How to Make Good the Damage Caused by a Natural Disaster

Compensation for costs incurred as a result of a natural disaster is State aid. The compensation must be for damage directly caused by the natural disaster.

Introduction

State aid to make good the damage caused by an “exceptional occurrence” such as the corona virus covid-19 is compatible with the internal market. The legal basis for exemption is Article 107(2)(b). Of the 15 State aid measures that have been authorised by the Commission to combat the effects of covid-19 only two so far have been based on Article 107(2)(b) [SA.56685 on compensation for cancellation of events and SA.56791 on grants to self-employed, both of which were adopted by Denmark.] As of the time of writing of this article, all the other measures have been based on Article 107(3)(b) according to which aid may be compatible with the internal market for the purpose of remedying a serious disturbance in the economy of a Member State.

Article 107(2)(b) also allows State aid to make good the damage caused by a natural disaster. The criteria for assessing the conformity of such aid are largely the same as those that apply to exceptional occurrences. Therefore, it is worth reviewing Commission decision 2020/394 concerning interest subsidies and guarantees to agricultural undertakings that were affected by the fires of 2007 in Greece.[1]

The approach of the Commission is instructive and also very relevant to how Member States should design measures to counter the effects of exceptional occurrences.

Background

After it received a complaint alleging that aid had been granted by Greece to Sogia Ellas and its subsidiaries which were active in the processing of agricultural products, the Commission opened a formal investigation that was extended to other undertakings producing, processing and marketing Annex I products.

The purpose of the aid was to provide credit and working capital to undertakings that suffered damage as a result of large fires.

The aid was granted in two schemes as follows:

(a) Capitalisation of debts and their conversion into new loans with a grace period, interest subsidies and state guarantees.

(b) New loans for working capital with interest subsidies and state guarantees.

The maximum aid intensity varied between 30% and 100%.

The schemes were open to all undertakings active in the production, processing and marketing of agricultural products [Annex I TFEU], and in forestry. The estimated number of beneficiaries of interest subsidies was about 3770 (including Sogia Ellas and its subsidiaries) and the number of beneficiaries of state guarantees was about 745.

Absence of advantage?

Although Greece did not dispute that the two schemes mobilised state resources and were imputed to the state, it argued that they did not involve State aid because they compensated for a disadvantage, they were not selective because other undertakings were not in the same situation as they had not suffered any damage and they did not distort competition because they did not seek to improve the competitive position of the beneficiaries. In its view, the two schemes aimed to compensate the damage caused by the fires which were an “extraordinary and exceptional occurrence”. “(87) The damage did not constitute normal charges and the situation at hand was not a normal market condition.” The aid “(89) did not improve the competitive position of the beneficiaries but restored the latter to their condition prior to the natural disaster.”

The Commission, first, noted that “(110) if the rationale of the comments made by the Greek authorities was followed to its logical end, there could be no State aid in cases where aid was granted by the State with State resources for compensation of damage from natural disasters or exceptional occurrences. Such understanding would not only be in contrast to the objective character of the definition of State aid, […], but it would also be in conflict with the letter of Article 107(2)(b) TFEU, which provides that aid to make good the damage caused by natural disasters or exceptional occurrences is compatible with the internal market. The General Court made the same observation in response to the same argument made by Greece before it in a case which referred to State aid granted by the latter for compensation of damage caused by adverse climatic effects.”  [Here the decision cites case Greece v Commission, Case Τ-52/12].

“(113) An advantage within the meaning of Article 107(1) TFEU is any economic benefit which an undertaking could not have obtained under normal market conditions, that is to say in the absence of State intervention. Again, only the effect of the measure on the undertaking is relevant, and not the cause or the objective of the State intervention. Whenever the financial situation of an undertaking is improved as a result of State intervention on terms differing from normal market conditions, an advantage is present. To assess this, the financial situation of the undertaking following the measure should be compared with its financial situation if the measure had not been taken.”

“(114) The precise form of the measure is also irrelevant in establishing whether it confers an economic advantage on the undertaking. It is not only the granting of positive economic advantages which is relevant for the notion of State aid, relief from economic burdens can also constitute an advantage.”

“(115) The beneficiaries could not have received the same economic advantage under normal market conditions and, as a result, their financial situation improved on different terms than the ones under normal market conditions.”

