A Real Estate Deal that Does not Affect Intra-EU Trade

Operators selected through competitive, transparent, non-discriminatory and unconditional procedures receive no State aid.

When only a single bid is submitted, the market conformity of the outcome must be verified with comparative analysis.

Activities are purely local when they are not likely to attract customers or operators from abroad.

Update on Temporary Framework:

Number of approved and published covid-19 measures, as of 18 September 2020: 281*

Legal basis: Article 107(2)(b): 29; Article 107(3)(b): 238; Article 107(3)(c): 22

– Average number of measures per Member State: 10

– Median number of measures per Member State: 12

– Mode number of measures per Member State: 6

* Excludes about 200 amendments of previously notified measures

Introduction

In order to ensure that the sale of public land or the granting of concession rights is free of State aid, public authorities should choose the buyer or the operator according to a competitive procedure that is 1) open, 2) transparent, 3) non-discriminatory and 4) unconditional. However, the conclusion of such a procedure on the basis of a single bid cannot create a presumption that it does not involve State aid.

In case SA.48582 concerning alleged State aid in favour of Maritim Group and KHI Immobilien GmbH in the German town of Ingolstadt, the Commission had to examine the possibility of both direct and indirect aid to Maritim which was the only bidder for a contract to operate a congress centre.[1]

The case illustrates the many issues that needed to be taken into account in order to verify whether the contract was on market terms. The case also reveals the complexity of the analysis of possible affectation of trade.

Background

In 2017, the Commission received a formal complaint from a trade association of operators and owners of hotels and restaurants in Bavaria concerning alleged unlawful State aid in favour of Maritim Group and KHI Immobilien [KHI] in connection with “Kongresszentrum” [CC-IN] and a nearby in the town of Ingolstadt, Germany.

Maritim is a privately owned, mainly Germany-based hotel chain. Maritim was selected to be the operator of the CC-IN. The latter was to be constructed and owned by the municipality of Ingolstadt via its fully-owned IFG Ingolstadt. The CC-IN would also have a garage that was to be operated by IFG itself.

Maritim would also operate a hotel that was yet to be constructed next to the CC-IN. The owner of the hotel was KHI, a private company, which had no apparent relationship with the municipality apart from the fact that in 2014, IFG had selected through a tender procedure involving four bidders the KHI as the purchaser of the land on which the hotel was to be built. For the operation of the hotel, KHI concluded a separate lease contract with Maritim.

The alleged aid measures

The complainant alleged that unlawful State aid would be granted in the form of:

“(30)(a) direct advantage for Maritim as CC-IN operator, through a contractually agreed rent, which was allegedly abnormally low compared to the market price based on an alleged flawed tender procedure;

(b) indirect advantage for Maritim as hotel operator, through the sale of the publicly owned plot of land on which the hotel will be built and owned by KHI, allegedly not based on an open and non-discriminatory tender procedure;

(c) indirect advantage for Maritim as hotel operator through coverage of certain hotel construction costs by IFG;

(d) indirect advantage for Maritim as hotel operator since it can allegedly use the congress facilities of CC-IN, avoiding the need to build such facilities itself;

(e) indirect advantage for Maritim as hotel operator through the municipality’s advertisement of the hotel in connection with CC-IN12;

(f) indirect advantage for Maritim as hotel operator through the use of the Garage below the CC-IN.”

The Commission examined the complaint and concluded that the arrangements between the municipality and IFG, on the one hand, and Maritim, on the other were free of State aid because Maritim obtained no advantage and because trade between Member States was unlikely to be affected.

No advantage

The Commission explained that it first “(57) analysed a potential direct advantage for Maritim as CC-IN operator. It should be pointed out that if transactions are carried out following a competitive, transparent, non-discriminatory and unconditional tender procedure in line with the principles of the TFEU on public procurement, it can be presumed that those transactions are in line with market conditions, provided that certain conditions are fulfilled.”

Although Maritim was selected via a competitive, transparent, non-discriminatory and unconditional procedure, it was the only bidder. Therefore, the Commission noted that “(58) if only one bid is submitted, pursuant to paragraph 93 NoA, the respective tender procedure would normally not be sufficient to ensure a market price, unless ‘(i) there are particularly strong safeguards in the design of the procedure […] or (ii) the public authorities verify through additional means that the outcome corresponds to a market price’.”

The Commission explained that “(59) the mere fact that only one bid was submitted does however not result in the reverse presumption (see recital (57)), i.e. a direct indication that the contested measure is not in line with market conditions. Only one submitted bid is not proof that an advantage indeed exists. It simply follows that in such an event an individual assessment must be carried out.”

Indeed, it cannot be presumed that a procedure with a single bid necessarily confers an advantage. My own experience suggests that in practice there is another possibility. When only one bid is submitted it is likely that there is something wrong with the terms of the tender; it is either too tough with very demanding requirements or it is skewed in favour of the bidder. Only the latter possibility would fall foul of State aid rules.

The Commission went on to examine the rent paid by Maritim in relation to rent for other comparable facilities.

“(61) Regarding the rent paid to IFG by Maritim, the Commission considers it worthwhile to note, that, [information on rent amount]. In fact, [information on rent amount] (see recital (41) and footnote 17 for rent calculation based on lease agreement provisions).”

The problem here is that the information in both recital 41 and footnote 17 is deleted as business secret. The Commission should have kept in the decision the formula or methodology for calculating the rent.

“(62) The contractually agreed rent between IFG and Maritim, according to Germany, was determined based on a comparison with other rents that comparable conference centre operators are paying in the same region in Germany […]. Compared to the rent of those centres mentioned, the CC-IN rent will be set at a higher end of the range of these amounts. The rent of two other congress centres in comparable cities in terms of size and population (Stadthalle [city 1] and Stadthalle [city 2]) is, according to Germany, even lower than […], which further indicates market conformity. Both facilities are also comparable with the CC-IN in terms of size and structure.”

For this reason the Commission concluded that there was no direct advantage for Maritim as CC-IN operator.

With respect to a possible indirect advantage for Maritim as operator of the nearby hotel, the Commission also found no evidence of such an advantage.

“(65) In particular, regarding the alleged indirect advantage for Maritim as hotel operator due to a flawed tender of the hotel land sale to KHI, the Commission takes note of the competitive, transparent, non-discriminatory and unconditional tender procedure regarding this sale […]. It can thus be presumed that this transaction is in line with market conditions. […] Even if this transaction was not market conform, it seems not apparent how Maritim as hotel operator, would benefit.”

“(67) The Commission further notes that hotel and CC-IN will each be built on separate plots owned by different owners and operated autonomously, based on individually concluded lease agreements. Therefore, it is not apparent how Maritim as hotel operator could indirectly benefit from the possibility of using the congress capacities of the CC-IN. In particular, given that, on the one hand, alleged arrangements for a joint use of facilities have repeatedly been denied by Germany and, on the other hand, as they were not sufficiently substantiated by the complainant.”

“(68) In addition, the Commission rejects the argument of a de facto advantage for Maritim as hotel operator through conference participants having the possibility to stay overnight in the neighbouring hotel. A potential impact on guest-nights in the hotel – if any at all – through events in the neighbouring CC-IN, would in the Commission’s view be a simple consequence of the CC-IN construction, i.e. result of a development in the market. Such overnight stays would not result from Maritim operating the CC-IN, but could rather result from the fact that hotel and CC-IN are located next to each other. It seems that – had a different entity been chosen as operator of the CC-IN – the number of overnight stays would likely have been affected (if at all) in the same vein.”

“(70) With regard to the allegations concerning the use of the Garage, IFG will construct and manage it as a public parking space for which all users will be required to pay a fee according to the relevant tariffs. Neither the hotel nor the CC-IN have reserved parking spaces (e.g. article 1 paragraph 5 of the lease agreement between IFG and Maritim clarifies that parking areas and parking spaces are not part of the relevant lease agreement). Therefore, there is no advantage for Maritim.”

No effect on trade between Member States

The Commission also considered that it was unlikely that trade between Member States would be affected.

“(74) The Commission notes that an effect cannot be hypothetical or presumed. It must be established why the measure distorts or threatens to distort competition and has an effect on trade between Member States. It is settled case-law that the Commission is not required to carry out an economic analysis of the actual situation on the relevant markets, of the market share of the undertakings in receipt of the aid, of the position of competing undertakings or of trade flows between Member States. In the case of aid granted unlawfully, the Commission is not required to demonstrate the actual effect, which that aid has had on competition and on trade. It must however be explained how and on what market competition is affected or likely to be affected by the aid, based on the foreseeable effects of the measure.”

