Liability assumed by the state for the actions of an undertaking constitutes a selective advantage that may result in potential transfer of state resources in the future.
On 16 January 2020 the General Court delivered its judgment in case T‑257/18, Iberpotash v European Commission.
Iberpotash, a Spanish company, appealed against Commission decision 2018/118. Iberpotash owns and operates potash mines in Spain. It also owns a salt waste site or “heap” that is located in Spain as well. It is a subsidiary of ICL Fertilisers, an Israeli company, which is the largest producer of fertilisers in the world.
Iberpotash bought the mines and the waste heap from the Spanish state in 1998. Sometime afterwards, the Spanish government bore the cost of environmental remediation at the salt waste heap by undertaking works to cover the heap.
In 2006 and 2008, Iberpotash obtained environmental permits to extract potash from its mines. These permits required Iberpotash to submit bank guarantees, the so-called “guarantee fees”. Their purpose was to ensure that sufficient resources were set aside for the purpose of covering the potential cost of restoration of the sites once the mining activities were terminated. A Spanish court found that the guarantees submitted by Iberpotash were not adequate.
After receiving a complaint, the European Commission opened in 2016 the formal investigation procedure in suspected illegal aid in favour of Iberpotash.
In 2017, the Commission adopted decision 2018/118 which found that Iberpotash received State aid in the form of unduly low guarantee fees. In addition, the aid was incompatible with the internal market. The decision also found that the covering of the waste heap constituted State aid in favour of Iberpotash. This aid, however, was partly compatible and partly incompatible with the internal market. Spain was ordered to recover all the incompatible aid.
Measure 1: Guarantees and state liability
The Iberpotach disputed that the “guarantee fees” – labelled “Measure 1” in the decision – involved transfer of state resources.
First, the General Court recalled the relevant principles in the case law.
“(51) It is not necessary to establish in every case that there has been a transfer of State resources for the advantage granted to one or more undertakings to be capable of being regarded as a State aid within the meaning of Article 107(1) TFEU. In particular, measures which, in various forms, mitigate the burdens normally included in the budget of an undertaking, and which therefore, without being subsidies in the strict meaning of the word, are similar in character and have the same effect, are considered to be aid”.
“(53) Thus, State intervention capable of both placing the undertakings which it applies to in a more favourable position than others and creating a sufficiently concrete risk of imposing an additional burden on the State in the future, may place a burden on the resources of the State”.
“(54) Advantages given in the form of a State guarantee can entail an additional burden on the State”. The seminal case law on future state liabilities is C-200/97, Ecotrade, C-275/10, Residex Capital, and C‑399/10 P, Bouygues.
“(55) Furthermore, […], where, in economic terms, the alteration of the market conditions which gives rise to an advantage given indirectly to certain undertakings is the consequence of the public authorities’ loss of revenue, even the fact that investors then take independent decisions does not mean that the connection between the loss of revenue and the advantage given to the undertakings in question has been eliminated”.
“(56) Consequently, for the purposes of establishing the existence of State aid, the Commission must establish a sufficiently direct link between, on the one hand, the advantage given to the recipient and, on the other, a reduction of the State budget or a sufficiently concrete economic risk of burdens on that budget”.
Then the General Court applied the principles outlined above to the case at hand.
“(57) As regards (i) whether Measure 1 can be imputed to the State, […] the amounts of the financial guarantees due by the applicant were set by the Generalitat de Catalunya in two individual administrative decisions”.
“(58) As regards (ii) the State resources criterion, […], the Commission considered, with regard to Measure 1, that the financial guarantees at issue were not examined in the light of the standards applicable to State aid rules as to the amount of fee possibly foregone in light of the risk or exposure incurred by the guarantor (i.e. a private bank, not the State) but as to the risk for the State in case the guaranteed amount is lower than the actual costs of the environmental damage and in case the guaranteed company does not or cannot pay the full restoration costs. In recital 90 of the contested decision, the Commission reiterates that there is a concrete risk of a potential effect on State resources due to the increased risk for the State to be obliged to call upon its resources in the future. Moreover, in recital 91 of that decision, it considers that the creation of a concrete risk of imposing an additional burden on the State in the future is sufficient for the purposes of fulfilling the notion of State aid and that the link to and effect on State resources of an aid measure need not be direct for this criterion to be met.”
