining whether the EUR 200 000 ceiling is exceeded or not.

2.639

On the other side, it gives rise to some tension concerning the interpretation of the notion of ‘undertaking’ as regards the SGEI de minimis Regulation. Under Article 2(2) of Regulation 360/2012, the amount of de minimis aid granted to “one undertaking” (often translated in a similar way as single undertaking in some languages which adds to the confusion, for example in Czech, both regulations refer to ‘ jeden podnik’) cannot exceed the ceiling of EUR 500 000 over three years. The term “one undertaking” is not defined in the Regulation 360/2012, meaning that recourse must be had to the case law of the Union Courts to interpret it. That means, in essence, that all entities that are controlled, on a legal or a de facto basis, by the same entity must be considered as one undertaking for that purpose.

2.640

Therefore, that simplified definition of “single undertaking” applies only to Regulation 1407/2013 and does not affect the use of the term in other legal texts, such as Regulation 360/2012. For the purposes of those other texts, therefore, reference still needs to be made to the case law of the Union Courts. In practice, that situation remains unsatisfactory from a consistent interpretation perspective as the same rationale for simplifying the definition in the Regulation 1407/2013 (i.e. less administrative burden on the aid granting authorities in situations of limited aid) would apply equally as regards Regulation 360/2012. That issue might seem an issue of coherency to be addressed in the future amendment of the Regulation 360/2012.

4.2 Clarification as to the application of the ceiling per Member State 2.641

Those clarifications as regards the scope of the single undertaking gave rise to additional questions from Member States concerning the situation of single undertakings with companies established in different Member States. In such cases, should the granting authorities also verify de minimis aid granted by other Member States subsidiaries located in their territory? 1258 See Article 3 of Annex I to the GBER.

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The Regulation 1407/2013 clarifies in Article 3(2) that the ceiling of EUR 200 000 applies per Member State. Where the beneficiary is part of an international group, any de minimis aid received by other companies of the group in another Member State does therefore not need to be taken into account, also because such a check would from a practical point of view hardly be feasible for granting authorities.

2.642

4.3 Direct links to a public administration In recital (4), the specific situation of companies that are directly linked to a public body is discussed. In that context, enterprises which have no relationship with each other except for the fact that each of them is directly linked to the same public body are not to be treated as a single undertaking. That recital addresses the situation of companies that, although controlled by public body/ bodies, retain their specific power of decision.

2.643

It should be noted that only the situation of companies directly linked to a public body is covered. If such companies are linked to the public body through an intermediary company (for example, a wholly-owned subsidiary of the municipality), the exemption from the application of the notion of single undertaking to such a group would seem to no longer apply.

2.644

Unlike the notion of undertaking, that interpretation does not seem too be a simplification limited solely to Regulation 1407/2013 but rather an interpretation of the case law that establishes that a subsidiary with real autonomy is not to be regarded as a single economic unit with its parent.1259 The notion of a publicly-owned business having an “ independent power of decision” could therefore be seen as being applicable to Regulation 360/2012 as well.

2.645

4.4 The reference period of three fiscal years Regulation 69/2001 allowed for the possibility of receiving de minimis aid for an amount of EUR 100 000 over a reference period of “three years”, generally understood as three calendar years. The system introduced at the time of Regulation 1998/2006, based on “fiscal years” has been designed to facilitate the control of the de minimis thresholds for the recipients, the Member States and the Commission. The same system was maintained in Regulation 1407/2013.

2.646

1259 Case 15/74 Centrafarm others v Sterling Drug EU:C:1974:114, paras 38-41 confirmed by Case 30/87 Bodson v Pompes funèbres des régions libérées EU:C:1988:225, paras 18-20.

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2.647

Under that provision, nothing more would need to be done than checking the presence of de minimis aid in the last three accounts of the beneficiary undertaking. Those accounts tend, according to common practice in the Member States, to be established on the basis of fiscal years, not necessarily corresponding to calendar years. That system should make it possible to identify precisely the amounts of de minimis aid granted during any relevant period (fiscal year X, fiscal year X-1 and fiscal year X-2). In other words, the individual “accounting year”, as used by the beneficiary for establishing its balance sheet would seem to correspond with the concept of “fiscal years” used by Regulation 1407/2013.

2.648

The question has been raised what happens in the transition period bridging calendar years covered by Regulation 1998/2006, as well as calendar years covered by Regulation 1407/2013. Is it necessary, when calculating the de minimis aid received by a beneficiary for the purpose of applying Regulation 1407/2013, to take into account de minimis aid given, for instance, in 2013, 2012 or 2011? The straightforward answer is that they have indeed to be taken into account. However, the consequences of this approach are mitigated by the fact that the new system – as the old one – functions on a rolling basis. As a result, if an undertaking has received EUR 100 000 in fiscal year 2013, EUR 50 000 in fiscal year 2012 and EUR 50 000 in fiscal year 2011), as soon as one enters the fiscal year 2014, the undertaking concerned may obtain a new de minimis aid of EUR 50 000.

2.649

Another important issue is whether the period of three fiscal years also applies with regard to the cumulation prohibition between de minimis aid and State aid laid down in Article 5 of Regulation 1407/2013. Although Article 5 does not indicate any precise time frame in which the issue of cumulation is to be assessed, it makes sense to also use, for that purpose, the period of three fiscal years provided in Article 3(2). A granting authority will thus have the obligation to enquire with the potential beneficiary of a new de minimis measure whether, on the basis of its last three annual accounts, any State aid has been received with regard to a given set of eligible costs, before granting de minimis aid for those same eligible costs. The details of the cumulation prohibition are explained in section 5.

4.5 Treatment of mergers, acquisitions and splits of undertakings 2.650

In response to questions from stakeholders and Member States, the Commission clarified for the first time in Regulation 1407/2013 how the ceiling should be applied in case of mergers, acquisitions and splits of undertakings. According to Article 4(8) in the case of mergers or acquisitions, all prior de minimis aid 404

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granted to any of the merging undertakings shall be taken into account when determining whether a new de minimis aid can be granted to the new or acquiring undertaking. Any de minimis aid lawfully received before the merger or acquisition remains lawful. If, for example, there is a merger of two undertakings having each received EUR 150 000 in the previous year, the new undertaking cannot receive any new de minimis aid, but the amounts received in the past are not put into question, even though taken together they reach EUR 300 000. Similarly, Article 4(9) provides that if one undertaking splits into two or more undertakings, de minimis aid prior to the split shall be allocated to the undertaking that benefited from it. That beneficiary is in principle the undertaking taking over the activities for which the de minimis aid was used. If such an allocation is not possible, the de minimis shall be allocated proportionately on the basis of the book value of the equity capital und the new undertakings at the date of the split.

5.

2.651

Cumulation of de minimis aid with State aids

Article 5(2) of Regulation 1407/2013 provides: “De minimis aid shall not be cumulated with State aid in relation to the same eligible costs or with State aid for the same risk finance measure if such cumulation would exceed the highest relevant aid intensity or aid amount fixed in the specific circumstances of each case by a block exemption regulation or decision adopted by the Commission”. The direct origins of that prohibition can be traced back to the regional block exemption regulation.1260 A more distant ancestor is the original de minimis Communication from 1992.1261

2.652

The rationale for the prohibition is to be found in the necessity to avoid the circumvention of maximum aid intensities provided under other State aid instruments. In that perspective, it must be underlined that Regulation 1407/2013 only prohibits one type of cumulation: the cumulation of de minimis aid with State aid on the same eligible costs1262 if that cumulation would lead to aid intensities higher than those provided either under the GBER or approved by the Commission in the context of individual State aid decisions. In consequence,

2.653

1260 Article 6(3) of Regulation 1628/2006. 1261 See the description of that communication in Commission Decision of 27.02.2002 on State aid granted to Thuringia (2004/165/EC), point 35. 1262 Article 7(3) of the GBER slightly reformulates that very same prohibition by making it applicable to the hypothesis of the same “partly or fully overlapping eligible costs”. It is likely that the hypothesis of partially overlapping costs – inspired by BER 364/2004 – would also be prohibited under the de minimis Regulation, even if it is not explicitly foreseen in that Regulation.

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cumulation of de minimis aid with State aid on eligible costs which are not the same is allowed, a clarification that was introduced by Regulation 1407/2013.1263

2.654

The cumulation prohibition should thus be interpreted in a narrow manner: as a matter of principle, cumulation between de minimis aid and State aid is allowed, unless one is confronted with the precise hypothesis envisaged by Article 5(2). Moreover, cumulation with de minimis aid under other sectorial de minimis aid Regulations as well as under the Regulation 360/2012 is allowed up to the highest relevant ceiling.

2.655

In that light three possible scenarios can be envisaged:

2.656

(a)

If the eligible costs of two measures (one State aid and one de minimis aid) are clearly different, they may be cumulated fully. The measure labelled “State aid” should respect the conditions of the GBER or individual decision of the Commission approving the scheme concerned and the de minimis aid should respect the conditions of Regulation 1407/2013.

(b)

If however both the de minimis measure and the State aid measure subsidise the same eligible costs, then Article 5(2) of Regulation 1407/2013 comes into play. In that case, it should be checked whether the State aid measure has exhausted the maximum aid intensity that was allowed under the GBER or under the individual Commission decision approving a scheme. If that aid intensity has not yet been exceeded, the additional de minimis aid on those eligible costs may still be in line with Regulation 1407/2013.

(c)

If both the de minimis measure and the State aid measure subsidise the same eligible costs and the maximum aid intensity provided, for instance in the GBER, has already been exhausted by the State aid measure, then the new de minimis aid cannot be granted for the eligible costs covered by the GBER measure. 

In light of the most recent modifications highlighted above, some commentators have argued that the whole cumulation issue will remain to a large extent a theoretical debate since in practice most de minimis measures are not linked to eligible costs.1264 1263 Article 5(2), second sentence. 1264 See Sinnaeve, “The Complexity of Simplification: The Commission s Review of the de minimis Regulation”, EStAL 2014, p. 1479.

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An interesting debate was brought about by the adoption of the Temporary Framework1265 a few years ago. The question to answer is whether aid received by a company as a result of the application of a scheme under the Temporary Framework precludes that company from receiving de minimis aid under the Regulation 1998/2006. In other words, are those two types of aid cumulable or not?

2.657

Firstly, to clarify the purpose of the rules, the Temporary Framework schemes of Member States were subject to a notification to the Commission. Therefore such aid is not to be considered as de minimis but as compatible aid.1266 However, the scheme to be put in place by the Member State did not need to provide that aid is given in relation to identified eligible cost or for a determined investment objective. That characteristic is in fact similar to a de minimis aid, allowing in practice companies to offset part of their operating expenses.

2.658

Section 4.2.2 of the Temporary Framework further stated that the Member State had to obtain a declaration from the undertaking concerned about any other de minimis aid and aid pursuant to the Temporary Framework measure received during the current fiscal year and check that the aid would not raise the total amount of aid received by the undertaking during the period from 1 January 2008 to 31 December 2011, to a level above the ceiling of EUR 500 000 and of EUR 15 000 respectively in case of aid to undertakings active in the primary production of agricultural products. In practice companies that have received de minimis aid before the entry into force of the Temporary Framework would seem to be able to only get additional aid under the Framework up to the 500 000 EUR. Conversely, as regards undertakings that had received such compatible aid in the last years of validity of the Framework (it was valid until the end of 2010), they would not have been able to receive additional de minimis aid under Regulation 1998/2006 in the following two years.

2.659

That issue should not present practical importance for the future as the Temporary Framework compatible aid was only granted until the end of 2010.1267 The Commission estimated that in the entire period of application of the Temporary Framework, it has been used by most Member States (23 schemes in 23 Member States). However, only a very small percentage of the funds allocated by the

2.660

1265 Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis, OJ C 83, 07.04.2009, p. 1. 1266 Section 4.2.2 of the Temporary Framework. 1267 Section 1.2 of the last Amendment of the Communication of the Commission – Temporary Union framework for State aid measures to support access to finance in the current financial and economic crisis, OJ C 6, 11.01.2011, p. 5.

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Member States and approved by the Commission under it have been actually paid out (around 7%). Moreover, the bulk of aid disbursed under this measure was concentrated in one Member State, Germany (over 78% of the funds granted), while Italy and the United Kingdom had respectively spent 8% and 1,1% of the total expenditure covered by the Temporary Framework.1268

6.

Prohibition of fractioning an aid amount into smaller de minimis aids

2.661

Article 3(7) of Regulation 1407/2013 also clarifies that Member States cannot divide an aid measure with a gross grant equivalent higher than EUR 200 000 into smaller sub-parts in order to bring such fractions of the higher amount within the scope of Regulation 1407/2013. The rationale for that rule1269 is that it is difficult to conceive that one fraction of a single aid measure would affect competition, whereas another fraction of that very same measure would not. That rule applies most prominently in cases where Member States are confronted with an order of the Commission to recover incompatible State aid.1270

2.662

A question, not explicitly solved by the latest revision of the regulation is whether the prohibition of fractioning also applies in the context of the application of the cumulation rule. If, for instance, a beneficiary has already received EUR 150 000 and is offered as second support measure of EUR 100 000, can it consider that a fraction of the latter measure (EUR 50 000) could be considered as de minimis. There is no Commission position yet in that respect, but logic would command that the fractioning prohibition also applies in that context. In the scenario described above, the total amount of EUR 100 000 will thus escape Regulation 1407/2013 and eventually qualify as State aid.

2.663

The prohibition of fractioning is most evident in the case of recovery of illegal aid. The General Court confirmed in Regione Autonome della Sardegna1271 that fractioning would risk compromising the very objective pursued by the de minimis rule to simplify administrative procedures as it could be used to undermine the willingness of Member States to notify. In fact, knowing that they could in any event reduce 200 000 EUR from the amount to be recovered would give 1268 Section 1.2 of the Amendment of the Temporary Framework, paragraph 10. 1269 For a past example allowing fractioning, see Commission Decision of 6.09.2005 on the aid scheme implemented in Italy for certain undertakings for collective investment in transferable securities specialised in share of small and medium capitalisation companies listed on regulated markets (2006/638/EC), OJ L 268, 27.09.2006, p. 1, point 60. 1270 Please refer to Section 8 below. 1271 Case T-394/08 Regione Autonome della Sardegna v Commission ECLI:EU:T:2011:493, paras 304-309.

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them the additional assurance that not all illegal aid would be subject to recovery. The purpose of the de minimis rule cannot be to guarantees that any undertaking receiving illegal aid may benefit of a partial exemption up to the de minimis ceiling. As such, the General Court concluded that the exemption under the de minimis rule could not be applied to amounts that are part of a larger amount exceeding the then applicable de minimis threshold, while it remained silent on amounts that are lower than such threshold.1272 Nevertheless, any difficulties arising from that situation are mitigated by the option for the Member State concerned to grant new de minimis aid.

7.

Monitoring and transparency requirements

7.1 A choice between declarations and register is maintained To ensure that the de minimis ceiling is respected, Member States must be able to check that the cumulative amount of all de minimis measures granted to the same beneficiary during the relevant period of three years remains below the ceiling. All de minimis Regulations always left Member States the choice between a central register containing complete information on any de minimis aid granted by any authority within that Member State, or a system of declarations under which, before any new de minimis aid is granted, the granting authority obtains a declaration from the beneficiary on all previous de minimis already received in the current and preceding two years.

2.664

During the revision process which led to the adoption of Regulation 1407/2013, monitoring was highly debated. In the first draft presented for consultation the Commission proposed to remove Member States’ choice and impose the setting up of a central register in all Member States. It reasoned that proposal1273 first of all with the lack of data on the use of de minimis in the absence of such a register which had become apparent in the context of the Impact Assessment: it was difficult for the Commission to set the appropriate ceiling without sound data to back-up that level and the absence of such data was inappropriate when it came to making sound policy decisions. In particular, aggregate data and break-downs per sector are crucial to determine the potential distortive effect of de minimis measures. As only Member States with a central register were able to provide such data, there was a risk that the Commission’s review would be based on data which painted only a partial picture.

2.665

1272 See Section 9 below. 1273 See section 3 of the Explanatory Note accompanying the first proposal: http://ec.europa.eu/competition/ consultations/2013_de_minimis/explanatory_note_en.pdf.

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2.666

As a second argument for a central register the Commission pointed to the inherent weaknesses of a monitoring system relying entirely on the information provided by the beneficiary. It argued that granting authorities would be better equipped to ensure compliance with the rules if they could consult a central register.

2.667

The main argument put forward against the introduction of central registers was the administrative burden and in particular the cost it would entail, even though a significant part of the expenses are one-off costs to create the platform. As shown by the published replies to the consultation, a majority of the Member States considered setting up a mechanism that potentially concerns hundreds or thousands of de minimis granting authorities to be too costly and too cumbersome. In addition, constitutional problems were invoked by federal States which claimed that they could not impose a central register in view of the division of competence between federal and regional authorities.1274

2.668

The argument of administrative burden was particularly sensitive, since the de minimis instrument is precisely a major tool of simplification and reduction of administrative burden. Requiring a central register for small measures that are not even State aid was a difficult case for the Commission to make, particularly at the time when there was no transparency obligation under the GBER.

2.669

Confronted with wide-spread opposition the Commission concluded in the end that, for the time being, it was preferable to maintain the system of choice for reasons of proportionality and administrative burden. It stated in the Impact Assessment that it might reconsider the issue after having carried out a study on the feasibility and practical modalities of a central register.1275 In parallel, the Commission also removed the reporting obligations from the final version of what became Regulation 1407/2013, since the collection of data would have been very difficult to implement for Member States without a central register.

2.670

Finally, it is arguable that if granting authorities carry out proper checks, compliance can be ensured under both systems. As regards the complaints from some companies that making a correct declaration is difficult because they are not always well-informed about the de minimis qualification of the support received, the gross grant equivalent or the date of granting, such difficulties are not a result of the declaration system itself but due to the incorrect application of Regulation 1407/2013 by aid grantors. The latter are obliged to provide all that 1274 See section 5.3.3 of the Impact Assessment (fn. 43). 1275 See the conclusion of section 5.3.3 and section 7 of the Impact Assessment (fn. 43).

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information to the beneficiary, so that any burden on companies should remain minimal if the system is correctly handled by the authorities. However, from a policy-making perspective it is regrettable that neither the central register nor the proposed new reporting obligations were maintained in the adopted version of Regulation 1407/2013. They would have offered more solid data on which the next review could be based so as to allow more informed policy choices at the time of the next review, in particular with respect to the ceiling.

2.671

7.2 Sanctions in case of non-compliance It is not contested that the violation of the substantive conditions contained in Articles 3 and 6 of Regulation 1407/2013 would lead to the subsidies concerned being considered as illegal State aid.1276 The question whether the violation of the procedural obligations, and most prominently the monitoring requirements contained in Article 6, also implies, ipso facto, the illegality of the aid concerned remains largely unanswered.

2.672

The wording of Article 3(1) of Regulation 1407/2013 speaks in favour of there being no automatic illegality for the violation of procedural provisions: “Aid measures shall be deemed not to meet all the criteria of Article 107(1) of the Treaty [...] if they fulfil all the conditions laid down in this Regulation”.

2.673

Dutch petrol stations supports the view that the burden of proof is on the Member State to demonstrate that the de minimis conditions are fulfilled. In that judgment, the Court confirmed that the Commission was right in considering that measures with respect to which it does not receive (sufficient) information from the Member State concerned, could not be covered by the de minimis rule: “Therefore, the Commission neither acted in breach of the obligation to State reasons nor made a manifest error of assessment by declaring that the aid granted to service stations in respect of which it had not received information or had received only partial information was not covered by the de minimis rule. The plea in law relating to the consequences of the lack, or inadequacy, of information provided by the Member State must therefore be rejected”.1277

2.674

If the Commission is entitled to consider such measures as not being de minimis for the procedural reason that no information could be provided about them, then those same measures are ipso facto illegal. Such thinking should not surprise

2.675

1276 Unless the measure concerned fulfils the conditions of a block exemption regulation. 1277 Case C-382/99 Netherlands v Commission ECLI:EU:C:2002:363, para 80.

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in the area of State aid. The Commission is largely in the hands of the Member States when it comes to obtaining information on the measures it examines. Dutch petrol stations could therefore be considered as confirming, as regards de minimis aid, a rule contained in Article 13 of the Procedural Regulation as regards State aid: “If a Member State fails to comply with an information injunction, that decision shall be taken on the basis of the information available”.1278

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Although Dutch petrol stations confirms the illegality of de minimis measures with respect to which the Commission does not receive information, it does not necessarily imply that violation of all monitoring requirements contained in Article 6 would lead to the same consequence: would, for instance, the mere fact that a Member States did not enquire with a beneficiary whether it has already received de minimis aid, or the mere fact that no explicit reference is made to the relevant de minimis Regulation, lead automatically to that measure being illegal, even if the ceiling would afterwards appear not to have been exceeded? Such question could only be decided by the Union Courts. The author does however consider that an automatic illegality would seem disproportionate for such a scenario.

8.

Application in time of the de minimis rule

8.1 The determining moment of the grant 2.677

As regards the application in time of Regulation 1407/2013, the determining factor is the moment at which the aid is granted , as is outlined in Article 3(4) of Regulation 1407/2013: “De minimis aid shall be deemed granted at the moment the legal right to receive the aid is conferred on the undertaking under the applicable national legal regime (& )”. The moment of granting does however not necessarily need to coincide with the payment of the aid by the authority concerned.

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The fact that the date at which the aid is granted determines the applicable de minimis rule is essential in the context of recovery cases described hereunder.1279 In those cases, one needs to determine whether or not State aid which “except for the de minimis rule” would be incompatible, needs to be recovered or not. Aid granted between February 2001 and December 2006 is, in principle, subject to Regulation 69/2001 and aid granted between January 2007 and December 20131280 is subject, in principle, to Regulation 1998/2006. Regulation 1278 See Article 13(1), last sentence, of Regulation 659/1999. 1279 See to that effect, Commission Decision of 30.10.2001 on the State aid granted by Gerrmany to Graf von Henneberg Porzellan GmbH, Ilmenau, (2002/865/EC), OJ L 307, 08.11.2002, p. 1, point 105 and footnote 24. 1280 The date of 2013 has been chosen in order to correspond with the Structural Funds funding period. See, to

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1407/2013 entered into force on 1 January 2014. The fact that, at a given moment in time, the legality of an aid granted in the past must be examined on the basis of Regulation 69/2001, does not imply any retroactive application. The retroactive application of Regulation 1407/2013 to grants of aid pre-existing Regulation 1407/2013will be described in a further section.

8.2 Transition period between 1 January 2014 and 1 July 2014 As provided in Article 7(2) of Regulation 1407/2013, in the period ranging from 1 January 2014 to 30 June 2014, Member States may still grant aid under the provisions of Regulation 1988/2006 or set up a new scheme under Regulation 1407/2013. As the ceilings do not differ between the two regulations but the latter Regulation gives additional possibilities to grant aid to firms in difficulty, Member States have probably used that period to enact new schemes based on the more favourable criteria of Regulation 1407/2013, particularly as regards aid to enterprises in difficulty.

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Regulation 1407/2013 contains in Article 7(4) a similar provision extending the application of that regulation. As a result, after the end of its period of application (end 2020), de minimis schemes covered by Regulation 1407/2013may remain in force for an additional period of six months.

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8.3 Retroactive application of de minimis regulations It is common practice in case of a block exemption regulation to make its more favourable norms immediately applicable. That approach is probably linked with the fact that such regulations exempt aid from the obligation of being notified and replace the centralised system of control by the Commission with a decentralised one. Therefore, its provisions could be considered as being essentially procedural, rather than substantive in nature.1281 Following a principle common to the Member States’ legal systems and to the Union, procedural rules1282 are – contrary to substantive rules1283 – immediately applicable to cases which, at the

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the same effect, Article 9(1) of Regulation 1628/2006 and Article 36 of the GBER. 1281 See points 41 of Commission Decision of 27.02.2002 on State aid granted to Thuringia (Decision 2004/165/EC) and Commission Decision of 16.12.2003 on the aid scheme implemented by France fort eh takeover of firms in difficulty (2004/343/EC), OJ L 108, 16.04.2004, p. 38, point 33. 1282 See Case T-357/02 Freistaat Sachsen v Commission ECLI:EU:T:2007:120. 1283 In its notice on the determination of the applicable rules for the assessment of unlawful aid, the Commission Stated that it “shall always assess the compatibility of unlawful State aid with the common market in accordance with the substantive criteria set out in the instrument at force at the time when the aid was granted”. See Commission notice on the determination of the applicable rules for the assessment of unlawful aid, OJ C 119 of 22.05.2002, p. 22.

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time of the rules’ adoption, are still ongoing. The Commission has followed that line thoroughly in Regulations 875/2007 and 1535/2007 concerning the fisheries and agricultural sectors, but has partially departed from it in the context of Regulation 1998/2006.1284

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According to Article 7(1) of Regulation 1407/2013, aid granted before 1 January 2014 may be considered as de minimis if it fulfils all the substantive conditions of Regulation 1407/2013.1285 That derogation from the principles outlined in the previous section implies, however, that conditions regarding, for example, enterprises in difficulty or lower threshold amongst others, have been retroactively cancelled. Taking the example of road passenger transport, an amount of EUR 200 000 granted in 2008 would at the time have been considered as unlawful aid since the de minimis for road transport was limited to EUR 100 000 in view of the small average size of the undertakings concerned. However, an aid granted in breach of that limitation would effectively be cleared under Regulation 1407/2013.

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Therefore, even if we see the simplification behind that retroactive application, we join other commentators in saying that this approach is at odds the Commission’s own policy set out in the Recovery Notice1286 and, even more important, difficult to defend based on existing case-law.1287 In principle, any aid measure could therefore be examined either in the light of the de minimis rule applicable at the time of the grant, or in the light of Regulation 1407/2013.

9. 2.684

The use of de minimis in a recovery context

Article 14 of the Procedural Regulation provides essentially that the Commission shall order recovery of illegal and incompatible State aid. That obligation presupposes that the measures at stake can indeed be qualified as State aid within the meaning of Article 107(1) of the Treaty. Given that de minimis aid is deemed not to meet all the criteria of Article 107(1) of the Treaty, the Commission cannot order the recovery of such aid. For that reason, most recovery decisions regarding aid schemes contain a specific provision stating that de minimis aid amounts should not be recovered. 1284 A different approach had been laid down in the original Commission proposal. See invitation to submit comments on the draft Commission regulation on the application of Articles 87 and 88 of the EC Treaty to de minimis aid, OJ C 137, 10.06.2006, p. 4 (Article 4). 1285 Advocate General Ruiz-Jarabo Colomer argued against such retroactive application in his Opinion in Case C-435/02 Pearle and others ECLI:EU:C:2004:448, points 87 and following. 1286 Notice from the Commission, Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible aid, OJ 2007 C 272, 15.11.2007, p. 4, para 49. 1287 For arguments against that legal choice, see Sinnaeve, “The Complexity of Simplification: The Commission’s Review of the de minimis Regulation”, EStAL 2014, p. 1479.

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One of the main issues to be treated in any such case is determining the rules which are, ratione temporis, applicable to the given situation. As mentioned above, the basic principle is that the de minimis rule applicable at the moment of the grant of the support measure should apply. However, the General Court has also confirmed that procedural rules – the de minimis is according to a certain line of reasoning considered to be of procedural nature – are deemed to apply to legal situations arising before their entry into force. In other words, a procedural rule, like the de minimis Regulations would be applicable to pending cases.

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The latter approach is precisely the one which the Commission opted for in the Thuringia case.1288 In that decision, the Commission decided to apply Regulation 69/2001 to facts dating from before its entry into force. The Commission based that approach on the fact that that regulation did not contain any express provision prohibiting its quasi-retroactive application to pending cases. Finally, the Commission noted in that case that the quasi-retroactive application of Regulation 69/2001 would not violate general legal principles of legitimate expectation and legal certainty because it was, as a matter of principle, more generous than the preceding de minimis rule.

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There are a number of reasons why the approach taken in past cases as respects the quasi-retroactive application of Regulation 69/2001 may also apply with respect to Regulation 1407/2013. First, Article 7(1) of the latter regulation states that it “shall apply to aid granted before its entry into force if the aid fulfils all the conditions laid down in this Regulation”. Secondly, Regulation 1407/2013 includes more generous provisions such as the possibility to grant aid to firms in difficulty and the increase of the passenger transport ceiling. In such circumstances, the unconstrained retroactive application of the de minimis rule to past cases would not risk creating problems with respect to the legitimate expectation of the Member States and beneficiaries concerned, as its field of application may be seen as broader than in the past.

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However, in practice, it remains true that the beneficiaries of illegal or incompatible aid were not being treated as beneficiaries of de minimis aid at the time the grant was received (i.e. they were not informed of the de minimis character of the measure, cumulation was not checked). However, it is one of the constitutive elements of the de minims aid as laid down in Regulation 1407/2013 and one that cannot be fulfilled retroactively. Arguably, in recovery cases, it would be impossible that the grant fulfils all the conditions laid down in Regulation 1407/2013.

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1288 Commission Decision of 27 November 2002 on the aid scheme implemented by Germany: “Thuringia working capital programme”, OJ L 157, 26.06.2003, p. 55.

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Chapter 14 Application to specific fields – fiscal aid1289

1.

Introduction

1.1 The Member States’ competence in the taxation field The application of State aid rules is without prejudice to the competence of Member States to decide on their economic policy and therefore on the tax system which they consider most appropriate. With the exception of indirect taxation, where a certain degree of harmonisation has been achieved at Union level, taxation falls within the exclusive competence of Member States. In particular, Member States are free to spread the tax burden as they deem most appropriate across the various factors of production. Nevertheless, the exercise of Member States’ sovereignty must be consistent with Union law.1290 In other words, Member States must not introduce or maintain legislation which entails State aid, is contrary to the fundamental freedoms or is contrary to Union law in general.

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1.2 Fiscal competition, aggressive tax planning and State aid rules Taxation is one of the remaining domains subject to the unanimity rule at Union level. While significant progress has been made in the field of indirect taxation,1291 with the adoption of the VAT and excise duties directives, direct

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1289 This chapter draws partially from chapter 3 of the first edition of this book. The authors would like to thank Koen Van de Casteele and Mehdi Hocine for being able to build on their work. 1290 Joined Cases C-344/13 and C-367/13 Blanco and Fabretti ECLI:EU:C:2014:2310, para 24; Case C-42/02 Lindman ECLI:EU:C:2003:613, para 18. 1291 On the basis of Article 113 of the Treaty, “the Council shall, acting unanimously (...), adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the

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business taxation remains basically non-harmonised at Union level. Even if the existence of different tax systems should not be seen per se as a distortion of competition, in the past certain tax schemes were designed by Member States with a view to attracting tax payers from other Member States.

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In 1996, at the initiative of Commissioner Monti who was at that time responsible for Internal Market and Taxation, a discussion was launched with Member States to tackle the issue of tax competition. The aim of that initiative was to shift the focus from harmonisation, which seemed unrealistic in the short- and medium-term, to coordination of policies. That discussion led in December 1997 to the adoption by the ECOFIN Council of a code of conduct on business taxation1292 (“the Code of Conduct”). That code, which is a non-legally binding instrument, aims at providing a forum of discussion for Member States on measures which have, or may have, a significant impact on the location of business within the Union. The Code of Conduct defines the measures that should be considered as potentially harmful because they provide for a significantly lower level of taxation compared to the levels which are normally applicable in the Member State concerned.1293 That lower taxation may derive from different nominal tax rates, adjusted tax bases or other factors. The criteria for identifying potentially harmful measures include the following: tax benefits reserved for non-residents or for transactions with non-residents (known also as “ring-fencing 1”); tax incentives isolated from the domestic economy having no impact on the national tax base (known also as “ring-fencing 2”); tax advantages granted in the absence of any real economic activity or in the absence of any substantial economic presence in the Member State concerned; departure from internationally accepted rules (in particular those approved by the Organisation for Economic Cooperation and Development (“OECD”)) for the determination of the taxable base for multinational groups; lack of transparency (including the exercise of discretionary powers by the tax administration). Those criteria, which are neither exhaustive nor cumulative, partially overlap. In substance they all address the question whether a tax measure deviates from the national tax system in a harmful manner. Under the Code of Conduct, when assessing the harmful nature of a tax measure, its effects on other Member States should also be taken into account.1294 internal market and to avoid distortion of competition”. 1292 Council conclusions of the ECOFIN Council meeting of 1 December 1997 concerning taxation policy, OJ C 2, 06.01.1998, p. 1. See also documents at the following link: http://ec.europa.eu/taxation_customs/ taxation/company_tax/harmful_tax_practices/#code_conduct 1293 See Section B of the Code of Conduct. 1294 See Section G of the Code of Conduct. Pursuant to that economic criterion, the average rate at which the activity is taxed in the Union seems to be of crucial importance.

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The Code of Conduct requires Member States to refrain from introducing such measures (“standstill”) as well as to roll back existing measures or practices that are deemed to be harmful (“rollback”).

2.692

Following the adoption of the Code of Conduct, a working group was set up and started the scrutiny of tax measures potentially falling under the code’s scope.

2.693

If most of the measures found harmful under the Code of Conduct also happened to constitute State aid, it is not because there is a systematic link between the notion of State aid and the qualification of the measure as harmful. Even if the criteria for the qualification of a measure as harmful have certainly been inspired by the concept of selectivity, the Code of Conduct and State aid rules pursue different objectives. While the Code of Conduct aims at tackling distortions of competition that might harm the tax revenues of Member States, State aid rules mainly aim to address competition between Member States which thereby favour undertakings already established (or are considering establishing themselves) in a given Member State. Moreover, while the Code of Conduct group enjoys a certain margin of appreciation, the Commission has no discretion in determining whether a measure falls within the notion of State aid, since that notion is an objective one. In addition, unlike decisions adopted under State aid rules, the application of the findings of the Code of Conduct group is not subject to judicial review.

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As part of the Code of Conduct,1295 the Commission committed to publishing guidelines on the application of State aid rules to measures relating to direct business taxation. Those guidelines were adopted on 11 November 1998.1296 However, at the time of writing, the announced intention of the Commission is that those guidelines should be withdrawn and the fiscal aspects of State aid will be included in the Commission Notice on the notion of State aid.1297

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In November 1999 the Code of Conduct group presented a widely recognised report (the so-called “Primarolo Report”) which identified 66 harmful tax measures. In 2001, on the basis of the Commission notice on direct business taxation, the Commission initiated 15 formal investigation procedures, most of which

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1295 See Section J of the Code of Conduct. 1296 See Commission Notice on the application of State aid rules to measures relating to direct business taxation, OJ C 384, 10.12.1998, p. 3. The latest Commission report on the action taken in the field of fiscal aid was adopted by the Commission on 9 February 2004. 1297 The notice on the notion of aid is an integral part of the Commission’s State Aid Modernisation (SAM) programme. For an overview and an up-date on the state of play, see the following link: http://ec.europa. eu/competition/consultations/2014_state_aid_notion/index_en.html

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had been identified in the context of the Code of Conduct. The Commission eventually prohibited various tax regimes1298 which provided special conditions for multinationals in determining their taxable liability, such as coordination centres in Belgium,1299 Luxemburg,1300 Germany,1301 France,1302 and Spain,1303 as well as the Exempt Holdings and Billionaire Holdings in Luxembourg1304 and the Gibraltar Exempt Companies regime.1305

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The Code of Conduct group keeps on monitoring not only potentially harmful tax measures but also the implementation of rollback, reporting regularly to the Council on it.

2.698

In the previous edition of this book, the authors of the chapter on fiscal aid had indicated in this context that the Commission action in the field of State aid could encounter limits linked to the boundaries of State aid insofar as only selective advantages that arise at national level can be tackled and that such phenomenon could result in fiscal reverse engineering. The most obvious case would be to replace any sector specific tax rate by a generally applicable tax rate for all sectors and to reduce that rate to outcompete other Member States. Unlike our predecessors we consider such a course of action legitimate if it de jure and de facto benefits all companies in an equal manner. A genuine absence of selectivity may have been the case as regards the Irish tax reform in 1997 which set the general tax rate at 12.5 per cent but it was certainly not the case for the 2002 Gibraltar tax reform.1306

1298 The Commission initiated in July 2001 a large scale State aid investigation into 15 preferential tax regimes for multinationals, thirteen of which had meanwhile been found harmful by the Council’s Code of Conduct Group. Most preferential tax regimes investigated under the State aid rules qualified as both harmful tax competition and selective State aid, with only a few differences. 1299 Commission Decision of 17.2.2003 on State aid C 15/02, Belgian Coordination centres, OJ L 282, 30.10.2003, p. 25. 1300 Commission Decision of 16.10.2002 on State aid C 49/2001, Luxembourg Coordination centres, OJ L 170, 09.07.2003, p. 20. 1301 Commission Decision of 5.9.2002 on State Aid C 47/01, German Coordination Centres, OJ L 177, 16.07.2003, p. 17. 1302 Commission Decision of 13.5.2003 on State Aid C 45/2001, French Headquarters and Logistic Centres, OJ L 23, 28.01.2004, p. 1. 1303 Commission Decision of 22.8.2002 on State aid C48/2001, Coordination Centres Vizcaya, OJ L 31, 06.02.2003, p. 26. 1304 Commission Decision of 16.10.2002 on State aid C50/2001, Luxembourg Finance Companies, OJ L 153, 20.06.2003, p. 40. 1305 Commission Decision of 30.03.2004 on State aid C66/2002, Gibraltar government corporation tax reform, OJ L 85, 02.04.2005, p. 1. 1306 That reform was examined in Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI: EU:C:2011:732.

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Reducing the general applicable tax rate is not always straightforward because it affects the public purse. Therefore, reductions of the tax rate often go along with a broadening of the tax base, so as to maintain the overall tax revenue. Such broadening has its limits, which are illustrated by the change of the loss carryforward rules in Germany.1307 To finance a general corporate tax rate reduction, the possibility to carry forward losses was curtailed to five years. There appeared to be good reasons for exempting companies in difficulty from that temporal restriction, given that to do so would facilitate their restructuring. However, the Commission considered it to be a selective advantage to certain companies which could not be justified by the logic of the corporate tax system and prohibited it.1308

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Notwithstanding the follow-up to the work of the Code of Conduct group, the abrogation of preferential tax systems for multinationals does not seem to have eliminated tax planning practices, as is well documented in the OECD report on “base erosion and profit shifting” of 2013.1309 On the contrary, many Member States seem to have continued to allow the reduced profit allocation to multinationals by replacing common regimes with rather opaque individual tax ruling practices.1310

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In February 2014 Commissioner Almunia who was at that time responsible for competition policy announced that the Commission had decided to look once again into that matter, because “A limited number of companies actually manage to avoid paying their proper share of taxes by reaching out to certain countries and shifting their profits there. In those cases where national laws or tax-administration decisions permit or encourage these practices, there might be a State aid component involved and I intend to go to the bottom of it.” In March 2014, he clarified that the Commission was gathering information on tax ruling practices as well as intellectual property tax regimes in several Member States.1311

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1307 Commission decision of 26.1.2011 on State aid SA 29150, German law on easing of fiscal carry-forward of losses (Sanierungsklausel), OJ L 235, 10.09.2011, p. 26. The decision was challenged before the General Court in multiple cases; for an overview of the cases, see the following link: http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_29150. 1308 A similar case existed in Finland where the Court explicitly denied employment considerations as a justification for exemptions from the corporate tax system, cf. Case C-6/12 P ECLI:EU:C:2013:525. 1309 http://www.oecd.org/ctp/BEPSActionPlan.pdf. It aims at addressing several deficiencies in the existing international tax rules and standards, which are exploited by multinationals to erode the tax base in high-tax countries and to shift the tax base to reduce their overall tax bill. 1310 For a recent example see Commission Decision of 1.10.2014 in case SA 34914, Alleged aid granted to offshore companies Gibraltar Income Tax Act 2010, not yet published, concerning the tax ruling practice in Gibraltar. 1311 IP/14/309.

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Subsequently, on 11 June 2014 the Commission opened three formal investigations against Ireland, Luxembourg and The Netherlands on tax rulings granted to individual companies, namely Apple, FFT and Starbucks.1312 On 7 October 2014 another formal investigation on tax rulings against Luxembourg (Amazon) was initiated1313 and on 3 February 2015 an investigation into the Belgian excessive profit scheme was initiated.1314 In those investigations the Commission raised doubts as to whether Member States had given multinationals a preferential treatment by granting them a favourable tax treatment on the basis of individual tax rulings. The first four cases concern either the allocation of profits to a branch (in Ireland) or transfer pricing between a local company and a foreign mother (in the Netherlands and Luxembourg). In all cases the profits recorded in the Member State where the tax ruling was granted seems to be minimised with the help of transfer pricing rules, while the remaining profits are transferred out of the country.

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The Commission’s doubts concern arrangements which provide the beneficiaries with preferential treatment compared to other companies. The Commission preliminarily considered that a transfer price must be comparable to that which would have been arrived at between independent operators transacting in the market, i.e. at arm’s length.1315 Any result that deviates from that outcome and lowers the tax basis has the effect of providing an advantage to the taxpayer concerned. In establishing such a comparison the Commission uses the OECD transfer pricing guidelines as a reference document.

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The analysis of the Commission to challenge individual tax rulings may be surprising to outsiders1316 but is supported by the Court jurisprudence. As will be explained in more detail below, in the Gibraltar corporate tax judgment the 1312 Commission Decisions of 11.6.2014 in case SA 38373, Alleged aid to Apple, OJ C 369, 17.10.2014, p. 22; SA 38374, Alleged aid to Starbucks, OJ C 460, 19.12.2014, p. 11, and SA 38375, Alleged aid to FFT, OJ C 369, 17.10.2014, p. 37. 1313 Commission Decisions of 7.10.2014 in case SA 38944, Alleged aid to Amazon, OJ C 44, 06.02.2015, p 13. 1314 Commission Decisions of 3.2.2015 in case SA 37667, Excess profit tax system in Belgium – Art. 185§2 b) CIR92, not yet published. 1315 Joined Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission EU:C:2006:416, para 95. 1316 There is extensive guidance on this in the draft Notice on the notion of aid, cf. paragraphs 170 and following. In the Notice it is reiterated that tax rulings treating taxpayers on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, particularly where the exercise of judgement goes beyond the simple management of tax revenue by reference to objective criteria, see paragraph 170 with reference to Case C-241/94 France v Commission (“Kimberly Clark”) ECLI:EU:C:1996:353, paras 23 and 24. In addition, in Case C-6/12 P ECLI:EU:C:2013:525, para. 27 the Court specified that even where the competent authorities have a broad discretion to determine inter alia the conditions under which a tax advantage can be granted, such discretion is not selective as long as the relevant criteria are intrinsically related to the tax system.

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Court confirmed that allowing certain multinational companies to escape the taxation of profits should prima facie be seen as selective. In Forum 187 regarding the Belgian coordination centres, the Court reiterated that as only prices derived at in a competitive environment do not give rise to competition distortions also transfer pricing must respect the principle of free competition, which is ensured by the arm’s length principle. It thereby established the arm’s length principle as one economic approach to ensure the application of state aid rules in cases of taxation of multinational companies, which must prevail over national law when transfer prices do not resemble those which would be charged in conditions of free competition.1317 Finally in Paint Graphos the Court has made clear that the primary objective of a corporate tax system is the taxation of corporate profits. Putting emphasis on the taxation of corporate profits also raises the question whether profits from different sources of income may be taxed differently, i.e. whether a royalty can be taxed at a lower rate than, for example, trading income. The Commission has in fact followed that line in its 2013 Gibraltar opening decision,1318 where it raised doubts as to the selective nature of an exemption of passive income (i.e. income from dividends, interests and royalties). That issue also arose in relation to the so-called Spanish patent box.1319 That regime allowed essentially a reduced taxation of income from intellectual property, such as royalties. In fact, in 2008 the Commission had approved the Spanish patent box scheme under the assumption that it was a general scheme linked to R&D. Those boxes have in the meantime been further developed as they cover also marketing intangibles and all kinds of acquired intellectual property rights and have been put into effect by several other Member States.1320

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In late 2014, during the formation of the new Commission, the then Presidentelect Juncker invited the future Competition Commissioner to continue to be vigilant in tax matters. As such, at the time of writing future developments in the field of direct tax planning can be expected.

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1317 Joined Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission EU:C:2006:416, para 95. 1318 Commission Decision of 16.10.2013 in case SA 34914, Gibraltar Income Tax Act 2010 – Passive income exemption, OJ C 348, 28.11.2013, p. 184. 1319 Commission Decision of 13.2.2008 in case N 480/2007, on intangible assets in Spain, OJ C 80, 01.04.2008, p. 3; for a comment on that case, see de la Brousse and Micheau, Case studies of tax issues on selectivity: analysis of the patent box scheme and the reduced taxation of foreign-source interest income, in Rust and Micheau (eds.), State Aid and Tax Law, (Kluwer, 2013). 1320 See also Luts, “Compatibility of IP Box Regimes with EU State Aid Rules and Code of Conduct” in EC Tax Review, 2014, p. 258.

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2.

The selectivity analysis

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When analysing a fiscal measure to establish if it entails State aid, selectivity is quite often the most problematic aspect.1321 Determining if a fiscal measure is selective can raise difficult questions. Selectivity involves determining if a tax measure favours certain undertakings or productions of goods in respect of others.1322

2.708

The general notion of selectivity was already analysed in Chapter 10 of the present book. This chapter will therefore focus on the application of selectivity to fiscal measures. The classical method used for the assessment of fiscal measures is the so-called three-step test.

2.1 The three-step test 2.709

The three-step test comes into play when it is necessary to analyse fiscal measures applicable to undertakings fulfilling specific criteria, which reduce the charges that those undertakings would normally have to bear. In particular, that test is used to establish if a fiscal measure is materially selective.

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The three-step approach has been developed by the Court in its jurisprudence, since its 1974 landmark judgment in Italian textiles.1323 That approach was substantially endorsed by the Commission in its decisional practice and an attempt to clarify its application could already be seen in the Commission Notice on 1321 It should be noted that State resources are generally not an issue in fiscal state aid cases. The Court reiterated that a fiscal measure, although not involving the transfer of State resources, places the recipients of the exemption in a more favourable financial position than that of other taxpayers and amounts to State aid within the meaning of Article 107(1) of the Treaty. Likewise, a measure allowing certain undertakings a tax reduction or to postpone payment of tax normally due can amount to State aid, cf. Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 46 (that analysis is also emphasised in para 9 of the Notice on direct business taxation). Moreover, the notion of advantage is normally intertwined with that of selectivity, see Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:55 at para 48; for further reference see Lang “State aid and Taxation, recent trends in the Case Law of the ECJ”, EStAL 2012, 411. 1322 For further references, see Triantafyllou, “La fiscalité façonnée par la discipline des aides d’État”, in EC State Aid Law: Liber Amicorum Francisco Santaolalla Gadea (Kluwer, 2008), 409 et seq.; Rossi-Maccanico, “The point on selectivity in State aid review of business tax measures”, in Pistone (ed), Legal Remedies in European Tax Law (IBFD, 2009), 223 et seq.; Jestaedt, “Taxes and duties”, in Heidenhain (ed.), European State aid law (Hart Publishing, 2010), 118 et seq.; Micheau, “State aid and taxation in EU law”, in Szyszczak (ed.), Research Handbook on European State Aid Law (Edward Elgar, 2011), 193 et seq.; Schön, “State aid in the area of taxation”, in Hancher, Ottervanger and Slot (eds.), EU State aids (Sweet & Maxwell, 2012), 321 et seq.; Biondi, “State aid is falling down: an analysis of the case law on the notion of aid”, (2013) 50 CMLRev 1719 et seq.; Bacon, European Union Law of State aid (Oxford University Press, 2013). 1323 Case C-173/73 Italy v Commission (“Italian textiles”) ECLI:EU:C:1974:71.

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the application of State aid rules to measures relating to direct business taxation.1324 Since the adoption of that notice in 1998, the focus of the three-step test has changed. In 2001, the Court shifted emphasis away from looking at the derogation, as it had done in 1974 (also referred to as “derogation approach”), to looking at an unequal treatment between companies in a factual and legally comparable situation (also referred to as “comparison test”). That shift culminated in 2011 in the Gibraltar corporate tax judgment where the Court held that in certain circumstances there was no need for applying the three step test by the book and to rely on a formalistic derogation as long as the measure was designed to have the effect of relieving a certain group of companies from being taxed on their corporate profits.1325 For the purposes of the three-step analysis, first it is necessary to identify the socalled system of reference. Second, it must be determined if the measure assessed constitutes a derogation from that system insofar as it differentiates between economic operators that, in light of the intrinsic objectives of the system, can be considered to be in a comparable legal and factual situation. If the measure does not constitute a derogation from the system of reference, it is not selective. On the other hand, if it establishes a derogation, the measure is prima facie selective. In such a case, it will still be necessary to establish (in the third step) if the measure can be justified by the nature or the general scheme of the (reference) system. Should the measure be justified by the nature or the general scheme of the system, the measure will not be considered selective and will thus fall outside the scope of Article 107(1) of the Treaty.

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2.1.1 Identification of the reference system The central issue in the material selectivity assessment of fiscal measures is the identification of the appropriate reference framework, which in many cases is far from easy.1326

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1324 In the authors’ view the three-step test can in principle be employed in all fiscal aid cases. It is however not always necessary to apply the test, in particular in cases of individual aid awards which clearly distinguish the beneficiary from other taxpayers. However, the three-step test with its justification defence provides the necessary room for sector-specific considerations, such as allowing progressive taxation of income so as to make up for the difference in the ability to pay. 1325 Cf. point 129 of draft Notice on the notion of State aid. 1326 Traversa, “State aid and taxation: can an anti-avoidance provision be selective?” EStAL 2014, p. 516; Schön, “Taxation and State aid Law in the European Union” (1999) 36 CMLR, 29; see also Drabbe, “The test of selectivity in State aid litigation: the relevance of drawing internal and external comparisons to identify the reference framework”, in Rust and Micheau (eds.), State aid and tax law (Kluwer, 2013), 87 et seq.

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As clarified by the Commission in its draft Notice on the notion of State aid, the reference system is composed of a consistent set of rules that generally apply, on the basis of objective criteria, to all undertakings falling within its scope as defined by its objective.1327

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In principle, the proper benchmark can only be determined by looking at the structure of the tax system as a whole. More specifically, the identification of the reference system must take into account elements such as the taxable persons, the taxable events, the tax base and the tax rates. The reference system could be the (general) corporate income tax system, the VAT discipline or the excise duties (sector-specific) legislation of a given Member State.

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First of all, it should be noted that even for cases where the national corporate tax system as such is to be regarded as the reference system, it may be however necessary to preliminarily consider other elements, such as the way the taxable base is determined. In Paint Graphos, the Court gave clear indications on the essential role which must be attributed to the determination of the taxable base. Paint Graphos concerned a preliminary ruling from the Italian Corte Suprema di Cassazione on the tax regime providing a corporate tax exemption for producers’ and workers’ cooperative societies. The Court observed that, on the basis of the information at its disposal, for the purpose of calculating the corporate tax, the taxable base of the producers’ and workers’ cooperatives concerned was determined in the same way as that of other types of undertakings, namely on the basis of the amount of net profit earned as a result of the undertaking’s activities at the end of the tax year.1328 That preliminary remark lays down the premises for a correct reasoning, since the determination of the taxable base is essential for tax purposes. If the taxable base were determined on the basis of different rules, the situation could result ex ante in a lack of comparability and it would be necessary to examine the issue from a different perspective. In Paint Graphos, given that the taxable base was determined (substantially) on the basis of the same rules, the Court concluded that the corporate tax was to be regarded as the legal regime of reference for the purpose of determining whether the corporate tax exemptions at issue could have been selective.

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Secondly, it should be pointed out that in certain circumstances, especially in the field of corporate tax, it may not be enough to take into consideration the corporate tax system as a whole. Instead, it may be necessary to identify a specific set of rules within that corporate tax system, which regulates the specific 1327 Para 140. 1328 Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 50.

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aspect under examination. One example is given by the Spanish scheme on the amortisation of financial goodwill, in which the Commission considered that the reference system had to be identified with the corporate tax system and, more specifically, with the rules concerning the fiscal amortisation of financial goodwill laid down in the Spanish tax system.1329 In two decisions on that case, the Commission concluded that the measure concerning the amortisation of financial goodwill arising from the acquisition of at least 5 per cent of shareholdings in a foreign company was selective and constituted State aid. Selectivity was present because the Spanish legal system did not provide for the amortisation of financial goodwill in case of acquisitions of participations in Spanish companies. A large number of taxpayers challenged the Spanish goodwill decisions.1330 On 7 November 2014, the General Court annulled the two Commission decisions.1331 Even if the General Court did not put into question the identification of the reference system, it considered that the Commission failed to establish the selectivity of the measure. The General Court found that, even considering that the measure derogated from the identified reference system, this derogation did not suffice to demonstrate that the measure favoured certain undertakings or certain productions, since such measure was available, a priori, to all undertakings. According to the General Court, the measure “ne vise donc aucune catégorie particulière d’entreprises ou de productions, mais une catégorie d’opérations économiques”.1332 The economic operation consisting in the acquisition of a 5 per cent shareholding in a foreign company “n’ impose pas, a priori, à l’entreprise acquéreuse de modifier son activité et, au demeurant, n’ implique, en principe, pour cette entreprise, qu’une responsabilité limitée à la hauteur de l’ investissement réalisé”.1333

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1329 Financial goodwill is defined by the Spanish law as the part of the difference between the purchase price of the shareholding and its book value on the date of the acquisition that has not been booked under the goods and rights of the non-resident company. See Commission Decision of 28.10.2009 in case C45/2007, on the tax amortization of financial goodwill for foreign shareholding acquisitions, OJ L 7, 11.01.2011, p. 48, recital 96. See also Commission decision of 12.1.2011, concerning the same tax measure (applied to the acquisition of foreign shareholdings in extra-EU countries, OJ L 135, 21.05.2011, p. 1). 1330 On a number of annulment actions the General Court and the Court ruled without examining the merits of the case (see, inter alia, Case T-221/10 Iberdrola v Commission ECLI:EU:T:2012:112; Case T-234/10 Ebro Foods v Commission ECLI:EU:T:2012:141; Case C-274/12 P Telefónica v Commission ECLI:EU:C:2013:852; Case T-400/11 Altadis v Commission ECLI:EU:T:2013:490). 1331 Case T 219/10 Autogril v Commission ECLI:EU:T:2014:939 and Case T-399/11 Banco Santander and Santusa v Commission ECLI:EU:T:2014:938. The Commission has appealed these rulings in Case C-20/15 P Commission v Autogrill España and Case C-21/15 P Commission v Banco Santander and Santusa. 1332 Case T-399/11 Banco Santander and Santusa v Commission ECLI:EU:T:2014:938 at para 57. 1333 Case T-399/11 Banco Santander and Santusa v Commission ECLI:EU:T:2014:938 at para 60.

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In the authors’ view, the reasoning of the General Court is not in line with the consolidated jurisprudence and, more in general, with the principles applicable to the selectivity analysis of fiscal measures. First of all, in order to conclude that a scheme is selective it is not necessary to identify ex ante a category of undertakings which would benefit from it. However, it is essential to establish if the entities concerned by the derogation are in a similar legal and factual situation in light of the intrinsic objectives of the (reference) system. Second, the selectivity of a measure cannot depend on the identification of a link between the activity carried out by certain undertakings and the possibility for such undertakings of benefitting from the measure, while considering substantially irrelevant the legal consequences of specific identified economic operations. It will now be for the Court to clarify which elements have necessarily to be taken into account for the selectivity assessment.

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Another example where a specific set of rules within a given corporate tax system was considered relevant is the case concerning the German law easing fiscal carryforward of losses.1334 In those circumstances, the Commission considered that the system of reference was the German corporate income tax system and, in particular, the rules on fiscal loss carry-forward for companies subject to change in their shareholding. According to the German legal system, unused losses are forfeited either in total (if more than 50 per cent of the ownership rights are transferred to an acquirer) or pro rata (if within a period of five years more than 25 per cent and up to 50 per cent of the ownership rights is transferred). On that basis, the Commission concluded that a forfeiture of losses constituted the regular scenario, i.e. the system of reference, in case of a change of ownership of a company.

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P is a last example concerning the identification of a specific set of rules as reference system.1335 The case was a preliminary ruling which turned around one specific aspect of the Finnish income tax law. Under the Finnish legal system, companies are allowed to carry forward losses incurred from their business activity to subsequent taxable periods. That right to deduct losses is denied in the event of a change in the company’s ownership. However, if “special circumstances” occur, the tax authorities may derogate from that prohibition and authorise the loss offset even when the company’s ownership has changed. The “special circumstances” allowing for such derogation are identified by administrative acts. The national judge, referring the matter to the Court, expressed doubts as to the correct determination of the reference system. The referring judge, in fact, considered that the 1334 Commission Decision of 26.1.2011 in case C7/2010, on the German law on easing of fiscal carry-forward of losses, OJ L 235, 10.09.2011, p. 26, para 77. See above note n. 19. 1335 Case C-6/12 P ECLI:EU:C:2013:525.

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framework could be identified either using the general rules on carry-forward of losses or using the specific exclusion of the carry-forward in case of a change in ownership. In P the Court assumed quite a narrow reference framework and in its ruling considered that the normal regime should have been identified using the prohibition on the deduction of losses in the case of change of ownership. Thirdly, there may be cases where the (ordinary) corporate tax system comes into play but where it is not identified as the reference system, as was the case for tax incentives in favour of certain restructured banks approved by Italy.1336 The case concerned mainly a scheme, approved by the 2004 Finance Law, on the realignment for fiscal purposes of the capital gains deriving from specific restructuring operations. The Commission considered it to be incompatible aid. In that context, however, the Commission also analysed realignment schemes previously in force in Italy. More precisely, the Commission examined the realignments provided for by two laws of 2000 and 2001, which allowed the undertakings concerned with the reorganisations governed by both a law on reorganisation of certain public banks1337 and a general law for company reorganisations1338 to recognise the historical gains they had realised in such reorganisations by paying a substitute tax. That substitute tax was set at the same level for all undertakings. In that respect, the Commission concluded that the possibility to realign was a general tax measure and that the reduced substitute tax as opposed to the ordinary company tax applicable did not provide any competitive advantage to the companies concerned since it was applied under identical conditions to all undertakings choosing to recognise the historical gains they had realised.1339

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Finally, as regards the identification of the reference system, that step is undoubtedly easier in cases of self-standing levies or of taxes which do not form part of a wider taxation system, such as real estate taxes.1340 In such cases, the reference system is in principle the levy or the tax itself.1341

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1336 Commission Decision of 11.3.2008 in case C15/2007 on tax incentives in favour of certain restructured banks, OJ L 237, 04.09.2008, p. 70. 1337 Law n. 218/1990. 1338 Legislative Decree n. 358/1997. 1339 Commission Decision of 11.3.2008, in case C15/2007 on tax incentives in favour of certain restructured banks, OJ L 237, 04.09.2008, p. 70, recital 89. 1340 See Commission Decision of 19.12.2012, in case C26/2010, on the municipal real estate tax exemption granted to real estate used by none commercial entities for specific purposes, OJ L 166, 18.06.2013, p. 24. That decision has been challenged before the General Court (see Case T-219/13 Ferracci v Commission and Case T-220/13 Scuola Elementare Maria Montessori v Commission). See Case C-522/13 Navantia ECLI:EU:C:2014:2262 concerning a property tax to which in principle any owner or use of land was liable. The Court considered that the regime to which the tax belonged had to be regarded the statutory regime of reference for the purposes of determining whether the exemption measure at issue was selective (para 36). 1341 See Case T-210/02 RENV British Aggregates v Commission ECLI:EU:T:2012:110.

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In the end, to understand the concept of the reference system properly, one must recall the shift from a derogation approach to a comparison approach described earlier. In a comparison approach, the reference framework normally sets the frame for finding a legally and factually comparable group of companies, which is then de jure or de facto discriminated against by the measure in question.1342

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However, there may not necessarily be one reference framework, as the convergent views of the General Court and the Court of Justice in cases such as British Aggregates1343 and NOx1344 indicated. Instead, it is sufficient to find any one reference framework under which the measure constitutes an unequal treatment.

2.1.2 Derogation from the system of reference 2.725

As outlined in the draft Commission Notice on the notion of State aid, once the reference system has been identified, the next step consists of examining whether the measure at issue differentiates between undertakings which are in a similar factual and legal situation, in light of the intrinsic objective of the system.1345 That second step is also sometimes identified as the “comparability test”.

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In the past, there has been quite some controversy on whether the specific objective of the measure or the specific objective of the system should be considered for the purpose of the so-called “comparability test”. That dispute found its origin in the different formulations of the test used by the Union Courts and by the Commission itself. However, whether the objective of the measure or that of the system should be taken into account seems to depend largely on the measure under assessment (self-standing levy/measure which is part of a system).1346

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The starting point for examining that issue can be Adria-Wien Pipeline, which is one of the milestone judgments of the Court for fiscal State aid. On reference from the Austrian courts, the Court analysed a tax relief providing a rebate for energy taxes on natural gas and electricity only for undertakings whose activity 1342 See Drabbe, “The Test of Selectivity in State Aid Litigation: The Relevance of Drawing Internal or External Comparisons to identify the Reference Framework”, in Rust and Micheau (eds.), State Aid and Tax Law (Kluwer, 2013), 87 and 97. 1343 See Case T-210/02 RENV British Aggregates v Commission ECLI:EU:T:2012:110. 1344 See Case C-279/08 P Commission v Netherlands (“NOx”) ECLI:EU:C:2011:551. 1345 Para 142. 1346 On that specific issue, cf. Bartosch, “Is there a need for a rule of reason in European State aid Law? Or how to arrive at a coherent concept of material selectivity?” (2010) 47 CMLRev, at 729 et seq. (see in particular p. 741 et seq.). See also Drabbe, “The test of selectivity in State aid litigation: the relevance of drawing internal and external comparisons to identify the reference framework”, in Rust and Micheau (eds.), State aid and tax law (Kluwer Law International, 2013) at 96 et seq.

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was consisting primarily in the manufacturing of goods.1347 The Court took the view that the measure at issue was selective since undertakings manufacturing goods and undertakings providing services were in a comparable factual and legal situation “ in the light of the objective pursued by the measure in question”. Similarly, in NOx, concerning an emission trading scheme which allowed only large industrial companies to monetize the economic value of their emission reductions, the Court stated that “a State measure constitutes aid if it is such as to favour undertakings or the production of certain goods in comparison with other undertakings, which are in a legal and factual situation that is comparable in light of the objective pursued by the measure in question”.1348 In that respect, it should be noted that the case was about an environmental measure, which constituted a self-standing levy. It is thus not surprising that the Court took into account the objective of the measure for the purpose of the selectivity assessment. In that case, the Court held that the specific group of large undertakings enjoyed an advantage which was not available to other undertakings that had also to comply with restrictions regarding nitrate oxide emissions. Since the two categories of undertakings were subject to the same kind of obligations, they were considered to be in a comparable situation. The Court therefore confirmed that the measure was selective.

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This said, it must be noted that the analysis for the purposes of the comparability test tends to take into account the objective pursued by the system of reference. The importance of the objective pursued by the system indeed becomes crucial in the context of the comparability analysis, as suggested also by the Court in Region of Sardinia.1349 The importance of that factor was also stressed by the Court in Paint Graphos. In that case, after having established the corporate tax regime as the reference system, the Court indicated that it was necessary to determine if the corporate tax exemptions granted to producers’ and workers’ cooperatives were liable to favour certain undertakings or the production of certain goods by comparison with other undertakings which were in a comparable factual and legal situation, in the light of the objective pursued by the corporation tax regime, namely the taxation of company profits.1350 In Paint Graphos

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1347 Case C-143/99 Adria Wien Pipeline and Wietersdorfer & Peggauer Zementwerke ECLI:EU:C:2001:598, para 41. 1348 Case C-279/08 Commission v Netherlands (“NOx”) ECLI:EU:C:2011:551, paras 34 and 41. 1349 Case C-169/08 Presidente del Consiglio dei Ministri ECLI:EU:C:2009:709. For a comment on that case, see Luja, “Revisiting the balance between aid, selectivity and selective aid in respect of taxes and special levies”, EStAL 2010, 161 et seq. 1350 Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:55, para 54. For a more detailed analysis of that judgment see Tomat, “The preliminary ruling of the Court of Justice on preferential taxation of cooperatives and State aid rules”, EStAL 2012, 462 et seq.

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the Court recognised that cooperative societies conform to particular operating principles which clearly distinguish them from other economic operators. Those operating principles are mainly an expression of the principle of primacy of the individual, giving rise to a number of specific rules applicable to cooperatives (rules on membership and expulsion; rules on the distribution of assets and reserves upon winding-up of the cooperative; “one man one vote” rule; rules on mutuality, i.e. activities run for the mutual benefit of members). Given the peculiar characteristic of cooperatives, the Court concluded that in principle producers’ and workers’ cooperatives cannot be regarded as being in a comparable legal and factual situation to that of commercial companies provided however a number of conditions are fulfilled. In the context of the preliminary ruling, the Court identified four cumulative conditions that must be fulfilled to consider the preferential tax treatment laid down for producers’ and workers’ cooperatives as falling outside the scope of application of State aid rules. More precisely, the Court indicated that producers’ and workers’ cooperatives can be regarded as not being in a comparable legal and factual situation to that of commercial companies when:

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–

they act in the economic interest of their members;

–

their relations with members are not purely commercial but personal and individual;

–

the members are actively involved in the running of the business; and

–

the members are entitled to an equitable distribution of the results of the cooperative’s economic performance.

In Paint Graphos the Court indicated that the specific operating principles governing cooperatives clearly lead to them being distinguished from other economic operators. However, in its conclusion, when identifying the four cumulative conditions which must be fulfilled, the Court referred specifically only to producers’ and workers’ cooperatives. The reason for that narrow approach is given by the limits which the Court itself decided to set, when reformulating the preliminary questions raised by the national judge.1351 It remains therefore to be seen to which extent the principles laid down by the Court can be applied to other cooperative societies.

1351 See Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:55 paras 29 et seq.; see in particular para 38 for the reformulation of the preliminary questions.

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It is interesting to note that, with reference to the “comparability test”, Paint Graphos substantially endorsed the approach already followed by the Commission and the EFTA Surveillance Authority in two State aid cases which dealt with the preferential taxation of cooperatives: the Commission decision on Spanish agricultural cooperatives1352 and the EFTA Surveillance Authority decision on Norwegian cooperatives.1353 In Paint Graphos the Court substantially made an implicit reference to that latter decision, where the EFTA Surveillance Authority had outlined the characteristics of “pure mutual cooperatives”. According to the EFTA Surveillance Authority, those cooperatives are considered - by definition - to be in a different legal and factual situation to that of profitmaking companies. The same reference to “pure mutual cooperatives” is contained in the Commission Decision on Spanish agricultural cooperatives. That definition of “pure mutual cooperative” was not contained in earlier Commission documents, namely the Commission Communication on the promotion of cooperative societies in Europe1354 and the Council Regulation on the European Cooperative Society.1355 However, both the Commission and the EFTA Surveillance Authority referred to that concept, which could be substantially identified with the definition of cooperatives that “truly pursue an objective based on mutuality”, used by the Court in Paint Graphos.

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The application of the “comparability test” raised and still raises problematic issues also with reference to a number of entities, to which specific legislation and principles apply (such as non-profit entities). Establishing whether certain entities are in a comparable legal and factual situation in light of the intrinsic objective of the system is far from being an easy exercise. In the Commission’s decisional practice on non-profit entities, one can note the Italian case concerning the municipal real estate tax exemption granted to real estate used by noncommercial entities for specific purposes.1356 There the Commission considered that, with reference to the municipal real estate tax in force until 31.12.2011, the non-commercial entities concerned were in a comparable legal and factual situation to that of other undertakings. The municipal real estate tax at issue had to be paid by every person in possession of real estate, irrespective of the use

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1352 Commission Decision of 15.12.2009 in case C22/2001 on support measures implemented by Spain in the agricultural sector following the increase in fuel prices, OJ L 235, 04.09.2010, p. 1. 1353 Decision N. 341/09/COL of 23.7.2009, OJ L 158, 16.06.2011, p. 39 (Section II, 2.3.1). 1354 Communication from the Commission to the Council and the European Parliament, the European Economic and Social Committee and the Committee of the Regions on the promotion of co-operative societies in Europe, COM(2004) 18 final. 1355 Council Regulation (EC) n. 1435/2003 on the European Cooperative Society (ECS), OJ L 207, 18.08.2003, p. 1. 1356 Commission Decision of 19.12.2012, in case C26/2010, on the municipal real estate tax exemption granted to real estate used by none commercial entities for specific purposes, OJ L 166, 18.06.2013, p. 24.

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made of it. Neither the fact that those non-commercial entities had to respect specific principles according to the Italian law nor the fact that they were subject to specific legislation led the Commission to conclude that they could have been considered in a different legal and factual situation to that of other undertakings, in view of the objectives pursued by the municipal real estate tax system.

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In addition, particular attention should be paid to cases where it is considered that the analysis of a measure concerning certain entities has to be done either in relation to a specific activity or to similar (comparable) categories of income.1357 In the case of the Dutch groepsrentebox1358 the Commission considered that the entities to which the measure was applied were in a different legal and factual situation (to that of other entities) in relation to a specific activity. In the Netherlands, the corporation tax generally applied to company revenues was set at a rate of 25.5 per cent. The group interest box measure provided for a different tax treatment for certain intra-group interest. Interest paid and received in the context of intra-group financing was not subject to the standard corporate tax rate of 25.5 per cent. The positive balance between interest received and paid in the context of intra-group financing transactions was taxed in a ‘group interest box’ at the rate of 5 per cent, instead of the 25.5 per cent. If the balance of interest received and paid was negative it would have been deductible, but at the reduced rate of 5 per cent, instead of the 25.5 per cent standard rate. After having concluded that the assessment of the scheme should have been done at the level of the individual companies, the Commission considered whether an advantage was granted by the measure in question. In that respect, the Commission indicated that it was necessary to draw a distinction between different situations at the level of the individual companies. First of all, any taxpayer in the Netherlands involved in a debt-financing transaction with unrelated companies was treated in exactly the same manner, and taxed at the same rate (25.5 per cent), including companies that were part of a group. Secondly, when a company obtained a loan from a related company, it actually suffered a less advantageous tax treatment than a company engaged in a loan relationship with a non-related company (deduction at only 5 per cent). Thirdly — and this was the only situation where there may have been a tax advantage — a company providing a loan to a related company was taxed on the ensuing interest payments at a rate lower than the rate charged on a transaction with a non-related company. The Com1357 See as an example Commission Decision of 19.7.2006 in case C 3/2006, on the fiscal regime applicable to the 1929 holdings in Luxembourg, OJ L 366, 21.12.2006, p. 47. 1358 Commission Decision of 8.7.2009 in case C4/2007, on the groepsrentebox scheme, OJ L 288, 04.11.2009, p. 26. For a comment on that case, see Szudoczky and van de Streek, “Revisiting the Dutch Interest Box under EU State aid rules and the Code of Conduct: when a “disparity” is selective and harmful”, Intertax 2010, vol. 38, 260 et seq.

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mission indicated however that, in terms of the measure’s consequences, the advantage conferred on a company providing a loan to a related company could not be considered discriminatory, since a loan to a related company could not be compared with a loan to an unrelated company. With respect to debt-financing activities, related companies were not deemed to be in a legal and factual situation comparable to that of unrelated companies which seek for example financing from a bank.1359 The reason was that related companies, unlike unrelated companies, are not engaged in a merely commercial transaction when they try to obtain loan or equity financing within the group. The parent and the subsidiary share the same interests, which is not the case in a commercial transaction with a third-party provider of finance, where each party tries to maximise its profits at the expense of the other.1360 However, in the authors’ view the observation that related companies are not in a legal and factual situation comparable to that of unrelated companies cannot be generalised when it comes to the determination of the tax base of related companies. A final issue concerns the question of the formal requirements of a derogation. The landmark case here is the Gibraltar corporate tax judgment, in which the Court adhered to the effectiveness principle of State aid control and dismissed any attempts of formalistic reversed engineering.1361

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The background to that judgment arose in 2002, when the United Kingdom notified a reform of the Gibraltarian corporate tax system. That tax reform concerned inter alia the repeal of the previous tax system, which was damned by the Code of Conduct as it had allowed the exemption of off shore companies identified inter alia as exempt companies and its replacement by a system which was still designed so as to not tax off shore companies. The new system, applicable to all companies located in Gibraltar, provided for a company registration fee, a payroll tax and a business property occupation tax (BOPT), these last two limited to 15 per cent of realised profits. In 2004, the Commission took the view that the proposed tax measures were both regionally and materially selective.1362

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1359 Commission Decision of 8.7.2009 in case C4/2007 on the groepsrentebox scheme, OJ L 288, 04.11.2009, p. 26, recitals 102 and 103. See also Commission Decision of 28.10. 2009 in case C10/2007, on tax deductions for intra-group interests in Hungary, OJ L 42, 17.02.2010, p. 3. 1360 That decision has been criticised in literature for having ignored the true aim of the system, which was to attract or stop from relocating group financing activities from the Netherlands, see for example Kemmeren, “Group Interest Tax Regimes and State Aid”, EC Tax Review, 2010-4, p. 46. 1361 Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI: EU:C:2011:732; see for comments Rossi-Maccanico, Gibraltar: Beyond the Pillars of Hercules of Selectivity , EStAL 2012, 443. 1362 Commission Decision of 30.03.2004 on State aid C66/2002, Gibraltar government corporation tax reform, OJ L 85, 02.04.2005, p. 1.

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On material selectivity, the Commission decided that the payroll tax and the BOPT were favourable to offshore undertakings which had no physical presence and employees in Gibraltar and thus did not need to pay corporation tax. In 2008, the General Court annulled the Commission’s decision.1363 As regards material selectivity the General Court, after having described the analytical framework for assessing selectivity,1364 concluded that the Commission had breached its duty to identify the normal regime under the notified system. In the absence of identification of the common regime, the Commission could not “establish to the requisite legal standard that certain elements of the notified tax system constitute derogations and are therefore prima facie selective (...)”.1365

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In 2011, the Court of Justice set aside the judgment of the General Court. The Court of Justice disagreed with the General Court in finding that the proposed tax reform did not confer selective advantages on offshore companies. It first dismissed the formalistic approach of the General Court, as the latter had disregarded the possible effects of the measures and a priori excluded that non taxation of offshore companies could result in a selective advantage: “Such an interpretation of the selectivity criterion would require, [...] that in order for a tax system to be classifiable as selective – it must be designed in accordance with a certain regulatory technique; the consequence of this would be that national tax rules fall from the outset outside the scope of control of State aid merely because they were adopted under a different regulatory technique although they produce the same effects in law and/or in fact”.1366 Instead the Court confirmed that “those considerations apply particularly with regard to a tax system which, (...), achieves the same result by adjusting and combining the tax rules in such a way that their very application results in a different tax burden for different undertakings”.1367

1363 Joined Cases T-211/04 and T-215/04 Government of Gibraltar and UK v Commission ECLI:EU:T:2008: 595. 1364 Joined Cases T-211/04 and T-215/04 Government of Gibraltar and UK v Commission ECLI:EU:T:2008: 595, para 143. The General Court held that the Commission must “ begin by identifying and examining the common or “normal” regime under the tax system (...) constituting the relevant reference framework” and then “assess and determine whether any advantage granted by the tax measure at issue may be selective (...)”. 1365 Joined Cases T-211/04 and T-215/04 Government of Gibraltar and UK v Commission ECLI:EU:T:2008: 595, para 70. 1366 Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI: EU:C:2011:732, para 92. 1367 Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI: EU:C:2011:732, para 93.

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The Court stressed that “the fact that offshore companies are not taxed is not a random consequence of the regime at issue, but the inevitable consequence of the fact that the bases of assessment are specifically designed so that offshore companies, which by their nature have no employees and do not occupy business premises, have no tax base under the bases of assessment adopted in the proposed tax reform”.1368

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The Court thus prevented a clear case of reverse engineering. In fact it took the stated intention of the legislator to tax the profits of all companies and constructed the widest possible system, the system for taxing corporates, as reference system. It then assessed whether the system itself internally had the effect of differentiating between operators. To that end the assessment boiled down to characterising the recipient undertakings, by virtue of the properties which were specific to them, as a privileged category of the system.

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In conclusion, to establish a derogation from the reference system requires a comparison to be made between companies in a similar legal and factual situation, which will be taxed differently. However, as the previous section shows, that comparison may be difficult to apply and very much depends on the specific reference system identified.

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2.1.3 Justification by the nature or general scheme of the system of reference A measure which derogates from the reference system and thus is considered prima facie selective, may still turn out to be non-selective if it is justified by the nature or general scheme of the system.

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A first mention of that possible justification of a measure by the logic of the system was already contained as far back as 1974 in Italian textiles. After many years of silence, the Court revamped and further developed that notion,1369 which also found an explicit mention in the Commission Notice of 1998.1370

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When establishing if a measure is justified by the nature or general scheme of the system, one should not forget that the concept should be interpreted narrowly

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1368 Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI: EU:C:2011:732, para 106. 1369 Case C-75/97 Belgium v Commission ECLI:EU:C:1999:31, para 33; Case C-487/06 P British Aggregates Association v Commission, ECLI:EU:C:2008:757, para 76; Case T-211/05 Italy v Commission ECLI:EU:T:2009:304, para 117; Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 65 et seq. 1370 See para 23 et seq. of the Commission Notice on direct business taxation.

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since it is a derogation from the rules of the Treaty. So far, both the Commission and the Union Courts have given a very strict interpretation of that concept and have considered a measure justified by the nature of the system in a limited number of cases.

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The Court has accepted justifications based on the principle of fiscal neutrality, the need to tackle tax avoidance,1371 the need to take into account specific accounting requirements, the need to consider the peculiar nature of a sector or activity or the redistributive purpose of a tax.1372

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It should be remembered also that the burden of proof for the justification based on the nature and logic of the system lies within the Member State.1373

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A measure is considered justified by the nature or general scheme of the system of reference if it derives directly from the intrinsic basic or guiding principles of the reference system or where it is the result of inherent mechanisms necessary for the functioning and effectiveness of the system.1374 In that context, it is important to distinguish between the objectives attributed to a particular (tax) regime which are extrinsic to it and the mechanisms inherent in the (tax) system itself which are necessary for the achievement of such objectives.1375 External policy objectives which are not inherent to the system cannot be relied upon in the third step of the selectivity test.1376

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Notwithstanding the difficulties that arise when assessing if a measure can be justified by the nature and general scheme of the system, in a number of cases the Commission’s decisional practice has accepted such justifications.

1371 Case C-308/01 GIL Insurance and others ECLI:EU:C:2004:252. 1372 Joined Cases T-92/00 and T-103/00 Diputación Foral de Álava v Commission ECLI:EU:T:2002:61, para 60. 1373 Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom ECLI:EU:C:2011:732, para 146; Case C-159/01 Netherlands v Commission ECLI:EU:C:2004:246, para 43. 1374 See for example Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 69. See also the recent judgment in Case C-522/13 Navantia ECLI:EU:C:2014:2262, at para 43. 1375 See Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 69; Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, para. 81. 1376 See Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, paras 69 and 70; Case C-88/03 Portugal v Commission ECLI:EU:C:2006:511, para. 81; Case C-279/08 P Commission v Netherlands (“NOx”) ECLI:EU:C:2011:551; Case C-487/06 P British Aggregates v Commission ECLI:EU:C:2008:757; and Case C-500/01 Commission v Spain ECLI:EU:C:2004:8, paras 124 to 128.

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In an Italian case concerning tax incentives in favour of certain restructured banks,1377 the Commission analysed the realignments schemes provided by two laws of 2000 and 2001, which allowed the undertakings concerned to recognise the historical gains realised by paying a substitute tax. That substitute tax was set at the same level for all undertakings. In that respect, the Commission concluded that the possibility to realign was a general tax measure justified by the logic of the tax system.1378 In the same vein, the non-recognition of a certain percentage of the capital gains realised in the transactions concerned was not considered State aid. In fact, the fiscal values of the assets exchanged remained unaltered, so that the fiscal gains did not materialise and no tax advantage was granted. As the realised gains were frozen, the related earning could not be distributed and the correspondingly increased value of the assets could not be depreciated, amortised or otherwise deducted from the taxable income of the companies resulting from such transactions. On those grounds, the Commission concluded that the measure was justified by the inherent logic of the tax system and did not constitute State aid.1379 On the other hand, the realignment scheme provided for by the 2004 Finance Law was not considered to be justified by the nature of the system. The Commission considered that the latter scheme did not represent an adaptation of the general system to the distinctive feature of banking but rather a specific advantage having the effect of improving competitiveness of certain undertakings, i.e. the banks concerned by specific reorganisations.1380 Therefore, as confirmed also by the Court,1381 that scheme could not be considered justified by the nature of the tax system.

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Another example of a measure which was considered justified by the logic of the system can be found in the Commission decision on measures granted by Italy in the form of tax exemptions and subsidised loans to public utilities with a majority public capital holding.1382 In that context, the Commission analysed also a measure providing that the transfer of assets linked to the conversion of special municipal undertakings into joint stock companies set up under two national

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1377 Commission Decision of 11.3.2008 in case C 15/2007, on tax incentives in favour of certain restructured banks, OJ L 237, 04.09.2008, p. 70. 1378 Commission Decision of 11.3.2008 in case C 15/2007, on tax incentives in favour of certain restructured banks, OJ L 237, 04.09.2008, p. 70, para 89. 1379 Commission Decision of 11.3.2008 in case C 15/2007, on tax incentives in favour of certain restructured banks, OJ L 237, 04.09.2008, p. 70, para 86. 1380 Commission Decision of 11.3.2008 in case C 15/2007, on tax incentives in favour of certain restructured banks, OJ L 237 04.09.2008, p. 70, para 105. 1381 Case C-452/10 P BNP Paribas and BNL v Commission ECLI:EU:C:2012:366. 1382 Commission Decision of 5.6.2002, in case C27/1999, on State aid granted by Italy in the form of tax exemptions and subsidised loans to public utilities with a majority public capital holding, OJ L 77, 24.03.2003, p. 21.

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laws1383 was not subject to registration tax, stamp tax, mortgage tax and in general to any sort of transfer tax. The Italian authorities had acknowledged that the transfer tax exemption was a special tax regime applicable only to the conversion of municipal or special undertakings into joint stock companies. Transfer taxes normally apply to the creation of a new economic entity or to the transfer of assets between different economic entities. However, when a municipal undertaking was converted into a joint stock company, in reality no new economic entity was created but the same economic entity was merely operating under a different legal form. In that case, since the Italian legal system contained no general provision on the conversion of a municipal undertaking into a joint stock company, the conversion had to take place by “technically” winding up the municipal undertaking and setting up a “new” joint stock company. The upshot was that a new economic entity was apparently created. It was thus justifiable that the normal tax rules on transfers of assets for the setting-up of a new economic entity should not be applied in that case.1384 Moreover, the simple conversion of the legal form of companies is governed by the principle of tax neutrality because the conversion in itself is not an indication of an increase in income or in the capacity to produce income. Therefore, the transfer tax exemption would be a specific application of that principle. On those grounds, the Commission concluded that the reasons for the exemption were consistent with the proper functioning and efficiency of the tax system. The exemption was based on the principle of tax neutrality, which is a basic principle of the tax system and the measure in question could therefore be considered justified by the nature or general scheme of the system.1385

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As regards the discipline applicable to undertakings for collective investments, it has been considered that a tax regime designed for such entities based on the principle of fiscal transparency at the level of the intermediary vehicle may constitute a possible justification under the logic of the tax system of reference. Such a ground of justification exists if the prevention of double economic taxation constitutes an inherent principle of the tax system assessed.1386 1383 The national laws concerned were laws n. 142/90 and n. 498/92. 1384 Commission Decision of 5.6.2002 in case C 27/1999, on State aid granted by Italy in the form of tax exemptions and subsidised loans to public utilities with a majority public capital holding, OJ L 77, 24.03.2003, p. 21, recital 78. 1385 Commission Decision of 5.6.2002 in case C 27/1999, on State aid granted by Italy in the form of tax exemptions and subsidised loans to public utilities with a majority public capital holding, OJ L 77, 24.03.2003, p. 21, recital 81. 1386 See Commission Decision of 12.5.2010 in case N 131/2009, on the Finnish Residential Real Estate Investment Trust (REIT) scheme, OJ L 131, 22.05.2012, p.7, recital 33 et seq. On undertakings for collective investments, see also Case T-445/05 Associazione Italiana del risparmio gestito and Fineco Asset Management v Commission ECLI:EU:T:2009:50, para 78 et seq. (reference Commission Decision of 6.9.2005, OJ

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There are however numerous measures which were not considered justified by the nature and the general scheme of the system. For example, in Unicredito, which concerned an Italian law providing inter alia tax advantages to banks which merged or engaged in restructuring operations, the Court did not consider the measure justified by the nature and general scheme of the system.1387 In that case, the Court confirmed that the measure was selective since it only applied to the banking sector and only to certain undertakings carrying out certain activities within that sector. Therefore, the measure was held to be selective not only in relation to other economic sectors but also within the banking sector itself. The tax reduction was not considered justified by the nature and overall structure of the tax system in question since it was not an adaptation of the general scheme to the particular characteristics of banking undertakings. Since the measure had been conceived expressly as a means of improving the competitiveness of certain undertakings at a certain stage in the development of the sector, the Court considered that that aim could not render the measure justified by the nature and logic of the system.

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With specific reference to the non-profit sector, in Cassa di Risparmio di Firenze the Court clarified that a tax reduction conferred on – amongst others – banking foundations could not be justified by the logic of the system. In that case, the tax advantage was accorded on the basis of the undertaking’s legal form, i.e. a legal person governed by public law or a foundation, and of the sectors in which that undertaking carried on its activities. Therefore, the Court concluded that the tax advantage at issue derogated from the ordinary tax regime without being justified by the nature or scheme of the tax system of which it formed part. The derogation was not based on the measure’s logic or the technique of taxation, but resulted from the legislator’s objective of financially favouring organisations regarded as socially deserving.1388

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In Paint Graphos, the Court - endorsing the Commission’s position - indicated when a preferential tax treatment for cooperatives may or may not be considered justified by the nature of the system. More precisely, it was considered that a (corporate) tax exemption for cooperatives may be justified, provided that tax is levied on the individual members.1389

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L 268, 27.09.2006, p. 1). 1387 Case C-148/04 Unicredito Italiano ECLI:EU:C:2005:774, para 51. See also Case C-66/02 Italy v Commission ECLI:EU:C:2005:768, para. 101. 1388 Case C-222/04 Cassa di Risparmio di Firenze and others ECLI:EU:C:2006:8, paras 136 and 137. 1389 Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 71.

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On the other hand, no valid justification can be found for a national measure if it provides that profits from trade with third parties who are not members of the cooperative are exempt from tax or that sums paid to such parties by way of remuneration may be deducted.1390

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It is interesting to note that in Paint Graphos the Court seems to have added two additional conditions which should be fulfilled for considering a measure justified by the nature of the system. More precisely, the Court indicated that the measure not only must form an inherent part of the essential principles of the reference tax system but it must also comply with the principles of consistency and proportionality.1391 In other words, firstly, it is necessary for the Member State concerned to introduce and apply appropriate control and monitoring procedures to ensure that specific advantageous tax measures are consistent with the logic of the system and to prevent economic entities from choosing a particular legal form for the sole purpose of taking advantage of the tax benefits provided for that kind of undertaking. Secondly, it is also necessary to ensure that the tax benefits are consistent with the principle of proportionality and do not go beyond what is necessary, in that the legitimate objective pursued could not be attained by less far-reaching measures.

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The application of both principles at the level of the justification by the logic of the system represents a novelty in the reasoning of the Court. Although the Court did not explicitly add additional conditions that have to be fulfilled to consider a measure justified by the logic of the system, it certainly increased the requirements for the burden of proof on behalf of the Member State coming forward with a justification. Moreover, in the latest Gibraltar case the Commission has already demonstrated that it will confront Member States with that development of the rule of reason, where it raised doubts on whether the 2011 tax ruling practice was based on a serious scrutiny of the tax rulings.1392 In view of the current focus on international tax planning schemes it will be interesting to see if the application of the proportionality criterion might also be employed to examine whether tax neutrality measures could not be attained by less farreaching measures.

1390 Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 72. 1391 Joined Cases C-78/08 to C-80/08 Paint Graphos and others ECLI:EU:C:2011:550, para 73 et seq. 1392 For a recent example see Commission Decision of 1.10.2014 in case SA 34914, not yet published, concerning the tax ruling practice in Gibraltar.

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A last issue is if a justification is also possible in case of de facto selectivity. Given that such a treatment does not follow from the rule itself but rather its unintended application, it is doubtful. Pragmatically, that issue will most likely be solved as in the Gibraltar corporate tax judgment, where the Court did not consider any justification. No such justification had been submitted by the Member State, implying that it actually did not exist.

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To conclude, the recent changes in the assessment of the “comparison approach” have made clear that such a comparison may solely be based on the effects of the measure and leave no room for an assessment of the objective. The measure’s objective is left for the assessment of the third criterion which thereby establishes the true significance of the three-step test. However, the Commission and the Union Courts have so far managed to keep the magnitude of that criterion limited to true fiscal considerations and to the inherent principles of the tax system. Recent jurisprudence has reiterated that criteria unrelated to the tax system, such as in particular maintaining employment,1393 have no room in a corporate tax context; they can only be taken into account in the context of the compatibility of the measure. In a context of property taxes, where an exemption was granted to immovable property owned by the State and used for purpose of national defence, the Court held that such exemption did not appear to be directly related to the objectives of the property tax itself.1394

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It remains to be seen how the Commission practice and the jurisprudence of the Court will further develop the justification test. In fact, notwithstanding the limitations intrinsic to the derogatory nature of the justification criterion, interesting developments may be expected.

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1393 Case C-6/12 P ECLI:EU:C:2013:525, para 27. 1394 Case C-522/13 Navantia ECLI:EU:C:2014:2262, at para 44.

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PART 2 – The concept of State aid Chapter 15 – Application to specific instrument – state guarantees Barbara Cattrysse and Valérie Guigue-Koeppen

Chapter 15 Application to specific instrument – state guarantees1395

1.

Introduction

The issue of the treatment of guarantees under State aid rules in the EU was first addressed by the Commission through two letters on State guarantees sent to Member States in 19891396 and a communication adopted in 19931397, all of them addressing partly, among other issues, the subject of guarantees.

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A notice adopted by the Commission in 20001398 replaced those texts so as to give Member States more detailed explanations about the principles on which the Commission intended to base its interpretation of what are now Articles 107 and 109 of the Treaty and their application to State guarantees.

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The 2000 Notice was replaced by a revised Notice adopted by the Commission in 2008, hereafter referred to as “the Notice”.1399 One of the major objectives of the revision was, in the framework of the State Aid Action Plan, to set out clear methodologies to calculate the aid element in a public guarantee and provide simplified rules for SMEs.

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1395 This chapter draws from the corresponding chapter in the first edition of this book. The authors would like to thank Pascal Schloesslen for being able to build on his work. 1396 Commission letters to the Member States, SG(89) D/4328 of 5 April 1989 and SG(89) D/12772 of 12 October 1989. 1397 Commission Communication to the Member States on the application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector, OJ C 307, 13.11.1993, p. 3, points 38.1 and 38.2. 1398 Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 71, 11.03.2000, p. 14. 1399 Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 155, 20.06.2008, p. 10.

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The Notice has not been reviewed in the framework of the State Aid Modernisation. However other texts relevant for the assessment of whether a guarantee involves State aid have been proposed or revised, in particular the draft Notice on the Notion of Aid1400 and the de minimis regulations.1401 As regards the draft Notice on the Notion of Aid, although it indicates when a public guarantee may be free of aid, it also contains a reference to the Guarantee Notice where further specific and detailed conditions are laid down, and explicitly mentions that it does not replace the Guarantee Notice.

2.

Scope of the Notice

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A State guarantee enables a firm to obtain better financial terms, for instance for a loan, than those normally available on financial markets as the guarantee can be seen as a collateral. It can thus facilitate the setting up of new businesses or enable businesses to raise money in order to pursue new activities. It may also allow the company to simply remain active instead of being eliminated or restructured. If a State guarantee turns out to contain an aid element, such aid can therefore easily result in distortions of competition.

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The Notice covers all forms of guarantees except export credit guarantees, an issue which is addressed in detail in Part 3, Chapter 22.

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In line with the general approach under State aid rules, the Notice is without prejudice to the system of ownership in Member States and applies to State aid granted in the form of guarantees by States or through State resources. It also means that any guarantee granted directly by the State, i.e. by central, regional or local authorities, and any guarantee granted by undertakings under the dominant influence of public authorities may constitute State aid.

1400 Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU. See the version in public consultation at: http://ec.europa.eu/competition/consultations/2014_state_aid_notion/index_ en.html 1401 Commission regulation (EU) No 1407/2013 of 18 December 2013 on the application of Article 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1, Commission Regulation (EU) No 1408/2013 on the application of Article 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agricultural sector, OJ L 352, 24.12.2013, p. 9, Commission Regulation (EU) No 717/2014 on the application of Article 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the fishery and aquaculture sector, OJ L 190, 28.06.2014, p. 45, Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest, OJ L 114, 26.04.2012, p. 8.

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The purpose of the Notice is to describe the conditions under which guarantees granted with public support constitute State aid. It is worth pointing out that it only contains rules on the presence of aid under Article 107(1) of the Treaty and, when the public guarantee does contain aid, on how to quantify the aid element.

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The Notice does not refer to the compatibility of the aid, which is therefore determined by other State aid instruments. As a result, a guarantee or a guarantee scheme containing State aid may be compatible aid because it is covered by a Block Exemption Regulation or is authorised by the Commission if the relevant aid intensity and the other conditions of compatibility under other State aid frameworks or guidelines, or possibly the Treaty itself, are met.

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3.

Common difficulties in relation to guarantees

Guarantees are not always very transparent for various reasons: (1) the evaluation of a guarantee has to be made ex ante; (2) there is a wide range of guarantees which exist, with different risks; (3) the guarantee may be recorded off balance sheet both for the guarantor and the beneficiary, which may lead to a lack of transparency of the existence of the guarantee; and (4) the definition of the aid element may not be in all cases consistent with that of other types of aid. Each of those points will be developed below in more detail.

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Despite these difficulties, guarantees also have advantages when they are considered in terms of the State aid discipline: (1) guarantees normally use less public resources, at least in most cases, than grants or subsidised loans; (2) due to the existence of another underlying transaction, typically a bank loan, they also include a significant use of private funding, as well as a certain level of scrutiny from the private operator, which facilitates the objective of reducing aid to the minimum. Guarantees are also typically used to foster the funding of SMEs which have frequently low equity and low collaterals to offer for bank borrowings and which bear higher transaction costs as a percentage of the funds raised than large undertakings. Guarantees are therefore typically an instrument that is very useful in supporting SMEs’ access to finance.

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3.1 The evaluation has to be made ex-ante As for all State measures which may involve aid, the evaluation of a guarantee or a guarantee scheme with respect to the existence, and possibly quantification of aid,

2.771

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will have to be made when the aid is granted.1402 However, such ex ante evaluation of guarantees raises more challenges than in the case of, for instance, a grant for which the existence of aid is rather obvious and whose amount is normally affected only by the aided operation, for instance the volume of investments performed.

2.772

When a guarantee is at stake, its exact value at a certain date depends almost only on the probability of future events. They include the probability that a borrower will default and that as a consequence the guarantee will be called, as well as the extent of the called guarantee if such an event arises, which in turn depends on the existence of collaterals. Finally, when a guarantee scheme is at stake and has to be defined by the Commission either as aid or non-aid, the difference between the risk profiles of the actual beneficiaries of the guarantees compared to that of the anticipated beneficiaries may also have significant impact on the assessment.

2.773

One of the consequences of such a line is that no valuation is normally possible for unlimited guarantees where it is not possible to determine either the date on which the guarantee can be called or its extent.

3.2 There are numerous types of guarantees 2.774

In their most common form, guarantees are associated with a loan or other financial obligation to be contracted by a borrower with a lender. However many different forms of guarantees may exist, depending on their legal basis, the type of transaction covered, their duration, etc. A non-exhaustive list of non-standard guarantees includes: –

general guarantees i.e. guarantees provided to undertakings as opposed to guarantees linked to a specific transaction, which may be a loan, an equity intervention, etc.,

–

guarantees provided by a specific instrument as opposed to implied guarantees such as guarantees linked to the statute of the undertaking,

–

guarantees provided directly as opposed to counter-guarantees provided to a first-level guarantor,

–

unlimited guarantees as opposed to guarantees limited in amount and/or time,

1402 Joined Cases T-204/97 and T-270/97 EPAC v Commission ECLI:EU:T:2000:148.

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–

fully enforceable guarantees originating from a contractual source (such as formal contracts or letters of comfort1403) or another legal source as opposed to guarantees whose form is far less visible (such as side letters or oral commitments1404). The latter group contains guarantees with differing levels of comfort and traceability and their validity may be doubtful.

3.3 The lack of traceability leads to suspicion In case of a proper and duly evidenced guarantee, an accounting entry will normally take place, although usually in an “off balance sheet caption” which may not be easily identifiable for a non-expert reader. However, for less visible forms of guarantees such as side letters, it is highly likely that no proper accounting entry at all has been made for those instruments, precisely as their purpose is often to be disconnected from the underlying transaction. Neither the guarantor nor the beneficiary is likely to want an appropriate legal or accounting recording of such a guarantee to appear. The very poor traceability of such a guarantee will most probably only be revealed after significant audit steps and, as a result, third parties will not receive proper information. It is to be noted though that with the view of rendering such information more transparent, the Transparency Directive requires that public undertakings disclose either in their annual report and annual accounts, or report to the Commission, the guarantees they received from public authorities.1405

2.775

3.4 The treatment of guarantees constituting aid differs from those of other types of aid The issuance of guarantees is, as for loans, an economic activity which may be performed in line with the conduct of the market economy operator principle (“MEO principle or MEOP”), and as such would be free of aid. Guarantees can of course also constitute aid when not in line with the MEO principle, provided the other requirements of Article 107(1) of the Treaty are met.

2.776

1403 The Commission has raised the issue of a letter of comfort for instance in the opening of procedure relating to DHL Leipzig (Commission decision of 22.11.2006 (C 48/2006 ex N227/2006), OJ C 48, 02.03.2007, p. 7). 1404 That line was followed in the France Telecom-case (Commission Decision 2006/621/EC of 2.8.2004, OJ L 257, 20.09.2006, p. 11); the conclusion taken was that the oral support provided had helped the company in difficulty to find financial support; given the novelty of the reasoning, no recovery was ordered. 1405 Article 8(3)(d) of Commission Directive 2006/111/EC on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L 318, 17.11.2006, p. 17.

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2.777

The basic evaluation criteria of guarantees have therefore to be linked to the comparison with market conditions. Such a comparison requires viewing the guarantee from the perspective of the guarantor in order to compare the action of a public guarantor with that of a private one. To do so, it is necessary to consider all the economic conditions that a private guarantor would have taken into account. If on the basis of this analysis a guarantee is deemed to contain aid, the question is what the valid benchmark is for calculating the economic advantage transferred to the final beneficiary. That economic advantage constitutes the aid element. This is specifically important for guarantee schemes and will be developed further in section 5.2 below.

4. 2.778

As set out above, the aid beneficiary is usually the borrower. However, it cannot be ruled out that, under certain circumstances, the lender will also benefit from the aid. Such aid to the lender can arise, for example, where a guaranteed loan is used to pay back another, non-guaranteed loan to the same credit institution. Similarly if a guarantee is granted after a loan agreement is concluded between a guarantor and a lender, the initial risk analysis and pricing is affected. In such a case, the lender may also benefit from the aid in so far as the security of the loan is increased while all other parameters of the operation are unchanged.

5. 2.779

The beneficiary of aid

Guarantees not constituting aid

The key question to be addressed when confronted with an individual guarantee or a guarantee scheme is if it constitutes aid or whether it is free of aid. Leaving aside the issue of State resources and imputability to the State,1406 effects on trade and possible distortion of competition, the status of a guarantee as aid mainly turns on whether the guarantee provides an advantage to its beneficiary. That issue in turn requires the application of the MEO principle as formulated in the case law of the Union courts.1407 As with other transactions, the relevant question is therefore if the guarantee has been obtained and was paid for on market terms, in which case no advantage exists and no aid is at stake, or if the beneficiary obtains an advantage because the guarantee terms (such as the price, the conditions, etc.) are sub-commercial. That advantage would be the aid element.

1406 Case C-242/19 Commerz Nederland ECLI:EU:C:2014:2224 1407 Case C-482/99 France v Commission (Stardust) ECLI:EU:C:2002:294.

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The draft Notice on the notion of aid1408 provides indications on how to establish whether a guarantee is granted at market conditions. “In the absence of empirical market information on a specific debt transaction, the debt instrument’s compliance with market conditions may be established on the basis of a comparison with comparable market transactions (i.e. through benchmarking). In the case of loans or guarantees, information on the financing costs of the company may, for example, be obtained from other (recent) loans taken by the company in question, from yields on bonds issued by the company or from credit default swap (CDS) spreads on that company. Comparable market transactions may be also similar loan/guarantee transactions undertaken by a sample of comparator companies, bonds issued by a sample of comparator companies or CDS spreads on a sample of comparator companies. In the case of guarantees, if no corresponding price benchmark can be found on the financial markets, the total financing cost of the guaranteed loan, including the interest rate of the loan and the guarantee premium, should be compared to the market price of a similar non-guaranteed loan. Benchmarking methods may be complemented with assessment methods based on the return of capital.”

2.780

To rule out the presence of aid in a guarantee, it can be checked if conditions set out in point 3 of the Notice are met. Those conditions are sufficient to exclude the existence of aid. The difference in nature and risk between an individual guarantee and a guarantee scheme gives rise to different requirements to verify that issue.

2.781

5.1 Individual guarantees as non-aid 5.1.1 The standard situation Four conditions are listed under point 3.2 of the Notice. If they are fulfilled, the Commission will deem an individual guarantee not to constitute aid.

2.782

5.1.1.1 The borrower is not in financial difficulty That requirement refers to the specific treatment of undertakings in difficulty under State aid rules, since specific guidelines exist for rescue and restructuring aid for undertakings in difficulty.1409

2.783

1408 Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, point 114. See the version in public consultation at: http://ec.europa.eu/competition/consultations/2014_state_aid_notion/ index_en.html 1409 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 09.07.2014, p. 1. For more details, see Part 2, Chapter 21 on rescue and restructuring aid.

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5.1.1.2 The extent of the guarantee can be properly measured when it is granted 2.784

According to the Notice, the extent of the guarantee can be properly measured ex ante when it is linked to a specific transaction, for a fixed maximum amount and limited in time. The objective of that condition is to exclude open-ended guarantees or guarantees that are unlimited in scope or time.

5.1.1.3 The guarantee does not cover more than 80 per cent of each outstanding loan 2.785

Like the previous condition of measurability, the limitation of the guarantee rate to maximum 80 per cent of the underlying transaction in the Notice seeks to exclude the possibility that unlimited guarantees may be automatically, or on the basis of a self-assessment by the Member States, considered State aid free. Therefore, 80 per cent is one of the main proxies in the Notice ensuring that the lender entitled to the guarantee both performs some credit checks before granting the loan and always shares a part of the risk together with the guarantor. A lender that does not bear any of the risks in the event of a loan default is unlikely to carry out the same risk analysis. Exceptions to the 80 per cent ceiling

2.786

The maximum 80 per cent guarantee rate condition does not apply to debt securities, typically bonds, as defined in internal market rules relating to securities. For such instruments, the guarantee can go up to 100 per cent and still be deemed to be in line with the MEO principle. The logic underlying that exception in the Notice is that in the case of bonds each bond-holder, possibly a private person, makes a small loan to the bond issuer without being able to make any creditworthiness analysis. In such a case, there is no link between incentive effect and the guarantee rate. The guarantee allows for low risk but also for a reduced margin. The bond-holder will therefore arbitrate between risk and financial return. Furthermore, at the time of the adoption of the Notice, partial guarantee coverage of bonds appeared to be rare if not impossible in many jurisdictions, and therefore it was not a standard market practice to issue 80 per cent guarantees on them.

2.787

Conversely the extension of a guarantee up to 100 per cent can be accepted when it is granted for the purposes of providing services of general economic in452

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terest (SGEI). That possibility will remain however limited, as it will only cover guarantees granted by public bodies having entrusted the beneficiary with such an SGEI1410 and when the beneficiary operates that SGEI only and therefore it cannot carry out any other activities being either commercial or another SGEI. The purpose of that rule is to allow the needs of SGEIs to be better covered.1411 Ceiling monitoring and attribution of losses The Notice clarifies how the 80 per cent rule should be applied when the size of the loan or the financial obligation decreases over time. When the loan starts to be reimbursed, the guaranteed amount has to decrease proportionally, so that at each moment in time the guarantee does not cover more than 80 per cent of the outstanding loan or financial obligation.

2.788

According to the Notice, losses have to be borne by the lender and the guarantor proportionally on a pari passu basis. Accordingly, any (net) revenues generated from securities (after handling costs) have to be attributed to the lender and the guarantor on a proportional basis. Transactions where losses are fully attributed to the guarantor first (i.e. without immediate and proportional recourse to the lender) are therefore excluded.

2.789

5.1.1.4 A market-oriented price is paid for the guarantee The Notice specifies that the price has to be at least as high as the corresponding guarantee premium benchmark that can be found on the market, or in the alternative, if no corresponding guarantee premium benchmark can be found on the market, the total financial cost of the guaranteed loan, including the interest rate of the loan and the guarantee premium, has to be compared to the market price of a similar loan without a guarantee. If the overall price, guarantee fees included, is lower than the price without guarantee, the operation cannot be seen as being in line with the MEO principle.1412

2.790

1410 Such an SGEI must be in conformity with Union rules such as the Commission Decision of 20.12.2011 on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest (OJ L 7, 11.07.2012, p. 3) or the Community framework for State aid in the form of public service compensation (OJ C 8, 11.01.2012, p. 15). 1411 For more details, see Part 4 on Services of General Economic Interest. 1412 See for instance Commission Decision of 24.07.2007 on State aid granted by Germany to the Biria group (case C38/2005), OJ L 195, 27.07.2011, p. 55, confirmed in Case-T 209/11 MB System v Commission ECLI:EU:T:2013:338.

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2.791

In order to determine the corresponding market price, the Notice first mentions the following elements: amount and duration of the guarantee, securities, borrower’s financial position, sector, rates of default and other economic parameters. It then elaborates further on a proper assessment of the borrower’s risk position and requires that the analysis allows for the classification of the borrower into a clear risk rating. Such a classification does not have to be provided by an international rating agency. It can also be based, where available, on the internal rating system used by the bank providing the underlying loan. To assess the premium, the Member State should compare it with prices paid by similarly rated undertakings on the market.

5.1.2 Specific case of SMEs 2.792

Although the Notice does not provide for a general proxy for the prices of guarantees, if the borrower is a SME, the Commission states in the Notice that it can exceptionally accept a simpler evaluation to establish whether an individual guarantee or a guarantee scheme involves aid.

2.793

A State guarantee would be deemed as not constituting aid if a minimum safeharbour premium is charged on the amount effectively guaranteed by the State, based on the rating1413 of the borrower, provided that the guarantee does not cover more than 80 per cent of the outstanding loan and that the rating of the company is not below B. The Notice allows for the use of a single safe harbour for SMEs having no proper rating, such as start-up companies.

2.794

That safe-harbour system is based on the de minimis logic where the Commission has accepted a simpler evaluation of the presence of de minimis aid in relation to loan guarantees.

2.795

The grid of “safe-harbour premiums” for individual guarantees and guarantee schemes to SMEs is built on the methodology of the Reference Rate Communication.1414 The safe-harbour premiums in the Notice are derived1415 from the reference rates set out in the Reference Rate Communication for a borrower with the same rating and associated with normal collateralisation.

1413 The table in the Notice uses rating classes of Standard and Poor’s, Fitch and Moody’s, as they are the most frequently used by the banking sector in order to link their own rating system. 1414 Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.01.2008, p. 6. 1415 In principle, the reference rate of a loan = the base rate of the loan + the risk premium of the loan + the administrative fees of the loan.

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That regime remains optional, in order to reduce administrative burdens on Member States. Therefore, Member States or guarantors remain free to use the standard system even for SMEs, if lower premiums can be demonstrated.

2.796

5.2 Guarantee schemes as non-aid 5.2.1 Standard situation The conditions under which the Commission will deem a guarantee scheme not to constitute aid are listed under section 3.4 of the Notice. The first three of those conditions are very close to those listed above for individual guarantees. Their wording only differs due to the plurality of guarantees at stake and their unknown characteristics when the analysis takes place but the outcome would be the same and is therefore not repeated here. One condition relating to market conditions is, however, quite different and other conditions also apply.

2.797

5.2.1.1 The scheme has to be self-financing According to the Notice, the terms of the scheme have to be based on a realistic assessment of the risk so that the premiums paid by the beneficiary enterprises make it, in all probability, self-financing. Basically that requirement implies that the premiums and other conditions (duration, etc.) attached to the guarantees are established in such a way that experience gained, forecasted outcomes, etc. show that the scheme will cover its losses, reduced by possible recoveries, with the premiums charged. The activity is thus seen from the side of the guarantor.

2.798

It is mandatory to use a risk-related premium. Risk differentiation ensures that all projects are charged premiums that correspond to their respective risk: the potentially higher rate of default incurred with riskier projects is remedied by higher revenues through the higher premiums charged, whereas the lower premiums charged to lower risks ensure that the scheme also remains attractive for those projects. In consequence the Notice explicitly requires that the risk of each new guarantee has to be assessed on the basis of all the relevant factors (quality of the borrower, securities, duration of the guarantee, etc.) and that on the basis of that risk analysis, the guarantee has to be classified in one of the several established risk classes and a corresponding guarantee premium has to be charged. Thus the Commission will require the premiums to be risk-adjusted.

2.799

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5.2.1.2 The adequacy of the level of premiums have to be reviewed annually 2.800

In order to further ascertain that the scheme will effectively be self-financing overall, its status has to be checked at least once a year to identify shortfalls. If it is ascertained that the scheme is no longer self-financing, the premiums have to be adjusted accordingly, which may concern both guarantees that have already been issued, as well as future guarantees.

5.2.1.3 Premium coverage 2.801

According to the Notice, the premiums should cover both the normal risks associated with granting the guarantee, the administrative costs of the scheme, and a yearly remuneration of an adequate capital. Again, the goal is to ensure comparability with similar guarantee schemes that are fully privately funded, if they exist, which would have to cover such costs.

2.802

As regards the capital effectively transferred to the guarantee scheme, the Notice considers it appropriate to also include capital costs on capital not received but on reserves which should have been constituted. Even if in the long run the premiums charged make a scheme self-financing, there may be up and down phases. Such variations in performance would oblige a private operator without State support to constitute, quite often on a compulsory basis, additional cushions to avoid insolvability because even the long-term self-financing aspect would not avoid a specific insolvency issue if many risks were to crystallise more or less at the same time.

2.803

The Notice provides detailed guidance on the level of reserves (ranging from 2 to 8 per cent of the outstanding guarantees and depending on the underlying companies’ risk profile). The remuneration of the risk premium is set at 0.4 per cent of those reserves, which leaves an annual cost for such reserves ranging from 0.08 to 0.32 per cent of the guaranteed amount.

2.804

The Notice also clarifies that administrative costs are those typically linked to the process of granting and managing guarantees. It also explains that the already existing capital costs linked to transferred capital must be paid to the State but do not necessarily affect the premiums themselves. Indeed the financial income generated by such transfers should allow the State cash transfer to be remunerated.

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5.2.1.4 Transparency To ensure transparency, the scheme must provide for the terms on which future guarantees will be granted, such as eligible companies in terms of rating and, when applicable, sector and size, maximum amount and duration.

2.805

5.2.2 Specific case of schemes for SMEs The safe-harbour thresholds for individual guarantees to SMEs also apply for guarantee schemes to SMEs.

2.806

Since the evaluation of the risk and premium class of each individual guarantee may constitute a costly and burdensome exercise, the Notice provides for an exception for schemes. That exception arises where risk differentiation may not be possible or economically reasonable, as possible beneficiaries will be rather homogeneous (e.g. small enterprises representing comparable risks), and guaranteed amounts remain under a certain threshold.

2.807

In such circumstances a fixed and single premium for all beneficiaries can be justified and would avoid unnecessary administrative costs. It would for instance exempt mutual schemes that work under broadly egalitarian principles. That approach is also in line with the widespread calls to facilitate SMEs’ access to guarantees and thereby improve their access to finance.

2.808

The Notice therefore states that for a scheme which is restricted to guarantees for SMEs below a threshold of EUR 2 500 000 per company, the Commission can accept a single yearly guarantee premium for all borrowers. Thus, it is not necessary to undertake a risk assessment for each borrower. However, the scheme has to remain self-financing and all other conditions excluding the existence of aid must still be fulfilled.

2.809

The default premium set for SMEs which do not have a rating is also applicable in that case.

2.810

5.3 No automaticity The Commission has insisted in section 3.6 of the Notice that a failure to comply with those non-aid conditions, either for an individual guarantee or a guarantee scheme, does not mean that the measure automatically qualifies as State aid.

2.811

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2.812

In fact, in case of doubts, the Commission recalls that a specific assessment has to be made on a case by case basis which implies that the measure must be notified.

6.

Guarantees constituting aid

2.813

Where a guarantee does not comply with the MEOP, it may entail State aid. The State aid element needs to be quantified in order to assess the compatibility of the guarantee with the internal market. In principle, the State aid element will be deemed to be the difference between the market price of the guarantee and the actual price paid for it.

2.814

The Notice however provides that “ for companies in difficulty, a market guarantor, if any, would, at the time the guarantee is granted charge a high premium given the expected rate of default. If the likelihood that the borrower will not be able to repay the loan becomes particularly high, this market rate may not exist and in exceptional circumstances the aid element of the guarantee may turn out to be as high as the amount effectively covered by that guarantee”.1416 If the beneficiary of the guarantee is in financial difficulty, the aid element may therefore be the full amount covered by the guarantee.1417 This is however not always the case.1418 A case-by-case analysis must therefore be carried out.

2.815

It is to be noted that the Notice is based on Article 107(3)(c) of the Treaty. Therefore, it does not provide the appropriate legal framework for assessing guarantees that are provided to remedy a serious disturbance in the economy which have often taken the form of crisis State aid measures provided to ailing banks. Such interventions, including those in the form of guarantees, must be assessed under the specific temporary rules that were established in response to the economic and financial crisis.1419

6.1 Aid element in individual guarantees 2.816

The aid element in individual guarantees is the difference between the market price of the guarantee and the price that was actually paid.

1416 See section 4.1(a) of the Notice. 1417 Commission Decision 2003/626/EC of 27.11.2002 on the aid scheme implemented by Germany - Thuringia loan programme for SMEs, OJ L 223, 05.09.2003, p. 32, recital 92. 1418 Commission Decision 2007/492/EC of 24.01.2007 on Biria Group – Germany, C 38/2005 (ex NN 52/2004) – OJ L 183, 13.07.2007, p. 27; Commission decision of 11.2.2013 on Aide au sauvetage de Banque PSA Finance, SA. 36059 (2013/N), OJ C 136, 15.05.2013, p. 2. 1419 For more details, see Part 3, Chapter 29.

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Where no market price for the guarantee is available, the Notice proposes an annual calculation based on the interest subsidy of the underlying loan itself represented by the difference between the market rate and the rate obtained with the State guarantee after inclusion of any premiums paid. If the market rate is not available, there is a cross-reference to the Notice on reference rates,1420 which is to be used as the proxy for the relevant market rates.

2.817

For individual guarantees to SMEs, the aid element may also be calculated using the proposed safe harbours defined for non-aid qualification of guarantees. It is possible to deviate from those rules in duly justified cases by using a risk-based approach. However, in that case, the burden of proof is on the Member State.

2.818

6.2 Aid element in guarantee schemes For guarantee schemes, a risk analysis is required to exclude the existence of aid and, as a general rule, risk-related premiums are required.

2.819

It is possible to use a methodology previously approved by the Commission. Several Member States have had such methodologies approved to allow them to calculate the aid elements in their national schemes that provide public guarantees, typically in compliance with the de minimis Regulation, the General Block Exemption Regulation, or the Regional Aid Guidelines.1421

2.820

For SME guarantee schemes, the Notice provides for two additional calculation methodologies: calculating the difference between the safe-harbour premiums or the single premiums, in other words the hypothetical proxies for a market rate. Those methodologies allow the aid element to be determined on an aggregate or portfolio level for the whole SME guarantee scheme.

2.821

1420 Communication from the Commission on the revision of the method for setting the reference and discount rates adopted on 12 December 2007, OJ C 14, 19.01.2008, p. 6. 1421 See Commission Decision of 1.12.2011 on the new Austrian methodology to calculate the aid element of guarantees in the tourism sector in 2012 and 2013 (case SA.32642), summary notice in OJ C 29, 02.02.2012, p. 4; Commission Decision of 04.08.2011 on the Danish calculation methodology for the Large Growth Guarantee Scheme (case SA.33022), summary notice in OJ C 271, 14.09.2011, p. 4; and Commission Decision of 25.9.2007 on the German method to Calculate the Aid Element in Guarantees (Case N 197/2007), OJ C 248, 23.10.2007, p. 3.

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7.

Unlimited guarantees

7.1 Definition 2.822

Unlimited guarantees are guarantees which are not limited in amount and/ or time. An unlimited guarantee can be explicit, for instance if it is set out in a legislative or contractual provision, or it can be implied, for instance by the public-law status of the enterprise which rules out insolvency procedures or by the existence of a mechanism ensuring the coverage of losses. Decisions related to unlimited guarantees have most often arouse in the sectors of public utilities (e.g. post1422 and electricity1423) and financial services.1424

7.2 Provisions of the Notice regarding unlimited guarantees 2.823

The Notice does not include a specific section on the unlimited guarantees. The main relevant provision is section 1.2, where the Commission distinguishes unlimited guarantees from guarantees limited in amount and/or time. It notes that the Commission “regards as aid in the form of a guarantee the more favourable funding terms obtained by enterprises whose legal form rules out bankruptcy or other insolvency procedures or provides an explicit State guarantee or coverage of losses by the State. The same applies to the acquisition by the State of a holding in an enterprise if unlimited liability is accepted instead of the usual limited liability.”

2.824

Unlimited guarantees cannot benefit from the application of sections 3.2 and 3.4 of the Notice. They set out four conditions which, if cumulatively met, are sufficient to rule out the presence of State aid in an individual guarantee or in a guarantee scheme. One of the conditions is that “the extent of the guarantee can be properly measured when it is granted. This means that the guarantee must be linked to a specific financial transaction, for a fixed maximum amount and limited in time”. 1422 Commission Decision 2010/605/EU of 26 January 2010 on State aid granted by France to La Poste (Case C56/07 ex E 15/05), OJ L 274, 19.10.2010, p. 1. An annulment action against that Commission decision was rejected by the General Court (Case T-154/10 France v Commission ECLI:EU:T:2012:452) and in turn confirmed by the Court of Justice (Case C-559/12 France v Commission ECLI:EU:C:2014:217). 1423 Commission Decision 2005/145/EC of 16.12.2003 on State aid granted by France to EDF and the electricity and gas industries (Case C(2003) 4637), OJ L 49, 22.02.2005, p. 9. The Commission decision was annulled by the General Court (Case T-156/04 EDF v Commission ECLI:EU:T:2009:505). The annulment of the General Court was confirmed by the Court of Justice (Case C-124/10 Commission v EDF ECLI:EU:C:2012:318). 1424 For a detailed overview of the German Landesbanken, see Moser, Pesaresi and Soukup, State guarantees to German public banks: a new step in the enforcement of State aid discipline to financial services in the Community, [2002] 2 Competition Policy Newsletter 1.

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However, that exclusion does not mean that an unlimited guarantee is automatically State aid. To determine if an unlimited guarantee constitutes State aid, one should examine if all conditions set out by Article 107(1) of the Treaty are met.

2.825

7.3 Presence of aid in unlimited guarantees 7.3.1 Unlimited guarantees are likely to constitute an advantage One of the conditions set out by Article 107(1) of the Treaty is the presence of an advantage. Like other types of guarantees, unlimited guarantees lower the risk of investing into and/or lending to the undertaking concerned, inducing thereby an economic advantage for it through more favourable funding terms.1425

2.826

In addition, because the extent of the guarantee cannot be properly measured when it is granted, it is doubtful that a market premium can be set for an unlimited guarantee and that a private operator would grant such a guarantee. Therefore, unlimited guarantees are unlikely to escape the qualification of State aid in application of the Market Economy Operator test1426 and in principle they constitute an advantage. This explains why unlimited guarantees cannot benefit from the application of sections 3.2 and 3.4 of the Notice.

2.827

7.3.2 Unlimited guarantees cannot benefit from de minimis In addition, since the amount effectively guaranteed by the State is unknown, it is not possible to calculate precisely the gross equivalent of an unlimited guarantee ex ante, unlimited guarantees are not considered transparent aid. Consequently, they cannot benefit from the provisions of any of the de minimis regulations.1427

2.828

1425 See section 1.2 of the Notice: “The Commission regards as aid in aid in the form of a guarantee the more favourable funding terms obtained by enterprises whose legal form rules out bankruptcy or other insolvency procedures or provides an explicit State guarantee or coverage of losses by the State”. 1426 See point 113 of the draft Commission notice on the Notion of State aid: “In general, unlimited guarantees are not in line with normal market conditions. This also applies to implicit guarantees stemming from the State liability for debts of insolvent public undertakings sheltered from ordinary bankruptcy rules”. 1427 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Article 107 and 108 of the Treaty to de minimis aid, OJ L 352, 24.12.2013, p. 1. Commission Regulation (EU) No 1408/2013 on the application of Article 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agricultural sector, OJ L 352, 24.12.2013, p. 9. Commission Regulation (EU) No 717/2014 on the application of Article 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the fishery and aquaculture sector, OJ L 190, 28.06.2014, p. 45. Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest, OJ L 114, 26.04.2012, p. 8.

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7.4 The specific issue of implied unlimited guarantees 2.829

Implied unlimited guarantees raise specific issues as regards the use of State resources and the presence of an advantage.

7.4.1 State resources 2.830

When a public unlimited guarantee is explicit, there is a priori no doubt that State resources are used through the foregoing by the State of a market premium to remunerate the guarantee, as for any type of guarantee.1428

2.831

When a public unlimited guarantee is not explicit but is the implied result of the application of a number of legal and factual elements, it becomes much more difficult for the Commission (on which the burden of proof falls) to prove the existence of the guarantee and the use of State resources.

2.832

In a decision1429 adopted in 2010, the Commission found that La Poste enjoyed an unlimited guarantee due to its public law status comparable to the status of “Etablissement Public Industriel et Commercial” (EPIC).1430 Although the French law does not explicitly provide La Poste with an unlimited guarantee, the Commission established the existence of such a guarantee by using a body of evidence. The latter included the law exempting public establishments from the ordinary legal framework for bankruptcy proceedings and defining the procedure to follow where a public establishment does not comply with a court decision ordering it to pay a sum of money. The body of evidence also included case law on State liability, case-studies of what happens to public establishments when they are closed down, budgetary provisions, etc.

2.833

After its annulment action had been rejected by the General Court, before the Court of Justice1431 France argued that the General Court had allowed the Commission to reverse the burden of proof of the existence of the guarantee by finding that it was for the French authorities to show that no State guarantee in favour of La Poste was implied by the fact that La Poste was not subject to the ordinary legal framework for bankruptcy proceedings.

1428 See section 2.1 of the Notice, third paragraph. 1429 Commission Decision 2010/605/EU of 26.01.2010 on State aid granted by France to La Poste (Case C56/07 (ex E 15/05)), OJ L 274, 19.10.2010, p. 1. 1430 EPIC are entities which have a public law status and carry out commercial activities. 1431 Case C-559/12 P France v Commission ECLI:EU:C:2014:217.

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The Court confirmed that the “Commission cannot assume that an undertaking has benefitted from an advantage constituting State aid solely on the basis of a negative presumption, based on a lack of information enabling the contrary to be found, if there is no other evidence capable of positively establishing the actual existence of such an advantage”.

2.834

However, after having recalled that principle, the Court held that “ in order to prove the existence of a guarantee which does not result expressly from any legislative or contractual document, it is permissible for the Commission to rely on the method of a firm, precise and consistent body of evidence to determine whether there is, in domestic law, a real obligation on the State to use its own resources for the purposes of covering losses of an EPIC in default (…)”.

2.835

The Court concluded that the Commission had made a positive finding as to the existence of an unlimited guarantee in favour of La Poste by taking account of several concordant facts.

2.836

7.4.2 Advantage In its judgment relating to the implied unlimited guarantee granted to La Poste,1432 the Court also ruled on whether the Commission must show the actual effects of the guarantee (for instance by showing that the undertaking obtained more favourable funding conditions than it would have obtained without the guarantee) to prove the existence of an advantage in relation to a guarantee that is not explicit.

2.837

In that regard, the Court held that “a simple presumption exists that the grant of an implied and unlimited State guarantee, in favour of an undertaking which is not subject to the ordinary compulsory administration and winding-up procedures, result in an immediate advantage of that undertaking and constitutes State aid, in that it is granted without the recipient thereof paying the appropriate fee for taking the risk supported by the State and also allows better financial terms for a loan to be obtained than those normally available on the financial markets”. Therefore, in order to prove the advantage, the Commission does not have to show the actual effects produced by an implied unlimited guarantee.

2.838

1432 Case C-559/12 P France v Commission ECLI:EU:C:2014:217, paragraph 97.

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7.4.3 Practical consequences for undertakings with a public law status1433 2.839

Enterprises that have been protected from bankruptcy procedures by their specific public law status and which carry out economic activities – such enterprises exist in many Member States, in particular in the utility and railway sectors – should examine if they have enjoyed an implied guarantee which would constitute incompatible State aid.

2.840

Those enterprises, and the Member States where they are located, should assess:

2.841

–

whether the existence of an implied guarantee could be established (for instance on the basis of a body of firm, precise and consistent evidence);

–

if the existence of such a guarantee has been established, whether it could be proved that it does not exist or no longer exists;1434

–

whether the presumption that such a guarantee provides the undertaking with an advantage could be rebutted, for instance by evidence demonstrating that the undertaking does not benefit from better financial terms than those normally available in the market to a comparable undertaking.

If all the cumulative criteria to establish the existence of State aid are met, considering that compatibility is unlikely,1435 then the Member State should consider corrective measures, such as the transformation of the status of the undertaking or the incorporation of its economic activities.

1433 This section is based on the article La Poste: Implied Unlimited State Guarantees Under the Loop of State Aid Law, Guigue-Koeppen, Journal of European Competition Law & Practice 2014; doi: 10.1093/jeclap/ lpu066 1434 According to the Advocate General (point 26 of his Opinion in Case C-559/12 P France v Commission ECLI:EU:C:2014:217), there is never certainty as regards the existence of an implied guarantee, therefore the guarantee should be considered to exist as long as there is no proof that it does not exist. For instance, it could be proved that there is no guarantee by pointing to cases where the debts of an EPIC went unpaid. 1435 In its decision relating to the State guarantee granted to the Institut Français du Pétrole (IFP) (Commission Decision 2012/26/EU of 29.06.201, case C35/2008, OJ L 14, 17.01.2012, p. 1), the Commission found that the unlimited guarantee enjoyed by the IFP because of its EPIC status was compatible aid insofar as the economic activities of IFP were secondary and linked to IFP’s main activity, i.e. public research. That case should however be interpreted as an exception, due to the low share of IFP’s activity which was economic, and the associated positive externality in terms of the spill over scientific knowledge.

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7.5 Conclusion as regards the presence of aid in unlimited guarantees and issue of the recovery In conclusion, unlimited guarantees are likely to constitute an advantage and if all other conditions of Article 107(1) of the Treaty are met, they are likely to constitute State aid. Because they are not transparent aid, they cannot benefit from the provisions of the General Block Exemption Regulation1436 and are unlikely to be considered compatible with the internal market.

2.842

With respect to the recovery of unlimited guarantees, it is settled case-law that the aim pursued by the Commission when it requires repayment of incompatible aid is to make the recipient forfeit the advantage which it has enjoyed over its competitors on the market and to restore the situation prior to payment of the aid.1437 The best recovery solution would be the recovery of the advantage obtained by the beneficiary which can be considered to be identical to the State resources transferred, i.e. the market premium that the undertaking should have paid in exchange for the State guarantee. That recovery solution requires that a possible market price exists. The second-best solution would be the recovery of at least the economic advantage derived from more favourable funding conditions on a case-by-case basis. The economic advantage in that case can be for instance the difference between the interest rate paid on the existing loans and the interest rate that would have to be paid without the unlimited guarantee.1438

2.843

8.

Reporting

The Notice asks Member States to supply reports for guarantees approved by the Commission. The data sought are mainly the amounts paid following the call of the guarantees as well as the premiums charged; they should allow the Commission to monitor the rate of default and possibly future premiums. Non-aid decisions on guarantee schemes are also covered by reporting, but it is limited to cases where such reports have been explicitly asked for in the Commission’s decision. Such an ex post monitoring of the implementation of the scheme may be a useful tool in verifying whether the scheme effectively continues to be free of aid.1439

2.844

1436 Article 5 of the Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1 1437 See for instance Case T-198/01 Technische Glaswerke Ilmenau v Commission ECLI:EU:T:2004:222, para 32. 1438 See for instance Commission Decision 97/433/EC of 30.04.1997 requiring the Portuguese Government to recover the aid in the form of a State guarantee granted to the undertaking EPAC, OJ L 186, 16.07.1997, p. 25. 1439 See Commission Decision of 12.10.2006 – The Netherlands – Default Guarantee Scheme ‘Growth Facility’ (case N 131/2006), OJ C 291, 30.11.2006, p.15; Commission Decision of 21.02.2007 – Finland – Shipbuilding guarantee scheme (case E 7/2005), summary notice in OJ C 152, 06.07.2007, p. 6.

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9. 2.845

Conclusion

The Guarantee Notice and the Reference Rate Communication on which the safe-harbour premiums for SMEs are based, were adopted before the financial crisis. Since their entry into force, market rates for debt instruments have changed significantly. That shift is not reflected dynamically in the Reference Rate Communication and Guarantee Notice, since both instruments are based on fixed historic rates prior to the crisis. There may therefore be a need to review the Guarantee Notice and the Reference Rate Communication to explore how to better approximate market conditions, while keeping provisions easy to implement.

466

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Index

Index A ABER (Agriculture Block Exemption Regulation) .............. 3.2147–3.2151 Accession. see EU Accession Advantage .................................................................................................. 2.320–2.353 Concept ......................................................................................................1.59–1.67 Market economy operator principle ................................................ 2.353–2.378 Unlimited guarantees.................................................2.826–2.827, 2.837–2.838 Agriculture and fisheries, De minimis .............................................. 2.588–2.590 Agriculture and forestry ....................................................... 2.10, 3.2117–3.2177 Aid to 2014-2020 CAP........................................................................ 3.2127–3.2131 De minimis ................................................................................. 3.2135–3.2139 pre-2014 CAP ........................................................................... 3.2122–3.2126 Treaty Provisions ....................................................................... 3.2117–3.2120 Compatibility assessment of State aid ABER .......................................................................................... 3.2147–3.2151 Agricultural sector .................................................................... 3.2163–3.2171 Application of rules .................................................................. 3.2154–3.2177 Forestry sector ........................................................................... 3.2172–3.2174 Guidelines................................................................................... 3.2152–3.2153 Measures ..................................................................................... 3.2140–3.2146 Rural areas .................................................................................. 3.2175–3.2177 Provisions for, in EU Accession negotiations ................................ 1.552–1.556 Agriculture Block Exemption Regulation (ABER) .............. 3.2147–3.2151 Aid schemes .......................................................................... 5.54–5.58, 5.546–5.558 Air transport ........................................ 3.1345–3.1544. see also Airlines; Airports Airport-airline arrangements ....................................................... 3.1403–3.1413 Airports, financing of ..................................................................... 3.1401–3.1402 Developments .................................................................................. 3.1353–3.1357 GBER ................................................................................................ 3.1434–3.1436 Guidelines 1994 and 2005 ............................................................ 3.1359–3.1372 Guidelines 2014 .............................................................................. 3.1373–3.1414 Advantage ................................................................................... 3.1400–3.1414 Application in time................................................................... 3.1385–3.1388 467

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Index

Competition, effect on ............................................................ 3.1398–3.1400 Integration in SAM .................................................................. 3.1373–3.1380 Scope............................................................................................ 3.1381–3.1384 Undertaking, notion of ........................................................... 3.1390–3.1397 Liberalisation process ..................................................................... 3.1348–3.1352 Regional aid ..................................................................................... 3.1441–3.1442 Rescue and restructuring aid ........................................................ 3.1437–3.1440 SGEI .........................................................................3.1415–3.1433, 4.192–4.195 Airlines Aid with social character ............................................................... 3.1540–3.1543 Link between aid to airports and aid to ..................................... 3.1520–3.1523 Start-up aid ....................................................................................... 3.1524–3.1539 Incentive effect .......................................................................... 3.1533–3.1534 Negative effects ................................................................................ 3.1536–3.1538 Notification ......................................................................................................3.1539 Objective of common interest...................................................... 3.1528–3.1529 Policy instrument ............................................................................................3.1532 Proportionality ................................................................................................3.1535 State intervention ........................................................................... 3.1530–3.1531 Airports Airport-airline arrangements ....................................................... 3.1403–3.1413 Financing of ..................................................................................... 3.1401–3.1402 Investment aid Aid to ........................................................................................... 3.1444–3.1489 Incentive effect .......................................................................... 3.1464–3.1466 Negative effects.......................................................................... 3.1484–3.1488 Notification ................................................................................................3.1489 Objective of common interest................................................ 3.1447–3.1457 Policy instrument ...................................................................... 3.1461–3.1462 Proportionality ............................................ 3.1464–3.1483, 3.1467–3.1483 State intervention ..................................................................... 3.1458–3.1460 Operating aid ................................................................................... 3.1490–3.1519 Incentive effect ..........................................................................................3.1506 Negative effects.......................................................................... 3.1514–3.1518 Notification ................................................................................................3.1519 Objective of common interest................................................ 3.1497–3.1500 Policy instrument ...................................................................... 3.1503–3.1505 Proportionality .......................................................................... 3.1505–3.1513 State intervention ..................................................................... 3.1501–3.1502

468

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Index

Altmark Criteria Land transport ........................................................................... 3.1683–3.1686 SGEI ................................................................................................. 4.049–4.113 Judgement...................................................................................................4.22–4.41 Association Agreements ....................................................................... 1.446–1.453 B Bank Recovery and Resolution Directive (BRRD).............. 3.2006–3.2049 Banking ................................................................................................. 3.1778–3.2049 Compatibility assessment of State aid After 1 January 2015 ................................................................ 3.2011–3.2030 Bank Recovery and Resolution Directive (BRRD)........... 3.2006–3.2049 Banking Communication 2008 ............................................. 3.1780–3.1782 Banking Communication 2013 .............................................................3.1783 Capital support ......................................................................... 3.1804–3.1814 Distortion of competition ...................................................... 3.1867–3.1887 Limiting of aid ........................................................................... 3.1857–3.1866 Liquidation aid .......................................................................... 3.1888–3.2004 Liquidity support...................................................................... 3.1788–3.1803 Monitoring .................................................................................................3.2005 Rescue and restructuring aid .................................................. 3.1815–3.1838 Restoration of viability ............................................................ 3.1846–3.1856 Schemes for guarantees and liquidity support ....................................3.1841 Schemes for recapitalisation ................................................... 3.1839–3.1840 Beneficiaries De minimis ............................................................................................ 2.631–2.651 Maritime transport ......................................................................... 3.1584–3.1588 State guarantees ................................................................................................. 2.778 Bilateral Investment Treaty (BIT) ................................................... 1.505–1.517 Broadband ............................................................................................ 3.1055–3.1157 Case practice .................................................................................... 3.1130–3.1157 Compatibility of aid ....................................................................... 3.1133–3.1157 Competition ...................................................... 3.1082–3.1095, 3.1141–3.1143 Digital Agenda and State intervention ...................................... 3.1061–3.1065 GBER ................................................................................................ 3.1124–3.1129 Guidelines......................................................................................... 3.1117–3.1123 469

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Index

Infrastructure, rules for .................................................................. 3.1130–3.1132 Infrastructures ................................................................................. 3.1130–3.1132 Market economy investor principle ............................................ 3.1103–3.1111 NRA’s, role of...................................................................................................3.1156 Presence of aid ................................................................................. 3.1097–3.1102 Services of general interest (SGEI) ...............................3.1112–3.1115, 3.1157 State aid control .............................................................................. 3.1096–3.1115 Technology ....................................................................................... 3.1066–3.1081 Broadcasting ........................................................................................ 3.1158–3.1263 Commission decisions ................................................................... 3.1161–3.1165 Communication 2009 ..................................... 3.1175–3.1179, 3.1204–3.1206 Legal framework, development of ............................................... 3.1166–3.1173 Public service ................................................................................... 3.1180–3.1203 Communication 2009 ............................................................. 3.1204–3.1206 Entrustment ............................................................................... 3.1229–3.1231 Funding mechanisms ............................................................... 3.1190–3.1197 New media services (internet etc.) ........................................ 3.1220–3.1228 New or existing aid ................................................................... 3.1198–3.1203 Proportionality .......................................................................... 3.1237–3.1256 Remit ........................................................................................... 3.1207–3.1232 Supervision ................................................................................. 3.1233–3.1236 C Challenges, to decisions ....................................................................... 5.482–5.572 Actions against a regulatory act ........................................................ 5.490–5.502 Actions for failure to act ..................................................................... 5.559–5.564 Commission guidelines ...................................................................... 5.565–5.570 Concerning aid schemes ..................................................................... 5.546–5.558 Final decisions ...................................................................................... 5.527–5.548 Initiating formal investigation........................................................... 5.518–5.526 Legal interest ......................................................................................... 5.503–5.509 Positive decisions ................................................................................. 5.510–5.517 Coal and Steel ...............................................................................................2.13–2.14 Coal mines, closure ................................................................................ 3.466–3.471 Combined transport Compatibility assessment of State aid ........................................................3.1770 Liberalisation of sector .................................................................. 3.1639–3.1640 470

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Index

Common Agricultural Policy (CAP) ......................................... 3.2120–3.2131 Compatibility assessment, Framework ............................................ 1.106–1.111 Compatibility rules Agriculture and forestry ................................................................ 3.2117–3.2177 Air transport .................................................................................... 3.1345–3.1544 Banking ............................................................................................. 3.1778–3.2049 Broadband ........................................................................................ 3.1055–3.1157 Broadcasting..................................................................................... 3.1158–3.1263 Culture .............................................................................................. 3.1264–3.1319 Energy and environment field ........................................................... 3.323–3.486 Export credit insurance ................................................................. 3.0986–3.1054 Finance, access to ................................................................................. 3.487–3.619 Fisheries............................................................................................. 3.2178–3.2299 GBER ..........................................................................................................3.1–3.194 Important projects of common European interests (IPCEI) 3.2050–3.2116 Maritime transport ......................................................................... 3.1576–3.1622 Ports ................................................................................................... 3.1547–3.1577 R&D&I.................................................................................................. 3.196–3.330 Regional aid .......................................................................................... 3.620–3.811 Rescue and restructuring aid ............................................................. 3.812–3.985 Sports ................................................................................................. 3.1319–3.1344 Compensation ETS costs. see Economics, of state aid SGEI ....................................................1.285–1.293, 4.149–4.157, 4.255–4.326 Competition Distortion of ................................................................1.096–1.105, 2.505–2.554 Banking ....................................................................................... 3.1867–3.1887 Close markets and .......................................................................... 2.524–2.529 Commission guidance .................................................................. 2.545–2.549 Decisional practice ........................................................................ 2.530–2.545 Duty to state reasons ..................................................................... 2.517–2.522 Land transport ........................................................................... 3.1665–3.1666 Effect on, Air transport.................................................................. 3.1398–3.1400 Control of state aid ....................................................................1.390, 1.409–1.415 Enforcement ......................................................................................... 1.416–1.423 Scope.................................................................................................................... 1.399 Union wide ............................................................................................ 1.391–1.396 Worldwide ............................................................................................. 1.397–1.398 Council, role of ........................................................................................ 5.473–5.481 Criteria 471

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Index

Altmark criteria ......................................................3.1683–3.1686, 4.049–4.113 Important projects of common European interests (IPCEI) ............................................................................................. 3.2086–3.2088 for State aid ................................................................................................1.56–1.58 Culture ................................................................................................... 3.1264–3.1319 Audiovisual products ....................................... 3.1284–3.1291, 3.1303–3.1308 Cinema .............................................................................................. 3.1305–3.1308 Compatibility of aid ....................................................................... 3.1298–3.1319 Culture and heritage conservation, GBER..................................... 3.152–3.166 Economic activity, existence of .................................................... 3.1266–3.1273 Effect on trade ................................................................................. 3.1275–3.1277 Languages, promotion of .............................................................. 3.1292–3.1294 Notion of .......................................................................................... 3.1278–3.1283 Culture and heritage conservation ............................................. 3.1301–3.1302 Cumulation, of aid De minimis Dorsten-type aid ......................................................................................... 2.574 State aid ............................................................................................ 2.652–2.660 Finance, access to ................................................................................. 3.599–3.601 GBER, Common provisions ..................................................................3.42–3.48 D De minimis ................................................................................................ 2.555–2.688 Agriculture and fisheries ..................................................................... 2.588–2.590 Application in time.............................................................................. 2.677–2.683 Beneficiaries .......................................................................................... 2.631–2.651 Ceiling .................................................................................................... 2.605–2.609 Cumulation Dorsten-type aid ......................................................................................... 2.574 State aid ............................................................................................ 2.652–2.660 Excluded and non-excluded sectors ................................................. 2.596–2.598 Export aid .............................................................................................. 2.583–2.586 Fisheries............................................................................................. 3.2197–3.2225 Foundation ............................................................................................ 2.555–2.563 Fractioning, prohibition of ................................................................ 2.661–2.663 Guarantees .................................................................................2.622–2.627, 2.828 Legality................................................................................................... 2.564–2.581 472

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Index

Aid not affecting trade .................................................................. 2.571–2.575 Policy neutrality ............................................................................. 2.576–2.581 Loans ...................................................................................................... 2.615–2.621 Recovery ................................................................................................ 2.684–2.688 Risk capital and capital injections .................................................... 2.628–2.630 Sectorial exclusions ........................................................................................... 2.587 SGEI ....................................................................................................... 4.114–4.118 Substantive Conditions, Exclusions from Regulation 1407/2013 ....................................................................... 2.582–2.609 Transparency ................................................................2.610–2.630, 2.664–2.676 Transport ............................................................................................... 2.591–2.595 Undertakings in difficulty .................................................................. 2.599–2.604 Decisions. see Procedures, Decisions Defence State aid .......................................................................................................2.16–2.34 Case law ................................................................................................2.30–2.34 Commission Decisional Practice .....................................................2.24–2.29 Disadvantaged and disabled persons Definition .............................................................................................. 3.114–3.117 GBER ..................................................................................................... 3.104–3.124 E Economics, of state aid ......................................................................1.037–1.1.303 Advantage, concept of..............................................................................1.59–1.67 Basic Rational ............................................................................................1.45–1.55 Compatibility assessment, framework for ...................................... 1.106–1.111 Competition, distortion of ................................................................ 1.096–1.105 Equity considerations.......................................................................... 1.157–1.162 ETS costs, compensation for ............................................................. 1.294–1.299 Financial constraints ........................................................................... 1.183–1.185 Incentive effect ..................................................................................... 1.163–1.185 Insights in On effectiveness.............................................................................. 1.271–1.284 Other applications of .................................................................... 1.267–1.270 Market Economy Investor Principle .....................................................1.74–1.95 Market failures ...................................................................................... 1.116–1.156 Coordination problems ................................................................ 1.143–1.153 473

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Index

Information asymmetries ............................................................. 1.136–1.142 Market power.................................................................................. 1.154–1.156 Negative effects ..................................................................................... 1.186–1.266 Different sector, distortions between ........................................ 1.232–1.233 Incentive effect as a screen for competition analysis............... 1.251–1.266 Input markets, distortions in ....................................................... 1.225–1.231 Product market, distortions in .................................................... 1.195–1.224 Taxation, shadow cost of .............................................................. 1.234–1.235 Theories of Harm ........................................................................... 1.188–1.194 Welfare, distribution of................................................................. 1.236–1.250 SGEI, compensation for ..................................................................... 1.285–1.293 State intervention ................................................................................ 1.112–1.115 Energy and environment field ........................................................... 3.323–3.486 Assessment............................................................................................. 3.340–3.344 Biofuels and biomass ........................................................................... 3.403–3.405 Coal mines, closure .............................................................................. 3.466–3.471 Cogeneration of heat and power plants ....................................................... 3.406 Electricity generation capacity .......................................................... 3.432–3.447 Emissions trading schemes (ETS) .................................................... 3.354–3.387 Energy efficiency .................................................................................. 3.408–3.415 Energy from renewable sources................................3.391–3.402, 3.454–3.465 Energy infrastructures......................................................................... 3.422–3.431 Environmental taxes ............................................................................ 3.449–3.453 GBER ..................................................................................................... 3.346–3.350 Investment aid ..........................................................................3.351–3.352, 3.391 Notification thresholds .................................................................................... 3.353 Nuclear energy...................................................................................... 3.472–3.486 Policy context ....................................................................................... 3.331–3.335 State aid modernisation ...................................................................... 3.336–3.339 Waste management .............................................................................. 3.416–3.421 Energy efficiency ..................................................................................... 3.408–3.415 Environmental aid measures .............................................................. 1.524–1.525 Environmental taxes .............................................................................. 3.449–3.453 EU Accession State aid .................................................................................................. 1.454–1.565 Bilateral Investment Treaty (BIT).............................................. 1.505–1.517 Challenges ....................................................................................... 1.559–1.565 Competition chapter and ............................................................. 1.460–1.476 Existing aid ...................................................................................... 1.477–1.484 Interim mechanism........................................................................ 1.485–1.504 474

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Index

Measures “put into effect” after accession ................................. 1.499–1.504 Measures “put into effect” before accession........................................... 1.498 Procedural aspects.......................................................................... 1.495–1.497 Safeguard clauses ............................................................................ 1.557–1.558 Sunset clause........................................................... 1.483, 1.488–1.492, 1.493 transitional and permanent provisions ...................................... 1.518–1.556 European Agreements, State aid......................................................... 1.446–1.453 European Emission Trading System (ETS) Costs, compensation for ..................................................................... 1.294–1.299 State aid .................................................................................................. 3.354–3.387 Evaluation SGEI ....................................................................................................... 4.375–4.376 State aid .................................................................................................. 1.304–1.389 Body conducting ............................................................................ 1.352–1.353 Data collection ............................................................................... 1.347–1.349 Evaluation questions...................................................................... 1.342–1.343 Lessons learnt so far ....................................................................... 1.386–1.387 Methods ...............................................................................1.346, 1.358–1.385 New requirements.......................................................................... 1.322–1.349 Objective of aid scheme ................................................................ 1.340–1.341 Policy Making ................................................................................. 1.307–1.321 Publicity ........................................................................................... 1.354–1.357 Result Indicators ............................................................................ 1.344–1.345 Timeline........................................................................................... 1.350–1.351 State guarantees .................................................................................... 2.771–2.773 Existing aid, Definitions.............................................................................5.22–5.52 Export aid .................................................................................................. 3.986–3.992 De minimis ............................................................................................ 2.583–2.586 Export credit insurance ................................................................... 3.0986–3.1054 Aid for insurers and exporters ...................................................... 3.1011–3.1021 Communication .............................................................................. 3.1022–3.1046 Communication 1997 ..................................... 3.1004–3.1010, 3.1047–3.1049 Definition ........................................................................................................... 3.991 Medium and long-term ................................................................. 3.1050–3.1053 Non-marketable risks ..................................................................... 3.1017–3.2021 OECD Export Credit Agreement ................................................... 3.993–3.995 Trade policy...................................................................................... 3.0998–3.1003 Union legislation .................................................................................. 3.996–3.997

475

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Index

F Failure to act, actions against ............................................................ 5.559–5.564 FIBER (Fishery Block Exemption Regulation) ..................... 3.2225–3.2261 Finance, access to.................................................................................... 3.487–3.619 Cumulation ........................................................................................... 3.599–3.601 Existence of aid ..................................................................................... 3.508–3.519 Financial intermediaries ............................................................... 3.513–3.518 Private investors.............................................................................. 3.510–3.512 Risk capital ............................................................................................ 3.487–3.497 Demand-side measures ................................................................. 3.528–3.589 Rules, exceptions to ....................................................................... 3.598–3.619 Start-up aid ...................................................................................... 3.590–3.591 State aid to enhance ....................................................................... 3.520–3.527 Supply-side measures ..................................................................... 3.592–3.597 Rules ..............................................................................3.498–3.507, 3.598–3.619 Financial services. see Banking Fiscal aid .................................................................................................... 2.689–2.759 Member States’ competence ........................................................................... 2.689 Selectivity analysis................................................................................ 2.707–2.759 Reference system, derogation from ............................................ 2.725–2.740 Reference system, identification of............................................. 2.712–2.724 Reference system, justification of................................................ 2.741–2.759 Three-step test................................................................................. 2.709–2.711 State aid rules ........................................................................................ 2.690–2.706 Tax competition ................................................................................................ 2.691 Fiscal measures, Provisions for, in EU Accession negotiations .... 1.520–1.523 Fisheries ................................................................................................. 3.2178–3.2299 Aid to Common fisheries policy ........................................................ 3.2181–3.2196 De minimis ................................................................................. 3.2197–3.2225 FIBER ......................................................................................... 3.2225–3.2261 Compatibility assessment of State aid Adverse climate events ............................................................. 3.2283–3.2287 Animal diseases in aquaculture .............................................. 3.2288–3.2290 Guidelines................................................................................... 3.2264–3.2299 Internal market .......................................................................... 3.2273–3.2779 Measures covered by FIBER ................................................... 3.2280–3.2281 Operating aid in outermost regions ...................................... 3.2292–3.2293 476

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Index

Fishery Block Exemption Regulation (FIBER) ..................... 3.2225–3.2261 Forestry. see Agriculture and forestry Free Trade Agreements (FTAs)................................. 1.427, 1.429–1.430, 1.432 G General Block Exemption Regulation (GBER) .................. 1.304, 3.1–3.194 Air transport .................................................................................... 3.1434–3.1436 Broadband ........................................................................................ 3.1124–3.1129 Common provisions Cumulation ..........................................................................................3.42–3.48 Incentive effect ....................................................................................3.33–3.41 Monitoring ...........................................................................................3.58–3.63 Notification thresholds ......................................................................3.27–3.29 Publication and Information ............................................................3.49–3.57 Scope......................................................................................................3.12–3.26 Transparency ........................................................................................3.30–3.32 Compatibility rules ............................................................................. 3.182–3.190 Culture and heritage conservation ................................................... 3.152–3.166 Disadvantaged and disabled persons ............................................... 3.104–3.124 Energy and environment field ........................................................... 3.346–3.350 Local infrastructures ........................................................................... 3.182–3.190 Natural disasters, aid for damage caused by ................................... 3.125–3.140 Regional aid .................................................................3.710–3.715, 3.724–3.738 Risk capital .........................................3.533–3.542, 3.550–3.555, 3.561–3.566 Role ...................................................................................................................3.5–3.7 SME aid ......................................................................................................3.67–3.90 Sports infrastructures .......................................................................... 3.167–3.181 Structure .....................................................................................................3.08–3.11 Training aid ........................................................................................... 3.091–3.103 Transitional provisions ............................................................................3.64–3.66 Transport aid, for residents of remote regions ............................... 3.141–3.151 Guarantee schemes Not constituting aid ............................................................................ 2.797–2.810 SMEs....................................................................................................... 2.806–2.810 Guarantees. see also State guarantees; Individual guarantees, De minimis ......... 2.622–2.627, 2.828

477

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Index

I Important projects of common European interests (IPCEI) .................................................................................................. 3.2050–3.2116 Compatibility assessment of State aid Communication on .................................................................. 3.2055–3.2060 Counterfactual .......................................................................... 3.2095–3.2098 Criteria for R&D&I projects ................................................. 3.2086–3.2088 Eligibility .................................................................................... 3.2063–3.2088 Funding gap approach.............................................................. 3.2099–3.2102 General cumulative criteria ..................................................... 3.2068–3.2076 Importance of project .............................................................. 3.2089–3.2091 Matching clause ......................................................................... 3.2103–3.2108 Number of Member States participating ............................. 3.2077–3.2084 And other Guidelines .............................................................. 3.2061–3.2062 Past decisional practice ............................................................ 3.2053–3.2054 Procedural issues ....................................................................... 3.2109–3.2113 Proportionality .......................................................................... 3.2093–3.2094 Imputability .............................................................................................. 2.075–2.234 Case law After Stardust Marine ................................................................... 2.202–2.225 Conclusion ...................................................................................... 2.226–2.234 Before Stardust Marine................................................................. 2.181–2.185 Stardust Marine.............................................................................. 2.186–2.201 No State resources ................................................................................ 2.085–2.119 Notion of ............................................................................................... 2.179–2.180 State resources............................................................................................2.76–2.84 Incentive effect......................................................................................... 1.163–1.185 Airlines .............................................................................................. 3.1533–3.1534 Airports ...............................................................................3.1464–3.1466, 3.1506 GBER ..........................................................................................................3.33–3.41 Land transport ................................................................................. 3.1659–3.1660 Research, development and innovation (R&D&I) ...................... 3.291–3.298 Indirect aid ................................................................................................ 2.475–2.504 Case law on............................................................................................ 2.486–2.491 Features of.............................................................................................. 2.492–2.504 Types of .................................................................................................. 2.479–2.485 Individual guarantees Constituting aid ................................................................................... 2.816–2.818 478

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Index

Not constituting aid ............................................................................ 2.779–2.796 SMEs....................................................................................................... 2.792–2.796 Information, requests for ............................... 5.100, 5.135–5.152, 5.276–5.278 Infrastructures Broadband ........................................................................................ 3.1130–3.1132 Energy .................................................................................................... 3.422–3.431 Funding .......................................................................................................2.73–2.74 Local, GBER ......................................................................................... 3.182–3.190 Sports Compatibility of aid ................................................................. 3.1333–3.1340 GBER .................................................................3.167–3.181, 3.1334–3.1336 Inland waterways Compatibility assessment of State aid ........................................ 3.1768–3.1769 Liberalisation of sector ..................................................................................3.1638 Internet. see Broadband Investment aid Airports ............................................................................................. 3.1444–3.1489 Energy and environment field ...............................................3.380–3.382, 3.391 Individual......................................................................3.714–3.715, 3.722–3.723 Maritime transport ......................................................................... 3.1612–3.1613 Ports ................................................................................................... 3.1564–3.1574 Regional .......3.684–3.702, 3.710, 3.717–3.718, 3.722–3.723, 3.724–3.734, 3.743–3.770 Investments. see State investments L Land and buildings, Sale of ................................................................. 2.434–2.439 Land transport .............3.1623–3.1777. see also Rail transport; Road transport Compatibility assessment of State aid Altmark criteria ......................................................................... 3.1683–3.1686 Cableways Communication ................................................... 3.1680–3.1682 Combined transport ................................................................................3.1770 Distortion of competition ...................................................... 3.1665–3.1666 Forms of aid................................................................................ 3.1644–3.1652 Incentive effect .......................................................................... 3.1659–3.1660 Inland waterways....................................................................... 3.1768–3.1769 Internal market .......................................................................... 3.1653–3.1655 479

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Index

Non-discriminatory basis ........................................................................3.1664 Objective of common interest................................................ 3.1656–3.1658 Proportionality .......................................................................... 3.1661–3.1663 Public service obligations ........................................................ 3.1683–3.1748 Regulation (EC) No 1370/2007 ........................................... 3.1692–3.1748 Regulation (EEC) No 1191/69 ............................................. 3.1687–3.1691 Residual categories of ............................................................... 3.1749–3.1773 Short sea shipping ..................................................................... 3.1771–3.1773 Coordination of .............................................................................. 3.1641–3.1643 Liberalisation of sector .................................................................. 3.1628–3.1640 Combined transport ................................................................ 3.1639–3.1640 Inland waterways transport ....................................................................3.1638 Railway transport ...................................................................... 3.1634–3.1637 Road transport........................................................................... 3.1630–3.1633 Liability, Member States ........................................................................ 5.323–5.342 Liberalisation ...................................................................................... 3.1639–3.1640 Air transport .................................................................................... 3.1348–3.1352 Combined transport ...................................................................... 3.1639–3.1640 Inland waterways transport ..........................................................................3.1638 Land transport ................................................................................. 3.1628–3.1640 Railway transport ............................................................................ 3.1634–3.1637 Road transport................................................................................. 3.1630–3.1633 Liquidation aid, Banking ................................................................. 3.1888–3.2004 Loans, De minimis ................................................................................... 2.615–2.621 M Maritime transport ................3.1576–3.1622. see also Inland waterways; Ports Compatibility assessment of State aid Activities, non-qualified .......................................................... 3.1598–3.1600 Activities, qualified ................................................................... 3.1591–3.1597 Aid ceiling................................................................................... 3.1614–3.1615 Beneficiaries ............................................................................... 3.1584–3.1588 Flag requirements...................................................................... 3.1589–3.1590 Guidelines................................................................................... 3.1581–3.1621 Investment aid ........................................................................... 3.1612–3.1613 Labour costs ............................................................................... 3.1602–3.1604 Restructuring aid.......................................................................................3.1616 480

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Index

Ring fencing measures..............................................................................3.1601 SGEI ............................................................................................ 3.1617–3.1621 Short sea shipping ..................................................................... 3.1609–3.1611 Tonnage Tax ...............................................................................................3.1583 Training aid ................................................................................ 3.1605–3.1608 SGEI ....................................................................................................... 4.196–4.198 Tonnage Tax ..................................................................................... 3.1576–3.1580 Market conditions Compliance with Assessment Methods ..................................................................... 2.416–2.423 Benchmarking................................................................................. 2.413–2.415 Specific considerations .................................................................. 2.424–2.430 Market Economy Investor Principle (MEIP) ...................................1.74–1.95 Market Economy Operator Principle (MEOP) Advantage .............................................................................................. 2.353–2.378 Comparable circumstances ................................................................ 2.362–2.370 Compliance with ................................................................................. 2.452–2.458 Hindsight .............................................................................................. 2.371–2.372 Neutrality principle ............................................................................. 2.356–2.361 State guarantees .................................................................................... 2.776–2.777 State obligations and prerogatives .................................................... 2.373–2.378 Member States Liability of Infringement of State aid rules .................................................... 5.331–5.342 Non-contractual ............................................................................. 5.323–5.330 Role in Granting aid .................................................................................... 5.127–5.134 Preliminary investigation ............................................................. 5.109–5.111 Misused aid ....................................................................................... 5.61–5.62, 5.234 N National courts, role of ................................................5.281–5.342, 5.297–5.322 National development banks.............................................................. 3.609–3.619 National Regulatory Authority (NRA), Role in broadband ................3.1156 Natural disasters, GBER ...................................................................... 3.125–3.140 Neutrality principle ............................................................................... 2.356–2.361 New aid, Definitions ...............................................................................................5.53 481

160324_state_aid_deel_1_part_1-2.indd 481

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Index

Notification. see Procedures, Notification Of decisions........................................................................................................ 5.169 Procedure ....................................................................................................5.63–5.95 Investment aid ...........................................................................................3.1489 Operating aid .............................................................................................3.1519 Start-up aid .................................................................................................3.1539 Thresholds ............................................................3.27–3.29, 3.253–3.263, 3.353 NRA (National Regulatory Authority), Role in broadband ................3.1156 Nuclear energy ............................................................................... 2.15, 3.472–3.486 O OECD Export Credit Agreement 1976 .......................................... 3.993–3.995 Operating aid Airports ............................................................................................. 3.1490–3.1519 Fisheries............................................................................................. 3.2292–3.2293 Regional ................... 3.702–3.706, 3.711–3.713, 3.719–3.721, 3.735–3.738, 3.771–3.811 P Parafiscal levies........................................................................................ 2.132–2.163 Policy Making, State aid evaluation ................................................... 1.307–1.321 Ports. see also Maritime Transport Compatibility rules ........................................................................ 3.1547–3.1577 Investment aid ................................................................................. 3.1564–3.1574 Inland ports ................................................................................ 3.1572–3.1574 Seaports ....................................................................................... 3.1567–3.1571 Legislation background ................................................................. 3.1550–3.1563 Leipzig Halle ................................................................3.1548, 3.1553–3.1563 Postal services, SGEI ............................................................................. 4.199–4.213 Privatisations ............................................................................................ 2.440–2.451 Procedure Aid schemes........................................................................................... 5.546–5.558 Complainants ....................................................................................... 5.273–5.275 Council, role of..................................................................................... 5.473–5.481 482

160324_state_aid_deel_1_part_1-2.indd 482

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Index

Decisions Challenges ....................................................................................... 5.482–5.572 Conditional ..................................................................................... 5.163–5.167 Final .................................................................................................. 5.527–5.548 Negative ........................................................................................................ 5.168 Notification and publication of ............................................................... 5.169 Positive ....................................................................5.161–5.162, 5.510–5.517 Revocation of .................................................................................. 5.172–5.176 Third parties, role in ...................................................................... 5.161–5.162 Definitions .................................................................................................5.19–5.62 Documents, Access to ......................................................................... 5.279–5.280 Existing aid, review of ......................................................................... 5.235–5.246 External experts, use of ....................................................................... 5.153–5.155 Failure to act, actions against ............................................................. 5.559–5.564 Information, requests for .............................. 5.100, 5.135–5.152, 5.276–5.278 Injunctions Information injunctions ............................................................... 5.215–5.226 Recovery Injunction ...................................................................... 5.231–5.233 Suspension injunction................................................................... 5.227–5.230 Investigation, Into economic sectors and aid instruments .......... 5.247–5.253 Investigation, formal............................................................................ 5.117–5.126 Challenges initiating ..................................................................... 5.518–5.526 Duration .......................................................................................... 5.170–5.171 Extension of .................................................................................... 5.156–5.160 Unlawful aid ................................................................................... 5.205–5.210 Investigation, preliminary .................................................................. 5.104–5.116 Unlawful aid ................................................................................... 5.201–5.204 Member States, Liability of................................................................ 5.323–5.342 Misused aid ........................................................................................................ 5.234 National courts, role of ....................................................................... 5.281–5.342 Notification ................................................................................................5.63–5.95 Completeness.................................................................................. 5.096–5.103 Decision ........................................................................................................ 5.169 Exemptions...........................................................................................5.82–5.86 Simplified..............................................................................................5.87–5.95 Stand still obligation ..........................................................................5.76–5.81 Recovery ................................................................................................ 5.297–5.322 Content of decision ....................................................................... 5.369–5.386 Effect of decision......................................................................................... 5.387 Impossibility ................................................................................... 5.424–5.432 483

160324_state_aid_deel_1_part_1-2.indd 483

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Index

Legal certainty ................................................................................ 5.458–5.464 Legitimate expectations ................................................................ 5.433–5.457 Limitation period .......................................................................... 5.470–5.472 Parties affected ................................................................................ 5.388–5.418 Proportionality ............................................................................... 5.422–5.423 Rights of defence ............................................................................ 5.465–5.468 Unlawful aid ................................................................................... 5.343–5.472 Reporting and monitoring ................................................................. 5.254–5.259 State Aid Action Plan 2005 ....................................................................5.08–5.10 State Aid Modernisation (SAM) ...........................................................5.11–5.18 Third parties, role of ............................................................................ 5.260–5.280 Unlawful aid, review of....................................................................... 5.177–5.213 Procurement rules .........................................................4.214–4.216, 4.235–4.245 Public service broadcasting. see Broadcasting, public service Public service obligations. see Services of general interest (SGEI) R Rail transport Compatibility assessment of State aid ........................................ 3.1756–3.1767 Guidelines................................................................................... 3.1667–3.1682 Research and development aid............................................... 3.1675–3.1677 Liberalisation of sector .................................................................. 3.1634–3.1637 Recovery. see Procedures, Recovery Regional aid Aid ceilings ...................................................................3.668–3.670, 3.679–3.680 Air transport .................................................................................... 3.1441–3.1442 Compatibility rules ............................................................................. 3.620–3.811 Context .................................................................................................. 3.625–3.638 GBER ............................................................................3.710–3.715, 3.724–3.738 Maps ....................................................................................................... 3.661–3.664 RAG 2014 ....................................................................3.716–3.723, 3.739–3.811 Rules, 2007-2013 ................................................................................. 3.633–3.638 Rules, revision of Architecture of ............................................................................... 3.707–3.709 ‘A’ areas ....................................................... 3.665–3.671, 3.687–3.692, 3.703 ‘C’ areas ...................................................................3.672–3.681, 3.693–3.695 Objectives ........................................................................................ 3.639–3.645 484

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Index

Scope.............................................................................................................. 3.646 Types of .................................................................................................. 3.682–3.706 Investment aid…. ........... 3.684–3.702, 3.710, 3.714–3.715, 3.717–3.718, 3.722–3.723, 3.724–3.734, 3.743–3.770 Operating aid .... 3.702–3.706, 3.711–3.713, 3.719–3.721, 3.735–3.738, 3.771–3.811 Regional Aid Guidelines 2014 ..................................3.716–3.723, 3.739–3.811 Regulation 1407/2013 .......................................................................... 2.582–2.609 Reporting and monitoring Procedure ............................................................................................... 5.254–5.259 R&D&I.................................................................................................. 3.323–3.326 Rescue and restructuring aid ............................................................. 3.881–3.884 SGEI ..............................................................................4.166–4.168, 4.375–4.376 State guarantees ................................................................................................. 2.844 Rescue and restructuring aid Air transport .................................................................................... 3.1437–3.1440 Banking Banking Communication 2013 ............................................. 3.1818–3.1838 Crisis Communications ........................................................... 3.1815–3.1817 Burden-sharing ..................................................................................... 3.938–3.946 Compatibility rules ............................................................................. 3.812–3.985 Economic rationale.............................................................................. 3.812–3.820 Eligibility ............................................................................................... 3.849–3.860 Guidelines 2014 ................................................................................... 3.830–3.839 Continuity and changes between 2004 and....................................788–792 Measures ................................................................................................ 3.912–3.915 Negative effects ..................................................................................... 3.947–3.966 Objective of common interest..................................3.874–3.878, 3.903–3.904 “One time, last time” principle ......................................................... 3.861–3.873 Own contribution................................................................................ 3.930–3.937 Period .........................................................................................3.909–3.911, 3.971 Plan ......................................................................................................... 3.905–3.908 Amendment .................................................................................... 3.968–3.970 Implementation .............................................................................. 3.966–3.967 Reporting and monitoring ................................................................. 3.881–3.884 Rescue aid .............................................................................................. 3.885–3.893 Restructuring aid.................................................................................. 3.902–3.972 Temporary ............................................................................................. 3.894–3.901 Scope....................................................................................................... 3.840–3.848 SGEI ....................................................................................................... 3.977–3.983 485

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Index

SMEs....................................................................................................... 3.972–3.976 Social costs, aid to cover ..................................................................... 3.984–3.985 Transparency ......................................................................................... 3.879–3.880 Undertaking in difficulty.................................................................... 3.821–3.829 Viability, long-term ............................................................................. 3.916–3.921 Research, development and innovation (R&D&I) Compatibility assessment of State aid ............................................. 3.196–3.330 Aid intensities ................................................................................. 3.267–3.275 Appropriateness of aid .................................................................. 3.288–3.290 Effect-based (R&D&I Framework) ........................................... 3.276–3.326 Evaluation, reporting and monitoring ....................................... 3.323–3.326 Incentive effect ............................................................................... 3.291–3.298 IPCEI .......................................................................................... 3.2086–3.2088 Negative effects, avoidance of ...................................................... 3.311–3.319 Notification thresholds ................................................................. 3.253–3.263 Proportionality ............................................................................... 3.299–3.310 Rule-based (GBER)....................................................................... 3.246–3.275 Scope................................................................................................. 3.230–3.245 State intervention .......................................................................... 3.284–3.287 Summary table of allowable aid intensities ............................................ 3.275 Summary table of notification thresholds.............................................. 3.263 Transparency ................................................................................... 3.320–3.322 Existence of aid ..................................................................................... 3.205–3.228 Research and development aid, Rail transport ......................... 3.1675–3.1677 Restructuring aid, Maritime transport.........................................................3.1616 Risk capital ............................................................................................... 3.487–3.490 Admissible investment forms ............................................................ 3.549–3.566 De minimis ............................................................................................ 2.628–2.630 Demand-side measures ....................................................................... 3.528–3.589 Eligible financial intermediaries ....................................................... 3.560–3.589 Eligible investees .................................................................................. 3.533–3.542 GBER ..................................................3.533–3.542, 3.550–3.555, 3.561–3.566 Notifiable schemes ......................................................3.543–3.548, 3.559–3.560 Review process...................................................................................... 3.491–3.497 Rules, exceptions to ............................................................................. 3.598–3.619 Start-up aid ............................................................................................ 3.590–3.591 State aid to enhance ............................................................................. 3.520–3.527 Supply-side measures ........................................................................... 3.592–3.597

486

160324_state_aid_deel_1_part_1-2.indd 486

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Index

Road transport Compatibility assessment of State aid ........................................ 3.1750–3.1755 Liberalisation of sector .................................................................. 3.1630–3.1633 S Sale, Land and buildings ......................................................................... 2.434–2.439 SAM (State Aid Modernisation). see State Aid Modernisation (SAM) SCM Agreement .........1.390, 1.399–1.400, 1.402–1.406, 1.408, 1.413–1.415, 1.415, 1.418, 1.420–1.423, 1.428, 1.430, 1.433 Selectivity................................................................................................... 2.235–2.319 Assessment............................................................................................. 2.270–2.274 Reference system ............................................................................ 2.275–2.293 De jure and de facto selectivity ......................................................... 2.250–2.260 Discretionary administrative practices ............................................ 2.261–2.269 Material selectivity ............................................................................... 2.239–2.249 Regional selectivity .............................................................................. 2.294–2.319 Autonomy test ................................................................................ 2.305–2.319 Distribution of competences ....................................................... 2.297–2.304 Services of general interest (SGEI) .............................................2.12, 4.1–4.118 Air transport ...........................................................3.1415–3.1433, 4.192–4.195 Almunia package.......................................................................................4.45–4.48 before Altmark ...........................................................................................4.15–4.21 Altmark criteria .................................................................................... 4.049–4.113 Clearly defined obligation.................................................................4.49–4.76 Efficiency of costs ........................................................................... 4.091–4.113 Overcompensation, absence of ........................................................4.85–4.90 Parameters ............................................................................................4.77–4.84 Altmark judgement...................................................................................4.22–4.41 Compensation ...................................................................................... 1.285–1.293 De minimis ............................................................................................ 4.114–4.118 Exemption decision ............................................................................. 4.119–4.168 Compensation ................................................................................ 4.149–4.157 Entrustment .................................................................................... 4.145–4.148 Information, availability of .......................................................... 4.164–4.165 Overcompensation ........................................................................ 4.158–4.160 Reporting ......................................................................................... 4.166–4.168 Scope................................................................................................. 4.121–4.143 487

160324_state_aid_deel_1_part_1-2.indd 487

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Index

Transparency ................................................................................... 4.161–4.163 Framework 2011 .................................................................................. 4.169–4.376 Additional requirements .............................................................. 4.364–4.373 Compatibility conditions............................................................. 4.219–4.376 Compensation .......................................................4.149–4.157, 4.255–4.326 Discrimination, absence of........................................................... 4.246–4.254 Efficiency incentives ...................................................................... 4.343–4.360 Entrustment .................................................................................... 4.223–4.231 Information, availability of .......................................................... 4.164–4.165 Overcompensation ...............................................4.158–4.160, 4.361–4.363 Public procurement rules ....................................4.214–4.216, 4.235–4.245 Reasonable profit ........................................................................... 4.327–4.342 Reporting ......................................................................................... 4.166–4.168 Reporting and evaluation ............................................................. 4.375–4.376 Scope................................................................................................. 4.173–4.188 Sectoral guidelines ......................................................................... 4.189–4.218 Transparency ............................................. 4.161–4.163, 4.232–4.234, 4.374 Maritime transport ................................................3.1617–3.1621, 4.196–4.198 Monti-Kroes package ...............................................................................4.42–4.44 Postal services ....................................................................................... 4.199–4.213 Rescue and restructuring aid ............................................................. 3.977–3.983 Treaty Provisions .......................................................................................4.05–4.14 Shipbuilding Sector, Provisions for, in EU Accession negotiations ................................................................................................. 1.542–1.551 Short sea shipping, Compatibility assessment of State aid ..... 3.1609–3.1611, 3.1771–3.1773 Small and Medium-sized Enterprises (SMEs) Definition ...................................................................................................3.73–3.75 GBER ..........................................................................................................3.67–3.90 Guarantee schemes .............................................................................. 2.806–2.810 Individual guarantees .......................................................................... 2.792–2.796 Rescue and restructuring aid ............................................................. 3.972–3.976 Sports Compatibility rules ........................................................................ 3.1319–3.1344 Infrastructures Compatibility of aid ................................................................. 3.1333–3.1340 GBER .................................................................3.167–3.181, 3.1334–3.1336 Sports facilities ................................................................................... 3.1341–3.1343 Sport clubs, funding of .................................................................. 3.1341–3.1343 Stabilisation and Association Agreements .................................... 1.446–1.453 488

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Index

Stardust Marine ...................................................................................... 2.186–2.201 Start-up aid Airlines .............................................................................................. 3.1524–3.1539 Risk capital ............................................................................................ 3.590–3.591 State As creditor ............................................................................................. 2.459–2.474 As investor ............................................................................................. 2.379–2.430 As vendor or buyer............................................................................... 2.431–2.458 State aid Advantage .............................................................................................. 2.320–2.353 Agriculture and forestry ...................................................... 2.10, 3.2117–3.2177 Aid schemes...................................................................... 5.54–5.58, 5.546–5.558 Aviation ............................................................................................. 3.1345–3.1544 Banking ............................................................................................. 3.1778–3.2049 Coal and Steel ............................................................................................2.13–2.14 Compatibility rules. see Compatibility rules Competition. see Competition Concept ............................................................................ 5.19–5.21, 5.289–5.296 Control. see Control of state aid ...........................................1.390, 1.409–1.415 Costs to State ........................................................................................ 2.120–2.127 Criteria ........................................................................................................1.56–1.58 De minimis. see De minimis Defence .......................................................................................................2.16–2.34 Development of.................................................................................... 1.438–1.445 Economics. see Economics, of state aid Emissions trading schemes (ETS) .................................................... 3.354–3.387 EU Accession. see EU Accession European Agreements and ................................................................. 1.446–1.453 Evaluation .............................................................................................. 1.304–1.389 Existing aid .................................................................................................5.22–5.52 Finance, access to ................................................................................. 3.487–3.619 Fiscal aid................................................................................................. 2.689–2.759 Fisheries............................................................................................. 3.2178–3.2299 Form of provision of............................................................................ 2.128–2.131 General Context.............................................................................................2.1–2.7 Important projects of common European interests (IPCEI) 3.2050–3.2116 Imputability .......................................................................................... 2.075–2.234 Indirect aid ............................................................................................ 2.475–2.504 Interaction with other Treaty Provisions .............................................2.35–2.37 Land transport ................................................................................. 3.1623–3.1777 489

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Index

Maritime transport ......................................................................... 3.1576–3.1622 Market economy operator principle. see Market economy investor principle (MEIP) Misused aid ................................................................................... 5.61–5.62, 5.234 New aid ..................................................................................................................5.53 Nuclear energy......................................................................................................2.15 Parafiscal levies ..................................................................................... 2.132–2.163 Recovery of, by national courts ......................................................... 5.297–5.322 Rescue and restructuring aid ............................................................. 3.812–3.985 Selectivity .............................................................................................. 2.235–2.319 SGEI ..................................................................................................2.12, 4.1–4.118 State aid Modernisation (SAM). see State Aid Modernisation (SAM) State guarantees .................................................................................... 2.760–2.845 Territorial Scope ........................................................................................2.38–2.46 Transport ...............................................................................................................2.11 Undertaking ...............................................................................................2.47–2.74 Unlawful aid .................................................................... 5.59–5.60, 5.177–5.213 Vision on .........................................................................................................1.5–1.6 WTO law and ...................................................................................... 1.390–1.437 State Aid Action Plan 2005 .....................................................................5.08–5.10 State Aid Modernisation (SAM) .......................1.2–1.3, 1.10–1.36, 5.11–5.18 After implementation...............................................................................1.34–1.36 Aviation Guidelines and ................................................................ 3.1373–3.1381 Common principles..................................................................................1.30–1.33 Context .......................................................................................................1.11–1.14 Energy and environment field ........................................................... 3.336–3.339 Finance, access to ................................................................................. 3.491–3.497 Foster ‘good aid’ ........................................................................................1.16–1.19 Increase efficiency .....................................................................................1.20–1.26 Shortcomings in framework ...................................................................1.27–1.29 Transparency .........................................................................................................1.33 State guarantees ...................................................................................... 2.760–2.845 Automaticity ......................................................................................... 2.811–2.812 Beneficiaries ....................................................................................................... 2.778 Constituting aid, Guarantee schemes .............................................. 2.819–2.821 Difficulties ............................................................................................. 2.769–2.770 Evaluation, ex-ante ............................................................................... 2.771–2.773 Individual guarantees Constituting aid ............................................................................. 2.816–2.818 Not constituting aid ...................................................................... 2.779–2.796 490

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Index

MEOP principle .................................................................................. 2.776–2.777 Not constituting aid, Guarantee schemes ....................................... 2.797–2.810 Reporting ............................................................................................................ 2.844 Scope....................................................................................................... 2.764–2.768 Traceability ......................................................................................................... 2.775 Transparency ...................................................................................................... 2.805 Types of ............................................................................................................... 2.774 Unlimited guarantees.......................................................................... 2.822–2.843 Advantage ...............................................................2.826–2.827, 2.837–2.838 De minimis ................................................................................................... 2.828 Specific issues .................................................................................. 2.829–2.841 State investments .................................................................................... 2.379–2.430 Assessment methods............................................................................ 2.413–2.415 Compliance with, Market conditions ............................................. 2.413–2.430 Economic return .................................................................................. 2.394–2.403 Pari-passu transactions ........................................................................ 2.409–2.412 Profitability ........................................................................................... 2.379–2.393 Repeated interventions/capital injections ...................................... 2.404–2.408 State resources Access ..................................................................................................... 2.164–2.178 Imputability ..................................................................... 2.76–2.84, 2.179–2.234 Unlimited guarantees.......................................................................... 2.830–2.836 Steel sector, Provisions for, in EU Accession negotiations ............. 1.526–1.541 T Training aid GBER ..................................................................................................... 3.091–3.103 Maritime transport ......................................................................... 3.1605–3.1608 Transparency Compatibility assessment of State aid, R&D&I ........................... 3.320–3.322 GBER, Common provisions ..................................................................3.30–3.32 State aid Modernisation (SAM) programme .................................................1.33 State guarantees ................................................................................................. 2.805 Transport ........................................... 2.11. see also Air transport; Land transport; Maritime transport; Rail transport De minimis ............................................................................................ 2.591–2.595 Important projects of common European interests (IPCEI) 3.2068–3.2076 491

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Index

Inland waterways...............................................................3.1638, 3.1768–3.1769 Residents of remote regions, GBER ................................................ 3.141–3.151 U Undertaking...................................................................................................2.47–2.74 In difficulties De minimis ...................................................................................... 2.599–2.604 Rescue and restructuring aid ....................................................... 3.821–3.829 Exercise of public authority ....................................................................2.65–2.69 Infrastructure funding .............................................................................2.73–2.74 Legal Status ................................................................................................2.49–2.58 Market activities ........................................................................................2.70–2.72 Notion of, Air transport ................................................................ 3.1390–3.1397 Public law status ................................................................................... 2.839–2.841 Social objectives ........................................................................................2.59–2.64 Solidarity Principle ..............................................................................................2.61 Unlawful aid ........................................................................ 5.59–5.60, 5.177–5.213 Recovery Content of Decision...................................................................... 5.369–5.386 Effect of Decision ....................................................................................... 5.387 Legal certainty ................................................................................ 5.458–5.464 Legal limits to enforcement of .................................................... 5.419–5.472 Legitimate expectations ................................................................ 5.433–5.457 National authorities....................................................................... 5.354–5.368 Parties affected ................................................................................ 5.388–5.418 Proportionality ............................................................................... 5.422–5.423 Rights of defence ............................................................................ 5.465–5.468 W Waste management ................................................................................ 3.416–3.421 WTO law, State aid and.......................................................................... 1.390–1.437

492

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Nicola Pesaresi, Koen Van de Casteele, Leo Flynn and Christina Siaterli

second edition

VOLUME IV

STATE AID BOOK TWO A. Avallone M. Balossino T. Beranger J. Bokobza E. Cabrera Maqueda B. Cattrysse P. Cesarini M. Chovino G. Conte A. S. Dupont L. Flynn C. Galand D. Grespan C. Grozea-Knuth V. Guigue-Koeppen A. Held

G. Ianakiev R. Ianus N. Imbert A. Jarosz-Friis C. Kerle M. Lienemeyer P.J. Loewenthal J. Majcher-Williams G. Mamdani S. Medghoul I. Neale-Besson P. Nemeckova S. Noë V. Nozar A. Nykiel-MateoR. Peduzzi

A. Pelin N. Pesaresi J. Rapp S. Ritzek-Seidl L. Rossi G. Sapi T. Scharf C. Schoser O. Stehmann C. Tenreiro F. Tomat K. Van de Casteele R. Van de Ven V. Verouden J. Wiemann

EU COMPETITION LAW VOLUME IV

STATE AID Second edition

BOOK TWO

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EU COMPETITION LAW VOLUME IV STATE AID Second edition BOOK TWO EDITORS Nicola Pesaresi, Koen Van de Casteele, Leo Flynn and Christina Siaterli

CONTRIBUTORS A. Avallone M. Balossino T. Beranger J. Bokobza E. Cabrera Maqueda B. Cattrysse P. Cesarini M. Chovino G. Conte A. S. Dupont L. Flynn C. Galand D. Grespan C. Grozea-Knuth V. Guigue-Koeppen A. Held

G. Ianakiev R. Ianus N. Imbert A. Jarosz-Friis C. Kerle M. Lienemeyer P.J. Loewenthal J. Majcher-Williams G. Mamdani S. Medghoul I. Neale-Besson P. Nemeckova S. Noë V. Nozar A. Nykiel-Mateo R. Peduzzi

A. Pelin N. Pesaresi J. Rapp S. Ritzek-Seidl L. Rossi G. Sapi T. Scharf C. Schoser O. Stehmann C. Tenreiro F. Tomat K. Van de Casteele R. Van de Ven V. Verouden J. Wiemann

CLAEYS CASTEELS 2016

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Part 3 – Compatibility rules Chapter 16 – General block exemption regulation Anna Nykiel-Mateo, April Pelin and Armando Avallone

BOOK TWO PART 3 – COMPATIBILITY RULES Chapter 16 General block exemption regulation

1.

Introduction

Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty1440 does not contain in its title the wording “General Block Exemption Regulation” (“GBER”), but it constitutes in fact the new GBER, replacing Commission Regulation 800/2008.1441

3.1

The legal basis for Regulation 651/2014 is explained in its first recital. On the basis of Article 109 of the Treaty, the Council may determine categories of aid that are exempted from the notification requirement stemming from Article 108(3) of the Treaty. In accordance with Article 108(4) of the Treaty the Commission may adopt regulations relating to those categories of State aid. Council Regulation 994/98 (“Enabling Regulation”)1442 empowered the Commission to declare that the following categories may, under certain conditions, be exempted from the notification requirement: aid to small and medium-sized enterprises (SMEs), aid in favour of research and development, aid in favour of environ-

3.2

1440 OJ L 187, 26.06.2014, p. 1. 1441 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of articles 87 and 88 of the Treaty (General block exemption Regulation), OJ L 214, 09.08.2008, p. 8. 1442 Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 142, 14.05.1998, p. 1.

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PART 3 – Compatibility rules Chapter 16 – General block exemption regulation Anna Nykiel-Mateo, April Pelin and Armando Avallone

mental protection, employment and training aid and aid that complies with the map approved by the Commission for each Member State for the grant of regional aid. On that basis, the Commission adopted several block exemption regulations in relation to training aid1443, aid to SMEs1444, aid for employment1445 and regional investment aid.1446 Those Regulations were subsequently replaced by the now repealed 2008 GBER. It originally applied until 31 December 2013 but was subsequently prolonged1447 and expired on 30 June 2014. On 22 July 2013 Regulation 994/98 was amended by Council Regulation 733/20131448, which empowered the Commission to extend the block exemption to new categories of aid including: aid to make good the damage caused by certain natural disasters, social aid for transport for residents of remote regions, aid for broadband infrastructures, aid for innovation, aid for culture and heritage conservation, aid for sport and multifunctional recreational infrastructures.

3.3

The first GBER constituted an important shift in the Commission’s policy from an ex ante control system to ex post control. Regulation 800/2008 consolidated into one text and harmonised rules previously set in separate Regulations and extended the scope of the exemption by introducing new block exempted categories of aid.1449 The current GBER 651/2014 continues that trend.

1443 Commission Regulation (EC) No 68/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to training aid, OJ L 10, 13.01.2001, p. 20; as amended by Commission Regulation (EC) No 363/2004 of 25 February 2004 amending Regulation (EC) No 68/2001 on the application of Articles 87 and 88 of the EC Treaty to training aid, OJ L 63, 28.02.2004, p. 20. 1444 Commission Regulation (EC) No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises, OJ L 10, 13.01.2001, p. 33; as amended by Commission Regulation No 364/2004 of 25 February 2004 amending Regulation (EC) No 70/2001 as regards the extension of its scope to include aid for research and development, OJ L 63, 28.02.2004, p. 22. 1445 Commission Regulation No 2204/2002 of 12 December 2002 on the application of Articles 87 and 88 of the EC Treaty to State aid for employment, OJ L 337, 13.12.2002, p. 3; corrigendum OJ L 349, 24.12.2002, p. 126. 1446 Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the EC Treaty to national regional investment aid, OJ L 302, 01.11.2006, p. 29. 1447 Commission Regulation (EU) No 1224/2013 of 29  November 2013 amending Regulation (EC) No 800/2008 as regards its period of application, OJ L 320, 30.11.2013, p. 22. 1448 Council Regulation (EU) No 733/2013 of 22 July 2013 amending Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 204, 31.07.2013, p. 11. 1449 See e.g. Van de Casteele, ‘General block exemption regulation’ in Hancher, Ottervanger and Slot, EU State aids (Sweet & Maxwell 2012), p. 2; Deiberova and Nyssens, ‘The new General Block Exemption Regulation (GBER): What changed?’ [2009] EStAL No. 1, pp. 27 et seq.; for further background: State aid: Commission adopts Regulation automatically approving aid for jobs and growth, IP/08/1110 of 07.07.2008 and MEMO/08/482 of 07.07.2008.

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PART 3 – Compatibility rules Chapter 16 – General block exemption regulation Anna Nykiel-Mateo, April Pelin and Armando Avallone

The GBER constitutes a core element of the Commission’s reform of State aid policy programme known as the State Aid Modernisation (SAM).1450 The main objectives of the modernisation were (i) to achieve sustainable, smart and inclusive growth in a competitive internal market, while contributing to Member State efforts towards a more efficient use of public finances, (ii) to focus Commission ex ante scrutiny of aid measures on cases with the biggest impact on the internal market, while strengthening Member State cooperation in State aid enforcement, and (iii) to streamline the rules and provide for faster, better informed and more robust decisions based on a clear economic rationale, a common approach and clear obligations. The review of the GBER was clearly linked to prioritisation and simplification objectives. It moreover resulted in strengthening the role of the Member States in the enforcement of State aid rules.

2.

3.4

Role of the GBER

The GBER gives Member States the possibility to grant State aid without prior notification. It establishes the conditions under which aid measures will be automatically considered compatible with the internal market and exempted from the notification requirement of Article 108(3) of the Treaty.

3.5

It therefore significantly reduces the administrative burden for Member States and local authorities and increases legal certainty for aid beneficiaries. It also eases the work of the Commission allowing it to focus its enforcement efforts on cases with the biggest potential for competition distortion.

3.6

The now repealed GBER 800/2008 covered approximately 60 per cent of all aid measures and slightly more than 30 per cent of the aid amounts granted each year in the Union. In the Commission’s estimation, based on 2012 data, about  three fourths of today’s State aid measures and some two thirds of aid amounts will be exempted under the revised GBER.1451 

3.7

3.

Structure

The GBER is divided into four chapters. The first one sets out the common compatibility conditions that apply to all aid categories covered by the third chapter.

3.8

1450 See Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: EU State Aid Modernisation (SAM), COM(2012)209 final, 08.05.2012; for further background: State aid: Commission launches major initiative to modernise State aid control, IP/12/458 of 08.05.2012; Sinnaeve, ‘The Complexity of Simplification: The Commission’s Review of the de minimis Regulation’, [2014] EStAL No. 2, pp. 261, 264. 1451 State aid: Commission exempts more aid measures from prior notification, IP/14/587 of 21.05.2014.

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PART 3 – Compatibility rules Chapter 16 – General block exemption regulation Anna Nykiel-Mateo, April Pelin and Armando Avallone

3.9

The second chapter concerns monitoring in a broad sense and contains three Articles dealing respectively with the withdrawal of the benefit of the block exemption, reporting and monitoring sensu stricto. In that way, the new GBER addresses the problem caused by the inclusion in the first chapter of the now repealed GBER 800/2008 (covering compatibility conditions common to all aid categories) of procedural provisions, concerning the publication obligation, monitoring and reporting by the Member States.1452 That structure meant that if e.g. a Member State did not publish on the internet the full text of an aid measure, such a measure fell outside the scope of the block exemption, even if it fulfilled all the other compatibility conditions set out in the GBER. Under the new GBER, the non-observance of one of the procedural requirements set out in Chapter II does not necessarily mean that the measure is not block exempted. The third chapter covers specific compatibility conditions applicable to different categories of aid covered by the block exemption.

3.10

The last chapter deals with the entry into force of the new GBER and with the transitional arrangements in relation to the previous GBER 800/2008.

3.11

Finally, the GBER contains three annexes setting out the SME definition (Annex I), the summary information form (Annex II) and requirements for comprehensive State aid websites (Annex III) that Member States will be required to set up within two years from the entry into force of the GBER.1453 As it was the case for GBER 800/2008, also Annex I to the new GBER 651/2014 invokes the SME definition as set out in Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises.1454

4.

Common provisions

4.1 Scope 3.12

Article 1 sets out the scope of the GBER, listing in paragraph 1 broad categories of aid covered by the block exemption and in the remaining four paragraphs exclusions from its scope.

3.13

According to Article 1(1) the GBER applies to the following categories of aid:

1452 See e.g. Berghofer, ‘The General Block Exemption Regulation: A Giant on Feet of Clay’ [2009], EStAL No. 3, pp. 323, 328, 329. 1453 See Article 9(6) of the GBER 651/2014. 1454 OJ L 124, 20.05.2003, p. 36.

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–

regional aid;

–

aid to SMEs in the form of investment aid, operating aid and SMEs’ access to finance;

–

aid for environmental protection;

–

aid for research and development and innovation;

–

training aid;

–

recruitment and employment aid for disadvantaged workers and workers with disabilities;

–

aid to make good the damage caused by certain natural disasters;

–

social aid for transport for residents of remote regions;

–

aid for broadband infrastructures;

–

aid for culture and heritage conservation;

–

aid for sport and multifunctional recreational infrastructures; and

–

aid for local infrastructures.

Paragraph 2(a) of Article 1 introduces a new element into the GBER’s system which must be taken into account while defining the scope of the application of the Regulation: evaluation. According to Article 1(2)(a), in relation to very large schemes – with the average annual State aid budget exceeding EUR 150 million – Member States must notify an evaluation plan. They have 20 working days from the scheme’s entry into force to do so. Such a scheme is provisionally block exempted during 6 months after its entry into force and falls out of the scope of the GBER if the Commission does not decide, having assessed the evaluation plan, that the scheme should continue to be block exempted. Not all the schemes will be subject to evaluation. Categories of aid for which Member States are obliged to notify an evaluation plan in relation to very large schemes are: –

3.14

regional aid (with the exception of regional operating aid),

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–

aid to SMEs,

–

aid for access to finance for SMEs,

–

aid for research and development and innovation,

–

aid for environmental protection (with the exception of aid in the form of reductions in environmental taxes) and

–

aid for broadband infrastructures.

3.15

Schemes concerning other categories of aid, such as training aid, aid for disadvantaged workers, aid for workers with disabilities, aid in case of natural disasters or aid for culture and for sport will not be subject to an evaluation requirement regardless of their budget.

3.16

The purpose of evaluation is to contribute to a more effective use of public funds, to help to assess whether and to what extent the original objectives of an aid measure have been met and to improve the design of future measures. It should also be useful for determining the impact of aid schemes on markets and competition. The issue of evaluation is dealt with more in detail in Chapter 4 of this book.

3.17

As in the now repealed GBER 800/2008, export aid or aid favouring the use of domestic over imported products is excluded. This exclusion is motivated by the EU’s WTO obligations.1455

3.18

Article 1(3) contains the list of sectoral exclusions from the scope of the GBER and clarifies that where an undertaking is active both in the excluded sectors and in sectors which fall within the scope of the GBER, the block exemption covers aid granted in respect of the latter sectors or activities, provided that Member States ensure by appropriate means, such as separation of activities or distinction of costs, that the activities in the excluded sectors do not benefit from the aid granted in accordance with the GBER. That provision was inspired by the reviewed de minimis aid Regulation.1456

1455 Article 3 of the WTO Agreement on Subsidies and Countervailing Measures, OJ L 336, 23.12.1994, p.156. See Van de Casteele, ‘General block exemption regulation’ in Hancher, Ottervanger and Slot, EU State aids (Sweet & Maxwell 2012), p. 4. 1456 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1.

498

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In line with the so-called Deggendorf principle1457, the GBER does not apply to aid schemes which do not explicitly exclude the payment of individual aid in favour of an undertaking which is subject to an outstanding recovery order following a previous Commission Decision declaring an aid illegal and incompatible with the internal market.1458 Ad hoc aid to such undertakings is also excluded from the scope of the GBER.1459

3.19

Finally, Article 1(4)(c) establishes that undertakings in difficulty remain outside the scope of the block exemption. That exclusion is not new and is motivated by the aim of the GBER which is to make it easier for Member States to grant aid that addresses market failures and supports Europe 2020 objectives.1460 As a result, aid needs to be granted to sound firms that can deliver those objectives. Struggling firms cannot be expected to be the drivers of growth and providers of new jobs.

3.20

What is new about the exclusion of undertakings in difficulty in the reviewed GBER is the definition of an undertaking in difficulty itself.

3.21

According to the definition set out in Article 2(18):

3.22

“undertaking in difficulty’ means an undertaking in respect of which at least one of the following circumstances occurs: (a)

In the case of a limited liability company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its subscribed share capital has disappeared as a result of accumulated losses. This is the case when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital. For the purposes of this provision, ‘limited liability company’ refers in particular to the types

1457 Case C-355/95 P TWD v Commission ECLI:EU:C:1997:241, paras 25-27; see Van de Casteele, ‘General block exemption regulation’ in Hancher, Ottervanger and Slot, EU State aids (Sweet & Maxwell 2012), p. 4; Zuleger, ‘Block Exemption Regulation’ in Heidenhain, European State Aid Law (C. H. Beck 2010), pp. 419,423. 1458 Article 1(4)(a) of the GBER. 1459 Article 1(4)(b) of the GBER. 1460 See Communication from the Commission, Europe 2020, A strategy for smart, sustainable and inclusive growth, Brussels, 3.3.2010, COM(2010) 2020 final.

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of company mentioned in Annex I of Directive 2013/34/EU1461 and ‘share capital’ includes, where relevant, any share premium.

3.23

(b)

In the case of a company where at least some members have unlimited liability for the debt of the company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses. For the purposes of this provision, ‘a company where at least some members have unlimited liability for the debt of the company’ refers in particular to the types of company mentioned in Annex II of Directive 2013/34/EU.

(c)

Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.

(d)

Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan.

(e)

In the case of an undertaking that is not an SME, where, for the past two years: (1)

the undertaking’s book debt to equity ratio has been greater than 7,5 and

(2)

the undertaking’s EBITDA interest coverage ratio has been below 1,0.”

For large enterprises the new definition greatly simplifies the qualification as undertaking in difficulty. Under the previous rules, large enterprises fell outside the scope of the GBER if they met certain objective or “hard” criteria, such as having lost half their capital or being in insolvency proceedings, or if the “usual signs of difficulty”1462 were present. The latter were referred to as “soft criteria” and 1461 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.06.2013, p. 19. 1462 Such as increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash

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their interpretation was not uncontroversial. The new GBER gets rid of the soft criteria. It applies instead a test of the firm’s financial soundness based on two of the criteria most commonly used by analysts for that purpose, the debt-toequity ratio and the interest cover ratio. The interest cover ratio shows whether the firm generates enough cash to pay its interest bill, while the debt-to-equity ratio shows whether it is overburdened by debt. If a firm has problems on both counts, it is considered to be in difficulty. For SMEs, which were already subject to a simplified definition under the old GBER1463, that simplified approach is maintained. In addition, it is stipulated that SMEs receiving risk finance aid are not considered as undertakings in difficulty for seven years from their first commercial sale provided that certain conditions are met.

3.24

Article 1(5) contains a reminder that State aid measures, which entail, by themselves, by the conditions attached to them or by their financing method a nonseverable violation of Union law cannot be subject to block exemption. The provision contains also several examples of conditions violating Union laws and linked to territorial restrictions. Article 49 of the Treaty guarantees the freedom of establishment of nationals of one Member State in the territory of another Member State. That freedom of establishment extends to legal persons that may set up branches in any other Member State and are free to carry out their activities from different Member States, across the internal market. Any restrictions on that freedom to set up an establishment (and carry out economic activity from that establishment) are therefore contrary to the Treaty.

3.25

In that context it is clear that the provision of State aid by one Member State should not be designed in such a way so as to effectively prohibit undertakings from carrying out their activities in other Member States. Such an outcome could, for example, result by requiring the beneficiary to achieve a certain part of its turnover in the granting Member State or by making the grant of aid subject to the obligation for the beneficiary to have its headquarters in the granting Member State (or in a certain municipality). However, the requirement to have an establishment or branch in the aid granting Member State at the moment of payment of the aid would appear to be coherent with the GBER.

3.26

flow, mounting debt, rising interest charges and falling or nil net asset value. See section 2.1 of the Community guidelines on State aid for rescuing and restructuring firms in difficulty (2004/C 244/02), OJ C 244, 01.10.2004, p. 2. 1463 See Article 1(7) of the GBER 800/2008.

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4.2 Notification thresholds 3.27

The GBER applies to aid that does not exceed the notification thresholds set out in Article 4. Aid above the thresholds is considered to have higher distortive potential. Those larger amounts of aid are not automatically forbidden, but must be notified to the Commission and will be assessed on the basis of the relevant frameworks, guidelines, etc. The levels of the thresholds are based on the Commission’s practice in relation to both notified and block exempted measures.

3.28

In general, the new GBER has increased notification thresholds for most categories of aid, such as aid to R&D projects for which notification thresholds are doubled, or risk finance aid, in relation to which the previous annual tranches of EUR 1.5 million have been replaced by a total limit of EUR 15 million that an eligible undertaking can receive.1464

3.29

For some aid categories, such as training aid, aid for the recruitment of disadvantaged workers, aid for the employment of workers with disabilities in the form of wage subsidies, the thresholds have not changed as compared to the GBER 800/2008 because block exempted aid granted to those objectives was, in any case, not reaching the thresholds and, generally, no need to raise them was signalled by the Member States.1465 Table 1: Notification thresholds in the current and now repealed GBER Aid Measure

Notification Threshold – (€) Millions per undertaking per project, unless specified otherwise New GBER

Regional Investment Aid

GBER 800/2008

Maximum aid amount for an investment of €100m

Regional Operating Aid in outermost regions and sparsely populated areas

See Art. [15(2)b]

Not covered

Regional Urban Development Fund

€ 20m

Not covered

Investment Aid to SMEs

€ 7.5m

€ 7.5m

€ 2m

€ 2m

Aid for consultancy in favour of SMEs

1464 See State aid: Commission adopts new General Block Exemption Regulation (GBER), MEMO/14/369  of 21.05.2014. 1465 Contributions to public consultations on the GBER can be consulted on DG Competition’s website: http://ec.europa.eu/competition/consultations/closed.html.

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€ 2m

€ 2m

Not covered

Risk Finance Aid

€ 15m per eligible undertaking

€ 1.5m per target undertaking over 12 months

Aid for Start Ups

See Art. [22(3)]

Not covered

Aid for alternative trading platforms specialised in SMEs

N/A

Not covered

Aid for scouting costs

N/A

Not covered

fundamental research

€ 40m

€ 20m

industrial research

€ 20m

€ 10m

Aid for SMEs to participate in fairs Aid for cooperation costs incurred by SMEs participating in European Territorial Cooperation Projects

Aid for research and development projects

experimental development feasibility studies Investment Aid for research infrastructures

€ 15m

€ 7.5m

€ 7.5m per study

€ 7.5m

€ 20m per infrastructure

Not covered

€ 7.5m per cluster

Not covered

€ 5m

Not covered

Aid for process and organisational development

€ 7.5m

Not covered

Aid for research and development in the fishery and aquaculture sector

N/A

N/A

€ 2m per training project

€ 2m

Aid for the recruitment of disadvantaged workers in the form of wage subsidies

€ 5m per undertaking per year

€ 5m

Aid for the employment of workers with disabilities in the form of wage subsidies

€ 10m per undertaking per year

€ 10m

Aid for compensating the additional costs of employing workers with disabilities

€ 10m per undertaking per year

€ 10m

Aid for compensating the costs of assistance provided to disadvantaged workers

€ 5m per undertaking per year

Not covered

Investment aid for environmental protection to go beyond EU standards or to increase protection in absence of standards

€ 15m

€ 7.5m

Investment aid for adaptation to future Union standards

€ 15m

€ 7.5m

Aid for innovation clusters Innovation aid for SMEs

Training Aid

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€ 10m

Not covered

Investment aid for energy efficiency projects in buildings

€ 10m

Not covered

Investment aid for high-efficiency cogeneration

€ 15m

€ 7.5m

Investment aid for the promotion of energy from renewable sources

€ 15m

€ 7.5m

Operating aid for the promotion of aid from renewable sources in small scale installations

€ 15m

Not covered

Aid in the form of reductions in environmental taxes

€ 15m

€ 7.5m

Investment aid for the remediation of contaminated sites

€ 20m

Not covered

Investment aid for energy efficient district heating and cooling

€ 20m

Not covered

Investment in waste recycling and reutilisation

€ 15m

Not covered

Investment aid for energy infrastructure

€ 50m

Not covered

Aid for environmental studies

N/A

N/A

Aid schemes to make good the damage caused by certain natural disasters

N/A

Not covered

Social aid for transport for residents of remote regions

N/A

Not covered

€ 70m total cost per project

Not covered

Investment aid

€ 100m per project

Not covered

Operating aid

€ 50m per undertaking

Not covered

€ 50m per scheme per year

Not covered

Investment aid

€ 15m or the total costs exceeding € 50m per project

Not covered

Operating aid

€ 2m per infrastructure per year

Not covered

Investment aid for local infrastructures

€ 10m or total costs exceeding € 20m

Not covered

Aid for broadband infrastructures Aid for culture and heritage conservation

Aid schemes for audio-visual works Aid for sport and multifunctional recreational infrastructures

504

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4.3 Transparency of aid The GBER applies only to transparent aid, i.e. aid in relation to which it is possible to calculate precisely the gross grant equivalent of the aid ex ante without any need to undertake a risk assessment. The requirement of transparency was already present in the GBER 800/2008 and was also present prior to that in the Regional Block Exemption Regulation as well as in the de minimis Regulation. Article 5(2) contains an enumeration of transparent forms of aid. The wording of that provision suggests that the list is exhaustive. In the GBER 800/2008 the corresponding list was illustrative only – forms of aid not explicitly cited in that provision could also be considered as transparent.1466

3.30

Article 5(2) indicates the following forms of transparent aid:

3.31

–

grants and interest rate subsidies;

–

loans where the gross grant equivalent has been calculated on the basis of the reference rate prevailing at the time of the grant;

–

guarantees where the gross grant equivalent has been calculated on the basis of safe-harbour premiums laid down in the Commission notice or where the methodology to calculate the gross grant equivalent has been notified and approved by the Commission;

–

tax advantages where the measure provides for a cap ensuring that the applicable threshold is not exceeded;

–

repayable advances, if the total nominal amount of the repayable advance does not exceed the thresholds applicable under the GBER or if, before implementation of the measure, the methodology to calculate the gross grant equivalent of the repayable advance has been accepted following its notification to the Commission.

In addition, certain categories of aid are considered to be transparent if the conditions set out in the relevant specific provisions included in Chapter III of the GBER are fulfilled. Those special rules apply in the case of:

3.32

1466 See Deiberova and Nyssens, ‘The new General Block Exemption Regulation (GBER): What changed?’ [2009], EStAL No. 1, pp. 27, 31.

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–

aid for regional urban development,

–

aid comprised in risk finance measures,

–

aid for start-ups,

–

aid for energy efficiency projects,

–

aid in the form of premiums in addition to the market price.

4.4 Incentive effect 3.33

As with the GBER 800/2008, the new GBER contains the requirement that aid should have an incentive effect. In other words, aid should make a difference, should change the behaviour of the recipient as compared to the situation without aid. If it did not, it would amount to operating aid which, in principle, would not qualify as compatible with the internal market.

3.34

The now repealed GBER 800/2008 only contained a formal condition as regards the establishment of the existence of the incentive effect in relation to SMEs: the beneficiary had to have submitted an application for the aid before work on the project or activity had started. In relation to large enterprises, the GBER 800/2008 also required additional documentation prepared by the beneficiary and a plausibility check carried out by the Member State in question.

3.35

The new GBER changes that approach. In relation to aid to SMEs and aid granted to large enterprises under schemes it contains formal requirement: the beneficiary must submit a written application for the aid before work on project or activity starts. In addition, Article 6(2) specifies the minimum requirements as to information that the application for the aid should contain.

3.36

The requirement concerning an additional documentation and plausibility check, that under GBER 800/2008 applied to all aid to large enterprises, applies under the reviewed GBER only to ad hoc aid to large enterprises, which was, in principle, not covered by the previous block exemption.

3.37

Thus, on the basis of Article 6(3) of the GBER ad hoc aid granted to large enterprises is considered to have an incentive effect if, in addition to ensuring fulfilment of the condition set out for SME aid and aid to large enterprises under schemes, the Member State has verified, before granting the aid concerned, that 506

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documentation prepared by the beneficiary establishes that the aid will result in one or more of the following: –

in the case of regional investment aid: that a project is carried out, which would not have been carried out in the area concerned or would not have been sufficiently profitable for the beneficiary in the area concerned in the absence of the aid.

–

in all other cases, that there is: •

a material increase in the scope of the project/activity due to the aid, or

•

a material increase in the total amount spent by the beneficiary on the project/activity due to the aid, or

•

a material increase in the speed of completion of the project/activity concerned;

Documentation referred to in Article 6(3) covers the company’s internal documentation such as business plan, etc.

3.38

The Commission’s monitoring practice indicates that the condition relating to the existence of the incentive effect is generally complied with by establishing a paper trail. While creating an administrative burden, the condition has very limited enforcement value and is not an effective tool for ensuring the efficiency of public spending on good aid only. That is why that requirement has been simplified in relation to aid to large undertakings under schemes. As regards ad hoc aid to large enterprises, it is considered that such aid needs to be subject to more thorough scrutiny as it is less likely to be a part of wider strategy and has bigger distortive potential. Therefore, the requirement of additional documentation has been kept in relation to such aid.

3.39

As under GBER 800/2008, under the reviewed GBER measures in the form of tax advantages are also deemed to have incentive effect if they are granted under “automatic” fiscal schemes, i.e. schemes establishing a right to aid in accordance with objective criteria and without further exercise of discretion by the Member State, adopted and in force before work on the aided project or activity has started.

3.40

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3.41

Certain other categories of aid are not required to have or are deemed to have an incentive effect if the conditions set out in the relevant specific provisions in Chapter III are fulfilled. This is the case for: –

regional operating aid,

–

aid for access to finance for SMEs,

–

aid for the recruitment of disadvantaged workers in the form of wage subsidies and aid for the employment of workers with disabilities in the form of wage subsidies,

–

aid compensating for the additional costs of employing workers with disabilities, 

–

aid in the form of reductions in environmental taxes,

–

aid to make good the damage caused by certain natural disasters, 

–

social aid for transport for residents of remote regions,

–

aid for culture and heritage conservation.

4.5 Cumulation 3.42

To determine whether the notification thresholds and maximum aid intensities are respected, aid for the given activity, project or undertaking must be cumulated. Thus, Article 8 sets out the rules for cumulation under different scenarios. The first scenario concerns cumulation with Union funds which at no point pass through the control of the Member States, but are centrally managed by bodies independent from the Member States and consequently do not constitute State aid. Such funds do not count for the verification of whether the thresholds and maximum aid intensities are respected, provided that the total amount of public funding granted in relation to the same eligible costs does not exceed the most favourable funding rate laid down in the applicable rules of Union law. It is worth noting that as Structural Funds are managed by the Member States, they would qualify as State aid. As a consequence, they would need to be taken into account for the calculation of the notification threshold and aid intensity under the GBER.

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The second scenario concerns cumulation of block exempted aid with identifiable eligible costs with any other State aid with identifiable eligible costs. Here full cumulation is possible as long as those measures concern different eligible costs.

3.43

The third scenario concerns cumulation of block exempted aid with identifiable eligible costs with any other State aid with identifiable eligible costs in relation to the same eligible costs where those eligible costs partially or fully overlap. In that scenario, the cumulated amount of aid cannot exceed the highest aid intensity or aid amount applicable to this aid under the GBER.

3.44

By way of derogation from that rule, aid in favour of workers with disabilities (Articles 33 and 34 of the GBER) may be cumulated with other block exempted aid in relation to the same eligible costs above the highest applicable threshold under the GBER, provided that such cumulation does not result in an aid intensity exceeding 100 per cent of the relevant costs over any period for which the workers concerned are employed.

3.45

The fourth scenario covers cumulation of risk finance aid, aid for start-ups and aid to alternative trading platforms specialised in SMEs with any other State aid with identifiable eligible costs, on which no limitations are imposed.

3.46

The fifth scenario concerns cumulation of aid without identifiable eligible costs with any other State aid without identifiable eligible costs, which is possible up to the highest relevant total financing threshold fixed in the specific circumstances of each case by the GBER or another block exemption regulation or decision adopted by the Commission.

3.47

The sixth scenario, tackled in Article 5(5) of the GBER, covers cumulation of block exempted aid with de minimis aid in respect of the same eligible costs, which is prohibited if it results in an aid intensity exceeding those laid down in Chapter III of the GBER. It can be deduced a contrario from that provision that where de minimis aid is not attributable to specific eligible costs (which is in practice most often the case1467) free cumulation is possible. That conclusion is in line with Article 5(2) of de minimis aid Regulation.1468

3.48

1467 See Sinnaeve, ‘The Complexity of Simplification: The Commission’s Review of the de minimis Regulation’ [2014], EStAL No. 2, pp. 261, 271. 1468 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1.

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4.6 Publication and information 3.49

Transparency is one of the key elements of the State Aid Modernisation. It promotes accountability and compliance as it allows undertakings to check whether aid awards granted to competitors are in line with State aid rules. It contributes to the creation and preservation of a level playing field across Member States and companies. By raising awareness of aid granted at various levels, transparency facilitates enforcement by national, regional and local authorities. Finally, in the future it should allow the Commission to reduce reporting obligations and the administrative burden linked to them.1469

3.50

In the context of the GBER transparency should be seen as an element securing the balance of the package: on one hand, the scope of the GBER is extended and more flexibility is given to Member States to carry out their State aid policies, on the other hand, safeguards are needed to protect the internal market against distortions. Transparency of State aid grants is one of such safeguards.1470

3.51

Transparency is a condition of aid compatibility and thus of eligibility under the GBER.

3.52

In accordance with Article 9(1) of the GBER, transparency of block exempted aid will be secured through the publication on a comprehensive State aid website, at national or regional level, of:

3.53

–

the summary information sheet or a link providing access to it;

–

the full text of each aid measure or a link providing access to the full text;

–

the information on each individual aid award exceeding EUR 500 000 – fulfilling the minimum requirements as set out in Annex III to the GBER.

The Commission will then publish on its own website the links to the comprehensive State aid websites of all Member States as well as the summary information sheets.1471

1469 See Competition policy brief, State aid Transparency for taxpayers, 4/2014, p. 1, http://ec.europa.eu/competition/publications/cpb/2014/004_en.pdf. 1470 See Competition policy brief, State aid Transparency for taxpayers, 4/2014, p. 1, http://ec.europa.eu/competition/publications/cpb/2014/004_en.pdf. 1471 See Article 9(5) of the GBER.

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The minimum requirements regarding the comprehensive State aid website are set out in Article 9(4). The information should be published within six months from the date on which the aid was granted or, for aid in the form of tax advantage, within one year from the date the tax declaration is due, and should be available for at least ten years from the date on which the aid was granted.

3.54

To ensure confidentiality of tax information and business secrets, information on aid granted under tax schemes or under risk finance schemes can be published through the indication of ranges instead of exact aid amounts.

3.55

As regards schemes for social aid for transport for residents of remote regions, the publication obligations do not apply to final consumers.

3.56

Article 9(6) sets out a transitional period for the Member States to comply with the publication and information obligations, which covers two years since the entry into force of the GBER – i.e. until 1 July 2016.

3.57

5.

Monitoring

Chapter II of the GBER concerns the monitoring of aid in a broad sense. It contains three Articles concerning respectively the withdrawal of the benefit of the block exemption, reporting and monitoring sensu stricto. As mentioned above in section 3, those procedural provisions were placed in a separate chapter so as to avoid interpretative problems arisen in relation to the GBER 800/2008. In the latter the provisions on monitoring and reporting were included in Chapter I containing the common compatibility conditions. Thus if a Member State had not submitted an annual report on given measures, they were outside the scope of the block exemption. Today, the fact that those provisions are included in a separate chapter seems to suggest that non-compliance with procedural requirements to which they refer can be rectified and does not result in aid measure qualifying as unlawful.

3.58

According to Article 10, where a Member State grants aid allegedly exempted from the notification requirement under the GBER without fulfilling the conditions set out in Chapters I to III, the Commission may adopt a decision stating that all or some of the future aid measures adopted by the Member State concerned which would otherwise fulfil the requirements of the GBER are to be notified to the Commission in accordance with Article 108(3) of the Treaty. The measures to be notified may be limited to the measures granting certain types of aid or in favour of certain beneficiaries or aid measures adopted by certain authorities of the Member State concerned.

3.59

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3.60

The now repealed GBER 800/2008 contained a similar provision which was, however, never applied. The provision in the new GBER differs from that previously in force in two ways: first, the sanction of withdrawal of the benefit of the block exemption was previously foreseen only for a situation in which a Member State did not provide the Commission with the information necessary for the monitoring of the block exempted aid, while today that sanction can be applied in case of non-compliance with any condition of the GBER. Secondly, the reviewed GBER emphasizes the possibility of targeted withdrawal – limited to the measures granting certain types of aid or in favour of certain beneficiaries or aid measures adopted by certain authorities. The objective behind the introduction of such a limited withdrawal is to discipline aid granting authorities that systematically lag behind in the application of the provisions of the GBER in general or as regards only certain categories of aid or certain aid beneficiaries. The fact that the withdrawal may be limited only to certain authorities or aid categories, etc., means that it will not penalise all the authorities in a given Member State or that it will not penalise given authorities for measures which are compatible with the GBER in relation to a given category of aid. The modified provision is also more realistic as regards its application in practice than its predecessor, which, as mentioned above, has never been applied by the Commission.

3.61

Article 11 of the GBER concerns reporting obligations of the Member States regarding the provision of the summary information and annual reports. It requires that Member States transmit to the Commission via the electronic notification system summary information about each aid measure exempted under the GBER, together with a link providing access to the full text of the aid measure, including its amendments, within 20 working days following its entry into force. In addition, Member States are required to transmit to the Commission an annual report in electronic form on the application of the GBER.

3.62

Article 12 concerns the obligation of the Member States to maintain detailed records with the information and supporting documentation necessary to establish that all the conditions laid down in the GBER are fulfilled. Such records must be kept for ten years from the date on which the ad hoc aid was granted or the last aid was granted under a scheme. The Member State concerned must provide the Commission within a period of 20 working days or such longer period as may be fixed in the request with all the information and supporting documentation which the Commission considers necessary to monitor the application of the GBER.

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The importance of Article 12 has grown as a result of the State Aid Modernisation and the shift towards strengthened ex-post control of block exempted aid through monitoring.

6.

3.63

Transitional provisions

The GBER 651/2014 entered into force on 1 July 2014 and will apply until 31 December 2020. Like the GBER 800/2008, the reviewed GBER also contains, in Article 58(4), a transitional provision prolonging by six months the block exemption for schemes exempted under the GBER 800/2008. That adjustment period is foreseen in order to allow Member States to adapt their schemes to the new Block Exemption Regulation. It does not, however, apply to regional aid schemes. The exemption of the latter expires on the date of expiry of the approved regional maps.

3.64

The exemption of risk finance aid in the form of equity or quasi-equity, or of a financial endowment to provide risk finance investments directly or indirectly to eligible undertakings, will expire at the end of the period foreseen in the funding agreement, provided the commitment of public funding to the supported private equity investment fund was made on the basis of such an agreement within six months from the end of the period of validity of the GBER and all other conditions for exemption remain fulfilled.

3.65

Article 58(1) of the GBER deals in identical manner to Article 44(1) of the repealed GBER with the retroactive application of the GBER. It states that the GBER applies to individual aid granted before its entry into force if the aid fulfils all the conditions laid down in the GBER, with the exception of conditions relating to publication and information.1472

3.66

7.

Specific provisions for different categories of aid

7.1 Aid to SMEs Small and medium-sized enterprises (“SMEs”) contribute more than half of the total value added in the non-financial business economy and have provided 80 per cent of all new jobs in Europe over the past five years.1473 The Commission has recognized their central role by adopting the “Small business Act for

3.67

1472 See criticism of a similar provision in the de minimis aid Regulation by Sinnaeve, “The Complexity of Simplification: The Commission’s Review of the de minimis Regulation” [2014], EStAL No. 2, pp. 261, 272. 1473 European Competitiveness Report, Commission staff Working Document SWD(2014)277 (47).

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3.68

Europe”1474, putting in place for the first time a comprehensive SME policy framework for the Union and its Member States. SMEs can be regarded as a motor of structural change and regeneration, since they facilitate shifts of economic resources from declining to expanding sectors.1475 In addition, the promotion of SMEs allows new and smaller businesses to be created, develop and grow, increasing the pool of competitors and hence contributing to the long-term stability of the Union.1476 State aid policy can be a powerful tool to address the market failures faced by SMEs. While SMEs play a decisive role in job creation and act as a factor of social stability, they tend to struggle to obtain capital or loans, and their limited resources restrict their access to new markets and information.1477

3.69

On one hand SMEs are highly dependent on domestic bank loans and credit lines to finance their investment projects, and they tend to face higher capital costs and tighter credit conditions due to their higher rates of failure and asymmetric information linked to the lack of a successful track record, insufficient collateral and a dearth of credit guarantees. Following on from the recent financial crisis, SMEs’ access to external financing has been restrained due to weak demand and banks’ increased risk aversion in the uncertain macroeconomic environment.1478

3.70

On the other hand SMEs face operational and informational barriers in entering new markets. Such obstacles can be due to internal factors, such as human resources and managerial knowledge and technological innovations. Inadequate managerial knowledge is often considered a major barrier to entering new markets. In addition, innovation activities are generally identified as the other main determinant: successful product innovations in particular are a prerequisite of doing well in international markets.1479

3.71

The main instrument in assessing aid to SMEs is the GBER. Unlike many other types of horizontal aid, there are no specific Guidelines setting out the Commission’s approach to the approval of non-block-exempted aid to SMEs. The 1474 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: “Think Small First” - A ‘Small Business Act’ for Europe, COM(2008)394 final, 25.06.2008. 1475 See Quigley, European State aid law and policy, 2009 Hart Publishing, (218). 1476 See Bacon, European Union law of State aid, 2013 Oxford University Press, (189). 1477 See Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1, recital 40. 1478 See European Competitiveness Report, chapter II of Commission staff Working Document SWD(2014)277. 1479 See European Competitiveness Report, chapter III of Commission staff Working Document SWD(2014) 277.

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first block exemption regulation covering aid for SMEs was adopted in 2001.1480 That regulation was then replaced by the GBER 800/2008. Since its entry into force on 1 July 2014 the new GBER sets out the compatibility conditions for block exempted aid to SMEs. After discussing a definition of SME and recalling the applicable common provisions, the following sections review the compatibility conditions of the different types of aid to SMEs grouped under section II of the third Chapter (aid to SMEs) of the new GBER, with the aim of highlighting the main differences with the GBER 800/2008. An additional section takes into account the regrouping of previously independent aid provisions regarding SMEs. Finally, the subject of SME bonuses is briefly touched upon.

3.72

7.1.1 Definition of SME “SME” stands for small and medium-sized enterprise. The definition of SME relevant for the GBER is provided in Annex I of the Regulation, and it is in line with the definition provided by the GBER 800/2008 and with the criteria set forth in Recommendation 2003/361.1481

3.73

The main factors determining whether a company is an SME are the number of its employees and either its turnover or its balance sheets total. Table 2 summarises the features to qualify as a medium-sized, small or micro enterprise:

3.74

Table 2: Staff headcount and financial thresholds determining enterprise categories Company category

Employees

Turnover

or

Balance sheet total

Medium-sized

< 250

d EUR 50 m

d EUR 43 m

Small

< 50

d EUR 10 m

d EUR 10 m

Micro

< 10

d EUR 2 m

d EUR 2 m

Those ceilings apply to the figures for individual firms only. A firm which is part of larger grouping may need to include employee, turnover or balance sheet data from that grouping too.

3.75

1480 Commission Regulation No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises, OJ L 10, 13.01.2001, p. 33. 1481 Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, OJ L 124, 20.05.2003, p. 36.

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7.1.2 Common provisions 3.76

The provisions on aid to SMEs do not apply to aid granted in the primary agricultural production sector, with the exception of aid for consultancy in favour of SMEs. It is also important to note that aid to SMEs is subject to the evaluation requirement laid down in Article 1 and to the incentive effect requirement specified in Article 6(2).

7.1.3 Investment aid to SMEs 3.77

Article 17 of the GBER lays down the compatibility conditions for such aid. The provision mirrors that of Article 14 of the GBER 800/2008, without major changes. In fact, the eligible costs are those of investment in tangible or intangible assets, or the estimated wage costs of employment directly created by the investment project over two years, not including the costs of recruitment of the personnel. The notification threshold remains at EUR 7.5 million per undertaking per investment project, and aid intensity is set at 20 per cent of the eligible costs for small enterprises and 10 per cent for medium sized ones. It is worth noting that eligible costs can be cumulated, that is to say that aid can be granted on the basis of both investment costs and wage costs. To give an example, for an investment entailing investment in tangible or intangible assets of 10 million and estimated wage costs of EUR 12 million, a medium-sized enterprise could get under Article 17 GBER up to: 10%*10 million + 10%*12 million = 1 million + 1.2 million = EUR 2.2 million of aid. The only difference in substance with the GBER 800/2008 is the lack of indication of specific aid intensities for investments concerning the processing and marketing of agricultural products, as those investments are now covered by Article 17 of the Agricultural Block Exemption Regulation.1482

7.1.4 Aid for consultancy in favour of SMEs 3.78

Article 18 of the GBER lays down the compatibility conditions for aid for consultancy in favour of SMEs. The provision mirrors that of Article 26 of the GBER 800/2008, without changes in substance. The eligible costs are those of consulting services provided by external consultants, the notification threshold is EUR 2 million per undertaking per project and the maximum aid intensity is set at 50 per cent of the eligible costs. 1482 Commission Regulation (EU) No 702/2014 of 25 June 2014 declaring certain categories of aid in the agricultural and forestry sectors and in rural areas compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union, OJ L 193, 01.07.2014, p. 1.

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7.1.5 Aid to SMEs for participation in fairs The compatibility conditions for aid to SMEs for participation in fairs are laid down in Article 19 of the GBER. It provides for a significant expansion of the scope of Article 27 of the GBER 800/2008. In fact, under the new GBER the eligible costs are those incurred during any participation to a given fair, while under the GBER 800/2008 compatible aid was limited to the first participation. As a result, under the new rules an SME might get public support for different participations in the same fair, providing Member States with a powerful tool to support SMEs entering new markets.

3.79

As in GBER 800/2008, the notification threshold is EUR 2 million per undertaking per project, and the maximum aid intensity is set at 50 per cent of the eligible costs.

3.80

7.1.6 Aid for cooperation costs incurred by SMEs participating in European Territorial Cooperation projects Article 20 of the GBER is an innovative provision, covering an aid category not included in the GBER 800/2008.

3.81

SMEs participating in European Territorial Cooperation (ETC) projects often find difficulties in financing additional costs stemming from the cooperation between partners located in different regions and in different Member States or third countries. That GBER provision is aimed at streamlining cohesion policy and State aid rules, thus improving the framework for the implementation of joint actions and policy exchanges between national, regional and local actors. In fact, many managing authorities and advisory bodies flagged to the Commission that inconsistencies between State aid and ETC rules could become obstacles in implementing ETC projects.

3.82

Eligible costs are those of organisational cooperation, for advisory and support services, for travel expenses, equipment and investment expenditure directly related to the project, where the latter can be interpreted as meaning investment costs in tangible and intangible assets that are undertaken by the projectpartners and are directly related to the ETC project. The notification threshold is EUR 2 million per undertaking per project, and the maximum aid intensity is set at 50 per cent of the eligible costs.

3.83

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7.1.7 Broader categories 3.84

The GBER seeks to improve the existing State aid rules in terms of better economic assessment and broader scope and clarity. For reasons of clarity different independent provisions in the GBER 800/2008 have been merged and grouped in broader categories.

3.85

One case is that of aid for SMEs created by female entrepreneurs, which have been folded into the broad category of start-up aid, targeting the market failure of access to finance for all start-ups (Article 22 of the GBER).

3.86

Similarly, aid for early adaptation to future Union standards for SMEs is now included in the broader category of investment aid for early adaptation to future Union standards (Article 37 of the GBER).

3.87

Finally, it has to be borne in mind that three different categories under the GBER 800/2008, namely aid for the loan of highly qualified personnel, aid for innovation advisory services and for innovation support services and aid for industrial property rights costs for SMEs are now grouped under the category of innovation aid to SMEs (Article 28 of the GBER).

7.1.8 Additional “SME bonuses” 3.88

It goes without saying that SMEs can be supported under GBER provisions specifically targeted at SMEs. But they can also benefit from aid under any other GBER categories, provided that the relevant conditions for exemption are met.

3.89

SME bonuses in terms of aid intensity are also provided for aid for research and development projects (Article 25), where aid intensities can be raised by 10 percentage points for medium-sized enterprises and by 20 percentage points for small enterprises.

3.90

SME bonuses in terms of aid intensity of 10 percentage points for mediumsized enterprises and of 20 percentage points for small enterprises are also provided for training aid (Article 31), in the light of the particular handicaps which SMEs face and the higher relative costs that they must bear when they invest in training.

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7.2 Training aid Skilled workers contribute to increasing the productivity and competitiveness of undertakings. Nevertheless, employers and employees may under-invest in training for a number of reasons. Employees may limit their investment in training if they are risk averse, suffer from financial constraints or have difficulties signalling the level of their acquired knowledge to future employers. On the other hand, undertakings may refrain from training their workforce due to the positive externalities of training.

3.91

Training has usually positive external benefits for society as a whole as it increases the pool of skilled workers. In addition training plays a key role in introducing new technologies and stimulating innovation and investment, and may also help to create or maintain jobs.1483

3.92

Due to the positive externalities of training, smaller firms, in particular, are reluctant in investing in training because they fear that the skills and expertise acquired at their expenses might be used elsewhere, since there is a considerable risk that the worker would leave and take employment in another firm. In that context State aid might provide the right incentive for undertakings to provide training at a level close to that optimal for society as a whole. Training aid should not be necessarily regarded as operating aid but it can be seen as a way to encourage investment that would not otherwise be made.

3.93

Many training measures are not caught under Article 107(1) of the Treaty and do not qualify as State aid because they do not favour certain undertakings. General training measures that apply to all undertakings are not selective. Measures that do not target undertakings at all are also not State aid, such as training measures that directly benefit individuals.1484 The financing of vocational trainings normally falls outside State aid rules. Vocational training programmes might amount to State aid where specific training is involved, corresponding to the needs of particular undertakings, which would otherwise have to be provided at the expense of the employer. A key decision on that aspect is the Ford Genk 2006 case.1485 The Commission concluded there that a significant part of the aid did not incite the beneficiaries to provide additional training since it funded training that was necessary for the normal operation of the companies (i.e. required either by the introduction of a new model or by other core business

3.94

1483 See Quigley, European State aid law and policy, 2009 Hart Publishing, (239). 1484 See Quigley, European State aid law and policy, 2009 Hart Publishing, (241). 1485 See Decision 2006/938/EC, Ford Genk, OJ L 366, 21.12.2006, p. 32.

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activities) and would have been undertaken by the companies in any event, on the basis of market incentives alone. Consequently, the Commission found that the training aid would not contribute to the common objective of compensating for underinvestment in workers’ training, but would simply cover normal operational costs.1486

3.95

For training measures that qualify as State aid the main compatibility route is the GBER. After quickly recalling the applicable common provisions, this subchapter reviews the compatibility conditions of training aid under section V of the third Chapter of the GBER, with the aim of stressing the main differences with the now repealed GBER 800/2008. Aid measures that do not comply with GBER compatibility conditions, for example because they exceed notification thresholds, can be assessed upon notification under the 2009 Training Communication.1487

7.2.1 Common provisions 3.96

Large training aid schemes are not subject to the evaluation requirement set forth in Article 1: thus, their compatibility is assessed under the GBER regardless of their dimension. In addition, block exempted training aid can be granted in the fishery and aquaculture sectors and in the primary agricultural production sector. Finally, it has to be borne in mind that the incentive effect requirement (Article 6(2)) fully applies to training aid.

7.2.2 The compatibility conditions for training aid 3.97

Article 31 of the GBER represents a major shift from the past, as the distinction between specific training and general training is dropped.

3.98

That distinction was a pillar under the GBER 800/2008. Specific training supposedly faces a minor market failure, as it endows the employee with skills specific to the workplace, and so is less likely to be transferred to another undertaking. Therefore, aid intensities for specific training were set at a substantially lower level then intensities for general training. While that line of reasoning makes perfect sense in theory, its implementation proved unsatisfactory. In practice, granting authorities had major difficulties in setting a clear line between spe1486 Von Buttlar and Medghoul - The principle of incentive effect applied to training aid Competition Policy Newsletter 3/2008. 1487 Communication from the Commission - Criteria for the compatibility analysis of training State aid cases subject to individual notification, OJ C 188, 11.08.2009, p. 1.

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cific and general training and assessing the general or specific nature of concrete project.1488 To face those difficulties and to provide for a more straightforward legal basis, the GBER simplifies the rules by removing the distinction between specific and general training. It should also be noted that the GBER clearly states that the block exemption does not apply to aid granted for training projects carried out to comply with national mandatory standards. That exclusion attempts to improve the effectiveness of the incentive effect requirement in training aid. It is true that if aid has to change the behaviour of an undertaking, it cannot be granted to implement a project that would be implemented anyhow, because national law so requires. The purpose of training aid is to allow the support of training measures with the purpose of developing and updating the knowledge of the workforce (e.g. management trainings, language trainings).

3.99

Eligible costs are trainers’ personnel costs, operating costs and advisory services relating to the training project, trainees’ personnel costs and general indirect costs. Trainers’ personnel costs can comprise either the fees paid to the trainers or, in case of in-house trainers, an allocation pro-rata of their salaries to the hours spent on training. According to recital (23) of GBER: “[…] The identification of eligible costs should be supported by clear, specific and up-to date documentary evidence. All figures used should be taken before any deduction of tax or other charges. […]” Therefore, it appears that all sums should be calculated on the basis of gross amounts. It is important not to confuse trainers’ personnel costs with wage costs that are defined in Article 2(31) of the GBER and constitute eligible costs for employment aid measures.

3.100

Operating costs directly relating to the training project are additional costs not related to the trainers’ or trainees’ personnel costs. Allowances to cover travel expenses can fall within that category as can participation fees to participate in trainings. As far as advisory services relating to the training project are concerned, an example could be that of advisory services linked to the training project.

3.101

The notification threshold is EUR 2 million per training project and the maximum aid intensity is set at 50 per cent of the eligible costs. The latter may be increased up to 70 per cent through the application of a 10 per cent bonus if the training is given to workers with disabilities or disadvantaged workers, of 10 percentage points if the beneficiary is a medium-sized enterprise and of 20 percentage points if the beneficiary is a small enterprise.

3.102

1488 See Decision 2006/938/EC Ford Genk OJ L 366, 21.12.2006, p. 32.

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3.103

For the maritime transport sector those eligible costs and notification thresholds apply; however, aid intensity can be increased up to 100 per cent of the eligible costs provided that the training is carried out on board of ships entered in Union registers and trainees are not active members of the crew but are supernumerary on board.

7.3 Aid for disadvantaged workers and for workers with disabilities 3.104

Unemployment and, in particular, structural unemployment is a significant problem in the Union as a whole, and a very severe one in some Member States. According to Eurostat Unemployment statistics1489, in December 2014 the unemployment rate was at 9.9 per cent in the EU-28 and at 11.4 per cent in the Euro area, compared to 5.6 per cent in the USA. Among the Member States, the highest rates were recorded in Greece (25.8 per cent) and Spain (23.7 per cent). At the same time, the youth unemployment rate was at 21.4 per cent in the EU-28 and at 23 per cent in the Euro area, with the highest rates observed in Spain (51.4 per cent), Greece (50.6 per cent in October 2014) and Croatia (44.8 per cent).

3.105

Fighting unemployment is a key priority in the policy agenda of many governments. From time to time governments decide to grant direct employment aid to undertakings under specific aid programmes. However, existing economic literature on the effectiveness of such measures often shows those goals are not reached.1490 For instance when the effects of aid provided under the French Textile plan in the beginning of the 1980s were studied, only a marginal impact of cutting social charges on the employment level of the industry was found.1491 Spanish regional wage subsidies to encourage the inflow into permanent jobs were also analysed: very limited positive effects are found for some categories of workers as, apparently, that policy failed to sufficiently reduce the differentiating costs between temporary and permanent workers.1492

3.106

So it appears that poorly targeted State aid might not be the most effective way for a government to boost employment. But State aid can prove effective, when

1489 According to Eurostat Newsrelease Euroindicators 20/2015 – 30 January 2015. 1490 See Buts and Jegers: Does State Aid create jobs? – European State aid law quarterly 4/2013. 1491 See Huttin – the effects of State aid on employment and investment in the French textile and clothing industry – International Journal of Industrial Organisation 7, 1989 – quoted in Buts and Jegers: Does State Aid create jobs? – European State aid law quarterly 4/2013. 1492 See Rebollo and Garcia – the use of permanent contracts across Spanish regions – Investigaciones Economicas, 33, 2009 (97-130).

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it targets specific categories of workers.1493 In fact, certain categories of workers experience particular difficulty in finding jobs, because employers consider them to be less productive or have prejudices against them. That perceived or real lower productivity may be due to a lack of recent employment experience (for example, young workers or long-term unemployed) or due to a permanent disability. Because of their perceived or real lower productivity the workers are likely to be excluded from the labour market unless employers are offered compensation for their employment.

3.107

Many employment measures do not involve State resources and so do not constitute State aid though they may favour some undertakings over others. Other measures may lack selectivity. For instance in the Second German Social Security Code Case1494 a financial support scheme offered to employers who recruited permanent unemployment individuals was considered to be a general measure and thus not State aid.1495

3.108

Employment aid may take the form of grants and exemptions from employers’ social security contributions or from certain taxes.1496 State aid in the form of subsidies to wage costs can provide additional incentives to undertakings to increase their levels of employment of disadvantaged and disabled workers. Moreover, State aid may help disadvantaged and disabled workers to stay in the labour market by covering the extra costs resulting from their perceived or real lower productivity.

3.109

For employment support measures that qualify as State aid the main compatibility route is the GBER. Aid measures that do not comply with GBER compatibility conditions, for example because they exceed notification thresholds, can be assessed upon notification under the 2009 Training1497 and Employment1498 Communications.

3.110

After recalling briefly the applicable common provisions, and defining the concepts of disadvantaged workers and of workers with disabilities, the following

3.111

1493 See Majcher-Williams, Juergen Foecking, State aid for disabled and disadvantaged workers: compatibility criteria for big cases /. Competition policy newsletter 2010, n. 1, pp. 20-22. 1494 See Decision 2008/1159/EC Financial support in order to encourage employment (Art.16(a) Second German Social Code of Law) OJ C 102, 24.04.2008, p. 5. 1495 See Bacon, European Union law of State aid, 2013 Oxford University Press, (254). 1496 See Quigley, European State aid law and policy, 2009 Hart Publishing, (246). 1497 Communication from the Commission – Criteria for the compatibility analysis of training State aid cases subject to individual notification, OJ C 188, 11.08.2009, p. 1. 1498 Communication from the Commission – Criteria for the compatibility analysis of State aid to disadvantaged and disabled workers subject to individual notification, OJ C 188, 11.08.2009, p. 6.

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sections review the compatibility conditions of aid for disadvantaged workers and for workers with disabilities under section 6 of Chapter III of the GBER, with the aim of highlighting the main differences with the now repealed GBER 800/2008.

7.3.1 Common provisions 3.112

Large employment aid schemes are not subject to the evaluation requirement set forth in Article 1. As a result, their compatibility is always assessed under the GBER, regardless of their dimension. In addition, it has to be borne in mind that block exempted employment aid can be granted in the fishery and aquaculture sector and in the primary agricultural production sector. Finally, it is of special interest that the requirement regarding the existence of an incentive effect does not apply to the aid categories in question.

7.3.2 Definition of disadvantaged workers 3.113

The definitions of both disadvantaged workers and severely disadvantaged workers in the reviewed GBER are wider than those definitions in the GBER 800/2008.

3.114

According to Article 2 of the GBER a disadvantaged worker is any person who: (a) has not been in regular paid employment for the previous 6 months; or (b) is between 15 and 24 years of age; or (c) has not attained an upper secondary educational or vocational qualification (International Standard Classification of Education 3)1499 or is within two years after completing full-time education and who has not previously obtained his or her first regular paid employment; or (d) is over the age of 50 years; or (e) lives as a single adult with one or more dependents; or (f ) works in a sector or profession in a Member State where the gender imbalance is at least 25 per cent higher than the average gender imbalance across all economic sectors in that Member State, and belongs to that underrepresented gender group; or (g) is a member of an ethnic minority within a Member State and who requires development of his or her linguistic, vocational training or work experience profile to enhance prospects of gaining access to stable employment.

3.115

A severely disadvantaged worker as defined in Article 2 of the GBER is any person who: (a) has not been in regular paid employment for at least 24 months; or (b) has not been in regular paid employment for at least 12 months and belongs 1499 International Standard Classification of Education ISCED 2011 - UNESCO Institute for Statistics.

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to one of the categories (b) to (g) mentioned under the definition of ‘disadvantaged worker’.

7.3.3 Definition of workers with disabilities The reviewed GBER uses the term of “worker with disabilities”, instead of “disabled worker”, and adapts the definition to the description set out in the United Nations Convention on the Rights of Persons with Disabilities.1500

3.116

A worker with disabilities as defined in Article 2 of the GBER is any person who is recognised as worker with disabilities under national law or has long-term physical, mental, intellectual or sensory impairment(s) which, in interaction with various barriers, may hinder their full and effective participation in a work environment on an equal basis with other workers.

3.117

7.3.4 Aid for the recruitment of disadvantaged workers in the form of wage subsidies Article 32 of the GBER lays down the compatibility conditions for aid for the recruitment of disadvantaged workers in the form of wage subsidies. Article 32 mirrors Article 40 of the GBER 800/2008, without changes in substance. The eligible costs are the wage costs over a maximum period of 12 months following recruitment of a disadvantaged worker, or over a period of 24 months for severely disadvantaged workers. The notification threshold is EUR 5 million per undertaking per year, and the maximum aid intensity is set at 50 per cent of the eligible costs.

3.118

7.3.5 Aid for the employment of workers with disabilities in the form of wage subsidies Article 33 of the GBER lays down the compatibility conditions for aid for the employment of workers with disabilities in the form of subsidies. The provision mirrors Article 41 of the GBER 800/2008, without changes in substance. The eligible costs are the wage costs over any given period during which the worker with disabilities is employed. The notification threshold is EUR 10 million per undertaking per year, and the maximum aid intensity is set at 75 per cent of the eligible costs.

3.119

1500 Annex 1, Final report of the Ad Hoc Committee on a Comprehensive and Integral International Convention on the Protection and Promotion of the Rights and Dignity of Persons with Disabilities – UN General Assembly 6 December 2006, A/61/611.

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7.3.6 Aid for compensating the additional costs of employing workers with disabilities 3.120

Article 34 of the GBER lays down the compatibility conditions for aid compensating the additional costs of employing workers with disabilities. While Article 34 mirrors Article 42 of the GBER 800/2008, the eligible costs have been reviewed in order to broaden the scope of the block exemption. The eligible costs are: (a) costs of adapting the premises; (b) costs of employing staff on the assistance of the workers with disabilities and of training such staff ; (c) costs of adapting or acquiring equipment or software for use by workers with disabilities; (d) costs directly linked to transport of workers with disabilities to the working place and for work related activities (not present in the GBER 800/2008); (e) wage costs for the hours spent by a worker with disabilities on rehabilitation (not present in the GBER 800/2008); (f ) where the beneficiary provides sheltered employment, that is employment in an undertaking where at least 30 per cent of workers are workers with disabilities, the costs of constructing, installing or modernising the production units of the undertaking concerned, and any costs of administration and transport, provided that such costs result directly from the employment of workers with disabilities.

3.121

The notification threshold is EUR 10 million per undertaking per year, and the maximum aid intensity is set at 100 per cent of the eligible costs.

7.3.7 Aid for compensating the costs of assistance provided to disadvantaged workers 3.122

Article 35 of the GBER is an innovative provision, covering an aid category not included in GBER 800/2008. It aims at providing a new tool assisting disadvantaged workers in re-entering and remaining in the job market. Due to long-term unemployment or other factors, workers might need a specific assistance on the job to positively reintegrate in the workforce. That specific assistance consists of measures to support the disadvantaged worker’s autonomy and adaptation to the work environment, in accompanying the worker in social and administrative procedures, facilitation of communication with the entrepreneur and managing conflicts.

3.123

Eligible costs are the costs of employing staff solely for time spent on the assistance of the disadvantaged workers over a maximum period of 12 months following recruitment of a disadvantaged worker or over a maximum period of 24 526

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months following recruitment of a severely disadvantaged worker, and those of training such staff to assist disadvantaged workers. The notification threshold is EUR 5 million per undertaking per year, and the maximum aid intensity is set at 50 per cent of the eligible costs.

3.124

7.4 New categories of aid The new categories of aid foreseen by the Enabling Regulation include aid for innovation, culture, natural disasters, sport, broadband infrastructure, other infrastructure and social aid for transport to remote regions.

3.125

Such categories of aid normally have a limited potential of distorting competition between Member States and concern areas where the Commission has developed solid decisional experience. Therefore, the horizontal extension of the GBER reduces red tape and ensures that the Commission focuses on more important distortions of competition.

3.126

7.4.1 Aid to make good damages caused by natural disasters 7.4.1.1 Rationale behind the exemption Until the revision of the GBER, Member States were required to notify aid measures to make good the damage caused by natural disasters. However, the amounts granted for such purposes are usually limited and the Commission acquired sufficient decisional practice to establish clear compatibility conditions to exempt such aid.1501 While the Enabling Regulation 994/98 authorized the Commission to exempt such aid from notification, it only permitted the exemption to the extent the aid was granted to SMEs. That situation was unsatisfactory, since large undertakings may also be affected by natural disasters. Hence, the 2013 amendment to the Enabling Regulation allowed aid for large undertakings to be exempted, since such aid does not give rise to any significant distortions of competition.1502

3.127

1501 Up until the entry into force of the GBER 651/2014, the Commission received around ten notifications of State aid to compensate for natural disasters every year. 1502 Para. 7, Article 1, (2) (vi) of Council Regulation (EU) No 733/2013 of 22 July 2013 amending Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 204, 31.07.2013, p. 11.

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7.4.1.2 Legal basis 3.128

The legal basis for the compatibility of such aid is Article 107(2)(b) of the Treaty (“aid to make good the damage caused by natural disasters or exceptional occurrences”). Therefore, aid to compensate for natural disasters is compatible with the internal market and constitutes an ‘automatic exemption’. However, pursuant to Article 108(3) of the Treaty, it still needs to be notified to the Commission. To provide legal certainty to Member States and other stakeholders, the Commission had thus to define those types of events that may constitute a natural disaster benefitting from the exemption under the GBER.1503 However, nothing prevents Member States from notifying to the Commission aid to compensate for other types of natural disasters that are not included in the definition provided in the GBER.

7.4.1.3 Derogations from the general compatibility conditions 3.129

Given its compensatory nature, such aid is exempted from the requirement of having an incentive effect, if the (remaining) specific conditions set out in the GBER are fulfilled.1504

3.130

Moreover, given the urgency and risk of irreparable damage, undertakings that are subject to an outstanding recovery order may (still) benefit from such compensation, although the unlawful aid has not been repaid.1505 Hence, the Deggendorf case law1506 does not apply in that situation.

3.131

Finally, and as a matter of exception from the general prohibition of granting aid to undertakings in difficulty, affected undertakings may receive aid to compensate for damages caused by natural disasters.1507

7.4.1.4 Scope of the exemption and notification threshold 3.132

Aid to compensate for damages arising out of natural disasters can be granted under schemes that may be designed either as ex ante or ex post aid to cover a specific natural disaster. 1503 1504 1505 1506

Article 50(1) of the GBER. Article 6(5)(f ) of the GBER. Article 1(4)(a) of the GBER. According to Case C-355/95 P TWD v Commission ECLI:EU:C:1997:241, any (new) aid granted to an undertaking subject to an outstanding recovery order should be assessed by the Commission in conjunction with such aid (and most likely, be prohibited if the unlawful aid is not recovered). 1507 Article 1(4)(c) of the GBER.

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Article 50(1) of the GBER contains an exhaustive list of “natural disasters” that includes earthquakes, avalanches, landslides, floods, tornadoes, hurricanes, volcanic eruptions and wild fires of natural origin. Notably, the list does not include “storms” because very often such events do not constitute a disaster but are to be assimilated with regularly occurring bad weather conditions. They would thus not fall under Article 107(2)(b) of the Treaty.

3.133

Moreover, the list does not include fires occasioned by human activity, for instance in the case where the fire originated from a spark of a forest machine that spread rapidly in a severely dry climate causing a severe fire. Wild fires caused by forest activity are excluded from the scope of the GBER, as they are not of natural origin, but are caused by accident, and entail the civil damage liability of the entity causing it. These events are qualified as “exceptional occurrences” and cannot be compensated under the GBER. However, if certain conditions are fulfilled, such “exceptional occurrences” may be compensated, under the Agricultural Block Exemption Regulation as “an adverse climatic event which can be assimilated to a natural disaster”. Furthermore, exceptional snowfalls are also not included in the definition of natural disasters, and cannot be assimilated with avalanches that are, on the other hand included in the definition.

3.134

There is no threshold foreseen for such aid; compensation can therefore be given for the entire damages arising out of the natural disaster.

3.135

7.4.1.5 Specific compatibility conditions In order to be exempted from the notification requirement under the GBER, aid to compensate for natural disasters must fulfil the following conditions: –

the competent (national) public authority must have formally recognized the character of the event as a natural disaster; and

–

there must be a direct causal link between the natural disaster and the damages suffered by the affected undertaking.

It should be noted that the requirement for Member States to submit information to the Commission regarding the occurrence of natural disasters, foreseen in earlier drafts of the GBER subject to public consultation, was eventually dropped as the Commission deemed the information obligation in Article 11 of the GBER sufficiently covering.

3.136

3.137

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7.4.1.6 Eligible costs 3.138

Aid to compensate for natural disasters can be granted in the form of compensation for the costs arising from the respective damage as well as loss of income due to the full or partial suspension of the activity for a period not exceeding six months after the disaster.1508 There is no threshold up to which such costs can be compensated, provided the conditions specified in Article 50 of the GBER are observed.

3.139

According to Article 50(4) of the GBER, eligible costs include material damage to assets such as buildings, equipment and machinery or stocks. The GBER provides the parameters for the calculation of the material damage and indicates that the compensation should not exceed the repair cost or the decrease in fair market value caused by the disaster – i.e., the difference between the property’s value immediately before and immediately after the occurrence of the disaster. Loss of income must be calculated on the basis of the financial data of the affected undertaking, by comparing the data for six months after the occurrence of the disaster with the average of three years chosen among the five years preceding the disaster, after excluding the two years giving the best and worst result. To avoid conflicts of interest, the costs arising from the damage must be assessed by an insurance undertaking or by an independent expert recognised by the competent national authority.

7.4.1.7 Aid intensity 3.140

The aid intensity may not exceed 100 per cent of the eligible costs. Insurance fees must be deducted in order to avoid any overcompensation. 1508 That approach is based on previous Commission decisional practice in this field e.g., N459a/2009 – ItalyThe earthquake in Abruzzo of 6 April 2009, OJ C 278, 18.11.2009, p. 1. The approved scheme qualified as eligible the costs for damage to property and damage for economic disadvantage caused by the natural disasters. Damage to property caused by the natural disasters included: a contribution to cover damage to movable or immovable property, including stocks; the contribution could cover up to 100 per cent of the value of the damage incurred, up to a maximum of EUR 5 million. Damages for the economic disadvantage caused by the natural disasters included: (a) a contribution to cover the damage suffered owing to the temporary suspension of activity for the period necessary to renovate the place of business; (b) a contribution to cover the damage suffered owing to the temporary suspension of the enterprise’s activities due to necessary interventions to remove all impediments to restart business, even in the case they do not directly affect the production site or activity, but they do prevent the enterprise from functioning; or, alternatively, (c) a contribution to cover the cost of transferring the production site or activity within the same municipality or within the area of the Region Abruzzo affected by the earthquakes, if the transfer is necessary to limit the damage for economic disadvantage resulting from the natural disasters. That contribution was equivalent to 100 per cent of these costs, including the cost of returning to the original premises once the reason for the transfer has ceased.

