No Effect on Trade

A public measure of purely local character and which does not induce cross-border movement of investors or clients is unlikely to affect trade between Member States.

Introduction

It is rare to find a judgment that confirms that a particular public measure is not liable to affect trade between Member States.

The General Court did so in its judgment of 19 October 2022 in case T-582/20, Interessengemeinschaft der Hoteliers und Grestauren Region 10 (Ighoga Region 10) v European Commission.

Ighoga Region 10 appealed against Commission decision SA.48582 which had found that transactions between municipal authorities, on the one hand, and Maritim group and KHI, a real estate company, on the other, for the construction of a Congress Centre and an adjacent hotel in Ingolstadt, Germany, did not constitute State aid. The Maritim group operates hotels in Germany.

Ighoga Region 10 is an association of companies that also operate hotels with conference facilities. In July 2017, Ighoga Region 10 lodged a complaint with the Commission alleging that incompatible State aid had been granted to Maritim group and KHI.

The City of Ingolstadt, through its agency IFG, sold to KHI the land on which the hotel was to be built, following an invitation to tender. Then, KHI concluded a lease agreement with Maritim for the operation of the hotel. Maritim was also the only company to submit a bid for the construction and operation of the congress centre. Consequently, it was awarded the contract for the congress centre.

Ighoga Region 10 claimed that the tendering procedures were abnormal, that there were synergies between the two contracts and projects and that the amount of rent paid by Maritim for the operation of the convention centre was exceptionally low and did not reflect the savings that Maritim would derive from directing visitors to the congress centre to use the adjacent hotel.

Ighoga Region 10 argued that its procedural rights had been infringed because the Commission failed to initiate the formal investigation procedure. In other words, it contended that the Commission should have had serious doubts as to the absence of State aid.

Did Maritim derive an advantage from being the single tender for the operation of the congress centre?

The General Court, first, recounted the considerations which led the Commission to find that there was no direct advantage in favour of Maritim.

The Commission took note that IFG had complied with its obligation to organise an open, transparent, non-discriminatory and unconditional tendering procedure for the operation of the congress centre, which resulted in the selection of Maritim. However, since Maritim was the only economic operator to submit a tender, the Commission could not conclude that the tender procedure guaranteed a market rate for the rent. Consequently, the Commission examined whether the German authorities verified that the rent that resulted from the tender could be a market rate. It found that, indeed, German authorities, through pre-published detailed rules, had sought to maximise the amount of the rent paid by the successful tenderer. It also found that IFG compared the rents paid in the Ingolstadt region by comparable conference centre operators. It concluded that the rent paid by Maritim was at the upper end of the range of comparable rents.

Then, the General Court noted that the Commission had not merely taken account of the information submitted by Germany. It also carried out its own examination of the detailed rules for setting the rent paid by Maritim and of the comparison of rents paid in the Ingolstadt region. [para 65]

The Court concluded that the Commission was entitled to consider that IFG had fulfilled its obligation to organise a open, transparent, non-discriminatory and unconditional tendering procedure for the operation of the congress centre. [para 76]

Did the rent paid by Maritim correspond to the market rate?

Ighoga Region 10 alleged that neither the benchmark comparison, nor the criterion of maximising rent was appropriate for verifying whether the rent paid by Maritim for the operation of the congress centre corresponded to the market price. In particular, Ighoga Region 10 argued that most congress centres that were considered in the benchmarking exercise of the rent paid by Maritim experienced operating losses.

In this connection, the General Court made an important statement. The fact that the operation of a congress centre may result in public financing of the losses of its operator is not a sufficient basis for considering that the determination of the amount of the rent paid by that operator is not based on market-related factors. The fact that the operation of a congress centre would lead to losses only means that the operating costs do not make it possible to make a profit. [para 85]

Then the General Court observed that even though point 99 of the Commission Notice on the concept of State aid within the meaning of Article 107(1) TFEU questions the usefulness of benchmarking [“benchmarking […] may not be an appropriate method for establishing market prices if the available benchmarks have not been set on market economy grounds or if existing prices are significantly distorted by State intervention”], it did not necessarily follow that the benchmarking of rents in the case of the Ingolstadt congress centre was wrong. [paras 87-88]

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Did Maritim derive an advantage by operating both the congress centre and the adjacent hotel?

In response, Ighoga Region 10 argued that the rent paid by Maritim did not take account of the savings made by Maritim as a result of the operation of the congress centre close to the hotel.

The General Court rejected that argument because the applicants submitted no evidence to back it up. [para 90]

Then, the Court repeated that Maritim was selected through a tender procedure and that the German authorities actually sought to maximise the amount of the rent by defining ex ante criteria for the fixing of the level of rent. [para 97]

Moreover, the contract for the operation of the congress centre was legally distinct from the contract for the operation of the adjacent hotel. In addition, the congress centre and the hotel belonged to different owners.