“(116) However, the Greek authorities argued […] that there was no economic advantage, because of the extraordinary and exceptional character of the occurrence that caused the market conditions not to be normal. However, the concept of ‘normal market conditions’ used to determine the existence of an advantage, refers to the possibility of the beneficiary to enjoy the same economic benefit in the market as it does from the aid, and not to the assessment whether the market functions as usual or is in crisis. If the interpretation put forward by the Greek authorities were to be accepted, then the existence of economic benefit would be determined by the cause or objective of the aid, and every Member State would have been able to invoke a legitimate objective in order to prevent the application of State aid law to a measure.”

Selective advantage?

As noted above, Greece also argued that the two schemes were not selective because the firms that had not suffered from the fires were not in the same situation as those that had incurred losses.

The Commission responded as follows. “(117) To fall within the scope of Article 107(1) TFEU the aid measure must favour ‘certain undertakings or the production of certain goods’. The fact that the aid is not aimed at one or more specific recipients defined in advance, but that it is subject to a series of objective criteria according to which it may be granted, within the framework of a predetermined overall budget allocation, to an indefinite number of beneficiaries who are not initially individually identified, is insufficient to call into question the selective nature of the measure. In addition, in principle, only measures that apply within the entire territory of the Member State escape the regional selectivity criterion laid down in Article 107(1) TFEU.”

“(118) The aid schemes in question provided an advantage only to undertakings, which were established and operating in the geographical areas that were affected by the fires in 2007. They did not apply to the rest of the territory of Greece. Other undertakings in a comparable legal and factual situation, within the agricultural sector or other sectors, are not eligible for aid and thus will not receive the same advantage. The aspect that certain undertakings were affected by fires while others were not, does not place them in a different situation, as fire damage is part of the economic risk any undertaking may face. Aid for natural disasters (including fire) is a category of aid under Article 107(2)(b) TFEU and in the Guidelines 2007-2013 (see recital 142), hence by definition such measures are selective. The schemes therefore give only certain undertakings (see recital 29) a selective economic advantage, by strengthening their competitive position on the market.”

“(119) The argument of the Greek authorities in recital 88, attempts yet again to alter the test on the basis of which the existence of selectivity is ascertained. In accordance with the case-law of Union Courts […] the existence of exceptional occurrences, the alleged transparent and objective character of the conditions for the granting of the aid as well as the broader objective of the aid are not relevant at the stage of the assessment of the existence of State aid.”

Another way to appreciate the selectivity of the Greek measures is to follow the logic of the General Court and the Court of Justice in their rulings on the compensation of the cost of BSE tests in Belgium [C‑270/15 P, Belgium v Commission and T-538/11, Belgium v Commission]. In those cases Belgium argued that only farmers of cattle bore the costs and therefore its compensatory measures covered all those who were affected by the exceptional occurrence of the BSE epidemic. The reply of both courts was that the measures were selective because they did not compensate other undertakings that were subject to compulsory tests. Similarly, the Greek measures did not compensate other undertakings that had suffered damage from other events.


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No effect on trade and distortion of competition?

Greece claimed that the schemes in question did not affect trade and did not distort competition because the beneficiaries were merely compensated. The Commission, first, explained that “(120) a measure granted by the State is considered to distort or threaten to distort competition when it is liable to improve the competitive position of the recipient compared to other undertakings with which it competes. For all practical purposes, a distortion of competition within the meaning of Article 107(1) TFEU is generally found to exist when the State grants a financial advantage to an undertaking in a liberalised sector where there is, or could be, competition. Public support is liable to distort competition even if it does not help the recipient undertaking to expand and gain market share. It is enough that the aid allows it to maintain a stronger competitive position than it would have had if the aid had not been provided. In this context, for aid to be considered to distort competition, it is normally sufficient that the aid gives the beneficiary an advantage by relieving it of expenses it would otherwise have had to bear in the course of its day-to-day business operations. The definition of State aid does not require that the distortion of competition or effect on trade is significant or material. The fact that the amount of aid is low or the recipient undertaking is small will not in itself rule out a distortion of competition or the threat thereof, provided however that the likelihood of such a distortion is not merely hypothetical.”

