The EU Treaty restrict state aid to private enterprises. The prohibition seeks to prevent states from giving an unfair advantage to public sector and private sector enterprises to the detriment of competitors. The purpose is to prevent the distortion of competition for the benefit of consumers
The Treaty provides that states shall not enact, maintain or enforce any measures contrary to the competition rules in relation to public undertakings or undertakings to which they have granted certain exclusive rights.
Undertakings which are entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly are subject to the Treaty rules in relation to competition insofar as those rules do not obstruct the performance in law or, in fact, of the particular tasks assigned to them.
The exceptions and derogations from the general rules are interpreted strictly. They are available only if the state can show that all of the relevant conditions are applicable. The development of trade must not be affected to such an extent as would be contrary to the interests of the EU.
The services of a general economic interest must be entrusted to the entity. This implies a grant by statute, a contract, concession or other arrangements. What constitutes services of general economic interest will depend on the nature of the economic arrangements in the particular state. They may be in place for historical reasons.
The provision need not be absolutely necessary in the sense that it would not otherwise survive. It is enough that special or exclusive rights are necessary to enable the holder to perform tasks of general economic interest assigned to it under economically acceptable conditions. The state need not go so far as to show that the relevant services could not be otherwise provided.
The restrictions necessary for the purpose of the performance and provision of the functions must be proportionate. They must have a corresponding benefit, which cannot be met by less restrictive measures.
Where public monies are paid or where the subsidies are refunded by competitors, they must be proportionate and not be more than the amount necessary to meet losses and costs incurred in providing the services of general interest at typical standards of efficiency.
The Irish health insurance risk equalisation scheme was challenged and was upheld by the European Court of Justice. It was found that the elements of the scheme were necessary so that it did not constitute state aid. Therefore, it was not necessary to consider the exempting conditions.
State aid could be used for protectionist purposes. There is obvious scope for distortion of competition if public monies are spent subsidising industries.
Article 107 of the Treaty provides that, save as otherwise provided, aid granted by a State in any form which distorts or threatens to distort competition by favouring certain undertakings or the protection of certain goods in so far as it affects trade between the Member States, is incompatible with the internal market.
Direct & Indirect
State resources may be granted directly or indirectly. They may be granted through private bodies established by the state.
They may be funded directly or indirectly from state resources or be imputed to the state. The resources need not be raised by taxation. They may come from funds directly or indirectly under state control, such as the assets of a state body.
The activities of local and regional governments, as well as public undertakings, are imputed to the state. This is the case, irrespective of the absence of political control by the state. However, the state will not automatically be deemed to have control of public undertakings even if it is in a position to exercise significant influence.
State aid may take a variety of forms. This ranges from direct payments and grants to taxes foregone and indirect benefits. This would include, for example, state insurance schemes, the provisions of services below cost and the purchase of goods and services by the state, other than on market terms.
If a recipient obtains an economic benefit that would not be available under standard market conditions, this may constitute state aid. This may include an investment undertaken or loans granted or guaranteed on non-commercial terms. There may be a state aid position relative to what a hypothetical private market investor or lender would provide.
Selective & Distorting
The Treaty refers to state aid that distorts and threatens to distort competition by favouring certain undertakings for the protection of certain goods. This implies that a certain selectivity is required.
A measure may be general in nature but may be selective in fact. It may not be selective, in fact, in other cases where there appears to be different treatment due to objective differences in circumstances or where aid is on offer but is not accepted.
There must be a distortion of or threat to competition, which affects trade between member states. The Commission will readily infer distortion of competition if one business is advantaged relative to another.
Detailed analysis of the market is not required. The effect on interstate trade will be readily inferred whether there is any prospect that the goods or services are in competition with those offered in another state.
The Commission allow a de minimis exception under which a certain level of state aid to small to medium size enterprises may be offered in accordance with state development plans approved by the Commission. Grand aid of up to €200,000 over three years is considered de minimis or below the level of appreciable effect. Guarantees of up to €1.5 million are de minimis.
The regulation governing de minimis aid does not cover certain agricultural products, fishing and aquaculture sectors. It does not cover aid that benefits domestic over imported goods. Certain other specific rules apply to some sectors. The thresholds have been raised to €500,000 per undertaking during the financial crisis.
