sou · GWB338d2 · 2009-01-01 00:00:00 — with the guarantee is carried by the State (with limitless re- sources) and secondly, the more favourable funding terms obtained by the borrower.193 The Commission considers that the granting of a guarantee does not constitute State aid under the following conditions: (1)the borrower is not in financial difficulty; (2)the borrower would in principle be able to obtain a loan on market conditions from the financial markets without any intervention by the State; (3)the guarantee is linked to a specific financial transaction, is for a fixed maximum amount, does not cover more than of the outstanding loan or other financial obligation (except for bonds and similar instruments) and is not open-ended; (4)the market price for the guarantee is paid (which reflects, amongst others, the amount and duration of the guaran- tee, the security given by the borrower, the borrowers financial position, the sector of activity and the , the rates of default, and other economic conditions).194 180.In its response to the first complaint of EPF, the Swedish government explains: guarantees that are provided must comply with the guidelines adopted by the Parliament for the provisions of State guarantees. This means, inter alia that the guarantees must be subject to a charge that corresponds to the States economic risk and other costs of the commitment.195 The response to the second complaint reads: With regard to the guarantee commitment, it can also be pointed out that it is usual for the municipalities to impose such charges as they consider reasonable in relation to the size and risk of the commitment. How this payment is made and is thus booked can vary from municipality to municipality.196 193Commission Notice on the application of Articles 87 and 88 of the to State aid in the form of guarantees, OJ 2000, C 71 (Commission Notice), paras 2.1.2. and 2.1.3. 194Ibid, para. 195Response by the , Housing Division, to the first complaint of the EPF to Commission, dated 16 October 2002, p. 196Response by to second complaint, , p. 182.Again, these statements are too vague to come to a concrete assessment as to the compatibility of the guarantees with the State aid provisions. in its report explains that only some housing companies pay a guarantee fee. Also, many loans exceed the market value.197 But irrespective of the exact figures, the fact that a significant number of public housing companies are in financial difficulty and that it is very unlikely that they would have been able to obtain similar loans without any government support suffices to conclude that at least two of the conditions in the Commission Notice, as listed above, are not fulfilled. 183.Another aid measure included in the government proposal and brought forward by the EPF in its first complaint is the pro- vision of loans to municipalities and public housing companies. In this context, the Commission explains in its Communi- cation: the aid element amounts to the difference between the rate which the firm should pay (which itself is dependent on its financial position and the security which it can offer on foot of the loan) and that actually paid. [] The situation would be viewed from the point of view of the lender at the moment the loan is appro- ved. If he chooses to lend on conditions which could not be con- sidered as normal in banking terms, then there is an element of aid involved which has to be quantified.198 184.When looking at the Swedish governments explanation, it seems doubtful whether the loan conditions correspond to normal market conditions: It is a fact that the interest rate paid by the municipalities on the loans they take up varies greatly, depending on the individual municipalitys financial situation. Many municipalities also work actively to improve their credit rating and reduce their borrowing costs.199 197Ernst & report, Public support to municipal housing companies, dated . 198Commission Communication to the Member States on the application of Articles 92 and 93of the and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector, OJ 1993 C 307, paras 41 and 42. 199Response by to second complaint, , p. 185.Again, considering the financial difficulties of the public housing companies and the overcapacity of the market in certain areas of due to changes in the population base and dramatically reduced demand for housing, it seems doubtful whether a private investor would have given loans under similar market conditions considering the poor of repayment. 186.It can therefore reasonably be argued that the measures identi- fied by EPF in its two complaints confer an economic advan- tage on the public housing companies as a private investor acting according to normal market conditions would not have under- taken these investments.200 Thus, as the MEIP test fails, it needs to be assessed whether the Altmark conditions on the com- pensation for public service obligations apply. (ii) Application of the Altmark conditions 187.As indicated above, the measures brought forward by the EPF cannot be considered to confer an economic advantage if they merely compensate the public housing companies for their public service task. For such compensation to escape the classifi- cation as State aid in a particular case, four conditions must be satisfied cumulatively: (1)the recipient undertaking must actually have public service obligations to discharge and those obligations must be clearly defined; (2)the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings; (3)the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of the public services obligation, taking into account the relevant receipts and a reasonable profit; 200 This is also not changed by the fact that private investors may, in the view of the