The First Application of the New GBER to Sport Infrastructure

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Public funding of local sport infrastructure may constitute State aid. The granting of a concession contract for the construction and/or operation of the infrastructure may not exclude State aid for the concessionaire. Measures based on the new GBER have to satisfy both its general and specific provisions. The funding gap method can be used in the context of the GBER.

Introduction
 
In this article I review Commission Decision SA.33045 on alleged aid to Kristall Bäder, in Germany.[1] It is an interesting case for two reasons. It is the first application of the 2014 General Block Exemption Regulation [GBER] to sport infrastructure and it contains an analysis of concessions in the context of State aid rules. Normally, the Commission does not examine aid measures based on the GBER for the simple reason that Member States do not notify them. However, in this instance the Commission assessed the aid on the basis of the GBER because there are no guidelines on state aid to sport infrastructure.Background

The case concerned alleged unlawful State aid granted by Bavaria and the Municipality of Kochel am See to the company “Kristall Trimini Kochel am See” for investment in the modernisation and upgrading the local swimming pool in Kochel am See (“Trimini”). The investment aimed to create a new swimming pool, wellness and spa facilities complex.

Trimini was a public swimming pool run by the Municipality of Kochel am See. Due to declining number of users, Trimini suffered significant operating losses, averaging about EUR 1 million per year over the period 2000-2010. Continuing operations in its current state would merely extend the financial losses of Trimini. Therefore, in 2010 the Municipality considered closing down Trimini.

The costs to close Trimini were estimated at EUR 6.48 million. Dismantling costs alone would amount to about EUR 5 million. In case of complete closure, the Municipality would have to compensate employees for about EUR 0.541 million. Furthermore, the Municipality received for a previous modernisation of Trimini from the Government of Upper Bavaria a grant of about EUR 1.232 million, from which, in the event of complete closure of Trimini, the Municipality would have to pay back an amount of EUR 0.942 million. That is,

Dismantling / demolition costs: EUR 5,000,000
Costs for dismissing employees: EUR 541,000
Reimbursement of part of public funding: EUR 941,541
Total: EUR 6,482,541

Instead of closing down Trimini, the Municipality decided to invest into a major modernisation, extension and upgrading, and to add spa, fitness and wellness facilities in order to increase its attractiveness.

The Municipality decided to outsource the construction and future operation of the new Trimini complex by granting a construction and operating concession to the winning bidder, following a European public procurement procedure.

In April 2011, at the end of the public procurement procedure, the Municipality signed a contract in the form of a concession with the winning bidder, “Kristall Trimini Kochel am See GmbH”. The concession period ran to 25 years. The Municipality remained the owner of the new Trimini complex whereas the concessionaire would build, operate and maintain the infrastructure and manage the new Trimini complex with owner-like rights and duties.

The contractually agreed total investment costs amounted to EUR 12.154 million and would be borne by the Municipality. However, cost overruns were to be covered by the concessionaire who would receive EUR 0.380 million per year during the construction phase, as indemnity for lost revenues, up to a total of EUR 0.831 million.

The contract required the concessionaire to:

  • Plan and build the new Trimini complex.
  • Exploit the facilities during a 25 years exploitation period.
  • Pay an up-front fee amounting EUR 6.154 million.
  • Keep entrance fees to swimming pools (but not to spa and sauna facilities) at socially acceptable prices, and offer reduced fees for certain social groups and associations, as well as free entrance for local schools and kindergartens. For these purposes, the concessionaire would receive from the Municipality a compensation of EUR 0.1 million per year for a period of 23 years.
  • Transfer back the new Trimini complex to the Municipality in full functioning and operating conditions at the end of the concession period.

In December 2011, Bavaria awarded to the Municipality a direct investment grant of EUR 2.4 million.

Existence of State aid

Following the receipt of a complaint the Commission examined the measures and had no difficulty in establishing that it was imputable to the state and financed through state resources. Both the Municipality and Bavaria funded the project.

The Commission explained that “both the financing of the construction and the operation of an infrastructure constitute as an economic activity in itself if that infrastructure is, or will be, used to provide goods or services on the market. The Commission in other words considers that there is a link between the managing and operating of infrastructure and its construction or development … Moreover, the economic character of the later use of the infrastructure would determine the nature of the construction. In the present case, the new Trimini complex will be used to provide services on the spa and wellness tourism market, hence for an economic activity” [paragraph 33].

