Rescue Aid

Member State must demonstrate that rescue or restructuring aid aims to prevent social hardship or address market failure.

The Temporary Framework is coming to an end

The European Commission announced on 12 May 2022 that the Temporary Framework will be abolished on 30 June 2022, with the exception of the two types of support that were inserted in the Temporary Framework at its last revision in November 2021. Investment and solvency support measures will be permitted until 31 December 2022 and 31 December 2023, respectively. The reason why these measures are allowed to be implemented beyond June 2022 is to avoid cliff-edge effects from the phasing out of the massive liquidity that Member States injected in their economies to combat the effects of covid-19.

 

In the same announcement, the Commission stated that in the period between March 2020 and May 2022, it had adopted more than 1300 decisions authorising about 950 measures with total budgeted amounts close to EUR 3.2 trillion.

 

 

Introduction

Rescue aid is one of the most distortionary kinds of State aid because it prevents directly the exit from the market of inefficient companies. That is the reason why the Guidelines for Rescue and Restructuring Aid [RRG] require Member States to show that if no State aid is granted there would be serious social hardship.

On 4 May 2022, the General Court, in case T‑718/20, Wizz Air Hungary v European Commission, had to assess whether indeed the Commission had assessed correctly the risk of serious social hardship.[1]

Wizz Air sought the annulment of Commission decision SA.56244 which authorised Romanian rescue aid to TAROM.[2] The rescue aid was in the form of a six-month loan of EUR 36.7 million to finance TAROM’s liquidity needs in 2020.

The Commission approved the aid because, first, it found that TAROM was an undertaking in difficulty and, second, if TAROM would go bankrupt, flights for which bookings had already been made would not take place. In addition, the Commission considered that TAROM’s competitors would not be able to take over in the short term the routes abandoned by TAROM. Consequently, the exit of TAROM from the market would affect a number of undertakings, in particular domestic airports, and a large number of persons who relied on domestic flights for their travel in view of the poor condition of roads and rail. Therefore, the Commission concluded, exit of TAROM would cause social hardship.

Legal standing of Wizz Air

Wizz Air argued that it was a party “concerned” in the meaning of Article 108(2) TFEU and also an “interested party” in the meaning of Article 1(h) of Regulation 2015/1589.

First, the Court reiterated well-established practice that when the Commission decides not to raise objections to a notified measure, not only does it declare the measure to be compatible with the internal market, but by implication, it also refuses to initiate the formal investigation procedure. By contrast, if the Commission has any doubts about the compatibility of the measure, it must open the formal procedure. When the formal investigation procedure is not initiated, interested parties are deprived of their procedural rights. [paragraph 19-20 of the judgment]

“(21) Such interested parties include, in the light of Article 1(h) of Regulation 2015/1589, undertakings in competition with the beneficiary of an aid measure”.

Then the Court acknowledged that Wizz Air was a competitor of TAROM, as it held 41% of the Romanian market against 15% of TAROM’s. “(23) It follows that the applicant is a party concerned”.

Next, the Court examined whether the procedural rights of Wizz Air had been infringed.

Existence of serious difficulties from incomplete assessment of compatibility

Wizz Air claimed that the Commission had encountered serious difficulties because its assessment of the compatibility of the aid with the internal market was insufficient and incomplete, in particular with respect to the contribution of TAROM’s rescue to an objective of common interest.

As is well known, in September 2020, the Court of Justice held in case C-594/18 P, Austria v Commission, that Article 107(3)(c) TFEU does not require that State aid serves an objective of common interest. It only requires that State aid contributes to the “development of certain economic activities”. However, the RRG do refer to “objective of common interest” [points 38 & 43 and section 3.1 of the RRG]. The Commission adopted decision SA.56244 approving rescue aid on the basis of Article 107(3)(c) in February 2020.

We will see below that the Court had a creative interpretation of how the pursuit of common interest as defined in the RRG could facilitate the development of certain economic activities.