“(59) In recitals 92 to 99 of the contested decision, the Commission states that the increased risk that State resources might be affected in the future stems from the amount of the guarantees being significantly lower than any expected restoration costs, since, in the event that the applicant is not willing or able to pay for that restoration, State resources would have to cover a greater part of those costs, the State’s obligation to step in on its own account in the event that the applicant is not willing or able to take the necessary restoration measures being well established in the applicable national and EU legislation. The Commission concludes from this that the level of guarantees which is significantly lower than necessary, as required by law, exposes the State to a risk of additional burden on its resources. The increased risk is thus sufficiently concrete to constitute at least a potential impact on the State’s resources. The Commission observes, moreover, that the applicant’s assets which the State could seize in the event of forced execution might prove to be insufficient.”
Then the Court noted, in paragraphs 60-63 of the judgment that “the amount of the financial guarantees, as set by the administrative decisions of the Generalitat de Catalunya, was too low”, that “the Spanish State had a subsidiary obligation to intervene in the event of non-compliance with the environmental protection obligations imposed on the undertakings engaged in mining activity” and that the obligation of the Spanish state emanated from EU environmental directives.
Next, the General Court observed that “(64) the resources of the State may be regarded as having a burden placed on them also if it is established that there is a ‘sufficiently concrete risk’ of an additional burden being imposed on the State in the future.”
Although Iberpotash argued that it had sufficient financial resources to cover any risks, the General Court was not convinced. Nonetheless, the Court ruled that even if “(67) the applicant does have sufficient financial capacity to reduce the risk of the State having to intervene, it must be held that, in view of the fact that the financial situation of a company is capable of changing at any time due to various random economic factors, and in so far as, in general, the obligation to provide a financial guarantee is aimed precisely at ensuring that funds are available at any time and irrespective of the financial capacity of the entity required to provide that guarantee, the financial capacity of that entity has no bearing on the determination of the appropriate amount of those guarantees and, ultimately, on the assessment of whether there is a sufficiently concrete risk of a burden being placed on the State budget.”
Iberpotash criticised the fact that the Commission did not use the normal methodology for pricing of guarantees to determine whether the Spanish state bore any liability. This methodology entails that the liability that is borne by the guarantor is the expected cost which is equal to the potential future cost of the guaranteed event multiplied by the probability of the event occurring. That is why the public authority that provides the guarantee can avoid conferring an advantage to the recipient of the guarantee by charging a premium that is at least equal to the expected cost. However, the problem in this case was that the guarantee was obtained by Iberpotash from a commercial bank. The relevant state authority offered nothing and charged nothing.
The General Court noted that “(70) although, in the case of State guarantees, a burden is placed on the State budget, in particular, by the reduction of the premiums that it receives itself and therefore by an immediate reduction of its revenues, in a situation such as that in the present case, on the one hand, there is also an advantage for the applicant by virtue of the reduction in the premiums that it has to pay on an amount of the guarantees lower than that which it should have set up, thereby altering normal market conditions. The fact that the loss of revenues concerns the budget of the private banking institution does not prevent the identification of the existence of an advantage for the applicant resulting from the setting of the financial guarantees, which it was required to provide, at a level lower than that which was necessary.”
In other words, by allowing Iberpotash to submit a guarantee for a lower amount than the potential cost of remediating the environmental damage caused by the mines, the state in effect assumed liability for the difference between the guaranteed amount and the potential cost. This is exactly what the General Court explained next.
“(71) The risk of an additional burden being placed on the State budget is also present in a situation such as that in the present case, in which the applicable provisions require the setting of guarantees to cover environmental risks, admittedly set up with a private banking institution, and in which there is an obligation of subsidiary State intervention to cover those risks, since the provision by a mining undertaking of a guarantee at too low a level increases the risk of the State having to intervene. That increased risk places a burden on the State budget and the increase in that risk is the direct consequence of setting the amount of the guarantees due at too low a level.”
“(73) Contrary to the applicant’s submission, the uncertainty or degree of probability as to whether the risk for the State will materialise is not a factor capable of rendering purely hypothetical the link between the advantage conferred on the applicant and the additional burden placed on the State budget, but represents solely an intrinsic characteristic of the concept of ‘risk’.”
“(75) The fact that the risk did not materialise does not eliminate the additional risk created by Measure 1, which is assessed at the time that the guarantee is provided and which continued during the period during which the level of the guarantee was too low.”