The Commission recalled that “the classification of a particular entity as an undertaking therefore entirely on the nature of its activities. This general principle has three important consequences: (1) the status of the entity under national law is not decisive, (2) the application of the State aid rules as such does not depend on whether the entity is set up to generate profits, and (3) the classification of an entity as an undertaking is always relative to a specific activity. An entity that carries out both economic and non-economic activities is to be regarded as an undertaking only with regard to the former” [paragraph 34].

The new Trimini complex was an undertaking, irrespective of whether it was operated by the Municipality or by the concessionaire. In this connection the Commission rejected the argument of the German authorities that the investment decision conformed with the MEIP because the Municipality chose the least costly option and the concessionaire was selected via a competitive procedure.

The Commission considered that:

(a) the financing of the investment by the Municipality and the grant of Bavaria “cannot be separated as they refer to the same investment and are awarded at the same moment in time. Therefore the public financing should be considered as one single measure”;

(b) “the public funding provided by local and regional authorities confers an economic advantage to the new Trimini complex, as the investment in the economic activity of new Trimini complex would not have been financed on market terms. Therefore, it can be assumed that the investment project would not yield an acceptable rate of return over the reference period of time of 25 years (duration of the concession)” [paragraph 36].


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The Commission went on to explain that since “the expected revenues (in this case, the advanced payment of the concession fees of EUR 6.124 million) … do not cover the full investment costs of the project (EUR 12.124 million), it must be concluded that a private investor would not have undertaken it. Even taking into account the fact that this project avoided the costs incurred in case of closure of the complex Trimini and the fact that the Municipality would be the owner of the complex after 25 years of concession without any obligation towards the concessionaire, no private investor would have undertaken such a project. Indeed, the public authorities had three options. No private operator would have chosen continuing the activities of Trimini (which would have entailed EUR 25 million of losses). Furthermore, the difference between the cost of the option of closing Trimini by dismantling it (EUR 5.541 million) and the one of investing into modernisation and extension (EUR 6.831 million) would amount to EUR 1.290 million. It does not result from the information taken into account by the German authorities that the net residual value of the Trimini complex after 25 years (taking into account the dismantling/ demolition costs and the costs of dismissing the employees) would be higher than EUR 1.290 million. It must be concluded that in this case the public funding does not take place on terms that would have been acceptable to a private investor, and the measure therefore confers an economic advantage to the new Trimini complex” [paragraph 37].

The reasoning of the Commission is robust. A private investor would take into account all options, would consider all costs and benefits associated with each option [up-front costs, operating expenses and revenues and any residual value] and would choose the least costly option. The Decision mentions three options: i) continuing operations [it would result in more operating losses]; ii) closure [it would result in one-off loss of EUR 6.483 million, including the return of an earlier grant of EUR 0.942 million to Bavaria or EUR 5.541 million without the return of that grant] and iii) refurbishment and modernisation. The numbers mentioned in the Commission Decision indicate that despite the costs of demolition and dismissal of employees, closure was the cheapest option.

However, there is one more option that neither the Municipality, nor the Commission appear to have taken into account. That option would have been to sell the complex. This is always the first option that the owner of an under-performing asset considers. Even if the price it would fetch would be pretty low, it would still relieve the Municipality from the cost of demolition [if the complex was sold as it was] or compensate the Municipality for the cost of demolition [if the complex was sold after the superstructure was demolished]. Moreover, even in the case that a private buyer would have to bear the cost of demolishing the existing superstructure, the new owner could have been able to generate more revenue from constructing, say, a shopping mall or an office building. This fact alone suggests that the Municipality was acting as a public authority that wanted to keep the swimming pool for the local population rather than act as a private investor to maximise revenue from the complex.

The German authorities also argued that the funding complied with the Altmark criteria. Incidentally, public funding that complies with the Altmark criteria pursues a well-defined public policy objective. Even though it so happens that public funding that satisfies the MEIP and public funding that conforms with Altmark are free of State aid, they have different objectives and they are free of State aid for different reasons. In the case of the MEIP, the public authority makes profit, while in the case of Altmark, the public service provider obtains no advantage.

At any rate, the Commission rejected the argument that the funding of Trimini complied with Altmark because the third Altmark criterion was not fulfilled. The compensation was not limited to what was necessary to cover the costs incurred in the discharge of public service obligations because “the infrastructure would not be exclusively used for purposes of general economic interest” [paragraph 38]. The spa, wellness and sauna facilities did not appear to fall within any definition of services of general economic interest.

The reasoning above demonstrates beyond any doubt that the Municipality acted as a public authority in pursuit of a public policy objective. However, the Decision paves over the issue of whether the concessionaire obtained any aid.

Let’s consider again the contractual obligations of the concessionaire. The construction cost was estimated at EUR 12.154 million. The Municipality was to finance the investment. But the concessionaire had to pay an up-front fee of EUR 6.154 million. That is, it obtained the right to use the new complex, built at the expense of the Municipality, for 25 years only for a fee of EUR 6.154 million. It also accepted the obligation to make the facility available to users at reasonable prices and offer free entrance to schools against an annual payment by the Municipality of EUR 100,000. In addition, the Municipality would compensate the concessionaire for the loss of income during the construction phase with an amount of EUR 0.831 million. The question that arises is whether the concessionaire could obtain any advantage out of this arrangement.

Since both the up-front fee and the annual compensation were determined by the competitive procedure itself, then how could it be thought that the concessionaire obtained an advantage? In this case, the aid granted by the Municipality merely facilitated the construction and operation of a complex that benefited the local population. Indeed, the aid “flows” through the concessionaire to the users of the complex. The concessionaire could only hope to generate enough revenue to cover its up-front costs. Although the Commission is certainly correct in its assessment of the role of the Municipality, it remains largely silent in the Decision with respect to whether the concessionaire derived an undue advantage. I will return to this issue at the end of this article because the Commission responded to a related issue raised by the complainant.

With regard to the remaining criteria in Article 107(1) TFEU, there was no doubt that the measure was selective. One would have thought, however, that any effect on trade would be insignificantly small. Nonetheless, the Commission contended that “the financial support granted to the economic activity of the Municipality of Kochel am See for the upgrading of Trimini could strengthen its position in relation to similar infrastructures in the Union and therefore might have potential distorting effects on competition and trade. Furthermore, the infrastructure of Trimini is not far from the border with Austria. Hence, the aid is liable to distort competition and to affect inter-Union trade” [paragraph 40].

The concept of effect of trade is empirical. It is true that it cannot be excluded a priori that such a project may have an impact on cross-border trade either because it attracts visitors from Austria or because the concessionaire carries out activities in other Member States or competes with undertakings from other Member States. However, these possible effects need at minimum to be supported by some empirical evidence rather than be alleged to exist without any proof. In case Germany appeals, this would constitute grounds for annulment for insufficient reasoning.

Compatibility of the aid

Once the Commission found that the measure contained State aid, the next step was to assess its compatibility.

The Commission considered that the Municipality decided to keep Trimini and to invest in its modernisation, extension and upgrading by entering into a contract with a concessionaire, rather than close and dismantle it at a cost of EUR 5.541 million. In its assessment, the Commission excluded funds that had to be reimbursed by the Municipality to Bavaria, as those funds would remain in the public realm.

The Commission had to determine the amount of aid and its necessity and proportionality. The public funding of the new Trimini complex was EUR 12.154 million for investment costs, minus EUR 6.154 million advanced by the concessionaire for concession fees, plus EUR 0.831 million as a contractually agreed indemnity to the concessionaire for losses during the construction phase. This public funding included EUR 2.4 million awarded by Bavaria to the Municipality. Moreover, in the long term the Municipality would pay to the concessionaire EUR 100,000 per year for 23 years to compensate it for reduced or free access fees. According to the Commission, the present value of that compensation was EUR 1.735 million [discounted at 2.5%]. Therefore, the total public funding was EUR 8.566 million [= EUR 6.154 million + EUR 0.831 million + EUR 1.735 million].

This meant that the concessionaire undertook the project at an up-front cost of EUR 6.154 – EUR 0.831 – EUR 1.735 = EUR 3.588. This funding gap of EUR 3.588 million [which, incidentally, is equal to the total investment cost minus the amount of the state aid, i.e. EUR 12.154 million – EUR 8.566 million] would have to be financed from future profits over the 23-year period of commercial operation of the project. At a discount rate of 2.5%, the concessionaire would have to make net profits of about EUR 205,000 per year.

Rather surprisingly, the Commission assessed the compatibility of the aid on the basis of the 2014 General Block Exemption Regulation [Regulation 651/2014] and in particular on two sets of rules: the common provisions and Section 12 concerning investment aid for sport and multifunctional recreational infrastructures. This case demonstrates that Member States must ensure that state aid measures based on the GBER must satisfy both its general and specific requirements.

Compliance with the common provisions of the GBER

Article 3 of the GBER allows for ad hoc aid as long as it “fulfils all the conditions laid down in Chapter I of this Regulation, as well as the specific conditions for the relevant category of aid laid down in Chapter III of this Regulation”.

