Duplication of Infrastructure Does not Promote Regional Development

A private investor is not interested in regional development.

A private investor recoups its investment in infrastructure from revenue from the operation of that infrastructure.

Duplication of infrastructure does not contribute to regional development.

Introduction

In 2015 the European Commission caused a buzz in the State aid community when it decided that investment aid granted to a small Polish airport was incompatible with the internal market, partly because it was contrary to the common interest. The airport was only 25km away from another airport. The Commission reasoned that duplication of infrastructure would be in no one’s interest, except, of course, the operator of the subsidised airport.

Before the judgment of the Court of Justice in September 2020 in case C-594/18 P, Austria v Commission (Hinkley Point C), the Commission routinely examined whether aid measures were capable of promoting the common interest. Given the very wide and rather flexible meaning of common interest, it became a criterion of compatibility that was very easy for Member States to satisfy. Indeed, it was exceedingly rare to find a measure that was not in the common interest. However, in September 2020, the Court of Justice ruled that Article 107(30(c) does not require State aid to be in the common interest. It only stipulates that State aid must facilitate the development of certain economic activities.

This shift in the interpretation of Article 107(3)(c) did not prevent the General Court on 21 December 2021, in case T-263/15 RENV, Gmina Miasto Gdynia (Poland) & Port Lotniczy Gdynia-Kosakowo v European Commission, from agreeing with the Commission, without referring to the common interest, that duplication of infrastructure could not promote regional economic development.


The full text of the judgment, in languages other than English, can be accessed at:

https://curia.europa.eu/juris/fiche.jsf?id=T%3B263%3B15%3BRAL%3B1%3BP%3B1%3BT2015%2F0263%2FJ%2F1&oqp=&for=&mat=or&lgrec=en&jge=&td=%3BALL&jur=C%2CT%2CF&num=t-263%252F15&dates=&pcs=Oor&lg=&pro=&nat=or&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&language=en&avg=&cid=316043


The municipality of Gdynia and the airport operator sought the annulment of Commission decision 2015/1586 concerning State aid granted to Gdynia-Kosakowo airport in the form of capital contributions. The purpose of the capital contributions was to finance investment in the conversion of the airport from military to civilian use. The Commission had found the aid to be incompatible with the internal market and ordered Poland to recover it.

The applicants had successfully challenged the Commission decision before the General Court which ruled in November 2017 that the Commission had infringed the right of the interested parties to submit observations. The General Court based its conclusion on the fact that, between the time of publication of the Commission guidelines on State aid to airports and airlines and the adoption of the contested decision, interested parties were not given the opportunity to express their views.

In March 2020, the Court of Justice, in case C-56/18 P, European Commission v Gmina Miasto Gdynia & Port Lotniczy Gdynia Kosakowo, set aside the 2017 judgment and returned the case back to the General Court.

The applicants raised several pleas some of which concerned procedural issues that are not reviewed here.

Application of the private investor test

The applicants claimed that the Commission erred in its analysis of the private investor test.

The General Court, first, reiterated that the Commission cannot assume that an undertaking has benefited from State aid by simply relying on a negative presumption that is based on the absence of information allowing the opposite conclusion to be reached. [paragraph 103 of the judgment]

When it appears that the private investor principle can be applicable, it is for the Commission to ask the Member State concerned to provide it with all the relevant information enabling it to verify whether the conditions for the applicability and application of this principle are fulfilled. [para 104]

Only profits and obligations linked to the state’s position as a shareholder, to the exclusion of those linked to its status as a public authority, are to be taken into account. [para 106]

The General Court went on to reject the claim of the applicants on the grounds that the Commission did take into account all the relevant, credible and contemporaneous information that was available. [paras 107-124]

The applicants also alleged that the Commission failed to consider the specific features of the public investors who aimed for long-term profitability.

