Introduction
On 28 February 2024, the General Court delivered an important judgment in case T-390/20, Scandlines v Commission.(1) The judgment is important because it interpreted the Commission guidelines on Important Projects of Common European Interest [IPCEI], the funding gap methodology for determining the necessary amount of aid and the 2008 Commission Notice on state guarantees.
Scandlines sought annulment of Commission decision SA.39078 by which the Commission authorised State aid granted by Denmark to Femern, the builder and operator of the Fehmarn Belt Fixed Link between Denmark and Germany. The Fehmarn Belt Fixed Link is a road and rail transport infrastructure project. More background information was provided in last week’s article in a related case on an appeal brought by Denmark against that Commission decision.
The Commission’s first decision of 2014 on the Fixed Link was annulled by the judgments of December 2018 in cases T-630/15, Scandlines v Commission and T-631/15, Stena Line v Commission. As a result, the Commission reopened the case and reassessed the compatibility of the aid embedded in several state loans and guarantees.
Before reviewing the salient aspects of the judgment, it is worth recalling the standard that EU courts use to determine the correctness of Commission decisions. “(70) As regards the assessment by the EU Courts as to whether there is a manifest error of assessment, it must be stated that, in order to establish that the Commission made a manifest error in assessing complex facts such as to justify the annulment of the contested act, the evidence adduced by the applicant must be sufficient to make the factual assessments made in the act implausible”.
In other words, it is not sufficient to argue that the Commission could, reasonably, have done something else. It is necessary to show that the Commission made a logical error, or based its decision on wrong data or an erroneous interpretation of the law.
Because of the length of the judgment, this article is in two parts. Part II will be published next week.
Part I
The number of aid measures in favour of Femern
The applicants complained that the Commission failed to examine separately the compatibility of each state loan and each state guarantee.
Femern had been granted three successive individual aid measures: A capital injection when the company was set up in 2005; a subsequent capital injection together with state guarantees and state loans in 2009; a combination of state loans and state guarantees in 2015.
The General Court noted that “(40) it cannot be excluded that several consecutive measures of State intervention must, for the purposes of Article 107(1) TFEU, be regarded as a single intervention.”
Then the General Court in paragraphs 41 & 42 of the judgment concurred with the Commission that the right to the loans and guarantees that were provided in several tranches was in fact granted by two separate decisions in 2009 and 2015. The General Court explained that “(45) State aid must be regarded as being ‘granted’, within the meaning of Article 107(1) TFEU, on the date on which the right to receive it is conferred on the beneficiary under the applicable national legislation”.
The applicants counter-argued that Danish authorities had discretion to alter the terms of funding provided to Femern. However, the General Court held that “(49) the discretion of the Danish Minister for Finance is limited and concerns only practical and technical conditions and rules intended to ensure the sound management of public resources. […] The exercise of powers intended to ensure the proper management of public resources cannot call into question, as such, Femern’s right to receive the State loans and the State guarantees granted to it by the Danish Parliament.”
The General Court added that “(50) a distinction must be drawn between, on the one hand, the recipient’s legal right to receive aid for a specific project resulting from a commitment by the national authorities and, on the other hand, the limits or conditions which govern the implementation of that aid and which are capable of being defined or adjusted in the light of any observations made by the Commission during the formal investigation procedure.”
Joint assessment of the three aid measures
Then the General Court went on to examine whether the Commission made an error of assessment in examining jointly the compatibility of the three individual aid measures. The problem was not just that Femern received multiple awards of aid, but also that some of the loans and guarantees were granted after the start of the project.
The total amount of aid and the form of aid that was granted to Femern were as follows: i) Capital injections of DKK 510 million (EUR 68.4 million); ii) multiple state loans and guarantees of a maximum amount of DKK 69.3 billion (EUR 9.3 billion) (that maximum amount was to be determined by the financing model of Femern, according to which all loans with a state guarantee would have to be repaid by the 16th year after the start of operation of the Fixed Link).