“(121) Public support to undertakings only constitutes State aid under Article 107(1) TFEU insofar as it affects trade between Member States. In that respect, it is not necessary to establish that the aid has an actual effect on trade between Member States but only whether the aid is liable to affect such trade. In particular, the Union Courts have ruled that ‘where State financial aid strengthens the position of an undertaking as compared with other undertakings competing in intra-[Union] trade, the latter must be regarded as affected by the aid’.”

Then the Commission applied the principles above to the situation at hand. “(122) The beneficiaries covered by the scope of the present Decision are active in the highly competitive market of agricultural products and in forestry. It should be noted in this regard that the agricultural trade between Greece and the other Member States in 2017 amounted to almost EUR 4 billion in exports and to over EUR 5 billion in imports. The beneficiaries would have normally had to bear the costs of the damage themselves. Contrary to the observations made by Greece … the Commission concludes that these aid schemes improved the competitive position of the beneficiaries. The fact that their condition might have been affected by the natural disaster is again not relevant for the assessment of the existence of a threat to distort competition and affect intra- EU trade. Furthermore, since the agricultural and forestry sectors are open to intra-EU trade, they are sensitive to measures favouring undertakings in a particular Member State. The schemes in question thus threaten to distort competition in the internal market and affect trade between Member States.”

“(123) As to the argument put forward by the Greek authorities that the aid schemes in question did not improve the condition of the beneficiaries towards their competitors, but simply restored the function of these undertakings to the conditions prior to the natural disaster, the Commission refers to the judgment of the General Court in Case Greece v Commission [Greece v Commission, Case Τ-52/12]. In that case, the Greek authorities argued that the State aid in question only partly compensated farmers for the damage they had suffered due to adverse weather conditions and had therefore restored competition. The General Court rejected that argument and ruled that the adoption of unilateral measures by Member States with the aim of aligning the conditions of competition of an economic sector with those existing in other Member States, does not negate the characterisation of those measures as State aid.”

State guarantees

Some of the aid had been granted in the form of state guarantees. The Commission had to determine whether the guarantees contained State aid.

“(125) The risk [borne by the state] should have normally been remunerated by an appropriate premium. In the case at hand no premium, let alone an appropriate one, was paid by the beneficiaries. […] There was therefore a benefit enjoyed by the beneficiaries and a drain on State resources. This is true even if it turns out that for some beneficiaries of the schemes no payments were ever made under the State guarantee.”

“(126) The State guarantee enables the borrowers to obtain better financial terms for loans than those normally available on the financial markets […] The Greek authorities challenged this statement […] by arguing that the State guarantees do not influence the conditions for the granting of a loan and that there is no comparison with a situation without guarantee because financial institutions always ask for a guarantee in order to grant a loan. These arguments cannot be accepted. In offering more certainty to the financial institution that the loan contract with the borrower will be honoured, guarantees by definition improve the financial terms of loans. This is all the more so if financial institutions refuse to grant a loan without a guarantee, as the Greek authorities suggest. In such cases, it is only thanks to the guarantee that the borrower has access to and can benefit from a loan.”

“(129) However, […], it is necessary to assess whether all the conditions which allow to exclude the existence of that aid as provided in Section 3.4 of the Commission Notice on guarantees are fulfilled. […] It should be noted that these conditions are cumulative, namely that the failure to fulfil even one of them is sufficient for the State guarantee to be considered State aid […] This is indeed the case here, as the borrowers did not have to pay any premium, as is required by the Commission notice on guarantees. It must therefore be concluded that the schemes were not self-financing; there was no annual review of the appropriate premium foreseen; the administrative costs of the scheme were not covered and there was no yearly remuneration of an adequate capital. Furthermore, the legal bases of the schemes did not refer to the possibility to use safe-harbour premiums or single premiums for SMEs where applicable. Finally, there was no determination of eligible companies in terms of rating, thereby affecting the overall transparency of the schemes. None of these elements were included in the legal bases of the schemes, whilst the Greek authorities failed to provide evidence to the contrary.”

In addition, the Commission noted that “(131) the schemes were open to firms in financial difficulty, since there was no provision excluding these firms in the legal bases of the schemes.”

With respect to the imputability of the guarantees to the state, the Commission pointed out that “(133) the aid is granted at the moment when the State guarantee is granted, not when the guarantee is invoked or the payments are made. Furthermore, the question whether the guarantee constitutes State aid is to be assessed at the moment the guarantee is granted. Thus, since the State guarantees granted under these schemes had been previously evaluated and found by the Board, an indisputably State organ, to fulfil the applicable conditions, they cannot be considered afterwards not to be imputable to the State and never to have been granted. It would of course be a completely different scenario and irrelevant for the present assessment, if financial institutions outside the control of the State misconstrued the relevant legal bases and independently from the State granted loans on the apparent understanding that these were covered by the schemes in question although the applicable conditions had not been complied with.”

