Public funding of ports confers an advantage to their owners, but not for operators chosen competitively or users who pay a market price.
Introduction
Few issues have exercised public authorities more than the funding of infrastructure which is used for commercial purposes. This is because State aid may benefit the owner and/or the operator and/or the users of the infrastructure. The Commission practice has not always been consistent, but over time one can observe convergence to the following two principles. First, competitive selection eliminates any advantage in the meaning of Article 107(1) TFEU for operators. Second, the charging of access fees at market rates also removes any advantage for users. The 2016 Notice on the Notion of State Aid has certainly contributed to this convergence.
This article is divided into two parts. The first part reviews three recent cases of management of infrastructure. The second part considers whether users of a subsidised infrastructure indeed derive no advantage if they pay a market price.
The three cases which are reviewed here are: SA.46644, construction of railway tracks in the port of Lubeck; SA.44693, cruise port of Harlingen; SA.46749, logistics centre in the port of Pitea.
SA.46644, railways tracks in the port of Lübeck, Germany[1]
The objective of the measure is to fund the construction of railway tracks in the port of Lübeck. The land on which the tracks will be built is owned by the Lübeck Port Authority [LPA] which is itself owned by the city of Lübeck.
Germany argued that the construction of the railway track was public infrastructure and therefore not an economic activity. The Commission rejected this argument on the following grounds:
“(27) In this regard, the Commission recalls that the construction of railway infrastructure that is made available to potential users on equal and non-discriminatory terms, indeed, typically does not affect trade between Member States or distorts competition, since such infrastructure (i) typically does not face direct competition, (ii) is typically subject to only insignificant private financing in the Member State concerned and (iii) typically is not designed to selectively favour one specific undertaking or sector but rather society at large. However, in the present case, the aforementioned condition (iii) is not met because the rail tracks in question are located within the area of the port of Lübeck and will be used exclusively to transport LNG to the port’s LNG terminal, thereby enabling the port to provide fuel for LNG fuelled ships and increasing the port’s ability to attract demand from ships using it.”
The principle that applies to this situation is clear. Public funding of infrastructure is State aid when the infrastructure is within private property or on a site that is not freely accessible and it is used commercially by the owner of the property or site.
The funding for the project is provided from three sources:
- the Land Schleswig-Holstein [EUR 0.51 million],
- a loan from the city to LPA on market terms [EUR 0.38 million],
- the EU Innovation and Network Executive Agency [INEA] [EUR 0.29 million].
Therefore, the total investment cost of the project was EUR 1.18 million.
The first and the third source utilise public money. However, the funds from INEA are not considered to be state resources [paragraph 30]. The decision does not explain why. The reason must be that they do not come under the control of any public authority in Germany because, presumably, they are paid directly to LPA without transiting through a channel which is under the management of a public authority. Therefore, the amount of State aid is only the EUR 0.51 million that is contributed by the Land.
The need for State aid is established through the funding gap method. The net operating revenue from the project over its expected 26-year life is not sufficient to cover the initial investment cost. This means that the project shows a negative net present value [paragraph 49].
The aid is found to be proportional because it remains below the identified funding gap [paragraph 51]. As noted in several past articles on the Lexxion StateAidHub, a project cannot be commercially viable if part of the funding gap remains unfilled. Either, the project operator is exaggerating costs or the real revenue is expected to be higher. The Commission considers that there is no State aid problem if the amount of aid remains below the projected funding gap, regardless of the commercial viability of the project.
But if the Commission approves aid for a project that will ostensibly fail commercially, then there is something wrong with the compatibility of the aid. The aid supports project that is likely to fail. This cannot be in the common interest which is a fundamental requirement for compatibility.
It would be better to admit that there cannot be certainty about future costs and revenues over a 26-year period and instead put in place appropriate mechanisms to claw-back any excess profit. The decision indeed refers to a “margin for unforeseen costs” [paragraph 11], but it does not appear to be the same as a claw-back arrangement.
Although there is aid, but compatible, for the port operator, there is no aid for the port users. This is because “(40) port users shall enjoy equal and non-discriminatory access to the infrastructure. Germany confirmed that the usage fees for the port of Lübeck will be charged in line with fees charged in comparable ports and, therefore, constitute market prices.” “(41) Thus, the Commission concludes that no advantage will be granted to port users and that there is, therefore, no aid granted to those users.”
Do you know we also publish a journal on State aid?
The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.
SA.44693, cruise port of Harlingen, the Netherlands[2]
The measure supports the construction of floating mooring for cruise ships and dredging of the access channel in the port of Harlingen in the Netherlands. The port is owned and operated by the municipality of Harlingen.
The total cost of the project is EUR 2.9 million with EUR 2.4 million contributed from the province [EUR 0.73 million] and the municipality [EUR 1.63 million]. What is interesting is that the remaining EUR 0.57 million also comes from municipal funds. However, this is not considered to be State aid because it “stems from commercial revenues” [paragraph 4].
The expected net revenue is EUR 0.57 million which results in a funding gap of EUR 2.4 million [= EUR 2.9 – EUR 0.57] over the 30-year life of the project. The aid of EUR 2.4 million corresponds to a rate of aid intensity of 81%.
As in the other decisions, the aid for the port owner/operator is found to be necessary and proportional [shown by the existence and size, respectively, of the funding gap]. Similarly, port users are deemed not to receive any State aid because they pay prices which are comparable to those charged by other ports.