The Treaty provides that the following state aids are compatible with the internal market.
- aid having a social character granted to individual consumers provided that such aid is granted without discrimination in relation to the origin of the products concerned;
- aid to make good the damage caused by natural disasters or exceptional occurrences;
- aid to promote the economic development of areas where the standard of living is abnormally low, where there is serious underemployment and aid in certain regions designated in view of their structural, economic and social situation (“abnormally low standard of living” and “serious underemployment” are relative to the EU level, rather than the national level);;
- aid to promote the execution of an important project of common European interest;
- aid to remedy a serious disturbance in the economy of a member state;
- aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;
- aid to promote cultural and heritage conservation, where the aid does not affect trading conditions and competition in the EU to an extent that is contrary to the common interest;
- aid allowed by the Commission in circumstances of exceptional economic dislocation, arising from extraordinary circumstances affecting the sector generally; and
- such other categories of aid as may be specified by the Council’s decision on a proposal from the Commission;
As derogations from the general prohibition on state aid, the exemptions are to be interpreted narrowly.
The Commission has issued a block exemption for certain types of aid. If the aid comes within the terms of the block exemption, it is not necessary to have it individually considered by the Commission. Outside of the block exemption, the Commission considers the economic and social circumstances on a case by case basis.
Notification to Commission
Generally, state aids must be notified to the Commission. If they fall within certain of the above provisions, they must be automatically approved.
The Commission has published guidelines and notices in the area of state aid as to how it may exercise its discretion. Its decision may be reviewed by the Court of Justice in accordance with general judicial review principles.
The provisions regarding serious disturbance of the economy have been invoked during the financial crisis, in particular in relation to bank guarantee schemes and recapitalisation. The financial institutions have been obliged to provide for restructuring so that they can ultimately return to being financially viable.
States have been required to give undertakings regarding the disposal of shareholdings. Banks have been required to dispose of non-core businesses and reduce the business size to an appropriate level in order to minimise distortion of competition.
The Treaty allows for exemption in the interests of heritage and cultural conservation. This has been used to justify investments in arts and heritage activities and in the film sector.
Public Function Providers
In several public sector monopolies, the incumbent operator must provide a universal service or other public service obligation that is not otherwise economic. For example, in the postal sector, there is a requirement to provide universal coverage. The question arises as to whether and to what extent payments for this public sector obligation may constitute State aid. If the compensation does not exceed the additional costs incurred, there will be no state aid at all.
The recipient must receive the advantage or payment as payment for the public service obligation. The public service obligation must be defined and exist in legal terms. The basis of the calculation of the compensation must be established by objective and transparent measures. It may not exceed the cost necessary to cover the public service obligation, having regard to revenue and costs and the requirement for a reasonable profit.
If the provider is not chosen in accordance with public procurement procedures, compensation must be based on an analysis of the costs which a typically efficient business would have incurred in meeting the public service obligations.
Key Public Services
If the undertaking is entrusted with services of general economic interest, it is subject to competition and state aid rules only insofar as they do not obstruct the tasks and functions entrusted to it, either in legal or in effective terms. The Court of Justice has been reluctant to allow justification of payments of sums more than the additional incremental cost of the public service obligation on other grounds of exemption.
The Commission has published a decision on circumstances in which businesses interested in the performance of services of general economic nature may be compatible with the common market. Where the terms are met, notification is not required. It covers
- public service compensation granted to undertakings with an average annual turnover before tax, all activities included, of less than EUR 100 million during the two financial years preceding that in which the service of general economic interest was assigned, which receive annual compensation for the service in question of less than EUR 30 million;
- public service compensation granted to hospitals and social housing undertakings carrying out activities qualified as services of general economic interest by the Member State concerned
- public service compensation for air or maritime links to islands on which average annual traffic during the two financial years preceding that in which the service of general economic interest was assigned does not exceed 300 000 passengers
- public service compensation for airports and ports for which average annual traffic during the two financial years preceding that in which the service of general economic interest was assigned does not exceed 1 000 000 passengers in the case of airports and 300 000 passengers in the case of ports.
Other aid must be specifically notified and exempted by the Commission.