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Infrastructure projects which are economic in nature are subject to State aid scrutiny regardless of their importance. However, public funding of transport networks which are open to all users does not constitute State aid.

Introduction

State aid approval of important projects of common European interest is very rare. The joint
Commission decisions
SA.36558 and SA.38371 [Denmark] and SA.36662 [Sweden] concerning
the Øresundsbro Consortium for the construction of the
Øresund Fixed Link is probably the only
case of an important European project in the past five years.
1

In August 1995, Øresundsbro Konsortiet [the Consortium] informed the Commission of state guarantees granted by Denmark and Sweden in favour of the Consortium for the financing of the Øresund Fixed Link and asked the Commission to confirm that the guarantees did not constitute State aid. The Commission was also informed that the guarantees were provided at no charge to the Consortium. The Commission found that the guarantees did not constitute State aid “because they were attached to an infrastructure project of common interest” [paragraph 2].

In April 2013 the Commission received a complaint alleging that the guarantees granted by Denmark and Sweden in favour of the Consortium were unlawful State aid, that the Consortium benefited from additional tax advantages and that the aid was incompatible with the internal market. The allegation was based on the view that the guarantees were unlimited and that the tax advantages were operating aid.

Background

The Øresund Fixed Link project is composed of a toll-funded 16km long bridge, the artificial island of Peberholm, a partially immersed tunnel for road and railway traffic between the Swedish coast and the Danish island of Amager. It is the longest combined road and rail bridge in Europe and provides a direct connection between Copenhagen and Malmö. The Fixed Link was constructed between 1995 and 2000 and has been in operation since June 2000. The project was one of the trans-European networks in transport (TEN-T) priority projects.

The Fixed Link is owned and operated by the Consortium. The Consortium is a partnership of the Danish and Swedish states established on the basis of an intergovernmental agreement. The Consortium was established to be the owner, constructor and operator of the Fixed Link. The Consortium procured the construction works of the Fixed Link to third-party undertakings through an open tender procedure. The Consortium cannot be engaged in any other activities.

In addition to the Fixed link, road and rail hinterland connections needed to be constructed in both Sweden and Denmark in order to make the Fixed link functional. These infrastructures connect the Fixed Link with other parts of the rail and road systems in Sweden and Denmark. The Swedish hinterland connections consist of a 10 km motorway and a 20 km railway. The Danish road hinterland connections consist primarily of a 9 km motorway and a 12 km railway for passenger traffic.

The design, construction and operation of the Øresund Fixed Link are fully financed by tolls levied on the users of the Fixed link. Railways also pay an annual fixed fee. The revenue from toll and railway payments is intended to cover all interest and capital repayments of loans taken out by the Consortium, including the loans taken out for the construction of the rail and road hinterland connections.

Denmark and Sweden guaranteed all loans and other financial instruments used by the Consortium in connection with the financing of the Øresund Fixed Link. For these guarantees, the two countries did not receive any premium. The guarantees were limited to the financing of the Fixed Link and were not be used by the Consortium to increase capacity or extend its activities on any market. In addition, Denmark provided favourable tax treatment to the Consortium.

The public financing of the hinterland connections

On the Danish side, the state funded the planning, construction and operation of the hinterland connections through an initial capital injection, a state guarantee, state loans and tax measures.

On the Swedish side, the planning and construction of road and rail hinterland connections were financed with public resources, namely an initial capital injection, state loans, a credit guarantee and a capital adequacy guarantee.

The Danish tax measures

Loss carry forward

For the period 1991 to 2001, under the Danish Depreciation Act, undertakings established in Denmark had the possibility to carry forward losses incurred during a specific tax year and deduct them from their tax base for the five subsequent years. The Consortium was however subject to special rules with respect to loss carry forward. The Consortium could carry forward its losses for a longer period in time, i.e. 15 years instead of five years. The Consortium was also allowed to include – in the total amount of losses which could be carried forward – losses resulting from the deduction of operating expenses incurred prior to the start of the operation of the Fixed Link. The Consortium was allowed to carry forward those losses for a maximum period of 30 years. In January 2013, a new limitation on the amounts of losses carried forward that can be deducted in a single year was introduced into the Danish tax law. However, this limitation does not apply to the Consortium.

Depreciation of assets

For the period 1991 to 1998, the depreciation rules applied to the Consortium corresponded to the normal depreciation rules applicable to buildings and installations and which applied to all undertakings established in Denmark. The normal rate was 6%.

However, in 1999 the normal depreciation rate for buildings and installations decreased to 5% and in 2007 it further decreased to 4%, while the depreciation rate for the Consortium remained 6%. This change in the normal depreciation rate created a difference between the rules applicable to the Consortium and those applicable to other undertakings established in Denmark.

Existence of State aid

The Commission considered that it had to assess the following: i) the State guarantees granted to the Consortium for the financing of the Fixed Link, ii) the alleged tax advantages granted to the Consortium for the financing of the Fixed Link and iii) the public financing of the hinterland connections on both sides of the Øresund.

Concept of undertaking

The Commission began its assessment with an analysis of whether the Consortium was an undertaking. Denmark and Sweden submitted that due to the purpose and nature of the Øresund Fixed Link, its construction and operation could not be considered an economic activity. They argued that the Consortium offered a public good (access to a particular road and rail infrastructure) and executed a public policy decision concerning the financing of the Fixed Link.

Interestingly, the Commission agreed with that view “at the time the State guarantees were granted to the Consortium in 1992” [paragraph 63]. In footnote 21, the Commission provided examples from its decisional practice where public funding of infrastructure projects had been found at that time not to constitute State aid: Commission Decisions N 208/2000, Netherlands: Subsidy Scheme for Public Inland Terminals; N 356/2002, United Kingdom: Network Rail; N 649/2001, Freight Facilities Grant.

But then the Commission explained that “in recent years there have been important developments in the jurisprudence and the Commission’s approach as regards the notion of "economic activity" in relation to public financing of the construction and operation of infrastructure projects has evolved. In its judgment “Aéroports de Paris”, the Court of First Instance held that the operation of an airport consisting in the provision of airport services to airlines and to the various service providers also constitutes an economic activity. In its “Leipzig-Halle airport” judgment the Court of Justice confirmed that where an infrastructure is operated for a commercial purpose, the construction of that infrastructure also constitutes an economic activity. In addition, for a certain activity to be classified as an economic activity, it is irrelevant whether a private investor would have carried out the same activity. Once an infrastructure operator engages in economic activities, regardless of its legal status or the way in which it is financed, it constitutes an undertaking within the meaning of Article 107 (1) of the Treaty, and the Treaty rules on State aid are capable of applying to advantages granted by the State or through State resources to that infrastructure operator” [paragraphs 64-66].

Then the Commission examined in more detail the operation of the Fixed Link. The Consortium operated the Fixed Link on a commercial basis by providing transport services against remuneration to citizens and undertakings. The Commission defined the relevant market to be that for transport services to cross the Øresund strait and noted that, on that market, the Consortium competed with operators of the other modes of transport, for example ferry services. The toll revenues from road and rail collected by the Consortium were used to finance in full the total cost of design, construction and operation of the Fixed Link. [Paragraphs 67-68]

Moreover, the Consortium decides on its own commercial and pricing policy on the basis of the principles fixed by Denmark and Sweden in the original agreement that set up the Consortium. According to that agreement, the Consortium had to conduct its business in accordance with sound commercial principles. The Commission interpreted this requirement to mean that “the Consortium should determine its prices based on the overall objective of maximising its long-term profit in order to repay the Consortium's and its parent companies’ debts. In this respect, the Consortium pursues a commercial strategy based on increasing revenue from traffic” [paragraphs 69-70]. The conclusion was that the operation of the Fixed Link was an economic activity and the Consortium was an undertaking.

The next issue to be examined by the Commission was the construction and operation of hinterland connections. “73. In Denmark and Sweden, road and rail infrastructure is provided and funded exclusively by the State as a matter of public policy. In neither of the States is the funding or operation of land transport infrastructure undertaken, wholly or partially, by private undertakings. On the contrary, land transport infrastructure is as a rule funded and managed exclusively by the States which have, in effect, not decided to open the market for the commercial operation of such infrastructure. In both countries, the provision of a nationwide land transport network remains, as a matter of public policy, within the essential tasks of the public authorities. As the Commission has explained in earlier decisions [here the Commission quotes Commission Decision 2003/227 on the Terra Mitica theme park in Spain, OJ L91, 8/4/2003]. State support will not constitute State aid when public powers carry out work to develop their land holdings, for instance, by funding infrastructure which will benefit the population as a whole. Moreover, the reason for which such infrastructure is set up is immaterial, provided that it is done in the overall general interest.”

In addition, the hinterland road connections on both sides of Øresund can be used free of charge like any other motorway in Sweden and Denmark. With respect to the hinterland rail connections, those are financed by the respective network managers.

The Commission concluded that “79. The road hinterland connections are made available free of charge to all users and provide a benefit to the population as a whole. As they are not commercially exploited and as there is no market in Denmark and Sweden for the management and operation of the road hinterland connections, the Commission considers that [the respective entities responsible for them] are not engaged in economic activity and therefore do not constitute undertakings for the purposes of Article 107 (1) of the Treaty. For the same reasons, the financial funding made available to those companies for the construction of the road hinterland connections is not liable to distort competition and affect trade between member States.”

80. With regard to the rail hinterland connections the Commission notes that the railway networks … form an integral part of transport infrastructure in Denmark and Sweden and are open to all potential railway operators on equal and non-discriminatory terms. Therefore, even supposing that the [rail] activities … constitute an economic activity, the Commission would consider that due to the nature of the national rail infrastructure network in both Member States, that there were no competition in the market for the operation and management of the national rail network. In addition, since the management and operation of the national network concerned is carried out in national, geographically closed and separated markets that are not subject to competition, public financial support … is not liable to affect intra-community trade [here the Commission quotes Decisions SA.35948, Czech Republic: Prolongation of the interoperability scheme in railway transport; N 356/2002, United Kingdom: Network Rail]. It follows from the above considerations that even if [the network managers] were considered as undertakings with respect to the planning, construction and management of rail hinterland connections, the measures they receive for the financing of those activities are not liable to distort competition or affect trade between Member States.”

