Public Funding of an Undertaking in a Closed Sector

Public funding of undertakings in sectors closed to competition does not constitute State aid.

A sector is closed to competition when competition on and for the market is precluded by law.

Introduction

Determining when State aid does not affected cross-border trade is both difficult and tricky. But there is one exception; when the sector is closed to competition. A sector is closed to competition when only a designated undertaking is allowed to operate in that sector, the state is obliged to grant only to that undertaking the exclusive right to operate in that sector and that undertaking has no operations outside the sector. Then it is possible to exclude that trade is affected without having to carry out a quantitative analysis of actual or potential trade flows.

But as became evident in the judgment of the Court of Justice on 6 October 2021, in joined cases C‑174/19 P and C‑175/19 P, Scandlines & Stena Line v European Commission, it is also necessary to consider possible indirect affectation of trade and distortion of competition.[1]

Scandlines & Stena Line appealed against the judgments of the General Court in cases T‑630/15, Scandlines v Commission and T‑631/15, Stena Line v Commission. The two appellants had challenged Commission decision SA.39078 authorising the financing of the Fehmarn Belt fixed link project between Denmark and Germany.

The project consisted of the construction of a submerged tunnel for cars and trains and the construction of connections to the national road and rail network – the so-called “hinterland links”. The two appellants operated ferries in the Fehmarn Belt and felt that the public funding of the fixed link distorted competition between that fixed link and their ferry operations.

The General Court partly annulled the Commission decision on the grounds that the Commission had not assessed properly a state guarantee that had been granted by Denmark to Femern A/S for the planning, construction and operation of the Fehmarn Belt fixed link and to Femern Landanlæg for the construction of the hinterland links. However, the General Court upheld the findings of the Commission that the financing of the hinterland road and rail links did not constitute State aid because Femern Landanlæg did not engage in cross-border trade and because competition was not distorted. The market for the management of the rail network was closed to competition. It should also be noted that ownership of the rail connections was to be shared between Banedanmark (20%), the Danish public rail infrastructure manager, and Femern Landanlæg (80%). After the judgments of the General Court, the Commission re-adopted its decision to correct its assessment of the guarantee.

The appellants’ pleas concerned the finding of no State aid with respect to the public funding of Femern Landanlæg.

Integrated project?

The appellants claimed that the General Court was wrong to hold that the public funding of Femern Landanlæg was not liable to affect competition even though the fixed link and the rail connections constituted an overall project.

The Court of Justice responded that “(87) the arguments relating to the integrated nature of the project, in particular those relating to the purpose and the means of financing of the project, in no way imply that Femern Landanlæg’s activities extend to the supply of transport services across the Fehmarn Belt.”

“(91) Even though the measures granted to Femern Landanlæg form part of a project which, as a whole, has the objective, …, of improving the conditions for the transportation of passengers and goods between Nordic countries and Central Europe, the fact remains that they cannot, for that sole reason, be assessed as a whole with the measures granted to Femern in the light of Article 107(1) TFEU, since the activities of the two undertakings are separate. It is common ground that, as soon as the project is completed, Femern Landanlæg’s activities will be limited to the management and operation of the rail connections, whereas Femern’s activities will relate only to the fixed link, since those different infrastructures may, in addition, be used independently of each other.”

“(92) It follows from the foregoing that the General Court was entitled, without erring in law, to find, […] that the measures granted to Femern Landanlæg, adopted in connection with the same project which granted measures for Femern in respect of the fixed link and categorised as State aid by the Commission, cannot, for that ‘sole reason’, constitute State aid, since those two types of measures have a different purpose and different beneficiaries. The General Court was therefore also right to draw a distinction, […] between the effects on competition of the measures granted to each of the undertakings.”

It may be recalled that the General Court held, in the Stena Line case, T-631/15, that “(66) First, […] the measures granted to Femern Landanlæg for the hinterland connections do not constitute State aid because they produce their effects on a market that is closed to competition. (67) Second, the measures granted to Femern for the project as a whole may constitute State aid because those measures have an impact, in the main, on the management and operation of infrastructure that is in competition with other transport services, in particular ferry services.”

Was the market for the management of railway infrastructure open to competition?

The appellants asserted that the General Court was wrong to hold that the market for the management of the railway infrastructure in Denmark was closed to competition. They argued that the licensing system for the operation, management and maintenance of the Danish railway infrastructure meant that those activities were open to competition.

The Court of Justice rejected that argument. “(130) As the Commission states, in essence, in paragraphs 188 and 219 of its Notice on the notion of State aid as referred to in Article 107(1) TFEU, the fact that a Member State assigns a public service subject to a legal monopoly to a public undertaking does not, in certain circumstances, entail a distortion of competition, and an advantage granted to the operator of an infrastructure subject to a legal monopoly cannot, in such circumstances, distort competition. However, as the Commission also states, in paragraph 188(b) of that notice, it is necessary, for such a distortion to be able to be excluded in such circumstances, that the legal monopoly not only excludes competition ‘on’ the market, but also ‘for’ the market, in that it excludes any possible competition to become the exclusive provider of the service in question”

“(131) In the present case, […] Banedanmark manages the national railway network under a statutory monopoly.” “(132) Banedanmark has such a statutory monopoly to manage and operate the national railway infrastructure it holds and that the rail hinterland connections form part of it.” “(133) Banedanmark will remain responsible for the management and operation of the rail connections after the project has been completed, including those which will be owned by Femern Landanlæg.”

“(134) Furthermore, although […] the Danish legislation allows undertakings meeting certain conditions to obtain a licence to manage and operate sections of the railway network, those are parts of that network that are separate from the national railway network.”

“(135) In that regard, it has not been demonstrated, or even alleged, that the grant of licences or, subsequently, the grant of safety approvals would allow undertakings other than Banedanmark to carry out their activities on or for the market for the management and operation of the national railway infrastructure.”

