The Incentive Effect of Public Funding of Infrastructure in Tranches

The Incentive Effect of Public Funding of Infrastructure in Tranches - StateAidHub blogpost13 StateAid motorway greece E65 EU Comission lexxion scaled

Public funding of functionally and commercially severable parts of an infrastructure project may have incentive effect even after construction is completed on some of the parts. A subsidy for the operation of a toll motorway may not constitute State aid.



State aid granted to a project that has already started lacks incentive effects and, therefore, cannot be found to be compatible with the internal market. By definition, if a company starts work on first part of a project [projects can always be divided into distinct parts or stages] it intends to complete the whole project. It cannot credibly argue, but companies often do, that funding for the second or third part of the project has incentive effect just because work on those parts has not started yet.

Therefore, how should a funding authority assess a project whose individual parts or stages are functionally or commercially separable? A recent case that has addressed this important issue is the construction and operation of an additional section of the central motorway in Greece, which is designated as E65 and is also part of the Trans-European Transport Network [TEN-T].

A concession contract for the motorway had already been awarded in 2008. Nevertheless, new State aid that was granted to the concession holder in 2018 was found by Commission to be compatible with the internal market in decision SA.50233.1

The concession for the motorway was awarded to a consortium through a competitive tender. Initially the concession had a duration of 30 years, commencing on 31 March 2008 and ending on 31 March 2038.

Normally, concessions are a source of revenue for the government. Quite interestingly, in this case a grant of EUR 518 million of public money, including EU structural funds, was provided to the winning bidder for the construction of the motorway. This was because the financial net present value [FNPV] of the motorway was negative. The amount of the private investment in the project was EUR 1345 million.

As explained in the Commission decision, the operational phase of the project also needed public funds in the form of operating aid. “(8) The E65 Motorway was considered from conception as requiring an ongoing State subsidy throughout its term. This subsidy was intended to cover the difference between the anticipated traffic revenues and the actual costs of the operation/maintenance and financing of the motorway, including a return to the investors. Therefore the E65 Motorway was tendered on the basis of an availability of a subsidy payment the maximum amount of which was determined on the basis of the first tenders’ offer (approximately EUR 1,645 million).”

The 2007-8 award procedure was notified to the Commission. “(9) The State support in favour of the E65 Motorway was the subject of a [2008] Commission decision which found that there was no State aid in favour of the Concessionaire.” This is fascinating. Both the investment and the operational subsidies were not considered to be State aid.

In its decision N 565/2007 of January 2008 the Commission found that the selection of the concessionaire was carried out objectively on the basis of the most economically advantageous offer and that the concessionaire bore all risk directly linked to the construction and operation of the motorway.2 However, both the invitation to tender and the concession agreement specified that the Greek government would bear certain risks such as those linked to antiquities and the need for archaeological excavations or those linked to future extension of the motorway and additional works.

Before awarding the contract, the Greek government compared the winning bidder’s offer with the results of the financial analysis of the project that had been undertaken by its independent advisor and concluded that not only the winning bid requested the lowest subsidy but that the requested amount was lower than that calculated by the advisor.

In addition, the contract contained a claw-back clause whereby the Greek government would extract retroactively 85% of all revenue above a certain benchmark.

The Commission found that the concession involved no State aid because it was awarded competitively, it did not alleviate the concessionaire from commercial risk and because the concessionaire would not be able to make any excess profits.


The 2013 measure

In 2013, Greece re-notified the project to the Commission. Because of the financial crisis, the concessionaire received much less revenue than was expected and needed State aid to cover the shortfall. The Commission found the aid to be compatible, although at first glance one would have thought that the concessionaire was locked into a contract and therefore had to complete the project regardless of the unexpected shortfall in revenue. This is how the Commission reasoned.

“(10) Due to the economic crisis, there was a steep decline in traffic throughout Greece and in the expected toll income for the concessionaire (at least 60% lower than predicted). This resulted in a serious disturbance of the financial balance of the CA and consequently in the withdrawal of support from the banking sector. Thus the works on the project stopped. In order to unblock the situation, and given that a termination of the concession would not be an economically sound option, the Greek State renegotiated the concession contract with the concessionaire. This resulted in 2013 to the amendment of the CA (“Reset”), which involved:

  1. a) the deferral of the construction of the northern and southern sections to a later stage, as the financing sources of Kentriki Odos S.A. would not be sufficient for the conclusion of the entire project.
  2. b) EUR 231.4 million additional State support in order to bridge the financing gap created due to the crisis for the construction of the middle section of the E65, and
  3. c) the replacement of the operating subsidy by a so called “recycling mechanism” which would cover the operating costs, loan servicing and IRR of the concessionaire through the State’s share of the toll revenues resulting from the operation of the E65, as well as of the Ionia odos motorway. The total potential amount corresponding to these toll revenues was estimated at EUR 1,199 million for the E65 Motorway.”


“(11) In exchange, the Concessionaire accepted a capped IRR of 7.49%7 through the whole period of the concession.” “(13) Given the guarantees provided by the elements of the Reset agreement, the lending financial institutions accepted to commit commercial loans, which had significantly lower principal amounts and higher interest margins than the previously committed loans.”