What is unusual about this case is that the Commission considers the amount of EUR 0.57 million not to constitute a state resource because it comes from “commercial revenue”. As the Commission has stressed in numerous decisions, the origin of the money is irrelevant. What is relevant is whether it comes under the control of a public authority. And in this case it does.
Since the amount of EUR 0.57 is invested by a public authority, it can confer an advantage to the project. Public money does not confer an advantage only in three situations: 1) It compensates for damage caused by the state, 2) it compensates for the cost of public service obligations in compliance with the Altmark criteria, and 3) it seeks to make profit at a rate that is acceptable to a private investor. The only possibility here is the third one. Probably, there is a realistic prospect for a commercial return on the investment of EUR 0.57 million. Indeed, the investment of EUR 0.57 million appears to break even because the net discounted net revenue is also EUR 0.57 million. Whether a private investor would be satisfied just with breaking even over a 30-year period depends on the rate of interest used in these calculations. This rate is not revealed in the decision. Moreover, the investment appears to break even only because the municipality put on the hat of public authority and authorised aid of EUR 1.63 million!
EU courts have dealt with the issue of multiple transactions in the France Telecom [T-425/04 RENV] and Bouygues [C-399/10 P] judgments. Actions of a public authority which are closely connected in time and have the same purpose must be assessed together. Consider the following example. Let a project cost 100 today and the expected net revenue be 40 in a year’s time. Obviously there is a funding gap of 60. But if there is a lot of uncertainty about the revenue that can be realised, so the risk is high, it would be prudent to discount the amount of 40 by an appropriate rate of interest. Let’s say that in this case it is 10%. The present value of 40 becomes 36.4 and the funding gap increases to 63.6. If the revenue is rather certain, the risk is low, and the rate is lowered to 3%, the present value is 38.8 and the funding gap is now 61.2. This example shows that there is an one-to-one relationship between the return to the investor and the amount of State aid that needs to be pumped into the project.
SA.46749, logistics centre at the port of Pitea, Sweden[3]
The measure concerns investment in a logistics centre at the port of Pitea in Sweden. The port is fully owned by the municipality of Pitea.
The total cost of the project is SEK 130 million. The discounted net revenue over the 30-year life of the project is estimated at SEK 27.5 million. The project has a residual value of SEK 4.1 million. These calculations result in a funding gap of SEK 98.4 million. The amount of aid is set at SEK 98.4 million which in terms of aid intensity is 76% [=98.4/130].
The sources of the public funds are budgets of Swedish authorities [SEK 33.4 million] and the European Regional Development Fund [SEK 65 million].
Like in the other decisions, the Commission concludes that the aid for the owner of the port is necessary and proportional. Also as in the other decisions, the users of the port are not considered to receive any advantage because “the fees charged to the port users correspond to the level of fees charged in comparable ports and, therefore, constitute market prices.” [Paragraph 38].
With respect to the port operator, the Commission notes that an unrelated company, called ShoreLink, was chosen through a competitive, transparent, non-discriminatory and unconditional tender. ShoreLink has a contract with the port owner to whom it pays an annual fee under market conditions. Consequently, the Commission finds no State aid for the port operator.
Where does the aid go?
In all three cases, the Commission takes the view that there is no aid for the users because they will pay fees at market rates. If ports were interchangeable, then there would be no doubt about the proposition that users pay the price that they could or would pay anyway in the absence of aid. Users would simply choose the port with the lowest fee or the fastest service or the port offering the most convenient combination of price and quality. But ports are monopolies in their catchment area. What is charged by another port may not be relevant to the users of a port several hundred kilometres away.
The aid that is granted to the port owner/operator does not disappear into thin air. It enables the owner/operator to offer a service below cost. If the price charged to users could cover the initial investment and subsequent operating costs, no State aid would be needed. The aid is needed precisely because the revenue that is generated by the prices paid by users falls below costs.
Consider again the example of a port with 100 of investment costs and 40 of net operating revenue. For the sake of simplicity, assume that the net revenue of 40 is derived from gross revenue of 70 minus operating costs of 30. Further assume that there is only one customer. Naturally, this is contrived but it is sufficient to illustrate the argument. The single customer pays a price of 70. The funding gap and the required amount of State aid is 60. If the price is raised to 80, net revenue becomes 50 and the funding gap declines to 50 too. If the price is lowered to 60, the net revenue becomes 30 and the funding gap increases to 70. We see that there is a correspondence between the price paid by the users and the amount of State aid that must be pumped into the project to make it viable. The customer may pay 70 but the real cost of the service it receives is 130 [= 100 + 30]. The aid of 60 covers the difference.
These rudimentary calculations lead to the important question of how indirect aid to port users, and more generally to infrastructure users, should be treated under State aid rules? Should it be quantified and be kept below a certain maximum rate? The answer is no. It would be too bureaucratic and too cumbersome. It would be better to consider it as compatible aid on the presumption that its proportionality is ensured by the charging of fees which are comparable to fees charged by other ports. This also ensures that the market distortion from price competition by state-funded ports is minimised.
————————————————————————–
[1] The full text of the Commission decision can be accessed at:
http://ec.europa.eu/competition/state_aid/cases/266455/266455_1899202_114_2.pdf.
[2] The full text of the Commission decision can be accessed at:
http://ec.europa.eu/competition/state_aid/cases/266751/266751_1865918_100_2.pdf.
[3] The full text of the Commission decision can be accessed at:
http://ec.europa.eu/competition/state_aid/cases/266720/266720_1898414_86_2.pdf.
