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Public funding of infrastructure which is not constructed for the specific needs of a company is not State aid.

 

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Introduction

An article carried by the Financial Times on 1 May 2019 revealed that Jaguar Land Rover [JLR] decided to make again the iconic Land Rover Defender. The production of this legendary off-roader ended about 10 years ago because it did not meet environmental and safety regulations. Apparently, it will be assembled at JLR’s new plant in Nitra in Slovakia.

Slovakia enticed JLR with a large investment subsidy. The compatibility of that subsidy with the regional aid guidelines was assessed by the European Commission in decision SA.45359.1 What makes this case interesting is the Commission’s analysis of whether public funding of the preparatory work carried out by Slovakia on the land that was eventually sold to JLR involved State aid.

The amount of the regional grant was EUR 130 million in nominal value or EUR 125 million in current value. JLR’s site is in a region eligible for aid with intensity ceiling of 25%. The eligible investment costs were EUR 1.407 billion in nominal value or EUR 1.369 billion in current value. The project was expected to create about 2800 direct jobs.

The Commission opened the formal investigation procedure because it “(17) considered that Slovakia may have granted, in addition to the notified [regional] aid, unlawful aid in the form of infrastructural development, including the sale of land below market price, in the NSP and exemption from the obligation to pay an Agricultural Land Transformation fee ('ALF fee'). The entity made responsible by the Slovak authorities for the implementation of the NSP [Nitra Strategic Park] is MH Invest ('MHI'), a 100% State owned company that is controlled, governed and financed by the Ministry of Transport, Construction and Regional Development of Slovakia. MHI is the initial owner of the sites of the NSP. The Slovak authorities, through MHI's commissioning of third parties, are carrying out works on the NSP, namely preparatory land remediation works, utilities works, rail and road connections, flood defence and ground water management works. Železnice sloveskej republiky ('Slovak Railways'), also a 100% State owned company, is constructing a multimodal transport terminal within the NSP. The total cost of those works and that terminal is estimated at about EUR 500 million.”

The Nitra Strategic Park [NSP] is an industrial park that was under construction at the time. JLR’s plant was to be based at NSP. When the investment decision was made, the land where NSP was to be established was predominantly privately owned agricultural land. In other words, MHI bought different agricultural plots, joined them together, made a single plot that was classified as industrial zone and then prepared it for its eventual use as an industrial park.

Therefore, the Commission had to determine whether JLR benefitted from non-notified aid and then take it into account in its overall assessment of the compatibility of the aid to a LIP.

 

Presence of non-notified aid

The Commission “(86) considered three ways in which the transaction could have resulted in additional State aid to JLR:

(a) […] if the NSP qualified as infrastructure dedicated to JLR, JLR's consideration for ownership interest and other rights relating to the NSP would under normal market conditions have to cover the infrastructural development costs incurred by the Slovak State in the construction of the NSP, with the exception of the costs relating to the development of infrastructures that are of truly general nature, which were still to be defined;

(b) even if it is concluded that the NSP as a whole does not qualify as an infrastructure dedicated to JLR, the Opening decision questioned whether some of the works carried out by Slovakia to develop and connect the JLR site were not designed specifically to serve the specific needs of JLR and whether the value of those works was properly reflected in the valuations prepared by the independent experts and the price eventually paid by JLR for the land and the relevant infrastructures;

(c) finally, the Opening decision also mentioned that the exemption from the ALF fee could be regarded as an additional aid measure in favour of JLR.”

 

Was NSP infrastructure dedicated to JLR?

The Commission defined two criteria for determining whether JLR should pay for the full infrastructural development costs incurred by Slovakia:

“(87) (a) the NSP constitutes dedicated infrastructure that is to say, JLR qualifies as a pre-identified undertaking and the NSP is tailored to JLR's needs; and

(b) the costs exclude costs of truly general nature.”

The Commission concluded that the infrastructure was not dedicated to JLR because

1) the land development began before JLR expressed its interest to invest there,

2) only 26% of NSP was purchased by JLR and

3) about 55% of the NSP land was kept aside for projects of general nature such as roads, public parking, highway bypass, utilities, flood defences, ground water management, fire station and protected areas. [paragraphs 88 & 89 of the decision].

Although the reasoning of the Commission was pretty clear on these issues, it is not obvious from the text of the decision how the Commission established that “costs excluded costs of truly general nature”. Probably they corresponded to the costs of the projects of general nature.

 

Did JLR pay a market price for the NSP land and specific infrastructure?

The Commission had doubts as to whether certain infrastructural development measures were designed to satisfy the specific needs of JLR and whether the land was sold at market price.

