A public authority may act as a market operator and acquire services through a private third party without conferring an advantage to the provider of those services.
Introduction
When a public authority buys a service and pays the market price it does not confer an advantage to the seller in the meaning of Article 107(1) TFEU. Even if it pursues a public policy objective, the decisive element is whether it pays a market price. However, when it buys that service through a private third party it may attempt to evade State aid rules.
But, on 17 November 2022, the Court of Justice ruled, in joined cases C331/20 P, Volotea v European Commission & C343/20 P, easyJet v European Commission, that it would be wrong to presume that state purchasing of services through private third parties automatically confers an undue advantage to the sellers. Regardless of the motives or objectives of the state, State aid is granted to the sellers only when the purchase price is higher than the market rate.
Background
Volotea and easyJet appealed against the judgments of the General Court in cases T-607/17, Volotea v Commission and T-8/18, EasyJet v Commission by which it dismissed their requests for annulment of Commission decision 2017/1861. In that decision, the Commission found that Italy had granted incompatible aid through the operators of Sardinian airport to the two airlines in question. The airports in question were considered to be “intermediaries” through which State aid flowed to the airlines.
The Sardinia authorities sought to attract more tourists to the island. For this purpose, they gave certain sums of money to Sardinian airports to promote the island as tourist destination. The airports then passed on those sums to airlines, two of which were Volotea and EasyJet. The Commission rejected the claim of Sardinia that in fact it procured marketing services or that it acted as a rational market operator.
After finding that the appeals were admissible, the Court of Justice turned its attention to the substance of the two cases. The first plea that it examined was whether the Sardinian regional authority acted as a market investor.
Can a market operator act through intermediaries?
The Court of Justice, first, noted in paragraphs 99-101 of the judgment that both Volotea and EasyJet disputed the correctness of the conclusion of the General Court that the Sardinian regional authority could not act as a market through the regional airports and that the regional authority pursued, instead, a public policy objective.
The Court of Justice, first, recalled, in paragraphs 103-104, the definition of State aid and of the concept of advantage. “(105) Accordingly, it is essentially the effects of the State measure at issue in a given case on the recipient undertaking or undertakings that must be taken into consideration in order to establish the existence of an advantage, whether that be granted directly by the State or by a public or private body which it has appointed or established for that purpose”.
“(106) By contrast, since Article 107(1) TFEU does not distinguish between the causes or objectives of State measures […], the nature of the objectives pursued by the Member State responsible for those measures or to which they may be imputed has no bearing whatsoever on the question of whether they grant an advantage to one or more undertakings and, more broadly, on whether they are to be classified as State aid”.
“(107) Consequently, any State measure which, whatever its form or objectives, is likely to favour one or more undertakings directly or indirectly, or which confers an advantage on them which they would not have been able to obtain under normal market conditions, must be regarded as satisfying the condition [concerning the definition of State aid]”.
In other words, the Court of Justice confirms that the state can pursue a public policy objective, such as attracting more tourists to Sardinia, without granting State aid if it does not confer an advantage.
“(108) Lastly, the characterisation of such an advantage as existing is, in principle, carried out by applying the market economy operator principle […], unless there is no possibility of comparing the State conduct at issue in a particular case with that of a private operator because that conduct is inseparably linked with the existence of infrastructure that no private operator would ever have been able to create […], or the State acted in its capacity as a public authority. In respect of that latter point, it must, however, be observed that the mere exercise of the prerogatives of a public authority, such as the use of means that are legislative or fiscal in nature, does not by itself render that principle inapplicable […] It is the economic nature of the State intervention at issue and not the means put into effect for that purpose that renders that principle applicable”.
The explanation in paragraph 108 is important. It reiterates two aspects of the application of Article 107(1) TFEU which are often misconstrued despite the fact that they have been clarified in the case law. First, the Commission must always ask whether the market economy operator principle [MEOP] is applicable even when the Member State concerned does not request it. It is only when the state pursues an objective that no private investor would ever do, such as, for example, the construction of public infrastructure, that the Commission can presume that the MEOP is inapplicable. Second, and more importantly, the origin of the resources which are available to the state is irrelevant. What is relevant is how those resources are used; i.e. whether they confer an advantage.
The various manifestations of the MEOP
Then the Court of Justice elaborated on the various forms or manifestations of the MEOP. “(109) The application of the market economy operator principle itself involves, […], the use, on a case-by-case basis, of various specific tests which each aim to compare, in the most appropriate and adequate manner possible, the State measure at issue in a given case, taking account in particular of its nature, with a measure that might have been adopted by a private operator in a situation that is as alike as possible and acting under normal market conditions”.
