Compatible State Aid May Have Negative Effects on some Market Operators

The existence of market failure is not necessary for aid to be declared compatible under Article 107(3). Market failure does not mean that the market is completely unable to supply a good or service. State aid aiming to remedy market failure may be compatible with the internal market even if it has a negative impact on some market operators.

 

Introduction

Barely within a month of the judgment on 12 May 2016 in case T-693/14, Hamr-Sport v Commission, the General Court rendered another judgment in a case also involving sport but also concerning the Commission’s assessment of the positive and negative effects of State aid.[1] On 9 June 2016, the General Court ruled in case T-162/13, Magic Mountain Kletterhallen and others v Commission.[2] The applicants requested annulment of Commission decision SA.33952 which had authorised, as compatible with the internal market, aid that Germany had granted to non-professional, non-profit, climbing centres.

The applicants were Dutch and German operators of private climbing centres whose main argument was that the Commission failed to assess properly the need for the aid and its impact on the market. They claimed that there was no market failure, as they were able to provide sufficient services, that the aid was unnecessary and that it caused excessive distortion of competition.

The relevant rules may change

The first plea of the applicants was that the Commission did not follow its own rules on the “refined economic analysis” and the “balancing test”. The General Court’s reply was that the Commission enjoys wide discretion in determining the compatibility of State aid. However, EU courts check, among other things, that the evidence on which the Commission relies is accurate and that the Commission takes into account all the relevant information. A person that appeals against a Commission decision must show that the Commission could not have reached its conclusions on the basis of the evidence available to it. [Paragraphs 50-52]

In other words, it is not sufficient to claim that the Commission could have decided differently. This possibility is not enough. It must be shown that the Commission was wrong in reaching the decision in question.

 

Then the Court recalled that the Commission is bound by its own guidelines. However, the balancing test was presented in a staff working document that had not been formally adopted by the Commission and therefore was not binding on the Commission [paragraphs 53-57]. It was irrelevant that certain principles of the balancing test were incorporated in the GBER and the guidelines [paragraph 58]. The Commission is not bound by its past decisions, as each State aid measure has to be examined on its own merits [paragraph 59]. The Commission is not required by the case law to conduct economic analysis of State aid, nor is it prohibited from doing so [paragraph 60]. The required level of detail in the Commission’s review of the compatibility of State aid depends on the nature of the aid and whether it is an individual measure or a scheme. Schemes can be more generally assessed [paragraphs 62-65].

Since now all State aid rules are based on the same, uniform principle of compatibility which have been formally adopted in the regulations and guidelines there should be no uncertainty as to how the Commission will carry out its assessment of State aid.

However, when Member States request the Commission to assess a notified measure directly on the basis of the Treaty [because it deviates from the guidelines], then they cannot be absolutely certain that the Commission will rely on all or some of the common principles. It may deviate from established practice if it detects unusual features in the notified measure. This is the meaning of examining the measure on its “merits”.

Existence of market failure

The second plea concerned an alleged absence of market failure. The applicants claimed that the Commission did not prove that the market suffered from any failure that justified intervention by public authorities with State aid. The response of the General Court on this point is a bit surprising, given the Commission regularly states in its decisions that the existence of market failure is indispensable in justifying state intervention.

The Court stressed in paragraph 77 that Article 107(3)(c) does not require proof of market failure in order for aid to be declared compatible with the internal market. Evidence of market failure may be a relevant factor and may justify state intervention [paragraph 78]. However, market failure is not an indispensable condition because a public authority may justify State aid in the pursuit of an objective general interest [paragraph 79]. The Court at this point referred to Article 165 TFEU that concerns sport.

This part of the judgment is disturbing. In principle it is true that a public authority may decide that the amount that the market supplies is not sufficient, given its public policy objectives, and that it wishes to increase whatever amount of a good or service is made available to its citizens. Economically, the only justification for intervening to raise the amount supplied by the market beyond the level that the citizens themselves value through their own purchasing decisions is to show that somehow the good or service in question is very important to the needs of citizens but citizens themselves cannot afford it.

There was no analysis either in the judgment or in the Commission decision of whether the services already provided by the market were not affordable. But this part of the judgment demonstrates that the policy choices of Member States cannot be challenged as long as it can be shown that the aim of a State aid measure is congruent with an objective that the Treaty acknowledges to be in the common interest.

The Court went on to note that the Commission, in recital 70 & 71 of its decision, indicated that there was market failure because non-profit sports associations were not able to finance with their own resources the costs of sport infrastructure. The aid was necessary and appropriate in order to ensure the construction and operation of sufficient infrastructure for amateur sport in Germany [paragraph 81]. The Court dismissed the arguments of the applicants because they did not provide any evidence to show that non-profit centres could build the necessary infrastructure [paragraph 82].

