Direct v Indirect Advantages: The Case of Sardinian Airports

Public funding that flows through intermediaries to third parties also counts as a state resource if the intermediaries carry out instructions by the funding authority.

Temporary Framework:

Number of approved covid-19 measures, as of 12 June 2020: 154*

Legal basis: Article 107(2)(b): 14; Article 107(3)(b): 130; Article 107(3)(c): 14

Three recapitalisation measures have been approved [Finland, Lithuania & Poland].

The Member States with the highest number of implemented State aid measures are Belgium, Denmark, France, Italy & Poland.

* Excludes amendments to previously notified measures

Introduction

On 13 May 2020, the General Court delivered three judgments in related cases. They all concerned agreements between Sardinian airports and airlines. The three cases were:

T‑8/18, easyJet Airline v European Commission[1]; T-716/17, Germanwings v European Commission[2]; T-607/17, Volotea v European Commission.[3]

The applicants in the three cases had appealed against Commission decision 2017/1861 on compensation granted to Sardinian airports for public service obligations. That Commission decision was reviewed here on 7 November 2017 [http://stateaidhub.eu/blogs/stateaiduncovered/post/9068].

Given the similarities between the three cases, this article reviews only the judgment on easyJet.

Background

Sardinia has five airports, including Alghero, Cagliari-Elmas and Olbia airports. Alghero airport is operated by So.Ge.A.AL [SOGEAAL] which is owned by local authorities. Cagliari-Elmas airport is operated by So.G.Aer [SOGAER] which is owned by the chamber of commerce of Cagliari. Olbia airport is operated by GEASAR [GEASAR] which is owned by a private company, Meridiana.

The airport operators were required by law to increase air traffic and to promote Sardinia as a tourist destination. For this purpose they received payment from the autonomous region of Sardinia.

In decision 2017/186, the Commission found that the airport operators SOGEAAL, SOGAER and GEASAR did not benefit from State aid. It also found that incompatible State aid had been granted to easyJet, Ryanair, Air Berlin, Meridiana, Alitalia, Air Italy, Volotea, Wizzair, Norwegian, JET2.COM, Niki, Tourparade, Germanwings, Air Baltic and Vueling. The Commission instructed Italy to recover the incompatible aid.

State resources?

The applicant claimed that the airport operators were not public undertakings and their decisions were not imputable to the state.

The General Court acknowledged that only two of the airport operators were publicly owned but considered that the decisive element that led the Commission to characterise the payments they received as state resources was the specific mechanism that was used to channel the public funding to them.

“(81) The Commission, in order to arrive at the conclusion that the funds received by the airlines came from Italian State resources, in this case the Autonomous Region, and were attributable to the Autonomous Region, relied primarily on the description of the mechanism established by that autonomous region, a mechanism by which that State entity provided financing to the airport operators which requested that financing, on the condition that they submit to it for approval plans of activities in which those operators had to set out in detail the manner in which they intended to use those funds, inter alia to remunerate co-contracting airlines.”

Then the General Court noted that the resources of sub-national authorities are also considered as state resources.

“(93) In the present case, […], it is not disputed that the Autonomous Region made funds available to the airport operators over a number of years in order that they take steps to promote Sardinia as a touristic destination, which involved both meeting targets for the island’s air services to and from its various airports and providing marketing services. […] The question arises, however, as to whether, as the applicant submits, the amounts it received from those airport operators in performance of the contracts it had concluded with them were or remained ‘State resources’ and were imputable to the Italian State for the purposes of Article 107(1) TFEU.”

This is a subtle but important point that often arises with regard to the functions of state-owned or state-controlled bodies that may also have income generating operations. For example, a public research organisation may also derive income from the sale of its publications. Another typical example is that of a public hospital that generates income from its amenities such as car park or visitors’ cafeteria. Should this kind of income be treated as a state resource?

The General Court observed that “(94) in that respect, it is clear both from the mechanism put in place by the Autonomous Region by means of the aid scheme at issue and from its implementation in practice that the funds transferred by that region to the airport operators were those used by the airport operators to remunerate co-contracting companies.” “(95) It must be noted that the aid scheme at issue provided for a sort of clearance mechanism […] enabling the Autonomous Region to verify that the activity had been implemented correctly, that targets had been met and that the costs incurred were genuine. That verification mechanism was therefore intended to prevent each airport operator from obtaining reimbursement of amounts other than those incurred by it to remunerate the co-contracting airlines”. “(96) The Autonomous Region had required it to demonstrate that the airlines providing the services had received the regional contributions in full and that it was therefore merely an intermediary which had passed on to them the amounts received from the Autonomous Region.” “(97) It is therefore clear that the funds used by the airport operators to remunerate the applicant under the contracts those operators had concluded with the applicant originated from the Autonomous Region’s budget and thus constituted State resources within the meaning of Article 107(1) TFEU.”

