Privatising state aid

The spectre of State aid can arise for local authorities in a variety of circumstances, some more expected than others, writes Anna Forge. If the European Commission is successful in encouraging affected parties to take private action through the courts, many more local authorities may find themselves in hot water.

Earlier this year the European Commission issued a Notice on enforcement of State aid law by national courts (2009/C 85/01) "to inform national courts and third parties about the remedies available in the event of a breach of State aid rules and to provide them with guidance as to the practical application of those rules", having reaffirmed its commitment to a strict approach towards unlawful and incompatible aid. This replaces a "Co-operation Notice" on the role of national courts issued in by the Commission 1995.

As fate would have it, the recent Notice was published not long after several temporary relaxations of State aid requirements were issued in order to address the effects of the credit crunch.

The spectre of State aid can arise for local authorities in a variety of circumstances, some more expected than others, including undervalue land transfers (or an overvalue purchase), providing grants, loans or guarantees, writing off losses, charging interest below market rates, providing services or advertising free or at an undervalue, providing infrastructure to benefit a particular end user, acceptance of a disproportionate share of risk in a transaction, injections of capital, certain equity participation in a joint venture company and other circumstances in which a private investor would not have provided support.

In terms of basic principles, aid given by a local authority is given through State resources and therefore potentially within the ambit of State aid policy. The remaining fundamental questions are whether aid "in any form whatsoever" granted by a local authority to an "undertaking" (widely defined)  " …distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods [and] affects trade between Member States" for the purpose of Article 87 of the Treaty establishing the European Community. If so, the aid will generally be considered to be "incompatible" with the common market and the Commission may require the Member State to seek repayment of the aid with interest.

J'Accuse

Whilst the potential existence of State aid may be relatively easy to identify – practical solutions to secure compliance with the rules can be more elusive and the question is sometimes asked, "but who is going to challenge us?"

The Commission has been pondering the same question from a rather different perspective over a number of years. The State Aid Action Plan published by the Commission in 2005 identified a need for more effective action to be taken by Member States to secure compliance with conditions of block exemptions and the recovery of illegal and incompatible State aid.

The Plan also highlighted the potential for private litigation and national courts to play a greater role in securing compliance with State aid policy. A study of enforcement of State aid law at a national level undertaken for the Commission in 2006 revealed that whilst there had been a considerable increase in State aid cases dealt with by national courts, the vast majority were "defensive actions", in particular taxpayers seeking relief against the imposition of allegedly discriminatory tax burdens. Actions by private parties against Member State authorities aimed at enforcing State aid law accounted for only 19% of the cases analysed and actions by competitors against beneficiaries of aid accounted for only 6%.

Notice on enforcement

The Commission's recent Notice on enforcement at a national level contains an explanation of its interpretation of the notion of State aid as well as the "standstill obligation" under Article 88(3) (not to implement aid until approved by the Commission), which is useful for anyone coming to this area afresh.  Other points made in the Notice include:

• The assessment of "compatibility" of proposed aid measures with the common market and whether any aid should be approved is the exclusive responsibility of the Commission (subject to review by the Community courts) and not of the national courts.  However, the Commission's powers to protect competitors of an aid beneficiary and other third parties are limited and time consuming.
• National courts are empowered to interpret the notion of State aid and to assess whether any aid measure is covered by a Block Exemption Regulation or an approved aid scheme and therefore exempt from the obligation under Article 88(3) to notify the Commission and apply the "standstill period".
• The standstill obligation under Article 88(3) gives rise to directly effective individual rights of affected parties such as competitors which the national courts are obliged to protect by such means as: preventing the payment of unlawful aid; ordering recovery of unlawful aid even if an application for approval has been made to the Commission and its decision is awaited; ordering recovery of "illegality interest" – on a compound basis – even where Commission approval is subsequently obtained and recovery of the basic amount should no longer be ordered; damages for competitors and other third parties, aimed at the State aid granting authority (subject to national law) or the Member State itself; interim measures to protect the rights of individuals (e.g. injunctions to prevent payment of aid pending the outcome of a Commission investigation).
• Section 3 of the Notice sets out the information, opinions and other forms of assistance the Commission will provide to national courts to comply with its duty to assist national courts in the application of State aid rules.

Conclusions

The Commission considers that private enforcement actions can offer considerable benefits for State Aid policy. Achievement of this aim is largely dependent on the efficacy of the remedies available in the national courts of Member States. The recent Notice is intended to make clear that affected parties may have effective remedies in the national courts beyond resorting to the lengthy and uncertain route of complaining to the Commission. It remains to be seen whether or not the Notice will have the intended effect of raising awareness of the scope for challenge of decisions of public authorities in cases potentially involving unlawful State aid.

Anna Forge is a partner at McGrigors.