Consequently, the Commission concluded that the compensation in the form of, both, interest subsidies and state guarantees to undertakings in the agriculture and forestry sectors constituted State aid. The next step was to assess it compatibility with the internal market.

Was the aid compatible with the internal market for making “good the damage caused by a natural disaster or exceptional occurrence”?

The Commission considered the compatibility of the aid with the requirements of Article 107(2)(b) TFEU in conjunction with the Guidelines for State aid in the Agriculture and Forestry Sector, 2007-2013.

Contrary to the requirements of the agricultural guidelines, the two Greek schemes did not exclude firms in difficulty. Aid for such firms is allowed only on the basis of the rescue and restructuring guidelines. “(140) The only exception to this rule is aid to make good damage caused by natural disasters or exceptional occurrences, […] based on Article 107(2)(b) TFEU […] irrespective of the viability [of the beneficiaries] at the time the aid was granted.”

“(141) The argument of the Greek authorities […], according to which the [R&R] Guidelines should be interpreted in accordance with the automatic derogation of Article 107(2)(b) TFEU, cannot be accepted. That interpretation is contrary to the standing case-law of the Union Courts. In accordance with that case-law, Article 107(2)(b) TFEU, which constitutes a derogation from the general principle laid down in Article 107(1) TFEU that State aid is incompatible with the internal market, must be construed narrowly [Spain v Commission, Case C-73/03]. In addition, the Court ruled that only economic disadvantages directly caused by natural disasters or exceptional occurrences qualify for compensation as provided for in Article 107(2)(b) TFEU [Spain v Commission, Case C-73/03; Greece v Commission, Case C-278/00; Larko v Commission, T-423/14]. In other words, the derogation of Article 107(2)(b) TFEU is automatic in the sense that it is not in the discretion of the Commission to decide that a State aid falling within its remit is compatible. However, it has to be proven that the aid fulfils the conditions of the derogation; namely that it does indeed compensate damage actually caused by a natural disaster or exceptional occurrence.”

It is well-established in the case law that aid to make good damage caused by natural disasters or exceptional occurrences is allowed under three conditions:

  1. The event in question qualifies as a natural disaster or exceptional occurrence.
  2. There is a direct link between the damage and the natural disaster or exceptional occurrence.
  3. The aid may not overcompensate the damage and should only make good the damage caused by the natural disaster or exceptional occurrence.

With respect to fires, the Commission acknowledged that it had “(61) consistently taken the view in its State aid legal instruments that wild fires of natural origin constitute natural disasters whilst fires which result in widespread loss are exceptional occurrences within the meaning of Article 107 (2)(b) TFEU”.

Then the Commission explained why “(144) the schemes under assessment do not fulfil any of the conditions. They do not define what qualifies as damage and they do not require the establishment of any link between the damage suffered and the fires. …, it is clear from the text of the legal bases of the schemes that the sole link between the beneficiaries and the fires is that the former are established and operating, irrespective of their registered seat, in one of the geographical areas affected by the fires. Instead of a direct link requirement between the damage and the fires, the aid schemes introduced a general geographical link between the establishment of the beneficiaries and the broader areas where the fires occurred. Besides, the Greek authorities revealed in their observations … that there was a presumption that due to the severity of the fires all undertakings suffered damage. The applicable test was, thus, not that of a direct link between the damage and the fires, but that of a presumption of damage. The schemes are therefore too broad in scope and cannot be regarded as aid to compensate the damage caused by natural disasters or exceptional occurrences.”

The Greek presumption is not necessarily wrong. In fact it is rather reasonable to surmise that a company that operates in an area affected by a natural disaster also suffers indirectly from the consequent downturn in economic activity in that area. However, Article 107(2)(b) allows only aid to remedy the impact of “direct” damage from the natural disaster or exceptional occurrence.