“(136) It is important to add that the fact that Banedanmark enjoys a statutory monopoly for the management and operation of the national railway infrastructure supports the finding that the Kingdom of Denmark is required, by legislative measures, to award the management and operation of that national infrastructure exclusively to that operator in the sense required by the case-law of the Court of Justice”.

“(138) As regards the argument [that] in order to claim that it is necessary, even where there is such a monopoly, to examine whether there is potential competition with other modes of transport, relying on paragraph 97 of the judgment of 30 April 2019, UPF v Commission (T‑747/17, EU:T:2019:271), it is apparent from paragraph 97 of that judgment that that case concerned a different situation as compared to the present cases; in that situation, potential competition had been established by the Commission not for port services offered under a monopoly, but for transport services offered by ports which were, to a certain extent, in competition with those offered by other ports or by other transport providers.”

The above statement by the Court of Justice is a bit confusing. The UPF case concerned preferential tax treatment enjoyed by French ports. In paragraph 97 of that judgment, the General Court confirmed the finding of the Commission that even though ports had monopoly status in their area, they still competed with each other because shippers could choose a port in another area for the transportation of their goods, or even a port in another Member State [e.g. Calais or Le Havre v Oostend or Antwerp]. So indeed there was competition between ports, regardless of their regional monopoly. But it is not clear why the Court of Justice rejected the argument that in order to exclude distortion of competition it is also necessary to exclude competition between different modes of transport. After all, this is what the Commission Notice on State Aid requires. Perhaps the Court of Justice meant that even though the fixed link road and rail services competed with ferries, there was no competition between ferries and the management of the rail network.

Then the Court of Justice turned its attention to the part of the plea concerning the licensing of managers of rail infrastructure. “(140) The General Court was right to find, […] that the Danish legislation establishing the licensing system for the management of railway infrastructure did not imply that there was ‘de lege’ competition ‘on’ or ‘for’ the market for the operation and management of the national infrastructure for which Banedanmark holds a statutory monopoly.”

“(141) It should be added that granting the measures at issue to another undertaking, such as Femern Landanlæg, established by the Danish legislature in order to ensure the financing of the part of the project relating to the rail hinterland connections in Denmark and which will also be responsible for the operation and maintenance of those connections, is not such as to alter that finding.”

“(142) In particular, it must be pointed out that the General Court found, […] that it is not apparent from the Danish legislation relating to Femern Landanlæg or from that company’s articles of association that it carries out or may carry out tasks other than those entrusted to it for the completion of the project.”

So it is legally possible to create statutory monopolies for two, and perhaps more, undertakings managing different parts of a closed sector.

Construction and maintenance v management and operation

Femern Landanlæg was responsible for ensuring that the rail connections were constructed and operated, but was not in a position to carry out itself the tasks relating to the construction and maintenance of the network. For this reason, it procured the services of other companies through tendering. The appellants contended that that demonstrated that Femern Landanlæg competed with undertakings in the construction and maintenance of the rail network. The General Court agreed that the market for construction and maintenance was open to competition. But it held that the holder of a statutory monopoly may procure services from third parties and that in itself does not mean that the market for the rail network was open to competition in the sense that there was competition on or for the market for the management of the rail network.

The Court of Justice noted that “(160) the distinction drawn by the General Court, […] between the markets for the construction and maintenance of the railway infrastructure, on which Femern Landanlæg is not ‘active’, and the markets for the management and operation, ‘in the strict sense’, of the railway infrastructure is based solely on the distinction between whether or not those different activities are actually performed by that undertaking.”

“(161) As the Commission states, it is necessary, for the purpose of assessing the effect on competition of the measures granted to Femern Landanlæg, to take account of the activities of which that undertaking is itself specifically and actually in charge.”

“(162) Since Femern Landanlæg is not capable of carrying out the activities of constructing or maintaining the rail connections itself, the General Court was right to find, […] that the existence of companies carrying out those activities on the Danish railway network, including following a competitive tendering procedure for the award of a contract, does not demonstrate that the activities of managing or operating the railway infrastructure performed by Femern Landanlæg in that sector are also open to competition.”

Direct and indirect affectation of trade

The appellants claimed that the measures granted to Femern Landanlæg were such as to affect trade between Member States since they were liable to affect competition both on the market for the management of railway infrastructure and on the market for transport across the Fehmarn Belt. They pointed out to the cross-border nature of the project, which connects two Member States.

The Court of Justice confirmed that “(172) the General Court did not err in law in taking the view that the Commission had been right to find that there is no competition on the market for the management and operation of the national railway infrastructure.”

“(173) It follows that the General Court was also right to find, without erring in law, […] first, that the fact that there is no competition on that market prevents companies established in other Member States from penetrating that market and, second, that the [relevant Danish laws], do not allow Femern Landanlæg to engage in activities other than the planning, construction and operation of the rail connections.”

“(174) The General Court was thus entitled to conclude, […] that the appellants had not succeeded in showing that Femern Landanlæg had been authorised to carry out activities other than those relating to the project and that it could therefore penetrate markets in other Member States.”

“(176) As regards the appellants’ argument alleging that the project is cross-border in nature, inasmuch as it will make it possible to connect two Member States, it must be noted that the measures examined in the context of the present ground of appeal concern in any event only the rail hinterland connections in Denmark, which are not ‘cross-border’ in nature in the sense in which the appellants rely on. Moreover, their financing is the subject of an assessment that is separate from that of the financing of the fixed link”.

Given that none of the pleas was upheld, the Court of Justice dismissed the appeal in its entirety.


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

https://curia.europa.eu/juris/document/document.jsf?text=&docid=247047&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=164337


 

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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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