Transactions at Market Rates Can still Confer an Advantage that Constitutes State aid (PART II)

Transactions at Market Rates Can still Confer an Advantage that Constitutes State aid (PART II) - Untitled design 17

Introduction

When public authorities buy goods and services for themselves, they have to pay a market price, otherwise they confer an abnormal advantage to the sellers. On 14 June 2023, the General Court, in case T‑79/21, Ryanair & Airport Marketing Services v European Commission, ruled that public authorities still confer an abnormal advantage by buying good and services that they don’t really need, even if they pay market prices.[1]

Ryanair and Airport Marketing Services [AMS], wholly owned by Ryanair, sought annulment of Commission decision 2020/1671 concerning State aid granted by France to Ryanair and the AMS in connection with their operations at Montpellier airport. The Commission found the aid to be incompatible with the internal market.

The aid was in the form of marketing agreements between the AMS and Montpellier’s Association de promotion des flux touristiques et économiques (Association for the Promotion of Tourist and Economic Flows) [APFTE]. The members of APFTE were public authorities. The aim of the agreements was to promote the Montpellier region to foreign tourists. For that purpose, the AMS undertook to advertise the region on Ryanair’s website. Some of the contracts had been put out to tender before they were awarded to the AMS. Nevertheless, the Commission concluded that the agreements did not serve a need of the region and that they conferred a selective advantage to the AMS and indirectly to Ryanair.

The main issue at hand was whether such services would have been bought on the same terms by a private operator – the so-called Market Economy Operator [MEO] test. Ryanair and the AMS also submitted a number of other pleas the main of which are reviewed in this article.

Because of the length of the judgment and its dealing with important State aid concepts, the article is published in two parts.

Part II

Real need

First and despite the fact that previously it had faulted the Commission for considering the real need of the APFTE, the General Court acknowledged that “(168) the ‘real need’ test is apparent from the case-law and is also mentioned in the Commission Notice on the notion of State aid.” “(169) Therefore, the Commission cannot be criticised for having taken into account the ‘real need’ test for the purpose of examining whether there was an economic advantage.”

According to point 82 of the Commission’s Notice on the Notion of State aid, “there can be exceptional circumstances in which the purchase of goods or services by a public authority, even if carried out at market prices, may not be considered in line with market conditions.” The Notice cites case T-14/96, BAI v European Commission that concerned the purchase of a large number of ferry tickets by the Spanish authorities allegedly at market rates. The tickets were supposed to be offered to pensioners to enable them to travel. The General Court had found, in paragraph 76, of that judgment that the actual need was for about 26,000 tickets while the number of purchased tickets was above 46,000. This fact combined with the use of the tickets by the Spanish authorities during the low season implied that, even though the Spanish authorities obtained a volume discount which was a standard commercial practice, P&O, the ferry company concerned enjoyed a guaranteed revenue at no extra costs.

In a related case, T-116/01, P&O v European Commission, the General Court reached, in paragraph 117, the same conclusion: the number of tickets that were purchased at market rates far exceeded the real need of the public authorities. The judgment of the General Court was endorsed by the Court of Justice in case C-442/03 P, P&O v European Commission, without adding any new analysis [see paragraph 129 of that judgment]. Apparently no other cases exist on this issue.

In the present case, the General Court agreed with the Commission which “(189) found that the purpose of the APFTE’s purchase of marketing services was in fact to subsidise Ryanair flights from and to Montpellier airport. Accordingly, it must be held that the payments made under the agreements at issue, which were used to disguise subsidies intended to maintain Ryanair’s presence at Montpellier airport, are the basis for the decision to require full recovery of the aid.”

The marketing agreements

Next, the General Court examined the objectives and contents of the agreements between the AMS and the APFTE in order to determine whether a private operator would have agreed to such contracts.

First, the General Court recounted the reasons for which the Commission had considered that the agreements and the procurement procedures that led to those agreements would not have been accepted by a private operator who would want to purchase marketing services.

