Remarks on the Infrastructure Section of the Commission Notice on the Notion of State Aid

Cable-stayed bridge across river Po in Northern Italy

Today we are glad to welcome once again Gian Marco Galletti as guest author on our State aid blog. He is a PhD Candidate & EU Law Tutor at the Dickson Poon School of Law of King’s College London. In this blog post he comments on the Commission’s new Notice on the notion of State aid. Thank you for your topical contribution!

 

Introduction

The Commission Notice on the notion of State aid (‘the Notice’) provides specific clarifications with respect to the funding of infrastructure (para 5)[1]. So far, the only issue on which the Court of Justice has been called upon to rule is the notion of economic activity (C-288/11 P Leipzig Halle). This is why the clarifications at issue do not concern the interpretation of the notion of aid given by the Court, but rather regard how the Commission considers that the notion of State aid should be construed in the field of infrastructure funding. Without being exhaustive, this post aims to make a number of critical remarks on the sections of the Notice devoted to the financing of infrastructure, with particular regard to the legal issues relating to (i) notion of economic activity, (ii) distortion of competition and effect on trade, and (iii) indirect advantage to the operator.

Economic Activity

As the Court teaches us in Leipzig Halle, only the funding of infrastructure that is meant to be commercially exploited falls within the purview of State aid law. In this respect, para 207 of the Notice addresses the case where a given infrastructure is subject to a mixed use (mainly non-economic). In these circumstances, the funding of infrastructure in its entirety is not caught by Article 107 TFEU provided that the economic use remains purely ancillary. As to the criterion for determining that an activity is ‘ancillary’ to another, the case law of the Court of Justice presents significant uncertainties. While at times the Court has considered as sufficient that the ancillary activity is merely ‘connected’ to the objective pursued by the main activity (C-113/07 Selex, para 79), at other times it has required the ancillary activity to be ‘essential or indispensable’ to attain the aim of the main activity (T-309/12 Zweckverband Tierkörperbeseitigung, para 84). In para 207 of the Notice, the Commission appears to favour the latter criterion, by stating that the ‘ancillary activity’ must be ‘directly related to and necessary’ for the operation of the infrastructure, or ‘intrinsically linked’ to its main use. The same approach is, it is submitted, embraced in the Commission’s decision-making practice. For instance, in its decision concerning the intermodal development of the Port of Baja (SA.39177) the Commission deemed that the fact that the roads development was ‘linked’ to parts of the project intended for commercial exploitation (rail and waterside infrastructural developments) was not sufficient to make State aid rules applicable to the funding of such developments. Nonetheless, this approach does not, as mentioned, find unequivocal support in the relevant case law, which is not even referred to in the Notice.

Distortion of Competition and Effect on Trade

Key provisions are paras 211 and 212 of the Notice, where it is stated that the effect on trade or distortion of competition is normally excluded in the construction of infrastructure where the following requirements are cumulatively fulfilled: (i) an infrastructure typically faces no direct competition (e.g. natural monopolies for which the replication would be uneconomical), (ii) private financing is insignificant in the sector and Member State concerned, (iii) the infrastructure is not designed to favour a specific undertaking or sector but the society at large, and (iv) the public funding is not used to cross-subsidise or indirectly subsidise other economic activities (e.g. operation of the infrastructure).

Little may be added to requirement (i), which is one of the essential constituents of the traditional assessment of effect on trade / distortion of competition in State aid cases. Requirements (iii) and (iv), by contrast, ought not to be included in this section, as they belong respectively to the region of selectivity (a measure benefitting the society at large is not selective) and the notion of ‘undertaking’ (only an entity carrying out an economic activity may be a beneficiary of State aid). Requirement (ii), it is submitted, appears to be the most striking feature of this section given that it seems to add a previously non-existent layer to the assessment of distortion of competition.

As it is common knowledge, the threshold for proof of an effect on competition and trade set by the case law is a relatively low one. It is not necessary, according to the Court, to define the market in question or analyse the structure, or provide evidence of trade flows between Member States (T-177/07 Mediaset v Commission; T-55/99 CETM). By contrast, the assessment whether the private financing is ‘insignificant’ required by the Notice is entirely akin to a market definition. Further evidence of this is that it must be carried out at the level of the Member State concerned, similarly to the assessment of the existence of a market in a Member State for the purpose of determining the applicability of State aid rules (T-461/13 Spain v Commission, para 44, referred to in footnote 312 of the Notice).

In this blogger’s view, the reason underlying the introduction of this further layer for the assessment of infrastructure funding lies in the need to strike a more appropriate balance between the competence of the European Union and that of the Member States, which is characterised by an accurate application of the principle of subsidiarity. In light of this, the fundamental question underlying the applicability of the State aid scrutiny becomes whether the exercise of regulatory authorities by a Member State sufficiently impairs cross-border trade to justify suppression of the relevant national measure in the interest of the internal market.

Admittedly, this approach, which is entirely consistent with the most recent decision-making practice of the Commission, is properly incorporated into the general section on effect on trade / distortion of competition of the Notice. Para 196 now reads: ‘The Commission has in a number of decisions considered, in view of the specific circumstances of the cases, that the measure had a purely local impact and consequently had no effect on trade between Member States. In those cases, the Commission ascertained in particular that the beneficiary supplied goods or services to a limited area within a Member State and was unlikely to attract customers from other Member States, and that it could not be foreseen that the measure would have more than a marginal effect’. Clearly, this implies a departure from the traditional line of case law that construes the condition of effect on trade / distortion of competition as a presumption; a departure which is further confirmed by the additions (‘the effect on trade between Member States cannot be merely hypothetical or presumed’ at para 195) and alterations (‘for aid to be considered to distort competition, it is normally sufficient that the aid gives 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’ at para 189, whereas para 190 of the draft notice read ‘for aid to be presumed…’) of some crucial wording. Of the same kind are the hints received from the Luxembourg Court in the recent cases concerning London taxis (C-518/13 Eventech) and a Spanish tax lease system (T-515/13 and T-719/13 Spain v Commission). In Eventech, Advocate General Wahl suggested that the traditional reading of the condition of effect on trade / distortion of competition should be abandoned as it may, at least under some circumstances, imply an irrebuttable presumption (para 85 of the Opinion). In Spain v Commission, the General Court found that the Commission had not given sufficient evidence that the measure at issue was likely to distort competition and affect trade on the market in which the beneficiaries operate (paras 199-200 of the judgment). It is submitted that, by analogy with recent case law on free movement, the Commission should be required to discharge its duty by providing ‘conclusive evidence’ (C-400/08 Commission v Spain, para 62), such as reliable estimates, figures and pattern of trade.


Indirect Advantage to the Operator

Section 7.3 of the Notice is devoted to the (indirect) aid to the operator of the infrastructure. The guiding principle is that if the conditions offered to the operator to exploit the infrastructure correspond to market conditions, the measure does not entail any advantage to the operator. In other words, there would be no aid at his level if he pays the market price for operating the infrastructure, regardless of whether this price is fully covering the investment costs incurred or not. As to the question how to determine the market price, para 223 of the Notice states that ‘the Commission considers that an economic advantage to the operator can in particular be excluded if the concession to operate the infrastructure (or part of it) is assigned for a positive price through a tender that meets all the relevant conditions set out in paras 90 to 96’. This statement is of major significance, as it means that public procurement procedures exclude the passing on of the advantage to the operator altogether. If consistently applied, this would remove the uncertainties arising from the previous decision-making practice of the Commission, which has not constantly trusted the public procurement procedures to produce a market-based operating fee. In Port of Salerno (SA.38302), for instance, the granting of an advantage was only ruled out because the Italian authorities had committed themselves to cross-check the concession fees resulting from the tender and to conduct a comparative analysis with fees paid for similar concession contracts in other Italian and foreign ports (‘benchmarking exercise’). The choice made by the Commission in the Notice appears thus clear-cut; what is less understandable is why a benchmarking exercise has not even been specifically mentioned as a second best to identify a market-based operating fee.

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[1] Link to the Commission Notice on the notion of State aid:

http://ec.europa.eu/competition/state_aid/modernisation/notice_of_aid_en.pdf

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