“(54) Since those three individual aids granted to Femern are intended to finance the planning and construction of one and the same project, the Commission could legitimately examine the compatibility of those aids with the internal market by taking into account all the financing that that entity might receive in order to finance the planning and construction of the Fixed Link project.” “(55) Contrary to what the applicants submit, a joint examination of all the financing that may be granted to Femern on the basis of the individual aids […] does not prevent the cumulative effect of those aids from being taken into account.”
The General Court concluded that “(58) it cannot be inferred, (…), that there is any general obligation on the Commission to examine separately each State guarantee granted to the same beneficiary for the same project.”
In other words, an aid award can be granted after the start of a project if there is a provision for it in the determination of the total amount of needed aid before the start of the project.
Next the General Court examined a number of pleas alleging that the Commission incorrectly authorised the aid on the basis of Article 107(3)(b) TFEU.
Adequate co-financing by Femern
The applicants contended that the Commission did not apply paragraph 18 of the Communication on Important Projects of Common European Interest (IPCEI), according to which the project had to be co-financed by the beneficiary.
According to the General Court, “(83) the co-financing requirement laid down in paragraph 18 of the IPCEI Communication cannot be interpreted as requiring the beneficiary of the aid necessarily to contribute upfront to the financing of the project.” For the Court it was sufficient that Femern would contribute with the revenue that would earn once it would begin its operation.
The necessity of the aid
The applicants alleged that the aid had no incentive effect
The General Court, first, confirmed that, “(110) within the discretion conferred on it by Article 107(3)(b) TFEU, the Commission is entitled to refuse the grant of aid where that aid does not induce the recipient undertakings to adopt conduct likely to assist attainment of one of the objectives referred to in that provision”. “(111) Such aid must thus be necessary for the attainment of the objectives specified in that provision, with the result that, without it, market forces alone would not succeed in getting the recipient undertakings to adopt conduct likely to assist attainment of those objectives.” “(112) To that end, it must be demonstrated that, in the absence of the planned aid, the investment intended to implement such a project would not take place.”
Then, the General Court noted that “(115) in the contested decision and in the parties’ pleadings, the concepts of ‘formal incentive effect’ and ‘substantive incentive effect’ are used. For the sake of clarity and terminological precision, for the purposes of the present judgment, first, the concept of ‘formal incentive effect’ must be understood as being the criterion that ‘the aid application must precede the start of the […] Second, the requirement of a ‘substantive incentive effect’ must be understood as being the condition of ‘the incentive effect of the aid’ […], namely the incentive for the beneficiary to adopt conduct likely to contribute to the attainment of the objectives of Article 107(3)(b) TFEU.”
With respect to the formal incentive effect, the General Court concurred that “(118) the Commission considered that satisfaction of the criterion that the aid application must be submitted beforehand, as defined in the IPCEI Communication, was not a necessary prerequisite on the ground that the incentive effect condition was satisfied by the demonstration that the project at issue could not be completed without aid. According to the Commission, a distinction must be drawn between an undertaking such as Femern which receives aid in order to carry out the link project defined by the public authorities and the other undertakings that may decide on the projects in which they wish to invest. Thus, in view of the particular features of the present case, the Commission took the view that, even in the absence of an aid application formally submitted by Femern to the Danish authorities, the criterion that the aid application must be submitted beforehand was satisfied on the ground that such an application could be regarded as inherent in the establishment of that entity.”
The General Court stressed that “(119) Femern is a specific-purpose company that was created by the public authorities to carry out a particular project to the exclusion of any other activity. As the Kingdom of Denmark has submitted, such an entity does not receive operating income until the end of construction works. Therefore, until the Fixed Link is brought into operation, Femern is dependent on the financing granted by the public authorities, in particular to carry out the construction of the infrastructure. Such a situation is not comparable with those of private or public undertakings that may determine the projects in which they wish to invest and finance them, at least in part, using income generated by their other activities.”
