REPORT ON GENERAL ASSESSMENT METHODOLOGY IN STATE AID CASES

Transcription

1 HARMONISATION OF PUBLIC PROCUREMENT SYSTEM IN UKRAINE WITH EU STANDARDS REPORT ON GENERAL ASSESSMENT METHODOLOGY IN STATE AID CASES Dr EUGENE STUART and Mr SIGITAS CEMNOLONSKIS APRIL 2016 A Project funded by the European Union and implemented by a consortium led by Crown Agents Ltd 1

2 TABLE OF CONTENTS Page Executive Summary 4 1. Introduction 6 2. The EU approach to the identification, categorisation and assessment of State aid measures 8 3. Identification of a State support measure as State aid Categorising a State aid for the purposes of further compatibility assessment Applying general principles and exemptions to assessing compatibility Applying a dedicated balancing test (in appropriate cases) Applying the specific rules of a particular soft law instrument or the GBER 8. Key considerations related to assessment under the Law of Ukraine on State Aid to Undertakings Conclusions and Recommendations 76 2

3 ABBREVIATIONS AMCU Anti-Monopoly Committee of Ukraine BSE Bovine spongiform encephalopathy CCS Carbon Capture and Storage CMLR Common Market Law Reports CO2 Carbon Dioxide EBRD European Bank for Reconstruction and Development ECR European Court Reports ECT Energy Community Treaty EEA European Economic area EIB European Investment Bank EU European Union GBER General Block Exemption Regulation GDP Gross Domestic Product IMF International Monetary Fund IPCEI Important Projects of Common European Interest OECD Organisation for Economic Cooperation and Development OJ Official Journal (of the European Union) R&D&I Research, Development and Innovation SCMA Subsidies and Countervailing Measures Agreement (WTO, 1994) SGEI Service of General Economic Interest SME Small and Medium-sized Enterprise TFEU Treaty on the Functioning of the European Union UK United Kingdom USA United States of America WTO World Trade Organisation 3

4 EXECUTIVE SUMMARY The EU funded Project Support for the Development of the Public Procurement and State Aid Systems of Ukraine to international standards commenced work in Kiev on 11 November The general objective of the Project is to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian State aid system. This Report responds to a request from the Anti-Monopoly Committee of Ukraine (the State aid regulator under the Law on State aid to Undertakings which comes fully into force in August 2017) for advice and guidance on the general methodology for the assessment of State aid measures (whether existing, new or modified). As the EU-Ukraine Association Agreement requires the Ukrainian State aid system to be fully aligned with the EU State aid system, the Report explores and explains the EU methodology for establishing first if a State measure is or is not State aid (Chapter 3). The categorisation of State aid measures is then explored (Chapter 4). For the assessment of compatibility a range of methodologies may need to be applied depending on the category and nature of the State aid measure. These are covered in Chapters 5 to 7. In particular, the application of general principles and de jure or discretionary exemptions is the baseline approach which may also be accompanied in appropriate cases by a dedicated economic balancing test, the application of specific rules related to a category of State aid or a particular type of State aid instrument and/or reference to the types of compatible measures set out in the European Commission s 2014 General Block Exemption Regulation 1. Various considerations concerning the application of these methodologies in Ukraine are examined in Chapter 8. These include aspects of assessment in terms of their consistency with EU norms, special considerations concerning the transposition of EU GBER rules and/or block exemptions as an option under the Law, the assessment of sectoral State aid and correct assessment where the Ukrainian Law is not fully compatible with EU rules. The Report concludes that the Ukrainian system must apply an assessment approach to State aid similar to that of the EU in line with the provisions of the EU-Ukraine Association Agreement. This involves establishing first if a State measure is or is not a State aid. If it is a State aid it needs to be categorised for the purposes of applying general or particular assessment and compatibility rules. For the assessment of compatibility a range of methodologies may need to be applied depending on the category and nature of the State aid measure. In particular, the application of general principles and de jure or discretionary exemptions is the baseline approach which may also be accompanied in appropriate cases by a dedicated economic balancing test, the application of specific rules related to a 1 European Commission: Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187 of 26 June

5 category of State aid or a particular type of State aid instrument and/or reference to the types of compatible measures set out in the European Commission s 2014 General Block Exemption Regulation. Moreover the following key recommendations emerge from the discussion of assessment methodologies inthe Report: Unresolved questions regarding the appropriate or optimal transposition of EU GBER White list rules in Ukraine need to be addressed; The content of Cabinet of Ministers regulations on State aid categories (substantive rules under Article 6 of the Law), should be clarified as soon as possible; Choices need to be made as regards whether to apply general principles case by case in regard to some or all forms of sectoral State aid; Certain aspects of the Law where the baseline rules are not fully compatible with EU rules and could therefore distort correct assessment (notably in regard to dual-use goods, SGEIs and the exclusion of infrastructure projects) should be addressed. These issues should be pursued with appropriate reference to the Ukrainian context, before the Law comes fully into force in August 2017 and with a focus on achieving a necessary degree of workable simplification while ensuring that core elements of the EU assessment criteria are fully transposed for application by the Ukrainian State aid system. 5

