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.