State Aid for i) Water Development ii) Travel

Aid to individuals in the context of social policy is compatible with the internal market as long as it is granted without discrimination on the origin of products or services.

Temporary Framework:

Number of approved covid-19 measures, as of 22 May 2020: 129*

Legal basis: Article 107(2)(b): 9; Article 107(3)(b): 111; Article 107(3)(c): 12

* Excludes amendments to previously notified measures

Introduction

Although very large amounts of State aid are pumped in the economy to combat the effects of the covid-19 pandemic, other State aid measures are also being implemented. This article reviews several rather unusual schemes that were approved by the Commission just before the covid-19 outbreak.

i) Water development

The Commission approved German and French measures for the development of water resources and improvement of water usage. Despite their similarities, public funding did not constitute State aid in the case of the German measure, while in the case of the French measure it was compatible aid.

SA.55183: Water development in the state of Brandenburg[1]

Objective

The notified measure was part of the Rural Development Programme [RDP] of Berlin and Brandenburg for the period 2014-2020. It aimed to improve water quality and the water management infrastructure and to comply with the requirements of the EU Water Framework Directive and the EU Flood Risk Management Directive. Its “(18) impact on the environment has already been analysed in the approved RDP […] and is expected to have positive effects on the environment.”

Beneficiaries

According to the Commission decision, the eligible beneficiaries were about 10 non-profit entities such as nature protection associations and federations.

Undertakings in difficulty and undertakings subject to an outstanding recovery order were excluded from the measure.

Aid instrument and budget

The aid was to be provided in the form of grants. The budget of the measure was EUR 2.67 million and it was to be co-financed by the EAFRD [EUR 2 million] (75%) and the Land Brandenburg [EUR 0.67 million] (25%).

Eligible costs

All of the planning and investment costs such as the following were eligible for public funding at a rate of 100%:

  • Preparation, research, feasibility studies, fees for architects and engineers, etc.
  • Infrastructure works, pipelines, land remediation, filters, drainage, sediment removal, etc.

 

Non-economic activities

What makes this case interesting is that the public funding supported non-undertakings. “(12) The beneficiaries are non-profit entities of private law, which do not exercise an economic activity with regard to the activities supported under the scheme at hand. […] The projects supported under the scheme concern water infrastructure, which is not commercially used. The activities do not generate net revenues and do not lead to an increase of the value of the infrastructure.”

“(13) For the improvement of the ecologic and chemical situation or the potential of waters, there is no existing market. In this regard, the German authorities have confirmed that the beneficiaries do not offer goods and services on a market and thus do not carry out an economic activity.”

“(19) It is not excluded that applicants carry out both activities of economic and of non-economic character. The supported activities notified under the present scheme are non-economic activities. In order to exclude possible cross-subsidisation from the non-economic into the economic sphere, the aided projects under the notified scheme are obligatory subject to a separate accounting. In this regard, a verification is made at the stage when the proof of the correct use of the eligible expenses has to be presented by the beneficiaries”.

“(21) Payments of the support are made by way of reimbursement, i.e. prior to the disbursement of funding all original invoices and payments are checked. The beneficiary must pay the eligible costs in advance. An inspection takes place in order to check whether the submitted invoices relate to the supported project, with the aim to ensure that the support cannot be used for any other projects.”

“(22) The support under the scheme cannot be cumulated with support from other measures for the same eligible costs.”

Commission assessment: Absence of State aid

On the basis of the above information submitted by the German authorities, the Commission found the public funding not to constitute State aid.

“(25) The State aid rules only apply where the beneficiary of a measure is an ‘undertaking’. The Court of Justice has consistently defined undertakings as entities engaged in an economic activity, regardless of their legal status and the way in which they are financed. The classification of a particular entity as an undertaking thus depends entirely on the nature of its activities.” [At this point the decision cites the landmark judgments in cases Pavlov and Others, Joined Cases C-180/98 to C-184/98, paragraph 74; Cassa di Risparmio di Firenze SpA and Others, C-222/04, paragraph 107.]

“(26) To clarify the distinction between economic and non-economic activities, the Court of Justice has consistently held that any activity consisting in offering goods and services on a market is an economic activity”. [Cases cited: Commission v Italy, 118/85, paragraph 7; Commission v Italy, C-35/96, paragraph 36; Pavlov and Others, Joined Cases C-180/98 to C-184/98, paragraph 75.]

“(28) In the present case, the beneficiaries of the aid are non-profit entities under private law, such as nature protection associations that safeguard the interests of near-nature development of waters.”

“(29) Furthermore, the objective of the scheme is to support near-nature development and management of waters […]. The activities and investments under the present scheme […] contribute to the achievement of this objective. The activities under the scheme are to the benefit of the general public and do not serve commercial exploitation.”

“(30) It follows from recitals (12) and (13) that the beneficiaries of the aid do not exercise an economic activity with regard to the supported activities under the notified scheme. There is no market existing for these activities carried out by the beneficiaries. They do not offer goods and services on a market and thus do not carry out any economic activity (recital (26)).”

“(31) Therefore, given the nature of the scheme and its focus on the natural development of waters, the Commission considers that the scheme is non-economic in nature as regards its beneficiaries.”

“(32) Nevertheless, it follows from recital (19) that, outside the scope of the projects supported under the notified scheme, it cannot be excluded that beneficiaries carry out economic activities. However, in this respect, first, public funding they receive will only cover the costs linked to the nature-protection activities supported under the notified scheme (recitals (14) and (19)).”

“(33) Second, there must be a clear division between economic and non-economic activities, so that cross-subsidisation is excluded. Third, it follows from recitals (19), (20) and (21) that beneficiaries use separate accounts for supported and non-supported activities, thus ensuring that costs are allocated, declared, verified and reimbursed in an appropriate way in order to exclude that public funding benefits any economic activities in which beneficiaries may engage outside of the supported projects.”

“(34) Based on the above, it can be concluded that the present scheme does not constitute State aid in the sense of Article 107(1) of the TFEU.”

Concluding thoughts

This case offers much guidance on how to design a system to support non-undertakings. They must not generate any revenue from the subsidised product or activity, nor should they compete with anyone else who may provide the same product or engage in the same activity for remuneration. In case they are also involved in economic activities, they must keep separate accounts and prevent cross-subsidisation of the economic activities.

SA.54810: Improvement of water quality in the Paris region[2]

France also recently implemented a measure for the improvement of the quality of water. By contrast to the German measure, the Commission concluded in decision SA.54810 that the French intervention involved State aid. Although the German and French measures had similar objectives, the French measure constituted State aid because the public money was paid to undertakings, in this case farmers.

The purpose of the French measure was to induce farmers to reduce their use of nitrites and consequently their discharge of nitrites and other chemicals which would seep into the reservoirs from which potable water was drawn for the needs of Paris. Lower amount of discharged chemicals at source would reduce the downstream cost of treating the water before it was pumped to residential areas.

The budget for this measure was EUR 46 million. The beneficiaries were agricultural enterprises, located in the water catchment area for Paris, which would participate voluntarily.

The assistance provided to farmers fulfilled all of the criteria of Article 107(1) TFEU and therefore was classified as State aid. The French measure was compatible with Article 107(3)(c) as was found to conform with the seven common assessment principles.

An interesting aspect of this case is the finding of the Commission that the aid was an appropriate instrument. Normally, when it comes to chemical discharges, regulation is a more effective intervention by the state. However, section 1.1.5.1 of the agricultural guidelines allows aid “for agri-environment-climate commitments” and in particular aid for “voluntary commitments going beyond the relevant mandatory standards” [point 210].

ii) Travel between islands and mainland: Article 107(2)(a)

Some State aid measures to combat covid-19 have been based on Article 107(2)(b) and have provided compensation for losses as a result of the lock-down.

The second paragraph of Article 107 also declares aid to be compatible with the internal market when it is granted to individuals in the context of social policy.

What do European islands such as the Balearic islands, Canary islands, Sicily, Lampedusa, Corsica, French overseas departments, Scottish islands, and German North Sea islands have in common (apart from the obvious fact that they are all surrounded by sea)? They have all benefitted from State aid to facilitate the transport of island residents to their respective mainlands [see footnote 6 of Commission decision in case SA.32888 on exemption from air transport tax for flights between German islands and mainland]. This kind of aid has been approved on the basis of Article 107(2)(a).

As explained by the Commission in its decision in case SA.55903[3] concerning travel between German islands and the mainland, “(18) point 156 of the 2014 Aviation Guidelines provides that aid of a social character in air transport services will be held compatible with the internal market pursuant to Article 107(2)(a) TFEU, if the following cumulative conditions are met:

  • the aid must effectively be for the benefit of the final consumers;
  • the aid must have a social character, that is it must in principle cover certain categories of passengers travelling on a route, or, in case of a remote region, such as an island, it could also cover the entire population of such remote region;
  • the aid must be granted without discrimination as to origin of services, meaning irrespective of the airline which is operating the services.”

 

“(20) The scheme does possess a social character as it covers the entire population of the islands to ensure the connectivity of the population with the mainland, also including medical flights and persons acting under public policy remit.”

The scheme was re-notified by Germany because its budget had been increased by about 75%. Although the scheme had been authorised by the Commission, it could no longer be considered as existing aid because the budget increase exceeded the threshold of 20% laid down in Article 4 of Regulation 794/2004.


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

https://ec.europa.eu/competition/state_aid/cases1/20206/281872_2130027_124_2.pdf

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

https://ec.europa.eu/competition/state_aid/cases1/20207/281179_2131217_114_2.pdf

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

https://ec.europa.eu/competition/state_aid/cases1/202010/283515_2137036_82_2.pdf


Photo by Peter H. on Pixabay

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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 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.

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