The General Court stressed that, according to the private investor test, the Commission had to ignore the specificities linked to the public nature of the investors. The behaviour of the public investors had to be compared to the behaviour of a private investor. [para 128]

At this point it is worth recalling the reasons for which the Commission had concluded that the public investments into Gdynia-Kosakowo airport did not conform with the private investor principle. First, Gdynia-Kosakowo airport was located approximately 25km from Gdańsk airport, which had unused capacity and had already planned an expansion. The two airports were competitors and aimed to attract mainly low-cost charter airlines. Second, the charges at Gdynia-Kosakowo airport were not competitive as they were higher than those applicable at Gdańsk airport. Third, in view of the competition between the two airports, the traffic forecasts of Gdynia-Kosakowo airport were based on unrealistically optimistic assumptions. Fourth, throughout the project period [i.e. until 2040] the total discounted cash flows would be negative. Fifth, the future revenue projections were unreliable and were not subject to sensitivity tests. Sixth, the calculations did not take into account that the land and infrastructure would have to be returned to the state at the end of the project.

The applicants disputed those findings.

But the General Court rejected the pleas of the applicants as follows:

The Commission could not take into account the contribution of the airport to regional development as that was a public policy concern. [para 136]

The Commission was correct to ignore possible revenue from use of the airport by the Polish army. This is because there was no agreement on how the facilities of the airport could be shared between civilian and military uses. [paras 150-151]

The Commission considered that the growth rate forecast for the long term [i.e. after 2040] meant that the airport would still be growing while, at the same time, the terminal value was calculated when the business was supposed to reach maturity. In this context, the Commission clarified that the growth rate of mature companies ought to be lower than the average growth rate of the whole economy. Furthermore, the Commission noted that the Polish authorities had not indicated on what basis they had forecast the growth rate in question over a very long period. In addition, the Commission indicated that, taking into account the length of the period covered by the forecasts and the distant date of the calculated terminal value, a wise investor would have carried out sensitivity tests, which had not been the case. [para 155]

Furthermore, throughout the project period [i.e. until 2040], the discounted cash flows would remain negative. The project became profitable only thanks to its discounted terminal value. However, the General Court held that the Commission had not committed a manifest error of assessment in considering that the terminal value of the project was very probably significantly overestimated. [para 159]

The General Court also reiterated well-established case law that aid for the construction of airport infrastructure cannot be dissociated from the operation of the airport itself and that the revenue and costs of the operation also had to be taken into account. [paras 160-163]

Affectation of trade

The applicants disputed the Commission’s conclusion as regards the distortion of competition and the effect on trade which would result from the measure in question.

The General Court, first, recalled well-established case law according to which trade is affected whenever aid strengthens the position of an undertaking in relation to other undertakings competing in trade between Member States. The Court also reiterated that trade may be affected even if the aid recipient does not itself participate in cross-border transactions. Furthermore, competition is distorted in principle whenever aid reduces the costs that an undertaking would normally have to bear. [paras 173-176]

The Commission indicated that competition existed, on the one hand, between airports which sought to attract airlines, and therefore air traffic [passengers & goods], and, on the other hand, between airport operators who could compete for the contract to manage an airport. [para 177]

Moreover, The General Court agreed with the Commission that the airports of Gdynia-Kosakowo and Gdańsk, around 25 kilometers away, would operate in the same market segment [low-cost airlines and charter flights], had the “same catchment area” and that there was “price competition” between them. Gdynia-Kosakowo airport was in direct competition, in particular, with Gdańsk airport, which offered facilities to flights between Member States. [paras 181-183]

The General Court rejected the argument of the applicants that Gdynia-Kosakowo airport was small. Even the relatively low level of aid or the relatively small size of the beneficiary company does not a priori exclude the possibility that trade between Member States is affected. [para 187]

Interestingly, the applicants protested that there was disproportionate interference by the Commission in the exercise of the powers of local administrations and that the Commission ought to concentrate its efforts on large airports. The General Court rejected this argument on the grounds that it related to the advisability of the review carried out by the Commission and not to the legality of the contested decision. [para 191]

Lastly, the applicants claimed that the construction of airport infrastructure was part of regional economic policy falling outside the scope of Article 107(1) TFEU. The General Court reiterated that the commercial operation and construction of airport infrastructure for commercial exploitation constituted economic activity. [para 195]

Alleged infringement of Article 107(3)(c) TFEU

The applicants claimed that the Commission failed to take account of the potential for regional development.