The Commission approved the aid in decision SA.36893.3 In the 2013 decision the Commission examined whether three new measures were severable from the 2008 ones. In this connection, the Commission cited as guidance the judgments in case C-399/10 P, Bouygues and case T-11/95, BP Chemicals and the criteria that emanated from them: (i) the chronology of the measures; (ii) their purpose and (iii) the assessment of the financial and risk situation of the beneficiary undertaking.

On the one hand, the three 2013 measures were separate from the 2008 ones by a period of five years. That is a pretty long period. On the other, they had the same purpose. It is not clear from the text of the 2013 decision why the Commission concluded that they were severable.

The Commission found two of the 2013 measures to constitute State aid because a private investor would not have committed its own resources in the loss-making motorway. It went on to declare them compatible with the internal market on the grounds that they covered the concessionaire’s funding gap. A third measure was found not to involve State aid because the payments by the state emanated from its contractual obligations under the 2008 concession agreement. Since the commercial risk of that agreement was assumed entirely by the concessionaire, it is not clear in the Commission decision why the state did not demand that the concessionaire bore the losses from the revenue shortfall, instead of covering its deficit.

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The 2018 measure

In 2018 Greece notified new aid of EUR 305.7 million to cover the construction costs of the southern section of the motorway with a total length of 32.5 km. That amount covered EUR 300 million for construction costs plus EUR 5.7 million for improvements to work already done. The aid was to be co-funded by EU structural funds.

“(21) The costs for the construction of the project have been estimated on the basis of the prices submitted in the concessionaire’s offer for the project in 2007”. “(22) The construction costs correspond to EUR 310.9 million, … . However the relevant aid amount was limited to a lump sum of EUR 300 million, as the concessionaire agreed to a price reduction of 3.5% following negotiations.” “(23) Moreover, on the basis of this agreement, the concessionaire is, on the one hand, not allowed to request additional payments in case the construction cost increases beyond this figure and, on the other hand, any savings cannot be claimed by the State.”

“(26) Moreover, under the CA [Concession Agreement] the State has undertaken the obligation to provide the concessionaire with vacant possession, i.e. a Greenfield area in view of the works. To this end, the State has undertaken the contractual obligation to assume all relevant costs for the works related to expropriations, archaeological findings and relocation of public utility networks. To this purpose, during the implementation of the CA the States’ competent services shall be assisted by specialised consultants.” These works and services were estimated to cost EUR 24.4 million.

“(27) Since the relevant amounts concern obligations undertaken by the State under the CA (archaeology, expropriations, PUO networks relocation, upgrade of safety barriers) or to the assistance of the State’s competent services (consultancy services) the Greek authorities argue that the relevant amounts do not constitute State aid. These costs could be eligible for financing by the ESIF funds, under the conditions that result from the applicable ESIF rules and regulations.”


Existence of State aid

The Commission found that the new measure involved transfer of state resources that conferred a selective advantage to the concessionaire.

“(38) The State will award a EUR 305.7 million grant to the concessionaire in order to cover its total construction costs for the completion of the southern section. The Commission considers that this grant entails a selective advantage in favour of the beneficiary, as, under normal market conditions the construction of the E65 southern section would have to be financed through the concessionaire’s own resources. This advantage is provided outside the context of a tender process as this grant was not included in the 2007 tender. Moreover, the aid will enable the construction and operation of the southern section, which will de facto result in additional traffic in the middle section of the E65 motorway. Thus it cannot be excluded that the concessionaire may enjoy an additional indirect advantage due to the increase in revenues it may derive from the middle section of the E65 motorway.”

With respect to the costs assumed by the state in relation to its obligations under the concession agreement, “(39) the Commission notes that the State will conduct the works relevant to the contractual obligations it undertook towards the concessionaire within the CA [e.g. provision of a greenfield site, archaeological excavations, etc] … this type of works are the responsibility of the State and that such obligations are in principle common practice within public contracts. Moreover, it considers that as in any contract between normal market operators, said State obligations, although they involve the coverage of the relevant costs, do not entail a selective advantage in favour of the concessionaire, as the latter will not be alleviated from the costs it would have to bear in any case, as according to the Greek authorities the State undertakes the same obligation for all Greek motorway concessions.”

With respect to affectation of trade and distortion of competition, the Commission noted that “(42) as explained in the Notice on the notion of aid, in order for the distortion of competition to be excluded in the particular case of bundled construction and operation of motorway infrastructure, as in this case, there has to be a natural monopoly and the bundled construction and operation has to be tendered out in compliance with public procurement rules. Moreover, it should be ensured that the funding cannot be used to cross-subsidise or indirectly subsidise other economic activities. In this case although the concession of the bundled construction and operation of the E65 motorway was initially (in 2007) agreed following a competitive tender procedure, the features of the concession and the public contribution were modified in 2013 and were (approved by the Commission in 2013. These modifications were not the result of a competitive tender. Thus an advantage in favour of the concessionaire cannot be excluded.”

