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May 01, 2018

Unsteady Foundations: The European Commission’s New Approach to Infrastructure State Aid

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Traditionally, the European Commission’s (EC) approach towards public funding of infrastructure was that such aid fell outside the scope of State aid rules. Recent investigations show that this approach is changing, as the scope for commercial exploitation of infrastructure has increased due to increased liberalization, privatization, market integration and technological progress. The renaming of one of the EC’s units to Infrastructure and Regional aid also clearly signals that the EC is carefully re-examining the boundaries between the construction of public infrastructure that is freely accessible (and therefore not State aid) and infrastructure that is dedicated to a particular investor (which amounts to State aid).

In the Commission 2016 Notice on the Notion of State aid (the Notice), the EC aimed to clarify the scope of EU State aid rules to facilitate public investment. The EC’s press release states that the Notice intends to clarify that:

  • Public investment for the construction or upgrade of infrastructure (such as roads, railway infrastructure, inland waterways and water supply and waste water networks) is free of State aid, if it does not directly compete with other infrastructure of the same kind. In contrast, State aid rules apply to the public funding of infrastructure (such as energy, broadband, airports or ports) that is often in competition with similar infrastructure to investigate whether the subsidized project is given a selective economic  advantage over its rivals.
  • Even if infrastructure is built with the help of State aid, there is no aid to operators and end-users if they pay a market price. Therefore, public authorities need to ensure that such aid is not passed on to the operator or users of the infrastructure. 

The EC’s Notice, however, missed an opportunity to set out a definition for ‘dedicated infrastructure.’ This distinction between what constitutes general public infrastructure and infrastructure that is dedicated to one company is still an evolving area of EU State aid law. The handful of cases in this area have arisen in the context of public funding of ports, airports and toll roads, which can be exploited directly to generate revenue. There is little decisional practice in relation to State aid that is granted for the development of greenfield industrial parks and aid to end-users of such parks. From a policy perspective, greenfield investment is critical to the future development of the EU. Such development requires public investment to make the land suitable for industrial use such as creating flood defenses, carrying out groundwork to ensure that the land is ready to build on and connecting the site to utilities such as gas and electricity.

The landmark Leipzig-Halle case on infrastructure development marked a change in the EC’s policy. Here, the EC found that public funding for the construction of a new runway, to one exclusive operator, amounted to dedicated State aid because the construction was indissociable from that operator’s subsequent competition with other exclusive operators of competing infrastructure.1  By contrast, this is not the case when it comes to the development of a greenfield site where the end-user does not have any exclusive rights over commercially exploitable infrastructure. In these circumstances, the end-use can be completely disassociated from the infrastructure, and there is no competition with other infrastructure of the same kind.  

Therefore, carrying out infrastructure development providing general public infrastructure on a greenfield site should not be considered, by the EC, to amount to State aid. 

Following this case, Germany re-notified a measure to clarify the application of State aid rules to public funding for the development and revitalization of public land by public authorities for the subsequent construction of commercial infrastructure. In the GRW Decision, the EC held that making public terrain ready to build upon and ensuring that it is connected to utilities (water, gas, sewage and electricity) and transport networks (rail and road) did not constitute an economic activity.2 Rather, this was part of the public  function of the State to provide and supervise land in line with local urban and spatial development plans and, therefore, did not amount to State aid.

The notified measure was called the GRW Framework and the factual scope of this scheme set out that: “[c]ustomised development of land for ex ante identified undertakings and tailored to their needs (bespoke development) is excluded from the scheme. The same holds for land redevelopment for large retail stores.”This was simply part of the facts, and the EC makes no legal finding on this point. The case does not find that the bespoke development of land for an ex ante identified investor amounts to State aid. In fact, the EC’s assessment of State aid in the GRW Decision makes no reference to the chronology of when an investor comes into the picture. What mattered when deciding whether there is aid granted to the purchasers of developed land was whether an advantage had been excluded through a payment (or receipt in the case of the developer) on market terms. Aid to the end-user was simply dealt with as follows: 

[a]fter the development of the land, any interested third party may buy the remedied land, which must be sold in accordance with the guidance provided in the Commission’s land sale communication, i.e. at a market price.”

This approach is also in line with the Notice which provides that there is no infrastructure aid to an end-user if it pays market price. There is no reference in the Notice or in the GRW Decision of a requirement for investors to not have been identified ex ante or any reference to the history behind the specific industrial sites chosen.

The development of infrastructure was also considered in the Propapier case, where the complainant alleged that certain infrastructure projects that had been financed using public resources, in a newly extended industrial plant, were exclusively intended for Propapier’s this amounted to dedicated infrastructure and therefore State aid for the benefit of Propapier. What was relevant in this case was not the percentage of infrastructure occupied by Propapier, but whether it received a selective benefit. The EC found the percentage of land occupied by Propapier was not necessarily an indication of dedication: 

“[t]he Commission is of the view that the fact that the TAZV plant is at present predominantly ([< 70]% on average and [< 70]% maximum) used by Propapier does therefore not necessarily mean that it constitutes dedicated infrastructure, as its modular design makes sense from an economic point of view in times of limited public budgets.

Therefore, there is no ‘bright line’ test for dedication based on the percentage of occupation of the infrastructure that was occupied by Propapier. Once a market price has been determined, it makes no difference what percentage of the land is occupied by the end-user. It makes no sense that where a user occupies 100% of a pre-existing industrial park, or 60% of a newly built park, that development is considered to be non-economic and costs of prior development at a loss can be met by the State, but if the user occupies 80% of a newly built park as an anchor investor, the same coverage of losses would constitute State aid to the end-user. In such a scenario, it is difficult to understand what benefit the user has received in the second case that the user in either of the first cases has not. 

The policy implications of applying a percentage usage test in a greenfield development context to determine ‘dedication’ could also be detrimental. Member States would have an incentive to either develop industrial parks speculatively, potentially wasting public funds and lowering land values by creating over-supply, or to expand the size of industrial parks in order that investments involving anchor investors fell beneath the ‘dedication’ threshold. This would result in some industrial parks being over-dimensioned and would also lead to public funds being wasted. This approach of waiting for a main investor is also consistent with Propapier where the EC found that:

“[t]he fact that the regional aid for the construction of the plant was granted subject to the settlement of a main investor, in this case Propapier, in the extended business park, is considered by the Commission to constitute good public management of scarce resources since it makes sense not to start building a major public infrastructure without ensuring that it will be used, and not to over-dimension it.”7

Any threshold for the level of occupation that is sufficient to constitute dedication is also bound to be arbitrary–indeed even 100% of a current footprint does not take into account any possible expansion. The concept of ‘dedicated infrastructure’ is ill-suited to development of industrial parks, especially since the focus should be whether the end-users actually receive a benefit. As long as a genuine market price is paid, an end-user of a greenfield site cannot receive any advantage.

Read the 2018 Antitrust Annual Report.

Antitrust Team

Footnotes

1. Case C-288/11 P, Mitteldeutsche Flughafen AG and Flughafen Leipzig-Halle GmbH v. European Commission (EU:C:2012:821).
2. Case SA.36346, Germany–GRW land development scheme for industrial and commercial use, (GRW Decision).
3. Id., para 18.
4. Id., para 25.
5. Case SA.36147, Alleged infrastructure aid implemented by Germany in favour of Propapier PM2 GmbH p. 72–93.
6. Id., para 160.
7. Id., para 161.