First, the General Court recalled that the assessment of the compatibility of aid measures with the internal market, under Article 107(3) TFEU, fell within the exclusive competence of the Commission. [para 207]

Then it agreed with the Commission that the creation of a new airport in the region of Pomerania would not contribute to the development of that region because Gdynia-Kosakowo airport was only located at around 25km from Gdańsk airport and because Gdańsk airport was operating below its full capacity. Therefore, Gdańsk airport was capable of processing any additional traffic resulting from the potential growth of the region. [paras 217-218]

The General Court also agreed with the Commission’s assessment that the measure in question would lead to a simple duplication of infrastructure in the region. [para 229]

Since none of the pleas put forth by the applicants were successful, the General Court dismissed the appeal in its entirety.

Tags

Über

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 is professor at the University of Maastricht and the University of Nicosia. 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.

Zusammenhängende Posts

24. Mai 2022
State Aid Uncovered von Phedon Nicolaides

Another Case of Rescue Aid to an Airline

An undertaking does not have to be nationally “important” in order to qualify for rescue aid. Introduction The pandemic has been hard on airlines. For some of them, however, the pandemic simply exacerbated their already existing problems. On 18 May 2022, in case T‑577/20, Ryanair v European Commission, the General Court had to examine the case of State aid to […]
01. Mrz 2022
State Aid Uncovered von Phedon Nicolaides

Security of Energy Supply

Guaranteed supply of electricity at fixed prices to a state-owned network operator involves a transfer of state resources to the supplier. Guaranteed supply of electricity at fixed prices confers an advantage to the supplier. Introduction Member States are allowed to take measures to ensure the security of energy supplies. There is a variety of such measures: imposition of obligations on […]
30. Nov 2021
State Aid Uncovered von Phedon Nicolaides

Public Funding of an Undertaking in a Closed Sector

Public funding of undertakings in sectors closed to competition does not constitute State aid. A sector is closed to competition when competition on and for the market is precluded by law. Introduction Determining when State aid does not affected cross-border trade is both difficult and tricky. But there is one exception; when the sector is closed to competition. A sector […]
21. Sep 2021
State Aid Uncovered von Phedon Nicolaides

Market Economy Operator Test: Timisoara Airport & Wizz Air

Public funding of activities that fall within the remit of the state does not constitute state aid. Although the presence of a credible ex ante business plan based on realistic assumptions is a strong indicator that the MEOT is satisfied, its absence does not necessarily prove that the MEOT is failed. Introduction Following a complaint by Carpatair, the European Commission […]
13. Apr 2021
State Aid Uncovered von Phedon Nicolaides

State Guarantee to an Energy Project

A state guarantee can bridge the funding gap of an infrastructure project. Introduction State aid rules allow energy infrastructure projects to be supported by as much aid as is necessary to bridge their “funding gap”; i.e. the difference between the initial investment cost and the present value of their expected net operating revenue which is the future gross revenue minus […]
27. Okt 2020
State Aid Uncovered von Phedon Nicolaides

The Common European Interest and the Environmental Impact of State Aid: The Case of Nuclear Power

I am grateful to Peter Staviczky for comments on an earlier version. The possible negative impact of State aid on the environmental is taken into account when the aid measure violates directly the relevant EU law. The Commission protects the interests of other Member States by ensuring that the negative effects of State aid are kept to the minimum possible. […]
22. Sep 2020
State Aid Uncovered von Phedon Nicolaides

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 […]
16. Jun 2020
State Aid Uncovered von Phedon Nicolaides

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 […]
02. Jun 2020
State Aid Uncovered von Phedon Nicolaides
euro coins

i) Investor-State Arbitration ii) Recovery of Incompatible State Aid iii) State Aid Scoreboard 2019

Member States abolish bilateral investment treaties between themselves. When the Commission orders recovery of incompatible State aid, interest has to be added to the recoverable amount for the whole period of illegality regardless of any national limitation rules. In 2018, Member States granted EUR 121 billion to industry and services, EUR 6.3 billion to agriculture and EUR 50 billion to […]
26. Mai 2020
State Aid Uncovered von Phedon Nicolaides
State Aid Blogpost 21 Picture

State Aid for i) Water Development ii) Travel

Aid to individuals in the context of social policy is compatible with the internal market as long as it is granted without discrimination on the origin of products or services. Temporary Framework: Number of approved covid-19 measures, as of 22 May 2020: 129* Legal basis: Article 107(2)(b): 9; Article 107(3)(b): 111; Article 107(3)(c): 12 * Excludes amendments to previously notified […]