State aid is granted on the date the relevant public authority makes an irrevocable commitment to grant it or creates a legal entitlement for the beneficiary. Loans that impose public policy obligations on borrowers are not in conformity with the behaviour of a private investor.
Introduction
This is a rather long article because it examines a rich case that includes several of the important issues that fall within the scope of State aid rules: existence of economic activity, transfer of state resources, presence of advantage and behaviour of private investor, compatibility of operating aid, etc. The case is assessed in Commission decision 2015/1824 on Airport Niederrhein (Weeze) und Flughafen Niederrhein in Germany.[1]
Background
In the period from 2003 to 2006, the Commission received several complaints alleging that regional authorities had granted illegal State aid to Niederrhein-Weeze airport which is in Nordrhein-Westfalen, close to Dusseldorf.
The airport used to be a military airfield. Passenger flights commenced in 2003 following its conversion into a civilian airport. The number of passengers increased steadily from 207,992 in 2003 to 2,896,999 in 2010. Close to 100% of the volume of traffic at the airport is generated by Ryanair and Transavia.
About 15 year ago, the district of Kleve and the municipality of Weeze set up a company, Flughafen Niederrhein [FN] to manage the airport. At about the same time, the district of Kleve and the municipality of Weeze also incorporated another company, Entwicklungs- und Erschließungsgesellschaft Laarbruch [EEL]. According to the Commission, “(26) the then tasks of EEL were different from the tasks of FN. While FN had been created to manage the conversion of the former military airport, EEL was entrusted in particular with the administration of the facilities between the closure of the military airport in 1999 and its purchase by a private investor.”
In 2001, the district of Kleve and the municipality Weeze withdrew from FN selling 99% of the shares in the company to a private investor, Airport Niederrhein Holding [ANH]. EEL has been kept fully state-owned.
In 2002, the German Federal Government sold the land on which the airport was built to FN. FN initially accumulated financial losses. It made losses from 2003 until 2006. However, since 2007, it has been profitable.
In 2012, the Commission opened the formal investigation procedure with respect to the following measures:
Measure 1: Four loans from EEL to FN in 2003, 2004, 2005 and 2010. Two loans were also extended beyond their agreed period.
Measure 2: Investment support from the Land Nordrhein-Westfalen for financing 50% of runway construction.
Measure 3: Support granted from the district of Kleve directly to FN for the acquisition of the airport real estate.
Measure 4: Public support in the form of loans to EEL.
Transfer of state resources and attribution to the state
The decisive element in all the measures examined by the Commission was the existence of advantage. Nonetheless, the Commission had to establish that all the criteria of Article 107(1) TFEU were satisfied as well. The Commission paid particular attention to the nature of the activities carried out by FN and EEL and whether they were economic. Since it is now well understood that airport construction and management are economic activities, the reasoning of the Commission in this respect is not reviewed in this article.
However, an interesting issue was whether the funds that came from EEL could be considered as transfer of state resources. The Commission concluded that the decisions of EEL could be attributed to the state for the following reasons:
- EEL was 100% owned by the district of Kleve and the municipality of Weeze.
- The management board of EEL GmbH consisted of two representatives of public bodies, namely the mayor of the municipality of Weeze and the Landrat of the district of Kleve.
- The decision to grant loans and extensions of these loans to FN by EEL was taken by the shareholders of EEL, which represented public authorities.
- The two public shareholders determined the scope, the content and the conditions for each of loans granted by EEL in favour of FN.
- EEL had no permanent staff and was managed by a single public official from the district of Kleve.
Presence of advantage
Measure 1: Four loans from EEL to FN in 2003, 2004, 2005 and 2010
The Commission applied the market economy operator principle in order to determine whether the conditions of the four loans and the two loan extensions provided by EEL to FN conferred an economic advantage to the latter, which would not have been obtained under normal market conditions. In this case the Commission relied on the methodology it set out in the 2008 communication on how to define the reference rate for loans. This methodology makes the calculation of the reference rate dependent on the credit rating of the borrower and the quality of the collateral it can provide.
