Intra-State Transfers and the Discretion of Public Authorities

Resources transferred from one public authority to another for the purpose of being used to subsidise undertakings do not fall within the scope of Article 107(1) TFEU if the recipient authority has discretion in their disbursement.

Introduction

A public authority that carries out economic activities becomes an undertaking that is subject to the prohibition of Article 107(1) TFEU. When the same authority receives funds to manage in its capacity as a public authority then it is necessary to identify the dividing line between its public tasks and its economic activities.

Public transport services, which are economic activities, are often provided by operators that are owned by regional or municipal authorities. Such authorities may have a dual role: to regulate the transport sector and also to provide transport services themselves.

The granting of aid to public transport undertakings can fall within the scope of Regulation 1370/2007. Regulation 1370/2007 functions like a block exemption regulation for State aid that is intended to compensate transport undertakings for the extra costs of public service obligations imposed on them. The Regulation interprets Article 93 TFEU and applies only to land transport [e.g. train, busses, metro]. Certain type of obligations fall outside its scope. A typical example is the obligation of bus, train or metro operators to offer discounts to certain categories of passengers such as students.

On 24 March 2022, the Court of Justice had to examine, in case C-656/20 P, Hermann Albers v European Commission, which concerned a German measure involving discounts for students, whether payments by one public authority to another were state resources in the meaning of Article 107(1) TFEU.[1] On the same day, the Court also ruled in a related case [C-666/20 P, GVN v European Commission][2] which, however, is reviewed here only with respect to the additional explanation offered by the Court in the context of its reasoning on the separation of public tasks and the economic activities of municipal authorities.

Hermann Albers appealed against the judgment of the General Court in case T-597/18, Hermann Albers v European Commission, by which the General Court dismissed the request for annulment of Commission decision SA.46697 that found that funds transferred by the German Land of Niedersachsen to municipal authorities were not State aid.

The municipal authorities were to use those funds to grant State aid in the context of public contracts for public transport services in accordance with Regulation 1370/2007.

The point of contention was the application of a provision of the relevant German law that required public transport undertakings to reduce the price of their tickets by 25% for students and apprentices. The public transport undertakings could receive compensation for forgone revenue.

The Commission concluded that no State aid was involved because the resources earmarked for the measure it examined never left the public sector. In other words, there was only intra-state transfer of resources from the Land to municipal authorities responsible for the management of public transport services. The recipient authorities were required to comply with the relevant State aid rules when they made payments to undertakings. The problem was that those authorities also owned transport undertakings.

Therefore, the main question put to the General Court and then to the Court of Justice was, in view of their ownership of transport undertakings, whether the municipal authorities acted as public authorities or as undertakings when they received funds from the Land.

Transfer of state resources?

The Court of Justice agreed with the General Court that the economic activity of an entity must be distinguished from its non-economic activity. A public entity may be regarded as an undertaking only as regards activities which are classified as economic activities and in so far as those activities can be dissociated from the exercise of public powers. [paragraph 41 of the judgment]

The qualification in the last part of the sentence above is important. If activities, which on their own would be classified as economic, are inseparably linked to public tasks then they fall within the realm of non-economic activities.

Even if a municipal authority and the transport undertakings which it controlled could be regarded as forming a single economic unit, the fact remained that, when the municipal authority granted compensation to those undertakings, it acted as the competent authority within the meaning of Regulation 1370/2007, and therefore the money it received lied outside its economic activity. [para 43]

Moreover, the relevant municipal authorities did not have discretion to direct to other activities or purposes the state resources they received for the funding of public transport services. Therefore, the Court of Justice concluded that the General Court was correct to find that the payment by municipal authorities of compensation to public transport undertakings was a stage distinct from that of the transfer of funds by the Land to those authorities and that that transfer did not confer, in itself, an advantage to those companies. [paras 44-45]

On the issue of transfer of state resources, the Court of Justice ruled in the related case C-666/20 P, GVN v European Commission, as follows [the language is similar but also differs in a way that it clarifies the reasoning of the Court].

A distinction had to be drawn between, on the one hand, the role of the municipal authorities as competent authorities within the meaning of Regulation 1370/2007 and, on the other hand, their role as owners of transport undertakings. An entity that carries out both economic and non-economic activities may be classified as an undertaking only in respect of its economic activities. [paragraph 66 of the judgment in case C-666/20 P]

In the exercise of their role as competent authorities within the meaning of Regulation 1370/2007, municipal authorities did not engage in any economic activity, since the funds they received merely created the budgetary framework necessary for them to be able to carry out the public service tasks assigned to them by the relevant law. [para 67]

The fact that municipal authorities had holdings in certain public transport undertakings was not sufficient to demonstrate that, in respect of the payment of compensation to transport undertakings, municipal authorities would favour those which they owned. This is because when they defined the terms of the compensation, municipal authorities were bound by the provisions of Regulation 1370/2007 and the relevant provisions of EU State aid law. [para 68]

Municipal authorities, in their role as competent authorities within the meaning of Regulation 1370/2007, in particular when they laid down the detailed rules for financial compensation of transport undertakings, did not engage in any economic activity, but acted as public authorities. [para 73]

For the reasons stated above, the Court of Justice concluded that the General Court did not err in law in finding that municipal authorities could not be classified as undertakings as regards the role assigned to them by the relevant law and that it was necessary to dissociate their activity as public authorities from their economic activities. [para 74]

Indirect advantage?

Article 107(1) TFEU applies to both direct and indirect advantages. Therefore, the Court of Justice also examined whether transport undertakings obtained an indirect advantage, as claimed by Hermann Albers.

The Court of Justice, first, recalled that the General Court found that Niedersachsen’s scheme did not regulate in detail the way in which municipal authorities could ensure a tariff reduction for students and apprentices and how to determine the amount of compensation, if any. Those authorities were free to decide how to achieve that objective. [para 54]

The relevant law did not require transport undertakings to reduce the price of the tickets they sold to pupils and apprentices. It was up to the municipal authorities to decide how those passengers could benefit from reduced fares. [para 55]

It was on those grounds that the General Court held that the relevant law did not entail any direct or indirect transfer of state resources to transport undertakings. The measure in question did not, in itself, favour certain undertakings over others. [para 56] In other words, the law at the level of the Land imposed an obligation on public transport undertakings without defining any rights. The latter was a task that was left for the municipal authorities.

Therefore, the Court of Justice agreed with the General Court that the measure in question did not confer an indirect advantage to any undertaking.

In both cases, the appeals were rejected.


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

CURIA – Case information (europa.eu)

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

CURIA – Case information (europa.eu)


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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 is professor at the University of Maastricht and the University of Nicosia. 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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