6 1. INTRODUCTION The EU funded Project Support for the Development of the Public Procurement and State Aid Systems of Ukraine to international standards commenced work in Kiev on 11 November The general objective of the Project is to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian State aid system. In regard to State aid support activities, the Project is focusing on expert advice on policies, legislation and institutional structures and operations together with a range of training activities and awareness raising events. As the key organisation in Ukraine responsible for the development of a State aid regulatory system, the Anti-Monopoly Committee of Ukraine (AMCU) is a key beneficiary of the Project. As well as undertaking major activities under the Project s workplans, a certain amount of ad-hoc advisory activity is also envisaged; in particular to assist the Project s main beneficiaries when new or pressing matters arise. The present Report responds to a request from the AMCU for methodological support concerning the assessment of State aid measures in line with EU practice. A parallel Report on the assessment of State aid measures in the Energy sector has also been prepared in the context of a pilot project being supported by the Project connected with Ukraine s compliance with State aid obligations under the Energy Community Treaty. While the adoption of the State Aid Law represents an important milestone for the development of Ukraine s State aid system and it is generally in accord with EU rules and the requirements of the EU-Ukraine Association Agreement (which entered into force provisionally on 1 January 2016), extensive secondary legislation is also needed before the Law comes fully into effect on 2 August 2017 together with a significant institutional effort to prepare the system and ensure that it is fully operational by August In that regard, the Project has provided and continues to provide a range of support to the AMCU as State aid Regulator. This includes training programmes, guidance materials, drafting support on secondary legislation (both substantive and procedural). This particular Report addresses a key issue in State aid control i.e. the general methodology to identify State aid within various actual or potential State support measures (not all of these are State aid) and how to assess the compatibility of identified State aid measures with competition as required by the Law on State aid to Undertakings based on compatibility assessment under EU rules, as required by the EU-Ukraine Association Agreement. Under the Law, State aid which is incompatible with competition must be prohibited and, where that State aid is otherwise operational but illegal, it must be re-paid to the State. In particular, this Report presents the detailed approach to the identification of a Government support measure as a State aid based on six tests. Secondly, it demonstrates 6

7 how a State aid measure is then categorised for the purposes of further assessment and indicates the principles, economic analysis and specific rules to be applied to various categories of State aid measures to produce a final compatibility assessment. In addition, the Report recognises the importance of substantive rules on different categories of State aid which are envisaged, but not yet made, under Article 6(2) of the Law of Ukraine on State Aid to Undertakings. Those substantive rules must effectively provide the detailed guidance (comparable to that provided in the detailed EU rules referred to in the Report) for the assessment of the different categories of State aid in Ukraine and for specific sectors. Some of the specific challenges facing correct State aid assessment are dealt with in the Report with a view to providing an action agenda on assessment before the Law on State aid to Undertakings comes fully into force in August

8 2. THE EU APPROACH TO THE IDENTIFICATION, CATEGORISATION AND ASSESSMENT OF STATE AID MEASURES EU Law on State Aid is governed primarily by Articles 107 to 109 of the Treaty on the Functioning of the European Union (TFEU). In effect, the TFEU provisions: set out a prohibition on State aid (based on its undue or unacceptable effects on competition and trade); establish certain cases where State aid is always compatible (de jure compatibility Article 107(2) of the TFEU); create a notification system for new or altered State aids to the European Commission (Article 108(3), providing general discretionary grounds (Article 107(3) for allowing the Commission to exempt notified State aid from the general prohibition on the basis of a case by case consideration of notified measures. Provide for an on-going duty of the European Commission to keep State aid measures under constant review (Article 108) to ensure their continued compatibility with the EU internal market (especially where market circumstances have changed). The bases for discretionary exemption are listed in Article 107 (3) of the Treaty. In order to assist Member States and potential State aid recipients, the Commission has published numerous Guidelines and Notices on the conditions under which certain types of State aid may be considered compatible with Article 107(1) of the TFEU. If no Guidelines are applicable the Commission must deal with the State aid measure on a case by case basis (and normally with reference to general principles) although the Commission is still bound to examine the possible application of Article 107(3)(c) which provides the widest general scope for exemption to the case. Article 106 (2) of the TFEU may also be relevant. This provides that: Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in the Treaties, in particular to the rules on competition, only in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Union. Article 106 (2) applies only to companies which have been entrusted with providing genuine services of general economic interest (SGEIs). In its judgment in the Altmark case, the European Courts set the parameters for this by requiring that: 1. the beneficiary has effectively been entrusted with clearly defined public service obligations; 8