To determine the credit rating of a borrower, one has to estimate its probability of default. According to information provided by Germany, the probability of default was estimated by taking into account the financial strength of the borrower, the legal issues, characteristics of the business, strength of the owner and collateralisation. This method includes an assessment of the value of the collateral, given the extent of loss in case of default (LGD), associated with each of the loans.
The loans were secured against the land and buildings of the airport. The Commission found that the value of the collateral was sufficient to cover the amount of the loans and thus the loss given default was very small, which implied that the quality of the collateral was high.
On the basis of the above calculations concerning the credit rating and the collateral, the Commission concluded that all loans, except one, were granted at market rates because the interest charged was higher than the derived reference rate. The exception was a loan that was granted in 2005 and an extension granted in 2010, although on the latter the Commission was not absolutely sure about the existence of advantage because the rate actually charged and the derived reference rate were very close.
Measure 2: Investment support from the Land Nordrhein-Westfalen for financing 50% of runway construction
With respect to this measure, Germany argued that it would have to be considered as existing aid as the relevant legal framework had been adopted in 1993. Germany was also of the view that it could be even considered as non-aid as it was adopted before the Airport de Paris judgment of December 2000, which defines the cut-off date for classifying public support as non-aid.
In response the Commission made an important distinction. The relevant date is not the date of adoption of a measure by a public authority, but the date the public authority makes an “irrevocable commitment” to grant aid or “creates a legal entitlement” for the beneficiary [paragraph 192]. The relevant date in this case was October 2002. The Commission had no difficulty showing that a subsidy of 50% was State aid.
Measure 3: Support granted from the district of Kleve directly to FN for the acquisition of the airport real estate
Germany claimed that the district of Kleve acted as a private investor. The Commission noted that “(208) the conduct of an investor in a market economy is guided by prospects of profitability. The market investor test will normally be satisfied where the structure and future prospects for the company are such that a normal return, by way of dividend payments or capital appreciation by reference to a comparable private undertaking, can be expected within a reasonable period.”
In the case at hand, the district of Kleve granted a zero-interest loan to FN and waived the obligation of FN to repay a tranche, without demanding any extra remuneration. The loan agreement specified that the tranche did not have to be repaid if 350 jobs were created. The Commission concluded that a private investor would not have given away something for nothing [zero-interest loan] and would have ignored any public policy considerations such as job creation. Measure 3 constituted State aid.
Measure 4: Public support in the form of loans to EEL
A point of contention with respect to measure 4 was the status of EEL. Germany argued that EEL was not an undertaking because its sole purpose was to channel funds from public authorities to FN. The reasoning of the Commission on this point is a bit convoluted.
On the one hand, the Commission argued that “(216) […] EEL GmbH was founded by the district of Kleve and the municipality of Weeze to manage the airport real estate prior to its privatisation. Thereafter, EEL GmbH engaged in granting loans to FN GmbH. The granting of loans to third parties is by itself an economic activity. Therefore, when the various measures forming Measure 4 were granted to EEL GmbH, the latter was engaged in an economic activity.”
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But then immediately afterwards it observed that “(217) […] EEL GmbH is only acting as a vehicle of public authorities, and does not, as such, carry economic activities: its only purpose is to pool the resources of two public authorities in view to financing the development of the airports. (218) As the cumulative criteria pursuant to Article 107(1) of the TFEU are not fulfilled, the Commission considers that Measure 4 does not contain any State aid within the meaning of Article 107(1) of the TFEU.”
It is probably true that EEL was merely a channel through which money flowed to the final beneficiary which was FN. The standard practice of the Commission is to consider such arrangement as not constituting an economic activity [e.g. funds for pooling private and public resources for the purpose of investing them in SMEs. The management of the fund is an economic activity, but the fund itself is not].
It also seems that the Commission was too quick to conclude that “the granting of loans to third parties is by itself an economic activity. Therefore, [EEL] was engaged in an economic activity.” The granting of loans for remuneration is indeed an economic activity. But here we have an entity – EEL – that receives money from public authorities and lends it to FN. If it made a profit in the process or charged a fee, one could reasonably argue that EEL was engaged in an economic activity even when it had a single customer. But it is not obvious from the decision whether EEL was acting as an undertaking, trying to make profit or at least cover its costs, or was indeed acting an agent of the state, passing all return from the loan back to the public authorities.
At any rate, the Commission went to state that even if EEL were an undertaking, measure 4 did not constitute State aid anyway.
“(224) It is first important to recall that EEL GmbH constitutes an SPV created by its two public shareholders with a view to managing the real estate of the Niederrhein-Weeze airport, and used exclusively as of 2003 to provide financing to the same airport. […] EEL GmbH has no board of directors. Both managing directors are representatives of the public bodies. […] Moreover, EEL GmbH has no permanent staff and is managed by a single public official from the district of Kleve. It results from these elements that any decision taken by EEL GmbH is in fact taken by representatives from the public shareholders, who run it on a day-to-day basis in addition to sitting in its governing bodies. This confirms that the measures at issue are imputable to the public shareholders.”
“(225) In applying the market economy operator principle to Measure 4, it is necessary to give due consideration to the fact that the beneficiary of these financing measures is an SPV created and owned by the entities from which Measure 4 originates, and exclusively used for a well-defined objective pursued by these same entities.”
“(226) SPVs are commonly created and used by private undertakings in a variety of circumstances. A possible situation where SPVs are used is cases where two independent undertakings set up a joint venture in order to develop a specific project or perform a specific activity or function (for instance research and development, production, distribution) to the benefit of each undertaking.”
“(227) Therefore, it is clear that when two independent private undertakings create and use a SPV in view of a well-defined objective, and provide it with funding, they do not necessarily provide this funding with a view to obtaining a financial return in the form of dividends or payment of interests, as an investor or a bank would do. Instead, they provide this funding with a view to achieve the objective for which the SPV is used.”
“(229) Therefore, when applying of the Market Economy Operator Principle to Measure 4, the fact that the district of Kleve and the municipality of Weeze decided to implement Measure 1 and to use EEL GmbH for that purpose ought to be taken as a starting point. The relevant question that the Commission must address is the following: if two hypothetical market economy operators had decided to implement measures such as those forming part of Measure 1, would they have used an SPV such as EEL GmbH and provide it with similar funding as that stemming from Measure 4 in order to achieve this objective?”
“(230) Against this backdrop, the fact that certain loans may have been provided to EEL GmbH by its shareholders at rates lower than normal market rates, that a guarantee was provided free of charge, or that capital was injected with no clear prospects of financial return would not necessarily lead to the conclusion that the district of Kleve and the municipality of Weeze did not act vis-à-vis EEL GmbH as market economy operators would have done. The relevant question is rather whether the financing provided to EEL GmbH under Measure 4 is reasonable, from a market economy operator perspective, in light of the objective pursued by EEL GmbH’s shareholders, namely, the implementation of Measure 1.”
“(231) Two prudent market economy operators pursuing the same objective as EEL GmbH’s public shareholders would have had essentially two options: create a Special Purpose Vehicle similar to EEL GmbH (option 1) or grant loans directly to FN GmbH without a dedicated body (option 2). A rational market economy operator would not have considered any other option, like the use of private financial intermediaries, which would have charged a fee for the provision of such a service. This option would have increased the cost of channelling funds to FN GmbH due to these fees.”
