navigation.skipToContent
Contractual obligation to provide compensation that does not exceed the loss of income is not State aid.

 


 

You want an overview of the concept of State aid and its general prohibition under EU treaty rules? Book your ticket for our workshop on Fundamentals of State Aid Law on 27-28 February in Amsterdam


 

Sign up for our free news alert

Sign Up For Free

 

 

 

Introduction

When is a company entitled to compensation by the state? The easy answer is “when the state is liable for damage”. However, it may be possible for a company to claim compensation from the state when the state has assumed contractual obligations.

On 24 October 2019, the General Court ruled in a case T‑778/17, Autostrada Wielkopolska v European Commission, which concerned the correct calculation of the amount of compensation resulting from contractual obligations.1 Autostrada Wielkopolska [AW] had applied for annulment of Commission decision 2018/556.

In March 1997, following a public tender, AW won a concession for the construction and operation of a section of the A2 motorway in Poland for a period of 40 years.

Under the concession agreement, AW had to obtain, at its own cost and risk, external funding for the project. At the same time, it was granted the right to collect tolls from the users of the motorway. The agreement also allowed it to increase the toll rates to maximise revenue, provided that they did not exceed certain maximum rates.

After becoming a member of the EU in May 2004, Poland had to change its legislation on the charging of heavy goods vehicles [HGVs]. Tolls and user charges could not both be imposed simultaneously on the same road. Therefore, a new law eliminated the double charging of HGVs for the use of the same road. HGVs holding a vignette [toll card] for Polish roads were exempted, as of 1 September 2005, from tolls on motorways covered by concession agreements.

The same law provided that concession holders had to be compensated by the National Road Fund for the loss of revenue they incurred as a result of exemption of HGVs from tolls. The reimbursement was equal to 70% of the amount derived from the actual number of journeys by HGVs multiplied by a pre-determined toll rate [the so-called “shadow” rate]. The reduction to 70% was intended to offset the expected increase in HGV traffic on toll motorways, following the exemption of HGVs from tolls. The shadow rate was to be agreed by the parties to the concession agreements.

In August 2012, Poland notified to the European Commission the financial compensation of AW in the form of shadow tolls.

After a formal investigation, the Commission concluded in decision 2018/556 that AW had a right to be compensated. However, if the compensation improved the expected financial situation of AW by going beyond the loss caused by the exemption of HGVs from tolls, AW would receive State aid. The Commission considered that the indicator for establishing the presence or absence of excessive compensation was the Internal Rate of Return [IRR] immediately prior to the legislative change, which, according to the Commission, was 7.42%. By contrast, AW used in its calculations an IRR rate of 10.77% which was determined by reference to the expected return at the beginning of the concession period. In the Commission’s view, it was excessive.

The difference in the IRR rates resulted in overpayment of about EUR 64.7 million in 2005-2007 and overpayment of about EUR 159 million in 2007-2011, totalling EUR 223.7 million.

Because the Commission also found that the overcompensation constituted operating aid that did not conform with the provisions of the regional aid guidelines, it ordered Poland to recover the aid for being incompatible with the internal market.

Perhaps an explanation on the role of IRR is in order before proceeding further.  The IRR is the rate of discount which makes zero the net present value [NPV] of the difference between future revenue and cost, including the cost of the initial investment in a project. A high IRR simply implies that, for the same costs, the amount of future revenue is larger. Therefore, when AW used a higher IRR for its calculations, it meant that when it received the concession rights it was expecting larger revenue than it actually earned at the moment the Polish legislation changed.

 

Right of defence

The first plea of AW was that its rights of defence had been violated because it was not allowed to participate in the administrative proceedings between the Commission and Poland.

The response of the General Court was that “(52) the administrative procedure relating to State aid is initiated solely against the Member State concerned. Consequently, the undertakings receiving aid are regarded solely as ‘interested parties’ in that procedure and they cannot themselves seek to engage in an adversarial debate with the Commission in the same way as is offered to the abovementioned Member State … That conclusion is inevitable even if the Member State concerned and the recipient undertakings thereof, may have diverging interests in the context of such a procedure”.

“(53) Thus, the case-law confers on the parties concerned essentially the role of information sources for the Commission in the administrative procedure instituted under Article 108(2) TFEU.”

But because the interests of AW were opposite to those of Poland, the General Court censured the Commission for not giving the opportunity to AW during the administrative procedure to respond to the various arguments and counter-arguments submitted by Poland. Nonetheless, the General Court concluded that that “regrettable” omission was not sufficient to lead to annulment of the Commission decision because it could not alter the results of the Commission’s analysis. [paragraphs 58-61 of the judgment.

This is an important conclusion that strengthens the rights of aid recipients and perhaps the rights of competitors of aid recipients as well.

 

The use of the IRR as the criterion for determining the existence of economic advantage

AW argued that the Commission used the wrong criterion to determine whether the shadow-toll compensation was excessive. It should have considered the IRR expected at the beginning of the concession.

The General Court, first, noted that “(84) the Commission set out in the contested decision the reasons why, in order to assess the existence of an economic advantage, it was necessary to examine whether the compensation had improved the applicant’s expected financial situation … The Commission indicated that the right to compensation by way of the consequences of the amendment to the law meant that the concession holder had the right to receive, from the State, compensation which reinstated its expected financial situation immediately prior to the change of the Law of 28 July 2005 (paragraph 126 of that decision). It clarified, …, that the IRR which the concessionaire could expect at the beginning of the concession period was immaterial, because the Concession Agreement did not guarantee any level of IRR, but rather transferred market and financial risks as well as opportunities to the concessionaire. It stated that the IRR could be different in each moment in time of the duration of the concession depending on the realisation of the risks and opportunities. It concluded that the relevant IRR in the present case could not be that which the applicant could have expected immediately prior to the change of the law (paragraph 130 of that decision).”

The underlined text in the paragraph above appears to be a mistake. The relevant part of the Commission’s decision reads as follows: “(130) the Commission considers that the relevant IRR in this case can only be the one that could be expected by the concession holder just before the legislative change and the related introduction of the shadow toll mechanism in 2005.” [emphasis in original text]

The General Court concluded on this point that “(86) the Commission was right to examine whether the compensation paid by the Republic of Poland had improved the applicant’s expected financial situation such that it could be assessed immediately prior to the Law of 28 July 2005.”

The General Court also added that AW “(92) is not entitled to rely on the IRR found for other motorway projects to try to demonstrate that the Commission should have examined whether the improvement in its financial situation was reasonable and in line with market price. Indeed, the loss of revenue that Annex 6 was intended to compensate for clearly does not depend on the IRR on other motorways. Shareholders’ expectations as to the level of return on their investment can obviously vary according to the motorway concerned, each Concession Agreement having its own specific features. Therefore, the fact that the IRR for the operation of the relevant section of the A2 motorway was lower than the one established for the management of another part of the Polish motorway network cannot justify the payment of compensation for improving, even in a limited manner, the applicant’s expected financial situation.”

 

The calculation of the right IRR

AW claimed that the Commission was wrong to use an IRR rate of 7.42% and to ignore certain other financial ratios and disadvantages.

On the issue of the alleged disadvantages, the General Court agreed with the Commission that the formula that had been inserted in the concession agreement did not cover possible disadvantages, only losses caused by actions of the state.

With regard to the IRR rate, the General Court also agreed with the Commission that the rate of 7.42% was the most reliable as it reflected future revenue and costs at the point of the legislative change.

With respect to other financial and credit ratios, the General Court concurred with the view of the Commission that they were not relevant to the case at hand.

 

Private investor test

AW contended that the Commission failed to apply the private investor test correctly.

The General Court, first, recalled that “(138) the private operator principle is one of the factors that the Commission is required to take into account for the purposes of establishing the existence of aid and is not, therefore, an exception that applies only if a Member State so requests, when it has been found that the constituent elements of ‘State aid’, as laid down in Article 107(1) TFEU, exist”. “(139) When it appears that the private creditor test might be applicable, it is for the Commission to examine that possibility, irrespective of any request to that effect”.

“(144) For the application of the private operator test, it is necessary to determine whether the same advantage as that made available to the beneficiary undertaking through State resources would have been granted by a private investor in normal market conditions”.

In this case, the General Court noted that “(146) although it is true that the Commission did not indicate in the contested decision whether the private investor test was applicable, it did explain why the conditions for applying that test were not met.”

“(152) The Commission considered, in essence, in paragraph 152 of the contested decision, that the Law of 28 July 2005 and the Concession Agreement imposed on the Republic of Poland an obligation to compensate the applicant only up to the amount equal to the estimated loss of revenue due to the relevant legislative change. It stated that it cannot be argued that paying more than what was required by the Law of 28 July 2005 and the Concession Agreement would be acceptable to a hypothetical, rational private operator. It added that it was highly doubtful that such an entity would agree to calculate the compensation on the basis of the 1999 WSA study rather than the more recent 2004 study. It concluded that the private investor test was not met.”

“(163) Moreover, when applying the private operator test, the Commission must carry out an overall assessment, taking into account all relevant evidence in the case enabling it to determine whether the recipient company would manifestly not have obtained comparable facilities from such a private operator”.

“(164) In that regard, all information liable to have a significant influence on the decision-making process of a normally prudent and diligent private operator, who is in a situation as close as possible to that of the Member State, must be regarded as being relevant.”

“(165) A private operator, assuming that it could be placed in a situation similar to that of the granting authority as a party to a Concession Agreement, would have concluded an amendment to that contract only to compensate the applicant, in accordance with the Law of 28 July 2005, for the sole loss of revenue caused by the toll exemption. Consequently, in calculating the amount of compensation granted to the applicant, a private operator would not take into account the alleged risks to its own financial situation in the event of failure of the negotiations and would not agree, for that reason, to pay higher compensation. Indeed, none of the risks listed in paragraphs 156 to 159 above make it possible to calculate the loss of revenue that Annex 6 was intended to compensate. Moreover, those risks were not discussed by the contracting parties during the negotiation of that annex and were not taken into account when calculating the amount of compensation paid to the applicant pursuant to that annex.”

 

Incompatibility of the aid

AW maintained that the Commission based its conclusion that the aid was incompatible on the erroneous finding that that aid only benefited investors.

The General Court, first, observed that “(175) the applicant does not dispute, …, that the measure in question does not fulfil the conditions laid down in Article 107(3)(c) TFEU on aid to facilitate the development of certain economic activities or of certain economic areas. In particular, it does not dispute … that the aid in question constituted operating aid.”

The Commission had considered that the aid was not compliant with the 1998 Regional Aid Guidelines. It did not seem to alleviate regional handicaps, nor was it proportional to those handicaps.

The General Court reiterated that “(180) the Commission is entitled to refuse the grant of aid where that aid does not induce the recipient undertakings to adopt conduct likely to assist attainment of one of the objectives referred to in Article 107(3) TFEU. Such aid must thus be necessary for the attainment of the objectives specified in that provision, with the result that, without it, market forces alone would not succeed in getting the recipient undertakings to adopt conduct likely to assist attainment of those objectives. Aid which improves the financial situation of the recipient undertaking but is not necessary for the attainment of the objectives specified in Article 107(3) TFEU cannot be considered to be compatible with the internal market”.

“(183) In the present case, the Commission did not make a manifest error in considering, …, that the operating aid in question had led only to an increase of the IRR in the project. Indeed, it appears from the reasons of the contested decision relating to the existence of the aid, …, that the compensation paid to the applicant, resulting from the inclusion of a higher IRR than that which the applicant could have expected immediately prior to the amendment of the law, constitutes an economic advantage in the form of operating aid. Consequently, the Commission, which gave sufficient reasons for its decision in this respect, was able to conclude, without committing a manifest error of assessment, that the operating aid in question, since it had the sole effect of increasing the IRR of the project, did not contribute to regional development and did not fulfil the criteria set out in point 4.15 of the 1998 Guidelines.”

On the basis of the above reasoning, the General Court dismissed the application for annulment of Commission decision 2018/556.

 

---------------------------------------------------------------------------

1 The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=219458&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=8944177.

 

 

 

Photo credit: Image by snow-dog from Pixabay



Comments


Click here to comment upon this article

State Aid Uncovered
Opinions by Phedon Nicolaides

Share this now

Follow by Email

About

Phedon Nicolaides

Professor at the College of Europe, Bruges, and at the University of Maastricht, and Academic Director at lexxion training

Search this Blog

Upcoming lexxion trainings with Phedon Nicolaides:

Inhouse Training on State Aid
Choose date & town

Recent Comments