When Infrastructure is not Public: Dedicated, Project-Specific and Bespoke

Public funding of open and freely used infrastructure is not State aid. Public funding of project-specific, dedicated or bespoke infrastructure is State aid. Public funding of infrastructure connecting public and private parts may be State aid if the relevant national rules require developers to bear the cost.

 

Introduction

The Commission has recently examined an infrastructure project in the vicinity of Brussels another Belgian city, Leuven (Louvain), lodged a complaint. In its decision SA.36019[1], the Commission concluded that the public funding of infrastructure in the Vilvoorde-Machelen area just on the outskirts of Brussels did not constitute State aid. The decision merits a review because the Commission’s reasoning provides useful guidance as to when infrastructure is considered to be “dedicated” to the exclusive use of an undertaking and when it is open to the public. The project concerned the construction of thoroughfares and connecting roads. The public money came from the Flemish government. The alleged beneficiary was the Uplace Group, a real estate group of companies which built shopping centres and industrial parks.

The issue at hand was whether the public funding benefitted Uplace by subsidising the cost of construction of the roads connecting the project to the public road network.

Funding of public goods

The Commission, as is now its standard practice, began its analysis by referring to the Leipzig-Halle judgment and reminding us that the construction of infrastructure that is commercially exploited constitutes an economic activity. Then it explained that “(36) the construction of infrastructure used for activities that the State carries out in the exercise of its public powers and which is not commercially exploited is in principle excluded from the application of State aid rules. The activity of providing adequate and safe road connections which are not commercially exploited but used by the society as a whole in a free and non-discriminatory manner falls within the public remit of the state, being thus exempted from State aid control.”

At this point a footnote refers to decision SA.36346 on the German GRW land development scheme for industrial and commercial use, where “the activity of ensuring that land is connected to utilities (water, gas, sewage and electricity) and transport networks (rail and roads) by municipalities is not an economic activity but part of the public tasks of the State, namely the provision and supervision of land in line with local urban and spatial development plans.”

 

 

In other words, the funding by the state of public goods, i.e. goods that the state has an obligation to provide to its citizens, falls outside the scope of Article 107(1) TFEU.

Assessing the project within the relevant legal system that defines the obligations of the state

Then the Commission examined the particular project in Belgium. “(37) The road infrastructure works in the present case relate to the public road network and links between the project site and the public road network. That network and those links are accessible to all for free; hence they are not commercially exploited.”

Despite this finding, it nonetheless went on to examine other aspects of the project. “(38) In circumstances such as those observed in the present case, a selective advantage in respect of infrastructure works realized and financed through State resources that are not commercially exploited could be envisaged in two situations:

  1. If the rules normally applicable to the project impose on project developers to bear part of the costs of the general road works, then there can be a selective advantage if the developer pays less than legally required.
  2. If the infrastructure is not of a general character but serves only one or a limited number of undertakings known in advance and if it is tailored to their needs in such a way that the undertaking(s) should normally have borne the costs of the infrastructure themselves.”

While the first aspect has often been considered in other cases, the second is more rarely seen in Commission decisions. With respect to the first aspect, the decisive element is what the relevant legal rules say about who bears the costs of a project development and the connection of the project to the road network. In some Member States the connection of large commercial projects is the responsibility of the developer and, therefore, the cost should be borne by the developer itself. Public funding of the connection would constitute State aid. In other Member States, the normal practice is for public authorities to build the connecting parts too.

The second aspect is different from the concept of dedicated infrastructure which is placed at the exclusive disposal of one or just a few undertakings. The second aspect concerns the development of infrastructure which, although it is nominally open to anyone, in fact it is designed to meet the needs of one or just a few undertakings. This is the concept of “bespoke” development that was first assessed by the Commission about 15 years ago in the English Partnership schemes that were implemented in the UK.

Therefore the Commission had to examine whether “(39) […] the infrastructure is bespoke, i.e. designed to suit only the needs of a certain predefined end-user (beneficiary), known at the start of the works. If the infrastructure serves various uses or users which are not established in an exhaustive manner in advance, then its development is general.” [Emphasis added] [The use of the word “exhaustive” here is certain to create uncertainty as to when the users are exhaustively defined.]

The Commission began its analysis by distinguishing what was paid by the state and what was paid by Uplace itself. It found that the cost of “project-specific” infrastructure was borne fully by the Uplace Group. It also found that Uplace paid for the construction and upgrade of infrastructure from the boundary of the project to junctions with public roads built by the regional government. This was in line with the rules on project development in Flanders where it is standard practice that developers bear the costs of connecting their projects to the public network. Consequently, no State aid was detected in these parts of the project.

 

With respect works outside the project area, the Commission found that “(42) the funding of the road infrastructure in the vicinity of Uplace […] does involve State resources. The Flemish Region is funding the construction of the regional highways and the City of Machelen is paying for the local roads.” “(43) However, these works are carried out on the public domain outside the borders of the site of the private project, accessible for free, and serving objectives of general interest. They are not designed to – and in effect do not – benefit Uplace exclusively. […] Furthermore, the roads concerned are under the responsibility and administration of the Flemish Region; they are regulated and separate from the Uplace project, of general nature, freely accessible and not economically exploited.”

“(45) The Commission also observes that there are no general rules in Belgium according to which project developers should bear part of the costs on general infrastructure.” “(46) Furthermore, it is noted that the infrastructure […] would be built anyway in the absence of the Uplace project. No selective economic advantage is therefore granted to Uplace through the financing by the authorities of the infrastructure works […] since they are not benefiting only to one specific undertaking known in advance.”

On the basis of the above considerations, the Commission concluded that the Uplace Group would cover the full cost of the construction and financing of the infrastructure works identified as project-specific and would not receive any advantage that could be classified as Article 107(1) TFEU. As regards the other works planned in the vicinity of the Uplace project site they appear to be of a general nature and therefore are not liable to confer any specific advantage to the Uplace Group.

Conclusions

The Commission in this decision is providing guidance on an important but so far relatively unexplored component of the State aid treatment of public funding of infrastructure. Infrastructure which is open and free to use is genuine public infrastructure. Infrastructure which is “dedicated” for the exclusive use of an undertaking is private infrastructure. The connection between public and private infrastructure falls under State aid rules when the relevant rules on project development require developers to bear the costs. In addition, state aid rules apply to public funding of bespoke infrastructure which is infrastructure that nominally can be used by the public but in reality is built to meet the needs of specified undertakings.

It should also be noted that the Commission in this decision cites a number of past cases that dealt with related issues. These are the decisions of:

20.07.1999, OJ 2000 L 137/1, – Sangalli; OJ 2001 C37/44 – Valmont Nederland; OJ C 1999, 253/4, – Lenzing Lycocell; OJ 1999 C 108/2 – Port of Ancona; OJ 1994 C 369/6 – Fritz Egger; C 20/94 (NN 27/94) – Kimberly Clark Industries, OJ C/283, 27.10.1995; OJ L/12, 15.01.2002 – Scott Paper Kimberly Clark; OJ L/ 91, 8.4.2003 – Terra Mítica; SA 36147 – Propapier. See also the judgment in case C-225/91 Matra v Commission where the Court confirmed that the public funding of connecting roads used by all vehicles was not State aid.

—————————————————————

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

http://ec.europa.eu/competition/state_aid/cases/255752/255752_1719143_191_4.pdf.

 

Tags

Über

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.

Hinterlasse eine Antwort

Ähnliche Beiträge

26. Mai 2020
State Aid Uncovered von Phedon Nicolaides
State Aid Blogpost 21 Picture

State Aid for i) Water Development ii) Travel

Aid to individuals in the context of social policy is compatible with the internal market as long as it is granted without discrimination on the origin of products or services. Temporary Framework: Number of approved covid-19 measures, as of 22 May 2020: 129* Legal basis: Article 107(2)(b): 9; Article 107(3)(b): 111; Article 107(3)(c): 12 * Excludes amendments to previously notified […]
03. Mrz 2020
State Aid Uncovered von Phedon Nicolaides
State Aide_Infrastructure

Public Funding of Infrastructure without State Aid

The existence of State aid must be checked at the level of both the direct and indirect beneficiaries who are the owners and users of infrastructure, respectively. If payments to private land owners are to be free of State aid, they must be calculated on the basis of an objective formula that takes into account the size and value of […]
30. Okt 2019
State Aid Uncovered von Phedon Nicolaides

The Operator of an Economic Infrastructure is an Undertaking

The assignment of public service tasks to an infrastructure operator is not sufficient to prevent the application of State aid rules. Introduction The characterisation of an entity as an undertaking is activity based, not status based. If it carries out activities for which there is a market, it becomes an undertaking, regardless of providing services which are in the general […]
08. Okt 2019
State Aid Uncovered von Phedon Nicolaides

Public Service Obligations, Duration of Entrustment and Reasonable Profit

The duration of entrustment should not exceed the economic life of the investment and the rate of return should reflect the commercial risk of that investment. Introduction Is a 55-year entrustment through a direct award compatible with EU rules? And is a profit rate that exceeds the risk-free rate of return reasonable? These are some of the questions that the […]
25. Jun 2019
State Aid Uncovered von Phedon Nicolaides

How to Value Land in Complex Land Swaps

A private investor assesses all components of a complex transaction and takes into account not just profit, but also the legal implications of the prospective transaction and possible future liability.   Introduction   When a public authority sells land, it should either auction it through a competitive and unconditional process or have it valued beforehand by an independent expert.Sometimes, public […]
21. Mai 2019
State Aid Uncovered von Phedon Nicolaides

There Is No Threshold below which Economic Activities Can Be Considered to be Non-economic

Non-economic activities have to be accounted separately from economic activities. The exercise of public tasks assigned by the state cannot protect an undertaking from State aid rules. State aid distorts competition even when it aims to remedy distortions. Introduction Ports, like other transport infrastructures, may operate under public obligations some of which may be of economic and some of non-economic […]
16. Mai 2019
State Aid Uncovered von Phedon Nicolaides

Competitors’ Rights

A competitor must show that it is substantially affected by State aid approved by the Commission in order to challenge the Commission’s decision. Merely being affected by the aid is not enough. To show that aid has a substantial impact, it is first necessary to define the relevant market. This is different from the “distortion of competition” in the meaning […]
07. Mai 2019
State Aid Uncovered von Phedon Nicolaides

Land Development: The Case of Jaguar Land Rover Slovakia

Public funding of infrastructure which is not constructed for the specific needs of a company is not State aid.   Introduction An article carried by the Financial Times on 1 May 2019 revealed that Jaguar Land Rover [JLR] decided to make again the iconic Land Rover Defender. The production of this legendary off-roader ended about 10 years ago because it […]
30. Apr 2019
State Aid Uncovered von Phedon Nicolaides

The Commission Must Explain its Decision

A Commission decision that affects the legal position of an undertaking is actionable before EU courts. The opening of the formal investigation procedure must lead the Member State concerned to suspend the aid measure and may result in a recovery ruling by a national court. The Commission must be consistent in its reasoning. If it cannot use certain information at […]
03. Apr 2019
State Aid Uncovered von Phedon Nicolaides

The Incentive Effect of Public Funding of Infrastructure in Tranches

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.   Introduction State aid granted to a project that has already started lacks incentive effects and, therefore, cannot be found […]