But what is “direct” damage? Normally a fire, flood, storm or earthquake cause physical destruction. This is the direct damage from the impact of a natural disaster. But physical destruction can also lead to subsequent damage that is experienced days or months after the natural disaster such as loss of revenue or increased cost from the need to buy in goods that used to be produced in-house or have to be procured from a supplier outside the affected region. When, after heavy rainfall about ten years ago, swollen rivers in Germany and Austria swept away bridges, companies that had not suffered directly subsequently incurred higher costs because they had to redirect their deliveries and supplies along longer routes. Was this direct damage? Consider another example. When the eruption of an Icelandic volcano in 2010 caused disruption of air travel in north-western Europe, shops at the airport in Ljubljana were compensated for loss of income [SA.32163]. So it is not necessary that the damage is linked to physical loss. It can also be linked to financial loss, as long as the impact is attributed solely to the natural disaster. But it also follows that it cannot be just presumed that a company that happens to operate in an area affected by a natural disaster is automatically harmed. At any rate, the nature of damage must be defined. For example, in the case of the Ljubljana airport shops the loss of income was limited to the reduction in sales in comparison to a reference period only for the days that the airport was closed. Similarly, Greece could have succeeded to provide compensation not just to farmers but also other companies that experienced losses as a direct result of the fires, had it defined the damage more specifically.

Indeed, the Commission highlighted that “(146) the schemes did not contain any methodology for an as precise as possible assessment of the damage suffered due to the fires nor did they determine the eligible costs on the basis of that damage. Instead, an arbitrary approach was adopted where the amount of the aid was ultimately determined by the amount of the loan for which the interest subsidy and the State guarantee were granted, as described in the opening decision … Consequently, the Commission concludes that the aid was completely dissociated from damage, if any, caused by the fires.”

Was the aid justified as a “remedy a serious disturbance in the economy of a Member State?”

Greece argued in the alternative that the State aid in question could be found compatible under Article 107(3)(b) TFEU as aid to remedy a serious disturbance in the economy of a Member State.

In response, the Commission, first, pointed out that “(154) the serious disturbance mentioned in that provision must affect the entire economy of the Member State, not merely that of one of its regions or sectors [Germany v Commission, C-301/96; Freistaat Sachsen v Commission, T-132/96]. In cases where particular regions or sectors of a Member State are affected, only Article 107(3)(a) and (c) TFEU apply [Commission Decision 94/725 on measures adopted by the French Government concerning pigmeat].”

“(155) As regards the statistical data provided by the Greek authorities […], the Commission concludes that these data do not support the argument [of serious disturbance]. In particular, even though the data indicate some fluctuations in the production […], they do not indicate any ‘disturbance’ in the entire economy of Greece, let alone a serious one. Moreover, there is no indication whatsoever proving that any impact on the production in Greece would be attributable to the fires of 2007. Finally, the statistical data provided by the Greek authorities only cover a three-year period (2007-2009); therefore, they do not provide sufficient indication on the longer-term evolution of the agricultural production and its impact on the total production in Greece in the period following the fires.”

The Commission also examined the possible compatibility of the aid with other provisions of Article 107(3) and concluded that none applied.

Was recovery absolutely impossible?

Since the aid was incompatible with the internal market, the Commission instructed Greece to recover the aid, except where at the time of granting it fulfilled all conditions of block exemption regulations, the de minimis regulation or of an aid scheme approved by the Commission.

Greece claimed that it was absolutely impossible to recover the aid. The Commission rejected that claim. “ (170) The Commission does not at this stage accept the argument of Greece that there is absolute impossibility to recover. In this regard two cumulative conditions must be satisfied following a detailed examination by the Commission, namely that the difficulties relied on by the Member State concerned are real and that there are no alternative methods of recovery. Only if the Commission had found, following such a detailed examination, that there were no alternative methods allowing even partial recovery of the unlawful aid in question might that recovery have been considered to be objectively and absolutely impossible to carry out. In the present case, Greece did not rule out alternative methods for at least partial recovery, relying solely on the fact that it is not possible to obtain the necessary information on direct and indirect damage caused by the fires, in the absence of any records and documentation thereof.”

The Commission also explained that past decisions in which allegedly incompatible aid did not have to be recovered were not binding or relevant. The Commission is required by Article 16 of Regulation 2015/1589 to order recovery of aid unless it was granted more than 10 years before the Commission first examined it.

—————————————————————

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

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2020.076.01.0004.01.ENG&toc=OJ:L:2020:076:TOC.

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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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