Iberpotash argued that the Commission wrongly concluded that Measure 1 conferred an advantage to it.
First, the General Court noted that “(94) in order to find that the setting of the amount of the financial guarantees constituted an aid measure falling within the scope of Article 107 TFEU, the Commission was required to establish that the level of those guarantees was indeed inadequate and significantly lower than that which would have been necessary to cover the costs of restoring the mining sites operated by the applicant.”
Then the Court pointed out that the Commission “(97 had not engaged in its own evaluation of the correct levels of the financial guarantees according to Directive 2006/21 [the relevant EU environmental directive], but had limited its assessment to evaluating the existing evidence of the insufficiency of the financial guarantees. In fact, a number of pieces of evidence suggested that the amount of the financial guarantees as set by the public authorities in 2006 and 2008 was actually lower than required under the applicable legislation.”
“(100) The Commission took into account the judgment of the Tribunal Superior de Justicia de Cataluña (High Court of Justice of Catalonia) of 11 October 2011, in which it was held that the restoration plan for the Sallent/Balsareny site was incomplete and that the level of the guarantee set in relation to it was too low.”
“(103) While the Commission is not bound by the decisions of the national courts […], it is certainly free to take them into account if it considers them relevant to its assessment.”
“(108) The Commission took other pieces of evidence into account which corroborated the finding reached by the national courts that the level of the financial guarantees at issue was unduly low.”
The General Court agreed with the Commission that Iberpotash obtained an advantage.
Iberpotash argued that the Commission failed to establish that the measure was selective, namely that the national provisions setting the amount of the guarantees at issue had been interpreted selectively with regard to the applicant.
The General Court rejected that argument.
“(116) In this respect, it is sufficient to note that the Measure 1 in question was granted, […], by means of specific operating permit decisions addressed to the applicant. Accordingly, the applicant cannot call in question the fact that it was the only undertaking covered by that measure.”
“(117) It has been held that the selectivity requirement differs depending on whether the measure in question is envisaged as a general scheme of aid or as individual aid. In the latter case, the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective”.
In connection to Measure 1, Iberpotash also claimed that, by ordering recovery of the aid, the Commission breached the principles of the protection of legitimate expectations and legal certainty.
The General Court dismissed that claim. It reiterated, in paragraphs 130-151, established principles according to which recovery is the natural consequence of incompatibility, as it removes the distortion caused by the aid; legitimate expectations can only be created by an act of an EU institution; a diligent operator is able to find out whether aid has been notified to the Commission; and that precedents may not lead an undertaking to entertain legitimate expectations.
Then the Court turned its attention to “Measure 4” which was the covering of the salt waste heap at a place called Vilafruns.
Measure 4: Environmental remediation
Iberpotash argued that the Commission had not established that the covering of the Vilafruns waste heap formed part of the environmental obligations to which it was subject, or that the costs borne by the public authorities were costs that it would have had to bear if the public authorities had not covered the waste heap.
As a preliminary point, the General Court stated that “(158) in this examination of what constitutes an advantage, the Commission must therefore assess whether the applicant was favoured directly or indirectly or obtained an advantage that it could not have obtained under normal market conditions.”
“(159) In the present case, …, the Commission considered that, regardless of the extent of the applicant’s obligations with respect to Vilafruns, it cannot be accepted that investment of EUR 7.9 million into significantly better environmental protection, in principle equivalent to the restoration of the site, without any investment cost to the applicant, did not yield any economic advantage for the applicant.”
“(160) The Commission stated, moreover, that the alternative measures in the absence of aid would not have provided such effective and long-lasting protection and would have exposed the applicant to risks of having to bear the consequences of the pollution and that, therefore, the construction of the facility paid from public resources enabled the applicant to better prevent pollution, lower its environmental risks for the future and provide for a long-lasting restoration of the heap.”
“(162) The covering of the Vilafruns waste heap was an effective and long-lasting measure to protect against pollution.”
“(163) The fact that the covering of the waste heap was an effective, long-lasting and not disproportionate measure to combat pollution implies, in itself, that that measure contributed to resolving the problem of pollution, the consequences of which would have weighed on the applicant. […] [I]t must be held that, under the applicable national and EU legislation and the sales and purchase agreement of the applicant’s facility, […], the applicant had a general responsibility to continually rectify any negative consequences of the pollution and management of that facility.”
“(164) It follows from the foregoing that the applicant’s arguments that there was no obligation on it to cover the waste heap … are irrelevant in assessing the existence of an advantage for it as a result of Measure 4, in the light of the fact that the covering of the waste heap was an effective and long-lasting measure enabling the applicant to avoid having to adopt further environmental protection measures for a very long period.”
“(165) The State intervention, in the form of investment of EUR 7.9 million, intended to cover the Vilafruns waste heap, decided on and financed entirely by the public authorities, constitutes a positive benefit, in the same way as a subsidy, necessarily entailing an advantage for the applicant, which, as a result of the covering of the waste heap, will not have to implement any other restoration measure for a very long period.”
“(169) As is stated in paragraph 9 of the 2008 [Environmental Aid] Guidelines, Member States may impose requirements for environmental protection that go beyond EU requirements, in order to reduce to the greatest possible extent negative externalities entailed by economic activities which can harm the environment, on account of the pollution which they generate.”
“(170) Under the ‘polluter-pays principle’, referred to in paragraphs 7 and 8 of the 2008 Guidelines, these negative externalities can be tackled by ensuring that the polluter pays for its pollution, which implies full internalisation of environmental costs by the polluter. This is intended to ensure that the private costs (borne by the undertaking) reflect the true social costs of the economic activity. The polluter-pays principle can be implemented either by setting mandatory environmental standards or by market-based instruments. Some of the market-based instruments may involve the granting of State aid to all or some of the undertakings which are subject to them. It is precisely with a view to creating incentives on an individual level (at the level of the undertaking) to achieve a higher level of environmental protection than required by Union standards or to increase the environmental protection in the absence of such standards that, according to paragraph 10 of the 2008 Guidelines, Member States may want to use State aid.”
“(172) The Commission took into account the fact that the Spanish State had opted for a higher level of environmental protection and drew the appropriate conclusions from this when examining the compatibility of the aid, specifically by concluding that only the amount of EUR 3 985 109.70 had to be recovered from the undertaking and not the entire State investment amounting to EUR 7 887 571, in accordance with the 2008 Guidelines.”
Calculation of the compatible amount of aid and the incompatible amount that had to be recovered
Iberpotash argued that the Commission infringed Article 16(1) of Regulation 2015/1589 in so far as the Commission did not correctly establish the amount of the aid, if any, arising from Measure 4.
“(179) As a preliminary point, it should be noted, as was mentioned in paragraph 172 above, that the Commission took into account the fact that Measure 4 was a measure to improve environmental protection, which had been decided on by the public authorities in order to guarantee a higher level of protection than that required by Union standards and which therefore went beyond existing needs at the time of the adoption of the contested decision, which the Commission itself acknowledges”.
“(180) In view of the foregoing, the Commission first found, […], that it could apply Section 3.1.1 of the 2008 Guidelines, according to which investment aid enabling undertakings to go beyond Union standards for environmental protection or to increase the level of environmental protection in the absence of Union standards might be considered compatible with the internal market.”
“(181) Next, in accordance with paragraph 80 of the 2008 Guidelines, in order to determine the amount of the eligible costs, the Commission, in recitals 161 and 162 of the contested decision, took into account the extra investment costs that would have been necessary to achieve the level of environmental protection higher than that which would have been achieved by the undertaking in the absence of any aid (namely the difference between the amount of State investment and the expected costs for the containment measures set in the 2008 restoration plan). In recital 165 of the contested decision, it deducted from that amount the operating profits, which for a non-active site such as Vilafruns amounted to zero and added the operating costs for the first five years. The Commission therefore found the total amount of the eligible costs to be EUR 7 804 922.60.”
“(182) Lastly, in accordance with the maximum permitted threshold for large undertakings, the Commission found, […], that 50% of eligible costs, namely EUR 3 902 461.30, could be considered compatible with the internal market, thus reducing the amount of aid to be recovered to EUR 3 985 109.70.”
“(183) Thus, the Commission ordered the recovery of the aid represented by Measure 4 from the applicant only in respect of the amount of EUR 3 985 109.70.”
On the basis of the above reasoning, the General Court dismissed in its entirety the action brought by Iberpotash.
 The full text of the judgment can be accessed at:Luis Zamora (eldelinux) from flickr.com]