Introduction
On 28 February 2024, the General Court delivered two important judgments on the presence of State aid and its compatibility with the internal market in connection to public funding of the Fehmarn Fixed Link between Denmark and Germany. The Fixed Link is a major infrastructure project consisting of tunnels, bridges and access road and rail connections.
The judgments of 28 February 2024 are important because the General Court clarified complex issues such as the exercise of state prerogatives, the guidelines on Important Projects of Common European Interest [IPCEI], the application of the funding gap methodology and balancing of the positive and negative effects of State aid.
This article reviews case T-364/20, Denmark v Commission.[1] The article next week will review case T-390/20, Scandlines v Commission.
Background
In July 2015, the Commission adopted decision SA.39078 by which it considered that measures in favour of Femern Landanlæg for the planning, construction and operation of road and rail connections to the hinterland did not constitute State aid. By contrast, the measures in favour of Femern for the planning, construction and operation of the Fixed Link constituted compatible State aid.
In December 2018, the General Court in cases T‑630/15, Scandlines v Commission and T‑631/15, Stena Line v Commission, annulled the part of the Commission decision concerning Femern because the Commission had not assessed correctly the gross grant equivalent of State aid in state guarantees. However, the General Court agreed with the Commission that the measures in favour of Femern Landanlæg did not constitute State aid because some of its activities were not economic in nature while other activities were carried out in the context of a legal monopoly, which were not open to trade and competition.
Subsequently, the Commission re-opened the case, re-assessed the state guarantee and in 2019 it re-adopted decision SA.39078. It again found the presence of compatible State aid.
State prerogatives and economic activities
Denmark argued that the Commission wrongly concluded that Femern did not carry out activities linked to the exercise of public powers.
The General Court noted, first, that the notions of “activity that falls within the exercise of responsibilities of public authority” and “activity linked to the exercise of prerogatives of public power” overlap. [paragraph 49 of the judgment]. The Commission considered that there was no difference between those two expressions which were variants of the same legal concept.
The General Court recalled that the Commission had considered that an entity can be considered as acting as a public authority or exercising prerogatives of public power when its activity is linked to the essential functions of the state. [para 51]
Then the General Court cited examples in the case law of the exercise of public power prerogatives such as the control of airspace, aviation safety, anti-pollution monitoring in ports, management of maritime traffic, collection of legally requested data from companies, the operation of electronic public procurement and determining the terms of compensation for operators of passenger transport services. [para 52]
Therefore, the notion of “activity linked to the exercise of prerogatives of public power” covers in particular activities which involve the use of prerogatives that are not subject to general legal principles of common law, such as regulatory or coercive activities, or privileges of public power which are binding on citizens and businesses, or activities aimed at ensuring compliance with the law. [para 54]
In other words, the General Court identified the binding character of regulation, coercion or enforcement as the decisive element of the prerogatives which are reserved for the state.
Then the General Court noted that the essential functions of the state were not defined in the treaties. According to Article 4(2) TEU, among the essential functions of the state are those whose aim is to ensure territorial integrity, maintain public order and safeguard national security. However, the Court warned that those are not the only essential functions of the state because the list in Article 4(2) TEU is non-exhaustive. [para 54]
The General Court concluded that the activities of an entity can be considered as linked to the exercise of prerogatives of public power when they fall within the essential functions of the state. [para 55]
Public service mission
Then the General Court rejected the argument of Denmark that the notion of “prerogatives” should be interpreted as including public service missions more broadly. It repeated that the exercise of public powers involves the imposition of an obligation and that compliance with that obligation is ensured by the use of coercive powers. [para 56]
This is an important statement because if the General Court had accepted that public service missions were linked to state prerogatives, it would have excluded all public funding granted on the basis of Article 106(2) TFEU from the scope of Article 107(1) TFEU. It would have also been contrary to Article 106(2) that refers to services that are in the general interest but which have an economic character.
The General Court also noted that non-economic activities are broader than the exercise of state prerogatives because they also include activities which do not consist of providing goods or services on a given market in competition with those of other operators who pursue profit. [para 61]
In addition, the General Court rejected the argument of Denmark that in order to determine the existence of a prerogative of public authority, account should be taken of the pursuit of an objective of general interest. This was because the fact that an entity is entrusted with a certain mission of general interest cannot prevent its activities from being characterized as economic activities. [para 64]
Indeed, as explained above, Article 106(2) TFEU allows Member States to grant State aid to providers of services of general economic interest only if they impose on them a public service obligation or mission.
Activities that may be linked to state prerogatives
Denmark claimed that the Commission wrongly held that the construction and operation of the Fixed Link did not relate to the exercise of state prerogatives.