With respect to infrastructural measures, the Commission referred to its decision SA.36346 concerning the GRW land development scheme for industrial and commercial use in Germany. In that decision, “(93) the Commission analysed whether the public financing of land development works for future sale to industrial undertakings under market conditions constituted aid for the initial owner or investor for carrying out land development. The Commission found that making a public terrain ready to build upon and ensuring that it is connected to utilities, like water, gas, sewage and electricity and to transport networks like rail and roads, does not constitute an economic activity, but was part of the public tasks of the State, namely the provision and supervision of land in line with local urban and spatial development plans. Bespoke development for pre-identified buyers of land was excluded from the scope of the measure, and buyers had to acquire the land under market conditions.”

According to the principles in the GRW decision, the Commission considered that “(94) the costs incurred by Slovakia for the preparatory land remediation works on the commercially exploitable part of the NSP do not go beyond standard development costs to make the public terrain ready to build upon and those works form part of the public task of the Slovak State, namely the provision and supervision of land in line with local urban and spatial development plans. Since those works fall within the public remit, their public financing does not constitute State aid for the land owner or investor for the carrying out of the development works. In this case the owner or investor is MHI. However, the question of whether the ultimate buyer of the land, in this case JLR, benefits from advantages that qualify as State aid is separate from that of whether there was State aid in favour of the land owner or developer. As MHI acts on behalf of the State, and is financed by the State, its actions are imputable to the State. State aid to JLR via the land remediation works and sale price can be excluded if MHI does not carry out, without appropriate remuneration, land remediation works on the JLR site that go beyond the works necessary to make the land 'ready for construction' and if the land transfer takes place under market conditions.”

The Commission also examined the investment agreement between MHI and JLR and found that it “(95) includes an exhaustive list of the scope of the site remediation works and refers to a preparation for standard manufacturing use. All additional land remediation works that are required by the specific needs of JLR are identified in the Investment Agreement under the heading "Investor Specific Preparatory Works" [e.g. preparing land for the specific load needs of JLR] and are separately paid for by JLR.” The Commission also takes note of the confirmation by the Slovak authorities that the supervisory rights of JLR over the construction phase were limited to verifying that the land would meet the standard of 'industrial land ready for construction', a standard that was agreed upon in the context of the purchase by JLR from MHI and which determined the sale price. The Commission concludes that the site remediation works to make the land ready to be built upon, and the additional works to the specifications of JLR, do not involve State aid to JLR, on the condition that they are covered by a land purchase agreement which conforms the market standards, or covered by an appropriate remuneration corresponding to market terms agreed in the Investment Agreement and additional payments. The assessment about whether that condition is met is set out in Recitals (105) to (108) of this Decision.”

The Commission noted that apart from preparing land for construction, MHI carried out development works aimed at making public utilities and road and rail access available to JLR. However, those infrastructures were “(96) situated outside the JLR Site and outside the sites of other undertakings and are not tailor-made for a pre-identified user”.

“(97) The Slovak authorities confirmed that all utility infrastructure works within the borders of the JLR Site are paid for by JLR, and that JLR will pay a market price to access and use services of public utilities. […] JLR will pay all connection fees and distribution fees, in compliance with the applicable provisions that apply nation-wide and that are regulated by the Regulatory Office for Network Industries. That is to say JLR will not benefit from any exemptions. The Commission considers the works on utilities infrastructure entirely within the public remit of the Slovak state and concludes that the utilities infrastructure works are not dedicated to JLR.”

“(98) The investment in road infrastructure … serves all the undertakings in the industrial zone consisting of NSP and Nitra North industrial park as well as in the wider region. None of the roads is for the exclusive use of JLR or built to its specific needs. The roads are available for free public use. The Slovak authorities have confirmed that the road works do not go beyond standard road development … The internal roads within the boundaries of the JLR Site are paid for by JLR. The Commission therefore considers the works on the roads infrastructure entirely within the public remit of the Slovak State and concludes that the road infrastructure works are not dedicated to JLR.”

“(99) The Commission has considered previously [decision 2015/508 (SA.36147) on Propapier] that when a parking lot is not built specifically for one undertaking but is part of the economic development plan for the industrial park, it can be considered as not dedicated and involving no State aid. The Commission notes that the construction of publicly accessible parking facilities featured already in the 2014 zoning plan […] The Commission therefore concludes that the parking development is within the public remit of the Slovak State and the works are not dedicated to JLR.”