“(110) Those tests include, inter alia, that of the private investor, which applies in the case of State measures such as capital injections […] They also include the private creditor test, which is applicable in the case of measures such as payment facilities for the repayment of a debt […], the private debtor test […], and the private vendor test, which is applicable in the case of measures related to the supply, directly or through public entities or private undertakings controlled by or under the influence of the State, of goods and services and the fixing of their conditions of sale, such as the price”.
“(113) As regards, in particular, the application of the market economy operator principle in a specific case, it follows from the settled case-law of the Court that this involves the Commission showing, following an overall assessment that takes into consideration all the relevant evidence in the case, that the undertaking or undertakings benefiting from the State measure at issue would manifestly not have obtained a comparable advantage from a normally prudent and diligent private operator in a situation that is as alike as possible and acting under normal market conditions. Within that overall assessment, the Commission must have regard to all the options that such an operator would reasonably have envisaged, all the information available and likely to have a significant influence on its decision, and the developments that were foreseeable at the time when the decision to confer an advantage was taken”.
In essence, therefore, a private operator i) takes all information into account, ii) weighs all the options open to it and iii) assesses future prospects rather than past performance, unless the past can affect future outcomes.
(In)applicability of the MEOP
Then the Court of Justice proceeded to show that the General Court misapplied those principles because it “(117) considered that [the MEO] principle had to be regarded as being inapplicable in the present case on three grounds, essentially relating, first, to the fact that the airport operators covered by the decision at issue were not State-owned entities […], second, to the fact that the aid scheme establishing the measures at issue pursued public policy objectives […], and, third, to the fact that those airport operators merely implemented that scheme and those measures without having in that context any significant autonomy in relation to the Autonomous Region”.
“(118) However, none of those grounds was capable of ruling out the applicability of the market economy operator principle.”
“(119) Accordingly, neither the first nor the third of those grounds justified the conclusion that the applicability of that principle was ruled out, since it may also be applied when an advantage is conferred on one or more undertakings by the State directly or through private undertakings under its control or influence”.
A comment is in order here. For a measure to constitute State aid, it must, among other things, be attributed to the state. Normally, when a measure that is attributed to the state is actually carried out by a third party, then the typical conclusion is that that party carries out public policy on behalf of the state. So there is no question of whether the third party acts autonomously as a market operator. But in this case the Court of Justice says that it is also possible that the state can instruct a private third party to act as a market operator on its behalf.
“(120) Similarly, the second ground relied on by the General Court by no means ruled out the applicability of the market economy operator principle […] The pursuit of public policy objectives is in fact inherent in most of the State measures which may be classified as ‘State aid’ and examined, to that end, in the light of that principle […] The consequence of applying that principle, however, is that those measures must be examined while leaving aside such objectives […] and the benefits linked to the State’s situation as a public authority which the implementation of those objectives is liable to generate”.
In other words, the Court confirms that the state can pursue a public policy objective without necessarily granting State aid if it does not confer an advantage. For example, the state can build public infrastructure to support the development of a region by procuring construction services. In this case, the Sardinian authorities allegedly procured marketing services.
“(121) That being said, it must be stated that, while wrongly concluding that the market economy operator principle was inapplicable, the General Court nevertheless held, as Volotea and easyJet point out, that the airlines which had concluded contracts for the provision of air transport, marketing and advertising services with the operators of Cagliari-Elmas and Olbia airports had to be regarded as having benefited from an ‘advantage which they would not have obtained under normal market conditions’, on the ground that the remuneration paid to them under those contracts was not consideration for services which satisfied genuine needs on the part of the Autonomous Region and that those contracts had furthermore been entered into by the airport operators at issue without a tender procedure or equivalent procedure being carried out beforehand”.
A new iteration of the MEOP: The private acquirer test
Then the Court of Justice dealt with the problem created by the fact that the contracts had not been awarded following a competitive selection procedure. In this respect, it reiterated established case law according to which a competitive procedure creates a presumption that no advantage is conferred. However, the absence of a competitive procedure does not create a presumption that an advantage has actually been conferred.
“(125) It must be pointed out that the private acquirer test, since it constitutes one of the various iterations of the market economy operator principle, must consequently be interpreted and applied in a manner that is consistent with that principle and the evidential requirements underlying its application.”
“(126) In that regard, it indeed follows from the settled case-law of the Court that where a State or other public body decides to sell or, conversely, to acquire goods or services directly from one or more private undertakings, the holding of a tender procedure organised in accordance with detailed rules ensuring its openness, impartiality and non-discriminatory nature allows for the presumption, in certain conditions, that the contracts or other acts which are concluded to that end following that procedure, and the remuneration that they stipulate, reflect normal market conditions and, in particular, a normal market price or value that rules out the existence of an ‘advantage’ for the purpose of Article 107(1) TFEU”.
