Indirect v Secondary Effects of State Aid

The prohibition of State aid in Article 107(1) of the Treaty applies both to the direct and indirect beneficiaries of aid. The direct and indirect beneficiaries are those who are intentionally targeted by the aid. Secondary effects are benefits which are inherent in an aid measure and which are not targeted at specific undertakings.

 

Introduction

Public funding for the construction of a public road which is open to everyone to use is not considered to be State aid. Yet, it is quite obvious that the undertakings which happen to be close to that road benefit more than others. Shouldn’t that funding be regarded as State aid?

The answer of the Court of Justice is “no” because the effect is “secondary” and the benefit that some undertakings obtain is “inherent” in the fact that any road is necessarily more useful to those undertakings which are geographically close to it.

A moment’s reflection would suggest that that is the right answer. Every aid measure has secondary effects. If a company gets a grant to build a new factory, the construction industry also benefits. The sector that provides the equipment for the new factory benefits too. If Member States or the Commission had to take into account the secondary effects of aid, then the scope of Article 107(1) would be extended to such a degree that it would become unpredictable, unmanageable and therefore unenforceable.

By contrast, an aid measure that requires the recipients to buy equipment from a certain company or sector confers a direct advantage to the recipients and an indirect advantage to the identified sellers of equipment. These indirect beneficiaries are explicitly targeted by the measure even though the indirect benefits are not inherent in the principal aim of the measure which is to support the companies that invest in new plants.

Recently, the Commission had opportunity to address the distinction between the indirect and secondary effects of aid. The reasoning of the Commission can be found in its decision 2017/1861 on compensation to Sardinia airports for public service obligations.[1]

The regional authorities in Sardinia provided funding to airlines to start new routes and to promote the island as a tourist destination. The funds were channeled via airport operators. The Sardinian authorities claimed that the funding was compensation for the extra costs of public service obligations.

The Commission assessed first the existence of State aid to airlines and then the existence of State aid to airport operators. It also examined whether genuine public service obligations had been imposed on airlines and whether the compensation was compatible with the internal market.


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Existence of State aid to airlines: Direct beneficiaries

There was no doubt that airlines and operators were undertakings, that the measures were selective and that they affected cross-border trade. What was in doubt was whether the measures could be attributed to the state and whether they conferred an advantage.

With respect to the attribution of the measures to the state, the Commission examined the legal context in which the airports operated and concluded that they were acting on behalf of the state. The airports had no discretion in how to dispose of the funds they received from the state. Even though the measures “(359) were designed and proposed in the first place by airport operators, […] the Region reviewed the plans, approved them, and determined the funding provided to the airport operator on that basis. Through the approval of the detailed activity plans, the Region determined precisely how each airport operator should allocate the funding received from the Region to airlines.”

Then the Commission considered whether airlines obtained an advantage by receiving funds to open up new routes and to promote the island. With respect to the promotional activities and marketing, the Commission was of the view that “(366) Those payments cannot be considered as true consideration for marketing services, but also amount to payments to the airlines for increasing their activities in the Region.” “(368) The fact that the marketing services […] are to be provided by airlines rather than any other type of companies able to offer such services is, in itself, a factor which naturally leads those marketing services to promote, in the first place, the air transport services offered by the airlines concerned. Indeed, airlines usually promote regions and cities, in particular on their websites, when they operate flights to such regions and territories, with a view to enticing potential customers to use their services to fly to those areas. Furthermore, on the websites of airlines, the promotion of certain regions and cities is usually intrinsically linked to the promotion of the flights operated by the airlines to that region, or at least to information supplied on the existence and characteristics of those flights.” “(371) Promoting its own destinations is part of the normal activities of an airline.” “(372) In view of the above, it can be concluded that payments made by the Region to airlines […] subsidise the marketing costs that airlines should normally bear in the context of their air transport operations. Furthermore, insofar as they are linked to the opening of new routes or extension of operations on existing routes, those payments act as financial incentives to airlines to increase air traffic to Sardinia.” “(373) In addition, […], the marketing actions funded by the Region […] must be part of the same activity plans referred to in the context of [the opening of new routes] […] This establishes a further link between the opening and extension of routes […] and the marketing agreements”.

For these reasons, the Commission concluded that both the funding for marketing and promotional activities and the funding for opening up of new routes conferred to airlines an advantage in the meaning of Article 107(1) TFEU. While the analysis of the Commission with respect to marketing is clear, its thinking with respect to the opening up of new routes is not so. The Commission decision links the two measures and the funding for the new routes is found to confer an advantage by association. But the decision does not address directly the important feature of the agreements between airports and airlines which was that compensation was granted only if airlines met specified targets and were penalised if they failed to meet them. The penalty side is ignored in the analysis of the Commission.

Once the Commission established that the airlines obtained an advantage, it went on to examine whether the funding by the regional authorities complied with Altmark conditions or with the market economy operator principle [MEOP].

The Commission found that the terms of the funding did not fulfil the first Altmark condition. “(379) As indicated in point 70 of the 2014 Aviation Guidelines, ‘as regards air transport services, public service obligations can only be imposed in accordance with Regulation (EC) No 1008/2008. In particular, such obligations can only be imposed with regard to a specific route or group of routes, and not with regard to any generic route originating from a given airport, city or region. Moreover, public service obligations can only be imposed with regard to a route to fulfil transport needs which cannot be adequately met by an existing air route or by other means of transport’ (footnotes omitted). Indeed, air transport is a sector where the Union legislator has decided to restrict the wide margin of discretion normally enjoyed by Member States when qualifying certain activities as SGEIs, by imposing conditions set out in Regulation (EC) No 1008/2008. However, routes that are the object of public service obligations in accordance with Regulation (EC) No 1008/2008, which exist in Sardinia, are explicitly excluded from the scope of application [of the measure in question], which is clearly designed as a system parallel to the system of public service obligations under Regulation (EC) No 1008/2008. Therefore, the funding provided by airport operators to airlines under [the measure in question] cannot be considered as compensation provided to airlines for the operation of genuine services of general economic interest. As a result, one of the four cumulative conditions of the Altmark judgment, namely the first one, is not satisfied.”

 

With respect to the application of the MEOP, the Commission found that the regional authorities did not conduct any ex ante analysis of prospective profitability, nor did they enter into agreements with the airlines that would secure returns for the region [the agreements were between airports and airlines, not between the regional authorities and airlines]. The Commission concluded that the regional authorities did not act as a market operator [paragraphs 380-385].

Existence of State aid to airports: Secondary beneficiaries

Next, the Commission examined the possible existence of state aid to airport operators. The Commission considered that “(396) airport operators passed on in full funds received from the Region to finance financial incentives for the expansion of air transport services as well as marketing agreements, which they co-financed through their own resources. The airport operators were thus intermediaries and did not retain the funds received from the Region. Hence, they cannot be considered as the direct beneficiaries of the aid scheme.”

But the Commission also had to examine whether the “(397) increase in air traffic confers an indirect advantage to the airports concerned.” Then it explained the important difference between “indirect” effect and “secondary” effects which are “inherent” in an aid measure.

“(398) In its recent notice on the notion of State aid, the Commission indicated 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 measures should be examined from an ex ante point of view. An indirect advantage is present if the measures are designed in such a way as to channel its secondary effects towards identifiable undertakings or groups of undertakings. This is the case, for example, if the direct aid is, de facto or de jure, made conditional on the purchase of goods or services produced by certain undertakings only (for example only undertakings established in certain areas).’”

“(399) The notice continues in a footnote [footnote 181] to that passage: ‘By contrast, a mere secondary economic effect in the form of increased output (which does not amount to indirect aid) can be found where the aid is simply channelled through an undertaking (for example a financial intermediary) which passes it on in full to the aid beneficiary.’”

“(400) The activities under assessment in this case have not been designed to channel their secondary effects towards the Sardinian airports. Instead, the activities have been designed to benefit a large group of undertakings in the region, in particular those offering services to tourists.” “(401) As already established, the purpose of the scheme consists in channelling public funds to several airlines and other services providers with a view to opening new routes (or increasing frequencies) as well as advertising Sardinia as a touristic destination accessible by air transport. Under the mechanism put in place by the Region […] the Region transfers the corresponding public funds to airport operators, which should in turn pass them on to third parties in accordance with the detailed specifications of the activity plans approved by the Region.” “(402) The Commission therefore concludes that the aid is channelled through the airport operators which pass it on in full to the airlines, which are the only real beneficiaries of the scheme. The airport operators should be considered de jure (because of the provisions of [the relevant law]) and de facto (because of the effective financial flows analysed by the Commission) as vehicles used to pass on public funding to airlines.”

“(403) The Commission notes that the airport operators may benefit from the increase in air traffic that is brought about by the aid to airlines under the scheme. 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.[…]). Those sectors are highly dependent on the number of passengers arriving at/departing from the Sardinian airports. Therefore, the Commission considers that the scheme has not been designed in such a way as to channel its secondary effects towards the airport operators, but rather so as to benefit the many tourism-related sectors in Sardinia.”

“(404) Furthermore, the effect of the measures on airports is inherent in the nature and objective of the scheme, which is to increase air traffic to Sardinia by providing appropriate incentives to airlines. The fact that the airlines purchase airport services from the operators of the three Sardinian airports concerned is an inherent feature of the scheme and cannot be detached from it, given that the scheme consists in providing airlines with financial incentives to increase air traffic. It is thus not an additional, independent condition concerning the acquisition of goods or services that the Region added to the design of its scheme in order to produce an effect other than the main expected effect of the scheme, namely the increase in air traffic to Sardinia.”

On the basis of the above reasoning, the Commission concluded that no indirect advantage had been conferred to airport operators.

Incompatibility and recovery

Because the two measures were not in conformity with the Aviation Guidelines, they were found to be incompatible with the internal market. Consequently, the Commission instructed the recovery of the incompatible aid.

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[1] The full text of the decision is published in OJ L268, 18/10/2017, and can be accessed at:

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.268.01.0001.01.ENG&toc=OJ:L:2017:268: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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