9 2. the parameters for calculating the compensation must be established in advance in an objective and transparent manner; 3. the compensation does not exceed what is necessary to cover all or part of the costs incurred in discharging the public service obligations, taking into account the revenue such obligations may generate and the fact that the beneficiary is entitled to make a reasonable profit for discharging these obligations; 4. either the undertaking selected to discharge the public service obligation is chosen by means of a public procurement procedure or, failing this, the level of compensation is determined on the basis of an analysis of what it would cost a typical, well-run undertaking to discharge these obligations, again taking into account the revenue such obligations may generate and the right for the beneficiary to make a reasonable profit As a result, a compensation for the provision of SGEIs is not State aid when these criteria are all strictly followed. Where any one or more of them do not apply, SGEI compensation is likely to constitute State aid and the State aid rules (especially on compatibility assessment) have to be applied to such measures. The structure of State aid assessment Article 107(1) of the TFEU provides the general basis for the State aid system in the EU. This provides that: Save as otherwise provided in the Treaties, 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 is the essential prohibition on State aid and it creates the basis on which prohibited measures are generally identified by applying the six tests contained in this provision viz. It is not covered by the opening phrase of Article 107(1) Save as otherwise provided in this Treaty. The measure is provided by or through State resources; It creates a selective advantage; The recipient of the advantage is (generally) an undertaking ; It actually or potentially distorts competition and It affects trade Any measure which does not meet these six conditions is not a State aid. There is no definition of aid 2 in the Treaty rules, nor is the more common term State aid actually 2 In regard to the definition of aid, the European Court of Justice has clarified that an aid is a broaderidea than a subsidy and that aid includes both State expenditure (direct and sometimes indirect) and the foregoing of public revenue e.g. in the form of tax write-offs or the agreed non- 9

10 used. The case law of the European Commission and the European Court of Justice refers to the notion of aid in a very dynamic way. In particular, the case law recognises that there is no definition and that aid is identified by its effects on competition and trade and by the extent to which it confers a selective benefit on certain firms or industries. The continuing absence of a definition is also justified by the European Commission for the reason that any definition could be or would be circumvented readily by the very ingenuity of Member State industrial and economic policies. Article 107(2) of the TFEU deals with types of State aid which are de jure not prohibited (even though they are State aids). This applies especially to: Government intervention measures to address the effects of natural disasters; Specific consumer subsidies (e.g. a subsidy on the price of bread to support poverty alleviation); Measures arising from exceptional occurrences (e.g. major nuclear or industrial accidents and fires which result in widespread loss and State measures responding to the BSE ( Mad cow ) cattle epidemic and, more recently, the international financial crisis). Under Article 108(3), there is a clear obligation on national governments to notify new or altered aid proposals to the European Commission and not to implement them until a positive decision has been received as regards their compatibility with the internal market. In appropriate cases, the European Commission may also force a Member State to abandon its plans to grant State aid or change the content of particular aid measures. In the context of the basic prohibition, Commission decisions typically focus on whether or not a notified proposed government measure is, in fact, aid within the meaning of Article 107(1) and, if it is aid, whether or not there are adequate grounds to exempt the measure from the basic prohibition on aid. Moreover, Member States notifying particular measures are also now required to justify the need for them (based on market failure analysis) and to provide necessary information as to the proportionality of the measures (that they do not over-compensate beneficiaries) and that they are limited in time (especially that they are not of unlimited duration). Under Article 107(3) of the TFEU, various grounds exist which allow the European Commission to exempt State aid. In brief the main grounds for discretionary exemption relate to aid measures or schemes of government aid to promote economic development in seriously deprived regions of the EU (the so-called A Regions of the EU with per capita GDP at less than 75% of the EU average); facilitate economic development in areas of Member States experiencing major economic difficulties by comparison with national averages (the so-called C Regions of the EU) 3 ; payment of social security contributions. The WTO, on the other hand, regulates subsidies and the SCMA 1994 has an extensive definition of a subsidy and especially when a subsidy is selective and subject to particular regulation. For most practical purposes, an EU aid and a WTO subsidy emerge as the same thing. The OECD, which has carried out an amount of comparative public policy analysis in this field, has a tendency to use the useful and generic term government supports to industry. Finally, in its international agreements, the EU uses a range of different expressions including State aid, public aid and aid. 3 Under the EU regional policy in coordination with the State aids rules, the EU refers to assisted 10