Four comments are in order here. First, the Court implicitly understands that the market fails when it does not supply the desired amount or quantity. This is not what is defined as market failure. The market fails when prices are not equal to social costs or benefits. Prices exceed social costs in the case of negative externalities as with pollution while prices fall below social benefits in the case of positive externalities as with research. Second, not affording to spend money on a project is not sign of market failure. No one can afford to spend money on any conceivable project. The market will refuse to finance a project whose costs exceed the revenue that it will generate. This is not failure, it is good economics. Third, a perusal of the original Commission decision does not reveal any evidence that a proper impact assessment had been carried out by Germany to prove that aid was indeed the most appropriate instrument. Vouchers to individuals could have been a more appropriate instrument as it would increase demand for climbing centres but would give the option to individuals to choose the centre of their choice. Vouchers, for example, are used to support travel by residents of islands to the mainland. Fourth, it shows, once more, that State aid rules cannot prevent a public authority from supporting a behemoth, as long as it serves in some way a public policy objective.

Necessity of aid

The General Court rejected the argument of the applicants that the Commission should have examined whether there were alternative forms of intervention to achieve the same objective [e.g. the voucher example given above]. The staff working document on the balancing test that referred to the appropriateness of aid was not binding on the Commission [paragraph 90]. The Commission also claimed that alternatives such as tax incentives were only supplementary means and they could not by themselves achieve the same policy objectives. Although the Court accepted this claim, the Commission did not adduce any evidence in its decision to support it. In fact, the part of the Commission decision under the heading “aid as an […] appropriate instrument” makes no reference to the appropriateness of the aid. The Court also thought that promotion of sport through non-profit organisations had advantages of educational and social nature [paragraph 92]. But it is debatable whether that proved the appropriateness of the aid.

The Court also rejected the argument that the Commission had not shown that the infrastructure could not be built without the aid on the grounds that a climbing centre in Berlin dropped its plans when the authorities refused funding [paragraph 93]. This, however, is only one example. Very often EU courts reject claims of applicants based on examples for being insufficient to prove the general effects of a State aid measure. Nonetheless, the Court explained that when it comes to assessing schemes the Commission can limit its analysis to the general characteristics of the measure without having to examine the exact amount of the proposed aid [paragraph 94].

Balancing of positive and negative effects

Another plea was that the Commission failed to carry out a proper balancing of the positive and negative effects of the aid. The General Court considered that the Commission had implicitly proven that the positives outweighed the negatives because the effect on trade and competition was limited [paragraph 110]. Strictly speaking this conclusion is wrong for the simple reason that although the negative effects were limited, the positive effects could be even more limited.

In fact, this part of the judgment reveals how the balancing test is actually carried out. In reality there is no weighing of positives and negatives. The decisional practice of the Commission and this judgment of the General Court show that the balancing test indicates that the aid is compatible when the effect on trade and the distortion of competition is limited, not that the costs are less than the amount of benefits from the aid.

The Court also pointed out, correctly, that the Commission had not tried to prove that there was no effect on trade. Rather it only showed that the effect on trade was limited. [Paragraphs 114-115]

The Court rejected the view of the applicants that the aid measure discriminated against foreign operators. It noted that the measure excluded profit-making entities, regardless of their national origin. [Paragraph 119]

The Court also disagreed with the applicants who claimed that the Commission ignored the distortion of competition caused by the fact that the subsidised centres would attract customers from commercial centres. The Court accepted the view of the Commission that commercial centres could not meet the needs of the customers [paragraph 120]. This is exactly the same reasoning as in case T-693/14, Hamr-Sport v Commission that was reviewed here on 7 June 2016. It is unclear how the German authorities or the Commission were certain that private operators could not meet demand or simply that they could not offer the services that customers wanted at prices they could afford. But as in the Hamr-Sport case, State aid that targets the supply of particular services to particular groups of citizens it is likely to be found to be compatible with the internal market, even if some undertakings suffer as a result.

Procedure

The applicants also complained that the Commission’s investigation was too long, that the Commission should have had serious difficulties with the measure and that, as a consequence, it should have opened the formal investigation procedure.

The Court rejected all of these complaints. The concept of serious difficulties, it said, is objective. The absence of relevant information may indeed indicate the existence of serious difficulties. It was true that the Commission had several exchanges with Germany, but according to the Court, that was not evidence that the Commission encountered serious difficulties. Nor, was the fact that it took the Commission a year to complete its assessment. Twelve months were not an unreasonable period of time. [Paragraphs 136-148]

On the basis of the above reasoning the General Court proceeded to dismiss the appeal.

Conclusions

This is the second time recently that the General Court has endorsed the Commission’s more economic approach to the assessment of the compatibility of State aid. Although in this case and in the Hamr-Sport case there was not much of economic analysis, the General Court highlighted the wide discretion enjoyed by the Commission. Certainly, the Commission does not have to carry out a detailed examination of the impact of an aid measure on competition and competitors.

————————————————————-

[1] This judgment was analysed here in an article published on 7 June 2016. The article can be accessed at:

http://stateaidhub.eu/blogs/stateaiduncovered/post/6462.

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

http://curia.europa.eu/juris/fiche.jsf?id=T%3B162%3B13%3BRD%3B1%3BP%3B1%3BT2013%2F0162%2FJ&pro=&lgrec=en&nat=or&oqp=&dates=%2524type%253Dpro%2524mode%253D8D%2524from%253D2016.06.04%2524to%253D2016.06.12&lg=&language=en&jur=C%2CT&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&td=%3BALL&pcs=Oor&avg=&mat=CONC.AIDE%252Cor&etat=clot&jge=&for=&cid=105541.

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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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