Inquiry, accept losses in the first years of a , knowing that in a number of years there will be a break-even, after which the will generate a profit. The financial situation of certain public housing companies seems to be too critical to be attractive for private investors. (4)where the undertaking is not chosen in a public procure- ment procedure, which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs, which a typical undertaking, well run and adequately provided within the same sector would incur, taking into account the receipts and a reasonable profit for discharging the obligations.201 188.Only if all four conditions are satisfied can it be concluded that an undertaking has not enjoyed a real financial advantage, which would have the effect of putting it in a more favourable competitive position than the undertakings competing with it. If the conditions are not met, the aid may still be declared compatible with the Treaty pursuant to Art. 86(2) EC if it is necessary for the operation of the services of general economic interest. With respect to the application of Art. 86(2) EC, the Commission adopted Decision 2005/842/EC202 which, if its conditions are met, ensures the compatbility of the aid measure with the State aid rules and exempts the Member States from their notification obligation to Commission. If the conditions of the Decision are not fulfilled, Art. 86(2) EC applies and the aid measure has to be notified to the Com- mission. The Community Framework 2005/C 297/04 for State aid in the form of public service compensation203 gives further guidance on the conditions that need to be fulfilled for the aid to be found compatible pursuant to Art. 86(2) EC. 189.In the case at hand, it is highly doubtful whether the first con- dition is fulfilled. As indicated in the context of Art. 86(2) EC, the obligations on the public housing companies to provide good housing at reasonable terms in order to further social 201Case C-280/00 Madgeburg v Nahverkehrs- gesellschaft beim Bundesverwaltungsgericht [2003] ECR I-7747, paras 87 and 88). 202Commission Decision 2005/842/EC on the application of Article 86(2) of the to State aid in the form of public service compensation to certain undertakings entrusted with the operation of services of general economic interest, OJ 2005, L 312/67 (hereinafter the Decision). 203Community Framework 2005/C 297/04 for State aid in the form of public service compensation, OJ 2005 C 297/4. The requirement of notification pursuant to the Frame- work results from the higher risk of distortion of competition as the aid may exceed the costs of the public service, or may be used by companies on other markets open to com- petition. (/05/937 of 15 2005). integration does not seem to be clearly defined in an unequivocal legal act but rather in a combination of different legal pro- visions. Moreover, the housing provided by the public housing companies is not only targeted at disadvantaged persons but may also include persons with normal income which raises doubts as to the qualification of the service as a SGEI. 190.Also the second condition does not seem to be satisfied. I do not have any information as to whether there are any regula- tions under Swedish law which establish in advance the level of compensation which should be granted to the public housing companies to fulfil their public mission, provided that such a mission exists, but I doubt that such rules exist.204 191.Furthermore, as the public housing companies are not chosen in a public procurement procedure in accordance with the fourth condition,205 the Swedish government has to provide informa- tion substantiating that the companies are being compensated according to the costs of a typical undertaking. Specifically, it would have to be examined whether the profit earned by the public housing companies and the dividends distributed to the municipalities206 correspond to the costs which a typical, well run, undertaking would incur in this sector of the economy. However, in the absence of indications that the public housing companies are acting as cost-efficient undertakings, it cannot be excluded that the fourth condition is also not fulfilled.207 192.As the Altmark conditions have to be satisfied cumulatively and as the first, second and the fourth condition do not seem to be fulfilled, the aid granted cannot be considered to consti- tute a compensation for the fulfilment of a public service task. The aid measures therefore confer an economic advantage on the public housing companies pursuant to Art. 87(1) EC. 204Any over-compensation exceeding of the amount of annual compensation constitutes incompatible State aid unless it can be exempted according to Art. 86(2) EC. (Community Framework on State aid in the form of public service compensation, OJ 2005 C 297, paras 20 and 21) 205Companies can apply to become public housing companies, provided they fulfil the criteria of the Act on public utility housing companies. (Response by to second complaint, , p. 206As indicated above, the dividends from a public housing company to the municipality amount to a fixed percentage of the portion of share capital or paid-in membership shares con- tributed by the municipality in cash. (Memorandum PM 4, p. 207See State aid N 395/2005 – , para. 193.The aid measures in question have only been granted to public housing companies to the exclusion of private, for profit, housing companies which are in the same sector of the economy. The aid measures are therefore clearly selective in nature. Effect on competition and trade 194.The distortion of competition in the present case could consist of two separate instances. Firstly, the size of the aid granted per se confers a considerable advantage on the public housing companies