11 promote major projects of common European interest; promote culture and heritage. These grounds are specifically relevant to the assessment of a notified measure and are also generally relevant to the rules set out in the General Block Exemption Regulation and other State aid regulatory instruments. The GBER, in effect, sets parameters for presumed compatibility with the internal market; having regard to the different bases for discretionary exemptions and the Commission s current policy in applying those exemptions. Accordingly, State aid assessment involves the following stages (where relevant): Identification of a State support measure as State aid (applying the six tests related to Article 107(2) of the TFEU); Categorising a State aid for the purposes of further compatibility assessment; Applying: 1) general principles and exemptions to assessing compatibility and/or 2) a dedicated balancing test (in appropriate cases) and/or 3) the specific rules of a particular soft law instrument (Notices, Guidelines, Commission Communications) which require the Commission to assess compatibility in a particular way and/or 4) the rules of the GBER regions as those where investment and job creation aids are seen as justified based on different degrees of national or regional handicaps and general market failures. The linkage to the grounds for State aid exemption emerges from Article 107(3)(a) referring to serious development handicaps ( A regions) and Article 107(3)(c) which provides the basis for exemption of State aid to address development issues in areas within a Member State ( C regions). 11

12 3. IDENTIFICATION OF A STATE SUPPORT MEASURE AS STATE AID Measures excluded by the Treaty (Test 1) Article 107(1) is made subject to other prevailing Treaty provisions by the phrase save as otherwise provided by this Treaty. In effect, this allows for different rules to apply in various areas of the common agricultural policy, the common fisheries policy and the common transport policy. It also explains why different Directorates General in the European Commission are responsible for State aid issues in some of these sectors 4 while DG Competition is responsible for State aid regulation in regard to all other sectors. In addition, it excludes State aid for military or security purposes but not State aid supporting the production of dual use goods. AGRICULTURE The agriculture and fisheries exclusions are not absolute and separate and increasingly stringent State aid rules have developed in each of these sectors over the years. At present, the State aid rules in these sectors (including forestry) are based on three different principles: 1. They follow the general principles of competition policy. 2. They have to be coherent and consistent with the EU's common agricultural and rural development policies. 3. They take into account the EU`s international commitments (including under the WTO Agreement on Agriculture, 1994). Thus there are now detailed State aid rules in the agriculture, forestry rural development and fisheries sectors, including: Guidelines on State aid for Agriculture, Forestry and Rural Development, an Agriculture Block Exemption Regulation, an Agriculture De Minimis Regulation and similar instruments related to the fisheries sector. It is also important to note that food processing industries are not excluded by the agricultural exemption as it essentially relates to State aid for primary agricultural production. Furthermore, as much agricultural aid in the EU is given in response to natural disasters affecting farming, the tightening up of the de jure exemption of State aid to relieve natural disasters under Article 107(2) of the TFEU is also relevant. TRANSPORT In regard to transport, Article 93 of the TFEU provides that: Aids shall be compatible with this Treaty if they meet the needs of co-ordination of transport or if they represent reimbursement for the discharge of certain obligations inherent in the 4 The Commission s Directorate General for Agriculture and Rural Development deals with aid in the agriculture sector, the Directorate General for Maritime Affairs and Fisheries deals with aid in the fisheries sector. All other cases and sectors are regulated by the Directorate General for Competition. 12

13 concept of a public service. The effect of this in combination with save as otherwise provided in this Treaty in Article 107(1) is not, however, to exempt transport aid from Articles 107 and 108. What Article 93 does, in fact, is provide an additional basis for compatibility or exemption for State aid. Thus, if a transport aid is compatible with Article 107(1), no further examination is required. If not, it may be held compatible under Article 107(2) or Article 93. In other cases, it may be exempted under Article 107(3). At the same time, the terminology of Article 93 is very vague and has required detailed elaboration under a variety of Council instruments 5 which clarify when transport aid properly meets the needs of co-ordination of transport or involves reimbursement for the discharge of certain obligations inherent in the concept of a public service. Regulation 1107/70, in particular, provided for the clearance of State aid under Article 93 where it promoted fair competition (especially for railways), assisted adaptation or was part of a plan to reduce sectoral capacity. By way of illustration, the road haulage sector could not receive State aid (e.g. grants to buy rolling stock) unless this was part of a national plan to reduce overall capacity levels in national haulage. With regard to air and sea transport, Article 100(2) of the TFEU provides that Article 93 and the other provisions of the Transport Title of the Treaty shall not apply to these sectors pending a Council decision to apply them. The French Sailors Case 6 held, however, that the general rules of the Treaty applied to those sectors. Accordingly, they are covered by Articles 107 to 109. To regulate air transport, three Regulations on the liberalisation of air transport 7 and guidelines on rescue aid in the air transport sector and on the financing of airports and startup aid to airlines departing from regional airports were adopted between 1994 and In February 2014, new Commission Guidelines on State Aid to Airports and airlines replaced both the 1994 and the 2005 aviation guidelines 9. A summary of the present position is provided below. 5 The seminal instrument here was Council Decision 271/65, ( ) OJ 1500 Spec. Ed. 67; which clarified the application of Articles 107 to 109 in regard to taxation, social security and State intervention in relation to competition in rail, road, and inland waterway transport. Subsequently, the Council adopted three Regulations:Council Regulation 1191/69 on public service obligations in transport, (1969) OJ L 156/1, Spec Ed. 276 ( which imposed a free market criterion on the concept while allowing notably for the safeguarding of adequate transport supply); Council Regulation 1192/69, (1969) OJ L 156/8, Spec. Ed. 283 (which dealt with common rules for the calculation and compensation via State aid of the social costs of railways) and Council Regulation 1107/70 (1970) OJ L 130/1 Spec. Ed. 360 (which set out detailed rules for the granting of aids for road, rail and inland waterway transport). 6 Case 167/83: Commission v. France, [1974] ECR 359 at Council Regulation 2407/92/EEC, OJ L 240 of 24 August 1992, Council Regulation 2408/92/EEC, OJ C 178 of 30 June 1993 and Council Regulation 2409/92, OJ C 293 of 29 October Community guidelines on the application of Articles 87 and 88 of the EC Treaty and Article 61 of the EEA Agreement to State aids in the aviation sector (OJ C 350 of 10 December 1994) and Community guidelines on financing of airports and start-up aid to airlines departing from regional airports, OJ C 312 of 9 December The general background to the 1994 guidelines is set out in Twenty Fourth Report on Competition Policy (1994), point Communication from the Commission - Guidelines on State aid to airports and airlines, OJ C 99 of 4 April