I find this line of reasoning not very convincing. The Commission would have been more credible had it simply stated that EEL was acting under instructions by the two public authorities in question. But now the Commission argues that the two public authorities were behaving as private investors when earlier in its decision it found that they had not acted as private investors in relation to all measures. More importantly, the Commission limited its analysis just to three options: i) the SPV [i.e. EEL], ii) granting loans directly and iii) granting loans via a financial intermediary. There is of course a fourth option: hiring expert advisors for each transaction. It would have costed some money, but it could have been cheaper than using a financial intermediary. Moreover, the Commission ignored that SPVs are created to pool expertise or create expertise with respect to a particular project. A private investor who is really interested in efficient use of its money would not set up a legal shell with a single civil servant to manage millions of euro. It does not appear that the Commission tried to compare whether the fee that would have been paid to a financial intermediary or financial advisor could have been offset by a higher return and better investment service that could have been obtained by an intermediary or advisor.
Compatibility of operating aid
The Commission assessed the compatibility of the aid under two sets of rules: the 2005 guidelines on airports and the 2014 aviation guidelines. The former were used to assess the investment aid in measures 1, 2 and 3, while the latter were used to assess the operating aid in the loan extension in measure 1. The assessment of the investment aid was straight forward and raised no unusual issues. The aid was found to be compatible with the internal market. It is not reviewed in the remainder of this article. The assessment of the operating aid is more problematic.
According to point 118 of the 2014 aviation guidelines, airports with traffic between 200,000 and 700,000 passengers may not be able to cover their operating costs to a “substantial extent” and, consequently, they may need operating aid.
In its decision the Commission notes that “(297) […] FN GmbH was always loss-making, and could not even cover its operational costs (the adjusted EBITDA is negative in 2004 and 2005), which the 2014 Aviation Guidelines identify as typical for airports of this size. (298) Therefore the Commission considers that the operating aid to the Niederrhein-Weeze Airport is necessary.”
The problem here is that the second loan prolongation which was for the largest amount occurred in 2010. The airport had exceeded the threshold of 700,000 passengers already in 2007. By 2010, it had reached 2.8 million passengers. Also as of 2007, the EBITDA of the airport was positive. So the Commission appears to be using the data of the initial loss-making phase of the airport to conclude that aid that was granted later in the profit-making phase of the airport to be necessary.
With respect to the existence of incentive effect and proportionality of the aid, point 124 of the 2014 aviation guidelines stipulates that “operating aid has an incentive effect if it is likely that in the absence of the operating aid and taking into account the possible presence of the investment aid and the level of traffic, the level of the economic activity of the airport would be significantly reduced.” [Emphasis added]
With respect to the proportionality of aid, points 125-128 stipulate that “operating aid to airports must be limited to the minimum necessary for the aided activity to take place. The business plan of the airport must pave the way towards full operating cost coverage at the end of the transitional period. The key parameters of this business plan form an integral part of the Commission’s compatibility assessment. In any event, the maximum permissible aid amount during the whole transitional period will be limited to 50 % of the initial funding gap for a period of 10 years.”
In relation to these points, the Commission observed that “(301) […] Despite rather increasing passenger numbers the airport is not able to cover their operating costs. Without the operating State aid the airport could not maintain the current level of traffic and investment and its economic activity would have to be reduced. At the same time the aid did not exceed the amount required to cover operating losses, hence the aid amount is limited to the minimum necessary. (302) Therefore the Commission considers that the operating aid to the Niederrhein-Weeze Airport has an incentive effect and is proportionate.”
Well, even if the Commission indeed examined the business plan of the airport, the decision does not explain how the Commission took that into account. The mere fact that as of 2007 the EBITDA was positive indicates that the aid in 2010 was not necessary or at least part of it was unnecessary. The Commission also does not appear to consider whether amount of aid was limited to 50% of the funding gap.
In the end, all aid was found to be compatible with the internal market, but the part of the decision on operating aid raises more questions than answers.
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[1] The decision is published in OJ L269, 15 October 2015. The full text of the decision can be accessed at:
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2015.269.01.0001.01.ENG.
