Unconditional and Unlimited Guarantees and their (In)Compatibility with the Internal Market

Operating aid is not normally compatible with the internal market. Therefore, State aid provided through state guarantees should not cover operating costs. State aid embedded in guarantees must be quantifiable so that its necessity and proportionality can be assessed. The assessment of State aid must be made within an EU context taking into account its impact on trade.


Article 107(2)(b) allows aid for important projects of common European interest (IPCEI). In 2014, the Commission published guidelines on State aid to IPCEI. Yet, IPCEI are very rare. During the past decade only two have been notified to and assessed by the Commission. One of them, the Øresund road-rail fixed link, was recently the subject of a judgment by the General Court in case T‑68/15, HH Ferries et al v Commission. The Court, on 19 September 2018 annulled the Commission decision that had authorised the aid.[1]What made that case unusual was not just that it concerned an IPCEI, but also that it was notified by two Member States at the same time (the corresponding Commission decision concerned measures SA.36558 and SA.38371 adopted by Denmark, and measure SA.36662 adopted by Sweden). The Commission decision on these measures was reviewed here on 23 December 2014 on our State Aid Hub Blog.The action before the General Court was brought by HH Ferries which is a competitor of the consortium that operates the Øresund fixed link. Naturally, HH Ferries lost much business as a significant amount of traffic was diverted to the fixed link.The consortium is owned in equal shares by the Danish and Swedish states. It was created in 1992 through an intergovernmental agreement. That agreement provided that Denmark and Sweden jointly and severally guaranteed, at zero cost, the consortium’s loans and other financial instruments used for the financing of the construction and operation of the fixed link.

In its decision the Commission found that the state guarantees and a Danish tax measure constituted compatible aid and that another guarantee by Sweden was existing aid. In addition, it decided that a so-called “joint taxation regime” and measures in favour of the parent companies of the consortium for the financing of the road and railway hinterland connections in Sweden and Denmark did not constitute State aid.


Infringement of the procedural rights of competitors

HH Ferries did not claim that the Commission’s assessment was wrong. Rather, it argued that the Commission carried out an insufficient and incomplete analysis with respect to the guarantees and the Danish tax, which was evidence that the Commission had experienced serious difficulties during the preliminary assessment of the measure. Therefore it should have opened the formal investigation procedure. By not opening the procedure, it infringed the rights of HH Ferries to submit is comments to the Commission.

The General Court first recalled that “60 where the Commission is unable to reach a firm view, following an initial examination in the context of the procedure under Article 108(3) TFEU, that a State aid measure either is not ‘aid’ within the meaning of Article 107(1) TFEU or, if classified as aid, is compatible with the FEU Treaty, or where that procedure has not enabled the Commission to overcome all the difficulties involved in assessing the compatibility of the measure under consideration, the Commission is under a duty to initiate the procedure provided for in Article 108(2) TFEU, and has no discretion in that regard”.

“61 The concept of serious difficulties is an objective one. The existence of such difficulties must be sought both in the circumstances in which the contested measure was adopted and in its content, in an objective manner, comparing the grounds of the decision with the information available to the Commission when it took a decision on the compatibility of the disputed aid with the internal market”. “62 If the examination carried out by the Commission during the preliminary examination phase is insufficient or incomplete, this constitutes evidence of the existence of serious difficulties”.

On the basis of these principles, the General Court went on to examine the arguments concerning the classification of the state guarantees as State aid and then the arguments concerning the compatibility of the state guarantees and the Danish tax aid in the light of Article 107(3)(b) TFEU.


State guarantees as schemes or individual measures

First, the Court noted that the guarantees were granted unconditionally in January 1992, when the consortium was formed. The Commission saw the guarantees that were subsequently issued with respect to each loan taken by the consortium as individual aid that stemmed from the 1992 guarantees which were deemed by it to be aid schemes. But according to the Court, “75 it is clear that the contested decision provides no explanation of why the State guarantees are to be considered to be aid schemes, which is a factor that indicates the existence of an insufficient and incomplete examination.”

