Use of Publicly-Funded Infrastructure without State Aid

Public funding of infrastructure which is open to any user does not constitute State aid. Public funding for the upgrading/extension of infrastructure in view of expected increase in the number of users is not State aid as long as it is not designed for the specific needs of certain users.Fees charged to users of publicly-funded infrastructure must cover incremental costs and include a reasonable margin.

 

Introduction

Speaking at a High Level Forum of Member States on 18 December 2014, the new Commissioner for Competition, Margrethe Vestager, invited Member States “to join the Commission in setting up a working group on designing State Aided infrastructure projects in a way that does not raise issues under State Aid Law. I know that this is an area where there are significant concerns about the lack of clarity of our rules and the long times that our cases can take to process.”[1]

Indeed, the case reviewed in this article has a long and meandering history. But it is an example of how clear analysis by the Commission, in addition to discussion with Member States, can provide useful guidance to Member States.

In October 2008, Smurfit Kappa, a paper manufacturer, submitted a complaint to the European Commission alleging that infrastructure aid had been granted by Germany to Propapier, another paper manufacturer. After initial contacts with the German authorities, the Commission launched in October 2010 the formal investigation procedure. The procedure was closed in October 2014 with a finding of no aid [Commission decision SA.36147].[2]

Two issues make this case interesting. First, Smurfit Kappa had successfully challenged before the General Court an earlier Commission decision [N 582/2007] that regional aid received by Propapier was compatible with the internal market. The aid was for the construction of a paper mill. The Court, with its ruling in case T-304/08, Smurfit Kappa v Commission, annulled Commission decision N 582/2007 on the grounds that the Commission failed to explain adequately the reasons for the compatibility of the aid. The Commission then opened the formal investigation procedure in relation to that case in May 2013. In October 2014 it also concluded that investigation with a finding that the aid, which concerned a “large investment project”, was compatible with the internal market. The text of that decision has not yet been made public.

Second, the decision in the present case deals with alleged indirect aid that benefitted Propapier through access to publicly funded infrastructure. Propapier produced corrugated paper. Smurfit Kappa was also a major producer of paper. Propapier’s paper plant was located in a newly built industrial park in East Germany that was financed by public resources. Smurfit Kappa claimed that the new infrastructure was constructed for the benefit of Propapier. The alleged aid covered four infrastructure projects: a waste water treatment plant, a parking lot, a new road and the widening and deepening of the Oder-Spree-Kanal. In addition, Smurfit Kappa contented that the tariffs charged for the use of the waste water treatment plant were lower than the market rate.

Existence of State aid

In order to determine whether Propapier benefited from indirect aid, the Commission paid particular attention to whether the publicly funded infrastructure projects were dedicated to Propapier. It made the following important distinction:

“(147) The Commission has considered in the past that public [authorities] can carry out work to develop their land. [Here it referred to Commission Decision of 2 August 2002 on the Terra Mitica theme park near Benidorm (OJ L91, 8/4/2003)] They can, for instance, finance investments into infrastructure which will benefit the population as a whole. Moreover, the Commission considers that the reason for which such infrastructure is set up is indifferent, provided that it is done in the interests of the local community as a whole. However, if such infrastructure will serve the needs of a private company only, that company is responsible for funding it. This follows from the fact that, where State aid is concerned, the Commission’s remit is to analyse the impact of the measures concerned in practice, rather than the objectives pursued. In the present case, the Commission therefore takes the view that, what matters is to analyse which infrastructure is of benefit to the community as a whole (including Propapier) and which is of use to Propapier only. It is only the latter which should be financed by Propapier.”

Before it examined each infrastructure project in detail, the Commission clarified that the parking lot, the road and the Oder-Spree-Kanal were not operated by undertakings “because their use is free of charge. Therefore, the issue of State aid to the owners and operators of those infrastructures does not arise in the present case” [paragraph 148].

Parking lot

“(149) The complainant claims that the location of the car park is inconvenient and too remote to serve other inner-city commercial locations and allow the municipality to close down parking lots for trucks in the city centre. Germany has indeed not demonstrated the opposite, but the fact that a parking lot is in the immediate vicinity of an undertaking, does not automatically mean that it is dedicated to that undertaking or would benefit predominantly that undertaking. […] The Commission notes that the parking lot is freely accessible and access to it is indicated along the public road without referring to a specific company. And whether it offers rest facilities or not is not relevant for its qualification as general infrastructure.”

“(150) […] The parking lot was not built specifically for Propapier but was part of the economic development plan for the industrial park. Moreover, Propapier has own parking space for 27 trucks and 213 passenger cars. […] Propapier’s own parking volume was large enough to cover the space necessary for its employees, suppliers and visitors.”

On the basis of the above, the Commission decided that the parking lot was not dedicated to Propapier and involved no State aid. It is obvious from the reasoning above that the Commission took into account three factors: i) access by other users, ii) the parking lot was a part of the overall industrial park and iii) Propapier had adequate parking facilities of its own so it was not dependent on the publicly funded parking lot.

Road

(152) The road is a public road. It is part of the overall development of the industrial area, which was already planned in 1993, long before the settlement plans of Propapier. Contrary to what is argued by the complainant, the road does not stop a few meters behind the Propapier paper mill, but it connects the current Oder-Spree-Kanal industrial area and its northern expansion areas to the motorway B-112. The last part was finalized in 2013. The new road may serve other undertakings since it offers further development options for the ArcelorMittal and other industrial areas.”

The Commission found here too that there was no State aid because the road was i) part of the overall planned development of the area and ii) was open to any user.

Widening/deepening of the Oder-Spree-Kanal

“(154) The complainant alleged in its complaint that the infrastructure works for the widening and deepening of the Oder-Spree-Kanal were exclusively dedicated to Propapier and involved State aid to Propapier. The City of Eisenhüttenstadt indeed extended in 2008 the industrial park ‚Industriegebiet am Oder-Spree-Kanal‘ in view of attracting firms. […] There is however no indication of a causal link between these infrastructure works and the settlement of Propapier or that these works would offer a selective advantage to Propapier, and the Commission agrees with Germany that the widening/deepening of the Oder-Spree-Kanal is part of the necessary regular maintenance of the waterway.”

The Commission concluded that there was no State aid for Propapier because the improvement of the canal was part of the overall development of the area and despite the fact that the intention of the local authority was to attract more firms to the area.

Waste water treatment plant

The assessment of whether Propapier derived an indirect advantage from the plant was based on similar but different logic. This is because the operation of the plant was an economic activity. Moreover, the plant itself benefited from an investment grant.

“(157) The Commission also notes that the TAZV waste water treatment plant was not constructed specifically for Propapier. The construction was already planned in the context of other potential investments in 2004-2006, long before the arrival of Propapier. Germany submitted evidence showing that the waste water treatment plant was planned in the context of the economic development of the industrial park ‚Industriegebiet am Oder-Spree-Kanal‘.”

“(158) Even though the waste water treatment plant is technically – through its anaerobe first treatment stage – designed to deal with waste water from heavy industrial polluters such as producers of CCM from recycled fibre, an anaerobe first treatment stage would also be useful for other users with industrial waste water with high organic pollution, such as companies from the beverages and food industry. Furthermore, for industrial waste water with high organic pollution, waste water treatment plants with an anaerobe first stage offer a number of important economic and environmental advantages.”

“(159) Although in its present dimensions the TAZV plant mainly serves the needs of Propapier, it is also used – under the same conditions – by the two other companies settled in the area. Its modular design allows to extend it to additional users. Even without modular expansion, there is currently some [20-40]% spare capacity available for additional investors, with a potential to double the present total capacity. The waste water treatment plant is open to all users on a non-discriminatory basis – new investors settling in the park are obliged by law to connect and use the plant – and it can deal with waste water from non-paper production.”

“(160) The Commission is of the view that the fact that the TAZV plant is at present predominantly ([< 70]% on average and [< 70]% maximum) used by Propapier does therefore not necessarily mean that it constitutes dedicated infrastructure, as its modular design makes sense from an economic point of view in times of limited public budgets. Contrary to what the complainant alleged, the cost to double the capacity of the TAZV plant which is estimated by Germany to amount to less than 50% of the initial investment cost, shows that the modular concept allows to realise economies of scale.”

“(161) The fact that the regional aid for the construction of the plant was granted subject to the settlement of a main investor, in casu Propapier, in the extended business park, is considered by the Commission to constitute good public management of scarce resources since it makes sense not to start building a major public infrastructure without ensuring that it will be used, and not to over-dimension it.”

Notwithstanding the fact that Propapier used up to 70% of the waste water treatment plant, the Commission concluded that the grant to the plant did not constitute investment aid to Propapier [The grant to the plant itself was compatible aid]. Again the decisive elements for the finding of no indirect aid for Propapier were that i) the plant was designed as part of the overall development of the area [which included the attraction of more firms to the area] and ii) the plant was expressly configured so as to be useful to other companies too. Although regional aid was granted to the plant on condition that it attracted major users, the users were not beneficiaries of that aid.

The next step for the Commission was to examine whether the users of the plant and in particular Propapier paid market rates.

Fees for the use of the waste water treatment plant

The Commission first clarified that “(167) … the existence of State aid has to be established irrespective of the question of 1) whether or not the EU Water Framework Directive and German legislation implementing the directive require the recovery of full costs of the provision of waste water treatment services, and 2) whether the fees are in compliance with the provisions of these laws. In other words, measures fully complying with both the EU Directive and the applicable German legislation may still constitute State aid, if the conditions laid down in Article 107(1) of the TFEU are satisfied on a cumulative basis.”

Of course, this is a legally correct statement. However, it would have been useful had the Commission explained the conditions under which charging a fee that covered full costs would confer an advantage to the users that would be tantamount to State aid.

With respect to state resources and imputability, the charges of the waste water treatment plant were set by a public authority. Therefore, if the fees were set below the level a private investor would have chosen, the public authority would forego revenues and there would be a transfer of state resources.