“(197) In the present case, the Commission observed, […], that the purchase of marketing services from the applicants did not meet a real need of the APFTE, on the basis of the following factors:

  • the purchase of those services served only as justification for the payments to keep Ryanair at Montpellier airport, having regard to:
    –the lack of any real intention on the part of the APFTE to advertise the region;
    –the targeting of Ryanair flight operations, rather than marketing services;
    –the targeting of the applicants, rather than any online marketing service provider in general;
    –the lack of evidence of the APFTE’s interest in the practical success of the marketing campaigns funded by its budget;
    –the fact that the end of the marketing payments coincided with the cessation of flight operations by Ryanair;
    –the existence of other investigations showing that marketing agreements had been used by Ryanair to conceal the payment of State aid;
  • the marketing services provided by the applicants could not promote the City of Montpellier and its surrounding area effectively, and therefore:
    –the choice of Ryanair was not sufficiently justified in economic terms;
    –Ryanair’s marketing services did not have the alleged effect;
    –if the agreements at issue did have an effect, they benefited Ryanair more than anyone else.”

The General Court proceeded to analyse a number of different issues linked to the assessment of whether the agreements and the selection procedure that led to the agreements would have been acceptable to a private operator.

“(219) [In] the contested decision, the Commission stated that the specifications of the 2013 call for tenders were ‘very general, not to say vague’ on the nature of the marketing services to be provided.”

“(225) The Commission explained, in essence, that an analysis of the agreements at issue and the 2013 and 2017 calls for tenders showed that the decisive criteria defined by the APFTE and selected in the calls for tenders favoured AMS over conventional marketing service providers, in particular by introducing the criterion of serving flight routes and needing to offer a website specific to the marketing service provider with enough traffic to offer online advertising on that site.”

“(226) Those lots corresponded precisely to the air transport services operated by Ryanair between Montpellier airport, on the one hand, and Brussels-Charleroi airport, Frankfurt-Hahn airport, Leeds-Bradford airport and Birmingham airport, on the other, at the time when the call for tenders was launched.” “(227) Therefore, it must be held that the Commission was entitled to conclude, without committing a manifest error of assessment, that the APFTE was targeting the applicants instead of traditional marketing service providers.”

“(229) The Commission demonstrated, in the contested decision, that those visitor numbers contributed only very little to the development of the Montpellier region. […], the total number of Ryanair passengers to and from Montpellier airport accounted for only a relatively small proportion of the passenger traffic at that airport and the number of Ryanair passengers had decreased continuously from 2012 onwards.”

“(235) In the present case, the Commission stated, […], that it had found no evidence to show that the APFTE had assessed, either ex ante or ex post, the potential impact of its budget by evaluating different service providers, by evaluating the impact of various marketing services, by assessing the impact of marketing campaigns targeting different regions of northern Europe, or by analysing the costs and benefits of the marketing agreements concluded with the applicants.”

“(248) In the present case, it should be noted that the Commission identified, […], evidence supporting the assessment that the choice of the applicants as marketing services providers was not sufficiently justified in economic terms.”

“(249) First, the Commission found that the marketing campaigns were limited to Ryanair’s website and customers. Secondly, it explained that Ryanair’s customers were not the most attractive market segment in terms of economic revenue for the region. The maximum potential number of tourists travelling with Ryanair was very low, Ryanair’s passengers did not have the greatest leverage effect in terms of spending in the region and, in terms of tourism and business travel, most of the customers of Montpellier and its surroundings are domestic and not international. Thirdly, the Commission stated that Ryanair’s marketing services had very little impact for the APFTE. The online marketing services provided by the applicants consisted essentially in inserting messages and links on the Montpellier destination page of Ryanair’s website, and inserting a link to the website designated by the APFTE on the English, German, Dutch and Belgian (French and Dutch) homepages of that same website. However, in the Commission’s view, the information provided about Montpellier was unlikely to attract new customers. Thus, Ryanair’s marketing value is targeted at Ryanair customers who have already chosen their destination airport or whose visit to Ryanair’s website indicates that they are likely to choose a specific destination airport. Fourthly, the Commission noted that the marketing services chosen by the APFTE from among Ryanair’s potential services had even less impact. Only the English, German, Dutch and Belgian (French and Dutch) homepages of Ryanair’s website were covered by the agreements at issue. Fifthly, the Commission found that the contribution made by AMS’s marketing services mainly attracted potential Ryanair customers without reaching other potential tourists, in terms of their origin, their choice of means of transport or their consumption behaviour.”