“(34) The Court considers it necessary, having regard to the judgment of 22 September 2020, Austria v Commission (C‑594/18 P, EU:C:2020:742), to note that it is apparent from point 43 of the Guidelines that, in order to be declared compatible with the internal market on the basis of the Guidelines, a State aid measure must pursue an objective of common interest. According to that same point, that requirement takes the form of the condition that such a measure must aim to ‘prevent social hardship or address market failure’. This is confirmed by point 44 of those guidelines, according to which Member States must demonstrate that the failure of the beneficiary would be likely to involve serious social hardship or severe market failure. The content of that requirement is thus linked to the condition laid down in Article 107(3)(c) TFEU, according to which the aid measure must be intended to facilitate the development of certain economic activities or of certain economic areas, as the parties, moreover, submitted at the hearing.”

“(35) It follows that the very substance of the requirement laid down in points 43 and 44 of the Guidelines is not contrary to Article 107(3)(c) TFEU, which, in addition, is not claimed by any of the parties, and that, by imposing that requirement, the Guidelines did not unduly reduce the scope of that provision as regards the examination as to whether a State aid measure was compatible within the meaning of the judgment of 22 September 2020, Austria v Commission (C‑594/18 P, EU:C:2020:742, paragraph 24). Furthermore, it is apparent from paragraphs 66 and 67 of that judgment that the fact that the proposed aid enables a market failure to be addressed may constitute a relevant factor in assessing the compatibility of that aid under Article 107(3)(c) TFEU.”

In other words, the common interest, as expressed in the prevention of social hardship or remedying market failure can be assimilated into development of economic activities. This is a reasonable interpretation, although the Court of Justice examined the term common interest in the Austria v Commission case in the context of a question whether aid had to be in the common European interest.

Then the Court examined who bears the burden of proof with respect to prevention of social hardship or remedying market failure [i.e. points 43 and 44 of the RRG].

“(38) In that regard, first of all, it is apparent from the wording of point 43 of the Guidelines that the Member State concerned must demonstrate that the aid ‘aims’ to prevent social hardship or address market failure.”

“(39) That point must be read in conjunction with point 44(b) of the Guidelines, which clarifies that the Member States must demonstrate that the failure of the beneficiary ‘would be likely’ to involve serious social hardship or severe market failure, in particular by showing that there is a ‘risk’ of disruption to an important service which is hard to replicate and where it would be difficult for any competitor simply to step in.”

“(40) It follows that the Member State concerned is not required to demonstrate that, in the absence of the aid measure, certain negative consequences would necessarily arise as a result of the aid beneficiary’s failure, but only that such consequences might arise.”

It seems that, in paragraph 40 that is quoted above, the Court waters down the requirements expressed in the preceding paragraph 39 and lowers the standard of proof for Member States. Admittedly, what is “hard” to replicate and when it is “difficult” for competitors to step in are subjective matters. But it is rather clear that Member States have to demonstrate that the consequences are not just negative, but must be “serious” or “severe”, and that they are likely, not just that they “might arise”.

Then, the Court turned to the obligations of the Commission. “(42) The lawfulness of a decision not to raise objections, […], depends on the question whether the assessment of the information and evidence which the Commission had at its disposal during the preliminary examination phase of the measure notified should objectively have raised doubts as to the compatibility of that measure with the internal market”.

“(43) Evidence of the existence of doubts as to the compatibility of the aid at issue with the internal market, […], must be adduced by the applicant seeking the annulment of that decision”.

And the Court rejected the argument of Wizz Aid because “(44) in order to assess the lawfulness of the contested decision, there is no need to examine whether the Commission demonstrated that, in the absence of the aid measure, social hardship or market failure would necessarily have arisen and that that measure would make it possible to prevent them or address them with certainty. By contrast, it is necessary to ascertain whether the applicant has demonstrated the existence of serious difficulties, in the light of the information and evidence which the Commission had or could have had at its disposal, which should have led the Commission to harbour doubts as to the existence of a risk that, in the absence of the aid measure, such social hardship or market failure would have arisen, or as to whether the aid measure was intended to prevent or address them.”

A comment is in order here. Given that the standard of proof laid down by the RRG is pretty high, it seems that Wizz Air could have legitimately questioned not just whether the evidence before the Commission was “complete” but also whether it was robust in the sense that it could prove that the hardship could be serious or that the market failure would be severe. Interestingly, later on in the judgment, the Court recalled that “(56) the lawfulness of a decision not to raise objections […] falls to be assessed by the EU Courts, in the light not only of the information available to the Commission at the time when the decision was adopted, but also of the information which could have been available to the Commission”. That is the information that the Commission should have taken into account.