Article 5 requires that aid is transparent. That is, “it is possible to calculate precisely the gross grant equivalent of the aid ex ante without any need to undertake a risk assessment”. The Commission found that the public funding of the investment in the new Trimini complex was in form of a non-reimbursable grant, and could “therefore, be considered transparent’ [paragraph 51].

Article 6 stipulates that the aid must have “an incentive effect” and that the beneficiary must submit “a written application for the aid to the Member State concerned before work on the project or activity starts.” The application for the aid must contain the following information: (a) the name and size of the aid recipient; (b) description of the project, and its start and end dates; (c) location of the project; (d) project costs; (e) type of aid and amount of public funding needed for the project. The Commission found that all these conditions were fulfilled. In particular it noted that “the concession contract represents the granting act of the infrastructure investment aid. As a granting act is a stronger entitlement than a written application for the aid, the provision on the incentive effect of the aid can be considered to be fulfilled.” [paragraph 52]

Article 8 provides that “the total amount of State aid for the aided activity or project or undertaking” be taken into account. The Commission found that this requirement was satisfied.

Compliance with the specific provisions of the GBER on sport and multifunctional recreational infrastructures

Article 1.1(k) of the GBER allows aid for sport and multifunctional recreational infrastructures. Given that the Trimini complex serves more than one purpose of recreation, it qualifies as a multifunctional infrastructure.

Article 55 of the GBER requires that:

(a) The sport infrastructure is not used exclusively by a single professional sport user. Trimini is not used exclusively by professional swimmers.

(b) The infrastructure consists of sport and recreational facilities with multi-functional character (education, leisure, tourism). Trimini is neither a leisure park nor a hotel.

(c) Access to the multifunctional sport and recreational infrastructure is open to all users and is granted on a transparent and non-discriminatory basis. Access to the new Trimini complex is open to all paying users (and free for certain categories).

(d) The concession was awarded on an open, transparent and non-discriminatory basis, having due regard to the applicable procurement rules.

(e) The aid takes the form of investment grant.

(f) The aid amount covers the funding gap, and does not exceed the difference between eligible costs and operating profit of the investment. The operating profit was deducted from the eligible costs ex ante.

(57) The aid (amounting to EUR 8.566 million) fell under the GBER threshold of EUR 15 million and total costs (amounting to EUR 12.154 million) did not exceed the threshold of EUR 50 million.

Following this assessment, the Commission declared the aid to be compatible with the internal market.

Comments on the concession fee

The complainant claimed that the concession fee was too low. In response, the Commission made the following observations.

“(60) The German authorities declare that the concessionaire has been chosen on the basis of a public, open and non-conditional tender, in compliance with EU public procurement law. The Commission observes that the Municipality of Kochel am See published a European public tender in the Official Journal of the European Union for a construction, building management and operating concession of the new Trimini complex.”

“(61) As a result of the public tender, the concessionaire does not pay an annual concession fee, but makes an advance payment of the total concession fees over 25 years in the amount of EUR 6.154 million, amount used to finance part of the overall investment costs of EUR 12.154 million. These EUR 6.154 million correspond to an average concession fee of EUR 246,160 per year.”

“(62) As far as the selection of the concessionaire is concerned, the conditions set by Article 55(6) of the GBER 2014 have been respected.”

“(63) More generally, the concession fee is part of a measure which is exempted according to the GBER 2014.”

For the following two reasons, the comments above do not enlighten public authorities which may wish to award concessions contracts. First, they appear to contradict the practice of the Commission in other infrastructure projects such as ports where the Commission routinely finds that concession contracts awarded after a competitive selection “exclude” or at least “minimise” any state aid [see, for example, Commission Decision SA.38302, Port of Salerno]. Even when, because of their complexity, the Commission cannot be certain that contracts are free of State aid at least it acknowledges that such arrangements can “exclude” State aid. In the case of the Trimini complex, the contract was relatively simple.

Second, Article 55 of the GBER provides that “6. Any concession or other entrustment to a third party to construct, upgrade and/or operate the sport or multifunctional recreational infrastructure shall be assigned on an open, transparent and non-discriminatory basis, having due regard to the applicable procurement rules.” Article 55 says nothing about the concession fee containing State aid or that it is exempted. It only requires selection of the concessionaire according to public procurement rules. In fact, one may on the contrary deduce that the objective of Article 55(6) is to eliminate State aid for the concessionaire.

Given that public authorities make increasing use of arrangements involving concession contracts, the Commission needs to clarify urgently the conditions under which such contracts involve State aid and at minimum it should streamline its own practice.

 

 

(image via Flickr)

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

http://ec.europa.eu/competition/state_aid/cases/247490/247490_1580456_110_2.pdf

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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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