State Aid and Essential National Interest

State aid that is necessary for protecting essential national interests can be compatible with the internal market.

Introduction

State aid should support outcomes that the market by itself cannot achieve. This implies that State aid that is restricted to only one or a few undertakings is unlikely to be capable of delivering the desired outcome. Yet, sometimes there may be good reasons for restricting the beneficiaries of State aid. On 29 April 2021, the Court of Justice dealt with this issue in case C‑847/19 P, Achemos Grupė & Achema v European Commission, concerning the direct award of a contract to the operator an LNG terminal in Lithuania.[1]

The judgment of the Court is important because it highlights that essential national interests may justify deviation from the normal public procurement procedures.

Deviating from public procurement rules by, for example, awarding directly a contract, is always problematic from a State aid perspective because, by and large, it confers an advantage that may constitute State aid. By implication, State aid that violates other provisions of EU law, such as public procurement, makes it more difficult for that aid to be considered compatible with the internal market. However, as the Court confirmed in the Achemos case, the aid can be compatible if the direct award is necessitated by reasons of essential national interests which are recognised as an exemption from the requirements of public procurement directives.

Achemos and Achema appealed against the judgment of the General Court in case T-417/16, Achemos Grupė & Achema v European Commission. In that judgment the General Court dismissed their request for annulment of Commission decision SA.36740 which found aid granted by Lithuania to Klaipėdos Nafta compatible with the internal market. The judgment of the General Court was reviewed here on 8 October 2019:

https://www.lexxion.eu/en/stateaidpost/public-service-obligations-duration-of-entrustment-and-reasonable-profit/

Klaipėdos Nafta, a state-owned company, is the operator of a liquefied natural gas terminal [the LNG terminal]. The Commission considered the project to be of strategic importance to Lithuania. It aimed to reduce its dependency on Russia which was the only supplier of gas. For this reason, the Commission accepted that a 55-year contract could be awarded to a company controlled by the state without competitive selection.

The project benefited from a 100% state guarantee on loans of EUR 116 million from the EIB and other sources. Klaipedos paid an one-off premium of 0.1%. The operation of the terminal was to be financed by a levy on users of natural gas. In addition certain companies were obliged to purchase a minimal mandatory quota of gas from the LNG terminal.

The guarantee, the levy and the purchase requirement were found by the Commission to constitute compatible State aid.

Infringement of procedural rules?

Achemos and Achema claimed that the Commission had violated their rights by not opening the formal investigation procedure and that the General Court erred in law by failing to confirm that their rights were violated.

It is well established in the case law that the Commission is not obliged to open the formal procedure if it has no doubts as to the compatibility of an aid measure with the internal market. Therefore, an undertaking that claims that its rights as interested party are violated must show that the Commission should have had serious doubts.

The Court of Justice first explained that “(40) the lawfulness of a decision not to raise objections, […] depends on whether the assessment of the information and evidence which the Commission had at its disposal during the preliminary examination of the notified measure should objectively have raised doubts as to the compatibility of that measure with the internal market […], given that such doubts must lead to the initiation of a formal investigation procedure in which the interested parties […] may participate.”

“(42) The information ‘available’ to the Commission includes that which seemed relevant to the assessment […] and which could have been obtained, upon request by the Commission, during the administrative procedure”.

“(44) If the examination carried out by the Commission during the preliminary examination procedure is insufficient or incomplete, this constitutes evidence of the existence of serious difficulties”.

Then the Court of Justice considered that the Commission was justified not to take into account information that it was not aware of its existence. Consequently, the General Court was correct not to fault the Commission. [paragraphs 45-50 of the judgment]

“(50) It is not for the Commission, on its own initiative and in the absence of any evidence to that effect, to seek all information in the public domain which might be connected with the case before it.”

Insufficient reasoning on the legality of the direct award?

Achemos and Achema alleged that the General Court failed to set out clearly and unequivocally the reasons why the LNG terminal project could be entrusted directly to Klaipėdos Nafta, without a prior call for competitive tendering.

In its judgment, the General Court held that assignment of the right to construct and operate the LNG terminal to any company through a competitive procedure could ensure protection of the essential interests of Lithuania. An operator chosen through such a procedure could come under the influence of, at the time, sole supplier of gas. Consequently, the only way to fully guarantee the essential interests of the country was for the state to have control over the operator of the LNG terminal.

The Court of Justice clarified that “(62) the obligation to state reasons is an essential procedural requirement that must be distinguished from the question whether the reasoning is well founded, which goes to the substantive legality of the measure at issue”.

In the present case, the Court of Justice held that “(63) although concise, the reasoning set out in paragraphs 138 to 140 of the judgment under appeal is sufficient to enable the parties concerned to know why the LNG terminal project covered by the aid measures at issue”. “(64) In particular, this makes it clear that the General Court considered that if some of the alternative solutions proposed by the appellants were such as to ensure that a tenderer, chosen in a public service contract procedure in accordance with Directive 2004/18 to manage the LNG terminal, would be free from the current influence of the single gas supplier on the market in Lithuania, none of those solutions could rule out the risk of that operator, in the relatively near future, falling under the influence of that supplier.” (65) The General Court therefore held that, having regard to the discretion left to the Member States under Article 14 of Directive 2004/18 to decide on the measures deemed necessary for the protection of the essential interests of their security, none of the alternative measures proposed by the appellants in paragraph 128 of the judgment under appeal would have enabled the Lithuanian State to protect itself effectively against such a risk.”

The Court of Justice concluded that the reasoning of the General Court was clear, but did not examine its validity [because the appellants did not submit any argument or facts to prove that it was faulty].

Therefore, the Court dismissed the appeal in its entirety.


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

https://curia.europa.eu/juris/document/document.jsf?text=&docid=240561&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=6890449

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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.

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