The analysis of the General Court on the issue of whether there could be advantages in the operation of both the congress centre and the hotel was a bit naïve and simplistic. It is not relevant that the congress centre and the hotel belonged to different owners. Assume that each owner sought to maximise the revenue it can generated from awarding operating rights to a third party. The question then is whether a bidder would be willing to offer a higher total price if it could operate both the centre and the hotel, than if it would operate each separately. For example, assume that the highest price that could be offered separately for the congress was 100 and for the hotel 80. Could joint operation induce someone to offer more than 180? The answer can be in the affirmative if the demand for the package of visiting/exhibiting at the centre and staying at the hotel was more than the demand for each service separately. A visitor/exhibitor at the congress centre would naturally be inclined to stay at the adjacent hotel. However, not every guest of the hotel would be inclined to visit the congress centre. Therefore, a discount on the entry ticket for the centre offered to hotel guests could induce more visitors to the centre. Say the normal entry price for the centre was EUR 20. The overnight stay at the hotel was EUR 150. For the centre an additional visitor created negligible additional costs. Therefore, the hotel could offer a package of overnight stay and visit to the centre for, say, EUR 160, instead of EUR 170. This offer would result in net profit of EUR 10 for Maritim for each additional visitor. Therefore, a company that could operate both facilities could have been willing to offer a higher price.

This leads to the second question. Would this be contrary to public procurement and State aid rules? The answer is no. Even if there were more profit to be made by joint operation, a competitive procedure would also increase the revenue for the contracting authority without conferring an undue advantage to the selected operator.

Were there indirect advantages in favour of Maritim in the operation of the congress centre and the adjacent hotel?

The General Court recalled and agreed with the Commission’s analysis. The Commission took note that the tendering procedure for the sale of the land on which the hotel had been built had been conducted in a transparent, competitive, unconditional and non-discriminatory manner. It concluded, in essence, that the advantage allegedly conferred on Maritim as a hotel operator by the irregular invitation to tender for the sale of the land had not been established and also stated that the link which could be established between the alleged advantage and the call for tenders had not been substantiated. [para 110]

In the end the General Court rejected the allegations of Ighoga Region 10 because Ighoga Region 10 did not specify which costs were cross-subsidised or how the financing arrangements resulted in an indirect advantage in favour of Maritim. [paras 111-118]

Was trade between Member States affected?

First, the General Court recalled that the Commission is not required to establish that the aid has a real effect on trade between Member States and that competition is actually distorted, but merely to ascertain whether the aid is liable to affect that trade and distort competition. In addition, the beneficiary undertakings need not themselves participate in intra-EU trade for trade to be affected.

Then, the General Court noted that according to Commission practice, activities of a purely local effect do not affect trade between Member States. This is the case where the beneficiary offers services in a geographically limited area in one Member State and cannot attract customers from other Member States and it is not sufficiently likely that the measure will have more than a marginal impact on cross-border investment and the establishment of companies. [para 143]

In this particular case, the Commission found that cross-border trade was not likely to be affected. It took into account four indicators: the size of the centre, its catchment area, its international attractiveness and its position on the national market for conferences and congresses.

The following findings were decisive for the Commission’s conclusion that trade was unlikely to be affected:

  • The congress centre was small in view of its surface area, capacity and number of rooms available.
  • The catchment area of the congress centre was essentially local.
  • The city of Ingolstadt is not large while the events envisaged in the congress centre were local in nature [they consisted essentially of events organised by schools, local associations and the municipality and other regional users]. The core business of the congress centre was to organise events and conferences for groups of 50 to 300 participants.
  • The activities of the Ingolstadt congress centre at national level accounted for a maximum of 0.41% of the total number of international participants in conferences or events organised in Germany. Ingolstadt was a negligible player in the market for international conferences.
  • The respondents to the call for tenders relating to the operation of the congress centre were established in Germany, the majority of whom came from Ingolstadt or the Ingolstadt area.

On the basis of this evidence, the General Court concluded that the contested measures could, at most, have only a marginal effect on the conditions of trade between Member States. [para 150]

Since none of the pleas was successful, the General Court dismissed the appeal in its entirety.

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

https://curia.europa.eu/juris/fiche.jsf?id=T%3B582%3B20%3BRD%3B1%3BP%3B1%3BT2020%2F0582%2FJ&nat=or&mat=CONC.AIDE%252Cor&pcs=Oor&jur=C%2CT%2CF&for=&jge=&dates=%2524type%253Dpro%2524mode%253D8D%2524from%253D2022.10.15%2524to%253D2022.10.23&language=en&pro=&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&oqp=&td=%3BALL&avg=&lgrec=en&lg=&cid=2919827

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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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