Executive Summary:
- State aid is appropriate if other less distortionary policy instruments are not as effective.
- Access to subsidised sport infrastructure must be open to all users on transparent and non-discriminatory terms.
- Payment of market rent or price ensures that no state aid is passed on to the users of a subsidised sport infrastructure.
Table of Contents:
- Introduction
- Background
- Costs and amount of investment aid
- Need for state aid
- Presence of state aid
- Lawfulness of the aid
- Compatibility with the internal market
- Conclusions
Introduction
Article 55 of the GBER allows state aid for sport and multifactional infrastructures such as stadiums. The aid can cover both the initial investment and the annual operating costs. However, aided sport infrastructure may not be used exclusively by a single professional team. Also, when investment aid exceeds EUR 33 million or the annual operating aid exceeds EUR 2.2 million, the aid measure has to be individually notified to the European Commission.
Recently, Germany notified a measure for the support of construction and operation of a new stadium with capacity of 15,000 spectators in Oldenburg, in Lower Saxony, because the aid exceeded the thresholds defined in Article 4 of the GBER. The measure was approved by the Commission in decision SA.122175.1 The stadium is intended to function as a venue primarily for professional football matches and other sports activities but also for cultural and social activities.
The Commission decision illustrates well the wide range of issues that determine the compatibility of state aid with the internal market. Not only must state aid be necessary and proportional, but it must also be an appropriate instrument for the achievement of the policy objective of the aid measure. It must be more effective and less distortionary than other instruments that may be deployed by the aid granting authority.
Background
In Oldenburg there is an old stadium, the Marschweg-Stadion, which was built in 1951. Although it has been renovated several times since it opened, it is now antiquated and neither fit, nor safe for large-scale sport events. The operation of the stadium is handicapped by the following problems and capacity constraints:
- Non-compliance with the German legal and technical standards for 3rd division football.
- Noise restrictions [e.g. events cannot start after 18.30].
- Shortage of parking.
- Need for traffic closure [large events require closure of a nearby motorway exit, resulting in significant traffic disruption].
- Inadequate public transport.
- Insufficient space and no access roads for police and fire services.
- The stadium is in a residential area. Matches and other events regularly lead to restrictions for residents.
The Commission decision mentions that the city council rejected the option of renovation because the capacity constraints were due to the location of the stadium. So, relocation and construction of a totally new stadium were considered unavoidable. Several feasible locations were examined and the most suitable was deemed to be that of “Maastrichter Straße”.
Costs and amount of investment aid
The construction costs are estimated at about EUR 68.1 million, including a provision of EUR 6.2 million for possible increases in construction costs [the provision is equivalent to 10% of construction and equipment costs]. In addition, the value of the municipal land on which the stadium will be built is about EUR 7.4 million. Therefore, the total amount of investment aid is EUR 75.5 million. However, as explained below, the city will also grant operating aid.
Need for state aid
The Commission decision explains that aid is necessary “(19) because a private undertaking would not construct and/or operate a stadium in Oldenburg. This is because the costs of constructing and operating the Stadium could not be fully covered. Thus, according to the German authorities, aid is to be granted in the form of investment aid for the construction as well as operating aid for the operation of the Stadium from the time of completion … [because] there was no investor willing to invest in the project.”
In addition, “(20) the German authorities explained that the Stadium not only addresses a structural shortcoming in the City of Oldenburg’s infrastructures by filling a long-standing gap and providing an attractive venue for hosting sporting and, secondarily, non-sporting events. It also strengthens social cohesion: major sporting and also non-sporting events create experiences that foster a sense of identity, encourage voluntary work and provide shared spaces where people of different generations and social backgrounds can come together. Moreover, it has far-reaching positive effects on the economy and society of the City of Oldenburg and, beyond that, on the surrounding area: the availability of a modern stadium promotes local economic growth by attracting both local and supra-regional events, thereby boosting tourism and associated spending in the City of Oldenburg and the surrounding area. The indirect benefits include the newly created demand for the maintenance and upkeep of the Stadium and its grounds, car park management as well as catering and security services for events. These spillover effects will boost local businesses as well as small and medium-sized enterprises operating in the fields of event organisation, hospitality and tourism, thereby promoting regional economic growth and sustainable employment.”
