Introduction
As part of the digital transition, Member States try to revitalise old industrial regions. A case in point is a recent Commission decision on the establishment of a technology hub in Poland’s former coal mining region of Katowice [SA.114301].1
The purpose of the Polish measure was to incentivise the development of new skills in the region. The aided project is a multifunctional facility to be used a centre for innovation, research and the development of gaming software. The facility is to be funded by the EU’s Just Transition Fund [JTF], by the city of Katowice and bank finance. The JTF will contribute EUR 165 million, the city EUR 28 million and a loan of EUR 9 million will be obtained at market terms from a bank.
The projects involves renovation of existing infrastructure that was used for mining activities and construction of a new technological facility. More specifically, it involves renovation and adaptation of eight old mining buildings, the construction of a multifunctional technological facility, an underground car park, a renewable energy system for the production of electricity and heat, access roads and the purchase and installation of equipment. The investment costs amount to about EUR 202 million. However, the costs of the energy system are excluded from the project and the notified measure.
Once completed the hub will offer space for offices, conference rooms, gaming related production (production halls, arena, laboratories, recording studios, production studies for e-sports, film/television studios, educational centre), and catering services. The hub will also provide incubation for start-ups and business services, especially for SMEs, as well as access to educational and learning initiatives, access to technical equipment.
The beneficiary is the city of Katowice who is the owner of the land and the hub. The project will be implemented by a municipal company which is 100% owned by the city and appointed for this purpose by the city without a competitive selection process. The hub will be operated by another company, also 100% owned by the city, which is also appointed without selection by the city.
Therefore, the Commission had to determine whether state aid existed at the level of the owner [i.e. the city], the investor, the operator and also the future users of the hub.
Interestingly, the Commission decision is silent on the presence of any advantage for the investment company. It only mentions that “(19) the costs of the project will be borne by the Owner [i.e. the city] and kept in separate accounting records by the City. Katowickie Inwestycje S.A [i.e. the investment company that manages the realisation of the project] is remunerated for managing the investment process on the basis of invoices issued in accordance with the concluded in-house agreement from the City’s own resources. None of the funds linked to the notified measure are transferred to Katowickie Inwestycje S.A.’s accounts.” It is not confirmed in the decision that the remuneration is indeed at market rates.
With respect to the operating company, the decision explains the following. The city will conclude a concession agreement with the operator and will remunerate it on the basis of a funding gap analysis that will take “(36) into account that the Operator is owned by Katowickie Inwestycje S.A, i.e. the City”. It is not clear what this means. Perhaps it indicates that the cost of capital of the operator is low.
Furthermore, “(25) the Operator’s remuneration is established pursuant to … the Act on concession contracts for works or services, which sets forth general rules regarding the entrustment of the concession to the concessionaire. The Operator will bear the economic risk of operating the facility and providing the services, including demand or supply risks. The remuneration paid to the Operator will cover the deficit between costs incurred and revenues generated (including a reasonable profit), based on the assumptions of the business plan.”
“(26) The Polish authorities explained that, in order to ensure the marketability of the operator’s remuneration, an additional analysis will be carried out at the stage of the operation of the service concession contract in order to ensure that the final value of the profit margin under the contract is set at a level not exceeding the market threshold (as at the time of the conclusion of the contract). To this end, a benchmarking of the margin level of comparable legal relationships on a competitive market will be carried out. In the absence of identification of comparable market transactions, another assessment method will be implemented.”
“(27) In order to determine the level of the market margin according to each of the above methods, the City will involve an independent external advisor with experience in conducting analyses of the profitability of economic projects.”
“(28) At the same time, the Polish authorities will ensure that the profit margin established in the concession contract will not exceed the level determined by the European Commission as reasonable for the purposes of the SGEI Decision in force at the time of the conclusion of the concession contract. The Polish authorities note that the assumed profit margin of 1.5% at this stage is in line with the current cap on the reasonable profit margin set by the European Commission for the purposes of the Commission Decision [2012/21 on state aid] … in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest”.
