EU & Competition

State Aid Rules Interfering with Public Financing of Infrastructure

It has been long considered that investments in public infrastructure are an integral part of exercising public power and hence escape from state aid control. Recent developments show that, to the contrary, financing of public infrastructure only in very limited cases need not be checked from a state-aid perspective. This brings numerous dilemmas as to how public infrastructure projects should be set up and also means that state aid compliance should be added to the checklist of all public infrastructure projects.

Overview

The general rule contained in article 107 TFEU lays down a clear and broad prohibition of state aid measures: “Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market”. This means that each measure that falls under the above definition falls under the scrutiny of the European Commission (EC) and may not be implemented before receiving a green light.

It has long been believed that financing of public infrastructure falls outside of the said prohibition as the member states are expected to remedy the lack of (private) funds and carry out infrastructure projects in the interest of society. The stance was also confirmed by the EC, which for example established in its 1994 Aviation Guidelines1 that “the construction or enlargement of infrastructure projects (such as airports, motorways, bridges, etc.) represents a general measure of economic policy, which cannot be controlled by the Commission under the Treaty rules on State aid”.

Twenty years later, we are looking at a completely different picture. If in 1994, the EC believed that infrastructure projects, regardless of the intended (economic) activity for which they have been built, fall outside of state aid control, in 2014 even infrastructure projects in the field of culture might be double-checked by the EC. This has been made very clear in the recent decision concerning construction of an archeological museum in Crete, where the EC concluded, “It cannot be excluded that the activity of the museum is of an economic nature, since it provides a service against remuneration”.2

Construction v operation of public infrastructure

The EC is of the opinion that both the construction and operation of infrastructure constitute economic activities in themselves and are thus subject to state aid rules if the infrastructure provides or will be used to provide goods or services on the market. The dividing line seems to be clear: only infrastructure that relates to an economic activity must be observed for state aid implications, and funding of it is subject to EC control. However, as can be seen from the above, the scope of activities regarded as non-economic is becoming increasingly narrow.

In the construction phase, state aid can be excluded only if financing is in conformity with the market economy investor principle (MEIP). This means that public (co-) financing that addresses a market failure and is provided on terms not in line with the MEIP principle constitutes an advantage and thus aid, and should thus be notified to the EC.

There are no exact guidelines as to how infrastructure built with public funds should be operated, but it can be inferred from the EC’s decisional practice that both the operator selection and the operating agreement will be examined by the EC to see whether they correspond to market terms.

In the recent Leipzig Halle case, the European Court of Justice (ECJ) confirmed the EC’s stance and provided indications relevant for future cases3. Most significantly it confirmed that “future use of infrastructure” is the applicable parameter when assessing the relevant scope of state aid rules, meaning the construction itself cannot be isolated from other/future infrastructure purposes. Further on, the judgment clarified two additional important questions. First, it recognised all undertakings that can own, operate or use the financed infrastructure as potential beneficiaries. Additionally, it denounced the importance of the legal status of the beneficiary in question, confirming the general concept of an undertaking in competition law.4

The way forward?

The EC is aware that the application of state aid rules is becoming increasingly complicated and recently decided to provide some clarification on key concepts relating to the notion of state aid, including financing of infrastructure. The Draft Commission Notice on the notion of state aid intends to provide practical guidance to identify state aid measures, although the final version of the Notice has not yet been adopted.

In the Notice, the EC takes the stance that “public funding of infrastructure that is not meant to be commercially exploited is in principle excluded from the application of the State aid rules”, which inter alia covers (i) public roads, bridges or canals made available for public use without consideration and (ii) infrastructure intended for activities that the state normally performs in the exercise of its public powers.5 The EC further clarifies that, when “an infrastructure is used for both economic and non-economic activities, public funding will fall under the State aid rules only insofar as it covers the costs linked to the economic activities.”

We will see how infrastructure financing is addressed in the final text. Looking at the Archeological Museum Messara Crete decision, it seems that the line between economic and non-economic activities remains far from obvious.
For the sake of legal certainty, state aid compliance should be added to the checklist of all public infrastructure projects in the future. Public authorities and undertakings might also want to re-evaluate all projects implemented after the Aéroports de Paris judgment of 12 December 2000 as the EC believes that only financing “granted prior to that judgment did not constitute State aid and that, accordingly, such measures did not need to be notified to the Commission.”6

If in 1994, the European Commission believed that infrastructure projects, regardless of the intended (economic) activity for which they have been built, fall outside of state aid control, in 2014 even infrastructure projects in the field of culture might be double-checked by the EC.

1
EC, Guidelines on the application of Articles 92 and 93 of the EC Treaty and Article 61 of the EEA Agreement to State aids in the aviation sector, par. 12.
2
EC Decision in Construction of Archaeological Museum Messara Crete case (SA.36581) dated 15.10.2014, par. 42.
3
Mitteldeutsche Flughafen AG and Flughafen Leipzig-Halle GmbH v European Commission, C-228/11 P, ECJ judgment dated 14.10.2014.
4
Defined as any entity engaged in an economic activity consisting in offering goods or services on a given market.
5
Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, par. 37, available on the EC’s website.
6
Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, par. 37, available on the EC’s website.