Private Investor and Preferential Regulatory Treatment

pills on money

The existence of an advantage has to be proven, not presumed just because its absence cannot be confirmed.

Preferential treatment may distort competition but it is not necessarily State aid if there is no transfer of state resources.

Temporary Framework:

Number of approved covid-19 measures, as of 5 June 2020: 148*

Legal basis: Article 107(2)(b): 13; Article 107(3)(b): 125; Article 107(3)(c): 15

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

Public authorities are allowed to buy and sell shares in companies. They do not confer any advantage to them that constitutes State aid when they behave in the same way as private investors. If the European Commission suspects that they behave differently, it can prove that State aid has been granted only if it can show that that difference has conferred an advantage; i.e. a benefit that is not available to the company in question under normal market conditions which means in the absence of state intervention.

On 7 May 2020, the Court of Justice of the European Union reiterated this fundamental principle in its judgment in case C-148/19 P, BTB Holding Investments & Duferco Participations Holding v European Commission.[1] The judgment is reviewed in part (i) of this article.

Part (ii) of this article reviews the Commission decision in case SA.43546 concerning alleged State aid to Lekarna Ljubljana, a pharmacy in Slovenia owned by the municipality of Ljubljana.[2] This is an unusual case because the state is both the grantor of an alleged advantage and the recipient.

i) C-148/19 P, BTB Holding Investments & Duferco Participations Holding v European Commission

BTB Holding Investments [BTB] and Duferco Participations Holding [DPH] requested the annulment of the judgment of the General Court of 11 December 2018 in case T-100/17, BTB & DPH v European Commission. The General Court had dismissed their appeal against Commission decision 2016/2041 concerning State aid granted by Belgium to Duferco.

A similar appeal against the same Commission decision by another member of the Duferco group was also dismissed by the General Court on 18 September 2018, in case T-93/17, Duferco Long Products v European Commission. This judgment was reviewed here on 9 October 2018 [http://stateaidhub.eu/blogs/stateaiduncovered/post/9325].

Duferco was a steel producer, partly-owned by the Walloon region. In January 2016, the Commission concluded that State aid had been granted to it through a sale of shares below market price and a loan at an interest rate below the relevant market rate.

The applicants claimed that the Commission misapplied the private investor principle.

The Court, first, recalled well-established case law that an advantage is granted to an undertaking when the state does not act as a private investor would in similar circumstances. The private investor principle is one of the elements that the Commission is required to take into account in determining the existence of aid, even when the Member State concerned does not request it. [paragraphs 46-47 of the judgment]

The Court went on to reiterate that the Commission cannot assume that an undertaking received a benefit constituting State aid simply on the basis of a negative presumption, i.e. absence of information confirming that no advantage was granted. [paragraph 48]

Indeed, just because one cannot prove his or her innocence, it does not necessarily follow that that person is guilty.

When the Commission applies the principle of private operator, it is obliged to ensure that the information at its disposal constitutes a sufficient basis for concluding that a company has received State aid. [paragraph 49]

Then the Court observed that the Commission had based its decision on relevant information which led it to the conclusion that the public authorities in this case did not behave in the same way as a private investor. [paragraph 52]

Then the Court recalled equally established case law according to which the control which EU courts exercise over complex economic assessments made by the Commission is necessarily limited to verification of compliance with the rules of procedure and statement of reasons, as well as the material accuracy of the facts, and the absence of a manifest error of assessment of the facts and misuse of powers. [paragraph 56]

In complex matters, such as the application of the private investor principle, it is not for the Court to substitute its economic assessment for that of the Commission. [paragraphs 60-62]

The burden of proof fell on BTB and DPH to provide convincing evidence that the Commission committed a manifest error that was capable of justifying the annulment of its decision. [paragraph 63]

As regards the level of evidence necessary to prove the Commission committed a manifest error in the application of the private operator principle, the applicants had to show the existence of an error sufficiently serious to undermine the credibility of the complex economic assessment made by the Commission. But the applicants did not succeed to refute the Commission’s economic analysis by demonstrating that it was implausible. [paragraphs 71-72]

