Building public infrastructure: when do you need to worry about state aid?


On 19 May 2016, the European Commission published the last part of its State Aid Modernisation initiative. The Notice looks broadly at what sorts of State funding and financing might constitute State aid, as well as the circumstances in which payments or relief from payments might be said to have sufficient cross-border interest to engage the EU rules.

In addition to the general conclusions about State aid, the document looks specifically at public funding of infrastructure and gives some helpful pointers as to the way to consider such funding. The Commission says that it is issuing this guidance given infrastructure’s “strategic importance…not least for the promotion of growth”, and it is almost certainly in response to the number of public infrastructure projects initiated around Europe in response to the 2007 financial crisis.

1. Who benefits from State funding for infrastructure?

The first thing to note is that, in line with the case law, the Commission identifies three categories of people who may benefit from State funding for infrastructure:

  • The developer and/or first owner of the infrastructure;
  • The operator of the infrastructure who is entrusted with exploiting it economically or obtains a concession or lease to use and operate it; and
  • The end-users of the infrastructure.

The unusual nature of the EU State aid rules means that a company that has itself done nothing wrong and has breached no legal obligations can be forced to repay any State aid it has received, with interest. It is therefore crucially important to know whether you fall within one of these three groups in relation to a publicly funded piece of infrastructure so that you can assess whether the public body that has funded or sponsored it has adequately followed its obligations.

2. When is there aid to the developer/owner?

Increasingly European markets have been liberalised and privatised, meaning that the categories of infrastructure that are truly public and do not involve an economic activity have been gradually eroded. The Commission gives some examples in its Notice, including military facilities, air traffic control in airports, lighthouses, flood protection, police and customs, as well as roads made available for free public use. It considers that none of these are of an economic nature and they therefore fall outside the scope of the State aid rules.

In other circumstances, where the construction of infrastructure is linked to the carrying out of an economic activity, the State aid rules will be engaged, and it is the developer and/or first owner of an infrastructure who is most likely to benefit from State aid.

The Notice first considers mixed use of infrastructure and mixed functions of the developer/owner and provides as follows:

  • When converting infrastructure from non-economic use to economic use, only the costs of conversion are relevant under the State aid rules;
  • When infrastructure is used for both economic and non-economic activities; only the costs linked to the economic activities are relevant. If the economic use is purely ancillary to the non-economic use (where all the inputs are the same and the economic use is very limited in scope) then it may fall outside the State aid rules entirely). The Commission gives the example of a research lab which occasionally rents out its laboratories to industrial partners;
  • In circumstances where the developer/owner also carries out economic activity then the Member State must ensure that public funding does not cross-subsidise those activities. Public funding must be limited to the net cost of the non-economic activities (which can include the cost of capital), and there must be clear separation of accounts.

Where the Notice is particularly useful is in relation to the concepts of distortion of competition and effect on trade. These concepts have been broadly interpreted in relation to State aid, but in this Notice the Commission seems to be prepared to take a somewhat less expansive view in relation to funding for infrastructure.

In particular funding for infrastructure:

  • with a predominantly local catchment area and in an area in which cross-border investment is unlikely will generally not engage the State aid rules. That might include, for example, local leisure facilities, health care facilities, small airports or ports.
  • which does not face competition from other infrastructure, is unlikely to attract private financing and is designed to give benefits for society at large, will not engage the State aid rules. The Commission highlights in particular infrastructure which is a natural monopoly, although specifies that even there they may be competition (for example, a toll bridge might compete with commercial ferry operators or a tunnel).

The Commission Notice then considers these principles in specific industries, with some of the key ones being:

  • Airports and ports: most airport and port infrastructure will be subject to the State aid rules. However, infrastructure for activities that fall under the responsibility of the State will not, such as air traffic control, police, customs, maritime traffic control etc.
  • Broadband infrastructure: public funding of broadband infrastructure for the provision of connectivity to end-users is subject to the State aid rules, although the provision of closed networks connecting only public authorities is not.
  • Energy infrastructure: will in principle always be subject to the State aid rules;
  • Research infrastructure: public funding of research infrastructures for activities such as independent research not for the purposes of commercial gain does not fall under the State aid rules.
  • Railway infrastructure: the construction of railway infrastructure, which includes bridges and tunnels, made available on equal and non-discriminatory terms does not fall within the State aid rules.

Note that for some sectors, such as aviation and broadband, there are detailed notices setting out the treatment of funding in those sectors, in the context of which the Notice should be considered.

3. When is there aid to an operator of infrastructure?

The presence of aid during the construction phase of infrastructure does not necessarily mean that there is aid to the operator of that infrastructure. The key to ensuring that any aid does not pass to the operator is ensuring that the operator pays a market rate for the right to exploit the infrastructure. Compliance with that requirement is normally achieved through the operation of a competitive, transparent, non-discriminatory and unconditional tender process. It is particularly important to note in relation to the running of that tender that:

  • the use of the negotiated procedure without prior publication of a contract notice does not meet these requirements;
  • the participation of only one bidder in the process does not exclude the presence of a market price ,provided that the procedure was not such that only one bidder could submit a credible bid; and
  • whilst the use of quality criteria is permitted, the award criteria must still put a significant weight on the ‘price’ component.
4. Aid to end-users

This is the area in which it is perhaps easiest to unwittingly fall within the State aid rules. There are circumstances in which an infrastructure can benefit the end-users and engage the State aid rules. A key way of avoiding that circumstance is to set the fees for use of the infrastructure through a tender process as described in 3 above, to ensure that they are at a market rate. Where that is not the case, benchmarking against other similar, but privately run, infrastructure is a possibility, and if not then other economic assessment models can be used to ensure that users pay a ‘market’ price. That assessment must take account of any additional incremental revenues received as a result of using the infrastructure, but can also take account of any incremental costs.

5. Conclusion

The Notice provides a useful framework for assessing funding for public infrastructure. In many situations the State aid rules will be engaged by the funding and it is necessary for all parties involved to ensure compliance. As might be expected, the Notice places significant weight on the use of public tendering processes to ensure that there is no aid.