Please also note that the Court held that the Commission was not required to verify that the hardship or failure was “necessary” or that the measure could prevent them with “certainty”. Of course the Commission was under no such obligation. This is because the RRG do not impose such high standards of proof on Member States.

Serious social hardship or severe market failure in the absence of the rescue measure?

At any rate, the Court did examine whether the Commission should have had serious doubts as to the significance of TAROM on the national market and whether competitors could substitute TAROM on domestic routes.

The Court noted that “(49) the Commission found that it had been shown that TAROM played a decisive role in ensuring regional connectivity within Romania, since it operated several domestic air routes on its own. Furthermore, the Commission stated that cessation of operations by TAROM would affect 460 000 passengers who had already booked flights, including 63 000 passengers booked on routes operated exclusively by TAROM. As regards the latter routes, the Commission found, […], that it appeared unlikely that competitor airlines would step in to fully cover those routes, which would affect the connectivity of the regions in Romania in view of the poor condition of the road and rail infrastructure that does not offer any real meaningful alternatives for the passengers on those routes. […], the Commission stated that cessation of operations by TAROM could be detrimental to the economic situation in the regions of Romania, particularly for regional airports, to the extent that it could result in a reduction in economic activity, which could lead to a decreased demand for travel services. […], the Commission found, on the basis of the information provided, that there was a concrete risk of disruption of passenger air transport services in Romania and, […], it concluded, in essence, that, by averting an imminent and potentially disruptive liquidation process, the aid measure would prevent serious social hardship and severe market failure.”

“(51) Point 43 and point 44(b) of the Guidelines do not require the Commission to take account of the size of the relevant market when examining whether the service in question is ‘important’. Thus, even if the market in question is relatively limited, that does not prevent a service provided on that market from being important within the meaning of the Guidelines.”

More importantly, “(57) although, when the existence and legality of State aid are being examined, it may be necessary for the Commission, where appropriate, to go beyond a mere examination of the facts and points of law brought to its notice, it cannot be inferred from this that it is for the Commission, on its own initiative and in the absence of any evidence to that effect, to seek all information which might be connected with the case before it, even where such information is in the public domain”. Indeed, it would be unreasonable to expect the Commission to ask for information whose existence it was not aware of. But isn’t incumbent on the Commission to ensure the robustness of the evidence before it, given that the required standard of proof is that the hardship must be serious or that market failure can be severe?

Then the Court made a number of observations concerning the possible impact of TAROM’s exit from the market.

“(58) The possibility of TAROM’s substitution by its competitors on the domestic routes operated exclusively by TAROM was assessed by the Commission […] the Commission took the view that it was unlikely that the competitor airlines present on the Romanian market, which are mainly low-cost airlines, would enter that market in order to fully cover all of those routes, since the commercial interest of those airlines in doing so was presumably low. To that end, the Commission noted that demand on those routes was low in terms of passengers per flight and that it was not profitable to operate such routes with aircraft with a larger seat capacity than those used by TAROM, such as those normally operated by low-cost airlines. The Commission observed that the business model of low-cost airlines is based on quantity and a homogeneous fleet in order to minimise costs.” [Similar reasoning is expressed in paragraph 122 of the judgment.]

Indeed, if there are only a few passengers on each domestic route, then there may be no room for more than one airline. But if the incumbent exits, what prevents a low-cost airline from leasing smaller aircraft in order to serve domestic routes? Perhaps one may counter-argue that those airlines did not have spare capacity in terms of personnel. This is a good counter-argument. But, the Court or the Commission did not examine whether there was no spare capacity. Please also note that the statement that demand was low on domestic routes appears to contradict the earlier statement that the rescue aid was necessary because a high number of persons would have been disadvantaged had TAROM gone bankrupt and that those persons were dependent on air transportation in view of the poor condition of roads and rail. [In paragraph 122 of the judgment it is mentioned that demand was low per flight. But still, smaller aircraft could be leased to meet the low demand per flight.]

“(59) Next, although it submits that airlines in competition with TAROM operated three of the seven domestic routes presented in that decision as operated exclusively by TAROM, the applicant does not dispute that, in any event, the other four domestic routes were indeed operated exclusively by TAROM.”

But if indeed other airlines operated on domestic routes and those airlines were low-cost carriers, then the reasoning of the Commission that low-cost carriers would not change their business model was wrong. They could lease smaller aircraft and enter the regional routes.

Later on in the judgment the Court returned to the issue of the size of aircraft and pointed out that “(69) the airlines in competition with TAROM, which are all low-cost airlines, use aircraft with a greater passenger capacity than the aircraft used by TAROM to cover routes which it operates on its own. The applicant does not explain to what extent it would be profitable to operate the domestic routes in question, which involve only a limited number of passengers, with such aircraft.” Again, it is assumed that low-cost airlines would not change their business model when they would attempt to enter regional routes.

The Court also questioned the feasibility of market entry. “(64) The fact that other airlines were operating certain domestic and international routes at any time in 2019 is not such as to demonstrate that those airlines would have been able easily to provide the service performed by TAROM, in the event that it were to fail, on all of the routes which TAROM operated exclusively.”

This observation of the Court is, naturally, correct. The point, however, is not that market entry was inevitable, but whether market entry was possible. It could not be simply assumed that the exit of TAROM would have left an unfilled gap.

And the court repeated that “(65) the Commission is not required to seek, on its own initiative and in the absence of any evidence to that effect, all information which might be connected with the case before it, even where such information is in the public domain.” But it appears that there was evidence to alert the Commission to other outcomes that could possibly result from TAROM’s exit.

The principle of “one time, last time” R&R aid

The RRG lay down the principle that rescue or restructuring aid may be granted only once. In practice this means once in any ten-year period. Wizz Air alleged that the Commission miscalculated that ten-year period. The Commission had considered that the aid was granted before Romania’s accession to the EU in 2007, even though payments of public funds were made after 2007. Those payments were linked to state guarantees that were granted before 2007 and were called after 2007.

With respect to the point in time that aid is deemed to be granted, the Court recalled that “(83) from the moment at which the right to receive support through State resources is conferred on the beneficiary under the applicable national legislation, the aid must be deemed to be granted, with the result that the actual transfer of the resources in question is not decisive”.

Next, the Court clarified that “(86) the nature of a State aid measure consisting of a guarantee for loans granted to the beneficiary of the aid necessarily implies that, once the guarantee is called, the payments made in that context may extend over the entire loan period. However, that does not affect the date on which the aid was granted, with the result that all the arguments concerning the payments relating to the guarantees made after that date are ineffective.”

Then the Court addressed Wizz Air’s contention that aid was granted beyond the restructuring period of TAROM. “(97) Point 47 of the Guidelines makes clear that ‘the restructuring period should be as short as possible’”. “(98) It follows from the foregoing that the concept of a ‘restructuring period’ refers to the period during which the [restructuring] measures […] are taken. That period is therefore separate, in principle, from that during which a State aid measure is implemented.”

“(101) The fact that restructuring aid is linked to a restructuring plan does not mean that, as such, that aid forms part of the restructuring plan, since the existence of the restructuring plan constitutes, on the contrary, an essential condition for such aid to be considered compatible with the internal market”.

Since the purpose of the restructuring plan is to return the aided undertaking to commercial viability, the restructuring plan ends when the undertaking in question becomes viable again; normally three to five years after restructuring starts. But the last instalment of aid may be made after the restructuring is completed. As the Court reiterated, the aid is deemed to be granted when the legal right to it is conferred to the aided undertaking, not when it is eventually paid.

Conclusions

The problem with the Commission decision which is repeated in the judgment is that there were a number of factors that made difficult the entry on competitors in the market for regional air services in Romania [e.g. low number of passengers per flight] and a number of factors that made that entry more attractive [e.g. absence of high quality road or rail links]. Listing of such factors is not the same as analysing and weighing their relative impact so as to determine the overall effect.

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

CURIA – Documents (europa.eu)

[2] The full text of the Commission decision can be accessed at:

284737_2161252_169_2.pdf (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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