“(250) In the light of the evidence identified, it must be held that the Commission has demonstrated to the requisite legal standard that the choice of the marketing services provided by the applicants was not sufficiently justified in economic terms.”

“(270) In the present case, the Commission noted, […], that, even if the agreements at issue did have the effect of encouraging tourists to purchase flight tickets to Montpellier, that effect primarily benefited Ryanair. According to the Commission, a marketing campaign might increase the load factor of aircrafts and, moreover, might help to alter the balance between passengers visiting Montpellier, who are prepared to pay a high-season price, and passengers living in the Montpellier region.”

Purchase prices v market prices

Another important part of the General Court’s assessment was whether the agreements led to a market price.

“(282) The Commission considered that the finding that there was no real need for the APFTE to conclude the agreements at issue was sufficient to determine that there was an economic advantage. However, given that Ryanair had raised arguments relating to the price paid in its comments on the opening decision, it also analysed whether the prices paid by the APFTE were in line with market prices.”

“(284) It should be borne in mind that the market price is the highest price which a private investor acting under normal competitive conditions is ready to pay for a service”.

“(285) For the purpose of checking the market price, account may be taken of, in particular, the manner in which the service was acquired, for example, by means of public tendering which was designed to ensure that the sale took place under market conditions. It follows that where a public authority uses an open, transparent and unconditional tendering procedure, it can be presumed that the market price corresponds to the highest bid, provided that it is established, first, that that bid is binding and credible and, secondly, that the consideration of economic factors other than the price is not justified”. [At this point, the General Court cited the landmark cases C-214/12 P, Land Burgenland v European Commission (sale of an Austrian bank) and C-39/14, BVVG (sale of agricultural land in Germany)].

“(286) The question whether a tendering procedure has been open and transparent is determined on the basis of a range of indicators specific to the circumstances of each case”.

“(288) In the present case, the Commission considered, […], that the issuing of the 2013 and 2017 calls for tenders did not guarantee a market price.” “(289) As regards the 2010 agreement, […] it was signed without a prior tendering procedure.”

“(290) As regards the 2013 call for tenders, it should be noted that, […], the only requirement that the marketing service provider needed to fulfil in relation to the marketing itself was to include a link on its website to the APFTE’s website. However, that call for tenders divided the contract into five lots, four of which corresponded to the routes operated by Ryanair when the call for tenders was launched. Furthermore, it is common ground between the parties that Ryanair was the only tenderer to submit a bid for those four lots.” “(292) In the absence of other bids, it is impossible to determine whether the bid submitted by the applicants was in line with the market price.”

“(293) In addition, […] the Commission clarified that an entity wishing only to purchase marketing services to promote a given area would have no interest in including obligations relating to the operation of air transport services in the agreements concluded with the provider of those marketing services; nor would it have any interest in including such obligations in the calls for tenders organised for the purchase of marketing services, in order to demonstrate that such obligations in agreements and calls for tenders limit the number of undertakings able to provide the marketing services requested.”

“(294) As regards the 2017 call for tenders, it should be noted that, […], that call for tenders referred to seven lots corresponding, in particular, to the regions in which the three airports served by Ryanair from Montpellier airport were located when the call for tenders was launched and that those three lots were awarded to Ryanair, despite the existence of a competing bid.”

“(296) Furthermore, […] the Commission demonstrated, on the basis of a range of indicators […], that the tendering criteria were defined in such a way as to favour Ryanair’s bids, in particular in so far as the APFTE had not identified any particular reason for choosing the three regions concerned (Rhineland-Palatinate, Wallonia and Yorkshire) as targets for marketing services, other than the fact that they were the only three regions already served by direct flights operated by Ryanair from Montpellier airport.”

In essence, the General Court concluded that the agreements favoured Ryanair and therefore, they failed the fundamental principle of non-discrimination.

Was Montpellier airport also a beneficiary?