Even though the Fixed link was itself an economic activity, the road and rail connections to the rest of the national networks were either not an economic in nature and therefore their public funding did not constitute State aid or the public funding did not affect intra-EU trade.

Since there was no doubt that the state guarantees and tax advantages entailed transfer of state resources, the Commission after a brief analysis moved on to the issue of whether they conferred an advantage to the Fixed link.

Advantage

The Danish and Swedish guarantees

88. The guarantees reduce the costs that the Consortium would normally have to bear, through the payment of premium on market terms for the guarantees, or through the financing the Fixed Link without the guarantees. By giving the guarantees without requiring the payment of a premium on market terms, the States have not behaved as market economy investors would have behaved. Therefore, the States’ guarantees confer an economic advantage on the Consortium. The Commission also notes that the advantage conferred by the guarantees is granted to the Consortium only. Thus, it is a selective measure within the meaning of Article 107 (1) of the Treaty.”

The Danish tax measures

89. Similarly, the special tax regime on depreciation and on loss carry forward reduce the tax liability of the Consortium compared to what it would have been in the absence of those measures and thereby confer an economic advantage to the Consortium.”

Loss carry forward

91. The system of reference is the normal Danish tax rules on loss carry forward that apply in principle to all undertakings in Denmark”. “95. The Commission therefore concludes that the special rules on the carry forward of losses that the Consortium enjoyed in the period 1991 to 2002 and since 2013 discriminate(d) between economic operators that were/are in a comparable factual and legal situation in the light of the objective pursued by the tax system concerned. The rules applicable to the Consortium during those two periods were/are thus prima facie selective.” Moreover, they could not be justified by the nature or general scheme of the tax system in which they were embedded.

The Danish authorities tried to argue that the special regime on loss carry forward was justified by the extraordinary character of the project in terms of its size and purpose making it incomparable to any other infrastructure project that was subject to Danish tax rules. The Commission accepted that the extraordinary nature of infrastructure projects could justify a different tax treatment. But it noted that the Danish tax law did not define or contain any specific rules for projects of an extraordinary character. The extraordinary character of the project was also not mentioned as a justification in the legislative texts that granted this advantage to the Consortium. The Commission went on, “the Danish authorities did not sufficiently show why, and to what extent, the size and the purpose of a project would be sufficient to justify a differential tax treatment i.e. that such tax treatment would be consistent, necessary and proportionate in the light of the guiding principles of the Danish tax system. Hence, this differential tax treatment seems the result of an objective that is unrelated to the tax system of which it forms part. For this reason, the Commission concludes that the measure is selective” [paragraph 97].

Depreciation of assets

The Commission observed that, since 1999, the depreciation rate applicable to the Consortium derogated from the common depreciation regime applicable to all other undertakings in Denmark that were in a comparable factual and legal situation in the light of the objective pursued by the tax system concerned. The rules applicable to the Consortium were therefore prima facie selective. [paragraph 100] Using the same reasoning as above, the Commission rejected Danish arguments that the deviation from the general regime on depreciation was justified by the logic of the system, precisely because the Danish tax law did not define projects of an extraordinary character and did not contain specific rules for such projects.

New or existing aid?

The Commission considered that the Danish guarantee and special tax regime on depreciation of assets and on carry forward of losses was new aid. By contrast, the Swedish guarantees were existing aid.

Compatibility

The Commission assessed the compatibility of the State aid directly on the first leg of Article 107(3)(b) TFEU that allows aid for the purpose of promoting the execution of an important project of common European interest. This must be the only case in the past five or so years with a genuine project of common European interest.

Then the Commission explained in paragraph 100 that it had established four criteria to be fulfilled cumulatively as a prerequisite for considering State aid to be compatible with the internal market [here the Commission quotes Commission Decision N 157/2009, Financing of the planning phase of the Fehmarn Belt fixed link; Commission Decision 96/369 concerning fiscal aid given to German airlines in the form of a depreciation facility (OJ L146, 20/6/1996) (this was a negative decision which rejected German arguments that the aid could be authorised on the basis of Article 107(3)(b)); Commission Decision N 576/1998, United Kingdom: Channel Tunnel Rail Link; Commission Decision N 420/2008, United Kingdom: Restructuring of London & Continental Railways]. The four criteria are:

  1. the aid must “promote” a project, meaning to take action which contributes to implementation of the project;
  2. the project must be specific, precise and clearly defined;
  3. the project must be important both quantitatively and qualitatively, with an emphasis on the qualitative aspect;
  4. the project must be 'of common European interest' and as such be of benefit to the whole of the Union.

On the basis of these four criteria, the aid was found to be necessary and proportional because private operators would not have undertaken it without state support due to its size, the large amount of financing (debt), the long duration and pay-back period, and the uncertainty concerning traffic volumes.

The Commission approved on the basis of Article 107(3)(b).



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