14 Main State aid rules on airlines and airports State aid for investment in airport infrastructure is allowed if there is a genuine transport need and the public support is necessary to ensure the accessibility of a region. The new guidelines define maximum permissible aid intensities depending on the size of an airport, in order to ensure the right mix between public and private investment. The possibilities to grant aid are therefore higher for smaller airports than for larger ones. Operating aid to regional airports (with less than 3 million passengers a year) will be allowed for a transitional period of 10 years under certain conditions, in order to give airports time to adjust their business model. To receive operating aid, airports need to work out a business plan paving the way towards full coverage of operating costs at the end of the transitional period. As under the current market conditions, airports with an annual passenger traffic of below may face increased difficulties in achieving full cost coverage during the transitional period, the guidelines include a special regime for those airports, with higher aid intensities and a reassessment of the situation after 5 years. Start-up aid to airlines to launch a new air route is permitted provided it remains limited in time. The compatibility conditions for start-up aid to airlines have been streamlined and adapted to recent market developments. In regard to railways, this is perhaps the transport sector with the lowest scrutiny of State aids within the EU system. This arises because of the relatively limited liberalisation and the very high level of public service obligations in that sector. In line with the Court s judgment in the Altmark Case (2003) 10, the State aid control regime does not apply to compensation given to any undertaking in consideration for public service obligations imposed on them (because there is no advantage conferred) where the relevant four conditions are met (see earlier on this). As a result, the apparent exemption of agriculture and transport under the phrase save as otherwise provided by this Treaty in Article 107(1) is no longer clear-cut and demands specialised navigation through the common policy rules, court jurisprudence and the secondary rules applying Articles 107 and 108 of the TFEU. DEFENCE AND SECURITY Article 346 of the TFEU provides that the provisions of the Treaty are without prejudice to the right of a Member State to take necessary measures for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material. Accordingly, ordnance factories can be subsidised without regard to Articles 107 and 108. However, the measures contemplated by Article 346 must not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes (so-called dual-use goods). Should this occur, Article 348 provides that the European Commission and the Member States concerned must examine how these measures can be adjusted to the rules laid down in the Treaty. Article 348 also provides that the Commission or any Member State may bring an action to the Court if they consider that a Member State is making improper use of the provisions of Article 346. The Court must give its ruling in camera. There have been few cases related to this provision. In Commission v. Greece (1994) the 10 Case C-280/00: Altmark Trans GmbH v. Nahverkehrsgesellschaft Altmark GmbH [2003] ECR I

15 Commission brought an action against Greece for prohibiting exports into or through its territory from the Former Yugoslav Republic of Macedonia. The in camera ruling of the Court rejected the Commission s application for interim measures 11. Later, in BFM v. Commission (1998), restructuring aid was granted to an Italian firm which was allegedly working in the defence sector. This aid was refused by the Commission and BFM argued that the aid in question was not covered by Article 107(1) of the Treaty. The Court of First Instance held that none of the aid at issue was specifically connected to military projects closely linked to national defence policy and that the causal link between the proposed injection of fresh capital and its specific application to the protection of the essential interests of security connected with the production of or trade in arms, munitions and war material could not be established 12. Reflecting the traditional EU logic of the phrase save as otherwise provided by this Treaty, the exclusions related to the phrase are also reflected in EU agreements with non-eu countries requiring national State aid systems in the latter. Generally, non-eu countries are also not required to regulate the areas excluded from the scope of Article 107(1) of the TFEU by this phrase. Indeed, the Ukrainian Law on State Aid to Undertakings excludes the above sectors on the basis of the EU-Ukraine Association Agreement. By or through State resources (Test 2) The second criterion for a State aid measure is direct or indirect involvement of State resources and the imputability of the measure 13 with reference to the phrase by or through State resources in Article 107(1) of the TFEU. Following the evolution of EU practice and case law, the term resources is to be interpreted widely and the EU Courts have expanded this beyond obvious public expenditure support to explicitly include cases where: revenues that would otherwise be payable to the State are foregone; the State makes a firm and concrete commitment to make State resources available in the future; revenues do not reach the State budget, but the State imposes contributions and controls their collection and spending; or the measure leads to a sufficiently concrete risk of an additional burden on the State s budget for the future. It is clear that the notion of State includes central government authorities, decentralised authorities (provincial, departments, municipalities and local authorities), autonomous regions (such as Sicily) 14 and States within States (e.g. the German Lander) 15. It is also clear 11 Case C-120/94: Commission v. Greece, judgment of 29 June 1994 [1996] ECR I Case T /96: Breda Fucine Meridionale SpA v. Commission [1998] ECR II-3437 at In its legal meaning, imputability refers to legal responsibility because of a particular relationship resulting in liability, financial or otherwise. 14 The Italian Constitutional Court ruled in two cases (State Commissioner for the Sicilian Region v. Regional Government of Sicily, [1963] CMLR 315 and State Commissioner for the Sicilian Region v. Regional Government of Sicily, [1970] CMLR 35) that the Italian autonomous regions were bound by Articles 107 and 108 of the TFEU. 15

16 that aid can be passed on within the various layers of a national system (e.g. central government aid decided and delivered at municipal level) or generated and granted from the resources of any type of authority covered by the broad descriptions above. Accordingly, the scope of the phrase is very wide. Accordingly, the scope of State is wide-ranging and includes the Government directly as well as all other public authorities Ministries, regional authorities, municipalities, and other public institutions. It also encapsulates public enterprises and other undertakings (even private) acting in the name of the State or authorised by public institutions. Only advantages granted directly or indirectly through State resources can constitute State aid within the meaning of Article 107(1) TFEU. State resources include all resources of the public sector, including resources of intra-state entities (decentralised, federated, regional or other) and, under certain circumstances, resources of private bodies. It is irrelevant whether an institution within the public sector is autonomous. Funds provided by the central bank of a Member State to specific credit institutions generally fall within the scope of the State aid rules. Resources of public undertakings also constitute State resources within the meaning of Article 107(1) of the TFEU because the State is capable of directing the use of these resources. Furthermore, the financial resources of private undertakings controlled by the State could also be subject to the TFEU State aid rules. By a Member State or through State resources excludes aid from a private body e.g. a philanthropic foundation or a charity. It does not exclude assistance from a private body which is itself assisted by the State as, for example, where Italian banks were encouraged by tax advantages to form consortia for rescue operations in the private sector 16. Moreover a formalistic approach to the status of a body giving aid does not preclude the application of Article 107 of the TFEU. In Firma Steinike und Weinlig v. Germany (1977), where the body concerned was established by public law and financed its food marketing operations from State grants and producer contributions, the Court held: It is not necessary to make a distinction whether the aid is granted directly by the State or by public or private bodies established or appointed by it to administer the aid. In applying Article 107, regard must primarily be had to the effects of the aid on the undertakings or producers favoured and not the status of the institutions entrusted with the distribution and administration of the aid. 17 In Italy v. Commission (1974) 18 the measure at issue was a 33% reduction for the textile sector in statutory contributions to family allowances. Italy argued that the losses to the social security fund were made up by another unemployment fund financed by the private sector and, accordingly, there was a double entry that meant the reduction did not constitute aid under Article 107. The Court rejected this as the contributions were a compulsory obligation in law and the replacement funds must be regarded as State resources within the meaning of Article 107 even if they are administered by institutions distinct from the public authorities 19. The position may be summarised by the application of the following tests to an apparently 15 European Commission: First Report on Competition Policy, (1971) points 158 and European Commission: Tenth Report on Competition Policy, (1980), point Case 78/76: Firma Steinike und Weinlig v. Germany, [1977] ECR 595 at Case 173/73: Italy v. Commission, [1974] ECR, Ibid. at