The General Court, first, recalled that the fact that an entity constitutes a public organisation under the authority of a minister cannot exclude it from being an undertaking. Furthermore, since the state itself or a state entity can act as an undertaking, the fact that that organisation can be assimilated to public administration does not prevent the exercise of economic activity. [para 78]
The General Court concluded that the fact that Femern is subject to close control by public authorities and that it must conform with rules on access to documents or with rules on control of its accounts cannot suffice to prove that its activities are linked to the exercise of state prerogatives. [para 80]
In response to the Danish argument that the Commission had not taken into account the functions delegated to Femern as a road authority and as manager of the railway infrastructure, the General Court held that the fact that an entity has state prerogatives for the exercise of part of its activities does not, in itself, prevent its qualification as an undertaking for other activities which are economic in nature. [para 87]
This finding of the General Court should not be surprising because it is well-established in the case law that the same entity can carry out both economic and non-economic activities and that the public funding of the non-economic activities is not deemed to be State aid as long as account separation can prevent the cross-subsidisation of the economic activities.
The General Court went on to further clarify the link between economic activities and the exercise of state prerogatives. To the extent that a public entity carries out an economic activity which can be dissociated from the exercise of its state prerogatives, that entity acts as an undertaking. However, if the economic activity is inseparable from the exercise of its state prerogatives, all of its activities are considered to be linked to the exercise of state prerogatives. And, the Court stressed that there is no threshold below which it would be appropriate to consider that all of the activities of an entity are non-economic, even if the economic activities are in the minority. [para 88]
Because the General Court considered that Denmark had not provided any evidence to demonstrate that the functions of road authority and railway infrastructure manager carried out by Femern were inseparable from its economic activities, it dismissed the plea of Denmark on this issue.
Competition between Femern and other transport operators
Next, Denmark argued that the Fixed Link was not in competition with ferry operators in the same way that rail infrastructure was not in direct competition with road transport, busses or airports.
The General Court, first, noted that the Commission had found that there was a market for transport services for crossing the Fehmarn Strait, which were offered by a ferry operator that was an undertaking. Consequently, the Commission considered that the transport services provided by Femern were in competition with the transport services offered by that ferry operator. [para 127]
The General Court also observed that, even though Denmark disputed the existence of a competitive relationship between the services offered by Femern and those provided by the ferry operator, in Femern’s financial analysis it was indicated that the price level was an element that was taken into account by consumers in their choice between the Fixed Link and the ferries. Thus, there was substitutability of services, even though Femern and the ferry operator offered services with different characteristics in certain respects. [paras 129-130]
The General Court also rejected the argument of Denmark that there was no competition between the Fixed Link and the ferry operators on the grounds that the effects on competition resulted from a decision of the public authorities exercising their state prerogatives. The Court noted that the fact that a Member State uses such prerogatives to establish an entity responsible for constructing and operating a transport infrastructure does not necessarily imply that the activities of this entity are also linked to the exercise of state prerogatives. [para 135]
In other words, the General Court here distinguished between the decision of the state to establish Femern in order to achieve a public policy objective and the nature and impact of the activities of Femern.
The General Court recalled that the fact that an entity is entrusted with a certain mission of general interest cannot prevent its activities from being considered as economic activities. [para 137]
The Fixed Link is commercially exploited
Denmark claimed that Femern did not operate the Fixed Link as a market operator and, therefore, it did not exploit it commercially.
The General Court began its analysis on this point by noting that the fact that an activity is not carried out by private operators or the fact that it is not profitable does not constitute a relevant criterion for the purposes of qualifying it as economic. It follows that the economic character or not of an activity does not depend on the private or public status of the entity carrying it out, nor on the profitability of the activity. [para 146]
By contrast, it is the fact of making access to the Fixed Link subject to the payment of fees that constitutes a relevant element in qualifying the operation of the Link as an economic activity. [para 148]
The General Court also recalled that, in order to exclude that an activity is of economic nature consisting of offering goods or services on a market, it is not sufficient to argue that the operator of the infrastructure does not act on a purely commercial basis of maximizing profits, that it puts the general interest before return on investment, that it does not have a profit motive or that it systematically reinvests its profits. [para 145]
It follows that even if the revenue from an activity must be reinvested in non-economic activities, remunerated activities constitute participation in the market. Thus, arguments based on the fact that Femern does not pursue an objective of maximizing profits and that it must reinvest its profits to finance infrastructure cannot succeed. [paras 156-157]
Furthermore, the question whether the activities carried out by an entity have an economic character does not depend on the fact that a private investor would not be able to carry them out under the same conditions. [para 158]
The mere fact that the Danish Minister of Transport regulates the level of fees on the basis of macroeconomic considerations relating to transport policy is not sufficient to conclude that the activity of operating the Fixed Link does not constitute an economic activity. [para 160]
Conclusion
The General Court, after rejecting several other pleas of Denmark concerning the alleged inseparability between the construction and operation of the Fixed Link and claimed absence of distortion of competition and affectation of trade, proceeded to dismiss the appeal in its entirety.
[1] The full text of the judgment in languages other than English can be accessed at:
