A state aid conference took place in Ljubljana on 3 November 2015, gathering competition law practitioners and interested professionals from the region to listen to two prominent state aid experts: Professor Piet Jan Slot from the University of Leiden and White & Case partner Kai Struckmann from Brussels. They provided a comprehensive overview of complex state aid issues from both theoretical and practical points of view.
State aid is not a topic one likes to read about with the morning coffee. Even the public employees or legal professionals tend to avoid dealing with the issues that arise in the application of state aid rules. Until a decade ago, our governments in the region did not have to think about state aid control. The remains of socialist political system were still well alive in the local thinking, and granting of state aid to undertakings was the prevailing economic model. It was not until the region faced the EU accession process that control of state aid was introduced.
Truth be told, until late 1990′, the state aid policy was also neglected in the EU. Professor Slot referred to state aid as a poor little sister of competition which grew into a monster. The value of state aid control for the establishment of the internal market was recognised in the founding treaties, but it was only about 40 years later, when the EU was facing the most demanding enlargement to date, that the need to modernise state aid policy and adopt the rules for its implementation emerged. And then, the crisis came. There was a real danger that the Commission’s “less and better targeted aid” objective would be quickly forgotten with all the Member States pouring aid into their banks and failing companies. However, the Commission adopted the crises package and successfully navigated it through the chaos of the crisis without significant distortions to the internal market.
What constitutes state aid for the purpose of state aid control? The rule contained in Article 107(1) of the TFEU seems straightforward: if there is an aid awarded to an undertaking from state resources on a selective basis, which has an effect on competition and trade between member states, it has to be notified to and approved by the European Commission on an ex-ante basis. If this sounds too simple to be true, that’s because it is. Each of these highlighted concepts is a cause of lively discussion in the literature and in practice.
A preliminary condition for there to be state aid is that the beneficiary is an undertaking. An entity performing economic activity can be an undertaking irrespective of its legal status or the sources of its financing. In the Leipzig-Hallecase, the General Court held, contrary to the previously established practice that the transport infrastructure fell outside the scope of state aid on the grounds of public interest, that the activity of constructing a new runway by the Leipzig Halle Airport could not be dissociated from the operation of the airport infrastructure, and the operation of infrastructure constitutes an economic activity which could not be linked, by its nature or purpose, to the exercise of state authority. Therefore, because the infrastructure was meant to be commercially exploited, the beneficiary which operated the airport was considered to be performing an economic activity and the state investment was held to constitute state aid.
An interesting case which baffled the audience concerns the battle of cabs. It involves London black cabs and their chartered use of fast lanes, a privilege that is not available to yellow cabs, the latter being exposed to fines if they stop on a fast lane to pick up passengers. The question was whether the choice not to subject black cabs to fines constituted an advantage at the expense of the public budget. In its preliminary ruling on the question referred to it by the Court of Appeal of England and Wales, the ECJ found that black cabs and yellow cabs are not in a comparable legal and factual situation: black cabs are not allowed to refuse service to passengers and are required to undergo longer and stricter trainings before obtaining licences. Consequently, their ability to use fast lane without exposure to fines was held not to be an advantage.
The concept of aid surpasses the obvious forms of subsidies, favourable loans or debt-write-offs, and encompasses any benefit for an undertaking which comes from public resources as a public expense or a forgone public revenue. For instance, lower energy prices for consumers (Van der Kooij C-67, 68 and 70/85) or higher energy purchase prices for investors (T-80/06 Budapesti v. Commission) may be caught under the state aid rules if there are no underlying objective justifications for disparaging treatment. Virtually any action by a public body which would not be considered rational if performed by a private investor (except for the services of general economic interest) can be considered state aid (Market Economy Operator Principle – “MEOP”). In Van der Kooij case, lower energy prices for flower producers kept them from switching to oil, which was still a profit-maximising decision of the energy company as long as the price was not lower than necessary to keep the flower producers from switching. In privatisation matters, MEOP is a guiding principle for avoiding state aid in sale of public companies to private investors. As a rule, there is no need to notify sale as long as there was an open tender procedure, bidders were given enough time and the highest bid won. If the result of the MEOP test is positive, even negative prices can be justified, if that is the only way to incentivise buyers and minimise losses. MEOP is assumed to be satisfied when the state invests jointly with a private investor on equal terms and at the same time (principle of concomitance). On the other hand, when a sale is based on negotiations with selected bidders, includes conditions which would not be found in comparable transactions between private parties, or is preceded by a debt write-off or a debt to equity conversion, notification is likely to be necessary.
The concept of state resources can also be tricky to identify. If the resources are not under public control or are transferred directly from the consumers to the beneficiaries, there is no state aid. Prof. Slot gave an example. In the 1970s, the Dutch government enacted minimum price legislation on certain product. However, even though there was an advantage for the producers/retailers of the said product, there was no state aid because it had not been granted through state resources but directly from consumers.
Transfer of state resources was not found to exist where only a marginal effect on the state budget was present (see: Sloman Neptun C-72/91, C-73/91).
Selectivity exists in any measure which favours one undertaking, sector or industry over another. Even those schemes which are on the paper available to all may be selective, if designed to benefit only certain undertaking(s) in practice. The latest obsession of the European Commission, tax state aid, is a good example. Tax schemes are usually considered available to everyone on equal terms, but individual tax rulings are per se selective, especially when tax authorities employ artificial methodologies to reduce companies’ tax burden (as we can see from the Commission’s Starbucks and Fiat decisions, which are only the beginning of what promises to be a long and entertaining battle).
The effect on competition and trade criterion is usually easily satisfied, as only potential harm has to be shown. The beneficiary does not even have to be active in cross-border trade, as long as aid concerns goods or services which can be traded among Member States. Similarly, aid for an undertaking operating on a non-liberalised market may have an effect on competition and trade if that undertaking is also active on another, liberalised market.
Thankfully, not all state aid has to be notified and approved before granted. Exemptions are provided both in the TFEU (Art. 107 (2) and (3)) and in the secondary legislation. State aid grantors and beneficiaries should always attempt to design the aid so that it fits within the scope of the General Block Exemption Regulation, De minimis Regulation or one of the Commission’s rules for horizontal or sector-specific aid. However, one should not insist on squeezing the aid within an exemption at all costs. Common sense is always a good ally. If the aid serves to correct a market failure or to encourage growth and innovation without overly distorting market competition, it is usually on the safe side.
In contrast, there is aid with bad reputation. Rescue and restructuring aid is viewed as pouring money down the drain into unviable undertakings, preventing new and efficient competitors from taking their spots on the market. Rules for such aid are stringent. They involve a viable restructuring plan and compensatory measures, and rest on the principle that there can be only one “second” chance. This “one time – last time rule” is still to be taken seriously in Serbia or Montenegro (or Bosnia). Mr. Struckmann stressed at the conference that restructuring cannot be only about financial injections into a company – if something is not working, it means it is burdened with structural or operational shortcomings that cannot be solved with money alone.
Serbia and Montenegro have come a long way in harmonising state aid rules and procedures with the EU acquis, but the track record is still largely missing. Even though aid granted before joining the EU will be considered as existing aid, the Commission will still have the authority to investigate unlawful aid (i.e. aid that had not been notified), and order recovery of incompatible aid.
The main message from the Ljubljana conference is that candidate countries must learn how to effectively control the state aid monster before joining the EU. So, is state aid an opportunity or a threat? The answer depends on the wisdom and skill of the grantor: it can be either a burden on the public finances, or an effective generator of growth and development.
