EU law: EUR 70 million in aid to another railway operator distorts competition, even if the aid recipient has a monopoly. This is because the aid may be suitable for maintaining the monopoly company’s operations and thus for this company remaining on the market.
Read the article from Jyllands-Posten, Wednesday, 1 July 2020 here.
Arriva Italia is pursuing a case in the Italian courts regarding aid to another operator in the same industry. In 2016, Arriva Italia thus brought a case before the Regional Administrative Court of Lazio. The lawsuit was directed against the Ministry of Infrastructure and Transport (hereinafter MIT), which had transferred the state’s holding of equity shares in Ferrovie del Sud Est (FSE), which is responsible for the operation and maintenance of railway infrastructure in the Puglia region. The transfer was made to another economic operator, Ferrovie DelleoStato (FSI), which is a holding company operating in the railway transport of goods and passengers. The transfer took place without a tender and free of charge, but with an obligation for FSI to remedy FSE’s financial crisis. FSE was also awarded EUR 70 million. Following the transfer, Arriva Italia challenged the legality and argued that the aid constitutes state aid in violation of EU state aid rules. Cinsiglio de Stato (the supreme court for administrative law cases in Italy) was in doubt about the interpretation of the state aid rules and therefore chose to refer preliminary questions of interpretation to the EU Court of Justice with a view to clarifying:
1) Does a measure whereby an operator [with a monopoly] in the rail transport sector receives a statutory contribution of EUR 70 million … without public tender and free of charge, under the factual and legal circumstances described, constitute [illegal] state aid?
2) If so, is the aid in question in any event compatible with EU law, and what are the consequences of the measure not having been notified in accordance with Article 107(3) TFEU?«
Theme 2 concerned whether the EUR 70 million was even covered by the notification obligation to the Commission. The doubt was due to the uncertainty of the timing of the award. Admittedly, the money did not come from the Italian state budget. However, since they were allocated in the budget, there was doubt as to whether the aid should be considered to have already been granted. In that case, the aid should be notified to the Commission.
The EU Court of Justice first examined the aid of EUR 70 million to FSE. In order for there to be state aid within the meaning of EU law, firstly, there must be aid granted by means of state resources. Secondly, this aid must be able to affect trade between Member States. Thirdly, it must give the recipient a selective advantage. Fourthly, the aid must distort or threaten to distort competition.
Regarding the first condition, it follows from settled case law that the aid must be granted directly or indirectly by means of state resources. The EU Court of Justice held that there can be no doubt that the EUR 70 million can be attributed to the Italian state, as the allocation of this amount follows from the adoption of the Italian budget. Likewise, the EU Court of Justice held that there were state resources, even though the amount did not come from the Italian state budget. The reason for this was that it appeared from the budget that a potential burden had been created for the Italian state and its budget, and therefore it had to be assumed that FSE had been granted a right to this amount. However, the Court left the final examination of this issue to the national Italian court. The Court stated: “Decisive in this regard is the decision of the public authority to grant the recipient state aid, rather than the actual payment thereof. It is then for the national court to examine whether the adopted budget already gave FSE the right to this allocation.”
As regards the second condition of affecting trade between Member States, the EU Court of Justice found that it is sufficient that the aid could potentially affect this trade. FSI argued that the aid of EUR 70 million cannot affect trade between Member States, since it mainly concerned railway infrastructure that is purely local. However, the EU Court of Justice did not agree with this view. Although FSE was not involved in trade with other Member States, the aid had reduced the possibilities for Arriva Italia to operate the railway that FSE had been awarded. The contribution therefore affected trade between Member States, as FSE is preserved, thereby preventing other operators from entering this market.
Regarding the third condition, it follows from practice that funds are considered state aid if they can directly or indirectly favour certain undertakings, or if the beneficiary undertaking obtains an economic advantage that it does not obtain under normal market conditions. In this regard, the EU Court of Justice stated that it is undisputed that the allocation of EUR 70 million to FSE constituted an advantage, and that this is undoubtedly selective.
As far as the fourth condition is concerned, funds that enable a company to continue to be present on the market can in principle distort the conditions of competition. FSI and the Italian government argued that the aid of EUR 70 million can only be used to finance the railway infrastructure operated by FSE, and that it therefore does not distort the conditions of competition. In support of this, the Italian government argued that the operation of the railway infrastructure in question, which was subject to a legally protected monopoly under Italian law, does not involve competition on the market for the operation of this infrastructure, or on this market. The EU Court of Justice clarified that the condition was met, even if there is no competition on the market in question. This is because there may be competition for the market itself. As there is no information that the region of Pugmia is obliged under a legal provision or the like, the EU Court of Justice assessed that the region could also have awarded this operation to another company. Thus, the EUR 70 million could restrict competition on the market, as it prevented other operators, such as Arriva Italia, from being awarded the operation of the railway infrastructure.
The EU Court of Justice concluded that the allocation of EUR 70 million to a public railway company that was in serious financial difficulties must be qualified as state aid that is subject to a prohibition under EU rules. When there is state aid, this must be notified to the Commission, as the Commission has sole competence to assess the legality of the aid. This did not happen. The lack of notification to the Commission means that the aid is illegal. The consequence of this will be that the benefits the aid has brought must be reversed, both in terms of money and equity shares, so that the parties are placed as if the aid had never existed.
The decision is particularly interesting because it establishes that aid can distort conditions of competition, even if the operator has a monopoly. Aid can provide the recipient with operational continuity and, if the recipient’s activity is subject to a statutory monopoly, the aid could enable the recipient to remain in the market and thus, by virtue of the aid, displace other potential operators.