A market economy operator undertakes activities whose incremental revenue exceeds their incremental costs. A market economy operator ignores costs which are unaffected by those activities. A service of general economic interest has special characteristics that set it apart from other services with positive impact on the economy. Having a positive impact is not enough.
Introduction
National and regional authorities support large infrastructure projects such as ports and airports in the expectation that they will contribute to the development of the local economy or revitalise old industrial regions. Under current State aid rules, subsidies to such projects are allowed. However, as indicated by the Commission decision 2016/633 concerning aid granted to Nîmes-Uzès-Le Vigan Chamber of Commerce and Industry, Veolia Transport Aéroport de Nîmes, Ryanair and Airport Marketing Services, regional promotion should not be sought through measures that give an unfair advantage only to certain undertakings.[1]
The case concerned State aid linked to the operation of Nîmes airport – a small regional airport. Initially the operation of the airport was entrusted to the Nîmes Chamber of Commerce and Industry [CCI] which, like other chambers of commerce in France, was a public administrative body carrying out public policy functions. Veolia Transport Aéroport de Nîmes [VTAN] was responsible for the operation of shops and restaurants within the terminal. Airport Marketing Services [AMS] was a wholly-owned subsidiary of Ryanair whose purpose was to promote the airport.
The measures investigated by the Commission included funding of public tasks [e.g. customs and immigration posts, security], investment and operating subsidies to the airport operator, an agreement between CCI and Ryanair, an agreement between CCI and AMS and various agreements between VTAN and Ryanair.
There was hardly any doubt that the agreements were selective and that aid to the airport or airline affected cross-border trade. The main issues were whether state resources were used, whether the airport operator, Ryanair, VTAN or AMS obtained an advantage and whether the operations of the airport could be classified as a service of general economic interest.
The case is complex and the Commission decision is unusually long [more than 110 pages or 700 paragraphs]. As a result, this article is divided into two parts. Part I examines the issues concerning Ryanair and AMS. The task of the Commission was to determine whether they were treated on market terms. Part II will be published next week. It examines the assessment of the various measures in favour of the airport operator and VTAN. Here the main task of the Commission was to separate public tasks from economic tasks and to evaluate French claims that the airport provided services of general economic interest [SGEI].
Part I: Market economy operator test
Transfer of state resources
The Commission first had to establish whether the various agreements involved transfer of state resources. It concluded that the agreements signed by the CCI did involve transfers of state resources because the CCI was a public body entrusted with public tasks. Although chambers of commerce are managed by elected representatives, they are supervised by the state and their tasks are defined by law. Their commercial activities are ancillary to the tasks assigned to them by law and are intended to facilitate the public policy objectives they pursue. In addition, the source of their funding was tax revenue. The Commission concluded that the decisions of the CCI could be imputed to the state.
The beneficiaries objected on the grounds that chambers of commerce and industry were managed by persons elected by traders and business leaders and representatives. The Commission considered this aspect to be irrelevant. “(265) Chambers of commerce and industry are, in this respect, like local and regional authorities, which are managed by local elected officials independent of the state (in the strict sense), and not by officials appointed by other public authorities. Moreover, national parliaments are also composed of elected representatives. However, these parliaments form one of the basic public authorities in a democratic state. The degree of control exercised by the state (in the strict sense) over the activities of chambers of commerce and industry is entirely irrelevant as these bodies are themselves public authorities.”
It went on to clarify that “(266) the situation of chambers of commerce and industry is therefore different from that of ‘traditional’ public undertakings, with regard to which the Court of Justice stated in the Stardust Marine judgment: ‘Even if the state is in a position to control a public undertaking and to exercise a dominant influence over its operations, actual exercise of that control in a particular case cannot be automatically presumed. A public undertaking may act with more or less independence, according to the degree of autonomy left to it by the state […] Therefore, the mere fact that a public undertaking is under state control is not sufficient for measures taken by that undertaking, such as the financial support measures in question here, to be imputed to the state. It is also necessary to examine whether the public authorities must be regarded as having been involved, in one way or another, in the adoption of those measures’.”
“(267) In the case of a measure taken by a public undertaking that has the primary vocation of carrying out an economic activity, it must be determined whether the public authorities controlling that undertaking, for example due to the capital share that they hold in said undertaking, are involved in the measure in question. The situation of a chamber of commerce and industry is different in that such a body is itself part of the public administration, or an ‘intermediate state authority’, and therefore a public authority created by law to satisfy general interests. As a result, in order to determine whether a decision of a chamber of commerce and industry is imputable to the state (as broadly defined by the case-law on State aid), it is not necessary to determine whether another public authority (for example, the state in the strict sense or a local authority) has been involved in the decision in question. In reality, such a decision necessarily meets the imputability criterion.”
On the basis of this reasoning, the Commission rejected arguments by the beneficiaries that the specific CCI decisions with respect to Nîmes airport had to be attributed to the state.
The Commission then turned its attention to VTAN which was a subsidiary of Veolia which is an undertaking. The Commission found that VTAN did not operate as a normal concessionaire, independently pursuing profit. Its conduct was shaped by the agreement itself had signed with CCI and other public bodies involved in Nîmes airport. The Commission based its findings on the following:
First, VTAN was requested to develop the airport in order to generate jobs and other benefits for the region as a whole, not just to pursue profits from the operation of the airport [paragraphs 278-280]. The Commission quotes the phrase “development of traffic” and correctly argues that in some cases more passengers may result in lower profitability. It is indeed entirely possible that very low landing charges may stimulate more traffic without however resulting in an increase in net revenue. The question that arises is not whether that was a possible event but whether it was a likely event. In view of the vagueness of the obligation to develop traffic, would VTAN pursue traffic at the expense of profitability?