Therefore, the response of the Court was that when an entity acts merely as an intermediary, the resources it channels to third parties are counted as resources belonging to the body from which they originated. I wish, however, that the Court had elaborated the concept of “intermediary” and examined the extent of its decision-making discretion in the disbursement of the funds. I infer that indeed the decisive issue is that the in-between entity is classified as an intermediary precisely because it has no discretion to determine how the resources in question are used. The Commission’s Notice on the Notion of State Aid explains in paragraph 116 that “an indirect advantage is present if the measure is designed in such a way as to channel its secondary effects towards identifiable undertakings or groups of undertakings.” In other words, the funding authority determines who ultimately benefits and therefore to whom the aid is eventually paid. As will be seen below, the General Court, first, clarified that the various criteria used for the disbursement of the money were not relevant and, then, examined whether the decisions could be attributed to the operators or the regional authority; i.e. whether the operators exercised any discretion.

The General Court stressed that, as always is the case, use of private funds together with public funds does not remove the public funds from the realm of state resources. “(104) Even assuming that the services provided by the airport operators were – partially and albeit, in any case, marginally – co-financed by other investors, including those operators themselves, that would in no way eliminate the State origin of the funds used by those airport operators to remunerate the airlines under the aid scheme at issue, which funds are the only ones those airlines are obliged to reimburse to the Italian State in performance of the contested decision. Furthermore, if one were to follow the reasoning of the applicant, it would suffice for a Member State to apply for co-financing of its measures by private-sector actors to remove them from the scope of Article 107(1) TFEU.”

Then the General Court stated that the criteria used by the airports in handling the public money were irrelevant. “(107) Given that, when examining a measure, the Commission can find it necessary to examine whether an advantage can be considered to be granted indirectly to operators other than the immediate recipient of the transfer of State resources […], it must be held that, as long as it can be determined, as in the present case, that an advantage originating from State resources has been transferred by the immediate recipient to a final beneficiary, it is irrelevant that that transfer was made by the immediate recipient in accordance with commercial principles or, on the contrary, that that transfer met an objective of general interest.”

“(108) That is supported by the case-law holding that an advantage granted directly to certain natural or legal persons can constitute an indirect advantage, hence State aid, for other legal persons who are undertakings […]. Indeed, in the cases which gave rise to those judgments, the transfer of an advantage by natural or legal persons who were immediate recipients of State resources, formed part of a commercial relationship, confirming that the existence of an underlying commercial reason for the transfer is of no relevance to the assessment under Article 107(1) TFEU of the flows taken by the State origin resources to reach the final beneficiary.”

“(111) It cannot be inferred from [the] case-law that only those advantages distributed directly by the State, that is to say, without an intermediary, and those granted through bodies, vested with prerogatives of public authority or missions of general interest and established or appointed to administer the aid, would fall within the scope of the prohibition laid down in Article 107(1) TFEU. On the contrary, as has already been recalled above, even an advantage granted directly to certain natural or legal persons may constitute an indirect advantage, hence State aid, for other legal persons who are undertakings (see paragraph 108 above), and without the requirement that the advantages at issue have been channelled through a structure specifically appointed or established by that State to administer the aid.”

With respect to the imputability of the aid to the regional authorities, the General Court considered that “(117) it is appropriate, in order to confirm the condition relating to the imputability of the measure concerned to the State, laid down in Article 107(1) TFEU, also to take into account that degree of control in the examination of whether the public authorities must be regarded as having been involved in the adoption of that measure […], involvement which may be inferred from a set of indicators arising from the circumstances of the case and the context in which that measure was taken and, in particular the compass of that measure, its content and the conditions which it contains”.

“(118) In the case at hand, the Commission found, in the contested decision, that the funds made available to the airport operators by the Autonomous Region had to be and were actually used in accordance with the instructions prescribed by that region, in this case as remuneration for services provided by the airlines, namely the opening of new air routes, the increase in frequencies and extension of the operation periods of existing routes, the meeting of passenger volume targets and the provision of marketing services.”

“(125) The Autonomous Region’s control over the content and scope of the airport operators’ initiatives is corroborated by the operators themselves.” “(127) Once the airport operators had taken the decision to participate in the financing programme put in place by the Autonomous Region by means of the aid scheme at issue, their discretion in defining their operating plans and in selecting co-contracting service providers was significantly reduced by the criteria and guidelines established by the Autonomous Region.”

“(129) By closely monitoring, at the upstream level, the plans of activities submitted by the airport operators, in particular the air routes concerned and the marketing services envisaged, as well as, at the downstream level, the amounts committed by the airport operators in remuneration of those services offered by the airlines in the context of promoting the island of Sardinia as a touristic destination, the Autonomous Region assumed sufficient control, over the contractual behaviours of the airport operators that decided to request the financing measures provided for under the aid scheme at issue, to the point that those behaviours could be considered imputable to it.”

On the basis of the above, the General Court concluded that the payments by the airports to the airlines were state resources and that they were attributed to the state.

Did the airport operators act as private investors?

The applicant claimed that it had been granted no advantage in the meaning of Article 107(1) TFEU because the airport operators acted as private investors.

The General Court dismissed that argument because the market economy investor principle [MEIP] applies only to state-owned actors. The General Court noted that the airport operators “(176) merely used the money made available to them by the Autonomous Region to acquire services in accordance with the latter’s instructions.” “(177) It follows that, […], the airport operators were essentially limited to implementing the aid scheme at issue. Given, moreover, that those operators were not State-owned, the transactions between the airlines and the airport operators had not been intended to be examined in the light of the market economy operator test, even though those transactions were made using State resources, those of the Autonomous Region in the case at hand.”

“(178) That finding is not called into question by the fact – assuming it were established – that the airport operators remunerated the airlines also from their own funds.” “(179) Moreover, as the Commission maintains, the airlines were selected only in order for the airport operators to receive regional financing to pay for their services.”


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Did the regional authority act as a private investor?

The General Court also examined the application of the market economy operator principle to the decisions of the regional authority.

“(185) The market economy operator test is not an exception which applies only if a Member State so requests. Where it is applicable, that test is among the factors which the Commission is required to take into account for the purposes of establishing the existence of such aid. Consequently, where it appears that the  market economy operator principle could be applicable, the Commission is under a duty to ask the Member State concerned to provide it with all relevant information enabling it to determine whether the conditions governing the applicability and the application of that principle are met, and it cannot refuse to examine that information unless the evidence produced has been established after the adoption of the decision to make the transaction in question”.

“(186) However, in the case at hand, the Commission did not rely entirely on the absence of invocation by the Italian Republic of the market economy operator principle to explain its assessment on the impossibility of justifying the aid scheme at issue in the light of that principle.” “(187) Indeed, […] the Commission noted […] that there was nothing to suggest that the Autonomous Region had acted in accordance with that principle when it had established the aid scheme at issue and that it was clear that it had sought, by implementing that scheme, to achieve public policy objectives, in particular the strengthening of the regional economy by attracting more tourists, rather than make profits in its capacity as owner.”

“(190) Given that the Autonomous Region does not own Cagliari-Elmas and Olbia airports […] that region cannot be deemed to have acted as an investor. It appears on the contrary that the Autonomous Region put in place the aid scheme at issue solely with a view to the economic development of the island of Sardinia.”

Obviously, the regional authority could not argue that it had acted as a private if it did not own the airports and therefore it received nothing in return.

Payment for services?

Then the applicant claimed that the payments from the region were for services rendered by the applicant [and the other airlines].

The General Court replied that “(200) a State measure in favour of an undertaking cannot be excluded as a matter of principle from the concept of State aid in the sense contemplated in Article 107 TFEU merely because the parties undertake reciprocal commitments.”

“(201) Regarding in particular the acquisition of services through the exercise of public authority, that must in principle be done in compliance with the public procurement rules laid down by secondary EU law. In that case, the fact that such a tender procedure is conducted, before a public authority of a Member State makes a purchase, is normally considered sufficient to rule out the possibility that the Member State is seeking to grant an advantage to the chosen service provider that it would not have otherwise obtained under normal market conditions”.

“(202) In the case at hand, the acquisition of the services in question was not made by the Autonomous Region itself, which, as public authority, would have been subject to the same EU public procurement rules. That acquisition was actually made via other operators not subject in that situation to those rules: the airport operators in this case, which were responsible for obtaining on the market the services desired by the Autonomous Region and which the latter financed.”