With respect to selective advantage, the question was whether the charges for Propapier were “(173) […] lower than what a similar undertaking would have to pay under normal market conditions, in other words, whether the level of charges is in line with the market economy operator principle. This can, in the Commission’s view, be determined in two alternative ways:

  1. i) Comparing the price paid by Propapier to a benchmark price which can be typically observed in the Member State in question for waste water treatment.
  2. ii) An ex ante profitability analysis that shows that a private operator would have charged the same level of prices.”

Benchmark price

“(174) In view of the organisation of the market and in view of the fact that operators, even if private, cannot set the prices for their services freely since they are bound by law, the Commission is of the view that it is not possible to establish benchmark prices that a private operator would have charged on normal market conditions.”

“(175) The Commission further notes that Germany provided data on prices paid by undertakings in the sector where Propapier is active. Although Germany claims that the benchmark prices it presented are averages which reflect full costs, there is no indication as to whether or not these fees contain State aid. The Commission’s doubts regarding the usefulness of these data as a basis for comparison have not been alleviated. This is primarily because the Commission believes these prices may reflect different cost realities and may or may not include State aid.”

In paragraphs 174 & 175 is making an important policy statement. Comparative analysis of prices is a credible method for establishing whether prices confer an advantage only when prices are freely determined by the market and only when the underlying assets are free of State aid.

Ex ante profitability analysis

“(176) […] The Commission considers that, for infrastructure which is open to all and not dedicated to a specific user, the market investor/operator test is satisfied if the users of the infrastructure incrementally contribute, from an ex ante viewpoint, to the profitability of the operator.” Here the Commission cites by analogy the method outlined at point 63 of the 2014 Commission guidelines on State aid to airports and airlines.

The fee charged by the operator of the infrastructure must be such as to cover all the incremental costs caused by the user of the infrastructure plus a reasonable profit margin. All revenue and all expected incremental costs incurred by the operator must be taken into account. Here the Commission cites two decisions, not yet public, where it found no State aid in fees paid by Ryanair to airports in Denmark and Sweden [SA.18855 & SA.18857].

Before examining how the Commission established whether the fee covered all incremental costs plus profit, it is worth making three comments about the two methods identified by the Commission for determining whether the operator of infrastructure acts as a market economy investor.

First, the benchmarking method is credible only if the infrastructure projects which are compared are similar. If they are dissimilar, their costs will be different and the fees they charge to users will consequently vary. Moreover, even similar projects must operate under similar market demand and supply conditions in order to presume that they would charge similar fees. Therefore, the benchmarking method is fraught with conceptual and technical difficulties.

Second, there is contradiction in the reasoning of the Commission in this case. Since it found that the fees were regulated, it could not simply proceed to the alternative method to examine whether the fees covered incremental costs plus profit. The latter presumes that fees are freely negotiated between the operator and the users.

Third, the cost plus method is used when the fee does not cover the full cost of the infrastructure. This was indeed true in this case. The plant received State aid presumably because it was not commercially viable without aid. What in fact the Commission outlines in this decision is the important principle that the use of subsidised infrastructure is not considered to entail an advantage for the users as long as the users are charged a fee that covers the costs which are caused by their access to that infrastructure. Economically, of course, the fee does not cover all costs incurred by the project. But if the fee had to cover all true costs, then any subsidised infrastructure would never be used [since by definition aid is necessary when a project is not commercially viable without aid] or users would be presumed to benefit from State aid – an unwelcome expansion of the scope of State aid and of State aid investigations.

Indeed, the Commission explained that incremental costs encompass all categories of expenses or investments, such as incremental personnel, equipment and investment costs, induced by the presence of the user. In contrast, costs which the operator incurs anyway, independently of the arrangement with the users, need not be taken into account.

The Commission concluded that “(180) […] the market investor/operator test is satisfied, i.e. the reduced fee does not confer an advantage to Propapier for the following reasons:

  1. a) The waste water treatment plant is open to all and is not dedicated to Propapier.
  2. b) The fee paid by Propapier includes operating costs, maintenance and repair costs, personnel and charge management costs, imputed depreciation, and, in addition imputed interest on 20% of the investment capital invested into the waste water treatment; it thus covers all incremental costs incurred by the operator of the waste water treatment plant in relation to the activity of Propapier.”

“(181) As regards the reasonable profit margin that the user fees should cover in addition to the incremental costs, the charges in the present case do not only cover the incremental costs but also imputed interest on 20% of the investment capital. Whereas this is not expressly identified as reasonable profit for the purposes of the incremental cost approach defined above, it provides the operator with additional income just as a reasonable profit would do.”

In view of the above, the Commission closed the investigation with a finding of no aid.

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[1] Speech at High Level Forum of Member States by Margrethe Vestager, Commissioner for Competition, 18 December 2014. The text of the speech can be accessed at:

http://ec.europa.eu/commission/2014-2019/vestager/announcements/speech-high-level-forum-member-states-margrethe-vestager-commissioner-competition-18-december-2014_en.

[2] The text of the decision can be accessed at:

http://ec.europa.eu/competition/state_aid/cases/238104/238104_1604031_278_4.pdf.

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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 presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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