Second, the tender documents specified that the winning bidder would have to develop traffic, services and an enterprise zone. Veolia’s submission contained a plan on how it would turn Nîmes airport into a regional hub and attract more airlines than just Ryanair. But again, one wonders whether such a plan is not consistent with a purely commercial target?
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Third, VTAN was constrained by the agreement that Ryanair had already negotiated with CCI which was extremely favourable for Ryanair and which, by VTAN’s own admission, would lead to a net negative result for VTAN [paragraph 287]. The Commission also mentions that CCI and the public authorities “(288) granted VTAN a contribution that was designed to allow Ryanair’s activity to continue under similar conditions to those under which this airline had offered its services from Nîmes airport when the CCI was operating the airport.” The Commission believed that if VTAN had been allowed to negotiate freely with Ryanair, it would not have granted the same terms to Ryanair.
Because the terms of the agreement between VTAN and Ryanair were not profit making for VTAN, the Commission concluded that those terms were attributed to the state and that state resources flowed via VTAN to Ryanair and AMS.
Existence of advantage
The Commission applied the Market Economy Operator Test [MEOT] to determine whether the CCI had granted an advantage to Ryanair and AMS.
According to the Commission, [paragraph 304], in order to apply the MEOT, it had to determine first whether to consider the various agreements together or separately, whether the conduct of CCI and VTAN had to be assessed together and what benefits a hypothetical market operator would seek from a marketing and other promotional service?
The answers provided by the Commission were as follows. First, the various agreements had to be assessed separately. Second, the behaviour of CCI and VTAN had to be considered together. VTAN was obliged under its own agreement with CCI to act in a particular way towards Ryanair. Third, with regard to the benefits from the provision of marketing benefits, the Commission concluded that the French authorities purchased something they did not need. “(338) In order for purchases made by a public entity not to confer an economic advantage on the seller, it is not enough for them to have been made at a price equal to or below ‘market price’. They must also meet an ‘actual need’ of the public purchaser”. And went further to note that “(340) A public entity cannot consider that marketing services mainly promoting the activities of one or more clearly defined undertakings form part of this entity’s specific task of promoting local economic development. It is logical for such an entity to start from the assumption that local undertakings must carry out or finance their own marketing operations, and that its own actions are limited to the general promotion of the area and local economic fabric, without targeting specific undertakings.” “(341) Any other approach would mean considering that an entity responsible for local economic development could, without such measures constituting State aid, purchase marketing services that mainly promote the products or services of certain locally established undertakings, on the grounds that these services encourage local economic development and that they are purchased at ‘market price’. Such an approach would circumvent Article 107(1) TFEU.” “(344) Furthermore, when an entity makes purchases in the performance of its general interest tasks, it is normally expected to minimise its expenditure by organising an invitation to tender, or at the very least by consulting several providers and comparing their offers. This is particularly the case with highly individual goods or services for which there are no clear market price benchmarks, which is plainly the case with marketing services. However, it seems that [CCI] did not consider any providers other than AMS for the marketing services in question.”
These statements are important. A regional authority is free to promote its region without the promotion constituting State aid as long as the promotion is a genuinely general measure. However, it may not support the activities of certain undertakings under the pretext that their activities contribute or form part of the overall economic development of the region. Moreover, the conduct of the promotion campaign itself may involve State aid for the undertaking that is chosen to carry it out if it is not chosen through a competitive procedure.
On the basis of the above reasoning the Commission concluded that the marketing services agreements signed with AMS constituted aid to AMS as the provider of the marketing services and aid to Ryanair as the direct and main beneficiary of these services.
Applying the MEOT
To determine whether CCI acted as a market operator, the Commission could follow two different methodologies: a benchmarking of prices and a calculation of incremental benefits and costs. The former was favoured by France. The Commission rejected the benchmarking of prices because it was of the view that prices at Nîmes airport were not comparable to prices charged at other airports. Such prices are affected by several factors: i) the costs and revenues structures differ significantly across airports, ii) costs and revenues depend on the state of the airport’s development, iii) number of airlines (users), iv) available capacity in terms of traffic, v) state of infrastructure and related investments, vi) debts and other obligations. [Paragraph 380]
The Commission is right in arguing that simple price comparison is meaningless. However, in numerous cases it has stated that users of subsidised infrastructures do not derive an advantage if they pay market prices which are comparable to those charged at other facilities. In view of the multiplicity of reasons identified above why prices are not comparable, one wonders why in other airport and port cases users are not thought to obtain an indirect advantage from access to subsidised infrastructures.
In the end the Commission opted to estimate the incremental profits and costs to CCI from Ryanair’s operations. The Commission noted at the outset that an airport operator does not have to charge the same price to all airlines. “(387) Price differentiation is a standard business practice, as long as it complies with all relevant competition and sectoral legislation. Nevertheless, such differentiated pricing policies should be commercially justified to satisfy the MEO test”. Commercial justification means that the extra revenue from lower prices but more passengers exceeds any extra costs from processing those extra passengers.
To estimate the extra revenue and extra costs, the Commission took into account:
- Future incremental traffic.
- Future incremental revenues [landing charges, passenger charges, ground handling services, revenue from shops, parking, etc.].
- Future incremental costs [extra personnel, other sundry costs].
However, all fixed costs or all costs that would have been incurred regardless of the presence or absence of Ryanair were excluded from the calculations.
The precise calculations are not shown in the Commission decision, as they are confidential. The calculations, however, revealed that CCI incurred a net loss from the various agreements made with Ryanair. The loss was State aid that the Commission could not declare compatible with the internal market on the basis of the aviation guidelines. Consequently it ordered France to recover the aid.
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[1] The full text of the Commission decision is published in the Official Journal, OJ L113, 27 April 2016. It can be accessed at:
http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32016D0633&from=EN.