And the Court went on to find that “83 the contested decision must therefore be annulled in so far as it classified the State guarantees as aid ‘schemes’ without initiating the formal investigation procedure, and the Court must refer back to the Commission the full analysis concerning the time when the State guarantees were granted, their number, and whether they should be classified as new aid or existing aid.”


Use of the state guarantees

When it assesses the compatibility of State aid, the Commission is obliged to provide sufficient explanation of its reasoning. However, the General Court noted that “95 in this case, it is common ground that the contested decision is silent on the existence of conditions governing the mobilisation of the State guarantees. Consequently, […], the Commission erred in not verifying the existence of conditions governing the mobilisation of the State guarantees. It follows that the examination of the compatibility of the State guarantees was insufficient and incomplete, which is evidence of the existence of serious difficulties”.

HH Ferries also claimed that the Commission erred in making no distinction between the phases of construction and operation of the fixed link, in the analysis of the compatibility of the state guarantees. According to HH Ferries, the Commission should have analysed how the state guarantees covering the phase of operation were to be considered to be compatible with the internal market, given that they constituted operating aid, which is normally incompatible with the internal market.

The General Court agreed that “103 aid which is intended to relieve an undertaking of the expenses which it would normally have to bear in its day-to-day management or its normal activities must be classified as operating aid”. “104 it follows from the case-law that operating aid does not, as a general rule, fall within the scope of Article 107(3) TFEU. According to the case-law, the effect of such aid is, as a general rule, to distort competition in the sectors in which it is granted, whilst nevertheless being incapable, by its very nature, of achieving any of the objectives of the exceptions there provided for […]. Such aid is as a general rule prohibited”.

Then the Court found that “107 Article 10 of the Intergovernmental Agreement, which exhaustively lists the responsibilities of the Consortium, refers also to the operation of the Fixed Link. Point 4(3) of the Consortium Agreement also provides that the State guarantees will cover the Consortium’s capital requirements ‘arising as a consequence of book losses which are expected to occur for a number of years after the Øresund Link has been opened to traffic’. In that regard, neither the Commission, nor the Kingdom of Denmark, nor the Kingdom of Sweden deny that the State guarantees also cover loans taken out in order to meet the Consortium’s operating costs, […]. The operating costs are costs which the Consortium ought normally to have borne itself in its day-to-day management or its normal activities.”

“108 Consequently, where it is common ground that the State guarantees cover both the construction costs and the operating costs of the Fixed Link, the examination of the compatibility of the aid involved in the State guarantees, and in particular its necessity and proportionality, fails to distinguish, or makes an inadequate distinction between, the aid for the construction and the aid for the operation of the Fixed Link, and there is no examination at all with respect to the operational phase in itself. Accordingly, the aid covering the operating costs of the Fixed Link was not the subject of a particular compatibility analysis, even though that aid is likely to constitute operating aid.”

The Court rejected the argument of the Commission that the operating costs were not as high as the construction costs. More importantly, it also rejected the argument that any classification of aid as operating aid was ruled out, because the consortium regularly repaid its debts. According to the Court, “111 it is clear that the regular repayment of its loans does not preclude the Consortium from having the benefit of an advantage as compared with its competitors, in the fact that it has available to it, for no consideration, guarantees that cover 100% of its borrowing, in particular its borrowing to meet costs which it would normally have had to bear itself, as part of the day-to-day management of its normal activities, in other words, operating costs. The State guarantees therefore allow it to have access to very favourable borrowing terms. Further, it must be said that it is not inconceivable, on reading the contested decision, that the regular repayment of its loans by the Consortium may in fact be supported by the further loans covered by those guarantees, since it is stated, in recital 131 of the contested decision, that the State guarantees are to cover the financing or refinancing requirements of the Consortium’s debt and that other guaranteed loans may be taken out without prior notice to the Commission until the end of the year 2040.”


Unlimited guarantees

HH Ferries contended that the Commission’s assessment of whether the state guarantees were limited, in time and in amount, was insufficient and incomplete. According to it, their unlimited nature constituted, as a general rule, State aid that was incompatible with the internal market.

The General Court observed that “120 the grant of a guarantee on terms which are not equivalent to market terms, such as an unlimited guarantee granted without consideration, is, as a rule, liable to confer an advantage on the beneficiary, in that that party thereby enjoys an improvement in its financial position through a reduction in charges which would normally burden its budget. An unlimited State guarantee enables its beneficiary, inter alia, to obtain more favourable credit terms than it would have obtained solely on its own merits and, therefore, eases the pressure on its budget”.

Then the Court noted that the state guarantees covered 100% of the loans required by the consortium both for the construction and the operation of the fixed link. “127 The contested decision, […], has no details as to any limit on the total amount of borrowing that can theoretically be covered by the State guarantees.” “128 It was not known exactly when that debt would be repaid.” “129 The fact that there is no limit on the amounts guaranteed or on the period for repayment, combined with the possibility of taking out new loans that are 100% covered by the State guarantees, at least until the end of 2040, may mean that there may be many extensions of the repayment period for the Consortium’s loans and an increase in the total amount of the debt covered by the State guarantees. […] In that regard, it must be observed that the principal uncertainty, in this case, lies in the fact that no ceiling was placed on the amount of the Consortium’s debt that might be covered by the State guarantees up to the end of 2040. Consequently, it is not sufficiently clear from the contested decision that the Consortium’s debt is limited in time and in amount.”

The General Court rejected the counter-argument of the Commission that “133 the State guarantees concern an economic activity that is clearly defined, namely the financing of the Fixed Link, to the exclusion of other activities, unlike general guarantees which cover all the economic activities of an undertaking. However, even if the State guarantees are limited to the financing of the Fixed Link, in the first place, it is apparent from paragraph 108 above that that project encompassed the operation of the Fixed Link and, consequently, that the State guarantees are liable to be classified as operating aid and, in the second place, it is apparent from paragraphs 125 to 128 above that no maximum amount covered by the guarantees is specified and their precise duration is not stated.”

“137 Accordingly, it is clear that the examination undertaken by the Commission as to whether the State guarantees and, as a consequence, the aid contained in those guarantees was limited, in time and in amount, was insufficient and incomplete.”

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Amount of State aid in guarantees and its necessity and proportionality

HH Ferries also claimed that the Commission failed to quantify, or insufficiently quantified, the aid in the state guarantees, although such quantification was essential for the assessment of the necessity and the proportionality of the aid. In addition, it contended that the Commission did not carry out any balancing of the positive effects of the aid, in terms of its contribution to an objective of common interest, against its negative effects on competition and trade.

The Court first recalled the relevant case law. “143 The Commission may declare aid compatible with Article 107(3) TFEU only if it can establish that the aid contributes to the attainment of one of the objectives specified, something which, under normal market conditions, a recipient undertaking would not achieve by using its own resources. In other words, the Member States must not be permitted to make payments which, although they would improve the financial situation of the recipient undertaking, are not necessary for the attainment of the objectives specified in Article 107(3) TFEU”. “144 According to the case-law, it is not acceptable for aid to include arrangements, in particular as regards its amount, whose restrictive effects exceed what is necessary to enable the aid to attain the objectives permitted by the FEU Treaty”.

It then examined the facts of the present case and pointed out at the outset that “149 the knowledge of how to determine the aid element contained in a guarantee, that is to say being familiar with the method for determining the aid element, while there is no requirement for a final precise figure, is an essential prerequisite in order to assess whether that aid is necessary and proportionate”. “150 The assessment of the proportionality of aid implies verification whether that aid is limited to the minimum necessary to achieve the objectives of the various derogations covered by Article 107(3) TFEU, which implies knowledge of the extent to which the aid is necessary to achieve the objective concerned and therefore knowledge of how to calculate the aid element in advance.”

The Court went on to state that “153 the Commission is wrong to consider that, since it had concluded that the aid was necessary and proportionate in order to attain the objective of raising financing for the project under the circumstances that existed at that time, there was no need to quantify the aid in order to avoid any overcompensation. On the contrary, in the course of examining the proportionality of the aid, it was necessary, in accordance with the case-law referred to in paragraph 144 above, to know how to determine the aid element in the State guarantees, in order to be satisfied that its restrictive effects would not go beyond what was necessary for the aid to be able to attain the objective of execution of the IPCEI.”