The Commission recalled the criteria for determining when economic activities have a purely local impact. “(75) First, the beneficiary supplies goods or services to a limited area within a Member State and is unlikely to attract customers from other Member States. Second, it cannot be foreseen, with a sufficient degree of probability, that the measure will have more than a marginal effect on the conditions of cross-border investments or establishment.”

With respect to CC-IN, the Commission took into account the following:

  • Small size of the project.
  • Local catchment area.
  • Lack of international attraction/promotion of the CC-IN.
  • Comparison with the national market.

 

“(79) In terms of size and international scope, the CC-IN does neither fall into the same category as the Congress Center in Hamburg (hereinafter: CCH33) nor the International Congress Centre in Katowice (hereinafter: ICC34), both of which the Commission considered to have an effect on trade between Member States”.

“(80) Comparing the present case to previous decisions on congress centres, in particular as regards the orientation and scale of events, the CC-IN seems rather comparable to the conference hall in Visby (Sweden), where the Commission considered the project to be predominantly local and therefore did not find any effect on trade between Member States”.

1) Size of the project

“(81) First, CC-IN with its planned surface of 6,600 m² is a small congress centre, in particular when comparing its surface to the 18,000 m² of the CCH36, which is almost three times the size.”

“(82) Second, with regard to the capacity, the maximum number of conference participants/seats is 2,223 in Ingolstadt, whereas it is of 12,500 in Hamburg and 12,000 in Katowice – i.e. more than 5 times as high.”

“(83) Third, the number of planned conference rooms differ as well: In Ingolstadt, only 6-8 smaller and one large conference room are planned.”

“(84) In contrast, the CCH provides up to 50 conference rooms (variable room concept) and the ICC Katowice holds apart from one large multi-purpose hall (up to 8000 people), a banquet hall (up to 1000 people), a banquet hall foyer (up to 300 people), an auditorium (up to 600 people), in addition to various conference rooms (for up to 1200 people) and exhibitor offices (up to 100 people) with the total exhibition space being 12,600 m².”

I do not find the above arguments and data convincing. The relevant issue is whether small international events or exhibitions actually take place in small conference centres. The fact that CC-IN is smaller than other conference centres seems irrelevant. The evidence below is more convincing.

2) Local catchment area

“(85) Another major difference between the centres in Hamburg and Katowice on the one hand and the CC-IN on the other, is their geographical location and catchment area. In the case of CC-IN, the latter is distinctly local.”

“(86) First, the municipality of Ingolstadt covers an area of 133.4 km², compared to Hamburg with 755.1 km². Although Katowice, with a total area of 164 km², seems rather comparable at first glance to Ingolstadt, all other factors, such as the city´s population or ICC´s targeted groups/planned events clearly differ from the case of the CC-IN”.

“(87) Second, unlike the municipality of Ingolstadt with 136,981 (2018) / 138,716 (2019) inhabitants, Katowice is more than twice as populous with 294,510 (2018); Hamburg counts even 1.89 million (2018) inhabitants.”

“(88) Third, while the CC-IN has a rather local catchment area, both the CCH in Hamburg and ICC Katowice have a clearly international scope. In contrast to both conference centres, which see themselves as multifunctional congress and event centres and strive for increased recognition of their international/European events, the CC-IN is targeting mainly local customer groups and has therefore a local catchment area. CC-IN targets essentially graduation events of the local schools (‘Abiturbälle’), events of the local associations, municipal events of parties and information and ball events of local organizations, such as Rotary or Lions Club. Germany expects that those activities account for the large majority of its revenues.”

“(89) Fourth, documents of the tender procedures for the CC-IN indicate that primarily locally based business enterprises, associations and institutions; private and cultural associations alongside social groups as well as the municipality of Ingolstadt and its shareholders themselves will be using the facilities. According to Germany, experience shows that demand is made up of around 80% of local and regional customers. That does however not mean, as the complainant seems to suggest, that the remaining 20% were expected to be international customers, but rather simply not local and regional ones.”

