New directions in European state aid law

Triniti

The judgment of the European Court of Justice made at the end of the last year in the case of DHL -Leipzig/Halle (C-288/ 11 P) pertains to prohibited state aid related to constructing an airport runway, but the principles of that adjudication can be applied to other infrastructure objects as well. In the light of the future joint venture to construct and manage the cross-border Rail Baltic , attempts of the Baltic public sector to save their national airlines (Estonian Air and Air Baltic) and even establish new ones (Air Lituanica) this judgement is very much worth our closer attention.

Just your usual PPP project

German lands and cities, having established a joint business association for operating and developing Lepzig/Halle airport, wished to construct a new runway there. For that purpose it was decided to fund the development activities with 350 million euros, guarantee the financial investments with the public budget and enter into a framework contract with DHL, a future major client of the airport who, after negotiations with other airports of the region, decided to bring its cargo handling centre from Brussels to Lepzig/Halle in light of construction of the new runway.

On a notice from the Federal Republic of Germany, the European Commission initiated an investigation and found that funding the construction of the new runway from public budget constitutes state aid, regardless of the construction being an object of infrastructure and the funded association belonging to the funders themselves. According to the Commission, constructing a runway is part of an airport’s economic activities and, as such, is subject to state aid rules.

State aid rules apply to construction of infrastructure

In a court action filed by the Germans, they expressed an opinion that as the construction was an object of infrastructure, the activity was not subject to state aid rules. The opinion was based on a notice by the Commission from the year 1994 which discussed the European state aid rules and stated that construction of bridges, roads, airport infrastructure, etc. is not to be considered state aid.

The European Court of Justice rejected the Germans’ approach that it was necessary to separate the construction of the runway and the operating of the airport; the Court referred to the fact that the market has developed in the meantime and the notice from 1994 is not relevant anymore. The Court agreed with the Commission that constructing the runway was a financial investment necessary for operating the airport and was thus an inseparable part of operating the airport; therefore the relevant economic activity would be subject to state aid rules.

The Court also found that there was an existing competition situation already before the construction of the runway, proven by the fact that DHL had conducted cargo centre transferring negotiations with several different airports. It was also proven in that court case that there were plans to fund a large part of the runway’s construction by the airport’s operator, using the airport duties collected by itself.

Conclusions from the judgement

The judgment referenced here is undoubtedly remarkable because it enables making parallels with construction of other infrastructure objects as well. For exactly that reason, the judgement has been widely criticised. For example, it has been stressed that a project as capital-intensive as constructing a new runway or some other large infrastructure object cannot be implemented at all without public sector participation. Therefore, such activity substantially lacks competition with the private sector, because as a rule, the latter only starts its operations after the infrastructure object is in place.

Further developments

The European Commission’s recent intensified interest towards construction of airports, sports facilities, seaports, railways, telecommunication and energy infrastructure speaks of a change in the European state aid law. Remarkably, the possible effect of an infrastructure construction on all kinds of neighbouring markets is assessed – for example when constructing an airport, its possible effect on railway traffic must be assessed, and vice versa. Understandably, it would be paralyzing for e.g. Estonian economy if, for example, development of Tallinn Airport would be hindered by lack of public funding because the relevant activity would have an effect on the turnover of an enterprise operating Helsinki Airport or Riga airport or, say, on a railway operator’s turnover.

It is understandable that the Commission’s goal is to hinder impermissible, competition-harming state aid being granted, but it is exactly the European Commission that has the right to permit certain state aid. The Commission could declare certain types of aid, e.g. for research and development, environment protection and regional aid to be in conformity with the common market, relieving those types from the requirement to apply for a permit.

It is definitely in the interest of Estonia that regional specifics be considered in each individual case; therefore it is only good to read the notice on the website of the Ministry of Finance, stating that Estonia supports the Commission’s proposal to expand that list. Additionally, Estonia wishes to propose new types of aid to be added to the list, e.g. state aid granted for infrastructure support, including aid for small regional airports and seaports, and also cooperation activities funded within the framework of European territorial cooperation. According to the Ministry, amendments to the state aid proceedings regulation and the state aid permitting regulation are planned to be adopted by the end of 2013.

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