And, “154 the Commission also stated that it was not necessary to determine a precise amount of aid for the purposes of examining compatibility, and in particular for assessing the proportionality of the aid, since what mattered was knowing that the project could not have been executed without aid […]. It has to be said that that argument deals only with the necessity of the aid, when it also has to be verified that the aid was in fact limited to the minimum necessary, in accordance with the principle of proportionality.”

The Court pointed out that the Commission had defined the advantage resulting from the state guarantees as arising from the fact that the guarantees reduced the costs that the consortium would have to bear either by paying a market premium or by obtaining loans at higher interest rate without the guarantees. In its decision, the Commission referred to two alternative methods for determining the aid element, which is the advantage that the consortium obtained from the guarantees. Then the Court observed that “158 the Commission failed to specify which method it claims that it applied in its analysis of the compatibility of the aid.” (The two methods were, first, the calculation of a market premium for equivalent guarantees, or, second, the calculation of a grant equivalent of a soft loan. The latter is the difference between the market interest rate in the absence of guarantees and the interest rate of the loans obtained by means of the guarantees.)

In response to the argument advanced by the Commission that it was impossible to quantify the aid contained in the 1992 state guarantees with a sufficient degree of precision, given the large scale and uncertainties of the fixed link project, the Court replied that “163 point 4.4 of the 2008 Notice on guarantees is itself evidence that there are methods for calculating an aid element in the context of guarantee schemes, where the characteristics of each guaranteed loan are not known in advance. Point 4.4 states that, ‘(s)ince, in the case of State guarantee schemes, the specific features of the individual cases may not be known at the time when the scheme is to be assessed, the aid element must be assessed by reference to the provisions of the scheme’. That provision also corresponded, in essence, to point 3.5 of the Commission Notice on the application of Articles (107) and (108 TFEU) to State aid in the form of guarantees (OJ 2000 C 71, p. 14), where the Commission stated that, in such circumstances, the aid element was to be assessed by reference to the scheme provisions concerning, inter alia, the maximum amount and the duration of loans, the category of enterprise and the type of project eligible, the security required from the borrowers, the premium to be paid and the rates of interest obtained by them”.

The Court concluded that if indeed “166 the analysis was so complex and difficult as to prevent the Commission, at the stage of the preliminary review, from determining the aid elements in the State guarantees, it has to be said that that only confirms the existence of serious difficulties which ought to have compelled the Commission to initiate the formal investigation procedure.”


Necessary aid may be disproportional

Then the General Court proceeded to consider other aspects concerning the necessity and proportionality of the aid in relation to an IPCEI.

“173 According to the (Commission’s) IPCEI Communication, aid must not subsidise the costs of a project that an undertaking would anyhow incur and must not compensate for the normal business risk of an economic activity; without the aid the project’s realisation should be impossible, or it [would have to] be realised in a smaller size or scope or in a different manner that would significantly restrict its expected benefits, and last, aid will only be considered proportionate if the same result could not be achieved with less aid.” The Court acknowledged that this reflected the principles in the case law and then emphasised that while “177 the first sentence of paragraph 28 of the IPCEI Communication is a restatement of the prohibition on operating aid, […] the Commission in fact failed to ascertain whether the State guarantees covered operating costs.”

“183 Even if the Commission could be regarded as having undertaken a sufficient examination with respect to the question whether the construction of the Fixed Link could not be realised without aid or had to be realised by different means, in any event, […] no separate analysis of the necessity of the aid with respect to the operational phase of the Fixed Link was carried out. Consequently, the assessment of the necessity of the aid concerned is plainly insufficient and incomplete.”

“187 The lack of any quantification of the aid linked to the State guarantees, the lack of any distinction between the construction and operational phases and the lack of any sufficiently precise limitation on the aid linked to the State guarantees in terms of its amount and in terms of time already demonstrate that the analysis of the compatibility of the State guarantees with the internal market was insufficient.”

