Lorraine Lee Scottish Government State Aid Unit The Leipzig-Halle decision and its implications for publicly funded infrastructure projects Lorraine Lee Scottish Government State Aid Unit

Overview Leipzig-Halle decision. Analytical Grids. Market Economy Investor Principle (MEIP). EC communication on the setting of reference and discount rates. GBER article 55 – Aid for sport and multifunctional recreational infrastructure. GBER Article 56 – Investment aid for local infrastructure.

Infrastructure

Overview of the Leipzig-Halle Decision Historically MS considered financing of infrastructure was out-with scope of state aid. Infrastructure was not regarded as an economic activity but a matter for regional and economic policy. Construction and future operation seen as tasks within public realm. Leipzig-Halle ruling made clear that interpretation no longer applied.

Overview of the Leipzig-Halle Decision German authorities invested €350m at LH airport for the construction of a new runway and gave exclusive use to DHL. Authorities notified to EC for legal certainty on basis of MEIP. EC and ECJ ruled that investment did not meet MEIP, that aid did exist but that it was compatible. Ruling confirmed that infrastructure constructed for later economic use is subject to state aid assessment. Also confirmed that some activity shall be considered typical tasks of the State acting as a public authority and compatible e.g. Safety, security.

Overview of the Leipzig-Halle Decision Leipzig Halle ruling confirmed two legal principles; That the State can be regarded as an ‘undertaking’ when it operates in a commercial market and/ 2. Infrastructure constructed for later economic use are subject to state aid rules.

Analytical Grids DG Comp note to DG Regio on application of ruling and when notification is required. Construction or operation of infrastructure cannot be disassociated when assessing the presence of state aid. Distinction made between activities that are typically reserved for the State (non-economic) and those that are not (economic). Not commercially exploitable – public roads/motorways, parks… Airports - police, customs, air traffic control, security. Ports - as above, breakwaters, locks, navigable channels, dredging.

Market Economy Investor Principle (MEIP) Investment by public authorities under the same terms and conditions that would be acceptable to a private investor operating under normal market conditions will be free from aid. Can be met by; significant private co-investment – proves its attractive investment, shares risk, invests on same terms and conditions – pari passu. an ex-ante business plan – has to be robust, appropriate rate of return, factors in all potential future costs and revenues, supported by industry experts Requires separation of accounts

Market Economy Investor Principle Principle Public investor Private investor Relevant Profit Risk-averse Better than alternative Return on investment Not relevant: Policy objectives Employment Training Environment Enterprise

Leipzig-Halle MEIP case German Authorities Public shareholders Private investor Leipzig – Halle Airport Relevant Poor ex-ante business plan. High risk Low return on investment Not relevant: Regional development Job creation Accessibility of region Noise reduction

EC Communication on the setting of reference and discount rates No aid if State offer market conform loans. Establish a market rate. Investigate similar transactions. If market rate found this is rate to be applied to avoid presence of aid. If no market equivalent available use the EC method for setting the reference and discount rates. 1.9.2014 – UK – rate – 0.88% Plus Margins applied in principle depending on the rating of the undertaking concerned and the collateral offered.

Private lender/creditor High Normal Low Strong (AAA-A) 60 75 100 Good (BBB) 220 Satisfactory (BB) 400 Weak (B) 650 Bad (CCC) 1,000

Commercial Loans Sub - Commercial Loans BBB rating and Normal collateral = Margin of 100. EC reference rate = 0.88% Proxy for market rate = 1.88% Sub - Commercial Loans Loan of £300,000 Interest Market/Proxy Rate - 4% = £12,000 Rate offered - 2% = £ 6,000 Difference/State aid = £ 6,000 Cover by De minimis

GBER Article 55 Aid for sport & multifunctional recreational infrastructure Sport and recreational facilities (leisure parks and hotels excluded). Access must be granted on a transparent and non-discriminatory basis. At least 20% use by other users at market rates. Investment aid (for construction or upgrade of infrastructure). The aid amount cannot exceed the difference between the eligible costs and the operating profit. Operating aid. To assist the provision of services. The amount cannot exceed the operating losses over the relevant period. Aid not exceeding €1m max aid can be set at 80%.

GBER Article 56 Investment aid for local infrastructures Infrastructure that contributes to improving business, consumer environment, modernising and developing the industrial basis at a local level. Excludes airport and port infrastructure. Access to be on an open, transparent and non-discriminatory basis at market rates. Eligible costs are investment costs in tangible or intangible assets. Aid amount - the difference between the eligible costs and the operating profit of the investment. German land redevelopment scheme – no aid. Re-notified scheme following LH judgement. The Commission found that the development of land by local authorities is part of their public tasks and therefore outside the realm of EU state aid rules.

Publicly funded infrastructure projects levels of aid NO AID YES NO AID APPROVED SCHEMES GBER FRAMEWORKS TREATY SGEI DE MINIMIS OWNER MEIP? Non-economic? OPERATOR MEIP? Non-economic? YES NO END USER Pays market rates? YES NO

Summary The future use of infrastructure determines the presence of aid. Clarity provided on activities regarded as within public remit and those out-with. Financing on MEIP is no aid, if business plan supports. Use of reference and discount rates for loan finance. Pari passu investment. Compatible aid using GBER articles 55 and 56. Assess aid at level of owner, operator and end user.

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