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 II
The estimated revenue for the calculation of the funding gap
The applicants submitted that, for the calculation of the funding gap, the Commission underestimated Femern’s revenues in order to increase artificially the funding gap.
The General Court, first, noted that “(218) as regards the revenues from the Fixed Link, the Commission considered, […], that the road traffic forecasts […] take into account redistribution of traffic linked to the reduction of the Great Belt fixed link toll and continued competition from ferry services. In that regard, it stated that a reasonable investor would, in its financial analysis, take into account a continued ferry service, and considers a one-hour ferry service to be appropriate.”
That is, Femern would charge a lower toll for its services, but the ferries were assumed to still be able to compete by providing an alternative service.
“(219) Concerning the assumed prices, the Commission stated that operating revenues largely exceeded operating costs and that prices could not be required to compensate all the costs, including construction costs. However, it stated that the prices assumed in the funding gap model could not be artificially low. In the present case, it observed that the Danish legislation had laid down the principle that the price level for road traffic was expected to be at the level of the ferry prices for Rødby-Puttgarden in 2007, adjusted by the general increase in prices up to the time of opening. […] As regards railway revenues, […], the Commission considered that the basis for the calculation of those revenues was reasonable.”
That is, the Commission accepted the assumption that prices would remain at the level of the ferry prices for Rødby-Puttgarden in 2007, adjusted for inflation. Member States are free to regulate prices of services of general economic interest. Of course, by not reflecting the upgrade in the quality of service provided by the Fixed Link, tolls adjusted only for inflation gave a competitive advantage to Femern over the ferries.
The General Court observed that “(222) Since the funding gap is intended to determine the extent to which the project could be financed under market conditions, in the assessment of revenues […] account must be taken of the conduct, on the market, of a private investor who as far as possible would seek to ensure that revenue is established at a level that would enable investment costs to be recovered as much as possible.”
In this case, an investor would presumably take into account the value to car drivers and rail passengers from the improved quality of the service in terms of faster and uninterrupted crossings and possibly charge a higher price. It is not clear whether the obligation to reflect market conditions would conflict with the right of Member States to regulate tolls
The General Court went on to agree with the Commission that “(225) the fact that prices are higher does not automatically lead to an increase in revenue because of the elasticity of demand in relation to price.”
This statement is correct as a general expression of the relation between price and revenue for a product of constant quality. But it is the wrong statement in this context where the quality of the service would improve, the demand for the service would shift outwards and presumably users of the Fixed Link would be prepared to pay a bit extra for the better service.
“(226) Moreover, the applicants acknowledge in their reply that higher prices do not automatically lead to an increase in revenues because of competition from other operators on the market.” But, again, a provider of a better would have more leeway to raise by an appropriate margin its prices.
Admittedly, the General Court did refer to the improvement of the quality of the service but only to dismiss the argument of the applicants for being unsupported by evidence. This raises the question why the prices assumed by Denmark [and the Commission] were given more probity. “(228) It should be noted, first of all, that the argument put forward […] that, in essence, the prices for the use of the Fixed Link should be higher than the prices for ferry services on the route between Rødby and Puttgarden on the ground that the Fixed Link provides a service that is superior to those provided by the ferry operators is not supported by any evidence. Those interveners have not referred to any evidence relating to the prices charged by the current ferry operator on the route between Rødby and Puttgarden. Therefore, [they] cannot claim that the prices for the use of the Fixed Link are in fact equal to or lower than those charged by the current ferry operator on that route.”
The General Court returned to the issue of how fares or tolls regulated by Member States may be taken into account for the purpose of the funding gap calculation and confirmed that “(234) where the public authorities decide to regulate charges for use of an infrastructure for the purposes of implementing transport policy in order to take account of the price that future users would be prepared to pay, a private operator who is responsible for the operation of such an infrastructure, as with certain motorways the prices of which are regulated, cannot disregard, in the assessment of revenues for the calculation of the funding gap, the fact that prices are regulated by the public authorities.”
Eligible the costs
The applicants disputed the costs that had been considered by the Commission as eligible to be funded by State aid. Those costs were the project’s construction costs, which included planning costs and costs for promotion, marketing and information.
The General Court, first, recalled that the Commission “(241) stated that the question of whether operating costs could be included in the calculation of the funding gap differed from the question of whether operating aid was granted. It indicated that […] it is inherent in the logic of investment decision-making to compare, ex ante, investment costs against future operating revenues and costs. In that regard, the Commission also stated that investors typically did not take a positive investment decision as long as that comparison resulted in a gap or a negative net present value (NPV).”
Then the Court stated that “(244) the inclusion of operating costs in the negative cash flows of the investment project in order to calculate the funding gap does not result in the grant of operating aid. […] the operating revenues which, correlatively, should also be taken into account under the positive cash flows largely exceed operating costs.”
The aid amount and the treatment of state guarantees
The applicants claimed that the Commission made manifest errors in the calculation of the aid amount because Femern could not construct the Fixed Link without aid. And, in accordance with point 4.1 of the 2008 Guarantee Notice, the aid amount should correspond to the value of all loans covered by the state guarantees and of all state loans.