“(127) However, it is also apparent from that case-law that the holding of such a procedure is not always mandatory for the purposes of such a sale or purchase transaction and, moreover, that there are other methods of ruling out the existence of such an advantage. It is in fact possible to use other methods, such as an independent expert report […] or a reliable, thorough and comprehensive valuation of the relevant costs […] in order to ensure that the transaction thus carried out constitutes a normal market transaction resulting in the setting of a normal market price or value.”
“(128) A fortiori, the holding of a tender procedure cannot constitute the sole method of ruling out the existence of an ‘advantage’, for the purposes of Article 107(1) TFEU, where the State does not carry out the sale or acquisition of goods or services to or from private undertakings directly, but does so through the intermediary of other private undertakings that are not obliged to make use of such a procedure. Whichever method is used, the question of whether such an advantage must be ruled out or, conversely, found to exist requires, in any event, an assessment of whether or not the contracts or other acts providing for that sale or acquisition reflect normal market conditions.”
Although in the very next paragraph, the Court of Justice lays the burden of proof on the shoulders of the Commission, its findings at this point undermine the effectiveness of State aid rules. It is true that when a public authority procures a service it may in fact pay a market price so it cannot be automatically inferred that absence of competitive selection confers an undue advantage. If public authorities had to organise tenders for whatever they bought, no matter how small the amount, it would have imposed a large administrative burden on them. However, if now they can escape detection by passing money to a private third party and require that party to procure services on their behalf, it becomes much more difficult for competitors and the Commission to identify whether they grant State aid, given that private parties can hide preferential dealings in their bona fide commercial transactions. The Court should not have left it to the third parties that operate as agents of the state to decide themselves whether to organise a tender or identify differently the market price. The Court should have ruled, in consistence with previous case law, that Member States are free to use third parties to pursue public policy objectives but at the same time Member States must impose explicit obligations on such third parties on the method by which they verify that the price they pay for the services they procure corresponds to the market price and the quality of the service that they must procure. Otherwise, why would a profit-seeking third party bother with a costly search to establish the market price and the right service quality when its task is simply to pass on money to a provider of some service?
“(129) Furthermore, […], it is the task of the Commission to carry out that assessment and prove the existence of an advantage, for the purposes of Article 107(1) TFEU, under the conditions referred to in paragraphs 111 and 112 above. In the present case, that advantage, assuming it to be established, can correspond only to the difference between the remuneration which the beneficiaries at issue could have expected to achieve under normal market conditions and that actually paid to them by the airport operators.”
Then the Court of Justice censured the General Court because, first, it “(131) confined itself to observing that the contracts at issue in the present case had not been concluded by the private entities which are parties to them following a tender procedure […] and then considering, in general terms, that implementing that procedure ‘could have proved the existence of market conditions and, consequently, the absence of any advantage within the meaning of Article 107(1) TFEU’, and that Volotea and easyJet had ‘failed’ to show in the present case that the operators of Cagliari-Elmas and Olbia airports had made use of an ‘equivalent’ procedure”.
“(132) In so doing, that court attributed an unjustified level of importance to the circumstance, for private undertakings that are not subject to the obligation to organise a tender procedure and which intend to conclude such contracts, of having recourse beforehand to such a procedure or one that is equivalent, failing which they face the risk, where such a procedure is not carried out, of those contracts being automatically classified as an ‘advantage’, for the purposes of Article 107(1) TFEU, if one of those private undertakings finances its contractual obligations by means of public funds. In fact, neither the need to have recourse to such a tender procedure or an equivalent procedure, nor the automatic consequence that would result from a failure to carry out such a procedure, follows from that provision or from the case-law of the Court, which, on the contrary, require an overall, concrete assessment on a case-by-case basis, […], and which, moreover, oblige the Commission to prove the existence of an advantage, not the undertakings concerned to show the absence of one”.
When a private undertaking acts as an agent of the state, it does not seem that an “unjustified level of importance” is attributed to the procedure that must be followed in order to prevent it from conferring a surreptitious advantage.
The needs of the state
A public authority can “create” an artificial market by buying large quantities of a good or service. That is why the Commission has found in several cases that, even if that authority pays a “market” price, it still confers an advantage. For this reason, the Commission also checks whether there is a genuine need for the good or service that is purchased.
According to the Court of Justice, “(133) the General Court, […] merely expressed ‘doubt’ that the marketing services covered by the contracts concluded between the airport operators and the airlines met ‘genuine needs’ on the part of the Autonomous Region. However, as Volotea correctly argues, that assessment did not permit it to find the existence of an advantage, for the purpose of Article 107(1) TFEU.”