Lastly, in response to the argument of the applicants that the Commission had failed to show that the aid had distorted competition, the Court stressed that when the Commission applies the principle of private operator, it does not rely on the presumption that the facts can be explained only by anti-competitive behaviour, but performs a complex economic assessment in order to determine whether the undertaking concerned has benefited from an advantage constituting State aid. [paragraph 75]

ii) SA.43546: Lekarna Ljubljana

After receiving a complaint in April 2016, the Commission examined whether the municipality of Ljubljana had granted State aid to Javni Zavod Lekarna Ljubljana [Lekarna Ljubljana], a pharmacy chain established in 1997 and owned by the municipality. Lekarna Ljubljana operates more than 50 branches, mostly in Ljubljana but also in about 15 other municipalities. In total there are around 230 public pharmacies in Slovenia.

According to the Commission decision, the Slovenian law that regulates pharmacies makes a distinction between public and private pharmacies. Private pharmacies receive authorisation to operate through a concession granted on the basis of a public tender.

Public pharmacies are established by municipalities which participate in their management. Public and private pharmacies basically offer the same services and products. They are both subject to the same rules, such as restrictions on the location of operation, stocking of sufficient quantities and types of medications, and prohibition of advertising. Public pharmacies are, in addition, required to reinvest their profits in their operations.

[The establishment of pharmacies is strictly regulated in Slovenia. Pursuant to Articles 8 and 9 of the Pharmacy Act, for example, the distance between an existing and a new pharmacy in non-urban areas must be at least 5 km, and pharmacies can generally be established only if the number of inhabitants in a “catchment area”, such as a town or city, is at least 5000.]

 

The alleged State aid consisted of the following:

  1. free 25-year lease of land from the municipality of Škofljica;
  2. assets granted for free by the municipality of Ljubljana;
  3. exemption from payment of concession fees [operating licences];
  4. relief of the obligation to share profits with the relevant municipalities.

 

It should be pointed out that the complainant was not able to provide detailed information on the amount of the alleged State aid, its precise form or the actual dates it was granted.

Existence of aid

The Commission examined separately each of the four alleged State aid measures.

Free lease of land

Although the Commission found that “(24) Lekarna Ljubljana did pay for the lease granted to it”, it also noted some unusual clauses in the lease contract.

“(25) Article 3 of the lease contract stipulates that the holder of the construction permit (Lekarna Ljubljana) shall bear all the costs of designing and constructing the building. Article 6 stipulates that upon termination of this contract the parties agree that in addition to the right to use the land being returned to the owner, the holder of the construction permit shall transfer gratuitously to it also facilities which were constructed on the basis of this contract (the pharmacy). The complainant has acknowledged that the municipality of Škofljica after 25 years will receive the “ownership of the building”, which it estimated to be worth EUR 30 000.”

“(26) This is therefore not a typical contract or a typical lease. Lekarna Ljubljana receives free use of a land parcel for 25 years, but the municipality thereafter becomes the owner of the pharmacy that Lekarna Ljubljana has constructed on the land at its own expense.”

Did the lease contain an advantage?

“(27) An advantage for the purposes of Article 107(1) TFEU is any economic benefit that an undertaking would not have obtained under normal market conditions, i.e. in the absence of State intervention. Only the effect of the measure on the undertaking is relevant, neither the cause nor the objective of the State intervention. Whenever the financial situation of the undertaking is improved as a result of State intervention, an advantage is present.”

“(28) Economic transactions carried out by public bodies do not confer an advantage, and therefore do not constitute aid, if they are carried out in line with normal market conditions. To that effect, the behaviour of public bodies should be compared to that of similar private economic operators under normal market conditions. Whether a State intervention is in line with market conditions should be examined on an ex-ante basis, having regard to the information available at the time the intervention was decided upon.”

“(29) To assess whether Lekarna Ljubljana benefited from an advantage, the value of the use of the land parcel for a duration of 25 years should therefore be compared to the value of the pharmacy that Lekarna Ljubljana built on it, and it should be assessed whether a private operator might have taken a similar decision in those circumstances.”

“(31) Before the lease was awarded on 5 December 2011, an independent expert (in a report dated 5 December 2011) estimated the value of the use of the land parcel for a period of 25 years to be EUR 102 212 (EUR 112.8 per square meter). At that time the municipality confirmed Lekarna Ljubljana’s preliminary design for the construction of a pharmacy, the value of which, according to the Slovene authorities, would be at least EUR 310 000. In December 2016, after construction of the pharmacy was completed, the same expert estimated it to be worth EUR 322 751.95.”

“(32) It follows that the terms of the lease of the land granted by the municipality of Škofljica are favourable to the municipality, and that a market operator would have agreed to those terms. As a result, Škofljica acted in line with the market economy operator principle and Lekarna Ljubljana did not receive any advantage under this measure.”

“(33) In light of the above, the Commission considers that the lease of land granted by the municipality of Škofljica to Lekarna Ljubljana does not constitute State aid within the meaning of Article 107(1) TFEU.”

This assessment of the lease may not be as straightforward as it appears in the Commission decision. At the time the lease was agreed, the pharmacy seemed to be making a loss of EUR 220 540 [= 322 752 – 102 212]. But this calculation of the loss is wrong because the relevant amount for the building should have been the present value of the residual value of the building in 25 years’ time. Perhaps after 25 years the residual value would be zero and, therefore, the pharmacy received State aid amounting to EUR 102 212. [The relevant discount rate is important. For example, the amount of EUR 322 752 discounted at 5%, after 25 years is reduced to only EUR 95 310].

But there is another strange thing here. The pharmacy is owned by a municipality which is part of the state. The pharmacy is obliged to share its surplus revenue with the municipality [see in the last section of this article, the quoted text of paragraphs 70-71 of the Commission’s decision]. The municipality participates in the management of the pharmacy. Therefore, by agreeing the terms of this lease the state willingly accepted certain losses. Is this how a private owner of a pharmacy would have acted?

Assets granted under management

The Commission first noted that under the relevant Slovenian law, public pharmacies “(34) shall acquire the resources for work from the funds of the founder, the sale of goods and services and from other sources [as] laid down in this Act […].”

“(35) The municipality of Ljubljana, as the founder of Lekarna Ljubljana, is obliged under the Institutes Act to provide it with assets for its establishment and initial operation. It is to be noted, however, that any asset acquired by Lekarna Ljubljana (including by its own means) is registered as an “asset under management”, pursuant to Article 71 of the Rules on the single chart of accounts for the budget, budget users and other entities under public law.”

“(36) According to the Slovene authorities, the municipality of Ljubljana provided the necessary assets for its operation to Lekarna Ljubljana […], upon its establishment in 1979. Lekarna Ljubljana […] has purchased any assets under management acquired since 1979 on the private market itself on market terms, and since 1979 it has not received any assets, under any conditions, from the municipality of Ljubljana or any other State entity.”

Then the Commission pointed out that, since Slovenia became a Member State on 1 May 2004, even if those assets contained State aid, it was granted before its accession to the EU and therefore it would be existing aid. “(40) In light of the above, the Commission considers that this measure constitutes existing aid.”

Exemption from concession fees

Slovenia informed the Commission that there was no legal act at national level that either obliged or prohibited the charging of fees to public or private pharmacies. For this reason, the Commission examined the relevant legal provisions at municipal level.

With respect to the municipality of Ljubljana, “(43) while it is true that Lekarna Ljubljana does not pay concession fees to the municipality of Ljubljana, according to the Slovene authorities the same is true for all other active pharmacies, and their contracts do not stipulate that they should pay any concession fees. Lekarna Ljubljana has therefore not been treated differently either in law or in fact.” “(44) The Commission therefore considers that Ljubljana has not conferred any selective advantage on Lekarna Ljubljana through the alleged measure.”

The Commission went on to examine concessions for pharmacies in other municipalities and concluded that although some differentiation was provided in municipal rules for public and private pharmacies, in practice all pharmacies were charged the same amounts.

However, the Commission found that the municipality of Ivančna Gorica did confer a selective advantage to Lekarna Ljubljana. Private pharmacies were obliged to pay an annual concession fee, although the relevant ordinance did not specify the amount of the fee. No fee was required of public pharmacies. In other municipalities the fee was calculated as a percentage of profit. The Commission examined whether competition was distorted but concluded that that was not the case because any amount of aid would have been less than the de minimis amount of EUR 200 000.

“(55) Based on the latest financial information available (pertaining to the years 2017-2018), provided by the Slovene authorities, Lekarna Ljubljana turns an operating profit of around EUR 25 000 per year in Ivančna Gorica. This corresponds to a margin on sales of less than 1%. Without considering Lekarna Ljubljana’s cost of capital, the Commission notes that the amount of this profit, even if considered in its entirety, is considerably below the ceiling referred to in Article 3(2) of Regulation 1407/2013, and therefore this measure, even if granted selectively to Lekarna Ljubljana, cannot be considered to distort or threaten to distort competition.”

“(62) Only measures favouring undertakings in a selective manner and distorting or threatening to distort competition fall within the concept of aid (see recital (23)). In light of the above considerations, the Commission found that the municipalities named by the complainant, with the exception of Ivančna Gorica, have not granted any selective advantage to Lekarna Ljubljana in their application of concession fees. In addition, the Commission found that the exemption from the payment of concession fees offered to Lekarna Ljubljana in Ivančna Gorica did not distort or threaten to distort competition.”

There are two problems with this reasoning of the Commission. First, it is not evident that in that municipality the fee was calculated as a percentage of profits. Second, the Commission does not seem to apply the de minimis regulation correctly. It is not enough that the amount in question is less than EUR 200 000. It must also be established that no other de minimis amount is granted in the relevant three-year period that would bring the total over the threshold of EUR 200 000.

Failure to share in Lekarna Ljubljana’s profits

The Commission first explained that “(65) in so far as Lekarna Ljubljana would have been active in certain municipalities in contravention of the applicable national rules, this would not be a State aid matter and should be adjudicated by national courts. The Commission has already informed the complainant of its conclusion that the concerns expressed in this respect relate if anything to the application of the new Pharmacy Act (ZLD1), and not to the text of the Act itself, and that the complainant could take this up directly with national courts.”

Then the Commission noted that “(69) the rules applicable to Lekarna Ljubljana pursuant both to the Pharmacy Act and its Founding Acts state that it should pay excess revenues to its founder, i.e. the municipality of Ljubljana, and not to any other municipalities where it is active. The complainant’s allegation that municipalities failed to share in Lekarna Ljubljana’s profits should therefore be assessed only in as far as it relates to the municipality of Ljubljana, since there exists no obligation by which Lekarna Ljubljana should share its profits with any other municipalities.”

The Commission recalled that “(70) an advantage for the purposes of Article 107(1) TFEU is any economic benefit which an undertaking would not have obtained under normal market conditions, i.e. in the absence of State intervention (see recital (27)). A relief from economic burdens can also constitute an advantage. This is a broad category, which comprises any mitigation of charges normally included in the budget of an undertaking. This covers all situations in which economic operators are relieved of the inherent costs of their economic activities.”

The Commission then verified that “(71) Lekarna Ljubljana has always complied with its obligation to transfer surpluses of revenue over expenditure to its founder, i.e. the municipality of Ljubljana. Lekarna Ljubljana has therefore not been relieved of any economic burden placed on it and has not benefited from any advantage.”


On the basis of the above reasoning, the Commission rejected the complaint and concluded that no State aid had been granted to Lekarna Ljubljana.

[1] The full text of the judgment, in languages other than English, can be accessed at:
http://curia.europa.eu/juris/fiche.jsf?id=C%3B148%3B19%3BPV%3B1%3BP%3B1%3BC2019%2F0148%2FJ&oqp=&for=&mat=or&lgrec=en&jge=&td=%3BALL&jur=C%2CT%2CF&num=C-148%252F19P&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=2153647

[2] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202016/262916_2148535_725_2.pdf


Photo by Michal Jarmoluk on Pixabay

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 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.