“(203) In such a situation, the mere fact that a Member State purchases services which, as the applicant maintains, were allegedly offered on market conditions is not sufficient for that transaction to constitute a commercial transaction concluded under conditions which a private operator would have accepted, or, in other words, a normal commercial transaction. In that type of situation, it is necessary, first, that the State had an actual need for those services and, second, that the acquisition of those services have been made by means of an open, transparent and non-discriminatory procedure such as to ensure equal treatment between the providers offering the services in question and guarantee that the services at issue are acquired at market price, which price ensures that, when those services are acquired, the public authorities do not confer an advantage on the provider chosen”.

“(204) In the case at hand, the Commission took the view, […], that the financing provided by the aid scheme at issue did not constitute remuneration for goods or services fulfilling genuine needs of the Autonomous Region and that an open and transparent tender procedure had not been followed in providing financial support to the airlines concerned.”

“(205) In that regard, contrary to what the Commission found, the Autonomous Region, as a public authority pursuing economic policy objectives, was entitled to consider that it had a need to promote the island of Sardinia as a touristic destination in order to contribute to the economic development of the island.”

“(206) However, first, as the Commission maintains, the unprecedented volume of the marketing services funded under the aid scheme at issue is liable to cast into doubt the fact that those services met, in a proportionate manner and in accordance with the principles of rationalisation of public spending, the genuine needs of the Autonomous Region with a view to pursuing its objectives of economic development of the island of Sardinia.”

“(208) In that regard, however, it must be held, […], that, […], neither the Autonomous Region nor the airport operators, acting as intermediaries, organised open and transparent tender procedures such as to guarantee observance of the principle of equal treatment between providers and the acquisition of those services, by the Autonomous Region and by means of State resources made available to the airport operators, at market prices.”

Further, the General Court noted that the purchase of those services by the region and the airport operators was not carried out on the basis of objective criteria intended to maximise the publicity for the region.

“(215) In those circumstances, the Commission was entitled to conclude that the airlines were remunerated by the Autonomous Region in order to promote their own services as airlines”.

Did the airport operators receive any advantages?

The applicant claimed that the Commission wrongly concluded that the airport operators had not benefited from any advantage, when they acted as intermediaries.

The General Court observed that, “(225) given that the airport operators passed on to the airlines the entirety of the funds they received from the Autonomous Region to remunerate them under the service contracts eligible for the aid scheme at issue, they did not receive an advantage within the meaning of Article 107(1) TFEU. That is supported by the fact that, without such funding, they would not have used such contracts or, at the very least, not to such an extent”.

Is this the right test? The right test is to ask what is the situation of the airports in relation to the counterfactual of no agreements with the airlines. Assume, as the General Court did, that in the absence of the funding by the regional authority, the agreements in question would not have been concluded. Why? Most likely because they were not profitable enough to airlines. Assume that without aid, an airline would incur cost of 10 and revenue of 8. This means that aid of 2.1 would induce it to fly to Sardinia, say once a week. For the sake of the argument, also assume that an airport operator makes a loss of 5 by accommodating that one flight per week, but that the loss turns to profit of 3 if the number of flights increases to two per week. The airport operator then asks the regional authority to pay 4.2 of aid to the airline. As a result it also benefits from extra profit of 3. Without any counterfactual analysis it is impossible for the General Court to determine whether the airports benefited too.

In fact the General Court did recognise that “(226) it is true that the co-contracting airlines’ performance of the services desired and funded by the Autonomous Region had the effect of increasing air traffic and the volume of passengers to and from the airports concerned, entailing an increase in the airport and non-airport resources of their operators. However, as the Commission contends, that is a secondary effect of the aid scheme at issue from which the entire Sardinian tourism sector benefited, including, moreover, the applicant, which, to some extent, also obtained such a secondary advantage in an increase in sales of the services offered on board its aircraft. Nevertheless, the immediate advantage forming the subject matter of the aid scheme at issue and which was not obtained under normal market conditions still consisted of the payments made to the airlines.”

I believe the General Court’s reasoning in this respect is faulty and the Commission contradicts itself. As already quoted earlier, paragraph 116 of the Notice on the Notion of State Aid explicitly states that “indirect advantages should be distinguished from mere secondary economic effects that are inherent in almost all State aid measures (for example through an increase of output). For this purpose, the foreseeable effects of the measure should be examined from an ex ante point of view. An indirect advantage is present if the measure is designed in such a way as to channel its secondary effects towards identifiable undertakings or groups of undertakings.”

The indirect benefits to airports were very predictable because aid flowed through the airport operators and, therefore, they could not be assimilated to secondary effects. Moreover, it is irrelevant that secondary effects were enjoyed by others, in addition to airports.