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7.4.2 Social aid for transport of residents of remote regions 7.4.2.1 Rationale behind the exemption As indicated in Recital 12 of Regulation 733/2013, amending the Enabling Regulation, social aid for the transport of residents of “remote regions” (e.g., outermost regions and islands, including single region island Member States and sparsely populated areas) does not give rise to significant distortions of competition, provided that it is granted without discrimination related to the identity of the carrier.1509

3.141

7.4.2.2 Legal basis As with aid to compensate for damages arising out of natural disasters, social aid for transport of residents of remote regions has a compensatory nature and is based on Article 107(2)(a) of the Treaty (“aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination to the origin of products concerned”).

3.142

7.4.2.3 Derogations from the general compatibility conditions Given its compensatory nature, this category of aid is exempted from the requirement of having an incentive effect, if the (remaining) specific conditions set out in the GBER are fulfilled.

3.143

Furthermore, for privacy reasons, Member States are not obliged to publish the awards of aid granted under such schemes to final consumers as it would normally be required to do under Article 9 of the GBER.

3.144

7.4.2.4 Scope of the exemption and notification threshold The exemption concerns aid for air and maritime passenger transport for passenger transport on a route linking an airport or port in a remote region with another airport or port within the European Economic Area (“EEA”). The aid is normally granted in the form of vouchers or compensation for the transportation cost of final consumers.

3.145

1509 Since 1998 the Commission has adopted 29 decisions concerning social aid for transport to remote regions, assessing aid amounts of approx. EUR 380 million. See e.g., SA.32069 Participation des collectivités de Martinique au dispositif d’’aide à la continuité territoriale, OJ C 149, 20.05.2011, p. 3; where the aid in an amount of EUR 450,000 (annual and overall budget) ensured connections between the island Martinique and the mainland (France)/other EU/EEA countries.

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3.146

There is no notification threshold foreseen for such aid; full compensation can therefore be given under the GBER for the entirety of the eligible costs.

7.4.2.5 Specific compatibility conditions 3.147

According to Article 51(2) of the GBER, to benefit from the exemption the entire aid must be for the benefit of final consumers who have their normal residence in remote regions. The GBER provides a definition of “normal residence” on the basis of the Union legislation applicable in different fields1510, which essentially refers to a certain period of time spent in the respective Member State, or if it is not applicable, personal connections to that Member State.1511 The rationale behind that is to ensure a uniform definition across Member States. However, if it is not possible due to, e.g., different definitions of “normal residence” in national fiscal legislation, Member States may proceed to establishing the definition themselves.

3.148

Furthermore, the aid must be granted for passenger transport on a route linking an airport or port in a remote region with another airport or port within the EEA.1512 Article 2(1)(7) of the GBER defines remote regions as outermost regions1513, Malta, Cyprus, Ceuta and Melilla, islands which are part of the territory of a Member State as well as sparsely populated areas.1514

3.149

Where a remote region is linked to the EEA by several transport routes, including indirect routes, aid should be possible for all those routes and for transport by all carriers operating on these routes. In recent decisional practice, the Commission had already invited Member States to open the schemes for any con1510 See e.g. Directive 2006/126/EC of the European Parliament and of the Council of 20 December 2006 on driving licences (Recast), OJ L 403, 30.12.2006, p. 18; Regulation (EU) No 165/2014 of the European Parliament and of the Council of 4 February 2014 on tachographs in road transport, repealing Council Regulation (EEC) No 3821/85 on recording equipment in road transport and amending Regulation (EC) No 561/2006 of the European Parliament and of the Council on the harmonisation of certain social legislation relating to road transport, OJ L 60, 28.02.2014, p. 1. 1511 Article 2(1)(132) of the GBER. 1512 Article 51(3) of the GBER. 1513 Article 2(1)(12) of the GBER stipulates that outermost regions are regions defined in Article 349 of the Treaty. In accordance with European Council Decision 2010/718/EU of 29 October 2010 amending the status with regard to the European Union of the island of Saint-Barthélemy, OJ L 325, 09.12.2010, p. 4, from January 1, 2012 Saint-Barthélemy ceased to be an outermost region. In accordance with European Council Decision 2012/419/EU of 11 July 2012 amending the status of Mayotte with regard to the European Union, OJ L 204, 31.07.2012, p. 131, on 1 January 2014, Mayotte became an outermost region. 1514 Article 2(1)(48) of the GBER provides that sparsely populated areas are those areas which are recognized by the Commission as such in the individual decisions on regional aid maps for the period 01.07.2014 31.12.2020.

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nection between the remote area and the rest of the EEA, to allow competition between different carriers and to avoid designing the schemes so that only one carrier would be eligible. Finally, the aid must be granted without discrimination as to the identity of the carrier or type of service and without limitation as to the precise route to or from the remote region.1515

3.150

7.4.2.6 Eligible costs The eligible costs must be the price of a return ticket from or to the remote region, including all taxes and charges invoiced by the carrier to the consumer.1516

3.151

7.4.3 Aid for culture and heritage conservation 7.4.3.1 Rationale behind the exemption As indicated in the Enabling Regulation, a number of measures taken by Member States in the culture and heritage conservation sector may not constitute aid because they do not fulfil all the criteria of Article 107(1) of the Treaty, for example because the activity is not economic or because trade between Member States is not affected. To the extent that such measures are covered by Article 107(1) of the Treaty, cultural institutions and projects typically do not give rise to any significant distortion of competition, and decisional practice has shown that such aid has limited effects on trade. While the Enabling Regulation 994/98 authorized the Commission to exempt such aid from notification, it only allowed it to the extent it was granted to SMEs. The exemption was therefore of limited use, since the recipients of aid in that field are often large companies. However, small culture, creation and heritage conservation projects, even if carried out by larger companies, typically do not give rise to any significant distortion, and recent cases have shown that such aid has limited effects on trade.

3.152

1515 Article 51(4) of the GBER. 1516 Article 51(5) of the GBER. In recent decisional practice, social aid schemes included clauses/provisions specifying that, e.g., only economy class ticket price is eligible for a discount, if a certain proportion of the ticket price is reimbursed, or established a maximum eligible ticket price, usually an average economy class ticket price, or a maximum annual budget per private beneficiary. As indicated above, the criteria for social aid are defined in Art 107(2)(a) of the Treaty, and the Commission’s discretion is quite limited. Therefore, the introduction of further conditions, e.g. concerning the ticket price in relation to route costs and a margin, was considered impractical, as airlines do not always have a business plan per route and may operate on the basis of other indicators such as load factor. Defining and benchmarking of cost indicators may imply discretion incompatible with Article 107(2) of the Treaty and legal uncertainty.

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3.153

The Commission has gained sufficient case practice (100 decisions out of which 10 per cent no aid decisions and 90 per cent approval decisions without objections in the recent years) to block-exempt such cases.1517

7.4.3.2 Scope of the exemption and notification threshold 3.154

Article 167 of the Treaty recognises the importance of promoting culture for the Union and its Member States and provides that the Union should take cultural aspects into account in its action under other provisions of the Treaty, in particular in order to respect and to promote the diversity of its cultures. Furthermore, as “natural heritage” is often crucial to the shaping of artistic and cultural heritage, conservation within the meaning of the GBER should be understood to cover also natural heritage linked to “cultural heritage” or formally recognised by the competent public authorities of a Member State.

3.155

Because of the dual nature of culture (being on the one hand an economic good that offers important opportunities for the creation of wealth and employment, and, on the other, a vehicle of identities, values and meanings that mirror and shape our societies), State aid rules should acknowledge the specificities of culture and the economic activities related to it. Therefore, the Commission has established in the GBER a list of eligible cultural purposes and activities.

3.156

The scope of activities that can be supported under this category of aid is very wide. Its limits are set by reference to the Commission’s decisional experience. An open list would not have been legally possible since the scope of the exemption needs to be clearly defined.

3.157

According to Article 53, the Commission can exempt investment and operating aid for the following purposes and activities: (a)

museums, archives, libraries, artistic and cultural centres or spaces, theatres, opera houses, concert halls, other live performance organisations, film heritage institutions and other similar artistic and cultural infrastructures, organisations and institutions;

1517 SA.36407 (2013/N) Aid for the promotion of the Basque language at the workplace, OJ C 293, 09.10.2013, p. 1, 23/05/2013, SA.37024 (2013/N) State aid to dance, music and poetry 19/08/2013, OJ C272, 20.09.2013, p. 1, SA.36873 (2013/N) Aid measures with a cultural objective under the Regional Development Operational Programmes 19/08/2013, OJ C 293, 09.10.2013, p. 1.

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(b)

tangible heritage including all forms of movable or immovable cultural heritage and archaeological sites, monuments, historical sites and buildings; natural heritage linked to cultural heritage or if formally recognized as cultural or natural heritage by the competent public authorities of a Member State;

(c)

intangible heritage in any form, including folklorist customs and crafts;

(d)

art or cultural events and performances, festivals, exhibitions and other similar cultural activities;

(e)

cultural and artistic education activities as well as promotion of the understanding of the importance of protection and promotion of the diversity of cultural expressions through educational and greater public awareness programs, including the use of new technologies;

(f )

writing, editing, production, distribution, digitisation and publishing of music and literature, including translations.

Aid to press and magazines, whether published in print or electronically, is not eligible for aid for culture and heritage conservation. Such aid is excluded because the GBER should not apply to activities which, although they may have a cultural dimension, have a predominantly commercial character, because of the higher potential for competition distortions. A similar rationale applies to commercial activities such as fashion, design or video games.

3.158

The threshold applicable for investment aid for culture and heritage conservation is EUR 100 million per project, while for operating aid the threshold applicable is EUR 50 million per undertaking per year.1518

3.159

7.4.3.3 Derogations from the general compatibility conditions Aid for culture and heritage conservation is exempted from the requirement of having an incentive effect, provided the (remaining) specific conditions set out in the GBER are fulfilled.1519 The requirement does not apply or should be presumed as having been complied with, given the nature of the purposes and activities supported, as well as their limited impact on trade and competition.

3.160

1518 Article 4(1)(z) of the GBER. 1519 Article 6(5)(h) of the GBER.

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7.4.3.4 Aid Amount and aid intensity 3.161

According to Article 53(6) of the GBER, the amount of investment aid exempted under the GBER must not exceed the difference between the eligible costs and the operating profit of the investment. The operating profit must be deducted from the eligible costs ex ante, on the basis of reasonable projections, or, alternatively, through a claw-back mechanism. However, the operator of the infrastructure is allowed to keep a reasonable profit over the relevant period.

3.162

Furthermore, according to Article 53(7), the operating aid amount must not exceed what is necessary to cover the operating losses and a reasonable profit over the relevant period. That ceiling must be ensured ex ante, on the basis of reasonable projections, or through a claw-back mechanism.

3.163

Alternatively, for aid not exceeding EUR 1 million, the maximum amount of aid may be set at 80 per cent of eligible costs.

3.164

Given the specificities of the sector and the Commission’s previous decisional practice, for the publishing of music and literature the maximum aid amount must not exceed either the difference between the eligible costs and the project’s discounted revenues or 70 per cent of the eligible costs. The revenues must be deducted from the eligible costs ex ante or through a claw-back mechanism. In such cases, the eligible costs are the costs for publishing of music and literature, including the authors’ fees (copyright costs), translators’ fees, editors’ fees, other editorial costs (proofreading, correcting, reviewing), layout and pre-press costs and printing or e-publication costs.

7.4.3.5 Eligible costs 3.165

For investment aid, the eligible costs are the investment costs in tangible and intangible assets, including: –

costs for the construction, upgrade, acquisition, conservation or improvement of infrastructure, if at least 80 per cent of either the time or the space capacity per year is used for cultural purposes;

–

costs for the acquisition, including leasing, transfer of possession or physical relocation of cultural heritage;

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–

costs for safeguarding, preservation, restoration and rehabilitation of tangible and intangible cultural heritage, including extra costs for storage under appropriate conditions, special tools, materials and costs for documentation, research, digitalisation and publication;

–

costs for improving the accessibility of cultural heritage to the public, including costs for digitisation and other new technologies, costs to improve accessibility for persons with special needs (in particular, ramps and lifts for disabled persons, braille indications and hands-on exhibits in museums) and for promoting cultural diversity with respect to presentations, programmes and visitors;

–

costs for cultural projects and activities, cooperation and exchange programmes and grants including costs for selection procedures, costs for promotion and costs incurred directly as a result of the project.

For operating aid, the eligible costs are the following: a)

the cultural institution’s or heritage site’s costs linked to continuous or periodic activities including exhibitions, performances and events and similar cultural activities that occur in the ordinary course of business;

b)

costs for the acquisition, including leasing, transfer of possession or physical relocation of cultural heritage;

c)

costs of the improvement of public access to the cultural institution or heritage sites and activities including costs of digitisation and of use of new technologies as well as costs of improving accessibility for persons with disabilities;

d)

operating costs directly relating to the cultural project or activity, such as rent or lease of real estate and cultural venues, travel expenses, materials and supplies directly related to the cultural project or activity, architectural structures for exhibitions and stage sets, loan, lease and depreciation of tools, software and equipment, costs for access rights to copyright works and other related intellectual property rights protected contents, costs for promotion and costs incurred directly as a result of the project or activity; depreciation charges and the costs of financing are only eligible if they have not been covered by investment aid;

3.166

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e)

costs for cultural projects and activities, cooperation and exchange programmes and grants including costs for selection procedures, costs for promotion and costs incurred directly as a result of the project;

f)

costs for advisory and support services provided by outside consultants and service providers, incurred directly as a result of the project.

7.4.4 Aid for sport and multifunctional infrastructures 7.4.4.1 The rationale behind the exemption 3.167

As indicated in the Enabling Regulation, in the sports sector and in particular in the field of amateur sport, a number of measures taken by Member States might not constitute aid because they do not fulfil all the criteria of Article 107(1) of the Treaty, for example because the beneficiary does not carry out an economic activity, or because there is no effect on trade between Member States. However, to the extent that measures in the field of sports do constitute State aid, Member States must notify them to the Commission. State aid measures for sport, in particular those which have a purely local character or those in the field of amateur sport or those that are small-scale, often have limited effects on trade between Member States and do not create serious distortions of competition. The amounts granted are typically also limited.

3.168

In the past years, the Commission has developed sufficient experience to devise compatibility criteria and block-exempt those cases.1520

3.169

Article 165 of the Treaty recognizes the importance of promoting European sporting issues, while taking account of the specific nature of sport, its structures based on voluntary activity and its social and educational function.

7.4.4.2 Scope of the exemption and notification threshold 3.170

The GBER covers aid to sport infrastructure and infrastructure which serve more than one purpose of recreation and are thus “multifunctional”. The aid may take the form of (a) investment aid, including aid for the construction or upgrade of sport and multifunctional recreational infrastructure, or (b) operat1520 Since 2010, the Commission has taken seven decisions in sport infrastructure cases, mostly involving stadia; one case concerned a horse racetrack, another a swimming pool (SA 33045 alleged unlawful aid in favour of Kristall Bäder AG, OJ C 393, 07.11.2014, p. 1), a third climbing centres. Recent cases also include the conversion of football stadia into multifunctional arenas, which continuously serve predominantly sports purposes (otherwise they would move to the multifunctional category).

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ing aid for sport infrastructure. Investment aid for sport and multifunctional infrastructures can be granted up to EUR 15 million or the total costs exceeding EUR 50 million per project, while operating aid for sport infrastructure can be granted up to EUR 2 million per infrastructure per year.1521

7.4.4.3 Specific compatibility conditions The compatibility conditions regarding aid for sport or multifunctional infrastructures should ensure, in particular, open and non-discriminatory access to the infrastructures and a fair process of assignment of concessions to a third party in accordance with the relevant provisions of Union law and the case law of the Union courts to construct, upgrade and/or operate the infrastructure.

3.171

Sport infrastructure must not be used exclusively by a single professional sport user. Use of the sport infrastructure by other professional or non-professional sport users must annually account for at least 20 per cent of time capacity. If the infrastructure is used by several users simultaneously, corresponding fractions of time capacity usage must be calculated. The Commission gives a definition of “professional sport”1522, which means the practice of sport in the nature of gainful employment or remunerated service, irrespective of whether or not a formal labour contract has been established between the professional sportsperson and the relevant sport organisation, where the compensation exceeds the cost of participation and constitutes a significant part of the income for the sportsperson. Travel and accommodation expenses to participate in the sport event shall not be considered as compensation under the GBER.

3.172

If sport infrastructure is used by professional sport clubs, Member States must ensure that the pricing conditions for its use are made publicly available, to ensure transparency and equal treatment of users.

3.173

Multifunctional recreational infrastructure must consist of recreational facilities with a multi-functional character offering, in particular, cultural and recreational services with the exception of leisure parks and hotel facilities.

3.174

It should be noted that aid to multifunctional tourism infrastructures such as leisure parks and hotel facilities will only be exempted if the aid is part of a regional aid scheme aimed at tourism activities in an assisted region which has a particular positive effect on regional development.

3.175

1521 Article 4(1)(bb) of the GBER. 1522 Article 2(1)(143) of the GBER.

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3.176

Access to both sport and multifunctional recreational infrastructures must be open to several users and be granted on a transparent and non-discriminatory basis. Undertakings which have financed at least 30 per cent of the investment costs of the infrastructure may be granted preferential access under more favourable conditions, provided those conditions are made publicly available.

3.177

Furthermore, any concession or other entrustment to a third party to construct, upgrade and/or operate the sport or multifunctional recreational infrastructure shall be assigned on an open, transparent and non-discriminatory basis, having due regard to the applicable procurement rules.

7.4.4.4 Aid amount and Intensity 3.178

To limit the distortion of competition to the minimum, for investment aid for sport and multifunctional recreational infrastructure the aid amount must not exceed the difference between the eligible costs and the operating profit of the investment, which must be deducted from the eligible costs beforehand, on the basis of reasonable projections, or through a claw-back mechanism.

3.179

For operating aid for sport infrastructure, the aid amount must not exceed the operating losses over the relevant period. This shall be ensured beforehand, on the basis of reasonable projections, or, alternatively, through a claw-back mechanism.

3.180

Alternatively, for aid not exceeding EUR 1 million, the maximum amount of aid can be set at 80 per cent of the eligible costs.

7.4.4.5 Eligible costs 3.181

For investment aid for sport and multifunctional recreational infrastructure the eligible costs are the investment costs in tangible and intangible assets. For operating aid for sport infrastructure the eligible costs are the operating costs of the provision of services by the infrastructure. Those operating costs include costs such as personnel costs, materials, contracted services, communications, energy, maintenance, rent, administration, etc., but exclude depreciation charges and the costs of financing if these have been covered by investment aid.

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7.4.5 Aid for local infrastructures 7.4.5.1 The rationale behind the exemption The GBER exempts aid for energy, research, broadband, sports and multifunctional infrastructures.1523 According to the Enabling Regulation, infrastructure aid in support of other objectives of common interest, in particular the Europe 2020 objectives can be exempted. If made available to interested parties on an open, transparent and non-discriminatory basis, such infrastructure may enable the creation of an environment conducive to private investment and growth, thus contributing positively to objectives of common interest, and in particular to the Europe 2020 priorities and objectives, while the risks of distortions remain limited. The exemption could concern, for instance, support for projects involving multisectoral networks or facilities where relatively small amounts of aid are necessary.1524 Such measures may not constitute aid because they might not fulfil all the criteria of Article 107(1) of the Treaty, for example because the beneficiary does not carry out an economic activity, because there is no effect on trade between Member States, or because the measure consists of compensation for a service of general economic interest which fulfils the Altmark criteria.1525 However, where the financing of such local infrastructures does constitute State aid within the meaning of Article 107(1) of the Treaty, such aid may be exempted from the notification requirement when only small amounts of aid are granted.

3.182

7.4.5.2 Scope of the exemption and notification threshold The GBER exempts financing for the construction or upgrade of local infrastructures contributing to improving the business and consumer environment at a local level and modernising and developing the industrial base.1526

1523 1524 1525 1526

3.183

Sections 4, 7, 10, 12 of the GBER. Recital 14 of Regulation 733/2013, amending the Enabling Regulation. Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415. In principle a scheme for aid granted to municipalities and other public institutions for preparation of industrial zones and related technical infrastructure (buying, preparation and revitalization of land, ensuring its connection to utilities, construction and modernisation of transport infrastructure and buildings) would be a scheme that, if involving State aid, would seem to be covered by Article 56 of the GBER. However, Article 56 only applies if no other more specific provision of the GBER applies, such as Article 48 relating to energy infrastructure. Also all the requirements of Article 56 should be met, including the prohibition as regards dedicated infrastructure and the total investment cost of maximum EUR 20 million (eligible cost also is capped at EUR 10 million).

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In order to prevent the circumvention of other specific rules on infrastructure aid, aid for infrastructures that is covered by other sections of the GBER (e.g. energy, R&D, broadband), cannot be granted, alternatively, under Article 56 of the GBER. Exceptionally, and given the need to promote regional cohesion and development, local infrastructures can benefit from both regional aid and aid under Article 56.1527

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Aid for airport infrastructure and port infrastructure cannot be exempted under Article 56 since the Commission envisages developing compatibility criteria in that field by December 2015.1528

3.186

Dedicated infrastructure cannot be exempted under Article 56 of the GBER. By “dedicated infrastructure” the Commission understands infrastructure that is built for ex-ante identifiable undertaking(s) and tailored to their needs.

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There are two thresholds up to which the GBER exempts this category of aid: for local infrastructures up to EUR 10 million or the total costs exceeding EUR 20 million for the same infrastructure.

7.4.5.3 Specific compatibility conditions 3.188

To benefit from the exemption, the infrastructure must be made available to interested users on an open, transparent and non-discriminatory basis. Furthermore, the price charged for the use or the sale of the infrastructure must correspond to the market price.1529 Any concession or other entrustment to a third party to operate the infrastructure shall be assigned on an open, transparent and non-discriminatory basis, having due regard to the applicable procurement rules.1530

7.4.5.4 Aid amount and intensity 3.189

To limit the aid amount to the minimum, and given the local nature of the infrastructure, the aid amount must not exceed the difference between the eligible costs and the operating profit of the investment. The operating profit must be deducted from the eligible costs ex ante, on the basis of reasonable projections, or through a claw-back mechanism.1531 1527 1528 1529 1530 1531

Article 56(2) of the GBER. Recital 1 of the GBER. Article 56(3) of the GBER. Article 56(4) of the GBER. Article 56(6) of the GBER.

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7.4.5.5 Eligible expenses Article 56(5) foresees that the eligible costs must be the investment costs in tangible and intangible assets.

8.

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Final remarks

The reviewed GBER reflects the same reasoning behind the compatibility assessment as the now repealed GBER 800/2008. The conditions set out by the reviewed GBER also express the balancing test and the Commission’s assessment as to when the positive effects of aid outweigh the negative effects. As with the GBER 800/2008, the new GBER therefore refers to notification thresholds, transparency of aid, incentive effect. It strengthens the publication and information requirements in order to secure the balance of the package and provide safeguards.

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The specific conditions for different aid categories are not really new: they are based on the Commission’s decisional practice and experience with block exempted aid gathered through monitoring. Changes introduced into different conditions, as compared to the GBER 800/2008, in relation to both general conditions, such as the incentive effect, and specific conditions regarding different aid categories, such as the R&D aid or training aid, seek to address difficulties encountered during the application of the GBER 800/2008. The review has therefore brought the general block exemption closer to market reality. In addition, such elements as ex-post evaluation of large schemes should allow the Commission and Member States to gather more data about the actual impact of aid measures and enable the latter to better design those measures in the future. While going through the GBER’s text one may wonder whether the simplification objective has been achieved. It should, however, be remembered that the GBER constitutes a compromise between the need to ensure, on one hand, that its conditions are simple and easy to apply and, on the other hand, that its provisions are self-standing – i.e. do not require further implementing acts – and that they provide sufficient safeguards against potential competition distortions.

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Where the authors would see the biggest impact of the GBER on the landscape of State aid control and policy is in the shift from ex post to ex ante control, better fitted to the reality of the Union of 28 Member States. Due to its enlarged scope in terms of both increased thresholds and new categories of aid covered by the block exemption, the GBER certainly has the potential to change the way in which the Commission carries out State aid control.

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The Commission itself stresses that under the new set of State aid rules, granting authorities will enjoy much wider margin to design and implement aid measures. That greater freedom for the Member States must however be balanced by strengthened compliance controls so as to limit distortions of competition to the greatest extent possible. The safeguards of that balance are such elements as transparency, monitoring and ex-post evaluation of large schemes. Transparency means that aid awards will become public at the individual level, which should ensure stronger public control. More systematic monitoring of block exempted measures will result in strengthened ex post controls of compliance with the formal conditions for exemption. Ex-post evaluation of large schemes should ensure that the aid has strong positive effects and should help Member States design better schemes with more limited impact on competition and trade.1532

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Having said the above, the practical significance of the reviewed GBER as an element of the State Aid Modernisation depends now on the extent to which it will actually be used by the Member States. The Commission itself stresses in this context the importance of competition advocacy, training and knowledge sharing between aid granting authorities at all levels.1533

1532 Competition policy brief, Issue 11, November 2014, p. 2, http://ec.europa.eu/competition/publications/ cpb/2014/011_en.pdf. 1533 Competition policy brief, Issue 11, Nove,mber 2014, p. 3, http://ec.europa.eu/competition/publications/ cpb/2014/011_en.pdf.

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Chapter 17 Research, development and innovation

1.

Introduction

Promoting research and development and innovation (R&D&I) is an objective of common interest enshrined in Article 179 of the Treaty, which states that “[t] he Union shall have the objective of strengthening the scientific and technological bases by achieving a European research area in which researchers, scientific knowledge and technology circulate freely, and encouraging it to become more competitive, including in its industry, while promoting all the research activities deemed necessary”.

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Having traditionally taken a favourable view on State aid for research and development (R&D), the Commission has first laid down compatibility rules for such aid in 19861534 and repeatedly adapted them to take account of policy developments and experience gained in case practice. The 1996 Framework for State aid for R&D1535 explicitly acknowledged that favourable attitude, and justified it with reference to the aims of R&D aid, the often considerable financial requirements and risks of R&D activities and the reduced likelihood that such aid distorts competition and trade, given its distance from the market. The 2006 Framework for State aid for R&D&I1536, which applied between 1 January 2007 and 30 June 2014, confirmed that approach and provided for the first time a clear economic justification for such aid with reference to those market failures that may prevent the spontaneous achievement of an efficient level of R&D.

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1534 Community framework for State aid for research and development, OJ C 83, 11.04.1986, p. 2. 1535 Community framework for State aid for research and development, OJ C 45, 17.02.1996, p. 5. 1536 Community framework for State aid for research and development and innovation, OJ C 323, 30.12.2006, p. 1.

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Compared to previous texts, the novelties of the 2006 Framework mainly consisted in extending their scope to a series of new innovation measures, clearer provisions on public funding of research organisations and on aid for collaborative R&D projects and, most importantly, an entire chapter dedicated to the detailed assessment of large individual aid measures. The 2006 Framework was thus the first application of the refined economic approach advocated by the 2005 State Aid Action Plan.1537 It moreover constituted an important step forward in terms of the scope for Member States to provide R&D&I aid, especially as from August 2008, when most of its provisions were included in a General Block Exemption Regulation (GBER).1538

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On the basis of the 2006 Framework, the Commission has approved more than 250 aid schemes and around 60 large individual aid measures, the latter alone being worth about EUR 3.4 billion. Some 80 per cent of the large aid projects involved key enabling technologies (KETs) such as micro and nanoelectronics, advanced materials, industrial biotechnologies, advanced manufacturing systems and, to a lesser extent, nanotechnologies. At the same time, around 600 additional aid schemes have been implemented by Member States under the 2008 GBER.1539 Those measures translated into an annual average amount of over EUR 10 billion of R&D&I State aid awarded over the period of application of the 2006 Framework, which corresponds to some 18 per cent of total aid for industry and services.

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Nevertheless, whilst the Europe 2020 strategy1540 identified R&D as a key driver for achieving the objectives of smart, sustainable and inclusive growth and set out the headline target according to which 3 per cent of the Union’s gross domestic product (GDP) should be invested in R&D by 2020, progress towards such objective has been moderate at most, as total R&D investment stood at only 2.06 per cent of GDP in 2012 (up from 1.84 per cent in 2007), well below the corresponding levels in the United States (2.79 per cent), South Korea (4.36 per cent) and Japan (3.35 per cent), and only marginally above that of China (1.98 per cent).1541 1537 State Aid Action Plan: less and better targeted State aid - a roadmap for State aid reform 2005–2009, COM(2005) 107 final, 07.06.2005. 1538 Commission Regulation (EC) No 800/2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty, OJ L 214, 09.08.2008, p. 3. Although innovation aid was then covered for the first time, R&D aid has featured in block exemption regulations since 2004. 1539 Even so, and in spite of an upward trend, the use of the 2008 GBER remained relatively limited, as the share of block-exempted aid only reached 30 per cent of total R&D&I aid in 2012. 1540 Communication from the Commission, “Europe 2020 - A strategy for smart, sustainable and inclusive growth”, COM(2010) 2020 final, 03.03.2010. 1541 See Commission Staff Working Document, “Impact assessment accompanying the document Communica-

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To the extent that such lacklustre progress mainly reflects lower levels of business R&D investment, which then accounted for 1.3 per cent of GDP, the Europe 2020 strategy in particular put forward the “Innovation Union” flagship initiative1542 aiming at improving framework conditions and access to finance in order to ensure that innovative ideas can be turned into products and services that create growth and jobs. In that context, in November 2011 the Commission moreover adopted the Horizon 2020 package1543 with an earmarked budget of EUR 80 billion for investment in R&D&I and focusing on three key objectives: strengthening the Union’s position as a world leader in science, strengthening industrial leadership in innovation, and helping address major societal challenges.

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In parallel, in its communication on State Aid Modernisation (SAM)1544, the Commission set out an ambitious programme for State aid reform, also with three main objectives: fostering growth in a strengthened, dynamic and competitive internal market, focusing enforcement on cases with the biggest impact on the internal market, and streamlining rules and enabling faster decisions.

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As a first preparatory step for the revision of the 2006 Framework, which constituted an integral part of the SAM initiative, the Commission issued a midterm review of its application in August 20111545, followed by two wide-ranging public consultations.1546 According to the general feedback received, nothing was blatantly missing or fundamentally wrong in the 2006 Framework and the relevant rules were found to sufficiently cater for the basic needs of fostering R&D&I activities, as well as for the detailed economic assessment of large individual aid measures. It was however also considered that a significant number of aspects could be revised, streamlined and clarified if State aid rules were to continue fulfilling their role in promoting “better” R&D&I aid, in particular in the light of Europe 2020 objectives in areas such as the promotion of demonstration and pilot projects, research infrastructures and certain innovation activities. In that regard, and even if State aid rules are only one element of R&D&I policies and State aid represents only a minor part (less than 5 per cent) of overall R&D

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1542 1543 1544 1545 1546

tion from the Commission, Framework for state aid for research and development and innovation”, available at http://ec.europa.eu/smartregulation/impact/ia_carried_out/docs/ia_2014/swd_2014_0163_en.pdf. Communication from the Commission, “European 2020 Flagship Initiative - Innovation Union”, COM(2010) 546 final, 06.10.2010. COM(2011) 808 final, COM(2011) 809 final, COM(2011) 810 final, COM(2011) 811 final and COM(2011) 812 final, 30.11.2011. Communication from the Commission, “EU State Aid Modernisation (SAM)”, COM(2012) 209 final, 08.05.2012. Commission Staff Working Paper, “Mid-Term Review of the R&D&I Framework”, available at http:// ec.europa.eu/competition/state_aid/legislation/rdi_mid_term_review_en.pdf. Four public consultations were also held in the framework of the revision of the 2008 GBER.

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expenditure, the Europe 2020 communication in particular noted that State aid policy can “actively and positively contribute […] by prompting and supporting initiatives for more innovative, efficient and greener technologies, while facilitating access to public support for investment, risk capital and funding for research and development”.

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The remaining of this chapter presents the new R&D&I State aid rules, and in particular their main novelties and developments, as laid down in the revised Framework for State aid for research and development and innovation (hereafter, “the R&D&I Framework”)1547 and the new GBER.1548 Where applicable, and unless indicated otherwise, all references to the R&D&I Framework should be understood as including the analogous GBER provisions.

2. 3.205

Existence of State aid

In addition to laying down the rules for assessing the compatibility of aid measures in the field of R&D&I, the R&D&I Framework considers in a detailed manner certain situations typically arising in the field of R&D&I activities and provides clarifications on whether and to what extent those are subject to State aid rules. In particular, and following the extension of its scope to research infrastructures1549, it clarifies when State aid rules apply to research organisations1550 or research infrastructures and when aid awarded to those entities can be considered as indirectly benefiting undertakings. For the first time it also includes a section on the possible presence of State aid in the public procurement of R&D services.1551

2.1 Support of research organisations and research infrastructures 3.206

First of all, the R&D&I Framework recalls in its point 17 that research organisations and research infrastructures “are recipients of State aid if their public funding fulfils all conditions of Article 107(1) of the Treaty”, and that whilst 1547 Framework for State aid for research and development and innovation, OJ C 198, 27.06.2014, p. 1. 1548 Commission Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 1549 See section 3.1.2. 1550 Although the relevant definition has been revised and expanded to cater for all types of “research and knowledge dissemination organisations” (such as universities or research institutes, technology transfer agencies, innovation intermediaries and research-oriented physical or virtual collaborative entities), for the sake of simplicity the expression “research organisations” will continue to be used hereafter. 1551 The R&D&I Framework does however not seek to address all possible situations where public expenditure on R&D constitutes State aid. For further guidance, see part 2 of this book on the concept of State aid and notably the chapter on fiscal aid.

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“the beneficiary must qualify as an undertaking, […] that qualification does not depend upon its legal status, that is to say whether it is organised under public or private law, or its economic nature, that is to say whether it seeks to make profits or not. Rather, what is decisive for that qualification as an undertaking is whether it carries out an economic activity consisting of offering products or services on a given market”.1552 Since public funding of non-economic activities does not constitute State aid, and as was the case under the previous rules, the R&D&I Framework continues to clearly indicate that the primary activities of research organisations and research infrastructures (education for more and better skilled human resources, independent R&D for more knowledge and better understanding, and wide dissemination of research results on a non-exclusive and non-discriminatory basis), as well as (under some conditions) knowledge transfer activities, are generally of a non-economic nature. In that respect, and as part of a general endeavour to better cater for non-technological innovation, the R&D&I Framework however refers to “knowledge transfer” instead of “technology transfer”. It moreover provides further clarification as to what can be considered “internal” knowledge transfer1553, by extending that concept to those activities that are conducted on behalf of (and not just jointly with) other research organisations or research infrastructures.

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Naturally, when the same entity carries out activities of both economic and noneconomic nature, it thus continues to be required that the two kinds of activities and their costs, funding and revenues be clearly separated so that a cross-subsidisation of economic activities (such as renting out equipment or laboratories to undertakings, supplying services to undertakings or performing contract research) can be excluded.1554 In the absence of separation of economic and noneconomic activities, the entirety of the public funding received by a research organisation or research infrastructure may qualify as State aid.

3.208

Without any doubt, the main novelty of the R&D&I Framework in that regard is however the reliance on the concept of ancillarity to exclude the presence of

3.209

1552 In the same vein, in order to stress that the legal status of the relevant entities is not decisive, the Commission continues to refer to research organisations and research infrastructures, without distinguishing between public and private ones. 1553 Although the explicit reference to the “internal nature” of knowledge transfer activities has been abandoned, the substantive conditions laid down in the 2006 Framework continue to apply. 1554 The novel emphasis on “undertakings” may indicate that the Commission would be prepared to consider that renting out equipment or laboratories, as well as supplying services to other research organisations or research infrastructures does generally not constitute an economic activity.

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State aid for publicly funded, dual-use (economic and non-economic) research organisations or research infrastructures. To the extent that the economic use of such an entity remains purely ancillary, the entirety of its public funding will be considered as if it was provided for non-economic activities only and thus as not constituting State aid.1555

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In particular, the R&D&I Framework considers in its point 20 that an economic activity can be seen as ancillary when it is “directly related to and necessary for the operation of the research organisation or research infrastructure or intrinsically linked to its main non-economic use, and […] limited in scope”. The Commission has moreover clarified that it will consider those conditions to be fulfilled insofar as the economic activities of research organisations or research infrastructures consume exactly the same inputs (such as material, equipment, labour and fixed capital) as the non-economic activities and do not require using more than 20 per cent of those entities’ annual capacity. Such clarification should on the one hand facilitate everyday compliance with the necessary qualitative criteria, to the extent that “directly related to and necessary or intrinsically linked” will be approximated by consuming “exactly the same inputs”. On the other hand, it seems to go a long way into simplifying State aid control of public funding for (for instance) the construction and upgrade of research infrastructures by setting a rather high threshold for “limited in scope”.1556 Although the R&D&I Framework remains silent on that matter, not least to provide for the necessary flexibility to accommodate the specificities of different cases, it seems possible to assume that indicators such as the time of use or the total value of inputs consumed yearly by the relevant research organisation or research infrastructure can be used for measuring the capacity share of economic activities.

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In practical terms, and in view of the relevant GBER provisions1557, the architecture of the new rules can be explained by considering a fictional project concerning the construction of a research infrastructure with the following characteristics: 1555 That new provision seems to have been inspired by the Commission Decision of 29.06.2011 on case C 35/2008 (ex NN 11/2008), Institut Français du Pétrole (OJ L 14, 17.01.2012, p. 1), even if the discussion then focused on the compatibility rather than the existence of aid. Although in an embryonic manner, such novel approach was in the meantime first laid down in the “Infrastructure analytical grid n° 6 – Research, development and innovation”, ref. Ares(2012)934142, 01.08.2012. 1556 Although the Commission has in the past referred to a share of economic activities below 25 per cent of total activities (see “Legal framework for a European Research Infrastructure Consortium – ERIC, Practical Guidelines”, available at http://ec.europa.eu/research/infrastructures/pdf/eric_ en.pdf#view=fit&pagemode=none), it has done so for the purpose of Council Regulation (EC) No 723/2009 on the Community legal framework for a European Research Infrastructure Consortium (OJ L 206, 08.08.2009, p. 1) and not with a view to excluding the presence of State aid. 1557 See sections 3.2.1 and 3.2.3.

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–

total investment costs: EUR 100 million;

–

the infrastructure performs both economic and non-economic activities and keeps separate accounts for the two types of activities;

–

the same facilities are used for both activities.

For that purpose, it is first of all important to note that if the proportion of the economic activities remains below 20 per cent of the total annual capacity and if the economic and non-economic activities are consuming “exactly the same inputs”, the economic activities can be considered as ancillary. State funding up to the total investment costs (EUR 100 million) can thus be awarded “outside State aid rules”. If we however assume that the proportion of the economic activities represents 25 per cent of the total annual capacity, those activities can no longer be considered as ancillary.

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State funding for the non-economic activities of the research infrastructure does not constitute State aid. The costs of those activities can therefore be fully funded by the State. Under the assumption that that the non-economic activities of the infrastructure represent 75 per cent of the total capacity, it could be considered that in a typical situation 75 per cent of the investment costs represent funding of non-economic activities. Therefore, the infrastructure can receive up to EUR 75 million (75 per cent of the total investment costs of EUR 100 million) of State funding that does not entail State aid and does not fall under State aid rules. If the remaining EUR 25 million are financed through means that do not include State resources, the funding of the infrastructure’s investment costs will not entail State aid.

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If the infrastructure in our example receives State funding that exceeds the above mentioned amount of EUR 75 million corresponding to the funding of its noneconomic activities, the additional amount can be considered as State funding of economic activities and therefore would fall under the State aid rules. Since the GBER provides for a maximum aid intensity of 50 per cent, the infrastructure from our example is entitled to receive EUR 12.5 million of funding for its economic activities (that is to say 50 per cent of the eligible costs of EUR 25 million, these being the costs linked to the economic activity of the infrastructure). Conditional on the respect of all other conditions laid down in the GBER, the EUR 12.5 million aid for the infrastructure will be block exempted as the aid amount does not exceed the EUR 20 million notification threshold.

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The table below provides a summary overview of the State funding that the infrastructure from our example can receive. Type of activity supported

Relevant costs

Maximum support amount

Intensity of support

Aid / No aid

Non-economic

EUR 75 million

EUR 75 million

100%

No aid

Economic

EUR 25 million

EUR 12.5 million

50%

Aid

EUR 100 million

EUR 87.5 million

87.5%

Total

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It is worth noting that Article 26(7) of the GBER also introduces a claw-back mechanism for research infrastructures performing both economic and noneconomic activities in view of ensuring that “the applicable aid intensity is not exceeded as a result of an increase in the share of economic activities compared to the situation envisaged at the time of awarding the aid”. The claw-back mechanism brings a further degree of flexibility for situations where the precise proportion of economic activities is difficult to estimate ex ante. Let us use again the example above and assume that the architecture described in the table corresponds to the ex ante estimation, but ex post it appears that the proportion of economic activities was 30 per cent instead of the expected 25 per cent. In such a case EUR 5 million that were initially considered as funding of the infrastructure’s non-economic activities eventually have to be considered as funding of economic activities. Considering that the maximum aid intensity allowed under the GBER is 50 per cent, EUR 2.5 million augmented with the applicable interest will have to be clawed-back as excessive aid for economic activities.

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Finally, without prejudice to the new concept of ancillarity, the R&D&I Framework continues to consider that research organisations and research infrastructures that receive public funding for economic activities are not beneficiaries of State aid when they act as mere intermediaries, that is to say when both the totality of such public funding and any advantage acquired through it is passed on to other economic actors (final recipients). The conditions under which the absence of State aid will generally be assumed in those circumstances have however been revised and clarified: –

first, there must be an appropriate mechanism in place to ensure the traceability of such funding, so as to prove that the full amount of any quan552

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tifiable and demonstrable advantage is actually transferred to the final recipients, for instance through reduced prices; –

secondly, the relevant intermediary (research organisation or research infrastructure) may not indirectly benefit from the public funding, for instance in terms of an artificially increased market position. That condition is now clearly considered to be fulfilled in cases where either the intermediary is selected through an open tender procedure or its potential customers are entitled to acquire equivalent services from other operators, which could be ensured for example through the implementation of a voucher system.1558

Where the advantage acquired through public funding of economic activities carried out by research organisations or research infrastructures is passed on to undertakings, it constitutes State aid at their level and its compatibility needs to be assessed as such.1559

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The Green Labs decision1560 provides an illustration of past application of the pass-on mechanism described above. Under the “Green Labs” scheme, the Danish authorities provide financing at the infrastructure level, but the entire amount is eventually passed on to the final users through rebates granted on the price of use of the facilities. By the end of the contractual period, the full amount of public funding (including interest) has to have been passed on to the final users. The applicable interest rate is established in accordance with the provisions of the Reference Rate Communication1561 and Articles 9 to 11 of the Implementing Regulation.1562 Any remaining amount that has not been passed on to the final users will be recovered by the Danish authorities at the end of the contractual period (also with interest). In view of the scheme’s architecture, the Commission concluded that aid was not present at the level of the infrastructure (owner and/or operator). Aid was considered present only at the level of the final users and assessed under the provisions of section 5.6 of the 2006 Framework regarding aid for innovation advisory and support services, as well as the de minimis Regulation.1563

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1558 See point 22 of the R&D&I Framework. 1559 See point 23 of the R&D&I Framework. Naturally, in case the related advantage is only partially passed on, the compatibility assessment needs to take place at both levels (intermediaries and final recipients). 1560 Commission Decision of 21.03.2011 on case N 301/2010, Green Labs DK, summary notice in OJ C 131, 03.05.2011, p. 1. 1561 Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.01.2008, p. 6. 1562 Commission Regulation (EC) No 794/2004 implementing Council Regulation (EC)No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L 140, 30.04.2004, p. 1. 1563 Commission Regulation (EC) No 1998/2006 on the application of Articles 87 and 88 of the Treaty to de

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2.2 Support to undertakings through research organisations and research infrastructures 3.220

Further to a general requirement that the behaviour of research organisations or research infrastructures be imputable to the State, the conditions under which (indirect) State aid to undertakings can be excluded in cases of contract research or research services provided by a research organisation or research infrastructure, as well as in cases of collaboration with such entities have been clarified and streamlined in the R&D&I Framework.

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First, in those situations where the research organisation or research infrastructure, acting as an agent, renders a service to an undertaking that, acting as principal, “typically specifies the terms and conditions of the contract, owns the results of the research activities and carries the risk of failure”1564, the Commission in particular considers that there is usually no State aid passed to the undertaking through the research organisation or research infrastructure if the research services or contract research are provided at market price or, if there is no market price, at a price which:

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–

reflects its full costs and generally includes a margin established by reference to those commonly applied in the sector concerned, or

–

“is the result of arm’s length negotiations where the research organisation or research infrastructure, in its capacity as service provider, negotiates in order to obtain the maximum economic benefit at the moment when the contract is concluded and covers at least its marginal costs”.1565

In that regard, although at first sight those conditions do not seem to deviate much from those laid down in the 2006 Framework, especially insofar as the reference to reliance on full costs in those situations where there is no market price basically corresponds to the traditional requirement of “full costs plus a reasonable margin”, two main novelties can be underlined: –

on the one hand, although by means of a footnote, it is now clarified that a specific research service or contract research will be considered as being provided at a market price when it is of an unique nature, is carried out “for the first time on behalf of a given undertaking, on a trial basis and

minimis aid, OJ L 379, 28.12.2006, p. 5. 1564 Point 25 of the R&D&I Framework. 1565 Point 25(b), second indent, of the R&D&I Framework.

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during a clearly limited period of time […] and it can be shown that there is no market for it”.1566 In that regard, subject to future decisional practice and in view of the concomitant use of the expression “for the first time”, the reference to the “unique nature” should probably be understood as pointing to the exclusive (or distinctly individual) character of a research service or contract research rather than its possible “one-off ” nature; –

on the other hand, the R&D&I Framework adds a new possibility for establishing the absence of indirect State aid to undertakings in those situations where there is no market price, by considering that research organisations or research infrastructures generally receive payment of an adequate remuneration for their services when such remuneration is set through “benefit maximising” arm’s length negotiations and cover at least the marginal costs incurred by those research organisations or research infrastructures. As hinted to by recent case-law1567, that provision may prove particularly useful for the assessment of the existence of State aid in transactions involving knowledge transfer to undertakings.

Secondly, in those situations where a specific project is carried out in collaboration with undertakings, the Commission generally restates the provisions of the 2006 Framework, albeit with a new emphasis on “effective collaboration” that could be meant to avoid that any allegedly independent, collaborative R&D undertaken by a research organisation or research infrastructure is automatically seen as a non-economic activity. The R&D&I Framework thus continues to consider that no indirect aid is provided to the participating undertakings due to favourable conditions of the collaboration if: –

the participating undertakings bear the full costs, or

–

the results which do not give rise to intellectual property rights (IPR) may be widely disseminated and any IPR resulting from the activities of research organisations or research infrastructures are fully allocated to them, or

–

any IPR, as well as related access rights are allocated to the different partners in a manner which adequately reflects their work packages, contributions and respective interests1568, or

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1566 Point 25(a), footnote 24, of the R&D&I Framework. 1567 See Case T-488/11 Sarc v Commission ECLI:EU:T:2014:497. 1568 Although that requirement was not explicitly listed in section 3.2.2 of the 2006 Framework, it actually fea-

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–

the research organisations or research infrastructures receive compensation equivalent to the market price for the IPR which result from their activities and are assigned to the participating undertakings.

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Nevertheless, the R&D&I Framework also goes further than the previous rules in clarifying under which circumstances compensation received by research organisations or research infrastructures for their IPR can be considered equivalent to the market price. In that regard, besides recalling in its point 29(c) that the Commission will consider a market price to be present if such entities “effectively negotiated the compensation, at arm’s length conditions, in order to obtain the maximum economic benefit”, it now explicitly also provides for the use of competitive sale procedures or independent expert valuations, as well as for a so-called “reverse English cause” in those cases where the collaborating undertakings enjoy a right of first refusal as regards IPR generated by research organisations or research infrastructures.1569

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Probably for precautionary reasons related to the inherent difficulty to objectively establish a market price for IPR, the Commission nevertheless seems to have refrained from going a step further into measuring the amount of State aid involved in those cases that do not fulfil the above mentioned conditions, as point 30 of the R&D&I Framework clearly continues to state that otherwise “the full value of the contribution of the research organisations or research infrastructures to the project will be considered as an advantage for the collaborating undertakings”.1570

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As a direct result of the public consultations that preceded its adoption, the R&D&I Framework now provides for a completely new section on public procurement of R&D services that covers both exclusive development and precommercial procurement procedures.1571 tured therein as a possible “fall back” option. 1569 An “English clause” is a contractual provision requiring a buyer to report any better offer to his supplier and allowing him to accept such offer only when the supplier does not match it. 1570 In that regard it can in particular be argued that there is no reason why the advantage received by an undertaking, for example under the form of free allocation of IPR, should correspond to the contribution of the research organisations or research infrastructures to the project. 1571 Although indicating in its section 2.1 that no State aid is normally involved in public R&D contracts “awarded according to market conditions, an indication for which may be that a tender procedure in accordance with the applicable directives on public procurement […] has been carried out”, the 2006 Framework did not provide any indication on the presence of State aid in situations where pre-commercial procurement takes place.

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In the case of pre-commercial procurement as well as, more generally, in the absence of an open tender procedure carried out in accordance with the applicable public procurement directives, the Commission indicates that it “will consider that no state aid is awarded to undertakings where the price paid for the relevant services fully reflects the market value of the benefits received by the public purchaser and the risks taken by the participating providers”.1572

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In line with general State aid principles, the cumulative conditions set in that regard broadly aim at ensuring equal and non-discriminatory treatment of all potential bidders on the one hand (most noticeably by requiring that objective selection and award criteria, as well as all rights and obligations of the parties are specified and made available in advance of the bidding procedure), and avoiding that the resulting transaction provides any subsequent advantage to the selected providers on the other hand (in particular with regard to the supply of commercial volumes of the final products or services and access to IPR). Should those conditions not be verified, the R&D&I Framework recalls that Member States can rely on an individual assessment of the relevant contract to determine whether its terms are in line with market conditions, but at the same time reminds the general obligation to notify State aid.

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3.

Compatibility assessment of State aid

Without prejudice to the importance of the clarifications it provides on the possible existence of aid in specific situations, the main role of the R&D&I Framework is to define the Commission’s margin of discretion in assessing the compatibility of State aid for R&D&I with the internal market on the basis of Article 107(3)(c) of the Treaty. It has binding effect on the Commission, which must authorise State aid that is in line with the R&D&I Framework’s compatibility criteria, as well as on Member States that have accepted the appropriate measures proposed therein. The conditions under which the compatibility of State aid measures can be presumed so that Member States may implement them without prior notification are set out in the GBER.

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3.1 Scope of the rules (GBER and R&D&I Framework) The 2006 Framework provided compatibility rules for notified schemes, individual cases subject to simplified assessment and large cases subject to detailed assessment. While the subsequent introduction of the 2008 GBER significantly reduced the need for individual notification of R&D&I schemes and cases

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1572 Point 33 of the R&D&I Framework.

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subject to simplified assessment, it still remained impossible to include in the GBER all categories of aid measures covered by the Framework. No legal base indeed existed at that moment that would have allowed the block exemption of innovation aid as such. Some State aid measures in favour of innovation could be exempted on the basis that they represent aid to SMEs and were included in the 2008 GBER. The categories of innovation aid opened to large enterprises, such as aid for process and organisational innovation and aid for innovation clusters, however remained subject to the notification obligation.

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The SAM initiative introduced an important shift in the delineation between the R&D&I Framework and the GBER compared to the situation previously in place. The revision in 2013 of the Enabling Regulation1573 opened the door for a significant extension of the scope of the GBER. In the field of R&D&I aid it in particular allowed the inclusion of all relevant aid categories in the GBER, thus potentially restricting the scope of the R&D&I Framework to the sole cases exceeding the notification thresholds and subject to detailed assessment. No obstacle to the implementation of all R&D&I schemes under the GBER therefore remains. The GBER and the R&D&I Framework thus form two complementary parts of the compatibility assessment of aid for R&D&I where the former allows simple and fast implementation of R&D&I support measures, without the need for prior notification, while the latter provides the necessary basis for the assessment of large measures that have a higher potential for distorting competition within the internal market.

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General principles and exclusions

The compatibility of R&D&I aid measures is generally assessed in the light of the provisions of Article 107(3)(c) of the Treaty. The 2006 Framework also included provisions regarding the compatibility assessment of aid for important projects of common European interest under Article 107(3)(b). The latter are henceforth the object of a separate Commission communication that was adopted in June 2014.1574

1573 Council Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 142, 14.05.1998, p. 1. Amended by Council Regulation No 733/2013 amending Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 204, 31.07.2013, p. 11. 1574 Communication from the Commission on the criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest, OJ C 188, 20.06.2014, p. 4.

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The compatibility assessment of aid measures is articulated around a set of seven common assessment principles that need always be respected: –

contribution to a well-defined objective of common interest: a State aid measure must aim at an objective of common interest in accordance with Article 107(3) of the Treaty;

–

need for State intervention: a State aid measure must be targeted towards a situation where aid can bring about a material improvement that the market cannot deliver itself, for example by remedying a market failure or addressing an equity or cohesion concern;

–

appropriateness of the aid measure: the proposed aid measure must be an appropriate policy instrument to address the objective of common interest;

–

incentive effect: the aid must change the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity, which it would not carry out without the aid or would carry out in a restricted or different manner or location;

–

proportionality of the aid (aid to the minimum): the amount and intensity of the aid must be limited to the minimum needed to induce the additional investment or activity by the undertaking(s) concerned;

–

avoidance of undue negative effects on competition and trade between Member States: the negative effects of aid must be sufficiently limited, so that the overall balance of the measure is positive;

–

transparency of aid: Member States, the Commission, economic operators, and the public must have easy access to all relevant acts and to pertinent information about the aid awarded thereunder.

For R&D&I aid measures that respect the conditions laid down in the GBER, the fulfilment of the common principles can be presumed. For other measures, the respect of the common principles has to be demonstrated in the context of a detailed assessment carried out under the R&D&I Framework.1575

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1575 See section 3.3.

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R&D&I activities can also receive funding that does not constitute State aid, for instance centrally managed Union funding originating from the Horizon 2020 programme. Clarifications on the interplay between State aid and centrally managed Union funds are provided in particular in Article 8(2) of the GBER: “[w]here Union funding centrally managed by the institutions, agencies, joint undertakings or other bodies of the Union that is not directly or indirectly under the control of the Member State is combined with State aid, only the latter shall be considered for determining whether notification thresholds and maximum aid intensities or maximum aid amounts are respected, provided that the total amount of public funding granted in relation to the same eligible costs does not exceed the most favourable funding rate laid down in the applicable rules of Union law.”1576

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Unlike the provisions of the 2006 Framework, the above mentioned wording clarifies that where State aid is combined with centrally managed Union funding such as Horizon 2020, only the former is subject to the State aid rules as long as the totality of the funding originating from public sources does not exceed the most favourable maximum intervention rate available under the two sets of rules (State aid rules and Horizon 2020 rules in that example). The new rules therefore allow projects receiving State aid close to the notification threshold defined in the GBER to also receive Union centrally managed funds without triggering the notification obligation. However, Member States should ensure that such forms of cumulation are carefully assessed in view of the fact that support granted in excess of the most favourable rates available will generally result in the award of incompatible aid.

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Whilst all sectors of economic activity are clearly covered by the R&D&I State aid rules1577, it is also worth recalling that certain categories of undertakings are 1576 Similar wording is included in point 9 of the R&D&I Framework. 1577 The draft R&D&I Framework published for public consultation on 19 December 2013 in particular included a footnote indicating that “[f ]ollowing the expiry of the Framework on State aid to shipbuilding (OJ C 364, 14.12.2011, p. 9), aid for innovation for shipbuilding, ship repair or ship conversion may continue to be granted under the substantive conditions and up to the maximum aid intensities laid down in this framework for experimental development activities, provided that it relates to the first industrial application of innovative products and processes, that is to say, technologically new or substantially improved products and processes when compared to the existing state of the art in the shipbuilding industry within the Union, which carry a risk of technological or industrial failure. Innovative products will continue to refer either to a new class of vessel as defined by the first vessel of a potential series of ships (prototype) or to innovative parts of a vessel, which can be isolated from the vessel as a separate element; innovative processes will continue to refer to the development and implementation of new processes regarding production, management, logistic or engineering areas; innovative products and processes will continue to include improvements in the environmental field related to quality and performance, such as optimising fuel consumption, emissions from engines, waste and safety” (see “Paper of the services of DG Competition containing a draft Framework for

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traditionally excluded from the benefit of R&D&I aid. A first such group are undertakings in difficulty as defined in the Rescue and Restructuring Guidelines.1578 A firm in difficulty is not an appropriate vehicle for promoting other public policy objectives until such time when its viability is assured. Consequently, firms in difficulty can receive no other form of aid than rescue and restructuring aid, in compliance with the relevant guidelines. That ban holds for notified aid measures as well as for block exempted measures.1579 Aid measures in favour of a beneficiary that is subject to an outstanding recovery order (following a previous Commission Decision declaring an aid illegal and incompatible with the internal market) are also excluded from the scope of the GBER.1580 If individual R&D&I aid granted to such undertakings is assessed under the R&D&I Framework, “the Commission will take account of the amount of aid still to be recovered”.1581

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A final point is worth mentioning in the particular context of aid for R&D&I activities: in order to be considered as compatible with the internal market an aid measure should be implemented in accordance with the principles of the Treaty and should not be “discriminatory to an extent not justified by its State aid character”.1582 The Commission’s monitoring experience has however unveiled that in some instances Member States’ authorities have attached territorial restrictions when granting R&D&I aid. Thus being, stronger and clearer wording is now included in both the R&D&I Framework and the GBER: “[i] f a State aid measure or the conditions attached to it (including its financing method when it forms an integral part of the measure) entail a non-severable violation of Union law, the aid cannot be declared compatible with the internal market”; “[t]his is particularly the case for aid measures where the award of aid is subject to the obligation for the beneficiary to have its central seat in the relevant Member State (or to be predominantly established in that Member State) or to use national products or services, as well as for aid measures restricting the

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1578 1579 1580 1581 1582

state aid for research and development and innovation”, available at http://ec.europa.eu/competition/consultations/2013_state_aid_rdi/rdi_draft_framework_en.pdf ). Although no equivalent footnote appears in the final version of the R&D&I Framework, a corresponding clarification, recalling that the shipbuilding sector continues being eligible for R&D&I aid, has been included in a Frequently Asked Questions (FAQ) document available at http://ec.europa.eu/competition/state_aid/modernisation/rdi_framework_faq_ en.pdf. Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014. See, respectively, point 10 of the R&D&I Framework and Article (1)(4)(c) of the GBER. See Articles (1)(4)(a) and (b) of the GBER. Point 11 of the R&D&I Framework. Point 104 of the R&D&I Framework.

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possibility for the beneficiary to exploit the R&D&I results in other Member States”.1583 It can also be noted that the credibility of the enforcement of the conditions laid down in the GBER, including the one mentioned above, is reinforced by the possibility that the Commission has to fully or partially withdraw the benefit of the block exemption for a Member State that grants aid contravening to the conditions of Chapters I to III of the GBER.1584

3.1.2 Scope and definitions 3.240

Conditional on the respect of specific conditions and in view of the typical market failures that may affect R&D&I activities - positive externalities and knowledge spillovers, imperfect and asymmetric information, coordination and network failures1585 – the following measures can be considered as compatible with the internal market and are included in the scope of the R&D&I Framework and of section 4 of the GBER: –

aid for R&D projects and feasibility studies in preparation for research activities: the realisation of R&D projects can be hampered by all three types of market failures listed above. Positive externalities and knowledge spillovers can reduce the private profitability and lead to a significant gap between the project’s social and private benefits. Imperfect and asymmetric information can in particular limit the access to finance for R&D projects while coordination failures may hamper socially beneficial interaction and cooperation between different relevant actors, such as large enterprises, SMEs and research organisations. R&D projects include projects falling in the categories of fundamental research, industrial research and experimental development. The definitions of these three categories have been improved in particular in view of enabling a simpler and more favourable treatment of prototypes and pilots;

–

aid for the construction and upgrade of research infrastructures: research infrastructures play a crucial role in enabling ground-breaking R&D activities. Coordination failures can in particular impede the establishment of such infrastructures. That category of aid is new and was not present in the 2006 Framework or the 2008 GBER. Amongst the compatibility conditions, it is worth noting that the infrastructure should

1583 Respectively, points 38 and 104 of the R&D&I Framework. Similar wording is included in Article 1(5) of the GBER. 1584 See Article 10 of the GBER. 1585 See also section 3.3.2.

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be open to several users on a transparent and non-discriminatory basis. Preferential access under more favourable conditions can be granted to undertakings that have financed at least 10 per cent of the infrastructure’s investment costs. Article 26(3) of the GBER in addition requires that the price charged to the users corresponds to a market price1586; –

aid for innovation clusters: innovation clusters play an important role in favouring synergies, collaboration and knowledge flows between different organisations involved in R&D&I activities (including firms and research organisations). These positive elements may remain unexploited because of significant coordination failures limiting the spontaneous establishment of innovation clusters. The State aid rules allow both investment aid and operating aid for some specific types of activities. Aid can however only be granted to the entity managing the innovation cluster and operating aid is limited in time. Innovation clusters are expected to become progressively self-sustainable: the coordination failure addressed by the aid should decrease in time as the participants go successfully through the necessary learning process. Following the revision of the Enabling Regulation that aid category has been included in the GBER, whose Article 27(7) provides that operating aid can be granted over a maximum duration of 10 years. It represents a very significant extension in comparison to the general 5 years limit in place under the 2006 Framework.1587 Conditions on access and pricing are similar to those for research infrastructures;

–

innovation aid for SMEs: in the absence of public support, positive externalities, coordination failures and imperfect or asymmetric information may hamper SMEs’ ability to deploy innovative activities and to appropriate the benefits derived from them. Innovation aid may be granted for obtaining, validating and defending patents and other intangible assets, for the secondment of highly qualified personnel, and for acquiring innovation advisory and support services. The conditions for granting

1586 Measures that foresee that the users pay a price that does not correspond to a market price correspond to a combination of aid to the infrastructure owner and/or operator and of an indirect aid in favour of the final users (see the example of the “Green Labs” scheme in section 2.1). Such an aid measure is not in line with the requirement of transparency of aid of the GBER and has to be notified and assessed under the R&D&I Framework. However, the same result can be achieved in a simpler manner by combining investment aid at the infrastructure level that is in line with the requirements of the GBER and a non-discriminatory scheme supporting the activities of the final users through a voucher system for instance. 1587 Although section 5.8 of the 2006 Framework also provided for the possibility to extend the relevant period to 10 years, it remained limited to “duly justified cases, and on the basis of convincing evidence provided by the notifying Member State”.

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innovation aid for SMEs have been consolidated and simplified in comparison to the rules previously in place, which contained different compatibility conditions for each of these three types of support measures; –

aid for process and organisational innovation: SMEs’ capacity to undertake process and organisational innovation is mainly limited by coordination failures and imperfect and asymmetric information. In comparison to the rules in place under the 2006 Framework, aid for innovation and organisational innovation is no longer limited to services thus resulting in a substantial increase in its scope. The eligibility of large enterprises on the other side remains subject to the strict condition that the large enterprise effectively collaborates with SMEs in the implementation of the aided project and the collaborating SMEs incur at least 30 per cent of the total eligible costs. In the absence of any reliable evidence on the existence of a market failure for large enterprises, their limited eligibility to cases of collaboration is to be seen principally as a means to further support SMEs’ involvement in such innovation projects by overcoming the impact of coordination failures and information imperfections that prevent the exploitation of synergies between large enterprises and SMEs.

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In addition to the above mentioned categories, Article 30 of the GBER lays down specific conditions for R&D&I aid in the fields of fisheries and aquaculture. While the corresponding Article in the 2008 GBER also contained similar conditions for aid in the field of agriculture, those have now been moved to the Agricultural Block Exemption Regulation (ABER).1588

3.242

Another change which deserves to be mentioned concerns aid for young and innovative enterprises, previously included under the 2006 Framework and the 2008 GBER. That aid category has been regrouped with a number of previously existing provisions regarding support for young enterprises and is now included in section 3 of the GBER - aid for access to finance for SMEs - under its Article 22 on aid for start-ups.

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On the basis of the experience accumulated by the Commission, a large number of definitions have moreover been revised or introduced.1589 Without listing all the adjustments introduced, several improvements deserve to be explicitly mentioned. 1588 Commission Regulation (EU) No 702/2014 declaring certain categories of aid in the agricultural and forestry sectors and in rural areas compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 193, 01.07.2014, p. 1. 1589 The R&D&I Framework now contains 36 new or revised definitions, compared to 13 in the 2006 Framework.

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In response to the need to bridge the gap between scientific research and market application and to remove the barriers for entrepreneurs to “bring ideas to market”, which are priorities identified for instance in the “Innovation Union” flagship initiative, the definitions of industrial research and experimental development have in particular been adjusted in order to provide an increased coverage of projects comprising the development of prototypes and pilots. While under the rules previously in place prototypes and pilots could only be covered under the category of experimental development, the revision of the definition of industrial research enables the granting of aid with higher aid intensities for the development of prototypes and pilots in a laboratory environment or in an environment with simulated interfaces.

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Another important improvement is brought by the revision of several definitions in order to better take into account the crucial role played by different categories of intangible assets in the research and innovation process. The revision of the definition of intangible assets provides an important contribution in that respect as it positively impacts the scope of the costs that can be considered as eligible under most of the R&D&I aid categories. The increase in the scope is achieved by abandoning the restriction to “assets entailed by the transfer of technology”1590 and thus adopting a wider perspective which better accommodates non-technology related intangible assets. More generally, the use of the term “knowledge” has been generalised: as already mentioned, “technology transfer” has been replaced by “knowledge transfer” and the word “technical” has been removed from previous limitative formulations, found for instance in the definition of eligible costs for R&D projects, such as “technical knowledge”.1591

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3.2 Rule-based compatibility assessment (GBER) As regards the GBER, two main categories of modifications characterise the revision of the R&D&I State aid rules: a substantial increase in scope (both vertically and horizontally) and simplification or consolidation. These changes are consistent with the objectives set out in the SAM initiative and in particular with the aim of streamlining the implementation of measures with limited potential for distortion.

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The horizontal increase in the scope of the GBER has been operated mainly through the inclusion of new aid categories. As already mentioned, the revision of the Enabling Regulation has allowed to completely align the scopes of the

3.247

1590 Article 2(11) of the 2008 GBER. 1591 See section 2.1.

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GBER and the R&D&I Framework through the inclusion under the former aid for innovation clusters and aid for process and organisational innovation. Another crucial element is the introduction of dedicated compatibility rules for aid for research infrastructures, an evolution that became necessary in view of the General Court’s ruling in Leipzig-Halle.1592 Under the rules previously in place, the construction or upgrade of research infrastructures was only eligible for R&D&I aid if it represented an R&D&I activity in itself. Ad hoc aid, previously excluded from the GBER, has also been included.

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A further horizontal increase in the scope has been achieved through modifications to the relevant definitions which allow covering a wider array of activities in comparison with the previously applicable rules.1593

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The vertical increase in the scope of the GBER’s rules on R&D&I aid is the consequence of a generalised increase in the notification thresholds. More specifically, the notification thresholds for R&D projects have been doubled while a more limited but still significant increase has been operated for some categories of innovation aid.1594

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As far as simplification and consolidation are concerned, several important improvements deserve to be mentioned.

3.251

First, the award of aid for the development of prototypes and pilots has been significantly simplified in particular through the abolition of the obligation to deduct the revenues derived from subsequent commercial use from the eligible costs. The same projects can therefore receive higher amounts of support under the GBER in comparison to the rules previously in place. Administrative burden is also reduced: it is no longer necessary to calculate ex ante the possible revenues generated through subsequent commercial use, nor is it required to put in place an ex post claw-back mechanism.1595

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Secondly, as already mentioned several rules have been streamlined and consolidated by regrouping previously dispersed provisions. Innovation aid for SMEs provides a good illustration in that respect: three previously separate categories 1592 See Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and others v Commission ECLI:EU:T:2011:117, upheld on appeal in Case C-288/11 P Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission ECLI:EU:C:2012:821. 1593 See section 3.1.2. 1594 See section 3.2.1. 1595 That modification further reinforces the progress in the treatment of prototypes and pilots achieved through the adjustments of relevant definitions as described in section 3.1.2.

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with different compatibility conditions have been regrouped and are now subject to a common set of streamlined provisions.

3.2.1 Notification thresholds The adjustments made to the notification thresholds are amongst the most significant modifications introduced by the SAM initiative concerning the rules on aid for R&D&I activities.

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Unlike other types of aid (such as regional investment aid), aid for R&D projects cover activities that are comparatively remote from market application. Their realisation may be hampered by significant market failures, while the potential for distortions of competition remains limited. On the basis of experience accumulated since the entry into force of the 2006 Framework and the 2008 GBER, the Commission has considered it possible to further streamline the treatment of R&D projects by significantly increasing the thresholds. However, the relation of the thresholds to the different categories of R&D projects remains unaffected and still reflects the acuteness of the market failure and the closeness to the market.

3.254

Under the 2006 Framework, the Commission has assessed 59 individually notified R&D projects subject to a detailed assessment. Out of that total 14 were projects consisting predominantly in industrial research and 45 consisting predominantly in experimental development. Simulations performed by applying the revised notification thresholds to the past cases show that more than 20 per cent of industrial research and approximately 30 per cent of the experimental development projects previously subject to the individual notification obligation would have been block exempted under the new rules.

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To further ease the implementation of R&D projects in the setup and management of which the Commission itself plays an important role and that, as a consequence, have a design that limits the risks of distortions of competition, the doubling of the notification thresholds previously available for EUREKA projects1596 has been extended to projects funded by a Joint Undertaking established on the basis of Articles 185 and 187 of the Treaty. A further 50 per cent increase of the thresholds applies when aid is awarded through a repayable advance and no accepted methodology to calculate its gross grant equivalent is available.

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1596 See footnote 42 of the 2006 Framework.

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A repayable advance is defined as 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 project”.1597 It is a risk-sharing aid instrument which is particularly appropriated for R&D projects characterised by important technical and commercial uncertainty and which generally require long periods to achieve profitability. For that reason, repayable advances are typically relied on in the aerospace sector. The use of that instrument enables the realisation of a R&D project where an instrument that does not allow risk-sharing will fail to achieve the desired effect. At the same time, compared to a grant, the repayable advance minimizes the risks of distortions of competition and the budgetary impact for the Member State in a long term perspective, as reimbursements for very successful projects can actually achieve rates of return for the public authorities that may exceed the market rate.

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The calculation of the gross grant equivalent of a repayable advance however requires a rather complex methodology based on a sufficiently large and robust set of data on relevant projects and their historical performance. Where a Member State is capable of establishing such a valid methodology based on sufficient verifiable data, it can notify it to the Commission. The notified methodology would be linked to a specific scheme – it is indeed specific to the type of projects covered by the underlying data on which it is built and it is thus not possible to generalise its use with regard to other types of projects. The Commission has in the past taken one decision approving such a methodology, concerning a French scheme1598 which specifically foresees that the French authorities will allow other Member States to have access to the database on which the methodology is based.

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In the absence of a methodology for the calculation of the gross grant equivalent and in view of the fact that the latter will generally be significantly lower than the repayable advance’s nominal amount, the rules provide for the above mentioned 50 per cent increase of the notification threshold provided that “in case of a successful outcome of the project, as defined on the basis of a reasonable and prudent hypothesis, the advances will be repaid with an interest rate at least equal to the discount rate applicable at the moment the aid is granted”.1599

1597 Article 2(21) of the GBER and point 15(dd) of the R&D&I Framework. 1598 Commission Decision of 17.01.2008 on case N 408/2007, Régime d’ intervention d’OSEO, summary notice in OJ C 39, 13.02.2008, p. 1. 1599 Article 7(5) of the GBER.

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The notification threshold for feasibility studies has been consolidated and no longer depends on the category of the related R&D project. The threshold has been set at EUR 7.5 million per study, a level which has never been exceeded in the past.

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The notification threshold for the new category of aid for research infrastructures has been set at EUR 20 million which should allow the block exemption of aid for the majority of mixed-use research infrastructures, for which non-economic activities are more important than economic activities.1600

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For innovation clusters, the notification thresholds have been significantly increased despite the fact that those previously in place have never been exceeded. The notification thresholds for the consolidated category of innovation aid for SMEs and for process and organisation innovation have been set, respectively, at EUR 5 million and EUR 7.5 million per undertaking and per project.

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A summary of these changes is provided in the following table:

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Past thresholds

GBER

Fundamental research: EUR 20 million per undertaking, per project Industrial research: EUR 10 million per undertaking, per project Experimental development: EUR 7.5 million per undertaking, per project Double thresholds for EUREKA projects

Fundamental research: EUR 40 million per undertaking, per project Industrial research: EUR 20 million per undertaking, per project Experimental development: EUR 15 million per undertaking, per project

Feasibility studies

From EUR 7.5 to 20 million (depending on category of related R&D project) per study

EUR 7.5 million per study

Research infrastructures

No such aid objective

EUR 20 million per infrastructure

Innovation clusters

EUR 5 million per cluster

EUR 7.5 million per cluster

R&D projects

Double thresholds for EUREKA projects and for Article 185 and 187 Joint Undertakings Additional 50% increase in case of repayable advances

1600 See example in section 2.1.

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EUR 5 million per undertaking, per project for industrial property rights Absolute limitation to EUR 200,000 within any three year period for innovation advisory and support services, and to 50% of costs over 3 years for loan of highly qualified personnel

EUR 5 million per undertaking, per project

Process and organisational innovation

EUR 5 million per undertaking, per project

EUR 7.5 million per undertaking, per project

3.2.2 Eligible costs 3.264

With the exception of some changes of a more general nature1601, the eligible costs for R&D projects have not been substantially modified. However, the deletion of the obligation to deduce the revenues from the subsequent commercial use of prototypes and pilots leads to an increase of the amount of the eligible costs on the basis of which the maximum aid amount can be determined.

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More important changes have been introduced regarding the eligible costs for different categories of innovation aid. As regards aid for innovation clusters the scope of the eligible costs for investment aid has been increased by replacing a previous list including “land, buildings, machinery and equipment”1602 by a more general formulation covering investment costs in tangible and intangible assets. The same definition of eligible costs is applicable to the new category of aid for the construction and upgrade of research infrastructures. The scope of the eligible costs for operating aid for innovation clusters has been increased, in particular by the inclusion of a new category of costs comprising “animation of the cluster to facilitate collaboration, information sharing and the provision or channelling of specialised and customised business support services”.1603 Other adjustments aim at covering the costs of activities aiming at increasing the cluster’s visibility or at enhancing transnational cooperation.

1601 See section 3.1.2. 1602 See section 5.8 of the 2006 Framework. 1603 Article 27(8)(a) of the GBER.

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The provisions on eligible costs for innovation aid for SMEs have been streamlined and simplified. At the same time, the eligible costs for process and organisational innovation have been significantly expanded: as mentioned before, that aid category is no longer restricted to services; in addition, the limitation of the eligible costs for organisational innovation to costs related to information and communication technologies (ICT)1604 has been removed.

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3.2.3 Aid intensities The proportionality of aid is assessed under the GBER through maximum aid intensities, defined in its Article 2(26) as “the gross aid amount expressed as a percentage of the eligible costs, before any deduction of tax or other charge”, or through maximum aid amounts laid down in consideration of the following factors: –

closeness of the supported activity to market application;

–

size of the aid beneficiary;

–

potential acuteness of the relevant market failure.

The Commission’s case practice shows that the maximum aid intensity was not reached in a significant number of cases regarding State aid for R&D projects. The applicable maximum aid intensities have therefore been adjusted only marginally by extending the benefit of the collaboration bonus to experimental development. The availability of the collaboration and dissemination bonuses is conditional on the fulfilment of specific requirements laid down in Article 25(6)(b) of the GBER: “(i)

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the project involves effective collaboration: –

between undertakings among which at least one is an SME, or is carried out in at least two Member States, or in a Member State and in a Contracting Party of the EEA Agreement, and no single undertaking bears more than 70 % of the eligible costs, or

–

between an undertaking and one or more research and knowledgedissemination organisations, where the latter bear at least 10 % of the eligible costs and have the right to publish their own research results;

1604 See section 5.5 of the 2006 Framework.

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(ii)

the results of the project are widely disseminated through conferences, publication, open access repositories, or free or open source software.”

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It is important to note that all the conditions applicable to a specific type of bonus need to be fulfilled. The Commission’s monitoring experience shows that in some cases Member States may have omitted to verify the respect of some of them – such as the need to ensure that no single undertaking bears more than 70 per cent of the eligible costs –, thus potentially granting aid that cannot be considered compatible with the internal market.

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The aid intensity for investment aid for research infrastructures and innovation clusters has been established at 50 per cent. In the case of the former, the maximum aid intensity only applies with regard to the funding of their economic activities. It thus allows reconciling limited risks of distortions of competition induced by commercial research infrastructures and generous total funding rates for infrastructures having an important share of non-economic activities.1605

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For innovation clusters, a maximum aid intensity of 50 per cent represents a very significant increase from the general rate of 15 per cent previously available. The extremely complex system of bonuses that was in place has been simplified. The aid intensity for operating aid has not been modified, but the period over which a cluster can receive operating aid has been extended from 5 to 10 years.1606

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In view of the significant market failure that SMEs face with regard to the implementation of projects for process and organisational innovation and of the lower risks of distortion that support granted to SMEs entails, the aid intensity has been increased to 50 per cent.

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The consolidation, under innovation aid for SMEs, of three previously separate aid categories has necessarily resulted in adjustments of the different pre-existing aid intensities towards a single 50 per cent maximum. One important exception has however been made, by maintaining an alternative possibility to grant aid for innovation advisory and support services with an intensity that can reach 100 per cent, with an absolute limitation of the amount of aid to EUR 200,000 per SME within any three year period. Such provision should allow the granting of small aid amounts under a streamlined set of conditions, in particular through voucher-based systems.

1605 See example in section 2.1 1606 See footnote 1587.

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Finally, the maximum aid intensities can be increased by 10 percentage points where repayable advances respecting those conditions mentioned in Article 7(5) of the GBER are used.

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A summary of the main changes is provided in the following table1607:

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Past maxima

GBER

Fundamental research

100%

No change

Industrial research

50% for large companies (65% if collaboration or dissemination of results), plus 10% or 20% for SMEs (up to 80%)

No change

Experimental development

25% for large companies (40% if collaboration), plus 10% or 20% for SMEs

25% for large companies (40% if collaboration or dissemination of results), plus 10% or 20% for SMEs

Feasibility studies

40% for large companies (65% if industrial research), plus 10% for SMEs

50%, plus 10% or 20% for SMEs

Research infrastructures

No such aid objective

50%

Innovation clusters (investment aid)

15% basic, 30% to 50% for Article 107(3)(a) regions (with specific bonuses for outermost and statistical effect regions), plus 10% or 20% for SMEs

50%, plus 5% or 15% for Article 107(3)(c) and 107(3)(a) regions

Innovation clusters (operating aid)

50% over 5 years, possible extension to 10 years

50% over 10 years

Process and organisational innovation

15% for large companies (if collaboration), plus 10% or 20% for SMEs

No change for large companies 50% for SMEs

Loan of highly qualified personnel

50% over 3 years

50% (under “innovation aid for SMEs”)

Innovation advisory and support services

75% or 100% (according to nature of service provider) Absolute limitation to EUR 200,000 over 3 years

50% (under “innovation aid for SMEs”) or 100% with a maximum amount of EUR 200,000 within any three year period

IPR costs for SMEs

40% to 65% (according to the type of research that first led to IPR)

50% (under “innovation aid for SMEs”)

1607 As mentioned in section 3.1.2, aid for young innovative enterprises is now included under the provisions applying to aid for start-ups (Article 22 of the GBER).

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3.3 Effect-based compatibility assessment (R&D&I Framework) 3.276

A key pillar of the SAM initiative has been the identification and definition of common principles, or key compatibility criteria applicable to the assessment of all types of aid measures, clarifying how the Commission is to assess common features across the different guidelines and frameworks and thus facilitating the treatment of “good aid” (well-designed, targeted at identified market failures and objectives of common interest, proportionate and least distortive) and preventing “bad aid” (which distorts competition, frustrates innovation, delays necessary adjustments and fragments the internal market).

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When applying the 2006 Framework to the assessment of large individual aid measures, the Commission has in a number of cases questioned the necessity and proportionality of the envisaged aid, both during its preliminary examination and through a formal investigation procedure. In turn, such questioning has in some cases led to changes in the aid instrument or reductions of the aid amount, the limitation of eligible costs, the application of more stringent conditions for repayable advances, or the introduction of clear commitments on dissemination of knowledge and access to IPR.1608 Insofar as the relevant rules, albeit largely underpinned by the same philosophy that has materialised into the SAM common principles1609, were based on a large number of heterogeneous elements without any precise indication as to their relative order of importance, such results have however only been achieved through an intensive and timeconsuming persuasion exercise.

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To the extent that the effect-based, or detailed compatibility assessment of R&D&I aid measures that are subject to the notification obligation will now follow the coordinated approach laid down in the SAM initiative, the R&D&I Framework is in particular meant to effectively address the identified shortcomings of its predecessor by relying more explicitly on a clearer and better structured set of principles, which constitute necessary conditions for the compatibility of aid.1610 1608 For an analysis of the assessment of large individual aid measures in the first few years of application of the 2006 Framework, see A. Rubin de Cervin and C. Siaterli, “State aid to research, development and innovation” in W. Mederer, N. Pesaresi and M. van Hoof (eds), “EU Competition Law, volume IV, State Aid” (Book Two, 1st edn, Claeys and Casteels, 1998). 1609 See in particular sections 7.3 and 7.4 of the 2006 Framework. 1610 See sections 3.3.1 to 3.3.7. Where such distinction appears to be relevant, the R&D&I Framework moreover lays down specific conditions for aid schemes and additional ones for individual aid. For the purposes of the present chapter, those conditions are in general discussed in an integrated manner and not necessarily in the same order in which they appear in the R&D&I Framework.

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3.3.1 Contribution to a well-defined objective Since R&D&I aid should first of all result in an increased level of R&D&I activities in the Union, the R&D&I Framework explicitly requires Member States to explain how the envisaged aid measures contribute to that common objective. In that regard, the Commission:

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–

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takes a favourable view of notifiable aid schemes “which are an integral part of a comprehensive programme or action plan [...] and are supported by rigorous evaluations of similar past aid measures demonstrating their effectiveness”1611;

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expects Member States to demonstrate the net contribution of large individual aid measures to the said common objective by means of indicators such as the increase in project size (total costs or number of persons employed), scope (number of expected deliverables or more ambitious project), speed (less time for completion of the project) or total R&D&I expenditure incurred by the aid beneficiary1612, and

–

will also consider “the contribution of the aid to the overall increase of R&D&I spending in the sector concerned, as well as to the improvement of the Union situation with regard to R&D&I in the international context”.1613

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Not only with a view to a convenient simplification of the rules but also because they are subject to specific and rigorous evaluation and selection processes, the contribution to a well-defined objective of common interest is however presumed in the case of State aid awarded to “projects or activities that are also financed by the Union, either directly or indirectly (that is to say by the Commission, by its executive agencies, by joint undertakings established on the basis of Articles 185 and 187 of the Treaty, or by any other implementing bodies where the Union funding is not directly or indirectly under the control of Member States)”.1614 For the same reasons, the need for State intervention (existence of a market failure) and the appropriateness of the aid measure among alternative policy instruments is also considered as having been established for those projects or activities.1615

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1611 Point 44 of the R&D&I Framework. 1612 Such indicators were in the past mainly considered for demonstrating the incentive effect of the aid (see section 6 of the 2006 Framework). 1613 Point 47 of the R&D&I Framework. 1614 Point 45 of the R&D&I Framework. 1615 See points 54 and 59 of the R&D&I Framework.

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3.3.2 Need for State intervention 3.284

The precise identification of a market failure hampering the spontaneous delivery of an optimal level of R&D&I activities in the Union has proven of outmost importance for the practical application of the 2006 Framework and is expected to remain so, not only because it is the primary justification and necessary condition for aid, but also because the extent to which Member States structure their interventions according to the nature and magnitude of the relevant market failure necessarily affects the assessment of the aid. For example, in the case of a coordination failure the aid should arguably be limited to providing the necessary stimulus to collaboration between a heterogeneous group of companies, thereby enabling them to effectively participate in a specific project and share its risks and benefits. However, in such cases a simple consideration of the characteristics of the main beneficiary (including with regard to the foreseeable profitability of the project) may not provide an accurate picture of the overall positive effects of the aid, and the compatibility analysis conducted at its level therefore has to take into account the said heterogeneity.

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The R&D&I Framework generally builds on the approach pioneered by its predecessor1616 and thus refers to those market failures that are potentially of most relevance and may need to be addressed by State aid, whilst recalling those elements that the Commission will take into consideration in its assessment of large individual aid measures: –

positive externalities, such as “knowledge spill-overs or enhanced opportunities for other economic actors to develop complementary products and services”1617 whose benefits cannot be sufficiently appropriated by profit-seeking undertakings under normal market conditions. In that context, the Commission takes account of the level of information dissemination envisaged, the specificity (or uniqueness) of the knowledge created, the availability of IPR protection and the degree of complementarity with other products and services, and is therefore expected to continue to view positively the involvement of research organisations which, apart from being often decisive for securing the necessary breakthroughs in ambitious and complex projects, can further enhance the subsequent dissemination of new knowledge;

1616 See sections 1.3.2 and 7.3.1 of the 2006 Framework. 1617 Point 49, first indent, of the R&D&I Framework.

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–

imperfect and asymmetric information, especially where the level of risk or degree of uncertainty of the relevant R&D&I activities hampers access to finance and prevents proper “allocation of human and financial resources” to “projects which may be valuable for society or the economy” and which, as a result, “may not be carried out” without aid.1618 The assessment of that market failure, which is likely to materialise in particular for very risky projects with large amounts of initial investment and returns spanning over a very long period of time, is closely linked to the analysis of the incentive effect of aid and the Commission takes account of the level of risk and complexity of R&D&I activities (not only from a technological point of view but also, where relevant, with regard to commercial and regulatory aspects), the need for external finance and the characteristics of the aid beneficiary regarding access to sources of such external finance;

–

coordination and network failures that impair “the ability of undertakings to coordinate with each other or to interact in order to deliver R&D&I”.1619 In that regard, the Commission takes account of the number of collaborating undertakings, the intensity of the collaboration and the existence of diverging interests among collaborating partners, as well as of possible problems in designing complete contracts or in coordinating collaboration.

Nevertheless, the R&D&I Framework also recalls in its point 50 that “not all undertakings and sectors in the economy are affected by [those market failures] to the same extent” and thus continues to require Member States to “provide adequate information about whether [a notifiable individual aid] addresses a general market failure regarding R&D&I in the Union, or a specific market failure regarding, for example, a particular sector or line of business”. To that effect, and in particular with a view to provide guidance on the elements that may be used in that context, in its point 52 it moreover indicates that Member States are in particular expected to submit to the Commission “any available sectoral comparisons and other studies” that substantiate the existence of an alleged market failure.1620 Although an explicit reference is no longer made to projects or activities located in assisted areas1621, in that context it however seems conceivable that a “specific” or increased degree of (regional) market failure be demonstrated by means of those sectoral comparisons and studies.

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1618 Point 49, second indent, of the R&D&I Framework. 1619 Point 49, third indent, of the R&D&I Framework. 1620 As was already the case under the 2006 Framework, “[w]hen notifying investment or operating aid for clusters, Member States must provide information on the planned or expected specialisation of the innovation cluster, existing regional potential and presence of clusters in the Union with similar purposes” (point 53). 1621 See section 7.3.1 of the 2006 Framework.

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To the extent that the existence of a market failure, and thus the need for State intervention can in general not be presumed for large individual aid measures1622, point 55 of the R&D&I Framework finally makes clear that “where State aid is awarded for projects or activities which, with respect to their technological content, level of risk and size, are similar to those already delivered within the Union at market conditions, the Commission will in principle presume that no market failure is present and will require further evidence of and justification for the need for State intervention”. Although such negative presumption remains a rebuttable one, that new provision can be particularly welcomed for at least two reasons: first, because it makes clear that the burden of proof needs to be higher in those cases where market forces alone have already delivered similar R&D&I projects and activities, in which case it should indeed be questioned whether aid is at all necessary; secondly, because by clearly referring to the Union as being the relevant frame of reference, the Commission indicates that it is not willing to take into consideration market conditions possibly prevailing in other parts of the world.

3.3.3 Appropriateness of the aid 3.288

Since there may be other, better placed instruments to increase the level of R&D&I in the Union, it needs first of all to be ascertained whether and to what extent State aid is an appropriate policy instrument, or whether the same increase in the level of R&D&I activities could be achieved through other, less distortive means such as regulation or general fiscal measures.1623 In that regard, point 58 of the R&D&I Framework makes clear that the Commission will therefore have a favourable view on proposed measures “for which Member States have considered other policy options and for which the advantages of using a selective instrument such as State aid are established”, for instance by means of an specific impact assessment.

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At the same time, since State aid for R&D&I can be awarded in various forms, the R&D&I Framework goes a step further than the previous rules and, “where the aid is awarded in forms that provide a direct pecuniary advantage (such as direct grants, exemptions or reductions in taxes or other compulsory charges, or the supply of land, products or services at favourable prices)”1624, also requires Member States to explain why those forms of aid have been preferred to other 1622 As mentioned in section 3.3.1, the need for State intervention is however deemed to have been established for Union financed projects or activities. 1623 As mentioned in section 3.3.1, the appropriateness of the aid measure among alternative policy instruments is presumed for Union financed projects or activities. 1624 Point 60 of the R&D&I Framework.

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potentially less distortive means such as repayable advances. The use of an appropriate aid instrument in order to correct a certain type of market failure, and the justification advanced by Member States for their specific choice thus become an explicit requirement for the detailed assessment of aid. In order to facilitate that process, the R&D&I Framework however includes a presumption of appropriateness of the financing instrument chosen in Operational Programmes1625 (for those aid schemes implemented under such programmes) and generally provides some additional guidance on the appropriateness of the use of the main aid instruments in other cases. In that regard, it in particular points to the preferential use of liquidity support (such as loans or guarantees) or repayable advances, respectively in those situations where the underlying market failure relates to access to external debt finance or where there is an identified need to provide the beneficiary with a certain degree of risk sharing. Thus being, and in view of the higher distortive potential of aid awarded for activities relatively close to the market1626, “where aid is awarded in a form other than liquidity support or a repayable advance” for such activities, Member States are now also explicitly required to “justify the appropriateness of the chosen instrument for tackling the specific market failure in question”.1627

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3.3.4 Incentive effect Since R&D&I aid can only be found compatible with the internal market if it has an incentive effect, that is to say if it changes the behaviour of the beneficiary by inducing it to pursue additional activities that would otherwise not be carried out, the analysis of the incentive effect of aid played a crucial role in the 2006 Framework. The requirements for its demonstration however varied with the aid amount and size of the aid beneficiary: for smaller amounts (below the individual notification thresholds), the demonstration of the incentive effect was of a rather formal nature for SMEs, whilst for large companies an additional verification based on a set of indicators (increase in size, scope, speed, amount spent) was warranted; for larger aid amounts (above the individual notification thresholds), a detailed analysis had moreover to be carried out.1628

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1625 Operational Programmes are designed by Member States and regional authorities and adopted by the Commission. They in particular outline national and regional investment plans for the use of European Structural and Investment Funds in the 2014-2020 programming period. 1626 See section 3.3.6. 1627 Point 61 of the R&D&I Framework. 1628 See in particular sections 6 and 7.3.3 of the 2006 Framework. For the incentive effect of aid to be acknowledged, the relevant conditions in section 5 needed moreover to be verified.

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As far as the detailed assessment of the incentive effect of large individual aid measures was concerned, the 2006 Framework mainly relied on the identification of a counterfactual scenario, the evaluation of the profitability of the envisaged project, and the appraisal of its risks. Insofar as a credible counterfactual could be identified, the profitability of the aided project thus became a central question, especially when the identified market failure was an asymmetry of information that translated into the non-availability of funding under market conditions.

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The R&D&I Framework does not deviate in any substantive manner from the previous approach, but certainly streamlines and simplifies its main aspects whilst at the same time addressing its most visible shortcomings.

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First, in applying the horizontal approach laid down by the SAM initiative, the R&D&I Framework cuts down the requirements for the formal demonstration of the incentive effect to their bare essentials. Since aid can arguably not be deemed to change the behaviour of a company if such company has actually launched a project before even considering the prospect of State aid, in all cases it is therefore now plainly considered that aid does not have an incentive effect “wherever work on the relevant R&D&I activity has already started prior to the aid application by the beneficiary to the national authorities”.1629 Naturally, in the case of large individual aid measures, that requirement does not prevent the aid beneficiary from starting work before the necessary Commission’s approval.

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Secondly, the R&D&I Framework has kept most of the elements used in the past for assessing the incentive effect of large individual aid measures, and therefore indicates that the Commission will consider in its analysis: –

“the change in behaviour which is expected to result from State aid, that is to say whether a new project is triggered, or the size, scope or speed of a project is enhanced”1630, which needs to be well specified and “identified by comparing what the expected outcome and level of intended activity would be with and without aid”1631, that is to say by means of a counterfactual analysis, requiring that the aid beneficiary clearly specifies what it would do in the absence of aid and substantiates it. For example, the fact that a smaller (reduced in scope) R&D project would not allow developing the envisaged new product could corroborate the allegation that, in the absence of aid, the company would not at all conduct the relevant research;

1629 Point 63 of the R&D&I Framework. 1630 Point 67, first indent, of the R&D&I Framework. 1631 Point 67, second indent, of the R&D&I Framework.

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the forecasted level of profitability of the envisaged project, in the sense that “where a project would not, in itself, be profitable to carry out for an undertaking, but would generate important benefits for society, it is more likely that the aid has an incentive effect”.1632 Indeed, if the profitability forecasts are good and the probability of success of a project is reasonably high, the company could be expected to pursue it even without aid. On the contrary, in cases where the forecasted profitability of the project is limited or the risks of failure high, the allegation that the company would not carry it out without aid is in principle credible. To evaluate the overall profitability of the project (or lack thereof ), use can be made of “methodologies which are demonstrably used by the beneficiary undertaking or are standard practice in the particular industry concerned”,1633 including estimations of its net present value (NPV) or internal rate of return (IRR). For instance, a positive NPV (and, the more so, a NPV superior to the one of the counterfactual) in principle indicates that it would be rational for the company to carry out the project even without aid;1634

–

the amount of investment and timeframe of cash flows, in regard of which it is indicated that the presence of “[h]igh start-up investment, low level of appropriable cash flows and a significant fraction of cash flows arising in the very far future or in a very uncertain manner”1635 are seen as positive elements. Indeed, State aid can for example be required as a risksharing instrument when significant up-front investments create liquidity pressures at an early stage of a project;

–

the degree of risks involved, in particular with regard to “the irreversibility of the investment, the probability of commercial failure, the risk that the project will be less productive than expected, the risk that the project undermines other activities of the aid beneficiary and the risk that the project costs undermine its financial viability”.1636 Since the assessment of risk is therefore not limited to technological aspects, it can be noticed in that context that the degree of risk of a project depends not only on its probability of success at the R&D&I stage, but also on what remaining options are available to the company in case of failure.

1632 1633 1634 1635 1636

Point 67, third indent, of the R&D&I Framework. Point 70 of the R&D&I Framework. However, that is only the case when profitability calculations take into account the risks (see section 3.3.5). Point 67, fourth indent, of the R&D&I Framework. Point 67, fifth indent, of the R&D&I Framework.

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At the same time, the R&D&I Framework includes some new guidance on the type of information that is required for the detailed assessment of the incentive effect of large individual aid measures, with a view to ensure that the right balance is struck between the needs to cater for both individual features and sector-specific conditions and to ensure an objective and consistent analysis across cases.

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To the extent that the said assessment aims at ascertaining whether State aid changes the behaviour of a given company, its specific constraints and business model will continue being taken into account, including through a plausibility check of the assumptions used in the relevant business plans. However, a company’s financial choices (for instance with regard to maintaining a certain liquidity buffer or limiting exposure to high-risk R&D&I investments) and strategic orientation are better understood in the light of customary practice in the relevant industry. In the absence of any operational test to determine the private value of a project, it therefore seems particularly important to obtain appropriate information (including representative financial indicators) on the sector in which the aid beneficiary is active. In that regard, the R&D&I Framework now explicitly refers to the possibility for Member States to support the counterfactual analysis of the incentive effect with company-specific but also industry-specific elements.1637

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Finally, always with a view to a further simplification of past requirements, the R&D&I Framework has discontinued the reporting obligation regarding the incentive effect of individual aid awarded to large undertakings under approved schemes.1638 In the same vein, whilst it broadly continues to require that Member States demonstrate the incentive effect of fiscal aid schemes on the basis of evaluation studies, that requirement has been relaxed for incremental fiscal measures, for which such effect can now be presumed.1639

3.3.5 Proportionality 3.299

Once the presence of a market failure and the existence of an incentive effect had been established, the analysis of the proportionality and appropriateness of aid were largely conducted in parallel under the 2006 Framework and mainly rested on two elements: the eligible costs and the aid instrument. To the extent 1637 See points 68 and 69 of the R&D&I Framework. 1638 See sections 6 and 10.1.1 of the 2006 Framework. 1639 See point 65, footnote 36, of the R&D&I Framework. Incremental fiscal measures (as opposed to volumebased, income-based or hybrid fiscal measures) are those where the level of a tax incentive is related to the increase of R&D&I expenditure of the aid beneficiary over a certain period of time.

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that the categorisation of eligible costs had been validated and that, in most cases, industrial research activities were supported through grants whilst repayable advances were used for experimental development, the assessment of whether aid was limited to the minimum needed for carrying out a particular project to a large extent built on a profitability analysis conducted on the basis of the beneficiary’s business plan. In practice, the projects’ IRR and NPV have been the indicators most frequently used, and technological risks have been taken into account for instance by incorporating a risk premium into the weighted average cost of capital (WACC) of the beneficiary or using its standard WACC associated with probability scenarios, preferably benchmarked by historical data. That approach, successfully applied and developed in all individual aid measures assessed under the 2006 Framework, has been kept in the R&D&I Framework whose point 86 recalls that for large individual aid measures “mere compliance with maximum aid intensities is not sufficient to ensure proportionality”, and the seemingly new reliance on the notion of net extra costs can be seen in that context as a mere codification of past practice.1640

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Nevertheless, the revised rules are more clearly geared to ensuring that only the actual increase in the level of R&D&I activities that is attributable to the aid is supported, as opposed to their overall level. In practice, that continues to mean that a specific project should be compared with a realistic counterfactual (account being taken not only of their respective costs, but also risks and benefits, when possible by referring to the industry and market practice), and the Commission has in that regard clarified that two types of situations are expected to occur, depending on whether the counterfactual scenario consists in the absence of an alternative project or rather “in a clearly defined and sufficiently predictable alternative project considered by the beneficiary in its internal decision making”, including cases where such alternative project would be “wholly or partly carried out outside the Union”.1641

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In the absence of an alternative project, which on the basis of decisional practice appears to be the “general rule”1642, the Commission has clarified that it will verify that the aid “does not exceed the minimum necessary for the aided project to be sufficiently profitable, for example by making possible to achieve an IRR corresponding to the sector or firm specific benchmark or hurdle rate. Normal

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1640 See for instance Commission Decision of 04.06.2008 on case N 603/2007, Soutien de l’Agence de l’ innovation industrielle en faveur du programme GENESIS, summary notice in OJ C 35, 12.02.2009, p. 3. 1641 Point 66 of the R&D&I Framework. 1642 Indeed, no alternative project has been identified in some two thirds of all large individual aid measures assessed under the 2006 Framework.

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rates of return required by the beneficiary in other R&D&I projects, its cost of capital as a whole or returns commonly observed in the industry concerned may also be used for this purpose”.1643 In that regard, it is interesting to notice the new emphasis on the “sufficiently profitable” nature of the aided project, as well as the precedence of sectoral “benchmarks or hurdle rates” over the beneficiary’s own financial indicators. Whilst primary reliance on representative sectoral data can be seen as originating in case practice1644 and incidentally may aim at avoiding that the amount of aid is unduly influenced by the particular idiosyncrasies1645 or past serendipity of specific undertakings, by referring to the “sufficiently profitable” nature of a project the R&D&I Framework now makes it explicitly clear that it is not required that a project is unprofitable to be aided, and that aid needs not be limited just to the amount necessary to increase its NPV to zero.1646

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In the same vein, in those cases where “the aid beneficiary faces a clear choice between carrying out either an aided project or an alternative one without aid”, the aid amount must “not exceed the net extra costs of implementing the activities concerned, compared to the counterfactual project that would be carried out in the absence of aid […] account being taken of the probabilities of different business scenarios occurring”.1647 In such cases, any difference in the probabilities of success of the aided project and the alternative one can thus be taken into account, and the aid should be limited to the amount needed to ensure, for example, that the expected profitability of the project matches the expected profitability of its counterfactual or that the beneficiary’s financial exposure is reduced to the one incurred under the counterfactual. To the extent that the amount of aid could in certain cases exceed the level needed to ensure that the aided project is “sufficiently profitable”, the R&D&I Framework however requires that the existence of an alternative project, as well as the choice faced by the aid beneficiary are shown “for example by means of internal company documents”.

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The practical application of the above mentioned provisions, as well as its similarities with past practice, can be respectively illustrated by the first two cases assessed under the R&D&I Framework: 1643 Point 87 of the R&D&I Framework. 1644 See for instance Commission Decision of 15.09.2009 on case N 357/2009, Individual R&D aid to GKN ASL, summary notice in OJ C 305, 16.12.2009, p. 4. 1645 For instance, to the extent that the beneficiary’s WACC largely depends on its equity/debt ratio, a representative hurdle rate (in the sense of the minimum return commonly expected in the sector for similar projects) would have the advantage of not being determined by the aid beneficiary itself. 1646 As calculated on the basis of the beneficiary’s WACC. 1647 Point 88 of the R&D&I Framework.

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–

first, in the SuperGrid case1648 the Commission has assessed a EUR 86.6 million grant notified by France for a R&D project aimed at developing a new generation of long-distance, point-to-point high voltage direct current transmission networks. In the absence of any alternative project (not least because the aid beneficiary had been established for the specific purpose of conducting the relevant research), it concluded that the aid was necessary to increase the project’s profitability to the minimum level necessary for it to be undertaken, account being taken of its strategic nature and intrinsic risks;

–

secondly, in the TS 3000 case1649 the Commission has assessed a EUR 70 million repayable advance, also notified by France, for a R&D project aimed at developing a new family of dual-use turbo aero-engines for both heavy helicopters and turbo propellers’ regional airplanes. To allow a proper comparison of the aided project and its counterfactual, the French authorities have provided different business scenarios reflecting the possible materialisation of the most important risks incurred by the aid beneficiary, which have allowed the Commission to conclude that the amount of the repayable advance lied within a credible range of values for the net extra costs of the project (as calculated for both the normal and worst case scenarios), and thus appeared to be close to the minimum required.

Incidentally, since it is now clear that all relevant expected costs and benefits of an aided project are to be considered regardless of whether or not the counterfactual consists in an alternative project, the 2006 Framework’s requirement for the deduction from eligible costs of revenues generated from a subsequent commercial use of demonstration or pilot project became redundant and has therefore been discontinued. Also in comparison with the 2006 Framework, the proportionality assessment has moreover been improved by introducing some guidance on the appropriateness of the main aid instruments to tackle specific market failures: “[i]nsofar as the identified need for aid relates mainly to diffi-

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1648 Commission Decision of 16.09.2014 on case SA.37178 (2013/N), Aide de l’ANR au projet de R&D « SuperGrid » dans le cadre du programme d’ investissements d’avenir (summary notice not yet published). Notwithstanding its different structure, that decision closely resembles the Commission Decision of 15.05.2013 on case SA.34876 (2012/N), Aide de l’Agence Nationale de la Recherche au projet “GENESYS” de l’Institut d’Excellence en Énergies Décarbonnées “PIVERT” (summary notice in OJ C 214, 27.07.2013, p. 3), adopted under the 2006 Framework. 1649 Commission Decision of 29.10.2014 on case SA.37137 (2013/N), Avance récupérable pour le programme de recherche et développement TS 3000 (summary notice in OJ C 94, 20.03.2015, p. 3). That decision can be compared for instance with the Commission Decision 07.03.2012 on case SA.33467 (2011/N), Avance remboursable pour le développement de l’ hélicoptère X4 (summary notice in OJ C 206, 13.07.2012, p. 1), adopted under the 2006 Framework, as well as with the “GENESIS” decision mentioned in footnote 1640.

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culties in attracting debt finance from the market, rather than to a lack of profitability, a particularly apt way to ensure that the aid is kept to the minimum may be to provide it in the form of a loan, guarantee or repayable advance instead of a non-repayable form, such as a grant”.1650 Subject to the result of the detailed assessment of large individual aid measures, the maximum aid intensities, which apply to the total amount of aid awarded to each beneficiary undertaking for a specific project or activity1651, including in the case of collaboration, can be summarised in the following table: Small enterprise

Medium-sized enterprise

Large enterprise

Fundamental research

100%

100%

100%

Industrial research and experimental development* - subject to effective collaboration or wide dissemination of results

80%

70%

60%

90%

80%

70%

Aid for feasibility studies

70%

60%

50%

Aid for the construction and upgrade of research infrastructures

60%

60%

60%

Innovation aid for SMEs

50%

50%

–

Aid for process and organisational innovation

50%

50%

15%

Investment aid - in Article 107(3)(c) regions - in Article 107(3)(a) regions

50% 55% 65%

50% 55% 65%

50% 55% 65%

Operating aid

50%

50%

50%

Aid for R&D projects

Aid for innovation clusters

* In that context, the R&D&I Framework actually uses the term “applied research”. For practical purposes, it moreover suggests a correspondence between different R&D categories and Technological Readiness Levels (see point 75, footnote 40).

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In that regard, it can be noticed that although the detailed assessment may apply to all types of R&D&I large individual aid measures, the above mentioned maximum aid intensities deviate (for the very first time) from those laid down in Annex II of the R&D&I Framework (and GBER) only for R&D projects and 1650 Point 90 of the R&D&I Framework. 1651 Without prejudice to specific provisions applying to the agricultural and fisheries sectors. As recalled in section 3.1.1, Union funding does not constitute State aid and needs not be taken into account for that purpose.

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the construction or upgrade of research infrastructures. It thus seems that the Commission, in view of its past practice, does not expect to have to assess any notifiable individual aid for innovation activities.1652 Insofar as aid is awarded under the form of repayable advances, the R&D&I Framework has largely kept the previous provisions according to which repayable advances are generally expressed as a percentage of the eligible costs and may exceed the otherwise applicable maximum aid intensities by 10 percentage points if the measure provides for their repayment in proportion to the degree of success of the aided project.1653 At the same time, point 79 of the R&D&I Framework also continues to provide for the possibility that Member States notify an aid scheme including “a valid methodology […] to calculate the gross grant equivalent of a repayable advance”, in which case “the aid may be awarded on the basis of the gross grant equivalent”, up to the normal aid intensities.1654

3.307

To the extent that fiscal measures constitute State aid (as opposed to general measures that do not translate into an advantage to specific undertakings), the R&D&I Framework has also kept in its point 82 some specific provisions allowing for their aid intensity to “be calculated either on the basis of individual projects or, at the level of an undertaking, as the ratio between the overall tax relief and the sum of all eligible R&D&I costs incurred in a period not exceeding three consecutive fiscal years”. The relevant maximum aid intensities must be complied with in the first case, whilst in the second one “the fiscal measure may apply without distinction to all eligible activities” up to the applicable aid intensity for experimental development. Although the R&D&I Framework does not explicitly address that issue, the fact that it refers to “experimental development” instead of “applied research”1655 indicates that aid intensities are in the latter case limited to those laid down in its Annex II (and in the GBER), that is to say 25 per cent for large enterprises, 35 per cent for medium-sized enterprises and 45 per cent for small enterprises.

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1652 Indeed, no individual cases were ever notified under the 2006 Framework for the corresponding aid categories (technical feasibility studies, IPR costs for SMEs, process and organisational innovation in services, innovation advisory services and innovation support services, loan of highly qualified personnel, and innovation clusters). 1653 See section 3.2.3. 1654 As mentioned under section 3.2.3, such possibility was used only once in the past but may become more widespread since the R&D&I Framework, contrary to its predecessor, does not seem to limit the use of repayable advances to R&D projects but rather envisages them as being potentially used for all kinds of eligible R&D&I activities. 1655 See footnote to the previous table.

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Finally, point 92 of the R&D&I Framework has kept the provision formerly known as the matching clause, according to which “higher intensities than generally permissible […] may be authorised if, directly or indirectly, competitors located outside the Union have received in the last three years or are going to receive aid of an equivalent intensity for similar projects”. In spite of the fact that such provision has never been invoked since 1996, when it was first included in R&D&I State aid rules, and notwithstanding some publicly raised doubts about its compatibility with WTO law,1656 the Commission has now complemented it by a new reference to the possible use of its investigative powers as a conceivable means of gathering the necessary evidence on distortions of international trade created by aid provided by third countries.

3.310

If anything, the practical relevance of the matching clause should however be even lower in the future, since the international dimension may be (indirectly but sufficiently) catered for by the increase of the notification thresholds and a number of other, new provisions such as the inclusion of certain prototypes and pilot lines under the category of industrial research,1657 the non-consideration of Union funding for cumulation purposes,1658 the application of higher aid intensities for large individual aid measures that are subject to detailed assessment1659 and the possibility to consider alternative locations in the counterfactual analysis.1660

3.3.6 Avoidance of negative effects 3.311

When dealing with the negative effects of R&D&I aid under the 2006 Framework, the Commission has in most cases examined its impact on competition in the innovation process (upstream of product markets) as well as on competition in those product markets where the results of the aided activities were meant to be exploited. With regard to competition in the innovation process, the Commission usually relied on internal expertise and available public information to appraise the state of the art in the area concerned. However, the value of any conclusions drawn in that context is clearly limited by the fact that most companies do not disclose the detailed content of their research programmes. For instance, even if it would be known that a competitor of the aid beneficiary is carrying out research on the same topic, it may not necessarily be exploring the same technological path.1661 1656 See for instance DG Competition’s Issues Paper of 12.12.2012 on the revision of the R&D&I State aid rules, available at http://ec.europa.eu/competition/state_aid/legislation/rdi_issues_paper.pdf. 1657 See point 15(q) of the R&D&I Framework. 1658 See point 83 of the R&D&I Framework. 1659 See point 89 of the R&D&I Framework. 1660 See point 66 of the R&D&I Framework. 1661 Incidentally, that seems to explain why the R&D&I Framework refers to “similarity” (and not just compa-

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The analysis of competition in the product markets is obviously a forward-looking exercise, often spanning over a relatively large period of time. The practical difficulties of assessing possible market distortions linked to R&D&I aid are in that context compounded by the recurrent need to perform an analysis of multiple markets (which are sometimes geographically segmented), especially since the relevant projects tend to translate into the development of new technologies and thus aim at opening up entirely new market opportunities. The relevance of existing market definitions (for example based on previous merger decisions) may therefore also be limited, especially if technological developments brought about by the aid are expected to result in significant changes of the very structures and boundaries of those markets.

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In practice, the main reasons for concluding on the absence of significant negative effects of aid under the 2006 Framework have thus been a limited market share of the aid beneficiaries, the existence of countervailing buyer power, the potential for developing competing end-products in markets with significant growth potential, the presence of mechanisms ensuring wide dissemination of knowledge or unrestrained access to IPR, and the presence of high exit barriers that lock-in competitors in alternative research paths with high up-front investments.

3.313

In identifying the main negative effects of aid, the R&D&I Framework does not deviate from the past and continues to refer in its point 95 to product market distortions (including in the innovation process) and location effects, both of which “may lead to allocative inefficiencies, undermining the economic performance of the internal market, and distributional concerns, in that the aid affects the distribution of economic activity across regions”. It therefore has broadly kept the same focus as before, although with a clearer reference to a number of manifest negative effects whose presence would make it impossible to find the aid compatible with the internal market.

3.314

With regard to competition in innovation processes and product markets, the R&D&I Framework first recalls that R&D&I aid can distort the competitive entry and exit process by preventing “the market mechanism from rewarding the most efficient producers and putting pressure on the least efficient to improve, restructure or exit”.1662 Besides excluding firms in difficulty from its scope of application, it therefore indicates that “the Commission will consider

3.315

rability) of “technological content, level of risk and size” when considering those elements that may point to the absence of a market failure, as mentioned in section 3.3.2. 1662 Point 98 of the R&D&I Framework.

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whether the aid is awarded in markets featuring overcapacity or in declining industries”1663, as support for inefficient undertakings “may lead to market structures in which many players operate significantly below efficient scale”.1664 In the same vein, aid awarded to customary beneficiaries may be more likely to contribute to the maintenance of inefficient market structures whilst, conversely, “[s] ituations where the market is growing or where State aid for R&D&I is likely to change the overall growth dynamics of the sector [...] are less likely to give rise to concerns”.1665

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Secondly, R&D&I aid can distort the dynamic incentives of market players to invest (crowding-out effect). Indeed, “[w]hen an undertaking receives aid, the likelihood of successful R&D&I activities on its part generally increases, leading to an increased presence on the relevant product market(s) in the future”, which in turn “may lead competitors to reduce the scope of their original investment plans”.1666 In that regard, the Commission will continue to pay particular attention to elements such as: –

the market prospects, in that the competitors’ incentives will be less likely to be negatively affected by the aid where it is awarded in growing markets;

–

the aid amount, including with reference to total R&D&I expenditure by the main market players;

–

the closeness to the market of the aided activity and the envisaged aid instrument, which explains the implicit preference for repayable instruments1667 for activities relatively close to the market, such as experimental development;

–

the nature of the selection process, that is to say the extent to which such process is based on transparent, objective and non-discriminatory criteria;

–

the level of exit barriers, insofar as competitors of the aid beneficiary are more likely to maintain or even increase their investment plans when exit barriers to the innovation process are high;

1663 1664 1665 1666 1667

Point 115 of the R&D&I Framework. Point 100 of the R&D&I Framework. Point 115 of the R&D&I Framework. Point 99 of the R&D&I Framework. Liquidity support or repayable advances, as mentioned in section 3.3.3.

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–

the incentives to compete for a future market, with a view to avoid those situations where aid would lead competitors to renounce competing for a future market because the advantage provided to the aid beneficiary (for instance in terms of the degree of technological advance or timing) significantly reduces their scope for profitably enter such market;

–

the degree of product differentiation and the intensity of existing competition, insofar as aid for R&D&I activities that focus on developing differentiated products (related for instance to distinct standards, technologies and consumer groups) is less likely to negatively affect competitors, in particular where there are many effective players in the market.

Thirdly, R&D&I aid can create or maintain positions of market power, that is to say “the power to influence market prices, output, the variety or quality of products and services, or other parameters of competition for a significant period of time, to the detriment of consumers”.1668 In that regard, and even if it has not made any significant use of such indicators under the 2006 Framework, the Commission continues to signal that it is “unlikely to identify competition concerns related to market power in cases where the aid beneficiary has a market share below 25 per cent and in markets with a market concentration below 2000 on the Herfindahl-Hirschman Index (HHI)”.1669 It moreover recalls that it will consider the following elements: –

the market power of the aid beneficiary and the market structure, that is to say the degree to which the aid is awarded to a dominant undertaking or in oligopolistic markets where only a few players are active;

–

the level of entry barriers (such as access to IPR, networks and infrastructure) and the extent to which the aid could contribute to raise them for new entrants;

–

the existence of countervailing buyer power, in particular where the aid beneficiary enjoys a strong market position;

–

the selection process, for instance with a view to avoid that the choice of aided R&D&I activities are unduly influenced by undertakings with a strong market position.

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1668 Point 101 of the R&D&I Framework. 1669 Point 113 of the R&D&I Framework.

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3.318

With regard to location effects, point 102 of the R&D&I Framework moreover indicates that State aid “may also give rise to distortions of competition when it influences the choice of a location” and that “[t]hose distortions can arise across Member States, either when firms compete across borders or consider different locations”. To the extent that R&D&I aid, in particular where it is awarded for activities relatively close to the market, “may result in some territories benefiting from more favourable conditions in respect of subsequent production” and therefore “may lead undertakings to re-locate to those territories”1670 without contributing to an increased level of R&D&I activities in the Union, “the Commission will [...] take into account any evidence that the aid beneficiary has considered alternative locations”.1671 Even so, while in principle the location effects of aid should thus be systematically considered in the context of a detailed assessment of large individual aid measures, significant concerns in that regard do not seem much likely to arise for R&D&I activities, whose location is to a large extent determined by other factors, such as the availability of the required knowledge pool, skilled researchers and infrastructure.

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Finally, since an aid measure cannot be approved if is discriminatory to an extent not justified by its intrinsic nature, the R&D&I Framework explicitly refers to those manifest negative effects that in all circumstances preclude the aid from being found compatible with the internal market. They arise in particular in the case of those aid measures that entail a non-severable violation of Union law in that they contravene one of the four fundamental freedoms, for instance by imposing undue territorial restrictions.1672 In general terms, any restrictions that would go beyond limiting the aid measure to companies which are active in the Member State or region concerned are thus clearly not acceptable, and so is “aid that merely leads to a change in location of R&D&I activities”.1673

1670 Point 116 of the R&D&I Framework. 1671 Point 118 of the R&D&I Framework. Arguably, such evidence will also be of relevance for the counterfactual analysis referred to in sections 3.3.4 and 3.3.5. 1672 See section 3.1.1. 1673 Point 105 of the R&D&I Framework.

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3.3.7 Transparency In general terms, compliance with all necessary conditions laid down under each common principle described above1674 should be sufficient to conclude on the compatibility of those aid measures that are subject to a detailed assessment and, contrary to the previous rules, the R&D&I Framework does therefore not require any explicit further balancing exercise1675 whereby the positive effects of the aid are weighed against its negative effects.

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In line with the approach set by the SAM initiative and laid down in the Transparency Communication1676, the said common principles have nevertheless been complemented by a general transparency obligation that not only replaces the previous requirement for the submission of summary information sheets on certain individual aid measures1677 but, more importantly, also constitutes an additional compatibility condition.

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Thus being, point 119 of the R&D&I Framework requires Member States to publish the following information for all individual aid awards above EUR 500,000 as from 1 July 2016: “the full text of the aid scheme and its implementing provisions or legal basis for individual aid, or a link to it; the identity of the aid awarding authority; the identity of individual beneficiaries; the form and amount of aid awarded to each beneficiary; the date of award; the type of beneficiary (SME or large enterprise); the region in which the beneficiary is located (at NUTS level II); and the principal economic sector in which the beneficiary has its activities (at NACE group level)”.1678 In the absence of any relevant case practice, it is however impossible at this stage to foresee whether the Commission will ever order the recovery of aid solely on the basis of a lack of compliance with that new transparency requirement.

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1674 See sections 3.1.1 to 3.1.6. 1675 See section 7.5 of the 2006 Framework. Although it means that also no reference is made in the R&D&I Framework to possible remedies for reducing potential distortions of competition, it however seems conceivable that the Commission seeks exactly the same types of remedies whenever large individual aid measures raise specific concerns, either during its preliminary examination or following a decision to initiate a formal investigation procedure. 1676 Communication from the Commission, amending the Communications from the Commission on EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, on Guidelines on regional State aid for 2014-2020, on State aid for films and other audiovisual works, on Guidelines on State aid to promote risk finance investments and on Guidelines on State aid to airports and airlines, OJ C 198, 27.06.2014, p. 30. 1677 See section 10.1.3 of the 2006 Framework. 1678 With the exception of business secrets and other confidential information. For fiscal measures, the information on individual aid amounts can be provided in ranges of 0.5-1, 1-2, 2-5, 5-10, 10-30 and above 30 EUR million.

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3.4 Evaluation, reporting and monitoring 3.323

The final substantive provisions of the R&D&I Framework, which is in particular applicable to all notified aid measures in respect of which the Commission takes a decision after 1 July 2014, refer to evaluation, monitoring and reporting and reflect the horizontal approach laid down by the SAM initiative.

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In that context, apart from the obvious simplification entailed by the discontinuation of the requirements for submission of summary information sheets1679 as well as for explaining in the annual reports how the incentive effect has been respected for all individual aids awarded to large undertakings under each approved scheme,1680 the main novelty of the R&D&I Framework clearly relates to its new evaluation provisions.

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Whilst, according to its point 121, an independent ex post evaluation may be required “for aid schemes with large budgets, containing novel characteristics or when significant market, technology or regulatory changes are foreseen”, the R&D&I Framework seems nevertheless to distinguish between two broad categories: –

on the one hand, the Commission undertakes to assess the compatibility of those aid schemes that may be excluded from the scope of the GBER “exclusively on the grounds of their large budget […] solely on the basis of the evaluation plan” that needs to be notified within twenty working days from their entry into force1681;

–

on the other hand, at least for aid schemes “containing novel characteristics or when significant market, technology or regulatory changes are foreseen”, it appears that Member States could (in addition to submitting an evaluation plan) be required to demonstrate, for instance for means of an impact assessment, that any negative effects of notifiable aid schemes “will be limited to the minimum taking into account, for example, the size of the projects concerned, the individual and cumulative aid amounts, the number of expected beneficiaries as well as the characteristics of the targeted sectors”.1682

1679 See section 3.3.7. 1680 See section 3.3.4. 1681 Point 122 of the R&D&I Framework (see also Article 1(2)(a) of the GBER). Such aid schemes are those whose average annual State aid budget exceeds EUR 150 million. 1682 Point 107 of the R&D&I Framework.

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To the extent that, apart from those with large budgets, all R&D&I aid schemes can in principle be implemented under the GBER without prior notification and in the absence of any case practice so far, it is however still not entirely clear how the evaluation requirement will apply to the second category of aid schemes mentioned above, or indeed how “novel characteristics” or foreseeable “significant market, technology or regulatory changes” are to be identified in the first place.1683 Nevertheless, it clearly stems from point 37 of the R&D&I Framework that the duration of any notifiable aid scheme can be limited by the Commission, “normally to four years or less” and that any subsequent prolongation of such schemes will be contingent on the results of their evaluation.

4.

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Conclusion

The increase of R&D&I activities is at the centre of the Europe 2020 strategy and has historically been supported by the Union through successive framework programmes of increased size and importance.

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The Commission has since 1986 laid down the compatibility criteria for the assessment of State aid for R&D&I. It has reviewed them in 1996, 2006 and, most recently 2014.

3.328

This chapter has briefly presented the current R&D&I State aid rules (R&D&I Framework and GBER) which, in line with the overall objective of supporting the Europe 2020 strategy, provide in particular for more scope for automatic approval of aid, more flexible aid ceilings for large individual aid measures, greater legal certainty for public-private R&D collaboration and for demand-side measures that foster innovation. At the same time, they also aim at promoting value for money, thereby maximising the impact of aid in a context of stretched national and regional budgets and furthering the Union’s potential to invest in more and better R&D&I.

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Although it is still early to judge their practical implementation, it can first of all be expected that an increasingly higher proportion of R&D&I aid (probably up to 90 per cent) is put into effect under the GBER, which now covers all types of measures for which State aid may be found compatible with the internal market. This would represent a significant administrative simplification that should cut

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1683 At the same time, the scope for a specific compatibility assessment of notifiable aid schemes, possibly directly based on the SAM common assessment principles, seems to be further limited by the requirement that individual aids awarded under such schemes be fully in line with the GBER (see point 41, footnote 32, of the R&D&I Framework).

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down the amount of time needed for the start of a project. As to the detailed assessment of aid measures that remain subject to the notification obligation, the very first cases of application of the R&D&I Framework1684 seem to indicate that the new, explicit reliance on the SAM common principles represents an evolution rather than a revolution in the process of conducting the compatibility assessment of large individual aid.

1684 Further to the SuperGrid and TS 3000 cases mentioned in section 3.3.5, see also Commission Decision of 14.08.2015 on case SA.39457 (2015/N), SABRE - Aid to Reaction Engines Limited (summary notice not yet published).

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Chapter 18 Energy and environment 1.

Introduction

1.1 A rapidly evolving policy context Over the past decade, the energy and environmental policies have undergone radical changes. Driven by the desire to ensure a sustainable, competitive and secure energy supply, the European Union and its Member States have taken numerous measures to reform the energy sector. A complex mix of measures aimed at market regulation and liberalisation was meant to ensure decarbonisation of the energy production while increasing its efficiency and security.1685 This almost unprecedented wave of change contrasts with the general inertia of the energy sector due to typically high capital costs and long investment cycles.

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The fundamental overhaul of the energy sector has triggered numerous individual State interventions, notably in the form of State aid. Their objective has been to accelerate the transition to the ‘brave new world’ of ‘green’ energy production and, more generally, of doing business in an environmentally friendly manner. In spite of the economic and financial crisis of the past years, Member States have therefore continued to direct substantial amounts of State aid funding to the objective of ‘environmental protection’ in the broad sense. The State aid scoreboard records for this area an annual EU-wide aid amount of about EUR 14 billion for the years 2008 to 2012.1686

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1685 The most notable examples of regulatory change are the EU’s third internal energy market package and the renewables Directive both adopted in 2009. 1686 Commission Staff Working Document, Impact Assessment accompanying the Communication from the Commission on Guidelines on State aid for environmental protection and energy for 2014-2020, C(2014) 2322, SWD(2014)140, p. 109.

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The Environmental State aid Guidelines that entered into force in 2008 (‘2008 EAG’)1687 provided guidance on the assessment of State aid measures for environmental and climate change measures accompanying the far-reaching energy and climate policy reform of the years 2008 and 2009.1688 Since then, the market and the regulatory environment have changed once more. As regards the legal framework, the year 2012 saw for instance the adoption of a new Energy Efficiency Directive (‘EED’)1689 and the start of a new phase of the EU Emission Trading Scheme (‘ETS’) including the auctioning of ETS certificates. With respect to market developments, the costs of renewable energy technologies have decreased considerably, promoting the impressive rollout of energy from renewable sources (‘RES’) and continuously increasing their share in the total energy supply. In 2013, the share of RES in the energy consumption reached 15.0 per cent, up from 8.3 per cent in 2004.1690 At the same time, the enlarged share of intermittent RES has proved a considerable challenge to ensure short-term network stability and longterm generation adequacy, putting in question the basic economics of the electricity markets. Such changes in the energy markets and their regulatory frameworks triggered aid measures that increasingly fell outside the scope of 2008 EAG.

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As these examples also demonstrate, the link between environmental and energy policy has intensified. Whether ETS, energy efficiency improvements, RES support, infrastructure developments or efforts to ensure generation adequacy, all these measures must be seen as complementary and interdependent. When the review of the 2008 EAG began, the intention was therefore to extend the scope of the Guidelines to fully encompass energy issues – only partially covered by the 2008 EAG and, instead, often assessed directly under the Treaty in a scattered way – and thus to develop more comprehensive Environmental and Energy Aid Guidelines (‘EEAG’).1691

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In recent years, another driver of the application of State aid rules in the energy and environmental field has come from Member States’ increasing concerns about the security of electricity supply. Such concerns have led some Member States to support for example the construction of new nuclear power plants or 1687 Community guidelines on State aid for environmental protection, OJ C 82, 01.04.2008, p.1. 1688 The 2008 EAG relied exclusively on the common objective of ‘environmental protection’ to justify State aid. This included also measures to tackle climate change such as supporting RES. 1689 Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC, OJ L 315, 14.11.2012. 1690 Share of energy from renewable sources in gross final consumption of energy, EU-28, 2004-2013, Source: Eurostat. 1691 Communication from the Commission — Guidelines on State aid for environmental protection and energy 2014-2020, OJ C 200, 28.06.2014, p. 1.

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to continue supporting the use of indigenous fossil fuels such as coal. Such measures fall outside the scope of both the 2008 EAG and the new EEAG and need to be assessed directly under the Treaty and/or on other legal bases such as the Euratom Treaty or the Council decision on coal.1692

1.2 State aid modernisation as stimulus and framework to review State aid in the energy and environmental field In May 2012, the Commission launched a comprehensive initiative to modernise its rules to assess State aid measures, known as State Aid Modernisation (‘SAM’).1693 Three main set of reasons led to this reform. First, SAM aimed at relaunching a sluggish economy, setting public budgets on a sustainable path and facilitating adjustments when Member States were tempted by protectionism or faced internal obstacles to carry out the necessary structural changes. Secondly, the Commission recognised the need to improve its analysis and enforcement of the largest individual aid measures and schemes. The monitoring exercise had revealed a number of deficiencies in the implementation of both notified schemes and block-exempted measures.1694 The Commission also wanted to systematically check the economic impact of aid measures, in particular aid schemes. SAM was therefore seen as an opportunity to focus on the assessment of larger, more distortive aid measures and to introduce a simpler assessment of simpler cases. Finally, it was acknowledged that the overall State aid framework had become more complex, with an increasing number of regulatory texts, sometimes with overlaps and inconsistencies.

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In line with the three reasons underpinning the SAM, the reform was built around three key objectives. The first one was to ensure that robust State aid rules fully support ‘good’ State aid, aimed at rectifying market failures and directly linked with the objectives of the Europe 2020 Strategy.1695 The second goal was to prioritise enforcement so as to focus on the cases that have the greatest impact on the internal market. Lastly, the aim was to streamline the decision making process, so that the Commission would be able to focus on these fewer more important cases and to deal with them more efficiently.

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1692 Council Decision 2010/787/EU on State aid to facilitate the closure of uncompetitive coal mines. 1693 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - EU State Aid Modernisation (SAM), COM/2012/0209 final. 1694 Para. 21 of the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - EU State Aid Modernisation (SAM), COM/2012/0209 final. 1695 Communication from the Commission, Europe 2020, A strategy for smart, sustainable and inclusive growth, COM(2010) 2020.

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The building blocks of the SAM package were the revisions of a number of State aid texts. This included the General Block Exemption Regulation (‘GBER’)1696 as well as the overhaul of the substantive rules set in all the major guidelines such as those concerning regional aid, environment and energy, risk capital and risk financing and research, development and innovation. The revision of the guidelines followed a common approach in terms of structure and compatibility criteria.

3.339

In order to facilitate support measures that strengthen the energy internal market and stimulate growth, the revision of the Guidelines followed two approaches: on the one hand emphasis was placed on cutting ‘red tape’ and promoting market mechanisms such as bidding processes to allocate aid, on the other the revision introduced new categories of aid such as aid to energy infrastructure, on the grounds that public investments in interconnection or district heating would have a pervasive and multiplying effect on a number of sectors and market players.

1.3 Towards a common State aid assessment across the EEAG 3.340

In implementing SAM, the so-called common assessment principles were determined to ensure that the revision of the various Guidelines followed a common approach in terms of structure and compatibility criteria. Essentially, on the basis of these principles it is determined whether the positive impact of the aid in achieving Union environmental or energy objectives exceeds the potential negative impacts on trade and competition.

3.341

The following cumulative principles were established (para 27 EEAG): a.

A State aid measure aims at an objective of common interest;

b.

A State aid measure is targeted towards a situation where aid can bring about a material improvement that the market alone cannot deliver (need for State intervention);

c.

A State aid measure is an appropriate policy instrument to address the objective of common interest (appropriateness of the State aid measure);

1696 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Article 107 and 108 of the Treaty, cf. OJ L 187, 26.06.2014, p. 1.

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d.

A State aid measure changes the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity which it would not carry out without the aid or which it would carry out in a restricted or different manner (incentive effect);

e.

The State aid amount is limited to the minimum needed to incentivise the additional investment or activity addressing the common objective (proportionality of the aid);

f.

The negative effects of the State aid are sufficiently limited, so that the overall balance of the measure is positive (avoidance of undue negative effects on competition and trade between Member States);

g.

Member States, the Commission, economic operators, and the public have easy access to all relevant acts and to pertinent information about the aid awarded thereunder (transparency of aid).

Where the potential distortion of competition is particularly high, the duration of a State aid scheme may be limited and the scheme may be made subject to an evaluation. The evaluation can support the assessment of a potential prolongation of such scheme in light of the common assessment principles. In order to ensure that the evaluation serves its purpose, its modalities are defined at the moment an aid scheme is approved.

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The assessment of compatibility with State aid rules takes place on the basis of the above mentioned common assessment principles. In addition, it should be recalled that if a State aid measures entails a non-severable violation of Union law, the aid cannot be declared compatible with the internal market.1697 The Commission has assessed the compliance with other Treaty provisions, in particular Articles 30 and 110 of the Treaty, in several RES aid schemes in view of their financing method i.e. whether imported RES electricity is discriminated against compared to domestically generated RES electricity.1698

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The 2008 EAG was structured around the common objectives targeted by a particular measure and subsequently the conditions applicable to that measure were

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1697 See Case C-156/98 Germany v Commission, ECLI:EU:C:2000:467 at para. 78 and Case C-333/07 Régie Networks v Rhone Alpes Bourgogne, ECLI:EU:C:2008:764 at paras 94-116. See also, in the field of energy, Joined Cases C-128/03 and C-129/03 AEM and AEM Torino, ECLI:EU:C:2005:224 at paras 38 to 51. 1698 See for instance the Commission Decisions concerning RES support in Denmark, Estonia, Germany, Luxembourg and the UK (available under case numbers SA.33995, SA.36204, SA.37122, SA.36023, SA.37232, SA. 36196).

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set out for each measure separately. EEAG have a different structure and apply a more horizontal approach. All measures are assessed on the basis of the same common assessment principles which are specified in more detail for specific measures where needed. While the structure of the Guidelines changed, the assessment criteria of the purely environmental measures have remained largely unchanged under EEAG, except for the new provisions for transparency and evaluation. In contrast, the measures having a direct impact on the energy market such as State aid for RES have seen more some fundamental changes.

1.4 Simplification and focus on more distortive large State aid measures 3.345

The general SAM objectives aimed to facilitate the assessment of State aid targeting the EU 2020 objectives and to streamline the decision making process to enable the Commission to focus on fewer and larger, more distortive State aid measures. These objectives have been implemented for State aid in the energy and environmental field along two lines: the scope of GBER was extended and the assessment of investment aid in EEAG was simplified. This was combined with an increase in the thresholds that trigger an individual assessment of projects where aid is granted under an approved scheme.

1.4.1 GBER 3.346

In order to incentivise growth-enhancing aid measures and to allow the Commission to focus on the larger, more distortive schemes, the environmental and energy measures falling within the scope of GBER were significantly extended. The following aid categories were added to GBER: a.

Aid for energy efficiency in buildings (Article 39)

b.

Aid for the remediation of contaminated sites (Article 45)

c.

Aid for waste recycling and re-utilisation (Article 47)

d.

Aid for energy efficient district heating and cooling (Article 46)

e.

Operating aid for renewable energy (Articles 42 and 43)

f.

Aid for energy infrastructure (Article 48)

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It is worth mentioning in particular that for the first time operating aid provisions for RES are introduced in GBER. Moreover, energy and resource efficiency measures have been newly introduced or extended. The provisions for waste recycling and re-utilisation correspond to the measures that proved to be least distortive under the waste management provisions in the 2008 EAG. Also the GBER provisions for aid for the remediation of contaminated sites are based on the provisions in the 2008 EAG.

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The possibilities for increasing energy efficiency are extended in two respects. First, specific conditions for State aid for energy efficiency in buildings through dedicated energy efficiency funds have been introduced. Secondly, State aid for energy efficient district heating or cooling can now be granted under GBER whereas this was previously limited to aid for highly efficient cogeneration of heat and power (‘CHP’) plants.

3.348

A district heating (or cooling) system consists typically of a heat production plant and a distribution network. The conditions for granting State aid distinguish accordingly between aid for the production plant and aid for the network. Whereas the conditions for aid to the production plant are in line with the conditions for investment aid to highly efficient CHP plants, aid for the network follows the rules of aid to energy infrastructure.

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GBER extended the scope to grant State aid to RES by introducing the possibilities to grant operating aid both for small-scale installations and larger installations. The provisions for RES installations are very similar to the respective EEAG rules but with more ex ante defined conditions. In the absence of a bidding process, an overcompensation test needs to be carried out to ensure that the aid does not result in higher revenues than the production costs. The reasonable rate of return that is allowed as part of the production costs is pre-defined based on the relevant swap rate.

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1.4.2 Investment aid The assessment of investment aid under EEAG was simplified by using the same eligible cost calculations for investment aid in both EEAG and GBER. Under EEAG, as compared to the 2008 EAG, operating costs and benefits are no longer taken into account (for the first five years). The eligible costs are calculated as the extra environmental investment cost, often by comparison to a counterfactual scenario. This is reflected in points 72-80 EEAG.

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The aid intensities were decreased accordingly in order to reflect the change in eligible costs calculation, while the differentiation in aid intensities for small, medium and large enterprises was maintained. The main change compared to the 2008 EAG is the introduction of higher aid intensities for investments in assisted areas.

1.4.3 Notification thresholds 3.353

In order to implement the aim to focus on the most distortive aid, EEAG have increased the threshold for cases that are subject to an in depth individual assessment in two respects. First, the thresholds that trigger an in depth assessment were increased and doubled for investment aid and for operating aid as compared to the 2008 EAG. However, the threshold for operating aid in support of CHP was (only) increased by 50 MW1699 and for biofuels left unchanged. Secondly, if aid is granted through a genuine competitive bidding process, no in-depth individual assessment is deemed to be necessary.

2.

State aid in the context of the EU Emissions Trading Scheme (ETS)

2.1 State aid in the wider ETS context 3.354

The ETS Directive1700 stipulates that Member States may compensate sectors and subsectors exposed to ‘carbon leakage’ for their CO2 costs included in their electricity prices (indirect emission costs). This is to be distinguished from the allocation of free allowances for direct emission costs that is considered not to constitute State aid as the modalities of that allocation are harmonised across the EU. Compensation for indirect emission costs may only be granted when it is necessary and proportionate and should ensure that the EU objectives to save energy and stimulate a shift in demand from ‘grey’ to ‘green’ electricity are maintained. Carbon leakage occurs when global greenhouse gas emissions increase as companies relocate or shift part of their production outside the EU as a result of lower CO2 prices outside the EU, where lesser CO2 constraints exist, and if companies cannot pass on such costs to their customers without significant loss of market shares.

1699 Both investment aid for the remediation of contaminated sites and for the district heating or cooling distribution network was included in GBER with a threshold of EUR 20 million. 1700 Recital (27) of Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community, OJ L 140, 05.06.2009, p. 63.

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In this context, State aid is critical because it may lead to subsidy races across Member States, potentially resulting in situations where companies in the same sector but in different Member States are treated differently. Furthermore, to the extent that compensation for indirect emission costs is based on electricity consumption of the beneficiaries, it undermines the efficiency of the EU ETS: it undermines the effects of price signals associated with carbon emissions, leading to an inefficient distribution of abatement efforts and thereby potentially increasing the overall costs for the whole EU economy of implementing a given emission cap.

3.355

The EU legislator chose two different instruments to compensate sectors for their direct (i.e. costs of buying allowances) and indirect emission costs. As regards the direct costs, the legislation stipulates a compulsory temporary allocation of free allowances harmonised at EU level; as regards indirect costs, an optional temporary financial compensation at the disposal of Member States. The two instruments have different effects: granting free allowances for direct emission costs does not change the price signals for reducing CO2 emissions created by the ETS and does not change the recipients’ marginal cost structure (because the recipients of the free allowances will still incur the opportunity cost of selling them). In contrast, compensation for indirect emission costs – at least when based on actual production levels – tends to distort the market incentives of a ‘cap & trade’ system. Financial support reduces the cost-efficiency of the ETS, since it tends to increase the overall energy consumption and emissions of compensated sectors and to lead to higher carbon price and higher electricity price for other sectors.

3.356

Therefore, financial compensation for indirect emission costs needs to be carefully designed and strike a balance between three distinct and partially conflicting objectives:

3.357

–

avoid carbon leakage (ETS efficacy),

–

minimise competition distortions between undertakings in the internal market and avoid subsidy races between Member States,

–

preserve the ETS objective of reducing CO2 emissions at least costs for the EU economy.

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2.2 The ETS State aid Guidelines and their application 3.358

To address the problem of carbon leakage due to indirect CO2 costs, the ETS State aid Guidelines seek to define on the one hand eligible sectors and subsectors, and on the other the maximum amount of aid.

3.359

The requirement in Article 10a(6) ETS Directive that aid must comply with the ‘State aid rules applicable’ means that they must respect the specific legal basis of the envisaged Guidelines, namely Article 107(3) of the Treaty.1701 With respect to the form of aid, State aid to compensate for indirect CO2 costs constitutes operating aid. Operating aid relieves undertakings of their day-to-day costs and is typically regarded as more distortive than investment aid. Unlike investment aid, operating aid does not require a counterfactual scenario i.e. an investment that would not have been undertaken without the aid.

3.360

When the Commission exceptionally authorises operating aid, it normally requires that the aid is reduced over time and does not cover all the costs.1702 A special State aid framework governing the payment of aid for part of the beneficiaries’ operating expenses, namely electricity costs, was thus needed.

2.2.1 Sector and subsector eligibility 3.361

In its Statement1703 to the European Parliament in 2008 relating to the ETS Directive, the Commission took the position that when defining sectors and subsectors deemed to be exposed to a significant risk of carbon leakage it “would use the method that is being developed in the context of direct emissions, but adapt this to take into account cost increases related to indirect emissions”. The ‘method’ used to determine the sectors and subsectors entitled to receive free allowances for their direct CO2 costs is enshrined in Article 10a (15-17) ETS Directive.

1701 This is consistent with recital 49 of Directive 2009/29/EC which provides that measures adopted under that Directive shall be without prejudice to State aid rules. 1702 Case C-459/10 P, Freistaat Sachsen und Sachsen-Anhalt v Commission, ECLI:EU:C:2011:515, para. 34; Case C-113/00, Spain v Commission, ECLI:EU:C:2002:507, para. 70; Case C-156/98, Germany v Commission, ECLI:EU:C:2000:467, para. 30; Case C-86/89, Italy v Commission, ECLI:EU:C:1990:373, para. 18; Case T-396/08, Freistaat Sachsen und Land Sachsen-Anhalt v Commission, ECLI:EU:T:2010:297, paras. 46-48 and Case T-459/93, Siemens SA v Commission, ECLI:EU:T:1995:100, para. 48. 1703 See Annex 6 to the Impact Assessment Report Accompanying the Guidelines on certain State aid measures in the context of Greenhouse Gas Emission Allowance Trading Scheme, available at http://ec.europa.eu/ competition/sectors/energy/legislation_en.html.

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That ‘method’ was further refined through the 2010 Carbon Leakage Decision.1704 It mainly involved two sets of quantitative data. First, each sector’s combined direct and indirect CO2 costs were related to the sector’s Gross Value Added (‘GVA’). The method to determine the indirect CO2 costs was based on net purchases from the electricity grid. The GVA is made up of the sector’s sales minus its intermediate consumption. Second, each sector’s trade intensity was used to determine eligibility. By trade intensity is meant the sector’s non-EU imports and non-EU exports as a share of the sector’s total EU turnover plus non-EU exports and imports.

3.362

The result of the above test was the following: if a sector’s direct and indirect CO2 costs exceeded 5 per cent of its GVA and its trade intensity exceeded 10 per cent, the sector was considered at risk of carbon leakage. A sector also qualified if its CO2 costs exceeded 30 per cent of its GVA or its trade intensity was above 30 per cent. In addition, a sector could qualify based only on qualitative assessment.

3.363

The ETS Directive however does not define the eligibility criteria to be applied in the ETS State aid Guidelines. The Commission only committed itself to use and ‘adapt’ the ‘method’ developed in the context of compensation for direct CO2 costs. Financial compensation should be targeted to those electricity intensive sectors which are unable to pass on the indirect emission cost increase to their customers into product prices without significant loss of market share.

3.364

In the State aid context, the inability of a sector to pass through the indirect costs is the key criterion to identify the eligible sectors. Of the three quantitative criteria set in the ETS Directive as proxies to measure the inability to pass on the increase costs, only the combination of cost increase of indirect emissions relative to gross value added (GVA) (5 per cent) with the trade intensity (10 per cent) or the stand alone indirect costs increase (30 per cent) should be relevant for aid for indirect emission costs.

3.365

Based on the same assumptions as in the ETS Directive, i.e. a CO2 price of 30€/t and 100 per cent C02 costs pass-on into electricity prices on the basis of an emission factor corresponding to the EU average (0.465 t CO2 /MWh), and applying the 5 per cent indirect cost increase combined with 10 per cent trade intensity, five sectors would have been eligible.1705

3.366

1704 Commission Decision 2010/2/EU determining a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, OJ L 1, 05.01.2010, p. 10. 1705 See SWD(2012) 130 final, Impact Assessment Report published at http://ec.europa.eu/competition/sec-

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3.367

However, the 5 per cent increase of only indirect costs is much stricter than the 5 per cent increase of indirect and direct costs set in the ETS Directive. Therefore, some electricity intensive sectors not meeting the above thresholds could still have been at risk of carbon leakage from indirect CO2 costs, as the criterion used to select them are only rough proxies. By analogy to Article 10a(17) of the ETS Directive that includes a supplementary qualitative assessment for the carbon leakage list for free allowances, a qualitative assessment allowed the Commission to focus on sectors considered to be borderline cases, subsectors that were not sufficiently represented in the quantitative assessment or for which statistics were absent or of poor quality and for which Member States or industry representatives had requested during the public consultation a qualitative analysis, based on plausible reasoning and substantiated evidence.1706

3.368

First, the Commission assessed qualitatively sectors claiming to be at risk of carbon leakage which were sufficiently close to the 5 per cent cost increase threshold (i.e. facing a cost increase of >3 per cent and < 5 per cent) and faced 10 per cent trade exposure. Five sectors were deemed to be borderline cases: preparation and spinning of cotton type fibres (NACE 1711), paper and paperboard (NACE 2112), mineral fertilisers and nitrogen compounds (NACE 2415), manufacture of basic iron, steel and ferroalloys (NACE 2710) and copper (NACE 2744). Six additional sectors could have qualified as ‘borderline’ sectors but sufficiently plausible and substantiated claims were not made on their behalf by Member States or industry associations.1707

3.369

Second, sectors and subsectors could also qualify for an assessment in case official data were missing or were of poor quality (always assuming sufficiently plausible and substantiated requests were made in support of eligibility). The sectors deemed to pass into a qualitative assessment via the second entry point (i.e. missing data) included mining of iron ore (NACE 1310); pulp (NACE 2111) and manufacture of synthetic rubber in primary forms (NACE 2417).

3.370

Finally, sectors and subsectors were qualified for an assessment in case they could be considered to have been insufficiently represented by the quantitative assessment (even if they did not constitute borderline cases and even if there were no data deficiencies). Most other sectors in Annex 2 qualified under this third, generally worded criterion. tors/energy/impact_assessment_main%20report_en.pdf, p. 37. 1706 See replies to the public consultation in Annex 3 to the Impact Assessment Report. Impact Assessment Report Accompanying the Guidelines on certain State aid measures in the context of Greenhouse Gas Emission Allowance Trading Scheme. 1707 See SWD(2012) 130 final, Impact Assessment Report, p. 28.

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2.2.2 Types of aid measures The ETS Directive provides for the following special and temporary measures for certain undertakings: aid to compensate for increases in electricity prices resulting from the inclusion of the costs of greenhouse gas emissions due to the EU ETS (commonly referred to as ‘indirect emission costs’), investment aid to highly efficient power plants, including new power plants that are ready for the environmentally safe capture and geological storage of CO2 (CCS-ready), optional transitional free allowances in the electricity sector in some Member States and the exclusion of certain small installations from the EU ETS if the greenhouse gas emission reductions can be achieved outside the framework of the EU ETS at lower administrative cost. As such special measures provided for in the context of implementation of the ETS Directive involve State aid within the meaning of Article 107(1) TFEU, they should be notified by Member States to the Commission. In order to ensure transparency and legal certainty, the ETS Guidelines explain the compatibility criteria that will be applied to these State aid measures in the context of the greenhouse gas emission allowance trading scheme, as improved and extended by Directive 2009/29/EC.

3.371

2.2.2.1 Aid for indirect emission costs The main objective of State aid in this area is an environmental one, since the aid aims to avoid an increase in global greenhouse gas emissions due to shifts of production outside the Union, in the absence of a binding international agreement on reduction of greenhouse gas emissions. On balance, aid for indirect emission costs may have a negative impact on the efficiency of the EU ETS. If poorly targeted, the aid would relieve the beneficiaries of the cost of their indirect emissions, thereby limiting incentives for emission reductions and innovation in the sector. As a result, the costs of reducing emissions would have to be borne mainly by other sectors of the economy. Furthermore, such State aid may result in significant distortions of competition in the internal market, in particular whenever undertakings in the same sector are treated differently in different Member States due to different budgetary constraints.

3.372

In order to limit the amount of aid to the minimum necessary to achieve the environmental objective, the amount of aid that Member States can grant must be calculated according to a formula that takes into account the installation’s baseline production levels or the installation’s baseline electricity consumption levels as defined in Annex III of the ETS Guidelines, as well as the CO2 emission factor for electricity supplied by combustion plants in different geographic

3.373

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areas.1708 Such regional coefficients reflect the significance of fossil fuel plants for the final price set on the wholesale market. Given the lack of relevant data at sub-national level, the geographic areas comprise the entire territory of one or more Member States. On this basis, the following geographic were identified: Nordic (Denmark, Sweden, Finland and Norway), Central-West Europe (Austria, Belgium, Luxembourg, France, Germany and Netherlands), Iberia (Portugal, Spain), Czech and Slovakia (Czech Republic and Slovakia) and all other Member States separately. The corresponding maximum regional CO2 factors are listed in Annex IV of the ETS Guidelines.

3.374

3.375

3.376

If an efficiency benchmark does not exist, a fall-back electricity consumption benchmark needs to be used. In case of electricity supply contracts that do not include any CO2 costs, no State aid may be granted. This formula ensures that the aid is proportionate and that it maintains the incentives for electricity efficiency and the transition from ‘grey’ to ‘green’ electricity, in accordance with the recital (27) of Directive 2009/29/EC. It is noteworthy that Member States may apply lower values than the baseline figures for actual output or electricity consumption. For example, the German scheme1709 relies on an actual output or consumption figure or on another, higher figure. However, the German authorities provided a commitment that neither the actual figure nor the higher figure can exceed the baseline figure in the sense of the Guidelines and therefore this calculation adjustment can only lead to a lower aid amount than what would be a maximum possible aid amount calculated according to the formulae and on the basis of the baseline figures. Furthermore, in order to minimise competition distortions in the internal market and preserve the objective to achieve a cost-effective decarbonisation, the aid must not fully compensate for the costs of EUAs in electricity prices and must be reduced over time. As mentioned above, digressive aid intensities are essential in operating State aid to avoid aid dependency. Therefore, the aid intensity must not exceed 85 per cent of the eligible costs incurred in 2014 and 2015, 80 per cent of the eligible costs incurred in 2016, 2017 and 2018 and 75 per cent of the eligible costs incurred in 2019 and 2020. The decrease of aid in time1710 will maintain the long-term incentives for full internalisation of the environmental cost and the short-term incentives to switch to less CO2-emitting 1708 See para. 27 ETS Guidelines. 1709 Commission Decision of 17.7.2013 on the German State aid for indirect CO2 costs, Case N 36103 2013, summary notice in OJ C 353, 03.12.2013, p. 2. 1710 See para. 26 ETS Guidelines.

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generation technologies. Moreover, due to the energy efficiency benchmarks in Annex III, only the most efficient beneficiaries will receive an optimal level of compensation. Where all the above conditions are met, the incentive effect of the aid measure is presumed. The Commission has approved six State aid measures compensating energyintensive industries at risk of carbon leakage for indirect CO2 emission costs due to the ETS passed on in electricity prices: United Kingdom (SA.35543), Germany (SA.36103), Netherlands (SA.37084), Spain (SA.36650), Belgium (Flanders, SA.37017) and Greece (SA.38630).1711 According to the Commission’s practice, it seems that stricter criteria for the selection of beneficiaries would also be in line with the necessity test. In the UK case1712, an additional ‘filter’ was chosen, namely whether the conditions were met not only at sector level but also at company level. As this filter was based on an objective criterion it was consistent with the underlying objective of section 3.1 of the ETS Guidelines on the prevention of a significant risk of carbon leakage.

3.377

3.378

3.379

2.2.2.2 Investment aid for highly efficient power plants In accordance with the Commission statement to the European Council1713, Member States may use revenues generated from the auctioning of allowances to support the construction of highly efficient power plants, including new power plants that are carbon capture and storage (CCS-) ready. According to the above, investment aid to such power plants may only be granted between 1 January 2013 and 31 December 2016. In order to be compatible, such aid must pursue an objective of common interest, in this case, to increase the protection of the environment resulting in lower CO2 emissions compared to the state-of-the-art technology and to target a market failure. The aid must be necessary, have an incentive effect and be proportional. It is noteworthy that aid for CCS does not fall within the scope of the ETS Guidelines and is already assessed under other existing State aid rules, in particular EEAG.

3.380

3.381

1711 OJ C 200, 12.07.2013, p. 3, OJ C 353, 03.12.2013, p. 2, OJ C 353, 03.12.2013, p. 5, OJ C 17, 21.01.2014, p. 8, OJ C 354, 04.12.2013, p. 9 and OJ C 348, 03.10.2014, p. 22. 1712 Commission Decision of 2.5.2013 on the Compensation for indirect EU ETS costs in the UK, Case N 35543 2013, summary notice in OJ C 200, 12.07.2013, p. 3. 1713 Addendum to ‘I/A’ Note from General Secretariat of the Council to COREPER/COUNCIL 8033/09 ADD 1 REV 1 of 31 March 2009.

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3.382

To ensure proportionality of the aid, the maximum aid intensities must vary depending on the contribution to the increase of environmental protection and reduction of CO2 emissions (objective of the ETS Directive) of the new power plant. Therefore, for new highly efficient power plants that are CCS-ready and start implementation of the full CCS chain before 2020, the aid must not exceed 15 per cent of the eligible costs. For new highly efficient power plants which are CCS-ready but do not start implementing the full CCS chain before 2020, the aid must not exceed 10 per cent of the eligible costs.1714 Lower aid intensities apply for new highly efficient power plants that do not meet the conditions above.

2.2.2.3 Aid involved in free allowances for the modernisation of electricity generation 3.383

Based on Article 10c of the ETS Directive, Member States fulfilling certain conditions, relating to the interconnectivity of their national electricity network or their share of fossil fuels in electricity production and the level of GDP per capita, have the option to temporarily deviate from the principle of full auctioning and grant free allowances to electricity generators in operation by 31 December 2008 or to electricity generators for which the modernisation investment was physically initiated by 31 December 2008. In exchange for granting free allowances to power generators, eligible Member States have to present a national investment plan (‘national plan’) setting out the investments undertaken by the recipients of the free allowances or by other operators in retrofitting and upgrading the infrastructure, in clean technologies and in diversifying their energy mix and sources of supply. Because Member States forego revenues by granting free allowances and give a selective advantage to power generators, such measure constitutes State aid.

3.384

The main conditions as regards compatibility relate to the quality and timing of the investments. To maintain aid proportionality, the market value (at the level of company groups) of free allowances during the whole allocation period (calculated in accordance with the Commission Communication of 29 March 20111715 or the relevant guidance document applicable when the aid is granted) shall not exceed the total costs for investments undertaken by the recipient of free allowances.

1714 See para. 37 of the ETS Guidelines. 1715 Communication from the Commission, Guidance document on the optional application of Article 10c of Directive 2003/87/EC, OJ C 99, 31.03.2011, p. 9.

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It is noteworthy that most eligible Member States submitted notifications under this provision. At the end of 2014 schemes for the modernisation of the electricity generation have been approved and are in force in Cyprus, Estonia, Romania, Czech Republic, Hungary, Bulgaria, Poland and Lithuania.1716

3.385

2.2.2.4 Aid involved in the exclusion of small installations and hospitals from the EU ETS Under Article 27 of the ETS Directive, Member States may exclude small installations and hospitals from the EU ETS. Member States have a wide margin of discretion in deciding whether to exclude small installations from the EU ETS and, if so, which type of installation to exclude and which type of measures to require. Therefore, it cannot be excluded that the measures imposed by Member States may amount to an economic advantage in the favour of small installations or hospitals excluded from the EU ETS that is likely to distort or threaten to distort competition and affect trade in the internal market and therefore constitute State aid. However, as long as the installations are subject to measures that achieve equivalent reduction of greenhouse gas emissions, such aid is deemed to be compatible with the Treaty.

3.386

2.2.3 Mid-term review clause The ETS Guidelines include a review clause. Such a review allows the Commission to assess whether it would be appropriate to review the Guidelines on the basis of important competition policy or environmental policy considerations

3.387

1716 Commission Decision of 27.6.2012 on the  Free emission allowances of greenhouse gases to installations of the Electricity Authority of Cyprus (EAC) for the period 2013-19, Case N 34250 12, summary notice in OJ C 21, 24.01.2013, p. 3; Commission Decision on 27.06.2012 on Transitional free allocation of greenhouse gas emission allowances for the modernisation of electricity generation installations in Estonia, Case N 33449 12, summary notice in OJ C 382, 12.12.2012, p. 3; Commission Decision on 5.12.2012 on Transitional free allocation of greenhouse gas certificates for electricity producers under Article 10c of the ETS Directive in Romania, Case N 34753 12, summary notice in OJ C 16, 19.01.2013, p. 4; Commission Decision on 19.12.2012 on Transitional free allocation of greenhouse gas emission allowances for the modernisation of electricity generation installations in the Czech Republic, Case N 33537 12, summary notice in OJ C 43, 15.02.2013, p. 17; Commission Decision on 19.12.2012 on Investments aiming at the modernisation of the Hungarian energy sector under Article 10 c) EU ETS Directive, Case N 34086 12, summary notice in OJ C 43, 15.02.2013, p. 13; Commission Decision on 4.12.2013 on Allocation of free greenhouse gas emission allowances in line with Article 10c of Directive 2003/87/EC in exchange for investments in installations for electricity production and in energy infrastructure in Bulgaria, Case N 34385 12, summary notice in OJ C 63, 20.02.2015, p. 1; Commission Decision on 22.01.2014 on Free allowances to power generators in Poland under Article 10c of the ETS Directive, Case N 34674 14, summary notice in OJ C 24, 23.01.2015, p. 1; Commission Decision on 27.06.2012 on National Investment plan for transitional free allocation of emission allowances in Lithuania under Article 10C(5) of Directive 2003/87/EC, Case N 34457 14, summary notice not yet published.

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or in order to take account of other Union policies or international commitments. If a review would be deemend approrpriate, this will allow taking stock of the application of the Guidelines and of the impact of the new ETS in the light of evidence of the risk of carbon leakage, while giving the Member States and stakeholders the possibility to present input that could serve the review. Elements could then be considered such as updating the list of eligible sectors, the benchmarks, the CO2 emission factor or elements. A revision of the CO2 emission factor could for instance reflect developments in the electricity markets.

3.

Aid to RES and CHP

3.1 Introduction 3.388

With the revision of the 2008 EAG, the rules for aiding RES, including biofuels, and energy from highly efficient CHP were updated and amended in the light of market and policy developments. The share of RES in the overall energy mix had increased significantly and will continue to increase substantially according to the 2030 and 2050 projections.1717 As many RES are becoming increasingly competitive, it seemed timely to reflect on their competitive impact and their role in the wider energy market and energy mix.

3.389

EEAG progressively introduced market-based rules to support RES. The new rules apply to all, new, modified and unlawful support schemes while respecting already existing and approved schemes.

3.390

EEAG maintain the general line that green electricity and efficient CHP can be publicly supported in view of the existence of market failures leading to their suboptimal production. The definitions of RES and highly efficient CHP have been aligned with the Renewable Energy Directive (“RED”)1718 and the Energy Efficiency Directive (“EED”)1719 respectively.

1717 Energy Roadmap 2015, COM (2011)885final of 15.12.2011 “A policy framework for climate and energy in the period 2020-2030”, COM(2014)15final, 22.1.2014. 1718 Directive 2009/28/EC of the European Parliament and the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L 140, 05.06.2005, p. 16. 1719 Directive 2012/27/EC of the European Parliament and the Council of 25 October 2012 on energy efficiency amending Directives 2009/125/EC, 2004/8/EC and 2006/32/EC, OJ L 140, 05.06.2005, p. 16.

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3.2 Investment aid for RES The rules for investment aid to RES have been clarified and modified in line with the general rules set out in section 1.4 on simplification and in line with the simplification that took place for all environmental investment aid. This approach is also reflected in Article 41 GBER which block-exempts investment aid for RES from ex ante notification. The notification threshold was increased to an aid amount of EUR 15 million.

3.391

3.3 Operating aid for RES With the increasing role of RES in the wider energy market and energy mix, EEAG aim at better integrating RES into the market in order to limit the competition distortions. In order to achieve this broader objective, the rules for operating aid to support RES significantly changed, even if they are only gradually coming into force.

3.392

With respect to the support instrument, the following cumulative conditions apply from 1 January 2016 to all new aid schemes and measures:

3.393

–

aid is granted as a premium in addition to the market price (premium) whereby the generators sell its electricity directly in the market;

–

beneficiaries1720 are subject to standard balancing responsibilities, unless no liquid intra-day markets exist; and

–

measures are put in place to ensure that generators have no incentive to generate electricity under negative prices.

The new rules reflect the goal that RES producers should be exposed to market signals and be incentivised to become normal market players. They have to find a buyer for their electricity and become responsible for dealing with short-term deviations from their scheduled generation plan (which they can outsource however). As a negative electricity price signals an oversupply of electricity, subsidies should not incentivise even further production in these moments.

3.394

Member States are free to exempt from the cumulative conditions above small RES installations with an installed electricity capacity of less than 500 kW or

3.395

1720 Beneficiaries can outsource balancing responsibilities to other companies on their behalf, such as aggregators.

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demonstration projects. However, for wind energy, installations with an installed electricity capacity of 3 MW or 3 generation units can be exempted.

3.396

With respect to the mechanism to allocate the aid, the EEAG promote the gradual introduction of competitive bidding processes, while offering Member States flexibility to take account of national circumstances. The aim is to limit subsidies to the minimum necessary and increase the price discovery away from administratively set tariffs. Administrative set prices can only have a certain degree of differentiation and necessarily need to make assumption based on more aggregated data. Using a competitive bidding process as an allocation process can better take into account the different characteristics of projects and beneficiaries. For instance, the climate conditions are different on different locations which affect the economics of the project such as the electricity output. Also different beneficiaries may have different levels of required return and some beneficiaries may also be ready to invest some private funds (e.g. because of a company´s sustainability policy). In a competitive bidding process the beneficiary will take these project specific elements into account and bid for the aid amount it would require instead.

3.397

In a first phase, in 2015 and 2016, Member States have to introduce at a minimum a pilot scheme granting aid on the basis of a competitive bidding process (5 per cent of the planned annual RES capacity). This will allow them to test competitive bidding procedures in a small share of their new electricity capacity in case they have little or no experience with such procedure.

3.398

As of 2017, aid must be granted as a matter of principle on the basis of a competitive bidding process open to all RES. Exceptions are possible both from the need to use a competitive bidding process and from the need to open a bidding process to all forms of RES. Member States may exempt from a bidding process where they can demonstrate that: –

only one or a very limited number of projects/sites could be eligible;

–

a competitive bidding process would lead to higher support levels (for example, to avoid strategic bidding);

–

a competitive bidding process would result in low project realization rates (avoid underbidding).

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A Member State has in any event the option to grant aid without a competitive bidding process to installations with an installed electricity capacity of less than 1 MW, or demonstration projects, except for electricity from wind energy, for installations with an installed electricity capacity of up to 6 MW or 6 generation units (paragraph 127 EEAG).

3.399

Member States may also invoke exemptions from the requirement to include all types of RES in the competitive bidding processes if this led to a suboptimal result which cannot be addressed in the process design in view of, in particular:

3.400

–

The longer-term potential of a new and innovative technology;

–

The need to achieve diversification;

–

Network constraints and grid stability;

–

System (integration) costs; or

–

The need to avoid distortions in the raw materials market from biomass support.

In the absence of a bidding process, the rules applicable to heat from RES apply also to electricity. These rules are essentially from the same as in the 2008 EAG with the additional requirement to update the production costs regularly and at least once a year.

3.401

The scope of GBER was amended and extended the possibilities for aiding RES. For the first time the possibility to grant operating aid to RES was included in GBER. The rules essentially follow the rules of EEAG. The maximum rate of return used in the levelled cost calculation has however been fixed in the absence of a competitive bidding process. The rate of return shall not exceed the relevant swap rate plus a premium of 100 basis points (Articles 42 and 43 GBER).1721

3.402

3.4 Aid for biofuels and biomass The interplay between environmental policy and the revision of the Guidelines is well illustrated by the conditions applicable to aid for biofuels. The rules in both EEAG and GBER do not allow support to new plants producing food-

3.403

1721 The relevant swap rate shall be the swap rate of the currency in which the aid is granted for a maturity that reflects the depreciation period of the installations supported.

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based biofuels, consistently with the Commission’s general policy line.1722 The term food-based biofuels is defined in Article 2(113) GBER as a biofuel produced from cereal and other starch rich crops, sugars and oil crops as defined in the Commission’s Proposal for an amendment of the Fuel Quality Directive.1723 Existing plants producing food-based biofuels can still receive aid until 2020.

3.404

EEAG also clarify the incentive effect with respect to biofuels: State aid cannot be granted to biofuels that already come on the market as a result of a blending or supply obligation as the aid would not increase the level of environmental protection (paragraph 114 EEAG). Such considerations were already expressed in Commission Decision N580/2005.1724 This does not imply an outright prohibition of State aid to biofuels if a supply or blending obligation is in place. However, such aid should be targeted towards more expensive biofuels that would not come on the market with a supply obligation only.

3.405

With respect to biomass, EEAG have maintained the possibility to aid biomass plants after plant depreciation if the operating costs for the biomass plants are higher than their market revenues. The provisions have however been clarified and now include two possibilities. The first possibility, reflected in paragraph 133 EEAG, allows aid if the operating costs are still higher than the market price (excluding depreciation costs). The second possibility, reflected in paragraph 134 EEAG, allows aid to incentivise a fuel switch from fossil fuels to biomass. In both cases a monitoring mechanism has to be put in place.

3.5 Aid for CHP 3.406

EEAG have also maintained the approach that operating aid for highly efficient CHP needs to fulfil the same conditions as operating aid to electricity from RES (paragraph 151 EEAG), and only – –

to undertakings generating electric power and heat to the public where the costs of producing such electric power or heat exceed its market price; for the industrial use of the combined production of electric power and heat where it can be shown that the production cost of one unit of energy using that technique exceeds the market price of one unit of conventional energy.

1722 COM(2014) 15 final, 22.1.2014 and COM(2012)595 final. 1723 Directive of the European Parliament and of the Council amending Directive 98/70/EC relating to the quality of petrol and diesel fuels and amending Directive 2009/28/EC on the promotion of the use of energy from renewable sources. 1724 C(2007)855.

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4.

Aid for ‘traditional’ environmental measures

While the greatest changes in the revision of the Guidelines and GBER occurred in the assessment of energy related measures, it is worth pointing out a number of important modifications with respect to ‘traditional’ environmental measures. The present section focuses on environmental measures relating to energy efficiency, district heating and waste management.

3.407

4.1 Energy efficiency measures in buildings The revised GBER (Article 38) introduced a new aid category on energy efficiency measures in buildings in addition to the category on general energy efficiency measures. This additional category has to be seen in the context of the Energy Efficiency Directive (‘EED’) that requires Member States to set an indicative national energy efficiency target, based on either primary or final energy consumption, primary or final energy savings, or energy intensity. For building efficiency, it requires Member States to establish a long-term strategy for mobilising investment in the renovation of the national stock of residential and commercial buildings, both public and private. Considering this objective and recent case practice whereby environmental measures are channelled through financial intermediaries to leverage limited public resources1725, a new provision was necessary to cover some of these new financing models.

3.408

At first sight, Article 38 may seem complex and burdensome to apply. The conditions laid down in this Article build on the experience gained by dealing with financial intermediaries in the context of urban development measures and under the Jessica Structural Funds mechanism.1726 In this particular situation, the Commission considered that such detailed conditions are necessary in order to ensure that, both at the level of the financial intermediary and at the level of the final beneficiary, State aid remains compatible with the internal market.

3.409

A support measure covered by Article 38 GBER would typically be provided by a financial intermediary or energy efficiency fund in the form of a loan (or a guarantee) having two components: one part from the financial intermedi-

3.410

1725 State aid: Commission approves UK Green Deal for energy-efficiency measures, IP/13/89 of 05/02/2013. 1726 A financial engineering instrument that concerns contributions from the European Regional Development Fund (ERDF) allocated to Urban Development Funds (UDFs) which invest them in public-private partnerships or other projects included in an integrated plan for sustainable urban development. These investments can take the form of equity, loans and/or guarantees. The legislative framework governing the deployment of these financial instruments is available at http://ec.europa.eu/regional_policy/archive/funds/2007/jjj/ doc/pdf/jessica_leg_provisions.pdf.

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ary’s own resources and granted on market terms, and one part from the public funds on more advantageous terms that would constitute the aided part. While in principle the aid may be fully passed on from the intermediary to the project promoter, in reality there is always a risk that some parts of the aid remain with the intermediary. For example, the intermediary may get additional revenues from selling ancillary products (insurance) to customers attracted via the energy efficiency financial instruments. In such a scenario, there would be an advantage at the level of both the building owner and the intermediary. The conditions regarding the management and selection of such financial intermediaries are meant to ensure that any aid present at this level remains compatible with the internal market.

4.2 Aid for energy efficient district heating and district cooling 3.411

Aid for the cogeneration of district heating and cooling remains part of a separate aid category (energy efficiency) under EEAG (paras 138 – 151), reflecting the taxonomy introduced in the 2008 EAG.1727 Based on case experience1728, the Commission also decided to include the investment aid part in GBER (Article 46).

3.412

The principle of calculating eligible cost for such investments remains the extra cost approach for the generation part. In other words, where the cost of investing in environmental protection cannot be easily identified in the total investment cost, the eligible costs are usually calculated by reference to an investment with the same production capacity and other similar technical characteristics. Reference may be made to the cost of a technically comparable investment that would credibly be realised without aid and which does not achieve the common interest objective or that only attains that objective to a lesser degree.1729 However, in situations where this comparison is not possible (for example, integrated projects) the Commission may accept the total cost of the investment as the eligible costs.1730

1727 Community guidelines on State aid for environmental protection, OJ C 82, 01.04.2008, p. 1-33. 1728 See cases regarding the district heating: Commission Decision on 23.01.2012 on Aid for modernizing the heat network in Dębica (Case N 32832 12), summary notice in OJ C 260, 29.08.2012, p. 1 and Commission Decision on 18.06.2013 on Individual aid for the modernisation of the district heating network in Warsaw (Case N 35674 12), summary notice in OJ C 200, 12.07.2013, p. 1. 1729 Para 73(b) EEAG. 1730 Para 75 EEAG.

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Questions were raised during the public consultation1731 whether aid would also cover investments for reaching an energy efficient district heating or cooling network, not only for generation that is already energy efficient in line with the definition in Article 2(124). The GBER text indeed seems to allow also this type of investment, considering that the EED does not set mandatory standards as regards energy efficiency in district heating and cooling but only objectives.

3.413

The GBER article dealing with investment aid for energy efficient district heating and cooling introduces a distinction between the aid granted to the production plant (generation part) and the distribution network (the infrastructure part). As regards the generation, the costs are calculated following the extra cost approach described above.1732 However, there is no possibility for the Member States to use the total cost under GBER as there is no means by which the Commission may verify, ex-ante, that there is no reasonable ‘less-efficient’ investment that may be used as proxy.

3.414

The infrastructure part of the investment in the district heating and cooling follows the cost approach developed for the energy infrastructure in the GBER (Article 48), namely total investment cost minus operating profits for the lifetime of the infrastructure. It is noteworthy that if the infrastructure generates losses it may not be covered by the GBER as this would in practice mean operating aid. Therefore, if the operating costs are equal or larger than the operating profits, the eligible cost shall be maximum the total investment cost in the infrastructure.

3.415

4.3 Aid for waste management Like in the 2008 EAG, support to waste management is a separate category of aid under EEAG. The same category is, at least partially, also included in GBER (Article 47) to simplify its treatment as these cases have been largely unproblematic in the past.1733 This split of activities (waste re-cycling and re-utilisation) from the wider waste management category was introduced in GBER to accommodate concerns that, even in the absence of an ex-ante Commission scrutiny, aid would comply with the waste hierarchy as set out in Directive 2008/98/EC on waste.1734

3.416

1731 The replies to the public consultation are available on http://ec.europa.eu/competition/consultations/2013 _consolidated_gber/index_en.html. 1732 Article 46(2) GBER. 1733 See replies to the public consultation available on http://ec.europa.eu/competition/consultations/2013_ consolidated_gber/index_en.html. 1734 Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on waste and

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3.417

The GBER conditions regarding waste recycling and re-utilisation follow previous1735 case practice and the applicable compatibility conditions of section 3.1.9 of the 2008 EAG. The treatment of the beneficiary’s own waste remains excluded from support as the burden of this action should normally be borne by the polluter itself, in line with the ‘polluter pays principle’.1736 Investments in projects that concern the treatment of own waste remain however subject to support under Article 36 GBER (dealing with aid for undertakings which go beyond EU standards or which increase the level of environmental protection in their absence).1737 In practice, this means that when aid is granted to beneficiaries treating also their own waste, the aid has to be calculated on the basis of two sets of rules applied each to the proportion of the waste treatment investment corresponding to the volume of own waste and the volume of waste originating from third parties.

3.418

In its first decision on WRAP1738, the Commission defined ‘state of the art’ as a process in which a waste product is used to manufacture a new product; a process that is profitable and therefore normal practice. Later, in the prolongation of the same scheme1739, the Commission also clarified that the criterion has a technological and common market component and the interpretation depends on the treatability of the materials concerned: the requirements for investments concerning waste streams for which international trade is common, such as waste glass, waste PVC and waste paper are stricter compared to treatment of wastes like organic compost. In the Dutch Green Funds case, the Commission also authorised aid upon the authorities’ commitment that the beneficiaries would be limited to SMEs if the projects exceeded the state of the art only from a national perspective.1740 The new definition of the ‘state of the art’1741 under GBER now refers to a ‘Union technological and internal market perspective’, thus excluding the possibility to rely on a ‘national’ benchmark.

repealing certain Directives, OJ L 312, 22.11.2008, p. 3. 1735 See, for example Commission Decision on 5.01.2011 on WRAP - Capital Grants and Lease Guarantee Fund Scheme (prolongation and modification), Case N 517 10, summary notice in OJ C 40, 09.02.2011, p. 9. 1736 Para. 157 EEAG. 1737 Para. 159 EEAG. 1738 Commission Decision on 11.11.2003 on Waste Resources Action Programme (WRAP), Case C21 2003, OJ L 102, 07.04.2004, p. 59. 1739 Commission Decision on 22.02.2006 on Broadening and prolongation of the WRAP, Case N 412 05, summary notice in OJ C 207, 30.08.2006, p. 2. 1740 Commission Decision on 25.08.2006 on Green funds, Case NN 41 05, summary notice in OJ C 14, 20.01.2007, p. 1. 1741 Article 2(129) GBER.

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In line with the requirement of point 158 e) EEAG and Article 47(5) GBER, authorities must ensure that the investments will not merely increase demand for the materials to be recycled without increasing collection of those materials. It is therefore important to assess the impact of a measure on the supply chain.

3.419

The WRAP Printing and Writing paper case1742 also demonstrates that the calculation of eligible costs can vary depending on the different situations that could arise. To take these differences into account, the Commission authorised the aid on the condition that the UK informs the Commission of the reference investments for all cases to be supported under the scheme. Such a complex scenario would typically not be covered by the straight forward requirements under the new GBER.

3.420

With a view to simplifying the calculation the eligible cost, the new GBER does not require any longer that the operating benefits arising during the first five years of the life of the investment are deducted from the eligible costs (point 131 of the 2008 EAG).

3.421

5.

Aid to energy infrastructure

As a major novelty, the new EEAG have for the first time defined compatibility conditions for State aid to energy infrastructure. Until then, the assessment of aid to energy infrastructure projects was subject to a case-by-case assessment directly under the Treaty. Case practice and the increasingly sophisticated regulatory framework for infrastructure have however made it possible to develop general compatibility criteria under the Guidelines and even block-exempt some infrastructure types under GBER.1743 The inclusion of energy infrastructure in EEAG and GBER was also motivated by the Court of Justice judgement in the Leipzig-Halle airport case1744 where it clarified that public financing of an infrastructure for its economic exploitation would normally constitute State aid.

3.422

EEAG and GBER take a generally favourable approach towards aid to energy infrastructure. The rationale is that energy infrastructure contributes to the achievement of a number of policy objectives. As stipulated in paragraph 201 EEAG, additional infrastructure helps to complete the internal energy market thus strengthening competition in upstream and downstream markets, ensures

3.423

1742 Commission Decision of 28.11.2007 on Waste and Resources Action Programme (WRAP) recycled fibre printings and writings grade mill capacity scheme, Case C 45/2005, OJ C 9, 14.01.2006, p. 6. 1743 Article 48 GBER. 1744 Judgement of the Court of Justice in case C288/11 P Mitteldeutsche Flughafen AG, Flughafen LeipzigHalle GmbH, ECLI:EU:C:2012:821.

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better security of supply and enables the integration of renewable energy. From a European perspective, energy infrastructure is particularly necessary and beneficial to promote cross-border flows and to contribute to regional cohesion.1745

3.424

Since the term ‘energy infrastructure’ may refer to a broad range of diverse energy projects, paragraph 32 EEAG includes a detailed definition. It distinguishes between infrastructure concerning electricity, gas, oil and CO2. This definition is largely based on the infrastructure definition in the Energy Infrastructure Regulation that for example defines ‘Projects of Common Interest’ (‘PCIs’).1746 It should however be noted that the Regulation has a stronger focus on the cross-border nature and impact of the infrastructure while EEAG is in principle equally applicable to infrastructure of national or local nature and impact.

3.425

EEAG’s favourable approach towards infrastructure aid is reflected in EEAG’s presumption that ‘aid to energy infrastructure is beneficial to the internal market and thus contributes to an objective of common interest’ (paragraph 202). There is therefore no further need for national authorities to demonstrate how their particular infrastructure project contributes to the achievement of a common objective.

3.426

As regards the ‘need for State intervention’, EEAG (paragraph 203) recognise in particular two possible types of market failures, problems of coordination caused by diverging interests of investors and positive externalities where costs and benefits of the infrastructure are unevenly distributed among market players or Member States. While tariff and access regulation and unbundling requirements are in principle meant to correct such market failures, EEAG recognise that State aid may also constitute a means to overcome these market failures. In this respect, EEAG distinguish three situations with varying degrees of the need for aid. –

First, paragraph 206 describes a situation with a positive presumption of the need for State aid, namely in the case of PCIs, Smart Grids and infrastructure in assisted areas. In these circumstances, market failures in terms of positive externalities and coordination problems are almost certain to exist.

–

Secondly, paragraph 207 stipulates a case-by-case assessment for all other types of infrastructure, in particular those partially or wholly exempted

1745 Recital 67 GBER. 1746 Regulation EU No 347/2013 on Guidelines for trans-European energy infrastructure.

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from the key provisions of the internal energy market legislation relating to tariffs, access and unbundling. In order to assess the individual cases, the Commission will take into account the possible market failures in the specific case at hand, the degree of regulatory oversight of the project and the strategic value of the project to improve security of supply. As regards the latter criterion, the energy security is measured notably at Union level rather than at national level. –

The third situation concerns oil infrastructure projects where EEAG define a negative presumption of the need for State aid (paragraph 208). This negative presumption may be explained by the EU-wide absence of tariff and access regulation for oil pipelines and other oil infrastructure. The selective granting of aid may therefore risk distorting competition in the provision and use of such infrastructure. Moreover, aid to oil would be difficult to reconcile with the EU’s objective of phasing out environmentally harmful subsidies.

Under GBER, the assessment of the need for aid is simplified. As stipulated by Article 48(2), only energy infrastructure in assisted areas may be exempted from the notification requirement. In addition, according to Article 48(6), aid for investment in electricity and gas storage projects and oil infrastructure are per se excluded from the scope of GBER. Due to the less stringent regulatory treatment of such infrastructure types, the Commission considered it necessary to assess the respective projects on a case-by-case basis under EEAG.

3.427

As regards the ‘appropriateness’ of granting aid to energy infrastructure, EEAG recall the general principle of tariff financing based on the ‘user pays’ principle. However, paragraph 209 clarifies that the granting of State aid may likewise be considered appropriate where the regulatory approach does not seem sufficient to deliver the socially optimal level of investment. Paragraph 209 refers only to the types of infrastructure for which there is a positive presumption of the need for aid. However, it must be assumed that the same logic and the same assessment criteria apply to infrastructure types which need to be assessed on a case-by-case basis.

3.428

With respect to the ‘proportionality’ assessment, EEAG propose a straightforward approach. In a nutshell, each infrastructure project is considered unique and does not need to be compared to a similar investment project (‘counterfactual scenario’) to identify the extra costs of an allegedly ‘greener’ project relative to a ‘standard’ project. Public authorities may therefore finance an infrastructure

3.429

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project entirely through State aid up 100 per cent of the eligible costs, i.e. the funding gap (paragraphs 211-212). GBER specifies the approach to proportionality in more detail as compared to EEAG and is somewhat stricter than under EEAG. Under GBER the eligible costs are limited to the investment costs and furthermore operating profits need to be deducted from these eligible costs.

3.430

3.431

Finally, to assess the effects of infrastructure aid ‘on competition and trade’, the key question is to determine to what extent the aided project is subject to the internal energy market legislation (paragraph 214). To the extent the full access and tariff requirements apply, it is presumed that there are no undue distortive effects of the aid. It is also only in this situation that public authorities may exempt from the notification requirement according to Article 48(3) GBER. The competitive effect of aid on infrastructure partially and wholly exempted or falling outside the internal energy market legislation however needs to be assessed on a case-by-case basis according to paragraph 215 EEAG. The relevant assessment criteria to make this assessment are the degree of third party access, the access to alternative infrastructure and the beneficiary’s market power. Compared to the previous case-by-case approach, the new rules considerably facilitate the assessment of aid for energy infrastructures. Infrastructure projects in so-called ‘assisted regions’1747 and subject to the normal internal energy market legislation can be implemented without need for prior notification as long as the proportionality requirements are fulfilled. Since new investments are likely to take place in particular in such assisted regions where the energy infrastructure still tends to be under-developed, a large share of infrastructure aid should pass under GBER. In all other cases, the assessment follows a few simple rules that should make it easy to identify whether aid to an individual project or an aid scheme may be compatible with EU State aid rules.

6.

Aid for generation adequacy

6.1 Policy context 3.432

Many Member States perceive the risk of insufficient investment in electricity generation capacity. Depending on the particular Member State or region, there are different reasons why electricity markets seem to provide insufficient incentives to invest in generation. Arguably, electricity markets are generally at high 1747 Under the 2014-2020 Regional Aid Guidelines, approximately 47.7 per cent of the EU-28 population lives in “assisted” regions, Competition Policy Brief, Issue 14, Guidelines on Regional State aid for 2014-2020 September 2014.

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risk of providing incorrect investment signals. The reason being that on the one hand, price formation is relatively short term and volatile while on the other hand, the necessary investments require typically high capital expenditure and a long-term planning horizon. In recent years, the conditions to invest in long-term generation assets seem to have deteriorated. The increased supply of intermittent renewable energy sources (‘RES’) at low marginal costs has weakened the economic case for conventional generation, driving some of the power stations out of the market. At the same time, conventional generation continues to play an important role to serve as back-up for periods of insufficient RES generation. Volatile prices of ETS certificates, strong seasonal variations of electricity demand, changing policies on nuclear power and caps on wholesale prices are some other reasons why Member States have introduced or are planning to introduce measures to ensure generation adequacy, often referred to as ‘capacity mechanisms’.1748

3.433

6.2 EEAG provisions The new EEAG have taken up these latest policy developments and include, for the first time, rules on how to assess generation adequacy measures from a State aid point of view.1749 As there is little case experience with such measures yet and as many Member States are still in a phase of designing the best possible mechanisms, the EEAG rules define essentially a number of general principles rather than prescribing a certain model of how to design and assess any such measure. Under ‘objective of common interest’, the Commission recognises that generation adequacy measures may be designed in a variety of ways, both with respect to the form of aid (operating or investment aid) and the objective pursued (short-term or long-term generation adequacy). Rather than proposing a list of pre-defined common objectives, the Commission charges national authorities with the task of clearly identifying and quantifying the perceived problem. An objective source such as the regular analysis by the European Network of Transmission System Operators for electricity (‘ENTSO-E’) should underpin Member States’ claims. Although it is not explicitly mentioned, the Commission seems to place generation adequacy measures under the umbrella of the security of energy supply. Where a Member State can prove convincingly that its security of energy supply is at risk, it would be difficult to dismiss the argument that a Member State pursues a ‘common objective’ when taking action to secure generation adequacy.

3.434

1748 For the purpose of this article, ‘generation adequacy measures’ and ‘capacity mechanisms’ are considered synonyms. 1749 Section 3.9 Aid for generation adequacy.

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3.435

Under ‘need for State intervention’, the Commission provides for more detailed elements how the nature and cause of the generation adequacy problem should be analysed. National authorities should demonstrate why their electricity market does not provide for the necessary price signals and other conditions to drive the necessary investments (paragraph 223). In particular, the Commission requests the national authorities to take into account the impact of variable generation, demand-side participation, the possible contribution of existing or planned interconnectors and the role of regulatory and market failures preventing investment.

3.436

The ‘appropriateness’ criterion must be considered a key condition in the assessment of generation adequacy measures. It specifies a number of key principles that such measures must comply with: –

first, only availability but not actual production may be rewarded;

–

secondly, the measure should be open and provide adequate incentives to both existing and future generators;

–

thirdly, the measure should be ‘technology neutral’, considering in particular demand response and storage; and

–

finally, the possible contribution of interconnection to remedy the problem should be analysed.

3.437

Obviously application of principles two and three require some analysis and consideration of alternative options, since they imply comparing and evaluating potentially very different solutions. While EEAG further elaborate on the competitive effects of the measures, paragraph 226 already provides that ‘potentially different lead times’ may be required to give an opportunity to ‘new investments by new generators using different technologies’.

3.438

As regards ‘proportionality’, the Guidelines advocate a competitive bidding process as the preferred allocation mechanism without however imposing this solution as the only acceptable solution. Where the aid is granted in a competitive bidding process it is in any event presumed to be proportionate as aid is expected to be limited to what necessary to guarantee a reasonable rate of return for the investors.

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Paragraph 230 requires Member States to have built-in mechanisms to prevent windfall profits. It would seem that this condition is of relevance in particular in the absence of a competitive bidding process which should normally be sufficient to prevent such excessive rents. The term ‘windfall profits’ also seems to establish a link between the revenues from the ‘energy-only’ market and from a capacity mechanism. The idea seems to be that where ‘energy-only’ revenues are sufficient to make electricity generation profitable, revenue from a capacity mechanism may be considered excessive. These considerations would however ignore the self-standing nature of capacity mechanisms where availability services are probably best understood to constitute a separate market which may well be rewarded independent of the generation output sold in the ‘energy-only’ market.

3.439

Paragraph 231 requires the price of capacity to fall to zero where there is no more capacity shortage. This means that the clearing price in a capacity auction or the certificate price in an obligation scheme would equal zero in the case of over-supply of capacity. Vice versa, this provision seems to allow for the temporary existence of a capacity mechanism even when there is no immediate need for additional capacity. If however this situation persists the very existence of the capacity mechanism is questionable but at least in a transitional or temporary phase the framework for a capacity mechanism may continue to exist without payments being made.

3.440

Finally, the Guidelines discuss the criteria to prevent distortions of competition and trade. Paragraph 232 includes as key assessment criteria (a) ‘technology neutrality’ and (b) ‘cross-border dimension’. Both criteria were already referred to in paragraph 226 under the appropriateness test. With respect to technology neutrality, paragraph 232 specifies in addition to paragraph 226 that ‘insufficient technical performance’ is the only justification for excluding certain technologies or operators. Moreover, it specifies that the aggregation of demand or supply is a valid option to ensure generation adequacy. This may be particularly important for the demand side since the respective capacity providers tend to be scattered and to offer smaller quantities.

3.441

As regards the cross-border dimension, paragraph 232(b) stipulates that participation may be limited to offers ‘where the capacity can be physically provided to the Member State implementing the measure’ and where the obligations can be effectively enforced. While it is conceivable that the responsibility of actually providing the capacity in case of need is left to market players and enforced through a general penalty regime, the Guidelines concede to Member States the

3.442

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right to limit capacity offers from the start to those where cross-border delivery is realistic.

3.443

Paragraph 232(d) lists restrictive regulatory measures such as export restrictions and wholesale price caps whose impacts on the internal market should be assessed in conjunction with a planned capacity mechanism. To some extent, this assessment is a repetition of the assessment of the regulatory context under the ‘need for intervention’ (market or regulatory failures) and the ‘appropriateness’ of the capacity mechanism. Finally, paragraph 233 specifies certain assessment criteria that are generic to the competition test. This concerns in particular the obligation to prevent the strengthening of market dominance and to maintain incentives to invest in interconnection capacity. In contrast, the obligation not to undermine previous investment decisions on generation or balancing services would seem to mirror the obligation to include existing capacity providers in the mechanism as specified in paragraph 226.

6.3 Commission Decision on UK capacity market 3.444

In July 2014, the Commission decided, for the first time under the new EEAG provisions, on a capacity market.1750 The capacity market, applicable in Great Britain (excluding Northern Ireland), aims to ensure security of electricity supplies in view of the projected increases in electricity demand and the upcoming closure of a significant share of the current UK generation capacity. The UK estimated that the Great Britain electricity market would reach critical levels of generation adequacy around 2017/2018.

3.445

Under the capacity market, the Great Britain system operator organises annual, centrally managed auctions to procure the level of capacity required to ensure generation adequacy. Auctions are open to existing and new generators, demand side response operators and storage operators. The UK also committed to opening the participation to new interconnectors as of 2015.

3.446

In return for a steady payment for the duration of the capacity agreement, successful bidders in the auctions are required to provide capacity at times of stress on the electricity system or face financial penalties. New generators are eligible for a 15-year capacity agreement. Other capacity providers are eligible for 1-year capacity agreements (except in the case of existing generators requiring significant refurbishment which are eligible for 3-year capacity agreements). 1750 Commission Decision on 23.07.2014 on UK capacity mechanism, Case N 35980 14, summary notice in OJ C 348, 03.10.2014, p. 5.

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Aid granted will be paid out as a function of the amount of capacity set out in each provider’s capacity agreement. The measure is financed through a levy on electricity suppliers.

7.

3.447

Aid for energy intensive users

EEAG include two broad categories of aid measures to provide operating aid to energy intensive users. The first group of measures concerns reductions or exemptions from environmental taxes and in particular from the energy tax (section 3.7.1 EEAG). The second group of aid measures consists of reductions from the funding of support for RES (section 3.7.2 and 3.7.3 EEAG).

3.448

7.1 Reductions in environmental taxes Environmental taxes focus on negative externalities and are imposed to increase the costs of environmentally harmful conduct, thereby encouraging a more environmental friendly behaviour. While any reduction of such environmental tax in principle has a negative environmental effect, (partial) exemptions from such tax may make it feasible to adopt higher taxes for other undertakings, resulting in an overall improvement of the level of environmental protection. Therefore, EEAG allow for (partial) exemptions from environmental taxes (like the 2008 EAG). Such aid cannot be approved for more than 10 years, but a Member State can notify the prolongation of the aid measure after the 10-year period.

3.449

A specific type of environmental tax concerns the energy tax falling within the scope of the Energy Tax Directive (‘ETD’).1751 For reductions in the energy tax a simplified assessment takes place as long as the beneficiaries pay less than the Union minimum tax level set by ETD and the aid is granted in an objective, transparent and non-discriminatory manner. This simplified assessment is also included in GBER. If the Union minimum tax level is not respected and for all non-harmonised environmental taxes, the aid can only be granted if in particular the necessity and proportionality of the aid is demonstrated (paragraphs 176 to 178 EEAG). For aid to be necessary it is specifically required that the environmental tax without the reduction leads to a substantial increase in production costs calculated as a proportion of the gross value added for each sector or category of individual beneficiaries and the substantial increase in production costs could not be passed on to customers without leading to significant sales reductions.

3.450

1751 Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity, OJ L 283, 31.10.2003, p. 51.

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3.451

In the 2008 EAG the first part of the necessity test – i.e. the substantial cost increase – was presumed for energy intensive users as defined in the ETD (footnote 55). This presumption has not been maintained in the EEAG to avoid confusion with the second part of the necessity test that assessed whether the cost increase could be passed on. A small cost increase that was presumed to meet the first part of the test could still fail the second part of the test as it was in practice too small to be deemed impossible to be passed on (without important sales reductions). The change is therefore not expected to impact significantly on the outcome of the necessity test of the Guidelines.

3.452

For aid to be proportional two of the three options of the 2008 EAG are maintained in the EEAG. Proportionality can be demonstrated by either aid beneficiaries paying at least 20 per cent of the national environmental tax or by making the tax reduction conditional on the conclusion of binding environmental agreements between the Member State and the (associations of ) beneficiaries.

3.453

Under the ETD, Member States can also impose an environmental tax on the use of fossil fuels for the generation of electricity (e.g. a carbon tax) in order to address negative externalities. If such tax is directly linked to and designed in such a way that it supports the EU ETS allowance price, the indirect effect may be similar to the effect of the ETS allowance costs being passed on and included in the electricity price. In this light, EEAG explicitly lay down that energy intensive users can be aided in a similar way as under the ETS State aid Guidelines (see paragraph 179 and 180 EEAG). The same approach was followed in the assessment of an aid measure put in place by the United Kingdom.1752

7.2 Reductions from the funding of RES support 3.454

Unlike environmental taxes, the funding of RES support through charges does not as such target a negative externality and accordingly has no direct environmental effect. However, the charges levied for the funding of RES support make up an increasing proportion of the energy costs for the energy intensive industry and may constitute a very high burden for some energy intensive companies, in particular those exposed to strong international competition. The increase in electricity costs may be explicit through a specific charge which is levied from electricity consumers on top of the electricity price or indirectly through additional costs faced by electricity suppliers due to obligations to buy renewable energy which are subsequently passed on to their customers, the electricity consumers. 1752 Commission Decision on 21.05.2014 on Aid for indirect carbon price floor costs (UK), Case N 35449 14, summary notice in OJ C 348, 03.10.2014, p. 3.

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In principle and to the extent that the costs of financing RES support are recovered from energy consumers, they should be recovered in a way that does not discriminate between consumers. However, some targeted reductions in these costs may be needed to secure a sufficient financing base for RES support and hence help reaching the RES targets set at EU level. Without such compensation the financing of RES support may be unsustainable and public acceptance of taking ambitious RES support measures may be limited. However, if such compensation is awarded to too many electricity consumers or just too generous, the overall funding to RES support may be threatened, the public acceptance of RES support may be hampered, or significant distortions of competition and trade may be created.

3.455

Therefore, EEAG allow reducing the burden stemming from RES funding for a limited number of energy intensive users. The aid should be limited to sectors that are exposed to a risk to their competitive position due to the costs resulting from the funding of RES support as a function of their electro-intensity and their exposure to international trade. The EU has set decarbonisation objectives and in particular to raise the share of EU energy consumption produced from renewable resources to 20 per cent 2020. The targeted reductions in the costs of financing RES support to achieve these EU targets should not unduly distort the market. These reductions should therefore be targeted towards sectors that are exposed to international trade at EU level to avoid subsidy races between Member States to attract a national financing base for funding RES support.

3.456

The costs of financing RES support differ largely from Member State to Member State. This can be a reflection of different levels of ambition, of different possibilities to develop certain RES technologies of other factors (e.g. spatial planning). There is therefore not one EU wide funding cost level like for instance the EU ETS allowance price. As a proxy for the exposure to the cost burden the electro-intensity of the sector has been used. In principle the more electrointensive the industry the more sensitive it is to changes in electricity prices (due to RES funding costs). This targets the support towards energy intensive users.

3.457

On this basis the EEAG have identified at EU level the mining and manufacturing sectors in which undertakings can be aided as presented in Annex 3 EEAG. The determination of the eligible sectors has taken into account that there is a risk that sectors that face a particular high cost burden can already deteriorate the financing base even when the exposure to international trade is less. In addition, to account for the fact that certain sectors might be heterogeneous in terms of electro-intensity, a Member State can aid an energy intensive user if the

3.458

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undertaking has an electro-intensity of at least 20 per cent and belongs to a sector with a trade intensity of at least 4 per cent at EU level.

3.459

The compensation can only be partial and cannot compensate all costs resulting from the funding of RES support. The partial reduction ensures that the energy intensive users still contribute to secure a sufficient financing base for RES support and hence help reaching the RES targets. The aid is proportionate if the beneficiaries pay at least 15 per cent of the additional costs without reduction.

3.460

However, in view of the sometimes significant increases in charges to finance RES support, several safeguards can be put in place to avoid that undertakings face an unbearable burden. First, Member States may limit the costs of RES funding to 4 per cent of the gross value added (‘GVA’) of the undertaking concerned. For undertakings having an electro-intensity of at least 20 per cent, Member States can limit the overall amount to the RES financing to 0.5 per cent of the GVA of the undertaking concerned. However, when Member States decide to adopt the limitations of respectively 4 per cent and 0.5 per cent of GVA, these limitations must apply to all eligible undertakings.

3.461

Finally, to prevent a too abrupt impact on the industry, the rules set out above only need to be applied as of 1 January 2019. Existing aid schemes need to be progressively adapted to these new EEAG rules by 1 January 2019 on the basis of an adjustment plan. If aid has already been granted to undertakings that are not eligible according to EEAG, the aid could still be declared compatible if there is an adjustment plan and if the undertakings pay a minimum contribution of 20 per cent of the total costs. Such adjustment plan needs to be notified to the Commission by 1 July 2016.

3.462

The conditions set out in EEAG concerning aid in the form of reductions in RES funding also apply to unlawful aid. With respect to new aid measures, the adjustment plan should include a progressive application of the criteria set out in EEAG. Before 1 January 2011, aid granted in the form of reductions in RES funding support can be declared compatible with the internal market by the Commission.

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The Commission has applied these rules for instance in two decisions1753 concerning Germany (SA.33995 EEG 2012 and SA.38632 EEG 2014). In the first decision, which was closing the formal investigation procedure, the Commis1753 These decisions also approve aid for RES producers and reductions in the EEG-surcharge for auto generation, but that is not part of the general description in this paragraph.

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sion approved most of the reductions from the RES funding costs (“the EEG surcharge”) granted to energy intensive users in Germany covering the years 2013 and 2014. In this respect Germany submitted an adjustment plan to progressively bring the (non-notified) reductions in line with the provisions of the EEAG1754. In the second decision, the Commission approved the reductions from the RES funding costs (“the EEG surcharge”) granted to energy intensive users in Germany covering the period as of 2014. Germany has put in place a system that grants reductions from the EEG-charge to energy intensive industries active in sectors in Annex 3 of the EEAG, as long as undertakings meet a certain minimum electro-intensity. Also undertakings with an electro-intensity of 20 per cent are eligible as long as they belong to a sector on Annex 5 of the EEAG.

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Germany in principle requires a payment of 15 per cent of the EEG-surcharge, but applies a cap of 0,5 per cent GVA respectively 4 per cent GVA depending on the electro-intensity. In addition some specific conditions are included in the scheme (e.g. minimum threshold of 1 GW, minimum payment per kWh consumed). Germany put in place a progressive application of the rules for existing beneficiaries, depending on eligibility under the EEG. In addition, Germany put in place a transitional period (adjustment plan) for undertakings that were already benefitting from EEG-reductions in 2014, differentiated on the basis of eligibility on the new 2014 EEG regime.

3.465

8.

Coal Decision 2010 - Aid for the closure of uncompetitive coal mines

The coal extracting industry has gone through important changes over the recent times as EU-based hard coal fields are either becoming depleted or uncompetitive because of the increasingly cheap imports from third countries. As the sector is employing around 200 000 people in the EU, the social and economic consequences of decreasing competitiveness had to be addressed in a gradual manner by phasing out subsidies. This is the general aim which was encapsulated in the Council Decision 2010/787/EU on State aid to facilitate the closure of uncompetitive coal mines (“the Council Decision”).

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1754 The reductions that were granted exceeding the levels set out in the adjustment plan had to be paid back.

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8.1 The Council Decision 3.467

The Council Decision provides a path for definitive and irrevocable closure of uncompetitive mines according to uniform requirements. Subject to the irrevocable closure of aided mines by 31 December 2018 the Commission may authorize operating aid to cover the current production losses of coal production (“closure aid” under Article 3) under the following main conditions: a.

The aid must not exceed the difference between the foreseeable production costs and the foreseeable revenue for a coal year.

b.

The overall amount of closure aid granted must follow a downward trend, taking 2011 as a benchmark: by the end of 2013 the reduction must not be less than 25 per cent, by the end of 2015 not less than 40 per cent, by the end of 2016 not less than 60 per cent and by the end of 2017 not less than 75 per cent of the aid granted in 2011.

c.

The aid must be accompanied by submission of a plan to take measures aimed at mitigating the environmental impact of production by the units which receive closure aid, for instance, energy efficiency, renewable energy or carbon capture and storage.

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Aid can also be granted to mining companies pursuant to Article 4 to cover the costs arising from the closure of coal production units (“exceptional costs”), that is mostly social costs such as the costs of social welfare benefits or early retirement, costs incurred in safety or site rehabilitation for the production units subject to closure, as well as “eternal liabilities” such as the pumping and cleaning of water from decommissioned mines, up to the total cost amount. Additionally, aid to undertakings intended to cover the current production losses of coal production units may be considered compatible only if the operation of the coal production units concerned is part of a closure plan with a deadline not exceeding 31 December 2018. In other words, the activities of such mines can only be subsidised until end-2018.

3.469

To date, the Commission has already adopted six positive decisions concerning Germany, Slovakia, Poland, Slovenia, Romania and Hungary. Poland, Slovakia and Slovenia granted aid only to cover exceptional costs to mining units which had already stopped their mining activities or were about to shut down. The other three decisions (Germany, Romania and Hungary) were taken under a monitoring commitment from the Member States. 636

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8.2 Monitoring of closure plans The Commission authorised the German closure plan on 7 December 2011.1755 In this case, safeguards were required that the privately owned mines would eventually close as planned. In addition, Germany had to list a number of measures for the mitigation of the environmental impact of closure. Romania’s closure plan was adopted by the Commission on 22 February 2012.1756 The National Hard Company had both viable units and units subject to closure under the Council Decision. The viable ones were planned to be sold later on. The Commission had to ensure in this case that no aid could be channelled towards the viable mines. Romania provided detailed figures on the exact amount of debts both per viable and non-viable mining units and confirmed that all aids received by the beneficiary must be shown in the profit-and-loss accounts as a separate item of revenue distinct from regular turnover. Irrevocable closure was further ensured since the beneficiary was a state owned company and the envisaged closure was enshrined in legislation.

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The Commission, on 23 January 2013, authorised the closure plan notified by Hungary1757 concerning one mining unit which is owned by the same company as the sole buyer of the coal coming from to mine to be closed. Pursuant to the decision, the mine was planned to close by the end of 2014.

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9.

Nuclear energy

9.1 Links with the Euratom Treaty The Euratom Treaty is the only remaining sector specific Treaty. This creates a special situation for the assessment of aid measures in favour of nuclear energy under State aid rules. The Euratom Treaty is a primary law instrument that also constitutes a lex specialis. Where its provisions are in conflict with those of the Treaty, the lex generalis, the former prevails over the latter. There are two opposite possible interpretations of the relationship between the Euratom Treaty and the Treaty as regards State aid.

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1755 Commission Decision on 7.12.2011 on Coal mine closure plan 2008-2018 in Germany, Case N 708 2007, summary notice in OJ C 284, 20.09.2012, p. 6. 1756 Commission Decision on 22.02.2012 on National Hard Coal Company Petroşani (Romania), Case N 33033 12, summary notice in OJ C 23, 25.01.2013, p. 3. 1757 Commission Decision on 23.01.2013 on Állami támogatás a versenyképtelen szénbányák bezárására Magyarországon - Vértesi Erőmű Zrt, Case N 33861 13, summary notice in OJ C 104, 10.04.2013, p. 2.

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The first interpretation consists in noticing that the Euratom Treaty does not include specific State aid rules which would directly enter in conflict with Article 107 to 109 of the Treaty. Hence, there would be no lex specialis as regards State aid, and the Treaty would apply fully to the nuclear sector.

3.474

The second interpretation consists in noticing that even though the Euratom Treaty does not include specific State aid rules, its objective clearly is to promote investment in nuclear energy. State aid would thus be inherent to this Treaty, as shown by several of its provisions, and notably those on investments. The application of State aid rules, which, as a matter of principle, prohibit State aid, would, under such an interpretation, be contrary to the Euratom Treaty’s objective. State aid rules would therefore not apply to the nuclear sector, because this was the implicit intention of the authors of the Euratom Treaty by choosing to omit such rules in the Treaty. The Court of Justice has never ruled on this question.

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For a long time, the Commission did not take a position on the interaction between the two Treaties. Commission Decisions (taken under the EC Treaty preceding the Treaty) all contained the caveat that the decision was without prejudice to the applicability of the Euratom Treaty. However, since its final decision on the restructuring of British Energy plc,1758 the Commission position has evolved into a more complex and comprehensive analysis of the relationship between the two Treaties.

3.476

The present Commission position is that the Euratom Treaty applies to State support to the nuclear sector. However, where the State support in question ‘is not necessary for or goes beyond the objectives of the Euratom Treaty or distorts or threatens to distort competition in the internal market’, the Treaty’s State aid rules apply. Furthermore, within the analysis of the compatibility of such State aid under the Treaty, the Commission takes account of whether the aid is necessary to allow a Member State to attain certain objectives of the Euratom Treaty.

1758 Commission Decision 2005/407/EC of 22.09.2004 on the State aid which the United Kingdom is planning to implement for British Energy plc, Case C 52/2003, OJ L 142, 06.06.2005, p. 26.

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9.2 Case practice The Commission has applied this position in particular in three major cases: the restructuring of British Energy plc, the transfer of British Nuclear Fuels Limited nuclear liabilities to the Nuclear Decommissioning Authorities,1759 and the support to the construction of the Hinkley Point C Nuclear Power Plant.1760

3.477

In all three cases, the complex position described above resulted in the Commission applying the Treaty rules nearly fully. Rather than weakening the Treaty analysis, the Euratom Treaty analysis, which came first, strengthened it, as it came as a further condition to be complied with by the aid receiving project (compliance with Euratom nuclear safety and security provisions).

3.478

In the British Energy plc restructuring case, the Commission fully applied the rules of the State aid Guidelines for Rescuing and Restructuring Firms in Difficulty to a nuclear undertaking. The aid was approved under strict conditions, including capacity constraints and behavioural remedies. Reference to the Euratom Treaty was only used by the Commission to justify the very long duration of some of the aid in line with the long duration of the decommissioning in the nuclear sector.

3.479

In the Nuclear Decommissioning Authority decision, the Commission went one step further in the normalisation of the application of State aid rules to the nuclear sector. For the first time, the Commission fully applied the ‘polluter pays’ principle to the management of nuclear liabilities, in particular the management of nuclear waste and the decommissioning of nuclear power plants. Indeed, in the decision the Commission considered as State aid all State payments for liabilities of the nuclear undertaking. The aid was authorised only under conditions which were equivalent to the ones imposed for State aid for restructuring.

3.480

In the Hinkley Point C decision, the Commission recognises the promotion of nuclear energy as a common objective based on the Euratom Treaty. The decision explicitly refers back to the British Energy plc decision as well as to the wording of the Euratom Treaty aiming at creating the ‘conditions necessary for the development of a powerful nuclear industry which will provide extensive energy sources.’ The decision further quotes Articles 1, 2(c) and 40 of the Euratom

3.481

1759 Commission Decision 2006/643/EC of 4.04.2006 on the State Aid which the United Kingdom is planning to implement for the establishment of the Nuclear Decommissioning Authority, Case C 39/2004, OJ L 268, 27.09.2006, p. 37. 1760 Case SA.35497 Support to Hinkley Point C Nuclear Power Station, opening decision published in OJ C 69, 03.07.2014, p. 60. Publication of the final decision is outstanding.

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Treaty, all of which point clearly to the EU’s and Member States’ stated objective to promote nuclear energy. In this context, it is worth noting that the fact that today many Member States no longer support nuclear energy is irrelevant for the legal value of the Euratom Treaty which was signed and ratified by all Member States and is still in force.

3.483

The Hinkley Point C decision, however, does not only rely on Euratom as common objective. As secondary objective it also recognises that the construction of Hinkley Point C will contribute to long-term security of supply, in particular based on capacity forecasts and the substantial electricity output which Hinkley Point C is expected to generate. The Commission therefore concludes that the State aid can also deliver a contribution to the common objectives of diversification and security of supply.

3.484

A second important element in the Commission’s assessment of the Hinkley Point C decision concerned the proportionality of the aid. The Commission concluded that the initial measure would have over-compensated the project promoters. It therefore modified the initial measure in two respects:

3.485

First, with respect to the State guarantee, the Commission found that the initial guarantee fee which the operator would have paid to the UK Treasury was too low for a project with this risk profile. The guarantee fee was therefore significantly raised. This increase will reduce the subsidy by more than GBP 1 billion (about €1.3 billion) and procure the UK Treasury an equivalent gain.

3.486

Secondly, the final decision modified the gain-share between the project promoters and UK consumers: as soon as the operator’s overall profits (return on equity) would exceed the rate estimated at the time of the decision, any gain would be shared with the public entity granting the public support. In addition, the decision defined a second, higher threshold above which the public entity would obtain more than half of the gains. These gains will be shared with UK consumers by a decrease in the price paid by the public entity to the operator (the so-called “strike price”). An increase in the profit rate of only one percentage point, for example, will generate savings of more than GBP 1.2 billion (about €1.5 billion). This gain-share mechanism will be in place not only for the 35-year support duration as initially envisaged, but at the request of the Commission for the entire lifetime of the project, namely 60 years. Moreover, if the construction costs turn out to be lower than expected, the gains will also be shared.

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Chapter 19 Access to finance

1.

Introduction

1.1 The rules for risk capital aid in force before 1 July 2014 Due to a persistent failure in business finance markets across the Union, small and medium-sized enterprises (“SMEs”) with risky but potentially profitable business plans and innovative ideas often face significant challenges when trying to secure the necessary financing, either for investment purposes or for working capital.1761 The Risk Capital Guidelines of 20061762 (the “2006 RCG”) and the General Block Exemption Regulation of 20081763 (the “2008 GBER”) acknowledged that State aid to risk capital could be justified, and be found compatible on the basis of Article 107(3)(c) of the Treaty if it were necessary to develop the growth potential of SMEs particularly in their early development stages.

3.487

Risk capital aid measures often involve complex funding structures as their aim is to create financial incentives for a first set of economic operators (private investors) to channel additional finance to a second set of undertakings (target SMEs) through the professional intermediation of a third party, normally an investment fund (financial intermediary). Depending on the design of the meas-

3.488

1761 See 2011 SMEs’ Access to Finance survey, Analytical Report, prepared by Ipsos MORI, to the request of Directorate General for Enterprise and Industry of the European Commission, in cooperation with the European Central Bank, accessed 05.11.2014 1762 Community Guidelines on State aid to promote risk capital investments in small and medium-sized enterprises, OJ C 194, 18.08.2006, p. 2. 1763 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation), OJ L 214, 09.08.2008, p. 3. See in particular Article 29 thereof.

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ure, and even if the intention of the public authorities may be to provide benefits only to the target SMEs, the public investment could involve aid for firms operating at any of those three levels. The 2008 GBER and the 2006 RCG established detailed conditions to ensure that State aid to risk capital was necessary and proportionate at all those levels, and well-designed to improve the access to capital markets for companies faced with a proven “equity gap” without crowding out competing investments.

3.489

Following a rather prudent approach, which was justified by the limited enforcement experience of the Commission in that field, the 2008 GBER and the 2006 RCG only authorised investments into seed, start-up and early-expansion capital. That approach excluded more established SMEs, including those in their growth stage. Moreover, the 2008 GBER applied only to risk capital aid provided through private-public funds, investing predominantly (70 per cent) in equity/quasi-equity (and with public and private investors intervening on a non-pari passu basis). As a result the safe-harbour did not cover several types of financial instruments (in particular debt instruments), fiscal incentives and certain funding structures that are commonly used in the market (e.g. funds of funds and public funds leveraging private capital at SME level on a deal-by-deal basis), which were subject to the prior approval by the Commission following notification and individual assessment. For the measures falling outside the scope of the 2008 GBER, the 2006 RCG provided guidance as to how to evaluate the equity gap1764 and the factors that influence the assessment of the incentive effect and proportionality of aid, as well as some indications as regards the balancing of the aid’s positive and potentially distortive effects.1765

3.490

Within its narrow scope, the 2008 GBER contained a limited number of compatibility criteria designed to ensure an adequate incentive effect for investors and a reasonable link between the volume of aid to SMEs and the equity gap addressed by the measure. In particular, it allowed aid only if the public and pri1764 In the context of the risk capital State aid rules, “equity gap” refers to a persistent capital market imperfection on the risk capital market preventing supply from meeting demand at a price acceptable to both sides, which negatively affects SMEs. See 2006 RCG, Section 1.1. 1765 The RCG were structured into two types of assessments: a “standard” assessment relying on the same compatibility criteria as laid down in the GBER, except for a higher threshold for the annual investment tranches (up to EUR 2.5 million); and a “detailed” assessment mainly focused on seven specific measures included in a “white list”. They were measures providing for: (i) investment tranches beyond EUR 2.5 million per target SME over each period of twelve months, (ii) expansion capital for medium-sized enterprises in non-assisted areas, (iii) follow-on investments beyond the safe-harbour thresholds, (iv) a minimum participation by private investors below 50 per cent in non-assisted areas and 30 per cent in assisted areas, (v) seed capital to micro and small enterprises with less or no private participation by private investors, and/or predominance of debt, (vi) directed to alternative trading platforms or (vii) to scouting costs.

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vate investors in each target SME provided capital in tranches of no more than EUR 1.5 million per successive periods of 12 months. Moreover, it required the volume of private capital raised at the level of the fund to be equal to or above certain minimum ratios (50 per cent or 30 per cent of the fund’s capitalisation depending on the assisted/non-assisted status of the region where the target SMEs had their permanent establishment). Importantly, it also required the investments funds to adhere to commercial management principles and to a profit-driven investment logic.

1.2 The review process in the context of State Aid Modernisation In view of the expiry of the 2008 GBER and the 2006 RCG, the Commission carried out an in-depth review of its policy in this field, taking into account two major developments. Firstly, it was guided by the launch of the State Aid Modernisation (SAM) plan, aimed at simplifying and rationalising State aid control to concentrate law enforcement on the most distortive cases.1766 Secondly, it gave weight to the political priority that has been granted, at the Union level, to actions designed to stimulate access to debt and equity finance for SMEs and mid-caps through financial instruments, notably in the context of the EU 2020 Strategy for growth and jobs.1767

3.491

Several rounds of public consultations1768 revealed that the basic principles underpinning the existing rules for risk capital aid were generally well-accepted as they provided a sound basis for channelling Member States’ resources to the right investment targets while limiting crowding out risks. Nevertheless, it also emerged that, in its practical implementation, the existing system of rules had run into several problems.

3.492

On the one hand, Member States and stakeholders viewed those existing rules as too restrictive in terms of eligible SMEs, financing forms, aid instruments and funding structures. In particular, a prominent view was that the existing State

3.493

1766 Communication from the Commission on EU State Aid Modernisation (SAM), COM(2012) 209 final, 08.05.2012. 1767 Communication form the Commission - Europe 2020, A strategy for smart, sustainable and inclusive growth, COMP (2010) 2020 final, 03.03.2010. 1768 The first public consultation on the Risk Capital Guidelines was launched on 16.07.2012, followed by a second consultation launched on 24.07.2013. The first public consultation on the draft new GBER was launched on 08.05.2013, followed by a second consultation launched on 18.12.2013. The main orientations for reform were published in an Issues Paper, which was discussed at a workshop held on 11.12.2013. The non-confidential replies to the public consultations, the Issues Paper, and the presentations given at the workshop are available at http://ec.europa.eu/competition/state_aid/modernisation/index_en.html (accessed 05.11.2014).

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aid rules had excessively restrained Member States’ ability to invest public resources to the benefit of SMEs and, ultimately, hindered the development of more efficient delivery modes for that type of aid (risk of over-deterrence).

3.494

On the other hand, some other rules were viewed as unduly permissive or unclear. In particular, the requirements concerning the need for a competitive selection of fund managers or other financial intermediaries, as well as those fixing the basic financial parameters for the eligible financial instruments (e.g. minimum private capital participations), were perceived as insufficiently clear and difficult to apply. In addition, the compatibility conditions designed to minimise the aid at the level of the private investors were seen as insufficient to remove two main competition-related concerns: first, the risk that one or more Member States could overcompensate one class of private co-investors against another, and distort the level-playing-field in equity and business credit markets within the Union. Second, there was a subsequent risk that, in order to attract new private financing into its policy-related investments, a Member State could overestimate the need for loss protection and take a too large share of risk, for instance by assuming full first-loss positions on the public budget of the measure, which would increase the potentially distortive effects of the aid (risk of under-deterrence).

3.495

Moreover, the different requirements set out in the existing system of rules in respect of risk-capital funds, based on the status of the region of their establishment, appeared inadequate to promote a level playing field within the Union venture capital market and to ensure an efficient allocation of financial resources within that market.1769 In that respect, one criticism voiced during the public consultation was that the 2006 RCG had failed to acknowledge that the relevant business finance markets cut across different Member States and tend to be at least Union-wide. Given the high mobility of capital, the ability of SMEs to gain access to finance would not depend necessarily on their location in a particular region. Hence those critics considered that there was a need to revise some rules in order to better reflect changing market realities.

3.496

In general, the enforcement model for State aid control in relation to risk capital was perceived as involving unnecessary red tape. In particular, the narrow scope of the 2008 GBER meant that Member States had to notify a large number of 1769 The latter criticism touched upon several provisions differentiating State aid control in assisted and nonassisted regions. In particular, at least 50 per cent private participation was required if the measure targeted SMEs located in non-assisted areas, while that ratio was reduced to 30 per cent in assisted areas. Moreover, the 2008 GBER excluded from its scope measures supporting medium-sized companies in their expansion phase located in non-assisted areas, which required a detailed assessment under the 2006 RCG. Also, the cumulation rules were different according to the assisted and non-assisted status of the target investment area

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their schemes and the Commission had to undertake a rather complex assessment process (depending on the type of assessment – “standard” or “detailed” – applicable to each notified scheme). In the light of those shortcomings, the Commission decided to carry out an in-depth review of its approach and sought to set up a simpler, more flexible and generous State aid framework for the provision of risk finance to SMEs and mid-caps. As a result, the Commission adopted new Risk Finance Guidelines1770 (the “RFG”) on 15 January 2014, and new provisions on access to finance for SMEs under Section 3 of the new General Block Exemption Regulation1771 (the “new GBER”) on 17 June 2014. Both set of rules entered into force on 1 July 2014. In line with the overall EU 2020 Strategy, the ultimate objective of this reform is to improve the conditions for the public sector to invest “revolving” resources, both equity and debt, in eligible undertakings through well-designed financial instruments, capable of attracting additional private funding and unleash the growth and job-creation potential of SMEs (and mid-caps) across the Union, without crowding out financial markets.

2.

3.497

The new system of rules for access to finance aid

2.1 A new legal architecture Taken together, and compared to the scope of the 2008 GBER, the new GBER provisions create a substantially enlarged safe-harbour by covering more categories of demand-side and supply-side measures. Doing away with the threepronged legal architecture underpinning the old rules (with a narrow safe harbour under the 2008 GBER and two types of assessment, standard and detailed, under the 2006 RCG), the new regime for access to finance aid is structured more simply around a wide safe-harbour and only one type of substantive assessment under the RFG.

3.498

All measures falling within the scope of the new GBER provisions are automatically compatible with the internal market and do not need to be notified to the Commission. By virtue of their design and foreseeable effects on markets, they are deemed to address a legitimate public policy objective undermined by a proven market failure, and to provide appropriate and proportionate incentives, with minimal distortive effects. By contrast, measures falling outside the scope

3.499

1770 Community Guidelines on State aid to promote risk finance investments, OJ C 19, 22.01.2014, p. 4. 1771 Commission Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 181, 26.06.2014, p. 1.

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of the new GBER must be notified and assessed individually by the Commission, in accordance with the criteria set out in the RFG, because their overall positive impact on competition and trade between Member States cannot be presumed in advance.

3.500

In essence, the RFG provide guidance to Member States and stakeholders as to the relevant indicators to be taken into account to justify public/private investments in SMEs and other companies where such investments go beyond the range of possibilities offered by the new GBER. A novelty in that respect consists in the clarifications concerning a key piece of evidence that Member States are required to provide with their notification, i.e. the “ex-ante assessment”.

2.2 New notification requirements 3.501

The ex-ante assessment is meant to be an organic and convincing analysis of relevant facts proving the existence of a specific market failure, the necessity of aid, the appropriate design and the incentive effect of the chosen instrument, its proportionality and limited impact on non-aided competitors, in accordance with the State aid common assessment principles.

3.502

In order to grasp fully the importance of that procedural requirement, it may be worth recalling that, under the old system, risk capital measures subject to “detailed assessment” required a specific market failure analysis.1772 Building on the experience gathered through decisional practice,1773 the RFG contain a number of additional requirements clarifying the scope of the analysis to be submitted to the Commission at the moment of the notification, so as to minimise the need for extended in-depth investigations.

3.503

As to its content, the ex-ante assessment must identify, first, the specific “funding gap” affecting the eligible undertakings in the target area. In this field State aid must be necessary to bring about a socially desirable material improvement that the market cannot deliver on its own; in other words, it has to address a market failure. For instance, should a measure be aimed at small mid-caps, the ex-ante assessment ought to provide adequate economic evidence about the specific financing constraints affecting that group of undertakings in the given Member State.1774 1772 See section 5.2.1 of the 2006 RCG. 1773 In the August 2006-August 2013 period, the Commission adopted 34 risk capital decisions after a detailed assessment. See Annex 1 to the Commission Staff Working Document, Impact Assessment accompanying the Guidelines on State aid to promote risk finance investments, (SWD(2014) 6). 1774 Pursuant to para. 65 of the RFG, both the structural and cyclical (that is to say, crisis-related) problems lead-

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Second, the assessment has to justify the choice of the specific measure compared to other policy instruments (including no-aid interventions through financial instruments that are in line with market behaviour). In particular, the assessment has to demonstrate that the notified risk finance measure is consistent with and complementary to national policies on SME access to finance.

3.504

Third, it has to justify the form and the appropriateness of the design of the chosen measure in the light of specific policy targets and performance indicators fixed ahead of the selection of the financial intermediary responsible for managing the funds. Those requirements concern in particular the envisaged level of private investment, the expected number of undertakings invested in, the estimated number of new undertakings or jobs created, or the expected return on investment for private and public investors.

3.505

Finally, the assessment has to demonstrate that the potential negative effects of the measure on the markets will remain limited, particularly in view of the amounts invested in each final investee and the magnitude of the incentives provided to private investors acting alongside the public investor (proportionality of upside boosters or downside protection mechanisms).

3.506

The obligation for Member States to provide an ex-ante assessment is consistent with other Union policies on SME access to finance. In particular, the deployment of centrally-managed Union financial instruments under the COSME1775 and Horizon 20201776 programmes also require a similar ex-ante assessment. Moreover, for financial instruments set up and financed from the European Structural and Investment Funds (ESIF), the Common Provisions Regula-

3.507

ing to suboptimal levels of private funding must be analysed. In particular, the assessment must provide a comprehensive analysis of the sources of financing available to the eligible undertakings, taking into account the number of existing financial intermediaries in the target geographic area, their public or private nature, the investment volumes targeted to the relevant market segment, the number of potentially eligible undertakings and average values of individual transactions. That analysis should be based on data covering the 5 years preceding the notification of the risk finance measure and, on that basis, it should estimate the nature and size of the funding gap, that is to say, the level of unmet demand for finance from eligible undertakings. 1775 Regulation (EU) No 1287/2013 establishing a Programme for Competitiveness of Enterprises and Small and medium-sized enterprises (COSME) (2014-2020), OJ L 347, 20.12.2013, p. 33. 1776 Regulation (EU) No 1291/2013 establishing Horizon 2020, the Framework Programme for Research and Innovation (2014-2020), OJ L 347, 20.12.2013, p. 104.

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tion1777 equally requires Member States to prepare an ex-ante assessment.1778 It may be worth noting that, in order to avoid duplications, the assessment prepared by (or on behalf of ) Member States and accepted by the Commission for ESIF financial instruments is considered to meet the requirements for an ex-ante assessment under the RFG.1779

3.

Existence of State aid

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It is important to realise that not all State measures designed to improve access to finance for businesses are such as to entail State aid. For measures which do not qualify as State aid, Member States do not need to conform to the new GBER nor notify such public investments in undertakings to the Commission.

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Apart from the other criteria set out in Article 107(1) of the Treaty to define the notion of State aid1780, the assessment of the concept of “economic advantage” may be particularly complex in case of public-private funding deployed via financial instruments. In general, a public investment in an undertaking via a financial intermediary does not create an economic advantage, and therefore does not constitute aid, if it meets the market economy operator (MEO) test, i.e. if it is in line with normal market conditions.1781 As already observed, for access to risk finance aid, three categories of operators can benefit from an economic advantage: (i) private (co-)investors, (ii) financial intermediaries and/or their managers and (iii) undertakings receiving the investment, i.e. the investees. The Commission’s scrutiny is therefore carried out at those three levels.

1777 Article 37(2) of the Regulation (EU) No 1303/2013 of the European Parliament and of the Council, laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down the general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund, OJ L 347, 20.12.2013, p. 320. 1778 See Article 37(2) of the Common Provisions Regulation. 1779 See para. 66 of the RFG. 1780 Article 107(1) of the Treaty requires the presence of the following cumulative conditions in order to establish that a measure constitutes State aid: it must involve the use of State resources; it must confer an advantage on undertakings; the advantage must be selective; and the measure must be likely to distort competition and affect trade between Member States. 1781 Section 2.1 of the RFG contains detailed explanations as to the specific application of the MEO test to risk finance measures, without prejudice to the ultimate prerogative of the Court of Justice concerning the interpretation of Article 107(1) of the Treaty.

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3.1 Aid to private investors As regards private investors, the Commission considers that those operators are deemed to receive an advantage where the State measure allows them to invest into a company or a set of companies on terms more favourable than the public (co-)investor (non pari passu investments). Conversely, an investment is in line with the MEO test when public and private investors intervene in the transaction pari passu, that is to say under the same terms and conditions (i.e. sharing the same risks and rewards and holding the same level of subordination in relation to the same risk class)1782 and simultaneously (i.e. co-investing into the final beneficiaries via the same investment transaction).1783 Moreover, in order to be pari passu, the private investment has to be of real economic significance compared to the overall volume of the investment. In the light of the Commission’s most recent decisional practice,1784 the RFG establish that this condition is fulfilled when at least 30 per cent of the funding comes from private investors that are independent of the final beneficiary undertakings. In case of debt instruments, notably in case of risk-sharing loans, guarantees or counter-guarantees (where the financial intermediary is also a co-investor), aid can be excluded at the investor level if the terms and conditions of the instrument are in line with the Reference Rate Communication1785 or the Notice on Guarantees.1786

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1782 See para. 32 of the RFG, which also specifies that “if the public investor is in a better position than the private investor, for instance because it receives a priority return in time compared to the private investors, the measure may also be considered to be in line with normal market conditions, as long as the private investors do not receive any advantage”. 1783 See para. 33 of the RFG. The Guidelines further indicate that investments by the public and private investors into public/private financial intermediaries (e.g. investment funds) will be presumed to be made simultaneously. 1784 For instance, in its “Citynet Amsterdam” Decision, the Commission considered that two private operators taking up one third of the total equity investments in a company (considering also the overall shareholding structure and that their shares are sufficient to form a blocking minority regarding any strategic decision of the company) could be considered economically significant (see Commission Decision of 11.12.2007 on the investment by the city of Amsterdam in a fibre-to-the-home (FttH) network (“Citynet Amsterdam”) (Case C 53/2006, ex N 262/05, ex CP 127/04), OJ L 247, 16.09.2008, p. 27, paras 96-100). By contrast, in the Agricultural Bank of Greece (ATE) case (Commission Decision of 23.05.2011 on Greek support measures for the credit institutions in Greece (“Agricultural Bank of Greece (ATE)”)(Case SA.31154 (N 429/10)), summary notice in OJ C 317, 29.10.2011, p. 5), the private participation only reached 10 per cent of the investment, as opposed to 90 per cent by the State, so that the Commission concluded that pari passu conditions were not met, since the capital injected by the State was neither accompanied by a comparable participation of a private shareholder nor was it proportionate to the number of shares held by the State. 1785 Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.01.2008, p. 6. 1786 Commission Notice on the application of Article 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 155, 20.06.2008, p. 10.

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The latter condition raises two key issues, as to the definition of “private investor” and of its “independent” status. In that respect it may be useful to recall that the RFG provide for a non-exhaustive list of entities that could typically be considered as private investors, which include the European Investment Fund (EIF), the European Investment Bank (EIB) and national financial institutions investing at own risk and from own resources, as well as private endowments and foundations, family offices and business angels, corporate investors, insurance companies, pension funds, private individuals and academic institutions.1787 In general, the public or private ownership of the entity is not decisive for its qualification as private investor. For instance, a partially State-owned pension fund may be considered as a private investor for the entire investment it makes (and not only for an amount proportionate to the share of its private ownership), provided that it invests its own resources and bears the full risk of its investment. Therefore, that condition would not be met, for instance, where the public investor benefits from a State guarantee on its investments.

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Moreover, as regards the concept of “independent” private investor, the RFG explain that the requirement is met when the private investor is not a shareholder of the undertaking in which it invests. The RFG further specify, however, that “upon the creation of a new company, all private investors, including the founders, are considered to be independent from that company”.1788

3.2 Aid to financial intermediaries and entrusted entities 3.513

As regards financial intermediaries,1789 the Commission considers that, as general rule, they should be seen as mere vehicles for the transfer of aid to investors and investees rather than being a beneficiary of aid themselves. Such is the case, in particular, for “entrusted entities” which are vested by the Member State with the responsibility of managing the risk finance measure without requiring those entities to co-invest and provided that they are not overcompensated for their financial management services.

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However, measures involving direct or indirect transfers in favour of a financial intermediary may constitute aid unless the transfer is made on terms that would be acceptable to a normal economic operator in a market economy. That caveat is particularly relevant when the financial intermediary, for instance an invest1787 See footnote 25 of the RFG. 1788 See para. 52(xvii) of the RFG. 1789 ‘Financial intermediary’ means any financial institution, regardless of its form and ownership, including fund of funds, private investment funds, public investment funds, banks, micro-finance institutions and guarantee societies. RFG, paragraph 52(x).

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ment fund, co-invests in the financial instrument that it manages. At that level, an aid exists whenever the funding agreement entered into between the granting authority and the fund manager establishes a preferential treatment for the latter compared to the public investor, having regard to the balance of their respective risks and rewards. It should be noted that the RFG establish a presumption that no aid is granted to financial intermediaries or fund managers if they are selected through an open, transparent and non-discriminatory procedure. When a public financial intermediary (for instance a development bank) and its manager are appointed directly by the State without going through such a selection procedure, they may not be considered recipients of aid only if three conditions are cumulatively fulfilled.1790 First, the “in-house” management should receive a capped management fee and its overall remuneration should reflect normal market conditions and be linked to performance. Secondly, the public entity must be managed commercially and take investment decisions in a profit-oriented manner at arm’s length1791 from the State (with appropriate mechanisms excluding any possible interference by the State in the day-to-day management). Thirdly, the private investors must be selected through an open, transparent and non-discriminatory selection procedure on a deal-by-deal basis to ensure that aid at their level is minimised. It is understood that, in this case, the measure must also adapt to the general principles on the notion of aid or the specific compatibility rules of the GBER and RFG as regards the assessment of possible aid at the other two levels, i.e. at the investors’ and investees’ levels.

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It is also noteworthy that, in case of debt instruments, such as measures providing loans to SMEs on the basis of a risk-sharing arrangement between public and private lenders, the financial intermediary, usually a bank, intervenes in general both as manager of the instrument and as a (co-)investor contributing from its own resources. As a result, the possible benefit to the financial intermediary must be assessed not only in respect of the remuneration that it receives for its intermediation services, but also in respect of the balance of risks and rewards fixed by the measure for its investments. The level of its remuneration is regarded as in line with the MEO principle if the intermediary has been selected following an open and non-discriminatory competitive process. As to the balance of risks and rewards, the instrument can be qualified as in line with the MEO prin-

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1790 See para. 41 of the RFG. 1791 ‘Arm’s-length’ means that the conditions of the investment transaction between the contracting parties do not differ from those conditions which would be made between independent enterprises and contain no element of influence of the State. See RFG, paragraph 52(ii).

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ciple if its terms and conditions are in line with the Reference Rate Communication or the Notice on Guarantees. If not, the measure involves aid at the level of the financial intermediary. Such aid can however be excluded if the Member State can demonstrate that the whole economic advantage resulting from a (sub-)commercial loan or guarantee is fully passed on (i.e. in its entirety) to the final investment targets on the basis of an appropriate and transparent methodology.1792

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The concept of financial intermediary must be distinguished from the notion of “entrusted entity”, which has been introduced in the new rules on risk finance aid and which designates a public financial institution empowered by a Member State to manage the risk finance measure on its behalf.1793 That notion includes the EIB and the EIF, as well as national public financial institutions with a public service mission, usually a national development bank. The involvement of an entrusted entity in the risk finance measure may be very useful. Those entities have sound knowledge of financial markets, are well placed to carry out due diligence on the financial intermediaries to be selected, can appropriately negotiate with them, enter into delegation agreements and oversee the implementation of the measure through reporting and monitoring mechanisms, which requires adequate financial literacy.

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An entrusted entity is considered as a mere vehicle to channel the financing and not, therefore, as a beneficiary of State aid.1794 However, as a condition for not being considered as an aided entity, the entrusted entity does not co-invest in the aid instrument, and it is not overcompensated for its administrative costs. Where instead the entrusted entity shares the risks of the transaction by contributing its own financial resources, State aid to the entrusted entity may be excluded only if the risk-sharing arrangements are in line with market conduct, or if any economic advantage accruing to the entrusted entity may be quantified and passed on in full to the investees. Otherwise, in case of residual aid staying at the level of the entrusted entity, the latter will have to comply with the same conditions as those laid down for financial intermediaries.

1792 As will be explained in Section 5 below, that condition differs from the pass-on rule enshrined in Article 21(16)(a) of the new GBER, which provides for the economic advantage to be passed on “to the largest extent to the final beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates”, for the purposes of finding a compatible aid at the level of the financial intermediary. 1793 Article 21(17) of the new GBER. 1794 See para. 39 of the RFG.

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3.3 Aid to the undertakings receiving the investment Finally, as regards the analysis at the level of the undertakings receiving the investment, i.e. the final beneficiaries, the RFG establish a legal presumption that no aid is present at that level if the public intervention is in line with MEOP at both the upper levels of the investors and financial intermediaries. Conversely, if the measure entails aid at any of the latter two levels, the Commission will consider that it is at least in part transferred to the target undertakings.1795 This is the case even where investment decisions are based on a purely commercial logic. Where the measure consists of loans or guarantees, the undertakings receiving the investment are not considered aid recipients if the instrument fulfils the conditions of the Reference Rate Communication or the Notice on Guarantees, respectively.

4.

3.519

Rationale for State aid to enhance access to risk finance

4.1 Objective of common interest Where State aid is present, the measure must contribute to the achievement of an “objective of common interest” within the meaning of Article 107(3)(c) of the Treaty. For risk finance aid, such an objective consists in the need to improve, at the Union level, the conditions for access to finance by young and innovative firms from their early-development up to their growth stages. The new RFG recognise that State measures designed to enhance access to finance for certain SMEs and mid-caps are in line with an objective of common interest. The ultimate goal is to develop in the longer run a wider and more competitive business finance market in the Union, with a view to steering investments into new, high-growth ventures that, because of their inherent riskiness, are insufficiently funded by the traditional funding channels.

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That policy objective is common to virtually all Member States that, during the past decade, have sought to incentivise private investments into the real economy through the use of repayable financial instruments (with a reduced impact on their national budgets). Such an objective is also part of the Union’s political agenda. In that respect, the Commission has taken several important regulatory and budgetary initiatives in recent years: the Europe 2020 Strategy,1796 the Small

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1795 See para. 44 of the RFG. 1796 Communication from the Commission - Europe 2020, A strategy for smart, sustainable and inclusive growth, COMP(2010) 2020 final, 03.03.2010.

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Business Act,1797 the Single Market Act,1798 the Action plan to improve access to finance for SMEs1799 and the Communication on long-term finance for the European economy.1800

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All those initiatives point to the existence of a market failure faced by SMEs in the Union and aim at establishing a more favourable business environment and better access conditions to finance markets for SMEs. Most recently, two initiatives relevant to investments funds were taken: a Regulation on venture capital funds in the Union was adopted 1801 with a view to enabling venture capital funds to market their funds and raise capital across the internal market; and a Regulation on European Long-term Investment Funds was proposed,1802 with a view to introducing a new form of investment fund whose successful development requires investors’ long-term commitment.

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In line with those policy orientations, the Commission has made proposals designed to enhance the use of new financial instruments1803 under the 2014-2020 Multiannual Financial Framework (MFF)1804 to facilitate access to finance for SMEs. Thus, both the COSME1805 and Horizon 20201806 programmes will make 1797 Communication from the Commission -Think Small First, A Small Business Act for Europe, COM(2008) 394 final, 25.06.2008. 1798 Communication from the Commission - Single Market Act, Twelve levers to boost growth and strengthen confidence, Working together to create new growth, COM(2011) 206 final, 13.01.2011. 1799 Communication from the Commission - An action plan to improve access to finance from SMEs, COM(2011) 870 final, 07.12.2011. 1800 Communication from the Commission on Long-Term Financing of the European Economy, COM(2014) 168 final, 27.03.2014. 1801 Regulation (EU) 345/2013 of the European Parliament and the Council of 17 April 2013 on European venture capital funds, OJ L 115, 25.04.2013, p. 1. 1802 Proposal for a Regulation (EU) of the European Parliament and of the Council on Long-term Investment Funds, OJ L 123, 19.05.2015, p. 98. 1803 The concept of financial Instruments (FIs) refers to all types of repayable funding instruments (therefore excluding grants), which may take the form of debt (loans, guarantees and counter-guarantees), equity, quasiequity or other risk-sharing instruments. 1804 Council Regulation (EU, EURATOM) No 1311/2013 laying down the multiannual financial framework for the years 2014-2020, OJ L 347, 20.12.2013, p. 884. 1805 COSME aims at ensuring access to finance for SMEs through dedicated financial instruments and target companies in different development phases: creation, expansion and business transfer. The available instruments are Equity Facility for Growth (providing venture capital for enterprises in particular in their growth phase) and Loan Guarantee Facility (covering loans up to EUR 150 000 available for all types of SMEs). Those instruments will be managed by the EIF in cooperation with the financial institution of the Member States. 1806 The Horizon 2020 Framework Programme sets out a number of objectives, each of them supported through a dedicated Specific Programme. The industrial leadership and competitive frameworks Specific Programme will aim at promoting research and innovation with a business driven agenda and will increase investment and facilitate access to risk finance, building on the FP7 Risk Sharing Finance Facility and the CIP financial instruments, so as to provide Union-wide support for innovation in SMEs with high growth potential, as well as small mid-caps and larger innovative mid-caps.

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use of such instruments to improve access to equity and debt finance for SMEs and mid-caps in their start-up and growth phases, with a particular emphasis on actions designed to provide seamless support from innovation to market, including the commercial implementation of R&D results. In addition, the new Common Provisions Regulation for the Union’s cohesion policy enlarges the scope for use of financial instruments (both equity and debt) and makes the legal framework for their implementation more flexible and effective. In particular, the new rules for the European Structural and Investment Funds (ESIF)1807 aim to provide standard terms and conditions for a set of predefined financial instruments (the so-called “off-the-shelf ” instruments) to facilitate the design and the management of the most commonly used financial products. Each “offthe-shelf ” financial instrument must be designed in such a manner as to be either in line with market practices or with the de minimis Regulation or with the new GBER.

4.2 Failures in business finance markets In accordance with the common assessment principles on State aid, measures entailing aid must clearly target a legitimate policy objective the achievement of which is negatively affected by a market failure. For measures aimed at enhancing SMEs’ access to finance, the proof of the relevant market failure comes from the identification of two possible problems: imperfect information and potential growth externalities.

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Irrespective of the quality of their project and their growth potential, SMEs are likely to be finance-constrained as long as they lack a proven track-record and sufficient collaterals. Those difficulties are particularly acute when they are young and innovative. At the heart of those difficulties lies a problem of asymmetric information. As acknowledged by the new RFG,1808 those undertakings are often unable to demonstrate their credit-worthiness or the soundness of their business plans to investors. The type of active screening undertaken by investors for financing larger companies may not be worth the investment in case of transactions involving those SMEs, for instance because the screening costs may be too large relative to the value of the investment. Imperfect information in new or emerging product markets may also act as a deterrent for venture capital investors and may weaken innovative firms’ ability to present robust busi-

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1807 Commission Implementing Regulation (EU) No 964/2014 laying down rules for the application of Regulation (EU) No 1303/2013 of the European Parliament and of the Council as regards standard terms and conditions for financial instruments, OJ L 271, 12.09.2014, p. 16. 1808 See para. 3 of the RFG.

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ness plans to investors. Therefore, due to such information problems, business finance markets may fail to provide the necessary equity or debt finance to newly created firms with potentially high-growth prospects.

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The consequences of a firm not receiving finance may well go beyond that single undertaking, due in particular to growth externalities. Many successful sectors witness productivity growth not because firms present in the market gain in productivity, but rather because the more efficient and technologically advanced firms grow at the expense of the less efficient ones (or ones with obsolete products). To the extent that that process is disturbed by the inability of potentially successful firms to obtain finance, there are likely to be wider and negative consequences for productivity growth. Allowing a wider base of companies to enter the market may then spur growth.

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Those problems have been exacerbated by the financial crisis which began in 2008: on the one hand, banks tightened their lending criteria also in response to new prudential requirements and, on the other hand, the supply of risk capital to SMEs in the Union, which is historically constrained by certain structural weaknesses affecting all main segments of this market,1809 has considerably shrunk. Thus, in 2012, in most Member States, venture capital investments compared to the national GDP fell by more than 25 per cent1810 and, in 2013, only 5 per cent of SMEs received equity financing in Europe through the venture capital industry.1811

1809 While business angels remain the main source of risk finance for early stage businesses, the size of the European informal venture capital market is four times smaller than that in the USA. As regards the formal venture capital segment, it is widely acknowledged that the European venture capital industry faces a fundraising gap for investments in SMEs, as it struggles to raise capital from private institutional investors who consider this asset class as unattractive because it does not deliver competitive financial returns and is too risky and illiquid. More generally, it lacks critical mass and efficient scale in terms of average fund size. In the period 2003-2010, a volume of approximately EUR 131 billion was raised into venture capital funds in the US, against EUR 28 billion in the Union. Moreover, the average US venture capital fund size reaches EUR 130 million of assets under management, against EUR 60 million in the Union. Venture capital investments make up only 0.03 per cent of EU’s GDP, whereas the corresponding US figure is 0.14 per cent. See Commission Staff Working Document – Impact Assessment accompanying the Commission Guidelines on State aid to promote Risk Finance Investments, SWD(2014)6, available at accessed 05.11.2014 1810 Commission Staff Working Document - Impact Assessment accompanying the Guidelines on State aid to promote risk finance investments, (SWD (2014) 6), p. 15, available at accessed 05.11.2014. 1811 2013 SMEs’ Access to Finance survey, Analytical Report, prepared by Ipsos MORI, to the request of Directorate General for Enterprise and Industry of the European Commission, in cooperation with the European Central Bank, p. 6. accessed 05.11.2014.

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5.

Demand-side measures: risk finance aid schemes

Within the broader category of access to finance aid, the new rules identify one specific type of supply-side measure that may be allowed under Article 107(3) (c) of the Treaty: risk finance aid, which differs from other types of aid in many respects.

3.528

First, while other types of aid are granted by the State directly to the target beneficiaries, risk finance aid is always channelled indirectly, via financial intermediaries such as investment funds or banks. That feature constitutes a strict requirement under both the new GBER and the RFG, as the objective here is to ensure an efficient management of public and private resources, based on a sound investment strategy and a profit-driven logic. As a corollary, the State must not intervene directly in the choice of the investments and in the selection of the beneficiary SMEs. For that reason, risk finance aid rules can only cover measures structured as aid schemes, to the exclusion of individual aid measures in favour of designated undertakings. Secondly, unlike other types of aid where the permissible aid amount is limited by maximum aid intensities and the private funding normally originates from the companies carrying out themselves the aided project, risk finance aid may be allowed only if necessary to mobilise additional private capital, i.e. if it has a significant multiplier effect (leveraging). That feature translates into the requirement that such measures must ensure upfront a reasonable participation of private investors independent from the final investees, who share (asymmetrically) risks and rewards with the public co-investor. The capital provided by the shareholders of the company in which the investment is made is therefore excluded from the computation of the private funds raised under the measure. In such a manner, the new GBER and the RFG are intended to ensure that the financial interests of the public and private partners remain consistently aligned during the whole investment cycle. The only two exceptions from that rule concern the case of investments aimed at establishing a new company,1812 and the provision of minor contributions in the form of “love money”.1813

3.529

Thirdly, only repayable forms of investment may be provided under a risk finance measure, excluding therefore the provision of grants. As a result, the pub-

3.530

1812 See para. 52(xvii) of the RFG. 1813 See para. 33 of Commission Decision of 20.04.2011 on French Fonds national d’amorçage (Case SA.31730 (11/N)), summary notice in OJ C 174, 15.06.2011, p. 1; and para. 12 of Commission Decision of 18.09.2012 on Italian Regional Venture Capital Scheme (Case SA.34006 (11/N)), summary notice in OJ C 352, 16.11.2012, p. 1.

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lic investment should generate a (sub-commercial) return for the State, allowing for the use of revolving public funds for new investments, with a reduced impact on national budgets. That feature represents a significant difference compared to other types of aid that take typically the form of non-repayable subsidies.

3.531

Finally, as opposed to other types of State aid, risk finance aid is not provided for specific eligible projects but to the benefit of a range of undertakings, the investees. Thus, the State aid rules applicable in that field are not linked to identifiable eligible costs and do not provide for any limitation as to the use of the funding by the final investee (be it for investment or working capital purposes). In other words, risk finance aid is for company-financing rather than project-financing.

3.532

Both the new GBER and the RFGs implement the common State aid principles taking into account the specific concerns that aid to risk finance may give raise to, including possible crowding-out effects on financial markets and distortions of competition in downstream product markets. Those concerns translate into a number of specific compatibility conditions, which can be divided into four categories concerning (i) the eligibility of final investees, (ii) the form and the financial parameters of financial instruments, (iii) the eligibility of financial intermediaries and funding structures and (iv) the form and the financial parameters of fiscal instruments.

5.1 Eligible investees 5.1.1 Schemes falling under the new GBER 3.533

As pointed out above, the 2006 RCG’s standard assessment and the 2008 GBER only covered SMEs in their early development stages, i.e. seed, start-up and expansion phases.1814 Moreover, in non-assisted areas, only small companies or start-up medium-sized companies were eligible,1815 which left many mediumsized companies outside their scope. The public consultation on the reform of those rules revealed that that approach was too restrictive compared to the actual width and depth of the relevant market failure1816 and, furthermore, difficult to implement due the vagueness of the definitions used to identify the three categories of eligible undertakings.

1814 See paras 2.2(e) to (g) of the 2006 RCG and Article 28(4) to (6) of the 2008 GBER. 1815 See section 4.3.2 of the 2006 RCG and Article 29(4) of the 2008 GBER. 1816 See Commission Staff Working Document - Impact Assessment accompanying the Guidelines on State aid to promote risk finance investments, (SWD(2014) 6), p. 47. See also Communication from the Commission on Long-Term Financing of the European Economy, COM(2014) 168 final, 27.03.2014.

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Those shortcomings called for eligibility criteria addressing a wider set of SMEs, which would be more objective in nature and easier to apply in practice. Such criteria are now enshrined in the new GBER,1817 which covers four newly defined classes of eligible undertakings: (i) SMEs before their first commercial sales, (ii) SMEs within seven years from first commercial sales, (iii) more established SMEs under certain conditions and (iv) all SMEs without restrictions up to a de minimis amount of total financing per undertaking.

3.534

The category of SMEs before their first commercial sale largely corresponds to the seed1818 and start-up1819 development phases. For that category, the public policy objective is clear: supporting company creation and helping start-ups in their initial investments before getting their first product on the market.

3.535

For the category of SMEs within seven years from their first commercial sale, the objective sought is to help young companies to scale up their production and commercial activities, so as to bridge a viability gap undermining their growth potential, until they become more attractive to non-aided private financing. It should be underlined that the new GBER allows, under certain conditions, follow-on investments in SMEs which may have been on the market for more than seven years after their first commercial sale.1820

3.536

The third eligible category covers more established SMEs that “require an initial risk finance investment which, based on a business plan prepared in view of entering a new product or geographic market, is higher than 50 per cent of their average annual turnover in the preceding 5 years”.1821 For that category, the required higher proportion of fresh funding compared to the average turnover of the SME aims at capturing situations of “transition businesses” with innovative but risky development plans which, if sufficiently funded, could allow the firm to overhaul its business model with a view to entering into a new market. Such a situation could arise, for instance, when a younger generation succeeds within a family-owned business with a view to engaging into a risky product or process innovation.

3.537

1817 Article 21(5)(a) to (c) and Article 21(18) of the new GBER 1818 According to para. 2.2(e) of the 2006 RCG and Article 28(4) of the 2008 GBER, “seed capital means financing provided to study, assess and develop an initial concept, preceding the start-up phase”. 1819 According to para. 2.2(f ) of the 2006 RCG and Article 28(5) of the 2008 GBER, “start-up capital means financing provided to companies, which have not sold their product or service commercially and are not yet generating a profit, for product development and initial marketing”. 1820 Article 21(6) of the new GBER. 1821 Article 21(5)(c) of the new GBER.

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3.538

The fourth category covers all other SMEs that fall outside the previous categories, subject to three restrictions.1822 Firstly, at the level of the SMEs, the aid must fulfil the conditions laid down in the de minimis Regulation.1823 Secondly, the measure must respect the conditions set out in Article 21 of the new GBER insofar as they concern the form of finance and type of instrument, the special safeguards applicable to replacement capital transactions, the application of the principle of non-discrimination between financial intermediaries and the principles for commercial management of the funds. Thirdly, for risk finance measures providing equity, quasi-equity or loan investments, the new GBER requires an aggregate private participation rate reaching at least 60 per cent of the risk finance provided to the SMEs.

3.539

Those four categories presuppose that the measure targets only SMEs. It is important to note in this connection that, under the new rules, the qualification of the investee as SME has to be checked only once, at the time of the initial investment. In other words, if an SME is eligible at the first investment round, it remains eligible for subsequent follow-on risk finance investments even if the successful implementation of its business plan would allow it to exceed the headcount, turnover and balance sheet thresholds defining the status of SME.1824 As the correct verification of the SME status is a key aspect for the legality of blockexempted risk finance aid, that clarification meets a general need for legal certainty. At the same time, by also including within the scope of the new GBER SMEs with plans to grow into mid-cap companies (during the whole holding period), the new rule acknowledges the need to attract investments with highgrowth potential. Indeed, if SMEs with the most ambitious business development plans were to be qualified as ineligible, early investors could be strongly deterred from joining the public investor either in single co-investment transactions or as shareholders in an investment fund.

3.540

Moreover, to link the eligibility conditions of investees with the market failure justifying the aid, a general cap, expressed in terms of maximum investment amount per SME, further circumscribes the first three classes of eligible SMEs (the fourth one being capped at the de minimis level). Those maxima aim at steering the investments towards SMEs with viable business plans but objectively suffering from a funding gap caused by a market failure. The size of that gap may vary widely across firms and sectors, but rarely exceeds EUR 15 million, 1822 Article 21(18) of the new GBER. 1823 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty to de minimis aid, OJ L 352, 24.12.2013, p. 1. 1824 See Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, OJ L 124, 20.05.2003, p. 36. See also Annex I to the new GBER.

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according to most views expressed during the public consultation.1825 Therefore, the safe harbour for eligible investees has been defined by reference to “a total financing threshold” of EUR 15 million (including both equity/debt and public/private contributions) per undertaking, spread across the whole investment cycle.1826 That focus on the funding gap over the investment cycle is not an entirely new feature. The previous rules on risk capital aid had already established limits in that respect, namely in the form of maximum “investment tranches” of EUR 1.5 million per SME/year (raised to EUR 2.5 million for standard assessment under the 2006 RCG). However, that approach was criticised for being too strict and far from reflecting the unmet need for finance of European SMEs, in particular in sectors with high market entry costs. Moreover, the undesirable effect of that rule was to constrain SMEs into artificial business planning so as to remain within the annual investment cap.

3.541

The new GBER therefore introduces more flexibility in the rules through the application of a simpler indicator: an overall maximum investment amount freely spread over the whole investment cycle for each individual investee. The aim is to cater for the varying capital needs of firms operating in different sectors, including companies with heavy upfront investment costs or requiring increasing volumes of finance as they progress with the implementation of their business plan. The new EUR 15 million threshold includes follow-on investments and there is no restriction as to the number of investment rounds that can be aided. Thus, it allows both investees and investors to adjust the amounts and sequence their investment rounds in accordance with the milestones set out in their business plan.1827

3.542

1825 See Annex 1 to the Commission Staff Working Document - Impact Assessment accompanying the Guidelines on State aid to promote risk finance investments (SWD(2014) 6. 1826 Article 21(9) of the new GBER. 1827 At first sight, the replacement of EUR 1.5 million by EUR 15 million may seem to be a multiple-fold increase of the threshold. While the new threshold provides for a more generous safe harbour to risky investments, the chosen level adheres to the Commission’s enforcement experience. In a recent case (Commission Decision of 30.05.2012 on UK Amendments of the Enterprise Investment Scheme and the Venture Capital Trusts Scheme (Case SA.33849 (12/N)), summary notice in OJ C 196, 04.07.2012, p. 3), the Commission allowed after a detailed assessment annual investment tranches of up to GBP 5 million. Thus, taking into account the interest-rate fluctuation, the EUR 15 million total financing would correspond to approximately two or three rounds of successive investments into the same SME.

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5.1.2 Notifiable schemes 3.543

The RFG acknowledge that certain undertakings falling outside the four blockexempted categories may also face a funding gap, which could justify their inclusion as recipients of risk finance aid. Potentially eligible investees include (i) small mid-caps, (ii) innovative mid-caps, (iii) SMEs beyond seven years from their first commercial sale and (iv) undertakings faced with a funding gap exceeding EUR 15 million. In all those cases, and subject to appropriate justifications grounded on a solid ex-ante assessment, the Commission may authorise the aid measure subject to a number of conditions.

3.544

As regards investments in mid-cap companies, the new approach is to distinguish, within the wide range of firms that may fit into that category, two specific classes of undertakings which are likely to face constraints similar to those affecting eligible SMEs.

3.545

The first includes so-called small mid-caps. In the absence of an Union-wide regulatory definition, the RFG define a small mid-cap as an undertaking whose number of employees does not exceed 499, whose annual turnover does not exceed EUR 100 million and whose annual balance sheet does not exceed EUR 86 million.1828 As those companies may still be in their growth phase, when it is difficult and costly for private investors to make relevant assumptions as regards future market prospects, the Commission is ready to consider positively measures designed to overcome such information problem. Moreover, the Commission may accept that, by including small mid-caps as eligible investment targets, the financial intermediary could articulate its investment strategy around a more diversified investment portfolio, with enhanced entry and exit possibilities. That approach is in line with the objective of allowing the development of a seamless financing stream available to companies from their start-up to internationalisation, and fits with the policy objective of encouraging SMEs to grow into global players. In its assessment, the Commission will take into account the labour- and capital-intensity of the targeted undertakings, as well as other criteria reflecting specific financing constraints affecting small mid-caps (for example, the absence of sufficient collaterals for a large loan).

3.546

The second class captures so-called innovative mid-caps. They are defined as undertakings fulfilling certain innovativeness criteria laid down in the RFG and whose number of employees does not exceed 1500. In particular, a mid-cap is 1828 RFG, paragraph 52(xxvii).

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considered “innovative” if its R&D and innovation costs, as defined by the new GBER, represent (a) at least 15 per cent of its total operating costs in at least one of the three years preceding the first investment under the risk finance aid measure, or (b) at least 10 per cent of its total operating costs calculated as a yearly average over the three years preceding the first investment under the risk finance aid measure. The rationale for that definition is that innovative mid-caps may be faced with severe technological challenges requiring unsecured investments for expected high returns over the long term. In such a case, risk finance aid may be necessary for enticing private investments into such risky plans until the beneficiary has proven its new technology and scaled its capacities up to a point where it becomes able to attract financing on its own. Moreover, the RFG recognise that certain SMEs beyond seven years from their first commercial sale may still be at an expansion or early growth stage and can therefore be affected by the same market failure as younger SMEs. For instance, this may be the case for innovative SMEs or SMEs operating in highrisk sectors such as the biotech, cultural and creative industries.

3.547

Finally, Member States may notify measures covering undertakings affected by a funding gap larger than EUR 15 million, if they demonstrate that the gap can be bridged only via risk finance aid. In particular, in certain industries where the upfront investment costs are relatively high, such as in life sciences, green technology or energy sectors, EUR 15 million may not be sufficient to set the company on a sustainable growth path. Therefore, the Commission may approve risk finance measures targeting undertakings whose business plan identifies capital needs in excess of EUR 15 million if the ex-ante assessment convincingly proves the existence of such a larger funding gap.

3.548

5.2 Financial instruments: admissible forms of investments and financial parameters Recognising that the relevant market failure extends beyond equity and affects debt finance, resulting in a broader “funding gap” for SMEs, the revised rules allow for a free choice in terms of forms of investment. Such a freedom is however subject to several conditions established by the new GBER and the RFG to steer Member States towards a design of their risk finance measures that is appropriate, has an incentive effect and is proportionate to the goal sought.

3.549

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5.2.1 Schemes falling under the new GBER 3.550

The new risk finance rules do not contain any restriction as to the ratio of the different forms of funding provided to SMEs.1829 Therefore, according to the new GBER, risk finance measures may include a vast set of financial instruments to the exclusion of securitisation instruments and refinancing of existing loans.1830 In practice, at the level of financial intermediaries, the new GBER covers financial instruments taking the form of equity or quasi-equity, financial endowments or loans to provide risk finance investments to eligible undertakings, as well as guarantees and counter-guarantees to cover losses from risk finance investments into eligible undertakings. At the level of eligible undertakings, risk finance aid may take the form of equity, quasi-equity investments, loans, guarantees, or a mix thereof.

3.551

That broad scope in terms of admissible forms of investment for aided financial instruments is counterbalanced by a number of financial parameters aimed at ensuring an appropriate design of the measure. Such specific conditions mainly relate to (i) the minimum required private capital participations, (ii) the risksharing arrangements between the public and private investors and (iii) the methods for ensuring a pass-on of the economic advantage of the aid to the final investees, i.e. into the real economy where the market failure lays.

5.2.1.1 Minimum private investment ratios 3.552

As regards the minimum private investment ratios, the new risk finance rules have introduced an important change with the view to better reflect the risks involved in each transaction, and to remove a regional approach that no longer appeared justified in the light of the increasingly transnational nature of business finance markets.1831 In essence, the region-based and flat minimum private 1829 Under the 2006 RCG at least 70 per cent of the budget of the measure had to be in the form of equity and quasi-equity, leaving only 30 per cent to be used for liquidity management and the provision of loans. While it was possible to provide a higher ratio of debt to equity, it required notification, detailed assessment, and was restricted to small companies receiving seed capital (Section 5.1(e) of the 2006 RCG). Those limitations proved to be very restrictive both vis-à-vis the SMEs receiving aided investments, as well as the investors or investment funds. On the one hand, the owners of young companies often prefer to receive some part of the financing in the form of loans not to dilute their shareholding in their companies. On the other hand, finance providers may also be keen to provide a more flexible mix of equity and loans, because the latter ensures steady revenues until exit compared to the more long-term and more uncertain equity investments, which may be equity, quasi-equity, loans, guarantees, and other hybrid forms, such as leases, or counter-guarantees. 1830 Article 21(2) of the new GBER. 1831 Several stakeholders in the public consultation pointed out that the minimum 50 per cent independent private investment, or 30 per cent in assisted regions - as required for block-exempted risk capital measures and notified measures under standard assessment - was difficult to procure in case of early stage companies

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investment ratios (50 per cent or 30 per cent depending on the assisted or nonassisted status of the region concerned) have been replaced by minimum private investment ratios modulated according to the inherent riskiness of the investee. Thus, for equity and quasi-equity investments into or loans provided to SMEs before their first commercial sale (when the private investors are the most reluctant to invest), the minimum required private capital participation has been pitched at a low level (10 per cent of the risk finance provided to the investee under the measure).1832 In other words, in that case the State can provide up to 90 per cent of the financing. For companies within seven years from their first commercial sale the minimum private capital participation is 40 per cent, while the applicable ratio is 60 per cent for follow-on investments in eligible undertakings after the seven-year period and for SMEs that receive de minimis risk finance aid.1833 The logic behind those ratios is that a company becomes gradually more attractive to private investors as it grows into more advanced development stages. For funds holding a multi-stage investment portfolio, the new GBER has introduced an element of flexibility by requiring the financial intermediary to achieve a private capital participation “that represents at least the weighted average based on the volume of the individual investments in the underlying portfolio and resulting from the application of the minimum participation rates”. 1834 The use of a weighted average is meant to facilitate the implementation of the ceilings by reflecting the different stages of development of the investees comprised within a single portfolio.

3.553

As already pointed out above1835, the minimum private investment has to come from investors that are independent from the target SME. The rationale for that requirement is that the positive effects of the aid may be presumed to offset potential distortive effects only if the measure is commercially managed and profitoriented, in other words if it involves non-biased profit-seeking private investors having an interest in selecting investees with credible business plans and high growth potential. As that requirement may be difficult to fulfil for companies at a seed stage, any investor is considered to be independent from the investee if the risk finance investments target the creation of new undertakings.1836 That

3.554

1832 1833 1834 1835 1836

where the risks are high and private investors are reluctant to invest. Lower private investment ratios were only approved if the investee was a small and seed phase companies, and required the demonstration of the market failures necessitating going beyond the standard conditions. See Article 21(10) of the new GBER. See Article 21(18) of the new GBER. See Article 21(11) of the new GBER. See Section 3 of this chapter. See Article 2(68) of the new GBER.

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requirement also reflects the Commission’s recent enforcement practice authorising the owners of the company, their family or friends to provide a minor part of the investment under certain conditions.1837

3.555

For risk finance measures providing guarantees or loans, the new GBER requires Member States to verify that the financial intermediary responsible for the deployment of the measure (which acts also as a co-investor) is effectively providing finance to firms that would not have been served without the aid.1838 That condition aims at reserving the benefit of the block exemption only to measures that have a genuine incentive effect.

5.2.1.2 Risk-sharing arrangements between the public and private investors 3.556

As regards the risk-sharing arrangements between the public and private investors, and for investments other than guarantees, the selection of the most procompetitive investment strategy, preference should be given to those financial intermediaries planning to leverage private investments via asymmetric profitsharing rather than downside protection.1839 Moreover, when a measure includes asymmetric loss-sharing between public and private investors, the first loss assumed by the public investor must be capped at 25 per cent of the total investment. In the case of guarantees, those rules are adjusted to take into account the specific nature of that instrument. What matters here is not the ratio between public and private finance deployed in each investment (the underlying loans being generally funded only by private credit institutions) but the share of possible losses that the instrument is designed to cover. Therefore, for guarantees the scope of the safe harbour is limited to capped guarantee instruments and the guarantee rate must be limited to 80 per cent, while the total losses assumed by the Member State must be capped at a maximum of 25 per cent of the underlying guaranteed portfolio.1840 Moreover, only guarantees covering expected losses can be provided free of charge. If a guarantee covers also unexpected losses, the financial intermediary must pay, for the part of the guarantee covering the unexpected losses, a guarantee premium in line with market rates. 1837 See e.g. para. 33 of Commission Decision of 20.04.2011 on French Fonds national d’amorçage (Case SA.31730 (11/N)), summary notice in OJ C 174, 15.06.2011, p. 1; and para. 12 of Commission Decision of 18.09.2012 on Italian Regional Venture Capital Scheme (Case SA.34006 (11/N)), summary notice in OJ C 352, 16.11.2012, p. 1. 1838 See Article 21(16) of the new GBER. 1839 See Article 21(13) of the new GBER. For instance, in the case of asymmetric profit-sharing, the private investor receives more of the realized profits, while down-side protection refers to the situation where the public investor bears more of the losses. 1840 See Article 21(13)(c) and (d) of the new GBER.

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5.2.1.3 Pass-on of the aid to the final beneficiaries For all debt instruments, Member States must put in place a mechanism allowing for the pass-on of the aid to the final investees. That duty means that the financial intermediary must operate a mechanism ensuring that the economic advantages deriving from the measure are efficiently used to bridge a funding gap in the real economy. Therefore, the intermediary bank must pass those advantages on “to the largest extent to the final beneficiaries, in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates”.1841 Since the benefits accruing to the intermediary bank may be difficult to quantify, and therefore unlikely to be passed-on in full, those financial intermediaries are presumed to receive unquantifiable but compatible aid under the new GBER.1842 In that respect, the RFG further specify that “the pass-on mechanism must include adequate monitoring arrangements, as well as a claw back mechanism”. 1843

3.557

Finally, it is important to mention two additional elements of flexibility that have been introduced in relation to replacement capital operations and liquidity management by investment funds. While the 2006 RCG explicitly excluded from their scope replacement finance and buy-outs,1844 the new GBER allows certain replacement capital transactions, under the strict condition that the purchase of existing shares is combined with an injection of fresh capital representing at least 50 per cent of each transaction. Pure buy-outs continue however to be excluded as no empirical evidence demonstrates that such operations suffer from any market failure. Moreover, for equity and quasi-equity investments, the new GBER allows up to 30 per cent of the fund’s aggregate capital contributions and uncalled committed capital to be used for liquidity management purposes.

3.558

1841 See Article 21(16)(a) of the new GBER. 1842 It is important to underline the difference between such a pass-on mechanism and the methodology required to justify a no-aid measure (i.e. with no advantage at the level of the provider of the debt instrument). It is also important to recall that, pursuant to para. 43 of the RFG “the fact that financial intermediaries may increase their assets and their managers may achieve a larger turnover through their commissions is considered to constitute only a secondary economic effect of the aid measure and not aid to the financial intermediaries and/or their managers”. 1843 See para. 104 of the RFG. 1844 The logic behind that exclusion is that such transactions do not necessarily provide additional fresh capital to the target company since they simply operate a change in ownership of existing shares. Therefore it is questionable whether they address any market failures.

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5.2.2 Notifiable schemes 3.559

Member States must notify risk finance aid schemes whose financial design parameters diverge from those permitted by the new GBER. To the extent that those schemes target the same undertakings that would be eligible under the new GBER, the market failure relating to the investees’ eligibility can still be presumed and does not need to be proved. Instead, the ex-ante assessment needs to justify the use of parameters going beyond the limits set in the new GBER.

3.560

The RFG recognise that, in certain circumstances, measures with financial design parameters exceeding the ceilings in the GBER may be authorised if, by taking a riskier financing position, public funding effectively induces private investors or lenders to provide additional financing.1845 That category of notifiable schemes includes two main classes: (i) schemes providing for lower private investor participation than in the new GBER, and (ii) schemes providing private investors with a more favourable loss protection than under new GBER.

5.2.2.1 Schemes allowing for lower levels of private investor participation than required under the new GBER 3.561

As regards schemes allowing for a level of private investor participation lower than required under the new GBER, the RFG ask Member States to conduct an ex-ante assessment which should address two main issues: the demonstration that the measure can leverage additional private funding that would not have been provided otherwise (or would have been provided in different forms, amounts or terms); and the demonstration that the estimated potential to raise additional private investment (on a portfolio or deal-by-deal basis) is correlated to the market failure affecting the specific range of eligible undertakings targeted by the measure.1846

3.562

Such an approach implies that no risk finance measure can be authorised if inadequate to attract private capital into each investment; in other words, if it provides de jure or de facto for the full investment to be drawn only from public resources. That situation would be mostly unlikely to fulfil the compatibility conditions of the RFG even if the 100 per cent public investment were to target the riskiest class of early-stage SMEs.1847 Outside that “no-go area”, the Commission will enforce the rules taking into account the economic evidence provided 1845 See para. 83 of the RFG. 1846 See para. 95 of the RFG. 1847 However, such SMEs could be supported by State aid under another appropriate legal base.

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in the ex-ante assessment regarding the relevant market failure. In particular, the RFG suggest that the Commission may be more likely to accept lower levels of private participation in case of risk finance measures targeting specifically SMEs before their first commercial sale or at their proof-of-concept stage. Alternatively, for such investment targets, the Commission may accept that the private participation is partly non-independent in nature, i.e. is provided by the owner of the beneficiary undertaking.1848 At the other end of the spectrum, the RFG indicate that for SMEs that have been operating on a market for more than seven years, a minimum private participation ratio of 60 per cent is normally required.1849

5.2.2.2 Schemes providing private investors with a more favourable loss protection than allowed under the new GBER Member States may notify schemes providing private investors with a more favourable loss protection than allowed under the new GBER. In such a case, the Commission will take into account the balance of risks and rewards between the public and private investors and consider positively measures whereby “the losses are shared pari passu between the investors, and private investors only receive upside incentives”.1850 The reason for taking that approach is that the closer the risk and reward sharing is to actual commercial practices, the less distortive is the measure. Conversely, measures combining strong asymmetry on the downside and levels of independent private capital participation lower than the GBER ratios could hardly be found compatible under the RFG.1851

3.563

In the area in between those two extremes, the Commission may take into account the extent of the residual risk retained by the selected private investors relative to the expected and unexpected losses assumed by the public investor, as well as the balance of expected returns between the public investor and the private investors. As a general criterion, the RFG indicate that “a different risk and reward profile could be accepted if this maximises the amount of private investment, without undermining the genuine profit-driven character of the investment decisions”. 1852 Therefore, in the context of the notification procedure, the exact nature of the incentives granted to private investors plays an important role.

3.564

1848 1849 1850 1851 1852

See para. 96 of the RFG. See para. 97 of the RFG. See para. 98 of the RFG. See para. 98 of the RFG, in fine. See para. 100 of the RFG.

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3.565

As a matter of principle, the balance of risks and rewards should be determined through an open and non-discriminatory process of selecting financial intermediaries and investors.1853 In particular, Member States should demonstrate that “in the process of selecting private investors, all participants in the process were seeking conditions that would not be covered by the General Block Exemption Regulation, or that the tender was inconclusive”. 1854 The Commission will assess that evidence in the light of specific considerations concerning respectively equity and debt instruments: a.

For equity/quasi-equity instruments, the RFG indicate that in general “upside incentives create a better alignment of interests between public and private investors”. 1855 Conversely, downside protection, whereby only the public investor is exposed to the risk of poor performance, may lead to misalignment of interests and sub-optimal allocation of resources at the level of the final investees. Equity instruments with capped return, call options and asymmetric income cash split are all described as instruments offering good incentives. Equity instruments providing incentives via loss mitigation may only be justified in the event of a severe market failure, which must be clearly identified in the ex-ante assessment. The RFG suggest that measures targeting predominantly SMEs before their first commercial sale or at the proof-of-concept stage are more likely to meet that test.1856 As a basic safeguard, the RFG specify that “the first loss piece borne by the public investor must be capped”1857 without, however, providing any binding ceiling.

b.

In case of funded debt instruments (e.g. subordinated loans, risk-sharing loans), the financial intermediary acts as a co-investor in the eligible undertakings but enjoys preferential treatment compared to the public investor/lender as the instrument mitigates its own exposure to credit risks resulting from the underlying loan portfolio. Again, where the risk mitigation characteristics of the instrument lead the public investor/lender to

1853 That issue should be carefully addressed by the granting authorities within the call for expression of interest that they should normally publish in order to proceed to that selection process. By the same token, the managers of the fund of funds should be required to legally commit as part of their investment mandate to determine via a competitive process for the selection of eligible financial intermediaries, fund managers or investors, the preferential conditions which could apply at the level of the sub- funds. 1854 See para. 101 of the RFG. 1855 See para. 108 of the RFG. 1856 A preference for downside protection mechanisms may also be justified for measures operating via a fund of fund structure, aiming at attracting private investors at this level. The rationale behind the latter rule is that in Europe institutional investors, typically pension funds, are low risk-takers. 1857 See para. 110 of the RFG.

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assume a first-loss position exceeding the cap set out by the new GBER, the measure may only be justified if it addresses a severe market failure that can be clearly identified in the ex-ante assessment. Measures providing for an explicit cap on the first losses assumed by the public investor are more likely to receive the approval of the Commission, in particular where such a cap does not exceed 35 per cent. c.

In case of unfunded debt instruments, in particular as regards guarantees, the RFG recognise that, in duly justified cases (and subject to the results of the ex-ante assessment), the aid instrument may fix a guarantee rate higher than the 80 per cent ceiling established in the new GBER, but also state that the higher rate should not exceed 90 per cent.1858 As to the level of the guarantee cap, it should be noted that the cap rate should not exceed 35 per cent and cover in principle only the expected losses. If it also covers unexpected losses, the latter should be priced at a level that reflects the additional risk coverage. For uncapped guarantees (guarantees with a guarantee rate, but with no cap rate), the RFG indicate that the Commission’s approval can be envisaged only in duly justified cases and on condition that the instrument is priced in such a manner as to reflect the additional risk coverage provided by the guarantee. In practice, the guarantee premium will have to be priced in line with market conditions for unexpected losses and above the 35 per cent cap all losses may be presumed to be unexpected.

The type of assessment that the Commission must carry out in that area also takes into account the characteristics of the sectors which are principally targeted by the notified measure. In that respect, the RFG states that “In certain cases, [...] it may prove necessary to give preference to downside protection, namely when the measure targets certain sectors in which the default rate of SMEs is high. This may be the case for measures targeting SMEs before their first commercial sale or at the proof-of-concept stage, sectors faced with important technological barriers, or sectors where the companies have a high dependence on single projects requiring large upfront investment and entailing high risk-exposure, such as the cultural and creative industries”.1859

3.566

1858 See para. 117 of the RFG. 1859 See para. 86 of the RFG.

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5.3 Eligible financial intermediaries and funding structures 5.3.1 Schemes falling under the GBER 3.567

The 2008 GBER covered only those risk capital measures that took the form of “participation into a profit-driven private equity investment fund managed on a commercial basis”.1860 Credit institutions did not come within the scope of 2008 GBER, which also did not cover many common funding structures, such as funds of funds and public funds co-investing with private investors on a transaction-per-transaction basis, and more complex funding structures with multiple layers of intermediaries.1861 To benefit from the block exemption, Member States had to either invest in an already existing private investment fund, or establish a new fund, together with private investors. By extending the scope of the exemption to a wider range of financial instruments (including equity, quasi-equity, loans and guarantees), the new GBER has also enlarged the range of eligible financial intermediaries. That concept now covers “any financial institution, regardless of its form and ownership, including fund of funds, private investment funds, public investment funds, banks, micro- finance institutions and guarantee societies”.1862

3.568

The grant of risk finance aid through the channel of professional financial intermediaries is a requisite for ensuring a commercial and profit-oriented investment strategy, aimed at generating returns for both the public and the private investors. Therefore, and with the notable exception of aid granted through fiscal incentives to investors, risk finance aid measures where the public authority provides repayable financing directly to private investors or to SMEs fall outside the scope of the new GBER.1863 The latter forms of public investment may be assessed instead under a different legal basis, such as the de minimis Regulation,1864 or the GBER provisions for start-up aid.1865

3.569

Moreover, to comply with the compatibility conditions of the new GBER, the set-up of the funding structure responsible for the deployment of public/private finance must respect certain minimum standards. 1860 See Article 29(2) of the 2008 GBER. 1861 For instance, some risk capital measures had a fund-of-fund investing in several underlying sub-funds, which in turn invest in SMEs. See e.g. Commission Decision of 26.09.2007 on Belgian Risk Capital Scheme ‘ARKimedees Risk Capital Programme’ (Case N 155/2007), summary notice in OJ C 288, 30.11.2007, p. 1. 1862 See para. 52(x) of the RFG. 1863 See Article 21(13)(a) of the new GBER and para. 20 of the RFG. 1864 Commission Regulation (EU) No 1407/2013 on the application of Article 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1. 1865 See Article 22 of the new GBER and below in Section 6.

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First, and most importantly, the financial intermediary and its manager have to be selected through an open, transparent and non-discriminatory call.1866 As a result, the safe-harbour does not extend to measures where a public financial intermediary channelling risk finance aid and making use of “in-house” management is designated directly by the State, without having undergone a competitive selection process.1867

3.570

By requiring a competitive selection process, that rule intends to ensure that the financial intermediary establishes its investment strategy, and actively scouts and screens new potential investments, with a view to reaching the best possible balance in the risk-reward sharing between the public and the private investor. Furthermore, it confirms the general ban of all forms of discrimination within the Union that could tilt the playing field against certain operators in the business finance market. More specifically, the Member State, or the entity entrusted with the implementation of the measure, must examine the bids submitted by competing financial intermediaries through a due diligence process aimed at selecting the most efficient financial intermediary, on the basis of “a commercially sound investment strategy, including an appropriate risk diversification policy aimed at achieving economic viability and efficient scale in terms of size and territorial scope of the relevant portfolio of investments”.1868

3.571

Secondly, the selected financial intermediary and its manager must commit to act with the diligence of a professional manager, in good faith and avoiding conflicts of interest.1869 Moreover, they must commit to choose the terms for each investment on the basis of “a viable business plan, containing details of product, sales and profitability development, establishing ex-ante financial viability”.1870

3.572

Thirdly, the remuneration of the financial intermediary in its capacity as a manager must be in line with market standards. Such compliance is presumed to exist when the manager is selected through an open, transparent and non-discriminatory competitive process.1871 For measures financed from the ESIFs, the Delegated Act on the Common Provisions Regulation1872 defines the maximum

3.573

1866 See Article 21(13)(b) of the new GBER. 1867 As pointed out in para. 41 of the RFG, such measures may however be designed in a manner in line with market conduct (i.e. excluding aid at all levels) or by reserving to the designated public financial intermediary the role of an “entrusted entity”. 1868 Article 21(14)(b) of the new GBER. 1869 Article 21(15)(a) of the new GBER. 1870 Article 21(14)(b) of the new GBER. 1871 Article 21(15)(b) of the new GBER. 1872 Articles 12 and 13 of Commission Delegated Regulation (EU) No 480/2014 supplementing Regulation (EU) No 1303/2013, laying down common provisions on the European Regional Development Fund, the

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remuneration thresholds for financial intermediaries, which means that in such cases the remuneration level determined via the competitive selection cannot exceed such thresholds. Moreover, to better align the interests of the financial intermediary with the interests of the public investor, its remuneration must be linked to performance. Alternatively, the alignment of interests can be achieved by requiring the financial intermediary to co-invest own resources at the same terms as the public investor.1873

3.574

Finally, as a general principle, while Member States cannot discriminate between financial intermediaries on the basis of their place of establishment or incorporation,1874 financial intermediaries may be required to fulfil predefined criteria objectively justified by the nature of the investments.

5.3.2 Notifiable schemes 3.575

For those schemes that do not fit into the safe harbour of the new GBER (either because they target different categories of investees, or because they do not fulfill its financial design parameters), Member States must submit a notification built on the findings of the ex-ante assessment, and the Commission must examine that notification in the light of a number of additional assessment criteria set out in the RFG. Those criteria are adjusted to the role played by different types of financial intermediaries as they act in different funding structures (e.g. venture capital funds, banks and guarantee societies). They are additional in the sense that, in order to be approved, the notified measure must also respect the specific rules applicable to financial intermediaries pursuant to the new GBER.1875

3.576

The safeguards put in place in the RFG to ensure the compatibility of measures falling outside the scope of the GBER (potentially the most distortive of competition) aim at strengthening the commercial management and profit-driven logic that is supposed to underpin the financial intermediary’s investment strategy. In particular, the RFG require the financial intermediary to commit to achieve the public policy goals and the targets fixed by the Member State (namely to provide finance at affordable rates to SMEs, including the riskiest)

European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down the general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund, OJ L 138, 13.05.2014, p. 5. 1873 Article 21(15)(c) of the new GBER. 1874 Article 21(12) of the new GBER. 1875 See Article 21 of the new GBER

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while minimizing the aid to the private investors.1876 To ensure the achievement of that aim, the RFG require a satisfactory alignment of interests between the public and the private investor. The additional assessment criteria set out for that purpose concern, first, the position of the financial intermediary as coinvestor in the measure and, second, the structure of its remuneration. First, as regards the position of the financial intermediary as co-investor, the new rules take into account the differences between intermediaries operating in equity or debt markets,1877 as the position of investment funds and their manager selling equity instruments obviously differs from the position of banks or guarantee societies providing debt instruments.1878 In that respect, any financial intermediary “may co-invest alongside the Member State, as long as the terms and conditions of such a co-investment are such as to exclude any possible conflict of interests”.1879 However, while “the ability of the [fund] manager to provide investment from its own resources can be one of the selection criteria”1880 (implying that alignment of interests through a co-investment transaction is not a mandatory requirement for fund managers), a co-investment by the financial intermediary is instead mandatory in case of banks providing funded debt instruments. The RFG state that “risk-sharing loans should ensure a substantial co-investment rate by the selected financial intermediary” and that “this is presumed to be the case if such a rate is not lower than 30 per cent of the value of the underlying loan portfolio”.1881 Moreover, as a general condition applicable to both equity and debt instruments, whenever the financial intermediary coinvests into the instrument, it “must take at least 10 per cent of the first loss piece”. The reason for that requirement is that “[s]uch co-investment could contribute to ensure that investment decisions are aligned with the relevant policy targets”.1882

3.577

1876 In that respect, in para. 141 of the RFG, the Commission recalls that “economic alignment of interests between the Member State and the financial intermediaries [...] can minimise the aid” and further states that “the interests must be aligned both as regards the achievement of the specific policy targets and the financial performance of the public investment into the instrument”. 1877 An example of the different treatment of equity and debt market operators is the rule regarding the “pass-on” of the aid element to the final investees, as set out in both the GBER and the RFG, which is only relevant for debt instruments and applies therefore only to credit institutions acting under the measure as financial intermediaries and as risk-sharing partners. 1878 Typically, the latter type of intermediary is always a direct co-investor in the risk finance instrument. 1879 See para. 142 of the RFG. 1880 See para. 103 of the RFG. 1881 See para. 114 of the RFG. 1882 See para. 103 of the RFG.

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3.578

Second, as regards the criteria applicable to the financial intermediary’s remuneration structure, “the total management fees must not exceed operational and management costs necessary for the execution of the financial instrument concerned, plus a reasonable profit, in line with market practice. The fees must not include investment costs”.1883 In addition, the RFG further indicate that the remuneration of the financial intermediaries must include an annual management fee, as well as a performance-based incentive, such as carried interests. The performance-based component must be significant relative to the overall level of remuneration, and designed in such a manner as to reward the financial performance of the instrument and the attainment of the specific policy targets. Therefore, for the purpose of an efficient selection of investees, policyrelated incentives must be balanced with financial performance incentives. As regards the level of the performance-related component of the remuneration, it should reflect normal market practices and be paid “not only for the successful disbursement and the amount of private capital raised, but also for the successful returns on investments, such as income receipts and capital receipts above a certain minimum rate of return or hurdle rate”.1884

5.4 Fiscal instruments: admissible incentives and financial parameters 5.4.1 Schemes falling under the new GBER 3.579

The risk capital rules in the 2008 GBER did not cover measures in the form of fiscal incentives, which were left for an individual assessment under the 2006 RCG, following notification to the Commission. Since 2007, the Commission adopted around 20 decisions authorising different types of tax reductions or tax exemptions for risk capital investments.1885 That volume of notifications and decisions suggests that fiscal risk capital measures were (and still are) commonly used by Member States as a mean to encourage private investment in early-stage SMEs.

3.580

Building on the experience gained through its decisional practice, the Commission has enlarged the scope of the GBER to cover such measures. Thus, for the first time, “tax incentives to private investors who are natural persons providing risk finance directly or indirectly to eligible undertakings” are exempted pursuant to the new GBER.1886 1883 See para. 146 of the RFG. 1884 See para. 145 of the RFG. 1885 It amounts to approximately one-fifth of all the risk capital decisions adopted during a seven-year period. See Annex 1 to Commission Staff Working Document Impact Assessment accompanying the Guidelines on State aid to promote risk finance investments, SWD(2014) 6. 1886 See Article 21(3) of the new GBER.

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Tax incentives to corporate investors are, however, excluded from the scope of that safe harbour. The reasons for that distinction are twofold: on the one hand, natural persons are not undertakings and, therefore, are not subject to State aid law. As such, compliance with State aid rules is not assessed at the level of the aided investors. On the other hand, corporate tax incentives may be potentially very distortive and it is therefore necessary to ensure that such fiscal instruments do not negatively affect competition either between financial intermediaries or between SMEs. Given the lack of harmonisation in corporate taxation amongst Member States, it has been considered preferable to take a prudent approach and to maintain the notification and individual assessment requirements for measures granting fiscal incentives to corporate investors.

3.581

Fiscal incentives to natural persons investing in eligible SMEs may be granted “directly or indirectly”. That distinction is important in respect of aided financial instruments which, as has been observed above, must always be implemented via a financial intermediary. The new GBER establishes that all risk finance measures must be implemented via one or more financial intermediaries “except for tax incentives to private investors in respect of their direct investments into eligible undertakings”.1887 Accordingly, for fiscal instruments, Member States can opt for direct aid to individual (non-corporate) investors or for the use of a more complex funding structure (as for aided financial instruments). All the other conditions of the new GBER on risk finance aid remain applicable to fiscal instruments. Obviously, in case of direct investments by natural persons, the fiscal authorities of the Member States will have to ensure that the tax advantage is granted to each investor only after an appropriate verification of the eligibility of the investees and of the claimed deductible investments.

3.582

5.4.2 Notifiable schemes The fiscal schemes covered by the RFG encompass a variety of tax exemptions for corporate investors, including institutional investors or large undertakings. Tax incentives to corporate investors may take the form of income tax reliefs and/or tax reliefs on capital gains and dividends, including tax credits and deferrals.1888 Irrespective of the type of tax relief, the qualifying shares must be fullrisk, ordinary shares, newly issued by an eligible undertaking and they must be held for at least three years. The relief cannot be available to investors who are not independent from the company in which they invest.

3.583

1887 See Article 21(13)(a) of the new GBER. 1888 See para. 122 of the RFG.

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3.584

As regards the scope of the RFG, an important point must be stressed. The 2006 RCG were ambiguous as regards the compatibility of fiscal incentives to financial intermediaries. It was unclear to what extent a risk capital measure could provide fiscal incentives to investment funds and/or their managers. More recent case-law of the Union Courts has clarified that fiscal incentives to financial intermediaries can be found compatible only if they relate to the amount coinvested by the fund manager out of its own resources and not as a reward for its intermediation services.1889 The RFG now incorporate that principle.1890

3.585

As regards the transparency of the instrument, the RFG consider that such types of fiscal measures are appropriate and therefore have an incentive effect if the Member State can produce evidence demonstrating that the instrument “is based on a well-structured set of investment requirements, made public through appropriate publicity, and setting out the characteristics of the eligible undertakings which are subject to a demonstrated market failure”.1891 Such publicity should also include the necessary ceilings and caps defining the maximum advantage that each individual investor may draw from the measure, as well as the maximum investment amount for each individual eligible undertaking. Moreover, the fiscal advantage must be open to all investors fulfilling the required criteria without discrimination as to their place of establishment.

3.586

As regards the proportionality of the fiscal incentive at the investors’ level, the 2006 RCG contained no clear rule limiting the fiscal benefit for corporate investors. Their guidance was mainly focused on the eligibility and the proportionality of the investments made at the level of the investees. In the context of its enforcement practice, the Commission has generally considered as compatible income tax reliefs that are designed in such a way so as to contain specific limits as to the maximum percentage of the invested amount that the investor can claim for the purposes of the tax relief, as well as a maximum tax break amount which can be deducted from the investor’s tax liabilities. In other words, the Commission has authorised in practice only schemes which also control the proportionality of the aid at the level of the investors. Building on that recent enforcement practice, the RFG fill an important regulatory gap by distinguishing between income tax reliefs and tax reliefs on dividends and capital gains.

3.587

As to the former, the RFG clarifies that “investors providing finance to eligible undertakings may receive relief of up to a reasonable percentage of the amount 1889 Case T-424/05 Italy v Commission (‘Fondo Chiuso’) ECLI:EU:T:2009:49. 1890 See para. 88 of the RFG. 1891 See para. 123 of the RFG.

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invested in eligible undertakings, provided the maximum income tax liability of the investor, as established prior to the fiscal measure, is not exceeded. In the Commission’s experience, capping the tax relief at 30 per cent of the invested amount is considered reasonable. Losses arising upon disposal of the shares may be set against income tax.1892 As to tax reliefs on dividends and capital gains, any dividend received in respect of and any profit on the sale of qualifying shares may be fully exempt respectively from income tax and capital gain tax.1893 Moreover, capital gains tax liability on disposal of qualifying shares can be deferred if reinvested in new qualifying shares within one year.

3.588

For all types of fiscal instruments, the RFG establish a general rule whereby fiscal schemes must have a maximum duration of 10 years and, if the scheme is prolonged beyond that period, the Member State must carry out a new ex-ante assessment together with an evaluation of the effectiveness of the scheme during the period of its implementation.

3.589

6.

Start-up aid and supply-side measures

6.1 Start-up aid In certain cases, the transaction costs involved in the set-up of a risk finance aid instrument may be too high for measures directed at smaller investments and with a low overall budget. In such cases, Member States may prefer to address the relevant market failure through direct aid to the final investees, within the limits imposed by the new GBER. Having regard to the negative effects that such a direct aid may entail in the selection of the final investees (if disturbed by considerations going beyond a pure commercial logic), the new GBER has sought to find a good balance by limiting such direct aid to the benefit only of start-up companies, i.e. those that are the most likely to be affected by a market failure in terms of access to finance. Thus, the new GBER exempts from the obligation of notification loans, guarantees and grants provided directly to “[...] undertakings [which are] unlisted small enterprises up to five years following their registration, which have not yet distributed profits and have not been formed through a merger”.1894

3.590

1892 See para. 151 of the RFG. 1893 See para. 152 of the RFG. 1894 See Article 22 of the new GBER.

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3.591

A beneficiary can receive support for loans of an amount comprised between EUR 1 million and EUR 2 million, depending on the assisted/non-assisted status of the region in which it is established. For guarantees, the maximum guaranteed amounts vary between EUR 1.5 million and EUR 3 million, always depending on the type of region. Those amounts correspond to instruments with ten-year maturity and can be adjusted proportionately for shorter maturities. In case of grants, the relevant amounts fall between EUR 0.4 and EUR 0.8 million. Moreover, there is a specific methodology for calculating the ceilings when the aid is provided through a mix of loans, guarantees and grant.1895 For small and innovative enterprises,1896 the maximum amounts may be doubled. It is noteworthy that the RFG do not contain any express reference to direct start-up aid. The silence is not accidental; the specific nature of such aid falls outside their intended scope.

6.2 Aid for alternative trading platforms 3.592

Alternative trading platforms are multilateral trading facilities as defined by the Directive on markets in financial instruments (MIFID)1897 where the majority of the financial instruments admitted to trading are issued by SMEs. They operate similarly to traditional stock exchanges matching investors with the shares of the companies listed on the exchange, with the difference that they target smaller companies, in particular SMEs, and the regulatory and listing requirements are lower. Alternative trading platforms, such as the Alternative Investment Market (AIM) in the UK, constitute alternative sources of financing compared to other traditional sources of finance, such as bank lending or investment funds. The main logic behind the possibility to provide aid to such platforms is to remedy supply-side market failures affecting SMEs’ access to finance.

3.593

The 2008 GBER contained no provisions on aid to alternative trading platforms, and therefore all such measures had to be notified to the Commission 1895 See Article 22(4) of the new GBER. 1896 In accordance with Article 2(80) of the GBER, an innovative enterprise is “an enterprise: (a) that can demonstrate, by means of an evaluation carried out by an external expert that it will in the foreseeable future develop products, services or processes which are new or substantially improved compared to the state of the art in its industry, and which carry a risk of technological or industrial failure, or (b) the research and development costs of which represent at least 10 per cent of its total operating costs in at least one of the three years preceding the granting of the aid or, in the case of a start-up enterprise without any financial history, in the audit of its current fiscal period, as certified by an external auditor”. 1897 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/ EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145, 30.04.2004, p. 1.

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and undergo a detailed assessment under the 2006 RCG. However, the 2006 RCG did not contain any detailed provisions on how to provide such support apart from stating that “the Commission is prepared to consider declaring measures specifically involving an investment vehicle compatible with the common market, provided the necessary evidence for a clearly defined market failure is submitted”.1898 As a result, under the 2006 RCG, only one decision was adopted on that basis, the “Investbx” decision1899, and even there, the positive decision was reached only following the opening of a formal investigation procedure. Although its enforcement experience is rather limited in that area, the Commission sought to increase the legal certainty for public support to that niche market by exempting from notification two types of measures whose ultimate goal is to diversify the available sources of financing for SMEs.1900 First, the platform operator may receive start-up aid within the meaning of the new GBER1901 if it is a small enterprise within five years from its registration and has not yet distributed any profit. In that case, the aid ceilings vary depending on the place of establishment of the operator (with the highest amounts for operators established in less developed regions as defined by the regional aid maps approved by the Commission for each Member State) and on the type of instrument (loans, guarantees, equity injections, grants or a mix thereof ). Where those permissible amounts are too low, and/or the criteria defining the concept of small company are too strict to meet the likely financing needs of an emerging platform, the measure must be notified to the Commission for individual approval under the RFG.

3.594

Second, Member States may set up block-exempted fiscal measures in favour of private investors acting as a natural person and investing in SMEs via an alternative trading platform. The objective of that provision is to create a more balanced playing field between different intermediaries channelling similar risk finance investments, including alternative trading platforms, while limiting risks of distortion of competition resulting from different types of fiscal instruments. However, if Member States wish to provide such tax incentives to corporate investors, they have to notify it to the Commission as for any other risk finance fiscal measure.

3.595

1898 1899 1900 1901

Section 5.1(f ) of the 2006 RCG. Commission Decision of 20.12.2006 on UK aid to ‘Investbx’ (Case C 36/2005), OJ L 45, 20.02.2008, p. 1. See Article 23 of the new GBER. See section 6.2 above.

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3.596

The RFG fill a gap left open by the 2006 RCG and make the Commission’s assessment of notifiable measures more predictable. In particular, the RFG indicate that Member States should provide in the notification a plausible counterfactual scenario comparing, in terms of access to the necessary finance, the situation that the tradable undertakings would face if the platform did not exist. Moreover, the operator of the platform must produce a business plan demonstrating that the aided platform can become self-sustainable in less than ten years. Based on that evidence, the Commission is likely to consider positively aid for the setting up of a new alternative trading platform, especially in Member States where no such platform exists. For existing platforms, there should be evidence based on the business plan demonstrating that the platform can achieve long-term viability after a short-term phase of public support, necessary to overcome a problem due to a persistent shortage of listings and resulting shortage of liquidity. An aid might be less justified when the alternative trading platform is a sub-platform or subsidiary of an existing stock exchange. In all cases, and as a rule, State aid can be granted in order to cover up to 50 per cent of the establishment costs of the platform. In the case of fiscal incentives for corporate investors and/or investors acting as a natural person trading in an existing platform, the same conditions apply as for any other fiscal incentive to risk finance.1902

6.3 Aid for scouting costs 3.597

Early-stage firms are often unable to demonstrate their credit-worthiness or the soundness of their business plans to investors as the screening costs for transactions involving those SMEs may be too large relative to the value of the investment.1903 While risk finance aid leverages the demand side by providing investment-related incentives, the same problem may be tackled by providing a direct subsidy to those involved, on the supply side, in the costly process of scouting and screening potential investment targets. Those costs are generally borne by the investors themselves (including business angels) or by financial intermediaries. To deal with that supply-side impediment, the new GBER contains a simple rule1904: aid for scouting costs is declared compatible with the internal market provided that it covers only the costs for initial screening and formal due diligence undertaken by managers of financial intermediaries or investors to identify eligible undertakings (pursuant to risk finance aid and start-up aid under the new GBER). Moreover, the aid intensity must not exceed 50 per cent of those eligible costs. 1902 See section 5.4 above. 1903 See para. 2 of the RFG. 1904 See Article 24 of the new GBER.

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7.

Specific exceptions to general rules

Due to the fact that risk finance aid presents a number of important features that are different from all the other categories of aid, several general horizontal rules have required specific adjustments, as pointed out in the following sub-sections.

3.598

7.1 Cumulation The aim of the rules on aid cumulation is to avoid double financing of the same eligible costs for the same project. However, it is conceptually difficult to apply that basic principle to risk finance aid, which is a form aid designed to provide finance to a company (without prior identification of eligible costs) rather than to a project. The problem may arise in practice, namely when the same company receives a project-related aid, based on eligible costs, as well as risk finance aid, which can in theory be used to finance the investment in the same project.

3.599

The cumulation rules applicable under the now repealed risk capital regime established that if a SME had first received risk capital aid and subsequently another type of aid (except for R&D&I aid), the relevant aid ceilings or maximum aid amounts had to be reduced by 50 per cent (by 20 per cent for SMEs located in an assisted area).1905 In practice, that rule was rather penalising as the overlap between the two aid measures was only theoretical and because larger companies unaffected by the same funding gap as early stage SMEs could receive project-related aid up to the maximum intensities. Moreover, the old rules were silent as to the approach to be followed when the grant of a project-related aid preceded the provisions of risk capital aid.

3.600

To eliminate that penalising effect and to provide a workable solution for the existing regulatory gap, the new GBER simply allows aid without identifiable eligible costs (risk finance aid, start-up aid and aid for alternative trading platforms) to be cumulated with any other State aid with identifiable eligible costs. As a result, a company receiving risk finance aid may also receive the maximum aid amount or aid intensity admissible for a project-related measure. In particular, the new GBER specifies that “aid without identifiable eligible costs may be cumulated with any other State aid without identifiable eligible costs, up to the highest relevant total financing threshold fixed in the specific circumstances of each case by this or another block exemption regulation or decision adopted by the Commission”.1906 Thus if a company has received start-up aid, the maximum

3.601

1905 See section 6 of the 2006 RCG. 1906 See Article 8(4) of the new GBER.

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amount of risk finance aid that it can receive under the GBER cannot exceed the difference between EUR 15 million and the amount of start-up aid already granted.

7.2 Undertakings in difficulty 3.602

Both the 2008 GBER and the new GBER exclude from their scope undertakings in difficulty.1907 While the 2008 GBER simply referred to the Rescue and Restructuring Guidelines1908, the new GBER contains a definition of undertakings in difficulty which foresees an exception for risk finance measures.1909

3.603

One parameter to define an undertaking is in difficulty is to establish whether at least some members of the company have unlimited liability for the debts of the company and more than half of its capital has disappeared as a result of accumulated losses. However, a SME within seven years from its first commercial sale that qualifies for risk finance investment following due diligence by the financial intermediary is not considered an undertaking in difficulty, unless they are subject to insolvency proceedings or fulfil the criteria under their domestic law for being placed in collective insolvency proceedings at the request of their creditors.

7.3 Publication requirements 3.604

While in general each individual aid award exceeding EUR 500 000 must be made public by the granting Member State, the new GBER provides for two specific exceptions applicable to risk finance aid.1910 First, the amounts invested may be published by broad ranges (instead of indicating the exact amount of each individual aid award). Second, the requirement to publish information on each individual award exceeding EUR 500 000 can be waived with respect to SMEs which have not carried out any commercial sale in any market. The objective of those exceptions is to ensure a wider confidentiality for transactions at both the level of the financial intermediaries and the level of the individual investees because, due to their early stage of development, the investees are particularly vulnerable to hostile counterstrategies of larger and more powerful competitors.

1907 1908 1909 1910

See Article 1(6)(c) of the 2006 GBER and Article 1(4)(c) of the new GBER. See recital 15 of the 2006 GBER. See Article 2(18)(b) of the new GBER. See Article 9 of the new GBER.

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7.4 Transitional and appropriate measures Risk finance aid is different from other types of aid in that it presupposes the participation of private investors that are independent from the target company, whose expectation is to gain profits from their investments in the longrun. Therefore, such legitimate expectations have to be safeguarded in case of changes to the State aid rules on eligibility and financing conditions occurring after the date of their initial (aided) risk finance investment. Against the general principle that when the State aid rules change, the existing State aid measures need to be adapted to the new conditions, the Commission has thus created an exception for certain specific types of risk capital measures.

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Pursuant to the new GBER, risk capital aid schemes set up before 1 July 2014 and block-exempted under the 2008 GBER remain exempted and compatible until the termination of the funding agreement, provided the commitment of the public funding into the supported private equity investment fund was made before 1 January 2015.1911 It is to be recalled that under the 2008 GBER, only those measures were eligible that took the form of public investment into a private equity fund. Therefore, those funds may continue to operate and invest in accordance with their original investment strategy until the end of the duration foreseen in the funding agreement.

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The logic of that exception is that investment funds focusing on early stage companies are often set up for a relatively long period of time (e.g. 10 to 20 years), which goes beyond the typical period of validity of a block exemption regulation (e.g. seven years) and includes a first phase of fund raising and deployment in selected investment targets, followed by a second phase of follow-on investments and exit. Private investors commit their capital on the basis of an investment strategy established in the light of the legal constraints applicable at the time of their initial investment. It is therefore important not to alter ex post the balance of incentives which determined the decision of private investors to join the aided instrument as this could have severe effects on their expected returns. However, it should be noted that this specific rule applies only insofar as the aided fund receives no new public funding after the regulatory change. If such a fund were to be refinanced following the adoption of the new GBER, the Member State concerned would have to take appropriate measures to bring its measure in line with the new rules.

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1911 See Article 58 of the new GBER.

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Moreover, for notified risk capital measures, Member States are required to take appropriate measures to bring them in line with the new rules. However, such an obligation does not concern risk capital aid schemes where the commitment of the public funding to the private equity investment funds (which is entered into by the signing the funding agreement) was made before the date of publication of the RFG, provided that all the conditions in the funding agreement remain unchanged. Those funds may continue to operate and invest in accordance with their original investment strategy until the end of the duration foreseen in the funding agreement.

7.5 The role of national development banks in implementing financial instruments 3.609

In general, development banks are set up to address market failures, caused by information asymmetry, inefficient allocation of risk or social externalities. They are usually active in the financing of SMEs and start-ups and therefore are an important delivery tool in implementing publicly-supported financial instruments, including risk finance aid, cohesion policy financial instruments or centrally-managed EU Financial Instruments, such as COSME or Horizon 2020.

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In recent years, the Commission has adopted a number of decisions related to development banks by which it defined their remit based on the targeted market failures. These decisions concern only the compatibility of aid to the banks themselves, and are without prejudice to the compatibility of the measures that they manage. Therefore, even if the Commission approved the establishment and/or remit of a development bank, the underlying schemes may still need to be notified for approval by the Commission.

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The Green Investment Bank (GIB) decision1912 concerned the establishment of a dedicated investment vehicle in the UK to finance environment-protection related projects and companies. The Commission clearly prescribed the limits of the possible interventions by the Green Investment Bank based on established market failures in terms of sectors, objective of financing and types of finance.

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By the decision on the Portuguese Development Finance Institution (DFI),1913 the Commission approved the establishment of an institution to manage and 1912 Commission Decision of 17.10.2012 in case SA.33984 – United Kingdom, Green Investment Bank (2012/N), OJ C370, 30.11.2012 p. 2. 1913 Commission Decision of 28.10.2014 in case SA.37824 – Portugal, Portuguese Development Finance Institution (2014/N), OJ, C5, 9.1.2015, p.1.

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channel European Structural and Investment Funds (ESIF) allocated to Portugal for the 2014-2020 financing period and the refunds from the previous financing periods, with a view to addressing market failures hampering SMEs’ access to debt, equity and quasi-equity funding. The IFD manages holding funds or specialised funds, with co-investment from private investors. The British Business Bank (BBB) decision1914 also concerned the establishment of a new institution for managing SME access to finance programs in the UK. The BBB is a holding company with three subsidiaries, managing three different streams of activity: the Mandated Arm, the Service Arm and the Commercial Arm. According to the Commission’s assessment, neither the activities of the Service Arm (which provides advice and services to the UK Government), nor those of the Commercial Arm (which is funded on a commercial basis and carries out interventions on a market basis) involved any State aid. The Commission considered instead that the Mandated Arm of the BBB was to operate as a development bank, and approved its capitalization and remit1915 for a limited period of time (until the end of 2019).

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The decisions on national development banks have been adopted directly under Article 107(3)(c) of the Treaty. The decision on the BBB contains a discussion on the legal base of the decision, delineating in this respect the scope of the RFG,1916 which is the specific guideline for SME access to finance state aid schemes.

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In particular, the Commission underlined that apart from some existing schemes to be transferred to the BBB, the initial financing of GBP 6 billion for the Mandated Arm was to be used for SME access to finance schemes that were still to be designed in the future with respect to their eligibility and financing conditions. This means that at the moment of the adoption of the decision, the UK government was still not clear as to the future activities to be implemented by the BBB. By contrast, in a decision approving a risk finance scheme, all the detailed parameters, including the eligible undertakings, the type and conditions of financing, including the maximum investment in any final beneficiary, should be specified.

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1914 Commission Decision of 15.10.2014 in case SA.36061 – United Kingdom, The British Business Bank (2014/N), OJ, C460, 19.12.2014, p.1. 1915 The remit of the Mandated Arm includes in particular SME access to finance measures approved by the Commission - typically under the 2006 RCG or the RFG, - SME access to finance measures that are compatible under the new GBER, de minimis SME access to finance measures, and participation in EU Financial Instruments. 1916 See section 5.2 of the Commission decision of 15.10.2014 in case SA.36061 – United Kingdom, The British Business Bank (2014/N), OJ, C460, 19.12.2014, p. 1.

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It is also worth noting another difference, which is that the RFG does not cover the capitalization of an institution which is not tied to the budget of a specific risk finance measure. This means that the budget approved in a risk finance decision can only be utilized for the specific risk finance scheme approved by that decision, and according to the conditions laid down therein. By contrast, the decision on the BBB gives a freedom to the UK government to design the schemes, as many as they wish, to be implemented within the broad parameters of the remit of the BBB.

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Moreover, in the light of the notified remit, the Commission considered that substantial amendments would have been necessary to the measure to make it compatible under the RFG.

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Finally, the Commission noted that the Mandated Arm could also provide financing directly to final beneficiary undertakings, which is excluded from the scope of the risk finance State aid rules.

3.619

In the light of the foregoing, it is likely that decisions approving the establishment and/or remit of national development banks will continue to be assessed directly under the Treaty. However, the risk finance State aid rules, as well as the start-up aid provisions of the new GBER, will likely be the primary legal base of the aid measures that are managed by national development banks. This is because the decision approving the remit of the BBB and in particular that of the Mandated Arm, is without prejudice to compatibility of the measures to be implemented. Therefore, if a scheme for SME access to finance is not in line with the de minimis Regulation, the new GBER, and is not in line with market conduct as authorized by the decision, then it needs to be notified to the Commission.

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Chapter 20 Regional aid

1.

Introduction

On the basis of Article 107(3)(a) and Article 107(3)(c) of the Treaty the Commission may consider State aid compatible with the internal market if it is granted to promote the economic development of certain disadvantaged regions within the Union. Such aid is called regional aid. The geographical dimension of that type of aid distinguishes it from other horizontal or sectoral aid.

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Since 1998, the Commission has exercised its margin of discretion in a transparent manner by issuing guidelines, which set out the conditions under which regional aid may be considered compatible with the internal market and which established the criteria to identify the areas eligible for regional aid. The guidelines ensure that the Member States are treated equally and that the Commission’s decision process is predictable for stakeholders. The regional aid guidelines have been regularly revised.1917 To facilitate the treatment of lower amounts of ‘good’

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1917 In 1998, the Commission issued for the first time guidelines for establishing national regional aid maps and consolidated the compatibility assessment rules (Guidelines on national regional aid, OJ C 74, 10.03.1998, p. 9). Those rules entered into force in 2000 and applied until 2006. For regional aid to large investment projects, in 1998 the Commission issued a multisectoral framework that applied from 2000 until 2002 when it was replaced with another multisectoral framework applied to measures notified until 31 December 2006 (Multisectoral framework for regional aid to large investment projects, OJ C 70, 19.03.2002, p. 8). In 2006, the Commission revised those rules and issued new guidelines that applied for aid granted after 31 December 2006 and before 31 December 2013 (Guidelines on national regional aid for 2007-2013, OJ C 54, 04.03.2006, p. 13) (“RAG 2007”). In 2009, the Commission issued a Communication concerning the criteria for an in-depth assessment of regional aid to large investment projects (OJ C 23, 16.09.2009, p. 3). With the adoption of the guidelines on regional aid for 2014-2020 (OJ C 209, 23.07.2013, p. 1), the Commission prolonged the RAG 2007 and the in-depth assessment communication until 30 June 2014.

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aid, in 20061918 and 20081919 the Commission used the powers conferred on it by the Council1920 and exempted from the notification obligation certain transparent regional investment aid schemes.

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In the context of the State Aid Modernisation (SAM) and in light of its objectives1921 in 2013 the Commission revised the regional aid rules to facilitate the development of the region’s most in need in the Union, while ensuring a level playing field between Member States by preventing subsidy races that may occur when the Member States try to attract or retain business in those regions. It was equally important for the Commission to ensure effective and efficient regional aid that could foster growth in the internal market, to limit the effects of regional aid on trade and competition to the minimum necessary, to simplify the rules for ‘good’ aid and to ensure consistency with Union policies (especially cohesion policy).

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Those objectives have been translated into guidelines on regional aid for 20142020 and new rules for block-exempted regional aid. The new rules entered into force on 1 July 2014. Member States must ensure that regional aid granted or to be granted after 1 July 2014 complies with the guidelines on regional aid for 2014-2020 (“RAG 2014”)1922, the regional aid maps for 2014-2020 or with the new GBER.1923 Regional aid unlawfully granted or intended to be granted before 1 July 2014 will be assessed on the basis of the guidelines on national regional aid for 2007-2013. Thus, the Commission will apply the 2007-2013 rules when assessing aid granted before 1 July 2014 subject to Commission’s approval, regardless of when the aid was notified to the Commission.

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This chapter summarises the rules set out in the RAG 2014 and the regional aid section of the GBER after describing the context, challenges and objectives of the revision and delineating the scope and architecture of the new rules. 1918 Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid, OJ L 301, 01.11.2006, p. 29. That Regulation was repealed by the General Block Exemption Regulation in 2008. 1919 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Article 87 and 88 of the Treaty (General block exemption Regulation), OJ L 214, 09.08.2008, p. 3. 1920 Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 142, 14.05.1998, p. 1. 1921 See book chapter 2 - State Aid Modernisation. 1922 OJ C 209, 23.07.2013, p. 1. 1923 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1.

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2.

Context, challenges and objectives of the revision

2.1 Context 2.1.1 Economic context and coherence with Union cohesion policy The Commission uses GDP per capita as a proxy indicator for the overall living standards in order to identify the region’s most in need at Union level on the basis of Article 107(3)(a) of the Treaty. For the areas under Article 107(3)(c) of the Treaty, the Commission uses regional GDP together with the unemployment rate.

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2.1.1.1 Economic context When adopting the new rules, the Commission had to take into account on one side the economic development occurred since 2000 and, on the other side, the disparate effects of the economic and financial crisis at regional level.

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The data from Eurostat available when the RAG 2014 was adopted covered regional GDP per capita until 2010 and unemployment until 2012. Those statistics showed that the growth disparities among EU regions had narrowed compared to 2006, when the RAG 2007 was adopted. Thus, the percentage of population leaving in areas with a GDP below 75 per cent of the EU average has decreased from 32.3 per cent in 2000 to 27.2 per cent in 20091924 while the unemployment rate had by contrast increased significantly across the Union. However, those statistics did not fully capture the disparate effects at regional level of the financial and economic crisis that had erupted in 2008. It was therefore not possible to establish at the moment of adoption of the RAG 2014 whether the regional economic disparities had increased as a result of that crisis.

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Therefore, the Commission announced in the RAG 2014 its intention to revise the economic situation of the regions in the Union in 2016 on the basis of more recent statistics.1925

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2.1.1.2 Coherence with the Union’s cohesion policy Whereas under the Union’s cohesion policy the Commission provides Structural Funds for the development of the regions covering the entire territory of the

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1924 The percentage refers to the population of the EU 27. 1925 See book para 3.671.

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Union, under the State aid policy the geographical scope is limited. To ensure effective regional aid, such aid must be focused on the region’s most in need and target undertakings for which the availability of aid makes a difference.

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The less developed regions under the cohesion policy correspond largely with the regions eligible for aid under Article 107(3)(a) of the Treaty.1926 However, only transition regions and more developed regions are covered by the regional aid rules under Article 107(3)(c) of the Treaty.

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The development of the regions can be supported also by using, in addition to regional aid, other State aid instruments (such as access to finance, R&D&I, broadband, aviation, environmental and energy rules). Those instruments apply across the Union in a similar manner to cohesion policy and aim to ensure effective spending that promotes growth. Since under those other instruments aid is aimed to tackle a market failure and not necessarily an equity objective, the compatibility conditions are stricter in order to limit the distortive effects of the aid on the internal market. However, the thematic guidelines for other aid instruments allow increased aid intensities in assisted areas, which leverage the positive effects of the aid granted in those areas. For example, under the R&D&I or environmental aid rules, projects or activities undertaken in assisted areas may receive increased aid intensity (10 or 20 percentage points higher than outside assisted areas).

3.632

Therefore, the main reforms undertaken within the SAM framework are coherent with the Europe 2020 Strategy and contribute to effective spending under the Union’s cohesion policy.

2.1.2 Experience with regional aid rules during 2007-2013 3.633

During the 2007-2013 period, the compatibility of regional aid was based mainly on a standard assessment and only for a specific category on an in-depth assessment. The standard assessment was similar in the Block Exemption Regulation for regional aid1927 and in the RAG 2007. Thus, regional aid was considered compatible with the internal market if the project was located in an assisted 1926 75 per cent of the EU GDP per capita is used for both regional aid and cohesion policy to identify the region’s most in need at Union level. However, under the Union’s cohesion policy in the 2014-2020 period the Commission made use of 2007-2009 GDP data and for regional aid the more recent data covering 20082010. 1927 Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid (Block Exemption Regulation for regional aid), OJ L 302, 01.11.2006, p. 29.

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area, the aid intensity was respected, the granting authority confirmed in writing the eligibility of the project for aid before the start of works and the project was maintained in the region for five years. However, with the introduction of the now repealed GBER in 2008, the formal requirements for the incentive effect in the 2008 GBER differed from those in the RAG 2007 and aid to large enterprises was subject to stricter rules in the 2008 GBER than in those guidelines. Thus, under the RAG 2007 the aid beneficiary could have started works only after the granting authority confirmed in writing the eligibility of the project for aid, while under the GBER works on the project could have started already after applying for aid without waiting for the confirmation of the granting authority. However, large enterprises under the GBER had to bring evidence of the counterfactual scenario (i.e. what would have happened in absence of the aid by comparing the net present value of the investment with and without the aid)1928 and the granting authority had to make a credibility check in order to verify that the aid had indeed an incentive effect. Under the RAG 2007 the counterfactual scenario was verified only if certain thresholds were exceeded. In addition to the standard assessment and for notified large investment projects, the Commission verified the market shares of the aid beneficiary and the capacity increase. The Commission’s treatment of such market shares evolved over time. Before 2007 companies with market shares above 25 per cent or companies increasing by more than 5 per cent the existing capacity on markets in decline could not receive regional investment aid, because it was deemed that the negative effects of that aid would not outweigh the potential positive effects of the aid on the region. After 2007 those underpinning indicators of that negative presumption became indicators of serious doubts obliging the Commission to open a formal investigation procedure and to verify the effects of the aid indepth. Thus, the Commission based the compatibility assessment of notified aid on formal requirements unless one of the two triggers (market shares or capacity increase) was activated, in which situation the Commission opened the formal investigation.

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The formal criteria enshrined in the RAG 2007 were supposed to ensure that the positive effects of the aid outweighed the negative effects. Therefore, large investment projects were subject to stricter rules on the assumption that such projects were less affected by the regional handicaps of the disadvantaged regions and therefore less in need for aid. To limit the negative effects of the aid to large investment projects, the maximum aid intensities were scaled down de-

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1928 See Article 8(3) of the GBER 800/2008.

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pending on the amount of the eligible costs.1929 In addition, the Commission verified that the market share of the beneficiary was below 25 per cent and that the capacity increase was below 5 per cent or that the market was not in decline.

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Thus, if all the formal requirements were complied with and those thresholds were not exceeded, the Commission presumed that the positive effects of the aid outweighed the negative effects. If the thresholds were exceeded, the positive presumption was rebutted and the Commission was obliged to open the formal investigation procedure to verify in-depth the necessity and the proportionality of the aid. By laying down the two market thresholds, the Commission had quantified the serious doubts that would oblige it to automatically open of the formal investigation procedure. However, that requirement to open a formal investigation procedure where the thresholds were exceeded did not mean that the Commission could not open the formal investigation procedure in absence of the thresholds being exceeded. The General Court confirmed in Smurfit Kappa1930 that the Commission had limited its margin of discretion only for the cases where the market thresholds were exceeded. For all the other cases, the Commission had a wide margin of discretion under the RAG 2007 to establish the compatibility of regional aid and had to open the formal investigation if it could not conclude without doubts on the compatibility of the aid or has difficulty to establish the facts.

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Nevertheless, the decisional practice reflected a hesitation on the side of the Commission to use that discretion outside the guidelines and to open the investigation procedure in cases where all formal requirements of the RAG 2007 and the two thresholds were respected.1931 Out of the 40 large investment projects notified under the aegis of the RAG 2007 the Commission opened the formal investigation procedure only in eight cases because the market thresholds 1929 The maximum aid intensity applies in full for the first EUR 50 million of eligible costs. If the project has eligible costs above EUR 50 million, the maximum aid intensity is reduced by half for the costs above EUR 50 million and below EUR 100 million. The aid intensity is further reduced for eligible costs above EUR 100 million (only 34 per cent of the applicable intensity can be granted for the costs above EUR 100 million). For example, if the applicable aid intensity is 50 per cent and the project has eligible costs of EUR 50 million, the granting authority can grant EUR 25 million of aid. For a project with eligible costs of EUR 70 million, only EUR 30 million of aid can be granted (EUR 25 million for the first EUR 50 million of eligible costs and additional EUR 5 million for the remaining EUR 20 million). For a project with EUR 120 million of eligible costs, a maximum aid amount of EUR 40,9 million can be granted (EUR 25 million for the first EUR 50 million, additional EUR 12.5 million for the next EUR 50 million and only EUR 3.4 million for the next EUR 20 million of eligible costs, even if the applicable aid intensity is 50 per cent). 1930 Case T-304/08 Smurfit Kappa Group v Commission ECLI:EU:T:2012:351. 1931 See for example, Commission Decision in Propapier case (N 582/2007), Wacker Chemie (N 221/2009), Globalfoundries Dresden (SA 30596/N/2013), Ford Craiova (SA 24773/N/2008), Ford Espana (SA 32076/N/2011) or in Ersol Thin Film Erfurt case (N 538/2008).

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seemed to have been exceeded or because the formal requirements for the incentive effect have not been fulfilled.1932 In addition, the structure of those opening decisions was built on a two-step approach. The first step of the formal investigation focused on the analysis of the market thresholds to establish whether they were exceeded. Only if they were or seemed to be exceeded, in a second step an in-depth assessment of the incentive effect and the proportionality test was undertaken, on the basis of the 2009 in-depth assessment Communication (“IDAC”).1933 The Commission finalized its investigation and issued final decisions only in four cases1934 on the basis of the IDAC. All the other notifications were withdrawn by the Member States concerned after reducing the aid amount below the notification threshold, bringing the aid measures under the GBER.1935 The decisional practice of the Commission showed clearly that the assessment of the two market thresholds was difficult to apply, requiring a lengthy assessment of the market definition without capturing the potentially most distortive cases. For example, the two thresholds did not capture those cases where economic activity was relocated inside the Union or those where the aid had no incentive effect because the investment would have been located in the area concerned even in absence of the aid because it was less expensive than in another location. Those cases were potentially more distortive for the internal market because in absence of an incentive effect the aid only leads to windfall profits for the beneficiary. In addition, the theories of harm the two triggers were supposed to capture (market power and maintaining inefficient market structures by contributing to overcapacities) were irrelevant in most of the cases, as the effects on the market would have occurred in any case (i.e. higher market shares or increased capacity) if the investor had taken the decision to invest but is hesitating where to locate its investment. Therefore, in those situations it was essential to establish that in absence of the aid the investor would have located its investment in an

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1932 See Commission Decision in Volkswagen Zwickau case (SA 32169/C/2011), Audi Hungary (C 31/2009), Dell (C 46/2008), BMW Leipzig (SA 32009/C/2014), Fri-El Acera (C 8/2009), Europac Kraft Viana (SA 34764/C/2014), Petroleos de Portugal-Petrogal (SA 26980/C/2011) and Porsche Leipzig (SA 34118/C/2014). 1933 Communication from the Commission concerning the criteria for an in-depth assessment of Regional aid to large investment projects, OJ C 223, 16.09.2009, p. 3. 1934 Commission final Decisions in Dell case (C46/2008), Petrogal (SA26098/C/2011), BMW Leipzig (SA 32009/C/2014) and Porsche Leipzig (SA 34118/C/2014). 1935 See footnote 23 to the IDAC that recognises the possibility for Member States to grant aid up to the notification thresholds under the applicable rules (here, the GBER or an approved scheme): “When the aid is granted on the basis of an existing regional aid scheme, it is however to be noted that the Member State retains the possibility to grant such aid up to the level which corresponds to the maximum allowable amount that an investment with eligible expenditure of EUR 100 million can receive under the applicable rules”; see Commission Decision to close the formal investigation that remained without object after the withdrawal by Poland in Fiat Powertrain case, C 12/2008, OJ C 12, 14.01.2012, p. 21.

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alternative location but because the aid in the assisted area compensates for the extra costs of locating the investment in that area the investor decides in favour of the latter.

2.2 Challenges and objectives of the revision 2.2.1 Ensuring effectiveness and efficiency of regional aid 3.639

The extent to which regional aid effectively contributes to regional development is intrinsically linked to whether or not the aid provides an incentive effect and changes the behavior of investors by directing projects towards less developed areas. Regional aid may be an economic development tool only if it induces additional investment in the assisted areas. Otherwise, a significant deadweight is created that threatens to distort competition and to affect trade in the internal market.1936

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In general, firms tend to locate their investment in more developed regions. However, that tendency does not mean that less developed regions are automatically less attractive for investors. Proximity to the market, less costly or more readily available production factors (e.g. greenfield sites, skilled labour) may be decisive for investors to invest or locate their projects in a specific area despite the level of development of the region and even in absence of aid. Thus, the challenge of the revision of the rules was to ensure that regional aid leveraged additional private investment in the assisted areas.1937

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The ex post evaluation study of the RAG 20071938 concludes that despite compliance with the formal requirements, allowing to presume that the aid had an incentive effect, it seems that regional aid is one of the factors influencing the decision to invest or to locate an investment in an assisted area but is not a determining one. For example, for the solar sector, the consultants concluded that the main drivers of the investments in Eastern Germany were the existing production plants, solar clusters and availability of skilled labour, rather than regional 1936 See Commission staff working document SWD (2013) 215, Impact Assessment accompanying the document ‘Communication of the Commission guidelines on regional state aid 2014-2020’, C (2013) 3769, http://ec.europa.eu/competition/state_aid/regional_aid/impact_assessment_report_en.pdf. 1937 See Commission staff working document, Impact Assessment accompanying the document ‘Communication of the Commission guidelines on regional State aid 2014-2020’, C (2013) 3769, http://ec.europa.eu/ competition/state_aid/regional_aid/impact_assessment_report_en.pdf. 1938 European Commission, Ex-Post evaluation of the Regional Aid guidelines 2007-2013 (Ramboll & Matrix, 2013) http://ec.europa.eu/competition/consultations/2013_regional_aid_guidelines/study_rag_evaluation_en.pdf.

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aid.1939 As regards the cement sector in Hungary, the study illustrated that the aid had no incentive effect, as the investment was not mobile.

2.2.2 Stricter treatment of large enterprises Subparagraphs (a) and (c) of Article 107(3) of the Treaty provide two exceptions from the free competition principle based on solidarity (equity) considerations. Therefore, when assessing the compatibility of State aid under those provisions the Commission must reconcile two fundamental principles of the Treaty: free competition in the internal market and solidarity considerations (equity objectives). As the General Court pointed out in AIUFFASS and AKT,1940 the Commission has a wider margin of discretion in balancing the two objectives under Article 107(3)(a) than under Article 107(3)(c) of the Treaty. Those different possibilities stem directly from the wording of the Treaty, which provides that ‘a’ areas are less developed from an Union perspective compared to ‘c’ areas and therefore the competition objective under the Treaty has more influence in ‘c’ areas, to the detriment of the equity objectives.

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In view of that case law and of the evidence that large enterprises are less in need of aid,1941 the Commission has restricted the possibilities for regional aid in assisted areas for large enterprises. The challenge was to identify those types of investment where the aid can be deemed to have an incentive effect. In the RAG 2014 it is explained that regional aid to large undertakings is unlikely to have an incentive effect and cannot be regarded to be compatible with the internal market under Article 107(3)(c) of the Treaty, unless it is granted for initial investments that create new economic activities in those areas, or for the diversification of existing establishments into new products or new process innovations.

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2.2.3 Identifying the negative effects of regional aid An important objective of the revision was to identify the situation where the negative effects of the aid outweigh any positive effects and therefore cannot be declared compatible with the internal market. That approach was introduced for the first time in the field of regional aid.

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1939 From the interviews conducted by the consultants it results that the investments would have been located in the region even in absence of the aid because of the important synergies of an existing specialized cluster. 1940 Case T-380/94 AIUFFASS and AKT v Commission ECLI:EU:T:1996:195, paras 54-55. 1941 See Impact assessment report done by the Commission when revising the regional aid rules. http:// ec.europa.eu/competition/State_aid/regional_aid/impact_assessment_report_en.pdf.

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3.645

The main negative effects derive from the two theories of harm and from the equity objective of regional aid. Thus, the negative effects are manifest when the aid determines the investor to invest on a market, which is in structural overcapacity, when the aid attracts an investment from an alternative location in the EEA, which is poorer than the location where the investor decided to invest because of the availability of aid and when there is a causal link between the aid and the relocation of an existing activity in the EEA. By identifying the manifest negative effects of the aid, the Commission has tackled the shortcomings of the previous reforms and has ensured a more refined economic approach towards regional aid that goes beyond the incentive effect and proportionality of the aid.

3.

Scope and architecture of regional aid rules

3.1 Sectoral scope 3.646

Regional aid may be granted to investments in all sectors of the economy except the synthetic fibres and the steel sector. As those sectors were traditionally considered to be in overcapacity or in decline in the EEA, the prohibition of regional aid to those two sectors is underpinned by a presumed negative balance of the effects of regional aid. The guiding approach is that the negative effects regional aid may have on sectors that are in overcapacity or in decline in the EEA outweigh any positive effects the aid may have on the development of the region concerned. Therefore, regional aid in those two sectors as defined in the RAG 2014 and in the GBER1942 is not considered compatible with the internal market.1943

3.647

Regional aid may be granted in all the other sectors in compliance with the conditions laid down in the RAG 2014 or in the GBER, provided there are no specific sectoral rules, such as those for agriculture, forestry, aquaculture, fisheries, transport and the related infrastructure and energy sector.

1942 Only the activities or products captured in the definition in Annex IV to the RAG 2014 or Article 2(1)(42) and (43) GBER are not eligible for regional aid. 1943 See also Case C-169/95 Spain v Commission ECLI:EU:C:1997:10, para 20. The Court of Justice ruled that “[Article 107(3) of the Treaty] gives the Commission a discretion the exercise of which involves economic and social assessments which must be made in a [Union] context. The Commission does not exceed its powers of appraisal where, pursuing the policy which it intends to apply with respect to regional aid schemes, it declares an aid of that kind incompatible with the [internal] market by reason of the overcapacity existing in the sector of activity concerned. Reference to such a criterion avoids encouraging the achievement of economically precarious initiatives which, because they do no more than aggravate the imbalances affecting the markets concerned, are ultimately not suited to provide an effective and lasting solution to development problems in the areas concerned.”

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Considering the common policies in agriculture, forestry, fisheries and aquaculture1944, State aid in those sectors is governed exclusively by the specific rules for those sectors.1945 Some specifications are worth underlining for the agricultural sector, in view of the derogations from the competition chapter set out in Article 42 of the Treaty for the production and trade of agricultural products.1946 Thus, State aid to primary production of agricultural products, processing and marketing of agricultural products into agricultural products and State aid to forestry is exclusively covered by the Agricultural State aid guidelines.1947 Member States may only choose the legal instrument (i.e. RAG 2014 or Agricultural State aid guidelines) for granting State aid for processing and marketing of agricultural products into non-agricultural products or for measures in rural areas covered by rural development programmes.

3.648

In view of the sector-specific rules,1948 regional aid rules are not applicable to transport activities (i.e. transport of passengers and freight transport services for hire or reward). The GBER1949 further clarifies what is meant by the transport sector by referring to the corresponding activities in the NACE code.1950 Likewise, the GBER excludes transport-related infrastructure from the scope of regional aid, albeit without defining the notion. However, the RAG 2014 clearly state that they do not apply to airport infrastructure, mirroring the provision of the Airport and Airlines guidelines.1951 The implication of the GBER exclusion is that the financing of motorways or other means of transport by land, water or air, to the extent it constitutes State aid, may not be considered compatible with the internal market on the basis of Article 14 of the GBER (regional investment

3.649

1944 Regulation (EU) No 1379/2013 of the European Parliament and of the Council of 11 December 2013 on the common organisation of the markets in fishery and aquaculture products, amending Council Regulations (EC) No 1184/2006 and (EC) No 1224/2009 and repealing Council Regulation (EC) No 104/2000, OJ L 354, 28.12.2013, p. 1. 1945 State aid to fisheries and aquaculture should be in line with the Commission’s guidelines for the examination of State aid to fisheries and aquaculture, OJ C 84, 03.04.2008, p. 10. 1946 Agricultural products are those listed in Annex I of the Treaty. 1947 Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020, OJ C 204, 01.07.2014, p. 1. 1948 E.g. Communication from the Commission — Community guidelines on State aid for railway undertakings, OJ C 184, 22.07.2008, p. 13; Communication from the Commission — Guidelines on State aid to airports and airlines, OJ C 99, 04.04.2014, p. 3; Commission communication C(2004) 43 — Community guidelines on State aid to maritime transport, OJ C 13, 17.01.2004, p. 3. 1949 See Article 2(1)(45). 1950 It refers to NACE 49 land transport and transport via pipelines, NACE 50 water transport, NACE 51 air transport of Regulation (EC) No 1893/2006 of the European Parliament and of the Council of 20 December 2006 establishing the statistical classification of economic activities NACE Revision 2 and amending Council Regulation (EEC) No 3037/90 as well as certain EC Regulations on specific statistical domains (OJ L 393, 30.12.2006, p. 1). 1951 See para. 23 of the guidelines on State aid to airports and airlines.

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aid). Thus, Member States may notify those measures and the Commission will assess their compatibility on the basis of the Treaty or other applicable State aid guidelines.

3.650

Energy is another sector newly excluded from the scope of the regional aid rules. The RAG 2014 announce that aid to that sector will be allowed only within the limits of the Energy and Environmental State aid guidelines which will duly take account of the specific handicaps of the assisted areas. The rationale behind that exclusion is that competition concerns in the energy sector can be better tackled on the basis of the sector-specific rules, which are coherent with the internal market regulation in that sector. Therefore, the GBER establishes that aid to energy generation, distribution and infrastructure may be granted only within the limits of the specific section in the GBER (Section 7). Aid for the production of electricity from renewable sources, for district heating or for energy infrastructure must thus be in line with Articles 41, 46 and 48 of the GBER. In assisted areas, Member States may nevertheless choose between Article 14 of the GBER (regional investment aid) and the energy efficiency measures and environmental standard provisions in Section 7 of the GBER.

3.651

The new regional aid rules include the shipbuilding and coal1952 sector in their scope of application. Nevertheless, because of the potential higher distortive effects of regional aid in those sectors, the aid falls outside the scope of the GBER and remains subject to the Commission’s scrutiny under the RAG 2014. Those sectors were excluded from the regional aid rules before 2013 because of other stricter rules derogating from the regional aid rules. For example, the shipbuilding framework1953 halved the applicable aid intensities in the regional aid maps and until 2010 a Council Regulation1954 capped to 30 per cent the aid intensity for initial investment to coal mines. With the expiry of the Coal Regulation in 2010, the Council issued a decision1955 allowing State aid in the form of R&D&I, training and environmental aid only for the closure of uncompetitive mines by the end of 2018. In absence of any exclusion from the RAG 2014, Member States may grant regional aid for competitive mines not covered by the 2010 Coal Decision. The inclusion of the shipbuilding and coal sectors in the 1952 ‘Coal’ means high-grade, medium-grade and low-grade category A and B coal within the meaning of the international codification system for coal laid down by the United Nations Economic Commission for Europe (Article 2(1)(13) of the GBER). 1953 Framework on State aid to shipbuilding, OJ C 364, 14.12.2011, p. 9. That framework expired on 31 December 2013. 1954 Council Regulation (EC) No 1407/2002 of 23 July 2002 on State aid to the coal industry, OJ L 205, 02.08.2002, p. 1. 1955 Council Decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines, OJ 336, 21.12.2010, p. 24.

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RAG 2014 implies, on one hand, increased aid intensities compared to the period before 2014 (e.g. for shipbuilding the aid intensities are doubled, considering that the full percentage stipulated in the regional aid map is applicable) and, on the other hand, the incentive effect and proportionality of the aid is assessed in-depth so that it is ensured that it changes the behaviour of the beneficiary (i.e. without the aid the investment would not have taken place in the assisted area in the Union) and that it is limited to the minimum necessary to achieve the common objective. State aid measures for investment in infrastructure fall both under the regional aid rules and under other guidelines, e.g. in the field of broadband network1956 and R&D infrastructure.1957 So-called “forum shopping” between those guidelines is allowed. However, the regional aid rules have imported a set of minimum conditions from the other guidelines to avoid competition concerns and ensure an open and non-discriminatory access to the infrastructure.1958

3.652

3.2 Geographical scope According to Article 107(3)(a) of the Treaty “aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic and social situation” may be considered compatible with the internal market. Likewise, “aid to facilitate the development of […] certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest” may be considered compatible with the internal market under the exemption of Article 107(3)(c) of the Treaty.

3.653

The Court of Justice has ruled that the use of the terms ‘abnormally’ and ‘serious’ in Article 107(3)(a) of the Treaty shows that the areas eligible for aid under that exemption concern those areas where the economic situation is extremely unfavorable in relation to the Union as a whole. Article 107(3)(c) of the Treaty, on the other hand, is wider in scope inasmuch as it permits the development of certain areas in a Member State which are less favoured in relation to the national average without being restricted by the economic conditions laid down in Article 107(3)(a), provided such aid “does not adversely affect trading conditions to

3.654

1956 Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, OJ C 25, 26.01.2013, p. 1. 1957 Framework for State aid for research and development and innovation 2014-2020, OJ C 198, 27.06.2014, p. 1. 1958 See paras 3.725-3.726.

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an extent contrary to the common interest”.1959 Conversely, the absence of that condition in the derogation under Article 107(3)(a) implies greater latitude in approving the granting aid to undertakings in regions which do meet the criteria laid down in that derogation. Nevertheless, that difference in wording cannot lead to the conclusion that the Commission should take no account of the common interest when applying Article 107(3)(a), and that it must confine itself to verifying the regional specificity of the measures involved, without assessing their impact on the relevant market or markets in the Union as a whole.1960 As established by the Court of Justice in Philip Morris,1961 Article 107(3) gives the Commission a discretion the exercise of which involves economic and social assessments, which must be made in a Union context.

3.655

In view of the settled case law, the Commission has maintained in the RAG 2014 the main features of the RAG 2007 for establishing the criteria to identify the areas eligible for aid under Article 107(3)(a) (known as ‘a’ regions) and under Article 107(3)(c) (known as ‘c’ regions). However, due account has been taken of the economic context of the regions in the EU. This chapter presents the main changes brought by the RAG 2014.

3.2.1 Regional aid coverage and its distribution 3.656

To be effective, i.e. to contribute to its development objective, regional State aid must be concentrated on the most disadvantaged regions of the Union. The principle enshrined in the RAG 1998 that the population living in areas eligible for regional aid must be less than 50 per cent of the EU population is maintained in the RAG 2014. In view of the difficult economic situation in several Member States since the outbreak of the economic crisis, the Commission slightly increased the overall population coverage in the RAG 2014 compared to the RAG 2007 (46.531962 per cent of the EU 27 population compared to 45.5 per cent of the EU 27).

3.657

While the overall percentage of the population that could live in assisted areas is largely maintained under the RAG 2014, its composition has significantly shifted compared to that of the RAG 2007. That change in the breakdown of the population percentage is due to the growing out of a significant number of areas from ‘a’ areas. 1959 See Case C-248/84 Germany v Commission ECLI:EU:C:1987:437, para. 19. 1960 See Case C-169/95 Spain v Commission ECLI:EU:C:1997:10, paras 15-17. 1961 See Case C-730/79 Philip Morris v Commission ECLI:EU:C:1980:209, para. 24, and Case C-310/85 Deufil v Commission ECLI:EU:C:1987:96, para. 18. 1962 Corresponding to 47 per cent of EU 28 after the accession of Croatia.

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Therefore, the share of ‘a’ areas is only slightly above the ‘c’ areas under the RAG 2014 (i.e. 25 percent ‘a’ areas and 22 percent ‘c’ areas). To determine the overall population coverage for 2014-2020, the Commission took as a starting point the population living in areas which are most disadvantaged from a Union perspective. They are the ‘a’ areas and certain ‘c’ areas.1963 On the basis of the available statistics underpinning the RAG 20141964 the population living in the predefined regions amounts to 32.7 per cent1965 of the EU 27 population. To allow Member States to tackle their national disparities, the Commission maintained the percentage of the population living in ‘c’ areas during 2007-2013 (i.e. 13.8 percent of the EU 27 population). That percentage is distributed between Member States on the basis of their national disparities, which are assessed in a Union-wide context.1966

3.658

The RAG 2014 maintains the principle of a safety net, which the Commission has further developed in view of the difficult economic context at the moment those guidelines were adopted. Thus, the Commission has introduced the principle of minimum population coverage and has made special provision for the Member States mainly affected by the economic crisis.

3.659

By maintaining the principle of a safety net and by introducing new provisions in the RAG 2014, the Commission ensured continuity in the regional aid maps and acknowledged the right of each Member State to implement a national cohesion policy complementing the Union’s cohesion objective. Thus, no Member State could ‘lose’ more than 50 per cent of existing coverage and each has a minimum coverage of 7.5 per cent of its population. For those Member States benefiting from a macro-financial assistance,1967 100 per cent of the previous population coverage is guaranteed.1968 In practice, the safety-net provision applies to Cyprus, Luxembourg and Greece. The Netherlands benefited from the minimum population coverage provision. The population coverage that is allocated to Spain, Portugal and Ireland on the basis of the new method of the RAG 2014 is slightly higher than the previous coverage and therefore the safety net provision is not relevant.

3.660

1963 They are the sparsely populated areas and the former ‘a’ areas. 1964 The three-year average of 2008-2010 for the GDP data and the average of 2010-2012 data for unemployment. 1965 25.2 per cent for ‘a’ areas and 7.5 per cent for predefined ‘c’ areas. 1966 See book para 3.678. 1967 The Member States that benefitted from the European stability funds and had still not repaid the loans in June 2013 were Spain, Portugal, Greece, Ireland and Romania. 1968 See for more details EPRC Policy briefing: the 2014-2020 Regional Aid guidelines, University of Strathclyde Glasgow, July 2013 available at: http://www.eprc.strath.ac.uk/news/EPRC_Policy_Briefing_July.pdf.

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3.2.2 Regional aid maps 3.661

To grant regional aid to businesses in ‘a’ and ‘c’ areas a Member State must notify to the Commission a single regional aid map, covering its territory. In the regional aid map, the Member State designates the ‘a’ and/or ‘c’ areas and indicates the maximum aid ceilings applicable in those areas. Those ceilings are established in the RAG 2014, but Member States may decide to set them at a lower level. The different bands of the maximum aid ceilings set in the RAG 2014 reflect the relative economic situation of the region concerned, calculated in terms of GDP per capita compared to the EU average. Therefore, the maximum aid intensities in ‘a’ areas are significantly higher than in ‘c’ areas.1969

3.662

As was the case with the RAG 20071970, the RAG 2014 requires a notification of regional aid maps though strictly speaking the regional aid maps do not constitute aid schemes. They are sui generis notifications necessary to apply the derogations under Article 107(3)(a) and (c) of the Treaty. As a result, the Commission required individual notifications for the prolongation of the 2007-2013 regional aid maps1971, instead of prolonging them unilaterally until 30 June 2014 with the adoption of the RAG 2014 or by means of a separate communication.

3.663

After receiving 28 individual notifications, the Commission approved the prolongation of the 2007-2013 regional aid maps until 30 June 2014. Following the adoption of the RAG 2014, the Member States notified their regional aid maps for the 2014-2020 period and the Commission approved all but four1972 of them before 1 July 2014. In addition, all Member States accepted the proposed appropriate measures in the RAG 2014 without any conditions.1973 In consequence, regional aid granted after 30 June 2014 on the basis of existing regional aid schemes is in line with the new regional aid maps. Furthermore, other horizontal aid schemes allowing specific treatment of aid to projects in assisted areas were adapted to the new regional aid maps.

1969 See paras 3.668. 1970 See para. 100 of the RAG 2007, which explicitly requires a notification on the basis of Article 108(3) of the Treaty. Though the RAG 2014 does not invoke the Treaty provision, the Commission used the notification procedure laid down in the Council Regulation 659/1999 (Procedural Regulation) to treat the notification of 2014-2020 regional aid maps and issued ‘no objection’ decisions based on its Article 4. 1971 See paras 178 and 179 of the RAG 2014. 1972 Cyprus, the Netherlands, Belgium and Italy. 1973 See RAG 2014, para 191. The acceptance of the appropriate measures was published in OJ 101, 05.04.2014, p. 3.

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The Commission decisions approving the regional aid maps form an integral part of the RAG 2014 and are the legal basis for granting regional aid. The GBER also refers to the areas and maximum aid intensities established in the regional aid maps when it comes to compatibility of regional investment aid.1974 The regional aid maps are also used by other horizontal or specific rules in order to provide for a bonus in the areas included in the maps (e.g. R&D&I aid, environmental aid).

3.664

3.2.3 Article 107(3)(a) of the Treaty 3.2.3.1 ‘a’ areas The ‘a’ areas are considered the most disadvantaged regions in the Union and are predefined by the Commission as regions, being NUTS 2 geographical units1975, with less than 75 per cent of the GDP EU-average per capita. In the Treaty, outermost regions1976 are explicitly considered as ‘a’ areas regardless of their economic situation.

3.665

For the period 2014-2020, the share of the population living in ‘a’ areas in the Union has significantly decreased, so that one in four Europeans live in those areas compared to one in three Europeans under the RAG 2007.1977 There is a general shift of those areas to the east and south of Europe. The ‘a’ areas are mainly located in the newer Member States1978 (except Malta and Cyprus), the north

3.666

1974 See Articles 14-15 of the GBER. 1975 Under the RAG 2014, those units are established by Commission Regulation (EU) No 31/2011 of 17 January 2011 amending annexes to Regulation (EC) No 1059/2003 of the European Parliament and of the Council on the establishment of a common classification of territorial units for statistics, OJ L 13, 18.01.2011, p. 3 (NUTS 2010 nomenclature). Member States may modify the composition of their territorial units with each revision of the nomenclature. However, those changes are not reflected in the regional aid maps, as it would affect the stability and predictability of the legal framework for the stakeholders. For example, the regional aid maps for 2007-2013 are based on NUTS 2003 nomenclature, though it had been revised in 2006 (NUTS 2006). 1976 The outermost regions referred to in Article 349 of the Treaty are: Guadeloupe, French Guiana, Martinique, Réunion, Saint-Martin, Saint-Barthélemy, the Azores, Madeira and the Canary Islands. However, as from 1 January 2012 Saint-Barthelemy ceased to be an outermost region and became an oversea country, as decided by the Council on 29 October 2010 (Council Decision 2010/718/EU, OJ L 325, 09.12.2010, p. 4). In addition to those listed in Article 349 of the Treaty, as from 1 January 2014 Mayotte becomes also an outermost region as decided by the Council Decision 2012/419/EU of 11 July 2012, OJ L 204, 31.07.2012, p. 131. Under the RAG 2007, the Commission treated the outermost regions as ‘a’ areas, even if the former Article 87(3)(a) of the Treaty on the European Community (TEC) did not explicitly refer to the former Article 299(2) of the TEC. 1977 Under the RAG 2014, 24.3 per cent of the EU 27 population lives in ‘a’ areas compared to 33 per cent under the RAG 2007. The underlying data for the RAG 2014 covers the three-year average of the GDP for the period 2008-2010 whereas that of the RAG 2007 the 2000-2002 period. 1978 Poland, Czech Republic, Slovakia, Slovenia, Hungary, Latvia, Lithuania, Estonia, Romania and Bulgaria.

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(UK) and the south of the EU (Greece, Italy, Spain,1979 Portugal). Compared to the 2007-2013 period, Germany, Belgium and Malta lost all their ‘a’ areas for the period 2014-2020. Likewise, the capital regions in Romania, Poland and Slovenia have a GDP above 75 per cent of the EU average and therefore do not qualify anymore for the ‘a’ status.

3.667

In general, the ‘a’ areas, which are defined for the purpose of State aid control, largely coincide with the least developed areas under the Union’s cohesion policy, which are defined on the basis of the same criteria as ‘a’ areas. The few divergences stem from the fact the least developed areas are defined on the basis of 2007-2009 data whereas the ‘a’ areas on the basis of 2008-2010 data.

3.2.3.2 Aid ceilings 3.668

The maximum aid intensities allowed in the ‘a’ areas are grouped in three bands depending on the level of the GDP per capita of the areas. The RAG 2014 and the GBER maintain the bands and the definition of the areas belonging to them. However, they reduced the aid intensities except for those areas that belong to the band with the highest aid intensities (because they are significantly below Union average). The table below summarises the applicable maximum aid intensities under the RAG 2014 and the GBER1980: Assisted area (% EU GDP/head)

3.669

Large enterprises

Medium-sized enterprises

Small enterprises

‘a’ areas (500 000 EUR

3.723

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4.1 Per se rules (GBER) 4.1.1 Investment aid (Article 15 of the GBER) 4.1.1.1 Contribution to a common objective (cohesion objective) 3.724

To ensure its contribution to the regional development objective, regional aid may be granted only for initial investment or for initial investment in favour of a new activity for large enterprises in ‘c’ areas. In addition, the investment must be maintained for five years (three years in the case of SMEs) after the completion of the investment. For the financing of the investment the beneficiary must contribute with at least 25 per cent from its own resources in order to ensure the viability of the project. Therefore, a public loan cannot cover the entire investment costs.

3.725

The Commission has enshrined in Article 15 of the GBER the minimum compatibility conditions developed for broadband networks2010 in order to limit the distortive effects of regional aid to the minimum necessary to achieve the cohesion objective. Thus, regional aid for the development of broadband networks can be granted only in areas where there is no network of the same category (‘white areas’) and where no such network is likely to be developed on commercial terms within the next three years from the granting of the aid. In addition, the aid must be allocated on the basis of a competitive tender and the operator must offer wholesale access under fair and non-discriminatory conditions to the subsidised network.

3.726

Similarly, Article 15 of the GBER has imported from Article 26 of the GBER the principle of open access to a subsidised R&D&I infrastructure. Thus, the beneficiary of regional aid must give transparent and non-discriminatory access to the subsidised R&D&I infrastructure.

3.727

Even if Article 52 (broadband networks) and Article 26 (R&D&I infrastructure) require additional conditions compared to the provision of Article 15 (regional investment aid), the aid intensity set in those two provisions is higher than in the regional aid maps. Hence, Member States may well rather use the dedicated provision for broadband and R&D&I infrastructure for projects located in ‘a’ and ‘c’ areas rather than notify the aid measure on the basis of the RAG 2014.

2010 See Article 52 of the GBER.

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4.1.1.2 Incentive effect The incentive effect of the investment aid is presumed to be present provided the beneficiary has applied for aid before the start of works. In the application for aid, the beneficiary must submit a set of minimum information (like the location and description of the project, of the costs, the type of aid and the amount of public funding needed for the project).2011 The application must be submitted before the start of the construction works or before the first legally binding commitment to order equipment or any other commitment that makes the investment irreversible, whichever is earlier. The GBER clarifies that buying land or preparatory works, such as obtaining permits or conducting feasibility studies, are not considered start of works.2012

3.728

Only when the beneficiary of ad hoc aid is a large enterprise, it must bring documentary evidence of the counterfactual scenario (i.e. that in absence of the aid the investment would not have been carried out in the area concerned or would not have been sufficiently profitable for the beneficiary). The Member State must verify that that evidence indeed establishes the counterfactual scenario.2013

3.729

4.1.1.3 Proportionality: aid intensities and eligible costs The Member States must respect the maximum aid intensities for large enterprises and SMEs included in the regional aid maps. Considering that for SMEs the maximum aid intensities are already increased in the regional aid maps, there is no longer a bonus on the basis of the GBER.

3.730

For projects with eligible costs above EUR 50 million (known as large investment projects), the applicable maximum aid intensity is adjusted. Thus, the applicable maximum aid intensity is applied in full to the first EUR 50 million and for the costs exceeding EUR 50 million the applicable intensity is halved.2014 If a Member State envisages granting aid also for the costs exceeding the first EUR 100 million of the project, it must notify to the Commission the aid amount for the entire project.

3.731

The Commission seems to be concerned about the cumulation of aid at the level of beneficiary. Also in view of the assumption that a company is less affected by

3.732

2011 2012 2013 2014

See Article 6(2) of the GBER. See Article 2(1)(23) of the GBER. See paras 3.792, 3.796 and Article 6(3)(a) of the GBER. For large investment projects, the increased aid intensity for SMEs is not applicable. SMEs may receive aid within the maximum aid intensity as laid down for large enterprises in the area concerned.

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the obstacles of the ‘a’ or ‘c’ areas, if it is already located in those areas, the Commission imposes a reduction of the aid intensity for the investments undertaken by the same beneficiary, which is defined at group level, in the last three years in the same NUTS III area.

3.733

The list of eligible tangible2015 and intangible2016 assets remains the same as under the 2007-2013 period. The only change refers to the eligibility conditions of acquiring intangible assets and the assets of an existing establishment. Thus, the beneficiary must buy the intangible assets from third parties that are unrelated to it. In the case of the acquisition of the assets of an existing establishment it is required that the buyer is unrelated to the seller.2017 Consequently, intra-group licences, transfer of technology or acquisitions of establishments are no longer eligible for regional aid.

3.734

To facilitate the absorption of Structural Funds for European territorial cooperation, the aid intensity, which applies to the area in which the initial investment is located, will apply to all beneficiaries participating in the project. If the initial investment is located in two or more assisted areas, the maximum aid intensity for the initial investment will be the one applicable in the assisted area where the largest part of the eligible costs are incurred.

4.1.2 Operating aid (Article 16 of the GBER) 3.735

The GBER covers two types of operating aid: aid to cover the transport costs of goods produced or further processed in outermost regions or sparsely populated areas and aid to cover the additional costs of maintaining the activity in the outermost regions. The purpose of the aid is to compensate the companies located in those regions for the additional costs derived from the handicaps of those regions. Therefore, the production activity of the aid beneficiary must be located there.

3.736

The sectoral scope of the previous RAG 2007 for operating aid has been taken over in the GBER. Thus, operating aid to undertakings providing financial and insurance activities or intra-group activities of the head office or any consultancy activities cannot be eligible for aid under the GBER. With the new sectors excluded from regional aid, operating aid in energy and transport is also not possible under the GBER. 2015 Land, buildings, machinery, equipment and plant are eligible for aid. 2016 Patents, licences, know-how or other intellectual property. 2017 See para 3.692.

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Aid can cover the additional costs of transporting goods produced in the outermost regions or sparsely populated areas inside or outside those regions (socalled, outbound transport aid). Likewise, aid can cover the additional costs of transporting goods that are further processed in those regions (so-called, inbound transport aid). To avoid any discrimination, the additional costs are calculated on the basis of the costs of a journey inside the national borders. However, for outermost regions - because of their remoteness - the additional costs for transporting goods that are further processed in those regions may include the transport costs of goods from any place of their production to those areas.

3.737

As regards the aid covering the additional costs of maintaining the economic activity in the outermost regions, the aid is capped to 100 per cent of the eligible additional costs but there is also an annual cap. Thus, the annual aid per beneficiary should not exceed 15 per cent of the gross value added annually created by the beneficiary, 25 per cent of the annual labour costs or 10 per cent of the annual turnover realized in the region.

3.738

4.2 Rule of reason (RAG 2014) Notified aid measures are subject to stricter rules under RAG 2014 than under the GBER because aid measures falling outside the scope of the GBER are potentially more distortive for the internal market. Therefore, the notified aid measure will be considered compatible with the internal market provided it is designed in a way to ensure that the positive effects of the aid towards the common interest exceed its potential negative effects on trade and competition.

3.739

The RAG 2014 took over most of the conditions laid down in the 2009 indepth assessment communication and will apply them to all notified aid measures. Thus, the Commission will analyse in-depth whether the aid measure is aimed at an objective of common interest, whether it is targeted to address an equity concern, whether it is an appropriate policy instrument to address the common objective, whether it changes the behavior of the aid beneficiary towards the common objective and whether it is limited to the minimum necessary to induce that change in behavior. Thereafter, the Commission is looking at the negative effects of the aid and is verifying that the aid does not create undue negative effects on competition and trade. The novelty introduced in the RAG 2014 is that the Commission identified a priori the situations where the negative effects are likely to exceed any positive effects, impeding an approval of the aid. Consequently, in all other situations, the positive effects of the aid exceed the negative effects provided the aid contributes to the regional development

3.740

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of the region, it is appropriate, it has an incentive effect and it is limited to the minimum necessary. In addition, the aid must be transparent and published on a website. As under the GBER, notified aid above EUR 500 000 must be published on a national or regional website as from 1 July 2016.

3.741

Even if all the conditions are met, the Commission may subject the approval of novel, big budget schemes to an evaluation obligation and limit their duration to four years. Such limited approvals are a new feature introduced under the SAM.

3.742

In RAG 2014, the Commission has consolidated the general case law2018 establishing that an aid measure or the conditions attached to it entailing a non-several violation of EU law cannot be declared compatible with the internal market. The Commission went even further than that and, on the basis of Matra case law,2019 explicitly explains that it will take into account any proceedings concerning any infringement of Articles 101 and 102 of the Treaty which may concern the aid beneficiary and which may be relevant for the assessment of the aid under Article 107(3) of the Treaty. It remains to be seen how the Commission will apply that filter in practice. In particular, it remains to be seen whether it will require Member States to inform it also about national proceedings under Article 101 or 102 of the Treaty, or it will limit itself to the pending investigations before the Commission. However, from the general wording of the RAG it seems possible that pending investigations can also be taken into account, even before the Commission decides on the existence of an infringement under those Articles.

4.2.1 Investment aid schemes 3.743

For notified aid schemes, the Commission has translated the common principles into stricter compatibility conditions than under the GBER. Some of those conditions apply at the level of notified schemes and others at the level of individual aid granted on the basis of those schemes. The stricter treatment of notified schemes and of the individual aid derives from the fact that the categories falling outside the GBER are potentially more distortive for the internal market. Therefore, the Commission may limit the duration of those schemes to four years or less and may require an ex-post evaluation that will underpin a possible prolongation of the scheme afterwards. Furthermore, individual aid granted to 2018 See Case C-156/98 Germany v Commission ECLI:EU:C:2000:467, para. 78 and Case C-333/07 Regie Networks ECLI:EU:C:2008:764, paras 94-116. 2019 See Case C-225/91 Matra v Commission ECLI:EU:C:1993:239.

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larger undertakings on the basis of notified schemes is treated more strictly than under the GBER. Under the RAG 2014 due consideration is given to the Union’s cohesion policy. Therefore, the Commission presumes that certain conditions are fulfilled if a regional aid scheme is implementing a programme under one of the European Structural and Investment Funds2020 (“ESI funds”). Thus, for those schemes Member States must not demonstrate that they contribute to a regional development strategy and that the chosen aid instrument is appropriate to achieve the objectives of that strategy.

3.744

Considering that the Commission analyses in-depth the positive and negative effects of aid schemes, Member States are advised to use impact assessments, ex post evaluations of similar schemes or other empirical data that can demonstrate that the potential higher negative effects of aid schemes (especially sectoral schemes) are limited to the minimum necessary to achieve the equity objective.

3.745

4.2.1.1 Contribution to a common objective In the RAG 2014, the Commission tackles the criticism of the General Court in Smurfit Kappa2021 as regards the RAG 2007 and puts more emphasis on the positive effects of the aid on regional development. The General Court ruled that the Commission did not exercise its margin of discretion under Article 107(3) of the Treaty because the Commission had inferred from the fact that the aid in question complied with the RAG 2007 that the aid was compatible with the internal market, without assessing the importance of the subsidised project in terms of regional development.

3.746

Under the RAG 2007 the assessment of the positive effects of a notified aid measure was based on formal requirements, such as the location of the investment in assisted areas, maintenance of the investment for five years and own contribution of 25 per cent for financing the project.

3.747

With the new regional aid rules, those formal requirements underpin only the compatibility of regional aid schemes with the internal market under the GBER. Under the RAG 2014 the Commission analyses in-depth those requirements to

3.748

2020 European Regional Development Fund (ERDF), European Social Fund (ESF), Cohesion Fund, European Agricultural Fund for Rural Development (EAFRD). The implementation of programmes under the European Maritime and Fisheries Fund falls in any case outside the scope of the RAG 2014. 2021 See Case T-304/08 Smurfit Kappa Group v Commission ECLI:EU:T:2012:351.

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ensure that the notified measure contributes to the regional development of the area concerned. Impact assessments, evaluations or other empirical evidence can be used by Member States to provide the necessary proof.

3.749

Thus, Member States should demonstrate how the envisaged regional aid scheme fits within a development strategy of the region concerned and how it will contribute towards its objective. Further, when it comes to the design of the schemes, the Commission has laid down the minimum requirements for selecting the subsidised projects and the granting of the aid. First, the subsidized projects must be selected on the basis of a selection mechanism (for example a scoring) that enables the granting authority to prioritise the investment projects according to the objectives of the scheme.2022 The applicants under the scheme must declare the expected positive effects of the project on the development of the region. Secondly, when granting the aid the national authority must confirm that the selected project will contribute to the development of the region concerned. Such a confirmation may be made on the basis of declarations of the aid beneficiary when applying for aid.

3.750

Under the RAG 2014, the treatment of co-financed aid schemes from the ESI funds is facilitated. The Commission assumes for aid schemes that implement the national investment strategies defined in the context of the ESI funds that those schemes contribute to the development of the region concerned, without further proof.

3.751

For both co-financed aid schemes and schemes financed exclusively by Member States, the same minimum requirements of the GBER are applicable. Thus, the investment or the new jobs created must be maintained for a minimum period of time in the area concerned and the aid beneficiary must contribute with at least 25 per cent of own resources.2023 An additional requirement is included in the RAG 2014, which relates to the compliance with Union environmental legislation. Thus, when granting regional aid the granting authorities must ensure that the beneficiary has all relevant environmental permits for the investment project at stake and that an environmental impact assessment has been carried out. In absence of those permits or impact assessment, the granting of regional aid must be conditional on undertaking the necessary steps to ensure compliance with the environmental legislation.

2022 In any case, aid for broadband networks can be granted only on the basis of a competitive selection process as described in the broadband guidelines (see paras 3.1141-3.1145). 2023 See paras 3.724.

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4.2.1.2 Appropriateness After showing that the notified aid scheme implements a regional development strategy, it must be demonstrated that the envisaged measure is the most appropriate instrument to achieve the objectives of that strategy and thus the equity objective recognized by the Treaty in Article 107(3)(a) and (c). Impact assessments of the envisaged scheme or ex post evaluation for the prolongation of existing schemes can be used.

3.752

The appropriateness of the regional aid is verified at two levels. First, at the level of the scheme, the Member State must justify why the aid scheme is the most appropriate policy instrument to achieve the equity objective. For example, it must be shown that other policy instruments like education, training, and improvement of the business environment cannot be used to fit that purpose. The burden of proof for sectoral schemes is stricter. The comparison is done with multi-sectoral schemes. Thus, it must be shown why a multi-sectoral scheme was not an appropriate tool to achieve the envisaged equity objective.

3.753

The second level of the appropriateness test refers to the aid instrument. The Commission presumes that repayable advances or other financing methods (for example guarantees, low-interest loans) are less distortive than a direct grant (cash) or other forms that provide a pecuniary advantage (for example tax exemptions, supply of land, goods, services at favourable prices). Therefore, the burden of proof rests on the Member State, which has to argue that the repayable advances or other financing methods are not appropriate to achieve the equity objective and therefore a direct grant is preferred as an aid instrument.

3.754

Aid schemes co-financed from ESI funds are not subject to those requirements and the financing instrument chosen in the operational programmes are considered appropriate instruments.

3.755

4.2.1.3 Incentive effect The formal requirements for the incentive effect are based on the conditions set out in the GBER. Thus, the beneficiary must apply for aid before starting the works on the subsidised project. However, further requirements are addressed to the beneficiary and granting authorities in the RAG 2014, which differ for SMEs and large enterprises.

3.756

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3.757

When applying for aid, the beneficiary must submit in a standard form the minimum information listed in Annex V to the RAG 2014. Both SMEs and large undertakings must explain the counterfactual scenario, by describing which scenario would happen in absence of the aid, i.e. investment or location scenario.2024 Only large enterprises are required to bring the documentary evidence to support the declarations in the standard application form.

3.758

On the other side, the granting authority must confirm that the counterfactual scenario presented by the aid beneficiary is credible. The Commission explains that the counterfactual scenario is credible if it is genuine and relates to the decision-making factors present at the time of the decision by the aid beneficiary regarding the subsidised project.

4.2.1.4 Proportionality 3.759

The maximum aid intensities foreseen in the regional aid maps are used as a proxy for the proportionality of the aid for SMEs and as a cap for large enterprises. Even if the aid is below the notification threshold, the Member States must limit the aid to large enterprises to the minimum necessary to attract the investment to the area concerned or to make the investment sufficiently profitable so that it takes place in the area concerned. While under the incentive effect test large enterprises are required to demonstrate why the aid is necessary and what would happen in its absence, Member States cannot ignore that evidence when checking the proportionality of the aid. Therefore, they are required to limit the aid to the minimum necessary on the basis of a net-extra costs approach and to use the maximum aid intensities as a cap.

3.760

The rationale of using the maximum aid intensities as an ultimate cap derives from the fact that they represent proxies for the socio-economic situation of the area concerned and the extent to which it suffers from a handicap in attracting and maintaining economic activity there. Those maximum aid intensities are also established to ensure predictability and a level playing field and to prevent that State aid is used for a project where the ratio between aid amount and eligible costs is very high and therefore likely to be distortive.

3.761

The Member States must establish first the maximum aid intensity a project can receive. For large investment projects, that maximum is further reduced because of the scaling down mechanism and especially if the new investment to be subsidised constitutes a single investment project with other projects that have 2024 See paras 3.792

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received aid in the last three years and are located in the same NUTS 3 area. The single investment project provisions and those regarding the scaling down mechanisms are the same as in the GBER, with lower aid ceilings. Accordingly, for eligible costs above EUR 50 million only half of the maximum aid intensity can be used and for costs above EUR 100 million, only 34 per cent of applicable aid ceilings can be used.2025 Secondly, due consideration must be given to the cumulation rules in order to ensure that the maximum aid intensities of the regional aid maps are respected. Thus, the RAG 2014 clarifies that the first granting authority must calculate in advance the maximum aid intensity a project can receive, especially in cases where a project is eligible for investment aid concurrently under several regional aid schemes or there is cumulation with ad hoc aid.2026

3.762

4.2.1.5 Avoiding undue negative effects on competition and trade The Commission is concerned about the cumulative effects of aid schemes on the internal market because they may still lead to high level of distortions, even if on an individual basis the negative effects of the aid measures are deemed to be limited because the conditions for investment aid are respected.

3.763

In the RAG 2014, the theory of harm of aid schemes refers to market structures and location of economic activity across the EEA. Granting investment aid under schemes might create or aggravate a situation of overcapacity in a particular market or might create, maintain or increase the substantial market power of some aid recipients in a way that affects negatively the dynamic incentives in the internal market. Furthermore, the existence of aid schemes in some regions might encourage the relocation of economic activity across the EEA. It is especially likely that such distortions occur in the case of sectoral schemes.

3.764

Therefore, Member States must demonstrate that the negative effects of aid schemes are limited to the minimum necessary to achieve the equity objective. For that purpose, the size of the projects, the type of beneficiaries and the characteristics of the sectors eligible for aid under the envisaged schemes might be relevant. Those indicators stem from the Commission’s decisional practice under the RAG 2007 for the assessment of sectoral schemes, which were subject to an assessment of their potential negative effects. However, there was no description of the potential distortive effects of those schemes in the RAG 2007.

3.765

2025 See Article 8(3) of the GBER 800/2008. 2026 See paras 90, 91 and 92 of the RAG 2014.

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3.766

In addition, at the level of individual aid, if in absence of the investment aid the project would have been located somewhere else (‘location scenario’), Member States cannot grant aid to a beneficiary that has located the investment in the area which is more developed than the alternative location. Because SMEs and large enterprises declare in the standard application form what would happen in absence of the investment, the granting authority must verify the status of the alternative location of the investment before granting the investment aid. If the alternative location is also an ‘a’ or ‘c’ area, the applicable maximum aid intensity, which reflects the socio-economic situation of that area, is the indicator to be used to verify whether the aid can be granted or not. For example, if the project is located in region A with a maximum aid intensity of 35 per cent and the alternative location in absence of aid would be in region B with a maximum aid intensity of 50 per cent, the granting authority in region A cannot grant the investment aid, even if the aid has an incentive effect and is limited to the minimum.

3.767

That prohibition of aid existed also in the IDAC. However, the scope of application was restricted to notified individual aid measures, which on the basis of paragraph 68 of the RAG 2007 were subject to an in-depth assessment because the aid beneficiary had market shares above 25 per cent or the capacity increase was more than 5 per cent on a market in decline. The Commission never applied that provision in practice. However, under the RAG 2014 Member States are required to apply it for investment aid below the notification threshold.

4.2.1.6 Transparency 3.768

The RAG 2014 was amended by a communication on transparency requirements of State aid. Therefore, the provisions of the RAG 2014 are now in line with those under the GBER and other guidelines adopted in 2014.

3.769

Thus, notified individual aid above EUR 500 000 must be published on a central or regional website. Considering that the transparency requirement is a compatibility condition, it must be ensured that at the moment of notification there are sufficient commitments to publish the aid, which is above the EUR 500 000.

4.2.1.7 Evaluation 3.770

The Commission may limit the duration of notified schemes that are novel or have big budgets to four years and impose an evaluation obligation at the end of the validity period. Thus, the prolongation of the scheme beyond the four years 732

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is subject to the results of the evaluation. That novelty introduced by SAM, ensures an overall positive balance of aid schemes that a priori have potentially higher negative effects because of the big budget or the characteristics of the scheme.

4.2.2 Operating aid schemes 4.2.2.1 Contribution to a common objective If it is to contribute to the development of the areas concerned, operating aid must target the challenges those areas face. Therefore, the challenges must be clearly identified in advance, as was done in the RAG 2007.2027

3.771

For operating aid in ‘a’ areas, Member States must demonstrate the existence and importance of the specific difficulties faced by the areas concerned and that such difficulties cannot be overcome with investment aid schemes.

3.772

Considering that Article 349 of the Treaty sets out the permanent handicaps confronting the outermost regions, they are used also in the RAG 2014 for the purpose of assessing the compatibility of operating aid schemes. However, Member States must clearly identify the additional costs related to those permanent handicaps which are intended to be covered with operating aid. The risk of depopulation in very sparsely populated areas must be identified in advance to justify the necessity of an operating aid scheme in such areas.

3.773

4.2.2.2 Appropriateness The assessment of the appropriateness of operating aid schemes is a new requirement introduced in the RAG 2014. It seems that the appropriateness test focuses on the way the operating aid is calculated. Thus, the aid may be set at a certain level over a given period in order to encourage undertakings to be more efficient. In addition, a claw-back mechanism can be introduced if the additional costs cannot be estimated accurately in advance.

3.774

4.2.2.3 Incentive effect The Commission presumes that operating aid has an incentive effect to induce additional economic activity in the areas concerned, provided the specific obstacles those areas face have been clearly identified in advance.

3.775

2027 See point 76 of RAG 2007.

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4.2.2.4 Proportionality 3.776

The RAG 2014 clarifies the conditions for the proportionality test. Thus, the aid must be limited to a proportion of predefined eligible costs and in any case it cannot exceed those costs. Secondly, at the level of the aid beneficiary the aid must be proportional to the problems identified.

3.777

In absence of a definition of eligible costs, Member States have a large margin of discretion in identifying them. The definition of operating aid in paragraph 20(k) of the RAG 2014 exemplifies costs that could be covered by the aid (e.g. personnel costs, materials, utilities). For outermost regions only the eligible costs are established by comparing the level of costs of a similar undertaking located in another region of the Member State concerned.

3.778

It will be seen in practice how Member States will implement the principles laid down for the proportionality test in view also with those under the appropriateness test.2028

4.2.2.5 Avoidance of undue negative effects 3.779

As long as the aid is necessary and proportional to achieve the equity objective, the negative effects of the aid are likely to be outweighed by its positive effects.

3.780

However, the RAG 2014 introduces a new theory of harm for operational aid schemes. Thus, operating aid may change the structure of the market or the characteristics of a sector or industry to an extent that distorts the competition on the internal market through barriers to entry or exit, or through the substitution or displacement of trade flows. In those situations, it is unlikely that the positive effects of the aid compensate any negative effects.

4.2.3 Individual aid 3.781

The common principles will be assessed in-depth for all individually notified aid measures, whether they are based on an aid scheme or are granted on an ad hoc basis. In addition, the Commission will verify that there is no condition attached to the aid measure or its financing method that entails a non-severable violation of Union law.2029 For the first time the Commission has translated the

2028 See para 3.774. 2029 See para 3.742.

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Matra case law2030 into explicit provisions requiring to take into account any proceedings concerning an infringement of Article 101 or 102 of the Treaty against the beneficiary of the notified aid measure which may be relevant for its assessment under Article 107(3) of the Treaty.

4.2.3.1 Contribution to a common objective Because ad hoc aid is granted outside an investment aid scheme, Member States must demonstrate, first, that the subsidised project is coherent with the development strategy of the area concerned and, secondly, that it contributes towards the development of the area concerned. The factors to be used for the assessment of the contribution to regional development are the same as for individual aid granted on the basis of aid schemes.

3.782

The RAG 2014 list the indicators that can be used to demonstrate the positive effects of individual aid. Those indicators can be directly or indirectly linked to the development of the area concerned. Therefore, to assess the contribution to the equity objective account is taken not only of directly or indirectly created jobs by the subsidised projects, but also of the envisaged training activities, knowledge spillovers or co-operation with higher education institutions. Even if no weight is given to one indicator to the detriment of another, the degree of their relevance depends on the characteristics of the project and of the status of the region. For example, the creation of a cluster is an important indicator but it will be less relevant for the regional development if the subsidised project takes place in a cluster which is well established. Likewise, the commitment of the aid beneficiary to provide training activities for its workforce is not taken into account if those activities will be subsidised.

3.783

In addition to those indicators, the business plan of the aid beneficiary can be another relevant indicator.

3.784

4.2.3.2 Appropriateness Ad hoc aid is again subject to stricter requirements. Thus, it must be shown how the development of the area concerned is better ensured by granting ad hoc aid rather than aid under an investment aid scheme or other types of measures.

3.785

As with investment aid schemes, the choice of direct grants or tax exemptions as aid instrument must be justified as being more appropriate than other less

3.786

2030 See Case C-225/91 Matra v Commission ECLI:EU:C:1993:239, para 42.

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distortive financing instruments. Most probably, if the individual aid is granted on the basis of an approved aid scheme it will no longer be necessary to demonstrate also for the notified individual aid measure that the chosen aid instrument is appropriate, provided the Commission has approved the underlying aid scheme.

4.2.3.3 Incentive effect: formal requirements 3.787

The formal requirements for the assessment of the incentive effect described for investment aid schemes2031 apply also for notified individual aid and ad hoc aid. Thus, if the works have started before applying for aid, it is presumed that the aid was not necessary and therefore it cannot be declared compatible with the internal market.2032

3.788

The Court of Justice confirmed in Sardinian hotel industry2033 that the requirement to apply for aid before the start of works is a simple, relevant and suitable criterion enabling the Commission to presume in the case of investment aid schemes that the planned aid is necessary. However, the Court of Justice ruled that when assessing individual cases, in absence of the fulfillment of that formal criterion, other criteria could be used to establish that the aid was necessary. Nevertheless, when dealing with such an individual case (more precisely, with an ad hoc investment aid), the General Court agreed in Fri-El Acerra2034 that the formal requirements for the incentive effect required in the RAG 20072035 were adequate to establish the necessity of the aid. In Sardinian hotel industry as well as in Fri-El Acerra, the Commission went beyond the formal requirements of the incentive effect in order to establish the necessity of the aid. However, no convincing arguments had been brought by Italy to demonstrate the necessity of the aid.

3.789

Further, the Commission has opened the formal investigation in another ad hoc case (“Europac”)2036 because the formal requirements have not been complied with. The Commission could not take a final decision in Europac as Portugal withdrew the notification, but the opening decision is consistent with the pre2031 See paras 3.757 and 3.758. 2032 See para. 69 of the RAG 2014 which refer back to the paras 64-67 applicable to schemes. 2033 Joined Cases C-630/11 P to C-633/11 P HGA and Others v Commission (‘Sardinian hotel industry’) ECLI:EU:C:2013:387, paras 106-109. 2034 Case T-551/10 Fri-El Acerra v Commission ECLI:EU:T:2013:430. 2035 See para. 38 of the RAG 2007, which allowed the start of works only after applying for aid and receiving a confirmation in writing from the granting authorities or, in the case of an ad hoc aid, a letter of intent regarding the aid subject to the Commission’s approval. 2036 Commission Decision, SA 34764/C/2014- PT - Europac Kraft Viana.

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vious cases as regards the respect of the formal requirements for the incentive effect. In Europac, the Commission doubted that the aid had an incentive effect considering that the beneficiary had started the works before the granting authorities confirmed in writing the eligibility of the project. The Commission also doubted that an oral confirmation sufficed to consider the formal requirements under paragraph 38 of the RAG 2007 fulfilled. In view of that case law and the decisional practice of the Commission, respect for the formal requirements of the incentive effect is essential in order to presume the necessity of the aid. However, with the RAG 2014 respecting the formal requirements is no longer sufficient as the Commission will verify in-depth the necessity of the aid for all notified aid by using a counterfactual scenario. In any case, it remains to be seen whether the Commission will accept to carry out a counterfactual scenario assessment in order to establish the necessity of the aid in absence of a formal application for aid before the start of works. The new RAG 2014 establishes clearly that a project for which the works have started before the beneficiary has applied for aid is not eligible for aid. The project is deemed to have started only after construction has started, or a first firm commitment to purchase the equipment has been given, or any other engagement that makes the investment irreversible (e.g. selling the output of the future plant without any conditions before even starting building the plant).

3.790

4.2.3.4 Incentive effect: counterfactual scenario If the same investment would have taken place in the region concerned even in absence of the aid there are no positive effects of the aid for the region and therefore the aid measure cannot be considered compatible with the internal market. Therefore, the analysis of the counterfactual scenario is important. The counterfactual scenario encompasses two situations: First, regional aid can encourage the aid beneficiary to invest in the area concerned if in absence of the aid the investment would not be sufficiently profitable there (scenario 1, investment aid) or, secondly, regional aid encourages the aid beneficiary to locate the investment in the area concerned if it compensates for the net disadvantages of the area concerned (scenario 2, location aid). In order to demonstrate that the aid has indeed an incentive effect, documents must be provided on the basis of which the company decided to invest or where to locate the investment. Those documents should refer to the moment when the company took its investment or location decision. Board documents, risk

3.791

3.792

3.793

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assessments, business plans or expert opinions can be brought as evidence. Those documents should reflect the process by which the company made the decision and a comparison of the different options presented to the board to underpin the investment or location decision. In any case, the counterfactual scenarios should also include the scenario where no aid is granted inside the EEA.

3.794

Paragraph 69 of the RAG 2014 introduces the possibility to take into account the aid granted by third countries outside the EEA to determine the location of a certain project within their territories. Consequently, if the alternative location of the project at stake is outside the EEA, proof must be brought that the investment costs are higher in locating the investment in the EEA than locating it outside the EEA where aid is granted. By allowing aid granted outside the EEA to be taken into account, the costs of locating the investment there would be decreased compared to locating the investment inside the EEA where only the costs are taken into account without the possibility to reflect the promised aid. That approach is justified by the fact that within the EEA the Commission knows how much aid the beneficiary can receive if it locates the investment in an alternative location inside the EEA. That information however is not available for aid granted outside the EEA. The Commission must ensure a level playing field within the internal market and limit the subsidy race between regions within the Union. Therefore, if the alternative location(s) is (are) in the EEA, the potential of receiving aid in those other locations cannot be taken into account to demonstrate the different levels of profitability of the project in those locations.

3.795

To demonstrate the level of the profitability of the project with and without the aid the methodologies which are standard practice in the industry concerned can be taken into account (including the net present value of the project, the internal rate of return and the average return on capital employed).

3.796

The aid will be considered to have an incentive effect if the counterfactual scenario demonstrates the following. For scenario 1 (investment decision), the profitability of the project without the aid should be below the normal rates of return applied by the beneficiary in similar projects. If the net present value of the project with the envisaged aid is higher than the net present value of the project without the aid, the aid is deemed to be necessary. For scenario 2 (location decision) the aid is considered to be necessary if the costs of investing in the target area (i.e. where the aid is to be granted as notified to the Commission) are higher than in the alternative location. If the net present value of the investment is higher in the target area than in the alternative area, it means that the costs 738

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of investing in the target area are lower, so that there are no additional costs to cover with the aid. As a result, the investment would in any event be located in the target area in absence of the aid because of lower costs. Thus, the aid will lack incentive effect and will not be considered compatible with the internal market. To demonstrate the incentive effect, it is sufficient to show that a comparison of different scenarios has been undertaken and that without the aid the project would not be sufficiently profitable or more expensive than in an alternative location. At that level, it is not important to demonstrate the level of the profitability or the net disadvantages. Those elements will be assessed in the proportionality test. However, if the net present value of the investment is calculated for the incentive effect, the same documents can be used for the proportionality test.2037

3.797

4.2.3.5 Proportionality: maximum aid intensities used as cap The investment aid should be limited to the minimum necessary to attract the investment to the region concerned or to make the investment profitable so that it takes place in the relevant region. However, the net extra cost approach is capped by the maximum aid intensities enshrined in the regional aid maps. For large investment projects those intensities are scaled down, so that the maximum aid a project can receive is already low in regions with an applicable ceiling of 10 per cent. For example, a project with eligible costs of EUR 120 million may receive a maximum aid amount of EUR 8.1 million. By putting in place an aid cap and at the same time verifying the net extra cost, the Commission is verifying that the minimum necessary is not exceeded. However, if on the basis of the net extra cost approach the aid exceeds the maximum aid intensity the Commission will cap the aid to that maximum allowable amount which is considered to be a proxy for the compatibility of aid. The Commission presumes that if the ‘minimum’ necessary exceeds the maximum allowable aid it is distortive and cannot be deemed compatible with the internal market. Therefore, not respecting the maximum aid intensities represents a manifest negative effect and cannot be declared compatible with the internal market

3.798

4.2.3.6 Proportionality: net extra cost approach For scenario 1 cases (investment decisions), the net extra cost approach refers to the amount necessary to make the project sufficiently profitable by increasing for example the internal rate of return (IRR) beyond the normal rate of return applied by the beneficiary in similar projects. For scenario 2 cases (location

3.799

2037 See para. 106 of the RAG 2014.

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decisions), the Commission will compare the net present value of the investment in the target area and that in the alternative location(s) and will limit the maximum aid amount to the difference between the two net present values. To calculate the net present value of the investment all relevant costs and benefits in the two locations must be taken into account. It is worth underlining that the costs used for the calculation of the net present value (including for example administrative costs, transport, wage differences, training costs) go beyond what is considered as eligible costs under the RAG 2014 to calculate the maximum allowable aid amount. As regards the benefits that must also be reflected in the calculation of the net present value, any aid granted in the alternative locations in the EEA should not be taken into account (in the same way as such aid is excluded for the incentive effect test).

3.800

The net extra cost approach can lead to different results. If the net present value of the investment is higher in the target area (i.e. where the aid is granted and notified to the Commission) then in the alternative area it means that the costs of investing there are lower. As a result, there are no additional costs to cover with the aid. Thus, the aid will not be considered compatible with the internal market.

3.801

The calculations used for the analysis of the incentive effect can also be used for the proportionality test. Though for the proportionality test it is not explicitly required to base the assessment on documents that are contemporaneous with when the investment or location decision was taken and the documents do not have to be same, it is implicit that the underlying projects and costs must be the same in both tests. Thus, if under the incentive effect test it was established that the aid has an incentive effect because it compensates the net extra costs of locating the investment in the target region, at the level of proportionality no additional costs can be taken into account even if the project has been modified after the location decision has been taken (e.g. if additional products will be produced in the same location).

4.2.3.7 Avoidance of undue negative effects on competition and trade 3.802

Compared to the regional aid rules for 2007-2013, the Commission has, on one side, clearly identified the scenarios where the balancing test will lead to a negative result (they are the manifest negative effects) and, on the other side, differentiated the importance of the negative effects depending on the counterfactual scenario. Only if they fall outside the list of manifest negative effects will the Commission balance the negative effects with the positive effects because when the aid falls within one of the category of manifest negative effects, the overall 740

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balance of the aid is deemed to be negative and cannot be declared compatible with the internal market.

4.2.3.8 Manifest negative effects In points 119 to 122 of the RAG 2014 the Commission presents four categories of manifest negative effects. For those categories the Commission presumes that the negative effects of the aid outweigh any positive effect and therefore the balance is deemed to be negative, leading thus to the incompatibility of the notified aid measure.

3.803

First, the non-respect of the maximum aid intensities will lead to the incompatibility of the aid measure.2038 Secondly, in scenario 1 cases, the creation of capacity on a market which is structurally in absolute decline is considered to be distortive and the negative effects are thus unlikely to be compensated by any positive effects. Thirdly, in scenario 2 cases, if in absence of the aid the investment would have been located in a region poorer than the target region, that outcome will be considered as a manifest negative effect because the aid conflicts with the cohesion objectives of the Union. The fact that the aid had an incentive effect in attracting the investment to the target area and is limited to the net extra costs does not prevail over the manifest negative effect. Fourthly, if there is a causal link between the aid and the relocation of the activity across the Union, the aid would not be compatible with the internal market. A causal link could be established if the net present value of the new investment is higher with the relocation of the activity than without the relocation and no other alternative location has been considered.

3.804

4.2.3.9 Negative effects: balancing test In the RAG 2014, the Commission has structured the assessment of the negative effects depending on the counterfactual scenario of the aid. The Commission will balance those negative effects with the other positive effects of the aid to decide on the compatibility of the aid.

3.805

Thus, for scenario, two main sources of potential negative effects are identified. The first category refers to a significant capacity increase on a market, which has overcapacity and a second one is when the beneficiary holds a significant market power. They are similar to the RAG 2007 and IDAC, except that under RAG 2014 the market shares and overcapacity thresholds no longer exist.

3.806

2038 See para. 3.798.

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3.807

For the assessment of the creation or deterioration of overcapacity on the relevant market, the Commission seems to distinguish between markets that are in structural decline and markets which are in relative decline, meaning that it shows a positive growth rate but does not exceed a certain benchmark growth rate.

3.808

Like under RAG 2007, underperformance is measured compared to the EEA GDP over the last three years before the start of works. However, under the new rules, the Commission is tackling with the shortcomings of the old rules. Thus, for the assessment of the impact of the new capacity in a market which is underperforming or is in overcapacity, the Commission is looking also to the forecasted growth in the coming three to five years and not only to the past anymore. In addition, in the RAG 2014 the Commission acknowledges that the EEA might not be the appropriate level to assess the effects of the aid, if the geographic market is worldwide. In such cases, the potential of the new capacity to crowd out producers from the EEA market will be assessed.

3.809

Under RAG 2007, the Commission had already dealt with the calculation of the threshold of 5 per cent under paragraph 68 for a product market that had a worldwide geographic dimension. This was the case for the production of solar panels or semiconductors. For example, in Globalfoundries case2039 in absence of data at EEA level the Commission assessed whether the investment of Globalfoundries had the potential to crowd out incentives of existing competitors with production capacity in Europe. Being the only worldwide significant foundry with productive capacity in Europe, the Commission concluded that it was unlikely that the investment of Globalfoundries would crowd out potential competitors or future projects for building production facilities in Europe by players who are not already producing in Europe.

3.810

As regards the assessment of market power of the aid beneficiary, in the RAG 2014 the Commission is not using anymore thresholds as indicators of market power.2040 It will take into account the market shares of the beneficiary, of its competitors and other relevant factors, such as market structure, concentration of the market, possible barriers to entry, buyer power or barriers to expansion or exit.

2039 Commission Decision SA 30596 (N 101/2010) DE – LIP – GLOBALFOUNDRIES Group (Fab Booster Investment and Fab 1 Annex) Dresden, OJ C 258, 02.09.2011, p. 3. 2040 In para. 68 of the RAG 2007, market shares above 25 per cent before or after the investment were indicators for serious doubts for the compatibility of the aid as it was assume that the beneficiary has market power and the negative effects had to be assessed during a formal investigation procedure.

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For scenario 2 cases, it is presumed that all the negative effects on market would have occurred in any event because the aid beneficiary has taken the decision to invest and the aid has the effect of determining the location of the investment. Therefore, provided the aid has an incentive effect and is proportional, the potential negative effects on the market are irrelevant because they are not caused by the aid but by the decision of the investor to invest.

3.811

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Chapter 21 Rescue and restructuring

1.

Background

1.1 Economic rationale for the control of rescue and restructuring aid It is easy to see why governments, faced by the threat of mass redundancies and the fear of losing prestigious domestic industries, would be drawn to rescue troubled firms. It is therefore no surprise that companies facing the risk of bankruptcy may find governments only too willing to help them overcome their difficulties. Even if we leave aside the banking rescues that took place during the recent crisis, and which are considered elsewhere in this book,2041 recent years have seen interventions in both Europe and the United States in a range of failing firms, including in the airline, automotive, rail and shipbuilding sectors.2042

3.812

2041 See Chapter 29 of this book. 2042 In Europe, see for example Commission Decision 2015/1091/EU of 09.07.2014 on the measures SA 34191 (2012/C) (ex 2012/NN) (ex 2012/CP) implemented by Latvia for A/S Air Baltic Corporation (air Baltic), OJ L 183, 10.07.2015, p. 1; Commission Decision 2015/1073/EU of 09.01.2015 on the State aid SA.35888 (2013/C) (ex 2013/NN) SA.37220 (2014/C) (ex 2013/NN) SA.38225 (2014/C) (ex 2013/NN) implemented by Cyprus for Cyprus Airways (Public) Ltd, OJ L 179, 08.07.2015, p. 83); Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines SA, OJ L 25, 30.01.2015, p. 1; Commission Decision 2015/494/ EU of 09.07.2014 on the measures SA.32715 (2012/C) (ex 2012/NN) (ex 2011/CP) implemented by Slovenian for Adria Airways d.d., OJ L 78, 24.03.2015; Commission Decision of 29.07.2013 on Aide à la restructuration du groupe PSA (Case SA.35611), available under the case number on the DG Competition internet page (not yet published in the OJ); Commission Decision of 15.12.2010 on Rescue aid for the Bulgarian State Railways EAD (BDZ) (Case N 402/2010), summary notice in OJ C 187, 28.06.2011, p. 7; Commission Decision of 11.11.2010 on Aide à la restructuration des activités “fret” de la SA de droit public SNCB (Case N 726/2009), summary notice in OJ C 327, 04.12.2010, p. 6; Commission Decision 2009/610/EC of 02.07.2008 on the measures C 16/04 (ex NN 29/04, CP 71/02 and CP 133/05) implemented by Greece in favour of Hellenic Shipyards, OJ L 225, 27.08.2009, p. 104. Similarly, the US govern-

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3.813

Yet if the political impulses behind the rescue of troubled firms are easy to understand, the economics of the problem points in a different direction. Put simply, without careful control of the circumstances of such support, the preservation of jobs and national prestige from rescue of a failing firm can come at too high a price in terms of damage to the wider economy.

3.814

There are a number of reasons for that damage. In the first place, the financial problems that typically precipitate a firm’s insolvency, such as the inability to meet cash payments or the refusal of lenders to roll over loans, are commonly caused by underlying economic problems. The firm’s costs may be too high to be competitive, for example, or its product range may be obsolete.2043 In that context, financial distress is simply a signal that the firm is not sufficiently productive to survive in its existing form.

3.815

It is always possible to address the need for restructuring by ensuring that government bailouts are only given on conditions that require the recipient of support to carry out a thorough restructuring.2044 But a number of factors make thorough restructuring difficult to achieve in practice, including: the fact that restructuring may require exit from certain businesses, leading to just those negative outcomes for jobs and prestige that the intervention is intended to avoid; the existence of asymmetric information, which makes it difficult for governments to know what changes they should mandate in return for assistance; and the short-term nature of political cycles, which may make a “quick fix” solution more attractive than a protracted and complex restructuring.

3.816

However, when support for failing firms prevents restructuring, it can have a strongly negative effect on the economy. The process of reallocating resources through restructuring or bankruptcy in response to financial distress is an important driver of productivity growth.2045 One often-quoted study has shown ment bailed out GM, Ford and Chrysler during the crisis. When GM had to file for Chapter 11 bankruptcy proceedings, it was majority State-owned. After successful restructuring, the government sold the last shares at the end of 2013. 2043 See Oxera Consulting, Should aid be granted to firms in difficulty? A study on counterfactual scenarios to restructuring State aid, p. 18. For the underlying economic causes of financial distress, see for example Commission Decision of 08.10.2014 on Restructuring aid for Alestis (Case SA.38324), summary notice in OJ C 418, 21.11.2014, p. 6 (high costs due to inefficient organisation and lack of labour restructuring). 2044 In that context, it is noteworthy that the US Congress was willing to approve bailouts to US carmakers during the financial crisis only on terms that they submitted credible restructuring plans: see letter from Nancy Pelosi and Harry Reid to the ‘Big Three’ carmakers, 21 November 2008. However, that outcome was only achieved in the context of heavy political pressure not to provide bailouts and of attitudes towards government intervention in industry that may be very different from those prevailing in Europe. 2045 See for example Barnett, Batten, Chiu, Franklin and Sebastiá-Barriel, “The UK productivity puzzle”, Bank of England Quarterly Bulletin 2014 Q2, p. 114.

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that “external” restructuring (exit, entry and market share change), as distinct from “internal” restructuring (improvements by incumbents), accounts for 50 per cent of establishment labour productivity growth and 80-90 per cent of total factor productivity growth.2046 Aid to failing firms can also have negative effects through its impact on incentives. For firms that expect to be bailed out if they find themselves in difficulty, a problem of moral hazard arises. Such firms have every incentive to take excessive risks, in the expectation that if those risks pay off, the benefits will accrue to the firm and its shareholders, whereas any losses will be borne by the State.2047 Meanwhile, efficient firms’ incentives to grow and innovate can be blunted by the availability of aid to their competitors. For example, a firm whose costs are lower than the rest of the industry should normally have an incentive to invest in new capacity, on the basis that its lower costs will allow it to capture corresponding market share. If, however, such a firm anticipates that its rivals will receive State support to maintain their market share, the incentive to invest is lost.2048

3.817

Finally, support from a particular Member State for a firm in financial difficulties can have a negative impact on industries in other Member States. In industries in need of structural adjustment, such as those where there is a lack of demand on an industrywide basis, the normal outcome in the absence of State intervention would be for the least efficient firms to exit the market first.2049 Such an outcome should ensure that excess capacity is absorbed in a way that boosts the productivity of the industry as a whole. However, by subsidising firms to keep them in business, governments can transfer the burden of adjustment to more efficient firms in other Member States. That is a particular concern in a period of fiscal consolidation, when some Member States do not have the budgetary capacity to compete in such a “subsidy race”.

3.818

2046 Disney, Haskel and Heden (2003) “Restructuring and productivity growth in UK manufacturing”, The Economic Journal 113 (489), 666-694. 2047 Moral hazard is a recognised problem in the financial sector, where banks and other financial institutions that were considered “too big to fail” were enabled to take on excessive levels of risk in the years leading up to the financial crisis by the belief of their shareholders and creditors that governments would stand behind them if those risks failed to pay off. The moral hazard problem has received less attention in relation to nonfinancial businesses, but it is hard to deny that at least in large-scale, prestige industries such as the automotive and airline industries, the likelihood of intervention in the case of problems is high and the risk of moral hazard correspondingly great. 2048 See Lyons, Van Reenen, Verboven and Vives, EAGCP Commentary on European Community Rescue & Restructuring Aid Guidelines, 6 February 2008, p. 2. 2049 See Ghemawat and Nalebuff (1985) ‘Exit’ The RAND Journal of Economics, 184-194; Fudenberg and Tirole (1986) ‘A theory of exit in duopoly’ Econometrica, 943-960; Whinston (1988) ‘Exit with multiplant firms’ The RAND Journal of Economics, 568-588; Ghemawat and Nalebuff (1990) ‘The devolution of declining industries’ The Quarterly Journal of Economics, 167-188; Murto (2004) ‘Exit in duopoly under uncertainty’, The RAND Journal of Economics, 111-127.

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3.819

For all those reasons, the Commission has traditionally been very suspicious of State aid for firms facing financial difficulties. Nevertheless, it has never sought to ban such aid outright. There are two main reasons why that is so.

3.820

First, even if a firm’s performance is so poor that exit is unavoidable, there can be a case for State support to cushion the blow. For example, support may be needed to keep essential services, such as services of general economic interest (SGEI), running while the service provider is restructured or a replacement is found. Likewise, in regions with persistently high unemployment, social considerations may call for State support to help troubled firms to remain in business. Second, many of the problems identified above can be addressed by ensuring that the intervention is well designed. For example, one key concern is that State support will provide a “quick fix” that addresses only the immediate financial problems of a troubled company, while failing to deal with its underlying difficulties. That concern can to a large extent be met by ensuring that the company has a suitable plan in place to restore its long-term viability, reinforced by a credible commitment from the government not to grant further aid if the plan fails. Likewise, moral hazard concerns can be met by ensuring that those who benefit from successful risk-taking, in particular the firm’s shareholders, have to accept losses if the firm is rescued by the State. Such design elements make it possible to square the circle between the wishes of government to be seen to take action, and the need to ensure that such action does not cause harm to the wider economy.

1.2 Short history of the Commission’s policy on aid to firms in difficulty 3.821

The considerations outlined in section 1.1 imply the need for a strict approach to aid for firms in difficulty, without ruling out the possibility of approving well-designed aid measures in appropriate cases. The earliest cases of rescue and restructuring aid, going back to the 1970s, show just such an approach in an embryonic form.

3.822

In a 1971 decision, the Commission required Belgium to stop providing aid under a system of loans to firms in difficulty.2050 In reaching that decision, the Commission noted that the grant of loans to firms in difficulty “has disturbed the normal play of market forces by suppressing their effect, namely that of driving inefficient undertakings out of business”. The Commission made clear 2050 Commission Decision 72/34/EEC of 15.12.1971 on the abolition, pursuant to Article 93(2) of the EEC Treaty, of Belgian aid to undertakings in difficulty, OJ L 10, 13.01.1972, p. 22.

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that while it was not necessarily opposed to aid for undertakings in difficulty in exceptional circumstances, such aid should be granted within the framework of a “reorganisation programme” that was sufficiently well defined to make an effective contribution to the reorganisation of the enterprises or regions concerned.2051 The circumstances in which aid to firms in difficulty could be approved were further refined in the Commission’s Eighth Competition Report for 1978.2052 In particular, that report introduced a distinction between rescue aid (shortterm aid intended to keep a firm in business while the causes of its difficulties were assessed and a remedy worked out), and restructuring aid (longer-term aid, described in the Eighth Competition Report as aid “to keep [firms] in business until the restructuring and/or conversion can take effect”). It also set out a number of key limitations to the form that rescue aid could take, including the requirement that such aid be in the form of loans or loan guarantees, and its duration limited to six months.2053

3.823

As far as restructuring aid was concerned, the policy set out in the Eighth Competition Report was much less precise. However, the Commission noted that restructuring aid could transfer social or industrial problems from one Member State to another and could “merely give the recipient firms a moment of respite, since their problems would be bound to reappear in exacerbated form at a later date”. For that reason, it insisted that restructuring aid be strictly conditional on the implementation of “a sound restructuring and/or conversion programme” that would “restore the viability of the production concerned”.

3.824

The Commission’s policy was significantly refined and expanded in 1994 in the light of the completion of the single market, with the introduction of the first Community guidelines on State aid for rescuing and restructuring firms in difficulty (“1994 Guidelines”).2054 Those guidelines followed up on the notion of restoration of viability, already present in 1979, by stating that “the sine qua non of all restructuring plans is that they must restore the long-term viability and health of the firm within a reasonable time scale and on the basis of realistic assumptions as to its future operating conditions”.2055 The 1994 Guidelines introduced two new conditions for the approval of restructuring aid: avoidance

3.825

2051 Commission of the European Communities, First Report on Competition Policy (April 1972), pp. 141-143. 2052 Commission of the European Communities, Eighth Report on Competition Policy (April 1979), pp. 156160. 2053 Those provisions remain the core of the concept of rescue aid: see further paras 3.885-3.893 of this book. 2054 OJ C 368, 23.12.1994, p. 12. 2055 1994 Guidelines, section 3.2.2. (i).

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of undue distortions of competition, through capacity reductions in cases of structural excess of production capacity within the European Community; and the requirement for aid beneficiaries to make a significant contribution to the restructuring plan from their own resources. Those three pillars for approval of restructuring aid – return to viability, measures to avoid undue distortions of competition and own contribution – remain the key principles for the approval of restructuring aid.2056

3.826

Finally, the 1994 Guidelines saw the first, tentative introduction of the “one time, last time” principle. As the 1994 Guidelines explained, a series of rescues that merely preserved the status quo and postponed the inevitable could not be acceptable. In principle, therefore, rescue aid should be granted once only.2057 Restructuring aid should also normally be granted only once.2058

3.827

The 1994 Guidelines remained in force until 1999, when the Commission, concerned about an increase in the amount of rescue and restructuring aid and committed through its action plan for the single market to tighten the rules on rescue and restructuring aid, introduced new guidelines intended to strengthen control over such aid (the “1999 Guidelines”).2059 In particular, the 1999 Guidelines expanded the scope of measures to avoid undue distortions of competition beyond markets with structural excess capacity, to cover all non-negligible markets. They also converted the “one time, last time” condition from an expectation to a clear rule, while permitting repeated injections of restructuring aid provided that they were separated by at least 10 years.

3.828

The 1999 Guidelines also provided more clarity on the scope of application of the rescue and restructuring rules. The 1999 Guidelines set out detailed indications for use in identifying when a firm was in difficulty which fell little short of a complete definition, and included not only “soft” criteria linked to the “usual signs” of difficulty, such as increasing losses, falling turnover and growing inventories, but also “hard”, objective, criteria linked to loss of capital or fulfilment of the criteria for being subject to insolvency proceedings under national law.2060

2056 They are central not only under the rescue and restructuring guidelines, but also for financial institutions under the separate rules in that field. See Chapter 29 of this book. 2057 1994 Guidelines, section 3.1. 2058 1994 Guidelines, section 3.2.2 (i). 2059 Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 288, 09.10.1999, p. 2. 2060 1999 Guidelines, points 5 and 6.

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The 1999 Guidelines remained in force until 2004. The successor guidelines adopted in that year (“2004 Guidelines”)2061 opened with a strong statement of the Commission’s basic concern that aid for troubled firms could interfere with normal and essential market processes, noting that “[t]he exit of inefficient firms is a normal part of the operation of the market. It cannot be the norm that a company which gets into difficulties is rescued by the State”.2062 To that end, the 2004 Guidelines further tightened the rules in certain important respects. In particular, measures to limit distortions of competition became a necessity, not just a possibility, even in markets that were not in structural overcapacity; for markets where structural overcapacity existed, the required capacity reduction could be as high as 100 per cent.2063 The own contribution requirement was also made stricter, with the introduction of specific percentages of the restructuring costs that own contribution should reach in order to be considered appropriate, ranging from 50 per cent in the case of large firms to 25 per cent for small enterprises.2064

3.829

1.3 Adoption of the 2014 Guidelines The 2004 Guidelines remained in force for nearly ten years. Originally due to expire in October 2009, their application was extended for a further three years in the light of the financial crisis.2065 By the time that extended expiry date came around, however, the Commission had already adopted its Communication on State Aid Modernisation (SAM), and it was clear that a hasty adoption of revised guidelines to meet the October 2012 deadline would risk creating inconsistencies among the various rules that were part of SAM. Rather than taking their place as the first of the instruments to be revised in the context of SAM, therefore, the rescue and restructuring guidelines were among the last, with new rules2066 (“2014 Guidelines”) being adopted in July 2014 and entering into force on 1 August of that year, one month after the bulk of the instruments forming part of SAM.

3.830

To understand the changes made by the 2014 Guidelines, it is important to take account of two main aspects of their context. On the one hand, the Commis-

3.831

2061 Community guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 244, 01.10.2004, p. 2. 2062 2004 Guidelines, point 4. 2063 2004 Guidelines, points 38 to 42. 2064 2004 Guidelines, point 44. 2065 Commission Communication concerning the prolongation of the Community Guidelines on State aid for Rescuing and Restructuring Firms in Difficulty, OJ C 156, 09.07.2009, p. 3. 2066 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1.

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sion’s development of the rules in this area over nearly 40 years has focused on refining and specifying certain fundamental principles laid down in the earliest stages of the Commission’s control of aid to troubled firms. The 2014 Guidelines do not deviate from that trend. They retain well-entrenched features of the 2004 Guidelines, such as the distinction between rescue and restructuring aid; the requirement for a restructuring plan showing return to long-term viability, providing for adequate own contribution and containing measures to limit distortions of competition; and the one time, last time principle. Change appears at first glance to have taken place at the margin, through some further specification of those basic features.

3.832

Looking more closely, however, it is possible to see that the 2014 Guidelines are deeply marked both by the SAM process and by the lessons drawn by the Commission from the crisis. That has led to certain fundamental changes to the substance of the Commission’s approach to rescue and restructuring aid.

3.833

First, the introduction of the common principles for the compatibility of State aid2067 into the rescue and restructuring guidelines has prompted a major rethink of the conditions for entry into a State-supported restructuring. Broadly speaking, the Commission’s approach to rescue and restructuring aid in the past has focused on ensuring that the conditions of restructuring minimise any distortions of competition. The issue of whether it is appropriate for the State to intervene at all has been largely left to one side. However, such an approach has had to be abandoned in light of the common principles, particularly the requirements to demonstrate contribution to an objective of common interest, need for State intervention and incentive effect. The 2014 Guidelines therefore signal a rebalancing of the Commission’s approach away from the conditions of restructuring and towards the entry conditions, including through the more objective definition of “undertaking in difficulty” (see paragraphs 3.849 to 3.853 of this book), the requirement to demonstrate social hardship or market failure (see paragraphs 3.874 to 3.878 of this book) and the need to show that restructuring aid is necessary to achieve an outcome that would not be achieved to the same extent in the absence of State support (see paragraphs 3.922 to 3.925 of this book).

3.834

At the same time, the Commission’s experience in the crisis, and its views on how best to ensure a strong and sustainable recovery, have led to significant changes in the conditions that seek to minimise distortions of competition. In particular, its experience of State-supported bank restructurings during the crisis2068 has 2067 See pp. 15-17 of this book. 2068 See Chapter 29 of this book.

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led to much greater focus on whether aid is required to maintain output and employment in the business, or simply to indemnify shareholders and creditors against losses. Where the latter is the case, the amount of aid will go beyond what is strictly necessary and problems of moral hazard may arise. The issue was brought into sharp relief in the banking context by the very large sums involved, leading to the introduction of burden-sharing rules that required shareholders and subordinated creditors to bear an appropriate share of losses.2069 The 2014 Guidelines extend the principle of burden-sharing to non-financial firms2070, with a view to addressing moral hazard concerns and ensuring market discipline.2071

3.835

Experience from the crisis also showed that the distortions caused by rescue and restructuring aid are closely linked to the form that aid takes. In particular, it became clear that there are important differences in this respect between liquidity support and more structural intervention. Liquidity support is by its nature limited in duration and has a disciplining effect due to the need to pay interest and, ultimately, to repay principal. That contrasts with equity injections or grants, which remain permanently at the disposal of the beneficiary. However, the Commission found that in practice this less distortive aid was rarely used: for example, liquidity accounted for only 21 per cent of the aid instruments used in restructuring cases decided by the Commission in 2012.2072

3.836

The 2014 Guidelines therefore take a number of steps to incentivise greater use of liquidity support. For SMEs, they introduce a new concept of “temporary restructuring support”, allowing aid in the form of liquidity support to be provided for a period of up to 18 months on the basis of a simplified restructuring plan and without the need to provide own contribution or implement measures to limit distortions of competition.2073 They also require Member States, when granting restructuring aid, to assess whether the beneficiary’s problems relate to liquidity needs or to solvency concerns and, where the former is the case, to select appropriate aid instruments such as loans or loan guarantees.2074 Finally, the requirement for burden sharing to take place when “equity-enhancing” aid

3.837

2069 See paras 3.1860 to 3.1866 of this book. 2070 See paras 3.938 to 3.946 of this book. 2071 Point 65 of the 2014 Guidelines. See also New rules on rescue and restructuring aid for industry: the right incentives for innovation and growth, Competition Policy Brief Issue 9 ( June 2014), p. 5, arguing that burden sharing will reduce the incentive for investors to hold out for a public bailout and encourage them to address the firm’s problems as early as possible. 2072 New rules on rescue and restructuring aid for industry, p. 4. 2073 See further paras 3.894 to 3.901 of this book. 2074 See further paras 3.926 to 3.927 of this book.

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(such as equity injections or direct grants) is provided2075 is likely to create further incentives to provide aid in the form of liquidity support.

3.838

The overall thrust of the changes introduced by the 2014 Guidelines, then, is to take a much more sceptical view of the need for aid, both generally and in terms of the specific form that it takes. As the guidelines state, the Commission considers that the main aims of restructuring – exit from structurally loss-making activities and reorganisation of the remaining activities to make them viable in the long term – should usually be achievable without State aid, either through informal agreements or, if necessary, by way of insolvency proceedings.2076 The context of recovery from the crisis only accentuates concerns that inappropriate rescue and restructuring aid may hamper readjustment and prevent resources from being reallocated where they can boost growth.2077 As a result, while the full effects of the 2014 Guidelines in practice remain to be seen, it is clear that the Commission is likely to take a stricter approach to rescue and restructuring aid than in the past.

3.839

The remainder of this chapter focuses on the provisions of the 2014 Guidelines. To situate those rules in context, however, as well as to provide guidance for readers who may be familiar with the earlier version of the rules, reference is also made, where relevant, to the equivalent provisions of the 2004 Guidelines. The box at pp. 788-789 also summarises the key elements of continuity and change between the 2004 Guidelines and the 2014 Guidelines.

2.

General principles

2.1 Sectoral scope 3.840

The rescue and restructuring guidelines apply to firms in difficulty in all sectors, with the exception of the coal and steel sectors and firms covered by specific rules for financial institutions.2078 The exclusion of coal and steel is carried over from the 2004 Guidelines, while the exclusion of financial institutions formalises a situation that arose de facto during the financial and economic crisis.

3.841

As far as coal and steel are concerned, since the expiry of the European Coal and Steel Community Treaty in 2002, the general principle is that the general State aid rules also apply to aid in those sectors. However, the Commission and Council 2075 2076 2077 2078

See paras 3.938 to 3.946 of this book. Point 7. See in this respect the impact assessment report on the 2014 Guidelines, SWD(2014) 228, p. 14. 2014 Guidelines, point 18.

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have considered it necessary to provide for specific regimes to deal with support for troubled coal and steel undertakings, in view of the deep structural problems those sectors face and their history of dependence on State intervention. As regards coal, Council Decision 2010/787/EU2079 (the “Coal Decision”) provides specific rules on aid for the closure of uncompetitive coal mines. The Coal Decision seeks to phase out State aid for uncompetitive coal mines, with a view to the definitive closure of uncompetitive production units by the end of 2018. The policy decision to allow aid only for the closure of such mines, and not for their restructuring, clearly rules out applying the 2014 Guidelines in this sector.

3.842

For steel, on the other hand, no sector-specific rules have been in place since the expiry in 2009 of the Commission’s Communication on rescue and restructuring aid and closure aid for the steel sector2080 (the “Steel Communication”). However, it seems clear from the 2014 Guidelines that the Commission intends to maintain a strict approach towards aid for troubled firms in the sector. As the 2014 Guidelines put the point, “in the present conditions of significant European and global overcapacity, State aid for rescuing and restructuring steel undertakings in difficulty is not justified”.2081

3.843

At first glance, that strict approach to aid for steel firms in difficulty appears to conflict with the Commission’s preference for a horizontal rather than sectoral approach to State aid guidelines. Nevertheless, the situation of the steel industry is unique from a historical and political economy perspective. It is not straightforward for governments to resist calls to defend an industry that is a symbol of industrial power, the industrial revolution and the postwar economic boom. Concerted action has therefore been necessary to allow the steel industry to overcome repeated problems of overcapacity. In particular, the two Davignon Plans of 1977 and 1981, which used a combination of subsidies and measures such as production quotas and minimum prices to encourage firms to reduce capacity, led to significant cuts in European steel capacity and improved profitability, but did not prevent a new crisis in the 1990s.2082

3.844

2079 Council Decision 2010/787/EU of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines, OJ L 336, 21.12.2010, p. 24. 2080 OJ C 70, 19.03.2002, p. 21. 2081 Point 15. 2082 See Schouw, “European Policy and Specific Sectors” in Darmer and Kuyper (eds.), Industry and the European Union: Analysing Policies for Business (Edward Elgar, 2000).

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3.845

Faced with demands to allow further aid to rescue troubled steel firms in the early 1990s, the Commission and Council took a new tack. While approving large sums of aid for certain steel firms in difficulty,2083 the institutions also made clear that no further rescue aid would be made available to steel firms. When the ECSC Treaty expired just under ten years later, the Commission judged that policy to have been a success. As it stated in the Steel Communication: In the last decisions adopted in 1993 on the basis of Article 95 of the ECSC Treaty, the Commission and the Council agreed that no further decisions of this nature would be taken to rescue Community steel firms. Following this, steel companies have been acting on the market on the assumption that no further restructuring aid was available to them. If this state of affairs were to change in future, there is no guarantee that steel firms would not relax their efforts towards costs reduction and increased competitiveness, thereby endangering the enormous efforts already made.

3.846

The exclusion of steel firms from the scope of the rescue and restructuring guidelines should be seen in this context. In a wide range of fields, the great challenge for policymakers is to make credible commitments not to support firms when they are in difficulty. However sincerely such views may be held when they are stated, the political and economic fallout of the failure of a major business will make it difficult for policymakers to stick to their commitments when put to the test. If indeed the long-standing policy on aid for steel firms has found even a partial answer to that commitment problem, the wish of the Commission to stick to a sectoral approach in that respect is understandable.2084

3.847

The sectoral approach towards financial firms is much more recent. The 2004 Guidelines and their predecessors not only served as the basis for assessing aid to financial firms before the recent financial and economic crisis,2085 but also in the early phase of the crisis itself, before the failure of Lehman Brothers in September 2008.2086 However, the collapse of financial market confidence that followed Lehman’s bankruptcy created, in the Commission’s view, a “serious disturbance 2083 The Council approved aid totalling up to EUR 6.97 billion for restructuring or privatisation of six companies from four Member States. 2084 For further discussion on how the rescue and restructuring guidelines approach the commitment problem, see paras 3.861 to 3.873 of this book. 2085 See for example Commission Decision 98/490/EC of 20.05.1998 concerning aid granted by France to the Crédit Lyonnais group, OJ L 221, 08.08.1998, p. 28. 2086 See Commission Decision of 05.12.2007 on Northern Rock (Case NN 70/2007), summary notice in OJ C 43, 16.02.2008, p. 1; Commission Decision 2009/775/EC of 21.10.2008 on State aid measure C 10/08 (ex NN 7/08) implemented by Germany for the restructuring of IKB Deutsche Industriebank AG, OJ L 278, 23.10.2009, p. 32; Commission Decision of 30.04.2008 on WestLB (Case NN 25/2008), summary notice in OJ C 189, 26.07.2008, p. 3.

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in the economy” of all the Member States, which called for the adoption of specific rules for banks under Article 107(3)(b) of the Treaty.2087 The 2014 Guidelines make clear that banks and non-financial firms will continue to be subject to different rules in the post-crisis period, noting that “specific rules applicable to the financial sector can be beneficial in view of the specific characteristics of financial institutions and financial markets”.2088 The guidelines do not go into further detail as to what those “specific characteristics” are or why they require a different set of rules, but clearly one very important way in which financial institutions differ from other firms is in the existence of a detailed set of regulatory provisions aimed at reducing the risk that they will become bankrupt and managing the process of “resolution” if, despite those rules, banks do approach bankruptcy. Given the very detailed nature of those rules, the existence of a long transition period for their phasing-in and their complex interaction with the use of State aid in avoiding or supporting resolution, it clearly makes sense for aid to failing banks to be dealt with by way of a separate, tailored instrument.

3.848

2.2 Eligibility The most important aspect of eligibility for aid under the rescue and restructuring guidelines is that, with one very limited exception, aid can only be granted to “undertakings in difficulty”.2089 That restriction has an important role to play not only under the rescue and restructuring guidelines, but in the scheme of the State aid rules as a whole. The Commission has made significant changes in the 2014 Guidelines to introduce a more objective definition of the concept (see Table 1 on p. 789).

3.849

As explained above,2090 providing State aid to troubled firms can have serious negative consequences. Those consequences do not depend on the fact that the support is labelled as “rescue aid” or “restructuring aid”: in practice, any form of aid granted to an undertaking in difficulty is liable to interfere with entry and exit dynamics by allowing that firm to survive longer than it otherwise would have. The only way to avoid such a negative impact is to ensure that aid is granted to undertakings in difficulty only in accordance with the rules governing rescue and restructuring aid.

3.850

2087 2088 2089 2090

See further Chapter 29 of this book. Point 17. For the exception, see para 3.854 of this book. Paras 3.813 to 3.818 of this book.

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3.851

With a handful of exceptions,2091 therefore, all of the State aid rules – including the General Block Exemption Regulation (GBER) – exclude undertakings in difficulty from their scope. Two situations can thus be contrasted: firms that are not in difficulty are in principle eligible for aid under the whole range of regulations and guidelines, whereas those that are in difficulty must (with limited exceptions) comply with the rescue and restructuring guidelines.2092

3.852

Given the importance of the distinction, it is obviously desirable to be able to determine with certainty whether a particular undertaking is in difficulty. The 2004 Guidelines were far from ideal in that respect, since they combined “hard”(objective) measures of difficulty such as loss of capital or eligibility for bankruptcy proceedings with “soft” measures based on the “usual signs of difficulty”.2093 Even if it was clear that a firm did not meet the hard criteria, it could be difficult to be sure whether it should be prevented from receiving aid under other rules and guidelines on the basis that it met certain soft criteria.

3.853

The 2014 Guidelines abandon the dual system of “hard” and “soft” criteria and rely only on objective measures of difficulty. Those measures are based on the hard criteria in the 2004 Guidelines, but with some additions and adaptations. Under the 2014 Guidelines, an undertaking is considered to be “in difficulty” if it meets at least one of the following criteria: –

Where more than half of its subscribed share capital2094 has disappeared as a result of accumulated losses.2095 The notion that the loss of half of a

2091 Most notably the de minimis Regulation (Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1) and the SGEI Decision (Commission Decision 2012/21/EU of 20 December 2011 on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3). See further Chapter 13 of this book on the de minimis Regulation and Chapter 34 on the SGEI Decision. 2092 The identification of a firm as a “firm in difficulty”is also relevant for the purposes of applying the Guarantee Notice (Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ C 155, 20.06.2008, p. 10), under which application of the safe harbour for determining that a guarantee does not involve State aid requires that the borrower is not in difficulty. 2093 According to point 11 of the 2004 Guidelines, the “usual signs of ... difficulty” were “increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash flow, mounting debt, rising interest charges and falling or nil net asset value”. 2094 The term “subscribed share capital” refers to shares that have been subscribed for by investors (but not necessarily fully paid up); it does not include authorised but unissued shares. In the case of a company where at least some members have unlimited liability for the company’s debts, the reference is instead to the disappearance of more than half of its capital as shown in the company accounts (point 20(b) of the 2014 Guidelines). 2095 Point 20(a). This is the case when deduction of accumulated losses from reserves (and all other elements

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company’s share capital is indicative of difficulty is clearly inspired by the provisions of the Second Company Law Directive,2096 which requires, in such a case, that a general meeting of shareholders be held to consider whether the company should be wound up or any other measures taken. The 2014 Guidelines move closer to the provisions of the Second Company Law Directive by removing the additional condition that one-quarter of the capital must have been lost within the preceding 12 months.2097 –

Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.2098 It is no surprise that undertakings that are actually in insolvency proceedings should be considered to be in difficulty. The fact that the definition also covers firms that are capable of being placed in insolvency proceedings serves two purposes. First, by allowing aid to be given immediately before entry into insolvency, it avoids conflict with national laws that may prevent the grant of State aid when a firm is already in insolvency. Second, the trigger for insolvency proceedings is usually a situation where the company in question is in severe financial trouble, such that further trading risks dissipating the assets available to satisfy creditors: such a situation clearly shows that the company is in difficulty, and it makes sense for the rescue and restructuring guidelines to “piggyback” on such a national definition of difficulty. However, many modern insolvency laws provide for a “protective” form of insolvency proceeding where a firm’s management can in effect call on the oversight of the bankruptcy courts to support a solvent restructuring of the business, even before the company faces critical financial difficulties. To avoid the technical availability of such protective insolvency leading to a firm being considered to be in difficulty, the definition under the 2014 Guidelines covers only firms that meet the conditions for being forced into insolvency by their creditors.

generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital. 2096 Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (Recast), OJ L 315, 14.11.2012, p. 74, Article 19. 2097 Compare 2004 Guidelines, point 10(a). 2098 Point 20(c).

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–

Finally, large firms (but not SMEs) are also considered to be in difficulty if their book debt to equity ratio has been above 7.5 and their EBITDA interest cover ratio below 1.0, in both cases for a period of two consecutive years.2099 That innovation of the 2014 Guidelines can be seen as an attempt to find a more objective alternative to the “usual signs of difficulty” set out in earlier versions of the guidelines. While those usual signs of difficulty were not always easy to apply, they did capture the important fact that even before a firm has made major losses or reached the verge of insolvency, it may be possible to tell from its financial condition that all is not well. The anticipatory role previously played by the “usual signs of difficulty” can now, at least to some extent, be covered by the financial ratios. Firms that are both carrying an unsustainable debt burden, as shown by the debt to equity ratio, and not generating enough cash to service that debt, as shown by the interest cover ratio, may not yet be on the brink of insolvency, but will find it hard to avoid insolvency without some form of support.

3.854

An undertaking that does not meet any of the above criteria is not considered to be in difficulty and generally cannot obtain State aid under the rescue and restructuring guidelines. There is, however, a limited exception in point 29 of the 2014 Guidelines, which allows liquidity support (in the form of rescue aid or temporary restructuring support) to undertakings that are not in difficulty but that are facing “acute liquidity needs due to exceptional and unforeseen circumstances”. That exception recognises that liquidity emergencies can arise so suddenly and unexpectedly that the companies concerned could go out of business before ever meeting the definition of an “undertaking in difficulty” (or at least, before there is time to demonstrate that they do so). However, the 2014 Guidelines set the bar high by referring not only to “acute liquidity needs”, but also to “exceptional and unforeseen circumstances”; that phrasing would seem to imply both that the liquidity crisis must arise suddenly (perhaps as a result of banks calling in loans or key suppliers refusing credit, rather than as a result of a long-term cash drain), and that those liquidity problems must be caused by events going beyond the normal risks of doing business.2100

3.855

There are also certain circumstances in which a firm, even if it meets the definition of an “undertaking in difficulty”, is not eligible for aid under the 2014 Guidelines. They relate in particular to newly created companies2101 and to com2099 Point 20(d). 2100 On the second element, see also point 72 and footnote 40 to the 2014 Guidelines and para 3.869 of this book; the use of the term “unforeseen” in point 29 as against “unforeseeable” in point 72 does not seem to imply a substantive difference in practice. 2101 Point 21.

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panies that are part of a business group.2102 In addition, a company may in practice be ineligible for aid because of the existence of an unsatisfied recovery order against it,2103 in line with the Deggendorf case law.2104 In principle, a newly created company should be established with sufficient means to enable it to compete in the marketplace. It is of course true that a large proportion of new companies fail, but such early-stage failure can be regarded as an essential winnowing of the viability of new business ventures and is not in itself a reason for the State to intervene. The 2014 Guidelines therefore provide that an undertaking will not be eligible for aid for the first three years following the start of operations in the relevant field of activity.

3.856

However, given the difficulties that SMEs face in gaining access to market finance, the State can be an important source of funding for early-stage companies with high growth potential. The fact that such companies may qualify as being in difficulty in the short term should not prevent them from accessing State support to realise their long-term potential. The 2014 Guidelines therefore provide that SMEs in existence for less than three years are not to be considered to be in difficulty (and can therefore obtain forms of aid other than rescue and restructuring aid) unless they are in insolvency proceedings or capable of being placed in such proceedings by their creditors.2105

3.857

Where a company forms part of a business group, there is clearly great scope to manipulate its apparent financial condition by shifting assets around the group. Such manipulation could be prevented by prohibiting aid to a group company if the group as a whole was in good financial health. However, such an approach is not necessarily realistic. Company law does not require a parent company to inject capital into a troubled subsidiary, and it is entirely possible for a subsidiary to enter bankruptcy without directly affecting the rest of the group. In addition, such a subsidiary may be a drain on the resources of the group to such an extent that it may not be possible, unless State support is given, to restructure it without bringing down the rest of the group.

3.858

2102 2103 2104 2105

Point 22. Point 94. Case C-355/95 P Textilwerke Deggendorf v Commission and others ECLI:EU:C:1997:241. Point 24(b). For SMEs that qualify for risk finance investments following due diligence by the selected financial intermediary, that period is extended to 7 years from first commercial sale: see Guidelines on State aid to promote risk finance investments, OJ C 19, 22.01.2014, p. 4, point 26, and Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1, Article 2(18)(b).

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3.859

The solution adopted by the 2014 Guidelines is to allow aid for companies that are members of a business group only where it can be demonstrated “that the company’s difficulties are intrinsic and are not the result of an arbitrary allocation of costs within the group, and that the difficulties are too serious to be dealt with by the group itself ”.2106

3.860

Finally, in line with Deggendorf,2107 point 94 of the 2014 Guidelines provides that, where recovery has been ordered but has not yet taken place, “the assessment of any aid pursuant to these guidelines to be granted to the same undertaking will take into account, first, the cumulative effect of the old aid and of the new aid and, secondly, the fact that the old aid has not been repaid”. The application of the Deggendorf principle is likely to have particularly serious implications in the case of rescue and restructuring aid. If a company is in difficulty despite its failure to repay earlier incompatible aid, it will not be possible to recover that aid without further weakening the company’s financial position. Therefore, in practice, the application of the Deggendorf principle in these circumstances will rule out the grant of rescue and restructuring aid to companies that are under an unsatisfied recovery obligation.2108 The Deggendorf principle also applies in a cross-border context, i.e. if a Member State intends to grant new aid to an undertaking which is liable to repay an old incompatible aid granted by another Member State. The grant of the new aid has either to be made conditional on the recovery of the old aid or the cumulative effect of the new aid and the old aid has to be assessed.2109

2.3 The “one time, last time” principle 2.3.1 Grounds for the principle 3.861

As noted above, the “one time, last time” principle was first introduced in 1994, and has become one of the cornerstones of the rules on aid for troubled firms. The 2014 Guidelines do not significantly change how that principle operates. The reasoning behind it is linked both to the exceptional nature of rescue and restructuring aid and to the basic requirement that the beneficiary’s difficulties should be dealt with adequately at the time when the aid is granted.

2106 2014 Guidelines, point 22. 2107 See further book paras 5.111 and 5.167 of this book. 2108 See Commission Decision of 18.07.2007 on State aid – Germany – WestLB AG – capital contributions (Case NN 19/2006), summary notice in OJ C 4, 09.01.2008, p. 1, points 117-118. 2109 Joined Cases T-115/09 and T-116/09 Electrolux and Whirlpool v Commission (‘Fagorbrandt’) ECLI:EU:T:2012:76, para. 71; Commission Decision 2013/283/EU of 25.07.2012 on State aid that France plans to grant to FagorBrandt (SA.23839 (C 44/2007)), OJ L 166, 18.06.2013, p. 1, points 64-88.

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First, much of the concern about rescue and restructuring aid stems from its effects on incentives. If it is suspected that a particular firm is likely to receive aid if it finds itself in difficulty, the result will be that the firm in question becomes more willing to take excessive risks, while its competitors hold back on investment2110. The impact of those skewed incentives rises with the degree of confidence with which the suspicion is held. If a particular firm has received aid in the past, the degree of expectation that it will be bailed out in future will be particularly high. Governments may seek to address that issue by making political commitments not to provide further aid in future, but those commitments will be discounted by markets unless they are backed up by some binding force that can overcome the natural preference to intervene when the next crisis arises. The one time, last time principle can provide the binding force needed to overcome this “time consistency” problem.

3.862

The second role of the one time, last time principle is to help ensure that the firm’s difficulties are adequately dealt with at the time the aid is granted. For example, even though the Commission carefully assesses restructuring plans to ensure that there are good grounds for believing in the return to sustainable viability2111, it cannot necessarily weed out all traces of over-optimism. In that respect, the one time, last time principle strengthens the incentives for management to make a realistic appraisal of the likelihood of success of the restructuring plan, by making clear that the firm cannot obtain further aid if the initial restructuring is unsuccessful.

3.863

The basic principle is that aid under the rescue and restructuring guidelines may not be given more than once in any ten-year period.2112 The ten-year period runs from the end of the restructuring period (or the end of implementation of the restructuring plan) where restructuring aid is granted; in the case of rescue aid and temporary restructuring support, it runs from the date of grant of the aid.

3.864

2.3.2 Aid which triggers the “one time, last time principle” The one time, last time principle is triggered if rescue aid, restructuring aid or temporary restructuring support was granted in the past, irrespective of whether the past aid was compatible or not. If past aid to an undertaking in difficulty was not notified and is only discovered when assessing the new rescue aid, restructuring aid or temporary restructuring support, it has to be considered when ap-

3.865

2110 See also book para 3.817 of this book. 2111 See further paras 3.911-3.921 of this book. 2112 Five years in the case of the primary agricultural production sector (2014 Guidelines, footnote 60).

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plying the one time, last time principle. Other types of aid, such as R&D&I aid, are not to be taken into account when applying the one time, last time principle. However, if such past aid was incompatible, it will have to be recovered before further aid is granted, in line with Deggendorf (see para 3.860 of this book).

3.866

The one time, last time principle also applies if rescue aid, restructuring aid or temporary restructuring support was granted prior to the accession of a Member State. On several occasions, the Commission has taken restructuring aid granted prior to accession into account for the application of the one time, last time principle in subsequent cases of restructuring aid.2113 State support that was granted at a time when a country was not yet operating as a functioning market economy can, however, be disregarded when applying the one time, last time principle.2114

3.867

The application of the one time, last time principle is also complicated by the difficulty of determining what constitutes a single instance of aid, particularly restructuring aid. In general, the Commission’s approach is that multiple State aid measures in favour of a given firm may not breach the one time, last time principle where they form part of a single restructuring process. However, that raises the question of how it is possible to distinguish multiple restructuring attempts within a ten-year period from a single, extended restructuring process. At least if the restructuring falls into a period which is covered by a single plan, it can normally be presumed that one restructuring is carried out.2115 On the other hand, where no coherent plan is pursued, the restructuring measures have to be assessed separately and will hence trigger the application of the one time, last time principle.2116

2113 See for example Commission Decision 2007/509/EC of 20.12.2006 on State aid for Fabryka Samochodow Osobowych SA (formerly DAEWOO — FSO Motor SA) (Case C3/2005), OJ L 187, 19.07.2007, p. 30; Commission Decision 2010/174/EC of 10.03.2009 on the State aid granted by Poland to Huta Stalowa Wola SA (Cases C 43/07 (ex N 64/07) and C 44/05 (ex NN 79/05, ex N 439/04)), OJ L 81, 26.03.2010, p. 1; Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29, point 163. 2114 See for example Commission Decision of 01.06.2005 on restructuring aid in favour of AB Vingriai (Case N584/2004), OJ C 187, 30.07.2005, p. 15, point 20. 2115 See for example Commission Decision 2002/200/EC of 3.7.2001 on State aid which Spain has implemented and is planning to implement for the restructuring of Babcock Wilcox Espana S.A. (Case C 33/1998), OJ L 67, 09.03.2002, p. 50. 2116 Commission Decision 2013/150/EU of 9.1.2012 on the State aid implemented by Hungary in favour of Malév Hungarian Airlines Zrt (case SA.30584 (C 38/10, ex NN 69/10)), OJ L 92, 03.04.2013, p. 1, point 104.

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2.3.3 Exceptions The 2014 Guidelines provide for certain exceptions to the one time, last time principle. First, it follows from their scheme that it is possible for a firm to move from a period of rescue aid, in which the purpose of aid is simply to preserve the status quo while the firm assesses its options for restructuring or liquidation, to a more extended period of restructuring aid. In addition, for SMEs, a period of temporary restructuring support may be provided in addition to, or instead of, rescue aid. The 2014 Guidelines allow for these arrangements by providing that the one time, last time principle does not prevent a “single restructuring operation” that moves from rescue aid, through temporary restructuring support (where relevant) to restructuring aid.2117

3.868

In addition, since the main purpose of the one time, last time principle is to adjust the incentives of beneficiary firms and other market players, the one time, last time principle does not prevent repeated grants of aid within a ten-year period “in exceptional and unforeseeable circumstances for which the beneficiary is not responsible”.2118 That derogation must, however, be applied so that poor management does not provide an excuse for repeated grants of aid. The guidelines therefore make clear in a footnote that events that should have been foreseen by the beneficiary’s management when the restructuring plan was drawn up will be considered to have been foreseeable.2119

3.869

Finally, where only rescue aid or temporary restructuring support was granted, but without being followed by restructuring aid, the one time, last time principle applies in slightly more lenient form. In such cases, further aid can be granted after five years instead of ten, provided that it could have been reasonably believed when the aid was granted that the beneficiary would be viable in the long term, and that the new rescue or restructuring aid or temporary restructuring support is required because of unforeseeable circumstances for which the beneficiary was not responsible.2120 Those exceptions have not been applied recently.2121

3.870

2117 2118 2119 2120 2121

Points 72(a) and 112(a) and (b). Points 72(c) and 112(d). Footnote 40 of the guidelines. Points 72(b) and 112(c). Past practice rarely accepted that circumstances were “unforeseeable and exceptional”; Commission Decision 1999/787/EC of 28.7.1999 on state aid granted by the Federal Republic of Germany to Everts Erfurt GmbH (case C 42/1997), OJ L 310, 04.12.1999, p. 56, point 38: the Commission considered the bankruptcy of the parent company of the beneficiary as a development outside the beneficiary’s control, i.e. as an external factor which justified the repeated granting of aid. However, it is doubtful that the bankruptcy is indeed “unforeseeable and exceptional” pursuant to the guidelines; Commission Decision 2005/941/ EC of 01.12.2004 on the State aid which France is planning to implement for Bull, OJ L 342, 24.12.2005,

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2.3.4 Ownership issues 3.871

Insolvency proceedings, and even private debt workouts, often create a break in the legal continuity of the business, for example when its assets are acquired by a new owner, reducing the original legal entity to a mere shell. Insolvency law recognises and seeks to address the capacity of that process to prejudice the interests of creditors by allowing the same owners to remain in control of the business while wiping out the claims of its creditors. Against that background, State aid law has developed the notion of “economic continuity” to avoid circumvention of the recovery obligation (see paras 5.395 to 5.418 of this book).

3.872

It is equally important that a break in the legal continuity of the firm does not allow a business to circumvent the one time, last time principle. The 2014 Guidelines therefore provide that application of the one time, last time principle will not be circumvented by any changes in the ownership of the beneficiary which have the effect of putting its balance sheet on a sounder footing, reducing its liabilities or wiping out its previous debts, where it is the same undertaking continuing in business.2122 That provision might apply if an undertaking takes over assets of another undertaking, in particular out of collective insolvency proceedings, and if the latter undertaking received rescue aid, restructuring aid or temporary restructuring support in the past. The guidelines clarify that in such a case the purchaser is not subject to the one time, last time principle if there is no economic continuity between the old undertaking and the purchaser.2123

3.873

The fact that an entity that receives aid is part of a business group does not necessarily rule out the possibility of further aid to other members of the group. The question is whether the aid can remain ring-fenced in such a way that the same entity cannot benefit from aid twice within a ten-year period. The 2014 Guidelines therefore provide that, where a group has received rescue aid, restructuring aid or temporary restructuring support, the Commission will normally not allow further aid to the group itself or any entities belonging to the group. However, where only an entity belonging to the group has received rescue aid, restructuring aid or temporary restructuring support, the rest of the group remains in principle eligible for rescue or restructuring aid2124 as long as it can be ensured p. 81, points 71-73: the Commission considered the downturn of the communication technology sector as exceptional, unforeseeable and not the fault of the beneficiary. 2122 Point 73. 2123 Point 75. See for example Commission Decision 2000/796/EC of 21.06.2000 on State aid granted by Germany to CDA Compact Disc Albrechts GmbH Thuringia (Case C42/1998), OJ L 318, 16.12.2000, p. 62, point 118. 2124 The guidelines do not mention temporary restructuring support; following the logic of the provision, the

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that no aid will be passed on from the group or other group entities to the earlier beneficiary of the aid.2125

2.4 Objective of common interest The 2014 Guidelines introduce a new requirement that aid must contribute to a well-defined objective of common interest. Merely preventing the beneficiary from exiting the market is not a sufficient justification for granting restructuring aid. The Member State has to show that the aid is needed to prevent social hardship or address market failure, by restoring the long-term viability of the company.2126 As the requirements related to long-term viability apply only to restructuring aid, they are discussed below in the section of this chapter devoted to restructuring aid (see paras 3.903 to 3.921 of this book). This section focuses on the need to show that aid is required to prevent social hardship or address market failure, which applies to all types of aid under the guidelines.

3.874

In the past, the main focus of the Commission’s assessment has been on minimising the distortions to competition caused by aid to firms in difficulty. The question of whether such aid was justified in the first place typically played little role in the analysis. It is true that the 2004 Guidelines set out certain circumstances that could justify the grant of rescue and restructuring aid, including social or regional policy considerations, the beneficial role of SMEs or, exceptionally, the avoidance of a monopoly or a tight oligopolistic situation. However, the Commission’s practice under the 2004 Guidelines did not involve detailed scrutiny of these conditions, and indeed it is doubtful that they could have been effectively enforced given their level of generality.

3.875

The 2014 Guidelines give greater attention to whether aid should be given at all. Member States must now demonstrate that the failure of the beneficiary would be likely to involve serious social hardship or severe market failure. The guidelines set out a non-exhaustive list of situations in which that would be the case, but without ruling out the possibility that other types of hardship might be relevant in particular cases.

3.876

1.

Unemployment level in the region(s) concerned is above the national or Union average.2127 In addition, the unemployment level has to be per-

rest of the business group should, however, also remain eligible for temporary restructuring support. 2125 Point 74. 2126 Points 38(a) and 43. 2127 Point 44(a).

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sistent and accompanied by difficulty in creating new employment. The region(s) concerned are the region(s) where the beneficiary’s offices or plants are located and where jobs would be lost if the beneficiary were to fail. However, it is important to note that the focus is not on the loss of jobs as such, but on the inability of redundant employees to find new work. Given the non-exhaustive nature of the list, it remains possible for rescue and restructuring aid to be given to support employment even in areas where unemployment is below both the national and the Union average, or where it is a temporary rather than a persistent phenomenon. However, the need to grant aid in those cases would have to be fully justified by the Member State; given the damage to the wider economy caused by rescue and restructuring aid, it needs to be explained why there is a need to use scarce resources to preserve jobs in economically successful areas. 2.

Risk of disruption to an important service.2128 The important service has to be hard to replicate and it must be difficult for a competitor simply to step in. The notion behind this condition, and several of the other conditions considered below, is that the loss of the output of a failing firm is not usually sufficient in itself to justify the grant of aid to keep that firm in business. If there is sufficient demand for all or part of the output of the firm, it will ultimately be retained, either through continued operation of the firm’s production assets under new ownership or by way of subsequent entry or expansion. On that view, government intervention is only justified where the process just described may not be effective, for example because new entrants may not be able to replicate the knowhow of the failed firm, or where even a temporary reduction in output may cause severe knock-on effects. The latter situation could arise with a national infrastructure provider, where competitors may not be able or willing to provide the service in the short term, even with access to the production assets of the failing firm. Indeed, the 2014 Guidelines mention a national infrastructure provider as an example of an “important service”.

2128 Point 44(b).

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3.

Exit of an undertaking with an important systemic role in a particular region or sector, where such exit would have potential negative consequences.2129 The guidelines provide a supplier of an important input as an example. However, as noted above, the key question is whether the market could not bear even a temporary reduction in output. The mere fact that an input is important, or even essential, does not mean that the supplier has a “systemic” role. What seems to be needed is that other suppliers, whether locally or in other Member States, would be unable to increase production rapidly enough to avoid severe difficulties downstream.

4.

Risk of interruption to the continuity of provision of a SGEI.2130 Continuity concerns exist if a potential new provider cannot step in immediately to replace the original provider of the SGEI, which would cease to operate the SGEI in absence of the aid.

5.

Failure or adverse incentives of credit markets, which would push an otherwise viable undertaking into bankruptcy.2131 It will be seen in future if and how Member States will invoke that criterion. The wording of the provision seems to suggest that the standard of proof required will be quite high, involving a direct link between the failure of credit markets and the likelihood of bankruptcy (such as the withdrawal of a credit line). In addition, the undertaking would have to be operationally sound and to face difficulties only because normal credit facilities were not available. Situations that do not meet those requirements, for example where a firm is unable to obtain finance for expansion or where it requires operational as well as financial restructuring to be viable, would not seem to qualify. It is worth noting that the notion that the undertaking is “otherwise viable” would seem to imply that a restructuring plan involving only financial restructuring measures would seem to be acceptable, and indeed essential, in that case.

6.

Where exit of an undertaking would lead to an irremediable loss of important technical knowledge or expertise.2132

2129 2130 2131 2132

Point 44(c). Point 44(d). Point 44(e). Point 44(f ).

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7.

Similar situations of severe hardship duly substantiated by the Member State.2133 That point clarifies, as explained above, that the severe hardship criteria provided in the list are not exhaustive.

3.877

The 2014 Guidelines recognise that different considerations are likely to come into play where SMEs are concerned. More specifically, while the failure of an individual SME is unlikely to have the type of systemic effects identified above, SMEs make a major contribution to innovation and can be networked in ways that produce knock-on effects of the failure of a single firm. They are also even more susceptible than large firms to credit market failures and adverse incentives.

3.878

Recognising those differences, the guidelines include a specific provision for SMEs, identifying criteria that are more relevant to the position of SMEs: 1.

Where exit of an innovative SME or an SME with high growth potential would have potential negative consequences.2134 The key practical question here appears to be whether the beneficiary is innovative or has high growth potential: negative consequences can usually be presumed from the exit of such a firm.

2.

Where exit of an SME with extensive links to other local or regional undertakings, particularly other SMEs, would have potential negative consequences.2135 As in the condition discussed above, the “potential negative consequences” are a logical consequence of the exit of a SME with such characteristics.

3.

Failure or adverse incentives of credit markets, which would push an otherwise viable undertaking into bankruptcy.2136 That criterion is identical to the one set out in point 44(e).

4.

Similar situations of hardship duly substantiated by the beneficiary.2137 The wording of that provision indicates that a less strict standard applies to SMEs. Whereas pursuant to point 44(g), similar situations of “severe” hardship have to be shown, point 107(d) only asks for similar situations of hardship. The same point is made in the introductory text of point 107

2133 2134 2135 2136 2137

Point 44(g). Point 107(a). Point 107(b). Point 107(c). Point 107(d).

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(which refers to the failure of the beneficiary involving “social hardship or a market failure”, as compared to “serious social hardship or severe market failure” in point 44).

2.5 Transparency, reporting and monitoring The 2014 Guidelines introduce new transparency requirements, as well as opening up the possibility of appointing monitoring and divestiture trustees to oversee the implementation of restructuring plans.

3.879

Point 96 of the 2014 Guidelines requires Member States to publish details of individual aid awards on a comprehensive State aid website. That transparency requirement is in the same terms as the transparency provisions in other guidelines linked to the SAM programme, and is discussed in more detail in Chapter 2 of this book.

3.880

As regards reporting and monitoring, in addition to the basic requirement for submission of annual reports, the 2014 Guidelines provide for the possibility of appointing a monitoring and/or divestiture trustee to ensure compliance with any conditions or commitments linked to the approval of the aid.2138

3.881

Such trustees are common in merger cases, in which they play an important role when mergers are cleared subject to divestiture commitments by ensuring that those commitments are effectively implemented.2139 The presence of an independent third party that can guarantee compliance with commitments is important in relation to mergers, since the Commission has few effective levers to punish firms for non-compliance once the merger has been cleared and implemented.

3.882

There are some parallels with the situation that faced the Commission when approving State aid to banks during the crisis, since here again, the Commission’s ability to take negative decisions in relation to banks for non-compliance with commitments or conditions was seriously compromised by the overriding need to preserve financial stability. In addition, the very large sums committed meant that any non-compliance could cause very serious competition distortions. During the crisis, therefore, the Commission made extensive use of the appointment of monitoring trustees and divestiture trustees when approving aid to banks.2140

3.883

2138 Point 132. 2139 See Commission notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004, OJ C 267, 22.10.2008, p. 1, point 117. 2140 See for example Commission Decision of 18.11.2009 on Restructuring of Lloyds Banking Group (case N 428/2009), summary notice in OJ C 46, 24.02.2010, p. 2, points 116-119: the UK committed to appoint a

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3.884

In view of that positive experience with trustees, it is no surprise to find the concept extended to the rescue and restructuring of non-financial firms as well.

3.

Rescue aid

3.1 Concept and purpose of rescue aid 3.885

As noted above, the Commission’s policy on aid for firms in difficulty draws a crucial distinction between rescue aid and restructuring aid. As expressed in the 2014 Guidelines, the principle is that rescue aid is to be understood as urgent and temporary assistance aimed at keeping an ailing undertaking afloat for the short time needed to work out a restructuring or liquidation plan, while restructuring aid is longer-term and, where necessary, more structural aid designed to resolve the beneficiary’s difficulties and return it to long-term viability.

3.886

That distinction has important benefits, making it possible to act quickly to prevent a company’s collapse, but without prejudicing a more in-depth assessment of the form that any more structural intervention by the State may take. Rescue aid conditions impose only very light administrative burdens, but they guarantee the temporary nature of such aid through restrictions on its form and duration. The key conditions specific to rescue aid are found under the headings of “appropriateness” and “proportionality”. In addition, rescue aid must contribute to an objective of common interest (see paras 3.874 to 3.878 of this book) and must comply with the one time, last time principle (see paras 3.861 to 3.873 of this book). The conditions for approval of rescue aid have changed only slightly in the 2014 Guidelines as compared to the previous version of the guidelines (see Table 2 on p. 790).

3.2 Appropriateness 3.887

Section 3.3.1 of the 2014 Guidelines, which deals with the appropriateness of rescue aid, sets out the bulk of the conditions for granting rescue aid. Most of those conditions are closely modelled on those of the 2004 Guidelines and are designed to ensure that rescue aid takes the form of temporary and reversible assistance and does not prejudice the arrangements for any future restructuring. Rescue aid must therefore be in the form of loans or loan guarantees, which are easily reversible.2141 Such loans or guarantees must be repaid or terminated monitoring trustee that would, under the Commission’s instructions, monitor and ensure compliance with the commitments provided. 2141 Point 55(a).

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within six months from disbursement of the first instalment to the beneficiary.2142 To guarantee that this will be the case, the Member State concerned must undertake to communicate either proof of such reimbursement or termination, or a restructuring or liquidation plan, within six months.2143 If a restructuring plan is notified, given the time needed for the Commission to assess the plan, the authorisation of the rescue aid will be automatically extended unless the Commission decides that such extension is not justified or should be limited in time or scope.2144 If the rescue aid is not terminated and no restructuring or liquidation plan is notified within six months, the Commission can open the formal investigation procedure.2145 It has occasionally done so when no “real” restructuring plan was provided, to prevent rescue aid being artificially extended beyond the six-month limit.2146 Point 55(e) makes clear that “structural measures” are not to be financed with rescue aid unless essential for the survival of the beneficiary. “Structural measures” are not defined, but can be understood as measures that affect the structure of the business and cannot therefore readily be reversed. The guidelines give the acquisition of significant businesses or assets as examples of such “structural measures”. Such measures are generally prohibited from being financed through rescue aid because they would pre-empt decisions as to the future structure of the business that ought normally to be taken in the context of a restructuring plan.

3.888

Finally, the guidelines set out rules on the minimum remuneration for rescue aid.2147 As point 56 explains, the aim of those rules is to link the remuneration to the underlying creditworthiness of the beneficiary, ignoring both the (negative) effects of temporary liquidity difficulties and the (positive) effects of State support, as well as to provide incentives to exit State support as quickly as possible. To better achieve those purposes, the 2014 Guidelines increase the minimum remuneration for rescue aid by three percentage points compared to the 2004

3.889

2142 2143 2144 2145

Point 55(c) Point 55(d). Point 55(d)(ii). See for example Commission Decision 2008/697/EC of 16.04. 2008 on State Aid C 13/07 (ex NN 15/06 and N 734/06) implemented by Italy for New Interline, OJ L 235, 02.09.2008, p. 12; Commission Decision 2010/215/EC of 30.09.2009 on a measure taken by Italy to rescue Sandretto Industrie srl (C 19/08 (ex NN 13/08)), OJ L 92, 13.04.2010, p. 19; Commission Decision 2011/346/EU of 20.07.2010 on the State aid C 33/09 (ex NN 57/2009, CP 191/09) implemented by Portugal in the form of a State guarantee to BPP , OJ L 159, 17.06.2011, p. 95. 2146 See Commission Decision of 06.12.2006 on individual aid to Ottana Energia (NN 14/2006), summary notice in OJ C 68, 24.03.2007, p. 7. 2147 For these purposes, “remuneration” is the sum of the interest rate on the loan and, where relevant, any guarantee premium payable by the beneficiary (point 55(b)).

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Guidelines. Point 56 provides that remuneration must be at least equal to the rate provided under the Reference Rate Communication2148 for weak firms with normal levels of collateralisation,2149 thus increasing the necessary margin above the inter-bank rate to 4 per cent. Where the submission of a restructuring plan leads to the authorisation of rescue aid being automatically extended, the margin must be increased by at least 0.5 per cent, thus helping to enhance incentives for exit.

3.890

The 2014 Guidelines also recognise that other evidence may provide useful guidance as to the underlying creditworthiness of the beneficiary. For example, if the beneficiary has recently issued debt in the market, that debt may have come with a higher interest rate that may demonstrate the insufficiency of a rate based on point 56 of the 2014 Guidelines. In that situation, point 57 provides that the Commission can adapt the required level of remuneration accordingly.

3.3 Proportionality 3.891

Since the purpose of rescue aid is to keep the beneficiary in business for long enough to allow a restructuring or liquidation plan to be put together, which should in principle take no longer than six months, it makes sense to limit the amount of aid that can be granted to the amount needed to take care of the beneficiary’s liquidity needs for that period.

3.892

Estimating the cash needs of a business in a situation of financial stress is not straightforward. The 2014 Guidelines therefore maintain the approach used in the 2004 Guidelines of benchmarking on the basis of the net cash outflow faced by the beneficiary in the previous financial year. Annex I to the guidelines sets out a method for calculating the firm’s negative operating cashflow based on its financial statements for the last two closed accounting periods. As that methodology is based on changes from year to year, it provides an estimate of the amount of liquidity needed to keep the firm in business for a further 12 months; to work out the amount needed for the six-month rescue aid period, that amount is then divided by two.

3.893

The result is a simple rule of thumb that can be used as a check of the proposed amount of rescue aid. If that amount is less than the figure specified by the formula in Annex I, it is presumed to be proportionate. Otherwise, the amount of 2148 Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14, 19.01.2008, p. 6. 2149 Under the 2004 Guidelines, the minimum remuneration was equal to that provided under the Reference Rate Communication for healthy firms: see 2004 Guidelines, point 25(a).

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aid must be justified on the basis of a liquidity plan setting out the beneficiary’s liquidity needs for the next six months.2150

4.

Temporary restructuring support

4.1 Concept and purpose of temporary restructuring support Temporary restructuring support is a form of aid newly permitted under the 2014 Guidelines. As points 12 and 13 of those guidelines indicate, such assistance is closely modelled on rescue aid. Temporary restructuring support is limited in amount and duration and can only be provided in the form of liquidity assistance that bears a minimum remuneration set out in the guidelines.

3.894

The purpose of rescue aid is to provide breathing space to a firm while it puts together a restructuring plan. However, it would be wrong to conclude that the Commission considers the model of rescue aid followed by restructuring aid to be the ideal approach to State support for a failing firm. On the contrary, rescue aid has many advantages over restructuring aid. The limitation to liquidity assistance means that it is less distortive than restructuring aid, which can take a wide variety of forms, including capital injections or even direct grants. The limited duration of rescue aid similarly makes it much easier to control any potential distortions of competition, while its clear and objective conditions make it less administratively burdensome for beneficiaries, Member States and the Commission.

3.895

However, as the Commission states in point 12 of the 2014 Guidelines, it is rarely practical to expect a firm to restructure its business using rescue aid alone. That is not only because of the preconception that the purpose of rescue aid is simply to maintain the status quo, but much more because rescue aid must be repaid or converted into restructuring aid after six months, often leaving insufficient time for firms to carry out restructuring.

3.896

The solution introduced by the 2014 Guidelines is to allow, through the introduction of temporary restructuring support, an extended period of liquidity support of up to 18 months. To ensure that the aid so provided is indeed used to restructure the firm’s business and not simply to keep it alive without addressing its underlying problems, firms are required to submit a simplified restructuring

3.897

2150 Point 60. The Commission has accepted such liquidity plans on a number of occasions: see for example Commission Decision of 28.11.2008 on Rescue aid for Lindenau Schiffswerft (Case N 534/2008), summary notice in OJ C 50, 03.03.2009, p. 3; Commission Decision of 20.12.2011 on Rescue aid in favour of Solon SE (Case SA.33662), summary notice in OJ C 12, 14.01.2012, p. 3.

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plan within six months of the grant of temporary restructuring support. Temporary restructuring support can only be granted to SMEs, and only in the context of an aid scheme.2151

3.898

The main compatibility conditions for temporary restructuring support are set out in section 6.6 of the 2014 Guidelines. Temporary restructuring support must also contribute to an objective of common interest (see paras 3.874 to 3.878 of this book) and must comply with the one time, last time principle (see paras 3.861 to 3.873 of this book).

4.2 Appropriateness 3.899

Like rescue aid, temporary restructuring support must be in the form of loans or loan guarantees.2152 It can be granted for a period of up to 18 months, but any immediately preceding rescue aid period must be deducted from that 18-month maximum. After 18 months, the loan must be reimbursed or the guarantee terminated, unless by that time the Member State concerned has approved a restructuring plan meeting all the requirements for restructuring aid or a liquidation plan.2153 Such a “full” restructuring plan is therefore only required if the beneficiary needs continuing State support beyond the 18-month temporary restructuring support period. However, beneficiaries of temporary restructuring support must produce a simplified restructuring plan, which must be approved by the Member State concerned within six months after the disbursement of the first instalment of aid.2154 The simplified restructuring plan need not contain all the elements required of a full restructuring plan, but must, as a minimum, identify the actions that the beneficiary has to take to restore its long-term viability.2155 The guidelines do not further specify what information must be included, but to be consistent with the idea of a “simplified” plan, it would seem that indepth analysis, with assessment of a range of scenarios and benchmarking of the assumptions used in those scenarios, would not be necessary.2156

2151 Points 28 and 114. “SMEs”, for this purpose, include smaller State-owned undertakings: on that point, see further para 3.973 of this book. 2152 Point 115(a). 2153 Point 115(d). 2154 Where the grant of temporary restructuring support immediately follows a period of rescue aid, that rescue aid period is deducted from the six-month grace period for approval of the simplified restructuring plan. Thus, where temporary restructuring support follows a full six-month rescue aid period, the simplified restructuring plan would need to be approved at the moment of conversion from rescue aid to temporary restructuring support. 2155 Point 115(e). 2156 Compare the requirements for restructuring aid in point 50 of the 2014 Guidelines.

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As with rescue aid, the remuneration for temporary restructuring support, including both the interest rate on the loan and the premium payable for any guarantee,2157 must be at least equal to the reference rate for weak firms offering normal levels of collateralisation, that is, 4 per cent over the inter-bank rate. To provide incentives for exit from State support, the rate must increase by a further 0.5 per cent after 12 months of temporary restructuring support: once again, any immediately preceding period of rescue aid is deducted from that 12-month grace period.2158

3.900

4.3 Proportionality As in the case of rescue aid, the amount of temporary restructuring support must be limited to the amount needed to take care of the liquidity needs of the beneficiary during the temporary restructuring support period. The same formula as for rescue aid, set out in Annex I to the 2014 Guidelines, is used to calculate the benchmark for such liquidity needs; the only difference is that, to match the temporary restructuring support period of 18 months, the annual cash outflow determined by the formula is not divided by 2, but multiplied by 1.5. As with rescue aid, the amount of temporary restructuring support can exceed the amount determined by the formula, but must in that case be duly justified by means of a liquidity plan setting out the beneficiary’s liquidity needs for the next 18 months.2159

5.

3.901

Restructuring aid

The approach of the 2014 Guidelines to restructuring aid can perhaps best be described as innovation within a familiar structure (see Table 3). The key requirement is still the submission of a restructuring plan that provides for the beneficiary’s return to viability, includes adequate own contribution by market investors and contains measures to ensure that competition is not unduly distorted by the fact that a particular market participant has received aid. However, the 2014 Guidelines not only strengthen the entry conditions that must be met before submitting a restructuring plan becomes a question, but also adapt the requirements for the restructuring plan to bring the outcomes of restructuring closer to what they would have been in the absence of State aid.

3.902

2157 Point 115(b) 2158 Point 116. 2159 Point 117.

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5.1 Objective of common interest: restructuring plan and return to long-term viability 3.903

The guidelines require that restructuring aid contributes to a well-defined objective of common interest. The Member State must show that restructuring aid is needed to prevent social hardship or address market failure by restoring the long-term viability of the company.2160 The circumstances under which a Member State can demonstrate such social hardship or market failure have been considered above (see paras 3.874 to 3.878 of this book). The following discussion therefore focuses on the return to viability.

3.904

Restructuring must be based on a feasible, coherent and far-reaching restructuring plan to restore the beneficiary’s long-term viability.2161 The granting of the aid must be conditional on implementation of the restructuring plan.2162 Only on that basis can it be ensured that restructuring aid not only makes good past losses but also tackles the reasons for those losses. The 2014 Guidelines did not introduce any major changes as regards the requirement to submit a restructuring plan that provides for the beneficiary’s return to viability.

5.1.1 Content of the restructuring plan 3.905

The first requirement of any successful restructuring, whether or not it involves State aid, is to make a clear-sighted assessment of the causes of the company’s difficulties and to identify realistic measures to address those difficulties. Although essential, it can be very difficult for existing management to dispassionately assess the true state of the company. There is also a danger of wishful thinking, in proposing restructuring measures that will be effective only if negative market trends suddenly reverse or if a poorly-run company transforms overnight into a market leader. To counteract those tendencies, the guidelines contain precise and demanding requirements as to the content of a restructuring plan.

3.906

The restructuring plan should be based on realistic assumptions as to future operating conditions and should exclude further State aid not covered by the restructuring plan.2163 The plan must identify the causes of the beneficiary’s difficulties and the beneficiary’s own weaknesses.

2160 2161 2162 2163

Point 38(a) and 43. Point 45. Point 46. Point 47. The reference to “further State aid” excludes SGEI compensation granted in accordance with a proper entrustment (see further book para 3.980).

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It has to outline how those difficulties and weaknesses will be tackled, and in particular how the restructuring plan will achieve the return to long-term viability.2164

3.907

Both the business model and the corporate governance structure have to be assessed, as well as the extent to which the difficulties could have been avoided through appropriate and timely management action. Since there is a high likelihood that the beneficiary’s difficulties will recur if problems in those fundamental areas remain unresolved, the guidelines specifically require that changes be made if they are found to be the cause of the difficulties.2165 To avoid the risks of wishful thinking, the restructuring plan should demonstrate the expected results of the planned restructuring in a baseline scenario as well as in a pessimistic (or worst-case) scenario, including as well a market survey2166 and a sensitivity analysis.2167 Annex II of the guidelines contains an indicative model restructuring plan, so that Member States and beneficiaries can easily identify the main elements which a restructuring plan should include.

3.908

5.1.2 Restructuring period According to the guidelines, the restructuring period should be as short as possible. The long-term viability of the beneficiary must be restored within a reasonable timescale.2168 The precise period that is required, however, can vary. The restructuring rules for financial institutions provide that the restructuring should not last more than five years,2169 explaining that period as a derogation from the usual practice under the 2004 Guidelines whereby the restructuring period would normally be no more than three years. Indeed, the draft version of the new guidelines that was published for consultation in November 2013 proposed to formalise that practice, setting a normal period of three years and a maximum of five. The final version, however, contains no such limit.2170

3.909

In practice, therefore, the Commission’s decisional practice under the 2004 Guidelines remains the best guide as to the expected restructuring period. That practice shows that the restructuring period will normally be of three to five

3.910

2164 2165 2166 2167 2168 2169

Point 48. Point 49. Beneficiaries under schemes are not required to submit a market survey. Point 50. Point 47. Commission Communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules, OJ C 195, 19.09.2009, p. 9, point 15. 2170 The indicative model restructuring plan in Annex II, however, provides that the timescale to restore longterm viability should in principle not exceed three years.

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years, and that it will depend, inter alia, on the sector in which the beneficiary is active, although more precise indications are hard to draw.2171 Restructuring periods longer than five years have only rarely been approved.2172 When determining the length of the restructuring period, the question arises when the restructuring actually started. In its practice, the Commission has accepted that restructuring plans are defined over time and considered the initial plan as the starting point of the restructuring period.2173

5.1.3 Restructuring measures 3.911

The proximate reasons for a troubled company to seek State support are generally financial. Banks or suppliers may withdraw credit, leaving the company unable to meet its day-to-day financial obligations towards suppliers, employees and government authorities and raising the threat that those creditors will seek the initiation of an insolvency procedure. The temptation can therefore be to seek a purely financial solution to a company’s problems, through such mechanisms as restructuring of the company’s debt or the provision of a short-term liquidity reserve in the form of loans, guarantees, or even cash grants.

3.912

However, financial difficulties usually represent only the culmination of what can be a long period of growing operational difficulties linked to such issues as falling market demand, an uncompetitive cost structure and an obsolete product range. That means that, even if a financial restructuring can help a company to survive a period of distress, failure to resolve the deeper, operational problems is likely to mean that those financial difficulties will simply recur.

3.913

For that reason, the restructuring plan should usually involve both operational and financial restructuring. The 2004 Guidelines expressly provided that re2171 Five years in the passenger air transport sector: Commission Decision 2015/1091/EU of 09.07.2014 on the measures SA.34191 (2012/C) (ex 2012/NN) (ex 2012/CP) implemented by Latvia for A/S air Balcti Corporation (air Baltic), OJ L 183, 10.07.2015, p. 1; Commission Decision 2015/494/EU of 09.07.2014 on the measures SA.32715 (2012/C) (ex 2012/NN) (ex 2011/CP) implemented by Slovenia for Adria Airways d.d., OJ L 78, 24.03.2015; Commission Decision 2013/151/EU of 19.9.2012 on the State aid implemented by the Czech Republic for České aerolinie, a.s. ČSA - Czech Airlines - Restructuring plan (SA.30908 (2011/C)(ex N 176/2010)), OJ L 92, 03.04.2013, p. 16; Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29; five years in the postal sector: Commission Decision 2012/542/EU of 21.3.2012 on the measure which the United Kingdom plans to implement for Royal Mail Group (SA.31479 (2011/C - ex 2011/N)), OJ L 279, 12.10.2012, p. 40. 2172 Six years: Commission Decision 2010/137/EC of 28.08.2009 on State aid C6/09 (ex N663/08) - Austrian Airlines - Restructuring Plan, OJ L 59, 09.03.2010, p. 1. 2173 Commission Decision 2015/1091/EU of 09.07.2014 on the measures SA.34191 (2012/C) (ex 2012/NN) (ex 2012/CP) implemented by Latvia for A/S Air Baltic Corporation (air Baltic), points 170-173.

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structuring could not be based solely on financial restructuring without tackling the reasons for the company’s difficulties.2174 While the 2014 Guidelines do not contain such an express statement, the drafting of point 45 suggests that the basic principle remains valid.2175 Operational restructuring requires the beneficiary’s activities to be reorganised and rationalised on to a more efficient basis. To that end, the beneficiary should withdraw from activities which would remain structurally loss-making in the medium-term;2176 it may also restructure the existing activities that can be made competitive again and diversify towards new and viable activities. The reduction of operating costs, including the reduction of the beneficiary’s workforce, can be restructuring measures.2177 Replacing outdated equipment or installing more efficient technology might also be an option.2178 Restructuring often involves disposals for viability reasons.2179 Not only the beneficiary’s business model, but also its corporate governance system might need to be changed in order to tackle its difficulties.2180

3.914

2174 Point 17: “Restructuring operations within the scope of these guidelines cannot, however, be limited to financial aid designed to make good past losses without tackling the reasons for those losses.” 2175 See last sentence of point 45: “It typically also involves financial restructuring…”. 2176 Point 51. 2177 See Commission Decision of 08.10.2014 on Restructuring aid for Alestis (Case SA.38324), summary notice in OJ C 418, 21.11.2014; Commission Decision 2005/418/EC of 7.7.2004 on the aid measures implemented by France for Alstom (C 58/2003), OJ L 150, 10.06.2005, p. 24. 2178 See Commission Decision of 15.12.2009 on Restructuring aid to POLFA (Case N 488/2009), summary notice in OJ C 31, 09.02.2010, p. 4, point 40: investments in order to achieve the company’s transformation according to the standard model generics drug producer. 2179 Disposals for viability reasons feature in most restructuring cases, see for example Commission Decision of 08.07.2011 on Aid for the restructuring of FLT Krasnik SA (SA.32024), summary notice in OJ C 350, 01.12.2011, p. 2, point 30. 2180 Corporate governance changes have been imposed in several banking cases, see for example Commission Decision 2010/395/EU of 15.01.2009 on State aid by Germany for the restructuring of Landesbank BadenWürttemberg (C 17/09 (ex N 265/09)), OJ L 188, 21.07.2010, p. 1: the Commission required several corporate governance measures such as (i) the creation of an independent supervisory board; (ii) a concentration of the supervisory and monitoring functions at the supervisory board; (iii) making the managing board of LBBW independent in its daily and operative management of the business and being answerable to the commercial benefit of the company only, thus excluding orders coming from the supervisory board or from the owners; (iv) a reduction of the number of members of the supervisory board to 21 and reserving half of the seats for the owners to be filled with independent members; and (v) during the restructuring phase until 2013, the chair of the supervisory board will be an independent member; Commission Decision 2014/535/ EU of 18.12.2013 on Restructuring of NLB which Slovenia is planning to implement for Nova Ljubljanska banka d.d. (SA.33229 (2012/C ex 2011/N)), OJ L 246, 21.08.2014, p. 28: the Commission required the implementation of up-to-date corporate governance structures and arrangements to ensure that NLB’s decisions were business-oriented; in particular, it had to be ensured that the management board of NLB would have the sole powers and responsibilities for managing the day-to-day business of NLB independently and in the sole interest of the bank.

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3.915

In addition, the fact that financial restructuring is not sufficient on its own does not mean that it can be left out of account. As explained above, it is normally financial difficulties that lead directly to the need for State aid. As a result, financial as well as operational restructuring will typically be necessary. That financial restructuring can take the form of capital injections by new or existing shareholders and debt reduction by existing creditors.2181 Rescheduling short-term into long-term debt or swapping debt for equity might also be an option.

5.1.4 Return to viability and long-term viability 3.916

Successful restructuring implies that the beneficiary of rescue and restructuring aid must return to sustainable long-term viability. If that goal is not achieved, the aid is essentially wasted and does not produce positive effects that can be balanced against the distortions to competition. However, troubled businesses have a well-established tendency to avoid the reality that their survival can only be assured in a form that is much changed, and often much reduced. The temptation is strong to gamble on a path that will lead to a much brighter future for the company, but only if a set of unlikely circumstances occur (such as the achievement of a significant market share in a market to which the company is entirely new).

3.917

For that reason, the 2014 Guidelines are particularly detailed as to the need for evidence that the restructuring plan will restore the long-term viability of the firm even if external circumstances do not go its way. The expected results of the restructuring should therefore be demonstrated in a pessimistic (or worst-case) scenario as well as in a baseline scenario. To that end, inter alia, the current state and future prospects of supply and demand on the relevant product market and the main cost drivers of the industry should be taken into account.2182

3.918

Such forecasts leave a considerable amount of discretion to the beneficiary, which might be problematic if the improvement of the company’s performance is strongly influenced by external factors. For example, different subjective judgments as to the future path of market demand can have a significant effect on assessments of the feasibility of the return to viability. The guidelines therefore provide that the assumptions for the scenarios should be compared with appropriate sector-wide benchmarks. Where appropriate, those assumptions have to be adapted to cater for country- and sector-specific circumstances. The assumptions about external factors such as variations in prices, demand, or supply of 2181 Point 45. 2182 Point 50.

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scarce resources must not be too optimistic.2183 In addition, the return to viability cannot be linked to the beneficiary outperforming the market and its competitors or entering and expanding into new activities where it has no experience and track record.2184 Viability is not simply a question of being able to meet the day-to-day running costs of the business. For the firm’s presence on the market to remain economically rational, the capital employed in the business must be appropriately remunerated in accordance with market rates. If that is not the case, it is a sign that the firm’s capital would be better employed elsewhere.

3.919

The guidelines therefore define long-term viability as being achieved when the beneficiary is able to provide an appropriate return on capital after having covered all its costs, including depreciation and financial charges. The underlying principle is that the restructured undertaking should be able to compete in the marketplace on its own merits.2185 In its decisional practice, the Commission has accepted various metrics for assessing whether there is an appropriate return on capital, including return on equity (ROE)2186, return on capital employed (ROCE),2187, development of EBIT2188 or net profit margin and return-on-equity ratio.2189 The appropriateness of the return could for example be measured by comparing the return provided for by the restructuring plan with the yield on bonds of the Member State concerned, given that this is commonly seen as an approximation of a return on a risk free investment.2190 In some recent decisions

3.920

2183 See for example Invitation to submit comments pursuant to 108(2) TFEU, in case SA 31250 (N/2011) Restructuring of BDZ – Bulgaria, OJ C 12, 12.01.2012, p. 9, point 70: the Commission raised doubts on the assumptions on which the restructuring plan of BDZ was based, in particular a quick return to growth of the Bulgarian economy, which might be too optimistic. 2184 Point 51. 2185 Point 52. 2186 Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29, points 102-103. 2187 Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/ NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1, point 218. 2188 See for example Commission Decision of 09.07.2014 on the measures SA.34191 (2012/C) (ex 2012/NN) (ex 2012/CP implemented by Latvia for AIS Air Baltic Corporation (Air Baltic), OJ L 183 10.07.2015, p. 1, point 176. 2189 Commission Decision 2015/494/EU of 09.07.2014 on the measures SA.32715 (2012/C) (ex 2012/NN) (ex 2011/CP) implemented by Slovenia for Adria Airways d.d., point 134. 2190 Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/ NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1, point 218; Commission Decision of 09.04.2014 on Restructuring aid for Classen-Pol S.A. (Case SA.36806), summary notice in OJ C 156, 23.05.2014, p. 1, point 44.

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the Commission has compared the return provided for by the restructuring plan with the average return of companies that are active in the same sector and are in comparable circumstances.2191 Using a sector specific benchmark might, however, not always be an option. For example, in a sector suffering from overcapacity, the typical return may be unsustainably low. That typical return would then not represent an appropriate benchmark, since it would not suffice to ensure the long-term viability of the company.

3.921

A restructuring plan is normally rather complex and the company has a margin of discretion as to how to restore viability.2192 Therefore, the Commission has not often reached the conclusion that the criterion of restoration of viability was not met.2193 However, the need to establish some sort of ex ante control of the very complex and uncertain process of restructuring a company means that the existence of a restructuring plan is critical: in the absence of a plan that complies with the requirements of the guidelines, aid granted to a company in difficulty cannot be declared compatible, even if the restructuring ends up being successful.2194

2191 See for example Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1, point 218: comparison with “other European airlines”; Commission Decision 2012/661/ EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29: comparison with profitability figures of other major European carriers in the last years; Commission Decision 2013/151/EU of 19.9.2012 on the State aid implemented by the Czech Republic for České aerolinie, a.s. ČSA - Czech Airlines - Restructuring plan (SA.30908 (2011/C)(ex N 176/2010)), OJ L 92, 03.04.2013, p. 16, points 117-118: comparison with air carriers in the peer group; Commission Decision of 12.06.2012 on Restructuring aid to BZPG Stomil S.A. (Case SA.33150), summary notice in OJ C 230, 01.08.2012, p. 1; Commission Decision 2012/542/EU of 21.03.2012 on the measure which the United Kingdom plans to implement for Royal Mail Group (SA.31479 (2011/C - ex 2011/N)), OJ L 279, 12.10.2012, p. 40, point 219. 2192 Case 730/79 Philip Morris Holland BV v Commission ECLI:EU:C:1980:209, para. 17; case C-372/97 Italian Republic v Commission (‘Italian road haulage companies’) ECLI:EU:C:2004:234, para. 83. 2193 Cases where the criterion of restoration of viability were not met: Commission Decision 2002/898/EC of 09.04.2002 on SKL-Motoren (C 44/2000), OJ L 314, 18.11.2002, p. 75: potential investor pulled out of restructuring; Commission Decision 2007/674/EC of 04.04.2007 Ernault (C 32/2005), OJ L 277, 20.10.2007, p. 25; Commission Decision 2010/47/EC of 06.11.2008 on State aid granted by Poland to Stocznia Gdynia (C17/05 (ex N 194/05 and PL 34/04)), OJ L 33, 04.02.2010, p. 1, points 292-340; Commission Decision 2010/3/EC of 06.11.2008 on State aid granted by Poland to Stocznia Szczecinska (C 19/05 (ex N 203/05)), OJ L 5, 08.01.2010, p. 1, points 270-301; Commission Decision 2014/342/EU of 16.12.2013 on State aid granted by the Slovak Republic for Frucona Kosice a.s. (SA.18211 (C 25/2005)(ex NN 21/2005)), OJ L 176, 14.06.2014, p. 38, points 155-169. 2194 Case T-20/03 Kahla/Thüringen Porzellan v Commission ECLI:EU:T:2008:395, para. 280.

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5.2 Need for State intervention and incentive effect As indicated in Table 3, the need for state intervention and incentive effect did not feature in the 2004 Guidelines. In recent years, however, Member States have made great strides in modernising their insolvency laws. Those changes, often inspired by Chapter 11 of the U.S. Bankruptcy Code, have moved the focus of European insolvency law away from the realisation of assets of a bankrupt company and towards an attempt to preserve the productive activities of the business, even if the company itself cannot be saved.

3.922

As a result, it cannot simply be assumed that State aid will make it possible to preserve, on a sustainable basis, a higher level of output and employment than could be achieved through an insolvency procedure without State aid. To address that changed situation, the 2014 Guidelines now require a simple counterfactual analysis to show that State aid can be expected to improve on the outcome without aid.

3.923

According to point 53 of the 2014 Guidelines, State intervention is needed, therefore, if granting of the aid brings about a material improvement, compared to the situation without aid. To demonstrate that, a Member State has to present a comparison between a scenario involving restructuring aid and an alternative scenario not involving such aid. The comparison should show how, in the absence of aid (i.e. in the alternative scenario), the relevant objective(s) of common interest (see paras 3.874 to 3.878 of this book) would not be attained or would be attained to a lesser degree.2195 The design of the alternative scenario depends on the facts of the case. If no aid was granted to the beneficiary, it is often likely to enter an insolvency or reorganisation procedure. However, in the context of modern insolvency procedures designed to preserve the viable activities of the business, the outcomes of insolvency proceedings and of private debt workouts can be very similar, the main differences being related to procedural matters such as the availability of a moratorium or the impact on dissenting creditors. The guidelines therefore suggest a range of possible ways in which the alternative scenario might be structured, such as debt reorganisation, asset disposal or sale to a competitor. Member States are free to define the most appropriate scenario, subject to the requirement that the scenario chosen should be “credible”: that seems to mean that the Member State should provide objective evidence that the scenario in question would be likely to occur in the absence of State aid. Only when a credible alternative scenario is provided is the Commission in a position to verify whether the restructuring aid is indeed needed.

3.924

2195 Point 53.

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3.925

A similar comparison must be done to demonstrate the incentive effect.2196 As in relation to the need for State intervention, the requirement is for the Member State to present a comparison between a scenario involving restructuring aid and an alternative scenario not involving such aid. The comparison should show that in the absence of aid the relevant objective of common interest (see paras 3.874 to 3.878 of this book) would not be achieved. Unlike point 53, the possible alternative scenarios are described in very general terms that cover all practical possibilities, namely the restructuring, sale, or winding up of the beneficiary. In addition, the incentive effect provision refers only to the fact that in the absence of aid the objective of common interest would not be achieved, whereas when demonstrating the need for State intervention, it is sufficient to show that the objective of common interest would be achieved to a lesser degree. Having said that, in practice, the demonstration of incentive effect will often be similar to the demonstration of the need for State aid. The guidelines therefore provide that the analysis of the incentive effect can form part of the analysis of the need for State aid.

5.3 Appropriateness 3.926

The restructuring aid has to be appropriate. If other, less distortive measures would allow the same objective to be achieved, the aid cannot be considered compatible.2197 In the case of restructuring aid, a key determinant of the distortiveness of an aid is its form. In particular, the Commission considers aid in the form of liquidity (loans and guarantees) to be much less distortive than other forms of aid, on a number of grounds including the fact that liquidity measures are normally remunerated in the form of interest payments and guarantee premia, and the fact that liquidity measures are repaid, whereas equity injections or grants remain at the disposal of the beneficiary even after the end of the restructuring period.

3.927

It follows that the use of liquidity measures should be encouraged, to the extent that they are sufficient to address the beneficiary’s difficulties. In that connection, the guidelines, while making clear that Member States are in principle free to choose the form of restructuring aid, also require them to assess whether the beneficiary’s problems relate to liquidity or solvency, and to select the form of aid that is appropriate to address the problems identified. The guidelines provide examples how appropriateness can be ensured: for example, the appropriate form of aid to tackle solvency problems might be a recapitalisation, whereas liquidity problems could be tackled through loans or loan guarantees.2198 2196 Points 38(d) and 59. 2197 Point 38(c). 2198 Point 58.

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5.4 Proportionality (aid limited to the minimum) The restructuring aid must be limited to the strict minimum necessary to enable restructuring to be undertaken. This minimum is to be assessed in light of the existing financial resources of the beneficiary, its shareholders or the business group to which it belongs. Any rescue aid granted beforehand which was not reimbursed or brought to an end within the six-month rescue period will be taken into account in the assessment.2199

3.928

The proportionality assessment has two aspects in relation to restructuring aid. The burden-sharing requirement aims to ensure that the company’s losses are borne by its investors, not by the State. The own contribution requirement, based on the same requirement in the 2004 Guidelines but refined (in particular by the requirement that own contribution should have a comparable effect to the aid granted), aims to ensure that market investors as well as the State demonstrate confidence in the beneficiary’s restructuring plan and contribute to its success.

3.929

5.4.1 Own contribution The basic principle of the own contribution requirement is that a sufficient contribution to the restructuring costs must be made by the market, including the beneficiary, its shareholders or the business group to which it belongs, as well as new market investors.2200 The contribution has to be significant; this is normally considered to be the case if it amounts to at least 50 per cent of the restructuring costs.2201 Such own contribution from market investors not only reduces the amount of State aid needed, but provides an essential indication that the markets believe in the feasibility of the return to viability.

3.930

5.4.1.1 Form of own contribution The contribution must be real, i.e. actual, and must not contain any aid.2202 Contributions by the State or a public company can be taken into account if they are free of aid.2203 Examples of own contribution provided in the guidelines

3.931

2199 Point 61. 2200 Point 62. 2201 Point 64. See paras 3.936 to 3.937 of this book for a discussion of the situations in which own contribution can amount to less than 50 per cent of the restructuring costs. 2202 Footnote 35 to the 2014 Guidelines. 2203 Point 63 of the guidelines gives as example a contribution by an entity which is independent from the aid granting authority and that takes the decision to invest on the basis of its own commercial interests; see

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are capital injections by the existing shareholders,2204 the conversion of existing debt into equity2205 or the write-down of existing debt and capital notes. Prior to the entry into force of the 2014 Guidelines it was at least questionable whether the write-down of existing debt could be accepted as own contribution. It was argued that debt relief does not provide actual and real funds2206 and that it cannot be likened to a contribution by the beneficiary through its own resources or external commercial financing.2207 In other cases, debt relief was accepted as own contribution.2208 The 2014 Guidelines now resolve that question, expressly allowing the write-down of existing debt as an own contribution, since although it does not provide cash, it does boost the net equity of the company.

3.932

The proceeds of the sale of assets or subsidiaries of the beneficiary count as own contribution; such sales are considered as a “real” contribution even if they have not yet taken place, provided that the market value of the assets to be sold is determined by an independent external evaluation and they are in the process of being sold.2209 If the State purchases the asset at stake, the proceeds can only

2204 2205

2206 2207 2208 2209

also Commission Decision of 22.02.2012 on Restructuring aid to Air Åland (Case SA.32698 (2011/N)), summary notice in OJ C 160, 06.06.2012, p. 8: the beneficiary was owned by around 40 companies and natural persons; three shareholders were public, but their joint shareholding did not exceed 25 per cent. The own contribution consisted in two capital increases. As the Commission had no indication that the behaviour of the public minority shareholders was imputable to the State, the full amount of the capital injections was counted as own contribution; Case T-20/03 Kahla/Thüringen Porzellan v Commission ECLI:EU:T:2008:395, paras. 280 and 287: the State-owned company did not act like a private investor; the measures in question were therefore not considered as own contribution, but as State aid. See for example Commission Decision of 22.02.2012 on Restructuring aid to Air Åland (Case SA.32698 (2011/N)), summary notice in OJ C 160, 06.06.2012, p. 8. The conversion of existing debt into equity has been considered as own contribution already before the entry into force of the 2014 Guidelines, see for example Commission Decision 2015/494/EU of 09.07.2014 on the measures SA.32175 (2012/C) (ex 2012/NN) (ex 2011/CP) implemented by Slovenia for Adria Airways d.d., OJ L 78, 24.03.2015, point 157-158: the decision distinguished between collateralised debt and unsecured debt: whereas the conversion of collateralised debt was accepted as own contribution, the conversion of unsecured debt would normally not demonstrate the confidence of the market into the company, as the unsecured creditors do not assume new risks related to the implementation of the restructuring plan. It is to be seen if this distinction will be taken up in decisional practice under the 2014 Guidelines. Commission Decision of 12.01.2011 on restructuring aid for Krakowskie Zaklady Garbarskie S.A., Poland (SA.27427 (N 24/2009)), summary notice in OJ C 104, 10.04.2013, p. 1, point 68. Case T-152/99 Hijos de Andrés Molina, SA (HAMSA) v Commission ECLI:EU:T:2002:188, para. 106. Commission Decision of 02.07.2008 on State aid - Austria - Restructuring aid for Der Bäcker Legat GmbH (Case N 92/2008), summary notice in OJ C 203, 09.08.2008, p. 1. Commission Decision 2015/494/EU of 09.07.2014 on the measures SA.32175 (2012/C) (ex 2012/NN) (ex 2011/CP) implemented by Slovenia for Adria Airways d.d., OJ L 78, 24.03.2015; Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1; Commission Decision 2012/542/EU of 21.3.2012 on the measure which the United Kingdom plans to implement for Royal Mail Group (SA.31479 (2011/C - ex 2011/N)), OJ L 279, 12.10.2012, p. 40: in Royal Mail, the Commission accepted that the valuations of the future sales were conservative and based on Royal Mail’s experience with recent sale transactions.

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be taken into account if the transaction was free of aid, i.e. if the asset was sold for its market price.2210 Loans are also a source of own contribution; unlike proceeds from sales, future loans are normally not to be considered as “real” contribution, since there is little guarantee that such future loans will actually be forthcoming.2211 Loans dating back long before the beginning of the restructuring period are not considered to provide “real” own contribution.2212 A loan backed by a State guarantee which contains an element of aid is not considered free of aid.2213 If the loan is granted by the State or a public company, it must not carry an interest-rate subsidy.2214 A finance lease is an acceptable source of own contribution, given that it is external financing similar to a credit offered by a bank.2215 Rent income can also be a source of own contribution.2216 The same is true for new funds that the new owner of a privatised beneficiary brings into the com2210 See for example Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29: the Maltese State bought land; its value was determined by an independent expert and the proceeds were hence accepted as own contribution; similar Commission Decision 2013/151/EU of 19.9.2012 on the State aid implemented by the Czech Republic for České aerolinie, a.s. ČSA - Czech Airlines - Restructuring plan (SA.30908 (2011/C)(ex N 176/2010)), OJ L 92, 03.04.2013, p. 16; Commission Decision 2015/494/EU of 09.07.2014 on the measures SA.32175 (2012/C) (ex 2012/NN) (ex 2011/CP) implemented by Slovenia for Adria Airways d.d., OJ L 78, 24.03.2015, points 118, 156: the acquisition of shares in an Adria Airways subsidiary was considered to be in line with the MEOP; the proceeds from the sales could therefore be counted as own contribution. 2211 Commission Decision of 12.06.2012 on Restructuring aid to BZPG Stomil S.A. (Case SA.33150), summary notice in OJ C 230, 01.08.2012, p. 1; a letter of intent provided by the bank was not considered to be sufficiently “real”; Commission Decision 2010/175/EC of 22.07.2009 on State aid awarded by Poland to Stocznia Gdansk (C 18/05 (ex N 438/04, N 194/05 and PL 34/04)), OJ L 81, 26.03.2010, p. 19, points 272-273: conditional undertakings from two banks to provide co-financing of a restructuring project were considered to be sufficiently “real”. 2212 Commission Decision 2013/151/EU of 19.9.2012 on the State aid implemented by the Czech Republic for České aerolinie, a.s. ČSA - Czech Airlines - Restructuring plan (SA.30908 (2011/C)(ex N 176/2010)), OJ L 92, 03.04.2013, p. 16. 2213 See for example Commission Decision of 02.07.2008 on State aid - Austria - Restructuring aid for Der Bäcker Legat GmbH (Case N 92/2008), summary notice in OJ C 203, 09.08.2008, p. 1. 2214 Footnote 35 to the 2014 Guidelines. In Commission Decision 2012/397/EU of 24.10.2011 on Restructuring aid to SeaFrance SA granted by the SNCF (Case SA.32600 (2011/C)), OJ L 195, 21.07.2012, p. 1: the Commission did not accept a loan provided by SNCF to SeaFrance as own contribution; confirmed in case T-1/12 France vs Commission (‘SeaFrance’) ECLI:EU:T:2015:17, para. 86. 2215 See for example Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1; Commission Decision of 9.7.2014 on the measures SA.34191 (2012/C) (ex 2012/NN) (ex 2012/CP) implemented by Latvia for AIS Air Baltic Corporation (Air Baltic), OJ L 183, 10.07.2015, p. 1: even if there is collateral covering a significant part of the risk, there is still a risk for the creditor; the lease of the aircraft can be considered as own contribution. 2216 See for example Commission Decision of 12.01.2011 on restructuring aid for Krakowskie Zaklady Garbarskie S.A., Poland (SA.27427 (N 24/2009)), summary notice in OJ C 104, 10.04.2013, p. 1: income from long-term rent for the time equal to the restructuring period; Commission Decision of 12.06.2012 on Restructuring aid to BZPG Stomil S.A. (Case SA.33150), summary notice in OJ C 230, 01.08.2012, p. 1: future potential rent from a so far unrented part of the production hall cannot be taken into account.

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pany.2217 For such a contribution to be real, the new owner should have made at least a firm commitment by the date of the decision authorising the aid.2218

3.933

The guidelines state that future profits such as cash flow cannot be a source of own contribution.2219 Future profit is too uncertain to be taken into account (not “real”) and might actually be a result of the aid provided. Depreciation cannot be counted as own contribution either.2220 Given that they are an ongoing source of financing, payables can only be considered as own contribution if a supplier commits to allow payment maturity longer than normal practice.2221 A deferral of debt can be taken into account, but not up to the full amount of the principal, as it does not relieve the beneficiary from the obligation to pay the debts at a later point in time.2222

5.4.1.2 Comparable effect to aid granted 3.934

Prior to the entry into force of the 2014 Guidelines, the State often bailed out a firm with solvency measures, while private investors merely provided loans or simply purchased assets from the beneficiary.2223 Those private investments involved little or no commitment to the future of the firm, particularly in cases where private investors simply purchased assets, compared to the long-term, structural commitment made by the State. To improve that balance, the 2014 Guidelines include a matching provision, which provides that the own contribution should normally be comparable to the aid granted in terms of its effects 2217 Invitation to submit comments pursuant to 108(2) TFEU, in case SA.32544 (2011/N) - Greece - Restructuring of the Greek Railway group - TRAINOSE, OJ C 272, 15.09.2011, p. 1. 2218 In Commission Decision 2010/3/EC of 06.11.2008 on State aid granted by Poland to Stocznia Szczecinska (C 19/05 (ex N 203/05)), OJ L 5, 08.01.2010, p. 1, a preliminary cooperation agreement between the investors was submitted to the Commission, in which one of the investors undertook to financially contribute by way of capital increase; given that the greater part of this contribution was conditional on the investor obtaining such financing on the market and that the investor subsequently withdrew from the privatisation procedure, the contribution could not in the end be considered real. 2219 Point 63. 2220 Commission Decision of 22.02.2006 on Restructuring aid in favour of AB Kauno ketaus liejykla (Case N 464/2005), OJ C 270, 07.11.2006, p. 2, point 17. 2221 Commission Decision 2014/342/EU of 16.12.2013 on State aid granted by the Slovak Republic for Frucona Kosice a.s. (SA.18211 (C 25/2005)(ex NN 21/2005)), OJ L 176, 14.06.2014, p. 38. 2222 Commission Decision of 22.02.2006 on Restructuring aid in favour of AB Kauno ketaus liejykla (Case N 464/2005), OJ C 270, 07.11.2006, p. 2,point 17; Commission Decision of 08.10.2014 on Restructuring aid for Alestis (Case SA.38324), summary notice in OJ C 418, 21.11.2014, point 83: the amount of own contribution was determined as the difference between the present value of the private loans calculated according to the original repayment schedule (i.e. before the debt settlement agreement) and the present value of the same loans calculated according to the new repayment schedule, as accepted by private creditors under the debt settlement agreement. 2223 See for example Commission Decision of 12.6.2012 on Restructuring aid to BZPG Stomil S.A.(Case SA.33150), summary notice in OJ C 230, 01.08.2012, p. 1.

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on the solvency or liquidity position of the beneficiary. For example, where the aid to be granted enhances the beneficiary’s equity position, the own contribution should similarly include measures that are equity-enhancing.2224 The wording (“normally”) indicates that own contribution not having a comparable effect to the aid granted can still be accepted in exceptional circumstances, although precisely what circumstances would justify such an exception remains to be defined through decisional practice. The extent to which own contribution has a comparable effect to the aid granted will in any event be taken into account when assessing the extent of measures to limit distortions of competition. The guidelines provide some indication of the types of of own contribution that can be considered to be equity-enhancing, including capital injections by the existing shareholders, the conversion of existing debt into equity or the writedown of existing debt and capital notes. The proceeds of asset sales would not be equity-enhancing, except to the extent that the sale takes place above book value.2225 Where the aid granted is not equity-enhancing, a broader range of own contribution can be taken into account, including for example loans or finance leases (for details on the sources of own contribution see paras 3.431 to 4.433 of this book).

3.935

5.4.1.3 Amount of own contribution and restructuring costs According to the guidelines, the amount of own contribution must be significant.2226 Whether own contribution is significant is assessed in relation to the restructuring costs. The guidelines do not provide a definition of “restructuring costs”. According to decisional practice, restructuring costs typically entail, for example, costs for investments to modernise or renew production facilities; redundancy payments; costs of financial restructuring (e.g. payment of debt;2227 coverage of operating losses); or costs for improving the production process. Daily expenses and income for running the firm should not be taken into account.2228 Once the amount of restructuring costs is established, the required amount of own contribution can be determined.

3.936

2224 Point 62. 2225 See draft guidelines as put in public consultation on 5.11.2013, available on the DG Competition internet page, point 64. 2226 Point 62. 2227 Reimbursement of financial liabilities, which would also have taken place outside restructuring, is not to be taken into account, Commission Decision 2008/145/EC of 12.09.2007 on State aid to Bison Bial (Case C54/2006), OJ L 46, 21.02.2008, p. 41, point 62. 2228 See for example Commission Decision 2010/3/EC of 06.11.2008 on State aid granted by Poland to Stocznia Szczecinska (C 19/05 (ex N 203/05)), OJ L 5, 08.01.2010, p. 1, point 314.

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3.937

An own contribution amounting to at least 50 per cent of the restructuring costs is normally considered to be adequate.2229 Lower thresholds exist for SMEs. If the beneficiary of the aid is a medium-sized enterprise, the own contribution has to amount to at least 40 per cent of the restructuring costs; if it is a small enterprise, the threshold goes down to 25 per cent.2230 The location of the beneficiary in an assisted area can also allow the level of own contribution to be reduced. The guidelines make clear, however, that the reduction must be linked to a specific difficulty that the beneficiary faces in providing the full amount of own contribution as a result of its location.2231 Finally, irrespective of the size and the location of the beneficiary, the required level of own contribution can also be reduced in exceptional circumstances and in cases of particular hardship.2232 So far, that provision has very rarely been used.2233 In any event, the own contribution must remain significant.

2229 Point 64. 2230 Point 111. 2231 Point 98. See for example Commission Decision 2011/414/EU of 14.12.2010 on State aid implemented by Greece in favour of Varvaressos S.A. (Case C 8/2010 (ex N 21/2009 and NN 15/2010)), OJ L 184, 14.07.2011, p. 9, points 84-85: 40 per cent; see also Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29, where also the peripheral geographical situation was taken into account. 2232 Point 64. 2233 Commission Decision of 31.07.2013 on Restructuring aid to Abbanoa S.p.A. (Case SA.35205 (2013/N)), summary notice in OJ C 279, 27.09.2013, p. 1: the own contribution of Abbanoa, the public water supplier of Sardinia, was equal to only a maximum of 22 per cent of the restructuring costs, but justified taking into account the exceptional circumstances. Abbanoa was entrusted with a SGEI for the management of the water supply services for Sardinia by way of an in-house concession which lasted until 2028; most if not all of the public services could be qualified as natural monopoly; there was an exceptional need for long-term infrastructure investment for the provision of the entrusted SGEI and Abbanoa had no assets to sell; Abbanoa was located in a partly assisted area, exacerbated by the geographic isolation of Sardinia; Commission Decision of 22.02.2006 on Restructuring aid in favour of AB Kauno ketaus liejykla (Case N 464/2005), OJ C 270, 07.11.2006, p. 2, point 18: 40 per cent own contribution, justified taking into account that the beneficiary was located in an assisted area, that the difficulties were attributable to the time period in the 1990s when the beneficiary had to adjust to a market economy system, that it had a small market share and was a comparatively “small” large enterprise; Commission Decision 2006/947/EC of 07.12.2005 on the State aid implemented by Belgium for ABX Logistics (C 53/2003 (ex NN 62/2003)), OJ L 383, 28.12.2006, p. 21, point 240: 43 per cent; Commission Decision 2010/175/EC of 22.07.2009 on State aid awarded by Poland to Stocznia Gdansk (C 18/05 (ex N 438/04, N 194/05 and PL 34/04)), OJ L 81, 26.03.2010, p. 19, points 277-280: 40 per cent; Commission Decision of 11.11.2010 on Aide à la restructuration des activités fret de SNCB (Case N 726/2009), summary notice in OJ C 327, 04.12.2010, p. 6, point 249: 15-25 per cent; to be noted that the compatibility of the aid was assessed under the Railway Guidelines, which include express derogations from the guidelines for the restructuring of freight divisions of railway undertakings in relation to cases notified before 1 January 2010: on the Railway Guidelines, see further para 3.1636 of this book.

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5.4.2 Burden-sharing In the context of modern insolvency laws, as discussed above (see para 3.838 of this book), the impact of State aid in terms of permitting the survival of a viable business is much less than in the past. Indeed, the difference between aided and non-aided restructuring may resolve to a question of the impact on investors, particularly shareholders and subordinated creditors. While an insolvency procedure or a private workout would require investors to crystallise losses, State aid can reduce or even eliminate those losses. That can have a series of negative impacts, including the creation of moral hazard, the introduction of incentives for investors to delay restructuring in the hope that they will be better off if the State steps in to rescue the firm than if they agree to a timely restructuring and the diversion of taxpayers’ money to save investors instead of jobs and output.

3.938

All of those issues were highly relevant in the context of State rescues of banks during the financial crisis. The enormous scale of the State resources committed for that purpose meant that billions of euros of taxpayers’ money, and huge risktaking incentives, were tied to the terms of those bailouts. In that context, the need for banks and their investors to share the burden of losses with taxpayers has been a theme that the Commission has emphasised with growing insistence as the crisis has moved through its various stages, culminating in the strict requirements in the most recent rules for shareholders and subordinated creditors to bear losses in full before any State involvement can be envisaged.2234

3.939

While the sums at stake are not as large where non-financial firms are concerned, the principles are exactly the same. The 2014 Guidelines have therefore introduced an adapted version of the burden-sharing requirement, which has two main elements: losses already incurred by the beneficiary have to be absorbed by existing shareholders and subordinated creditors,2235 and a reasonable share of future gains must accrue to the State.2236 The burden-sharing rules apply whenever the aid is granted in a form that enhances the beneficiary’s equity position, such as grants, capital injections or write-offs of debt.

3.940

2234 Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication), OJ C 216, 30.07.2013, p. 1; that Communication lays down the rules for burden sharing in the banking sector. See further paras 3.1860 to 3.1866 of this book. 2235 Point 66. 2236 Point 67.

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5.4.2.1 Absorption of losses and preventing cash outflow 3.941

According to the 2014 Guidelines, existing shareholders and, where necessary, subordinated creditors must absorb losses in full. State aid should only be granted after losses have been fully accounted for and attributed to the existing shareholders and subordinated creditors.2237 In the case of shareholders, that will primarily mean that the firm’s balance sheet situation should be established at the time of grant of the aid, rather than relying on the most recent year-end accounts.2238 Since companies in difficulty typically face mounting losses, that approach will ensure that any further injection of capital will be based on a valuation that takes full account of the scale of losses.

3.942

As for subordinated creditors, they can either convert their debt into equity or write down the principal of the debt. Burden sharing by senior creditors, on the other hand, is not required, although if it does take place, that can lead to a reduction in the necessary degree of measures to limit distortions of competition2239 (see paras 3.951 to 3.953 of this book).

3.943

During the restructuring period, cash outflows from the beneficiary to shareholders or subordinated creditors should be prevented to the extent legally possible.2240 In practice, as in banking restructuring cases,2241 that primarily means that the beneficiary should not pay dividends on shares or interest (coupon) on subordinated debt. Such a ban is usually legally possible as regards dividends, which are commonly paid at the discretion of the company’s management. For subordinated debt, the scope for preventing payments of coupon will depend on whether there is a contractual right for the borrower not to pay coupon in certain circumstances, for example if it does not make sufficient distributable profits. If fresh equity has been injected during the restructuring, an exception can be made to avoid disproportionate effects by allowing investors that were not implicated in the firm’s difficulties to receive remuneration for their investments.

2237 2238 2239 2240 2241

Point 66. Footnote 37 to the 2014 Guidelines. Point 69. Point 66. Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication), OJ C 216, 30.07.2013, p. 1, point 47. See paras 3.1860 to 3.1866 of this book.

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5.4.2.2 Exceptions Finally, the guidelines provide for exceptions from the full implementation of loss absorption, where this would lead to “disproportionate results”. The guidelines themselves provide two examples: where the aid amount is small when compared to the own contribution provided; or where the Member State demonstrates that subordinated creditors would receive less in economic terms than under normal insolvency proceedings without State aid.2242

3.944

5.4.2.3 Reasonable share of future gains for the State Burden sharing also requires that the State should obtain a reasonable share of the future gains in value of the beneficiary.2243 That means that the benefits of the State’s contribution will not simply accrue to existing shareholders and creditors.

3.945

Such a reasonable share could in principle be obtained in a variety of ways. A private investor injecting equity into a failing firm would normally expect to obtain a shareholding commensurate with the size of that equity injection, and the State could also obtain its share of the upside in that way. However, where the State injection of equity is large enough in relation to the value of the company, that approach could essentially lead to nationalisation of the firm. Where that outcome is considered unacceptable, other approaches could be explored, including the use of non-voting shares2244 or of “clawback” arrangements providing for a share of future profits to accrue to the State. In any event, the concept of a “reasonable share” should be determined by comparing the amount of State equity injected with the remaining equity of the beneficiary after the losses have been accounted for.

3.946

5.5 Negative effects Negative effects of the aid on competition and trade between Member States have to be sufficiently limited, so that the overall balance of the aid is positive. To that end, restructuring aid has to comply with the one time, last time principle (see paras 3.861 to 3.873 of this book) and measures have to be taken to limit distortions of competition.

3.947

2242 Point 68. 2243 Point 67. 2244 See Communication from the Commission on the application, from 1 January 2012, of State aid rules to support measures in favour of banks in the context of the financial crisis, OJ C 356, 06.12.2011, p. 7, point 10.

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5.5.1 Grounds for measures to limit distortions of competition 3.948

Aid to companies in difficulty necessarily distorts competition by preventing exit. By allowing aid to companies in difficulty, the Commission has acknowledged that it is sometimes necessary to accept a certain level of distortion to competition in order to achieve the objectives of common interest discussed above (paras 3.874 to 3.878 of this book). However, given the very serious impact of restructuring aid on competitive incentives, the guidelines require measures to be taken to limit those distortions to the minimum.

3.949

In the past, those measures have focused on ensuring that competitors of aid beneficiaries receive some compensation for the grant of State support. Since it was assumed that, in the absence of such support, competitors would have been able to capture the market share held by the failing firm, those “compensatory measures” usually took the form of ensuring that the restructured entity was reduced in size, either by reducing capacity or by disposing of certain activities. However, the focus of the measures was on reducing the scale of the beneficiary: broader questions of whether the market structure was sufficiently competitive after the implementation of restructuring were left aside.

3.950

In that context, the change of terminology in the 2014 Guidelines, which refer not to compensatory measures but to “measures to limit distortions of competition”, can be read as a signal that the Commission will give greater attention in future to the broader impact of restructuring on competition in the market concerned. The guidelines also contain detailed provisions on the form that competition measures should take, as well as how to determine the extent of the necessary measures. The guidelines distinguish between structural, behavioural and market-opening measures.

5.5.2 Extent of competition measures 3.951

The extent of competition measures depends on three criteria.2245 1.

The first criterion is the size and nature of the aid2246 and the conditions and circumstances under which it was granted. That criterion is a new addition in the 2014 Guidelines, although it is not without precedent in the Commission’s practice. In the financial sector, the Commission

2245 Point 87. 2246 Size and nature of the aid will be considered both in absolute terms and in relation to the beneficiary’s assets and the size of the market (point 88).

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has, since 2009, taken account of the amount of aid granted as one of the factors relevant to determining the extent of the necessary competition measures.2247 It has also made reference to the size2248 and form2249 of the aid when assessing the extent of compensatory measures in certain recent non-financial decisions. 2.

The second criterion is the size and relative importance of the beneficiary in the market and the characteristics of the market concerned. The size and relative importance of the beneficiary on its market(s) will be examined both before and after the restructuring, to assess the likely effects of the aid on those market(s).2250 While the link between the size and relative importance of the beneficiary and the extent of competition measures is carried over from the 2004 Guidelines, it is explained in a way that makes much clearer the link between that condition and a form of counterfactual analysis. As the 2014 Guidelines state, the purpose of the criterion is “to evaluate the likely effects of the aid on those markets as compared to the likely outcome in the absence of State aid”. In keeping with the greater focus of the 2014 Guidelines on the market structure after restructuring, point 89 makes clear that measures must be tailored to market characteristics in order to ensure that effective competition is preserved: the relevant characteristics for that purpose include concentration levels, capacity constraints, the level of profitability and barriers to entry and to expansion.2251 Experience gained in other areas of competition enforcement, particularly in merger cases, can be helpful to the Commission in understanding the characteristics of the markets concerned.2252

2247 Commission communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules, OJ C195, 19.08.2009, p. 9, point 31. 2248 See for example Commission Decision of 12.06.2012 on Restructuring aid to BZPG Stomil S.A. (Case SA.33150), summary notice in OJ C 230, 01.08.2012, p. 1, point 55: the Commission took into account the limited aid amount and its therefore restricted potential distortive effects. 2249 Commission Decision of 30.05.2012 on Restructuring aid to PZL Sedziszów S.A. (Case SA.32117), summary notice in OJ C 206, 13.07.2012, p. 1, point 58: the Commission took into account that the large majority of the aid took the form of a loan which would be repaid within 3 to 5 years. The potential distortive effects of such aid are weaker than in the case of a grant; Commission Decision of 25.08.2011 on Restructuring aid to Keller Elettromeccanica S.p.A. (SA.32770), summary notice in OJ C 206, 13.07.2012, p. 1, point 77: The Commission noted that the aid was given in the form of a guarantee, which meant that the beneficiary did not dispose of the funds in a permanent manner, but would have to repay the loan and pay the corresponding interest. 2250 Point 89. 2251 Footnote 44 to the 2014 Guidelines. 2252 See for example Commission Decision of 08.10.2014 on Restructuring aid for Alestis (Case SA.38324), summary notice in OJ C 418, 21.11.2014, point 75.

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3.

The third criterion is the extent to which moral hazard concerns remain following own contribution and burden-sharing.2253 As explained above (paras 3.834 to 3.835 in this book), moral hazard should generally be addressed through own contribution and burden-sharing, which have a direct impact on the incentives of investors in the firm. However, those mechanisms may not always be sufficient (for example, because they do not require senior creditors to contribute). In such a case, competition measures can play a supporting role by ensuring that the beneficiary relinquishes some of the advantages that its risky strategic decisions have brought (such as the new businesses resulting from over-expansion). Own contribution and burden sharing going beyond the degree required in the guidelines can therefore reduce the extent of competition measures.2254

3.952

In view of the new emphasis on competition in the market as a whole, the 2014 Guidelines provide that competition measures that help to ensure that national markets remain open and contestable will be considered positively.2255 The guidelines also provide that competition measures should not come at the expense of consumers and competition.2256 Measures limiting distortions of competition should not compromise the prospects of the beneficiary’s return to viability.2257 However, that provision should not be read as providing carte blanche for a reduction in the scope of competition measures required. On the contrary, the implication is that competition measures should be designed in such a way as to avoid viability problems, including, for example, by the use of market-opening measures instead of structural measures.2258

3.953

On the other hand, there are a few situations in which the necessary extent of competition measures can be reduced. Aid for social measures exclusively for the benefit of redundant employees will be disregarded when determining the extent of competition measures.2259 In addition, the extent of the necessary reduction of capacity or market presence could be smaller than otherwise required where the beneficiary is located in an assisted area, since too great a reduction in the activity of the assisted firm could have negative knock-on effects on the regional economy as a whole. For that purpose, the Commission will take into ac2253 2254 2255 2256 2257

Point 87. Point 90. Point 91. Point 92. Point 91. See for example Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29, point 124. 2258 See for example Commission Decision of 31.07.2013 on Restructuring aid to Abbanoa S.p.A. (Case SA.35205 (2013/N)), summary notice in OJ C 279, 27.09.2013, p. 1 (see para. 3.964). 2259 Point 93.

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count whether the beneficiary is located in an area eligible for regional aid under Article 107(3)(a) of the Treaty or in an area eligible under Article 107(3)(c) of the Treaty, so as to take account of the greater severity of the regional problems in the former.2260 In airline restructuring cases, the Commission has also considered peripheral geographical situation as an island as a factor to be taken into account when determining the appropriateness of competition measures.2261

5.5.3 Structural measures Competition measures should normally take the form of structural measures.2262 The guidelines identify two types of structural measures, namely divestment of assets or reductions in capacity or market presence. To ensure that they address the competition distortions caused by State aid, structural measures should take place in the market(s) where the beneficiary will have a significant market position after the restructuring,2263 in particular those with significant excess capacity.2264 To this end, the markets where the beneficiary maintains or improves its market position in the restructuring have to be identified. The significance of the market share will then have to be considered on a case-by-case basis; even a market share of 1 per cent might be considered significant in certain cases.2265 That evaluation has to be seen against the background that State aid considers primarily the effects on localisation of economic activities between Member States. If activities are kept alive with the help of aid which would otherwise

3.954

2260 Point 98. 2261 Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29, points 126-131; Commission Decision of 9.07.2014 on the measures SA.34191 (2012/C) (ex 2012/NN) (ex 2012/CP) implemented by Latvia for AIS Air Baltic Corporation (Air Baltic), OJ L 183, 10.07.2015, p. 1, point 201: although not an island, the Commission took into account the “peripheral geographical situation and its accessibility” of Latvia when assessing the competition measures. 2262 Point 77. 2263 See also Joined Cases T-115/09 and T-116/09 Electrolux and Whirlpool v Commission (‘Fagorbrandt’) ECLI:EU:T:2012:76, paras. 52-54; the Court annulled the restructuring decision of the Commission, finding that the sale of the subsidiary Brandt Components did not constitute an appropriate compensatory measure, as it took place three and a half years before the restructuring aid was even notified and it was not established that that sale had the effect of reducing the adverse effects of the aid on the main market in which FagorBrandt was present; Commission Decision 2013/151/EU of 19.9.2012 on the State aid implemented by the Czech Republic for České aerolinie, a.s. ČSA - Czech Airlines - Restructuring plan (SA.30908 (2011/C)(ex N 176/2010)), OJ L 92, 03.04.2013, p. 16, points 134-135: the sale of Duty Free was not taken into account as compensatory measure, given that it did not affect the position of CSA in its core market, the passenger air transport market; Commission Decision 2012/661/EU of 27.06.2012 on the State aid which Malta is planning to implement for Air Malta plc. (SA.33015), OJ L 301, 30.10.2012, p. 29, point 120: the sale of insurance subsidiaries was not considered to be in the core market of Air Malta. 2264 Point 78. 2265 Commission Decision 2007/509/EC of 20.12.2006 on State aid for Fabryka Samochodow Osobowych SA (formerly DAEWOO — FSO Motor SA) (Case C3/2005), OJ L 187, 19.07.2007, p. 30, point 80.

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have relocated to other Member States, the aid can be deemed to create significant distortive effects on trade flows, even if the market share of the product is only 1 per cent.

3.955

The way that structural measures are carried out has a significant impact on their effectiveness in preserving competition. In particular, reducing capacity or selling discrete assets may simply allow dominant players in the market to increase their market share, to the detriment of effective competition in the market. For that reason, the guidelines provide that normally, a viable stand-alone business should be divested as a going concern, so that the divested business can compete effectively in the long term if operated by a suitable purchaser.2266 That approach has already been taken by the Commission in a number of cases in the banking sector.2267 If such a business is not available, the beneficiary could create a new viable entity. Divestments of assets alone are less effective and will only be accepted as competition measures in exceptional cases (where no other form of structural measures is feasible or where other structural measures would seriously jeopardise the economic viability of the undertaking).2268 Divestments of activities necessary to restore the long-term viability of the beneficiary do not generally count as competition measures.2269 In particular, divestments of lossmaking subsidiaries are not taken into account.2270 Proceeds from such divestments could, however, be taken into account as own contribution. Divestments should form an integral part of the restructuring plan and should take place without undue delay, and in any case within the duration of the restructuring plan.2271 When determining what constitutes “undue” delay, the type of assets and any obstacles to their disposal will be taken into account. 2266 Point 80. 2267 See for example Commission Decision of 18.11.2009 on Restructuring of Lloyds Banking Group (case N 428/2009), summary notice in OJ C 46, 24.02.2010, p. 2; amended by Commission Decision of 13.05.2014 on Amendment to the restructuring plan of Lloyds Banking Group (case SA.29834 (2014/N-2)), summary notice in OJ C 46, 07.11.2014, p. 1. 2268 Prior to the entry into force of the Guidelines, the Commission considered e.g. the piecemeal sale of aircraft to a number of different operators, without any apparent intention of those operators to use those aircraft on the routes divested by the beneficiary, as an additional competition measure, Commission Decision 2013/151/EU of 19.9.2012 on the State aid implemented by the Czech Republic for České aerolinie, a.s. ČSA - Czech Airlines - Restructuring plan (SA.30908 (2011/C)(ex N 176/2010)), OJ L 92, 03.04.2013, p. 16, points 134-135. Whether such sales would be accepted under the new guidelines would presumably depend on whether the divestment of a stand-alone business was possible. 2269 Point 78. 2270 See for example Commission Decision 2014/273/EU of 19.09.2012 on the measures in favour of Elan d.o.o. implemented by Slovenia (SA.26379 (C13/2010) (ex NN 17/2010)), OJ L 144, 15.05.2014, p. 1, point 168: the three subsidiaries sold were loss-making at the time of the sales as well as in the years prior to the sales. 2271 Point 78. See also Joined Cases T 115/09 and T-116/09 Electrolux and Whirlpool v Commission (‘Fagorbrandt’) ECLI:EU:T:2012:76.

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5.5.4 Reductions in capacity or market presence Where divestments are not possible, competition measures can take the form of capacity reductions. The Commission has built up substantial decision practice in that field over the years, although the new focus on measures that are most beneficial to competition in the market will make capacity reduction of less relevance in the future. Nevertheless, a notion of capacity will remain important in order to assess the scale of the competition measures carried out.

3.956

In the manufacturing sector, capacity is traditionally defined by reference to the maximum output of a production facility (maximum number of units per month/quarter/year).2272 Capacity might, however, also be determined in terms of workforce,2273 labour hours,2274 space available in plants,2275 or turnover.2276 In the transport sector, capacity is defined differently. In the case of airlines, the number of Available Seat Kilometres (ASKs)2277 is taken as a reference. Therefore, giving up ASKs has been accepted as an adequate capacity reduction measure in airline restructuring cases;2278 giving up slots at coordinated airports2279

3.957

2272 Commission Decision of 12.01.2011 on restructuring aid for Krakowskie Zaklady Garbarskie S.A., Poland (SA.27427 (N 24/2009)), summary notice in OJ C 104, 10.04.2013, p. 1, points 31-32; the beneficiary was active in chrome tanning of leather for the footwear industry; capacity was measured in m2/month. 2273 Commission Decision 2005/418/EC of 7.7.2004 on the aid measures implemented by France for Alstom (C 58/2003), OJ L 150, 10.06.2005, p. 24, point 162. 2274 Commission Decision of 25.08.2011 on Restructuring aid to Keller Elettromeccanica S.p.A. (SA.32770), summary notice in OJ C 206, 13.07.2012, p. 1, point 79. 2275 Commission Decision of 08.10.2014 on Restructuring aid for Alestis (Case SA.38324), summary notice in OJ C 418, 21.11.2014, point 72. 2276 See for example Commission Decision 2011/414/EU of 14.12.2010 on State aid implemented by Greece in favour of Varvaressos S.A. (Case C 8/2010 (ex N 21/2009 and NN 15/2010)), OJ L 184, 14.07.2011, p. 9, points 107-109: Varvaressos was active in yarn production; reducing sales in Greece by 10 per cent was seen as adequate competition measure; Commission Decision of 12.06.2012 on Restructuring aid to BZPG Stomil S.A. (Case SA.33150), summary notice in OJ C 230, 01.08.2012, p. 1, Table 3 and points 52-61: the beneficiary was active in manufacturing rubber products. 2277 ASK captures the total passenger capacity of an airline. It is calculated as the total number of scheduled seats available for passengers multiplied by the total number of kilometres those seats were flown. 2278 Commission Decision 2010/137/EC of 28.08.2009 on State aid C6/09 (ex N663/08) - Austrian Airlines - Restructuring Plan, OJ L 59, 09.03.2010, p. 1, point 323; Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1, point 255. 2279 When airlines reduce their capacity, they necessarily give up slots allocated to them for landing and take-off, associated with the respective flights given up. The slots that are made available can then be used by any other airline for any other route from/to that airport. Some airports have spare capacity, and thus slots given up by an airline under restructuring do not necessarily present an opportunity for competitors. However, at certain congested airports (known as “coordinated airports”), slots have a market value. At those airports, slots that are made available due to a discontinued flight are placed in a pool and allocated to interested airlines.

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has been considered as a separate competition measure;2280 so has reduction of the fleet.2281

3.958

In passenger sea or land transport, capacity can be measured in number of places offered; therefore, closing profitable lines and reducing the number of places offered might be a competition measure.2282 In the rail freight transport sector, capacity might be measured in workforce and rolling stock available.2283

3.959

As with divestments, the reduction or closure of loss-making activities does not constitute a sufficient competition measure. In the case of airline restructuring, for example, only the giving up of profitable routes can be counted.2284

3.960

Finally, capacity reduction has to be distinguished from production limitation. While a capacity reduction means the downsizing of capacity, production limitation means only a reduction of the capacity utilisation. In its decisional practice, the Commission has accepted production limitation when capacity reduction was not possible, or, where suitable, as an additional competition measure.2285 The 2014 Guidelines also refer to reduction of market presence as an alternative to reduction of capacity. A cap on market share has been accepted as a means of limiting market presence.2286 2280 See for example Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1, point 256. 2281 Commission Decision 2015/494/EU of 09.07.2014 on the measures SA.32715 (2012/C) (ex 2012/NN) (ex 2011/CP) implemented by Slovenia for Adria Airways d.d., OJ L 78, 24.03.2015, point 146. 2282 See for example Commission Decision of 11.07.2012 on Restructuring aid to PKS Lubliniec (Case SA.34758), summary notice in OJ C 173, 19.06.2013, p. 1; Commission Decision 2014/882/EU of 20.11.2013 on State aid implemented by France in favour of SNCM (SA.16237 (C 58/2002)(ex N 118/2002), OJ L 357, 12.12.2014, p. 1, points 356-366: the lines proposed for closure were however lossmaking and hence not accepted as compensatory measures. 2283 See for example Commission Decision of 11.11.2010 on Aide à la restructuration des activités fret SNCB (Case N 726/2009), summary notice in OJ C 327, 04.12.2010, p. 6, point 231. 2284 Commission Decision 2015/119/EU of 29.07.2014 on the State aid SA.36874 (2013/C) (ex 2013/N) which Poland is planning to implement for LOT Polish Airlines SA and on the measure SA.36752 (2014/ NN) (ex 2013/CP) implemented by Poland for LOT Polish Airlines, OJ L 25, 30.01.2015, p. 1, points 259251: routes were considered as profitable if they had a positive contribution margin in the year preceding their surrender. 2285 See for example Commission Decision of 09.04.2014 on Restructuring aid for Classen-Pol S.A. (Case SA.36806), summary notice in OJ C 156, 23.05.2014, p. 1, points 23, 59: the beneficiary’s main market was the production of wooden doors and door frames; one of the competition measures was a cap on the production volume of doors for three consecutive years; Commission Decision 2010/175/EC of 22.07.2009 on State aid awarded by Poland to Stocznia Gdansk (C 18/05 (ex N 438/04, N 194/05 and PL 34/04)), OJ L 81, 26.03.2010, p. 19, point 291: cap on annual production. 2286 Commission Decision of 30.05.2012 on Restructuring aid to PZL Sedziszów S.A. (Case SA.32117), sum-

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5.5.5 Behavioural measures In addition to structural measures, the guidelines provide for two compulsory behavioural measures: an acquisition ban and an advertising ban. Similar provisions can be found in the Banking Communication.2287 The two bans should in principle be imposed for the duration of the restructuring plan. Where appropriate, the Commission can accept other behavioural measures than an acquisition ban and an advertising ban.2288

3.961

The acquisition ban requires the beneficiary to refrain from acquiring shares during the restructuring period, except where indispensable to ensure the beneficiary’s long-term viability. Any acquisition has to be notified and is subject to prior Commission approval. While the guidelines only mention acquisition of shares in this context, the same principle would seem to apply to acquiring a business by way of an asset purchase. 2289 The advertising ban requires the beneficiary to refrain from publicising State support as a competitive advantage when marketing its products and services.2290

3.962

In addition, the Commission can, in exceptional circumstances, require the beneficiary not to engage in aggressive commercial behaviour; aid beneficiaries should not be able to expand rapidly their market share by offering terms which cannot be matched by competitors that do not receive State aid. Such restrictions will only be applied where no other remedy, structural or behavioural, can adequately address the competition distortions identified, and where such a measure will not itself restrict competition in the market concerned.2291

3.963

5.5.6 Market-opening measures Market opening measures are an alternative means to limit the effects on competition by promoting more open, sound and competitive markets, for instance

2287

2288 2289

2290 2291

3.964

mary notice in OJ C 206, 13.07.2012, p. 1, point 59: one of the competition measures accepted was a pledge not to increase the domestic market share above 11 per cent until the completion of the restructuring process. Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication), OJ C 216, 30.07.2013, p. 1, point 47. See further para 3.1327 of this book. Point 77. According to point 84(a) of the 2014 Guidelines, the acquisition ban “aims at ensuring that the aid is used to restore viability and not to fund investments or to expand the beneficiary’s presence in existing or new markets”. Point 84. Point 85.

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by favouring entry and exit.2292 A market opening measure might complement or even replace structural measures.2293 The Commission can either request commitments from the beneficiary2294 or ask the Member State to take action. Market opening measures are used quite rarely, but can be of importance when suitable structural measures are not available. Member State action was, for example. accepted in a restructuring case in the freight rail transport sector.2295 In another case, the Commission requested France to open up its market for rolling stock, in which there had been a tendency to give preference to national undertakings.2296 In a restructuring case concerning the public water supplier in Sardinia, providing its services on the basis of an in-house concession lasting until the end of 2028, Italy had to limit the duration of the concession and to open up the water services market in Sardinia by running an open, transparent and non-discriminatory tender procedure at the expiry of the concession period.2297

5.6 Implementation and amendment of restructuring plans 3.965

The guidelines set out specific procedural rules for restructuring aid. These rules concern (1) the implementation of the restructuring plan, (2) the amendment of the restructuring plan and (3) aid granted during the restructuring period.

5.6.1 Implementation of the restructuring plan 3.966

The lawfulness of any restructuring aid is dependent on implementation of the restructuring plan.2298 The Commission Decision can also lay down other obligations, either in the form of commitments from the Member State or of conditions imposed by the Commission.2299 The Commission could for example 2292 Point 86. 2293 Point 77. 2294 Commission Decision 2005/418/EC of 07.07.2004 on the aid measures implemented by France for Alstom (C 58/2003), OJ L 150, 10.06.2005, p. 24, points 85 and 206: the beneficiary had to share its special know-how with competitors or to form industrial partnerships in order to involve competitors in its activities; Commission Decision of 11.11.2010 on Aide à la restructuration des activités fret SNCB (Case N 726/2009), summary notice in OJ C 327, 04.12.2010, p. 6, point 233: the beneficiary had to open up its diesel supply stations to other rail freight companies and had to provide non-discriminating triage for those other companies. 2295 Commission Decision of 02.03.2005 on the restructuring aid in favour of SNCF freight (N 386/2004), summary notice in OJ C 172, 12.07.2005, p. 3, point 173: France was obliged to open the railway freight market ten months earlier than planned. 2296 Commission Decision 2005/418/EC of 07.07.2004 on the aid measures implemented by France for Alstom (C 58/2003), OJ L 150, 10.06.2005, p. 24, points 85 and 204. 2297 Commission Decision of 31.07.2013 on Restructuring aid to Abbanoa S.p.A. (Case SA.35205 (2013/N)), summary notice in OJ C 279, 27.09.2013, p. 1. 2298 Point 46. 2299 Approval subject to conditions requires the opening of the formal investigation procedure, Article 7 of Coun-

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impose competition measures or a ban on granting other types of aid to the beneficiary during the restructuring period2300 (point 95). Where restructuring operations cover several years and involve substantial amounts of aid, the Commission may require payment of the restructuring aid to be split into instalments. Each payment may be made subject to prior confirmation of the satisfactory implementation of each stage of the restructuring plan, in accordance with the planned timetable.2301 Alternatively, each payment could be made subject to prior approval, after the Commission has verified the satisfactory implementation of the plan.2302 If the beneficiary does not fully implement the restructuring plan or if other obligations are not met, there is a misuse of aid. The Commission may open the formal investigation procedure on such a misuse.2303 If the Member State does not comply with a conditional decision, the Commission can also bring infringement proceedings against the Member State before the Court.2304

3.967

5.6.2 Amendment of the restructuring plan As restructuring plans are often spread over several years, amendments might be needed during the restructuring period. Additional aid might also become necessary. In such an event, Member States have to inform the Commission, which may approve any changes to the restructuring plan or the aid amount if specific conditions are met.

3.968

The Commission may allow changes on the following conditions: (a) The revised restructuring plan must still show a return to viability within a reason-

3.969

2300

2301

2302 2303

2304

cil Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union of the EC Treaty, OJ L 83, 27.03.1999, p. 1. See for example Commission Decision 2011/414/EU of 14.12.2010 on State aid implemented by Greece in favour of Varvaressos S.A. (Case C 8/2010 (ex N 21/2009 and NN 15/2010)), OJ L 184, 14.07.2011, p. 9, points 113-115: State aid ban for a period of four years after the end of the restructuring. In another case (Commission Decision 2005/418/EC of 07.07.2004 on the aid measures implemented by France for Alstom (C 58/2003), OJ L 150, 10.06.2005, p. 24, point 209) a ban of further State aid during the restructuring period was imposed. See for example Commission Decision 98/466/EC of 21.01.1998 granting conditional approval to aid which France had decided to grant to Société Francaise de Production (Case C 13/1997), OJ L 205, 22.07.1998, p. 68, Article 2. Point 123. Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union of the EC Treaty, OJ L 83, 27.03.1999, p. 1, Article 16. Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union of the EC Treaty, OJ L 83, 27.03.1999, p. 1, Article 23.

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able timescale; (b) if the restructuring costs are increased, the own contribution must increase correspondingly; (c) if the amount of aid is increased, competition measures must be more extensive than those initially imposed; (d) if the proposed competition measures are more limited than those initially imposed, the amount of the aid must be correspondingly reduced; (e) if the new timetable for implementation of the competition measures is delayed with respect to the timetable initially adopted, the amount of the aid must be correspondingly reduced if the delay was not outside the beneficiary’s or the Member State’s control.2305 Finally, if the conditions imposed by the Commission or commitments given by the Member State are relaxed, the amount of aid must be correspondingly reduced. Alternatively, the Member State can offer other commitments or the Commission can impose other conditions.2306

3.970

If the restructuring aid has been already approved, the Commission needs to approve any changes in an additional decision. Such decision does not necessarily require an opening of the formal investigation procedure.2307 If the Member State changes the approved restructuring plan without informing the Commission, the Commission will consider it as a misuse of aid (see paras 5.11 to 5.12 of this book).

5.6.3 Aid granted during the restructuring period 3.971

At the beginning of the restructuring period, the beneficiary must be a company in difficulty in the meaning of the guidelines; otherwise, it would not be eligible for restructuring aid. During the restructuring period, however, it will at some point cease to be a company in difficulty, even though long-term viability may not yet be achieved. From this point onwards, the beneficiary could receive aid other than aid pursuant to the guidelines or de minimis aid.2308 Even though such aid is granted at a time when the beneficiary is not in difficulty, it may still be linked to the re-establishment of the beneficiary’s competitive position and should therefore be taken into account when determining the extent of the competition measures.2309 In that respect, the 2014 Guidelines address both aid that is already planned to be given at the time of notification of the restructur-

2305 2306 2307 2308

Point 124. Point 125. Case T-140/95 Ryanair v Commission ECLI:EU:T:1998:201, para. 89. Companies in difficulty are only eligible for aid falling under the 2014 Guidelines or for de minimis aid (or aid under the SGEI Decision). See further para 3.851 of this book. 2309 Point 127.

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ing aid2310 and aid that is actually granted during the restructuring period.2311 A Member State has to inform the Commission about all other aid, including aid under approved schemes, which is planned to be granted to the beneficiary during the restructuring period, unless it is covered by the de minimis rule or by exemption regulations.2312 If aid of which the Commission was not informed at the time of its decision on the restructuring aid is granted during the restructuring period, the Member State must notify such aid to the Commission; the obligation to notify also applies to aid granted under an approved scheme. Finally, the 2014 Guidelines recall that the Commission will ensure that the grant of aid under an approved scheme does not circumvent the requirements of the guidelines.2313

6.

Special cases

6.1 SMEs While earlier versions of the rescue and restructuring guidelines contained specific provisions to recognise the special characteristics of SMEs, the 2014 Guidelines go a step further by bringing together all of those specific provisions in Chapter 6 of the guidelines.

3.972

Point 104 of the guidelines sets out the general principle that aid to SMEs should normally be granted under schemes. In discussing SMEs in that context, the guidelines include not only SMEs properly so called,2314 but also those companies that are of SME size but that do not meet the definition set out in the SME Recommendation because they are 25 per cent or more State-owned. In extending the SME-related provisions of the guidelines to such “smaller Stateowned undertakings”, the 2014 Guidelines can be expected to ease the way for a number of very small cases of aid to State-owned firms to be dealt with under schemes in future, easing the administrative burden both for Member States and for the Commission.2315

3.973

2310 Point 128. 2311 Point 129. 2312 See for example Commission Regulation (EU) N 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ 2014 L 187, 27.03.1999, p. 1. 2313 Point 130. 2314 As defined in Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, OJ L 124, 20.05.2003, p. 36 (the “SME Recommendation”). 2315 See for example Commission Decision of 23.07.2014 on Restructuring aid for Alumast S.A. (Case SA.38024), summary notice in OJ C 280, 22.08.2014, p. 18; Commission Decision of 25.01.2012 on Restructuring aid to ZNMR (Case SA.32965), summary notice in OJ C 70, 08.03.2012, p. 3; Commission

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3.974

The maximum total amount of aid that can be granted to any one undertaking under a scheme or series of schemes remains set at EUR 10 million.2316 In line with the rules on evaluation of approved schemes (see Chapter 4 of this book), the guidelines allow the Commission to limit the duration of certain schemes, normally to four years or less, and to require evaluation of aid schemes with large budgets or containing novel characteristics, or when significant market, technology or regulatory changes are anticipated.2317

3.975

Chapter 6 of the 2014 Guidelines also contains a series of specific provisions for SMEs. Those specific provisions include a different list of situations that may justify aid as being in the common interest2318 (see paras 3.877 to 3.878 of this book), lower own contribution requirements2319 (see paras 3.937 of this book) and the absence of a requirement to submit a market survey2320 (see para 3.908 of this book). In addition, small enterprises are not required to provide measures to limit distortions of competition, although they should not normally increase their capacity during the restructuring period.2321

3.976

As point 106 of the guidelines explains, the common aim of those provisions is to enable Member States to apply the rules on rescue and restructuring aid without further reference to the Commission once a scheme has been approved by the Commission, as well as to reduce the burden on SMEs and smaller Stateowned undertakings of providing the information required. Point 106 also notes that the small size of aid amounts and beneficiaries reduces the scope for distortions of competition.

6.2 Services of general economic interest 3.977

Before the entry into force of the SGEI Framework2322 in January 2012, it had been understood that providers of SGEIs could continue to receive SGEI compensation even if they qualified as undertakings in difficulty.2323 However, paragraph 9 of the SGEI Framework made clear that aid for SGEI providers in dif-

2316 2317 2318 2319 2320 2321 2322 2323

Decision of 22.02.2012 on Restructuring Aid to PKS SwS (Case SA.34088), summary notice in OJ C 121, 26.04.2012, p. 3. Point 105. Points 118-120. Point 107. Point 111. Point 108. Point 113. Communication from the Commission: European Union framework for State aid in the form of public service compensation (2011), OJ C 8, 11.01.2012, p. 15. See Part 4 of this book for further details on the rules on SGEI compensation.

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ficulty falling within the scope of the SGEI Framework would henceforth be assessed under the rescue and restructuring guidelines. The 2004 Guidelines, which were in force at the time of that policy change, provided no way to take account of the specific legal and financial framework in which SGEI providers operate. In particular, Article 106(2) of the Treaty provides that SGEI providers are subject to the competition rules only “in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them.” In applying the rescue and restructuring rules to SGEI providers, therefore, the Commission must take account of that limitation.

3.978

The 2014 Guidelines therefore make clear that the Commission “will take account of the specific nature of SGEI and, in particular, of the need to ensure continuity of service provision in accordance with Article 106(2) of the Treaty.”2324 It does so in two main ways. First, the 2014 Guidelines set out specific adaptations to the rescue and restructuring rules for SGEI providers, as detailed further below. And second, they address the situation where aid does not comply with the guidelines and the consequences for continuity of service provision.

3.979

The specific adaptations provided by the guidelines focus on the three key questions of viability, own contribution and measures to limit distortions of competition. As regards viability, the general rule is that the restructuring plan must be sufficient to restore the long-term viability of the beneficiary on the assumption that it will receive no further State aid that is not included in the restructuring plan.2325 For SGEI providers, however, the receipt of State aid, in the form of SGEI compensation, may quite legitimately be necessary to allow them to carry out their business plan. The 2014 Guidelines therefore recognise that an SGEI provider can be considered viable in the long term in a situation where it is reliant on future SGEI compensation, but only where that compensation is provided under a valid entrustment entered into in accordance with the applicable rules and during the restructuring period.2326

3.980

In relation to own contribution, point 101 provides that SGEI compensation that complies with the applicable SGEI rules will be disregarded when determining the necessary amount of own contribution. In substance, that means that costs covered by SGEI compensation should not be treated as “restructuring

3.981

2324 Point 99. 2325 Point 47. 2326 Point 100.

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costs” for the purposes of applying the own contribution requirement. In relation to measures to limit distortions of competition, meanwhile, the guidelines recognise that divestment of businesses or assets, which is usually the preferred form of measures to limit distortions of competition,2327 may not be feasible in the case of SGEI providers, since it may be impossible to find assets to divest that are not required for the provision of the SGEI. In that case, alternative competition measures will be required, which will take the form, in particular, of “introducing fair competition in respect of the SGEI in question as soon as possible”.2328 An example of what that last requirement might mean is provided by the Commission’s decision in the case of Abbanoa2329, a case decided under the 2004 Guidelines, in which the Commission accepted a commitment by Italy to reduce the duration of a concession to provide water services in Sardinia by three years and to carry out an open, transparent and non-discriminatory call for tender to assign the concession at the end of that period.

3.982

It is clear that those provisions do not amount to carte blanche for aid to SGEI providers in difficulty. On the contrary, the basic principles of return to viability, own contribution and measures to limit distortions of competition apply in full, and it is only the detailed provisions of the guidelines that are adapted to bring them into line with the particular circumstances of SGEI providers. It follows that there may be cases where aid to an SGEI provider must be found incompatible in accordance with the guidelines. However, prohibiting aid to an SGEI provider in difficulty carries with it a high risk that the firm will become unable to provide the service. To ensure that in such situations the application of the competition rules “does not obstruct the performance … of the particular tasks assigned to” such a firm, point 103 of the 2014 Guidelines provides that the Commission can authorise the provision of such aid as is necessary to ensure continuity of the SGEI until a new provider is entrusted with the service. However, point 103 also emphasises the need to strictly construe the question of the “necessity” of such aid, noting that the Member State must demonstrate on objective grounds “that the aid is strictly limited to the amount and duration indispensable to entrust a new provider with the service”.

3.983

In substance, those provisions allow for a distinction between State aid that is needed for the restructuring of the SGEI provider in question, and aid that is used for the day-to-day operation of the SGEI. It is only the former that is sub2327 See para. 3.954 of this book. 2328 Point 102. 2329 Commission Decision of 31.07.2013 on Restructuring aid to Abbanoa S.p.A. (Case SA.35205), summary notice in OJ C 279, 27.09.2013, p. 4. See also para 3.964 of this book.

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ject to the full restructuring aid discipline; the latter can still be provided in line with the SGEI rules, at least until it has become clear that restructuring will not be possible and a new operator has been entrusted with the service provision.

6.3 Aid to cover the social costs of restructuring While the maintenance of employment is one of the main justifications for the grant of State support to failing companies, and is indeed first on the Commission’s list of objectives of common interest that can justify the grant of State aid,2330 aid that serves to maximise the surviving production and employment of a firm may not be the most efficient form of intervention. In particular, where the firm’s difficulties are caused by structural demand factors, it may be more efficient to sharply reduce the firm’s size and reorient its activities than to maintain capacity, prolonging the inevitable and shifting costs to other regions or Member States. In such a context, supporting redundant employees with measures that help them to increase their employability may bring greater benefits than retaining jobs within the firm, while limiting the impact on competition.

3.984

The 2014 Guidelines therefore contain provisions that allow for favourable treatment of aid to cover the social costs of restructuring, in terms that are essentially identical to those of the 2004 Guidelines. First, points 31 to 33 of the 2014 Guidelines clarify the Commission’s understanding of when such measures constitute aid. In particular, the guidelines note that general social security schemes do not as a rule involve aid, whether they involve direct payment of benefits to individual employees or coverage by the State of the costs incurred by a company in providing benefits going beyond its statutory or contractual obligations. On the other hand, where such schemes are limited to particular industries2331 or where they involve the coverage of costs incumbent on the company as a result of employment legislation or collective agreements,2332 aid is likely to be involved. In keeping with the policy considerations outlined above, however, the guidelines make clear that the Commission has no objection to such aid2333, and in particular that it “consistently” takes a positive view of aid measures that improve the employability of redundant workers.2334 For those reasons, point 93 of the guidelines makes clear that aid to cover the social costs of restructuring will be disregarded for the purposes of determining the extent of measures to limit distortions of competition.

3.985

2330 2331 2332 2333 2334

See para 3.876 of this book. Point 32. Point 33. Point 34. Point 35.

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Box 1: Continuity and change between the 2004 Guidelines and the 2014 Guidelines Key common features of the 2004 Guidelines and the 2014 Guidelines • Rescue and restructuring guidelines govern (almost) all aid to undertakings in difficulty. • Guidelines distinguish between rescue aid (temporary and reversible assistance) and restructuring aid (longer-term support that returns the beneficiary to long-term viability). • Rescue aid conditions based on form (loans or guarantees), duration, remuneration and amount. • Restructuring aid conditions based on a restructuring plan providing for return to long-term viability, own contribution / burden sharing, and compensatory measures / measures to limit distortions of competition. • One time, last time principle generally prohibits repeated grants of aid in a ten-year period. Key novelties of the 2014 Guidelines • More objective definition of “undertaking in difficulty”, through removal of “soft” criteria and revision of “hard” criteria. • Requirement to demonstrate an objective of common interest: failure of the beneficiary would likely involve social hardship or market failure. • Requirement to show that aid is needed to achieve the objective of common interest (restructuring aid only). • Increase in the minimum remuneration for rescue aid. • New concept of “temporary restructuring support” for SMEs: liquidity support for up to 18 months on the basis of a simplified restructuring plan. • New requirements on the form of restructuring aid: Member States are in principle free to choose the form of the aid, but the aid should be in the appropriate form to address the beneficiary’s (liquidity or solvency) difficulties and own contribution should normally have a comparable effect to the aid. • Introduction of burden-sharing requirement for restructuring aid.

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• More detailed rules on the selection and extent of measures to limit distortions of competition (formerly compensatory measures). • New rules for SGEI providers. • Introduction of transparency and evaluation requirements.

Table 1: Changes to the definition of “undertaking in difficulty” 2004 Guidelines

Changes in 2014 Guidelines

Loss of capital

Loss of more than half of capital, with one-quarter having been lost within the past 12 months.

Loss of half of share capital suffices: no longer necessary for one-quarter to have been lost within the past 12 months.

Insolvency

Company fulfils the criteria under its domestic law for being the subject of collective insolvency proceedings.

Company is subject to collective insolvency proceedings or fulfils criteria for being placed in insolvency proceedings at the request of its creditors.

Financial performance

No provision

For large firms only, where book debt to equity ratio has exceeded 7.5 and EBITDA interest cover ratio has been below 1.0 for the past two years.

List of eight examples, including increasing losses, diminishing turnover and growing inventories.

No provision

Hard criteria

Soft criteria “Usual signs of difficulty”

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Table 2: Rescue aid – continuity and change 2004 Guidelines

Changes in 2014 Guidelines

Definition

Temporary and reversible assistance, with the objective of keeping the firm afloat for the time needed to work out a restructuring or liquidation plan.

Urgent and temporary assistance, with the objective of keeping the firm afloat for the short time needed to work out a restructuring or liquidation plan.

Use to finance structural measures

Only if they need to be implemented immediately to stem losses.

Only if required during the rescue period for the survival of the beneficiary.

Eligibility conditions

Firm must be in difficulty.

Firm must be in difficulty and aid must pursue an objective of common interest.

Form

Loan guarantees or loans

Loan guarantees or loans

Duration

Up to 6 months

Up to 6 months

Remuneration

At least 1% above the interbank rate.

At least 4% above the interbank rate, with a further 0.5% increase if rescue aid is extended due to submission of a restructuring plan.

Amount

Any rescue aid exceeding the amount calculated in line with the formula in the Annex must be explained.

Any rescue aid exceeding the amount calculated in line with the formula in Annex 1 must be duly justified by way of a liquidity plan.

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Table 3: Restructuring aid – innovation within a familiar structure 2004 Guidelines

Changes in 2014 Guidelines

Objective of common interest

Aid could be justified by social or regional policy considerations, the beneficial role of SMEs or, exceptionally, the need to avoid a tight oligopolistic situation: but no detailed scrutiny of these conditions.

Must be shown that failure of the beneficiary would be likely to involve (serious) social hardship or (severe) market failure.

Need for State intervention

No provision.

Comparison with a credible alternative scenario not involving State aid must be presented, showing that the objective of common interest would not be attained (to the same degree) in the absence of aid.

Appropriateness

No provision.

Member States are in principle free to choose the form of the aid, but the aid should be appropriate to tackle the beneficiary’s (liquidity or solvency) difficulties.

Restructuring plan must restore long-term viability within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions.

Restructuring plan must restore long-term viability within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions.

General requirements

Return to viability Restructuring plan

Own contribution and burden sharing Amount of own contribution

Aid-free contribution of at least 50% of restructuring costs (40% for medium-sized firms and 25% for small firms).

Aid-free contribution of at least 50% of restructuring costs (40% for medium-sized firms and 25% for small firms).

Form of own contribution

No specific requirements, but own contribution generally expected to raise cash.

Own contribution should generally be comparable to the aid granted in terms of its effects on the liquidity or solvency position of the beneficiary.

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No provision.

Incumbent shareholders (and, where necessary, subordinated creditors) must absorb losses in full and dividends/ coupons should be withheld where legally possible. State must obtain reasonable share of future gains.

Compensatory measures / measures to limit distortions of competition Purpose of measures

Minimise effects on competitors.

Limit distortions of competition.

Form of measures

Generally structural measures (divestment of assets, reductions in capacity or market presence, reduction of entry barriers). Market-opening measures could also be required in certain cases.

Generally structural measures (in the form of divestment of viable stand-alone business wherever possible). Acquisition ban and publicity ban required in all cases; other behavioural measures may be included where appropriate. Market-opening measures can be accepted in place of other measures.

Extent of measures

In proportion to the size and relative importance of the beneficiary on its market or markets.

In proportion to: The size and nature of the aid and the conditions and circumstances in which it was given The size and relative importance of the beneficiary in the market and the characteristics of that market The extent to which moral hazard concerns remain.

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PART 3 – Compatibility rules Chapter 22 – Credit Export Insurance Camelia Grozea-Knuth and Justyna Majcher-Williams

Chapter 22 Export credit insurance2335

1.

Introduction

Export subsidies can adversely affect competition in the marketplace among potential rival suppliers of goods and services. When such measures fall within the scope of application of Article 107(1) of the Treaty, the question arises whether and under which conditions such aid could be allowed.

3.986

The Commission provides detailed guidance on how it intends to apply Articles 107 and 108 of the Treaty to short-term export credit insurance in a 2012 Communication to the Member States on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to short-term export credit insurance (hereafter the “the Communication”)2336. The rules set out in the Communication aim to ensure that State aid does not distort competition among private and public or publicly supported export credit insurers and to create a level-playing field among exporters.

3.987

2.

General reflections on export aid

When the aid is qualified as “export aid”, in principle it cannot be allowed. Export aid is defined as any aid directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current expenditure linked to the export activity.2337 A distinction must be made between

3.988

2335 This chapter draws from the corresponding chapter in the first edition of this book. The authors would like to thank Jasmin Battista and Koen Van de Casteele for being able to build on their work. 2336 OJ C 392, 19.12.2012, p. 1. 2337 See e.g. Article 1(1)(d) of Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid,

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intra-Union aid and aid for exports outside the Union because Article 107(1) of the Treaty only relates to the affectation of trade between the Member States in the Union. (1)

Intra-Union export aid. Intra-Union export aid is prohibited; such aid is incompatible with the internal market and in principle, cannot benefit from any of the derogations laid down in Article 107 of the Treaty. In that context, it is worth remembering that the Court of Justice already decided at a very early stage that aid to all products exported is selective notwithstanding its wide scope.2338

(2)

Aid for exports outside the Union. Following Tubemeuse,2339 it has been established that aid may distort competition within the Union, even if the undertaking receiving the aid exports almost all of its production outside the Union. As a result, in principle, the same rules will apply as for export aid within the Union. Nevertheless, some more recent cases seem to question that principle.2340

3.989

However, not all export-related support is considered as prohibited export aid. For instance, that prohibition does not extend to aid towards the cost of participating in trade fairs, or of studies or consultancy services needed for the launch of a new or existing product on a new market.2341

3.990

A special form of export-related aid which can be allowed in certain circumstances is aid for export credit insurance. There are two main elements in an export credit: the “financing” element and the “risk” element. Both are closely related.

2338 2339 2340

2341

OJ L 352, 24.12.2013, p. 1; Case T-190/00 Regione Siciliana v Commission EU:T:2003:316, para 17: ‘… it is intended for export-oriented undertakings and is calculated on the volume (50 per cent) of the undertaking’s turnover, which is mostly accounted for by export earnings’. Joined Cases 6 and 11/69 Commission v France EU:C:1969:68. Case 142/87 Belgium v Commission (“Tubemeuse”) EU:C:1990:125. See Joined Cases T-304/04 and T-316/04 Italy and WAM v Commission EU:T:2006:239, paras 74, 123124, in which the General Court considered that a detailed analysis of the effect of the aid, taking into account that it finances expenses on the Far East market and that the interdependence between that market and the Community market must be examined. See also Case T-34/02 Le Levant 001 and others v Commission EU:T:2006:59. See Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013 p. 1.

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2.1 What is export-credit insurance? Export credit insurance is an insurance that will indemnify exporters for any possible payment risk default from buyers caused by commercial and political risks. It is an insurance contract which –

can cover the risk of buyer non-payment for commercial risks (e.g., protracted default, insolvency or bankruptcy) and certain political risks (e.g. war or the inconvertibility of currency);

–

can be used as a way to extend credit to buyers, giving a competitive advantage to suppliers who can offer such arrangements.

Usually a distinction2342 is made between a “buyer credit transaction” and “supplier credit transactions”. In a buyer credit transaction a bank grants a loan to a foreign borrower in order to finance the purchase of goods or services from an exporter and, to enable the bank to grant that loan, an export credit agency (hereafter “ECA”) gives the bank a sort of guarantee in respect of the borrower’s repayment obligations. In a supplier credit transaction a buyer requires credit terms for an export contract, and that credit is extended by the exporter. In that case, the exporter is the financing provider and the ECA will agree with the exporter to cover the borrower’s repayment obligations. Export credit insurance could also be used by the exporter to receive cash from the bank upon shipment of the goods or for work done under the contract. An ECA will normally guarantee payment to the bank, if the buyer defaults on the credit. Export credit agencies, which in most cases have been established as part of general government policies to facilitate and promote national exports, may be extensively involved in the financing and insurance of national exports to a wide range of markets, for both short and longer term business. They compete with each other and with their private sector counterparts.

3.991

3.992

2.2 The OECD Export Credit Agreement of 1976 Back in 1976, the Organisation for Economic Cooperation and Development (hereafter “OECD”) countries began co-ordinating their policies on export credits. Two years later, the Arrangement on guidelines for officially supported export credits (hereafter “the OECD Arrangement”)2343 was accepted directly

3.993

2342 See Annex to Council Directive 98/29/EC of 7 May 1998 on harmonisation of the main provisions concerning export credit insurance for transactions with medium and long-term cover, OJ L 148, 19.05.1998, p. 22. 2343 The Arrangement, developed under the auspices of the OECD, came into being in April 1978. The Arrange-

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by the participants and developed in the framework of the OECD. Today, that Arrangement still ensures the operation of an orderly credit market and seeks to prevent countries from competing to offer the most favourable financing terms for exports. The main purpose of the OECD Arrangement is to provide the institutional framework for an orderly market for officially supported export credits. It therefore seeks to prevent an export credit race in which exporters compete on the basis of who is granted the most favourable financing terms or “subsidy” from the respective government; instead it seeks to encourage competition on the basis of which the exporter provides the best price in relation to quality.

3.994

Official support can take various forms,2344 i.e. direct credits or financing, refinancing, interest rate support, aid financing in the form of credits and grants, export credit insurance and guarantees. The OECD Arrangement applies to all official support for exports of goods and services, or to financial leases which have repayment terms of two years or more. It applies regardless of the form in which the official support for export credits is given. The OECD Arrangement also applies to official support in the form of tied aid. Special guidelines apply to certain sectors, e.g. ships, nuclear power plants, aircraft and project finance transactions (initially provided for a trial period, now optional) but not to military equipment and agricultural products.

3.995

The OECD Arrangement places limitations on the terms and conditions of export credits that benefit from official support. It addresses the circumstances in which official support in the form of trade-related tied and partially untied aid may be given or mixed with officially supported export credits. The OECD Arrangement sets minimum concessionality levels for transactions which incorporate tied aid credits and grants (50 per cent concessionality level for the poorest “Least Developed Countries” (LDCs) as classified by the UN, and 35 per cent concessionality level for all other developing countries).

ment is a “Gentlemen’s Agreement” among its Participants: it is not an OECD Act although it receives the administrative support of the OECD Secretariat. It was incorporated, via a Council Decision, into Union law. The Arrangement is an area of Union competence under Article 207 of the Treaty. 2344 They may be financed by the exporting firm from its own cash resources, or through a subsidiary specialised in financing the firm’s domestic and export sales. Alternatively, the export transaction may be financed through a commercial bank in the exporting country in the form of a financial trade-related credit provided to the exporting firm (see the earlier description of “supplier credit”). Where the financing of an export credit is instead extended through a commercial bank in the exporting country, either directly to the foreign buyer or to the foreign buyer’s bank in the importing country, the transaction is referred to as a “buyer credit”.

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2.3 Union legislation In the 1950s, when the forerunners of the Union were established, there was no European market for export credit insurance and public credit insurance occupied virtually the entire market. Big differences also existed between the different Member States: the only thing Member States had in common was the belief that private insurances could not cover public risks and that export activities were to be considered of general economic interest. Moreover, public assistance to export credit insurers was considered to be more a sort of development aid rather than State aid. National systems providing State guarantees were thus put in place for national exporters only. As the markets were closed along national lines, there was no real competition.2345

3.996

Nevertheless, the lack of rules set the stage for competition amongst governments to provide the most attractive financial terms in support of exporters competing for overseas sales. The end result was financial subsidies and potential trade distortions.

3.997

2.4 Trade policy The Union acts in the area of international trade through the common commercial policy regulated by the Treaty. Article 207 of the Treaty provides that the commercial policy must be based on uniform principles, including those concerning export policy.

3.998

Harmonisation of the aid for export to third countries was very limited.2346 Gradually that situation changed, albeit at a slow pace, leading to a more integrated and Europe-wide market for export credit insurance.

3.999

In 1960 the Council set up a Policy Coordination Group for Credit Insurance, Credit Guarantees and Financial Credits.2347 In 1969, the Council adopted a Regulation establishing common rules for exports2348 - the regulation itself indirectly offered a justification for the late adoption of any legislation in this area: “exports are almost completely liberalised in all the Member States”, so that

3.1000

2345 Touscoz, “Le marché unique et l’assurance crédit à l’export” in Revue des Affaires européennes [1993], No 1, p. 5. 2346 See e.g. Resolution on export credit subsidies, OJ C 104, 16.04.1984, p. 132. 2347 EEC Council: Decision setting up a Policy Coordination Group or Credit Insurance, Credit Guarantees and Financial Credits, OJ 66, 27.10.1960, p. 1339. 2348 Regulation (EEC) No 2603/69 of the Council of 20 December 1969 establishing common rules for exports, OJ L 324, 27.12.1969, p. 25.

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there was little to coordinate.2349 In 1970, two directives were adopted laying down the Commission policy as regards medium- and long-term credit insurance.2350 In 1973, the Council adopted a decision establishing procedures for consultation and information in the domain of credit-insurance, guarantees and financing credits.2351

3.1001

In 1976, France, Italy, UK and Germany negotiated a consensus on export credit with other industrialised countries (e.g. US and Japan) in a meeting in Puerto Rico. That violation of Article 207 of the Treaty led to a reaction of the Commission which threatened to take action against those Member States. To resolve that conflict on 14 March 1977 the Council adopted a decision to “communitarise” the consensus. Subsequently, in 1978, the OECD adopted an export credit arrangement, building on that export credit “consensus” agreed among a number of OECD countries in 1976. In its turn, that arrangement was then taken over in Union legislation.

3.1002

In the same vein, a proposal was made for the creation of a European export bank.2352 The proposal was however rejected and only some of the competences were given to the European Investment Bank (“EIB”). In 1987, the Commission proposed to the Council a Regulation concerning a European export credit insurance system to cover export contracts with third countries.2353 It was not adopted, largely because it lacked the support of France and Germany.

3.1003

The two directives from 1970 laying down the Union policy as regards mediumand long-term credit insurance were replaced in 1998 by a directive2354 which still regulates the area of medium- and long-term credit insurance.

2349 Pourvoyeur and Roosens, “Réflexions autour du caractère commun de la politique commerciale à l’exportation de la CEE”, in Revue du Marché Commun, [1986] No 293, p. 26. 2350 Council Directive 70/509/EEC of 27 October 1970 on the adoption of a common credit insurance policy for medium- and long-term transactions with public buyers, OJ L 254, 23.11.1970, p. 1; Council Directive 70/510/EEC of 27 October 1970 on the adoption of a common credit insurance policy for medium- and long-term transactions with private buyers, OJ L 254, 23.11.1970, p. 26. 2351 Council Decision 73/391/EECof 3 December 1973 on consultation and information procedures in matters of credit insurance, credit guarantees and financial credits, OJ L 346, 17.12.1973, p. 1. 2352 Proposal for a Council Regulation (EEC) setting up a European Export Bank, COM (76) 28 final, 17 February 1976. 2353 Proposal for a Council Regulation (EEC) concerning the establishment of a European Export Credit Insurance Facility to provide export credit insurance for export contracts to third countries sourced in more than one Member State, COM (87) 251 final/2, 24 July 1987. 2354 Council Directive 98/29/EC of 7 May 1998 on harmonisation of the main provisions concerning export credit insurance for transactions with medium and long-term cover, OJ L 148, 19.5.1998, p. 22.

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3.

The Communication

Export subsidies directly affect competition in the market place between rival potential suppliers of goods and services. Recognising their pernicious effects, the Commission, as the guardian of competition under the Treaty, has always condemned export aid in intra-Union trade.2355 The Commission had however not systematically intervened in this field under the State aid rules. The reasons are firstly, as observed before, that the area is partly governed by the provisions of the Treaty relating to external trade (Article 207 of the Treaty). Secondly, other than concerns about competition distortion within the Union, there is also the issue of the competitiveness of Union exporter’s vis-à-vis those of the Union’s trading partners, which may also receive various supports for exports. Thirdly, some harmonised rules and control had been achieved under the Treaty’s trade provisions and in the OECD and WTO.

3.1004

For the first time the Commission set the main rules on short-term credit insurance in 1997, adopting the Communication of the Commission to the Member States pursuant to Article 93(1) of the EC Treaty applying Articles 92 and 93 of the EC Treaty to short-term export-credit insurance (hereafter “1997 Communication”)2356.

3.1005

As a result of its experience gained in applying the 1997 Communication, in particular during the financial crisis between 2009 and 20112357, the Commission reviewed its policy in relation to short-term export credit insurance. Consequently in 2012 the Commission adopted a new Communication to the Member States on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to short-term export credit insurance (hereafter the “the Communication”)2358.

3.1006

2355 In its seventh report on competition policy (1977), point 242, the Commission Stated that export aids in intra-Community trade ‘cannot qualify for derogation whatever their intensity, form, grounds or purpose’. 2356 OJ C 281, 17.09.1997, p. 4. The 1997 Communication was to apply for a period of five years from 1 January 1998. However, it was subsequently amended and its period of application was prolonged by the Communication of 2 August 2001(OJ C 217, 2.08.2001, p. 2), the Communication of 11 December 2004 (OJ C 307, 11.12.2004, p. 12), the Communication of 22 December 2005 (OJ C 325, 22.12.2005, p. 22) and the Communication of 7 December 2010 (OJ C 329/6, 7.12.2010, p. 6). 2357 The Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis (OJ C 16, 22.1.2009, p. 1, hereinafter ‘Temporary Framework’) simplified the burden of proof required from the Member States in order to show the unavailability of cover by the private insurers. This administrative simplification for the burden of proof addressed the exceptional circumstances in the financial markets, and was based on Article 107(3)b of the Treaty (aid to remedy a serious disturbance in the economy of a Member State). Other conditions of the 1997 Communication remained unaltered and together with the simplified burden of proof under Temporary Framework provided the legal basis for the analysis and approval of thirteen public short-term export credit schemes between 2008 - 2012. 2358 OJ C392, 19.12.2012, p. 1.

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3.1007

The Communication is part of a wider exercise of modernisation of State aid rules launched by the Commission on 8 May 2012.2359 The Communication provides detailed guidance on how the Commission intends to apply Articles 107 and 108 of the Treaty to short-term export credit insurance. The rules set out in the Communication aim to ensure that State aid does not distort competition among private and public or publicly supported export credit insurers and to create a level-playing field among exporters.

3.1008

The Communication continues to build on the distinction between ‘marketable’ and ‘non-marketable’ risks. ‘Marketable risks’ are defined as commercial and political risks with a risk period of less than two years established on buyers in the Member States and some high-income countries (Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland, USA). Member States must in principle not intervene in marketable risks because there are private credit insurers who cover those risks. In practice it means that credit insurers operating for the account of or guaranteed by the State or the State directly are prohibited from underwriting short-term export credit insurance for those risks.

3.1009

All other risks are considered to be non-marketable and are outside the scope of application of the Communication. It remains unclear whether State intervention to provide credit insurance for non-marketable risks may constitute State aid and would require notification to and approval by the Commission. However, the Communication implies that for non-marketable risks there is by definition no competition from private insurers, so it can be deemed that there is no distortion of competition.

3.1010

The Communication identifies the advantages to insurers and exporters which will risk distorting competition in the internal market and introduces a general prohibition of State intervention in marketable risks. Although it allows State intervention in very specific, exceptional situations and subject to strict conditions in order to minimise distortions of competition in the internal market, the Communication is not explicit as to whether such intervention leads to no aid or compatible aid. The Communication applies until 31 December 2018.

2359 See (COM(2012) 209 final).

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3.1 Aid for insurers and exporters The Communication identifies advantages in favour of State export credit insurers. If State insurers have certain advantages compared to private credit insurers, State aid may be involved. The advantages can take different forms and might include, for example: –

State guarantees enabling insurers to borrow at rates lower than the normal market rates or making it possible for them to borrow money at all;

–

any difference in the obligations on State insurers and private insurers as regards the maintenance of adequate provisions;2360

–

relief or exemption from taxes normally payable (such as company taxes and taxes levied on insurance policies);

–

awards of aid or provisions of capital by the State or other forms of financing that are not in accordance with the market economy operator test;

–

provision by the State of services in kind, such as access to and use of State infrastructure, facilities or privileged information, on terms that do not reflect their market value;

–

direct reinsurance by the State or a direct State reinsurance guarantee on terms more favourable than those available on the private reinsurance market, leading to under-pricing of the reinsurance cover or to the artificial creation of capacity that would not be forthcoming from the private market.

In point 12 the Commission considers that those advantages for State insurers affect intra-Union trade in credit insurance services and lead to variations in the insurance cover available for marketable risks in different Member States. They distort competition among insurers in different Member States and have secondary effects on intra-Union trade regardless of whether intra-Union exports or exports outside the Union are concerned.2361 To ensure that State insurers do

3.1011

3.1012

2360 State insurers are exempted from the requirement to constitute adequate reserves and the other requirements stemming from the exclusion of export-credit insurance operations for the account of or guaranteed by the State from First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance (OJ L 228, 16.08.1973, p. 3). 2361 Case C-142/87 Belgium v Commission (“Tubemeuse”) EU:C:1990:125.

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not benefit from any State aid, the Communication requires that they must not insure marketable risks.

3.1013

In point 14 of the Communication the Commission considered that advantages for State insurers are also, at least partly, passed on to exporters. Such advantages to exporters may distort competition and trade and constitute State aid. However, if the conditions for the provision of export-credit insurance for marketable risks are fulfilled, the Commission considers that no undue advantage has been passed on to exporters.

3.2 Measures restoring fair competition 3.1014

State insurers or their subsidiaries are allowed to insure marketable risks, only if in so doing, they do not benefit from State aid. To ensure that no State aid is involved State insurers must have a certain amount of own funds (a solvency margin, including a guarantee fund) and technical provisions (an equalisation reserve) and must have obtained the required authorisation in accordance with Directive 73/239/EEC. They must also at least keep a separate administration account and separate accounts for their insurance of marketable risks and nonmarketable risks for the account of or guaranteed by the State, to show that they do not receive State aid for their insurance of marketable risks. The accounts for businesses insured on the insurer’s own account should comply with Directive 91/674.2362

3.1015

Member States providing reinsurance cover to an export-credit insurer by way of participation or involvement in private sector reinsurance treaties covering marketable and non-marketable risks, must be able to demonstrate that the arrangements are done on market terms and do not involve State aid.

3.1016

In addition, State insurers may also provide export-credit insurance for temporarily non-marketable risks, subject to the conditions set out in Section 4.3 of the Communication.

3.3 Temporarily non-marketable risks 3.1017

Exceptionally, where private insurers are temporarily unable to provide sufficient export credit insurance capacity for all economically justifiable risks in the Union and in high income countries, the Member State may intervene. The 2362 Council Directive 91/674/EEC of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings, OJ L 374, 31.12.1991, p. 7.

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Commission identified four possible market gaps that can justify State intervention: 1) systemic capacity crisis and exclusion or significant reduction by private insurers of a particular marketable risk country or countries from cover; 2) single transactions with risk period between six and 24 months; 3) credit insurance for SMEs with limited export turnover; and 4) acute general supply shortage for exporters in a particular Member State. In the first case the unavailability of cover must be determined by the Commission and consulted with stakeholders on the basis of objective criteria and may result in temporary modification of the list of marketable risks countries.

3.1018

When determining whether the lack of sufficient private capacity justifies the temporary removal of a country from the list of marketable risk countries the Commission will take the following factors into account: contraction of private credit insurance capacity, deterioration of sovereign sector ratings, and deterioration of corporate sector performance.

3.1019

For the remaining three cases, the unavailability of cover has to be demonstrated by a notifying Member State and consulted with private insurers in the country concerned. The Member State must demonstrate it has contacted the main credit insurers and brokers in that Member State and given them an opportunity to provide evidence that cover for the risks concerned is available there. If the credit insurers concerned do not give the Member State or the Commission information about the conditions of cover and insured volumes for the type of risks the Member State wants to cover within 30 days of receiving a request from the Member State to do so, or if the information provided does not demonstrate that cover for the risks concerned is available in that Member State, the Commission can consider the risks temporarily non-marketable.

3.1020

3.4 Conditions for providing cover for temporarily non-marketable risks Once a market gap has been determined, State intervention can take place under conditions specified in the Communication. Those conditions include: –

3.1021

Quality of cover: The quality of cover offered by State insurers must be consistent with market standards. In particular, only economically justified risks, that is to say, risks that are acceptable on the basis of sound underwriting principles, can be covered. The maximum percentage of cover must be 95 per cent for commercial risks and political risks and the claims waiting period must be a minimum of 90 days. 827

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–

Underwriting principles: Sound underwriting principles must always be applied to the assessment of risks. Accordingly, the risk of financially unsound transactions must not be eligible for cover under publicly supported schemes. With regard to such principles, risk acceptance criteria must be explicit. If a business relationship already exists, exporters must have a positive trading and/or payment experience. Buyers must have a clean claims record, the probability of the buyers’ default must be acceptable and their internal and/or external financial ratings must also be acceptable.

–

Minimum pricing: Risk-carrying in the export-credit insurance contract must be remunerated by an adequate premium. To minimise the crowding out of private credit insurers, average premiums under publicly supported schemes must be higher than the average premiums charged by private credit insurers for similar risks. That requirement ensures the phasing out of State intervention, because the higher premium will ensure that exporters return to private credit insurers as soon as market conditions allow them to do so and the risk becomes marketable again. Pricing is considered adequate if the minimum premium for the relevant buyers’ risk category corresponds to the safe-harbour premium table in point 23 of the Communication. Member States have also the possibility to provide evidence that those minimum rates are inadequate for the risk in question.

–

4.

Transparency and reporting: Member States are also required to report to the Commission and make public all activities they undertake in marketable and temporarily non-marketable risks and specify all applicable conditions.

Commission’s decisions on export credit insurance

4.1 Decisions under the Communication 3.1022

Although in the period after the adoption of the Communication the Commission has had pre-notification contacts as well as notifications from a series of Member States, to date there have only been a few formal decisions.

3.1023

The first decision taken since the adoption of the new Communication concerned the short-term export credit scheme of Denmark to account for the dif828

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ficulty for exporters to find cover for short-term, single risks from the private market2363. A second case concerned Austria2364. The purpose of the scheme notified by Austria was to provide short-term export-credit re-insurance coverage for limited risks arising from natural and man-made catastrophes to the private insurance companies. The private insurers in turn provided exporters cover for risks arising from natural and man-made catastrophes. Such re-insurance was to be provided by the State through Oesterreichische Kontrollbank AG (hereafter “OeKB”), which is Austria’s main provider of financial and information services to the export industry and the capital market. A third decision was taken as regard Romania in June 2014.2365 The Romanian scheme targeted the insurance of sales to a single foreign buyer or a single contract with a single buyer (so-called “single-risk cover”). Due to the fact that private export-credit insurers were not providing single-risk cover, the Romanian authorities argued that exporters which carry out financially sound transactions may experience lack of cover against the risks associated with such transactions. Export-credit insurance in accordance with the scheme is provided by the State insurer Eximbank.

3.1024

In all those decisions, the Commission started the analysis by confirming the presence of State aid. Each of the State insurers providing the export-credit coverage enjoyed a State guarantee for their respective borrowings and losses. Therefore, the schemes involved State resources. The involvement of the State could give a selective advantage to the export-credit insurers or the exporters or both, and could thereby distort or threaten to distort competition and affect trade between Member States.

3.1025

As regards the aid to the insurer, point 12 of the Communication states that if State insurers have certain advantages compared to the private credit insurers, State aid may be involved. In that context, the State insurers were clearly benefiting from an advantage as they held a guarantee of the State for their borrowing and losses. As regards the aid to the exporters, point 14 of the Communication provides that advantages for State insurers are also sometimes passed on to exporters, at least in part. Such advantages may distort competition and trade and constitute State aid within the meaning of Article 107(1) of the Treaty. How-

3.1026

2363 Commission Decision of 16.04.2013 in case SA. 35955, 2013/N Danish short term export credit scheme 2013, OJ C 138, 17.05. 2013, p. 1. 2364 Commission Decision of 20.02.2014 in case SA. 37076, 2013/N Short term export credit insurance scheme – Austria, OJ C 210, 04.12.2014, p. 1. 2365 Commission Decision of 05.08.2014 in case SA. 38347, 2014/N Romanian Short-Term Export-Credit Scheme, OJ C 136, 24.04.2015, p. 1.

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ever, if the conditions of the Communication are fulfilled, the Commission considers that no undue advantage has been passed on to exporters.

3.1027

Once it had established the presence of State aid, the Commission examined the notified measures pursuant to the Communication. According to point 15 of the Communication, if State insurers have any advantages compared to private credit insurers they shall not insure marketable risks. If State insurers2366 or their subsidiaries wish to insure marketable risks, it must be ensured that in so doing, they do not directly or indirectly benefit from State aid.

4.1.1 Non-existence of comparable private coverage 3.1028

In accordance with point 18(d) of the Communication, risks incurred on debtors established in countries listed in the Annex to the Communication are considered temporarily non-marketable only if it can be demonstrated that private insurance cover for the risks generally viewed as marketable is unavailable in the notifying Member State.

3.1029

To substantiate the of lack of cover, Denmark submitted evidence provided by the four private credit insurers operating in the Member State and confirming that the product offered under the scheme is not compatible with their current coverage policy.

3.1030

In that context, Austria proved unavailability of private insurance cover for risks related to natural and man-made catastrophes by submitting relevant letters provided by a large well-known international private export credits insurer and two national credit insurers.2367 Austria thus demonstrated that its private insurance market offered a limited range of products within the meaning of point 39 of the Communication.

3.1031

The Romanian authorities also gave the main credit insurers and brokers an opportunity to provide evidence that cover for the risks concerned is available in Romania. However, the credit insurers concerned did not provide information demonstrating that they cover the types of risks that Romania wished to cover.2368 2366 Comprising re-insurers (see footnote 5 of the Communication). 2367 See recital 6 of the Commission Decision of 20.0202014 in case SA.37076, 2013/N Short term export credit insurance scheme – Austria. 2368 According to point 38 of the Communication, “If the credit insurers concerned do not give the Member State or the Commission information about the conditions of cover and insured volumes for the type of risks the Member State wants to cover within 30 days of receiving a request from the Member State to do so,

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To minimise distortions of competition in the internal market, risks which are considered ‘temporarily non-marketable’ in accordance with point 18 can be covered by the State insurers, provided they fulfil the following conditions set out in section 4.3 of the Communication: (i) quality of cover and underwriting principles, (ii) adequate pricing, and (iii) transparency and reporting.

3.1032

What is important to note in the context of the Austrian scheme was that the measure covers only well-defined ‘tail-risks’2369 while, for the majority of other the risks covered, the contractual conditions are set by the private insurers according to market conditions. The escape clause analysed above2370 does not provide specific rules adapted to that situation. Therefore, the Commission took a sui generis decision in that case, given the specificities of the risks concerned.

3.1033

4.1.2 Quality of State cover and underwriting principles The maximum percentage of loss cover offered by the Romanian State insurer was 85 per cent for commercial risks and political risks and the claims waiting period will be 90 days, which was in line with the conditions laid down in point 20 of the Communication.

3.1034

Similarly, the Danish State insurer offered a maximum percentage of cover of 95 per cent for commercial risks and political risks.

3.1035

The Austrian scheme proposed to reinsure 100 per cent of the risks related to natural and man-made catastrophes. However, companies will still have a maximum cover of 95 per cent for their contract, since the scheme only reinsures a very small portion (catastrophe-related) risks of the overall risks to be covered by private insurers Moreover, based on a force majeure type of reasoning, there was no scope for moral hazard as the insurer or the policy-holder have no influence on its occurrence.

3.1036

In order to ensure that no financially unsound transactions were covered under the schemes, the State insurers of Denmark and Romania as well as the primary insurer (in the Austrian scheme) committed to conduct their own risk assessment of the risk relating to the foreign buyer. On the basis of that assessment,

3.1037

or if the information provided does not demonstrate that cover for the risks concerned is available in that Member State, the Commission will consider the risks temporarily non-marketable.” 2369 The term tail-risk is used to indicate events that are particularly unlikely to occur, or, in other words, are at the tail end of the statistical distribution of possible outcomes but have a very high impact if they occur (e. g. the tsunami and subsequent nuclear accident in Fukushima, Japan in 2011. 2370 Point 18(d) of the Communication.

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only risk relating to the sound buyers would be covered. Therefore, credit information was a prerequisite for the underwriting of short-term risks under the schemes. In the Austrian scheme, the primary insurer provider has all the incentive to conduct its own risk assessment in a thorough way, as it assumes all the liability for the risks linked to the financial terms of the transaction.

4.1.3 Adequate pricing 3.1038

Under the notified measures, the Danish and Romanian State insurers committed to apply pricing principles in line with Section 4.3.3 of the Communication. The premium to be paid by the exporters covered by those schemes was a premium covering both the political and commercial risks. In addition to the annual risk premium, a separate administration fee was charged for all policies. The Commission found that the premiums levels set according to the overall creditworthiness of the buyer and the duration of the risk period are adequate and in line with the Communication. Even more, as regards all risk categories, the level of the premium to be paid according to the Romanian scheme was at least twice as high as the “safe-harbour premium” in the Communication.

3.1039

The Austrian scheme provided for a uniform re-insurance premium for all covered risk categories of 0.1 per cent of the insured amount. A sum equal to 20 per cent of the insurance premium would be paid to the insurer to cover the insurer’s administration costs.2371 As the scheme covered only specific risks, namely risks related to natural and man-made catastrophes, the ‘top up’ compared to the pricing of general export credit insurance would be very small in quantitative terms, reflecting the low likelihood of occurrence of catastrophic events compared to other commercial and political risks. In consequence, the appropriateness of the re-insurance premium charged for the coverage of natural and man-made catastrophe risks was measured slightly different from a general insurance policy. In that context, the Commission considered that the risks intended to be covered by the scheme are ‘tail risks’ and extremely arduous to price. The premium of 0.1 per cent charged for the tail risks is an ‘add-on’ to the privately established pricing for the commercial and political risk. Under such circumstances, a reinsurance premium of 0.1 per cent was considered appropriate as an add-on. The same applies for the 20 per cent administration fee to be passed on to the insurer.

2371 See point (14) of the Communication.

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4.1.4 Transparency and reporting Regarding the transparency and reporting condition, the decisions on the Danish, Austrian and Romanian schemes require that the use of the schemes must be published on each of the State insurers’ websites. Such publication will allow private credit insurers and any other market player wishing to enter the market to access information on market activity in those particular segments.

3.1040

4.1.5 Exemptions for Greece For the countries listed in the Annex to the Communication, the Member State may demonstrate the non-marketability of the risks specified in point 18(b) and (c) by providing sufficient evidence of the unavailability of cover for the risk in the private insurance market.

3.1041

As a consequence of the difficult situation in Greece, a lack of insurance or reinsurance capacity to cover exports to Greece was observed in 2012 as a result of which the Commission amended the Communication, by temporarily removing Greece from the list of marketable risks countries.2372 That modification was extended in 20132373 and 2014 and is valid until 31 December 2015.2374

3.1042

4.1.6 Decisions regarding ECAs and their affiliates Recently, the Commission has adopted two decisions regarding the funding of export credit agencies. Such interventions by State entities in companies carrying out economic activities can be considered to be free of aid if they are made on terms that a private agent operating under market conditions would have accepted.

3.1043

The two cases concern support measures granted to Ducroire of Belgium and to SACE BT of Italy by their respective state-owned export credit agencies, Office National du Ducroire and SACE2375.

3.1044

In the case of SACE BT, the Commission found an initial capital allocation granted to SACE BT in 2004 to be in line with EU state aid rules, because the capital was injected into a newly created subsidiary with the objective of offering

3.1045

2372 2373 2374 2375

OJ C 398, 22.12.2012, p. 6. OJ C 372, 19.12.2013, p. 1. OJ C 28, 28.01.2015, p. 1. See Commission Decisions of 20.03.2013 in case SA. 23420, 2011/C Ducroire, OJ L 144, 15.05. 2014, p. 29 and in case SA.23425, 2011/C SACE, ,OJ L 239, 12.08.2014, p. 24.

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short-term export-credit insurance on market terms as well as other commercial activities. However, for additional capital injections in 2009 to cover losses and a reinsurance cover in favour of SACE BT, the state-owned parent entity did not take into consideration the risk profile of the investment and therefore did not behave as a market economy investor would have, giving SACE BT an undue economic advantage

3.1046

For Ducroire, the Commission found that part of the measure supported activities that were not open to competition (i.e. non-marketable risks) and therefore did not constitute state aid. However, for the remainder which supported activities that were open to competition, the Commission’s investigation found that the expected profitability of the investment was not sufficient. The stateowned parent entity did not behave as a market economy investor would have and therefore gave Ducroire an undue economic advantage.

4.2 Decisions under the 1997 Communication 3.1047

There are few Commission decisions in which the 1997 Communication was applied. The escape clause has been successfully invoked by Estonia under the so-called “interim procedure”2376 (EE 2/03).2377 That measure was later prolonged.2378

3.1048

In January 2007, the Commission approved a Hungarian short-term exportcredit insurance aid scheme (case N 488/2006). 2379 According to point 2.5 of the 1997 Communication, risks incurred on debtors established in countries listed in the Annex to the Communication are - if no private insurance market exists in a Member State - considered temporarily non-marketable if incurred by SMEs having a total annual export turnover not exceeding EUR 2 million. To that effect, Hungary demonstrated the unavailability of cover for the risks in the private insurance market and the alignment of rates for such non-marketable risks with the rates charged elsewhere by export credit insurers. Hungary also 2376 In the last accession rounds, aid granted before accession did not automatically become “existing aid” within the meaning of Article 1 of Regulation 659/1999. There are three different types of measures which were put into effect before accession and are still applicable after that date which can be regarded as existing aid: – the first covers aid measures put into effect in a new Member State before 10 December 1994; – the second consists of a list of State aid measures attached to the Accession Treaty; – the third type of existing aid covers other measures submitted to the Commission which were assessed by the State aid monitoring authority prior to accession and found to be compatible with the acquis and to which the Commission did not raise an objection (“Interim procedure”). 2377 See http://ec.europa.eu/comm/competition/state_aid/register/list_en.html. 2378 Commission Decision of 7.5.2005 in case N116/2005, OJ C 295, 26.11.2005, p. 8. 2379 Commission Decision of 22.1.2007 in case N 488/2006, OJ C 67, 23.03.2007, p. 9.

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tried to invoke point 2.5 of the 1997 Communication for a scheme to provide short-term export credit guarantees to finance export transactions by SMEs with an annual export turnover not exceeding € 2 million. However, the Commission had doubts about the applicability of the 1997 Communication and the unavailability of export credit insurance in view of the earlier scheme introduced by the Hungarian authorities. The Commission therefore decided, in April 2008, to prohibit the scheme.2380 On 23 November 2011 the Commission adopted a negative decision with recovery on the Portuguese scheme for the short-term export credit insurance and declared it incompatible under the Temporary Framework and the 1997 Communication.2381 In 2009 Portugal introduced the scheme to tackle a market failure due to the unavailability of credit insurance and to help restore confidence in the credit insurance market. Those aims were pursued through the provision of credit insurance coverage to exporters and to companies that were temporarily confronted with the unavailability of export insurance cover in the private market for transactions with buyers in OECD countries or for domestic transaction. In the final decision the Commission argued that the scheme provided selective advantage to both insurers and exporters and constituted incompatible State aid. Aid to insurers was found incompatible with the internal market because it did not meet the conditions of the escape clause of the 1997 Communication, in particular in the terms of pricing. The rates charged under the scheme represented 60 per cent of the rate charged by a private insurer to cover the same client. The Commission considered that contrary to the allegations of Portugal, the risk transferred to the State under the scheme was higher than the risk covered by the private insurer on a stand-alone basis. Therefore, in the case of a top-up scheme where the decision to extend the cover is taken only after the premium for the initial credit insurance limit had been set, the price of the top-up must reflect a higher risk of possible excess cover. The pricing should therefore have been higher than the price charged for the base cover by the private insurers.

3.1049

2380 The Commission concluded that the proposed guarantee scheme would not meet the conditions of the 1997 Communication as the risks to be covered were too wide. Therefore, the measure would constitute illegal export aid, which would distort trade within the EU’s Single Market by giving Hungarian exporters an unfair competitive advantage compared to companies in other Member States. See http://europa.eu/rapid/ pressReleasesAction.do?reference=IP/08/594. 2381 Commission Decision of 23.11.2011 in case C 28/2010, OJ L 244, 19.08.2014, p. 59. Compatibility of the aid to domestic trade and exporters was assessed under Article 107(3)(b) of the Treaty and the Temporary Framework. The aid was declared incompatible because i) the scheme was not appropriate to address the alleged market failure of unavailability of private cover; ii) necessity of the State intervention could not be established; and iii) the pricing of the scheme based on a premium lower than the premium which would be charged by the market for similar risks was not proportionate to the objective of the scheme.

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4.3 Decisions on medium- and long-term export credit insurance 3.1050

Traditionally, the Commission did not look into State aid aspects of mediumor long-term export credit insurance, even when it concerned intra-Union trade. The Commission only checked that such support was compatible with the OECD Arrangement. It did not require notifications under State aid procedures.

3.1051

The Framatome case provides some guidance on the relationship between the OECD framework and Union trade rules regarding medium- and long-term export credit insurance and the State aid rules.2382 The case concerns a EUR 570 million guarantee granted by the French government, via the French agency for export credit insurance (Coface), to the Finnish electricity producer Teollisuuden Voima Oy (TVO) for the purchase of equipment from the French company Areva/Framatome.

3.1052

The Framatome case constitutes a change of policy as it seems to suggest – at least for intra-Union transactions – that the Commission might start looking at medium- and long-term transactions. As such, the OECD Arrangement would not constitute a safe harbour which exempts such measures entirely from the State aid rules, but rather a necessary but not sufficient condition for the compatibility of such measures. State aid rules could still impose stricter requirements.

3.1053

However, the final decision does not give a clear answer as to the relationship between the OECD Arrangement and Union trade rules regarding medium- and long-term export credit insurance and the State aid rules since it concludes that the measure did not constitute State aid.2383 The Commission concluded that the Coface guarantee conferred no advantage to TVO. First, the Commission found that TVO would have been able to finance the whole project without State intervention. TVO had a good rating from an international rating agency and was not a company in difficulty. Moreover, some banks had already committed to provide loans of a sufficient size before the State granted its guarantee. Finally, the guaranteed loan financed only a limited part of the project and did not represent the most risky part of the financing, which was provided by TVO’s shareholders. The Commission also analysed whether the State guarantee had 2382 Commission Decision of 24.10.2006 in case C 45/2006 (ex NN 62/A/2006) Coface guarantee - construction by Framatome ANP of a nuclear power station for Teollisuuden Voima Oy, OJ C 23, 01.02.2007, p. 11. 2383 Commission Decision of 25.9.2007 in case No C 45/2006 (ex NN 62/A/2006) France - construction by AREVA NP (formerly Framatome ANP) of a nuclear power station for Teollisuuden Voima Oy, OJ L 89, 01.04.2008, p. 15.

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PART 3 – Compatibility rules Chapter 22 – Credit Export Insurance Camelia Grozea-Knuth and Justyna Majcher-Williams

the effect of reducing TVO’s financing costs below the level corresponding to market conditions. It found that the cost of the guaranteed loan, including the premium paid to the State, was not lower than the costs of loans concluded at the same period by TVO without a State guarantee. The Commission also verified whether the French State guarantee constituted an advantage to AREVA NP, by rendering its offer more attractive for TVO. The Commission found that was not the case, as the State intervention did not allow TVO to obtain cheaper financing conditions. In addition, TVO had selected the AREVA NP/Siemens consortium before the Coface guarantee was granted.

5.

Conclusion

State aid and export credit insurance are still partially uncharted territory. Nevertheless, some trends can be discerned: –

Debates about the competitiveness of European industry continue to have their impact in the application of the State aid rules to export-oriented measures. However, one should not forget that State aid control ensures that the internal market is not jeopardised by State interventions. At the same time, State aid rules give many possibilities for Member States to grant aid supporting the competitiveness of Union companies or the cohesion of the Union’s regions. Departure from that balance would unduly increase competition distortion within the Union and undermine cohesion policy. When firms within the Union are faced with unfair foreign subsidies, the Union should use the tools to defend its interests: trade policy instruments like anti-subsidy duties or the WTO dispute settlement mechanism.

–

With some delay compared to the development of Union legislation in the trade area, specific State aid rules have also been developed covering the area of short-term export insurance. Those rules follow the general principle that unless specifically admitted, State aid must be prohibited.

–

However, as a result of the financial crisis the Commission has acknowledged that there may be situations where the private credit insurers are unable or unwilling to provide sufficient capacity to cover risks which would normally be considered as marketable. Leaving those gaps unfilled may result in undue negative effects for Union exporters and the economy at large. Allowing public intervention in clearly defined exceptional situations where there is a market failure and homogenous implementation

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of cover conditions throughout the Union will guarantee a level-playing field between insurers and exporters. –

In that respect the Communication presents a welcome degree of transparency and detailed guidance in relation to the Commission’s policy on the application of State aid rules to short-term export credit insurance. Member States’ action in that field is now better framed. It in turn results in more predictable Commission’s decisions and equal treatment across the Union. The Communication provides guidance about when and under which conditions export credit insurance provided by public or publicly supported insurers can be deemed compatible with the internal market.

–

The Commission seems very cautious about applying the State aid rules to medium- and long-term operations. The Commission chose not to extend the scope of the Communication and continues to limit it to the short-term export credit insurance for marketable risks only. Other trade finance instruments, medium and long term export credits and shortterm export credit insurance in non-marketable countries are left outside. It remains unclear whether State intervention to provide credit insurance for non-marketable risks may constitute aid. The Communication implies that for non-marketable risks there is by definition no competition from private insurers, so it can be deemed that there is no distortion of competition.

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PART 3 – Compatibility rules Chapter 23 – Broadband Oliver Stehmann

Chapter 23 Broadband

1.

Introduction

As motorways are necessary for the transportation and exchange of goods, a well- functioning broadband infrastructure is a pre-condition for the development of digital services. The latter can only flourish once an adequate infrastructure is put in place. Thus, the broadband sector is of utmost importance for the development of the digital economy and the creation of a Digital Single Market (DSM) and it may have a significant stimulating effect for the economy as a whole. The development of the digital economy and the good functioning of the DSM fundamentally depend upon affordable access for consumers to sound telecommunication/broadband infrastructure.

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Investment in telecommunications infrastructure therefore has significant positive spill-overs. This conclusion is supported by empirical research. There exists ample literature estimating such positive spill-overs of the telecommunications (broadband) infrastructure for the economy as a whole. For instance, in 2001 empirical research by Röller and Waverman demonstrated a positive impact for 21 Organisation of Economic Cooperation and Development (OECD) countries in the 1970s and 1980s.2384 More recently, using a similar approach for broadband technology, Czerich et al. shows for the period from 1996 to 2007 that the development of broadband networks had led to a 2.7 per cent to 3.9 per cent higher per capita GNP for 25 OECD countries.2385 Fornefeld, Delaunay

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2384 L-H. Röller and L. Waverman, ‘Telecommunications Infrastructure and Economic Development: A Simultaneous Approach’ [2001] American Economic Review 91(4), pp. 909-923. 2385 N. Czernich, O. Falck, T. Kretschmer and L. Woessmann: ‘Broadband Infrastructure and Economic Growth’ [2009], CES Working Papers No. 5.

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and Elixman estimate that 0.89 per cent of economic growth can be attributed to the broadband sector in economically advanced countries.2386

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A positive impact on economic development and employment from investing in broadband networks has also been found for areas with low population density. As in many other parts of the world, rapid deployment of broadband infrastructure is therefore also a priority for the Union. Internet access in the Union currently is mainly based on first generation broadband.2387 Most people connect to cyberspace over telephone copper and TV cable networks, both of which offer only limited speeds. The Union is currently lagging behind other parts of the world as regards the deployment of the Next Generation Access (NGA) networks that enable high-speed internet to be provided.

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From the viewpoint of State aid control, State intervention in the broadband sector raises interesting issues. On the one hand, broadband infrastructure creates significant general economic benefits. Those benefits exceed the private benefits to individual operators. As a result, from the viewpoint of the society as a whole there is too little private investment.2388 In addition, there are high entry barriers in the form of considerable fixed and sunk costs of broadband infrastructure investment. Those factors generate strong arguments in favour of public intervention due to market failure, arguments which are particularly powerful in rural and less populated areas. On the other hand, there is a risk that public intervention may crowd out private investment. Such crowding-out leads to a distortion of competition and increases the burden on taxpayers, as a part of public investment only replaces private investment that would take place in any event in the absence of the State support.

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In the Union, public financing is subject to State aid control, to avoid in particular such crowding out of private investment. Only after EU approval, a Member State can grant public support for individual broadband projects. Since 2003, the Commission has taken more than 130 State aid decisions in the broadband 2386 M. Fornefeld, G. Delaunay, and D. Elixman, ‘The impact of broadband on growth and productivity’ [2008], report by Micus Management Consulting GmbH. 2387 While there is a clear trend in the Union towards delivering higher speeds using first generation broadband technologies, as of January 2012 only 8.1 per cent of the population subscribed to lines providing speeds equal to or higher than 30 Mbps. Most of those lines were for speeds above 30 Mbps and below 100 Mbps with just 1.3 per cent of accesses in some Member States providing speeds equal to or above 100 Mbps (European Commission, Digital Agenda for Europe Scoreboard 2012 (2012) http://ec.europa.eu/digitalagenda/sites/digital-agenda/files/KKAH12001ENN-PDFWEB_1.pdf accessed 15 October 2014). 2388 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: European Broadband: investing in digitally driven growth, COM(2010) 472, 20.09.2010.

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sector.2389 Until 2009, the financial support offered by Member States for the broadband development was assessed directly under the State aid rules of the Treaty on a case-by-case basis. On the basis of that case practice, in 2009 the Commission adopted guidelines for the assessment of State aid in broadband.2390 The 2009 Guidelines were reviewed in 20132391 and were updated in what this chapter will refer to as the Broadband Guidelines.2392 Since then, the Broadband Guidelines have formed the fundamental reference for State aid control in relation to broadband-related aid measures. In what follows, an overview is first given on the main technological and policy issues related to the broadband sector. Thereafter, the application of State aid rules is discussed. That discussion includes more recent developments which arise out of the State Aid Modernisation (SAM) and deals in particular with the application of the GBER2393 to some types of investment in the broadband sector.

2.

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The broadband sector: market and technological developments

2.1 The Digital Agenda and State intervention in the broadband sector In 2010, the Commission published its “Digital Agenda for Europe”2394 which emphasised that Europe needs widely available and competitively priced fast and ultra-fast internet access. The Europe 2020 Strategy restated the objective to bring basic broadband to all Europeans by 2013 and it sought to ensure that by 2020 all Europeans would have access to much higher internet speeds of above 30 Mbps, and 50 per cent or more of European households would subscribe to internet connections above 100 Mbps. The estimated costs of those objectives were up to EUR 60 billion for the first stage and EUR 270 billion for

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2389 The list of Commission’s broadband decisions is available at http://ec.europa.eu/competition/sectors/telecommunications/broadband_decisions.pdf accessed 15 October 2014. 2390 Community Guidelines for the application of State aid rules in relation to rapid deployment of broadband networks, OJ C 235, 30.09.2009, p. 7. 2391 For a discussion of the review process, see: A. Kliemann and O. Stehmann, ‘EU State aid control in the broadband sector – the 2013 Broadband Guidelines and recent case practice’ [2013], EStAL No. 3, p. 493515. 2392 Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, OJ C 25, 26.01.2013, p. 1. 2393 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 1987, 26.06.2014, p. 1. 2394 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Digital Agenda for Europe, COM (2010) 245, 19.05.2010.

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the second stage.2395 According to the Digital Agenda the Member States were to draw up national broadband strategies until 2012 that could contain funding instruments.

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The deployment of NGA networks, which is necessary for the achievement of the 2020 targets, was slow to begin. In Member States such as Belgium, France, Germany, Portugal and Spain less than 1 per cent of all broadband cables had switched to fiber in 2009.2396

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The biggest obstacle to achieving the objectives of the Digital Agenda was the significant funding gap. While most of the necessary investments were to be made by private companies, investments of private operators alone will not yield the desired results. Apart from the fact that the investment costs of deploying ultra-fast (fibre-based) broadband networks are particularly high, the (incumbent) operators usually consider that there is still insufficient demand for services requiring such advanced networks. From that perspective, it is more profitable to carry on operating the existing infrastructure. Even in Member States where investments had been undertaken, commercial deployment of ultra-fast broadband networks was focused on few major (capital) cities.

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The Commission approved EUR 1.9 billion and EUR 6.5 billion of broadband State aid per year in 2011 and 2012, respectively.2397 That amount, however, did not include all government support to the sector, as not all State measures fall under the definition of State aid.2398 In addition to Member State financing, the Union itself also planned to make significant funding available in the coming years.2399

2395 See Report from the Commission: State aid Scoreboard. Report on State aid contribution to Europe 2020 Strategy - Spring 2011 Update, COM(2011) 356, 22.06.2010. 2396 See M. Bourreau, C. Cambini and S. Hoernig, ‘National FTTH plans in France, Italy and Portugal’ [2010] Communications & Strategies, issue 78. 2397 European Commission, Digital Agenda for Europe Scoreboard 2012 (2012). http://ec.europa.eu/digital-agenda/sites/digital-agenda/files/KKAH12001ENN-PDFWEB_1.pdf, accessed 15 October 2014. 2398 See below Section 4.1. 2399 Not all Member States considered it necessary to grant State aid to the broadband sector. Due to high population density, a favourable topology and sufficient competition between private operators, as of the time of writing Belgium, Denmark and the Netherlands have refrained from granting State aid. Finland has only granted aid for the construction of NGA infrastructure. See F. Chirico and N. Gaal, ‘State aid to broadband: primer and best practices’ [2011], Competition Policy Newsletter No. 1, p. 52, http://ec.europa.eu/competition/publications/cpn/2011_1_10_en.pdf accessed 15 October 15 2014.

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Outside the Union, very different policies have been applied to pursue the goal of achieving ubiquitous high speed broadband coverage. The most radical approach has been taken by Australia and New Zealand where the complete roll-out relies on public funds, forcing all operators to compete on that infrastructure. In South Korea and Japan, governments provide “soft loans” to the incumbent operators to undertake such investments. In the US, a mixture of State funding and regulatory intervention has been applied, with the 2009 “American Recovery and Reinvestment Act” (ARRA) setting aside USD 7.2 billion for the construction of broadband networks. In addition incumbents in that country have benefitted from a “regulatory holiday”, i.e. they are not (or only to a small degree) subject to regulatory supervision. This allows dominant operators, usually the incumbent, to raise prices more freely. This may stimulate investment into broadband infrastructure, while at the same time it may reduce take-up where consumers suffer from higher prices.

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2.2 Broadband technology State aid control in the broadband sector requires some understanding of the different technological concepts. The choice of a particular technology not only determines the quality of service provided over a particular network but also has a considerable impact on the competitive market situation. One of the controversial issues discussed during the revision process of the 2009 Guidelines was to find an adequate definition of NGA networks which would take into account technological advances.

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Basically one can distinguish between fixed line and wireless infrastructure. Incumbent telecom operators possess universal copper line networks that have already been installed. “Digital Subscriber Line” (DSL) technology is based on those existing copper links. In addition, fibre networks have been rolled out more recently. NGA networks mainly rely on fibre technology which is best suited for the transmission of large data files. To date, fibre has been mainly used for backbone and backhaul2400 networks. The following step, that of connecting the final customer (which is known as the “last mile”), is highly expensive. As a result, there exist hybrid networks which combine fibre technologies with a DSL link for the last mile. More recently, last mile infrastructure has also been provided by wireless connections (“fixed wireless” technologies).

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2400 I.e. the intermediate links of a fixed network excluding the access part.

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Due to rapid technological convergence, today cable TV networks can also be used for the transmission of broadband services. Cable TV networks are built for the transmission of large data files in one direction (“point-to-multipoint”). However, they can be up-graded for communication services in both directions.

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Any assessment of (public) investments in fixed-line networks must distinguish between vertical and horizontal aspects. The vertical aspects comprise passive infrastructure, active infrastructure and the level of service providers.2401 Passive infrastructure refers to physical elements of infrastructure such as ducts, cabinets and dark fibre. Those upstream markets may account for up to 70 per cent of total investment costs. Passive infrastructure needs to be activated by connecting equipment which allows the network operator to sell the transmission capacity of the network.2402

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With regard to horizontal aspects of fixed networks, one may distinguish three categories. The backbone network consists of fibre lines which cover large distances and typically connect different cities. Due to large data transmission, those backbone lines require very large capacity. Generally, private investments are sufficient to cover such backbone infrastructure. Regional networks (“backhaul”) connect backbone infrastructure with access networks. Those access networks are the “last mile” mentioned above, which connect the individual household with the cabinet. From a horizontal perspective, the main problem arises with access networks as they require the largest part of the overall investment. The quality of the access network also defines the overall speed available for the final consumer. The critical point of NGA development is therefore to improve or replace the existing copper cables with better technology.

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Apart from qualitative aspects (and in particular transmission capacity), networks also have different characteristics from a competition point of view. In that regard the extent to which the end-customer can switch from one supplier to another (“unbundling”) is particularly important. As an illustration, the figure below shows the deployment of VDSL (“Very-high-bit-rate digital subscriber line”), TV cable and point-to-point (P2P) fibre lines to the end-customer.

2401 See also F. Chirico and N. Gaal, ‘State aid to broadband: primer and best practices’ [2011], Competition Policy Newsletter No. 1, p. 52, http://ec.europa.eu/competition/publications/cpn/2011_1_10_en.pdf accessed October 15, 2014. 2402 Active infrastructure therefore consists of equipment which is necessary for the management, control and maintenance of infrastructure (which in that context includes street cabinets and exchanges). Finally, the network operator grants service providers access to the network. The latter are active on the downstream market. For the provision of their own services they normally need to connect their own equipment.

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DSL-based technology is usually used to provide broadband access to the endcustomer. All DSL technologies are supported by a “Fibre-to-the-Cabinet” (FTTC) architecture.2403 The VDSL network is relatively cheap, as it still uses copper cables for the connection up to the cabinet.2404 However, that use of copper cable reduces transmission capacity in comparison to the P2P fibre network. Being asymmetrical2405, the FTTC/VDSL network is not the optimal solution to serve very high broadband demand. From a competition point of view, as several end-customers share the fibre line up to the exchange, those networks make unbundling difficult. Their technical features therefore limit the scope of competition over such infrastructure.

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So-called “vectoring” is a relatively new technological development which improves the performance of the “last mile” of the existing copper network.2406 Vectoring achieves a download speed of up to 100 Mb/s. However, vectoring has two disadvantages. First, it can only be applied where the copper cable does not exceed a length of 500 metres. Second, unlike VDSL, it suffers from interference if the use of copper wires is not co-ordinated. Those two constraints basically exclude any unbundling. Competitors’ access is then limited to “bitstream”.

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In the case of the cable TV network (point-to-multipoint), the fibre cable reaches the end-customer. However, after the exchange the unbundling is not possible. Today’s cable networks are bidirectional and deliver interactivity and high speed broadband capabilities. The Data Over Cable Service Interface Specification (DOCSIS) architecture allows separate communication channels alongside the TV signals to communicate in both directions over the network. Cable networks are by definition a shared infrastructure, i.e. the resources are shared between all the connected end-customers.

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2403 FTTC refers to a particular architecture of the telecommunication access network. The fibre cables connect the network provider’s central office (exchange) and an intermediate node/street cabinet. In most cases, the street cabinet is placed inside or near an existing intermediate network node where the existing copper-based telephone network of the area is split to multiple subscribers or lots of subscribers. That part of the network is also called ‘sub-loop’ since it is the final segment of the copper local loop. Essentially, the street cabinet introduces a point-to-multipoint topology in the network. One fibre or pair of fibres (depending on the optical technology used) can serve multiple subscribers over their respective pair of copper wires. 2404 VDSL2 is continuously evolving in order to extend the service life of the copper plant, and to allow operators to get the most out of their existing infrastructure. A key evolution in that regard is VDSL2 vectoring. 2405 I.e. the down-load speed is significantly higher than the up-load speed. 2406 It requires the installation of active equipment in the street cabinet to ensure cross noise cancellation.

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A similar situation arises in the case of “Passive Optical Network” (PON) technology. The available speed for the end-customer depends on the number of “splitters” deployed in the network implementation.2407 As several users share the same bandwidth, unbundling is almost excluded. Access seekers therefore can only offer services on the existing network.

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A third option is the Fibre-to-the-Home” (FTTH)2408 architecture which provides an individual fibre line from the end-customer to the exchange. That point-to-point connection is the best solution both from the viewpoint of overall transmission capacity2409 as well as from a competition point of view. If the end-customer wishes to change operator, its fibre link in the exchange merely needs to be re-connected. Unfortunately, however, it is also the most expensive solution.2410

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Due to technological progress cable and telecommunication networks have already become substitutes. However, it is expected that in future mobile networks (LTE, WiMAX2411) will also become a further alternative for the deployment of 2407 G-PON is cheaper than point-to-point and could be used for residential districts which usually do not require very high upstream speeds. Only “virtual unbundling” is supported. 2408 FTTH: Fibre cables are typically deployed by directly digging new trenches and then laying ducts where cables are subsequently pulled in. Existing duct systems are often used to save construction costs related to digging up and resurfacing city streets. FTTH provides high speed connectivity to the end-user which can in practical terms go up to 10 Gbps. 2409 FTTH network is capable to provide broadband services from 100 Mbps up to 10 Gbps and offers symmetrical bandwidth (i.e. the same up-link and down-link speed). 2410 The differences in cost depend on various factors, including in particular the density of customers and the quality of existing infrastructure. In an extensive study, carried out for Vodafone (WIK Consult GmbH, Architectures and competitive models in fiber networks (2010)), WIK Consult concluded that G-PON networks were about 10 per cent cheaper that P2P infrastructure. 2411 Worldwide Interoperability for Microwave Access. The technology can be used for point-to-point backhaul connections and for point-to-multipoint customer access networks. As it is a shared medium, WiMAX is an

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NGA infrastructure. In the past, mobile networks were used mainly as complements to fixed line networks to connect households in thinly populated areas. However, as the capability to transfer data files has increased rapidly, mobile networks may replace fixed ones in the future. WLAN and WiMAX are wireless technologies with a common communication channel delivering bandwidths of up to 300 Mbps, with that channel being shared by all users communicating over the network at the same time. While in principle those networks can offer ultra-fast broadband speeds, they would only be suited to a handful of customers working in parallel, not for the mass market.2412

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Since around 2000, when the UMTS frequencies were auctioned off in many Member States, mobile networks have been able to deliver at least to some extent “broadband” speeds. LTE (Long Term Evolution), the most used technology for mobile broadband access networks, may provide a nominal download speed of up to 100 Mbps and an upload speed of up to 50 Mbps. However, the actual speed can vary significantly. Due to the cell-based characteristic of that technology the effective access speed for the individual user may only be a fraction of the speed mentioned above (shared medium). LTE is able to support basic broadband access and to some extent also fast internet access, however, it is not able to support ultra-fast NGA, or at least not in the near future.

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Finally, satellites are mainly used for point-to-multipoint TV signal transmission. However, technological advance has allowed greater use of satellite for point-to-point communication. Due to their very wide geographic coverage, satellite networks seem to be particularly useful for connecting remote areas. The very long transmission length, however, leads to latency which reduces significantly the “uplink” speed. As a result, for the time being, satellite technology only seems to be able to provide basic broadband services.2413

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To conclude, for State aid assessment it should be borne in mind that both the broadband infrastructure as well as the digital service sector, are subject to very

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access technology that does not offer homogenous services in its coverage area. 2412 Even fast broadband cannot be supported for a relevant amount of customers. For mass market usage and in dense populated areas these technologies also require a dense network of base stations, thus exhibiting severe challenges for profitability. 2413 Astra2 Connect for instance offers a broadband service which is complementary to existing terrestrial networks. The download (upload) speed is up to 4 Mbit/s (360 Kbit/s). Satellite as an Internet access medium never got off the ground at least in Europe: In 2012, Astra claimed to have about 60,000 subscribers and Eutelsat claimed to have 25,000 subscribers.

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rapid technological progress. As a result, an optimal broadband infrastructure should be as open as possible for innovation at the level of service providers (such a network is called “future proof ”) and public intervention should be technologically neutral, as the optimal technology cannot be pre-determined today. The compatibility criteria of the 2013 State aid broadband Guidelines, as discussed below, directly reflect these conclusions.

2.3 Competition in the broadband sector 2.3.1 High market concentration at network level 3.1082

The liberalisation of the telecommunications sector has generated significant competition between service providers. The convergence between telecommunications and TV cable networks has also generated facility-based competition in areas where such networks overlap. Still, in many parts of the EU, broadband infrastructure markets are highly concentrated and often dominated by incumbents.2414 Apart from the risk of abuse of dominance and the corresponding need to regulate markets, this also has a negative impact on infrastructure investment. Incumbents often delay investment into new and more powerful fibre networks as they prefer to write off past investment (based on copper links). This delays the roll-out of high speed NGA networks (NGA networks offer a speed of above 30 Mbps) and thereby the development of new services and the digital economy. Finally, malfunctioning arises due to network operators’ interest in restricting wholesale access to their bottleneck infrastructure to limit competition from other service providers. This again hampers or may even foreclose the development of new and innovative services downstream.

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Where there is room for several networks to coexist (mostly in densely populated urban areas), it appears that infrastructure competition (including local loop unbundling (LLU2415)) is the most effective one. Infrastructure competition implies that several parallel networks exist in the same geographic area. It exists for instance between DSL and cable TV networks or, in the case of basic 2414 On EU average, although the (retail) market share of incumbents fell in the past, it is currently still around 42 per cent (see Digital Agenda Scoreboard 2014). 2415 Local loop unbundling (LLU) refers to one of two scenarios: (a) Fully unbundled lines: In the case of full unbundling, a copper pair is rented to a third party for its exclusive use. (b) Shared access lines: In the case of shared access, the incumbent continues to provide telephony service, while the new entrant delivers high-speed data services over that same local loop.

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broadband services, between fixed and wireless networks. Several studies have concluded that infrastructure competition has contributed significantly more to the provision of broadband technology than the mere access of service providers on the downstream market.2416 In this regard, cable companies play an important role as they have already a separate second network installed. Such infrastructure competition also fosters the roll-out of NGA networks. Typically, countries which have a wide coverage by cable, as Belgium and the Netherlands, are also most advanced in NGA coverage. Instead, countries like Italy and Greece, which lack cable entirely, fall behind on NGA coverage. In urban areas, new entrants, so-called alternative operators, build new fixed infrastructure. This includes municipality owned entities and utilities from other network industries (energy, water) which invest in fibre to the premise (FTTP) technologies. When building their own infrastructure, entrants are often the driver of the construction of NGA networks. Market shares for NGA lines are significantly higher for new entrants (78 per cent) than for incumbents (22 per cent). Although NGA connections by alternative operators are mainly cable-based, a significant part of alternative operators’ NGA connections are non-cable. Indeed, alternative operators hold more than 40 per cent of fibre to the home (FTTH) connections and about 90 per cent of fibre to the building FTTB connections, making alternative operators’ non-cable NGA subscriptions represent 21 per cent of all NGA subscriptions.2417

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Finally, when they face such infrastructure based entry, incumbents react by upgrading or expanding their existing networks. No such effect arises if competition takes place only between the incumbent and service providers using the same network. There is evidence that telecom incumbents invest in particular in areas where they face competition from cable operators. Public funding for the roll-out of alternative infrastructure network granted to alternative operators, therefore, is likely not only to foster the entrance of new players but also push incumbents to invest.

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Also experience outside the EU confirms the above conclusion. South Korea is one of the most advanced countries in the world in terms of roll-out of NGA

3.1086

2416 Compare Grajek and Roeller (2009), Regulation and Investment in Network Industries: evidence from European Telecoms, SFB Discussion Paper. Bourkaert et al (2010) use panel data of 20 OECD countries and conclude that network competition had a significant positive effect on the supply of broadband infrastructure. The effect of competition on existing networks instead was not significant. The effect of service competition on DSL networks was even significant and negative. Bouckaert, Jan & van Dijk, Theon & Verboven, Frank, 2010, “Access regulation, competition, and broadband penetration: An international study”,Telecommunications Policy, Elsevier, vol. 34(11), pages 661-671, December. See also Cambini/Jiang (2009): Broadband investment and regulation: a literature review in: Telecommunications Policy 33, pp. 559-574. 2417 European Commission (2014), Digital Agenda Scoreboard 2014.

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networks. One of the factors that presumably supported this result is the high population density which implies reduced roll-out costs. This has fostered intense infrastructure competition among several cable and VDSL providers (up to the point where some providers went into receivership) which also spurred investments into fast broadband infrastructure.2418 Heavy private investment implied that South Korean Government‘s per capita spending on broadband was lower than in many other countries, including France, Japan and Sweden.

3.1087

Generally infrastructure based competition requires that consumers have the choice between several broadband networks. Typically the cost per subscriber drops with the rise of the number of customers hosted by a broadband network due to economies of scale. Infrastructure based competition (which implies that customers are distributed among several networks) may therefore result in higher total cost of broadband infrastructure.

3.1088

However, even if there exists only one passive (duct) infrastructure, network competition can take place. While they share the same ducts, operators have control over the capacity and the type of services they provide over their own fibre network. Given that about 70 per cent of total cost of a fixed NGA network arises from civil works (e.g. the digging of trenches) there exist significant economies of scale in the construction of such networks. Open access to the (passive) duct infrastructure can still ensure that alternative operators control their own fibre network.

3.1089

The situation is different when competitors rely on the incumbent’s fibre network as well. In this case, by selecting the active equipment, the incumbent can exert (some) control over the competitor’s service. Such service-based competition (i.e. bit-stream) depends on the strength of regulatory control, as incumbents have an incentive to control access to their networks. Today only a minority of wholesale access happens at the level of bit-stream access.2419 Although, in the short term, bit-stream access can reduce the incentives to invest both for the incumbent network operator as well as for its competitors with low regulatory access charges (a low price may reduce the incumbent’s incentive to further expand or up-grade its infrastructure and may also discourage service providers from taking the risk of building their own infrastructure), it can also help alternative operators to obtain a minimum scale and incentivise them to build their own infrastructure.2420 2418 European Parliament, Policy department A, Economic and scientific policy: Entertainment x.0 to Boost Broadband Development; study of October 2013, p.188. 2419 According to data from the Digital Agenda Scoreboard 2014, 87 per cent of accesses to the incumbents’ lines are LLU or shared accesses, for only 17 per cent of bit-stream accesses. 2420 The “investment ladder theory” supposes that depending on a number of parameters, once newcomers have

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Due to high investment cost per subscriber in rural areas, it becomes inefficient to construct several infrastructures in less densely populated areas. In these areas access regulation is required to ensure that the consumer can still benefit from competing services.2421 It is very difficult to define the right level of regulatory intervention.

3.1090

As pointed out in section 2.1. the US chose a laissez faire approach to broadband that was supposed to ensure sufficient incentives to private investors. Indeed, the US are often referred to as having achieved a good high speed broadband roll-out. However, high prices for network access generated limited retail competition. As a result, end consumers face relatively high prices and, in spite of its availability, there is only a limited take-up of fast broadband products.2422 On the other hand, imposing sharp access conditions also has drawbacks. It leads to a conflict between static and dynamic efficiencies. Open access fosters more competition in the short run on the downstream market, in particular if access pricing is kept low. On the other hand, open access reduces the incentives to invest both for the incumbent network operator as well as for its competitors. A low access charge may reduce the incumbent’s incentive to further expand or upgrade its infrastructure. A low access price also discourages service providers from taking the risk of building their own infrastructure. Deploying one’s own infrastructure is risky due to the high degree of irreversible costs and the long amortisation period.

3.1091

By way of contrast, the “investment ladder” theory supports the imposition of access conditions. By reducing entry barriers, new players may find it convenient to invest in the market. Once newcomers have gained experience, they may be better equipped to construct their own infrastructure at a later stage. Therefore, allowing first access to the existing infrastructure reduces entry barriers and promotes further investments in the longer term.

3.1092

Studies have shown that there indeed exists such a trade-off between access regulation and investment into broadband infrastructure. Using a data basis of 20 fixed network operators from 20 different countries, Grajek and Röller2423 dem-

3.1093

gained experience, at a later stage they may be better equipped to construct their own infrastructure. Entry barriers would be too high if they did not get a first access to the existing infrastructure. 2421 In Germany, for instance, the introduction of new access up-stream products for VDSL technology, to be used by new entrants, led to a sharp increase in VDSL penetration from 700 000 (2011) to 1.8 million (2013) household connections. 2422 European Parliament, Policy department A, Economic and scientific policy: Entertainment x.0 to Boost Broadband Development; study of October 2013, p.181. 2423 M.Grajek and L. H. Röller, ‘Regulation and Investment in Network Industries: Evidence from European Telecoms’ (SFB 649 Discussion Paper 2009-039, 2009).

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onstrated that over a period of ten years access regulation had reduced overall investment (by both incumbents and alternative operators taken together) into infrastructure by almost USD 17 billion. Cambini und Jiang2424 also argued that a strong drop in private investment into the telecommunications sector could be explained in particular by access regulation. Both in the US and in the Union the peak of private infrastructure investment was reached in 2001 and subsequently declined sharply.2425

3.1094

Apart from negative effects on private investment, favourable access conditions may also have a negative impact on the intensity of competition. Several studies have concluded that network competition has contributed significantly more to the provision of broadband technology than competition on existing networks or the mere access of service providers to the downstream market. As said above, when entrants invest into new infrastructure, incumbents react by up-grading or expanding their existing networks. No such effect arises if competition takes place only between the incumbent and service providers using the same network.2426

3.1095

Nevertheless, open and effective access is the most important compatibility criterion under the Broadband Guidelines. In comparison to access regulation for private infrastructure, in the case of State-funded networks the role of open access conditions is different. In that case, open access conditions would not deter investment, as the incentive to invest comes from the public funding. As long as the incentive is sufficient, investors will be found. Open access conditions would therefore only have an effect on the total aid amount. Moreover, State aid can be used to support a technology which would foster network competition instead of only service-based competition. Increasing the aid amount in order to fund 2424 Cambini/Jiang (2009): Broadband investment and regulation: a literature review in: Telecommunications Policy 33, pp. 559-574. 2425 However, Cambini and Jiang (ibid.) only refer to investments made by incumbent operators and therefore neglect investments made by new entrants. 2426 See Grajek and Röller (2009), Regulation and Investment in Network Industries: evidence from European Telecoms, SFB Discussion Paper. That result is supported by Bourkaert et al. (2010), “Access regulation, competition, and broadband penetration: An international study,” Telecommunications Policy, Elsevier, vol. 34(11), pp. 661-671, December. Using a panel data of 20 OECD countries over the period 2003-2008, the authors concluded that network competition had a significant positive effect on the supply of broadband infrastructure. The effect of competition on existing networks instead was not significant and the effect of service competition on DSL networks was even significant and negative. According to the authors, the latter result could be due to the negative investment incentives created by access regulation. In line with Cambini and Jiang (C. Cambini and Yanyan Jiang, ‘Broadband investment and regulation: A literature review’ [2009] Telecommunications Policy No. 33, pp. 559-574), the authors concluded that the “investment ladder” theory would not be a good regulatory approach. They argued that access to bit-stream should therefore be limited and infrastructure competition should be supported.

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an open infrastructure would be in the public interest. The 2010 WIK study2427 concluded that technologies which allow for unbundling – and therefore for network competition – would generate a higher consumer benefit and general overall welfare than technologies which allow only bit-stream access (like GPON). Those additional welfare effects would exceed the additional investment cost if point-to-point technology were employed instead of PON technology.

3.

State aid control in the broadband sector

Public funds have to be used cautiously in a sector such as the electronic communications sector which has already been fully liberalised. Public support for broadband investment should be complementary and not substitute the investments of private market players. To minimise distortions of competition, State intervention should limit as much as possible the risk of crowding-out private investments and of altering commercial investment incentives. Crowding-out of private investments would not only lead to the waste of taxpayer’s money2428, but it would also drive away private investors and therefore it could delay achieving the Digital Agenda’s objective. Apart from the crowding-out effect, distortions of competition can also arise at other levels. For instance, when tendering out publicly-funded projects, the tender procedure may be biased towards a particular technology or a particular bidder.2429 Further, the high level of fixed (and sunk) costs makes it unlikely in many cases that competing infrastructures will be put in place. In that scenario, competition could then take place on one single infrastructure if proper access conditions were applied. To avoid such competition, the network operator may choose technological solutions which exclude granting effective access.2430 All those different interests have to be balanced

3.1096

2427 WIK Consult GmbH, Architectures and competitive models in fiber networks (2010). 2428 An extreme example from the US where State aid control does not exist: Eisenach and Caves (2011) report that a large part of the “Rural Utilities Service” (RUS) from the ARRA funded broadband initiative was invested in areas where a high proportion of households was already previously served by private providers. In the three projects examined only 452 new homes were connected to broadband infrastructure with a State subsidy of USD 232 million. According to the authors, that massively wasteful investment resulted from the fact that the ARRA left substantial freedom to the RUS while the latter had insufficient experience in the sector. As a result, it was mainly projects in the suburbs that were funded. Eisenach J.A. und K.W. Caves (2011), Evaluating the Cost-Effectiveness of RUS Broadband Subsidies: Three Case Studies, Navigant Economics 13.04.2011. 2429 In “Mediaset” the Court confirmed a negative Commission Decision with recovery because the measure supported the terrestrial wireless network over alternative technologies (i.e. cable or satellite). Technological neutrality was also the main issue in two negative decisions concerning digital switch-over in Spain. Mediaset SpA v Commission, T-177/07 [2010], ECR II-02341. 2430 For instance, the use of “vectoring” technology allows increasing transmission speed on the copper network which connects the household to the street cabinet. However, to avoid interference, “vectoring” can only be employed if other “last mile” connections are switched-off. The use of vectoring therefore allows the incumbent to avoid local loop unbundling, i.e. granting competitors effective access to the street cabinet.

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in the compatibility assessment. Thus, the purpose of State aid control in the broadband sector is to achieve a balance between fostering infrastructure rollout and minimising distortions of competition and preserving a level-playing field in the internal market.

3.1 Presence of aid 3.1097

Not every State intervention, even if public resources are employed, qualifies as State aid. A State intervention becomes subject to State aid control only if the four conditions of Article 107(1) of the Treaty are fulfilled. Apart from using State resources, the action must grant an economic advantage to certain undertakings or certain economic activities (selectivity) and the action must distort competition and affect trade between Member States.

3.1098

State resources are normally involved, whether aid is granted on the level of the central or federal State, of the regions or – as is quite common for broadband– on the municipal level. In broadband it is relevant that the notion of “State resources” does not only cover grants but also extends to ‘State support in kind’, e.g. if the municipality constructs a broadband network (or parts of it) and makes it available to broadband operators without adequate remuneration. Such a ‘loss of revenues’ is quite typical in broadband cases, where the State decides to carry out the civil engineering works. Even when the State limits its intervention to the construction of the passive network infrastructure, that component normally amounts to 70 per cent of the costs of a broadband project. The Broadband Guidelines also recall a long-standing decisional practice, namely that funding from the Union’s Structural Funds is classified as State resources.

3.1099

Further, State aid only exists if it generates an “advantage” for the beneficiary. As the compatibility criteria of the Broadband Guidelines require the aid-granting authority to grant the aid on the basis of an open tender, a controversial question for the notion of advantage continues to be whether such a tender ‘takes away’ the advantage. Some commentators have criticised the Commission for creating a ‘broadband-specific approach’ to the notion of advantage.2431 They argue that while in infrastructure cases the Commission often considers the conduct of a tender based on Union public procurement procedure sufficient to exclude the advantage as the tender leads to a ‘market price’, for broadband support the tender is considered a necessary requirement for the compatibility of the aid but does not exclude the existence of State aid.

2431 See Nicolaides and Kleis, ‘Where is the advantage’ [2007] EStAL No. 4, p. 615.

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In fact, whether a tender actually removes a selective advantage depends on the market conditions. Generally speaking, if the government uses an open tender to purchase equipment for its own use, one would consider that the beneficiary of the contract would not obtain an “advantage” in the terms of Article 107(1) of the Treaty.2432 However, that assumption implies that the tender attracts a sufficient number of bidders. This, unfortunately, is not the case in many broadband State aid measures.2433 Apart from the extreme case of the presence of only one bidder, even if there are only a small number of bidders the competitive effect of the tender can be significantly reduced. Where for instance the tender includes a number of (complicated) qualitative criteria and where bidders may have very different reservation prices2434, a simple auction could imply that the winner obtains a significant benefit. Finally, an open tender which is geared to only one technology could still provide a significant advantage to operators using that technology in comparison to others which have been excluded.2435

3.1100

In Broadband, it is therefore considered that a tender minimises the selective advantage by keeping the State support to a minimum, but that the winning operator will be able to establish its business on conditions which are not available on the market.2436 That approach is also reflected in paragraph 12 of the Broadband Guidelines, which in footnote 16 explains why it is likely that the subsidy is passed on to access seekers even if they pay a remuneration for it.2437 In many cases, the broadband operator acquires ownership of the broadband network which has been (at least partially) built with State resources. But even if the operator does not obtain ownership it is considered to be exploiting tangible and

3.1101

2432 For that reason, contracts awarded following Union procurement rules, in particular in the case of open tendering, are not considered to involve State aid. 2433 For instance, in the national scheme BD UK, only the national incumbent BT qualified under the framework contract. 2434 The ‘reservation price’ is the maximum price a bidder would be willing to pay. If one bidder has a much higher reservation price than the others and if that bidder has some knowledge about its competitors, it can win the bid by paying less than what it is willing to pay. That situation is likely to arise in broadband State aid tenders, where often only a (very) small number of operators participate. 2435 As an example, for the transmission of digital TV signals in Spain, open tenders were carried out for the purchase of digital terrestrial transmission (DTT) equipment. The Commission found that the terrestrial equipment manufacturers did not benefit from an advantage. However, as an indirect beneficiary, the terrestrial platform operator (Abertis) had an advantage because it benefited from the exclusion of other platforms (i.e. satellite and cable). SA. 28599 – Commission Decision of 19.06.2013. 2436 Arguably, without the State subsidy, the infrastructure would not exist and could not be exploited by the commercial operator(s). 2437 In addition, at that level a tender cannot automatically eliminate the advantage. If the State funds a duct network and grants access on the basis of a tender to telecommunications operators (so that they can put in their cables), the latter may pay a very small amount as the duct is unlikely to face capacity shortage. Resulting revenues from the tender would only cover a fraction of investment costs.

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intangible assets acquired from State funds.2438 In addition, the choice of an infrastructure manager following a tender also does not remove that advantage.2439 As to selectivity, in the broadband sector the Commission normally identifies advantages for certain undertakings on different levels: on the levels of the broadband operator, who either with or without the ownership will manage and commercially exploit the network, of third parties such as other broadband operators (e.g. retail providers) and of business users, who have access to broadband infrastructure, which without the State funding would not exist. The Commission has further established that a measure which provides civil works for broadband deployment is indeed sector-specific. In a case concerning the German region of Saxony2440, the Commission accepted as being free of State aid only the measure of ‘co-placement’ (Mitverlegung), which allows broadband and utility providers such as water or gas companies to place their ducts – at their own costs when the municipality carries out e.g. maintenance works on a road, etc. That situation had however to be distinguished from the situation of the German federal ducts programme.2441 In that latter case, the State – with the explicit goal of fostering broadband deployment – carried out civil works and placed ducts in favour of the broadband operators. The Broadband Guidelines take up that distinction in the section concerning measures which fall outside the scope of State aid rules.2442 That section presents some administrative and regulatory measures which may foster broadband deployment.

3.1102

As a result, exceptions to the finding that public support constitutes State aid are therefore limited: the main examples are the application of the Market Economy Investor Principle, which is linked to the condition of an “advantage”, and support under application of the ‘Altmark criteria. Their application to the broadband sector is discussed below.2443

2438 See e.g. Commission approves public funding of broadband projects in Pyrénées-Atlantiques, Scotland and East Midlands, IP/04/137 of 16.11.2004, Commission Decision of 10.12.2008 on Provision of Remote Broadband Services in Northern Ireland (Case N 508/2008), summary notice in OJ C 18, 24.01.2009, p. 1. 2439 See the facts of Commission dDcision of 13.12.2010 on Shefa 2 Interconnect (Case N 497/2010), summary notice in OJ C 92, 24.03.2011, p. 1. 2440 Commission Decision of 08.02.2010 – Germany: N 383/2009 – Amendment of the State aid broadband scheme N 150/2008 Freistaat Sachsen. 2441 Commission Decision of 12.07.2010 - N 53/2010 – Germany: Federal framework programme on duct support. 2442 Section 2.4 of the broadband guidelines. 2443 book paragraphs XX-XX

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3.1.1 The Market Economy Investor Principle Among the four conditions of Article 107(1) of the Treaty, the Market Economy Investor Principle (MEIP) test addresses the issue of an economic advantage. Essentially, if a public authority invests in an undertaking on terms which are comparable to those which would also be applied by a private investor operating under normal market conditions, no economic advantage to the undertaking is deemed to arise. As a result, the measure does not qualify as State aid.

3.1103

It is for the Member State to carry out the MEIP analysis before making its investment. If it comes to the conclusion that the MEIP is fulfilled, the public intervention does not need to be notified to the Commission. However, the legal risk then remains with the Member State and if, at a later stage, a Commission investigation concludes that there is an advantage to the beneficiary that it would not have obtained in the market, the Member State will usually be required to recover any incompatible aid.2444 In some cases, therefore, Member States notify measures to the Commission as being in line with market conduct to obtain the legal certainty of a ‘no aid’ decision. In that situation, it is for the Commission to carry out the MEIP test.2445

3.1104

The MEIP test is not a test about the economic rationality of the public intervention. It is applied leaving aside all social, regional-policy and sectoral considerations. The decisive element is whether the beneficiary receives an economic advantage which it would not have obtained under normal market conditions. The conformity of a State intervention with market conduct is examined on an ex-ante basis, as any prudent market economy operator would normally carry out its own ex-ante assessment (feasibility study) before investing into a particular project.2446 Conformity with market conduct can be established on the basis of available market data, benchmarking or other assessment methods, as for instance the calculation of the internal rate of return (IRR) of the investment (or Net Present Value (NPV) calculations).2447

3.1105

2444 See e.g. Commission Decision 2007/254/EC of 07.04.2006 on State aid implemented by the Slovak Republic for Frucona Košice (case C 25/2005 ex NN 21/2005), OJ L 112, 30.04.2007, p. 14. 2445 See e.g. Commission Decision 2008/729/EC of 11.12.2007 on Citynet Amsterdam – investment by the city of Amsterdam in a fibre-to-the-home (FTTH) network (case C 53/06 ex N 262/05, ex CP 127/04), OJ L 247, 16.09.2008, p. 27. 2446 See Case C-124/10 P Commission v EDF, ECLI:EU:C:2012:318, para. 25 2447 See e.g. Commission Decision 2013/126/EU of 08.05.2012 on State aid to Ciudad de la Luz film studios (case C 8/08 ex NN 4/08), OJ L 85, 23.03.2013, p. 1.

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In the vast majority of cases, the State’s reason for supporting broadband is driven by a desire to provide its population with high-speed connections to achieve innovation, enhance the competitiveness of certain regions and foster social and territorial cohesion. Those goals are in line with the spirit of the Broadband Guidelines, which aim to channel State aid into those areas which do not attract private investors. On the other hand, of course, such measures are then less likely to be in line with the MEIP.

3.1106

Nevertheless, the State’s investment in a broadband project could still be carried out on market terms and it is incumbent on the Commission to prove the existence of State aid. While the equal participation of the State in a broadband project under the same terms and conditions as private investors (‘concomitant participation ‘) can be considered as normal market behaviour, the reality in broadband funding often is that the State accepts a greater responsibility than its private counterparts. In addition, according to the case law of the Union Courts, the concomitance analysis constitutes just one but not necessarily the only element for establishing the existence – or rather the absence - of State aid. Other elements are also relevant and the Commission must in particular consider whether the public investment has sufficient prospects of return, at least on a long-term perspective.2448

3.1107

In its Citynet Amsterdam decision2449, the Commission set out principles for the application of the MEIP test.2450 The question whether State aid was involved in that case was particularly important as complainants and other interested parties had pointed out that the roll-out of the fibre network in Amsterdam took place in a so-called ‘black area’2451, where broadband provision was sufficient. In such an area there exists the risk that public funding of a telecom network could crowd out private investment. The Commission is adamant that State aid 2448 Case T-565/08 Corsica Ferries France v Commission, ECLI:EU:T:2012:415, paras. 122 and 131. 2449 Commission Decision 2008/729/EC of 11.12.2007 on Citynet Amsterdam – investment by the city of Amsterdam in a fibre-to-the-home (FTTH) network (case C 53/06 ex N 262/05, ex CP 127/04), OJ L 247, 16.09.2008, p. 27. 2450 In that case, the municipality invested (30 per cent), together with two private investors and a few housing corporations into the construction of a passive glass fibre network (thus comprising ducts, fibre and street street cabinets). The network was owned and operated by a separate company, of which the municipality owns a third of the shares. The wholesale operator was selected through a tender procedure and provided open and non-discriminatory access to retail operators. 2451 Black areas’ are, according to paragraph 72 of the Broadband Guidelines, areas in which at least two broadband network providers are present and broadband services are provided under competitive conditions. The Commission will view funding in this area negatively and did so in the “Appingedam” case, where State aid was present and declared not to be compatible with the Treaty. See Commission Decision 2007/175/EC of 19.07.2006 on the measure which the Netherlands are planning to implement concerning a broadband infrastructure in Appingedam (case C 35/2005 ex N 59/2005), OJ L 86, 27.03.2007, p. 1.

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must not be used to duplicate existing broadband services so that State support in ‘black areas’ is not possible.2452 As a result, a State aid measure supporting the roll-out of a fibre network in the city of Amsterdam would probably not have been found compatible under the Broadband Guidelines. In Citynet Amsterdam, however, the Commission came to the conclusion that no State aid was involved, a conclusion which it derived from a four-step analysis. The Commission analysed a) whether the private investors’ investments had real economic significance, b) whether the investments took place at the same time or whether the decision of the municipality to invest provided a signal to the private investors that the investment project was in safe – public – hands, c) whether the terms and conditions of the investments were identical, or whether the municipality assumed greater risks and d) whether there are any other relationship issues which would make the private investment appear to be more a strategy to stay on good terms with the municipality rather than a business decision.2453 On all those points the Commission concluded that the investment by the municipality was done on market terms.

3.1108

In a more recent decision regarding the funding for the deployment of a NGA infrastructure in the Province of Trento2454, the Commission opened the formal investigation procedure because – on the basis of those principles – it had doubts that the intervention of the Province of Trento would be in conformity with the MEIP principle. The regional government had entered into a joint venture with Telecom Italia2455 to roll out an NGA network in certain parts of the province. Italy claimed that the project was in line with the MEIP and fell outside State aid rules. Telecom Italia’s competitors submitted a complaint alleging that the measure constituted State aid in favour of the incumbent.

3.1109

Following various inconclusive submissions from various economic consultants of the Province, the beneficiary Telecom Italy and the complainants, in July 2013 the Commission appointed an independent expert to conduct an eco-

3.1110

2452 See paragraph 72 of the Broadband Guidelines. 2453 For more insight into the case, see Gaal, Papadis and Riedl, ‘Citynet Amsterdam: an application of the market economy investor principle in the electronic communications sector’ [2008] CPN No. 1, p. 82. 2454 Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.33063 (2012/C ex 2012/NN) on Trento NGAN Project (Italy), OJ C 323, 24.10.2012, p. 6. 2455 In 2011, the Province of Trento signed an agreement with Telecom Italia (TI) for the creation of the joint venture “Trentino NGN” (TNGN) to deploy a fibre-to-the-home infrastructure in medium profitability areas. The Province made an immediate cash contribution to the capital of Trentino NGN, while TI would make various in-kind contributions in separate subsequent steps. TI was also appointed service provider for Trentino NGN for the construction and operation of the network and the provision of connectivity services.

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nomic study on compliance with the MEIP. After the Italian authorities had received a draft of the expert’s analysis, the Province of Trento announced its decision to leave the NGN project, and to recover the money already invested in the joint venture.

3.1111

The expert’s analysis had followed closely the MEIP-related aspects of the Commission decision in “Ciudad de la Luz”.2456 The Ciudad de la Luz decision, which was confirmed by the General Court2457, had assessed whether the MEIP was fulfilled in an investment in film studios in Spain. In that regard, the in-depth investigation in Ciudad de la Luz demonstrated that external studies carried out on behalf of the beneficiary were based on assumptions which were overly optimistic and not robust enough. As a prudent private investor, the national authority would be required to check the validity of such estimations before taking an investment decision of that size. The Commission assessed the opportunity cost of capital for the investor in Ciudad de la Luz, i.e., the return that it could achieve from an investment with equivalent risk in the financial markets. The opportunity cost of capital was found to be in fact considerably higher than the internal rate of return that an investor could expect from the Ciudad de la Luz project. In those circumstances, a private player would normally refrain from making such an investment.2458 Ciudad de la Luz has set a precedent for the Commission’s approach in assessing the MEIP in similar situations. The General Court has confirmed that the Member State cannot simply rely on external consultancy reports when carrying out such investment and that the Commission is right to assess their validity. The Commission is not required to use a particular benchmark, as average industry returns, if it is not adequate for a particular case.

3.1.2 Services of general economic interest 3.1112

While the Commission has adopted over 130 broadband decisions, not even a handful of them has dealt with the question whether the funding concerned a service of general economic interest (SGEI). The Broadband Guidelines describe the SGEI rules first by referring to the Commission’s SGEI Decision2459, 2456 Following a complaint from a competitor of the film studios Ciudad de la Luz in May 2012, the Commission found a EUR 265 million investment aid granted by the Valencia Regional Government to the Ciudad de la Luz film studio complex to be in breach of State aid rules. 2457 Joined Cases T-319/12 and T-321/12 Spain v Commission (‘Ciudad de la Luz’) ECLI:EU:T:2014:604. 2458 See in more detail: Claici, Siotis, Chatterjee and Stehmann, ‘The Market Economy Investor Principle – lessons learnt from the Ciudad de la Luz case’ [yyyy] Competition Law and Economics No. xx, p. xx. 2459 Commission Decision 2012/21/EU of 20.12.2011 on the application of Article 106(2) of the Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3.

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the so-called ‘SGEI package’2460, which also applies to that sector. In addition, where it is worth mentioning broadband-specific aspects, the Broadband Guidelines provide additional illustration on the application of the SGEI rules to broadband deployment. The Broadband Guidelines continue to stipulate that broadband funding could not be considered a SGEI when it just leads to the creation of a parallel network infrastructure. As will be seen below, that requirement is based on the Commission’s understanding that in order to qualify as a SGEI, the service should have special features. The Commission then specifies certain minimum criteria, namely that the supported network should provide universal connectivity to residential and business users alike. Public support only for businesses would thus not qualify as a SGEI. Likewise, the structure should be passive, neutral and grant open (i.e. non-discriminatory) access. The funding should neither cover retail services. Where a vertically-integrated wholesaler is entrusted with the public service mission, adequate safeguards should be put in place to avoid conflict of interest. As it will be seen later, those requirements of limitation of the public funding to passive network infrastructure and the (in ideal circumstances) separation of wholesale from retail activities go beyond what the Broadband Guidelines demand for publicly-funded projects which will be authorised under Article 107(3)(c) of the Treaty. The Commission has refused to accept the claim of a SGEI when support measures are mainly geared to businesses.2461 A claw-back mechanism for SGEI funding, which is based on an ex-ante fixation of the compensation, should ensure that overcompensation does not occur. Again, here, in comparison with the claw-back provided for support under Article 107(3)c)2462, no threshold is introduced for the application of the claw-back mechanism.

3.1113

As is well known, there is no State aid if the four criteria developed by the Court in Altmark2463 have been respected. The non-existence of State aid has indeed been acknowledged by the Commission in three cases, all of them concerning France. France is the only Member State which in the past2464 had sought – for reasons of legal certainty – a Commission decision that no State aid was involved.

3.1114

2460 See paragraph 18 of the Guidelines. 2461 See e.g. Commission Decision of 10.07.2007 on aid to Sicoval for a high-speed network (case N 890/06), summary notice in OJ C 218, 18.09.2007, p. 1. 2462 See para. 78 i) of the Broadband Guidelines. 2463 Case C-280/00 Altmark Trans GmbH and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415. 2464 However, in 2010 the French authorities notified a nation-wide broadband support scheme which they considered to involve State aid and which the Commission approved under Article 107(3)(c) of the Treaty in conjunction with the 2009 Guidelines; see Commission Decision of 19.10.2011 on French programme “Très Haut Débit”(Case N330/2010), summary notice in OJ C 364, 14.12.2011, p. 1.

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Other Member States may well apply the Altmark conditions to some of their broadband support but as they are not legally obliged to notify the Commission might not always be informed of such funding. The first two decisions stemming from France on the Altmark criteria concerned the regions of Pyrénées-Atlantiques and Limousin-Dorsal.2465 The Commission acknowledged that the basic broadband services covered by the French regions’ funding did not conflict with Directive 2002/22/EC2466 which imposed a very basic universal service obligation which could not be compensated. In terms of characteristics, in particular as regards broadband speeds, that universal service obligation established only a very basic minimum (a speed of only 56 kb), whereas the basic broadband services (haut débit) were better performing and of a higher standard. In those two decisions the Commission also clearly stated that in order to qualify as a SGEI, the service must have special characteristics which distinguish the service from normal commercial services. While the definition of the public service remit is the competence of the Member State and only subject to control of whether the definition involves a manifest error on behalf of the Member State, the Commission ascertained that the publicly-funded network offered something ‘more’ and did not only duplicate existing commercial services. The Commission was satisfied that the compensation parameters were fixed in advance and any overcompensation excluded. For the fourth Altmark condition it is interesting to note that the operators for those schemes were to be chosen according to a procedure which involved elements of negotiation. The Commission was careful to stress that in such a scenario where some discretion of the Member State exists, it could not be guaranteed that the most efficient operator is chosen. In casu, the Commission could accept the chosen procedure, not the least because it was able to ascertain itself – on the basis of the documents provided – that the French regions had, firstly, made a detailed study on the regions’ needs, the possible costs and the necessary State support, secondly, launched a public tender specifying the minimum criteria and thirdly, provided the Commission with a synthesis document comparing the various offers received. Based on that latter document the Commission was able to ascertain that the choice was based on quantitative criteria (aid intensity, rate of return, price offer by the operators for their services, degree of coverage of the territory, etc.). In particular the use of quantitative criteria was important. Quite often, project selections for broad2465 Commission Decision of 16.11.2004 on French broadband project in Hauts Pyrénées Atlantiques (Case N 381/2004), summary notice in OJ C 162, 02.07.2005, p. 5; Commission Decision of 03.05.2005 on public funding for broadband network in Limousin, France (Case N 382-2004), summary notice in OJ C 230, 20.09.2005, p. 6. 2466 Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users’ rights relating to electronic communications networks and services (Universal Service Directive), OJ L 108, 24.04.2002, p. 51.

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band support involve qualitative assessments in form of a ‘beauty contest’ and they are unlikely to qualify as a public procurement procedure for the purposes of Altmark. It is further questionable whether the Commission would accept a procedure involving discretionary elements to escape the State aid rules when it has no means to verify those criteria itself. The use of ‘negotiated procedures’ in funding schemes might therefore raise concerns as to the existence of State aid. The third Commission decision involving Altmark and coming to the conclusion that a particular French measure involved no State aid is the Hauts-de Seine decision.2467 The measure involved compensation of EUR 59 million, granted by the French authorities to a group of undertakings for the establishment and operation of a very-high-speed broadband electronic communications network (project THD 92). The Commission’s analysis broadly followed the PyrénéesAtlantiques and Limousin-Dorsal precedents in declaring the Altmark criteria to be met. The Hauts-de Seine decision was challenged by competitors on the basis that the Commission should have opened the formal investigation procedure to carry out an in-depth assessment. They argued that the roll-out of the passive net infrastructure in that densely populated region of France did not require subsidies and that there was a risk of overcompensation. In its decision, the Commission dealt with the fact that the public service mandate covered profitable and non-profitable zones. However, the Commission was convinced that the methodology chosen by the French authorities would guarantee that the public subsidy, which was in any case limited to a maximum amount, only covered the costs of the non-profitable areas. The General Court rejected their annulment action.2468

3.1115

3.2 Compatibility assessment in the broadband sector 3.2.1 General principles of compatibility in the broadband sector The compatibility of State intervention to support broadband deployment is generally assessed under Article 107(3)(c) of the Treaty.2469 As laid out in detail in section 2.5 of the Broadband Guidelines, the compatibility assessment fol-

3.1116

2467 Commission Decision of 30.09.2009 – on broadband project in French Hauts-de-Seine department (Case N 331/2008), summary notice in OJ C 256, 23.09.2010, p. 1. 2468 Judgement of General Court on16.09.2013 in joint cases [T-79/10 ], Colt Télécommunications France / Commission; [T-258/10] Orange / Commission and [T-325/10] Iliad e.a. / Commission. 2469 Broadband State aid cases may also be implemented in assisted areas within the scope of Article 107(3)(a) of the Treaty, and the specific rules on regional aid. In that case, the Member State needs to demonstrate that the project in question contributes towards a coherent regional development strategy and will not result in unacceptable distortions of competition.

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lows the Commission’s “balancing test”. It weighs the positive impact of the aid measure against its potential negative effects like distortion of competition or trade. According to that test, the project needs to (a) contribute to the achievements of objectives of common interest, (b) address a market failure or important inequalities, (c) be an appropriate policy instrument, (d) have an incentive effect, (e) limit the aid to the minimum necessary and (f ) limit the distortions of competition. The Commission’s assessment will then look at the balance of the positive and negative effects of the planned investment.

3.2.2 The Broadband Guidelines 3.1117

The Broadband Guidelines distinguish between basic and NGA networks. The logic behind the distinction is that while the former is based on the existing legacy network (or other wireless technologies), NGAs represent new infrastructures with enhanced characteristics and are able to deliver advanced connectivity services (very high up-load and down-load speeds, etc.).

3.1118

The Broadband Guidelines specify the conditions to be met to fulfil the balancing test, as described in section 3.2.1. In order to assess the existence of market failures, the Broadband Guidelines use the concept of “white”, “black” or “grey” target areas for State intervention. “White areas” are those where broadband services are currently not available and where no network expansion plans are pursued by private investors within the near future (specified as a period of three years). Those “white areas” are eligible for State aid. By contrast, no State intervention is needed in “black areas”, since they are characterised by at least two broadband network providers and by the provision of broadband services under competitive market conditions (facilities-based competition). In “grey areas”, considered as those with a de facto monopoly, State aid is permitted only under certain circumstances, and the Commission must make a more thorough assessment. To justify the proposed categorisation of a particular region, the Member State has to provide detailed mapping information including coverage and market analysis. The ‘colour scheme’ applies to both basic broadband and NGA funding.

3.1119

The balancing test then sets out a number of principles to limit the distortion of competition to the minimum. First, it has to be demonstrated that, in order to address the market failure, there is no better way of intervention (such as regulation). Moreover, the Broadband Guidelines set out concrete conditions that have to be fulfilled for the intervention to be considered as not excessively distortive: an open tender process, the choice of the most economically advantageous offer, technological neutrality, use of existing infrastructure, wholesale 864

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third party access at prices derived from benchmarking and a claw-back mechanism to avoid over-compensation. In rural and remote areas there is often only limited demand for access. Economic incentives for third parties to engage in those areas may be still too small in comparison to other regions even when wholesale services are available. Some national authorities have argued that wide-ranging access conditions would therefore inflate costs of such projects without generating more competition. As discussed below, that point was taken up in the “Très Haut Débit”2470 and “BD UK”2471 decisions adopted by the Commission in 2011 and 2012, respectively. In line with those decisions, paragraph 80(a) of the Broadband Guidelines introduces some flexibility with regard to areas with low population density.

3.1120

The high cost of NGA roll-out results to a large extent from civil engineering costs. To reduce costs of multiple excavations and other civil works, it is important to share existing ducts.2472 However, experience has shown that existing infrastructure is often not sufficiently exploited. As a result, there is a risk of wasteful duplication of investments. For that reason, the Broadband Guidelines have introduced a number of transparency requirements and clarify the rules for access to existing infrastructure. Local authorities rarely have the required technical knowledge and expertise to deal with regulatory issues in the broadband sector. Issues such as access pricing and the choice of the adequate access technology can be quite complex. That lack of knowledge can create numerous problems. For instance, there is a risk that awarded operators may try to fleece less experienced local authorities in the context of defining access and pricing obligations, thereby gaining unwarranted advantages over access seeking competitors. Second, a decentralized policy significantly increases transaction costs of network operators if there is no harmonization at the national level between the different State aid projects. In some State aid cases the national regulatory authority (NRA) is deeply involved in that step (e.g. in Finland, France), or earlier decisions of the NRA regarding wholesale access prices are explicitly taken into account (e.g. in UK, Italy). Such an approach allows the risk of competitive distortions to be limited and reduces the transaction cost of operators. For that reason the Broadband Guidelines ask Member States to give their NRAs an advisory role on technical aspects of implementation.

3.1121

2470 Commission Decision of 19.10.2011 on French programme “Très Haut Débit”(Case N330/2010), summary notice in OJ C 364, 14.12.2011, p. 1 2471 Commission Decision of 07.11.2012 on Broadband Delivery UK framework scheme (‘BD UK’) (Case SA.33671 (12/N)), summary notice in OJ C 16, 19.01.2013, p. 1. 2472 See OECD, ‘Next Generation Access Networks and Market Structure’ [2011] OECD Digital Economy Papers No. 183, p. 38.

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3.1122

While certain regional projects, such as those in Cumbria in 20032473 and in Sardinia in 20062474, have seen a profitable application of the claw-back mechanism, the practical relevance of the claw-back mechanism to avoid over-compensation has been limited to date.

3.1123

Finally, there is little knowledge about the implementation of State aid decisions in the broadband sector. Gathering information about the implementation of State aid decisions may lead to “best practice” recommendations in the future. An ex post reporting obligation on certain elements of the authorised measures and transparency obligations2475 should lead to an improved assessment of the effectiveness of the authorised aid.

3.2.3 General Block Exemption Regulation (GBER) in broadband 3.1124

State aid in broadband is exempted from the notification obligation if it fulfils the conditions of Article 52 of the GBER. The provisions of Article 52 require that such projects should be carried out in areas where no equivalent infrastructure exists yet. Thus, State aid for a basic broadband project would have to be carried out in a “white basic broadband area”, while a NGA project could only be carried out in a “white” NGA area.2476 In addition, a NGA infrastructure would have to provide full unbundling, so that the operator would have to give access both to the passive and the active elements of the network. Full unbundling ensures that any competitor can access the publicly-funded network to compete with the network operator on equal terms.

3.1125

Broadband projects which fulfil those conditions can be considered to have a very limited (if any) distortive effect on the market and they should be pro-competitive. As can be deduced from recital (71) of the GBER, its provisions follow the principles of the Broadband Guidelines. Thus, the principles laid down in the latter, such as technological neutrality or the need to carry out an open tender2477 before granting the aid, also apply to the GBER. That shared philosophy also provides some guidance on the question whether in the broadband sector GBER-compatible aid is limited to only certain types of aid. Article 52(1) and (2) of the GBER specifies that the GBER applies to “investment aid”. That limi2473 Commission Decision of 10.12.2003, N 282/2003 - Cumbria Broadband-Project ACCESS. 2474 Commission Decision of 22.11.2006, N 222/2006 - Digital Divide in Sardinia. 2475 Among other, the Broadband Guidelines require that the granting authorities should publish information on the winning bid including the selected operator, the timeframe on which the investments will take place, the proposed technological solution(s), the aid amounts and/or aid intensity of the measure. 2476 The latter, however, could be basic “grey” or “black”. 2477 Article 52(4) of the Broadband Guidelines.

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tation, in principle, would exclude the granting of aid which also comprises operating aid. However, such an interpretation would deviate from the Broadband Guidelines which in practice allows all types of aid, including so-called “gap funding”. The presumption of the Broadband Guidelines is that the public tender should limit the aid amount to the minimum (which is further ensured by a claw-back mechanism). In that case, for the provision of broadband infrastructure, it becomes of secondary importance whether part of the aid qualifies as operating aid. Consequently, as in the broadband sector the GBER follows the principles of the Broadband Guidelines, when being consulted on individual cases, it would seem possible to apply the Broadband Guidelines by analogy and consider that “gap funding” is compatible with the GBER.

3.1126

Following the entry into force of the GBER, the Commission has already sent “confirmation letters” to some national authorities confirming that it considers a particular broadband measure to be covered by the GBER.

3.1127

However, given the multitude of technological solutions available and the technical specificities of the broadband sector, it is unlikely that the GBER can replace the notification of broadband cases on a large scale. For instance, many NGA broadband State aid cases concentrate on FTTC solutions. Bringing fibre to the cabinet can considerably increase the speed available to the end-customer, even if the “last mile” copper line remains unchanged. However, in such cases the increase in speed will depend on the distance between the home and the cabinet. In many cases the intervention will therefore lead to NGA solutions for some and to an improved basic broadband service for other households. If the target area is already “basic grey” or “black”, such a FTTC solution would then not fulfil the GBER requirements.

3.1128

3.3 Ex post monitoring While the exemption from the notification obligation under the GBER grants Member States significant discretion, as a quid pro quo, the Commission has extended its ex-post monitoring of individual broadband cases. In 2014, ex-post monitoring has been carried out of the German duct scheme and the Slovenian national broadband scheme. In both cases the national schemes comprised numerous individual projects. The Commission selected a few of these projects to verify whether their implementation was in line with the Commission decisions.

3.1129

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4.

Recent case practice

4.1 Rules for infrastructure 3.1130

In the early days of approval for broadband support, Member States argued that such State intervention did not fall within the scope of Article 107(1) of the Treaty, but should be seen as general infrastructure financing. As early as 2006, when the Commission had to deal with those arguments for assessing the support for broadband infrastructure, it rejected that line of reasoning. The Commission made it clear from the early stages of its decisional practice on broadband, e.g. in its “Metropolitan Network Areas for Ireland” (MAN) Decision2478, that it would not accept broadband deployment support to happen be given outside the application of then Article 87 EC Treaty, now Article 107 (1) TFEU of the Treaty. In the MAN decision the Commission underlined that, contrary to general infrastructures which are open on a non-discriminatory basis to end users, ( e.g. within the transport sector), broadband projects are (normally) deployed by market operators on commercial terms. Public interests with regard to broadband deployment can be pursued in the framework of providing a SGEI, but are not as such sufficient to deny the application of Article 107(1) of the Treaty (unless the Altmark criteria are fulfilled).

3.1131

However, at that stage the Commission did not consider the construction of broadband networks, i.e. in particular the civil works, to be State aid, as long as the construction works were allocated after the conduct of a public procurement procedure.2479 State aid was considered only to arise later, i.e. when the public authorities made the constructed network available to public undertakings. Even if a tender was carried out, for example for the management of the infrastructure, that tender was normally not considered to ‘take away’ the advantage.2480 But the question of whether State aid could already be involved at 2478 Commission Decision of 08.03.2006 on Irish Metropolitan Area Network Broadband Program (‘MAN’) (Case N 284/2005), summary notice in OJ C 207, 30.08.2006, p. 2. See also Commission Decision of 20.07.2004 on British Broadband infrastructure scheme for business park (‘ATLAS’) (Case N 213/03), summary notice in OJ C 131, 28.05.2005, p. 10. 2479 See Commission Decision of 08.03.2006 on Irish Metropolitan Area Network Broadband Program (‘MAN’) (Case N 284/2005), summary notice in OJ C 207, 30.08.2006, p. 2, recital 45, which explicitly states that State aid only comes in at the stage ‘after construction’ when the facility is made available to broadband operators or managers of the infrastructure. See also Commission Decision 2007/175/EC of 19.07.2006 on the measure which the Netherlands are planning to implement concerning a broadband infrastructure in Appingedam (case C 35/2005 ex N 59/2005), OJ L 86, 27.03.2007, p. 1, recital 53, where the investment of the municipality into a passive infrastructure was seen as an advantage to the ‘municipal foundation’ which did not pay any remuneration for its use, but the construction as such was not addressed. 2480 See Commission Decision of 08.03.2006 on Irish Metropolitan Area Network Broadband Program (‘MAN’) (Case N 284/2005), summary notice in OJ C 207, 30.08.2006, p. 2, recital 47.

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the very first stage, i.e. at the level of the construction, had not been addressed. That situation was to change following the landmark judgment of the General Court in Leipzig-Halle.2481 In that judgment the General Court found that the construction of a new runway for an airport, which was financed with State resources, constitutes State aid as it is intrinsically linked with another activity, which qualifies as an economic activity.2482 The General Court rejected the thesis put forward by Germany denying that financing of that kind of infrastructure should be considered to take place outside the application of the State aid rules. The judgment arrived when the Commission was analysing the France’s Très Haut Débit broadband programme. In one of the detailed arrangements of that nation-wide support initiative, France foresaw the allocation of State resources to the local and regional authorities which would construct passive broadband infrastructure and also exploit that infrastructure commercially at wholesale level without the help of an outside operator.2483 The Commission, in line with the approach set out by the General Court in Leipzig-Halle, found that the offering of broadband infrastructure by those public authorities on the wholesale level constituted an economic activity, as goods and services were offered on the market against remuneration. The necessary step before that, i.e. the construction of the passive network, was carried out exactly for the purposes of offering wholesale broadband access and thus intrinsically linked to it. Legally, that prior step therefore shared the same qualification as ‘economic activity’ as the wholesale operation itself. For that reason, the Commission did not follow the argument put forward by France that the construction of the network was ‘public’ in nature, but considered its financing in favour of the public authorities as State aid.2484

3.1132

4.2 Compatibility 4.2.1 The scope for intervention The Broadband Guidelines are mainly relevant for their guidance on when State aid for broadband deployment can be found compatible. In a nutshell, the Commission tailors the compatibility requirements to the competitive situation in

3.1133

2481 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and others v Commission (‘Leipzig-Halle‘) ECLI:EU:T:2011:117. 2482 The General Court found that the operation of an airport is indeed an economic activity and the airport operator thus an undertaking within the meaning of Article 107(1) of the Treaty. The use of the runway is part of that economic activity and the construction could not be separated from it. 2483 That type of in-house operation was based on the concept of ‘regie’ under French administrative law. 2484 Commission Decision of 19.10.2011 on the French programme “Très Haut Débit”(Case N330/2010), recitals 43 and 44. That type of intervention is, based on this case, described in point 3 of Annex I to the Broadband Guidelines 3.

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the geographic area in which the support should take place. It makes a further distinction depending on whether the support concerns basic broadband or NGA networks. As discussed in section 3.2.2. above, the Broadband Guidelines distinguish three different target areas according to a colour scheme.2485 “White areas” are those in which broadband is not available and such deployment is not foreseen within the next three years. In “grey areas” there is one network operator present and in a “black area” at least two broadband network providers are present. In the Très Haut Débit decision the Commission clarified that the presence of one network provider at the infrastructure level and service providers offering services at the downstream level were not to be considered as ‘two network operators’. Thus, the geographic area does not qualify as “black” because the network operator competes with an access seeker at the downstream level.2486

3.1134

The colour code and the competitive analysis is the same for support for very high speed broadband connections, so-called NGA networks. Nowadays, in areas in which not even basic broadband is available, some Member States decide to immediately support NGA networks. In other areas, basic broadband networks are no longer considered sufficient for the needs of the society and a NGA upgrade is envisaged.

3.1135

Where a broadband infrastructure already exists, public intervention to upgrade such infrastructure can be distortive as it may overbuild private investments. Such potential distortions can only be accepted if the intervention delivers a clear improvement to end-customers. The Broadband Guidelines therefore clarify the assessment methodology by introducing the so-called “step-change” approach.2487 In order to be compatible, public funding of broadband projects must produce a significant improvement over already available infrastructure and services. Such a step-change can stem from a more powerful infrastructure (for instance in terms of speeds) or from a more pro-competitive topology.2488

2485 See paras 66, 67 and 72 of the Broadband Guidelines. 2486 See above, SA. 31316, para. 67, according to which the notion means two competing infrastructures. That approach is taken up now in footnote 86 of the Broadband Guidelines. 2487 Para. 51. 2488 As an example, the funding of only “passive” networks is considered a pro-competitive way of accelerating rollout of broadband. The Broadband Guidelines therefore incentivize the building of such infrastructure projects as opposed to “gap funding” in two ways: (1) introducing a condition by which priority should be given to “passive only” infrastructures in the tender procedures (para. 80 (b)) and (2) making the funding of “passive-only” infrastructure (i.e. funding of civil works or of duct/dark fibre rollout) or funding of backhauls subject to less stringent conditions (para. 81).

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The Broadband Guidelines contain no quantitative definition of a NGA network but acknowledge that at the current stage of technological development such networks are fibre-based. To take into account technological progress, paragraph 58 lays down qualitative criteria for NGA networks, in particular to guarantee (i) actual delivery of very high speeds2489, (ii) a variety of advanced digital services and (iii) substantially higher upload speeds compared to basic broadband networks.2490 Fibre-based access networks, advanced cable networks and certain advanced wireless access networks are explicitly mentioned as possible NGA networks while footnote 69 to the Broadband Guidelines acknowledges that other technologies may be included in the future.

3.1136

Paragraph 60 of the Broadband Guidelines introduces a new category of very fast networks, so-called Next Generation Networks (NGN). The term NGN is used for backhaul networks which – unlike NGA – do not reach the end-user. Investment in NGN fibre infrastructure therefore does not necessarily provide very high speed access to the end-customers, because their speed of access would depend on the technology used to cover the “last mile”. The Commission clarified its position in the Xarxa Oberta decision and subsequently in the second German ducts decision.2491 In Xarxa Oberta the Commission found that support for an upgrade in a basic broadband area, in which several basic broadband providers were present, should only be authorised if there was a mechanism to ensure that the higher speed will reach the end-customers. The State aid should not lead to just a duplication of existing basic networks or broadband offers, but only be granted if the supported network provides added value. On the other hand, NGN investment has positive features. It brings the fibre closer to the end-customer. Backhaul networks are a necessary input for retail operators which can connect different types of “last-mile” infrastructure themselves (like fixed-wireless access in competition to copper- based fixed infrastructure).2492

3.1137

2489 Technologies which use a shared medium face significant discrepancies between nominal speed and actual speeds, depending on the number of actual users. To qualify as NGA, minimum speeds have to be guaranteed. 2490 At the current state of technological development, delivering high up-load speeds is particular difficult for wireless and satellite networks. 2491 See Commission Decision of 11.08.2010 on Optical Fiber in Catalonia (‘Xarxa Oberta’)(Case N 407/2009), summary notice in OJ C 259, 25.09.2010, p. 1; Commission Decision of 24.01.2011 on German Next Generation Access Infrastructure project in Rotenburg (Case N 451/2010), summary notice in OJ C 40, 09.02.2011, p. 5. 2492 In Poland, a backhaul network was built covering mostly passive elements. By providing wholesale access to other operators, the project aims to encourage private investment into NGA networks (“last mile” connections). To prevent undue distortions of competition, connection for the provision of basic broadband services is not permitted in areas where at least two competing basic broadband networks are already in place (“basic black area”). See Commission Decision of 14.12.2012 on Polish Broadband network in Lower Silesia (Case SA.33386), summary notice in OJ C 36, 08.02.2013, p. 6.

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3.1138

According to paragraph 81 of the Broadband 2013 Guidelines, such pro-competitive features will be taken into account in the assessment of such projects.

3.1139

In general, the possibilities of State intervention are decreasing, the more competitive the target area the fewer are the possibilities of State intervention. In „white” basic broadband areas only the conditions of paragraph 78(a)-(h) have to be fulfilled. For “grey” areas a more detailed assessment of the need for a State intervention is necessary and in “black” areas normally no support should be granted, as there is no market failure.

3.1140

There are a number of conditions which need to be fulfilled for declaring the aid compatible. Apart from a meticulous identification of the competitive situation in the target area and its classification according to the colour code, the most important are the presence of a tender, technological neutrality, and open and effective access. The access requirement in particular has led to discussions between the Commission and the Member States.

4.2.2 Common compatibility issues 4.2.2.1 Competitive selection procedure 3.1141

According to paragraph 78(c) of the Broadband Guidelines, the aid should be allocated following an open competitive selection procedure. As the Broadband Guidelines state, the use of that procedure fulfils two objectives by i) minimising the State aid and ii) ensuring that the aid beneficiary is not known in advance. Experience shows that there is a tendency of public authorities to contract with the national telecommunications incumbent, which the selection procedure requirement seeks to avoid. The criterion is of paramount importance for the compatibility assessment.2493 However, the question sometimes arises whether there always has to be such procedure, for example, when the municipality decides to construct a broadband network or parts thereof itself. The question was partially answered in Très Haut Débit. In one of the support mechanisms of that French broadband programme, the public authorities would run a passive wholesale network to which they grant access, themselves, with support from a dedicated State fund. That so-called Regie system under French administrative law is an in-house activity by the local administration.

2493 See Chirico and Gaal, ‘State aid to broadband, primer and best practices’[2011] CPN No. 1, who rightly point out that if the selection procedure was not respected or flawed, the whole process would have to be re-done.

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In its decision, the Commission classified offering wholesale services as ‘economic in nature’2494 and considered the funding to be State aid, as the public authorities were not conducting that activity on market terms. The Commission did not require, however, that in such situation a tender needs to be conducted first. First, there is no general principle that every State intervention – unless national or Union public procurement rules apply and require a tender – has to be market tested before, to establish whether a private operator could conduct the activity in a more efficient and less costly manner. The Commission underlined that in casu the public authorities did not act as a broadband investor, which is the situation foreseen by the Broadband Guidelines. The tender criterion should avoid that the State pre-selects an operator. If the State carries out the activity itself, that objective is no longer relevant. On the contrary, the network offered by the public authorities should stimulate competition as it provides open and non-discriminatory access to all broadband operators interested in using it. The public authorities limited themselves to managing the network access, without themselves having any intention to become a fully-fledged broadband operator. Their activity was not profit-making in nature and they were by law required to operate only in one given geographic area. Subsequently, the Commission approved public ownership of infrastructure in several other cases. Typically, the operator of the network is then selected by an open tender.2495

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Another question is whether any tender procedure will suffice to meet the criterion of Article 78(c) of the Broadband Guidelines. Sometimes the question is raised whether the ‘competitive dialogue procedure’ will be sufficient, as it contains elements of negotiation. The competitive dialogue procedure is foreseen in Article 29 of Directive 2004/18/EC2496 and provides, while still maintaining that the public contract shall be awarded on the sole basis of the award criterion for the most economically advantageous tender, that such an outcome can also be achieved by organising a dialogue the aim of which shall be to identify and define the means best suited to satisfying the needs. The negotiation might include all aspects of the contract. One could question whether such procedure is sufficient to ensure aid minimisation, as elements of discretion enter via the negotiation, and whether any bidder is still able to compete on the same terms. Therefore, the competitive dialogue provides that a tender notice is published, so again – as required by the Broadband Guidelines – equal and non-discrimi-

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2494 Offering broadband access is an activity provided against remuneration and also offered by private telecommunication operators, who act as broadband wholesalers on a given geographic market. 2495 Commission decision of 21.04.2015 in case SA 39518 – Germany – NGA cluster Nordhessen. 2496 Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts, OJ L 134, 30.04.2004, p. 114.

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natory treatment of the bidders is ensured. The Commission has thus confirmed in several decisions that the use of that procedure fulfils the Broadband Guidelines’ compatibility criterion.2497

4.2.2.2 Definition of NGA 3.1144

Paragraph 57 of the Broadband Guidelines specifies that at the current stage of technological development NGA networks are access networks which rely mainly on optical elements. While that term can include wireless and mobile technologies when used as complements, the Broadband Guidelines also acknowledge that in the future other technologies may also be able to deliver NGA services. Paragraph 58 sets out the main qualitative characteristics of NGA networks. They include, apart from fibre-based access networks, advanced cable networks and advanced wireless access networks – to the extent that they can deliver reliable high up-load2498 and download speeds and support a variety of advanced digital services.

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The term “reliable high speed” implies that the tender of a publicly-financed NGA project must require a minimum speed. At the current stage of development that requirement raises a hurdle for certain technologies such as LTE or cable TV networks which, as a shared medium, face significant variance in speed depending on the number of users in the network. Similarly, they face the obstacle that they may not offer sufficient up-load speed. In the case of vectoring technology the speed declines with the length of the copper cable.2499 As a result, it is unlikely that at the current level of technological development vectoring can be considered an NGA solution in rural areas.

4.2.2.3 Technological neutrality 3.1146

Discriminating against certain technological solutions can be as detrimental for the overall outcome as discriminating between particular platform operators. The principle of technological neutrality has therefore been confirmed by the Union Courts.2500 In that respect, there is no substantial change between the 2497 E.g. Commission Decision of 12.05.2010 on Cornwall & Isles of Scilly Next Generation Broadband (Case N 461/2009), summary notice in OJ C 162, 22.06.2010, p. 1; Commission Decision of 10.01.2008 on Amendment of N131/2005 Fibre-speed broadband project in Wales (Case N 692/2007), summary notice in OJ C 124, 21.05.2008, p. 1. 2498 High up-load speed is particularly important for business users of the network. 2499 As a rule of thumb, a final customer who is more than 800 meter away from the street cabinet is unlikely to receive speeds necessary for the delivery of NGA services. 2500 See Case T-8/06 FAB v Commission ECLI:EU:T:2009:386 and Case C-403/10 P Mediaset v Commission ECLI:EU:C:2011:533.

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Broadband Guidelines and their 2009 predecessor. For the tender process, both require that bidders should be free to propose the technological solution which they deem most suitable. In some cases, the principle of technological neutrality has been misunderstood as implying that the aid-granting authority would have to ensure that, irrespective of the particular needs, any kind of technology should be eligible. However, the principle of technological neutrality is not an end in itself. It can be disregarded if a particular technology is not suitable to achieve the particular objectives of the tender. Such qualitative criteria may include, for instance, minimum up-load or down-load speeds or open access conditions (see below). As discussed above, in the NGA definition the Broadband Guidelines themselves exclude certain technologies if they do not meet the qualitative requirements. To avoid that misunderstanding in the future, in paragraph 78(c) the Broadband Guidelines explicitly state that the granting authority is entitled to select the most suitable technological solution on the basis of objective tender criteria.

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4.2.2.4 Open and effective access2501 Due to the cost structure of broadband networks (and in particular NGA networks), which in many circumstances have “natural monopoly” characteristics, competition among different commercial infrastructure providers is often quite unlikely to emerge. It is therefore important to ensure that competition can take place at least on the subsidised infrastructure itself. Otherwise, public subsidies would finance (private) monopolies to the detriment of the consumer. Open and effective access to a publicly financed infrastructure as required in paragraph 78(g) of the Broadband Guidelines could be considered to be an objective of public interest. It would then override other principles, as for instance the principle of technological neutrality or the principle of reducing State aid to the minimum. As discussed in section 2.2, some technologies can provide better access conditions than others and are therefore more suitable for intra-network competition. For instance, for the reasons explained in section 2, FTTH (P2P) technology is better from a competition point of view than FTTC. However, the latter is likely to win in a tender which only focusses on price. The more restrictive FTTC solution is cheaper and in addition it would be preferred by an incumbent as it allows competitors’ access to be limited. It would therefore be

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2501 Ensuring that access is actually effective requires going into some technological detail. For instance, if in a particular project only active equipment is funded, access conditions may only be effective if they also require access to passive infrastructure. Without an obligation on the incumbent to offer passive wholesale services and access to the Street cabinet, alternative operators could hardly enter the market.

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justified if a tender were to give preference to the more open FTTH technology. Certain technologies may even be excluded from a tender, if they do not fulfil minimum access requirements. This may be the case, for instance, for vectoring technology. Vectoring allows the transmission speed on the traditional local copper infrastructure to be considerably improved. It is already used by national incumbents in Ireland, Belgium, Denmark and Germany.2502 However, vectoring suffers from interference if the use of copper wires is not co-ordinated. The currently available technology requires that one operator controls all copper wires at the level of the street cabinet. As a result, unbundling becomes unfeasible at the “last mile” connection. Competitors’ access is then limited to “bit-stream” and competition from alternative operators is excluded.2503 As paragraph 80 (a) of the Broadband Guidelines specifies that in the case of NGA networks effective access requires full unbundling, the Commission excluded the use of vectoring in NGA State aid decisions such as “Broadband Saxony”2504, “NGA in Sachsen-Anhalt”2505 and “NGA Bavaria”.2506 However, in 2015 the Commission for the first time accepted the use of vectoring in the German NGA scheme. By doing so, it took into account technological progress. Vectoring can be deployed once Germany has notified a virtual unbundling product (Vula). This Vula product needs to be approved by a separate decision.2507

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In two cases, for proportionality considerations the very far-reaching access requirements of the 2009 Guidelines were qualified. In both cases NGA infrastructure was built in NGA “white” rural areas. In Très Haut Debit, as discussed above, the Commission concluded that the imposition of all types of access products would disproportionately increase investment costs without delivering significant benefits in terms of increased competition. Such costly access products should therefore only have to be provided on the basis of a reasonable demand by an access seeker. A “reasonable demand” was deemed to exist if in the geographic area concerned such access products are not offered by other network operators and if the access seeker can provide a coherent business plan for its planned activity. In the “BD UK” decision2508 the Commission agreed 2502 In 2013, Germany changed its regulatory framework to allow for the use of vectoring technology. 2503 That situation may change in the future. Apparently, new vectoring solutions are being developed which would allow for several operators in the sub-loop area. 2504 Commission Decision of 12.09.2013, SA.36703 (2013/N) – Entwicklungskonzept Brandenburg Glasfaser 2020 II. 2505 Commission Decision of 13.12.2013, SA.36601 (2013/N) – NGA Sachsen-Anhalt. 2506 Commission Decision of 20.11.2012, SA.35000 (2012/N) – NGA Bayern. 2507 Commission Decicsion of 15.06.2015 in case SA.38348 – Germany. 2508 Under that “umbrella” scheme the UK government planned to fund approximately 140 projects for a total aid amount of GBP 1.5 billion by 2017. Commission Decision of 07.11.2012 on Broadband Delivery UK framework scheme (‘BD UK’) (Case SA.33671 (12/N)), summary notice in OJ C 16, 19.01.2013, p. 1.

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with the evidence provided by the UK2509 that - within the specific UK context related to the applicable regulatory framework2510 - a request for certain access could be subject to a proportionality analysis, supervised by the NRA. If aid is granted for deploying NGA infrastructure, access must be used primarily for the provision of retail NGA deployment without unduly distorting adjacent markets, such as business leased-line services.2511 The Broadband Guidelines take up those derogations for areas with low population density in paragraph 80(a). At the same time they explicitly state that they cannot be invoked for more densely populated areas where one may expect infrastructure competition to develop. For such areas all types of network access products have to be provided which are requested by the access seeker.

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4.2.2.5 Ultra-fast broadband networks Section 3.6 of the Broadband Guidelines has no counterpart in its 2009 forerunner. Section 3.6 sets out the conditions when aid can be granted for deploying ultra-fast NGA networks in “black” NGA areas. “Ultra-fast” is defined as speeds well above 100 Mbps. Points (a) to (c) of paragraph 83 of the Broadband Guidelines specify a number of cumulative criteria which have to be fulfilled to pass the “step change” test.2512 In addition to the compatibility criteria which apply for aid to NGA networks, in the case of public investment into an NGA “black” area, paragraph 84 of the Broadband Guidelines lays down three additional compatibility requirements.2513

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A first test case, albeit one which arose in relation to a “grey” NGA area, was an ultra-fast NGA project in Birmingham which focused primarily on business services.2514 The incumbent BT operated only an FTTC network while, according to

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2509 The UK provided detailed evidence and calculations that full and unrestricted access to business leased line services would allow entrants to do “cream-skimming” of the leased line market without providing NGA services – which would be contrary to the objective of the measure. 2510 The current regulatory framework of the UK does not allow third party operators to use BT’s passive infrastructure (‘PIA’) to provide business leased line services. 2511 Ofcom’s market analysis had not identified any market failure for that market (called “market 6” under the regulatory framework). 2512 In particular, the existing NGA networks do not already reach the end-user premises with fibre infrastructure, existing operators do not themselves invest into ultra-fast networks and it is shown that there exists demand for services which require such ultra-fast technology. 2513 It must be demonstrated that the subsidised network has significant qualitative improvements over existing networks, it is based on an open architecture and operated as a wholesale only network and that the aid does not lead to an excessive distortion of competition with existing NGA networks that have been built recently. 2514 Commission Decision of 12.06.2012 on City of Birmingham - Digital District NGA Network (Case SA. 33540), summary notice in OJ C 220, 25.07.2012, p. 1.

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the UK’s notification, in the area concerned there was no fiber-based cable network. The project was approved because the UK could demonstrate demand for the enhanced services, because of a number of very pro-competitive measures and because the competition concerns seemed to be limited. However, subsequently the decision was challenged in General Court by existing operators.2515 In Court, that annulment action was then suspended, as the UK authorities declared that the project would not be implemented. That first test case already demonstrates that such “ultra-fast” projects in urban areas will raise significant competition issues.

4.2.2.6 Existing infrastructure 3.1153

To better exploit existing infrastructure and reduce wasteful duplication of investment, paragraph 78(f ) of the Broadband Guidelines requires that, as a precondition to participate in the tender, any operator which owns or controls infrastructure in the target area needs to inform the aid granting authority about that infrastructure and provide all relevant information to other bidders which would allow them to include such infrastructure in their bid.2516

4.2.2.7 Claw-back 3.1154

The Broadband Guidelines clarify in paragraph 78(i) that where an operator is selected on the basis of a competitive procurement procedure, there is typically less need for ex-post monitoring of the profit. They also provide examples for an incentive-based claw-back mechanism and, compared to a lower threshold in the 2009 Broadband Guidelines, increase the threshold to EUR 10 million.

4.2.2.8 Transparency 3.1155

Several transparency measures have been introduced in the Broadband Guidelines. In paragraph 78(c) Member States are requested to set up a dedicated central website at national level to publish all on-going broadband tender procedures. Paragraph 78(f ) requires Member States to set up a national database on available infrastructure. According to paragraph 78(i), Member States must publish information on the approved aid scheme and its implementation provisions (such as the aid beneficiary, the aid amount and the technology employed) on a central website. Paragraph 78(k) requires the aid granting authority to report key information to the Commission every two years on the implementation of the aid projects. 2515 Case T-456/12 British Telecommunications v Commission, action brought on 17.10.2012. 2516 See, for instance, Commission Decision of 06.06.2013 on Polish Broadband network in the districts of Monki, Knyszyn, Goniadz and Jaswiły (Case SA 35027), summary notice in OJ C 206, 20.07.2013, p. 1.

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4.2.2.9 Role of NRAs Given their technical knowledge and expertise, paragraph 42 the Broadband Guidelines foresees a much stronger involvement of NRAs in the implementation of State aid broadband decisions. While according to paragraph 78(a) the consultation of the NRA for the mapping exercise is encouraged but optional, the NRA should in particular be consulted to determine the wholesale access price and to solve disputes between access seekers and the subsidised network operator. Member States are encouraged to provide an appropriate legal basis for such involvement of NRAs in State aid projects.

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4.2.2.10 SGEIs outside Altmark As it has been described in section 3.1.2., the provision of broadband services might be entrusted to an operator as a service of general economic interest. However, the definition of the operator’s public service remit, which falls into Member States’ competence, would be considered to be abusive, if it i) were limited to broadband provision to businesses and not universal in nature, ii) would deny access to the State-funded network and iii) lead to duplication of existing networks. The acceptability of the definition of the public service remit cannot differ according to whether Altmark or the compatibility test of Article 106(2) of the Treaty is applied. The Commission has accepted in a decision concerning broadband support for Estonia that indeed the same rules apply.2517 In the ‘SGEI’ chapter of the Broadband Guidelines2518 the Commission explains that the broadband specific characteristics also apply to the compatibility test under Article 106(2) of the Treaty.

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2517 Commission Decision of 20.07.2010 on Establishment of a Sustainable Infrastructure Permitting Estoniawide Broadband Internet Connection (EstWin project) (Case N 196/2010), summary notice in OJ C 60, 25.02.2011, p. 3. The Commission first accepted that – for its analysis of the Altmark conditions - the public service definition was correct, taking into account the requirements of paragraphs 25 seq of the Broadband Guidelines. However, it considered the Altmark criteria not fulfilled but accepted that the aid was compatible under Article 106 (2) of the Treaty in conjunction with Commission Decision 2005/842/EC of 28 November 2005 on the application of Article 86(2) of the EC Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 312, 29.11.2005, p. 67. 2518 Para. 18 seq.

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Chapter 24 Broadcasting

1.

Introduction

Member States have established different models for organising and financing public service broadcasting. The so-called Amsterdam Protocol,2519 attached to the Treaty, acknowledges the Member States’ wide margin of discretion in that respect. In that Protocol Member States attributed special status to that sector due to its importance for democratic discussion, the social needs of society and media pluralism. The very existence of the Protocol illustrates the Member States’ concern to ensure that the competition rules do not jeopardize their competence to define the scope and the organization of public service broadcasting (and probably also to exert a certain influence on its programme content), as well as to decide on its funding.

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Most Member States maintain some sort of State funding for public service broadcasting. Public broadcasters are active in a market where they compete for audience with private, commercial broadcasters. That market is evolving. Technological developments in the TV sector have resulted in a multiplication of platforms and services. In that rapidly changing media environment, new players continue to enter the market. Public service broadcasters compete not only with private broadcasters, but also with newspapers and various service providers on the internet or mobile platforms. Those competitors do not appreciate the State funding and they question whether a public service broadcaster should receive financing for its activities, in particular those on new platforms.

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2519 Protocol on the system of public service broadcasting in the Member States, OJ C 326, 26.10.2012, p. 312.

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The financing provided to public service broadcasters therefore constitutes State aid within the meaning of Article 107(1) of the Treaty, and the Commission needs to assess whether such aid is compatible with the internal market. The Commission’s Broadcasting Communication of 27 October 20092520 provides guidance on how State financing should be tailored to the needs of that sector in times of change.2521

2.

The development of the Commission’s policy approach

2.1 The early decisional practice of the Commission2522 3.1161

Commission action in the field of public service broadcasting is relatively recent. Until the 1980s, television broadcasting was provided in most Western European countries by State entities without any competition from private operators. The broadcasting market was gradually opened to competition, with the first commercial operators entering the market following the allocation of frequencies to private operators. The coexistence of public and private broadcasters led to the first complaints coming from commercial operators against State funding of public service broadcasters.2523 Their concerns focussed on the one hand on the scope of public service broadcasters’ activities; in particular they criticised the inclusion of allegedly purely commercial programmes such as entertainment and sports. On the other hand, the complainants were concerned about the possibility given to public service broadcasters to generate advertising revenues in addition to State funding, and about alleged anti-competitive behaviour on the advertising markets.

2520 Communication from the Commission on the application of State aid rules to public service broadcasting, OJ C 257, 27.10.2009, p. 1. 2521 On the overall positive influence of State aid policy on the evolution of public service broadcasting in the Union, see Donders and Moe, “European State Aid Control and PSB: Competition Policy Clashing or Matching with Public Interest Objectives?”, in: Donders, Pauwels and Loisen (eds), The Palgrave Handbook of European Media Policy, 2014, 426. 2522 An overview of Commission decisions adopted in the area of public service broadcasting can be found on the Competition Directorate’s website under: http://ec.europa.eu/comm/competition/sectors/media/decisions_psb.pdf. 2523 The first complaints were lodged by commercial operators against the Spanish public service broadcasters (1992), the French and Portuguese public service broadcasters (1993) and the Italian public service broadcaster (1996).

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It proved difficult for the Commission to assess the first complaints since there was neither an established legal practice nor any guidelines as regards the qualification of the compensation for public service obligations as aid and its compatibility assessment. At the same time, its actions in relation to one of those complaints could have significant repercussions for all Member States.

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The uncertainties regarding the qualification of compensation to public service broadcasters can be illustrated by the first Commission Decision adopted in that field, which was taken in October 1996. In that Decision, the Commission took the view that the compensation received by Radiotelevisão Portuguesa (RTP) did not constitute State aid since it was limited to the actual costs of the public service provided by RTP.2524 However, the General Court annulled that decision considering that the mere fact that payments were intended to offset additional costs resulting from the public service tasks did not prevent them from being classified as State aid.2525

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In 1998 and 1999, the Commission was condemned by the General Court for failure to act upon the complaints lodged against the Spanish and French public service broadcasters.2526 Following those judgments, the Commission initiated formal investigations concerning ad hoc financing measures in France, Italy and Portugal2527 which eventually led in 2003 to the adoption of Decisions declaring the measures in question compatible.2528

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In addition, the Commission received new complaints in relation to individual projects of public service broadcasters, such as the launch of special interest channels in Germany and the UK2529 as well as other individual projects of

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2524 Commission Decision of 02.10.1996 on aid in the audiovisual sector to help finance Portuguese public television (Case NN 141/1995), summary notice in OJ C 67, 04.03.1997, p. 10. 2525 Case T-46/97 SIC v Commission ECLI:EU:T:2000:123, para. 82. 2526 Case T-95/96 Gestevisión Telecinco v Commission ECLI:EU:T:1998:206; Case T-17/96 TF1 v Commission ECLI:EU:T:1999:119. 2527 As regards the financing regime in Spain, no such formal investigation procedure was initiated since the Commission considered it to constitute existing aid which is subject to different procedural rules. 2528 Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1; Commission Decision 2005/406/EC of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005 p. 1; see also Commission Decision 2004/838/EC of 10.12.2003 on State aid implemented by France for France 2 and France 3 (Case C 60/99), OJ L 361, 08.12.2004, p. 21. The complainants in the French and Portuguese case appealed against these Decisions. In Case T-144/04 TF1 v Commission ECLI:EU:T:2008:155 (France), the Court dismissed the application; in particular, the appellants did not produce any evidence which would have supported their claim that they were discharging similar obligations as those imposed on France 2 and France 3. Regarding Portugal (Case T-442/03 SIC v Commission ECLI:EU:T:2008:228), the Commission decision was annulled. 2529 See for instance the complaint by BSkyB against the BBC 24 hour channel lodged in 1997: Commission

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public service broadcasters.2530 The Commission approved those financing measures.2531

2.2 Development of a general legal framework 3.1166

Following the first complaints, Member States agreed in 1997 on the Amsterdam Protocol, an interpretative Protocol on the system of public broadcasting in the Member States which was annexed to the Treaty.2532 The Amsterdam Protocol recognises that Member States are free to organise and fund public service broadcasting insofar as such funding does not affect trading conditions and competition in the Union to an extent which would be contrary to the common interest. In interpreting and applying the State aid rules to public service broadcasting, the Commission is bound to respect the prerogatives recognised in the Amsterdam Protocol.2533

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In 1999, the Council adopted a Resolution on public service broadcasting2534, stressing that public service broadcasters need to “benefit from technological progress”, bring “the public the benefits of the new audio-visual and information services and the new technologies” and undertake “the development and diversification of activities in the digital age”. The Council also emphasised that “public service broadcasters must be able to continue to provide a wide range of programming in accordance with its remit as defined by the Member States in order to address society as a whole; in this context it is legitimate for public service broadcasters to seek to reach wide audiences.”

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In parallel, the Commission established broad policy considerations concerning services of general economic interest. In its Communication on Services of General Interest in Europe published in 2001,2535 the Commission recognised that

2530 2531

2532 2533 2534 2535

Decision of 12.09.1999 (Case NN 88/98), OJ C 78, 18.03.2000, p. 6, or the complaint by the association of private broadcasters in Germany, VPRT, against the thematic channels Phoenix and Kinderkanal, lodged in 1997, Commission Decision of 24.02.1999 (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3. See for instance the complaints lodged against the ZDF Medienpark in 1999, Commission Decision of 03.04.2002 (Case NN 2/2002), summary notice in OJ C 137, 08.06.2002, p. 25. See Commission Decisions of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3, and of 12.09.1999 on the BBC 24 hour channel (Case NN 88/98), summary notice in OJ C 78, 18.03.2000, p. 6. Protocol on the system of public service broadcasting in the Member States, OJ C 326, 26.10.2012, p. 312. Given that the Protocol forms, according to Article 51 TEU, an integral part of the Treaties, the Commission is legally bound by it. Resolution of the Council and of the Representatives of the Governments of the Member States, Meeting within the Council of 25 January 1999 concerning public service broadcasting, OJ C 30, 05.02.1999, p 1. OJ C 17, 19.01.2001, p. 4.

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“[i]t is for the Member States, in conformity with EC law, to decide whether they want to establish a system of public service broadcasting, to define its exact remit and to decide on the modalities of its financing.” That freedom of manoeuvre for Member States also included the choice of so-called “dual funding”, i.e. the combination of public funds with advertising revenues. The general acceptance of “dual funding” and of Member States’ freedom to define the public service remit paved the way for the adoption of guidelines on the application of State aid rules to public service broadcasting. The first Broadcasting Communication was adopted by the Commission in November 2001.2536On the basis of the 2001 Communication, the Commission launched a review of the financing of public service broadcasters in France, Italy, Spain and Portugal. Those procedures were terminated in April 2005 (in the case of France, Italy and Spain)2537 and in March 2006 (in the case of Portugal),2538 after the Member States concerned had adopted the necessary safeguards or committed to implementing them.

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The Commission also assessed notifications of support measures in favour of public service broadcasters. In all cases, the Commission adopted decisions declaring the State aid compatible with the Treaty without opening the formal investigation procedure.2539

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Complaints were lodged against the financing regimes in Germany, The Netherlands, Ireland, Austria and Belgium. In those cases, the complainants expressed concerns about overcompensation and the cross-subsidisation of commercial activities. But their complaints also concerned the scope of public service broadcasters’ activities, in particular in the new media environment and as regards the

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2536 Communication from the Commission on the application of State aid rules to public service broadcasting, OJ C 320, 15.11.2001, p. 5. 2537 Commission Decision of 20.04.2005 on the financing of RTVE (Case E 8/2005), summary notice in OJ C 239, 04.10.2006, p. 17; Commission Decision of 20.04.2005 on licence fee payments to RAI (Case E 9/2005), summary notice in OJ C 235, 23.09.2005, p. 3, and Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary notice in OJ C 240, 30.09.2005, p. 20. 2538 Commission Decision of 22.03.2006 on the financing system of RTP (Case E 14/2005), not published, press release IP/06/349 of 22.03.2006. 2539 Commission Decision of 13.02.2002 regarding local TV channels in Belgium (Case N 548/2001), summary notice in OJ C 150, 22.06.2002, p. 7; Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), summary notice in OJ C 23, 30.09.2003, p. 6 and Commission Decision of 01.10.2003 on the BBC digital curriculum (Case N 37/2003), summary notice in OJ C 271, 12.11.2003, p. 47; Commission Decision of 02.02.2005 on the Danish plans to recapitalise TV2 (Case N 313/2004), summary notice in OJ C 172, 12.07.2005, p. 3; Commission Decision of 07.06.2005 on a French international news channel (Case N 54/2005), summary notice in OJ C 256, 15.10.2005, p. 25; Commission Decision of 16.07.2008 on capital injection for France Télévisions (Case N 279/08), summary notice in OJ C 242, 23.09.2008, p. 1.

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acquisition of sports rights. The Commission took the preliminary view that those financing regimes were not fully compatible with State aid law. Letters setting out the Commission’s concerns were sent to Germany, Ireland and The Netherlands in March 2005,2540 to Belgium in July 2006 for the Flemish Community2541 and April 2013 for the French Community and to Austria in January 2007.2542 The investigation into the financing of the German public service broadcasters was eventually closed in April 2007, after the German authorities gave commitments to change the at the time applicable financing regime.2543 Similarly, the investigations into the Irish and Belgian Flemish public service broadcasters were closed in February 2008,2544 into the Dutch broadcasters in 2010,2545 and into the Belgian French public broadcaster in May 2014.2546

3.1172

The cases regarding Germany, the Netherlands, Ireland and Belgium focussed on the introduction of an ex-ante mechanism for the provision of new media services. The Commission found that a solution should be established at national level, avoiding any necessity for it to scrutinise each programme or internet presence of the broadcaster to assess whether it meets the public service test.

3.1173

In terms of the results of those complaints, the investigation into the financing of the two German public service broadcasters marked an important step towards the development of the ‘ex-ante test’ and paved the way for a revision of the 2001 Communication. For the introduction of new media services, Germany introduced a three-step test which foresaw an analysis of i) whether the new service meets the democratic, social and cultural needs of society, ii) whether it contributes to the quality of editorial competition and iii) its financial impact.

2540 2541 2542 2543

See press release IP/05/250 of 03.03.2005. See press release IP/06/1043 of 20.07.2006. See press release IP/08/130 of 31.01.2008. Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007 p. 1. 2544 Commission Decision of 27.02.2008 on the financing of RTE and TNAG (Case E 4/2005), summary notice in OJ C 121, 17.05.2008, p. 5; Commission Decision of 27.02.2008 on the funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7. 2545 Commission Decision of 26.10.2010 on the yearly financing of Dutch public broadcasters (Case E 5/2005), summary notice in OJ C 74, 24.03.2010, p. 4. 2546 Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ C 233, 18.07.2014, p. 1.

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Another group of cases concerning Spain and France2547 dealt with the detailed arrangements of financing the public service broadcaster. Spain and France abolished advertising and replaced it by State funding based on levies charged on telecommunication operators. In the case concerning the Danish radio channel FM4, the Commission assessed whether the way the public service broadcaster was chosen fulfilled the fourth Altmark criterion.2548

3.1174

2.3 The 2009 Broadcasting Communication The evident need to introduce a mechanism allowing Member States to adapt the public service remit of broadcasters to the rapidly changing technologic environment led the Commission to review its rules on compatibility of State aid to broadcasters. The Broadcasting Communication of 2 July 20092549 (“the 2009 Communication”) revised the previous rules of 2001.2550 It is based on Article 106(2) of the Treaty concerning the application of competition rules to services of general economic interest.

3.1175

To a large extent the 2009 Communication confirms and clarifies the rules of 2001. It requires that there must be a true service of general economic interest, which is clearly defined as such; the undertaking carrying out that service must be clearly entrusted with that task. The development of trade must not be affected to such an extent as would be contrary to the interests of the Union. Furthermore, the public service compensation should not exceed the net costs of the public service.

3.1176

The 2001 Communication did not have a section on financial control. The 2009 Communication stipulates that Member States should ensure regular supervision of the use of public funding and the carrying out of the public service mandate.

3.1177

2547 Commission Decision of 20.07.2010 on a new tax based funding system for public broadcasting in Spain (Case C 38/2009), OJ L 1, 04.01.2011, p. 9; Commission Decision of 20.07.2010 on subvention pluriannuelle pour France Télévisions (Case C 27/2009), OJ L 59, 04.03.2011, p. 44. Both decisions were challenged in the General Court but were upheld, in Case T-533/10 DTS Distribuidora de Televisión Digital v Commission ECLI:EU:T:2014:629 (under appeal as Case C-449/14) and in Case T-151/11 Telefónica de España and Telefónica Móviles España v Commission ECLI:EU:T:2014:631 for the Spanish measure, and in Case T-275/11 TF1 v Commission ECLI:EU:T:2013:535 for the French measure. 2548 Commission Decision of 23.3.2011 on the Danish radio channel FM4 (Case SA.32019), summary notice in OJ C 131, 03.05.2011, p. 1; regarding the notion of aid and the Altmark criterion cf. part 2, chapter 11, and part 4, chapter 33. 2549 Communication from the Commission on the application of State aid rules to public service broadcasting, OJ C 257, 27.10.2009, p. 1. 2550 OJ C 320, 15.11.2001, p. 5; for an overview about the preparation and background see Repa, Tosics, Dias, Bacchiega, The 2009 Broadcasting Communication, Competition Policy Newsletter 3/2009, p. 10.

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3.1178

Regarding the relationship between the 2009 Communication and the Commission’s rules on State aid for services of general economic interest, paragraph 8 of the European Union Framework for State aid in the form of public service compensation explicitly excludes broadcasting from its scope of application.2551 On the other hand, the Decision on State aid in the form of public service compensation is, in principle, applicable to all sectors, including broadcasting.2552 If a compensation measure fulfils the requirements set out in the Decision, it is compatible with the Treaty and does not need to be notified to the Commission. The Decision is, however, only applicable to annual compensation payments of not more than EUR 15 million. Consequently, it is applicable in practice only to smaller regional and local broadcasters. It is therefore surprising that in 2013 the Commission did not even consider the possibility that the annual support of EUR 600 000 to a French local radio station could fall under the Decision.2553

3.1179

Regarding the scope of the application of the 2009 Communication, the Commission does not apply it to every publicly financed broadcasting service. In the case of the international news channel France 24, the Commission found that it would be covered neither by the Amsterdam Protocol nor by the (then 2001) Broadcasting Communication (which is the logical consequence of the measure not coming under the Amsterdam Protocol). It considered in a rather summary way that the principal objective of that service, the international impact (“rayonnement”) or presence of France through a high quality channel for reliable news, would not have a sufficiently clear link to the democratic, social and cultural needs of a particular society.2554 The provision of online learning services by the BBC was also considered as not falling within the scope of the (then 2001) Communication and was therefore assessed directly under Article 106(2) of the Treaty.2555

2551 OJ C 8, 11.01.2012, p. 15. 2552 Article 2(1)(a) of the Decision of 20 December 2011 on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3. 2553 Commission Decision of 8.11.2013 on financement de la station radio locale France Bleu Saint-Etienne Loire (Case SA.37136), summary notice in OJ C 105, 05.04.2011, p. 3. 2554 Commission Decision of 07.06.2005 on a French international news channel (Case N 54/2005), summary notice in OJ C 256, 15.10.2005, p. 25, at para. 40. 2555 Commission Decision of 01.10.2003 on the BBC digital curriculum (Case N 37/2003), summary notice in OJ C 271, 12.11.2003, p. 47, paras 37 et seq.

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3.

The assessment of State aid to public broadcasters

3.1 The State aid quality of compensation payments for public service obligations 3.1.1 General considerations In Altmark the Court of Justice established four conditions under which compensation for public service tasks is not regarded as State aid. Those conditions are: (1) clear definition of the public service obligations; (2) ex ante establishment of parameters for the calculation of the compensation; (3) limitation of compensation amount to the net costs of the public service, including a reasonable profit; and (4) either selection of the operator through a tender procedure or compensation based on costs of a typical well-run undertaking.2556

3.1180

In its investigations in the broadcasting sector so far, the Commission has not accepted the argument made by Member States claiming that the Altmark conditions were fulfilled. The Commission has considered that in particular the second and fourth criteria have not been fulfilled in the measures it has examined.

3.1181

For the second condition to be satisfied, the parameters for the calculation of the compensation must be established in advance and in relation to the public service tasks as specified in the act of entrustment. As a consequence, the Commission did not consider that the second Altmark condition was fulfilled in cases where the amount of compensation was fixed for a period of several years without a link between compensation and output and the parameters on the basis of which the amount was based were not established in advance,2557 where the relevant legal acts laying down the public service mission did not refer to objective and transparent parameters on the basis of which the compensation for the public service task was to be calculated,2558 or where the compensation was based on financial needs as calculated by the public service broadcaster itself.2559 In addition, the parameters and assumptions for determining the compensation amount need to be sufficiently objective and robust in order to satisfy

3.1182

2556 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415. 2557 Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1. 2558 Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary notice in OJ C 240, 30.09.2005, p. 20, para. 24. 2559 Commission Decision of 27.02.2008 on the funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7, para. 99.

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the second Altmark criterion.2560 The mere existence of parameters is not sufficient if the amount of compensation is not automatically determined based on those parameters but remains subject to discretional decisions.2561

3.1183

In all cases of ad hoc financing to date, the Commission has considered that the second condition was not fulfilled. In such cases the compensation payments granted under the general financing regime turned out to be insufficient and the public service broadcasters had accumulated debt which the additional financial contribution intended to cover. In such cases, the amount of public funding is determined by the concrete financial needs of the broadcaster in question and is not based on pre-established parameters.2562

3.1184

For the fourth condition, the Commission has clarified in its decisional practice that it was for the Member States to submit the necessary proof that the costs of the public service broadcasters which are compensated for correspond to the costs of an efficient operator.2563 The Commission found that the determination of the amount of compensation cannot simply be based on historical costs of an undertaking or an ex-post analysis. Instead, the recognised costs of a public service broadcaster would have to be based on the hypothetical costs of an efficient operator (which would usually exclude aid receiving public service broadcasters).2564 Where the determination of the compensation amount is based on cost benchmarks, it needs to be demonstrated that those benchmarks are reliable and exhaustive.2565

2560 Commission Decision of 07.06.2005 on a French international news channel (Case N 54/2005), summary notice in OJ C 256, 15.10.2005, p. 25, para. 23. 2561 Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007 p. 1, para. 164. 2562 Commission Decision of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005, p. 1, para. 154, as regards debt rescheduling and preferential loans and para. 155 as regards capital injections for which the relevant legal provisions did not clearly lay down the conditions; para. 156 stresses that ad hoc payments had not been determined with reference to an efficient operator; Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary notice in OJ C 240, 30.09.2005, p. 20, para. 55; Commission Decision of 04.07.2006 on RTP financial restructuring (Case NN 31/2006), summary notice in OJ C 222, 15.09.2006, p. 4, para. 74. 2563 Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 166. 2564 Commission Decision of 01.10.2003 on the BBC digital curriculum (Case N 37/2003), summary notice in OJ C 271, 12.11.2003, p. 47, para. 23; Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1, paras 131, 132. 2565 Commission Decision of 07.06.2005 on a French international news channel (Case N 54/2005), summary notice in OJ C 256, 15.10.2005, p. 25, paras 24 to 27.

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In the case of State financing of the workforce reduction measures of Spain’s public service broadcaster RTVE, the Commission considered that the fourth condition was not fulfilled since a typically well-run and adequately equipped undertaking would not have built up an excessive workforce and would consequently not have needed any compensation for the workforce reduction.2566

3.1185

Interesting issues arose in the decision concerning the Danish radio channel FM4, where the operator was chosen following an open tender procedure.2567 The Commission found the fourth criterion was not fulfilled because the tender was insufficiently focussed on the amount of the funding requested. In addition to referring to predefined obligations the tender referred to commitments which the provider of the public service would assume as part of a beauty contest. As a result it did not provide a sufficient guarantee that the service would be rendered at the least cost to the community.

3.1186

That approach regarding the tender, which limits the application of the fourth Altmark criterion to a mere price comparison, is rather restrictive and seems to suppose that the term “least cost to the community” used by the Court is stricter than the term “most economically advantageous” referred to in Directive 2004/18 on public procurement.2568 It is also arguable that a contract awarded on the basis of a price comparison and of a weighting of quality and programme profile criteria with the amount of funding requested leads to an outcome which assures that the service agreed upon is provided at the least cost to the community. Such an approach would also be in line with basic principles of the public procurement rules where Article 53 of Directive 2004/18 allows for some flexibility in the weighting of various aspects in order to determine the most economically advantageous tender.2569 It is unfortunate that the Commission did not address that issue in its decision.2570

3.1187

2566 Commission Decision of 07.03.2007 on the financing of workforce reduction measures of RTVE (Case NN 8/2007), summary notice in OJ C 109, 15.05.2007 p. 2, para. 29. 2567 Commission Decision of 23.3.2011 on the Danish radio channel FM4 (Case SA.32019), summary notice in OJ C 131, 03.05.2011, p. 1. 2568 Article 53 of Directive 2004/18/EC of the European Parliament and of the Council on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts, OJ L 134, 30.04.2004, p. 114. 2569 This flexibility is also maintained in Article 67 of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC Text with EEA relevance, OJ L 94, 28.03.2014, p. 65. 2570 See Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice Two Years after its Entry into Force, EStAL 1/2012, 37 (44, 45).

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3.1188

In cases where Member States intervene in favour of public service broadcasters through debt cancellations2571 or capital injections,2572 the support measures constitute State aid if the Member State concerned cannot demonstrate that its behaviour was comparable to that of a private creditor or investor under the market economy operator principle (MEOP).

3.1189

It can be queried whether the MEOP is at all applicable to the financing of public service broadcasters. The public service broadcaster’s primary objective is generally not to maximise the profitability of its operations and an adequate return.2573 Given the usually poor financial performance of public service broadcasters, the State cannot expect a reasonable return.2574

3.1.2 State aid qualification of the different funding mechanisms 3.1190

In accordance with paragraphs 57 and 58 of the 2009 Communication, it is up to Member States to choose the funding mechanisms for public service broadcasters. Funding may be provided directly from the State budget or via a levy on broadcasting equipment holders ore households; it may furthermore take the form of a single funding, by which the broadcaster is financed only through public funds, or of a dual funding with a combination of State funds and various revenues from the sale of advertising space or of productions.

3.1191

For the financial contributions to constitute State aid, it is not necessary that they are paid directly from the State budget. Where the State has established funds 2571 See the rescheduling of debt under the social security regime in the Commission Decision of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005, p. 1. 2572 See the capital increase in favour of RTP in the Commission Decision of 15.10.2003 (previous fn.); the capital injection as part of the financial restructuring of RTP in the Commission Decision of 04.07.2006 on RTP financial restructuring (Case NN 31/2006), summary notice in OJ C 222, 15.09.2006, p 4 and Commission Decision of 20.12.2011 on financial support to restructure the accumulated debt of RTP (Case SA.33294), summary notice in OJ C 53, 23.02.2012, p. 1, as well as the capital injections in favour of France 2 and France 3 in the Commission Decision of 10.12.2003 on State aid implemented by France for France 2 and France 3 (Case C 60/99), OJ L 361, 08.12.2004, p. 21, para. 48, or in favour of RAI in the Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1, paras 45 and 83 to 88. 2573 Commission Decision of 10.12.2003 on State aid implemented by France for France 2 and France 3 (Case C 60/99), OJ L 361, 08.12.2004, p. 21, para. 50; see also Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1, para. 84. 2574 Commission Decision of 10.12.2003 on State aid implemented by France for France 2 and France 3 (Case C 60/99) (see previous fn.), para. 52; a similar conclusion was reached by the Commission in the RAI ad hoc financing Decision (previous fn.), paras 86 and 87 as well as in the Decision on financial restructuring of RTP (previous fn.), para. 68, where the Commission stated that given the accumulated debt of EUR 1 billion, no private investor would have been willing to inject capital into the company as no reasonable return could be expected within a reasonable time period.

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with the purpose of financing public service broadcasting, contributions from such funds are regarded as State resources. Such was for instance the Commission’s conclusion as regards funds established by the Dutch government in favour of public service broadcasters. The Commission considered that, even though the public service broadcasters made proposals on how the funds should be used, it was ultimately for the responsible Minister to adopt the proposal and to establish the conditions under which the funds could be used by them.2575 Another funding mechanism which can be found in several Member States is that of financing through licence fees. Those fees are for instance charged by household or on the owners of TV/radio sets or any other device capable of receiving TV and radio broadcasts. The Commission has also considered that such financing mechanisms involve State resources. That conclusion is based on a number of circumstances, such as the fact that the fees are compulsory2576 with a fiscal or quasi-fiscal character.2577 The required imputability to the State and thus the State control exercised over those funds can be deduced from the fact that the fees are for instance collected by the State or State bodies and then re-distributed to individual public service broadcasters in accordance with legal provisions,2578 or are collected directly by public service broadcasters, acting as public institutions or with powers similar to those of tax-collecting authorities.2579 The Commission has also considered that the licence fee payments to public service broadcasters were attributable to the State insofar as the level of the licence fee, the conditions for collection of the licence fee and their enforcement were laid down by law.2580

3.1192

2575 Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, paras 83 et seq. 2576 Commission Decision of 14.12.1999 on the BBC 24 hour news channel (Case NN 88/98), summary notice in OJ C 78, 18.03.2000, p. 6, para. 22, and Commission Decision of 01.10.2003 on the BBC digital curriculum (Case N 37/2003), summary notice in OJ C 271, 12.11.2003, p. 47, para. 21. 2577 Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary notice in OJ C 240, 30.09.2005, p. 20, para. 21; see also Commission Decision of 20.04.2005 on licence fee payments to RAI (Case E 9/2005), summary notice in OJ C 235, 23.09.2005, p. 3, para. 16, with reference to the qualification by the Italian Constitutional Court as an obligation having a fiscal nature. 2578 Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary notice in OJ C 240, 30.09.2005, p. 20, para. 21. 2579 Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1, para. 74 and Joined Cases T-309/04, T-317/04, T-329/04 and T-336/04 TV 2/Danmark A/S v Commission ECLI:EU:T:2007:66, paras 158 and 159; Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 144. 2580 Commission Decision of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3, where the Commission considered the German licence fee as State resources given the fact that the payment of these fees was compulsory irrespective of the actual use of TV and that they were regulated by law.

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Furthermore, the distribution of the licence fee revenues was determined by the public authorities2581 and remained under public control.2582

3.1193

A financing regime based on licence fees is not comparable to a system of guaranteed prices and quotas, which would not involve the transfer of State resources,2583 in particular due to the fact that there is no contractual relationship between the person liable to pay the fee and the public service broadcaster.2584 The fee is not equivalent to remuneration for services provided. Furthermore, the Commission considers that the State, instead of simply intervening into a contractual relationship between private parties, honours its own obligations towards the public service broadcaster.2585

3.1194

The qualification of licence fee revenues as State resources has been upheld by the Union Courts which have ruled that public service broadcasters in Germany who receive broadcasting licence fees are to be regarded as financed by the State within the meaning of the public procurement rules.2586

3.1195

Member States may also choose to allow public service broadcasters to finance their activities through debt, in some cases guaranteed by the State.2587 State 2581 Commission Decision of 14.12.1999 on the BBC 24 hour news channel (Case NN 88/98), para. 22; and Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1, para. 74. 2582 Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), summary notice in OJ C 23, 30.09.2003, p. 6, para. 20, with reference to Case C-83/98 P France v Ladbroke Racing ECLI:EU:C:2000:248 and Case T-358/94 Air France v Commission ECLI:EU:T:1996:194; see also Commission Decision of 19.05.2004 on the financing of TV2 (Case C 2/2003), OJ L 85, 23.03.2006, p. 1, para. 58, where the Commission stated that financial resources must be considered State resources if they are permanently under the control of the public authorities and therefore available to the competent public authorities. 2583 Just as in the case of regulated prices in the relationship between electricity distributors and suppliers, Case C-379/98 PreussenElektra ECLI:EU:C:2001:160. 2584 Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1, para. 74 and Joined Cases T-309/04, T-317/04, T-329/04 and T-336/04 TV 2/Danmark A/S v Commission ECLI:EU:T:2007:66, paras 158 and 159; see also Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007 p. 1, para. 151. 2585 Commission Decision of 24.04.2007 (previous fn.), para. 144. 2586 Case C-337/06 Bayerischer Rundfunk and others ECLI:EU:C:2007:786, paras 41-48. The Court concluded that the licence fee funding of the German public service broadcasters was to be regarded as financed by the State within the meaning of the procurement rules. That conclusion was based on, amongst other things, the fact that the obligation to pay the fee was established by the State and did not result from a contractual relationship between the public service broadcaster and the consumer. The fee was collected through administrative procedures and the payment was not remuneration for a specific service rendered to the consumer. See also Case T-24/06 MABB v Commission ECLI:EU:T:2009:388, para 50. 2587 Such guarantees were for instance given by the Spanish and Danish Governments in favour of RTVE and TV2: Commission Decision of 20.04.2005 on the financing of RTVE (Case E 8/2005), summary notice

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guarantees enable the public service broadcaster to have access to financial resources under more favourable conditions than private competitors and have to be regarded as an advantage to the public service broadcaster according to Article 107(1) of the Treaty.2588 Allocation of frequencies free of charge may constitute State aid, where private operators have to pay fees.2589 On the other hand, must-carry obligations imposed for instance on cable operators have not been regarded as constituting State aid because no State resources were involved.2590

3.1196

Apart from the question of the involvement of State resources and a financial advantage, for a measure to qualify as State aid within the meaning of Article 107(1) of the Treaty, it has to be capable of distorting competition and having an effect on trade. The 2009 Communication considers in general terms that public funds given to public service broadcasters favour certain broadcasters and thereby distort competition and affect trade between Member States.2591 The aid allows public service broadcasters to acquire content (for instance premium sports rights) in direct competition with private operators. Those activities have a cross-border effect. The acquisition of rights takes place at a European or international scale. Furthermore, private competitors have an international ownership structure. Public service broadcasters may also be engaged in other than broadcasting activities, such as film production with competition on a European and international scale.2592

3.1197

2588

2589

2590

2591 2592

in OJ C 239, 04.10.2006, p. 17, and Commission Decision of 19.05.2004 on the financing of TV2 (Case C 2/2003), OJ L 85, 23.03.2006, p. 1, respectively; see also preferential loans given to RTP: Commission Decision 2005/406/EC of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005, p. 1. Commission Decision of 27.02.2008 on the State funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7, paras 88 and 103 et seq.; Commission Decision of 20.04.2005 on the financing of RTVE (Case E 8/2005), summary notice in OJ C 239, 04.10.2006, p. 17, paras 37 to 39; see also the State guarantee linked to the organisational form of public service broadcasters in Germany as Anstalten : Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, paras 153,154 and 177 to 180. Cf. Commission Decision of 27.02.2008 on the State funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7, para. 105; Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, para. 105. Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1, para. 99, with reference to the Commission Decision of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3; see also Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, para. 91. Cf. paras 22 and 24 of the Broadcasting Communication. Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007 p. 1, paras 181 to 190; para. 22 of the Broadcasting

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3.1.3 Qualification as new or existing aid 3.1198

Since most public service broadcasting schemes in the Member States were established before their accession to the Union, the Commission often has to assess in its investigations whether the financing measures they involve constitute new or existing aid within the meaning of Article 108(1) of the Treaty and Article 1(b)(i) of the Procedural Regulation.2593

3.1199

In the Commission’s decisional practice, certain modifications to existing schemes have been considered not to be new aid. The Commission considered for instance that a change in the methodology for determining the financial needs of public service broadcasters or modifications concerning the collection of the licence fees or the distribution of licence fee revenues between the different beneficiary bodies were of rather administrative and technical nature and did not affect the substance of the original funding scheme.2594 In addition a change of the licence fee charged from the owners of TV/radio sets or any other device capable of receiving TV and radio broadcasts to a household fee may not have an effect on the compatibility assessment of the aid. The switch from dual to single financing would also not constitute new aid.2595

3.1200

Likewise, there are decisions in which increases in the revenues through an increase in the licence fee level were not regarded as substantial.2596 Such increases can indeed be regarded as merely reflecting the increased financial needs of public service broadcasters. Moreover, the amendment of the legal form of the aid beneficiary does not affect the qualification as existing aid where the financing remains to be destined to finance public service broadcasting.2597 Furthermore, Communication. 2593 Concerning that distinction and its procedural consequences, see also Part 5, Chapter 37. 2594 Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1, para. 42; see also Commission Decision of 22.03.2006 on the financing system of RTP (Case E 14/2005), not published, press release IP/06/349 of 22.03.2006, para. 72; Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, paras 203 and 205. 2595 Commission Decision 2011/1/UE of 20.07.2010 on the aid scheme which Spain is planning to implement for RTVE (Case C 38/2009, ex NN 58/2009), OJ L 1, 04.01.2011, p. 9, para. 55; on the decision see S. Medina González, La financiación de las televisions públicas a la luz del derecho europeo de la competencia, Revista del Derecho de la Unión Europea, 24/115 (138). 2596 Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1, para. 43. See also Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary notice in OJ C 240, 30.09.2005, p. 20, paras 34 and 35; and Commission Decision of 20.04.2005 on the financing of RTVE (Case E 8/2005), summary notice in OJ C 239, 04.10.2006, p. 17, para. 53; see also Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 206. 2597 Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary

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the Commission has considered that the conclusion of successive concession agreements with the public service broadcaster did not constitute a new aid measure, given that those agreements only implemented previously established funding rules and mechanisms.2598 In contrast, funding granted in relation to new activities based on a revised public service remit may constitute new aid. For instance, in the BBC digital curriculum case, the Commission considered that the provision of online learning material could not be regarded as falling under the existing public service remit. The public funding of those activities was therefore regarded as constituting new aid. Even though education was part of the public service broadcaster’s mission, the offer of online learning material could not be regarded as being closely associated with the broadcaster’s television and radio programme activities. Instead, the public service broadcaster was given the possibility to enter markets within which it had not previously been active and where competitors had no or little exposure to the public service broadcaster’s services.2599

3.1201

Similarly, additional funding granted to public service broadcasters for new thematic channels based on new programme concepts would normally constitute new aid.2600 However, where new channels are mainly used to distribute existing programme material, the Commission has considered that the financing would still be regarded as existing aid.2601

3.1202

2598

2599 2600

2601

notice in OJ C 240, 30.09.2005, p. 20, para. 33; Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, para. 105. Commission Decision of 20.04.2005 on licence fee payments to RAI (Case E 9/2005), summary notice in OJ C 235, 23.09.2005, p. 3, para. 47. See also Commission Decision of 27.02.2008 on the State funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7, para. 141; Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, para. 145. Commission Decision of 01.10.2003 on the BBC digital curriculum (Case N 37/2003), summary notice in OJ C 271, 12.11.2003, p. 47, paras 35 and 36. Commission Decision of 01.10.2003 on the BBC digital curriculum (Case N 37/2003), summary notice in OJ C 271, 12.11.2003, p. 47, and Commission Decision of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3; see also for instance other examples in Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), summary notice in OJ C 23, 30.09.2003, p. 6, and Commission Decision of 07.06.2005 on a French international news channel (Case N 54/2005), summary notice in OJ C 256, 15.10.2005, p. 25, a joint venture between the private and the public broadcasters. Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 211.

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3.1203

The Commission has not regarded financing of public service broadcasters’ presence on the internet or other new distribution platforms as constituting new aid in cases where the existing public service remit was fulfilled via new distribution platforms, such as the Internet. Such a modification does not constitute a substantial and severable amendment, provided that there is a close connection with the original task.2602 The 2009 Communication states in paragraph 81 that public service broadcasters may provide services over new distribution platforms to fulfil their public service mission. The condition for that acceptance is however that internet services must be programme-related and programmeaccompanying, in close association with the public service broadcaster’s television programme activities. They should be of an ancillary character, supporting the main tasks. Those links imply that the financing of internet activities which go beyond services of an ancillary and supportive character would normally be regarded as new aid, requiring a new assessment by the Commission.

3.2 Compatibility of aid to public service broadcasting under the 2009 Broadcasting Communication 3.1204

State aid to public service broadcasters is generally assessed on the basis of Article 106(2) of the Treaty as compensation for a public service mandate.2603 Although in principle the financing of public service broadcasters could also be compatible pursuant to Article 107(3)(d) of the Treaty as aid to promote culture, in practice that latter ground of compatibility is relevant only in exceptional cases. The notion of culture is more restricted than “educational and democratic needs of society”.2604 Public funding to broadcasters can be approved under that “cultural exemption” in Article 107(3)(d) of the Treaty only where the Member State concerned ensures that the funding is specifically aiming at promoting cultural objectives.2605 Accordingly, in the case of the BBC 24-hour 2602 Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 208 with reference to the Commission Decision of 01.10.2003 on the BBC digital curriculum (Case N 37/2003), summary notice in OJ C 271, 12.11.2003, p. 47, paras 35 and 36. See also Commission Decision of 27.02.2008 on the State funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7, para. 147. 2603 Concerning Article 106(2) of the Treaty, see also part 4. 2604 Cf. para. 34 of the Broadcasting Communication with reference to the Commission Decision of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3, where the Commission considered that Article 107(3)(d) of the Treaty could only be applied to activities which could be identified as cultural . 2605 Cf. para. 35 of the Broadcasting Communication and Commission Decisions of 27.01.2010 on the Austrian Fonds zur Förderung des privaten Rundfunks (Case N 631/2009) and Nichtkommerzieller RundfunkFonds (Case N 632/2009), summary notices in OJ C 53, 19.02.2011, p. 1.

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news channel, the Commission considered that the channel aimed more at fulfilling the information needs of UK citizens than at promoting culture or natural heritage.2606 In applying and interpreting Article 106(2) of the Treaty, the Commission is guided by the Amsterdam Protocol as well as the case law of the Union and its own decisional practice, which is reflected in the 2009 Communication.

3.1205

The Amsterdam Protocol recognises that Member States have “the competence to provide for the funding of public service broadcasting insofar as such funding is granted to broadcasting organisations for the fulfilment of the public service remit as conferred, defined and organised by each Member State, and that such funding does not affect trading conditions and competition in the Community to an extent which would be contrary to the common interest, while the realisation of the remit of the public service shall be taken into account.” Under the 2009 Communication, the Commission must assess whether the service in question is a service of general economic interest and clearly defined as such by the Member State (definition); whether the undertaking in question is entrusted with the provision of that service (entrustment); and whether the amount of compensation is limited to what is necessary for the operator to fulfil its public service tasks (proportionality).2607

3.1206

3.2.1 Definition of the public service remit 3.2.1.1 General considerations The Commission’s assessment of the definition of the public service is subject to certain limits. Member States have a wide margin of discretion in defining a given service as a service of general economic interest.2608 Those considerations apply even more so to public broadcasting where the remit needs to respect the editorial independence of the broadcaster.2609

3.1207

2606 Commission Decision of 12.09.1999 on the BBC 24 hour channel (Case NN 88/98), OJ C 78, 18.03.2000, p. 6, para. 36. 2607 Cf. Broadcasting Communication, para. 37. 2608 Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, paras 166-169 and 172; Case T-17/02 Olsen v Commission ECLI:EU:T:2005:218, para. 216; para 45 of the Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4. 2609 Broadcasting Communication, para. 47.

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3.1208

Therefore it is acceptable if a mandate requires, regarding the content of the offer, a balanced and varied programming.2610 The General Court has repeatedly confirmed that Member States have a large discretion regarding the public service remit.2611 It stated that as a consequence the competence of the Commission and itself is limited to checking whether the definition of the remit is not manifestly wrong.2612 Such a manifest error would be present where the service in question could not reasonably be regarded as serving the democratic, social and cultural needs of society.2613 However, the Commission has also stressed that the public service mission should be sufficiently precise to make clear whether the Member State wanted or did not want to include a certain activity, in particular on new platforms in the area of new media.2614 Those new platforms allow a range of services to be developed which do not have the same character as the traditional tasks of public service broadcasting, and the contribution of those services to the objectives of public broadcasting is not always evident.2615

3.2.1.2 Elements of the remit 3.1209

When looking at the constitutive elements of a service of general economic interest in the context of public service broadcasting, the availability of a given service to the entire population is certainly an important feature. However, the mere fact that a specific service is not immediately available to the entire population does not exclude its qualification as a service of general economic interest, in particular where the limitation of a particular service to a small part of the population is of a temporary nature due to technical constraints and where the aim pursued by the Member State concerned is to reach the entire population as soon as it becomes technically possible.2616 2610 Cf. Broadcasting Communication, para. 47, Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, para. 201, where the General Court considered that the remit could comprise “full-spectrum programming”. The General Court rejected in particular arguments that the remit would need to be limited in areas where public service broadcasters were allowed to compete with private operators on the market for advertisement. 2611 Case T-533/10 DTS Distribuidora de Televisión Digital v Commission ECLI:EU:T:2014:629, para. 126 (appeal before the Court of Justice, Case C-449/14 P), Joined Cases T-568/08 and T-573/08 M6 and TF1 v Commission ECLI:EU:T:2010:272, at para. 139. 2612 Case T-533/10 DTS Distribuidora de Televisión Digital v Commission ECLI:EU:T:2014:629, paras 127 and 128, Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 220, Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, para. 195 et seq, and paras 39 and 48 of the Broadcasting Communication. 2613 Broadcasting Communication, para. 48. 2614 Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, paras 174 and 186. 2615 Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, para. 188, Commission Decision of 27.02.2008 on the State funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7, para. 181. 2616 Commission Decision of 12.09.1999 on the BBC 24 hour channel (Case NN 88/98), summary notice in

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To ensure the public broadcasters’ task to serve the needs of the society it is also legitimate that Member States want to ensure a programme which is able to attract large audiences.2617 Private operators have challenged the inclusion of sports in the public service remit of public service broadcasters. However, the concept of public service broadcasting does not exclude broadcasting commercially attractive content, as long as it remains part of a wider programme concept.2618 The Commission, in checking whether the definition of the public service remit contained any manifest error, concluded that the broadcasting of sports events within a limit of 10 per cent of total broadcasting time2619 or of a limited number of films produced by major international producers would be permissible.2620

3.1210

The Commission has accepted a definition of the public service remit of a qualitative nature,2621 such as public service definitions based on a number of objectives (e.g. contribution to media pluralism), general quality requirements (i.e. production and broadcasting of a balanced set-up of programmes and channels providing access to information, culture, education and quality entertainment2622), which may also be complemented by quantitative requirements (e.g. amount of broadcasting time to be devoted to certain categories of programmes,2623 limitations for premium content2624) but also more specific ob-

3.1211

2617

2618

2619

2620 2621 2622 2623 2624

OJ C 78, 18.03.2000, p. 6, paras 59 and 60; see also the Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), summary notice in OJ C 23, 30.09.2003, p. 6, para. 30 where reference is made to the explicit wider policy goal of the UK government to promote digital take-up leading to switchover by the whole population. Case T-533/10 DTS Distribuidora de Televisión Digital v Commission ECLI:EU:T:2014:629, paras 130 and 193, Case T-151/11 Telefónica de España and Telefónica Móviles España v Commission ECLI:EU:T:2014:631, para. 177, Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, para. 201. Cf. the case law cited in the previous fn.; it is a misunderstanding that the notion of public service would exclude the broadcasting of attractive content, an idea for example expressed by Medina González, La financiación de las televisions públicas a la luz del derecho europeo de la competencia, Revista del Derecho de la Unión Europea, 24/115 (140). Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, para. 121, see on sport also Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 242. Commission Decision 2011/1/UE of 20.07.2010 on the aid scheme which Spain is planning to implement for RTVE (Case C 38/2009, ex NN 58/2009), OJ L 1, 04.01.2011, p. 9, para. 26. Commission Decision 2005/406/EC of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005, p. 1, para. 164. Commission Decision of 20.04.2005 on the financing of RTVE (Case E 8/2005), summary notice in OJ C 239, 04.10.2006, p. 17, para. 56. Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, para. 119. Commission Decision 2011/1/UE of 20.07.2010 on the aid scheme which Spain is planning to implement for Corporación de Radio y Televisión Española (RTVE) (Case C 38/2009), OJ L 1, 04.01.2011, p. 9, para. 8.

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ligations in the public interest (e.g. provision of traffic information, broadcasting of free-of-charge messages in the public interest). The Commission would also not be entitled to question the quality of a certain product.2625

3.1212

The public service remit may also comprise additional thematic channels. In its decision on the financing of nine digital channels by the BBC, the Commission considered that the content of each channel was to be regarded as a public service without it being necessary for all channels to cover the whole spectrum of programme contents.2626 More specifically, as regards the examination of public funding awarded to the BBC 24-hour news channel, the Commission considered that the provision of news providing a wider coverage of news topics and a greater degree of in-depth analysis of events compared to the existing information included in the existing BBC channels was to be regarded as a service of general economic interest in line with the Amsterdam Protocol. The new channel enriched consumer choice and was therefore regarded as contributing to the preservation of media pluralism. Finally, the news channel exhibited specific features compared to services offered by private operators, in particular the fact that the news channel was advertisement-free.2627 In its decision on aid to the international news channel France 24, the Commission excluded the applicability of the Amsterdam Protocol but found the aid nevertheless compatible with the internal market as a project financing a service of general economic interest.2628

3.1213

Similarly, in the Kinderkanal/Phoenix Decision, the Commission considered that advertisement-free children programmes as well as advertisement-free background information was not offered by private competitors and could therefore be accepted as a public service.2629

3.1214

It is questionable, however, whether the mere fact that the channel is advertisement-free should by itself be an appropriate criterion; in principle, services of public service broadcasters may contain and be financed by advertising. Its presence or absence in the programme should therefore not be relevant for the assessment whether it constitutes a public service. 2625 Broadcasting Communication, para. 48. 2626 Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), summary notice in OJ C 23, 30.09.2003, p. 6, paras 31 to 33. 2627 Commission Decision of 12.09.1999 on the BBC 24 hour channel (Case NN 88/98), summary notice in OJ C 78, 18.03.2000, p. 6, paras 49 to 53. 2628 Commission Decision of 07.06.2005 on a French international news channel (Case N 54/2005), summary notice in OJ C 256, 15.10.2005, p. 25. 2629 Commission Decision of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3.

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The 2009 Communication also recognises that the public service remit is not limited to traditional broadcasting services but may also comprise new services on other distribution platforms such as on-line information services or the distribution of its programme through digital means.2630 In light of technological developments, the qualification as a service of general economic interest could not depend upon the distribution platform.2631 The 2009 Communication clarifies in paragraph 81 that the principle of technology neutrality allows public service broadcasters to use the opportunities offered by digitisation and the diversification of distribution platforms. They may offer audio-visual services over new distribution platforms, provided that they are addressing the same democratic, social and cultural needs, and do not entail disproportionate effects on the market, which are not necessary for the fulfilment of the public service remit.

3.1215

The Commission first took a position on a public service broadcaster’s Internet activities in its decision concerning the financing of the Danish public service broadcaster TV2. TV2’s public service remit included the obligation to provide, through the Internet, other services in the form of news coverage, general information, education, art and entertainment. The Commission recognised that the public service remit could also include online services. It found, however, that interactive on-demand products such as games or chat rooms, which did not differ from similar commercial products, could not be regarded as addressing the democratic, social and cultural needs of society and did therefore not constitute a service of general economic interest.2632

3.1216

In a case concerning the ad hoc funding of the Dutch public service broadcasters, the Commission expressed the view that only such new media services which remained closely associated with broadcasting services could be assessed under the (then 2001) Broadcasting Communication.2633 It would be doubtful if new media activities, which were clearly separable from the broadcasting

3.1217

2630 Cf. Broadcasting Communication, para. 47; Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1; Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), summary notice in OJ C 23, 30.09.2003, p. 6, para. 27, with reference also to the Resolution of the Council and of the Representatives of the Governments of the Member States, Meeting within the Council of 25 January 1999 concerning public service broadcasting, OJ C 30, 05.02.1999, p. 1; Commission Decision of 26.01.2010 on the annual financing of the Dutch public service broadcasters (Case E 5/2005), summary notice in OJ 2010 C 74, 24.03.2010, p. 4, para. 145. 2631 Commission Decision of 12.09.1999 on the BBC 24 hour channel (Case NN 88/98), summary notice in OJ C 78, 18.03.2000, p. 6, para. 57. 2632 Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1, para. 173. 2633 Commission decision of 03.02.2004 on ad-hoc measures to Dutch public broadcasters and NOB (Case C 2/2004), OJ C 61, 10.03.2004, p. 8.

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activities and which are also operated by other commercial operators, could be regarded as part of a public service remit.2634 Those doubts concern in particular online text news services which are in competition with a well-functioning non-subsidised commercial offer.2635 For such services it is necessary to precisely describe them in the remit and to require that they are linked to the radio and TV programme and accentuate the audio-visual aspects of the presentation.2636 In the evolving media environment, a precise definition of the mandate is important in the interest of the competitors. A general statement in a mandate for a public service broadcaster to have the possibility to use new platforms is not sufficiently precise. It is not possible to thereby confer a public service character on all the services that could possibly be offered on these platforms.2637

3.1218

However, the commercial exploitation of the public service would not be covered by the notion of a service of general economic interest. Examples of such activities which are explicitly mentioned in the 2009 Communication are advertising, teleshopping or e-commerce. The intention to subsidise such services under a public service remit would constitute a manifest error.2638

3.1219

A further development which seems to be considered in some Member States is the possibility for public service broadcasters to offer certain services against remuneration. So far, the Commission has not had to deal with that question but has merely expressed a prima facie view that considering such pay-services as public services would normally constitute a manifest error.2639

3.2.1.3 Inclusion of new services into the public service remit (the so-called ex-ante or Amsterdam test) 3.1220

In the rapidly evolving technological and media environment broadcasters have been keen to widen the range of services they offer, and Member States may 2634 Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, paras 84 to 86. 2635 Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, paras 193 and 194. 2636 Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, para. 293. 2637 Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1, paras 186 and 188. 2638 Broadcasting Communication, para. 48. 2639 Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, paras 229 to 242. See also Commission Decision of 27.02.2008 on State financing of Irish Radio Teilifís Éireann (RTÉ) and Teilifís na Gaeilge (TG4) (Case E 4/05), summary notice in OJ C 121, 17.05.2008, p. 5, para. 137 – contrary to initial plans, the Irish government declared in the end that any such services would have to be provided under commercial terms.

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see the need to entrust public service broadcasters with the provision of new services not covered by the initial public service remit for broadcasting services. The possible effects of the new services on competition in existing markets usually have not been assessed when the initial mandate was imposed. In principle, Member States would be required in such cases to modify the definition of the public service remit in the formal entrustment act, with the possible consequence to be obliged to notify the amendment to the Commission.2640 To avoid lengthy procedures and allow for some flexibility and swiftness, paragraph 52 of the 2009 Communication gives Member States the possibility, if they choose so, to modify the entrustment in line with the so-called Amsterdam or ex-ante test outlined in paragraphs 80 et seq. of that Communication.

3.1221

The Commission set out that approach as regards new media activities within the framework of an existing scheme the first time in its decision concerning the general funding regime for the German public service broadcasters.2641 It stated that a clearly defined public service remit is important to strike a balance between the provision of services of general economic interest and a level playing field between public and private operators ensuring that State funding of new media activities does not run counter to the Union interest.

3.1222

According to paragraph 84 of the 2009 Communication, Member States are asked “to consider, by means of a prior evaluation procedure based on an open public consultation, whether significant new audiovisual services (…) meet the requirements of the Amsterdam Protocol, i.e. whether they serve the democratic, social and cultural needs of the society, while duly taking into account its potential effects on trading conditions and competition.”

3.1223

That test at the national level addresses the legitimate concern of commercial media that public broadcasters use public money to offer new online services which are not remotely similar to a TV or radio broadcast, which do not add any clear value for society, and which considerably distort competition.2642 In

3.1224

2640 Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice Two Years after its Entry into Force, EStAL 1/2012, 37 (39). 2641 Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007 p. 1, paras 310, 327-339; it was later also applied in Commission Decision of 26.01.2010 on the annual financing of the Dutch public service broadcasters (Case E 5/2005), summary notice in OJ 2010 C 74, 24.03.2010, p. 4, Commission Decision of 27.02.2008 on State financing of Irish Radio Teilifís Éireann (RTÉ) and Teilifís na Gaeilge (TG4) (Case E 4/05), summary notice in OJ C 121, 17.05.2008, p. 5, and Commission Decision of 27.02.2008 on the funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7. 2642 Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice

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Germany for example the debate focuses on the question whether broadcasters could use public service compensation to finance a kind of electronic online press.2643 The test is therefore necessary to guarantee that new media services are truly a public service.

3.1225

As to the administrative burden, paragraphs 85 to 90 of the 2009 Broadcasting Communication set out a few minimum requirements: the test is to be carried out by a body which is independent from the public service broadcaster. All stakeholders will have to get a chance to make their views known. The Communication leaves it up to each Member State to work out the details of the procedure and the institutional solution. Furthermore, it is applied only to ‘significant new services’, without defining them, thereby giving Member States a certain flexibility in defining the benchmark which triggers the test.2644

3.1226

The test should enhance legal certainty and should render complaints to the Commission about single elements of the public service remit redundant. The Commission will have to closely follow the development in the application of that new concept of evaluation on Member State level. It cannot be excluded that in cases of manifest error or major procedural deficiencies the Commission might find itself obliged to act.2645

3.1227

It may also become necessary to draw a line between ‘significant new services’ and alterations to existing aid within the meaning of Article 108(3) of the Treaty which could affect the evaluation of the compatibility of the aid measure with the internal market and which require a notification.2646

3.1228

After the entry into force of the 2009 Communication, Austria, Spain and Belgium introduced the ex-ante test mechanism.2647

2643

2644 2645 2646 2647

Two Years after its Entry into Force, EStAL 1/2012, 37 (39); Repa, Tosics, Dias and Bacchiega, The 2009 Broadcasting Communication, Competition Policy Newsletter 3/2009, 15; for a critical comment with regard to the Commission’s possibility to intervene in that respect, see Wiedemann, Public service broadcasting, State aid and the internet, EStAL 4/2004, 595. Gebührenfinanzierte presseähnliche Angebote sind wettbewerbswidrig - Verlage klagen gegen Tagesschau-App, press release of the Association of German Newspaper Publishers, http://www.bdzv.de/bdzv_ intern+M5dc35dac6b0.html. For details see Repa, Tosics, Dias and Bacchiega, The 2009 Broadcasting Communication, Competition Policy Newsletter 3/2009, 15. Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice Two Years after its Entry into Force, EStAL 1/2012, 37 (39). Idem. Commission Decision of 28.10.2009 on the financing of the Austrian public service broadcaster ORF (Case E 2/2008), summary notice in OJ C 309, 13.11.2010, p. 3; Commission Decision of 02.12.2009 opening the formal investigation on a new tax-based funding system for public broadcasting in Spain (Case C

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3.2.2 Entrustment As required by the 2009 Communication, the public service remit should be entrusted to one or more undertakings by means of an official act (for example, by legislation, contract or terms of reference).2648 Normally, the public service mission is laid down by law. Sometimes a more general legal mandate is supplemented by additional contractual agreements, like in France, Portugal, Spain, or Belgium.2649 Self-commitments adopted by the public service broadcasters themselves cannot substitute for the required act of entrustment.2650 Unlike other services of general economic interest, where the framework calls for a limited duration of the period of entrustment,2651 the mandate for public service broadcasters is usually not limited in time.2652 Furthermore, the entrustment does not require a tender procedure.2653

3.1229

The definition and the entrustment act should clearly specify the nature and scope of the public service obligations.2654 For instance, the obligation to provide “other services to be specified on an ad hoc basis” was regarded as not being sufficiently precise.2655 Similarly, the Commission considered that the task

3.1230

2648 2649

2650 2651 2652 2653 2654 2655

38/2009), OJ C 8, 14.01.2010, p. 31; Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1. Cf. Broadcasting Communication, para. 50. The Portuguese public service broadcaster RTP is entrusted by law with the fulfilment of its public service mission which is further substantiated in public service contracts, Commission Decision 2005/406/EC of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005 p. 1, para. 175; the French public service broadcasters are subject to the Law, supplemented by so-called schedule of tasks and obligations and target-setting contracts , Commission Decision of 10.12.2003 on State aid implemented by France for France 2 and France 3 (Case C 60/99), OJ L 361, 08.12.2004, p. 21, paras 70 to 73, 76; similarly in Italy, Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1; the general legal requirements for Spanish RTVE are supplemented by a so-called framework mission adopted by the Parliament and a programme contract between the Government and RTVE, Commission Decision of 07.03.2007 on the Financing of workforce reduction measures of RTVE (Case NN 8/2007), summary notice in OJ C 109, 15.05.2007, p. 2, para. 43; the public service obligations imposed on the Flemish and the francophone Belgium public service broadcaster are laid down by decree and further substantiated by a contrat de gestion , Commission Decision of 27.02.2008 on the State funding for Flemish public broadcaster VRT (Case E 8/2006), summary notice in OJ C 143, 10.11.2008, p. 7, Commission Decision of 07.05.2014 on the financing of the Belgian public broadcaster RTBF (Case SA.32635), summary notice in OJ 2014 C 233, 18.07.2014, p. 1. Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 248. The European Union Framework for State aid in the form of public service compensation explicitly excludes broadcasting from its scope of application, OJ C 8, 11.01.2012, p. 15, para. 17. An exception is the Commission Decision of 07.06.2005 on a French international news channel (Case N 54/2005), summary notice in OJ C 256, 15.10.2005, p. 25. Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, para. 156. Broadcasting Communication, para. 51. Commission Decision 2005/406/EC of 15.10.2003 on ad hoc measures implemented by Portugal for RTP

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“to provide other ways of supply and disperse of programme materials” was too vague not allowing a clear determination of activities that should be performed by the public service broadcaster.2656

3.1231

In the Kinderkanal/Phoenix Decision, the Commission observed that the relevant legal acts did not contain any details regarding the content of thematic channels and did not contain an explicit obligation to offer those additional channels. Ultimately, the Commission was satisfied that the representatives of the German Länder approved the programmes concepts presented by the public service broadcasters.2657

3.1232

Similarly, in the BBC licence fee case, the Commission observed that the relevant legal acts (i.e. the BBC Charter and the Agreement) did not contain a clear and precise definition but was ultimately satisfied that the proposal to launch nine digital channels was formally approved by the UK government based on a number of conditions for each specific service.2658

3.2.3 Supervision of the public service mission 3.1233

The 2009 Communication clarifies in paragraph 53 to 55 that to approve public funding of broadcasters the Commission must be able to rely on appropriate supervision by the Member States of the compliance by the broadcaster with the public service mandate. It is for the Member State concerned to establish such control mechanisms which should be exercised by an authority that is independent from the entrusted undertaking.

3.1234

The General Court has clarified that the requirement of supervision contained two steps: (1) the monitoring of compliance with qualitative criteria and (2) the control that the services actually provided by the public service broadcaster correspond to the costs declared. The General Court further stressed that the compliance control was the necessary counterbalance to accepting a wide remit.2659

2656 2657 2658 2659

(Case C 85/2001), OJ L 142, 06.06.2005 p. 1, para. 171: despite the lack of a clear definition, there was no problem as regards possible overcompensation given that during the period under investigation no State payments had been made for such services. Commission decision of 03.02.2004 on ad-hoc measures to Dutch public broadcasters and NOB (Case C 2/2004), OJ C 61, 10.03.2004, p. 8, para. 82. Commission Decision of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3. Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), OJ C 23, 30.09.2003, p. 6, para. 35. Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, in particular paras 209-213.

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Member States have established different control mechanisms, both as regards the funding and the fulfilment of the public service. Control may be exercised by national courts of auditors2660 in addition to the control by external auditing firms, lie in the hand of specially appointed bodies or institutions,2661 or be exercised by national or regional Parliaments2662 or the Government, based on regular reports submitted by public service broadcasters.2663

3.1235

Supervision carried out by an entity within the organisational structure of the public service broadcaster itself may not provide the guarantees for a truly independent control. As regards the Broadcasting Councils in Germany, the Commission concluded that due to the different functions exercised by them (i.e. advisory function as regards programme activities of the public service broadcasters on the one hand and control function on the other) there was an inherent conflict of interest which might endanger a fully effective supervision.2664

3.1236

3.2.4 Proportionality The Commission has to verify that the State funding does not affect competition in the internal market in a disproportionate manner. The aid should not affect the development of trade to such an extent as would be contrary to the interests of the Union.2665

3.1237

The 2009 Communication starts, in paragraph 71, from the assumption that State funding is necessary for the undertaking to carry out its public service

3.1238

2660 See for instance the control exercised by the National Audit Office as regards TV2 s accounts (Commission Decision of 19.05.2004 on the financing of TV2 (Case C 2/2003), OJ L 85, 23.03.2006, p. 1) or the report by the Court of Auditors on the financial performance of RTVE (Commission Decision of 20.04.2005 on the financing of RTVE (Case E 8/2005), summary notice in OJ C 239, 04.10.2006, p. 17, para. 62). 2661 For instance, in Ireland, supervision will be ensured through the Irish Broadcasting Authority; cf. Commission Decision of 27.02.2008 on State financing of Irish Radio Teilifís Éireann (RTÉ) and Teilifís na Gaeilge (TG4) (Case E 4/05), summary notice in OJ C 121, 17.05.2008, p. 5, in particular para. 151 et seq. 2662 See for instance the Parliamentary Commission in Spain (Commission Decision of 20.04.2005 on the financing of RTVE (Case E 8/2005), summary notice in OJ C 239, 04.10.2006, p. 17, para. 61) and Italy (Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1, para. 119). 2663 See for instance the reports submitted by RTP to the Government which checks compliance with the public service contracts (Commission Decision 2005/406/EC of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005 p. 1, paras 178 to 181) or the annual reports which France 2 and France 3 submit to the Minister responsible for Communication to demonstrate compliance with their schedules of tasks and obligations (Commission Decision of 10.12.2003 on State aid implemented by France for France 2 and France 3 (Case C 60/99), OJ L 361, 08.12.2004, p. 21, para. 77). 2664 Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007 p. 1, paras 255 and 256. 2665 Cf. Broadcasting Communication, para. 37.

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tasks. Therefore, the Commission only needs to ascertain that the State aid does not exceed the net costs of the public service mission, taking account of other revenues derived from the public service mission or the commercial activities. They need to be deducted from those costs in order to arrive at the net public service costs.

3.2.4.1 Determination of the net public service costs 3.1239

In a first step, the costs deriving from the public service mission need to be identified. That process requires a clear separation between public service activities and non-public service activities as well as a correct allocation of costs to the respective activity.2666

3.1240

The 2009 Communication acknowledges in paragraph 67 the specific situation of public broadcasters which are financed on the basis of their net costs. It is more lenient than the European Union Framework for State aid in the form of public service compensation2667 by accepting that costs do not need to be apportioned to commercial and public service activities. If the two activities share the same input, all costs can be borne by the public service. However, that seemingly generous approach is counterbalanced by a stricter approach for the commercial income of the broadcaster. All the revenues of commercial services relying on the public service must be used to establish the net costs of the public service. They must be deducted as income, thus lowering the need for State aid. That difference in approach seems justified because usually the public service encompasses the whole programming of a broadcaster. At the same time the broadcaster is free to commercially exploit its programming (e.g. by selling a TV production on DVD or to other broadcasters). It is difficult to apportion costs meaningfully, whereas the approach to calculate the commercial revenues works well. In other words, when a commercial and a public service activity share the same input, costs can be fully shifted to the public service. However, on the other side, all revenues derived from the public service should be deducted in order to define the public service financing need.2668

3.1241

A way of ensuring a separation of accounts would be to have commercial activities carried out by the public service broadcaster’s commercial subsidiaries.2669 2666 For details see the Broadcasting Communication, paras 60 69. 2667 OJ C 8, 11.01.2012, p. 15. 2668 Broadcasting Communication, para. 71; Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice Two Years after its Entry into Force, EStAL 1/2012, 37 (41). 2669 Commission Decision of 22.05.2002 on the BBC Licence fee (Case N 631/2001), summary notice in OJ C 23, 30.09.2003, p. 6, para. 42; this solution was also offered by Germany: Commission Decision of

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No deduction of revenues is necessary where they are generated by so-called “stand-alone” commercial activities, i.e. commercial activities which are strictly separate from the public service. In such a situation, cost allocation rules would be substituted by the establishment of transfer prices. Any possible input from the public service would need to be paid for at market prices.2670 However, it must be possible to verify the correctness of the transfer prices between the public service broadcaster and its subsidiaries.2671

3.1242

When determining the public service costs, the costs actually incurred serve as a basis. The proportionality test under Article 106(2) of the Treaty does not require a limitation of the compensation amount to the costs of an efficient operator. Paragraph 9 of the 2009 Communication stresses that “public service broadcasting is not comparable to a public service in any other economic sector”. Efficiency considerations do not seem to be appropriate for broadcasters. The General Court has clearly stated that it is not the Commission’s competence to analyse the public service broadcaster’s efficiency. In M6 andTF1 it stated: Furthermore, in the absence – as in this case – of Community rules governing the matter, the Commission is not entitled to rule on the basis of public service tasks assigned to the public operator, such as the level of costs linked to that service, or the expediency of the political choices made in this regard by the national authorities, or the economic efficiency of the public operator.2672 That relative leniency in the case-law is also the consequence of the Member States’ competence to define the scope and quality of public service broadcasting. Efficiency considerations are intrinsically linked with the quality, scope and organization of public service broadcasting. Introducing efficiency scrutiny for the whole programming or on the level of single offers (news production with an own network of correspondents, the decision whether the broadcaster should finance an orchestra, or whether the news should be presented by a famous anchor or somebody less famous and less expensive) would contradict the wide discretion of the Member States in that regard. Thus, efficiency may be a concern for the national tax payer but not for the compatibility assessment under Article 106(2) of the Treaty.2673

3.1243

2670 2671

2672 2673

24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 343. Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, para. 133. Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1, paras 126 and 127. The same conclusion was reached in the Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, para. 131. Joined Cases T-568/08 and T-573/08 M6 and TFI v Commission ECLI:EU:T:2010:272, para 139. It should be noted that the General Court did not limit these considerations to broadcasting. Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice

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The difficulty in establishing objective efficiency standards for public broadcasters also makes it unlikely that the public financing of a broadcaster would meet the Altmark test, thereby escaping the qualification as State aid.2674 The fourth criterion of that test would require an efficiency comparison of public service broadcasters with the costs which a typical undertaking, well-run and adequately equipped, would have incurred in discharging likewise obligations. Although private broadcasting operators could serve as a reference, efficiency considerations are not a suitable benchmark for considerable parts of the public service tasks of broadcasters.2675 Thus, a comparison to another undertaking is not appropriate, and the efficiency test is not possible.2676 It is easier to define a typical well-run undertaking in the area of bus transport than in public service broadcasting, given that the objectives that the public service broadcaster must serve are often defined in qualitative, rather than quantitative terms, and the assessment of the extent to which those objectives are met often involves a subjective assessment.

3.2.4.2 Financial control and avoidance of overcompensation 3.1244

To be proportionate, the amount of public compensation should not exceed the net costs of the public service mission.2677 Public service broadcasters may retain yearly overcompensation above the net costs of the public service to the extent that to do so is necessary for securing the financing of their public service obligations. In general, the Commission considers that an amount of up to 10 per cent of the annual budgeted expenses of the public service mission may be deemed necessary to withstand cost and revenue fluctuations.2678 That possibility to retain up to 10 per cent of the annual budgeted expenses was, in principle, taken over from the Public Service Framework, but the amount is calculated on the basis of the annual budgeted expenses, rather than on the annual compensation amount. That difference in approach takes into account that public service broadcasters are sometimes dually funded by State aid and commercial income. Two Years after its Entry into Force, EStAL 1/2012, 37 (40). 2674 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, paras 88 to 93. 2675 Koenig and Haratsch, The licence fee based financing of public service broadcasting in Germany after the Altmark Trans judgment, EStAL 4/2003, pp. 569, 577; the Commission was more optimistic about this in its Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, para. 168. 2676 Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice Two Years after its Entry into Force, EStAL 1/2012, p. 37 (41); for such situations cf. Müller, Limitations to the Power of Member States to define SGEIs, EStAL 1/2009, p. 39. 2677 Broadcasting Communication, paras 70, 71. 2678 Broadcasting Communication, para. 73.

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Linking the 10 per cent to the compensation amount would have favoured those broadcasters who only receive State aid.2679 In duly justified cases public service broadcasters may be allowed to keep an amount in excess of that 10 per cent provided that the overcompensation is specifically earmarked in advance of and in a binding way for the purpose of a non-recurring, major expense necessary for the fulfilment of the public service mission. Such special reserves may be justified for major technological investments or for major restructuring measures necessary to maintain the continuous operation of a public service broadcaster within a well-defined time period.2680

3.1245

In view of the wide discretion of Member States to compensate broadcasters, the Commission’s control of the proportionality of that compensation is limited; the General Court’s review of that Commission assessment is even more restricted.2681 The Commission may therefore limit itself to verify whether an effective financial control is in place which ensures the absence of overcompensation.2682 According to paragraphs 77 to 79 of the 2009 Communication, Member States must establish mechanisms to ensure effective and regular control of the use of the public funds. That control is ideally carried out by an external body independent from the broadcaster. The financial situation of the broadcasters should be subject to a regular ex-post in depth review.

3.1246

In a system where all effective net costs may be covered by State aid and where there are no efficiency requirements, ex-post control is the more important tool to ensure the absence of overcompensation. An ex-ante determination of expected funding needs can therefore only be indicative and has no significance at all for the question whether there could be overcompensation. That feature was underlined by the General Court in its judgment on the financing of the Spanish broadcaster RTVE. The applicants had suggested that overcompensation would necessarily follow from the amount which the law foresaw, for the reason of budgetary planning of the State, for the funding of RTVE. The General Court found that that argument was in any event unfounded because an ex-ante assessment would already suggest that this is the funding need which

3.1247

2679 Repa, Tosics, Dias and Bacchiega, The 2009 Broadcasting Communication, Competition Policy Newsletter 3/2009, p. 13; Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice Two Years after its Entry into Force, EStAL 1/2012, p. 37. 2680 Broadcasting Communication, para. 74. 2681 Case T-151/11 Telefónica de España and Telefónica Móviles España v Commission ECLI:EU:T:2014:631, paras 159-161. 2682 Case T-151/11 Telefónica de España and Telefónica Móviles España v Commission ECLI:EU:T:2014:631, para. 168; Case T-533/10 DTS Distribuidora de Televisión Digital v Commission ECLI:EU:T:2014:629, para. 184.

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could reasonably be expected – in view of past annual budgets.2683 The General Court made clear that, in a system which allows coverage of effective net costs, the budgetary planning itself is relatively irrelevant for the assessment whether there is overcompensation.

3.1248

Guaranteeing coverage of net costs of a public service broadcaster does also not amount to overcompensation just because commercial broadcasters which depend on advertising may be subject to revenue variations linked to the situation of the economy. For a scheme it would be decisive whether an ex-post assessment and auditing would ascertain that eventually the broadcaster will not dispose of more funds than it actually had needed.2684

3.1249

A particularly awkward approach by a Member State is to establish a financing system which makes sure from the outset that it does not compensate the public service broadcaster for the entire public service costs. Such was the case of the Portuguese broadcaster RTP. As a consequence, subsequent additional ad hoc capital contributions to cover up to the entire net public service costs will then constitute new aid, subject to the notification requirement for each single ad hoc capital injection.2685 The Commission accepted in 2003 that ad hoc financing, based on the public service broadcaster’s annual accounts. In 2008, the General Court annulled that decision, considering that the Commission should have verified whether the costs declared corresponded to the discharge of public service obligations. It held that the Commission could not rely on information submitted by the Portuguese authorities in that respect, since the public service reports at issue had not been audited systematically.2686

3.1250

In its new decision following that judgment, the Commission found that the system of annual compensation payments chosen by Portugal had the effect of underestimating the actual costs of the public service tasks performed by RTP. The system led to an accumulation of debt. In order to maintain RTP’s financial equilibrium, Portugal used ad hoc measures to finance RTP’s public service 2683 Case T-151/11 Telefónica de España and Telefónica Móviles España v Commission ECLI:EU:T:2014:631, para. 175-178. 2684 Case T-151/11 Telefónica de España v Commission ECLI:EU:T:2014:631, para. 168. 2685 Commission Decision 2005/406/EC of 15.10.2003 on ad hoc measures implemented by Portugal for RTP (Case C 85/2001), OJ L 142, 06.06.2005, p. 1, paras 193, 194 and 197. The annual compensation system applicable to RTP had the effect of underestimating the actual costs of its public service tasks. In order to maintain the financial equilibrium of RTP, the State made use of ad hoc instruments to finance RTP s public service debt. Shortly thereafter came Commission Decision of 04.07.2006 on the financial support to restructure the accumulated debt of the Portuguese public service broadcaster RTP (Case NN 31/2006), summary notice in OJ C 222, 15.09.2006, p. 4, paras 122, 123 and 137. 2686 Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, in particular paras 241, 249, 250 and 254.

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costs. The total compensation was still below the net public service costs. The Commission concluded, therefore, that the total State funding was proportionate to the net operating public service costs of RTP for the period under investigation.2687 That case demonstrates that it is not a very efficient regulatory approach for a Member State to establish a system which provides in a binding way for a foreseeable and systematic under-financing of the country’s public broadcaster. It will inevitably lead to ad hoc measures. They should normally be notified to the Commission which, in turn, may wonder whether it has before it a well-considered financing of a public service or a rescue or restructuring aid measure, and which set of rules it should apply.2688 A general binding provision that the net costs of the broadcasting service will eventually be covered and overcompensation be avoided, accompanied by a credible ex-post control mechanism, would easily avoid repetitive ad hoc measures, and in particular their notification. The rest would be internal budgetary planning which is not of the Commission’s concern.

3.1251

Regarding possible overcompensation, in other investigations the Commission has also come to the conclusion that the State funding remained within the permissible limits or that the public service broadcaster had actually been under-compensated.2689 The only serious issue of the rather unlikely case of overcompensation in a State aid context where efficiency is not a concern would be a cross-subsidisation of commercial activities.

3.1252

There has so far only been one case where the Commission found that the public service broadcasters were overcompensated.2690 In the Decision concerning the ad hoc financing of the Dutch public service broadcasters, the Commission

3.1253

2687 Commission Decision 2012/365/EU of 20 December 2011 on the State aid granted by Portugal in the form of ad hoc measures in favour of RTP (Case C 85/2001), OJ L 183, 13.07.2012, p. 1, paras 208 - 210. 2688 Portugal notified in 2011 yet another ad hoc measure linked to the institutionalised underfinancing of RTP, Commission Decision of 20.12.2011 on financial support to restructure the accumulated debt of RTP (Case SA.33294), summary notice in OJ C 53, 23.02.2012, p. 1. 2689 Commission Decision of 20.04.2005 on licence fee payments to France 2 and 3 (Case E 10/2005), summary notice in OJ C 240, 30.09.2005, p. 20, para. 89. 2690 Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1. Also in Decision of 19.05.2004 on the financing of TV2 (Case C 2/2003), OJ L 85, 23.03.2006, p. 1, the Commission had concluded on the existence of overcompensation regarding the Danish broadcaster TV2; this decision was annulled by the General Court in 2008. In April 2011 the Commission finally adopted a positive decision (Commission Decision C(2011)2612 of 20 April 2011 on the measures implemented by Denmark for TV2 (Case C 2/2003), OJ L 340, 21.12.2011, p. 1). The validity of that decision has been challenged in the General Court (Case T-674/11 TV2/Danmark v Commission and Case T-125/12 Viasat Broadcasting UK v Commission).

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observed that, during the period under investigation, the annual compensation payments as well as ad hoc funds led to a significant accumulated amount of overcompensation which was held by public service broadcasters in so-called programme reserves . The situation in the Dutch case was complicated by the fact that the overall amount of overcompensation was the result of both the annual funding and the ad hoc financing measures. Since recovery can only be ordered for new aid, the Commission deducted the existing aid from the overall amount and thus arrived at the overcompensation amount to be recovered.2691 The General Court upheld the validity of that decision.2692

3.2.4.3 Other possible market distortions due to the State funding 3.1254

In the context of the proportionality assessment, the Commission checks also any market distortions which are not necessary for the fulfilment of the public service mission. The 2009 Communication mentions in that respect in particular the risk that public service broadcasters might depress advertising prices or other non-public service activities on the market, knowing that lower revenues are covered by the State.2693 Conversely, where public service broadcasters do not maximise revenues from the exploitation of public service activities, the net public service costs, and consequently the amount of compensation, would be higher than necessary and hence not justified.2694 The 2009 Communication stipulates therefore that broadcasters must respect market principles and keep arm s length relations with their subsidiaries.

3.1255

A particular issue in that context is the acquisition of premium content by public broadcasters, in particular sport content. Such purchasing is generally considered legitimate. However, it would be disproportionate if those broadcasters were to maintain exclusive premium rights unused without offering them for sub-licensing.2695

2691 Commission Decision of 22.06.2006 on the ad hoc financing of Dutch public service broadcasters (Case C 2/2004), OJ L 49, 22.02.2008, p. 1, para. 154. 2692 Joined Cases T231/06 and T237/06 Netherlands and NOS v Commission ECLI:EU:T:2010:525. 2693 Cf. Broadcasting Communication, para. 94; Commission Decision of 10.12.2003 on State aid implemented by France for France 2 and France 3 (Case C 60/99), OJ L 361, 08.12.2004, p. 21: complainants claimed that both public service broadcasters, acting outside the profitability constraints of their competitors, were able to offer discounts on their advertisement slots or sponsorship activities in order to retain customers (para. 91). 2694 Commission Decision of 15.10.2003 on the measures implemented by Italy for RAI SpA (Case C 62/99), OJ L 119, 23.04.2004, p. 1, para. 124; Commission Decision of 24.04.2007 on the financing of public service broadcasters in Germany (Case E 3/2005), summary notice in OJ C 185, 08.08.2007, p. 1, paras 334 and 350. 2695 Broadcasting Communication, para. 92.

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Within those limits, sport can be part of the public service mission of providing a balanced and varied programme. Public service broadcasters may, in line with accepted business practice, acquire exclusive sports rights as long as private operators are not prevented from acquiring sports rights of similar appeal and in any case are able to acquire a number of those sports rights, so that public service broadcasters do not empty the market. More generally, the Commission must assess whether the adverse effects of a certain service on competition would make it impossible for competitors to continue to do business or would preclude potential competitors from entering the market. In that case, the aid would become disproportionate.2696

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In any case, when examining new and existing financing regimes, the Commission needs to make sure that there are adequate safeguards in place to exclude anti-competitive behaviour and to allow assessing any possible complaint at the national level.2697

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4.

Outlook

With the consolidation of the rules in the 2009 Communication many contested issues regarding the public service remit and its appropriate compensation have been settled. Complaints made more recently to the Commission address issues which, in the complainants’ view, are not satisfactorily solved at national level.

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Such complaints call for an examination of the introduction of individual new programmes, the use of new platforms, theme channels, pay services, or specific internet offers of the broadcaster. However, the revision of the 2001 Broadcasting Communication in 2009 sought to avoid the Commission having to scrutinise that field, and did so by requiring the establishment of a transparent mechanism on the national level. That core element of the 2009 Broadcasting Communication would be weakened by opening numerous investigations into specific single service offers. The Commission would become the supervisory body of last resort for the public service broadcasting remit.2698

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2696 Commission Decision of 14.12.1999 on the BBC 24 hour news channel (Case NN 88/98), summary notice in OJ C 78, 18.03.2000, p. 6, paras 93 and 98; Case T-533/10 DTS v Commission ECLI:EU:T:2014:629, para. 160. 2697 Broadcasting Communication, para. 96. 2698 Held and Kliemann, The 2009 Broadcasting Communication and the Commission’s Decisional Practice Two Years after its Entry into Force, EStAL 1/2012, 37 (46).

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Thus the Commission is more likely to be willing to look into complaints which point to a structural problem of non-compliance with the requirements of the 2009 Communication than to deal with cases in which there is no such structural problem and where the complainant is just not satisfied with the individual outcome of the ex-ante assessment at the level of the Member State. In such cases, national mechanisms are better placed to address possible concerns.

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An example concerns Germany. As a follow up to the decision of 2007 in case E 3/2005, Germany amended the definition of the public service remit by providing that press-like products2699 of the broadcasters should not be financed with State aid. The association of German newspaper editors (BDZV) expressed the view that the ex-ante test concerning the content of broadcasters’ websites, in particular their news section, led to the authorisation of an offer which would be comparable with the online offer of major German newspapers and thereby not add any value for society in terms of satisfying democratic, social and cultural needs.2700

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In such cases redress should be sought in the first place at national level. That priority to solutions at a national level is also in line with the principle that the discretion of Member States to define the public service remit is wide and that the Commission s room for review is limited to the control of abuse and manifest error. The Commission should focus its intervention on those cases where a structural solution on the general funding system is needed, e.g. because the Member State has not yet introduced an ex-ante test or is lacking other elements required by the 2009 Communication.

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However, technological development and the increasing media convergence will pose new questions regarding the compatibility of State aid to broadcasters’ new activities. Traditional TV is challenged by new media activities, such as video on demand services. They will lead public service broadcasters to test the scope of what could be acceptable as subsidised activity. In that context it may be of significance whether the subsidised activity is not provided in the same, or even better, way by commercial operators. The 2009 Communication only states that online information services might be part of the public service remit provided they serve the same democratic, social and cultural needs of society. It does not contain further guidance on how to carry out the assessment of sub2699 The notion is sufficiently vague. It prohibits not only electronic versions of print media (like newspapers), but all electronic offers, which resemble newspapers and magazines in content and design. 2700 Gebührenfinanzierte presseähnliche Angebote sind wettbewerbswidrig - Verlage klagen gegen Tagesschau-App, press release of the Association of German Newspaper Publishers, http://www.bdzv.de/bdzv_ intern+M5dc35dac6b0.html.

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stantially new activities. However, cases where a Member State would qualify as public services activities that are already provided in the same way by commercial operators are likely to be considered as involving a manifest error, or, at least, the necessity of the financing would have to be doubted.2701

2701 Case C-179/90 Merci Convenzionali Porto di Genova v Siderurgica Gabrielli ECLI:EU:C:1991:464, paragraph 27; Case C-242/95 GT-Link v De Danske Statsbaner ECLI:EU:C:1997:376, paragraph 53; and Case C-266/96 Corsica Ferries France v Gruppo Antichi Ormeggiatori del porto di Genova and others ECLI:EU:C:1998:306, paragraph 45.

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Chapter 25 Culture and sport

1.

Introduction

Both cultural and sport activities may be economic and thus subject to the State aid rules. However, the application of State aid rules on culture and sports has a rather short history. Article 107(3)(d) of the Treaty specifically mentions culture as one of the grounds which could justify State aid. Sport is not mentioned in Article 107(3) but forms part of the objectives of the Treaty, according to Article 165 of the Treaty. Thus, aid to sport may be assessed under Article 107(3) (c) of the Treaty as aid pursuing objectives of common interest.

2.

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State aid and culture

2.1 Application of Article 107(1) of the Treaty to culture Establishing the presence of State aid within the meaning of Article 107(1) of the Treaty in the field of culture raises several issues, in particular whether the aided cultural activity is economic within the meaning of the State aid rules, and whether the aid affects trade between Member States.2702

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2.1.1 Economic activities Nobody would question that film producers engage in an economic activity and compete with each other in offering films on the market. They are undertakings carrying out an economic activity within the meaning of Article 107(1) of the Treaty. However, in other cultural sectors than cinema the qualification of

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2702 Cf. part 2, chapters 8 and 12 on the notion of aid.

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certain beneficiaries of State support as undertakings may be less obvious. The starting point for any such qualification is the concept of economic activity. As paragraph 12 of the Communication on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest states, the State aid rules only apply where a certain activity is provided in a market environment.2703 In fact, in several notified cases, usually involving aid for the protection and restoration of monuments and national heritage, the Commission has concluded that the notified measures involve no aid when the owners of the restored buildings were individuals, churches and religious institutions or local authorities since they do not normally engage in economic activities.2704

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Also in the Ecomusée d’Alsace case, the Commission considered that certain cultural institutions, such as museums, are not undertakings.2705 The case concerned an aid granted to a museum representing the traditional way of life in an Alsatian village. The Commission concluded that the two non-profit making associations running the museum were not undertakings since their tasks of preserving, conserving and showing to the public the collections and site of the Ecomusée were the typical scientific activities of a museum. However, the Commission also assessed the compatibility of the measure, in case it would nevertheless constitute aid. And in later cases the Commission increasingly concluded on the existence of aid in the financing of museums. In the Fussballmuseum Dortmund decision, the Commission found that exposing objects of cultural value in exchange for entrance fees is in principle an economic activity and hence not exempted from the State aid rules as such.2706

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In its decisional practice, the Commission has always been careful to distinguish the non-economic, scientific and educational activities of cultural institutions from any other commercial activities that may be exercised on their premises. For instance, in the Aviodrome case,2707 the notified aid was meant to finance the construction of an aviation museum, as well as supporting commercial infra2703 OJ C 8, 11.01.2012, p. 4. 2704 See for instance Commission Decision of 20.07.2005 on Heritage Conservation – Poland (Case NN 55/2005), summary notice in OJ C 295, 26.11.2005, p. 10; Commission Decision of 20.7.2005 on the Hungarian Cultural Heritage Scheme to Promote Tourism (Case N 123/2005), summary notice in OJ C 314, 10.12.2005, p. 2. 2705 Commission Decision of 21.01.2003 on Ecomusée d’Alsace – France (Case NN 136/A/2002, summary notice in OJ C 97, 24.04.2003 p. 10). 2706 Commission Decision of 21.09.2010 on the Fussballmuseum Dortmund (Case N 158/2010), summary notice in OJ C 136, 06.05.2011, p. 1. 2707 Commission Decision of 15.10.2003 on the Aviodrome – Netherlands (Case N 221/2003), summary notice in OJ C 301, 12.12.2003, p. 6.

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structures such as a restaurant and a cinema. While the Commission generally acknowledged that museum activities are not normally considered as economic activities, it also noted that there could be spill-over effects of the public support to the aviation museum for the commercial activities and therefore that the presence of State aid could not be excluded. Given that most museums have some forms of commercial activities (bookshops and boutiques, restaurants, renting of premises for private events, etc.), it can be argued that any aid to a museum may have spill-over effects on those commercial activities. Such a line of reasoning would however miss the point that the commercial activities usually serve to support the cultural activities rather than the contrary. It is unrealistic to assume that the aid to a large art collection would ever go beyond what those institutions need; usually the public funding is not sufficient; a spill-over to commercial activities can be generally excluded. However, turning against such criticisms, the Commission went one step further in its analysis of the qualification of aid to essentially cultural activities in a subsequent decision on the State guarantee in favour of Austrian national museums.2708 That case concerned a clause in the Austrian Federal Finance Act, identically reintroduced each year, under which the Austrian Minister of Finance assumed the liability for loss or damages to objects loaned to temporary exhibitions organised by the eight Austrian federal museums.2709

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The Commission could have concluded that the federal museums are not undertakings and that the organisation of temporary exhibitions is part of or ancillary to their main activity which is to preserve, study and show collections to the public for educational purposes. Instead, the Commission took the view that the organisation of exhibitions displays certain commercial characteristics: such exhibitions play a major role in generating revenues for the organising museums, in terms of higher admission fees and merchandising. Furthermore, the Federal museums, when organising temporary exhibitions, compete with non-public museums or

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2708 Commission Decision of 10.10.2007 on a State guarantee in favour of Austrian national museums (Case NN 50/2007), summary notice in OJ C 308, 19.12.2007, p. 9. 2709 It would have been worthwhile to assess more closely whether that liability coverage by the State constituted an economic advantage. That clause is simply a reflection of the principle of internal self-insurance by the State, a principle also common to the German administration and its subsidiaries, such as museums or universities. That principle follows the very economic consideration that a very large entity, like the State, or a very large company, can more economically cross-finance its risks by building up appropriate budgetary reserves than to externalise the risks against premiums by third insurers (Farny, Handwörterbuch der Versicherung, Karlsruhe 1988, 782). The State is thus just making savings in the insurance of its objects. If a museum is part of the State administration, it forms part of that system as a result. Extra insurance would be economically less efficient. As such, it could be argued that the State had thereby acted as a market economy operator would have done had it been in a comparable situation.

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cultural institutions in order to attract visitors and sponsors. The Commission came to the rather far reaching conclusion that, irrespective of whether all activities of the Austrian federal museums are of a cultural nature, they must be considered as entities carrying out economic activities when they organise exhibitions.

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The Austrian national museums decision calls for a certain number of comments. It is difficult and probably not even appropriate to draw a clear distinction between the core functions of museums and their role as organisers of temporary exhibitions: in both instances, they present works of art and collections to the public, in exchange of the payment of an admission fee. In both cases, they are likely to compete with private collections and museums to attract visitors. To conclude that the organisation of temporary exhibitions by national museums is an economic activity may eventually lead to the far reaching conclusion that the opening of their permanent collections to the public is an equally economic activity.

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If the organisation of art exhibitions is indeed an economic activity, it would be subject to State aid control. It is submitted that by reaching that conclusion, the Commission has possibly over-stretched the notion of economic activity and limited its analysis to the fact that exhibitions are generating revenues in an area where major private operators are also active, such as for instance the Guggenheim Foundation. It cannot be disputed that revenue generation may lead to a contribution to the costs actually incurred by a collection. However, offering services on a market as an economic activity generally supposes that the underlying activity can be performed at market conditions and with a view to make profits.2710 If a type of activity were structurally dependent on public or private charitable support (because it was perpetually loss-making), it is submitted that such public assistance would not be State aid because clearly no one of the recipients was operating with a view to making profits. It would therefore seem necessary for the Commission to first establish that in the area of art collections and their public presentation there is at least a commercial operator able to fund those activities on market terms. Such a demonstration might well be difficult because even large non-public collections do not expect to, and generally do not, earn profits. Private entities, usually in the form of foundations, can generally only be active because of generous private donations. There are e.g. also no commercial public libraries to be found in the Union.2711 2710 According to paras 12 and 13 of the Communication on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, State aid rules only apply where a certain activity is provided in a market environment, and an economic activity exists where other operators would be willing and able to provide the service in the market concerned. It is submitted that a “market environment” presupposes also the realistic expectation to generate a profit. 2711 For a critical perspective regarding the Commission’s assumption of the pursuance of economic activities, see

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A particularly noteworthy example of the Commission’s far-reaching tendency of finding the existence of an economic dimension to cultural activities is the Commission Decision on a Czech scheme which provided for support to a variety of activities related to cultural heritage and contemporary art and the dissemination of the relevant knowledge.2712 Aided activities included projects in diverse artistic disciplines, theatre festivals, theatre workshops, playwriting, creative film scriptwriting, scriptwriting seminars, or the restoration of the architectural national heritage. The Commission found that it could not be excluded that the beneficiaries might engage in activities of an economic nature and mentioned as examples the organisation of cultural events and festivals. It concluded that the performance of cultural activities could be considered as economic because it assumed, without giving an example, that there may be entities other than the beneficiaries offering the same or similar services on the market. The Commission did not explain why it thought that activities like theatre playwriting workshops are offered on a competitive market. Similarly, in a case involving the renovation of monuments, the Commission found an advantage to an economic activity because potential beneficiaries might use the building for the operation of an economic activity.2713

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It would probably be more appropriate for the Commission not to consider as an economic activity those cultural activities which generally are not pursued by commercial operators with a view to generate profits.

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2.1.2 Effect on trade Public support will not constitute State aid within the meaning of Article 107(1) of the Treaty if it does not affect trade between Member States. An absence of effect on inter-State trade is especially pertinent in the case of public support for culture since many cultural activities have essentially a local character. The Commission has acknowledged this in a certain number of cases. In the case of aid for the restoration of the Brighton West Pier,2714 it concluded that the pier, given its location, was in itself unlikely to attract tourists and visitors from other Member States. In the Ecomusée d’Alsace decision the Commission reinforced

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Psychogiopoulou, State aid to the Publishing Industry and Cultural Policies in Europe, EStAL 1/2013, 69 (74). 2712 Commission Decision of 19.12.2013 on the Czech programme on cultural heritage and contemporary art (Case SA.36361), summary notice in OJ C 117, 16.04.2014, p. 9. 2713 Recital 48; see also Commission Decision of 30.06.2011 on the support for private owners of cultural monuments in the restoration and preservation of cultural heritage in Latvia (Case SA.33106), summary notice in OJ C 215, 21.07.2011, p. 24. 2714 Commission Decision of 09.04.2002 on the National Heritage Fund for Brighton West Pier Trust (Case N 560/2001), summary notice in OJ C 239, 04.10.2002, p. 2.

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its conclusion that the notified measure did not involve State aid by underlining that, apart from important and internationally renowned museums, museum activities are generally not the object of exchanges between Member States.2715 That observation is noteworthy in view of the proximity of the institution to the German border. Similarly, in the case of Basques Theatres the Commission found no effect on trade.2716

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However, in later museum cases, the decisional practice with regard to the effect on trade became more restrictive and suggests that the Commission generally presumes that cultural activities, even if they are of local character, may affect trade and therefore fall within the scope of Article 107(1) of the Treaty. Even in the case of smaller museums of at best regional importance, the Commission seems now reluctant to exclude the presence of aid on the ground that there is no effect on trade.2717 Furthermore, it considered that the restoration of historical sites and buildings could have an effect on trade because they could attract visitors from other Member States or because the beneficiary could use the building for the operation of an economic activity.2718 In such cases the Commission preferred to avoid deciding on the presence of aid and to find the measure compatible with the internal market if it should constitute aid.2719 It is not clear why it changed its approach in that sense. As those activities in many cases are of a regional or local importance only, it is often not understandable why the Commission should deal with them.2720

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The increasing number of such decisions led to a growing number of notifications to the Commission concerning cultural activities, some of rather local nature like theatres, festivals or cultural centres which so far have not been suspected to constitute an economic activity. Therefore the Commission proposed the inclusion of culture in the General Block Exemption Regulation (GBER).2721 2715 Commission Decision of 21.01.2003 on Ecomusée d’Alsace – France (Case NN 136/A/2002), the Commission nevertheless also assessed the compatibility of the measure; see also Commission Decision of 18.02.2003 Local museums of the region of Sardinia (Case N 630/2003), summary notice in OJ C 275, 08.11.2005, p. 3. 2716 Commission Decision of 27.06.2007 on Basques theatres (Case N 257/2007), summary notice in OJ C 173, 26.07.2007, p. 1. 2717 E.g. in the Commission Decisions of 21.09.2010 on the Fussballmuseum Dortmund (Case N 158/2010), summary notice in OJ C 136, 06.05.2011, p. 1, and of 11.05.2011 on State aid to Basque museums (Case SA.32643 (2011/N)), summary notice in OJ C 225, 30.07.2011, p.1. 2718 Commission Decision of 19.12.2013 on the Czech programme on cultural heritage and contemporary art (Case SA.36361), summary notice in OJ C 117, 16.04.2014, p. 9, recital 60. 2719 Commission Decision of 21.09.2010 on the Fussballmuseum Dortmund (Case N 158/2010), summary notice in OJ C 136, 06.05.2011, p. 1. 2720 A. Kliemann in H. Schröter, T. Jacob, R. Klotz, W. Mederer (ed.), Europäisches Wettbewerbsrecht, 2014, 2345. 2721 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible

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Article 53 of the GBER now contains dedicated provisions for the compatibility of aid for culture and heritage conservation.

2.2 The notion of culture in the Treaty and the scope of Article 107(3) (d) of the Treaty The Treaty did not make specific reference to culture until the entry into force of the Treaty of Maastricht in 1993. By adopting the latter Treaty, the Member States agreed on the need to promote and protect culture. Article 167(1) of the Treaty provides that “the Union shall contribute to the flowering of the cultures of the Member States”. More specifically, Article 167(4) lays down that “the Union shall take cultural aspects into account in its action under other provisions of the Treaties, in particular in order to respect and to promote the diversity of its cultures”.

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Along with that amendment came the introduction of Article 107(3)(d) of the Treaty, which can be considered as the application to State aid policy of the objective enshrined in Article 167(4) of the Treaty. According to the former provision “aid to promote culture and heritage conservation where such aid does not affect trading conditions to an extent that is contrary to the common interest, may be considered to be compatible with the internal market”.

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Some authors have seen in the adoption of that provision the recognition that culture and competition are put on an equal footing2722 with one commentator going as far as to claim that culture had acquired a superior value to the notion of competition.2723 However, the wording of the provision does not support such an interpretation. Others suggested that the wording of that provision, as compared to the other State aid derogations contained in the Treaty, would imply that it should be applied more restrictively.2724 In any case, the Commission considers that the cultural derogation may be applied in those cases where the cultural product is clearly identified or identifiable. Moreover, the notion of culture must be applied to the content and nature of the product in question, and not to the medium or the product’s distribution per se.2725

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with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 2722 See Mayer-Robitaille, Le Statut ambivalent au regard de la politique communautaire de concurrence des accords de nature culturelle et des aides d Etat relatives à la culture, RTDE 40(3) juillet-septembre 2004, 486 (493). 2723 Bekemans and Balodimos, Le Traité de Maastricht et l éducation, la formation professionnelle et la culture, Rec. Marché de L Union européenne, n° 2, 1993. 2724 Scharf and Orssich, The Application of State Aid Rules to Culture and Sports, in M. Sanchez Rydelsky (ed.), The Application of State Aid Rules, 2006, 511. 2725 Communication from the Commission on the application of State aid rules to public service broadcasting, OJ C 257, 27.10.2009, p. 1, para 34.

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Regarding the concept of culture and heritage, the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions of 2005 states in Article 4(4): “Cultural activities, goods and services refers to those activities, goods and services, which … embody or convey cultural expressions, irrespective of the commercial value they may have. Cultural activities may be an end in themselves, or they may contribute to the production of cultural goods and services.”

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However, the concept of culture is not defined anywhere in the Treaty defines. That lack of definition in Union law has two consequences for the application of the cultural exception in State aid policy. First, in line with the subsidiarity principle enshrined in Article 5 of the Treaty on European Union, the definition of cultural activities is primarily a responsibility of the Member States. Secondly, the Commission has only very limited room to control the Member States’ concept of culture. That limitation is expressly laid down in the Communication from the Commission on State aid for films and other audio-visual works (Cinema Communication) which states that the Commission’s task is limited to verifying whether a Member State has a relevant and effective verification mechanism in place able to avoid manifest error.2726

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As a result, it is difficult to define clearly the scope of a provision that applies to “State aid to promote culture and heritage conservation”. It is sometimes a complex task for the Commission to verify the cultural content of a measure. Regarding aid to audio-visual production, the existence of rules for the sector which refer to Article 107(3)(d) of the Treaty suggests that aid for films is very likely to promote cultural objectives. In any case, in the light of these considerations, the suggestion that the notion of culture in Article 107(3)(d) of the Treaty should be interpreted restrictively is somewhat contradictory. If the definition of culture remains the prerogative of Member States and the Commission’s assessment of that is restricted to cases on manifest error, the scope of Article 107(3)(d) of the Treaty seems to be wide rather than narrow.

2726 OJ C 332, 15.11.2013, p. 1, para 25; likewise in Article 54(2) of Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1.

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2.2.1 The control of the cultural content of audio-visual products As explained above, the Cinema Communication2727 provides that it is the Commission’s duty to control that Member States establish a mechanism verifying that the aid promotes culture.

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Originally, when the Commission started to assess aid to film production, it refrained from actively carrying out that control. The Commission’s decision on the French audio-visual aid schemes2728 is an example of that approach. The decision neither mentions nor describes any specific cultural test or criteria that a cinematographic production has to fulfil in order to be aided. Such an approach would imply that any cinematographic or audio-visual production is eligible for the derogation laid down in Article 107(3)(d) of the Treaty and that films or audio-visual products are per se cultural products within the meaning of that provision. That policy may appear to be contrary to the principle that the content rather than the medium is the relevant element when analysing the applicability of Article 107(3)(d) of the Treaty. However, for fiction films, which as a rule are the result of a creative process, another approach would be difficult to defend.

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However, since the adoption of the decision concerning the French audio-visual aid schemes, the Commission has exercised a closer control on the application of Article 107(3)(d) of the Treaty to the cinematographic and audio-visual sectors. This is illustrated by its decisions on the UK film tax incentive2729 and on the German Film Fund.2730 The example provided by the UK Film incentive is significant in many ways. When it was initially notified, that aid measure, which took the form of a tax deduction, relied on a point-based test which cinematographic productions had to fulfil in order to be eligible to the aid scheme. That original test, called the “UK Cultural Test”, was divided into three sections. Two of them referred to certain technical costs (such as studios and visual effects) and to the geographic origin of certain categories of cast members, while only one referred to the cultural content of the film.2731 The genuinely cultural part

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2727 Communication from the Commission on State aid for films and other audio-visual works, OJ C 332, 15.11.2013, p. 1, para 25. 2728 Commission Decision of 22.03.2006 on French aid schemes in favour of cinema and audio-visual (Cases NN 84/2004 and N 95/2004), summary notice in OJ C 305, 14.12.2006, p. 8. 2729 Commission Decision of 22.11.2006 on the UK film tax incentive (Case N 461/2005), summary notice in OJ C 9, 13.01.2007, p. 1. 2730 Commission Decision of 20.12.2006 on the German Film Fund (Case N 695/2006), summary notice in OJ C 14, 20.01.2007, p. 1. 2731 That cultural content was assessed on four criteria: whether the film was set wholly or mainly in the United Kingdom; the extent to which the main characters are British citizens; whether the subject matter of the film is based on British subject matter or underlying material; whether the dialogue is in English or in UK

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of the test only accounted for four points out of 32. The Commission’s analysis concluded that a film could achieve the pass mark of 16 points without picking up any of the points attributed to that “cultural” section of the test. The Commission therefore concluded that the selection test could not guarantee that only films with a cultural content would be eligible for the tax incentive.2732 Following the Commission’s comments, the UK authorities developed a new cultural test, in which the genuinely cultural elements accounted for 65 per cent of the total number of points available.2733 On the basis of that revised test, the Commission was able to conclude that films eligible for the tax incentive could reasonably be found to be cultural according to the UK authorities’ definition.

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In the decision on the German Film Fund, as in the UK scheme, the test of eligibility included sections on cultural content, creative talent and location of the production. In order to be eligible for the aid, films had to fulfil a minimum number of criteria in the cultural content section. On that basis, and given the truly cultural nature of the criteria in that section of the eligibility test, the Commission concluded that the aid was clearly aimed at the promotion of films with a cultural content.

3.1288

Those decisions appear to show a stricter control by the Commission of the national cultural criteria used by Member States to select “cultural” films.2734 However, that approach did not serve to review the cultural criteria but rather to ensure that it was such cultural criteria which were decisive and not those based on factors like the use of local industrial infrastructure. The latter are inspired by the objective to promote a national film industry.2735 The Commission was concerned that the selection criteria could become primarily protective by discriminating in favour of the granting Member State’s film industry.2736

regional or minority languages. 2732 Commission Decision of 22.11.2006 on the UK film tax incentive (Case N 461/2005), summary notice in OJ C 9, 13.01.2007, p. 1, recital 43. 2733 Apart from a revised attribution of the number of points to each criterion, the UK authorities added to the test of contribution to British culture/heritage/diversity. 2734 Orssich, Aid for Films and Other Audiovisual Worke – Current Affairs and New Developments, EStAL 1/2012, 49 (51). 2735 Broche, Chatterjee, Orssich and Tosics, State Aid for Films – a Policy in Motion? , Competition Newsletter, Spring 2007, 44 (45). 2736 The UK Film Incentives, in their initial form, were designed to favour mainly films that were shot in the United Kingdom: 47 per cent of the points were awarded on the basis of the use of UK cultural hubs (i.e. studios, shooting location, laboratories) in the production of the movies. The purely culture related points only represented 12 per cent of the total.

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Following the decision on the UK film tax incentive, Member States have notified increasingly sophisticated and detailed systems for the selection of eligible films. A detailed review of such systems by the Commission could give the impression that it may infringe the prerogative of Member States to define their cultural policy. It would certainly go too far if the Commission assessed e.g. criteria like the professional background of film selection panel members. It has to be welcomed therefore that the 2013 Cinema Communication2737 clarified that the Commission only assesses whether there is a verification mechanism in place at all to ensure the cultural objective of film funding.

3.1289

2.2.2 The promotion of culture by video games Compared to film funding, the Commission exercises a more thorough control on aid to video games. That difference of approach can to a certain extent be explained by the nature of the sector involved. The video game industry has only recently started to be recognised as a cultural industry. In a context where the cultural status of that sector can still be disputed, the Commission may have legitimate doubts concerning the application of Article 107(3)(d) of the Treaty and require that a stricter cultural test be applied in order to ensure the compatibility of aid to video games under this provision.

3.1290

In 2006, France notified a 20 per cent tax credit to studios in order to encourage the production of video games. While accepting that certain video games may constitute cultural products, the Commission nevertheless opened the formal investigation procedure, since it had doubts whether the eligibility criteria proposed by the French authorities would ensure that the aid would only be granted to cultural products within the meaning of Article 107(3)(d) of the Treaty.2738 The French authorities agreed to adopt a stricter test of eligibility, with precise cultural criteria which focussed on the content of the games and their relevance for French or European cultural heritage. Examples of such criteria are that the work is inspired by the historical or artistic heritage of Europe or by European literature or films, the creativity or originality of the scenario, or the reflection of current cultural, social or political topics. Thus fewer video games could benefit from that tax credit. On the basis of that revised test and of evidence of the limited impact of that regime on trade and competition, the Commission concluded that it was compatible with the internal market under Article 107(3)

3.1291

2737 Communication from the Commission on State aid for films and other audiovisual works, OJ C 332, 15.11.2013, p.1, para 25. 2738 Commission Decision of 22.11.2006, France, tax credit for the creation of video games (Case C 47/2006), OJ C 297, 01.12.2006, p. 19.

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(d) of the Treaty.2739 The 2014 decision on UK video games followed that approach.2740

2.2.3 The promotion of languages under Article 107(3)(d) of the Treaty 3.1292

In some cases the question has arisen whether the promotion of certain languages, in particular minority languages, should be assessed under Article 107(3)(d) of the Treaty. The Commission’s approach to this question shows an increased tendency to assess aid with that objective under Article 107(3)(d) of the Treaty. In two cases regarding State aid granted to printed media or to publishing with the view to promoting certain languages, the Commission first concluded that Article 107(3)(d) of the Treaty was not applicable. It argued that the measures in question did not promote products with a specific cultural content, but only products in a specific language. Thus, the aid was declared to be compatible with the internal market on the basis of Article 107(3)(c) of the Treaty.2741 In a case regarding the Basque media the Commission also based its assessment on Article 167 of the Treaty2742 and on the Charter of fundamental rights of the European Union,2743 which guarantees the respect for the cultural, religious and linguistic diversity in Member States.2744 On the basis of those provisions, the Commission concluded that the promotion of a regional language was in the common interest.

3.1293

However, languages are one of the main and essential forms of expression of culture. The conclusion that Article 107(3)(c) of the Treaty, rather than Article 107(3)(d) of the Treaty, is the relevant provision to analyse the compatibility of aid measures promoting languages may appear to be a very restrictive inter2739 Commission Decision of 11.12.2007 on a tax credit introduced by France for the creation of video games (Case C 47/2006), OJ L 118, 06.05.2008, p.16, in particular recitals 69 to 76. 2740 Commission Decision of 27.03.2014 on the State aid scheme which the United Kingdom is planning to implement for video games (Case SA.36139 (2013/C)), OJ L 323, 07.11.2014, p. 1. 2741 Commission Decision of 13 June 2007 on the promotion of the Basque language in the media (Case N 132/2007), summary notice in OJ C 172, 25.07.2007, p. 1. Another example of the application of that reasoning is Commission Decision of 10.05.2007 on the book promotion in the Basque country (Case N 82/2007), summary notice in OJ C 172, 25.07.2007, p. 1, which concerns a scheme supporting fairs, conferences and seminars for the promotion of books in the Basque country. See also Commission Decision of 20.05.2008 on aid to the press in Finland (Case N 537/2007), summary notice in OJ C 168, 03.07.2008, p. 1. 2742 “The Union shall contribute to the flowering of the cultures of the Member States, while respecting their national and regional diversity and at the same time bringing the common cultural heritage to the fore”. 2743 Article 22 of the Charter of Fundamental Rights of the European Union, signed and proclaimed by the Presidents of the European Parliament, the Council and the Commission on 7 December 2000 in Nice, OJ C 364, 18.12.2000, p. 1. 2744 See also Commission Communication on a New Framework Strategy for Multilingualism, COM(2005) 596 final.

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pretation of the latter provision. It may also appear to be inconsistent with the fact that, when applying Article 107(3)(c) of the Treaty to such cases, the Commission has also relied on Article 167 of the Treaty, which specifically and expressly deals with culture. Thus, in other decisions taken by the Commission in the same year but also later, Article 107(3)(d) of the Treaty has been applied to aid measures aiming at the promotion of languages. In its decision on the aid given to CELF,2745 a cooperative undertaking the members of which are French publishers handling orders for French books from booksellers abroad, the Commission applied Article 107(3)(d) of the Treaty. It concluded that the aim of the aid, the promotion of the distribution and spreading of French books abroad, was a cultural one. Similarly, aid measures that aimed at promoting the use of the Basque language in the working environment2746 and in social life2747 and Basque literature2748 were declared to be compatible with the internal marker under Article 107(3)(d) of the Treaty. The Court of Justice underlined explicitly in UTECA that linguistic diversity is an important element of cultural diversity; hence, defending and promoting the use of one or several of the languages of a Member State would also serve the promotion of culture.2749 Although UTECA does not concern the application of State aid rules (in that State resources were not involved in the measure before the national court), it appears that the Commission now accepts that an aid measure clearly aiming at promoting languages should be deemed to have a cultural content, and its compatibility should in principle be assessed under Article 107(3)(d) of the Treaty.

3.1294

2.2.4 Other cases In other areas, a significant body of Commission decisions has shed light on the scope of Article 107(3)(d) of the Treaty. Thus, that provision clearly applies

3.1295

2745 Commission Decision 1999/133/EC of 10.06.1998 concerning State aid in favour of Coopérative d’exportation du livre français (CELF) (Case C 39/1996), OJ L 44, 18.02.1999, p. 37. Although the decision was annulled by the General Court, that interpretation of Article 107(3)d) of the Treaty was confirmed by it and in the final Commission Decision 2011/179/EC in that investigation of 14.12.2010 concerning State aid implemented by France in favour of Coopérative d’exportation du livre français (CELF) (Case C 39/1996), OJ L 78, 24.03.2011, p. 37; see Case T-49/93 SIDE v Commission ECLI:EU:T:1995:166. 2746 Commission Decision of 21.03.2007 on aid for the development of the use of the Basque language in the working environment (Case N 776/2006), summary notice in OJ C 100, 04.05.2007, p. 4. 2747 Commission Decision of 21.03.2007, on aid for the development of the use of the Basque language in social life (Case N 49/2007), summary notice in OJ C 100, 04.05.2007, p. 4. 2748 Commission Decision of 01.07.2009 regarding publishing aid for Basque literature (Case N 132/2009), summary notice in OJ C 247, 15.10.2009, p. 5. 2749 Case C-222/07 UTECA ECLI:EU:C:2009:124, paras 27-33.

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to State aid in favour of museums, music, cinema and audiovisual works and theatre.2750 It also applies to publications with cultural content or objectives, like literature magazines.2751 However, the Commission decided that Article 107(3) (d) of the Treaty does not apply to aid schemes directed at the entire publishing industry.2752 The principle that the notion of culture has to be applied to the content and nature of the measure rather than to the medium or its distribution channel per se 2753 generally excludes an analysis of State aid to the print media under Article 107(3)(d) of the Treaty, and rather points to an analysis under Article 107(3)(c) of the Treaty.2754 However, if the media is dedicated to a clearly cultural content, Article 107(3)(d) of the Treaty is applicable, as in the case of aid to a literary periodical.2755

3.1296

Likewise, the Commission generally does not consider State aid to the broadcasting sector under Article 107(3)(d) of the Treaty. The Broadcasting Communication states in paragraph 34 that the cultural derogation may only be applied to broadcasting in those cases where the cultural product is clearly identified or identifiable.2756 This is only exceptionally the case.2757 The educational and democratic needs of a Member State, which the public service broadcasters are called to serve, have to be regarded as distinct from the promotion of culture under Article 107(3)(d) of the Treaty.2758

3.1297

The scope of “culture” is now further ring-fenced by the General Block Exemption Regulation which has included in Article 53 a long list of activities which may receive aid for culture and heritage conservation, including the publication 2750 Cf. also Commission Decision of 19.12.2013 on the Czech programme on cultural heritage and contemporary art (Case SA.36361), summary notice in OJ C 117, 16.04.2014, p. 9. 2751 Commission Decisions of 19.07.2006 on the promotion of the publishing industry in Slovenia (Case N 1/2006), summary notice in OJ C 300, 09.12.2006, p. 7, and of 21.12.2005 on aid in favour of a weekly literature magazine in Slovakia (Case N 542/2005), summary notice in OJ C 79, 01.04.2006, p. 23. 2752 Commission Decision 2206/320/EC of 30 June 2004 on the measures notified by Italy in favour of the publishing industry (Case C 63/03), OJ L 118, 03.05.2006, p. 8. 2753 Communication from the Commission on a European agenda for culture in a globalising world, COM(2007) 242 final, 10.5.2007. 2754 Commission Decision of 04.07.2014 on production and innovation aid to written media in Denmark (Case SA.36366), summary notice in OJ C 371, 18.12.2013, p. 6. 2755 Commission Decision of 21.12.2005 on aid in favour of a weekly literature magazine in Slovakia (Case N 542/2005), summary notice in OJ C 79, 01.04.2006, p. 23. 2756 Communication from the Commission on the application of State aid rules to public service broadcasting, OJ C 257, 27.10.2009, p.1. 2757 Commission Decisions of 27.01.2010 on the Austrian Fonds zur Förderung des privaten Rundfunks (Case N 631/2009) and Nichtkommerzieller Rundfunk-Fonds (Case N 632/2009), summary notices in OJ C 53, 19.02.2011, p. 1. 2758 Commission Decision of 24.02.1999 on the thematic channels Phoenix and Kinderkanal in Germany (Case NN 70/1998), summary notice in OJ C 238, 21.08.1999, p. 3.

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of literature.2759 Article 53 (10) states that “Aid to press and magazines, whether they are published in print or electronically, shall not be eligible under this Article”.

2.3 Compatibility of State aid to promote culture If a State aid measure does fall within the scope of Article 107(3)(d) of the Treaty, that provision provides that only State aid to promote culture and heritage that does not affect trading conditions and competition to an extent contrary to the common interest can be declared to be compatible with the internal market. Under Article 107(3)(c) of the Treaty, State aid is compatible unless it “adversely affects trading conditions”. The reasons for the difference in wording are not entirely clear. In practice however, that difference does not appear to have had a significant impact on the control carried out by the Commission. By singling out culture as a specific aid objective the Member States apparently wanted to ensure that aid for that objective is very likely to be deemed compatible with the internal market. In fact, the Commission has accepted aid intensities and other provisions, in particular relating to the issue of territorialisation of the aid, that go beyond what is generally allowed in other areas.

3.1298

While for aid “to facilitate the development of certain economic activities or of certain economic areas”, the Commission has long since clarified the way it assesses compatibility under Article 107(3)(c) of the Treaty, for “aid to promote culture and heritage conservation” there were until 2014 no guidelines or communications that detailed in general the conditions under which aid to promote culture can be considered to be compatible - with the exception of the rules on State aid to audio-visual production.2760 However, with the adoption of the General Block Exemption Regulation, that gap is now addressed. The Commission has not only exempted audio-visual aid but also introduced more general rules setting the conditions under which aid for culture and heritage conservation may be compatible with the Treaty.2761

3.1299

2759 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 2760 Communication from the Commission on State aid for films and other audio-visual works, OJ 2013 C 332, 15.11.2013, p. 1, preceded by the Communication from the Commission on certain legal aspects relating to cinematographic and other audio-visual works, OJ C 43, 16.02.2002, p. 6. 2761 Article 53 of the Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1.

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3.1300

For measures coming under the General Block Exemption Regulation, Member States may now grant aid without having to notify such measures to the Commission and wait for its approval under the conditions set by the Regulation. In areas which are not covered by the new provisions on aid for culture and heritage conservation of the General Block Exemption Regulation, the Commission will continue to directly apply Article 107(3)(d) of the Treaty. However, the Regulation will offer an orientation as to how the Commission will use its discretion under that provision.

2.3.1 The general rules on aid for culture and heritage conservation 3.1301

3.1302

Article 53(2) of the General Block Exemption Regulation exempts from the notification requirement of Article 108(3) of the Treaty investment and operating aid for the following cultural purposes and activities: –

museums, archives, libraries, artistic and cultural centres, theatres, opera houses, concert halls, film heritage institutions and other similar artistic and cultural infrastructures, organisations and institutions;

–

tangible heritage including all forms of movable or immovable cultural heritage and archaeological sites, monuments, historical sites and buildings;

–

intangible heritage in any form;

–

art or cultural events and performances, festivals, or exhibitions;

–

cultural and artistic education activities; or

–

writing, editing, production, distribution, digitisation and publishing of music and literature.

The rules are generous regarding the aid intensity. Aid may fully cover the net costs of investment in relevant infrastructure or of its operation. In consequence, the aid amount must not exceed the difference between the eligible costs and the operating profit of the investment or what is necessary to cover the operating losses and a reasonable profit.2762 The notification exemption is subject to a maximum threshold of EUR 100 million of investment aid per project and of

2762 Article 53(6) and (7).

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EUR 50 million of operating aid per undertaking and year.2763 The new rules, it is hoped, will relieve the Commission from the burden of assessing the compatibility of script writing seminars in rural areas or cultural activities of similar economic significance.

2.3.2 Compatibility of aid to audio-visual production The Cinema Communication2764 lays down several criteria which have to be fulfilled before an aid scheme can be found to be compatible under Article 107(3) (d) of the Treaty. Article 54 of the General Block Exemption Regulation contains identical criteria but limits the exemption from the notification requirement of Article 108(3) of the Treaty to audio-visual aid schemes with an annual budget not exceeding EUR 50 million.2765 That notification threshold constitutes a diversion from the usual approach under the General Block Exemption Regulation, which is to link the exemption to a maximum aid or investment volume per individual aid measure.

3.1303

The Cinema Communication is based on the assumption that European film production generally needs aid. It is difficult for European producers to obtain sufficient upfront commercial financing for their projects.2766 The Cinema Communication also acknowledges industrial considerations as aid objective. It states in paragraph 6 that State aid measures “aim to generate the critical mass of activity that is required to create the dynamic for the development and consolidation of the industry through the creation of soundly based production undertakings and the development of a permanent pool of human skills and experience.” Of course, both sets of rules provide that the aid must in any case be directed to a cultural product and that each Member State must ensure that the content of the aided production is cultural according to its national criteria. That condition has already been discussed in section 2.2.1 of this chapter.

3.1304

2763 Article 4(1)(z). 2764 Communication from the Commission on State aid for films and other audiovisual works, OJ C 332, 15.11.2013, p. 1; for a detailed report on the consultation process leading to the Communication cf. Javier Cabrera and Lépinard, The New Cinema Communication: All’s Well that Ends Well?, IRIS plus (publication of the European Audiovisual Observatory) 2014-1, 7; Lewke, Fostering Illusion – The 2013 Cinema Communication, Journal of European Competition Law and Practice, Vol. 5, No. 3, 137; and the Competition Policy Brief of the Competition Directorate General of the Commission, 2014, Issue 13 of 12.09.2014, http://ec.europa.eu/competition/publications/cpb/2014/013_en.pdf. 2765 Article 4(1)(aa). 2766 Para. 4.

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2.3.2.1 Scope of the Cinema Communication 3.1305

The 2013 Cinema Communication has a broader scope of application than that of the Communication of 2001.2767 The latter focused on the production of films, while the current rules cover the entire value chain of a film. Besides the production phase in a narrow sense, they apply to scriptwriting, development as well as to promotion and distribution, including film festivals.2768 That enlarged scope has increased legal certainty. Previously, the Commission was bound to refer to the Cinema Communication by analogy and to formally analyse the compatibility of the measure directly on the basis of Article 107(3)(d) of the Treaty.

3.1306

Regarding aid to cinemas, the Cinema Communication does not establish precise compatibility criteria. Due to the vast diversity of cinema support measures and the limited Commission experience in that field, it would not have been an easy exercise to do so. But the Cinema Communication states that the Commission would assess such aid under the (generous) approach of the Cinema Communication and under Article 107(3)(d) of the Treaty.2769 It is important that the Communication clarified that aid to cinemas is to be considered as aid to promote culture, because the principal purpose of cinemas is the exhibition of the (usually cultural) product of film.

3.1307

On the other hand, the Cinema Communication has excluded aid to video games from its direct application. Games may be one of the fastest-growing forms of mass media in the coming years. It is less obvious than for film that games actually need aid. And not all games necessarily qualify as audio-visual works or cultural products. Therefore, the rules designed for film production do not apply automatically to games. Furthermore, contrary to the film and television sector, the Commission does not have a critical mass of decisions on State aid to games. Therefore, any aid measures in support of games will continue to be addressed on a case-by-case basis. To the extent that the necessity of an aid scheme targeted at games which serve a cultural or educational purpose can be demonstrated, the Commission will apply the aid intensity criteria of the Cinema Communication by analogy.2770 2767 Communication from the Commission on certain legal aspects relating to cinematographic and other audio-visual works, OJ C 43, 16.02.2002, p. 6. 2768 Para. 21. 2769 Paras 22 and 53. 2770 Commission Decision of 11.12.2007 on a French scheme of tax credits in favour of video games (Case C 47/2006), OJ L 118, 06.05.2008, p. 16; Commission Decision of 27.03.2014 on the State aid scheme which the United Kingdom is planning to implement for video games (Case SA.36139 (2013/C) (ex 2013/N)), OJ L 323, 07.11.2014, p. 1.

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Although the Cinema Communication does not explicitly mention this, it does not cover the involvement of public service broadcasters in the production of films. Their investment in the production of films generally does not constitute aid to these film productions. Although it is done in fulfilment of their public service mission, it is generally an investment on the market in the same way as the financing of film productions by commercial broadcasters. Therefore it usually does not involve aid and the relevant amounts are not taken into account as aid, when determining the cumulated aid amount for a film production. It is also obvious that audio-visual aid must not include aid to advertising films. Such aid for the promotion of products and services outside the cultural sector would constitute operating aid to the company whose products are advertised.

3.1308

2.3.2.2 The general legality principle An aid measure cannot be declared compatible with the internal market if it infringes other provisions of the Treaty.2771 Therefore, the eligibility conditions of film aid schemes must not contain any provision contrary to the Treaty in fields other than State aid.

3.1309

More specifically, the Commission must verify that the Treaty principles prohibiting discrimination on the grounds of nationality, freedom of establishment, free movement of goods and freedom to provide services have been respected. Thus, for instance, aid schemes must not reserve aid exclusively to nationals.

3.1310

The main issue in that respect in the area of film production is the phenomenon of territorial spending obligations. Most Member States have introduced such provisions that require the aid beneficiary to spend a certain part of the supported film budget in the aid-granting Member State. The 2001 Cinema Communication2772 allowed Member States to tie 80 per cent of the entire film budget to local spending because it acknowledged that such requirements may be justified to ensure the continued presence of the human skills and technical expertise required for cultural creation. At the same time, such provisions also fragment the internal market for the provision of goods and services and limit free movement. Therefore it is important to strike the right balance when setting up such conditions.

3.1311

2771 Case 73/79 Commission v Italy ECLI:EU:C:1980:129, paragraph 11; Case C-225/91 Matra v Commission ECLI:EU:C:1993:239. 2772 Communication from the Commission on certain legal aspects relating to cinematographic and other audio-visual works, OJ C 43, 16.02.2002, p. 6.

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3.1312

During the public consultation preceding the 2013 Cinema Communication, many Member States and in particular the film producers ardently defended the high level of possible territorial restrictions and argued against the full application of internal market freedoms in that area. The main stakeholders were concerned that without guaranteed local economic benefits, it would be difficult to convince governments and parliaments to agree to make public funds available for film production.

3.1313

Nevertheless, the Commission was not convinced that such high territorial restrictions were justified. They may be acceptable only when they pursue an overriding reason of general interest, are suitable for securing the attainment of the objective, and they must be necessary. The specific characteristics of the film industry, in particular the mobility of productions, may certainly justify some territorial linking, and promoting cultural diversity may constitute an overriding requirement of general interest. However, the Commission found that the amount of expenditure subject to territorial spending obligations should at least be proportionate to the Member State’s actual financial commitment.

3.1314

For those reasons it limited in the 2013 Cinema Communication the maximum level of territorial production activity that can be required as an upfront eligibility condition to 50 per cent of the production budget. Moreover, if the aid amount is calculated as a percentage of the budget, the territorial spending obligation cannot be higher than 160 per cent of the aid amount. The Commission will also continue to accept aid awarded as a percentage of the expenditure on production activity in the granting Member State. In both cases, the expenditure that can be subject to territorial spending obligations remains limited to 80 per cent of the production budget. This means e.g. for direct grants with an aid intensity of more than 50 per cent of the film budget that not more than 80 per cent of the budget may be subject to territorial restrictions although 160 per cent of the aid amount would be higher.

3.1315

The proof of the usefulness of territorial spending obligations has not yet been made. They may help the local film sector. The economic success and popularity of European films does not seem to have benefited from them. For the sake of clarity the Cinema Communication mentions in paragraph 38 that Member States are not obliged to impose such conditions which eventually constitute limitations to the creative potential of the actors involved in the production of films.

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2.3.2.3 Aid intensity The aid intensity must in principle be limited to 50 per cent of the production budget.2773 Since the overall budget to be spent on a cinematographic or audiovisual production is the expense at risk necessary for its creation, the appropriate reference for aid calculation is the overall budget, regardless of the nature of the individual expenditure items of which it is formed.2774 Member States may of course define a more restrictive set of eligible costs.2775 For the Commission’s assessment the yardstick is the overall largely defined budget.

3.1316

The aid intensity may be as high as 60 per cent for cross border productions funded by more than one Member State and involving producers from more than one Member State. No aid intensity limit exists for aid to the production of difficult films, the definition of which is left to Member States.2776 For such films the aid intensity may be up to 100 per cent. They typically include short films, films by first-time and second-time directors, documentaries, or low budget or otherwise commercially difficult works. The UK Film Incentive e.g. defines difficult films as films “which would have little if any prospect of commercial success because of their experimental nature or because they represent a high level of creative risk”.

3.1317

2.3.2.4 Aid supplements Aid granted for specific production activities is not allowed. The aid must not be reserved for individual parts of the production value chain but should contribute to a production’s overall budget. The producer should be free to choose the items of the budget that will be spent in other Member States. That liberty is to ensure that the aid has a neutral incentive effect. The prohibition is based on the assumption that the earmarking of aid for specific individual items of a film budget could turn such aid into a national preference to the sectors providing the specific aided items, which would be incompatible with the Treaty.2777

3.1318

2773 2013 Cinema Communication, para 52(2). 2774 Section 2.3. of the 2001 Cinema Communication stated as much explicitly. The 2013 Cinema Communication did not repeat that observation but the Commission continues to follow that principle. 2775 The Belgian system of the tax shelter defines as eligible costs only those “directly linked to the production”, Commission Decision of 08.11.2013, Modifications du “tax shelter” pour soutenir des Suvres audiovisuelles (Case SA.36655 (2013/N)), summary notice in OJ C 280, 22.08.2014, p. 1, recital 4. 2776 2013 Cinema Communication, para 52(2). 2777 2013 Cinema Communication, para 52(5).

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2.4 Conclusion 3.1319

The new rules on aid to the audio-visual sector and the General Block Exemption Regulation clarify the rules applicable to aid to culture and will increase legal certainty. The more explicit acknowledgement of the Member States’ prerogative to define their cultural policy will reduce the administrative burden linked with the notification and assessment of State aid schemes. The Cinema Communication does not limit the duration of its applicability, which should ensure a more stable legislative environment. The balance between the available aid and the restrictions tied to the use of that aid is improved. Taken together, the updated rules will contribute to the continued viability and competitiveness of the European audio-visual sector, with a view to ensuring that European audiences will continue to have access to Europe’s cultural creativity and diversity. The General Block Exemption Regulation will reduce the administrative burden and speed up procedures, in particular for regional schemes of audio-visual support, but also in other areas of public financing of cultural activities.

3.

State aid and the sports sector

3.1320

It is only since recently that sport has triggered State aid questions in cases relating to the financing of sport clubs and infrastructure. The first decision regarding State aid to sport activities was only taken in 2001.2778

3.1321

Union policy on sport is based on two Declarations annexed respectively to the Amsterdam and the Nice Treaty2779 and furthermore based on policy areas where the Treaties provide for a legal base for the Union’s action in the field of education, health and cultural or social policy. Sport is specifically mentioned in Article 165 of the Treaty, with a focus on the educative and social function of sport.

3.1 The application of Article 107(1) of the Treaty to the sport sector 3.1322

The Commission’s policy regarding State aid to sport clubs and for sport infrastructures has been driven predominantly by complaints, while notifications by Member States remain rare. The complaints generally came from citizens and not from competing clubs. 2778 Commission Decision of 25.04.2001 regarding aid granted to French training centres (Case N 118/2000), summary notice in OJ C 333, 28.11.2001, p. 6. 2779 Declaration on sport, annexed to the final act of the Treaty of Amsterdam and Declaration on the specific characteristics of sport and its social function in Europe, of which account should be taken in implementing common policies, annexed to the Conclusions of the Nice European Council.

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Establishing the presence of State aid within the meaning of Article 107(1) of the Treaty in the field of sport requires in the first place considering that the relevant activity is economic. State aid rules only apply to professional sport and not to amateur sport. Amateur sport is not an economic activity and therefore is not subject to State aid rules.2780

3.1323

However, entities engaged in professional sport are considered to be undertakings and are subject to State aid control. For instance, football has developed a high level of professionalism and thereby increased its economic impact. The economic nature of sport is particularly evident where a sporting activity takes the form of gainful employment or the provision of services for remuneration, as in the case of professional football.2781 Several football clubs are organised as public limited companies, are listed on stock markets and are focussed on making profits for their shareholders. In view of the many markets on which professional football clubs deploy activities (participation in competitions, selling tickets and broadcasting rights, transfers of players, sponsoring, merchandising and publicity agreements and others), measures providing an advantage to a professional football club will in all likelihood have the potential to affect trade and competition between Member States.2782

3.1324

Aid to certain clubs may in the first place distort competition within the national boundaries. But it may also affect trade and competition between Member States. It can affect a club’s ability to recruit international players, who are the object of intense competition between European clubs. The most successful football clubs also compete for presence in European competitions, which is a relevant source of additional revenues, and are active on the product markets of merchandising or TV rights. Therefore aid to professional football clubs is likely to affect competition and trade between Member States, even if the clubs are not playing in the highest league.2783 In a similar vein, with regard to race cir-

3.1325

2780 Commission Decision of 25.04.2001 regarding aid granted to French training centres (Case N 118/2000), summary notice in OJ C 333, 28.11.2001, p. 6; Commission Decision concerning service contracts concluded by the Dutch public authorities with volleyball and basketball clubs (Case N 555/2004), summary notice in OJ C 333, 29.12.2005, p. 6. 2781 Case C-325/08 Olympique Lyonnais ECLI:EU:C:2010:143, at paragraphs 27 and 28; Case C-415/93 Bosman ECLI:EU:C:1995:463, paragraph 73; Case C519/04 P Meca-Medina and Majcen v Commission ECLI:EU:C:2006:492, paragraph 22. 2782 Commission Decision on Fußballstadion Chemnitz (Case SA.36105 (2013/N)), summary notice in OJ C 50, 21.02.2014, p. 1, recital 13. 2783 Commission Decisions regarding Germany of 20.03.2013 on Multifunktionsarena der Stadt Erfurt (Case SA.35135 (2012/N)), para 12, and Multifunktionsarena der Stadt Jena (Case SA.35440 (2012/N)), summary notices in OJ C 140, 18.05.2013, p. 1, and of 02.10.2013 on Fußballstadion Chemnitz (Case SA.36105 (2013/N)), summary notice in OJ C 50, 21.02.2014, p. 1, recitals 12-14; regarding Spain Commission Decisions of 18.12.2013 on possible State aid to four Spanish professional football clubs (Case

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cuits, there might be competition between circuits for attracting international races, which are a source of income notably from sponsors and media operators. Car manufacturers may also have an interest in organising races in their own Member State or in countries where they expect to sell their products.2784

3.1326

Aid to sport appears mainly in two forms. In most cases the Commission is confronted with aid to sport infrastructure. A smaller number of investigations concerns direct operating support to individual professional sport clubs. Owning and operating a football stadium, whether it is multifunctional or not, will normally be considered to constitute an economic activity to which State aid rules apply. The Court of Justice has confirmed that investment in infrastructure which will be commercially exploited constitutes an economic activity and its financing is caught by State aid control.2785

3.1327

When assessing public financing of sports infrastructure built, owned and/or operated by public authorities, the Commission firstly examines whether the facility is financed and run on strictly commercial lines. If that is the case, the public owner acts in the same way as all other operators on the market and no State aid is involved. This is ideally ensured by a business plan which realistically aims at a reasonable return on investment. A market price for the stadium operator may also be assumed if the operation is assigned on the basis of an open, transparent and non-discriminatory tender procedure.

3.1328

Regarding the use of infrastructure, and in order to assess whether users benefit from aid, it needs to be determined whether the users pay a price for the use of the stadium which reflects market conditions or whether it offers them an advantage. Ideally, professional stadium users should pay a market price for the use. For professional clubs, a market price cannot be determined easily. For the home matches, clubs are usually captive users of the local stadium. In such case the appropriate price could be determined for example by benchmarking it with similar fees paid by other users of other (aid free) infrastructure.2786 Of course, SA.29769 (2013/C)), para 28, Real Madrid CF (Case SA.33754 (2013/C)), recital 20, and alleged aid in favour of three Valencia football clubs (Case SA.36387 (2013/C)), recital 16, OJ C 69, 07.03.2014, p. 99. For a critical perspective, see Traupel, Football and State aid: Really the Greatest Pastime in the World?, EStAL 3/2014, 414 (424). 2784 Commission Decision of 01.10.2014 on aid Germany granted for the Nürburgring racecourse (Case SA.31550 (2012/C)), not yet published in the OJ. 2785 Case C-288/11 Mitteldeutsche Flughafen AG and Flughafen Leipzig-Halle GmbH v Commission ECLI:EU:C:2012:821. 2786 Commission Decision of 20.03.2013 regarding the German Fussballstadion Chemnitz (Case SA.36105 (2013/N)), summary notice in OJ C 50, 21.02.2014, p. 1, recital 11, and of 09.11.2011 on the Hungarian sport infrastructure development scheme (Case SA.31722), summary notice in OJ C 364, 14.12.2011, p. 1,

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benchmarking needs to be possible and based on data which relate to comparable parameters. Often, those figures are not available. France e.g. committed to establish a central information system regarding the fees for the use of the stadiums renovated for the UEFA EURO 2016 championship.2787 The presence of aid would in any case be excluded if the revenues from the user would cover the total infrastructure costs pro rata of the capacity used. On the other hand, sport infrastructure outside the activities of professional sport clubs is often local in nature and the impact of support to it on trade between Member States less obvious. For example, the Commission concluded that there was no impact on trade between Member States in the case of swimming pools which are unlikely to attract visitors from outside the region.2788 However, there are also situations, where support to local sport infrastructure has been considered as involving aid. For example, in a case concerning climbing halls the Commission could not fully exclude that the public financing may have an effect on trade. Companies established in another Member State may invest in climbing halls, and the aid recipient was not a local sport association but a large group operating climbing centres across the Member State and also active in other Member States.2789

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In the area of cableways or ski lifts, the Commission has established some case practice.2790 Several decisions addressed the question whether the funding of cableways would qualify as a general infrastructure and therefore be outside the scope of Article 107(1) of the Treaty.2791 The Commission actually rejected the argument brought forward that cableway installations are general infrastructures and as such not subject to State aid rules. The Commission stated that cableways can, at least in principle, be an economically viable activity exercised for profit purposes by private operators.2792 Moreover, cableways do not serve

3.1330

recital 97, though using that element as a criterion for the compatibility of aid. 2787 Commission Decision of 18.12.2013, Financement de la construction et de la rénovation des stades pour l’EURO 2016 en France (Case SA.35501), recital 306. 2788 Commission Decision of 21.12.2000 on the German leisure pool Dorsten (Case N 258/2000), summary notice in OJ C 172, 16.06.2001, p. 14. 2789 Commission Decision of 05.12.2012 on Kletteranlagen des Deutschen Alpenvereins (Case SA.33952), summary notice in OJ C 21, 24.01.2013, p. 1, recitals 55 62; the validity of the decision has been challenged in Case T-162/13 Magic Mountain Kletterhallen and others v Commission. 2790 Commission Decision of 7.05.2004 on cableways in Valle D Aosta (Case N 676/2002) summary notice in OJ C 131, 28.05.2005, p. 4; Commission Decision of 14.12.2004 on Cableways in Prada-Costabella (Case N 476/2004), summary notice in OJ C 131, 28.05.2005, p. 4; Commission Decision of 27.02.2008 on cableways in Veneto (Case N 731/2007), summary notice in OJ C 106, 26.04.2008, p. 1. 2791 Cf. Commission Decision of 9.04.2002 on the State aid implemented by Italy for cableway installations in the Autonomous Province of Bolzano (Case C 42/2000), OJ L 183, 22.07.2003, p. 19. 2792 Case C 42/2000, recital 21.

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general mobility needs but are destined to serve a specific economic category of users, i.e. skiers, thus not constituting transport in a broader sense.

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Furthermore, the Commission concluded that State support for cableways intended for sporting activities in tourist resorts normally distort competition and affect trade between Member States. It accepted, however, that there might be cases of cableways with a purely local use where State funding would not distort competition and affect trade between Member States and would therefore not constitute State aid under Article 107(1) of the Treaty.2793 Thus, the Commission has indicated that installations supporting sport activities in areas with a small number of facilities dedicated to the practice of winter sports with limited tourism capacity tend to be of a purely local attraction and are not capable of drawing visitors that could use the installations of other Member States as an alternative. In such cases, State funding would not affect trade between Member States and therefore not constitute State aid within the meaning of Article 107(1).2794

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These decisions show that the legal requirements are high to exclude an effect on trade and competition in the field of local sport infrastructure for popular sport and that the Commission’s approach in this respect is not always consistent. In some cases it excluded an effect on trade because of the local character of installations, in others it could not exclude that the public financing may have an effect on trade because undertakings established in another Member State also could invest in such local infrastructure.2795 In any event, the Commission probably considered it to be exaggerated, an inefficient use of resources, and also not easily justifiable in the public, that Brussels has to deal with the compatibility of local infrastructure to non-professional sport. One of the reasons for including aid to sport infrastructure in the General Block Exemption Regulation2796 was to put an end to complaints and notifications in that area.

3.2 Compatibility of State aid to sport infrastructure 3.1333

The Commission has had several occasions to apply the State aid rules to the financing of sport infrastructure like football stadiums. As State aid for sports 2793 Case C 42/2000, recital 30. 2794 Case C 42/2000, para 65; Commission Decision of 27.02.2008 on cableways in Veneto (Case N 731/2007), summary notice in OJ C 106, 26.04.2008, p. 1. 2795 See e.g. the Commission Decision of 05.12.2012 on Kletteranlagen des Deutschen Alpenvereins (Case SA.33952), summary notice in OJ C 21, 24.01.2013, p. 1, recitals 55 - 62. 2796 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1.

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infrastructure may provide undue advantages at various levels (owners, operators and users), the Commission assesses the effects of the measures at all those levels. The danger of crowding out private investors (e.g. duplicating existing infrastructure) is also taken into consideration, notably in the case of multifunctional facilities or facilities built for specific events.

3.2.1 Sport infrastructure aid under the General Block Exemption Regulation The General Block Exemption Regulation (Article 55) exempts from the notification requirement of Article 108(3) of the Treaty aid to the investment in and the operation of sport infrastructure. For investment aid the exemption applies where the overall investment costs do not exceed EUR 50 million or the aid amount does not exceed EUR 15 million.2797 As a result, even if the aid amount is low, it will not be exempted if the whole project costs more than EUR 50 million. Aid amounts higher than EUR 15 million are also not exempted, even if the project costs are below the limit of EUR 50 million. Operating aid is exempted if the annual aid amount does not exceed EUR 2 million.2798 With those thresholds it can be expected that all aid plans involving small and medium-sized infrastructure projects of primarily regional importance will no longer require a detailed Commission assessment.

3.1334

Article 55 of the General Block Exemption Regulation provides that sport infrastructure projects may benefit from exempted aid if it is not used exclusively by a single professional sport user. Use by other sport users must annually account for at least 20 per cent of time capacity. Furthermore, access to the aided sport infrastructure must be open to several users on a transparent and nondiscriminatory basis. Undertakings which contribute at least 30 per cent of the investment costs of the infrastructure may be granted preferential access under more favourable conditions, provided those conditions are made publicly available. If sport infrastructure is used by professional sport clubs, Member States must ensure that the pricing conditions for its use are made publicly available. Finally, any concession or other entrustment to a third party to construct, upgrade and/or operate the sport or multifunctional recreational infrastructure must be assigned on an open, transparent and non-discriminatory basis.

3.1335

2797 Article 4(1)(bb) Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 2798 Article 4(1)(bb) Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1.

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The aid amount must not exceed the net costs of the sport infrastructure investment or operation. For investment aid, the aid amount must not exceed the difference between the eligible costs and the operating profit of the investment. For operating aid for sport infrastructure, the aid amount must not exceed the operating losses over the relevant period.2799

3.2.2 The Commission’s decisional practice on the compatibility of aid to the construction and use of sport infrastructure 3.1337

The criteria mentioned in the General Block Exemption Regulation are also significant for the assessment of aid to larger projects. They have been developed in the recent decisional practice of the Commission with regard to the construction and operation of sport infrastructure which is supported by public funds and which is in part used by professional sport clubs.2800 In principle, the construction and/or operation of a venue for public events, supporting sport and different other categories of activities, may be considered as embodying a State policy objective towards the general public in line with the objectives of the Treaty, which recognises the social significance of sport.2801 Moreover, a stadium is a facility requiring a large and risky investment, which the market might not be capable of carrying out in its entirety on its own. The Commission acknowledges therefore that public intervention is sometimes necessary.2802 However, the infrastructure should not duplicate existing stadiums.2803

2799 Article 55(10) and (11) Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 2800 Commission Decisions regarding Germany of 20.03.2013 on Multifunktionsarena der Stadt Erfurt (Case SA.35135 (2012/N)) and Multifunktionsarena der Stadt Jena (Case SA.35440 (2012/N)), summary notices in OJ C 140, 18.05.2013, p. 1, and of 02.10.2013 on Fußballstadion Chemnitz (Case SA.36105 (2013/N)), summary notice in OJ C 50, 21.02.2014, p. 1; Commission Decision of 02.05.2013 regarding the Uppsala arena (Case SA.33618 (2012/C)), OJ L 243, 12.09.2013, p. 19; Commission Decision of 09.11.2011 on the Hungarian sport infrastructure development scheme (Case SA.31722), summary notice in OJ C 364, 14.12.2011, p. 1. 2801 Cf. Commission Decision of 21.10.2008 on the investment in the Ahoy sports palace by Rotterdam (Case C4/2008), OJ L 248, 22.09.2009, p. 28; Commission Decision of 18.12.2013, Financement de la construction et de la rénovation des stades pour l’EURO 2016 en France (Case SA.35501), recital 273, not yet published in the OJ. 2802 Commission Decision of 20.11.2013 on football stadiums in Flanders (Case SA.37109), summary notice in OJ C 69, 07.03.2014, p. 1, para 35; Commission Decision of 18.12.2013, Financement de la construction et de la rénovation des stades pour l’EURO 2016 en France (Case SA.35501), recital 275, not yet published in the OJ. 2803 Commission Decision of 20.11.2013 on football stadiums in Flanders (Case SA.37109), summary notice in OJ C 69, 07.03.2014, p. 1, para 36; Commission Decision of 18.12.2013, Financement de la construction et de la rénovation des stades pour l’EURO 2016 en France (Case SA.35501), recital 278.

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If the public authorities maintain ownership of the facility and also if a stadium operation is entrusted to another operator, the stadium should be made available to sport clubs on non-discriminatory terms. If it is rented out to football clubs, appropriate fees should be paid by them to ensure that they do not indirectly benefit from the aid. This could be ensured by market benchmarked prices.2804

3.1338

If the stadium owning or operating club received aid for it, it must open the stadium in exchange to partial use by e.g. amateur sport or other types of events.2805 The contribution of the club to the refinancing costs should in any case be considerable, pro rata of the capacity used. In cases of privileged users, the General Block Exemption Regulation requires a contribution of 30 per cent; the decision on Hungarian stadiums requires a contribution of 50 per cent.2806 On the other hand, in the case of stadiums in Belfast, the Commission agreed that an aid intensity between 81 and 100 per cent was necessary and proportionate, in light of the wide availability of the stadiums for non-professional activities.2807

3.1339

A major case of investment and operating aid to sport outside the area of football was the Commission investigation into the financing of the German motor race course Nürburgring.2808 In March and August 2012 the Commission opened a formal investigation into a set of aid measures granted by the Land Rheinland-Pfalz to the Nürburgring companies in the period 2002-2012. In its closing decision the Commission found that the race track operators received EUR 1.28 billion of aid. It did not find a justification for that aid under the Article 107(3)(c) of the Treaty. The criteria established in the General Block Exemption Regulation for aid to sport infrastructure were not applicable. The thresholds for notification set by Article 4(1)bb of that Regulation were by far exceeded, and, according to its Article 1(4)c, the Regulation does in any case not apply to firms in difficulty. Since the aid beneficiaries were in difficulty at the

3.1340

2804 Commission Decision of 09.11.2011 on the Hungarian sport infrastructure development scheme (Case SA.31722), summary notice in OJ C 364, 14.12.2011, p. 1; Commission Decision of 02.10.2013 on Fußballstadion Chemnitz (Case SA.36105 (2013/N)), summary notice in OJ C 50, 21.02.2014, p. 1, para 11; Commission Decision of 20.11.2013 on football stadiums in Flanders (Case SA.37109), summary notice in OJ C 69, 07.03.2014, p. 1. 2805 Commission Decision of 09.11.2011 on supporting the Hungarian sport sector via a tax benefit scheme (Case SA.31722), recital 97; Commission Decision of 20.11.2013 on football stadiums in Flanders (Case SA.37109), summary notice in OJ C 69, 07.03.2014, p. 1, para 34; Commission Decision of 02.10.2013 on Fußballstadion Chemnitz (Case SA.36105 (2013/N)), summary notice in OJ C 50, 21.02.2014, p. 1, recital 26. 2806 Commission Decision of 09.11.2011 on the Hungarian sport infrastructure development scheme (Case SA.31722), summary notice in OJ C 364, 14.12.2011, p. 1. 2807 Commission Decision of 09.04.2014 on regional stadia development in Northern Ireland (Case SA.37342), summary notice in OJ C 418, 21.11.2014, p. 1, recital 100. 2808 Commission Decision of 01.10.2014 on aid Germany granted for the Nürburgring racecourse (Case SA.31550 (2012/C)), not yet published in the OJ.

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time when they received the State aid, the Commission found the aid incompatible under the Rescue and Restructuring Guidelines and ordered the recovery of the above-mentioned amount of State aid.

3.3 State aid to professional sport clubs 3.1341

The funding of professional sport clubs came into the Commission’s focus after 2000 only. The Commission has not adopted specific rules regarding the compatibility of State aid to professional clubs. The assessment of such aid has therefore to be done on the basis of the general, horizontal rules on e.g. aid to SME, to training, or for rescuing or restructuring undertakings in difficulty. The special role of football in the society and its popularity do not seem to serve as a basis for justifying aid under Article 107(3)(c) of the Treaty.2809

3.1342

The cases dealt with have in common that a main aspect was the establishment of the existence of aid. Italy’s so-called Salva Calcio law raised concerns as to the distortion of competition because the favourable tax scheme in that law concerned the entire Italian professional football league. Professional football clubs were allowed to use accounting instruments to amortise the value of players in a favourable manner. The Commission opened the formal investigation procedure in 2003.2810 The Italian government amended subsequently the scheme in a way that it no longer provided for any tax advantage. The Commission subsequently closed the formal investigation.2811 The investigation opened with regard to a favourable corporate tax treatment of four Spanish football clubs also focussed mainly on whether a different treatment of clubs under corporate taxation rules could constitute State aid.2812 The presence of State aid was also the main issue in the case of aid in form of State guarantees provided on conditions more favourable than market conditions to three Spanish clubs in Valencia,2813 or in the case of a real estate deal between the City of Madrid and the Real Madrid FC.2814 In those three investigations, the Commission did not see a justification of the aid under the Treaty. 2809 Critical: T. Traupel, Football and State aid: Really the Greatest Pastime in the World?, EStAL 3/2014, 414 (420). 2810 Commission Decision of 22.06.2005 on the measure implemented by Italy in favour of professional sports clubs - Decreto Salva Calcio (Case C70/2003 (ex NN 72/2003)), OJ L 353, 13.12.2006, p. 16. 2811 Commission Decision of 22.06.2005 on the measure implemented by Italy in favour of professional sports clubs - Decreto Salva Calcio (Case C70/2003 (ex NN 72/2003)), OJ L 353, 13.12.2006, p. 16. 2812 Commission Decision of 18.12.2013 on possible State aid to four Spanish professional football clubs (Case SA.29769 (2013/C)) OJ C 69, 07.03.2014, p. 115. 2813 Commission Decision of 18.12.2013 on alleged aid in favour of three Valencia football clubs (Case SA.36387 (2013/C)), OJ C 69, 07.03.2014, p. 99. 2814 Commission Decision of 18.12.2013 on Real Madrid CF (Case SA.33754 (2013/C)), OJ C 69, 07.03.2014, p. 108.

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A slightly different situation arose regarding the financing of Dutch professional football clubs PSV, NEC, Willem II, MVV and FC Den Bosch.2815 In those cases the State support was granted in order to assist clubs which were in financial difficulties. Therefore there is a possibility that the aid may eventually be compatible with criteria laid down in the Community Guidelines on State aid for rescuing and restructuring firms in difficulty, which do not exclude professional sports from its scope. Those Guidelines require however that the undertaking involved takes compensatory measures. Such measures may entail the divestment of assets but also reduction in production or market presence. That requirement raises the issue how that concept could be applied to a football club. Possible elements of compensation could be a temporary limit on the number of registered players, a cap on player salaries, or limits on transfer prices paid for new players.2816

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3.4 Conclusions State aid rules apply to the funding of professional sport clubs, because those clubs carry out an economic activity and can be considered as undertakings. As regards the financing of sport infrastructure, such infrastructure cannot be considered as general infrastructure. Its financing is generally subject to State aid rules. The Commission has now established core principles on the assessment of aid for sport and multifunctional recreational infrastructures in the General Block Exemption Regulation. However, this Regulation does not apply to operating aid directed to single professional clubs which will continue to be assessed by the Commission on a case-by-case basis.

3.1344

2815 Commission Decision of 06.03.2013 on State aid in favour of certain Dutch clubs (Case SA.33584), OJ C 116, 23.04.2013, p. 19. 2816 Commission Decision of 06.03.2013 on State aid in favour of certain Dutch clubs (Case SA.33584), OJ C 116, 23.04.2013, p. 19, recital 80; the formal investigation is not yet concluded.

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PART 3 – Compatibility rules Chapter 26 – Aviation Joachim Bokobza and Nicolas Imbert

Chapter 26 Aviation

1.

Introduction

This chapter briefly presents the airport and aviation industries, and describes the purpose and evolution of the specific State aid policy developed by the Commission in those sectors since the beginning of the 1990s. It then provides an overview of the sectoral specificities and of the various compatibility basis for aid to airports and airlines, with examples drawn from the most recent decisions when available.

3.1345

State aid policy in the airport and aviation sectors has, ever since its inception, been linked to European sectoral policies and to the Commission’s efforts to liberalize air transport. Against that backdrop, the adoption of the 2014 Aviation Guidelines2817 marks the beginning of a new paradigm with a broader set of objectives being pursued, in line with the principles of the State Aid Modernization initiative.

3.1346

As evidenced by recent decisions, State aid policy is now on the forefront of Union policy in the airport sector, and constitutes a key tool to contribute to a more efficient and more sustainable airport and air transport sector in the Union.

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2817 Communication from the Commission – Guidelines on State aid to airports and airlines, OJ C 99, 04.04.2014, p. 3.

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2.

Market and policy developments

2.1 The European aviation sector: history and recent trends 2.1.1 The liberalisation of the air transport sector 3.1348

The European aviation landscape was until the end of the 1980s segmented along national borders. National airlines, the so-called “flag carriers”, operated from State-owned airports in a heavily regulated environment. Access rights were often made available to flag carriers through bilateral air service agreements between Member States. Member States also regulated the number and capacity of air services on each route, as well as the airlines’ commercial policy and in particular their pricing.

3.1349

From 1987 onwards, a common regulatory framework was gradually put in place in the Union, leading to a genuine internal market for aviation services. Those efforts culminated in the “Third package” of aviation legislation, which, upon the entry into force of its provisions on cabotage in April 1997, effectively removed all commercial barriers for airlines operating within the Union.2818

3.1350

The liberalization of air transport services heralded an era of significant expansion for intra-Union passenger air transport, with the number of summer cross-border routes more than trebling between 1992 and 2012.2819 Passenger numbers also significantly increased during that period, reaching 842 million passengers in 2013.2820

3.1351

In parallel, the completion of the internal aviation market allowed the expansion of the low-cost carrier business model, with new airlines entering the market and new routes being developed from smaller airports.

3.1352

However, flag carriers also needed to adjust to that liberalized and more competitive environment. A number of airlines accordingly underwent far-reaching internal restructuring in the 1990s, often with the support of public authorities. Overall, since 2003, the European aviation industry has consolidated, although 2818 Council Regulation (EEC) No 2407/92 of 23 July 1992 on licensing of air carriers (OJ L 240, 24.08.1992, p. 1), Council Regulation (EEC) No 2408/92 of 23 July 1992 on access for Community air carriers to intraCommunity air routes (OJ L 240, 24.08.1992, p. 8), and Council Regulation (EEC) No 2409/92 of 23 July 1992 on fares and rates for air services (OJ L 240, 24.08.1992, p. 15). 2819 See Commission Staff Working Document - Fitness Check - Internal Aviation Market SWD(2013) 208 final, figure 7, p. 20. 2820 Source: Eurostat, Passenger transport statistics.

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without reaching a high level of concentration, and the number of Union airlines has accordingly decreased.2821 Several airlines have, since the financial crisis, found themselves in financial difficulty, as evidenced by the number of rescue and restructuring aid measures granted to airlines since 2008.2822

2.1.2 Summary of developments in the airport industry The liberalization of air transport services also had a profound effect on the business model of airports. No longer restricted by national regulations, European airlines became in principle free to allocate their aircraft capacity to the most profitable routes in the Union. Combined with an increase in the number of available airports, those developments led to increased competition between airports. As a consequence, the relationships between airports and airlines became more commercial in nature. Longer-term contracts and partnerships increasingly superseded traditional pricing practices implemented through uniform airport charge schedules. In particular, in order to lower switching costs for airlines,2823 the practice of airports paying one-off fees to airlines through so-called “marketing agreements”2824 became common in the market.

3.1353

Airport capacity also increased significantly in the Union since 1992.2825 Many airports today overlap in terms of catchment areas.2826 While the tremendous increase in passenger and freight traffic provided an opportunity for expansion at existing airports, a number of former military airports were also converted to full or partial commercial use in the same period.2827 Decentralization of transport infrastructure policy from national to regional level helped further increase airport capacity in the Union, with airport infrastructure investment often being viewed by local authorities as a tool for regional economic development, or for decongestion of major European hubs.2828

3.1354

2821 See Commission Staff Working Document - Fitness Check - Internal Aviation Market SWD(2013) 208 final, p.22, figure 9. 2822 See section 3.5.3. Airlines which received rescue or restructuring aid include Austrian Air, Air Malta, Czech Airlines, airBaltic, Adria Airways, Alitalia, Malev, Lot Polish Airlines and Cyprus Airways. 2823 Those switching costs stem from relocation expenses (for aircraft, personnel and equipment), as well as from marketing expenditure necessary to launch a new air route. 2824 In those agreements, airlines typically undertake to advertise the airport through a variety of means (such as online advertising on their website, paintings on planes, etc.). 2825 See Eurocontrol Challenges of Growth studies, published in 2001, 2004, 2008 and 2013. 2826 Overlaps in catchment areas frequently occur between regional airports, or when several airports serve a major population center. 2827 See Airport Entry and Exit: A European Analysis, in Airport Competition: The European Experience, edited by Prof. Dr. Hans-Martin Niemeier, Prof. Dr. Jürgen Müller, Professor David Gillen, Professor Peter Forsyth, Ashgate, 2010. 2828 See Communication from the European Commission to the European Parliament, the Council, the Euro-

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3.1355

As recognized by the Commission,2829 airport profitability has been and remains strongly correlated to passenger traffic. While small airports struggle to cover their operating costs with airport charges paid by passengers, airlines and freight forwarders, larger airports are able to attract more diverse sources of revenues such as travel retail, parking and business parks, so-called non-aeronautical revenues.

3.1356

The trend towards the privatization of State-owned airports, whether full or partial, has also gained traction in the EU since 1992. The majority of UK airports have for instance been privatized,2830 while more limited initiatives also took place in the rest of the Union. Even at smaller airports, which are in general less profitable and remain largely owned by public authorities, those public owners have increasingly sought to delegate the operational and commercial management of airport facilities to private undertakings. That trend towards private airport management, usually implemented through concessions or similar longterm partnerships, has led to the creation of an airport management industry with prominent European players,2831 and to competition for the market at the level of airport operation and management concessions.

3.1357

Ultimately, air transport liberalization therefore stimulated competition for traffic (passenger numbers and cargo quantities) between European airports. Challenges to the European airport industry include the uncertain profitability of small airports, the sustainable development of more airport capacity in the light of congestion at a number of major hubs, and overcapacity in certain regions.

2.2 State aid policy in the aviation sector 3.1358

The specific State aid instruments developed by the Commission in the aviation sector should be first and foremost seen as part of the Union’s efforts to create a well-functioning internal aviation market.

pean Economic and Social Committee and the Committee of the Regions on Airport policy in the European Union - addressing capacity and quality to promote growth, connectivity and sustainable mobility of 1 December 2011, COM(2011) 823. 2829 See 2014 Aviation Guidelines, para. 5, and 2005 Aviation Guidelines, paras 71 and 72. 2830 See ICAO Case Study on Commercialization, Privatization and Economic Oversight of Airports and Air Navigation Services Providers for the United Kingdom, February 2013, accessible online. 2831 European-based cross-border airport managers include Hochtieff, Vinci, Aéroports de Paris and Fraport.

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2.2.1 The 1994 and 2005 guidelines In 1994, the Commission published a first set of guidelines2832 (the “1994 Guidelines”) complementing the Third package from a State aid perspective, which aimed to support the on-going liberalization. Those guidelines accordingly focused on (i) the restructuring of flag carriers, (ii) public service obligations (“PSOs”) for air transport services, for which a specific procedural and substantive framework had been set up in the Third package, and on (iii) social aid.

3.1359

By contrast, the 1994 Guidelines did not address public support to airports. On the contrary, the Commission then stated that ‘[t]he construction [or] enlargement of infrastructure projects (such as airports, motorways, bridges, etc.) represents a general measure of economic policy which cannot be controlled by the Commission under the Treaty rules on State aids’.2833

3.1360

In essence, the development of airport infrastructure was considered as a general measure and therefore as outside the scope of Article 107 of the Treaty.

3.1361

However, in their judgments in the Aéroports de Paris cases2834 the Union Courts ruled against that view and held that the operation of an airport consisting in the provision of airport services to airlines and to the various service providers also constitutes an economic activity. Since airport infrastructure is essential to the provision of airport services and constitutes its main cost category, these judgments implied that the financing and development of airport infrastructure could no longer be considered as by nature outside the ambit of State aid control.

3.1362

In December 2005, the Commission published its Community guidelines on financing of airports and start-up aid to airlines departing from regional airports.2835 Those Guidelines had been announced in the landmark Charleroi decision2836, which was itself subsequently annulled by the General Court.2837

3.1363

2832 Application of Articles 92 and 93 of the EC Treaty and Article 61 of the EEA Agreement to State aids in the aviation sector, OJ C 350, 10. 12. 1994, p. 5, hereinafter referred to as the « 1994 Guidelines ». 2833 1994 Guidelines, para. 12. 2834 Case T-128/98 Aéroports de Paris v Commission EU:T:2000:290, confirmed by Case C-82/01 P, EU:C:2002:617, paras 75-79. 2835 OJ C 312, 09.12.2005, p. 1, hereinafter referred to as the « 2005 Guidelines ». 2836 See Commission Decision of 12 February 2004 concerning advantages granted by the Walloon Region and Brussels South Charleroi Airport to the airline Ryanair in connection with its establishment at Charleroi, OJ L 137, 30.04.2004, p. 1, recitals 345 to 356. 2837 Case T-196/04 Ryanair v Commission EU:T:2008:585.

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3.1364

The 2005 Guidelines supplemented the 1994 Guidelines by introducing a compatibility basis for State aid for airport infrastructure financing, stopping short of defining aid intensities.2838 No compatibility basis for operating aid to airports was foreseen outside the scope of provisions on services of general economic interest.2839 However, a new compatibility basis for aid to airlines was introduced through the possibility for Member States to grant start-up aid for the creation of new routes from regional airports, under a set of detailed conditions.2840

3.1365

The Commission examined a number of public measures supporting the development of airport infrastructure under the 2005 Guidelines, with only one instance of a decision finding that public support for airport infrastructure constituted incompatible aid.2841 In parallel, the Commission launched a number of investigations into agreements between airports and airlines from 2007 on, often examining public support to the airport itself as part of the same cases.2842

2.2.2 Need for review of the 1994 and 2005 Guidelines 3.1366

As foreseen in paragraph 86 of the 2005 Guidelines, the Commission undertook a detailed review of the application of the guidelines, with a first public consultation held in 2011. That review was rendered all the more important by the major legal and industry developments which occurred in the years following the entry into force of the 2005 Guidelines.

3.1367

First, industry participants had called for greater clarity regarding the State aid assessment of arrangements between airports and airlines. Relatively few decisions had been adopted by the Commission on that point2843, and the only Commission Decision finding that illegal and incompatible aid had been granted to an airline had subsequently been annulled by the General Court in the Charleroi judgment.2844 However, while the Commission was essentially silent on the issue, a number of such arrangements had been assessed by national courts and public authorities in several Member States.2845 In addition, the Commission 2838 2839 2840 2841 2842 2843 2844 2845

2005 Guidelines, section 4.1. Id., section 4.2. Id., section 5. Commission Decision of 26 February 2015 on the measure SA.35388 (13/C) (ex 13/NN and ex 12/N) – Poland – Setting up the Gdynia-Kosakowo Airport, OJ L250 of 25.9.2015. See for instance Commission Decision of 28 November 2007 in case SA.22614 Aéroport Pau Pyrénées, OJ C 41, 15.02.2008, p. 11. See Commission Decision in Case C 12/2008 – Slovakia – Agreement between Bratislava Airport and Ryanair, OJ L 27, 01.02.2011, p. 24, hereafter the “Bratislava decision”. Case T-196/04 Ryanair v Commission EU:T:2008:585. See for instance Cour administrative d’appel de Nancy, 18 December 2003, n° 03NC00859, Chambre de

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itself initiated between 2007 and 2014 above 40 in-depth investigations concerning public support to airports and to their user airlines. The question of the possible link between State aid granted to an airport and the assessment of that airport’s relationships with airlines had in particular not found a clear answer in the Commission’s decisional practice.2846 Second, the Union Courts had clarified unambiguously that the construction and development of airport infrastructure cannot be separated from the economic activity of operating an airport, and that public support for airport infrastructure therefore falls within the ambit of State aid control.2847 In addition, the General Court held that, from 2000, the application of State aid rules to the financing of airport infrastructure could no longer be excluded.2848

3.1368

That recognition of the indissoluble link between the construction and the operation of airport infrastructure, although prompted by the Union Courts, also allowed the Commission to align its State aid policy with its long-standing merger decisional practice, which has defined a relevant market for the provision of airport infrastructure services to airlines. That market encompasses the development, maintenance, use and provision of the runway facilities, taxiways and other airport infrastructure, as well as the coordination and control of the activities performed on these infrastructures.2849

3.1369

Third, start-up aid provisions were seen as overly detailed and unfit for their purpose in a changing market environment. Relatively few start-up aid measures or schemes had been notified, and a large number of public support measures to airlines were outside the scope of the guidelines. That sense of a lack of adaptation to market conditions was borne out by the feedback from the public consultations.

3.1370

2846

2847

2848 2849

commerce et d’industrie de Strasbourg et du Bas-Rhin c/ Société Brit Air, confirmed by the Conseil d’Etat (n° 264406 of 27 February 2006). See also Third annual report on State aid in Spain by the Comisión Nacional de la Competencia, available online (http://www.cnmc.es/Portals/0/Ficheros/Promocion/Ayudas_ publicas/III%20Informe%20anual%20Ayudas%20publicas_CNC_2011_indexado.pdf ), pp. 47 ff. That question had also been tackled by national courts in a number of cases such as in Conseil d’Etat, n°329818 of 26 July 2011, regarding the schedules of airport charges at Marseille airport. In its judgment, the national court annulled a decision setting passenger charges for user airlines, on the grounds that the methodology used took account of an illegally granted State aid to the airport. The breach of Article 108(3) of the Treaty as regards investment aid to the airport therefore entailed the illegality of the decision setting passenger charges. Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and others v Commission EU:T:2011:117 (the « Leipzig-Halle » judgment), subsequently confirmed by the Court of Justice in C-288/11 P Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission EU:C:2012:821. Id. para. 106. See for instance Commission Decision in case COMP/M.6862 Vinci/Aeroportos de Portugal, para. 16 and related decisional practice.

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3.1371

In that respect, industry participants also highlighted the need to clarify the distinction between start-up aid and compensation for public service obligations imposed on airlines. As regards PSOs for airlines, Regulation 1008/2008 (the “Air Service Regulation”) had updated and consolidated the relevant provisions of the Third Package, which had been the reference point in the 1994 Guidelines. In the context of the Commission’s so-called Fitness Check on the aviation internal market, it was suggested that the Commission should provide “clarification on the interplay between rules on PSOs under Regulation 1008/2008 and State aid rules, notably through the revision of State aid Guidelines to airports and airlines, and through an information note to Member States, if deemed necessary.”2850

3.1372

Finally, the Commission had signaled its increased scrutiny on public support to smaller airports by lowering the passenger threshold exempting public service compensation from the notification obligation from 1 million to 200.000.2851 In a number of decisions opening formal investigation procedures in 2012 and 2013, the Commission specifically questioned the scope of alleged public service obligations imposed on airport operators.2852

3.

The 2014 Aviation Guidelines

3.1 Overview – integration in SAM 3.1373

The Guidelines on State aid to airports and airlines2853 (the “2014 Guidelines”) were adopted on 20 February 2014. In line with the changed market conditions, the 2014 Guidelines offer sector-specific guidance on the notion of aid in the airport and aviation industries. Moreover, the 2014 Guidelines describe the compatibility conditions for State aid based on three different legal bases: (i) public service compensation, assessed under Article 106(2) of the Treaty, (ii) aid to airports and airlines under Article 107(3)(c) of the Treaty and finally (iii) aid of a social character, assessed under Article 107(2)(a) of the Treaty. With the exception of social aid, each of those sections discusses both aid to airports and aid to airlines. 2850 Commission Staff Working Document - Fitness Check - Internal Aviation Market SWD(2013) 208 final, p.110, table 8. 2851 Commission Decision 2012/21/EU of 20 December 2011 on the application of Article 106(2) of the Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3. 2852 See for instance Commission Decisions in SA.33961 – Aéroport de Nîmes (OJ C 241, 10.08.2012, p. 11), SA.33962 – Plainte Air France - Aéroport de Carcassonne (OJ C 254, 23.08.2012, p. 11), SA.33963 – Aéroport d’Angoulême (OJ C 149, 25.05.2012, p. 29) and SA.33983 – Compensation to Sardinian airports for public service obligations (SGEI) (OJ C 152, 30.05.2013, p. 30). 2853 OJ C 99, 04.04.2014, p. 3.

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The 2014 Guidelines differ in several important respects from the 2005 Guidelines, which were previously applicable.

3.1374

First, they contain much more comprehensive provisions on investment aid to airports, with new features. In particular, the Commission has introduced detailed rules aimed at ensuring that any investment aid granted to an airport has an incentive effect and is proportionate, in other words limited to the minimum necessary to the implementation of the supported investment project.2854

3.1375

The 2005 Guidelines contained no such elements. In its most recent decisions based on those guidelines, the Commission had nevertheless verified the existence of an incentive effect and the proportionality of the aid, leaning upon a general principle derived from the case law whereby in order to be found compatible with the internal market, any aid should meet those two conditions.2855 However, the 2014 Guidelines require a more detailed analysis than that stemming from that general principle. That analysis revolves around the notions of extra costs and funding gap as well as a set of maximum permissible aid intensities, that is, ceilings on the aid amounts expressed as maximum percentages of investment costs into airport infrastructure.2856 Those maximum aid intensities depend on the size of the airport.2857 There were no such maximum aid intensities in the previous guidelines, which consequently did not rule out, in principle, State aid covering the entirety of investment costs into airport infrastructure no matter the size and location of the airport.

3.1376

The second key difference between the current and the previous guidelines relates to operating aid to airports. The 2005 Guidelines contained no detailed provisions in that regard but referred to a general ban of such aid, from which it would be possible to derogate “under exceptional circumstances and under strict conditions in underprivileged regions, i.e. regions covered by the derogation set out in Article 87(3)(a) of the EC Treaty, the most remote regions and sparsely populated areas.” 2858 In the 2014 Guidelines, the Commission has changed that line. It takes the view that in light of market reality, operating aid to airports might still be justified under certain conditions for a transitional period, to enable the aviation industry to adapt to the new market situation.2859

3.1377

2854 2014 Guidelines, paras 93 to 105. 2855 See for instance Commission Decision of 25.07.2012 in case SA.34586, Greece-Ghania Airport Modernisation, OJ C 305, 10.10.2012, p. 2, recitals 54-55. 2856 2014 Guidelines, paras 99-101. 2857 2014 Guidelines, paras 101 to 105. 2858 2005 Guidelines, para. 27. 2859 2014 Guidelines, para. 13.

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3.1378

Third, the Commission provides detailed methodological guidance as to the application of the market economy operator principle (“MEOP”) to arrangements between airports and airlines, with a view to determining whether such an arrangement confers an economic advantage on the airline concerned. That guidance, resting essentially on the notion of incremental profitability, will be presented in section 3.4.3 below. The 2005 Guidelines touched upon the application of the market economy operator principle to arrangements between airports and airlines but did not provide any detailed methodology, merely referring to the core cross-sector features of the MEOP, as established by the case law.2860

3.1379

Start-up aid to airlines is the fourth main difference between the 2014 and 2005 Guidelines. In the new guidelines, the Commission still allows such aid to be granted, a possibility which already existed under the previous regime. However, it has significantly streamlined the provisions laid down in the 2005 Guidelines in that regard, and made them stricter in a number of respects. For instance, whereas start-up aid could previously be granted for the opening of new routes “or new schedules”,2861 it is now limited to the launch of new routes only.2862

3.1380

An important feature of the 2014 Guidelines is the fact that they form an integral part of the State Aid Modernisation (SAM) programme. In particular, the compatibility criteria laid down in the 2014 Guidelines simply apply to the aviation sector the common principles laid down in the Commission’s Communication on State Aid Modernisation2863 with respect to the assessment of compatibility of all aid measures under Article 107(3) of the Treaty. The 2014 Guidelines explicitly acknowledge as much2864, referring to those common principles for every type of State aid for which they provide compatibility criteria based on Article 107(3)(c) of the Treaty.

2860 2861 2862 2863

2005 Guidelines, paras 42 to 52. 2005 Guidelines, para. 79 (c). 2014 Guidelines, para. 138. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on EU State Aid Modernisation (SAM), COM(2012) 209 final. 2864 2014 Guidelines, paras 79 and 80.

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3.2 Scope of the guidelines The 2014 Guidelines apply to State aid granted to any airport or airline2865 irrespective of its size and financial situation. In particular, the scope of the guidelines encompasses large and small airports alike and does not exclude airports in difficulty.

3.1381

However, the 2004 Guidelines do not apply to aid for the provision of ground handling services, regardless of whether such services are provided by an airport operator, by an airline or by a company whose core business is ground handling. The guidelines specify that such aid is to be assessed on the basis of the relevant general rules.2866 The 2005 Guidelines did not exclude ground handling services from their scope2867 and had by contrast dealt relatively extensively with that activity. In its opening decision of 9 July 2014 regarding the setting up of a new company intended to provide ground handling services at Milan airports, the Commission accordingly did not refer to the 2014 Guidelines or any compatibility instrument other than the Treaty articles themselves.2868 By contrast, the 2012 Commission Decision regarding aid to the previous ground handling service provider at Milan airports relied on the provisions of the 2005 Guidelines regarding ground handling services in its assessment.2869

3.1382

The 2014 Guidelines do not apply to undertakings which, though active at an airport, are engaged in non-aeronautical activities without operating the airport infrastructure itself.2870 That category includes a broad variety of companies running businesses such as travel retail shops, restaurants or hotels at the premises of an airport.

3.1383

Even though the guidelines formally apply to State aid to any airport or airline, the specific compatibility criteria that they provide are not applicable to airports and airlines specialised in freight transport. The Commission considered that it did not yet have sufficient experience in assessing the compatibility of aid to those categories of beneficiaries to summarise its practice in the form of specific compatibility criteria in the 2014 Guidelines. The Commission indicated that it

3.1384

2865 2866 2867 2868

2014 Guidelines, para. 21. 2014 Guidelines, footnote 16. 2005 Guidelines, para. 24. See Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.21420 – Setting up of Airport Handling – Italy, OJ C 44, 06.02.2015, p. 30, para. 65. 2869 See Commission Decision of 19.12.2012 in case SA.21420, regarding capital injections into SEA Handling, OJ L201, 30.07.2015, p. 1, recitals 320-323. 2870 2014 Guidelines, footnote 16.

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would apply the common principles of compatibility as set out in the Communication on State Aid Modernisation through a case-by-case analysis.2871

3.3 Application in time 3.1385

The 2014 Guidelines have been applicable since their publication in the Official Journal of the European Union, on 4 April 2014. From that date, they replaced both the 1994 and the 2005 Guidelines.2872

3.1386

As of 4 April 2014, the 2014 Guidelines apply to all operating aid to airports, and even to operating aid unlawfully granted before that date and under assessment after their entry into force. That approach to temporal application deviates from the general principle laid down in the Notice on the determination of the applicable rules for the assessment of unlawful State aid2873 whereby the criteria applicable to the compatibility assessment of unlawful aid are those in force when the aid was granted. As explained in section 3.1, the Commission has considered that the general ban on operating aid to airports, prevailing under the previous regime, did not tally with market reality, and that operating aid was warranted for a transitional period, under certain conditions. Such a transitional phase could not be meaningfully established without provisions allowing the Commission to clear operating aid granted in the past under certain conditions, in addition to accepting some form of operating aid in the future until the end of the transition. The Commission had thus to set aside the general principles it generally follows as regards temporal applicability.

3.1387

However, the substantive criteria applicable to the assessment of compatibility of aid unlawfully granted before 4 April 2014 (“past operating aid”) are different from those applicable to notified aid in respect of which the Commission is called upon to take a decision after 4 April 2014 and unlawful aid granted after 4 April 2014 (“future operating aid”).2874 As described in section 3.6.2, the compatibility criteria applicable to past operating aid are significantly less strict than those applicable to future operating aid.

3.1388

The situation is different with respect to investment aid to airports and start-up aid to airlines. For those categories of aid, the Commission has elected to adhere to its standard approach on temporal applicability governing the assessment of 2871 2872 2873 2874

2014 Guidelines, para. 22. 2014 Guidelines, para. 171. OJ C 119, 22.05.2002, p. 22. 2014 Guidelines, para. 172.

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unlawful aid. The substantive rules of the 2014 Guidelines are applicable only to unlawful aid granted after 4 April 2014 and to notified aid in respect of which the Commission is called upon to take a decision from 4 April 2014, even if the planned aid was notified prior to that date. By contrast, the compatibility criteria applicable to unlawful aid granted prior to 4 April 2014 are those in force at the time when the aid was granted.2875 In particular, the compatibility of unlawful investment or start-up aid granted between 9 December 2005 (the date of entry into force of the 2005 Guidelines) and 3 April 2014 is to be assessed on the basis of the compatibility criteria in the 2005 Guidelines.

3.4 Sector-specific guidance on the presence of State aid The 2014 Guidelines were published before the potential adoption of the Notice on the notion of State aid.2876 As such, they recall a number of general principles regarding the presence of aid which have been discussed in Part 2. This section will accordingly only describe the specific guidance given by the Commission regarding the presence of State aid in public support measures for airports and airlines, whether in the 2014 Guidelines or in its decision-making practice.

3.1389

3.4.1 Notion of undertaking The 2014 Guidelines first and foremost clarify that the provision of airport services to airlines and other airport users on commercial terms constitutes an economic activity, of which the construction of airport infrastructure itself is an inseparable part, in line with the Leipzig-Halle judgment.2877

3.1390

While already applied in the Commission’s decision-making practice2878 and sanctioned by the Union courts, that approach nevertheless differs from the view embodied by the 1994 Guidelines, where airport infrastructure was considered to be outside the ambit of State aid control. To ensure legal certainty regarding the transition to that new paradigm, the Commission thus recognizes the date of the Aéroports de Paris judgment2879, i.e. 12 December 2000, as a cutoff point: all measures granted from that date could be considered new aid if the criteria of Article 107(1) of the Treaty are met. By contrast, due to the uncertainty that

3.1391

2875 2876 2877 2878

2014 Guidelines, paras 173-174. The Commission launched a consultation on a draft Notice in January 2014. Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and others v Commission EU:T:2011:117. See for instance Commission Decision of 23.7.2008 on measures by Germany to assist DHL and Leipzig Halle Airport, OJ L 346, 23.12.2008, p.1, para. 176. 2879 Case T-128/98 Aéroports de Paris v Commission EU:T:2000:290.

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existed prior to that date, the Commission cannot question measures granted before that date on the basis of State aid rules. In addition, the Commission provides sector-specific guidance on the public funding of non-economic activities performed by airports.

3.1392

First, a list of air transport-related activities that are considered in general to be of a non-economic nature is explicitly mentioned in the 2014 Guidelines, including “air traffic control, police, customs, firefighting, activities necessary to safeguard civil aviation against acts of unlawful interference and the investments relating to the infrastructure and equipment necessary to perform those activities”.2880

3.1393

In its decision-making practice, the Commission has also considered that certain air traffic safety2881 and environmental protection2882 activities could legitimately be included by Member States within the “public policy remit” and thus be considered part of the non-economic activities of an airport. It should however be noted that, in other contemporary decisions, the Commission also held that improvements in ground lighting and navigational aids do not fall within the public policy remit, due to “the improvement of the safety of the airport operation correspond[ing] to normal costs of an economic activity”.2883 Throughout its decisional practice, the Commission therefore distinguishes between (i) air traffic safety activities, which are aimed at ensuring the safety of aircraft while airborne and can be considered non-economic in nature, and (ii) airport safety activities, which address operations within the airport infrastructure itself and are thus part of the economic activity of a commercial airport manager.

3.1394

Second, the Commission clarifies that the public funding of those non-economic activities should satisfy two conditions in order not to constitute an economic advantage: (i) the public funding should be limited to compensating the costs to which those non-economic activities give rise2884 and (ii) it should not lead to undue discrimination between airports under a given legal order. 2880 2014 Guidelines, para. 35. 2881 For example bird strike countermeasures, see Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, OJ L 201, 30.7.2015, p. 48, recital 198 and Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109. The Commission explicitly stated that bird strike countermeasures were considered as air traffic safety measures. 2882 For example regular measures of the noise level and of air and water quality near airports, ibid. 2883 See Commission Decision of 7.5.2014 in case SA.38441 regarding the Isles of Scilly, para. 21, and Commission Decision of 20.2.2014 in case SA.35847 (2012/N) – Czech Republic – Ostrava airport, para. 16. 2884 The 2014 Guidelines further specify that separate cost accounting is warranted to avoid the transfer of funds between the economic and non-economic activities of an airport, see para. 36.

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The Commission clarified through its decisional practice that the public funding of the non-economic activities of an airport can only be declared free of aid if all airports operating under the same legal order are similarly relieved of the costs induced by these activities.2885 By contrast, if the applicable regulatory framework foresees that airport operators normally bear the costs of these activities from their own resources, the public funding of these activities at a particular airport may grant it an advantage and ultimately constitute State aid, irrespective of the fact that the activities being funded may be considered noneconomic.2886

3.1395

For instance, in its decision regarding Angoulême airport (Aéroport d’Angoulême), the Commission applied that assessment framework by analyzing the applicable French legal order. In that decision, the Commission held that the French system designed to compensate airport operators for the costs of public policy activities does not entail State aid.2887 The Commission emphasized that both the scope of the non-economic activities imposed on airport operators and their public financing scheme apply consistently across all commercial airports in France, thereby ensuring that State financing does not lead to discrimination between airports.2888

3.1396

While providing guidance on the acceptable scope of the non-economic activities performed at an airport, the Commission’s decisional practice therefore places great emphasis on the legal and regulatory framework under which individual airport managers operate. Since that framework is by and large a matter of national or even regional competence, the Commission’s assessment therefore has to walk a fine line between recognizing local and national specificities and ensuring a level-playing field between competing European airports.

3.1397

2885 See Commission Decision of 26.2.2015 in case SA.35388 – Setting up the Gdynia-Kosakowo airport, para. 105. See also Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109. 2886 See for instance Commission Decision of 11.2.2014 on the measure SA.35388 – Setting up the GdyniaKosakowo Airport, OJ L 357, 12.12.2014, p. 51, revoked on 26 February 2015. The Commission analyzed a number of activities performed by the airport manager in light of the applicable Polish regulatory framework and concluded that under the Polish legal order “airports managers are obliged to finance the facilities and equipment necessary to perform these activities from their own resources” (para. 90). Since the Commission held that the public measures at stake were not in line with the MEOP, the public funding earmarked for those non-economic activities was eventually considered as constituting State aid (paras 177 and 183). 2887 See Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, recitals 196 to 202. 2888 The Commission also checked that compensation amounts were subject to both ex ante and ex post controls. It should be noted that the French system ultimately ensures that airport users across France are charged for the costs of those activities.

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3.4.2 Effect on competition and trade 3.1398

As regards the scope for distortion of competition and trade stemming from public support to airports and airlines, the 2014 Guidelines make clear that four sets of markets could be affected: (i) competition between airports to provide airport services to airlines and other users, (ii) competition between airport operators in the markets for airport infrastructure operation, (iii) competition between airlines in the markets for air transport services and (iv) intermodal competition between airlines and other transport undertakings.2889

3.1399

Accordingly, public funding to airports and airlines is highly likely to give rise to distortions of competition and trade, and even the public funding of very small airports has been recognized by the Commission to entail such effects.2890

3.1400

However, the Commission has also recognized in a decision posterior to the adoption of the 2014 Guidelines that the public funding of airport infrastructure does not always distort competition and affect trade. In the “exceptional” case of Saint Mary’s airport in the Isles of Scilly (UK), the Commission concluded that the public funding at stake, although granting an economic advantage to the airport operator, was not liable to distort competition or affect trade in light of the following elements: (i) there was no competing airport in the Isles of Scilly, (ii) the air services and ferry services from the Isles of Scilly to the mainland were in different markets and did not compete with each other and (iii) the airport had a short runway (600 meters) which could not be extended, and as a consequence could only accommodate very short-haul flights to three airports in nearby Cornwall.2891

3.4.3 Advantage 3.4.3.1 Public financing of airports 3.1401

As discussed in chapter 11, and recalled in section 3.5 of the 2014 Guidelines, the Commission assesses whether public financing measures for airport infra2889 2014 Guidelines, paras 43 and 44. 2890 For instance, in its decision in case SA.33963 –Aéroport d’Angoulême, the Commission considered that the public funding of Angoulême airport, which was open to commercial traffic, was liable to have a distortive effect on competition and trade, while the airport had less than 40 000 passengers per year in the ten years preceding the decision and no other airport was open to commercial traffic in a 1h30 car transport radius. See Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, recital 274. 2891 See Commission Decision of 7.5.2014 on Isles of Scilly Air links – United Kingdom (Case SA.38441), summary notice in OJ C 5, 09.01.2005, p. 4, paras 27 to 38.

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structure entail the presence of an advantage by applying the MEOP. The long time horizons of infrastructure investment2892 imply a comparatively greater emphasis on the credibility of the business plans used to measure the profitability of investment decisions, as evidenced by several decisions of the Commission focusing on the application of the MEOP. Evaluating complex economic matters, the Commission accordingly scrutinizes the credibility of the assumptions underpinning the traffic and revenue estimates of individual airport infrastructure projects. The 2015 decision in the GdyniaKozakowo airport case has shown that the Commission is willing to criticize the business plans presented by Member States when appropriate in light of its experience of air transport markets.2893 In the 2014 Charleroi decision, the Commission’s conclusion that Belgium had granted State aid to the airport operator through a low concession fee was also grounded in the in-depth assessment of the airport’s business plan.2894 In addition, the Commission analyses all relevant counterfactual scenarios for the hypothetical market economy operator when such scenarios can be identified.2895

3.1402

3.4.3.2 Airport-airline arrangements To address the crucial question of whether the use of an airport by an airline confers an economic advantage on the latter, the 2014 Guidelines set out a twopronged test. In principle, an airline does not receive any advantage if (i) the price charged for the airport services it receives corresponds the market price (“benchmarking”) or if (ii) the airport-airline arrangement raises the airport’s profitability from an ex ante perspective (“incremental profitability”).2896

3.1403

2892 For instance, in case SA.37125, the aid beneficiary was granted a 55-year long concession on the airport infrastructure. See Commission Decision of 20.11.2013, C(2013) 7891 final, Aide d’Etat SA.37125 (2013/ NN) – France, Opération de financement de la construction de l’aéroport du Grand Ouest (Notre-Damedes-Landes), para. 24. 2893 See Commission Decision of 26.2.2015 in case SA.35388 – Setting up the Gdynia-Kosakowo airport, paras 131 to 185. See for instance para. 147: “the Commission considers that (...) taking into account the competitive situation of Gdynia airport the traffic forecasts included in the 2010 MEIP study are based on unrealistic assumptions”. 2894 See Commission Decision of 1.10.2014 in case SA.14093 – Avantages consentis par la Région Wallonne à Brussels South Charleroi Airport et à la compagnie aérienne Ryanair, not yet published (contested in pending Case T-818/14 BSCA v Commission), and Commission’s Memo of 1 October 2014 State Aid: Commission Decisions on public financing of airports and airlines in Germany, Belgium, Italy and Sweden – further details: http://europa.eu/rapid/press-release_MEMO-14-544_en.htm. 2895 See for instance Commission Decision of 19.12.2012 in case SA.35378 – Financing of Berlin Brandenburg airport, para. 37. 2896 See 2014 Guidelines, para. 53.

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3.1404

However, the Commission has, in its 2014 Guidelines and in its decisional practice, all but dismissed the practicality of the “benchmarking” approach, primarily due to the lack of airports operating under normal market conditions.2897 Its decisional practice since the adoption of the 2014 Guidelines has clarified that, even if a convincing benchmarking exercise could be conducted in a particular case, the Commission could not conclude that no advantage is received by the airline if the incremental profitability test is not satisfied.2898

3.1405

From a theoretical perspective, the usefulness of a benchmarking analysis to assess the conformity of an airport’s behaviour with that of a market economy operator is indeed questionable given that the value of airport services is heavily differentiated from the viewpoint of customer airlines.2899 In addition, airports have imperfect information on the value of the airport services they provide from the point of view of their customer airlines: while airport managers often invest in marketing research on their own catchment area to assess its traffic generation potential, they have incomplete information on the passenger and yield prospects of the particular routes that a customer airline could set up from their airport.2900 The profitability prospects of setting up a route from the customer airline’s point of view would nevertheless be expected to play a significant role in the price formation process for airport-airline arrangements. It is thus unclear that comparing price levels across airports could yield any significant information about the conformity with the MEOP of a given decision by an airport operator to enter into an arrangement with an airline.

3.1406

The Commission has therefore cast doubts on the relevance of a benchmarking approach at this point in time, while accepting that this approach could become more relevant in the future, especially as State aid rules create a level-playing field across the Union. The 2014 Guidelines also provide a list of seven indica-

2897 In essence, according to the Commission, a large number of – publicly-owned – Union airports charge prices which are not determined according to market rules, thereby distorting airport charge levels across the Union. See 2014 Guidelines, paras 55 to 59. In addition, the level of services provided by an airport to an airline is in general too heavily differentiated across the Union and even across airlines operating at a given airport to allow for meaningful price-based benchmarking exercises. See also Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, OJ L 201, 30.7.2015, p. 48. (contested in pending Case T-111/15 Ryanair and Airport Marketing Services v Commission), recitals 341 to 349. 2898 See Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France – « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109. 2899 Economic theory suggests that the airport’s pricing strategy would thus depend on the elasticity of airline demand, for instance through Ramsey pricing. See Ramsey pricing including CO2 emission cost: An application of Ramsey pricing to Spanish airports by R.R. Martín-Cejas, Journal of Air Transport Management, January 2010. See also OECD, Airport Regulation Investment and Development of Aviation, 2010. 2900 See for instance Airport Marketing by Nigel Halpern, Anne Graham, Routledge, 2013.

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tors which any relevant benchmarking exercise should make use of.2901 However, from a practical point of view, the number of parameters emphasized by the Commission makes an empirical analysis of the conformity of a given schedule of airport charges a challenging task.2902 Conversely, the 2014 Guidelines clarify that assessing the incremental profitability of an airport-airline arrangement for the airport is the best criterion to assess the presence of an advantage for airlines at present.2903 That question therefore boils down to whether a market-economy airport operator would have expected to increase its profits when entering into the arrangement at stake, without taking any public support into account.

3.1407

In addition to the incremental profitability test described above, the Commission also assesses the extent to which the airport-airline arrangements under review are part of an overall strategy of the airport expected to lead to profitability at least in the long term.2904 The – so far limited – Commission decisional practice on this matter suggests that the Commission actually considers compliance with that criterion as an additional necessary condition for an airport-airline arrangement not to constitute an advantage to an airline.2905 Whether an arrangement that satisfies the incremental profitability test could be deemed to entail an advantage to the airline based on that provision alone remains however hypothetical at this stage.2906

3.1408

2901 2014 Guidelines, para. 60. The Commission identifies in that respect (a) the airport’s traffic volume, (b) the type of traffic, the relative importance of freight and the relative importance of revenue stemming from the non-aeronautical activities of the airport, (c) the type and level of airport services provided, (d) the proximity of the airport to a large city, (e) the number of inhabitants in the catchment area of the airport, (f ) the prosperity of the surrounding area (GDP per capita) and (g) the different geographical areas from which passengers could be attracted. 2902 From a data analysis perspective, controlling the charge levels at comparator airports for (at least) seven different parameters requires a significant number of data points, i.e. comparator airports. Even for the most active airlines in the Union, such as Ryanair, gathering comprehensive price data from a sufficient number of «market-conform » airport operators may prove daunting. 2903 2014 Guidelines, para. 61. 2904 2014 Guidelines, point 66. 2905 While the Commission undertook such an assessment when the incremental profitability test was satisfied, it did not when an ex ante approach demonstrated that the airport-airline arrangement incrementally decreased the profitability of the airport. For an example of such an assessment, see Commission Decision of 23.7.2014 in SA.33961 – Aéroport de Nîmes, not yet published. Conversely, no such assessment was undertaken in SA.22614 – Aéroport de Pau and in SA.33963 – Aéroport d’Angoulême where the airport-airline arrangements at stake were all held to entail an advantage to the airline. 2906 Such a case might arise if an airport manager consistently prices its services so that none of its fixed costs are covered, while each arrangement with airlines (marginally) increases its profitability. However, such an airport manager could not realistically sustain this business model without eventually receiving public support, which would fall under the provisions of the 2014 Guidelines regarding aid to airports and thus in principle be gradually phased out.

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3.4.3.3 Application of the incremental profitability test 3.1409

Following the entry into force of the 2014 Guidelines, the Commission has applied its approach regarding airport-airline arrangements in a series of cases allowing for the identification of a number of common principles, which are however always founded in the facts of each particular case.

3.1410

First, the Commission jointly assesses all measures – i.e. contracts, agreements or unilateral decisions – which are concluded in the context of a given airportairline relationship.2907 Other ancillary agreements, such as marketing or incentive agreements with airlines, are thus assessed as part of the airport-airline relationship if warranted by the facts of the case. That approach encompasses measures granted directly by public authorities to the airline, as well as through public or private entities in a wide variety of setups across the Union.2908

3.1411

Second, the Commission has clarified its assessment framework for marketing agreements2909 in a series of cases focused on web advertising on the airline’s own website in the context of a given airport-airline arrangement. In essence, the Commission holds that the only tangible benefit that a market economy airport operator would assign to such a marketing agreement would be higher traffic on the air routes operated by that airline for the duration of the arrangement.2910 In other words, the benefits of a marketing arrangement should already be factored in the business plan laid out by the airport for its arrangement with the airline, and should not be expected to materialise elsewhere.

3.1412

Third, when no ex ante profitability evaluation is available from the airport manager or from the Member State concerned, the Commission carries out its 2907 The Commission thus considers that the cornerstone of an airport-airline relationship is the commercial provision of airport services (see section 2.2.2 above), whether formalized through an airport service agreement or, when airports publish their charge schedules, merely evidenced by the use of the airport by the airline. 2908 The public support at stake may be either granted to the airport to offset part of its costs in entering into an arrangement with an airline, or directly granted to the airline by public authorities. In the latter case, the Commission does not exclude that public support to an airline with respect to a given airport-airline arrangement may actually entail an economic advantage to the airport, which is relieved of costs it would normally have to bear (see for instance decision to open proceedings in SA.33909 – Alleged aid to Ryanair and other airlines and possible aid to Girona and Reus Airports, OJ C120, 23.04.2014, p. 24, paras 72, 115 and 153). 2909 In such arrangements, airlines advertise on behalf of an airport through a variety of means. See section 2.1.2 and footnote 2823 above. 2910 See Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, OJ L201 of 30.7.2015, p. 48, recital 338 and Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France – « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109.

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own assessment of the profitability of airport-airline arrangements based on the incremental costs and revenues that could be reasonably expected at the time of their inception.2911 The Commission considers in that respect that the absence of any ex ante profitability analysis or business plan constitutes a serious presumption that the airport-airline arrangement at stake does not satisfy the MEOP.2912 That presumption should in all likelihood be reinforced as regards arrangements entered into after the adoption of the 2014 Guidelines, since the Commission has now clarified the principles underpinning its application of the MEOP to airport-airline arrangements. Finally, the Commission considers that the time horizon of the arrangement itself is in general the appropriate timeframe for that profitability assessment, and has decided against assigning value to an arrangement beyond its contractual duration, in particular because airlines are able to adapt their operations in a short timeframe.2913

3.1413

3.4.3.4 Conclusion Through the 2014 Guidelines and its subsequent decisional practice, the Commission has enshrined the incremental profitability test as its primary assessment framework to determine whether airport-airline arrangements entail an advantage for the latter. As recalled in the Guidelines, that test also implies that whether or not airports price discriminate between their customer airlines is de facto irrelevant for the purposes of assessing the presence of State aid.2914 In other words, the Commission’s assessment framework now matches the flexibility of commercial practices encountered in the Union’s airport and airline industries.

3.1414

2911 See decisions in case SA.22614 – Aéroport de Pau, recital 392 ff and in case SA.33963 – Aéroport d’Angoulême, recital 363 ff. 2912 See decisions in SA.22614 – Aéroport de Pau, recitals 386 and 387 and in case SA.33963 – Aéroport d’Angoulême, recitals 360 and 361. 2913 A prudent airport operator would therefore not in principle assume that the initial terms of an arrangement would continue beyond the arrangement itself. See Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109, in SA.22614 – Aéroport de Pau, recitals 393 to 397, and Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, OJ L 201, 30.7.2015, p. 48. 2914 This is without prejudice to other competition or sectoral rules on airport pricing. Furthermore, as seen above, each instance of price discrimination should make commercial sense to satisfy the incremental profitability test. See 2014 Guidelines, para. 62. See also Commission Decision in case SA.22614 – Aéroport de Pau, recital 372 as well as Commission Decision in Case C 12/2008 – Slovakia – Agreement between Bratislava Airport and Ryanair, OJ L 27, 01.02.2011, p. 24 and Commission Decision in Case C 25/2007 – Finland – Tampere Pirkkala airport and Ryanair, OJ L 309, 19.11.2013, p. 27.

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3.5 Interplay with other horizontal rules 3.5.1 SGEI 3.1415

As regards services of general economic interest (SGEI) in the airport and air transport industries, the 2014 Guidelines first and foremost rely on the SGEI Package, to which they refer in its entirety.2915 However, the 2014 Guidelines also provide guidance on the scope of SGEI for (i) air transport services and (ii) airport infrastructure. They also summarize the compatibility basis for aid in the form of SGEI compensation in those sectors.

3.5.1.1 Scope of SGEI Air transport services

3.1416

Member States may impose public service obligations (PSOs) on specific air routes with a view to ensuring that appropriate air transport services are maintained. The Air Services Regulation lays down detailed substantive and procedural conditions to be fulfilled by Member States in that regard.2916 Some 225 air routes were subject to PSOs in the EEA in December 2014.2917 In addition to compliance with sectoral legislation, PSOs that entail a transfer of public resources to airlines may be subject to State aid scrutiny. The Commission has seldom assessed air transport PSOs under State aid rules. In relation to Air Catalunya, the Commission considered that the breach of the relevant provisions of the Third Package reversed the “no aid” presumption described in the 1994 Guidelines for PSO compensation.2918 Non-compliance with the requirements laid down in the then-applicable sectoral legislation also led to Article 106(2) of the Treaty being ruled out as a compatibility basis.2919 More recently, in relation to Sardinian airports’ PSOs, the Commission, in its decision to open the formal investigation procedure, also questioned whether the SGEI decision and the SGEI Framework could constitute compatibility basis for payments to airlines which did not seem to comply with the relevant provisions of the Air Service Regulation.2920 2915 2014 Guidelines, para. 68. 2916 See Regulation 1008/2008 on common rules for the operation of air services, OJ L 293, 31.10.2008, p. 3, Articles 16 to 18. 2917 Source: DG MOVE PSO inventory table, accessible online: http://ec.europa.eu/transport/modes/air/internal_market/pso_en.htm. 2918 Commission Decision of 20.10.2004 concerning the aid scheme implemented by the Kingdom of Spain for the airline Intermediación Aérea SL, OJ L 110, 30.04.2005, p. 56. 2919 The Commission eventually re-qualified the public support as start-up aid and declared it compatible with the internal market under Article 107(3)(c) of the Treaty. 2920 Case SA.33983 – Compensation to Sardinian airports for Public Service Obligations (SGEI), Decision

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In the 2014 Guidelines, the Commission refers to the scope of air transport PSOs as defined in Article 16 of the Air Service Regulation.2921 The Commission provides three additional clarifications on that scope.

3.1417

First, the Commission clarifies that PSOs for air transport services must be defined with respect to specific origin and destination airports.2922

3.1418

Second, the Commission reasserts that air transport PSOs can only be defined on routes where transport needs cannot be adequately met by an existing air route or by other means of transport,2923 and clarifies in that respect that it would be difficult to justify PSOs on a route to a given airport if there are already similar services notably in terms of transport time, frequencies, level and quality of service, to another airport serving the same catchment area.2924

3.1419

Third, the Commission recalls that compliance with the relevant substantive and procedural requirements of the Air Service Regulation does not eliminate the need for the Member State(s) concerned to assess whether the PSO compensation actually entails State aid to the recipient airline(s).2925

3.1420

That final reminder should be understood bearing in mind that the provisions on air transport PSOs laid down in the Air Service Regulation have been modelled on the four Altmark conditions,2926 which together ensure that SGEI compensation does not constitute State aid.

3.1421

C(2013) 106 final of 23.1.2013, OJ C 152, 30.05.2013, p. 30, paras 123 ff. 2921 Pursuant to Article 16(1) of the Air Service Regulation, a Member State may impose PSOs (i) for a scheduled air route between an airport and a peripheral or development region in the Union and (ii) on a thin route to an airport in its territory, if that route is considered as being vital for the economic and social development of the region which the airport serves. 2922 See also in that respect Commission Decision C(2007)/1712, recitals 54-58 and 63 to 71, as well as Article 1 (f ). In that case which related to PSOs between Sardinia and mainland Italy, the Commission also considered doubtful that applying PSOs to all airports serving Rome and Milan would be proportionate to the objectives of ensuring mobility to the mainland and territorial cohesion (see recital 79). However, in light of the commitment by the Italian authorities to restrict the PSO to one airport per city, the Commission did not conclude on that point. 2923 See also Air Service Regulation, Article 16(3). 2924 2014 Guidelines, footnote 77. 2925 2014 Guidelines, para. 71. 2926 Article 16 of the Air Service Regulation defines the scope of air transport PSOs, which is to be granted through a formal mandate. The provisions of Article 17(3) and 17(8) of the Air Service Regulation closely follow the second and third Altmark conditions. Articles 16(10) and 17(4) of the Air Service Regulation require that PSO compensation is granted through a public and transparent tender procedure.

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3.1422

Against that backdrop, the Commission’s reminder in point 71 of the 2014 Guidelines merely underlines that, despite the procedural safeguards of the Air Service Regulation, compliance with all four Altmark conditions should be verified in each individual case. If, for instance, the public tender foreseen by the Air Service Regulation fails to ensure that a given PSO contract is awarded to a tenderer capable of providing those services at the least cost to the community,2927 the PSO compensation at stake may entail State aid to its recipient and should accordingly be notified to the Commission unless exempted from notification (see below). It should also be noted that, contrary to land transport and Regulation 1370/2007, the Air Service Regulation itself does not exempt PSO compensation, even validly granted, from the notification requirement.2928 Guidance on the scope of SGEI for airports

3.1423

In paragraphs 72 and 73 of the 2014 Guidelines, the Commission provides sector-specific guidance on the possible scope of SGEIs imposed on airports.

3.1424

First, the Commission outlines the conditions under which, subject to a caseby-case assessment,2929 the overall management of an airport may in principle be considered a SGEI. The Commission considers that it can only be the case if “part of the area potentially served by the airport would, without the airport, be isolated from the rest of the Union to an extent that would prejudice its social and economic development”, taking account of other modes of transport.2930

3.1425

In Aéroport d’Angoulême,2931 the Commission thus held that imposing PSOs limited to ensuring that the airport infrastructure remained operational and accessible to commercial traffic did not constitute a manifest error of assessment, 2927 This may be the case if there is an insufficient number of tenderers or if the PSO contract is not awarded to the lowest cost bidder. See Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C8, 11.01.2012, para. 68. With regard to air transport PSOs, see Commission staff working document on SGEI, SEC(2011) 397, p.12. 2928 See recital 24 of the 2011 SGEI Decision, “unlike Regulation (EC) No 1370/2007, those Regulations [the Air Service Regulation and Regulation 3577/92 on maritime cabotage] do not refer to the compatibility of the possible State aid elements, nor do they provide for an exemption from the obligation to notify pursuant to Article 108(3) of the Treaty.” 2929 The requirement for public authorities to carry out a case-by-case assessment was made clear by the Commission in its decision in SA.22614 Aéroport de Pau. See Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109, recital 509. 2930 The Commission underlines that this may in particular be the case in outermost regions and islands. See 2014 Guidelines, para. 72. 2931 See Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, OJ L 201, 30.7.2015, p. 48.

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on the grounds that (i) the airport at stake was located more than 1h30 away by car from other airports with scheduled air services, (ii) the city served by the airport was not well connected to highways or high-speed trains serving the rest of France and (iii) the passenger traffic was low (well below 200 000 passengers per annum) and the airport was consistently loss-making.2932 By contrast, in Aéroport de Pau, the Commission rejected the qualification of a SGEI on the grounds that the airport at stake was located less than 50km away (and less than 40 minutes by car) from another airport, which was open to commercial traffic.2933 The Commission thus held that considering the overall management of the airport as a SGEI, as claimed by France, would be a manifest error of assessment.

3.1426

Second, the scope of PSOs imposed on airports cannot encompass the commercial development of commercial air transport services.2934 In its decisional practice, the Commission further made clear that creating new air routes or supporting non-aeronautical activities cannot fall within the scope of a SGEI.2935 In particular, the public service compensation granted to an airport operator should in principle not distort its economic incentives to engage in commercial relationships with airlines.2936 That approach suggests that the amount of public service compensation should not depend on the number of passengers or routes in a given year or season.

3.1427

The Commission’s decisional practice therefore seems to suggest that even in cases where the overall management of an airport could validly constitute a SGEI, the scope of that SGEI – i.e. the service actually entrusted to the airport manager – should in principle be limited to ensuring that the airport remains open to commercial traffic.

3.1428

2932 The public service compensation was ultimately declared compatible with the internal market on the basis of the SGEI Framework. 2933 See Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109, recital 510. 2934 2014 Aviation Guidelines, para. 73. The Commission suggests that indirect support to air transport services would constitute a circumvention of the framework laid down for air transport PSOs in the Air Services Regulation, and therefore cannot be accepted. 2935 See Commission Decision of 23.7.2014 in case SA.33963 – Aéroport d’Angoulême, OJ L 201, 30.7.2015, p. 48. 2936 Id., recital 225.

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3.5.1.2 Compatibility of SGEI compensation 3.1429

The 2014 Guidelines refer to the SGEI Package, which contains a number of provisions that are specific to air transport and air transport infrastructure. The thresholds for exemption of notification for air transport services and air transport infrastructure under the 2011 SGEI decision are for instance expressed in terms of passenger numbers,2937 “as this more accurately reflects the economic reality of these activities and their character of services of general economic interest.”2938

3.1430

The Regulation on de minimis aid granted to undertakings providing services of general economic interest applies to the air transport and airport industries without further qualification.

3.1431

The 2011 SGEI decision, which also refers to the Air Service Regulation as regards air transport services, exempts from the notification obligation all SGEI compensation for (i) airports where the average annual traffic did not exceed 200 000 passengers in the last two financial years before the SGEI is entrusted2939 and (ii) airlines as regards air links to islands for which the average annual traffic did not exceed 300 000 passengers in the last two financial years before the SGEI is entrusted.2940 The Commission used that decision to declare aid to airport managers compatible in Aéroport d’Angoulême.2941

3.1432

Finally, the SGEI Framework applies to the air transport and the airport industries in their entirety.2942

3.1433

The Commission also underlined that its guidance regarding the scope of SGEI in the air transport and airport sectors would also apply to its assessment under the SGEI Decision and the SGEI Framework.2943 2937 2011 SGEI Decision, Article 2(d) and (e). 2938 2011 SGEI Decision, recital 24. 2939 The 2014 Guidelines clarify that this threshold is to be measured per airport (and not per airport operator or airport group), and on the basis of a one-way count. See 2014 Guidelines, footnote 79. 2940 The 2014 Guidelines clarify that this threshold is assessed for each route between two individual airports, and on the basis of a one-way count. See 2014 Guidelines, footnote 80. 2941 See Commission Decision of 23.7.2014 regarding State aid SA.33963 – Aéroport d’Angoulême, OJ L 201, 30.7.2015, p. 48. 2942 For air transport, the SGEI Framework applies without prejudice to the Air Service Regulation. See SGEI Framework, para. 8. 2943 See 2014 Guidelines, para. 76. See also Commission Decision of 23.7.2014 regarding State aid SA.22614 (C 53/2007) – France « Aéroport de Pau », OJ L 201, 30.7.2015, p. 109, recital 539, where the Commission excluded the application of the 2005 SGEI decision on that ground.

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3.5.2 General Block Exemption Regulation (GBER)2944 For the most part, State aid measures that specifically target airports or airlines and that do not constitute public service compensations are not block-exempted. The only exception relates to social aid2945 for transport for residents of remote regions, which is subject to Article 51 of the GBER. Insofar as it applies to air transport, Article 51 of the GBER2946 has a narrower scope than the provisions on social aid laid down in the 2014 Guidelines.2947 First, it only applies to aid benefiting final consumers established in remote regions2948, whereas under the 2014 Guidelines, social aid may also be granted for other types of regions. Second, under Article 51 of the GBER, insofar as it applies to air transport, social aid may be granted only for passenger transport on routes linking the remote region subject to the measure to an airport located in the EEA. That limitation is not explicitly foreseen in the 2014 Guidelines.2949

3.1434

The GBER does not apply to aid to airports and start-up aid to airlines. It provides for a block exemption for investment aid to local infrastructures but airports have been explicitly left outside the scope of that provision.2950 The Commission considered that airports were among the types of infrastructure for which aid “may be subject to specific and well-designed criteria which ensures its compatibility with the internal market” and on that basis has refrained from applying the local infrastructure block exemption to them.2951

3.1435

In the GBER, the Commission announced that it envisaged setting out criteria for block exemptions of aid to port and airport infrastructure by December

3.1436

2944 Commission Regulation No 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 2945 Aid of a social character within the meaning of Article 107(2)(a) of the Treaty. 2946 That article applies to both air and maritime transport. 2947 2014 Guidelines, paras 156-157. 2948 In the GBER and in the 2014 Guidelines alike, the notion of remote regions is defined as encompassing outermost regions, Malta, Cyprus, Ceuta, Mellila, islands which are part of the territory of a Member State and sparsely populated areas (see Article 2(7) of the GBER and para. 25(27) of the 2014 Guidelines). See section 3.6.1 for more details on that notion. 2949 A further apparent difference stems from provisions of Article 51 of the GBER according to which the eligible costs of block-exempted social aid shall be the price of a return ticket, including all taxes and charges invoiced by the carrier to the consumer, and that the aid amount shall not exceed 100 per cent of those eligible costs. No specific conditions on eligible costs or aid intensity are set out in the 2014 Guidelines in relation to social aid. However, it is almost inherent to such aid in the air transport sector that the eligible costs correspond to the price of flight tickets and that the aid, which typically takes the form of a compensation between the fare charged by the carrier and a “target fare” sustainable by passengers, does not exceed the price of the flight ticket. 2950 Article 56 of the GBER. 2951 Recital 76 of the GBER.

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2015, provided that sufficient decisional experience is further developed allowing the design of sound criteria.2952 In that regard, it can be noted that the GBER and the 2014 Guidelines were developed quasi-simultaneously. Therefore, the Commission lacked sufficient experience with the implementation of the 2014 Guidelines to work out “safe harbour” conditions under which aid to airports could be block exempted. The Commission could also not rely on the experience gained prior to the entry into application of the Guidelines in particular in view of the lack of notifications so far.2953

3.5.3 Rescue and restructuring 3.1437

Specific provisions on restructuring of flag carriers were laid down in the 1994 Guidelines. The aviation sector (in contrast to the coal and steel sectors) was not excluded from the 2004 Rescue and Restructuring Guidelines2954 providing for compatibility criteria for rescue and restructuring aid across economic activities. However, those Guidelines were to apply without prejudice to any sector-specific rules relating to firms in difficulty, with a specific reference to the aviation sector and the 1994 Guidelines. In some of the decisions adopted since 2004 on restructuring aid for airlines, the Commission took the view that the framework for assessing the compatibility of such aid comprised both the 2004 Rescue and Restructuring Guidelines and the 1994 Guidelines2955 whereas in others it simply applied the 2004 Rescue and Restructuring Guidelines without further reference to the 1994 Guidelines.2956 In practice, the Commission mostly relied on the substantive criteria set forth in the 2004 Rescue and Restructuring Guidelines in the numerous decisions adopted in that field.

2952 Recital 1 of the GBER. 2953 See for instance Commission Staff Working Document – Impact assessment accompanying the document Communication from the Commission Guidelines on State aid to airports and airlines (http://ec.europa. eu/smart-regulation/impact/ia_carried_out/docs/ia_2014/swd_2014_0042_en.pdf ), p. 22. 2954 Communication from the Commission – Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 244, 01.10.2004, p. 2, para. 18. 2955 See for instance Commission Decision of 7.3.2007 in case C 10/2006, Cyprus Airways Public Ltd – Restructuring plan, OJ L 49, 22.2.2008, p. 25, recital 107; Commission Decision of 28.8.2009 in case C 6/2009, Austrian Airlines – Restructuring Plan, OJ L 59, 9.3.2010, p. 1, recital 258; Commission Decision of 27.06.2012, on the State aid which Malta is planning to implement for Air Malta plc., OJ L 301, 30.10.2012, p. 29, recital 78. 2956 See for instance Commission Decision of 9.1.2012 in case Case SA.30584, OJ L 92, 03.04.2013, p. 1, recital 103; Commission Decision of 19.9.2012 in Case SA.30908, OJ L 92, 03.04.2013, p. 16, recital 91; Commission Decision of 9.7.2014 in Case SA.34191, not yet published, recital 162.

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In the 2014 Guidelines, the Commission has repealed the 1994 Guidelines without setting out specific compatibility criteria for rescue and restructuring aid in the aviation sector. Simultaneously, the Commission adopted the 2014 Rescue and Restructuring Guidelines, for which the definition of the sectoral scope no longer makes reference to specific rules for the aviation sector.2957 It follows that the Commission sees no ground for maintaining any sector-specific State aid regime for airlines in difficulty in the highly competitive environment in which they now operate resulting notably from the establishment of a genuine internal market for intra-Union flights.

3.1438

As indicated in section 3.2, the scope of the 2014 Guidelines extends to airports and airlines in difficulty. Unlike other compatibility frameworks issued by the Commission,2958 the 2014 Guidelines do not automatically refer to the substantive compatibility rules of the rescue and restructuring guidelines when it comes to aid granted to companies in difficulty. As such, aid granted to an airport or an airline in difficulty may be declared compatible with the internal market if it fulfils the compatibility criteria laid down in the 2014 Guidelines for all airports or airlines, even though it might fail to meet the test set forth in the 2014 Rescue and Restructuring Guidelines.

3.1439

That feature of the 2014 Guidelines is particularly important when it comes to operating aid to airports. The very rationale for allowing operating aid to airports on a transitional basis is to keep afloat certain categories of airports which otherwise would almost certainly be condemned to going out of business in the short- or medium-term, in order to give them enough time to adapt to the new market reality and become viable without operating aid.2959 Therefore, if airports in difficulty had been excluded from the scope of the 2014 Guidelines, the latter’s provisions on operating aid would have probably become devoid of purpose. In several decisions opening or extending proceedings on suspected operating aid to airport operators2960 that were adopted before the guidelines, the Commission considered that the beneficiaries might qualify as firms in difficulty and that compatibility might have to be assessed under the rescue and

3.1440

2957 Communication from the Commission – Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1, para. 18. 2958 See for instance Communication from the Commission - European Union framework for State aid in the form of public service compensation (2011), OJ C 8, 11.01.2012, p. 15, para. 9. 2959 See 2014 Guidelines, paras 113 and 118. 2960 See for instance Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.23098, Italy – Aeroporto di Alghero, OJ C 40, 12.2.2013, p. 15, para. 175 and Invitation to submit comments pursuant to Article 108(2) of the Treaty in cases SA.19880 and SA.32576, Germany – Flughafen NiederrheinWeeze and Flughafen Niederrhein GmbH, OJ C 279, 14.9.2012, p. 1, para. 155.

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restructuring guidelines in force. However, in most of those cases, the Commission eventually concluded that the measures in question were compatible operating aid on the basis of the 2014 Guidelines. It was thus superfluous to verify whether the requirements of the rescue and restructuring guidelines were also satisfied.

3.5.4 Regional aid 3.1441

In the 2014 Guidelines, the Commission has focused to a large extent on the specific issues surrounding regional airports.2961 It came up with an approach consisting in allowing State aid to regional airports under certain conditions whilst prohibiting aid to large national or international airports save under exceptional circumstances. Furthermore, it took the view that one of the objectives of common interest of the Union that was liable to vindicate the granting of State aid to airports was regional development.2962

3.1442

Nevertheless, in spite of that regional dimension at the heart of its State aid policy in the aviation sector, the Commission has decided against applying the regional aid guidelines2963 to airport infrastructure.2964 That choice is due to the particular features of airports, which distinguish them from other economic activities. They are in a specific situation due notably to the financing difficulties facing them as well in view of the important role that some of them play in terms of mobility of citizens, accessibility of regions and spill-overs on other sectors. Those features warranted a sector-specific treatment. Furthermore, since regional development is a legitimate objective of common interest acknowledged both in the 2014 Guidelines and in the regional aid guidelines as a justification for authorizing State aid, it was rational to exclude airports from the scope of the regional aid guidelines. This prevents a “forum shopping” phenomenon whereby the compatibility basis invoked in support of aid granted to an airport for regional development purposes would be selected as the more generous set of rules for the measure in question.

2961 See for instance 2014 Guidelines, para. 12. 2962 2014 Guidelines, paras 15, 84(c) and 113(c). 2963 Guidelines on national regional aid for 2007-2013, OJ C 54, 04.03.2006, p. 13; Guidelines on regional State aid for 2014-2020, OJ C 209, 23.07.2013, p. 1 or any future guidelines on regional aid. 2964 2014 Guidelines, para. 23.

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3.5.5 Other horizontal rules With the exception of the regional aid guidelines, the 2014 Guidelines have not excluded airports or airlines from the scope of other compatibility frameworks. Therefore, airports or airlines may in principle benefit from State aid approved on the basis of other State aid rules, in the same way as most other sectors. For instance, airports and airlines are not excluded from the scope of the Guidelines on State aid for environmental protection and energy 2014-20202965 and could thus possibly receive aid on that basis.2966

3.1443

3.6 Aid to airports 3.6.1 Investment aid to airports As pointed out in section 3.3, the compatibility criteria set forth in the 2014 Guidelines in regard to investment aid to airports do not apply to unlawful aid granted prior to 4 April 2014. For that category of aid, the relevant compatibility criteria are those that were in force when the aid was granted. If the aid was granted after 9 December 2005, those criteria are to be found in the 2005 Guidelines.

3.1444

To date, the substantive test provided for by the 2014 Guidelines has been applied to very few cases concerning notified aid for which the Commission had to take a decision after 4 April 2014.2967 However, in several earlier decisions adopted on notified investment aid assessed under the 2005 Guidelines, the Commission carried out an analysis which by and large follows the core principles underpinning the provisions of the new guidelines. Some of those decisions are thus used to illustrate the compatibility criteria laid down in the 2014 Guidelines, which are presented below.

3.1445

As explained in section 3.1, those criteria are articulated around the common principles underpinning the assessment of compatibility of any State aid, as highlighted in the Communication on State Aid Modernisation. Accordingly, to be found compatible with the internal market, investment aid to an airport must first contribute to a well-defined objective of common interest for the Un-

3.1446

2965 OJ C 200, 28.06.2014, p. 1. 2966 The Guidelines on State aid for environmental protection and energy 2014-2020 explicitly provide that they apply to those sectors that are subject to specific Union rules on State aid, including transport (see para.13). 2967 See Commission Decision of 7.5.2014 in case SA.38441, United Kingdom – Isles of Scilly Air links, OJ C 5, 9.1.2005, p. 4; Commission Decision of 10.12.2014 in case SA.37582, France – Projet de développement de l’aéroport de La Réunion – Roland Garros, OJ C 44, 6.2.2015, p. 5.

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ion. Second, the aid must be necessary, in the sense that the expected contribution to the furtherance of genuine objectives of common interest would not be achieved without the aid. Third, the aid must be an appropriate policy instrument to reach the desired outcome. Fourth, it must have an incentive effect, which means that it changes the behaviour of the beneficiary so that it engages in a project or an activity which it would not carry out, or at least not to the same extent, absent the aid. Fifth, the aid must be proportionate. Sixth, the negative effects of the aid on competition and trade must be limited so that they are outweighed by the contribution of the aid to the furtherance of objectives of common interest. The latter is the “balancing test”, at the heart of the assessment of compatibility of State aid under Article 107(3)(c) of the Treaty. Seventh, the aid must be transparent so that Member States, the Commission, economic operators and the interested public can have access to all relevant information pertaining to the aid.2968

3.6.1.1 Contribution to a well-defined objective of common interest 3.1447

The 2014 Guidelines single out three objectives of common interest for the Union that may justify the granting of investment aid to airports: mobility of Union citizens and connectivity of Union regions, fight against air traffic congestion at major Union hub airports and regional development.2969 If an investment project, and related to it, the aid aiming to support it, do not contribute to the furtherance of any of those three policy objectives, the aid cannot be found compatible on the basis of the 2014 Guidelines.

3.1448

In the 2014 Guidelines, the Commission has chosen not to give further guidance on the specific types of airport infrastructure investment projects which would be more likely to contribute to an objective of common interest.2970 It has however identified two main types of situations where that fundamental condition is not met. The first one concerns “ duplication of unprofitable airports”, which relates to infrastructure simply “mirroring” another airport located in the same catchment area and which does not operate at or near full capacity.2971 2968 The transparency requirements are not discussed in detail in this chapter, since they largely overlap with those applicable to other types of aid and other sectors. 2969 2014 Guidelines, para. 84. 2970 By contrast, the TEN-T Regulation defines a dual-layer structure (core and comprehensive networks) which comprises in particular two sets of airports for which different types of infrastructure projects are held to be of common interest. See Regulation (EU) No 1315/2013 of the European Parliament and of the Council of 11 December 2013 on Union guidelines for the development of the trans-European transport network and repealing Decision No 661/2010/EU, OJ L 348, 20.12.2013, p.1. 2971 2014 Guidelines, paras 8, 85 and 86.

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The notion of “catchment area” plays a key role in the Commission’s identification of such situations. The 2014 Guidelines provide for a definition of that concept which leaves a significant margin of appreciation to the Commission as to its application to concrete cases: “ ‘catchment area of an airport’ means a geographic market boundary that is normally set at around 100 kilometres or around 60 minutes travelling time by car, bus, train or high-speed train; however, the catchment area of a given airport may be different and needs to take into account the specificities of each particular airport. The size and shape of the catchment area varies from airport to airport, and depends on various characteristics of the airport, including its business model, location and the destinations it serves;”.2972 According to that definition, two simple criteria, a distance of 100 km from the airport and a travelling time of 60 minutes, serve as first indicators used to delineate the catchment area. The Commission may however refine its analysis of the boundaries of the catchment area by taking account of other relevant parameters such as the airport’s business model, its location and the destinations that it serves.2973 The 2014 Guidelines do not contain any closed list of such relevant factors but simply provide examples.

3.1449

Investment projects consisting in creating, extending, maintaining or upgrading an airport infrastructure located in the catchment area of an under-utilized airport are unlikely to offer any added value with respect to any of the three objectives of common interest identified in the 2014 Guidelines. If there is an existing infrastructure with significant spare capacity in the vicinity of the airport where the project is envisaged, it is likely to be sufficient to meet all needs in terms of mobility, connectivity or decongestion of major hubs. A significant positive contribution to regional development is also doubtful. The investment project may in those circumstances generate activity at the airport where it is implemented by simply shifting traffic away from the other airport, reducing accordingly the activity of that other airport.

3.1450

When other airports are located in the catchment area of the airport intended to receive investment aid, the situation of those other airports in terms of capacity utilization has to be assessed, as a rule, on a forward-looking basis. Even if those other airports have significant spare capacity at the time when the aid is assessed, that spare capacity might be insufficient for all airports in the area to handle future traffic in that area without the investment project intended to be aided being implemented at the beneficiary airport. It depends in particular on

3.1451

2972 2014 Guidelines, para. 25(12). 2973 See in that regard Commission Decision of 26.02.2015 in case SA.35388, setting up the Gdynia-Kosakowo Airport, OJ L 250, 25.09.2015, p. 165, recitals 215 and 218.

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expected future traffic in the area and possible extension plans at all airports serving that area.2974

3.1452

The second type of investment projects identified in the 2014 Guidelines as failing to contribute to the furtherance of objectives of common interest relates to the “creation of additional unused capacity”.2975 Obviously, a project expected to result in unused extra capacity does not meet genuine transport needs and cannot be expected to alleviate congestion at major hubs. Furthermore, such unused extra capacity is by nature unlikely to generate activity fostering regional development.

3.1453

Having identified those two situations, the Commission has stated in the 2014 Guidelines: “Any investment which does not have satisfactory medium-term prospects for use, or diminishes the medium-term prospects for use of existing infrastructure in the catchment area, cannot be considered to serve an objective of common interest.” 2976

3.1454

The traffic projections associated with an investment project under assessment play a key role in the Commission’s analysis. Medium-terms prospects for use of the infrastructure are to be assessed on that basis. Therefore, those projections ought to exhibit a sufficient degree of reliability. According to the guidelines, “The medium-term prospects for use must be demonstrated on the basis of sound passenger and freight traffic forecasts incorporated in an ex ante business plan and must identify the likely effect of the investment on the use of existing infrastructure, such as another airport or other modes of transport, in particular high-speed train connections.” 2977

3.1455

In the Gdynia decision2978 the Commission assessed whether aid for the construction of a new airport in Gdynia contributed to the furtherance of an objective of common interest. That aid was eventually found incompatible. The assessment was performed under the 2005 Guidelines but the Commission’s analysis matched to a large extent the principles laid down in the 2014 Guidelines. The Commission noted that Gdansk airport was located only around 25 km away from the planned new airport. Taking into consideration the existing and future road and rail infrastructure available in the Pomeranian Region, where both airports are located, the Commission found that the new airport would not substantially improve the connectivity of the inhabitants of that region, even those living 2974 See Commission Decision of 9.4.2014 in case SA.38346, Italy – Capital injection – Aeroporto Valerio Catullo di Verona Villafranca S.p.A., OJ C 172, 6.6.2014, p. 17, para. 60. 2975 2014 Guidelines, paras 8, 85 and 86. 2976 2014 Guidelines, para. 86. 2977 2014 Guidelines, para. 86. 2978 Commission Decision of 26.2.2015 in case SA.35388, setting up the Gdynia-Kosakowo Airport, OJ L250, 25.09.2015, p. 165.

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in Gdynia.2979 The Commission also underlined the significant overlap between the business models of the two airports and the wide range of destinations offered from Gdansk airport.2980 It also estimated that Gdansk airport would only be used at around 50-60 per cent of its capacity in the coming years and would thus be able to meet demand from airlines and passengers during a long period.2981 A similar approach was followed in the Zweibrücken airport case2982 where investment aid was also assessed on the basis of the 2005 Guidelines and found incompatible. The recipient of that aid, Zweibrücken airport, was a relatively recent airport located only around 40 km away from Saarbrücken airport, which had been in operation for decades and provided sufficient airport capacity to the neighbouring area.2983

3.1456

In other recent cases, the Commission authorized investment aid into airport infrastructure after finding that no other airport with spare capacity served the same catchment area and that the infrastructure had satisfactory medium-term prospects for use based on sound traffic forecasts. That conclusion was reached in particular in the case of investment projects aimed at modernizing an infrastructure that met genuine transport needs and securing its compliance with safety requirements, addressing deficiencies and improving the functionality of a necessary airport, extending the capacity of an airport expected to reach full capacity utilization or relocating a congested airport which could not be optimally extended.2984

3.1457

3.6.1.2 Need for State intervention The fact that an investment project genuinely contributes to the furtherance of one or more of the three objectives of common interest listed in the 2014 Guidelines is not sufficient for aid supporting that project to be found compatible. That aid must also be necessary to the implementation of the project.

3.1458

2979 2980 2981 2982 2983

Gdynia Decision, recitals 206 to 208. Gdynia Decision, recitals 215 and 218. Gdynia Decision, recital 214. Case SA.27339. See Commission’s Memo of 1 October 2014 State Aid: Commission Decisions on public financing of airports and airlines in Germany, Belgium, Italy and Sweden – further details: http://europa.eu/rapid/pressrelease_MEMO-14-544_en.htm. 2984 See Commission Decision of 11.2.2014 in case SA.38168, Croatia – Dubrovnik Airport Development, OJ C 369, 17.10.2014, p. 3, para. 33; Commission Decision of 7.5.2014 in case SA.38441, United Kingdom - Isles of Scilly Air links, OJ C 5, 9.1.2005, p. 4, para. 47; Commission Decision of 10.12.2014 in case SA.37582, France - Projet de développement de l’aéroport de La Réunion – Roland Garros, OJ C 44, 6.2.2015, p. 5, para. 85; Commission Decision of 20.11.2013 in case SA.37125, France - Opération de financement de la construction de l’aéroport du Grand Ouest (Notre-Dame-des-Landes), OJ C 69, 7.3.2014, p. 14, para. 72.

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3.1459

3.1460

In that regard, the Commission emphasized that the need for public funding to finance investments at airports varied according to the size of the airports, and that smaller airports may have difficulties in ensuring the financing of their investments without public funding.2985 It has distinguished different categories of airports, appraising for each of them their ability to fund their investments without State aid:2986 –

airports with up to 200 000 passengers per annum, which may not be able to cover their capital costs to a large extent;

–

airports with annual passenger traffic of between 200 000 and 1 million, which are usually not able to cover their capital costs to a large extent;

–

airports with annual passenger traffic of 1–3 million which should, on average, be able to cover their capital costs to a greater extent;

–

airports with annual passenger traffic of 3–5 million which should, in principle, be able to cover, to a large extent, all their costs (including operating costs and capital costs);

–

airports with annual passenger traffic above 5 million, which are usually profitable and able to cover all of their costs, except in very exceptional circumstances.

Those are general observations which may guide the assessment of specific cases. However, the necessity of a particular aid measure can be completely established only once it has been proven that the aid has an incentive effect, or in other words, that absent the aid the beneficiary would have been unlikely to implement the same investment project. That aspect is dealt with below.

3.6.1.3 Appropriateness of State aid as a policy instrument 3.1461

Member States seeking authorisation for an airport’s investment aid measure should demonstrate that it is an appropriate policy instrument to achieve the intended objective or resolve the problems intended to be addressed by the aid. Such a measure may not be declared compatible if other less distortive policy instruments or aid instruments allow the same objective to be reached.2987 2985 2014 Guidelines, paras 88-89. 2986 2014 Guidelines, para. 89. 2987 2014 Guidelines, para. 90.

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Against that backdrop, Member States must show that they have considered other policy options and that the particular form of aid that they have chosen, for instance a direct grant, has been compared with less distortive forms of aid, for instance loans, guarantees or repayable advances.2988

3.1462

The appropriateness of granting State aid, as such, can in principle be established if the project exhibits positive extra costs or a funding gap. As explained below, it means that the beneficiary would have no incentive to undertake the project without public support. Moreover, a direct grant may be preferred over soft loans or repayable advances in situations where the beneficiary would not be in a position to reimburse them before a very long term horizon.2989

3.1463

3.6.1.4 Existence of an incentive effect and proportionality of the aid amount When assessing investment aid to an airport, the Commission must analyse whether that aid has an incentive effect, which entails verifying whether the investment project would not have been undertaken, or at least not to the same extent, without the aid.2990 The presence of an incentive effect implies that the aid is necessary to the implementation of the project.

3.1464

If works start before an application is submitted to the granting authority, it means that the beneficiary is prepared to undertake the project without aid and that the incentive effect is lacking.2991

3.1465

The fact that works are launched after the company has applied for aid is not sufficient to show that the aid has an incentive effect. The presence of an incentive effect is in principle to be established through a “counterfactual analysis”.2992 The first step of such analysis consists in identifying the various options available to the beneficiary apart from the project intended to be aided, and among them, the most likely scenario assuming that the project intended to be aided is not undertaken. Depending on each case, that “counterfactual scenario” might be for instance a less ambitious investment project than the one intended to be aided or the absence of any particular investment project.2993 If the project intended to

3.1466

2988 2014 Guidelines, para. 91. 2989 See Commission Decision of 10.12.2014 in case SA.37582, France – Projet de développement de l’aéroport de La Réunion – Roland Garros, OJ C 44, 6.2.2015, p. 5, paras 93-94. 2990 2014 Guidelines, para. 94. 2991 2014 Guidelines, para. 93. 2992 2014 Guidelines, paras 95 and 99. 2993 See Commission Decision of 9.4.2014 in case SA.38346, Italy - Capital injection – Aeroporto Valerio Cat-

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be aided is indispensable to the continued operation of an airport, the counterfactual scenario might be the mere closure of the airport.2994

3.1467

The next step of the counterfactual analysis is the estimation of the extra costs (net of extra revenues) expected to result from implementing the project intended to be aided rather than the counterfactual scenario.2995 The “gross” extra costs correspond to the difference between on the one hand, the costs expected to be incurred in the hypothetical scenario where the project intended to be aided would be carried out without the aid, and on the other hand, the costs expected in the counterfactual scenario. Those costs must include both investment and operating costs. Similarly, the extra revenues correspond to the difference between the revenues expected under both scenarios. The forecasted “net extra costs” are to be calculated as the difference between the “gross extra costs” and the extra revenues, for each year over the time-span considered in the analysis. That time-span must correspond to the lifetime of the investment.

3.1468

If the net present value of the net extra costs over that time-span is positive, it means that it would be less profitable for the beneficiary to undertake the project intended to be aided without receiving aid than to opt for the counterfactual scenario. In such a case, it would not be rational to undertake the project intended to be aided without aid. Therefore, the presence of an incentive effect is demonstrated if the (net) extra costs, in terms of net present value, are positive. According to the 2014 Guidelines, “[w]here no specific counterfactual is known, the incentive effect can be assumed when there is a capital cost funding gap, that is to say, when on the basis of an ex ante business plan, it can be shown that there is a difference between the positive and negative cash flows (including investment costs into fixed capital assets) over the lifetime of the investment in net present value terms”.2996 The capital cost funding gap is in fact a particular instance of application of the notion of extra costs. Indeed, the capital cost funding gap is the net present value of the extra costs in cases where the counterfactual situation is assumed to be a “business as usual” scenario where no particular investment project is contemplated. If such a counterfactual scenario appears reasonable in a particular case, a positive capital cost funding gap is sufficient to establish the presence of an incentive effect. ullo di Verona Villafranca S.p.A., OJ C 172, 6.6.2014, p. 17, para. 85; Commission Decision of 10.12.2014 in case SA.37582, France - Projet de développement de l’aéroport de La Réunion – Roland Garros, OJ C 44, 6.2.2015, p. 5, para. 101. 2994 See Commission Decision of 7.5.2014 in case SA.38441, United Kingdom – Isles of Scilly Air links, OJ C 5, 9.1.2005, p. 4, para. 59. 2995 2014 Guidelines, paras 95 and 99. 2996 2014 Guidelines, paras 96 and 99.

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The notions of extra costs and capital cost funding gap are not only instrumental in the identification of the incentive effect but also in the analysis of the proportionality of the aid. Indeed, the amount of the extra costs (or the capital cost funding gap), in net present value terms, stands for the minimum level of public support necessary to render the project economically attractive to the beneficiary. Therefore, in order to be proportionate, the amount of aid, also in net present value terms, should not exceed that level. That requirement is enshrined in the 2014 Guidelines.2997

3.1469

In the estimation of the extra costs or the capital cost funding gap, an important parameter is the discount rate used to calculate net present values. According to the 2014 Guidelines, the discount rate has to reflect the cost of capital, that is to say, the “normal required rate of return applied by the company in other investment projects of a similar kind or, where not available, the cost of capital of the company as a whole, or expected returns commonly observed in the airport sector”.2998 The cost of capital represents the minimum return that a project must generate in order to allow the company to remunerate its creditors and shareholders to a sufficient level. The weighted average capital cost (WACC) of a company is typically used to estimate its cost of capital. That notion may be used to calculate the extra costs or the capital cost funding gap of an investment project at an airport.2999 A benchmarking approach, whereby the rate of return observed for similar projects is used to estimate the cost of capital, is also possible.3000

3.1470

The amount of extra costs or capital cost funding gap constitutes a ceiling on the aid amount, which is however also subject to a second cap. The 2014 Guidelines provide for maximum aid intensities expressed as maximum percentages of the eligible costs of an investment project. The ratio between the aid amount and the eligible costs of the project may not exceed the maximum aid intensity, failing which the aid cannot be deemed proportionate.

3.1471

The eligible costs are defined as “the costs relating to the investments in airport infrastructure, including planning costs, ground handling infrastructure (such as baggage belts, etc.) and airport equipment.” 3001 If the investment project involves

3.1472

2997 2014 Guidelines, para. 99. 2998 2014 Guidelines, para. 25(19). 2999 See Commission Decision of 10.12.2014 in case SA.37582, France – Projet de développement de l’aéroport de La Réunion – Roland Garros, OJ C 44, 6.2.2015, p. 5, paras 38 and 103. 3000 See Commission Decision of 20.11.2013 in case SA.37125, France – Opération de financement de la construction de l’aéroport du Grand Ouest (Notre-Dame-des-Landes), OJ C 69, 7.3.2014, p. 14, para. 99. 3001 2014 Guidelines, para. 97.

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items relating to non-aeronautical activities (in particular car parks, hotels, restaurants, shopping areas…), the associated costs are excluded from the eligible costs of the project within the meaning of the 2014 Guidelines.3002 Similarly, the eligible costs exclude the investment costs relating to the provision of ground handling services (such as buses, vehicles, etc.), insofar as they are not part of ground handling infrastructure.3003

3.1473

According to the 2014 Guidelines, the maximum aid intensity applicable to a given project depends on the size of the airport, and more specifically, on the actual average annual passenger traffic at the airport during the two financial years preceding that in which the aid is notified, actually granted or paid.3004 The greater the traffic, the lower the maximum aid intensity.

3.1474

The question could be raised why the aid amount is subject to two cumulative caps to ensure its proportionality, and not only to the “first cap”, that is, the amount of extra costs or capital cost funding gap. As pointed out above, in economic terms, the amount of extra costs or capital cost funding gap represents the minimum level of public support necessary to render the project attractive to the beneficiary. Three main reasons explain the introduction of a second cap, expressed as a fraction of the eligible costs.

3.1475

First, that second cap ensures that a reasonable proportion of the investment costs is financed through the beneficiary’s own contribution, made up of readily available resources and capital raised on market terms, and that that proportion is all the more significant as the airport is large. It reflects the fact that in essence, the larger the airport, the greater the proportion of the investment costs that can be funded without aid.

3.1476

Second, since the calculation of the extra costs or capital cost funding gap rests on a forward-looking estimation of future costs and revenues, it is inherently riddled with a certain degree of uncertainty. That uncertainty is particularly true for investment projects into airport infrastructure, for which the economic lifetime of the assets is often very long and initial investment costs are not re3002 2014 Guidelines, para. 97. 3003 2014 Guidelines, para. 98. The underlying logic of that approach is that at a given airport, facilities such as baggage belts are usually not replicated even if ground handling services are not exclusively provided by the airport operator. Instead, such assets are usually set up by the airport operator and made available to third party providers of ground handling services, if any, in exchange for remuneration. Those assets are thus normally part of the infrastructure controlled by the airport operator and made available to the various entities that operate at the airport in one way or another. By contrast, equipment such as forklifts or other vehicles are in principle brought by providers of ground handling services to the airports where they operate. 3004 2014 Guidelines, para. 101.

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couped before a significant period of operation. In the calculation of the net extra cost, revenue or cost forecasts may sometimes be exceedingly pessimistic, which would tend to inflate the estimated net extra costs. Because of the inevitable information asymmetry surrounding the assessment of such projects by the Member State or the Commission, those authorities are not necessarily always in a position to detect such flaws in the projections. The cap resulting from the maximum aid intensity thus acts as a “safety net”. A third justification for that cap stems from the fact that cost and revenue estimates underpinning the calculation of the net extra costs may factor in a certain level of inefficiencies on the part of the beneficiary, translating for example in operating costs higher than what they could be if the airport was run optimally. The “hard cap” resulting from the maximum aid intensities may thus, in a number of instances, provide airport operators with a powerful incentive to keep cost under control, strive for efficiency, and maximise revenues associated with the projects for which they seek investment aid.

3.1477

The maximum aid intensities laid down in the 2014 Guidelines are as follows:3005

3.1478

–

for airports with a traffic of up to 1 million passengers per annum, the maximum aid intensity is 75 per cent,

–

for airports with a traffic of between 1 and 3 million passengers per annum, the maximum aid intensity is 50 per cent,

–

for airports with a traffic of between 3 and 5 million passengers per annum, the maximum aid intensity is 25 per cent,

–

for airports with a traffic of more than 5 million passengers per annum, the maximum aid intensity is 0 per cent, which means that in principle, no investment aid may be granted to that category of airports.

The guidelines provide for four possible exemptions to those maximum intensities.

3.1479

3005 2014 Guidelines, para. 101.

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3.1480

First, those maximum aid intensities may be increased by up to 20 per cent for airports located in remote regions irrespective of their size.3006 That bonus for remote regions reflects the more lenient approach towards airports located in such regions, which surfaces throughout the guidelines. That approach obviously caters for the specific transport needs of such regions and the particularly critical role that airports play in the accessibility of many of them. Under the guidelines, “remote regions” are defined as encompassing outermost regions, Malta, Cyprus, Ceuta, Melilla, islands which are part of the territory of a Member State, and sparsely populated areas. Outermost regions are the regions referred to in Article 349 of the Treaty, which are currently Guadeloupe, French Guiana, Martinique, Réunion, Saint-Martin, Mayotte, the Azores, Madeira and the Canary Islands. Sparsely populated areas are defined as NUTS 2 regions with less than 8 inhabitants per km2 or NUTS 3 regions with less than 12.5 inhabitants per km2, based on Eurostat data on population density.3007

3.1481

The second exception relates to investment projects at airports with traffic below 1 million passengers per annum located in peripheral regions, because of the funding gap that such projects may exhibit. For such projects, an intensity exceeding 75 per cent may be justified, subject to a case-by-case assessment and depending on the particular characteristics of the airport, the investment project and the region served.3008 There is no definition of “peripheral regions” in the guidelines or elsewhere in the Union legislation. As such, common sense must be used to identify such regions in specific cases. Moreover, “peripherality indices” have been developed in economic literature and may serve as guidance to identify peripheral regions.3009

3.1482

Third, the Commission has provided for a specific treatment for a very particular category of projects, namely the relocation of airports. For such projects, the Commission will not necessarily apply the maximum aid intensities laid out in the 2014 Guidelines but will assess the necessity and proportionality of the aid on a case-by-case basis notably in light of a funding gap analysis or the counterfactual scenario, regardless of the airport’s traffic.3010

3.1483

The fourth exemption relates to airports with traffic above 5 million passengers per annum. Investment aid to that category of airports is generally banned but a 3006 3007 3008 3009

2014 Guidelines, para. 102. 2014 Guidelines, para. 25(24), (27) and (28). 2014 Guidelines, para. 103. See for instance Evaluation of the implementation and effects of EU infrastructure charging policy since 1995, Report for the European Commission: DG MOVE, Ricardo-AEA, 2014. 3010 2014 Guidelines, para. 104.

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deviation from that principle may be considered “under very exceptional circumstances, characterised by a clear market failure and taking into account the magnitude of the investment, the impossibility to finance the investment on capital markets, a very high level of positive externalities and the competition distortions”, subject to an in-depth individual assessment.3011

3.6.1.5 Avoidance of undue negative effects on competition and trade The balancing test carried out by the Commission when assessing the compatibility of investment aid involves an appraisal of the magnitude of the effects of the aid on competition and trade. The 2014 Guidelines provide for three conditions aimed at ensuring that those effects are limited to an acceptable level.

3.1484

The first condition relates to projects contributing to the duplication of unprofitable airports.3012 As pointed out above, an investment project consisting in creating, extending or maintaining capacity in the catchment area of another airport with significant spare capacity is liable to have unacceptable distortive effects. Such a project may in fact result in shifting traffic away from the competing neighbouring airport. Moreover, such projects are also unlikely to provide any contribution to the furtherance of objectives of common interest. Therefore, in such cases, the detrimental effect of the aid on competing airports located in the same catchment area may simply be a further reason to declare the aid incompatible. This is exemplified by the Gdynia decision, where the Commission’s findings as to the magnitude of the distortive effects of the aid largely overlaps with those relating to the failed contribution of the measure to the furtherance of objectives of common interest.3013

3.1485

The second condition relates to the form of the aid. The guidelines stipulate that the aid can be granted either as an upfront fixed amount to cover eligible investment costs or in annual instalments to compensate for the capital cost funding gap resulting from the business plan of the airport.3014 In other words, the aid amount must be defined ex ante or at least, it must be capped by an absolute amount which cannot be revised upwards during the implementation or operation phases. If the aid was designed as an ex post compensation of any deficit resulting from the project, the beneficiary would not bear the consequences of a possible lack of efficiency in the implementation of the project or the operation

3.1486

3011 3012 3013 3014

2014 Guidelines, para. 105. 2014 Guidelines, para. 106. Gdynia Decision, recitals 226, 238 and 239. 2014 Guidelines, para. 107.

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of the assets, which would place it in an unduly favourable situations vis-à-vis competitors.3015

3.1487

The third condition relates to access to the infrastructure, which must be open to all potential users and must not be dedicated to one specific user. The guidelines stipulate that “[i]n the case of physical limitation of capacity, the allocation should be done on the basis of pertinent, objective, transparent and non-discriminatory criteria.” 3016

3.1488

Provided those three conditions are met, the Commission will consider that the distortive effects of the aid are sufficiently limited, if the other requirements of the guidelines are fulfilled in terms of contribution to objectives of common interest, necessity and proportionality of the aid and appropriateness of the aid as a policy instrument.

3.6.1.6 Notification of schemes and individual measures 3.1489

In the 2014 Guidelines, the Commission invited Member States to design and notify investment aid schemes rather than individual aid measures whenever possible.3017 Doing so reduces the administrative burden for both the Member States and the Commission. However, the Commission has singled out six categories of measures which deserve particular scrutiny, in particular because of their potentially significant impact on competition. Those measures have thus to be notified individually: –

investment aid to airports with average annual traffic above 3 million passengers,

–

aid with an intensity exceeding 75 per cent of the eligible costs, unless if the airport is located in a remote region,

–

aid granted for the relocation of an airport,

–

aid financing a mixed passenger/freight airport handling more than 200 000 tonnes of freight per annum,

–

aid for the creation of a new passenger airport,

3015 2014 Guidelines, footnote 90. 3016 2014 Guidelines, para. 108. 3017 2014 Guidelines, paras 92 and 109.

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–

aid to an airport located within 100 kilometres distance or 60 minutes travelling time by car, bus, train or high-speed train from an existing airport.3018

3.6.2 Operating aid to airports Unlike investment aid, intended to support a specific project, operating aid funds the day-to-day operations of a company. Operating aid to airports, as well as to other types of firms, may possibly take a variety of forms: one-off or recurring subsidies, refundable advances or soft loans, capital injections, goods or services supplied below market price, profit transfer agreements within a group running various airports etc.3019 Moreover, when the airport is operated under a concession granted by the public authorities to a third party, a concession fee lower than would be charged by a private firm owning the airport in lieu of those authorities may constitute operating aid to the airport operator. That specific issue arose in particular in the Charleroi Airport case.3020

3.1490

As explained in section 3.1, operating aid to airports was as a rule prohibited under the 2005 Guidelines. However, that principle turned out to be at odds with market reality. A large proportion of regional airports have been so far kept afloat through operating aid,3021 due to a number of factors. In particular, they have often been used as public policy instruments and not as businesses to be run with a profitability objective.3022 The losses that they generated, offset with public funding, were rarely perceived as a problem to solve. The Commission had refrained from actively enforcing the ban of operating aid, which might have resulted in the closure of as many as 200 airports out of the 460 airports

3.1491

3018 That provision refers to the parameters used as first indicators to delineate the catchment area of an airport. The individual assessment of an aid measure notified individually due to that provision should in principle allow the Commission to identify the precise boundaries of the catchment area of the airport, using the margin of assessment provided for by para. 25(12) of the 2014 Guidelines, and to assess the situation of other airports located in that catchment area in terms of capacity utilization. 3019 See for instance Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.23098, Italy – Aeroporto di Alghero, OJ C 40, 12.2.2013, p. 15, paras 173-174; Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.33960 – France, Aéroport de Beauvais-Tillé, OJ C 279, 14.9.2012, p. 23, paras 54 and 184-187; Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.15376, Germany – Berlin Schönefeld Airport, OJ C 257, 30.10.2007, p. 16, paras 105, 110 and 117-125. 3020 Case SA.14093. See Commission’s Memo of 1 October 2014 State Aid: Commission Decisions on public financing of airports and airlines in Germany, Belgium, Italy and Sweden further details: http://europa.eu/ rapid/press-release_MEMO-14-544_en.htm. 3021 The Commission estimates that 42 per cent of European airports are currently loss-making (see Competition policy brief, Issue 2, New State aid rules for a competitive aviation industry, p. 2 - http://ec.europa.eu/ competition/publications/cpb/2014/002_en.pdf ). 3022 2014 Guidelines, paras 3-13.

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currently in operation in the Union.3023 Such a course of action might have led to the closure of unnecessary and unviable airports but might also have deprived the Union of some airports which meet genuine transport needs and which would have the potential to become economically viable without public support if that goal was actively pursued. At the same time, operating aid to airports, as in other sectors, is viewed as “a very distortive form of aid” which “can only be authorised under exceptional circumstances”.3024

3.1492

Against that backdrop, the Commission has taken the view that certain categories of operating aid to airports might still be justified under well-defined conditions for a transitional period, in order to enable airports to adapt to the new market situation.3025 The Commission has thus established a 10-year transition phase running as of the entry into force of the 2014 Guidelines, on 4 April 2014,3026 to give enough time to airports to carry out the measures necessary to achieve full operating cost coverage without operating aid.3027 A variety of measures can be envisaged during that period to stem operating losses and make an airport eventually viable without operating aid, e.g. an increase of airport charges, attraction of new carriers, seeking of new sources of revenues notably in the field of non-aeronautical activities, or reduction of costs through increased efficiency.

3.1493

The Commission has worked out detailed provisions governing the granting of operating aid during the transitional period. Furthermore, specific provisions were laid down in the new guidelines as regards unlawful operating aid granted to airports before 4 April 2014 in respect of which the Commission is called upon to take a decision after that date.3028 Without such provisions, the general ban of operating aid prevailing under the regime in force before the 2014 Guidelines would have applied to such “past operating aid” according to the general principle set forth in the Notice on the determination of the applicable rules for the assessment of unlawful State aid.3029 If that approach had been taken, it would have given rise to preposterous situations where an airport eligible for operating aid during the 2014-2024 transitional period would have been subject to a recovery order in relation to similar aid received in the past. 3023 See for instance Commission Staff Working Document – Impact assessment accompanying the document Communication from the Commission Guidelines on State aid to airports and airlines (http://ec.europa. eu/smart-regulation/impact/ia_carried_out/docs/ia_2014/swd_2014_0042_en.pdf ), p. 22. 3024 2014 Guidelines, para. 13. 3025 2014 Guidelines, para. 13. 3026 2014 Guidelines, para. 112. 3027 2014 Guidelines, paras 14 and 129. 3028 2014 Guidelines, paras 137 and 172. 3029 See section 3.3.

998

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The substantive criteria applicable to the assessment of compatibility of “past operating aid” are different from those applicable to “ future operating aid”, namely notified aid in respect of which the Commission is called upon to take a decision as of 4 April 2014 and unlawful aid granted as of that same date.3030 The compatibility criteria applicable to past operating aid are significantly less strict than those applicable to future operating aid. Part of the most important requirements to be satisfied by future aid is waived for past aid. The Commission has distinguished between three main categories of airports, subject to different rules: –

airports with average annual traffic above 3 million passengers, which are usually profitable at operating level and to which operating aid may not be granted as of 4 April 2014.3031 Therefore, that category of airports cannot benefit from the transitional arrangements,

–

airports with average annual traffic between 700 000 and 3 million passengers, which are expected to be able to reach full operating cost coverage at the end of the transitional phase. Those airports may in principle receive operating aid during the transitional phase and not thereafter3032,

–

airports with average annual traffic below 700 000 passengers, whose ability to reach full operating cost coverage even within a period of 10 years is more uncertain. Under the 2014 Guidelines, that category of airports may in principle receive operating aid for a period of five years after the beginning of the transitional period, that is, between 2014 and 2019. By 2018, the Commission will reassess the situation of that group of airports with a view to determining whether they may receive further operating aid and for how long.3033

Those categories are only relevant when it comes to future operating aid. Past operating aid may be approved ex post, under certain circumstances, irrespective of the size of the airports, even if the annual traffic exceeds 3 million passengers.3034

3030 3031 3032 3033 3034

3.1494

3.1495

2014 Guidelines, para. 137. 2014 Guidelines, paras 118(c) and 119. 2014 Guidelines, paras 118(c), 118(d) and 129. 2014 Guidelines, paras 118(a), 118(b) and 130. 2014 Guidelines, para. 137.

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3.1496

Like for investment aid, the compatibility criteria set out in the 2014 Guidelines for operating aid are structured around the common principles set forth in the Communication on State Aid Modernisation for all types of aid: contribution to the furtherance of genuine objectives of common interest, appropriateness of the aid as a policy instrument, presence of an incentive effect, proportionality, avoidance of undue negative effects on competition and trade, transparency.3035 Those compatibility criteria have many common features with those applicable to investment aid. Therefore, the remainder of this section, where those criteria are presented, refers extensively to section 3.6.1.

3.6.2.1 Contribution to a well-defined objective of common interest 3.1497

The objectives of common interest recognised in the 2014 Guidelines as valid grounds to justify operating aid are the same as for investment aid: mobility of Union citizens and connectivity of Union regions, fight against air traffic congestion at major Union hub airports and regional development.3036 Operating aid may thus be justified under certain circumstances if it keeps afloat an airport that fulfils genuine transport needs or contributes to regional development.

3.1498

Like in the context of investment aid, the Commission considers that the “ duplication of unprofitable airports” does not contribute to an objective of common interest, and the delineation of the catchment area of the airport and the traffic projections associated with it are key aspects of the Commission’s analysis in that respect.

3.1499

A situation of duplication may preclude the clearance of past and future operating aid alike. In the Zweibrücken airport case, past operating aid in the form of capital injections was found incompatible on the basis of the 2014 Guidelines because of the presence of Saarbrücken airport at a distance of only 40 km.3037

3.1500

Unlawful investment aid was declared incompatible under the 2005 Guidelines on the same grounds.3038 In the Gdynia decision, past operating aid to Gdynia airport was not assessed under the 2014 Guidelines, which were not yet in force, but it was found incompatible in particular because it was granted to ensure the operation of assets resulting from an investment project carried out thanks to in3035 See section 3.6.1 and 2014 Guidelines, para. 112. 3036 See section 3.6.1 and 2014 Guidelines, para. 113. 3037 See Commission’s Memo of 1 October 2014 State Aid: Commission Decisions on public financing of airports and airlines in Germany, Belgium, Italy and Sweden – further details: http://europa.eu/rapid/pressrelease_MEMO-14-544_en.htm. 3038 See section 3.6.1.

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compatible investment aid.3039 In 2014 the Commission approved past operating aid in a number of cases where no duplication issue arose.3040 In certain cases, past operating aid was approved even though there was another close-by airport competing against the beneficiary. In its recent decision on Charleroi airport, in spite of the relatively short distance from Brussels-National airport, operating aid granted to the operator of Charleroi airport in the form of an abnormally low concession fee charged by the Walloon Region was declared compatible until 4 April 2014. That finding was notably based on the positive impact of the dramatic growth in the airport’s traffic on regional development.3041

3.6.2.2 Need for State intervention In the 2014 Guidelines, the Commission provided general indications as to the ability of airports to fund operating costs through their own resources according to their size:3042 –

airports with up to 200 000 passengers per annum may not be able to cover their operating costs to a large extent,

–

airports with annual passenger traffic of 200 000 – 700 000 passengers may not be able to cover their operating costs to a substantial extent,

–

airports with annual passenger traffic of 700 000 – 1 million passengers should in general be able to cover their operating costs to a greater extent,

–

airports with annual passenger traffic of 1–3 million should, on average, be able to cover the majority of their operating costs,

–

airports with annual passenger traffic above 3 million are usually profitable at operating level and should be able to cover their operating costs.

3.1501

3039 Gdynia Decision, recitals 244 to 246. 3040 See for instance Commission Decision of 11.6.2014 in case SA.26818, on State aid granted by Italy to the Stretto airport management company SO.G.AS, OJ L 367, 23.12.2014, p. 99, recitals 119 and 120; Commission Decision of 9.4.2014 in case SA.24258, Netherlands – operating aid in favour of Groningen Airport Eelde NV, OJ C 172, 6.6.2014, p. 1, para.49. 3041 See Commission’s Memo of 1 October 2014 State Aid: Commission Decisions on public financing of airports and airlines in Germany, Belgium, Italy and Sweden – further details: http://europa.eu/rapid/pressrelease_MEMO-14-544_en.htm. See also Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.14093, Belgium – Advantages granted by the Walloon Region to Brussels South Charleroi Airport and the airline Ryanair – Belgium, OJ C 248, 17.8.2012, p. 1, para. 143. 3042 2014 Guidelines, para. 118.

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3.1502

Those general findings underpin the thresholds of 700 000 and 3 million passengers, which are used to define the scope of the three different regimes applicable to operating aid to airports during the transitional period. However, the necessity of a particular operating aid measure ought to be demonstrated on the basis of the presence of an incentive effect, entailing that absent the aid, the airport’s activity would have been significantly reduced or would have ceased altogether. That aspect is dealt with below.

3.6.2.3 Appropriateness of State aid as a policy instrument, presence of an incentive effect and proportionality 3.1503

When it comes to operating aid, those three aspects are intrinsically linked. Member States willing to grant operating aid should demonstrate that it is an appropriate policy instrument to achieve the intended objective or resolve the problems intended to be addressed by the aid, as in the case of investment aid.3043

3.1504

Furthermore, according to the 2014 Guidelines, “[i]n order to provide proper incentives for efficient management of an airport, the aid amount is, in principle, to be established ex ante as a fixed sum covering the expected operating funding gap (determined on the basis of an ex ante business plan) during a transitional period of 10 years. For these reasons no ex post increase of the aid amount should, in principle, be considered compatible with the internal market. The Member State may pay the ex-ante fixed amount as an up-front lump sum or in instalments, for instance on an annual basis”.3044 As a matter of fact, that important requirement relates to three compatibility criteria: appropriateness of the aid, presence of an incentive effect and proportionality.

3.1505

It first concerns the appropriateness of the aid, which should take the form of a fixed sum set ex ante instead of a more distortive measure consisting in compensating any observed operating deficit during the transitional phase. A measure whereby the amount of public support is adjusted according to ex post parameters so that the operating deficit is covered under any circumstance tends to relieve the beneficiary from normal commercial risks and removes efficiency incentives, resulting in undue distortions vis-à-vis unsubsidised airports.3045 The benefits of a fixed amount set ex ante over an ex post loss compensation system was verified for instance in the Groningen Airport case, where the Dutch authorities had opted as early as in 2001 for a lump sum covering expected oper3043 See section 3.6.1 and 2014 Guidelines, para. 120. 3044 2014 Guidelines, para. 121. 3045 A similar requirement exists for investment aid (see section 3.6.1).

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ating losses. That approach provided the beneficiary with the right incentives, translating into a significant traffic growth and setting the airport on the track towards full operating costs coverage in the medium-term.3046 Second, that requirement relates to the presence of an incentive effect. It refers to the notion of operating funding gap, defined as an airport’s operating losses discounted to their current value over the period during which they are measured or forecasted.3047 A positive operating funding gap expected over a ten-year period is indicative that without operating aid, the airport’s activity might be significantly downsized or even discontinued. Just such a test is set out in the 2014 Guidelines to verify whether operating aid has an incentive effect3048 and is thus necessary to reach the desired outcome in terms of mobility, accessibility, de-congestion of hubs and regional development. That logic was applied to the Groningen Airport case, where the incentive effect was established on the basis of the airport’s forecasted operating losses.3049

3.1506

Third, that requirement forms an integral part of the proportionality test to be conducted by the Commission. In economic terms, the forecasted operating funding gap over a given period corresponds to the minimum level of aid necessary to make the activity viable and thereby, to induce the beneficiary to keep the airport up and running without reducing its activity.3050 Therefore, to be proportionate, the aid should not exceed that level. Like the notion of capital cost funding gap used in the context of investment aid, the operating funding gap is expressed in net present value terms and the discount rate should correspond to the cost of capital.3051

3.1507

However, according to the guidelines, to be proportionate, the aid amount should also remain equal to or lower than a second cap, defined on the basis of the “initial operating funding gap”. Unlike the first ceiling, calculated on the basis of future estimated costs and revenues, the second ceiling is based on an observed funding gap. The initial operating funding gap is defined as the airport’s average operating losses recorded during the five years preceding the beginning

3.1508

3046 See Commission Decision of 9.4.2014 in case SA.24258, Netherlands - operating aid in favour of Groningen Airport Eelde NV, OJ C 172, 6.6.2014, p. 1 (“the Groningen Decision”), paras 20-24 and 57. The Groningen Airport case concerned past operating aid. However, the assessment conducted by the Commission in that case was in essence quite similar to that required for future operating aid under the 2014 Guidelines. 3047 2014 Guidelines, para. 25(23). 3048 2014 Guidelines, para. 124. 3049 Groningen Decision, para. 60. 3050 See Groningen Decision, paras 63-67 and 2014 Guidelines, para. 125. 3051 See section 3.6.1.

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of the transitional period, in other words over the 2009-2013 period.3052 The rules pertaining to that second ceiling are as follows: –

For airports with traffic between 700 000 and 3 million passengers per annum, the aid received during the 10-year transitional period may not exceed 50 per cent of the initial operating funding gap, calculated on an annual basis, multiplied by the number of years.3053

–

For airports with traffic lower than 700 000 passengers per annum, the aid, which may be received under the 2014 Guidelines only over the 2014-2019 period, may not exceed 80 per cent of the initial operating funding gap, calculated on an annual basis, multiplied by the number of years.3054 However, following its re-assessment of the situation of those smaller airports,3055 the Commission may put in place a new framework allowing further operating aid to them.

3.1509

That structure with two cumulative caps to secure the proportionality of the aid is similar to the one prevailing for investment aid and may be justified, at least partially by similar considerations, in particular the uncertainty surrounding the estimation of future operating costs and revenues. Moreover an aid amount capped by a fraction of the initial operating funding gap is liable to induce the beneficiary to make significant efforts to reduce its future operating losses compared to the period 2009-2013 period, notably by raising airport charges, finding new clients and new sources of revenues and stemming operating costs.3056

3.1510

In the 2014 Guidelines, the Commission envisaged the situation where, in exceptional circumstances, where the level of uncertainty is particularly high, the first ceiling is set aside and the aid amount is subject only to the second one, based on the initial operating funding gap.3057

3.1511

In the context of the proportionality test, the 2014 Guidelines provide that the business plan of the recipient airport must pave the way towards full operating cost coverage at the end of the transitional period.3058

3052 3053 3054 3055 3056 3057 3058

2014 Guidelines, para. 122. 2014 Guidelines, para. 128. 2014 Guidelines, para. 128. 2014 Guidelines, para. 134. See section 3.6.1. 2014 Guidelines, para. 122. 2014 Guidelines, paras 127 and 129.

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Those requirements pertaining to the appropriateness of the aid, the presence of an incentive effect and the proportionality of the aid amount apply in full to “future operating aid”. By contrast, a significant part of them is waived for past operating aid. In particular, neither of the two ceilings, whether based on the expected operating funding gap or the initial operating funding gap, formally applies. Instead, past operating aid is subject to more general tests on incentive effect and proportionality: it should be established that in the absence of the aid, “the level of economic activity of the airport concerned would be significantly reduced” and that “the aid must be limited to the minimum necessary for the aided activity to take place”. Furthermore, the aid does not have to be designed as a fixed sum defined ex ante and no business plan paving the way towards full operating cost coverage is required.3059

3.1512

That more lenient approach to past operating aid with respect to appropriateness, incentive effect and proportionality has led the Commission to clear a number of past operating aid measures which would not meet the standard set forth for future aid. For instance, in certain cases, the Commission approved a series of ex post compensations of operating losses outside the framework of a business plan geared towards achieving operating cost coverage.3060 It is quite logical that the applicable requirements are more stringent for aid to be assessed after precise and workable compatibility rules have been defined and a clear phase out process has been established, than for aid granted at a time where no such framework was in place.

3.1513

3.6.2.4 Avoidance of undue negative effects on competition and trade As in the case of investment aid, the analysis of the magnitude of the distortive effects of an operating aid measure has to be performed to determine whether those effects outweigh the contribution of the aid to the furtherance of objectives of common interest. The analysis of the distortive effects of the aid plays an important role in the Commission’s assessment. For instance, in the Charleroi Airport case, the aid was declared partially incompatible notably in view of its detrimental effect on neighbouring airport Brussels-National.3061

3.1514

3059 2014 Guidelines, paras 137 and 120-126. 3060 See for instance Commission Decision of 11.6.2014 in case SA.26818 on State aid granted by Italy to the Stretto airport management company SO.G.AS (Case SA.26818), OJ L 367, 23.12.2014, p. 99, recitals 1416 and 122. 3061 See Commission’s Memo of 1 October 2014 State Aid: Commission Decisions on public financing of airports and airlines in Germany, Belgium, Italy and Sweden – further details: http://europa.eu/rapid/pressrelease_MEMO-14-544_en.htm.

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3.1515

The 2014 Guidelines leave significant leeway to the Commission for that analysis, specifying in general terms that in its compatibility assessment, the Commission will take account of the distortions of competition and the effects on trade.3062

3.1516

In its analysis, the Commission must nevertheless pay particular attention to potential situations of duplication, which is a further similarity with the framework applicable to investment aid. It is stipulated in particular that when the recipient airport is located in the same catchment area as another airport with spare capacity, the business plan must identify the likely effects of the aid on the traffic of that neighbouring airport.3063

3.1517

Furthermore, when there is another airport in the catchment area of the beneficiary’s airport, operating aid to the latter may be compatible only when the Member State demonstrates that “all airports in the same catchment area will be able to achieve full operating cost coverage at the end of the transitional period”.3064 That test, which is only applicable to future operating aid, aims at ensuring that situations of duplication are not artificially maintained through operating aid throughout the transitional phase if some of the airports concerned have no prospect of becoming viable without aid.

3.1518

In addition, as in the case of investment aid, the infrastructure benefitting from operating aid must be open to all potential users and must not be dedicated to one specific use and in the case of capacity limitation, the allocation should be done on the basis of pertinent, objective, transparent and non-discriminatory criteria. That test only applies to future operating aid.3065

3.6.2.5 Notification of schemes and individual measures 3.1519

As for investment aid, Member States are encouraged to notify operating aid schemes rather than individual measures, to the extent possible. However, potentially problematic cases, belonging to the following categories, must be notified individually:3066

3062 3063 3064 3065 3066

2014 Guidelines, para. 131. 2014 Guidelines, para. 131. 2014 Guidelines, para. 132. See section 3.6.1 and 2014 Guidelines, paras 133 and 137. See section 3.6.1 and 2014 Guidelines, paras 123 and 135-136.

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–

operating aid financing a mixed passenger/freight airport handling more than 200 000 tonnes of freight per annum,

–

operating aid to an airport if other airports are located within 100 kilometres distance or 60 minutes travelling time by car, bus, train or highspeed train.3067

3.7 Aid to airlines 3.7.1 Link between aid to airport and aid to airlines The “incremental profitability test” described in section 3.4.3 above is designed to break the link between aid to the airport and aid to airlines using the airport.3068 The Commission considers that the fact that an airport received aid does not entail that an airline using that airport receives an advantage under the following conditions: (i) the airline incrementally contributes to the profitability of the airport, (ii) the infrastructure is open to all airlines and (iii) the aid to the airport is compatible and/or investment aid.3069 In addition, (iv) the airportairline arrangement under assessment should be part of an overall strategy of the airport expected to lead to profitability at least in the long term.3070

3.1520

While the 2014 Guidelines state that, under the conditions mentioned above, user airlines do not receive an advantage, and cannot therefore be considered aid beneficiaries, the Commission also specified that any aid those airlines would have indirectly received would (i) be compatible with the internal market if the aid to the airport is itself compatible or (ii) not give rise to recovery from specific airlines if the airport has received incompatible investment aid.3071 It might thus be construed that airlines using airports that have received aid may under certain conditions nevertheless be aid recipients despite their arrangements with the airport complying with the four conditions specified above.

3.1521

3067 Those cases deserve particular scrutiny because they might involve situations of duplication (see section 3.6.1). 3068 The Commission also specifies that that approach would apply in the same way to other users of the airport, see footnote 64 to point 65 of the 2014 Guidelines. However, the Guidelines do not apply to ground handling companies and undertakings active in non-aeronautical activities (see footnote 16 to point 21). 3069 2014 Guidelines, points 65 and 66. 3070 See section 3.4.3 above and 2014 Guidelines, point 66. 3071 While that case may remain hypothetical, the Commission has thus not ruled out that airlines using an airport which has received incompatible operating aid could be considered recipients of incompatible aid and be exposed to recovery.

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3.1522

The first decisions adopted under the 2014 Guidelines are however consistent with the view that airlines, under the four conditions mentioned above, are not aid beneficiaries when using an airport which is receiving State aid, since they are not identified as such in the operative part of those decisions.3072

3.1523

Overall, the Commission has placed significant emphasis on the incremental profitability test, which – in the airport and air transport industries – leads to disentangling aid to infrastructure managers and aid to infrastructure users.

3.7.2 Start-up aid to airlines 3.1524

Overall, the Commission allows State aid to airlines only in a limited set of well-defined situations. That policy reflects the very competitive environment in which airlines operate, following the completion of the internal market for intra-Union air transport. In that context, any State aid granted to an airline is liable to bring about sizable distortive effects which can be accepted only if the aid delivers a significant contribution to the furtherance of objectives of common Union interest.

3.1525

There are essentially only three types of State aid that airlines may receive. Two of them have been mentioned in previous sections: financial compensation on routes where Member States have put in place public service obligations in accordance with the Air Services Regulation3073 and rescue or restructuring aid.3074 The third main category is start-up aid contributing to the launch of a new route. That category is specific to the air transport sector and is justified by the benefits that air transport can bring to a region in terms of accessibility, mobility and regional development.

3.1526

The Commission considers that in principle, decisions made by airlines as to the opening or shutting down of routes should not be influenced by targeted public interventions, but should be based on sound business considerations. It nonetheless acknowledges that “without appropriate incentives, airlines are not always prepared to run the risk of opening new routes from unknown and untested small airports”. That is the rationale for allowing start-up aid to airlines, which “provides them with the necessary incentive to create new routes from regional 3072 See Commission Decision of 23.7.2014 in case SA.33961 – Aéroport de Nîmes, which was based on Article 7(2) of Regulation 659/1999 as regards measures granted to Ryanair that satisfied the incremental profitability test (see DG COMP website page on SA.33961, available at: http://ec.europa.eu/competition/ elojade/isef/case_details.cfm?proc_code=3_SA_33961). 3073 See section 3.5.1. 3074 See section 3.5.3.

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airports, increases the mobility of the citizens of the Union by establishing access points for intra-Union flights and stimulates regional development”.3075 In the 2005 Guidelines, the Commission had set forth a detailed set of cumulative conditions under which start-up aid may be declared compatible.3076 However, those criteria turned out to be exceedingly cumbersome and difficult to apply. As a result, between 2005 and 2013 only 18 start-up aid measures were notified, concerning eight Member States. In the run-up to the adoption of the new guidelines, many stakeholders expressed concerns as to the complexity of the existing rules.3077 The 2014 Guidelines have simplified the rules and in a number of respects made them stricter. In particular, under the new regime, start-up is only permissible for the launch of a new route, whereas previously, it could be authorised for an increase in the number of frequencies on an existing route.3078 As for investment and operating aid to airports, the compatibility criteria laid down in the 2014 Guidelines for start-up aid follow the common principles set forth in the Communication on State Aid Modernisation for all types of aid in all sectors: contribution to the furtherance of genuine objectives of common interest, appropriateness of the aid as a policy instrument, presence of an incentive effect, proportionality, avoidance of undue negative effects on competition and trade and transparency.3079

3.1527

3.7.2.1 Contribution to a well-defined objective of common interest Start-up aid may be declared compatible only if it increases the mobility of Union citizens and the connectivity of the regions or facilitates the development of remote regions.3080 The Commission is of view that such is not the case when the new route simply duplicates an existing high-speed train or air service linking the same city pair under comparable conditions, in particular in terms of length of journey. That encompasses situations where the new route intended to be subsidised is from an airport located in the catchment area of another airport from which there is an existing service to the same destination.3081 In such situations, the aid does not improve the connectivity of the region and is unlikely to have a net positive impact on its development since it may only result

3.1528

3075 2014 Guidelines, para. 15. 3076 2005 Guidelines, para. 79. 3077 See for instance Commission Staff Working Document Impact assessment accompanying the document Communication from the Commission Guidelines on State aid to airports and airlines (http://ec.europa. eu/smart-regulation/impact/ia_carried_out/docs/ia_2014/swd_2014_0042_en.pdf ), p. 20 and 29. 3078 See 2014 Guidelines, paragraph 138 and 2005 Guidelines, para. 79(c). 3079 See 2014 Guidelines, paras 79 and 138. 3080 See 2014 Guidelines, para. 139. See also the definition of remote regions in section 3.6.1. 3081 See 2014 Guidelines, para. 140.

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in diverting traffic away from existing services which themselves contribute to the development of the region.

3.1529

Whereas regional development is a common objective justifying both investment and operating aid to airports irrespective of their location, start-up aid may be based on that objective only for routes from airports situated in remote regions.3082 As described below, on several aspects, the compatibility criteria foreseen in the 2014 Guidelines are less strict for routes from remote regions than for other routes, reflecting the particularly critical role often played by air links in the accessibility and economy of those regions. In the Canary Islands Decision, where it assessed start-up aid for the first time under the 2014 Guidelines, the Commission acknowledged the importance of the tourism sector for the Canary Islands. It considered that supporting that sector through the creation of new air links was one of the justifications for start-up aid.3083

3.7.2.2 Need for State intervention 3.1530

Start-up aid is in principle considered justified for routes from airports with less than 3 million passengers per annum or airports located in remote regions regardless of their traffic. An exception is however possible for airports outside remote regions with annual traffic between 3 and 5 million passengers “ in duly substantiated exceptional cases”.3084

3.1531

When the route is from an airport outside a remote region, the other end of the route must be located in the Common European Aviation Area, which comprises the territory of the Union, Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Iceland, Montenegro, Norway, Serbia and Kosovo.3085 By contrast, for routes from remote regions, there is no limitation as to the location of the other end of the route, which can thus be a non-European destination.

3082 See 2014 Guidelines, paras 84, 113 and 139. 3083 See Commission decision of 9.4.2014 in case SA.37121, Spain - start-up aid to airlines operating from the Canary Islands, OJ C 348, 3.10.2014, p. 9 (“Canary Islands Decision”), para. 45. 3084 See 2014 Guidelines, paras 142-144. 3085 See 2014 Guidelines, para. 142 and Decision 2006/682/EC of the Council and of the Representatives of the Member States meeting with the Council on the signature and provisional application of the Multilateral Agreement between the European Community and its Member States, the Republic of Albania, Bosnia and Herzegovina, the Republic of Bulgaria, the Republic of Croatia, the former Yugoslav Republic of Macedonia, the Republic of Iceland, the Republic of Montenegro, the Kingdom of Norway, Romania, the Republic of Serbia and the United Nations Interim Administration Mission in Kosovo on the Establishment of a European Common Aviation Area (ECAA) (OJ L 285, 16.10.2006, p.1).

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3.7.2.3 Appropriateness of State aid as policy instrument One of the core principles governing start-up aid is that it must not serve to continuously subsidise a loss-making route. Instead, it must be granted as an incentive for launching a route which has reasonable prospects of becoming profitable without public support after an initial phase of operation. In order to secure compliance with that key principle, the 2014 Guidelines require an ex ante business plan prepared by the airline concerned, showing that the route intended to be supported is expected to become profitable without public funding at least after three years. Alternatively, the airline must provide an irrevocable commitment to operate the route for a period at least equal to the period during which it is due to receive start-up aid.3086 For instance, if an airline offers such a commitment in respect of a route for which it would receive start-up aid for three years, it will have to operate the route for at least six years, including three without aid.

3.1532

3.7.2.4 Presence of an incentive effect Start-up aid must have an incentive effect in that without the aid, the level of activity of the airline at the airport concerned would be unlikely to be expanded, for example because the route in question would not be launched.3087 That can be established when the aid is granted for routes which have not been recently operated (for example over the 12 months preceding the planned start date for the operation of the new services), and for which prior to the publication of the call for proposals organised in view of granting the aid, no airline has announced plans to launch new services on that route within a certain period (for example 12 months) of the publication.3088

3.1533

In addition, the new services must start only after the application for aid has been submitted to the granting authority, failing which the incentive effect is deemed lacking.3089

3.1534

3.7.2.5 Proportionality Start-up aid must be limited to 50 per cent of airport charges incurred in operating the route concerned for a maximum period of three years.3090 Under the 2014 Guidelines, the maximum amounts of start-up aid can thus be determined 3086 3087 3088 3089 3090

3.1535

See 2014 Guidelines, para. 147. See 2014 Guidelines, para. 148. See Canary Islands Decision, paras 28, 51 and 52. See 2014 Guidelines, para. 149. See 2014 Guidelines, para. 150.

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very easily, in contrast with the previous regime, which resorted to the more complex notion of “additional start-up costs”.3091

3.7.2.6 Avoidance of undue negative effects on competition and trade 3.1536

The Commission considers that start-up aid for launching a new route which merely duplicates an existing high-speed train or air service under comparable conditions, including an air service from an airport located in the catchment area of the airport from which the new route is due to be launched, is liable to cause undue distortions of competition.3092 In such a situation, the aid may have very detrimental effects on competing transport services. It is worth noting that intermodal competition is explicitly taken into consideration in that context, through the reference to high-speed train.

3.1537

In any case, as already pointed out, such situations preclude the aid from contributing to the furtherance of genuine objectives of common interest for the Union, and for that reason alone lead in principle to the incompatibility of the aid.

3.1538

In addition, in order to minimise the distortions of competition caused by startup aid, that aid may not be combined with any other type of State aid granted for the operation of the route3093 and before granting it, the public authorities are required to make their plans public in good time and with adequate publicity to enable all interested airlines to offer their services.3094 Those requirements result in principle in the aid being awarded to the airline requesting the least public funding to launch the route in question, or at least offering the best value for money on the route. That outcome is however subject to the selection process being fully objective and solely based on the amounts requested and the proposed operations on the route concerned. In particular, the selection of a proposal from an airline should not be linked to the continued operation of any other route the airline in question may already be operating to the region.3095

3.7.2.7 Notification of schemes and individual measures 3.1539

As in the case of aid to airports, Member States are encouraged to notify national schemes for start-up aid to airlines rather than measures for individual 3091 3092 3093 3094 3095

See 2005 Guidelines, para. 79(e). See 2014 Guidelines, para. 151. See 2014 Guidelines, para. 153. See 2014 Guidelines, para. 152. See Canary Islands Decision, para. 61.

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airports. However, due to higher risks of distortions of competition, start-up aid for routes from airports outside remote regions and with annual traffic exceeding 3 million passengers per annum must always be notified individually.3096

3.8 Aid of a social character In the 2014 Guidelines, the Commission has codified its long-standing decisional practice concerning aid granted to airlines under Article 107(2)(a) of the Treaty. That provision allows “aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned”. It has been traditionally applied to a significant extent in the air transport sector, as well as in other modes of transport, often taking the form of grants to individuals to refund part of the price of their plane tickets on particular routes.

3.1540

As implied by the wording of Article 107(2)(a), such schemes may involve State aid to the airlines concerned. Indeed, they are likely to induce additional demand for the services concerned because those are more attractive to passengers than they would be absent the scheme.3097 In other words, they are tantamount to discounts offered to attract more passengers, financed by the public authorities instead of the airlines.

3.1541

The 2014 Guidelines foresee three compatibility criteria. First, the aid must effectively be for the benefit of final consumers. Second, it must in principle only cover certain categories of passengers travelling on a route, for example people on low incomes, students, children or elderly people. However, that limitation does not apply to remote regions, where social aid may benefit the whole population. The third condition, enshrined in Article 107(2)(a) itself, relates to the absence of discrimination as to the origin of the services. It implies that the scheme must apply irrespective of the airline offering the service.

3.1542

As indicated, social aid in the air transport is partially covered by the GBER when it concerns remote regions.3098 Member States willing to grant that type of aid beyond the limits of the GBER are invited to notify national schemes instead of individual measures.3099

3.1543

3096 See 2014 Guidelines, para.155. 3097 See Commission Decision of 5.1.2011 in case N 426/2010, France - Régime d’aides à caractère social au bénéfice de certaines catégories de personnes ayant leur résidence habituelle dans la Région de La Réunion , OJ C 71, 5.3.2011, p. 5, para. 32. 3098 See section 3.5.2. 3099 See 2014 Guidelines, para. 157.

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4.

Conclusion

3.1544

The 2014 Guidelines provide Member States and the aviation industry with comprehensive and new guidance as regards the interpretation of the notion of State aid in the air transport sector. That guidance is expected to play a particularly important role in two areas, where there was so far no common and clear understanding as to the conditions under which certain measures may qualify as State aid. The first area relates to arrangements between airports and airlines, a number of which have been subject to complaints lodged with the Commission in recent years. The second area concerns public funding to airports to compensate them for the costs of public policy remit activities. In those two areas, the new guidelines are expected to bring much needed legal clarity to the sector and public authorities. In addition, the Commission carried out a profound revision of the compatibility criteria applied to aid to airports and airlines, bringing them into line with the cross-cutting principles of the State Aid Modernisation Programme. The changes are particularly extensive as regards aid to airports. In that area, the expected outcome of the reform is to limit the granting of State aid to situations where it is necessary to support infrastructure that fulfils a genuine transport need, thereby contributing to mobility, accessibility and regional development. To reach that objective, the 2014 Guidelines have introduced additional safeguards aimed at avoiding aid resulting in unnecessary airport capacity and aid to airports merely duplicating under-utilized infrastructure. New requirements have also been added in order to ensure that State aid to airports and airlines is not granted when it it is not necessary to achieve the desired outcome, and is always limited to the minimum necessary. Airports have thereby been aligned with other sectors of the Union’s economy with respect to the core principles underpinning the Commission s modernized State aid control policy.

3.1545

In many respects, the new compatibility criteria laid down in the 2014 Guidelines are stricter than those in force under the previous regime. However, such is not the case for operating aid to airports. In that field, the Commission has walked away from the general ban prevailing so far, which proved unrealistic. Instead, it established a phasing out process over a relatively long period, which appeared to be more in line with market reality. In doing so, the Commission offered to regional airports a demanding but clear, predictable and stable legal framework, with strong built-in incentives to achieve efficiency gains, diversify their business models and customer bases, charge their services in a businessoriented fashion and eventually become viable without continuous public funding. The reviews of the guidelines, that the Commission committed to carrying out by 2018 for airports with less than 700 000 passengers per annum and by 1014

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2020 for all other aspects,3100 should tell whether those rules and their enforcement will have been effective in making the Union’s regional airports efficient, competitive, dimensioned according to demand, and up to the transport needs of Union citizens and businesses.

3100 2014 Guidelines, paras 134 and 175.

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PART 3 – Compatibility rules Chapter 27 – Ports and maritime transport Marta Balossino and Justyna Majcher-Williams

Chapter 27 Ports and maritime transport

The application of State aid rules to the port and maritime transport sectors presents two particularities. First, unlike inland (rail, road and inland waterways) and combined transport, which are governed by a lex specialis through the application of Articles 93 and 96 of the Treaty, sea ports and maritime transport are only covered by general state aid guidelines3101 and the general rules governed by Article 107 of the Treaty. Second, the application of these rules has evolved and has been driven by the level of liberalisation reached by the sector. This chapter provides a detailed overview of the general State aid framework applicable to the port and maritime transport sector. It specifies the common features with the general horizontal rules, while underlining the specificities, amongst others by explaining the treatment of public investments to port infrastructures and tax relief to shipping companies. The application of State aid rules in the port and maritime transport sector provides constant debates and developments. The complexity of the sector together with a changing environment pleads for greater legal clarity and the necessity to provide more transparency and predictability on the application of State aid rules.

1.

3.1546

Ports

1.1 Introduction The Commission control of public investments to port infrastructures has become increasingly important in the last few years. Despite a few Commission

3.1547

3101 Article 100(2) of the Treaty provides that the application of the common transport policy as set in title VI to air and maritime sectors is subject to a decision by the European Parliament and the Council, acting in accordance with the ordinary legislative procedure.

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Decisions on that subject in the early 2000s3102, it was then a common understanding that investments in basic port infrastructures were considered to be in the public remit and therefore outside the scope of State aid rules. Moreover, the fact that many Member States qualified their port management bodies as noneconomic entities performing activities in the public interest was considered as an indicator that they could not qualify as undertakings under Article 107(1) of the Treaty.

3.1548

In that context, the 2011 Leipzig Halle judgment3103 triggered a growing number of notifications of investment projects from Member States and the development of a rather new decisional practice of the Commission in the port sector. According to recent Commission Decisions, the compatibility of public support granted to ports and intermodal platforms is assessed under different legal bases: while Article 107(3)(c) of the Treaty has been used for investment aid to transport infrastructures (e.g. seaports), investment aid to intermodal infrastructures (e.g. inland ports, intermodal platforms or intermodal infrastructures in seaports) is normally assessed under Article 93 of the Treaty.

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In general, the port sector appears to be extremely challenging due to the great diversity of port management models in the Union and the often mixed functions that ports perform.

1.2 The State aid policy in the port sector 1.2.1 Background legislation and early Commission Decisions 3.1550

In the past the Commission had not considered public funding of port infrastructure as aid, when such funding was open to all users.3104 However, the Commission already examined public financial support for assets used by undertakings in carrying out commercial activities in ports. In particular, financial support was considered as State aid, when benefitting particular operators as distinct from others. 3102 Commission Decision of 20.12.2001 on the Freight Facilities Grant (FFG) (Case N 649/2001), summary notice in OJ C 45, 19.02.2002, p. 2 and Commission Decision of 13.02.2002 on the Stimuleringsregeling verwerking baggerspecie - Rules on incentives to encourage the processing of dredging silt, (Case N 812/2001), summary notice in OJ C 248, 15.10.2002, p. 23. 3103 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and others v Commission ECLI:EU:T:2011:117, confirmed by the Court of Justice in Case C-288/11 P Mitteldeutsche Flughafen and Flughafen LeipzigHalle v Commission (“Leipzig-Halle”) ECLI:EU:C:2012:821. 3104 See the Commission Green Paper on sea ports and maritime infrastructure, COM(1997)678 fin of 10 December 1997, not published in the Official Journal, points 12 and 15.

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In its 2001 Communication on Quality Service in Sea Ports3105, the Commission elaborated on that concept, by dividing port infrastructures into ‘public (general)’ infrastructure (e.g. dikes, breakwaters, locks and other high water protection measures; navigable channels, including dredging and ice-breaking navigation aids, lights, buoys, beacons; floating pontoon ramps in tidal areas) and ‘user-specific’ infrastructure (e.g. yards, jetties, pipes and cables for utilities on the terminal sites of a port). While investments in the first category were normally considered by the Commission as general measures,3106 being de jure and de facto open to all users on a non-discriminatory basis, developments of the latter could be considered State aid if they were done with a particular end-user in mind.3107 Since then, the Commission adopted very few decisions on investment aid to port infrastructures. In particular, the Commission has normally concluded that the financing of general port infrastructures cannot be considered to be an economic activity and therefore pertains to the public remit.3108 The Commission followed that approach with very few exceptions,3109 notably in the wake of Aéroport de Paris.3110

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3105 Communication from the Commission to the European Parliament and the Council “Reinforcing Quality Service in Sea Ports: A Key for European Transport”, COM/2001/0035 final. 3106 Public (general) infrastructures included maritime access and maintenance, public land transport facilities within the port area, short connecting links to the national transport networks or TENs, and infrastructure for utilities up to the terminal site. The reason to consider such investments as not covered by State aid rules was that they represented expenditures incurred by the State in the framework of its responsibilities for planning and developing a transport system in the interests of the general public. Depending on the characteristics of the specific case, the investment could nevertheless be aid in case the infrastructure benefitted a specific undertaking despite its prima facie appearance as public infrastructure. 3107 Communication from the Commission to the European Parliament and the Council “Reinforcing Quality Service in Sea Ports: A Key for European Transport”, COM/2001/0035 final, para. 3.3. 3108 In Commission Decision of 20.10.2004 on the Aide financière pour des travaux d’ infrastructure dans les ports fl amands (Case N 520/2003), summary notice in OJ C 176, 16.07.2005, p. 4, the Commission seems to conclude that maritime access to ports is not economic activity if performed directly by the State or Region, whereas for the period in which the port authority (Régie portuaire d’Anvers) was responsible for it, the Commission concludes that public support would be no aid in the absence of an advantage to the port authority, thereby implicitly concluding that it is an economic activity although in the general public interest (see recitals 36 to 41 and 43 to 45). See also Commission Decision of 21.12.2005 on the Great Yarmouth Outer Harbour (Case N 503/2005), summary notice in OJ C 83, 06.04.2006, p. 4; Commission Decision of 24.04.2007 on the Project Mainportontwikkeling Rotterdam (Case N 60/2006), summary notice in OJ C 196, 24.08.2007, p. 1. 3109 In particular, in Commission Decision of 20.12.2001on the Freight Facilities Grant (FFG) (Case N 649/2001), summary notice in OJ C 45, 19.02.2002, p. 2, the Commission considered all the investments to be an economic activity, without distinguishing between general and user-specific infrastructure. This approach could be explained considering the different ownership model of ports in the UK, which are mostly private. Similarly, with the Commission Decision of 13.02.2002 on the Stimuleringsregeling verwerking baggerspecie - Rules on incentives to encourage the processing of dredging silt, (Case N 812/2001), summary notice in OJ C 248, 15.10.2002, p. 23, the Commission took the view that the contributions for dredging activities paid by the Netherlands to the port authorities (private or public managers of transport infrastructures) constituted State aid for the purposes of Article 107(1). 3110 Case C-82/01 P Aéroports de Paris v Commission ECLI:EU:C:2002:617.

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A further step in the development of the practice of the Commission occurred in 2008, with the Commission Decision on the “Port of Jade Waser”3111 where the Commission acknowledged that the question whether entities such as port authorities are engaged in an economic activity is complex and may give rise to diverging interpretations. Therefore, it took the view that there was no need to conclude on the State aid nature of the measure in question given that, even if it contained State aid elements, it was in any case compatible with the internal market.3112 With the Commission Decisions on the “Port of Ventspils”, the Commission again quoted Aéroport de Paris and concluded that a port authority is an undertaking insofar as it “pursues a commercial policy in accordance with its own economic criteria” and it participates on the market by “making available the port land and certain infrastructure to the port service providers against a fee […] insofar as the abovementioned fees have been freely fixed by the port authority, without regulatory intervention by the State”.3113

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As already explained,3114 Leipzig Halle3115 contributed to better shape the practice of the Commission in the field of State aid to infrastructures in general.3116 Following that judgment, the Commission concluded in its most recent decisions in the port sector, that “it is the future use of the infrastructure, i.e. its economic exploitation or not, which determines whether the funding of the construction of such infrastructure falls within the scope of EU state aid rules or not”.3117 3111 See Commission Decision of 10.12.2008 on the Public financing of the Jade Weser Port Project (Case N 110/2008), summary notice in OJ C 137, 17.06.2009, p. 1. 3112 Ibid., recitals 52-70. 3113 Invitation to submit comments pursuant to Article 108(2) TFEU in case C 39/2009 (ex N 385/2009) on Public financing of port infrastructure in Ventspils Port, OJ C 62, 13.03.2010, p. 4, recitals 56 and 57. 3114 See Part 2, Chapter 9, paragraph 1.5. 3115 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and others v Commission ECLI:EU:T:2011:117, confirmed by the Court of Justice in Case C-288/11 P Mitteldeutsche Flughafen and Flughafen LeipzigHalle v Commission (“Leipzig-Halle”) ECLI:EU:C:2012:821. 3116 Already in 2011 many Commission decisions concluded that the port authority was an undertaking (e.g. Commission Decision of 15.06.2011 on the Contribution for Port of Rotterdam in order to develop the project Alblasserdam Container Transferium (container transfer facility) (Case SA.32224), summary notice in OJ C 215 21.07.2011, p. 7). In the Commission Decision of 15.06.2011 on the Notification for public financing within the project development of infrastructure on Krievu Sala for relocation of port activities out of the city centre (Case N 44/2010), summary notice in OJ C 215, 21.07.2011, p. 21, the port authority was considered an undertaking “as far as the economic activities are concerned”. 3117 See Commission Decision of 22.02.2012 on the Construction of Infrastructure for the Passenger and Cargo Ferries Terminal in Klaipéda (Case N 137/2010), summary notice in OJ C 121, 26.04.2012, p. 1; Commission Decision of 19.12.2012 on the Port of Augusta (Case SA.34940), summary notice in OJ C 77, 15.03.2013, p. 1, and Commission Decision of 05.06.2013 on the Investment aid to the Port Authority of

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The consistent application of that approach in the recent years has therefore led to the qualification of port management bodies and port authorities as undertakings for the purposes of State aid rules, as long as the infrastructure managed is or will be economically exploited. However, two issues appear to be particularly problematic in the port sector, notably the notion of economic activity and the potential downstream effects of the investment aid on other levels of users of the port infrastructure.

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The notion of economic activity in the port sector The Commission performs an ad hoc assessment on the notion of economic activity on a case-by-case basis in order to determine whether the public support to the port infrastructure is aid or not. The Commission has consistently concluded that investments relating to the port infrastructure necessary to perform maritime traffic control,3118 police,3119 customs,3120 and anti-pollution surveillance3121 do not qualify as State aid since such activities are within the exercise of State authority. However, many Member States and stakeholders frequently demand more legal certainty on the qualification as aid of investments in basic infrastructures which are not directly economically exploited but are nevertheless essential for the economic activity engaged in the port (e.g. infrastructures for the maritime access to the port), for which considerable amounts of public funding are spent every year in Europe. In this respect, the Commission has concluded that public funding of general infrastructure that is not meant to be commercially exploited, such as public roads, bridges or canals, is in principle excluded from the application of the State aid rules, provided that it does not constitute dedicated infrastructure and is made available for public use without consideration on a non-discriminatory basis.3122

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Santa Cruz de Tenerife (Case SA.36223), summary notice in OJ C 306, 22.10.2013, p. 3. 3118 Commission Decision of 25.06.2014 on the Upgrading of the Port of Patras (Case SA.38048), summary notice in OJ C 280, 22.08.2014, p. 1, recital 42. 3119 Commission Decision of 30.04.2015 on the Cruise Ship Terminal in Wismar (Case SA.39637), summary notice in OJ C 203, 19.06.2015, p. 1, recitals 32 and 33. 3120 Commission Decision of 19.06.2013 on the Aid for the upgrading of Katakolo port (Case SA.35738), summary notice in OJ C 204, 18.07.2013, p. 2, recitals 17-19. 3121 Case C-343/95 Cali & Figli v Servizi ecologici porto di Genova ECLI:EU:C:1997:160, paras 22 and 23. 3122 For example, in the recent Commission Decision of 30.04.2015 on the Cruise Ship Terminal in Wismar (Case SA.39637), summary notice in OJ C 203, 19.06.2015, p. 1, recital 34, the Commission has clarified that the activity of building a road dedicated to the economic activity of operating a cruise terminal cannot fall under the State’s powers as a public authority. Similarly, the Commission has concluded that rail connections and electric power supply lines located directly within the area of the port and exclusively used in the context of the port’s activity of economically exploiting the infrastructure, also constitute dedicated infrastructure (see Commission Decision of 30.04.2015 on the Seaport extension in Wismar (Case SA.39608), summary notice in OJ C 203, 19.06.2015, p. 1, recital 31).

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In particular, Member States and stakeholders often claim that some expenses in the port sector are in the public remit of the public authorities. For example, in the Commission Decision “Port of Augusta” the Commission concluded that whether expenses are economic activities or activities that fall within the public remit would depend on whether the activities are an “intrinsic part of the project with a commercial end”.3123 Many other recent port decisions3124 also qualified the whole funding of the projects as State aid, without distinguishing funds dedicated for dredging and/or breakwaters.3125

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The approach of the Commission in “Port of Augusta” has been questioned in light of Leipzig Halle,3126 where the Court, despite confirming the findings of the General Court, noted that any consideration that the investment is “essential for”, “linked to”, or “precondition for” the economic activity is unsuitable for establishing the economic nature of a given activity.3127 However, it must be noted that the conclusions of the Commission as to the economic nature of a given activity are not solely based on such considerations. Instead, the Commission also verifies, in line with the findings of the Court,3128 whether the port management body is active in the market for port services and in competition with other ports in Europe, and whether it is engaged in an economic activ3123 Commission Decision of 19.12.2012 on the Port of Augusta (Case SA.34940), summary notice in OJ C 77, 15.03.2013, p. 1, recital 46. 3124 Commission Decision of 02.07.2013 on the Extension of Piraeus Port (Case SA.35418), summary notice in OJ C 256, 05.09.2013, p. 2, recital 26; Commission Decision of 18.09.2013 on the Port Authority of Bahía de Cádiz (Case SA.36953), summary notice in OJ C 335, 16.11.2013, p. 1; Commission Decision of 18.12.2013 on the Port of Capo D’Orlando (Case SA.36621), summary notice in OJ C 69, 07.03.2014, p. 1. 3125 On dredging, the Commission took different approaches in two recent cases. In the Commission Decision of 27.03.2014 on the Port of Salerno (Case SA.38302), summary notice in OJ C 156, 23.05.2014, p. 1, recital 35, the investments for dredging and the extension of the port entry have been considered as an economic activity since they were directly related to the development of the dock, which was commercially exploited by specific operators (see also Commission Decision of 19.06.2015 on the Port of Taranto (Case SA.39542), summary notice in OJ C 259, 07.08.2015, p. 1, recital 40), On the contrary, in the Commission Decision of 11.03.2014 on the Liverpool City Council Cruise Liner Terminal (Case SA.35720) summary notice in OJ C 120, 23.04.2014, p. 1, recitals 56-58, the Commission concluded that the dredging in question was to be regarded as “public works in the general interest”, since it was not solely related to the construction and operation of the terminal, but was funded by the authorities to improve access to the river, thus benefitting indistinctly all the operators located in the estuary and along a further inland waterway. 3126 That approach has been criticised by Wilson in Infrastructure Financing and State Aid Post Leipzig-Halle, EStAL 1/2014, p. 25. According to Wilson, the conclusion of the Commission in Augusta “goes beyond what has been established by the European courts”. 3127 In Case C-288/11 P Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission (“LeipzigHalle”) ECLI:EU:C:2012:821, para. 47 the Court of Justice established that those considerations are unsuitable “by reason of their general nature and because they might also apply to certain activities which fall within the exercise of State authority”. 3128 Case C-288/11 P Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission (“Leipzig-Halle”) ECLI:EU:C:2012:821, paras 47 and 40 to 42.

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ity by managing the infrastructure and demanding fees for its use. Such fees usually represent the main source of income for the purposes of financing the investment, which allows the port management body to increase its capacity and extend its business. As to whether some of the expenses covered by the capital contribution could be considered within the exercise of State authority, the Commission assesses under the general rules if they fall within the performance of a specific public duty.3129 As already mentioned, the Commission has consistently conceded that certain expenses/activities (e.g. relating to security, customs and police functions) pertain to the public remit. As regards investments for the access to the port, the Court of Justice has held in the past that the activity of ensuring the navigability of the State’s most important waterway may fall within the definition of service of general economic interest under Article 106(2) of the Treaty,3130 thereby qualifying such activity as economic. As a consequence, those activities and related investments may still be assessed under State aid rules for services of general economic interest (SGEI) provided that they fulfil the relevant conditions.3131 Downstream effects of investment aid on other levels of port users As explained in a 2011 study of the European Parliament,3132 four main port management models have emerged over the past twenty years: “public service ports” and “tool ports”, both with a predominantly public function, “landlord ports”, characterised by a mixed public-private orientation, and “private ports”.3133 In recent years, European ports have shifted from a public role to a more private role with the majority of ports adopting the “landlord port” model.3134 Under that model a port management body is either the public owner of the basic infrastructure or it exercises the ownership rights on behalf of the owner (the Member State or a Region), and manages the real estate within the port area. At the same time, private operators rent part of the port infrastruc-

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3129 See Part 2, Chapter 8, paragraph 4. 3130 Case 10/71 v Muller ECLI:EU:C:1971:85, para. 11; see also Case C-242/95 GT-Link v De Danske Statsbaner ECLI:EU:C:1997:376, para. 51. 3131 In Case C-242/95 GT-Link v De Danske Statsbaner ECLI:EU:C:1997:376, para. 52, the Court nevertheless explained that “it does not follow [...] that the operation of any commercial port constitutes the operation of a service of general economic interest or, in particular, that all the services provided in such a port amount to such a task”. In particular, in Case C-179/90 Merci convenzionali porto di Genova v Siderurgica Gabrielli SpA ECLI:EU:C:1991:464, paras 25 seq., the Court clarified that the activity of loading and unloading goods cannot qualify as service of general economic interest. See also Part 4. 3132 European Parliament, State aid to EU seaports (2011). 3133 Very few privatised ports are present in the Union and they are mainly located in the United Kingdom, the only Member State in the Union having decided to privatise seaports in the 1980s. 3134 For example, the French Grand Ports Maritimes adopted the “landlord model” with the “Loi de réforme portuaire” in 2008.

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ture such as terminals to provide end-users with services, the most important of which is generally cargo handling. As pointed out by the 2011 study, the most common form is a concession agreement where a private undertaking is granted a long-term lease or concession in exchange for a rent or concession fee that is normally a function of the size of the facility as well as the investment required to build, renovate or expand the infrastructure.3135

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However, the structure and organisation of European ports vary consistently between Member States and even within the same Member State. For example, there may be more than one entity exercising the ownership rights and performing the activity of the port management body,3136 or the owner/manager may operate directly the infrastructure without entrusting its operation to third concession holders or concessionaires.3137 In some cases the construction is separated from the operation of the infrastructure, whereas in other cases they might be combined by means of a Public Private Partnership (PPP), in which the concessionaire builds, operates and maintains the infrastructure.3138

3.1560

In principle, the beneficiary for the purposes of the State aid assessment is the owner of the port or intermodal platform who is active in the port market and is interested in making the infrastructure attractive for port service providers and end-users.3139 However, since the Court has established in Leipzig Halle that “an airport operator should finance, from its own resources, the costs of using or building the infrastructure it manages and which are the basis of its economic activity”,3140 the port management body or port authority is normally also considered as aid beneficiary, regardless of whether it simply manages the real estate 3135 European Parliament, State aid to EU seaports (2011), p. 39. An example of “landlord port” model would be the port of Cadiz and the Port of Salerno, see Commission Decision of 18.09.2013 on the Port Authority of Bahía de Cádiz (Case SA.36953), summary notice in OJ C 335, 16.11.2013, p. 1, and Commission Decision of 27.03.2014 on the Port of Salerno (Case SA.38302), summary notice in OJ C 156, 23.05.2014, p. 1. 3136 Commission Decision of 01.10.2014 on the Port of Gyor Gonyu (Case SA.38478), recital 43, summary notice in OJ C 418, 21.11.2014, p. 1. 3137 Commission Decision of 25.06.2014 on the Port of Patras (Case SA.38048), summary notice in OJ C 280, 22.08.2014, p. 1; Commission Decision of 02.07.2013 on the Extension of Piraeus Port (Case SA.35418), summary notice in OJ C 256, 05.09.2013, p. 2; Commission Decisions of 16.10.2013 on Interporto Regionale della Puglia (Case SA.35124), summary notice in OJ C 354, 04.12.2013, p. 2. 3138 Commission Decision of 19.10.2011 on the Containertransferium Beverdonk (Case SA.31825), summary notice in OJ C 350, 01.12.2011, p. 2; Commission Decision of 18.12.2013 on the Port of Capo D’Orlando, (Case SA.36621), summary notice in OJ C 69, 07.03.2014. p. 1. Commission Decision of 02.07.2015 on the Port of Calais (Case SA.39688), summary notice in OJ C 387, 20.11.2015, p. 1. 3139 In case of private owner also operating the infrastructure, the aid beneficiary is easy to identify (e.g. Commission Decisions of 16.10.2013 on Interporto Regionale della Puglia (Case SA.35124), summary notice in OJ C 354, 04.12.2013, p. 2). 3140 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and others v Commission ECLI:EU:T:2011:117, paras 93 and 107.

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or it also provides port services directly.3141 That principle is particularly relevant in all cases where the owner of the infrastructure is a public body which does not directly exercise ownership rights in terms of economic exploitation of the infrastructure, but rather entrusts a separate entity (e.g. port management bodies like a port authority or another public undertaking) with the activity of managing the assets on its behalf.3142 As regards the downstream effects of the investment aid on other levels of service providers/concessionaires and port end-users (shipping/transport companies), the Commission has often concluded that a tender “excludes or minimises” or “tends to minimise” the potential advantage that might spill over to such levels.3143 That approach may be considered unsatisfactory, since the question of the existence of aid at the levels of the concessionaires and end-users is not clearly settled in those decisions, and the potential aid at those levels is not addressed in the compatibility assessment. That uncertainty may create procedural difficulties since non-notified aid carries legal consequences, for example in terms of recovery or payment of damages.3144 Moreover, the difficulty in calculating the potential advantage stemming from future tenders also creates practical problems concerning the rules on cumulation and the newly introduced requirements on transparency.

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In its 2014 Decision in “Port of Salerno”,3145 the Commission seems to provide more legal certainty in that respect by stating that a genuinely public and sufficiently advertised, open, non-conditional and non-discriminatory tender may exclude the presence of an advantage at the level of the concessionaire/service provider, as it leads to establishing the market price for the use of the port/ platform infrastructure. In that case, the Member State in question provided a

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3141 This conclusion has an impact on the calculation of the funding gap, which should capture all the cash-flows arising from the activity of managing the infrastructure - see Commission Decision of 01.10.2014 on the Port of Gyor Gonyu (Case SA.38478), recital 14, summary notice in OJ C 418, 21.11.2014 p. 1 3142 In that case, there would be no aid to the owner since the State resources would be transferred by the State to the manager (port authority) acting on behalf of the owner. 3143 Commission Decision of 15.06.2011 on the Public financing of port infrastructure in Krievu Sala (Case N 44/2010), summary notice in OJ C 215, 21.07.2011, p. 21; Commission Decision of 22.02.2012 on the Construction of Infrastructure for the Passenger and Cargo Ferries Terminal in Klaipéda (Case N 137/2010), summary notice in OJ C 121, 26.04.2012, p. 1; Commission Decision of 19.12.2012 on the Port of Augusta (Case SA.34940), summary notice in OJ C 77, 15.03.2013, p. 1; Commission Decision of 18.09.2013 on the Port Authority of Bahía de Cádiz (Case SA.36953), summary notice in OJ C 335, 16.11.2013, p. 1. 3144 Indeed, it should be possible to quantify the amount aid since national courts may order the aid to be suspended or recovered and can order payment of damages to competitors. 3145 Commission Decision of 27.03.2014 on the Port of Salerno (Case SA.38302), summary notice in OJ C 156, 23.05.2014, p. 1, recital 46; see also Commission Decision of 01.10.2014 on the Port of Gyor Gonyu (Case SA.38478), recital 43, summary notice in OJ C 418, 21.11.2014 p. 1.

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commitment that the tender procedure would result in market prices by crosschecking and verifying that the fees resulting from the tender were comparable to the fees charged at other ports. It is still unclear whether such commitment is considered to be necessary to exclude an advantage to the concessionaire/service provider level and, if so, how the cross-checking should be applied by Member States in practical terms. In any case, the mere compliance with Union public procurement rules does not necessarily guarantee the exclusion of an advantage to the concessionaire. In fact, the award of concessions for the use of land in ports is still excluded from the scope of application of the 2014 Concession Directive,3146 which implies that a great number of port concessions may still be granted without open tenders. For State aid purposes, only a true tender complying with the above-mentioned conditions would be able to exclude the presence of aid, regardless of whether Union public procurement rules are formally respected.

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It must be noted, however, that the principle established in the Commission Decision “Port of Salerno” was formulated in a context where the construction of the infrastructure was tendered out by the port authority to construction companies and then rented out to concessionaires/service providers for a short period of time. It is therefore unclear whether that principle could also apply to concessionaires not only operating but also building the infrastructure, and participating in the investment costs in the context of a PPP contract awarded by the port management body through a competitive tender meeting the necessary requirements.3147 In those cases, the duration of the concession period is normally longer as it must allow the repayment of the investment made by the private concessionaire (builder and operator). However, the Commission has adopted only a few decisions involving PPP contracts in the port sector, and it has often qualified the concessionaire as the direct beneficiary of investment aid.3148 3146 Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts, OJ L 094, 28.03.2014, p. 1, recital 15 and Article 10(8). According to the Directive, the agreements having as their object the right of an economic operator to exploit certain public domains or resources under private or public law, such as maritime and inland ports, should not qualify as concessions within the meaning of the Directive. 3147 In the past, the Commission has concluded that a public tender to award a concession to build and manage a port can exclude State aid to the concessionaire (see Commission Decision of 10.12.2008 on the JadeWeserPort (Case N110/2008), summary notice in OJ C 137, 17.06.2009, p.1, recital 71-79). 3148 In the Commission Decision of 19.10.2011 on the Containertransferium Beverdonk (Case SA.31825), summary notice in OJ C 350, 01.12.2011, p. 2, the aid beneficiary was the concessionaire, who would have built and operated for 25 years the infrastructure on land belonging to the Flemish Region and managed by a public agency; in the Commission Decision of 18.12.2013 on the Port of Capo D’Orlando (Case SA.36621), summary notice in OJ C 69, 07.03.2014, p. 1, the aid beneficiary was the concessionaire, who would have built and operated for 60 years the infrastructure on land belonging to the Italian State and managed by the Region Sicily.

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1.3 Investment aid to ports: compatibility assessment The adoption of guidelines for the control on State aid to ports has been often considered but so far not materialised. The Commission therefore assesses the compatibility of the investment aid to ports with the internal market directly on the basis of Article 107(3)(c) of the Treaty for seaports, and Article 93 of the Treaty for inland ports and intermodal platforms.

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As a starting point, it should be kept in mind that investment aid should concern investment for infrastructures truly and closely related, at least potentially, to transport activities. Unlike other transport infrastructures, many ports are not solely dedicated to transport activities, but sometimes rent out part of their land to industries of different kinds, from more closely related types like shipbuilding or ship repair activities, to oil refineries, distribution centres, or other factories.3149 Some ports are also partly or fully dedicated to touristic activities, such as cruise ship terminals and marinas. Some types of investment aid within the geographical area of a port but not related to maritime transport may therefore fall under specific State aid guidelines, with the correspondent aid intensities.3150 For example, aid to purely touristic infrastructure like marinas must be separated from investment for the general transport infrastructure.3151 On the other hand, the compatibility of aid to basic infrastructure of a cruise terminal potentially serving other maritime purposes may follow the standard assessment directly under the Treaty.3152 Similarly, aid of environmental nature like the construction of a land-based electricity facility or the construction of power barges to serve transport terminals may also be assessed directly under the Treaty.3153 Finally, it cannot be excluded that some port investments may be dedicated to the provision of a service of general economic interest and therefore fall within the scope of the 2012 ‘SGEI Package’.3154

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3149 See e.g. Commission Decision of 25.07.2001 on the alleged State aid for the American group Reebok in connection with its establishment in Rotterdam (Case C 33/99), OJ L 25, 29.01.2002, p. 41. 3150 Since no maximum aid intensities have been established yet for aid to port infrastructures, it is important that aid to non-transport infrastructures is assessed under the correct legal basis, to avoid circumventions of the maximum permissible aid intensities. 3151 Commission Decision of 18.12.2013 on the Port of Capo D’Orlando, (Case SA.36621), summary notice in OJ C 69, 07.03.2014, p. 1. 3152 Commission Decisions of 02.07.2013 on the Extension of Piraeus Port (Case SA.35418), summary notice in OJ C 256, 05.09.2013, p. 2 and Commission Decision of 19.06.2013 on the Aid for the upgrading of Katakolo port (Case SA.35738), summary notice in OJ C 204, 18.07.2013, p. 2. 3153 See Commission Decision of 09.04.2014 on the Alternative power supply for cruise ships in the Hamburg City Port (Altona HafenCity), (Case SA.37322), summary notice in OJ C 280, 22.08.2014, p. 1. 3154 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4; Commission Decision 2012/21/EU of 20 December on the application of Article 106(2) of the Treaty on the

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Following the State aid Modernisation programme, aid to port infrastructures is now excluded from the scope of application of the 2013 Regional aid Guidelines,3155 the Guidelines on State aid for environmental protection and energy 2014-20203156 and the 2014 General Block Exemption Regulation (GBER).3157 However, recital 1 of the GBER foresees the possibility to include aid to port infrastructure in the scope of the GBER in the context of its next revision, provided that sufficient decisional experience is further developed allowing the design of operational exemption criteria ensuring the ex-ante compatibility of that category of aid. Developing criteria for port infrastructure are expected to be announced by December 2015.

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As already mentioned, the assessment of compatibility for investment aid to seaports is carried out directly under Article 107(3)(c) of the Treaty. The public funding must therefore meet a clearly- defined objective of common European interest, must be necessary and proportionate to this objective and should not affect competition and intra-Union trade to an extent contrary to the common interest.

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The 2013 Communication of the Commission “Ports: an engine for growth” 3158 underlined the importance of upgrading existing port infrastructures to meet technological, industrial, safety, security and other challenges. Projects aimed at developing European ports are therefore generally considered to meet a clearlydefined objective of common interest and to contribute to the development of both an economic activity and an economic area for State aid purposes. In particular, projects aimed at upgrading existing ports which are part of the transEuropean transport (TEN-T) network and promoting their resource-efficient use are highly important for the European transport policy. In that respect, the most recent TEN-T Guidelines3159 have established a dual-layer structure con-

3155 3156 3157 3158 3159

Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3, and Communication from the Commission, European Union: Framework for State aid in the form of public service compensation, OJ C 8, 11.01.2012, p. 15. Guidelines on regional State aid for 2014-2020, OJ C 209, 23.07.2013, para. 10. Communication from the Commission: Guidelines on State aid for environmental protection and energy 2014-2020, OJ C 200, 28.06.2014, p. 1, para. 16(b). Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. Communication from the Commission: Ports: an engine for growth, COM/2013/0295 final, 23.05.2013. See Regulation (EU) No 1315/2013 of the European Parliament and of the Council of 11 December 2013 on Union guidelines for the development of the trans-European transport network and repealing Decision

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sisting of a comprehensive network and a core network, which represents the highest level of infrastructure planning within the Union.3160 The funding gap methodology used for the assessment of necessity and proportionality of the aid is the same as described in the 2014 Aviation Guidelines;3161 the funding gap is therefore calculated as the difference between the discounted value of the expected net operating revenues of the investment3162 and the discounted investment costs of the project. A negative net present value shows that the investment would not be carried out without the aid, which is therefore necessary and has an incentive effect. As regards proportionality, the assessment requires that the aid does not exceed the funding gap of the investment in order to keep the public funding to the minimum indispensable for the investment to be carried out. The use of the funding gap methodology in the port sector has been criticised in cases where the duration of the contract for the management of the port infrastructure is longer than its average economic life (for ports, it is considered to be between 25 and 30 years).3163 That problem may be avoided by adding to the funding gap also the residual value of the infrastructure at the end of the economic life, namely the discounted value of the net cash-flows in the residual period of duration of the concession (from year 25/30 until the end of the contract). Despite the degree of uncertainty inherent in a financial forecast over such a long period of time, that approach has the advantage of taking into account the entire duration of the contract. On the other hand, it is unclear how any such residual period should be calculated in cases where the port manager is a public entity (e.g. a port authority) created by the State for the management of the infrastructure without there being a contract with a specific end-date.

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No 661/2010/EU, OJ L 348, 20.12.2013, p. 1. 3160 While the comprehensive network should be the Europe-wide transport network ensuring the accessibility and connectivity of all regions in the Union, the core network should constitute the backbone of the development of a sustainable multimodal transport network and stimulate the development of the entire comprehensive network. 3161 See Part 3, Chapter 26, paragraph 3.6.1.4. 3162 In the port sector, the revenues (port fees, land concession fees, dues, and taxes) charged by the port management body vary considerably between the different Member States and the different ports, depending on the type of traffic. Moreover, some Member States set port charges by law or regulatory provisions, whereas others apply market oriented approaches. It is therefore doubtful whether any comparison of the level of port fees and charges between at least some Union ports can be conclusive. 3163 P. Nicolaides, “Management of Port Infrastructure through a very long Concession Contract: Is the Funding Gap Method Meaningful?” (Lexxion State aid blog, 12.08.2014) accessed 20.10.2014

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In the past, the relatively few cases assessed by the Commission normally presented a level of aid below 50 per cent of the total investment costs.3164 Therefore, for aid exceeding such thresholds, additional justification had to be provided.3165 After Leipzig Halle, the increased number of projects notified to the Commission showed considerably higher aid intensities, up to 100 per cent of the total investment costs.3166 As a general observation, the highest aid intensities can be observed for investments to replace or improve obsolete infrastructures, as well as for any investments necessary to remain on the market that are not directly linked to a correspondent cash-flow from new activities.3167

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Finally, on the effects on competition and intra-Union trade two types of seaports can be distinguished: ‘gateway’ and ‘transhipment’ ports. While the activity of a gateway port is strongly linked to the economic significance of its area of economic influence (hinterland), transhipment ports are much more exposed to competition, including from third countries, since their use is not linked to the economic activity of the Member State or region in which they are located.3168 Investment aid in ports relying heavily on transhipment activities involves significant risks of competition distortion. On the other hand, gateway ports directly compete with each other only to the extent that they can serve the 3164 See Commission Decision of 15.06.2011 on the notification for public financing within the project development of infrastructure on Krievu Sala for relocation of port activities out of the city centre (Case N44/2010), summary notice in OJ C 215, 21.07.2011, p. 21; and Invitation to submit comments pursuant to Article 108(2) TFEU in case C 39/2009 (ex N 385/2009) on Public financing of port infrastructure in Ventspils Port, OJ C 62, 13.03.2010, p. 4. In Commission Decision of 15.06.2011 on the Contribution for Port of Rotterdam in order to develop the project Alblasserdam Container Transferium (container transfer facility) (Case SA.32224), summary notice in OJ C 215, 21.07.2011, p. 21, the aid intensity was 17.9 per cent. 3165 For example, see Commission Decision of 22.02.2012 on the Construction of Infrastructure for the Passenger and Cargo Ferries Terminal in Klaipéda (Case N 137/2010), summary notice in OJ C 121, 26.04.2012, p. 1, recitals 71-79, and Commission Decision of 19.12.2012 on the Port of Augusta (Case SA.34940), summary notice in OJ C 77, 15.03.2013, p. 1, recitals 74-75. 3166 In Commission Decision of 02.07.2013 on the Extension of Piraeus Port (Case SA.35418), summary notice in OJ C 262, 05.09.2013, p. 2, the aid intensity was 95 per cent; in Commission Decision of 27.03.2014 on the Port of Salerno (Case SA.38302), summary notice in OJ C 156, 23.05.2014, p. 1, the aid intensity was 97.28 per cent. 3167 Commission Decision of 27.03.2014 on the Port of Salerno (Case SA.38302), summary notice in OJ C 156, 23.05.2014, p. 1; Commission Decision of 25.06.2014 on the Port of Patras (Case SA.38048), summary notice in OJ C 280, 22.08.2014, p. 1. 3168 To be considered a pure transhipment hub the incidence of transhipment must exceed 75 per cent of the activities of the port. For example, the port of Tenerife (see Commission Decision of 05.06.2013 on the Investment aid to the Port Authority of Santa Cruz de Tenerife (Case SA.36223), summary notice in OJ C 306, 22.10.2013, p. 4) is a transhipment port competing with the main European and African ports. A combination of a dominant gateway function with sea to sea transhipment activities can be found in Hamburg, Rotterdam, Le Havre, and Antwerp (see T. Notteboom, “Recent traffic Dynamics in The European Container port system” [2013] Port Technology International 58, 2013).

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same hinterland for the same trade.3169 However, even in cases where there is no overlapping of hinterlands, competition issues may still arise, as investment aid could potentially also indirectly affect other ports in the Union.3170 In fact, since ports provide services to transport undertakings and passengers of any origin, investment aid has the potential to attract the provision of shipping and transport services which are sectors open to competition and trade at Union level.3171 However, especially for pure gateway ports whose hinterland is geographically limited to one Member State there is normally little risk of relocation of traffic from other Union ports. In addition to the geographic location, important factors to consider are also the economic production of the surrounding areas serviced by the competing ports, the foreseen increase in traffic as compared to the market share of the port and the accessibility by road, rail and inland waterway. In particular, the quality of the connections to the port and the proximity to the point of original departure or final destination (e.g. industrial zones, main consuming markets) seem particularly important to determine the degree of substitutability between seaports.

1.3.2 Inland ports and intermodal platforms As with the compatibility assessment of aid to seaports, aid to inland port infrastructures and intermodal platforms must meet the same conditions, with the additional requirement that the infrastructure must be open to all users on a non-discriminatory basis. The assessment is based on Article 93 of the Treaty, concerning the coordination of transport.3172

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3169 For example, for container transport the Institute of Transport and Maritime Management Antwerp (ITMMA) the European Sea Ports Organisation (ESPO) in 2009 have recognised twelve multi-port gateway regions in Europe competing with each other for the same hinterlands: 1. The Rhine Scheldt area, including ports such as Amsterdam, Antwerp, Rotterdam, Zeebrugge and Zeeland Seaports; 2. Helgoland Bay, including the ports of Hamburg, Bremerhaven and Wilhelmstadt; 3. United Kingdom south east Coast, including the ports of Felixstowe, Tilbury and London; 4. Spanish Mediterranean range, including Barcelona and Valencia; 5. Ligurian Range, including the ports of Genoa, Livorno and La Spezia. 3170 Commission Decision of 18.09.2013 on the Port Authority of Bahía de Cádiz (Case SA.36953), summary notice in OJ C 335, 16.11.2013, p. 1. 3171 Commission Decision of 25.06.2014 on the Port of Patras (Case SA.38048), summary notice in OJ C 280, 22.08.2014, p. 1. 3172 See Commission Decision of 17.10.2012 on the Extension of the inland port Königs Wusterhausen/Wildau (Case SA.34501), summary notice in OJ C 176, 21.06.2013, p. 1; Commission Decision of 05.06.2013 on the Intermodal Platform of Termini Imerese (Case SA.35193), summary notice in OJ C 227, 06.08.2013, p. 12; Commission Decision of 16.10.2013 on Interporto Regionale della Puglia (Case SA.35124), summary notice in OJ C 354, 04.12.2013, p. 2; Commission Decision of 18.12.2013 on the Intermodal development of the Freeport of Budapest (Case SA.37402), summary notice in OJ C 141, 09.05.2014, p. 1.

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The objective of common interest is in general linked to the promotion of the modal shift from road to more environmentally-friendly modes of transport, such as inland waterway transport. In particular, the Commission takes into account the need to accelerate investments in infrastructure, particularly in environmentally-friendly transport-modes which are part of the Trans-European Network (TEN-T).3173 The Naiades II Communication of September 20133174 also encourages the development of quality infrastructures for inland navigation. The general policy of the Commission therefore supports investments to better exploit the potential of inland waterway transport and combined transport as a more sustainable alternative to road transport, with a view to reducing the Union’s CO2 emissions.

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The assessment of necessity and proportionality is very similar to the one of seaports, based on the funding gap methodology. Aid intensities for investments in intermodal transport are generally high, often above 70 per cent of the investment costs.3175 The main justification for the approval of such high aid intensities is that the investment performed normally aims to foster the modal shift from road to inland water transport by making inland ports and intermodal transport more attractive to users, rather than a mere increase in revenues and capacities. Moreover, the competition context for inland ports seems different, since not only do they compete with each other, but they also compete with other modes of transport (i.e. road and rail) because of the high transport costs through inland waterway and combined transport as compared to the others. Some stakeholders claim that inter-modes competition is crucial, while competition between inland ports plays a relatively minor role.3176 In some regions, inland ports were created along historical trading routes to serve industries that depend on large flows of raw materials and can hardly re-locate to other inland ports since the additional transport costs would probably make road transport more convenient. Those origins would explain the importance of inland ports for the economy of their region, even when they are relatively small and relatively close 3173 To be part of the comprehensive network, inland ports shall have an annual freight transhipment volume exceeding 500 000 tonnes. 3174 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions towards quality inland waterway transport NAIADES II, COM/2013/0623, 10.09.2013. 3175 In the Commission Decision of 17.10.2012 on the Extension of the inland port Königs Wusterhausen/ Wildau (Case SA.34501) summary notice in OJ C 176, 21.06.2013, p. 1, the aid intensity was 75 per cent; in Commission Decision of 18.12.2013 on the Intermodal development of the Freeport of Budapest (Case SA.37402), summary notice in OJ C 141, 09.05.2014, p. 1, the aid intensity was 98 per cent. 3176 European Foundation of Inland Ports, Position Paper on State aid to Inland Ports (2014) http://www. inlandports.eu/images/stories/downloads/positions/42.27.01.2014_efip%20position%20on%20state%20 aid.pdf accessed 20.10.2014.

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to another port. In recent cases, the Commission has noted that for ports that are moderate players in term of presence on the market an increase of capacity up to 30 per cent is deemed not to distort competition.3177 For intermodal platforms, the Commission also verifies whether the increase of capacity may be able to redirect towards the platform traffic from maritime ports that may be potentially in competition with neighbouring ports.3178

1.4 Conclusions The case practice of the Commission in the field of ports is still under development and the projects notified to the Commission so far are probably not representative enough of the entire sector. The great variety of models and the different national legislations preclude a one-size-fits-all approach and highlight the need for a deep knowledge of the sector, especially in view of the possible inclusion of investment aid to port infrastructure in the context of the next revision of the GBER. As regards aid intensities, at this stage a one-to-one transposition of the 2014 Aviation Guidelines approach does not seem warranted, not least in light of the diversity between ports.

2.

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Maritime Transport

2.1 Competition in maritime transport: roots of the tonnage tax regime Maritime transport services between Member States or between Member States and third countries was first open to competition with Regulation 4055/86.3179 Such regulation progressively abolished from 1990 to 1993 bilateral agreements between Member States and third countries on cargo sharing. A second pack-

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3177 An increase of 30 per cent was considered compatible in Commission Decision of 17.10.2012 on the Extension of the inland port Königs Wusterhausen/Wildau (Case SA.34501), summary notice in OJ C 176, 21.06.2013, p. 1; in Commission Decision of 18.12.2013 on the Intermodal development of the Freeport of Budapest (Case SA.37402), summary notice in OJ C 141, 09.05.2014, p. 1, the increase was 6.9 per cent. 3178 See Commission Decision of 05.06.2013 on the Intermodal Platform of Termini Imerese (Case SA.35193), summary notice in OJ C 227, 06.08.2013, p. 5, recital 20; Commission Decision of 16.10.2013 on Interporto Regionale della Puglia (Case SA.35124), summary notice in OJ C 354, 04.12.2013, p. 2, recital 43. 3179 Council Regulation (EEC) N° 4055/86 of 22 December 1986 applying the principle of the freedom to provide maritime services to transport between Member States and between Member States and third countries, OJ L 378, 31.12.1986, p. 1.The package included three other instruments, published in the same Official Journal: Council Regulation (EEC) N° 4056/86 of 22 December 1986, laying down detailed rules for the application of articles 85 and 86 of the Treaty to maritime transport; Council Regulation (EEC) N° 4057/86 of 22 December 1986 on unfair pricing practices in maritime transport and Council Regulation (EEC) N° 4058/86 of 22 December 1986 concerning coordinated action to safeguard free access to cargoes in ocean trades.

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age3180 liberalised cabotage traffic from 1993 to 1999 starting with freight within a Member State, and extending to regular passenger services.

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Liberalisation of maritime transport fuelled competition in maritime transport, which is high not only within the Union but also at an international level. As a result, vessels previously registered in Member States have drifted towards open registries, or so-called flags of convenience, which give ship-owners more favourable conditions than under Union registration in terms of taxation, costs, controls, social legislation, safety and environmental rules. In order to face that problem, the Union has defined a global strategy to make the Union fleet more competitive thanks to specific State aid measures and the introduction of a tonnage tax.3181

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The roots of the tonnage tax regimes currently in force can be found in the first maritime guidelines adopted in 1989,3182 which were adopted with the specific aim of reducing the burdens not shared by third country competitors. The two main objectives of those guidelines were the maintenance of ships under EU flags and the employment, to the highest possible degree, of EU seafarers. The Commission sought to achieve those objectives by addressing the problem of the cost gap between the fleet registered in Member States and vessels operating under flags of convenience.3183 However, given the continuing decline in EU fleets the Commission revised its policy and adopted new guidelines in 1997.3184 The Commission admitted that there was no evidence of schemes that distorted competition and trade between Member States to the point of being contrary to the common interest. In fact, flagging out between Member States was a rare phenomenon and fiscal competition was mainly an issue between Member States, on the one hand, and third countries, on the other. The cost savings available to ship-owners through third country registers and flags of convenience were considerable, in comparison with the options available within the Union. 3180 Council regulation (EEC) N° 3577/92 of 22 December 1992 on the application of the principle of freedom to provide services to maritime transport within Member States (maritime cabotage), OJ L 364, 12.12.1992, p. 7. 3181 Under the tonnage tax scheme, the ship-owner pays an amount of tax linked directly to the tonnage operated. The tonnage tax will then be paid irrespective of the company s actual profits or losses. 3182 Guidelines for the examination of State aids to Community shipping companies, SEC(89) 921 final. 3183 The 1989 guidelines included the outline of a method devised to ensure that the global impact of State aid would not exceed a ceiling to be defined based on the cost handicap, which ships operating under the flag of a low salary Member State met on world markets. The calculation was based on the hypothetical operating costs of vessels under Portuguese and Cypriot flags, which represented the cheapest EU first register and a flag of convenience. Once weighted to reflect the composition of the national flag fleet, in terms of vessel types, this resulted in a single national ceiling for annual operating aid, applicable to all types of vessels. 3184 Community guidelines on State aid to maritime transport (97/C 205/5), OJ C 205, 05.07.1997, p. 5.

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Based on the objective of State aid to promote the competitiveness of EU fleets in the global shipping sector, the Commission stated that fiscal schemes should, as a rule, require a link with an EU flag.3185

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The most recent revision of the guidelines dates back to 20043186 (hereafter “Maritime Guidelines”). There were two major innovations introduced in 2004 compared to the previous frameworks. The first one concerns the clarification on the towing and dredging activities. The second one deals with the introduction of aid to short sea shipping between ports situated in Member States.

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2.2 Maritime Guidelines Maritime Guidelines aim at setting the parameters within which State aid to maritime transport can be approved as compatible with internal market under Article 107(3)(c) and/or Article 106(2) of the Treaty. The main objectives of the Maritime Guidelines are: –

improving a safe, efficient, secure and environment friendly maritime transport,

–

encouraging the flagging or re-flagging to Member States’ registers,

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contributing to the consolidation of the maritime cluster established in the Member States while maintaining an overall competitive fleet on world markets,

–

maintaining and improving maritime know-how and protecting and promoting employment for European seafarers, and

–

contributing to the promotion of new services in the field of short sea shipping following the White Paper on Community Transport Policy.

Bearing those objectives in mind, in particular the registration of vessels under Union flags and the protection of employment for seafarers maritime transport benefits from a very generous regime compared with other sectors. The Maritime Guidelines allow for a wide range of operating aid, which are normally banned

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3185 The guidelines exceptionally allowed schemes with a non-EU flag link to be approved provided that it was demonstrated that the strategic and commercial management of all ships concerned was effectively carried out from the EU territory and that this activity contributed substantially to economic activity and employment within the European Union. 3186 Community guidelines on State aid to maritime transport, OJ 2004 C 13, 17.01.2004, p. 3.

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for their highly distortive effects. The Commission justifies such an exception to general rule in order to halt the drift of Union vessels to flags of convenience. Hence the Maritime Guidelines allow, as being compatible with the internal market, an important number of aid measures: –

fiscal treatment of ship owning companies, in particular by replacing the normal corporate tax system by a tonnage tax and introducing special measures to improve the fiscal climate for ship-owners;3187

–

labour related costs, they allow for reduced rates of income tax and reduced rates of contributions for the social protection of EEA seafarers employed on board ships registered in a Member State;

–

aid for crew relief, may, therefore, be granted in the form of payment or reimbursement of the costs of repatriation of Union seafarers working on board ships entered in Member States’ registers;3188

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investment aid will be allowed only for equipment that will upgrade EEA-registered ships to standards above the mandatory safety and environmental standards laid down in international conventions;

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training aid up to 100 per cent of the costs of on-board trainees;

–

restructuring aid;

–

public service obligations and contracts; and

–

aid to short sea shipping between ports situated in Member States.

3187 Those special measures include, for instance, accelerated depreciation on investment in ships or the right to reserve profits made on the sale of ships for a number of years on a tax-free basis, provided that these profits are reinvested in ships. 3188 See for example Commission Decision of 4.04.2012 on Prolongation of the State Aid for Crew Travel and Relief Costs (SA.34280 (N/2012) Finland), OJ C 141, 17.05.2012, p. 1.

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2.2.1 Tonnage tax The introduction of special fiscal measures for maritime transport was at the roots of the tonnage tax boom in the Union since the late 1990s. To date 15 tonnage tax schemes have been authorised by the Commission (in the Netherlands,3189 the United Kingdom,3190 Denmark,3191 Germany,3192 Spain,3193 Ireland,3194 Finland,3195 France,3196 Belgium,3197 Italy,3198 Poland,3199 Slovenia,3200 Lithuania,3201 Cyprus3202, Croatia3203). However, the two oldest tonnage tax regimes in Europe: in Greece (since 1957) and Malta (since 1973), were never notified to the Commission.3204 The tonnage tax regimes in force in the Member States are quite similar and generous. They generally follow either the Dutch model or the Greek model. The tonnage tax system replaces the normal corporate taxation, whereby the ship-owner pays an amount of tax linked directly

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3189 See Commission Decision of 12.04.1996 on Dutch tonnage tax (Case N 738/95), reapproved on 31.07.1997 (Case NN 89/97). 3190 See Commission Decision of 02.08.2000 on UK tonnage tax (Case N 790/99), summary notice in OJ C 258, 09.09.2000, p. 2. 3191 See Commission Decision of 12.03.2002 on Danish tonnage tax (Case N 563/01), summary notice in OJ C 146, 19.06.2002, p. 6. 3192 See Commission decision of 25.11.1998 on German tonnage tax (Case N 396/98). 3193 See Commission decision of 27.02.2002 on Spanish tonnage tax (Case N 736/01), summary notice in OJ C 38, 12.02.2004, p. 4. 3194 See Commission decision of 11.12.2002 on Irish tonnage tax (Case N 504/02), summary notice in OJ C 15, 22.01.2003, p. 5 amended by Commission Decision of 25.02.2009 on amendment to the Irish tonnage tax system (Case C2/2008 (ex N 572/2007), OJ L 228, 01.09.2009, p. 20. 3195 See Commission Decision of 16.10.2002 on Finnish tonnage tax (Case N 195/02), summary notice in OJ C 28, 31.01.2004, p. 2, modified by Commission decision of 20.12.2011 on amendment to the Finnish tonnage tax system (Case SA.30515 N 448/2010), summary notice in OJ C 220, 25.07.2012, p. 1. 3196 See Commissions Decision of 13.05.2003 on French tonnage tax (Case N 737/02); summary notice in OJ C 38, 12.02.2004, p. 4. 3197 See Commission Decision of 19.03.2003 on Belgian tonnage tax (Case N 433/02), OJ C 145, 21.06.2003, p.4; and Commission Decision of 30.06.2004 on Belgian tonnage tax (Case C2004/2040), OJ L 150, 10.06.2005, p. 1. 3198 See Commission Decision of 20.10.2004 on Italian tonnage tax (Case N 114/04) summary notice in OJ C 136, 03.06.2005, p. 36. 3199 See Commission Decision of 10.04.2010 on Polish tonnage tax (Case C 34/07), OJ L 90, 10.04.2010, p. 15. 3200 See Commission Decision of 13.01.2009 on Slovenian tonnage tax (Case N 330/05), summary notice in OJ C 53, 06.03.2009, p. 1. 3201 See Commission Decision of 19.07.2006 on Lithuanian tonnage tax (Case N 330/05), summary notice in OJ C 90, 25.04.2007, p. 2. 3202 See Commission Decision of 24.03.2010 on tonnage tax in Cyprus (Case N37/2010), summary notice in OJ C 144, 03.06.2010, p. 27. 3203 See Commission Decision of 1.04.2015 on tonnage tax in Croatia (Case SA.37912 N/2013), not yet published. 3204 In 2012 the Commission opened an in-depth investigation into those two tonnage tax systems. The Greek system is being assessed pursuant to Article 17 of Council Regulation (EC) No. 659/1999 (as existing aid). The Maltese system is examined as new aid (See Commission Decision of 25.07.2012 on Tonnage tax in Malta (Case SA.33829), OJ C 289, 25.09.2012, p. 49).

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to the tonnage operated. The tonnage is payable irrespective of the company’s actual profits or losses. The schemes are restrictive and only apply to qualified activities and vessels. The tax relief scheme requires a link with the flag of one of the Member State. Entry into tonnage tax system is optional and temporary, with a minimum stay of ten years. The tonnage taxes to be paid by shipping companies in the different Member States should be aligned.3205

2.2.1.1 Qualified beneficiaries 3.1584

The Maritime Guidelines draw no distinction between types of beneficiary in terms of their legal structure (whether companies, partnerships or individuals), nor between public or private ownership. For a shipping company to qualify for a tonnage tax regime, the company must have a certain degree of ownership regarding the vessel. The required degree of ownership differs between the different tonnage tax regimes. In addition, a certain level of management activities with respect to the vessel must be undertaken in the country where the company is located for tax purposes. For most tonnage tax regimes strategic and commercial management should usually be undertaken by the vessel owning company itself.

3.1585

In 2009 the Commission clarified and extended the application of the Maritime Guidelines to ship management companies by adopting a Communication providing guidance on State aid to ship management companies3206 (hereinafter “the Ship management Communication”). The Maritime Guidelines allow for ship management companies to qualify for tonnage tax or other tax arrangements for shipping companies. However, eligibility is conditional on the joint provision of both technical and crew management for the same vessel. As such, those activities are not eligible for tonnage tax or other tax arrangements when provided individually.

3.1586

Ship management is a standard core activity of maritime carriers, normally provided in-house. Ship management is one of the most characteristic activities of ship operators and ship-owners, the only customers of ship management 3205 The tonnage tax is assessed as follows: a virtual profit for ship owners is calculated by applying a notional profit rate to their tonnage and national corporate tax is applied to the amount so determined. The resulting amount is the `tonnage tax’. However, since corporate tax rates may vary significantly across the Member States, the tonnage taxes to be paid for the same tonnage might be very uneven in the different Member States. In order to keep the balance, the guidelines require that the Commission only approves schemes giving rise to a tax-load for a given tonnage approximately in line with the schemes already approved. This has not always been the case (See for example Commission Decision of 10.04.2010 on Polish tonnage tax (Case C 34/07), OJ L 90, 10.04.2010, p. 15). 3206 OJ C 132, 11.06.2009, p. 6.

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companies. In general, ship management companies are entities providing different kinds of services to ship-owners, such as technical surveys, crew recruiting and training, crew management, and vessel operation. Currently, however, management is outsourced to third-party ship management companies in some instances. Against that background, the Commission determined that outsourcing of ship management should not be penalised in terms of tax in comparison to in-house ship management, provided that the ship management companies meet the same requirements as are applicable to ship-owners. In particular, the Commission held that, precisely because of their specialization and the nature of their core business, ship management companies may substantially contribute to the achievement of the objectives of the guidelines, in particular, an “efficient, secure and environment friendly maritime transport” and of the “consolidation of the maritime cluster established in the Member States”. On that basis, the Ship management Communication extends the scope of tonnage tax to ship management companies that provide crew and technical management, irrespective of whether or not these services are provided individually or jointly to the same ship. As such, there is no longer a requirement of full management. Only commercial management3207 of ships is outside the scope of the Maritime Guidelines. If the ship managers also provide other specialised services, even related to vessel operation, separate accounting for such activities, which do not qualify for the tonnage tax, is required.

3.1587

A separate category of qualified beneficiaries concerns companies that charter in vessels. The companies that charter in such ships are considered as providers of maritime transport services even if they use for this purpose ships and personnel of third parties. Therefore such companies would normally be covered by the Maritime Guidelines provided they also contribute to one of the objectives of the guidelines. However, the Maritime Guidelines themselves do not mention any limitation to the inclusion under tonnage tax schemes of vessels that are chartered in. In many Member States one precondition for being eligible for the tonnage tax scheme is that the share of qualifying ships owned by the company itself, calculated on the basis of their tonnage, be not less than 20 – 25 per cent of the tonnage of all its qualifying ships. In order to enter and remain within the tonnage tax regime it is required that a company not have chartered in, including time charter, more than 75 per cent – 80 per cent of the net tonnage of the

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3207 Commercial management consists in promoting and ensuring the sale of ships’ capacity, by means of chartering the ships, taking bookings for cargo or passengers, ensuring marketing and appointing agents.

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qualifying ships operated by it.3208 When in 2007 Ireland notified its intention to abolish the time charter limitation (i.e. a company would be able to benefit from the tonnage tax scheme without owning a single ship) the Commission opened the formal investigation procedure.3209 The Commission was worried that a complete abolition of such time charter limits could trigger fiscal competition between more or less attractive tonnage tax schemes across the Union. In earlier decisions the Commission authorized schemes covering companies with a ratio between tonnage of owned vessels, or chartered-in vessels on bareboat conditions, and tonnage of vessels chartered-in on a time or voyage basis of up to 3:13210 or 4:1.3211 A ratio had been intended to avoid situations where tonnage tax companies eventually become pure maritime brokers, without any responsibility for the crew management and the technical management of vessels that they operate. In addition, the existence of a ratio achieves several of the Maritime Guidelines’ objectives namely “maintaining and improving maritime knowhow”, contributing “to the consolidation of the maritime cluster established in the Member States” and “encouraging the flagging or re-flagging to Member States”. As a consequence, the Commission did not accept the derogation of the ratio notified by Ireland but reduced the ratio to a minimum of 10:1 between chartered-in vessels and owned vessels operated by each tonnage tax company, provided that each of the chartered-in vessels operated by a given tonnage tax company satisfies at least one of the following conditions: (1) the chartered in vessel is registered in an EU or EEA maritime register; or (2) the crew management and technical management of the chartered-in vessel are carried out within the Union or EEA.3212 Similar conditions on chartering in with crew were authorised for a modified system in Finland in 2011.3213

3208 However, in the Dutch tonnage tax-case (N 738/95, approved on 20.03.1996) or the Italian tonnage taxcase (N 114/04, approved on 20.10.2004) no indications on ratio were provided. 3209 Commission Decision of 15.01.2008 on modification of Irish tonnage tax (Case C2/08 (ex N572/07), OJ C 117, 14.05.2008, p. 32. 3210 For example in the German tonnage tax (Case N 396/ 98, approved on 25.11.1998), the UK tonnage tax (Case N 790/99, approved on 2.08.2000), the Spanish tonnage tax (Case N 736/01, approved on 27.02.2002), the Belgian tonnage tax (Case N 433/02, approved on 19.03.2003), the French tonnage tax (Case N 737/02, approved on 13.05.2003); the Lithuanian tonnage tax (Case N 330/05, approved on 19.07.2006) and the Irish tonnage tax (Case N 504/02, approved on 11.12.2002). 3211 For example in the Danish tonnage tax (Case N 563/01, approved on 12.03.2002) and the Polish tonnage tax (Case N 93/06, approved on 10.4.2010). 3212 Commission Decision of 25.02.2009 on amendment to the Irish tonnage tax system (Case C2/2008 (ex N 572/2007), OJ L 228, 01.09.2009, p. 20. 3213 Commission Decision of 20.12.2011 on amendment to the Finnish tonnage tax system (Case SA.30515 N 448/2010), summary notice in OJ C 220, 25.07.2012, p. 1.

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2.2.1.2 Flag requirement The Maritime Guidelines stipulate that as a matter of principle, tax relief schemes require a link with the flag of one of the Member States. However, they may also, exceptionally, be approved where they apply to the entire fleet operated by a ship owner established within a Member State’s territory liable to corporate tax, provided that it is demonstrated that the strategic and commercial management of all ships concerned is actually carried out from within the territory and that that activity contributes substantially to economic activity and employment within the Union. The EU flag-link obligation for the new vessels that companies would like to incorporate under tonnage tax applies only to undertakings that operate less than 60 per cent of their tonnage under an EU flag and only if the share of tonnage that they operated under EU flags decreased when the Maritime Guidelines became applicable, i.e. January 2004. Should a company fail to respect that requirement, the relevant Member State should not grant further tax relief with respect to additional non-EU flagged vessels operated by that company, unless the EU flagged share of the global tonnage eligible for tax relief in that Member State has not decreased on average during a three-year reporting period. The guidelines specifically exclude tugboats and dredgers from the derogation of the EU flag-link obligation.

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The Maritime Guidelines do not specify how the flag-link rule should apply to new (after 1 January 2004) entrants into the tonnage tax system. In the 2010 the Commission authorized the Cypriot tonnage tax scheme, which allows for non-EU/EEA flagged ships to be eligible for tonnage tax only if i) at the time of opting into the tonnage tax system, 60 per cent of the ship-owner’s fleet is EU/ EEA- flagged; or ii) at the time of opting into the tonnage tax system a share of the ship-owner’s fleet is EU/EEA–flagged and that EU–flagged share shall remain unchanged or increase within a period of three years from the date of opting in the tonnage tax system.

3.1590

2.2.1.3 Qualified activities Only certain shipping activities qualify for a tonnage tax regime. The scope of the Maritime Guidelines covers ‘maritime transport’ defined as the ‘carriage of goods and persons by sea’.3214 The fiscal alleviation regime should in principle

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3214 See Council Regulation (EEC) No 4055/86 of 22 December 1986 applying the principle of freedom to provide services to maritime transport between Member States and between Member States and third countries (OJ L 378, 31.12.1986, p. 1); and Council Regulation (EEC) No 3577/92 of 7 December 1992 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage) (OJ L 364, 12.12.1992, p. 7).

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be limited to vessels used for that purpose. Nevertheless, the Commission considered that certain type of operations and activities that are intrinsically linked with and carried out in connection with the provision of maritime transport services can also benefit from tonnage taxation and other measures foreseen in the Maritime Guidelines.3215

3.1592

Consequently the Commission considered the following activities necessary for and closely associated with maritime transportation of goods and passengers: self-handling’ operations such as loading, unloading and maintenance facilities,3216 transport of cargo and passengers from the port area to and from the vessel that is included in the price of the transport service,3217 temporary placement of cargo carried on a qualified ship operated by the company, on or at the dockside, consolidation or breaking of cargo carried on a qualifying ship, rental or provision to customers of containers for goods to be carried on a qualifying ship,3218 operation of ticketing facilities and passenger terminals in connection with shipping activities subject to tonnage tax, operation of office facilities in connection with shipping activities subject to tonnage tax,3219 administrative and insurance services which are directly related to the transport of passengers or cargo,3220 revenue from short-term investment of operating capital if it corresponds to income from the company’s ordinary cash resources accruing from eligible activities, revenue related to currency fluctuation and insurance contracts, in relation to the carriage of passengers by sea,3221 all hotel, catering, entertainment and retailing activities on board of a qualifying ship, provided that these services are performed as ancillary activities to the activity of carriage of passengers by sea by that ship and are all consumed or used on board that ship.3222 3215 Commission Decision of 30.06.2004 on Belgian tonnage tax (Case C2004/2040), OJ L 150, 10.06.2005, p. 1. 3216 Commission Decision of 12.03.2002 on Danish tonnage tax (Case N 563/01), summary notice in OJ C 146, 19.06.2002, p. 6; Commission Decision of 24.03.2010 on tonnage tax in Cyprus (case N37/2010), summary notice in OJ C 144, 03.06.2010, p. 27. 3217 Commission Decision of 20.12.2011 on amendments to the tonnage taxation aid scheme in Finland (Case N448/2010), OJ C 220, 25.07.2012, p. 1. 3218 Commission Decision of 21.06.2003 on Belgium tonnage tax (case C 20/03), OJ C 145, 21.06.2003, p. 4., Commission Decision of 02.08.2000 on UK tonnage tax (Case N 790/99), summary notice in OJ C 258, 09.09.2000, p. 2. 3219 Commission Decision of 12.03.2002 on Danish tonnage tax (Case N 563/01), summary notice in OJ C 146, 19.06.2002, p. 6; Commission Decision of 20.12.2011 on amendments to the tonnage taxation aid scheme in Finland (Case N448/2010), OJ C 220, 25.07.2012, p. 1. 3220 Commission Decision of 30.06.2004 on Belgium tax measures for maritime transport (case C2004), OJ L 150, 10.06.2005, p. 1, recital 145. 3221 Commission Decision of 30.06.2004 on Belgium tax measures for maritime transport (case C2004), OJ L 150, 10.6.2005, p. 1, recitals 139-141. 3222 See Commission Decision of 20.12.2011 on amendments to the tonnage taxation aid scheme in Finland (Case N448/2010), OJ C 220, 25.07.2012, p. 1; Commission Decision of 24.03.2010 on the introduction of a tonnage tax scheme in favour of international maritime transport in Cyprus (case N37/2010), OJ C

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In order to maintain a level playing field in competition within the Union in accordance with the objectives of the Maritime Guidelines, the Commission has consistently pursued a policy of not including in tonnage tax schemes the sale of articles or the provision of services that are not directly linked with maritime passenger transport. Thus, the sale of luxury articles and gambling, gaming tables and casinos on board eligible ships, floating hotels and restaurants could not be intrinsically linked with maritime passenger transport and that these activities could therefore not be eligible for tonnage taxation.3223

3.1593

Even though the activities of research vessels, cable layers, pipeline layers and crane vessels do not fall within the definition of “maritime transport” in the Maritime Guidelines, the Commission has established in its decision-making practice that these activities are eligible for the same type of aid as maritime transport since they operate under the same competitive and technical conditions as the classical vessels involved in transportation of goods and passengers by sea.3224

3.1594

The application of tonnage taxation to tugboats or dredgers has given rise to intense debates. In 2002 the Commission declared aid to Dutch tugboats in seaports and on inland waterways in the European Union incompatible with the internal market because tugboats are not active at sea and cannot be considered engaged in maritime transportation.3225 However, the Commission accepted that the towing at sea of other vessels or oil platforms falls under the definition of maritime transport. Consequently, the Maritime Guidelines stipulate that EU-flagged tugboats are only covered by the scope of the guidelines if more than 50 per cent of the towage activity effectively carried out by a tug during a given year constitutes “maritime transport”. In addition, the Commission emphasizes that towage activities that are carried out, inter alia, in ports, or which consist in assisting a self-propelled vessel to reach port do not constitute “maritime transport” for the purposes of applying tonnage taxation.

3.1595

144, 03.06.2010, p. 27. 3223 See for example Commission Decision of 11.12.2002 on Irish tonnage tax (Case N 504/02), recital 29, Commission Decision of 16.10.2002 on Finnish tonnage tax (case N 195/02), section 2.8.2; Commission Decision of 13.05.2003, (case N 737/02), recital 26; Commission Decision of 30.06.2004 on Belgium tax measures for maritime transport (case C2004), OJ L 150, 10.06.2005, p. 1, recitals 128-135. 3224 See for example Commission Decision of 13.01.2009 on the extension to dredging and cable-laying activities of the regime exempting maritime transport companies from the payment of the income tax and social contributions of seafarers in Denmark, (Case C 22/2007), OJ L 119, 15.05.2009, p. 23; and Commission Decision of 27.04.2010 on Intégration des transports de la pose de câbles, pose de canalisations, navires de grues et navires de recherche sous le régime de la “tonnage tax (Case N 714/2009), OJ C 158, 18.06.2010, p. 2. 3225 Commission Decision of 19.07.2002 on State aid implemented by the Netherlands for operations by Dutch tugboats in seaports and on inland waterways in the Community (Case C(2002) 2158), OJ L 314, 18.11.2002, p. 97.

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3.1596

The same reasoning was applied to dredgers, as dredging activities are not maritime transport by nature and thus, are not eligible for aid, and they were excluded from the tonnage tax regimes authorised before 2004. The Maritime Guidelines were, however, extended to dredgers too. Since 2004 the Commission has accepted that tonnage tax may be applied to those EU-flagged dredgers the activities of which consist of ‘maritime transport’, that is, the transport at deep sea of extracted materials for more than 50 per cent of their annual operational time and only in respect of such transport activities. In such situations, separate accounting for maritime transport activities is required as the ships also extract or dredge materials that they carry afterwards and extraction or dredging, as such, do not qualify for State aid to maritime transport.

3.1597

In 2009 the Commission authorised the application of the Danish Tonnage Tax to seafarers working on board cable-layers and dredgers, interpreting it in an extensive manner in relation to dredgers.3226 As regards the condition that dredgers have to be engaged in maritime transport at sea for at least 50 per cent of their operational time, the Commission noted that “maritime transport” in regard to dredging is defined as “transport at deep sea of extracted materials” and excludes “extractions or dredging as such”. In that context, the Commission considers that “sailing between the place of extraction and the place where the extracted materials are to be unloaded” and “sailing between places of extraction” are indeed transporting the extracted materials. The Commission also accepted that dredgers do not always sail loaded because of imbalances on certain trades. It accepted therefore by analogy that “sailing between the port and the extraction site” and “sailing between the place of unloading and the port” constitute maritime transport. Similarly, it considers “unloading” to be inherent to maritime transport. Finally, the Commission affirms that when dredgers provide assistance at the request of public authorities in deep sea, the time they spend directly and exclusively for that purpose benefits maritime transport. That new interpretation of what is considered “maritime transport” for dredgers will surely help many dredgers to reach the 50 per cent threshold in terms of the percentage of operational time engaged in maritime transport activity required in order to benefit from tonnage taxation under any of the existing schemes.

2.2.1.4 Non-qualified activities 3.1598

All other types of activities than maritime transport or associated activities should not in principle benefit from tonnage taxation. Although the Maritime 3226 Commission Decision of 13.01.2009 on the extension of the Danish Tonnage Tax to seafarers working on board cable-layers and dredgers (Case C 22/07), OJ L 119, 14.05.2009, p. 23.

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Guidelines do not explicitly allow any other activities to benefit from tax relief, the Commission recognised that the shipping business should be viewed as a whole and accepted a certain degree of flexibility with regard to ancillary activities to maritime transport. Namely, it was accepted that as long as those activities remain ancillary and make a minor contribution relative to the operation of ships and are closely related to such operation they can benefit from tonnage taxation.3227 Two types of ancillary activities, bareboat chartering out and financial leasing, have given rise to intense debate. Bareboat chartering out consists in leasing vessels without crew. The revenues from the renting of ships to third-party shipping companies should generally not be included within the scope of the Maritime Guidelines because these are not maritime transport activities3228 but leasing activities. Member States developed very varied approach, from prohibition of bareboat chartering out to unconditional inclusion under tonnage tax schemes. The Commission’s decisional practice in this respect has not always been clear and consistent.3229 However, in some recent decisions the Commission confirmed that bareboat chartering out and financial leasing do not constitute maritime transport and should not benefits from tax relief. When in 2010 Finland notified amendments to its tonnage tax, the Commission only accepted that revenues from leasing can be subject to tonnage taxation if they concern a limited part of the fleet (20 per cent) and are used in the context of temporary overcapacity. In that context, the Commission noted that the administrative burden of taking ship out of tonnage tax regime and reintroducing it back into tonnage tax may be disproportionate for shortterm bareboat chartering out contracts compared to the potential tax gain. Furthermore, independently of bare-boat chartering out activity and chartering in of ships with crew, the tonnage tax beneficiary will always have to operate itself at least 20 per cent of the fleet it has under tonnage tax (i.e. the share of ships chartered in with crew together with ships chartered out without crew should not exceed 80 per cent of the fleet under tonnage tax).3230

3.1599

3227 Such approach is also consistent with the OECD model tax convention, which allows profits from ancillary activities to be treated as shipping profits. 3228 Maritime transport is classified under 50.1 Sea and coastal passenger water transport (resp. 50.2 for freight) which explicitly excludes “renting of commercial ships of boats without crew”. 3229 For example, in Finland, Denmark, UK, Ireland and Germany the revenues from bare-boat chartering out are allowed under tonnage tax under certain conditions related to overcapacity. Such conditions are missing in Spain, Poland or Malta (See Commission Decision of 25.07.2012 on Tonnage tax in Malta (Case SA.33829), OJ C 289, 25.09.2012, p. 49, recitals 55-56.) 3230 Commission Decision of 20.12.2011 on amendments to the tonnage taxation aid scheme in Finland (Case N448/2010), OJ C 220, 25.07.2012, p. 1.

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3.1600

In 2013 the Commission concluded that a Spanish scheme for the purchase of ships involving leasing and financing through tax relief was partly incompatible with the internal market.3231 Under that scheme, which was set up in 2002, a maritime transport company can purchase a ship via a complex contractual and financial structure involving an economic interest grouping, an investment vehicle – with tax transparency - held by investors wishing to reduce their basic taxable amount, rather than directly from a shipyard. In practice, the economic interest grouping acts on behalf of the maritime transport company purchasing the ship, acquires it on a financial leasing basis and pays it off in the three to five years after work starts on its construction. The economic interest grouping then benefits from taxation exclusively on the basis of tonnage and hands the ship over to the transport company without paying capital gains tax.3232 The maritime transport company acquires the ship with a reduction ranging from 20 per cent to 30 per cent on the purchase price charged by the shipyard. The Commission considered that the scheme conferred a selective advantage on economic interest groupings and their investors over their competitors. The Commission, however considered, that to the extent the tax relief was passed on to the maritime transport companies, it contributed to an extent to achieving the objectives of common interest set out in the Maritime Guidelines and was compatible with the single market. In 2007 a similar French scheme was also declared incompatible.3233

2.2.1.5 Ring fencing measures 3.1601

Maritime Guidelines provide that shipping companies which perform not only shipping operations but also other operations must implement account separation systems and ensure that there are no spill-over effects between eligible and non-eligible activities. In the decision on Cyprus tonnage tax the Commission further required3234: 3231 Commission Decision of 17.07.2013 on Spanish tax lease (Case SA.21233), OJ L 114, 16.04.2014, p. 1. 3232 Capital gains arising from the sale of ships may be covered by the tonnage tax regime only if the relevant ships were used by genuine shipping companies for the purpose of maritime transport. Such exemption from ordinary taxation could apply without restrictions only to capital gains arising from the sale of ships acquired after the entry of the beneficiary into the tonnage tax regime. As to the ships acquired before the beneficiary’s entry into the tonnage tax regime, a reduction or exemption from the capital gains taxation would constitute a separate State aid measure and would be acceptable only within the limits of the aid ceiling fixed in the Maritime Guidelines (see Commission Decision of 20.12.2011 on amendments to the tonnage taxation aid scheme in Finland (Case N448/2010), OJ C 220, 25.07.2012, p. 1). 3233 Commision Decision of 20.12.2006 on the aid scheme implemented by France under Article 39 CA of the General Tax Code (Case C 46/2004 (ex NN 65/2004), OJ L 112, 30.04.2007, p. 41. 3234 Commission Decision of 24.03.2010 on tonnage tax in Cyprus (Case N37/2010), summary notice in OJ C 144, 03.06.2010, p. 27.

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–

the application of detailed national rules on the cost allocation between different types of activities of the tonnage tax beneficiary; it is also normally expected that limitations exist, for groups of companies, to concentrate equity- based financing in companies under the tonnage tax regime while directing credit-based financing to companies non-eligible for tonnage tax, where interest expenditure is tax deductible.

–

the compulsory entrance of all eligible ships owned or operated by the same beneficiary into the tonnage tax regime, in order to avoid “cherrypicking” depending on the profitability of a particular vessel or vessels.

–

an obligation imposed on beneficiaries to remain under the tonnage tax regime for at least 10 years, thus preventing companies from switching between the general corporate income taxation system and the tonnage tax regime depending on the profitability of operations in different years).

–

the application of robust sanction mechanisms which effectively dissuade abuse of the tonnage tax regime. Most serious or repeated offences should normally lead to the exclusion of the beneficiary concerned from the tonnage tax regime.

2.2.2 Labour related costs The reimbursement of employers’ social security contributions paid by shipping companies is a measure which intends to equalise the burdens of unfair competitive advantages enjoyed by ships flying flags of convenience. Under such schemes, companies which employ ship crews and whose ships face international competition are reimbursed the social security contributions. The Commission has approved labour-related costs schemes in fourteen Member States.3235

3.1602

Aid to employment in the maritime transport sector is permitted if it concerns reduced rates of income tax or of contributions for the social protection of EEA seafarers employed on board ships registered in a Member State in as far as they “directly stimulate the development of the sector and employment rather than provide general assistance”. Seafarers are defined as “Community/EEA citizens, in the case of seafarers working on board of vessels (…) providing scheduled passenger services between ports of the Community, all seafarers liable to taxation and/or social contribution in a Member State, in all other cases.”

3.1603

3235 Belgium, Cyprus, Denmark, Estonia, France, Finland, Germany, Ireland, Italy, Lithuania, Spain, Sweden, Poland, the Netherlands.

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3.1604

For the maritime part of towage and dredging activities (maritime transport of materials), aid in favour of the employment of seafarers may be also granted, but only if the aid relates to EEA seafarers working on board seagoing, self-propelled tugs and dredgers, registered in a Member State, carrying out maritime transport at sea for at least 50 per cent of their operational time.3236

2.2.3 Training aid 3.1605

While aid granted with a view of ameliorating and updating officers’ skills and aid for professional retraining of high-sea fishermen who would like to work as seafarers may be allowed, financial contributions for on-board training can only be paid in cases where the trainee is not a member of the crew. It should also be recalled that aid to training for seafarers is covered by the GBER,3237 which also applies to maritime transport. Moreover, many training schemes followed by seafarers and supported by the State are not considered to be State aid because they are of a general nature (whether vocational or academic). They are, therefore, not subject to notification and examination by the Commission.

3.1606

If a scheme is to be regarded as including State aid, notification is, however, required. This may be the case if, for example, a particular scheme is specifically related to on-board training and the benefit of State financial support is received by the training organisation, the cadet, seafarer or ship-owner. The Commission takes a favourable attitude towards aid, granted on a non-discriminatory basis, to training carried out on board ships registered in a Member State. Exceptionally, training on board other vessels may be supported where justified by objective criteria, such as the lack of available places on vessels in a Member State’s register.

3.1607

Aid aimed at enhancing and updating Community officers’ skills may be allowed during their whole career. The aid may consist of a contribution to the cost of the training and/or compensation for the wage paid to the officer during the training period. The schemes must, however, be designed in a way which prevents the aid for training from being directly or indirectly diverted into a subsidy to officers’ wages.

3236 See Commission Decision of 24.03.2014 on shipping aid in Sweden (Case SA.38240), summary notice in OJ C 348, 03.10.2014, p. 1. 3237 Commission Regulation (EU) N° 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1.

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The Commission’s practice has been to authorize aid related to training activities in the maritime transport sector aiming at competence enhancement,3238 safety at sea,3239 modernisation of infrastructure through technological improvements,3240 and the preservation of know-how.3241

3.1608

2.2.4 Short sea shipping The inclusion in the scope of the Maritime Guidelines of short sea shipping is a novelty introduced in 2004.3242 The Maritime Guidelines restrict the definition of short sea shipping to the movement of cargo and passengers by sea between ports situated in Member States. Aid for that activity is allowed if it aims at decreasing the launching cost of short-sea shipping services in order to promote these services.

3.1609

The aid will only be authorised if the beneficiaries are ship-owners within the meaning of Article 1 of Regulation 4055/86 in respect of ships flying the flag of one of the Member States, and if it fulfils all the conditions laid down in the guidelines:

3.1610

–

the aid must not exceed three years in duration and its purpose must be to finance a shipping service connecting ports situated in the territory of the Member States,3243

3238 See Commission Decision of 15.11.2000 on Danish maritime training aid scheme for seafarers, (Case N441/2000), summary notice in OJ C 380, 30.12.2000, p. 18. 3239 Commission Decision of 11.08.2000 on aid scheme for training seafarers in Finland (Case N33/2000), summary notice in OJ C 65, 13.03.2004, p. 5. 3240 See Commission Decision of 16.10.2002 on aid directed from the Flemish Region to finance the harbourmasters’ offices at Belgian seaports (Case N438/2002), summary notice in OJ C 284, 21.11.2002, p. 2. 3241 See Commission Decision of 16.11.2004, (Case N376/2004) on training of German seafarers, summary notice in OJ C 66, 18.03.2005, p. 2. 3242 See also Commission Communication to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions – The development of Short Sea Shipping in Europe, a dynamic alternative in a sustainable transport chain, COM(1999) 317 final. The guidelines in their section 10 restrict the definition of short sea shipping provided by the Communication to transport between ports in the territory of the Member States. 3243 In its decision concerning the Italian intermodal scheme the Commission noted a discrepancy between the Maritime Guidelines and the Community guidelines on State aid for railway undertakings (OJ C 184, 22.07.2008, p. 13) in which, for similar schemes promoting an intermodal shift from road transport to rail transport, no corresponding three-year limit is prescribed. The Commission also proposed that during next revision of the Maritime Guidelines it will specify that under certain circumstances, State aid for short sea shipping may be declared compatible for a period of more than three years (see Commission Decision of 17.07.2013 in case SA.33412 The prolongation of ECOBONUS scheme, OJ L 265, 08.10.2013, p. 8, recital 65).

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3.1611

–

the service must be of such a kind as to permit transport (of cargo essentially) by road to be carried out wholly or partly by sea, without diverting maritime transport in a way which is contrary to the common interest,

–

the aid must be directed at implementing a detailed project with a preestablished environmental impact, concerning a new route or the upgrading of services on an existing one, associating several ship-owners if necessary, with no more than one project financed per line and with no renewal, extension or repetition of the project in question,

–

the purpose of the aid must be to cover, either up to 30 per cent of the operational costs of the service in question, or to finance the purchase of trans-shipment equipment to supply the planned service, up to a level of 10 per cent in such investment,

–

the aid to implement a project must be granted on the basis of transparent criteria applied in a non-discriminatory way to ship-owners established in the Union. The aid should normally be granted for a project selected by the authorities of the Member State through a tender procedure in compliance with applicable Union rules,

–

the service which is the subject of the project must be of a kind to be commercially viable after the period in which it is eligible for public funding,

–

such aid must not be cumulated with public service compensation (obligations or contracts).

It should be noticed that this type of aid is also covered by the EU Marco Polo II Programme3244 (for start-up aid) and Article 12a of the TEN-T decision3245 (for investment aid) and the Communication on motorways of the sea.3246 If a project is rejected for Union financing under the Marco Polo II Programme or TEN-T, State aid financing under the Maritime Guidelines should not be possible. In 2010 the Commission approved for the first time State aid for launching a “Motorways of the Sea” project on the basis of both the Maritime Guide3244 Established by Regulation (EC) No 1692/2006 of the European Parliament and of the Council of 24 October 2006 establishing the second “Marco Polo” programme for the granting of Community financial assistance to improve the environmental performance of the freight transport system (Marco Polo II) and repealing Regulation (EC) No 1382/2003, OJ L 328, 24.11.2006, p. 1. 3245 Decision No 1692/96/EC of the European Parliament and of the Council of 23 July 1996 on Community guidelines for the development of the trans-European transport network, OJ L 228, 09.09.1996, p. 1. 3246 OJ C 317, 12.12.2008, p. 10.

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lines and the Communication on motorways of the sea. The project concerns the establishment of a maritime link operated by GLD Atlantique between the French port of Nantes-Saint Nazaire and the Spanish port of Gijón.3247 The aim is to capture between 3 per cent and 5 per cent of the road traffic which currently passes through the west of the Pyrenees. The overall financing of the project (State aid and Marco Polo grant) is limited to 35 per cent of the eligible costs within the first four years of its operation.

2.2.5 Investment aid Since subsidies for fleet renewal tend to distort competition, they are not allowed under the Maritime Guidelines, except where they form part of a structural reform leading to reductions in overall fleet capacity. Other investment aid may, however, be permitted, in line with the Union safe seas policy, in certain restricted circumstances to improve equipment on board vessels entered in a Member State’s registers or to promote the use of safe and clean ships. Thus aid may be permitted which provides incentives to upgrade ships registered in a Member State to standards which exceed the mandatory safety and environmental standards laid down in international conventions and anticipating agreed higher standards, thereby enhancing safety and environmental controls.

3.1612

Since shipping is essentially very mobile, regional aid for maritime companies in disadvantaged regions, which often take the form of investment aid to companies investing in the regions, may only be permitted where it is clear that the benefits will accrue to the region over a reasonable time period. Such would, for example, be the case of investment related to the construction of dedicated warehouses or to the purchase of fixed transhipment equipment. Investment aid for maritime companies in disadvantaged regions may then only be permitted where it also complies with the regional aid rules.

3.1613

2.2.6 Aid ceiling Member States can support their maritime sectors through tax reduction or direct payments - for instance, by providing reimbursement of seafarers’ income tax or a combination of both. The guidelines stipulate that a reduction to zero of taxation and social charges for seafarers and a reduction of corporate taxation of shipping activities is the maximum level of aid which may be permitted.

3.1614

3247 Commission Decision of 27.01.2010 in cases N573/2009 and N647/2009 Aide à la mise en oeuvre et à l’exploitation de l’autoroute de la mer entre le port de Nantes-Saint-Nazaire (France) et le port de Gijón (Espagne) opérée par GLD Atlantique, OJ C 74, 24.03.2010, p. 5.

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3.1615

Other systems of aid are possible under the condition that they do not provide any greater benefit than this. In addition, the total amount of aid granted in the form of corporate tax and labour costs reductions, crew relief, investment and regional aid should not exceed the total amount of taxes and social contributions collected from shipping activities and seafarers. Separate accounts should be hold in all cases where the beneficiary also carries out activities which do not quality for aid.

2.2.7 Restructuring aid 3.1616

As far as rescue and restructuring aid is concerned the Maritime Guidelines refer to the general rules applicable. In that respect, it is worth mentioning the different cases related to SNCM (Société nationale Corse Méditerranée). In July 2003 the Commission approved the injection of public funds into SNCM on the basis of a restructuring plan submitted by France which authorised conditional aid of EUR 66 million to SNCM for restructuring, as well as a second tranche of EUR 3.3 million, which the Commission approved on 16 March 2005.3248 The General Court annulled that decision in June 20053249 on the grounds that there had been manifest error of assessment in the way in which SNCM s contributions had been calculated. In 2006 the Commission extended its investigation due to changes introduced to the measures initially planned after the annulment of the decision of 2003.3250 In July 2008 the Commission approved a package of measures taken by the French State in 2006 as part of the privatisation of SNCM.3251 SNCM received a capital injection of EUR 158 million (by way of the sale of the company at a negative price), a cash advance of EUR 38.5 million for social measures relating to SNCM employees and an additional capital contribution of EUR 8.75 million. At the time, the Commission took the view that those measures did not constitute State aid because, according to the Commission’s reasoning, in partially selling off the company at a negative price as opposed to winding it up, France took what was for it the most advantageous option. In addition, the Commission endorsed the 2003 measures (including restructuring aid other than public service compensation of EUR 15.81 million) as being in accordance with the State aid rules. The General Court annulled that decision

3248 Commission Decision of 09.07.2003 in case C58/2002 (ex-N 118/2002) Restructuring aid to SNCM, OJ L 61, 27.02.2004, p. 1. 3249 Case T-349/03 Corsica Ferries France v Commission ECLI:EU:T:2005:221. 3250 See Commission Decision of 13.09.2006 in case C 58/2002 Aid for the restructuring of Société Nationale Maritime Corse-Méditerranée (SNCM), OJ C 303, 13.12.2006, p. 53. 3251 Commission Decision of 08.07.2008 in case C58/2002 Aid for the restructuring of Société Nationale Maritime Corse-Méditerranée (SNCM), OJ L 225, 27.08.2009, p. 180.

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in September 2012.3252 It held that the Commission had committed a manifest error of assessment in regarding those measures as free of State aid. The Commission consequently had to adopt a new decision to take account of the General Court’s findings. In its new decision,3253 the Commission concluded that it had not been established that France, in opting for privatisation, behaved like a MEO or that it chose the least costly solution for public finances. Moreover, the additional capital contribution of EUR 8.75 million was made under conditions which were not comparable to those governing the contribution of the private purchasers. In addition, the EUR 38.5 million cash advance for social measures covered costs which SNCM should have borne itself. Since those measures did not correspond to those that a MEO would have taken, they constituted State aid. The Commission considered that the restructuring plan accompanying that aid did not enable SNCM to return to long-term viability without availing itself of further public aid. The aid, totalling some EUR 220 million, was therefore declared incompatible and to be recovered by France.

2.2.8 Public service obligations Article 16 of the Treaty of Amsterdam recognised the importance and role of services of general economic interests, also called public service obligations (PSOs). In the maritime sector, under article 4(2) of the cabotage regulation,3254 two types of PSOs exist. The first type applies to all operators on a given route and usually do not lead to a financial compensation. The second type of PSOs only applies to a single company through a public service contract, which does not exceed six years and involves financial compensation. The cabotage Regulation does not require the organisation of an open tendering to award such a contract but specifies instead that the contract should be concluded on a nondiscriminatory basis with regard to all Community ship owners .3255

3.1617

3252 Case T-565/08 Corsica Ferries France v Commission ECLI:EU:T:2012:415. On appeal (in which the Commission did not participated) the Court upheld the judgment of the General Court in Joined Cases C-533/12 P and C-536/12 P SNCM and France v Corsica Ferries France ECLI:EU:C:2014:2142. 3253 Commission Decision of 20 November 2013 in case SA 16237 (C58/2002) (ex N118/2002) mises à exécution par la France en faveur de la SNCM, not yet published. 3254 Council regulation (EEC) N° 3577/92 of 22 December 1992 on the application of the principle of freedom to provide services to maritime transport within Member States (maritime cabotage), OJ L 364, 12.12.1992, p. 7. 3255 See also Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the interpretation of Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage) COM/2003/0595 final.

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3.1618

The Maritime Guidelines require the duration of public service contracts to be limited to a reasonable and not overlong period, which should normally not be more than six years.

3.1619

After the Altmark judgement specified whether and when PSOs constitute State aid, the Commission adopted legislation in order to clarify how the judgement would be applied in practice.3256 In its decision of 20 December 2011,3257 the Commission specifies under which conditions compensation to undertakings for public service obligations are compatible with state aid rules and are exempted from notification. Those compensations concern:

3.1620

–

air or maritime links to islands on which the average annual traffic during the two financial years preceding that in which the service of general economic interest was assigned does not exceed 300 000 passengers;

–

airports and ports for which the average annual traffic during the two financial years preceding that in which the service of general economic interest was assigned does not exceed 200 000 passengers, in the case of airports, and 300 000 passengers, in the case of ports.

In that respect, it is worth mentioning the different cases related to Tirrenia di Navigazione S.p.A. In 2004 the Commission approved aid granted by Italy for companies in the Tirrenia Group (Adriatica, Siremar, Saremar, Toremar and Caremar) on the basis of public service agreements. That aid for the period 2004-2008 was intended to guarantee links between mainland Italy and its large and small islands and hence ensure the mobility of the local populations. The Commission took the view that pursuant to Article 106(2) of the Treaty and the Maritime Guidelines the annual payment of the subsidy to companies in the group was a quid pro quo for the imposition of public service obligations. In addition, the Commission found that compensation granted on certain international maritime links was not compatible with State aid rules since there was no real need for public services and that it should be recovered. In 2009 the General Court annulled the Commission decision.

3256 See Chapter 33 of this book. 3257 Commission Decision of 20 December on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3-10.

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Separately, in October 2011 the Commission launched an in-depth investigation into various measures adopted by the Italian State in favour of the companies of the former Tirrenia Group.3258 The Commission is looking closely at the public service compensation paid during 2009-2011 to the companies of the group and has doubts whether the maritime services provided by the companies as of 2009 have effectively been defined as services of general economic interest by Italy before entrusting them to the companies and that the compensation paid for their operation is proportionate to the net costs of discharging the public-service obligations conferred on the companies. In 2012 the Commission extended the scope of an in-depth investigation opened in 2011 into public support measures in favour of companies of the former Tirrenia Group, namely Tirrenia di Navigazione, Caremar, Laziomar, Saremar, Siremar and Toremar.3259 The Commission had doubts whether several measures granted to these companies or their buyers after the opening of the investigation in October 2011 were in line with EU state aid rules. The Commission wanted also verify if the compensations granted as of January 2012 until full completion of the privatisation of the companies are in line with the SGEI rules. The Commission also expressed doubts whether the new public service compensations granted by Italy to the buyers of the companies are in line with those rules. In January 2014 the Commission concluded that measures implemented by the Region of Sardinia in favour of Saremar in the form of public service compensation and in the form of a capital injection were incompatible with the internal market as the condition of the SGEI decision, SGEI Framework and guidelines for rescue and restructuring aid were not fulfilled.3260

3.

3.1621

Conclusions

To conclude the Maritime Guidelines have brought about major improvements to the competitiveness of European shipping industry. While it is true that the objectives of the guidelines, i.e. to foster the competitiveness of the EU-flagged fleets and the employment of the EU seafarers as well as to secure Union maritime know-how in the context of strong international competition are sufficiently addressed with the existing rules, the current rules lack clarity

3.1622

3258 In 2011-2012, Tirrenia di Navigazione, Siremar and Toremar were privatised. Tirrenia di Navigazione was sold to Compagnia Italiana di Navigazione (CIN), Siremar was sold to Compagnia delle Isole (Cdl) and Toremar to Moby. The privatisation of the remaining companies of the former Tirrenia Group, i.e. Caremar, Saremar and Laziomar is underway. 3259 See Commission Decision of 19.12.2012 on State aid to the companies of the former Tirrenia Group and their acquirers (Cases SA.32014 (2011/C), SA.32015 (2011/C), SA.32016 (2011/C), OJ C 84, 22.03.2013, p. 58. 3260 Commission Decision of 22.01.2014 on measures implemented by the Region of Sardinia in favour of Saremar (Cases SA.32014 (2011/C), SA.32015 (2011/C), SA.32016 (2011/C), not yet published.

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concerning the conditions under which State aid can be granted and their application by the Commission has been rather flexible and has resulted in variety of authorised tonnage tax schemes in terms of eligible vessels, eligible activities or flag requirements.

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PART 3 – Compatibility rules Chapter 28 – Land transport Paul-John Loewenthal

Chapter 28 Land transport 1.

Introduction

This chapter deals with State aid to land transport. Land transport can be distinguished from maritime transport, on the one hand, and air transport, on the other. This distinction is made because different rules apply when assessing the compatibility of State aid granted to each mode of transport. More specifically, only in the case of land transport can the compatibility of State aid with the internal market be assessed under Article 93 of the Treaty, which provides that “[a]ids shall be compatible with the Treaties if they meet the needs of coordination of transport or if they represent reimbursement for the discharge of certain obligations inherent in the concept of a public service”. This article is located in Part 3, Title VI of the Treaty, which comprises eleven provisions governing the Union’s common transport policy. According to Article 100 of the Treaty, the provisions of that title only apply to transport by rail, road and inland waterway.

3.1623

With the entry into force of Regulation (EC) No 1370/20073261 and the repeal of Regulations (EEC) Nos 1191/693262 and 1107/703263 on December 3, 2009, Article 93 has become directly applicable as the legal basis for establishing the compatibility of aid for the coordination of transport or to offset costs relating to public service obligations in land transport not covered by that Regulation.

3.1624

3261 Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, OJ L 315, 03.12.2007, p. 1. 3262 Regulation (EEC) No 1191/69 of the Council of 26 June 1969 on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway as amended, OJ L 156, 28.06.1969, p. 1. 3263 Regulation (EEC) No 1107/70 of the Council of 4 June 1970 on the granting of aids for transport by rail, road and inland waterway, OJ L 130, 15.06.1970, p. 1.

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3.1625

Prior to that date, Article 93 was considered to have been exhaustively implemented by the aforementioned repealed Regulations,3264 so that it could not be applied directly to assess the compatibility of State aid to land transport: Regulation 1191/69 covered the provision of public transport services, while Regulation 1107/70 covered certain forms of aid to coordinate transport.

3.1626

Article 93 constitutes a lex specialis in relation to Articles 106(2) and 107(3) of the Treaty. This means that there is no room for the application of the latter two provisions where aid is granted for the coordination of transport or to offset costs relating to public service obligations in land transport. That is not to say that aid to land transport can only be deemed compatible with the internal market under Article 93. State aid to land transport may take several forms besides aid for transport coordination and public service compensation. Many of these are listed in the “Community Guidelines on State aid for railway undertakings” (“Railway Guidelines”)3265, but can equally be granted for land transport of any form:

3.1627

–

aid for transport infrastructure;

–

aid for the purchase or renewal of rolling stock;

–

aid for small and medium enterprises;

–

aid for environmental protection;

–

regional aid;

–

debt cancellation;

–

aid for the restructuring of transport undertakings;

–

State guarantees for transport undertakings.

The compatibility assessment of State aid to land transport will therefore need to be made according to the common interest objective to which the aid contributes. This may entail a compatibility assessment under relevant State aid 3264 Case C-280/00 Altmark Trans v Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para. 107. See also, section 4.1 of this chapter. 3265 Communication from the Commission - Community guidelines on State aid for railway undertakings, OJ C 184, 22.07.2008, p. 13.

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guidelines or under Articles 93, 107(2) and 107(3) of the Treaty directly. Since aid for the coordination of transport (Section 3) and aid to offset costs relating to public service obligations (Section 4) are the types of aid most specific to land transport, these will receive the greatest attention in this chapter. The residual categories of compatible aid to land transport will be briefly touched upon at the end of this chapter (Section 5). First, however, a general overview of the liberalisation of the land transport markets is provided as a backdrop to State aid control in this sector (Section 2).

2.

Liberalisation of the land transport sector

Where a market or a sector is completely confined to national boundaries, aid granted to operators in that market is deemed not to constitute State aid within the meaning of Article 107(1) of the Treaty, since it does not affect trade between Member States. It follows that markets which have not yet undergone a process of liberalisation, through the opening of those markets to competition, fall outside the scope of the State aid rules.

3.1628

This is particularly important for the land transport sector, which has only recently undergone a process of opening. Despite the inclusion of provisions on a common transport policy in the Treaty of Rome, for many years the Council showed reluctance when it came to liberalising the land transport sector, fearing that the liberalisation measures proposed by the Commission would upset the competitive climate prevailing within each mode of transport as well as between those modes. The most important step towards a common EU transport policy came in December 1992 with the adoption of the Commission’s first Transport White Paper3266, while several legislative acts gradually liberalising the road sector and a first step towards railway market opening entered into force the following year. That process of liberalisation triggered the application of the State aid rules and reinforced control thereof by the Commission. That process has not, however, proceeded at the same pace for each mode of transport and for each type of service.

3.1629

3266 The Future Development of the Common Transport Policy: A Global Approach to the Construction of a Community Framework for Sustainable Mobility - White Paper, COM (92) 494 final, 02.12.1992, Bulletin of the European Communities, Supplement 3/93. This was followed up by a White Paper submitted by the Commission on 12.09.2001: “European transport policy for 2010: time to decide”, COM(2001) 370 final, not published in the Official Journal and the Commission White Paper of 28 March 2011: “Roadmap to a Single European Transport Area – Towards a competitive and resource efficient transport system”, COM (2011) 144 final, not published in the Official Journal.

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2.1 Road transport 3.1630

Road transport is the sector in which liberalisation has undoubtedly gone the furthest. Over the past thirty years, all quotas applicable to cross-border transport services have been replaced by a system of Community licences issued on the basis of qualitative criteria. Since January 1, 1993, any road transport operator holding a Community license has free access to provide freight transport services to the entire single market.3267 On July 1, 1998, road cabotage3268 for freight was fully liberalised.3269 This means that a road haulier from a Member State who holds a Community license may transport goods, on a temporary basis, between two points within another Member State.3270 A Community license also allows commercial transport operators to perform international passenger transport operations within the Union, regardless of nationality or place of establishment.

3.1631

In December 2009, new Regulations modernising the rules governing road transport were adopted, including Regulation (EC) No 1073/2009 on the international carriage of passengers by coach and bus3271, which entered into force on December 4, 2011. This regulation replaces Regulation 684/923272 and Regulation 12/98.3273 It defines the different types of coach and bus service and the specific requirements they must fulfil to access the market: –

regular services, which require a national authorisation issued by a competent authority;

–

special regular services (e.g. the transport of pupils or workers), which

3267 Council regulation (EEC) No 881/92 of 26 March 1992 on access to the market in the carriage of goods by road within the Community to or from the territory of a Member State or passing across the territory of one or more Member States, OJ L 95, 09.04.1992, p. 1. 3268 National transport operations carried out by non-resident operators. 3269 Council regulation (EEC) No 3118/93 of 25 October 1993 laying down the conditions under which nonresident carriers may operate national road haulage services within a Member State, OJ L 279, 12.11.1993, p. 1 3270 By a “temporary basis” the Regulation means that such transports must not be carried out over a longer period of time or systematically or continuously. 3271 Regulation (EC) No 1073/2009 of the European Parliament and of the Council of 21 October 2009 on common rules for access to the international market for coach and bus services, and amending Regulation (EC) No 561/2006, OJ L 300, 14.11.2009, p. 88. 3272 Council Regulation (EEC) No 684/92 of 16 March 1992 on common rules for the international carriage of passengers by coach and bus, OJ L 74, 20.03.1992, p. 1. 3273 Council Regulation (EC) No 12/98 of 11 December 1997 laying down the conditions under which nonresident carriers may operate national road passenger transport services within a Member State, OJ L 4, 08.01.1998, p. 10.

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shall not require a national authorisation, if covered by a contract between the organiser and the transport operator; –

occasional services (e.g. a one-off tourist trip), which only require a journey form;

–

own-account transport and related authorisations and rules, which are exempt from the authorisation system, but require a certificate issued by the Member State in which the vehicle is registered.

Cabotage operations for passenger transport are also governed by Regulation 1073/2009 as of December 4, 2011. Any carrier who operates road passenger transport services and who holds a Community licence can operate regular services, special regular services and occasional services in the course of a regular international service.

3.1632

Finally, since 1994 public passenger transport contracts fall within the scope of the public procurement directives so that the Court of Justice, in its Altmark judgment3274, could declare in 2003 that “several Member States have since 1995 started to open certain transport markets to competition from undertakings established in other Member States, so that a number of undertakings are already offering their urban, suburban or regional transport services in Member States other than their State of origin”.

3.1633

2.2 Railway transport By contrast, railway transport is the sector in which the process of liberalisation has advanced the slowest. A first attempt at liberalisation by the Commission dates as far back as 1996 with the publication of its White Paper on “A Strategy for Revitalising the Community’s Railways”3275. The liberalisation of the railway sector has progressed through a series of packages of legislation, the first adopted in 2001. That ‘package’ consisted of three pieces of legislation. Directive 2001/12/EC3276 opened the market for international freight transport, meaning that Member States could no longer discriminate in favour of national operators. It also requires the separation of accounts for infrastructure management from the operation of transport services, with an option for functional separation

3.1634

3274 Case C-280/00 Altmark Trans v Regierungsprasidium Magdeburg ECLI:EU:C:2003:415, para. 79. 3275 Commission White Paper of 30 July 1996: A strategy for revitalising the Community s railways , COM(96) 421 final, not published in the Official Journal. 3276 Directive 2001/12/EC of the European Parliament and of the Council of 26 February 2001 amending Council Directive 91/440/EEC on the development of the Community’s railways, OJ L 75, 15.03.2001, p. 1.

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(known as “unbundling” or “vertical separation”), while prohibiting the transfer of funds between those activities to avoid cross-subsidisation.3277 Similarly, it prohibits funds related to the provision of public passenger transport services to be transferred to other activities the transport operator might be engaged in. Directive 2001/13/EC3278 ensured that there was an independent regulator in all Member States for railway services and extended the licensing system for railway operators. Directive 2001/14/EC3279 laid down the regulatory framework applicable to infrastructure managers. It also required Member States to set up systems for the allocation of network capacity on a non-discriminatory basis and required train operators to have a safety certificate.

3.1635

The ‘second railway package’3280, adopted in 2004, established the European Railway Agency, set a common regulatory framework for rail safety and brought forward by two years (to January 1, 2006) the date from which international freight service providers must be granted access to the single EU railway network. It also provided that access must be granted to the entire EU railway network for all types of rail freight services by January 1, 2007.

3277 In its judgments in Case C-555/10 Commission v Austria ECLI:EU:C:2013:115 and in Case C-556/10 Commission v Germany ECLI:EU:C:2013:116, the Court of Justice ruled that the first railway package does not require Member States to have an institutional separation between the infrastructure manager and the incumbent railway operator. According to the Court, that legislation allows Member States to integrate both the infrastructure manager and the railway operator into a single holding company provided those entities have separate legal personalities as well as their own bodies and resources which are different from those of their respective holding company. 3278 Directive 2001/13/EC of the European Parliament and of the Council of 26 February 2001 amending Council Directive 95/18/EC on the licensing of railway undertakings, OJ L 75, 15.03.2001, p. 26. 3279 Directive 2001/14/EC of the European Parliament and of the Council of 26 February 2001 on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification, OJ L 75, 15.03.2001, p. 29. 3280 Directive 2004/49/EC of the European Parliament and of the Council of 29 April 2004 on safety on the Community s railways and amending Council Directive 95/18/EC on the licensing of railway undertakings and Directive 2001/14/EC on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification (Railway Safety Directive), OJ L 164, 30.04.2004, p. 44; Directive 2004/50/EC of the European Parliament and of the Council of 29 April 2004 amending Council Directive 96/48/EC on the interoperability of the trans-European high-speed rail system and Directive 2001/16/EC of the European Parliament and of the Council on the interoperability of the transEuropean conventional rail system, OJ L 164, 30.04.2004, p. 114; Directive 2004/51/EC of the European Parliament and of the Council of 29 April 2004 amending Council Directive 91/440/EEC on the development of the Community s railways, OJ L 164, 30.04.2004, p. 164; Regulation (EC) No 1335/2008 of the European Parliament and of the Council of 16 December 2008 amending Regulation (EC) No 881/2004 establishing a European Railway Agency (Agency Regulation), OJ L 354, 31.12.2008, p. 51.

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The ‘third railway package’3281, adopted in 2007, liberalised cabotage operations for freight transport, which in theory brings a complete liberalisation of the rail freight market, and provides that railway undertakings offering international passenger services must be granted access to the infrastructure of all Member States by January 1, 2010. This means that any train operator operating an international route should be allowed to collect or set down passengers at any station on that route, including within the same Member State. The Railway Guidelines3282, adopted in 2008, introduced a transitional period up to January 1, 2010, in which railway undertakings could receive restructuring aid to help them adapt to the new competitive situation.3283

3.1636

Finally, in January 2013, the Commission adopted its proposals for a fourth railway package which seeks to open up domestic passenger rail transport services to competition, ensures competitive tendering for public service contracts, proposes common rules for rolling stock used to carry out public service contracts, and demands functional separation between infrastructure managers and railway operators.3284 Some Member State, most notably Italy, Germany, The Netherlands and the United Kingdom, have already opened their domestic passenger transport markets to competition.3285

3.1637

3281 Directive 2007/58/EC of the European Parliament and of the Council of 23 October 2007 amending Council Directive 91/440/EEC on the development of the Community s railways, and Directive 2001/14/ EC on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure, OJ L 315, 03.12.2007, p. 44; Directive 2007/59/EC of the European Parliament and of the Council of 23 October 2007 on the certification of train drivers operating locomotives and trains on the railway system in the Community, OJ L 315, 03.12.2007, p. 51; Regulation (EC) No 1371/2007 of the European Parliament and of the Council of 23 October 2007 on rail passengers rights and obligations, OJ L 315, 03.12.2007, p. 14. 3282 Communication from the Commission - Community guidelines on State aid for railway undertakings, OJ C 184, 22.07.2008, p. 13. 3283 Railway Guidelines, point 71. 3284 Proposal for a Directive of the European Parliament and of the Council on railway safety, COM(2013) 31 final; Proposal for a Regulation of the European Parliament and of the Council repealing Regulation (EEC) No 1192/69 of the Council on common rules for the normalisation of the accounts of railway undertakings, COM(2013) 26 final; Proposal for a Directive of the European Parliament and of the Council on the interoperability of the rail system within the European Union, COM(2013) 30 final; Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1370/2007 concerning the opening of the market for domestic passenger transport services by rail, COM(2013) 28 final; Proposal for a Directive of the European Parliament and of the Council amending Directive 2012/34/EU of the European Parliament and of the Council of 21 November 2012 establishing a single European railway area, as regards the opening of the market for domestic passenger transport services by rail and the governance of the railway infrastructure, COM(2013) 29 final; Proposal for a Regulation of the European Parliament and of the Council on the European Union Agency for Railways and repealing Regulation (EC) No 881/2004, COM(2013) 27 final. 3285 Railway Guidelines, point 9.

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2.3 Inland waterway transport 3.1638

Inland waterway transport has experienced a progressive liberalisation with the opening of cabotage traffic from January 1, 1993 and the liberalisation of intraUnion trade from August 1, 1996. Regulation No 3921/91 lays down the conditions under which non-resident carriers may transport goods or passengers by inland waterways within a Member State3286 and Regulation 1356/96 lays down common rules applicable to the transport of goods or passengers by inland waterway between Member States with a view to establishing freedom to provide such transport services.3287 By virtue of Regulation 1356/96 all carriers of goods or passengers by inland waterway have the right to carry out their transport operations between Member States and in transit without discrimination on grounds of nationality or place of establishment.

2.4 Combined transport 3.1639

Combined (or intermodal) transport is the movement of goods in one and the same loading unit (container, swap-body or semi-trailer) which uses successively two or more modes of transport without handling the goods themselves in changing modes. The objective of combined transport policy is that part of the road freight journey within the Union can be transferred to less congested, more environmentally friendly modes of transport, such as rail, inland waterway and short-sea shipping.

3.1640

The liberalisation of combined transport was accomplished in 1993. Legal instruments such as Directive 92/106/EEC on the establishment of common rules for certain types of combined transport of goods between Member States3288 aim at fostering the development of combined transport.

3286 Council Regulation (EEC) No 3921/91 of 16 December 1991 laying down the conditions under which non-resident carriers may transport goods or passengers by inland waterway, OJ L 373, 31.12.1991, p. 1. 3287 Council Regulation (EC) No 1356/96 of 8 July 1996 on common rules applicable to the transport of goods or passengers by inland waterway between Member States with a view to establishing freedom to provide such transport services, OJ L 175, 13.07.1996, p. 7. 3288 Council Directive 92/106/EEC of 7 December 1992 on the establishment of common rules for certain types of combined transport of goods between Member States, OJ L 368, 17.12.1992, p. 38.

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3.

Coordination of transport

3.1 What does coordination of transport entail? In accordance with Article 93 of the Treaty, aid which meets the needs of transport coordination shall be compatible with the internal market. Transport coordination is “government intervention in the market for reasons of transport policy”3289 involving “some form of planning by the State”3290. Point 89 of the Railway Guidelines further specifies that the notion of transport coordination used in Article 93 “has a significance which goes beyond the simple fact of facilitating the development of an economic activity. It implies an intervention by public authorities which is aimed at guiding the development of the transport sector in the common interest”3291.

3.1641

Coordination measures are considered a necessary instrument to organise and restructure regulated markets. As noted in point 90 of the Railway Guidelines, however, the more a market is subject to competition, the less State aid is required for coordination purposes, as coordination might result from the action of market forces.3292 As explained in Section 2 of this chapter, the transport sector has undergone a process of gradual liberalisation since the 1990s through secondary legislation on market access. Nevertheless, even after the sector’s liberalisation, there may still be various market failures which justify the intervention of the public authorities. Indeed, the presence of a specific provision in the Treaty making it possible to authorise aid which meets the needs of transport coordination shows how important these risks of market failures are and the negative impact they have on the development of the Union.3293

3.1642

3289 Commission Decision 2004/261/EC of 09.07.2003 on the State aid which Italy is planning to implement in favour of certain heavy goods vehicles designed for the carriage of goods by road in order to divert heavy goods traffic from trunk road 33 (SS 33) from Lake Maggiore to the A26 motorway (Case C 11/2002 ex N 382/2001), OJ L 81, 19.03.2004, p. 80, recital 42. 3290 Commission Decision 2003/879/EC of 24.06.2003 on State aid which the Netherlands proposes to implement to assist NV Huisvuilcentrale Noord-Holland (HVC) (Case C51/2002), OJ L 327, 16.12.2003, p. 39, recital 30. 3291 Railway Guidelines, point 89. 3292 See also Commission Decision 1999/590/EC of 04.05.1999 on the measures for the restructuring of road haulage and the development of intermodality (Law No 454 of 23 December 1997) which Italy intends to implement (Case N 403/97), OJ L 227, 28.08.1999, p. 12; Commission Decision 98/693/EC of 01.07.1998 on the Spanish Plan Renove Industrial system of aid for the purchase of commercial vehicles (August 1994 - December 1996)(Case 65/1998), OJ L 329, 05.12.1998, p. 23; Commission Decision 93/496/EEC of 09.06.1993 on – Italian tax credit for professional road hauliers (Case C 32/92 ex NN 67/92), OJ L 233, 16.09.1993, p. 10. 3293 Railway Guidelines, point 94.

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3.1643

The Railway Guidelines list three types of market failure in points 91 to 94 justifying coordination measures in relation to railway transport, but those failures may equally exist in relation to other modes of land transport. First, the transport sector entails major negative externalities, for example between users (congestion) or in respect of the society as a whole (pollution). These externalities are difficult to take into account, notably due to the inherent limits of including external costs, or even simply direct usage costs, in the pricing systems for access to transport infrastructure. As a result, there may be disparities between the different modes of transport, which should be corrected by public support for those modes of transport which give rise to the lowest external costs. Second, the transport sector may experience “coordination” difficulties within the economic meaning of the term, for example in the adoption of a common interoperability standard or in the connections between different transport networks. Third, transport undertakings may not be able to reap the full rewards of their research, development and innovation efforts.

3.2 What forms of aid? 3.1644

Prior to the entry into force of Regulation 1370/2007, Article 93 was considered to be sufficiently implemented by Regulations 1191/69 and 1107/70. From that perspective, Article 3 of Regulation 1107/70 was considered to exhaustively list the permissible categories of transport coordination aid for road, rail and inland waterway. Those categories were (i) aid for costs which undertakings have to bear for the use of certain transport infrastructure, while other undertakings are not subject to a like burden (Article 3(b)), (ii) aid for research and development (Article 3(c)), (iii) aid for the elimination of excess capacity causing serious structural problems (Article 3(d)) and (iv) aid for the normalisation of the accounts of railway undertakings (Article 3(a)).

3.1645

However, in light of the description of transport coordination in the preceding section, many measures serving that purpose were clearly not covered by Regulation 1107/70 but were nevertheless considered worthy of public support in response to market failures. To account for those measures, the Commission devised an approach whereby measures that de facto contributed to solving an identified market failure through transport coordination were considered compatible with the internal market under Article 107(3)(c), provided the other conditions for a finding of compatible aid under that provision were met.

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Support for this approach could be found in Commission v Belgium3294, where the Court of Justice rejected Belgium’s argument that aid under Article 93 could no longer be considered to fall within the scope of Article 107 on the basis that Article 3(2), first paragraph, of Regulation 1107/70 specifies that it is applicable “save as otherwise provided in this Treaty”. The Court of Justice noted that that provision also provides that “Article [107 to 109 of the Treaty] shall apply to aids granted for transport by rail, road and inland waterway”. Accordingly, in cases in which the Commission concluded that aid was not covered by Regulations 1191/69, 1192/69 or 1107/70, it could still proceed by assessing the compatibility of the aid with the internal market on the basis of Article 107.3295

3.1646

With the repeal of Regulation 1107/70 on December 3, 2009, all types of aid for the coordination of transport can now be directly assessed for compatibility with the internal market under Article 93, thereby opening the door for a broader set of categories of compatible transport coordination aid than those covered by that regulation. This development has had the effect that measures that were previously assessed under Article 107(3)(c) and which are more appropriately considered to reflect transport coordination measures are now assessed under Article 93 directly. For good measure, however, Regulation 1370/2007, which is meant to cover public passenger transport services only, repeats in its Articles 9(2)(a) and 9(2)(b) the transport coordination aid measures previously listed in Articles 3(b) and 3(c) of Regulation 1107/70. The purpose of those provisions is to ensure a certain degree of continuity between the old and new regimes following the repeal of Regulations 1191/69 and 1107/70.

3.1647

On the basis of the aforementioned and considering the description of transport coordination in the preceding section, aid for the coordination of transport will generally consist of three categories of measures. First, measures which aim to correct disparities between the different modes of transport through the reduction of external costs (for example the cost of access to transport infrastructure), the reduction of negative externalities (for example congestion and pollution), and by encouraging a modal shift to transport modes generating lower external costs and negative externalities. Second, transport coordination measures may aim to better interlink modes of transport through the adoption of common interoperability standards (including promoting greater safety and the removal of technical barriers) and the establishment of connections between transport

3.1648

3294 Case C-156/77 Commission v Belgium ECLI:EU:C:1978:180. 3295 Commission Decision of 16.11.2004 on the prolongation of Belgian scheme N550/2001 concerning public private cooperation for loading and unloading installations (Case N 344/2004), summary notice in OJ C 88, 21.04.2007, p. 14.

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modes and networks. Third, transport coordination measures may aim to promote research, development and innovation in the transport sector. Several of these transport coordination measures are listed in point 98 of the Railway Guidelines in relation to railway transport, but are equally valid for other modes of transport.

3.1649

In relation to road transport, it is difficult to imagine aid measures that could fall into the first category of transport coordination measures (measures to correct disparities between the different modes of transport). As regards the second category (measures to better interlink modes of transport), the Commission has recently approved a German scheme granting aid for the development of computerised transport control systems and for infrastructure measures concerning the development of electronic fare management systems and digital radio links on busses and trams.3296

3.1650

By contrast, a whole host of transport coordination measures have been approved under the first category in relation to railway transport. Railway transport must support high infrastructure costs that other modes of transport, in particular road, do not have to bear. The Commission has authorised numerous measures which encourage the transfer of traffic of goods from road to rail to alleviate congestions on roads and by promoting environmentally friendly transport modes. Thus, the Commission has often approved subsidy schemes to cover the additional external costs of rail freight transport in relation road transport.3297 Aid intended for demonstration purposes to raise awareness of the potential of railway transport or aid justified on environmental grounds have 3296 Commission Decision of 05.12.2012 on German Aid scheme for Electronic Fare Management and Computerised Transport Management in Westfalen-Lippe (Case SA.34638 (2012/N)), summary notice in OJ C 15, 18.01.2013, p. 2. 3297 Commission Decision of 16.12.2011 on Italian Subsidy scheme “Ferrobonus” for combined transport (Case SA. 32603), summary notice in OJ C 88, 24.03.2012, p. 1; Commission Decision of 02.07.2008 on Hungarian operating aid to RO LA combined transport (Case N 78/2008), summary notice in OJ C 249, 01.10.2008, p. 1; Commission Decisions of 10.12.2003 on Implementation of an experimental rolling motorway service France (Case NN 155/2003), summary notice in OJ C 37, 11.02.2004, p. 14; and on Italian System to promote freight transport by rail (Case N 810/2002), summary notice in OJ C 41, 17.02.2004, p. 6, most recently prolonged by Commission Decisions 11.07.2012 on Prolongation of an experimental rolling motorway service in the Alps (Cases SA.33845 (2011/N) and SA.34146 (2011/N)), summary notice in OJ C 305, 10.10.2012, p. 5; Commission Decision of 03.03.2003 on Italian Aid for the setting up of rolling-motorway services in the Friulia-Venezia Giulia region (Case N 335/2003), summary notice in OJ C 25, 29.01.2004, p. 7; Commission Decision of 19.09.2001 on UK Network grants to licensed heavy rail infrastructure managers (Case N 500/2001), summary notice in OJ C 333, 28.11.2001, p. 6; Commission Decision of 21.04.1999 on Danish Environmental subsidy for the transport of goods by rail (Case N 588/98), summary notice in OJ C 166, 12.09.1999, p. 6, most recently prolonged for the period 2014-2017 by Commission Decision of 04.01.2014 on Danish Environmental aid scheme for the transport of goods by rail (Case SA.36758), summary notice in OJ C 280, 22.08.2014, p. 1.

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also been accepted, such as exemptions from a climate charge levy3298 and excise duty exemptions and refunds for energy products used as fuel for railway transport3299. The Commission has also approved aid for the construction, extension and reactivation of private railway sidings.3300 As regards interoperability aid, the Commission has recently authorised German noise reduction measures funding the retrofitting of existing railway freight wagons with less noisy break blocks3301 and also authorised interoperability aid in the Czech Republic, including the implementation of a digital mobile radio network, the implementation of telematic subsystems in cargo transport and the implementation of noise reduction measures for rolling stock.3302 Finally, an example of R&D&I aid (third category) to railway undertakings that was approved by the Commission under Article 93 is a Dutch aid measure financing the development of a cross-border hub and spoke system.3303

3298 Commission Decision 2002/676/EC,ECSC of 3 April 2002 on the dual-use exemption which the United Kingdom is planning to implement under the Climate Change Levy and the extended exemption for certain competing processes (Case C 18/2001), OJ L 229, 27.08.2002, p. 15, prolonged by Commission Decisions of 08.04.2011 on Extension of the exemption from the climate change levy for certain forms of transport (Case SA.31348 (2011/N)) and on Exemption from the climate change levy for electrified rail freight (Case SA.32614 (2011/N)), summary notice in OJ C 153, 24.05.2011, p. 1. 3299 Commission Decision of 13.01.2010 on Excise duty exemptions and refunds for energy products used as fuel for railway transportation and navigation on inland waterways in Hungary (Case NN 29/2008), summary notice in OJ C 36, 13.02.2010, p. 2. 3300 Commission Decision of 06.10.2004 on Guidelines on funding for the construction, extension and reactivation of private railway sidings in Germany (Case N 170/2004), summary notice in OJ C 125, 24.05.2005, p. 7, most recently prolonged by Commission Decision of 26.11.2012 (Case SA. 35363), not yet published, and Commission Decision of 19.06.2002 on Programme of aid for the development of railway sidings in Austria (Case N 643/2001), summary notice in OJ C 178, 26.07.2002, p. 20, most recently prolonged by Commission Decision of 29.01.2007 on Prolongation of aid scheme for the development of private railway sidings (Case N 707/2006), OJ C 137, 21.06.2007, p. 3. 3301 Commission Decision of 19.12.2012 on the Funding Guidelines for noise reduction measures on freight wagons in Germany (Case SA.34156), summary notice in OJ C 43, 15.02.2013, p. 12. A similar measure notified by the German authorities was approved under the Environmental Aid Guidelines prior to the direct applicability of Article 93 of the Treaty in Commission Decision of 05.11.2009 on German support for the equipment of freight trains with certain brakes (Case N 324/2009), summary notice in OJ C 229, 23.09.2009, p. 5. 3302 Commission Decision of 28.01.2009 on Interoperability in railway transport Czech Republic (Case N 469/2008), summary notice in OJ C 53, 06.03.2009, p. 1. 3303 Commission Decision of 05.10.2011 on Dutch start-up aid to new combined transport services based on Twin hub railway network (Case SA.31981), summary notice in OJ C 361, 10.12.2011, p. 1.

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3.1651

In relation to inland waterway transport, the Commission has approved schemes promoting the transport of goods by inland waterways3304 and schemes covering the additional external costs of inland waterway transport in relation to road transport3305. Even investment aid, which is normally considered as operational aid, has been accepted by the Commission so long as it facilitated an intermodal shift from other transport modes to inland waterway transport and there was no overcapacity in that particular segment of the market.3306

3.1652

Finally, in relation to combined transport, from 1982 to 1997 combined transport aid was explicitly mentioned as a form of transport coordination aid in Article 3(1)(e) of Regulation 1107/70. During that period, aid for infrastruc3304 Commission Decision of 08.08.2011 on Flemish subsidy scheme for palettes transportation using inland waterways (Case SA.30987 (N/2010)), summary notice in OJ C 281, 24.09.2011, p. 6; Commission Decision of 12 October 2006 on Belgian aid as pilot project by the Region of Flanders to estuarine navigation and inland waterway navigation for the transport of containers from and to the Flemish coastal ports (Zeebrugge and Ostend)(Case N 53/2006), summary notice in OJ C 297, 07.12.2006 , p. 14; and Commission Decision of 20.06.2001 on Austrian Pilot programme for the development of intermodal transport and for the promotion of projects in combined transport on the River Danube (Case N219/2001), summary notice in OJ C 244, 01.09.2001, p. 2, prolonged by Commission Decision of 23.07.2008 (Case N 31/2008), summary notice in OJ C 253, 04.10.2008 , p. 3. 3305 Commission Decision of 30.4.2010 on Belgian Support for intermodal transportation by waterway in the Brussels Capital Region – Belgium (Case N 678/2009), summary notice in OJ C 158, 18.06.2010 , p. 1; Commission Decision of 18.07.2007 on Belgian subsidies by the Port of Brussels to container transport lines (Case N 720/2006), summary notice in OJ C 307, 18.12.2007, p. 10; Commission Decision of 10.05.2007 on Flemish measure to support inter modal transport via inland waterways Belgium (Case N 682/2006), summary notice in OJ C 227, 27.09.2007, p. 4; Commission Decision of 14.07.2004 on Belgian aid to the inland navigation sector for the handling of containers in the Port of Antwerp (Case N88/2004), summary notice in OJ C 77, 31.03.2005, p. 29; Commission Decision of 05.07.2005 on Belgian aid scheme for combined transport (Case N 249/2004), summary notice in OJ C 280, 12.11.2005, p. 9; Commission Decision of 16.06.2004 on Walloon aid scheme for inland waterway transport 2004-2007 – Belgium (Case N 4/2004), summary notice in OJ C 125, 24.05.2005, p. 6; Commission Decision of 16.12.2003 on UK Company Neutral Revenue Scheme (CNRS) (Case N 464/2003), summary notice in OJ C 16, 22.01.2004, p. 25; Commission Decision of 30.04.2003 on French State aid for the operation of scheduled combined freight transport services as an alternative to the road-only mode (Case N 623/2002), summary notice in OJ C 248, 16.10.2003, p. 3; Commission Decision of 01.10.2003 on Italian aid Scheme for combined transport (Case N 64/2003), summary notice in OJ C 284, 27.11.2003, p. 2; Commission Decision of 08.07.1999 on Austrian program for the promotion of combined transport Road-rail-ship (Case N 121/1999), summary notice in OJ C 245, 28.08.1999, p. 2; Commission Decision of 08.12.1999 on Italian subsidies for the realisation of infrastructures and services in the freight transport sector and for the restructuring of the road transport sector (Case N 412/1998), summary notice in OJ C 55, 26.02.2000, p. 11; Commission Decision of 22.12.1999 on Dutch subsidy for Container Terminal Lage Weide Utrecht (Case N 617/1998), summary notice in OJ C 71, 11.03.2000, p. 7. 3306 See Commission Decision of 05.06.2013 on French aid scheme for the modernisation and innovation of the inland waterway fleet for the period 2013-2017 (Case SA.35139 (2012/N)), summary notice in OJ C 200, 12.07.2013, p. 1; Commission Decision of 20.05.2008 on Modernisation of the inland waterway fleet – Czech Republic (Case N 358/2007), summary notice in OJ C 177, 12.07.2008, p. 1; Commission Decision of 31.01.2001 on Dutch subsidy scheme for private industrial links with inland waterways (SBV) – Netherlands (Case N 597/2000), summary notice in OJ C 102, 31.03.2001, p. 8.

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ture construction3307 and aid for the unpaid external costs of road transport3308 were allowed with few conditions and little limitation in aid intensity. With the repeal of that article, the Commission started applying Article 93 directly to such aids,3309 until the Altmark judgment excluded that compatibility basis.3310 Thereafter, Article 107(3)(c) was used to approve combined transport aid which was, for all intents and purposes, aid for the coordination of transport. Since December 2009, Article 93 has become directly applicable, under which provision the Commission has approved multiple combined transport aid measures. Many measures have been approved under the first category, including numerous measures to encourage a modal shift from road to rail, inland waterway and short sea shipping3311 and aid to compensate for the unpaid external costs of road transport3312.The Commission has also authorised aid for the construction of intermodal transport terminals,3313 logistic centres and container 3307 See Commission Decision of 22.12.1998 on South Wales European Freight terminal (Case N 517/1998), summary notice in OJ C 81, 24.03.1999, p. 1. 3308 See Commission Decision of 21.04.1999 on Danish environmental subsidy for the transport of goods by rail (Case N 588/98), summary notice in OJ C 166, 12.06.1999, p. 6; Commission Decision of 08.07.1999 on Austrian Environmental Premium (Case N 121/1999), summary notice published in OJ C 245, 12.06.1999, p. 2. 3309 Commission Decision 2003/879/EC of 24.06.2003 on State aid which the Netherlands proposes to implement to assist NV Huisvuilcentrale Noord-Holland (HVC), OJ L 327, 16.12.2003, p. 39. 3310 See Commission Decision of 05.07.2005 on Belgian aid scheme for combined transport (Case N 249/2004), summary notice in OJ C 280, 12.11.2005, p. 9. 3311 Commission Decision of 08.09.2004 on Austrian Programme of aid for combined transport road-rail-ship (Case N 104/2004), summary notice in OJ C 126, 25.05.2005, p. 10, most recently prolonged by Commission Decision of 13.01.2009 on Special Guidelines for the Austrian programme of Aid for Innovative Combined Transport (Case N 415/2008), summary notice in OJ C 53, 06.03.2009, p. 1; Commission Decision of 12 October 2006 on UK Rail Environmental Benefit Procurement Scheme (REPS) (Case N 427/2006), summary notice in OJ C 283, 21.11.2006, p. 9; Commission Decision of 26 September 2006 on Czech aid to cover losses resulting from deficient boating conditions on the river Elbe between the town of Usti nad Labem and the German border (Case N 564/2005), summary notice in OJ C 283, 21.11.2006, p. 9; Commission Decision of 05.07.2005 on Belgian aid scheme for combined transport (Case N 249/2004), summary notice in OJ C 280, 12.11.2005, p. 9; Commission Decision of 16.12.2003 on UK Company Neutral Revenue Scheme (CNRS) (Case N 464/2003), summary notice in OJ C 16, 22.01.2004, p. 25. 3312 Commission Decision of 25.07.2012 on Austrian aid for the provision of certain combined transport services by rail (Case SA.33993), summary notice in OJ C 263, 31.08.2012, p. 1; Commission Decision of 26.11.2008 on Belgian Aid scheme in favour of transport modes other than road for the period 2008-2013 (Wallonia) (Case N 352/2008), summary notice in OJ C 7, 13.01.2009, p. 1, prolonged by Commission Decision of 04.02.2014 on Belgian aid scheme in favour of transport modes other than road for the period 2014/2020 (Wallonia) (Case SA. 37293), summary notice in OJ C 163, 28.05.2014, p. 1. 3313 Commission Decision of 17.07.2013 on Slovak aid for the construction and operation of public intermodal transport terminals (Case SA. 34369), OJ L 238, 09.08.2014, p. 11; Commission Decision of 22.12.2006 on Italian aid for the establishment of infrastructure and services in the goods transport sector, for the restructuring of road haulage and the development of combined transport (Case N 575/2006), summary notice in OJ C 139, 23.06.2007, p. 11; Commission Decision of 13.092006 on Austrian guidelines on aid for transhipment systems in intermodal transport (Case N 196/06), summary notice in OJ C 280, 18.11.2006, p. 2; Commission Decision of 06.04.2006 on Czech aid scheme to support combined transport (Case N 132/05), summary notice in OJ C 150, 28.06.2006, p. 35; Commission Decision of 25.01.2006 on Polish

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terminals,3314 aid for the enlargement of an existing terminal3315 and the extension of an inland port with intermodal functionality,3316 aid for the acquisition of combined transport equipment, such as semi-trailers or intermodal loading units,3317 start-up aid for the launch of for the launching of rail-based combined transport services,3318 and aid for the laying of connecting roads, rail tracks and loading facilities.3319 Finally, where aid for infrastructure use is notified, this will normally be examined under Article 9(2)(a) of Regulation 1370/2007.3320

3314

3315

3316 3317

3318

3319

3320

aid scheme for development of intermodal systems (Case N 160/05), OJ C 272, 09.11.2006, p. 10; Commission Decision of 16.03.2005 on Belgian aid to combined transport (Wallonia), summary notice in OJ C 136, 03.06.2005, p. 43; Commission Decision of 14.09.2001 on Dutch subsidy Scheme for Public Inland Terminals (SOIT) (Case N 208/2000), summary notice in OJ C 315, 04.11.2000, p. 21. Commission Decision of 31.05.2013 on Polish investment aid for the development of intermodal transport under the Infrastructure and Environmental Operational Programme (Case SA.36485), summary notice in OJ C 204, 18.07.2013, p. 2. Commission Decision of 16.10.2013 on Interporto Regionale della Puglia - Italy (Case SA.35124), summary notice in OJ C 354, 04.12.2013, p. 6; Commission Decision of 09.11.2011 on Intermodal Container Terminal Genk Belgium (Case 32632), summary notice in C 82, 21.03.2012, p. 1. Commission Decision of 11.06.2013 on German aid for the extension of inland port Königs Wusterhausen/ Wildau (Case SA.34501), summary notice in OJ C 176, 21.06.2013, p. 1. Commission Decision of 25.01.2006 on Polish aid scheme for development of intermodal systems (Case N 160/05), OJ C 272, 09.11.2006, p. 10; Commission Decision of 16.03.2005 on German aid scheme for the funding of new combined transport (Case N 238/04), summary notice in OJ C 136, 03.06.2005, p. 43; Commission Decision of 20.04.2005 on Italian aid for the development of logistics chains and the upgrading of intermodality (Case N 496/03), summary notice in OJ C 79, 01.04.2006, p. 23; Commission Decision of 08.09.2004 on Austrian programme of aid for combined transport road-rail-ship (Case N 104/2004), summary notice in OJ C 126, 25.05.2005, p. 10; Commission Decision of 11.11.2003 on Italian aid for the establishment of infrastructure and services in the goods transport sector, for the restructuring of road haulage and the development of combined transport (Case N 134/2001), summary notice in OJ C 311, 20.12.2003, p. 18; Commission Decision of 24.07.2002 on Italian Special provisions for transport sector (Autonomous Province of Trento) (Case N 833/01), summary notice in OJ C 242, 08.10.2002, p. 8; Commission Decision of 27.03.1996 on Austrian subsidised loans to the transport sector (Case NN 97/95), most recently prolonged by Commission Decision of 12.09.2007 (Case SA 22582 (N76/2007)), OJ C 282, 24.11.2007, p. 5. Commission Decision of 17.06.2009 on Interporto Campano S.p.A. High-frequency combined road-rail transport service between the Container Terminal at the Port of Naples and the District of Nola – Italy (Case N 449/2008), summary notice in OJ C 196, 20.08.2009, p. 1. Commission Decision of 12.03.2014 on Intermodal Development of the Free Port of Budapest Hungary (Case SA.37402), summary notice in OJ C 141, 09.05.2014, p. 1; Commission Decision of 13.07.2009 on First-last mile infrastructure and intermodality – Hungary (Case N 316/08), summary notice in OJ C 232, 26.09.2009, p. 2, most recently prolonged by Commission Decision of 19.12.2013 Prolongation of the aid scheme First-last mile infrastructures, inter-modality – Hungary (Case SA. 37578), summary notice in OJ C 23, 25.01.2014, p. 7. Commission Decision of 06.05.2013 on Belgian support scheme to intermodal transport by waterway in the Brussels Capital region (Case SA.36207), summary notice in OJ C 176, 21.06.2013, p. 1.

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3.3 Compatibility under Article 93 of the Treaty 3.3.1 Aid which may be compatible with the internal market By its literal wording, Article 93 of the Treaty would appear to suggest that the Commission has no discretion as to the compatibility of the categories of aid listed therein. Indeed, like Article 107(2) and in contrast to Article 107(3), Article 93 provides that aids shall be compatible with the Treaties. Nevertheless, the Court of Justice held early on that this Article “acknowledges that aid to transport is compatible with the Treaty only in well-defined cases which do not jeopardise the general interests of the [Union] ”.3321 Moreover, for aid to be compatible with the Treaties, it must “meet the needs” of coordination of transport. For a given aid measure to be considered to meet the needs of transport coordination, it has to be necessary and proportionate to the intended objective.3322

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On further reflexion, Article 93 would therefore appear to be more similar to Article 107(3) in that the Commission has the discretion to determine whether aid for coordination of transport is compatible with the internal market. Indeed, in its decisional practice, the Commission has applied a compatibility analysis which is very similar to that deployed in cases where an aid measure is assessed directly under Article 107(3)(c). This has much to do with the fact that between the date of the Altmark judgment and the date on which Regulations 1191/69 and 1107/70 were repealed, the Commission often conducted its compatibility assessment of aid that fell outside the scope of those regulations but de facto aimed at transport coordination directly on the basis of Article 107(3)(c).

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Therefore, the Commission has, in its constant decisional practice, considered that aid for the coordination of transport is compatible with the internal market on the basis of Article 93, if the following cumulative conditions are met:

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–

the aid contributes to an objective of common interest;

–

the aid is necessary and has an incentive effect;

–

the aid is proportionate;

–

the aid/aided activity is open to all users on a non-discriminatory basis; and

3321 Case C-156/77 Commission v Belgium ECLI:EU:C:1978:180, para. 10. 3322 Railway Guidelines, point 96.

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–

the aid does not lead to distortions of competition contrary to the common interest.

Each of these conditions will be examined separately in the following sections.

3.3.2 The aid must contribute to an objective of common interest 3.1656

Just like with compatibility under Article 107(3)(c), compatibility under Article 93 requires that the aid contributes to an objective of common interest. Those objectives are legitimate policy goals of the Member States, which may or may not be objectives of the EU. Ultimately, the objective pursued will depend on the measure being adopted.

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A key objective of the EU’s common transport policy is to eliminate the negative externalities associated with road transport through the promotion of environmentally sound modes of transport. The 2011 White Paper on Transport Policy encourages the use of environmentally-friendly modes of transport instead of and alongside transport by road.3323 The White Paper states that a certain percentage of road freight should shift to these alternative modes of transport by certain fixed dates. More specifically, the Union has set itself the goal that, by 2030, 30 per cent of road freight transported over 300 kilometres should shift to other modes of transport such as rail or waterborne transport, and more than 50 per cent by 2050, facilitated by efficient and green freight corridors. As regards the common objective to re-balance the freight transport market in favour to inland waterway transport, the Commission recently adopted the Naiades II Communication3324 (September 2013), which encourages the development of quality infrastructures for inland navigation. As regards combined transport, 3323 White Paper “Roadmap to a Single European Transport Area – Towards a competitive and resource efficient transport system”, COM (2011) 114 final, 28.03.2011; see also White Paper “European transport policy for 2010: time to decide”, COM (2001) 370, 12.09.2001 and the mid-term review “Keep Europe moving Sustainable mobility for our continent. Mid-term review of the European Commission’s 2001 Transport White Paper”, COM (2006) 314, 22.06.2006, which points out in para 1.1: The objectives of EU transport policy, from the transport White Paper of 1992 via the White Paper of 2001 to today s communication, remain valid: to help provide Europeans with efficient, effective transportation systems (& ) . In addition, in point 9 it is stated: “A European sustainable mobility policy therefore needs to build on a broader range of policy tools achieving shifts to more environmentally friendly modes where appropriate, especially on long distance, in urban areas and on congested corridors.” 3324 Towards quality inland waterway transport NAIADES II, COM(2013)623 final, 10.09.2013. See also Communication from the Commission on the promotion of Inland Waterway Transport “Naiades” - An Integrated European Action Programme for Inland Waterway Transport, COM (2006) 6, 17.1.2006. Point II, para. 3 states: “In the context of a liberalised inland navigation market, the European Commission aims at promoting and strengthening the competitive position of inland waterway transport, in particular by enhancing its integration into multi-modal supply chains”.

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the Marco Polo Regulation3325 recognizes that combined transport is a complex transport option, involving various actors with various business models, in a fragmented and small-scale environment, often still separated by modal cultures and along national lines. That regulation stresses the need for Community action to enhance intermodality so as to reduce road congestion and to improve the environmental performance of the freight transport system within the Community, thereby contributing to an efficient and sustainable transport system.3326 These actions should contribute to shift the expected aggregate increase in international road freight traffic to short sea shipping, rail and inland waterways or to a combination of modes of transport in which road journeys are as short as possible. The Commission recognises that it is in the first place the task of market operators to improve alternative modes of transport within markets to which access is free and where the rules of free competition and supply and demand prevail. However, to fully unleash the potential of these transport modes, the willingness to take risks inherent in switching from road to alternative modes of transport may need to be stimulated. The Commission acknowledges that considerable investments will be needed to expand or upgrade the capacity of transport networks.3327 Member States may therefore encourage the use of cleaner modes of transport and measures to enhance energy efficiency. It is in this context that public financing of transport must be understood.

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3.3.3 The aid must be necessary and have an incentive effect To benefit from compatibility under Article 93, transport coordination aid must not only contribute to an objective of common interest, it must also be necessary to achieve that objective. Just like under the compatibility assessment pursuant to Article 107(3)(c), aid will only be considered necessary if it can be shown that without the aid the common interest objective cannot be achieved.

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Article 93 also requires that transport coordination aid has an incentive effect. This means that the beneficiary of the aid would not have carried out the aided activities absent the granting of aid. The aid must actually induce the recipient to change its behaviour in such a way that the objective can be achieved. In an

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3325 Regulation (EC) No 1692/2006 of the European Parliament and of the Council of 24 October 2006 establishing the second “Marco Polo” programme for the granting of Community financial assistance to improve the environmental performance of the freight transport system ( Marco Polo II ), OJ L 328, 24.11.2006, p. 1. 3326 Recital 4 of Marco Polo II Regulation. Similar ideas are developed in the Communication on Freight Transport Logistics in Europe – the key to sustainable mobility, COM(2006) 336, 28.06.2006. 3327 Communication “A European Economic Recovery Plan”, COM (2008) 800 final, 26.11.2008.

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opening decision concerning Italy’s intention to grant aid for the construction of an intermodal terminal, the laying of specialised railway tracks to unload oil products and the laying of connections to the national rail network, the Commission expressed doubts on whether the notified aid had an incentive effect, considering that the works on the project had started after the beneficiary had submitted an application for funding but before it had been given any assurances it would receive that funding.3328 In particular, the Commission expressed doubts that the beneficiary had a reasonable expectation that it was going to receive the aid in question at the time of the submission of its application and that it would not have realised the investment without the aid.3329 Italy subsequently withdrew its notification.3330

3.3.4 The aid must be proportionate 3.1661

As a third requirement for compatibility, transport coordination aid must be proportionate to the intended objective pursued by the measure. That requirement means that the aid must be limited to the minimum necessary.

3.1662

In relation to aid for reducing external costs, the aid may not exceed the additional costs associated with the use of rail or inland waterway transport instead of road transport. For interoperability aid, the beneficiary of that aid should, as a general rule, be expected to carry at least half of the costs associated with the installation of safety or interoperability systems, or noise reduction measures.

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In relation to infrastructure aid, it has traditionally been a rule of thumb that where at least 50 per cent of the infrastructure costs are borne by the aid beneficiary, the measure was considered to be proportionate.3331 The Commission has 3328 Invitation to submit comments pursuant to Article 108(2) of the Treaty in case C17/2010 (ex N 315/2009) on the partial public financing for the construction of an intermodal terminal (rail-road) in the Province of Trento (Firmin Srl) Italy, OJ C 278, 15.10.2010, p. 28. 3329 Invitation to submit comments pursuant to Article 108(2) of the Treaty in case C17/2010 (ex N 315/2009) on the partial public financing for the construction of an intermodal terminal (rail-road) in the Province of Trento (Firmin Srl) Italy, OJ C 278, 15.10.2010, p. 28, recital 62. 3330 Commission Decision of 02.08.2012 to close the formal investigation procedure after withdrawal by Member State in Case SA.28642 (Firmin Srl) Italy, OJ C 302, 06.10.2012, p. 15. 3331 Commission Decision of 20.12.2011 on French aid to the financing of a multimodal dock in the maritime port of Le Havre (CaseSA.33434), summary notice in OJ C 53, 23.02.2012, p. 1; Commission Decision of 23.11.2011 on German funding transhipment facilities for intermodal transport (Case SA.33486), summary notice in OJ C 306, 22.10.2013, p. 4; Commission Decision of 20.12.2010 on Prolongation of the aid scheme N550/2001 concerning public private cooperation for the construction of loading and unloading facilities along the waterways of the Flemish Region – Belgium (Case N 490/2010), summary notice in OJ C 122, 20.04.2011, p. 1; Commission Decision of 31.01.2001 on Dutch subsidy scheme for private industrial links with inland waterways (SBV) (Case N 597/2000), summary notice in OJ C 102, 31.03.2001, p. 8;

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accepted higher aid intensities in duly justified cases where the Member State has demonstrated the economic need to exceed this threshold.3332 As a general rule, however, the total public financing, including both national and EU public funds, may not exceed the funding gap ratio of the project. The funding gap ratio is the ratio between the financial net present value and the discounted cost of the project. The financial net present value should be calculated as discounted revenues minus discounted costs. Limiting the total public funding to the identified funding gap ratio is a means of ensuring that the State aid given for such projects is limited to what is strictly necessary to achieve the common interest objective of the financed project.

3.3.5 The aid/aided activity must be open to all users on a non-discriminatory basis Whether the condition of non-discrimination is met as regards a particular aid measure depends on the nature of the aid granted. Where aid is granted for transport coordination purposes under a scheme, the conditions for the grant of that aid should be set up in a non-discriminatory manner, so that it is open to all eligible transport undertakings.Where aid is granted to fund the construction of transport infrastructure meeting the needs of transport coordination, it is the infrastructure in question which should be open to all potential users in a fair and non-discriminatory manner.

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3.3.6 The aid must not lead to distortions of competition contrary to the common interest State aid for the coordination of transport will inevitably give rise to distortions of competition. What the final compatibility criterion of Article 93 seeks to ensure is that those distortions are not contrary to the common interest. This criterion is similar to that examined under Article 107(3) of the Treaty and the observations made in that context are equally valid when applying Article 93.

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Commission Decision of 14.09.2001 on Dutch subsidy Scheme for Public Inland Terminals (SOIT) (Case N 208/2000), summary notice in OJ C 315, 04.11.2000, p. 21; Commission Decision of 15.11.2000 on Italian Rules for the promotion of combined transport within the province of Bolzano (Case N 755/1999), OJ C 71, 03.03.2001, p. 17. 3332 Commission Decision of 17.07.2013 on Slovak aid for the construction and operation of public intermodal transport terminals (Case SA. 34369), OJ L 238, 09.08.2014, p. 11; Commission Decision of 11.06.2013 on German funding for the extension of inland port Königs Wusterhausen/Wildau (Case SA.34501), summary notice in OJ C 176, 21.06.2013, p. 1; Commission Decision of 20.12.2011 on French aid to the financing of a multimodal dock in the maritime port of Le Havre (Case SA.33434), summary notice in OJ C 53, 23.02.2012, p. 1, Commission Decision of 23.11.2011 on German funding transhipment facilities for intermodal transport (Case SA.33486), summary notice in OJ C 306, 22.10.2013, p. 4.

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3.1666

A recent example of a decision in which the Commission expressed serious doubts as to whether the distortion of competition resulting from a transport coordination measure could be said not to be contrary to the common interest was the project notified by the Slovak Republic to finance the construction of four publicly accessible intermodal transfer terminals.3333 The concern raised by the Commission was that some of the new terminals, due to their proximity to existing privately owned terminals, might only attract existing combined transport customers from those existing terminals and thus could possibly push out these terminal operators from the market. The project was subsequently modified to finance the construction of only one of the planned terminals as a pilot project, namely the one furthest from existing terminals.3334

3.4 Compatibility under the Railway Guidelines 3.4.1 Scope of the Guidelines 3.1667

The Commission adopted the Railway Guidelines in 2008, that is, before the entry into force of Regulation 1370/2007 which repealed Regulations 1191/69 and 1107/70 and rendered Article 93 directly applicable for the compatibility assessment of transport coordination measures. Nevertheless, those guidelines anticipate that new legal framework3335 and lay down the rules the Commission intends to follow in applying Articles 93 and 107 to public funding for railway undertakings.3336 The material scope of the Railway Guidelines is thus broader than aid measures for transport coordination in that it covers measures that fall outside the realm of Article 93. Several of those aid measures will be examined in Section 5.3 of this chapter.

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However, the scope of the Railway Guidelines is limited to public funding for railway undertakings within the meaning of Directive 91/440/EEC only.3337 According to Article 3 of that directive, “railway undertaking” means “any private or public undertaking whose main business is to provide rail transport services for goods and/or passengers with a requirement that the undertaking should ensure traction”. In other words, the Guidelines are not applicable where public 3333 Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA. 34369 on Slovak aid for the construction and operation of public intermodal transport terminals, OJ C 45, 16.02.2013, p. 13. 3334 Commission Decision of 17.07.2013 on Slovak aid for the construction and operation of public intermodal transport terminals (Case SA. 34369), OJ L 238, 09.08.2014, p. 11. 3335 See Railway Guidelines, points 19 and 20. 3336 See Railway Guidelines, point 21. 3337 Council Directive 91/440/EEC of 29 July 1991 on the development of the Community’s railways, OJ L 237, 24.08.1991, p. 25

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funding is granted for railway activities to undertakings that do not operate as railway undertakings. For instance, aid granted to an infrastructure manager or logistics company will fall outside the scope of the Railway Guidelines.

3.4.2 Aid for infrastructure use, reducing external costs and interoperability Chapter 6 of the Railway Guidelines lays down the rules which the Commission will apply in assessing the compatibility of aid for the coordination of transport granted to railway undertakings. Chapter 6.3 lays down the criteria for assessing aid for rail infrastructure use, aid for reducing external costs and interoperability aid. In relation to these three categories of transport coordination aid, the notion of “eligible costs” is central to the assessment of compatibility under the Railway Guidelines. The eligible costs for aid for railway infrastructure use are the additional costs for infrastructure use paid by railway transport but not by a more polluting competing transport mode.3338 As regards aid for reducing external costs, the eligible costs are the part of the external costs which railway transport makes possible to avoid compared with competing transport modes.3339 Finally, as regards interoperability aid, the eligible costs cover, to the extent to which they contribute to the objective of coordinating transport, all investments relating to the installation of safety systems and interoperability, or noise reduction both in rail infrastructure and in rolling stock.3340

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As regards the necessity and proportionality of the aid, the Commission considers that a presumption of necessity and proportionality for aid for rail infrastructure use exists when the intensity of the aid stays below 30 per cent of the total cost of railway transport and amounts up to 100 per cent of the eligible costs.3341 For aid for reducing external costs, that presumption exists where the intensity of aid stays below 30 per cent of the total cost of railway transport and up to 50 per cent of the eligible costs.3342 Finally, for interoperability aid a presumption of necessity and proportionality exists where the intensity of aid does not exceed 50 per cent of the eligible costs.3343 For aid above these thresholds, Member States must demonstrate the need and proportionality of the measures in question.3344

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3338 3339 3340 3341 3342 3343 3344

Railway Guidelines, point 102. Railway Guidelines, point 103. Railway Guidelines, point 106. Railway Guidelines, point 107(a). Railway Guidelines, point 107(b). Railway Guidelines, point 107(c). Railway Guidelines, point 108.

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The Railway Guidelines further provide that both for aid for rail infrastructure use and aid for reducing external costs the aid has to be strictly limited to compensation for opportunity costs connected with the use of railway transport rather than with the use of a more polluting mode of transport. Where there are several competing options which cause higher levels of pollution than railway transport, the limit chosen corresponds to the highest cost differential among the various options. Where the intensity thresholds referred to above are adhered to, it may be presumed that no overcompensation is present.3345

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Finally, as regards all three categories of aid, it must be proved that the aid really does have the effect of encouraging the modal shift to rail. In principle this will mean that the aid has to be reflected in the price demanded from the passenger or from the shipper, since it is them who make the choice between rail and the more polluting transport modes such as road.3346

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Specifically as regards aid for rail infrastructure use and aid for reducing external costs, it must also be shown that realistic prospects of keeping the traffic transferred to rail exist, so that the aid leads to a sustainable transfer of traffic.3347

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If the conditions laid down by the guidelines are met for finding that aid for rail infrastructure use, for reducing external costs and for interoperability is necessary and proportionate, so that it does not distort competition contrary to the common interest, it must be deemed compatible under Article 93.3348

3.4.3 Aid for research and development 3.1675

Chapter 6.4 provides the compatibility rules as regards aid to railway undertakings for research and development. As explained in Section 3.2 of this chapter, Article 3(1)(c) of Regulation 1107/70 provided for the possibility of granting aid to research and development. That provision has been repeated in Article 9(2)(b) of Regulation 1370/2007. Under that provision, aid which has the purpose of promoting research into or development of rail passenger transport systems and technologies which are more economic for the community in general, which is restricted to the research and development stage and which does not cover the commercial exploitation of such transport systems and technologies, has to be regarded as meeting the needs of transport coordination. 3345 3346 3347 3348

Railway Guidelines, point 109. Railway Guidelines, point 110. Railway Guidelines, point 111. Railway Guidelines, point 112.

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The compatibility of aid for research, development and innovation in the field of passenger transport not covered by Article 9(2)(b) of Regulation 1370/2007 or aid which only concerns freight transport may be assessed on the basis of Article 107(3) or Article 93 depending on the common interest objective to which the aid contributes. In the case of the former, regard should be had to the rules laid down in the Framework for State aid for research and development and innovation (“R&D&I Framework”)3349.

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In the case of the latter, aid for research and development may be analysed directly on the basis of Article 93 where it is aimed at meeting the needs of transport coordination. The criteria laid down in Section 3.3 of this chapter should be examined in assessing the compatibility of such aid with Article 93. According to point 117 of the Railway Guidelines, the general principles set out in the R&D&I Framework are relevant in analysing these various criteria.

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3.4.4 Other forms of transport coordination aid In addition to the categories of aid listed in Chapters 6.3 and 6.4, several other transport coordination measures are mentioned at various points throughout the Railway Guidelines, more specifically: –

aid for transport infrastructure3350;

–

aid for the purchasing of rolling stock3351; and

–

debt cancellation3352.

When those measures concern transport coordination regard should be had to the general considerations for compatibility under Article 93, as laid down in Chapter 6.2 of the Railway Guidelines.

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3.5 Compatibility under the Cableways Communication The Cableways Communication is peculiar in that it is part of a Commission no objection decision regarding the establishment of a fund for the renewal of ca-

3.1680

3349 Communication from the Commission – Framework for State aid for research and development and innovation, OJ C 198, 27.06.2014, p.1. 3350 Railway Guidelines, Chapter 2 3351 Railway Guidelines, point 33(a). 3352 Railway Guidelines, point 53.

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bleway installations in the non-autonomous regions of Italy.3353 In that decision, the Commission distinguished between cableway installations used for general mobility needs and cableway installations for a specific economic category of users, i.e. consumers of a service which is not transport in itself, such as skiers3354.

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As regards the former, the Commission considered that cableway installations meeting general transport needs could be found compatible with the internal market under the transport coordination arm of Article 93 provided the following three conditions are met:3355 –

State contribution towards total financing of the project is necessary to enable the realisation of the project or activity in the interest of the Community;

–

access to the aid is granted on non-discriminatory terms;

–

the aid does not give rise to distortions of competition to an extent contrary to the common interest.

These compatibility criteria present a snapshot of the general compatibility criteria for the application of Article 93 at the time at which the decision was adopted. Those criteria were recently updated and brought further into line with the general conditions of compatibility for transport coordination measures in a decision concerning the construction and operation of a cable car for pedestrians and cyclists across the River Thames in London.3356 In that decision, the 3353 Commission communication to the Member States and other interested parties concerning State aid N 376/01 on Italian Aid scheme for cableways, OJ C 172, 18.07.2002, p. 2. 3354 As regards this category, the Commission observed as a preliminary matter that installations supporting sport activities in areas with a small number of winter sport facilities and with limited tourism capability tend to have a purely local use and are not capable of attracting users who have the option of destinations in other Member States as an alternative. In those cases, there would not be any distortion of competition and effect on trade on the demand side. On the supply side, it would have to be assessed whether the beneficiary cable car operators operated only at local level and whether State support for this activity harmed or discouraged the supply in loco of other facilities by operators of other Member States. Where an effect on interState trade could not be ruled out, the Commission acknowledged that State aid to cableways could play an important role in assisting balanced economic development of an area, but that the provision of services for winter sports had become subject to increasing cross-border competition which increased the distortion caused by the grant of aid to the cableway sector. To account for the fact that aid had previously been authorised to this sector on generous terms without regard to the Regional Aid Guidelines, the Commission laid down transitional rules that would apply for five years until the full application of those guidelines would take place. 3355 Commission communication to the Member States and other interested parties concerning State aid N 376/01 on Italian Aid scheme for cableways, OJ C 172, 18.07.2002, p. 2, recital 39. 3356 Commission Decision of 27 June 2012 on Cable Car for London – United Kingdom (Case SA.34056),

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Commission examined the construction and operation of the cableways installation jointly under the transport coordination arm of Article 93. The decision clearly demonstrates how difficult it can be to distinguish between transport coordination, on the one hand, and the discharge of a public service obligation, on the other, in cases where State aid is granted for the construction and operation of infrastructure for general transport needs in a single operation.

4.

Public service obligations

4.1 When is aid present: the Altmark criteria The Altmark judgment3357 is one of the seminal judgments of EU State aid law. It has become the foundation of the Commission’s policy on services of general economic interest (“SGEI”). However, it is often forgotten that the Altmark judgment dealt with a case concerning compensation for public service obligations in the field of land transport, especially since the SGEI Communication explicitly excludes land transport from its sphere of application.3358

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More specifically, the Altmark judgment concerned a reference for a preliminary ruling by the German Bundesverwaltungsgericht (the highest German administrative court) to the Court of Justice in a case in which a competitor of Altmark sought the annulment of licences granted to the latter to provide regional transport services. In operating the routes in question, Altmark had suffered a loss of 0.58 DM per km and received compensation from the Regierungspräsidium Magdeburg to cover those losses. The competitor argued before the national court that Altmark relied on illegal subsidies to provide the services and that the licences were therefore illegal under German law. The national court requested a preliminary ruling from the Court of Justice, asking it whether the compensation received by Altmark for providing the transport services in question contained illegal State aid under Articles 93 and 107 of the Treaty.

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The Altmark judgment is important for two aspects of the application of the State aid rules to land transport. First, the judgment confirms that public service compensation for transport services falls outside the scope of the State aid rules. This means that where public funding qualifies as compensation for the discharge of a public service there is no prior notification or standstill obliga-

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summary notice in OJ C 220, 25.07.2012, p. 6. 3357 Case C-280/00 Altmark Trans v Regierungspräsidium Magdeburg ECLI:EU:C:2003:415. 3358 Communication from the Commission – European Union framework for State aid in the form of public service compensation, OJ C 8, 11.01.2012, p. 15, point 8.

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tion. Confirming its earlier judgment in Ferring3359, the ECJ held that public funding of transport services does not contain State aid when four cumulative conditions are met:

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–

the recipient undertaking must actually have public service obligations to discharge and those obligations must be clearly defined;

–

the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner;

–

the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of the public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations;

–

where, in a specific case, the undertaking which is to discharge public service obligations is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant revenues and a reasonable profit for discharging the obligations.

Second, in response to a question by the referring court on whether Article 93 could be applied without taking into account Regulation 1191/69, the Court recalled Article 3 of Regulation 1107/70 which provides that “without prejudice to the provisions of Council Regulation (EEC) No 1192/69 […] and of Council Regulation (EEC) No 1191/69 […], Member States shall neither take coordination measures nor impose obligations inherent in the concept of a public service which involve the granting of aids pursuant to Article [93] of the Treaty except in the following cases or circumstances” and concluded “that Member States are no longer authorised to rely on Article [93] of the Treaty outside the cases referred to in secondary Community legislation”.3360 The judgment thus confirmed that Article 93 could not be directly relied on to authorise State aid to land transport. 3359 Case C-53/00 Ferring ECLI:EU:C:2001:627. 3360 Case C-280/00 Altmark Trans v Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para. 107

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4.2 Compatibility under the ancien régime: Regulation (EEC) No 1191/69 It is not the purpose of this subsection to describe in full the legal regime applicable to public service obligations in the field of land transport prior to the entry into force of Regulation  1370/2007.3361 Moreover, considering the approach laid out in Section 4.3.10 of this chapter on the application of Regulation 1370/2007 to unnotified public service contracts concluded before the entry into force of that regulation, it is unlikely that the prior legislation will be much applied in future cases coming before the Commission. However, to better appreciate Regulation 1370/2007, it is useful to reflect on the legal regime in place before its entry into force, particularly its shortcomings.

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Regulation 1191/69 entered into force on July 1, 1969. Its stated objective was the termination of public service obligations in transport by rail, road and inland waterway existing on July 1, 1969.3362 However, in accordance with Article 1(2), those obligations could be maintained if they were essential to ensure the provision of adequate transport services. New public service obligations could also be imposed under the Regulation,3363 but the competent authorities were obliged, when deciding to maintain or impose such obligations, to provide for grants of compensation in respect of the financial burdens resulting from their performance. The idea behind the regulation was that public authorities should not impose public service obligations unilaterally on transport operators, but where they did they were obliged to adequately compensate the operator for the services provided. Section IV of the Regulation (Articles 10 to 13) provided rules for compensation (the ‘common compensation procedure’). According to Article 17(2), compensation paid pursuant to the common compensation procedure was exempt from prior notification to the Commission under Article 108(3) of the Treaty.

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3361 For a detail description, reference is made to Chapter 14 of the previous edition of this book. 3362 See Recital 2 and Article 1(3) of Regulation 1191/69. Council Decision 65/271/EEC of 13 May 1965 on the harmonisation of certain provisions affecting competition in transport by rail, road and inland waterway, OJ 88, 24.05.1965, p. 1500 already dealt with distortions of competition arising from the unilateral imposition of public service obligations and provided that any decision to maintain such obligations should result in an obligation to pay compensation. 3363 This follows from the original wording of Article 14 of Regulation 1191/69, before it was amended by Council Regulation (EEC) No 1893/91 of 20 June 1991 amending Regulation (EEC) No 1191/69 on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway, OJ L 169, 29.06.1991, p. 1.

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For this reason, Regulation 1191/69 initially dealt with unilaterally imposed public service obligations only. In 1991, Regulation 1191/69 was amended by introducing a provision on public service contracts in Article 14.3364 A public service contract could include: –

transport services satisfying fixed standards of continuity, regularity, capacity and quality;

–

additional transport services;

–

transport services at specified rates and subject to specified conditions, in particular for certain categories of passengers or on certain routes;

–

adaptation of services to actual requirements.

If a public service contract was awarded through a tendering procedure respecting the four Altmark criteria (Section 4.1 of this chapter), no State aid was deemed to be present. However, as follows from the Combus judgment,3365 Regulation 1191/69 provides no room for declaring compensation that does not fulfil the four Altmark requirements as compatible State aid. The Combus judgment concerned an incumbent bus undertaking in Denmark which had bid for and won most of the tenders for bus contracts by making offers which proved too low to execute. The Danish State injected additional money into the company to make up for this shortfall, which it notified to the Commission. The Commission initially authorised those capital injections as compensation payments for public service obligations on the basis of Article 14 of Regulation 1191/1969. However, following a legal challenge by an association of private bus undertakings called Danske Busvognmænd, the Court of First Instance (now: General Court) annulled that decision. The Commission accordingly opened the formal investigation procedure and eventually declared the aid incompatible.3366

3364 Council Regulation (EEC) No 1893/91 of 20 June 1991 amending Regulation (EEC) No 1191/69 on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway, OJ L 169, 29.06.1991, p. 1. 3365 Case T157/01 Danske Busvognmænd v Commission (“Combus”) ECLI:EU:T:2004:76. 3366 Commission Decision 2009/973/EC of 13.07.2009 on the restructuring aid for Combus A/S granted by Denmark, OJ L 345, 23.12.2009, p. 28.

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Shortly after the Combus judgment, the Commission rendered two decisions3367 in which it declared compatible compensation granted for public service contracts that did not comply with all the Altmark conditions (notably the fourth condition), but were deemed to be in line with the “general principles of the Treaty”, that is, the first three Altmark conditions as further developed in part 2.4 of the Community framework for State aid in the form of public service compensation.3368 The Antrop judgment seems to have closed this route, however, reaffirming the line in Combus by excluding any compatibility of State aid granted in the context of a public service contract on the basis of Article 14 of the Regulation 1191/1969 or directly on the basis of the Treaty.3369 Eventually, seven months after that judgment was handed down, Regulation 1370/2007 came into force, repealing Regulations 1191/69 and 1107/70 and providing a compatibility basis for State aid granted for the performance of public passenger transport services by road and rail.

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4.3 Compatibility under Regulation (EC) No 1370/2007 4.3.1 Introduction The Commission submitted a first proposal to modify Regulation 1191/69 in 2000 with the aim of opening markets for public passenger transport to competition throughout the Union. Due to the reluctance of the Council to fully liberalise those markets, that proposal initially stalled until the rulings in the Altmark and Combus judgments made legislative action inevitable. The legal uncertainty following those judgments combined with more active enforcement by the Commission in State aid complaints ultimately led to the adoption, on October 23, 2007, of a new Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road. That regulation entered into force on December 3, 2009, two years after its publication in the Official Journal.

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Regulation 1370/2007 has two legal bases: Article 91 from the part of the Treaty dealing with the Union’s common transport policy and Article 109 from the part of the Treaty dealing with State aid. This dual legal basis also explains why

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3367 Commission Decision 2009/845/EC of 26.11.2008 on State aid granted by Austria to the company Postbus in the Lienz district, OJ L 306, 20.11.2009, p. 26 and Commission Decision 2009/325/EC of 26.11.2008 on State aid concerning public service compensations for Southern Moravia Bus Companies, OJ L 97, 16.04.2009, p. 14. 3368 Community framework for State aid in the form of public service compensation, OJ C 297, 29.11.2005, p. 4. 3369 Case C-504/07 Associação Nacional de Transportadores Rodoviários de Pesados de Passageiros (Antrop) et al v Conselho de Ministros, Companhia Carris de Ferro de Lisboa SA (Carris) and Sociedade de Transportes Colectivos do Porto SA (STCP) ECLI:EU:C:2009:290, paras 28 and 32.

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the regulation contains two sets of rules. First, a set of provisions that provide the mandatory content of public service contracts for transport services, the manner in which they are to be awarded and the manner in which public service compensation is to be calculated, and, second, a provision which provides that public service compensation for the operation of public passenger transport services or for complying with tariff obligations established through general rules paid in accordance with the first set of rules of the Regulation is compatible with the internal market and exempt from the prior notification obligation laid down by Article 108(3) of the Treaty.

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In March 2014, the Commission adopted a Communication on interpretative guidelines concerning Regulation 1370/2007 on public passenger transport services by rail and by road.3370 That communication provides extensive guidance on all provisions of that regulation.

4.3.2 Scope of application 3.1695

According to Article 1(1), Regulation 1370/2007 defines how public authorities may act in the field of public passenger transport and lays down the conditions under which those authorities, when imposing or contracting for public service obligations, compensate public service operators for costs incurred and/ or grant exclusive rights in return for the discharge of those obligations.

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Article 1(2) provides that the Regulation applies to national and international public passenger transport services by rail, by other track-based modes and by road. By virtue of that same provision, Member States may elect to apply the regulation to public passenger transport by inland waterways.3371

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According to Article 2(a), “public passenger transport” means passenger transport services of general economic interest provided to the public on a non-discriminatory and continuous basis. As regards the requirement of non-discrimination, Regulation 1370/2007 is not intended to cover transport services that are offered only to certain sections of society, such as the elderly or people with disabilities, instead of the public at large. Thus, school bus services fall outside the scope of Regulation 1370/2007, while rural bus services which are open to the general public would not be discriminatory. As regards the requirement 3370 Communication from the Commission on interpretative guidelines concerning Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road, OJ C 92, 29.03.2014, p. 1. 3371 In the absence of a Decision to apply Regulation 1370/2007 to inland waterway passenger transport services, these services will be governed directly by Article 93 of the Treaty.

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of a “continuous” service, this requirement should not be taken to refer to the frequency or regularity of the services during the day, i.e. requiring buses to run a certain number of times per hour throughout the day, as this would be a purely arbitrary distinction. Rather, it should be taken to refer to timetabled services, i.e. services which are scheduled to run at fixed times known in advance, irrespective of whether this is once an hour, once a day or once a week. This would exclude on-demand “dial-a-ride” services from the scope of the Regulation. Finally, by virtue of Article 3(3), Member States may exclude from the scope of Regulation 1370/2007 general rules on financial compensation for public service obligations which establish maximum tariffs for the transport of pupils, students, apprentices and persons with reduced mobility. If a Member State decides to do so, the national authorities must assess the compensation provisions under the Treaty rules instead, in particular those on State aid, and notify any such arrangements to the Commission for prior authorisation where aid is present.

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4.3.3 Public service contracts and general rules (Article 3) According to Article 3(1), where a competent authority decides to grant the operator of its choice an exclusive right and/or compensation, of whatever nature, in return for the discharge of public service obligations, it shall do so within the framework of a public service contract. Article 2(i) defines a public service contract as consisting of one or more legally binding acts confirming the agreement between a competent authority and a public service operator to entrust to that public service operator the management and operation of public passenger transport services subject to public service obligations. To account for the differences between the legal regimes of the Member States, the contract may also consist of a decision adopted by a competent authority taking the form of an individual legislative or regulatory act or containing conditions under which the competent authority itself provides the services or entrusts the provision of such services to an internal operator. The combination of a general legal act, assigning the operation of services to an operator, with an administrative act, setting out the detailed requirements concerning the services to be provided and the method of compensation calculation to be applied, can therefore also constitute a public service contract.3372

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3372 Communication from the Commission on interpretative guidelines concerning Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road, OJ C 92, 29.03.2014, p. 1. See, also, Commission Decision 2011/501/EU of 23.02.2011 on State aid implemented by Germany for Bahnen der Stadt Monheim (BSM) and Rheinische Bahngesellschaft (RBG) in the Verkehrsverbund Rhein-Ruhr (Case C 58/06 ex NN 98/05), OJ L 210, 17.08.2011, p. 1, where the Commission found a so-called threefold act of entrustment, i.e. by means of licenses, the Local Public Transport Schemes and the respective financing

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Moreover, it follows from Article 3(1) that the transfer of an exclusive right, even in the absence of an entitlement to compensation, also falls within the scope of the Regulation. This is important for those Member States that organise their public transport systems through the allocation of exclusive licenses or concessions. An exclusive right is defined in Article 2(f ) as “a right entitling a public service operator to operate certain public passenger transport services on a particular route or network or in a particular area, to the exclusion of any other such operator”.

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Member States may also organise public transport services through general rules such as laws, decrees or regulatory measures. A competent authority may decide to use general rules to establish social or qualitative standards in accordance with national law. When general rules involve compensation or the grant of an exclusive right, the competent authority must conclude a public service contract in accordance with Article 3(1). A public service contract is not necessary, however, when those general rules establish maximum tariffs for all passengers or for certain categories of passengers pursuant to Article 3(2). In that case, the competent authority shall compensate the public service operators for the net financial effect, positive or negative, on costs incurred and revenues generated in complying with the tariff obligations established through general rules in a way that prevents overcompensation, in accordance with Articles 4 and 6 of the Regulation, as well as with its Annex.

4.3.4 Mandatory requirements (Article 4) 3.1702

Article 4 of Regulation 1370/2007 establishes the mandatory content of public service contracts and general rules. Compliance with these mandatory rules is of the utmost importance in light of the first sentence of Article 6(1) of the Regulation which provides that “[a]ll compensation connected with a general rule or a public service contract shall comply with the provisions laid down in Article 4, irrespective of how the contract was awarded” and Article 9(1) of the regulation which declares that “[p]ublic service compensation for the operation of public passenger transport services or for complying with tariff obligations established through general rules paid in accordance with this Regulation shall be compatible with the [internal] market […] [and] […] shall be exempt from the prior notification requirement laid down in Article [108(3)] of the Treaty”. In short, public service compensation which fails to comply with the mandatory rules laid down in Article 4 of the Regulation cannot be declared compatible notice based on Guidelines to fulfil the requirement laid down in Article 3(1) of the Regulation to conclude a public service contract.

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with the internal market under Article 9(1) of the Regulation, nor can it benefit from the exemption from prior notification to the Commission provided therein. The question remains whether such compensation can still be declared compatible under Article 93 directly or whether Regulation 1370/2007 is exhaustive as regards public service compensation which falls under its scope. This will be discussed in Section 4.4.1 of this chapter. First, Article 4(1)(a) requires that the public service obligation be clearly defined. Moreover, to fall within the scope of Regulation 1370/2007, that public service obligation must comply with the definition laid down in Article 2(e) thereof.

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As regards the requirement that the public service obligation be clearly defined, this generally relates to the definition of the routes, fares and the frequency and timing of the services by the public authority. Since public services are, by their very nature, services which address market failures, the Commission can only accept that a limited amount of autonomy is left to the public service provider to define these parameters of the public service. As regards fares, the public authorities must define the maximum fares that the operator can apply or link that flexibility either to objective criteria, which allow to determine with a reasonable degree of certainty what fare level is to be considered as appropriate, or to a prior authorisation procedure by the entrusting authority.3373

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As regards the existence of a genuine public service obligation, Article 2(e) refers to this as “a requirement defined or determined by a competent authority in order to ensure public passenger transport services in the general interest that an operator, if it were considering its own commercial interests, would not assume or would not assume to the same extent or under the same conditions without reward”. As a general rule, Member States have a wide margin of discretion in defining a given service as a public service and in granting compensation to the service provider.3374 However, where specific Union rules exist, the Member States’ discretion is further bound by those rules, without prejudice to the Commission’s duty to carry out an assessment of whether the public service has been cor-

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3373 See, by way of analogy, Commission Decision of 22 January 2013 on measures implemented by the Region of Sardinia in favour of Saremar (Cases SA.32014 (2011/C), SA.32015 (2011/C), SA.32016 (2011/C)), OJ C 84, 22.3.2013, p. 58, recitals 214 and 215. 3374 Case T-289/03 BUPA and Others v Commission ECLI:EU:T:2008:29, paras 166-169 and 172; Case T-17/02 Fred Olsen v Commission ECLI:EU:T:2008:29, para. 216. See also Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest (“SGEI Communication”) OJ C 8, 11.01.2012, p. 4.

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rectly defined for the purpose of State aid control.3375 As a harmonisation tool, Regulation 1370/2007 contains its own definition of public service obligations, which should limit the normally wide discretion granted to Member States in providing, commissioning and organising services of general economic interest. Moreover, in prior case law, the Court has deemed Article 91 of the Treaty to confer upon the Council “wide legislative powers” as regards the adoption of appropriate common rules in the field of transport policy,3376 which would be difficult to reconcile with the wide discretion normally enjoyed by Member States to define public services, once exercised. In short, to fall within the scope of the Regulation the public service obligation must comply with Article 2(e) thereof. That is, it must be shown that the operator, if it were considering its own commercial interests, would not assume or would not assume to the same extent or under the same conditions the public passenger transport services in question without reward. That reward can be either in the form of compensation or the grant of an exclusive right.

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Second, Article 4(1)(b) provides that the parameters on the basis of which the compensation is calculated and the nature and extent of any exclusive rights granted have to be established in advance in an objective and transparent manner in a way that prevents overcompensation. The need to establish the compensation parameters in advance does not mean that the compensation has to be calculated on the basis of a specific formula. Rather, what matters is that it is clear from the outset how the compensation is to be determined. The Commission applies this requirement for ex ante determination of compensation parameters strictly.3377

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In the case of an internal or direct award of a public service contract (Section 4.3.5 of this chapter), these parameters shall be determined in such a manner that no compensation payment may exceed the amount required to cover the net financial effect on costs incurred and revenues generated in discharging the public service obligations, taking account of revenue relating thereto kept by the public service operator and a reasonable profit. 3375 Para. 46 of the SGEI Communication. 3376 Case 97/78 Fritz Schumalla ECLI:EU:C:1978:211. 3377 Commission Decision of 2 October 2013 on compensation to be paid to Simet SpA for public transport services provided between 1987 and 2003 – Italy (Case SA.33037 (2012/C)), OJ L 114, 16.04.2014, p. 48; Commission Decision of 19 January 2015 on additional public service compensation for CSTP – Italy (Case SA.35842 (2014/C)), OJ L 179, 8.7.2015, p. 112; Commission Decision of 19 January 2015 on additional public service compensation for Buonotourist – Italy (Case SA.35843 (2014/C)), OJ L 179, 8.7.2015, p. 128, and Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.38132 on additional PSO Compensation for ARFEA, OJ C 219, 3.7.2015, p. 12.

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Third, Article 4(1)(c) and Article 4(2) contain arrangements with regards to the allocation of costs and revenues. Article 4(1)(c) provides that public service contracts and general rules shall determine the arrangements for the allocation of costs. The costs to be taken into account may include, in particular, the costs of staff, energy, infrastructure charges, maintenance and repair of public transport vehicles, rolling stock and installations necessary for operating the passenger transport services, fixed costs and a suitable return on capital. Article 4(2) provides that public service contracts and general rules shall determine the arrangements for the allocation of revenue from the sale of tickets which may be kept by the public service operator, repaid to the competent authority or shared between the two.

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Fourth, Article 4(3) requires that the duration of public service contracts be limited to 10 years for bus and coach services and to 15 years for passenger transport services by rail or other track-based modes,3378 while Article 4(4) allows for an extension of the duration of the public service contract by 50  per cent, if necessary, having regard to the conditions of asset depreciation. Such an extension can be granted if the public service operator provides assets that are significant in relation to the overall assets needed to carry out the passenger transport services covered by the public service contract and are predominantly linked to the passenger transport services covered by the contract.

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Finally, Article 4(5) provides competent authorities with the possibility to require the selected public service operator to grant staff previously taken on to provide services the rights to which they would have been entitled if there had been a transfer within the meaning of Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses3379. That provision further provides that where competent authorities require public service operators to comply with certain social standards, tender documents and public service contracts shall list the staff concerned and give transparent details of their contractual rights and the conditions under which employees are deemed to be linked to the services. Similarly, Article 4(6) provides that where competent authorities, in accordance with national law, require public service operators to comply with certain quality standards, those standards shall be included in the tender documents and in the public service contracts.

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3378 However, where a competent authority directly awards a public service contract for transport by rail (with the exception of other track-based modes such as metro or tramways), the duration of the contract may not exceed 10 years. Article 5(6) of the Regulation. 3379 OJ L 82, 22.03.2001, p. 16.

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4.3.5 Award rules (Article 5) 3.1711

Article 5 of Regulation 1370/2007 concerns the award of public service contracts. It follows from that provision that a competent authority may decide to provide public passenger transport services itself, to award public service contracts directly to a legally distinct entity over which it exercises control or to award public passenger contracts to a third party operator. That decision is important for competent authorities since, depending on the choice, different award rules shall apply. However, according to Article 8(2) of the Regulation the award of public service contracts by rail and by road only needs to comply with Article 5 as from December 3, 2019.

3.1712

Article 5(2) covers internal awards of public service contracts. Article 5(2)(a) lays down a set of criteria to consider when assessing whether a competent authority effectively controls a transport operator. Those criteria include “the degree of representation on administrative, management or supervisory bodies, specifications relating to this representation in the articles of association, ownership, effective influence and control over strategic decisions and individual management decisions”3380. Article 5(2)(b) requires that the transport activities of internal operators and any body or bodies under their control should be geographically confined within the competent authority’s territory or jointly controlled by a local competent authority. Thus, these operators or bodies may not participate in competitive tender procedures related to the provision of public passenger transport services organised outside the territory of the competent authority. However, Article 5(2)(b) acknowledges that internal operators may need to operate “outgoing lines or other ancillary elements of that activity which enter the territory of neighbouring competent local authorities”.

3.1713

Article 5(3) provides, as a general rule, that public service contracts with third party operators shall be awarded on the basis of a competitive tendering procedure. While competent authorities only need to comply with that rule as from December 3, 2019 and, even after that date, a number of exceptions shall continue to apply, the choice of awarding public service contracts on the basis of a competitive tendering procedure has its benefits. For instance, compensation granted by virtue of a public service contract so awarded does not need to fulfil the requirements of the Annex to the Regulation to comply with Article 6 thereof and benefit from Article 9(1).

3380 According to Article 2(j) of the Regulation, an internal operator must be “a legally distinct entity over which a competent local authority [ ... ] exercises control similar to that exercised over its own departments”.

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Beyond the requirement to apply open, transparent, non-discriminatory and fair procedures when awarding public service contracts to third parties, the Regulation provides few other details on the conditions under which a competitive tendering procedure should be organised. A purely negotiated procedure without prior publication of a contract notice is against the principles of transparency and non-discrimination of Article 5(3). Similarly, a tender procedure which is designed in such a way so as to unduly restrict the number of potential bidders will not comply with Article 5(3). Selection criteria, including for example quality related, environmental or social requirements, should be closely related to the subject-matter of the service provided. The awarding authority is not prevented from setting qualitative standards to be met by all economic operators or from taking qualitative aspects related to the different proposals into account in its award decision.3381 In any event, a tender procedure held in compliance with the principles of the public procurement directives, even in cases where those directives are not as such applicable, will be presumed to fulfil the requirements of Regulation 1370/2007.

3.1714

For the relationship between Regulation 1370/2007 and the public procurement directives3382, it is important to distinguish between service contracts and service concessions. Article 2 points (1), (2) and (5) of Directive 2014/25/EU defines service contracts as contracts for pecuniary interest concluded in writing between one or more contracting entities and one or more economic operators and having as their object the provision of services. When these contracts involve contracting authorities within the meaning of Article 2(1) point (1) of Directive 2014/24/EU, they are considered as public service contracts in accordance with Article 2(1) points (6) and (9) of Directive 2014/24/EU.

3.1715

Article 5(1)(b) of Directive 2014/23/EU on the award of concession contracts defines a service concession as “a contract for pecuniary interest concluded in writing by means of which one or more contracting authorities or contracting entities entrust the provision and the management of services other than the execution of works referred to in point (a) to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment”.

3.1716

3381 Communication from the Commission on interpretative guidelines concerning Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road, OJ C 92, 29.03.2014, p. 1. 3382 Directive 2014/24/EU of the European Parliament and the Council on public procurement and repealing Directive 2004/18/EC, OJ L 94, 28.03.2014, p. 65; Directive 2014/25/EU on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC, OJ L 94, 28.03.2014, p. 243 and Directive 2014/23/EU on the award of concession contracts, OJ L 94, 28.03.2014, p. 1.

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3.1717

Art 5(1) specifies further that “the award of a works or services concession shall involve the transfer to the concessionaire of an operating risk in exploiting those works or services encompassing demand or supply risk or both. The concessionaire shall be deemed to assume operating risk where, under normal operating conditions, it is not guaranteed to recoup the investments made or the costs incurred in operating the works or the services which are the subject-matter of the concession. The part of the risk transferred to the concessionaire shall involve real exposure to the vagaries of the market, such that any potential estimated loss incurred by the concessionaire shall not be merely nominal or negligible”.

3.1718

This distinction between (public) service contracts and concessions is important because, according to Article 10(3) of Directive 2014/23/EU, that Directive shall not apply to concessions for public passenger transport services within the meaning of Regulation  1370/2007. The award of service concessions for these public passenger transport services is thus solely governed by Regulation 1370/2007. Moreover, Article 5(1) of Regulation 1370/2007 specifies that the award of (public) service contracts for transport services by bus or tram is governed by Directives 2004/17/EC and 2004/18/EC, except where such contracts take the form of service concessions. The award of (public) service contracts for public passenger services by bus or tram is thus solely governed by Directives 2014/24/EU and 2014/25/EU. The award of (public) service contracts for public passenger transport services by railway and metro is governed by Regulation 1370/2007 and excluded from the scope of Directive 2014/24/ EU, according to Recital 27 and Article 10(i) of that Directive, and from the scope of Directive 2014/25/EU, according to Recital 35 and Article 21(g) of that Directive. Finally, Article 1(3) of Regulation 1370/2007 provides that that Regulation shall not apply to public works concessions within the meaning of Article 1(3)(a) of Directive 2004/17/EC or Article 1(3) of Directive 2004/18/ EC. Therefore, works concessions for public passenger transport services by rail and other track-based modes and by road are governed solely by Directive 2014/23/EU.

3.1719

Article 5(4) provides a first exception to the general rule that public service contracts concluded with third party operators should be concluded following a competitive tendering procedure. In the case of a public service obligation with an average annual value less than EUR 1 million or which involves the annual provision of less than 300 000 kilometres of public passenger transport services, the competent authority may decide to award the public service contract directly, provided this is not prohibited by national law. Such a direct award is also possible if the public service contract is awarded to a small or medium-sized 1096

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operator. In that case, the thresholds may be increased to an average annual value estimated at less than EUR 2 million or the annual provision of less than 600 000 kilometres of public transport services. Article 5(5) provides a second exception to that rule in the event of a disruption of services or the immediate risk of such a situation. In the case of such a situation, the competent authority may directly award a public service contract, formally agree to extend an existing contract or impose a requirement to perform certain public service obligations for a period not exceeding two years.

3.1720

Article 5(6) provides a third exception to a competitive tendering procedure. According to that provision, competent authorities may award public service contracts directly for railway transport, with the exception of other track-based modes such as metro and tramways.

3.1721

While a competitive tendering procedure is not necessary in these cases, the question arises whether the direct award must respect general Treaty principles, such as transparency and equal treatment.3383 Recital 20 of the Regulation would appear to suggest that this is the case.3384 Moreover, Article 7(2) of the Regulation requires the competent authority to publish in the Official Journal certain relevant information in the case of a direct award one year prior to that award, while Article 5(7) of the Regulation confirms that direct awards are subject to judicial review.

3.1722

Finally, it may arise that a public service contract needs to be modified during its execution, for instance because transport volumes increase beyond projections so that the corresponding compensation amounts need to be adapted, or an extension of lines. Where those amendments are minor and do not substantially affect the content of the initial agreements, a new competitive tendering procedure might not be necessary to ensure compliance with the general Treaty principles, such as transparency and equal treatment. Regulation 1370/2007 does not cover this situation, but the Court of Justice has already held that in such cases a simple amendment might suffice.3385 By contrast, substantial amend-

3.1723

3383 Case C-324/98 Telaustria ECLI:EU:C:2000:669. 3384 That recital provides: “Where a public authority chooses to entrust a general interest service to a third party, it must select the public service operator in accordance with Community law on public contracts and concessions, as established by Articles 43 to 49 of the Treaty, and the principles of transparency and equal treatment”. 3385 Case C-337/98 Commission v France ECLI:EU:C:2000:543, paras 44 and 46; Case C-454/06 Pressetext Nachrichtenagentur GmbH v Republik Österreich ECLI:EU:C:2008:351, para. 34; and Case C-91/08 Wall AG ECLI:EU:C:2010:182, paras. 37 and 38.

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ments to essential provisions of a service concession contract or to contracts subject to the public procurement directives require the award of a new contract in certain situations. This is the case, in particular, if the new provisions are materially different in character from the original contract and therefore demonstrate the intention of the parties to renegotiate the essential terms of that contract. According to the case-law, an amendment to a contract during its execution may be regarded as substantial if it introduces conditions which, if they had been part of the original award procedure, would have allowed for the admission of tenderers other than those originally admitted or would have allowed for the acceptance of an offer other than that originally accepted.3386

4.3.6 Compensation rules (Article 6 and the Annex) 3.1724

Article 6 of Regulation 1370/2007 provides that “[a]ll compensation connected with a general rule or public service contract shall comply with the provisions laid down in Article 4, irrespective of how the contract was awarded”, while in the case of directly awarded public service contracts or general rules, “compensation, of whatever nature, […] shall also comply with the provisions laid down in the Annex” to the Regulation. The mandatory requirements laid down in Article 4 are discussed in Section 4.3.4 of this chapter.

3.1725

The Annex to Regulation 1370/2007 establishes an ex post check to ensure that the compensatory payments are not higher than the actual net cost for the provision of the public service over the lifetime of the contract. The Annex specifies that compensation for a public service obligation may not exceed the net financial effect of the obligation, defined as costs minus revenues generated by public service operations, minus potential induced network revenues, plus a reasonable profit (point 2). The Annex states that a “reasonable profit” must be taken to mean a rate of return on capital that is normal for the sector in a given Member State and that takes account of the risk, or absence of risk, incurred by the public service operator by virtue of public authority intervention (point 6). No further guidance is given on the correct level of return on capital or reasonable profit in the Annex, but inspiration may be drawn from the relevant points of the SGEI Communication, although that Communication is not applicable in cases where compensation is paid for public service obligations in land transport.3387

3386 Case C-91/08 Wall AG ECLI:EU:C:2010:182. 3387 Communication from the Commission – European Union framework for State aid in the form of public service compensation, OJ C 8, 11.01.2012, p. 15, point 8.

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The Annex further requires that costs and revenues are calculated in accordance with the accounting and tax rules in force (point 4). For transparency reasons and to prevent cross-subsidies, there should also be a separation of accounts when a transport operator engages in other activities beyond the discharge of public service obligations (point 5). Finally, point 7 of the Annex requires the method of compensation to promote the maintenance or development of an effective management by the public service operator, which can be the subject of an objective assessment. It also requires promoting the provision of passenger transport services of a sufficiently high standard. Therefore, the use of compensation schemes which simply cover actual costs as they occur should be limited to instances where uncertainty about costs is high and the transport provider needs a high degree of protection against that uncertainty.3388

3.1726

4.3.7 Publication and transparency (Article 7) Article 7 of Regulation 1370/2007 lays down certain publication and transparency requirements with which competent authorities must comply.

3.1727

Article 7(1) requires competent authorities to publish an aggregated report once a year on the public service obligations for which it is responsible, the selected public service operators and the compensation payments and exclusive rights granted to public service operators by way of reimbursement. This report should distinguish between bus transport and railway transport, allow the performance, quality and financing of the public transport network to be monitored and assessed, and, if appropriate, provide information on the nature and extent of any exclusive rights granted. Public transport operators must provide all necessary information and data to the competent authority to enable it to comply with this publication obligation. The objective of this provision is to enable the monitoring and assessment of the public transport network in a meaningful manner, allowing for a comparison with other public transport networks in a transparent, structured framework.

3.1728

Article 7(2) requires competent authorities to publish information in the Official Journal of the European Union, including its name and address, the type of award envisaged and the services and areas potentially covered by the award, at least one year before the publication of an invitation to tender or the direct award of a public service contract. In the case of a direct award of a public service contract for railway services, Article 7(3) requires the relevant competent

3.1729

3388 Communication from the Commission on interpretative guidelines concerning Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road, OJ C 92, 29.03.2014, p. 1.

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authority to publish certain information on the awarded contract, including the name of the contracting entity, its ownership and the name of the parties exercising legal control over it, the duration of the contract, a description of the services to be performed and the parameters of the financial compensation, quality targets and conditions relating to essential assets.

3.1730

Finally, Article 7(4) provides that a competent authority, when so requested by an interested party, “shall forward to it the reasons for directly awarding a public service contract”. The purpose of this provision is to enable potential public service operators the opportunity to react to the competent authority’s intention to directly award a contract before its actual conclusion.3389

4.3.8 Transitional provisions (Article 8) 3.1731

Article 8 of Regulation 1370/2007 relates essentially to the application of Article 5 of the Regulation. Article 8(2) states that, without prejudice to its paragraph 3, the award of public service contracts by rail and by road shall comply with Article 5 as from December 3, 2019 and that within six months of the first half of the transitional period (by May 3, 2015) Member States shall provide the Commission with a progress report, highlighting the implementation of any gradual award of public service contracts in line with Article 5. This means that Member States cannot wait until December 2019 before starting to comply with the general rule of ensuring competitive tendering procedures for public service contracts.

4.3.9 Compatibility with the Treaty (Article 9) 3.1732

According to Article 9(1) of Regulation 1370/2007, “[p]ublic service compensation for the operation of public passenger transport services or for complying with tariff obligations established through general rules paid in accordance with this Regulation shall be compatible with the common market. Such compensation shall be exempt from the prior notification requirement laid down in Article [108(3)] of the Treaty.” As explained in Section 4.3.6 of this chapter, public service compensation shall be considered to be paid in accordance with that Regulation provided the mandatory requirements of Article 4 are fulfilled and, in the case of a directly awarded public service contract, the provisions of the Annex are complied with.

3389 Recital 29 of Regulation 1370/2007.

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Article 9(1) is broader than its predecessor, Article 17(2) of Regulation 1191/69, in two respects. First, it covers all types of public service compensations paid in accordance with Regulation 1370/2007, whereas Article 17(2) covered only unilaterally imposed public service obligations and not public service contracts. Second, it not only exempts such compensation from notification, but also declares it compatible with the internal market.

3.1733

Article 9 also contains a curious provision in its paragraph (2) which provides that Member States may continue to grant aid for the transport sector pursuant to Article 93 of the Treaty which meets transport coordination needs or which represents reimbursement for the discharge of certain obligations inherent in the concept of a public service, “other than those covered by this Regulation […]”.This provision gives the following examples of such aid: (a) aid granted to undertakings which have to bear expenditure relating to the infrastructure used by them, while other undertakings are not subject to a like burden and (b) aid to promote either research into, or development of, transport systems and technologies which are more economic for the Union in general.

3.1734

Article 9(2) appears to state the obvious and should therefore be considered superfluous. The question remains, however, why this provision is included in Regulation 1370/2007. First, it could be seen as a reaffirmation that the repeal of Regulations 1191/69 and 1107/70 by Regulation 1370/2007 means that Article 93 of the Treaty can be directly applied in cases not covered by the scope of that Regulation. Second, the examples provided in subsections (a) and (b) of that provision can be seen as a further reaffirmation that, despite the repeal of Regulation 1107/70, those types of aid should still be considered to fall within the scope of aid for the coordination of transport. Indeed, aid for infrastructure costs used to be covered by Article 3(1)(b) of Regulation 1107/70, while aid to promote research and development in transport systems and technologies was covered by Article 3(1)(c) of that regulation. In other words, the repeal of Regulation 1107/70 by Regulation 1370/2007 should not be considered to alter established practice as concerns aid granted in these circumstances.

3.1735

4.3.10 Application in time Regulation 1370/2007 entered into force on December 3, 2009. It is on that same date that Regulations 1191/69 and 1107/70 were repealed. The question thus arises under which legal regime should public service contracts concluded before that date but examined by the Commission after the entry into force of the new Regulation be examined for compatibility with the internal market.

3.1736

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This question might seem highly theoretical, but it is not. Indeed, on the date Regulation 1370/2007 entered into force, six formal investigation procedures were pending which had been opened on the basis of Regulation 1191/69.3390 Moreover, since then, the Commission has received a number of notifications and complaints concerning public service contracts provided before the entry into force of Regulation 1370/2007.3391

3.1737

The General Court recently considered this question in the Andersen judgment3392. That judgment concerned a challenge to the Commission’s decision declaring public service contracts concluded for the periods 2000-2004 and 2005-2014 by the Danish Ministry of Transport with Danske Statsbaner (DSB), the incumbent rail operator in the Danish passenger transport sector3393, compatible with Article 93 of the Treaty. That decision was the first to apply Regulation 1370/2007 to public passenger transport contracts. The Commission’s investigation looked into three main aspects of DSB’s alleged overcompensation: DSB’s surplus profits, compensation for delays in acquiring rolling stock, and various issues relating to the operation of a specific route between Copenhagen and Ystad in southern Sweden. The Commission found that Denmark eliminated DSB’s surplus profits by deducting dividends and that no overcompensation 3390 Invitation to submit comments pursuant to Article 88(2) of the EC Treaty in case C 54/2007 on State Aid to Emsländische Eisenbahn, OJ C 174, 09.07.2008, p. 13; Invitation to submit comments pursuant to Article 88(2) of the EC Treaty in case C 47/2007 on Public service contract between Deutsche Bahn Regio and the Länder of Berlin and Brandenburg, OJ C 35, 08.02.2008, p. 13; Invitation to submit comments pursuant to Article 88(2) of the EC Treaty in case C 17/2008 on Complaint against domestic road transport public services in the Ústí Region, OJ C 187, 24.07.2008, p. 14; Invitation to submit comments pursuant to Article 88(2) of the EC Treaty in case C 41/08 (NN 35/08) on Aid allegedly granted to Danske Statsbaner, OJ C 309, 04.12.2008, p. 14; Invitation to submit comments pursuant to Article 88(2) of the EC Treaty in case C 31/07 (ex NN 17/07) on State aid to Córas Iompair Éireann Bus Companies (Dublin Bus and Irish Bus), OJ C 217, 15.09.2007, p. 44; Invitation to submit comments pursuant to Article 88(2) of the EC treaty in case C 58/06 (ex NN 98/05) on State aid implemented by Germany for Bahnen der Stadt Monheim and Rheinische Bahngesellschaft in the Verkehrsverbund Rhein-Ruhr, OJ C 74, 31.03.2007, p. 18. 3391 Commission Decision of 2 October 2013 on compensation to be paid to Simet SpA for public transport services provided between 1987 and 2003 – Italy (Case SA.33037), OJ L 114, 16.04.2014, p. 48.; Commission Decision of 19 January 2015 on additional public service compensation for CSTP – Italy (Case SA.35842 (2014/C)), OJ C 219, 3.7.2015, p. 12; and Commission Decision of 19 January 2015 on additional public service compensation for Buonotourist Italy (Case SA.35843 (2014/C)), OJ L 179, 8.7.2015, p. 128. All three decisions have been appealed to the General Court: see Cases T-15/14 SIMET v Commission, T-185/15 Buonotourist v Commission, T-186/15 CSTP v Commission and Cases T-187/15 and 188/15 CTP v Commission. See also Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.26763 on Presumed aid granted to public transport undertakings by the Île-de-France region, OJ C 141, 09.05.2014, p. 38 and Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.38132 on additional PSO Compensation for ARFEA, OJ C 219, 3.7.2015, p. 12. 3392 Case T92/11 Jørgen Andersen v Commission ECLI:EU:T:2013:143. 3393 Commission Decision of 24 February 2010 concerning public transport service contracts between the Danish Ministry of Transport and Danske Statsbaner (Case C 41/08 ex NN 35/08), OJ L 7, 11.01.2011, p. 1.

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had therefore resulted from the contracts. The Commission nevertheless asked the Danish authorities, as a condition for its approval, to revise the compensation system by introducing a claw-back mechanism to guard against future overcompensation. That mechanism introduces a maximum level of reasonable profit and an adjustment mechanism for adjusting the profit level according to the operator’s performance in terms of management and quality of service. The Commission also asked Denmark to ensure that any compensation due to DSB for delays in the delivery of rolling stock should be repaid in full to account for aid already received for that same loss. The General Court annulled this decision. It held that the Commission was wrong to apply Regulation 1370/2007 to the public service contracts in question and should have examined the compatibility of those contracts on the basis of Regulation No 1191/69. It based this finding on the reasoning that, as regards aid which has been paid without being notified, the applicable substantive rules are those in force at the time when the aid was paid, since the advantages and disadvantages created by such aid arose during the period in which that aid was paid. This reasoning is flawed for a number of reasons and the General Court’s judgment has accordingly been challenged before the Court of Justice3394. On the one hand, there is the case-law of the Court of Justice which supports the position that the rules, the principles and the criteria of assessment of the compatibility of State aid in force at the date on which the Commission takes its decision on compatibility may, as a rule, be regarded as better adapted to the context of competition and that notification of planned aid is only a procedural obligation which cannot have the effect of setting the legal framework applicable to the aid notified.3395 On the other hand, and as explained in Section 4.2 of this chapter, the practical consequence of this judgment is that any compensation granted for the discharge of public service obligations on the basis of contracts concluded before the entry into force of Regulation 1370/2007 that does not comply with all four Altmark conditions cannot be declared compatible with the internal market since Regulation 1191/69 does not provide for such a mechanism.

3.1738

3394 Case C303/13 Commission v Andersen. 3395 Case C-334/07 ¡ Commission v Freistaat Sachsen ECLI:EU:C:2008:709, paras. 51 to 54. In his opinion of 21 May 2015 in Case C303/13 Commission v Andersen EU:C:2015:340, Advocate General Wathelet proposed to the Court of Justice on the basis of a similar line of reasoning to set aside the judgment of the General Court in Case T92/11 Jørgen Andersen v Commission EU:T:2013:143 since the General Court erred in that judgment by concluding that the compatibility of the non-notified aid granted to DSB should have been assessed in light of the rules in force at the time when that aid was granted (Regulation 1191/69) and not the rules in force when that aid was deemed compatible by the Commission (Regulation 1370/2007).

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3.1739

Consequently, in a number of decisions taken since,3396 the Commission has applied Regulation 1370/2007 to assess the compatibility of public service compensation awarded on the basis of contracts concluded before the entry into force of that Regulation.3397 A similar approach has been adopted in relation to freight transport services which, by virtue of Article 10(1) of the Regulation, continue to be covered by the provisions of Regulation 1191/69 for a period of three years after the entry into force of Regulation 1370/2007.3398

4.4 Compatibility under Article 93 of the Treaty 4.4.1 Is Regulation (EC) No 1370/2007 exhaustive? 3.1740

As explained in Section 4.3.2 of this chapter, Regulation 1370/2007 governs the award of public service contracts and contains general rules in the field of public passenger transport by road and by rail. The question arises whether cases falling within the scope of the Regulation that do not abide by all of its provisions can still be deemed compatible with the internal market on the basis of Article 93 of the Treaty directly. As noted in Section 1 of this chapter, Regulations 1191/69 and 1107/70 were deemed to exhaustively implement that provision of the Treaty so that any forms of State aid for transport coordination or public service compensation that did not comply with the provisions of those regulations were considered to constitute illegal aid. In the case of Regulation 1370/2007, the case for exhaustive implementation as regards the cases covered by that regulation is even stronger.

3396 Commission Decision 2011/501/EU of 23.02.2011 on State aid implemented by Germany for Bahnen der Stadt Monheim (BSM); Rheinische Bahngesellschaft (RBG) in the Verkehrsverbund Rhein-Ruhr (Case C 58/06 ex NN 98/05), OJ L 210, 17.08.2011, p. 1; Commission Decision of 25.06.2014 on Complaint against the domestic road transport public services in the Usti Region – Czech Republic (Case C18/2008), OJ L 329, 14.11.2014, p. 35; Commission Decision of 2 October 2013 on compensation to be paid to Simet SpA for public transport services provided between 1987 and 2003 (Case SA.33037 (2012/C)), OJ L 114, 16.04.2014, p. 48; Commission Decision of 19 January 2015 on additional public service compensation for CSTP – Italy (Case SA.35842 (2014/C)), OJ L 179, 8.7.2015, p. 112, p. 39; Commission Decision of 19 January 2015 on additional public service compensation for Buonotourist – Italy (Case SA.35843 (2014/C)), OJ L 179, 8.7.2015, p. 128; and Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.38132 on additional PSO Compensation for ARFEA, OJ C 219, 3.7.2015, p. 12. 3397 A similar approach has been taken by the EFTA Surveillance Authority, see EFTA Surveillance Authority Decision 254/10/COL of 21 June 2010 on AS Oslo, AS Oslo Sporveier and AS Sporveisbussene. That decision was challenged on a different point in Case E-14/10, Konkurrenten.no v EFTA Surveillance Authority. 3398 See Invitation to submit comments pursuant to Article 108(2) of the Treaty in cases SA.32953 and SA.32179 on State aid measures in favour of Trenitalia SpA and FS Logistica SpA, OJ C 156, 23.05.2014, p. 77.

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Indeed, Article 9(2) of Regulation 1370/2007 provides that “[…] Member States may continue to grant aid for the transport sector pursuant to Article [93 of the Treaty] which meets transport coordination needs or which represents reimbursement for the discharge of certain obligations inherent in the concept of a public service, other than those covered by this Regulation […]”. From this provision, it can be reasoned a contrario that Member States may not continue to grant aid for the discharge of public service obligations covered by the Regulation. Such a conclusion would also make sense, since opening the door for compatibility in cases where the public authority has not abided by the provisions of the Regulation would undermine the will of the Union legislator.

3.1741

A distinction should be drawn, however, between the mandatory requirements of Article 4 of Regulation 1370/2007 and the other provisions of the Regulation which may be open to ex post rectification. Indeed, Article 9(1), which declares public service compensation paid in accordance with the Regulation to be compatible with the internal market, should be read in conjunction with Article 6, which provides the conditions according to which public service compensation should be paid under the regulation. More specifically, Article 6 requires all compensation to comply with the provisions of Article 4 of Regulation 1370/2007 and compensation resulting from a directly awarded public service contract to comply with Article 4 and the Annex to that Regulation.

3.1742

It thus follows that public service compensation connected with a public service contract that does not fulfil the mandatory requirements of Article 4 of the Regulation cannot be considered compatible on the basis of Article 93 of the Treaty instead. This is unsurprising, considering that the requirements stemming from Articles 4(1)(a), 4(1)(b), 4(1)(c) and 4(2) essentially coincide with the first three Altmark requirements.

3.1743

The situation is somewhat more complicated when it comes to applying the provisions of the Annex. For instance, in the “DSB” decision the Commission concluded that the aid granted by Denmark to DSB in the context of public transport services contracts was compatible with the internal market under Regulation 1370/2007, subject to Denmark’s introduction into those contracts of a claw-back mechanism to comply with point 2 of the Annex. Since the Annex provides an ex post control to ensure that the annual compensatory payments are not higher than the actual net costs for the provision of the public service, in cases in which those payments exceed the costs, the Commission may deem the compensation compatible with the Regulation, provided a refund mechanism is subsequently introduced.

3.1744

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3.1745

Finally, as regards the failure to comply with the other provisions of the Regulation, in particular the Regulation’s formal requirements, it is doubtful that this should exclude compatibility under the Regulation. Those provisions are not referred to in Article 6, which deals with compensation, while Article 9(1) only refers to compensation paid in accordance with the Regulation. Thus, failure to comply with, for instance, a publication requirement will not withdraw the benefit of Article 9(1) of the Regulation, although it may give rise to infringement proceedings against the Member State.

3.1746

In no case, however, does there appear to be any room to declare public service contracts or general rules falling under the scope of Regulation 1370/2007, but not fulfilling the mandatory requirements of Article 4, compatible with the internal market on the basis of Article 93 of the Treaty directly.

4.4.2 Residual categories of public service compensation for land transport 3.1747

As explained in Section 4.3.2 of this chapter, there are public service contracts for passenger transport by road and rail which fall outside the scope of Regulation 1370/2007. A case recently examined by the Commission concerned compensation of school bus transport in the Land Rhineland-Palatinate,3399 Germany, which Germany had excluded from the scope of the Regulation by virtue of Article 3(3) thereof. In following the logic of the Altmark judgment, Regulation 1370/2007, the 2012 Decision on public service compensation and the 2012 Framework on public service compensation, as well as Article 106(2) of the Treaty, the Commission defined the following criteria for declaring public service compensation for land transport compatible with the internal market directly under Article 93: –

the aid must be granted for the discharge of a genuine and correctly defined public service;

–

the parameters for compensation must be laid down in advance in an objective and transparent manner;

–

the amount of compensation must not exceed what is necessary to cover the net cost of discharging the public service obligations, including a reasonable profit;

3399 Commission Decision of 26.03.2014 on German Regional law on the compensation of school bus transport in the Land Rhineland-Palatinate (Case SA. 34155), summary notice in OJ C 120, 23.04.2014, p. 1.

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–

where an authority assigns the same public service to several undertakings, the compensation for the discharge of that service should be calculated on the basis of the same method in respect of each undertaking; and

–

the aid must not lead to distortions of competition contrary to the common interest.

Considering the observations in Section 4.4.1 of this chapter, there will be limited scope to apply Article 93 directly to authorise compensation for the discharge of public service obligations. 3400 In any event, consistency has been assured between the different rules concerning SGEIs and public service obligations.

5.

3.1748

Residual categories of aid to the land transport sector

5.1 Introduction As explained in Section 1 of this chapter, State aid to land transport may take many forms besides aid for the coordination of transport and compensation for the discharge of public service obligations. The compatibility assessment of such aid depends on the common interest objective to which it contributes. This may entail a compatibility assessment under the relevant State aid guidelines or under Articles 107(2) and 107(3) Treaty directly. The following sections examine, by mode of transport, compatible aid measures granted outside the scope of Article 93.

3.1749

5.2 Road transport Commission Regulation 1407/2013 on de minimis aid3401 contains several provisions specific to road transport. Thus, Article 3(2), second paragraph, provides a lower threshold of EUR 100 000 for de minimis aid granted per Member State over a three year period to a single undertaking performing road freight transport services for hire or reward. Article 3(3) further specifies that if an undertaking performs road freight transport services and also carries out other activities to which the general de minimis ceiling of EUR  200  000 applies, the ceiling of EUR 200 000 shall apply to that undertaking, provided the Member State concerned ensures, by appropriate means such as separation of activities or dis-

3.1750

3400 Another recent example is Commission Decision of 4 June 2015 on UK alleged unlawful State aid granted by Nottinghamshire and Derbyshire County Councils to community transport organisations (Case SA.34403), OJ C 234, 17.7.2015, p. 1. 3401 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty to de minimis aid, OJ L 352, 24.12.2013, p. 1.

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tinction of costs, that the benefit to the road freight transport activity does not exceed EUR 100 000. The regulation also contains specific rules to ensure the transparency of de minimis aid in the form of loans and guarantees to undertakings performing road freight transport services.3402 In no case may de minimis aid be used for the acquisition of road freight transport vehicles. This exclusion is justified by the overcapacity in the road freight transport sector and the objectives of transport policy as regards road congestion and freight transport. Finally, in contrast to the previous de minimis Regulation,3403 the general de minimis ceiling of EUR 200 000 applies to aid granted to transport undertakings providing road passenger services, rather than the lower ceiling for freight transport. However, if those passenger services are provided by undertakings performing services of general economic interest, thus public services, the higher de minimis ceiling of EUR 500 000 laid down by Commission Regulation 360/2012 applies.3404

3.1751

The Commission recently used Article 107(2)(a) of the Treaty to approve an aid measure compensating bus and tram undertakings in the Land RhinelandPalatinate, Germany, in return for offering discounted tickets to pupils, students and trainees.3405 According to the Commission, the aid was effectively for the benefit of final consumers notwithstanding the fact that the reduction in price was not directly paid to consumers but rather to the transport undertakings; the aid had a social character by covering pupils, students and trainees; and the aid was granted without discrimination as to the origin of the service providers.

3.1752

As regards compatibility under Article 107(3)(c), the Environmental Aid Guidelines have frequently been used as a basis for approving aid measures in the road transport sector which contribute to environmental protection. Indeed, the Commission has approved aid for measures such as retrofitting particulate filters on old and new heavy-duty vehicles and passengers buses.3406 It also twice 3402 Articles 3(b) and 6(b) of Regulation 1407/2013. 3403 Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid, OJ L 379, 28.12.2006, p. 5, Article 2(2). 3404 Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest, OJ L 114, 26.04.2012, p. 8. 3405 Commission Decision of 26.03.2014 on German Regional law on the compensation of school bus transport in the Land Rhineland-Palatinate (Case SA. 34155), summary notice in OJ C 120, 23.04.2014, p. 1. See also Commission Decision of 4 June 2015 on UK alleged unlawful State aid granted by Nottinghamshire and Derbyshire County Councils to community transport organisations (Case SA.34403), OJ C 234, 17.7.2015, p. 1. 3406 Commission Decision of 19.11.2009 on UK Green Bus Fund (Case N 517/2009), summary notice in OJ C 74, 24.03.2010, p. 3; Commission Decision of 06.12.2006 on Particulate filters for diesel buses in Lombardy Italy (Case N 400/2006), summary notice in OJ C 90, 25.04.2007, p. 10; Commission Decision of

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approved a multi-annual French scheme aimed at limiting greenhouse gas emissions linked to that sector3407 as well as a UK scheme funding the acquisition of low carbon emission busses for public transportation services3408. The Commission thus considers it possible to grant aid in connection with the purchase of new road vehicles in well-defined cases if that aid is aimed at environmental or safety protection and represents compensations for the costs of higher technologies than those laid down or required by national or Union standards.3409 This is important because the General Court has declared that investment aid – for instance for the purchase of vehicles – for sectors characterised by overcapacity, like road transport, cannot be granted, since they are deemed to distort competition.3410 In accordance with this case-law, the Commission has considered public subsidies for the purchase of new equipment, not responding to environmental or safety objectives, as operating aid, and thus incompatible with the Treaty. This was in particular the case for the Spanish schemes Renove I and II which were designed to assist road hauliers to renew their aging fleet.3411 The Commission has also adopted several decisions on the basis of Article 107(3)(c) concerning compensation measures for the introduction of tolls on motorways. For instance, the Commission authorised Italy to reimburse up to 40 per cent of the toll charges that heavy vehicles had to pay between June and September 1998 when they were banned from using the Lago Maggiore State

3407

3408 3409

3410 3411

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20.07.2004 on Particulate filters for heavy vehicles- Denmark (Case N 90/2004), summary notice in OJ C 235, 22.09.2004, p. , prolonged by Commission Decision of 21.12.2006 (Case N 573/2005), summary notice in OJ C 133, 15.06.2007, p. 3. See Commission Decision of 05.03.2003 on French ADEME aid scheme in the field of transport (Case N 353/200), summary notice in OJ C 143, 19.06.2003, p. 2, prolonged by Commission Decision of 09.11.2005 (Case N 134/2005), summary notice in OJ C 89, 12.04.2006, p. 6. Commission Decision of 19.11.2009 on UK Green Bus Fund (Case N 517/2009), summary notice in OJ C 74, 24.03.2010, p. 3. See Commission Decision of 18.09.2002 on Spanish aid scheme for the purchase of electric or hybrid motorcycles within the territory of the Autonomous Community of Castile Leon (Case N 203/2002), summary notice in OJ C 9, 15.01.2003, p. 6, prolonged by Commission Decision of 25.06.2007 (Case N 212/2007), summary notice in OJ C 282, 24.11.2007, p. 5; Commission Decision of 24.01.2007 on German Guidelines for the promotion of environmental friendly heavy vehicles (Case N 649/2006), summary notice in OJ C 139, 23.06.2007, p. 11, prolonged by Commission Decision of 26.03.2008 (Case N 106/2008), summary notice in OJ C 137, 04.06.2008, p. 1; Commission Decision of 27.11.2003 on Spanish aid for the acquisition of public transport vehicles adapted to persons with reduced mobility (Case N 337/2002), summary notice in OJ C 34, 07.02.2004, p. 4, prolonged by Commission Decision of 25.01.2006 (Case N 605/2005), summary notice in OJ C 220, 13.09.2006, p. 2. Case T-55/99 Confederación Española de Transporte de Mercancías v Commission (1109 CETM ), ECLI:EU:T:2000:223. Commission Decision 98/693/EC of 01.07.1998 on the Spanish Plan Renove Industrial system of aid for the purchase of commercial vehicles (August 1994 - December 1996)(Case 65/1998), OJ L 329, 05.12.1998, p. 23.

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highways.3412 By contrast, a German compensation measure, intended to offset the negative consequences of the introduction of tolls for motorways and which included a one-off toll reimbursement of a maximum of 2.6 cents of excise duties on fuel purchased within Germany, was viewed as being incompatible with the Treaty.3413 The Commission found that the system was mainly discriminatory against hauliers of other Member States due to the obligation to prove that the fuel was purchased within Germany.

3.1754

The Commission adopted a handful of decisions concerning aid for road infrastructure under Article 107(3)(c). For example, the Commission found that the extension of the concession for the Mont Blanc tunnel and the adjacent motorways, which helped to finance the renovation of the tunnel following the accident in 1999, constituted State aid, but was compatible with the internal market as compensation for a service of general economic interest.3414 The Commission has also deemed compatible aid for the construction and operation in Poland of a stretch of the motorway connecting Berlin to Warsaw,3415 but opened the formal investigation procedure into compensation granted to the operator of that motorway to compensate it for a change in Polish law exempting heavy goods vehicles from the obligation to pay motorway tolls.3416 In two decisions from 2008 concerning the partial public funding for the design, construction and operation of two motorway projects in Greece, the Commission concluded that that funding did not constitute State aid.3417 When the concession holders of those motorways ran into trouble as a result of the financial crisis in Greece, 3412 Commission Decision 2004/261/EC of 09.07.2003 on the State aid which Italy is planning to implement in favour of certain heavy goods vehicles designed for the carriage of goods by road in order to divert heavy goods traffic from trunk road 33 (SS 33) from Lake Maggiore to the A26 motorway (Case C 11/2002 ex N 382/2001), OJ L 81, 19.03.2004, p. 80. 3413 See Commission Decision 2009/150/EC of 25.01.2006 on State aid which the Federal Republic of Germany is planning to implement concerning a reimbursement mechanism linked to the introduction of a toll system for heavy goods vehicles on German motorways (Case C 54/03 ex N 194/02), OJ L 50, 21.02.2009, p. 30. 3414 Commission Decisions of 22.02.2006 on Extension of the duration of concessions for Mont-Blanc motorway tunnel (ATMB) and the Maurice Lemaire Tunnel (TML / APRR) companies - France (Case N 420/2005), summary notice in OJ C 90, 25.04.2007, p. 2 and Commission Decision of 16.05.2006 on Extension of the duration of concession for Società Italiana del Traforo del Monte Bianco – Italy (Case N 562/2005), summary notice OJ C 90, 25.04.2007, p. 10. 3415 Commission Decision of 02.12.2009 on Polish aid for the construction and operation of the A2 Motorway, Zwiecko Nowy Tomy[l section (Case N 462/2009), OJ C 418, 21.11.2014, p. 1. 3416 Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA.35356 on Shadow toll compensation to Autostrada Wielkopolska (AW S.A.) OJ C 328, 20.09.2014, p. 12. 3417 Commission Decisions of 30.01.2008 on Public financing of the Central Greece Motorway (E65) and Public financing of the motorway sections between Maliakos and Kleidi (part of Pathe programme), between Tembi and Skotina, and between Evangelismos and Leptokaria (Cases N 565/2007 and N 633/2007), summary notice in OJ C 70, 15.03.2008, p. 3.

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caused by increased interest rates on international loans and reduced revenues from operating toll roads, the Commission in December 2013 authorised additional aid to enable those operators to complete the projects.3418 The Commission’s view was that the 2013 measures could be deemed separate from the 2008 measures because they were taken five years apart and the beneficiaries found themselves in a different financial situation by that time, despite the fact that both sets of measures had the same purpose. The Commission has also clarified the conditions under which public involvement in a public private partnership constitutes State aid when assessing the construction of road infrastructure.3419 As a general rule, the Commission considers that the financing of infrastructure through State resources does not confer and advantage on its users provided that the infrastructure is open without discrimination to all in accordance with Union legislation, and does not favour one user in particular.3420 Finally, the relatively important differences in fuel tax levels between Member States are also a significant factor influencing the development of the road transport sector. In 2002, the Council decided that exceptional circumstances within the meaning of Article  108(2)(b) of the Treaty existed to allow France, Italy and the Netherlands to apply reduced rates of excise duty on diesel fuel for road hauliers to alleviate the costs resulting from the petrol crisis of 2000. The case is worth mentioning on two grounds: first, it is extremely rare that the Council prevails itself of the use of Article 108(2)(b) and, second, the Council took its decision while the Commission had opened formal investigation procedures in 2000 for the three cases3421, which most probably were going to lead to three negative decisions.

3.1755

3418 Commission Decisions of 13.12.2013 on Reset of Greek Motorway concession projects – Greece (Cases SA.36877 and SA.36893), summary notice in OJ C 50, 21.02.2014, p. 1. 3419 See Commission Decision of 16.05.2006 on Irish application for clearance under State Aid rules to the provision of a Traffic Guarantee as part of the payment mechanism on the M3 Clonee to North of Kells PPP road scheme and N7 Limerick Southern Ring Roadin (Case N 149/2006), summary notice OJ C 207, 30.08.2006, p. 2. 3420 Commission Decision (EU) 2015/635 of 15 October 2014 on State aid SA.20580 (C 31/07) (ex NN 17/07) implemented by Ireland for Córas Iompair Éireann Bus Companies (Dublin Bus and Irish Bus), OJ L 104, 23.04.2015, p. 17, recital 185. See also Commission Decision of 5.11.1997 on Greek measure for the construction and operation of Rion Antirion motorway bridge (Case 713/97), recital 38, summary notice in OJ C 395, 31.12.1997, p. 13. 3421 Commission Decisions of 11.04.2001 on Italian measures for road hauliers compensating for the increase of petrol prices (Case NN56/2000), on French measures for road hauliers compensating for the increase of petrol prices (Case NN 112/2000), and on Dutch measures for road hauliers compensating for the increase of petrol prices (Case NN 115/2000), summary notice in OJ C 160, 02.06.2001, pp. 15, 24 and 30.

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5.3 Railway transport 3.1756

Railway transport has traditionally been highly subsidised. Infrastructure construction and maintenance require major investments. Moreover, revenues from passenger transport hardly enable transport operators to cover all their operational costs so that State support has become an essential condition to ensure the continuity and quality of service. It is against this background that the financing of railway transport must be understood.

3.1757

As explained in Section 3.4 of this chapter, the Railway Guidelines provide guidance on the compatibility of State aid to railway undertakings not only in relation to Article 93 of the Treaty, but also in relation to Article 107(3)(c). Those Guidelines are considered to complement Regulation 1370/2007, which deals with aid in the form of compensation for discharging public service obligations. The Railway Guidelines provide six chapters on the compatibility of aid to railway undertakings.3422

3.1758

Chapter 2 of the Guidelines covers public financing of railway undertakings by means of railway infrastructure funding. As explained in point 23, since the Railway Guidelines only apply to railway undertakings, their aim is not to define the State aid rules which apply to the public financing of infrastructure, but only to examine the effects of public financing of infrastructure on railway undertakings. In that context, the Guidelines note that, according to the case law of the Court of Justice, public financing of infrastructure development will be considered to grant an advantage to railway undertakings indirectly and thus constitute State aid if the infrastructure measure is found to have the economic effect of lightening the burden of charges normally encumbering those undertakings’ budgets.3423 For that to be the case, a selective advantage would have to be granted to the undertakings concerned, that advantage originating in the financing of the infrastructure in question.3424 The Guidelines further specify, however, that where infrastructure is open to all potential users in a fair and non-discriminatory manner and access to that infrastructure is charged for at a rate in accordance with Directive 2001/14/EC, the Commission will normally consider that public financing of the infrastructure does not constitute State aid to railway undertakings.3425 Where public financing of railway infrastructure 3422 3423 3424 3425

The categories of aid covered by those guidelines are summarised in Section 1 of this chapter Railway Guidelines, point 24; Case C-382/99 Netherlands v Commission ECLI:EU:C:2002:363. Case C-156/98 Germany v Commission ECLI:EU:C:2000:467. Railway Guidelines, point 25. See also Commission Decision of 7 June 2006 on Irish State Guarantee for capital borrowings by Córas Iompair Éireann (CIÉ) for infrastructure investment ( Case N 478/2004), recital 26, summary notice in OJ C 209, 31.08.2006, p. 8,; Commission Decision of 20 April 2005 on

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constitutes aid to one or more railway undertakings, it may be authorised, for example on the basis of Article 93 of the Treaty, if the infrastructure in question meets the needs of transport coordination. The Railway Guidelines do not cover aid to fund infrastructure.3426 A peculiarity arises in the railway sector in that such aid will often be paid out to infrastructure managers. As explained in Section 2.2 of this chapter, the first railway package opens the door to functional separation between railway operators and infrastructure managers. In relation to infrastructure management, the Commission has previously concluded that since the operation and management of the national rail network is considered to be confined to the territory of a Member State, no competition can be considered to exist on that market. In addition, since Member States are not required to open up the operation and management of the rail network to competition, no competition can be considered to exist for that market. Accordingly, public funding granted to an infrastructure manager solely for purposes directly related to the management and operation of the national rail network is not liable to distort competition, so long as the infrastructure manager’s activities are wholly limited to the funded activity. Moreover, considering that in that case the national infrastructure management had no equity, it would not distribute any dividends and any surplus would be re-invested into its business, and that none of its subsidiaries could be taken over by other commercial actors, nor could the infrastructure manager transfer the right to operate the rail network to another undertaking, the Commission found that funding was not liable to affect trade between Member States and thus did not constitute State aid.3427

3.1759

Chapter 3 of the Guidelines deals with aid for the purchase and renewal of rolling stock. In assessing the compatibility of such aid, the Commission will apply the criteria laid down in the applicable guidelines, including specific rules laid

3.1760

Belgian public-private partnership for tunnelling the Krijgsbaan at Deurne; the development of industrial estates and the operation of Antwerp Airport (Case N 355/2004), recital 34, summary notice in OJ C 176, 16.07.2005, p. 11; Commission Decision of 17 July 2002 on UK Network Rail (Case N 356/2002), point 70, summary notice in OJ C 232, 28.09.2002, p. 2; Commission Decision of 20 December 2001 on UK Freight Facilities Grant (Case N 649/2001), recital 45, summary notice in OJ C 45, 19.02.2002, p. 2; and Commission Decision of 11 December 2001 on Belgian public-private partnership for loading and unloading facilities, recital 24, summary notice in C 24, 26.1.2002, p. 2. 3426 Railway Guidelines, point 15. 3427 Commission Decision of 17 July 2002 on UK Network Rail (Case N 356/2002), summary notice in OJ C 232, 28.09.2002, p. 2. See also Commission Decision of 02.05.2013 on Prolongation of the interoperability scheme in railway transport – Czech Republic (Case SA.35948 ex N 469/2008), OJ C 306, 22.10.2013, p. 4, and Commission Decision of 15.10.2014 on Danish and Swedish aid granted to Oresundsbro Konsortiet (Cases SA.36558 and 36662), OJ C 437, 5.12.2014, p.1.

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down in the Railway Guidelines, or in any other relevant document depending on the common interest objective to which the aid contributes. Thus, aid for the purchase and renewal of rolling stock can be assessed as transport coordination aid under Chapter 6 and Article 93 of the Treaty; it can be examined as restructuring aid under Chapter 5 and the Rescue and Restructuring Guidelines3428; it can be assessed as SME aid, as aid for environmental protection under the Environmental Protection and Energy Guidelines3429, and as aid to offset costs relating to public service obligations and in the framework of public service contracts under Regulation 1370/2007.

3.1762

Finally, in points 34 to 40, the Railway Guidelines provide specific rules for regional aid covering the costs of acquisition of passenger rolling stock. The objective pursued by such measures is to put such aid towards the modernisation of railway transport, which is urgently required, especially in the new Member States. On the basis of those rules, the Commission has approved regional aid for the purchase and refurbishment of rolling stock in Bulgaria3430, the Czech Republic3431, Poland3432 and Hungary3433. According to the Guidelines, any kind of investment in passenger rolling stock, whether initial or for replacement purposes3434, so long as it is assigned to lines regularly serving a region eligible for aid under Article 107(3)(a) of the Treaty, an outermost region or a region of low population density within the meaning of points 80 and 81 of the Regional Aid Guidelines can be approved, provided certain conditions are met. In the other regions, only aid for initial investment can be approved. The Guidelines list the 3428 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty , OJ C 249, 31.07.2014, p. 1. 3429 Guidelines on State aid for environmental protection and energy 2014-2020, OJ C 200, 28.06.2014, p. 1 3430 Commission Decision 11.09.2009 on Bulgarian subsidies from the central budget for BDZ EAD for the modernisation of passenger rolling stock for rail transport (Case N 175/2009 ex PN 132/2008), summary notice in OJ C 246, 14.10.2009, p. 3. 3431 Commission Decisions of 10.03.2009 on Acquisition and modernisation of rail rolling stock, Acquisition and modernisation of vehicles for urban transport and Acquisition and modernisation of vehicles for regional transport Czech Republic (Cases N 409/08, N410/08 and N411/08), summary notice in OJ C 106, 08.05.2009, p. 17; Commission Decision of 30.04.2008 on Czech Programme for the acquisition and modernisation of railway rolling stock (Case N 495/2007), OJ C 152, 18.06.2008, p. 21; Commission Decision of 30.01.2008 on Czech State guarantee for the purpose of financing the purchase of railway rolling stock by eske dráhy (Czech Railways) (Case N 685/2007), summary notice in OJ C 140, 06.06.2008, p. 1. 3432 Commission Decision of 22.01.2014 on Renewal of rolling stock for PKP IC to serve the interregional line Warszawa – Szczecin - Poland (Case SA.37673), summary notice in OJ C 172, 06.06.2014, p. 1; Commission Decision of 18.12.2013 on Polish aid to PKP IC for purchase of long-distance passenger rolling stock (Case SA.36486), summary notice in OJ C 172, 06.06.2014, p. 1. 3433 Commission Decision of 05.06.2013 on MFB Public Transport Development and Financing Program Hungary (Case SA.35448), OJ C 287, 03.10.2013, p. 1. 3434 For aid for investment for replacement purposes, the derogation applies only when all the rolling stock that the aid is used to modernise is more than 15 years old.

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following four cumulative conditions, which are necessary to avoid distortions of competition which would be contrary to the common interest:3435 – – – –

the rolling stock concerned must be exclusively assigned to urban, suburban or regional passenger transport services in a specific region or for a specific line serving several different regions;3436 the rolling stock must remain exclusively assigned to the specific region or the specific line passing through several different regions for which it has received aid for at least ten years; the replacement rolling stock must meet the latest interoperability, safety and environmental standards applicable to the network concerned; the Member State must prove that the project contributes to a coherent regional development strategy.

Points 38 and 39 of the Railway Guidelines provide, on the one hand, that the other conditions provided for in the Regional Aid Guidelines, notably as regards the intensity ceilings, the regional aid maps and the rules on the cumulation of aid continue to apply and, on the other hand, refer to points 64 and 67 of those Guidelines as part of the analysis into regional aid for passenger rolling stock. The question that arises is what value this reference should be considered to have, now that new Regional Aid Guidelines which exclude transport from their scope have been adopted.3437 Since it is unlikely that by this exclusion it was intended to change the rules on regional aid for the acquisition or renewal of passenger rolling stock as laid down in the Railway Guidelines, the references in points 38 and 39 should be considered as dynamic references to the new Regional Aid Guidelines.

3.1762

Chapter 4 of the Railway Guidelines explain to Member States how to reconcile with the Treaty’s rules on State aid and the requirement imposed on them by Union legislation to assume the debts of railway undertakings in order to allow them to rectify their financial situation. Points 54 to 60 of the Guidelines

3.1763

3435 Railway Guidelines, point 36. 3436 Point 36(a) of the Railway Guidelines further explains that “[f ]or the purposes of these guidelines ‘urban and suburban transport services’ is to be understood as transport services serving an urban centre or conurbation as well as those services between that centre or conurbation and its suburbs. ‘Regional transport services’ is to be understood as transport services intended to meet the transport needs of one or more regions. Transport services serving several different regions, in one or more Member States, may therefore be covered by the scope of this point if it can be shown that there is an impact on the regional development of the regions served, in particular by the regular nature of the service. In this case, the Commission verifies that the aid does not compromise the effective opening of the international passenger transport market and cabotage following the entry into force of the third railway package”. 3437 Guidelines on regional State aid for 2014-2020, OJ C 209, 23.07.2013, p. 1, point 10

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deserve highlighting in this regard. Point 54 states that under certain circumstances, it should be possible to authorise debt cancellations without financial restructuring if the cancellation concerns old debts incurred prior to the entry into force of Directive 2001/12/EC, that is, March 15, 2001. Insofar as that aid seeks to ease the transition to an open rail market, as provided for by Article 9 of Directive 91/440/EEC, the Commission will consider a debt cancellation compatible with Article 107(3)(c) provided the following five conditions are met: (i) the aid serves to offset clearly determined and individualised debts incurred prior to the entry into force of Directive 91/440/EEC or the accession of a Member State, whichever is later; (ii) the debts concerned are linked to rail transport or railway infrastructure; (iii) the company concerned is excessively indebted which hinders its sound financial management and the aid is necessary to remedy this situation; (iv) the aid must not go beyond what is necessary for the purpose; account must be taken of future developments in competition; and (v) the debt cancellation must not give an undertaking a competitive advantage such that it prevents the development of effective competition on the market.

3.1764

In cases that do not fall under the objective of Article 9 of Directive 91/440/ EEC, the Guidelines provide that debt cancellation measures should normally be examined on the basis of the Rescue and Restructuring Guidelines.3438 In specific cases, where the debts cancelled exclusively concern transport coordination, compensation of public service obligations or the setting of accounting standards, the compatibility of this aid will be examined on the basis of Article 93 of the Treaty.3439

3.1765

In cases where railway undertakings require restructuring aid, the compatibility of such aid shall normally be examined under the Rescue and Restructuring Guidelines. In that context, the Commission examined and approved restructuring aid granted to the freight division of the French incumbent railway operator SNCF.3440 The Commission also approved restructuring aid given to the developer of the high speed rail link between London and the Channel Tunnel and the owner of Eurostar (UK) Limited, the UK arm of Eurostar.3441 The Commission has approved rescue aid to the Bulgarian railways3442, while opening the 3438 Railway Guidelines, point 52. 3439 Railway Guidelines, point 53. 3440 Commission Decision of 2.3.2005 on Restructuring aid to SNCF – France (Case N 386/2004), summary notice in OJ C 172, 12.07.2005, p. 3. 3441 Commission Decision of 13.05.2009 on State aid Restructuring of London & Continental Railways and Eurostar (UK) Limited N United Kingdom (Case N 420/2008), summary notice in OJ C 183, 05.08.2009, p. 2. 3442 Commission Decision of 15.12.2010 on Rescue aid for the Bulgarian State Railways EAD (BDZ) Bulgaria (Case N 402/2010), summary notice in OJ C 187, 28.06.2011, p. 6.

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formal investigation procedure into the restructuring aid granted to that operator, including a debt cancellation measure.3443 It has also opened the formal investigation procedure into restructuring measures concerning the Greek railway operator, including a debt cancellation measure, asset and employee transfers and public service compensation.3444 The Rescue and Restructuring Guidelines exclude restructuring aid to a division of an undertaking, namely an economic entity without legal personality.3445 However, considering the specific financial situation of the European freight sector at the time that the Railway Guidelines were adopted, a transitional arrangement for restructurings of freight divisions notified before January 1, 2010 was provided by Chapter 5 of the Railway Guidelines.3446 Chapter 6 of the Guidelines, dealing with aid for the coordination of transport, has been covered in Section 3 of this chapter.

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Finally, Chapter 7 of the Guidelines provides further clarifications on the State aid rules applicable to State guarantees for railway undertakings. Particular mention should be made of points 122 and 123 of those Guidelines in which the Commission explains that several railway undertakings in the EU enjoy unlimited guarantees, but acknowledges that many of those guarantees constitute existing aid. The Commission therefore invited the Member States concerned to inform it of the conditions for implementing the schemes for existing aid as well as of the measures envisaged for removing them by July 22, 2010, two years after the publication of the Railway Guidelines in the Official Journal, as stipulated by point 127 of those Guidelines.

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5.4 Inland waterway transport Inland waterway transport has traditionally faced problems of overcapacity. Thus, inland waterway aid authorised by the Commission was initially directed towards reducing overcapacity and providing a structural reorganisation of the

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3443 Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA 31250 on Restructuring of BDZ (Bulgarian Railways), summary notice in OJ C 10, 12.01.2012, p. 9. 3444 Invitation to submit comments pursuant to Article 108(2) of the Treaty in case SA 32544 on Restructuring of the Greek Railway Group TRAINOSE S.A., summary notice in OJ C 272, 15.09.2011, p. 7. 3445 Railway Guidelines, point 63. 3446 Only one decision has been adopted under the transitional rules concerning the freight division of the Belgian incumbent railway operator SNCB/NMBS, see Commission Decision of 26.05.2010 on Restructuring aid to the freight activities of the public undertaking SNCB Belgium (Case N 726/2009), summary notice in OJ C 327, 04.12.2010, p. 6. For an earlier example of the examination of restructuring aid to the freight division of a railway undertaking, see Commission Decision of 2.3.2005 on Restructuring aid to SNCF France (Case N 384/2004), summary notice in OJ C 172, 12.07.2005, p. 3.

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sector in light of increased liberalisation.3447 However, compared to other modes which are often confronted with congestion and capacity problems, inland waterway transport has been recognised as a clean and reliable alternative to road transport with unexploited capacities. Therefore, as explained in Section 3.2 of this chapter, transport coordination measures promoting a shift from road to inland waterway transport have been looked upon favourably by the Commission.

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Beyond transport coordination measures, the Commission has authorised measures for the promotion of inland waterway under Article 107(3)(c) of the Treaty, in particular under the Environmental Aid Guidelines. Under these guidelines, the Commission has approved aid for the replacement and retrofitting of diesel engines used by inland waterway vessels3448, for the purchase of low emission power units in the Czech Republic3449 and aid for the modernisation of vessels3450. The Commission also authorised a German training aid scheme to promote inland waterway transport.3451

5.5 Combined transport 3.1770

Aid to combined transport is by definition transport coordination aid. Nevertheless, the Commission has used Article 107(3) of the Treaty on limited occasions to assess aid granted for combined transport activities outside the scope of transport coordination.3452 This includes aid for investment in information systems and start-up aid,3453 which is neither infrastructure aid nor aid to compensate for the unpaid external costs of road transport. 3447 See Commission decision of 2.10.2001 on Aid plan for inland waterway carriers France (Case N299/01), summary notice in OJ C 342, 05.12.2001, p. 7; Commission Decision of 12.7.2000 on Second Walloon aid scheme for inland waterway transport Belgium (Case N 567/99), summary notice in OJ C 284, 07.10.2000, p. 3, Commission Decision of 18.10.2000 on Aid plan for inland waterway carriers for 2000 France (Case N 564/2000), summary notice in OJ C 380, 30.12.2000, p. 9; and Commission decision of 16.05.2000 on Aid for boys training ships Germany (Case N 180/2000), summary notice in OJ C 184, 07.10.2000, p. 23. 3448 Commission Decision 05.07.2005 on Dutch aid for the replacement and retrofitting of diesel engines used by inland waterways vessels (Case N 213/2005), summary notice in OJ C 79, 01.04.2006, p. 23. 3449 Commission Decision of 20.05.2008 on Modernisation of the inland waterway fleet Czech Republic (Case N 358/2007), summary notice in OJ C 177, 12.07.2008, p. 1 3450 Commission Decision of 23.05.2011 on Austrian State aid scheme for the modernisation of inland waterway freight transport vessels (Case N 264/2010), OJ C 196, 05.07.2011, p. 1. 3451 Commission Decision of 16.05.2000 on German aid for boys training ships (Case N 180/2000), summary notice in OJ C 184, 01.07.2000, p. 23. 3452 See Commission Decision of 12.07.2000 on Second Walloon aid scheme for inland waterway transport Belgium (Case N 567/1999), summary notice in OJ C 284, 07.10.2000, p. 3; Commission Decision of 16.03.2005 on German aid scheme for the funding of new combined transport (Case N 238/04), summary notice in OJ C 136, 03.06.2005, p. 43. 3453 See Commission Decision of 27.02.2002 on New private pilot combined transport service linking Munich to Verona Germany (Case NN 134/2002 ex N 841/01), summary notice in OJ C 88, 12.04.2002, p. 16

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5.6 Short sea shipping Short sea shipping is the movement of cargo and passengers by sea between ports situated in geographical Europe or between those ports and ports situated in non European countries having a coastline on the enclosed seas bordering Europe. Short sea shipping includes domestic and international maritime transport, including feeder services, along the coast and to and from the islands, rivers and lakes. The concept of short sea shipping also extends to maritime transport between the Member States of the Union and Norway and Iceland and other States on the Baltic Sea, the Black Sea and the Mediterranean 3454. While short sea shipping does not technically fall within the definition of land transport provided by Article 100 of the Treaty, and therefore any compatibility assessment of aid measures for the promotion of this mode of transport cannot be examined under Article 93, short sea shipping often pursues similar goals to transport coordination measures for the benefit of rail and inland waterway transport, namely encouraging a shift away from road freight haulage towards a more environmentally-friendly mode of transport.

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Instead, the compatibility assessment of aid to encourage a modal shift to short sea shipping falls within the ambit of Article 107(3)(c) of the Treaty for which point 10 of the Guidelines on State aid to Maritime Transport provides specific guidance.3455 According to that point, the Commission shall approve aid of this kind intended for shipowners3456 provided the following conditions are met:

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–

the aid must not exceed three years in duration and its purpose must be to finance a shipping service connecting ports situated in the territory of the Member States;

–

the service must be of such a kind as to permit transport (of cargo essentially) by road to be carried out wholly or partly by sea, without diverting maritime transport in a way which is contrary to the common interest;

3454 Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions: The Development of Short Sea Shipping in Europe: A Dynamic Alternative in a Sustainable Transport Chain, Second Two-yearly Progress Report, COM(1999) 317 final, 29.06.1999. 3455 Commission Communication C(2004) 43 Community guidelines on State aid to maritime transport, OJ C 13, 17.01.2004, p. 3. 3456 As defined by Article 1 of Regulation 4055/86 and in respect of ships flying the flag of one of the Member States.

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–

the aid must be directed at implementing a detailed project with a preestablished environmental impact, concerning a new route or the upgrading of services on an existing one, associating several shipowners if necessary, with no more than one project financed per line and with no renewal, extension or repetition of the project in question;

–

the purpose of the aid must be to cover, either up to 30 per cent of the operational costs of the service in question, or to finance the purchase of trans-shipment equipment to supply the planned service, up to a level of 10 per cent in such investment;

–

the aid to implement a project must be granted on the basis of transparent criteria applied in a non-discriminatory way to shipowners established in the Community. The aid should normally be granted for a project selected by the authorities of the Member State through a tender procedure in compliance with applicable Community rules;

–

the service which is the subject of the project must be of a kind to be commercially viable after the period in which it is eligible for public funding;

–

such aid must not be cumulated with public service compensation (obligations or contracts).

As regards the first condition, in a recent decision concerning an Italian scheme to encourage the use of short sea shipping as an alternative to road freight haulage,3457 the Commission noted a discrepancy between the Maritime Guidelines and Railway Guidelines as regards the duration of such schemes. Since in the latter Guidelines no corresponding 3 year time limit is prescribed for similar schemes promoting an intermodal shift from road to rail transport, the Commission declared that for the purposes of consistency State aid to short sea shipping should be able to be declared compatible for a period of more than three years.

3457 Commission Decision 2013/487/EU of 17.07.2013 on State aid which Italy is planning to implement for the development of logistics chains and the upgrading of intermodality (Case SA.33412 (12/C) ex 11/N), OJ L 265, 08.10.2013, p. 8.

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6.

Conclusion

State aid control in the land transport sector is said to be more complex than in other sectors.3458 The peculiarity of State aid control in the land transport sector lies, on the one hand, in the unique Treaty rules and secondary legislation that apply when assessing the compatibility of public funding to that sector and, on the other hand, in the progressive and differentiated opening of the land transport markets through liberalisation. Add to this the social, regional and environmental policy considerations which increasingly play a role in the EU’s common transport policy and State aid control in the land transport sector becomes a complicated endeavour.

3.1774

The ultimate purpose of State aid control in the land transport sector is to ensure that, where a market has been opened to competition, public funding is limited to those instances where a market failure is apparent. In particular, public funding should not be used to shield incumbent transport operators from the liberalisation of the transport markets.

3.1775

At the same time, public funding may be necessary to ensure the objectives of the EU’s common transport policy are achieved. The land transport sector represents a key part of the EU’s economy. According to estimates, transport in general accounts for almost 5% of EU GDP, with land transport taking the largest share of that amount. In addition, land transport facilitates other sectors of the economy. Economic growth and prosperity is dependent on a properly functioning supply chain. This, in turn, requires investments in transport infrastructure and transport coordination measures and an efficient public transport network. The transport industry would therefore be unable to reach its full potential absent public funding.

3.1776

The task of the Commission is to strike the right balance between encouraging public investment in transport markets that pursues common interest objectives and preventing distortions of competition on newly liberalised markets. As more markets complete the liberalisation process, more State financing will be subject to the scrutiny of the Commission under the State aid rules.

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3458 Ninth survey on State aid in the European Union, COM (2001) 403 final, 18.07.2001, para. 151.

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Chapter 29 Banking 1.

Introduction

Before the financial crisis swept through the world markets in mid-2008, there were no specific rules for the assessment of compatibility of State aid to the financial sector. Rescue and restructuring of financial institutions was handled under the Rescue and Restructuring Guidelines (“RRGL”)3459, based on Article 107(3)(c) of the Treaty, which had been considered adequate in order to deal with the failures of isolated banks. The principles of a return of an aided bank to long-term viability on the basis of a restructuring plan, own contribution of the beneficiary to the costs of restructuring, as well as measures to address competition distortions stemming from aid have been applied to the assessment of aid and restructuring of institutions like Credit Lyonnais,3460 BAWAG3461 and West Deutsche Girozentrale.3462

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However, the events of the financial crisis and in particular its first acute phase post-collapse of Lehman Brothers threw up novel challenges which could not be satisfactorily addressed under the RRGL and therefore necessitated rapid adaptation of the State aid control rules. First, a large number of banks in several Member States needed aid at the same time. National governments, faced with

3.1779

3459 See Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 244, 01.10.2004, p. 2, and the (new) Commission Guidelines on State aid for rescuing and restructuring nonfinancial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1. When this chapter refers to the RRGL, both the new and the old guidelines are meant: The key concepts – to the extent they are relevant for the Crisis Communications – have remained unaltered. 3460 Commission Decision of 20.05.1998 on aid granted by France to the Crédit Lyonnais group (Case C 47/1996), OJ L 221, 08.08.1998, p. 28. 3461 Commission Decision of 27.06.2007 on State guarantee granted to BAWAG-PSK by Austria (Case C 50/2006; ex NN 68/2006, CP 102/2006), OJ L 83, 26.03.2008, p. 7. 3462 Commission Decision of 30 April 2008 on Rescue aid to WestLB (Case NN 25/2008), OJ C 189, 26.07.2008, p. 3.

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financial stability threats, introduced unprecedented measures (such as the decision of the Irish government to guarantee the balance sheets of all Irish banks) with significant cross-border impacts and material risks to the internal market. Second, the freezing of liquidity markets and the uncertainty about the valuation of structured products on banks’ balance sheet required public policy action to provide both liquidity and capital support to banks. Third, the financial stability threat was so great that action in favour of individual banks may not have been sufficient and there was a need for market-wide measures to stabilise the situation. Overall, there was an urgent need for a mechanism which could provide for the tools needed to address those unprecedented threats and would ensure equal terms of access to State support, preserving the integrity of internal market. State aid control emerged as the only available mechanism which could fulfil that role at Union level. But to do so and be accepted in doing as much, State aid control needed significant and rapid adaptation in order to come up with tailor-made sectoral rules for conditions under which support to banks in crisis could be granted.

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The 2008 Banking Communication,3463 adopted on 13 October 2008, provided for the comprehensive set of conditions under which support to banks in the circumstances recognised as financial crisis could be granted. Acknowledging the unprecedented nature of the crisis, the Commission decided to use the special legal base foreseen in the Treaty to deal with aid which is needed to “remedy a serious disturbance in the economy of a Member State”, Article 107(3)(b), and base on it the crisis rules for aid to banks. The 2008 Banking Communication set out a menu of tools for supporting banks, the terms at which such aid could be given and the consequences which it triggered. Specifically, and departing from the principles of what became since then labelled “industrial rescue and restructuring aid guidelines”, the 2008 Banking Communication allowed a number of sector- and crisis-specific measures. One such measure was to allow liquidity support for longer than six months without triggering the restructuring obligation, in recognition that the need for such support might stem from liquidity stress in the markets and not from intrinsic weaknesses of individual banks. Another crisis-related innovation was to allow “structural aid”, i.e. State recapitalisations or asset protection measures, not only as restructuring aid but also as a form of rescue aid. Such rescue measures were authorised through temporary approvals, a new procedural type of a no-objection decision which provided for legal certainty for aid measures needed to stabilise a bank in the rescue phase in exchange for respecting a minimum set of conditions, including the pricing 3463 See Commission Communication “The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis”, OJ C 270, 25.10.2008, p. 8.

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of the aid measures and an obligation to present a restructuring plan within six months. As a result, the Commission could quickly approve urgent rescue measures for reasons of financial stability while postponing its examination of the compatibility of restructuring to the post-rescue phase. Recognising that some of the difficulties of banks were caused by extreme market circumstances, small recapitalisations (less than 2 per cent of bank’s risk weighted assets) could be authorised without triggering the obligation to restructure. Finally, the 2008 Banking Communication allowed Member States to opt for market-wide aid measures through liquidity and recapitalisation schemes for large companies, and not just for SMEs. With the basic rules of the game in place thanks to the 2008 Banking Communication, the Commission turned to elaborating in more detail the terms under which the State recapitalisations and impaired asset measures could be granted. They were two important aid measures to which Member States started resorting shortly after the worst of the liquidity freeze was over and the attention of markets was turning towards the quality of the banks’ balance sheets. Those detailed conditions, including how much banks are supposed to remunerate the State for what type of support, were laid down in the Recapitalisation Communication3464 adopted on 5 December 2008 and in the Impaired Assets Communication3465 adopted on 25 February 2009. The Restructuring Communication followed, adopted on 22 July 2009, explaining in detailed and operational terms the requirements which a restructuring plan had to fulfil in order to pass the scrutiny of three-pillar assessment of return to long-term viability, burden–sharing and limitation of competition distortion. The level of detail and sophistication of those sets of rules went well beyond the requirements of the industrial rescue and restructuring aid guidelines, and was tailor-made to the financial sector’s situation in crisis. Having said that, the basic principles for the assessment of the aid (return to viability, own contribution developed into a burden-sharing concept and measures to limit competition distortions) remained the pillars around which the compatibility assessment of restructuring aid was articulated.

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Once the initial and most acute phase of the financial crisis was over and strongest banks regained market access, it became clear that State aid was needed only for the weakest banks. At the same time, the sovereign debt crisis added a new dimension to the problems which State aid control had to deal with, like differ-

3.1782

3464 See Commission Communication “Recapitalisation of financial institutions in the current financial crisis: limitation of the aid to the minimum necessary and safeguards against undue distortions of competition”, OJ C 10, 15.01.2009, p. 2. 3465 See Commission Communication on the Treatment of Impaired Assets in the Community Banking sector, OJ C 72, 26.03.2009, p. 1.

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ent values of sovereign guarantees depending on the quality of public finances of a given Member State. Therefore, the Commission progressively removed certain elements of flexibility which were no longer warranted by the market situation, and adapted the rules to the changing nature of the crisis. In particular, the threshold for “small recapitalisations” was abolished with the 2010 Prolongation Communication3466 and as from 1 January 2011, any public recapitalisation or impaired asset measure triggered a restructuring obligation, irrespective of the size of the aid. The pricing of the guarantees was adapted to cater for the different value of such guarantees issued by different sovereigns. Subsequently, the 2011 Prolongation Communication3467 tightened the rules on pricing of capital injections in the form of equity and introduced the obligation to always remunerate the State, if not in cash then in shares, for hybrid capital instruments.

3.1783

The most significant substantive adaptation of the rules took place in August 2013, with the entry into force of the 2013 Banking Communication3468. Firstly, the Commission would no longer approve public recapitalisation or asset protection measures on a temporary basis as rescue aid; such approval would only be granted after the Commission had accepted a restructuring or liquidation plan. Temporary approvals remain reserved for truly exceptional circumstances. That change was introduced in light of improved market conditions and the recognition that, five years after the beginning of the crisis, large capital shortfalls should not come as a surprise to competent authorities but should be detected early enough for Member States to be able to negotiate and agree a restructuring or liquidation plan with the Commission. Secondly, the Commission would authorise the aid only after the bank’s shareholders and junior creditors had contributed fully to covering the capital shortfall. That burden-sharing significantly contributes to limit the aid to the minimum necessary. Both changes should be seen in the light of preparing the new resolution regime for the Banking Union and single resolution rulebook for the entire internal market.3469

3466 See Commission Communication on the application, after 1 January 2011, of State aid rules to support measures in favour of banks in the context of the financial crisis OJ C 329, 07.12.2010, p. 7. 3467 See Commission Communication on the application, from 1 January 2012, of State aid rules to support measures in favour of banks in the context of the financial crisis, OJ C 356, 06.12.2011, p. 7. 3468 See Commission Communication on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (“Banking Communication”), OJ C 216, 30.07.2013, p. 1. 3469 The 2013 Banking Communication was adopted by the Commission on 10 July 2013, the same day in which it adopted its proposal for the Single Resolution Mechanism Regulation.

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2.

Scope of the Crisis Communications

In this chapter, the framework of specific rules that the Commission adopted on the basis of Article 107(3)(b) of the Treaty to assess aid to “banks” in difficulty – the 2008 Banking, Recapitalisation, Impaired Assets, Restructuring, 2010 and 2011 Prolongation and 2013 Banking Communications – are referred to as the “Crisis Communications”. The meaning of the term “banks” should also be clarified upfront.

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Most of the institutions that received aid assessed against those rules were “banks”, that is to say ‘credit institutions’.3470 Nevertheless, the material scope of the Crisis Communication extends beyond such financial institutions. The Commission has also applied those rules to insurance companies of systemic relevance,3471 and, in one instance, to an in-house bank.3472 The key rationale underlying those decisions is that an insolvency of those institutions could have had severe knock-on effects on other financial institutions, and could thus have jeopardised financial stability.

3.1785

The 2013 Banking Communication codifies that decisional practice. According to its point 25 the Crisis Communications apply only to banks, but pursuant to point 26 their “principles” will, where appropriate and mutatis mutandis, also be used for the assessment of aid to insurance companies.

3.1786

In the light of the above, when this chapter refers to “banks” as (potential) beneficiaries, that term is meant to encompass the entire range of beneficiaries which have received aid pursuant to the Crisis Communications.

3.1787

3470 As defined in Article 4(1) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast), OJ L 177, 30.06.2006, p. 1. 3471 For example, the Commission noted in Commission Decision C(2011) 7266 of 12.10.2011 on the Restructuring of Quinn Insurance (Case SA.33023), summary notice in OJ C 71, 09.03.2012, p. 3, “that the situation in Ireland in terms of financial stability still is fragile, including with regard to insurance companies”. See also Commission Decision C (2010) 3249 of 20.05.2010 on Restructuring aid to Ethias (Case Sa N 256/2009), summary notice published in OJ C 252, 18.09.2010, p. 5. 3472 Commission Decision C (2013) 4971 of 29.07.2013 on Aide à la restructuration du groupe PSA in France (Case SA.35611), available under the case number on the DG Competition internet page (not yet published in the OJ) http://ec.europa.eu/competition/state_aid/cases/248537/248537_1472106_159_3.pdf.

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3.

Instrument-specific rules

3.1 Liquidity support 3.1.1 State guarantees 3.1788

During the crisis, the most intensively used instrument to support the liquidity of banks was the State guarantee on debt instruments newly issued by banks. In Member States with a strong creditworthiness, the banks were able, thanks to the State guarantee, to raise funding from the market. In Member States with a low creditworthiness, it was difficult to find investors ready to subscribe to bank debt instruments, even if the instrument was guaranteed by the State. In those countries, banks often sought a State guarantee on a new debt instrument which they did not issue on the market but retained on their balance sheet. They then used the State-guaranteed debt instrument as collateral to get central bank financing. The use of State guarantees on retained debt instrument is strongly decreasing, as from March 2015 the ECB ceased to accept as collateral debt instruments which were not issued on the market.

3.1789

The requirements applicable to State guarantees are precisely listed in section 4 of the 2013 Banking Communication.

3.1790

The first condition is that the State guarantee is granted on a newly issued instrument. That limitation is inherent in the purpose of a State guarantee, which is to facilitate the access of the bank in difficulty to new liquidity. The State guarantee cannot protect existing creditors of a bank against losses. Such a guarantee on existing liabilities of the bank does not stabilise or reinforce the liquidity position of the bank.

3.1791

The guarantee cannot cover subordinated debt. Capital aid is subject to stricter requirements than liquidity aid and any State support facilitating the raising of subordinated debt would be assessed as capital aid. If the State is guaranteeing subordinated debt issued on the market, both in terms of advantage provided to the bank and level of risk borne by the State, it is equivalent to the State subscribing to a subordinated debt issued by the bank.3473

3.1792

The second condition is that the debt instrument covered by the State guarantee should have a tenor of at the minimum three months and at the maximum five 3473 See for example the Commission Decision C(2013) 5648 of 03.09.2013 on the Restructuring aid to Hypo Group Alpe Adria (Case SA.32554) OJ L 176, 14.06.2014, p. 1.

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years. Guaranteed covered bonds can have a tenor up to seven years. The guarantees on instruments having a tenor longer than three years should be limited to one-third of the outstanding guarantees granted to each individual bank. The cap on the duration of the State guarantee aims at avoiding that a bank which is currently in a difficult liquidity position receives an advantage for a duration longer than what is necessary to stabilise it. For instance, it would be disproportionate if a bank temporarily in liquidity stress were to receive a State guarantee allowing it to raise cheap funding for 20 years: the advantage to the aided bank could distort significantly competition for long period of time. The third condition is that the State has to charge at least a fee equal to the one determined by the formulae laid down in the Annex to the 2011 Prolongation Communication. That Annex contains a formula for guarantees on debt instrument having a tenor equal or longer than one year and another formula in case the guaranteed instrument is shorter than one year. The former formula is based on the credit default swap (“CDS”) of the bank and the CDS of the Member State granting the guarantee. The higher the CDS of the bank, the higher the fee has to be, reflecting the higher risk of the guarantee. The higher the CDS of the Member State is, the lower the fee can be, reflecting the lower value of the State guarantee, i.e. the fact that it will allow the bank to achieve a smaller reduction of its costs of funding than a guarantee granted by a more creditworthy sovereign.

3.1793

At time of stress on the wholesale funding market, the fact that a bank needs a small amount of State liquidity support is unlikely to reveal a structural weakness in the business model or liquidity position of the bank. The Commission therefore does not require the submission of a restructuring plan for small amounts of liquidity aid. However, a bank’s need for a large amount of liquidity aid is more likely to reveal a fundamental unbalance in the business model or funding position of the bank. The fourth condition is therefore that the Member State commits to submit a restructuring plan if at any time the outstanding guarantees exceed both a ratio of five percent of total liabilities of the bank and a total amount of EUR 500 million.

3.1794

If a guarantee is called upon, it means that the borrowing bank is unable to meet its obligations, which in turn demonstrates an acute liquidity crisis. As a fifth condition, the Member State has therefore to commit that, if such a situation occurs, it will submit a restructuring plan for the bank concerned.

3.1795

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3.1796

As a sixth and last condition, the Member State has to commit that the aided bank will not use the receipt of State aid as a marketing argument towards customers.

3.1797

The conditions just described apply to cases individually notified to the Commission. For guarantee schemes, on top of those six conditions, one additional substantive condition applies: the scheme has to be limited to banks having no capital shortfall. As a result, liquidity support to banks having a capital shortfall must be notified individually to the Commission. It ensures that the Commission can review the situation of the bank before authorising liquidity aid.

3.1798

In case of guarantee schemes, two additional reporting obligations apply: the Member State must submit a quarterly report on the operations of the scheme, including the issuance of guaranteed debt and the actual fee charged on those debts. It has also to submit a report on the cost of comparable non-guaranteed debt issuance. Such information is important to allow the Commission to assess to which extent the banks in a Member State have access or not to the market without a State guarantee and to assess the funding cost reduction which the State guarantee allows the beneficiary bank to achieve.

3.1.2 Direct lending by the State and other types of liquidity support 3.1799

The State may wish to provide liquidity support under another form than guarantees on banks’ debt instruments. The support can consist in direct senior lending by the State to the financial institution or lending of government bonds which the bank can in turn use as collateral to borrow from the central bank.3474 For such types of liquidity support, the assessment criteria remain the same as those applicable to State guarantees.

3.1.3 Provision of liquidity by central banks 3.1800

State aid control rules are not meant to interfere with normal monetary operations of central banks. However, in case of stress in a specific bank or in the entire banking sector, a central bank enjoys some discretion as to whether to provide or not liquidity support to the bank(s), and to determine the terms of that support.3475 Such exceptional liquidity support may therefore fall within 3474 See for instance the Greek government bonds loan scheme described in recitals 31 and following of the Commission Decision C(2008) 7382 of 19.11.2008 on the Support Measures for the Credit Institutions in Greece (Case N 560 /2008), OJ C 125, 05.06.2009, p. 6. 3475 In the euro area, emergency liquidity support granted by national central banks has to be approved by the ECB. In other words, the pricing, amount, duration and type of collateral taken will be scrutinized by the

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the definition of State aid. In line with the then existing decisional practise,3476 section 5 of the 2013 Banking Communication clarifies that, to escape the qualification of State aid, ad-hoc central bank support to a bank has to cumulatively meet five conditions. Firstly, at the time the support is provided, the bank must be solvent. Secondly, the dedicated liquidity support must not be part of a larger package of support measure to the bank. Thirdly, the central bank must obtain collateral for the entire amount of the loan to the bank. Fourthly, the central bank must charge an interest rate significantly higher than the one charged for normal monetary refinancing operations. Lastly, the central bank must not enjoy a State guarantee on its loan to the bank.

3.1801

Interestingly enough, while the 2013 Banking Communication defines precisely the criteria for the assessment of the existence of aid arising from central bank interventions, it does not provide explicit compatibility criteria, i.e. it does not clearly requires that all the conditions applicable to other types of liquidity support are met. In general, the terms of emergency liquidity support makes it highly likely that such aid is limited to the minimum necessary and does not lead to undue distortion of competition: emergency liquidity support is always provided for short period of time and its necessity is therefore regularly re-assessed by the central bank based on the liquidity position and the liquidity plan of the bank. The supported bank is under tight scrutiny of the central bank and could therefore not use that liquidity for financing the growth of its activities, by making acquisitions for instance. In addition, such emergency liquidity support is systematically provided at an interest rate significantly higher than the interest rate of normal refinancing operations, which discourages its use and ensures that it is not a cheap source of funding. In addition, there is a stigma associated with the receipt of emergency liquidity support: it is a clear indication to the outside world that the bank is under intense liquidity stress. As a consequence, the bank loses access to wholesale funding market. That risk of stigma and of losing market access further encourages the bank to seek alternatives source of financing.

3.1802

ECB and has to comply with certain common rules. Hence the national central banks have less discretion regarding the terms and amount of support. 3476 See recitals 121 to 127 and section 4.2.5 of the Commission Decision C(2009)10112 of 14.12.2009 on the restructuring of Royal Bank of Scotland following its recapitalisation by the State and its participation in the Asset Protection Scheme, (Case N 422/2009 and N 621/2009), summary notice in OJ C 119, 07.05.2010, p. 1. See also section 8.1.3 of the Commission Decision C(2010) 1180 of 26.02.2010 on the aid in favour of Dexia SA (Case C 9/2009 (ex NN 45/2008; NN 49/2008 and NN 50/2008)), OJ L 274, 19.10.2010, p. 54.

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3.1803

Therefore, in general, the Commission finds such support emergency liquidity compatible without seeking to have its terms amended.3477

3.2 Capital support 3.2.1 Ordinary shares - equity 3.1804

If a Member State intends to grant capital support by subscribing to new shares to be issued by the bank in difficulty, the issue price of the shares should comply with the requirements laid down in points 8 to 12 of the 2011 Prolongation Communication. In particular, point 8 requires that the new shares are issued at a sufficient discount to the share price which can be anticipated to prevail after the issuance of the new shares. In consequence, the larger the size of the capital increase compared to the existing market capitalisation of the bank, the larger the discount to the current stock market price has to be. Those provisions aim at ensuring that the State will get a sufficiently large economic ownership of the bank, which contributes to achieve a sufficient remuneration on the State money injected. Correspondingly, they will lead to a reduction of the shareholding of the existing shareholding (so-called “dilution” of existing shareholding), ensuring that the capital aid provided by the State does not protect the existing shareholders from bearing losses and facing thereby the consequences of past decisions. That requirement should avoid repeating situations which arose earlier in the crisis where the State subscribed to new shares at a price per shares which, even if close to prevailing stock market price, overestimated the value of the bank because it did not correctly integrate the future losses, the capital needs of the banks and the capital increase, all of which were sometimes unknown to the market – or at least underestimated - until their announcement.

3.2.2 Hybrid capital instruments 3.1805

If the capital support is provided in the form of a subordinated debt or another kind of hybrid instrument, the coupon rate to be paid by the aided bank to the State must be equal or higher than the coupon rate defined in the Recapitalisation Communication. Depending on the degree of subordination of the capital instrument, point 27 of that Communication defines a coupon rate range from 7 per cent to 9,3 per cent for non-distressed bank. As recalled in point 28 of 3477 See for instance the assessment of the emergency liquidity support received by the Greek bank Eurobank in section 7.3 of the Commission Decision C(2014) 2933 of 29.04.2014 on the State aid implemented by Greece for the Eurobank Group (SA.34825 (2012/C) SA.34825 (2014/NN), SA.36006 (2013/NN), SA.34488 (2012/C) (ex 2012/NN), SA.31155 (2013/C) (2013/NN) (ex 2010/N)) OJ L 357, 12.12.2014, p. 112.

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that Communication, that indicative range was calculated on the basis of the then prevailing risk-free interest rate. If the risk-free rate then evolves, the range would correspondingly move. The details of the formula are laid down in the ECB Governing Council recommendations on the pricing of recapitalisations of 20 November 2008. For distressed banks, the coupon rate has to be set at a least 10 per cent.3478 For some types of hybrid instruments the payment of the coupon is automatically waived if the bank does not make enough profits or does not have enough capital to proceed with such distribution. In addition, for some instruments, the payment of the coupon is discretionary, which means that the management of the bank may decide not to pay it. As a consequence, on several hybrid instruments approved by the Commission as compatible State aid during the early part of the crisis, the bank did not pay any coupon at all to the State. In some cases, the hybrid instrument was repaid after several years by the bank to the State, without the State having received any coupon.

3.1806

To remedy that situation and avoid those instruments becoming a de facto interest-free loan to the bank, the Commission tightened its requirements in point 13 of the 2011 Prolongation Communication. That point provides that new hybrid instruments subscribed by the State must contain an alternative coupon satisfaction mechanism (“ACSM”) whereby coupons which cannot be paid in cash have to be paid to the State in the form of newly issued shares. Concretely, it means that if a 8 per cent coupon on a EUR 1 billion hybrid instrument cannot be paid in cash in a given year because the bank does not have enough capital or enough profit (or because the management discretionarily decides not to pay it – the reason why the coupon is not paid doesn’t affect the ACSM), the bank will have to issue new shares for a value of EUR 80 million and grant them to the State as coupon payment for that year. That issuance of new shares will increase the shareholding of the State in the bank and dilute the existing shareholders. The hybrid instrument is therefore no longer a free loan. As a result, and also because of higher regulatory requirements towards the quality of capital instruments, hybrid instruments have become a much less popular form of granting capital aid than was the case at the end of 2008.

3.1807

3.3 Impaired asset measures Certain types of securities held by the banks (such as structured credits in 2008) or certain types of loans (such as real estate development loans in Ireland in

3.1808

3478 As provided in footnote 1 to point 46 of the Recapitalisation Communication.

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2010 and in Spain a year later) may rapidly lose value and become illiquid, such that their real value become difficult to determine. In such circumstances, it becomes very difficult to establish whether a bank holding a significant amount of such securities or loans is still solvent or is insolvent: the diagnosis depends on the value of the securities and loans in questions, which in turn is at that moment subject to high uncertainty. The bank is therefore shut off from the capital and funding market.

3.1809

In that situation, as indicated in point 7 of the Impaired Asset Communication, “Asset relief would directly address the issue of uncertainty regarding the quality of bank balance sheets and therefore revive confidence in the sector”. An asset relief measures entails the transfer of the risk related to specific assets to the State. Such measures can take the form of a purchase of the assets by a vehicle or institution owned, funded or guaranteed by the State (so-called “bad bank” or “asset management company” (AMC)). Such measures were adopted in Ireland and Spain, where NAMA and SAREB respectively bought real estate development loans from banks. Alternatively, an impaired asset measure can allow the assets to remain in the ownership and in the balance sheet of the bank, with the State committing to indemnify the bank if the cumulative credit losses on a well-identified set of assets exceed a certain amount (so-called “attachment point”). That type of guarantee was applied for instance in the case of the Asset Protection Scheme put in place by the UK in favour of Royal Bank of Scotland3479 and in the case of HSH.3480 Member States have also used hybrid asset relief solutions involving a bad bank partly owned by the beneficiary (like Royal Park Investment, which was partly capitalised by Fortis3481) or cash flow swaps (like in the case of ING3482).

3.1810

Footnote (2) to point 20(a) of the Impaired Asset Communication clarifies that the aid amount is the difference between the value at which the assets are transferred to the State (i.e. the purchase price paid by the State-supported bad bank) and the market price of the transferred assets. Obviously, if the bank were to 3479 See section 2.4.2 of the Commission Decision C(2009)10112 of 14.12.2009 on the restructuring of Royal Bank of Scotland following its recapitalisation by the State and its participation in the Asset Protection Scheme, (Case N 422/2009 and N 621/2009), summary notice in OJ C 119, 07.05.2010, p. 1. 3480 See recitals 42 and following of the Commission Decision C(2011) 6483 of 20.09.2011 on State aid granted by Germany to HSH Nordbank AG SA.29338 (Case C 29/09 (ex N 264/09)), OJ L 225, 21.08.2012, p. 1. 3481 See section 2 as well as Annexes 1 and 2 of the Commission Decision C(2009) 3907 of 12.05.2009 on the additional aids to Fortis Banque, Fortis Banque Luxembourg and Fortis holding (Case N 255/2009 and N 274/2009), summary notice in OJ C 178, 31.07.2009, p. 2. 3482 See section 2.3.2 of Commission Decision C(2009)9000 of 18.11.2009 on ING’s Illiquid Assets Back Facility and Restructuring Plan (Case C 10/09 (ex N 138/09)), OJ L 274, 19.10.2010, p. 139.

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try to sell the assets in the market, it would receive the market price. Therefore, the premium paid by the State above the market price represents the amount by which the State overpays for the assets. Point 40 of the Impaired Asset Communication defines the cornerstone concept of “real economic value”. It is defined as the long-term economic value of the assets, on the basis of underlying cash flows and longer time horizon. In case of stress and uncertainty affecting their valuation, the real economic value of certain assets will be significantly above the market price, since the latter is then supposed to be depressed by a high risk premium reflecting the uncertainty and by an illiquidity discount reflecting the lack of liquidity and tradability of the assets concerned. When uncertainty recedes and liquidity increases, the market price will converge to the real economic value. The real economic value could therefore be defined as the expected market value of the assets in a context where the uncertainty in low (i.e. good long-term visibility on the expected cash flow of the assets) and the liquidity/tradability of the assets is high. Therefore, for instance, for government bonds, the real economic value will nearly always be equal to the market price.

3.1811

Assuming there is no observable and tradable market price, the real economic value of loans and securities can be determined on the basis of the expected cash flows of those assets in a prudent base line scenario. Those cash flows should be discounted using an interest rate which includes a risk premium reflecting the uncertainty around that base line scenario and aiming at remunerating the State. The importance of remunerating the State for the risk it takes is repeated in point 21 of the Impaired Asset Communication. Alternatively, the real economic value can be assessed by using the expected cash flows in a more stressed scenario, but then using a discount rate closer to the risk-free rate, i.e. a discount rate integrating a smaller risk premium.

3.1812

Point 41 of the Impaired Asset Communication provides that the assets should be transferred to the State at their real economic value. The rationale of that requirement is that the asset relief measure should not shelter the bank against the losses which are expected to occur on the assets concerned; those losses should be borne by the bank and its shareholders: the asset relief measure should only shelter the bank against the unexpected losses. In that context, if the assets are transferred at a price exceeding their real economic value, it is considered as an aggravating factor triggering the need for the bank to implement a deeper restructuring. In addition, the difference with the real economic value should be clawed back from the bank over time.

3.1813

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3.1814

If the asset relief measure does not take the form of a sale, the assets remain in the bank and the State commits to indemnify the bank for credit losses exceeding the attachment point. Then the same rules apply: the attachment point should be determined on the basis of a prudent assessment of the expected credit losses on the assets subject to the asset relief measure. In line with point 21 of the Impaired Asset Communication, including its footnote (1), the bank should pay to the State a yearly fee proportionate to the size of the capital relief it enjoys thanks to the State guarantee.3483 More precisely, the fee has to be higher than the coupon the bank should have paid on such an amount of capital if it had been provided in the form of a hybrid instrument. For an impaired assets guarantee, if the credit losses exceed the attachment point, the bank should retain a part of the losses. That residual loss sharing3484, e.g. 10 per cent of the losses exceeding the attachment point, encourages the bank to continue to try to minimize the losses on the guaranteed assets after the attachment point is reached, even if most of the losses are then borne by the State.

4.

Rescue and restructuring aid

4.1 Rescue and restructuring aid in the Crisis Communications 3.1815

As discussed above, the compatibility framework for aid to banks is conceptually based on many of the key features of the RRGL, which distinguish two kinds of support: on the one hand so-called rescue aid – short-term liquidity support, granted in principle for a period of no longer than six months to help a company overcome temporary liquidity shortages or give it some breathing space to prepare a restructuring plan –, and, on the other hand, restructuring aid, which can take in essence any form and is intended for longer duration, and is meant to support a company’s efforts to re-establish long-term viability.

3.1816

Although the Crisis Communications were all adopted on the exceptional legal basis of Article 107(3)(b) of the Treaty, that conceptual distinction between rescue and restructuring aid has been maintained, albeit in a somewhat modified form. Certain rescue measures, predominately liquidity support, need only to comply with a few instrument-specific criteria, in addition to the aid being limited to the minimum necessary; banks in need of more structural support have been obliged to restructure. However, in view of the market circumstances, the 3483 From a regulatory point of view, the State guarantee on the credit losses of the assets will reduce the risk exposure of the bank and therefore reduce the capital requirements of the bank. The capital relief is the reduction of the regulatory capital requirements. 3484 Sometimes also referred to as the “vertical slice” retained by the bank.

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Commission had to soften its approach to rescue aid in two main regards in the early phases of the crisis. First, the six month limitation for rescue aid in the form of liquidity support was abandoned; consequently, the obligation to reimburse or terminate the liquidity support, or alternatively submit a restructuring plan disappeared. Second, the Commission also temporarily authorised recapitalisations, thereby introducing quasi-rescue recapitalisations, and even approved recapitalisation and impaired asset schemes. The provision of the RRGL which prohibits the approval as rescue aid of “structural” or irreversible measures was thus altered in the context of the crisis, until it was all but re-introduced by the Commission through the 2013 Banking Communication. In line with the overall orientation of this chapter, the following will only briefly touch upon the evolution of the compatibility rules for banks over the course of the crisis, but rather present them as they stand today. In a nutshell, liquidity support, up until a certain limit, remains possible as rescue aid, which means in essence that it does not trigger the obligation to restructure. Recapitalisations, a few narrowly worded exceptions aside, and impaired asset measures can only be approved as restructuring aid, that is, on the basis of a restructuring plan approved by the Commission, or as liquidation aid, and for both purposes must be in accordance with the procedures set forth in the 2013 Banking Communication, as explained below.

3.1817

4.2 Rescue and restructuring pursuant to the 2013 Banking Communication 4.2.1 Introduction In the first phase of the crisis, the Crisis Communications allowed for the provision of liquidity and immediate injections of large amounts of capital for reasons of financial stability, often on the basis of national (rescue) schemes, which could not have been approved on the basis of the RRGL. Those capital injections, approved on a temporary basis as rescue aid and on the basis of a commitment by the Member State that subsequently a restructuring plan would be submitted for assessment and approval by the Commission, helped to stabilise markets at the height of the crisis in 2008/2009. Whilst that approach thus proved successful in averting panic, it sometimes delayed the recognition of the banks’ difficulties and, as a consequence, led to a postponement of the necessary restructuring. In certain cases, banks which probably should have been wound down as their viability could not be restored were initially recapitalised at high

3.1818

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cost.3485 Moreover, the immediate capital injections prevented any enhanced burden-sharing taking place in the course of the restructuring of the banks. In some cases it even led to excessive levels of capitalisation.3486

3.1819

As the crisis evolved, the immediate need for rescue measures decreased. For example, in the context of the Spanish programme, in line with a procedure enshrined in a Memorandum of Understanding between Spain and the Eurogroup,3487 the disbursement of aid was only permitted after the approval of the restructuring plans by the Commission. That “novel” procedure – in essence nothing but a return to that of the RRGL – allowed for carrying out a systemwide diagnostic first, by means of an asset quality review of the banking sector. Banks with capital shortfalls could then be put to a closer scrutiny, to determine whether they could restore their viability. That procedure also enabled the Spanish authorities to implement far reaching burden-sharing measures, requiring subordinated creditors to contribute to reducing the capital deficits that had been uncovered in the sector, and in turn to cut the cost of public recapitalisation of Spanish banks by roughly 23 per cent.

3.1820

The 2013 Banking Communication emphasises the need to maximise private capital-raising and bail-in before the cost of restructuring are once again allocated to the public purse. It is for that reason that the Commission can thus only authorise State aid for restructuring, in accordance with point 29 of the 2013 Banking Communication, “once the Member State concerned demonstrates that all measures to limit such aid to the minimum necessary have been exploited to the maximum extent”.

3.1821

Points 34 and 50 of the 2013 Banking Communication explain that the Commission “will authorise any recapitalisation or impaired asset measure as restructuring aid only after agreement on the restructuring plan has been reached”. That sequencing of steps allows the Commission to be satisfied that the notification of a restructuring plan and aid complies with the core requirement of limiting the aid to the minimum.

3485 See for example Commission Decision C(2011) 9395 of 20.12.2011 for the Restructuring of WestLB (Case C 40/2009 and C 43/2008), OJ L 148, 01.06.2013, p. 1, and Commission Decision C (2011) 4432 of 29.06.2011 on the Restructuring of Anglo Irish Bank (Case C 11/2010, ex N 667/2009), OJ L 139, 26.05.2012, p. 18. 3486 Commission Decision of 25.07.2012 in BayernLB [Germany] (C 16/2009) OJ L 109, 28.04.2015, p. 1. 3487 Memorandum of Understanding on financial sector polity for Spain, available at: http://ec.europa.eu/ economy_finance/eu/countries/pdf/mou_en.pdf.

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Those steps also comprise incentives that are intended to prevent outflows of capital from vulnerable banks, a pre-notification procedure that is focused on the establishment of a capital-raising plan, and a methodology to determine what part of a capital shortfall could eventually be covered by restructuring aid.

3.1822

4.2.2 Safeguards and incentives to limit restructuring aid to the minimum necessary The temporal scope, if one can call it that, of the 2013 Banking Communication stretches back to the moment when a capital shortfall is detected.3488 From that moment on, the Banking Communication places certain restrictions on Member States and banks, to be ignored at the bank’s own peril. First, point 32 requires that “as soon as a capital shortfall that is likely to result in a request for State aid has been identified, all measures to minimise the cost of remedying that shortfall for the Member State should be implemented”.

3.1823

Second, points 47 and 48 specify further:

3.1824

“47. In order to limit the aid to the minimum necessary, outflows of funds must be prevented at the earliest stage possible. Therefore, from the time capital needs are known or should have been known to the bank, the Commission considers that the bank should take all measures necessary to retain its funds: […] 48.

As it needs to be ensured that the aid is limited to the minimum necessary, if a bank undertakes actions which are not in line with the requirements listed in point 47 at a point in time when its need for additional capital should have been evident to a well-run business, the Commission will, for the purpose of establishing the required measures to limit distortions of competition, add an amount equivalent to the outflow of funds to the aid amount.”

The rationale underlying that set of provisions is to provide an incentive framework consisting of a “carrot” and a “stick” for banks to on one hand reduce or ideally fill a capital shortfall by themselves, and, on the other hand, to discourage behaviour that could increase the capital shortfall, and potentially the need for aid.

3.1825

3488 See points 47 and 48 of the 2013 Banking Communication; those points also refer to the point in time when the capital shortfall “should have been known”.

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3.1826

Point 48 serves as the “stick” in that regard: non-compliance will result in more far-reaching measures to limit distortions of competition. That stick also aims to bring about a more careful monitoring and reporting of potential shortfalls in banks as it also applies to those situations in which a capital need “should have been known”.

3.1827

Point 47 lists in a non-exhaustive manner certain prohibitions. Those include bans on dividend and coupon payment, on acquisition and on aggressive commercial behaviour. Moreover, capital management, purchase of own shares, calls of hybrid capital and liability management exercises (LMEs) are subject to the Commission’s prior approval. Those limitations are meant to ensure that the potential to reduce a capital shortfall – if necessary by mandatory burden-sharing is not diminished by prior action of the bank. Point 47(c) clarifies that rationale by prohibiting any LMEs at that stage that would not lead to a full absorption of the capital shortfall.

3.1828

The “carrot” is that no aid might be needed at all ultimately, which in turn avoids having to respect the Communication’s rather biting prerequisites for the approval of capital support, most notably perhaps the burden-sharing requirements and the much debated remuneration and severance pay caps of points 37 to 39.

4.2.3 Pre-notification and capital-raising 3.1829

The Commission’s attempt to create an improved incentive framework that ensures the greatest possible decrease for public capital support, also underlies the 2013 Banking Communication’s specific pre-notification and capital-raising plan procedure, as provided for in point 32: “[…] Member States are invited to enter into pre-notification contacts with the Commission. […] The basis for the pre-notification will be a capital-raising plan established by the Member State and the bank and endorsed by the competent supervisory authority. It should: (a)

list the capital-raising measures to be undertaken by the bank and the (potential) burden-sharing measures for shareholders and subordinated creditors;

(b)

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As no aid has been granted or even notified at that stage, it should be stressed that it is a voluntary procedure in which Commission and Member States can engage. However, entering such a procedure can ensure that the bank in need of capital cannot fall foul of the provisions described above, and can support the Member State in defining and implementing a capital shortfall reducing strategy. If Member States choose not to submit a capital-raising plan and enter in pre-notification contacts with the Commission, such a plan must in any event be included in the restructuring plan which needs to be submitted prior to approval of the capital support for restructuring. There is therefore no difference of substance, merely of the chronology of steps to be taken.

3.1830

A capital-raising plan in accordance with the Banking Communication has to contain two main elements3489: a thorough asset quality review of the bank including a forward looking capital adequacy assessment, and a list of capitalraising measures by the bank3490. The combination of the two elements should enable Member States and Commission to determine precisely whether there is any residual need for public capital support, and if so, how large it is. It should also contain the safeguards discussed above that are intended to prevent capital outflows, thus turning them from incentives into enforceable obligations.

3.1831

4.2.4 Obligation to restructure and notification of a restructuring plan If a capital shortfall remains after those steps have been taken, and if the Member State intends to cover that shortfall by granting aid, it has to notify restructuring aid, including, in particular, a restructuring plan. According to point 59(d) of the 2013 Banking Communication, a restructuring plan also has to be submitted, within two months after the granting of liquidity support, if, at the time of granting, such support exceeds both a total of EUR 500 million and amounts to more than five percent of total liabilities. Thus all banks that receive any form of structural aid and those that receive liquidity support beyond those thresholds have to restructure if they are not going to be liquidated.

3.1832

In order to determine the capital shortfall that can possibly covered with aid, a detailed methodology and input data need to be provided.3491 The capital short-

3.1833

3489 Point 30 of the 2013 Banking Communication. 3490 Capital-raising measures could include rights issues, the voluntary conversion of subordinated debt instruments into equity on the basis of a risk-related incentive, liability management exercises which should in principle be 100 per cent capital-generating if the capital shortfall cannot be overcome in full and therefore State aid is required, capital-generating sales of assets and portfolios, securitisation of portfolios in order to generate capital from non-core activities, earnings retention and other measures reducing capital needs. 3491 See point 33 of the Banking Communication.

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fall will then be reduced by the sum of capital that will be generated by future capital-raising measures. As a general rule, those capital-raising measures must be implemented within six months, but can also be taken into account beyond that as long as the longer execution period is accepted by the supervisor. Finally, the capital effect of the bail-in measures has to be estimated.

3.1834

Once the residual capital shortfall, corresponding to the total amount of State aid necessary, is determined, the Member State can draw up and discuss with the Commission the restructuring plan, which will be assessed under the Restructuring Communication. Additional burden-sharing measures as referred to in point 20 of the 2013 Banking Communication, i.e. such that go beyond the minimum requirements of the guidelines and thus affect senior creditors, should thereby reduce the need for measures to limit distortions of competition.

3.1835

That sequence of steps, which ensures that the aid is kept to the minimum, inter alia by enabling the implementation of burden-sharing, has for example been successfully put to the test in the context of the recapitalisation and restructuring of the Slovenian banking sector.3492

4.2.5 Rescue recapitalisations in exceptional circumstances 3.1836

Whilst the 2013 Banking Communication firmly establishes the principle that structural State support measures can only be approved on the basis of a restructuring plan, the Communication has not completely abandoned the possibility of rescue recapitalisations. It recognises that under specific circumstances, as were present for example in the case of Abanka,3493 they could still be necessary to preserve financial stability. The applicability of that financial stability clause is subject to a set of precise conditions in point 50, which ensure that rescue recapitalisations remain a rare exception.

3.1837

The main condition is that there has to be a current, rather than a prospective capital shortfall, as otherwise there would not seem to be a compelling reason for an immediate boosting of the bank’s capital base. Moreover, that capital shortfall has to be of such gravity that the competent supervisor, were it not 3492 See for example Recital 33 of the Commission Decision C(2013) 9632 of 18.12.2013 for the Restructuring of NLB (Case C/2012, ex N/2011), OJ L 246, 21.08.2014, p. 28. In that case, an asset quality review and stress test was used to determine the capital shortfall, which was then reduced by certain divestments, the transfer of assets to an asset manager and burden-sharing. The residual capital shortfall could be covered by restructuring aid. See also Case C-526/14 Kotnik and others, pending. 3493 See Commission Decision C (2013) 9633 of 18.12.2013 on rescue aid to Abanka (Case SA.37690), summary notice published in OJ C 37, 07.02.2014, p. 11.

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rectified immediately, would have to withdraw the banking license. Lastly, the rescue recapitalisation has to undergo a specific appropriateness and proportionality assessment: it can only be approved when no “lighter” measure – such a private means or liquidity support – could avert the risk to financial stability. Point 52 adds a further condition to be complied with so that rescue recapitalisation can be approved: it must not prevent the implementation of the burden-sharing requirements described in the following section. If a rescue recapitalisation is to be approved, the required burden-sharing measures must be implemented as part of the rescue aid, or the public capital support must allow for the implementation of the burden-sharing measures ex post if it had not been done ex ante.3494 Finally, if a temporary approval is given by the Commission, the 2013 Banking Communication shortens the deadline for submitting a restructuring plan from six to two months from the authorisation date.

3.1838

4.3 Schemes 4.3.1 Recapitalisation schemes for small institutions The philosophy of the 2013 Banking Communication in which (structural) State aid is a measure of last resort, which can only be approved on the basis of a restructuring plan and after the implementation of burden-sharing, is inconsistent with the idea of system-wide recapitalisations through the State of the kind that were necessary in the early phases of the crisis.

3.1839

Consequently, the Commission removed the possibility of granting recapitalisations under approved aid schemes, with the exception of recapitalisation and restructuring schemes to very small banks (with a balance-sheet total of not more than EUR 100 million).3495 That limitation is the logical consequence of the exceptionality of rescue recapitalisations: as capital support can in principle only be approved on the basis of a restructuring plan, which requires a complex caseby-case assessment by the Commission, recapitalisation schemes no longer fit into the overall framework for crisis aid. Given that the recapitalisation of very small banks has a smaller potential to distort competition, and that the restructuring of such institution entails fewer choices and complexity, the Communication retains the availability of schemes for such institutions. Nevertheless,

3.1840

3494 Please note that in the only case of application of the rescue recapitalisation at the time of writing in the Abanka case, full burden-sharing was undertaken before rescue recapitalisation was injected into the bank. See Commission Decision C (2013) 9633 of 18.12.2013 on rescue aid to Abanka (Case SA.37690), summary notice published in OJ C 37, 07.02.2014, p. 11. 3495 See point 54 of the Banking Communication.

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aid granted under such schemes has to comply with the provisions of the Crisis Communications, including in particular the burden-sharing requirements. To date, only one such scheme has been approved by the Commission.3496

4.3.2 Schemes for guarantees and liquidity support 3.1841

As for liquidity support, Member State can continue to grant it as rescue or restructuring aid, under schemes3497 or on the basis of individual notifications.3498 The flexibility offered for State aid which supports liquidity is retained because such support is of reversible nature. If granted under schemes, certain conditions have to be met.3499 However, liquidity support cannot be granted under schemes to banks with a capital shortfall - for those banks, even liquidity aid has to notified individually. Such a notification will then trigger the obligation to submit a capital-raising or restructuring plan.

5.

Compatibility assessment in individual restructuring, resolution and liquidation cases

5.1 Introduction 3.1842

The compatibility assessment laid down in the Restructuring Communication takes direct inspiration from the three pillar requirements laid down in the RRGL, namely the submission and implementation of a restructuring plan restoring the long-term viability of the aided company, the limitation of the aid amount to the minimum, and the implementation of additional measures aiming at limiting distortion of competition. The Restructuring Communication adapts those requirements to the specificities of the banking sector and to the circumstances of a sector-based crisis.

3.1843

It is the normal – and desirable - functioning of market economy that less efficient producers exit the market, at the benefit of more efficient producers. They are valid financial stability reasons why, in certain circumstances, one may want to keep alive a financial institution and prevents its exit from the market in a 3496 See Commission Decision C(2014) 7532 of 16.10.2014 on restructuring aid for Irish credit unions (Case SA. 36262), summary notice published in OJ C 126, 18.04.2015, p. 1. 3497 See for example Commission Decision C (2013) 9335 of 18.12.2013 on the Third Prolongation of the Cypriot Guarantee scheme (Case SA.37870), summary notice published in OJ C 280, 22.08.2014, p. 17. 3498 See Commission Decision C(2013) 5815 of 06.09.2013 on rescue aid in favour of Probanka (Case SA 37314), summary notice published in OJ C 314, 29.10.2013, p. 1 and Commission Decision C(2013) 5814 of 06.09.2013 on rescue aid in favour of Factor Banca (Case SA 37315), summary notice published in OJ C 314, 29.10.2013, p. 2. 3499 See point 59 and 60 of the Banking Communication.

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disorderly manner. However, that rescue should be done in a way which limits to the minimum the distortions of competition and of market incentives. The requirements of the Restructuring Communication explained in the next sections are applicable to all the cases where a part of the economic activities of the failing bank continues, at least for some time, to operate and compete on the market. Whilst the delineations between restructuring, resolution and liquidation cases are not always clear cut, restructuring normally implies that the beneficiary will remain active on the market, whereas liquidation entails an exit of the bank from the market (see section 5.4 below).

3.1844

In that respect, it can be observed that “resolution” as foreseen in the Bank Recovery and Resolution Directive3500 (“BRRD”) allows for a variety of outcomes it terms of the banking activity of a bank put in resolution and therefore covers a wide range of scenarios, allowing the competent authorities to access a number of resolution tools which permit inter alia restructuring and the distribution of the costs of such restructuring. Therefore, resolution within the meaning of the BRRD allows for both going concern restructuring and gone concern liquidation. State aid requirements apply to all scenarios where State aid is present but the compatibility conditions will vary depending on whether part of the economic activity of a bank remains on the market or not.

3.1845

5.2 Restoration of long-term viability If the bank is to be restructured, the Member State must submit a restructuring plan which should demonstrate how the bank will restore its long-term viability as soon as possible. The reason why the Commission, as competition authority, cares about the restoration of viability and profitability is that keeping artificially alive - through the injection of State aid - a bank which has an unsustainable business model is highly distortive of competition - and a real danger to financial stability. Such “zombie” or “reckless” banks offer products on the market at a price which does not reflect their real cost or their real risk, and thereby crowd out viable banks which are making more correct business and pricing decisions.

3.1846

The submitted plan has to identify the causes of the bank’s difficulties and the bank’s own weaknesses and outline how the proposed restructuring measures

3.1847

3500 Directive 2014/59/EU of the European Parliament and the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/ EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173, 12.06.2014, p. 190.

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remedy the bank’s underlying problems. Without such information, it is not possible to make a correct diagnosis of the problem and, as a consequence, it is not possible to assess the appropriateness of the proposed restructuring measures.

3.1848

During recent years, the sources and depth of the problems of the aided banks have been diverse, and therefore the proposed restructurings diverged significantly.

3.1849

In certain cases, such as, to a certain extent, KBC,3501 Fortis3502 and ING3503 the problems came from the fact that the banks invested several billion euros in structured credits, whose value decreased dramatically and became uncertain. In such a case, since the bank is destabilised by those assets, the restructuring plan has to address that uncertainty. In such cases, the solution often took the form of an impaired asset relief measure, by which the assets were transferred to the State in a manner which put a floor on the future losses which could be generated by those assets.

3.1850

If the difficulties and need of State aid stems from loan losses due to excessive and risky lending to the real estate sector and to households to finance the purchase of houses (Bank of Ireland,3504 Allied Irish Banks,3505 several Spanish and Slovenian banks, and RBS3506), the restoration of viability usually requires a deeper restructuring: the plan has not only to try to bring an end to the uncertainty regarding the future losses which those bad loans can create – which can be achieved through a transfer of the most risky assets to the State (as was done using NAMA in Ireland and SAREB in Spain) – but the way the bank underwrites new loans and manages its risk has also to be deeply improved. Unlike past lending, new lending has to be based on (1) a realistic and prudent assessment of the ability of the borrower to service its loan; such analysis of the repayment capacity of the borrowers was neglected by some banks pre-crisis, and on 3501 Commission Decision C(2009) 8980 of 18.11.2009 on the State aid C 18/09 (ex N 360/09) implemented by Belgium for KBC, OJ L 188, 21.07.2010, p. 24. 3502 Commission Decision of 03.12.2008 on the restructuring aid to Fortis Bank and Fortis Bank Luxembourg, OJ C 80, 03.04.2009, p. 7. 3503 Commission Decision C(2009)9000 of 18.11.2009 on ING s Illiquid Assets Back Facility and Restructuring Plan (Case C 10/09 (ex N 138/09)), OJ L 274, 19.10.2010. 3504 Commission Decision C(2010) 4963 of 15.7.2010 on the restructuring of Bank of Ireland (Case N 546/2009), summary notice in OJ C 40, 09.02.2011, p. 9. 3505 Commission Decision C(2014) 2638 of 07.05.2014 on the restructuring of Allied Irish Banks plc and EBS Building Society (Case SA.29786 (ex N 633/2009), SA.33296 (2011/N), SA.31891 (ex N553/2010), N 241/2009, N 160/2010 and C 25/2010 (ex N 212/2010)), OJ L 44, 18.02.2015, p.40. 3506 See footnote 3478.

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(2) realistic estimation of the proceeds which can be recovered from the collateral in case of default of the borrower; this requires assessing the ability and time needed for the seizure and sale of the collateral and assessing the cost related to the enforcement and the forced sale price in time of crisis; pre-crisis, some banks relied excessively on the then current market value of the collateral, which, when the crisis started and the real estate bubble burst in certain countries, deeply overestimated the amount of money which could be recovered by the bank. In addition, the pricing of new lending must be adjusted compared to the – often low - margin on existing loans, to reflect more correctly the risk of loan losses. Such in-depth improvement in the lending process and change in the bank’s culture towards risk requires time and adequate leadership to be successful. The previous paragraphs deal with problems on the asset side of the balance sheet, which can generate losses affecting the capital position of the bank. However, sufficient attention has also to be devoted to the liability side of the balance sheet, and more generally to the liquidity position of the bank. Some banks relied excessively on short-term wholesale funding, rendering them vulnerable to drying up of the wholesale funding market, such as observed from 2008. This was the case for instance for Lloyds TSB3507 following the acquisition of HBOS, for RBS,3508 and for several German Landesbanken.3509 Several of those banks therefore needed very large liquidity support from the State in order not to fail. In those circumstances, the restructuring plan should provide that the bank will reduce its reliance on wholesale funding, which usually involves a deleveraging of the securities and loan books’ size – such that the bank has fewer assets to fund - and an increase of customer deposits, which represents a more stable source of funding. That necessity to reduce the assets and to increase the deposits was regularly translated into the commitment to decrease the loan-to-deposit ratio of the bank below a certain level by the end of the restructuring plan. It is also important that the tenor of the remaining wholesale funding of the bank is increased through the issuance of medium- and long-term debt instruments, which reduces the sensitiveness to short-term tension in the wholesale market.

3.1851

It is often the case that a bank significantly increases its cost base during the boom years. As a consequence, when revenues suddenly drop and return to a more normal level, the bank finds itself with excessive operating costs. In such

3.1852

3507 Commission Decisions C(2009) 9807 of 18.11.2009 on the Restructuring of the Lloyds Banking Group (Case N 428/2009), summary notice published in OJ C 46, 24.02.2010. p. 2. 3508 See footnote 3478. 3509 Commission Decision C(2011) 5157 of 18.07.2011 on Restructuring aid for Hypo Real Estate (Case SA.28264,), OJ L 60, 01.03.2012, p. 1; Commission Decision C(2011) 9395 of 20.12.2011 for the Restructuring of WestLB (Case C 40/2009 and C 43/2008), OJ L 148, 01.06.2013, p. 1.

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circumstances, the restructuring plan has to include cost reduction measures, to bring back the costs under control.

3.1853

The Restructuring Communication provides that the restructuring measures should be implemented as soon as possible. However, it may go against viability to divest certain assets when market conditions are unusually unfavourable. It may also generate systemic negative effects if several banks have to sell the same type of assets in a short time frame. On a case-by-case basis, the Commission may therefore agree to a longer implementation period - up to five years – for certain restructuring measures.

3.1854

Regulators have often dealt with distressed banks by selling them to a larger and more solid financial institution. The Restructuring Communication explicitly repeats that, under certain conditions, the sale of an ailing bank can be a valid way to restore the long-term viability of the sold activities. One key condition is that the purchaser is able to absorb the acquired businesses and therefore that the integrated entity will be viable. In cases where the acquiring bank is already present in the market in which the ailing bank is active, the two branch networks often overlap and there is duplication of back office, IT infrastructure and more generally headquarter support functions. The acquisition then allows the buyer to achieve large synergies: the buyer will be able to serve the ailing bank’s customers, without having to increase its operating costs proportionally, as a large part of the overlapping costs can be eliminated and the customers serviced through the existing infrastructure of the buyer. In such cases, and if the buyer does not have pre-existing viability problems which are not solved, the Commission has usually concluded that the merged entity was viable and the sale was an acceptable way to restore the viability of the ailing entity (e.g. Dunfermline3510 and Quinn Insurance3511).

3.1855

A few months before the entry into force of the Restructuring Communication, the Commission approved the acquisition of Fortis Bank Belgium by BNP Paribas, which had no retail and SME banking activities in Belgium. In that case, the acquisition resulted in the entry of the buyer in a new country through the acquisition of an ailing bank. Such scenarios were exceptional during the crisis, as most strong banks were reluctant to enter new markets, notably due to the high losses some of them were registering in their existing foreign subsidiaries. In the 3510 See recitals 93 and following in Commission Decision C(2009)340 of 25.1.2010 on Restructuring aid to Dunfermline Building Society (Case NN 19/2009), summary notice in OJ C 101, 20.04.2010, p. 7. 3511 See recitals 124 to 132 in Commission Decision C(2011) 7266 of 12.10.2011 on Restructuring of Quinn Insurance Ltd through the contribution of the Insurance Compensation Fund (Case SA.33023 (2011/ NN)), summary notice in OJ C 71, 09.03.2012, p. 3.

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case of Fortis Bank Belgium, the viability of the merged entity did not raise specific doubts as the buyer did not have viability problems of its own, was large and solid enough to absorb the Belgian bank, and it acquired healthy activities. The problems of the Fortis Group had not come from those Belgian banking activities but from the overpaid acquisition of parts of ABN Amro and from investment in structured credits which had in the meantime been ring-fenced, through impaired asset relief measures. Of course, the sale of the aided ailing bank should not lead to aid being granted to the buyer. This could for instance occur if the State enters in bilateral sale negotiation with one single buyer without having tested first the market appetite for the sold entity. Indeed, in such a case it will be difficult to establish that the purchase price paid by the buyer is not lower than the market price of the sold entity. The Restructuring Communication therefore recommends the organisation of an open and unconditional competitive tender, which will allow all interested investors to bid and thereby to establish the market price. Especially in time of crisis, an ailing bank cannot be left in limbo for a long period of time, as it would for instance risks to lose its deposits and thereby could lose a significant part – or even all – its value and attractiveness. Therefore, the selling Member State may be forced to organise such tender in a very short time frame. In circumstances where such time pressure exists, if duly justified, the Commission has accepted that the State entity organising the sale may directly contact only the investors which can realistically be expected to be interested in the ailing bank and neither publish a public call for interest nor contact a very large number of investors (as was done in relation to ATE,3512 First Business Bank and Probank3513).

3.1856

5.3 Limiting aid to the minimum necessary / burden-sharing 5.3.1 Limitation of the restructuring costs to the minimum During its restructuring, the aided ailing bank should only carry out projects and incur expenses which are necessary to restore its long-term viability. More precisely, it should not use the aid to expand in new markets or to make acquisitions if those new investments are not necessary to restore its long-term viability. Investment and acquisitions which make business sense but which are not

3.1857

3512 See recitals 53 and 54 of the Commission Decision C(2013) 2655 of 03.05.2013 on the Liquidation aid for ATE Bank resolution (Case SA.35460 (2013/NN)), summary notice in OJ C 261, 10.09.2013, p. 1. 3513 See respectively recitals 199 to 202 and recitals 242 to 245 of the Commission Decision C (2014) 5201 of 23.07.2014 on the State aid implemented by Greece for National Bank of Greece Group (SA.34824 (2012/C)) OJ L183, 10.07.2015, p. 29.

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necessary to restore viability and which involve an upfront cost – and hence a risk – should be postponed to the period after the bank has restored the viability of its existing activities and has regained a solid financial position. Those factors explain why the Commission seeks a commitment from the Member State – or sets a corresponding condition in conditional approval decision3514 - that the aided bank will not make costly3515 acquisitions during at least three years. That approach was validated by the General Court in ABN Amro.3516

3.1858

The limitation on the remuneration of the employees of aided banks laid down in points 38 to 39 of the 2013 Banking Communication also contributes to reducing the restructuring costs of aided banks.

5.3.2 Own contribution by the aid beneficiary 3.1859

To avoid failing or needing State aid, a bank which is in difficulty or anticipates that it could be in difficulty in the future will normally start to implement measures to improve its financial position. Such measures frequently take the form of cost reduction measures to increase profitability. It often also includes the sale of non-core assets, to generate resources which can be used for the strengthening of core operations, or to reduce risk weighted assets and thereby limit capital requirements. It would of course sent the wrong incentives – and encourage firms to seek State support rather than trying to escape it – if aided financial institutions could receive aid to finance the retention of their existing perimeter of core and non-core activities and to keep an expensive cost structure. Hence the Banking Communication requires the aided banks to try first to finance the restructuring costs with their own resources and limit the amount of compatible aid to what cannot be contributed internally. In practice, a restructuring plan should therefore include measures aiming at rationalising the costs structure of the bank, except in unusual cases where the available evidence indicates that the bank is already efficient and there is no room for reducing the operating expenses without affecting its viability. The restructuring plan has also to provide for the sale of non-core activities, which may be activities in geographical or products markets other than the core operations of the bank. In that context, several 3514 See recital 310 and Article 5 of the Commission Decision 2011/823/EU of 05.04.2011 on the measures implemented by the Dutch State for ABN AMRO Group NV (Case C 11/2009 (ex NN 53b/2008, NN 2/2010 and N 19/2010)), OJ L 333, 15.12.2011, p. 1. 3515 In order to avoid having to monitor and assess small acquisitions which have no material effects on the situation of the bank, the Commission has sometimes accepted commitments which provided that that acquisitions below a certain size would not fall under the acquisition ban. See e.g. the second paragraph of section 7.1 of the Term Sheet of the Commission Decision C(2012) 8762 of 28.11.2012 on the restructuring of NovaCaixaGalicia(Case SA.33734 (2012/N)), summary notice in OJ C 75, 14.03.2013, p. 1. 3516 See Case T-319/11 ABN Amro v Commission ECLI:EU:T:2014:186.

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banks have for instance committed to sell their insurance activities (Royal Bank of Scotland,3517 ING,3518 National Bank of Greece3519 and Eurobank3520). The insurance market was less affected by the crisis and insurance businesses could therefore be sold at decent price and in a not too long time period.

5.3.3 Burden-sharing by shareholders and subordinated debt holders Restructuring or liquidating a bank necessitates that someone bears the costs, which are often very significant. To limit the amount of aid to the minimum necessary to undertake restructuring or manage orderly liquidation, the Commission seeks that the aided banks hold onto capital necessary in order to finance restructuring and do not engage in pay-outs or actions which would diminish their capital base.

3.1860

At the beginning of the crisis this took the form of restrictions on buy-backs of bonds and discretionary coupon payments. That decisional practice, applied since 2008, was recalled in a press release in October 2009.3521 It consisted of allowing cash buy-backs of bonds only if they were capital-generating and crystallised sufficient loss for the bondholders, and of prohibiting coupon payments on debt instruments when such payments were discretionary. It meant that the aided banks were required to use all means to avoid capital outflows, but it stopped short of requiring a more substantial contribution from the shareholders and junior bond holders to sharing the cost of the banks’ failures. Therefore the most of costs fell on the taxpayer.

3.1861

The sovereign debt crisis of the Eurozone periphery revealed significant differences in the ability of Member States to sustain the cost of rescuing their banks because of the differing strengths of their public finances. After the Cypriot government had to reach for the bail-in of senior debtors in order to partially finance the cost of liquidation and restructuring of its major banks and to limit the size of the macro-financial assistance to levels considered bearable from the point of view of public debt sustainability, the markets began to reflect the different probability of bail-in in the funding costs of the banks. Those increasing divergences of funding costs were driven by the state of public finances rather than the intrinsic strengths of individual banks, posing a significant problem

3.1862

3517 3518 3519 3520 3521

See footnote 3479. See footnote 3482. See footnote 3513. See footnote 3477. “State aid: Commission recalls rules concerning Tier 1 and Tier 2 capital transactions for banks subject to a restructuring aid investigation” MEMO/09/441, 8 October 2009.

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for the internal market. Breaking the loop between the sovereign and the banks become one of the main drivers behind the construction of the Banking Union. In mid-2012, an external stress test of the Spanish banking sector revealed capital needs in a number of banks, eight of which could not cover them by raising fresh capital from private sources. Since those capital shortfalls came to light at a point in time when the Spanish sovereign faced very high funding costs, Spain turned to the Eurogroup for assistance in order to finance the banks’ restructuring and liquidation. The programme conditionality put State aid control at the heart of its compliance and governance method, and required full contribution from shareholders and junior debt holders before any programme funds would be disbursed. It also requested prior Commission approval of a restructuring or liquidation plan before any such money could go – via the Spanish government – to banks in need. As a result, in a short period of time, all shareholders were wiped out and all junior bondholders saw their claims converted into shares, covering about 23 per cent of all capital needs across eight banks. That significant saving through conversion did not cause any particular market turbulence. It therefore paved the way for making a conversion and bail in one of the key tools of the proposed architecture of the future Banking Union, and opened new possibilities to limit State aid to the minimum necessary under the State aid rules.

3.1863

Having in mind both the need to address the risks to the internal market stemming from divergent funding costs of banks, driven by different quality of public finances, and equipped with the Spanish experience which was well taken by the markets, the Commission changed the requirements for burden-sharing under State aid rules. The 2013 Banking Communication explains that a public recapitalisation or an impaired asset measure can be granted only after full contribution of the shareholders and junior bondholders to covering the capital need of the bank. In practice a full contribution means that shareholders have to be written down or diluted, and junior debt holders converted and/or written down, thereby absorbing losses and/or constituting the capital base before the remaining shortfall can be covered with State aid (points 43 and 44 of the 2013 Banking Communication). The central principle according to which any such write-down or conversion has to take place is that of “no creditor worse off ”, implying that no creditor should be economically worse off after the conversion compared to the situation in which the bank would not have received State aid in the first place. “No creditor worse off ” invites the question, “worse off than what?”, which in turn brings to the forefront the question of counterfactual and the necessity of aid, which is a key pre-condition for any compatibility assessment by the Commission. It obliges the Member State to consider what 1152

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would have happened to the bank without the aid – and if that counterfactual is business as usual, then the aid is not necessary and therefore cannot be granted. Conversely, if that counterfactual is that the bank would eventually face difficulties leading to a gone concern situation, then the proper yardstick to assess the situation of shareholders and junior bond holders is insolvency of the bank. The 2013 Banking Communication foresees two exceptions to the burdensharing rule, which is when such burden-sharing would cause disproportionate results or endanger financial stability (point 45 of 2013 Banking Communication). In the decision-making practice of the Commission until the time of writing, no such exception on grounds of financial stability has been granted. The disproportionate results exception was invoked in two cases: for the Greek bank Eurobank,3522 where the aid consisted of the public body underwriting the capital raise which subsequently was fully covered by the private investors, and the Spanish bank CEISS-Unicaja.3523 In the latter case, the burden-sharing exercise completed in CEISS in 2012 was fully compliant with the burden-sharing requirements which were subsequently laid down under the 2013 Banking Communication, and that anticipated compliance with the stricter requirements, in combination with the very small amount of aid enabling the sale (only 0.75 per cent of risk weighted assets of CEISS-Unicaja) was considered as justifying the use of “disproportionate results” exception. As a result, there was no conversion of claims held by junior creditors of the buyer.

3.1864

That significant change in the size and scope of contribution required from shareholders and junior debt holders has resulted in major limitations of the amount of aid. In case of Slovenia’s banks, where the Commission approved the aid to five institutions in late 2013,3524 the overall contribution from shareholders and junior bondholders was in the order of 15 per cent of overall capital needs. It has also had the effect on the pricing of junior bond instruments in the

3.1865

3522 Commission Decision C(2014) 2933 of 29.04.2014 on the State aid implemented by Greece for the Eurobank Group (SA.34825 (2012/C) SA.34825 (2014/NN), SA.36006 (2013/NN), SA.34488 (2012/C) (ex 2012/NN), SA.31155 (2013/C) (2013/NN) (ex 2010/N)) OJ L 357, 12.12.2014, p. 112. 3523 Commission Decision C(2014) 1658 of 12.03.2014 on the Amendment of the Restructuring of CEISS through integration with Unicaja Banco (Case SA.36249 (2014/N-3), OJ C 141, 09.05.2014, p. 1. 3524 Commission Decision C (2013) 9632 of 18.12.2013 on Restructuring of NLB which Slovenia is planning to implement for Nova Ljubljanska banka d.d. (Case SA.33229 (2012/C) (ex 2011/N), OJ L 246, 21.08.2014, p. 28; Commission Decision C(2013) 9634 of 18.12.2013 on Restructuring of Nova Kreditna Banka Maribor d. d. (NKBM) (Case SA.35709 (2013/N), OJ C 120, 23.04.2014, p. 3; Commission Decision C(2013) 9622 of 18.12.2013 on Orderly winding down of Probanka d. d. (Case SA.37642 (2013/N), OJ C 69, 07.03.2014, p. 18; Commission Decision C(2013) 9640 of 18.12.2013 on Orderly winding down of Factor Banka d. d. (Case SA.37643 (2013/N), OJ C 69, 07.03.2014. p. 18; Commission Decision C(2013) 9633 of 18.12.2013 on Rescue aid in favour of Abanka d. d. (Case SA.37690 (2013/N), OJ C 37, 07.02.2014, p. 11.

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market, with the rating agencies removing the sovereign uplift in the rating of junior bonds since the revised State aid rules make them bail-in-able.

3.1866

One must bear in mind that to be able to undertake such a write down or conversion, Member States have to be equipped with powers at national level to undertake mandatory conversion as a prelude to granting State aid, in order to source contributions from junior bondholders whose contracts don’t foresee any conversion clauses. An alternative is to rely on voluntary debt-to-equity swaps, which did take place3525 but remain a riskier option if a Member State wants to have a certainty to be able to react with State aid to a bank in case of need, given that the Commission will approve the aid only after all junior bondholders have been fully converted. A number of Member States introduced the necessary legislative changes into their domestic laws3526 in order to avail themselves of that possibility.

5.4. Measures limiting distortion of competition 5.4.1 Introduction 3.1867

It has already been explained that the Crisis Communications are conceptually based on the RRGL, and the three compatibility pillars in the RRGL, return to long-term viability, limiting aid to the minimum and compensatory measures. The latter aim to ensure, in a non-crisis context, that the harm that competitors suffer almost inevitably as a result of the saving of their rival is limited. They “compensate”.3527 This dynamic is more complex in banking in general, due the inter-connectedness of financial markets and financial institutions. The saving of one bank might well, at least in the short term, have positive effect on its competitors. In the context of a systemic crisis, such as the recent one, and as acknowledged for example in point 28 of the Restructuring Communication, State aid to prevent a bank from failing can maintain financial stability and therefore have wider positive spill-overs on the entire industry. Nevertheless, even in such a situation, State-financed bail-outs can have various negative effects on competition (and competitors), which the Restructuring Communication recalls in points 28 to 29.

3525 See for example the voluntary debt to equity swap undertaken by the Cooperative Bank in the UK. 3526 See for example relevant provisions in national legislation (either resolution, recapitalisation, or transposing the Bank Recovery and Resolution Directive) in Portugal, Greece, Slovenia, Spain, Cyprus or Germany. 3527 The (new) Commission Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1, no longer refer to “compensatory measures”, but, in line with the Crisis Communications, to “measures limiting distortions of competition.”

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First, they reward moral hazard in that State aid prolongs distortions of competition created in the period preceding the crisis by excessive risk-taking and unsustainable business models. State-financed bail-outs stop market forces from sanctioning unsustainable business practices and from eliminating inefficient or excessively risk-prone market participants (in particular through bankruptcies) and thus prevent more efficient firms from expanding or from entering those markets. In certain situations, bail-outs can have the effect of reinforcing the market power of the aided firm, possibly resulting from the risky business decisions in which the firm engaged prior to the crisis, such as certain acquisitions which State aid can later help absorb. From the more general point of view based on effective competition contributing to consumer welfare, bail-outs weaken incentives for unaided competitors to compete (on merits), invest and innovate. Finally, the internal market dimension gives rise to an additional concern when bail-outs shift the burden of structural adjustment to changing market circumstances and the related social and economic problems to other Member States, creating barriers to entry and to cross-border activities. All those effects are still present in times of crisis.

3.1868

During a systemic crisis, it is also vital to pave the way for a rapid return to normal market conditions. This means that moral hazard must be properly tackled to avoid repeating the mistakes of the past. Moreover, banks and Member States across the Union have been hit by the crisis to very different degrees.

3.1869

In a situation of financial, economic and budgetary crisis, differences between Member States in terms of resources available for State intervention become even more marked. Those resources can be used to pay ex-post expansionary strategies banks in difficulties have implemented in the past, to the detriment of their competitors. Finally, national interventions in a crisis context are by their nature bound to promote a focus on the national markets, including a risk of retrenchment into national boundaries, at the expense of the functioning of the internal market for financial services.

3.1870

Not all those facets of distortions of competition are present, or exist to the same degree, in each and every case. Burden-sharing measures, discussed above, address in particular the problem of moral hazard. However, the Commission has considered that, whilst financial stability should remain the overriding priority,3528 certain measures would remain necessary to address distortions of competition, reflecting the specificities of the restructuring of banking businesses.

3.1871

3528 See Restructuring Communication, point 29.

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3.1872

In point 30 of the Restructuring Communication, the Commission provides some indications as to the manner in which it assesses whether measures to limit distortions of competition, which should be tailor-made to each case, are appropriate: “The nature and form of such measures will depend on two criteria: first, the amount of the aid and the conditions and circumstances under which it was granted and, second, the characteristics of the market or markets on which the beneficiary bank will operate.”

3.1873

Before exploring further how the Commission has calibrated measures to limit distortions of competition based on those two criteria, it is useful to recall what types of measures can be considered.

5.4.2 Types of competition measures 3.1874

Structural measures3529 remain the first option, based on experience gained in pre-crisis times. They can represent an effective and efficient ways of limiting competition distortion. While divestments of stand-alone viable businesses might often represent the most appropriate remedy, the Commission has also accepted carve-outs of business entities potentially capable of allowing the entry of a new market player3530 (such carve-outs need then entail a critical mass in terms of size, clients, etc.), which is especially advantageous in relatively concentrated markets.

3.1875

The Restructuring Communication secondly refers to “accompanying” behavioral measures3531 such as a temporary ban on acquiring competing businesses or the imposition of a claw-back mechanism for example in the form of a levy on the aid recipient. Banks are also prohibited from marketing State support as a competitive advantage. Finally, the Restructuring Communication explicitly mentions that banks cannot use State aid to offer their customers terms (rates in particular) which cannot be matched by their un-aided competitors. As a result, there may be limitations on the bank’s position in league tables or of various types of price-leadership clauses.3532 3529 See Restructuring Communication, point 35 et seq. 3530 See for example Commission Decisions C(2009) 9807 of 18.11.2009 on the Restructuring of the Lloyds Banking Group (Case N 428/2009), summary notice published in OJ C 46, 24.02.2010, 2.; C(2009) 10112 of 14.12.2009 on the restructuring of Royal Bank of Scotland (Case N 422/2009 and N 621/2009), summary notice published in OJ C 119, 07.05.2010, p. 1. 3531 See Restructuring Communication, point 38 et seq. 3532 See for example Commission Decisions C(2009) 3708 of 7.5.2009 on State aid to Commerzbank (Case

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Third, market-opening measures can also serve to limit distortions of competition. Such measures facilitate market entry and possibly the expansion of smaller, unaided competitors, and are intended to bring about a more competitive, open market going forward. For example, in Bank of Ireland, the commitment by the Irish authorities to a number of market-opening measures was qualified as a measure limiting distortions of competition, as it facilitated the entry and expansion of competitors. Those measures applied to the banking sector in general and not only to Bank of Ireland. They included for example measures enhancing customer mobility between banks, cost comparison support to facilitate consumer decision-making, enhancing of electronic banking, promotion of financial inclusion as well as other measures strengthening corporate governance in the financial sector.3533

3.1876

Having now introduced the arsenal of measures at the Commission’s disposal, it can be explored how, as required by the Restructuring Communication, the Commission can ensure that measures limiting competition distortion are effective and proportionate.

3.1877

5.4.3 Calibration of competition measures As for proportionality, the Restructuring Communication recognises certain absolute limits. Given the supremacy of financial stability as an objective to be pursued, measures to limit competition distortion must not compromise the prospects of the bank’s return to viability. Similarly, such measures must not decrease competition but ensure that effective competition is preserved. Within those boundaries, tailoring measures to limit distortions of competition to the market in question is based on the two afore-mentioned criteria, the amount of aid and the characteristics of the market on which the aid beneficiary will operate after the restructuring.

3.1878

As for the first criterion, the amount of State aid is relevant both in absolute (amount of capital received, aid element in asset relief measures and guarantees) and in relative terms, that is in relation to the bank’s risk-weighted assets.3534 The latter is in particular relevant for smaller markets, in which nominally smaller amounts of State aid can lead to significant distortions. In its decisional practice,

3.1879

N 244/2009), summary notice published in OJ C 147, 27.06.2009, p. 4, recital 111, and C(2009) 8980 of 18.11.2009 on KBC (Case C 18/2009), OJ L 188, 21.07.2010, p. 24. 3533 Commission Decision C(2011) 9755 of 20.12.2012 on the Restructuring of Bank of Ireland (case SA.33443), summary notice published in OJ C 246, 15.08.2012, p. 1. 3534 Cf. Joined Cases T-29/10 and T-33/10 Netherlands and ING Groep v Commission ECLI:EU:T:2012:98, e.g. para 155.

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the Commission has therefore consistently taken in account both aspects of the amount of aid.3535

3.1880

The Commission also distinguishes in that calibration exercise between liquidity and capital support; it clarified in the first restructuring decision on Dexia that “aid amounts corresponding to recapitalisations should not be added to funding guarantees, since the two categories of measures do not have the same distortive effect on competition”.3536 It would appear from the Commission’s decisional practice and the logic of the Crisis Communications, in which liquidity support alone does not trigger the obligation to restructure, that the key factor is the amount of capital support, whilst liquidity support is at most an aggravating element.

3.1881

Point 31 of the Restructuring Communication adds further elements that the Commission has to consider in its assessment of measures to limit distortions of competition - the degree of burden-sharing and the pricing of the aid.

3.1882

The latter, remuneration, is of particular importance when the beneficiary cannot comply with the instrument-specific remuneration requirements of the Recapitalisation and Impaired Assets Communications. For example, the prima facie uncertain sufficiency of the remuneration for the risk-shield for HSH was considered appropriate only because Germany had already committed to restructure the beneficiary in-depth.3537 By contrast, in relation to Northern Rock,3538 Kommunalkredit3539 and Parex Banka3540 the proposed restructuring was of such scope that the Commission did not consider it necessary to perform a detailed valuation of the assets to be run-off in a bad-bank to the benefit of the surviving good bank. The scope of the restructuring would have offset any shortcomings in terms of remuneration.

3535 See for example Commission Decision C(2011) 5157 of 18.07.2011 on Restructuring aid for Hypo Real Estate (Case SA.28264,), OJ L 60, 01.03.2012, p. 1, recitals 88 and 125. 3536 Commission Decision C(2010) 1180 of 26.02.2010 on the aid in favour of Dexia SA (Case C 9/2009 (ex NN 45/2008; NN 49/2008 and NN 50/2008)), OJ L 274, 19.10.2010, p. 54, recital 150. 3537 Commission Decision C(2011) 6483 of 20.09.2011 on State aid granted by Germany to HSH Nordbank AG SA.29338 (Case C 29/09 (ex N 264/09)), OJ L 225, 21.08.2012, p. 1, recital 45. 3538 Commission Decision C (2009) 8102 of 28.10.2009 on aid for Northern Rock (Case C 14/2008), OJ L 112, 05.05.2010, p. 38. 3539 Commission Decision C (2011) 2262 of 31.03.2011 on the restructuring of Kommunalkredit (Case SA.32745), summary notice published in OJ C 239, 17.08.2011, p. 2. 3540 Commission Decision C (2010) 6202 of 25.09.2010 on aid for the restructuring of Parex Banka (Case C 26/2009), OJ L 163, 23.06.2011, p. 28.

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The importance of the degree of burden-sharing is illustrated by the Spanish cases that were decided after Spain had made the recapitalisation of distressed banks contingent on burden-sharing by subordinated creditors, before doing so had become mandatory under the 2013 Banking Communication. The Commission acknowledged in those decisions that burden-sharing beyond what is required as a minimum reduces the need for measures to limit distortions of competition.3541 That element may play an even bigger role in the future – should Member States require the bail-in of senior creditors beyond what is mandatory according to Union law, it is to be expected that the Commission would only require a rather limited amount of measures to limit distortions of competition.

3.1883

The 2011 Prolongation Communication entails another element that influences the calibration that is discussed here. Recalling the impact of the sovereign crisis on banks, its point 14 specifies that the Commission would “undertake a proportionate assessment of the long term viability of banks, taking full account of elements indicating that banks can be viable in the long term without the need for significant restructuring, in particular where the capital shortage is essentially linked to a confidence crisis on sovereign debt, the public capital injection is limited to the amount necessary to offset losses stemming from marking [… European …] sovereign bonds to market in banks which are otherwise viable, and the analysis shows that the banks in question did not take excessive risk in acquiring sovereign debt.”

3.1884

Point 14 was used in the context of assessing the appropriateness of the measures to limit distortions of competition in, for example, the restructuring decisions on MPS,3542 NordLB3543 and the Greek banks.3544 As the sovereign crisis has abated, the future relevance of that point is uncertain. However, it shows that the Commission considers also in this part of the assessment of a restructuring plan the origin of a beneficiary’s difficulties.

3.1885

It follows from the many considerations pertaining to the criterion of “aid amount” that the calibration exercise performed by the Commission is not a

3.1886

3541 See for example Commission Decision C(2012) 8762 of 28.11.2012 on the restructuring of NovaCaixaGalicia (Case SA.33734),summary notice published in OJ C 75, 14.03.2013, p. 1, recital 188. 3542 Commission Decision C(2013) 8427 of 27.11.2013 on the restructuring of MPS (Case SA.36175), summary notice published in OJ C 177, 16.04.2014, p. 6, recitals 154 162. 3543 Commission Decision C(2012) 5063 of 25.7.2012 on restructuring aid to NordLB (Case SA.34381), summary notice published in OJ C 138, 17.05.2013, p. 3, recital 160. 3544 See for example Commission Decision C (2014) 5201 of 23.07.2014 on the State aid implemented by Greece for National Bank of Greece Group (SA.34824 (2012/C)) available under the case number on the DG Competition internet page http://ec.europa.eu/competition/state_aid/cases/245545/245545 _1605985_305_2.pdf (footnote 54).

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quantitative, but a qualitative one. This becomes even more evident when the second criterion, the impact of the aid on the markets on which the beneficiary will operate after the restructuring, is added to the calibration equation. A relatively significant market share post-restructuring on a rather concentrated market might call for targeted divestments or carve-outs even if the aid has been small and appropriately remunerated. On the other hand, if the future market presence of a bank will be limited, it could even lead to a reduction of necessary degree of competition measures that would result from the consideration of the aid amount alone.3545

3.1887

Therefore it is necessary to apply some caution when the extent of measures to limit competition distortion is compared, in particular when that comparison is mostly limited to the size of balance-sheet reductions across cases.3546 The size of the reduction does not always reflect the quality of the structural measures undertaken. There is in particular a need to distinguish between run-offs of activities and divestitures of existing businesses, between measures undertaken in the interest of restoration of viability of the aided bank and those implemented to address a concrete competition concern and, finally, between structural measures put in place in core markets and ancillary markets in which the aided bank is active.3547

5.4. Compatibility assessment of liquidation aid 5.4.1 Applying the compatibility conditions mutatis mutandis 3.1888

Generally speaking, the Commission regards the exit of non-viable banks favorably, and point 65 of the 2013 Banking Communication expressly encourages Member States to ensure that such banks can exit the market in an orderly, nondistortive manner. It also recognises that ordinary insolvency proceedings are normally not an apt means to enable such exit in a manner that is compatible with financial stability, and therefore allows Member States aid “to support the liquidation of a failing credit institution”.3548 3545 Restructuring Communication, point 32. 3546 See for example Arhold in Hancher, Ottervanger and Slot, EU State aids (4th ed.), p. 689 et seq; compare the Commission’s MEMO 09/507, available under http://europa.eu/rapid/press-release_MEMO-09-507_ en.htm?locale=en. See in particular also the General Court’s discussion on the proportionality of measures to limit distortions of competition in Case T-319/11 ABN Amro v Commission ECLI:EU:T:2014:186, para 72 et seq. 3547 See for example Commission Decision C(2009)9000 of 18 November 2009 on ING s Illiquid Assets Back Facility and Restructuring Plan (Case C 10/09), OJ L 274, 19.10.2010 p. 139, recital 143. 3548 2013 Banking Communication, point 66.

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In certain cases, the distinction between in-depth restructuring and liquidation is blurred; for the purposes of its assessment, the Commission considers liquidation aid as aid that is given to banks that disappear from the market in their entirety. It is for that reason that point 67 of the 2013 Banking Communication sets out the goal of the cessation of the ailing bank’s activities, implying that liquidation aid can only be approved so as to slowly run-off existing business, in order to minimise the cost of the liquidation, but comes with the condition that the beneficiary does not engage in any new business.

3.1889

Provided that the liquidation plan which the Member State has to submit (in case of liquidity support, at most two months after the decision approving such aid,3549 in case of capital support prior to such granting of aid) respects that core requirement that no new business is undertaken, the Commission assesses such aid based on the provisions of the Crisis Communication, which apply mutatis mutandis.

3.1890

Compared to vetting restructuring plans that foresee that the beneficiary, or parts of it, remains on the market, the Commission does not have to examine liquidation plans to ensure that they establish long-term viability. Instead, the sole goal of a liquidation plan is to make the winding-up as cheap and effective as possible,3550 with the least possible distortions of competition resulting from that aid.3551 As a result, the burden-sharing provisions apply, although the 2013 Banking Communication specifies that claims of shareholders and subordinated debt holders may not be transferred to any continuing economic activity.3552

3.1891

Distortion of competition resulting from the liquidation aid should generally be rather small given the envisaged disappearance of the bank from the market. To minimise those distortions still further, the Banking Communication restricts the scope of permitted activities of a bank in run-off mode to changing the terms of existing contracts and restructuring existing loans, provided that those changes improve the respective assets’ value. Likewise, potentially unnecessary banking licenses should be withdrawn as soon as is compatible with the overall goals of the liquidation (i.e. cost minimisation).3553

3.1892

3549 2013 Banking Communication, point 59 d); see for example Commission Decision C(2013) 5814 of 06.09.2013 on rescue aid in favour of Factor Banca (Case SA 37315), summary notice published in OJ C 314, 29.10.2013, p. 2. 3550 See for example Commission Decision C (2011) 4432 of 29.06.2011 on the Restructuring of Anglo Irish Bank (Case C 11/2010, ex N 667/2009), OJ C L 139, 26.05.2012, p. 18. 3551 See for example Commission Decision C(2011) 9395 of 20.12.2011 for the Restructuring of WestLB (Case C 40/2009 and C 43/2008), OJ L 148, 01.06.2013, p. 1. 3552 2013 Banking Communication, point 77. 3553 2013 Banking Communication, point 76.

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3.1893

In consequence, the assessment of liquidation aid should normally be a rather straightforward exercise, at least compared to a going-concern restructuring operation.3554 However, there is one element that may add a layer of complexity to that task. Regularly, the liquidation of a bank entails the selling on the market of certain parts of it, or bundles of assets. Where that occurs the Commission has to assess whether there are other aid beneficiaries than the legal entity that originally sheltered the economic activity that received aid. In practice, the sale of (parts of ) an aided bank can lead to aid found on two other levels: that of the buyer and that of the “economic activity”.

5.4.2 Aid to the buyer and to the (sold) economic activity 3.1994

Generally speaking, it cannot be excluded that the sale of a public asset or (parts of ) an aid beneficiary confers aid to the buyer unless the sale follows an open, unconditional and non-discriminatory process, and is then implemented on market terms, i.e. maximises the sales price.3555 If there is aid to the buyer, the Commission assesses such aid separately, as provided for in point 81 of the 2013 Banking Communication.

3.1995

The assessment is considerably more complex as regards potential aid to the sold activity/undertaking, which is to be seen as a different legal and economic entity from the buyer.3556 Share deals, i.e. changes in ownership, do not have an impact on the assessment of whether an entity has received aid. In the case of asset deals, it is necessary to determine whether the purchased undertaking’s functional identity - based on considerations of economic attribution of the benefit3557 continues to exist.

3.1996

In practice, the Commission must assess whether the undertaking’s economic activity has been preserved after the sale of its assets or a substantial part thereof. In other words, it must examine whether the transfer of assets equates to a transfer of an economic unit. The elements that the Commission has relied on most frequently in its practice are:

3554 See Case T-812/14 BCP Lux 2 and others v Commission, pending. 3555 Banking Communication, point 80. 3556 That distinction between owner and economic activity as different economic entities for the purposes of State aid law has long been recognised by the jurisprudence. In order to determine whether the advantage is passed on to the economic activity, it is first necessary to distinguish between “share deals” and “asset deals”. OJ C 272, 15.11.2007. 3557 XXIXth Report on Competition Policy 1999, at para. 314.

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–

Size of the new entity in relation to the size of the liquidated part of the business (if e.g. 80 per cent of the old bank is transferred into the new bank the Commission is more likely to find continuation of the economic activity of the old bank compared to a situation where 20 per cent of business is transferred and 80 per cent liquidated);

–

Nature of the new entity (assets only, assets and liabilities, retail accounts, branches, IT, personnel, etc.) and whether the purchaser of the undertaking maintains the main focus of the purchased entity.

On the basis of that analysis the Commission has in the course of the crisis distinguished between the following types of situations:

3.1997

When the beneficiary is split into a good part and a bad part with the latter to be liquidated, the whole operation is more akin to an “impaired assets measure” which relieves the good bank of bad assets and allows it to continue the same, albeit reduced economic activity. In such cases, when the good bank is then sold to a third party, aid was found.3558 This is even more so if the operation essentially consists of split of the company without a sale to a third party, comprising the same assets, liabilities and the same activity as before, only at a smaller scale and possibly as a different legal entity,3559 and evidently also the case when the entire business is sold, and only the legal entity ceases to exist.3560

3.1998

A different albeit similar scenario occurs when a significant part (normally 50 per cent or more) of the beneficiary’s assets and liabilities (including infrastructures, IT, human resources ...) is sold to a third party. In that case, aid is considered to be present at the level of the economic activity. This is particularly so if the assets and liabilities purchased constitute an economic unit in themselves which enable the purchaser to provide - independently and under a different identity - the same services as the beneficiary did in the past.3561 On the contrary, when only a part of the bank’s liabilities (e.g. customer deposits) is sold to a third

3.1999

3558 See for example Commission Decision C (2008) 5673 of 01.10.2008 on rescue aid to Bradford and Bingley (Case NN 41/2008 and N194/2009), summary notice published in OJ C 290, 13.11.2008, p. 2, recitals 9, 36, 37 and Commission Decision C (2009) 340 of 25.1.2010 in case on rescue aid to the Dunfermline Building Society (Case NN19/2009), summary notice published in OJ C 101, 20.04.2010, p. 7, recital 49. 3559 Such a case would then rather have to qualified as in-depth restructuring see for example Commission Decision C (2009) 8102 of 28.10.2009 on aid for Northern Rock (Case C 14/2008), OJ L 112, 05.05.2010. p. 38. 3560 See for example Commission Decision C(2012) 8849 of 28.11.2012 on the restructuring of Banco de Valencia (case SA.34053), summary notice published in OJ C 75, 14.03.2013, p. 3. 3561 See for example Commission Decision C(2009) 5640 of 09.7. 2009.on the restructuring of Kaupthing Luxemburg (Case N 344/2009 and N 380/2009), OJ C 247, 15.10.2009, p. 3, recitals 45 et seq.

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party without any assets or infrastructure, and they are immediately integrated into the business of the acquirer, it is relatively clear that that the economic activity of the beneficiary does not continue.3562

3.2000

In Banco Espírito Santo3563 (BES) the Commission took a slightly different approach. BES, a failing bank, had most of its assets and liabilities transferred to a bridge bank, and the remainder was to be liquidated. Instead of assessing whether the split had conferred an advantage on a potentially transferred and continuing economic activity, the Commission accepted certain commitments that seem to achieve the same outcome, namely to avoid any distortion of competition arising from an aided continuing activity. The bridge bank’s activities were confined to the management of the assets that it received, and the Commission was to be notified of any substantial sale of assets (measured by market share) by the bridge bank. If such a sale were to occur, the Commission could still ensure compliance with the requirements of the Restructuring Communication (notably viability and the avoidance of distortions of competition) when vetting any such transaction.

5.4.3 Compatibility assessment of aid to the sold entity 3.2001

If there is aid to the sold activity, the three criteria of return to long-term viability, burden-sharing and absence of undue distortion of competition are fulfilled at the level of the sold activity.3564 In practice, the Commission must assess whether the measures undertaken at the level of the original aid beneficiary to meet those conditions are sufficient, or whether any additional measures need to be requested at the level of the sold entity, or at level of an integrated entity. Regarding the criterion of a return to long-term viability, it will need to be demonstrated at the level of the integrated entity. Often such an assessment has been 3562 See for example Commission Decision C(2009) 5640 of 09.07.2009 on the restructuring of Kaupthing Luxemburg (Case N 344/2009 and N 380/2009), OJ C 247, 15.10.2009, p. 3, recital 47. See also Commission Decision C (2008) 6498 of 5.11.2008 on aid for liquidation of Roskilde Bank (Case NN39/2008), summary notice published in OJ C 12, 17.01.2009, p. 3. In that case the bank was split into a good and a bad bank and a relatively small part of the assets and liabilities of the good bank were sold to three different buyers. The Commission considered that “the branches sold have been divided over the three acquiring entities, and will be fully integrated into the branch network of the respective entities as soon as possible”. As a consequence, the Commission concluded that the economic activity of Roskilde Bank was not continued. Likewise, in the Commission Decision C (2014) 4662 final of 09.7.2014 on Alpha Bank (Cases SA.34823, SA.36004, SA.37965, SA.37966 and SA.37967), OJ L 80, 25.03.2015, p. 1, recitals 151 et seq, the Commission took the view that the transfer of customer deposit does not lead to a continuation of an economic activity. 3563 Commission Decision C(2014) 5682 of 03.08.2014 on the resolution of Banco Espirito Santo (Case SA.39250), OJ C 393, 07.11.2014, p. 11. 3564 See also point 17 of the Restructuring Communication.

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comparatively “lighter”,3565 particularly if the buyer is considerable larger, and has strong financial fundamentals.3566 As for measures to limit competition distortion, the elements that are used to determine whether there is a continuation of the economic activity are also relevant here. The 2013 Banking Communication provides in point 82 that if the liquidation process entails the sale of an economic entity with a significant market share, there might be a need for measures to limit distortions of competition that go beyond the sale/liquidation itself. For example, in its decision on the acquisition of Fortis by BNP Paribas, the Commission noted “with satisfaction that, on the Belgian market, BNPP has made a firm commitment, valid for four years, not to acquire or take control of other credit institutions or investment companies that have their registered office or a subsidiary or branch in Belgium or Luxembourg and have substantial operations there, or, where the entity bought or controlled has subsidiaries or branches in Belgium or Luxembourg, to sell them. This commitment ensures that the aid received will not be used to buy out competitors in a market in which Fortis Banque is already dominant”.3567

3.2002

5.4.4 Schemes The 2013 Banking Communication in points 83 et seq also retains the possibility for Member States to notify “orderly liquidation” schemes for credit institutions of “limited size”, that is EUR 3 billion of total assets. Such schemes must ensure in particular that the burden-sharing requirements of the 2013 Banking Communication are complied with. To date, only Denmark, Poland and Ireland operate such schemes3568 but it seems likely that following the entry into force of the new Union legal framework for bank resolution (see in section 7 of this chapter), more Member States may avail themselves of that possibility.

3.2003

3565 See for example Commission Decision of 09.7.2009 in case N 344/2009 and N 380/2009 - Restructuring of Kaupthing Luxemburg, OJ C 247, 15.10.2009, p. 3, Commission Decision C(2012) 8849 of 28.11.2012 on the restructuring of Banco de Valencia (case SA.34053), summary notice published in OJ C 75, 14.03.2013, p. 3. 3566 See for example Commission Decision C(2012) 8849 of 28.11.2012 on the restructuring of Banco de Valencia (case SA.34053), summary notice published in OJ C 75, 14.03.2013, p. 3, recital 163: “First, the Commission notes that the business of BVA is absorbed by a much larger group. In terms of total assets, the ratio exceeds 1:15. As a consequence, the impact of the acquisition of BVA on CaixaBank’s accounts and prudential position will be limited.” 3567 Commission Decision C(2009) 3907 of 12.05.2009 on the additional aids to Fortis Banque, Fortis Banque Luxembourg and Fortis holding (Case N 255/2009 and N 274/2009), summary notice in OJ C 178, 31.07.2009, p. 3568 See Commission Decision C(2010) 6788 on the Danish winding-up scheme for banks (Case N 407/10), summary notice published in OJ C 312, 17.11.2010, p. 7.

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3.2004

The Irish Credit Union Resolution scheme3569 illustrates those considerations well: any credit-union that is failing or likely to fail will be resolved by transferring its assets and liabilities to the highest bidders. There is thus no viability analysis to perform; burden-sharing is ensured as the members of the credit union will not receive any proceeds from the sale, and distortions of the competition limited as the beneficiary is absorbed by the market. Given the limited size of the potential beneficiaries, it is simply not necessary for the Commission to assess each and every case individually. The Polish Credit Unions Orderly Liquidation scheme3570 follows similar principles.

6. 3.2005

Monitoring

To ensure the effective enforcement of State aid control in the banking sector, it is imperative that the restructuring and liquidation plans are implemented in line with the provisions of the Commission decisions. The large number of such plans, their duration (typically five years) as well as their complexity and the level of detail of the commitments have made it necessary to have a very close monitoring of their implementation. Inspired by the experience in merger control, during the crisis the Commission started to systematically seek the inclusion of monitoring trustees in its decisions as part of the implementation process.3571 Those monitoring trustees, being the “eyes and ears” of the Commission, assist the Commission in the task of close monitoring of the implementation of the restructuring plans and the commitments, ranging from the respect of behavioural commitments such as price leadership ban or acquisition ban, to compliance with divestments and key performance indicators of the restructuring plans. Such close follow-up of the respect of restructuring plans is fundamental to preserving the level playing field. While changes to approved restructuring plans can exceptionally be agreed by the Commission in amendment decisions if justified on objective grounds and compensated for by appropriate additional measures in order to preserve the balance of the original decisions,3572 the Commission has sanctioned the breaches of commitments by opening a misuse of aid procedure.3573 3569 See Commission Decision C(2014) 1060 of 28.02.2014 on the Credit Unions Orderly Liquidation Scheme (Case SA.37425), summary notice published in OJ C 210, 04.07.2014, p. 3. 3570 See Commission Decision C(2014) 144 of 16.01.2014 on the Prolongation of the Credit Union Resolution Scheme (Case SA.37984), summary notice published in OJ C 69, 07.03.2014, p. 28. 3571 The role of the monitoring trustee in relation to resolution plans is currently under examination in Case T-814/14 Banco Espírito Santo v Commission. 3572 See for example the amendment Commission Decision C(2011) 5450 of 27.07.2011 on Monitoring of KBC - replacement of certain own contribution measures, change to divestment of Romstal and the extension of the deadline for the divestment KBL (Case SA.29833 - MC11/2009), OJ C 38, 11.02.2012, p. 1. 3573 Commission Decision C (2012) 9753 of 18.12.2012 on Breach of a dividend ban by Caixa Geral de Depósi-

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7.

State aid rules and the Banking Union – overview and outlook

In response to the financial crisis that emerged in 2008, the Commission pursued a number of initiatives to create a safer and sounder financial sector for the single market. Those initiatives include stronger prudential requirements for banks3574 and improved depositor protection.3575

3.2006

After the initial phases of the banking crisis, characterised by sky-rocketing fiscal cost to resolve the crisis and apparent difficulties to deal with complex cross-border institutions, the necessity to limit the cost of bank restructuring for taxpayers to the minimum, and agree on a common European resolution framework has become increasingly evident. That insight underpinned the Commission’s proposal for common rules to manage failing banks – and led to the adoption of the Bank Recovery and Resolution Directive3576 (“BRRD”). The BRRD’s core principle is that banks, their owners and creditors should in the future bear the cost of bank restructuring and resolution – its main aim is therefore to prevent future bail-outs.

3.2007

The BRRD obliged Member States to adopt and publish by 31 December 2014 the laws, regulations and administrative provisions necessary to comply with it, and most of its provisions became applicable as of 1 January 2015. Given its aim to end bail-outs, in other words, the use of public resources to resolve failing banks, the question arises as to whether State aid rules for aid to banks in difficulty will, and if so to what extent, still be relevant mainly once the BRRD is transposed. The following section will explore that question, but also address a related set of issues.

3.2008

The new regulatory framework for banks as discussed above form the so-called “single rulebook” for all financial actors in the 28 Member States of the Euro-

3.2009

tos, S.A. - Misuse of rescue aid (Case SA.35062 (2012/C) (ex2012/NN), OJ C 116, 23.04.2013, p. 13. 3574 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.06.2013, p. 338; and Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.06.2013, p. 1. 3575 Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes, OJ L 173, 12.06.2014, p. 149. 3576 Directive 2014/59/EU of the European Parliament and the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/ EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173, 12.06.2014, p. 190.

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pean Union. But the crisis has led to more than just a single rulebook; As the financial crisis evolved and turned into the Eurozone debt crisis, it also became clear that, for those countries which shared the euro and were therefore even more interdependent, a deeper integration of the banking system was needed. That is why, on the basis of the Commission roadmap for the creation of the Banking Union3577, the Union institutions agreed to establish a Single Supervisory Mechanism (“SSM”)3578 and a Single Resolution Mechanism (“SRM”) for banks3579.

3.2010

In essence, the SRM can be considered as transposing, in parts, the BRRD for the participating Member States; it will apply to all banks in the Banking Union. Given that the SRM elevates the responsibility for bank resolution to a supranational level, as discussed below, the second key question that this section discusses is whether and to what extent State aid control has a role to play in relation to the SRM, after its entry into force on 1 January 2016.

7.1 Possibility to grant State aid after 1 January 2015 (within and outside resolution) 7.1.1 Aid to banks in difficulty outside resolution 3.2011

As indicated above, the key goal and principle of the BRRD is to put an end to the old paradigm of bank bail-outs, which cost taxpayers’ hundreds of billions of euros in the crisis.

3.2012

That aim is translated chiefly by Article 32 of the BRRD, which provides in paragraph 4 that “[…] an institution shall be deemed to be failing or likely to fail in one or more of the following circumstances: […] (d) extraordinary public financial support is required”

3577 Communication from the Commission to the European Parliament and the Council: A Roadmap towards a Banking Union, COM/2012/0510 final. 3578 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions , OJ L 287, 29.10.2013, p. 63. 3579 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010, OJ L 225, 30.07.2014, p. 1. In fact, the SRM is established and governed by two texts: the SRM regulation covering the main aspects of the mechanism and an intergovernmental agreement related to some specific aspects of the Single Resolution Fund, SRF.

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Article 32(4) of the BRRD thus establishes the principle that the need for extraordinary public support, defined by Article 2(28) as “State aid within the meaning of Article 107(1) TFEU, or any other public financial support at supranational level”, to prevent a bank failure triggers its resolution, i.e. the application of the BRRD’s resolution tools, including the so-called bail-in tool,3580 which aims to ensure that shareholders and creditors of the failing institution suffer appropriate losses and bear an appropriate part of the costs arising from the failure of the institution. That general approach would suggest that State aid to banks “outside” (i.e. without triggering resolution) is a thing of the past.

3.2013

This is not the case, however, as Article 32 provides for three important exceptions, according to which extra-ordinary public support should not lead to qualifying a bank as failing or likely to fail:

3.2014

“when, in order to remedy a serious disturbance in the economy of a Member State and preserve financial stability, the extraordinary public financial support takes any of the following forms: (i)

a State guarantee to back liquidity facilities provided by central banks according to the central banks’ conditions;

(ii)

a State guarantee of newly issued liabilities; or

(iii)

an injection of own funds or purchase of capital instruments at prices and on terms that do not confer an advantage upon the institution, where neither the circumstances referred to in point (a), (b) or (c) of this paragraph nor the circumstances referred to in Article 59(3) are present at the time the public support is granted.

In each of the cases mentioned in points (d)(i), (ii) and (iii) of the first subparagraph, the guarantee or equivalent measures referred to therein shall be confined to solvent institutions and shall be conditional on final approval under the Union State aid framework. Those measures shall be of a precautionary and temporary nature and shall be proportionate to remedy the consequences of the serious disturbance and shall not be used to offset losses that the institution has incurred or 3580 Cf. Articles 43 to 55 of the BRRD. Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173, 12.06.2014, p.190.

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is likely to incur in the near future. Support measures under point (d)(iii) of the first subparagraph shall be limited to injections necessary to address capital shortfall established in the national, Union or SSM-wide stress tests, asset quality reviews or equivalent exercises conducted by the European Central Bank, EBA or national authorities, where applicable, confirmed by the competent authority.”

3.2015

The first two exceptions enable Member States in essence to grant some liquidity support to solvent banks that encounter liquidity shortages, provided that the Commission’s final approval under State aid rules have been obtained.

3.2016

The third exception in Article 32(4)(d)(iii) of the BRRD means that certain (“precautionary”) recapitalisations do not automatically trigger resolution, meaning that a certain margin remains for Member States to recapitalise banks in difficulty “outside” resolution. The question thus arises as to how broad that margin is for such “precautionary recapitalisations”.

3.2017

Article 32(4)(d) is an exception to the general rule provided for in Article 32, and should thus probably be read restrictively. That interpretation is supported by numerous requirements that have to be met in order to qualify a measure as “precautionary” in the sense of the BRRD, i.e. not triggering resolution.

3.2018

First, such intervention should be done “at prices and on terms that do not confer an advantage” The wording interpreted in isolation would suggest that it only covers measures which do not confer an advantage, i.e. in line with the market economy operator principle (“MEOP”). Such interpretation would mean that the measure would not constitute State aid. However, such a reading would probably deprive Article 32(4)(d) of the BRRD of any meaning, as it would prima facie be difficult to comply with the MEO test in a situation when the bank at hand is unable to raise capital privately in the markets. This was presumably not the intention of the co-legislators – not at least because the final approval by the Commission under State aid rules, a criterion under that provision, would then not be necessary and its insertion in the text superfluous. Consequently, the wording is probably to be read as obliging Member States to require market-oriented remuneration when they inject capital – a condition that should be met if the remuneration requirements of the Crisis Communications are met.

3.2019

Second, “measures shall be of a precautionary and temporary nature”. The word “temporary” implies that there are two option for the Member State wishing to grant such aid: it can either choose a hybrid instrument with a predetermined 1170

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maturity date or it chooses a recapitalisation in shares, but then it would have to take a binding commitment that the shares would be sold at a certain point in time Third, the provision refers to extra-ordinary financial support granted “in order to remedy a serious disturbance in the economy of a Member State”. That wording paraphrases Article 107(3)(b) of the Treaty, which suggests that the exception will no longer be applicable when the Commission decides that Article 107(3)(b) of the Treaty can no longer be used as a basis to assess aid to banks in difficulty.3581

3.2020

Fourth, for a measure to comply with Article 32(4)(d) it “shall not be used to offset losses that the institution has incurred or is likely to incur in the near future” and “shall be limited to injections necessary to address capital shortfall established in the national, Union or SSM-wide stress tests, asset quality reviews or equivalent exercises conducted by the European Central Bank, EBA or national authorities, where applicable, confirmed by the competent authority.” That wording restricts the applicability of that provision to stress tests and similar supervisory exercises. The fact that the provision also provides for a review by the Commission of the continuing need for that exception by the end of 2015 strongly suggests the co-legislators had the EBA-SSM stress test of 2014/2015 in mind when deciding to include that clause.

3.2021

In a stress test, there are typically two scenarios against which the capital adequacies of the participating banks are tested: a likely “base case” scenario and an adverse case (unlikely) scenario.

3.2022

The wording “not to offset losses that are the bank is likely to incur in the near future” implies that a precautionary recapitalisation in the meaning of that provision cannot be used to cover the losses projected in the base case scenario, as they are indeed likely to occur. It would thus seem that the exception is only applicable to recapitalisations that would boost a bank’s capital ratio so that it can weather an “unlikely” adverse case scenario.

3.2023

The final condition to be met under Article 32(4)(d) is that of “conditional on final approval under State aid rules”. This means that a temporary approval (or an approval as rescue aid) does not suffice to comply with that condition. The Commission could only approve a precautionary recapitalisation for the purposes of Article 32(4)(d) if the Member State intending to inject capital has

3.2024

3581 For example because the crisis has been overcome.

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already submitted a restructuring plan complying with the Restructuring Communication, and has, in accordance with the 2013 Banking Communication, implemented the necessary burden-sharing by shareholders and subordinated debt holders.

7.1.2 Aid to banks in difficulty within resolution 3.2025

Even if a bank is deemed failing or likely to fail, and resolution is triggered, and in spite of the existence of the bail-in tool, it should not be concluded that aid can no longer be granted to banks that are being resolved.

3.2026

First, the BRRD requires Member States to set up resolution funds, which can be used for the purposes provided for in the directive, including for recapitalisation and loss absorbance (cf. for example Article 44), once not less than 8 per cent of the total liabilities including own funds of the institution under resolution have been bailed-in, i.e. written-down or converted into equity. Using a resolution fund to the benefit of a resolved bank constitutes State aid pursuant to Article 107 of the Treaty – it confers a selective advantage granted by a Member State through the national resolution authority to an undertaking, and can distort competition and affect trade between Member States.

3.2027

Second, the BRRD also provides for so-called government financial stabilization tools, which would presumably be financed from the national budgets, and would hence evidently qualify as State aid.

3.2028

Third, and regarding the SRM-context, the question arise as to whether the use of the Single Resolution Fund SRF in resolution would constitute aid. State aid for the purposes of Article 107(1) of the Treaty would probably not be present, as the criterion of imputability does not seem to be met for the use of the SRF, given that under the SRM Regulation, the use of the fund depends on the decision(s) of Union bodies, notably the Single Resolution Board (“SRB”), and in some instances the Commission and Council. If that is indeed the case, the use of resolution funds would be subject to State aid control for the Member States that do not participate in the Banking Union, but not in the participating Member States, and would have run counter the objective that the same conditions and rules should apply to the resolution of banks throughout the entire Union.

3.2029

Addressing that issue, the co-legislators, based on the Commission’s proposal to apply to the use of the SRF State aid rules “by analogy”, created a distinct legal base for an assessment of the use of SRF funds for compliance with State aid 1172

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rules in Article 19 of the SRM Regulation which provides that the Commission “shall apply to the use of the Fund the criteria established for the application of State aid rules as enshrined in the Treaty”. That provision also clarifies that such assessment is to be made in the form of a Commission decision. Accordingly, even if the interventions of the SRF are not State aid pursuant to Article 107 of the Treaty, the Commission must treat them as if they were, both procedurally and in substance. In conclusion, the presence of aid in resolution will not be not ruled out even after a common Union-wide resolution regime has entered fully into force.

3.2030

7.2. Interplay between State aid rules and BRRD/SRM The previous section has demonstrated that State aid control will continue to play a significant role in any situation in which public resources are used to intervene in favor of a bank in difficulty. The following section endeavors to hazard a brief outlook of the procedural and substantive impact that the interlinkages between the Union’s resolution regimes – BRRD and SRM – and State aid rules could have.

3.2031

7.2.1 Procedure For aid which comes within the scope of the BRRD, there are no procedural particularities. Pursuant to Article 108 of the Treaty, Member States have to notify the use of resolution funds, including a resolution plan, to the Commission. Prior to a positive decision of the Commission on the use of fund the resolution authority would be barred from going ahead with resolution.

3.2032

The establishment of the SRM, fulfilling in essence the role of the Banking Union’s single resolution authority, and its somewhat complex decision-making process, which in rare cases foresees roles for the SRB, the Commission, the Council and a national resolution authority, made some specific adjustments necessary in order for SRF aid not to be treated differently, in terms of procedure, to the use of national resolution funds under the BRRD.

3.2033

Articles 18 and 19 of the SRM Regulation provide for the following sequencing of decisions to the extent that resolution entails the use of a resolution fund or other (national) aid: Following a notification by a relevant authority that a bank is failing or likely to fail, the SRB performs an assessment of whether a bank should be resolved. If so, and it considers that its resolution will require the use

3.2034

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of resolution funds, it notifies to the Commission. The Commission then decides whether the notified use of the fund is compatible with the internal market. Only then can the SRB adopt a so-called resolution scheme, which enters into force (i.e. has to be implemented by the national resolution authorities) if no objection is expressed by the Commission (or the Council, in certain circumstances). That sequencing ensures that, just as for national resolution authorities, the SRB cannot use resolution aid prior to a positive Commission decision under state aid rules.

7.2.2 State aid in resolution – practical relevance of State aid control 3.2035

To gauge the practical relevance of State aid control for resolution pursuant to the BRRD, and the SRM, four types of resolution cases can be distinguished.

3.2036

First, there will be cases in which the no resolution fund is used, for example because the application of resolution tools suffices to resolve a bank without any capital aid , and the fund does not have to provide any liquidity to the bank, the bridge bank or the bad bank. In those cases, no aid will evidently be notified, assessed and approved.

3.2037

Second, there will be a subset of cases in which the entire bank that is resolved will disappear from the market. In such cases, if the fund does give liquidity or capital to finance the orderly winding-up, given that the risk of distortions of competition is minimal, the Commission’s assessment will mainly be limited to checking whether the winding-up process is performed in a manner that does not lead to distortions and that the bank fully exit the market. This is in practice a light assessment, as explained above.

3.2038

Third, there will be situations in which the resolution fund merely provides liquidity, for example to fund a bank that continues to operate on the market after a bail-in cannot initially obtain market funding. As set out in the section on guarantees (liquidity aid), the Commission limits in such cases, (except when the provided liquidity exceeds certain threshold) its assessment to verifying whether the aid provided is kept to the minimum necessary, and whether certain remuneration requirements are met. Again, this is in practice a light and straightforward assessment.

3.2039

Fourth, there might be cases in which all - or a part of - the resolved bank continues to operate on the market, and the resolution fund will re-capitalise that part of the bank, for example because the bail-in tool does not suffice to restore the capital ratio of the bank to a viable level, or there is aid to the bank included in 1174

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the pricing of the assets transferred to a fund-supported bad bank. In that subset of cases, the Commission’s assessment will have to verify notably whether a) the burden-sharing requirements – the bail-in of subordinated creditors in particular - are met (on that point, see specifically the following part), b) the part that continues to operate on the market is viable, and c) whether the distortions of competition resulting from the recapitalisation are limited to the minimum.

3.2040

It is submitted that in particular tasks b) and c) are in essence consideration of the future contours of the beneficiary that remains active on the market which could raise contentious issues between the Commission and the authority granting the aid, as they have throughout the crisis. However, those consideration relate to the key rationale of State aid control altogether, and are of the essence if the entire internal market is to remain characterised by a level playing field, including for bank resolution.

3.2041

7.2.3 The BRRD’s provisions on bail-in and conversion of capital instruments and the burden-sharing regime of State aid control Burden-sharing under State aid rules and the BRRD both pursue the objective of limiting the cost of bank restructuring and resolution as much as possible. Their parallel existence and different nature invites questions as to the relationship.

3.2042

At the outset, regarding the legal frameworks applicable in cases of resolution (which also entail public recapitalisation), one must distinguish between the periods as of 1 January 2015, and as of 1 January 2016.

3.2043

Article 59 of the BRRD, applicable as of 1 January 2015, lays out a requirement to write down and convert capital instruments when the conditions for resolution have been met; when such a write-down or conversion would restore the bank’s viability within a reasonable timeframe, or when a public support has been provided, other than in case of a precautionary recapitalisation as defined in Article 32(4)(d)(iii).

3.2044

As a result, public recapitalisations in the context of resolution will also automatically trigger the write-down and conversion of capital instruments under Article 59 of the BRRD. Article 59 does not foresee any exceptions. In such circumstances, both the State aid rules and the BRRD provisions apply, which means that after the Member State has written down and/or converted capital instruments as required by the BRRD and if there is still a capital shortfall to be

3.2045

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covered by State aid, subordinated debt instruments, which are not considered as a capital instrument under Article 59 of the BRRD, have to be written down and/or converted according to State aid rules. In such a case the possible exceptions to the burden-sharing requirements provided for in the 2013 Banking Communication are no longer applicable for the capital instruments covered by Article 59, as those exceptions are not included in the BRRD.

3.2046

After 1 January 2016, the main change compared to the previous period (from 1 January to 31 December 2015) will be the entry into force of the provisions related to the bail-in tool. If the conversion or write-down of capital instruments under Article 59 BRRD is not sufficient to fill a capital shortfall, the other debt instruments up to and including uncovered depositors will be subject to bailin. When and before any public resources are used, the absorption of losses by shareholders and creditors must amount to a minimum of 8 per cent of total liabilities (including own funds) of the institution under resolution. All liabilities are subject to bail-in with the exception of secured, collateralised and guaranteed liabilities, covered deposits and some specific unsecured liabilities, as defined under Article 44(2) of the BRRD. It is worth noting that several Member States decided to transpose the bail-in tool of the BRRD already as of 1 January 2015.

3.2047

Accordingly, as of 1 January 2016, the burden-sharing requirements of State aid rules will only be of substantial relevance for resolution cases in the rare circumstances in which all capital instruments have been bailed-in (in line with Article 59 of the BRRD) and the total bail-in has reached 8 per cent of total liabilities but certain subordinated debt instruments which are not considered as a capital instrument under Article 59 of the BRRD remain untouched. They would then also have to be converted or written-down, so as to comply with the State aid rules.

8. 3.2048

Conclusion

Since 2008 and up to the time of writing, under State aid control rules the Commission reviewed 110 aided banks throughout the Union, representing circa 25 per cent of the Union banking sector by assets. Between 2008 and 2013, Member States have granted the equivalent of 5.4 per cent of 2008 EU GDP (or EUR 671 billion) in capital and loans injected into banks and 10.9 per cent in contingent exposure (or EUR 1,365 billion of liquidity and guarantees provided to banks). 33 of those banks were put in liquidation as their long-term viability was beyond repair, 52 have been restructured, and 12 investigations are on1176

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going. In terms of their financial performance, the aided banks in the process of implementation of restructuring plans on average converge on key indicators of profitability, liquidity and solvency to their non-aided peers, though the averages hide divergent individual performance.3582 Those results demonstrate that the massive repair of the European banking sector driven by State aid control is bearing fruit. The increased burden-sharing requirements introduced in August 2013 have been a stepping stone to prepare the markets for the bail-in tool of the Banking Union. State aid control by the Commission will remain an important element of the new regulatory and institutional framework put in place as a response to the financial crisis, ensuring in particular that the “ins” and “outs” of the Banking Union are treated in the same way, and that any public support still available outside resolution does not become a source of competition distortion in the internal market but is firmly subject to State aid control principles.

3.2049

3582 “State aid to European banks: returning to viability”, published in Competition State aid brief, Issue 201501 | February 2015, http://ec.europa.eu/competition/publications/csb/csb2015_001_en.pdf.

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PART 3 – Compatibility rules Chapter 30 – Important projects of common European interest Barbara Cattrysse

Chapter 30 Important projects of common European interest

1.

Introduction

As part of the State Aid Modernisation (SAM) programme, in 2014 the Commission adopted a new Communication3583 setting out the conditions under which Member States can grant aid to support the execution of important projects of common European interests (IPCEI). The IPCEI Communication entered into force on 1 July 2014. Unlike the other communications and legislation adopted within the framework of the SAM programme, which revise previously existing texts, the IPCEI Communication is entirely new.

3.2050

The legal base of the communication is Article 107(3)(b) of the Treaty, which provides, inter alia, that aid to promote the execution of an important project of common European interest may be considered to be compatible with the internal market. Article 107(3)(b) of the Treaty is a legal base which traditionally had been rarely used in the Commission’s decisional practice; the vast majority of State aid decisions examine aid measures under 107(3)(c) of the Treaty or guidelines adopted by the Commission which structure how it will exercise its discretion under that latter provision. Article 107(3)(b) of the Treaty is also the legal base for State aid measures to remedy a serious disturbance in the economy of a Member State, and that “serious disturbance” limb of the provision has been used to approve crisis-related measures in the banking sector.

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3583 Communication from the Commission, Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest, OJ C 188, 20.06.2014, p. 4.

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For the 2014-2020 Multiannual Financial Framework3584, one of the important mandates of State aid law is to support the European Investment Plan3585 announced by Commission President Juncker at the start of his mandate in 2014. The main pillar of the Investment Plan is the setting up of the European Fund for Strategic Investments (EFSI) which primarily targets investments in largescale infrastructure projects. In addition to private investment, the Investment Plan also calls on Member States and national development banks to co-invest in the same projects that are supported by EFSI. In that context, the IPCEI Communication could well become an important tool to achieve the policy objectives of the EFSI.

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There is limited decisional practice regarding the application of Article 107(3) (b) of the Treaty for aid to promote IPCEIs. There have been a few cases related to large R&D projects3586 (predating the 2006 R&D&I Framework3587), industrial standardisation projects benefitting the entire internal market for highdefinition television (HDTV),3588 transport projects3589 or projects against en3584 The Multiannual Financial Framework lays down the maximum amounts which the Union may spend in different political fields. The current period covers seven years from 2014 to 2020. 3585 Communication from the Commission, An Investment Plan for Europe, COM(2014) 903 final, 26.11.2014, and Regulation (EU) 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the Europea Fund for Strategic Investments, the European Investment Advisory Hub and the European Investment Project Postal and amending Regulations (EU) No 1291/2013 and (EU) No 1316/2013 – the European Fund for Strategic Investments, OJ, 163, 1.7.2015, p. 1. 3586 See the Commission decisions on aid measures concerning microelectronic technology falling within the scope of the MEDEA+ programme: Cases N 701/A/2001, France – Individual cases under the MEDEA+ scheme (T 201, T 301 and T 304), OJ C 133, 05.06.2002, p. 10; N 702/B/2001, Individual case of State aid for the scheme MEDEA+ (A404), OJ C 292, 27.11.2002, p. 6; N 207/2002 – (A302), OJ C 33, 12.02.2003; N 62/2003 – (T 206), OJ C 301, 12.12.2003, p. 6; N 8/2003 - (T 404), OJ C 301, 12.12.2003, p. 6; and N 478/2003 – Programme MEDEA+ Eureka 2365, projet T 207, “65 nm CMOS 300 mm”, OJ C 131, 28.05.2005, p. 15 3587 Community Framework for State aid for Research and Development and Innovation, OJ C 323, 30.12.2006, p. 1. 3588 The concept of IPCEI was applied to French, Dutch and Italian aid granted to the HDTV project. The aid was granted to Thomson, Philips, Angénieux, Nokia, Cett and Seleco. XXIst Report on Competition Policy, 1991, para. 180. 3589 See the Commission decisions on the planning phase of a tunnel between Denmark and Germany (Case N 157/2009 – DK – Financing of the planning phase of the Fehmarn Belt fixed link, OJ C 202, 27.08.2009, p. 1.), the channel tunnel rail link project (Cases N 576/1998 (XXVIIIth Report on Competition Policy, 1998, paras. 3 and 260) and N 706/2001 (OJ C 130, 01.06.2002, p. 4.) – UK – The Channel Tunnel Rail Link, Case N 420/2008 – UK – Restructuring of London & Continental Railways and Eurostar (UK) Limited, OJ C 183, 05.08.2009, p. 13.) and the financing of the Belgian TGV (Case N 800/1996 – Belgian TVG, XXVIth Report on Competition Policy 1996, para. 201). Both the Channel Tunnel Rail Link and the Belgian TGV cases aimed at supporting the Paris-Brussels-Amsterdam-Cologne-London line, which was recognised as one of the 14 priority projects for the trans-European networks. Most recently, support by Denmark and Sweden for the financing of the Øresund Fixed Link, the longest combined road and rail bridge in Europe providing direct connection between Copenhagen and Malmö, (Case SA.36558 (2014/NN) and SA.38371 (2014/NN) – Den-

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vironmental pollution.3590 The Commission also approved a number of Eureka projects as being important projects of common European interest in the field of microelectronics.3591 It has also recognised that the “Airbus” project could be considered as an important project of common European interest.3592 Traditionally, decisional practice put forward the following cumulative criteria for the application of Article 107(3)(b) of the Treaty: first, the aid must promote a project, ‘promote’ being taken to mean action which contributes to the implementation of the project; second, it must be a specific, precise and clearly defined project; third, the project must be important quantitatively and qualitatively; and fourth, the project must be ‘of common European interest’ and as such be of benefit to the whole of the Union. It is along those criteria that the IPCEI Communication has been drafted, taking into account the conditions laid down by the Union Courts.

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1.2 Reasons for a Communication on IPCEI In the absence of specific rules pertaining to the application of Article 107(3) (b) of the Treaty to IPCEIs, the Commission first introduced an ad hoc compatibility assessment under that provision in the 2006 R&D&I Framework and the 2008 Environmental Guidelines.3593 Those communications applied to IPCEIs whose subject matter fell in their respective scope. Aid for such projects could be authorised up to the level that proved necessary to overcome the relevant market failures, which meant that the aid could exceed the ceilings laid down in the Framework and the Guidelines respectively. However, it is important to note that those provisions were never applied.

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The initial approach within the SAM programme was to maintain the specific IPCEI sections in the revised versions of the 2006 R&D&I Framework and of the 2008 Environmental Guidelines. With that objective, the draft Environmental and Energy Guidelines published for public consultation3594 on 18 De-

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mark, SA.36662 (2014/NN) – Sweden – Aid granted to Øresundsbro Konsortiet, OJ C 418, 21.11.2014, p. 1.). 3590 Case 730/79 Philip Morris v Commission ECLI:EU:C:1980:209, para. 17, and Case C-169/95 Spain v Commission ECLI:EU:C:1997:10, para. 25. 3591 See point 3.4 of the Community framework for State aid for research and development, OJ C 45, 17.02.2006, p. 5. The Commission approved the following projects: EU 127 JESSI, EU 102 EPROM, EU 147 DAB and EU 43 ESF. 3592 Commission decision of 26.01.1999, SG(99) D/586, Avance remboursable à Aérospatial pour le programme Airbus A340-500/600 (case SA.9980), OJ C 52, 23.02.1999, p. 10. While the Commission concluded that the public support did not constitute State aid within the meaning of Article 107(1) of the Treaty, it considered that if it were State aid, it could have been compatible under Article 107(3)(b) of the Treaty. 3593 Community Guidelines on State aid for environmental protection, OJ C 82, 01.04.2008, p. 1. 3594 See the draft Environmental and Energy Guidelines published for public consultation at: http://ec.europa.

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cember 2013 still contained a section on IPCEIs, and invited stakeholders to comment on their application.

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The impact assessment3595 carried out within the Commission in the course of the revision of the 2006 R&D&I Framework considered that the lack of notifications under its IPCEI chapter might have been attributable to a lack of relevant cross-border collaboration between Member States, budgetary reasons, or could indicate that aid ceilings as applicable under Article 107(3)(c) of the Treaty were generally sufficient to cater for the specific needs of IPCEIs in the field of R&D. However, the impact assessment also pointed out that there were indications that the criteria laid down in the 2006 R&D&I Framework did not ensure the necessary clarity as regards both the eligibility of a given project and the assessment process to which it would be subject by the Commission.

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During the various revision and consultation processes in the SAM programme, it emerged that keeping limited IPCEI-related provisions in those two specific guidelines might not fully address the relevance, specificities and features of such projects. The alternative was to consider the introduction of dedicated eligibility, compatibility and procedural provisions. It emerged that there was also need for clarity as to the application of Article 107(3)(b) of the Treaty in other sectors than those covered by the existing guidelines. IPCEIs outside those guidelines would have to be assessed directly under the Treaty. For instance, the High-Level Expert Group on Key Enabling Technologies (KETs) recommended applying the notion of IPCEI more generally to KETs, which are characterised by extensive industrial collaboration.3596 Therefore, it also seemed necessary not only to revise the existing assessment criteria but also to consolidate them in a single document that would apply to all the sectors. Apart from the need for more detailed and specific guidance, the Commission sought to send a clear political signal with respect to the need to promote IPCEIs at a Union level, and its own more flexible stance with respect to Member States’ support for such projects.

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Therefore, the Commission’s services started drawing up a first draft of the IPCEI Communication, while the draft R&D&I Framework published for pub-

eu/competition/consultations/2013_state_aid_environment/index_en.html. 3595 Commission Staff Working Document, Impact assessment Accompanying the document Communication from the Commission, Framework for state aid for research and development and innovation, SWD(2014) 163, see at: http://ec.europa.eu/smart-regulation/impact/ia_carried_out/docs/ia_2014/swd_2014_0163_ en.pdf. 3596 High-level Expert Group on KETs, Final Report, 28.6.2011, p. 36. See at: http://ec.europa.eu/enterprise/ sectors/ict/files/kets/hlg_report_final_en.pdf.

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lic consultation3597 on 20 December 2013 (i.e. only two days after the opening of the public consultation on the Environmental and Energy Guidelines) no longer contained a section on IPCEIs, but the following message: “The precise definition of important projects of common European interest and modalities for their compatibility assessment will be subject to a separate communication, for which the public consultation will be launched shortly.” That signal was followed by the publication for public consultation of the draft IPCEI Communication3598 on 28 January 2014. The IPCEI Communication, as subsequently adopted, sets out the principles along which the Commission will apply Article 107(3)(b) of the Treaty when it comes to IPCEIs. The IPCEI Communication has introduced a number of novel flexibilities compared to other guidelines. In particular, it provides for a simplified compatibility assessment compared to that foreseen in other guidelines, whereby it is to be presumed that certain compatibility criteria are fulfilled for projects which fulfil the eligibility conditions. It also introduced the possibility to cover up to 100 per cent of the funding gap on the basis of a large set of eligible costs, and allows aid to be granted for first industrial deployment stemming from a R&D&I project, which is a development stage closer to the market than the stages covered by the 2014 R&D&I Framework.3599

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1.3 Relation between the IPCEI Communication and other Guidelines The final adopted versions of the 2014 R&D&I Framework and the Environmental and Energy Guidelines3600 no longer contain provisions on IPCEIs. However, aid to promote the execution of IPCEIs may also be found compatible with the internal market on bases other than the IPCEI Communication or Article 107(3)(b) of the Treaty itself, notably Article 107(3)(c) of the Treaty and guidelines adopted by the Commission which structure how it will exercise its discretion under that latter provision. Therefore, if a project fulfils the conditions of both the IPCEI Communication and of another guideline, it is up to the Member States to advocate the compatibility basis it considers most appropriate.

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3597 See the draft Environmental and Energy Guidelines published for public consultation at: http://ec.europa. eu/competition/consultations/2013_state_aid_rdi/index_en.html 3598 See the draft IPCEI communication published for public consultation at: http://ec.europa.eu/competition/consultations/2014_state_aid_cei/index_en.html 3599 OJ C 198, 27.06.2014, p. 1. 3600 OJ C 200, 28.06.2014, p. 1.

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At the same time, a project which is considered important, bringing benefits going beyond the beneficiary undertakings, industries, or even the Member State, but which does not fulfil all the conditions of the IPCEI Communication, can be notified as compatible under another legal base than the IPCEI Communication. Doing so may be appropriate in particular if a project’s importance materialises only at a local level, or it is financed only by one Member State. However, the rules applicable in the relevant sectoral guidelines must be respected.

2.

Eligible projects

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The compatibility of State aid for the execution of an IPCEI heavily relies on the assessment of whether the project is eligible under the IPCEI Communication. The eligibility criteria are drafted in a way that they leave, on the one hand, room for Member States to demonstrate that a project is important enough to be considered an IPCEI and, on the other hand, sufficient discretion for the Commission to judge whether a project merits such qualification, as confirmed by the Court of Justice in Glaverbel3601 and subsequently in other cases.3602

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The IPCEI Communication accepts that both traditional single projects as well as so-called integrated projects can be found eligible.

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Single projects are those that are clearly defined in respect of their objectives, as well as terms of implementation, including its participants and funding. Even if a single project consists of several components, the components are usually not separable from each other, and together they serve one purpose. Most of the projects notified for State support are single projects.

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Integrated projects cover initiatives which are composed of a number of individual but complementary projects which form a coherent system, usually integrated in a common structure or roadmap, aiming at the same objective and based on a systemic approach. The notion of integrated projects has been introduced in order to capture large and complex projects. It allows for common treatment of groups of complementary projects, when individual assessments would fail to capture the synergies and the strategic importance of the integrated project as a whole. That risk is particularly acute in the case of projects that involve various

3601 Joined Cases 62/87 and 72/87 Exécutif regional wallon v Commission (‘Glaverbel’) ECLI:EU:C:1988:132, para. 21. 3602 See for instance Case C-148/04 Unicredito Italiano ECLI:EU:C:2005:774, para. 71; Case C-66/02 Italy v Commission ECLI:EU:C:2005:768, para. 135.

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sectors and multiple participating entities and beneficiaries, or projects carried out over several distant geographical locations, while being part of a same concept.

2.1 Common European interest The existing decisional practice and jurisprudence show that proving the common European interest of a project is a serious test. It is not sufficient that the overall objective is in the common European interest; rather, the specific project implemented by the measure ought to be of common European interest and be of European scale, forming part of a transnational European programme supported jointly by a number of Member States, or arising from concerted action by a number of Member States.3603 In the light of the existing guidance by the Union Courts, the IPCEI Communication contains two sets of criteria: a first set of mandatory cumulative criteria, and a second set of criteria which may indicate the existence of a common European interest. The Communication brings much needed legal certainty in that regard.

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2.1.1 General cumulative criteria First, the project must contribute in a concrete, clear and identifiable manner to one or more Union objectives and must have a significant impact on competitiveness of the Union, sustainable growth, addressing societal challenges - such as the ageing population, climate change, or the scarcity of resources - or value creation across the Union.

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The Courts have interpreted restrictively the notions of impact on the competitiveness of the Union and value creation across the Union. For instance in Unicredito, the Court held that a tax reduction that is essentially designed to improve the competitiveness of the Italian banking system, and therefore improve the competitiveness of operators established in Italy in order to strengthen only their competitive position, benefiting mostly the economic operators of one Member States rather than the Community as a whole, cannot be regarded in itself as a project of common European interest. The Court also added that a privatization process undertaken in one Member State cannot, of itself, constitute a project of common European interest.3604 In Albergo Quattro Fontane,

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3603 Decision of 23 October 2007 on the State aid C 34/2006 which the Federal Republic of Germany is planning to implement for the introduction of digital terrestrial television (DVB-T) in North Rhine-Westphalia, OJ L 236, 03.09.2008, p. 10, para. 191. 3604 Case C-148/04 Unicredito Italiano ECLI:EU:C:2005:774, paras. 73-77; See also Case C-66/02 Italy v Commission ECLI:EU:C:2005:768, paras 138-142.

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the General Court held that an aid measure that aims at saving the city of Venice and therefore benefits only operators that are established in Venice cannot be regarded as a project of common European interest.3605

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Second, as regards contribution to Union objectives, the IPCEI Communication gives a non-exhaustive list of Union programmes, such as the European Strategy for KETs, the Energy Strategy for Europe, or the Digital Agenda for Europe. The purpose of having left the list non-exhaustive is to cater for Union programmes that are developed later, as well as for Union objectives that may be set in the future. In consequence, the IPCEI Communication can follow dynamically the evolution of Union policies, rather than being static, an approach which could have necessitated its regular revision. The open-ended nature of that list is particularly important in the context of the Investment Plan for Europe which was announced in November 2014 as the Juncker Commission took over, and which therefore was still unknown at the time the IPCEI Communication was adopted.

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It is not enough that a project receives financing from one of the listed Union programmes or that it fits with the general objectives set out in them. It is also necessary that the project is of major importance for the Union programme or strategy. The Court has already held that the mere fact that a project fits within the objectives of a Union programme or that the potential beneficiary may participate in such programme is not enough to consider the project to be of common European interest.3606

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Third, the project must normally involve more than one Member State and its benefits must not be confined to the financing Member States, but extend to a wide part of the Union. Since that criterion was much debated during the public consultation, the next section is devoted to it.

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Fourth, the benefits of the project must not be limited to the undertakings or the sector concerned but must be of wider relevance and application to the Union economy or society through positive spillover effects which are clearly defined in a concrete and identifiable manner. Such positive spillover effects may present at multiple levels of the value chain, or up- or downstream markets, or having alternative uses in other sectors or modal shift. 3605 Joined Cases T-278/00, 280/00, 282/00, 286/00, 288/00, 295/00 Albergo Quattro Fontance and others v Commission ECLI:EU:T:2013:77, paras 45 and 46. 3606 Joined Cases 62/87 and 72/87 Exécutif regional wallon v Commission (‘Glaverbel’) ECLI:EU:C:1988:132, para. 20.

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Fifth, the project must involve co-financing by the beneficiary.

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Sixth, the project must respect the principle of the phasing out of environmental harmful subsidies.

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In conclusion, the general cumulative eligibility criteria seek to restrict the application of the IPCEI Communication to the most important projects in terms of pursuing the Union’s objectives, cooperation between Member States, and spillover effects beyond the beneficiary undertakings, sectors and participating Member States. While the criteria may seem very demanding, IPCEI projects are the exception to the rule and the notion of IPCEI should not be debased.

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2.1.2 Minimum number of Member States participating in the IPCEI As one of the mandatory eligibility criteria, the project must normally involve more than one Member State. As a result, even major national initiatives pursuing policies encouraged by the Commission would not qualify. At least two Member States should be involved in the project, and involvement in that context meaning the provision of finance.

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By definition, that criterion limits the scope of the IPCEI Communication to truly transnational and cross-border projects, necessitating the cooperation of several Member States. This is not a common practice in the field of State aid where it is almost always one financing Member State notifying the support for approval, although some exceptions of procedural cooperation between several Member States can be found in some fields (on this issue, see section 4 below). The traditional “single Member State notification” is embedded in the Member States’ prime interest in spending their public money to benefit their national economic development, which is most often realized within the territory of the Member State.

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During the public consultation, several stakeholders argued that a project that is financed only by one Member State may be equally important, extending its benefits beyond the borders of the financing Member State, and therefore asked for the deletion of the condition requiring several participating Member States. However, the case law clearly limits the acceptance of such projects as an IPCEI. In Glaverbel, the Court of Justice upheld the Commission’s policy that a project may not be considered as being of a common European interest for the purposes of Article 107(3)(b) of the Treaty unless it forms part of a transnational Euro-

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pean programme supported jointly by a number of governments of the Member States, or arises from concerted action by a number of Member States to combat a common threat such as environmental pollution.3607

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Within the limitations set by the case law, the IPCEI Communication allows three exceptions to the condition of minimum two Member State financing: (a) interconnected research infrastructures; (b) Trans-European Transport Network (TEN-T) projects that are of fundamentally transnational importance because they are part of a physically connected cross-border network; and (c) TENT-T projects that are essential to enhance cross-border traffic management or interoperability.

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In the case of interconnected research infrastructures, the exception is foreseen for infrastructures that are built and connected to those which already exist. Such infrastructures are placed at different geographic locations but are connected and function together.

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In the case of physically connected cross-border transport networks, the rationale is that a network of important highways or railways that cuts across the Union connecting very distant locations are naturally, by their physical connection, transnational. Their benefits naturally extend to a wide part of the Union since they connect distant Member States and are used by a vast number of citizens across the Union. Furthermore, the benefits of such a transport network benefit many industries.

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By that exception, the IPCEI Communication recognizes the fact that the entirety of such a network would probably fulfill the conditions of an IPCEI if it were to be realized at once. However, most often, the various parts of such a transport network are constructed or upgraded at different times, and Member States only finance the construction of the fraction that cuts across their national territory. That exception does not apply to airports or to network of airports even where they are important. The condition that the network has to be physically connected seems indeed to exclude airports. That exclusion was necessary in order not to undermine the rules laid down in the 2014 Airport Guidelines,3608 which set strict criteria on how Member States may provide support to airports. While State aid to airports is excluded from the exception al3607 Joined Cases 62/87 and 72/87 Exécutif regional wallon v Commission (‘Glaverbel’) ECLI:EU:C:1988:132, para. 22. 3608 Communication from the Commission – Guidelines on State aid to airports and airlines, OJ C 99, 04.04.2014, p. 3.

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lowing for only one Member State financing for the project under the IPCEI Communication, they remain eligible if they meet the other general conditions. However, in practice, it is unlikely that several Member States would finance the construction of an airport which lies in the territory of one of them. Therefore, while the IPCEI Communication does not explicitly say so, in practice, airports seem de facto to be excluded from its scope. The rationale for the exception for TENT-T projects that are essential to enhance cross-border traffic management or interoperability is the same as for the physically connected transnational networks. The fluid flow of traffic on Unionwide transport networks is to the benefit of the entire Union.

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2.1.3 General positive indicators In addition to the general mandatory cumulative criteria, the Commission will take a more favourable approach as to the eligibility of a project where it presents one or several positive indicators. Such positive indicators are present where: participation in the project is open to all interested Member States; the design or selection of the project involves the Commission; the governance structure of the project involves the Commission and several Member States; the project involves important collaborative interactions in terms of number of partners, involvement of organisations of different sectors, or the undertakings of different size; or if the project involves co-financing by a Union fund.

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2.1.4 Specific criteria for R&D&I projects The IPCEI Communication sets out some mandatory criteria for research, development and innovation projects (R&D&I), where it is particularly important to ensure consistency with the 2014 R&D&I Framework. Several decisions have been taken in that field in the past. The Commission approved several R&D aid measures concerning microelectronic technology falling within the scope of the MEDEA+ programme and related to large R&D projects,3609 and industrial standardisation projects for HDTV.3610

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3609 See the Commission decisions on aid measures concerning microelectronic technology falling within the scope of the MEDEA+ programme: Cases N 701/A/2001, France – Individual cases under the MEDEA+ scheme (T 201, T 301 and T 304), OJ C 133, 05.06.2002, p. 10; N 702/B/2001, Individual case of State aid for the scheme MEDEA+ (A404), OJ C 292, 27.11.2002, p. 6; N 207/2002 (A302), OJ C 33, 12.02.2003; N 62/2003 (T 206), OJ C 301, 12.12.2003, p. 6; N 8/2003 - (T 404), OJ C 301, 12.12.2003, p. 6; and N 478/2003 “Programme MEDEA+ Eureka 2365, projet T 207, 1189 65 nm CMOS 300 mm”, OJ C 131, 28.05.2005, p. 15. 3610 The concept of IPCEI was applied to French, Dutch and Italian aid granted to the high-definition television project. The aid was granted to Thomson, Philips, Angénieux, Nokia, Cett and Seleco. XXIst Report on

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According to the IPCEI Communication, it is necessary that the project is of major innovative nature or constitutes an important added value in the light of the state of the art in the sector concerned. That condition is to ensure that only those projects that go beyond the already available technologies are supported. However, it has already been held by the Court that the mere fact that the investments enabled a new technology to be used does not make the project one of common European interest.3611 Therefore, it is also necessary that the new technology represents other important positive elements, such as an important evolution in the industry concerned, or that it is of potential use to other industries, for which it is equally likely to bring about a technological evolution. As with traditional notifications for State aid to be assessed under the R&D&I Framework, the notifying Member States will have to describe the state of the art, the various development trends on a global level, and explain how the specific project goes beyond them.

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One of the significant aspects where the IPCEI Communication goes beyond the possibilities offered by the R&D&I Framework is that it allows the granting of State aid for later stages, notably for the industrial deployment of the R&D&I results. However, to receive State aid under the IPCEI Communication, it is necessary that the industrial deployment project allows for the development of a new product or service with high R&D content and/or the deployment of a fundamentally innovative production process. Regular updates without an innovative dimension of existing facilities and the development of newer versions of existing products do not qualify as an IPCEI.

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While the criteria that determine whether a project is of common European interest are set in a way that projects must be significant in terms of attaining the Union’s objectives, the project must be significant in other aspects as well. In particular, an IPCEI must be important quantitatively or qualitatively. It should either be particularly large in size or scope, or imply a very considerable level of technological or financial risk, or some combination of the two.

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The IPCEI Communication does not specify the minimum amount of State support, total project budget or other quantitative thresholds, since it could have been unduly restrictive. Nevertheless, the Commission will probably use its Competition Policy, 1991, para. 180. 3611 Joined Cases 62/87 and 72/87 Exécutif regional wallon v Commission (‘Galverbel’) ECLI:EU:C:1988:132, para. 25.

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discretionary power to set that bar high. For instance, in the decisions concerning the MEDEA+ programme, the Commission considered that that criterion was met where the project presented a high number and diversity of participants and cooperation between different actors within the sector, (the project involved cooperation between public or university laboratories and industrial research centres in different Member States), significant costs, impact of the potential results of the project on the European industry, and potentially high synergies. In the Øresund case3612 concerning the construction of a 16 km combined road and rail bridge connecting Denmark and Sweden, the Commission considered that that criterion was met noting that the construction of the bridge cost approximately EUR 2.7 billion, and including the costs of the construction of the connecting land infrastructures, the total cost of the project was approximately EUR 4 billion. Furthermore, the project significantly improved the mobility of people and provided a physical connection of people and businesses in the crossborder Øresund region inhabited by more than 3.5 million people, and contributed to a better connection of the Nordic countries to Central Europe. The construction of the bridge was also a priority trans-European transport network (TEN-T) project. In light of those factors, the Commission concluded that the project was important quantitatively and qualitatively, and that it played an important role in Common European transport policy to the benefit of the whole Union.

3.

3.2091

Compatibility criteria

The additional flexibility of the IPCEI Communication compared to other guidelines and frameworks lies in the simplified compatibility assessment. Most importantly, the Commission may consider that the presence of market failures or other important systemic failures, as well as the contribution to a common objective are presumed, where the project fulfils the eligibility criteria. The IPCEI Communication does not define the situations where it may accept such a presumption, which leaves ample possibility to the Member States to argue for a lighter compatibility assessment, as well as a wide discretion to the Commission in establishing the presumption.

3.2092

3612 Cases SA.36558 (2014/NN) and SA.38371 (2014/NN) – Denmark, SA.36662 (2014/NN) – Sweden – Aid granted to Øresundsbro Konsortiet, OJ C 437, 05.12.2014, p. 2, para. 124.

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3.1 Necessity and proportionality of the aid 3.2093

It is a general principle of State aid law that aid must not subsidise the costs of a project that an undertaking would anyhow incur and must not compensate for the normal business risk of an economic activity. Despite the fact that there may be no need to demonstrate that the market cannot deliver the realisation of the relevant project on its own, the aid will only satisfy the necessity and proportionality test where the same result could not be achieved with less aid.

3.2094

For instance, in the Øresund case3613 the Commission noted that the possibility of constructing the Fixed Link had been discussed for 35 years between the two governments prior to the final decision to construct it, and during that period, there had been no indications that such an extraordinary large-scale infrastructure project could be established without public support. The construction of the Fixed Link, the bridge connecting Denmark and Sweden, required substantial capital investments that could only be recovered in the very long term and numerous uncertainties existed in relation to the revenues. The Commission concluded that no rationale private investor would have engaged in the financing of such a project under normal market conditions, and therefore, without the aid, the project would not have been realised.

3.1.1 The counterfactual 3.2095

To enable the Commission to assess whether the aid is necessary, proportionate and has an incentive effect, the notification must contain a detailed description of the counterfactual scenario, which is the situation that would occur in the absence of the aid. The IPCEI Communication distinguishes three broad categories of counterfactual scenarios:

3.2096

The first type of counterfactual scenario is where the beneficiary undertaking may have considered a comparable alternative project which is clearly defined, sufficiently predictable, and which has been already considered by the internal governance bodies of the beneficiary. Such a plan B is similar in nature to the aided project, but is for instance smaller in scope, size, etc. In that case, the Member State must submit the details of that alternative project so that the Commission can compare them.

3613 Cases SA.36558 (2014/NN) and SA.38371 (2014/NN) – Denmark, SA.36662 (2014/NN) – Sweden – Aid granted to Øresundsbro Konsortiet, OJ C 437, 05.12.2014, p. 2, paras 117-121.

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The second type of counterfactual scenario is where without the aid, the beneficiary would carry out the notified project entirely or partly outside the Union. Typically, in that case the difference with the lower production costs would substitute for the amount of the aid applied for.

3.2097

Finally, the third category of counterfactual scenario is where without the aid, the beneficiaries simply would not carry out a comparable alternative project to the aided project at all.

3.2098

3.1.2 The funding gap approach The funding gap analysis is the core of the compatibility assessment of aid measures for IPCEI projects. In essence, it focuses on verifying whether the aid is necessary and proportionate, which boils down to the verification of the aid beneficiary not being overcompensated.

3.2099

In order to ensure that the aid is proportionate, the IPCEI Communication uses the so-called funding gap approach. The funding gap refers to the difference between the positive and negative cash flows over the lifetime of the investment, discounted to their current value on the basis of an appropriate discount factor reflecting the rate of return necessary for the beneficiary to carry out the project notably in view of the risks involved.

3.2100

The calculation of the funding gap depends on the counterfactual scenario. Where there is a clearly identifiable, sufficiently precise alternative project to the aided project, the Commission compares the expected net present values (NPV) of the aided project and the alternative project, and calculates the difference between the two. Where there is no comparable alternative project, the Commission will examine the profitability of the aided project, to see, in particular, whether it will achieve an internal rate of return (IRR) corresponding to the sector or firm specific benchmark or hurdle rate. For that analysis, the Commission may also use the normal rates of return required by the beneficiary in other investment projects of a similar kind, its cost of capital as a whole or returns commonly observed in the industry concerned.

3.2101

The maximum aid level will be determined with regard to the identified funding gap in relation to the eligible costs. If justified by the funding gap analysis, the aid intensity could reach up to 100 per cent of a very wide set of eligible costs. Therefore, the aid may be 100 per cent of the funding gap, or 100 per cent of the eligible costs, whichever is the lower. The maximum 100 per cent aid intensity is

3.2102

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another important flexibility offered by the IPCEI Communication compared to other State aid guidelines and frameworks, under which the aid intensity is in most cases limited to a part of a specific set of eligible costs.

3.1.3 Matching clause 3.2103

As is the case with the 2014 R&D&I Framework, the IPCEI Communication contains a so-called “matching clause”. Both the Framework and the IPCEI Communication take over the matching clause which was contained in the 2006 R&D&I Framework. According to that clause, in order to address actual or potential direct or indirect distortions of competition of international trade, the Commission may take account of the fact that, directly or indirectly, competitors located outside the Union have received or are going to receive aid. Therefore, that clause is specific to the situation where a potential State aid beneficiary may be at a disadvantage because its counterparts in countries outside the Union receive State subsidies. In such a case, invoking the matching clause may result in allowing higher aid intensities than those the State aid rules would have allowed otherwise.

3.2104

It is to be emphasised, however, that the scope of using the matching clause may be limited in several ways under the IPCEI Communication:

3.2105

First, IPCEIs receiving State support remain subject to the rules of the World Trade Organisation (WTO), and may eventually trigger a WTO dispute. Therefore, the main legal instruments available to address concerns about distortions of global competition remain the specific WTO agreements on subsidies and countervailing measures (SCM) and on trade-related investment measures (TRIM).

3.2106

Second, the scope of the matching clause is very narrow. It is not enough that a non-Union competitor of the potential State aid beneficiary receives aid. What is required to invoke the clause is that the non-Union competitor receives or is going to receive aid of a higher intensity for similar projects than allowed under the otherwise applicable State aid rules. However, one of the flexibilities introduced by the IPCEI Communication is the possibility to cover 100 per cent of the eligible costs, without invoking the matching clause. Therefore, it would appear that matching clause does not have any added value where the beneficiaries already receive 100 per cent aid intensity. It is to be emphasised that the matching clause does not allow aid intensity which goes beyond 100 per cent, since by definition, such aid would no longer be for the same project. Therefore, the sole 1194

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situation where in theory the matching clause under the IPCEI Communication may make any difference is where the funding gap analysis would result in a lower maximum aid amount than 100 per cent of the eligible costs. It may be difficult to gather enough evidence proving that certain projects are subsidised outside the Union. In essence, it is for Member States to provide evidence to the Commission if they want to invoke the matching clause. Although the language of the matching clause allows circumstantial evidence, the IPCEI Communication explicitly refers to the possibility for the Commission to use the investigative powers to gather evidence which it now has as a result of Articles 6a and 6b of the Procedural Regulation.3614 Therefore, it may be that where only circumstantial evidence exists, the Commission might request information from undertakings that are unrelated to the notified aid. It is to be noted, however, that those investigative powers may only be used in the course of a formal investigation, and following a Commission decision to use them. Moreover, while the Commission may use fines for failure to respond to its requests for information, it can only do so in respect of undertakings established in the Union. In consequence, without a possible penalty, non-Union undertakings might be reluctant to provide the requested information. It may therefore be more advantageous for the Member State not to invoke the matching clause where only circumstantial evidence exists, because the Commission‘s investigative powers require longer and more cumbersome procedures and will not necessarily produce any results.

3.2107

In conclusion, as it has so far been the case in the area of R&D&I, it is likely that the matching clause will remain more symbolic than of actual relevance.

3.2108

4.

Some procedural issues specific to IPCEIs

The fact that several Member States need to take part in an IPCEI presents a number of procedural questions. In particular, the procedural rules have been designed for the traditional scenario whereby there is one financing Member State and they do not provide easily identifiable answers as to who does what in case of the joint financing of the same State aid measure. This section discusses some of the issues that may arise in that respect.

3.2109

3614 Those provisions were introduced by Article 1(3) of Council Regulation (EU) No 734/2013 of 22 July 2013 amending Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ L 204, 31.07.2013, p. 15).

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3.2110

The IPCEI Communication indicates that the Member States involved are invited, whenever possible, to submit to the Commission a common notification. Since the standard practice has been that only one Member State finances an aid project, they will have to learn how to cooperate on IPCEI projects. The common notification would be particularly useful in the case of integrated projects, where only the joint submission of all the necessary information may enable the Commission to assess the entirety and the complexity of the project. Receiving information at different times would make it difficult for the Commission to capture the entirety of the case, and would unnecessarily slow down the assessment procedure.

3.2111

An important question that stems from the participation of several Member States in an IPCEI is which of them should take the responsibility to comply with the obligations ensuring transparency. If all of them had to publish the aid amounts and the beneficiaries, it could result in double-counting of the same support. It would seem logical that each financing Member State should report the aid it has provided. Only such a mechanism allows the Commission to map all the State aid that each Member State spends for distinct objectives and to beneficiary undertakings.

3.2112

At the time of writing of this chapter, there has been no common notification of an IPCEI under the communication. Therefore, it remains to be seen how the Commission will treat important procedural questions that stem from such unorthodox common notifications. For instance, the procedural rules indicate that the formal communication in State aid matters has to be done via the Permanent Representation to the Union of the Member State. In the case of a common notification, would it mean all the Permanent Representations of all the Member States? To avoid parallel communication channels and potentially contradictory information, it would probably make sense that the participating Member States designate one of them which represents the project vis-à-vis the Commission. However, without any guidance in the IPCEI Communication on how common notifications should be done, the practical implementing solutions will have to be worked out in the practice.

3.2113

An example how such cooperation between two or more financing governments could function is provided by the Dexia case,3615 where Belgium, France and Luxembourg submitted a joint notification to the Commission. Another example of procedural cooperation between several Member States can be found in 3615 Commission decision of 30 October 2009 in case N 583/09 – Belgium, France, Luxembourg, Extension of the Member States – guarantees for Dexia bonds, OJ C 305, 16.12.2009, p. 1.

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the Øresund case.3616 Without any obligation to do so, the two governments found it practical to cooperate in relation of the State aid procedure. In practice, based on an Intergovernmental Agreement, the two States established a Consortium, i.e. a partnership, setting out the details of their cooperation, and amongst others, they submitted joint replies to the requests of information sent by the Commission.

5.

Conclusion

The IPCEI Communication breaks new grounds in State aid control and has a strategic dimension as it opens new possibilities for Member States to finance large and risky cross-border projects that can re-launch investment and growth in Europe and strengthen the internal market. The IPCEI Communication is a clear response to demand from stakeholders in general, and from European industry in particular, seeking a wider use and clearer approach to IPCEIs, in particular where industry-wide and cross-industry collaboration seems necessary at Union level. The IPCEI Communication introduces a number of additional flexibilities compared to other secondary State aid acts which are nevertheless justified by the strategic nature of the projects and their contribution to the European interest. It remains to be seen whether and to what extent Member States and the industry will exploit those new possibilities.

3.2114

Although the case-law of the Union Courts has been restrictive in the application of Article 107(3)(b) of the Treaty, perhaps the adoption of a dedicated communication on the subject is a signal that the Commission is ready to engage more openly, actively and extensively in the application of that derogation from the prohibition of State aid.

3.2115

The Investment Plan for Europe announced by Commission President Juncker at the start of his mandate is likely to be a test-ground for the IPCEI Communication in the 2014-2020 period. By providing a dedicated framework for the assessment of large-scale infrastructure projects that pursue European objectives, the IPCEI Communication could encourage Member States to co-invest with the newly established European Fund for Strategic Investments.

3.2116

3616 Cases SA.36558 (2014/NN) and SA.38371 (2014/NN) Denmark, SA.36662 (2014/NN) Sweden Aid granted to Øresundsbro Konsortiet, OJ C 437, 05.12.2014, p. 2, see for instance paras. 5, 10 and 23. Although adopted after the entry into force of the IPCEI Communication, the decision is based directly on Article 107(3)(b) of the Treaty, since the financing of the IPCEI project took place beforehand. The decision however is heavily inspired by the IPCEI Communication.

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Chapter 31 Agriculture and forestry3617

1.

Treaty provisions on State aid in the agricultural sector

The State aid rules in the agricultural and forestry sector reconcile, on the one hand, the general principles of competition policy with, on the other hand, the EU’s common agricultural and rural development policies. The regulation of State aid to the agricultural sector is closely interlinked with the broader common agricultural policy (the CAP), to the extent that the Treaty confines the delimitation of the control of State aid for primary agricultural production to the Council and the Parliament, through secondary legislation. According to Article 42 of the Treaty, the rules on competition, including Articles 107 and 108 of the Treaty, only apply to production and trade in the agricultural products to the extent determined by the Council and the European Parliament.3618 The agricultural products (including fisheries products, see Chapter 32 below) that are subject to those rules (stipulated in Part Three, Title III of the Treaty) are listed in Annex I3619 to the Treaty. In other words, it was considered, already from the outset of the European Union, that the agricultural policy objectives

3.2117

3617 This chapter draws partially from chapter 12 of the first edition of this book. The author would like to thank Agnieszka Stobiecka-Kuik for being able to build on her work. 3618 Case C-311/94 IJssel-Vliet Combinatie v Minister van Economische Zaken EU:C:1996:383, para. 31; AG’s Opinion in Joined Cases C-346/03 and C-529/03 Atzeni and others EU:C:2005:256, para. 12. 3619 “Agricultural product” means one of the products listed in Annex I of the Treaty, products falling under CN codes 4502, 4503 and 4504 (cork products) and products intended to imitate or substitute milk and milk products, excluding those products covered by Council Regulation (EC) No 2371/2002 of 20 December 2002 on the conservation and sustainable exploitation of fisheries resources under the Common Fisheries Policy, as amended, OJ L 358, 31.12.2002, pp. 59-80. Currently the eight-digit Combined Nomenclature (CN) is used to interpret Annex I, but in practice it is not always easy to determine whether or not it covers a specific product. See M. Erhart, “State Aid in the Field of Agriculture”, in: M. Sanchez Rydelski (ed.), The EC State Aid Regime. Distortive Effects of State Aid on Competition and Trade, 2006, p. 477 (478).

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take priority over regular competition policy3620, and therefore recourse to State aid measures can only be justified if the objectives of the common agricultural policy (stipulated in Article 39 of the Treaty) are respected.3621

3.2118

In contrast to other sectors, the Commission’s authority to control and supervise State aids for the production of primary agricultural products3622 does not derive directly from the Treaty, but from legislation adopted by the Council and, as from the Lisbon Treaty, the Parliament under Article 43 of the Treaty, and is subject to restrictions laid down by those institutions. Prior to the Lisbon Treaty, the Council had wide discretion in the exercise of that power, as it had in the implementation of agricultural policy as a whole.3623 As of the entry into force of the Lisbon Treaty and save a few exceptions3624, the Council shares that responsibility with the Parliament, by means of the ordinary legislation procedure.

3.2119

In relation to Annex I products, it is therefore in the competence of the Parliament and the Council to specify that State aid rules only apply to a limited extent, or not at all, to production of and trade in agriculture. Agriculture, however, is not limited to the production of Annex I products only. State aid rules, 3620 Case 177/78 Pigs and Bacon Commission EU:C:1979:164, para. 11; Case C-456/00 France v Commission EU:C:2002:753, para. 33. 3621 Case 177/78 Pigs and Bacon Commission EU:C:1979:164. The objectives of common agricultural policy are defined in Article 39 of the Treaty as the need to “ increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour”; “thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture”; “to stabilise markets”; “to assure the availability of supplies” and “to ensure that supplies reach consumers at reasonable prices”. 3622 Article 2(b) of Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty to de minimis aid, OJ L 352, 24.12.2013, p. 1: “processing of agricultural products” means an operation on an agricultural product resulting in a product which is also an agricultural product, except on-farm activities necessary for preparing an animal or plant product for the first sale”; a first-stage processed product is an agricultural product which, following a processing operation, remains such a product, e.g. the extraction of juice from fruit (Commission Regulation (EC) No 386/2004 of 1 March 2004 amending Council Regulation (EC) No 2201/96 and Regulation (EC) No 1535/2003 as regards the combined nomenclature codes for certain products processed from fruit and vegetables OJ L 64, 02.03.2004, p. 25 or the slaughter of animals for meat. The processing of Annex I agricultural products into non-Annex I products therefore falls outside the scope of the special rules for agricultural products. Marketing is defined in Article 2(c) of the de minimis Regulation as “ holding or display with a view to sale, offering for sale, delivery or any other manner of placing on the market, except the first sale by a primary producer to resellers or processors and any activity preparing a product for such first sale; a sale by a primary producer to final consumers shall be considered as marketing if it takes place in separate premises reserved for that purpose”. 3623 Case 139/79 Maizena v Council EU:C:1980:250, para. 23. 3624 Art. 43(3) of the Treaty.

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to the extent they are applicable, are embedded in the CAP. Within the CAP, the Union provides financial support not only to primary production of Annex I products, but also to its further processing and marketing, as well as to the sector of forestry and to the development of rural areas. State support in those areas is subject to the general State aid rules that emanate directly from Articles 107 and 108 of the Treaty. The compatibility rules for those cases are defined mostly in the Guidelines for agriculture and forestry sectors and in rural areas and in the block exemption regulations, discussed in greater detail below.

2.

The Common Agricultural Policy and State aid

The common agricultural policy plays a central role in ensuring a stable supply of affordable and quality food for the EU’s citizens and exports and it also plays a crucial role in safeguarding rural communities, villages and towns, biodiversity, the landscape and soil quality. These goals determine the two pillars on which the CAP is based: the first pillar consists of instruments related to the functioning of the agricultural markets and the food supply chain and to direct payments and the second pillar is composed of instruments related to the rural development policy.

3.2120

The CAP was significantly reshaped in 2013 for the programming period 2014 – 2020, with the adoption, by the Parliament and the Council, of four new Regulations that constitute the main legal CAP instruments (commonly referred to as “four basic Regulations”) and a series of delegated and implementing acts, adopted by the Commission.

3.2121

2.1 State aid in the pre-2014 CAP Already in the 1970s, the Court of Justice acknowledged that State aid measures may influence the organisation of the internal market by regulating the volume of production or the quality of products.3625 The proper working of the internal market based on the CAP would be jeopardised by uncontrolled granting of national aid, since such aids do not in principle have a lasting effect on the development of the agricultural sector. The Commission’s control of State aid should therefore prevent Member States from undermining or creating exceptions to the organisation of the internal market.3626 Therefore, rules that interfere with the proper functioning of the common organisation of the market are incom-

3.2122

3625 Case 51/74 Van der Hulst v Productschap voor Siergewassen EU:C:1975:9, para. 25. 3626 Case 83/78 Redmond EU:C:1978:214 and Case 177/78 Pigs and Bacon Commission EU:C:1979:164, para. 14, Case C-113/00 Spain v Commission EU:C:2002:507, para. 73.

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patible with that common organisation, even if the matter in question has not been exhaustively regulated by the Council.3627

3.2123

In principle, it is for the Union to seek solutions to problems3628 facing the common agricultural policy and Member States should refrain from taking any unilateral measure, even if that measure is likely to support the common policy of the Union.3629 As a general principle, such actions are, however, acceptable, if the State aid measure is strictly ancillary to a measure envisaged by the common market organisation.3630 On the other hand, while the establishment of a common organisation of the agricultural markets pursuant to Article 40 of the Treaty does not have the effect of exempting agricultural producers from any national provisions intended to attain objectives other than those covered by the common organisation, it cannot affect the machinery of production or price formation under the common organisation, whatever its alleged or stated objective may be.3631 When faced with national measures on the quality of products that contained a prohibition of the production of cheese of a quality other than that laid down by the national legislation, the Court accepted that in the absence of any rule of Union law on the quality of cheese products, the Member States retained the power to apply rules of that kind to cheese producers established within their territory.3632

3.2124

The Commission and the Member State must, in accordance with Article 4(3) TEU, cooperate in good faith with a view to overcoming difficulties, while fully observing the Treaty and other Union provisions, in particular those regulating the common organisation of the market in the sector concerned and those relating to State aid.3633

3.2125

The instruments for the 2014-2020 programming period build on the previous CAP reform, carried out a decade earlier. The 2003 CAP reform simplified the common agricultural policy’s legislative environment, inter alia by establish-

3627 Case C-1/96 Compassion in World Farming EU:C:1998:113, para. 41, and Case C-428/99 van den Bor EU:C:2002:3, para. 35. 3628 Case 90/86 Zoni EU:C:1988:403, para. 26; Case C-86/89 Italy v Commission EU:C:1990:373, para. 19; Case 216/84 Commission v France EU:C:1988:81, para. 18; Case C-173/02 Spain v Commission EU:C:2004:617, para. 19. 3629 Case C-86/89 Italy v Commission EU:C:1990:373, para. 19; Case Fedecom v Commission EU:T:2012:497, para. 87. 3630 Case C-428/99 van den Bor EU:C:2002:3, para. 44. 3631 Case C-283/03 Kuipers EU:C:2005:314, para. 44. 3632 Case 237/82 Jongeneel Kaas and Others EU:C:1984:44, paras 12 to 14. 3633 Case C-428/99 van den Bor EU:C:2002:3, paras 40 to 47.

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ing, for the first pillar, a horizontal legal framework for all direct payments3634 and amalgamating an array of support systems into a single payment scheme. Council Regulation (EC) No 1234/2007 of 22 October 2007 establishing a common organisation of agricultural markets and specific provisions for certain agricultural products (the Single CMO Regulation)3635 replaced 21 existing CMOs at the beginning of 2008. The fruit, vegetable and wine sectors were fully incorporated in the scope of that regulation at a later stage.3636 Articles 180 and following of the Single CMO Regulation specified that State aid rules apply to the production of and trade in most agricultural products, but exempted certain national payments from the notification obligation. The Member States were merely obliged to inform the Commission of such measures, while the Commission’s powers with regard to them are limited to providing comments on their compatibility with the State aid rules. In respect of payments in the framework of rural development, according to the Council Regulation (EC) No 1698/2005,3637 State aid rules did not apply to payments made under co-financing mechanisms, whether to the part financed by the Union or to the part financed in that regime by the Member State. For the so-called top-ups, i.e., additional national financing, for which Union support is also granted, Member States were not required to notify the measures, being able to simply submit the relevant information sheet for those payments in their respective rural development plans. For purely national rural development measures, financed exclusively from national funds, both procedural and substantive State aid rules fully applied. A similar, but even more simplified approach is followed post-2013.

3.2126

3634 Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001, OJ L 270, 21.10.2003, p. 1. The 2003 CAP reform cut the link between subsidies and production and lead to farmers now receiving an income support payment, on condition that they look after the farmland and fulfil environmental, animal welfare and food safety standards. 3635 OJ L 299, 16.11.2007, p. 1, as amended by Council Regulation (EC) No 491/2009 of 25 May 2009 amending Regulation (EC) No 1234/2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation), OJ L 154, 17.06.2009, p. 1. 3636 Council Regulation (EC) No 1182/2007 of 26 September 2007 laying down specific rules as regards the fruit and vegetable sector, amending Directives 2001/112/EC and 2001/113/EC and Regulations (EEC) No 827/68, (EC) No 2200/96, (EC) No 2201/96, (EC) No 2826/2000, (EC) No 1782/2003 and (EC) No 318/2006 and repealing Regulation (EC) No 2202/96, OJ L 273, 17.10.2007, pp. 1 30. Council Regulation (EC) No 479/2008 of 29 April 2008 on the common organisation of the market in wine, amending Regulations (EC) No 1493/1999, (EC) No 1782/2003, (EC) No 1290/2005, (EC) No 3/2008 and repealing Regulations (EEC) No 2392/86 and (EC) No 1493/1999, OJ L 148, 06.06.2008, p. 1. 3637 Council Regulation (EC) No 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD), OJ L 277, 21.10.2005, p. 1.

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2.2 State aid and the 2014-2020 CAP 3.2127

3.2128

For the programming period 2014 – 2020, the Union co-legislators agreed upon and adopted the following four basic legislative texts, which reflect the political agreement between the Commission, Member States’ Agriculture Ministers (in the Council) and the Parliament: –

Regulation 1306/20133638 deals with horizontal issues such as funding and controls;

–

In the first pillar, Regulation 1307/20133639 lays down rules on direct payments for farmers and Regulation 1308/20133640 establishes a common organisation of the markets in agricultural products;

–

In the second pillar, Regulation 1305/20133641 (“RD Regulation”) aims at promoting sustainable rural development throughout the Union in a complementary manner to the CAP first-pillar.

The first pillar instruments relate to the functioning of agricultural markets and the food supply chain and to direct payments from the Union budget, subject to certain requirements that are mandatory for the Member States (statutory management requirements and good agricultural and environmental conditions). Direct payments are payments granted directly to farmers under certain support schemes and there is only very limited co-financing by Member States allowed. Any State support related to direct payments is broadly excluded from the application of the State aid rules.3642 The general rule for the agricultural products listed in Annex I is that State aid rules do not apply to payments made 3638 Regulation (EU) No 1306/2013 of the European Parliament and of the Council of 17 December 2013 on the financing, management and monitoring of the common agricultural policy and repealing Council Regulations (EEC) No 352/78, (EC) No 165/94, (EC) No 2799/98, (EC) No 814/2000, (EC) No 1290/2005 and (EC) No 485/2008, OJ L 347, 20.12.2013, p. 549. 3639 Regulation (EU) No 1307/2013 of the European Parliament and of the Council of 17 December 2013 establishing rules for direct payments to farmers under support schemes within the framework of the common agricultural policy and repealing Council Regulation (EC) No 637/2008 and Council Regulation (EC) No 73/2009, OJ L 347, 20.12.2013, p. 608. 3640 Regulation (EU) No 1308/2013 of the European Parliament and of the Council of 17 December 2013 establishing a common organisation of the markets in agricultural products and repealing Council Regulations (EEC) No 922/72, (EEC) No 234/79, (EC) No 1037/2001 and (EC) No 1234/2007, OJ L 347, 20.12.2013, p. 671. 3641 Regulation (EU) No 1305/2013 of the European Parliament and of the Council of 17 December 2013 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) and repealing Council Regulation (EC) No 1698/2005, OJ L 347, 20.12.2013, p. 487. 3642 See recital 16 of Regulation 1307/2013.

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by Member States of those measures, which are partly or wholly financed by the Union, and to payments made in certain cases (e.g. distillation of wine in cases of crisis, apiculture, nuts).3643 It is understood that the provisions on direct payments already include appropriate conditions for the granting of support in order to prevent any undue distortion of competition, or envisage the adoption of such conditions by the Commission. The second pillar of the CAP is the rural development policy, governed by the RD Regulation. That Regulation aims at improving the competitiveness of agriculture, the sustainable management of natural resources and climate action and a balanced territorial development of rural areas. In the area of rural development, State aid rules with respect to support to Annex I products do not apply to payments made under co-financing or national top-ups (additional national financing for which Union support is also granted). For top-ups, Member States should indicate their intentions in the rural development programmes, which have to be submitted to the Commission for approval pursuant to Article 10 of the RD Regulation. If the Member States have not done so in their initial Rural Development Plan, they may still do so at any time during the programming period by way of a programme amendment. The Commission will assess (and, where compliant, approve) those programmes or the amendments according to the criteria of the RD Regulation. In order to lower the administrative burden on the Member States in the rural development area, as of July 2014 there is greater scope for such State aid to fall under one of the block exemption rules (see below section 5.2. of this Chapter). That alleviation of the administrative burden benefits mainly measures that fall outside Article 42 of the Treaty, i.e., non-Annex I products and processing and marketing activities in rural areas or measures that are financed solely from national funds (i.e. measures that are not co-financed by the Union, nor national top-ups to Union funding).

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Last but not least, on some occasions, probably more often in the agricultural sector than in others, Member States resort to the authorisation procedure before the Council. It is established case law that the Commission has a central role in determining whether aid is compatible with the internal market on the basis of Article 107 of the Treaty.3644 However, that competence is subject to an exception stipulated in the third indent of Article 108(2) of the Treaty, whereby

3.2130

3643 Articles 211 and 213 to 218 of Regulation 1308/2013. In the past, State aid to crisis distillation of wine was frequently granted by the Council pursuant to Article 108(2) 3rd paragraph of the Treaty. See examples of Council decisions in footnote 3647. 3644 Case C-354/90 Fédération nationale du commerce extérieur des produits alimentaires and others v France EU:C:1991:440, paras 9 and 14. See also Council document No 11567/06 of 12 July 2006, last paragraph, concerning the Commission’s competence to adopt State aid guidelines for the agricultural sector.

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the Council, acting unanimously on an application from a Member State, has a decision-making power on compatibility, in derogation from Article 107 of the Treaty. That possibility gives the Council an extraordinary power which should be interpreted strictly, so the Council must reason the exceptional circumstances3645 which justify the adoption of such measures.3646 Decisions based on the third indent of Article 108(2) of the Treaty will only be struck down if the Council has exceeded the limits of its discretionary power under that provision. The Council has authorised aid on that basis, e.g. in the wine3647 or sugar sectors.3648 The Council may not act on the basis of Article 108(2) of the Treaty once the Commission has taken a negative stance on a particular measure. The Commission has successfully challenged Council decisions authorising State aid to agriculture, precisely in order to reaffirm its exclusive competence in that area.3649

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The scope of the Council’s powers and the notion of “exceptional circumstances”, under which the Council may act, have been discussed in Court in a number of recent cases brought by the Commission against the Council in relation to State aid granted for the purchase of agricultural land. The contested Council decisions3650 concerned aid for the purchase of agricultural land in Latvia, Lithuania, Hungary and Poland. The Commission adopted special prolongation measures in the 2007 Agricultural State aid guidelines3651 to phase out aid for the purchase of land by the end of 2009, specifically addressing the issue of 3645 Case C-122/94 Commission v Council EU:C:1996:68, para. 12. 3646 See e.g. Council Decision 2006/39/EC of 23 January 2006 on the approval of exceptional national aid by the Republic of Cyprus to Cypriot farmers for the purpose of repaying part of agricultural debts created long before the accession of Cyprus to the European Union OJ L 23, 27.01.2006, p. 78. 3647 See e.g. Council Decision 2000/808/EC of 19 December 2000 on the granting of exceptional national aid by the authorities of the Federal Republic of Germany for the distillation of certain wine sector products OJ L 328, 23.12.2000, p. 49; or Council Decision 2000/809/EC of 19 December 2000 on the granting of exceptional national aid by the Government of the Italian Republic for the distillation of certain wine sector products OJ L 328, 23.12.2000, p. 51. 3648 Council Decision 2000/257/EC of 20 March 2000 concerning aid granted in Italy by RIBS SpA in accordance with the provisions of national law No 700 of 19 December 1983 on the restructuring of the sugar beet sector, O.J. L 79/38. See footnote 3643 above regarding the new rules for aid granted to the wine sector pursuant to the Regulation 1308/2013. 3649 Case C-110/02 Commission v Council EU:C:2004:395, paras 33, 44 and 45; Case C-399/03 Commission v Council EU:C:2006:417, paras 23-29; on a different occasion such challenge was not admitted for procedural reasons see Case C-309/95 Commission v Council EU:C:1998:66, pp. I-655. For further reading, see e.g. K. Van de Casteele, “The European Court of Justice clarifies the powers of the Council in State aid cases” in Competition Policy Newsletter, 2004, No. 3, p. 21 3650 Case C-121/10 Commission v Council (Hungary), EU:C:2013:784, Case C-111/10 Commission v Council (Lithuania) EU:C:2013:785, Case C-117/10 Commission v Council (Poland) EU:C:2013:786 and Case C-118/10 Commission v Council (Latvia) EU:C:2013:787. 3651 Community guidelines for State aid in the agriculture and forestry sector 2007-13, OJ C 319, 27.12.2006, p. 1.

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compatibility of aid for the purchase of land in those guidelines, which were accepted by all Member States under the appropriate measures procedure. In late 2009 five Member States asked the Council for further prolongations of these measures until 2013, claiming the effects of the financial and economic crisis. The Council refused the request of one of them (Italy) but for the other four it considered that the approved aid constituted new aid and that it was competent to act on the basis of Article 108(2) of the Treaty. The Court, siding with the Council, ruled that the aid at stake should be considered new because the Council decision was based on an occurrence of new circumstances and, moreover, a  significant period elapsed between the Commission appropriate measures assessment and that made by the Council.3652 The Court also considered that the effects of a financial and economic crisis on the agricultural sector may constitute exceptional circumstances, which justified the authorisations by the Council in the contested decisions.3653

3.

Forestry sector and State aid

Forestry products are not in principle covered by Annex I to the Treaty, as the Court confirmed in its judgment in Atzeni.3654 Accordingly, aid to forestry holdings is subject in its entirety to the provisions of Articles 107 and 108 of the Treaty and the derogations of Article 42 of the Treaty do not apply.

3.2132

This said, forestry is inevitably linked to the agricultural sector and is a very important part of rural development measures. Therefore, the compatibility rules for the application of the State aid rules to forestry were introduced, for the first time, in the 2007 – 2013 Agricultural State aid guidelines, on the basis of previously established decisional practice. To avoid overlaps with other rules on State aid for forestry, the Commission had already found it appropriate in the previous programming period to take aid to forestry activities into account in the rules governing rural development. At present, special structural rules for the forestry sector are set out in the RD Regulation and in the Commission delegated and implementing acts.3655

3.2133

3652 3653 3654 3655

See e.g. Case C-111/10 Commission v Council (Lithuania) EU:C:2013:785, paras 62 to 67. Idem, paras 97 to 99. Case C-346/03 Guiseppe Atzeni and others EU:C:2006:130, para. 43. Commission Delegated Regulation (EU) No 807/2014 of 11 March 2014 supplementing Regulation (EU) No 1305/2013 of the European Parliament and of the Council on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) and introducing transitional provisions, OJ L 227, 31.07.2014, p. 1, and Commission Implementing Regulation (EU) No 808/2014 of 17 July 2014 laying down rules for the application of Regulation (EU) No 1305/2013 of the European Parliament and of the Council on support for rural development by the European Agricultural Fund for Rural Development (EAFRD), OJ L 227, 31.7.2014, p. 18.

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Due to the close link to State aid in the agricultural sector and for rural areas, the compatibility rules for State aid in the forestry sector are treated in greater detail in the following sections together with the rules in the agricultural sector.

4.

De minimis rules in the agricultural and forestry sectors

3.2135

In case of public support measures to primary production in the agricultural sector that constitute State aid, such aid may be considered de minimis if it fulfils the criteria of the Agricultural de minimis Regulation,3656 specific to primary production activities in the agricultural sector. Under that Regulation, the total amount of de minimis aid granted per Member State to a single undertaking shall not exceed EUR 15 000 over any period of three fiscal years, provided that the global amount of such aid does not exceed 1 per cent of the annual agricultural output (calculated for each Member State and set out in Annex to the Agricultural de minimis Regulation).

3.2136

Agricultural production in the Union is normally characterised by the fact that every commodity is produced by a large number of very small producers, producing largely interchangeable goods within the framework of common organisations of the market. Therefore, the much higher limit of a general de minimis Regulation3657 would be excessive for a such fragmented market. In addition, the impact of small amounts of aid granted to individual producers over a given period of time should be related to the value of agricultural production at sectorial level over the same period of time. As a result, the Commission established in the Agricultural de minimis Regulations a ceiling in the form of an amount per Member State, on the basis of the value of output in the agriculture sector, that allows a consistent approach in all Member States, based on an objective economic reference value.3658

3.2137

Since State support under the EUR 15 000 threshold (and provided that the national ceiling and other conditions are respected) is not deemed to fulfil all the criteria of Article 107(1) of the Treaty, the Member States may grant it without the Commission’s prior approval, but the aid must be transparent and accounted for, and Member States must provide information certifying compliance with 3656 Commission Regulation (EC) No 1408/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty to de minimis aid, OJ L 352, 24.12.2013, p. 9. 3657 Commission Regulation (EC) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty to de minimis aid, OJ L 352, 24.12.2013, p. 1. 3658 See recital 3 of Commission Regulation (EC) No 1860/2004 of 6 October 2004 on the application of Articles 87 and 88 of the EC Treaty to de minimis aid in the agriculture and fisheries sectors, OJ L 325, 28.10.2004, p. 4 (2004 Agricultural de minimis Regulation).

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the two ceilings.3659 Member States may grant de minimis aid for almost any objective they deem appropriate, including operating aid, but the Regulation lays down a few limitations in order to avoid distortion of the common organisations of the markets in agricultural products: no export aid may be granted, and aid may not be linked to the price or quantity of products put on the market or made contingent on the use of domestic products. The Agricultural de minimis Regulation is limited to primary production of agricultural products, which is generally carried out by smaller entities than industrial activity. However, activities outside the scope of the Agricultural de minimis Regulation, such as processing and marketing of agricultural or non-agricultural products, as well as other non-agricultural activities, are not prevented from profiting from the so-called general de minimis, which currently amounts to EUR 200 000 over a three-year period.3660

3.2138

In a situation where an undertaking is active in the primary production of agricultural products and is also active in one or more of the sectors or has other activities falling within the scope of the general de minimis Regulation or the de minimis Regulation in the fishery and aquaculture sector,3661 the Member State concerned must ensure, by appropriate means such as separation of activities or distinction of costs, that the primary production of agricultural products does not benefit from de minimis aid granted in accordance with the other de minimis Regulations.3662

3.2139

5.

Compatibility rules in the agriculture and forestry sectors: the ABER and the Agricultural State aid guidelines 2014-2020

5.1 Measures covered by the State aid instruments in the agriculture and forestry sectors As explained in section 2 above, State aid rules effectively apply only to part of the agriculture sector. Due to the specificities of the agricultural sector, in particular, the close links to the provisions in the four basic Regulations, State aid measures in the agricultural sector, to the extent they fall under Articles 107 and 108 of the Treaty, are subject to special compatibility rules. Those rules, appli-

3.2140

3659 This construction also seems to allow the Commission to monitor in respect of the WTO obligations imposed by the Agreement on trade in agricultural goods. 3660 See chapter 13 on de minimis. 3661 Commission Regulation (EU) No 717/2014 of 27 June 2014 on the application of Articles 107 and 108 of the Treaty to de minimis aid in the fishery and aquaculture sector. OJ L 190, 28.06.2014, p. 45. 3662 Articles 1(2) and 1(3) of the Agricultural de minimis Regulation.

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3.2141

cable as of 1 July 2014, are the Block Exemption Regulation in the agricultural sector and forestry (“the ABER”),3663 the Agricultural de minimis Regulation (see previous section) and the Commission Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014-2020 (“the Agricultural State aid guidelines”),3664 which is applicable to State aid subject to the notification obligation and individual assessment by the Commission.

3.2142

The legislative cobweb of the four basic Regulations leaves room for the assessment of State aid in the agricultural sector for the following categories of aid:

3.2143

First, the ABER and the Agricultural State aid guidelines (together, “Agricultural State aid instruments”) are applicable to measures in the agricultural sector financed exclusively from national funds and consisting of either rural development measures, or risk and crisis management measures, aid for the livestock sector and certain promotion measures. Examples of such measures include investment aid on agricultural holdings, aid in favour of the conservation of cultural and natural heritage located on agricultural holdings, the relocation of farm buildings, aid for organic farming or certain agri-environment-climate commitments. Aid can also be granted to compensate for the damage caused by natural disasters, adverse climatic events or protected animals, among others.

3.2144

Second, the State aid instruments contain compatibility criteria for aid to the forestry sector. Those measures are, for example, investment aid in the development of the forest area and in the improvement of the viability of forests; aid for forest-environment and climate services and forest conservation or aid for restoration and maintenance of natural pathways, landscape elements and natural habitat for animals in the forestry sector, or for maintenance of roads to prevent forest fires.

3.2145

Third, the Agricultural State aid instruments apply to aid for undertakings active in rural areas. Such aid must be co-financed by the European Agricultural Fund for Rural Development or through additional national financing related to a measure in the framework of a rural development programme.

3663 Commission Regulation (EU) No 702/2014 of 25 June 2014, declaring certain categories of aid in the agricultural and forestry sectors and in rural areas compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union, OJ L 193, 01.07.2014, p. 1. 3664 European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020, OJ C 240, 01.07.2014, p. 1.

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Measures pursuing objectives that were not envisaged at all in any of the State aid instruments are assessed directly on the basis of Article 107 of the Treaty.3665

3.2146

5.2 The ABER The ABER allows the granting of certain categories of State aid to the agricultural and forestry sectors and in rural areas without prior notification to the Commission. In 2013, as part of the State Aid Modernisation, the Council Enabling Regulation was amended3666 as to include other areas for which the Commission could exempt State aid measures from the notification obligation. The new categories of aid relevant to the agricultural and forestry sectors are aid in favour of heritage conservation, aid in favour of making good the damage caused by natural disasters, aid in favour of forestry and aid to the promotion of food sector products not listed in Annex I. Prior to the reform, the above aid categories could only be exempted if the aid was limited to SMEs.3667

3.2147

In line with the goals set by the State Aid Modernisation exercise, the new ABER considerably widened the scope of the exempted aid. The new ABER covers measures such as compensation for damage caused by protected animals and to purchase breeding animals for the improvement of the genetic quality of the herd. Furthermore, before 2014, Member States had to notify most State aid measures in the forestry sector, because not all beneficiaries would have been SMEs. That limitation to SMEs often entailed a double notification of the same measures: one for the purposes of the rural development rules (approval of the national plans) and another one for the State aid authorisation procedure. As of July 2014, provided that the national measure are compliant with the conditions of the new ABER, for a wide variety of measures Member States only have to go through one administrative authorisation procedure vis-à-vis the Commission dealt by one department only (that of the national plan approval).

3.2148

3665 E.g., the previous 2007-2013 Agricultural State aid guidelines did not contain measures relating to compensation for damages caused by protected animals. Prior to July 2014, these measures were therefore assessed directly under the Treaty and, on the basis of the experience drawn, compatibility criteria for this type of compensation were included in the new Agricultural State aid guidelines. 3666 Council Regulation No 733/2013 of 22 July 2013 amending Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L 204, 31.07.2013, p. 11. 3667 See Commission Regulation (EC) No 1857/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to State aid to small and medium-sized enterprises active in the production of agricultural products and amending Regulation (EC) No 70/2001, OJ L 358, 16.12.2006, p. 3, as amended by Commission Regulation (EU) No 1114/2013 of 7 November 2013 amending Regulation (EC) No 1857/2006 as regards its period of application, OJ L 298, 08.11.2013, p. 34.

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3.2149

The ABER encompasses a very complete list of exemption criteria for numerous State aid measures in agriculture, forestry and rural development areas. However, the General Block Exemption Regulation No 651/2014 (“the GBER”)3668 is also applicable to some extent. The GBER provides for exempted aid in certain fields (research and development, aid in the form of risk finance, training aid, environmental aid and aid for disadvantaged and disabled workers) insofar as the ABER does not cover those categories of aid. Given the similarities between the processing and marketing of agricultural products and non-agricultural products, the GBER may also, under certain conditions, apply to the processing and marketing of agricultural products provided that certain conditions are met.

3.2150

When the ABER conditions are met, a Member State may grant aid immediately, without first notifying it to the Commission. Member States need only to inform the Commission of the aid, using a simple information sheet, at the latest 10 working days before the date of entry into force of an aid scheme exempted. That requirement of prior information is possibly the main difference with respect to the general requirements of the GBER, pursuant to which Member States need to submit the information sheet only after having granted the aid.

3.2151

According to the latest scoreboard (2014),3669 in 2013 aid granted in the agricultural sector on the basis of the block exemption regulations amounted to EUR 8,095.4 million and corresponds to approximately 13 per cent of total aid granted to the agricultural sector (in the 28 Member States). That share is expected to increase with the new ABER in force.

5.3 The Agricultural State aid guidelines 3.2152

As regards the applicable rules to notifiable aid, the horizontal State aid instruments are applicable to undertakings in the agricultural and forestry sectors, unless the Agricultural State aid guidelines provide specific criteria. That rule concerns in particular the EU guidelines on State aid for rescuing and restructuring firms in difficulty,3670 the Framework for State aid for research and development and innovation,3671 the Guidelines on State aid for environmental protection and energy 2014-2020,3672 the EU Guidelines for the application of State aid

3668 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 3669 http://ec.europa.eu/competition/state_aid/scoreboard/index_en.html. 3670 OJ C 249, 31.07.2014, p. 1. 3671 OJ C 198, 27.06.2014, p. 1. 3672 OJ C 200, 28.06.2014, p. 1.

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rules in relation to the rapid deployment of broadband networks,3673 the Guidelines on State aid to promote risk finance investments3674 and the instruments related to services of general economic interest.3675 By contrast, the Guidelines on regional State aid for 2014-20203676 do not apply to aid for the production of primary agricultural products due to the specificities of the sector. They do however apply to the processing of agricultural products, the marketing of agricultural products, forestry and rural areas. This said, the Agricultural State aid guidelines provide for specific rules for a number of environmental aid measures in the agricultural and forestry sectors, such as aid for agri-environment-climate and animal welfare commitments3677 or aids for investments to pursue environmental objectives in the field of primary agricultural production.3678 For aid to undertakings active in the forestry sector or in rural areas, Member States can choose whether they will apply the compatibility criteria under the general State aid rules and the more specific provisions of the Agricultural State aid guidelines.

3.2153

5.4 Application of the common compatibility principles in the agricultural and forestry sectors As any other Guidelines, Frameworks or Communications adopted during the State Aid Modernisation process, in addition to the specific conditions applicable to specific aid measures, the Agricultural State aid guidelines first identify and define the common principles applicable to the assessment of compatibility of all aid measures in the agricultural and forestry sectors. In light of those principles, any aid, even if it complies with the specific criteria, can be declared compatible under Article 107(3)(c) of the Treaty only if it aims at an objective of common interest (contribution to a common interest objective), is targeted towards a situation where it can bring about a material improvement that the market cannot deliver itself (need for State intervention), is an appropriate policy instrument to address the objective of common interest (appropriateness), has an incentive effect and is proportionate, or, in other words, limited to the minimum needed to induce the activity in the sector concerned. Furthermore,

3.2154

3673 OJ C 25, 26.01.2013, p. 1. 3674 OJ C 19, 22.01.2014, p. 4. 3675 See Commission Decision of 20 December 2011 on the application of Article 106(2) of the Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3, and European Union framework for State aid in the form of public service compensation, OJ C 8, 11.01.2012, p. 15. 3676 OJ C 209, 23.07.2013, p. 1. 3677 Agricultural State aid guidelines, section 1.1.5 of Part II. 3678 Idem, section 1.1.1.1 of Part II.

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the aid should not cause major undue negative effects on competition and trade between Member States and the granting of aid should be transparent in the sense that Member States, the Commission, economic operators and the public must have easy access to all relevant acts and to pertinent information about the aid granted thereunder.

3.2155

In the agricultural sector, those common assessment principles have to be seen in the specific context of the CAP. Therefore, aid in the agricultural and forestry sectors and in rural areas must, in the first place, relate closely to the CAP, be consistent with the rural development objectives and compatible with the rules on the common organisation of the markets in agricultural products.3679

3.2156

Furthermore, as regards the appropriateness of the aid, where a Member State decides to put in place a rural development-like aid measure financed exclusively from national funds, when at the same time the same measure is provided for in the relevant rural development programme, the Member State should demonstrate the advantages of such a national aid instrument compared to the rural development programme measure at stake. With regard to certain forestry measures, Member States must also demonstrate that the ecological, protective and recreational objectives they are aiming for cannot be achieved with the rural development such as forestry measures.3680

3.2157

As far as the incentive effect is concerned, the general rule is that unilateral State aid measures which are simply intended to improve the financial situation of undertakings but which in no way contribute to the development of the agricultural or forestry sector, and in particular aid which is granted solely on the basis of price, quantity, unit of production or unit of the means of production are considered to constitute operating aid, likely to interfere with the mechanisms regulating the organisation of the internal market, which is incompatible with the internal market. Those same reasons have led the Commission to authorise aid to facilitate compliance with obligatory standards only in very exceptional cases and to the extent that it meets the objectives of rural development policy.3681

3.2158

There is stricter verification of the incentive effect and proportionality for aid granted to large enterprises that must explain in their application for the aid the counterfactual scenario or alternative project or activity and submit documen3679 Idem, section 3.1 of Part I. 3680 Idem, section 3.4 of Part I. 3681 Idem, points 68 and 148.

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tary evidence in support of the counterfactual described in the application,3682 as well as for larger investment aid, which must be notified individually even when part of a scheme and for which the Member State must provide evidence that the aid effectively has an impact on the investment choice.3683 In terms of proportionality, in addition to the specified eligible costs and aid intensities, aid for large enterprises and for larger investments will be considered to be limited to the minimum only if the aid amount corresponds to the net extra costs of implementing the investment in the area concerned, compared to the counterfactual scenario in the absence of aid.3684 Save for certain crisis management measures such as compensation for damages caused by natural disasters, adverse climatic events, destruction of removal of fallen stock or eradication of plant pests and animal diseases,3685 undertakings in difficulty (as defined in the Rescue and Restructuring guidelines) are excluded from the aid covered by the Agricultural State aid guidelines and the ABER.

3.2159

Last but not least, the new transparency requirements oblige Member States to publish on a website the full text of the aid scheme and its implementing provisions and the identity (and other information) of the individual beneficiaries that received aid of more than EUR 60 000 for undertakings active in the primary agricultural production and than the general threshold of EUR 500 000 for beneficiaries in the sectors of the processing of agricultural products, the marketing of agricultural products, the forestry sector or activities falling outside the scope of Article 42 of the Treaty.3686

3.2160

5.5 Overview of the specific compatibility rules applicable to measures in the agricultural and forestry sectors The State aid compatibility rules in the agricultural and forestry sectors are very much guided by common market organisation and rural development rules. Nevertheless, the conditions for declaring State aid compatible with the internal market under Article 107 of the Treaty are not always identical with the conditions required for obtaining co-financing under the RD Regulation. The State

3.2161

Idem, point 72. Idem, point 76. Idem, points 95 to 98. Aid to compensate for losses caused by an adverse climatic event, for the eradication costs and damages caused by a plant pest or animal disease and for the restoration of forests from fires, natural disasters and adverse climatic events can only be granted to undertakings in difficulty if the undertaking became an undertaking in difficulty due to the losses or damages caused by the event in question. ABER, Article 1(6), Agricultural State aid guidelines, sections 1.2.1.2 to 1.2.1.5, 2.1.3 and 2.8.5 of Part II. 3686 Idem, point 128.

3682 3683 3684 3685

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aid rules are more detailed regarding the eligible costs for particular activities, or may allow different aid intensities, especially with regard to activities falling outside the scope of Annex I to the Treaty, since they are subject to horizontal State aid control measures.

3.2162

The different specific aid measures are grouped in three main categories: first, aid in favour of undertakings active in the primary production, processing and marketing of agricultural products (Chapter 1 of Part II of the Agricultural State aid guidelines and sections 1 to 4 of Chapter III of the ABER), second, aid to the forestry sector (Chapter 2 of Part II of the Agricultural State aid guidelines and sections 4 and 5 of Chapter III of the ABER) and third, aid in rural areas which are co-financed by the European Agricultural Fund for Rural Development (EAFRD) or granted as additional national financing to such co-financed measures (Chapter 3 of Part II of the Agricultural State aid guidelines and section 6 of Chapter III of the ABER).

5.5.1 Aid in favour of undertakings active in the primary production, processing and marketing of agricultural products 3.2163

First, that category includes investment measures on agricultural holdings linked to rural development, in particular, investments on agricultural holdings in assets linked to primary agricultural production or in assets linked to the production of biofuels or to the production of energy from renewable sources on holdings esentially for auto-consumption.3687 That aid must fulfill one of the rural development objectives, such as improvement of the the overall performance and sustainability of the agricultural holding or of natural environment or animal welfare standards. Investment aid granted to SMEs and not exceeding EUR 500 000 per undertaking (per project) fall under the ABER.

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Other aid measures include relocation of farm buildings, start-up aid for young farmers and small farms, as well as aid for knowledge transfer, advisory services and technical support or participation of producers of agricultural products in quality schemes. Those measures, if they are limited to SMEs, can also be blockexempted.3688

3687 Unlike in the previous 2007 Agricultural State aid guidelines, energy taxation measures and other measures relating to renewable energy sources in the agricultural sector are, as of July 2014, assessed in accordance with the Environmental and Energy State aid guidelines and the GBER. 3688 ABER, section 1.

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Investment aid can also be granted in favour of the conservation of cultural and natural heritage located on agricultural holdings (in the form of natural landscapes or cultural heritage buildings). Aid under EUR 500 000 per undertaking and per project may be exempted. Since cultural and natural heritage is a standalone category in the Enabling Regulation, the block exemption is not limited to SMEs.

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The Guidelines also allow, in very limited cases, investment aid for meeting Union standards for young farmers setting up for the first time in an agricultural holding and for the first 12 months from the date on which they become mandatory. Those criteria derogate from a general principle that aid to meet mandatory Union standards should not be approved, for lack of incentive effect. However, in that case, the Commission has taken into consideration the fact that the mandatory standards often only entail significant costs for the farmers, without increasing their earning potential.

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Second, it is possible to grant also investment aid in connection with the processing and marketing of agricultural products. Those rules are defined in Article 17 of the ABER, which is restricted to projects under EUR 7,5 million undertaken by SMEs, as well as in section 1.1.1.4 of the Agricultural State aid guidelines.

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Following the Lisbon strategy, notably in the light of the request for less and better aid, the emphasis was shifted away from specific sectors and companies to horizontal support measures such as employment, regional development, environment and training or research.3689 That trend is also reflected in the maximum aid intensities allowed for the investment aid in agricultural holdings and in processing and marketing of agricultural products, which follow the regional differentiation between assisted and normal areas. Therefore, investment aid in normal areas is limited to 40 per cent of the eligible costs. In assisted areas, support was brought into line with the rates applicable to non-agricultural companies, which in many regions reduced the support allowed to 50 per cent. Only for the outermost regions and smaller Aegean islands the maximum aid intensity remain at a level of up to 75 per cent.

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That category also comprises risk and crisis management measures, which are mainly of compensatory nature. Those measures cover damages caused by natu-

3.2169

3689 State aid policy was under the Lisbon strategy objectives, notably in the light of the request for less and better aid, and to shift the emphasis away from specific sectors and companies to horizontal support measures such as employment, regional development, environment and training or research: see Presidency Conclusions - Lisbon European Council: 23 and 24 March 2000, point 17, DOC/00/8 of 24/03/2000.

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ral disasters or exceptional occurences, assessed under Article 107(2)(b) of the Treaty, for damages caused by adverse climatic events or by protected animals, aid for prevention, control and eradication of animal diseases and plant pests, aid for fallen stock (for primary producers only), as well as aid for the payment of insurances premiums, provided such aid does not constitute a barrier to the operation of the internal market for such services. The ABER foresees block exemption criteria for almost all risk and crisis management measures, if they are restricted to SMEs, the only exception being compensatory schemes for damages caused by natural disasters or exceptional ocurrences within the meaning of Article 107(2)(b) of the Treaty, which can cover all types of enterprises. Whereas the notions of natural disasters and exceptional ocurrences are subject to strict interpretation, the Commission’s decisional practice has recognised e.g. the crisis in the beef market caused by a BSE scare at the end of 2001 and dioxin in 2000 as exceptional occurrences within the meaning of Article 107(2)(b) of the Treaty.

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Furthermore, it is worth mentioning aid for the closing of production capacity, which can only be approved on the basis of the Guidelines.3690 Compatibility criteria differ depending on whether the closing of capacity is done for animal, plant or human health, sanitary, ethical or environmental reasons, on the one hand, or other reasons, on the other hand. For both subcategories, the decision to scrap or irrevocably close the production capacity concerned must be definitive, irrevocable and irreversible.3691

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Aid for research and development in the agriculture and forestry sectors can be assessed either under the general Framework for State aid for research and development and innovation, or in accordance with the Agricultural State aid guidelines. In the latter case, the results of the aided project must be made available on internet from the end date of the aided project or the date on which any information concerning those results is given to members of any particular organisation, whatever comes first and remain available on internet for a period of at least five years starting from the end date of the aided project. Research and development projects fulfilling these criteria and not exceeding EUR 7,5 million can be block exempted (Article 31 of the ABER).

3690 The ABER foresees aid to SMEs relocation of farm buildings (Article 16). 3691 Agricultural State aid guidelines, points 425 and 439.

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5.5.2

Aid for the forestry sector

Compatibility criteria for aid measures in the forestry sector are comprised in Chapter 2 of Part II of the Agricultural State aid guidelines and in section 5 of the ABER. Due to the inclusion of the forestry category in the Council Enabling Regulation, the block exempted aid is not limited to SMEs. In order to be block-exempted, the aid must be granted in the framework of the rural development programme in accordance with the RD Regulation or be identical to such a measure. The Guidelines provide for more flexibility for notified aid.

3.2172

It is established Commission practice to authorise State aid for the conservation, improvement, development and care of forests, on account of the ecological and recreational functions of the forest environment. It is recognised that forestry and forest-based commercial activities are part of the economy s open sector, and that their commercial functions should be guided primarily by market forces.3692

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When an investment concerns tree-growing and the protection of forests, the definition of eligible investment costs is fairly flexible; it includes the purchase or transfer of ownership of forestry lands to an extent not exceeding 10 per cent of the total eligible costs of the operation concerned, as well as aid for use of environmentally friendly techniques in the preservation or cultivation of forests, provided commercial exploitation is excluded. Aid intensities may reach up to 100 per cent of the eligible costs. As well as aids which are typical for the forestry sector due to its natural characteristics, the State aid instruments replicate the same rules for the agricultural sector, for example with regard to adverse weather conditions, natural disasters or plant pests or for damages casued by certain animals,3693 technical assistance, start-up aid or the setting up of forestry associations.3694

3.2174

5.5.3 Aid in rural areas co-financed by the EAFRD or granted as additional national financing to such co-financed measures The third main category of specific aid measures is composed of measures in favour of rural areas that are covered by the RD Regulation but which fall outside the scope of Article 42 of the Treaty, and, hence, Articles 107 and 108 of the

3.2175

3692 Point 14 of Council Resolution of 15 December 1998 on a forestry strategy for the European Union OJ C 56, 26.02.1999, p. 1. 3693 Agricultural State aid guidelines, section 2.1.3 and 2.8.5 of Part II. 3694 Agricultural State aid guidelines, section 2.4 to 2.8 of Part II.

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3.2176

Treaty are fully applicable. Rural areas measures are aimed at achieving a balanced territorial development of rural areas, are largely voluntary, contractual in nature, co-financed and implemented via rural development programmes. Replicating the structure for the agricultural and forestry sectors, those measures include, for instance, investment aid for the processing of agricultural products into non-agricultural products or for the creation and development of non-agricultural activities in rural areas, aid for basic services and village renewal in rural areas, business start-up aid for non-agricultural activities in rural areas, aid for certain agri-environment-climate commitments, aid for advisory services, knowledge transfer and promotion activities in rural areas and, in particular, concerning foodstuffs and cotton.

3.2177

Measures limited to SMEs can be block exempted pursuant to section 6 of the ABER. Moreover, given the inextricable link with the EU financing of rural development, State aid in rural areas falling under that category cannot be granted if there is no direct link to the rural development programmes and no co-financing from the EAFRD. Therefore, it only applies to measures, which are co-financed by the EAFRD or granted as additional national financing to such co-financed measures, with the exception of investments in energy saving and renewable energies (which are assessed exclusively under the Energy and Environmental State aid guidelines or the GBER). Furthermore, the Member States are free to apply any other compatibility rules should they consider it apropriate.3695

3695 Agricultural State aid guidelines, points 632 and 634.

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Chapter 32 Fisheries

1.

Introduction

Fishery and aquaculture are important economic activities in the European Union and constitute an important source of employment, especially in coastal areas where there may be few other alternatives. Fish stocks are renewable but vulnerable to overfishing. In terms of policy, it is therefore essential to strike a balance between short-term economic considerations and the long-terms ecologic and economic sustainability of fishery.

3.2178

Due to its natural, social and economic sensitivity, the fishery and aquaculture sector is subject to extensive regulation by the European Union. The main instrument for managing the European fishing fleets and for conserving fish stocks is the Common Fisheries Policy. Part of that policy is a common organisation of markets in fishery and aquaculture products. The Common Fisheries Policy is financially supported by the European Union under the European Maritime and Fisheries Fund.

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At national level, Member States can grant financial support to the fishery and aquaculture sector only if it is compatible with the objectives of the Common Fisheries Policy. In order to understand how the State aid rules work in that field, it is therefore important to first describe the Common Fisheries Policy.

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2.

The Common Fisheries Policy

2.1 Introduction 3.2181

The Common Fisheries Policy was first introduced in the 1970s and went through successive updates, the most recent of which took effect on 1 January 2014. It is currently set out in Regulation (EU) No 1380/2013 of the European Parliament and of the Council of 11 December 2013 on the Common Fishery Policy.3696

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Under Article 2(1) of Regulation No 1380/2013, the general objective of the Common Fisheries Policy is to ensure that fishing and aquaculture activities are environmentally sustainable in the long-term and are managed in a way that is consistent with the objectives of achieving economic, social and employment benefits, and of contributing to the availability of food supplies. Given that the impact of fishing on the fragile marine environment is not fully understood, the Common Fisheries Policy applies the “precautionary approach” to fisheries management. It aims to restore and maintain fish stocks above levels that produce the maximum sustainable yield. To that end, between 2015 and 2020 catch limits should be set that are sustainable and maintain fish stocks in the long term (Article 2(2)). The Common Fisheries Policy implements an ecosystem-based approach to fisheries management so as to ensure that negative impacts of fishing activities on the marine ecosystem are minimised, and endeavours to ensure that aquaculture and fisheries activities avoid the degradation of the marine environment (Article 2(3)). It also contributes to the collection of scientific data (Article 2(4)).

3.2183

Article 2(5) of Regulation No 1380/2013 sets out the so-called “specific objectives” of the Common Fisheries Policy. It must, in particular: (a)

gradually eliminate discards, on a case-by-case basis, taking into account the best available scientific advice, by avoiding and reducing, as far as possible, unwanted catches, and by gradually ensuring that catches are landed;

3696 Regulation (EU) No 1380/2013 of the European Parliament and of the Council of 11 December 2013 on the Common Fishery Policy, amending Council Regulations (EC) No 1954/2003 and (EC) No 1224/2009 and repealing Council Regulations (EC) No 2371/2002 and (EC) No 639/2004 and Council Decision 2004/585/EC, OJ L 354, 28.12.2013, p. 22.

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(b) (c) (d)

(e) (f ) (g) (h) (i) (j)

where necessary, make the best use of unwanted catches, without creating a market for such of those catches that are below the minimum conservation reference size; provide conditions for economically viable and competitive fishing capture and processing industry and land-based fishing related activity; provide for measures to adjust the fishing capacity of the fleets to levels of fishing opportunities consistent with paragraph 2, with a view to having economically viable fleets without overexploiting marine biological resources; promote the development of sustainable Union aquaculture activities to contribute to food supplies and security and employment; contribute to a fair standard of living for those who depend on fishing activities, bearing in mind coastal fisheries and socio-economic aspects; contribute to an efficient and transparent internal market for fisheries and aquaculture products and contribute to ensuring a level–playing field for fisheries and aquaculture products marketed in the Union; take into account the interests of both consumers and producers; promote coastal fishing activities, taking into account socio-economic aspects; be coherent with the Union environmental legislation, in particular with the objective of achieving a good environmental status by 2020 as set out in Article 1(1) of Directive 2008/56/EC, as well as with other Union policies.

The Common Fisheries Policy includes a common organisation of the markets in fishery and aquaculture products. The rules on that common market organisation are set out in Regulation (EU) No 1379/2013 of the European Parliament and of the Council on the common organisation of the markets in fishery and aquaculture products.3697 They include, in particular, the organisation of industry, including market stabilization measures, the production and marketing plans of fishery and aquaculture producer organisations, common marketing standards, and consumer information.

3.2184

3697 Regulation (EU) No 1379/2013 of the European Parliament and of the Council of 11 December 2013 on the common organisation of the markets in fishery and aquaculture products, amending Council Regulations (EC) No 1184/2006 and (EC) No 1224/2009 and repealing Council Regulation (EC) No 104/2000, OJ L 354, 28.12.2013, p. 1.

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2.2 The European Maritime and Fishery Fund 3.2185

The European Maritime and Fishery Fund is the financial instrument that supports the objectives of the Common Fisheries Policy and the implementation of the EU Integrated Maritime Policy.3698 The European Maritime and Fishery Fund is part of the EU multi-annual financial framework for the 2014-2020 programming period, among four other European Structural and Investment Funds which complement each other. It is laid down in Regulation (EU) No 508/2014 of the European Parliament and of the Council on the European Maritime and Fisheries Fund.3699

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The budget of the European Maritime and Fishery Fund is EUR 6.5 billion. The fund is mainly used to co-finance projects, along with national funding. Member States are allocated a share of the total budget, based on the size of their fishing industry. Each Member State then draws up an operational programme, detailing how it intends to spend the money. Once the Commission approves that programme, it is up to the national authorities to decide which projects will be funded. The national authorities and the Commission are jointly responsible for the implementation of the programme.

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The European Maritime and Fishery Fund focuses on the long-term objectives of the Europe 2020 strategy for a smart, sustainable and inclusive growth over the 2014-2020 period. Its six priorities are the following: 1.

Environmentally sustainable, resource efficient, competitive fisheries which are more selective, produce less discards, and do less damage to marine ecosystems. Support under that priority will thus focus on innovation and added value that can make the fisheries sector economically viable and resilient to external shocks and to competition from third countries.

2.

Environmentally sustainable, resource efficient, competitive aquaculture to make the industry green, economically viable and competitive, while providing EU consumers with healthy and highly nutritional products.

3698 The Integrated Maritime Policy seeks to enhance the coherence and coordination of maritime policies across sectors. See the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - An Integrated Maritime Policy for the European Union, COM(2007) 574 final. 3699 Regulation (EU) No 508/2014 of the European Parliament and of the Council of 15 May 2014 on the European Maritime and Fisheries Fund and repealing Council Regulations (EC) No 2328/2003, (EC) No 861/2006, (EC) No 1198/2006 and (EC) No 791/2007 and Regulation (EU) No 1255/2011 of the European Parliament and of the Council, OJ L 149, 20.05.2014, p. 1.

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3.

Fostering the implementation of the Common Fisheries Policy through the collection and management of data to improve scientific knowledge and through support to monitoring, control and enforcement of fisheries legislations.

4.

Increasing employment and territorial cohesion through the promotion of economic growth and social inclusion in coastal and inland communities depending on fishing.

5.

Fostering marketing and processing through improved market organisation for fishery and aquaculture products and through improved processing and marketing sectors in particular in Outermost Regions.

6.

Fostering the implementation of the Integrated Maritime Policy.

The European Maritime and Fishery Fund is applied in accordance with the socalled Common Provisions Regulation.3700 That regulation sets out common set of rules for all European Structural and Investment Funds. It includes provisions concerning conditionality, performance review, arrangements for monitoring, reporting, evaluation and eligibility rules.

3.

3.2188

3.2189

The applicability of Articles 107-109 of the Treaty in the fishery and aquaculture sector

Article 42 of the Treaty provides that the rules on competition shall apply to production of and trade in agricultural products only to the extent determined by the European Parliament and the Council within the framework of the common organisation of agricultural markets, account being taken of the objectives of the common agricultural policy. Consequently, the extent to which the State aid rules set out in Articles 107-109 of the Treaty apply to fishery and aquaculture is determined by the Union legislator.

3.2190

The legislator has chosen to apply, in principle, the State aid rules in the fishery and aquaculture sector. That choice is now laid down in Article 8 of Regulation

3.2191

3700 Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006, OJ L 347, 20.12.2013, p. 320.

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No 508/2014 on the European Maritime and Fisheries Fund.3701 Article 8(1) provides that Articles 107, 108 and 109 of the Treaty apply to aid granted by Member States to undertakings in the fishery and aquaculture sector, without prejudice to Article 8(2). Article 8(2) states that Articles 107, 108 and 109 of the Treaty do not apply to payments made by the Member States pursuant to and in conformity with the European Maritime and Fisheries Fund falling within the scope of Article 42 of the Treaty. Article 8(3) then provides that national provisions setting up public financing going beyond the provisions of Regulation No 508/2014 concerning payments referred to in Article 8(2) shall be treated as a whole on the basis of Article 8(1).

3.2192

It is important to understand the implications of those provisions. The general rule is laid down in Article 8(1): the State aid rules apply in the fishery and aquaculture sector. Most measures under the European Maritime and Fisheries Fund are financed in accordance with the principle of shared management, under which Member States actually distribute the funds and manage expenditure.3702 Since it allows Member States to control the use of the resources and in particular to select the beneficiary such measures are likely to fulfil the conditions of Article 107(1) of the Treaty and hence to constitute State aid. Measures under the European Maritime and Fisheries Fund that are financed in accordance with the principle of direct management3703 do not constitute State aid, because the Commission or Union agencies,3704 and not the Member States, decide how the money from the fund is spent.

3.2193

Article 8(2) makes an important exception to the general rule that the State aid rules apply in the fishery and aquaculture sector. It provides that the State aid rules do not apply to payments by the Member States under Regulation No 508/2014 on the European Maritime and Fisheries Fund that fall within the scope of Article 42 of the Treaty. Thus, measures under the European Maritime and Fisheries Fund which are financed in accordance with the principle of shared management (and which would therefore normally constitute State aid) are not subject to the State aid rules, provided that they fall within the scope 3701 For the period before 1 January 2014, see Article 32 of Regulation No 104/2000 on the common organisation of the markets in fishery and aquaculture products, OJ L 17, 21.01.2000, p. 22, and Article 7 of Regulation No 1198/2006 on the European Fisheries Fund, OJ L 233, 15.08.2006, p. 1. 3702 All measures listed in Title V of Regulation No 508/2013. 3703 All measures listed in Title VI of Regulation No 508/2013. 3704 The Executive Agency for Small and Medium-sized Enterprises (EASME) is responsible for the implementation of a number of measures under the European Maritime and Fisheries Fund that are financed in accordance with the principle of direct management. See the Commission Implementing Decision of 17 December 2013 establishing the ‘Executive Agency for Small and Medium-sized Enterprises’ and repealing Decisions 2004/20/EC and 2007/372/EC, OJ L 341, 18.12.2013, p. 73.

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of Article 42 of the Treaty. Such measures are controlled under Regulation No 508/2014 and other relevant secondary legislation.3705 The condition that payments fall within the scope of Article 42 of the Treaty means that they should be granted to the fishery and aquaculture sector. It is important to note that the scope of the European Maritime and Fisheries Fund is not limited to that sector. The fund supports, for instance, the Integrated Maritime Policy, which seeks to enhance the coherence and coordination of maritime policies across sectors. Measures financed in accordance with the principle of shared management in that field would typically constitute State aid to undertakings in sectors other than fishery and aquaculture. Also measures for the sustainable development of fisheries and aquaculture areas under Chapter III of Title V of Regulation No 508/2014 may fall outside the fishery and aquaculture sector, depending on their objectives and beneficiaries. Depending on the circumstances, measures to support fishing ports and landing sites3706 may also involve payments to undertakings outside the fishing and aquaculture sector.

3.2194

If a Member State decides to grant financial support to undertakings in the fishery and aquaculture sector that goes beyond the payments foreseen under Regulation No 508/2014 on the European Maritime and Fisheries Fund, pursuant to Article 8(3) such support will be considered State aid in full. The European Maritime and Fisheries Fund operates on a fixed budget and contains specific rules on the degree to which Member States should contribute in the form of co-financing.3707 Moreover, Article 95 of Regulation No 508/2014 limits the intensity of public aid that Member States may grant to a percentage of the total eligible expenditure. Consequently, it is possible that a Member State intends to adopt more measures than can be financed under its share of the fund, or to grant more financing than allowed. In such cases, Article 8(3) applies and renders all public financing (including possible payments under the European Maritime and Fisheries Fund) State aid.

3.2195

Measures that contain public financing which goes beyond the payments under the European Maritime and Fisheries Fund may fall under the scope of the block

3.2196

3705 See in particular Regulation (EU) No 1303/2013 of the European Parliament and the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006, OJ L 347, 20.12.2013, p. 1. 3706 See Article 43 of Regulation No 508/2014. 3707 See Article 94 on the determination of co-financing rates. In certain cases, the contribution from the European Maritime and Fisheries Fund is 100 per cent of the eligible public expenditure.

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exemption regulation for fishery and aquaculture, provided that the relevant general conditions of the Regulation No 508/2014 are fulfilled and that the maximum intensity of public aid allowed under that regulation is not exceeded. They might also fall under the scope of the general block exemption regulation or be considered as de minimis aid. If the measures constitute State aid and do not fall under the scope of any block exemption regulation, they will have to be notified to the Commission under Article 108(3) of the Treaty.3708

4.

The Fishery and Aquaculture de minimis Regulation

4.1 Introduction 3.2197

The scope of the State aid rules is large. It is well-established that the relatively small amount of aid or the relatively small size of the undertaking which receives it does not as such exclude the possibility that trade between Member States might be affected.3709 In order to reduce legal uncertainty in that respect and to focus administrative efforts on more important cases, the Commission has adopted regulations that set out when aid is so small that it is unlikely to affect trade between Member States or distort or threaten to distort competition in the sense of Article 107(1) of the Treaty. Such measures are called de minimis, a label drawn from the Latin maxims “de minimis non curat lex” and “ de minimis non curat praetor” (both meaning that the law should not concern itself with trifles). The Court of Justice has accepted that measures which met the conditions of a de minimis regulation were excluded from the concept of State aid and thus exempt from the notification requirement of Article 108(3) of the Treaty.3710

3.2198

Commission Regulation (EU) No 717/20143711 contains the de minimis regulation for the fishery and aquaculture sector. It grants a specific exemption for aid granted to undertakings in that sector that does not exceed the sum of EUR 30 000 over a period of three years and meets a number of conditions. Such aid is deemed not to meet all the criteria in Article 107(1) of the Treaty and therefore 3708 The European Maritime and Fisheries Fund differs on that point from the European Agricultural Fund for Rural Development. Pursuant to Articles 81 and 82 of Regulation (EU) No 1305/2013 of the European Parliament and of the Council on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) (OJ 347, 20.12.2013, p 487), the State aid rules do not apply to additional national financing for rural development for which Union support is granted during the programming period and that falls within the scope of Article 42 TFEU. 3709 Case C-142/87 Belgium v Commission (‘Tubemeuse’) ECLI:EU:C:1990:125. 3710 Case C-197/11 Libert and Others ECLI:EU:C:2013:288. 3711 Commission Regulation (EU) No 717/2014 of 27 June 2014 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the fishery and aquaculture sector, OJ L 190, 28.06.2014, p. 45.

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does not need to be notified to the Commission under Article 108(3) of the Treaty. The Fishery and Aquaculture de minimis Regulation is based on Article 2 of Council Regulation No 994/983712. That provision enables to the Commission to decide, by means of a regulation, that having regard to the development and the functioning of the internal market, certain aids do not meet all the criteria of Article 107(1) of the Treaty and that they are therefore exempted from the notification procedure provided for in Article 108(3) of the Treaty, provided that the aid granted to the same undertaking over a given period of time does not exceed a certain fixed amount. On that basis, the Commission has adopted, in the period after 1998, various de minimis regulations.

3.2199

Originally, the Commission had excluded agriculture and fisheries from the scope of the de minimis regulation, in view of the risk that even low levels of public support for could fulfil the criteria of Article 107(1) of the Treaty. In 2004, however, the Commission changed its position in the light of the experience that it had acquired, and adopted a regulation on de minimis aid in the agriculture and fishery sectors.3713 The regulation considered as de minimis aid not exceeding EUR 3 000 over any period of three years, provided also that the overall amount of aid granted to undertakings in the fisheries sector did not exceed a specific value for each Member States. In view of the differences between the fishery and agriculture sector, the regulation was replaced in 2007 by separate regulations for agriculture and fisheries.3714 In the light of further experience and changed economic circumstances, the ceiling per beneficiary in the fishery sector was increased tenfold to EUR 30 000 over any period of three years. The Commission also considered that it was not appropriate to distinguish between, on the one hand, primary production and, on the other hand, processing and marketing, as was done for agriculture. The current rules are laid down Regulation No 1407/2013 (the General de minimis Regulation),3715 Regulation No 1408/2013 (the Agriculture de minimis Regulation, which cov-

3.2200

3712 Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid, OJ L 142, 14.05.1998, p. 1, as amended by Regulation (EU) No 733/2013, OJ L 204, 31.07.2013, p. 11. 3713 Regulation No 1860/2004 on the application of Articles 87 and 88 of the EC Treaty to de minimis aid in the agriculture and fisheries sector, OJ L 325, 28.10.2004, p. 4. 3714 The one for fisheries was Regulation No 875/2007 on the application of Articles 87 and 88 of the EC Treaty to de minimis aid in the fisheries sector and amending Regulation (EC) No 1860/2004, OJ L 193, 25.07.2007, p. 6. 3715 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1.

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ers only primary production),3716 and Regulation No 717/2014 (the Fishery de minimis Regulation, which covers both primary production and processing and marketing).

3.2201

The Fishery and Aquaculture de minimis Regulation has been modelled on the General de minimis Regulation. Thus, it follows the structure of the General de minimis Regulation, and only departs from the language used there when it is necessary to reflect the specific nature of the fishery and aquaculture sector. The discussion below therefore focuses on those parts of the Fishery and Aquaculture de minimis Regulation that differ from the General de minimis Regulation.

4.2 Scope of the Fishery and Aquaculture de minimis Regulation 3.2202

Article 1 set outs the scope of the Fishery and Aquaculture de minimis Regulation. The important terms used there are defined in Article 2.

3.2203

First, Article 1(1) explains that the Fishery and Aquaculture de minimis Regulation applies to aid granted to undertakings in the fisheries and aquaculture sector,3717 with the exception of a number of aid measures that are considered harmful or that may undermine the objectives of the Common Fisheries Policy. Thus, the regulation does not apply to (a) aid the amount of which is fixed on the basis of price or quantity of products purchased or put on the market, (b) aid to export-related activities towards third countries or Member States, namely aid directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current expenditure linked to the export activity, and (c) aid contingent upon the use of domestic over imported goods. Those exceptions have been taken from Article 1 of Regulation No 1407/2013. The regulation also does not apply to (d) aid for the purchase of fishing vessels and (e) aid for the modernisation or replacement of main or ancillary engines of fishing vessels. Aid for those purposes would go against the objectives of the Common Fisheries Policy and the European Maritime and Fisheries Fund.3718 Moreover, the regulation does not apply to (f ) aid to operations increasing the fishing capacity of a vessel or equipment increasing the ability of a vessel to find fish, (g) aid for the construction of new fishing vessels or importation of fishing vessels, (h) aid to the temporary or permanent cessation of fishing activities, unless specifically provided for in the Regulation (EU) No 508/2014, (i) aid to 3716 Commission Regulation (EU) No 1408/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agriculture sector, OJ L 352, 24.12.2013, p. 9. 3717 Article 2 defines in detail what is meant by “undertakings in the fishery and aquaculture sector”. 3718 See recital 7 of the preamble of the Fishery and Aquaculture de minimis Regulation.

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exploratory fishing, (j) aid to the transfer of ownership of a business, and (k) aid to direct restocking, unless explicitly provided for as a conservation measure by a Union legal act or in the case of experimental restocking. Since they are all operations which are ineligible for support under the European Maritime and Fisheries Fund,3719 allowing aid for them would run counter to the objectives set by the Union legislator when establishing that fund. Second, Articles 1(2) and 1(3) determine the relation between the Fishery and Aquaculture de minimis Regulation and the other de minimis regulations.

3.2204

Article 1(2) deals with undertakings which are not only active in fishery and aquaculture but also in sectors falling within the scope of the General de minimis Regulation (Regulation No 1407/2013). In such cases, the General de minimis Regulation applies to aid for activities in the sectors covered by that regulation, provided that the Member State concerned ensures, by appropriate means such as separation of activities or distinction of costs, that the activities in the fishery and aquaculture sector do not benefit from the de minimis aid granted in accordance with that regulation. If the Member State does not do so, neither the Fishery and Aquaculture de minimis Regulation nor the General de minimis Regulation applies.3720 This provision is necessary to ensure that aid is indeed used for the activities for which it was granted and to avoid the circumvention of the limit of EUR 30 000 for undertakings in the fishery and aquaculture sector. Given that ceiling of the General de minimis Regulation is much higher, without that provision there would be a risk that aid received under that regulation is used for fishery and aquaculture activities.

3.2205

Article 1(3) relates to undertakings that are not only active in the fishery and aquaculture sector but also in the primary production of agricultural products. In such cases, the Fishery and Aquaculture de minimis Regulation applies to aid granted for activities in the fishery and aquaculture sector, provided that the Member State concerned ensures, by appropriate means such as separation of activities or distinction of costs, that the primary production of agricultural products does not benefit from de minimis aid granted in accordance with that Regulation. If the Member State does not do so, the Fishery and Aquaculture de minimis Regulation does not apply, so the lower limit of EUR 15 000 for aid for the primary production of agricultural products applies to all activities of the undertaking concerned.3721

3.2206

3719 See Article 11 of Regulation No 508/2014. 3720 See Article 1(2) of Regulation No 1407/2013. 3721 See also Article 1(3) Regulation No 1408/201. The reference to Regulation (EC) No 875/2007, the previ-

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3.2207

Article 2 defines two important notions; “undertakings in the fishery and aquaculture sector” and “single undertaking”.

3.2208

Article 2(1) clarifies that “undertakings in the fishery and aquaculture sector” means undertakings active in the production, processing and marketing of fishery and aquaculture products. Those terms are then further defined: “fishery and aquaculture products” means the products defined in Article 5 (a) and (b) of Regulation (EU) No 1379/2013,3722 and “processing and marketing” means all operations, including handling, treatment, production and distribution, performed between the time of landing or harvesting and the end-product stage.

3.2209

The notion of “single undertaking” is the same as in the General de miminis Regulation (see Chapter 13). The State aid rules apply to undertakings in the sense of the case-law of the Court of Justice, that is to any entity that provides goods or services on a market, irrespective of its legal structure. It is sometimes difficult, however, to determine the precise contours of a specific undertaking, in particular where it is made up of different legal entities. In order to provide an exemption that is easier to apply in practice, the Fishery and Aquaculture de minimis Regulation uses the single undertaking as defined in Article 2(2).

4.3 The notion of de minimis aid 3.2210

The core of the regulation is Article 3, which defines the notion of de minimis aid. Article 3(1) provides that aid measures fulfilling all conditions laid down in the regulation are deemed not to meet all the criteria in Article 107(1) of the Treaty and therefore exempt from the notification requirement in Article 108(3) of the Treaty. The two main conditions are the ceiling per undertaking set out in Article 3(2) and the national cap set out in Article 3(3). Articles 3(4)(9) provide further detail on how the ceiling should be applied.

3.2211

Article 3(2) contains the ceiling per undertaking: the total amount of de miminis aid granted per Member State to a single undertaking in the fishery and aquaculture sector may not exceed EUR 30 000 over any period of three fiscal years. That provision is similar to Article 3(2) of the General de minimis Regulation3723 and Agriculture de minimis Regulation. The ceiling of EUR 30 000 for ous Fishery de minimis Regulation, must be understood as a reference to its successor. 3722 Regulation (EU) No 1379/2013 of the European Parliament and of the Council of 11 December 2013 on the common organisation of the markets in fishery and aquaculture products, amending Council Regulations (EC) No 1184/2006 and (EC) No 1224/2009 and repealing Council Regulation (EC) No 104/2000, OJ L 354, 28.12.2013, p. 1. 3723 See chapter 13 of this book.

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aid to undertakings in the fishery and aquaculture sector is much lower than the general ceiling of de minimis aid of EUR 200 000, but higher than the ceiling of EUR 15 000 that applies in the agriculture sector. Article 3(3) contains the national cap: the cumulative amount of de minimis aid granted per Member State to undertakings active in the fishery and aquaculture sector over any period of three fiscal years may not exceed the national cap set out in the annex to the regulation. For each Member State, the annex provides a specific amount that represented 2.5 per cent of the annual fisheries output in 2012 (including aquaculture and inland fisheries). For Member States with large fishing industries, that ceiling is well above EUR 100 million (Spain: EUR 166 million, United Kingdom: EUR 115 million, and France: EUR 113 million); but it is very low for Member States without significant activities (Austria: EUR 1.5 million, Slovenia: EUR 990 000, and Slovakia: 860 000) and even EUR 0 for Luxembourg. While the de minimis regulation for agriculture also has a national cap, the general one does not.

3.2212

The purpose of the national cap is to limit the total amount of aid to the fishery and aquaculture sector. Its practical effect however differs from one Member State to another. In particular, the presence of relatively large undertakings may increase the national cap to such a level that the Member State could grant all undertakings de minimis aid up to the ceiling per undertaking of EUR 30 000, while such an approach is not possible in Member States which have a fishery and aquaculture sector made up many very small undertakings. In practice, the total amount of de minimis aid granted by Member States tends to fall below 20 per cent of the sum of the national caps.3724

3.2213

Articles 3(4) to 3(8) contain specific rules for the application of the ceiling per undertaking and the national cap. Those provisions are similar to those of the General de minimis Regulation and the Agriculture de minimis Regulation and are therefore discussed here concisely.

3.2214

Article 3(4) provides that de minimis aid shall be deemed granted at the moment the legal right to receive the aid is conferred under the applicable legal regime irrespective of the date of payment of de minimis aid to the undertaking. It is in line with the case-law of the Union Courts, according to which aid is granted when competent national authorities adopt the legally binding act by which they undertake to grant aid.3725 The moment the aid is granted is rel-

3.2215

3724 See the answer of the Commission to parliamentary question E-010562/2011, OJ C 180 E, 21.06.2012. 3725 Case T-109/01 Fleuren Compost v Commission EU:T:2004:4, para 74.

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evant because the ceiling per undertaking and the national cap both apply to aid granted over any period of three fiscal years.

3.2216

Pursuant to Article 3(5), the ceiling per undertaking and the national cap apply irrespective of the form of the de minimis aid or the objective pursued, and regardless of whether the aid granted by the Member State is financed entirely or partly by resources of Union origin. Thus, even categories of aid that are normally considered incompatible with the internal market, such as operating aid, may qualify as de minimis aid. It should be noted, however, that Article 1(1) excludes a number of aid measures that are considered undesirable from the scope of the regulation. Article 3(5) also specifies that the period of three fiscal years shall be determined by reference to the fiscal years used by the undertaking in the Member State concerned.

3.2217

Article 3(6) to (9) mirror Article 3(6)-(9) of the General de minimis Regulation. Under Article 3(6), the ceiling per undertaking and the national cap is applied to aid expressed as a cash grant. Thus, if aid is not granted as a cash grant or subsidy, the gross grant equivalent must be determined. Article 4 contains detailed rules on the calculation of the gross grant equivalent. Article 3(7) provides that when the ceiling or the national cap would be exceeded by the grant of new de minimis aid, none of the new aid may benefit from the regulation. Article 3(8) and (9) contain rules for mergers and divestments.

4.4 Further provisions 4.4.1 Calculation of gross grant equivalent (Article 4) 3.2218

Article 4 contains detailed rules on the calculation of the gross grant equivalent. Those rules are identical to those in Article 4 of the General de minimis Regulation.

4.4.2 Cumulation (Article 5) 3.2219

Article 5 contains rules on the cumulation of de minimis aid granted under the Fishery and Aquaculture de minimis Regulation and other aid. The relation to the General de minimis Regulation is set out in Article 5(1), the relation to the Agriculture de minimis Regulation in Article 5(2), and Article 5(3) deals with cumulation of de minimis aid with other aid.

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First, under Article 5(1), it is possible to cumulate de minimis aid granted in accordance with the Fishery and Aquaculture de minimis Regulation with de minimis aid granted under the General de minimis Regulation, provided that the Member State concerned ensures by appropriate means, such as separation of activities or distinction of costs, that the activities in the fishery and aquaculture sector do not benefit from the granted under the General de minimis Regulation. Thus, fishermen who also carry out other economic activities may receive up to EUR 200 000 de minimis aid under the General de minimis Regulation, provided that their fishery and aquaculture activities do not benefit from such aid.

3.2220

Second, Article 5(2) provides that undertakings which are active both in fishery and aquaculture and in the primary production of agricultural products can receive de minimis aid under the Fishery and Aquaculture de minimis Regulation up to the ceiling of EUR 30 000, provided that Member States ensure that the aid does not benefit the primary production of agricultural products.

3.2221

Third, de minimis aid under the Fishery and Aquaculture de minimis Regulation cannot be cumulated with State aid in relation to the same eligible costs or with State aid for the same risk finance if to do so would result in a higher aid intensity or aid amount than allowed under the relevant block exemption or Commission decision (Article 5(3). That provision is identical to Article 5(3) of the General de minimis regulation.

3.2222

4.4.3 Monitoring (Article 6) Article 6 contains rules on monitoring that are very similar to those in the General de minimis Regulation.

3.2223

4.4.4 Transitional provisions and entry into force (Article 7) Article 7 contains the transitional provisions. The Fishery and Aquaculture de minimis Regulation of course applies to all aid granted after its entry force on 1 July 2014 and until the end of the period of application on 31 December 2020 (see Article 8). But it also applies to all aid granted before its entry force that meets all the conditions laid down in the regulation (Article 7(1)). Individual de minimis aid granted under past de minimis regulations is also deemed not to meet all the criteria in Article 107(1) of the Treaty and therefore exempt from the notification requirement of Article 108(3) of the Treaty (see Article 7(2) and (3)). Finally, Article 7(4) provides that after expiry of the regulation, de minimis aid remains covered for a further period of six months.

3.2224

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5.

The Fishery Block Exemption Regulation (the FIBER)

5.1 General 3.2225

Regulation No 1388/20143726 contains a block exemption for aid to the fishery and aquaculture sector. State aid that meets all the conditions set out in the regulation is declared compatible with the internal market and exempt from the notification requirement of Article 108(3) of the Treaty. In that way, the regulation provides legal certainty for numerous aid measures in a simple way, without the need to go through an administrative procedure which may require time and resources. Block exemption regulations cover categories of aid which do not require, in view of the Commission’s practice, a case-by-case compatibility assessment. The predecessors of the current fisheries block exemption regulation - hereafter referred to as the FIBER - were Regulation No 736/20083727 and Regulation No 1595/2004.3728 Regulation (EC) No 736/2008 applied until 31 December 2013.

3.2226

The FIBER is based on Article 1(1) of Regulation No 994/98,3729 by which the Council granted the Commission the power to declare, by means of a regulation adopted in accordance with a specific procedure, that certain categories of aid should be compatible with the internal market and not subject to the notification requirement of Article 108(3) of the Treaty. Amongst those categories are aid in favour of small and medium-sized undertakings and aid making good the damage caused by natural disasters.3730 That latter category was added with the 2013 amendment of Regulation No 994/98. Thus, the FIBER grants a block exemption for aid in favour of small and medium-sized undertakings and for aid making good the damage caused by natural disasters those categories of aid to fishery and aquaculture undertakings, irrespective of the size of the beneficiary of the aid. 3726 Commission Regulation (EU) No 1388/2014 of 16 December 2014 declaring certain categories of aid to undertakings active in the production, processing and marketing of fishery and aquaculture products compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union, OJ L 369, 24.12.2014, p. 37. 3727 Commission Regulation (EC) No 736/2008 of 22 July 2008 on the application of Articles 87 and 88 of the Treaty to State aid to small and medium-sized enterprises active in the production, processing and marketing of fisheries products, OJ L 201, 30.07.2008, p. 16. 3728 Commission Regulation (EC) No 1595/2004 of 8 September 2004 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises active in the production, processing and marketing of fisheries products, OJ L 291, 14.09.2004, p. 3. 3729 Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid, OJ L 142, 14.05.1998, p. 1, as amended by Regulation No 733/2013, OJ L 204, 31.07.2013, p. 11. 3730 Article 1(2)(i) and (vi) of Council Regulation (EC) No 994/98.

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The categories of aid that are eligible for exemption under the FIBER reflect to a large degree the policy choices made by the Union legislation in the framework of the European Maritime and Fisheries Fund. Many categories of measures that may be supported by that fund qualify for block exemption under the FIBER. In addition, the FIBER block exempts aid schemes to make good damage caused by natural disasters and aid in the form of tax exemptions or reductions under the Energy Taxation Directive.3731 In all cases, various conditions apply.

3.2227

The structure of the FIBER is similar to that of Regulation No 651/20143732 that contains the General Block Exemption Regulation (the GBER) and Regulation No 702/20143733 that contains the Agriculture Block Exemption Regulation (the ABER). Chapter I sets out common provisions, Chapter II provisions on monitoring, Chapter III specific provisions for the different categories of aid, and Chapter IV the final provisions. The annex defines small and medium-sized undertakings for the purpose of the regulation. Except for Chapter III, most provisions of the FIBER closely mirror those of the GBER and the ABER. In order to avoid repetition, the text below focuses on the provisions of the FIBER that differ from the GBER.

3.2228

It is important to bear in mind that while the FIBER applies exclusively to undertakings in the fishery and aquaculture sector, certain categories of aid in that sector may also fall under the scope of the GBER. Training aid, aid for SME’s access to finance, aid in the field of research and development, innovation aid for SMEs and aid for disadvantaged workers and workers with disabilities may also be compatible with the internal market and exempt from the notification requirement of Article 108(3) of the Treaty under the GBER, even when granted to undertakings in the fishery and aquaculture sector.

3.2229

5.2 Chapter I – Common provisions 3.2230 The first Chapter of the FIBER contains the common provisions. Article 1 sets out the scope of the FIBER. It applies to aid granted to small and medium-sized enterprises active in the production, processing and marketing of

3.2231

3731 Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity, OJ L 283, 31.10.2003, p. 51. 3732 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187, 26.06.2014, p. 1. 3733 Commission Regulation (EU) No 702/2014 of 25 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 193, 01.07.2014, p. 1.

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fishery and aquaculture products (Article 1(1)), as well as to aid granted to undertakings in that sector to make good the damage caused by natural disasters, irrespective of the size of the undertaking that receives the aid (Article 1(2)). In that respect, the FIBER differs from its predecessors, which were limited to aid to small and medium-sized undertakings and did not allow for aid to make good the damage caused by natural disasters. Since most of the categories of aid that are block exempted have been taken from European Maritime and Fisheries Fund, which is not limited to small and medium-sized undertakings in the fishery and aquaculture sector, one should not misled by the broad language used in Chapter III of the FIBER. For instance, while Article 28 refers to aid to fishing ports, landing sites, auction halls and shelters, it results from Article 1 that such aid is only block exempted in so far as it is granted to a small or medium-sized undertaking active in the production, processing and marketing of fishery and aquaculture products.

3.2232

Article 1(3) and Article 1(4) exclude a number of specific aid measures. Pursuant to Article 1(3)(a), the FIBER does not apply when the amount of the aid is fixed on the basis of price or quantity of products put on the market. That exclusion can also be found in Article 1(3)(c)(i) of the GBER. Article 1(3)(b) and Article 1(3)(c) provide that the FIBER does not apply to aid to exportrelated activities towards third countries or Member States and aid contingent upon the use of domestic over imported goods. It corresponds with Article 1(2) (c) and Article 1(2)(d) of the GBER. Article 1(3)(d) excludes aid granted to undertakings in difficulty, and Article 1(3)(e) and (f ) exclude aid in favour of undertakings which are subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market. In both cases, an exception is made for aid to make good the damage caused by natural disasters. The GBER contains similar provisions in Article 1(4)(c). Article 1(4) provides that the FIBER does not apply to State aid measures which entail a non-severable violation of Union (cf. Article 1(5) of the GBER).

3.2233

Article 2 contains the notification threshold. The FIBER does not apply to aid for any project with eligible costs above EUR 2 million, or where the amount of aid exceeds EUR 1 million per beneficiary per year. Those thresholds must not be circumvented by artificially splitting up aid schemes or projects (Article 2(2)). Aid that exceeds that threshold must be notified to the Commission under Article 108(3) of the Treaty.

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Article 3 defines a number of terms used in the FIBER. Those definitions follow those of the GBER.

3.2234

Article 4(1) contains the block exemption itself. It provides that aid schemes, individual aid granted under aid schemes and ad hoc aid are compatible within the meaning of Article 107(2) or (3) of the Treaty and exempted from the notification requirement of Article 108(3) of the Treaty when the aid fulfils the conditions laid down in Chapter I as well as the specific conditions for the relevant category of aid laid down in Chapter III of the FIBER. Article 4(2) provides that aid measures are only exempted as far as they explicitly provide that, during the grant period, the beneficiaries of the aid shall comply with the rules of the Common Fisheries Policy and that, if during that period it is found that the beneficiary does not comply with those rules, the aid must be reimbursed in proportion to the gravity of the infringement.

3.2235

Article 5 provides that the FIBER only applies to transparent aid, that is, aid in respect of which it is possible to calculate precisely the gross grant equivalent ex ante without any need to undertake a risk assessment. Article 5(2) lists categories of aid that are considered to be transparent and Article 5(3) categories of that are not considered to be transparent. Article 5 of the FIBER is identical to Article 5 of the GBER, except that the rules for categories of aid that are specific to the GBER have not been taken over.3734

3.2236

Article 6 stipulates that the FIBER only applies to aid which has an incentive effect. Aid shall be considered to have an incentive effect if the beneficiary has submitted a written application for the aid to the Member State concerned before work on the project or activity starts (Article 6(2)). Specific rules apply to certain measures in the form of tax advantages and to aid to make good the damage caused by natural disasters and aid in the form of tax exemptions and reductions in accordance with the Energy Taxation Directive (Articles 6(3) and (4)).3735

3.2237

Article 7 gives rules on calculating the aid intensity and determining eligible costs. It is identical to Article 7 of the GBER, except for paragraph 6 which provides that the eligible costs shall comply with the requirements of Articles 67 to 69 of the Common Provisions Regulation.3736

3.2238

3734 The measures referred to in Article 5(2)(e) - (i) of the GBER. 3735 Council Directive No 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity, OJ L 283, 31.10.2003, p. 51. 3736 Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund,

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Article 8 sets out rules on cumulation. First, in determining whether the notification threshold of Article 2 and the maximum aid intensities in Chapter III are respected, the total amount of public support shall be taken into account, regardless of whether that support is financed from local, regional, national or Union sources. Second, State aid exempted under the FIBER may be cumulated with other State aid in relation to other eligible costs, or with other State aid in relation to the same eligible costs if all aid together does not the exceed the maximum aid intensity or aid amount permissible under the FIBER (Article 8(2)). Finally, State aid exempted under the FIBER cannot be cumulated with any de miminis aid in respect of the same eligible costs if that would result in an aid intensity which is higher than permissible under the FIBER (Article 8(3)).

3.2239

Article 9 requires Member States to ensure publication of information about aid exempted under the FIBER on a comprehensive State aid website. Its structure is similar to that of Article 9 of the GBER, but the thresholds and ranges have been adapted to the fishery and aquaculture sector. Member States have two years to start applying those rules.

5.3 Chapter II - Monitoring 3.2240

The second Chapter of the FIBER contains rules on monitoring. It is made up of three provisions.

3.2241

First, Article 10 provides that where a Member State grants aid without notifying it to the Commission, pretending that the aid is covered by the FIBER while in reality the relevant conditions are not met, the Commission may, after having provided the Member State concerned with the possibility to make its views known, adopt a decision stating that all or some of the future aid measures adopted by that Member State which would otherwise fulfil the requirements of the FIBER must be notified to the Commission. That provision is identical to Article 10 of the GBER.

3.2242

Second, Article 11 contains rules on reporting. Member States must transmit, via the Commission’s electronic notification system, the summary information set out in Annex II and a link to the full text of the aid measure, within 20 working days of its entry into force. Also, Member States must submit an anthe Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006, OJ L 347, 20.12.2013, p. 320.

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nual report, as referred to in Commission Regulation No 794/2004,3737 on the application of the FIBER. That provision is similar to Article 11 of the GBER. Third, in order to enable the Commission to monitor the aid exempted under the FIBER, Article 12 requires Member States to maintain detailed records with the information that shows that the relevant conditions are fulfilled. Those records must be kept for 10 years from the date on which ad hoc aid was granted or the last aid was granted under an aid scheme. At the Commission’s request, the Member State concerned must provide all information and supporting documentation which the Commission considers necessary to monitor the application of the FIBER. That provision is similar to Article 12 of the GBER.

3.2243

5.4 Chapter III – Specific provisions for different categories of aid The third Chapter constitutes the core of the FIBER. It sets out specific provisions for the different categories of aid that are block exempted. Those categories have been grouped in four sections; Section 1 deals with aid for the sustainable development of fisheries, Section 2 with aid for the sustainable development of aquaculture, Section 3 with aid for marketing and processing related measures, and Section 4 sets out other categories of aid which are block exempted.

3.2244

5.4.1 Aid for activities that may be supported by the EMFF All categories of aid in Sections 1, 2, and 3 correspond with measures that are eligible for support under the European Maritime and Fishery Fund. For each category of aid, the FIBER provides that aid fulfilling the conditions laid down in Chapter I shall be compatible with the internal market within the meaning of Article 107(3)(c) of the Treaty and exempt from the notification requirement of Article 108(3) of the Treaty, provided that (a) the aid fulfils the relevant general and specific conditions set out in Regulation No 508/2014 on the European Maritime and Fishery Fund and (b) the amount of the aid does not exceed, in gross grant equivalent, the maximum intensity of public aid fixed by Article 95 of Regulation No 508/2014 and the implementing acts adopted on the basis of Article 95(5) of that regulation.

3.2245

3737 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 Treaty, OJ L 140, 30.04.2004, p. 1.

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3.2246

The general and specific conditions are discussed below for each Section. Article 95 of Regulation No 508/2014 contains very detailed rules on the permissible maximum intensity of public aid. The main rule is that public aid should not exceed 50 per cent of total eligible expenditure of the operation (Article 95(1)). A maximum of 100 per cent applies to certain categories of operations, and where the public aid is granted for the operation of services of general economic interest (Article 95(2)). A maximum between 50 per cent and 100 per cent applies to aid which relates to operations that are of collective interest, have a collective beneficiary, and have innovative features, where appropriate, at the local level (Article 95(3)). For specific types of operations, the maximum intensity of public aid is increased or reduced in accordance with the rules set out in Annex I of Regulation No 508/2014 (Article 95(4). Finally, in accordance with Article 95(5) the Commission has adopted an implementing regulation that provides further rules on how to apply the increases and reductions of Annex I of Regulation No 508/2014.3738

3.2247

The FIBER does not incorporate Chapter III of Regulation No 508/2014 on sustainable development of fisheries and aquaculture areas (Articles 58-64). Most of the measures included in that chapter do not involve aid to fishery and aquaculture activities.

5.4.1.1 Sustainable development of fisheries (Section 1) 3.2248

Section 1 relates to sustainable development of fisheries. It provides a block exemption for the following categories of measures: – – – – – – – – –

aid for innovation (Article 13); aid for advisory services (Article 14); aid for partnership between scientists and fishermen (Article 15); aid to promote human capital, job creation and social dialogue (Article 16); aid to facilitate diversification and new forms of income (Article 17); aid to start-up support for young fishermen (Article 18); aid to improve health and safety (Article 19); aid to mutual funds for adverse climatic events and environmental incidents (Article 20); aid to support systems of allocation of fishing opportunities (Article 21);

3738 Commission Implementing Regulation (EU) No 772/2014 of 14 July 2014 laying down the rules on intensity of public aid to be applied to the total eligible expenditure of certain operations financed under the European Maritime and Fisheries Fund, OJ L 209, 16.07.2014, p. 47.

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– – – – – – – –

aid to support the design and implementation of conservation measures and regional cooperation (Article 22); aid to limit the impact of fishing on the marine environment and adapt fishing to the protection of species (Article 23); aid to innovation linked to the conservation of maritime biological resources (Article 24); aid for the protection and restoration of marine biodiversity and ecosystems and compensation regimes in the framework of sustainable fishing activities (Article 25); aid to improve energy efficiency and to mitigate the effects of climate change, with the exception of aid to replace or modernise engines3739 (Article 26); aid to added value, product quality and use of unwanted catches (Article 27); aid to fishing ports, landing sites, auction halls and shelters (Article 28); aid to inland fishing and inland aquatic fauna and flora (Article 29).

Those categories of aid correspond to the measures for the sustainable development of fisheries that may be supported by the European Maritime and Fisheries Fund under Articles 26-44 of Regulation No 508/2014, with two exceptions. Article 33 and 34 of that regulation provide that the European Maritime and Fisheries Fund may support measures for, respectively, the temporary and permanent cessation of fishing activities; the FIBER, however, does not block exempt aid for those purposes. No such exemption exists because the Commission doubts whether the removal of overcapacity through public aid for temporary or permanent cessation and scrapping schemes is effective.

3.2249

For all categories, the aid must fulfil not only the conditions set out in the provision of Regulation No 508/2014 that corresponds with the aid measure in question, but also the general conditions of Article 25(1) and (2) of that regulation. Article 25(1) provides that the owner of a fishing vessel having received support under Chapter 1 of Title V of Regulation No 508/2014 shall not transfer that vessel outside the Union during at least the five years following the date of actual payment of that support to the beneficiary. If a vessel is transferred within that time–frame, sums unduly paid in respect of the operation shall be recovered by the Member State, in an amount proportionate to the period during which the condition set out in the first sentence of that paragraph has not been fulfilled. Under Article 25(2), operating costs shall not be eligible for support un-

3.2250

3739 Article 41 of Regulation No 508/2014 allows support for modernising or replacing engine under the European Maritime and Fisheries Fund.

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less otherwise expressly provided for in Chapter 1 of Title V of Regulation No 508/2014.

5.4.1.2 Sustainable development of aquaculture (Section 2) 3.2251

Section 2 relates to sustainable development of aquaculture and provides a block exemption for the following categories of measures: – – – – – – – – – – –

aid for innovation in aquaculture (Article 30); aid to productive investments in aquaculture (Article 31); aid to management, relief and advisory services for aquaculture farms (Article 32); aid to promote human capital and networking in aquaculture (Article 33); aid to increase the potential of aquaculture sites (Article 34); aid to encourage new aquaculture farmers practising sustainable aquaculture (Article 35); aid for the conversion to eco-management and audit schemes and organic aquaculture (Article 36); aid to aquaculture providing environmental services (Article 37); aid for public health measures (Article 38); aid for animal health and welfare measures (Article 39); aid for aquaculture stock insurance (Article 40).

3.2252

Those categories of aid fully correspond to the measures for the sustainable development of aquaculture that may be supported by the European Maritime and Fisheries Fund under Articles 47-57 of Regulation No 508/2014.

3.2253

For all categories, the aid must fulfil not only the conditions set out in the provision of Regulation No 508/2014 that corresponds with the aid measure in question, but also the general conditions laid down in Article 46. Consequently, support must be limited to aquaculture enterprises, unless otherwise stated in Regulation No 508/2014 (Article 46(1)). Entrepreneurs entering the sector must provide a business plan and, where the amount of investments is more than EUR 50 000, a feasibility study including an environmental assessment of the operations; and support must be granted only where it has been clearly demonstrated in an independent marketing report that good and sustainable market prospects exist for the product (Article 46(2)). Where operations consist of investments in equipment or infrastructure ensuring compliance with future requirements relating to the environment, human or animal health, hygiene 1244

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or animal welfare under Union law, support may be granted until the date on which such requirements become mandatory for the enterprises (Article 46(3)). Support must not be granted to the farming of genetically modified organisms (Article 46(4)) nor to aquaculture operations in marine protected areas, if the competent authority of the Member State determines, on the basis of an environmental impact assessment, that the operation would generate a significant negative environmental impact that cannot be adequately mitigated (Article 46(5)).

5.4.1.3 Market and processing related measures (Section 3) Section 3 relates to market and processing related measures. It provides a block exemption for the following categories of aid: – –

3.2254

aid for marketing measures (Article 41); aid for the processing of fishery and aquaculture products (Article 42).

Those categories of aid correspond with two of the market and processing related measures that may be supported by the European Maritime and Fisheries Fund (see Articles 68 and 69 of Regulation No 508/2014). The European Maritime and Fisheries Fund also allows support for production and marketing plans and storage aid (Articles 66 and 67 of Regulation No 508/2014); however, aid for such measures is not block exempted. The aid must fulfil the conditions set out in Articles 68 or 69 of Regulation No 508/2014. Unlike aid for sustainable development of fisheries and the sustainable development of aquaculture, Regulation No 508/2014 does not contain general conditions for those categories of measures.

3.2255

5.4.1.4 Other categories of aid (Section 4) Section 4 contains the other categories of aid that are block exempted: – aid for data collection (Article 43); – aid to make good damage caused by natural disasters (Article 44); – aid in the form of tax exemptions and reductions in accordance with the Energy Taxation Directive (Article 45).

3.2256

Article 43 grants a block exemption for measures for data collection that may be supported by the European Maritime and Fisheries Fund (see Article 77 of Regulation No 508/2014). It is structured in the same way as the categories of aid in the previous sections.

3.2257

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3.2258

Article 44 is new in the FIBER. It declares aid schemes to make good damage caused by natural disasters compatible with the internal market within the meaning of Article 107(2)(b) of the Treaty.3740 Unlike for other categories of aid, that provision also applies if the beneficiary is not a small or medium-sized enterprise. In order to ensure that aid granted to make good the damage caused by natural disasters is indeed covered by the exemption, the FIBER lays down conditions following established practice the fulfilment of which will ensure that aid schemes to make good the damage caused by natural disasters can benefit from block exemption. Those conditions relate, in particular, to the formal recognition by the competent Member States’ authorities of the character of the event as a natural disaster and to a direct causal link between the natural disaster and the damages suffered by the beneficiary undertaking, which may include undertakings in difficulty, and should ensure that overcompensation is avoided. The compensation should not exceed what is necessary to enable the beneficiary to return to the situation prevailing before the disaster occurred.

3.2259

The conditions set out in Article 44 correspond with those in Article 30 of the ABER. Article 3 defines the notion of “natural disasters” as earthquakes, avalanches, landslides, floods, tornadoes, hurricanes, volcanic eruptions and wildfires of natural origin. Damage caused by adverse weather conditions such as storms, frost, hail, ice, rain or drought, which occur on a more regular basis, cannot be considered a natural disaster within the meaning of Article 107(2)(b) of the Treaty.3741

5.4.2 Article 45 3.2260

Article 45 grants a block exemption for aid in the form of tax exemptions and reductions in accordance with the Energy Taxation Directive3742. Pursuant to Article 15(1)(f ) and 15(3) of that directive, Member States may introduce tax exemptions or reductions applicable to inland fishing and piscicultural works. Those measures are exempted from the notification requirement of Article 108(3) of the Treaty where the conditions provided under the Directive are fulfilled. Tax exemptions applicable to fishing within EU waters which Member States must introduce pursuant to Article 14 (1)(c) of the Directive are not imputable to the State and do therefore not constitute State aid.3743 3740 Note that the other categories of aid included in the FIBER are declared compatible within the internal market within the meaning of Article 107(3)(c) TFEU. 3741 See recital 29. 3742 Council Directive No 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity, OJ L 283, 31.10.2003, p. 51. 3743 See recital 30.

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5.5 Chapter IV Final provisions Chapter IV contains two articles that lay down the transitional rules and the entry into force and application of the FIBER.

3.2261

Article 46(1) provides that the FIBER applies to individual aid granted before its entry into force, if the aid fulfils all conditions laid down in the FIBER, with the exception of the conditions of Article 9 on publication and information. Consequently, while aid schemes cannot benefit from that provision, aid granted to individual beneficiaries under an aid scheme is covered. Pursuant to Article 46(2), any aid granted before 1 July 2014 by virtue of a block exemption regulation previously in force shall be compatible with the internal market and exempted from the notification requirement of Article 108(3) of the Treaty. However, any aid not exempted from the notification requirement of Article 108(3) of the Treaty by virtue of the FIBER or other block exemption regulations previously in force shall be assessed by the Commission in accordance with the relevant frameworks, guidelines, communications and notices (Article 46(3)). Finally, at the end of the period of validity of the FIBER, that is, on 31 December 2020, any aid schemes that it exempted shall remain exempted during an adjustment period of six months.

3.2262

Article 47 provides that the FIBER enters into force on 1 January 2015 and applies until 31 December 2020.

3.2263

6.

The Guidelines for the examination of State aid to the fishery and aquaculture sector

6.1 Introduction The Guidelines for the examination of State aid to the fishery and aquaculture sector are the third specific State aid instrument. They set out the Commission’s policy when examining whether aid measures in that sector can be declared compatible with the internal market under Article 107(2) and (3) of the Treaty. Thus, they relate to aid measures that are notified (or that should have been notified) to the Commission under Article 108(3) of the Treaty.

3.2264

The Commission adopted its first Guidelines for the examination of State aids in the fisheries sector in 1985.3744 Those guidelines have been revised on numerous

3.2265

3744 OJ C 268, 19.10.1985, p. 2.

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occasions, most recently in 20083745 and 2015, when the Commission adopted the Guidelines for the Examination of State aid to the Fishery and Aquaculture Sector.3746

3.2266

The Fishery and Aquaculture Guidelines are not based on any Council regulation. The merely set out how the Commission intends to apply Article 107(2) and (3) of the Treaty in the fishery and aquaculture sector. Although the Guidelines are not “law” in the strict sense of the word, the Commission is bound by guidelines that it adopts (to the extent that they are not contrary to the Treaty).

6.2 Outline of the Fishery and Aquaculture Guidelines 3.2267

The first two sections of the Fishery and Aquaculture Guidelines are essentially introductory. Section 1 contains an introduction that recalls the relevant provisions of the Treaty, discusses the applicability of the State aid rules in the fishery and aquaculture sector and stresses that the Commission’s policy of State aid control in that sector should be consistent and coherent with the Common Fisheries Policy and the objectives of the State Aid Modernisation programme. Section 2 discusses the scope of the Fishery and Aquaculture Guidelines, recalls the duty to notify plans to grant new aid in the sector that is not covered by a block exemption regulation or the Fishery de minimis Regulation, and defines a number terms used in the Guidelines.

3.2268

Section 3 then sets outs the principles that the Commission will apply. Those principles are twofold; first, the Commission will, as in any other sector, apply the common assessment principles defined in the State Aid Modernisation programme, and second, the Commission will apply a number of principles that are specific to the fishery and aquaculture sector.

3.2269

The common assessment principles imply that in order to be declared compatible with the internal market, an aid measure must contribute to a objective of common interest, there must be a need for State intervention, the aid measure must be an appropriate policy instrument, the aid must have an incentive effect, the aid must be proportional, that is, limited to the minimum necessary, undue negative effects on competition and trade must be avoided, and the aid must be transparent. Those common assessment principles have been discussed above (see Chapter 2) and will therefore not be considered any further here.

3745 OJ C 84, 03.04.2008, p. 10. 3746 OJ C 217, 02.07.2015, p. 1.

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The assessment principles that are specific for the fishery and aquaculture sector seek to ensure coherence with the Common Fisheries Policy and contribute to the effective implementation of that policy. Point 31 states as a general principle that the beneficiary must comply with the rules of the Common Fisheries Policy. That general principle is followed by four specific rules. First, point 32 provides that an operator which has committed one or more of the infringements or offences set out in Article 10(1) of Regulation No 508/2014 or a fraud as set out in Article 10(3) cannot apply for State aid for a specific period of time, unless the aid applied for is compensatory in nature. Second, after applying for aid each undertaking must continue to comply with the rules of the Common Fisheries Policy throughout the period of the implementation of the project and for a period of five years after the final payment. If the competent authority determines that a beneficiary has committed one or more of the infringements set out in Article 10(1) of Regulation No 508/2014, the aid must be reimbursed (point 33). Third, aid for operations which are eligible for funding under regulation No 508/2014 must comply with the relevant provisions of that regulation, in particular with respect to aid intensity. If the aid goes beyond what is allowed under the European Maritime and Fisheries Fund, the Member State must justify the aid measure (point 34). Fourth, no aid may be granted for activities that would be ineligible for support under Article 11of Regulation No 508/2014 (point 35).

3.2270

Sections 4 and 5 constitute the core of the Fisheries and Aquaculture Guidelines. Section 4 covers aid to make good the damage caused by natural disasters and exceptional occurrences, which is compatible with the internal market under Article 107(2) of the Treaty. Section 5 discussed the various categories of aid measures that can be considered compatible with the internal market under Article 107(3)(c) of the Treaty: aid for categories of measures covered by a block exemption regulation, aid falling within the scope of certain horizontal guidelines, aid to make good the damage caused by adverse climatic events, aid for the prevention, control and eradication of animal diseases in aquaculture, aid financed through parafiscal charges, operating aid in the outmost regions, and aid for other measures. Those sections will be considered in greater detail below.

3.2271

Section 6 contains procedural matters. In particular, it sets out rules concerning the maximum duration of aid schemes and their evaluation, the applicability of the guidelines, a proposal for appropriate measures under Article 108(1) of the Treaty to bring existing aid schemes in line with the guidelines, reporting and monitoring, and revision of the guidelines.

3.2272

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6.3 Aid that shall be compatible with the internal market 3.2273

Section 4 of the Fishery and Aquaculture Guidelines sets out rules on aid to make good the damage caused by natural disasters and exceptional occurrences. Those rules give effect to Article 107(2)(b) of the Treaty, which provides that such aid shall be compatible with the internal market. Thus, the Treaty requires the Commission to declare aid to make good the damage caused by natural disasters and exceptional occurrences compatible with the internal market; in that respect, Article 107(2) differs from Article 107(3), which grants the Commission a broad margin of discretionary in declaring aid compatible.

3.2274

The main rule is that aid to make good the damage caused by natural disasters and exceptional occurrences is compatible with the internal market if it respects the common assessment principles and the specific principles for the fishery and aquaculture sector set out in Section 33747 and meets the specific conditions set out in Section 4. In accordance with the case-law, the notions of natural disasters and exceptional occurrences must be interpreted restrictively.3748 In the fishery and aquaculture sector, the Commission has accepted that exceptionally severe storms and floods may constitute natural disasters. The FIBER also lists the following natural disasters: earthquakes, avalanches, landslides, tornadoes, hurricanes, volcanic eruptions and wild fires of natural origin. As to exceptional occurrences, the Commission has recognised as such war, internal disturbances, strikes, with certain reservations and depending on their extent, major industrial and nuclear accidents, and fires resulting in widespread loss. The outbreak of an animal disease or a plant pest does in general not constitute an exceptional occurrence. A large-scale outbreak of a new animal disease might, however, constitute an exceptional occurrence. On the other hand, trade bans are not normally considered as exceptional occurrences.3749

3.2275

Proposals to grant aid to make good damage caused by natural disasters and exceptional occurrences will be assessed on a case-by-case basis, in the light of the Commission’s past decision-making practice. In particular, the competent authority of the Member State must have formally recognised the event as a natural disaster or as an exceptional occurrence, there must be a direct causal 3747 Aid fulfilling the specific conditions of Section 4 is, however, considered to meet most of the common assessment principles, see points 38, 42, 44, 52, 58, and 62 of the Fisheries and Aquaculture Guidelines. Such aid can also be applied for by operators that committed infringements and offences referred to in Article 10 of regulation no 508/2014; see point 32 of the Fisheries and Aquaculture Guidelines. 3748 Joined Cases C-346/03 and C-529/03 Atzeni and others , ECLI:EU:C:2006:130, para. 79. 3749 See, for instance, the Commission decision of 24 June 2015 in Case SA.40616 Finland, Russian important ban on fishery products from the EU, recitals 24-27.

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link between the event and the damage suffered by the undertaking, and the aid must be paid directly to the undertaking concerned. Aid schemes related to a specific natural disaster or exceptional occurrence must be established within three years from the date of the occurrence of the event, and the aid must be paid out within four years. It is also possible to establish ex ante framework aid schemes to compensate for the damage caused by earthquakes, avalanches, landslides, floods, tornadoes, hurricanes, volcanic eruptions, and wild fires of natural origin, provided that the conditions under which aid can be granted in such cases of natural disasters are clearly stipulated and that the specific reporting obligation set out in point 130 is complied with.

3.2276

In all cases, the eligible costs are the costs of the damage incurred as a direct consequence of the natural disaster or exceptional occurrence, as assessed by a public authority, by an independent expert recognised by the granting authority, or by an insurance undertaking. Both material damage and loss of income can be taken into account. Material damage must be based on the repair cost or economic value of the affected asset before the natural disaster or exceptional occurrence. The damage must be calculated at the level of the individual beneficiary and the aid and other payments to compensate the damage, including under insurance policies, must not exceed 100 per cent of the eligible costs.

3.2277

6.4 Aid that may be compatible with the internal market Section 5 of the Fishery and Aquaculture Guidelines sets out seven categories of aid measures that are considered compatible with the internal market under Article 107(3)(c) of the Treaty. That provision lists aid measures that may be considered compatible with the internal market, thus affording a large margin of discretion on the Commission. In that respect, Article 107(3) differs from Article 107(2) of the Treaty, which requires the Commission to declare certain aid measures compatible with the internal market.

3.2278

The seven categories of aid are the following: (i) aid for categories of measures covered by a block exemption regulation, (ii) aid falling within the scope of certain horizontal guidelines, (iii) aid to make good the damage caused by adverse climatic events, (iv) aid for the prevention, control and eradication of animal diseases in aquaculture, (v) aid financed through parafiscal charges, (vi) operating aid in outermost regions, and (vii) aid for other measures.

3.2279

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6.4.1 Aid for categories of measures covered by a block exemption regulation 3.2280

Given that the FIBER only applies to aid to SMEs (except for aid to make good the damage caused by natural disasters), it does not cover aid to other undertakings, even if the aid otherwise meets all the conditions for exemption. It is in particular for that situation that Section 5.1 provides that such aid may be declared compatible with the internal market.

3.2281

The aid will be assessed the aid on the basis of the common assessment principles and the specific principles for the fishery and aquaculture set out in Section 3 of those Guidelines, that Section, and the criteria laid down for each category of aid set out in the FIBER and the GBER. If aid does not fulfil all those criteria, the Member State must demonstrate the justification for and the indispensability of the aid. For aid of the same kind as aid falling with the category of aid to make good the damage caused by natural disasters mentioned in Article 44 of the FIBER, the specific conditions set out in Section 4 of the guidelines apply. That category already featured in the previous version of guidelines.

6.4.2 Aid falling within the scope of certain horizontal guidelines 3.2282

Where aid falls within the scope of certain horizontal guidelines or other instruments adopted by the Commission, the Commission will assess such aid on the basis of the principles set out in Section 3 of those Guidelines and the relevant Sections of those instruments. That category already featured in the previous version of guidelines.

6.4.3 Aid to make good the damage caused by adverse climatic events 3.2283

Aid to make good the damage caused by adverse climatic events can be declared compatible with the internal market if it respects the common assessment principles and the specific principles for the fishery and aquaculture sector, and meet the specific conditions set out in section 5.3 of the Fishery and Aquaculture Guidelines.

3.2284

Aid to make good the damage caused by adverse climatic events shares certain features with aid to make good the damage caused by natural disasters and exceptional occurrences (see book paragraphs 3.2272-3.2277). Both types of aid are compensatory in nature and are governed by similar (but not identical) rules. The notion of adverse climatic event may include, depending on the cir1252

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cumstances, storms, gusts of wind causing exceptionally high waves, heavy and persistent rainfall, floods, and exceptionally elevated water temperatures over a longer period. When they occur less regularly and are of a more serious nature, those events may also qualify as a natural disaster. The dividing line with natural disasters is therefore a matter of degree. Proposals to grant aid to make good damage caused by adverse climatic events will be assessed on a case-by-case basis, in the light of the Commission’s past decision-making practice. In particular, aid can only be granted if the damage caused by the event amounts to more than 30 per cent of the average annual turnover of the undertaking that suffered the loss, there must be a direct causal link between the adverse climatic event and the damage suffered by the undertaking, and in the case of losses caused by adverse climatic events referred to in Article 35(1) of Regulation No 508/2014, the Member State must justify why it intends to grant aid rather than financial compensation being paid through mutual funds for adverse climatic events under Article 35 of that Regulation.

3.2285

It is also possible to establish ex ante framework aid schemes to compensate for the damage caused by adverse climatic events, provided that the conditions under which aid can be granted are clearly stipulated.

3.2286

In all cases, the eligible costs are the costs of the damage incurred as a direct consequence of the natural disaster or exceptional occurrence, as assessed by a public authority, by an independent expert recognised by the granting authority, or by an insurance undertaking. Both material damage and loss of income can be taken into account. Material damage must be based on the repair cost or economic value of the affected asset before the natural disaster or exceptional occurrence. The damage must be calculated at the level of the individual beneficiary and the aid and other payments to compensate the damage, including under insurance policies, must not exceed 100 per cent of the eligible costs. That category already featured in the previous version of guidelines.

3.2287

6.4.4 Aid for the prevention, control and eradication of animal diseases in aquaculture Aid to support costs relating to the prevention, control and eradication of animal diseases in aquaculture can be declared compatible with the internal market if it respects the principles set out in Section 3 of those Guidelines and the conditions set out in Section 5.4.3750

3.2288

3750 Aid of the same kind as aid falling with the category of aid for animal health and welfare measures of Article

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3.2289

Aid may only be granted in respect of a number of specific diseases.3751 The aid must be granted as part of a programme at Union, national, or regional level for the prevention, control or eradication of animal diseases, or as part of emergency measures imposed by the competent national authority. The aid must be paid directly to the undertaking concerned. No aid should be granted if it is established that the beneficiary caused the disease deliberately or by negligence. Aid schemes must be established within three years from the date of the occurrence of the costs caused by the animal disease. Aid must be paid out within four years from that date.

3.2290

It is also possible to establish ex ante framework aid schemes. Such schemes must clearly set out the conditions under which aid can be granted and provide for reporting in accordance with point 130 of the Fishery and Aquaculture Guidelines. The guidelines set out in detail which costs are eligible. Aid and any other payments received to compensate the damage, including payments under insurance policies, must not exceed the eligible costs. That category is new in the Fishery and Aquaculture Guidelines.

6.4.5 Aid financed through parafiscal charges 3.2291

Aid financed through special charges imposed on certain fishery or aquaculture products irrespective of their origin, in particular parafiscal charges, can be declared compatible with the internal market. The Commission will assess the proposed aid scheme on the basis of the principles set out in Section 3. Moreover, it must be established that the aid equally benefits domestic and imported products. That category already featured in the previous version of guidelines.

39 of Regulation No 1388/2014, however, will be assessed under Section 5.1 of the Fishery and Aquaculture Guidelines. 3751 Namely the list of animal diseases and zoonoses included in Annex II of Regulation Regulation (EU) No 652/2014 of the European Parliament and of the Council of 15 May 2014 laying down provisions for the management of expenditure relating to the food chain, animal health and animal welfare, and relating to plant health and plant reproductive material, amending Council Directives 98/56/EC, 2000/29/EC and 2008/90/EC, Regulations (EC) No 178/2002, (EC) No 882/2004 and (EC) No 396/2005 of the European Parliament and of the Council, Directive 2009/128/EC of the European Parliament and of the Council and Regulation (EC) No 1107/2009 of the European Parliament and of the Council and repealing Council Decisions 66/399/EEC, 76/894/EEC and 2009/470/EC, OJ L 189, 27.06.2014, p. 1, and the list included in Part II of Annex IV of Council Directive 2006/88/EC of 24 October 2006 on animal health requirements for aquaculture animals and products thereof, and on the prevention and control of certain diseases in aquatic animals, OJ L 328, 24.11.2006, p. 14.

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6.4.6 Operating aid in outermost regions Operating aid in outermost regions can be declared compatible with the internal market when granted to alleviate the specific constraints in those regions as a result of their isolation, insularity, and extreme remoteness. The Commission will assess such aid on a case-by-case basis, on the basis of the principles set out in Section 3, the conditions of that Section, and the specific legal provisions applying to those regions. It will also consider whether the aid is compatible with measures under the European Maritime and Fisheries Fund for the region concerned and assess the effects on competition.

3.2292

The aid must not go beyond what is necessary to alleviate the specific constraints in the outermost regions as a result of their isolation, insularity, and extreme remoteness. To avoid overcompensation, the Member State must take into account other types of public intervention. It may include compensation of additional costs under Articles 70 to 72 of Regulation (EU) No 508/2014 and aid for implementing compensation plans under Article 73 of that Regulation. That category already featured in the previous version of guidelines.

3.2293

6.4.7 Aid for other measures Aid that does not correspond to one of the types of aid mentioned in Sections 4 and 5.1 to 5.6 is in principle incompatible with the internal market. If a Member State nevertheless intends to provide such aid or provides such aid, it must clearly demonstrate that the aid complies with the principles set out in Section 3. The Commission may declare the aid compatible with the internal market on the basis of a case-by-case assessment. That category already featured in the previous version of guidelines.

3.2294

6.5 Procedural matters (Section 6) Section 6 contains procedural matters.

3.2295

Section 6.1 deals with the maximum duration of aid schemes and evaluation. In principle, aid schemes must not apply for more than seven years. That maximum duration may be reduced to four years or less, in particular in relation to schemes which risk to distort competition when their implementation is not reviewed in due time. Such schemes may also be made subject to ex post evaluation.

3.2296

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3.2297

Section 6.2 explains the application of Fishery and Aquaculture Guidelines in time. The main rule is that the Commission applies the guidelines to aid granted as of 1 July 2015, irrespective of the date of notification. There are special rules for aid granted on the basis of an approved aid scheme and unlawful aid.

3.2298

In Section 6.3, the Commission proposes, pursuant to Article 108(1) of the Treaty, to all Member States to bring their existing aid schemes in conformity with the Fishery and Aquaculture by 31 December 2015.

3.2299

Section 6.4 and 6.5 respectively deal with reporting and revision of the guidelines.

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PART 4 – SGEI

Chapter 33 Altmark and the Communication 1.

Background

1.1 The nature of public services and their recognition in the Treaties The State aid regime for public services is one of the most politically and technically complex fields of State aid law. While the role of the market in public service delivery has been steadily increasing since the 1970s, driven by changing conceptions of the role of the State as well as liberalisation efforts at the European and national level, that process has occurred at different rates in different parts of the European Union, and never without controversy. It is no surprise, then, that State aid control and public services are frequently seen as being essentially in conflict: as the Court has put it, that the aim of the rules on aid for public services is “to reconcile the Member States’ interest in using certain undertakings, in particular in the public sector, as an instrument of economic or fiscal policy with the Community’s interest in ensuring compliance with the rules on competition and the preservation of the unity of the Common Market.” 3752

4.1

It is certainly true that market logic has its limits in relation to public services. Universal access to high-quality public services at an affordable price is not just a policy goal but a fundamental right,3753 and the market, with its essential role of providing a mechanism for pricing trade-offs between different goals and preferences, is not well suited to regulate the concrete interpretation of such fundamental rights.

4.2

3752 Case C-202/88 France v Commission ECLI:EU:C:1991:120, para. 12. 3753 In general terms under Article 36 of the Charter of Fundamental Rights of the European Union, as well as through specific articles addressing particular services such as Article 14 (education), Article 29 (placement services), Article 34 (social security and housing assistance) and Article 35 (health care).

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4.3

But if market logic cannot be used to establish or police the boundaries of public service provision, it does have a role to play in making the best use of resources within those boundaries. The expectations of public service users are not so different from those of consumers – higher quality, better value for money, more innovation – and that is exactly the type of benefit that competition policy can bring.3754 It would therefore be more correct to describe the relationship between State aid control and public service provision not as one of inevitable conflict, but as a relationship between ends and means.

4.4

It is also important to take account of the close relationship, and blurred boundaries, between many public services and market activities. With the exception of certain public goods such as security or pollution control,3755 and certain social services aimed almost exclusively at vulnerable citizens, the need for State support for public services commonly arises not from the fact that the market would not provide the service at all in the absence of State intervention, but that it would not cover all citizens at an acceptable level of quality and price. Thus, for example, certain postal services (for business customers and in densely populated areas) would certainly still be provided in the absence of State intervention; the public service requirement arises from the fact that such services could not be provided in outlying rural areas at an affordable cost on purely commercial terms. Similar considerations apply to a range of services, including utilities such as water and energy, as well as health, education, social security and housing. However, the fact that State support pays for extending an already commercially viable service, rather than introducing wholly new services, means that there is an ever-present risk that State support for public services could spill over into commercial markets by way of cross-subsidy. As will be seen below, this concern about cross-subsidy plays a central role in State aid policy towards public services.

1.1.1 Article 106(2) of the Treaty 4.5

The complex political and technical relationship between public services and the market is reflected in the key Treaty provision on State aid and public services. Article 106(2) of the Treaty provides that: Undertakings entrusted with the operation of services of general economic interest … shall be subject to the rules contained in the Treaties, in particular to the rules on 3754 See Ilzkovitz and Dierx, Ex post evaluation of competition policy enforcement: What can we learn from the literature and from the experience of Competition Authorities?, Competition Policy Brief 2015-04 ( June 2015). 3755 Such public goods are commonly treated as non-economic activities and therefore excluded from the scope of State aid control; see para 2.65 of this book.

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competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Union. The interpretation of Article 106(2) of the Treaty is discussed in detail in this chapter and in the chapters that follow. For the time being, however, a few aspects of that provision are worth highlighting.

4.6

First, the Treaty does not refer to “public services” but to “services of general economic interest” (SGEI). The use of that term has two important implications for the scope of the concept. In the first place, to benefit from Article 106(2) of the Treaty, a service must be in the “general interest”; in the absence of Union legislation harmonising that notion, it is for Member States to determine whether a service is in the general interest, subject only to control by the EU institutions for manifest error in that determination.3756 As for the “economic” nature of such an interest, it results from the Court’s interpretation of the notion of “undertaking” as an entity carrying out an economic activity3757 that the term “SGEI” merely states the obvious, namely that only services of an economic nature are covered by Article 106(2) of the Treaty, since non-economic services would not be caught by the competition rules of the Treaty in any event.

4.7

Second, Article 106(2) of the Treaty allows derogation from the competition rules to permit the performance of the tasks assigned to an undertaking, rather than to support the operation of the undertaking as a whole. As will be seen below, that distinction has made it possible for State aid policy towards SGEIs to separate the interests of public service users from those of the undertakings that provide those public services. The Commission’s assessment has thus focused on whether State aid is necessary in order to ensure the provision of a specific service, while the broader interests of SGEI providers, such as maintenance of employment or preservation of the overall financial equilibrium of the undertaking, have not been treated as being relevant to the assessment. This approach has benefits and disadvantages. On the positive side, it has allowed the Commission to implement a rigorous and relatively technical State aid policy that does not require it to make value judgements as to which producer interests should be supported. On the other hand, it has also contributed to the sense of a conflict between State aid policy and public service goals. That is because, however rational it may be to treat the execution of public service tasks as being separable

4.8

3756 See further book paras 4.53 and 4.56 of this book. 3757 Case C-41/90 Höfner and Elser v Macrotron ECLI:EU:C:1991:161, para. 21.

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from the interests of the undertakings that carry out those tasks, that approach does not necessarily accord with the perspective of citizens, who may see the existence of strong provider institutions as the best guarantor of high-quality public services. That difference of perspective has had the unfortunate effect of creating the mistaken impression that State aid policy is opposed to the existence of high-quality public services.

4.9

Finally, the relationship between Article 106(2) and Article 107 of the Treaty is not immediately clear from the text of the former. The Court has confirmed, however, that Article 106(2) is to be treated as a derogation from Article 107(1) akin to the derogations set out in Article 107(2) and (3)3758; it cannot simply be read together with Article 107(1) to take State support for SGEI providers outside the notion of State aid. The Court has also confirmed that the application of Article 106(2) does not prevent the normal procedural requirements from applying, including the notification and standstill obligations under Article 108(3) of the Treaty as well as the existing aid procedure under Article 108(1) and (2).3759

1.1.2 Other relevant Treaty provisions 4.10

In addition to Article 106(2) of the Treaty, which remains substantially unchanged since the conclusion in 1957 Treaty of Rome, a series of further provisions on SGEI have been inserted into the Treaty in recent years, giving ever greater recognition to the role of services of general interest. The Amsterdam Treaty inserted Article 16 EC, which recognised the place occupied by SGEI in the shared values of the European Community and required the Community and Member States to “take care that such services operate on the basis of principles and conditions which enable them to fulfil their missions.” That provision was significantly amended by means of the Lisbon Treaty, following which that article (now Article 14 of the Treaty) specifies that the “principles and conditions” concerned refer in particular to economic and financial conditions. Article 14 of the Treaty also provides a legal basis for Union legislation to establish those principles and set those conditions. In practice, however, the Commission has so far considered, on the basis of the views of stakeholders, that legislation under Article 14 of the Treaty is not an immediate priority.3760 3758 Case T-106/95 FFSA and others v Commission ECLI:EU:T:1997:23, paras 170-172. 3759 Case C-387/92 Banco Exterior de España v Ayuntamiento de Valencia ECLI:EU:C:1994:100, para. 18. See further paras 5.63 to 5.81 and 5.235 to 5.246 of this book. 3760 See Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Quality Framework for Services of General Interest in Europe, COM(2011) 900 final, p. 5.

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The Lisbon Treaty also saw the adoption of a new Protocol No 26 to the Treaty, which set out in more detail the “shared values” referred to in Article 14. Those shared values incorporate three essential elements: the discretion of public authorities in the Member States when it comes to providing, organising and commissioning SGEIs; the diversity between different SGEIs and the differences in the needs and preferences of different users; and the basic principles of public service provision, including quality, safety, affordability, equal treatment, universal access and users’ rights. Protocol No 26 also reaffirms that the Treaties do not affect Member States’ competence to organise non-economic services of general interest.

4.11

Finally, the Lisbon Treaty has given the Charter of Fundamental Rights, including the general and specific rights in relation to SGEIs, binding legal effect equivalent to that of the Treaties.

4.12

As the provisions mentioned above show, SGEIs have attracted intense political attention and there has been concern among certain stakeholders about the direction of policy in this field. Nevertheless, the direct impact on State aid policy of the changes brought in by the Amsterdam and Lisbon Treaties has been relatively limited. High-level debates on matters of principle are clearly important, but the concentration of State aid policy on means rather than ends has the effect that State aid rules are relatively little affected by such debates. As for the power under Article 14 of the Treaty to adopt legislation concerning the economic and financial conditions on which services operate, it is unlikely to have much direct impact given that Article 14 is stated to be without prejudice to Articles 106 and 107 of the Treaty. For example, if rules were to be introduced to create minimum Union-wide quality or affordability standards, such rules might affect the way in which State aid rules are implemented, by restricting Member States’ freedom to organise services, but should not affect the essentials of State aid control.

4.13

The key to State aid policy therefore remains Article 106(2) of the Treaty. However, before addressing the scope of the derogation under that article, it is first necessary to consider how the notion of State aid in Article 107(1) of the Treaty applies to SGEI.

4.14

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1.2 The case law before Altmark 4.15

The Court’s approach to State support for SGEIs has historically been marked by strong differences of opinion as to the proper legal qualification of such support, combined with a remarkable degree of consensus as to the policy aims that should be pursued. The key debate in that respect has been over whether State support to SGEI providers should be analysed in accordance with what AG Jacobs referred to in his Opinion in GEMO as the “compensation approach” or the “State aid approach”.3761

4.16

The “compensation approach” was based on the idea that compensation for carrying out public service obligations does not bring any advantage to the beneficiary, to the extent that it does no more than cover the additional costs arising from those obligations. In that case, the compensation could more properly be said to remove a potential disadvantage arising from the public service obligations.3762 The situation has also been compared to one where the State acquires goods or services for its own use, in which case there would be no aid provided that the remuneration does not exceed what is appropriate.3763

4.17

That approach was called into question, however, by two judgments of the General Court in 19973764 and 2000,3765 in which the Court held that compensation for the costs of carrying out public service obligations did provide an advantage to the recipient of that support. Relying on the well-established principle that the purpose of a measure is irrelevant to its characterisation as aid under Article 107(1) of the Treaty,3766 the General Court drew the conclusion that the fact that compensation aimed to offset the costs of providing a service of general economic interest could not allow it to escape qualification as aid.3767 As AG Léger indicated in his second Opinion in the Altmark case,3768 the notion that aid cannot be granted without the recipient in some way changing its behaviour

3761 Case C-126/01 GEMO ECLI:EU:C:2002:273, paras 94-95. 3762 See for example Opinion of AG Tizzano in Case C-53/00 Ferring ECLI:EU:C:2001:253, para. 61. 3763 See Opinion of AG Jacobs in Case C-126/01 GEMO ECLI:EU:C:2002:273, para. 115. See also Case 240/83 Procureur de la République v ADBHU ECLI:EU:C:1985:59, para. 18 (“the indemnities do not constitute aid within the meaning of [Articles 107 et seq of the Treaty], but rather consideration for the services performed”). 3764 Case T-106/95 FFSA and others v Commission ECLI:EU:T:1997:23. 3765 Case T-46/97 SIC v Commission ECLI:EU:T:2000:123. 3766 See para 2.347 of this book. 3767 Case T-46/97 SIC v Commission ECLI:EU:T:2000:123, paras 83-84. 3768 Opinion of 14 January 2003 in Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2002:188, para. 37.

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in return is an essential element of compatibility rules in general,3769 and does not therefore justify looking at aid for SGEIs “net” of the costs of that change of behaviour, while other forms of aid are assessed on a “gross” basis, that is, without deducting the costs of complying with compatibility requirements. Despite such differences of opinion as to how to characterise compensation for the provision of SGEIs, however, the two lines of authority reached remarkably similar conclusions on the circumstances in which SGEI aid could be permitted. The key requirement, whether for SGEI compensation to escape qualification as aid under the “compensation approach” or for it to meet the conditions for application of the Article 106(2) derogation under the “State aid approach”, was that the amount of compensation should not exceed the additional costs of carrying out the public service obligations (that is, that there should be no “overcompensation”). Given the types of cases in which the issue arose, the requirement was commonly expressed as a way to avoid cross-subsidy.3770 Nevertheless, the possibility of applying that requirement even where cross-subsidy of commercial activities was impossible (for example, where the beneficiary’s only activity was the provision of SGEIs) was not ruled out.3771

4.18

In practical terms, therefore, the characterisation of SGEI compensation resolved in essence to a procedural question. Proponents of the compensation approach argued that to treat SGEI compensation as State aid would interfere with the provision of public services through the cumbersome requirement to notify all SGEI compensation.3772 Proponents of the State aid approach, on the other hand, noted that to exempt SGEI compensation from qualification as aid would make Article 106(2) of the Treaty otiose and prevent the Commission from exercising proper control over compensation.3773

4.19

The matter was addressed by the Court in July 2003 with its judgment in Altmark.3774 That judgment, while essentially endorsing the compensation approach, did so in a highly prescriptive way that left considerable scope for certain compensation to fall outside the requirements established in the case law and therefore to require assessment by the Commission under Article 106(2) of the Treaty.

4.20

3769 See the discussion of incentive effect on p. 16 of this book. 3770 See for example Case T-106/95 FFSA and others v Commission ECLI:EU:T:1997:23, para. 183. 3771 Indeed, in his Opinion in Ferring, AG Tizzano considered that overcompensation could involve aid by distorting competition in the market where the public service constraints applied, as well as the possibility that it could lead to cross-subsidy (para. 62). 3772 Opinion of AG Jacobs in Case C-126/01 GEMO ECLI:EU:C:2002:273, para. 115. 3773 Opinion of AG Léger of 19 March 2002 in Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2002:188, para. 93. 3774 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415.

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2.

The Altmark judgment and the SGEI packages

2.1 Facts and procedure 4.21

The case took the form of a preliminary reference from the German Federal Administrative Court that raised the question, among others, of whether certain subsidies granted to a local bus operator, Altmark Trans GmbH, constituted State aid within the meaning of Article 107(1) of the Treaty. Under the applicable national law, transport licences were to be granted through a public tendering procedure in accordance with public procurement rules, in order to ensure that the option chosen was the one that entailed the least cost to the public.3775

4.22

After having heard arguments in relation to the Altmark reference, a different formation of the Court delivered its judgment in Ferring.3776 That judgment reasserted the “compensation approach”, following the judgments in FFSA and SIC that had seemed to indicate the replacement of that approach by the “State aid approach”. Ferring was strongly criticised by AG Léger in his Opinion of 19 March 2002 in the Altmark case. Meanwhile, in another pending case, AG Jacobs in his Opinion of 30 April 2002 in GEMO attempted to steer a middle way by restricting the compensation approach to situations where there was a “direct and manifest link” between the public service obligations and the compensation and where those obligations were clearly defined. On the basis of the specific facts in the GEMO case, AG Jacobs indicated that the grant of compensation on the basis of public service contracts awarded in accordance with public procurement procedures would demonstrate such a “direct and manifest link”.3777

4.23

In view of the uncertainty in the case law, the parties in Altmark were given a further opportunity to state their position on the effect of the Ferring judgment. While certain interveners3778 expressed their agreement with the approach set out by AG Jacobs in his Opinion in GEMO, AG Léger’s second Opinion in the Altmark case expressed serious doubts about that approach. In particular, he questioned whether it was appropriate to take account of the beneficiary’s obligations as well as the compensation received when assessing the existence of an advantage,3779 and expressed concern that the concept of a “direct and mani3775 3776 3777 3778

Opinion of AG Léger of 19 March 2002, para. 19. Case C-53/00 Ferring ECLI:EU:C:2001:627. Opinion of AG Jacobs in Case C-126/01, GEMO, ECLI:EU:C:2002:273, para. 119. Denmark, the Netherlands and the UK. See Opinion of AG Léger of 14 January 2003 in Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2002:188, para. 9. 3779 Paras 80-82.

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fest link” would both create legal uncertainty as a result of its vagueness3780 and, if it were to be interpreted as meaning that a public service contract awarded through a public procurement procedure must be in place in order to demonstrate such a link, would make the qualification of SGEI compensation as State aid depend on formal rather than substantive elements.3781

2.2 The four conditions The Court gave its judgment in the Altmark case on 24 July 2003. The judgment, which is now accepted as the definitive statement of the law on the matter, follows ADBHU and Ferring in endorsing the “compensation approach”. At the same time, however, it sets out four cumulative conditions which must be fulfilled if SGEI compensation is not to qualify as State aid.

4.24

The criteria set out in the Altmark judgment depart significantly from the two Opinions of AG Léger, as well as from previous case law. To make matters worse, there is no explanation in the judgment as to how the Court arrived at those criteria. Nevertheless, the four criteria can be seen as bringing together aspects highlighted both in the Opinions of the Advocates-General and in the previous case law. To that extent, the Altmark judgment does not represent a departure from the previous case law, but rather an attempt to synthesise it in a new formulation that both has the necessary precision to be used by national courts applying Article 107(1) of the Treaty directly and leaves scope for Commission discretion in less clear-cut cases.

4.25

The criteria set out in the judgment are as follows:

4.26

First, the recipient undertaking must actually have public service obligations to discharge, and the obligations must be clearly defined.3782

4.27

That requirement can be seen as a response to the concern raised by AG Léger in his first Opinion that the “compensation approach” would make it possible to circumvent important elements of the compatibility assessment under Article 106(2) of the Treaty, in particular the need to verify that the task in question is indeed an SGEI and has been entrusted to the provider by an express act of the public authority.3783 The Altmark judgment avoids that concern by import-

4.28

3780 3781 3782 3783

Paras 90-91. Para. 84. Para. 89. Para. 87.

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ing those elements of the compatibility assessment into the notion of State aid through the terms of this first condition.

4.29

Second, the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings.3784

4.30

It is more difficult to find the origins of this requirement in the earlier case law. Nevertheless, the logic behind it is not difficult to understand. As explained by the Court in paragraph 91 of its judgment, it is to be contrasted with a situation where the Member State covers the losses of an undertaking where it turns out after the event that the discharge of public service obligations was not economically viable; in such a case, where the undertaking was initially willing to carry out the public service obligations without prospect of compensation, it is hard to argue that the compensation is given in consideration of such obligations.

4.31

Third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations.3785

4.32

This requirement repeats the basic condition for acceptability of SGEI compensation – under both the compensation approach and the State aid approach – that the amount of compensation should not exceed what is necessary to cover the additional costs of carrying out the public service obligations. It is clear from the formulation that the test is one of overcompensation, not cross-subsidy: the absence of any scope for cross-subsidy does not allow overcompensation to escape qualification as State aid.

4.33

While the added mention of a reasonable profit appears to derive from the ADBHU case, in which such a profit was allowed by the terms of the Directive giving rise to the case,3786 it also implies a more precise approach to overcompensation. Some of the case law prior to Altmark appears to be compatible with a fairly broad approach to the assessment of overcompensation, which might not require the costs associated with the public service obligations to be precisely identified.3787 However, if it is necessary to establish not just whether the under3784 Para. 90. 3785 Para. 92. 3786 See Opinion of AG Lenz in Case 240/83 Procureur de la République v ADBHU ECLI:EU:C:1984:357, p. 536. 3787 See for example FFSA, para. 180.

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taking is making a profit on its SGEI activities, but whether that profit is reasonable, that helps to make clear that a precise assessment is required.3788 Fourth, where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations.3789

4.34

The last of the four Altmark conditions is both the condition that represents the clearest departure from earlier case law and the one that has proved to be the most difficult to comply with in practice. In essence, that condition implies that SGEI compensation will constitute State aid, even if it does not overcompensate the provider for the additional costs incurred in discharging its public service obligations, if the costs to be covered exceed those that would have been incurred by an efficient provider.

4.35

That requirement clearly goes beyond the requirements for compatibility under Article 106(2) of the Treaty. As the Court made clear in FFSA, “[i]n the absence of Community rules governing the matter, the Commission is not entitled to rule on the basis of … La Poste’s economic efficiency in the sector reserved to it” when applying Article 106(2) of the Treaty.3790 Thus the efficiency requirement serves to ensure that, despite the Court’s confirmation of the compensation approach, Article 106(2) of the Treaty retains a role in the system of State aid control in the SGEI field: compensation that does not exceed the extra costs of an efficient provider is not aid, whereas compensation that, while not overcompensating the costs of the specific provider, does exceed efficient costs must be assessed by the Commission under Article 106(2) of the Treaty.

4.36

3788 See in that respect Case C-399/08 P Commission v Deutsche Post ECLI:EU:C:2010:481, paras 42-47, in which the Court of Justice upheld the General Court’s finding that the Commission’s failure to check whether compensation received by Deutsche Post exceeded what was necessary to cover the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit, constituted grounds for annulment of a Commission decision finding that Deutsche Post had benefited from overcompensation. 3789 Para. 93. 3790 Para. 108.

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4.37

One further point is worth noting about the fourth condition. Despite AG Léger’s warning of the risks of making the notion of aid depend upon formal rather than substantive conditions, it is clear that the fourth condition is indeed largely formal. It is true that the two limbs of the condition can be seen as essentially evidential, with the underlying question being whether or not the costs of the undertaking in question exceed those of an efficient provider. But the fact remains that those two options – either use of a public procurement procedure or benchmarking against the costs of an efficient provider – are the only two ways in which that can be shown. It may be that with two examples before it of SGEI compensation awarded by means of a procurement procedure – in GEMO as well as in Altmark itself – the challenges of using such a procedure were not uppermost in the Court’s mind. But the fact that procurement procedures, as well as being costly to organise, may undermine the position of existing providers has meant that the Altmark judgment has emphasised the way that State aid policy prioritises provision of services over protection of providers, sparking further controversy over this area of law.

2.3 Scope and implications of the Altmark judgment 4.38

The Altmark judgment introduced specific rules for determining the existence of an advantage in relation to SGEIs. Those rules are distinguished by the adoption of a compensation approach, or what might be referred to as a “net” rather than a “gross” concept of State aid.3791 While there are clearly arguments in favour of a compensation approach, the adoption of this approach leaves certain troubling questions about what it is about SGEIs that qualifies them for this approach, and therefore what the scope of the notion of SGEI should be.

4.39

One approach to understanding the “net” approach to aid for SGEIs is to treat it as filling in a gap in the the market economy operator principle.3792 As noted elsewhere,3793 when applying the market economy operator test, benefits to the State of carrying out a transaction cannot be taken into account unless those benefits could also have been taken into account by a market operator. There is therefore no scope to apply the market economy operator test to a transaction (such as procurement of an SGEI) where the benefits sought by the State are public policy benefits that would not be of interest to a private operator. The Altmark approach can be seen as allowing that gap to be filled by providing a 3791 That is to say, a concept under which the amount of aid is assessed net of the linked obligations. 3792 See paras 2.353 to 2.474 of this book. 3793 See paras 2.394 to 2.396 of this book.

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framework in which a transaction on market terms that seeks to achieve nonmarket objectives can also be found not to constitute State aid. For example, the provision of postal services in rural areas is a public policy objective; but entrusting such services in accordance with the Altmark conditions should ensure that the price paid is the market price for such provision. The difficulty of that approach is that it is not clear what the limits to it could be. Whenever the State grants support to an undertaking, it aims (or should aim) at reaping certain public policy benefits from the intervention. Why is it that public policy benefits linked to the provision of SGEIs justify a net approach to the notion of State aid, while those linked to regional development, for example, do not?

4.40

One possible solution is that the key feature that distinguishes an SGEI is that it involves the provision of services to the citizen. The fact that, by entrusting an SGEI, the State is procuring a service on behalf of the citizen would then justify a different and less stringent approach to the notion of State aid. If that is the case, it would seem to follow that, when the Commission mentions in the SGEI Communication that an SGEI “must be addressed to citizens or be in the interest of society as a whole”,3794 it is the first of those conditions that is in fact determinative.

4.41

2.4 Outline of the 2005 (“Monti-Kroes”) SGEI package In the years leading up to the Altmark judgment, the Commission faced a number of calls for greater clarity and legal certainty in the application of the State aid rules to SGEI. Following up on those calls, the Commission proposed in 2001 to take a two-step approach to improving legal certainty, with a framework setting out the conditions for approval of SGEI compensation under Article 106(2) of the Treaty to be followed, after evaluation of the application of the framework, by a block exemption that would specify compatibility conditions and/or the conditions to be fulfilled in order to ensure that SGEI compensation was not State aid.3795

4.42

Work on those documents was suspended as a result of the uncertainty caused by the Altmark case. Immediately following the judgment, however, the Commission returned to its 2001 proposal. Rather than adopt a two-stage approach, the framework and block exemption were adopted as a package. That package,

4.43

3794 Para 50. 3795 See Report to the Laeken European Council: Services of General Interest, COM(2001) 598 final.

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which was launched during the mandate of Mario Monti as Competition Commissioner and completed under his successor, Neelie Kroes, is commonly known as the “Monti-Kroes package”. Under the Monti-Kroes package, the framework took the form of a Communication setting out the Commission’s approach to assessing compatibility under Article 106(2) of the Treaty, 3796 while the “block exemption” was adopted in the form of a Decision addressed to all Member States, adopted under Article 106(3) of the Treaty.3797 The Decision covered annual compensation of less than EUR 30 million awarded to undertakings with an average annual turnover in the previous two financial years of less than EUR 100 million, as well as compensation for social housing and hospitals (without limitation of amount) and air and maritime transport (subject to ceilings linked to passenger numbers).3798

4.44

What is perhaps most noteworthy about those documents is how closely the compatibility conditions parallel the Altmark conditions: in both the framework and the Decision, the main requirements for compatibility are the existence of a valid entrustment (setting out the public service obligations and the mechanism for calculating, controlling and reviewing the compensation) and the avoidance of overcompensation. It is true that those documents include additional clarifications and procedural requirements (such as a definition of “reasonable profit” and requirements for regular overcompensation checks). Nevertheless, the fact that compensation is qualified as State aid does not lead to the application of stricter standards than those required by the Altmark criteria. Although Article 106(2) of the Treaty retains a role under the Altmark system, therefore, that role is somewhat truncated.

2.5 Outline of the 2011/12 (“Almunia”) SGEI package 4.45

With the 2005 framework due to expire in November 2011, the Commission began the process of reviewing the Monti-Kroes package with the launch of a public consultation in June 2010. As the Commission noted in a report published in March 2011, the public consultation identified a series of issues with the package then in force. In particular, the Commission noted that:

3796 Community framework for State aid in the form of public service compensation, OJ C 297, 29.11.2005, p. 4. 3797 Commission Decision 2005/842/EC of 28 November 2005 on the application of Article 86(2) of the EC Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 312, 29.11.2005, p. 67. 3798 Article 2.

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–

Many stakeholders sought clarification on questions relating to the notion of State aid, both in general terms (such as the distinction between economic and non-economic activity) and in relation to the Altmark criteria.

–

Others expressed concern that the requirements imposed by the package were excessively demanding for social services and for small-scale services organised by local authorities.

–

Finally, certain stakeholders argued that for large-scale services in commercial fields, the requirements of the package might not be sufficient to prevent distortions of competition. There was particular concern about the high ceiling below which SGEI compensation came under the Decision (and could thus escape detailed scrutiny by the Commission), as well as the fact that the compatibility conditions in the framework focused on the avoidance of overcompensation, to the exclusion of issues of efficiency and broader competitive impacts (such as the capacity of aid to support the creation or maintenance of networks that could allow incumbents to foreclose markets).3799

A revised package was therefore adopted in 2011-2012 under the mandate of Vice-President Joaquín Almunia (hence, the “Almunia package”). That package made significant changes to the Decision and framework, and introduced two new instruments. The Almunia package in its final form therefore consists of the following four documents: –

4.46

A de minimis regulation (the “SGEI de minimis regulation”) providing that SGEI compensation that does not exceed EUR 500 000 over any period of three fiscal years is not considered to be State aid.3800 The regulation seeks to limit the administrative burden of compliance with the SGEI rules by raising the de minimis limit above the EUR 200 000 ceiling that applies outside the SGEI field.3801

3799 Commission Staff Working Paper: The Application of EU State Aid rules on Services of General Economic Interest since 2005 and the Outcome of the Public Consultation, SEC(2011) 397. 3800 Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest, OJ L 114, 26.04.2012, p. 8. See further paras 4.114 to 4.118 of this book. 3801 On the general rules on de minimis aid, see Chapter 13 of this book.

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A new Communication (the “SGEI Communication”) that clarifies certain key concepts of State aid law.3802 That includes both the main elements of the general notion of State aid, such as the concept of an “undertaking” and of an effect on trade between Member States, and also the interpretation of the Altmark conditions. As regards the Altmark conditions, the SGEI Communication is a fairly bold document, setting forth detailed provisions on how the Commission will interpret conditions whose meaning is not fully clear from the case law. While paragraph 7 of the SGEI Communication expressly states that it is without prejudice to the case law of the Court, the Commission’s interpretations will in fact provide the best guidance available, at least until the Court has the occasion to consider the issues; that being so, the discussion of the Altmark conditions below refers not only to case law, but also, where relevant, to the SGEI Communication.

–

A revised Decision (“SGEI Decision”).3803 The most significant changes to the SGEI Decision are two contrasting amendments that together reflect the Commission’s intention to adopt a more proportionate approach to the compatibility of SGEI compensation. On the one hand, the annual compensation ceiling is reduced from EUR 30 million to EUR 15 million3804 (the turnover ceiling, which the Commission considered was difficult to apply in the case of group structures and could lead to discrimination between undertakings of different sizes,3805 has also been abandoned), bringing more commercial SGEI services into the scope of the SGEI Framework rather than the Decision. On the other hand, the exemption without limit of amount is extended from social housing and hospitals to also cover services of general economic interest meeting social needs as regards health and long term care, childcare, access to and reintegration into the labour market and the care and social inclusion of vulnerable groups.3806

3802 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4. 3803 Commission Decision 2012/21/EU of 20 December 2011 on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.01.2012, p. 3. See further chapter 34 of this book. 3804 Article 2(1)(a). 3805 See the Commission’s impact assessment report on the reform of the EU rules applicable to State aid in the form of public service compensation, SEC(2011) 1581 final, p. 33. 3806 Article 2(1)(c).

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A revised Framework (“SGEI Framework”).3807 The SGEI Framework includes a number of new provisions that introduce into the Commission’s assessment under Article 106(2) of the Treaty a much more detailed assessment of the risks of distortion of competition. The Framework no longer assumes that avoiding overcompensation is a sufficient guarantee of the absence of competition harm. Recognising the risk that a simple focus on overcompensation may remove any incentive for SGEI providers to control costs, the Framework requires Member States to introduce incentives for efficient provision of SGEI.3808 It requires Member States to comply with the applicable procurement rules when entrusting SGEIs to a provider3809 and to calculate compensation on the same basis for all undertakings entrusted with provision of the same SGEI, thus avoiding discrimination.3810 The Framework also contains a very broad provision concerning any “serious competition distortions” that may remain even after the basic requirements of the Framework have been complied with;3811 where that is the case (for example, where the aid allows the SGEI provider to finance an infrastructure that is not replicable and that enables it to foreclose the SGEI market or a related market), further conditions or commitments may be necessary for approval of the aid.

4.47

The remainder of this Chapter considers in detail the circumstances in which SGEI compensation qualifies as State aid. It focuses on the application in practice of the four Altmark criteria, and also describes briefly how small amounts of compensation can be deemed not to constitute State aid under the SGEI de minimis regulation. The following chapters address the compatibility conditions for SGEI compensation under the SGEI Decision and Framework.

4.48

–

3.

The Altmark conditions3812

3.1 First Altmark condition: entrustment with a clearly defined public service obligation The first Altmark condition stipulates that “the recipient undertaking must actually have public service obligations to discharge, and the obligations must be

4.49

3807 Communication from the Commission: European Union framework for State aid in the form of public service compensation (2011), OJ C 8, 11.1.2012, p. 15. See further chapter 35 of this book. 3808 Para. 39; see further paras 4.343 to 4.360 of this book. 3809 Para. 19; see further paras 4.214 to 4.216 and 4.235 to 4.245 of this book. 3810 Para. 20; see further paras 4.246 to 4.254 of this book. 3811 Paras 51-59; see further paras 4.364 tot 4.373 of this book. 3812 This section draws in parts from the chapter on Services of General Economic Interest in the previous version of this book, written by Davide Grespan.

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clearly defined”.3813 Thus, the first Altmark condition is only fulfilled if the service constitutes (1) a clearly defined public service obligation which has been (2) entrusted to the service provider. Both requirements will be further explained in the following sections. The definition of a public service obligation or Service of General Economic Interest (SGEI)3814 is key to the application of not only the Altmark judgment but also the rules that form the “Altmark package”, i.e. the SGEI Decision, the SGEI Framework and the SGEI de minimis regulation.

4.50

It should be noted that the Altmark conditions, as well as the other conditions for the existence of State aid pursuant to Article 107(1) of the Treaty, are further clarified in the SGEI Communication. The SGEI Communication includes a useful summary of the case law and explains the Commission’s interpretation of some aspects of the Altmark judgment that have not yet been clarified by the Court of Justice. However, it is without prejudice to the case law of the Court, which sets out the decisive parameters that determine the existence of aid.

3.1.1 Definition of a SGEI 4.51

There is no general definition in Union law of the notion of services of general economic interest and no established legal concept definitively fixing the conditions that must be satisfied before a Member State can invoke the existence of a SGEI mission, either within the meaning of the first Altmark condition or within the meaning of Article 106(2) of the Treaty.3815 Moreover, the concept is dynamic and evolves depending, among other things, on the needs of citizens, technological and market developments and social and political preferences in the Member State concerned.3816

4.52

In its case-law, the Court has clarified that SGEIs are services that exhibit special characteristics as compared with those of other economic activities.3817 In addition, the Commission stated in its SGEI Quality Framework3818 that SGEIs 3813 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para. 89 (hereinafter: Altmark judgment) 3814 In the following, the notions of public service obligation (PSO) and services of general economic interest (SGEI) are considered to have the same meaning. 3815 Article 106(2) of the Treaty only speaks of a “particular task” that undertakings carrying out the operation of SGEIs are entrusted with. 3816 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 45. 3817 Cases C-179/90 Merci convenzionali porto di Genova ECLI:EU:C:1991:464, para. 27; Case C-242/95 GT-Link v De Danske Statsbaner ECLI:EU:C:1997:376, para. 53; and Case C-266/96 Corsica Ferries France v Gruppo Antichi Ormeggiatori del porto di Genova and others ECLI:EU:C:1998:306, para. 45. 3818 Communication on a Quality Framework for Services of General Interest in Europe, 20.12.2011,

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are “economic activities which deliver outcomes in the overall public good that would not be supplied (or would be supplied under different conditions in terms of quality, safety, affordability, equal treatment or universal access) by the market without public intervention.” It is not necessary that the public services directly benefit citizens; they can also benefit undertakings that in turn provide public services to citizens.3819 The Court has specified that the determination of the nature and scope of a SGEI mission in spheres which do not fall within the powers of the Union or are based on only limited or shared Union competence remains, in principle, within the competence of the Member States.3820 Member States therefore have a wide discretion to define what they consider as SGEIs. Outside sectors where the notion of SGEI has been defined through Union legislation, that definition can be questioned by the Commission only in the event of manifest error. Thus, account needs to be taken of the specific nature of the sector in question when assessing the SGEI definition of the Member State.

4.53

As will be explained later, the same flexibility seems to apply as regards the application of the other Altmark conditions and the SGEI compatibility rules. Hence, with respect to sectors - such as the health or hospital sector - which fall within the exclusive competence of Member States,3821 the Court considers it appropriate to show flexibility with regard to the application of the Altmark judgment, by referring to the spirit and the purpose of the conditions in a manner adapted to the particular facts of the case.3822

4.54

The definition of a SGEI and the way it is financed constitute two distinct issues. For instance, a SGEI in the field of broadcasting, where the Court has recognised that a legitimate SGEI can cover full-spectrum broadcasting, cannot be

4.55

COM(2011) 900 final, page 3. 3819 Joined Cases C-197/11 and C-203/11 Libert and others ECLI:EU:C:2013:288, para. 88. 3820 T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 167 (hereinafter BUPA judgment). 3821 According to Article 168 of the Treaty, the Union can only engage in action which is not legally binding, while fully respecting the responsibilities of Member States for the organisation and provision of health services and medical care. See also para. 92 of Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, which stipulates that the application of Article [106(2) of the Treaty] in the hospital sector concerned must take account of respect of the responsibilities of the Member States for the definition of their health policy and the organisation and delivery of health services and medical care. That consideration stems, inter alia, from Article [168 of the Treaty] . 3822 Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 86. In addition, the General Court took into account the fact that the sector in question constitutes an economic activity essentially because of its impact on the competitive and commercial sector. Therefore, the Altmark judgment concerning transport cannot be applied strictly to the hospital sector, which does not necessarily have such a competitive and commercial dimension.

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called into question by the fact that it is financed through the sale of advertising space which constitutes a commercial activity. According to the General Court, “an SGEI is defined, ex hypothesi, in relation to the general interest which it is designed to satisfy and not in relation to the means of ensuring its provision”.3823

4.56

Member States’ discretion is not unlimited, of course. If it were, the definition of a service as SGEI would provide a simple means to avoid the more demanding rules, particularly on operating aid, that apply in other fields. The definition of SGEI can therefore be called into question in the case of a manifest error. The Court’s case law and the Commission’s decision-making practice illustrate certain limited examples of such manifest error. The following list is not exhaustive, but gives an overview of the cases where the Court or, more often, the Commission has considered that the definition of a service as SGEI was manifestly wrong. It should however be emphasised that it is rare for the Commission to find a manifest error in a Member State’s definition of a SGEI:3824 –

port operations, i.e. the loading, unloading, transshipment, storage and movement in general of goods or any equipment in national ports;3825

–

activities consisting in advertising, e-commerce, the use of premium-rate telephone numbers in prize games, sponsoring or merchandising;3826

–

disposal of animal corpses and maintaining an epidemic reserve capacity;3827

3823 Joined Cases T-309/04, T-317/04, T-329/04 and T-336/04 TV 2/Danmark v Commission ECLI:EU: T:2008:457, para. 108. 3824 In practice, if the Commission should consider, for instance in the context of a pre-notification procedure, that an SGEI definition is erroneous, it would encourage the Member State to change the definition or choose a different legal basis, still in the pre-negotiation phase. 3825 Case C-179/90 Merci convenzionali porto di Genova ECLI:EU:C:1991:464, para. 27; Case C-242/95 GT-Link v De Danske Statsbaner ECLI:EU:C:1997:376, para. 53; and Joined Cases C-34/01 to C-38/01 Enirisorse ECLI:EU:C:2003:640, paras 33-34. 3826 Communication from the Commission on the application of State aid rules to public service broadcasting, OJ C 257, 27.10.2009, p. 1. 3827 Commission Decision C(2012) 2257 final of 25 April 2012 on Germany – State aid granted by Germany to the Zweckverband Tierkörperbeseitigung in Rhineland-Palatinate, Saarland, Rheingau-Taunus-Kreis and Landkreis Limburg-Weilburg, (NN23/2010 and N15/2004), OJ L 236, 01.09.2012, p. 1, paras 175 et seq and 186 et seq. Confirmed by the General Court in Case T-309/12 Zweckverband Tierkörperbeseitigung v Commission ECLI:EU:T:2014:676. Those operators should bear the costs of disposing the waste that they have caused (i.e. the SGEI obligation contradicts the polluter-pays-principle).

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–

production and marketing of products listed in Annex I of the Treaty (i.e. agricultural products);3828

–

broadband limited to business parks, thus not benefitting the population at large;3829

–

economic development;3830

–

tourism promotion;3831

–

promotion of horse breeding;3832

–

environmental project for an electricity power station and compliance with Union standards;3833

–

additional ferry routes where it is not demonstrated that the services would be inadequate if they were left to market forces alone (Article 4 of Regulation 3577/1992).3834

3828 Commission Decision C(2000) 1173 final of 11.04.2000 on Italy – Centrale del Latte di Roma, (C 28/1998), OJ L 265, 19.10.2000, p. 15. 3829 Commission Decision C(2007) 3235 final of 10.07.2007 on France – Aide du Sicoval pour un réseau de très haut debit, (N 890/2006), OJ C 218, 18.09.2007, p. 1, para. 35; Commission Decision C(2006) 436 final of 08.03.2005 on Ireland – Regional Broadband Program “MAN”, (N 284/2005), OJ C 207, 30.08.2000, p. 2, paragraphs 37 to 40. 3830 Commission Decision C(2004) 4343 final of 16.11.2004 on France – Projet de réseau de télécommunication haut débit des Pyrénées-Atlantiques, (N 381/2004) OJ C 162, 02.07.2005, p. 5, para. 53; Commission Decision C(2009) 7426 final of 30.09.2009 on France - Compensation de charges pour une Délégation de Service Public (DSP) pour l’ établissement et l’exploitation d’un réseau de communications électroniques à très haut débit dans le Département des Hauts-de-Seine, (N331/2008) OJ C 256, 23.09.2010, p. 1, para. 143. 3831 Commission Decision C(2012) 1731 final of 21.03.2012 on Germany – Nürburgring, (SA.31550 ), OJ C 216, 21.07.2012, p. 14, para. 192 3832 Commission Decision C(2010) 7672 final of 17.11.2010 on France – Taxe affectée au financement de la mission de service public d’amélioration de l’espèce équine et de promotion de l’ élevage, de formation dans le secteur des courses et de l’ élevage chevalin ainsi que de développement rural, (C 34/2010), OJ L 14, 18.01.2014, p. 17, para. 45. 3833 Commission Decision of 17.11.2010 on Malta – Environmental project for Delimara power station, (C 32/2010 ), OJ C 52, 18.02.2011, p. 3, The EU Electricity Directive 2009/72/EC gives the possibility to entrust an SGEI for reasons of security of electricity supply, taking into account environmental protection. The Commission raised doubts that an improvement of the emission performance which, however, did not go beyond EU standards, could constitute an integral part of the SGEI. In addition, it raised doubts whether the project contributed to enhancing security of supply (paras 83 et seq.). 3834 Commission Decision C(2013) 4231 final of 02.05.2013 on France – Concernant l’aide d’Etat mise à exécution par la France en faveur de la Société Nationale Corse Méditerranée (SNCM) et la Compagnie Méridionale de Navigation (CMN), (SA.22843) OJ L 220, 17.08.2013, p. 20, para. 167. See also Commission Decision C(2011) 6961 final of 05.10.2011 on Italy – Measures implemented by the Region of

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4.57

In contrast, the following non-exhaustive list of examples gives an overview of the cases where the Commission accepted the SGEI definition put forward by the Member State: –

maintaining a network of loss-making post offices in rural areas, providing a set of public services, e.g. banking access, processing of social benefits and tax payments;3835

–

social housing for a certain target group of disadvantaged persons;3836

–

access to basic banking services;3837

–

deployment of a broadband network, ensuring NGA access to all citizens or users in a certain area which the private sector would not provide in the foreseeable future;3838

–

the provision of new electricity reserve generation capacity to cope with electricity demand at any time of the year, including in peak periods;3839

3835

3836 3837

3838

3839

Sardinia in favour of Saremar, (SA.32014, SA.32015, SA.32016 and C64/1999) OJ C 28, 01.02.2012, p. 18, paras 180 et seq. Commission Decision C(2006) 434 final of 22.02.2006 on United Kingdom – Government rural network support funding to Post Office Limited (POL) for 2006-2008, (N166/2005) OJ C 141, 16.06.2006, p. 2, paras 39 to 43; Commission Decision C(2012) 1905 final of 28.03.2012 on United Kingdom – Post Office Limited (POL), (SA.33054) OJ C 121, 26.04.2012, p. 2, paras 27 et seq. and 54 et seq., where the SGEI was divided into a network SGEI and a product SGEI ; see also Case T-106/95 FFSA and others v Commission ECLI:EU:T:1997:23, para 72. Commission Decision C(2009) 9963 final of 15.12.2009 on The Netherlands – Existing and special project aid to housing corporations, (E 2/2005 and N 642/2009) OJ C 31, 09.02.2010, p. 6. Commission Decision C(2002) 311 final of 06.08.2003 on United Kingdom – Modernisation of the UK benefit payment system and provision of access to universal banking services through post offices, (N 514/2001) OJ C 186, 06.08.2013, p. 16; Commission Decision C(2005) 977 final of 06.04.2005 on United Kingdom – Credit Union Provision of Access to Basic Financial Services, (N 244/2003) OJ C 323, 20.12.2005, p. 13; Commission Decision C(2008) 5585 final of 21.10.2008 on Italy – Poste Italiane distribution of postal savings certificates, (C 49/2006 ), OJ L 189, 21.07.2009, p.4; Commission Decision C(2006) 5481 final of 22.11.2006 on Sweden – Compensation to Posten AB for providing basic payment and cash facilities services, (N 642/2005), OJ C 291, 05.12.2007, p. 5; Commission Decision C(2002) 941 final of 12.03.2002 on Ireland – Equity injection to An Post for the purpose of restructuring the counter network, (N 650/2001), OJ C 43, 27.02.2007, p.1; see also the Commission Recommendation on access to a basic payment account (C(2011)4977). T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and T-325/10 Iliad and others v Commission (Hauts-de-Seine) ECLI:EU:T:2013:463. See also Commission Decision C(2010) 4943 final of 20.07.2010 on Estonia Establishment of a sustainable infrastructure permitting Estonia-wide broadband internet connection (EstWin project), (N 196/2010), OJ C 60, 25.02.2011, p.4, paras 48 to 59; Commission Decision C(2004) 4343 final of 16.11.2004 on France – Projet de réseau de télécommunication haut débit des Pyrénées-Atlantiques, (N 381/2004) OJ C 162, 02.07.2005, p. 5. Commission Decision C(2003) 4488 final of 16.12.2003 on Ireland – Public service obligation in respect

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–

security of electricity supply through a preferential dispatch mechanism of electricity produced from indigenous coal;3840

–

maintaining a scheduled bus service in rural areas;3841

–

nature conservation;3842

In addition, the construction of infrastructure that is linked to the public service obligation and is, therefore, necessary for its provision can qualify as a cost linked to the provision of an SGEI.3843

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3.1.2 Limits when defining the SGEI Even though Member States have wide discretion when determining what they regard as SGEI, the Court has set out certain limits that Member States must respect when defining SGEIs. As such, the provision of the service in question must, by definition, serve a general or public interest as opposed to services in the private interest, even though that interest may be more or less collective or be recognized by the State as legitimate or beneficial.3844 Furthermore, it must indicate the reasons why it considers that the service in question, because of its specific nature, deserves to be characterised as a SGEI and to be distinguished from other economic activities. It must also ensure that the mission satisfies certain minimum criteria common to every SGEI mission within the meaning of the Treaty.3845 Absent those minimum requirements, the Commission could not even conduct a marginal review as required by the first Altmark condition and Article 106(2) of the Treaty, creating the risk that the Commission itself would commit a manifest error.3846

4.59

of new electricity generation capacity for security of supply, (N 475/2003), OJ C 34, 07.02.2004, p. 8. 3840 Case T-57/11 Castelnou Energía v Commission ECLI:EU:T:2014:1021. 3841 Commission Decision C(2009) 6789 final of 15.09.2009 on Germany – Satzung zur Unterstützung eigenwirtschaftlicher Verkehrsleistungen im Landkreis Wittenberg, (N 207/2009), OJ C 255, 24.10.2009, p. 4, para. 36; Commission Decision C(2009) 6777 final of 15.09.2009 on Germany – Finanzierung für den Öffentlichen Personennahverkehr im Landkreis Anhalt-Bitterfeld, (N 206/2009 ), OJ C 255, 24.10.2009, p.4, para. 39. 3842 Commission Decision C(2009) 5080 final of 02.07.2009 in case Germany – Nature conservation areas, (NN 8/2009 ), OJ C 230, 24.09.2009, p. 2, paras 53 et seq. 3843 See Article 5(3)(d) of the SGEI Decision; para. 49 of the Broadband Guidelines; Commission Decision C(2012) 142 final of 25.01.2012 on Greece – Aid to Hellenic Post, (SA.32562 ), OJ C 99, 03.04.2012, p. 3, Commission Decision C(2005) 4668 final of 07.12.2005 on Ireland –Loan guarantee for social infrastructure schemes funded by the Housing Finance Agency, (N 395/2005 ), OJ C 77, 05.04.2007, p. 1, para. 40. 3844 Case 172/80 Zürchner v Bayerische Vereinsbank, ECLI:EU:C:1981:178, para. 97; Case 7/82 GVL v Commission ECLI:EU:C:1983:52. 3845 T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 172. 3846 T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and T-325/10 Iliad and others v Commission (Hauts-de-Seine)

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From the Court’s case law, the minimum requirements to be observed by Member States when defining an SGEI appear to be the following: (a)

if the SGEI is subject to specific Union legislation, the discretion of Member States when defining the public service obligation is limited in accordance with the conditions set in the sectoral legislation. That limitation applies e.g. in sectors which have been harmonised at Union level such as the postal, telecommunications and energy sectors;3847

(b)

the SGEI obligation must address a market failure;

(c)

it must be universal and compulsory.

These requirements will be discussed next.

3.1.2.1 Public services subject to Union legislation 4.61

Whereas, as explained above, Member States have a wide discretion when defining a SGEI, in particular in sectors that fall within their competence, such discretion is limited in sectors that fall under the exclusive competence of the Union and which have been regulated through Union secondary law. The SGEI Communication states that: “in the absence of specific Union rules defining the scope for the existence of an SGEI, Member States have a wide margin of discretion in defining a given service as an SGEI and in granting compensation to the service provider. The Commission’s competence in this respect is limited to checking whether the Member State has made a manifest error when defining the service as an SGEI and to assessing any State aid involved in the compensation. Where specific Union rules exist, the Member States’ discretion is further bound by those rules, without prejudice to the Commission’s duty to carry out an assessment of whether the SGEI has been correctly defined for the purpose of State aid control”.3848 ECLI:EU:T:2013:463, para. 124. 3847 See Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users’ rights relating to electronic communications networks and services (Universal Service Directive), OJ L 108, 24.04.2002, p. 51 (as amended by Directive 2009/136/EC, OJ L 337, 18.12.2009, p. 11); Directive 97/67/EC of the European Parliament and of the Council of 15 December 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service, OJ L 15, 21.1.1998, p. 14 (as amended by Directives 2002/39/EC, OJ L 176, 05.07.2002, p. 21 and 2008/06/EC, OJ L 52, 27.02.2008, p. 3); Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity, OJ L 211, 14.08.2009, p. 55. 3848 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para.

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Such is the case, for instance, in the field of passenger transport and cabotage where detailed EU rules governing public service obligations (hereafter PSOs) have been laid down in the Passenger Transport Regulation3849 and the Maritime Cabotage Regulation.3850 In addition, the EU has adopted Directives to liberalise and harmonise the telecommunications, postal and energy sectors, which also make reference to SGEIs in the form of universal service obligations (hereafter USO).3851 For instance, in the field of passenger transport, Article 93 of the Treaty constitutes a lex specialis in relation to Article 106(2) of the Treaty. The Transport Regulation 1370/2007,3852 adopted on the basis of Article 93 of the Treaty, contains specific provisions with respect to public service obligations, which Member States need to comply with and which therefore limit their discretion.3853 The same is the case in the field of cabotage, where it results from the Maritime Cabotage Regulation in conjunction with established case law that public service obligations may only be imposed if justified by the need to ensure adequate regular maritime transport services which cannot be ensured by market forces alone.3854 The Communication interpretating the Maritime Cabotage

3849

3850 3851

3852

3853

3854

4.62

46. See also Commission Decision C (2012) 2257 final of 25 April 2012 on Germany – State aid granted by Germany to the Zweckverband Tierkörperbeseitigung in Rhineland-Palatinate, Saarland, RheingauTaunus-Kreis and Landkreis Limburg-Weilburg, (NN23/2010 and N15/2004), OJ L 236, 01.09.2012, p. 1, para. 176. In that decision, the Commission concluded that as the disposal of animal carcasses is regulated by Union law which foresee the polluter-pays-principle, qualifying the disposal as a SGEI and granting compensation constitutes a manifest error: “Because of these specific provisions of Union law there is no longer any room for national provisions seeking to classify the disposal of category 1 and 2 material as a service of general economic interest. Classing it as a service of general economic interest is therefore ruled out.” A challenge to that decision was rejected by the General Court in Case T-309/12 Zweckverband Tierkörperbeseitigung v Commission ECLI:EU:T:2014:676. Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, OJ L 315, 03.12.2007, p. 1. Council Regulation (EEC) No 3577/92 of 7 December 1992 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage), OJ L 364, 12.12.1992, p. 7. A universal service is defined as the minimum set of services of a specified quality to which all users and consumers have access in the light of a specific national condition, at an affordable price and irrespective of the profitability of individual operations (Annex II of the 2001 SGEI Communication). Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, OJ L 315, 03.12.2007, p. 1. See for instance Article of the Regulation which provides: “The purpose of this Regulation is to define how, in accordance with the rules of Community law, competent authorities may act in the field of public passenger transport to guarantee the provision of services of general interest which are among other things more numerous, safer, of a higher quality or provided at lower cost than those that market forces alone would have allowed. To this end, this Regulation lays down the conditions under which competent authorities, when imposing or contracting for public service obligations, compensate public service operators for costs incurred and/or grant exclusive rights in return for the discharge of public service obligations.” Case C-205/99 Analir and others ECLI:EU:C:2001:107; see also Commission Decision C(2011)6961 of 5.10.2011 on Italy – State aid to the companies of the former Tirrenia Group (potential State aid under the form of public service compensation and potential aid in the context of the privatisation), SA.32014

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Regulation confirms that “it is for the Member States […] to determine which routes require public service obligations. In particular, public service obligations may be envisaged for regular (scheduled) island cabotage services in the event of market failure to provide adequate services”.3855

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In the energy sector, Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 96/92/EC3856 makes a clear and explicit reference to the fact that Member States may entrust services of general economic interest in relation to security of electricity supply. Its preamble states that (Recital 46): “[r]espect for the public service requirements is a fundamental requirement of this Directive, and it is important that common minimum standards, respected by all Member States, are specified in this Directive, which take into account the objectives of consumer protection, security of supply, environmental protection and equivalent levels of competition in all Member States.”

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Furthermore, paragraph 2 of its Article 3 states that: “Member States may impose on undertakings operating in the electricity sector, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency and climate protection. Such obligations shall be clearly defined, transparent, non discriminatory, verifiable and shall guarantee equality of access for EU electricity companies to national consumers”.

4.65

Besides the liberalisation of certain sectors through Union legislation, the Commission has defined through soft law the scope of SGEI in certain sectors such as broadband,3857 broadcasting,3858 and maritime transport.3859 However, the guidelines adopted in those sectors are based on Article 106(2) of the Treaty and therefore represent the Commission’s interpretation of this provision in those sectors. They are meant to provide legal certainty to Member States but

3855

3856 3857 3858 3859

(2011/C) (ex 2011/NN), SA.32015 (2011/C) (ex 2011/NN), SA.32016 (2011/C) (ex 2011/NN), OJ C 28, 01.02.2012, p. 18, paras 198 et seq. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions updating and rectifying the Communication on the interpretation of Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage), COM (2003) 595 final, 22.12.2003. OJ L 211, 14.8.2009, p. 55. EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, OJ C 25, 26.01.2013, p. 1. Communication from the Commission on the application of State aid rules to public service broadcasting, OJ C 257, 27.10.2009, p. 1. Commission Communication C(2004) 43 – Community Guidelines on State aid to maritime transport, OJ C 13, 17.01.2004, p. 3

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do not limit their freedom to define SGEIs in those sectors.3860 In addition, the guidelines and other soft law instruments adopted by the Commission do not in any way bind the Union Courts.

3.1.2.2 Market failure According to the case law of the Court of Justice, the existence of a market failure is a necessary condition for defining and entrusting a SGEI. Indeed, where there are other, non-entrusted, undertakings operating under normal market conditions that already provide or can provide a service satisfactorily and under conditions such as price, objective quality characteristics, continuity and access to the service that are consistent with the public interest, it is not appropriate to attach a public service obligation to such a service.3861 If, on the other hand, a service is already provided by the market, but under conditions that are considered unsatisfactory by the Member State concerned, for instance because the market cannot provide it at the level of quality or at a price that public authorities might consider as being in the public interest (for example because transport fares are too expensive for low-income families), such a service can qualify as a SGEI.

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The market failure should exist at the moment of entrustment of the SGEI and during the entire duration of the entrustment of the SGEI provider, subject to the manifest error check of the Commission.3862 However, in relation to a public service in the passenger transport sector, which is characterised by low and high seasons and where a market failure only existed in the low season, the Commission considered it acceptable that the public service obligation nevertheless covered the whole year (and not only the low season). Besides efficiency and technical reasons that made it appropriate for the same ferry operator to provide the public service throughout the year, the higher revenues in the peak season also allowed the provider to reduce its fares in the low season.3863 The same reasoning

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3860 In that respect, see Case T-309/12 Zweckverband Tierkörperbeseitigung v Commission ECLI:EU:T:2014: 676, para. 110. 3861 Case C-205/99 Analir ECLI:EU:C:2001:107. See also para. 48 of the Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4 3862 The assessment by the Commission as to whether the Member State committed a manifest error needs to be made on the basis of the information available at the time of the decision. (T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and T-325/10 Iliad and others v Commission (Hauts-de-Seine) ECLI:EU:T:2013:463. para. 169) 3863 The Commission stated that “ des considerations d’efficacité technique et économique évidentes justifient le caractère permanent de service de base, sans qu’ il soit ainsi besoin de caractériser une carence des services de transport sur toute l’année.” » (Commission Decision C(2013) 4231 final of 02.05.2013 on France - Con-

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was followed for a public service contract concerning rail passenger transport which included unprofitable but also profitable rail links to the extent that they formed a coherent transport system covering the whole territory concerned.3864

3.1.2.3 Universal and compulsory nature of the SGEI 4.68

In addition to the existence of a market failure, the universal and compulsory nature are necessary additional features of a SGEI. However, universality cannot be interpreted as meaning that the service in question must respond to a need common to the whole population or be supplied throughout a territory.3865 Nor does it require that the price of the SGEI be regulated or subject to a cap3866 or that the service be provided free of charge or without consideration of economic profitability. The fact that some consumers may not be able to afford to pay for all the services included in the SGEI mission does not undermine its universal nature, provided that the service in question is offered at a uniform price and non-discriminatory rates and on similar quality conditions for all customers.3867

3864

3865 3866 3867

cernant l’aide d’Etat mise à exécution par la France en faveur de la Société Nationale Corse Méditerranée (SNCM) et la Compagnie Méridionale de Navigation (CMN), (SA.22843), OJ L 17.08.2013, p. 20, para. 147). For an example where the Member State did not prove that a market failure existed with respect to the public service obligation to apply affordable fares on two routes, see Commission Decision C(2011)6961 of 5.10.2011 on Italy, State aid to the companies of the former Tirrenia Group (potential State aid under the form of public service compensation and potential aid in the context of the privatisation), SA.32014 (2011/C) (ex 2011/NN), SA.32015 (2011/C) (ex 2011/NN), SA.32016 (2011/C) (ex 2011/NN) – Italy – OJ C 28, 01.02.2012, p. 18. Commission Decision C(2010) 975 final of 24.02.2010 on Denmark – Danske Statsbaner, (C 41/2008 ), OJ L 7, 11.01.2011, p. 1, paras 266 et seq. It should be noted that the bundling together of profitable and unprofitable services and allowing cross-subsidisation between the two follows more the logic of the universal service obligation than the SGEI where the condition of market failure would, in principle, exclude the inclusion of profitable services. However, according to decision-making practice, that approach was not only followed in the transport sector but also in broadband, where the Commission in the Hauts-de-Seine decision allowed cross-subsidisation between areas where the broadband roll-out was profitable with areas where this was not the case (Commission Decision C(2009)7426 final of 30.09.2009 on France – Compensation de charges pour une Délégation de Service Public (DSP) pour l’ établissement et l’exploitation d’un réseau de communications électroniques à très haut débit dans le Département des Hauts-de-Seine, (N331/2008), OJ C 256, 23.09.2010, p. 1). Case T-289/03 BUPA and others v Commission, ECLI:EU:T:2008:29, paras 186 and 187. Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 202. Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para 203. In Commission Decision C(2009) 3572 final of 17.06.2009 on Ireland – Health insurance intergenerational solidarity relief, (N 582/2008 ), OJ C 186, 08.08.2009, p. 2, the Commission considered the universal character of the health insurance services fulfilled as it was “open to anybody and overall of such significance in terms of number of members that without them the public system would be inadequate to ensure proper health care to Ireland’s citizens” (para. 37). On the universal nature of a broadband network, see Case T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and Case T-325/10 Iliad and others v Commission (Hauts-de-Seine) ECLI:EU:T:2013:463, paras 124 et seq.

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Likewise, the compulsory nature of the service must be understood as meaning that the entrusted undertaking is in principle required to offer the service in question. When a SGEI mission is associated with the grant of an exclusive right, the compulsory nature may consist in the obligation to exercise a certain activity independently of the costs associated with it. In the absence of an exclusive right, the compulsory nature of the SGEI mission may lie in the obligation borne by the operator to offer a certain service to every citizen requesting it. The compulsory nature of the service does not preclude a certain latitude being left to the operator on the market, including in relation to the content and pricing of the service in question, but means that the service provider is obliged to contract, on consistent conditions, without being able to reject the other contracting party.3868 It follows that when a plurality of undertakings is entrusted with the same SGEI, a certain competition between those operators is compatible with the obligation to carry out the SGEI mission.3869

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3.1.3 Entrustment The first Altmark condition requires, besides a clear definition of the SGEI, that the recipient undertaking has an “actual public service obligation to discharge”. Thus, the recipient undertaking has to be entrusted with the provision of a SGEI through an entrustment act that spells out the nature of the task as well as the scope and the general operational conditions of the SGEI. The need for an entrustment flows directly from the wording of Article 106(2) of the Treaty which refers to “undertakings entrusted with the operation” of a SGEI. Before the Altmark judgment, the Court of Justice constantly repeated the necessity of an entrustment3870 in the compatibility assessment. With Altmark, the Court of Justice confirmed that that condition also applies when assessing the existence of State aid.

4.70

3868 Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, paras 188-190. The General Court also added that the obligation to contract does not need to be reciprocal so that the consumer can choose not to request the supply of the service in question (at para. 195) and that the State can introduce certain restrictions to the accessibility of the service in order to prevent abuses (at paras 197-200). 3869 Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 206. 3870 Case 127/73 BRT v SABAM ECLI:EU:C:1974:25. See also Case C-7/82 GVL v Commission ECLI:EU:C:1983:52 .

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An act of entrustment is necessary in order to set out the organisation of a public service mission. It is the official act which requires the company to carry out the SGEI and spells out the mission of general interest as well as the scope and general conditions of the functioning of the SGEI. The act of entrustment does not have to define in detail each specific activity included in the provision of the relevant SGEI. It is sufficient if the entrustment contains a broad definition of the public service mission which, however, still makes it possible to understand what the SGEI activities and obligations are. This is essential not only to allow a correct cost allocation between SGEI and non-SGEI activities but also for transparency and legal certainty reasons, i.e. to allow competitors as well as the general public to understand which SGEI obligations are publicly funded.

4.72

The public service task must be assigned by way of an act that, depending on the legal framework in each Member State, may take the form of a legislative or regulatory instrument or a contract. It may also be laid down in several different acts, which involve a combination of texts that lay down general rules and others that impose obligation on certain specific institutions.3871 The notion of an entrustment act is thus functional, not formal: provided that the act or acts are binding on the provider and that they contain the appropriate details, the legal form is irrelevant. Based on the approach taken by the Commission in such cases, the act or series of acts must at least specify: (a)

the content and duration of the public service obligations;3872

(b)

the undertaking and, where applicable, the territory concerned;

(c)

the nature of any exclusive or special rights assigned to the undertaking by the authority in question;

(d)

the parameters for calculating, controlling and reviewing the compensation;3873 and the arrangements for avoiding and recovering any overcompensation.3874

(e)

3871 Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 108. 3872 The act can also entrust several services of general economic interest within the same act. For an example where the Commission wrongly considered that the entrustment acts clearly defined the public service obligation, see Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, paras 119 et seq. See also paras 231 et seq. of the same judgment where the Commission wrongly assumed the existence of prior compensation parameters. 3873 For an example where the Commission wrongly considered that the parameters were not clearly set out, see Joined Cases T-309/04, T-317/04, T-329/04 and T-336/04 TV 2/Danmark v Commission, ECLI:EU:T:2007:66 , paras 178 et seq. 3874 Communication from the Commission on the application of the European Union State aid rules to com-

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However, the Member State can also go beyond the basic requirements listed above and include, for instance, quality requirements in the entrustment act. Some examples of entrustment acts are: –

Concession contracts3875 and public service contracts

–

Ministerial programme contracts3876

–

Ministerial instructions3877

–

Laws3878 and acts3879

–

Yearly or multiannual management contracts3880

–

Legislative decrees and any kind of regulatory decisions, as well as municipal decisions or acts3881

–

Strategic plans of an association of hospitals formed by public authorities and subject to their control.3882

The involvement of the service provider in the process by which it is entrusted with a public service task does not mean that that task does not derive from an act of public authority, even if the entrustment is issued at the request of

3875 3876

3877 3878

3879 3880 3881 3882

4.73

4.74

pensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 52. Where State aid for an SGEI is granted under the Decision or the Framework, the requirements for the entrustment act are set out explicitly and with additional details in Article 4 and paragraph 16 respectively (i.e.: the undertaking and, where applicable, the territory concerned; the nature of any exclusive rights assigned to the undertaking by the granting authority; a description of the compensation mechanisms). Commission Decision C(2006) 1849 final of 16.05.2006 on Italy – Proroga della durata della concessione della Società Italiana del Traforo del Monte Bianco (SITMN), (N 562/2005), OJ C 90, 25.04.2007, p. 10. Commission Decision C(2006) 4206 final of 26.09.2006 on Italy – Poste Italiane SpA: compensation by the Member State for universal postal service obligations 2000-2005, (NN 51/2006 ), OJ C 291, 30.11.2006, p. 15. Commission Decision C(2006) 434 final of 22.02.2006 on United Kingdom – Government rural network support funding to Post Office Limited, (N 166/2005 ), OJ C 141, 16.06.2006, p. 2. Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, paras 182 and 183. Commission Decision of 07.03.2007 on Spain – Financiamento de las medidas de reducción de plantilla de RTVE, (NN8/2007), OJ C 109, 15.05.2007, p.1. Commission Decision C(2005) 4668 final of 07.12.2005 on Ireland – Loan guarantees for social infrastructure schemes funded by the Housing Finance Agency (HFA), (N 395/2005 ), OJ C 77, 05.04.2007, p. 1. Commission Decision C(2012) 178 final of 25.01.2012 on Belgium – State aid implemented by Belgium in favour of De Post – La Poste, (SA.14588), OJ L 170, 29.06.2012, p. 1. See Case C-451/03 Servizi Ausiliari Dottori Commercialisti ECLI:EU:C:2006:208. Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 113.

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the service provider.3883 As such, the entrustment can also involve contractual acts, provided they emanate from the public authority and are binding.3884 In addition, the scope for unilateral withdrawal from the provision of a service is compatible with the imposition of public service obligations.3885

4.75

In the case of an entrustment act in the form of a public service contract or a service concession contract, public procurement rules in principle apply and the entrustment follows the result of the public procurement procedure. However, neither Altmark nor Article 106(2) of the Treaty require that an entrustment be made on the basis of a public procurement procedure,3886 i.e. the State aid rules do not modify or expand the scope of application of the public procurement rules. The form and content of the act determines whether public procurement rules apply. However, it is also true that if a public procurement procedure has been carried out to entrust the public service provider and the first, second and third conditions of Altmark are also met, the SGEI compensation may escape the application of the State aid rules.

4.76

Last but not least, rather than entrusting only one undertaking on the basis of a special or exclusive right, the Member State can entrust several or even all operators in a given market with SGEI obligations.3887 In that case, the entrustment can be made collectively for all operators, i.e. there is no need for a separate entrustment with the mission by an individual act or mandate for each operator.3888 However, the situation where all operators of a given activity are entrusted with the SGEI obligation should be distinguished from the situation where all operators in a market are subject to certain regulatory requirements according to national legislation, acting in the general interest in the broad sense.3889 In addition, a general requirement to be authorized before conducting a certain activity cannot be considered as an entrustment in the sense of Altmark or Article 106(2) of the Treaty. Public service obligations, even if entrusted to all operators of that activity in a given market, must be specific to those undertakings. An Case T-17/02 Olsen v Commission, ECLI:EU:T:2005:218 , para. 188. Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 109. Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 189. Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 239. See also for the broadcasting sector Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, para. 145. 3887 The entrustment with an SGEI does not necessarily imply that the provider is also conferred a special or exclusive right. This follows from the Treaty where Article 106(1) and (2) of the Treaty draw a distinction between special or exclusive rights and SGEI. The grant of a special or exclusive right to an operator can merely be the instrument which allows that operator to perform a SGEI mission. See Case T-289/03 BUPA and others v Commission, para. 179. 3888 Case T-289/03 BUPA and others v Commission, ECLI:EU:T:2008:29, para. 179. 3889 Case T-289/03 BUPA and others v Commission, ECLI:EU:T:2008:29, para. 178.

3883 3884 3885 3886

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authorisation to conduct a certain activity does not create an obligation for the operator to provide the service but only allows him to do so.

3.2 Second Altmark condition: parameters established in advance According to the Altmark judgment, compensation for the costs arising from the obligation to discharge a public service obligation needs to be calculated on the basis of parameters that are “established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings. […] Payment by a Member State of compensation for the loss incurred by an undertaking without the parameters of such compensation having been established beforehand, where it turns out after the event that the operation of certain services in connection with the discharge of public service obligations was not economically viable, therefore constitutes a financial measure which falls within the concept of State aid within the meaning of Article 107(1) of the Treaty.” 3890

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As explained in the previous section, the entrustment act needs to contain information on the parameters for calculating, controlling and reviewing the compensation. However, the need to establish the compensation parameters in advance in an objective and transparent manner does not mean that the compensation has to be calculated on the basis of a specific formula (for example, a certain price per day, per meal, per passenger or per number of users).3891 The Court has stipulated in its judgment on Hauts-de-Seine3892 that it is not necessary that the exact amount of funding is fixed beforehand. What matters only is that it is clear from the outset how the compensation is to be determined, i.e. that the act of entrustment includes the basis for the future calculation of compensation (i.e. taking the example from before, the fact that compensation will be determined on the basis of a price per day or per meal and on the estimation of the number of potential users).3893 Where the undertaking is offered a reasonable profit as part of its compensation, the entrustment act must include the criteria for calculating that profit.

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3890 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para. 90. It is worth noting that neither the SGEI Decision nor the SGEI Framework require that the parameters are established in advance. 3891 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 55. 3892 Case T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and Case T-325/10 Iliad and others v Commission (Hauts-deSeine) ECLI:EU:T:2013:463, para. 212. 3893 Guide to the application of the European Union rules on state aid, public procurement and the internal market to service of general economic interest, and in particular to social services of general interest, Commission staff working document, 29.4.2013, SWD(2013) 53 final 12, p. 63

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The requirement that the parameter is set “in advance” relates to the compensation itself and not to the situation where an SGEI is provided without compensation, i.e. the parameters should be set in advance of the period for which compensation is granted irrespective of whether the provider was already entrusted in the past with a SGEI but without compensation.3894

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Member States’ discretion in calculating the compensation is not incompatible in itself with the existence of objective and transparent parameters within the meaning of the second Altmark condition: “the Member State has a wide discretion not only when defining an SGEI mission but also when determining the compensation for the costs, which calls for an assessment of complex economic facts. It is precisely because the determination of the compensation is subject to only restricted control by the Community institutions, moreover, that the second Altmark condition requires that those institutions must be in a position to verify the existence of objective and transparent parameters, which must be defined in such a way as to preclude any abusive recourse to the concept of an SGEI on the part of the Member State.” 3895

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Thus, Member States’ leeway when defining the parameters is only limited insofar as the method chosen should allow for a transparent and verifiable calculation of compensation. In the case of unforeseen circumstances, the parameters as to how the compensation will be adjusted should likewise be known in advance.3896 The Commission’s assessment for that purpose must be based on an analysis of the actual legal and economic considerations which governed the setting of the amount of the compensation.3897 In addition, the SGEI operators must not be overcompensated. 3894 Commission Decision C(2009) 3572 final of 17.06.2009 on Ireland – Health insurance intergenerational solidarity relief, (N 582/2008 ), OJ C 186, 08.08.2009, p. 2, para. 43. 3895 T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 213. In that judgment, where the compensation to private medical insurance companies was granted in the form of risk equalisation payments (based on a comparison between the actual risk profile for each insurer and the average market profile), the Court also added that “the complexity of the economic and mathematical formulae which govern the calculations to be carried out does not by itself affect the precise and clearly-determined nature of the relevant parameters.” (para. 217) 3896 Commission Decision C(2009) 8117 final of 28.10.2009 on United Kingdom – Subsidies to CalMac and NorthLink for maritime transport services in Scotland, (C 16/2008 ), OJ L 45, 18.02.2011, p. 33. In that case, the second Altmark condition was not considered fulfilled as in the case of unforeseen circumstances, the parties could have recourse to an arbitration procedure where the “criteria used in this arbitration procedure are not set out in advance in an objective manner for all possible events. This arbitration procedure gives rise to a lack of transparency in the determination of the parameters for compensation. It also introduces a risk of variation in the compensation granted each year that is not dependent on transparent, predetermined and objective criteria.” (para. 175). 3897 See to that effect Joined Cases T-309/04, T-317/04, T-329/04 and T-336/04 TV 2/Danmark v Commission ECLI:EU:T:2008:457, paras 227 et seq.

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A margin of manoeuvre which allows the SGEI provider to adjust the fares if the need arises in order to break-even exceeds the flexibility granted to Member States under the second Altmark condition, as the parameters are not established in advance in an objective and transparent manner.3898 As such, where the service is considered to be commercially viable and the flexibility in adjusting the fares is meant to ensure economic equilibrium for the service provider, the Commission considers that the second Altmark condition is not complied with as the parameters are not established ex ante. The same reasoning applies in case of a capital injection resulting from an ad hoc decision by the Member State to compensate the SGEI provider retrospectively for the inadequacy of its past compensation system. Such a capital injection is not part of a compensation system with pre-defined, transparent parameters.3899

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In another case, the SGEI compensation was granted pending approval of the agreements that constituted the entrustment case. Here, the Court considered that the subsidies paid during that period did not comply with the conditions of the Altmark judgment.3900 The fact that the agreements were only approved four years after the first subsidies were granted may have played a role in the Court’s conclusion. If the agreements had entered into force shortly after the granting of the subsidy, the conclusion might have been different.

4.83

Where the SGEI provider is selected via a public procurement procedure, the tender documents often specify the basic parameters for compensation which is considered sufficient by the Commission for the purposes of the second Altmark condition.3901 However, even in the context of a tendering procedure, it is

4.84

3898 Commission Decision C(2009) 8113 final of 28.10.2009 on Austria – Financing of ORF (the Austrian public broadcaster), (E 2/2008 ), OJ C 309, 13.11.2010, p. 3, para. 116, where the Commission considered that the second Altmark condition was not fulfilled for the same reason: “ORF maintains the possibility to auto-determine the licence fees it deems necessary to cover public service costs over a five year cycle. This mechanism leaves ORF considerable discretion, both with regard to the estimation of the evolution of its own cost and of its future revenues. While these estimations will be verified by the media regulator, Austria has only committed to a purely formalistic control. [...]” 3899 Commission Decision C(2006) 2952 final of 04.07.2006 on Portugal – Financial support to restructure the accumulated debt of the Portuguese public service broadcaster RTP, (NN31/2006), OJ C 222, 15.09.2006, p. 4, para. 112. See also Commission Decision C(2009) 8117 of 28.10.2009 on United Kingdom – Subsidies to CalMac and NorthLink for maritime transport services in Scotland, (C 16/2008), OJ L 45, 18.02.2011, p. 33, para. 205. 3900 Case C-140/09 Fallimento Traghetti del Mediterraneo SpA v Presidenza del Consiglio dei Ministri, ECLI:EU:C:2010:335 paras 44 and 45. 3901 See Commission Decision C(2003) 4488 final of 16.12.2003 on Ireland - Public Service Obligation in respect of new electricity generation capacity for security of supply, (N 475/2003), OJ C 34, 07.02.2004, p. 8, paras 47 and 48; see also see Commission Decision C(2009) 7426 final of 30.09.2009 on France - Compensation de charges pour une Délégation de Service Public (DSP) pour l’ établissement et l’exploitation d’un réseau de communications électroniques à très haut débit dans le Département des Hauts-de-Seine,

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not necessary for the exact compensation amount to be established beforehand and communicated to all tender participants. It is therefore irrelevant for the application of the second Altmark condition if the actual compensation amount resulting from the tender is lower than the amount proposed by the winning bidder at the beginning of the tender procedure.3902

3.3 Third Altmark condition: Absence of overcompensation 4.85

The third condition of the Altmark judgment stipulates that “the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit”.3903

4.86

This largely coincides with the criterion of proportionality as established by the case-law before Altmark in the context of the application of Article 106(2) of the Treaty.3904 That case law also established that the review of potential overcompensation is limited to ascertaining whether the compensation provided for is necessary in order for the SGEI in question to be capable of being performed in economically acceptable conditions,3905 or whether, on the other hand, the measure in question is manifestly inappropriate by reference to the objective pursued. However, whereas the case law on Article 106(2) of the Treaty originating from the antitrust field included an assessment of whether less restrictive means were available to fulfill the task,3906 the case-law and Commission decision-making practice in the field of State aid has developed the principle of proportionality into a mere overcompensation test, i.e. whether the compensation exceeds the net costs incurred in discharging the public service obligation, including a reasonable profit.

4.87

When conducting such an assessment, the Commission must again respect Member States’ discretion, which relates not only to the definition of a SGEI and the parameters for calculating the compensation, but also to the conditions of its implementation under the third Altmark condition, including the addi-

3902

3903 3904 3905 3906

(N331/2008) OJ C 256, 23.09.2010, p. 9, para. 157 and Commission Decision C(2004) 4343 final of 16.11.2004 on France – Projet de réseau de télécommunication haut débit des Pyrénées-Atlantiques, (N381/2004), OJ C 162, 02.07.2005, p. 5, paras 69 to 71. Case T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and Case T-325/10 Iliad and others v Commission (Hauts-deSeine) ECLI:EU:T:2013:463, para. 212. Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para. 92. See, for instance, Case T-106/95 FFSA v Commission ECLI:EU:T:1997:23 . Case C-157/94 Commission v Netherlands ECLI:EU:C:1997:499 para. 53. Case C-320/91 Corbeau ECLI:EU:C:1993:198

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tional costs incurred in discharging the mission. The assessment of complex economic facts and Member States’ discretion limits the scope of control which the Commission is entitled to exercise in that regard as to one of manifest error.3907 Thus, in a system where compensation is not based on the actual costs incurred but is, for instance, calculated on the basis of the difference between a health insurer’s individual and actual risk profile and the average market risk profile, that compensation is “consistent with the spirit of the third Altmark condition in so far as the compensation is calculated on the basis of elements which are specific, clearly identifiable and capable of being controlled”.3908 As regards the revenues to be taken into account, these should encompass all the receipts3909 during the period of entrustment with the public service mission that are directly related to that mission. Where the provider is entrusted with several SGEIs, the Member State can provide compensation for all those SGEIs by way of a single payment, provided that the amount of the payment is correctly established as regards the costs as well as the revenues from all SGEIs.

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With respect to the reasonable profit to be included in the compensation calculation, this is further explained in paragraph 61 of the SGEI Communication. It relates to the “rate of return on capital3910 that would be required by a typical company considering whether or not to provide the service of general economic interest for the whole duration of the period of entrustment, taking into account the level of risk.” The reference to a “typical company” implies a comparison with

4.89

3907 Case T-106/95 FFSA v Commission [1997] ECR II-229, paras.99 and 100; see also Case T-17/02 Olsen v Commission [2005] ECR II-2031, para. 216. The Commission’s limited control entails that also the General Court’s review of the Commission’s assessment must observe the same limit and that accordingly, its review must be confined to ascertaining whether the Commission properly found or rejected the existence of a manifest error by the Member State. (T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 220) 3908 Consequently, the additional burdens which a health insurer must bear on account of its negative risk profile by comparison with the average market risk profile represent the additional costs. (Case T-289/03 BUPAand others v Commission ECLI:EU:T:2008:29, paras 236 and 237) 3909 As regards the receipts to be taken into consideration, the General Court noted in Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 241. that in a system of compensation which operates independently of receipts (e.g. compensation is based exclusively on the risk profile of the health insurer) “neither the purpose nor the spirit of the third Altmark condition requires that receipts be taken into account”. Note, however, that the system described in that judgment is very specific. The General Court emphasised that the operation of that system is radically different from that of the compensation systems forming the subject-matter of the judgments in Ferring and Altmark (Bupa, para. 237). It continues by stating that “ in those circumstances, a strict application of the third Altmark condition, which is aimed at a different form of compensation for an SGEI obligation, would not take account of the particular nature of the functioning of the compensation system provided for by the risk equalisation system.” (T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, para. 241) 3910 The rate of return on capital means the Internal Rate of Return (IRR) that the undertaking makes on its invested capital over the lifetime of the project, that is to say the IRR over the cash flows of the contract.

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other companies that provide services under similar contracts awarded under competitive conditions, i.e. in the context of a tender procedure. In addition, Member States can introduce efficiency incentives in the compensation calculation but are not obliged to do so.3911

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Having established the costs3912 and revenues of the public service and the permissible level of reasonable profit, any compensation that produces a net gain to the provider of the SGEI (that is to say, the revenues from the service plus the compensation, less the costs of providing the service) which is more than the reasonable profit constitutes overcompensation. The compensation granted by the State includes all types of payments made by the Member State for the SGEI in question (i.e. recurrent payments as well as one-off payments, grants, loans, tax benefits, etc.). A methodology whereby concrete calculations are dispensed with and it is assumed that the undertaking received an advantage because losses derived from an aggressive price policy “could only have been financed by State resources” that the undertaking received as compensation for the provision of SGEI was held to be deficient by the Court of Justice as it failed to take into account all net additional costs arising from the SGEI at issue.3913 Although the Commission has a certain discretion in deciding on the most appropriate method for making sure that competitive activities are not subsidised by the State, it is not entitled, according to Altmark, to classify as State aid State resources granted as compensation for additional costs associated with the provision of an SGEI (if all the Altmark conditions are met).3914

3911 This is different under the SGEI Framework, see chapter 35, 3.7.6. 3912 The net costs can be determined on the basis of the accounting methodology, i.e. as the difference between costs and revenues (“methodology based on cost allocation”); where the undertaking concerned also carries out activities falling outside the scope of the SGEI, only the costs related to the SGEI will be taken into consideration; or, alternatively, the net cost may be calculated as the difference between the net cost for the undertaking of operating with the public service obligation and the net cost or profit of the same undertaking operating without the public service obligation (“net avoided cost methodology”). See for more details chapter 35, 3.7.2. For an example of the net avoided cost methodology under the third Altmark condition, see Commission Decision C (2012) 2257 final of 25 April 2012 on Germany – State aid granted by Germany to the Zweckverband Tierkörperbeseitigung in Rhineland-Palatinate, Saarland, Rheingau-Taunus-Kreis and Landkreis Limburg-Weilburg, (NN23/2010 and N15/2004) OJ L 236, 01.09.2012, p. 1, paras 206 et seq. 3913 Case C-399/08 P Commission v Deutsche Post ECLI:EU:C:2010:481 , paras 38 et seq. 3914 Case T-266/02 Deutsche Post v Commission ECLI:EU:T:2008:235, para. 91.

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3.4 Fourth Altmark condition: Tender or efficiency of costs The fourth Altmark condition stipulates that: “where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations”.3915

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Therefore, the fourth Altmark condition is fulfilled if the level of compensation is either the result of a public procurement procedure which allows for selection of the tenderer capable of providing those services ‘at the least cost to the community’, or the result of a benchmarking exercise with a typical undertaking, well run and adequately provided with the necessary means. The fourth Altmark condition thus requires a material analysis which goes beyond the respect of the applicable public procurement rules and which also goes beyond checking that no overcompensation occurs. It requires that the most efficient provider is chosen, either via a tender procedure that fulfills certain requirements or through a benchmarking exercise.

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So far, the fulfillment of the fourth Altmark condition has turned out to be the biggest hurdle for Member States seeking to claim that SGEI compensation does not constitute State aid. The public service undertaking benefitting from compensation has often carried out the same public service for many years or even centuries. In the postal sector, for instance some postal service providers have been in existence since the 19th century and were of course not selected at the time on the basis of a public procurement procedure. The Altmark judgment from 2003 did not change this, i.e. Member States continue to entrust the same provider as before with the public service task,3916 arguing that the provider should instead be considered an efficient undertaking pursuant to the second alternative of the fourth Altmark condition. However, this argument is often not accepted by the Commission, for reasons that are explained below.

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3915 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para. 93. 3916 This was in particular the case in the first years after the Altmark judgment and under the 2005 SGEI package. With the introduction of a specific reference in the 2012 SGEI Framework to the need to comply with public procurement rules in order for the aid to be compatible, Member States started to change their approach and carry out public procurement procedures to select the undertaking(s) providing the public service. For more details on the public procurement requirement under the SGEI Framework, see chapter 35, 2.3.4.2.

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3.4.1 Level of compensation is the outcome of a public procurement procedure 4.94

As explained in the context of the first three Altmark conditions, Member States have broad discretion concerning the definition, organisation and financing of SGEIs provided that the compensation does not exceed the amount necessary to carry out the SGEI under economically viable conditions. Accordingly, they can decide to award the task to a third party or to provide the service themselves (in-house). If they decide to provide the service in-house, public procurement procedures do not apply, provided certain conditions set out in jurisprudence are met.3917 However, in that case, Member States need to show that the service provider is efficient within the meaning of the second alternative of the Altmark judgment to fulfill the conditions of the judgment.

4.95

If, on the other hand, a Member State decides to outsource the provision of the SGEI, the simplest way for the public authorities to meet the fourth Altmark criterion is to conduct an open, transparent and non-discriminatory public procurement procedure in line with the public procurement rules.3918

3917 The conditions for applying the principle of the in-house exception are as follows: (a) the control exercised by the public authority, alone or with other public authorities, over the legally distinct entity must be similar to that which it exercises over its own departments; and (b) the essential part of the activities of the legally distinct entity is carried out with the controlling public authority or authorities (Case C-107/98 Teckal ECLI:EU:C:1999:562, Case C-26/03 Stadt Halle ECLI:EU:C:2005:5 ). In Commission Decision C (2012) 2257 final of 25 April 2012 on Germany – State aid granted by Germany to the Zweckverband Tierkörperbeseitigung in Rhineland-Palatinate, Saarland, Rheingau-Taunus-Kreis and Landkreis Limburg-Weilburg, (NN23/2010 and N15/2004), OJ L 236, 01.09.2012, p. 1, para. 234, Germany (supported by a judgment from the Federal Administrative Court) argued that the fourth Altmark condition does not apply in the case of in-house provision of the SGEI. That view was rejected by the Commission. According to the Commission, the second alternative of the fourth Altmark condition concerns precisely the case where there is no obligation to carry out a procurement procedure (para. 236). 3918 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 20014/18/EC, OJ L 94, 28.03.2014, p. 65; Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 20014/17/EC, OJ L 94, 28.03.2014, p. 243; Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts, OJ L 91, 28.03.2014, p 1. Also some sectoral rules require a tender. See for example, Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70 (OJ L 315, 03.12.2007, p. 1). However, also outside the scope of application of the Directives on public procurement the award nevertheless has to meet Treaty requirements of transparency, equality of treatment, proportionality and mutual recognition (Case C-324/98 Telaustria and Telefonadress ECLI:EU:C:2000:669, para. 60 and Commission interpretative communication on the Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives (OJ C 179, 01.08.2006, p. 2).

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Indeed, in that situation, the conduct of such a public procurement procedure is often a mandatory requirement under existing Union rules3919 (i.e. when a service is provided in return for remuneration in the form of payment of a price or by granting the right to exploit the service in return for a fee payable by users3920). If the management of an SGEI is awarded as part of a public procurement procedure allowing selection of the candidate able to provide the service at the least cost to the community, and if the other conditions of the Altmark judgment are also complied with, the compensation awarded does not constitute State aid within the meaning of the Altmark judgment.3921

4.96

With regard to the characteristics of a tender required under the fourth Altmark condition in order to select the tenderer capable of providing the service at the least cost to the community, the Commission has set out in its SGEI Communication certain clarifications.

4.97

The Communication explains that: “an open procedure3922 in line with the requirement of the public procurement rules is certainly acceptable, but also a restricted procedure3923 can satisfy the fourth Altmark criterion, unless interested operators are prevented to tender without valid reasons. On the other hand, a competitive dialogue3924 or a negotiated procedure with prior publication3925 confer a wide discretion upon the adjudicating authority and may restrict the participation of interested operators. Therefore, they can only be deemed sufficient to satisfy the fourth Altmark criterion in exceptional cases. The negotiated procedure

4.98

3919 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 63. 3920 A contract can be covered by the definitions of public service contract or concession if (a) the aim of the contract is to meet needs previously defined by the public authority within the framework of its competences; (b) the nature of the service and the way in which it is to be provided are specified in detail by the public authority; (c) the contract provides for remuneration of the service (payment of a price or granting of the right to operate the service in return for a fee payable by users); (d) the public authority takes the initiative of finding a provider to whom to entrust the service; (e) the contract lays down penalties for failure to meet contractual obligations, in order to guarantee that the service entrusted to the third party is provided properly in such a way as to meet the public authority’s requirements (penalties, compensation for damages, etc.). These above criteria serve to establish whether the subject matter of the contract is indeed an obligation to provide a service in return for remuneration. (Guide tot the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest an in particular to social services of general interest, Commission staff working document, 29.4.2013, SWD(2013) 53 final, p. 101). 3921 Ibidem, p. 100. 3922 Article 1(11)(a) of Directive 2004/18EC, Article 1(9)(a) of Directive 2004/17/EC, OJ L 134, 30.04.2004, p. 114. 3923 Article 1(11)(b) of Directive 2004/18/EC, Article 1(9)(b) of Directive 2004/17/EC, OJ L 134, 30.04.2004, p. 114. 3924 Article 29 of Directive 2004/18/EC, OJ L 134, 30.04.2004, p. 114. 3925 Article 30 of Directive 2004/18/EC , OJ L 134, 30.04.2004, p. 114, Article 1(9)(a) of Directive 2004/17/ EC, OJ L 134, 30.04.2004, p.1..

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without publication of a contract notice3926 cannot ensure that the procedure leads to the selection of the tenderer capable of providing those services at the least cost to the community.” 3927

4.99

The reason behind excluding some types of public procurement procedures is that, according to the Commission, they do not provide sufficient safeguards as regards publicity, transparency and objectivity to attract all potentially interested providers (such as the negotiated procedure without prior publication).3928 Such a procedure cannot therefore ensure the selection of the provider able to provide the service ‘at the least cost to the community’. Moreover, the tender procedure needs to be carried out in conditions of genuine competition, i.e. a tender where only one bid is submitted, where the time between award and start of the service is very short in view of substantial investments to be made,3929 or where existing intellectual property rights or necessary infrastructure owned by a particular service provider lead to a competitive advantage may not ensure that the successful tender involves the provision of the service at the least cost to the community.3930

4.100

Even if Member States carry out a public procurement procedure to select the most efficient beneficiary, thus providing the service ‘at the least cost to the community’, the possibility of overcompensation according to the third Altmark condition is not necessarily ruled out. Whereas the fourth Altmark condition aims at identifying the most suitable service provider, namely that capable of offering the SGEI to the community at the lowest price, the third Altmark condition addresses directly the level of compensation and aims at ensuring that compensation does not exceed the net costs incurred in discharging the SGEI obligation, including a reasonable profit margin. In some circumstances, an open tender can satisfy both conditions, i.e. when it ensures that the winner cannot make excessive profits (where there are no incumbent advantages, no collusion, 3926 Article 31 of Directive 2004/18/EC, OJ L 134, 30.04.2004, p. 114. See also Article 40(3) of Directive 2004/17/EC, OJ L 134, 30.04.2004, p.1. 3927 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 66. 3928 See Commission Decision C(2012) 1905 final of 28.03.2012 on United Kingdom – Post Office Limited (POL), (SA.33054), OJ C 121, 26.04.2012, p. 2, where the Commission held that the negotiated procedure without prior publication of a contract notice did not fulfill the fourth Altmark condition (para. 41). 3929 Commission Decision C(2013) 4231 final of 02.05.2013 on France – Concernant l’aide d’Etat mise à exécution par la France en faveur de la Société Nationale Corse Méditerranée (SNCM) et la Compagnie Méridionale de Navigation (CMN), (SA.22843) OJ L 220, 17.08.2013, p. 20, para. 176. 3930 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 68.

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little margin for qualitative and discretional analysis for the adjudicatory power, a high degree of predictability of costs and revenues over the duration of the service and a sufficient number of bidders). However, there may be cases where, due to the specific character of the service or its complexity or other competitive advantages of the winning bidder, the final offer chosen does not necessarily ensure that the provider is not overcompensated.3931 Thus, in order to avoid the difficulties involved in assessing in each specific case whether the possibility of overcompensation of the winning bidder has been ruled out, it may be advisable in general to provide for an ex post analysis of the costs and profits of the service providers, or for other safeguards that ensure that the third Altmark condition is met even where the operator is entrusted by means of an open tender. In addition, it is not impossible that certain procedures which are not considered sufficient under the SGEI Communication can nevertheless satisfy the fourth Altmark condition. In a judgment on public service compensation for the establishment and operation of a very high speed broadband electronic communications network in the French department of Hauts-de-Seine, the General Court ruled that a negotiated procedure with prior publication for the award of a concession contract (délégation de service public) which involved some discretion by the French authorities and negotiation between the authorities and companies that submitted a bid was acceptable under Altmark, as the procedure still involved a substantial degree of effective competition and publicity. In particular, the holding of negotiations with the three final bidders whose offers were selected could not raise doubts with respect to the publicity and transparency of the procurement procedure.3932

4.101

The SGEI Communication also clarifies that ‘least cost to the community’ is a broader concept than the lowest price and therefore that a public procurement procedure does not necessarily have to set the lowest price as the award criterion

4.102

3931 Commission Decision C(2009) 7426 final of 30.09.2009 on France – Compensation de charges pour une Délégation de Service Public (DSP) pour l’ établissement et l’exploitation d’un réseau de communications électroniques à très haut débit dans le Département des Hauts-de-Seine, (N331/2008) OJ C 256, 23.09.2010, p. 1, para. 159. 3932 Case T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and Case T-325/10 Iliad and others v Commission (Hauts-deSeine) ECLI:EU:T:2013:463, para. 243. As regards the details of the procedure that was carried out in 2 stages, see paras 244 et seq. of the same judgment. For an example of a case where the negotiated procedure with publication in the form of a délégation de service public was not considered compliant with the fourth Altmark decision, see Commission Decision C(2013) 4231 final of 02.05.2013 on France – Concernant l ’aide d’Etat mise à exécution par la France en faveur de la Société Nationale Corse Méditerranée (SNCM) et la Compagnie Méridionale de Navigation (CMN), (SA.22843) OJ L 220, 17.08.2013, p. 20, paras 169 et seq.

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in order to fulfill the first alternative of the fourth Altmark criterion. Paragraph 67 of the Communication states that the ‘most economically advantageous offer’ can also be used, provided that the award criteria are closely related to the subject matter of the service to be provided and allow for the most economically advantageous offer to match the value of the market. That criterion allows a range of elements to be taken into account, including quality considerations (in addition to those provided in the technical specifications and the selection criteria) and social and environmental criteria, but the criteria have to be defined in advance in such a way as to allow for effective competition.3933 In effect, in the Hauts-de-Seine judgments, the General Court considered it acceptable that criteria other than lowest price were used to select the most economically advantageous bid, such as the technical specifications, the means of covering the whole territory and the time frame and coherence of the deployment.3934 However, in a case where the compensation was determined through a public tender procedure but where, after the tender, a new deficit funding system was introduced, the Commission considered that the later change “altered the nature and extent of the initial tender, thereby affecting its transparency in relation to the way it had been presented to potential bidders”. The fourth Altmark condition was therefore not considered to have been met.3935

3933 If the tender is carried out on the basis of elements other than lowest price and it is difficult to anticipate the revenues that will be earned from the provision of the service, the SGEI Communication specifies that in certain cases, a claw-back mechanism can be appropriate to minimize the risk of overcompensation ex ante (Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 67). 3934 Case T-79/10 Colt Télécommunications France v Commission ECLI:EU:T:2013:463; Case T-258/10 Orange v Commission ECLI:EU:T:2013:471; and Case T-325/10 Iliad and others v Commission (Hauts-deSeine) ECLI:EU:T:2013:463, paras 244 et seq; For examples of the Commission’s decision-making practice in the broadband sector, see Commission Decision C(2009) 7426 final of 30.09.2009 on France – Compensation de charges pour une Délégation de Service Public (DSP) pour l’ établissement et l’exploitation d’un réseau de communications électroniques à très haut débit dans le Département des Hauts-de-Seine, (N331/2008) OJ C 256, 23.09.2010, p. 1, para. 37 and Commission Decision C(2004) 4343 final of 16.11.2004 on France – Projet de réseau de télécommunication haut débit des Pyrénées-Atlantiques, (N381/2004), OJ C 162, 02.07.2005, p. 5, para. 86. For examples in the area of public passenger transport, see Commission Decision C(2009) 6786 final of 15.09.2009 on Germany – Satzung zur Unterstützung eigenwirtschaftlicher Verkehrsleistungen im Landkreis Wittenberg, (N 207/2009), OJ C 255, 24.10.2009, p. 4, and Commission Decision C(2009) 6777 final of 15.09.2009 on Germany – Finanzierung für den Öffentlichen Personennahverkehr im Landkreis Anhalt-Bitterfeld, (N 206/2009), OJ C 255, 24.10.2009, p. 4, where the Commission accepted a tender based on qualitative criteria. 3935 Commission Decision C(2009) 8117 final of 28.10.2009 on United Kingdom – Subsidies to CalMac and NorthLink for maritime transport services in Scotland, (C 16/2008 ), OJ C 45, 18.02.2011, p. 33, para. 211.

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3.4.2 Level of compensation is determined on the basis of the costs incurred by an efficient undertaking If the Member State does not carry out a tender procedure that satisfies the conditions of the first alternative under the fourth Altmark condition, it either needs to prove that the compensation corresponds to the generally accepted market remuneration for the same service,3936 or that the public service compensation does not cover costs that are inflated due to inefficiency on the part of the beneficiary undertaking, i.e. that the compensation is determined on the basis of the costs that a typical undertaking, well run and adequately equipped would have incurred when discharging the same obligation.

4.103

Compliance with the generally accepted market remuneration provides, according to the Commission, an appropriate estimate of the level of the costs that would be incurred by a typical well run undertaking, taking into account the receipts and a reasonable profit for discharging the obligations.3937 However, it also requires that the services are indeed comparable in all respects and is therefore a rather strict concept. The Communication does not go into detail about how the existence of a generally accepted market remuneration can be proven, as this depends on the particularities of each individual situation. In the Decision on a State aid scheme implemented by Italy to remunerate Poste Italiane for distributing postal savings certificates3938 the Commission followed an expert study that, firstly, identified the financial products most comparable to the various categories of postal savings certificates and, secondly, established the market remuneration paid by market participants for the placement of these comparable products, allowing a comparison with the remuneration paid by the Member State.3939 The Commission then concluded that, as the consideration paid to Poste Italiane for the distribution of postal savings books was lower than the amounts for similar financial products on the market, the compensation paid could be deemed to be in line with the level of compensation that would have

4.104

3936 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 69. 3937 Commission Decision C(2008) 5585 final of 21.10.2008 on Italy – A state aid scheme implemented by Italy to remunerate Poste Italiane for distributing postal savings certificates, (C 49/2006 ) OJ L 189, 21.07.2009, p.3, para. 137 3938 Commission Decision C(2008) 5585 final of 21.10.2008 on Italy – A state aid scheme implemented by Italy to remunerate Poste Italiane for distributing postal savings certificates, (C 49/2006 ), OJ L 189, 21.07.2009, p.3. 3939 Commission Decision C(2008) 5585 final of 21.10.2008 on Italy – A state aid scheme implemented by Italy to remunerate Poste Italiane for distributing postal savings certificates, (C 49/2006 ), OJ L 189, 21.07.2009, p.3, para. 138.

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been required by a typical, well run and suitably equipped undertaking. Since the other three Altmark criteria were also met, the compensation did not constitute state aid.

4.105

If a generally accepted market remuneration for a comparable product cannot be established, the Member State should prove that the compensation is determined on the basis of the costs of an efficient undertaking in order to fulfill the fourth Altmark condition. The SGEI Communication provides further explanations as to what can be considered an efficient, i.e. a typical, well run and adequately equipped, undertaking.

4.106

The reference to the costs of a “typical” undertaking in the sector under consideration implies that there is a sufficient number of undertakings whose costs may be taken into account. Those undertakings may be located in the same Member State or in other Member States. However, the Commission takes the view that reference cannot be made to the costs of an undertaking that enjoys a monopoly position or receives public service compensation granted on conditions that do not comply with Union law, as in both cases the cost level may be higher than normal. The costs to be taken into consideration are all the costs relating to the SGEI, that is to say, the direct costs necessary to discharge the SGEI and an appropriate contribution to the indirect costs common to both the SGEI and other activities.3940

4.107

As regards the concept of a “well run undertaking” and in the absence of any official definition, the Member States should apply objective criteria that are economically recognised as being representative of satisfactory management. Therefore, they may base their analysis, inter alia, on analytical ratios representative of productivity (such as turnover to capital employed, total cost to turnover, turnover per employee, value added per employee or staff costs to value added). Member States can also use analytical ratios relating to the quality of supply as compared with user expectations. Undertakings with such analytical ratios representative of efficient management may be regarded as representative typical undertakings. However, the analysis and comparison of the cost structures must take into account the size of the undertaking in question and the fact that in certain sectors undertakings with very different cost structures may exist side by side.3941 3940 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 74. 3941 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, paras

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The expression ‘undertaking adequately provided with material means’ should be taken to mean an undertaking which has the resources necessary to discharge immediately the relevant public service obligations.3942

4.108

So far, there have been only a few cases in which the Court or the Commission have accepted that compensation was based on the costs that would have been incurred by an efficient undertaking. In Poste Italiane, the Commission accepted that the remuneration could be deemed to be in line with the criterion of an efficient undertaking, as it was equal to a market remuneration for a comparable product.3943 In BUPA, although the costs and revenues of the private health insurers could not be directly compared with the costs of an efficient operator3944 and although the potential beneficiaries of the SGEI compensation could not be identified at the time of the decision, the General Court nevertheless considered that the compensation granted to the private health insurance providers fulfilled the fourth Altmark condition as there was no possibility to offset any costs (e.g. management costs) that could result from inefficiency. In addition, claim costs were only taken into account up to a certain maximum level of cover whereas actual costs (e.g. from hospitalisation) were usually higher. This, according to the Court, constituted a measure of protection against over-consumption of medical services and against poor cost management.3945

4.109

Furthermore, in a decision of 2007 on a State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers, the Commission accepted that choosing one out of two possible public service providers was the most economically efficient way to achieve the public service obligation which consisted in producing electricity with domestic fuel. In addition, given that, firstly, the compensation did not include any profit, secondly, a public tender procedure would not have delivered a cheaper solution, thirdly, the company had recently restructured its activities and, last but not least, there was no indication that the chosen provider was operated in an inefficient way, it concluded that the compensation fulfilled the fourth Altmark condition.3946

4.110

71 to 73. 3942 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest, OJ C 8, 11.01.2012, p. 4, para. 76. 3943 Commission Decision C(2008) 5585 final of 21.10.2008 on Italy – A state aid scheme implemented by Italy to remunerate Poste Italiane for distributing postal savings certificates, (C 49/2006 ), OJ L 189, 21.07.2009, p.3. 3944 This was due to the fact that there were no identified costs that could be directly linked with the supply of the health insurance service. 3945 Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, paras 247 et seq. 3946 Commission Decision C(2007) 1181 final of 24.04.2007 on Slovenia – The State aid scheme implemented

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4.111

It is, however, doubtful that the Commission would come to the same conclusion nowadays. Indeed, in a 2012 decision on public service compensation granted to the French postal service provider La Poste, France argued that the fourth Altmark condition was fulfilled as the provider was significantly undercompensated (i.e. did not receive any profit), the creation of a parallel postal network would imply significant additional costs, the current postal provider is the only one that could ensure the provision of the service at the least cost to the community, and La Poste would also seek to reduce its costs by restructuring its activities. However, none of those arguments was accepted by the Commission, which instead made reference to the absence of a study or possible market benchmark which would confirm those statements. In addition, a report of the French court of auditors seemed to come to the opposite conclusion, even in light of the restructuring.3947

4.112

The following list includes some examples of Commission reasoning rejecting arguments brought forward by Member States to show compliance with the second alternative of the fourth Altmark condition:3948 –

The compensated costs were based on a benchmarking with “standard values” using historic data as observed at the level of the power plant concerned, and not the value associated with a typical and well run coal power plant;3949

–

The sample of companies used for the comparison included other national universal service providers which were not necessarily typical and well run undertakings. With regard to several of those operators, the Commission had in the past adopted State aid decisions where it concluded that they could not be considered as typical undertakings. Even if the provider at issue was more efficient than those other providers, that would not suffice to prove that the fourth Altmark condition was met.3950 Solid and specific evidence needed to be provided demonstrating that for

3947

3948 3949

3950

by Slovenia in the framework of its legislation on qualified energy producers, (C 7/2005 ), OJ L 219, 24.08.2007, p. 9, paras 111 et seq. Commission Decision C(2012) 152 final of 25.01.2012 on France – Abattement fiscal en faveur de la Poste française pour le financement de la présence territoriale; Subvention pour le transport et la distribution de la Presse par la Poste française, (SA.34027), OJ C 77, 16.03.2012, p. 2, paras 47 et seq. The following list contains just examples from the decision-making practice and is by no means exhaustive. Commission Decision C(2010) 4499 of 29.09.2010 on Spain – Public service compensation linked to a preferential dispatch mechanism for indigenous coal power plants, (N 178/2010), OJ C 312, 17.11.2010, p. 6, para. 109. Commission Decision C(2013) 1909 final of 02.05.2013 on Belgium – State compensations to bpost for the delivery of public services over 2013-2015, (N1/2013 ), OJ 279, 27.09.2013, p. 2, paras 79 and 80.

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each cost category of a postal operator (labour cost, procurement cost, etc.), the provider’s costs were in line with the market.3951 –

The comparison with an abstract enterprise using certain economic assumptions was not sufficient. The Member State needed to identify a representative undertaking that was well run and adequately provided with the necessary means to make the comparison.3952

–

Compensation was based on incurred costs3953 or included an ex post adjustment based on the difference between projected and actual costs and revenues. Therefore, the actual compensation, as adjusted ex post, depended on the actual costs of each company concerned and of its revenues, and not on the costs of a typical well run and well equipped power generating company.3954

It is clear when reading these few examples that the threshold for proving efficiency of an undertaking and thereby fulfillment of the second alternative of the fourth Altmark condition is very high. However, that does not mean that the Member State cannot grant any financial support to the SGEI provider. It can grant support provided it complies with the rules set out in the SGEI Decision and Framework as explained in chapters 34 and 35 below.

4.113

3951 Commission Decision C(2012) 8230 final of 20.11.2012 on Italy – State compensations for the delivery of the universal service over 2009-2011, (SA.33989 OJ C 77, 15.03.2013, p. 12, para. 50. 3952 Commission Decision C(2008) 1606 final of 30.04.2008 on Italy – Poste Italiane SpA; State compensation for universal postal service obligations 2006-2008, (NN 24/2008 and NN51/2006 ), OJ C 145, 11.06.2008, p. 1, paras 49 and 50. On the other hand, the Commission continues with a reference to the Chronopost judgment ( Joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost ECLI:EU:C:2003:388) where the Court held that the postal operator La Poste is in a situation very different from that of a private undertaking and that the postal network would never have been created by a private undertaking. This seems to say that at least in the postal sector, there is no representative undertaking with which the provider could have been compared and that therefore, the comparison can only be made with an abstract undertaking. 3953 Commission Decision C(2009) 9962 final of 15.12.2009 on Poland – State aid which Poland plans to implement for Poczta Polszka as compensation of universal postal service obligations, (C 21/2005 ), OJ L 347, 31.12.2010, p. 29, para. 86. 3954 Commission Decision C(2010) 499 final of 29.09.2010 on Spain – Public service compensation linked to a preferential dispatch mechanism for indigenous coal power plants, (N 178/2010) OJ C 312, 17.11.2010, p. 6, para. 111. See also Commission Decision C(2011) 632 final of 23.02.2011 on Germany – State aid implemented by Germany for Bahnen der Stadt Mohnheim (BSM) and Rheinische Bahngesellschaft (RBG) in the Verkehrsverbund Rhein-Ruhr, (C 58/2006 ), OJ L 210, 17.08.2011, p. 8, paras 202 et seq.

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4. 4.114

The SGEI de minimis regulation

The SGEI de minimis regulation is modelled on the Commission’s general de minimis regulation of 2006,3955 which was in force at the time of adoption of the SGEI de minimis regulation. Since that time, however, a revised general de minimis regulation has been adopted in the context of State aid modernisation (SAM)3956 (the “general de minimis regulation”), which has made some significant changes to the general rules. As a result, despite certain similarities, the SGEI de minimis regulation now differs in two ways from the general de minimis regulation: those that relate to its specific focus on SGEI, and those that result from subsequent amendments to the general de minimis regulation.

4.1 SGEI specificities 4.115

The most notable feature of the SGEI de minimis regulation is that it covers aid of up to EUR 500 000 over any period of three fiscal years, compared to EUR 200 000 under the general de minimis regulation. In order to benefit from this higher ceiling, aid must be granted for the provision of a service of general economic interest.3957 As recital 6 explains, that provision implies that the beneficiary undertaking must have been entrusted in writing with the SGEI. However, it is not necessary for the entrustment act to contain all the information that would have been required for a valid entrustment under the SGEI Decision. It is also important to note that the SGEI de minimis regulation, unlike the SGEI Decision, does not require any overcompensation check to be carried out.3958

4.2 Differences resulting from the amendments to the general de minimis regulation 4.116

Since the SGEI de minimis regulation was not updated in the context of SAM, certain further differences have appeared with the general de minimis regulation. There seems on the face of it to be no reason as a matter of principle for those differences, and it may therefore be reasonable to expect the SGEI de minimis regulation to be brought into line with the general de minimis regulation when the 3955 Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid, OJ L 379, 28.12.2006, p. 5. 3956 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1. 3957 Article 2(1). 3958 See Commission Staff Working Document: Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest, SWD(2013) 53 final/2, p. 52.

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former is next reviewed.3959 However, it also seems clear that there is no overriding need to interpret the SGEI de minimis regulation in line with the general rules. For the time being, therefore, those differences between the two sets of rules remain. The most striking difference between the two sets of rules is that the SGEI de minimis regulation does not apply to undertakings in difficulty.3960 In addition, the simplified notion of “single undertaking” contained in the general de minimis regulation3961 does not apply in the SGEI context. That means that all legal entities that form part of a single economic unit must be treated as a single undertaking under the SGEI de minimis regulation, whether the relationship between those legal entities arises as a result of a controlling shareholding or otherwise.

4.117

4.3 Similarities between the de minimis regulations Despite the various differences highlighted above, the two de minimis regulations also share important similarities. In both cases, the main principle is the same: aid that meets the requirements of the regulation is deemed not to meet all the criteria of Article 107(1) of the Treaty and therefore not to constitute aid.3962 “Aid” amounts in both cases are to be understood as the gross grant equivalent of the “aid”,3963 and the regulations do not apply to aid for which it is not possible to calculate the gross grant equivalent precisely ex ante without the need to undertake a risk assessment.3964 Finally, the key cumulation rules are essentially the same: in both cases, cumulation of de minimis aid with other aid in respect of the same eligible costs is not permitted if the aid would as a result exceed the permitted aid intensity3965, although in the case of the SGEI de minimis regulation that also extends to prohibiting any cumulation with other compensation in respect of the same SGEI, whether or not that other compensation constitutes State aid.3966 De minimis aid under the two regulations can be cumulated, but only up to the EUR 500 000 ceiling set out in the SGEI de minimis regulation.3967

4.118

3959 The SGEI de minimis regulation expires on 31 December 2018 (Article 5). 3960 Article 1(2)(h). “Undertakings in difficulty” are defined in the Commission’s rescue and restructuring guidelines (see further paras 3.851 to 3.853 of this book). On the rules for undertakings in difficulty under the general de minimis regulation, see paras 2.599 to 2.604 of this book. 3961 See paras 2.631 to 2.640 of this book. 3962 SGEI de minimis regulation Article 2(1); general de minimis regulation Article 3(1). 3963 SGEI de minimis regulation Article 2(3) ; general de minimis regulation Article 3(6). 3964 SGEI de minimis regulation Article 2(4); general de minimis regulation Article 4(1). See also paras 2.610 to 2.630 of this book. 3965 SGEI de minimis regulation Article 2(6); general de minimis regulation Article 5(2). 3966 Article 2(8). 3967 SGEI de minimis regulation Article 2(7); general de minimis regulation Article 5(1).

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Chapter 34 Compatibility – Part 1: the Exemption Decision 1.

Introduction

The two key aims of the revision of the rules on Services of General Economic Interest (hereafter SGEI) in 20113968 were clarification and the introduction of a diversified and proportionate approach, to distinguish more clearly between different types of services depending on the extent to which State aid in those economic sectors poses a serious risk of creating distortions of competition in the internal market.3969 Both of those objectives are clearly reflected in the Decision of 20 December 2011 (hereafter the 2011 SGEI Decision) which sets out the conditions under which compensation granted to certain undertakings entrusted with the operation of SGEI is compatible with the internal market and exempt from the notification requirement. The 2011 SGEI Decision builds on the experience gained by both Member States and the Commission in the application of its predecessor (the so-called 2005 Decision3970). Thus, the material

4.119

3968 On 20 December 2011, the European Commission adopted a new package of State aid rules for services of general economic interest (SGEI), which replaced the previous rules adopted in 2005. The “2011 package” consists of four instruments: (i) a new Communication, clarifying basic concepts of State aid relevant for SGEI (OJ C 8, 11.01.2012, p. 4); (ii) a de minimis Regulation, providing that compensation below EUR 500.000 over three years does not fall under State aid scrutiny (OJ L 114, 26.04.2012, p. 8); (3) a revised Decision, defining the conditions under which public service compensation is compatible with the internal market and does not need to be notified to the Commission (OJ L 7, 11.01.2012, p. 3) and (4) a revised Framework for assessing large compensation amounts granted to operators outside the social services field: those cases have to be notified to the Commission and may be declared compatible if they meet certain criteria (OJ C 8, 11.01.2012, p. 15). The present chapter analyses the Decision. For a general overview of the new rules and a presentation of the Communication and the de minimis Regulation, see Chapter 33. For a presentation of the Framework, see Chapter 35. 3969 See 2011 Communication on Reform of the EU State Aid Rules on Services of General Economic Interest, p. 6. 3970 Commission Decision of 28 November 2005 on the application of Article 86(2) EC to State aid in the form of public service compensation (OJ L 312, 29.11.2005, p. 67).

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scope of the 2011 SGEI Decision has been adjusted to ensure greater scrutiny of some large-scale SGEIs, while recognising the special characteristics of sectors such as social services.

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Given its nature as a block exemption Decision, it is not surprising that there have been few Commission Decisions and fewer court cases relating to it.3971 That paucity of litigation and scant decisional practice necessarily means that some questions have yet to be clarified, nor much is known about the practical application of the Decision in the Member States.

2.

Subject-matter and scope

2.1 Material scope 4.121

The 2011 SGEI Decision sets out the conditions under which State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest is compatible with the internal market and exempt from the notification requirement.

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The cases that fall under the Decision have been identified by the Commission, based on its case practice, as areas where the distortions of competition are deemed to be limited, either because of the characteristics of the sector concerned, or because of the limited amount of State aid involved.

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The exemption from the notification obligation aims at decreasing the administrative burden for national public authorities3972 as well as for the Commission, which does not need to examine all small SGEI schemes individually. At the same time it offers Member States greater legal certainty. However, Member States remain free to notify a planned measure for legal certainty, if they so desire.

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Unlike the Framework, the 2011 SGEI Decision does not exclude firms in difficulty from its application. It therefore allows for the compensation of SGEI costs irrespective of the financial situation of the service providers.3973 While the Decision is not explicit as to why that approach was taken, the probable reason for this 3971 The same is true of the 2005 Decision. 3972 Commission Staff Working Paper: The Application of EU State Aid Rules on Services of General Economic Interest since 2005 and the Outcome of the Public Consultation, SEC(2011) 397, p.5. 3973 According to point 9 of the Framework: “Aid for providers of SGEIs in difficulty will be assessed under the Community guidelines on State aid for rescuing and restructuring firms in difficulty”. The Decision does not contain a similar exclusion.

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policy choice has to be found in the wish of the Commission to be more demanding with large commercial SGEI and less with smaller and social services. According to recital 26, cases which fall within the scope of the 2011 SGEI Decision but fail to meet its conditions will be assessed under the 2011 SGEI Framework. Taken in isolation, recital 26 could mean that a hospital would become subject to the full compatibility requirements of the Framework if for example the entrustment does not contain a reference to the 2011 SGEI Decision3974. That result would appear disproportionate in view of the objective of applying a diversified and proportionate assessment to SGEIs that involve health and social services and lower aid amounts.3975 The 2011 SGEI Framework therefore clarifies in point 61 that a number of compatibility criteria (including efficiency incentives and compliance with public procurement rules) will not be applied to such cases.

2.1.1 Exemption based on the limited amount of aid involved Lower aid amounts are presumed not to affect the development of trade and competition to an extent that would be contrary to the interests of the Union. There is therefore no need for an assessment of individual cases following their notification to the Commission, provided that certain safeguards are respected.

4.125

Under Article 2(1)(a) of the 2011 SGEI Decision, SGEI compensation not exceeding an annual amount of EUR 15 million,3976 granted for the performance of SGEI in all sectors other than transport and transport infrastructure, is exempt from the notification requirement. Where the amount of compensation varies over the duration of the entrustment, the annual amount is to be calculated as the average of the annual amounts of compensation expected to be made over the entrustment period.

4.126

The language of the 2011 SGEI Decision is not actually clear on whether that threshold is applied per undertaking or per individual SGEI entrusted, as it merely refers to compensation “ for the provision of services of general economic interest”. That formulation contrasts with that of the 2005 Decision, which specified that it applied to undertakings “which receive annual compensation for the service in question” of less than EUR 30 million. However, the preparatory documents for the reform do not reveal any intention to tighten the maximum amount payable even further by calculating it per undertaking rather than, as

4.127

3974 As required by Article 4(f ). 3975 Merola and Ubaldi, The 2011 Almunia Package and the Challenges Ahead: Are the New Rules Flexible Enough to Fit the Wide Variety of SGEI?, EStAL 2/2012, 17 (35). 3976 That threshold is gross, i.e. without any deduction of taxes.

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under the 2005 Decision, per SGEI. The SGEI Frequently Asked Questions confirm that the threshold of EUR 15 million is applied per SGEI entrusted.3977 Thus an undertaking that carries out several distinct SGEIs can receive an overall amount that is significantly higher, provided that the aid per service remains below EUR 15 million. Conversely, where several undertakings jointly provide a single SGEI, the total compensation paid to them must not exceed EUR 15 million.

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The cap of EUR 15 million is a significant reduction of the EUR 30 million annual compensation allowed under the 2005 Decision. The lowered cap is due to the development of intra-Union trade in the provision of SGEIs, as evidenced by the increasing presence of multi-national providers in a range of key sectors, such as health care. However, undertakings with an annual turnover (before tax) of over EUR 100 million3978 during the two financial years preceding that in which the SGEI was assigned were excluded from the 2005 Decision, thus significantly limiting its scope. That restriction has been removed in the 2011 SGEI Decision, placing the emphasis solely on the size of the SGEI and no longer on the size of the undertaking providing it. The change avoids situations in which different undertakings are treated differently because of their size, even though the impact on competition of the activity under assessment is the same. In addition, the turnover threshold proved difficult to apply in some cases, especially those involving group structures.

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The general threshold also applies in the air and maritime transport sectors, provided that the conditions of Regulation (EC) No 1008/20083979 and Regulation (EEC) No 3577/923980, respectively, are complied with, where applicable.3981 However, as was already the case under the 2005 Decision, specific limitations apply in terms of passenger numbers. Under Article 2 (1)(d) of the 2011 SGEI Decision, SGEI compensation for air or maritime links to islands is only cov3977 Guide to the application of the European Union rules on State aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest, SWD(2013) 53 final/2, pt. 91. See also Sinnaeve, What’s New in SGEI in 2012? – An Overview of the Commission’s SGEI Package, EStAL 2/2012, 347 (356). 3978 In the case of credit institutions, the threshold was a balance sheet total of EUR 800 million. 3979 Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community, OJ L 293, 11.11.2008, p. 3. 3980 Council Regulation (EEC) No 3577/92 of 7 December 1992 applying the principle of freedom to provide services to maritime transport within Member States, OJ L 364, 12.12.1992, p. 7. 3981 Article 2(4) of the 2011 Decision. See, for example, Commission Decision C(2013) 9101 final of 22 January 2014 on the measures implemented by the Region of Sardinia in favour of Saremar (SA. 32014 (2011/C), SA. 32015 (2011/C), SA. 32016 (2011/C)), available under the case number on the DG Competition internet page (not yet published in the OJ).

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ered by the Decision if the average annual traffic during the two financial years preceding that in which the service in question was assigned did not exceed 300 000 passengers; under Article 2(1)(e) of the 2011 SGEI Decision the limits are 200 000 passengers for airports and 300 000 passengers for ports respectively. The figures have remained unchanged for links to islands and ports, but there has been a significant reduction as regards airports, down to 200 000 passengers from 1 000 000 in the 2005 Decision. That lower ceiling is in line with the approach taken in the new Aviation Guidelines,3982 aiming at closer scrutiny of SGEI compensation for regional airports in response to the development of competition in that sector.3983 Recital 25 of the 2011 SGEI Decision clarifies that for those services only the number of passengers is relevant; Member States cannot use the Decision for larger ports and airports, even if annual compensation remains below EUR 15 million. In contrast to air and maritime transport, which fall under Article 106(2) of the Treaty and are therefore covered by the SGEI Decision, aid to land transport is based on Article 93 of the Treaty. Consequently it is excluded from the scope of the 2011 SGEI Decision (and its predecessor, the 2005 Decision).3984

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2.1.2 Exemption based on the sector concerned The 2005 Decision had already exempted public service compensation for hospitals and social housing undertakings from the notification requirement, irrespective of the amount of State aid involved. Article 2(1)(b) of the 2011 SGEI Decision retains the category of hospitals3985 and clarifies that it includes emergency services; in addition, the pursuit of purely ancillary activities by a hospital does not prevent the Decision from being applicable.3986 The reference to ancillary activities had already been included in recital 16 of the 2005 Decision. It is submitted that its inclusion in the operative part of the 2011 Decision does not introduce any substantive changes, but it does gain greater prominence. It remains to be seen whether it will result in greater attention being given to the limits of the notion of ancillarity in that context.

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3982 Guidelines on State aid to airports and airlines, OJ C 99, 04.04.2014, p. 3. 3983 For details, see above chapter 26. 3984 Article 2(5) of the 2011 Decision. SGEIs in the land transport sector may be exempt from the notification requirement under Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road, OJ L 315, 03.12.2007, p. 1. 3985 Concerning the special nature of hospitals, see also Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, paras 85 et seq. 3986 It is worth noting that the term “ancillary activity” is here used in a slightly different context than in, for example, the rules on infrastructures for research, development and innovation, where ancillary activities concern the boundary between economic and non-economic activities.

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Social housing3987 likewise remains exempted from the need to notify, but it is now included in Article 2(1)(c) as just one of several categories of SGEIs meeting social needs, the others being health and long-term care, childcare, access to and reintegration into the labour market, and the care and social inclusion of vulnerable groups. The express material scope of the 2011 SGEI Decision is thus significantly broader than that of its predecessor.3988 That enlarged scope is justified by the specific characteristics of those undertakings and in particular the fact that, in the present economic conditions and at the current stage of development of the internal market, with services still largely organised at the local level, social services may require an amount of aid beyond the threshold set in the 2011 SGEI Decision to compensate them for the public service cost. A larger amount of compensation for social services does thus not necessarily produce a greater risk of distortions of competition.3989 In addition, SGEIs in social services often contain elements that focus on the quality of human interaction rather than e.g. administrative services. Were such services to be assessed under the Framework, they would be subject to the requirement to impose efficiency incentives. As the efficiency of such services may be difficult to measure, it seems more appropriate for them to be included in the scope of the Decision.3990

4.134

The list of social services is exhaustive, as is necessary in a document that is directly applicable in Member States. However, in particular the category of “care and social inclusion of vulnerable groups” is sufficiently broad to cover a range of services, and of course Member States remain free to determine the exact scope of each SGEI, based on their particular needs and subject only to a manifest error test.3991

4.135

The relative freedom of the Member States in that regard is illustrated by the Commission Decision on Dutch Social Housing.3992 Recital 16 of the 2005 De-

3987 This includes the provision of infrastructure elements needed to ensure a good environment for social dwellings; see Commission Decision C(2005) 4668 final of 7 December 2005 on Ireland - Loan guarantee for social infrastructure schemes funded by the Housing Finance Agency (N 395/2005), OJ C 77, 05.04.2007, p.1, para 40. 3988 It should be noted that the previous cap of EUR 30 million ensured that a significant number of social services also benefited from the exemption in practice; in that respect, the change lies rather in their express recognition, rather than in a substantive widening of the scope of the SGEI Decision. 3989 Recital 11 of the 2011 Decision. 3990 See Commission Policy Newsletter 2012-1, The New State Aid Rules for Services of General Economic Interest (SGEI), by Pesaresi, Sinnaeve, Guigue-Koeppen, Wiemann and Radulescu. 3991 See Sinnaeve, What’s New in SGEI in 2012? – An Overview of the Commission’s SGEI Package, EStAL 2/2012, 347 (354 et seq.). 3992 Commission Decision C (2009) 9963 final of 15 December 2009 on – Netherlands – Existing and special project aid to housing corporations (E2/2005 and N 642/2009), OJ C 31, 09.02.2010, p. 6.

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cision3993 refers to “undertakings in charge of social housing providing housing for disadvantaged citizens or socially less advantaged groups, which due to solvability constraints are unable to obtain housing at market conditions”. It is thus clear that there must be some restriction of the SGEI to a target group, but it is for the Member State to determine the size of the group and the precise detailed arrangements of the system.3994 In the specific case, following a complaint, the Commission had expressed doubts as to whether the renting out of dwellings to all income groups could qualify as social housing. In response, the Dutch authorities committed to a new, clear definition which identified the target group through an income ceiling set at EUR 33 000 per year, thus covering the lowest-earning 43 per cent of the population. The Commission considered this definition acceptable, “since it clearly delimits the scope of the activities to socially less advantaged households that are disadvantaged compared with those that are outside the target group”.3995 It is therefore likely that the detailed utilisation, and thus ultimately the sphere of application, of the 2011 SGEI Decision will vary significantly between Member States. In addition, the individual social services listed may not be as unambiguous as they first appear, requiring further clarification by the Commission.3996 For example, it is not clear whether the reference to “health” includes health insurance, or whether such services would fall to be assessed under the Framework. That question arose in the so-called “Slovak Health” case,3997 which concerned the provision of compulsory health insurance in Slovakia, but was left open by the Commission in the opening of the formal investigation.3998

4.136

3993 The same language is now contained in recital 11 of the 2011 Decision. 3994 Commission Decision C (2009) 9963 final of 15 December 2009 on Netherlands – Existing and special project aid to housing corporations (E2/2005 and N 642/2009), OJ C 31, 09.02.2010, p. 6, para 55. 3995 Commission Decision C (2009) 9963 final of 15 December 2009 on Netherlands – Existing and special project aid to housing corporations (E2/2005 and N 642/2009), OJ C 31, 09.02.2010, p. 6, para 57. 3996 Van de Gronden and Rusu, The Altmark Update and Social Services: Toward a European Approach in Szyszczak and Van de Gronden (eds.), Financing Services of General Economic Interest – Reform and Modernization [sic], Asser Press 2013, p. 202. 3997 Commission Decision of 2 July 2013 on – Slovak Republic – Alleged State aid to Spolocná zdravotná poist’ovna, a.s.(SZP) and Vaeobecná zdravotná poist’ovna, a.s. (VZP) (SA.23008, 2013/C (ex 2013/NN)), OJ C 278, 26.09.2013, p. 28. 3998 The Commission noted the basic substantive compatibility criteria, which are the same under both the 2011 Decision and the 2012 Framework, and invited the Slovak authorities and third parties to provide comments on the potential applicability of, and compatibility with, both sets of rules. In the final Decision no position was taken on this, as the provision of compulsory health insurance in Slovakia was determined to be non-economic, and therefore outside the scope of State aid control (see Commission Decision of 15 October 2014 on the measures implemented by Slovak Republic for Spoločná zdravotná poisťovňa, a.s (SZP) and Všeobecná zdravotná poisťovňa, a.s (VZP) (SA.23008, 2013/C (ex 2013/NN)), OJ L 41, 17.02.2015, p. 25.

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4.137

Despite the considerable discretion given to Member States, not least in determining which services they require for the care and inclusion of socially vulnerable groups, it is clear that they cannot circumvent the restrictions included in the 2011 SGEI Decision. While in most cases they are express (e.g. requiring compliance with specific secondary legislation, as in relation to air and maritime transport3999) and straightforward, an anomaly has arisen in the context of transport SGEIs. As noted above, land transport is excluded from the scope of the SGEI Decisions, as its legal basis is Article 93 of the Treaty rather than Article 106(2). Thus, transport services do not qualify under the 2011 SGEI Decision, even if they are aimed at the inclusion of socially vulnerable groups (e.g. the elderly or people with disabilities). At the same time, such services are likely to fall outside the scope of Regulation 1370/2007, as the exemption from notification granted there only covers services that are, inter alia, “non-discriminatory and continuous”.4000 The logical consequence is that all SGEIs for transport services by rail or road which are not covered by Regulation 1370/2007 have to be notified to the Commission for assessment directly under the Treaty. As there is no conceptual difference between transport services aimed at the inclusion of socially vulnerable groups and other services aimed at such inclusion and there are no objections to the exemption from the notification obligation for transport services per se,4001 that difference in treatment must be regarded as unnecessary and unfortunate. As Article 93 of the Treaty constitutes a lex specialis with regard to Article 106(2), however, it would seem that the only way to change the situation would be to amend Regulation 1370/2007, to ensure its application to services that may not be continuous and will, by definition, be targeted at certain sections of society.

2.1.3 Temporal limitation of the entrustment 4.138

In addition to the limitations in terms of sectors and the amount of compensation noted above, the 2011 SGEI Decision only applies to entrustments that are awarded for a period of no more than ten years. An exception is granted for cases in which a significant investment is required from the service provider that needs to be amortised over a longer period in accordance with generally accepted accounting principles.4002 3999 Article 2(4) of the 2011 Decision. 4000 Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road, OJ L 315, 03.12.2007, p. 1, Article 2(a). 4001 As evidenced by the fact that maritime and air transport are included in the scope of the 2011 Decision and that general public transport, which will often involve far higher amounts of compensation than social service transport, is likewise exempt from notification under Regulation 1370/2007. 4002 Article 2(2) of the 2011 Decision.

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The 2005 Decision contained no provision on the duration of the entrustment and in the past the Commission has expressly recognised that an entrustment unlimited in time was not an obstacle to the application of the Decision to the measure in question: “The Commission considers that the lack of a determined duration is acceptable taking into account the very nature of the public service in the field of housing. The lifetime of the social housing investments extends over several decades. The Dutch housing policy dates from the 19th century and is not foreseen to change in the future. However, the obligations derive from the Housing Act and ministerial decrees which could be revoked or amended by the Dutch authorities in the future.”4003

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Since then, however, the Commission has taken the view that the duration of an entrustment also has an effect on the extent to which a measure affects trade and competition. First, long entrustments restrict potential competition for the provision of the service; second, they render the accurate determination of ex ante content and compensation parameters difficult.4004 Unlimited entrustments are therefore no longer regarded as acceptable.4005

4.140

The language used in the 2011 SGEI Decision is both wider and narrower than that in the Framework. It is narrower, because an entrustment period of more than ten years can only be justified by reference to significant investments in fixed assets, while the Framework (though encouraging the link with depreciation) also allows other “objective criteria”. It is also wider because for the period of up to ten years, no specific justification is required at all, while under the Framework, even shorter entrustments must be justified in the context of the individual case.

4.141

The need to limit the entrustment will ensure that, at least every ten years, Member States will have to reassess the situation concerning a particular SGEI, not least to check whether the market has developed in such a way that the service in question no longer qualifies as a genuine SGEI. Provided that it is not the case, however, the existing provider can simply be re-entrusted for another ten years.

4.142

4003 Commission Decision C (2009) 9963 final of 15 December 2009 on – Netherlands – Existing and special project aid to housing corporations (E2/2005 and N 642/2009), OJ C 31, 09.02.2010, p. 6 at para 53. See also Commission Decision C(2009) 8120 final of 28 December 2009 on – BE – Financement des hôpitaux publics du réseau IRIS de la Région Bruxelles-Capitale (NN 54/2009), OJ C 74, 24.03.2010, p. 1, para 173. 4004 See Sinnaeve, What’s New in SGEI in 2012? – An Overview of the Commission’s SGEI Package, EStAL 2/2012, 347 (357). 4005 The 2012 Framework also requires entrustments to be limited in time. See chapter 35.

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2.2 Temporal Scope 4.143

The 2011 SGEI Decision was adopted on 20 December 2011 and entered into force on 31 January 2012.4006 It repealed the 2005 Decision.4007 Article 10 of the 2011 SGEI Decision sets out the transitional provisions. Individual aid that was granted before this date and fulfilled all the requirements of the 2005 Decision is not affected by the introduction of the new rules. Individual aid granted before the entry into force of the 2011 SGEI Decision which did not comply with the 2005 Decision, but is in line with the 2011 SGEI Decision, is deemed compatible with the internal market and exempt from the notification obligation.4008 For example, unlawful aid of below EUR 15 million, granted to an undertaking that exceeded the turnover cap set out in the 2005 Decision, will now be regarded as falling under the 2011 SGEI Decision (provided of course that all the other compatibility criteria are met). The 2011 SGEI Decision is thus partially retroactive, but only to the extent that it benefits Member States. As regards existing aid schemes granted in accordance with the 2005 Decision, Member States were given two years, i.e. until 31 January 2014 to bring them in line with the requirements of the 2011 SGEI Decision.4009

3. 4.144

Compatibility criteria

The following section explains the compatibility conditions that apply under the 2011 SGEI Decision. Specific reference will also be made where the rules with respect to the 2005 Decision have changed. It should be noted, however, that the conditions relating to “entrustment”, “compensation” und “control of overcompensation” are largely similar to the first three conditions as stipulated in the Altmark judgment of the Court of Justice in 2003.4010 For a detailed discussion of those criteria, the reader is referred to chapter 34. This chapter will therefore discuss the compatibility conditions of the SGEI Decision to the extent that they require clarifications additional to those under the Altmark judgment.

3.1 Entrustment 4.145

Public service obligations for which compensation is granted must be clearly defined in an entrustment act. An act of entrustment is the act which entrusts the provision of an SGEI to the undertaking(s) concerned and spells out the 4006 4007 4008 4009 4010

Article 12 of the 2011 Decision. Article 11 of the 2011 Decision. Article 10(b) of the 2011 Decision. Article 10(a) of the 2011 Decision. Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415.

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nature of the task as well as the scope and the general operational conditions of the SGEI.4011 A public service assignment is necessary in order to define the obligations of the undertaking and of the State.4012 In the absence of such an act, the specific task of the undertaking is unknown and fair compensation cannot be determined.4013

4.146

According to Article 4 of the 2011 SGEI Decision, the act or acts shall include, in particular:

4.147

(a)

the content and duration of the public service obligation(s);

(b)

the undertaking and, where applicable, the territory concerned;

(c)

the nature of any exclusive or special right(s) assigned to the undertaking by the granting authority;

(d)

a description of the compensation mechanism and the parameters for calculating, controlling and reviewing the compensation;

(e)

the arrangements for avoiding and recovering any overcompensation; and

(f )

a reference to this Decision.

Besides the fact that the entrustment act cannot exceed a period of 10 years pursuant to Article 2(2) of the 2011 SGEI Decision, the main novelty introduced with respect to the 2005 Decision is that the entrustment act needs to include a reference to the 2011 SGEI Decision. The purpose of that new requirement is

4.148

4011 Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest, SWD(2013) 53 final/2 pt. 46. 4012 Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest, SWD(2013) 53 final/2 pt. 21. 4013 The General Court stated in Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, at para 95 that where several undertakings have been entrusted with the same public service obligation but with differing requirements, which lead to a different level of costs and compensation, the entrustment acts must clearly identify those differences in order to verify the compliance with the conditions of the SGEI Decision and ensure equal treatment between the providers. Thus, the entrustment act(s) need(s) to be sufficiently precise and comprehensive to determine for each undertaking to which the entrustment act applies the different level of costs and compensation.

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to improve transparency and compliance by the public authorities that thereby need to ask themselves whether the compensation involves State aid or not.

3.2 Compensation 4.149

According to Article 5(1) of the 2011 SGEI Decision “the amount of compensation shall not exceed what is necessary to cover the net cost incurred in discharging the public service obligations, including a reasonable profit.” Above that limit, the provider receives overcompensation which cannot be justified by the need to provide the SGEI.

4.150

Regarding the method for calculating the net cost of providing the SGEI, as under the 2005 Decision, Member States can calculate the net cost as the difference between the costs incurred in providing the SGEI and the revenue earned from it. In particular, when an undertaking carries out activities that constitute SGEI and activities that do not, it should separate the accounts between them and count as SGEI costs all direct costs incurred in providing the SGEI, and an appropriate contribution to the costs that are common to both SGEI and non SGEI activities.

4.151

However, Member States can also calculate the net cost of providing the SGEI as the difference between the net cost for the undertaking operating with the public service obligation and the net cost or profit of the same undertaking operating without the public service obligation. That methodology can be useful and appropriate (and, in certain cases, simple to use), for instance, for undertakings active in social housing: the net cost can be calculated as the sum of foregone rent (due to limitation of rent compared to market price) and the additional costs arising from the public service obligation (e.g. costs incurred in checking that tenants are eligible); revenues which would not have been received if the housing had been commercial should be subtracted. In contrast to the Framework, the 2011 SGEI Decision does not impose a specific methodology to calculate the net costs of providing the SGEI. Member States can decide which methodology is the most appropriate for them given the specific circumstances of the SGEI.4014

4.152

The 2011 SGEI Decision makes specific reference to the profit indicator as well as the level of the reasonable profit allowed under the Decision. With respect to 4014 See also Van de Gronden and Tefan Rusu, The Altmark Update and Social Services: Towards a European Approach, in Szyszczak and Van de Gronden (eds.), Financing Services of General Economic Interest – Reform and Modernization, Asser Press 2013, p. 206.

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the profit indicator, Article 5(5) of the 2011 SGEI Decision refers to the “rate of return on own capital” which means the “ internal rate of return” (IRR) that the undertaking makes on its invested capital over the duration of the entrustment period. That rate is the standard measure to assess investment profitability over longer periods of time. The level of profit allowed, as a rule, remains the same as under the 2005 Decision: the profit should not exceed the rate of return on capital that would be required by a typical undertaking considering whether or not to provide the SGEI, taking into account the level of risk. However, the 2011 SGEI Decision and Framework introduce the concepts of safe harbour and reasonable profit cap. As such, a profit level below swap rate4015 + 100 basis points4016 is considered to be reasonable in any event and therefore constitutes a safe harbour. On the other hand, where the provision of the SGEI is not connected with a substantial commercial or contractual risk, in particular when the net cost incurred in providing the SGEI is essentially compensated ex post in full, the safe harbour level becomes the cap that cannot be exceeded when determining the reasonable profit.4017

4.153

Many of the other rules relating to the amount of compensation and control of overcompensation remain unchanged:

4.154

i.

If an undertaking holds special or exclusive rights linked to activities, other than the SGEI for which the aid is granted, which generate profits in excess of the reasonable profit, or if it benefits from other advantages granted by the State, these have to be included in its revenue, irrespective of their classification for the purposes of Article 107 of the Treaty. However, Member States can freely decide if the profits accruing from other activities outside the scope of the SGEI in question are to be assigned in whole or in part to the financing of the SGEI.

4015 The swap rate is the longer maturity equivalent to the Inter-Bank Offered Rate (IBOR). It is used in the financial markets as a benchmark rate for establishing the funding rate. 4016 The premium of 100 basis points serves, inter alia, to compensate for liquidity risk related to the fact that a SGEI provider that invests capital in an SGEI contract commits that capital for the duration of the entrustment act and will be unable to sell its stake as rapidly and at as low a cost as is the case with a widely held and liquid risk-free asset. 4017 See Sinnaeve, What’s new in SGEI in 2012? – An Overview of the Commission’s SGEI Package, EStAL 2/2012, 347 (357). She also notes that as the profit cap only applies to the rate of return on capital, and that the Decision allows, where that profit level indicator is not appropriate, the use of other indicators (cf Article 5(8) of the Decision) for which no cap is foreseen, Member States may de facto still be able to use a higher profit level, provided they can justify the use of other profit indicators.

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ii.

In determining what constitutes a reasonable profit, Member States may introduce incentive criteria relating, in particular, to the quality of service provided and gains in productive efficiency. Efficiency gains must not reduce the quality of the service provided.

iii.

Where an undertaking carries out activities falling both inside and outside the scope of the SGEI, the internal accounts must show separately the costs and receipts associated with the SGEI and those of other services, as well as the parameters for allocating costs and revenues. This is an important condition in order to rule out cross-subsidisation, which refers to the possibility to use the subsidy obtained for the provision of the SGEI in order to offer artificially low prices in other, commercial activities.

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The method for calculating the compensation under the Decision and the Framework is the most distinguishing element with respect to the Altmark judgment. According to the fourth Altmark criterion, in order not to constitute State aid the amount of the compensation must be defined either through an open, transparent and non-discriminatory public procurement procedure, allowing for selection of the tenderer capable of providing the services at the least cost to the community; or through a procedure whereby the public authorities have to determine the amount of compensation on the basis of an analysis of the costs of a typical undertaking, well run and adequately equipped.4018 In other words, the fourth Altmark criterion is fulfilled if the compensation is not set above the level that would be required by an efficient undertaking (capable of winning a tender or identified through a benchmarking exercise).

4.156

The 2011 SGEI Decision, on the other hand, does not set efficiency requirements. According to settled case-law of the General Court, the fourth Altmark criterion is not taken into account for assessing the compatibility of aid measures under Article 106(2) of the Treaty, since the conditions for compatibility are different from the criteria in the Altmark judgment, which were laid down in order to assess the existence of State aid.4019 The economic efficiency of an undertaking in providing the SGEI and, in particular, the question of whether an undertaking responsible for the SGEI may fulfil its public service obligations at lower cost is irrelevant for assessing the compatibility of State aid in the light 4018 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg ECLI:EU:C:2003:415, para 93. 4019 Case T-354/05 TF1 v Commission ECLI:EU:T:2009:66 , paras 129 to 140. In Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29 (which is an earlier judgment), the question whether the inefficiency of the SGEI provider should also be taken into account in the examination of proportionality under Article 106(2) of the Treaty was left open (para 297).

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of Article 106(2) of the Treaty. Through the assessment of proportionality of aid, Article 106(2) of the Treaty seeks only to prevent the operator responsible for the SGEI benefiting from funding which exceeds the net costs of the public service.4020 Thus, as long as the public authority proves that the compensation granted corresponds to the net costs estimated on the basis of the precisely defined parameters contained in the act of entrustment and that there is no overcompensation, the compensation in question is regarded as State aid compatible with the Treaty.

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3.3 Control of overcompensation According to Article 6 of the 2011 Decision, “Member States shall ensure that the compensation granted for the operation of the service of general economic interest meets the requirements set out in the Decision and in particular that the undertaking does not receive compensation in excess of the amount determined in accordance with Article 5. They shall provide evidence upon request from the Commission. They shall carry out regular checks, or ensure that such checks are carried out, at least every 3 years during the period of entrustment and at the end of that period. Where an undertaking has received compensation in excess of the amount determined in accordance with Article 5, the Member State shall require the undertaking concerned to repay any overcompensation received. The parameters for the calculation of the compensation shall be updated for the future. Where the amount of overcompensation does not exceed 10 per cent of the amount of the average annual compensation, such overcompensation may be carried forward to the next period and deducted from the amount of compensation payable in respect of that period.”

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In order to ensure that the compensation granted complies with the conditions of the 2011 SGEI Decision and in particular does not exceed the costs of the SGEI provision, Member States have a large discretion in putting in place appropriate control and review procedures. They can take the form of audits carried out by private consultants or by national Courts of Auditors.4021 The procedures need, however, to be specified in the entrustment act as stipulated by Article 4 of the 2011 SGEI Decision.4022

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4020 See also Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 293. 4021 Joined Cases T-309/04, T-317/04, T-329/04 and T-336/04 TV 2/Danmark and Others v Commission ECLI:EU:T:2008:457, para. 219. 4022 Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, para. 252.

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In order to calculate the compensation over the entrustment period, the 2011 SGEI Decision takes a multi-annual approach. In consequence, a provider can receive overcompensation for a certain year, as long as there is no overcompensation for the whole duration of the contract. It thus increases flexibility and reduces the administrative burden. It also better fits the aim of moving towards compensation schemes that provide for efficiency incentives, given that the provision of such incentives typically requires a multi-annual perspective.4023

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However, with a view to avoiding cases where the beneficiary would receive overcompensation for a long time without any scrutiny, Article 6(1) of the 2011 SGEI Decision provides that Member States must carry out regular intermediate checks (at least every three years) during the period of entrustment and at the end. Where, under the terms of the entrustment act, the undertaking has received overcompensation, the Member State must require the undertaking concerned to repay it. However, the overcompensation can be carried forward to the next period when it does not exceed 10 per cent of the average annual compensation. A final, comprehensive, check is made at the end of the contract to ensure that there was no overcompensation over the lifetime of the contract.

3.4 Transparency 4.161

Article 7 of the 2011 SGEI Decision stipulates that for compensation above EUR 15 million granted to an undertaking which also has additional commercial activities outside the scope of the SGEI, the Member State concerned must publish the entrustment act or a summary of it and the amounts of aid granted to the undertaking on a yearly basis.

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That provision needs to be seen in conjunction with Article 2(1)(b) and (c) of the 2011 SGEI Decision in particular, and is intended for large social services that benefit from the application of the Decision regardless of any thresholds. For those cases, the Decision sets out additional transparency requirements in Article 7.4024 It is not intended to apply to undertakings that provide several SGEIs, each of which is individually compensated with an aid amount not exceeding EUR 15 million, as can also be understood from the reference in Article 7(a) of the 2011 SGEI Decision to “the entrustment act”, in the singular.4025 4023 Commission Policy Newsletter 2012-1, The New State Aid Rules for Services of General Economic Interest (SGEI), by Pesaresi, Sinnaeve, Guigue-Koeppen, Wiemann and Radulescu. 4024 See also Van de Gronden and Rusu, The Altmark Update and Social Services: Towards a European Approach, Szyszczak and Van de Gronden (eds.), Financing Services of General Economic Interest – Reform and Modernization [sic], Asser Press 2013, p. 210. 4025 Guide to the application of the European Union rules on state aid, public procurement and the internal

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Although the timing of the publication is not mentioned in Article 7 of the 2011 SGEI Decision, the objective of that provision is to ensure transparency, by informing public service providers that an SGEI has been entrusted, to whom, what it covers, and what the annual compensation is. Publication also allows a possible competitor or a citizen to bring to the attention of a judge or of the Commission a case of illegal or incompatible aid. It can therefore be argued that such information should be published at the time of the entrustment or in the course of that year. If one were to wait until the end of the entrustment period, the transparency objective could no longer be fully achieved.4026

4.

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Availability of information and reporting

4.1 Availability of information Article 8 of the 2011 SGEI Decision requires Member States to keep available, during the period of the entrustment and for at least ten years from the end of the period of entrustment, all the information necessary to determine whether the compensation granted is compatible with the Decision. That obligation is similar to, but more precise than, the corresponding provision in the 2005 Decision,4027 which merely imposed on Member States an obligation to retain the necessary information for at least ten years, without however specifying the starting point.

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On written request by the Commission, Member States must provide the Commission with all the information the latter considers necessary to determine whether the compensation measures in force are compatible with the Decision. The wording, which is equivalent to that of the 2005 Decision, is noteworthy for its reference to “compensation measures in force”. Read in isolation, it could be taken as giving Member States the right to refuse to provide information on measures which are no longer in force. However, it is clear from the requirement to keep records for ten years after the end of the entrustment period that such an interpretation cannot be correct.

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market to services of general economic interest, and in particular to social services of general interest, SWD(2013) 53 final/2, pt 147. 4026 Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest, SWD(2013) 53 final/2, pt 148. 4027 Article 7 of the 2005 Decision.

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4.2 Reporting 4.166

As was already the case under the 2005 Decision,4028 Member States are required to submit periodic reports on the implementation of the 2011 SGEI Decision to the Commission. However, the 2011 SGEI Decision4029 has increased the frequency from every three to every two years, and has specified the required content, including: (a) a description of the application of the Decision to the services falling within its scope, including in-house activities; (b) the total amount of aid granted in accordance with the Decision, with a breakdown by the economic sector of the beneficiaries; (c) an indication of whether, for a particular type of service, the application of the Decision has given rise to difficulties or complaints by third parties; and (d) any other information concerning the application of the Decision required by the Commission and to be specified in due time before the report is to be submitted.

4.167

During the first reporting exercises (covering the years 2006-2008 and 20092011) some Member States had difficulties in gathering detailed statistical information on the provision of SGEI from different parts of their national administration. Some Member States pointed to the fact that the rules on SGEI are often applied on a regional or even local level with little national co-ordination, which makes data collection difficult. In fact, some Member States did not provide statistical information on the application of the 2005 Decision at all, whilst others concentrated their reports on SGEI compensation organised at central government level. Instead of providing detailed statistical information on the application of the SGEI rules, most Member States thus focused their contributions on practical experience with the application of the SGEI rules. The comments from Member States were not limited to the instruments and requirements of the SGEI rules themselves. Instead, Member States also dealt with issues of aid definition under Article 107 of the Treaty and with the implications of the Altmark jurisprudence.4030

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The latest reports (due in 2014) have not yet been published on the Commission’s website. It remains to be seen whether the inclusion of required content in the 2011 SGEI Decision will lead to a significant increase in the uniformity, and completeness, of the reports.

4028 Article 8 of the 2005 Decision. 4029 Article 9 of the 2011 Decision. 4030 For a short review of the first set of reports submitted by Member States, see Sinnaeve, The Report and Communication on Services of General Economic Interest: Stocktaking and Outlook for Reform, EStAl 2/2011 (214).

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Chapter 35 Compatibility – Part 2: the Framework

1.

Introduction

The new rules on Services of General Economic Interest (hereafter SGEI) adopted on 20 December 20114031 (hereafter the SGEI package) include a revised SGEI Framework4032 “the 2011 SGEI Framework”. In a nutshell, the 2011 SGEI Framework is used for assessing large compensation amounts (above EUR 15 million) granted to operators outside the social services area. Those measures have to be notified to the Commission and may be declared compatible if they meet the criteria set out in the 2011 SGEI Framework.

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The 2011 SGEI Framework introduces additional compatibility conditions as compared to its predecessor4033 (“the 2005 SGEI Framework”), taking better account of efficiency and competition considerations and strengthening transparency with a view to ensuring that competition distortion induced by SGEI

4.170

4031 On 20 December 2011, the European Commission adopted a new package of State aid rules for services of general economic interest (SGEI), which replaced the previous rules adopted in 2005. The “2011 SGEI package” consists of four instruments: (i) a new Communication, clarifying basic concepts of State aid relevant for SGEI (OJ C 8, 11.01.2012, p. 4); (ii) a de minimis Regulation, providing that compensation below EUR 500.000 over three years does not fall under State aid scrutiny (OJ L 114, 26.04.2012, p. 8); (iii) a revised Decision, defining the conditions under which public service compensation is compatible with the internal market and does not need to be notified to the Commission (OJ L 7, 11.01.2012, p. 3) and (iv) a revised Framework for assessing large compensation amounts granted to operators outside the social services field: those cases have to be notified to the Commission and may be declared compatible if they meet certain criteria (OJ C 8, 11.01.2012, p. 15). The present chapter analyses the Framework. For a general overview of the new rules and a presentation of the Communication and the de minimis Regulation, see Chapter 33. For a presentation of the Decision, see Chapter 34. 4032 Communication from the Commission: European Union framework for State aid in the form of public service compensation (2011), OJ C 8, 11.01.2012, p. 15. 4033 Communication from the Commission: Community framework for State aid in the form of public service compensation (2005), OJ C 297, 29.11.2005, p. 4.

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compensations remains limited to the minimum necessary for the delivery of genuine SGEIs to European citizens. The 2011 SGEI Framework is part of a general move toward a more thorough assessment of cases that have the potential to produce an important distortion of competition and trade and a lighter assessment for cases that do not have such potential (such as small compensation amounts or compensations for social services).

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Among others, the new rules introduce a more sophisticated methodology to determine the amount of compensation, a requirement for Member States to introduce efficiency incentives in their compensation mechanisms, the requirement to comply with EU public procurement rules and equal treatment of providers of the same SGEI for determining compensation. Moreover, the Commission may require Member States to adopt measures to reduce the anticompetitive effects of certain compensations that present a particularly strong potential for distorting competition in the internal market even when the amount of compensation as such is not excessive in comparison to the net cost of the SGEI.

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While the previous 2005 SGEI Framework reflected the same compatibility criteria as the previous SGEI Decision4034 (“the 2005 SGEI Decision”), the novelties of the 2011 SGEI Framework strongly differentiate it from the new SGEI Decision4035 (“the 2011 SGEI Decision”).

2.

Scope of the 2011 SGEI Framework

2.1 Material scope 4.173

The principles set out in the 2011 SGEI Framework apply to a public service compensation only in so far as it constitutes State aid not covered by the 2011 SGEI Decision.4036 Such compensation is subject to the prior notification requirement under Article 108(3) of the Treaty.

4034 Commission Decision of 28 November 2005 on the application of Article 86(2) EC to State aid in the form of public service compensation, OJ L 312, 29.11.2005, p. 67. 4035 Commission Decision of 20 December 2011 on the application of Article 106(2) TFEU to State aid in the form of public service compensation granted to certain undertaking entrusted with the operation of SGEI, OJ L 7, 11.01.2012, p. 3; For more details on the 2011 SGEI decision see book chapter 34. 4036 Apart from services of social nature (hospitals, social housing, childcare...) that fall within the remit of the 2011 SGEI Decision regardless of the amount of aid granted, the dividing line between the 2011 SGEI Framework and the 2011 SGEI Decision is the amount of compensation: below EUR 15 million/year the Decision applies while above EUR 15 million/year, the Framework applies.

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It can happen that an aid measure falls within the scope of the 2011 SGEI Decision4037 (e.g. because of its amount) but does not satisfy all the compatibility conditions of that decision. In such case, according to paragraph 61 of the 2011 SGEI Framework the compatibility of the aid measure has to be assessed under the 2011 SGEI Framework, but the potentially less distortive nature of that measure is recognized as the following paragraphs of the 2011 SGEI Framework (containing the most salient novelties of the 2011 SGEI Framework) do not apply: 1.

Paragraph 14: which requests that Member States give proper consideration to public service needs when entrusting the provider with a particular SGEI (see book paragraphs 4.220-4.222);

2.

Paragraph 19: which requests compliance with EU public procurement rules when entrusting a SGEI (see book paragraphs 4.235-4.245);

3.

Paragraph 20: which imposes the absence of discrimination, when the same SGEI is entrusted to several providers (see book paragraphs 4.2464.254);

4.

Paragraph 24 (and onwards): which defines a new methodology (the net avoided cost methodology) as the reference approach for the calculation of the net cost of the SGEI (see book paragraphs 4.263-4.306);

5.

Paragraph 39 (and onwards): which requests that Member States introduce efficiency incentives when designing the compensation measure (see book paragraphs 4.343-4.360);

6.

Paragraphs 51 to 59: which allow the Commission to impose additional requirements if, in a specific case, the fulfilment of the compatibility conditions of the 2011 SGEI Framework are not sufficient to avoid excessive competition distortions (see book paragraphs 4.364-4.373);

7.

Paragraph 60: which requires Member States to publish certain information such as compensation amounts on a yearly basis to ensure transparency (see book paragraphs 4.374).

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4037 As defined in Article 2(1) of the 2011 SGEI Decision.

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The 2011 SGEI Framework does not apply to SGEI compensation in the field of land transport4038 and public service broadcasting.4039 Unlike the 2005 SGEI Framework, it applies to SGEI compensation in the field of air and maritime transport.

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Moreover, with regard to SGEI providers in difficulty, unlike the 2005 SGEI Framework, the 2011 SGEI Framework makes reference to the State aid guidelines for rescue and restructuring to firms in difficulty. The current version of those guidelines4040 (“the 2014 Rescue and Restructuring aid Guidelines”) were adopted in July 2014 and provide a clearer definition of firms in difficulty and define under which conditions SGEI compensations can be granted to SGEI providers in difficulty.

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The rationale of the use of the 2014 Rescue and Restructuring aid Guidelines to assess compensations to SGEI providers in difficulty is twofold.

4.178

First, as stated by paragraph 23 of the 2014 Rescue and Restructuring aid Guidelines, “given that its very existence is in danger, an undertaking in difficulty cannot be considered an appropriate vehicle for promoting other public policy objectives until such time as its viability is assured”. Without a global assessment of the return to viability of the SGEI provider, such SGEI compensations could constitute a waste of public resources, uselessly distorting competition without ensuring the continuity of the SGEI which is precisely the justification of SGEI compensations under Article 106(2) of the Treaty.

4.179

Second, paragraphs 127 to 130 of the 2014 Rescue and Restructuring aid Guidelines indicate that when restructuring aid is assessed, all other aid measures to be received during the restructuring phase are to be taken into account by the Commission in order to assess the viability prospects of the company as well as the impact on competition and intra-Union trade of those aid measures. That requirement can concern, for example, regional aid or environmental aid or, in the same way, SGEI compensation. 4038 Public service compensation in the land transport sector has to comply with a specific regulation: Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) No 1191/69 and 1107/70 (OJ L 315, 03.12.2007, p.1). 4039 Which is covered by a specific Communication: Communication from the Commission on the application of State aid rules to public service broadcasting (OJ C 257, 27.10.2009, p. 1). 4040 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1 (for more details on the treatment of SGEI in the rescue and restructuring guidelines see book chapter 21).

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Given that return to viability is a necessary condition for the SGEI compensation to guarantee the continuity of the SGEI and that the 2014 Rescue and Restructuring aid Guidelines provide the framework for an assessment of that return to viability, taking into account all aid measures including the SGEI compensation, it is logical that those guidelines constitute the instrument to define the compatibility conditions of SGEI compensations to SGEI providers in difficulty.

4.180

As stated in paragraph 99 of the 2014 Rescue and Restructuring aid Guidelines, “In assessing State aid to SGEI providers in difficulty, the Commission will take account of the specific nature of SGEI and, in particular, of the need to ensure continuity of service provision in accordance with Article 106(2) of the Treaty.” SGEI providers can therefore benefit from a more favourable treatment than other commercial operators when necessary to preserve a SGEI (see book chapter 21). In particular, the 2014 Rescue and Restructuring aid Guidelines protect the assets necessary to deliver the SGEI4041 and even foresee situations where SGEI compensation can be granted, although not complying with its compatibility conditions, until an alternative has been found to ensure the continuity of the service.4042

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2.2 Temporal scope According to its paragraph 67, the 2011 SGEI Framework is applicable from 31 January 2012 onwards to all notified aid regardless of their date of notification. SGEI compensations notified before that date for which a decision had not yet been taken must also be assessed under the 2011 SGEI Framework.4043

4.182

The 2011 SGEI Framework also applies to illegal aid (i.e. aid granted before being notified or before the Commission has taken a decision on the measure) granted before 31 January 2012. However, in such cases, the principles set out in paragraphs 14, 19, 20, 24, 39 and 60 do not apply. Those paragraphs cover the most salient novelties introduced in the 2011 SGEI Framework.

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4041 See paragraph 102 of the 2014 Rescue and Restructuring aid Guidelines “To the extent that assets are necessary for the provision of SGEI, it may not be practicable to require the divestment of such assets by way of measures to limit distortions of competition for the purposes of section 3.6.2. In such cases, the Commission may require alternative measures to be taken to ensure that competition is not distorted to an extent contrary to the common interest (...)” 4042 See para. 103 of the 2014 Rescue and Restructuring aid Guidelines. 4043 See para. 68 of the 2011 SGEI Framework.

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On the other hand, the new competence of the Commission set out in paragraphs 51 to 59 of the 2011 SGEI Framework, to request additional commitments or imposing conditions to ensure that competition is not excessively distorted, applies also with respect to illegal aid granted before 31 January 2012. The application of paragraphs 51 to 59 should not create major practical difficulties as regards the past application of the illegal aid scheme, as those additional commitments and conditions seem by essence forward-looking (and presuppose that the Commission either accepts the commitments or imposes the conditions). In other words, on the basis of paragraphs 51 to 59 of the 2011 SGEI Framework, the Commission may request a Member State to make some adjustments to an illegal aid scheme (which would otherwise comply with the other requirements of the SGEI Framework) in order for it to continue to apply that scheme (see book paragraphs 4.364-4.373). Were the Member State not to abide by those adjustments (i.e. violate the conditions or commitments), then all the aid granted under the scheme may become incompatible and may need to be recovered.

4.185

Overall, the novelties of the 2011 SGEI Framework do not apply to aid measures that have been illegally granted before its entry into force, thereby avoiding situations where those illegal aid measures could be declared incompatible because they do not fulfil compatibility conditions that were not applied by the Commission in its assessment when those aid measures were granted. In that respect, it is worth noting that, according to the jurisprudence, the relevant criterion to establish when an aid has been granted “ is the legally binding act by which the competent [national] authorities undertake to grant aid.” 4044 An aid can therefore have been granted without having been paid out to the SGEI provider. The Commission has taken several decisions after the entry into force of the 2011 SGEI Framework where it considered that the aid had been illegally granted before 31 January 2012, and therefore those new rules of the 2011 SGEI Framework did not apply.4045

4.186

The fact that the 2011 SGEI Framework applies in full to aid notified prior to its publication for which the examination was still pending at the moment of its publication reflects the principle that new rules apply to pending situations, 4044 Case T-109/01 Fleuren Compost BV v Commission ECLI:EU:T:2004:4, para 74 and Joined Cases T-362/05 and T-363/05 Nuova Agricast v Commission ECLI:EU:T:2008:541, para 80, and Joined Cases T-427/04 et T-17/05 France and France Télécom v Commission ECLI:EU:T:2009:474, para 321. 4045 See for example Commission Decision of 20.11.2012 on State compensations for the delivery of the universal service over 2009-2011 and State compensations for reduced tariffs offered to publishers, not-for-profit organisations and electoral candidates over 2009-2011 (Case SA. 33989 (2012/NN)), summary notice in OJ C 77, 15.03.2013, p. 3 (“2012 Poste Italiane decision”).

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as confirmed by the case law.4046 It is unsurprising that some of the first decisions adopted under the 2011 SGEI Framework related to cases initiated/prenotified before its entry into force (e.g. the 2013 bpost Decision4047 which was adopted on 2 May 2013 while pre-notification contacts had started before the adoption of the 2011 SGEI Framework). However, none related to measures that had been actually notified before its publication. In the 2011 SGEI Framework, the Commission also recommended Member States to bring their existing aid schemes regarding public service compensation in line with the 2011 SGEI Framework by 31 January 2014.

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This was a recommendation for appropriate measures under Article 108(1) of the Treaty. Member States had to confirm to the Commission by 29 February 2012 that they agreed to the appropriate measures proposed. In the absence of any response, the Commission would presume that the Member States did not agree and could open the formal investigation procedure pursuant to Article 19(2) of the Procedural Regulation.4048 All Member States accepted those appropriate measures.4049

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2.3 Relationship to rules on SGEI in sectoral guidelines According to paragraph 8 of the 2011 SGEI Framework: “The principles set out in this Communication apply to public service compensation in the field of air and maritime transport, without prejudice to stricter specific provisions contained in sectoral Union legislation” and according to paragraph 10(d): “The principles set out in this Communication apply without prejudice to additional requirements flowing from the Treaty or from sectoral Union legislation.”

4.189

Those provisions seem to imply that compliance with the 2011 SGEI Framework does not mean necessarily compliance with additional sectoral rules, but also that compliance with those sectoral rules is not necessarily a prerequisite for compatibility under the 2011 SGEI Framework. Indeed, paragraphs 9 and 10 of the 2011 SGEI Framework define the scope of the Framework, while the

4.190

4046 Case C-334/07 P Commission v Freistaat Sachsen ECLI:EU:C:2008:709, para 56. 4047 Commission Decision of 02.05.2013 on State compensations to bpost for the delivery of public services over 2013-2015, (case SA.31006 (2013/N)), OJ C 279, 27.09.2013, p.1 (“2013 bpost decision”). 4048 Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union, OJ L 83, 27.03.1999, p.1. 4049 Communication from the Commission – European Union framework for State aid in the form of public service compensation (2011) – Acceptance by all Member States of the Commission’s proposal of the appropriate measures pursuant to Article 108(1) of the Treaty on the Functioning of the European Union, OJ C 308, 12.10.2012, p. 3.

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conditions for compatibility of State aid granted under the Framework are listed from paragraph 11 onwards.

4.191

In practice, the Commission takes into account sectoral rules to the extent possible when applying the Framework. As a consequence, certain sectoral legislation such as the 2014 Aviation Guidelines,4050 the 2004 Maritime Guidelines4051 and the 2008 Postal Directive4052 contain rules that influence significantly the compatibility assessment under the 2011 SGEI Framework.

2.3.1 Aviation Guidelines 4.192

Section 4 of the 2014 Aviation Guidelines is dedicated to State aid for SGEI in the aviation sector. It establishes that such aid should comply with the rules established in the SGEI package, but also contains additional indications as regards the type of services that can be considered as SGEIs.

4.193

As regards air transport services, paragraph 70 of the 2014 Aviation Guidelines indicates that “(…) public service obligations can only be imposed in accordance with Regulation (EC) No 1008/2008. In particular, such obligations can only be imposed with regard to a specific route or group of routes, and not with regard to any generic route originating from a given airport, city or region. Moreover, public service obligations can only be imposed with regard to a route to fulfil transport needs which cannot be adequately met by an existing air route or by other means of transport”.

4.194

As regards airports, paragraph 72 of the 2014 Aviation Guidelines also sets out that: “(…) it is possible for the overall management of an airport, in well-justified cases, to be considered an SGEI. (…) the Commission considers that this can only be the case if part of the area potentially served by the airport would, without the airport, be isolated from the rest of the Union to an extent that would prejudice its social and economic development. Such an assessment should take due account of other modes of transport, and in particular of high-speed rail services or maritime links served by ferries. In such cases, public authorities may impose a public service obligation on an airport to ensure that the airport remains open to commercial 4050 Communication from the Commission – Guidelines on State aid to airports and airlines, OJ C 99, 04.04.2014, p. 3. 4051 Commission communication C(2004) 43 – Community guidelines on State aid to maritime transport, OJ C 13, 17.01.2004, p. 3. 4052 Directive 2008/6/EC of the European Parliament and the Council of 20 February 2008 amending Directive 97/67/EC with regard to the full accomplishment of the internal market of Community postal services, OJ L 52, 27.02.2008, p. 3.

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traffic. The Commission notes that certain airports have an important role to play in terms of regional connectivity of isolated, remote or peripheral regions of the Union. Such a situation may, in particular, occur in respect of the outermost regions, as well as islands or other areas of the Union. Subject to a case-by-case assessment and depending on the particular characteristics of each airport and the region which it serves, it may be justified to define SGEI obligations in those airports”. That latter provision seems perfectly in line with the rather general requirements of the 2011 SGEI Framework, in that public service obligations should not be attached to “services that are already provided or can be provided satisfactorily and under conditions such as price, objective quality characteristics, continuity and access to the service, by undertakings operating under normal market conditions”.4053

4.195

2.3.2 Maritime Guidelines Section 9 of the Maritime Guidelines is dedicated to public service obligations. In that section, the type of public service obligations that can be imposed is defined and additional conditions are also imposed based on Regulation 3577/92.4054

4.196

In the field of maritime cabotage, public service obligations (PSOs) may be imposed or public service contracts (PSCs) may be concluded for the services indicated in Article 4 of Regulation (EEC) No 3577/92. For those services, PSOs and PSCs as well as their compensation must fulfil the conditions of that provision and the Treaty rules and procedures governing State aid, as interpreted by the Court of Justice. […] The duration of public service contracts should be limited to a reasonable and not overlong period, normally in the order of six years, since contracts for significantly longer periods could entail the danger of creating a (private) monopoly.

4.197

The provisions related to the definition of the SGEI reflect in particular the position of the Court in Analir.4055 The Court concluded that the combined provisions of Articles 1 and 4 of Regulation 3577/92, applying the principle of freedom to provide services to maritime transport within Member States, per-

4.198

4053 See paragraph 13 of the 2011 SGEI Framework. 4054 Council Regulation (EEC) No 3577/92 of 7 December 1992 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage), OJ L 364, 12.12.1992, p. 7. 4055 Case C-205/99 Analir and others ECLI:EU:C:2001:107.

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mit the provision of regular maritime cabotage services to, from and between islands to be made subject to prior administrative authorisation only if (i) a real public service need arising from the inadequacy of the regular transport services under conditions of free competition can be demonstrated; (ii) it is also demonstrated that a prior administrative authorisation scheme is necessary and proportionate to the aim pursued; and (iii) such a scheme is based on objective, non-discriminatory criteria which are known in advance to the undertakings concerned.

2.3.3 Third Postal Directive 4.199

The European postal market was gradually liberalised by the three postal directives: Directive 97/67/EC,4056 as amended by Directive 2002/394057 and Directive 2008/6/EC4058 (“the Third Postal Directive”). Under the Third Postal Directive, the European postal market was fully liberalized as of 1 January 2013.

4.200

The postal directives also defined the main SGEI in the postal sector, namely the universal service which is defined as a baseline level of postal services4059 of specified quality to which all users and consumers have access at an affordable price and irrespective of the profitability of individual operations.4060

4.201

Postal service providers can be entrusted with the universal postal service and/ or other SGEI (e.g. press distribution, basic banking services, pension distribution….). Article 7(3) of the Third Postal Directive foresees the possibility to compensate universal service providers through different mechanisms:

4.202

Where a Member State determines that the universal service obligations, as provided for in this Directive, entail a net cost, calculated taking into account Annex I, and represent an unfair financial burden on the universal service provider(s), it may introduce: 4056 Directive 97/67/EC of the European Parliament and of the Council of 15 December 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service, OJ L 15, 21.01.1998, p. 14. 4057 Directive 2002/39/EC of the European Parliament and of the Council of 10 June 2002 amending Directive 97/67/EC with regard to the further opening to competition of Community postal services, OJ L 176, 05.07.2002, p. 21. 4058 Directive 2008/6/EC of the European Parliament and the Council of 20 February 2008 amending Directive 97/67/EC with regard to the full accomplishment of the internal market of Community postal services, OJ L 52, 27.02.2008, p. 3. 4059 Delivery of postal items up to 2 kg, postal packages up to 10 kg, registered and insured items. 4060 See Article 3(1) of the Third Postal Directive « Member States shall ensure that users enjoy the right to a universal service involving the permanent provision of a postal service of specified quality at all points in their territory at affordable prices for all users ».

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(a)

a mechanism to compensate the undertaking(s) concerned from public funds; or

(b)

a mechanism for the sharing of the net cost of the universal service obligations between providers of services and/or users.

Most of the decisions adopted by the Commission on the basis of the 2005 SGEI Framework and after the 2011 SGEI Framework relate to the postal sector4061 and a few of them more precisely to the compensation of the universal service. In those decisions, the Commission found that the different compensation mechanisms above amounted to State aid and assessed them in general under the SGEI Framework(s) (as the amounts involved were above the threshold of the 2005 SGEI Decision and after 2011 SGEI Decision).

4.203

While the Third Postal Directive applies without prejudice to the Treaty rules on State aid,4062 its Article 7(3) imposes specific conditions for the funding of the universal service (calculating method of the net cost, unfair burden condition), its Article 7(5) imposes conditions for cost sharing mechanisms, and its recital 23 recalls the features of the acceptable detailed arrangements for the designation of the universal service provider.

4.204

(23) (…) Member States may apply one or a combination of the following: the provision of the universal service by market forces, the designation of one or several undertakings to provide different elements of the universal service or to cover different parts of the territory and public procurement of services As regards the coherence between the 2011 SGEI Framework and the Third Postal Directive, it is worth noting first that the 2011 SGEI Framework has adopted the net avoided cost methodology referred to in the Third Postal Directive as the general method for the calculation of the net cost for all SGEIs. The 2011 SGEI Framework refers explicitly to the Annex I of the Third Postal Directive in its paragraph 26:

4.205

(26) Annex IV to Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users’ rights relating to electronic communications networks and services (…), and Annex I to Directive 97/67/EC of the European Parliament and of the Council of 15 De4061 Hence most of the examples presented in this chapter also relate to that sector. 4062 See recital 59 of the Third Postal Directive which states that “(...) this Directive is without prejudice to Member States’ obligation to respect the Treaty rules on State aid”.

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cember 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service (…), contain more detailed guidance on how to apply the net avoided cost methodology.

4.206

Despite that alignment, the Commission has nevertheless considered in its 2012 Poste Italiane decision that the net avoided cost methodology was not mandatory for the calculation of the net cost of the universal service obligation (hereafter USO), for State aid assessment purposes, in conditions where it was not imposed by the 2011 SGEI Framework, even if it might be mandatory under the Third Postal Directive.

4.207

The relevant recitals of that decision4063 read as follows: (93) It can be noted that the Postal Services Directive and in particular its article 7(3) imposes a specific methodology for the determination of the acceptable maximum amount of compensation that can be granted for the delivery of the universal service which implies in particular the use of the net avoided cost methodology to calculate the net cost of the universal service as well as the demonstration that such net cost represents an unfair financial burden for the universal service provider. (94) However, in the case at hand, since the compensations of the universal service constitute illegal aid granted before its entry into force, the 2011 SGEI Framework specifically provides that, for the purpose of the State aid assessment, the use of the net avoided cost methodology is not required (see recital (74)). As a consequence, the Commission considers that the conditions established in paragraph 21 of the 2011 SGEI Framework suffice to verify the absence of overcompensation for the application of the justification provided for by Article 106(2) TFEU to the State aid in question.

4.208

In summary, the Commission kept the general approach laid out in the 2011 SGEI Framework on the relation between the Framework and sectoral rules, according to which the two sets of rules are to be seen as complementary to each other.

4063 See recitals 93-94 of the 2012 Poste Italiane decision (already cited in footnote 4045).

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2.3.4 Unfair burden The Third Postal Directive seems to consider that the mere existence of a net cost of the universal postal service does not suffice to justify a compensation of that net cost. It should also be demonstrated that the universal service represents an unfair burden for its provider.4064 The unfair burden which must be found to exist by the national regulatory authority before any compensation is paid is a burden which, for each undertaking concerned, is excessive in view of the undertaking’s ability to bear it, account being taken of all the undertaking’s own characteristics, in particular the quality of its equipment, its economic and financial situation and its market share.

4.209

Without specifying that it was a compatibility condition under the 2011 SGEI Framework, in some decisions approving universal service compensations, the Commission verified that that condition could be considered fulfilled. For example in its “2011 Post Office Limited” decision,4065 the Commission found that:

4.210

(87) Using the identified principles laid down by the Court of Justice by analogy in the present case, the Commission finds that the maximum amount of compensation of […] (net costs of USO) can be regarded as an ‘unfair financial burden’ for the, in the economic terms, universal service provider when providing accessibility of universal postal services. The Commission based this conclusion, under the circumstances of the present case, on POL’s overall delicate financial situation and, in particular, on POL’s cumulated losses originating from the provision of universal services and other SGEIs.

2.3.4.1 Conditions related to cost sharing mechanisms Article 7(5) of the Third Postal Directive allows for the introduction of cost sharing mechanisms, also called compensation funds, whereby competitors of the USO providers can be requested to contribute to the financing of the net cost of the USO:

4.211

Member States shall ensure that the principles of transparency, non-discrimination and proportionality are respected in establishing the compensation fund and when fixing the level of the financial contributions referred to in paragraphs 3 and 4. Decisions taken in accordance with paragraphs 3 and 4 shall be based on objective and verifiable criteria and be made public. 4064 See Article 7(3) of the Third Postal Directive. 4065 Case C-389/08 Base and others ECLI:EU:C:2010:584, para. 42.

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4.212

In a decision concerning the compensation of Hellenic Post for the delivery of the USO over 2013-20204066 (the “2014 Hellenic Post decision”), the Commission opened the formal investigation procedure on a notified compensation fund because the level of contributions requested from competitors seemed discriminatory and disproportionate.

4.213

It is worth noting however that the Commission did not base its decision directly on a possible non-compliance with the requirements of the Third Postal Directive,4067 but relied instead on the possibility introduced by the 2011 SGEI Framework to envisage additional compatibility conditions in case of serious risks of competition distortion (see book paragraphs 4.364-4.373).

2.3.4.2 Public procurement 4.214

In relation to all of the measures that the Commission has assessed, universal services providers have been directly entrusted by their respective Member States with the universal service provision. The question arose then about how that direct entrustment should be analysed in light of the requirement of paragraph 19 of the 2011 SGEI Framework for Member States to comply with public procurement rules when entrusting the SGEI.

4.215

The Commission took into account in its assessment that Article 7(2) of the Third Postal Directive did not seem to impose the application of public procurement rules for the selection of the provider of the universal services. That provision reads as follows: “Member States may ensure the provision of universal services by procuring such services in accordance with applicable public procurement rules and regulations, including, as provided for in Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services (*), competitive dialogue or negotiated procedures with or without publication of a contract notice”.

4.216

For example, in the 2014 Hellenic Post Decision, the Commission concluded that:

4066 Invitation to submit comments pursuant to Article 108(2) TFEU in case (SA.35608(2014/N)) on Hellenic Post (ELTA) – Compensation for the financing of the universal postal service (Case SA.35608(2014/N)), OJ C 348, 03.10.2014, p. 48. 4067 The Commission merely states that those conditions do not seem to be fulfilled (see recital 198 of the 2014 Hellenic Post Decision).

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(177) The Commission considers that it is only in the case that Member States decide to organize a tendering procedure for the selection of the postal USO operator that public procurement rules would be applicable and that, therefore, the compatibility of the USO financing with the internal market would depend on whether the said rules have indeed been observed. (178) In the present case, the Greek authorities have opted for the direct entrustment by law to the incumbent operator, in conformity with the Third Postal Directive. It follows that public procurement rules are not applicable and that the direct entrustment of ELTA as the USO provider can be considered to be in line with paragraph 19 of the 2011 SGEI Framework.

2.3.5 Conclusion Although compliance with sectoral rules is not a general compatibility condition under the 2011 SGEI Framework, certain sectoral rules, because of their very content, have to be taken into account in the compatibility assessment under the 2011 SGEI Framework. Such a requirement arises in particular when the sectoral rules concern the definition of what services can or must (like the universal service in the postal sector) be considered as SGEI. Because the definition of SGEI is based on Article 106(2) of the Treaty, it cannot change depending on what set of rules is applied. According to the jurisprudence,4068 it is necessary to take into account in the compatibility assessment of a given measure under State aid rules the fact that some aspects of the measure, which are indissolubly linked it, infringe other provisions of Union law.

4.217

On the other hand, it is possible that rules which are specific to different areas of law apply to the measure, but the Commission does not need to assess their observance in the same procedural context (one can think of an economic operator that must comply both with environmental legislation and with work safety standards). In Castelnou Energía4069 the General Court has for example considered that the Commission had to take into account the provisions of Union law related to the freedom of movement of goods and freedom of establishment in its compatibility assessment of a SGEI scheme aiming at guaranteeing the security of electricity supply in Spain but did not have to verify compliance with provisions of Union law relating to the protection of the environment as

4.218

4068 See Case T-57/11 Castelnou Energía v Commission EU:T:2014:1021, paras 180-193, Case C-225/91 Matra v Commission EU:C:1993:239, paras 41-43, and Joined Cases T-197/97 and T-198/97 Weyl Beef Products and others v Commission EU:T:2001:28, paras 75 and 77. 4069 Case T-57/11 Castelnou Energía v Commission EU:T:2014:1021.

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the measure did not pursue an environmental objective. The environmental aspects of the measure were not considered to be indissolubly linked to the SGEI compensation.4070

3.

Compatibility conditions under the 2011 SGEI Framework

3.1 Genuine service of general economic interest 4.219

According to paragraph 12 of the 2011 SGEI Framework: “The aid must be granted for a genuine and correctly defined service of general economic interest as referred to in Article 106(2) of the Treaty.”

4.220

The notion of genuine service of general economic interest is the same as the one which appears in Altmark4071 and the 2011 SGEI Decision and is discussed in detail in chapter 33 of this book. Like the 2005 SGEI Framework, the 2011 SGEI Framework (in line with Protocol 26 of the Treaty)4072 recognizes the wide margin of discretion of Member States in defining and organizing public services and limits the control of the Commission to the verification that there is no manifest error. Compared to the 2005 SGEI Framework, paragraph 14 of the 2011 SGEI Framework adds that “[…] Member States show that they have given proper consideration to the public service needs supported by way of a public consultation or other appropriate instrument, to take the interests of users and providers into account […]”

4.221

That requirement builds on the 2005 SGEI Framework which already stated that “When defining public service obligations and in assessing whether those obligations are met by the undertakings concerned, the Member States are encouraged to consult widely, with a particular emphasis on users.”4073 Such requirements do however not concern situations where the SGEI is imposed by Union legislation (e.g. the USO in the postal sector)4074 as clarified by the Commission in the 2014 Hellenic Post Decision.4075

4070 Ibidem, paras 190-192. 4071 Case C-280/00 Altmark Trans GmbH und Regierungspraesidium Magdeburg ECLI:EU:C:2003:415. 4072 According to which the shared values of the Union include in particular “a high level of quality, safety and affordability, equal treatment and the promotion of universal access and of user rights as well as the wide discretion of national, regional and local authorities in providing, commissioning and organising [SGEIs]”. 4073 See para 10 of the 2005 SGEI Framework. 4074 It is interesting to note however that the USO is also greatly affected by the development of internet and the phenomenon of e-substitution (replacement of mail by electronic means of communication) which trigger discussions at national and European level on the scope of the USO. 4075 Already cited at footnote 4066.

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(163): […] As the USO entrusted to ELTA described in paragraph (10) corresponds to the minimum requirements outlined in the Third Postal Directive, the Commission considers that Greece does not have to prove that it has given consideration to public service needs by way of a public consultation or other appropriate instruments.[…] The position taken by the Commission in its decisional practice that Member States do not have to demonstrate that they have given consideration to public service needs when they only entrust an operator with the USO (as defined in the Third Postal Directive) is a clear example of sectoral legislation upon which the Commission relies when defining the content of the conditions set out by the 2011 SGEI Framework.

4.222

3.2 Entrustment According to paragraph 15 of the 2011 SGEI Framework “Responsibility for the operation of the SGEI must be entrusted to the undertaking concerned by way of one or more acts, the form of which may be determined by each Member State. The term ‘Member State’ covers the central, regional and local authorities.”

4.223

Paragraph 16 further indicates that “The act or acts must include, in particular: (a)

the content and duration of the public service obligations;

(b)

the undertaking and, where applicable, the territory concerned;

(c)

the nature of any exclusive or special rights assigned to the undertaking by the granting authority;

(d)

the description of the compensation mechanism and the parameters for calculating, monitoring and reviewing the compensation; and

(e)

the arrangements for avoiding and recovering any overcompensation.”

Those provisions are almost identical to those of the 2005 SGEI Framework except that the 2011 SGEI Framework also spells out that the compensation mechanism (and not only the parameters for calculating, monitoring and reviewing compensation as in the 2005 SGEI Framework4076) must be defined in

4.224

4076 See para 12 of the 2005 SGEI Framework.

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the entrustment act. However, certain provisions of the 2011 SGEI Framework contain an evolution in the practice of the Commission regarding the flexibility that could be tolerated as regards the completeness of the entrustment.

4.225

Under the 2005 SGEI Framework, it could be argued that an incomplete entrustment where the parameters of the compensation were not defined ex ante was not necessarily sufficient, from an ex post perspective, to declare a SGEI compensation incompatible, if the SGEI provider had not been overcompensated. Paragraph 20 of the 2005 SGEI Framework was clear in that respect in stating that only overcompensation could be recovered.

4.226

Under the 2011 SGEI Framework, a complete ex ante entrustment seems however indispensable to ensure compliance with the new requirements (e.g. public consultation, efficiency incentives, compliance with public procurement rules, transparency requirements, compensation mechanism to be defined in the entrustment act). The 2011 SGEI Framework therefore marks a further step towards an ex ante approach to State aid for SGEI, which started with the 2005 SGEI Framework and aims at ensuring better predictability for all the market actors.

3.3 Duration of the entrustment 4.227

Paragraph 17 of the 2011 SGEI Framework reads as follows “The duration of the period of entrustment should be justified by reference to objective criteria such as the need to amortise non-transferable fixed assets. In principle, the duration of the period of entrustment should not exceed the period required for the depreciation of the most significant assets required to provide the SGEI.”

4.228

This is a new condition compared to the 2005 SGEI Framework which did not include any condition relating to the duration of the entrustment period. The main objective of that provision is to avoid excessively long entrustment periods leading to a risk of competition distortion (possibly even foreclosing the market in case of exclusive rights or extremely low regulated tariff ), when such a long period is not necessary to provide the SGEI.

4.229

The provision also ensures that the State reviews the market situation regularly to verify that maintaining a public service is still justified. Indeed, it may be that, due to market and/or technological developments, social or political preferences, the imposition of public service obligations becomes obsolete, as the market delivers spontaneously exactly the same service at the required conditions. If, on the contrary, the imposition of public service obligations appears still necessary, 1344

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the new provision allows competition for the entrustment of that public service through the application of public procurement rules. It can also be noted that the longer the entrustment, the less reliable are the estimations of the net cost of the service and in turn the potential needs for compensation.

4.230

By linking the duration of the entrustment to the economic life of non-transferable fixed assets, the provision also recognizes the necessity to allow the SGEI provider enough time to recoup the necessary investments for the delivery of the SGEI.

4.231

3.4 Compliance with Directive 2006/111 According to paragraph 18 of the 2011 SGEI Framework “Aid will be considered compatible with the internal market on the basis of Article 106(2) of the Treaty only where the undertaking complies, where applicable, with Directive 2006/111/EC4077 […]”

4.232

Directive 2006/111 (“the Transparency Directive”) requires Member States to ensure transparency of the financial and organisational structures of public and private undertakings to which special or exclusive rights are granted or which are responsible for operating services of general economic interest for which they receive compensation in any form whatsoever and which also perform other activities.

4.233

The requirement to comply with the Transparency Directive is new compared to the 2005 SGEI Framework. Its objective is to increase transparency so as to improve monitoring of compliance with State aid rules. However, the practical importance of that provision seems limited, considering that the separation of accounts is in any event required by paragraph 44 of the 2011 SGEI Framework for undertakings having activities falling both inside and outside the SGEI “(...) Where an undertaking carries out activities falling both inside and outside the scope of the SGEI, the internal accounts must show separately the costs and revenues associated with the SGEI and those of the other services (...)”

4.234

4077 Directive 2006/111/EC on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings OJ L 318, 17.11.2006, p. 17.

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3.5 Compliance with Union public procurement rules 4.235

Paragraph 19 of the 2011 SGEI Framework reads as follows “Aid will be considered compatible with the internal market on the basis of Article 106(2) of the Treaty only where the responsible authority, when entrusting the provision of the service to the undertaking in question, has complied or commits to comply with the applicable Union rules in the area of public procurement […]”

4.236

Until the adoption of the 2011 SGEI Framework, the Commission used to consider that if there was no indissoluble link between the public procurement rules and the State aid rules, the aid could be deemed compatible even if public procurement rules had not been complied with. That approach was in line with certain decisions of the General Court which supported a separation between State aid and public procurement rules. For example, in Fred Olsen, the General Court concluded that “ it is not apparent either from the wording of Article [106(2) of the Treaty] or from the case law on that provision that an SGEI may be entrusted to an operator only as a result of a tendering procedure”4078 and in SIC, it further added that absence of competitive tendering cannot [...] have the result that State funding of the SGEI holder’s public service obligations must, even though the requirements concerning the definition of the SGEI, the remit and proportionality are fulfilled, be considered to be State aid incompatible with the [internal] market”.4079

4.237

Thus, paragraph 19 is one of the main novelties of the 2011 SGEI Framework which makes compliance with Union public procurement rules, where applicable, a condition for compatibility of State aid for SGEI. That obligation includes any requirement of transparency, equal treatment and non-discrimination resulting directly from the Treaty and, where applicable, secondary Union law (in particular, public procurement directives). Where Union public procurement rules are not applicable (e.g. when the relationship between the SGEI provider and the State is not contractual in nature), compliance with them is not a condition for compatibility. Therefore that provision does not in itself impose new obligations on Member States, but reinforces very significantly the existing obligations given the practical implications of the linkage of compatibility of SGEI compensations and the compliance with public procurement rules. That requirement automatically implies the incompatibility of State aid granted for SGEIs in disrespect of public procurement rules, even if the aid as such does not result in overcompensation. 4078 Case T-17/02 Olsen v Commission ECLI:EU:T:2005:218, para 239 4079 Case T-442/03 SIC v Commission ECLI:EU:T:2008:228, paras 145 and 147.

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It also means that, in assessing the compatibility of the aid, the Commission will have to take a position on the issue of compliance with public procurement rules in the context of the State aid procedure (unless the issue has already been dealt with by the Union Courts or at national level4080).

4.238

That new provision should contribute both to improving compliance with public procurement rules and to fostering competition when designating the public service provider(s), where public procurement rules apply. As explained for example by Fiedziuk4081: with the view to ensuring efficient allocation of resources, it can be argued that selecting an SGEI provider via a non-discriminatory and open public procurement procedure is the most desirable way to provide those services, given that the procedures minimize the likelihood of conferring unwarranted State aid on their providers.4082 Moreover, in economic theory, public procurement rules are the response to the principal/agent problem. The problem rests on the premise that the interests of the principal (government) and the agent (contracting authority) are rarely identical. The agent is closer to the procurement process than the principal and consequently has more information available with regard to the market and the suppliers. Their difference in situation creates information asymmetry between the principal and the agent which, in turn, allows the agent to exploit its more advantageous position.4083 Public contracting is, thus, not without reason perceived by the general public as tainted with corruption and favouritism. Public procurement regulation is, therefore, needed to realign the interest of the agent with that of a principal, and hence to guarantee economically efficient spending of public resources and to achieve the best value for money as a result of contracting.4084

4.239

In practice, it can be noted however that in most instances where compliance with public procurement rules has been verified, the Commission has accepted that a direct entrustment of the SGEI provider was acceptable as it was the sole

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4080 For example, see 2013 bpost decision (already cited at footnote 4047), recital 130: “As regards Press distribution, in order to comply with public procurement rules, the Belgian State is organising a competitive, transparent and non-discriminatory tendering procedure, with a view to award a service concession at national level as soon as possible to an operator that would take over the provision of this SGEI as of 1 January 2016.” In that case, the Belgian authorities had decided to tender a SGEI that was so far directly entrusted to bpost. 4081 Fiedziuk, “Putting Services of General Economic Interest up for Tender: Reflections on Applicable EU Rules”, (2013) 50 CMLRev 87. 4082 See e.g. Nicolaides, “Towards more competition in services of general economic interest”, in Eekhoff (Ed.), Competition Policy in Europe (Springer, 2004), p. 224; Nicolaides, “Compensation for public service obligations: The fl oodgates of state aid?”, 24 ECLR (2003), 571 4083 Trepte, Regulating Procurement: Understanding the Ends and Means of Public Procurement Regulation (Wolf legal Publishers, 2004), pp. 65 66. 4084 Dekel, “The legal theory of competitive bidding for Government contracts”, 7 Public Contract Journal (2008), 241 246.

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provider of the service. For example in a decision related to the French postal operator La Poste,4085 the Commission concluded that only La Poste had a logistic and retail network the density and size of which allowed it to deliver SGEI with the requested territorial presence and therefore that the SGEI could be covered by the sole provider exemption and be entrusted to La Poste through a negotiated procedure without prior publication according to Article 31(1)(b) of Directive 2004/18.4086

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From an economic viewpoint, it has been argued that even in circumstances where a competitive tender could be organised, it could in practice result in a higher financial burden for the State as compared to a direct entrustment. Certain Member States4087 have historically systematically and significantly undercompensated the directly entrusted incumbents by granting compensations which were very likely below the price that any operator would bid for in a regular tendering process. By undercompensating the incumbent, the State implicitly forces it to cross-finance the cost of the SGEI from its other profitable activities keeping down the cost for the public budget.4088 It can be assumed that in a tendering process, where bidders would request market-based remuneration for delivering the SGEI, such remuneration would cover the full (or at least incremental) cost of the service for any bidding operator. In those circumstances, even if competition could potentially allow more efficient operators (than the incumbent) to be awarded the delivery of the SGEI, it is perfectly possible that the State would in fact have to increase its financing of the SGEI as a result of that tendering procedure. In such a situation, competition may be reinforced albeit at the expense of the State budget. While it can be argued in that case that the State is still paying the real price of the SGEI, an even worse situation could materialize in sectors characterized by economies of scale and scope rendering the cost of providing the SGEIs significantly higher for new entrants than for the incumbent. In such cases, the incumbent can bid up the price and increase unduly the cost for the community.4089 There could also be a risk that the winning bidder (if not the in4085 See Commission Decision of 26.05.2014 on “ des dispositifs compensatoires des missions d’aménagement du territoire, de transport et de distribution de la presse dévolues à La Poste”, OJ C 280, 22.08.2014, p. 16, (« 2014 French La Poste decision »), recitals 78 and 81. 4086 Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts, OJ L 134, 30.04.2004, p. 114. 4087 Such as France with La Poste, Italy with Poste Italiane for example. 4088 The argument has even been made (but without success so far) that such under-compensation could cast doubt on the contractual dimension of the relationship between the State and the SGEI provider and therefore on the applicability of public procurement rules. 4089 See Geradin and Malamataris, “2012 Framework on Public Compensation for SGEIs: Application in the Postal Sector”, C.N.R.I., 2013/3, p.241.

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cumbent) underestimates the cost of delivering that SGEI because of significant asymmetries of information, which may put the continuity of an essential public service at risk.4090 That potential risk for the continuity of the SGEI is necessarily taken into account by the Commission when assessing the decision of Member States to entrust directly a SGEI provider considered the sole possible provider of that particular SGEI. The Commission has accepted that argumentation in several cases as explained above. At the same time, accepting the sole provider argument may avoid situations where the tendering procedures could potentially allow the incumbent to ripe windfall profits. Another important point to mention is that while that new compatibility provision indirectly imposes the implementation of open and transparent tendering procedures whenever it is required by public procurement rules, the award of an SGEI through such tendering procedures would often lead to granting a compensation that does not constitute a State aid according to the Altmark jurisprudence (with the key requirement that the compensation is at the least cost to the community), rather than to a compatible State aid. Compensation granted on that basis would therefore most likely represent no aid. The compatibility provision of the 2011 SGEI Framework would therefore really apply directly mostly in cases where compliance with public procurement rules is not enough to ensure Altmark compliance. This can be the case for example when the SGEI is awarded through a negotiated procedure without a prior publication which according to the 2011 SGEI Communication is not sufficient to ensure Altmark compliance.

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It is too early to know whether in practice the inclusion of public procurement rules in the 2011 SGEI Framework will have a positive impact overall on SGEI delivery by increasing competition. From a legal viewpoint, the imposition by the Commission of that new condition of compatibility of State aid for SGEI rests on the last sentence of Article 106(2) of the Treaty, according to which, in applying the first sentence of that provision the Commission must ensure that “the development of trade must not be affected to such an extent as would be contrary to the interests of the Union”.

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Another interesting issue related to that new requirement is the exact interpretation that should be given to the terms “commit to comply” in paragraph 19. That requirement does not mean a priori that it suffices that a Member State commits to comply in the future (for future entrustments) with public procurement rules

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4090 See Geradin and Malamataris, “2012 Framework on Public Compensation for SGEIs: Application in the Postal Sector”, C.N.R.I., 2013/3, p. 241.

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for a SGEI compensation to be compatible, where the related entrustment does not itself comply with public procurement rules. In fact, that wording rather addresses the situation of an ex ante notification of a State aid scheme for a SGEI where the provider has not yet been entrusted and the Member State must submit, with its notification, its plans to comply with public procurement rules at the moment when the SGEI mission will be entrusted.

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In the 2013 bpost Decision,4091 taking into account the very specific circumstances of the case, the Commission has accepted that SGEI compensation be granted, over a short transitory period, against what might be considered a commitment to comply with public procurement rules (tendering the service): (149 ) The 2011 SGEI Framework which conditions the State aid compatibility assessment to compliance with public procurement rules entered into force only on 31 January 2012, so one year before the adoption of the current decision. In these circumstances, and taking into account the need to ensure the uninterrupted provision of that public service during the period necessary to organise the selection process as well as the need to ensure that potential tenderers put in place the organisational and financial arrangements to be capable of providing that service in the future, the Commission considers it acceptable that bpost receives a compensation to ensure the continuity of this essential public service over the duration of the overall procedure. (150) The alternative solution would have been to interrupt the delivery of the Press Distribution SGEI, until the completion of the tendering procedure. The Commission considers that discontinuing the delivery of this essential public service would be in contrast with the principles of the Treaty relating to the essential roles of SGEI in the European Union and notably with article 14 of the TFUE which provides for the Union to take care that SGEIs operate on the basis of principles and conditions which enables them to fulfil their mission.

3.6 Absence of discrimination 4.246

According to paragraph 20 of the 2011 SGEI Framework “Where an authority assigns the provision of the same SGEI to several undertakings, the compensation should be calculated on the basis of the same method in respect of each undertaking.”

4091 Already cited at footnote 4047.

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That new provision, which was not contained in the 2005 SGEI Framework, is important as public authorities relatively often entrust the same SGEI to several undertakings. Entrusting all possible providers of the service can be a very interesting alternative to tendering as it substitutes competition in the SGEI segment of the market to competition for the SGEI segment market. It allows more production capacities, which can be indispensable in situations where no single provider can meet the whole demand for the SGEI, and also reduces the risk of an interruption of the service due to potential difficulties of one provider.

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However, in those circumstances, genuine competition can only be really preserved if all providers are treated in a non-discriminatory manner. In that respect, the Commission had, before the adoption of the 2011 SGEI Framework, received a number of complaints on discrimination between SGEI providers for instance in the health and health insurance sector.

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For example, in September 2005, two associations of Brussels private hospitals lodged a complaint, which in essence claimed that the five Brussels public IRIS hospitals received specific deficit financing from the public authorities while private hospitals could not benefit from such measures. In its decision of 28 October 2009, the Commission concluded that the disputed financing was compatible with the internal market as it was considered to be a compensation for additional public service missions that only the Brussels public IRIS hospitals, and not the private hospitals, were entrusted with.4092

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The General Court annulled the Commission’s decision4093 and considered that:

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The Member States organise their national health systems according to principles which they choose; in particular, hospital public service obligations may include both obligations imposed on all hospitals and additional obligations imposed only on public hospitals, in view of their greater importance for the proper running of the national health service.4094 Where different requirements are imposed on the public and private bodies entrusted with the same public service, which presupposes a different level of costs and compensation, those differences must be clearly shown in their respective mandates.4095

4092 Commission Decision of 28.10.2009 in case NN54/2009 (ex- CP 244/2005) Belgique Financement des hôpitaux publics du réseau IRIS de la Région Bruxelles-Capitale, OJ C 74, 24.03.2010, p. 1. 4093 Case T-137/10 CBI v Commission ECLI:EU:T:2012:584. 4094 Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, paragraph 93. 4095 Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, paragraph 95.

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State aid, certain of the conditions of which contravene the general principles of EU law, such as the principle of equal treatment, cannot be declared by the Commission to be compatible with the internal market4096.

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The decision of the General Court therefore questions the existence of truly different missions for public and private hospitals and insists on the importance of equal treatment. Following that decision of the General Court, the Commission opened the formal investigation procedure4097 without taking a view on the discrimination issue.

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The same general principle of non-discrimination between SGEI providers can also be found in Article 4 of Regulation 3577/92 (related to maritime cabotage): 1.

A Member State may conclude public service contracts with or impose public service obligations as a condition for the provision of cabotage services, on shipping companies participating in regular services to, from and between islands.

2.

Whenever a Member State concludes public service contracts or imposes public service obligations, it shall do so on a non-discriminatory basis in respect of all Community ship-owners. In imposing public service obligations, Member States shall be limited to requirements concerning ports to be served, regularity, continuity, frequency, capacity to provide the service, rates to be charged and manning of the vessel. Where applicable, any compensation for public service obligations must be available to all Community ship owners.

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Paragraph 20 of the 2011 SGEI Framework is therefore not a complete novelty. From an economic viewpoint the new provision reflects the new attention within the 2011 SGEI Framework to a more efficient provision of SGEIs. Indeed, it promotes comparative efficiency among SGEI providers. Those providers that are most efficient may be able to make higher profit and expand their market presence, without endangering the provision of the SGEI.

4096 Case T-137/10 CBI v Commission ECLI:EU:T:2012:584, paragraph 95. 4097 Invitation to submit comments pursuant to Article 108(2) TFEU in case SA.19864 (2014/C) (ex NN54/2009) on public financing of Brussels public IRIS hospitals, OJ C437, 05.12.2014, p. 10.

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An argument could be made that the provision may lead to an overall higher level of compensation. However, having considered the limited resources available to public authorities, it appears more likely that the rule will lead to lower compensation in the medium or long term.

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3.7 Amount of compensation The 2011 SGEI Framework foresees that4098: “The amount of compensation must not exceed what is necessary to cover the net cost of discharging the obligation, including a reasonable profit.”

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That rule states the basic principle according to which compensation in excess of the net costs of the SGEI is unnecessary for ensuring the provision of the service and therefore it cannot be considered as compatible Sate aid pursuant to Article 106(2) of the Treaty.

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The same language was already contained in the 2005 SGEI Framework. However section 2.8 of the 2011 SGEI Framework introduces a number of significant differences in the method of applying that principle. Those changes are mainly explained by the Commission’s objective to better take account of efficiency and competition for large-scale SGEIs outside the social services area.

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The main changes relate to:

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1.

A multi-annual ex ante approach instead of an annual approach,

2.

The reference method to calculate the net cost of the service which becomes the net avoided cost methodology instead of the methodology based on cost allocation of the 2005 SGEI Framework.

3.

The clarifications as regards the notion of reasonable profit and the inclusion of efficiency incentives.

3.7.1 Multi-annual ex ante approach While the 2005 SGEI Framework undeniably brought clarity and legal certainty on the conditions under which public service compensation could be granted, it did not give the service provider any incentive to improve its efficiency. That was criticised by some authors, who underlined that the 2005 SGEI Framework ac-

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4098 See para. 21 of the 2011 SGEI Framework.

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tually protected the entrenched position of historical and often inefficient SGEI providers. Potentially more efficient providers were therefore crowded out.

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It is true that the 2005 SGEI Framework, while in principle allowing for efficiency gains to be recognised,4099 did not ask Member States to provide for any efficiency mechanism but required Member States to carry out annual checks for overcompensation on the basis of incurred costs and receipts. Moreover, paragraph 14 of the 2005 SGEI Framework explicitly allowed Member States to compensate the whole net costs of the SGEI.4100

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In order to promote efficiency in SGEI provision, the Commission has switched from the annual approach where, on the basis of the annual accounts, the public authorities check the absence of overcompensation every year (with some limited possibilities to carry over the possible overcompensation),4101 to an ex ante multi-annual contract/project based approach where the public authorities fix upfront the level of compensation for the whole entrustment generally on the basis of the expected net cost of the SGEI or a combination of expected and incurred net costs. As explained in paragraph 22 of the 2011 SGEI Framework “The amount of compensation can be established on the basis of either the expected costs and revenues, or the costs and revenues actually incurred, or a combination of the two, depending on the efficiency incentives that the Member State wishes to provide from the outset (...)”. Although that paragraph seems to also authorize compensation on the basis of revenues and costs actually incurred, the necessity to include efficiency incentives from the outset in the entrustment act4102 renders it normally impossible to solely rely on an ex post calculation of the incurred net cost to determine the amount of compensation without at least some pre-defined efficiency targets (see book paragraphs 4.343-4.360). Only in the rare cases where it can be demonstrated that no efficiency gains can be made that an ex post full compensation of the incurred net costs can be envisaged.4103

4099 See para 18 of the 2005 SGEI Framework “In determining what amounts to a reasonable profit, the Member State may introduce incentive criteria relating, among other things, to the quality of service provided and gains in productive efficiency”. 4100 According to that paragraph “The amount of compensation may not exceed what is necessary to cover the costs incurred in discharging the public service obligations, taking into account the relevant receipts and reasonable profit for discharging those obligations”. 4101 See para 21 of the 2005 SGEI Framework “Where the amount of over-compensation does not exceed 10 per cent of the amount of annual compensation, such overcompensation may be carried forward to the next year. (...)”. 4102 See para. 42 of the 2011 SGEI Framework. 4103 See para. 38 of the 2011 SGEI Framework.

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The multi-annual contract based approach gives public authorities more flexibility in the way they grant aid over the duration of the entrustment, as long as there is no overcompensation over its whole duration as reflected in paragraph 47 of the 2011 SGEI Framework “Overcompensation should be understood as compensation that the undertaking receives in excess of the amount of aid as defined in paragraph 21 for the whole duration of the contract”.

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3.7.2 Net avoided cost methodology In order to establish the net costs of the SGEI, which essentially defines the maximum level of compensation/State aid that the provider can receive, the 2011 SGEI Framework contemplates two methods: the net avoided cost and the full costs allocation.

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The normal method for the calculation of the net cost has changed in the 2011 SGEI Framework and is now the net avoided cost methodology. It should be applied when it is required by the Union or national legislation and in any other cases where it is possible.4104 The former method based on cost allocation (which is still described by the 2011 SGEI Framework) can on the other hand be applied if it is demonstrated that the net avoided cost approach is not applicable or relevant.4105

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The rationale for the change of methodology for the calculation of the net costs of the SGEI is probably twofold: on the one hand the Third Postal Directive and its Annex I already defined the net avoided cost methodology as the method to

4.265

4104 See paragraphs 24 and 27 of the 2011 SGEI Framework. 4105 See paragraph 27 of the 2011 SGEI Framework “Although the Commission regards the net avoided cost methodology as the most accurate method for determining the cost of a public service obligation, there may be cases where the use of that methodology is not feasible or appropriate. In such cases, where duly justified, the Commission can accept alternative methods for calculating the net cost necessary to discharge the public service obligations, such as the methodology based on cost allocation”. The Commission has for example considered in a decision related to a Risk Equalization Scheme in Ireland that the net avoided cost was not an appropriate methodology, see recital 40 of Commission Decision of 15.03.2012 on (Ireland) Risk Equalisation Scheme 2013 (case SA.34515 (2013/NN)), summary notice in OJ C 204, 18.07.2013, p. 2: “First, the Commission notes that, as concerns the methodology used for the calculation of the net costs expected to be necessary to discharge the public service obligations, the 2011 SGEI Framework requires the use of the net avoided cost methodology where this is possible. Under the net avoided cost methodology, the net cost necessary to discharge the public service obligations is calculated as the difference between the net cost for the provider of operating with the public service obligation and the net cost or profit for the same provider of operating without that obligation. In the RES, all operators are obliged to participate, instead of a single operator entrusted with the SGEI. As with the previous RES 2003 and the Interim Scheme, the RES 2013 does not aim at calculating the costs of providing private health insurance in Ireland, but is aimed at equalising risks between insurers, as described above. Under these circumstances, the specific methodology used under the RES can therefore be accepted as more appropriate than the net avoided cost methodology”.

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calculate the net cost of the universal postal service. The Third Postal Directive foresees that only the net cost calculated in that way can potentially be compensated by Member States.4106

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It would therefore have been odd to have different methodologies to calculate the net cost of the SGEI in the 2011 SGEI Framework and in the Third Postal Directive. Providers of the universal postal service would have been required to apply two different methods for assessing basically the same concept, each of which requires a considerable investment to be implemented.

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The second reason is that the net avoided cost methodology can be seen as a more appropriate method than the methodology based on cost allocation to estimate the cost of a SGEI obligation. It is based on a notion of causality of the costs while the cost allocation method is rather based on a notion of consumption of resources. That difference is essential for the treatment of the costs of shared resources. The cost allocation method was based on an allocation of the cost of all resources between the SGEI and other activities based on the best allocation drivers that could be found. Such allocation could lead to impute to the SGEI fixed costs that would have been incurred even in its absence (if for example they relate to infrastructures necessary in any case for commercial services that would be maintained in the absence of SGEI obligation). The opposite is also true: the methodology based on cost allocation can lead to impute to commercial services, costs that would still be incurred (because of the SGEI obligations) in their absence. The net avoided cost methodology can thus be considered as a superior method to estimate the genuine cost of each SGEI obligation as it only imputes to the SGEI those costs that would not be borne in the absence of the SGEI obligation.

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According to paragraph 24 of the 2011 SGEI Framework “The net cost necessary, or expected to be necessary, to discharge the public service obligations should be calculated using the net avoided cost methodology where this is required by Union or national legislation and in other cases where this is possible”.

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Paragraph 25 of the 2011 SGEI Framework further adds: “Under the net avoided cost methodology, the net cost necessary, or expected to be necessary, to discharge the public service obligations is calculated as the difference between the net cost for the provider of operating with the public service obligation and the net cost or profit for the same provider of operating without that obligation. Due attention must be given to correctly assessing the costs that the service provider is expected 4106 See Article 7(3) of the Third Postal Directive.

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to avoid and the revenues it is expected not to receive, in the absence of the public service obligation. The net cost calculation should assess the benefits, including intangible benefits as far as possible, to the SGEI provider”. The net avoided cost methodology calculates the net cost of a SGEI by comparing the profit of the provider operating with the SGEI with a hypothetical (“counterfactual”) scenario, whereby the same provider operates without that obligation.

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From a conceptual viewpoint, the implementation of the methodology implies the following steps:

4.271

1.

Definition of the counterfactual scenario (without the SGEI obligation)

2.

Estimation of the profit of the operator with the SGEI (factual scenario)

3.

Estimation of the profit of the operator under the counterfactual scenario

4.

Calculation of the net cost of the SGEI.

Estimation of the profit of the operator with the SGEI (factual scenario) is not particularly problematic because it results from the accounts of the provider. By contrast, the difficulties in the net avoided cost methodology arise from the necessity to define a counterfactual scenario and to estimate the profit of the operator under that counterfactual scenario.

4.272

The 2011 SGEI Framework is not very detailed on the implementation of the net avoided cost methodology. It refers in its paragraph 26 to the Annex I to the Third Postal Directive on the calculation of the net cost of the Universal Postal Service as a source of guidance but otherwise it remains quite unclear on the constraints or specificities related to the net avoided cost methodology. As a matter of fact, certain sections of the 2011 SGEI Framework related for example to relevant revenues or reasonable profit seem to have been drafted with the full cost allocation methodology in mind as it is not always easy to make sense of their wording in the context of the application of the net avoided cost methodology. It is therefore submitted that in such circumstances one should be particularly careful in following a literal interpretation of those sections when applying the net avoided costs methodology.

4.273

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3.7.2.1 Definition of the counterfactual scenario 4.274

In the net avoided cost methodology, one of the most complex tasks is the definition of a counterfactual scenario. Such a scenario must describe the commercial behaviour of the designated SGEI provider in a situation where it would not be entrusted with the SGEI. In order to calculate the net avoided cost of the SGEI, that scenario is then to be compared with the factual scenario corresponding to the situation where the SGEI provider is entrusted.

4.275

From a conceptual viewpoint, the notion of counterfactual scenario can be more or less intuitive depending on the context of that assessment.

4.276

In the easiest case, a company contemplates operating a SGEI over a certain period for the first time. In such case, we can assume that the situation of the operator without the SGEI is well-known as it corresponds to the current reality of the company. The impact of adding the SGEI activity, provided that it remains limited in scope and does not completely change the functioning of the future SGEI operator, can be apprehended relatively precisely by that operator through an adequate business plan exercise.

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A much more difficult situation occurs when the SGEI provider has been entrusted with a SGEI almost since its creation and that SGEI has since then constituted most of its activities. For example, national historic postal operators in almost all Member States have continuously been entrusted with the Universal Postal Service. Given the size of the necessary infrastructure to deliver the Universal Postal Service, the development of the company has been almost completely determined by the existence of that SGEI. In such circumstances, the situation of the company with the obligation is easy to know but the situation of the company without the obligation is a rather difficult conceptual exercise.

4.278

One important point to clarify is that the counterfactual scenario cannot be considered, in that case, as being the situation where the SGEI provider would just be relieved from the obligation for the future. Relieving the SGEI provider of the obligation would not immediately allow it to operate as a normal market operator as it would probably for a quite long period have to adapt its infrastructure (e.g. reducing the number of staff, closing post offices). Considering that transitional phase as the counterfactual scenario (or even as part of the counterfactual scenario) would disadvantage the historic SGEI provider since it could lead to the conclusion that the company without the obligation would not be significantly better off because of the practical difficulties in adapting its infra1358

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structure. It could even be the case that those practical difficulties would temporarily worsen the financial situation of the company (relieved of the obligation) as compared to the situation with the SGEI. A practical way to describe the counterfactual scenario could be to consider the “final” stable picture of the company after all necessary adjustments to become a normal market operator have been implemented. Such an approach avoids penalizing former SGEI providers but at the same time ensures that the counterfactual scenario is sufficiently linked with the current characteristics of the company. The counterfactual scenario must not end up as a description of a virtual company without any connection to the existing one. One important point is that only the constraints specifically related to the SGEI in question must be relaxed and that other constraints unrelated to the SGEI (for example other contractual obligations) keep applying in the counterfactual scenario.

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Paragraph 26 of the 2011 SGEI Framework refers explicitly to the Annex I to the Third Postal Directive on the calculation of the net cost of the Universal Postal Service as a source of guidance for the design of the counterfactual scenario:

4.280

(26) (...) Annex I to Directive 97/67/EC of the European Parliament and of the Council of 15 December 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service (…), contain more detailed guidance on how to apply the net avoided cost methodology. The way Annex I to the Third Postal Directive has been implemented in practice4107 is therefore a very valuable source of information for the implementation of the 2011 SGEI Framework. The Commission commissioned a study4108 (the “net cost study”), which was published in 2013, on the way Member States, national regulatory agencies and universal service providers had applied in practice the principles of Annex I to calculate the net cost of the Universal Postal Service since the adoption of the Third Postal Directive.

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The net cost study identifies and assesses three methods that have been used in that context:

4.282

4107 Reference is made here to the application of Annex I to the Third Postal Directive, not necessarily for compensation purposes, but also for example for pricing purposes. 4108 Study on the principles used to calculate the net costs of the postal Universal Postal Service (2013).

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A.

The Deficit Approach (DA) with Fully Allocated Costs;

B.

The Net Avoidable Cost Approach (NAC);

C.

The Profitability Cost Approach (PC).

The Deficit Approach

4.283

The methodology used under the deficit approach is nothing other than the methodology based on cost allocation which measures the accounting loss made on the Universal Postal Service based on the separation of accounts.

4.284

The fact that that methodology has been used to implement Annex I raises the interesting question of whether the methodology based on cost allocation could be considered as an acceptable way to implement the net avoided cost methodology sought by the 2011 SGEI Framework.

4.285

In that respect, while the deficit approach method does not rely explicitly on a counterfactual scenario, it is possible to argue that an implicit counterfactual scenario underlies it: such a counterfactual scenario would rely on the assumption that without the obligation to provide the SGEI, the operator would drop it altogether and that its other activities would remain totally unaffected.

4.286

That implicit (and rather simplistic) counterfactual scenario is however also unrealistic as, on the one hand, it is difficult to understand why the ex-SGEI provider would necessarily abandon all the activities falling in the SGEI area (e.g. an Universal Postal Service provider would very likely keep the profitable service falling with the Universal Postal Service remit) and, on the other hand, if it were to abandon completely the SGEI (e.g. close all post offices in case of an Universal Postal Service provider), it seems very unlikely that its other activities would remain unaffected.

4.287

For those reasons, it is doubtful that the methodology based on cost allocation can be considered as a valid way to implement the net avoided cost methodology requested by the 2011 SGEI Framework. The method should therefore, as foreseen by the 2011 SGEI Framework4109, only be considered as a fall-back solution when the net avoided cost methodology cannot be adequately implemented. 4109 See para. 27 of the 2011 SGEI Framework

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The NAC Approach Under the net avoidable cost approach, there is an explicit counterfactual which consists in considering that the Universal Service Provider would only cease the provision of unprofitable products of the Universal Postal Service, where the term “product” is defined according to mail characteristics that explain the variations in the costs of providing the delivery of a mail service (e.g. delivery areas, type of sender, size, etc.). The Universal Service Provider would continue providing all non-Universal Postal Service products together with profitable Universal Postal Service mail flows via an unchanged network.

4.288

Generalized to all types of SGEIs, that method consists in identifying the unprofitable segments4110 of the SGEI. The only change envisaged in the counterfactual scenario is that those segments would be abandoned and as a consequence the corresponding losses would be saved.

4.289

Such an approach seems already more realistic than the deficit approach but is also more demanding as it necessitates a sufficiently detailed cost accounting separation to distinguish the different segments in question. The allocation of costs and revenues to the segments is done using the same principles and methods as are used with the methodology based on cost allocation (see book para 4.314-4.317).

4.290

More importantly, the counterfactual scenario which is considered still remains rather simplistic: for example, instead of dropping loss-making products, it could be more interesting to adapt their pricing or modify their characteristics. In addition, the view that the impact of abandoning the loss-making segments of the SGEI would be limited to saving the accounting losses related to those segments does not necessarily reflect the reality. Abandoning those segments could have impacts (demand effects) on the other segments within the SGEI perimeter but also on the services outside the SGEI perimeter.

4.291

For those reasons, the net avoidable cost methodology does not seem to provide a very solid basis to calculate the net cost of the SGEI. It might be possible to consider it also as a fall-back solution (probably closer to the concept of net avoided cost than the deficit approach) but its use should probably only be considered with some adjustments, notably in order to take into account demand effects.

4.292

4110 A segment is defined as the combination of different characteristics of a delivered service. For example: geographical area x quality category.

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The PC Approach

4.293

Cremer et al. (2000) and Panzar (2000) developed the profitability cost approach and provided a theoretical foundation for its application in the postal sector. Under the profitability cost approach, the degree of flexibility of the Universal Service Provider in the counterfactual is greater than in the net avoidable cost, as it considers how the whole Universal Service Provider operation could be modified in order for the Universal Service Provider to try and ‘maximise’ profits absent the Universal Postal Service: for example, change in pricing, in quality, in coverage can be envisaged.

4.294

Moreover, if certain services of the Universal Postal Service are discontinued, the profitability cost approach also considers how the ceasing to provide those services affects demand for the Universal Service Provider and its market share. Therefore, the profitability cost assumes a richer and more realistic hypothetical strategic response from the Universal Service Provider without the Universal Postal Service. It also necessitates more hypotheses regarding customers’ responses to changes to the Universal Service Provider’s product offering and regarding the changes in operations the Universal Service Provider might be expected to introduce.

4.295

The profitability cost approach can be used with any SGEI and appears to be the method that best corresponds to the requirements of the 2011 SGEI Framework. It is however more time- and resource-consuming than the other methods as it requires a full modelling of the company and cannot be simply based on accounting information.

4.296

In its conclusions, the net cost study underlined the emergence of a trend towards the adoption of the profitability cost approach. The latter is also the method that has been used in the recent decisions adopted by the Commission.4111 It would appear therefore that to calculate the net costs of the SGEI in a reliable manner, as requested by the 2011 SGEI Framework, Member States and public service providers should implement the net avoided cost methodology with the profitability cost approach.

4111 See 2013 bpost Decision already cited at footnote 4047, 2014 Hellenic Post Decision already cited at footnote 4066.

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3.7.2.2 Estimation of the profit of the operator under the counterfactual scenario with the profitability cost approach Regarding implementation, overall the profitability cost approach can be data intensive given the richness of the counterfactual. The impacts of the different counterfactual hypotheses have to be valued and combined to determine the profit of the operator under the counterfactual scenario.

4.297

That combination entails a risk of double counting when several constraints which do not have independent impacts on the profit level are lifted. For example, if some services (or segments) of the SGEI are abandoned and at the same time the overall pricing policy is changed (e.g. prices are increased), it is important not to take into account the impact of the pricing change on services or segments that are supposed to be abandoned. If the impact of the two hypotheses is just cumulated the profit of the operator under the counterfactual scenario could be overestimated.

4.298

In order to avoid that risk, the best approach is to remove constraints in a sequential (step-by-step) manner. A quite detailed illustration of such a sequential approach can be found in the 2013 bpost Decision.4112

4.299

3.7.2.3 Calculation of the net cost of the SGEI under the profitability cost approach The calculation of the net cost with the profitability cost approach consists in the difference between the profit of the SGEI provider under the counterfactual scenario and its profit under the factual scenario. Such a calculation must however also take into account intangible benefits.

4.300

In that regard, paragraph 25 of the 2011 SGEI Framework specifically states that with the net avoided cost methodology “(...) The net cost calculation should assess the benefits, including intangible benefits as far as possible, to the SGEI provider.”

4.301

A definition of “intangible benefit” can be found in the net cost study:4113 “a benefit is classified as ‘ intangible’ when a universal service provider’s performance and cost accounting, and its calculation of the net cost of the universal service

4.302

4112 See 2013 bpost Decision already cited at footnote 4047, paras 155-168. 4113 See Study on the principles used to calculate the net costs of the postal USO Universal Postal Service (2013), p. 109.

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obligation does not (fully) reflect the impact on revenues and cost that result from the existence of this benefit. The definition is relevant insofar as the identification of such benefits becomes necessary only if they are not already included it the universal service provider’s net cost calculation.”

4.303

It is worth noting that paragraph 45 also states that “If the undertaking in question (...) benefits from other advantages granted by the State, these must be taken into consideration, irrespective of their classification for the purposes of Article 107(1) of the Treaty, and added to the undertaking’s revenue (...)”. The provision seems quite open-ended and does not seem specifically linked to the net avoided cost methodology. Moreover, unlike the reference to the exclusive rights in paragraphs 32 and 45 of the 2011 SGEI Framework, the Commission’s decisional practice does not give many indications as to what such benefits could be (if they are different from intangibles). It could be argued that the important part of the sentence is probably “ irrespective of their classification for the purposes of Article 107(1) of the Treaty” and that it mostly aims at stating that even non-aid tangible benefits (for example arising from a purely regulatory measure that would generate extra revenues for the SGEI provider or an Altmark-compliant compensation that would not constitute State aid) should be taken into account in the State aid assessment.

4.304

As regards intangible benefits, several examples can be found in the net cost study4114: Table 1: typology of intangibles. Intangible/ market benefits

Thanks to the Universal Postal Service, the Universal Service Provider may achieve…

Most discussed in postal literature 1. Economies of scale and scope:

Lower average cost in providing several Universal Postal Service products and non-Universal Postal Service products

2. Enhancement of brand value:

Higher sales due to positive impact of brand (customer retention and acquisition)

3. Enhanced advertising effect:

Higher sales due to more effective advertising thanks to higher visibility (better value for money)

4. VAT exemption:

Higher sales to customers who cannot reclaim VAT back

5. Interest on prepaid postage:

Earn interest on this revenue

4114 See Study on the principles used to calculate the net costs of the postal USO Universal Postal Service (2013), p. 110.

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Higher sales of other products (as complement to the sale of Universal Postal Service products)

Discussed in postal literature 7. Ubiquity:

Better customer retention and acquisition when mailers move address, better customer acquisition

8. Uniform price:

Lower transaction costs for customers and therefore better customer acquisition

9. Customer life cycle effects:

These are benefits arising from customers who are currently commercially non-viable and may at some future date become commercially viable. Such customers may, at this point, choose the Universal Service Provider over competitors (better customer retention)

10. Better bargaining position:

Easier access to politicians than other operators and stronger influence on regulatory regime

11. Exclusive sale of stamps and monopoly over philately market:

Additional revenues/ profits as some sold stamps are never used by users

Those examples are related to the Universal Postal Service but some of them such as “Enhancement of brand value” could also be relevant in other contexts.

4.305

One of the difficulties with the inclusion of intangible benefits in the assessment under the 2011 SGEI Framework is that there is no officially recognized method to establish their relevance in a given case and quantify their impact. In that respect, the example of the decision of the Commission in the Credit mutuel case is an interesting one, where the Commission refrained from including the estimation of a possible “pull effect” of the Livret bleu4115 because its magnitude could not be quantified.4116 Given the absence of established method for such evaluation, in practice, Member States have a margin of discretion to define a methodology to measure the impact of such intangibles benefit.

4.306

3.7.3 Methodology based on cost allocation As already mentioned, the methodology based on cost allocation can still be applied in some cases and the 2011 SGEI Framework describes how that meth-

4.307

4115 The Livret bleu was a savings product regulated by France and distributed exclusively by Crédit Mutuel. 4116 See Commission Decision of 24 May 2011 on State aid C 88/97 implemented by France in favour of Crédit Mutuel, OJ L 309, 24.11.2011, p. 23, para 99 “In verifying the absence of any overcompensation (see subsection 7.2.5), the Commission follows for the period from 27 September 1991 (see subsection 7.2.1) to 31 December 2005 – a global approach (see subsection 7.2.2). It takes account of all the advantages connected with the Livret bleu, without, however, including a possible pull effect whose scope could not be established (see subsection 7.2.3). A reasonable profit is taken into account (see subsection 7.2.4), including for deposits centralised with the CDC.”

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odology works. It requires identifying the revenues generated by the SGEI if any4117 and the costs incurred by the SGEI provider to deliver the SGEI. The net cost of the SGEI is then the difference between the two. In an ex ante perspective, expected revenues and costs are to be estimated, while in an ex post perspective actual revenues and costs would be used.

4.308

When a SGEI provider only delivers the SGEI in question, the identification of the relevant revenues and costs raises no methodological issue as all the revenues of that SGEI provider are SGEI revenues and all its costs are SGEI costs.

4.309

However, when a SGEI provider delivers other services than the SGEI in question, the difficulty arises of identifying the relevant revenues and the costs to be used to calculate the net cost of the SGEI. That difficulty is particularly acute for the SGEI costs as resources used for the delivery of the SGEI might also be used for the delivery of other services.

4.310

According to paragraph 31 of the 2011 SGEI Framework: “Where the undertaking also carries out activities falling outside the scope of the SGEI, the costs to be taken into consideration may cover all the direct costs necessary to discharge the public service obligations and an appropriate contribution to the indirect costs common to both the SGEI and other activities. The costs linked to any activities outside the scope of the SGEI must include all the direct costs and an appropriate contribution to the common costs. To determine the appropriate contribution to the common costs, market prices for the use of the resources, where available, can be taken as a benchmark. In the absence of such market prices, the appropriate contribution to the common costs can be determined by reference to the level of reasonable profit the undertaking is expected to make on the activities falling outside the scope of the SGEI or by other methodologies where more appropriate.”

4.311

Paragraph 44 further adds that “Where an undertaking carries out activities falling both inside and outside the scope of the SGEI, the internal accounts must show separately the costs and revenues associated with the SGEI and those of the other services in line with the principles set out in paragraph 31.(...)”

4.312

Those paragraphs address the issue of separation of costs between a SGEI and other activities (generally commercial activities), when the SGEI provider does not deliver only the SGEI. They aim at avoiding in particular that costs of other services are imputed to the SGEI and are partially or totally offset by the State. 4117 A SGEI delivered for free to users might not generate any revenue at all.

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Such an arrangement would in practice amount to a cross-subsidization of those other services which would be particularly problematic if they are commercial services offered in competitive markets. In those circumstances, cross-subsidisation would provide the SGEI provider with an undue advantage over its competitors.

4.313

Two categories of costs are distinguished: the direct costs and the indirect (or common) costs. The direct costs can be allocated directly to the services which generate them, as for example the cost of an asset which is exclusively used for the provision of that service. Logically the direct costs necessary to deliver the SGEI are imputed to it. The indirect/common costs relate to resources that are shared by the SGEI and other services. Classical indirect/common costs are for example overheads, but buildings, IT resources or human resources can also be shared between several activities. In a post office for example, the same postal workers can deliver postal services which fall within the Universal Postal Service area and banking services which do not.

4.314

The sharing of those indirect/common costs between the SGEI and other activities (in general commercial services) should be made in line with Article 4 of the Transparency Directive and is generally a difficult issue. At this juncture, it is worth recalling the discretion of Member States, recognized by the Union Courts, in defining the methodology for the determination of the additional costs incurred in discharging the SGEI, which is then only subject to a control for manifest errors by the Commission.4118 Consequently, the determination of the “appropriate contribution to the indirect costs” can a priori be done in various ways, provided that they do not appear arbitrary or manifestly wrong.

4.315

The 2011 SGEI Framework suggests the use of market prices as a benchmark.4119 The underlying idea is the following: if commercial activities which are delivered on a market open to competition use some common resources with the SGEI (e.g. IT resources), and if a market price can be identified for the use of

4.316

4118 Case T-151/11 Telefónica de España and Telefónica Móviles España v Commission ECLI:EU:T:2014:631, paras 155-161, Case T-289/03 BUPA and others v Commission ECLI:EU:T:2008:29, paras 214 and 220, Case T-106/95 FFSA and others v Commission ECLI:EU:T:1997:23, para 105, and Case T-17/02 Olsen v Commission ECLI:EU:T:2005:218, at para 266. It is submitted that that jurisprudence does not prevent the Commission from laying out in its frameworks which methodology Member States should follow to calculate the net cost of the SGEI but it rather refers to the technical alternative choices that can be made in that calculation within the methodology required by the Commission or to peculiar situations in which the methodologies described in the Commission frameworks are not applicable to the facts of the case (e.g. BUPA). The very implementation of each methodology for the calculation of the net cost of the SGEI constitutes clearly a complex economic assessment. 4119 That suggestion is new as compared to the 2005 SGEI Framework.

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those resources, then by ensuring that the commercial services pay at least the market price for the use of those common resources, it is ensured that they do not benefit from any undue cross-subsidization from the SGEI. Following that approach would then imply allocating an amount of indirect/common costs to those commercial activities equivalent to the market price of the common resources that they use.

4.317

Due to the singularity of some SGEIs (e.g. in network industries), the common resources used by SGEI and commercial activities (e.g. the network) may be unique and in such case it can happen that no market price can be found. In such circumstances, other approaches have to be envisaged. One possible approach is to use the full cost allocation methodology in line with Chronopost4120 which consists in essence in allocating all indirect/common costs on the basis of drivers (labour costs, number of employees, amount of material used, amount of space occupied, number of transactions), which are considered to best reflect the use of these resources by the different activities. One difficulty of that approach is however that the choice of the relevant drivers for a given activity is not subject to any regulation and different drivers can therefore be used by different entities for similar activities.

4.318

While the issue of cost allocation is mostly relevant to ensure a proper distinction between SGEIs and commercial activities, it can also be important for two SGEIs, to the extent that Member States might want to grant SGEI compensation to a specific SGEI and not to compensate the other one. That scenario arises for example in the postal sector when certain Member States do not compensate the Universal postal service but compensate other specific public services.4121 In such cases, it must be ensured that there is no cross-subsidisation between the two activities, using the same approach to the one applied to avoid a crosssubsidisation between an SGEI and a commercial activity.

4.319

The end of paragraph 44 of the 2011 SGEI Framework appears to impose the same strict approach between SGEIs even if they are all compensated “(...) Where an undertaking is entrusted with the operation of several SGEIs because the granting authority or the nature of the SGEI is different, the undertaking’s internal accounts must make it possible to verify whether there has been any overcompensation at the level of each SGEI.”

4120 Joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost v Ufex and others ECLI:EU:C:2003:388. 4121 This is for example the case for France and Belgium that compensate various SGEIs entrusted to la Poste and bpost respectively but not the USO.

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The notion of different SGEIs is however not always devoid of ambiguity. It often happens that a Member State bundles up several services under one SGEI and compensates globally that SGEI allowing thereby implicitly cross-subsidisation between the bundled services. The degree to which those services have different natures and should be considered as different SGEIs is open to interpretation.

4.320

3.7.4 Relevant revenues According to paragraph 32 of the 2011 SGEI Framework: “The revenue to be taken into account must include at least the entire revenue earned from the SGEI, as specified in the entrustment act, and the excessive profits generated from special or exclusive rights even if linked to other activities (...)”.

4.321

That paragraph seems to be drafted with the methodology based on cost allocation in mind as under the net avoided cost methodology, necessarily all revenues of the SGEI provider under the factual and counterfactual scenario have to be taken into account.

4.322

In line with paragraph 32 of the 2011 SGEI Framework, all revenues directly generated by the SGEI (for example if the users of the service have to pay a tariff or a price4122 to obtain the SGEI) are to be taken into account. Even when a SGEI provider offers services other than the compensated SGEI, the identification of the revenues generated by the compensated SGEI should not be particularly problematic as the origin of revenues is normally easy to trace.

4.323

In addition, excessive profits generated from exclusive rights linked to activities other than the SGEI and other advantages granted by the State are to be included in the relevant revenues to be taken into account for the calculation of the net cost of the SGEI.4123 The 2005 SGEI Framework contained a similar provision, but its wording was ambiguous as regards the exact link between the compensated SGEI and exclusive and special rights.4124 The 2011 SGEI Framework is very clear that no particular linkage between those revenues and the SGEI is necessary. As regards the notion of excessive profit, it relies upon the notion of reasonable profit which can be considered as a cost of capital necessary for the delivery of the SGEI (for more details see book paragraphs 4.327-4.342).

4.324

4122 Such a price is generally insufficient to cover the cost of the service hence the need for compensation. 4123 See paragraphs 32 and 45 of the 2011 SGEI Framework. 4124 That provision was applied in particular in the Commission Decision of 25 January 2012 in Case SA.14588 (C 20/2009) implemented by Belgium in favour of De Post-La Poste (now bpost), OJ L 170, 29.06.2012, p. 1. (the 2012 bpost decision ), see paras 349-353.

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4.325

The excessive profits are the profits made beyond what is considered to be reasonable for the services in question from an ex ante perspective. The underlying assumption is that exclusive rights confer market power to the holder of those rights that can be used to obtain more profit than could normally be achieved in a competitive market. Therefore, the excessive profit must be used to finance any SGEI entrusted to the holder of the exclusive rights before the State grants any form of additional support.

4.326

Member States are also free to decide that “the profits accruing from other activities outside the scope of the SGEI, in particular those activities which rely on the infrastructure necessary to provide the SGEI, must be allocated in whole or in part to the financing of the SGEI”.4125

3.7.5 Reasonable profit 3.7.5.1 Reasonable profit under the cost allocation methodology in the 2011 SGEI Framework 4.327

Like the 2005 SGEI Framework, the 2011 SGEI Framework explicitly allows SGEI providers to make a reasonable profit with the SGEI activity (the decision to grant such reasonable profit is however completely dependent on the Member State which can exclude any profit from the compensation).

4.328

From an accounting viewpoint the reasonable profit can either be considered as a cost of capital which can then be covered by the various revenues of the SGEI provider including the SGEI compensation or can be considered as a top-up that can be added once the SGEI operational costs have been netted of all the relevant revenues to determine the maximum authorized level of SGEI compensation.

4.329

The rationale of the reasonable profit is to allow for a remuneration of the capital requested for the delivery of the SGEI which is in line with comparable activities in the market. Such remuneration allows SGEI providers to cover the cost of paying the company’s debt and equity holders. It therefore also incentivizes SGEI providers to make the necessary investments for the quality and continuity of the SGEI.

4.330

According to paragraph 33 of the 2011 SGEI Framework “Reasonable profit should be taken to mean the rate of return on capital (4) that would be required 4125 See para. 46 of the 2011 SGEI Framework.

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by a typical company considering whether or not to provide the service of general economic interest for the whole duration of the entrustment act, taking into account the level of risk. The level of risk depends on the sector concerned, the type of service and the characteristics of the compensation mechanism.” The move from an ex post annual approach towards a more ex ante multi-annual approach is reflected in: –

The perspective for assessing the reasonable profit: “The reasonable profit will be assessed from an ex ante perspective (based on expected profits rather than on realised profits) in order not to remove the incentives for the undertaking to make efficiency gains when operating activities outside the SGEI”.4126

–

The indicator chosen to reflect the return on capital: “The rate of return on capital is defined here as the Internal Rate of Return (IRR) that the company makes on its invested capital over the lifetime of the project, that is to say the IRR on the cash flows of the contract”.4127

The use of the IRR as a profit indicator illustrates that the Commission takes a more contract/project-based perspective. It allows for compensation schemes that are more ex ante oriented, in that the compensation is based, at least partially, on forecasted costs and revenues over the lifetime of the contract (instead of incurred costs and revenues). In doing so, it provides greater incentives for SGEI operators to become more efficient over time. However, where justified, it is also possible to use more ex post oriented accounting measures of the profit such as the average return on equity, the return on capital employed, the return on assets or the return on sales.4128 Whatever indicator is chosen, the Member State must provide the Commission with evidence that the projected profit does not exceed what would be required by a typical company considering whether or not to provide the service, for instance by providing references to returns achieved on similar types of contracts awarded under competitive conditions.

4.331

4.332

4126 See footnote 3 of the 2011 SGEI Framework. 4127 See footnote 4 of the 2011 SGEI Framework. 4128 In certain sectors such as the postal sector, return on sales (ROS) is usually preferred to return on capital as it only depends on accounting profit and sales data, which are both easily observable in the company s accounts. In addition, the use of the ROS avoids the valuation and attribution of assets between different services, which would be necessary for a capital-based benchmark, and which can be a difficult exercise. ROS is often used in the postal sector to define a benchmark for the reasonable profit (see for example Commission Decision of 25 January 2012 in Case SA.14588 (C 20/2009) implemented by Belgium in favour of De Post-La Poste (now bpost), OJ L 170, 29.06.2012, p. 1).

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4.333

The 2011 SGEI Framework also provides clarifications on the level of profit which can be considered reasonable in different situations: –

Relevant swap rate (maturity and currency must correspond to the duration and currency of the entrustment act) + 100 basis points constitutes a safe harbour, under which profit is considered to be reasonable in any event.4129 That novelty of the 2011 SGEI Framework aims to simplify the application of SGEI rules and increase predictability;

–

The safe harbour above is also the maximum level of reasonable profit that can be allowed when “the provision of the SGEI is not connected with a substantial commercial or contractual risk, for instance because the net cost incurred in providing the service of general economic interest is essentially compensated ex post in full”.4130

–

Paragraph 37 of the 2011 SGEI Framework further states that “where the SGEI provision is connected with a substantial risk, for instance because the compensation takes the form of a fixed lump sum payment covering expected net costs and a reasonable profit and the undertaking operates in a competitive environment, the reasonable profit may not exceed the level that corresponds to a rate of return on capital that is commensurate with the level of risk. That rate should be determined where possible by reference to the rate of return on capital that is achieved on similar types of public service contracts awarded under competitive conditions (for example, contracts awarded under a tender). Where it is not possible to apply that method, other methods for establishing a return on capital may also be used, upon justification.”

4.334

Paragraph 37 of the 2011 SGEI Framework therefore authorizes Member States to grant a higher level of reasonable profit to the SGEI provider when the delivery of the SGEI is connected with a substantial risk.

4.335

It can be seen from Commission’s decisions (and in particular the 2012 bpost decision4131 where a thorough assessment of reasonable profit was made, albeit on the basis of the 2005 SGEI Framework) that various types of risks can be considered to be associated with a particular SGEI.

4129 See para. 36 of the 2011 SGEI Framework. 4130 See para. 38 of the 2011 SGEI Framework. 4131 Already cited at footnote 4124.

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For example, Geradin and Malamataris have elaborated a useful table summing up the main risks that a SGEI provider might face.4132

4.336

Table 2: typology of risks Risk Type (Framework)

Examples

Description

Examples from the Postal Sector

Sectorspecific Risks

Volume Risk

Some SGEI providers may be active in sectors which face structural decline, leading to significant volume decreases

The volume in the postal services sector is declining constantly since 2000, in relation to most SGEIs, due to substitution by other means of communication and the internet.

Pricing Risk

Some SGEI providers are subject to tariff regulations (e.g. price caps), which prevent them from fully passingthrough input cost increases (e.g., oil price, salary inflation)

Tariffs for USO services are regulated and monitored by the NRA. In addition, in the postal sector, SGEIs are often provided at reduced prices (e.g., press distribution in France and in Belgium)

Regulatory Risk

SGEI providers may face uncertainty as regards their long-term profitability, because legislators at EU or national level could review the existing regulations and/ or regulators (NRAs) could adapt their policies or implementation strategies.

After full market opening has been achieved in the postal sector, this risk seems less pronounced

4132 Geradin and Malamataris, “2012 Framework on Public Compensation for SGEIs: Application in the Postal Sector”, C.N.R.I., 2013/3, p. 241.

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Compensation Mechanismrelated Risks

Operational Risk

SGEI providers may be subject to strict performance standards and quality penalties, which creates significant operational risks.

Strict performance standards are common for USO and SGEIs in the postal sector, e.g. the D+1 or D+2 requirements or the delivery of newspapers before 07.30 am in some Member States

Investment Risk

SGEI providers will often need to continuously implement major restructuring programmes to become and remain efficient. This creates uncertainty on the return rate and pay-back period.

In the postal sector, there is the need to invest in more efficient collection, sorting and distribution facilities (e.g., ELTA or POL)

Fixed Lump Sum Risk

Some SGEI providers bear the risk of cost overruns and/ or revenue shortfalls, when the compensation for SGEIs takes the form of a _fixed lump sum payment covering expected net cost without ex post correction.

This is the case with certain postal operators, including the French La Poste, the Belgian bpost and Post Office Limited

Limited Duration Risk

SGEI providers typically face the risk that the entrustment might not be renewed at the end of the entrustment period. If so, they would suffer from winding down costs (e.g., redundancies) or be left with assets not being fully depreciated (e.g., new investment in infrastructure with long payback period).

Risk applies to all sectors, including the postal sector

Counterparty Risk

Some SGEI providers receive funding (compensation or other revenue) by counterparties (e.g., State, suppliers, customers) who could potentially default on their obligations.

Risk applies to all sectors, including the postal sector

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Whenever possible, the 2011 SGEI Framework requests Member States to take as a reference the rate of returns resulting from tenders.4133 Such a requirement can be expected to become operational when a significant proportion of SGEIs contracts are awarded through tenders (or more generally under competitive conditions).

4.337

In recent Commission decisions, the reasonable profit has been determined either through a statistical comparison of the return on sales of the SGEI provider with the median return on sales of a set of comparable operators (e.g. in the 2012 bpost Decision)4134 or through a comparison of the return on capital of the SGEI operator and its Weighted Average Cost of Capital (WACC)4135 which is an alternative evoked in the 2011 SGEI Framework.4136

4.338

3.7.5.2 Reasonable profit and net avoided cost methodology (profitability cost approach) The reasonable profit is not approached in the same way under the profitability cost approach and under the cost allocation methodology. As the net avoided cost calculation consists in identifying the foregone profit that could have been made by the SGEI provider without any SGEI obligation (which should be logically the normal profit that can be made in the relevant market), it does not seem logical to add a reasonable profit on top of that result.

4.339

In fact, with the profitability cost approach, it seems more appropriate to include the cost of capital in the calculation, and the net cost is given by the following formula4137:

4.340

Net cost of SGEI = Net profit w/o SGEI – Net profit w/ SGEI = (Π w/o SGEI – CC w/o SGEI) – (Π w/ SGEI – CC w/ SGEI) Where: Π = operating profit; w/o SGEI = without SGEI; w/ Universal Postal Service = with SGEI; CC = capital costs

4133 See paragraph 37 of the 2011 SGEI Framework. 4134 Already cited at footnote 4124. 4135 E.g. Commission Decision of 15.03.2012 on (Ireland) Risk Equalisation Scheme 2013 (case SA.34515 (2013/NN)), summary notice in OJ C 204, 18.07.2013, p. 2, paras 127-140. 4136 See footnote 3 of the 2011 SGEI Framework. 4137 See Study on the principles used to calculate the net costs of the postal Universal Postal Service (2013), p. 96.

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4.341

As explained in the net cost study, if the level of capital employed is not materially affected by the removal of the SGEI then the difference between the cost of capital under the factual scenario and the counterfactual will not be significant. If that level of capital would be materially affected by the removal of the SGEI, then it becomes necessary to estimate the difference between the cost of capital in the counterfactual and factual scenario which will then affect the net cost of the SGEI. The assumption that the level of capital is not materially affected is all the more valid when the activities in question are labour intensive (e.g. postal sector) and therefore rely on a relatively small share of capital.

4.342

That simplification hypothesis has been used in several decisions of the Commission.4138 It is worth noting that the reasonable profit was in fact used in those decisions but only as a means among others to verify the credibility of the counterfactual scenario. The idea is that the counterfactual scenario is all the more credible when its leads to calculating a profit level that is in line with observable market data.

3.7.6 Efficiency incentives 4.343

The 2011 SGEI Framework takes better account of efficiency considerations than its 2005 predecessor did, in several different ways. The shift to an ex ante multi-annual contract/project based perspective, the non-discrimination provision, the modalities for the calculation of the reasonable profit and the requirement to respect public procurement rules, where applicable, should all contribute to that objective. In addition, paragraph 39 of the 2011 SGEI Framework requires explicitly Member States to introduce efficiency incentives, when designing the compensation mechanism: “In devising the method of compensation, Member States must introduce incentives for the efficient provision of SGEI of a high standard, unless they can duly justify that it is not feasible or appropriate to do so.”

4.344

That provision is an evolution as compared to the 2005 SGEI Framework which, however, already allowed Member States to impose such mechanisms.4139 It is submitted that the broad margin of appreciation of the Commission when it comes to assessing the compatibility of State aid under Article 106(2) of the Treaty entitles the Commission to impose that compatibility condition. 4138 E.g. the 2013 bpost Decision already cited at footnote 4047, 2014 Hellenic Post Decision already cited at footnote 4066. 4139 See paragraph 18 of the 2005 SGEI Framework: “In determining what amounts to a reasonable profit, the Member State may introduce incentive criteria relating, among other things, to the quality of service provided and gains in productive efficiency.”

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Admittedly, the jurisprudence of the Union courts contains some language to the effect that the Commission is not entitled to assess the efficiency of the public service provider in applying Article 106(2) of the Treaty.4140

4.345

However, that case law reflects the peculiarity of the sector to which it refers (public service broadcasting) or the state of development of Union law at the time those judgments were issued (including the communication on the application of Article 106(2) of the Treaty adopted by the Commission at the relevant time). As such, it is argued that they should not preclude the Commission from developing its approach to the application of Article 106(2) of the Treaty.

4.346

Second, paragraph 39 of the 2011 SGEI Framework does not require the Commission to assess the efficiency of the SGEI providers but rather requires the Member States to do so. All the Commission asks is that some efficiency incentive is included in the compensation mechanism. That requirement does not seem to conflict with the current case law.

4.347

Moreover, paragraph 39 does not require the SGEI provider either to reach a predetermined level of efficiency or to be as efficient as “a typical well run undertaking” as is required by Altmark to exclude that the compensation constitute State aid. Therefore, that paragraph is not a duplication of the fourth Altmark condition.

4.348

Member States are left with a large margin of discretion to design the compensation mechanism including the required efficiency incentives. The 2011 SGEI Framework gives however two examples of such compensation mechanisms:

4.349

The first one is described in paragraph 40 of the 2011 SGEI Framework: “For instance, Member States can define upfront a fixed compensation level which anticipates and incorporates the efficiency gains that the undertaking can be expected to make over the lifetime of the entrustment act.”

4.350

A precise example of that type of efficiency incentivising mechanism can be found in the 2012 Poste Italiane Decision4141:

4.351

4140 Case T-106/95 FFSA and others v Commission ECLI:EU:T:1997:23, para 108, Case T-275/11 TF1 v Commission ECLI:EU:T:2013:535, para 130-134, and Case T-137/10 CBI v Commission ECLI:EU:T: 2012:584, para 300. 4141 Already cited at footnote 4045, recitals 110 to 112.

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(110) The public service compensation granted to PI for the period 2009-2011amounts to € 1,093.541 million, divided as follows: € 371.977 million for 2009; € 364.463 million for 2010; € 357.101 million for 2011. (111) The above amounts are determined in function of a subsidy capping mechanism, which anticipates planned efficiency gains (average yearly efficiency gains of 3.62 percent) and accounts also for inflation. (112) This mechanism allows for calculation of the compensation as follows: Sn= Sn-1(1+X-Y) where: Sn: is the compensation for the year n Sn-1 is the compensation for the previous year X is the planned inflation rate for the year n Y is the planned efficiency gain resulting from PI business plan.

4.352

The second example given in the 2011 SGEI Framework, which consists in making the compensation level dependent upon the extent to which efficiency targets have been met, is described in paragraph 41 of the 2011 SGEI Framework: “Alternatively, Member States can define productive efficiency targets in the entrustment act whereby the level of compensation is made dependent upon the extent to which the targets have been met. If the undertaking does not meet the objectives, the compensation should be reduced following a calculation method specified in the entrustment act. In contrast, if the undertaking exceeds the objectives, the compensation should be increased following a method specified in the entrustment act. Rewards linked to productive efficiency gains are to be set at a level such as to allow balanced sharing of those gains between the undertaking and the Member State and/or the users.”

4.353

The idea is that on the one hand if the company becomes more efficient, part of those gains should benefit the users either directly through for example tariff reductions, or indirectly by reducing the need for State funding. On the other hand, allowing the company to keep part of the efficiency gains provides it with an incentive to reduce its costs. The simple numerical example below based on the cost allocation method for the sake of simplicity illustrates that approach:

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1/ First step: definition of a simple efficiency mechanism Let s say that the expected revenue and cost, without any efficiency gain, for the SGEI provider (S) are: –

Expected revenue: EUR 100 million, Expected cost: EUR 200 million

–

Expected net cost = 200 – 100 = EUR 100 million

4.354

For this simplified example we also consider that the reasonable profit is 5 per cent return on sales, therefore it amounts to: Reasonable profit rate x Expected revenue = 5%*100 = EUR 5 million From an ex ante perspective, without efficiency gains, the compensation would amount to EUR 105 million leaving S with a profit of EUR 5 million. The Member State considers that S should be able to save 10 per cent of its costs (EUR 20 million) from efficiency gains and defines it as a target. It designs then the following mechanism: at the end of the period, S will receive a compensation equal to the incurred net cost + EUR 5 million adjusted in the following way: –

If S has reduced its cost by EUR 20 million, no adjustment;

–

If S has reduced its cost by more than EUR 20 million then it receives a reward corresponding to half of the extra-reduction;

–

If S has not reduced its cost by at least EUR 20 million, it will have a penalty of half of the extra-cost.

2/ Second step: ex post verification and adjustments Assuming that the incurred revenues are exactly EUR 100 million, the outcome then depends on the incurred costs of S (see Table 3 below)

4.355

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Table 3: Compensation amount and Profit of the SGEI provider Incurred Incurred Incurred revcosts net cost enues

Reward/Penalty

Compensation paid

Profit of S

100

180

80

No adjustment as S has just met the target

85 (80 +5)

5

100

160

60

S has exceeded the objective by EUR 20 million and receives a reward of EUR 10 million

75 (60+5+10)

15

100

200

100

S has missed the objective by EUR 20 million and receives a penalty of EUR 10 million

95 (100+5 - 10)

-5

4.356

In that example, the SGEI provider is incentivized to reduce its costs as to do so has a direct impact on its profit level. The State also benefits from the efficiency driving system, as it reduces the amount of compensation paid.

4.357

It is worth noting that the efficiency incentives can be implemented in the same way for the net avoided cost methodology (profitability cost approach) as for the methodology based on cost allocation:

4.358

Since the net avoided cost is equal to the difference between the profit of the counterfactual scenario (where the provider is not entrusted with the SGEI) and the profit of the factual scenario (where the provider is entrusted with the SGEI), efficiency gains made by the operator in the delivery of the SGEI which increase its profit in the factual scenario (by reducing its costs) mechanically reduce the net avoided cost.

4.359

Therefore, by factoring in future efficiency gains, Member States can reduce the level of net avoided cost, calculated ex ante that will be compensated, as indicated in paragraph 40 of the 2011 SGEI Framework.

4.360

Alternatively, Member States could for example also compensate the net avoided cost ex post and make the level of that compensation dependant on the achievement of efficiency targets.

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3.7.7 Overcompensation The 2011 SGEI Framework defines overcompensation as “compensation that the undertaking receives in excess of the amount of aid as defined in paragraph 21 for the whole duration of the contract” taking into account any existing efficiency incentive scheme.4142

4.361

Overcompensation constitutes incompatible State aid.4143 The new multi-annual contract/project oriented perspective of the 2011 SGEI Framework changes however the approach to overcompensation as compared to the 2005 SGEI Framework: while the latter requested an annual verification and recovery of overcompensation (with some limited possibilities to carry over the possible overcompensation),4144 the 2011 SGEI Framework only requests that checks are performed every three years4145 (two for certain measures “granted by means other than a public procurement procedure with publication”).4146

4.362

The 2011 SGEI Framework also clarifies that in cases where the efficiency incentives are imposed through an upfront payment incorporating efficiency gains, no verification based on ex post data would be necessary.

4.363

3.8 Additional requirements Relying on the last sentence of Article 106(2) of the Treaty, according to which “the development of trade must not be affected to such an extent as would be contrary to the interests of the Union”, the 2011 SGEI Framework opens the possibility for the Commission to impose conditions or request commitments to the Member States if, despite the fulfilment of all other compatibility conditions of the 2011 SGEI Framework, serious competition distortions remain unaddressed.4147 Paragraph 52 and 54 stress that such a need should only occur in exceptional circumstances, since the fulfilment of the other compatibility conditions provided for by the 2011 SGEI Framework is normally sufficient for the aid to be declared compatible.

4.364

4142 See para 47 of the 2011 SGEI Framework. 4143 See para 48 of the 2011 SGEI Framework. 4144 See para 21 of the 2005 SGEI Framework “Where the amount of over-compensation does not exceed 10 per cent of the amount of annual compensation, such overcompensation may be carried forward to the next year (...)”. 4145 See para 49 of the 2011 SGEI Framework. 4146 The 2011 SGEI Framework refers to in-house contracts, concessions with no competitive allocation, public procurement procedures with no prior publication. 4147 See paras 51-59 of the 2011 SGEI Framework.

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4.365

For example, paragraph 56 of the 2011 SGEI Framework sets out that: “Another situation in which a more detailed assessment may be necessary is where the Member State entrusts a public service provider, without a competitive selection procedure, with the task of providing an SGEI in a non-reserved market where very similar services are already being provided or can be expected to be provided in the near future in the absence of the SGEI. Those adverse effects on the development of trade may be more pronounced where the SGEI is to be offered at a tariff below the costs of any actual or potential provider, so as to cause market foreclosure (...)”

4.366

That paragraph seems to recall the situation mentioned in the 2012 bpost decision.4148 That decision arose out of a complaint from Belgian private press distribution companies against a press distribution agreement concluded between the Belgian authorities and bpost (called DPLP at the time).4149 The agreement entrusted bpost with the public service mission of press distribution throughout Belgium, and fixed tariffs for that service as well as the compensation bpost was entitled to receive for the extra costs incurred in fulfilling that mission. The complaint focused on the tariffs for bpost’s services, which according to the complainants, were so low as to effectively exclude any possibility of competition. The Commission opened the procedure following that complaint and adopted a final decision in January 2012. It is worth noting that in that final decision, adopted under the 2005 SGEI Framework, which did not contain such additional requirements, the Commission could not address the specific issue raised by the complainants, but rather focused on the verification that bpost had not been overcompensated over the assessment period.4150

4.367

Such a situation has clearly the potential to generate a serious distortion of competition, which cannot be addressed with a simple overcompensation test. Even if the SGEI provider is not overcompensated, the fact that it is subsidized to offer a service at a tariff that can never be matched by other providers practically has the effect of foreclosing that market in a similar way as the granting of an exclusive right to the SGEI provider.

4.368

In order to clarify to which situation that new provision refers to, and show that it does not unduly undermine the wide discretion of Member States in organising and providing SGEI, explicitly recognised by Protocol 26 to the Treaties, the Commission has provided a non-exhaustive list of situations in which the SGEI 4148 Already cited at footnote 4124. 4149 See recital 5 of the 2012 bpost Decision, already cited at footnote 4124. 4150 As a matter of fact, the Commission found that bpost had been significantly overcompensated (EUR 415 million) over 2006-2010.

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may have the potential to generate particularly serious competition distortions in the internal market. On top of the example given in paragraph 56, the 2011 SGEI Framework refers also to situations in which the Member States: –

bundle a series of tasks within the same SGEI mission without there being an economic justification (e.g. economies of scale): such bundling could for example unduly exclude some competitors from offering some of the SGEI tasks;

–

grant aid on the basis of an entrustment that hinders the implementation or enforcement of the Union legislation aimed at safeguarding the functioning of the internal market: for instance, in the energy sector, the Commission could examine whether an aid is necessary to ensure security of supply or whether security of supply could be ensured by implementing the provisions of the sectoral Union legislation;

–

provide aid financing the creation or use of a network that is not replicable and enables the public service provider to foreclose the market: that possibility has been evoked in certain decisions of the Commission and the Member States have provided specific commitments in that respect.4151

If the Commission considers that additional requirements may be necessary to ensure that competition is not excessively distorted and if those requirements are not offered as commitments by the Member State during the preliminary investigation, the Commission may open the formal investigation procedure to assess the necessity of imposing conditions in that respect.

4.369

In the 2014 Hellenic Post Decision,4152 Greece decided to establish a five-year compensation fund mechanism, requiring other providers of postal services active on the Greek market to contribute to the financing of the Universal Postal Service over 2016-2020. The Commission opened the formal investigation procedure because although most of the conditions of the 2011 SGEI Framework were fulfilled, the level of contributions requested from ELTA’s competitors raised serious competition concerns since they might prevent competitors from entering or remaining active in the market segments where the universal service obligations apply.

4.370

4151 See for example 2014 French La Poste decision (already cited at footnote 4085), recital 110-118 and 2013 bpost decision (already cited at footnote 4047), recital 193-197. 4152 Already cited at footnote 4066.

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4.371

In other postal cases, the Commission did not open the procedure as it considered that certain commitments made by the Member States, relating in particular to the possibility to obtain access to the subsidized postal network, ensured “that the exceptional circumstances that would require additional conditions are not present”.4153

4.372

The objective of the additional competition test under paragraphs 51 to 59 of the 2011 SGEI Framework is clearly not to unduly limit Member States’ discretion to define the set-up for SGEI compensation. It seems rather intended at mitigating specific competition concerns.

4.373

It is interesting to note in that respect that paragraphs 51 to 59 have not been included in the list of provisions that cannot apply to illegal aid granted before the entry into force of the 2011 SGEI Framework. It is doubtful that a measure entirely granted in the past could be declared incompatible because the Commission would consider that additional conditions would have been necessary when the aid measure was granted to avoid excessive distortions of competitions. Indeed, paragraph 53 of the 2011 SGEI Framework refers to the imposition of conditions or acceptance of commitments by the Member State and therefore seems to refer implicitly to new aid schemes or at least to schemes that are in the course of implementation, to which conditions and commitments can apply for the future.

3.9 Transparency 4.374

The 2011 SGEI Framework provides that for SGEI compensation falling within its scope, the Member State concerned must publish a number of information elements, including the amounts of aid granted to the undertaking on a yearly basis.4154 That measure is aimed at reinforcing transparency and improving compliance with the rules.

4153 See for example 2014 French La Poste decision (already cited at footnote 4085), recital 110-118 and 2013 bpost decision (already cited at footnote 4047), recital 193-197. 4154 See para. 60 of the 2011 SGEI Framework.

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3.10 Reporting and Evaluation The 2011 SGEI Framework requests Member States to submit to the Commission a periodic report on the implementation of the Framework every two years4155 which should in particular provide indications of the potential difficulties raised by the application of its principles.

4.375

By 31 January 2017, the Commission will undertake a review assessment of the 2011 SGEI Framework.4156

4.376

4155 See para. 62 of the 2011 SGEI Framework. 4156 See para. 65 of the 2011 SGEI Framework.

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PART 5 – Procedures Chapter 36 – Introduction Davide Grespan and Luca Rossi

PART 5 – PROCEDURES Chapter 36 Introduction State aid control has gained greater visibility amongst the policies of the Union in the past three decades. Until the end of the 1980s, Commission decisions requiring aid to be recovered were rare and aid procedures were characterised by exhausting negotiations between the Commission and the Member States.

5.1

The situation changed once the Commission began to examine the relations between public undertakings and the Member States. It is not a coincidence that when Mario Monti was appointed Competition Commissioner in 1999 he indicated that one of his main objectives was to ensure that State aid was strictly monitored.4157

5.2

At the European Council in Stockholm in 2001, the Member States committed themselves to reducing the level of aids as a percentage of GDP by 2003 and to redirecting aid towards horizontal objectives of Union interest, such as the strengthening of economic and social cohesion, employment, environmental protection and the encouragement of research and development.4158 Since then the motto “ less and better targeted” State aid has been reaffirmed several times by the Union’s institutions.

5.3

State aid control also received a considerable boost during the liberalisation process initiated in the telecommunications, energy and postal sectors from the late 1980s onwards. The purpose of that increased vigilance as regards State aid was to prevent the liberalisation process being undermined by the provision of public assistance to operators that were still in public ownership.

5.4

4157 See M. Monti, New Developments in State Aid Policy, speech of 1 December 2003 in Brussels to the British Chamber of Commerce. 4158 Presidency conclusions, Stockholm European Council, 23-24 March 2001.

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5.5

However, that new attention to State aid questions also required the adoption of a new procedural framework to ensure transparency and legal certainty and to rationalise and simplify procedures.

5.6

Those procedural rules were implemented in 1999, with the adoption of Council Regulation (EC) No 659/1999 (the Procedural Regulation ).4159 The General Court has stated that Regulation 659/1999 is a procedural regulation and, in particular, that Chapter III, entitled Procedure regarding unlawful aid contains procedural rules which, as such, apply to all administrative procedures pending at the time when the Procedural Regulation came into force.4160 Prior to the adoption of the Procedural Regulation, a detailed corpus of procedural rules had been developed over several decades through cases in which the Union Courts interpreted Article 108 of the Treaty and the Commission’s decisional practice implementing that jurisprudence. The Procedural Regulation was largely a codification of that corpus. In that respect, the Court of Justice has observed that “[the Procedural Regulation] is largely a measure codifying in detail the interpretation of the procedural provisions of the Treaty on State aid laid down by the [Union] judicature prior to the adoption of that regulation”.4161

5.7

As provided for by Article 27 of the Procedural Regulation, in 2004 the Commission adopted Regulation (EC) No 794/2004 (the “Implementing Regulation”).4162 That regulation contains rules on notifications and annual report forms, calculation of time limits,4163 and of the interest rate for recovery of unlawful aid. 4159 Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L 83, 27.03.1999, p. 1. 4160 See Case T-369/00 Département du Loiret v Commission ECLI:EU:T:2003:114, para 50. That characterisation should not be taken to imply, however, that all the provisions are procedural. For instance, it seems unlikely that the provisions of Chapter I defining the terms used in the Procedural Regulation can be classified in that way. 4161 Case C-400/99 Italy v Commission ECLI:EU:C:2005:275, para 23. See also Case C-139/07 P Commission v Technische Glaswerke Ilmenau ECLI:EU:C:2010:376, para 55: “ it should be noted that, according to recital 2 thereof, Regulation No 659/1999 is designed to codify the consistent practice of the Commission in applying Article [108 of the Treaty], that practice having been developed and established in conformity with the case-law”. 4162 Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No. 659/99 laying down detailed rules for the application of Article 88 of the EC Treaty, OJ L 140, 30.04.2004, p. 1. 4163 See Article 8 of the Implementing Regulation which provides that time limits in State aid matters shall be calculated in accordance with Regulation (EEC, Euratom) No 1182/71 of the Council of 3.06.1971 determining the rules applicable to periods, dates and time limits as supplemented by the specific rules set out in Regulation 794/2004. The starting point with regard to time limits for action by the Commission is the receipt of the notification or subsequent correspondence in accordance with Article 3 of the Implementing Regulation. The receipt of the relevant notification or correspondence from the Commission is the starting point for time limits for action by the Member States.

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1.

The 2005 State Aid Action Plan

The increasing importance of State aid discipline was further confirmed by Commissioner Neelie Kroes. During her mandate, in July 2005 the Commission adopted the State Aid Action Plan ( the Plan ). The Plan was an ambitious and coherent project heralding a far-reaching reform of State aid law aiming at the objective of less and better targeted State aid. The Plan aimed to reform State aid policy so as to to contribute directly to the renewed Lisbon Strategy.4164

5.8

Among the declared objectives of the Plan were “more efficient procedures, better enforcement, higher predictability and enhanced transparency”. To achieve those objectives, in 2009 the Commission adopted the so-called Simplification Package, which included the Simplified Procedure Notice4165 and the Best Practices Code (the “BPC”).4166 In the same year, the Commission also adopted the so-called Enforcement Notice,4167 by means of which it tried to revamp the role of national courts in enforcing State aid rules, while also redisigning the instrument of cooperation between national courts and the Commission that had already been outlined in its 1995 Communication.4168

5.9

All those instruments tried to address the perceived shortcomings of State aid procedures à droit constant. However, it soon appeared necessary to proceed one step further in the modernisation process, namely by amending the Procedural Regulation itself.

5.10

2.

The 2012 State Aid Modernisation

On 8 May 2012, the Commission adopted a Communication which officially launched a substantial reform of the State aid framework: “The State aid modernisation” (SAM).4169

5.11

4164 See European Commission, State Aid Action Plan: Less and Better Targeted State Aid: a Roadmap for State Aid Reform 2005-2009, SEC(2005) 795. See also the speech by Commissioner Neelie Kroes: “The State Aid Action Plan – Delivering Less and Better Targeted Aid”. Both documents can be downloaded at the following address: http://europa.eu.int/comm/competition/state_aid/others/action_plan. 4165 Commission Notice on a Simplified procedure for the treatment of certain types of State aid, OJ C 136, 16.06.2009, p. 3. 4166 Commission Notice on a Best Practices Code on the conduct of State aid control proceedings, OJ C 136, 16.06.2009, p. 13. 4167 Commission notice on the enforcement of State aid law by national courts, OJ C 85, 09.04.2009, p. 1. 4168 Notice on cooperation between national courts and the Commission in the State aid field, OJ C 312, 23.11.1995, p. 8. 4169 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, EU State Aid Modernisation (SAM), 8.05.2012, COM(2012) 209 final.

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The three declared objectives of that initiative were: (i) to foster growth in a strengthened, dynamic and competitive internal market; (ii) to focus enforcement on cases with the biggest impact on the internal market; and (iii) to achieve streamlined rules and faster decisions.

5.13

The planned revision of the Procedural Regulation was one of the building blocks of the State aid modernisation package. In that context, the SAM Communication announced that the Commission would initiate: “A modernisation of the State aid Procedural Regulation with regards to complaint-handling and market information tools, in order to enable the Commission to better focus its action on cases which are most relevant for internal market”.4170

5.14

The Commission set out two main objectives for that revision. First, the Commission declared that the new provisions would enable “the Commission to set priorities for complaints handling, in order to prioritise allegations of potential aid with a large impact on competition and trade in internal market”.4171 Second, they would enable “the Commission [...] to effectively investigate cases of aid with significant impact, [endowing it] with more efficient tools to obtain all the necessary information from market participants and in good time so as to deliver decisions within business relevant timelines”.4172

5.15

In pursuit of those objectives, in December 2012 the Commission adopted a proposal for a Council regulation amending the Procedural Regulation which focused mainly on two areas of intervention, namely new rules for the handling of complaints and new instruments allowing the Commission to obtain complete and correct information from the market (the so-called market information tools and sector inquiries). It also provided for new instruments of cooperation between the Commission and national courts applying State aid rules.4173

5.16

Unlike the original provisions of the Procedural Regulation, the new provisions do not codify previous case-law or Commission practice. They aim at genuinely altering the State aid legal framework and appear to be inspired by the experience gained by the Commission in the field of anti-trust.

4170 4171 4172 4173

Paragraph 23. Ibidem. Ibidem. Proposal for a Council Regulation amending Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, COM/2012/0725 final - 2012/0342 (NLE).

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On 22 July 2013, the Council adopted Regulation 734/2013,4174 largely reflecting the Commission’s proposal, which entered into force on 20 August 2013.

5.17

In the following chapters, all references to the Procedural Regulation, save where otherwise specified, are to be intended as referring to Regulation 659/1999 as amended by Regulation 734/2013.

5.18

4174 Council Regulation (EU) No 734/2013 of 22 July 2013 amending Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L 204, 31.07.2013, p. 15.

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PART 5 – Procedures Chapter 37 – Definitions Davide Grespan and Luca Rossi

Chapter 37 Definitions

1.

Brief remarks on the concept of “aid”

Aid is referred to in Article 107(1) of the Treaty. In order for a measure to constitute aid the following conditions must be satisfied: –

the measure must be granted in any form whatsoever by the State or through State resources;

–

it must favour certain undertakings or the production of certain goods (selective advantage);

–

it must distort or threaten to distort competition;

–

it must have an effect on trade between Member States.

The concept of aid is objective and includes all measures that fulfil those conditions. The case law defining the content of those conditions is constantly evolving, not least as a result of the ever more sophisticated means to which Member States resort in order to grant support to particular undertakings or types of production. If one of the conditions is not satisfied, the measure does not constitute State aid within the meaning of Article 107 of the Treaty and, consequently, the rules on State aid do not apply to it.

5.19

5.20

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Even if those conditions are satisfied, the measure must also be imputable to the authorities of the Member State in order to constitute aid.4175 The question of imputability arises when the measure in question is not adopted by a public authority but by a public undertaking. However, even measures which grant an advantage and which are imputable to the Member State do not constitute State aid unless they are financed by State resources.4176

2.

The definition of existing aid

5.22

Article 1(a) of the Procedural Regulation does not contain an autonomous definition of State aid, but sipmly refers to Article 107(1) of the Treaty, by stating that: “‘aid’ shall mean any measure fulfilling all the criteria laid down in Article [107](1) of the Treaty”. Instead, Article 1 sets out the definitions of all different types of aid for the purpose of the application of that regulation. The first type