Is there an Advantage when the State Pays for Compulsory Milk Tests?

Undertakings obtain an advantage when the state pays for their normal costs. Normal costs are costs which are inherent in the operations of undertakings. The costs of meeting legal obligations are normal.

 

Introduction

The case law on advantage in the meaning of Article 107(1) TFEU says that aid confers an advantage to undertakings when they obtain a benefit that reduces their “normal” costs. This immediately raises the question of what is normal? Normal costs are those which are inherent in the operations of undertakings [employment costs, investment costs, training costs, etc]. But is inherent in the operation of an undertaking a compulsory test; i.e. a test that the undertaking is obliged by law to carry out? The answer is yes. The concept of “normal” includes all the costs and expenses that an undertaking has to bear or incur in order to carry out its activities and comply with its legal obligations. It is the legal framework or regulatory framework in which an undertaking operates that determines what is “normal”. It is not relevant that in legal or regulatory systems in other countries similar undertakings are not subject to the same obligations. The implication is that compensation for the cost of compulsory tests is State aid. The only exception is compensation for the extra costs of public service obligations, which satisfies the four Altmark criteria.

The case which is the subject of Commission decision 2015/2432 concerning milk quality tests in Germany is fascinating because, in addition to the issue of advantage, it raised several other questions such as whether there was State aid, given that the tests were paid by revenue raised from contributions by the beneficiaries, and whether the payment by the state was a selective measure.[1]

Background

This case was initiated by the Commission after reviewing information submitted by Germany itself in an Annual Report that Member States were required to provide to the Commission under Regulation 659/1999. German Laender granted financial support to offset the cost of milk quality tests. Dairies – which were the main buyers of milk – were required to have all delivered milk tested or to test it themselves. The tests were mandatory for the milk obtained by dairies in Germany.

The tests were funded by the proceeds of a milk levy and, in some cases by contributions from Laender budgets. The milk levy is imposed on dairies according to the quantities of delivered milk. The levy did not apply to milk imports. By contrast, exports were subject to the milk levy.

The revenues obtained from the milk levy could only be used for improving milk quality and hygiene, the provision of advice and training and the funding of advertising for the consumption of milk and dairy products.

Germany was of the view that the funding of the tests did not constitute State aid. Its main arguments were that the resources used came from private sources and that the compulsory nature of the tests meant that dairies did not obtain any advantage. Instead they were compensated by the disadvantage imposed on them.

Existence of State aid

Transfer of state resources

The levy was imposed by law and the proceeds were collected by the Laender authorities. Germany argued that the levy was decided after consultation with the relevant professional organisations and therefore it could not be attributed to the state. The Commission disputed this view.

“(119) The Land Governments collect the milk levy in consultation with the Land association in question. However, ‘consultation’ represents a significantly weaker form of participation than ‘agreement’. While ‘agreement’ means that another body (e.g. a legislative body or authority) must necessarily give its consent before a legal act is (lawfully) adopted, a decision that is to be adopted in ‘consultation’ with another body does not, by contrast, necessarily depend on that other body’s consent.”

“(120) The legal basis for collecting a milk levy in the individual German Länder is provided by corresponding Land regulations on the detailed arrangements for collecting the levy, including the amount of the levy. It is therefore the State (represented by the respective Land Government) that regulates the levy’s collection.”

“(123) The assertion […] that the milk levy scheme is not associated with any cost to the public exchequer […] is first contradicted by the fact that revenues from the milk levy are entered under a specific sub-heading in the budget. It is generally the case that even if resources used for a subsidy are derived from a (specific) charge (levy) paid by private parties, it must be assumed that there is a cost to the public exchequer and that State resources are thus being used if those resources first accrue to the budget. In this respect, there is a significant difference compared with the PreussenElektra Case, which was concerned with a system of minimum prices, where financial means never entered the State budget or the State in other form exerted control over them (and even in form of a conferral to third parties). Consequently, the use of State resources was ruled out in that case.”

“(124) […] According to the Commission’s decisional practice in this area, measures funded solely from parafiscal resources are considered to constitute aid within the meaning of the first sentence of Article 107(1) TFEU.”

“(125) With regard to the assertion that it is the [professional] associations that actually decide to collect the levy from dairies, the Commission considers that it is the Federal Government that, […], has empowered the Land Governments to collect a milk levy.”

“(128) Although the State (at Federal level) grants the Land associations certain rights of participation, it has nevertheless established a clear legal framework in that the respective Land governments […] decide on the rates that must be applied in respect of the milk levy and how the resources are to be used. […] Moreover, the duty of consultation in respect of usage of the resources […] does not in any way require the views of those consulted to be followed. The final decision as to how the resources are to be used lies with the respective Land authorities, i.e. with the State.”