Ähnliche Beiträge

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 […]
11. Jun 2020
Guest State Aid Blog von Erika Szyszczak

When State Aid Gets Political

We are happy to receive a guest comment on the EU – UK post-Brexit trade negotiations from Professor Emerita, Erika Szyszczak, who is a Fellow of UKTPO at the University of Sussex. This is a longer version of an earlier Blog published on the UKTPO website. Control over State aid is a stumbling block for the future of an EU […]
12. Mai 2020
State Aid Uncovered von Phedon Nicolaides
Road sign "Wrong Way"

Advantage Must be Proven, Not Assumed

The European Commission has to consider whether the private investor principle is applicable in cases of state investments. It is for Member States to prove that their investments conform with the private investor principle. Temporary Framework As of 9 May 2020, the European Commission had approved 113 State aid measures to combat covid-19. Their legal basis was: Article 107(2)(b): 10; […]
05. Mai 2020
State Aid Uncovered von Phedon Nicolaides
corona virus poster

Non-recovery of Incompatible State aid Is Costly

Legal and practical difficulties in the recovery of incompatible State aid do not constitute justifiable “absolute impossibility”. Temporary Framework On 1 May, the total number of State aid measures to combat covid-19 approved by the European Commission reached 102. Their legal basis was: Article 107(2)(b): 9; Article 107(3)(b): 86; Article 107(3)(c): 7   Introduction The 2020 Temporary Framework for State […]
27. Apr 2020
State Aid Uncovered von Phedon Nicolaides
corona virus poster

Identification of Undertakings in Difficulty

A company is in difficulty if, in practice, its accumulated net losses exceed 50% of its subscribed capital, regardless of whether the subscribed capital is formally written down. The classification of a company as being in difficulty is independent of the sector in which it operates and of whether a private investor would be willing to invest in it. Also […]
17. Apr 2020
Guest State Aid Blog von Michail Kamperis
Corona Virus

COVID-19 Measures Adopted and State Aid Measures (Hopefully) to Be Adopted: An Update from Cyprus

We are happy to share with you an update on the Covid-19 measures that are or will be adopted in Cyprus. Our guest auhor Michail Kamperis is a lawyer and partner at the law firm of Ierotheou, Kamperis & Co. LLC Nicosia, Cyprus. * Sign up for our free news alert  Sign Up For Free   Cyprus is one of […]
09. Apr 2020
Guest State Aid Blog von Lexxion Publisher
Woman sitting by the computer

Follow Up Webinar with Phedon Nicolaides on ‚COVID-19 and State Aid Law‘ on 20 April

The European Commission is working on quickly adapting the existing State aid legal framework to address the current Covid-19 pandemic. Join us on 20th April from the comfort and safety of your (home) office to get an insider update on the Covid-19 response by State aid experts from the European Commission and national governments. ✓ Join from wherever you are – […]
31. Mrz 2020
State Aid Uncovered von Phedon Nicolaides

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 […]
23. Dez 2019
State Aid Uncovered von Phedon Nicolaides

A Preferential Electricity Tariff Is Selective, Confers an Advantage and Distorts Competition

A judicial decision on interim measures is a selective measure. The private investor test does not apply to judicial decisions on interim measures. Introduction On 11 December 2019, in case C‑332/18 P, Mytilinaios Anonymos Etairia — Omilos Epicheiriseon v European Commission, the Court of Justice probably wrote the last chapter in a long-running case concerning privileges that had been granted […]
19. Nov 2019
State Aid Uncovered von Phedon Nicolaides

Compensation to a Toll Road Operator

Contractual obligation to provide compensation that does not exceed the loss of income is not State aid. Introduction When is a company entitled to compensation by the state? The easy answer is “when the state is liable for damage”. However, it may be possible for a company to claim compensation from the state when the state has assumed contractual obligations. […]