to the detriment of their private competitors. It strengthens their position on the housing market compared to their private counterparts competing in and outside . This has been confirmed by the ECJ in the case,208 where it stated: financial aid strengthens the position of an undertaking compared with other undertakings competing in intra-Community trade the latter must be regarded as affected by that aid.209 195.The amount of the aid also constitutes an appreciable dis- tortion of competition in that it does not fall under the de minimis threshold which exempts State aid from the notifica- tion requirement if it does not exceed Euro 100,000 granted over a period of three years.210 196.The second instance of distortion of competition, which has been raised by EPF in its second complaint to Commission,211 could consist in the fact that the provision of additional capital through subsidies allows the public housing companies to lower the prime costs of their buildings212 and hence, to lower the level of their rents to an extent that private housing companies would find difficult to match. 208Case 730/79 v Commission [1980] ECR 2671. 209Ibid, para. 210Article 2 of Commission Regulation 1998/2006 on the application of Articles 87 and 88 of the to de minimis aid, OJ 2006 L 379/5. 211Linklaters Memorandum Is the Public Support to Compatible with the EC rules on State aid?, dated 24 2005, p. 212To the extent that State subsidies can be taken into account when calculating the prime costs of a . the utility value system which gives public housing companies a rent normative role, a lower level of rents has a direct effect on the rents that private housing companies can set. 197.This argument, however, cannot be accepted. Since the ruling in the case by the of Appeal, rent setting by public housing companies which does not observe the prime cost principle due to profit transfer within the housing stock or the existence of municipal subsidies, shall not be taken into account in the context of the utility value system. If the rents of apartments cited for comparative purposes before a rent tri- bunal deviate significantly from the reasonable prime costs of the , the cited comparisons cannot be taken into account when assessing the fair rent as this would otherwise lead to discrimination against private landlords.213 Thus, at least since the judgment, State subsidies do not constitute any longer a distortive element in relation to the rent setting pur- suant to the utility value system. 198.However, as indicated above, already the granting of State subsidies per se distorts competition and strengthens the position of the public housing companies to the detriment of private companies. This distortion of competition must affect trade between Member States in order to fall under the prohibition of Art. 87(1) EC. 199.In this respect, it is not necessary for the Commission to pro- vide a full fledged market analysis and examination as to what extent trade between Member States is indeed affected by the granting of State aid. It is sufficient that [w]here a grants aid to an undertaking, domestic production may for that reason be maintained or increased with the result that [] undertakings established in other Member States have less chance of exporting their products to the market in that . Such aid is therefore likely to affect trade between Member States and distort competition.214 200.It is therefore irrelevant if the aid recipient actually engages in cross-border trade. It is sufficient if the aid increases the difficulty for foreign investors to enter the market in question, even hypothetically. 213Response by the to the second complaint from the EPF of , p. 214Case 102/87 v Commission [1988] ECR 4067, para. 201.In a similar case relating to the housing market in and the granting of housing loans to the most socially disadvantaged households,215 the Commission explained: In this context reference has also to be made to the jurisprudence of the Court, stating that relatively small aid amounts and State aid to relatively small companies which are only within their home country can in principle have effects on trade within the Community. As this activity [the granting of loans] covers the whole territory of it can therefore not be considered as a local activity and trade between the Member States must be supposed to be affected. 202.With respect to the Swedish housing market, both the arguments submitted by EPF and the Swedish government suggest that the rental market is local in scope.216 However, this does not necessarily imply, according to the ECJ and the Commission, that trade between the Member States is not affected as firstly, the State subsidies strengthen the position of the incumbents and could therefore deter foreign investors from entering the rental housing market. Indeed, according to the information provided by EPF, a significant number of foreign companies have started investing in the residential property market217 which is a market closely connected to the rental market. If not for the subsidies, it cannot be excluded that these foreign investors would not find sufficient incentive to also enter the rental market on a large scale.218 215State aid N 209/2001 – , p. 216See Memorandum State Aid to – Issues of Trade between Member States and Community Interest, dated , p. Response by the , Housing Division, to the first complaint of the EPF, dated 16 October 2002, p. Memorandum Is the Public Support to Compatible with the EC rules on State Aid?, dated 24 2005, p. The views diverge on the question whether the upstream property market, which is cha- racterised by international investment, should be included in the analysis and whether it is relevant that the public housing companies also engage in the commercial property market, which is open to competition from other Member States. 