“(129) This distinguishes this case significantly from the Doux Elevage Case. Collection of the milk levy and the allocation of the corresponding resources is regulated by the State at two levels, i.e. Federal and Land. In Germany, the legislator has not only granted the Land Governments the power to collect the levy but has also restricted the margin available to dispose at Land level of the resources generated from levies by Federal law. The Land associations are not able to seek to amend the objectives that may be promoted […]. A State restriction of this nature did not form part of the facts on which the Val’Hor und Doux Elevage Cases were based.”

“(131) Contrary to the case Doux Elevage, the promotion objectives are not objectives that the [professional] organisations have themselves laid down and introduced.”

“(134) Consequently, the revenues from the levy in question should be regarded as being under State control and the measures funded by them were granted through State resources and are attributable to the State.”

Existence of a selective advantage

The tests were carried out by laboratories on behalf of dairies. In turn, the labs received payments which were financed by the milk levy. The Commission considered that although the labs appeared to be the recipients of the aid, in fact “(136) […] these tests are ultimately of benefit to dairies because it is they who are required by law to test the milk delivered to them. The laboratory tests are thus services which [are provided to] the dairies. The dairies may therefore be regarded as beneficiaries of aid granted in the form of benefits in kind. […] Any possible advantage is granted to ‘certain undertakings’, because there are many other economic sectors other than the dairy sector that do not benefit from the measures in question. The possible advantage being conferred is thus selective.”

(137) […] The costs arising [have to] be regarded as typical operating costs which are normally borne by the undertakings in question, i.e. the dairies, as the parties required to perform the analyses under the national scheme.”

Germany, however, claimed that by carrying out milk quality tests the milk testing agencies were performing tasks that were incumbent on the state. The tests were not an economic activity. The Commission acknowledged that the tests were required by law and that they pursued a public purpose (ensuring milk quality). Nonetheless, the Commission rejected that claim because “(139) […] it cannot be concluded from this that the funding of milk quality tests by means of the levy is not related to economic activities pursued by undertakings. Rather at issue is one of numerous regulatory requirements (e.g.: product safety, environment standards, etc.) that economic operators (here: the dairies) have to comply with when pursuing their economic activities. In addition, the milk quality tests do not constitute any activity which forms part of the essential tasks of the State within the meaning of paragraph 16 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.” [In a footnote the Commission noted the judgment of the Court of 25 March 2015, Belgium v Commission, T-538/11, point 96, according to which the fact that undertakings are burdened with charges under national law that inevitably relates to the exercising of public power by the Member State, does not rule out any qualification of these charges as ‘charges that normally have to be borne by the undertaking’.]

“(140) […] Undertakings have to bear themselves the costs incurred to market their products as typical operating costs. […] The sale of milk by dairies is undoubtedly an economic activity. By having the costs of the analyses refunded from levy resources, dairies […] are thus exempted from costs that they would normally have to meet themselves in exercising economic activities.”

“(145) The Commission further takes the view that the existence of a selective advantage cannot be refuted by claiming that the dairies have already paid the value of the tests carried out by means of the milk levy. Indeed, the Commission rejects the claim […] that the levy corresponds to the actual economic cost of the services provided in return. […] a variety of different sub-measures are funded by the milk levy. It is in the nature of the sub-measures that the benefit which each individual undertaking derives from specific sub-measures is not necessarily equivalent to the levy amounts previously paid. Additionally in the case of [certain Laender], the measures at issue are not only financed from milk levy resources but also from additional resources stemming from the general budget for which reason a ‘compensation’ is ruled out.”

Affectation of trade and distortion of competition

In view of that milk and dairy products are highly traded across the EU, the Commission had no difficulty showing that cross-border trade could be affected and competition distorted.

Incompatibility with the internal market and recovery

Once the Commission it found that the funding of the compulsory milk tests was State aid, the next step was to assess its compatibility with the internal market. The state aid rules that were applicable at the time of the granting of the aid allowed for the funding of test for extraordinary purposes. The Commission considered that the tests in question were routine and not necessitated, for example, by the outbreak of an animal disease or contamination of the food chain. Routine tests were no covered by the relevant rules. Therefore, it concluded that the aid was incompatible with the internal market and ordered Germany to recover it.

——————————————————————————

[1] The full text of the decision is published in the Official Journal OJ L 334, 22 December 2015, and can be accessed at:

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2015.334.01.0023.01.ENG&toc=OJ:L:2015:334:TOC.

Tags

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.