“(90) Fifth, data from comparable congress centres operating in the region, namely the cities Ulm and Würzburg, provide a strong indication that the CC-IN will be mainly used by local and regional clients. With regard to the conference centres in these two cities, Germany indicated that 99% of inquiries in the period from 2017 to 20 October 2019 generally concerned regional or national events, while international inquiries accounted for only 1%. During the respective time period the enquiries primarily stemmed from regional or national entities. In addition, in these comparable centres other regional events such as events organised by local associations, municipal parties or information and election events organised by local entities were held.”

“(91) Sixth, the finding of a local catchment area is also confirmed by the above-mentioned fact […] that all of those entities that requested the procurement documents, are based in Germany, the majority (11 out of the 14) even in Ingolstadt or within a radius below 100km.”

“(92) Seventh, the Commission accepted in the CCH decision that events with a typical maximum duration of one day with approximately up to 500 and occasionally up to 1000 visitors/participants, which are mainly offered to a rather local population and for which there is little cross-border publicity, are typically qualified as local events. From the information submitted by the complainant and Germany, it appears that the planned activities in the CC-IN embody such local character, as the demand for conference/seminar and event space is likely to emanate predominantly from local companies, individuals or the municipality of Ingolstadt itself. The core business of the CC-IN is to host events and conferences consisting of approximately 50 to 300 participants, i.e. mainly local events.”

“(93) Eighth, even the list provided by the complainant […] of events in 2018 in its members’ premises indicates the local nature of events held in the municipality of Ingolstadt. The Commission notes that the complainant’s members are based in the city Ingolstadt or the neighbouring region, which is why their statistics can give an indication about the events taking place in Ingolstadt. In this submission, the complainant itself categorized certain events as ‘international’, without indicating any benchmark for this categorization. From the provided documents, it appears that the vast majority (approximately 88%) of the 2018 events in the complainant’s members’ premises had less than 50 participants, and only in exceptional cases more than 100 participants (approximately 3% of the events), in single cases up to 300 participants. To the Commission it thus rather appears that the majority of this list concerns small events.”

3) Lack of international attraction

“(94) The procurement procedure carried out in the year of 2015 for the operation of the CC-IN emphasizes the lack of international attraction, as simply a total of 14 undertakings (all of German origin) showed interest in the tendering and requested further tender documents. Ultimately, apart from Maritim, no other company submitted a bid. This might partly be due to the fact that the advertisements with the call for tenders were only published in German newspapers as the contracting authority considered the CC-IN project to be rather local.”

“(95) However, in the case of the Süddeutsche Zeitung and Frankfurter Allgemeine Zeitung the call for a tender was also available online and could therefore have been perceived by the international community if there had been any interest. These two newspapers are among the most prominent ones in Germany and therefore likely to be considered by undertakings established in other Member States that are looking for business opportunities in Germany. As the lack of bids shows, there was no such interest.”

“(96) Despite completion being planned for spring 2021, at present, no future events in the CC-IN are promoted on the international market for congress/conference centre. To date, no web-presence forecasts any events planned at the congress centre. CC-IN was neither advertised on specialised websites targeting foreign tourist nor promoted on international touristic fairs (e.g. no advertising of the CC-IN during the International Tourism Fair of 2018 and 2019).”

4) Comparison with the national market

“(97) With regard to the effect on the conditions of cross-border investments or establishment, from data on the congress centres and congress hotels in Germany and the area around the municipality of Ingolstadt, it can be concluded that the activities of the CC-IN on conference facilities/congress market are negligible.”

“(98) Data demonstrate that the majority of event participants in Germany was not international. […] The proportion of international participants in Germany has been below 10% in the last years […]. Even in the hypothetical and unlikely case that all foreign guests who stayed in 2017 in Ingolstadt were also attending conferences/congress events, these international participants would nonetheless account for only 0.037% of the total number of participants of conferences/events in Germany and for only 0.41% of the total number of international participants in Germany. Therefore, it can be assumed that the municipality of Ingolstadt is a marginal actor on the international conference market.”

Conclusion

The Commission concluded that “(99) the alleged measures in favour of Maritim are unlikely to attract customers from other Member States and cannot reasonably be foreseen to have more than a marginal effect, if any, on the conditions of cross-border investment and establishment between Member States.”


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

https://ec.europa.eu/competition/state_aid/cases1/202028/271157_2172503_313_2.pdf


Photo by stux on Pixabay.

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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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