I must say, however, that such direct and indirect effects are largely inherent and almost always present in infrastructure projects of this size, especially when no similar infrastructure exists nearby.
At any rate, the financial projections of the city indicated that operating costs would exceed operating revenue. This implies that the funding gap of the project over its economic life is larger than the investment costs [construction & equipment costs]. Therefore, the amount of investment aid of EUR 75.5 million fully covers the construction and equipment costs.
The investment aid will be delivered in the following three forms:
- Equity injection of EUR 15 million into Stadion Oldenburg which is the beneficiary. Stadion Oldenburg is a company 100% owned by the city of Oldenburg.
- State guarantee to secure debt financing for the construction of the stadium, having a value of EUR 53.1 million.
- Free transfer of the land on which the stadium will be built with an estimated market value of EUR 7.4 million.
Since operating costs will exceed operating revenue, the stadium will also require operating aid in order to be able to remain commercially viable when it starts operations.
Given that the stadium will be mostly used by the local football team, the extent of the annual budgetary deficit will depend on the results of the team. The rent that it will pay to Stadion Oldenburg will depend on the number of tickets that will be issued and that in turn will depend on the footballing success (of failure) of the team. The revenue from the rent is estimated to vary between 38% and 50% of total receipts. If the team remains in the 3rd German division, the stadium will attract more visitors than if the team is relegated to the 4th division. Therefore, the annual deficit is estimated to range between EUR 2.5 million and EUR 3.5 million. The exact amount will be determined annually and paid by the city to Stadion Oldenburg in the form of annual grants.
“(27) The German authorities further highlighted that VfB Oldenburg [the local football team] is expected to be one of the few users engaging in economic activities, from whom a market-based usage fee must therefore be charged. In the case of other users who do not carry out economic activities (e.g. use for amateur sport or social activities), the Company may, from a State aid perspective, charge lower usage fees”.
This indicates that although the stadium will be used primarily by VfB Oldenburg, it will not have an exclusive right of use. Other users performing economic activities [e.g. concerts] will be charged rents that will correspond to market rates and will be applied on transparent and non-discriminatory terms.
Presence of state aid
The beneficiary – Stadion Oldenburg – will exploit commercially the stadium. Therefore, it is an undertaking and the public support it receives in the form of equity, guarantee and free land constitutes state aid. It is funded by state resources, it confers a selective advantage, and it is liable to affect trade and distort competition. That the public support confers a selective advantage is easy to understand. But it is not so obvious why it is also liable to affect trade.
The Commission explains that Stadion Oldenburg “(53) is entrusted with the operation of the Stadium, which is used to host sporting and, secondarily, non-sporting events … These activities have an economic dimension insofar as the Stadium is rented against payment of a rental fee … To that extent, the Company competes, at least potentially, with other operators managing comparable facilities in Germany or other Member States for the hosting of similar events. The construction of the Stadium financed under the aid measure is therefore liable to strengthen the Company’s position, enabling it to attract events and to operate under better economic conditions than comparable facilities that have not benefitted from such public investment. The Commission therefore concludes that the aid measure is liable to distort competition.”
“(54) Moreover, sporting and non-sporting events hosted at the Stadium may attract participants, organisers, sponsors and audiences from other Member States, considering that the market for such events is open to operators established across the Union. The Commission therefore considers that the aid measure is liable to affect trade between Member State.”
The reasoning of the Commission the affectation of trade is not really robust. A local team will not play its home matches in the stadium of a different city. Even if it could, it would likely to be difficult as a result of scheduling conflicts. VfB Oldenburg’s own experience in playing in a stadium in Hannover confirms that. Most users are also likely to be local. Of course, some non-local concert or cultural event organisers may be induced to organise performances and events at the stadium. The question is whether they and foreign visitors represent more than a marginal proportion of potential users, given that the nearest international border is about 100km away.
There are also two other possible beneficiaries of the aid: VfB Oldenburg and the company that will construct the stadium. The Commission explained that they would not receive state aid. “(45) The local football club does not qualify as a beneficiary for two main reasons. First, it will pay a market rental fee determined on the basis of an independent assessment … Second, it will not have a general preferential access to the Stadium, but only a preferential consideration before and after matchdays; considering that the football match schedule is set at the beginning of each sporting season by a third party (i.e. the league organiser) and that the football club will be the main relative contributor to the revenues of the beneficiary, VfB Oldenburg does not qualify as a beneficiary.”
“(46) The Commission also notes that the construction company does not qualify as a beneficiary of the aid measure because it was selected via a competitive procurement procedure. Therefore, the outcome of such a process can be regarded as in line with market conditions and excludes the existence of aid to the construction company.”
A comment is in order here. Competitive selection eliminates advantage. This is the principle in the case law too. But, the “market” price paid by the user of a heavily subsidised infrastructure is a nebulous concept. In theory, the market price for the use of any asset is that which at minimum covers its full costs over its economic life. This is not the price that VfB Oldenburg will pay. So probably, it will pay the rent that it would otherwise pay at an alternative stadium. But that too is not the rent that would be charged by a private stadium operator. This is because the football team will derive extra benefits from playing more matches at its home stadium rather than at an away stadium [e.g. higher attendance, more local sponsorships, less transport and accommodation expenses, etc]. Will Stadion Oldenburg try to extract from VfB Oldenburg those extra benefits through higher rent?
Lawfulness of the aid
Because the contractor was chosen before the measure was notified to the Commission, it was necessary for the Commission also to determine the lawfulness of the aid.
“(58) The Commission notes that the award of the public contract for the construction of the Stadium does not, in itself, constitute an infringement of the standstill obligation laid down in Article 108(3) TFEU, provided that the disbursement is expressly made conditional upon the Commission’s final approval of the aid measure. In such circumstances, the granting authority did not confer an irrevocable economic advantage on the selected operator, as the effectiveness of the award and any related financial commitments remained suspended pending a final decision by the Commission on the compatibility of the aid measure. The standstill obligation prohibits the implementation of aid measures prior to Commission approval; however, preparatory steps, including procurement procedures, do not amount to implementation where they do not entail the definitive granting of the aid. Since in the present case, the final award and any corresponding funding obligations are subject to a suspensive clause linked to the Commission’s authorisation under Article 108(3) TFEU, the award of the construction contract does not, as such, breach the standstill obligation.”
Compatibility with the internal market
With respect to the positive effects of the aid, the Commission notes that “(81) first, the Stadium addresses a deficiency in Oldenburg’s infrastructure by making available to the City a modern Stadium that complies with modern safety and sport competition requirements and which is not affected by the restrictions of the existing Marschweg-Stadion”.
“(82) Second, … the Stadium serves important social and community functions. … Accordingly, public measures facilitating access to modern sports infrastructure and enabling the organisation of sporting and community activities contribute to the achievement of objectives expressly recognised under the Treaties.”
“(83) Third, the Stadium generates wider spillover effects for the economy and society, by attracting visitors, thereby boosting tourism and associated spending in the City of Oldenburg and the surrounding area, and by creating demand for the maintenance and upkeep of the Stadium and its premises. These spillover effects will have positive effects on local businesses, especially small and medium-sized enterprises, thereby promoting regional economic growth and sustainable employment”.
“(84) Fourth, the aid measure significantly contributes to the development and sustainability of the local sports sector. … This use enhances the development of sport by providing access to a high-standard facility that meets modern safety and competition requirements.”
The aid also has an incentive effect because “(72) the restoration of the Marschweg-Stadion would neither ensure compliance with safety standards nor be economically viable. The restoration could not address the structural deficiencies of the existing stadium nor the inherent limitations due to its location … Consequently, only the construction of a new stadium, as financed under the aid measure, can ensure the operation of an attractive venue in Oldenburg; and the construction of the Stadium would not be undertaken without public support”.
“(73) Also operating aid has an incentive effect, because – based on the business plan – the operating costs associated with the Stadium are expected to exceed the revenues that can reasonably be generated from its operation. In particular, while users engaged in an economic activity will be required to pay a market-oriented rental fee, certain categories of users pursuing non-economic activities – such as organiser of event of amateur sport or social events – may be granted access on terms below market conditions. As a result, the expected operating revenues are unlikely to cover the costs of managing and maintaining the Stadium, thereby proving the existence of an incentive effect of operating aid, considering that, in the absence of this aid, the continued management and availability of the Stadium would not be possible.”
The aid is also necessary from a public policy perspective. That is, there is a need for the state to intervene for the following reasons. “(89) The provision, maintenance and upgrading of major sports venues serving a wide range of sporting events form part of the responsibilities of the State in pursuit of objectives of general interest”. In this connection, Article 165 TFEU is relevant.
“(90) The aid measure seeks to address the absence in the city of Oldenburg of an attractive venue for professional football matches and others sports, and, secondarily, for social and cultural activities, which complies with current competition, safety and comfort standards”.
“(91) The existing Marschweg-Stadion, built in 1951, has become structurally and functionally obsolete, with major safety and compliance deficiencies, which could not be by a mere renovation of the stadium … the availability of a modern stadium in the city of Oldenburg is needed to ensure compliance with the licensing requirements for hosting football matches … as well as to ensure availability of a modern stadium … without the significant restrictions that affect the use of the existing stadium”.
“(92) The public intervention also addresses a clear market failure. … the construction and operation of the Stadium does not present an attractive business case to private investors, thus there was no investor willing to invest in the project.”
“(93) As concerns the operating aid, the German authorities provided a business plan, showing the expected annual deficits, which would mainly depend on the league membership of the local football club … The business plan shows that operating aid is necessary, because in the absence of aid the operation of the Stadium would not be possible.”
The aid is also appropriate because a new stadium has to replace the obsolete old stadium for which renovation cannot remedy structural weaknesses and spatial constraints. The use of other stadiums, such as those in Hannover, by the local football club is not a viable solution. Hannover is 180 km away from Oldenburg.
The aid is proportional because it does not exceed the minimum necessary for the initial investment and the forecast subsequent annual deficits. Since, the precise annual deficits cannot not be estimated with any precision, a claw-back mechanism is also foreseen. If instead of operating loss, the stadium succeeds to realise an operating profit, it will be recovered by the city.
The possible negative effects of the aid on trade and competition were assessed by the Commission in a rather general and abstract fashion in a mere two paragraphs [109 & 110], similarly to its assessment of the presence of effect on trade and distortion of competition in the context of Article 107(1) TFEU.
More puzzling is the last sentence of paragraph 110 on the potential negative effects of the aid: “The Commission therefore cannot exclude that the operating aid may give rise to distortions of competition exceeding those inherent in the pursuit of the common objective pursued by the aid measure.”
But, according to the case law of the Court of Justice, any distortion which goes beyond those which are “inherent” in an aid measure are necessarily “contrary to the common interest” in the meaning of Article 107(3)(c) TFEU. Yet, later on the decision states that “(109) the Commission considers that any effects of the aid measure on trade between Member States are likely to be limited, considering the relatively limited capacity of the Stadium and the availability of many bigger stadiums in Germany and in neighbouring Member States. In these circumstances, the Commission considers that any such effects are likely to be limited and that the risk of significant distortions at Union level is correspondingly low.”
Conclusions
This case illustrates well that the Commission, correctly, takes into account not only the need and the proportionality of aid in financial terms, but also the broader issue of the possible alternative solutions to the problem that state aid seeks to address. In this case the options of renovation instead of relocation and the use of alternative stadiums were considered and rejected. However, this case also reveals that the Commission sometimes struggles to identify the potential harm of the aid on competition and its impact on cross-border trade. Instead of demonstrating their likelihood, it hypothesises that negative effects cannot be excluded. It is reasonable to expect that aid will have some negative effect. The question is whether it goes beyond what is inherent is the development of the economic activity that is allowed by Article 107(3)(c).