Leave a Reply

Related Posts

14. Jul 2020
State Aid Uncovered by Phedon Nicolaides
report

2019 Competition Report

The Annual Competition Report is a useful document, but it should provide more information on the results of the ex post evaluations and ex post monitoring. Update on Temporary Framework: Number of approved and published COVID-19 measures, as of 10 July 2020: 202* Legal basis: Article 107(2)(b): 20; Article 107(3)(b): 171; Article 107(3)(c): 17 Six Member States have implemented 11 […]
23. Jun 2020
State Aid Uncovered by Phedon Nicolaides

The Commission’s White Paper on Foreign Subsidies: A Real Problem that Needs Sharper Tools

The European Commission proposes new instruments to counter unfair foreign subsidies and acquisition of European companies. Temporary Framework: Number of approved Covid-19 measures, as of 20 June 2020: 164* Legal basis: Article 107(2)(b): 14; Article 107(3)(b): 137; Article 107(3)(c): 15 Fifteen measures support R&D, testing or production of Covid-19 related products. Three measures support recapitalisation. The Member States with the […]
16. Jun 2020
State Aid Uncovered by Phedon Nicolaides

Direct v Indirect Advantages: The Case of Sardinian Airports

Public funding that flows through intermediaries to third parties also counts as a state resource if the intermediaries carry out instructions by the funding authority. Temporary Framework: Number of approved covid-19 measures, as of 12 June 2020: 154* Legal basis: Article 107(2)(b): 14; Article 107(3)(b): 130; Article 107(3)(c): 14 Three recapitalisation measures have been approved [Finland, Lithuania & Poland]. The […]
09. Jun 2020
State Aid Uncovered by Phedon Nicolaides
pills on money

Private Investor and Preferential Regulatory Treatment

The existence of an advantage has to be proven, not presumed just because its absence cannot be confirmed. Preferential treatment may distort competition but it is not necessarily State aid if there is no transfer of state resources. Temporary Framework: Number of approved covid-19 measures, as of 5 June 2020: 148* Legal basis: Article 107(2)(b): 13; Article 107(3)(b): 125; Article […]
02. Jun 2020
State Aid Uncovered by Phedon Nicolaides
Euromünzen

i) Investor-State Arbitration ii) Recovery of Incompatible State Aid iii) State Aid Scoreboard 2019

Member States abolish bilateral investment treaties between themselves. When the Commission orders recovery of incompatible State aid, interest has to be added to the recoverable amount for the whole period of illegality regardless of any national limitation rules. In 2018, Member States granted EUR 121 billion to industry and services, EUR 6.3 billion to agriculture and EUR 50 billion to […]
12. May 2020
State Aid Uncovered by Phedon Nicolaides
Road sign "Wrong Way"

Advantage Must be Proven, Not Assumed

The European Commission has to consider whether the private investor principle is applicable in cases of state investments. It is for Member States to prove that their investments conform with the private investor principle. Temporary Framework As of 9 May 2020, the European Commission had approved 113 State aid measures to combat covid-19. Their legal basis was: Article 107(2)(b): 10; […]
05. May 2020
State Aid Uncovered by Phedon Nicolaides
corona virus poster

Non-recovery of Incompatible State aid Is Costly

Legal and practical difficulties in the recovery of incompatible State aid do not constitute justifiable “absolute impossibility”. Temporary Framework On 1 May, the total number of State aid measures to combat covid-19 approved by the European Commission reached 102. Their legal basis was: Article 107(2)(b): 9; Article 107(3)(b): 86; Article 107(3)(c): 7   Introduction The 2020 Temporary Framework for State […]
07. Apr 2020
State Aid Uncovered by Phedon Nicolaides

EU Decisions Override National Decisions on Compensation for Public Service Obligations

The principle of res judicata cannot be used to avoid recovery of incompatible State aid.   An update on State aid measures to counter the impact of COVID-19 As of 3 April 2020, the Commission has approved 29 measures submitted by 16 Member States. Article 107(3)(b) is the legal basis for 26 of those measures, while Article 107(2)(b) is the […]
31. Mar 2020
State Aid Uncovered by Phedon Nicolaides

How to Make Good the Damage Caused by a Natural Disaster

Compensation for costs incurred as a result of a natural disaster is State aid. The compensation must be for damage directly caused by the natural disaster. Introduction State aid to make good the damage caused by an “exceptional occurrence” such as the corona virus covid-19 is compatible with the internal market. The legal basis for exemption is Article 107(2)(b). Of […]
28. Jan 2020
State Aid Uncovered by Phedon Nicolaides

State Aid Rules in the UK after Brexit: Alignment or Divergence?

The current rules will apply at least until 31 December 2020. Introduction On Saturday, 1 February 2020, the United Kingdom will no longer be a Member of the European Union. Will it then have to abide by EU State aid rules? According to the Agreement on the Withdrawal of the UK from the EU, the whole of the UK will […]