“(29) The concession contract will also include a mechanism to control that there is no overcompensation. The Owner will be entitled to carry out ex-post controls on the level of the costs of the Operator in order to assess whether the remuneration paid to it has led to a surplus (ex-post profit margin higher than set ex-ante); in case of excess, the Operator will be obliged to return it to the Owner. In case the ex-post profit margin is lower than set ex-ante, the Operator will not be entitled to any compensation. The Polish authorities consider that the remuneration level and the control mechanism will ensure that no advantage is granted to the Operator.”
In addition, the operator will pay rent to the city, i.e. the owner of the hub. For this purpose, “(30) the rent paid by the Operator to the Owner for the use of the Hub will result from a lease contract separate from the concession contract. The Polish authorities explain that the amount of rent will be based on the estimated market value of the property made by an independent expert … The Polish authorities confirm that [the rent] will in any event cover the Owner’s development costs of the facility, at the level of its depreciation charges. The Polish authorities consider that the rent rate paid by the Operator is in line with market conditions.”
The above arrangement suggests that if the period of concession is the same as the economic life of the project, then the rent paid by the operator [concessionaire] should be sufficient to offset the initial cost of investment. However, as we will see below, the funding gap analysis was for a 15-year period. The decision does not indicate the length of the period of the concession. Presumably, it is the same as the period of the funding gap analysis.
Users will have to pay market rates for the use of the facilities and services of the hub.
Funding gap analysis
“(36) The project would not be carried out in absence of the aid, as it is not economically viable for a private investor. Without the aid, a Hub would not be built, especially on former coal mine premises. … The funding gap is calculated at consolidated level, taking into account that the Operator is owned by Katowickie Inwestycje S.A, i.e. the City.”
“(37) The funding gap calculations include, for the entire infrastructure covered by the measure (and therefore excluding the costs of the RES installation, …, all construction and remediation costs, equipment costs, and, for all activities, the operational costs and revenues. The funding gap is calculated over a period of 15 years (reference period)”.
“(39) The nominal discount rate used in the model amounts to 4%.”
“(40) The assumed reference period is 15 years. However, the economic usability of the project’s fixed assets extends beyond this period and is reflected in the residual value taken into account in the calculations.”
“(41) The expected investment costs of the project amount to PLN 863 941 364 (EUR 201.8 million) (nominal). Those costs include the costs related to the remediation works, construction of the multifunctional space (including preparatory works and supervision costs), and purchase of the relevant equipment. The remediation and construction costs have been determined on the basis of the outcome of the tender procedure conducted in line with the rules applicable to public procurement, in compliance with Union law.”
“(42) The revenues are estimated at PLN 164 016 059 (EUR 38.3 million) (nominal) for the whole period as from the first stable year of operation (i.e. in year five). They consist of revenues related to the long-term lease of office space, hourly rental of workstations, “Virtual Office” service, rental of catering premises, rental of technological laboratories, rental of conference rooms, rental of film / recording / e-sports studios and subscriptions for parking spaces. Operating costs for the whole period as from that year are estimated at PLN 154 303 027 (EUR 36 million) (nominal). They are categorised in consumption of materials and energy costs, external services costs, taxes and charges, payroll costs, social security and other benefits costs, replacement costs and other costs, including financial costs.”
“(43) The balances are negative during the investment implementation period (year 1 – year 5) and the first years of the operation. During the remaining lifetime, the project has a positive cash balance. The total balances for the whole analysis period are negative since a 15-year long reference period does not make it possible to offset the investments made during that period.”
“(44) The funding gap is the difference between the net present value of the eligible investment costs and the net present value of the operating profit, taking into account a residual value at the end of the reference period and the costs of repayment of the loan. The funding gap was calculated to be PLN 762 865 057 (EUR 178.2 million) (discounted at a rate of 4%).”
“(45) The Polish authorities submit that the notified measure consists of two elements: (a) direct grant of up to PLN 706 058 336 (EUR 164.9 million) (nominal) financed by the JTF. Discounted at a rate of 4%, this amounts to PLN 634 463 199 (EUR 148.2 million). The direct grant will be provided by the Managing Authority for the European Funds for Silesia 2021-2027; (b) direct grant of at least PLN 117 883 028 (EUR 27.5 million) (nominal) provided by the City. Discounted at a rate of 4%, this amounts to PLN 106 090 724 (EUR 24.8 million).”