“188 The Commission also failed to examine whether the same result could have been achieved by requiring less aid, for example, by introducing a form of limited guarantee premium, by limiting the guarantees to cover less than 100% of the amount of each loan covered, by limiting the duration of the State guarantees or by verifying whether the extent of the aid was limited to the minimum necessary. No analysis of that kind was carried out in the contested decision.”

“189 The assertion … that the aid linked to the State guarantees covering 100% of the Consortium’s liabilities and to tax advantages is proportionate and limited to the minimum necessary, merely because of the nature and size of the Fixed Link project, is plainly insufficient and unsubstantiated.”

But the General Court also acknowledged that “190 the Commission is indeed correct to state that the requirement, in paragraph 30 of the IPCEI Communication, to calculate an internal rate of return in cases where there is no counterfactual scenario, in order to verify that the amount of the aid does not exceed the minimum necessary, so that the project qualifying for the aid is sufficiently profitable, is mentioned solely as an ‘example’. However, the obligation to ‘verify that the aid amount does not exceed the minimum necessary for the aided project to be sufficiently profitable’ is no more than an expression of the general principle of proportionality, which is applicable in this case. It is clear that the Commission did not undertake an examination that was sufficient to verify whether the aid linked to the State guarantees was limited to the minimum necessary.”

The Court also pointed out that determining the proportionality of the aid was even more important in this case because “194 the loans that are 100% covered by the guarantees may be taken out over a period that extends until the end of the year 2040, with no indication of any limit on their amount and on their maximum repayment periods.”


Negative effects and the interests of the rest of the EU

HH Ferries claimed that there was no examination of the negative effects of the State aid and that there was no weighing of the positive effects against its negative effects of the aid.

Rather remarkably, in its defence, the Commission argued that “202 the origin of the balancing test was the wording of Article 107(3)(c) TFEU, in relation to aid to facilitate the development of certain economic activities or of certain economic areas, but that this test is not part of the normal criteria used in the examination of compatibility under Article 107(3)(b) TFEU. Although the IPCEI Communication mentions the balancing test, the Commission considers that it was inapplicable rationed temporise in this case.”

The General Court recalled that “204 economic assessments pursuant to Article 107(3)(c) TFEU, in respect of which the Commission enjoys a broad discretion, must be made in an EU context, which means that the Commission is under an obligation to examine the impact of the aid on competition and trade within the European Union”. “206 The Commission enjoys a wide discretion when applying Article 107(3)(b) TFEU, the exercise of which involves assessments of an economic and social nature which also have to be made within an EU context”. “207 Consequently, the Commission is also bound to examine the impact of aid on competition and trade within the European Union in its economic assessments for the purposes of the application of Article 107(3)(b) TFEU.”

“208 In this case, there is no dispute that the Commission did not carry out such an examination. In recital 129 of the contested decision, the Commission considered the potential effects of other forms of aid (capital injections, State loans) on the total cost of the project and on the budgets of the Kingdom of Denmark and of the Kingdom of Sweden, but at no time did the Commission envisage the effects of the aid at issue on competition or trade within the European Union, as part of the analysis of compatibility. However, the applicants’ particular complaint seems to have been that the aid at issue enabled the Consortium to set the toll charges for the Fixed Link artificially low.”

“210 As regards more specifically the failure to weigh the positive effects of aid against its negative effects, in the judgment of 25 June 1970, France v Commission (47/69, EU:C:1970:60, paragraph 7), the Court of Justice held that, in order to determine whether aid adversely affects trading conditions to an extent contrary to the common interest, it is necessary to consider, in particular, whether there is an imbalance between the charges imposed on the undertakings concerned on the one hand and the benefits derived from the aid in question on the other. The General Court concluded that the Commission is under an obligation, when examining the impact of State aid, to weigh the beneficial effects of the aid against its adverse effects on trading conditions and the maintenance of undistorted competition”. (Case 47/69, France v Commission, concerned the levying of a French tax on textile products. The revenue from the text was used to fund an aid scheme for textile companies).

“211 While that statement was made in the context of a case relating to Article 107(3)(c) TFEU, it is clear that the need for such a ‘weighing’ of the expected positive effects in terms of realisation of the objectives set out in Article 107(3)(a) to (e) TFEU against the negative effects of aid in terms of distortion of competition and the effect on trade between Member States is no more than an expression of the principle of proportionality and the principle that the exemptions set out in Article 107(3) TFEU must be interpreted strictly.”