The General Court recalled the salient points of the Commission’s Guarantee Notice. “(257) According to point (a) of the third paragraph of point 4.1 of the Guarantee Notice, ‘for companies in difficulty, a market guarantor, if any, would, at the time the guarantee is granted charge a high premium given the expected rate of default[; if] the likelihood that the borrower will not be able to repay the loan becomes particularly high, this market rate may not exist and in exceptional circumstances the aid element of the guarantee may turn out to be as high as the amount effectively covered by that guarantee’.”
“(258) Thus, it follows from point (a) of the third paragraph of point 4.1 of the Guarantee Notice that it is only where a company is in difficulty and in exceptional circumstances that the aid element of a guarantee is equivalent to the total amount of the loans covered by the guarantee. Given the far-reaching implications of such an approach, the possibility of calculating the benefit from a State guarantee as being equal to the entire amount of the guaranteed loan cannot be justified merely because the beneficiary undertaking is in difficulty. Thus, the Commission may use that approach only in exceptional circumstances and only if the company in difficulty is unable, through its own resources, to repay the loan covered by the guarantee.”
“(259) In the present case, […], the Commission found that the aid element did not have to equal the full amounts covered by the State loans and the loans with State guarantees, on the ground that Femern’s situation did not come under the exceptional circumstances referred to in point (a) of the third paragraph of point 4.1 of the Guarantee Notice.”
“(260) It must be stated that the applicants […] have not adduced any evidence to support the view that Femern is an undertaking in difficulty within the meaning of the Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, or that that undertaking would be unable to repay the loans covered by the debt taken on to cover the planning and construction costs.”
“(265) In the present case, […], the Commission first of all set out the methodology used by the Danish authorities to calculate the aid amount. The Commission stated that that method was based on an approach similar to that set out in point 4.2 of the Guarantee Notice, which provides that, where no market price for the guarantee is available, ‘the aid element should be calculated in the same way as the grant equivalent of a soft loan, namely as the difference between the specific market interest rate this company would have borne without the guarantee and the interest rate obtained by means of the State guarantee after any premiums paid have been taken into account’. The Commission also stated that the Danish authorities, when calculating the aid amount, had not distinguished between the value of aid associated with the State loans and the value of aid associated with the State guarantees, and therefore the aid elements resulting from the State guarantees and from the State loans were therefore calculated in the same way. In addition, the Commission stated that the Danish authorities had determined the yearly aid element by taking the difference between the WACC that a market investor would be expected to require (5.59%) and the risk-free rate (1.5%) adjusted for the premium that Femern was required to pay to the Danish State, multiplied by the sum of outstanding guaranteed debt and outstanding State debt. The Commission set out, […], the reasons why it considered that method to be appropriate.”
It is likely that a rate equal to the WACC is pretty high as the risk associated with a large infrastructure project such as the Fixed Link is relatively lower than that of other infrastructure projects. The Danish authorities, acting as regulators, can adjust the level of tolls without conferring State aid. So here the Commission may have erred on the side of caution.
“(266) The Commission calculated the aid amount as being DKK 12.046 billion (approximately EUR 1.615 billion). In that regard, it stated that the aid was the discounted value using the WACC as the discount rate. It also stated that that calculation included capital injections and aid associated with State loans and State guarantees, and that the calculation of the aid amount was based upon an increase of the premium from 0.15% to 2%.”
“(268) The Commission explained the relationship between the aid amount and the funding gap by stating that ‘the aid amount is directly linked to the underlying assumptions of the funding gap model, not only as a consequence of the limitation of the aid amount to the funding gap level but also due to the fact that the level of the debt, and thus the level of the aid amount, depends on factors such as the overall construction cost and the interest rate assumed’.”
When using the funding gap method, Member States must ensure that the aid amount does not exceed the funding gap. Therefore, the General Court held that “(271) the Danish authorities cannot be criticised for having calibrated the various parameters used to calculate the aid amount, in particular the maximum guaranteed amount and the premium applicable to the risk-free rate and the duration of the aid, in order to ensure that the aid amount
corresponded to the funding gap which constitutes the maximum aid ceiling that may be authorised.”
Prevention of undue distortions of competition and balancing of the effects of aid
The applicants claimed that the Commission erred in concluding that the negative effects of the Fixed Link on competition were not capable of offsetting its positive effects.
With respect to the negative effects of the aid, the General Court concurred that “(281) the opening of the Fixed Link would have a negative impact on ferry operators serving the Rødby and Puttgarden route, and on other routes, and on the activities of the ports used by those ferries. In that regard, the Commission considered that Femern’s power to influence the operation of the ferry services was limited on the ground that the aid was limited to the financing needed for the costs incurred during the phase relating to the planning and construction of the Fixed Link, with the funding gap as the upper limit. Therefore, the Commission considered that the main impact on the ferry operators’ services is created by the public authorities’ decision to construct the Fixed Link, providing an alternative to existing modes of transport, and that it is not for the Commission to call into question the choice made by the public authorities.