17 private body: Is it established or appointed by the State to administer aid? 20 ; Does it get its funding from compulsory contributions under public law? 21 ; Does it manage and distribute funds in accordance with legislation? 22 ; and Is it, de facto or de jure, predominantly under State influence in its decision making 23? In regard to imputability, an aid measure is imputable to the State when it can be linked to the decision of a public authority and it is clear that the State ultimately had control over the decision to transfer the relevant resources. Such a link is present when the aid is granted directly by a public authority or when the public authority appoints a private or public body to administer the measure, regardless of whether that public authority has some degree of autonomy. However, it is harder to prove imputability to the State when the advantage is granted through intermediate bodies (public or private). In such cases, the fact that a measure is taken by an intermediate body is insufficient to establish the link. In the France v. Commission (Stardust) (2002) case, 24 the Court of Justice concluded that State aid may be established only where State funds are used and that the use of the funds of State enterprises alone was insufficient to meet this condition. In addition, it is necessary to prove that public authorities had been involved in the adoption of the measure and/or that they were instructed by the State. To help to clarify imputability, the European Commission has suggested a list of indicators through which imputability can be established. If the advantage is granted through a public undertaking such indicators are: that the undertaking had to take into account directives issued by governmental bodies; or the integration of the undertaking into the structures of public administration. By contrast, a measure is not imputable to the State if it is the mere result of the implementation of EU law and the State had no discretion in the matter 25. According to the Commission, the origin of the resources is not relevant provided that, before being directly or indirectly transferred to the beneficiaries, they enter under public control and are, therefore, available to the national authorities, even if the resources do not become the property of the public authority. This policy position has allowed the Commission in various recent legislation and soft law instruments to include most EU structural funds as State aid. This is a controversial position and emerged from political complaints by Member States not in receipt of structural funds. In essence, structural funds are EU funds which are fundamentally directed by the EU. In some cases, structural funds are added to by national funds but in some cases they are not. In the case of other EU 20 The Steinike und Weinlig principle. 21 The Italy v. Commission case. 22 Case 290/83: Commission v. France (Credit Agricole) [1985] ECR 439 and Case 222/82: Apple and Pear Development Council v. Lewis [1983] ECR Case 67/85: Van der Kooy v. Commission [1988] ECR 219 and Case C-303/88: ENI-Lanerossi [1991] I ECR Case C-482/99: France v. Commission (Stardust) [2002] ECR I European Commission: Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, 17 January

18 funding, the funds are entirely administered and distributed by the EU. An alternative approach would have been to only view State matching funding as State resources and, indeed, this was the previous Commission position. However, in its latest policy statement on this, the Commission points out that: Resources coming from the Union (e.g. from structural funds) or international financial institutions, such as the IMF or the EBRD, should also be considered as State resources if national authorities have discretion as to the use of those resources (in particular the selection of beneficiaries). By contrast, if such resources are awarded directly by the Union or the international financial institutions, with no discretion on the part of the national authorities, they do not constitute State resources (e.g. funding awarded in direct management under the Horizon 2020 framework programme or the COSME programme) 26 Moreover, regulation that leads to financial redistribution from one private entity to another without any further involvement of the State does not entail a transfer of State resources, if the money flows directly from one private entity to another, without passing through a public or private body designated by the State to administer the transfer. An example of this is an obligation imposed by the State on private electricity suppliers to purchase electricity produced from renewable energy sources at fixed minimum prices. This does not entail the direct or indirect transfer of State resources to undertakings which produce that type of electricity. In this case, the undertakings concerned (i.e. the private electricity suppliers) are not appointed by the State to manage an aid scheme, but are only bound by an obligation to purchase a specific type of electricity with their own financial resources 27. A further consideration here is that, while the concept of aid has clearly widened over the years, the European Courts have paradoxically taken a strict position of interpretation against widening the scope of aid to include any measures with equivalent effect to aid 28. This has generally arisen where the Commission found it difficult to confirm that a particular measure was aid and, nonetheless, wanted to see it broadly regulated as if it was aid. A final consideration here is that, because of the potential for evading the State aid rules, the Commission adopted a Directive in 1980 to make the financial relations between Member States and public bodies operating in the professional, industrial, agricultural or business sectors transparent 29. Under the Directive, Member States are required to ensure 26 Ibid. para 62. This citation also notes that in the case of funding directly from the EU principles similar to the substantive provisions of State aid law are often applicable by virtue of secondary Union legislation which frequently imposes consistency requirements. 27 Ibid, paras 63 and This was confirmed in Case 290/83: Commission v. France ( Poor farmers ) [1985] ECR 439, para. 18. The point also arose in Case C-349/98: Preussen Elektra [2001] ECR I-2099, paras European Commission Directive on the transparency of financial relations between Member States and public undertakings [1980] OJ L 195/35. This Directive is based on the view that the fair and effective application of the competition rules requires a detailed knowledge of companies' financial and organisational structures, especially as regards the financial relations between public authorities and public undertakings. This Directive was needed also because of the fact that what is now Article 345 of the TFEU stipulates that the Treaty does not prejudice the rules in Member States governing the system of property ownership and that no unjustified discrimination may be made between public and private undertakings in the application of the competition rules. Accordingly, EU Law is agnostic as between public enterprises and private firms in its market economy. 18

19 the transparency of financial relations between public authorities and undertakings which have benefited from public resources and they must take the necessary measures to guarantee transparency in respect of: setting-off of operating losses; provision of capital; non-refundable grants or loans on privileged terms; financial advantages granted by forgoing profits or debt recovery; forgoing of a normal return on public funds used; compensation for financial burdens imposed by public authorities. EU Member States are also required to make available to the Commission all data concerning financial relations between the Member States and public undertakings. Moreover, the Directive creates an obligation to keep separate accounts which reflect the financial and organisational structure of undertakings with special or exclusive rights, so that it is possible to determine the costs corresponding to the different activities and the method whereby costs and revenues are assigned or allocated to the different activities. The Directive applies, in particular, to public undertakings operating in the manufacturing sector if their annual turnover exceeds 250 million. However, it does not apply to small scale public and private undertakings supplying services (which are unlikely to affect trade between EU countries to an appreciable extent) 30, central banks, public credit institutions, as regards deposits of public funds placed with them by public authorities on normal commercial terms and undertakings which have been entrusted with the operation of services of general economic interest - if the compensation they receive in any form whatsoever was fixed for an appropriate period following an open, transparent and nondiscriminating procedure. The Directive was amended and updated in to clarify the requirements for separate accounts in the light of the Altmark Case on Services of General Economic Interest and, in particular, to require separate accounting - even in cases where the transfer of State resources does not constitute State aid. The consolidated version of the Directive was published in Providing a selective advantage (Test 3) The a priori prohibition of State aid under Article 107(1) of the TFEU requires that aid favours certain undertakings or the production of certain goods. Accordingly, there must 30 In effect, public undertakings whose net annual turnover in the two financial years preceding that in which the public resources were made available was less than 40 million (or a balance sheet total of 800 million in the case of public credit institutions) and public and private undertakings whose net annual turnover in the two financial years preceding any year in which it enjoys special or exclusive rights granted by an EU country or in which it is entrusted with the operation of a service of general economic interest was less than 40 million (or a balance sheet total of 800 million in the case of public credit institutions). 31 Commission Directive 2005/81/EC of 28 November 2005 amending Directive 80/723/EEC on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L 312 of 29 November Commission Directive 2006/111/EC of 16 November 2006 transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings (Codified version), OJ L 318 of 17 November

20 be an advantage and it must be a selective, rather than a general, advantage. Moreover, the recipient of the aid must be an undertaking, rather than a private individual (see Test 4 below). Accordingly, not all measures which favour economic operators fall under the notion of aid, but only those which grant an advantage in a selective way (sometimes referred to as a specific advantage ) to certain undertakings or categories of undertakings or to certain economic sectors. In particular, an advantage granted to all undertakings in a Member State is a general measure, rather than a State aid as it does not favour certain undertakings or the production of certain goods. This is important for several reasons. First, it effectively excludes such interventions as generalised tax reliefs, general reductions of social security payments and most forms of general initiatives to promote employment, improve the investment climate and the business environment. Indeed, it is clear that general economic policy measures (such as those providing advantageous crediting terms, reduction of interest rates, reduction of the general tax burden e.g. corporate income tax) in respect of all undertakings do not constitute State aid. Secondly, specificity under Article 107(1) demands the presence of favourable treatment within the same Member State as between firms objectively in the same position. Despite extensive but rather erratic case-law on the subject, the selectivity test can be somewhat difficult to apply, in certain situations. This is because not every measure that produces an advantage for certain undertakings over others is regarded as selective within the meaning of Article 107(1) of the TFEU. In particular, the case-law of the European Courts has held that a differential measure (one that applies differently to undertakings) may escape classification as State aid based on the selectivity criterion where: (1) The favoured undertakings are not correctly comparable to the identified group of non-favoured undertakings; (2) The different treatment may be justified by the nature and scheme of the relevant system. Increasingly, EU law focusses on material selectivity and regional selectivity. Material selectivity can be established de jure or de facto. De jure selectivity results directly from the legal criteria for granting a measure that is formally reserved for certain undertakings only (for instance, those of a certain size, those located in a certain area, firms active in certain sectors, firms having a certain legal form, firms incorporated during a particular period, firms belonging to a group having certain characteristics or firms entrusted with certain functions within a group). De facto selectivity can be established in cases where, although the formal criteria for the application of the measure are formulated in general and objective terms, the structure of the measure is such that its effects significantly favour a particular group of undertakings. De facto selectivity may be the result of conditions or barriers imposed by Member States preventing certain undertakings from benefiting from the measure. For example, applying a tax measure (e.g. a tax credit) only to investments exceeding a certain threshold may mean that the measure is de facto reserved for undertakings with significant financial resources. Equally, selective advantage can also stem from discretionary administrative practices. Measures which prima facie apply to all undertakings, but are (or may be) limited by the discretionary power of administration, are selective This has been an important consideration in recent EU State aid cases involving discretionary setting of tax arrangements between EU Member States and Starbucks, FIAT and Amazon. 20