217Linklaters Memorandum Is the Public Support to Compatible with the EC rules on State Aid?, dated 24 2005, p. 218This conclusion is also not contradicted by the findings of the Commission in the decision concerning State aid granted by the to so-called Prefabs (State aid N 343/2005 – ). There, the Commission concluded that since the aid reci- pients were only locally and considering the low amount of aid granted (annual budget of approx. million), the impact on intra-EU trade was very limited (para 55). The facts in the present case, however, are very different in that the aid granted amounts to SEK 3billion (million) in the first instance and million (million) in the second case. The level of aid granted is thus considerably higher than in the 203.Secondly, it appears from the information that the aid measures have been granted to various public housing companies spread over the entire country.219 Such a widespread granting of sub- sidies may have an adverse effect on trade irrespective of the fact that the public housing companies may not operate outside their municipality. In accordance with the statement of the Commission in the aid decision, quoted above, even State aid granted to small companies which do not operate outside their local market may affect trade between Member States pursuant to Art. 87(1) EC if the aid measures cover the whole of the territory of the . 204.It can therefore be concluded that the granting of the various aid measures to the public housing companies has an adverse effect on intra-Community trade. As all the conditions for finding State aid pursuant to Art. 87(1) EC are fulfilled, it must now be determined whether the aid measures qualify for an exemption according to Art. 87(2) or (3) EC. c.Application of Art. 87(2) or (3) EC 205.At the outset, it should be emphasised that the fact that public undertakings are sometimes expected to fulfil non-commercial functions alongside or in addition to the commercial activities does not justify an exemption from the application of the competition and State aid rules per se. enables the Commission to take account of such consideration where they are justified in the Community interest and where they fall under one of the derogation provisions of Art. 87 EC. However, unless one of the derogations of the Treaty is applicable, public undertakings are not exempted from the rules of competition aid decision which in turn results in a significant effect on trade between Member States. 219 refers to an amount of million granted to fourteen municipalities by , which forms the basis of the first EPF complaint. (Memorandum Is the Public Support to Compatible with the EC rules on State Aid?, dated 24 2005, p. 3.). Additional to these aid measures, identified 28 companies which received support over million. (report, Public support to municipal housing companies, dated ). These aid measures form the basis of the second EPF complaint. and State aid by the imposition of these non-commercial objectives.220 87(2) EC 206.As regards Art. 87(2) EC, only the first derogation could play a theoretical role in the present case. Art. 87(2) EC: The following shall be compatible with the common market: (a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned. Art. 87(2)(a) EC exempts aid of a social character, granted to individual consumers but not to undertakings.221 Thus, as the aid in the present case is granted to the public housing companies and not to the themselves, this exemption provision is not applicable. 207.With regard to the other exemption provisions of Art. 87(2) EC, it does not constitute aid intended to make good the damage caused by natural disasters or exceptional occurrences nor can it be categorised as aid granted to certain areas of the Federal Republic of affected by the division. 87(3) EC 208.Given that Art. 87(2) EC is not applicable in the present case, it remains to determine whether one of the derogation provi- sions pursuant to Art. 87(3) EC could apply. Among those provisions, Art. 87(3)(c) EC may prove to be the most success- ful, firstly, in the context of regional aid, secondly in relation to sectoral aid and lastly, in relation to rescue and restructu- ring aid. Art. 87(3)(c) EC reads: 220Commission Communication to the Member States on the application of Articles 92 and 93 of the and of Article 5 of Commission Directive 80/723/EEC to public under- takings in the manufacturing sector, OJ 1993 C 307, para. 221Case 57/76 Benedetti v Munari [1977] ECR 163. Art. 87(3) EC: The following may be considered to be compatible with the common market: (c) 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. (i) Regional aid 209.Regional aid is a special category of government support which is reserved for particular regions and has as its specific aim the development of those regions by supporting investment and job creation in a sustainable context.222 210.According to Art. 87(3)(a) and (c) EC, aid may be granted if the aid measures qualify as regional aid in accordance with the Guidelines set out by the Commission. These provisions provide exceptions for aid assisting areas which are economically under- developed by comparison with the Community as a whole or with the rest of the Member States. The conditions in Art. 87(3)(a) are fulfilled if the regions, being NUTS223 level II geographical unit, have a per capita gross domestic product, measured in purchasing power standards, of less than of the Community average.224 Regional aid covered by the dero- gation of Art. 87(3)(c) EC must form part of coherent regional policy and the regions must conform to the requirements set to qualify as NUTS level III geographical unit.