Also note the safeguards that the Commission has inserted in the RDI Framework to ensure that when research organisations act as intermediaries they do not retain an undue advantage. Point 22 of the RDI Framework is as follows:

“The Commission will not consider the research organisation or research infrastructure to be a beneficiary of State aid if it acts as a mere intermediary for passing on to the final recipients the totality of the public funding and any advantage acquired through such funding. This is generally the case where:

(a) both the public funding and any advantage acquired through such funding are quantifiable and demonstrable, and there is an appropriate mechanism which ensures that they are fully passed on to the final recipients, for example through reduced prices, and

(b) no further advantage is awarded to the intermediary because it is either selected through an open tender procedure or the public funding is available to all entities which satisfy the necessary objective conditions, so that customers as final recipients are entitled to acquire equivalent services from any relevant intermediary.”

In the case of condition (a), any advantages for the airports would have to be passed on in the form of additional payments or discounts to airlines. Condition (b) was not satisfied because different airports made different offers.

Moreover, in paragraph 403 of its decision, the Commission noted “that the airport operators may benefit from the increase in air traffic that is brought about by the aid to airlines under the scheme.” But the Commission dismissed their significance because “such effects are, however, similar to the positive effects on economic operators in other sectors whose revenues are linked to the number of air passengers, in particular tourism (car rental, hotels, restaurants, catering, fuelling, retail etc. […]).”[4]

This conclusion is wrong for at least three reasons. First, when aid is granted to an airline, the granting authority has no control on how the beneficiary decides to invest and with which hotels, travel agents, sightseeing guides or rental companies it will conclude commercial agreements. In this case, the purpose of the aid was for the airports to attract more airlines to themselves. Second, the transactions between an aid recipient and its suppliers or clients are at arm’s length. That is, they take place on market terms and at market rates. The transactions between the Sardinian airports and the airlines did not reflect market terms and rates. They were dictated by the funding authority. Third, the airports had discretion in choosing airlines and deciding the terms of their agreements. The Commission did not examine whether this discretion was exploited by the airports to maximise the benefits they obtained from the payments they made to airlines.

Distortion of competition and affectation of trade between Member States?

The General Court recalled established case law according to which it is not necessary to establish that aid has a real effect on trade between Member States and that competition is actually distorted. It is sufficient examine only whether that aid is liable to affect trade and distort competition. It also reiterated that if aid strengthens the position of an undertaking as compared with that of other undertakings competing with it, the latter undertakings must be regarded as affected by the aid. The Commission may confine itself to examining the characteristics of an aid scheme to determine whether it confers an appreciable advantage to recipients in relation to their competitors.

“(233) In the contested decision, […], the Commission sufficiently explained that airlines, receiving the payments made by airport operators under the aid scheme at issue, were active in a sector characterised by intense competition between operators from different Member States, and therefore were participating in trade within the European Union.”

“(235) The clear cross-border nature of the activities in question, namely passenger air transport services, implied that the aid scheme at issue was liable to distort competition and affect trade between Member States by strengthening the position on the market of the airlines that benefited from that scheme.”

Incompatibility with the internal market

The General Court observed that exceptions to the prohibition of Article 107(1) must be interpreted narrowly and that “(243) in the application of Article 107(3)(c) TFEU, the Commission has a wide discretion, the exercise of which involves economic and social assessments. Judicial review of the manner in which that discretion is exercised is confined to establishing that the rules of procedure and the rules relating to the duty to state reasons have been complied with and to verifying the accuracy of the facts relied on and that there has been no error of law, manifest error of assessment in regard to the facts or misuse of powers.”

Because the aid had not been notified, the Commission had examined it on the basis of the 2005 aviation guidelines and found that the financial compensation provided by the airport operators to the airlines could not be considered compatible with the internal market, because the criteria mentioned in point 79 of the 2005 guidelines were not fulfilled. Since those criteria were cumulative, the General Court agreed with the Commission that it was sufficient to reach a negative decision on the grounds that the aid to the applicant did not comply with the requirements that the aid had to be only for start-up routes and degressive over time.


[1] The full text of the judgment can be accessed at:
http://curia.europa.eu/juris/document/document.jsf?text=&docid=226446&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=284290

[2] It can be accessed at:
http://curia.europa.eu/juris/document/document.jsf?text=&docid=226445&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=284290

[3] It can be accessed at:
http://curia.europa.eu/juris/document/document.jsf?text=&docid=226444&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=284290

[4] The Commission decision can be accessed at:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32017D1861


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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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