Ryanair argued that the operator of Montpellier airport also benefitted indirectly from the marketing agreement between the AMS and the APFTE because of the increase in the number of passengers. In the judgment, Montpellier airport is indicated by the initials AMM.

First, the General Court noted that “(313) Article 107 TFEU prohibits aid granted by a Member State or through State resources in any form whatsoever, without drawing a distinction as to whether the aid-related advantages are directly or indirectly conferred”.

Next, the General Court clarified that “(315) the fact, even if it were established, that AMM also benefited from the agreements at issue has no bearing, as such, on the finding that the applicants benefited from those agreements, with the result that that argument of the applicants must be regarded as ineffective”.

More decisively, the Court rejected Ryanair’s argument on the grounds that it failed to prove that in fact there had been an increase in the number of passengers using Montpellier airport.

Were the agreements selective?

Ryanair contested the finding of selectivity in the Commission decision.

The General Court recalled the principle that “(325) the requirement as to selectivity under Article 107(1) TFEU must be clearly distinguished from the concomitant detection of an economic advantage in that, where the Commission has identified an advantage, understood in a broad sense, as arising directly or indirectly from a particular measure, it is also required to establish that that advantage specifically benefits one or more undertakings. It falls to the Commission to show, in particular, that the measure at issue creates differences between undertakings which, with regard to the objective of the measure, are in a comparable situation. It is necessary therefore that the advantage be granted selectively and that it be liable to place certain undertakings in a more favourable situation than that of others”.

“(326) It must, however, be observed that the requirement as to selectivity differs depending on whether the measure at issue is envisaged as a general aid scheme or as an individual aid measure. In the latter case, the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective. By contrast, when examining a general aid scheme, it is necessary to identify whether the measure at issue, notwithstanding the finding that it confers an advantage of general application, does so to the exclusive benefit of certain undertakings or certain sectors of activity”.

The General Court pointed out that the Commission had “(327) concluded that the agreements at issue were one-off measures, concluded individually between the parties, containing specific contractual obligations and not applying public or otherwise predetermined prices applied by the APFTE, with the result that the economic advantage conferred on the applicants had to be regarded as selective.”

“(328) That analysis must be upheld. First, it should be borne in mind that, as is apparent from paragraph 326 above, when assessing the selective nature of an individual measure, the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective. In the present case, the agreements at issue contain terms individually agreed between the APFTE and the applicants.”

“(329) Secondly, it should be noted that it is apparent from the file that the APFTE sought to conclude the agreements at issue with the applicants.”

Conclusion

Given that none of Ryanair and the AMS’s pleas were successful, the General Court dismissed the appeal in its entirety.

The most important part of the judgment is its assessment of purchases of goods and services by public authorities. Although the General Court rejected the Commission’s starting premise of identifying the needs of the public authority that pays for goods or services, it still went on to consider the contents of the agreements for the purchase of marketing services by the APFTE. Implicitly this corresponded to identifying the public policy objective of the APFTE [i.e. promotion of the region] and then assessing whether the provisions of the agreements were capable of achieving that objective. So, in this regard the views of both the General Court and the Commission appear not to match the reality of the case. The General Court could not avoid identifying the real need to the APFTE while the Commission could not claim that a public authority that purchased services in its capacity as a public authority necessarily conferred an advantage. If this were true, it would prevent public authorities from accessing the market for their needs.

In conclusion, a comparison of the behaviour of the state and private operators can be meaningful only of it is based on the same common denominator. It is not possible to ask whether the price corresponds to the market rate if the comparison is not for the same good or service. Since it is the buyer who determines the good or service that is to be purchased, the comparison must necessarily start with the identification of whether what is bought is needed for the legitimate tasks of the state. Therefore, the assessment of whether a purchase agreement confers an advantage to the provider has to be carried out in the following three-step sequence:

First, does the purchase of the public authority correspond to a legitimate public policy need?

Second, what provisions would a private operator seeking to address the same need include in the purchase agreement?

Third, is the selection of the provider open, transparent, non-discriminatory and unconditional?


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

https://curia.europa.eu/juris/document/document.jsf?text=&docid=274631&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=585489

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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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