Therefore, “(46) the notified measure results in an estimated amount of PLN 740 553 923 (EUR 172.9 million) (discounted), which … does not exceed the estimated funding gap of PLN 762 865 057 (EUR 178.2 million) (discounted).”
Commission assessment
The Commission examined possible presence of state aid at the level of owner, operator and users [as noted earlier, there is no assessment of possible state aid for the investing company].
With respect to the owner, the Commission, first, explained that public funding of infrastructure can constitute state aid whenever infrastructure is linked to an economic activity as in the present case. Then it noted that the city acted both as a public authority, subsidising the hub, and as an undertaking, owning and exploiting commercially the hub. In relation to the bank loan, the Commission stated that “(60) the funding originating from the market loan drawn by the City of Katowice as the Owner of the infrastructure can be considered as not bearing the characteristics of State aid, as long as the servicing of liabilities arising from the loan taken out is financed from revenues generated by the investment.”
In other words, even after the aid is formally granted when the decision by the city is made, i.e. before the project starts, additional state aid may be inadvertently granted if the loan is repaid with resources other than the revenue from the hub. Although the borrower is the city, it has to maintain separate accounts until the loan is fully repaid.
The Commission also found that the state aid was necessary, proportional and did not cause undue distortion of competition because the aid was limited to what was strictly necessary. Therefore, it was determined to be compatible with the internal market.
With respect to the operator of the hub, “(66) the Commission recalls first the principle of free administration by national, regional or local authorities, recognised by Article 2 of Directive 2014/23/EU on the award of concession contracts, when it comes to the management of the provision of services.”
“(67) In order to establish if the Operator of the aided infrastructure to provide services to end-users receives an advantage, the Commission needs to assess if the use of the infrastructure provides it with an economic benefit that it would not have obtained under normal market conditions.”
“(68) As the selection of the Operator was made without tender, the Commission uses alternative methods to assess whether the transaction complies with market conditions. The Commission notes that the level of the rent paid to the Owner, reflecting the right to use the infrastructure, will be determined based on an expert assessment of the value of the building and will in any event cover the depreciation charges borne by the Owner. The Commission considers that this ensures the market conformity of the rent.”
“(69) The Commission notes that the Operator will benefit from a remuneration … this remuneration will cover the deficit of the operation of the Hub calculated ex ante, including a reasonable profit, while leaving the actual economic risk of operating the facility and providing the services, including demand or supply risks to the Operator. In addition, the Commission notes that control mechanisms including a claw back will be provided for in the concession contract to avoid any overcompensation of the operator. These arrangements limit the benefits of the operator to the minimum necessary to ensure the operation of the infrastructure in the framework of the concession contract, without eliminating the business risk for the Operator nor ensuring a guaranteed income level. Hence the existence of an advantage at the level of the operator can be excluded.”
With respect to end-users, the Commission recalled that “(71) if the operator of an infrastructure has received State aid or if its resources constitute State resources, it is in a position to grant an advantage to the users of the infrastructure (if they are undertakings) unless the terms of use comply with the Market Economy Operator test, that is to say the infrastructure is made available to the users on market terms.”
“(72) The Commission has established that there would be no aid at the level of the operator. In addition, the Commission notes that access to the Hub will be open to several users and be granted on a transparent and non-discriminatory basis against remuneration and that the Polish authorities committed that the Hub will be operated on market terms. The Commission therefore concludes that the advantage granted to the Owner is not going to be passed on to the end-users of the infrastructure, as far as those would be undertakings.”
Conclusions
This is an interesting case for several reasons. First, an undertaking can receive public funding without obtaining an advantage in the meaning of Article 107(1) TFEU. Second, the funding gap method that normally establishes the need and proportionality of state aid can also be used to show the absence of advantage and to ensure that profit does not exceed the market rate. Third, the same public authority can be both the source and recipient of state aid. Fourth, transfer of state resources to a 100% state-owned undertaking can constitute state aid.
