The Montenegrin Agency for Protection of Competition (“Agency“) issued on 3 September 2020 a decision to open a formal investigation procedure into the compatibility with state aid rules of the state aid granted by virtue of the 2019 Law on Investment into Consolidation and Development of the Company for Air Transport of Passengers and Goods “Montenegro Airlines” A.D. Podgorica (“Lex MA“). Lex MA should not be confused with COVID-19 aid as it predates the current crises. It provides for a set of measures, in the total value of EUR 155,1 million, aimed at bailing out Montenegro Airlines. The Agency opened the investigation following a failed attempt by the Ministry of Transport and Maritime Affairs (“Ministry“) to prove in the course of ex ante investigation that Lex MA is compliant with the Market Economy Operator Principle (“MEOP“). The Agency ordered the Ministry to suspend the granting of any further aid until the final decision on its compatibility.
The Montenegro Airlines decision will be likely read with interest not only in Montenegro but also in Serbia whose national Air Serbia has notified Etihad Airways that it may not be able to repay its USD 56.5 million loan coming due in September 2020 and another USD 63 million loan coming due in June 2021, and whose Minister of Finance Siniša Mali announced that Serbia would assist Air Serbia in meeting its obligations.
History of state aid to Montenegro Airlines
Montenegro Airlines, the national airline in which the state of Montenegro owns 99.92% of all issued shares, has been receiving state aid for more than a decade. It had received individual state aids in 2009 and 2011, followed by a EUR 35.6 million-worth restructuring aid approved by the predecessor of the current Montenegrin state aid authority as compatible aid in 2012. In 2018 and 2019, the Government granted additional state aid to the airline outside the restructuring plan, in the amount of EUR 12,7 million. The investigation of the compatibility of that aid is still pending.
The Parliament of Montenegro adopted Lex MA on 27 December 2019 upon the Government’s proposal in an urgent procedure, the rationale being that the rescue of the national airline is of special importance for Montenegro considering the country’s strategic orientation towards tourism. The legislation entered into force on the day of its adoption.
The bill was submitted to the Agency for a prior assessment on 10 December 2019, only 17 days before the scheduled voting in the Parliament, whereas the statutory deadline is 60. The proposal was accompanied with an economic analysis prepared by Deloitte (“Deloitte Analysis“), proposing that the legislation passes MEO test. On 23 December 2019, the Agency issued an opinion that MEOP argument does not stand. It did not exclude the possibility that additional analysis to be furnished by the state could support MEOP. The Parliament, however, went on to adopt the disputed legislation.
Lex MA provides for the allocation of at least EUR 155,1 million of state funds to Montenegro Airlines until 2024 through conversion of debt owed to the state and state-owned companies into equity, as well as through direct gratuitous transfer from the treasury.
Debt-to-equity conversion is supposed to cover the following:
- EUR 25 million tax and social contributions debt;
- EUR 9 million debt to the state resulting from previous transfers from the treasury;
- EUR 32 million to be granted to Montenegro Airlines to settle its debt to the state-owned “Aerodromi Crne Gore” by the end of 2020;
- EUR 6.5 million to settle the debt of Montenegro Airlines to air traffic control company “SMATSA” d.o.o. Beograd incurred until 27 December 2019, plus any additional ancillary claims accrued until the General Assembly of Montenegro Airlines adopts a resolution on debt to equity conversion;
- EUR 6.8 million debt to Hipotekarna Bank A.D. Podgorica, plus interest and ancillary claims accrued until 27 December 2019;
- EUR 6 million debt to suppliers plus any interest and ancillary claims accrued until the General Assembly of Montenegro Airlines adopts a resolution on debt to equity conversion.
In addition to the foregoing, Lex MA provides for the following gratuitous transfers from the treasury to the airline:
- EUR 11 million for the operative costs in 2020;
- EUR 50 million for the purchase of an aircraft between 2021 and 2024; and
- EUR 8,8 million in 2020 for the restauration of the engines in the existing aircrafts.
Article 2 of the Montenegrin State Aid Control Act, similarly to Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), defines four criteria a measure must satisfy to be considered state aid: (i) impact on state resources, (ii) advantage for the beneficiary who is an undertaking, (iii) selectivity, and (iv) effect on competition and trade.
In its decision, the Agency did not waste too much time on individual assessment of each of the four criteria. It is obvious that the disputed legislation enacts measures that will have an impact on state resources. It also goes without saying that the measure is selective. The criterion related to effects on competition and trade are satisfied as Montenegro Airlines operates on a liberalised market and its activities have cross-border effects. The Agency thus focused on the claim put forward by the grantor that the measures are not state aid because they are in line with normal market conditions and thus do not confer an advantage on the airline.
When examining the MEOP claim put forward by the grantor, the Agency relied on the Commission’s Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union. The notice is part of the Montenegrin assessment toolkit by virtue of the Stabilisation and Association Agreement (SAA).