“(100) The Commission considers that the investments relating to the fire station, police station, road maintenance facility, flood defence system and ground water management are typical public tasks within the public remit of the State and hence do not concern an economic activity. Their public financing does not constitute State aid.”

 

Another complication: The multimodal transport terminal Luzianky

At the same time as the development of the NSP, Slovak Railways built the multimodal transport terminal Luzianky. The terminal was adjacent to the NSP and was funded by a state-owned company responsible for railway infrastructure. The Commission examined whether that the investment could potentially be imputable to Slovakia and whether JLR obtained any specific advantage. If that would be the case, then JLR could be receiving additional State aid.

“(102) The Multimodal Transport Terminal is financed by Slovak Railways from resources generated from its commercial activities which are accounted for separately from its publicly funded non-economic activities. For part of the infrastructure relative to the finished vehicle storage area, JLR is seeking contractual exclusivity. The other two functional parts of the Multimodal Transport Terminal will be open to any user on market conditions. Therefore, it appears that at least part of the infrastructure is built to the specific needs of JLR as a pre-identified undertaking.”

However, Slovakia confirmed that “(103) user fees for all parts of the Terminal will be calculated on a commercial basis and will cover all related investment costs, operating costs and costs for renewal or replacement investments. The fees will be market oriented and target an Internal Rate of Return for the project of […]. The user fees over a period of 30 years should ensure a return on investment for the project, as evaluated by an ex ante NPV calculation of EUR […] million.”

The Commission concluded that “(104) Slovak Railways acts just like a market economy operator would do in a similar situation. When economic transactions carried out by public bodies are carried out in line with normal market conditions, they do not confer an advantage on its counterpart. […] JLR receives no State aid in the use of the Multimodal Transport Terminal Luzianky.”

 

The land transaction

“(105) Slovakia, through MHI, sold 185 hectares of construction-ready commercially exploitable land, referred to as the JLR Site, to JLR at a price of 15.83 EUR per square meter or almost EUR 30 million in total. [According to previous practice] the final buyer of redeveloped land is not to be considered as a beneficiary in the meaning of Article 107(1) TFEU for the land development measure if that final buyer pays a market price for the redeveloped land. In that regard, the Commission notes that the final purchase price for the JLR Site was established as an average of three independent valuation reports established by internationally recognised experts … All three evaluation reports include a declaration of independence … The three reports use a comparable methodology to evaluate the price, comparing the land with other plots sold or on sale in Slovakia and adjusting those sale or asking prices based upon factors such as size of the plot, location, available infrastructure, date, shape, visibility[…] The three reports estimated that the value per square meter of the JLR Site is EUR 15.5, EUR15.0 and EUR 17.0 respectively.”

“(106) The assumptions about the characteristics of the land are identical in the three reports and correspond to the situation of the JLR Site after the execution of the public infrastructure works.”

“(108) Therefore, the Commission concludes that the purchase price of EUR 15.83 per square meter complies with market conditions and that the sale of the land in the state described by the market valuation reports was carried out in conformity with market conditions.”

On the basis of the above considerations, the Commission concluded that JLR received no selective advantage from the purchase of land at NSP or from the infrastructure works financed by Slovakia.

 

Exemption from the ALF fee

There was one more issue for which the Commission had expressed doubt in its opening decision. It was whether the exemption from the ALF fee constituted State aid to JLR.

In Slovakia when agricultural land is converted to industrial use, the owner or developer pays a fee – the so-called ALF fee. In this case, the owner of the land – MHI – did not pay any fee. All three independent valuation reports no ALF fee was paid or would be paid. Therefore the purchase price of EUR 15.83 per square meter would be equivalent to the market price only if the buyer would not have to pay a fee for the land conversion. However, MHI was a state agency performing public policy tasks [land remediation]. For this reason, the Commission found that “(111) MHI's exemption from paying the ALF fee reduces the costs which this public special purpose vehicle incurs in carrying out its public task, but is not channelled through as a selective advantage to JLR.” (112) Therefore, the Commission concludes that the exemption from the ALF fee does not constitute State aid within the meaning of Article 107(1) TFEU in favour of JLR.”

 

Conclusion

The Commission decided that “(113) the conditions of the sale of the JLR Site to JLR and the conditions under which land remediation, public utility and other infrastructure works are carried out, do not confer selective advantages to JLR”.

However, it went on to assess the regional aid grant which was found to be compatible with the internal market.

 

 

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1 The full text of the Commission decision can be accessed at: http://ec.europa.eu/competition/state_aid/cases1/201913/269660_2056790_206_2.pdf.

 

 

 

 

 

Photo by Zakaria Zayane on Unsplash



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