Exclusive Rights and Legal Monopolies

StateAidHub_LegalMonopolies
State aid rules can apply to sectors which are legal monopolies.

Introduction

The fact that a company enjoys exclusive rights and operates in a sector covered by a legal monopoly does not necessarily insulate it from State aid rules. This has been confirmed by the Court of Justice in its judgment of 19 December 2019, in case C-385/18, Arriva Italia and others.[1]

An Italian court asked the Court of Justice for guidance in a case involving Arriva Italia and other companies, on the one hand, and the Ministry of Infrastructure and Transport, on the other. The case concerned the transfer of 100% of the holding of the Ministry in Ferrovie del Sud Est e Servizi Automobilistici Srl a socio unico [hereinafter FSE] to state-owned Ferrovie dello Stato Italiane [hereinafter FSI]. Both the FSE and the FSI are railway undertakings.

The applicants wanted to buy the FSE which at that time encountered financial difficulties. After the Italian government transferred the FSE to the FSI, the applicants claimed that the transfer involved State aid of EUR 70 million for the benefit of the FSE. The amount of EUR 70 million was earmarked in the Italian 2016 “stability law” for the FSE on condition that a restructuring plan would be implemented and the FSE would return to viability.

The national court asked the Court of Justice whether the transfer of a state-owned company in difficulty, together with a grant, to a state-owned company without a competitive selection on condition that the latter made the former commercially viable again would constitute State aid.

The grant of EUR 70 million to FSE

The referring court noted that there was no actual disbursement of any money from the Italian state budget. However, the Court of Justice recalled that state resources are transferred at the moment an undertaking receives the right to a subsidy and, as a consequence, the state assumes a liability. [paragraphs 35-36 of the judgment] The allocation of EUR 70 million to the FSE was approved, pending the implementation of a restructuring plan, in order to enable the FSE to continue with its activities. Apparently, the Italian authorities wanted to avoid a disruption in rail services.

The Court of Justice concluded in paragraph 41 of the judgment that the allocation of EUR 70 million to the FSE under the 2016 stability law, even if that amount was not actually disbursed, was an intervention with state resources, given that the FSE had been granted a right to a budget line.

Then the Court went on to examine whether the remaining criteria of Article 107(1) TFEU applied. It began by noting, in paragraph 42, that for a national measure to be classified as State aid it is not necessary that the aid actually affects trade between Member States and that competition is indeed distorted, but only to examine whether such aid may affect trade and distort competition.

It is not necessary for the beneficiaries themselves to trade between Member States. Indeed, when a Member State grants aid to undertakings, domestic economic activity may be maintained or increased, thereby hampering the ability of undertakings established in other Member States to enter the market of the first Member State. [paragraph 43]

In this case, the possible affectation of trade did not depend on whether transport services were provided locally or regionally or on the importance of the relevant services or sector. [paragraph 44]

Since Arriva Italia was a subsidiary of the German group Deutsche Bahn and since the EUR 70 million to the FSE restricted the possibility of Arriva Italia to take over the rail infrastructure assigned to the FSE or to provide passenger services, a financial contribution to ensure the viability of a business such as that of FSE, which was facing financial difficulties, was capable of affecting trade between Member States. [paragraph 45]

With respect to the distortion of competition, the Court recalled that it is not necessary to prove the actual distortion of competition but only to examine whether the aid is capable of distorting competition. Aid intended to exempt an undertaking from the costs which it would normally have to bear in the course of its day-to-day activities would distort competition. In principle, a grant such as that at issue, which enabled an undertaking in serious financial difficulties to remain on the market, was in principle capable of distorting the conditions of competition. [paragraphs 52-53]

The Court also found that the grant of EUR 70 million to the FSE constituted an advantage in favour of that public undertaking. In addition, the grant did not satisfy the private investor test when taking into account only the benefits and liabilities assumed by the state acting as a shareholder, not as a public authority. It was for Italy to prove unequivocally and on the basis of objective and verifiable evidence drawn up before or at the same time by the decision to grant the financial advantage that the measure was related to its shareholder status. [paragraphs 46-48]

Given the financial difficulties of FSE, a private investor in a situation as close as possible to that of the state, would not have granted EUR 70 million without previously evaluating the profitability of the investment. [paragraph 49

Although prior to the adoption of the 2016 stability law a technical report referred to a “financial and economic analysis”, there was no evidence that this analysis was intended to determine whether the grant of EUR 70 million would be profitable for the Italian state. [paragraph 50]

The Court concluded that in the absence of any evidence showing that the decision to allocate the amount of EUR 70 million to the FSE was taken by the state in its capacity as a shareholder of that company, it was not possible to apply the private investor test. [paragraph 51]


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Statutory monopoly

Then the Court of Justice turned its attention to the argument of the FSE and the Italian government that the EUR 70 million would only be used to finance the railway infrastructure operated by the FSE and that the infrastructure in question was subject to a statutory monopoly under Italian law. In addition, the FSE kept separate accounts for the operation of that infrastructure and for the provision of transport services in order to prevent cross-subsidisation of services outside the scope of the monopoly.

In response to these arguments, the Court of Justice, first, noted that neither the 2016 stability law, nor any subsequent decision concerning the grant stipulated that the EUR 70 million allocated to the FSE could be used solely to finance the railway infrastructure used by the FSE. [paragraph 55]

Second, the fact that a Member State entrusts a public undertaking with a public service subject to a statutory monopoly does not mean that the advantage granted to a statutory monopoly operator cannot distort competition. It is necessary for the statutory monopoly to exclude not only competition on the market but also for the market. [paragraph 57]

According to the Court of Justice, the FSE had a contract with the Region of Puglia granting it the exclusive right to operate the railway infrastructure needed to provide passenger rail services. However, in order to prove that it was a market for which competition was excluded, it would be necessary to show that the Region of Puglia was obliged by law to entrust the exploitation of that infrastructure and those services exclusively to that company. [paragraph 58] [Here the Court cited the judgment of 29 July 2019, Azienda Napoletana Mobilità, C-659/17, EU:C:2019:633, paragraph 38]. However, there was no indication that the Region was obliged by law to do so. [paragraph 58]

Third, with regard to the argument concerning the FSE’s separate accounts for the operation of the railway infrastructure and for the provision of transport services, the Court of Justice noted that even if it were assumed that the amount of EUR 70 million was used exclusively to finance the railway infrastructure, it did not exclude all possible impact on the conditions of competition. The Court pointed out that according to paragraph 219 of the Commission Notice on the Notion of State aid, the construction of rail infrastructure available to all potential users on equal terms which excludes discrimination does not distort competition. [paragraph 60]

However, even assuming that the allocation of that amount to the FSE could be considered to have been made solely for the construction of the railway infrastructure and not for other purposes, the railway infrastructure in question was not made available to all potential users under equal conditions that excluded discrimination. This is because the FSE had an exclusive right to that infrastructure. Therefore, the fact that the FSE was required to keep separate accounts did not affect the conclusion that the allocation of EUR 70 million to that undertaking was capable of distorting competition. [paragraph 61]

Interestingly, it is not the first time that EU courts refer to the Commission’s Notice on the Notion of State aid as an authoritative source on the concept of aid.

The transfer to the FSI of the state’s holding in the FSE capital

The Court, first, observed that the transfer had two elements: the transfer to the FSI of the holding of the Ministry of Infrastructure and Transport without any competition or remuneration, and the FSI’s commitment to remedy the FSE’s financial problems.

The Court of Justice noted that, one the one hand, the FSI received shares for free. On the other hand, it had to improve the situation of the FSE. The Court of Justice left it to the referring court to determine which of the two undertakings was to be considered as beneficiary of a possible State aid or whether it could be that both the FSE and the FSI jointly obtained aid. [paragraph 64]

Nonetheless, the Court of Justice did outline the principles that would guide the referring court. The transfer of the Ministry’s shares to the FSI was a transfer of state resources attributable to the Italian state. In addition, the FSI’s obligation to remedy the FSE’s problems could also constitute an implicit transfer of state resources in favour of the FSE, if the FSE had acquired the right to such support. [paragraph 65]

Article 345 TFEU does not prevent the application of State aid rules to state-owned undertakings. The transfer of shares could be a selective advantage for the FSI that could affect trade and distort competition. An advantage could have been conferred in case the value of the capital of the FSE, increased by the grant of EUR 70 million, exceeded the cost of its liabilities. [paragraphs 66-70]

There could also be an advantage for the FSE if the transfer made it possible for it to return to viability. Therefore, the existence of an advantage in favour of the FSE depended on whether the FSI’s obligation to remedy the problems of the FSE enabled the FSE to continue operating the railway infrastructure entrusted to it. [paragraph 71]

In reply to the argument by Italy and the FSI that the transfer satisfied the private investor test, the Court of Justice observed that in order to apply the criterion of the private investor, it was necessary to prove unequivocally and on the basis of objective and verifiable evidence that the measure in question related to the state’s shareholder status. However, in this case the transfer to the FSI of the holding in the FSE was intended in particular to ensure the continuity of employment, the continuity of the FSE’s transport services and to keep the FSE in the public sector. Such reasons are not taken into account by a private investor. [paragraph 73]

Consequences of non-notification

The referring national court also asked what consequences ought to be drawn from the fact that the aid was not notified to the European Commission.

First, the Court of Justice reiterated that the assessment of the compatibility of aid measures with the internal market falls within the exclusive competence of the Commission.

Then it recalled that national courts have to ensure that domestic law provides all legal consequences to infringement of the notification obligation under Article 108(3) TFEU regarding both the validity of aid measures and the recovery of aid. [paragraph 84]

The Court of Justice stressed that a return to the situation before the payment of unlawful or incompatible aid is a necessary precondition for the effectiveness of the State aid provisions of the Treaties. [paragraph 85]

With regard to the sum of EUR 70 million, the referring court ought to determine in particular the advantage, including accrued interest, and order the FSE to pay it back. [paragraph 87]

With regard to the transfer of the FSE to the FSI, the restoration of the former situation would probably have the effect of reversing that transfer and cancelling all the results of that transfer. [paragraph 88]

Undoing the transfer of a company must be a pretty difficult task. This is the mess that is created when State aid rules are ignored.


[1]The full text of the judgment, in languages other than English, can be accessed at:

http://curia.europa.eu/juris/fiche.jsf?id=C%3B385%3B18%3BRP%3B1%3BP%3B1%3BC2018%2F0385%2FJ&oqp=&for=&mat=or&lgrec=en&jge=&td=%3BALL&jur=C%2CT%2CF&num=c-385%252F18&dates=&pcs=Oor&lg=&pro=&nat=or&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&language=en&avg=&cid=2091401.

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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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