The substance of the MEO test is to determine whether, in similar circumstances, a private investor of a comparable size operating in normal conditions of a market economy would make the investment in question. If yes, the investment is not state aid. MEO test is run on an ex-ante basis, i.e. taking into account the circumstances that exist at the moment when the measure is approved (in the present case, at the moment when Lex MA was adopted). The primary criterion is the profitability of the investment suspected to be state aid (but not necessarily the current profitability of the beneficiary). Exceptionally, additional considerations, such as reputation, may be taken into account. Public policy considerations, such as development of tourism, are not relevant for the MEO test as an average private investor does not have them. The burden of proof that a measure passes MEO test is on the grantor.
When the profitability of the state’s investment is not directly testable against market data from the pari passu investment involving a private investor or from the tender for the same transaction, or indirectly through benchmarking against comparable private investment, the state must use assessment methods such as calculation of the internal rate of return (IRR) on the investment, or the net present value of the investment (NPV), this being the difference between the positive and negative cash flows over the lifetime of the investment, discounted for the cost of capital, or a combination thereof. Transaction is profitable if the NPV is positive, i.e. if the IRR is greater than the opportunity cost of the invested capital. However, when the state is a majority shareholder and the liquidation scenario is likely, as is the case with Montenegro Airlines, the transaction should be deemed profitable if the expected return on the investment is higher than the expected return in the counterfactual scenario of the liquidation. Furthermore, it should be assessed not only whether a private investor would convert the debt into equity under the circumstances existing at the time of the conversion but also whether it would have allowed itself to arrive to such degree of exposure in the first place or it would have instead resorted to liquidation at a time when the situation of the company could have been better than at present. Finally, when investment is of large value, it is recommended to run additional sensitivity analysis of different business scenarios (basic, optimistic, and pessimistic), contingency plans, and comparison of results of alternative evaluation methodologies.
The Agency’s assessment
The Deloitte Analysis excludes from the profitability analysis and thus from MEO test EUR 72,8 million that allegedly has “neutral effect on the State budget” because it would be allegedly unrecoverable in the counterfactual scenario of liquidation. This pertains to tax and social security debt to the state, debt to the state-owned company Aerodromi Crne, and a portion of the debt to Hipotekarna Bank secured by the deposit provided by Aerodromi Crne Gore.
Having excluded EUR 72,8 million from the investment, the Deloitte Analysis calculated that the NPV of the remaining investment in the amount of EUR 82.3 million is EUR 21.8 million. Therefore, it projected the total amount that the State could expect to recover from the investment to EUR 104.1 million. The IRR on such investment is, according to the Deloitte Analysis, 13.5%, way above the normal market rate of 8%. The Deloitte Analysis also established that, in case of the airline’s bankruptcy, the state and the state-owned creditors would be able to recover only EUR 2.8 million.
The Agency was, however, of the opinion that there is no legal basis to exclude any part of the investment from the profitability calculation. Consistently with the practice of the European Commission, it held that the conversion of debt owed to the state or state-owed undertakings into equity always has to pass MEO test. It consequently concluded that the total invested amount of EUR 155.1 million should have been evaluated against MEOP. Moreover, the Agency suggested that the measures under Lex MA and the EUR 12,7 million granted to the airline in 2019 outside the Lex MA framework might have to be regarded as a single intervention due to their proximity. If so, the total amount of investment to be subject to MEO test would be EUR 167.9 million. In either case, the investment clearly would not have passed MEO as it would produce, according to the presented analysis, an income of only EUR 104.1 million and would be far more unfavourable than the counterfactual liquidation scenario.
The Agency also took an issue with the overall methodology used to calculate NPV and IRR, emphasizing that the projections were done without a business plan and that chosen periods for projected income and cash flows were unclear to it.
The Agency further objected that additional sensitivity analysis assessing different business scenarios (basic, optimistic, and pessimistic), contingency plans, and comparison of results of alternative evaluation methodologies is missing.
What to expect in the course of the investigation
Even though the Agency’s decision is framed as a decision opening an investigation into the compatibility of what is presumed to be state aid, the state will have another go at trying to prove that the measures from Lex MA pass MEO test and thus do not amount to state aid. It is another issue whether it can be successful in that endeavor.
If the Agency confirms in the course of the investigation its current thinking that Lex MA constitutes state aid, it is difficult to see how such aid could be deemed compatible with the State aid rules as it would violate the one-time, last time principle integrated into the rescue and restructuring guidelines.
 State aid C 28/2009 (ex N 433/2009) – Romania support measures in favour of Oltchim SA Râmnicu Vâlcea
 See for example cases: SA.43549 Aid to CFR Marfa; SA. C 28/2009 (ex N 433/2009) – Romania support measures in favour of Oltchim SA Râmnicu Vâlcea; Case T-152/99 Hamsa  ECR II-3049