The second sentence of the above paragraph does not explain how the impact of competition is linked to the amount of the aid. The amount of aid affects competition in so far that it enables the aid recipient to reduce its prices and to use the aid to cover any deficit between revenue and costs. In this case, competition had already been impacted by the forecast revenue that was included in the funding gap calculations. As may be remembered, the tolls that would be charged by Femern were assumed to stay at the 2006 level, adjusted for inflation. That would give a competitive advantage to Femern as the quality of the service would improve.
“(284) As regards the argument of the applicants […] that the Commission failed to quantify the positive and negative effects of the aid for the purposes of assessing the seriousness of the distortion of competition, it should be noted that it is accepted that the consideration of the positive and negative effects of aid may be succinct […], or inferred implicitly from the examination of the effects of the aid on competition and trade where the negative effects of the aid are limited”.
“(285) In addition, it must be noted that paragraphs 41 to 43 of the IPCEI Communication merely set out principles for the purposes of the examination of the weighing up of the positive and negative effects of the aid, but do not require those effects to be quantified. Therefore, the Commission cannot be criticised for not having assessed those positive and negative effects on the basis of quantitative factors taking into account the size of the beneficiary of the aid, its market share relative to its competitors and the size of the amount of aid granted.”
“(289) It should be noted that, as regards the negative effects of the Fixed Link on existing transport services and in particular on the activities of ferry service operators, the Commission, […], drew a distinction between, on the one hand, the negative effects attributable to the public authorities’ decision to construct the Fixed Link, which offers an alternative to the existing modes of transport, and, on the other hand, the negative effects attributable to the
aid measures granted to Femern. According to the Commission, when weighing up the positive and negative effects, it must confine itself to examining the negative effects of the aid measures granted to that undertaking.”
“(290) In that regard, it must be noted that it has already been held that, in the context of the review of State aid, it is not for the Commission to call into question the public authorities’ choice to decide on the construction of an infrastructure that will provide an alternative to existing means of transport on the ground that such a project provides a solution which, on the whole, has positive results, even if the putting into service of that infrastructure would result in the disappearance of the existing modes of transport”.
“(292) As regards the negative effects of the grant of aid measures to Femern, the Commission found that the financing granted to Femern covered the costs of planning and constructing the Fixed Link up to the limit of the funding gap, that the amount of the fees for use of the Fixed Link was regulated by the public authorities and that the possibility for that undertaking to grant discounts was limited by the need to ensure sufficient revenues to pay for the operating costs and to repay the loans taken out to finance the planning and construction of the Fixed Link. Therefore, the Commission considered that Femern’s power to influence the operation of ferry services was limited and that the main negative effects resulted from the public authorities’ decision to construct the Fixed Link.”
Once more, the possibility of Femern to grant discounts seems to be an issue of limited significance, given the higher quality of the service it would provide.
“(293) It must be noted that the need for a weighing of the expected positive effects in terms of realisation of the objectives set out in Article 107(3)(a) to (e) TFEU against the negative effects of aid in terms of distortion of competition and the effect on trade between Member States is no more than an expression of the principle of proportionality and the principle that the exemptions set out in Article 107(3) TFEU must be interpreted strictly”.
At this point the General Court cited its judgment in case Hotel Berlin [T-578/17] which in turn cited its earlier judgment in case HH Ferries [T-68/15] concerning another major infrastructure project. The statement that the weighing of the effects of aid is nothing more than an expression of the principle of proportionality is odd because in all its guidelines the Commission examines proportionality separately from the weighing and balancing of the effects of aid.
“(294) Furthermore, since the principle of proportionality seeks to limit aid to the minimum necessary so as to reduce distortions in the internal market, it must be held that the Commission is entitled to use, at the stage of weighing up the positive and negative effects of the aid measures, the findings made in the context of the examination of the proportionality of the aid. In the present case, the limitation of the aid amount to the funding gap of the investment project meant that the financing granted to Femern was limited to 27.3% of the eligible costs. Thus, where the examination of the proportionality of State aid and the examination of the weighing up of positive and negative effects are intrinsically linked, such a limitation of the aid amount is a relevant factor in finding that the negative effects of the aid measures are limited.”
Proportional aid presumably causes less distortion in relation to disproportional aid. But, it does not necessarily follow that the distortion caused by proportional aid is not large or substantial. Therefore, the relevant question is whether the benefits of aid outweigh the competition harm caused by the aid even when it is proportional.
With respect to a possible negative effect by the acquisition of market dominance by Femern, the General Court held that “(304) although the Commission accepted that it could not be excluded that Femern would acquire a dominant position on certain transport services on the Fehmarn Belt market, it nevertheless stated that the existence of a dominant position was not in itself contrary to EU law. In addition, after finding that Scandlines currently held a monopoly on the route between Rødby and Puttgarden, it considered that, if there were continued ferry services on that route, the Fixed Link would contribute to breaking that monopoly, which would create a more competitive market.”
Conclusion
The General Court dismissed in its entirety the action against the Commission decision. Despite the questions I raised on certain parts of the judgment, it is still an important interpretation of the IPCEI guidelines.