“(43) Moreover the concessionaire’s shareholders are companies active in infrastructure works in several sectors and with an international presence. Therefore an indirect advantage to other activities of the companies involved cannot be excluded either. As a result the Commission concludes that the notified measure is liable to distort competition.”


Compatibility of the aid

Since there was no doubt that the construction of a motorway that was part of the EU’s TEN-T was in the common interest, the difficult issues in the Commission’s assessment of compatibility were the incentive effect and the proportionality of the aid.

With respect to the incentive effect, the Commission first verified that work on the project [i.e. the southern section] had not yet started. “(59) In addition, … given the fact that the construction of the southern part of the E65 Motorway is not economically viable, the incentive effect of the measure is already present, because the aid enables the beneficiary to implement the project whereas, in the absence of the public support, neither the beneficiary nor any other market investor or financial institution would have financed the project. The Commission considers that in the absence of the notified measure the project could indeed not have taken place”.

Then the Commission noted that “(61) upon Reset, the State agreed with the concessionaire to defer the southern and northern motorway sections, as due to the financial crisis, their construction was not feasible.”

“(62) The Commission observes that according to annex K of the CA, the concessionaire would fund the deferred sections, and hence bear further risks, only in case it reached a certain level of revenues (see recital 17 of this decision), given that a structurally non-profitable concession was faced with additional financial difficulties due to the financial crisis. Even in the case where such funding would be possible, according to the same annex, the concessionaire would have to partially finance these sections and hence bear part of the risk of the project.”

“(63) On the basis of the updated estimates on traffic and forecasted revenues of the concessionaire, submitted by the Greek authorities, the concessionaire at this stage, is not in a position to finance alone any deferred section and in particular the southern section. In particular the estimates submitted by the Greek authorities demonstrate that the operating revenues of the southern section would not even cover the operating and maintenance costs of this section. Therefore the Commission considers that the aid that the Greek State awards to the concessionaire in order to cover the construction costs of the completion of the southern section is necessary, as otherwise this section would not be constructed.”

With respect to the proportionality of the aid, the Commission took into account that there were safeguards to ensure that the concessionaire’s financial advantages from the public funding of the southern section were mitigated.

First, the aid amount corresponded to the construction costs determined as specified in the 2007-8 tender and concession agreement. “(69) Taking into account the fact that these cost estimates were the result of a competitive, transparent and non-discriminatory tender procedure, the fact that the 2013 Reset did not alter this element of the CA, as well as the fact that these estimates were updated on the basis of objective and verifiable parameters, although these prices include de facto a profit margin in favour of the concessionaire, the Commission can conclude that these estimates can be considered as appropriate in view of the assessment of the proportionality of the aid.”

Second, there was a clear account separation of revenue and costs of the southern section from the already completed section of the motorway in order to prevent cross-subsidisation.

Third, the Commission also took into account that the complete motorway concession was from the beginning conceived as needing an operational subsidy to cover functioning and maintenance costs. However, in its notification Greece indicated that “(75) following negotiations on the southern section, the concessionaire has accepted to waive its right, deriving from the CA, to receive any kind of financial support for the operation of the southern section either indirectly through the Recycling mechanism or directly from the State budget. In addition, …, the estimated revenues that will be generated from the operation of the southern section barely cover the estimated operation and maintenance costs of this section. Therefore, no advantage is expected to stem from the operation phase of the project.” “(77) In addition, the Greek authorities have put in place a claw-back mechanism in the event that the operation and maintenance of the southern section turns out to be profitable.”

The concessionaire undertook all the commercial risk from the operation of the southern section. I doubt that the concessionaire acted selflessly or stupidly. It had no contractual obligation to construct and operate the southern section at a loss. But it knew that all parts of a motorway, like any other network, benefit from expansion of any of its individual parts. The Commission, correctly, also looked at the impact on the revenue from the already completed sections.

“(79) Concerning the indirect benefit that the concessionaire may derive due to the increased traffic in the middle section, induced by the operation of the southern section, the Commission notes that the IRR is capped at 7.49%, a level which was considered as appropriate already under the Reset, on the basis of a benchmark analysis presented by the Greek authorities. According to the updated financial model the concessionaire has developed in June 2017, the currently expected IRR corresponds to 6.67%. Thus on the basis of these estimates, possible additional revenues in the middle section due to additional traffic may in the best case scenario result in maximum increase of 0.82% of the IRR of the concessionaire. Any extra profits above this level will flow back to the State through the claw-back mechanism foreseen in the CA as regards the middle section, ensuring that the concessionaire will not benefit from excessive revenues. It is finally to be noted that such indirect advantage would have existed anyhow irrespective of whether the construction of the southern section would have been done by the State, the current concessionaire or another concessionaire, in view of the specific circumstances that led to 2013 Reset.”

The Commission concluded its assessment by finding that the grant of EUR 305.7 million was compatible with the internal market. The public funds for expropriations, archaeological findings and relocation of public utility networks did not constitute State aid.



1 The full text of the Commission decision can be accessed at:

2 The decision of the Commission can be accessed at:

3 The text of the decision can be accessed at:



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 is professor at the University of Maastricht and the University of Nicosia. 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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