“(134-135) At the same time, the General Court did not seek […] to review whether the Commission had fulfilled its obligation, […], to determine whether the contracts concluded between the airport operators and the airlines constituted normal market transactions. […] Consequently, the General Court erred in law by finding that the airlines that had concluded contracts for the provision of air transport, marketing and advertising services with the operators of Cagliari-Elmas and Olbia airports had to be regarded as having benefited from an ‘advantage’, for the purposes of Article 107(1) TFEU, on the ground that the remuneration paid to them under those contracts did not constitute consideration for services that met genuine needs on the part of the Autonomous Region and because those contracts had in addition been concluded by the airport operators at issue without the implementation of a tender procedure or an equivalent procedure beforehand.”
The problem here is that the Court of Justice did not elaborate further on whether the General Court should have established, instead of merely expressing doubt, that the marketing services reflected genuine needs or only created an artificial demand. Even if the price paid corresponded to the market rate, the airlines still obtained an advantage from being compensated for a service for which there was no real demand.
Who bears the burden of proof?
The Court of Justice concluded its analysis by reiterating the obligations of the Commissions. “(151) First of all, […] the onus was on the Commission, in order to determine whether the measures at issue and the contracts by which they were put into effect by Geasar and Sogaer in respect of easyJet and Volotea constituted advantages for those undertakings for the purposes of Article 107(1) TFEU, to examine those measures and contracts in the light of the market economy operator principle. Furthermore, […] the public policy objectives pursued by the Autonomous Region and the fact of the airport operators at issue being private did not prevent that principle being applied.”
“(152) Next, the application of the market economy operator principle in the present case required the Commission to examine, […], whether the Autonomous Region, as a public entity having introduced the measures at issue, and the airport operators, which the Commission describes as ‘intermediaries’, as parties to the contracts concluded with the airlines, could be regarded as having acted like private acquirers of goods or services in a comparable situation by, respectively, envisaging the conclusion of contracts for the provision of air transport services and by entering into such contracts.”
“(153) Lastly, […], that examination entailed assessing, in an overall and concrete manner, whether those entities had sought, each in its own capacity, to acquire the services concerned under normal market conditions, having regard, in particular, to the rationality of such a transaction, its foreseeable prospects for profitability, the commercial and economic interest of the services to be delivered to that end, the price to be paid in return for them, and the legal and practical arrangements by which the contracts stipulating the provision of those services and the payment of that price had been concluded.”
“(154) However, […], the Commission, in the first place, clearly rejected – on grounds based incorrectly on the public policy objectives pursued by the Autonomous Region, the private character of the airport operators through which the region implemented the measures at issue, and the form that those measures took – both ‘the applicability’ of the market economy operator principle and the ‘relevance’ and ‘possibility’ of applying that principle to the ‘relationship’ between the Autonomous Region and the airlines and the ‘individual financial relationship’ between those airlines and the airport operators, in particular for the purpose of assessing the rationality and the expected profitability of the contracts concluded for putting those measures into effect.”
“(155) While it is true that the Commission, despite that clear and repeated stance, made a number of assessments […] which might be understood as an initial step in applying the market economy operator principle, it should be stated, first, that those assessments relate only to the conduct of the Autonomous Region itself, while the conduct of the airport operators, by contrast, was not at any time examined in substance. Second, those assessments are evidently focused on whether the Autonomous Region behaved like a private investor seeking to obtain ‘dividends’, ‘capital gains’ or ‘financial returns’ and not on whether it acted as a private acquirer of goods or services would have done in a comparable situation. Third, the Commission, which, […], has the burden of proving the existence of an advantage, in essence merely postulates in peremptory terms, in those same considerations, that the Autonomous Region ‘could not expect any return’ or other benefit that could be taken into account in an analysis under the market economy operator principle. It goes on to criticise the Italian Republic for failing to ‘identify any profitability element’ or, ‘in any event’, for not providing information ‘showing clearly’ that the Autonomous Region had behaved like a market economy operator. Fourth, the Commission did not at any point carry out a detailed examination of the information actually available to it, as easyJet and Volotea also rightly submit.”
“(156) However, it is clear from the legislative and regulatory provisions at issue in the present case and from the detailed rules for their implementation, […], that the contracts concluded between the airport operators and the airlines constitute the concrete, bilateral expression of plans of activities that were subject to the prior approval and subsequent scrutiny of the Autonomous Region, which had to include – and did indeed include according to the Commission – information, concerning, inter alia, the ‘initiatives [that] the airport operators consider[ed] feasible’ and the ‘economic and financial forecasts [supporting the] prospects for the profitability’ of the services to be provided, which the Commission was required to take a view on.”
Conclusions
The Court of Justice annulled both the judgment of the General Court and the Commission decision.
It is clear that a public authority can act as an economic operator through a private party. It is also clear that the Commission must examine whether the private acquirer test is applicable. The fact that the private party acts on instructions by the public authority does not prove that that party carries out public policy on behalf of the public authority.
However, as explained at several points in this article, the Court has also left a number of important issues unclear.
The full text of the judgment can be accessed at:
