Competitive Elements in the Selection of Operators of Sports Infrastructure May not Be Enough to Eliminate State Aid

sport arena seats
The existence of an advantage cannot be excluded when the operator of an infrastructural facility is chosen through a competitive procedure which combines price with other selection criteria. The users of a subsidised infrastructural facility who pay a market fee may still derive an advantage when the facility is designed and/or reserved for certain usage.

Introduction
 
Ever since the Leipzig-Halle judgment on construction of infrastructure, public authorities – especially those at regional level owning infrastructure such as ports, airports and stadiums- have been trying hard to figure out when the use of their funds can be classified as State aid. 

The European Commission, through its decisional practice and its formal guidelines, has developed a few rules of thumb. The Commission also has been at pains to point out that there can be no fast and ready rules because the case law on State aid requires it to consider all relevant facts of each case. This is fair enough.

Commission practice, however, suggests that, in general, i) there is no State aid when the operator/manager and the constructor of infrastructure are chosen competitively, ii) if there is aid, the necessity and proportionality of the aid are established through the “funding gap” method which calculates the difference between the discounted costs [investment and operating] and discounted revenue and iii) users of infrastructure are presumed not to benefit from State aid when the operator/manager charges market rates.

In this article I examine Commission Decision SA.37373 concerning the renovation of the ice arena “Thialf” in Heerenveen in the Province of Friesland (Netherlands).[1] It is an unusual case because the amount of aid is 100% while the operator/manager and users are presumed to obtain an advantage despite competitive selection. The assessment of the Commission in this case differs significantly from the more robust analysis in a number of port, airport and arena projects, some of which have also been examined in this blog.

The beneficiary and project

The Provincial Council of Friesland wants to contribute to the renovation and improvement of the ice arena Thialf. The arena is situated in the municipality Heerenveen, which is part of South East Friesland, a region eligible for assistance under Article 107(3)(c).

The beneficiary is Thialf Onroerend Goed BV, which is responsible for the operation of the ice arena through its subsidiary Thialf BV. The municipality of Heerenveen has one third of the shares of Thialf OG BV, whereas the Province has a two third share of the company. Therefore, Thialf OG BV, a private limited liability company, is 100% government-owned.

Renovation is necessary because the current ice arena is no longer suitable in terms of climate control and energy provisions, training facilities and facilities for the general public, the media and sponsors.

The notification indicates that Thialf is one of 23 ice arenas currently established in the Netherlands and one of the four ice arena locations in the Province of Friesland. The Thialf arena is predominantly used for long track (400m) speed skating. This Olympic sports discipline is practiced in only a few countries but forms the most prominent winter sports activity in the Netherlands. According to the Dutch authorities, the importance of ice skating for the Netherlands is furthermore reflected in the dominant presence of Dutch companies in sponsorship agreements for international skating events [paragraph 16].

According to the Commission, the Dutch authorities argue that public support is necessary as the exploitation of ice arenas is subject to “market failure” and have put forward several reasons for the lack of market viability of ice arenas:

“a. Ice arenas are expensive to realise and maintain both in general terms and with regard to maintenance of the ice.

b. Long track skating is a sport of limited size, which makes it impossible to cover the costs of the ice arena by offering training facilities to sports teams.

c. The recreational usage of an ice arena is not a profitable activity either. The Dutch authorities estimate that [Thialf’s] admission prices would have to increase by 800% to make a profit, with expected detrimental effects on the demand side.

d. The particularities of an ice arena make it difficult to use the ice hall for other events during the ice skating season” [paragraph 8 of the Decision].

None of these four arguments proves market failure. They merely indicate that the arena is costly or that the demand for its services is low. Market failure occurs when the social [i.e. collective] cost of a good or service is not equal to its social [i.e. collective] benefit. If, for example, the social benefit is higher than social cost, then the market under-provides. In the case of the ice arena, none of the arguments prove that the collective benefits exceeded the collective costs.

In fact, the Dutch authorities indirectly undermine the robustness of their own arguments by further claiming that there is “limited population density in the region” [i.e. low demand] and that in relation to multifunctional facilities there are other “existing facilities in the region” and that “the area does not have a shortage in terms of cultural, congress or retail facilities”. In other words, the Dutch authorities want to establish facilities which the market can determine to be uneconomic because alternative facilities already exist and there is not enough users willing to pay for a new facility. This, of course, is not market failure. It is the market functioning efficiently.

Apparently “it is the ambition of the Dutch authorities to make Thialf the fastest sea-level skating track of the world, thereby ensuring its continued “A” status at the International Skating Union (ISU). Moreover, the Dutch authorities argue that this modernisation would increase the general attractiveness of ice skating in the Province and in The Netherlands. This will reflect on the amateur usage of the ice arena, which is the predominant type of usage at Thialf” [paragraphs 10 & 11]. If this indeed is the intention of the Dutch authorities, the question is why the comparison is made with existing but obviously very dissimilar facilities which are of lower grade and capacity. For example, later on in the Decision it is mentioned that professional users of the arena are considered to be undertakings because, amongst others, they organise competitions, sell broadcasting rights and secure corporate sponsors. It is unlikely that other smaller arenas in the area have similar sources of income. Therefore, one also wonders why the revenue from the improved status of the arena is not taken into account in the calculation of the amount of State aid that is needed for the renovation [see below].

It may be true that, as the Dutch authorities prove through expert studies, the arena would create jobs and would stimulate economic activity in the region. However, this is an issue concerning the rationale for state intervention, not whether the project could be self-financing.

The aid measure

The aid for the renovation of Thialf will consist of a direct grant of EUR 50 million, corresponding to an aid intensity of 100% (!)

Thialf OG BV will set up a European restricted procedure to select the building company that will renovate the infrastructure. According to Directive 2004/18 on public procurement, in a restricted procedure any economic operator may request to participate and only candidates invited to do so may submit a tender. There must be a minimum of five candidates.

Interestingly, the notification mentions that in preparation of the public procurement procedure and subsequent renovation of Thialf, the Province Friesland has agreed to provide limited preliminary financing through a loan of EUR 1 million. This amount will be deducted from the grant of EUR 50 million. The loan is granted on market terms, with an interest rate set at 10.56% [the rate of 10.56% corresponds to the highest reference rate in the 2008 Communication on the method for setting reference and discount rates. It equals the base rate of 0.56% (Commission notice on recovery rates and reference/discount rates of November 2013) to which 1000 basis points are added (as applied to companies with low creditworthiness and low collateralisation)]. “Therefore, the Commission considers that this preliminary financing is not in contradiction with the so-called stand-still clause, whereby the aid granting body commits not to grant any aid until the Commission has cleared it” [paragraph 33].

In terms of the organisational and financial structure of the ice arena, there will be a distinction between the ownership and operation of the infrastructure. Thialf OG B.V. will organise a separate European restricted procedure to select the party that will operate the renewed Thialf complex.

The tender procedure regarding the operator agreement “will be based on objective requirements to be established in advance. The price paid for the exploitation of the ice arena will be one of the criteria applied” [paragraph 37]. The operating company chosen on the basis of these criteria will pay an exploitation fee to Thialf OG B.V. The fee will be used to finance the maintenance of the infrastructure and the capital charges.

The operating company will be subject to a number of usage obligations. “In this way, the Dutch authorities aim to ensure that the arena remains predominantly used for ice skating purposes. The arena will in particular have to be made available for: international and national competitions; training for professional skating teams from The Netherlands or abroad; training for amateurs, in particular those from within the region; recreational sports use; skating in a school context. The relative weight of each of the usage types has not yet been determined. Yet the Dutch authorities have guaranteed that the renewed arena will be used more than 80% for skating purposes. Within the boundaries of this framework of usage obligations, the exploitation can be organised in view of revenue maximisation” [paragraphs 37-38].

It can be inferred from this description of the procurement procedure that the operator will be chosen on the basis of an open and competitive selection and that the obligations that will be imposed on the operator appear to make the arena less attractive because they will limit the discretion of the operator to use it in ways that maximises revenue. The exploitation fee is one of several selection criteria which are not mentioned in the Decision. This is unfortunate because it appears that they had a decisive influence on the assessment of the Commission.

Existence of aid

The Commission bases its finding that the measure contains State aid on several precedents, which are cited in the Decision.[2] There is no doubt that Thialf OG B.V. enjoys an advantage and therefore receives State aid. The question is whether the operator, the constructor and the users also obtain an advantage.

As is now standard practice, the Commission considers that both the construction and operation of an infrastructure constitute economic activity. Therefore, the constructor and the operator are undertakings.

The constructor, who will be chosen through a restricted procedure resulting in competitive selection, is considered not to receive State aid.

With respect to the operator, the Commission notes that “although the procurement procedure minimises any potential advantage to the selected operator, the facts of the case do not allow the Commission to ensure that the operator will pay a consideration comparable to what would apply on normal market terms. An advantage to the operator of the renovated ice arena cannot be excluded” [paragraph 48].

Given that public authorities, especially at regional level, often have difficulty applying procurement rules properly, it is unfortunate that the Commission does not bother to explain why the operator may obtain an advantage. It is even more unfortunate because the same procedure is used for the selection of both constructor and operator [restricted procedure], but surprisingly they lead to different results.

The fact that the operator will be under specific usage obligations implies that the commercial attractiveness of the arena is reduced. There is a disadvantage here, but, by contrast, the selection criteria could be such that they give an edge to certain undertakings over others [e.g. extensive experience in the management of top class skating facilities]. There are two conflicting issues and the Commission should have been more explicit how it took them into account.

With respect to the users of the ice arena, the Commission makes a distinction between professional and non-professional, and considers the former to qualify as undertakings. This is because, amongst others, they organise competitions, sell broadcasting rights, and conclude sponsoring agreements with regard to these events.

It then goes on to observe that “the renting of the arena may furthermore constitute aid for the users, insofar as they are undertakings and if the rent they pay is below the level that would apply for the use of similar facilities on normal market terms. The Dutch authorities impose usage obligations with which the operating company will have to comply in order to ensure that several types of users will be able to benefit from the ice skating facilities. However, the Dutch authorities have explained that there will be no usage requirements linked to a specific professional sports user. The Thialf arena is open to all professional users on the basis of a market oriented fee. The same goes for other users (e.g. when organising business events). However, the facts of the case do not provide sufficient evidence that the fee paid by undertakings using the infrastructure would in no case be lower than the fee for the use of comparable infrastructure under normal market conditions. It can therefore not be excluded that an advantage may be granted to users in some cases” [paragraph 49].

Once again, not enough explanation is provided. There are two contradictory pieces of information in the Decision. On the one hand, the operator is expected to maximise revenue. It will have a strong incentive to keep prices at or even above market level. This will not be to the advantage of users. On the other hand, the usage of the arena is prescribed by prior regulations. Even if it is assumed that the operator will charge a fee that will reflect the demand of the privileged users, it could still be the case that market forces would have driven the fee to an even higher level if the arena were open to all possible users.

Compatibility assessment

At the outset, the Commission accepts the Dutch views that the renovation of the ice arena satisfies policy objectives of public interest.

The fact that the arena is to be used for specific purposes is one of the reasons for which the Commission cannot exclude the existence of advantage for professional users. Yet, when it comes to assessing the compatibility of the aid, this is a positive factor. “The usage obligations with which the operating company will have to comply ensure that several types of users will be able to benefit from the ice skating facilities. The renovation, with public support, of the ice arena will therefore benefit professional and amateur sports as well as the general public.” This is an interesting but not surprising statement. It is in conformity with the decisional practice of the Commission that policy objectives which are irrelevant under Article 107(1) may in fact be decisive for a finding that aid is compatible under Article 107(2) or (3).

Then the Commission turns its attention to the issues of necessity and proportionality of the aid. “The aid is necessary as it addresses the specific problem of under-investment in sports infrastructure. […] the exploitation of ice arenas is not possible without public support, at least in the case of stand-alone ice arenas. […] The existing ice skating facilities have become outdated, but private investors are not willing to take up the risks associated with renovating and exploiting Thialf” [paragraph 58]. It should be noted that the necessity of aid is asserted rather than proven through a proper cost-benefit analysis, as in other cases of public funding of infrastructure.

There are no surprises with respect to proportionality. “By making use of European restricted procurement procedures for respectively the renovation and subsequent exploitation of the ice arena, the Dutch authorities have ensured that the aid measure is proportionate. Within the framework of the usage obligations, the operating company is enticed to aim for revenue maximisation and to propose an exploitation fee in line with market conditions. In the absence of specific usage requirements linked to a particular user, the possible advantage given to professional users does not appear to be disproportionate either to the objectives of common interest pursued or the operation of the arena” [paragraph 60].

In relation to the impact on competition, the Decision acknowledges that “there is some duplication with existing and planned ice arenas elsewhere in The Netherlands. However, as the Dutch authorities have asserted, the recreational sports capacity of Thialf will not increase. Moreover, the catchment area of the ice arena is not expected to become larger as a result of the renovation, as ice skaters typically travel to a nearby skating facility. In this sense, the renovated ice arena will form a complement rather than a substitute for other ice skating infrastructures in The Netherlands or in other Member States” [paragraph 61].

This conclusion appears to contradict earlier statements about the objectives of the project and the aim of the Dutch authorities to make Thialf a top international facility.

On the basis of the above rather superficial and hardly substantiated reasoning, the Commission concludes that the public financing of the renovation of the Thialf ice arena in Heerenveen, including its spill-over effects on the operating company and professional users, pursues acknowledged public policy objectives, is necessary and proportionate and does not affect trade and competition between Member States to an extent contrary to the common interest, according to Article 107(3)(c) TFEU” [paragraph 65].

Concluding observations

This is a Decision that could have been better reasoned. Any guidance it may provide is limited to what public authorities should avoid or not to do if they want their measures not to fall within the scope of Article 107(1). They can be summarised as follows.

First, normally the use of public procurement procedures is sufficient to eliminate advantage for operators of infrastructural facilities. However, if the selection criteria are such that they may favour a particular bidder, then the existence of advantage cannot be excluded.

Second, normally making facilities open to all users and charging usage fees at market rates are sufficient to eliminate advantage for users. However, if usage is prescribed, then it cannot be excluded that users derive an advantage from access to a subsidised facility even if they pay fees at market rates.

In a nutshell, any limitations on who may bid for an infrastructural project or how the infrastructure is to be used may result in State aid for its operator and/or users.

 


[1] The full text of the Commission Decision can be accessed at:

http://ec.europa.eu/competition/state_aid/cases/250448/250448_1502751_94_2.pdf

[2] SA.37109, Football stadiums in Flanders,

http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_37109;

SA.33618, Uppsala arena,

http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_33618;

SA.35440, Multifunktionsarena der Stadt Jena,

http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_35440;

SA.35135, Multifunktionsarena der Stadt Erfurt,

http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_35135;

SA.36105, Fußballstadion Chemnitz,

http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_36105.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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