The reference to “proportionality” in paragraph 211 is puzzling. As defined earlier in the judgment, aid is proportional when it does not go beyond the minimum necessary to achieve its objective. But such aid, even when it is limited to the minimum necessary, may still cause a significant distortion to competition and a big impact on trade. The requirement that the positive effects of aid should outweigh its negative is not the same as the proportionality of the aid. The former is determined by taking into account the effect of the aid on competitors, while the latter is limited to the effect of the aid on the beneficiary. Perhaps the Court means that proportionality has several aspects.

Quite importantly, the General Court added that “212 if it were to be accepted, …, that such a weighing should take place with respect to some of the exemptions laid down in Article 107(3) TFEU, but not with respect to others, that would be equivalent to recognising that, with respect to some of the objectives referred to in Article 107(3) TFEU, aid could be declared to be compatible even if its positive effects in terms of realisation of the specified objectives were inferior to its negative effects in terms of distortion of competition and the effect on trade. Such an interpretation would be likely to establish an asymmetry in the assessment of the various exemptions referred to in Article 107(3) TFEU, which would undermine the effectiveness of the State aid rules.”


Affectation of trade at the level of the parent companies

HH Ferries claimed that the Commission erred in finding that the aid to the parent companies of the consortium were not liable to distort competition and affect trade between Member States.

The General Court noted that “237 according to recital 80 of the contested decision, ‘the management and operation of the national network concerned (are) carried out in national, geographically closed and separated markets that are not subject to competition’. The Commission inferred from that finding that there was no risk that the measures of support to the parent companies of the Consortium would distort competition with respect to the planning, construction and management of the rail hinterland connections and would affect trade between Member States.” “238 The Court must hold that that statement, while very succinct, nonetheless sufficiently set out the facts and the legal considerations that were taken into account in the Commission’s assessment, and is not confined to reproducing the wording of the criteria in Article 107(1) TFEU. Consequently, the Court must reject any claim that the reasons stated in recital 80 of the contested decision are insufficient”.

But then, the Court went on to examine “243 the applicants’ argument that the measures concerned are capable of affecting trade between Member States and distorting competition for the sole reason that they placed the parent companies of the Consortium in a position that was more favourable than that of their competitors, by enabling them more easily to penetrate the market of another Member State where management of the railway infrastructure was open to competition. The applicants add that nothing in the rules governing the establishment of the parent companies of the Consortium or in their statutes prevents them from engaging in other activities.”

Indeed, trade can be affected either because it prevents entry of foreign products or companies into the subsidised market or because it facilitates expansion of the activities of the subsidised undertakings outside their home market.

However, after reviewing the terms of establishment of the parent companies, the General Court concluded that they were not allowed to operate outside their home countries. (Paragraph 252 of the judgment)

The General Court also rejected several other pleas submitted by HH Ferries, which are not reviewed here because they do not add anything new to the concept of State aid or the assessment of the compatibility of aid.

In the end, the General Court annulled the Commission decision because the examination of the compatibility of the State aid granted to the consortium was insufficient and incomplete. The Commission (i) did not consider the conditions for the mobilisation of the state guarantees; (ii) did not quantify the aid element contained in the guarantees; (iii) failed to verify the possibility that operating aid covered operating costs; (iv) did not take into account whether there was any limit on the amount or duration of the aid in the guarantees; (v) did not assess the effects of the aid on competition and trade between Member States; and (vi) failed to weigh the negative effects against the positive effects of the aid. For these reasons the Court concluded that the Commission had experienced serious difficulties in determining the compatibility of the State aid and that it should have initiated the formal investigation procedure.


Concluding comment

The General Court has reaped the Commission decision apart. The Commission will have to re-open the file and launch a formal investigation. Many aspects of the decision will need to be fixed but that is not a problem because they are fixable. The most challenging issue will be the quantification of the aid in the unlimited and unconditional guarantees that were granted before Denmark and Sweden were members of the EU.


[1] The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=205883&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=2572548.



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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