The General Court also explained that the relevant rules for IPCEIs are different from other guidelines. “(127) It is clear from the wording of footnote 24 to paragraph 28 of the IPCEI Communication that it is sufficient for the aid application to precede the start of the works. Therefore, the beneficiary of the aid is not required to wait for the approval of that application or for the grant of the aid before commencing the work. That requirement of the IPCEI Communication is not comparable to that of other guidelines, (…), which expressly required written confirmation from the national competent authorities.”
The counterfactual situation
The applicants argued that the Commission was wrong to find that the counterfactual scenario consisted in the absence of an alternative project.
Paragraph 29 of the IPCEI Communication requires Member State to provide a comprehensive description of the counterfactual scenario which corresponds to the situation where no aid is granted. In the case of the Fixed Link, the Commission considered that there was no credible or realistic counterfactual description of an alternative project because the capital costs would have been so high that the project would not have been feasible without substantial public support. In addition, the long recoupment period for the investment made the project too risky. The Commission also considered that improved ferry services could not achieve the same results as the Fixed Link because of limited number of passengers and cars that could be transported on each ferry, time delays for passengers and drivers waiting for ferry crossings, disruption of crossings due to weather conditions, and, ferries could not transport trains.
It is also important to note that the Commission is not allowed to question the economic rationality of public funding of a project that may generate only marginal benefits in relation to an alternative project without aid. Even if the benefits from quick crossing without delay and without disruption were, in some cost-benefit analysis, not worth the huge extra cost, the Commission could not prohibit the aid on these grounds alone.
Therefore, the General Court held that “(149) since a project for an improved ferry system would not be capable of attaining the objectives pursued by the Fixed Link project, the fact that the rate of return from a project for an improved ferry system is higher than the rate of return from a fixed link is irrelevant.”
The calculation of the IRR (necessity of the aid) and the funding gap (proportionality of the aid)
The applicants argued that the lifetime of the investment, for the purposes of calculating the funding gap, ought to correspond to the lifetime of the project that is taken into account in order to calculate the internal rate of return (IRR) of the project.
The Commission had considered that an operational period of 40 years was a reasonable assumption for the calculation of the funding gap of the Fixed Link.
First, the General Court noted that “(168) in the absence of an alternative project, (…) the aid is necessary if the project is not profitable during its lifetime”. “(169) Second, (…), the maximum aid level is determined with regard to the identified funding gap in relation to the eligible costs and, if justified by the funding gap analysis, the aid intensity could reach up to 100% of the eligible costs. (…) the funding gap (is) the difference between the positive and negative cash flows over the lifetime of the investment, discounted to their current value on the basis of an appropriate discount factor reflecting the rate of return necessary for the beneficiary to carry out the project notably in view of the risks involved.”
“(171) As regards the IRR, (…), since Femern does not have an investment project of a similar kind or overall cost of capital that could be used to calculate whether the aid amount exceeds the level necessary for the project to be sufficiently profitable, the Commission considered that it was appropriate to compare the IRR from the Fixed Link project, without aid, with the cost of capital requirements seen in the industry concerned, namely a 5.59% weighted average cost of capital (‘WACC’). Thus, (…), by using 40 years for the economic lifetime of the investment, the Commission found that the IRR of the project without aid was 3.9% and that it would remain below the WACC even with a longer lifetime until 2100.”
The General Court concurred that “(173) the IRR is to be calculated taking into account all expected costs and benefits over the ‘lifetime of the project’.” “(177) Furthermore, (…), in order to determine whether the IRR without aid was sufficient to achieve the minimum level of profitability that would have been required by the market, it was necessary to use the WACC. This is a rate which represents the cost of financing from all sources (debt, equity) for a comparable project. It is common ground between the main parties that the value of that rate reflects the minimum level of profitability to be achieved in order for the project to be viable. It was calculated, (…), by taking into account market indicators (risk premium on debt, risk premium on equity, specific risk premium, risk-free rate).”
Then the General Court made an important distinction between the economic life of a project and the length of time that a project possibly be used. “(178) The reference to the ‘lifetime of the project’ in the last sentence of paragraph 30 of the IPCEI Communication cannot be interpreted as requiring the Commission to examine whether the aid exceeds the minimum necessary for the investment project in respect of the aided Fixed Link to be sufficiently profitable over the lifetime of that infrastructure. That reference, which is intended to take into account all the expected costs and benefits that have to be taken into consideration, must be understood as referring to the economic lifetime of the investment project and not the infrastructure from a technical perspective. It follows that, in the circumstances of the present case, the Commission was entitled to calculate the IRR from the Fixed Link project without aid, on the basis of the economic lifetime of the investment project.”
A comment is in order here. The economic life of any project is length of time for which a project can generate income. Here the Court says something else. Investors would not take into account the income after the first 40 years because of huge uncertainty. Therefore, what the Court says here is that the economic life of a project is the maximum length of time that investors are willing or capable of considering revenue and costs.
“(179) As regards the period used to calculate the funding gap, (…) the cash flows must be discounted on the basis of an appropriate discount factor reflecting the rate of return necessary for the beneficiary to carry out the project, notably in view of the risks involved. It follows that, (…), the purpose of the analysis of the funding gap is to determine the extent to which the project could be financed under market conditions. It follows (…) that aid granted for the deployment of important projects of common European interest is intended to overcome the lack of financing available on the market for the completion of such projects which require significant participation by the public authorities. In the present case, for the calculation of the funding gap, the WACC was also used to discount the cash flows of the investment project.”
“(182) It follows from the foregoing considerations that, in order to determine the relevant period for calculating the IRR and the funding gap, the Commission was entitled to rely on the conduct of investors on the market.”
The General Court went on to ascertain whether the Commission was right to define 40 years as the economic lifetime of the investment in order to calculate the IRR and the funding gap.
The Court concurred that “(184) the Commission explained why it would not be reasonable to use a period of 120 years. Thus, (…), the Commission took the view that it was appropriate to work on the assumption that the operational period would be 40 years, which it considers to be longer than the period used for other infrastructure projects in the ports and airport sectors.”
“(185) As the Commission submits in its defence, in order to guard against the risks inherent in investments lasting beyond 40 years, an investor would probably have required a higher return, which would have had the effect of increasing the WACC and, consequently, of reducing the value of discounted future revenue.”
Temporal limitation of the aid
The applicants argued that the Commission made a manifest error of assessment with regard to the proportionality of the aid on the grounds that the aid was not limited in time and, in any event, the period of 16 years after the opening of the Fixed Link for repayment of the loans was too long.
The General Court recalled that “(195) the choice of the aid instrument must be made with a view to the market failure or other important systemic failures which it seeks to address, and that, where the underlying problem is lack of access to finance, Member States should normally resort to aid in the form of liquidity support, such as a loan or guarantee.”
“(196) In the present case, (…), the Commission stated that the Danish authorities had ensured that Femern would not adopt State loans and State guarantees, which, together, would exceed a maximum guaranteed amount of DKK 69.3 billion (approximately EUR 9.3 billion), and that those loans and guarantees are strictly limited to the planning and construction costs of the Fixed Link. In addition, according to the alternative funding gap model, […], the Commission found, (…), that, 16 years after the start of operation, all loans with a State guarantee would be terminated and all State loans obtained would be repaid. According to the Commission, (…), the resulting aid is equal to the funding gap of DKK 12.046 billion (approximately EUR 1.615 billion). Moreover, it is apparent (…) that, since it cannot be ruled out that the funding gap may be overestimated as a result of the inclusion of a reserve budget, the Danish authorities will have to recalculate the funding gap at the latest five years after the start of operation, and that, if the funding gap were below what was anticipated, the maximum guaranteed amount would be reduced to DKK 66.1 billion (approximately EUR 8.9 billion) and the maximum guarantee period would be reduced to 11 years from the start of operation.”
The General Court then rejected the argument that the aid was not limited in amount or time.
(1) The full text of the judgment can be accessed at:
